<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 January 31, 1997
[ ] 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 January 31, 1997: 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.
<PAGE>
THE CASTLE GROUP, INC.
FORM 10-QSB
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of January 31, 1997 (unaudited) ....... 3
Consolidated Statements of Operations for the Quarter
ended January 31, 1997 and January 31, 1996 (unaudited)............ 4
Consolidated Statement of Cash Flows for the Quarter Ended
January 31, 1997 and January 31, 1996 (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
<PAGE>
<TABLE>
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated Balance Sheet - January 31, 1997 and 1996 (Unaudited)
<CAPTION>
January 1997 January 1996
<S> <C> <C>
ASSETS
Current Assets
Cash $ 63,210 $ 45,025
Accounts Receivable, Net 1,093,035 1,199,518
Prepaid Expenses 45,398 8,854
Restricted Cash 26,536 19,941
Deferred Cost 73,913 241,607
Deferred Compensation Expense 50,000 50,000
------------- -------------
Total Current Assets 1,352,092 1,564,945
------------- -------------
Non Current Assets
Furniture Fixtures & Equipment, Net 85,931 81,470
Investment in HBII Timeshare Program 100,000 100,000
Deposits & Other Assets 33,021 32,971
Intangibles, Net of Amortization 18,100 228,442
Deferred Compensation Expense 37,500 87,500
------------- -------------
Total Non Current Assets 274,552 530,383
------------- -------------
TOTAL ASSETS 1,626,644 2,095,328
============= =============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 995,097 $ 853,674
Due to Related Parties (Note 3) 184,400 0
Vacation Payable 97,537 91,224
Wages Payable 108,568 94,385
Taxes Payable 16,114 14,714
Notes and Contract Payable, Current 73,914 161,138
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 68,586 84,436
------------- -------------
Total Current Liabilities 2,170,856 1,926,211
Long Term Debt (Note 5) 0 264,869
Deferred Revenues 25,410 127,050
------------- -------------
Total Liabilities 2,196,266 2,318,130
------------- -------------
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 (2,789,625) (2,442,805)
------------- -------------
Total Stockholders' Equity ( 569,622) ( 228,802)
------------- -------------
Total Liabilities and Stockholders' Equity 1,626,644 2,095,328
============= =============
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
3
<PAGE>
<TABLE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated Statement of Operations
for the quarter and six months ended January 31, 1997 and 1996
(Unaudited)
<CAPTION>
Quarter Ended Jan 31 Six Months Ended Jan 31
------------------------- -------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue
Management Fees $ 851,317 $ 738,907 $ 1,615,413 $ 1,416,616
Other Income 200,029 156,273 396,404 301,074
------------ ------------ ------------ ------------
Total Revenues 1,051,346 895,180 2,011,817 1,717,690
------------ ------------ ------------ ------------
Expenses
Payroll and benefits 475,824 437,812 944,301 883,165
Professional fees 26,765 31,039 49,584 43,445
Reservations 237,057 225,631 475,330 442,942
Depreciation and
Amortization 53,177 115,252 172,099 229,976
Rent 101,247 90,346 203,390 190,372
Travel & entertainment 8,368 12,499 13,875 25,244
Office expenses 14,021 9,031 28,885 21,322
Utilities 9,803 9,155 19,143 19,659
Taxes other than income 40,668 36,507 80,844 69,776
Advertising & marketing 17,197 30,194 43,653 42,433
Insurance 26,897 14,482 54,845 30,401
Other 15,641 2,588 33,831 16,589
------------ ------------ ------------ ------------
Total Expenses 1,026,665 1,014,536 2,119,780 2,015,324
------------ ------------ ------------ ------------
Operating Profit (Loss) 24,681 ( 119,356) ( 107,963) ( 297,634)
------------ ------------ ------------ ------------
Other Expenses
Interest Expense 15,359 16,541 29,040 37,514
------------ ------------ ------------ ------------
Net Profit ( Loss ) 9,322 ( 135,897) ( 137,003) ( 335,148)
============ ============ ============ ============
Primary and Fully
Diluted Per Share Data
Net Profit ( Loss ) $ .002 ($ .027 ) ($ .027 ) ($ .066 )
============ ============ ============ ============
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
4
<PAGE>
<TABLE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated statement of cash flows
Six months ended January 31, 1997 and 1996
( Unaudited )
<CAPTION>
Six Months Ended
January 31
---------------------------
1997 1996
------------- -------------
<S> <C> <C>
Cash Flows From Operating Activities
Net Loss ($ 137,003 ) ($ 335,148 )
Adjustments to reconcile net loss to net
cash used by operating activities-
Depreciation and amortization 172,096 229,978
Amortization of deferred compensation
expense 25,000 25,000
Issuance of Employee Stock Award 0 8,437
Changes in assets and liabilities-
Decrease (Increase) in accounts receivable ( 131,939 ) ( 282,693 )
