Registration of Securities of a Small-Business Issuer — Form 10-SB
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10SB12G Form 10-Sb 45 161K
2: EX-2.01 Certificate of Incorporation 2 8K
3: EX-2.02 Certificate of Merger, With Agreement of Merger 5 17K
4: EX-2.03 By-Laws 11 25K
5: EX-2.04 Amendment to By-Laws 1 8K
6: EX-5.01 Lock Up Agreement 1 5K
7: EX-8.01 Agreement and Plan of Merger 33 99K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of the Securities Exchange
Act of 1934
SURETY HOLDINGS CORP.
(Exact name of Registrant in its charter)
DELAWARE 56-2229054
(State of organization) (I.R.S. Employer Identification No.)
850 Fort Plains Road, Howell, New Jersey 07731
(Address of principal executive offices) (Zip code)
Registrant's Telephone Number, including area code: (732) 886-0706
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act: Common Stock
Forward looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934 appear
throughout this report. These statements relate to the Company's expectations,
hopes, beliefs, intentions, goals or strategies regarding the future and are
based on certain underlying assumptions by the Company. Such assumptions are, in
turn, based on information available and internal estimates and analyses of
general economic conditions, competitive factors, conditions specific to the
property, unfavorable local, regional, national, international and economic
developments, weather conditions, competition, regulations pertaining to
property development, federal, state and local. Readers are urged to carefully
review and consider the various disclosures made by the Company in this Report,
as an attempt to advise interested parties of the risks and factors that may
affect the Company's business, financial condition and results of operations and
prospects.
PART I
ITEM 1. BUSINESS.
(a) DEVELOPMENT OF BUSINESS.
In June 1999, Surety Holdings Corp., a Florida corporation (incorporated in
December 1995), merged with Surety Holdings Corp., a Delaware corporation
(incorporated in May 1999). The surviving Delaware corporation ("Surety")
continued the Florida corporation's endeavors of pursuing business
opportunities. Chalon International of Hawaii, Inc. ("Chalon Hawaii"), the sole
subsidiary of Surety, was incorporated in Hawaii in December 1988 for the
primary purpose of real estate development, including the acquisition of fee
simple land or leaseholds, and the construction of improvements thereon.
In December 1999, Surety issued 2,000,000 shares of its common stock in
exchange for 100% of Chalon Hawaii's outstanding shares in a recapitalization
transaction accounted for as a reverse acquisition with a "shell" company.
Chalon Hawaii was deemed the accounting acquirer and Surety was deemed the
legal acquirer (see Note 3 to Consolidated Financial Statements).
Surety and Chalon Hawaii's (collectively, the "Company") primary focus is
the development of a hotel, 18-hole golf course and resort homes on
approximately 600 acres of land in the North Kahola district of Hawaii Island
in the state of Hawaii (the "Mahukona development project").
(b) NARRATIVE DESCRIPTION OF BUSINESS.
CHALON HAWAII
Chalon Hawaii owns approximately 18,000 acres of fee simple land in
North Kahola district of Hawaii Island (The Big Island), in the State of Hawaii,
USA. Chalon Hawaii has, since 1989, worked with the local Kohala community for
the master planning of the development and is intending to develop a New Style
Health community, utilizing eco-management of the excellent natural environment.
The plan is more than just building a resort area; it is a plan to integrate an
existing community with a new development plan for the 18,000 acres of land,
which is expected to include housing, recreational facilities, farming,
historical assets and commercial business institutes.
The Mahukona property consists of approximately 600 acres of land. Chalon
Hawaii has already acquired the necessary governmental permits for the
developments of a hotel, 18-hole golf course and approximately 87 sites for
resort homes. Located on the leeward (dry) side of the island, with resort
permitting in place, and general community and government acceptance as a resort
location, Mahukona is a valuable and critical component of the overall master
plan strategy. In keeping focused on an eco-based theme for the master plan, and
working towards Chalon's corporate goals, the Mahukona Resort will:
1. Emphasize sensitivity to the Hawaii environment, culture, human
physical and spiritual health, practicality, comfort and quality
accommodations.
2. Provide access to the unique, semi-exclusive Hawaiian eco-activities
on the Chalon land.
Although there is no assurance that this will, in fact, be the actual total
cost, it is expected that the total current cost for the Mahukona Development
will be approximately $70,000,000-$75,000,000. This estimated cost currently
includes a 100 Room Hotel, 100 Bungalow Units, 87 Lot units for Residential
Homes (land only, costs for building the homes are not included) 18-Hole Golf
Course and Sports Facilities.
In developing the property, the Company will rely upon a pool of
experienced and talented entities and individuals. One entity is the Lake Forest
Resort Development Team which is lead by Shoichi Kamon, who has extensive
experience in real estate development. Over the past 30 years, his experience
includes more than 50 restaurants, 5 hotels and the very successful Lake Forest
Resort. His development style is based on his management experience in the
hospitality industry, where his philosophy is to integrate beauty and
efficiency.
Another entity, TFP Inc., headed by Toru Yamaguchi, is a planning.
engineering and golf course design company. Mr. Yamaguchi's academic and
practical experience for civil engineering contributes to keeping costs down on
the construction of a Golf Course. TFP has been working with Chalon since the
Lake Forest Development. TFP, Inc., has extensive experience in planning of
housing projects as well as golf course projects all over Japan and Hawaii.
Additionally, Eco-Resort Management Co. is a company that is a spin-off
from Chalon International Co., created to be exclusively in charge of resort
management. Eco-Resort Management Co. operates Lake Forest Resort in Kyoto,
Japan. Chalon International was established in 1968 by Shoichi Kamon with a
small restaurant in Osaka, Japan. Since then, Chalon International Co. has grown
into a diversified international hospitality company, specializing in
restaurant, hotel and recreational projects in Japan, USA, Hong Kong and China.
Lake Forest Resort is Chalon International's Flagship Facility that has 45 Holes
of Golf, Hotels and a variety of Sports Facilities. Lake Forest is a membership
resort, with many corporate members.
Kohala Coast Resort Area is one of the most luxurious resort areas in the
US. The price range of accommodations in this area start from at approximately
$300 per night (no ocean view). Mahukona Resort is approximately a 20 minute
drive from the north point of the Kohala Coast Resort Area. The relation between
Mahukona Resort and Kohala Coast Resort is similar to Kapalua Resort and
Kaanapali Resort in Maui or Kahala Hilton and Waikiki in Oahu. This means
Mahukona is more isolated and an eco-related facility compared to Kohala Coast
Resort Area. Our strategy is to utilize Kohala Coast's luxury image and price
range without competing with their resorts. We expect to emphasize a "New Style
of Development", which is far beyond the regular resort development.
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LOCATION.
The State of Hawaii (the Aloha State) was admitted as the nation's 50th
state in 1959. It consists of eight major islands and 124 minor islands which
form a chain extending over 1,600 miles across the mid-Pacific Ocean.
With more than twice the landmass of all other Hawaiian Islands combined,
the nickname Hawaii's "Big Island" fits perfectly. At 4,028 square miles in
size, the Big Island is larger than the State of Connecticut, USA. Hawaii is the
youngest island in the chain (being 35 million years old) and the southernmost
point of the United States is on this island. The Big Island was formed by five
volcanoes, the world's most active and safest volcano, Kilauea, which has become
one of the island's most popular visitor attractions.
Hawaii Island is almost a "Mini Continent" by itself, offering everything
from active volcanoes to quiet sandy beaches; from dense tropical rainforests to
verdant pasturelands. A huge variety of marine life flourishes along Hawaii's
Mauna Kea, the tallest mountain at 13,736 feet in the Pacific Basin. The Big
Island provides astronomers with the best stargazing on the planet earth. The
diverse background of the Big Island residents creates an exciting blend of
cultural heritage. The Company believes that the population's ethnic makeup as
of 1996 was 40% Caucasian, 58% Asian or Pacific Islander and 1.8% mixed
non-Hawaiian.
Between Kona Airport and Mahukona, the area is called "Kohala Coast Resort
Area". The destination resorts along the Kona Kohala Coast are located on the
northwestern shore of the island and begin six miles north of Kona International
Airport. Boundaries of the Kona Kohala Coast region are marked by the Mauna Kea
Resort to the north, Ka'upulehu to the south with the Mauna Lani Resort and
Waikoloa Beach Resort in between. There are 3,618 visitor units to choose from,
including Condos, one and two bedroom Oceanfront Suites, Oceanside Villas,
Bungalows, Thatched Huts and Private Vacation homes. Island wide, there are
9,490 visitor facilities accommodations, including Bed & Breakfasts. Resort
Sport and Fitness Facilities have over 55 Tennis Courts, 7 Championship Golf
Courses (126 holes), an Executive Putting Course and 6 Spas. Other resort
activities include scuba, snorkeling, glass-bottom boating, windsurfing,
deep-sea fishing, hunting, horseback riding, sightseeing, whale watching
(in season), sailing and kayaking.
The Mahukona project land is located on the west (leeward coast) of the
District of North Kohala with about an hour drive time from the Keahole-Kona
International Airport and 20 minutes from Mauna Kea Beach Hotel, which is
located on the north part of Kohala Coast Resort Area. The climate of the area
is generally warm, arid and savanna-like. Daytime temperatures range from about
89 degrees F. in the summer months to about 82 degrees F. in the winter months.
