<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
[ ] TRANSITION REPORT PURSUANT TO 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 November 30, 1998:
Common stock, $.02 par value - 5,311,130
Transitional Small Business Disclosure Format (check one):
Yes [ x ] No [ ]
Page 1 of 28 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 Sheets as of October 31, 1998 (unaudited)
and July 31, 1998................................................ 3
Consolidated Statements of Operations for the Quarter
ended October 31, 1998 and October 31, 1997 (unaudited)........... 4
Consolidated Statements of Cash Flows for the Quarter Ended
October 31, 1998 and October 31, 1997 (unaudited)................ 5
Notes to the Consolidated Financial Statements (unaudited)......... 6
Item 2. Management's Discussion and Analysis and
Plan of Operation........................................ 14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders....... 21
Item 5. Other Information......................................... 21
Item 6. Exhibits and Reports on Form 8-K.......................... 21
SIGNATURES......................................................... 28
2
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PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated Balance Sheets - October 31, 1998 (Unaudited) and July 31, 1998
ASSETS October 1998 July 1998
Current Assets
Cash $ 171,120 $ 245,969
Accounts Receivable, Net 1,121,471 1,013,418
Prepaid Expenses 36,292 22,074
Restricted Cash 19,941 19,941
Notes Receivable, current (Note 3) 530,600 530,600
Due from Related Parties 964,593 844,798
------------- -------------
Total Current Assets 2,844,017 2,676,800
Other Assets: ------------- -------------
Furniture Fixtures & Equipment, Net 64,439 61,136
Notes receivable, noncurrent (Note 3) 154,400 154,400
Investment in HBII Timeshare Program 57,602 58,906
Deposits 1,750 25,647
Organization Costs -- 2,585
------------- -------------
Total Other Assets 213,752 241,538
------------- -------------
TOTAL ASSETS $ 3,122,208 $ 2,979,474
LIABILITIES & STOCKHOLDERS' EQUITY ============= =============
Current Liabilities
Accounts Payable $ 1,037,020 $ 889,407
Vacation Payable 114,455 108,855
Wages Payable 85,190 76,485
Taxes Payable 28,998 26,359
Due to Related Parties, current 505,368 374,500
Notes Payable, Current 750,000 750,000
Deferred Income 26,667 26,667
Other Accrued Liabilities 268,174 281,905
------------- -------------
Total Current Liabilities 2,815,872 2,534,178
Deferred Income 122,482 53,333
Due to Related Parties, non-current -- 152,500
------------- -------------
Total Liabilities 2,938,354 2,740,011
Stockholders' Equity
Common stock, $.02 par, 20,000,000 shares
authorized, 5,311,130 issued and outstanding 106,223 106,223
Capital in excess of par 2,539,175 2,539,175
Accumulated Deficit (2,461,544) (2,405,935)
------------- -------------
Total Stockholders' Equity 183,854 239,463
------------- -------------
Total Liabilities and Stockholders' Equity $ 3,122,208 $ 2,979,474
============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
3
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Operations
for the quarter ended October 31, 1998 and 1997
(Unaudited)
Three Months Ended
October 1998 October 1997
------------- -------------
Revenue
Hotel revenue and management fees $ 910,181 $ 1,185,251
Other Income 210,415 162,624
------------- -------------
Total Revenues 1,120,596 1,347,875
Expenses
Payroll and benefits 525,394 478,386
Hotel Operating Expenses 1,655 477,715
Professional fees 35,384 57,965
Reservations 257,369 206,505
Depreciation and Amortization 8,736 7,605
Rent 100,590 104,087
Travel and entertainment 46,295 49,666
Office expenses 13,858 15,209
Utilities 12,204 11,371
Taxes, other than income 45,133 33,174
Advertising and marketing 33,559 24,659
Outside sales offices 35,358 11,430
Insurance 17,391 18,235
Other 10,123 13,446
------------- -------------
Total Expenses 1,143,049 1,509,453
------------- -------------
Operating Loss ( 22,453) ( 161,578)
Other Expenses
Interest Expense 33,159 11,902
------------- -------------
Net Loss $( 55,612) $( 173,480)
============= =============
Per Share Data
Basic Earnings
Net Loss $( .01) $( .03)
Diluted Earnings
Net Loss $( .01) $( .03)
The accompanying notes are an integral part of the consolidated financial
statements.
