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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended July 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number: 0-23338
THE CASTLE GROUP, INC.
(Name of small business issuer in its charter)
Utah 99-037845
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
745 Fort Street, Tenth Floor, Honolulu, Hawaii 96813
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (808) 524-0900
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.02 par value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
Page 1 of 95 sequentially numbered pages. The Exhibit Index appears on page
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $5,609,619
Aggregate market value of issuer's common stock held by
non-affiliates as of July 31, 1998: $1,538,706
Number of shares outstanding of the issuer's common stock as of
July 31, 1998: 5,311,130.
DOCUMENTS INCORPORATED BY REFERENCE: None
Transitional Small Business Disclosure Format (Check One):
Yes [x] No [ ]
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TABLE OF CONTENTS
PART I
Page
Item 1. Description of Business 4
Item 2. Description of Property 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 14
Item 6. Management's Discussion and Analysis or Plan of Operation 14
Item 7. Financial Statements 27
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 45
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act 45
Item 10. Executive Compensation 49
Item 11. Security Ownership of Certain Beneficial Owners
and Management 52
Item 12. Certain Relationships and Related Transactions 54
PART IV
Item 13. Exhibits and Reports on Form 8-K 55
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PART I
Item 1. Description of Business
General
The Castle Group, Inc. (the "Company") is a Utah corporation engaged in
the business of hotel and resort management, reservations, and sales and
marketing. The Company operates its business under the trade names
"Hawaiian Pacific Resorts" and "Castle Resorts and Hotels". At July 31,
1998, the Company had thirty hotel and resort management contracts covering
3,400 rooms. The Company plans to continue its expansion in the hotel and
resort management business and has been actively seeking to increase the
number of hotel and resort properties under management in the Hawaiian
islands and the Pacific Basin.
The properties under management include small budget inns as well as
larger condominium resort hotels on all of the major islands within the
State of Hawaii, in addition to one luxury condominium resort located in
Saipan. In May of 1996, The Company entered into a two year lease for 167
units located in the Kuhio Village Resort ("KVR") located in Waikiki. The
Company terminated the lease for the KVR effective April 30, 1998. The
company does not own any of the properties under management and has no
present or future plans involving the purchase of equity positions in any
such properties other than described under the caption "Plan of Operations
for 1999" under Item 1, Part I which follows.
The Company's executive offices are located at 745 Fort Street, Suite
1000, Honolulu, Hawaii, 96813. The Company's telephone number is (808)
524-0900.
Development of Business
The Company was organized under the laws of the State of Utah on August
21, 1981, under the name "Vector Communications, Inc." The Company was
formed primarily for the purpose of conducting business activities in the
communications industry and to invest in real estate, minerals and oil and
gas development. On November 22, 1983, the Company changed its name to
"Quest National, Inc."
During the fiscal year ended July 31, 1984, the Company acquired a
fifty percent interest in Guam Productions, Inc., a corporation organized
under the laws of the Territory of Guam ("Guam Productions"), in exchange
for 11,000,000 shares of the Company's "unregistered" and "restricted"
common stock and $100,000, and persons affiliated with Guam Productions were
elected to serve as directors and executive officers of the Company. Guam
Productions' sole asset was an exclusive franchise to operate a lottery in
the Territory of Guam through December 31, 1988. The Company's investment
in Guam Productions was written off in fiscal year ended July 31, 1985,
after initial attempts to operate the Guam lottery profitably were
unsuccessful. The Company did not renew its annual option to extend the
franchise. Its interest in Guam Productions was abandoned, and the Company
ceased business operations in 1986.
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The Company was inactive until fiscal 1993. On June 4, 1993, the
Company filed Articles of Amendment to its Articles of Incorporation with
the Department of Commerce of the State of Utah, changing the name of the
Company to "The Castle Group, Inc.," reducing the authorized shares of
common stock from 50,000,000 shares of $.001 par value per share to
20,000,000 shares of $.02 par value per share common stock and effecting a
reverse split of the outstanding shares on a basis of one for twenty. As a
result of the reverse split, the 21,330,500 outstanding shares of common
stock were reduced to 1,066,530 shares (including an additional 5 shares
resulting from "rounding" following the reverse split". The reverse split
did not affect the proportional interest of any stockholder in the Company.
On November 8, 1993, the Company and all of the stockholders of Castle
Group, Ltd., a Hawaii corporation ("Castle Group Hawaii") entered into an
Agreement and Plan of Reorganization (the "Castle Plan"). Pursuant to the
Castle Plan the Company acquired all of the assets of Castle Group Hawaii,
consisting primarily of four hotel and resort management contracts, in
exchange for 2,100,000 post-split "unregistered" and "restricted" shares of
the Company's common stock. The Company did not acquire any significant
assets other than the management contracts and did not assume any material
liabilities. Following the closing of the transaction, John G. Tedcastle
and Hideo Nomura were appointed as directors of the Company.
Castle Group Hawaii was originally organized in February 1989,
primarily for the purpose of managing 86 condominium units in the Hanalei
Bay Resort which had been recently acquired by Hanalei Bay International
Investors ("HBII"). HBII is a Hawaii limited partnership formed for the
purpose of acquiring the Hanalei Bay Resort, a 134 unit resort condominium
located in Princeville, Kauai, Hawaii. The partners of HBII include HBII
Management Inc. owned by Rick Wall, Voyage Fourteen, Ltd. owned by John G.
Tedcastle, L.C.C. Management Inc., owned by Judvhir Parmar, Nomura Firm and
Nomura Holdings, owned by Hideo Nomura and Kenji Nomura, and Siam Commercial
Bank.
HBII made an offer to purchase all 134 condominium units of the Hanalei
Bay Resort in November, 1988. HBII was able to purchase 86 condominium
units. Rick Wall, John G. Tedcastle, and Judvhir Parmar then formed Castle
Group Hawaii to manage the acquired condominium units and entered into a
management contract with Castle Group Hawaii. The contract was not modified
after the acquisition of Castle Group Hawaii by the Company. Management
believes that the terms of the management contract are no less favorable to
Castle Group Hawaii than contracts that could have been negotiated with
non-affiliated third parties. The management contract provided for full
management of the condominium units, including sales, staff supervision,
accounting and maintenance. Following the execution of the management
contract, the Hanalei Bay Resort was severely damaged by Hurricane Iniki,
causing the resort to cease hotel operations. The resort was initially
scheduled to reopen on May 1, 1994, but construction delays resulted in the
opening being postponed to August 1, 1994.
Between the time of its formation and the closing of the Castle Plan,
Castle Group Hawaii secured three more management contracts with the
Association of Apartment Owners of Hanalei Bay Resort, Kaluakoi Villas and
West Molokai Resort Condominium Owners Association. Each of these contracts
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were assigned to the Company in connection with the Castle Plan.
The operations of Castle Group Hawaii were relatively small at the time
of the closing of the Castle Plan. The total revenues for the years ended
July 31, 1992 and 1993 were $231,156 and $317,532, respectively. Expenses
for these periods consisted mostly of management salaries and rent for its
principal executive offices in Honolulu, Hawaii. Castle Group Hawaii had
approximately ten employees, all of whom were hired by the Company.
On November 8, 1993, in connection with the closing of the Castle Plan,
the Company sold 1,000,000 post-split shares of its common stock at a price
of $2.00 per share in a private placement. 250,000 shares were sold to
Akira Fujii, a resident of Japan, and 750,000 shares were sold to N.K.C.
Hawaii, Inc. ("NKC Hawaii"), a Hawaii corporation owned and controlled by
Ryoji Takahashi, a resident of Japan, and his family which includes Ms.
Motoko Takahashi. Following the sale of these shares, Mr. Fujii and Mr.
Takahashi were appointed as directors of the Company. On March 15, 1995,
Motoko Takahashi was also appointed as a director and corporate secretary of
the Company. Prior to their purchase of shares in the Company, Mr. Fujii
and NKC Hawaii had no affiliation with the Company, Castle Group Hawaii or
HBII, other than an option Nichiman International, a Hong Kong based company
owned by Mr. Ryoji Takahashi, acquired in 1992 which entitled it to purchase
a 3% interest in HBII.
On November 10, 1993, the Company purchased all of the stock of KRI,
Inc. ("KRI"), a Hawaii corporation doing business as "Hawaiian Pacific
Resorts," in exchange for 650,000 post-split "unregistered" and "restricted"
shares of the Company's common stock and $400,000 in cash, subject to a
holdback of $240,000 to cover any operating losses incurred by KRI during
the 18 months following November 10, 1993. An additional $800,000 was paid
to the selling stockholders of KRI in exchange for certain non-competition
covenants. Upon closing of the purchase of KRI, KRI became a wholly owned
subsidiary of the Company.
Prior to its acquisition by the Company, KRI managed several hotels and
resorts located in the State of Hawaii, including Waikiki Hana Hotel, Queen
Kapiolani Hotel, Kuhio Village Resort, Maui Beach Hotel, Maui Palms Hotel,
Hilo Hawaiian Hotel, Kauai Resort Hotel, Kona Reef Hotel and Wailea
Oceanfront Hotel. KRI operated its business under the name "Hawaiian
Pacific Resorts."
The business operations of KRI at the time of its acquisition were far
more significant than those of Castle Group Hawaii. KRI managed and
controlled the operations of between five and nine hotels in 1992 and 1993,
with total revenues of $1,120,041 and $1,284,804 for the years ended July
31, 1992 and 1993, respectively. Its expenses consisted primarily of
management, accounting and reservation personnel payroll and other sales
related expenses. At the time of its acquisition by the Company, KRI did
not have any significant assets other than its management contracts and
accounts receivable, had no material liabilities other than its trade
accounts payable, and had approximately 250 employees.
The business operations of KRI at the time of its acquisition also
included a 62% interest in HPR Advertising, Inc. ("HPR Advertising") a
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corporation organized under the laws of the State of Hawaii. HPR
Advertising was set up in 1989, with its primary operation being the
advertising of the hotels & resorts managed by KRI. The 38% minority
interest in HPR Advertising was owned by certain employees of KRI. On July
31, 1995, KRI purchased all of the minority interests in HPR Advertising for
$380 and HPR Advertising became a wholly owned subsidiary of KRI.
Several of KRI management contracts cover hotels and resorts owned by
the former stockholders of KRI, including Waikiki Hana Hotel, Maui Beach
Hotel and Hilo Hawaiian Hotel. These contracts were not modified after the
acquisition of KRI by the Company. Management believes that the terms of
these management contracts are no less favorable to KRI than contracts that
could have been negotiated with non-affiliated third parties.
On February 1, 1994, the Company filed with the Securities and Exchange
Commission a Registration Statement on Form 10-SB to register its common
stock, $.02 par value, under the Securities and Exchange Act of 1934. The
Registration Statement became effective on May 2, 1994.
Business
With the completion of the acquisitions of Castle Group Hawaii and KRI
in November of 1993, the Company succeeded to the business operations of
these entities and was firmly engaged in the management of hotels and
resorts in the Hawaiian islands. The Company has since then added a net of
seventeen management contracts to its portfolio of hotel and resort
management contracts, and plans to continue with its expansion by actively
seeking and acquiring additional contracts with hotels and resorts in the
Hawaiian islands and the Pacific Basin.
Management believes the consolidation of the business operations of
Castle Group Hawaii and KRI into one entity which specializes in hotel and
resort management better serves the public by offering a wider range of
rooms and services at competitive prices. From the hotel and resort owners'
point of view, management believes the size of the consolidated entity
provides increased visibility, cost savings by consolidation and allows a
hotel or resort a better opportunity to sell its accommodations during
periods of time when the market for such accommodations is depressed.
Management believes that the concentration of this wider range of
accommodations gives the Company greater access to numerous wholesalers who
book accommodations in large blocks and who are more likely to deal with
companies having a greater range of locations and prices than individual
hotel or resort properties or companies with a limited product line. The
large concentration of accommodations also allows for more cost effective
sales, marketing and advertising due to the economies of scale, with an
economical apportionment of the expenses over a wider range of
accommodations. Management also believes that in markets where there is a
tendency to overbook accommodations, the Company has a greater inventory of
available rooms as backup accommodations.
Pursuant to the majority of the management contracts with the hotels
and resorts, the Company provides total management of the hotel and resort
facilities, including supervision of staff and employees, reservation
services, food and beverage services, housekeeping, accounting and
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preparation of annual budgets and pro forma operating statements, and
physical maintenance. In some instances, the Company's management contract
provides for services which only include sales, marketing and reservations.
Under the majority of the management contracts, the Company is not
responsible for any of the direct operating expenses of the client hotels or
resorts. All of the operating expenses of the hotel or resort are paid
directly by the hotel or resort. Examples of expenses paid directly include
payroll, repairs, food and room cleaning. The Company may hire the
personnel to perform these services, but the hotel or resort is ultimately
responsible for the payment of these services. The Company is responsible
for its own costs only, and those costs usually include administrative,
sales, marketing and reservation expenses.
The Company is compensated by the client hotels and resorts by earning
a percentage of gross sales revenues accrued to the hotel or resort. Many
contracts also provide for additional compensation in the form of incentive,
marketing, reservation and accounting fees.
Under a few of the management contracts, the Company returns a fixed
percentage of gross revenues to the hotel or resort owners. The balance of
revenues remaining after such payment to the owners are used to pay
operating expenses associated with the property. The Company's management
fee under these types of agreement are the funds remaining after the payment
to the owners and the payment of operating expenses.
On May 1, 1996, the Company leased 167 rooms located within the Kuhio
Village Resort (KVR), located in Waikiki on the island of Oahu. Terms of
the lease called for a fixed monthly rent to be paid to the hotel owner,
plus a percentage of the hotel's operating profits in excess of $100,000 per
year. The lease agreement was terminated on April 30, 1998.
At July 31, 1998, the Company had thirty hotel and resort management
contracts. The Company plans to continue its expansion and has been
actively seeking to increase the number of hotel, resort and condominium
properties under management in the Hawaiian islands and the emerging markets
of other Pacific Basin countries.
Management believes that the emerging tourism markets of other Pacific
Basin countries such as Saipan, Guam and Indonesia will provide additional
opportunities for expansion and has focused efforts in these regions. On
August 1, 1997, the Company entered the foreign markets with the signing of
a full management agreement with the Aquarius Beach Tower ("ABT"), located
in Saipan. ABT is a 67 unit luxury condominium resort which opened on
November 1, 1997.
Conflicts of Interest
The potential exists for a conflict of interest when the Company enters
into a management contract with a hotel or resort in which stockholders of
the Company own or otherwise have an interest. Management will, whenever
possible, require that material terms and provisions of the management
contracts negotiated with affiliated entities to be no less favorable than
those that could have been negotiated at arms length. It is management's
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belief that all of its management contracts are on terms which are no less
favorable than those which are negotiated with owners not affiliated with
the Company.
Principal Products and Services
The principal services provided by the Company are the management,
reservations, sales and marketing of hotels and resort condominiums.
Principal clients include owners of these hotels and resorts which includes
individuals, general and limited partnerships, corporations and
associations.
