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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 April 30, 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 May 31, 1998:
Common stock, $.02 par value - 5,311,130
Transitional Small Business Disclosure Format (check one):
Yes [ x ] No [ ]
Page 1 of 32 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 (Unaudited)
Consolidated Balance Sheets as of
April 30, 1998 and 1997 (unaudited).............................. 3
Consolidated Statements of Operations for the three and nine months
ended April 30, 1998 and 1997 (unaudited)........................ 4
Consolidated Statement of Cash Flows for the nine months
ended April 30, 1998 and 1997 (unaudited)........................ 5
Notes to Consolidated Financial Statements
(unaudited)....................................................... 6
Item 2. Management's Discussion and Analysis or Plan
of Operations....................................... 12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 19
Item 5. Other Information......................................... 19
Item 6. Exhibits and Reports on Form 8-K.......................... 19
SIGNATURES.......................................................... 24
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PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated Balance Sheets - April 30, 1998 and 1997(Unaudited)
April 1998 April 1997
ASSETS ------------- --------------
Current Assets
Cash $ 133,746 $ 63,655
Accounts Receivable, Net 1,172,086 885,558
Prepaid Expenses 257,391 28,902
Restricted Cash 19,941 26,536
Deferred Cost 0 29,991
Deferred Compensation Expense 0 50,000
Due from Related Party 559,517 74,739
------------- --------------
Total Current Assets 2,142,681 1,159,381
Non Current Assets ------------- --------------
Furniture Fixtures & Equipment, Net 71,998 87,308
Investment in HBII Timeshare Program 59,389 61,888
Deposits & Other Assets 158,230 33,021
Intangibles, Net 5,171 15,514
Deferred Compensation Expense 0 25,000
------------- --------------
Total Non Current Assets 294,788 222,731
------------- --------------
TOTAL ASSETS $ 2,437,469 $ 1,382,112
============= ==============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 940,249 $ 721,261
Due to Related Parties 293,200 184,400
Vacation Payable 99,004 97,017
Wages Payable 73,129 99,807
Taxes Payable 48,361 18,028
Notes and Contract Payable 550,000 279,861
Deferred Compensation 0 250,000
Deferred Income 0 101,640
Other Accrued Liabilities 157,442 73,446
------------- --------------
Total Current Liabilities 2,161,385 1,825,460
Deferred Income 80,000 0
------------- --------------
Total Liabilities 2,241,385 1,825,460
Stockholders' Equity ------------- --------------
Common stock, $.02 par, 20,000,000 shares
authorized, 5,311,130 and 5,089,030
issued and outstanding, respectively 106,223 101,781
Capital in excess of par 2,539,175 2,118,222
Accumulated Deficit (2,449,314) (2,663,351)
------------- --------------
Total Stockholders' Equity 196,084 ( 443,348)
------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,437,469 $ 1,382,112
============= ==============
The accompanying notes are an integral part of the financial statements.
3
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Operations
for the three and nine months ended April 30, 1998 and 1997
(Unaudited)
Three Months Ended Nine Months Ended
04/30/98 04/30/97 04/30/98 04/30/97
--------- ---------- ---------- ----------
Revenue
Management Fees $ 820,210 $ 908,936 $2,474,573 $2,505,501
Hotel Operating Revenues 356,407 528,489 1,267,102 1,502,545
Other Income 306,629 276,530 675,653 672,934
--------- ---------- ---------- ----------
Total Revenues 1,483,246 1,713,955 4,417,328 4,680,980
Expenses --------- ---------- ---------- ----------
Payroll and benefits 508,686 516,064 1,492,443 1,460,365
Hotel Operating Expenses 325,646 486,496 1,288,093 1,441,704
Professional fees 26,539 28,644 72,447 78,228
Reservations 224,967 245,523 651,068 720,853
Depreciation
and Amortization 7,605 53,915 22,815 226,014
Rent 101,489 90,891 313,139 294,281
Travel and entertainment 22,683 30,425 96,689 44,300
Office expenses 12,396 12,166 40,346 41,051
Utilities 7,854 11,090 30,574 30,233
Taxes, other than income 46,448 42,790 123,901 123,634
Advertising & marketing 21,178 22,072 86,632 65,725
Insurance 18,162 17,926 56,133 72,771
Other 30,543 17,238 79,654 51,069
--------- ---------- ---------- ----------
Total Expenses 1,354,196 1,575,240 4,353,934 4,650,228
--------- ---------- ---------- ----------
Operating Income 129,050 138,715 63,394 30,752
--------- ---------- ---------- ----------
Other Expenses
Interest Expense 19,977 12,441 48,640 41,481
--------- ---------- ---------- ----------
Net Income ( Loss ) 109,073 126,274 14,754 ( 10,729)
========= ========== ========== ==========
Per Share Data
Basic Earnings $ .021 $ .025 $ .003 ($ .002)
========= ========== ========== ==========
Diluted Earnings $ .020 $ .025 $ .003 ($ .002)
========= ========== ========== ==========
The accompanying notes are an integral part of the financial statements.