4
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Three months ended October 31, 1998 and 1997
( Unaudited )
Three Months Ended
October 1998 October 1997
Cash Flows From Operating Activities
Net Loss ($ 55,612) ($ 173,480)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 8,736 7,605
Changes in assets and liabilities-
Decrease (Increase) in accounts receivable ( 108,053) 18,187
Increase in due from related parties ( 119,795) ( 71,782)
Increase in prepaid expenses ( 14,218) ( 56,365)
Increase (Decrease) in deferred income 69,149 ( 25,410)
Increase in accounts payable 147,613 179,968
Increase (Decrease) in wages payable 8,705 ( 3,234)
Increase (Decrease) in vacation payable 5,600 ( 21,134)
Increase (Decrease) in taxes payable 2,639 ( 24,686)
Decrease in other accrued liabilities ( 13,731) ( 19,459)
------------ ------------
Net cash used in operating activities ( 68,967) ( 189,790)
------------ ------------
Cash Flows From Investing Activities
Purchase of furniture, fixtures & equipment ( 9,451) ( 1,791)
Stock subscription received -- 40,645
Receipt (Payment) of deposits 23,897 ( 8,309)
Investment in HBII Timeshare 1,304 549
------------ ------------
Net cash provided by investing activities 15,750 31,094
------------ ------------
Cash Flows from Financing Activities
Repayment to related parties ( 21,632) --
------------ ------------
Net cash flow from financing activities ( 21,632) --
------------ ------------
Net Decrease in Cash ( 74,849) ( 158,696)
Cash at Beginning of Period 245,969 268,938
------------ ------------
Cash at End of Period $ 171,120 $ 110,242
============ ============
Supplemental disclosure of cash flow
Information
Cash paid during the year for interest $ 33,159 $ 11,901
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
5
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (unaudited)
The accompanying consolidated financial statements of The Castle Group,
Inc., its wholly owned subsidiary, KRI, Inc. and KRI, Inc.'s wholly-owned
subsidiary, HPR Advertising, Inc. for the three months ended October 31,
1998 have been prepared in accordance with generally accepted accounting
principles. These consolidated 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 of The Castle Group, Inc. and Subsidiary (the
"Company") does 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, 1998, 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, 1998 are not necessarily indicative of the
operating results for the remainder of the year.
NEW ACCOUNTING PRONOUNCEMENTS-
Effective August 1, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income,"
which established standards for reporting comprehensive income. The
adoption of this statement had no impact of the Company's consolidated
financial statements since the Company had no items of other comprehensive
income during the period ended October 31, 1998 of 1997, respectively.
Effective August 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
established standards for reporting operating segments and requires certain
other disclosures about products and services, geographic areas and major
customers. The disclosure requirements are effective for the year ending
July 31, 1999. SFAS No. 131 requires interim financial statements to
include selected information about operating segments beginning the quarter
ended October 31, 1999. The adoption of SFAS No. 131 is not expected to
have a material effect on the Company's consolidated financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which standardized the
disclosure requirements for pensions and other post-retirement benefits.
This statement is effective for fiscal years beginning after December 15,
1997. As the Company does not have a pension plan or other post retirement
plan, the adoption of this statement is not expected to have material effect
on the Company's consolidated financial statements.
6
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In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting
and reporting standards for derivative instruments and hedging activities.
SFAS No. 133 requires the recognition of all derivative instruments as
either assets or liabilities in the statement of financial position and
measurement of those derivative instruments at fair value. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999. As the Company
does not invest in derivative instruments or participate in hedging
activities, the adoption of this standard is not expected to have a material
effect on the Company's 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.
CASH AND CASH EQUIVALENTS-
The Company considers all highly liquid investments with a maturity date of
three months or less when purchased to be cash equivalents.
INCOME RECOGNITION-
The Company recognizes income from the management of resort properties
according to terms of its various management contracts.
DEFERRED INCOME-
During the year ended July 31, 1998, the Company received a signing bonus of
$80,000 as a result of a contract entered into with a vendor to provide
services over a three-year period. Income is recognized on the straight
line method over the term of the contract.
During the quarter ended October 31, 1998, the Company received an
improvement allowance of $56,475 as a result of a contract entered into with
its landlord over a 69 month period. The allowance is recognized on a
straight line method over the term of the contract.