Decrease (Increase) in prepaid expenses 3,804 33,773
Increase (Decrease) in deferred income ( 50,820 ) ( 50,820 )
Increase (Decrease) in accounts payable 112,291 184,619
Increase (Decrease) in taxes payable 1,962 2,785
Increase (Decrease) in accrued liabilities 11,262 52,262
------------- -------------
Net cash flow from operating activities 6,653 ( 131,807 )
------------- -------------
Cash Flows From Investing Activities
Purchase of furniture, fixtures & equipment ( 7,785 ) ( 1,970 )
Cash held as collateral for equipment
lease and notes payable ( 6,595 ) ( 19,941 )
------------- -------------
Net cash flow from investing activities ( 14,380 ) ( 21,911 )
------------- -------------
Cash Flows from Financing Activities
Repayment of Long Term Debt ( 85,518 ) ( 78,963 )
------------- -------------
Net cash flow from financing activities ( 85,518 ) ( 78,963 )
------------- -------------
Net Increase (Decrease) in Cash ( 93,245 ) ( 232,681 )
Cash at Beginning of Period 156,455 277,706
------------- -------------
Cash at End of Period 63,210 45,025
============= =============
Supplemental disclosures of cash flow
Information
Cash paid during the year for interest 29,040 37,514
============= =============
</TABLE>
[FN]
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
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 any common stock
equivalents because of their anti-dilutive effect. As of January 31,
1997 and 1996, 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 January 31, 1997 and 1996, furniture, fixtures and equipment
6
<PAGE>
consisted of the following:
01/31/97 01/31/96
-------- --------
Office Furniture and Equipment 209,456 176,045
Less Accumulated Depreciation (123,525) ( 94,575)
-------- --------
Net Book Value 85,931 81,470
======== ========
Depreciation is computed using the declining balance and
straight-line methods over the estimated useful life of the assets
(5 to 7 years). At January 31, 1997 and 1996, depreciation expense
was $14,740 and $12,782, 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 January 31, 1997 and 1996, the balances of those
intangibles were as follows:
01/31/97 01/31/96
-------- --------
Noncompetition Agreements 800,000 800,000
Organizational Costs 51,714 51,714
-------- --------
Total Cost 851,714 851,714
Less Accumulated Amortization (833,614) (623,272)
-------- --------
Net Book Value 18,100 228,442
======== ========
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
<PAGE>
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
<PAGE>
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 receives 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 $280,987 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 January 31, 1997, HBII reduced its outstanding balance
due to the Company by $156,986.
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. It is
managements' belief that the terms and conditions of the reservation
services are no more favorable to HRCC or the Company than could have
been obtained from other companies which provide reservations services.
STOCKHOLDER ADVANCES-
In 1994, former stockholders advanced the Company $80,400 which was
non-interest bearing and due on demand. In 1995, the advances increased
to $184,400 and were converted to 6% loans due on January 31, 1997.
Management is currently working on an extension of the due dates for
these loans.
4. COMMITMENTS AND CONTINGENCIES
9
<PAGE>
LEASES-
The Company has leases for office space, vehicles and equipment
expiring at various dates through 1999. The office leases are renewable
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 January 31, 1997, the future
minimum rental commitment under these leases were as follows:
Schedule of minimum lease payments
1997 510,000
1998 844,000
1999 202,000
---------
Total 1,556,000
=========
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 January 31, 1997 and 1996, long-term debt consisted of the
following:
1997 1996
---------- ----------
Contract Payable in monthly installments
of $15,080, expiring in June 1997 (see below). 73,914 241,607
6% Loans from stockholders due January 31, 1997 184,400 184,400
---------- ---------
Subtotal 258,314 426,007
Less Current Portion ( 258,314) ( 161,138)
---------- ---------
Total Long Term Debt 0 264,869
========== =========
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 January 31, 1997 and 1996, is presented net
of the discount of $8,307 and $58,442, respectively.
Since signing the contract, the Company has obtained three
10
<PAGE>
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
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 January 31, 1997 and 1996, 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, 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 January 31, 1997.
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.
11
<PAGE>
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.