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated statements of cash flows
Nine months ended April 30, 1998 and 1997
( Unaudited )
Nine Months Ended
April 1998 April 1997
------------ -------------
Cash Flows From Operating Activities
Net Income (Loss) $ 14,754 ($ 10,729)
Adjustments to reconcile net income (loss)
to net cash flow from operating activities-
Depreciation and amortization 22,814 226,008
Amortization of deferred
compensation expense 0 37,500
Changes in operating assets and liabilities-
Increase in accounts receivable ( 351,717) ( 125)
Decrease (Increase) in due from
related party ( 361,787) 0
Decrease (Increase) in prepaid expenses ( 167,612) 20,300
Increase (Decrease) in deferred income 3,770 ( 76,230)
Increase (Decrease) in accounts payable 326,458 ( 161,545)
Increase (Decrease) in taxes payable 12,218 3,876
Increase (Decrease) in accrued liabilities ( 118,276) 7,765
Net cash flow provided by (used in) ------------ --------------
operating activities ( 619,378) 46,820
Cash Flows From Investing Activities ------------ --------------
Purchase furniture, fixtures & equipment ( 4,484) ( 16,566)
Stock Subscription 40,645 0
Release of Security Deposit 37,374 ( 6,595)
Investment in HBII Timeshare 1,851 38,112
------------ --------------
Net cash flow provided-investing activities 75,386 14,951
------------ --------------
Cash Flows from Financing Activities
Loan Proceeds Received 410,000 0
Repayment of Notes ( 1,200) ( 129,571)
Repayment of Line of Credit 0 ( 25,000)
Net cash flow provided by (used in) ------------ --------------
financing activities 408,800 ( 154,571)
------------ --------------
Net Decrease in Cash ( 135,192) ( 92,800)
Cash at Beginning of Period 268,938 156,455
------------ --------------
Cash at End of Period $ 133,746 $ 63,655
============ ==============
Supplemental disclosures of cash flow
Information
Cash paid during the year for interest $ 48,640 $ 41,481
============ ==============
The accompanying notes are an integral part of the financial statements.
5
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
The accompanying consolidated financial statements of The Castle Group,
Inc. and subsidiary (the "Company") for the three months and nine months
ended April 30, 1998 and 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 and nine months ended April 30, 1998 and
1997 are not necessarily indicative of the operating results for the
remainder of the year.
NEW PRONOUNCEMENTS-
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" which is effective for periods ending after December
15, 1997. This statement had no impact on the Company's financial
statements disclosures since the Company had no items of other comprehensive
income for the three and nine months ended April, 1998 and 1997.
In February 1998, the FASB issued SFAS No. 132, "Employers Disclosures
about Pensions and Other Post Retirement Benefits" which is effective for
fiscal years ending after December 15, 1997. This statement will have no
impact on the Company's disclosures since the Company does not have a
pension plan or other post retirement plan.
The Company implemented SFAS No. 128, "Earnings Per Share" which
specifies the computation, presentation and disclosure requirements of
earnings per share. Prior period earnings per share data has been expanded
to comply with the provisions of SFAS No. 128.
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share data for the three and nine months
ended April 30, 1998 and 1997.
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INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
THREE MONTHS ENDED 04/30/98: ----------- ------------ -----------
BASIC
Net Income $ 109,073 5,311,130 $ .021
Effect of dilutive securities
Stock options and warrants - 20,070 -
DILUTED ----------- ------------ -----------
Net income & assumed conversions $ 109,073 5,331,200 $ .020
=========== ============ ===========
NINE MONTHS ENDED 04/30/98
BASIC
Net Income $ 14,754 5,311,130 $ .003
Effect of dilutive securities
Stock options and warrants - 18,182 -
DILUTED ----------- ------------ -----------
Net income & assumed conversions $ 14,754 5,329,312 $ .003
=========== ============ ===========
THREE MONTHS ENDED 04/30/97:
BASIC
Net Income $ 126,274 5,089,030 $ .025
Effect of dilutive securities
Stock options and warrants - - -
DILUTED ----------- ------------ -----------
Net income & assumed conversions $ 126,274 5,089,030 $ .025
=========== ============ ===========
NINE MONTHS ENDED 04/30/97
BASIC
Net Loss ($ 10,729) 5,089,030 ($ .002)
Effect of dilutive securities
Stock options and warrants - ( 52,354) -
DILUTED ----------- ------------ -----------
Net loss & assumed conversions ($ 10,729) 5,036,676 ($ .002)
=========== ============ ===========
Note that warrants and options outstanding for the three months ended April
30, 1997 were not considered common stock equivalents since they were
anti-dilutive.
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.
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At April 30, 1998 and 1997, furniture, fixtures and equipment consisted
of the following:
04/30/98 4/30/97
---------- ---------
Office Furniture and Equipment 210,013 218,237
Less Accumulated Depreciation (138,015) (130,929)
---------- ---------
Net Book Value 71,998 87,308
========== =========
Depreciation is computed using the declining balance and straight-line
methods over the estimated useful life of the assets (5 to 7 years).
