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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended July 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number: 0-23338
THE CASTLE GROUP, INC.
(Name of small business issuer in its charter)
Utah 99-037845
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
745 Fort Street, Tenth Floor, Honolulu, Hawaii 96813
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (808) 524-0900
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.02 par value
(Title of class)
Check whether the issuer (1) 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 [ ]
Page 1 of 81 sequentially numbered pages. The Exhibit Index appears on page 46
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $6,185,798
Aggregate market value of issuer's common stock held by non-affiliates
as of July 31, 1997: $ 7,399,531
Number of shares outstanding of the issuer's common stock as of July
31, 1997: 5,089,030.
DOCUMENTS INCORPORATED BY REFERENCE: None
Transitional Small Business Disclosure Format (Check One):
Yes [x] No [ ]
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TABLE OF CONTENTS
PART I
Page
Item 1. Description of Business 4
Item 2. Description of Property 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of
Security Holders 13
PART II
Item 5. Market Price of and Dividends on the Company's
Common Equity and Other Shareholder Matters 13
Item 6. Management's Discussion and Anaysis and Results
Of Operations 13
Item 7. Financial Statements 20
Item 8. Changes in and Disagreements with Accountants 35
PART III
Item 9. Directors, Executive Officers,
and Significant Employees 36
Item 10. Renumeration of Directors and Officers 40
Item 11. Security Ownership of Certain Security
Holders and Management 43
Item 12. Interest of Management and Others in
Certain Transactions 44
PART IV
Item 13. Exhibits and Reports on Form 8-K 46
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PART I
Item 1. Description of Business
General
The Castle Group, Inc. (the "Company") is a Utah corporation engaged in
the business of hotel and resort management, reservations, and sales and
marketing. The Company operates its business under the trade names
"Hawaiian Pacific Resorts" and "Castle Resorts and Hotels". At July 31,
1997, the Company had twenty seven hotel and resort management contracts for
properties located across the Hawaiian Islands, covering 2,874 rooms. The
Company plans to continue its expansion in the hotel and resort management
business and has been actively seeking to increase the number of hotel and
resort properties under management in the Hawaiian islands and the Pacific
Basin.
The properties under management include small budget inns as well as
larger condominium resort hotels on all of the major islands within the
State of Hawaii. In May of 1996, The Company entered into a two year lease
for 167 units located in the Kuhio Village Resort ("KVR") located in
Waikiki. The company does not own any of the properties under management
and has no present or future plans involving the purchase of equity
positions in any such properties other than described under the caption
"Plan of Operations for 1998" under Item 1, Part I which follows.
The Company's executive offices are located at 745 Fort Street, Suite
1000, Honolulu, Hawaii, 96813. The Company's telephone number is (808)
524-0900.
Development of Business
The Company was organized under the laws of the State of Utah on August
21, 1981, under the name "Vector Communications, Inc." The Company was
formed primarily for the purpose of conducting business activities in the
communications industry and to invest in real estate, minerals and oil and
gas development. On November 22, 1983, the Company changed its name to
"Quest National, Inc."
During the fiscal year ending July 31, 1984, the Company acquired a
fifty percent interest in Guam Productions, Inc., a corporation organized
under the laws of the Territory of Guam ("Guam Productions"), in exchange
for 11,000,000 shares of the Company's "unregistered" and "restricted"
common stock and $100,000, and persons affiliated with Guam Productions were
elected to serve as directors and executive officers of the Company. Guam
Productions' sole asset was an exclusive franchise to operate a lottery in
the Territory of Guam through December 31, 1988. The Company's investment
in Guam Productions was written off in fiscal year ending July 31, 1985,
after initial attempts to operate the Guam lottery profitably were
unsuccessful. The Company did not renew its annual option to extend the
franchise. Its interest in Guam Productions was abandoned, and the Company
ceased business operations in 1986.
The Company was inactive until fiscal 1993. On June 4, 1993, the
Company filed Articles of Amendment to its Articles of Incorporation with
the Department of Commerce of the State of Utah, changing the name of the
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Company to "The Castle Group, Inc.," reducing the authorized shares of
common stock from 50,000,000 shares of $.001 par value per share to
20,000,000 shares of $.02 par value per share common stock and effecting a
reverse split of the outstanding shares on a basis of one for twenty. As a
result of the reverse split, the 21,330,500 outstanding shares of common
stock were reduced to 1,066,530 shares (including an additional 5 shares
resulting from "rounding" following the reverse split". The reverse split
did not affect the proportional interest of any stockholder in the Company.
On November 8, 1993, the Company and all of the stockholders of Castle
Group, Ltd., a Hawaii corporation ("Castle Group Hawaii") entered into an
Agreement and Plan of Reorganization (the "Castle Plan"). Pursuant to the
Castle Plan the Company acquired all of the assets of Castle Group Hawaii,
consisting primarily of four hotel and resort management contracts, in
exchange for 2,100,000 post-split "unregistered" and "restricted" shares of
the Company's common stock. The Company did not acquire any significant
assets other than the management contracts and did not assume any material
liabilities. Following the closing of the transaction, John G. Tedcastle
and Hideo Nomura were appointed as directors of the Company.
Castle Group Hawaii was originally organized in February, 1989
primarily for the purpose of managing 86 condominium units in the Hanalei
Bay Resort which had been recently acquired by Hanalei Bay International
Investors ("HBII"). HBII is a Hawaii limited partnership formed for the
purpose of acquiring the Hanalei Bay Resort, a 134 unit resort condominium
located in Princeville, Kauai, Hawaii. The partners of HBII include HBII
Management Inc. owned by Rick Wall, Voyage Fourteen, Ltd. owned by John G.
Tedcastle, L.C.C. Management Inc., owned by Judvihr Parmar, Nomura Firm and
Nomura Holdings, owned by Hideo Nomura and Kenji Nomura, and Siam Commercial
Bank.
HBII made an offer to purchase all 134 condominium units of the Hanalei
Bay Resort in November, 1988. HBII was able to purchase 86 condominium
units. Rick Wall, John G. Tedcastle, and Judvihr Parmar then formed Castle
Group Hawaii to manage the acquired condominium units and entered into a
management contract with Castle Group Hawaii. The contract was not modified
after the acquisition of Castle Group Hawaii by the Company. Management
believes that the terms of the management contract are no less favorable to
Castle Group Hawaii than contracts that could have been negotiated with
non-affiliated third parties. The management contract provided for full
management of the condominium units, including sales, staff supervision,
accounting and maintenance. Following the execution of the management
contract, the Hanalei Bay Resort was severely damaged by Hurricane Iniki,
causing the resort to cease hotel operations. The resort was initially
scheduled to reopen on May 1, 1994, but construction delays resulted in the
opening being postponed to August 1, 1994.
Between the time of its formation and the closing of the Castle Plan,
Castle Group Hawaii secured three more management contracts with the
Association of Apartment Owners of Hanalei Bay Resort, Kaluakoi Villas and
West Molokai Resort Condominium Owners Association. Each of these contracts
were assigned to the Company in connection with the Castle Plan.
The operations of Castle Group Hawaii were relatively small at the time
of the closing of the Castle Plan. The total revenues for the years ended
July 31, 1992 and 1993 were $231,156 and $317,532, respectively. Expenses
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for these periods consisted mostly of management salaries and rent for its
principal executive offices in Honolulu, Hawaii. Castle Group Hawaii had
approximately ten employees, all of whom were hired by the Company.
On November 8, 1993, in connection with the closing of the Castle Plan,
the Company sold 1,000,000 post-split shares of its common stock at a price
of $2.00 per share in a private placement. 250,000 shares were sold to
Akira Fujii, a resident of Japan, and 750,000 shares were sold to N.K.C.
Hawaii, Inc. ("NKC Hawaii"), a Hawaii corporation owned and controlled by
Ryoji Takahashi, a resident of Japan, and his family which includes Ms.
Motoko Takahashi. Following the sale of these shares, Mr. Fujii and Mr.
Takahashi were appointed as directors of the Company. On March 15, 1995,
Motoko Takahashi was also appointed as a director and corporate secretary of
the Company. Prior to their purchase of shares in the Company, Mr. Fujii
and NKC Hawaii had no affiliation with the Company, Castle Group Hawaii or
HBII, other than an option Nichiman International, a Hong Kong based company
owned by Mr. Ryoji Takahashi, acquired in 1992 which entitled it to purchase
a 3% interest in HBII.
On November 10, 1993, the Company purchased all of the stock of KRI,
Inc. ("KRI"), a Hawaii corporation doing business as "Hawaiian Pacific
Resorts," in exchange for 650,000 post-split "unregistered" and "restricted"
shares of the Company's common stock and $400,000 in cash, subject to a
holdback of $240,000 to cover any operating losses incurred by KRI during
the 18 months following November 10, 1993. An additional $800,000 was paid
to the selling stockholders of KRI in exchange for certain non-competition
covenants.
Upon closing of the purchase of KRI, KRI became a wholly owned
subsidiary of the Company. Kimo Keawe, the president of KRI, was appointed
senior vice president and director of the Company. Michael S. Nitta, KRI's
secretary and treasurer, was appointed as the Company's vice president of
finance. On July 8, 1995, Mr. Nitta was appointed chief financial officer
of the Company.
Prior to its acquisition by the Company, KRI managed several hotels and
resorts located in the State of Hawaii, including Waikiki Hana Hotel, Queen
Kapiolani Hotel, Kuhio Village Resort, Maui Beach Hotel, Maui Palms Hotel,
Hilo Hawaiian Hotel, Kauai Resort Hotel, Kona Reef Hotel and Wailea
Oceanfront Hotel. KRI operated its business under the name "Hawaiian
Pacific Resorts."
The business operations of KRI at the time of its acquisition were far
more significant than those of Castle Group Hawaii. KRI managed and
controlled the operations of between five and nine hotels in 1992 and 1993,
with total revenues of $1,120,041 and $1,284,804 for the years ending July
31, 1992 and 1993, respectively. Its expenses consisted primarily of
management, accounting and reservation personnel payroll and other sales
related expenses. At the time of its acquisition by the Company, KRI did
not have any significant assets other than its management contracts and
accounts receivable, had no material liabilities other than its trade
accounts payable, and had approximately 250 employees.
The business operations of KRI at the time of its acquisition also
included a 62% interest in HPR Advertising, Inc. ("HPR Advertising") a
corporation organized under the laws of the State of Hawaii. HPR
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Advertising was set up in 1989, with its primary operation being the
advertising of the hotels & resorts managed by KRI. The 38% minority
interest in HPR Advertising was owned by certain employees of KRI. On July
31, 1995, KRI purchased all of the minority interests in HPR Advertising for
$380 and HPR Advertising became a wholly owned subsidiary of KRI.
Several of KRI management contracts cover hotels and resorts owned by
the former stockholders of KRI, including Waikiki Hana Hotel, Maui Beach
Hotel and Hilo Hawaiian Hotel. These contracts were not modified after the
acquisition of KRI by the Company. Management believes that the terms of
these management contracts are no less favorable to KRI than contracts that
could have been negotiated with non-affiliated third parties.
On February 1, 1994, the Company filed with the Securities and Exchange
Commission a Registration Statement on Form 10-SB to register its common
stock, $.02 par value, under the Securities and Exchange Act of 1934. The
Registration Statement became effective on May 2, 1994.
Business
With the completion of the acquisitions of Castle Group Hawaii and KRI
in November of 1993, the Company succeeded to the business operations of
these entities and was firmly engaged in the management of hotels and
resorts in the Hawaiian islands. As of September 1997, The Company has
since then added a net of fourteen management contracts to its portfolio of
hotel and resort management contracts, and plans to continue with its
expansion by actively seeking and acquiring additional contracts with hotels
and resorts in the Hawaiian islands and the Pacific Basin.
Management believes the consolidation of the business operations of
Castle Group Hawaii and KRI into one entity which specializes in hotel and
resort management better serves the public by offering a wider range of
rooms and services at competitive prices. From the hotel and resort owners'
point of view, management believes the size of the consolidated entity
provides increased visibility, cost savings by consolidation and allows a
hotel or resort a better opportunity to sell its accommodations during
periods of time when the market for such accommodations is depressed.
Management believes that the concentration of this wider range of
accommodations gives the Company greater access to numerous wholesalers who
book accommodations in large blocks and who are more likely to deal with
companies having a greater range of locations and prices than individual
hotel or resort properties or companies with a limited product line. The
large concentration of accommodations also allows for more cost effective
sales, marketing and advertising due to the economies of scale, with an
economical apportionment of the expenses over a wider range of
accommodations. Management also believes that in markets where there is a
tendency to overbook accommodations, the Company has a greater inventory of
available rooms as backup accommodations.
Pursuant to the majority of the management contracts with the hotels
and resorts, the Company provides total management of the hotel and resort
facilities, including supervision of staff and employees, reservation
services, food and beverage services, housekeeping, accounting and
preparation of annual budgets and pro forma operating statements, and
physical maintenance. In some instances, the Company's management contract
provides for services which only include sales, marketing and reservations.
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Under the majority of the management contracts, The Company is not
responsible for any of the direct operating expenses of the client hotels or
resorts. All of the operating expenses of the hotel or resort are paid
directly by the hotel or resort. Examples of expenses paid directly include
payroll, repairs, food and room cleaning. The Company may hire the
personnel to perform these services, but the hotel or resort is ultimately
responsible for the payment of these services. The Company is responsible
for its own costs only, and those costs usually include administrative,
sales, marketing and reservation expenses.
The Company is compensated by the client hotels and resorts by earning
a percentage of gross sales revenues accrued to the hotel or resort. Many
contracts also provide for additional compensation in the form of incentive,
marketing, reservation and accounting fees.
Under a few of the management contracts, The Company returns a fixed
percentage of gross revenues to the hotel or resort owners. The balance of
revenues remaining after such payment to the owners are used to pay
operating expenses associated with the property. The Company's management
fee under these types of agreement are the funds remaining after the payment
to the owners and the payment of operating expenses.
On May 1, 1996, the Company leased 167 rooms located within the Kuhio
Village Resort (KVR), located in Waikiki on the island of Oahu. Terms of
the lease call for a fixed monthly rent to be paid to the hotel owner, plus
a percentage of the hotel's operating profits in excess of $100,000 per
year. The lease agreement expires on March 31, 1998 and may be renewed for
an additional four years. Management believes, although no assurance can be
given, that the hotel operations at the KVR shall be profitable.
At July 31, 1997, the Company had twenty seven hotel and resort
management contracts. The Company plans to continue its expansion and has
been actively seeking to increase the number of hotel, resort and
condominium properties under management in the Hawaiian islands and the
emerging markets of other Pacific Basin countries.
Management believes that the emerging tourism markets of other Pacific
Basin countries such as Saipan, Guam and Indonesia will provide additional
opportunities for expansion and has focused efforts in these regions. On
September 1, 1997, the Company entered the foreign markets with the signing
of a full management agreement with the Aquarius Beach Tower (ABT), located
in Saipan. The ABT is a 67 unit condominium resort which is scheduled to
open on November 1, 1997.
Conflicts of Interest
The potential exists for a conflict of interest when the Company enters
into a management contract with a hotel or resort in which stockholders of
the Company own or otherwise have an interest. Management will, whenever
possible, require that material terms and provisions of the management
contracts negotiated with affiliated entities to be no less favorable than
those that could have been negotiated at arms length. It is management's
belief that all of its management contracts are on terms which are no less
favorable than those which are negotiated with owners not affiliated with
The Company.
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Principal Products and Services
The principal services provided by the Company are the management,
reservations, sales and marketing of hotel and resort condominiums.
Principal clients include owners of these hotels and resorts which includes
individuals, general and limited partnerships, corporations and
associations.
In addition to management of transient rental operations of a property,
the Company also manages the Association of Apartment Owners ("AOAO") for
its client properties. The Company operates and supervises all aspects of
the property's day to day operations, subject to direction from the AOAO's
board of directors. These functions may include but are not limited to
employee training, property maintenance, accounting, finance, benefits
administration and purchasing. The Company earns a fixed monthly fee for
providing these services.
Under the majority of the Company's management contracts, the Company
provides total management of the facilities, including supervision of staff
and employees, reservation services, food and beverage services,
housekeeping, accounting, preparation of annual budgets and pro forma
operating statements and physical repairs & maintenance. Under certain
contracts, the Company only provides sales, marketing, reservations and
advertising services.
Products and services incidental to the management of hotels and
resorts are readily available from a number of suppliers, and include
bedding and toiletries, glassware, cleaning supplies and related equipment
and ground maintenance supplies and related equipment. These products and
supplies are usually provided by the hotel or resort. In some instances the
Company may contract for these products and services on behalf of the hotel
or resort.
The Company also receives revenues in the form of commissions through
its centralized purchasing network. Fees are generated from the sharing of
savings enjoyed by its managed hotels and resorts by centralizing the
purchasing for the hotels and resorts managed by the Company, thereby
reducing the costs to the managed properties.
