<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 0-23338
THE CASTLE GROUP, INC.
(Exact name of small business issuer as specified in its charter)
UTAH 99-037845
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
745 Fort Street, Tenth Floor
Honolulu, Hawaii 96813
Issuer's telephone number: (808) 524-0900
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
Number of shares outstanding of each of the Registrant's classes of
stock, as of April 30, 1996: Common stock, $.02 par value -
5,089,030
Transitional Small Business Disclosure Format (check one):
Yes [ x ] No [ ]
Page 1 of 18 sequentially numbered pages.
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THE CASTLE GROUP, INC.
FORM 10-QSB
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of April 30, 1996 (unaudited) ........ 3
Consolidated Statements of Operations for the Quarter
ended April 30, 1996 and April 30, 1995 (unaudited)............... 4
Consolidated Statement of Cash Flows for the Quarter Ended
April 30, 1996 and April 30, 1995 (unaudited)..................... 5
Notes to the Consolidated Financial Statements (unaudited).......... 6
Item 2. Management's Discussion and Analysis or Plan of Operation.. 13
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders........ 15
Item 5. Other Information.......................................... 15
Item 6. Exhibits and Reports on Form 8-K........................... 15
SIGNATURES ......................................................... 17
EXHIBITS ........................................................... 18
2
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<TABLE>
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated Balance Sheet - April 30, 1996 and 1995 (Unaudited)
<CAPTION>
April 1996 April 1995
<S> <C> <C>
ASSETS
Current Assets
Cash $ 92,544 $ 71,936
Accounts Receivable, Net 1,040,217 1,216,361
Prepaid Expenses 59,801 17,740
Restricted Cash 19,941 19,941
Deferred Cost 161,138 148,788
Deferred Compensation Expense 50,000 50,000
------------- -------------
Total Current Assets 1,423,641 1,524,766
------------- -------------
Non Current Assets
Furniture Fixtures & Equipment, Net 97,232 100,358
Deposits 132,971 31,447
Intangibles, Net of Amortization 159,280 436,199
Deferred Cost 39,791 210,098
Deferred Compensation Expense 75,000 125,000
------------- -------------
Total Non Current Assets 504,274 903,102
------------- -------------
TOTAL ASSETS 1,927,915 2,427,868
============= =============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 769,855 $ 754,372
Due to Related Parties (Note 3) 0 84,400
Vacation Payable 97,931 50,362
Wages Payable 80,250 80,213
Taxes Payable 17,914 11,795
Notes and Contract Payable, Current 161,138 148,788
Deferred Compensation Payable 250,000 250,000
Witheld from former stockholders 0 120,000
Line of Credit due to Bank (Note 6) 275,000 275,000
Deferred Income 203,280 0
Other Accrued Liabilities 63,803 42,329
------------- -------------
Total Current Liabilities 1,919,171 1,817,259
Long Term Debt (Note 5) 224,282 210,181
------------- -------------
Total Liabilities 2,143,453 2,027,440
------------- -------------
Stockholders' Equity
Common stock, $.02 par, 20,000,000 shares
authorized, 5,089,530 and 5,066,530
issued and oustanding, respectively 101,781 101,331
Capital in excess of par 2,118,222 2,110,235
Accumulated Deficit (2,435,541) (1,811,138)
------------- -------------
Total Stockholders' Equity ( 215,538) 400,428
------------- -------------
Total Liabilities and Stockholders' Equity 1,927,915 2,427,868
============= =============
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
3
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<TABLE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated Statement of Operations
for the quarter ended April 30, 1996 and 1995
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
April 30 April 30
------------------------- -------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue
Managment Fees $ 892,769 $ 726,194 $ 2,309,385 $ 1,921,330
Other Income 201,436 82,012 502,510 141,045
------------ ------------ ------------ ------------
