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U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission file number 0-23338
THE CASTLE GROUP, INC.
(Exact name of small business issuer as specified in its charter)
UTAH 99-037845
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
745 Fort Street, Tenth Floor
Honolulu, Hawaii 96813
Issuer's telephone number: (808) 524-0900
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [ x ] No [ ]
Number of shares outstanding of each of the Registrant's classes of stock,
as of October 31, 1997:
Common stock, $.02 par value - 5,311,130
Transitional Small Business Disclosure Format (check one):
Yes [ x ] No [ ]
Page 1 of 20 sequentially numbered pages
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THE CASTLE GROUP, INC.
FORM 10-QSB
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of October 31, 1997 (unaudited)
and July 31, 1997................................................. 3
Consolidated Statements of Operations for the Quarter
ended October 31, 1997 and October 31, 1996 (unaudited)............ 4
Consolidated Statement of Cash Flows for the Quarter Ended
October 31, 1997 and October 31, 1996 (unaudited)................. 5
Notes to the Consolidated Financial Statements (unaudited).......... 6
Item 2. Management's Discussion and Analysis and Plan of
Operation................................................. 10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders........ 16
Item 5. Other Information........................................... 16
Item 6. Exhibits and Reports on Form 8-K............................ 16
SIGNATURES........................................................... 20
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PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated Balance Sheet - October 31, 1997 (Unaudited) and July 31, 1997
ASSETS October 1997 July 1997
Current Assets
Cash $ 110,242 $ 268,938
Accounts Receivable, Net 802,181 820,368
Prepaid Expenses 146,144 89,779
Restricted Cash 19,941 19,941
Due from Related Party 269,512 197,730
------------- -------------
Total Current Assets 1,348,020 1,396,756
Non Current Assets ------------- -------------
Furniture Fixtures & Equipment, Net 79,343 82,571
Investment in HBII Timeshare Program 60,691 61,240
Deposits & Other Assets 71,330 63,021
Intangibles, Net of Amortization 10,342 12,928
------------- -------------
Total Non Current Assets 221,706 219,760
------------- -------------
TOTAL ASSETS $ 1,569,726 $ 1,616,516
============= =============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 793,759 $ 613,791
Due to Related Parties 18,000 18,000
Vacation Payable 88,099 109,233
Wages Payable 81,333 84,567
Taxes Payable 11,457 36,143
Notes and Contract Payable, Current 250,000 250,000
Deferred Income 50,820 76,230
Other Accrued Liabilities 102,008 121,467
------------- -------------
Total Current Liabilities 1,395,476 1,309,431
Long Term Debt 166,400 166,400
------------- -------------
Total Liabilities 1,561,876 1,475,831
Stockholders' Equity ------------- -------------
Common stock, $.02 par, 20,000,000 shares
authorized, 5,311,130 and 5,089,030 issued
& outstanding, respectively 106,223 101,781
Common stock subscribed and unissued,
222,100 shares 0 384,750
Capital in excess of par 2,539,175 2,118,222
Accumulated Deficit (2,637,548) (2,464,068)
------------- -------------
Total Stockholders' Equity 7,850 140,685
------------- -------------
Total Liabilities and Stockholders' Equity $ 1,569,726 $ 1,616,516
============= =============
The accompanying notes are an integral part of the financial statements.
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated Statement of Operations
for the quarter ended October 31, 1997 and 1996
(Unaudited)
Three Months Ended
----------------------------
October 1997 October 1996
------------- -------------
Revenue
Management Fees $ 761,409 $ 783,504
Hotel Operating Revenues 423,842 461,684
Other Income 162,624 196,375
------------- -------------
Total Revenues 1,347,875 1,441,563
Expenses
Payroll and benefits 478,386 468,477
Hotel Operating Expenses 477,715 481,092
Professional fees 57,965 22,819
Reservations 206,505 238,273
Depreciation and Amortization 7,605 118,922
Rent 104,087 102,143
Travel and entertainment 49,666 5,507
Office expenses 15,209 14,864
Utilities 11,371 9,340
Taxes, other than income 33,174 40,176
Advertising and marketing 24,659 26,456
Insurance 18,235 27,948
Other 24,876 18,190
------------- -------------
Total Expenses 1,509,453 1,574,207
------------- -------------
Operating Profit (Loss) ( 161,578) ( 132,644)
Other Expenses
Interest Expense 11,902 13,681
------------- -------------
Net Profit ( Loss ) ( 173,480) ( 146,325)
============= =============
Primary and Fully
Diluted Per Share Data
Net Profit ( Loss ) ($ .03) ($ .03)
============= =============
The accompanying notes are an integral part of the financial statements.