Rainfall in the project area averages approximately 14 inches per year.
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CHALON'S KOHALA LAND MASTER PLAN.
Chalon's Kohala Land is located at the northern end of the island of
Hawaii, in the District of North Kohala. This island jewel with its mild
weather, untouched natural features, unsurpassed scenery and deep historical and
culture values is becoming one of the world's leading health resort area. Within
half an hour drive of Chalon's land is the famous Kohala Resort Area. It was
Lawrence Rockefeller who first realized the potential of this area when he
developed his favorite retreat at the Mauna Kea Beach Hotel in the 1960's.
Chalon's land in Kohala was formerly owned by Castle and Cooke, one of Hawaii's
largest corporations, whose Dole Food label is well-known across the nation. A
plantation for over 100 years on these lands before increased competition and
rising costs forced the closure of the plantation in 1975. Since that time,
little economic activity has been developed within North Kohala. The various
villages of Kohala create an aggregate population of about 4,200 people. The
principal area of employment of Kohala residents is in the resort and support
communities of nearby South Kohala.
Throughout today's world, the long range importance of solving
environmental issues is an ever increasing consideration and commitment. During
discussion of the global environment, land development is frequently thought to
be yet another of man's burdens placed on natural eco-systems. This idea was
anchored in past disorderly development, which generally did not include a
specific concern for future impacts. The main objective of Chalon is not only to
pursue profit, but to also implement a clear vision of an improved community
that will continuously seek to maintain harmony with nature.
In these regards, Chalon decided the best method to understand their land
was to seek involvement from the local community through open dialogue and
exchange of ideas. A Citizens Participation Committee (CPC) was formed to assist
Chalon. The CPC was formed by Chalon to examine existing plans and conditions in
the North Kohala area. To facilitate the evaluation and recommendation proceeds,
the CPC was broken down into 6 different sub-committees: Housing, Public
Infrastructure/Recreation, Historic Sites, Land Use - Agriculture, Land Use -
Commercial/Industrial and Natural Resources/Environmental Quality.
With strong support by the local Kohala community, Chalon Hawaii is
intending to develop a new type community utilizing eco-management of the
excellent natural environment of Kohala. In essence, this plan means more than
just building a resort area. Currently, it is a plan to integrate an existing
community with a new development plan for the 18,000 acres of land, which may
include housing, recreational facilities, farming, historical assets and
commercial business institutes. Some of the land, may, however, be sold, under
the appropriate circumstances.
Chalon has already acquired the necessary governmental development
approvals, as discussed later, in the Mahukona area for the Kohala Land. This
will be the flagship facility for the master plan of the area community. The
tourist and owners of the Chalon land may expect to enjoy sophisticated
facilities for dining, sports and relaxation during their stay in Kohala.
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It is anticipated that the land values will be enhanced by the
multi-purpose uses, i.e., land sales, resort, residential lots, bulk land, and
timeshares.
MAHUKONA RESORT DEVELOPMENT.
Development Concept
The Mahukona property consists of approximately 642 acres of land. Chalon
already has acquired the necessary governmental permits for the development of a
hotel, restaurant(s), an 18-hole golf course and approximately 87 lots for
resort homes.
Located on the leeward (dry) side of the island, with resort permitting, as
discussed later, in place and the general community and government acceptance as
a resort location, Mahukona is a valuable and critical component of the overall
master plan strategy.
In keeping with the eco-based theme of the master plan and working towards
Chalon's corporate goals, the Mahukona Resort will, as presently planned:
(1) Emphasize sensitivity to the Hawaii environment, culture, human
physical and spiritual health, comfort and quality accommodations.
(2) Provide access to unique, semi-exclusive Hawaiian eco-activities on
which the Chalon land has.
(3) Cater to the U.S. "Baby Boomers" market. This large, well-educated and
affluent segment of the U.S. comprises 75% - 80% of the current Kohala
eco-activities users. Also, recent land sales have been almost
exclusively to this market as well. It is anticipated that by
satisfying their expected (real or perceived) standards for a quality
eco-active resort, the resort will appeal to very large potential
market.
18-Hole Golf Course. It is an ocean view golf course along the shoreline.
Emphasis during design, construction and operation will be on environmental
sensitivity.
Plantation Cottage Hotel. It is anticipated that by blending together with
ecological sensitive concept of the Caribbean's highly successful Maho Bay and
Harmony "Eco-Resorts" and the culturally sensitive Waimea Plantation Cottages on
Kauai along with the hint of the quality and comfort of the Four Seasons
Hualalai and Kona Village, the proposed Plantation Cottages Hotel of Mahukona
will be an appropriate gateway to the Kohala experience.
1-Acre Estate Lot Subdivision. These will offer individuals and
corporations the opportunities to become a part of the Chalon Mahukona/Kohala
development. The Mahukona Mauka parcel located above the highway offers future
opportunities for intensive development and adjustments to the market.
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Sports Facility. Tennis Courts, Putting Green, Driving Range and Spa
Facilities are planned to develop as additional sports facilities.
Restaurants. Plans for various restaurants have been developed. The food
served will include western food, hawaiian style pan-pacific food, teppanyaki
and shabu-shabu.
Bungalow. Each bungalow is intended to have 4 units and each unit has 2
bedrooms, living room and dining area.
Governmental Permits for Development
Chalon has acquired the following necessary governmental approvals for the
development of its projects:
State Land Boundary Amendment: Amendment to the State Land Use Boundary Map
from Agricultural to Urban, 14.3 Acres. (SLU 853 dated November 17, 1993)
County Zoning Code: Amendment to the County Zoning Code, changing the
district classification from Unplanned (U) to Agriculture (A-1a),
resort-Hotel (V 2.0) and Open (O). (REZ 747 dated November 17, 1993)
Special Management Area (SMA) Use Permit: The Planning Commission approved
SMA Use Permit No. 341, dated June 24, 1993
Golf Course Use Permit: The Planning Commission approved Golf Course Use
Permit No. 111, dated June 24, 1993
Approval of an environmental assessment and a permit to utilize state lands
for a cart underpass servicing the golf course, which must go under a state
highway, must still be obtained. These requirements resulted, in part, from an
appeal filed by a citizens group challenging Chalon Hawaii's approvals, and it
can be anticipated that this group will appeal future approvals or permits.
There can be no assurance that such litigation will be favorably resolved. An
adverse outcome of such litigation will adversely impact the Company's
development plans.
After the approvals, the zoning acreage breakdown is:
[Download Table]
V2.0 (Resort) 14,324 Acres
Ag.1 266,652 Acres
Ag.5 307,214 Acres
Conservation District 43.22 Acres
Open 11,045 Acres
Infrastructure System
Water. Although other developments in west Hawaii suffer from shortage of
both portable and irrigation water, North Kohala is very rich with water
resources. Portable water will be supplied to the site from wells in the
northern part of Kohala through pipelines. Irrigation
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water will be supplied by Kahola Ditch Water System that was developed about 100
years ago for sugar cane.
Electricity. Chalon has been conducting research for electricity system
alternatives. Cogeneration System is one of the options and Chalon will decide
the most cost efficient system.
Development Team
In developing the property, the Company will rely upon a pool of
experienced and talented entities and individuals. One entity is the Lake Forest
Resort Development Team, headed by Shoichi Kamon, founder of the Chalon Group,
who has extensive experience in real estate developments for the past 30 years.
His experience includes more than 50 restaurants, 5 hotels and the Lake Forest
Resort in Kyoto, Japan. His development style is based on his management
experience in the hospitality industry. Concentrating on the importance to
integrate "Beauty" and "Efficience".
TFP, Inc., headed by Toru Yamaguchi, is a planning, engineering and golf
course design company. Mr. Yamaguchi's academic and practical experience for
civil engineering contributes to keeping costs down on the construction of a
golf course. TFP, Inc., has extensive experience in planning housing projects
all over Japan and Hawaii.
Lake Forest Resort is located in Kyoto, Japan. It was originally built in
1987 (Hotel, Sports Facilities and a 27 Hole Golf Course) and expanded another
18 Holes in 1993. Lake Forest Resort is a membership resort and has about 2,000
members at this time. The members consist of a variety of people/organizations,
from individual members to famous big corporation, labor unions, medical care
associations and others. It is managed by Chalon International, Inc., which has
extensive experience in management of restaurants and hotels in Japan and other
countries. Also, its Central Kitchen Systems supports the Lake Forest Resort
from the points of quality of food, efficient management and cost control of
food.
Expected Construction Cost (US$)
[Download Table]
GOLF COURSE (Not including Club House) 5,900,000
HOTEL Entry Road 1,200,000
Hotel 22,000,000
Bungalows 17,700,000
Park improvement 3,100,000
Sports Facility 600,000
1-Acre House Lots 10,800,000
Off Site Infrastructure 9,400,000
Total 70,700,000
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Compared with other companies' developments, we believe that our estimate
of the constructions costs are relatively low. It is not because of our
facilities are downgraded, but with the experience of the Lake Forest Resort
development and the expertise of our development team, TFC, Inc., we believe we
will be able to keep costs under control. There is of course no assurance that
the project can or will be completed at the estimate cost, which is based on
many variables which can and will change.