Total Revenues 1,094,205 808,206 2,811,895 2,062,375
------------ ------------ ------------ ------------
Expenses
Payroll and benefits 470,558 371,468 1,353,723 1,114,036
Professional fees 18,339 31,576 61,784 123,822
Reservations 238,217 207,108 681,159 578,230
Depreciation and
Amortization 116,645 111,863 346,621 333,299
Rent 87,432 88,569 277,804 277,830
Travel and entertainment 6,630 35,141 31,874 53,204
Office expenses 13,421 16,983 34,743 45,937
Utilities 9,030 11,845 28,689 42,500
Taxes, other than income 43,984 33,987 113,760 85,202
Advertising and marketing 22,657 15,350 65,090 49,053
Insurance 34,090 743 64,491 13,778
Other 8,049 10,633 24,638 28,683
------------ ------------ ------------ ------------
Total Expenses 1,069,052 935,266 3,084,376 2,745,574
------------ ------------ ------------ ------------
Operating Profit (Loss) 25,153 ( 127,060 )( 272,481 )( 683,199 )
------------ ------------ ------------ ------------
Other Expenses
Interest Expense 17,889 16,083 55,403 37,605
------------ ------------ ------------ ------------
Net Profit ( Loss ) 7,264 ( 143,143) ( 327,884 )( 720,804 )
============ ============ ============ ============
Primary and Fully
Diluted Per Share Data
Net Profit ( Loss ) $ .001 ($ .028 ) ($ .064 ) ($ .142 )
============ ============ ============ ============
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
4
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<TABLE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated statement of cash flows
Nine months ended April 30, 1996 and 1995
( Unaudited )
<CAPTION>
Nine Months Ended
April 30
---------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
Cash Flows From Operating Activities
Net Loss ($ 327,884 ) ($ 720,804 )
Adjustments to reconcile net loss to net
cash used by operating activities-
Depreciation and amortization 346,621 333,298
Amortization of deferred compensation
expense 37,500 37,500
Changes in assets and liabilities-
Decrease (Increase) in accounts receivable ( 123,392 ) ( 562,641 )
Decrease (Increase) in prepaid expenses ( 17,174 ) 8,919
Increase (Decrease) in deferred income ( 87,790 ) 0
Increase (Decrease) in accounts payable 100,799 505,333
Increase (Decrease) in wages payable 946 27,299
Increase (Decrease) in vacation payable 20,435 1,282
Increase (Decrease) in taxes payable 5,985 ( 19,691 )
Increase (Decrease) in accrued liabilities 22,820 ( 13,951 )
--------------- ---------------
Net cash flow from operating activities ( 21,134 ) ( 403,456 )
--------------- ---------------
Cash Flows From Investing Activities
Purchase of furniture, fixtures & equipment ( 24,537 ) ( 12,865 )
Sale of furniture, fixtures & equipment 0 10,271
Cash held as collateral for equipment
lease and notes payable ( 19,941 ) 26,529
--------------- ---------------
Net cash flow from investing activities ( 44,478 ) 23,935
--------------- ---------------
Cash Flows from Financing Activities
Repayment of Long Term Debt ( 119,550 ) ( 159,589 )
Proceeds from Bank Line of Credit 0 275,000
Use of restricted cash from former
stockholders of KRI, Inc. 0 68,230
--------------- ---------------
Net cash flow from financing activities ( 119,550 ) 183,641
--------------- ---------------
Net Increase (Decrease) in Cash ( 185,162 ) ( 195,880 )
Cash at Beginning of Period 277,706 207,675
--------------- ---------------
Cash at End of Period 92,544 11,795
=============== ===============
Supplemental disclosures of cash flow
Information
Cash paid during the year for interest 55,403 37,605
=============== ===============
</TABLE>
[FN]
The accompanying notes are an integral part of the financial statements.
5
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statement
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION-
The Castle Group, Inc. (the Company) was incorporated under the laws
of the State of Utah on August 21, 1981. The Company was considered to
be a development stage company and inactive prior to the acquisitions of
the assets of The Castle Group, Ltd. and the acquisition of KRI, Inc.
(the Subsidiary). The Company operates in the hotel and resort
management industry (see Note 2).