In addition to management of transient rental operations of a property,
the Company also manages the Association of Apartment Owners ("AOAO") for
its client properties. The Company operates and supervises all aspects of
the property's day to day operations, subject to direction from the AOAO's
board of directors. These functions may include but are not limited to
employee training, property maintenance, accounting, finance, benefits
administration and purchasing. The Company earns a fixed monthly fee for
providing these services.
Under the majority of the Company's management contracts, the Company
provides total management of the facilities, including supervision of staff
and employees, reservation services, food and beverage services,
housekeeping, accounting, preparation of annual budgets and pro forma
operating statements and physical repairs & maintenance. Under certain
contracts, the Company only provides sales, marketing, reservations and
advertising services.
Products and services incidental to the management of hotels and
resorts are readily available from a number of suppliers, and include
bedding and toiletries, glassware, cleaning supplies and related equipment
and ground maintenance supplies and related equipment. These products and
supplies are usually provided by the hotel or resort. In some instances the
Company, as managing agent, may contract for these products and services on
behalf of the hotel or resort owner.
The Company also receives revenues in the form of commissions through
its centralized purchasing network. Fees are generated from the sharing of
savings enjoyed by its managed hotels and resorts by centralizing the
purchasing for the hotels and resorts managed by the Company, thereby
reducing the costs to the managed properties.
Competition and Competitive Position in the Industry
The management and marketing of hotels and resorts domiciled within the
State of Hawaii is very competitive, as the tourism industry is one of the
largest industries contributing to the State of Hawaii's economy. The
Company competes with national, regional and local management companies,
some of which may have a larger network of locations, greater financial
resources and better brand name recognition than the Company. The primary
competitors of the Company and the number of years each has been in business
are as follows: Aston Hotels and Resorts (31 years), Classic Resorts (14
years), and Outrigger Hotels & Resorts (51 years). Each of the competitors
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offer the same type of services provided by the Company and has bid against
the Company in the past. The competition for management contracts has led
to reduced profit margins and to more management contracts under which a
guaranteed return to the hotel or condominium owner may be required in order
to successfully acquire the management contract to these properties.
The management and marketing of properties in the emerging market of
the Pacific Basin is also very competitive, as Aston Hotels & Resorts and
Outrigger Hotels & Resorts have recently focused efforts in these areas.
The executive officers and key employees of the Company possess
substantial experience in the hotel and resort condominium management
industry, much of which was with the principle competitors listed above.
The senior management and the Company's infrastructure relative to sales and
marketing, central accounting and administrative support are believed by
management to be as comprehensive and complete in the Hawaiian segment of
this industry as any of its competitors. Although the Company commenced its
operations in November 1993, management has been successful in more than
doubling the number of contracts, many of which were previously managed by
competitors of the Company. In its brief operating history, the Company has
lost only one property to one of its competitors.
Sources and Principal Suppliers
The sources of the Company's revenues are generated as a percentage of
the gross revenues of the hotels and resorts managed by the Company and
therefore, the sources of revenue for the hotels and resorts have a
substantial impact on the revenues of the Company. The sources of the
principal business generated by the Company for its clients are the
wholesalers, tour operators and general public with whom the Company has
established long-term relationships, including travel agents throughout the
world.
The Company has hundreds of tour operators and wholesalers under
contract. These contracts give the tour operators and wholesalers the right
to sell the hotel and resort rooms that the Company manages at rates which
are discounted due to the large volume of business. These contracts are
typical of the industry and provide the Company with a ready market for the
hotel and resort rooms it manages. These contracts are not exclusive and
the Company does market its rooms under contract through its own reservation
and marketing network.
Dependence on One or a Few Customers
The loss of one or more of the larger hotels or resorts managed by the
Company may have an adverse impact on the Company's gross revenues and
earnings. Management intends to increase the number of properties under
management and thereby minimize the potential adverse effects which may
result from the loss of one of the larger hotels or resorts currently under
management. Management believes that it has made significant progress in
minimizing the adverse financial effects of losing properties in its
management portfolio.
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Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements
or Labor Contracts
With the exception of the management contracts and the tradenames
"Hawaiian Pacific Resorts" and "Castle Resorts & Hotels," the Company does
not have any material patents, trademarks, licenses, franchises,
concessions, or royalty agreements, the loss, or expiration, of which would
have a material adverse impact on the Company.
At July 31, 1998 and 1997, none of the employees of the Company or
properties managed by the Company were subject to any labor contract.
Governmental Approvals and Regulations
To the best of management's knowledge, the products and services
provided by the Company are not subject to governmental approval. The
extent of future promulgation of new regulations detrimental to the visitor
industry could have a substantial impact on the Company's profitability.
The hotel industry may be adversely effected by regulations which cover
wages, benefits, pricing, taxes and availability of financing. In addition,
the Company has expanded outside of the United States and are subject to
International laws and the laws and regulations of foreign countries. To the
best of management's knowledge, there are no existing or probable
governmental regulations covering the present or intended business
operations of the Company that have or are anticipated to have a material
adverse impact on the Company's business, financial condition or otherwise.
Environmental Regulations
Management believes there are no material environmental laws, rules and
regulations that have or are likely to have a material adverse impact on the
Company, and such regulations as they apply to the present and contemplated
business operations of the Company. Management also believes that those
regulations related to hazardous material and waste disposal, can be readily
complied with by services provided by local governmental agencies or
numerous private contract suppliers. The Company is not aware of any
environmental claims pending or threatened against it or against the owners
of the properties managed by the Company, however, no assurances can be
given that such a claim will not be asserted against the Company in the
future.
Employees
In some of the properties managed by the Company, all of the property
employees are employees of the Company instead of the property owner. At
July 31, 1998, the Company had approximately 800 employees. Approximately
600 employees were full time and 200 were part time. The total number of
employees employed at all properties represented by the Company was
approximately 1,200 at July 31, 1998, of which approximately 900 were full
time and 300 were part time. The number of categories in which these
employees serve may vary greatly from month to month, depending on the
season. The Company considers its relations with its employees and
employees of its clients whom it supervises to be excellent.
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Seasonal Business
Tourism in general is seasonal, though to a lesser extent in the State
of Hawaii where tourism represents one of the principal industries.
Seasonal fluctuations will occur, however, affecting occupancy rates, the
number of employees required for management related services and quarterly
revenues, expenses and earnings.
Item 2. Description of Property.
The Company leases 11,357 square feet of office space for its principle
executive offices at Suite 1000, 745 Fort Street, Honolulu, Hawaii 96813.
The initial lease for these premises was for a five year period commencing
June 1, 1994, and ending May 31, 1999, at a monthly rental of $11,130 plus
the costs of common area management. Effective September 1, 1998, the
Company renegotiated the lease for the premises. The renegotiated lease
covers the period through May 31, 2004 at a monthly rental cost that
averages $9,516 per month, plus the costs of common area management. The
Company has an option to renew the lease for an additional five years at a
rental amount that will be mutually agreed upon.
The Company's wholly-owned subsidiary, KRI, Inc. leased approximately
3,035 square feet of office space at a rental of $6,373.50 per month plus
the costs of common area management. The initial lease commenced on April
1, 1988, and was extended on April 1, 1993, to March 31, 1998. Effective
April 1, 1998, the lease was assigned to the Company by KRI, Inc. The
renegotiated lease covers the period from April 1, 1998 through March 31,
2003, with the Company having the option to extend the lease for an
additional five years. The average monthly rental under the lease is $5,450
plus the costs of common area management. The rent for the optional five
year period shall be mutually agreed upon. The leased premises are used for
the operation of the central reservations department, which is operated
under the name "Hawaii Reservations Center Corp."
During the year, the Company also leased 167 units located within the
Kuhio Village Resort for a fixed monthly rental plus general excise tax.
The lease also provided for additional annual rents as a percentage of net
operating profits in excess of a specified sum per year. The initial lease
commenced May 1, 1996 and expired March 31, 1998. KRI had the option to
extend the lease for an additional four years at a rental rate to be
mutually determined between KRI and the lessor. The leased premises were
utilized by KRI for a hotel operation. Effective April 30, 1998, KRI
terminated its lease agreement and discontinued its hotel operation at the
Kuhio Village Resort.
Item 3. Legal Proceedings
The Company is a named defendant in Berke v. Castle Group, Ltd., et al.
Civil No. 96-00766, United States District Court, District of Hawaii, filed
on September 16, 1996. The plaintiffs are the owners of one apartment unit
and the owners of partial interests in two other apartments at the Hanalei
Bay Resort who purport to be filing a class action suit for other apartment
owners, and also claim that the suit is a derivative action on behalf of the
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Association of Apartment Owners of Hanalei Bay Resort (AOAO). The suit
contains allegations that the Company acted without authorization with
regard to payment of insurance funds related to the reconstruction of the
Hanalei Bay Resort following hurricane Iniki in 1992. Remedies sought
against the Company include unspecified amounts of general damages, punitive
damages and removal of the Company as managing agent for the AOAO.
Management vehemently disagrees that the Company acted without the
authorization of the AOAO and intends to defend itself vigorously against
the plaintiffs. The Litigation Committee of the AOAO has conducted an
independent investigation of the allegations contained in the lawsuit.
Their investigation disclosed that the Company acted properly in its
capacity as the managing agent of the AOAO, and that all payments of
insurance funds were fully authorized by the AOAO. The Company has filed a
motion to dismiss the lawsuit. Because of the aforementioned, management
believes that the lawsuit is without merit and shall be dismissed or
adjudicated in favor of the Company.
The Company is subject to various other claims and lawsuits which are
normal and reasonably foreseeable in light of the nature of the Company's
business and the growth in the Company's business. In the opinion of
management, although no assurances can be given, the resolution of these
claims will not have a material adverse effect on the Company's financial
position, results of operations and liquidity. Further, to the knowledge of
management, no director, officer, affiliate or record of beneficial owner of
more than 5% of the common voting stock of the Company is a party adverse to
the Company or has a material adverse interest to the Company in any
material proceeding.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the security holders of record
during the fourth quarter ended July 31, 1998.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Market Information
The Company's common stock is listed on the "Electronic Bulletin Board"
of the National Association of Securities Dealers, Inc., under the symbol
"CAGU." There has been only limited trading activity in the common stock of
the Company. The following table sets forth the high asked and low bid
prices for the Company's stock for each of the full quarters during the year
ended July 31, 1998. The following market quotations reflect inter-dealer
prices, without retail markup, markdown or commission and may not
necessarily represent actual transactions.
Quarter Ended Low Bid High Asked
------------------ --------- ------------
October 31, 1997 $ 1.500 $ 2.375
January 31, 1998 1.625 3.000
April 30, 1998 2.000 2.875
July 31, 1998 1.250 2.438
Holders
The number of record holders of the Company's common stock as of July
31, 1998 was approximately 280.
Dividends
The Company has not paid any dividends with respect to its common
stock, and does not intend to pay dividends in the foreseeable future. It
is the present intention of management to utilize all available funds for
the development and expansion of the Company's business. There are no
present material restrictions that limit the ability of the Company to pay
dividends on common stock or that are likely to do so in the future.
Item 6. Management's Discussion and Analysis of Financial Condition or
Plan of Operation.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements contained in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Plan of Operation"
including statements regarding the anticipated development and expansion of
the Company's business, the intent, belief or current expectations of the
performance of the Company and the products and/or services it expects to
offer and other statements contained herein regarding matters that are not
historical facts, are "forward-looking" statements. Because such statements
include risks and uncertainties, actual results may differ materially from
those expressed or implied by such forward-looking statements. Factors that
could cause actual results to differ materially from those expressed or
implied by such forward-looking statements include, but are not limited to,
the factors set forth in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Plan of Operation."
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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 primarily operates within the State of
Hawaii under the trade names "Hawaiian Pacific Resorts" and "Castle Resorts
and Hotels".
The Company's revenues are derived from management fees, sales &
marketing fees, reservation fees, accounting fees, commissions, incentive
fees and other fees from the properties it represents pursuant to the terms
and conditions of its management contracts. The revenues of the properties
which are managed by the Company are not recorded as revenues of the
Company.
The Company's operating expenses are comprised of labor, reservations
fees and other costs associated with operating as a management company. The
expenses of the properties which are managed by the Company, except as
mentioned herein, are not recorded as expenses of the Company.
As of July 31, 1998, the Company had 30 management or sales, marketing
and reservations 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 based on the net operating profits of the property managed.
Sales and marketing and reservation fees earned from the properties are
based on the gross revenues of the property. The Company is also reimbursed
for direct advertising and marketing expenditures it makes on behalf of the
property, all in accordance with the terms and conditions of the management
contracts. The Company also earns commissions and other fees from the
properties managed by providing centralized purchasing services to the
hotel owners. Under these arrangements, the net savings to the property
owner from centralized purchasing are shared between the Company in the form
of commissions and to the property owner in the form of cost savings.
Hotel revenues consist of revenues from 167 rooms leased by the
Company. Under this arrangement, the Company includes as its own revenues
the entire property revenues which includes hotel transient rental income as
well as the total expenses incurred to operate the property. The property
is situated in Waikiki, Hawaii. The Company terminated this lease effective
April 30, 1998. The Company does not currently own any other real property
interest in fee or leasehold.
Overview
The tourism industry has been, historically, seasonal in nature. The
Company generally reflects higher revenues from the fees generated by its
properties in the first and third quarters of its operating year, which may
cause expected fluctuations in the Company's quarterly revenues and net
earnings.
The majority of the Company's properties under contract are located in
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Hawaii. The tourism economy of the State of Hawaii has been in a downward
trend over the past few years. The economic crisis in Asia, upon whom
Hawaii depends upon for its tourist market has resulted in a decrease in the
eastbound traveler. Although no assurances can be given, management
believes that the economy of the mainland United States will continue to
improve, and that the economic crisis in Asia will not be a long term
problem. Management also believes that the convention center recently
completed in Waikiki shall allow the State to capture a portion of the
lucrative convention travel market, further increasing the demand for guest
rooms.
Revenues from management related operations grew at a compound annual
rate of 40.5% from 1994 through 1998, from $1,118,386 to $4,362,299. Total
revenues grew at a compound annual rate of 49.7% from 1994 through 1998,
from $1,118,386 to $5,609,619. The growth in revenues attained by the
Company over the past four years has been substantial, however management
gives no assurances that these increases shall continue in future periods.
The increase in revenues together with smaller increases in operating
expenses resulted in the Company being able to reduce net losses from 1994
through 1996, and record a profit in 1997 and 1998. Net losses decreased
from $922,644 for the nine months ended July 31, 1994 to a profit of $58,133
for the fiscal year ended July 31, 1998. Management attributes the
improvements in operating income to the growth in revenues coupled with
effective cost controls. There can be no assurance that these improvements
to operating income will continue in future periods.
Results of Operations
For the Years Ended July 31, 1998 and 1997
Sales
For the years ended July 31, 1998 and 1997, the Company had total
revenues of $5,609,619 and $6,185,798, respectively, representing an
decrease of $576,179 or 9%. The decrease in revenues was attributable to a
decrease of $644,262 in hotel revenues, offset by an increase of $68,083 in
management and other management related income. The decrease in hotel
revenues is due to the Company terminating its lease of 167 rooms operated
as a hotel in April of 1998. The increase in management related income is
due to the expansion and maturing of the Company's client base, and due to
the addition of two properties during the fiscal year ended July 31, 1998.