PER SHARE DATA-
Effective August 1, 1997, the Company adopted SFAS No. 128, "Earnings per
Share," which specifies the computation, presentation and disclosure
requirements for earnings per share.
7
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The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share as of October 31, 1998 and 1997,
respectively.
<TABLE>
1998
----------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Basic:
Net Loss ($ 55,612) 5,311,130 ($ .01)
Effect on dilutive securities-
Stock subscriptions, options and warrants -- 25,000 --
------------ ------------- -------------
Diluted
Net loss and assumed conversions ($ 55,612) 5,336,130 ($ .01)
============ ============= =============
1997
-----------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic:
Net Loss ($ 173,480) 5,317,771 ($ .03)
Effect on dilutive securities-
Stock subscriptions, options and warrants -- 25,000 --
----------- ------------- -------------
Diluted
Net loss and assumed conversions ($ 173,480) 5,342,771 ($ .03)
=========== ============= =============
</TABLE>
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 income for the period.
The cost of maintenance and repairs are charged to income as the expense is
incurred. Renewals and betterments are capitalized and depreciated over
their estimated useful lives.
At October 31, 1998 and July 31, 1998, furniture, fixtures and equipment
consisted of the following:
10/31/98 07/31/98
---------- ----------
Office Furniture and Equipment $ 219,466 $ 210,013
Less Accumulated Depreciation (155,027) ( 148,877)
---------- ----------
$ 64,439 $ 61,136
========== ==========
Depreciation is computed using the declining balance and straight-line
methods over the estimated useful life of the assets (5 to 7 years).
8
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ORGANIZATION COSTS-
Organization costs are recorded at cost and are being amortized on a
straight-line basis over 5 years. At October 31, 1998 and July 31, 1998,
the balances were as follows:
10/31/98 07/31/98
---------- ----------
Organizational Costs $ 51,714 $ 51,714
Less Accumulated Amortization ( 51,714) ( 49,129)
---------- ----------
$ -- $ 2,585
========== ==========
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 Company. 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, 1998 and July 31, 1998, the Company had
receivable balances of $964,593 and $844,798, respectively, from HBII.
The Company also had a note receivable as of October 31, 1998 in the amount
of $435,000. The loan was made to HBII to fund the operations of HBII.
Interest on this note receivable is due on a monthly basis with interest
accruing at 12% per annum. The principal and any unpaid interest on the
note is due on March 31, 1999.
Reservation Services-
Reservation services are provided by Hawaii Reservation Center Corporation,
wholly owned by a stockholder/director who has a 2% interest in the Company.
Reservations services expense for the quarters ended October 31, 1998 and
1997 was $257,369 and $206,505, respectively. The Company had a payable
balance to Hawaii Reservation Center Corporation of $199,863 and $13,978 as
of October 31, 1998 and 1997, respectively.
9
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Due to Related Parties-
The Company had the following related party loan balances as of October 31,
1998 and July 31, 1998:
October 1998 July 1998
6% loans from stockholders, $18,000 was
due on January 31, 1997 and $166,400 was
extended to August 1, 1998 $ 166,400 $ 184,400
10% loan from Director, due March 31,
1999 175,000 175,000
10% loans from Officers, due August 15,
1999 163,968 167,600
---------- ----------
505,368 527,000
Less current portion 505,368 374,500
---------- ----------
Long term portion $ -- $ 152,500
========== ==========
In June 1998, the Company issued warrants to acquire up to 87,500 shares of
common stock for $2.00 per share, exercisable through June 2003 in exchange
for the $175,000 loan made by a director. No warrants were exercised as of
October 31, 1998.
LEASES-
The Company has leases for office space, vehicles and equipment expiring at
various dates through
2004. The office leases are renewable for an additional five years.
At October 31, 1998, the future minimum rental commitment under these leases
were as follows:
Schedule of minimum lease payments:
1999 $ 228,000
2000 180,000
2001 186,000
2002 191,000
2003 165,000
Thereafter 95,000
-------------
Total $ 1,045,000
=============
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RESTRICTED CASH-
Restricted cash consists of cash held in client trust accounts and cash
pledged as collateral for an equipment lease.
