1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended January 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to ____________________ Commission File Number 0-4179 CAPITAL INVESTMENT OF HAWAII, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Hawaii 99-0065664 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) Suite 1700, Makai Tower, 733 Bishop Street Honolulu, Hawaii 96813 - ------------------------------------------ ------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (808) 537-3981 -------------------------- No Change - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. There were 1,032,683 shares outstanding of common stock, no par value, as of January 31, 1999. 2 PART I - FINANCIAL INFORMATION CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets January 31, 1999 and July 31, 1998 ASSETS January 31, July 31, 1999 1998 ------------ ----------- (Unaudited) Cash and cash equivalents $ 449,644 $ 752,493 Receivables: Trade accounts and notes, less allowance for doubtful receivables of $1,000 at January 31, 1999 and July 31, 1998 85,659 77,074 Accrued interest 195,161 565,458 Other 123,431 161,514 ------------ ----------- Total receivables 404,251 804,046 ------------ ----------- Developed real estate, less accumulated depre- ciation of $264,676 at January 31, 1999 and $253,533 at July 31, 1998 1,394,009 1,401,479 Undeveloped land held for sale 134,474 134,474 Other investments: Real estate 1,560,099 1,525,410 Securities 721,109 737,202 ------------ ----------- 2,281,208 2,262,612 ------------ ----------- Property and equipment, at cost: Leasehold improvements 58,469 61,282 Furniture and equipment 400,594 394,610 ------------ ----------- 459,063 455,892 Less accumulated depreciation and amortization (418,062) (413,242) ------------ ----------- Net property and equipment 41,001 42,650 Deferred charges and other assets 21,290 9,020 ------------ ----------- $ 4,725,877 $ 5,406,774 ============ =========== 1 3 CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets, cont'd. January 31, 1999 and July 31, 1998 LIABILITIES AND STOCKHOLDERS' DEFICIENCY January 31, July 31, 1999 1998 ------------ ----------- (Unaudited) Indebtedness (current installments of $3,696,447 at January 31,1999 and $4,208,043 at July 31, 1998): Debentures $ 1,932,745 $ 1,942,745 Mortgage notes 1,834,489 1,841,684 Other notes, secured 309,488 590,470 Other notes, unsecured 512,458 502,355 ------------ ----------- Total indebtedness 4,589,180 4,877,254 ------------ ----------- Accounts payable, trade 190,730 99,521 Accrued expenses 800,148 721,093 Other payables: Loans under participation agreement: Related parties 474,996 237,265 Other 594,600 274,077 Other 336,984 625,297 ------------ ----------- 1,406,580 1,136,639 ------------ ----------- Stockholders' deficiency: Common stock, no par value, stated value $1 per share: Authorized 2,531,765 shares; issued 1,723,765 shares. (No shares reserved for conversion, warrants, options or other rights) 1,723,765 1,723,765 Additional paid-in capital 469,321 469,321 Retained earnings (accumulated deficit) (396,360) 436,668 ------------ ----------- 1,796,726 2,629,754 Deduct cost of 691,082 common shares in treasury (4,057,487) (4,057,487) ------------ ----------- Stockholders' deficiency (2,260,761) (1,427,733) ------------ ----------- $ 4,725,877 $ 5,406,774 ============ =========== See accompanying notes to condensed consolidated financial statements. 2 4 CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations Three months ended January 31, 1999 and 1998 and Six months ended January 31, 1999 and 1998 (Unaudited) Three Months Six Months January 31, January 31, ---------------------------------- ----------------------------------- 1999 1998 1999 1998 -------------- ------------- --------------- -------------- Revenues: Commissions and fees $ 180,470 210,900 $ 302,925 341,422 Income from investments 187,730 270,511 383,146 463,232 Other 6,190 - 11,377 80,075 -------------- ------------- --------------- -------------- 374,390 481,411 697,448 884,729 -------------- ------------- --------------- -------------- Cost and expenses: Other direct operating expenses and general and administrative expenses 393,598 434,880 845,317 958,206 Provision for loss from real estate investments 400,000 - 400,000 - Interest 133,789 161,642 285,159 248,975 -------------- ------------- --------------- -------------- 927,387 596,522 1,530,476 1,207,181 -------------- ------------- --------------- -------------- Loss from continuing operations (552,997) (115,111) (833,028) (322,452) -------------- ------------- --------------- -------------- Discontinued operations: Loss from operations of discon- tinued bakery operations - (5,433) - (36,272) Gain from sale of certain assets and liabilities of discontinued bakery operations - 415,499 - 415,499 -------------- ------------- --------------- -------------- Net earnings from discon- tinued operations - 410,066 - 379,227 -------------- ------------- --------------- -------------- Net earnings (loss) (552,997) 294,955 (833,028) 56,775 Retained earnings at beginning of period 156,637 465,355 436,668 703,535 -------------- ------------- --------------- -------------- Retained earnings (accumulated deficit) at end of period $ (396,360) 760,310 $ (396,360) 760,310 ============== ============= =============== ============== Earnings (loss) per common share: Loss from continuing operations $ (.54) (.11) $ (.81) (.31) Earnings (loss) from discontinued operations - .40 - .36 -------------- ------------- --------------- -------------- Net earnings (loss) per common share $ (.54) .29 $ (.81) .05 ============== ============= =============== ============== Weighted average number of common shares outstanding during the period 1,032,683 1,032,683 1,032,683 1,032,683 ============== ============= =============== ============== See accompanying notes to condensed consolidated financial statements. 