INTANGIBLES-
Intangible assets consist of organizational costs which are amortized
on a straight-line basis over 5 years. At April 30, 1998 and 1997, the
balances of this intangible was as follows:
04/30/98 04/30/97
----------- -----------
Noncompetition Agreements 0 800,000
Organizational Costs 51,714 51,714
----------- -----------
Total Cost 51,714 851,714
Less Accumulated Amortization ( 46,542) ( 836,200)
----------- -----------
Net Book Value 5,171 15,514
=========== ===========
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 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 April 30, 1998 and 1997, The Company
had receivable balances of $559,517 and $74,739 respectively, from HBII.
8
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HAWAII RESERVATIONS CENTER CORP. -
On August 1, 1994, the Company contracted with Hawaii Reservations
Center Corp. ("HRCC") to provide reservation services for the hotels and
resorts the Company manages. HRCC is owned and operated by a director of
the Company who has a 2% interest in the Company. On May 1, 1997, the
Company and HRCC amended the contract for reservation services and reduced
the amount of certain fees paid by the Company to HRCC. It is managements'
belief that the terms and conditions of the agreement are no more favorable
to HRCC or the Company than could have been obtained from other companies
which provide reservation services.
STOCKHOLDER ADVANCES -
On January 15, 1998, an officer of the Company advanced $50,000 to the
Company. On January 29, 1998, another officer of the Company advanced
$60,000 to the Company. The advances were due on or before April 15, 1998
and bear interest at the rate of 8.5% per annum. On April 15, 1998, the due
dates for the advances were extended to July 15, 1998. As of April 30,
1998, repayment of principle in the amount of $600 was made on each of the
two advances.
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 April 1998. The Company did not
renew the hotel lease and on April 30, 1998, surrendered the property to the
lessor. All assets and liabilities of the hotel operations have been
included as net assets in the Company's operations.
Effective April 1, 1998, the Company renegotiated one of its office
leases and entered into a new 5 year lease.
At April 30, 1998, the future minimum rental commitment under these
leases were as follows:
Schedule of minimum lease payments
1998 48,000
1999 196,000
2000 69,000
2001 76,000
2002 80,000
2003 43,000
------------
Total 512,000
============
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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 April 30, 1998.
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 July 1997, the
options were forfeited by the officer. The historical financial statements
presented as of April 1997 includes the deferred compensation expense and
deferred compensation payable as of April 30, 1997.
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 April 30, 1998.
STOCK SUBSCRIPTIONS-
In July 1997, 222,100 common shares were subscribed at $2 per share.
As of April 30, 1998, the Company received $425,399, net of stock issuance
expenses of $18,801. 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 and results of operations or liquidity.
There were no new lawsuits filed during the quarter ended April 30, 1998.
INCOME TAXES-
The Company adheres to the provisions of SFAS No. 109, "Accounting for
Income Taxes."
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No net deferred tax asset has been recorded in accordance with SFAS No.
109 because it could not be reasonably determined if the net operating loss
available to carryforward would be realized by the Company.
Significant components of the Company's deferred tax assets and
liabilities as of April 30, 1998 and 1997 are:
04/30/98 04/30/97
----------- -----------
Deferred tax assets-
Vacation Pay 7,000 37,000
Deferred Compensation Expense 0 35,000
Noncompetition agreement 240,000 240,000
Deferred Income 31,000 120,000
Net Operating Loss 766,000 723,000
----------- -----------
Deferred tax asset 1,044,000 1,155,000
Deferred tax liability-
Furniture, fixtures and equipment ( 8,000) ( 34,000)
----------- -----------
Net Deferred Tax Asset 1,036,000 1,121,000
Valuation Allowance (1,036,000) (1,121,000)
----------- -----------
-0- -0-
=========== ===========
The Company has a net operating loss carryforward for income tax
purposes of $1,915,000 at April 30, 1998 which expires at various dates
through fiscal year 2012. Net operating losses were utilized to offset year
to date taxable income.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
FORWARD LOOKING STATEMENTS - "RISK FACTORS"
This "Management's Discussion and Analysis or Plan 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 April 30, 1998, the Company had 30 contracts covering 3,325
rooms, all located within the State of Hawaii except for 68 rooms located in
Saipan. 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
reservation fees earned from the properties are based on the gross revenues
of the property. The Company is also reimbursed for direct advertising and
marketing expenditures it makes on behalf of the property, all in accordance
with the terms and conditions of the management contracts. The Company also
earns commissions and other fees from the properties managed by providing
centralized purchasing services to the hotel owners. Under these
arrangements, the net savings to the property owner from centralized
purchasing are shared between the Company, in the form of commissions, and
to the property owner in the form of cost savings.
12
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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 lease expired on April 30,
1998, and the Company terminated its rental operations. 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 THREE MONTHS ENDED APRIL 30, 1998 AND 1997
SALES
For the three months ended April 30, 1998 and 1997, the Company had
total revenues of $1,483,246 and $1,713,955 respectively, a decrease of
$230,709 or 13.5%.
The decrease in revenues for the quarter ended April 30, 1998 as
opposed to the prior year is attributed to the Company not renewing its
lease for a hotel located in Waikiki, Hawaii. Due to the Company not
renewing this lease, revenues decreased due to sales and marketing efforts
being kept at minimum levels and a decrease in reservations being taken from
travel agents. For the nine months ended April 30, 1998, the Company
experienced a net loss on its rental operations related to the leased
property in the amount of $20,991. Revenues from management operations
decreased by $58,627 due to a downturn in Hawaii's tourism industry.