Management Team
Eco-Resort Management Co. Eco-Resort Management Co. is a company that was
spun off from Chalon International Co. to be exclusively in charge of resort
management. Eco-Resort Management Co. operates Lake Forest Resort in Kyoto,
Japan. Chalon International was established in 1968 by Shoichi Kamon with a
small restaurant in Osaka, Japan. Since then, Chalon International has grown
into a diversified international hospitality company, specializing in
restaurants, hotels and recreation projects in Japan, USA, Hong Kong and China.
Total Resort Operation Systems (Computer Software). This system has been
developed by Lake Forest Resort System Engineering Team. It is a PC Networking
system, which includes member database, golf, sports facilities and F&B
management. The system uses MS Windows GUI and achieves user friendly systems.
Existing Luxury Facilities in Kohala Coast
Hotels
Mauna Kea Beach Hotel - (310 Rooms). The very first resort to open along
the Kona Kohala Coast. This was Lawrence S. Rockefeller's retreat and now houses
a portion of his Asian art and Hawaiian quilt collection. Recently remodeled,
overlooking a crescent of white sandy beach and Kauna Koa Bay, all rooms have
lanais, Cable television (available on request), swimming pool, 13 tennis
courts, beach and 6 shops. Shuttle service and reciprocal charging privileges
with the adjacent Hapuna Beach Prince Hotel.
Hapuna Beach Hotel - (350 Rooms). Opened in 1994 on the island's best
beach, this is Mauna Kea's sister hotel and the two properties are adjacent,
with reciprocal privileges. Carpeted guest rooms with marble bathrooms, 36
suites, with all rooms overlooking the ocean, hotel pool, hot tub and five
restaurants. The showpiece of this hotel is an 8,000 square foot, four-bedroom
suite with its own swimming pool.
Mauna Lani Bay Hotel - (350 Rooms). A refined atmosphere permeates this
hotel whose rooms have recently been redecorated in shades of white with linen
and cotton, along with teak furnishings. If money is no object, the $3,000 to
$4,000 per night bungalows come with a butler, limo and private pool. This is
the home of the annual Senior Skins Game. There are two
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spectacular golf courses. The signature hole is the 15th on the South Course
where golfers tee off over a wide expanse of ocean. Mauna Lani is also home to
the annual event of the Sun Food Celebration in July, a four-day event featuring
renowned chefs and vintners from sunny climes.
Hilton Waikoloa - (1,240 Rooms). Children especially love this resort
hotel, whose 62 acres are navigated by monorail or boat. There is a swimming
pool nearly an acre in size with a 175 foot water slide, several smaller pools,
a lazy river, man-made beach and a four-acre lagoon where a chosen few (drawn by
lottery) can experience an encounter with dolphins. The three buildings of the
resort are elaborately landscaped and a multi-million dollar Pacific Island Art
Collections housed in the corridors of the hotel. In addition, guests may enjoy
privileges at 2 golf courses, 3 pools, 8 tennis courts, a spa, 7 restaurants, 6
bars and a lively disco.
Four Seasons Hotel - (243 Units). The Big Island's newest resort features
32 low-rise bungalows along the ocean, each housing six or eight guest rooms and
four golf club bungalows along the golf course. The rooms breathe the tropical
elegance with sisal carpeting, natural slate floors, Hawaiian artwork from an
earlier era and louvered sliding doors of dark wood. Some suites have outdoor
garden baths with showers that fall from lava ledges, private plunge pools and
whirlpools.
Golf Courses
Seven Championship courses, all on the Kona Kohala Coast, offer visitors a
total of 126 holes with a view. The Mauna Lani's Francis H. Brown Golf Courses
are home to the annual Senior Skins Game. The Waikoloa Resort hosts the Kings'
Cup and Tiebreaker and the newest, Hualalai, is the home of the PGA's MasterCard
Championship.
Mauna Kea Golf Course. The Mauna Kea Golf Course offers dramatic elevation
changes and spectacular views. Consistently top rated, this 18-hole championship
golf course is one of Hawaii's most unique challenges. Amenities include a pro
shop, driving range, practice green, restaurant and fitness center.
Hapuna Golf Course. A unique, environmentally sensitive golf course, the
Hapuna Golf Course is a link-style 18-hole championship course. It offers the
golfer an ultimate challenge with sweeping panoramic views of the Kohala Coast
and the volcanic peaks of the Big Island. Amenities include a pro shop, driving
range, practice green, restaurant and fitness center.
Muana Lani Golf Course. Characterized by rolling terrain and groves of
kiawe trees, the North Course is built on an ancient lava flow. Feral goats
frequent the fairways and the course's signature hole is a par three which hits
from an elevated tee into a natural amphitheatre of lava. Amenities include a
pro shop, two driving ranges, practice green, lessons, rentals, on-course
refreshment cart and restaurant.
Waikoloa Kings Course. Designed by Tom Weiskopf and Jay Morrish, the Par
72 link, 7,000 yard layout of Waikoloa's Kings' Course features six major lakes
and approximately 75 bunkers. The sophisticated bunker strategy and multiple tee
placements work together to create
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a challenging and fun course. Amenities include a golf shop, complete practice
facility, golf academy, hotels, condominiums, restaurant and lounge.
Four Seasons Golf Course. This 18-hole Jack Nicklaus golf course was
crafted with extreme sensitivity to the land. Winding over 7,100 yards, this
carefully groomed course flows across brilliant green fairways contoured against
black lava, ending at the ocean where the finishing holes capture the drama and
beauty of direct seaside golf. Amenities include a short game practice area,
30-station driving range, sand bunker, golf shop, men and women's locker rooms
and restaurant.
Local Resort House Lot Markets
There are a number of resorts in the area that offer residential lots for
sale. One resort is known as the Mauna Kea Resort which offers three different
locations for residential lots. The company believes that prices for residential
lots at the High Bluffs location at the Mauna Kea Resort range from
approximately $1,250,000 to approximately $1,750,000. Prices for lots at two
other locations within Mauna Kea Resort may be higher or lower than those at the
High Bluffs. Another resort was formerly known as Mauna Lani but is now known as
Forty-Nine Black Sand Beach. The Company believes that lot prices range from
$300,000 to a few million dollars. The Company believes that Toyota built a
corporate retreat on two lots with a combined costs of $10 million dollars.
Additionally, Nintendo built a corporate retreat on two lots that the Company
believes the combined real estate cost was approximately $10 million dollars. It
is the Company's opinion that its residential lots, when approved and improved,
will be of significant value. As real estate is unique and each and every lot
has unique characteristics there can, of course, be no assurance that the
Company's residential lots can, in the future, be sold for prices similar to
previous sales in the area. In addition, real estate sales of resort lots are
influenced by factors beyond control of the Company, such as the economy,
inflation, consumer confidence, etc.
OKINAWA DEVELOPMENT PROJECT
In the year 2000, the Company loaned to Marine Forest Resort, Inc.("Marine
Forest"), a Japanese corporation, the sum of $6,400.000. The notes, which are
due six months after date of issuance and bear interest at the U.S. prime rate
plus one percent, may be converted to equity interests in Marine Forest in
2001.
Marine Forest presently operates two restaurants and a convenience store in
the Okinawa Airport. In addition, it has undertaken a resort project and has
obtained government approvals in 1995 for construction of a hotel and 18 hole
golf course. The project is at the very earliest stages with the beginning of
the construction of the entry road and mass grading of the property for future
construction of the hotel. The site is located in Sedaka of Nago City which is
about one hour drive from Okinawa International Airport.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Except for historical information, the materials contained in this Management's
Discussion and Analysis or Plan of Operation is forward-looking (within the
meaning of Section 27A of the
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Securities Act and Section 21E of the Exchange Act) and involve a number of
risks and uncertainties. Forward looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 appear throughout this report. These statements relate to
the Company's expectations, hopes, beliefs, intentions, goals or strategies
regarding the future and are based on certain underlying assumptions by the
Company. Such assumptions are, in turn, based on information available and
internal estimates and analyses of general economic conditions, specific to the
property, unfavorable local, regional, national, international and economic
developments, weather conditions, competition, regulations pertaining to
property development, federal state and local. Readers are urged to carefully
review and consider the various disclosures made by the Company in this Report,
as an attempt to advise interested parties of the risks and factors that may
affect the Company's business, financial condition and results of operations and
prospects.
12
OVERVIEW
On December 29, 1999, pursuant to an Agreement and Plan of Merger and
Reorganization (the "Plan"), Surety issued 2 million shares of its common stock
in exchange for 100% of Chalon Hawaii's outstanding shares in a recapitalization
transaction accounted for as a reverse acquisition with a "shell" company.
Chalon Hawaii was deemed the accounting acquirer and Surety was deemed the legal
acquirer. The consolidated financial statements included herein and discussed
below include the accounts of Chalon Hawaii for the years ended December 31,
1998 and 1999 and the accounts of Surety from December 29, 1999 (date of the
Plan) to December 31, 1999.