4 5 CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows Six months ended January 31, 1999 and 1998 (Unaudited) 1999 1998 ------------ ----------- Net cash provided by (used in) operating activities $ (840,863) $ 300,703 ------------ ----------- Cash flows from investing activities: Capital expenditures (3,171) (9,223) Proceeds from sales of securities 127,005 - ------------ ----------- Net cash provided by (used in) investing activities 123,834 (9,223) ------------ ----------- Cash flows from financing activities: Proceeds from issuance of long-term debt 17,605 167,023 Principal payments on long-term debt (305,679) (180,257) Proceeds received under loan participa- tion agreements 1,053,202 435,493 Payments made under loan participation agreements (350,948) (1,019,352) ------------ ----------- Net cash provided by (used in) financing activities 414,180 (597,093) ------------ ----------- Net decrease in cash and cash equivalents (302,849) (305,613) Cash and cash equivalents at beginning of period 752,493 797,514 ------------ ----------- Cash and cash equivalents at end of period $ 449,644 $ 491,901 ============ =========== See accompanying notes to condensed consolidated financial statements. 5 6 CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Information (Unaudited) (1) Basis of Presentation The accompanying unaudited consolidated financial information have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited consolidated financial statements should be read in conjunction with the report on SEC Form 10-K for the fiscal year ended July 31, 1998 and the consolidated financial statements and the notes thereto in the Company's Quarterly Report on SEC Form 10-Q for the quarter ended October 31, 1998. In the opinion of the Company's management, the accompanying unaudited financial information contains all material adjustments required by generally accepted accounting principles to present fairly the Company's financial position as of January 31, 1999 and July 31, 1998, the results of its operations for the three and six months ended January 31, 1999 and 1998, and its cash flows for the six months ended January 31, 1999 and 1998. All such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q or other referenced material. Results of operations for interim periods are not necessarily indicative of results for the full year. (2) 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 requires that changes in comprehensive income be reported in a financial statement. 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 requires public companies to report selected quarterly information about business 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. (3) Real Estate Investments COPPER BLUFFS In January 1999, the Company obtained title to 59 parcels of land in Clark County, Nevada in satisfaction of its acquisition, development and construction (ADC) loan to Copper Bluffs, LLC. Title to the parcels were subsequently assigned to Martin Development , Inc., a Nevada Corporation in exchange for an non-interest bearing loan of $813,376 which is included in the consolidated balance sheet as real estate investments at January 31, 1999. The loan is secured by the 59 parcels. The loan terms provide for repayment of $13,786 for each lot sold of which $96,502 is due on or before April 15, 1999 and final payment due on March 1, 2001. 6 7 As a result of the transactions, the Company recorded a provision for loss from real estate investment of $100,000 during the quarter ended January 31, 1999. SUNSET BAY At January 31, 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. (4) Subsequent Event In February 1999, the Company began negotiations with a Nevada corporation to assign its interest in its ADC loan to Touchstone Development of Utah, LLC. The terms of the assignment includes a purchase price of $110,000 with interest of 20% per annum from January 1, 1999 to the date of closing. The closing date is expected to be March 31, 1999. The purchase price and interest thereon is expected to satisfy the net investment balance recorded on the Company's consolidated balance sheet of $106,457 at January 31, 1999. 