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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 October 31, 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 October 31, 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 October 31, 1996 (unaudited) ...... 3
Consolidated Statements of Operations for the Quarter
ended October 31, 1996 and October 31, 1995 (unaudited)........... 4
Consolidated Statement of Cash Flows for the Quarter Ended
October 31, 1996 and October 31, 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 ......................................................... 18
2
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<TABLE>
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated Balance Sheet - October 31, 1996 and 1995 (Unaudited)
<CAPTION>
October 1996 October 1995
<S> <C> <C>
ASSETS
Current Assets
Cash $ 199,771 $ 84,445
Accounts Receivable, Net 1,040,274 1,006,741
Prepaid Expenses 45,920 25,336
Restricted Cash 26,536 19,941
Deferred Cost 117,099 161,138
Deferred Compensation Expense 50,000 50,000
------------- -------------
Total Current Assets 1,479,600 1,347,601
------------- -------------
Non Current Assets
Furniture Fixtures & Equipment, Net 89,349 85,626
Investment in HBII Timeshare Program 100,000 100,000
Deposits & Other Assets 32,971 32,971
Intangibles, Net of Amortization 20,685 418,039
Deferred Compensation Expense 50,000 100,000
------------- -------------
Total Non Current Assets 293,005 736,636
------------- -------------
TOTAL ASSETS 1,772,605 2,084,237
============= =============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 969,439 $ 720,577
Due to Related Parties (Note 3) 184,400 0
Vacation Payable 91,950 79,923
Wages Payable 127,530 75,952
Taxes Payable 15,313 11,504
Notes and Contract Payable, Current 117,099 161,138
Deferred Compensation Payable 250,000 250,000
Line of Credit due to Bank (Note 6) 275,000 275,000
Deferred Income 101,640 101,640
Other Accrued Liabilities 168,358 38,205
------------- -------------
Total Current Liabilities 2,300,729 1,713,939
Long Term Debt (Note 5) 0 304,744
Deferred Revenues 63,540 152,460
------------- -------------
Total Liabilities 2,351,549 2,171,143
------------- -------------
Stockholders' Equity
Common stock, $.02 par, 20,000,000 shares
authorized, 5,089,530 issued and
outstanding, respectively 101,781 101,781
Capital in excess of par 2,118,222 2,118,222
Accumulated Deficit (2,798,947) (2,306,909)
------------- -------------
Total Stockholders' Equity ( 578,944) ( 86,906)
------------- -------------
Total Liabilities and Stockholders' Equity 1,772,605 2,084,237
============= =============
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
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<TABLE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated Statement of Operations
for the quarter ended October 31, 1996 and 1995
(Unaudited)
<CAPTION>
Three Months Ended
October 31
-------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenue
Management Fees $ 764,096 $ 677,709
Other Income 196,375 144,801
------------ ------------
Total Revenues 960,471 822,510
------------ ------------
Expenses
Payroll and benefits 468,477 445,353
Professional fees 22,819 12,406
Reservations 238,273 217,311
Depreciation and
Amortization 118,922 114,724
Rent 102,143 100,026
Travel and entertainment 5,507 12,745
Office expenses 14,864 12,291
Utilities 9,340 10,504
Taxes, other than income 40,176 33,269
Advertising and marketing 26,456 12,239
Insurance 27,948 15,919
Other 18,190 14,001
------------ ------------
Total Expenses 1,093,115 1,000,788
------------ ------------
Operating Profit (Loss) ( 132,644) ( 178,278)
------------ ------------
Other Expenses
Interest Expense 13,681 20,973
------------ ------------
Net Profit ( Loss ) ( 146,325) ( 199,251)
============ ============
Primary and Fully
Diluted Per Share Data
Net Profit ( Loss ) ( $ .029 ) ($ .039 )
============ ============
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
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<TABLE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated statement of cash flows
Three months ended October 31, 1996 and 1995
( Unaudited )
<CAPTION>
Three Months Ended
October 31
---------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
Cash Flows From Operating Activities
Net Loss ($ 146,325 ) ($ 199,251 )
Adjustments to reconcile net loss to net
cash used by operating activities-
Depreciation and amortization 118,921 114,724
Amortization of deferred compensation
expense 12,500 12,500
Issuance of Employee Stock Award 0 8,437
Changes in assets and liabilities-
Decrease (Increase) in accounts receivable 69,172 ( 89,916 )
Decrease (Increase) in prepaid expenses 10,717 17,291
Increase (Decrease) in deferred income 0 ( 45,410 )
Decrease (Increase) in deposits 30,000 0
Increase (Decrease) in accounts payable ( 93,079 ) 51,521
Increase (Decrease) in wages payable 33,261 ( 3,352 )
Increase (Decrease) in vacation payable ( 19,234 ) 2,427
Increase (Decrease) in taxes payable ( 18,298 ) ( 425 )
Increase (Decrease) in accrued liabilities 10,344 ( 2,778 )
--------------- ---------------