Significant components of the Company's deferred tax assets and
liabilities as of January 31, 1997 and 1996 are:
01/31/97 01/31/96
Deferred tax assets-
Vacation Pay 37,000 21,500
Deferred compensation expense 35,000 35,000
Noncompetition agreement 240,000 149,000
Deferred Income 120,000 120,000
Net Operating Loss 1,115,000 571,000
--------- ----------
1,547,000 896,500
Deferred tax liability-
Furniture, fixtures and equipment ( 34,000) ( 4,500)
--------- ----------
Net Deferred Tax Asset 1,513,000 892,000
Valuation Allowance (1,513,000) ( 892,000)
--------- ---------
-0- -0-
========= =========
12
<PAGE>
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 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 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 January 31, 1997 and 1996, the Company
had total revenues of $1,051,346 and $895,180, respectively, an increase
of $156,166 or 17%. Operating expenses for the quarters ended January
31, 1997 and 1996 were $1,042,024 and $1,031,077, respectively, an
increase of $10,947 or 1%, which contributed to a net profit for 1997 of
$9,322 as compared with a net loss of $135,897 for the quarter ended
January 31, 1996, which represents an improvement of $145,219.
The increase in revenues for the quarter ended January 31, 1997 as
opposed to the prior year is attributed to the number of rental rooms
managed by the Company. As of January 31, 1997, the Company managed
properties containing 2,749 compared to 2,525 as of January 31, 1996.
Although the Company increased revenues by 17%, the increase in
expenses for the quarter ended January 31, 1997 as opposed to the prior
year was only 1% 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 January 31, 1997, total current assets were $1,352,092 and
consisted primarily of $1,093,035 in accounts receivable. Total current
liabilities of $2,170,856 exceeded total current assets by $818,764.
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
13
<PAGE>
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 finalized a short term extension of the line of
credit, through May 30, 1997. As of January 31, 1997, 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.
14
<PAGE>
PART II OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
(a) The annual meeting of the shareholders of The Castle
Group, Inc., was held on February 28, 1997.
(b) At the annual meeting, the shareholders voted to elect
each of management's board of director nominees as listed in the
Company's proxy statement, and to ratify the selection of Coopers &
Lybrand, L.L.P. as the independent auditors for the Company for the
fiscal year ending July 31, 1997. The number of votes cast for, against,
or witheld, as well as the number of abstentions as to each matter is set
forth below:
1. Election of Directors
Nominee Votes Cast For Against Abstentions
Rick Wall 3,510,615 3,510,615 0 0
Ryoji Takahashi 3,510,615 3,510,615 0 0
Kimo Keawe 3,510,615 3,510,615 0 0
Kelvin Bloom 3,510,615 3,510,615 0 0
Akira Fujii 3,510,615 3,510,615 0 0
Hideo Nomura 3,510,615 3,510,615 0 0
Charles McGee 3,510,615 3,510,615 0 0
John Tedcastle 3,510,615 3,510,615 0 0
Motoko Takahashi 3,510,615 3,510,615 0 0
Judvhir Parmar 3,510,615 3,510,615 0 0
2. Ratification of Coopers & Lybrand, L.L.P. as the Companys'
independent auditor for the year ending July 31, 1997
Votes Cast For Against Abstentions
3,510,615 3,505,897 0 4,718
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.
15
<PAGE>
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.
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.
16
<PAGE>
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.
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)
March 14, 1997 Rick Wall
(Signature)
Chairman of the Board and
Chief Executive Officer
March 14, 1997 Michael S. Nitta
(Signature)
Chief Financial Officer and
Vice President Finance
18
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> Jul-31-1997 Jul-31-1996
<PERIOD-END> Jan-31-1997 Jan-31-1996
<CASH> 63,210 45,025
<SECURITIES> 0 0
<RECEIVABLES> 1,107,874 1,214,357
<ALLOWANCES> 14,839 14,839
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,352,092 1,564,945
<PP&E> 209,456 176,045
<DEPRECIATION> 123,525 94,575
<TOTAL-ASSETS> 1,626,644 2,095,328
<CURRENT-LIABILITIES> 2,170,856 1,926,211
<BONDS> 0 0
0 0
0 0
<COMMON> 101,781 101,781
<OTHER-SE> ( 671,403) ( 324,583)
<TOTAL-LIABILITY-AND-EQUITY> 1,626,644 2,095,328
<SALES> 2,011,817 1,717,690
<TOTAL-REVENUES> 2,011,817 1,717,690
<CGS> 0 0
<TOTAL-COSTS> 2,119,780 2,015,324
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 29,040 37,514
<INCOME-PRETAX> ( 137,003) ( 335,148)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> ( 137,003) ( 335,148)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> ( 137,003) ( 335,148)
<EPS-PRIMARY> ( .027) ( .066)
<EPS-DILUTED> ( .027) ( .066)
<FN>
UNAUDITED
<PAGE>
</TABLE>