7 8 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The Company and its subsidiaries are engaged principally in the business of acquiring, developing, leasing and dealing in real estate and investing in securities, which are subject to various factors which cause fluctuations between periods. Accordingly, the results of operations for the three and six months ended January 31, 1999 are not necessarily indicative of results to be expected for the year and are not necessarily comparable to the results of operations for the three and six months ended January 31, 1998. Income from Investments The decrease in income from investments of $82,781 and $80,086, respectively for the three and six months ended January 31, 1999 as compared to the same periods in 1998 is primarily due to several non-performing acquisition, development and construction (ADC) loans in Nevada and Utah. The Company has not received principal or interest payments on the ADC loans made to Copper Bluffs, LLC, Sunset Bay, LLC and Touchstone Development of Utah, LLC during the quarter ended January 31, 1999. The borrower under those ADC loans has indicated that the loans have been impaired and collectibility is questionable. Provision for Loss on Real Estate Investment Management has provided for losses on the impaired ADC loans of $400,000 for the quarter ended January 31, 1999. The provision includes the write-off of all principal and interest receivable on the ADC loan to Sunset Bay, LLC of $300,000. Further, management has obtained title to 59 parcels in Clark County, Nevada in satisfaction of its ADC loan to Copper Bluffs, LLC. The parcels were subsequently assigned to Martin Development, Inc. in exchange for a loan of $813,376. These transactions resulted in an additional provision for loss of $100,000. Management does not consider any other ADC loans to be in distress as of January 31, 1999. Other Income The decrease in other income of $68,698 for the six months ended January 31, 1999 as compared to the same period in 1998 is primarily due to the receipt of cash surrender value of officer life insurance policies which were cancelled by the Company during the first quarter of fiscal 1998. 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. In October 1997, the Company entered into an agreement to sell certain assets and liabilities of its subsidiary Latipac Fine Foods, Inc. and to discontinue its bakery operations. 8 9 LIQUIDITY AND CAPITAL RESOURCES At January 31, 1999, the Company held cash and cash equivalents of $449,644. The decrease in cash of $302,849 for the six months ended January 31, 1999 is primarily due to cash used in operating activities. Included in cash used in operating activities for the six months ended January 31, 1999 was approximately $1,182,403 of advances made and $562,655 of repayments received on advances for the construction of residential developments in Nevada and Utah. The Company's net loss $833,028 is also included in cash used in operating activities. Cash flows from financing activities for the six months ended January 31, 1999 includes repayments on loan participation agreements on the Company's ADC loans to of approximately $350,948. Proceeds received on loan participation agreements amounted to $1,053,202 for the six months ended January 31, 1999. The Company met its operating cash requirements for the six months ended January 31, 1999 by using cash on hand at July 31, 1998 and proceeds from loan participation agreements. Cash inflows and outflows from ADC loans to Hearthstone Homes, Inc. and Hearthstone Homebuilders, Inc. will continue throughout fiscal year 1999. Management expects cash inflows from Martin Development, Inc. to continue through March 2001, with approximately $96,500 to be received by April 15, 1999. Included in the Martin Development, Inc. ADC loan is approximately $470,000 due to loan participants which is payable upon receipt of such funds from Martin Development, Inc. Further, management is currently negotiating an assignment of its interest in the Company's ADC loan to Touchstone Development of Utah, LLC for $110,000. The proceeds of which are expected to be collected in March 1999. Further, in February and March 1999, the Company received approximately $150,000 of sales proceeds on the sale of security investments. Management will continue to sell security investments as necessary to meet cash requirements for the remaining of fiscal year 1999. Cash requirements for ADC commitments will continue to be satisfied primarily by participation agreements. Long-term debt that is scheduled for repayment is expected to be refinanced with the respective lending institutions. Management also expects that cash inflows will also be realized in the remaining quarters of fiscal 1999 from collections of accounts receivable. YEAR 2000 The Company has conducted a comprehensive review of its computer systems to identify the systems that could be affected by the "Year 2000" issue and is developing an implementation plan to resolve the issue. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather then the year 2000. This could result in a major system failure or miscalculations. The company presently believes that the Year 2000 problem will not pose significant operational problems for the Company's computer systems. 9 10 PART II - OTHER INFORMATION Items 1,2,3,5,6 None Item 4. The following actions were taken at the annual stockholders meeting held on January 29, 1999: a. Directors were re-elected for the year as follows: Stuart T.K. Ho Dean T.W. Ho Donald M. Wong Stanley W. Hong Pedro Ada C.B. Sung b. KPMG LLP was re-elected independent auditors for the year ending July 31, 1999 by a vote of 570,958 shares in the affirmative and none in the negative. 10 11 SIGNATURES Pursuant to the requirements of the Securities and 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. Dated: March 15, 1999 /s/ STUART T.K. HO ----------------------------------- Chairman of the Board and President Dated: March 15, 1999 /s/ DONALD M. WONG ----------------------------------- Senior Vice President and Treasurer