The Company was also successful in increasing the revenues of its managed
properties which favorably impacts the Company's management fees, which are
generally based on the room revenues for the property.
Costs and Expenses
Operating expenses for management operations were $4,166,531 for the
year ended July 31, 1998 as compared to $4,051,676 for the prior year, an
increase of $114,854 or 2.8%.
Operating expenses for hotel operations were $1,314,284 for the nine
months of operations during the year ended July 31, 1998 as compared to
$1,893,634 for the twelve months of operations ended July 31, 1997.
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The following table summarizes the increases and decreases in operating
expenses for the fiscal year 1998 as compared to the prior year by
management related operations and hotel related operations:
(In Thousands)
Management Operations Hotel Operations
Expense Increase (Decrease) Increase(Decrease)
- ------------------------- ---------------------- ------------------
Payroll & Benefits $ 287 ( $ 259 )
Rent 73 ( 174 )
Reservations Expense ( 70 ) 0
Repairs & Maintenance 5 ( 101 )
Taxes 1 ( 5 )
Advertising 32 0
Travel & Entertainment 38 ( 1 )
Professional Fees ( 22 ) ( 4 )
Insurance ( 10 ) ( 33 )
Utilities 1 ( 8 )
Office Expenses ( 1 ) ( 2 )
Depreciation & Amortization ( 227 ) 0
Other Expenses 8 8
--------------------- -------------------
$ 115 ($ 579 )
===================== ===================
Expenses for hotel operations decreased by $579,350 for the fiscal year
ended July 1998 as compared to the prior year due to the Company terminating
its lease of 167 rooms located within the Kuhio Village Resort in April of
1998. On an average basis, hotel expenses were $146,000 per month in fiscal
1998 as compared to $157,000 for fiscal 1997, a decrease of 7%.
Payroll and related costs for management operations increased by
$287,000 as a result of the Company increasing its staffing to properly
service the two additional properties and also in anticipation of future
growth in the Company's client base. Included in 1997 is the elimination of
deferred compensation payable of $250,000 and the unamortized balance of
the deferred compensation expense of $62,500 resulting from the forfeiture
of a stock option granted to an officer of the Company; this resulted in a
reduction in payroll and benefits expense of $187,500 in 1997.
Depreciation and amortization expense decreased by $227,000 for the
year ended July 31, 1998, primarily due to the amortization in full of
deferred costs and non-competition fees in fiscal July 1997. The
non-competition agreements were purchased for $800,000 in November of 1993
and covered a period of three years. Monthly amortization expense of
$22,222 was recorded between the months of November 1993 through October
1996. Of the $227,000 decrease for fiscal 1997, $66,700 is attributed to
the non-existence of this amortization expense for the fiscal year ended
July 31, 1998. The deferred costs represents the cost of obtaining
management contracts and was amortized over a five year period which ended
in June of 1997. In fiscal 1997, the amortization of the deferred costs
were $157,500.
Interest expense increased by $18,700, from $51,900 to $70,600 for the
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year ended July 31, 1998 as compared to the prior year. The increase in
interest expense is attributed to the Company securing and drawing on an
additional line of credit for $250,000 in November of 1997. (See Note 5 to
the consolidated financial statements).
Net Income (Loss)
The Company reported net income of $58,133 and $188,552 for the fiscal
years ended July 31, 1998 and 1997, respectively.
For the fiscal year 1998, the Company incurred a net loss of $67,000 in
its hotel operations at the Kuhio Village Resort as opposed to a net loss of
$2,100 for the prior year. The Company terminated its hotel operations at
the Kuhio Village Resort in April of 1998.
Net Income from the core business operations of the Company, management
and related services, decreased by $65,500 for fiscal 1998 as opposed to the
prior year. In fiscal 1997 the Company recorded a reduction of $187,500 to
its payroll & benefits expense to record the forfeiture of a stock option by
an officer of the Company.
For the Years Ended July 31, 1997 and 1996
Sales
For the year ended July 31, 1997 and 1996, the Company had total
revenues of $6,190,000 and $4,110,000, respectively, representing an
increase of $2,080,000 or 51%. The increase in revenues was attributable to
a $1,480,000 increase in hotel revenues and a $600,000 increase in
management and other management related income. Because the Company
acquired the leasehold interest to 167 rooms operated as a hotel in May of
1996, total revenues for the two periods does not provide an accurate
comparison for means of measuring performance. For the nine months ended
April 30, 1997 and 1996, the Company had unaudited management related
revenues of $3,200,000 and $2,800,000, an increase of $400,000 or 14.2%.
The increase in management related income is due to the expansion and
maturing of the Company's client base. In 1996, the Company was successful
in acquiring and/or starting the rental operations of four properties and
therefore, the revenues included for 1997 covers twelve months of operation
as opposed to only fractional portions of the year in 1996. The Company was
also successful in increasing the revenues of its managed properties which
favorably impacts the Company's management fees, which are generally based
on the room revenues for the property.
Costs and Expenses
Operating expenses for management operations were $3,790,000 for the
year ended July 31, 1997 as compared to $3,660,000 for the prior year, an
increase of $130,000 or 3.6%. The increase in operating expenses were
attributable to the costs associated with the 51% increase in revenues for
the year. Included in 1997 is the elimination of deferred compensation
payable of $250,000 and the unamortized balance of the deferred
compensation expense of $62,500 resulting from the forfeiture of a stock
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option granted to an officer of the Company; this resulted in a reduction in
payroll and benefits expense of $187,500 in 1997. Operating expenses for
hotel operations were $1,900,000 for the year ended July 31, 1997 as
compared to $450,000 for the three months of hotel operations ended July 31,
1996.
Depreciation and amortization expense decreased by $202,000 for the
year ended July 31, 1997, primarily due to the amortization in full of the
non-competition agreements incurred upon the purchase of KRI, Inc. as of
October 31, 1996. The non-competition agreements were purchased for $800,000
in November of 1993 and covered a period of three years. Monthly
amortization expense of $22,222 was recorded between the months of November
1993 through October 1996. Of the $202,000 decrease for fiscal 1997,
$200,000 is attributed to the non-existence of this amortization expense for
the months of November 1996 through July, 1997.
Interest expense decreased by $16,000, from $68,000 to $52,000 for the
year ended July 31, 1997 as compared to the prior year. The decrease in
interest expense is attributed to a lower amount of indebtedness. The
Company fully paid off its contract payable in June of 1997 and during the
year reduced its indebtedness on the line of credit by $25,000 in February
of 1997 (See Note 5 to the consolidated financial statements).
Net Income (Loss)
The Company reported net income of $188,552 and a net loss of $544,962
for the fiscal years ended July 31, 1997 and 1996, respectively. As
discussed above, the increases in management related income at a minimal
incremental cost, the fully amortized non-competition agreements and the
forfeiture of a stock option granted to an officer of the Company resulted
in the Company improving it's net income by $733,514 for the fiscal year
ended July 31, 1997.
Liquidity and Capital Resources
The Company's primary sources of working capital are cash flows from
operations and borrowings. Net cash provided from operations was a deficit
of $506,443 in fiscal 1998 and a deficit of $333,957 in fiscal 1997. The
Company had unrestricted cash of $245,969 and $268,938 at July 31, 1998 and
1997, respectively.
At July 31, 1998, the Company's balance sheet reflected $245,969 of
cash representing a decrease of $22,969 from July 31, 1997. During the year
ended July 31, 1998, cash used in operating activities exceeded cash
provided by operating activities by $506,443. Cash used by investing
activities was $399,775 and cash provided by financing activities was
$883,249.
In July of 1997, the Company sold 222,100 shares of "unregistered" and
"restricted" stock for a gross price of $2.00 per share, or an aggregate of
$425,399 (net of commissions and other fees) in a private placement. The
shares were subscribed and paid for as of September 18, 1997, and the stock
certificate was subsequently issued.
The Company has a $300,000 line of credit dated October 21, 1994 which
is personally guaranteed by four directors of the Company. The Company made
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draws against the line of credit for $275,000 during the fiscal year ended
July 31, 1995. The Company subsequently repaid $25,000 of the line of
credit in April 1997, and subsequently drew the remaining $50,000 in
December of 1997. The line of credit which was due on November 10, 1998 was
subsequently extended to December 20, 1998.
In November of 1997, the Company received and drew an additional line
of credit for $250,000 dated November 14, 1997. The line of credit was
initially due on May 17, 1998 and has been extended through December 31,
1998. Management believes, although no assurances can be given, that the
line of credit may be further extended if necessary.
The Company had net working capital of $142,622 as of July 31, 1998 and
net working capital of $87,325 as of July 31, 1997.
As of July 31, 1998, net working capital included liabilities due to
affiliates in the amount of $386,263 consisting of $195,464 in notes payable
and accrued interest to former stockholders of KRI, Inc. (representing the
undistributed cost on the acquisition of the stock of KRI, Inc.), and
$190,799 in notes payable and accrued interest to directors and officers who
advanced funds to the Company. Also included in net working capital is
$26,667 in unamortized deferred revenues related to a signing bonus of
$80,000 in cash paid to the Company by one of its vendors in May of 1998 as
a result of the Company entering into a three year contract with the vendor.
The deferred revenues are being amortized over three years.
At July 31, 1998, accounts payable increased by $275,616 over the prior
fiscal year, to $889,407. The increase in accounts payable is attributable
to the Company increasing its client base. During the fiscal year, the
Company added three management contracts and terminated a lease on another.
The increased advertising and marketing costs to promote the three
properties contributed to the increase in accounts payable. The increase in
accounts payable is also attributed to the increase in accounts receivable.
At July 31, 1998, the Company's accounts receivable consisted of
$310,297 in sales, marketing, reservations, and other reimbursements,
$653,619 of management and other fees, and $110,160 in receivables for
transient room rentals. Sixty three percent (40%) of the total accounts
receivable was current, twenty seven percent (27%) was 30 to 60 days past
due, nine percent (9%) was 60 to 90 days past due, and twenty three percent
(23%) was more than 90 days past due.
At July 31, 1998, the Company had a receivable balance of $844,798 from
Hanalei Bay Resort, of which fifteen percent (15%) was current, ten percent
(10%) was 30 to 60 days past due, ten percent (10%) was 60 to 90 days past
due, and sixty five percent (65%) was more than 90 days past due. HBII is
currently negotiating a sale of all or a portion of its ownership interests
in the Hanalei Bay Resort to a regional timeshare sales organization. Under
the terms of the sale, in addition to the sale proceeds to be received, the
current HBII partners shall share in the future cashflows generated by
timeshare sales of the units located within the Hanalei Bay Resort, after
certain secured and preferential payments are made. Although no assurances
can be given, management is confident that the sale shall be consummated and
that upon closing, the Company shall receive payment in full of its accounts
receivable from Hanalei Bay Resort. HBII currently has backup alternatives
should the currently negotiated sale not be consummated. Should the
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receivable not be collected during fiscal 1999, management shall be forced
to seek other financing alternatives. Certain members of the Board of
Directors of the Company have a direct or indirect financial interest in
HBII (See Item 12).
In July of 1998, the Company also funded a loan of $435,000 to Hanalei
Bay International Investors ("HBII"). The terms of the loan call for
interest at the rate of 12% per annum and a percentage of the future
cashflows received from timeshare sales by the partners of HBII. The loan
is due on or before March 31, 1999. HBII is currently negotiating a sale of
all or a portion of its ownership interests in the Hanalei Bay Resort to a
regional timeshare sales organization. Under the terms of the sale, the
current HBII partners shall share in the future cashflows generated by
timeshare sales of the units located within the Hanalei Bay Resort, after
certain secured and preferential payments are made. Although no assurances
can be given, management is confident that the sale shall be consummated and
that upon closing, the Company shall receive payment in full on the note
receivable, together with interest. HBII currently has backup alternatives
should the currently negotiated sale not be consummated. Should the note
not be collected when due, management shall be forced to seek other
financing alternatives. Certain members of the Board of Directors of the
Company have a direct or indirect financial interest in HBII (See Item 12,
Certain Relationships and Related Transactions).
The funds collected from Hanalei Bay Resort upon the closing of its
sale shall be used to reduce the accounts payable balances of the Company
and for working capital to fund operations.
In January of 1998, two officers loaned the Company $50,000 and
$60,000, respectively and the Company executed a note which called for
interest at the rate of 8.5% and a due date of April 15, 1998. In July of
1998, one of the officers advanced an additional $60,000 to the Company.
The notes were thereafter amended to include interest at the rate of 10% per
annum and the due dates were extended to August 15, 1999. The terms of the
notes call for monthly payments of $600 and $2,000, respectively.
In July of 1998, a director of the Company advanced $175,000 and the
Company executed a note which called for interest at the rate of 10% per
annum and a due date of March 31, 1999. In addition to the return of
principal plus interest, warrants on the Company's common stock shall also
be issued to the director. (see Item 11, Security Ownership of Certain
Beneficial Owners and Management).
In July of 1998, the Company received loans of $200,000 from four
unrelated parties. The terms of the notes call for interest at the rate of
10% per annum and a due date of March 31, 1999. In addition to the return
of principal plus interest, warrants on the Company's common stock were also
be issued. (see Item 11, Security Ownership of Certain Beneficial Owners
and Management).
The Company has, in the past, met its financial obligations through its
line of credit with Hawaii National Bank and through the issuance of notes
to the former stockholders of KRI, Inc. The Company plans to further extend
the due dates of the notes to the former stockholders of KRI, Inc., officers
and directors if necessary. Although no assurances may be given, management
believes that it has built up its revenue base to a level which will sustain
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a net operating profit, allowing the Company to meet its current
obligations. Management further believes that the Company shall have
sufficient cash flow for its business operations for the next year.
The Company filed a registration statement on Form SB-2 for the
issuance of 1,600,000 shares of its common stock. The registration
statement became effective on March 11, 1998. The public offering has not
materialized as planned and management is considering the withdrawal of the
registration statement in the near future. Management is, instead
negotiating a private placement for cumulative preferred stock and
although no assurances may be given, management is confident that the
private placement shall be successful.
The proceeds from the private placement shall be used to retire the
outstanding lines of credit of the Company and to fund future expansion and
growth for the Company.
Management believes, although no assurances can be given, that the
combination of the net proceeds of the private placement, net of repayment
of borrowing, net cashflow generated from operations, the collection of the
receivable balance from HBII, and the future availability of credit
facilities will be sufficient to fund the operations of the Company and its
future anticipated growth.
The Company has no present plans involving the sale or purchase of any
properties, assets or business.
Plan of Operation
The Company is one of the leading regional hotel and resort management
companies within the State of Hawaii. At July 31, 1998, the Company had 30
management or sales, reservations and marketing contracts covering 3,400
rooms.
The properties represented by the Company appeals to a wide variety of
the public market as the Company manages a wide spectrum of property types
from the luxury condominium resorts with room rates exceeding $1,000 per
nite to the small budget inns with a rates under $40. The Company believes
that the availability of differing products provides appeal to all levels of
business or leisure traveler.