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated statement of cash flows
Three months ended October 31, 1997 and 1996
( Unaudited )
Three Months Ended
October 1997 October 1996
------------- --------------
Cash Flows From Operating Activities
Net Loss ($ 173,480) ($ 146,325)
Adjustments to reconcile net loss to net
cash used by operating activities-
Depreciation and amortization 7,605 118,921
Amortization of deferred compensation
expense 0 12,500
Changes in assets and liabilities-
Decrease (Increase) in accounts receivable 18,187 135,428
Decrease (Increase) in due from
related party ( 71,782) ( 66,256)
Decrease (Increase) in prepaid expenses ( 56,365) 10,717
Decrease (Increase) in deposits ( 8,309) 30,000
Increase (Decrease) in accounts payable 179,968 ( 93,079)
Increase (Decrease) in wages payable ( 3,234) 33,261
Increase (Decrease) in vacation payable ( 21,134) ( 19,234)
Increase (Decrease) in taxes payable ( 24,686) ( 18,298)
Increase (Decrease) in accrued liabilities ( 19,459) 10,344
-------------- --------------
Net cash flow from operating activities ( 172,689) 7,979
-------------- --------------
Cash Flows From Investing Activities
Purchase of furniture, fixtures & equipment ( 1,791) ( 3,749)
Stock subscription received 40,645 0
Investment in HBII Timeshare 549 0
-------------- --------------
Net cash flow from investing activities 39,403 ( 3,749)
Cash Flows from Financing Activities
Repayment of Long Term Debt ( 25,410) ( 25,410)
-------------- --------------
Net cash flow from financing activities ( 25,410) ( 25,410)
-------------- --------------
Net Increase (Decrease) in Cash ( 158,696) ( 21,180)
Cash at Beginning of Period 268,938 220,951
-------------- --------------
Cash at End of Period 110,242 199,771
============== ==============
Supplemental disclosures of cash flow
Information:
Cash paid during the year for interest 11,901 13,681
============== ==============
The accompanying notes are an integral part of the financial statements.
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statement
The accompanying consolidated financial statements of The Castle Group,
Inc. and subsidiary for the three months ended October 31, 1997 have been
prepared in accordance with generally accepted accounting principles. These
financial statements have not been audited by independent public
accountants, but include all adjustments (consisting of only normal
recurring adjustments) which are, in the opinion of management , necessary
for a fair presentation of the financial condition, results of operations
and cash flows for such periods. The consolidated financial statements do
not include all disclosures associated with annual financial statements and
accordingly, should be read in conjunction with the annual consolidated
financial statements and notes thereto included in the Company's Annual
Report on Form 10-KSB for the year ended July 31, 1997, as filed with the
Securities and Exchange Commission. A copy of this report is available from
the Company upon request. The results of operations for the three months
ended October 31, 1997 are not necessarily indicative of the operating
results for the remainder of the year.
PER SHARE DATA-
Per share data is based on the weighted average number of shares
outstanding during the period without regards to common stock equivalents
because of their anti-dilutive effect. As of October 31, 1997 and July 31,
1997, the weighted average shares outstanding was 5,311,130 and 5,109,903,
respectively.
FURNITURE, FIXTURES AND EQUIPMENT-
Furniture, fixtures and equipment are recorded at cost. When assets
are retired, sold or otherwise disposed of, the cost and the related
accumulated depreciation of the asset is removed from the accounts, and any
resulting gain or loss is reflected in the income statement for the period.
The cost of maintenance and repairs are charged to income as the
expense is incurred. Renewals and betterments are capitalized in the
accounts and depreciated over the estimated useful life of the asset
acquired.
At October 31, 1997 and July 31, 1997, furniture, fixtures and
equipment consisted of the following:
10/31/97 07/31/97
--------- ---------
Office Furniture and Equipment 207,320 205,529
Less Accumulated Depreciation (127,977) (122,958)
--------- ---------
Net Book Value 79,343 82,571
========= =========
Depreciation is computed using the declining balance and straight-line
methods over the estimated useful life of the assets (5 to 7 years).