NOTES RECEIVABLE-
The Company had notes receivable balances as of October 31, 1998 and July
31, 1998 as follows:
Oct 1998 Jul 1998
Notes receivable from third party in monthly
installments of $10,000 beginning September
15, 1998, including interest at 10% per
annum. Balance of principal and interest
is due September 1, 2000. Real estate is
pledged as collateral $ 250,000 $ 250,000
Notes receivable from related parties 435,000 435,000
---------- ----------
685,000 685,000
Less current portion 530,600 530,600
---------- ----------
Notes receivable, current portion $ 154,400 $ 154,400
========== ==========
COMMON STOCK WARRANTS-
In June 1998, the Company issued warrants to acquire up to 187,500 shares of
common stock for $2.00 per share, exercisable through June 2003 in exchange
for certain loans made to the Company. No warrants were exercised as of
October 31, 1998.
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 were exercised as of October
31, 1998.
COMMON STOCK OPTIONS-
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, 1998.
11
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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, 1998.
NOTES PAYABLE-
At October 31, 1998 and July 31, 1998, notes payable consisted of the
following:
10/31/98 07/31/98
$300,000 line of credit from a bank with
drawings due on December 20, 1998, with
interest (10.5% at October 31, 1998) at
2.0% above the bank's base rate. The
Company's accounts receivable are pledged
as collateral and the Chief Executive
Officer and several of the Company's
directors are guarantors. $ 300,000 $ 300,000
$250,000 line of credit from a bank with
drawings due on December 31, 1998, with
interest at 10.0% per annum. The
Company's furniture and equipment are
pledged as collateral and the Company's
Chief Executive Officer is a guarantor. 250,000 250,000
Note payable to various individuals with
interest accruing at 10% per annum.
Principal and any unpaid interest due
on March 31, 1999. In connection with
the notes, certain common stock warrants
were issued. 200,000 200,000
----------- ----------
Notes Payable, current $ 750,000 $ 750,000
=========== ==========
12
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INCOME TAXES-
Significant components of the Company's deferred tax assets and liabilities
as of October 31, 1998 and July 31, 1998 are:
10/31/98 07/31/98
------------- ------------
Deferred tax assets-
Vacation Pay $ 7,000 $ 7,000
Noncompetition agreement 219,000 219,000
Deferred Income 32,000 32,000
Net Operating Loss 682,000 673,000
------------- ------------
Deferred tax asset 940,000 931,000
Deferred tax liability-
Furniture, fixtures and equipment ( 8,000) ( 8,000)
------------- ------------
Net Deferred Tax Asset 932,000 923,000
Valuation Allowance ( 932,000) ( 923,000)
------------- ------------
$ -- $ --
============= ============
The Company has a net operating loss carryforward for income tax purposes of
$1,682,000 at July 31, 1998 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, 1998, the Company had 30 contracts covering 3,400 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 cases, 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.
14
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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 terminated this lease effective
April 30, 1998. 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 to obtain management
agreements 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, 1998 AND 1997
SALES
For the quarters ended October 31, 1998 and 1997, the Company had total
revenues of $1,120,596 and $1,347,875, respectively, a decrease of $272,279
or 17%. The decrease in revenues for the quarter ended October 31, 1998 as
opposed to the prior year is attributed to the termination of a lease of 167
units operated as a hotel. The lease was terminated on April 30, 1998 and
therefore, hotel revenues were zero for the quarter ended October 31, 1998
as compared to $423,842 for the quarter ended October 31, 1997. For the
quarter ended October 31, 1998, revenues from the Company's primary source
of income, (management fees and management related services,) increased over
the prior year by $196,563, or 21%, from $924,033 to $1,120,596.
COSTS AND EXPENSES
Operating expenses for the quarters ended October 31, 1998 and 1997 were
$1,143,049 and $1,509,453, respectively, a decrease of $366,414 or 24%. The
decrease in operating expenses as opposed to the prior year is attributed to
the termination of a lease of 167 units operated as a hotel. The lease was
terminated on April 30, 1998 and therefore, operating expenses for the
quarter ended October 31, 1998 was only $1,655 as compared to $477,715 for
the quarter ended October 31, 1997. For the quarter ended October 31, 1998,
operating expenses from the Company's primary source of income, (management
fees and management related services,) increased over the prior year by
15
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$109,656, or 11%, from $1,031,738 to $1,141,394. The increase in management
related expenses is attributed to the 21% increase in management related
income.
Payroll and benefits increased by $47,008 as a result of the Company
increasing its staffing in order to effectively service the increase in the
Company's portfolio of management agreements.
