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 12 of the notes to consolidated financial statements. As of July 31, 1998, the Registrant and its subsidiaries had 22 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, there exist significant fluctuations 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.
OTHER ACTIVITIES
Other activities include a real estate management division in Waikiki, Hawaii that in fiscal year 1998 had revenues of $660,560 and net income of $303,319, compared with revenues of $670,420 and net income of $316,913 in fiscal year 1997.
ITEM 2.
ITEM 2. PROPERTIES
As of July 31, 1998, the Registrant and its subsidiaries owned properties used in connection with its real estate activities as set forth below. All properties 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 6 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 TO A VOTE 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, 1998.
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, 1998 and 1997:
The aforementioned quotations were received from Abel-Behnke Corporation which makes a market in the Company's stock.
On July 31, 1998, there were approximately 540 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 1998, 1997, and 1996.
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, 1998.
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 $266,867 for the fiscal year ended July 31, 1998, (fiscal year 1998), compared with net losses of $846,984 and $373,358 for fiscal years 1997 and 1996, respectively.
The net loss for fiscal year 1998 included depreciation and amortization totaling $71,747, as compared to $100,370 and $211,836 in fiscal years 1997 and 1996, respectively.
The Company's subsidiary, Latipac Fine Foods, Incorporated, ("Latipac") accounted for $29,858, $56,806 and $156,899 of depreciation for fiscal years ended July 31, 1998, 1997, and 1996, respectively.
The Company's operating performance during fiscal year 1998, substantially reflected the effects of (a) an agreement to dispose of certain assets and liabilities owned by its subsidiary, Latipac, and the business known as "Bakery Europa"; (b) the Company's continuing activity as a lender making working capital available to home builders in Nevada and Utah to buy land and to build finished lot pads; and (c) the Company's continuing business as a property management agent of approximately 300 condominium apartments in Waikiki, Hawaii, mostly situated in the Ilikai Apartment Building and the Ilikai Marina Apartment Building.
The economic climate in Hawaii during fiscal year 1998 was poor, as it had been for several years, without interruption. Hawaii's private-sector economy is heavily dependent upon tourism, and especially upon tourists from Japan. The Japanese economy has been in decline since 1992, and it is not expected to significantly improve in fiscal year 1999. The Company does not expect Hawaii's economy to improve in fiscal year 1999. The economies of southern Nevada and Utah, on the other hand, are robust and have been so for several years. The Company expects homebuilding activity in southern Nevada and Utah to continue to be active during fiscal year 1999, stimulated by steady job growth and low interest rates.
BAKERY OPERATIONS
In December 1997, the Company sold certain assets and liabilities of Latipac. Bakery Europa's operating results for fiscal years 1998, 1997, and 1996 is summarized as follows:
Bakery Europa's net product sales for fiscal year 1998 were $2,137,368, compared with net sales of $4,737,228 and $5,521,390 for fiscal years 1997 and 1996, respectively. The gross profit margin for fiscal year 1998 was 40.1%, compared with 40.1% and 36.4% for fiscal years 1997 and 1996, respectively. Net income (loss) per share for Bakery Europa amounted to $.34, $(.41) and $(.35) for the fiscal years 1998, 1997, and 1996, respectively. Gain on sale of the discontinued operation for fiscal 1998 resulted in an earnings per share of $.37.
NEVADA AND UTAH FINANCING ACTIVITIES
Since fiscal year 1991, the Company has engaged in making "ADC loans" to home builders in southern Nevada and Utah. An ADC loan is an arrangement whereby the Company, who shares in the same risks and potential rewards as those of the borrower, advances funds so that the borrower is able to acquire and develop unimproved land, provide infrastructure and construct homes. In recent years, banks and other federally insured lending institutions have tightened credit standards. As a result of this stringent credit environment many home builders have been forced to seek alternate sources of financing such as ADC loans.
The Company has made sixteen such loans since 1991, and all have either been paid or are performing. The Company has never experienced a default on a loan it has made. The Company's ADC lending activities in recent years have been as follows:
Deferred income on these loans totaled $434,755 at July 31, 1998, compared to $372,827 and $28,886, at July 31, 1997 and 1996, respectively.