Competition and Competitive Position in the Industry
The management and marketing of hotels and resorts in the State of
Hawaii is very competitive, as the travel industry is one of the largest
industries contributing to the state's economy. The Company competes with
national, regional and local management companies, some of which have a
larger network of locations, greater financial resources and better name
recognition than The Company. The primary companies which the Company
considers to be its main competitors and the number of years each has been
in business are: Aston Hotels and Resorts (30 years), Colony Hotels &
Resorts (25 years), Classic Resorts (13 years), Village Resorts (20 years),
and Outrigger Hotels & Resorts (50 years). Each of the competitors offer
the same type of services provided by The Company and has bid against The
Company in the past. The competition for management contracts has led to
reduced profit margins and to more management contracts under which a
guaranteed return to the homeowner is required.
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The management and marketing of properties in the emerging market of
the Pacific Basin is also very competitive, as Aston Hotels & Resorts and
Outrigger Hotels & Resorts have recently focused efforts in these areas.
The executive officers and key employees of the Company possess
substantial experience in the resort, condominium and hotel management
industry, much of which was with the principle competitors listed above.
The senior management and the Company's infrastructure relative to sales and
marketing, central accounting and administrative support are believed by
management to be as comprehensive and complete in the Hawaiian segment of
this industry as any of its competitors. Although the Company commenced its
operations in November 1993, management has been successful in more than
doubling the number of contracts, many of which were previously managed by
competitors of the Company. In its brief operating history, The Company has
lost only one property to one of its competitors.
Sources and Principal Suppliers
The sources of the Company's revenues are generated as a percentage of
the gross revenues of the hotels and resorts managed by the Company and
therefore, the sources of revenue for the hotels and resorts have a
substantial impact on the revenues of the Company. The sources of the
principal business generated by the Company for its clients are the
wholesalers, tour operators and general public with whom the Company has
established long-term relationships, including travel agents throughout the
world.
The Company has hundreds of tour operators and wholesalers under
contract. These contracts give the tour operators and wholesalers the right
to sell the hotel and resort rooms that the Company manages at rates which
are discounted due to the large volume of business. These contracts are
typical of the industry and provide the Company with a ready market for the
hotel and resort rooms it manages. These contracts are not exclusive and
the Company does market its rooms under contract through its own reservation
and marketing network.
Dependence on One or a Few Customers
The loss of one or more of the larger hotels or resorts managed by the
Company may have an adverse impact on the Company's gross revenues and
earnings. Management intends to increase the number of properties under
management and thereby minimize the potential adverse effects which may
result from the loss of one of the larger hotels or resorts currently under
management. Management believes that it has made significant progress in
minimizing the adverse financial effects of losing properties in its
management portfolio.
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements
or Labor Contracts
With the exception of the management contracts and the tradenames
"Hawaiian Pacific Resorts" and "Castle Resorts & Hotels," the Company does
not have any material patents, trademarks, licenses, franchises,
concessions, or royalty agreements, the loss, or expiration, of which would
have a material adverse impact on the Company.
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At July 31, 1997, none of the employees of The Company or properties
managed by the Company were subject to any labor contract.
Governmental Approvals and Regulations
To the best of management's knowledge, the products and services
provided by the Company are not subject to governmental approval. The
extent of future promulgation of new regulations detrimental to the visitor
industry could have a substantial impact on the Company's profitability.
The hotel industry may be adversely effected by regulations which cover
wages, benefits, pricing, taxes and availability of financing. In addition,
the Company has expanded outside of the United States and are subject to
International laws and the laws and regulations of foreign countries. To the
best of management's knowledge, there are no existing or probable
governmental regulations covering the present or intended business
operations of the Company that do or are anticipated to have a material
adverse impact on the Company's business, financial or otherwise.
Environmental Regulations
Management believes there are no material environmental laws, rules and
regulations that do or are likely to have a material adverse impact on the
Company, and such regulations as they apply to the present and contemplated
business operations of the Company. Management also believes that those
regulations related to hazardous material and waste disposal, can be readily
complied with by services provided by local governmental agencies or
numerous private contract suppliers. The Company is not aware of any
environmental claims pending or threatened against it or against the owners
of the properties managed by the Company, however, no assurances can be
given that such a claim will not be asserted against the Company in the
future.
Employees
In some of the properties managed by the Company, all of the property
employees are employees of the Company instead of the property owner. At
July 31, 1997, the Company had approximately 650 employees. Approximately
500 employees were full time and 150 were part time. The total number of
employees employed at all properties represented by the Company was
approximately 1,000 at July 31, 1997, of which approximately 800 were full
time and 200 were part time. The number of categories in which these
employees serve may vary greatly from month to month, depending on the
season. The Company considers its relations with its employees and
employees of its clients whom it supervises to be excellent.
Seasonal Business
Tourism in general is seasonal, though to a lesser extent in the State
of Hawaii where tourism represents one of the principal industries.
Seasonal fluctuations will occur, however, affecting occupancy rates, the
number of employees required for management related services and quarterly
revenues, expenses and earnings.
Item 2. Description of Property.
The Company leases 11,357 square feet of office space for its principle
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executive offices at Suite 1000, 745 Fort Street, Honolulu, Hawaii 96813.
The initial lease for these premises was for a five year period commencing
June 1, 1994, and ending May 31, 1999, at a monthly rental of $11,130 plus
the costs of common area management.
The Company's wholly-owned subsidiary, KRI, leases approximately 3,035
square feet of office space at a rental of $6,373.50 per month plus the
costs of common area management. The initial lease commenced on April 1,
1988, and was extended on April 1, 1993, to March 31, 1998. KRI has the
right to an additional five-year extension at a rental rate to be mutually
determined and agreed upon between KRI and the lessor, in accordance with
the lease. The leased premises are used for the operation of the central
reservations department, which is operated under the name "Hawaii
Reservations Center Corp."
KRI also leases 167 units located within the Kuhio Village Resort for a
fixed monthly rental plus general excise tax. The lease also provides for
additional annual rents as a percentage of net operating profits in excess
of a specified sum per year. The initial lease commenced May 1, 1996 and
expires March 31, 1998. KRI has the option to extend the lease for an
additional four years at a rental rate to be mutually determined between KRI
and the lessor. The leased premises are utilized by KRI for a hotel
operation.
Item 3. Legal Proceedings
The Company is a named defendant in Berke v. Castle Group, Ltd., et al.
Civil No. 96-00766, United States District Court, District of Hawaii, filed
on September 16, 1996. The plaintiffs are the owners of one apartment unit
and the owners of partial interests in two other apartments at the Hanalei
Bay Resort who purport to be filing a class action suit for other apartment
owners, and also claim that the suit is a derivative action on behalf of the
Association of Apartment Owners of Hanalei Bay Resort (AOAO). The suit
contains allegations that the Company acted without authorization with
regard to payment of insurance funds related to the reconstruction of the
Hanalei Bay Resort following hurricane Iniki in 1992. Remedies sought
against the Company include unspecified amounts of general damages, punitive
damages and removal of the Company as managing agent for the AOAO.
Management vehemently disagrees that the Company acted without the
authorization of the AOAO and intends to defend vigorously against the
plaintiffs. The Litigation Committee of the AOAO has conducted an
independent investigation of the allegations contained in the lawsuit.
Their investigation disclosed that the Company acted properly in its
capacity as the managing agent of the AOAO, and that all payments of
insurance funds were fully authorized by the AOAO. The Company has filed a
motion to dismiss the lawsuit. Because of the aforementioned, management
believes that the lawsuit is without merit and shall be dismissed or
adjudicated in favor of the Company.
The Company is subject to various other claims and lawsuits which are
normal and reasonably foreseeable in light of the nature of the Company's
business and the growth in the Company's business. In the opinion of
management, although no assurances can be given, the resolution of these
claims will not have a material adverse effect on the Company's financial
position. Further, to the knowledge of management, no director, officer,
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affiliate or record or beneficial owner of more than 5% of the common voting
stock of the Company is a party adverse to the Company or has a material
adverse interest to the Company in any material proceeding.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the security holders of record
during the fourth quarter ended July 31, 1997.
PART II
Item 5. Market Price and Dividends on the Company's Common Equity and
Other Shareholder Matters.
Market Information
The Company's common stock is listed on the "Electronic Bulletin Board"
of the National Association of Securities Dealers, Inc., under the symbol
"CAGU." There has been only limited trading activity in the common stock of
the Company. The following table sets forth the high asked and low bid
prices for the Company's stock for each of the full quarters during the year
ending July 31, 1997. The following market quotations reflect inter-dealer
prices, without retail markup, markdown or commission and may not
necessarily represent actual transactions.
Quarter Ended Low Bid High Asked
October 31, 1996 $ .750 $ 1.625
January 31, 1997 .750 1.750
April 30, 1997 .750 1.750
July 31, 1997 1.125 2.375
Holders
The number of record holders of the Company's common stock as of July
31, 1997 was approximately 270.
Dividends
The Company has not paid any dividends with respect to its common
stock, and does not intend to pay dividends in the foreseeable future. It
is the present intention of management to utilize all available funds for
the development of the Company's business. There are no present material
restrictions that limit the ability of the Company to pay dividends on
common stock or that are likely to do so in the future.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company is a Utah corporation which earns revenues primarily by
providing management, reservations and sales and marketing services to
hotels and resorts. The Company currently operates within the State of
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Hawaii under the trade names "Hawaiian Pacific Resorts" and "Castle Resorts
and Hotels".
The Company's revenues are derived from management fees, sales & marketing
fees, reservation fees, accounting fees, commissions, incentive fees and other
fees from the properties it represents pursuant to the terms and conditions of
its management contracts. In addition to the fees described, the Company also
earns revenues from transient and long term rentals and other hotel related
income from its leased hotel. The revenues of the properties which are managed
by the Company, except as mentioned herein, are not recorded as revenues of
the Company.
The Company's operating expenses are comprised of labor, reservations fees
and other costs associated with operating as a management company. The
expenses of the properties which are managed by the Company, except as
mentioned herein, are not recorded as expenses of the Company.
As of September 22, 1997, the Company had 28 contracts covering 3,055 rooms,
all except 68 rooms located in Saipan being situated within the State of
Hawaii. Under the management contracts, the Company is typically responsible
for the supervision and day to day operations of the property in exchange for
a base management fee with is based on gross revenues. In some cases, the
Company also participates in the profitability of the properties it manages
and may earn an incentive fee based on the net operating profits of the
property managed. Sales and marketing and reservation fees earned from the
properties are based on the gross revenues of the property. The Company is
also reimbursed for direct advertising and marketing expenditures it makes
on behalf of the property, all in accordance with the terms and conditions of
the management contracts. The Company also earns commissions and other fees
from the properties managed by providing centralized purchasing services to
the hotel owners. Under these arrangements, the net savings to the property
owner from centralized purchasing are shared between the Company in the form
of commissions and to the property owner in the form of cost savings.
Hotel revenues consist of revenues from 167 rooms leased by the
Company. Under this arrangement, the Company includes as its own revenues
the entire property revenues which includes hotel transient rental income as
well as the total expenses incurred to operate the property. The property
is situated in Waikiki, Hawaii. The Company does not currently own any
other real property interest in fee or leasehold.
Overview
The lodging industry has been, historically, seasonal in nature. The
Company generally reflects higher revenues from the fees generated by its
properties in the first and third quarters of its operating year, which may
cause expected fluctuations in the Company's quarterly revenues and net
earnings.
Results of Operations
For the Years Ended July 31, 1996 and 1997
Sales
For the year ended July 31, 1996 and 1997, the Company had total
14
<PAGE>
revenues of $4.11 million and $6.19 million, respectively, representing an
increase of $2.08 million or 51%. The increase in revenues was attributable
to $1.48 million in hotel revenues and $.60 million in management and other
management related income. Because the Company acquired the leasehold
interest to 167 rooms operated as a hotel in May of 1996, total revenues for
the two periods does not provide an accurate comparison for means of
measuring performance. For the nine months ended April 30, 1996 and 1997,
the Company had unaudited management related revenues of $2.8 million and
$3.2 million, an increase of $400,000 or 14.2%. The increase in management
related income is due to the expansion and maturing of the Company's client
base. In 1996, the Company was successful in acquiring and/or starting the
rental operations of four properties and therefore, the revenues included
for 1997 covers twelve months of operation as opposed to only fractional
portions of the year in 1995. The Company was also successful in increasing
the revenues of its managed properties which favorably impacts the Company's
management fees, which are generally based on the room revenues for the
property.
Costs and Expenses
Operating expenses for management operations were $3.79 million for the
year ended July 31, 1997 as compared to $3.66 million for the prior year, an
increase of $130,000 or 4%. The increase in operating expenses were
attributable to the costs associated with the 51% increase in revenues for
the year. Included in 1997 is the elimination of deferred compensation
payable of $250,000 and the unamortized balance of the deferred compensation
expense of $62,500 resulting from the forfeiture of a stock option granted
to an officer of the Company; this resulted in a reduction in payroll and
benefits expense of $187,500 in 1997. Operating expenses for hotel
operations were $1.9 for the year ended July 31, 1997 as compared to $.45
million for the three months of hotel operations ending July 31, 1996.
Depreciation and amortization expense decreased by $202,000 for the
year ended July 31, 1997, primarily due to the amortization in full of the
non-competition agreements incurred upon the purchase of KRI, Inc. as of
October 31, 1996. The non-competition agreements were purchased for $800,000
in November of 1993 and covered a period of three years. Monthly
amortization expense of $22,222 was recorded between the months of November
1993 through October 1996. Of the $202,000 decrease for fiscal 1997,
$200,000 is attributed to the non-existence of this amortization expense for
the months of November 1996 through July, 1997.
Interest expense decreased by $16,000, from $68,000 to $52,000 for the
year ended July 31, 1997 as compared to the prior year. The decrease in
interest expense is attributed to a lower amount of indebtedness. The
Company fully paid off its contract payable in June of 1997 and during the
year reduced its indebtedness on the line of credit by $25,000 in February
of 1997 (See Note 5 to the financial statements).
Net Income (Loss)
The Company reported net income of $188,552 and a net loss of $544,962
for the fiscal years ended July 31, 1997 and 1996, respectively. As
discussed above, the increases in management related income at a minimal
incremental cost, the fully amortized non-competition agreements and the
forfeiture of a stock option granted to an officer of the Company resulted
15
<PAGE>
in the Company improving it's net income by $733,514 for the fiscal year
ended July 31, 1997.
For the Years Ended July 31, 1995 and 1996
Sales
Total revenues for the year ended July 31, 1996 were $4.10 million, an
increase of $1.14 million or 38.5% over total revenues for 1995. Revenues
from management operations were $3.65 million as opposed to $2.97 million
for the prior year, an increase of $.68 million or 23%. The increase in
management related income is attributable to the increase in the number of
rooms managed by the Company. As of July 31, 1996 the Company managed 2,749
rooms as opposed to 2,427 rooms as of July 31, 1995. Revenues from hotel
operations were $459,000, representing the revenues attributed to a lease
agreement on 167 hotel rooms entered into on May 1, 1996.
Costs and Expenses
Operating expenses for management operations were $3.65 million for the
year ended July 31, 1996 as compared to $3.48 million for the prior year,
and increase of $.17 million or 4.9%. The increase in operating expenses for
the management operations were primarily attributable to the increase in
cost associated with the 23% increase in management related income.
Operating expenses for hotel operations were $473,000 for year ended July
31, 1996 on revenues of $459,000.
As mentioned previously, the hotel industry is subject to seasonal
fluctuations in revenues. The first and third quarters of the Company's
fiscal year are typically busier months for the tourist industry. The
Company signed the lease agreement for the 167 hotel units on May 1, 1996.
As of July 31, 1996, the results of operations from hotel operations
encompassed the fourth quarter ended July 31, 1996. The hotel operations
reported an operating loss of $14,000 for the three month period, as this
quarter is one of the low seasons for tourism in Hawaii, where the property
is situated and is not indicative of the results of operations for a whole
year.
Depreciation and amortization expense increased by $12,000 for the year
ended July 31, 1996 due to the depreciation of equipment and furnishings
exceeding the decrease caused by assets becoming fully depreciated or
amortized.
Interest expense increased by $14,000, from $54,000 to $68,000 for the
year ended July 31, 1996 when compared to the prior year. The increase in
interest expense is attributed to interest incurred on the borrowing against
a line of credit and the conversion of advances received from former KRI,
Inc. stockholders to a note payable at 6% interest on July 31, 1995.
Net Income (Loss)
The Company reported net losses of $1,017,324 and $544,962 for the
fiscal years ended July 31, 1995 and 1996, respectively, an improvement of
$472,362. As discussed above, the combination of increased revenues at a
minimal incremental increase in operating costs contributed to the
reduction of the Company's net loss for the fiscal year ended July 31, 1996.
16
<PAGE>
Liquidity and Capital Resources
The Company's primary sources of working capital are cash flow from
operations and borrowing. Net cash provided from operations was $890 in
fiscal 1996 and a deficit of $374,600 in fiscal 1997. The Company had
unrestricted cash of $220,951 and $268,938 at July 31, 1996 and 1997,
respectively.
At July 31, 1997, the Company's balance sheet reflected $268,938 of
cash representing an increase of $47,987 from July 31, 1996. During the
year ended July 31, 1997, cash used in operating activities exceeded cash
provided by operating activities by $333,957. Cash provided by investing
activities was $22,199 and cash provided by financing activities was
$359,745.