The Company has experienced significant growth since its commencement
of operations in November of 1993. From November of 1993 through July of
1998, the number of contracts has more than doubled, from 13 to 30 and the
number of rooms managed also increased substantially during this period,
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 Basin
destinations. In addition to Hawaii, management believes that there are
many opportunities to expand its client base in the emerging markets of the
Pacific Basin. In addition to signing on independent hotels and resorts,
the Company may achieve its desired goals through joint venture investments,
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leases and/or acquisitions of management contracts and/or companies.
Currently, the Company is engaged in various stages of discussions for
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 signed a management agreement with the
Aquarius Beach Tower, a 68 unit luxury condominium resort located in Saipan.
Although no assurance can be given, it is management's belief that it will
be able to continue its expansion into the Pacific Basin.
With the increase in the management contracts, the number of hotel and
resort employees that the Company will supervise may increase significantly.
The Company is presently negotiating for both small budget hotels and large
luxury condominium resorts and therefore, it is impossible at this time to
predict the number of additional employees that it will supervise or that it
will be required to hire for the hotels and resorts during the next fiscal
year.
On July 31, 1995, the Company invested $100,000 into a reorganization
plan instituted by HBII. Under terms of the HBII reorganization plan, the
eighty seven units owned by HBII will be sold under a timeshare plan and
investors in the timeshare plan may receive up to four times their
investment over the life of the timeshare plan. As of July 31, 1998, the
Company has received a total of $164,376 from this investment. Of the funds
received, $41,094 represents a return of the initial investment and $123,282
represents a gain to the Company. HBII is currently negotiating a sale of
all or a portion of its ownership interests in the Hanalei Bay Resort to a
regional timeshare sales organization. Although no assurances can be given,
management is confident that the sale shall be consummated and that the
Company shall receive payment in full on its investment. Certain members of
the Board of Directors of the Company have a direct or indirect financial
interest in HBII (See Item 12).
On August 1, 1994, the Company entered into a contract with Hawaii
Reservations Center Corp. ("HRCC"), a company controlled by Charles M.
McGee, pursuant to which HRCC shall provide reservation services for hotels
and resorts managed by the Company. Since the purchase of KRI, reservation
services have been provided by KRI. The fees to be paid by the Company
include a fixed monthly fee plus commissions. The Company also agreed to
sell to HRCC the assets of the reservation offices of KRI, which consisted
of office equipment. As consideration for the equipment, HRCC agreed to
employ the reservation department employees of KRI and to assume the
liability for the accrued vacation of such employees. KRI realized a gain
of $4,372 on the transaction, as the value of the accrued vacation exceeded
the net book value of the office equipment sold.
It is management's belief that the contract with HRCC are on terms
which are no less favorable than those which could be negotiated with
companies not affiliated with The Company, however, in May of 1997, the
Company renegotiated its contract with HRCC with regard to the fees charged.
Under the renegotiated agreement, the fees paid to HRCC is 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
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given, that the Company shall enjoy lower reservations costs under the new
agreement.
The Tourism Industry
The majority of the Company's properties under contract are located in
Hawaii. According to "Travel and Tourism and Hawaii's Economy - Impact and
Perspective Millennium Vision 1997" published by the World Travel and
Tourism Council, tourism is Hawaii's largest industry, providing 24% of the
Gross State Product. It is estimated that in 1997, tourism accounted for
approximately 31% of the State's total work force. During the last ten
years, the average statewide occupancy has ranged from the low seventies to
the low eighties. Management believes that the economy of the mainland
United States will continue to improve, and that the recent economic crisis
in Asia will not be a long term problem, and therefore the tourism industry
as a whole will experience future growth in earnings. Management also
believes that the convention center recently completed in Waikiki shall
allow the State to capture a portion of the lucrative convention travel
market, further increasing the demand for guest rooms.
Growth Strategy
The Company believes that the improving tourism industry together with
the current economic environment will provide excellent opportunities for
future growth. Under the current sluggish economy of the Hawaii hotel
industry, the Company would be able to provide more benefits to the owners
of properties which are underperforming in the form of economies of scales
in advertising, reservations, sales and marketing which should translate to
higher revenues for the property. Since the Company allocates the cost of
each expenditure to all of the managed properties, property owners would
enjoy a substantial increase in the exposure to the general public, travel
agents and wholesalers. The operational expertise provided by the Company
would also assist the property owner in reducing operating expenses through
staffing and central purchasing. Other contributing factors to the future
growth of the Company over the next few years are:
Existing Contracts. The Company has been successful in improving the
performance for its properties over the past three years. Further
improvements in revenues and net operating profits for the Company's current
portfolio of properties will result in higher management fees for the
Company. The additional fees from the Company's current portfolio of
properties would generally not entail additional incremental expenses to the
Company. Instead, an expansion of the Company's management contract
portfolio would provide better savings to the existing properties which in
certain contracts would translate into higher management incentive fees.
Additional Contracts. Although no assurance can be given, management
believes that it will be successful in attaining additional management
contracts in the future. Opportunities for additional contracts may arise
from a myriad of factors which include sales of properties, foreclosures,
underperformance and dissatisfaction with current management. Management
has a proven track record over the past three years of improving the
performance of the properties it manages. Management is constantly looking
for properties in need of the Company's services.
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Emerging Markets. The Company currently has the majority of its
contracts located within the State of Hawaii. Management believes that
there are emerging markets in which the services provided by the Company
will be needed. These areas include Guam, Saipan and other Pacific Basin
regions. Although no assurance can be given, management is confident that
it will be able to obtain management contracts for properties located within
this region and will be successful in enhancing the profitability of these
properties through the services it provides.
Acquisitions. The Company may also seek opportunities to acquire other
hotel management contracts and/or companies that would result in further
synergies for the Company and its managed properties.
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 25% 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 10% of its testing. The Company has not yet
implemented its implementation phase. Completion of the testing phase is
expected by December 31, 1998, with all remediated systems fully implemented
by March 31, 1999.
25
<PAGE>
With respect to third parties, for systems that interface directly with
significant vendors, the Company is 50% 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
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 $1,000 in expenses
related to all phases of the Year 2000 project. Of the total remaining
project costs, approximately $49,000 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.
26
<PAGE>
Item 7. Financial Statements
PART F/S
Financial Statements Page No.
July 31, 1998 and July 31, 1997
Report of Independent Accountants -
PricewaterhouseCoopers, L.L.P 28
Consolidated Balance Sheets -
July 31, 1998 and 1997 29
Consolidated Statements of Operations
for the years ended July 31, 1998 and 1997 30
Consolidated Statements of Stockholder's Equity
for the years ended July 31, 1998 and 1997 31
Consolidated Statements of Cash Flows
for the years ended July 31, 1998 and 1997 32
Notes to the Consolidated Financial Statements 34
27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
October 29, 1998
The Board of Directors and Stockholders
The Castle Group, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of The
Castle Group, Inc. and its subsidiary (the "Company") at July 31, 1998 and
1997, and the results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
These consolidated financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion
expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
28
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated balance sheets - July 31, 1998 and 1997
1998 1997
Assets
Current Assets:
Cash $ 245,969 $ 268,938
Accounts receivable, less allowance for doubtful
accounts of $60,658 and $25,405 in 1998 and
1997, respectively 1,013,418 820,368
Due from related parties (Note 2) 844,798 197,730
Notes Receivable, current (Note 3) 530,600 --
Prepaid expenses 22,074 89,779
Restricted cash 19,941 19,941
------------ ------------
Total current assets 2,676,800 1,396,756
Furniture, Fixtures and Equipment, Net 61,136 82,571
Other Assets:
Notes receivable, noncurrent (Note 3) 154,400 --
Deposits 25,647 63,021
Investment in HBII Timeshare Program 58,906 61,240
Organization Costs 2,585 12,928
------------ ------------
Total other assets 241,538 137,189
------------ ------------
Total Assets $ 2,979,474 $ 1,616,516
============ ============
Liabilities And Stockholders' Equity
Current Liabilities:
Accounts payable $ 889,407 613,791
Vacation payable 108,855 109,233
Wages payable 76,485 84,567
Taxes payable 26,359 36,143
Due to related parties, current 374,500 18,000
Notes Payable, current (Note 5) 750,000 250,000
Deferred income (Note 1) 26,667 76,230
Other accrued liabilities 281,905 121,467
------------ ------------
Total current liabilities 2,534,178 1,309,431
Due to Related Parties, non-current 152,500 166,400
Deferred Income (Note 1) 53,333 --
Commitments and Contingencies (Note 4)
Stockholders' Equity:
Common stock, $.02 par value, 20,000,000
shares authorized, 5,311,130 and 5,089,030
shares issued and outstanding in 1998 and 1997 106,223 101,781
Common stock subscribed and unissued,
222,100 shares -- 384,750
Capital in excess of par 2,539,175 2,118,222
Accumulated deficit ( 2,405,935) ( 2,464,068)
------------ ------------
Total stockholders' equity 239,463 140,685
------------ ------------
Total Liabilities and Stockholders' Equity $ 2,979,474 $ 1,616,516
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
29
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated statements of operations
For the years ended July 31, 1998 and 1997
1998 1997
Revenues:
Hotel revenues and management fees (includes
$169,896 in 1998 and $167,053 in 1997
of Hawaii general excise taxes) $ 5,056,622 $ 5,219,506
Other income 552,997 966,292
------------ ------------
Total revenues 5,609,619 6,185,798
------------ ------------
Expenses:
Payroll and benefits 2,429,167 2,401,567
Rent 1,053,855 1,155,212
Reservations services 849,634 919,857
Repairs and maintenance 262,448 358,655
Taxes 212,226 215,470
Advertising 134,436 102,351
Travel and entertainment 117,249 80,881
Professional fees 104,756 131,271
Insurance 59,505 101,984
Utilities 52,604 60,257
Office expense 47,684 50,197
Depreciation and amortization 36,257 263,322
Other 120,992 104,288
------------ ------------
Total expenses 5,480,813 5,945,312
------------ ------------
Income from operations 128,806 240,486
Other Expenses:
Interest expense 70,673 51,934
------------ ------------
Net Income $ 58,133 $ 188,552
============ ============
Per Share Data
Basic earnings $ .01 $ .04
============ ============
Diluted earnings $ .01 $ .04
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
30
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated statements of stockholders' equity
For the years ended July 31, 1998 and 1997
<TABLE>
Common
Stock Capital in
Common Stock Subscribed Excess of Accumulated
Shares Amount & Unissued Par Value Deficit Total
<S> <C> <C> <C> <C> <C> <C>
Balances, August 1, 1996 5,089,030 $ 101,781 $ -- $ 2,118,222 $(2,652,620) $( 432,617)
Stock subscriptions sold 222,100 -- 425,399 -- -- 425,399
Subscription Receivable -- -- ( 40,649) -- -- ( 40,649)
Net income for the year
ended July 31, 1997 -- -- -- -- 188,552 188,552
----------- ----------- ------------ ------------ ------------ -------------
Balance, July 31,1997 5,311,130 101,781 384,750 2,118,222 (2,464,068) 140,685
Stock subscriptions
redeemed ( 222,100) -- ( 384,750) -- -- ( 384,750)
Issuance of common stock 222,100 4,442 -- 420,953 -- 425,395
Net income for the year
ended July 31, 1998 -- -- -- -- 58,133 58,133
----------- ----------- ------------ ------------ ------------ -------------
Balance, July 31, 1998 5,311,130 $ 106,223 $ -- $2,539,175 $(2,405,935) 239,463
=========== =========== ============ ============ ============ =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
31
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated statements of cash flows
For the years ended July 31, 1998 and 1997
1998 1997
Cash Flows From Operating Activities:
Net income $ 58,133 $ 188,552
Adjustments to reconcile net income to net cash
used in operating activities -
Depreciation and amortization 36,257 263,322
Amortization of deferred compensation expense -- 112,500
Changes in assets and liabilities -
Decrease in restricted cash -- 6,595
Increase in accounts receivable ( 193,050) ( 82,639)
Decrease (increase) in due from related parties ( 647,068) 173,987
Decrease (increase) in prepaid expenses 67,705 ( 33,142)
Increase in Note Receivable ( 250,000) --
(Decrease) increase in deferred income 3,770 ( 101,640)
Decrease in contract payable -- ( 159,432)
(Decrease) increase in accounts payable 275,616 ( 448,726)
Decrease in wages payable ( 8,082) ( 9,702)
Decrease in vacation payable ( 378) ( 1,950)
Decrease in deferred compensation payable -- ( 250,000)
(Decrease) increase in taxes payable ( 9,784) 2,532
Increase in accrued liabilities 160,438 5,786
------------ -----------
Net cash used in operating activities ( 506,443) ( 333,957)
------------ -----------
Cash Flows From Investing Activities:
Loan to Hanalei Bay International Investors ( 435,000) --
Purchase of furniture, fixtures & equipment ( 4,483) ( 16,516)
Decrease in investment in HBII Time Share Program 2,334 38,760
Receipt (Payment) of deposits 37,374 ( 50)
------------ -----------
Net cash provided by (used in) investing activities ( 399,775) 22,194
------------ -----------
Cash Flows From Financing Activities
Repayment to related parties ( 2,400) --
Proceeds from related parties 345,000 --
Proceeds from stock subscription 40,649 384,750
Repayment of notes payable ( 250,000) ( 275,000)
Proceeds from notes payable 750,000 250,000
------------ -----------
Net cash provided by financing activities 883,249 359,750
------------ -----------
Net Increase (Decrease) In Cash ( 22,969) 47,987
Cash At Beginning Of Year 268,938 220,951
------------ -----------
Cash At End Of Year $ 245,969 $ 268,938
============ ===========
The accompanying notes are an integral part of the consolidated financial
statements.
32
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated statements of cash flows (continued)
For the years ended July 31, 1998 and 1997
1998 1997
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 66,766 $ 43,434
=========== ===========
Supplemental schedule of noncash investing
and financing activities:
Issuance of common stock, 222,100 shares for
subscriptions redeemed $ 4,442 $ --
Additional paid in capital on subscriptions
redeemed 420,953 --
Stock subscription receivable -- 40,649
The accompanying notes are an integral part of the consolidated financial
statements.
33
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to the consolidated financial statements
July 31, 1998 and 1997
1. Summary of Significant Accounting Policies
Organization
The Castle Group, Inc. was incorporated under the laws of the State of Utah
on August 21, 1981. The Castle Group, Inc. operates in the hotel and resort
management industry in the State of Hawaii and the Commonwealth of Saipan
under the trade names "Hawaiian Pacific Resorts" and "Castle Resorts &
Hotels."
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 year ended July 31, 1998.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for reporting operating
segments and requires certain other disclosures about products and services,
geographic areas and major customers. This statement is effective for
fiscal years beginning after December 15, 1997. The adoption of this
standard 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.
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.
34
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to the consolidated financial statements
July 31, 1998 and 1997
Principles Of Consolidation
The consolidated financial statements include The Castle Group, Inc., its
wholly-owned subsidiary, KRI, Inc. and KRI, Inc.'s wholly-owned subsidiary,
HPR Advertising, Inc. All significant intercompany transactions have been
eliminated in the consolidated financial statements.