Net cash flow from operating activities 7,979 ( 134,232 )
--------------- ---------------
Cash Flows From Investing Activities
Purchase of furniture, fixtures & equipment ( 3,749 ) 0
Cash held as collateral for equipment
lease and notes payable 0 ( 19,941 )
--------------- ---------------
Net cash flow from investing activities ( 3,749 ) ( 19,941 )
--------------- ---------------
Cash Flows from Financing Activities
Repayment of Long Term Debt ( 25,410 ) ( 39,088 )
--------------- ---------------
Net cash flow from financing activities ( 25,410 ) ( 39,088 )
--------------- ---------------
Net Increase (Decrease) in Cash ( 21,180 ) ( 193,261 )
Cash at Beginning of Period 220,951 277,706
--------------- ---------------
Cash at End of Period 199,771 84,445
=============== ===============
Supplemental disclosures of cash flow
Information
Cash paid during the year for interest 13,681 20,973
=============== ===============
</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 October 31, 1996 and 1995,
the weighted average shares outstanding was 5,089,030 for each date,
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 October 31, 1996 and 1995, furniture, fixtures and equipment
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consisted of the following:
10/31/96 10/31/95
-------- --------
Office Furniture and Equipment 205,470 174,075
Less Accumulated Depreciation (116,121) ( 88,449)
-------- --------
Net Book Value 89,349 85,626
======== ========
Depreciation is computed using the declining balance and
straight-line methods over the estimated useful life of the assets
(5 to 7 years). At October 31, 1996 and 1995, depreciation expense
was $7,337 and $6,384, 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 October 31, 1996 and 1995, the balances of those
intangibles were as follows:
10/31/96 10/31/95
-------- --------
Noncompetition Agreements 800,000 800,000
Organizational Costs 51,714 51,714
-------- --------
Total Cost 851,714 851,714
Less Accumulated Amortization (831,029) (554,019)
-------- --------
Net Book Value 20,685 297,695
======== ========
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.
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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.
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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 $437,973 due from HBII. The
Company has set up a payment plan with HBII to receive monthly
installments which will reduce the outstanding balance. During the
quarter ended October 31, 1996, HBII paid the Company a total of
$217,012 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 finalizing its timeshare plan financing. Once this is
consummated, HBII may begin the sale of timeshare intervals. 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.
4. COMMITMENTS AND CONTINGENCIES
LEASES-
The Company has leases for office space, vehicles and equipment
expiring at various dates through 1999. The office leases are renewable
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for an additional five years. In May 1996, the Company leased a hotel
under a noncancelable agreement expiring in March 1998. The lease may
be renewed for an additional four years. The lessor is entitled to a
percentage of the operating profits for the hotel in excess of certain
thresholds of return until April 1997. At October 31, 1996, the future
minimum rental commitment under these leases were as follows:
Schedule of minimum lease payments
1997 1,020,000
1998 844,000
1999 202,000
---------
Total 2,066,000
=========
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 1997. 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 October 31, 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). 117,099 281,482
6% Loans from stockholders due January 31, 1997 184,400 184,400
---------- ---------
Subtotal 301,499 465,882
Less Current Portion ( 301,499) ( 161,138)
---------- ---------
Total Long Term Debt 224,282 304,744
========== =========
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 October 31, 1996 and 1995, is presented net
of the discount of $6,488 and $26,270, respectively.
Since signing the contract, the Company has obtained three
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 three management contracts will
exceed the monthly payments made to the property manager, exclusive
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of any additional management contracts which the property manager
may assist in obtaining.
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 October 31, 1996 and 1995, no contributions of
profits were made by the Company.
KRI, Inc., the subsidiary of 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 taxable 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. On October 1, 1996 the
Plan was amended to include all employees of the Company effective
January 1, 1997.
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 October 31, 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 October 31, 1996.
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 available to carryforward would be used by the Company.