In July of 1997, the Company sold 222,100 shares of "unregistered" and
"restricted" stock for a gross price of $2.00 per share, or an aggregate of
$425,399 (net of commissions and other fees) in a private placement. The
shares were subscribed and paid for as of September 18, 1997, and the stock
certificate was subsequently issued.
The Company has available a $300,000 line of credit dated October 21,
1994 which is personally guaranteed by four of the directors of the Company.
The line of credit was initially due on October 21, 1995, and has been
extended for periods of three months each through September 1997. The
Company made draws against the line of credit for $275,000 during the fiscal
year ended July 31, 1995. The Company subsequently repaid $25,000 of the
line of credit in April 1997. Proceeds received from the sale of shares of
Common Stock offered hereby will be utilized to repay the outstanding
balance of $250,000 on the line of credit. Management plans to have the
line of credit available following the payment of the outstanding balance,
in order to provide additional liquidity to the Company if needed.
Management believes, although no assurances can be given, that the line of
credit may be further extended if necessary.
The Company had a net working capital deficit of $764,731 as of July
31, 1996 and net working capital of $87,325 as of July 31, 1997.
As of July 31, 1997, net working capital included liabilities due to
affiliates in the amount of $40,128 consisting of $18,000 in notes payable
to former stockholders of KRI, Inc. representing the undistributed cost on
the acquisition of the stock of KRI, Inc., and $22,128 in interest accrued
on the notes payable. Also included in net working capital is $76,230 in
unamortized deferred revenues related to a signing bonus of $316,000 in cash
paid to the Company by one of its vendors in April of 1994 as a result of
the Company entering into a three year contract with the vendor. The
deferred revenues are being amortized over three years.
At July 31, 1997, the Company's accounts receivable consisted of $197,250
in sales, marketing, and reservations reimbursements, $659,300 of management
and other fees, and $186,950 in receivables for transient room rentals.
Sixty three percent (63%) of the total accounts receivable was current,
sixteen percent (16%) was 30 to 60 days past due, eleven percent (11%) was 60
to 90 days past due, and ten percent (10%) was more than 90 days past due.
At July 31, 1997, the Company had a receivable balance of $197,730 from Hanalei
Bay Resort (see item 6 below), none of which was more than 90 days past due.
17
<PAGE>
The Company has, in the past, met its financial obligations through its
line of credit with Hawaii National Bank and through the issuance of notes
to the former stockholders of KRI, Inc. The Company currently has available
an additional $50,000 from its line of credit, and plans to further extend
the due dates of the notes to the former stockholders of KRI, Inc., if
necessary. Although no assurances may be given, Management believes that it
has built up its revenue base to a level which will sustain a net operating
profit, allowing the Company to meet its current obligations. Management
further believes that the Company shall have sufficient cash flow for its
business operations for the next year. In addition, although no assurances
may be given that the Company will be successful, the Company plans to
obtain additional financing through a secondary offering of its stock, and
is currently in the process of registering 1,600,000 shares for sale in a
public offering.
Management believes, although no assurances can be given, that the
combination of the net proceeds of this offering, net of repayment of
borrowing, net cashflow generated from operations, and the future
availability of credit facilities will be sufficient to fund the operations
of the Company and its future anticipated growth.
The Company has no present plans involving the sale or purchase of any
properties, assets or business.
PLAN OF OPERATION
The Company is one of the leading regional hotel and resort management
companies within the State of Hawaii. At September 22, 1997, the Company
had 28 management or sales, reservations and marketing contracts covering
3,055 rooms. The Company also leases and operates as a hotel 167 rooms in a
condominium complex domiciled in Waikiki in the State of Hawaii.
The properties represented by the Company appeals to a wide variety of
the public market as the Company manages a wide spectrum of property types
from the luxury condominium resorts with room rates of $450 to the small
budget inns with an average rate of $40. The Company believes that the
availability of differing products provides appeal to all levels of business
or leisure traveler.
The Company has experienced significant growth since its commencement
of operations in November of 1993. From November of 1993 through September
of 1997, the number of contracts has more than doubled, from 13 to 28; the
number of rooms managed also increased substantially during this period,
from 1,684 to 3,055.
Although no assurances can be given, the Company plans to expand its
portfolio of management contracts both within the State of Hawaii and
outside of Hawaii in areas such as Saipan, Guam and other Pacific Basin
destinations. In addition to Hawaii, management believes that there are
many opportunities to expand its client base in the emerging markets of the
Pacific Basin. In addition to signing on independent hotels and resorts,
the Company may achieve its desired goals through joint venture investments,
leases and/or acquisitions of management contracts and/or companies.
Effective August 1, 1997, the Company was successful in entering the
foreign market of the Pacific Basin when it signed a management agreement
18
<PAGE>
with the Aquarius Beach Tower, a 68 unit condominium resort located in
Saipan. Although no assurance can be given, it is management's belief that
it will be able to effectively manage this property and to also continue its
expansion in the Pacific Basin.
With the increase in the management contracts, the number of hotel and
resort employees that the Company will supervise may increase significantly.
The Company is presently negotiating for both small budget hotels and large
luxury condominium resorts and therefore, it is impossible at this time to
predict the number of additional employees that it will supervise or that it
will be required to hire for the hotels and resorts during the next fiscal
year.
On July 31, 1995, the Company invested $100,000 into a reorganization
plan instituted by HBII. Under terms of the HBII reorganization plan, the
eighty seven units owned by HBII will be sold under a timeshare plan and
investors in the timeshare plan may receive up to four times their
investment over the life of the timeshare plan. As of July 31, 1997, the
Company has received a total of $155,000 from this investment. Of the funds
received, $38,800 represents a return of the initial investment and $116,200
represents a gain to the Company. Management is confident, although no
assurances can be given, that the HBII reorganization plan shall continue be
profitable for the investors.
On August 1, 1994, the Company entered into a contract with Hawaii
Reservations Center Corp. ("HRCC"), a company controlled by Charles M.
McGee, pursuant to which HRCC shall provide reservation services for hotels
and resorts managed by the Company. Since the purchase of KRI, reservation
services have been provided by KRI. The fees to be paid by the Company
include a fixed monthly fee plus commissions. The Company also agreed to
sell to HRCC the assets of the reservation offices of KRI, which consisted
of office equipment. As consideration for the equipment, HRCC agreed to
employ the reservation department employees of KRI and to assume the
liability for the accrued vacation of such employees. KRI realized a gain
of $4,372 on the transaction, as the value of the accrued vacation exceeded
the net book value of the office equipment sold.
It is management's belief that the contract with HRCC are on terms
which are no less favorable than those which could be negotiated with
companies not affiliated with The Company, however, in May of 1997, the
Company renegotiated its contract with HRCC with regard to the fees charged.
Under the renegotiated agreement, the fees paid to HRCC shall be based upon
the monthly room revenues of the properties managed by the Company, subject
to a minimum monthly fee. Management believes, although no assurances can
be given, that the Company shall enjoy lower reservations costs under the
new agreement.
19
<PAGE>
Item 7. Financial Statements
PART F/S
Financial Statements Page No.
July 31, 1997 and July 31, 1996
Report of Independent Accountants -
Coopers & Lybrand, L.L.P 21
Consolidated Balance Sheets -
July 31, 1997 and 1996 22
Consolidated Statement of Operations
for the years ended July 31, 1997 and 1996 23
Consolidated Statement of Stockholder's Equity
for the years ended July 31, 1997 and 1996 24
Consolidated Statement of Cash Flows
for the years ended July 31, 1997 and 1996 25
Notes to the Consolidated Financial Statements 27
20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
The Castle Group, Inc.
We have audited the accompanying consolidated balance sheets of The Castle
Group, Inc. and Subsidiary as of July 31, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity (deficit) and
cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Castle Group, Inc. and Subsidiary as of July 31, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Honolulu, Hawaii
September 19, 1997
1
21
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated balance sheets - July 31, 1997 and 1996
1997 1996
Assets
Current Assets:
Cash $ 268,938 $ 220,951
Accounts receivable, less allowance for
doubtful accounts of $25,405 and $18,200
in 1997 and 1996, respectively 820,368 737,729
Due from related party 197,730 371,717
Prepaid expenses 89,779 56,637
Restricted cash 19,941 26,536
Deferred cost, current -- 159,432
Deferred compensation expense, current -- 50,000
Total current assets 1,396,756 1,623,002
Furniture, Fixtures and Equipment, Net 82,571 92,936
Other Assets:
Deposits 63,021 62,971
Investment in HBII Timeshare Program 61,240 100,000
Intangibles, net 12,928 89,937
Deferred compensation expense, non-current -- 62,500
Total other assets 137,189 315,408
Total Assets $ 1,616,516 $ 2,031,346
Liabilities And Stockholders' Equity (Deficit)
Current Liabilities:
Accounts payable $ 613,791 $ 1,062,517
Vacation payable 109,233 111,183
Wages payable 84,567 94,269
Taxes payable 36,143 33,611
Due to related party, current 18,000 184,400
Long-term debt, current 250,000 434,432
Deferred compensation payable -- 250,000
Deferred income 76,230 101,640
Other accrued liabilities 121,467 115,681
Total current liabilities 1,309,431 2,387,733
Long-Term Debt, non-current 166,400 --
Deferred Income -- 76,230
Commitments and Contingencies
Stockholders' Equity (Deficit):
Common stock, $.02 par value, 20,000,000
shares authorized, 5,089,030 shares issued
and outstanding in 1997 and 1996 101,781 101,781
Common stock subscribed and unissued,
222,100 shares 384,750 --
Capital in excess of par 2,118,222 2,118,222
Accumulated deficit ( 2,464,068) ( 2,652,620)
Total stockholders' equity (deficit) 140,685 ( 432,617)
Total Liabilities and
Stockholders' Equity (Deficit) $ 1,616,516 $ 2,031,346
The accompanying notes are an integral part of the consolidated financial
statements.
2
22
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated statements of operations
for the years ended July 31, 1997 and 1996
1997 1996
Revenues:
Hotel revenues and management fees
(includes $167,053 in 1997 and $142,082
in 1996 of Hawaii general excise taxes) $ 5,219,506 $ 3,742,408
Other income 966,292 369,218
----------- -----------
Total revenues 6,185,798 4,111,626
----------- -----------
Expenses:
Payroll and benefits 2,401,567 1,968,255
Rent 1,155,212 584,548
Reservation expense 919,857 912,279
Repairs and maintenance 358,655 103,995
Depreciation and amortization 263,322 464,867
Taxes 215,470 151,522
Professional fees 131,271 88,822
Advertising 102,351 66,220
Insurance 101,984 93,351
Travel and entertainment 80,881 37,906
Utilities 60,257 41,152
Office expense 50,197 35,408
Other 104,288 40,297
----------- -----------
Total expenses 5,945,312 4,588,622
----------- -----------
Income (loss) from operations 240,486 ( 476,996)
Other Expenses:
Interest expense 51,934 67,966
----------- -----------
Net Income (Loss) $ 188,552 $( 544,962)
=========== ===========
Per Share Data
Net income (loss) $ .04 $( .11)
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
3
23
<PAGE>
<TABLE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated statements of stockholders' equity (deficit)
for the years ended July 31, 1997 and 1996
Common
Stock Capital in
Common Stock Subscribed Excess of Accumulated
Shares Amount & Unissued Par Value Deficit
<S> <C> <C> <C> <C> <C>
Balances
August
1, 1995 5,066,530 $ 101,331 $ - $ 2,110,235 $(2,107,658)
Issuance
of common
stock 22,500 450 - 7,987 -
Net loss
for the
year ended
July 31,
1996 - - ( 544,962)
--------- ---------- ---------- ----------- ------------
Balance,
July 31,
1996 5,089,030 101,781 - 2,118,222 (2,652,620)
Stock
subscriptions
sold 222,100 - 425,399 - -
Subscription
receivable - - ( 40,649) - -
Net income
for the year
ended July
31, 1997 - - - 188,552
---------- ---------- ----------- ----------- ------------
Balance,
July 31,
1997 5,311,130 $ 101,781 $ 384,750 $ 2,118,222 $(2,464,068)
========== ========== =========== =========== ============
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
4
24
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated statements of cash flows
for the years ended July 31, 1997 and 1996
1997 1996
Cash Flows From Operating Activities:
Net income (loss) $ 188,552 $( 544,962)
Adjustments to reconcile net income (loss) to
to net cash provided by (used in)
operating activities -
Depreciation and amortization 263,322 464,867
Amortization of deferred compensation expense 112,500 50,000
Issuance of common stock for compensation - 8,437
Issuance of stock subscriptions 40,649 -
Changes in assets and liabilities -
Decrease (increase) in restricted cash 6,595 ( 26,536)
Decrease (increase) in accounts receivable 50,699 ( 192,621)
Increase in prepaid expenses ( 33,142) ( 14,010)
Decrease in deferred income ( 101,640) ( 101,640)
Decrease in contract payable ( 159,432) ( 161,138)
(Decrease) increase in accounts payable ( 448,726) 393,461
(Decrease) increase in wages payable ( 9,702) 14,965
(Decrease) increase in vacation payable ( 1,950) 33,687
(Decrease) in deferred compensation payable ( 250,000) -
Increase in taxes payable 2,532 21,682
Increase in accrued liabilities 5,786 54,698
------------- -------------
Net cash provided by (used in)
operating activities ( 333,957) 890
------------- -------------
Cash Flows From Investing Activities:
Purchase of furniture, fixtures & equipment ( 16,516) ( 27,645)
Decrease in investment in HBII Timesharing 38,760 -
Payment of deposits ( 50) ( 30,000)
------------- -------------
Net cash provided by (used in)
investing activities 22,194 ( 57,645)
------------- -------------
Cash Flows From Financing Activities
Proceeds from stock subscription 384,750 -
Repayment of long-term debt ( 275,000) ( 275,000)
Proceeds of long-term debt 250,000 275,000
------------- -------------
Net cash provided by financing activities 359,750 -
------------- -------------
Net Increase (Decrease) In Cash 47,987 ( 56,755)
Cash At Beginning Of Year 220,951 277,706
------------- -------------
Cash At End Of Year $ 268,938 $ 220,951
============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
5
25
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated statements of cash flows (continued)
for the years ended July 31, 1997 and 1996
1997 1996
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 43,434 $ 53,844
Supplemental schedule of noncash investing
and financing activities:
Issuance of common stock, 22,500 shares for
compensation and services $ - $ 8,437
Assignment of the leased hotel's accounts
receivable to the Company also recorded
as an accounts payable to the lessor - 150,000
Stock subscription receivable 40,649 -
The accompanying notes are an integral part of the consolidated financial
statements.
6
26
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to the consolidated financial statements
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 operates in the hotel and
resort management industry in the State of Hawaii.
New Accounting Pronouncements -
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 128, "Earnings Per Share" and SFAS No. 129, "Disclosure of
Information About Capital Structure," which improves the earnings per share
information provided in financial statements by simplifying the existing
computational guidelines and revising the disclosure requirements. These
statements are effective for financial statements issued for periods ending
after December 15, 1997, including interim periods, and earlier application
is not permitted. In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which are both effective for fiscal
periods beginning after December 15, 1997. The impact of these statements
on the Company's current disclosures is not expected to be significant.
Principles Of Consolidation -
The consolidated financial statements include The Castle Group, Inc. and its
wholly-owned subsidiary, KRI, Inc. and KRI, Inc.'s wholly-owned subsidiary,
HPR Advertising, Inc. All significant intercompany 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 due to their
anti-dilutive effect. In 1997 and 1996, the weighted average shares
outstanding was 5,109,903 and 5,085,280, respectively.
Income Taxes -
The Company records deferred tax assets and liabilities for expected
future tax consequences of events that have been recognized in a Company's
financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the difference between the
financial statement carrying amounts and tax bases of assets and
7
27
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to the consolidated financial statements
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized.
Cash And Cash Equivalents -
The Company considered all highly liquid investments with a maturity 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 or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss
is reflected in income for the period.
The costs of maintenance and repairs are charged to income as incurred.
Renewals and betterments are capitalized and depreciated over their
estimated useful lives.
At July 31, 1997 and 1996, furniture, fixtures and equipment consisted of
the following:
1997 1996
Office equipment $ 205,529 $ 201,721
Less accumulated depreciation ( 122,958) ( 108,785)
----------- -----------
$ 82,571 $ 92,936
=========== ===========
Depreciation is computed using the declining balance and straight-line
methods over the estimated useful life of the assets (5 to 7 years). For
the years ended 1997 and 1996, depreciation expense was $26,881 and $26,719,
respectively.
Intangibles -
Intangible assets consist of noncompetition agreements and organization
costs. The noncompetition fees are being amortized over the life of the
agreements (3 years) on a straight-line basis. Organization costs are being
amortized on a straight-line basis over 5 years. At July 31, 1997 and 1996,
the balances of those intangibles were as follows:
8
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<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to the consolidated financial statements
1997 1996
Noncompetition agreements $ - $ 800,000
Organization costs 51,714 51,714
------------ ------------
51,714 851,714
Less accumulated amortization ( 38,786) ( 761,777)
------------ ------------
$ 12,928 $ 89,937
============ ============
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 4).