Professional fees decreased by $22,581 due to a renegotiation of a
consulting agreement the Company entered into with an unrelated party to
assist the Company in attaining additional management contracts. The
expense for the quarter ended October 31, 1997 was $29,400 as opposed to
$5,761 for the quarter ended October 31, 1998.
Reservations expenses increased by $50,864 due to the increased revenues
contributed by the additional number of properties managed during the
quarter ended October 31, 1998 as opposed to the prior year. Reservations
fees are based on the hotel revenues of the properties managed by the
Company.
Taxes, other than income increased by $11,959 for the quarter ended October
31, 1998 as compared to the prior year as a result of the increases in
management related income.
Outside sales offices expense increased by $23,928 for the quarter ended
October 31, 1998 as compared to the prior year as a result of the Company,
in July of 1998, entering an general sales agreement with a company located
in Asia.
Interest expenses increased by $21,257 as a result of increases in notes
payable and amounts due to related parties for the quarter ended October 31,
1998 as compared with the prior year.
NET LOSS
The Company reported a net loss of $55,612 and a net loss of $173,480 for
the quarters ended October 31, 1998 and 1997, respectively, a decrease of
$117,868 or 68%.
As discussed previously, the decrease in the net loss is attributed to the
Company being able to increase its management related income by $196,563.
The Company also terminated its lease for 167 condominium units which were
operated as a hotel on April 30, 1998. For the quarter ended October 31,
1998 and 1997, the net loss from the hotel operation was $1,655 and $53,873,
respectively, which resulted in a $52,218 decrease in the Company's net loss
for the quarter ended October 31, 1998 as compared to the prior year.
LIQUIDITY AND CAPITAL RESOURCES-
As of October 31, 1998, total current assets were $2,844,017 and consisted
primarily of $1,121,471 in accounts receivable and $964,593 in amounts due
16
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from related parties. Total current liabilities were $2,815,872, leaving a
net working capital of $28,145.
The Company's primary sources of working capital are cash flow from
operations and borrowing. Net cash used in operations was $68,967 for the
quarter ended October 31, 1998 as compared to $189,790 for the prior year.
Net cash provided by investing activities was $15,750 as compared to $31,094
for the quarters ended October 31, 1998 and 1997, respectively. Net cash
used to retire amounts due to related parties was $21,632 for the quarter
ended October 31, 1998.
The Company had unrestricted cash of $171,120 and $245,969 at October 31,
1998 and July 31, 1998, respectively.
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 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 Company has extended the line of credit
through December 20, 1998.
In November of 1997, the Company secured an additional line of credit for
$250,000 from a local bank. The line of credit was extended to December 31,
1998 and is personally guaranteed by the Chairman and Chief Executive
Officer of the Company.
The Company had a net working capital $28,145 and $142,622 as of October 31,
1998 and July 31, 1998, respectively.
As of October 31, 1998 and July 31, 1998, net working capital included
liabilities due related parties in the amount of $505,368 and $374,500,
respectively. Also included in net working capital is $26,667 in
unamortized deferred revenues related to a signing bonus paid to the Company
by one of its vendors in July 1998 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.
In November of 1998, Hanalei Bay International Investors ("HBII") entered
into an agreement for the sale of its interest in the Hanalei Bay Resort.
The sale is currently scheduled to close in January of 1999 and upon closing
of the sale, the Company shall be able to collect a portion of its $964,593
receivable balance (see Balance Sheet - "Due from Related Parties").
The Company is also in the final negotiating stages for management contracts
17
<PAGE>
on numerous properties located in the Pacific Basin. Although no assurances
may be given, management is confident that these properties will enter into
management contracts with the Company, and that the Company will increase
its profitability and liquidity as a result of the increased management fee
income.
The Company is also contemplating the private placement of equity. The
private placements are planned to be made to high net worth and
sophisticated investors in the form of preferred convertible stock.
Although no assurance can be given, management is confident that it will be
successful in raising additional equity through private placement sales of
its stock.
Although no assurances can be given, 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 impending sale of
HBII, the increase in the Company's property portfolio, the private
placement of equity, 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, 1998, the Company had 30
management or sales, reservations and marketing contracts covering 3,400
rooms.
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, 1998, the number of
contracts has more than doubled, from 13 to 30 and the number of rooms
managed also increased from 1,684 to 3,400.