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INTANGIBLES-
Intangible assets consist of organizational costs which are amortized
on a straight-line basis over 5 years. At October 31, 1997 and July 31,
1997, the balances of this intangible was as follows:
10/31/97 07/31/97
---------- ----------
Organizational Costs 51,714 51,714
Less Accumulated Amortization ( 41,372) ( 38,786)
---------- ----------
Net Book Value 10,342 12,928
========== ==========
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.
RELATED PARTY TRANSACTIONS: HANALEI BAY INTERNATIONAL INVESTORS-
The Company has a hotel management agreement with Hanalei Bay
International Investors (HBII) to manage the Hanalei Bay Resort (HBR). The
managing general partner of HBII is also the Chairman and Chief Executive
Officer of the Castle Group, Inc. Under the agreement, the Company is to
receive management and incentive fees based on a percentage of gross total
revenue and net income respectively. The Company also receives reservation
fees based on a percentage of gross room revenues and a marketing fee based
on a percentage of gross revenue. At October 31, 1997 and July 31, 1997,
The Company had receivable balances of $269,512 and $197,730, respectively,
from HBII.
LEASES-
The Company has leases for office space, vehicles and equipment
expiring at various dates through 1999. The office leases are renewable for
an additional five years. In May 1996, the Company leased a hotel under a
non-cancelable agreement expiring in March 1998. The lease may be
renewed for an additional four years. The lessor is entitled to a
percentage of the operating profits for the hotel in excess of certain
thresholds of return until April 1997. All assets and liabilities of the
hotel operations have been included as net assets in the Company's
operations.
At October 31, 1997, the future minimum rental commitment under these
leases were as follows:
Schedule of minimum lease payments
1998 863,000
1999 261,000
----------
Total 1,124,000
==========
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COMMON STOCK WARRANTS-
In May 1994, the Company issued warrants to acquire up to 25,000 shares
of common stock for $1.25 per share, exercisable through May 1999 in
exchange for consulting services rendered. No warrants have been exercised
as of October 31, 1997.
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 and in 1997, the options
were forfeited by the officer.
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
Reservations Center Corp., which is wholly owned by a director/ stockholder
of the Company. The option may be exercised between May 1997 and 2000 and
had not been exercised as of October 31, 1997.
STOCK SUBSCRIPTIONS-
In July 1997, 222,100 common shares were subscribed at $2 per share.
As of October 31, 1997, the Company received $425,399, net of stock issuance
expenses of $18,806. The shares were issued in November of 1997 to the
subscriber.
LITIGATION
There are various claims and lawsuits pending against the Company
involving complaints which are
normal and reasonably 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.
There were no new lawsuits filed during the quarter ended October 31, 1997.
INCOME TAXES-
For the fiscal year ended July 31, 1994, the Company implemented the
provisions of Statement of Financial Accounting Standards No. 109 (SFAS No.
109), "Accounting for Income Taxes," which changed the criteria for
measuring the provisions for income taxes and recognizing deferred tax
assets and liabilities on the balance sheet. Under the provisions of SFAS
No. 109, the Company elected not to restate prior years and has determined
that the cumulative effect of implementation was immaterial.
No net deferred tax asset was recorded in accordance with SFAS No. 109
because it could not be reasonably determined if the net operating loss
available to carryforward would be used by the Company.
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Significant components of the Company's deferred tax assets and
liabilities as of October 31, 1997 and 1996 are:
10/31/97 07/31/97
----------- -----------
Deferred tax assets-
Vacation Pay 7,000 7,000
Noncompetition agreement 240,000 240,000
Deferred Income 31,000 31,000
Net Operating Loss 790,000 738,000
----------- -----------
Deferred tax asset 1,068,000 1,016,000
Deferred tax liability-
Furniture, fixtures and equipment ( 8,000) ( 8,000)
----------- -----------
Net Deferred Tax Asset 1,060,000 1,008,000
Valuation Allowance (1,060,000) (1,008,000)
----------- -----------
-0- -0-
=========== ===========
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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
FORWARD LOOKING STATEMENTS - "RISK FACTORS"
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains forward-looking statements that are subject
to a number of risks and uncertainties. These risks and uncertainties could
cause actual results to differ materially from the results anticipated in
such forward-looking statements.