RESULTS OF OPERATIONS
Years ended December 31, 1998 and 1999 -
The following table sets forth the statements of operations of the Company for
the years ended December 31, 1998 and 1999:
[Download Table]
1998 1999
Real estate sales $ 3,236,000 $ 3,483,000
Rentals 355,000 379,000
Cattle sales 335,000 305,000
Water and other 130,000 174,000
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Total revenues 4,056,000 4,341,000
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Cost of real estate sales 5,372,000 1,907,000
Cost of rentals 153,000 149,000
Cost of cattle sales 269,000 204,000
Cost of water and other 216,000 206,000
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Total cost of revenues 6,010,000 2,466,000
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Gross margin (1,954,000) 1,875,000
General and administrative expenses 728,000 819,000
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Income (loss) from operations (2,682,000) 1,056,000
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Other expenses, net 1,000 210,000
Deferred income taxes (benefit) (530,000) 210,000
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(529,000) 420,000
----------- -----------
Net income (loss) $(2,153,000) $ 636,000
=========== ===========
13
Although real estate sales were relatively consistent during the years ended
December 31, 1998 and 1999, real estate sales margins improved significantly.
Specifically, in 1998, cost of real estate sales were higher because the Company
sold "Maliu Phase 3 Subdivision" and adjacent land as bulk sales. The land was
allocated higher land costs because it was originally planned to be sold as 3
and 5 acres housing lots (already zoned). The Company sold the land in a bulk
sale transaction because of deteriorated market conditions. Rental revenue and
cattle sales and their related margins were relatively consistent during the
years ended December 31, 1998 and 1999. The approximate 34% increase in water
and other revenues is attributable to the success of the Company's eco-tourism
operations (see discussion at Nine months ended September 30, 1999 and 2000).
The approximate 13% increase in general and administrative expenses is primarily
attributable to the professional fees associated with the Agreement and Plan of
Merger and Reorganization.
While interest income, net has remained relatively consistent, the substantial
increase in other expenses, net is attributable to a $206,000 charge incurred in
connection with the recapitalization transaction (see Note 3 to Consolidated
Financial Statements). Deferred income taxes have increased proportionally to
the Company's pretax income. There are no current taxes as a result of net
operating loss carryforwards.
Nine months ended September 30, 1999 and 2000 (unaudited)-
The following table sets forth the statements of operations of the Company for
the nine months ended September 30, 1999 and 2000:
[Download Table]
1999 2000
Real estate sales $ 828,000 $ 5,628,000
Rentals 306,000 245,000
Cattle sales 219,000 359,000
Water and other 134,000 215,000
----------- -----------
Total revenues 1,487,000 6,447,000
----------- -----------
Cost of real estate sales 378,000 1,937,000
Cost of rentals 121,000 68,000
Cost of cattle sales 155,000 129,000
Cost of water and other 146,000 201,000
----------- -----------
Total cost of revenues 800,000 2,335,000
----------- -----------
Gross profit 687,000 4,112,000
General and administrative expenses 557,000 874,000
----------- -----------
Income from operations 130,000 3,238,000
----------- -----------
Interest income, net (252,000)
Deferred income taxes 26,000 698,000
----------- -----------
26,000 446,000
----------- -----------
Net income $ 104,000 $ 2,792,000
=========== ===========
14
Increased real estate sales and related margins are a result of increasing
demand of the Company's North Kohala property in a favorable economic time.
Correspondingly, the increased real estate sales have contributed to the
approximate 20% decrease in rental revenue. Specifically, the Company has been
selling previously rented agricultural land without any development plan. The
Company's management anticipates the real estate sales and rental revenue trends
will continue in 2001. The approximate 64% increase in cattle sales is
attributable to a strong, but difficult to predict, beef market. Hence, future
trends are uncertain, although the Company's plan to sell the real estate that
is used for the cattle ranch will substantially decrease cattle sales. The
approximate 60% increase in water and other revenues is attributable to the
success of the Company's eco-tourism operations such as Kohala Ditch kayak rides
and Pololu Beach mule rides. The Company's management believes that these
eco-tourism operations are consistent with the current tourism trend in Hawaii
and will be instrumental in enhancing the image of the Company's real estate
holdings.
The approximate 57% increase in general and administrative expenses is
attributable to increased Delaware franchise tax fees, higher allocation of
administrative payroll previously capitalized in connection with the now
abandoned non-Mahukona development projects and higher professional fees.
While interest expense has remained relatively consistent, interest income has
increased substantially as a result of the Company's high cash balance generated
from the March 2000 private placement (see Liquidity and Capital Resources).
Deferred income taxes have increased proportionally to the Company's pretax
income. There are no current taxes as a result of net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
For the years ended December 31, 1998 and 1999 and the nine months ended
September 30, 1999 and 2000(unaudited), the Company's net cash used in operating
activities of approximately $405,000, $362,000, $107,000 and $246,000,
respectively, is comprised of the following:
[Enlarge/Download Table]
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1999 2000
(unaudited) (unaudited)
Net income (loss) $(2,153,000) $ 636,000 $ 104,000 $ 2,792,000
Depreciation, amortization and
other noncash charges 204,000 326,000 96,000 90,000
Deferred income taxes (benefit) (530,000) 210,000 26,000 698,000
Loss (gain) on sales of property 2,056,000 (1,820,000) (537,000) (4,292,000)
Changes in operating assets
and liabilities 18,000 286,000 204,000 466,000
----------- ----------- ----------- -----------
$ (405,000) $ (362,000) $ (107,000) $ (246,000)
=========== =========== =========== ===========
15
For the years ended December 31, 1998 and 1999 and the nine months ended
September 30, 1999 and 2000(unaudited), the Company's net cash provided by (used
in) investing activities of approximately $2,655,000, $2,192,000, $175,000 and
($1,071,000), respectively, is comprised of the following:
[Enlarge/Download Table]
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1999 2000
(Unaudited) (Unaudited)
Capital expenditures including
real estate development $ (643,000) $(1,168,000) $ (856,000) $(1,774,000)
Proceeds from sales of property 3,096,000 3,051,000 725,000 3,497,000
Proceeds from notes receivable 202,000 309,000 306,000 106,000
Advances to Marine Forest Resort, Inc. (2,900,000)
----------- ----------- ----------- -----------
$ 2,655,000 $ 2,192,000 $ 175,000 $(1,071,000)
=========== =========== =========== ===========
For the years ended December 31, 1998 and 1999 and the nine months ended
September 30, 1999 and 2000(unaudited), the Company's net cash provided by (used
in) financing activities (excluding the March 2000 private placement discussed
below) of approximately ($958,000), ($1,763,000), ($1,566,000) and $317,000,
respectively, is comprised of the following:
[Download Table]
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1999 2000
(Unaudited) (Unaudited)
Debt proceeds $ -- $ 160,000 $ 25,000 $ 350,000
Debt repayments (173,000) (347,000) (7,000) (207,000)
Capital contributions 83,000 113,000 105,000 174,000
Capital withdrawals (868,000) (1,689,000) (1,689,000)
----------- ----------- ----------- -----------
$ (958,000) $(1,763,000) $(1,566,000) $ 317,000
=========== =========== =========== ===========
In March 2000, the Company raised approximately $7 million, net of offering
costs, pursuant to a private placement of 146,000 shares of its common stock at
$50 per share. The use of the proceeds would be generally allocated among the
business objectives and marketing needs of the Company, including development of
the Company's properties, expansion of facilities and administrative costs.
As of September 30, 2000, the Company has total current assets of approximately
$18.7 million and total current liabilities of approximately $1.3 million or a
working capital of approximately $17 million. Looking forward to 2001 and
beyond, the Company anticipates revenue levels to be relatively consistent with
levels experienced during 2000. However, given the Company's anticipated cash
requirements to complete the Mahukona
16
Resort project and plans to pursue the Okinawa Marine Forest Resort project,
future capital raising or debt financing activities will be required.
The anticipated cash requirements to complete the Mahukona Resort project are as
follows (in millions):
[Download Table]
Golf course $ 5.9
Hotel
Entry road $ 1.2
Infrastructure 22.0
Timeshare units 17.7
Park improvements 3.1 44.0
------
Sports facility 0.6
1 Acre house lots 10.8
Off-site infrastructure 9.4
------
70.7
Less: Costs capitalized through
September 30, 2000 (8.4)
------
Anticipated cost to complete $ 62.3
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARD
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
provides guidance on the recognition, presentation and disclosure of revenues in
financial statements and requires adoption no later than the fourth quarter of
2000. The Company is currently evaluating the impact of SAB 101 and its related
interpretations to determine the effect, if any, that it will have on the
Company's consolidated financial position and results of operations.
17
ITEM 3. PROPERTIES.
In addition to the office at 855 Fort Plains Road, Howell, New Jersey,
the Company presently leases a small office at One World Trade Center, New York,
New York, on a month-to-month basis, for a monthly rate of $351.00.
Chalon Hawaii, maintains offices at 55-155 Hawi Road, Hawi, Hawaii. The
building, containing approximately 11,700 square feet, is owned by Chalon.
Chalon Hawaii, as dicussed in Item 1, owns approximately 18,000 acres in the
North Kahala District.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial ownership,
as defined in applicable regulations, of our common stock as of December 31,
1999, based on 2,100,000 shares of common stock outstanding including the
2,000,000 issued in connection with the acquisition of Chalon Hawaii, by the
following individuals or groups: each person or entity who is known by us to
own beneficially more than 5% of our outstanding stock; each of the Named
Executive Officers; each director of the Company; and, all directors and
executive officers as a group. Except as otherwise indicated, and subject to
applicable community property laws, the persons named in the table below have
sole voting and investment power with respect to all shares of common stock
held by them.