PRINCIPLES OF CONSOLIDATION-
The accompanying consolidated financial statements include The
Castle Group, Inc. and its wholly owned subsidiary, KRI, Inc. and a 100%
ownership interest of KRI, Inc. in HPR Advertising, Inc. All
significant inter-company transactions have been eliminated in the
consolidated financial statements.
PER SHARE DATA-
Per share data is based on the weighted average number of shares
outstanding during the period without regards to common stock equivalents
because of their anti-dilutive effect. As of April 30, 1996 and 1995,
the weighted average shares outstanding was 5,089,030 and 5,066,530,
respectively.
INCOME TAXES-
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amount used for income tax
purposes.
CASH AND CASH EQUIVALENTS-
The Company has considered all highly liquid investments with a
maturity date of three months or less when purchased to be cash
equivalents.
FURNITURE, FIXTURES AND EQUIPMENT-
Furniture, fixtures and equipment are recorded at cost. When assets
are retired, sold or otherwise disposed of, the cost and the related
accumulated depreciation of the asset is removed from the accounts, and
any resulting gain or loss is reflected in the income statement for the
period.
The cost of maintenance and repairs are charged to income as the
expense is incurred. Renewals and betterments are capitalized in the
accounts and depreciated over the estimated useful life of the asset
acquired.
At April 30, 1996 and 1995, furniture, fixtures and equipment
6
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consisted of the following:
04/30/96 04/30/95
-------- --------
Office Furniture and Equipment 198,612 170,140
Less Accumulated Depreciation (101,380) ( 69,782)
-------- --------
Net Book Value 97,232 100,358
======== ========
Depreciation is computed using the declining balance and
straight-line methods over the estimated useful life of the assets
(5 to 7 years). At April 30, 1996 and 1995, depreciation expense
was $19,315 and $14,059, respectively.
INTANGIBLES-
Intangible assets consist of noncompetition agreements and
organizational costs. The noncompetition agreements are amortized
over their respective lives (3 years) on a straight-line basis.
Organizational costs are amortized on a straight-line basis over
5 years. At April 30, 1996 and 1995, the balances of those
intangibles were as follows:
04/30/96 04/30/95
-------- --------
Noncompetition Agreements 800,000 800,000
Organizational Costs 51,714 51,714
-------- --------
Total Cost 851,714 851,714
Less Accumulated Amortization (692,434) (415,515)
-------- --------
Net Book Value 159,280 436,199
======== ========
DEFERRED COST-
Deferred cost represents the cost of obtaining management
contracts and is being amortized on a straight line basis over the
life of the contract (see Note 5).
DEFERRED COMPENSATION EXPENSE-
Deferred compensation expense represents the cost of common
stock options issued to an officer as an inducement to enter into an
employment contract. The deferred compensation expense is amortized
on a straight-line basis over the life of the contract (5 years).
INCOME RECOGNITION-
The Company recognizes income from the management of resort
properties in the Hawaiian Islands according to the individual terms
and conditions of its various management contracts.
CONCENTRATIONS OF CREDIT RISK-
The Company's cash is deposited in savings and demand deposit
accounts with various financial institutions in the state of Hawaii.
7
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2. ACQUISITIONS
CASTLE GROUP, LTD.-
In November 1993 the Company purchased the assets of The Castle
Group, Ltd. (CGL). CGL was engaged in the management of hotels and
resorts in the Hawaiian Islands. The primary assets of CGL were
certain hotel and resort management contracts. The purchase price
was 2,100,000 shares of the Company's stock.
The transaction was accounted for as a purchase of CGL with no
adjustment to the basis for the assets. The excess of the purchase
price over the basis was accounted for as a preferential distribution.
The Company changed its name to The Castle Group, Inc. The Company's
consolidated financial statements include the operations of CGL since
acquisition.
The condensed financial information for the operations of CGL
prior to the acquisition (for the period 08/01/93 to 11/10/93) was as
follows:
Revenues $110,408
Net Income 51,404
KRI, INC.-
In November 1993, the Company acquired a one hundred percent
interest in KRI, Inc. for 650,000 shares of common stock and
$1,200,000 cash. KRI, Inc.'s operation consisted of hotel and resort
management and through its subsidiary, HPR Advertising, Inc., provides
advertising services related to the Company's management services.