Per Share Data
Effective August 1, 1997, The Castle Group, Inc. and Subsidiary (the
"Company") adopted SFAS No. 128, "Earnings per Share," which specifies the
computation, presentation and disclosure requirements for earnings per
share. Prior period earnings per share data has been expanded to comply
with the provisions of SFAS No. 128. There was no change in earnings per
share as previously reported.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share:
<TABLE>
1998
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Basic:
Net Income $ 58,133 5,274,113 $ .01
Effect on dilutive securities-
Stock subscriptions, options and warrants -- 12,500 --
------------ ------------ ------------
Diluted:
Net income and assumed conversions $ 58,133 5,286,613 $ .01
============ ============ ============
</TABLE>
<TABLE>
1997
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Basic:
Net Income $ 188,552 5,089,030 $ .04
Effect on dilutive securities-
Stock subscriptions, options and warrants -- -- --
------------ ------------ ------------
Diluted:
Net income and assumed conversions $ 188,552 5,089,030 $ .04
============ ============ ============
</TABLE>
35
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to the consolidated financial statements
July 31, 1998 and 1997
In 1997, the common stock subscriptions (222,100 shares), common stock
options (50,000 shares), and common stock warrants (25,000 shares) were not
considered common stock equivalents since they were anti-dilutive.
Reclassifications
Certain reclassifications were made to the 1997 consolidated financial
statements to conform to the 1998 presentation. Such reclassifications did
not have an effect on net income as previously reported.
Income Taxes
The Company records deferred tax assets and liabilities for expected future
tax consequences of events that have been recognized in a Company's
financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the difference between the
financial statement carrying amounts and tax bases of assets and liabilities
using enacted tax rates in effect in the years in which the differences are
expected to reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
Cash And Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Furniture, Fixtures And Equipment
Furniture, fixtures and equipment are recorded at cost. When assets are
retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss
is reflected in income for the period.
The costs of maintenance and repairs are charged to income as incurred.
Renewals and betterments are capitalized and depreciated over their
estimated useful lives.
At July 31, 1998 and 1997 , furniture, fixtures and equipment consisted of
the following:
1998 1997
------------ -----------
Office equipment $ 210,013 $ 205,529
Less accumulated depreciation ( 148,877) (122,958)
------------ -----------
$ 61,136 $ 82,571
============ ===========
36
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to the consolidated financial statements
July 31, 1998 and 1997
Depreciation is computed using the declining balance and straight-line
methods over the estimated useful life of the assets (5 to 7 years). For
the years ended 1998 and 1997, depreciation expense was $25,918 and $26,881,
respectively.
Organization Costs
Organization costs are being amortized on a straight-line basis over 5
years. At July 31, 1998 and 1997, the balances of those organization costs
were as follows:
1998 1997
------------ ------------
Organization costs $ 51,714 $ 51,714
Less accumulated amortization ( 49,129) ( 38,786)
------------ ------------
$ 2,585 $ 12,928
============ ============
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.
Concentrations of Credit Risks
The Company maintains its cash with several financial institutions in
Hawaii. Balances maintained with certain of these institutions are in
excess of federally insured limits.
Concentration In Market Area
The Company manages hotels primarily in Hawaii and is dependent on the
state's visitor industry. During the year ended July 31, 1998, the Company
expanded its operation to Saipan. The Company is also contemplating
expansion into other areas of the Pacific Basin.
Restricted Cash
Restricted cash consists of cash held in client trust accounts and cash
pledged as collateral for an equipment lease.
37
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to the consolidated financial statements
July 31, 1998 and 1997
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value Of Financial Instruments
The carrying value of long-term debt approximate the fair value because of
the short maturity of those instruments. The fair value of the investment
in Hanalei Bay International Investors ("HBII") Time Share Program is
estimated to be $236,000 at July 31, 1998 based on future cash flow
projections.
2. Related Party Transactions
Hanalei Bay International Investors
The Company has a hotel management agreement with 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 and marketing fees based on a percentage of room revenue.
During the year ended July 31, 1998, and 1997, total fee income from HBR
amounted to $712,451 and $774,372, respectively. At July 31, 1998 and 1997,
the Company's receivable from HBR amounted to $844,798 and $197,730,
respectively.
On July 31, 1995, the Company invested $100,000 in HBII Time Share Program
of the Hanalei Bay Resort. The Company receives moneys based on a
percentage of timesharing sales. The Company records proceeds from the
investment on the installment method, whereby a portion of the proceeds
represents a return of initial investment and a portion represents gains.
During 1998 the Company received $9,300 from this investment of which $2,300
represents a return of the initial investment and $7,000 represents a gain
recognized by the Company. During 1997, the Company received $155,000 from
this investment of which $38,800 represents a return of initial investment
and $116,200 represents gain recognized by the Company. At July 31, 1998
and 1997, the investment was $58,906 and $61,240, respectively.
38
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to the consolidated financial statements
July 31, 1998 and 1997
During the year ended July 31, 1998, the Company entered into a $435,000
note receivable with HBII. This loan was made to HBII to fund the
operations of HBR. 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 this note is due on March 31, 1999.
Reservations Services
Reservations 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 in 1998 and 1997 was $849,634 and $919,857,
respectively. The Company had a payable balance to Hawaii Reservation
Center Corporation of $140,868 and $50,346 as of July 31, 1998 and 1997,
respectively.
Due to Related Parties
The Company had the following related party loan balances as of July 31,
1998 and 1997:
1998 1997
6% loans from stockholders, $18,000 was due
on January 31, 1997 and $166,400 was
extended to August 1, 1998 $ 184,400 $ 184,400
10% loans from Director, due March 31, 1999 175,000 --
10% loans from Officers, due August 15, 1999 167,600 --
---------- ----------
527,000 184,400
Less current portion 374,500 18,000
---------- ----------
Long-term portion due in fiscal year 2000 $ 152,500 $ 166,400
========== ==========
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 during
1998.
39
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to the consolidated financial statements
July 31, 1998 and 1997
3. Notes Receivable
The Company had notes receivable balances as of July 31, 1998 as
follows:
Notes receivable from third party in monthly
installments of $10,000 beginning September 15,
1998, including interest at 10.00% per annum.
Balance of principal and interest is due
September 1, 2000. Real estate is pledged
as collateral $ 250,000
Notes receivable from related parties (see Note 2) 435,000
----------
685,000
Less current portion 530,600
----------
Notes receivable, noncurrent $ 154,400
==========
4. Commitments and Contingencies
Leases
The Company leases office space, vehicles and equipment expiring at various
dates through 1999. The office leases may be renewed for an additional five
years.
At July 31, 1998, the future minimum rental commitment under these leases
was as follows:
Schedule of minimum lease payments:
1999 $ 304,000
2000 180,000
2001 186,000
2002 191,000
2003 165,000
Thereafter 95,000
-------------
$ 1,121,000
=============
Rent expense under these leases amounted to $922,000 and $1,076,000 for the
years ended July 31, 1998 and 1997, respectively.
40
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to the consolidated financial statements
July 31, 1998 and 1997
Management Contracts
The Company manages several hotels and resorts under management agreements
expiring at various dates through February 2003. Several of these
management agreements contain automatic extensions for periods of 1 to 10
years. Management fees received are based on the revenues and net available
cash flows of the hotels' operations as defined in the management
agreements.
In addition, the Company has sales, marketing and reservations agreements
with other hotels and resorts expiring at various dates through December
1998. Several of these agreements contain automatic extensions for periods
of one month to three years. Fees received are based on revenues, net
available cash flows or commissions as defined in the agreements.
5. Notes Payable
At July 31, 1998 and 1997, notes payable consisted of the following:
1998 1997
$300,000 line of credit from a bank with
drawings due on November 10, 1998, with
interest (10.50% at July 31, 1998) at 2.00%
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. On
October 27, 1998, the line of credit
was extended to December 20, 1998. $ 300,000 $ 250,000
$250,000 line of credit from a bank with drawings
due on September 30, 1998, with interest at
10.00% per annum. The Company's furniture and
equipment are pledged as collateral and the
Company's Chief Executive Officer is a guarantor
on the line of credit. On October 27, 1998, the
line of credit was extended to December 31, 1998. 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 (see Note 7). 200,000 --
---------- ----------
Notes Payable, current $ 750,000 $ 250,000
========== ==========
41
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to the consolidated financial statements
July 31, 1998 and 1997
6. Employee Benefits
The Company has a 401(k) Profit Sharing Plan available for its employees.
Under the terms of the Plan, the Company may match 50% of the compensation
reduction of the participants in the Plan up to 1% of compensation. Any
employee with one year service and 1,000 credit hours of service, who is at
least twenty-one years old is eligible to participate. For the years ended
July 31, 1998 and 1997, no contributions were made by the Company.
The Subsidiary has a Flexible Benefits Plan. The participants in this plan
are allowed to make pre-tax premium elections which are intended to be
excluded from income as provided by Section 125 of the Internal Revenue Code
of 1986. To be eligible, an employee must have been employed for 90 days.
The benefits include group medical insurance, vision care insurance,
disability insurance, cancer insurance, group dental coverage, group term
life insurance and accident insurance. On October 1, 1995, the Plan was
amended to include all employees of the Company effective January 1, 1997.
7. Capital Stock
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 during
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 have been exercised for 1998
and 1997.
Common Stock Options
In November 1993, as an inducement to enter into an employment contract with
the Company, the Company issued options to an officer of the Company to
obtain 125,000 shares of common stock for one dollar, exercisable by
December 2, 1998. The transaction was recorded as deferred compensation
expense and deferred compensation payable of $250,000, representing the fair
value of the common stock option at the date of grant. In 1995, the option
period was amended to be only exercisable after August 1, 1996 but before
December 2, 1998. No options have been exercised for 1996 and in 1997, the
options were forfeited by the officer. The deferred compensation payable
of $250,000 and the unamortized balance of the deferred
42
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to the consolidated financial statements
July 31, 1998 and 1997
compensation expense of $62,500 were eliminated which reduced payroll and
benefits expense by $187,500 in 1997. No stock options were issued during
the year ended July 31,1998.
In May 1997, the Company, as part of a renegotiation of its reservation
services agreement, granted an option to purchase 50,000 shares of the
Company's common stock at a price of $2 per share to Hawaii Reservation
Center Corporation which is wholly owned by a stockholder/director of the
Company. The option may be exercised between May 1997 and 2000 and had not
been exercised as of July 31, 1998 and 1997.
Stock Subscriptions Redeemed
In July 1997, 222,100 common shares were subscribed at $2 per share. As of
July 31, 1997, the Company received $384,750, net of stock issuance expenses
of $18,806, with a receivable balance of $40,649 at July 31, 1997. The
subscription receivable was collected in September 1997, at which time, the
shares were issued to the subscriber.
8. Income Taxes
Significant components of the Company's deferred tax assets and liabilities
as of July 31, 1998 and 1997 are as follows:
1998 1997
Deferred tax assets-
Net operating loss 673,000 738,000
Deferred income 32,000 31,000
Noncompetition agreement 219,000 240,000
Vacation pay $ 7,000 $ 7,000
-------------- --------------
931,000 1,016,000
Deferred tax liability-
Furniture, fixtures and equipment ( 8,000) ( 8,000)
-------------- --------------
Net deferred tax asset 923,000 1,008,000
Valuation allowance ( 923,000) ( 1,008,000)
-------------- --------------
$ -- $ --
============== ==============
In 1998 net operating losses of $89,000 were utilized to offset current year
taxable income.
43
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to the consolidated financial statements
July 31, 1998 and 1997
The net change during 1998 and 1997 in the total valuation allowance was a
decrease of $85,000 and $128,000, respectively.
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.
9. Litigation
There are various claims and lawsuits pending against the Company involving
complaints which are normal and reasonable foreseeable in light of the
nature of the Company's business. The ultimate liability of the Company, if
any, cannot be determined at this time. Based upon consultation with
counsel, management does not expect that the aggregate liability, if any,
resulting from these proceedings would have a material effect on the
Company's consolidated financial position, results of operations or
liquidity.
44
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Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
The Company did not change nor have any disagreements with its
principal accountant during the fiscal year ended July 31, 1998.
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The following table sets forth certain information concerning the
directors and executive officers of the Company as of July 31, 1998.
Except as otherwise stated below, the directors will serve until the next
annual meeting of stockholders or until their successors are elected or
appointed, and the executive officers will serve until their successors are
appointed by the Board of Directors.
Name Age Position
- ----------------------- ---- ---------------------------------------
Rick Wall 54 Chief Executive Officer, Director and
Chairman of the Board
John G. Tedcastle 65 Vice Chairman of the Board and Director
Kelvin M. Bloom 39 Chief Operating Officer, Senior Vice
President and Director
Kimo M. Keawe 49 Director
Hideo Nomura 48 Director
Charles E. McGee 62 Director
Ryoji Takahashi 58 Director
Motoko Takahashi 54 Secretary and Director
Michael S. Nitta 39 Chief Financial Officer and Vice
President, Finance
Shari W. Chang 48 Sr. Vice President, Sales & Marketing
Judhvir Parmar 54 Director
Steve Townsend 44 Sr. Vice President, Operations
Stanley Mukai 54 Director
Edward Calvo Sr. 54 Director
Noboru Sekiguchi 61 Director
Rick Wall. Mr. Wall was appointed the Company's chief executive
officer and chairman of the board upon consummation of the Castle Plan. Mr.
Wall was instrumental in the formation of Castle Group Hawaii, the
negotiation and consummation of the Castle Plan and the acquisition of KRI.
He was the president, director and founder of Castle Group Hawaii. During
the past ten years, Mr. Wall has been the managing director of HBII, which
owns 62% of the Hanalei Bay Resort. Mr. Wall has been elected to the board
of directors of the Hawaii Visitors & Convention Bureau and resides in
Honolulu, Hawaii.
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Charles E. McGee. Mr. McGee was appointed as director of the Company
in November, 1993. Mr. McGee has 36 years of diversified experience in
marketing, management and computer technology. From 1975 until 1992, he was
employed by First Insurance Company of Hawaii, Ltd., most recently as senior
vice president, overseeing the marketing, information systems,
administration and service departments. Mr. McGee had previously been
president of two independent data processing services companies. In
addition, he has held various senior management positions with IBM
Corporation, including division manager of the Pacific region. As discussed
in the caption "Plan of Operation for 1999", Item 6, Part II, Mr. McGee
currently operates and controls Hawaii Reservations Center Corporation, a
company which provides reservations for hotels and resorts. Mr. McGee has
been a resident of Hawaii for over thirty years. Mr. McGee is a graduate of
LaSalle University, and has studied at Massachusetts Institute of
Technology.
Kimo M. Keawe. Mr. Keawe was appointed as senior vice president and
director of the Company in November, 1993 following the acquisition of KRI,
Inc. Mr. Keawe is also the president and chief operating officer of KRI,
the company's wholly owned subsidiary doing business as Hawaiian Pacific
Resorts. Mr. Keawe was instrumental in the formation of KRI in 1988,
purchasing Hawaiian Pacific Resorts from its original founders. He has held
numerous senior management positions throughout his hotel and resort
management career, which spans over 20 years. Mr. Keawe left the companies'
employ in July 1997 to pursue other interests and resigned as senior vice
president of the Company and as chief operating officer of KRI, Inc. Mr.