[Download Table]
Name of No. of Shares Percentage
Owner Beneficially Owned of Class
----- ------------------ --------
Yoshihiro Kamon (1) 90,000 4.3
Chalon Corp. (1) 2,000,000 95.2
Directors/Officers 90,000 4.3
7 as a group
(1) Yoshihiro Kamon also has a 12% ownership interest in Chalon Corp. and owns
50% of Kamon Corp. which owns 66% of Chalon Corp.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
The following table sets forth certain information with respect to executive
officers and directors of the Company and its subsidiary as of December 31,
2000.
[Download Table]
NAME AGE POSITION HELD
---- --- -------------
Yoshihiro Kamon 38 President and sole Director of Surety
18
[Download Table]
Howard R. Knapp 54 Chief Financial Officer of Surety
Masahiro Kume 40 Chairman of Chalon Hawaii
Takeshi Okumura 66 President and Director of Chalon Hawaii
Kengo Aso 54 Director of Chalon Hawaii
Michael Gomes 52 First Vice President of Chalon Hawaii
Duane Kanuha 52 Second Vice President of Chalon Hawaii
Hermann Fernandez 37 Secretary and Treasurer of Chalon Hawaii
YOSHIHIRO KAMON. Mr. Kamon holds a B.A. degree in economics from Konan
University. In addition to being the President and sole Director of the Company,
Mr. Kamon has served, from 1996 to 1999, as the Executive Senior Vice President
of Chalon International Co. and Executive Director of Chalon Corporation, in
which positions he was responsible for general business administration, finance
planning, budgeting, negotiations with commercial banks and property management.
From 1988 to 1996, he was a director of Chalon Corporation and Special Assistant
to Shoichi Kamon, Chairman and President of Chalon Corporation. From 1988
to1999, Mr. Kamon was the President of Chalon International of Hawaii, Inc.,
responsible for management of Chalon Hawaii's property on the Island of Hawaii.
He was also the Director of the Shanghai International Airport Hotel and
restaurant and a Director of Chalon Hong Kong from 1986 to 1996.
HOWARD R. KNAPP. Mr. Knapp has served as the Company's Chief Financial Officer
since January, 2000. Prior thereto, Mr. Knapp worked in the securities industry
for over 30 years in various corporations, including trader, bank manager and
principal in various offices. Mr. Knapp received a B.S. degree in economics
from St. Peter's College in 1974.
MASAHIRO KUME. Mr. Kume joined Chalon Restaurants Corp. in 1979 and in 1989 he
became special assistant of Shoichi Kamon, Chairman and CEO of Chalon Group. Mr.
Kume has been involved in the development and management of Chalon Group's
resort projects, and is presently involved in the development of a networking
system for integrated resort management. In 1995 Mr. Kume was appointed a
director of Chalon International, Inc., a Delaware corporation, which operates
approximately 40 restaurants, 5 hotels and a resort facility, and was appointed
Chairman of Board of Chalon International of Hawaii, Inc. in December 1999. From
1990 to 1995 Mr. Kume was the Manager of the Division Development Division of
Chalon International (Japan)
TAKESHI OKUMURA. Mr. Okumura joined Chalon International of Hawaii, Inc. in
1992, working on the planning and development of Chalon Hawaii's properties, and
became its President in December 1999. His prior business experience includes
being a marketing manager for a cruise company and a branch manger of a
commercial bank in California.
KENGO ASO. Mr. Aso joined Chalon Restaurant Corp. in 1970 after his graduation
from school in Kumamoto, and has served in numerous management positions for
that company's restaurants.
19
Since 1989, Mr. Aso has been acting director, president and general manager of
Shanghai International Airport Hotel, a joint venture project between Chalon
Corp. and China Eastern Airline, and acting director of Shanghai International
Airport Restaurant. In 1996, Mr. Aso was appointed a director of Chalon
International Limited and in 1999 became a director of Chalon International of
Hawaii, Inc.
MICHAEL GOMES. Mr. Gomes was born in and is a lifetime resident of Kohala,
Hawaii. He was employed by the Mauna Lani Resort as a project manager before
joining Chalon in 1990. He was appointed First Vice President of Chalon Hawaii
in December, 1999.
DUANE KANUHA. Mr. Kanuha was the former Planning Director of county of Hawaii
and has extensive working experience in governmental entities in the State of
Hawaii. He was appointed Second Vice President of Chalon Hawaii in December,
1999.
HERMANN FERNANDEZ. Mr. Fernandez joined Chalon Hawaii in 1989, and has served as
its Chief Financial Officer. Mr. Fernandez has a BS Degree in accounting from
the University of Washington and was employed by the United States Internal
Revenue before joining Chalon Hawaii. He was appointed as Secretary and
Treasurer in December, 1999.
20
ITEM 6. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The table below summarizes the compensation awarded to, earned by or paid to the
named executive officer for services rendered to the Company in all capacities
for the years ended December 31, 1999 and 1998, and the nine months ended
September 30, 2000, by each person serving as the Company's Executive Officers
in the years ended December 31, 1999 and 1998 and the nine months ended
September 30, 2000.
[Download Table]
Long-Term
Compensation
Annual Awards
Compensation Securities
---------------------- Underlying
Options/SARs
Name Year Salary($) Bonus($) (#)
-------------------------------------------------------------------------
Yoshihiro Kamon 2000 $0
" " 1999 $0
" " 1998 $0
Masahiro Kume 2000 $118,200
" " 1999 $0
" " 1998 $0
Hermann Fernandez 2000 $ 62,904
" " 1999 $ 62,904
" " 1998 $ 62,904
Mike Gomes 2000 $ 72,960
" " 1999 $ 72,960
" " 1998 $ 72,960
Takeshi Okumura 2000 $118,200
" " 1999 $104,785
" " 1998 $104,784
Duane Kanuha 2000 $ 88,224
" " 1999 $ 88,224
" " 1998 $ 88,224
Kengo Aso 2000 $0
" " 1999 $0
" " 1998 $0
Howard R. Knapp 2000 $0
" " " 1999 $0
" " " 1998 $0
Currently, compensation remains at the same rate, but may change in the future.
21
NO OPTION GRANTS IN LAST FISCAL YEAR
No stock options were granted to the named executive officers in the Summary
Compensation Table during Fiscal 1999 nor have any options ever been granted.
The Company's directors currently serve without compensation.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In September, 1999, the Company entered into an Agreement and Plan of Merger and
Reorganization, with Chalon International of Hawaii, Inc., a Hawaii corporation
("Chalon Hawaii"), whereby Chalon Hawaii would be merged into a subsidiary of
SURETY HOLDINGS CORP., and become a subsidiary of Surety. The Company issued two
million shares of its common stock, $.001 par value, to Chalon Corp., the
shareholder of Chalon Hawaii, as and for the consideration for this acquisition.
The Articles of Merger were filed with the Secretary of State of Hawaii on
December 29, 1999. Yoshihiro Kamon, President and Chairman of the Company, is a
12% shareholder of Chalon Corp. and owns 50% of Kamon Corp. which owns 66% of
Chalon Corp. Mr. Kamon was President of Chalon Hawaii from 1988 to 1999, and was
Executive Director and Vice President of Chalon Corp. from 1988 to 1999.
Masahiro Kume, Chairman of Chalon Hawaii, is Mr. Kamon's brother-in law.
ITEM 8. DESCRIPTION OF REGISTRANT'S SECURITIES.
Our Certificate of Incorporation authorizes 200,000,000 shares of $0.001
par value common stock. As of September 30, 2000, there were issued and
outstanding 2,246,000 shares of common stock, including 2,000,000 shares issued
in connection with the acquisition of Chalon and the shares issued in a private
placement of our securities (discussed in Part II, Item 4).
The 2,000,000 shares issued in connection with the acquisition of
Chalon Hawaii are subject to the agreement of Chalon Corp., the shareholder, not
to pledge, hypothecate, assign or sell the shares in the Company for a period of
5 years.
The holders of common stock are entitled to one vote for each share held of
record on all matters to be voted on by the shareholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50 percent of the shares have the ability to elect the
directors. The holders of common stock are entitled to receive dividends when,
as, and if declared by the Board of Directors out of funds legally available
therefor. The Company has not, however, previously paid any cash dividends and
does not anticipate paying any cash dividends in the foreseeable future. In the
event of liquidation, dissolution or winding up of the Company, the holders of
common stock are entitled to share ratably in all assets remaining available for
distribution to them after payment of liabilities and after provision has been
made for each class of stock, if any, having preference over the common stock.
Holders of shares of common stock, as such, have no conversion, preemptive or
other subscription rights,
22
and there are no redemption provisions applicable to the common stock. All of
the outstanding shares of common stock are, when issued, fully paid and
nonassessable.
The Company's Transfer Agent is Interwest Transfer Co., Inc., 1981 East
Murray Holiday Road, Salt Lake City, Utah 84117.
23
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
Our common stock is listed in the Over-The-Counter Bulletin Board (OTC-BB) under
the Symbol "SHDC". Over-the-counter market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commissions and may not represent
actual transactions. To date there has been no trading.