The transaction was accounted for as a purchase with no adjustment
to the basis of the assets acquired. The excess of the cash paid to
the former stockholders of KRI, Inc. over the predecessor cost of the
assets acquired was accounted for as a preferential distribution. The
Company's consolidated financial statements include the operations of
KRI, Inc. since the acquisition.
The condensed financial information of the operations of KRI, Inc.
prior to the acquisition (for the period August 1, 1993 to November 10,
1993), was as follows:
Revenues $ 322,608
Net (Loss) ( 13,112 )
RESTRICTED CASH-
The terms of the stock purchase agreement for the purchase of KRI,
Inc. stated that if, at the end of twelve months following the closing
date of the agreement, KRI, Inc. had a net gain, the funds would be
released to the former stockholders of KRI, Inc. If there was a loss,
funds sufficient to cover the loss would be released to the Company and
the situation would be re-evaluated in another six months. If after a
total of eighteen months, KRI, Inc. showed a profit, the balance of the
funds wold be returned to the Company.
In February 1994, $120,000 of the original $240,000 in restricted
cash was released to the former stockholders of KRI, Inc. and in July,
1995, the remaining $120,000 was released.
8
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3. RELATED PARTY TRANSACTIONS-
HANALEI BAY INTERNATIONAL INVESTORS-
The Company has a hotel management agreement with Hanalei Bay
International Investors (HBII) to manage the Hanalei Bay Resort (HBR).
The managing general partner of HBII is also the chairman and chief
executive officer of the Castle Group, Inc. Under the agreement, the
Company is to receive management and incentive fees based on a
percentage of gross total revenue and net income respectively. The
Company also receives reservation fees based on a percentage of gross
room revenues and a marketing fee based on a percentage of gross
revenue.
On July 31, 1995, HBII paid the Company $150,000 to be applied
against HBR's accounts receivable balance in anticipation of HBII
receiving cash inflows on August 1, 1995. The anticipated cash was
not received by HBII and therefore, on August 2, 1995, the Company
issued a $150,000, 6% promissory note to HBII. The promissory note
matured on August 31, 1995. In September of 1995, HBII repaid the
Company the note in full, together with interest.
Included in accounts receivable is $383,435 due from HBII. The
Company has set up a payment plan with HBII to receive weekly
installments which will reduce the outstanding balance. During the
quarter ended April 30, 1996, HBII paid the Company a total of
$226,812 against the receivable balance due to the Company.
On July 31, 1995, the Company invested $100,000 in the "HBII Time
Share Program of the Hanalei Bay Resort". Assuming the HBII Time
Share Program begins its timeshare sales, The Company will receive
monies based on a percentage of timeshare sales, up to four times the
amount invested. Although management can give no assurance, it is
confident that the investment will be a profitable one for the Company.
The HBII Timeshare Program received governmental approval in
January 1996 to sell timeshare intervals, as it is required that
timeshare plans register with the State of Hawaii. HBII is currently
in the process of establishing its pre-opening timeshare plan and it
is management's belief, although no assurance can be given, that HBII
will commence with the selling of timeshare intervals in the very near
future.
HAWAII RESERVATIONS CENTER CORP.-
On August 1, 1994, the Company contracted with Hawaii Reservations
Center Corp. (HRCC) to provide the Company reservations services for
the hotels and resorts the Company manages. HRCC is operated by a
director of the Company who has a 2% interest in the Company.
STOCKHOLDER ADVANCES-
In 1994, former stockholders advanced the Company $80,400 which
was non-interest bearing and due on demand. In 1995, the advances were
increased to $184,400 and were converted to 6% loans due on January 31,
1997.
9
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4. COMMITMENTS AND CONTINGENCIES
LEASES-
The Company has two leases for office space expiring in March 1998
and May 1999. The leases are renewable for an additional five years.