Contributing to the downturn in the industry was the rising strength of the
U.S. Dollar against the Japanese yen which made travel to Hawaii more
expensive for eastbound travelers.
COSTS AND EXPENSES
With the 13.5% decrease in revenues, operating expenses decreased by
14.0% for the quarter ended April 30, 1998 as opposed to the prior year.
13
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Hotel operating expenses for the quarter decreased by $160,850, or 33%
from the prior year due to the $172,082, or 33% decrease in hotel revenues
previously mentioned.
Reservation expenses decreased by $20,556, or 8%, as a result of the
renegotiated agreement with Hawaii Reservations Center Corp. ("HRCC").
Through April of 1997, 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 only, subject to a minimum monthly fee
which is lower than the fixed fees incurred during the quarter ended April
30, 1997.
Depreciation and amortization expenses decreased by $46,310, or 86%, as
a result of the non-existence of the amortization of property rights during
the quarter ended April 30, 1998. The property rights were fully amortized
in June of 1997. During the quarter ended April 30, 1997, the Company
incurred amortization expense of $43,185 on the property rights.
Rent expense increased by $10,598 or 12% due to an adjustment made in
the prior year's quarter of $9,305 to record a credit received from building
management related to a refund of operating expenses for calendar year 1996.
Other expenses increased by $13,305, or 77%, as a result of the Company
opening sales offices in Europe for the purpose of securing travel clientele
for the properties managed by the Company. The offices were opened in
fiscal 1998 and were not present in fiscal 1997.
NET INCOME (LOSS)
The Company reported net income of $109,073 and $126,274 for the
quarters ended April 30, 1998 and 1997, respectively.
As discussed previously, the decrease in revenues resulted in the
Company being $17,201 short of the net income reported for the quarter ended
April 30, 1997. The total revenue shortfall of $230,709 was made up for
through increased cost controls which resulted in a decrease in total
expenses of $213,508. Although no assurances can be given, management will
continue it's attempts to enhance it's revenue base through growth and
expansion, while maintaining strict controls over operating expenses.
Management also believes that the non-renewal of the lease on its Waikiki
property as of April 30, 1998 will ultimately increase the Company's
profitability. Included in net income as of the nine months ended April 30,
1998 is a net loss from the Company's operation of a leased property in the
amount of $20,991, as opposed to net income of $60,842 for the nine months
ended April 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES-
As of April 30, 1998, total current assets were $2,142,681 and
consisted primarily of $1,731,603 in accounts receivable from its managed
properties. Total current liabilities of $2,161,385 exceeded total current
assets by $18,704.
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The Company's primary sources of working capital are cash flow from
operating and financing activities. Net cash used in operations was
$619,378 for the nine months ended April 30, 1998 as compared to net cash
flow of $46,820 for the prior year. Net cash provided by investing
activities was $75,386 as compared to $14,951 for the nine months ended
April 30, 1998 and 1997, respectively. Net cash provided from financing
activities was $408,800 for the nine months ended April 30, 1998 as opposed
to net cash used of $154,571 for the prior year.
The Company had unrestricted cash of $133,746 and $63,655 at April 30,
1998 and 1997, 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 line expired in September 1997. The
Company extended the line of credit through July 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 December of
1997, the Company subsequently drew down the remaining 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 expired on May 15, 1998
and is personally guaranteed by the Chairman and Chief Executive Officer of
the Company. The Company borrowed the full amount against the line of credit
in December 1997 and January 1998. The Company extended the line of credit
through August 15, 1998.
In January 1998, two officers of the Company made short term advances
to the Company for $60,000 and $50,000, respectively. The advances are due
on April 15, 1998 and provide for interest at 8.5% per annum. As of April
30, 1998, the Company has repaid $600 of the principle balances on each of
the two advances.
Accounts receivable was $286,528, or 32%, higher as of April 1998 when
compared to April 1997 due to the Company having a larger client base when
compared to the prior year. At April 30, 1998, the Company had 30 contracts
covering 3,325 rooms, compared to 27 contracts covering 3,120 rooms for the
prior year.
Amounts due from a related party, HBII, were $486,778, or 649%, higher
as of April 1998 when compared to the prior year. At April 1998, $90,715
was thirty days past due, $73,828 was sixty days past due, $90,247 was
ninety days past due and $304,727 was more than ninety days past due. HBII
is currently in the final negotiating stages of securing debt and/or equity
financing which would allow HBII to bring its balances up to a current level
with the Company. Although no assurance can be given, management is
confident that HBII shall be successful in securing its financing and
bringing its account with the Company up to a current level.
15
<PAGE>
Included in prepaid expenses as of April 30, 1998 is $226,434 of
attorney fees, NASD filing fees, and underwriting fees associated with the
Company's public offering as filed with the Securities and Exchange
commission on form SB-2. These costs shall be taken as a deduction against
the proceeds received from the public offering. Should the offering not be
successful, the Company would incur a charge against income for the costs
associated with the offering. Although no assurance can be given,
management is confident that the public offering shall be successful.