Keawe is on the advisory board of the Travel Industry Management School of
Hawaii Pacific University. Mr. Keawe is a graduate of Oregon State
University, and was born and raised in the State of Hawaii.
Kelvin M. Bloom. Mr. Bloom was appointed senior vice president and
director of the Company in November, 1993, and was appointed Chief
Operating Officer in July, 1995. Mr. Bloom was also appointed president of
Castle Hotels and Resorts, Inc., a wholly-owned subsidiary of the Company,
responsible for all facets of the Condominium Resort Management Division of
the Company. Prior to joining the Company, Mr. Bloom was the vice president
of the Hawaii Region of Village Resorts, Inc./Horizon Hospitality Group,
responsible for all Hawaiian interests and operations of that company.
During his 15 years with Village Resorts, Mr. Bloom served as general
manager, Kiahuna Plantation Resort in Poipu, Kauai; general manager for the
Lakeland Village Beach and Ski Resort in Lake Tahoe, California; and
executive assistant manager for the Whaler on Kaanapali Beach in Kaanapali,
Maui. Mr. Bloom was previously employed by Menefee Resorts in Kihei, Maui
and Sheraton Hotels in Hawaii.
Hideo Nomura. Mr. Nomura was appointed as a director of the Company in
November, 1993. Mr. Nomura is president of Nomura Holdings and of Nomura
Hitchcock Corporation, Ltd., a property related investment consulting firm
based in Tokyo, Japan, and has held this position since 1987. Mr. Nomura is
the operational executive of the Marina del Rey Residential Development in
California, and was the manager of Mitsui & Company (N.Z.) Ltd. for five
years until 1987. Mr. Nomura is a resident of Japan.
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Ryoji Takahashi. Mr. Takahashi was appointed as a director of the
Company in November, 1993. Mr. Takahashi, a resident of Japan, has, for
over thirty years, been a substantial principal of Nichiman Kosan, a
corporation which specializes in coordinating the installation of air
conditioning and sound control systems in commercial buildings and
subcontracts with over 300 companies. He is also the major stockholder of
Nikkankyo Group which consists of six independent companies and has over
five hundred employees. Mr. Takahashi is a graduate of Hosei University in
Tokyo, Japan, where he majored in economics.
Motoko Takahashi. Ms. Takahashi is the sister of Ryoji Takahashi and
was appointed secretary of the Company in August of 1994 and as director in
March of 1995. Ms. Takahashi had previously served as director for various
Japanese investment companies in the United States. She also holds the
position as Vice President of N.K.C. Hawaii, Inc. Ms. Takahashi was born
and completed her education in Tokyo, Japan and has resided in the United
States for more than 30 years.
John G. Tedcastle. Mr. Tedcastle was appointed as a director of the
Company in November, 1993. Mr. Tedcastle is experienced in the travel and
hotel industry, having been involved for several years as part owner and
developer of an eleven property hotel chain in New Zealand. He has also
been a senior partner in a prominent law firm in Auckland, where he
specialized in property, financing and general business law. Mr. Tedcastle
is also the owner/operator of the Takapuna Golf course in Auckland, New
Zealand, where he resides.
Shari W. Chang. Ms. Chang joined the Company in July, 1994 as senior
vice president of sales and marketing. Prior to joining the Company, Ms.
Chang was vice president of sales for Aston Hotels and Resorts and a vice
president of Holiday Tours. She has also served as consultant to the Hawaii
Visitors Bureau in the past. Ms. Chang is a graduate of the University of
Hawaii, and resides in Honolulu, Hawaii.
Michael S. Nitta. Mr. Nitta joined the Company in November, 1993
following the acquisition of KRI, Inc. Prior to joining the Company, Mr.
Nitta served as secretary and treasurer of KRI. Together with Mr. Keawe,
Mr. Nitta was instrumental in the formation of KRI Inc. and the acquisition
of Hawaiian Pacific Resorts in 1987 from its former founders. Prior to the
formation of KRI, Inc. Mr. Nitta served as secretary and treasurer of
Hawaiian Pacific Resort Hotels Inc. from 1982. Born and residing in Hawaii,
he is a graduate of the University of Hawaii and holds a Masters of
Accounting Degree.
Judhvir Parmar. Mr. Parmar was formerly Senior Vice President of
Investment Operations for International Finance Corporation ("IFC"), a
wholly owned subsidiary of the World Bank. IFC was responsible for all
private sector operations of the World Bank. A specialist in project
corporate finance, Mr. Parmar was with IFC for more than twenty years and
was responsible for the worldwide investment program at IFC. In August,
1993, Mr. Parmar retired from IFC to form his own consulting company.
47
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Steve Townsend. Mr. Townsend joined the Company in July, 1997 and has
23 years of hotel and resort management experience. During his career he
has held numerous senior management positions with resort and hotel
management companies. Prior to joining the Company, Mr. Townsend was
director of operations for Interstate Hotels prior to a one year assignment
entailing rebuilding and re-opening a hurricane damaged resort in the Virgin
Islands. Prior to Interstate, Mr. Townsend spent 8 years with Village
Resorts. Mr. Townsend is a graduate of the Hotel and Restaurant
Administration School at Florida State University.
Stanley Mukai. Mr. Mukai is a graduate of the Harvard Law School and a
partner in the law firm of McCorriston Miho Miller Mukai located in
Honolulu, Hawaii. His expertise is in the area of taxation and Mr. Mukai
has held various positions such as Advisory Board Member, Hawaii Tax
Institute; Trustee, Tax Foundation of Hawaii; Co-Chairman, Tax
Subcommittee, American Bar Association; Chairman, Tax Subcommittee on U.S.
District and Portfolio Investment by Foreigners; and Chairman, Section of
Taxation, Hawaii Bar Association.
Edward Calvo, Sr. Mr. Calvo is vice president of Calvo Enterprises,
Inc., a conglomerate of ten businesses with fifteen hundred employees.
They are the largest private employer on Guam. Mr. Calvo has served as a
Senator in the Guam legislature and is currently the Board Chairman of the
Guam Waterworks Authority.
Noburu Sekiguchi. Mr. Sekiguchi is a graduate of Waseda University
and is a Director and controller of Nikkankyo Group, which is the parent
company of N.K.C. Hawaii. He has worked for Toyo Menka Company, one of the
leading trading companies in Japan for forty years as a financial officer.
Compliance with Section 16(a) of the Securities Act.
Section 16 of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers and persons who own more than
10% of a registered class of the Company's equity securities to file with
the Securities and Exchange Commission initial reports of beneficial
ownership (Form 3) and reports of changes in beneficial ownership (Forms 4
and 5) of the Company's common stock and other equity securities of the
Company. Officers, directors and greater than 10% shareholders are required
by SEC regulation to furnish the Company with copies of all Section 16(a)
reports they file.
To the Company's knowledge, all directors, officers and holders of more
than 5% of the Company's common stock, filed all reports required of Section
16(a) of the Securities Exchange Act of 1934 during the fiscal year ending
July 31, 1998.
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Item 10. Executive Compensation.
Executive Compensation
The following table shows for the fiscal year ended July 31, 1998, the
aggregate annual remuneration of each of the three highest paid persons who
were executive officers or directors of the Company and the executive
officers and directors as a group. The reported compensation is based on
cash compensation without consideration of a restricted stock grant to
Charles E. McGee described below under "Compensation of Directors".
Name of Individual Capacities in which renumeration Aggregate
or identity of group was received renumeration
- --------------------- --------------------------------- --------------
Rick Wall Chairman of the Board and $120,000
Chief Executive Officer
Kelvin M. Bloom Chief Operating Officer and $120,000
Senior Vice President
Shari W. Chang Senior Vice President $100,000
Sales & Marketing
Steve Townsend Senior Vice President $100,000
Operations
Officers and
Directors as a group Various $634,800(1)
(1) Includes payments made under consulting agreement between the Company
and Kimo M. Keawe.
Compensation of Directors
The Company does not have any present standard arrangements regarding
compensation of directors for service as a director, or for attendance at
meetings of the Board of Directors or for participation on committees or
other special assignments. The Board of Directors may adopt resolutions
providing for reasonable compensation for participation in committees or
special assignments and reimbursement for reasonable expenses incurred in
attending any meeting of the Board of Directors. No compensation for
service as a director is presently contemplated.
There were no arrangements pursuant to which any director of the
Company was compensated during its most recent fiscal year for service
provided solely as a director, or for attendance at any meeting of the board
of directors.
Employment Contracts
The Company has entered into written employment contracts with Messrs.
Bloom, Keawe and Nitta, as of November 1, 1993, Ms. Chang as of August 1,
1994 and Mr. Townsend as of July 31, 1997. Other than Mr. Bloom, Mr. Keawe,
Mr. Nitta, Mr. Townsend and Ms. Chang, the Company has entered into no
employment contract with any director or executive officer.
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The above-mentioned employment agreements are for five years and
provide for a base salary, to be increased annually by a percentage no less
than the increase in the Honolulu Consumer Price Index for the preceding
twelve months. Under their respective employment agreements, the current
base salary for each of Messrs. Bloom Keawe and Nitta is $120,000 per year.
However, Mr. Nitta has agreed to reduce his base salary for the current
fiscal year to $90,000. The current base salary for Ms. Chang and Mr.
Townsend under the terms of their agreements is $100,000. The employment
agreements further provide for paid vacation; a monthly automobile
allowance; an annual performance bonus potential of up to 20% of the base
salary (up to 15% for Ms. Chang and Mr. Townsend), depending upon attaining
pre-determined goal criteria; membership in a pension plan (not yet
established) that would contribute the equivalent of 10% of base salary
annually; a business development bonus (which has been waived in the past
and current fiscal years); membership in a 401(k) plan; and full medical,
dental and disability insurance.
The employment agreements contain a "change-in-control" provision which
gives each of the employees under contract the right, upon the occurrence of
a "change-in-control," to terminate their employment and receive as
severance pay the total compensation remaining to be paid under the
agreement as of the date of such termination or the total compensation for
three years following the date of termination, whichever is greater. The
term "change-in-control" is defined in each agreement as the date when
persons other than the shareholders of record on the date of commencement of
the term of such agreement become the beneficial owner of 51% of the
Company's voting stock.
Mr. Keawe resigned as an officer of the Company in accordance with an
Agreement dated April 16, 1997 and the Company and Mr. Keawe have agreed to
a termination of his employment contract and its related terms and
conditions, to be effective as of April 1997. The Agreement specifies that
the Company shall pay to Mr. Keawe a fee of $10,000 per month for the seven
months ending November 1997 and $5,000 per month for the six months ending
May, 1998 for a total consulting fee of $100,000 plus health insurance
benefits. Mr. Keawe, for the consideration given, shall render consulting
and advisory services to the Company on marketing, managerial and
operational matters. The Agreement also calls for Mr. Keawe to transfer
32,250 shares of the Company's Common Stock owned by Keawe Resorts, Inc., a
company owned and controlled by Mr. Keawe, to the Company upon the
occurrence of certain events as set forth in the Agreement.
The Company and Mr. Keawe entered into a new consulting agreement
effective as of June 1, 1998 which specifies that the Company shall pay to
Mr. Keawe a fee of $3,000 per month for the period beginning June 1, 1998
and ending on December 31, 1998.
Long Term Incentive Plans
No options (with the exception of the option discussed in the section
entitled "Options, Warrants and Rights" in Item 5), stock appreciation
rights or long term incentive plan awards were issued or granted to the
Company's management during the fiscal year ending July 31, 1998.
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The Company has a 401(k) profit sharing plan generally available to all
of its employees. Under the terms of the plan, the Company is required to
match 50% of the amounts contributed by participants through payroll
deductions, up to a maximum of 1% of their compensation. Any employee with
one year of service who is at least 21 years of age is eligible to
participate. Effective September 1, 1998, the Company amended the profit
sharing plan that specifies that the Company is required to match 100% of
the amounts contributed by participants through payroll deductions, up to a
maximum of 1% of their compensation.
Stock Plans
The Company's stockholders have approved a 1995 Stock Option Plan and a 1995
Stock Purchase Plan for the purposes of: (i) attracting and retaining
employees, executive management and key employees with ability and
initiative; (ii) providing incentives to those deemed material to the
success of the Company; and (iii) attaining a common interest for these
individuals to coincide with the interests of the Company and its
shareholders. No stock grants were issued for the years ended July 31, 1995
through July 31, 1998.
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Item 11. Security Ownership of Certain Beneficial Owners and Management.
Security Ownership of Certain Beneficial Owners
The following table sets forth the number of shares of the Company's
common stock beneficially owned as of July 31, 1998 by: (i) each of the
three highest paid persons who were officers and directors of the Company,
(ii) all officers and directors of the Company as a Group, and (iii) each
shareholder who owned more than 10% of the company's common stock, including
those shares subject to outstanding options.
Beneficially Shares %
Name and Address Owned (1) of Class (2)
--------------------------- -------------- --------------
Rick Wall
745 Fort Street
Honolulu, HI 96813 815,000 (3) 15%
Kimo M. Keawe
745 Fort Street
Honolulu, HI 96813 322,500 (4) 6%
John G. Tedcastle
745 Fort Street
Honolulu, HI 96813 525,000 (5) 10%
Hideo Nomura
745 Fort Street
Honolulu, HI 96813 525,000 10%
L.C.C. Management Inc.
745 Fort Street
Honolulu, HI 96813 525,000 10%
N.K.C. Hawaii, Inc.
745 Fort Street
Honolulu, HI 96813 900,000 (6) 17%
All directors and officers
as a group (12 persons) 4,263,500 80%
(1) Except as otherwise noted, the Company believes the persons named in
the table have sole voting and investment power with respect to the
shares of the Company's common stock set forth opposite such persons'
names. Amounts shown include the shares issuable pursuant to various
stock options exercisable in 1998.
(2) Determined on the basis of 5,361,130 shares outstanding. Amount
includes shares issuable under certain stock options exercisable as of
July 31, 1998.
(3) Includes 375,000 shares held by HBII Management, Inc., which is owned
and controlled by Mr. Wall.
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(4) Includes 322,500 shares held by Keawe Resorts, Inc., which is owned and
controlled by Mr. Keawe. Includes 32,250 shares which Mr. Keawe has
agreed to return to the Company in accordance with the terms and
conditions of the Consulting Agreement between the Company and Mr.
Keawe.
(5) Includes 525,000 shares held by The John Tedcastle Family Trust, of
which Mr. John Tedcastle is trustee with control over voting rights.
(6) Includes 525,000 shares held by L.C.C. Management, Inc., a corporation
owned and controlled by Ms. Janet Parmar, spouse of Mr. Judvhir Parmar,
a director of the Company.
(7) Includes 900,000 shares held by N.K.C. Hawaii, Inc. which is owned and
controlled by the family of Mr. Takahashi. Includes 525,000 shares
held by Hideo Nomura. Mr. Nomura is also listed in the table as the
owner of more than 10% of the Company's stock.