One office is used as the corporate headquarters and the other office is
occupied by HRCC (See note 3 to the financial statements). At April
30, 1996, the future minimum rental commitment under these leases were as
follows:
Schedule of minimum lease payments
1996 77,000
1997 228,000
1998 217,000
1999 79,000
--------
Total 601,000
========
MANAGEMENT CONTRACTS-
The Company manages several hotels and resorts under management
agreements expiring at various dates through December, 1999. Several of
these management agreements contain automatic extensions for periods of
1 to 10 years. Management fees are based on the revenues and net
available cash flows of the hotels' operations as defined in the
management agreements.
In addition, the Company has sales, marketing and reservations
agreements with other hotels and resorts expiring at various dates
through December 1996. Several of these agreements contain automatic
extensions for periods of one month to three years. Fees received are
based on revenues, net available cash flows or commissions as defined in
the agreements.
5. LONG TERM DEBT
At April 30, 1996 and 1995, long-term debt consisted of the
following:
1996 1995
---------- ----------
Contract Payable in monthly installments
of $15,080, expiring in June 1997 (see below). 201,020 358,969
6% Loans from stockholders due January 31, 1997 184,400 -
---------- ---------
Subtotal 426,007 358,969
Less Current Portion ( 161,138) ( 148,788)
---------- ---------
Total Long Term Debt 224,282 210,181
========== =========
The contract payable represents a contract with an unrelated
property manager to secure management contracts on behalf of the
Company, and is payable in monthly installments of $14,500 plus tax
through June 1997. The contract payable is discounted at an effective
interest rate of 8% and at April 30, 1996 and 1995, is presented net
of the discount of $26,270 and $58,442, respectively.
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Since signing the contract, the Company has obtained two
management contracts with the assistance of the property manager.
It is management's belief, although no assurance can be given, that
the revenues generated from the two management contracts will exceed
the monthly payments made to the contract manager, exclusive of any
additional management contracts which the property manager may assist
in obtaining.
Scheduled maturities of notes and contracts payable at April 30,
1996 are as follows:
1996 $161,138
1997 264,869
--------
426,007
========
6. EMPLOYEE BENEFITS
The Company has a 401(k) Profit Sharing Plan available for its
employees. Under the terms of the Plan, the Company may match 50% of
the compensation reduction of the participants in the Plan up to 1% of
compensation. Any employee with one year of service and 1,000 credit
hours of service, who is at least twenty-one years old is eligible to
participate. As of April 30, 1996 and 1995, no contributions of
profits were made by the Company.
The Company has a flexible benefits plan under which participants
are allowed to make pre-tax premium elections which are intended to be
excluded from income as provided by Section 125 of the Internal Revenue
Code of 1986. To be eligible, an employee must have been employed for
90 days. The benefits include group medical, vision care, disability,
cancer group dental, group life and accident insurance.
7. CAPITAL STOCK
Other Capital Stock Issuances-
In September, 1995, the Company issued 22,500 shares of its common
stock to an employee as compensation.
COMMON STOCK WARRANTS-
In May 1994, the Company issued warrants to acquire up to 25,000
shares of common stock for $1.25 per share, exercisable through May 1999
in exchange for consulting services rendered. No warrants have been
exercised as of April 30, 1996.
COMMON STOCK OPTIONS-
In November 1993, as an inducement to enter into an employment
contract with the Company, the Company issued options to an officer of
the Company to obtain 125,000 shares of common stock for one dollar,
exercisable by December 2, 1998. The transaction was recorded as
deferred compensation expense and deferred compensation payable of
$250,000, representing the fair value of the common stock option at the
date of grant. In 1995, the option period was amended to be only
exercisable after August 1, 1996 but before December 2, 1998. No
options have been exercised during the quarter ended April 30, 1996.
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TREASURY STOCK-
In June 1994, 150,000 shares of common stock were returned to the
Company by an officer without charge. The 150,000 shares of treasury
stock were subsequently sold at $2.00 per share.
