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 April 30, 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 April 30, 1999. 2 PART I - FINANCIAL INFORMATION CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets April 30, 1999 and July 31, 1998 ASSETS April 30, July 31, 1999 1998 (Unaudited) ----------- ----------- Cash and cash equivalents $ 117,000 752,493 Receivables: Trade accounts and notes, less allowance for doubtful receivables of $1,000 at April 30, 1999 and July 31, 1998 52,902 77,074 Accrued interest 37,951 565,458 Other 93,767 161,514 ----------- ----------- Total receivables 184,620 804,046 ----------- ----------- Developed real estate, less accumulated depre- ciation of $270,294 at April 30, 1999 and $253,533 at July 31, 1998 1,524,991 1,401,479 Undeveloped land held for sale 134,474 134,474 Other investments: Real estate 1,398,273 1,525,410 Securities 686,370 737,202 ----------- ----------- 2,084,643 2,262,612 ----------- ----------- Property and equipment, at cost: Leasehold improvements 58,469 61,282 Furniture and equipment 399,002 394,610 ----------- ----------- 457,471 455,892 Less accumulated depreciation and amortization (419,608) (413,242) ----------- ----------- Net property and equipment 37,863 42,650 Deferred charges and other assets 36,193 9,020 ----------- ----------- $ 4,119,784 5,406,774 =========== =========== 3 CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets, cont'd. April 30, 1999 and July 31, 1998 LIABILITIES AND STOCKHOLDERS' DEFICIENCY April 30, July 31, 1999 1998 (Unaudited) ----------- ----------- Indebtedness (current installments of $3,738,529 at April 30,1999 and $4,208,043 at July 31, 1998): Debentures $ 1,906,485 1,942,745 Mortgage notes 1,874,173 1,841,684 Other notes, secured 405,659 590,470 Other notes, unsecured 522,323 502,355 ----------- ----------- Total indebtedness 4,708,640 4,877,254 ----------- ----------- Accounts payable, trade 160,535 99,521 Accrued expenses 547,696 721,093 Other payables: Loans under participation agreement: Related parties 380,404 237,265 Other 524,922 274,077 Other 174,047 625,297 ----------- ----------- 1,079,373 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) (512,059) 436,668 ----------- ----------- 1,681,027 2,629,754 Deduct cost of 691,082 common shares in treasury (4,057,487) (4,057,487) ----------- ----------- Stockholders' deficiency (2,376,460) (1,427,733) ----------- ----------- $ 4,119,784 5,406,774 =========== =========== See accompanying notes to condensed consolidated financial statements. 4 CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations Three months ended April 30, 1999 and 1998 and Nine months ended April 30, 1999 and 1998 (Unaudited) Three Months Nine Months April 30, April 30, ---------------------------- ---------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Revenues: Commissions and fees $ 187,729 201,415 $ 490,654 542,837 Income from investments 195,369 157,808 578,515 621,040 Other 6,317 (885) 17,694 79,190 ----------- ----------- ----------- ----------- 389,415 358,338 1,086,863 1,243,067 ----------- ----------- ----------- ----------- Cost and expenses: Other direct operating expenses and general and administrative expenses 376,860 395,995 1,222,177 1,354,201 Provision for losses from real estate investments 37,297 -- 437,297 -- Interest 90,957 91,560 376,116 340,535 ----------- ----------- ----------- ----------- 505,114 487,555 2,035,590 1,694,736 ----------- ----------- ----------- ----------- Loss from continuing operations (115,699) (129,217) (948,727) (451,669) ----------- ----------- ----------- ----------- Discontinued operations: Loss from operations of discon- tinued bakery operations -- -- -- (36,272) Gain from sale of certain assets and liabilities of discontinued bakery operations -- -- -- 415,499 ----------- ----------- ----------- ----------- Net earnings from discon- tinued operations -- -- -- 379,227 ----------- ----------- ----------- ----------- Net loss (115,699) (129,217) (948,727) (72,442) Retained earnings (accumulated deficit) at beginning of period (396,360) 760,310 436,668 703,535 ----------- ----------- ----------- ----------- Retained earnings (accumulated deficit) at end of period $ (512,059) 631,093 $ (512,059) 631,093 =========== =========== =========== =========== 5 CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations - cont'd. Three months ended April 30, 1999 and 1998 and Nine months ended April 30, 1999 and 1998 (Unaudited) Three Months Nine Months April 30, April 30, -------------------------- -------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Earnings (loss) per common share: Loss from continuing operations $ (.11) (.13) $ (.92) (.44) Earnings from discontinued operations -- -- -- .37 ---------- ---------- ---------- ---------- Net loss per common share $ (.11) (.13) $ (.92) (.07) ========== ========== ========== ========== 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. 6 CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows Nine months ended April 30, 1999 and 1998 (Unaudited) 1999 1998 ----------- ----------- Net cash provided by (used in) operating activities $(1,272,097) 138,108 ----------- ----------- Cash flows from investing activities: Proceeds from sales of securities 278,305 -- Capital expenditures (8,944) (16,723) ----------- ----------- Net cash provided by (used in) investing activities 269,361 (16,723) ----------- ----------- Cash flows from financing activities: Proceeds from indebtedness 241,070 176,190 Principal payments on indebtedness (409,684) (258,335) Proceeds received under loan participa- tion agreements 1,053,202 810,283 Payments made under loan participation agreements (517,345) (1,304,776) ----------- ----------- Net cash provided by (used in) financing activities 367,243 (576,638) ----------- ----------- Net decrease in cash and cash equivalents (635,493) (455,253) Cash and cash equivalents at beginning of period 752,493 797,514 ----------- ----------- Cash and cash equivalents at end of period $ 117,000 342,261 =========== =========== See accompanying notes to condensed consolidated financial statements. 