ADC loans bear higher than average risk. The Company adheres to a policy of concentrating its loans with experienced builders building single-family dwelling projects priced for the "entry-level" or "first move-up" markets. The Company's practice is to limit the outstanding loan balance to an amount only sufficient to acquire land and to construct homes on only a portion of the total lots in the project. The effect of this practice is to require the builder to sell completed homes in order to finance the building of the remaining lots. The loans are secured, but they are often subordinated to conventional loans to finance the construction of homes.
The Las Vegas new home market continues to be very active, driven by an expansion of hotel and gaming facilities, steady immigration into the area, driven by the growth of the area's high-job growth. The Salt Lake City home building market is also very active, driven by the growth of the area's high-technology industry and the city's confining land features, which have resulted in high urban density. The Company also finances projects in Mesquite, Nevada, and in the suburbs of St. George, Utah, which have attracted new residents, many of whom are fleeing what they consider to be over-crowded conditions in Las Vegas.
PROPERTY MANAGEMENT
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents balance at July 31, 1998 was $752,493 compared with $797,514 at the end of fiscal year 1997.
Cash provided by operating activities amounted to $597,782 in 1998 and resulted primarily from the net decrease in investments in real estate of $1,433,827 related to the Company's Nevada and Utah ADC arrangements.
Cash inflows in 1998 provided by investing activities amounted to $239,159 which are attributed to collections on long-term receivables and proceeds from the sale of other investments. Cash used in financing activities of $881,962 included proceeds of loan participation agreements of $832,500 which were offset by payments made under loan participation agreements of $1,556,708 (see note 6 to the consolidated financial statements).
During fiscal year 1998, the Company was able to meet its operating cash requirements with cash flows generated from operating and investing activities. Cash inflows and outflows from investments in Copper Bluffs, LLC, Sunset Bay, LLC, Red Rock Canyon, LLC, Touchstone Development of Utah, LLC, and Hearthstone Homes, Inc. will continue into fiscal year 1999. Cash requirements for fiscal year 1999 will be satisfied from institutional borrowings, refinancing of notes payable, net collections of notes receivable, cash in banks at year end, net collections of ADC loans and additional loan participation agreements.
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, 1998 and 1997.
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, 1998:
(1) Mr. Dean T. W. Ho is the brother of Mr. Stuart T. K. Ho. (2) Mr. Stanley W. Hong is the brother-in-law 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, 1998:
(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. No events have occurred during the past five years that are material to an evaluation of the ability or integrity of any executive officer.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table shows the compensation for each of the years ended July 31, 1998, 1997, 1996 and 1995 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, 1998, 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, 1998, 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; and (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.
During fiscal year 1995, the Company borrowed $100,000 from certain officers of the Company through unsecured short-term notes. As of July 31, 1998, the balance of these short-term notes were $5,000 due to an officer.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company entered into loan participation agreements during 1997 and 1998 which provided that the Company sell, without recourse, to participants an undivided participating interest in the loans to Pageantry Communities, Inc., Touchstone Development of Utah, LLC and Hearthstone Homes, Inc. (see footnote 5 to the consolidated financial statements). Included in the total participants share of the loan commitment to Pageantry Communities, Inc., amounting to $485,550 at July 31, 1997, was $226,590 borrowed from an officer of a subsidiary of the Company. There were no outstanding amounts due to participants on the loan agreement with Pageantry Communities, Inc. at July 31, 1998. Included in the total participants share of the loan commitment to Touchstone Development of Utah, LLC, amounting to $750,000 at July 31, 1997, was $150,000 borrowed from a director of the Company and $75,000 borrowed from an officer 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. Included in the total participants share of the loan commitment to Hearthstone Homes, Inc., amounting to $119,804 at July 31, 1998 was borrowed 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, 1998.
(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, 1998 and 1997
Consolidated Statements of Operations and Retained Earnings - Years ended July 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows - Years ended July 31, 1998, 1997, and 1996
Notes to Consolidated Financial Statements
Schedules:
II Valuation and Qualifying Accounts and Reserves - Years ended July 31, 1998, 1997, and 1996
III Real Estate and Accumulated Depreciation - July 31, 1998
IV Mortgage Loans on Real Estate - July 31, 1998
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, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended July 31, 1998, 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/ KPMG PEAT MARWICK LLP
Honolulu, Hawaii October 23, 1998
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
July 31, 1998 and 1997
(Continued)
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
July 31, 1998 and 1997
See accompanying notes to consolidated financial statements.