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Significant components of the Company's deferred tax assets and
liabilities as of October 31, 1996 and 1995 are:
10/31/96 10/31/95
Deferred tax assets-
Vacation Pay 7,000 21,500
Deferred compensation expense 55,000 35,000
Noncompetition agreement 235,000 149,000
Deferred Income 71,000 120,000
Net Operating Loss 775,000 571,000
--------- ----------
1,143,500 896,500
Deferred tax liability-
Furniture, fixtures and equipment ( 7,000) ( 4,500)
--------- ----------
Net Deferred Tax Asset 1,136,000 892,000
Valuation Allowance (1,136,000) ( 892,000)
--------- ---------
-0- -0-
========= =========
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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 adding a net of eight
management contracts to its portfolio of properties; in fiscal 1996, the
Company continued its growth by adding two additional properties with
320 rooms while losing only one which contained 75 rooms. This contributed
to revenues increasing by 149% with a 90% increase in expenses. In fiscal
1996, revenues increased by 31% while expenses increased by 10%. The
number of rental rooms managed increased by 16% in fiscal 1995 and by an
additional 13% in fiscal 1996.
With virtually all of the key personnel and corporate infrastructure
in place, the focus for the Company shall be to continue its success in
increasing revenues through the expansion of its client base; and to
accomplish this at a minimal incremental cost. 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 much larger customer base
without expending significant amounts of additional resources due to the
solid foundation and management team which the Company currently has.
The Company is presently in the negotiating stages with various
other properties located throughout the State of Hawaii.
RESULTS OF OPERATIONS-
For the quarters ended October 31, 1996 and 1995, the Company
had total revenues of $960,471 and $822,510, respectively, an increase
of $137,961 or 17%. Operating expenses for the quarters ended October 31,
1996 and 1995 were $1,019,433 and $931,304, respectively, an increase of
$88,129 or 9%, which contributed to a net loss for 1996 of $146,325 as
compared with a net loss of $199,251 for the prior year, a decrease of
$52,926 or 27%.
The increase in revenues for the quarter ended October 31, 1996 as
opposed to the prior year is attributed to the number of rental rooms
managed by the Company. As of October 31, 1996, the Company managed
properties containing 2,749 rooms as opposed to 2,429 as of October 31,
1995.
Although the Company increased revenues by 17%, the increase in
expenses for the quarter ended October 31, 1996 as opposed to the prior
year was only 9% The disproportionate increase is a result of success in
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 October 31, 1996, total current assets were $1,479,600 and
consisted primarily of $1,040,274 in accounts receivable. Total current
liabilities of $2,300,729 exceeded total current assets by $821,129.
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
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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.
The Company has a $300,000 line of credit which expired on November
1, 1996. The Company is finalizing a short term extension of the line of
credit, through January 31, 1997. As of October 31, 1996, the Company
had drawn $275,000 against the line, leaving a balance of $25,000.
To further strengthen the liquidity and financial position, the
Company is currently working on a private placement of its common stock
to a selected group of sophisticated investors. The proceeds of the
placement would be used to retire outstanding debt and to provide
additional working capital to fund the further expansion of the
Company's revenue base.
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. It is also management's belief that
the private placement of stock, if consummated, shall provide the
Company with additional working capital and liquidity reserves which
would assist the Company in the negotiation of future management
contracts.
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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 October 31, 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 02/01/95, incorporated *
by reference to Exhibit 2.2 to the Company's
Quarterly report on Form 10-QSB for the quarter
ending 04/30/96.
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.
15
<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.
6.14 Extension of Revolving Line of Credit Agreement *
dated 12/18/95 between The Castle Group, Inc.,
KRI, Inc., Castle Resorts & Hotels, Inc., and
Hawaii National Bank, incorporated by reference
to Exhibit 6.14 to the Company's Annual Report
on Form 10-KSB for the year ended 07/31/96.
16
<PAGE>
6.15 Extension of Revolving Line of Credit Agreement *
dated 01/18/96 between The Castle Group, Inc.,
KRI, Inc., Castle Resorts & Hotels, Inc., and
Hawaii National Bank, incorporated by reference
to Exhibit 6.15 to the Company's Annual Report
on Form 10-KSB for the year ended 07/31/96.
6.16 Extension of Revolving Line of Credit Agreement *
dated 06/05/96 between The Castle Group, Inc.,
KRI, Inc., Castle Resorts & Hotels, Inc., and
Hawaii National Bank, incorporated by reference
to Exhibit 6.16 to the Company's Annual Report
on Form 10-KSB for the year ended 07/31/96.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
period from 07/31/96 to 10/31/96.
17
<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)
December 13, 1996 Rick Wall
(Signature)
Chairman of the Board and
Chief Executive Officer
December 13, 1996 Michael S. Nitta
(Signature)
Chief Financial Officer and
Vice President Finance
18
<PAGE>
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