The Company had a net working capital deficit of $18,704 and $666,079
as of April 30, 1998 and 1997, respectively.
As of April 30, 1998 and 1997, net working capital included liabilities
due to affiliates in the amount of $320,626 and $212,060, respectively, with
both amounts consisting of $184,400 representing the undistributed cost on
the acquisition of the stock of KRI, Inc. and interest of $27,426 and
$27,660, respectively. Also included in net working capital is $101,640 at
April 30, 1997, 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. At April 30, 1998, net working capital also
includes $108,800 in advances received from two officers of the Company.
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., advances from officers and a private placement of stock in 1997. On
March 10, 1998, the Company registered with the Securities and Exchange
Commission on form SB2/A-1, 1,600,000 shares of its Common Stock, and went
effective as of said date. Although no assurances may be given, the
Company plans to be successful in obtaining additional working capital
through the 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 April 30, 1998, the Company had 30
management or sales, reservations and marketing contracts covering 3,325
rooms. Included in the rooms managed is 167 rooms in a condominium complex
domiciled in Waikiki under a lease agreement which expires on April 30,
1998.
16
<PAGE>
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 exceeding $1,000 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 April 30, 1998, the
number of management, reservations, sales and marketing contracts has more
than doubled, from 13 to 30 and the number of rooms managed also increased
from 1,684 to 3,325.
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.
On 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.
On February 1, 1998, the Company acquired the management contract for a
242 room hotel located in Waikiki on the island of Oahu.
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
full-service 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 April 30, 1998, the Company employed
approximately 700 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 April 30, 1998, the
Company has received a total of $162,444 from this investment. Of the
funds received, $40,611 represents a return of the initial investment and
17
<PAGE>
$121,833 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.,
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.
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.
The Company utilizes and is dependent upon data processing systems and
software to conduct its business. The data processing systems and software
utilized for the operating and accounting functions were purchased form
independent vendors and are run on in-house computer networks. In 1997, the
Company initiated a review and assessment of all related hardware and
software to confirm that it will function properly in the year 2000. To
date, those vendors which have been contacted have indicated that their
hardware or software is or will by Year 2000 compliant before the end of
1998. Primarily all of the costs associated with the compliance efforts
have already been incurred and did not have a significant impact on the
Company's operations. Management is currently investigating the utilization
of independent consultants to assess the less critical components of the
operations which may also be impacted by the Year 2000, such as telephone
systems. Management does not expect that any additional costs will have a
material impact on the Company's results of future operations.
18
<PAGE>
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the quarter ended April 30, 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.
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. *
19
<PAGE>
6.3 Kelvin Bloom Employment Agreement dated December 2, 1993
between the Company and Kelvin Bloom, incorporated by
reference to Exhibit 10.3 to the Company's Registration
Statement on Form 10-SB. *
6.4 Kimo M. Keawe Employment Agreement dated July 30, 1994,
effective as of November 10, 1993 between Kimo M. Keawe
and the Company, incorporated by reference to Exhibit 6.4
to the Company's Annual Report on Form 10-KSB for the year
ended July 31, 1994. *
6.5 Michael S. Nitta Employment Agreement dated June 23, 1994,
effective as of November 10, 1993 between Michael S.
Nitta and the Company, incorporated by reference to Exhibit
6.5 to the Company's Annual Report on Form 10-KSB for the
year ended July 31, 1994. *
6.6 Shari Chang Employment Agreement dated July 15, 1994,
effective as of July 16, 1994 between Shari Chang and the
Company, incorporated by reference to Exhibit 6.6 to the
Company's Annual Report on Form 10-KSB for the year ended
July 31, 1994. *
6.7 Sublease Agreement dated September 16, 1993 between Rush
Moore Craven Sutton Morry & Beh and The Castle Group, Ltd.