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
18
<PAGE>
leases and/or acquisitions of management contracts and/or companies. The
Company is currently engaged in various stages of negotiations for the
management of several properties located both within Hawaii and the Pacific
Basin area.
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.
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, 1998, the Company employed approximately 800 employees
and managed an additional 400 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, 1998, the Company has
received a total of $169,592 from this investment. Of the funds received,
$42,398 represents a return of the initial investment and $127,194
represents a gain to the Company. Although no assurance can be given,
management is confident that it will be able to collect the remaining
principal balance of this investment upon the sale of HBII.
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.,
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
19
<PAGE>
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.
YEAR 2000
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business
activities.
Based on recent assessments, the Company determined that it will be required
to modify or replace certain portions of hardware and software so that those
systems will properly utilize dates beyond December 31, 1999. The Company
presently believes that with modifications and replacement of existing
hardware and software, the Year 2000 Issue can be mitigated. However, if
such modifications and replacements are not made, or are not completed
timely, the Year 2000 Issue could have a material impact on the operations
of the Company.
The Company's plan to resolve the Year 2000 Issue involves four phases;
assessment, remediation, testing and implementation. To date the Company
has fully completed its assessment of all material systems that could be
affected by the Year 2000 Issue. The completed assessment indicated that
some of the Company's significant information technology systems could be
affected. That assessment concluded that the affected systems include a
number of the Company's personal computers and the Company's telephone
system. If not resolved on a timely basis, these systems could hamper the
Company's ability to provide adequate and timely customer services from
which the Company derives a significant portion of its revenues.
For its information technology and operating equipment exposures, to date
the Company is approximately 75% complete on the remediation phase for all
material systems and expects to complete software reprogramming and/or
replacement no later than January 31, 1999. After completing the
reprogramming and/or replacement of software, the Company's plans call for
testing and implementing it's information technology systems. To date, the
Company has completed 40% of its testing. The Company has not yet
implemented its implementation phase. Completion of the testing phase is
expected by January 31, 1999, with all remediated systems fully implemented
by March 31, 1999.
With respect to third parties, for systems that interface directly with
significant vendors, the Company is 60% complete with its remediation
efforts. Testing of all material systems is expected no later than March
31, 1999. Implementation has not yet taken place but is expected to be
20
<PAGE>
completed by June 30, 1999. The Company has queried its important suppliers
and vendors that do not involve system interface. To date, the Company is
not aware of any problems that would materially impact the results of
operations, liquidity, or capital resources. The Company has no means of
ensuring that these parties will be Year 2000 ready. The inability of those
parties to complete their Year 2000 resolution process could materially
impact the Company. The affects for non-compliance by third parties where
no system interface exists is not determinable.
The Company will utilize both internal and external resources to reprogram,
or replace, test, and implement the software and operating equipment for
Year 2000 modifications. The total cost of the Year 2000 project is
estimated at $50,000 and will be funded through operating cash flows. To
date, the Company has incurred approximately $5,000 in expenses related to
all phases of the Year 2000 project. Of the total remaining project costs,
approximately $45,000 is attributable to the purchase of new software and
operating equipment, which will be capitalized or financed through an
operating lease.
The Company plans to complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, and other factors. Estimates on the status of completion and
expected completion dates are based on man-hours incurred to date compared
to total expected man-hours. However, there can be no guarantee that these
estimates will be achieved and actual results could differ materially from
those plans. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel
trained in this area, the ability to locate and correct all relevant
computer costs, and similar uncertainties.
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, 1998.
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.