Options, Warrants and Rights
In November, 1993, the Company granted an option to Kelvin Bloom to
purchase 125,000 shares of the Company's common stock at an exercise price
of $0.000008 per share. In 1995, the Company and Mr. Bloom the option
period was amended to be exercisable only between August 1, 1996 and
December 2, 1998. In July 1997, Mr. Bloom forfeited all of his rights,
title and interest in the stock option.
In May 1994, the Company entered into a Common Stock Purchase Warrant
with Van Kasper and company for services provided. The Warrant is for
25,000 shares exercisable on or before May 12, 1994 for a price of $1.25 per
share. As of July 31, 1997, the warrant had not yet been exercised.
In August, 1994, the Company, as part of the employment agreement with
Shari Chang, agreed to give to Shari W. Chang as a bonus, 22,500 shares of
the Company's common stock. On September 30, 1995, Ms. Chang accepted
delivery of the shares under the employment agreement.
In May, 1997, The Company, as part of a renegotiation of its
reservation services agreement, granted to Hawaii Reservations Center Corp.
an option to purchase 50,000 shares of the Company's common stock at a price
of $2.00 per share. The option may be exercised between My 21, 1997 and May
20, 2002. Hawaii Reservations Center Corp. is a wholly owned corporation of
Mr. Charles McGee, a director of the Company. As of July 31, 1997, the
option had not yet been exercised.
In July 1998, certain individuals advanced a total of $375,000 to the
Company in the form of a Promissory Note from the Company to the individual.
The Notes specify that if the principle amounts are not returned to the
individuals on or before March 31, 1999, then the entire principle balance
shall be converted into common stock of the Company at a 50% discount of the
then fair value of the Company's common stock. The notes also provide for
the issuance of a warrant to the individuals whereby the individual has the
right to acquire 1 share of the Company's common stock for every $2.00 of
funds advanced to the Company. The exercise price under the warrant
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agreements is $2.00 per share and the warrants may be exercised at any time
between June 30, 1998 and June 29, 2003. As of the date of this filing, the
notes and warrant agreements had been sent out to the individuals for
execution, but have note yet been returned to the Company. Management
believes, although no assurance may be given, that the notes and the
warrants shall be executed and returned to the Company. No warrants were
exercised during the fiscal year ended July 31, 1998. Mr. Judvhir Parmar, a
director of the Company, advanced $175,000 of the $375,000 received.
Other than the warrants issued to the individuals who advanced funds to
the Company, and the option granted to Hawaii Reservations Center Corp.,
there were no outstanding options, warrants or rights to purchase common
stock held by any of the officers or directors of the Company or its
principal shareholders.
Item 12. Certain Relationships and Related Transactions.
Transactions with Management and Others.
As noted in section "Development of Business," Item 1, Part I, the
Hanalei Bay Resort is a 134 unit condominium located in Princeville, Kauai,
Hawaii. HBII was formed through the efforts of HBII Management Inc., owned
by Mr. Wall, with the following partners: Siam Commercial Bank; Voyage
Fourteen Ltd., owned by John G. Tedcastle; L.C.C. Management, Inc., owned by
Judhvir Parmar; Nomura Firm and Nomura Holdings, owned by Hideo Nomura and
Don Nomura. In 1988 HBII made an offer to purchase all 134 units of the
Hanalei Bay Resort and eighty six owners accepted the offer. HBII elected
to form its own management company and entered into a management contract
with Castle Group Hawaii, which was one of the assets acquired by the
Company pursuant to the Castle Plan. Under terms of the management contract
between HBII and Castle Group Hawaii and as acquired by the Company, the
Company is required to provide full management, including sales, supervision
of staff, accounting and maintenance. Mr. Tedcastle and Mr. Hideo Nomura
were elected to serve on the board of directors of the Company following
completion of the Castle Plan. Mr. Parmar was appointed interim director in
November 1995. Mr. Parmar is a general partner of HBII and is the owner of
L.C.C. Management, Inc., which is the holder of approximately 10% of the
Company's common stock (see Item 11, Part III). Nichiman International
later became an investor in HBII and Nichiman International's owner, Mr.
Ryoji Takahashi was appointed as a director of the Company. In March of
1995, Mr. Takahashi's sister, Ms. Motoko Takahashi, was appointed Secretary
and director of the Company. In November of 1995, Mr. Kelvin Bloom married
the daughter of one of the limited partners of HBII. In March of 1997, Mr.
Michael Nitta was appointed Assistant Vice President of HBII Management,
Inc. Mr. Wall and Mr. Bloom received a monthly retainer from HBII.
Management believes that the terms of the management contract between the
Company and HBII are on terms which are no less favorable to HBII or the
Company than those which are negotiated with other owners not affiliated
with the Company.
On August 1, 1994, the Company entered into a contract with HRCC (as
described in section "Plan of Operation" Item 6, Part II, and incorporated
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herein by reference), a company owned and controlled by Charles M. McGee, a
director of the Company. It is management's belief that the contract with
HRCC are on terms which are no less favorable than those which could be
negotiated with companies not affiliated with the Company, however, in May
of 1997, the Company renegotiated its contract with HRCC with regard to the
fees charged. Under the renegotiated agreement, the fees paid to HRCC shall
be based upon the monthly room revenues of the properties managed by the
Company, subject to a minimum monthly fee. Management believes, although no
assurances can be given, that the Company shall enjoy lower reservations
costs under the new agreement.
Except for the Castle Plan, the HBII Plan and the purchase agreement
involving KRI described under the caption "Development of Business" of Item
1, Part I and incorporated herein by reference, the employment contracts and
other matters described in Item 10, "Remuneration of Directors and
Officers," the HBII management contract, the issuance of warrants as
described in Item 11 "Security Ownership of Certain Beneficial Owners and
Management," and the HRCC contract, there were no transactions or proposed
transactions during 1998 and 1997, to which the Company or any of its
subsidiaries was or is to be a party, in which the amount involved exceeds
$50,000 and in which any director or executive officer, or any shareholder
who is known to the Company to own of record or beneficially more than 10%
of the Company's common stock, or any member of the immediate family of any
of the foregoing persons, had a direct or indirect material interest.
PART IV
Item 13. Exhibits and Reports on Form 8-K.
Reports on Form 8-K.
The Company did not file any current report on Form 8-K during the
fiscal year ended July 31, 1998.
Index to Exhibits
The following exhibits are filed as a part of this report:
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 *
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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. *
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. *
56
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6.9 Reservations Services Agreement dated August 1, 1994
between the Company and Hawaii Reservations Center
Corp., incorporated by reference to Exhibit 6.9 to the
Company's quarterly report on Form 10-QSB for the
quarter ended October 31, 1994. *
6.10 Stock Acquisition Agreement between the Company and
Shari W. Chang dated September 10, 1995, incorporated
by reference to Exhibit 6.10 to the Company's Annual
Report on Form 10-KSB for the year ended July 31, 1995. *
6.11 Revolving Line of Credit Loan Agreement dated October
21, 1994 between the Company, and Castle Resorts &
Hotels, Inc., KRI, Inc., Hawaii National Bank, Rick
Wall, John Tedcastle, Hideo Nomura and Kimo Keawe,
incorporated by reference to Exhibit 6.11 to the
Company's Annual Report on Form 10-KSB for the year
ended July 31, 1995. *
6.12 Letter dated October 17, 1995 from Kimo M. Keawe to
KRI, Inc. Stockholders, together with Promissory Notes
dated July 31, 1995 payable to Maui Beach Hotel, Inc.
for $12,000, James Kurita for $6,000, Saburo or Mitsue
Maruyama for $3,600, TN Group Hawaii, Inc. for $6,000,
M.K. & Sons, Inc. for $12,000, Shigeru Shinno for
$6,000, Michael S. Nitta for $16,800, and Keawe
Resorts, Inc. for $122,000, incorporated by reference
to Exhibit 6.12 to the Company's Annual Report on Form
10-KSB for the year ended July 31, 1995. *
6.13 Second Amendment to Letter of Agreement Dated December
2, 1993 between Kelvin Bloom and The Castle Group, Inc.
incorporated by reference to Exhibit 6.13 to the
Company's Annual Report on Form 10-KSB for the year
ended July 31, 1995. *
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. *
57
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6.16 Extension of Revolving Line of Credit Agreement dated
June 5, 1996 between The Castle Group, Inc., KRI, Inc.,
Castle Resorts & Hotels, Inc., and Hawaii National Bank
incorporated by reference to Exhibit 6.16 to the
Company's Annual Report on Form 10-KSB for the year
ended July 31, 1996. *
6.17 Extension of Revolving Line of Credit Agreement dated
December 11, 1996 between The Castle Group, Inc., KRI,
Inc., Castle Resorts & Hotels, Inc., and Hawaii
National Bank incorporated by reference to Exhibit 6.17
to the Company's Annual Report on Form 10-KSB for the
year ended July 31, 1997. *
6.18 Extension of Revolving Line of Credit Agreement dated
March 5, 1997 between The Castle Group, Inc., KRI,
Inc., Castle Resorts & Hotels, Inc., and Hawaii
National Bank incorporated by reference to Exhibit
6.18 to the Company's Annual Report on Form 10-KSB for
the year ended July 31, 1997. *
6.19 Extension of Revolving Line of Credit Agreement dated
June 30, 1997 between The Castle Group, Inc., KRI,
Inc., Castle Resorts & Hotels, Inc., and Hawaii
National Bank incorporated by reference to Exhibit 6.19
to the Company's Annual Report on Form 10-KSB for the
year ended July 31, 1997. *
6.20 Stock Option Agreement dated May 21, 1997 between
Hawaii Reservations Center Corp. and The Castle Group,
Inc. incorporated by reference to Exhibit 6.20 to the
Company's Annual Report on Form 10-KSB for the year
ended July 31, 1997. *
6.21 Steve Townsend Employment Agreement dated May 31,
1997, effective as of July 28, 1997 between Steve
Townsend and the Company incorporated by reference to
Exhibit 6.21 to the Company's Annual Report on Form
10-KSB for the year ended July 31, 1997. *
6.22 Consulting Agreement between Kimo M. Keawe, Keawe
Resorts, Inc. and the Company dated April 16, 1997
incorporated by reference to Exhibit 6.22 to the
Company's Annual Report on Form 10-KSB for the year
ended July 31, 1997. *
6.23 Amendment to Consulting Agreement between Kimo M.
Keawe, Keawe Resorts, Inc. and The Castle Group, Inc.
dated April 16, 1997 incorporated by reference to
Exhibit 6.23 to the Company's Annual Report on Form
10-KSB for the year ended July 31, 1997. *
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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. *
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. *
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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. 62
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. 66
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. 68
6.37 Promissory note dated August 13, 1998 in favor of the
Company from Fortress LLC for $250,000. 86
6.38 Promissory note in favor of the Company from Hanalei
Bay International Investors for $435,000 dated July 31,
1998. 88
6.39 Promissory note dated July 15, 1998 between the Company
and Kelvin M. Bloom for $118,800. 90
6.40 Promissory note dated July 15, 1998 between the Company
and Michael S. Nitta for $48,800. 92
6.41 Letter of extension from Hawaii National Bank extending
the due date on the $300,000 line of credit to December
20, 1998. 94
6.42 Letter of extension from City Bank extending the due
date on the $250,000 line of credit to December 31,
1998. 95
Description of Exhibits
See Item 1 Above.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
THE CASTLE GROUP, INC.
Date: October 29, 1998 By /s/ Rick Wall
-------------------------------------------
Rick Wall, Chief Executive Officer and
Chairman of the Board
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Date: October 29, 1998
/s/ Rick Wall /s/ Kelvin M. Bloom
- ----------------------------- ---------------------------------
Rick Wall Kelvin M. Bloom
Chief Executive Officer and Chief Operating Officer, Director
Chairman of the Board and Sr. Vice President
/s/ Michael S. Nitta /s/ John Tedcastle
- ----------------------------- ---------------------------------
Michael S. Nitta John Tedcastle
Chief Financial Officer and Vice Chairman of the Board and
Vice President Finance Director
/s/ Charles E. McGee /s/ Kimo M. Keawe
- ----------------------------- ---------------------------------
Charles E. McGee Kimo M. Keawe
Director Director
/s/ Motoko Takahashi /s/ Judvhir Parmar
- ----------------------------- ---------------------------------
Motoko Takahashi Judvhir Parmar
Director and Secretary Director
/s/ Noboru Sekiguchi /s/ Ryoji Takahashi
- ----------------------------- ---------------------------------
Noboru Sekiguchi Ryoji Takahashi
Director Director
/s/ Stanley Mukai /s/ Edward Calvo, Sr.
- ----------------------------- ---------------------------------
Stanley Mukai Edward Calvo, Sr.
Director Director
/s/ Hideo Nomura
- -----------------------------
Hideo Nomura
Director
61
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AGREEMENT
THIS AGREEMENT ("Agreement") is made as of the 22nd day of July, 1998,
among CASTLE RESORTS & HOTELS, INC. ("CRH") and Kimo M. Keawe
("Consultant"), an individual whose address is 1060 Kalihiwai Place,
Honolulu, Hawaii 96825.
WITNESSETH:
WHEREAS, CRH is a hotel and condominium management company doing
business in Hawaii and the Pacific Rim, and is interested in expanding their
business through the acquisition of additional hotel and condominium
management agreements; and
WHEREAS, Consultant is experienced in providing consulting and advisory
services including new business development and the acquisition of hotel and
condominium management agreements;
IN CONSIDERATION of the foregoing and of the undertakings and covenants
set forth herein, CRH hereby engages Consultant to provide such services as
contained in this AGREEMENT upon and subject to all of the following terms
and conditions:
1. Consulting Services
a. Consultant shall represent CRH in the area of new business
development and provide consulting and advisory services on marketing,
managerial, and operational matters as directed by CRH. Consultant shall
devote such time and effort toward his services hereunder as may be
reasonably necessary to perform the same.
b. Consultant shall use his best efforts in securing new management and
or consulting agreements from potential hotel, condominium and resort
clients for CRH exclusively except for Consultant's representation of Hawaii
Reservations Center as specified in Section 1.c. Consultant will offer a
range of mange and related services to these clients depending on their
requirements. Any and all proposals for services or subsequent management
agreements must have prior approval of CRH. Consultant shall provide a
status activity report to CRH on a weekly basis.
c. It is expressly understood and agreed to that the Consultant will
also represent Hawaii Reservations Center, in the area of new business
development for reservations services for those clients who require only
this service. Such representation is not a part of this agreement.
Consultant shall not directly or indirectly solicit, offer proposals, refer,
or secure business for Hawaii Reservations Center that may be detrimental to
CRH, as determined by CRH.
d. At all times in providing the consulting services hereunder,
Consultant shall be an independent contractor to CRH. Except as provided in
this Agreement with respect to medical coverage and other designated
expenses, Consultant shall pay all other costs in providing such services.