The Company had approximately 38 shareholders of record as of December 31, 2000.
The Company has never declared or paid any dividends on its common stock and
does not anticipate paying any dividends on its common stock in the foreseeable
future.
ITEM 2. LEGAL PROCEEDINGS.
As discussed under Narrative Description Of Business, there is an appeal of the
Mahukona Resort development approvals, being the matter of "Citizens for
Protection of North Kohala Coastline v. County of Hawaii/Chalon International of
Hawaii, Inc., Civil No. 93-417, Supreme Court No. 20723". As to that matter,
pursuant to the July 13, 1999 Opinion of the Supreme Court of the State of
Hawaii, the March 17, 1997 Order of the Circuit Court of the Third Circuit, and
Judgment entered thereon on April 28, 1997, was affirmed in part, vacated in
part and remanded for proceedings consistent with the Court's Opinion. The net
result for the development of the Mahukona Lodge Project will depend on the
final project design.
Chalon is also the plaintiff in two actions to Quiet Title, as follows:
Chalon/Nuhi, Complaint to Quiet Title, filed October 3, 2000, Civil No.
00-1-0413; and Chalon/Uwaia, Complaint to Quiet Title filed October 23, 2000,
Civil No. 00-1-0450. In each of these matters, Chalon is in the process of
identifying and serving defendants.
In addition, Chalon has received a demand made by Virginia Carabelli
alleging that Chalon must remedy a wrongful representation or omission relating
to an access easement in connection with the sale of real property by Chalon to
Virginia Carabelli. It is anticipated that a Land Court Petition to Designate
Easements will be filed shortly and the parties will execute a settlement
agreement and mutual release.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None
24
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
The issuance of shares by the Company in connection with the hereinafter
described private placement acquisitions were each transactions exempt from
registration pursuant to Regulation D of the Securities Act.
On March 5, 2000, the Company accepted subscriptions from 26 investors for the
issuance of a total of 100,000 shares of the Company's common stock, at a
purchase price of $50.00 per share. On March 29, 2000, the Company accepted
subscriptions from an additional 5 investors for an additional 46,000 shares of
common stock at $50.00 per share. The Company's private placement had authorized
a sale of up to a maximum of 400,000, but no additional shares were sold.
Each purchaser of the securities described above has represented that he/she/it
understands that the securities acquired may not be sold or otherwise
transferred absent registration under the Securities Act or the availability of
an exemption from the registration requirements of the Securities Act, and each
certificate evidencing the securities owned by each purchaser bears or will bear
upon issuance a legend to that effect.
ITEM 5. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The By-Laws of the Company contain the following provision:
Article IX: Indemnification. Each person who at any time is or shall
have been a director or officer of the Corporation and is threatened
to be or is made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that the person is, or the person
or the person's testator or intestate was, a director, officer,
employee or agent of the Corporation, or served at the request of the
Corporation as a director, officer, employee, trustee or agent of
another corporation, partnership, joint, venture, trust or other
enterprise, shall be indemnified against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with any
such threatened, pending or completed action, suit or proceeding to
the full extent authorized under Section 145 of the General
Corporation Law of the State of Delaware. Subject to applicable
statutory limitations, in connection with the forgoing the Company may
from time to time, in its sole discretion, advance such sums it deems
appropriate for defense of any action. The foregoing right of
indemnification shall in no way be exclusive of any other rights of
indemnification to which such director or officer may be entitled
under any by-law, agreement, vote of stockholders or disinterested
directors, or otherwise.
25
To the extent that officers, directors, employees and agents of the
Company may be indemnified against any cost, loss, or expense arising
out of any liability under the '33 Act. Insofar as indemnification for
liabilities arising under the '33 Act may be permitted to directors,
officers and controlling persons of the Company, the Company has been
advised that in the opinion of the Securities and Exchange Commission,
such indemnification for violations of the '33 Act is against public
policy and is, therefore, unenforceable.
26
SURETY HOLDINGS CORP. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
DECEMBER 31, 1999
And
SEPTEMBER 30, 2000
(unaudited)
SURETY HOLDINGS CORP. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
DECEMBER 31, 1999
And
SEPTEMBER 30, 2000
(unaudited)
[Download Table]
Page
----
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31. 1999 F-2
amd September 30, 2000 (unaudited)
Consolidated Statements of Operations F-3
for the years ended December 31, 1998 and
December 31, 1999 and the nine months ended
September 30, 1999 (unaudited) and
September 30, 2000 (unaudited)
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows for
the years ended December 31, 1998 and F-5 - F-6
December 31, 1999 and the nine months ended
September 30, 1999 (unaudited) and
September 30, 2000 (unaudited).
Notes to Consolidated Financial Statement F-7 - F-15
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Surety Holdings Corp. and Subsidiary
We have audited the accompanying consolidated balance sheet of Surety Holdings
Corp. and Subsidiary as of December 31, 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended December 31, 1999 and 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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 Surety
Holdings Corp. and Subsidiary as of December 31, 1999, and the consolidated
results of their operations and their cash flows for the years ended December
31, 1999 and 1998, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Rothstein, Kass & Company, P.C.
Roseland, New Jersey
June 16, 2000, except for the last two paragraphs of
Note 11, which are as of January 11, 2001.
F-1
SURETY HOLDINGS CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
[Download Table]
December 31, September 30,
1999 2000
------------- -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash $ 1,935,358 $ 7,986,007
Real estate held for sale, current 4,215,207 7,061,393
Note receivable, Marine Forest Resort, Inc.
(see Note 11) 2,972,407
Other current assets 184,612 654,971
------------- -------------
Total current assets 6,335,177 18,674,778
NOTES RECEIVABLE, less current maturities 585,188 2,159,321
REAL ESTATE HELD FOR SALE 39,907,725 35,819,115
REAL ESTATE DEVELOPMENT COSTS 31,105,176 32,268,054
PROPERTY AND EQUIPMENT, net 3,323,731 3,751,180
DEFERRED TAX ASSET 2,804,000 2,106,000
------------- -------------
$ 84,060,997 $ 94,778,448
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Mortgage note payable, current maturity $ 9,169 $ 9,226
Note payable, president 150,000
Accounts payable 160,700 436,025
Accrued expenses and other current liabilities 442,626 726,053
------------- -------------
Total current liabilities 612,495 1,321,304
------------- -------------
LONG-TERM LIABILITIES,
Mortgage note payable, less
current maturity 425,943 418,946
------------- -------------
CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.001 par value,
200,000,000 shares authorized,
2,100,000 and 2,246,000 shares issued
and outstanding, respectively 2,100 2,246
Additional paid-in capital 94,370,572 101,594,346
Accumulated deficit (11,350,113) (8,558,394)
------------- -------------
Total stockholders' equity 83,022,559 93,038,198
------------- -------------
$ 84,060,997 $ 94,778,448
============= =============
See accompanying notes to consolidated financial statements. F-2
SURETY HOLDINGS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
[Enlarge/Download Table]
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1999 2000
----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
REVENUES
Real estate sales $ 3,235,595 $ 3,482,820 $ 828,000 $ 5,627,966
Rentals 355,366 379,602 306,025 245,551
Cattle sales 335,280 304,623 218,898 358,847
Water and other 129,872 174,097 133,588 214,942
----------- ----------- ----------- -----------
Total revenues 4,056,113 4,341,142 1,486,511 6,447,306
----------- ----------- ----------- -----------
COST OF REVENUES
Cost of real estate sold 5,371,649 1,906,707 378,252 1,937,042
Cost of rentals 152,989 149,588 120,780 68,118
Cost of cattle sales 269,458 203,617 155,218 129,073
Cost of water and other 215,569 205,733 145,588 200,901
----------- ----------- ----------- -----------
Total cost of revenues 6,009,665 2,465,645 799,838 2,335,134
----------- ----------- ----------- -----------
GROSS MARGIN (1,953,552) 1,875,497 686,673 4,112,172
GENERAL AND ADMINISTRATIVE
EXPENSES 728,417 818,796 557,031 873,945
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (2,681,969) 1,056,701 129,642 3,238,227
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Recapitalization charge (206,000)
Interest income 66,729 47,370 35,771 281,529
Interest expense (67,812) (51,744) (35,549) (30,037)
----------- ----------- ----------- -----------
(1,083) (210,374) 222 251,492
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE DEFERRED
INCOME TAXES (BENEFIT) (2,683,052) 846,327 129,864 3,489,719
DEFERRED INCOME TAXES (BENEFIT) (530,000) 210,000 26,000 698,000
----------- ----------- ----------- -----------
NET INCOME (LOSS) $(2,153,052) $ 636,327 $ 103,864 $ 2,791,719
=========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON
SHARE, basic and diluted $ (1.08) $ 0.32 $ 0.05 $ 1.26
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 2,000,000 2,001,000 2,000,000 2,221,667
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements. F-3
SURETY HOLDINGS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
[Enlarge/Download Table]
COMMON STOCK ADDITIONAL TOTAL
------------ PAID- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT IN CAPITAL DEFICIT EQUITY