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 being amortized on a straight-line
basis over the life of the contract (5 years). In 1997, the stock options
were forfeited by the above mentioned officer (see Note 6).
Income Recognition -
The Company recognizes income from the management of resort properties
according to terms of its various management contracts.
Concentrations of Credit Risks -
The Company's cash is deposited in savings and demand deposit accounts with
financial institutions in Hawaii.
Concentration In Market Area -
The Company manages hotels primarily in Hawaii and is dependent on the
state's visitor industry. Subsequent to year end, the Company expanded its
operation to Saipan and is currently contemplating expansion into other
areas of the Pacific Basin.
Restricted Cash -
Restricted cash consists of cash held in client trust accounts and cash
pledged as collateral for an equipment lease.
9
29
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to the consolidated financial statements
Management Estimates -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value Of Financial Instruments -
The carrying value of long-term debt, and deferred compensation payable
approximate the fair value because of the short maturity of those
instruments. The fair value of the investment in HBII Time Share Program is
estimated to be $400,000 at July 31, 1997 based on future cash flow
projections.
2. 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 and
marketing fees based on a percentage of room revenue. During the year ended
July 31, 1997, and 1996, total fee income from HBR amounted to $774,372 and
$949,263, respectively. At July 31, 1997 and 1996, the Company's receivable
from HBR amounted to $197,720 and $371,717, respectively.
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.
Therefore, on August 2, 1995, the Company issued a $150,000, 6% promissory
note to HBII. The promissory note matured on August 31, 1995. On October
3, 1995, HBII repaid the note in full.
On July 31, 1995, the Company invested $100,000 in HBII Time Share Program
of the Hanalei Bay Resort. The Company will receive moneys based on a
percentage of timesharing sales. During 1997, the Company received $155,000
from this investment of which $38,800 represents a return of the initial
investment and $116,200 represents a gain recognized by the Company. At
July 31, 1997, the investment was $61,240.
10
30
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to the consolidated financial statements
Reservations System -
Reservations services are provided by Hawaii Reservation Center Corporation,
wholly owned by a stockholder/director who has a 2% interest in the Company.
The expense in 1997 and 1996 was $919,857 and $912,279, respectively.
Due to Related Party -
1997 1996
6% loans from stockholders, $18,000 was due
on January 31, 1997 and $166,400 was
extended to August 1, 1998 $ 184,400 $ 184,400
Less current portion 18,000 184,400
---------- ----------
Long-term portion due in fiscal year 1999 $ 166,400 $ -
========== ==========
3. Commitments and Contingencies
Leases -
The Company leases office space, vehicles and equipment expiring at various
dates through 1999. The office leases may be renewed for an additional five
years. Additionally, 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 profit of the hotel in excess of $100,000 until April 1997. All
assets, liabilities, revenues and expenses have been included in the
Company's operations.
At July 31, 1997, the future minimum rental commitment under these leases
was as follows:
Schedule of minimum lease payments:
1998 $ 863,000
1999 261,000
------------
$ 1,124,000
============
Rent expense under these leases amounted to $1,076,000 and $513,400 for the
years ended July 31, 1997 and 1996, respectively.
11
31
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to the consolidated financial statements
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 received 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.
4. Loan And Contract Payable
At July 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). $ - $ 159,432
$300,000 line of credit from a bank with
drawings due within 90 days from withdrawal,
with interest (10.50% at July 31, 1997) at
2.00% above the bank's base rate due on
September 30, 1997. The Company's accounts
receivable are pledged as collateral and
several of the Company's directors are named
as guarantors. 250,000 275,000
---------- ----------
$ 250,000 $ 434,432
========== ==========
5. Employee Benefits
The Company and its subsidiary have a 401(k) Profit Sharing
Plan for its employees. Under the terms of the Plan, the
Company may match 50% of the compensation reduction of
12
32
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to the consolidated financial statements
the participants in the Plan up to 1% of compensation. Any employee with
one year service and 1,000 credit hours of service, who is at least twenty-one
years old is eligible to participate. For the years ended July 31, 1997
and 1996, no contributions were made by the Company.
6. Capital Stock
Capital Stock Issuances -
On September 30, 1995, the Company issued to an officer 22,500 shares of
common stock as compensation for services rendered. The compensation
recorded was equivalent to the fair market value of the stock on September
30, 1995.
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 for 1997
and 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 for 1996 and in 1997, the
options were forfeited by the officer. The deferred compensation payable of
$250,000 and the unamortized balance of the deferred compensation expense of
$62,500 were eliminated which reduced payroll and benefits expense by
$187,500 in 1997.
13
33
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to the consolidated financial statements
In May 1997, the Company, as part of a renegotiation of its reservation
services agreement, granted an option to purchase 50,000 shares of the
Company's common stock at a price of $2 per share to Hawaii Reservation
Center Corporation which is wholly owned by a stockholder/director of the
Company. The option may be exercised between May 1997 and 2000 and had not
been exercised as of July 31, 1997.
Stock Subscriptions -
In July 1997, 222,100 common shares were subscribed at $2 per share. As of
July 31, 1997, the Company received $384,750, net of stock issuance expenses
of $18,806, with a receivable balance of $40,649 at July 31, 1997. The
subscription receivable was collected in September 1997, at which time, the
shares were issued to the subscriber.
7. Income Taxes
Significant components of the Company's deferred tax assets and liabilities
as of July 31, 1997 and 1996 are as follows:
1997 1996
Deferred tax assets-
Vacation pay $ 7,000 $ 7,000
Deferred compensation expense - 55,000
Noncompetition agreement 240,000 235,000
Deferred income 31,000 71,000
Net operating loss 738,000 775,000
----------- -----------
1,016,000 1,143,000
Deferred tax liability-
Furniture, fixtures and equipment ( 8,000) ( 7,000)
----------- -----------
1,008,000 1,136,000
Net deferred tax asset (1,008,000) (1,136,000)
----------- -----------
$ - $ -
=========== ===========
In 1997, $37,000 of net operating losses was utilized to offset current year
taxable income.
The net change during 1997 and 1996 in the total valuation allowance was a
decrease of $128,000 and an increase of $304,000, respectively.
14
34
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to the consolidated financial statements
The Company has a net operating loss carryforward for income tax purposes of
$1,844,400 at July 31, 1997 which expires at various dates through fiscal
year 2011.
8. Litigation
There are various claims and lawsuits pending against the Company involving
complaints which are normal and reasonable foreseeable in light of the
nature of the Company's business. In the opinion of management, the
resolution of these claims will not have a material adverse effect on the
Company's financial position.
15
35
<PAGE>
Item 8. Changes in and Disagreements with Accountants.
The Company did not change nor have any disagreements with its
principal accountant during the fiscal year ended July 31, 1997.
Part III
Item 9. Directors, Executive Officers, and Significant Employees.
The following table sets forth certain information concerning the
directors and executive officers of the Company as of July 31, 1997. Except
as otherwise stated below, the directors will serve until the next annual
meeting of stockholders or until their successors are elected or appointed,
and the executive officers will serve until their successors are appointed
by the Board of Directors.
Name Age Position
- ---------------------- ---- -----------------------------------------
Rick Wall 53 Chief Executive Officer, Director and
Chairman of the Board
John G. Tedcastle 64 Vice Chairman of the Board and Director
Kelvin M. Bloom 38 Chief Operating Officer, Senior Vice
President and Director
Kimo M. Keawe 48 Director
Hideo Nomura 47 Director
Charles E. McGee 61 Director
Ryoji Takahashi 57 Director
Motoko Takahashi 53 Secretary and Director
Akira Fujii (1) 59 Director
Michael S. Nitta 38 Chief Financial Officer and Vice
President, Finance
Shari W. Chang 47 Senior Vice President, Sales & Marketing
Judhvir Parmar 53 Director
Steve Townsend 43 Sr. Vice President, Operations
Stanley Mukai (2) 53 Interim Director
Edward Calvo Sr. (2) 53 Interim Director
Noboru Sekiguchi (2) 60 Interim Director
(1) Effective September 22, 1997, Mr. Fujii resigned as a director of the
Company.
(2) Effective September 22, 1997, the board of directors appointed Messrs.
Mukai, Calvo and Sekiguchi as interim directors until the next annual
meeting of the shareholders.
Rick Wall. Mr. Wall was appointed the Company's chief executive
officer and chairman of the board upon consummation of the Castle Plan. Mr.
Wall was instrumental in the formation of Castle Group Hawaii, the
negotiation and consummation of the Castle Plan and the acquisition of KRI.
He was the president, director and founder of Castle Group Hawaii. During
the past six years, Mr. Wall has been the managing director of HBII, which
owns 62% of the Hanalei Bay Resort. Mr. Wall has been elected to the board
of directors of the Hawaii Visitors Bureau and resides in Honolulu, Hawaii.
Charles E. McGee. Mr. McGee was appointed as director of the Company
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<PAGE>
in November, 1993. Mr. McGee has 36 years of diversified experience in
marketing, management and computer technology. From 1975 until 1992, he was
employed by First Insurance Company of Hawaii, Ltd., most recently as senior
vice president, overseeing the marketing, information systems,
administration and service departments. Mr. McGee had previously been
president of two independent data processing services companies. In
addition, he has held various senior management positions with IBM
Corporation, including division manager of the Pacific region. As discussed
in the caption "Plan of Operation for 1996", Item 1, Part I, Mr. McGee
currently operates and controls Hawaii Reservations Center Corporation, a
company which provides reservations for hotels and resorts. Mr. McGee has
been a resident of Hawaii for over thirty years. Mr. McGee is a graduate of
LaSalle University, and has studied at Massachusetts Institute of
Technology.
Kimo M. Keawe. Mr. Keawe was appointed as senior vice president and
director of the Company in November, 1993 following the acquisition of KRI,
Inc. Mr. Keawe is also the president and chief operating officer of KRI,
the company's wholly owned subsidiary doing business as Hawaiian Pacific
Resorts. Mr. Keawe was instrumental in the formation of KRI in 1988,
purchasing Hawaiian Pacific Resorts from its original founders. He has held
numerous senior management positions throughout his hotel and resort
management career, which spans over 20 years. Mr. Keawe is on the advisory
board of the Travel Industry Management School of Hawaii Pacific University.
Mr. Keawe is a graduate of Oregon State University, and was born and raised
in the State of Hawaii.
Kelvin M. Bloom. Mr. Bloom was appointed senior vice president and
director of the Company in November, 1993, and was appointed Chief Operating
Officer in July, 1995. Mr. Bloom was also appointed president of Castle
Hotels and Resorts, Inc., a wholly-owned subsidiary of the Company,
responsible for all facets of the Condominium Resort Management Division of
the Company. Prior to joining the Company, Mr. Bloom was the vice president
of the Hawaii Region of Village Resorts, Inc./Horizon Hospitality Group,
responsible for all Hawaiian interests and operations of that company.
During his 15 years with Village Resorts, Mr. Bloom served as general
manager, Kiahuna Plantation Resort in Poipu, Kauai; general manager for the
Lakeland Village Beach and Ski Resort in Lake Tahoe, California; and
executive assistant manager for the Whaler on Kaanapali Beach in Kaanapali,
Maui. Mr. Bloom was previously employed by Menefee Resorts in Kihei, Maui
and Sheraton Hotels in Hawaii.
Hideo Nomura. Mr. Nomura was appointed as a director of the Company in
November, 1993. Mr. Nomura is president of Nomura Holdings and of Nomura
Hitchcock Corporation, Ltd., a property related investment consulting firm
based in Tokyo, Japan, and has held this position since 1987. Mr. Nomura is
the operational executive of the Marina del Rey Residential Development in
California, and was the manager of Mitsui & Company (N.Z.) Ltd. for five
years until 1987. Mr. Nomura is a resident of Japan.
Ryoji Takahashi. Mr. Takahashi was appointed as a director of the
Company in November, 1993. Mr. Takahashi, a resident of Japan, has, for
over thirty years, been a substantial principal of Nichiman Kosan, a
corporation which specializes in coordinating the installation of air
conditioning and sound control systems in commercial buildings and
37
<PAGE>
subcontracts with over 300 companies. He is also the major stockholder of
Nikkankyo Group which consists of six independent companies and has over
five hundred employees. Mr. Takahashi is a graduate of Hosei University in
Tokyo, Japan, where he majored in economics.
Akira Fujii. Mr. Fujii, a resident of Japan, was appointed as director
of the Company in November, 1993. Mr. Fujii is president of Sinko Kogyo,
Co., Ltd., one of the largest Japanese commercial air conditioning
manufacturing companies which has facilities in various locations throughout
Japan and overseas operations in Taiwan, Singapore, Oregon and North
Carolina, with continuing operations for over sixty years. Mr. Fujii is a
graduate of Keio University in Tokyo, Japan, and also attended Stanford
University. Effective September 22, 1997, Mr. Fujii tendered his
resignation as a board of director due to scheduling conflicts with other
businesses in which Mr. Fujii is involved.
Motoko Takahashi. Ms. Takahashi is the sister of Ryoji Takahashi and
was appointed secretary of the Company in August of 1994 and as director in
March of 1995. Ms. Takahashi had previously served as director for various
Japanese investment companies in the United States. She also holds the
position as Vice President of N.K.C. Hawaii, Inc. Ms. Takahashi was born
and completed her education in Tokyo, Japan and has resided in the United
States for more than 30 years.
John G. Tedcastle. Mr. Tedcastle was appointed as a director of the
Company in November, 1993. Mr. Tedcastle is experienced in the travel and
hotel industry, having been involved for several years as part owner and
developer of an eleven property hotel chain in New Zealand. He has also
been a senior partner in a prominent law firm in Auckland, where he
specialized in property, financing and general business law. Mr. Tedcastle
is also the owner/operator of the Takapuna Golf course in Auckland, New
Zealand, where he resides.
Shari W. Chang. Ms. Chang joined the Company in July, 1994 as senior
vice president of sales and marketing. Prior to joining the Company, Ms.
Chang was vice president of sales for Aston Hotels and Resorts and a vice
president of Holiday Tours. She has also served as consultant to the Hawaii
Visitors Bureau in the past. Ms. Chang is a graduate of the University of
Hawaii, and resides in Honolulu, Hawaii.
Michael S. Nitta. Mr. Nitta joined the Company in November, 1993
following the acquisition of KRI, Inc. Prior to joining the Company, Mr.
Nitta served as secretary and treasurer of KRI. Together with Mr. Keawe,
Mr. Nitta was instrumental in the formation of KRI Inc. and the acquisition
of Hawaiian Pacific Resorts in 1987 from its former founders. Prior to the
formation of KRI, Inc. Mr. Nitta served as secretary and treasurer of
Hawaiian Pacific Resort Hotels Inc. from 1982. Born and residing in Hawaii,
he is a graduate of the University of Hawaii and holds a Masters of
Accounting Degree.
Judhvir Parmar. In 1996, the board of directors voted to increase the
number of directors to ten, and Mr. Parmar was subsequently elected. Mr.
Parmar was formerly Senior Vice President of Investment Operations for
International Finance Corporation ("IFC"), a wholly owned subsidiary of the
World Bank. IFC was responsible for all private sector operations of the
World Bank. A specialist in project corporate finance, Mr. Parmar was with
38
<PAGE>
IFC for more than twenty years and was responsible for the worldwide
investment program at IFC. In August, 1993, Mr. Parmar retired from IFC to
form his own consulting company.
Steve Townsend. Mr. Townsend joined the Company in July, 1997 and has
23 years of hotel and resort management experience. During his career he
has held numerous senior management positions with resort and hotel
management companies. Prior to joining the Company, Mr. Townsend was
director of operations for Interstate Hotels prior to a one year assignment
entailing rebuilding and re-opening a hurricane damaged resort in the Virgin
Islands. Prior to Interstate, Mr. Townsend spent 8 years with Village
Resorts. Mr. Townsend is a graduate of the Hotel and Restaurant
Administration School at Florida State University.
Stanley Mukai. Mr. Mukai was appointed interim director on September
22, 1997. Mr. Mukai is a graduate of the Harvard Law School and a partner
in the law firm of McCorriston Miho Miller Mukai located in Honolulu, Hawaii.
His expertise is in the area of taxation and Mr. Mukai has held various
positions such as Advisory Board Member, Hawaii Tax Institute; Trustee, Tax
Foundation of Hawaii; Co-Chairman, Tax Subcommittee, American Bar
Association; Chairman, Tax Subcommittee on U.S. District and Portfolio
Investment by Foreigners; and Chairman, Section of Taxation, Hawaii Bar
Association.
Edward Calvo, Sr.. Mr. Calvo was appointed interim director on September
22, 1997. Mr. Calvo is vice president of Calvo Enterprises, Inc., a
conglomerate of ten businesses with fifteen hundred employees. They are the
largest private employer on Guam. Mr. Calvo has served as a Senator in the
Guam legislature and is currently the Board Chairman of the Guam Waterworks
Authority.
Noburu Sekiguchi. Mr. Sekiguchi was appointed interim director on
September 22, 1997. Mr. Sekiguchi is a graduate of Waseda University and is
a Director and controller of Nikkankyo Group, which is the parent company of
N.K.C. Hawaii. He has worked for Toyo Menka Company, one of the leading
trading companies in Japan for forty years as a financial officer.