GENERAL-
The Company is a Utah corporation which earns its revenues primarily by
providing management, reservations, and sales and marketing services to
hotels and resorts. The Company currently operates within the State of
Hawaii and the Commonwealth of Saipan under the trade names "Hawaiian
Pacific Resorts," and Castle Resorts and Hotels."
The Company's revenues are derived from management fees, sales and
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, reservation
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 October 31, 1997, the Company had 29 contracts covering 3,138
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 which is based on gross revenues. In
some cased, the Company also participates in the profitability of the
properties it manages and may earn an incentive fee which is based on the
net operating profits of the managed property. Sales and marketing and
reservations 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
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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 interests in fee or leasehold.
With virtually all of the key personnel and corporate infrastructure
in place, the focus for the Company shall be to continue its success in
increasing revenues through the expansion of its client base; and to
accomplish this at a minimal incremental cost. Although no assurances can
be given, based on the success experienced to date, management believes that
it will be able to further add to its portfolio of management contracts.
Management also believes, although no assurances can be given, that the
Company will be able to handle a much larger customer base without expending
significant amounts of additional resources due to the solid foundation and
management team which the Company currently has.
The Company is presently in the negotiating stages with various other
properties located throughout the State of Hawaii and in other Pacific Rim
regions.
RESULTS OF OPERATIONS-
FOR THE QUARTERS ENDED OCTOBER 31, 1997 AND 1996
SALES
For the quarters ended October 31, 1997 and 1996, the Company had total
revenues of $1,347,875 and $1,441,563, respectively, a decrease of $95,688
or 7%. Operating expenses for the quarters ended October 31, 1997 and 1996
were $1,521,355 and $1,587,888, respectively, a decrease of $66,533 or 4%,
which contributed to a net loss for 1997 of $173,480 as compared with a net
loss of $146,325 for the prior year, a decrease of $27,155 or 19%.
The decrease in revenues for the quarter ended October 31, 1997 as
opposed to the prior year is attributed to a decrease in hotel revenues from
two properties managed by the Company. The first property is located in
Maui and revenues for 1997 were $45,000 lower than 1996; the other property
is located on Oahu and net fees from this property were $32,500 lower than
1996. Much of this variance occurred during the one month ended October,
1997 and management is confident, although no assurance can be given, that
the revenue decrease when compared to the prior year shall be made up in the
busier months of January through March of 1998. Also included in 1996 is
$45,000 in other income resulting from centralized purchasing commissions
earned on the renovation of one of the properties managed by the Company.
COSTS AND EXPENSES
With the 7% decrease in revenues, operating expenses decreased by 4%
for the quarter ended October 31, 1997 as opposed to the prior year.
Professional fees increased by $35,100 as a result of a consulting
agreement the Company entered into with GC Corporation to assist the Company
in attaining additional management contracts. The agreement provides for a
payment of $9,980 per month and is cancelable upon one month's notice.
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Reservations expenses decreased by $31,768 as a result of the
renegotiated agreement with Hawaii Reservations Center Corp. ("HRCC"). In
1996, reservation fees paid to HRCC were based upon a fixed monthly amount
plus a percentage of certain revenues. The new agreement is based on a
percentage of revenues, subject to a minimum monthly fee which is lower than
the fixed fees incurred in 1996.
Depreciation and amortization decreased by $111,317 as a result of the
non-competition fees being fully amortized in October of 1996 and therefore,
this expense of $66,666 for the quarter ended October
31, 1997 was non-existent. Additionally, in 1996 the Company amortized
$42,333 of property rights which was also fully amortized as of June, 1997
and this expense was also non-existent for the quarter ended October 31,
1997.
Travel and entertainment expenses increased by $44,159 over the $5,507
expense incurred in 1996. The increase is attributable to travel expenses
for the Company's executives to the mainland, Saipan and other Pacific Rim
countries to meet with the owners of properties which the Company is
targeting.
Insurance costs decreased by $9,713 to $18,235 when compared to the
prior year as a result of a renegotiated insurance policy which encompassed
the Company and some of the hotels managed by the Company. Although the
policy premiums decreased substantially, the coverages provided to the
Company increased.