21
<PAGE>
Sequential
Exhibit Page
Number Description Number
- ------- ------------------------------------------------------- ---------
1.1 Form of Placement Agency Agreement incorporated by
reference to Exhibit 1.1 to the Company's Registration
Statement on Form SB2/A-1 filed on March 10, 1998. *
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 for the
quarter ending 04/30/96 *
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. *
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. *
22
<PAGE>
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. *
23
<PAGE>
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 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. *
24
<PAGE>
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. *
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. *
6.26 Commercial Promissory Note between the Company and
City Bank dated November 14, 1997 incorporated by
reference to Exhibit 6.26 to the Company's quarterly
report on Form 10-QSB for the quarter ended January
31, 1998 *
6.27 Promissory note for $50,000 dated January 15, 1998
between the Company and Michael S. Nitta incorporated
by reference to Exhibit 6.26 to the Company's
quarterly report on Form 10-QSB for the quarter ended
January 31, 1998 *
25
<PAGE>
6.28 Promissory note for $60,000 dated January 29, 1998
between the Company and Kelvin M. Bloom incorporated
by reference to Exhibit 6.26 to the Company's
quarterly report on Form 10-QSB for the quarter ended
January 31, 1998 *
6.29 Letter from Hawaii National Bank extending the due
date on the $300,000 revolving line of credit to July
15, 1998, incorporated by reference to Exhibit 6.29 to
the Company's quarterly report on form 10-QSB for the
quarter ended April 30, 1998 *
6.30 Amendment of promissory note dated January 29, 1998
between the Company and Kelvin M. Bloom extending the
due date on the note to July 15, 1998, incorporated by
reference to Exhibit 6.38 to the Company's quarterly
report on form 10-QSB for the quarter ended April 30,
1998 *
6.31 Amendment of promissory note dated January 15, 1998
between the Company and Michael S. Nitta extending the
due date on the note to July 15, 1998, incorporated by
reference to Exhibit 6.31 to the Company's quarterly
report on form 10-QSB for the quarter ended April 30,
1998 *
6.32 Letter from City Bank extending the due date on the
$250,000 line of credit to August 15, 1998,
incorporated by reference to Exhibit 6.32 to the
Company's form 10Q-SB for the quarter ended April 30,
1998. *
6.33 Amendment of Lease between The Castle Group, Inc. and
Hirano Enterprises effective April 1, 1998,
incorporated by reference to Exhibit 6.33 to the
Company's form 10Q-SB for the quarter ended April 30,
1998. *
6.34 Consulting agreement dated July 22, 1998 and effective
as of June 1, 1998 between the Company and Kimo M.
Keawe incorporated by reference to Exhibit 6.34 to the
Company's form 10K-SB for the year ended July 31, 1998. *
6.35 Form of promissory notes dated June 30, 1998 between
the Company and Judvhir Parmar for $175,000, K. Roger
Moses for $50,000, Gary J. Stevens, Susanne L.
Blankley for $50,000, and Thomas S. Blankley for
$50,000 incorporated by reference to Exhibit 6.35 to
the Company's form 10K-SB for the year ended July 31,
1998. *
26
<PAGE>
6.36 Form of Common Stock Purchase Warrants dated June 30,
1998 between the Company and Judvhir Parmar for 87,500
shares, K. Roger Moses for 25,000 shares, Gary J.
Stevens for 25,000 shares, Susanne L. Blankley for
25,000 shares, and Thomas S. Blankley for 25,000
shares incorporated by reference to Exhibit 6.36 to
the Company's form 10K-SB for the year ended July 31,
1998. *
6.37 Promissory note dated August 13, 1998 in favor of the
Company from Fortress LLC for $250,000 incorporated by
reference to Exhibit 6.37 to the Company's form 10K-SB
for the year ended July 31, 1998. *
6.38 Promissory note in favor of the Company from Hanalei
Bay International Investors for $435,000 dated July
31, 1998 incorporated by reference to Exhibit 6.38 to
the Company's form 10K-SB for the year ended July 31,
1998. *
6.39 Promissory note dated July 15, 1998 between the
Company and Kelvin M. Bloom for $118,800 incorporated
by reference to Exhibit 6.39 to the Company's form
10K-SB for the year ended July 31, 1998. *
6.40 Promissory note dated July 15, 1998 between the
Company and Michael S. Nitta for $48,800 incorporated
by reference to Exhibit 6.40 to the Company's form
10K-SB for the year ended July 31, 1998. *
6.41 Letter of extension from Hawaii National Bank
extending the due date on the $300,000 line of credit
to December 20, 1998 incorporated by reference to
Exhibit 6.41 to the Company's form 10K-SB for the
year ended July 31, 1998. *
6.42 Letter of extension from City Bank extending the due
date on the $250,000 line of credit to December 31,
1998 incorporated by reference to Exhibit 6.35 to
the company's form 10K-SB for the year ended July 31,
1998. *
DESCRIPTION OF EXHIBITS
See item 1 above.
27
<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, 1998 /s/ Rick Wall
---------------------------
Chairman of the Board and
Chief Executive Officer
December 15, 1998 /s/ Michael S. Nitta
---------------------------
Chief Financial Officer
28
<PAGE>
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