Compliance with Section 16(a) of the Securities Act.
Section 16 of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers and persons who own more than 10% of a
registered class of the Company's equity securities to file with the
Securities and Exchange Commission initial reports of beneficial ownership
(Form 3) and reports of changes in beneficial ownership (Forms 4 and 5) of
the Company's common stock and other equity securities of the Company.
Officers, directors and greater than 10% shareholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) reports
they file.
To the Company's knowledge, all directors, officers and holders of more
than 5% of the Company's common stock, filed all reports required of Section
16(a) of the Securities Exchange Act of 1934 during the fiscal year ending
July 31, 1997, summarized as follows:
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<PAGE>
Name of Reporting Person Form Filed Date Filed
-------------------------- ------------ -------------
John Tedcastle Form 5 Sep 13, 1996
Motoko Takahashi Form 4 Aug 09, 1996
Motoko Takahashi Form 4 Feb 07, 1997
Charles McGee Form 5 Sep 12, 1997
Kelvin Bloom Form 5 Sep 12, 1997
Kelvin Bloom (1) Form 5 Sep 26, 1997
Kimo M. Keawe Form 3 Aug 08, 1997
Steve Townsend Form 3 Aug 08, 1997
Stanley Mukai Form 3 Oct 09 , 1997
Edward Calvo, Sr. Form 3 Oct 10, 1997
Noburu Sekiguchi Form 3 Oct 09, 1997
(1) Amended filing
Item 10. Remuneration of Directors and Officers.
Executive Compensation
The following table shows for the fiscal year ended July 31, 1997, the
aggregate annual remuneration of each of the three highest paid persons who
were executive officers or directors of the Company and the executive
officers and directors as a group. The reported compensation is based on
cash compensation without consideration of a restricted stock grant to
Charles E. McGee described below under "Compensation of Directors".
Name of Individual Capacities in which renumeration Aggregate
or identity of group was received renumeration
- ----------------------- -------------------------------- ------------
Rick Wall Chairman of the Board and $120,000
Chief Executive Officer
Kelvin M. Bloom Chief Operating Officer and $126,500
Senior Vice President
Kimo M. Keawe Senior Vice President $124,050(1)
Officers and Directors
as a Group Various $624,200(1)
(1) Includes payments made under consulting agreement between the Company
and Kimo M. Keawe.
Compensation of Directors
The Company does not have any present standard arrangements regarding
compensation of directors for service as a director, or for attendance at
meetings of the Board of Directors or for participation on committees or
other special assignments. The Board of Directors may adopt resolutions
providing for reasonable compensation for participation in committees or
special assignments and reimbursement for reasonable expenses incurred in
attending any meeting of the Board of Directors. No compensation for
service as a director is presently contemplated.
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<PAGE>
There were no arrangements pursuant to which any director of the
Company was compensated during its most recent fiscal year for service
provided solely as a director, or for attendance at any meeting of the board
of directors.
During the fiscal year ended July 31, 1994, Mr. Charles E. McGee was
issued 125,000 shares of "restricted" common stock for past, present and
future services as the Company's director.
Employment Contracts
The Company has entered into written employment contracts with Messrs.
Bloom, Keawe and Nitta, as of November 1, 1993, Ms. Chang as of August 1,
1994 and Mr. Townsend as of July 31, 1997. Other than Mr. Bloom, Mr. Keawe,
Mr. Nitta, Mr. Townsend and Ms. Chang, the Company has entered into no
employment contract with any director or executive officer.
The above-mentioned employment agreements are for a period of five
years unless sooner terminated by either party giving at least one month's
prior notice to the expiration of the current term.
Mr. Keawe resigned as an officer of the Company in accordance with an
Agreement dated April 16, 1997 and the Company and Mr. Keawe have agreed to
a termination of his employment contract and its related terms and
conditions, to be effective as of April 1997. The Agreement specifies that
the Company shall pay to Mr. Keawe a fee of $10,000 per month for the seven
months ending November 1997 and $5,000 per month for the six months ending
May, 1998 for a total consulting fee of $100,000 plus health insurance
benefits. Mr. Keawe, for the consideration given, shall render consulting
and advisory services to the Company on marketing, managerial and
operational matters. The Agreement also calls for Mr. Keawe to transfer
32,250 shares of the Company's Common Stock owned by Keawe Resorts, Inc., a
company owned and controlled by Mr. Keawe, to the Company upon the
occurrence of certain events as set forth in the Agreement.
The remaining employment agreements provide for a base salary, to be
increased annually by a percentage no less than the increase in the Honolulu
Consumer Price Index for the preceding twelve months. Under their
respective employment agreements, the current base salary for Mr. Bloom, is
$120,000 per year. The terms of the agreements for Mr. Nitta call for a
base salary of $120,000, however, Mr. Nitta has agreed to reduce their base
salaries for the current fiscal year ending July 31, 1997 to $90,000. The
current base salary for Ms. Chang is $100,000 per year. The employment
agreements further provide for paid vacation; an annual performance bonus
potential of up to 20% of the base salary (up to 15% for Ms. Chang),
depending upon attaining pre-determined goal criteria (no bonuses were
earned during the current fiscal year); membership in any pension plan (not
yet established) that would contribute the equivalent of 10% of base salary
annually; a business development bonus (which has been waived in the current
fiscal year); membership in a 401(k) plan; and full medical, dental and
disability insurance.
The employment agreements contain a "change-in-control" provision which
gives each officer the right, upon the occurrence of a "change-in-control,"
to terminate their employment and receive as severance pay the total
compensation remaining to be paid under the agreement as of the date of such
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<PAGE>
termination or the total compensation for three years following the date of
termination, whichever is greater. The term "change-in-control" is defined
in each agreement as the date when persons other than the shareholders of
record on the date of commencement of the term of such agreement become the
beneficial owner of greater than 50% of the Company's voting stock.
Long Term Incentive Plans
No options (with the exception of the option discussed in the section
entitled "Options, Warrants and Rights" in Item 5), stock appreciation
rights or long term incentive plan awards were issued or granted to the
Company's management during the fiscal year ending July 31, 1997.
The Company has a 401(k) profit sharing plan generally available to all
of its employees. Under the terms of the plan, the Company is required to
match 50% of the amounts contributed by participants through payroll
deductions, up to a maximum of 1% of their compensation. Any employee with
one year of service who is at least 21 years of age is eligible to
participate.
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Item 11. Security Ownership of Certain Security Holders and Management.
Security Ownership of Certain Beneficial Owners
The following table sets forth the number of shares of the Company's
common stock beneficially owned as of July 31, 1997 by: (I) each of the
three highest paid persons who were officers and directors of the Company,
(ii) all officers and directors of the Company as a Group, and (iii) each
shareholder who owned more than 10% of the company's common stock, including
those shares subject to outstanding options.
Name Beneficially Shares %
and Address Owned (1) of Class (2)
- -------------------------- ----------------- --------------
Rick Wall
745 Fort Street
Honolulu, HI 96813 815,000 (3) 15%
Kimo M. Keawe
745 Fort Street
Honolulu, HI 96813 322,500 (4) 6%
John G. Tedcastle
745 Fort Street
Honolulu, HI 96813 525,000 (5) 10%
Hideo Nomura
745 Fort Street
Honolulu, HI 96813 525,000 10%
L.C.C. Management Inc.
745 Fort Street
Honolulu, HI 96813 525,000 10%
N.K.C. Hawaii, Inc.
745 Fort Street
Honolulu, HI 96813 900,000 (6) 17%
All directors and
officers as a group
(12 persons) 4,263,500 80%
(1) Except as otherwise noted, the Company believes the persons named in
the table have sole voting and investment power with respect to the
shares of the Company's common stock set forth opposite such persons'
names. Amounts shown include the shares issuable pursuant to various
stock options exercisable in 1997.
(2) Determined on the basis of 5,361,130 shares outstanding. Amount
includes 222,100 shares sold in a private placement for which the
shares have not yet been issued as of July 31, 1997 and includes shares
issuable under certain stock options exercisable as of July 31, 1997.
(3) Includes 375,000 shares held by HBII Management, Inc., which is owned
and controlled by Mr. Wall.
43
<PAGE>
(4) Includes 322,500 shares held by Keawe Resorts, Inc., which is owned and
controlled by Mr. Keawe. Includes 32,250 shares which Mr. Keawe has
agreed to return to the Company in accordance with the terms and
conditions of the Consulting Agreement between the Company and Mr.
Keawe.
(5) Includes 525,000 shares held by The John Tedcastle Family Trust, of
which Mr. John Tedcastle is trustee with control over voting rights.
(6) Includes 900,000 shares held by N.K.C. Hawaii, Inc. which is owned and
controlled by the family of Mr. Takahashi. Includes 525,000 shares
held by Hideo Nomura. Mr. Nomura is also listed in the table as the
owner of more than 10% of the Company's stock.
Options, Warrants and Rights
In November, 1993, the Company granted an option to Kelvin Bloom to
purchase 125,000 shares of the Company's common stock at an exercise price
of $0.000008 per share. In 1995, the Company and Mr. Bloom the option
period was amended to be exercisable only between August 1, 1996 and
December 2, 1998. In July 1997, Mr. Bloom forfeited all of his rights,
title and interest in the stock option.
In May 1994, the Company entered into a Common Stock Purchase Warrant
with Van Kasper and company for services provided. The Warrant is for
25,000 shares exercisable on or before May 12, 1994 for a price of $1.25 per
share. As of July 31, 1997, the warrant had not yet been exercised.
In August, 1994, the Company, as part of the employment agreement with
Shari Chang, agreed to give to Shari W. Chang as a bonus, 22,500 shares of
the Company's common stock. On September 30, 1995, Ms. Chang accepted
delivery of the shares under the employment agreement.
In May, 1997, The Company, as part of a renegotiation of its
reservation services agreement, granted to Hawaii Reservations Center Corp.
an option to purchase 50,000 shares of the Company's common stock at a price
of $2.00 per share. The option may be exercised between may 21, 1997 and
May 20, 2002. Hawaii Reservations Center Corp. is a wholly owned
corporation of Mr. Charles McGee, a director of the Company. As of July 31,
1997, the option had not yet been exercised.
Other than the option granted to Hawaii Reservations Center Corp.,
there were no outstanding options, warrants or rights to purchase common
stock held by any of the officers or directors of the Company or its
principal shareholders.
Item 12. Interest of Management and Others in Certain Transactions.
Transactions with Management and Others.
As noted in section "Business Development," Item 1, Part I, the Hanalei
Bay Resort is a 134 unit condominium located in Princeville, Kauai, Hawaii.
HBII was formed through the efforts of HBII Management Inc., owned by Mr.
44
<PAGE>
Wall, with the following partners: Siam Commercial Bank; Voyage Fourteen
Ltd., owned by John G. Tedcastle; L.C.C. Management, Inc., owned by Judhvir
Parmar; Nomura Firm and Nomura Holdings, owned by Hideo Nomura and Don
Nomura. In 1988 HBII made an offer to purchase all 134 units of the Hanalei
Bay Resort and eighty six owners accepted the offer. HBII elected to form
its own management company and entered into a management contract with
Castle Group Hawaii, which was one of the assets acquired by the Company
pursuant to the Castle Plan. Under terms of the management contract between
HBII and Castle Group Hawaii and as acquired by the Company, the Company is
required to provide full management, including sales, supervision of staff,
accounting and maintenance. Mr. Tedcastle and Mr. Hideo Nomura were elected
to serve on the board of directors of the Company following completion of
the Castle Plan. Mr. Parmar was appointed interim director in November
1995. Mr. Parmar is a general partner of HBII and is the owner of L.C.C.
Management, Inc., which is the holder of approximately 10% of the Company's
common stock (see Item 5, Part I). Nichiman International later became an
investor in HBII and Nichiman International's owner, Mr. Ryoji Takahashi was
appointed as a director of the Company. In March of 1995, Mr. Takahashi's
sister, Ms. Motoko Takahashi, was appointed Secretary and director of the
Company. In November of 1995, Mr. Kelvin Bloom married the daughter of one
of the limited partners of HBII. In March of 1997, Mr. Michael Nitta was
appointed Assistant Vice President of HBII Management, Inc. Management
believes that the terms of the management contract between the Company and
HBII are on terms which are no less favorable to HBII or the Company than
those which are negotiated with other owners not affiliated with the
Company.
On August 1, 1994, the Company entered into a contract with HRCC (as
described in section "Plan of Operation for Fiscal 1998" Item 1, Part I, and
incorporated herein by reference), a company owned and controlled by Charles
M. McGee, a director of the Company. It is management's belief that the
contract with HRCC are on terms which are no less favorable than those which
could be negotiated with companies not affiliated with The Company,
however, in May of 1997, the Company renegotiated its contract with HRCC
with regard to the fees charged. Under the renegotiated agreement, the fees
paid to HRCC shall be based upon the monthly room revenues of the properties
managed by the Company, subject to a minimum monthly fee. Management
believes, although no assurances can be given, that the Company shall enjoy
lower reservations costs under the new agreement.
Except for the Castle Plan, the HBII Plan and the purchase agreement
involving KRI described under the caption "Business Development" of Item 1,
Part I and incorporated herein by reference, the employment contracts and
other matters described in Item 10, "Remuneration of Officers and
Directors," the HBII management contract, and the HRCC contract, there were
no transactions or proposed transactions during 1996 and 1997, to which the
Company or any of its subsidiaries was or is to be a party, in which the
amount involved exceeds $50,000 and in which any director or executive
officer, or any shareholder who is known to the Company to own of record or
beneficially more than 10% of the Company's common stock, or any member of
the immediate family of any of the foregoing persons, had a direct or
indirect material interest.
45
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K.
Reports on Form 8-K.
The Company filed a current report on Form 8-K on August 15, 1997
regarding its potential acquisition of 51% of the authorized issued and
outstanding stock of a management company situated in Indonesia.
The Company filed a current report on Form 8-K on September 26, 1997
regarding the resignation of Mr. Akira Fujii from its board of directors.
Index to Exhibits
The following exhibits are filed as a part of this report:
Sequential
Exhibit Page
Number Description Number
- ------ -------------------------------------------------------- ----------
2.1 Restated Articles of Incorporation, incorporated by
reference to Exhibit 2.1 to the Company's Registration
Statement of Form 10-SB. *
2.2 Bylaws, as amended effective February 1, 1995,
incorporated by reference to Exhibit 2.2 to the Company's
Quarterly Report on Form 10-QSB, File No. 0-23338. *
6.1 Agreement and Plan of Reorganization dated as of November
8, 1993, 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 as of November 10, 1993,
by and among The Castle Group, Inc., Keawe Resorts, Inc.,
Maui Beach Hotel, Inc., M.K. & Sons, Inc., TN Group,
Inc., Michael S. Nitta, Saburo & 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. *
46
<PAGE>
Sequential
Exhibit Page
Number Description Number
- ------ ------------------------------------------------------- ----------
6.3 Kelvin Bloom Employment Agreement dated December 2,
1993 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 July 30, 1994,
effective as of November 10, 1993 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 July 31, 1994. *
6.5 Michael S. Nitta Employment Agreement dated June 23,
1994, effective as of November 10, 1993 between Michael
S. Nitta and the Company, incorporated by reference to
Exhibit 6.5 to the Company's Annual Report on Form 10-KSB
for the year ended July 31, 1994. *
6.6 Shari Chang Employment Agreement dated July 15, 1994,
effective as of July 16, 1994 between Shari 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
July 31, 1994. *
6.7 Sublease Agreement dated September 16, 1993 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 April 1, 1988, between Hirano
Enterprises, Cen Pac Properties, Inc., and KRI, Inc., dba
Hawaiian Pacific Resorts, as renewed by agreement dated May
3, 1993, incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form 10-SB. *
6.9 Reservations Services Agreement dated August 1, 1994
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
October 31, 1994. *
6.10 Stock Acquisition Agreement between the Company and Shari
W. Chang dated September 10, 1995, incorporated by
reference to Exhibit 6.10 to the Company's Annual Report
on Form 10-KSB for the year ended July 31, 1995. *
6.11 Revolving Line of Credit Loan Agreement dated October 21,
47
<PAGE>
Sequential
Exhibit Page
Number Description Number
- ------- ------------------------------------------------------- ----------
1994 between the Company, and Castle Resorts & Hotels,
Inc., KRI, Inc., Hawaii National Bank, Rick Wall, John
Tedcastle, Hideo Nomura and Kimo Keawe, incorporated
by reference to Exhibit 6.11 to the Company's Annual
Report on Form 10-KSB for the year ended July 31, 1995. *
6.12 Letter dated October 17, 1995 from Kimo M. Keawe to KRI,
Inc. Stockholders, together with Promissory Notes dated
July 31, 1995 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 July 31, 1995. *
6.13 Second Amendment to Letter of Agreement Dated December 2,
1993 between Kelvin Bloom and The Castle Group, Inc.
incorporated by reference to Exhibit 6.13 to the
Company's Annual Report on Form 10-KSB for the year ended
July 31, 1995. *
6.14 Extension of Revolving Line of Credit Agreement dated
December 18, 1995 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
July 31, 1996. *
6.15 Extension of Revolving Line of Credit Agreement dated
January 18, 1996 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
July 31, 1996. *
6.16 Extension of Revolving Line of Credit Agreement dated
June 5, 1996 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
July 31, 1996. *
6.17 Extension of Revolving Line of Credit Agreement dated
December 11, 1996 between The Castle Group, Inc., KRI,
Inc., Castle Resorts & Hotels, Inc., and Hawaii National
Bank. 51
48
<PAGE>
Sequential
Exhibit Page
Number Description Number
- ------- ------------------------------------------------------- ----------
6.18 Extension of Revolving Line of Credit Agreement dated
March 5, 1997 between The Castle Group, Inc., KRI,
Inc., Castle Resorts & Hotels, Inc., and Hawaii
National Bank. 53
6.19 Extension of Revolving Line of Credit Agreement dated
June 30, 1997 between The Castle Group, Inc., KRI, Inc.,
Castle Resorts & Hotels, Inc., and Hawaii National Bank. 54
6.20 Stock Option Agreement dated May 21, 1997 between Hawaii
Reservations Center Corp. and The Castle Group, Inc. 56
6.21 Steve Townsend Employment Agreement dated May 31, 1997,
effective as of July 28, 1997 between Steve Townsend and
The Castle Group, Inc. 60
6.22 Consulting Agreement between Kimo M. Keawe, Keawe Resorts,
Inc. and The Castle Group, Inc. dated April 16, 1997. 65
6.23 Amendment to Consulting Agreement between Kimo M. Keawe,
Keawe Resorts, Inc. and The Castle Group, Inc. dated
April 16, 1997. 73
6.24 Letter dated July 31, 1997 from Kelvin Bloom forfeiting
his stock option and all amendments. 75
6.25 Amendment to Promissory Notes from the Company to Saburo
or Mitsue Maruyama for $3,600; Michael S. Nitta for
$16,800; Keawe Resorts, Inc. For $122,000; M.K. & Sons,
Inc. for $12,000; Shigeru Shinno for $6,000; and T.N.