NET INCOME (LOSS)
The Company reported a net loss of $173,480 and a net loss of $146,325
for the quarters ended October 31, 1997 and 1996, respectively.
As discussed previously, the decreases in fees from two properties
managed by the Company, although offset by decreases in operating expenses,
resulted in the Company's loss increasing by $27,155 when compared to the
prior year.
LIQUIDITY AND CAPITAL RESOURCES-
As of October 31, 1997, total current assets were $1,348,020 and
consisted primarily of $802,181 in accounts receivable. Total current
liabilities of $1,395,476 exceeded total current assets by $47,456.
The Company's primary sources of working capital are cash flow from
operations and borrowing. Net cash used in operations was $172,689 for the
quarter ended October 31, 1997 as compared to cash provided ,of $7,979 for
the prior year. Net cash provided by investing activities was $49,403 as
compared to a deficit of $3,749 for the quarters ended October 31, 1997 and
1996, respectively. Net cash used to retire long term debt was $25,410 for
each of the quarters ended October 31, 1997 and 1996.
The Company had unrestricted cash of $110,242 and $199,771 at October
31, 1997 and 1996, respectively.
In July of 1997, the Company sold 222,100 shares of "unregistered" and
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"restricted" stock for a gross price of $2.00 per share, or an aggregate of
$425,399 (net of commissions and other issuance fees) in a private
placement. The shares were subscribed and $384,754 was received in July
1997, with the balance of $40,645 received in September 1997. The stock
certificate was issued in November of 1997.
The Company has a $300,000 line of credit which is guaranteed by four
of the directors of the Company. The line expired in September 1997. The
Company extended the line of credit through April 15, 1998. During the
fiscal year July 1995, the Company drew $275,000 against the line, and in
April of 1997, repaid $25,000 leaving a balance of $50,000.
In November of 1997, the Company secured an additional line of credit
for $250,000 from a local bank. The line of credit is due in May of 1998
and is personally guaranteed by the Chairman and Chief Executive Officer of
the Company.
The Company had a net working capital deficit of $47,456 and net
working capital of $87,325 as of October 31, 1997 and July 31, 1997,
respectively.
As of October 31, 1997 and July 31, 1997, net working capital included
liabilities due to affiliates in the amount of $42,894 and $40,128,
consisting of $18,000 representing the undistributed cost on the acquisition
of the stock of KRI, Inc. and interest of $24,894 and $22,128, respectively.
Also included in net working capital is $50,820 and $76,230 in unamortized
deferred revenues related to a signing bonus paid to the Company by one of
its suppliers in April 1994 which is being amortized over three years.
The Company has, in the past, met its financial obligations through its
line of credit, the issuance of notes to the former stockholders of KRI,
Inc. and a private placement of stock in 1997. The Company currently has
available an additional $50,000 on its line of credit, and in November of
1997, received an additional $250,000 line from another local banking
institution. On November 4, 1997, the Company registered with the Securities
and Exchange Commission on form SB-2, 1,600,000 shares of its Common Stock.
Although no assurances may be given, the Company plans to obtain additional
capital through a secondary offering of the 1,600,000 shares of Common Stock.
Management believes that it has increased its revenue base to a level
which will sustain an annual net operating profit, allowing the Company to
meet its current obligations. Management also believes that the
combination of the net proceeds from the secondary offering, net cashflow
generated from operations and the future availability of credit facilities
will be sufficient to fund the operations of the Company in the future.
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 in the State of Hawaii. At October 31, 1997, the Company had 29
management or sales, reservations and marketing contracts covering 3,128
rooms. The Company also leases and operates as a hotel 167 rooms in a
condominium complex domiciled in Waikiki.
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The properties represented by the Company appeal 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 room rates of $40. The Company believes that the
availability of differing product lines appeals to all levels of business or
leisure traveler.
The Company has experienced significant growth since it began
operations in November of 1993. From inception to October 31, 1997, the
number of contracts has more than doubled, from 13 to 29 and the number of
rooms managed also increased from 1,684 to 3,138.
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 Rim
countries. 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 growth through joint venture investments and
leases and/or acquisitions of management contracts and/or companies.