--------- ------------ ------------ ------------ ------------
BALANCES, January 1, 1998 2,000,000 $ 2,000 $ 96,581,519 $ (9,833,388) $ 86,750,131
CAPITAL CONTRIBUTIONS 82,700 82,700
CAPITAL WITHDRAWALS (867,625) (867,625)
NET LOSS (2,153,052) (2,153,052)
--------- ------------ ------------ ------------ ------------
BALANCES, December 31, 1998 2,000,000 2,000 95,796,594 (11,986,440) 83,812,154
CAPITAL CONTRIBUTIONS 112,967 112,967
CAPITAL WITHDRAWALS (1,688,889) (1,688,889)
RECAPITALIZATION TRANSACTION 100,000 100 149,900 150,000
NET INCOME 636,327 636,327
--------- ------------ ------------ ------------ ------------
BALANCES, December 31, 1999 2,100,000 2,100 94,370,572 (11,350,113) 83,022,559
CAPITAL CONTRIBUTIONS (unaudited) 173,920 173,920
SALES OF COMMON STOCK, net
of offering costs (unaudited) 146,000 146 7,049,854 7,050,000
NET INCOME (unaudited) 2,791,719 2,791,719
--------- ------------ ------------ ------------ ------------
BALANCES, September 30, 2000 (unaudited) 2,246,000 $ 2,246 $101,594,346 $ (8,558,394) $ 93,038,198
========= ============ ============ ============ ============
See accompanying notes to consolidated financial statements. F-4
SURETY HOLDINGS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1999 2000
----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (2,153,052) $ 636,327 $ 103,864 $ 2,791,719
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Depreciation and amortization 204,301 119,835 95,919 89,511
Recapitalization charge 206,000
Deferred income taxes (benefit) (530,000) 210,000 26,000 698,000
Loss (gain) on sales of property 2,055,764 (1,820,058) (537,499) (4,291,841)
Increase (decrease) in cash
attributable to changes in operating
assets and liabilities:
Other current assets (49,149) 9,995 (15,863) (91,966)
Accounts payable (171,503) 71,763 48,316 275,325
Accrued expenses and other
current liabilities 238,365 204,261 172,527 283,427
------------ ------------ ----------- ------------
NET CASH USED IN
OPERATING ACTIVITIES (405,274) (361,877) (106,736) (245,825)
------------ ------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (9,310) (350,518) (268,582) (516,960)
Proceeds from sales of property 3,095,595 3,050,820 725,000 3,496,591
Real estate development expenditures (633,279) (817,611) (586,789) (1,256,579)
Proceeds from notes receivable 202,008 309,440 305,758 106,442
Advances to Marine Forest Resort, Inc. (2,900,000)
------------ ------------ ----------- ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 2,655,014 2,192,131 175,387 (1,070,506)
------------ ------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on mortgage
notes payable and bank line of credit (172,700) (347,125) (6,833) (206,940)
Proceeds from bank line of credit 160,000 25,000 200,000
Capital contributions 82,700 112,967 104,967 173,920
Capital withdrawals (867,625) (1,688,889) (1,688,889)
Proceeds from note payable, president 150,000
Proceeds from sales of common
stock, net of offering costs 7,050,000
------------ ------------ ----------- ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (957,625) (1,763,047) (1,565,755) 7,366,980
------------ ------------ ----------- ------------
NET INCREASE (DECREASE) IN CASH 1,292,115 67,207 (1,497,104) 6,050,649
CASH
Beginning of period 576,036 1,868,151 1,868,151 1,935,358
------------ ------------ ----------- ------------
End of period $ 1,868,151 $ 1,935,358 $ 371,047 $ 7,986,007
============ ============ =========== ============
See accompanying notes to consolidated financial statements. F-5
SURETY HOLDINGS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
[Enlarge/Download Table]
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1999 2000
----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION, cash paid during the
period for interest $ 62,000 $ 78,000 $ 26,000 $ 30,000
========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Liability assumed in recapitalization
transaction $ -- $ 56,000 $ -- $ --
========== ========== ========== ==========
Issuance of notes receivable upon
sales of property $ 140,000 $ 432,000 $ 103,000 $2,131,000
========== ========== ========== ==========
See accompanying notes to consolidated financial statements. F-6
SURETY HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of operations In June 1999, Surety Holdings Corp., a
Florida corporation (incorporated in
December 1995), merged with Surety Holdings
Corp., a Delaware corporation (incorporated
in May 1999). The surviving Delaware
corporation ("Surety") continued the Florida
corporation's endeavors of pursuing business
opportunities. Chalon International of
Hawaii, Inc. ("Chalon"), the sole subsidiary
of Surety, was incorporated in Hawaii in
December 1988 for the primary purpose of
real estate development, including the
acquisition of fee simple land or
leaseholds, and the construction of
improvements thereon.
In December 1999, Surety issued 2,000,000
shares of its common stock in exchange for
100% of Chalon's outstanding shares in a
recapitalization transaction accounted for
as a reverse acquisition with a "shell"
company. Chalon was deemed the accounting
acquirer and Surety was deemed the legal
acquirer (see Note 3).
Surety and Chalon's (collectively, the
"Company") primary focus is the development
of a hotel, 18-hole golf course and resort
homes on approximately 600 acres of land in
the North Kahola district of Hawaii Island
in the state of Hawaii (the "Mahukona
development project") (see Note 5).
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES Principles of Consolidation
The consolidated financial statements of the
Company include the accounts of Chalon for
the years ended December 31, 1999 and 1998.
The consolidated financial statements also
include the accounts of Surety from December
29, 1999 (the effective date of the
recapitalization transaction/reverse
acquisition) to December 31, 1999. All
significant intercompany transactions and
balances have been eliminated in
consolidation.
Cash
The Company maintains its cash with
financial institutions in accounts that at
times may exceed insured limits. The Company
has not experienced any losses in such
accounts and believes it is not subject to
any significant credit risk on cash.
F-7
SURETY HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED) Property and Equipment
Property and equipment are stated at cost
less accumulated depreciation and
amortization. Depreciation and amortization
are provided using the straight-line method
over the following estimated useful lives.
Buildings and improvements 15-30 Years
Livestock 7 Years
Orchard 15 Years
Machinery, equipment and other 5-10 Years
Real Estate Held for Sale and Development
Costs
Real estate held for sale is stated at the
lower of cost or market.
Development costs include substantially all
costs directly related to the planning of
improvements to be constructed on the land;
land acquisition costs, interest, real
estate taxes and other indirect charges.
Land and land development costs are
allocated to the project using relative fair
values.
Impairment of Long-lived Assets
The Company reviews its long-lived assets
for impairment whenever events or changes in
circumstances indicate that the carrying
amount of the assets may not be fully
recoverable. To determine the recoverability
of its long-lived assets, the Company
evaluates the probability that future
undiscounted net cash flows will be less
than the carrying amounts of the assets.
Impairment is the amount by which the
carrying value of the asset exceeds its fair
value.
Income per Common Share
The Company complies with Statement of
Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share" which requires
dual presentation of basic and diluted
earnings per share. Basic earnings per share
excludes dilution and is computed by
dividing income available to common
stockholders by the weighted-average common
shares outstanding for the year. Diluted
earnings per share reflects the potential
dilution that could occur if securities or
other contracts to issue common stock were
exercised or converted into common stock or
resulted in the issuance of common stock
that then shared in the earnings of the
entity. Since the Company has no securities
or other contracts to issue common stock,
basic and diluted net income (loss) per
common share for the years ended December
31, 1999 and 1998 and for the nine months
ended September 30, 2000 and 1999
(unaudited) were the same.
F-8
SURETY HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED) Income Taxes
The Company complies with SFAS No. 109,
"Accounting for Income Taxes," which
requires an asset and liability approach to
financial accounting and reporting for
income taxes. Deferred income tax assets and
liabilities are computed for differences
between the financial statement and tax
bases of assets and liabilities that will
result in future taxable or deductible
amounts, based on enacted tax laws and rates
applicable to the periods in which the
differences are expected to affect taxable
income. Valuation allowances are
established, when necessary, to reduce
deferred tax assets to the amounts expected
to be realized.
Revenue Recognition
Sales of real estate are accounted for under
the accrual method. Accordingly, gain is not
recognized until the collectability of the
sales price is reasonably assured and the
earnings process is complete.
In December 1999, the Securities and
Exchange Commission issued Staff Accounting
Bulletin 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). SAB 101
provides guidance on the recognition,
presentation and disclosure of revenues in
financial statements and requires adoption
no later than the fourth quarter of 2000.
The Company is currently evaluating the
impact of SAB 101 and its related
interpretations to determine the effect, if
any, that it will have on the Company's
consolidated financial position and results
of operations.
Use of Estimates
The preparation of financial statements in
conformity with generally accepted
accounting principles requires management to
make estimates and assumptions that affect
the reported amounts of assets and
liabilities and disclosure of contingent
assets and liabilities at the date of the
financial statements and the reported
amounts of revenues and expenses during the
reporting period. Actual results could
differ from those estimates.