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Retained Earnings
Years ended July 31, 1998, 1997 and 1996
See accompanying notes to consolidated financial statements.
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended July 31, 1998, 1997 and 1996
(Continued)
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended July 31, 1998, 1997 and 1996
See accompanying notes to consolidated financial statements.
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 31, 1998, 1997 and 1996
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES
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.
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.
REAL ESTATE ACCOUNTING
CARRYING AMOUNTS
Developed real estate and undeveloped land held for sale are carried at the lower of cost or market value.
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 determined and recognized under either the installment, cost recovery, deposit or percentage of completion method.
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
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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.
CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents. At July 31, 1998 and 1997, the Company held no instruments that would be considered cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method.
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.
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.
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 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.
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on August 1, 1996. 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. Adoption of this Statement did not have a material impact on the Company's financial position, results of operations, or liquidity.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income and SFAS No. 131, Disclosures About Segments of An Enterprise and Related Information. SFAS No. 130 establishes standards for reporting and display of comprehensive income 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 investments by and distributions to owners. SFAS No. 131 establishes standards for the way that public business enterprises report selected quarterly information about operating segments, including information on products and services, geographic areas and major customers based on a management approach to reporting. SFAS No. 130 and 131 are effective for fiscal years beginning after December 15, 1997, although SFAS No. 131 need not be applied to interim periods in the initial year of implementation. Reclassification of financial statements for prior periods will be required for comparative purposes. As these statements relate solely to disclosure requirements, their implementation will not have an affect on the Company's financial condition, results of operations or liquidity.
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 OPERATIONS
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:
The components of net liabilities of discontinued operations included in the consolidated balance sheet at July 31, 1997 are as follows:
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) SECURITY INVESTMENTS
Gross unrealized gains on the portfolio of marketable equity securities at July 31, 1997 and 1996 and net realized gains for the years then ended pertaining to all security investments were as follows:
(4) DEVELOPED REAL ESTATE
The components of developed real estate at July 31, 1998 and 1997 were as follows:
(5) REAL ESTATE INVESTMENTS
UNDEVELOPED LAND
Undeveloped land held for sale at July 31, 1998 and 1997 consisted of approximately 39 acres in Makaha Valley on the island of Oahu, state of Hawaii.
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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, 1998 and 1997, all ADC loans were made to corporate real estate ventures which are owned by individuals who have personally guaranteed payment of the ADC loans.
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.
The following paragraphs summarize the ADC loan arrangements and present summary financial information for the corporate real estate ventures.
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 and 1997, the Company's aggregate investment in the real estate project amounted to $392,580 and $539,449, respectively, including $27,200 and $58,600, respectively, of capitalized interest. The ADC loan is secured by a parcel of land in Clark County, Nevada.
Financial information of Copper Bluffs, LLC is as follows:
CONDENSED BALANCE SHEETS JUNE 30, 1998 AND JULY 31, 1997
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
CONDENSED STATEMENTS OF INCOME (LOSS)
PERIODS ENDED JUNE 30, 1998 AND JULY 31, 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 and 1997, the Company's aggregate investment in the real estate project amounted to $288,132 and $554,668, respectively, including $38,900 and $56,400, respectively, of capitalized interest. The ADC loan is secured by a parcel of land in Clark County, Nevada.
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Financial information of Sunset Bay, LLC is as follows:
CONDENSED BALANCE SHEETS
JUNE 30, 1998 AND JULY 31, 1997
CONDENSED STATEMENTS OF INCOME (LOSS)
PERIODS ENDED JUNE 30, 1998 AND JULY 31, 1997
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
PAGEANTRY COMMUNITIES, INC.
On June 25, 1996, the Company extended a $900,000 ADC loan commitment to Pageantry Communities, Inc. to finance a residential real estate project known as Tradewinds Subdivision in Clark County, Nevada. The ADC loan was fully repaid as of July 31, 1998.
In fiscal year 1997, 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 Pageantry Communities, Inc. The participants' share of the loan commitment was fully repaid to participants as of July 31, 1998.
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 and 1997, the Company's aggregate investment in the real estate project amounted to $208,706 and $485,636, respectively, including $17,300 and $33,300, respectively, of capitalized interest. The ADC loan is secured by a parcel of land in Washington County, Utah.