On August 1, 1997, the Company was successful in entering the foreign
market of the Pacific Basin when it consummated a management agreement with
the Aquarius Beach Tower, a 68 unit luxury resort located in Saipan.
Although no assurance can be given, management believes that it will be able
to effectively manage this property and to also continue its growth in the
Pacific Basin.
Effective November 1, 1997, the Company acquired the management
contract for approximately 130 rooms located in the Kiahuna Plantation
Resort, an upscale condominium resort located in Poipu, Kauai.
With the increase in 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. At October 31, 1997, the Company employed approximately 650 employees
and managed an additional 350 on behalf of the property owners.
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 October 31, 1997, the
Company has received a total of $158,468 from this investment. Of the
funds received, $39,617 represents a return of the initial investment and
$118,851 represents a gain to the Company. Although no assurance can be
given, management is confident that the HBII reorganization plan shall
continue to be profitable.
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, Inc.,
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reservation services for hotels and resorts managed by the Company were
provided by KRI, Inc. The fees 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, Inc., which consisted of office
equipment. As consideration for the equipment, HRCC agreed to employ the
reservation department employees of KRI, Inc. And to assume the liability
for the accrued vacation of such employees. The Company 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 new agreement, the fees paid to HRCC are 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.
15
<PAGE>
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders for the
quarter ended October 31, 1997.
Item 5. OTHER INFORMATION
There is no other information being reported for the current quarter.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits designated by an asterisk are incorporated herein by
reference. The exhibits with page references are filed herewith.
Exhibit Page
Number Description Number
- ---------------------------------------------------------------------------
2.1 Restated Articles of Incorporation, incorporated by
reference to Exhibit 2.1 to the Company's Registration
Statement on 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. *
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. *
16
<PAGE>
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,
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. *
17
<PAGE>
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 incorporated
by reference to Exhibit 6.17 to the Company's Annual Report on
Form 10-KSB for the year ended July 31, 1997. *
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 incorporated by
reference to Exhibit 6.18 to the Company's Annual Report on
Form 10-KSB for the year ended July 31, 1997. *
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 incorporated by
reference to Exhibit 6.19 to the Company's Annual Report on
Form 10-KSB for the year ended July 31, 1997. *
6.20 Stock Option Agreement dated May 21, 1997 between Hawaii
Reservations Center Corp. and The Castle Group, Inc.
incorporated by reference to Exhibit 6.20 to the Company's
Annual Report on Form 10-KSB for the year ended July 31, 1997. *
6.21 Steve Townsend Employment Agreement dated May 31, 1997,
effective as of July 28, 1997 between Steve Townsend and the
Company incorporated by reference to Exhibit 6.21 to the
Company's Annual Report on Form 10-KSB for the year ended July
31, 1997. *
6.22 Consulting Agreement between Kimo M. Keawe, Keawe Resorts,
Inc. and the Company dated April 16, 1997 incorporated by
reference to Exhibit 6.22 to the Company's Annual Report on
Form 10-KSB for the year ended July 31, 1997. *
6.23 Amendment to Consulting Agreement between Kimo M. Keawe, Keawe
Resorts, Inc. and The Castle Group, Inc. dated April 16, 1997
incorporated by reference to Exhibit 6.23 to the Company's
Annual Report on Form 10-KSB for the year ended July 31, 1997. *
18
<PAGE>
6.24 Letter dated July 31, 1997 from Kelvin Bloom forfeiting his
stock option and all amendments incorporated by reference to
Exhibit 6.24 to the Company's Annual Report on Form 10-KSB for
the year ended July 31, 1997. *
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 incorporated by reference to Exhibit 6.25 to the
Company's Annual Report on Form 10-KSB for the year ended July
31, 1997. *
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.
(b) Reports on Form 8-K
On September 26, 1997, the Company filed Form 8-K, reporting the
resignation of Mr. Akira Fujii from the Board of Directors effective as of
September 22, 1997. Mr. Fujii did not have any disagreements with the
Company or any of the remaining Board of Directors.
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.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
THE CASTLE GROUP, INC.
(Registrant)
December 15, 1997 /s/ Rick Wall
-----------------------------
Chairman of the Board and
Chief Executive Officer
December 15, 1997 /s/ Michael S. Nitta
-----------------------------
Chief Financial Officer and
Vice President Finance
20
<PAGE>
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