F-9
SURETY HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. RECAPITALIZATION On October 15, 1998, the majority beneficial
owner of Chalon ("Beneficial Owner")
acquired 90% of the outstanding common
shares of Surety Holdings Corp., a Florida
Corporation from an existing shareholder for
$150,000. After the June 1999 merger between
Surety Holdings Corp., a Florida corporation
and Surety (see Note 1) and effective
December 29, 1999, Surety entered into an
Agreement and Plan of Merger and
Reorganization (the "Plan") with Chalon. The
Plan provided for Surety to issue 2,000,000
shares of its common stock in exchange for
2,000,000 shares, or 100%, of Chalon. The
transaction, which is a recapitalization of
the Company, has been accounted for as a
reverse acquisition of a "shell" company.
The costs related to the recapitalization of
$206,000, the excess of the Beneficial
Owner's purchase price plus the net
liability assumed, has been included in
other expenses for the year ended December
31, 1999. No goodwill has been recognized
since Surety was a "shell company".
Accordingly, the accompanying consolidated
statements of operations include the results
of operations of Surety from December 29,
1999, the effective date of the Plan,
through December 31, 1999.
Additionally, the consolidated statements of
stockholders' equity have been retroactively
restated to reflect the number of shares
received by the stockholders of Chalon in
the business combination.
4. NOTES RECEIVABLE At December 31, 1999 and September 30, 2000
(unaudited), the Company had notes
receivable aggregating approximately
$689,000 and $2,714,000, respectively. The
notes bear interest at rates ranging from 7%
to 10% per annum, mature on various dates
through 2011 and are collateralized by real
property.
Approximate maturities of notes receivable
in each of the five years subsequent to
September 30, 2000 are as follows:
YEAR ENDING DECEMBER 31,
2000 $ 555,000
2001 117,000
2002 26,000
2003 27,000
2004 338,000
Thereafter 1,651,000
-----------
$ 2,714,000
===========
F-10
SURETY HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. REAL ESTATE DEVELOPMENT At December 31, 1999 and September 30, 2000
COSTS (unaudited), real estate development costs
attributed primarily to the Company's
Mahukona development project consist of the
following:
[Download Table]
DECEMBER 31, SEPTEMBER 30,
1999 2000
----------- ------------
(Unaudited)
Land and land acquisition costs $23,938,570 $23,896,144
Planning and studies 1,563,150 1,546,340
Engineering and architectural 580,647 576,483
Infrastructure 2,110,078 3,262,197
Professional and consulting fees 1,687,732 1,679,856
Other 1,224,999 1,307,034
----------- -----------
$31,105,176 $32,268,054
=========== ===========
Prior to the year ended December 31, 1998,
the Company wrote-off approximately $3.1
million of real estate development costs
associated with primarily all other
non-Mahukona development projects.
F-11
SURETY HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PROPERTY AND EQUIPMENT At December 31, 1999 and September 30, 2000
(unaudited), property and equipment consist
of the following:
[Download Table]
DECEMBER 31, SEPTEMBER 30,
1999 2000
(Unaudited)
Land $2,346,169 $2,346,169
Buildings and improvements 1,216,421 1,611,625
Livestock 759,226 759,226
Orchard 300,000 300,000
Machinery, equipment and other 359,076 480,832
---------- ----------
4,980,892 5,497,852
Less accumulated depreciation
and amortization 1,657,161 1,746,672
---------- ----------
$3,323,731 $3,751,180
========== ==========
7. MORTGAGE NOTE PAYABLE The mortgage note, which is collateralized
CREDIT FACILITY by certain property, is payable in monthly
installments of principal and interest
through 2019. The mortgage note bears
interest based on the Federal Reserve rate
(7.625% and 9.125% at December 31, 1999 and
September 30, 2000, respectively), plus 3%,
not to exceed 15%, adjusted annually.
Approximate aggregate future required
principal payments on the mortgage note at
September 30, 2000 is as follows:
YEAR ENDING DECEMBER 31,
2000 $ 2,000
2001 9,000
2002 10,000
2003 11,000
2004 12,000
Thereafter 384,000
---------
$ 428,000
=========
In addition, the Company has a $250,000 bank
line of credit, which bears interest at
11.5%, collateralized by certain assets of
the Company. At December 31, 1999 and
September 30, 2000 (unaudited), there were
no borrowings against the bank line of
credit.
F-12
SURETY HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. NON-CANCELABLE The Company leases certain parcels of land
OPERATING LEASES to tenants, which are used primarily for
agricultural purposes, under noncancelable
operating leases expiring through 2028.
Rental income under these operating leases
and month-to-month arrangements was
approximately $355,000 and $380,000 for the
years ended December 31, 1998 and 1999,
respectively, and $306,000 and $245,000 for
the nine months ended September 30, 1999 and
2000 (unaudited), respectively. Approximate
minimum rentals under the operating leases,
excluding renewal options, are as follows:
YEAR ENDING DECEMBER 31,
2000 $ 69,000
2001 64,000
2002 59,000
2003 48,000
2004 39,000
Thereafter 448,000
---------
$ 727,000
=========
9. INCOME TAXES At December 31, 1999, the Company's deferred tax
asset is comprised of the tax benefit associated
with the following items based on the statutory tax
rates current in effect:
[Download Table]
DECEMBER 31, SEPTEMBER 30,
1999 2000
(Unaudited)
Net operating loss carryforwards $3,884,000 $2,488,000
Difference between financial
and tax bases of assets 1,724,000 1,724,000
---------- ----------
Deferred income tax asset, gross 5,608,000 4,212,000
Valuation allowance 2,804,000 2,106,000
---------- ----------
$2,804,000 $2,106,000
========== ==========
F-13
SURETY HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES (CONTINUED) Deferred income taxes (benefit) for the
years ended December 31, 1998 and 1999 and
the nine months ended September 30, 1999 and
2000 (unaudited) consisted of the following:
[Download Table]
NINE NINE
YEAR ENDED YEAR ENDED MONTHS ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1999 2000
(Unaudited) (Unaudited)
Federal $(450,000) $ 178,000 $ 22,000 $ 592,000
State (80,000) 32,000 4,000 106,000
--------- --------- --------- ---------
$(530,000) $ 210,000 $ 26,000 $ 698,000
========= ========= ========= =========
The following table reconciles the federal
statutory income tax rate to the Company's
effective tax rate for the years ended
December 31, 1998 and 1999 and the nine
months ended September 30, 1999 and 2000
(unaudited):
[Enlarge/Download Table]
NINE NINE
YEAR ENDED YEAR ENDED MONTHS ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1999 2000
(Unaudited) (Unaudited)
Provision for income
taxes at the
federal statutory rate (34)% 34% 34% 34%
State income tax,
net of federal
tax benefit (6) 6 6 6
Effect of net
operating loss carry-
forwards and valuation
allowances, net 20 (20) (20) (20)
Other 5
-----------------------------------------------------------
(20)% 25% 20% 20%
===========================================================
F-14
SURETY HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES (CONTINUED) Through December 31, 1998, the Company
generated federal and state net operating
loss carryforwards ("NOL"s) of approximately
$10.9 million, available to offset future
taxable income. However, a change in the
ownership of the Company's common stock has
triggered an annual limitation on the
utilization of NOL's. At December 31, 1999
and September 30, 2000 (unaudited), the
Company had NOL's of approximately $9.7
million and $6.2 million, respectively,
available to offset future income subject to
tax. The NOL's expire through 2018.
10.CONTINGENCIES As discussed in Note 1, the Company's
primary focus is on the development of the
Mahukona property. Approval of an
environmental assessment and a permit to
utilize state lands for a cart underpass
servicing the golf course, which must go
under a state highway, must still be
obtained. These requirements resulted, in
part, from an appeal filed by a citizens
group challenging the Company's approvals,
and it can be anticipated that this group
will appeal future approvals or permits.
There can be no assurance that such
litigation will be favorably resolved. An
adverse outcome of such litigation will
adversely impact the Company's development
plans.
11.SUBSEQUENT EVENTS In March 2000, the Company raised
approximately $7 million, net of offering
costs, pursuant to a private placement of
146,000 shares of its common stock at $50
per share.
During 2000 and 2001, the Company's
President advanced the Company $260,000
($150,000 during the nine months ended
September 30, 2000-unaudited) pursuant to
one year, 5% promissory notes.
Pursuant to promissory notes, during 2000,
the Company advanced Marine Forest Resort,
Inc. ("Marine Forest"), a Japanese
corporation, $6.4 million ($2.9 million
during the nine months ended September 30,
2000-unaudited) to initiate the Company's
development endeavors in Okinawa, Japan.
The notes, which are due six months after date of
issuance and bear interest at the U.S. prime
rate (9.5% at September 30, 2000) plus one
percent, may be converted to equity
interests in Marine Forest in 2001. Related
interest income for the nine months ended
September 30, 2000 (unaudited) is approximately
$72,000.
F-15
PART III
EXHIBITS:
2.01 Certificate of Incorporation
2.02 Certificate of Merger, with Agreement of Merger annexed
2.03 By-Laws, with adopting resolution
2.04 Amendment to By-Laws
5.01 Lock Up Agreement by Chalon Corp.
8.01 Agreement and Plan of Merger and Reorganization by and between Surety
Holdings Corp., Chalon Acquisition Corp. and Chalon International of
Hawaii, Inc.
28
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
Registrant: SURETY HOLDINGS CORP.
Date: February 9, 2001 By: /S/ Howard R. Knapp
----------------------------
Howard R. Knapp
Chief Financial Officer
29
Dates Referenced Herein
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