Financial information of Red Rock Canyon, LLC is as follows:
CONDENSED BALANCE SHEETS
JUNE 30, 1998 AND JULY 31, 1997
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
CONDENSED STATEMENTS OF INCOME (LOSS)
PERIODS ENDED JUNE 30, 1998 AND JULY 31, 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 and 1997, the Company's aggregate investment in the real estate project amounted to $406,592 and $825,354, respectively, including $2,400 and $19,700, respectively, of capitalized interest. The ADC loan is secured by a parcel of land in Tooele County, Utah. Restrictive loan covenants limit the maximum amount of loan proceeds available during various phases of the project.
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Financial information of Touchstone Development of Utah, LLC is as follows:
CONDENSED BALANCE SHEETS
JUNE 30, 1998 AND JULY 31, 1997
CONDENSED STATEMENTS OF LOSS
ELEVEN MONTHS ENDED JUNE 30, 1998
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 and $750,000 at July 31, 1998 and 1997, respectively. Certain participants are related parties which, in the aggregate, totaled $117,461 and $225,000 at July 31, 1998 and 1997, respectively.
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, 1998, the Company's aggregate investment in the real estate project amounted to $229,400, including $4,400 of capitalized interest. The ADC loan is secured by a parcel of land in Clark County, 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 $119,804 at July 31, 1998. The participant is an officer of a subsidiary of the Company.
(6) INDEBTEDNESS
Indebtedness at July 31, 1998 and 1997 is summarized as follows:
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Maturities of indebtedness are shown in the following summary:
*Notes were repaid in August 1998.
The carrying amounts of assets pledged as collateral for indebtedness as of July 31, 1998 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, 1998.
(7) INCOME TAXES
The benefit for income taxes applicable to the net loss for fiscal years 1998, 1997 and 1996 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 to Consolidated Financial Statements, Continued
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at July 31, 1998 and 1997 are presented below.
The valuation allowance for deferred tax assets as of August 1, 1997 and 1996 were $1,698,600 and $1,596,300, respectively. The net change in the total valuation allowance for the years ended July 31, 1998 and 1997 were increases of $102,300 and $311,200, 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, 1998, the Company had tax net operating loss carryforwards of approximately $3,600,000 and $4,400,000 for federal and state income tax purposes, respectively, which can be used to offset future taxable income through 2013.
(8) 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.
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The accrued obligation as of July 31, 1998 and 1997 amounted to $149,158 and is included in the consolidated balance sheet as other payables.
(9) 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, 1998 are summarized as follows:
Rent expense for all operating leases was $176,509, $408,250 and $501,100 for the years ended July 31, 1998, 1997 and 1996, respectively.
(10) FOURTH QUARTER RESULTS (UNAUDITED)
Fourth quarter results for the year ended July 31, 1998 are as follows:
(11) 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.
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12) SEGMENT INFORMATION The Company has classified its business activities into significant segments for the years ended July 31, 1998, 1997 and 1996. 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, 1998, 1997 and 1996:
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Sales between business segments are immaterial and are netted against the sales of the respective segment.
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(13) 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, 1998 and 1997, the Company had outstanding ADC loans of $1,435,210 and $2,711,737, respectively, due from corporate real estate ventures. Under participation agreements the Company had sold $511,342 and $1,235,550 of these loans without recourse as of July 31, 1998 and 1997, respectively (see note 5).
(14) 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 and cash equivalents, trade accounts receivable, accounts payable, accrued expenses and debentures payable approximate fair value because of the short maturity of these instruments.
OTHER INVESTMENT SECURITIES
Fair value is based on dealer quotes.
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.
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.
DEFERRED COMPENSATION PAYABLE
The carrying value of deferred compensation payable estimates fair value.
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
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered.
SCHEDULE II
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years ended July 31, 1998, 1997, and 1996
(1) Accounts receivable written off.
See accompanying independent auditors' report.
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SCHEDULE III
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Real Estate and Accumulated Depreciation
July 31, 1998
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SCHEDULE III
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Real Estate and Accumulated Depreciation, Continued
(1) Changes during the two years ended July 31, 1998:
(2) Aggregate original cost for federal income tax purposes amounted to $1,865,475 for 1998. (3) Presentation on consolidated balance sheet as of July 31, 1998:
See accompanying independent auditors' report.
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SCHEDULE IV
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Mortgage Loans on Real Estate
July 31, 1998
(1) Changes during the years ended July 31, 1998 and 1997:
See accompanying independent auditors' report.
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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.
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