8. INCOME TAXES-
For the fiscal year ended July 31, 1994, the Company implemented the
provisions of Statement of Financial Accounting Standards No. 109 (SFAS
No. 109), "Accounting for Income Taxes," which changed the criteria for
measuring the provisions for income taxes and recognizing deferred tax
assets and liabilities on the balance sheet. Under the provisions of
SFAS No. 109, the Company elected not to restate prior years and has
determined that the cumulative effect of implementation was immaterial.
No net deferred tax asset was recorded in accordance with SFAS No. 109
because it could not be reasonably determined if the net operating loss
will be usable.
The net change during the quarter ended April 30, 1996 and 1995
was an increase of $60,000 and $71,700, respectively. The Company has
a net operating loss carryforward for income tax purposes of $1,277,109
at July 31, 1995 which expires at various dates through fiscal 2010.
Significant components of the Company's deferred tax assets and
liabilities as of April 30, 1996 and 1995 are:
04/30/96 04/30/95
Deferred tax assets-
Vacation pay 21,500 21,500
Deferred compensation expense 35,000 15,000
Noncompetition agreement 149,000 64,000
Deferred Income 120,000 --
Net Operating Loss 571,000 330,000
896,500 430,500
Deferred tax liability-
Furniture, fixtures and equipment ( 4,500) ( 3,500)
Net Deferred Tax Asset 892,000 427,000
Valuation Allowance (892,000) (427,000)
-- --
12
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
PLAN OF OPERATION-
In fiscal 1995, the Company was successful in attracting personnel
with substantial experience and business acumen in the Company's related
industry. During fiscal 1995, the Company added nine contracts to its
management portfolio while losing only one (due to the purchase and
conversion of a property to non-hotel use). In January 1996, The Company
added an additional property, bringing the total number of management
contracts by The Company to twenty five. The Company intends to
continue increasing the number of properties under contract during
fiscal 1996 utilizing the current management team. Although no
assurances can be given, based on the success experienced to date,
management believes that it will be able to further add to its portfolio
of management contracts. Management also believes, although no assurances
can be given, that the Company will be able to handle a significantly
larger customer base without expending significant amounts of additional
resources due to the solid foundation the Company successfully built in
fiscal 1995.
The Company is presently in the negotiating stages with various
other properties located throughout the State of Hawaii.
RESULTS OF OPERATIONS-
For the third quarters ended April 30, 1996 and 1995, the Company
had total revenues of $1,094,205 and $808,206, respectively, an increase
of $285,999 or 35%. Operating expenses for the quarters ended April 30,
1996 and 1995 were $1,086,941 and $951,349, respectively, an increase of
$135,592 or 14%, which contributed to a net profit for 1996 of $7,264 as
compared with a net loss of $143,143 for the prior year.
The increase in revenues for the quarter ended April 30, 1996 as
opposed to the prior year is attributed to the number of properties
managed by the Company. As of April 30, 1996, the Company had twenty
five management contracts in its portfolio as opposed to nineteen as of
April 31, 1995.
Although the Company increased revenues by 35%, the increase in
expenses for the quarter ended April 30, 1996 as opposed to the prior
year was only 14% The disproportionate increase is a result of
management's initial plan of operation to expend the resources necessary
to build a solid foundation upon which the Company would be able to
expand its revenue base with a minimum incremental increase in expenses
once this foundation was attained.
LIQUIDITY AND CAPITAL RESOURCES-
As of April 30, 1996, total current assets were $1,423,641 and
consisted primarily of $1,040,217 in accounts receivable. Total current
liabilities of $1,919,171 exceeded total current assets by $495,530.
Although no assurance can be given, management believes that the
continued collection of the receivable balances from HBII shall
proceed and that HBII will have the ability to make substantial
payments to the Company for past due amounts in the near future. HBII
is currently in the final stages of commencing with timeshare sales (See
Notes to Financial Statements, Item 3. Based on preliminary projections,
the HBII Timeshare Plan will generate adequate cash flow to HBII which
will be more than enough to pay the past due amounts owed to The Company.