Group Hawaii, Inc. for $6,000. 76
16.2 Letter of resignation as a board of director from Akira
Fujii dated September 22, 1997, incorporated by reference
to exhibit 16.2 to the Company's 8-K filed on September
26, 1997. *
Description of Exhibits
See Item 1 Above.
49
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
THE CASTLE GROUP, INC.
Date: October 22, 1997 By /s/ Rick Wall
-----------------------------------
Rick Wall, Chief Executive Officer
and Chairman of the Board
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Date Signature Title
October 22, 1997 /s/Rick Wall Chief Executive Officer and
---------------------- Chairman of the Board
Rick Wall
October 22, 1997 /s/Kelvin Bloom Chief Operating Officer,
---------------------- Director and Sr. Vice President
Kelvin Bloom
October 22, 1997 /s/Michael S. Nitta Chief Financial Officer and
--------------------- Vice President Finance
Michael S. Nitta
October 22, 1997 /s/Motoko Takahashi Secretary and Director
---------------------
Motoko Takahashi
October 22, 1997 /s/Charles E. McGee Director
---------------------
Charles E. McGee
October 22, 1997 /s/ Kimo M. Keawe Senior Vice President and Director
---------------------
Kimo M. Keawe
October 22, 1997 /s/ John Tedcastle Director
---------------------
John Tedcastle
October 22, 1997 /s/ Judvihr Parmar Director
---------------------
Judvihr Parmar
October 22, 1997 /s/ Ryoji Takahashi Director
---------------------
Ryoji Takahashi
October 22, 1997 /s/ Hideo Nomura Director
---------------------
Hideo Nomura
50
<PAGE>
EXTENSION OF REVOLVING LINE OF CREDIT AGREEMENT
THIS AGREEMENT made and entered into on the 11th day of December, 1996
between THE CASTLE GROUP, INC., a Utah corporation, CASTLE RESORTS & HOTELS,
INC., a Hawaii corporation, and KRI, INC. a Hawaii corporation, whose post
office address is 745 Fort Street, 10th flr., Honolulu, Hawaii 96813,
(hereinafter collectively referred to as "Borrower") and HAWAII NATIONAL
BANK, a national banking association, with its principle place of business
and post office address at 841 Bishop Street #145, Honolulu, Hawaii,
(hereinafter referred to as "Bank");
W I T N E S S E T H T H A T:
WHEREAS, Borrower and Bank entered into that certain Revolving Line of
Credit Loan Agreement dated October 21, 1994, (hereafter referred to as the
"Loan Agreement"); and
WHEREAS, as security for the repayment of said Loan Agreement, RICK
WALL, JOHN TEDCASTLE, HIDEO NOMURA, and KIMO KEAWE, previously made,
executed and delivered to Bank a Guaranty for all indebtedness under the
Loan Agreement,
WHEREAS, said Loan Agreement has been extended and modified from time to
time,
WHEREAS, Borrower has requested and Bank has agreed to extend and modify
said Loan Agreement to January 31, 1997.
NOW THEREFORE, in consideration of the premises as above stated,
Borrower and Bank hereby covenant and agree as follows:
1. The date of maturity of said Loan Agreement is changed from November 1,
1996 to January 31, 1997.
2. All other terms, conditions and provisions of said Loan Agreement shall
remain in effect and are hereby ratified and confirmed.
51
<PAGE>
IN WITNESS WHEREOF, the parties hereunto have executed this indenture on
the date first above written.
THE CASTLE GROUP, INC. CASTLE RESORTS & HOTELS, INC.
By /s/ Motoko Takahashi By /s/ Kelvin Bloom
---------------------------- ---------------------------
Its Secretary Its President
KRI, INC.
By /s/ Michael Nitta
----------------------------
Its Secretary/Treasurer (Borrowers)
HAWAII NATIONAL BANK
By /s/ Dwight Asato
----------------------------
Its Vice President & Manager (Bank)
/s/ Rick Wall
----------------------------
Rick Wall
/s/ John Tedcastle
----------------------------
John Tedcastle
/s/ Hideo Nomura
----------------------------
Hideo Nomura
/s/ Kimo Keawe
----------------------------
Kimo Keawe
52
<PAGE>
EXTENSION OF REVOLVING LINE OF CREDIT AGREEMENT
THIS AGREEMENT made and entered into on the 5th day of March, 1997
between THE CASTLE GROUP, INC., a Utah corporation, CASTLE RESORTS & HOTELS,
INC., a Hawaii corporation, and KRI, INC. a Hawaii corporation, whose post
office address is 745 Fort Street, 10th flr., Honolulu, Hawaii 96813,
(hereinafter collectively referred to as "Borrower") and HAWAII NATIONAL
BANK, a national banking association, with its principle place of business
and post office address at 841 Bishop Street #145, Honolulu, Hawaii,
(hereinafter referred to as "Bank");
W I T N E S S E T H T H A T:
WHEREAS, Borrower and Bank entered into that certain Revolving Line of
Credit Loan Agreement dated October 21, 1994, (hereafter referred to as the
"Loan Agreement"); and
WHEREAS, as security for the repayment of said Loan Agreement, RICK WALL,
JOHN TEDCASTLE, HIDEO NOMURA, and KIMO KEAWE, previously made, executed and
delivered to Bank a Guaranty for all indebtedness under the Loan Agreement, and
WHEREAS, said Loan Agreement has been extended and modified from time to
time,
WHEREAS, Borrower has requested and Bank has agreed to extend and modify
said Loan Agreement to May 30, 1997.
NOW THEREFORE, in consideration of the premises as above stated,
Borrower and Bank hereby covenant and agree as follows:
1. The date of maturity of said Loan Agreement is changed from
November 1, 1996 to May 30, 1997.
2. All other terms, conditions and provisions of said Loan Agreement
shall remain in effect and are hereby ratified and confirmed.
IN WITNESS WHEREOF, the parties hereunto have executed this indenture on
the date first above written.
THE CASTLE GROUP, INC. CASTLE RESORTS & HOTELS, INC.
By /s/ Rick Wall By /s/ Kelvin Bloom
Its CEO Its President
By /s/ Michael Nitta By /s/ Linda Leonti
Its CFO Its Secretary
KRI, INC.
By /s/ Kimo Keawe
Its President
By /s/ Michael Nitta
Its Secretary/Treasurer (Borrowers)
HAWAII NATIONAL BANK
By /s/ Dwight Asato
Its Vice President & Manager (Bank)
53
<PAGE>
EXTENSION OF REVOLVING LINE OF CREDIT AGREEMENT
THIS AGREEMENT made and entered into on the 30th day of June, 1997
between THE CASTLE GROUP, INC., a Utah corporation, CASTLE RESORTS & HOTELS,
INC., a Hawaii corporation, and KRI, INC. a Hawaii corporation, whose post
office address is 745 Fort Street, 10th flr., Honolulu, Hawaii 96813,
(hereinafter collectively referred to as "Borrower") and HAWAII NATIONAL
BANK, a national banking association, with its principle place of business
and post office address at 841 Bishop Street #145, Honolulu, Hawaii,
(hereinafter referred to as "Bank");
W I T N E S S E T H T H A T:
WHEREAS, Borrower and Bank entered into that certain Revolving Line of
Credit Loan Agreement dated October 21, 1994, (hereafter referred to as the
"Loan Agreement"); and
WHEREAS, as security for the repayment of said Loan Agreement, RICK
WALL, JOHN TEDCASTLE, HIDEO NOMURA, and KIMO KEAWE, previously made,
executed and delivered to Bank a Guaranty for all indebtedness under the
Loan Agreement, and
WHEREAS, said Loan Agreement has been extended and modified from time to
time,
WHEREAS, Borrower has requested and Bank has agreed to extend and modify
said Loan Agreement to September 30, 1997.
NOW THEREFORE, in consideration of the premises as above stated,
Borrower and Bank hereby covenant and agree as follows:
1. The date of maturity of said Loan Agreement is changed from November
1, 1996 to September 30, 1997.
2. That except as expressly modified hereby, all of the terms,
conditions and provisions contained in the Loan Agreement shall
remain in full force and effect and the parties hereby confirm and
ratify the same.
3. This agreement shall insure to the benefit of and be finding upon
the parties hereto, and heirs, personal representatives and
permitted assigns of the Borrower and the successors and assigns of
the Bank.
4. Throughout this Agreement, except where clearly repugnant to the
context, the singular shall include the plural and vise versa, and
the use of any gender shall include all genders.
54
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this indenture on
the date first above written.
THE CASTLE GROUP, INC. CASTLE RESORTS & HOTELS, INC.
By /s/ Rick Wall By /s/ Kelvin Bloom
---------------------------- --------------------------
Its CEO Its President
By /s/ Michael Nitta By /s/ Linda Leonti
---------------------------- --------------------------
Its CFO Its Secretary
KRI, INC.
By /s/ Kimo Keawe
----------------------------
Its President
By /s/ Michael Nitta
----------------------------
Its Secretary/Treasurer (Borrowers)
HAWAII NATIONAL BANK
By /s/ Dwight Asato
----------------------------
Its Vice President & Manager (Bank)
55
<PAGE>
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT is made and entered into as of the 21st day
of May, 1997, by and between THE CASTLE GROUP, INC., a Utah corporation,
whose principal place of business and post office address is 745 Fort
Street, Tenth Floor, Honolulu, Hawaii, 96813 (hereinafter called the
"Corporation") and HAWAII RESERVATIONS CENTER CORP., whose office and post
office address is 1150 South King Street, Honolulu, Hawaii 96814
(hereinafter called the "Optionee").
WITNESSETH THAT:
WHEREAS, the Corporation desires to grant to the Optionee an option to
purchase Fifty Thousand (50,000) shares of common stock of the Corporation,
$.02 par value, in accordance with the terms and conditions contained
herein;
NOW, THEREFORE, in consideration of the foregoing and of the covenants
and conditions contained herein, the parties agree as follows:
1. Grant of Option. In consideration of the sum of $1.00 paid to the
Corporation by the Optionee and other good and valuable consideration
(collectively, the "Option Fee"), the receipt and sufficiency of which is
hereby acknowledged, the Corporation does hereby irrevocably grant unto the
Optionee and the Optionee does hereby accept from the Corporation the right,
privilege, and option (the "Option") to purchase Fifty Thousand (50,000)
shares of common stock of the Corporation, $.02 par value (the "Option
Shares") at the purchase price and upon the terms and conditions and within
the time set forth in this Agreement.
2. Term of Option; Exercise of Option. The Option shall commence on
the date hereof (the "Commencement Date") and shall terminate on the date
five (5) years from the Commencement Date (the "Termination Date"). The
Optionee may exercise the Option, in whole or in part, by delivering to the
Corporation, at any time prior to the Termination Date, written notice of
its intention to exercise the Option, the number of Option shares being
purchased by the Optionee, together with the purchase price for such number
of Option Shares purchased by the Optionee. Upon the exercise of the Option
by the Optionee and the payment of the purchase price therefor, the
Corporation shall promptly deliver to the Optionee the certificate or
certificates evidencing the Option Shares.
3. Purchase Price of Option Shares. The purchase price of the Option
Shares shall be $2.00 per share. At the time of the exercise of the Option
by the Optionee, the Optionee shall deliver to the Corporation in cash or by
check the purchase price for the Option Shares.
56
<PAGE>
4. Stock Dividends, Stock Splits, Etc. If the Option is exercised
subsequent to any stock dividend, stock split, recapitalization, combination
or exchange of shares, or other similar change or transaction of or by the
Corporation, as a result of which shares of any class are issued in respect
of outstanding shares, or shares are changed into the same or different
number of shares or another class or classes, the Optionee shall receive,
for the aggregate purchase price payable upon such exercise, the aggregate
number and class of shares equal to the number and class of the Option
Shares he would have had on the date of exercise had the shares been
purchased for the same aggregate purchase price on the date the Option was
granted, taking into consideration any such stock dividend, stock split,
recapitalization, combination or exchange of shares, or other similar change
or transaction; provided, however, that such an adjustment shall not give
the Optionee any additional benefits which he did not hold at the date the
Option was granted, or deprive him of any benefits which he held at the date
the Option was granted.
5. Merger, Consolidation, Etc. If, at any time during the term of this
Option, there should be any consolidation or merger of the Corporation with
another corporation or any sale, conveyance, lease or other transfer by the
Corporation of all or substantially all of its property to any other
corporation, the Optionee shall thereafter, upon exercise of the Option, be
entitled to receive the number of shares of stock or other securities or
property of the Corporation, or of the successor corporation resulting from
such consolidation or merger, as the case may be, to which the Option Shares
(and any other securities and property) of the Corporation, deliverable upon
the exercise of this Option, would have been entitled upon such
consolidation, merger, sale or other transfer if this Option had been
exercised immediately prior to such consolidation, merger, sale or other
transfer; and, in any such case, appropriate adjustment (as determined in
good faith by the Board of Directors of the Corporation and approved by the
Optionee in writing, such approval not to e unreasonably withheld) shall be
made in the application of the provisions herein set forth with respect to
the rights and interests thereafter of the Optionee to the end that the
provisions set forth herein (including those relating to adjustments of the
purchase price and the Option Shares) shall thereafter be applicable, as
near as reasonably may be, in relation to any shares or other property
thereafter deliverable upon the exercise hereof as if this Option had been
exercised immediately prior to such consolidation, merger, sale or other
transfer of the Option Shares exchanged as provided for by such
consolidation or merger.
2
57
<PAGE>
The Corporation shall not effect any such consolidation or merger
unless, upon or prior to the consummation thereof, the successor corporation
shall assume by written instrument, reasonably deemed by each of the Board
of Directors of the corporation and the Optionee to be satisfactory in form
and substance, the obligations to deliver to the Optionee upon exercise of
this Option such shares of stock, securities, cash or property as the
Optionee shall be entitled to purchase in accordance with the foregoing
provisions.
6. Rights Prior to Exercise of Option. The Option is non-transferable
by the Optionee and may be exercised only by the Optionee; provided,
however, that the Optionee may transfer his rights under this Agreement to
any member of his immediate family, to a trust of which he or an immediate
family member is a grantor or beneficiary, to an entity of which he or an
immediate family member are the sole owners, or by will or in accordance
with the laws of descent and distribution. For this purpose, the immediate
family of any person shall mean his spouse, lineal descendants and
ancestors.
7. Other Agreements of the Corporation. The corporation covenants that
it will at all times reserve and keep available out of its authorized and
unissued common stock, solely for the purpose of issue upon exercise of the
purchase rights evidenced by this Option, the number of shares of common
stock purchasable and deliverable hereunder. the shares of common stock of
the Corporation, when issued and delivered pursuant to the valid exercise of
the Option, will be validly issued, fully paid and non-assessable. the
Corporation will not, by amendment of its Articles of Incorporation or
through reorganization, consolidation, merger, dissolution, issuance of
capital stock or sale of treasury stock (otherwise than upon exercise of the
Option) or sale of assets, or by any other voluntary act or deed, avoid or
seek to avoid the performance or observance of any of the covenants,
stipulations, or conditions to be observed or performed by the Corporation
hereunder. The Corporation will at all times in good faith carry out all of
the provisions of this Option.