for the Company's principle executive offices, incorporated
by reference to Exhibit 10.4 to the Company's Registration
Statement on form 10-SB. *
6.8 Lease Agreement dated April 1, 1988, between Hirano
Enterprises, Cen Pac Properties, Inc., and KRI, Inc., dba
Hawaiian Pacific Resorts, as renewed by agreement dated
May 3, 1993, incorporated by reference to Exhibit 10.5 to
the Company's Registration Statement on Form 10-SB. *
6.9 Reservations Services Agreement dated August 1, 1994
between the Company and Hawaii Reservations Center Corp.,
incorporated by reference to Exhibit 6.9 to the Company's
quarterly report on Form 10-QSB for the quarter ended
October 31, 1994. *
6.10 Stock Acquisition Agreement between the Company and Shari W.
Chang dated September 10, 1995, incorporated by reference to
Exhibit 6.10 to the Company's Annual Report on Form 10-KSB
for the year ended July 31, 1995. *
6.11 Revolving Line of Credit Loan Agreement dated October 21,
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. *
20
<PAGE>
6.12 Letter dated October 17, 1995 from Kimo M. Keawe to KRI,
Inc. Stockholders, together with Promissory Notes dated July
31, 1995 payable to Maui Beach Hotel, Inc. for $12,000, James
Kurita for $6,000, Saburo or Mitsue Maruyama for $3,600, TN
Group Hawaii, Inc. for $6,000, M.K. & Sons, Inc. for $12,000,
Shigeru Shinno for $6,000, Michael S. Nitta for $16,800, and
Keawe Resorts, Inc. for $122,000, incorporated by reference to
Exhibit 6.12 to the Company's Annual Report on Form 10-KSB for
the year ended July 31, 1995. *
6.13 Second Amendment to Letter of Agreement Dated December 2, 1993
between Kelvin Bloom and The Castle Group, Inc. incorporated
by reference to Exhibit 6.13 to the Company's Annual Report
on Form 10-KSB for the year ended July 31, 1995. *
6.14 Extension of Revolving Line of Credit Agreement dated December
18, 1995 between The Castle Group, Inc., KRI, Inc., Castle
Resorts & Hotels, Inc., and Hawaii National Bank incorporated
by reference to Exhibit 6.14 to the Company's Annual Report on
Form 10-KSB for the year ended July 31, 1996. *
6.15 Extension of Revolving Line of Credit Agreement dated January
18, 1996 between The Castle Group, Inc., KRI, Inc., Castle
Resorts & Hotels, Inc., and Hawaii National Bank incorporated
by reference to Exhibit 6.15 to the Company's Annual Report on
Form 10-KSB for the year ended July 31, 1996. *
6.16 Extension of Revolving Line of Credit Agreement dated June 5,
1996 between The Castle Group, Inc., KRI, Inc., Castle Resorts
& Hotels, Inc., and Hawaii National Bank incorporated by
reference to Exhibit 6.16 to the Company's Annual Report on
Form 10-KSB for the year ended July 31, 1996. *
6.17 Extension of Revolving Line of Credit Agreement dated December
11, 1996 between The Castle Group, Inc., KRI, Inc., Castle
Resorts & Hotels, Inc., and Hawaii National Bank 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. *
21
<PAGE>
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. *
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 *
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 *
22
<PAGE>
6.29 Letter from Hawaii National Bank extending the due date on
the $300,000 revolving line of credit to July 15, 1998. 25
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. 26
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. 27
6.32 Letter from City Bank extending the due date on the $250,000
line of credit to August 15, 1998. 28
6.33 Amendment of Lease between The Castle Group, Inc. and Hirano
Enterprises effective April 1, 1998. 29
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
No reports on Form 8-K were filed during the quarter ended April 30,
1998.
23
<PAGE>
SIGNATURES
In accordance with 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)
June 12, 1998 /s/ Rick Wall
----------------------------
Chairman of the Board and
Chief Executive Officer
June 12, 1998 /s/ Michael S. Nitta
----------------------------
Chief Financial Officer and
Vice President Finance
24
<PAGE>
(logo)
HAWAII NATIONAL BANK
June 2, 1998
Mr. Rick Wall
Chief Executive Officer
THE CASTLE GROUP, INC.
745 Fort Street Mall, 10th Floor
Honolulu, Hawaii 96813
Dear Mr. Wall:
This is to advise you that Hawaii National Bank ("the Bank") has approved
your request to extend its existing $300,000.00 revolving line of credit
("the line") to The Castle Group, Inc., Castle Resorts & Hotels, Inc., and
KRI, Inc. (collectively referred to as "the Borrowers") to a new maturity
date of July 15, 1998. The line, which is presently fully drawn, bears the
personal guarantees of Rick Wall, Kimo Keawe, John Tedcastle and Hideo
Nomura.
As you are aware, one of the factors precluding the Bank from performing its
annual review of the line, and hence, necessitating the need for the said
short-term extension, is the lack of an updated personal financial statement
for guarantor, Hideo Nomura. Inasmuch as the strength of the individual
guarantors was a material consideration in the Bank granting the Borrowers
the financial data, including, but not limited to Mr. Nomura's updated
personal statement, prior to the extended July 15, 1998 maturity of the
line, the Bank, at its sole election, will terminate the line, and require
that all advances outstanding thereunder be payable in full as they become
due.
Please note that even with the submission of the required data prior to July
15, 1998, the Bank, upon performing its review, will at its sole discretion
determine whether or not the line will be renewed, extended or otherwise.
Should you have any questions, please feel free to call me.
Sincerely,
/s/ Dwight Asato
--------------------
Dwight Asato
Vice President
25
<PAGE>
Honolulu, Hawaii
January 29, 1998
AMENDMENT TO PROMISSORY NOTE
Whereas, on January 29, 1998, Kelvin M. Bloom advanced the sum of SIXTY
THOUSAND DOLLARS ($60,000.00) in the form of a Promissory Note between
Kelvin M. Bloom and The Castle Group, Inc.
Whereas, the due date as specified in the Promissory Note was April 15,
1998, or upon the receipt of funds from the secondary offering that The
Castle Group, Inc. has registered with the Securities and Exchange
Commission, whichever is earlier.
Whereas, the parties mutually desire to amend the Promissory Note.