13
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The Company has a $300,000 line of credit which expired on November
1, 1995. The Company received a short term extension of the line of
credit, through March 15, 1996, and is finalizing documents for an
extension through November 1, 1996. As of April 30, 1996, the Company
had drawn $275,000 against the line, leaving a balance of $25,000.
Although no assurance can be given, it is management's belief that
the combination of the reduction in the accounts receivable balance due
from HBII and the extension of the $300,000 line of credit will provide
sufficient liquidity necessary for the Company to honor its financial
obligations in a timely manner.
To further the liquidity and financial strength, The Company has
also entertained the possibility of a private placement of its common
stock to a selected group of sophisticated investors.
14
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PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the quarter ended April 30, 1996.
Item 5. OTHER INFORMATION
There is no other information being reported for the current quarter.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits designated by an asterisk are incorporated herein by
reference. The exhibits with page references are filed herewith.
Sequential
Exhibit Page
Number Description Number
2.1 Restated Articles of Incorporation, incorporated by *
reference to the Company's Registration Statement on
Form 10-SB
2.2 Bylaws, as amended effective November 16, 1995 18
6.1 Agreement and Plan of Reorganization dated 11/08/93, *
by and among The Castle Group, Inc., Bernard Wall
Trust, LCC, Ltd., John Tedcastle, Hideo Nomura,
and Castle Group, Limited, with exhibits,
incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form 10-SB.
6.2 Stock Purchase Agreement dated 11/10/93, by and *
among The Castle Group, Inc., Keawe Resorts, Inc.,
Maui Beach Hotel, Inc., M.K. & Sons, Inc., TN Group
Hawaii, Inc., Michael S. Nitta, Saburo and Mitsue
Maruyama, Shigeru Shinno, James Kurita, and KRI,
Inc., with exhibits, incorporated by reference to
Exhibit 10.2 to the Company's registration
statement on form 10-SB.
6.3 Kelvin Bloom Employment Agreement dated 12/02/93, *
between the Company and Kelvin Bloom, incorporated
by reference to Exhibit 10.3 to the Company's
Registration Statement on Form 10-SB.
6.4 Kimo M. Keawe Employment Agreement dated 07/30/94, *
effective as of 11/10/93 between Kimo M. Keawe and
the Company, incorporated by reference to Exhibit
6.4 to the Company's Annual Report on Form 10-KSB
for the year ended 07/31/94.
6.5 Michael S. Nitta Employment Agreement dated *
06/23/94, effective as of 11/10/93 between the
Company and Michael S. Nitta, incorporated by
reference to Exhibit 6.5 to the Company's Annual
Report on Form 10-KSB for the year ended 07/31/94.
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<PAGE>
6.6 Shari W. Chang Employment Agreement dated 07/15/94, *
effective as of 07/16/94, between Shari W. Chang
and the Company, incorporated by reference to
Exhibit 6.6 to the Company's Annual Report on Form
10-KSB for the year ended 07/31/94.
6.7 Sublease Agreement dated 09/16/93, between Rush *
Moore Craven Sutton Morry & Beh and the Castle
Group, Ltd. for the Company's principle executive
offices, incorporated by reference to Exhibit 10.4
to the Company's Registration Statement on form
10-SB.
6.8 Lease Agreement dated 04/01/88, between Hirano *
Enterprises, Cen Pac Properties, Inc., and KRI,
Inc., dba Hawaiian Pacific Resorts, as renewed by
agreement dated 05/03/93, incorporated by reference
to Exhibit 10.5 to the Company's Registration
Statement on form 10-SB.
6.9 Reservation Services Agreement dated 08/01/94 *
between the Company and Hawaii Reservations Center
Corp., incorporated by reference to Exhibit 6.9 to
the Company's Quarterly Report on Form 10-QSB for
the quarter ended 10/31/94.
6.10 Stock Acquisition Agreement Between the Company *
and Shari Chang dated 09/10/95, incorporated by
reference to Exhibit 6.10 to the Company's Annual
Report on Form 10-KSB for the year end 07/31/95.