8. Miscellaneous. This Agreement contains the entire agreement between
the parties hereto. No oral understandings or modifications shall be
binding upon any party hereto. All of the negotiations between the parties
have been completed, and no further negotiations, any term or provisions of
this Agreement are contemplated. This Agreement shall be construed in
accordance with the laws of the State of Hawaii and shall be binding upon,
and inure to the benefit of, the parties hereto and their respective heirs,
personal representatives, successors and assigns.
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IN WITNESS WHEREOF, the Corporation and the Optionee have executed and
delivered this Agreement as of the day and year first above written.
THE CASTLE GROUP, INC.
By /s/ Michael Nitta
--------------------------
Its CFO
the "Corporation"
HAWAII RESERVATIONS CENTER, CORP.
By /s/ Charles E. McGee
--------------------------
Its President
the "Optionee"
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STEVE TOWNSEND
EMPLOYMENT AGREEMENT
THIS AGREEMENT made this 31st day of May, 1997, but effective as of
July 28 1997, by and between THE CASTLE GROUP, INC., a corporation organized
and existing under the laws of the State of Utah (hereinafter referred to as
"Employer"), and STEVE TOWNSEND (hereinafter referred to as "Employee").
WITNESSETH:
WHEREAS, the said Employer desires to employ Employee, who desires to
become an Employee of the said Corporation, on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and promises
herein contained, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Employment. The Employer agrees to and hereby does engage and
employ Employee, and the latter agrees to devote his services, business skill
and ability to his employment under the terms, covenants and conditions of
this Agreement as necessary for the success of the business of the Employer.
2. Term of Employment. The term of this employment shall be for a
period of FIVE (5) years commencing on the 28th day of July, 1997 and will be
automatically renewed on a year-to-year basis unless sooner terminated by
either party hereto by giving the other written notice of termination one (1)
month before the expiration of the then current term.
3. Obligation of Employee. Employee agrees that during the term of
this Agreement or for any renewal period thereof, he will render his best
efforts and services in his capacity as Senior Vice President - Operations to
the Employer pursuant to the job description attached hereto and incorporated
herein by reference, or as amended in writing from time to time. Employee
further agrees to perform to the best of his ability and skill all assignments
as assigned by Employer.
4. Compensation. Employer shall pay Employee, during the period of
employment, a compensation package consisting of:
(a) Base salary of $100,000.00 per year payable in equal semi-monthly
installments, or at more frequent intervals, as determined by the Board of
Directors.
(b) An annual performance bonus potential up to 15% of base salary
based upon attaining pre-determined criteria.
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(c) Membership in a 401K plan.
(d) Full monthly premium paid by Employer for medical, dental, health
insurance under the family plan.
(e) Cost of relocating Employee and family, and their automobile,
household goods, personal effects, etc... to Honolulu to be paid by Employer.
Substantiated expenses not to exceed $4,000.00 and the cost of advance
purchase economy class one-way airfare.
(f) One time relocation allowance equivalent to one month's base
salary of $8,334.00.
(g) Monthly auto parking fee at place of business paid by Employer.
(h) Group term life insurance equal to one year's base salary.
5. Business Expense. Employee is authorized to incur reasonable
expenses in connection with the business of the Employer, including expenses
for travel and similar items. Employer will reimburse Employee for such
expenses upon presentation by Employee of an itemized account of such
expenditures as may be prescribed by Employer. It is intended by Employer and
Employee that all such expenses be ordinary and necessary expenses incurred in
connection with the business activities of Employer.
6. Termination of Agreement. The Employer reserves the right to
terminate this Agreement, notwithstanding the provisions of Paragraph 2,
above, during the term hereof, provided, however, that the Employer has just
cause for termination. "Just cause" shall exist only when one or more of the
following occurs:
(a) Default or violation of any term or condition of this Agreement
by Employee;
(b) Employee's habitual failure to devote his reasonable skills,
efforts and abilities in the service of the Employer;
(c) Death of Employee;
(d) Total disability of Employee for a period of three (3) months.
Employee reserves the right to terminate this Agreement,
notwithstanding the provisions of Paragraph 2, above, during the term hereof
upon default or violation of any term or condition of this Agreement by
Employer, including its failure to use its best efforts in supporting the
performance by Employee.
7. Rights upon Termination. Except as provided in Paragraphs 8
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and 9, hereof, if Employer shall terminate this Agreement during the term
hereof, without just cause, or if Employee shall terminate this Agreement with
just cause, then notwithstanding anything herein to the contrary and in all
events, the Employee shall be entitled to receive as severance pay, within
thirty (30) days of such termination as a lump sum payment, the total
compensation remaining to be paid under Paragraph 4 as of the date of such
termination or the total compensation for one (1) year following the date of
such termination, whichever is greater, which amount shall not be reduced by
any compensation for services received by the Employee after such termination
from any other person or entity.
8. Right of Reimbursement upon Gross Default. If the Employer shall
terminate this Agreement during the term hereof, as a result of the
intentional or gross default or violation or any term or condition of this
Agreement by Employee, or if the Employee shall terminate this Agreement
without just cause, then no further obligation or payments from Employer shall
be due Employee.
9. Change of Control. Upon the occurrence of an event constituting
a Change in Control, then the Employee shall have the right to elect to
terminate this Agreement with or without further cause, at any time prior to
end of the term hereof. Upon such termination, or if following such Change in
Control the Employer shall terminate this Agreement for any reason other than
the intentional or gross default or violation of this Agreement by the
Employee, the Employee shall be entitled to receive as severance pay, within
thirty (30) days of such termination as a lump sum payment, the total
compensation remaining to be paid under Paragraph 4 as of the date of such
termination or the total compensation for three (3) years following the date
of such termination, whichever is greater, which amount shall not be reduced
by any compensation for services by the Employee after such termination from
any other person or entity. For purposes of this Agreement, a "Change in
Control" shall be deemed to have occurred if and when any persons or entities,
other than the existing stockholders of record of Employer as of the
commencement of the term hereof or other than persons or entities controlled
by the existing stockholders, become collectively the beneficial owner,
directly or indirectly, of securities of Employer representing fifty-one
percent (51%) or more of the combined voting power of the Employer's shares of
voting stock then outstanding.
10. Death of Employee. Upon the death of Employee during the term
of this Agreement, or any renewal thereof, Employer shall pay to the legal
representative of Employee's estate any salary accrued but unpaid as of the
date of death.
11. Noncompetition. In consideration of the promises of Employer in
this Agreement, and in order to protect the business and good will of
Employer, Employee agrees that, for a period ending two (2) years after the
termination of his employment by Employer for just cause under Paragraph 6, or
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if Employee shall voluntarily terminate his employment without just cause
under Paragraph 6, he shall not directly or indirectly, alone or as a member
of a partnership or an officer, director, shareholder, agent or Employee of
any person, firm or corporation, initiate any solicitation of hotel,
condominium or resort management business under contract with Employer at the
time of such termination. This prohibition shall only be applicable if such
termination is by the Employer with just cause under Paragraph 6 or by the
Employee without just cause under Paragraph 6. In the event that this section
or any portion thereof shall be held by a court of competent jurisdiction to
be invalid, illegal or unenforceable for any reason whatsoever, it is
expressly understood and agreed that as to such jurisdiction the foregoing
restrictive covenant shall be considered modified to embrace the greatest
possible time and area of restriction then permitted under the laws of the
jurisdiction so holding such invalidity, illegality or unenforceability, and
such invalidity, illegality or unenforceability of this section or any portion
thereof shall not impair the enforceability of this restrictive covenant in
any other jurisdiction or affect the remaining provisions of this Agreement.
12. Arbitration. If any controversy shall arise between the parties
the same shall be submitted to an arbitration for resolution thereof. The
arbitrator shall be a person mutually agreed upon by the parties; provided, if
the parties hereto are unable to agree upon an arbitrator, such determination
shall be made by three (3) arbitrators, one to be appointed by each of the
parties hereto. Each party shall promptly name one such arbitrator and give
written notice thereof to the other party, and in case either party shall fail
so to do within ten (10) days after such notice of the appointment of the
first arbitrator, the party naming the first arbitrator may apply to any
person then sitting as judge of the Circuit Court of the First Circuit, State
of Hawaii, for appointment of a second arbitrator. The two arbitrators thus
appointed in either manner shall appoint a third arbitrator, and in case of
their failure so to do within ten (10) days after appointment of the second
arbitrator, either party may have the third arbitrator appointed by such
judge. The three arbitrators so appointed shall proceed to determine the
matter in question, and the decision of said arbitrators or a majority of them
shall be final, conclusive and binding on both parties hereto, unless the same
shall be vacated, modified or corrected as provided in Chapter 658, Hawaii
Revised Statutes, as the same may from time to time be amended. Each party
shall pay its own witness and attorneys' fees, appointed arbitrator's fee and
one-half (1/2) of: the third arbitrator's fee and all proper costs and expenses
of such arbitration.
13. Prohibition on Assignment. This Agreement cannot be assigned or
transferred, nor can any of the parties hereunder sell, assign or transfer any
of their rights, excepting as specifically otherwise provided.
14. Personal Representatives, Successors and Assigns. This Agreement
shall be binding upon and inure to the benefit of the parties hereto, their
personal representatives, successors and assigns.
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15. Severability. The invalidity or unenforceability of any
provision thereof shall in no way affect the validity or enforceability of
any other provision.
16. Situs and Governing Law. This Employment Agreement shall be
construed and enforced in accordance with the laws of the State of Hawaii.
17. Entire Agreement. This Agreement represents the entire
Agreement between the parties with respect to the subject matter hereof, and
supersedes all prior agreements and understandings with respect thereto. No
change or modification of this Agreement shall be enforceable against any
party unless the same be in writing and signed by the party against whom
enforcement in sought.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seal
on the day and year first above written.
THE CASTLE GROUP, INC.
By /s/ Kelvin Bloom /s/ Steve Townsend
----------------------- ----------------------
Chief Operating Officer "Employee"
"Employer"
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AGREEMENT
THIS AGREEMENT ("Agreement") is made as of the 16th day of April, 1997,
among THE CASTLE GROUP, INC., a corporation organized and existing under the
laws of the State of Utah ("CGI"), KIMO M. KEAWE ("Consultant"), and KEAWE
RESORTS, INC., as corporation organized and existing under the laws of the
State of Hawaii ("KRI").
W I T N E S S E T H:
WHEREAS, Consultant was employed by CGI and its subsidiaries
("Employer") pursuant to that certain employment agreement effective as of
November 10, 1993, but executed July 30, 1994 (the "Employment Agreement");
WHEREAS, upon the terms and conditions described in this Agreement,
Employer and consultant desire to terminate the Employment Agreement and their
employer/employee relationship; and
WHEREAS, CGI is indebted to KRI pursuant to that certain promissory
note dated July 31, 1995, in the original principal amount of $122,000.00 (the
"KRI Note") and KRI and CGI desire to modify the terms of the KRI Note as
provided in this Agreement;
NOW THEREFORE, the parties hereto agree as follows:
1. Consulting Agreement.
(a) Consultant shall render consulting and advisory services to
CGI on marketing, managerial and operational matters beginning on April 16,
1997 (the "Commencement Date"), and continuing to May 15, 1998, subject to
earlier termination as provided in paragraph 1(e) (the "Consulting Term").
Such services shall be rendered during usual business hours upon CGI's written
or oral request. Consultant shall respond to CGI's requests for his services
with reasonable promptness, devoting such time and effort toward his services
hereunder as may be reasonably necessary to perform the same.
(b) In consideration for the consulting services and the other
obligations of Consultant under this Agreement, commencing on the 16th day of
April, 1997, and continuing on the 16th day of each month thereafter during
the Consulting Term, CGI shall pay to Consultant a monthly fee as follows: (1)
$10,000 per month for the seven month period beginning on the Commencement
Date and ending on November 15, 1997; and (2) $5,000 per month for the
six-month period beginning on November 16, 1997, and ending on May 15, 1998
(collectively the "Consulting Payments" and individually a "Consulting
Payment").
(c) If CGI fails to make any Consulting payment when due, and
such failure continues for 30 days after receiving Consultant's written notice
of failure, then, by separate written demand, Consultant may require CGI to
and CGI shall, within 30 days after receiving such demand, pay to: (1)
Consultant the aggregate amount of all unpaid Consulting Payments plus the
aggregate value of all amounts payable by CGI in connection with medical
coverage under this Agreement; and (2) KRI the principal balance and all
accrued but unpaid interest on the KRI Note.
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(d) At all times in providing the consulting services hereunder,
Consultant shall be an independent contractor to CGI. Except as provided in
this Agreement with respect to medical coverage, Consultant shall solely pay
the cost of Consultant's insurance, health insurance, licenses and related
costs in providing such services. Consultant shall be responsible for payment
of all taxes on any and all compensation received by Consultant (including,
without limitation, payments for medical coverage) under this Agreement.
(e) In the event that prior to May 15, 1998, Consultant shall
die, or shall become employed by, a consultant to, or an owner of any
corporation (not including CGI), partnership, limited liability company or
other business entity that is or intends to be engaged in the business of
hotel/condominium resort management within the State of Hawaii, THEN, in any
such event, the Consulting Term shall terminate immediately and the Consulting
Payments plus the payments for medical coverage paid or to be paid to or on
behalf of Consultant for services rendered or for medical coverage shall be
prorated for the particular month of death or other reason and CGI shall only
be responsible for payment of such prorated amounts.
2. Employment Matters.
(a) Effective on the Commencement Date, Consultant hereby resigns
as an officer and employee of the Employer.
(b) Effective on the Commencement Date, the Employment Agreement
is terminated and cancelled for all purposes including, without limitation,
any unexecuted payments or other considerations contained therein.
(c) In the event that (1) within 21 days after the date hereof,
Consultant shall fail to sign and deliver to CGI the general release in the
form attached as Exhibit A (the "Release") or (2) Consultant shall revoke the
Release within 7 days of signing it, THEN, in either event, notwithstanding
any other provision of this Agreement, this Agreement shall be rescinded and
the parties shall be restored to status quo existing just prior to the making
of this Agreement as if this Agreement had never been made. Consultant is
advised to consult with any attorney of his choice, at his own expense,
regarding the terms of the Release before signing it and shall have 21 days in
which to consider the terms of the Release.
(d) Any and all information obtained by or disclosed to
Consultant during his employment with Employer which is not generally known to
the public, including but not limited to Employer's customers, programs,
methods of operation, processes, practices, policies and procedures, are
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strictly confidential and proprietary to Employer, shall be treated as trade
secrets, and shall not be disclosed, discussed or revealed by Consultant to
any other persons, entities or organizations.
3. Other Matters -- CGI.
(a) From the Commencement Date and for the Consulting Term, CGI
shall provide Consultant with medical coverage substantially identical to that
provided by CGI under the Employment Agreement.
(b) CGI shall use its reasonable efforts to pay in full,
principal and interest, the KRI Note on or before November 15, 1997. In the
event that the KRI Note shall not have been paid in full by such date, then
CGI shall make minimum monthly payments of $1,000 on the KRI Note until it
shall have been paid in full.
(c) CGI shall use its reasonable efforts to cause Hawaii National
Bank to release Consultant from that certain guaranty made by Consultant (the
"HNB Guaranty") in connection with a loan of approximately $300,000 (the "HNB
Loan") but CGI does not guaranty that it will be able to obtain such a
release.
(d) CGI shall indemnify and hold Consultant harmless against and
from all claims, demands, suits, actions, rights of action, attorneys' fees,
expenses, damages, judgments and other costs, sustained by Consultant and
caused by, arising out of or resulting from, the failure of CGI to make or
cause to be made payments on the HNB Loan. Consultant shall notify CGI
promptly of such claims, demands, suits, actions and rights of action and
shall give CGI reasonable opportunity to participate in the defense thereof.
4. Other Matters -- Consultant.
(a) Consultant represents to CGI that Consultant is the sole
record and beneficial owner of 322,500 common shares, par value $.02, of the
capital stock of CGI (the "CGI Shares"), free and clear of any pledge, lien,
security interest, charge, claim, encumbrances, mortgage, equity, or
restriction of any kind whatsoever.
(b) Within ten days after the date of this Agreement, Consultant
shall surrender to CGI the stock certificates for the CGI Shares in exchange
for one stock certificate representing 32,250 CGI Shares and for one or more
stock certificates representing the balance of the CGI Shares. CGI shall
cause the stock certificate representing 32,250 CGI Shares to be legended with
a notation substantially as follows:
"Notice is hereby given that transfer of the shares of stock evidenced
by this certificate is subject to the restrictions of a certain
agreement dated as of April 16, 1997, a copy of which is on file in
the office of the corporation. Transfer of the shares of stock
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evidenced by this certificate is subject to the restrictions set forth
in, and may be made only in compliance with the terms of, said agreement.
By accepting this certificate the holder hereof and his, her or its
successors and transferees and assigns become parties to such
agreement and are bound by its provisions."