Now Therefore, the Promissory Note is hereby amended as follows:
The first paragraph of the Promissory Note is deleted and replaced with
the following:
"FOR VALUE RECEIVED, THE CASTLE GROUP, INC. does hereby promise to
pay to the order of Kelvin M. Bloom on or before July 15, 1998, or upon the
receipt of funds from the secondary offering it has registered with the
Securities and Exchange Commission, whichever is earler, the principal sum
of SIXTY THOUSAND DOLLARS ($60,000.00) in lawful monies of the United States
of America."
All other terms and conditions of the Promissory Note shall remain in
full force and effect.
THE CASTLE GROUP, INC. KELVIN M. BLOOM
By /s/ Rick Wall By /s/ Kelvin M. Bloom
------------------------ -----------------------
Its Chairman and CEO
By /s/ Motoko Takahashi
------------------------
Its Secretary
26
<PAGE>
Honolulu, Hawaii
January 15, 1998
AMENDMENT TO PROMISSORY NOTE
Whereas, on January 15, 1998, Michael S. Nitta advanced the sum of
FIFTY THOUSAND DOLLARS ($50,000.00) in the form of a Promissory Note between
Michael S. Nitta and The Castle Group, Inc.
Whereas, the due date as specified in the Promissory Note was April 15,
1998, or upon the receipt of funds from the secondary offering that The
Castle Group, Inc. has registered with the Securities and Exchange
Commission, whichever is earlier.
Whereas, the parties mutually desire to amend the Promissory Note.
Now Therefore, the Promissory Note is hereby amended as follows:
The first paragraph of the Promissory Note is deleted and replaced with
the following:
"FOR VALUE RECEIVED, THE CASTLE GROUP, INC. does hereby promise to
pay to the order of Michael S. Nitta on or before July 15, 1998, or upon the
receipt of funds from the secondary offering it has registered with the
Securities and Exchange Commission, whichever is earler, the principal sum
of FIFTY THOUSAND DOLLARS ($50,000.00) in lawful monies of the United States
of America."
All other terms and conditions of the Promissory Note shall remain in
full force and effect.
THE CASTLE GROUP, INC. MICHAEL S. NITTA
By /s/ Rick Wall By /s/ Michael S. Nitta
----------------------- ----------------------
Its Chairman and CEO
By /s/ Motoko Takahashi
-----------------------
Its Secretary
27
<PAGE>
(Logo)
CITY BANK
MAIN OFFICE
201 Merchant Street
Honolulu, Hawaii 96813-2992
June 12, 1998
The Castle Group, Inc.
745 Fort Street Suite 1000
Honolulu, Hawaii 96813
Attention: Mr. Michael Nitta
Vice President and Chief Financial Officer
Re: Commercial Loan No. 88-028635-50
Dear Mr. Nitta:
We are pleased to inform you that City Bank has approved an extension to the
above loan to August 15, 1998.
With the payment of an extension fee of $500.00, the interest rate, terms and
conditions of the loan shall remain unchanged except for the new maturity date.
Please call me at 535-2812 if you have any questions.
Thank you.
Sincerely,
/s/ Roy Yanaoshi
- -------------------------
Roy Yanaoshi
Vice President
Corporate Loan Department
Telephone: (808) 535-2500
28
<PAGE>
AMENDMENT OF LEASE
This Agreement made and entered into this 6th day of April, 1998 and
effective from and after April 1, 1998, by and between HIRANO ENTERPRISES, a
partnership of the City and County of Honolulu, State of Hawaii, hereinafter
called "Landlord", and THE CASTLE GROUP, INC., hereinafter called "Tenant".
W I T N E S S E T H
WHEREAS, Landlord leased and demised unto to KRI, INC., as "Tenant",
the right and privilege of occupying Suite 102 in the Atlas Building,
situated at 1150 South King Street, Honolulu, Hawaii containing a total
floor area of approximately 3,035 square feet by way of a Lease Agreement
dated April 1, 1998 and further amended by way of that Renewal of Lease
dated may 3, 1993. Said Lease is concurrently herewith assigned to The
Castle Group, Inc. as Assignee, by a separate Assignment of Lease dated
April 6, 1998 and effective retroactively to August 1, 1994.
WHEREAS, Landlord and Tenant mutually desire to amend the terms of the
lease.
NOW THEREFORE, the parties hereto agree as follow, to wit:
A. The term of the lease shall be amended to read as follows:
The lease shall be extended for an additional term of five years
(5), commencing April 1, 1998 and ending March 31, 2003.
B. Rent. Tenant shall pay to Landlord in lawful money of the United
States as base (minimum) rent in advance on the first day of each calendar
month without deduction, offset, prior notice or demand, exclusive of the
General Excise Taxes, the sum of:
$1,517.50/mo. commencing April 1, 1998 through July 31, 1998, then
$5,311.25/mo. commencing August 1, 1998 through January 31, 2000, then
$5,766.50/mo. commencing February 1, 2000 through January 31, 2001, then
$6.373.50/mo. commencing February 1, 2001 through January 31, 2003, then
$1,517.50/mo. commencing February 1, 2003 through March 31, 2003.
29
<PAGE>
Amendment of Lease
The Castle Group, Inc.
Page 2
C. Rent adjustment. Taxes, Assessments and Building Service Costs.
(Reference Paragraph 5)
This paragraph of the lease shall be modified to reflect a new
base year of 1998. All other conditions of this paragraph shall
remain unchanged.