6.11 Revolving Line of Credit Loan Agreement dated *
10/21/94 between the Company, Castle Resorts &
Hotels, Inc., KRI, Inc., Hawaii National Bank,
Rick Wall, John Tedcastle, Hideo Nomura and Kimo
M. Keawe, incorporated by reference to Exhibit
6.11 to the Company's Annual Report on Form 10-KSB
for the year ended 07/31/95.
6.12 Letter dated 10/17/95 from Kimo M. Keawe to KRI, *
Inc. Stockholders, together with Promissory Notes
dated 07/31/95 payable to Maui Beach Hotel, Inc.
for $12,000, James Kurita for $6,000, Saburo or
Mitsue Maruyama for $3,600, TN Group, Hawaii, Inc.
for $6,000, M.K. & Sons, Inc. for $12,000, Shigeru
Shinno for $6,000, Michael S. Nitta for $16,800,
and Keawe Resorts, Inc. for $122,000; incorporated
by reference to Exhibit 6.12 to the Company's
Annual Report on Form 10-KSB for the year ended
07/31/95.
6.13 Second Amendment to Letter of Agreement Dated *
12/02/93 between Kelvin Bloom and the Company,
incorporated by reference to Exhibit 6.13 to the
Company's Annual Report on Form 10-KSB for the
year ended 07/31/95.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
period from 07/31/95 to 04/30/96.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE CASTLE GROUP, INC.
(Registrant)
June 12, 1996 Rick Wall
(Signature)
Chairman of the Board and
Chief Executive Officer
June 12, 1996 Michael S. Nitta
(Signature)
Chief Financial Officer and
Vice President Finance
17
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BY-LAWS
OF
THE CASTLE GROUP, INC.
An annual meeting of the shareholders of the Company shall be held during
January of each year, or such later date as the board of directors may
determine, at such place and specific time as shall be designated by the board
of directors for the purpose(s) of presenting the Company's annual report to
the shareholders, electing directors and conducting such other business as may
be necessary or appropriate.
Special meetings of the Company's shareholders may be called by the
President as well as by the board of directors and the persons specified in
section 16-10a-702(b) of the Utah Revised Business Corporation Act. Special
meetings called by the board of directors shall be held at such time and place
as the board shall designate. As to all other special meetings, the person(s)
calling the same may designate the time (within normal business hours) of the
meeting, and may request the board to designate a particular place at which it
will be held, but if the board fails to do so then all such special meetings
shall be held at the place designated by the Company as its principal office
in the most recent document file (with the Division of Corporations and
Commercial Code of the Utah Department of Commerce) providing such information;
An annual meeting of the board of directors shall be held without other
notice than this bylaw immediately following, and at the same place as, the
annual meeting of shareholders;
Special meetings of the board of directors may be called by the President
or by a majority of the directors, who may fix the time and place for holding
any special meeting they might call. Written notice of special meetings,
specifically stating the purpose(s) for which the same are called, shall be
given not less than five calendar days prior to the time fixed for the meeting
by personal delivery or by mailing the notice to each director at the
director's address provided for that purpose (mailed notice shall be deemed
to be delivered when deposited into the United States mail postage prepaid);
Any or all directors may participate in a regular or special (but not
annual) meeting by, and such meetings may be conducted through the use of, any
means of communication by which all directors participating may hear each
other during the meeting. A director participating in a meeting by this means
is considered to have waived any required notice of , and to be present in
person at, the meeting; and,
In order for the board of directors to take action without a meeting, the
signatures of the directors on any particular "writing" (as that terms as used
in section 16-10a-821 of the Revised Utah Business Corporation Act) need not
all be contained on the same counterpart of the writing, and the signature of a
director on a counterpart of a writing in question delivered to the Secratary
by facsimile shall be, when one or more other counterparts of the writing are
received by the Secretary which together are signed (in the original or by
facsimile) by all of the other directors, fully as effective as though all of
the directors had originally executed one counterpart of the writing.
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