(c) Consultant hereby grants, sells, conveys, assigns and
transfers to CGI, all right, title and interest of Consultant in and to 32,250
CGI Shares, free and clear of all mortgages, liens, pledges, security
interests, charges, claims, restrictions and encumbrances of any nature
whatsoever effective upon the last to occur of the following conditions
("Conditions Subsequent"):
(1) The payment by CGI of the final Consulting Payment, including
such payment as a result of earlier termination of the Consulting Term as
described in paragraph 1(e);
(2) The payment by CGI in full, principal and interest, of the
KRI Note; and
(3) The payment in full of the HNB Loan or the earlier release
by Hawaii National Bank of consultant from the HNB Guaranty in connection with
the HNB Loan, and, in either case, after notice thereof by CGI to Consultant.
(d) Not later than five days after the last to occur of the
Conditions subsequent, Consultant shall deliver to CGI the stock certificate
representing such 32,250 CGI Shares, duly endorsed in blank or accompanied by
stock transfer powers duly executed in blank, and in proper form for transfer.
5. KRI Note. KRI hereby consents to the modification of the KRI
Note as provided in paragraph 3(b).
6. Governing Law. The validity, construction and performance of
this Agreement shall be governed by the laws of the State of Hawaii.
7. Dispute Resolution; Location of. Any litigation between the
parties which arises out of or relates to this Agreement shall be filed and
tried in a state court of competent jurisdiction in the City and County of
Honolulu, State of Hawaii.
8. Partial Invalidity. In the event that, in any judicial
proceeding, any provision of this Agreement is held invalid or unenforceable
to its full extent, such provision shall be enforced to the fullest extent
permitted by law and the validity of the remaining provisions shall not be
affected thereby.
9. Entire Agreement; Modification. This Agreement contains the sole
understanding between the parties with respect to its subject matter and
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supersedes all agreements or understandings, written or oral, between them
with respect thereto. Neither this Agreement nor any provision hereof may be
modified, waived, discharged or terminated except by a writing executed by the
parties.
10. Titles. As used in this Agreement, the term "paragraph" refers
a paragraph of this Agreement. The titles of the paragraphs of this Agreement
are for the convenience of reference only and shall not be considered in
construing this Agreement.
11. Benefit and Binding Effect. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective heirs,
personal representatives, successors and assigns.
12. Attorneys' Fees and Expenses. In the event of any default by any
party hereunder, the other parties (provided they are not also in default)
shall be entitled to recover from the defaulting party all reasonable
attorney's fees and other costs and expenses incurred as a result of the
default.
Remainder of page intentionally left blank
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IN WITNESS WHEREOF, the parties have signed this Agreement as of the
date first above written.
THE CASTLE GROUP, INC. KEAWE RESORTS, INC.
"CGI" "KRI"
By /s/ Kelvin Bloom By /s/ Kimo Keawe
--------------------------- --------------------
Its Chief Operating Officer Its President
/s/ Kimo Keawe
--------------------
KIMO M. KEAWE
"Consultant"
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Exhibit A
GENERAL RELEASE
On April 16, 1997, I voluntarily resigned as an officer and employee
of THE CASTLE GROUP, INC. and its subsidiaries, such resignation to be
effective April 16, 1997. In consideration for THE CASTLE GROUP, INC.'s
signing and becoming a party to that certain agreement dated as of April 16,
1997, among THE CASTLE GROUP, INC., me and KEAWE RESORTS, INC. (the "Master
Agreement") I hereby make the following promises and agree to the terms of
this Release, intending to be legally bound by those terms and promises.
1. I hereby release THE CASTLE GROUP, INC., its subsidiaries,
affiliates, parents, and their respective successors, predecessors, assigns,
officers, directors, shareholders, employees, managers, agents, attorneys,
officials, owners, divisions and branches (herein collectively referred to as
"the Company") from any and all claims, demands, suits, complaints, actions
and causes of action, whether in law or in equity, with respect to any event,
mater, claim, damage or injury arising out of and/or with respect to my
employment with the Company, including, but not limited to, claims based on
express or implied contract, covenants of fair dealing and good faith, age
discrimination, wrongful discharge, the Age Discrimination in Employment Act,
accrued but unused vacation, Title VII of the Civil Rights Act of 1964, the
Equal Pay Act, the Hawaii employment Practices Act, and any other applicable
federal, state or local laws, ordinances and regulations. This Release does
not, however, apply to, or waive, any right I may have under applicable
worker's compensation laws or employee benefit plans, or to claims that may
arise after the effective date of this Release.
2. I understand that by signing this Release, I am forever
relinquishing my right to sue the Company based on any claim arising out of
and/or with respect to my employment with the Company (other than claims
arising under employee benefit plans or claims for injuries compensable under
workers' compensation laws) and I agree that I will never file any charge or
complaint or maintain any litigation against any of those companies or persons
based on any of the employment-related claims I am giving up by signing this
document.
3. I acknowledge that I have been advised to consult with any
attorney of my choice, at my own expense, regarding the terms of this document
before signing it, and that I was offered twenty-one (21) days in which to
consider the terms of this document before signing it.
4. I understand that I may revoke this Release at any time within
seven (7) days of signing it, by providing written notice to the Company that
I wish to cancel this Release, which must be received by the Company within
this seven (7) day period. The terms of this Release will not be effective
until the seven (7) day revocation period expires. I agree that in the event
this Release shall not have become effective on or before the date one
calendar month after the date of the Master Agreement, the Master Agreement
will be rescinded and the parties thereto will be restored to the status quo
existing just prior to the making of the Master Agreement as if the Master
Agreement had never been made.
5. In the event that any provision, or part thereof, of this Release
is held to be void, voidable, illegal or unenforceable, I understand and agree
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that the remaining portions of this Release shall remain in full force and
effect. Hawaii law shall govern the validity and interpretation of this
Release. I further understand that this Release may not be changed or
altered, except by a written writing signed by an authorized representative
of the Company.
6. I understand that the consideration provided to me under the
terms of the Master Agreement and this Release does not constitute an
admission by the Company that it has violated any law, or other legal
obligations such as those described in paragraph 1 above. I have signed this
document freely and voluntarily and not because of any deception or coercion.
I understand the terms of this document and agree that they are fair and
equitable.
/s/ Kimo M. Keawe
---------------------------
KIMO M. KEAWE
04/16/97
---------------------------
Date Signed
04/24/97
----------------------------
Effective Date of Release
(Eight days after signature)
Exhibit A
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AMENDMENT TO AGREEMENT
THIS AMENDMENT ("Amendment") is made as of the 16th day of April, 1997,
among THE CASTLE GROUP, INC., a corporation organized and existing under the
laws of the State of Utah ("CGI"), KIMO M. KEAWE ("Consultant"), and KEAWE
RESORTS, INC., a corporation organized and existing under the laws of the
State of Hawaii ("KRI").
W I T N E S S E T H:
WHEREAS, Consultant was employed by CGI and its subsidiaries
("Employer") pursuant to that certain employment agreement effective as of
November 10, 1993, but executed July 30, 1994 (the "Employment Agreement");
WHEREAS, Employer and Consultant entered into an Agreement dated April
16, 1997 (hereinafter referred to as the "Agreement") to terminate the
Employment Agreement and their employer/employee relationship; and
WHEREAS, the parties hereto desire to amend the Agreement upon the
following terms and conditions;
NOW THEREFORE, the parties hereto hereby mutually covenant and agree
to amend the Agreement as follows:
1. Paragraph 1 (e), page 2, is modified to provide that the
consulting term and the consulting payments shall not be affected if
Consultant is directly retained by a hotel owner or condominium resort owner.
2. Paragraph 3 (b), page 3, is deleted in its entirety and a new
paragraph 3 (b) is added as follows:
"CGI shall use its reasonable efforts to pay in full, principal
and interest, the KRI note on or before November 15, 1997. In the event that
the KRI note shall not have been paid in full by such date, then CGI shall
make minimum monthly payments of $1,000 on the KRI note until May 15, 1998.
In the event that the KRI note shall not have been paid in full by May 15,
1998, then CGI shall make minimum monthly payments of $2,000 on the KRI note
until May 15, 1999, at which time the KRI note shall become payable in full.
In the event that CGI secures an underwriting or private placement, the KRI
note shall become payable in full."
3. Paragraph 3 (d), page 3, is modified by adding "defend", between
the words "shall indemnify" in the first line.
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4. A new paragraph 3 (e) is hereby added to the Agreement as
follows:
(e) CGI shall forever relinquish its right to sue the
Consultant based on any claim arising out of and/or
with respect to Consultant's employment with CGI.
5. Paragraph 4 (b), Page 3, first sentence, is deleted in its
entirety and a new sentence is added as follows:
On or before September 30, 1997, Consultant shall surrender to
CGI the stock certificates for the CGI Shares in exchange for one stock
certificate representing 32,250 CGI Shares and for one or more stock
certificates representing the balance of the CGI Shares.
IN WITNESS WHEREOF, the parties hereto have executed this
instrument as of the date and year first above written.
THE CASTLE GROUP, INC. KEAWE RESORTS, INC.
"CGI" "KRI"
By /s/ Kelvin Bloom By /s/ Kimo M. Keawe
---------------------- ----------------------
Its COO Its President
/s/ Kimo M. Keawe
---------------------
KIMO M. KEAWE
"Consultant"
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THE CASTLE GROUP, INC.
A Hotel & Resort Management Company
July 31, 1997
Board of Directors
The Castle Group, Inc.
745 Fort Street #1000
Honolulu, Hawaii 96813
Re: Stock Option
This is to inform you that effective as of the above date, I hereby give up
all of my rights, title, interest and claims pertaining to the stock option
(and all past amendments) granted to me as part of my employment contract.
I look forward to continuing to provide my best efforts to The Castle Group
and all of its stockholders.
Sincerely,
/s/ Kelvin Bloom
KELVIN BLOOM
745 Fort Street, Tenth Floor Honolulu, Hawaii 96813 Phone (808) 524-0900
Fax (808) 521-9994
75
<PAGE>
AMENDMENT TO PROMISSORY NOTE
WHEREAS, on or about July 31, 1995, SABURO OR MITSUE MARUYAMA
("Holder") and The Castle Group, Inc. ("CGI") entered into a promissory note
in the amount of $3,600, due and payable on or before January 31, 1997.
WHEREAS, Holder and CGI wish to amend the promissory note under the
following terms and conditions contained herein.
NOW, THEREFORE, the Holder and CGI agree to amend the promissory note
dated July 31, 1995 as follows:
1. The due date for the promissory note shall be
changed from January 1, 1997 to August 1, 1998.
All other terms and conditions of the Promissory Note dated July 31,
1995 shall remain in full force and effect, except for the above amendment.
THE CASTLE GROUP, INC. SABURO OR MITSUE MARUYAMA
By /s/ Rick Wall By /s/ Saburo Maruyama
--------------------- ------------------------
Its Chairman & CEO Saburo Maruyama
By /s/ Motoko Takahashi
---------------------
Its Secretary
76
<PAGE>
AMENDMENT TO PROMISSORY NOTE
WHEREAS, on or about July 31, 1995, MICHAEL S. NITTA ("Holder") and The
Castle Group, Inc. ("CGI") entered into a promissory note in the amount of
$16,800, due and payable on or before January 31, 1997.
WHEREAS, Holder and CGI wish to amend the promissory note under the
following terms and conditions contained herein.
NOW, THEREFORE, the Holder and CGI agree to amend the promissory note
dated July 31, 1995 as follows:
1. The due date for the promissory note shall be
changed from January 1, 1997 to August 1, 1998.
All other terms and conditions of the Promissory Note dated July 31,
1995 shall remain in full force and effect, except for the above amendment.
THE CASTLE GROUP, INC. MICHAEL S. NITTA
By /s/ Rick Wall By /s/ Michael S. Nitta
----------------------- -----------------------
Its Chairman & CEO Michael S. Nitta
By /s/ Motoko Takahashi
-----------------------
Its Secretary
77
<PAGE>
AMENDMENT TO PROMISSORY NOTE
WHEREAS, on or about July 31, 1995, KEAWE RESORTS, INC. ("Holder") and
The Castle Group, Inc. ("CGI") entered into a promissory note in the amount of
$122,000, due and payable on or before January 31, 1997.
WHEREAS, Holder and CGI wish to amend the promissory note under the
following terms and conditions contained herein.
NOW, THEREFORE, the Holder and CGI agree to amend the promissory note
dated July 31, 1995 as follows:
1. The due date for the promissory note shall be
changed from January 1, 1997 to August 1, 1998.
All other terms and conditions of the Promissory Note dated July 31,
1995 shall remain in full force and effect, except for the above amendment.
THE CASTLE GROUP, INC. KEAWE RESORTS, INC.
By /s/ Rick Wall By /s/ Kimo M. Keawe
--------------------- -----------------------
Its Chairman & CEO Its President
By /s/ Motoko Takahashi
---------------------
Its Secretary
78
<PAGE>
AMENDMENT TO PROMISSORY NOTE
WHEREAS, on or about July 31, 1995, M.K. & SONS, INC. ("Holder") and
The Castle Group, Inc. ("CGI") entered into a promissory note in the amount of
$12,000, due and payable on or before January 31, 1997.
WHEREAS, Holder and CGI wish to amend the promissory note under the
following terms and conditions contained herein.
NOW, THEREFORE, the Holder and CGI agree to amend the promissory note
dated July 31, 1995 as follows:
1. The due date for the promissory note shall be
changed from January 1, 1997 to August 1, 1998.
All other terms and conditions of the Promissory Note dated July 31,
1995 shall remain in full force and effect, except for the above amendment.
THE CASTLE GROUP, INC. M.K. & SONS, INC.
By /s/ Rick Wall By /s/ Masamichi Kato
----------------------- ----------------------
Its Chairman & CEO Its President
By /s/ Motoko Takahashi By /s/ Saburo Maruyama
----------------------- ----------------------
Its Secretary Its Secretary
79
<PAGE>
AMENDMENT TO PROMISSORY NOTE
WHEREAS, on or about July 31, 1995, SHIGERU SHINNO ("Holder") and THE
CASTLE GROUP, INC. ("CGI") entered into a promissory note in the amount of
$6,000, due and payable on or before January 31, 1997.
WHEREAS, Holder and CGI wish to amend the promissory note under the
following terms and conditions contained herein.
NOW, THEREFORE, the Holder and CGI agree to amend the promissory note
dated July 31, 1995 as follows:
1. The due date for the promissory note shall be
changed from January 1, 1997 to August 1, 1998.
All other terms and conditions of the Promissory Note dated July 31,
1995 shall remain in full force and effect, except for the above amendment.
THE CASTLE GROUP, INC. SHIGERU SHINNO
By /s/ Rick Wall By /s/ Shigeru Shinno
----------------------- -----------------------
Its Chairman & CEO SHIGERU SHINNO
By /s/ Motoko Takahashi
-----------------------
Its Secretary
80
<PAGE>
AMENDMENT TO PROMISSORY NOTE
WHEREAS, on or about July 31, 1995, T.N. GROUP HAWAII, INC. ("Holder")
and THE CASTLE GROUP, INC. ("CGI") entered into a promissory note in the
amount of $6,000, due and payable on or before January 31, 1997.
WHEREAS, Holder and CGI wish to amend the promissory note under the
following terms and conditions contained herein.
NOW, THEREFORE, the Holder and CGI agree to amend the promissory note
dated July 31, 1995 as follows:
1. The due date for the promissory note shall be
changed from January 1, 1997 to August 1, 1998.
All other terms and conditions of the Promissory Note dated July 31,
1995 shall remain in full force and effect, except for the above amendment.
THE CASTLE GROUP, INC. T.N. GROUP HAWAII, INC.
By /s/ Rick Wall By /s/ Atsushi Horigome
--------------------- -----------------------
Its Chairman & CEO Its President
By /s/ Motoko Takahashi By /s/ Etsuro Matsumoto
--------------------- -----------------------
Its Secretary Its Secretary
81
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C> <C>
<PERIOD-TYPE> 12-Mos 12-Mos
<FISCAL-YEAR-END> Jul-31-1997 Jul-31-1996
<PERIOD-END> Jul-31-1997 Jul-31-1996
<CASH> 268,938 220,951
<SECURITIES> 0 0
<RECEIVABLES> 1,043,503 1,127,646
<ALLOWANCES> 25,405 18,200
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,396,756 1,623,002
<PP&E> 205,529 108,785
<DEPRECIATION> 122,958 108,785
<TOTAL-ASSETS> 1,616,516 2,031,346
<CURRENT-LIABILITIES> 1,309,431 2,387,733
<BONDS> 0 0
0 0
0 0
<COMMON> 101,781 101,781
<OTHER-SE> 38,904 ( 534,398)
<TOTAL-LIABILITY-AND-EQUITY> 1,616,516 2,031,346
<SALES> 6,185,798 4,111,626
<TOTAL-REVENUES> 6,185,798 4,111,626
<CGS> 0 0
<TOTAL-COSTS> 5,945,312 4,588,622
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 51,934 67,966
<INCOME-PRETAX> 188,552 ( 544,962)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 188,552 ( 544,962)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 188,552 ( 544,962)
<EPS-PRIMARY> .04 ( .11)
<EPS-DILUTED> .04 ( .11)
<PAGE>
</TABLE>