7 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 January 31, 1999. 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 April 30, 1999 and July 31, 1998, the results of its operations for the three and nine months ended April 30, 1999 and 1998, and its cash flows for the nine months ended April 30, 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) Real Estate Investments COPPER BLUFFS, LLC 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 April 30, 1999. The loan is secured by the 59 parcels. The loan terms provide for repayment of $13,786 for each lot sold with final payment due on March 1, 2001. 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, LLC 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. RED ROCK CANYON, LLC The Company obtained title to 11 improved residential housing lots in Washington County, Utah in satisfaction of its ADC loan to Red Rock Canyon, LLC. As of April 30, 1999, the Company had sold 3 of the 11 lots. The net realizable values of the remaining 8 lots totals $136,000 and is recorded as developed real estate in the consolidated balance sheet as of April 30, 1999. 8 The lots are secured by a first mortgage from a bank. The Company is obliged to remit $15,677 to the bank for each lot sold. The balance of the bank loan is $43,677 at April 30, 1999 and is included in mortgage notes in the consolidated balance sheet. As a result of the transaction, the Company recorded a provision for loss from real estate investment of $37,297 during the quarter ended April 30, 1999. TOUCHSTONE DEVELOPMENT OF UTAH, LLC 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. 9 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 nine months ended April 30, 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 nine months ended April 30, 1998. Income from Investments The increase in income from investments of $37,561 for the three months ended April 30, 1999 as compared to the same period in 1998 is primarily due to the sale of security investments resulting in gains totaling approximately $196,000. These gains were offset by 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, Red Rock Canyon, LLC and Touchstone Development of Utah, LLC during the three months ended April 30, 1999. The Company has determined that the loans are impaired and collectibility is questionable. Provision for Loss on Real Estate Investment Management has provided for losses on the impaired ADC loans of $437,297 during the nine months ended April 30, 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, the Company 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 an ADC loan of $813,376. These transactions resulted in a provision for loss from real estate investment of $100,000. 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 quarter ended April 30, 1999. Management does not consider any other ADC loans to be impaired as of April 30, 1999. Other Income The decrease in other income of $61,496 for the nine months ended April 30, 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. 10 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. LIQUIDITY AND CAPITAL RESOURCES NINE MONTHS ENDED APRIL 30, 1999 At April 30, 1999, the Company held cash and cash equivalents of $117,000. The decrease in cash of $635,493 for the nine months ended April 30, 1999 is primarily due to cash used in operating activities. Included in cash used in operating activities for the nine months ended April 30, 1999 was approximately $1,382,400 of advances made and $714,200 of repayments received on advances for the construction of residential developments in Nevada and Utah. The Company's net loss $948,727 is also included in cash used in operating activities. Cash flows from financing activities for the nine months ended April 30, 1999 includes repayments on loan participation agreements on the Company's ADC loans of approximately $517,345. Proceeds received on loan participation agreements amounted to $1,053,202 for the nine months ended April 30, 1999. The Company met its operating cash requirements for the nine months ended April 30, 1999 by using cash on hand at July 31, 1998 and proceeds from loan participation agreements. FUTURE CASH REQUIREMENTS The decline in cash during the nine months ended April 30, 1999 is directly related to the loss of revenues from real estate investments, particularly with respect to the Company's ADC loans. Management expects to continue to fully realize interest income and profit participation revenues from its remaining ADC loans with Hearthstone Homes, Inc. and Hearthstone Homebuilders, Inc. during the remaining quarter of fiscal 1999. Cash requirements for ADC commitments will continue to be satisfied primarily by participation agreements. Management expects cash inflows from Martin Development, Inc. to continue through March 2001, with approximately $200,000 to be received in June 1999. Approximately 58% of the amount on the loan due from Martin Development, Inc. are due to the loan participants. During the nine months ended April 30, 1999, the Company has implemented cost reduction measures, primarily related to general and administrative expenses. As a result of management's cost reduction efforts, salary costs have been reduced by approximately 7% during the three months ended April 30, 1999, as compared to the same period last year. Management will continue to reduce expenses in order to meet its current obligations during the fourth quarter of fiscal 1999. 11 Long-term debt that are scheduled for repayment are expected to be refinanced with the respective lending institutions. Management also expects that cash inflows will also be realized in the remaining quarter of fiscal 1999 from collections of accounts receivable and sales of security investments. 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. 12 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. 13 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: June 18, 1999 /s/ STUART T.K. HO ---------------------------------------- Chairman of the Board and President Dated: June 18, 1999 /s/ DONALD M. WONG ---------------------------------------- Senior Vice President and Treasurer