D. Use and Maintenance of the Premises. (Reference Paragraph 12)
This paragraph of the lease shall be modified to reflect the use
of the premises as "General office use and any other use legally
permitted".
E. Consent: (added to the lease)
When consent shall be required by either the Landlord or Tenant,
it is understood that neither party shall unreasonably withhold or
delay such consent.
F. Deposit (Reference Paragraph 23)
This paragraph of the lease shall be deleted and Tenant's security
deposit presently held by Landlord shall be applied to the
Tenant's rental account.
G. Parking: (Added to the lease)
Tenant shall be allocated up to six (6) reserved and three (3)
unreserved parking stalls which Tenant may rent for the term of
the lease under a separate parking agreement. The Tenant agrees
to pay the then prevailing monthly parking rates applicable to the
Atlas Building. The Landlord reserves its right to adjust such
monthly parking rate from time to time.
H. Asbestos and Hazardous Material: (Added to the lease)
Landlord represents that to the best of its knowledge at the
present time, there are no hazardous materials or asbestos
containing materials in the Building other than a limited amount
of non-firable vinyl asbestos tiles located under the carpet on
the Eighth Floor of the Building. Whenever Landlord makes a
representation on its actual knowledge or to the best of its
knowledge or that effect, Landlord has made no special "due
diligence" investigation with regard to that representation, and
shall not be required to make such inquiry.
30
<PAGE>
Amendment of Lease
The Castle Group, Inc.
Page 3
I. Americans with Disabilities Act (Added to the Lease)
The Landlord shall be responsible for any improvements required to
the common areas of the Building under the Americans with
Disabilities Act and such improvements shall be made as capital
improvements and not charged back to the Tenant.
J. Special Conditions: (Reference Paragraph 39)
This paragraph of the Lease shall be amended to delete
subparagraph a. King Street Improvement District Assessment and
subparagraph c. Right to Relocate.
K. Option to Extend: (Reference Paragraph 2)
The last paragraph of Paragraph 2 of the lease shall be deleted
and amended as follows:
If Tenant is not then in default of the lease, Tenant shall have
one (1) non-assignable option to extend the lease for five (5)
additional years. Tenant shall notify Landlord in writing of its
intent to exercise the option no later than one hundred eighty
days (180) days prior to the expiration of the lease, and exercise
of said option shall be subject to the mutual agreement by
Landlord and Tenant of rental rates and terms, which is to occur
no later than ninety (90) days prior to the expiration of the
lease. If mutual agreement is not reached prior to ninety (90)
days before the expiration of the lease then the option shall
become null and void.
L. Cancellation Option: (Added to the lease)
If the Tenant is not then in default of the lease, the Tenant, The
Castle Group, Inc., shall have a non-assignable option to cancel
the Lease at any time during the period from April 1, 2001 through
March 31, 2003 contingent upon the Landlord's receipt of written
notice of such cancellation no less than three (3) months prior to
the date of cancellation AND Landlord's receipt from The Castle
Group, Inc. of the applicable cancellation fee upon or prior to
the effectuated cancellation date.
The cancellation fee shall be $12,500.00 if Tenant's effective
date of cancellation is April 1, 2001; thereafter, for every
remaining month canceled by exercise of said option, the fee shall
be $520.83 ($12,500.00 divided by 24 months = $520.83).
31
<PAGE>
Amendment of Lease
The Castle Group, Inc.
Page 4
IN WITNESS WHEREOF, Landlord and Tenant have executed this Agreement as
of the day and year first above written.
Landlord:
HIRANO ENTERPRISES
A partnership
By /s/ Herbert H. Hirano
-------------------------------
Its partner
Tenant:
THE CASTLE GROUP, INC.
By /s/ Kelvin M. Bloom
-------------------------------
Its COO
32
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> JUL-31-1998 JUL-31-1997
<PERIOD-END> APR-30-1998 APR-30-1997
<CASH> 133,746 63,655
<SECURITIES> 0 0
<RECEIVABLES> 1,186,925 900,397
<ALLOWANCES> 14,839 14,839
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,142,681 1,159,381
<PP&E> 210,013 218,237
<DEPRECIATION> 138,015 130,929
<TOTAL-ASSETS> 2,437,469 1,382,112
<CURRENT-LIABILITIES> 2,161,385 1,825,460
<BONDS> 0 0
0 0
0 0
<COMMON> 106,223 101,781
<OTHER-SE> 89,861 ( 545,129)
<TOTAL-LIABILITY-AND-EQUITY> 2,437,469 1,382,112
<SALES> 4,417,328 4,680,980
<TOTAL-REVENUES> 4,417,328 4,680,980
<CGS> 0 0
<TOTAL-COSTS> 4,353,934 4,650,228
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 48,640 41,481
<INCOME-PRETAX> 14,754 ( 10,729)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 14,754 ( 10,729)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 14,754 ( 10,729)
<EPS-PRIMARY> .003 ( .002)
<EPS-DILUTED> .003 ( .002)
<FN>
UNAUDITED
<PAGE>
</TABLE>