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2. Fees and related Matters
In consideration for the consulting services and other obligations of
Consultant under this Agreement, CRH shall provide the following:
a. A base retainer fee of $3,000/month inclusive of tax for the period
beginning June 1, 1998 and ending December 31, 1998. Any incentive fee
income earned by Consultant from new contracts will be deducted from the
retainer fee following the month in which they were earned.
b. An incentive fee of on-half of one percent (1/2 of 1%) of total
revenue collected from new contracts, but not to exceed $75,000.00 and not
to exceed twenty-five percent (25%) of net management fees (base, incentive
and marketing) collected by CRH in any one year of the contract. Said fee
to be paid from management fees (base, incentive and marketing) collected by
CRH from new contracts secured by Consultant on all services except
reimbursements and reservations service which fee schedule is covered by
separate agreement and not a part of this agreement. Such incentive fee to
be paid for the term of the new management contract subject to the terms and
conditions contained therein.
c. Office space with phone. Consultant will primarily be officed out
of CRH's Amfac Center offices.
d. Reasonable travel and entertainment expenses not to exceed $350.00
per month unless approved by CRH.
e. Parking and related staff services.
f. Medical Insurance (1/2 of premium cost only). The base retainer fee
shall be reduced by the amount of one-half (1/2) of the medical insurance
premium.
3. Term of Agreement
This AGREEMENT shall be effective June 1, 1998 and continue through
December 31, 1998 as the initial term. This AGREEMENT can not be canceled
during the initial term except in the case of default as specified in
Section 8. This AGREEMENT shall continue after the initial term on a month
to month basis subject to thirty (30) days written notice of termination.
4. Governing Law
The validity, construction and performance of this Agreement shall be
governed by the laws of the State of Hawaii.
5. Arbitration
Except as herein otherwise provided, any and all issues, disagreements,
disputes, questions, or matters arising under or related to this Agreement
or any alleged breach thereof shall be settled by binding arbitration by a
single arbitrator appointed by the parties or, if the parties are unable to
agree within thirty (30) days of the giving of notice by either party of its
desire to arbitrate, by any judge of the Circuit Court of the first Circuit,
State of Hawaii, upon application of either party pursuant to Section 658-4,
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Hawaii Revised Statutes. Such arbitration shall be conducted in accordance
with the Commercial Arbitration Rules of the American Arbitration
Association ("AAA") but shall not be administered by the AAA unless
otherwise agreed by the parties. The arbitrator's fees and costs, including
any initial deposit, shall be shared equally by the parties, provided that
the prevailing party, as determined by the arbitrator, shall be entitled to
recover all of its costs and expenses, including reasonable attorney's fees,
incurred in such proceedings. In the event of any litigation arising out of
or related to such proceedings, the prevailing party therein shall be
entitled to recover all of its costs and expenses, including reasonable
attorneys' fees, incurred in such litigation, including without limitation
any appeals. Jurisdiction and venue for all proceedings under this Section
5 shall be in the First Judicial Circuit of the State of Hawaii.
6. Confidentiality
Any and all information obtained by or disclosed to Consultant which is
not generally known to the public including but not limited to CRH's
customers, clients, programs, methods of operation, processes, practices,
policies and procedures, and any and all information obtained by or
disclosed to Consultant concerning business development are strictly
confidential and proprietary to CRH, shall be treated as trade secrets, and
shall not be disclosed, discussed or revealed by Consultant to any other
persons, entities or organizations, or used by Consultant, for personal
benefit or gain, in any way.
7. Other Matters
Prior to commencement of this Agreement, Consultant shall surrender to
THE CASTLE GROUP, INC. ("CGI") the stock certificates for the CGI Shares in
exchange for one stock certificate representing 32,250 CGI Shares and for
one or more stock certificates representing the balance of the CGI Shares.
CGI shall cause the stock certificate representing 32,250 CGI Shares to be
legended with a notation substantially as follows:
"Notice is hereby given that transfer of the shares of stock evidenced
by this certificate is subject to the restrictions of a certain agreement
dated as of April 16, 1997, a copy of which is on file in the office of the
corporation. Transfer of the shares of stock evidenced by this certificate
subject to the restrictions set forth in, and may be made only in compliance
with the terms of, said agreement. By accepting this certificate the holder
hereof and his, her or its successors and transferees and assigns become
parties to such agreement and are bound by its provisions."
8. Default
If either party (the "defaulting party") fails in any respect to
perform any of the duties, obligations, agreements, and/or covenants
hereunder, the other party (the "non-defaulting party") may, in addition to
any other remedies in law or equity, serve written notice on the defaulting
party setting forth the details of such default with reasonable specificity.
If within fifteen (15) days of receipt of such notice the defaulting party
has failed to cure such default or commenced to cure such default to the
reasonable satisfaction of the non-defaulting party, or if the default is of
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such a nature that it cannot be cured, then this Agreement may be terminated
by the non-defaulting party upon giving seven (7) days written notice of
such termination to the defaulting party.
9. Partial Invalidity
In the event that, in any judicial proceeding, any provision of this
Agreement is held invalid or unenforceable to its full extent, such
provision shall be enforced to the fullest extent permitted by law and the
validity of the remaining provisions hereof shall not be affected thereby.
10. Entire Agreement
This Agreement shall constitute the entire agreement between the
parties hereto, and no amendment or modification to this Agreement shall be
valid and enforceable except by supplemental written agreement executed by
the parties hereto.
11. Benefit and Binding Effect
This AGREEMENT shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, personal representatives,
successors and assigns.
IN WITNESS WHEREOF, the parties have signed this AGREEMENT as of the
date first written above.
CASTLE RESORTS & HOTELS, INC. KIMO M. KEAWE
"CRH" "CONSULTANT"
/s/ Kelvin M. Bloom /s/ Kimo M. Keawe
- ----------------------------- -----------------------------
President
65
<PAGE>
CONVERTIBLE PROMISSORY NOTE
U.S. $______________________ Honolulu, Hawaii
June 30, 1998
FOR VALUE RECEIVED, THE CASTLE GROUP, INC., a Utah corporation
("Maker") promises to pay to the order of _________________________, (the
"Holder") whose address is _____________________________________________, or
to such other place as the Holder shall from time to time designate in
writing, the principal sum of _________________________ AND 00/100 DOLLARS
($___________), or so much thereof as is, from time to time disbursed,
together with interest thereon from the date of this Note until fully paid
at a rate of TEN PERCENT (10%) per annum. Interest shall be calculated, but
not compounded, beginning on the basis of a 365-day year and the actual
number of days elapsed.
Interest shall be payable at redemption on March 31, 1999 (the
"Maturity Date").
All outstanding amounts of principal and any accrued interest then
unpaid, together with all other unpaid fees, charges or expenses due
hereunder, shall become, on the Maturity Date, (i) due and payable in full,
or (ii) in the event of default on this Note, this Note may be convertible
into common stock of the Maker at a conversion ration of a fifty percent
(50%) discount of the then current trading price to purchase common stock of
the Maker.
The Note may be prepaid in whole or in part at any time without
penalty.
The Maker promises to pay the Holder's reasonable attorneys' fees and
such other expenses as are incurred to induce or compel the payment of this
Note or any portion of the indebtedness, whether suit is brought hereon or
not. In the event of a default, and to the extent permitted by law, all
payments hereunder will be applied first to charges then due, then to
interest, and then to principal.
If a petition under the Federal Bankruptcy Code or any other similar
statute is filed by or against the Maker, or if the Maker shall fail to make
any payment of principal, interest or other fees or charges then due under
this Note, then, and in any such event, the Holder shall have the option to
declare the unpaid principal sum of this Note, together with all charges and
interest accrued thereon, to be immediately due and payable, and such
principal sum, charges and interest shall thereupon become and be due and
payable, and such principal sum, charges, and interest shall thereupon
become and be due and payable without presentment, demand, protest or notice
of any kind, all of which are hereby expressly waived, and upon such
maturity by acceleration or otherwise, the unpaid principal balance shall
thereafter bear interest until fully paid at the rate of Twelve Percent
(12%) per annum (based on actual number of days elapsed). Failure to
exercise this option shall not constitute a waiver of the right to exercise
the same in the event of the same or any subsequent default.
Except as otherwise provided herein, the Maker, and all others who are
now or may become liable for any part of this obligation severally waive
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<PAGE>
presentment, protest, demand and notice of protest, demand, dishonor and
nonpayment of this Note and consent to any and all extensions of the time of
payment or other provisions hereof, to any other modification hereof, to the
release of any security at any time given for the payment hereof, or any
part thereof, with or without substitution, and to any release of any
parties obligated hereunder or forbearance in the enforcement hereof.
This note shall be governed by and construed in accordance with the
laws of the State of Hawaii.
Principal and interest shall be payable to the Holder in lawful money
of the United States.
No provision in this Note may be waived, modified or canceled orally,
but only by an agreement in writing, signed by the Maker and the Holder of
this Note.
IN WITNESS WHEREOF, the Maker has caused this Note to be duly executed.
THE CASTLE GROUP, INC.
By /s/ Rick Wall
----------------------------------
Name: Rick Wall
Title: Chairman, CEO
"Maker"
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This Warrant and any shares acquired upon the exercise of this Warrant have
not been registered under the Securities Act of 1933, as amended, and may
not be transferred in the absence of such registration or an exemption
therefrom under such Act, except under circumstances where neither such
registration nor such an exemption is required by law.
THE CASTLE GROUP, INC.
Series A Common Stock Purchase Warrant
Expiring June 29, 2003
June 30, 1998
No. W-___
THE CASTLE GROUP, INC., a Utah corporation (the "Company"), for value
received, hereby certifies that ___________________, or registered assigns,
is entitled to purchase from the Company, at any time or rom time to time
prior to 5 P.M., Hawaii time, on June 29, 2003, ______ duly authorized,
validly issued, fully paid and nonassessable shares of Common Stock, par
value $.02 per share (the "Common Stock") of the Company at a purchase price
of $2.00 per share, all subject to the terms, conditions and adjustment set
forth below in this Warrant.
This Warrant is one of the Series A Common Stock Purchase Warrants (the
"Warrants"), such term to include all Warrants issued in substitution
therefor). The Warrants issued evidence rights to purchase an aggregate of
187,500 shares of Common Stock of the Company, subject to adjustment as
provided herein.
1. Exercise of Warrant.
1.1 Manner of Exercise. This Warrant may be exercised by the
holder hereof, in whole or in part, during normal business hours at any time
on or after June 30, 1998 upon 30 days notice (the "Exercise Notice") by the
holder hereof to the Company and by surrender of this Warrant to the Company
at the principal office of the Company, accompanied by a subscription in
substantially the form annexed hereto duly executed by such holder and by
payment, in cash or by certified or official bank check payable to the order
of the Company in the amount obtained by multiplying (a) the number of
shares of Common Stock (without giving effect to any adjustment therein)
designated in such subscription by (b) $2.00, whereupon such holder shall be
entitled to receive the number of duly authorized, validly issued, fully
paid and nonassessable shares of Common Stock (or Other Securities)
determined as provided in sections 2 through 6.
1.2 When Exercise Effective. Each exercise of this Warrant shall
be deemed to have been effected immediately prior to the close of business
on the Business Day on which this Warrant shall have been surrendered to the
Company upon the expiration of the 30-day notice period as provided in
section 1.1, and at such time the Person or Persons in whose name or names
any certificate or certificates for shares of Common Stock (or Other
Securities) shall be names any certificate or certificates for shares of
Common Stock (or Other Securities) shall be issuable upon such exercise as
provided in section 1.3 shall be deemed to have become the holder or holders
of record thereof.
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1.3 Delivery of Stock Certificates, Etc. As soon as practicable
after the exercise of this Warrant, in whole or in part, and in any event
within five Business Days thereafter, the Company at its expense (including
the payment by it of any applicable issue taxes) will cause to be issued in
the name of and delivered to the holder hereof or, subject to section 8, as
such holder (upon payment by such holder of any applicable transfer taxes)
may direct,
(a) a certificate or certificates for the number of duly
authorized, validly issued, fully paid and nonassessable shares of
Common Stock (or Other Securities) to which such holder shall be
entitled upon such exercise plus, in lieu of any fractional share to
which such holder would otherwise be entitled, cash in an amount
equal to the same fraction of the Market Price per share on the
Business Day next preceding the date of such exercise, and
(b) in case such exercise is in part only, a new Warrant or
Warrants of like tenor, calling in the aggregate on the face or
faces thereof for the number of shares of Common stock equal
(without giving effect to any adjustment therein) to the number of
such shares called for on the face of this Warrant minus the number
of such shares so designated by such holder upon such exercise as
provided in section 1.1.
1.4 Company to Reaffirm Obligations. The Company will, at the
time of each exercise of this Warrant, upon the request of the holder
hereof, acknowledge in writing its continuing obligation to afford to such
holder all rights to which such holder shall continue to be entitled after
such exercise in accordance with the terms of this Warrant; provided,
however, that if the holder of this Warrant shall fail to make any such
request, such failure shall not affect the continuing obligation of the
Company to afford such rights to such holder.
1.5 Payment by Application of Certain Securities. Upon any
exercise of this Warrant by the holder of any Note due March 31, 1999 of the
Company issued pursuant to the Purchase Agreement, such holder may, at its
option, surrender such Note of Notes to the Company, together with written
instructions from such holder to apply all or any part of the unpaid
principal amount of such Note or Notes against the cash payment required
upon such exercise pursuant to section 1.1, in which case the Company will
accept such specified principal amount in satisfaction of a like amount of
such payment.
2. Adjustment of Common Stock Issuable upon Exercise
2.1 Number of Shares; Warrant Price. The number of shares of
Common Stock which the holder of any Warrant shall be entitled to receive
upon each exercise thereof shall be determined by multiplying the number of
shares of Common Stock which would otherwise (but for the provisions of this
section 2) be issuable upon such exercise, as designated by the holder
thereof, by a fraction of which (a) the numerator is $2.00 and (b) the
denominator is the Warrant Price (as defined below) in effect on the date of
such exercise. The Warrant Price shall initially be $2.00, shall be
adjusted and readjusted from time to time as provided in this Section 2,
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and, as so adjusted or readjusted, shall remain in effect until a further
adjustment or readjustment thereof is required by this section 2.
2.2 Adjustment of Warrant Price.
2.2.1 Issuance of Additional Shares of Common Stock. In
case the Company at any time or from time to time after the date hereof,
shall issue or sell Additional Shares of Common Stock (including Additional
Shares of Common Stock deemed to be issued pursuant to section 2.3 or 2.4)
without consideration or for a consideration per share less than the greater
of the Current Market Price and the Warrant Price in effect immediately
prior to such issue or sale, then, and in each such case, subject to section
2.8, such Warrant Price shall be reduced, concurrently with such issue or
sale, to an amount (calculated to the nearest .01 of a cent) determined by
multiplying such Warrant Price by a fraction.
(a) the numerator of which shall be (i) the number of shares
of Common Stock outstanding immediately prior to such issue or sale
plus (ii) the number of shares of Common Stock which the aggregate
consideration received by the Company for the total number of such
Additional Shares of Common Stock so issued or sold would purchase
at the greater of such Current market Price and such Warrant Price,
and
(b) the denominator of which shall be the number of shares
of Common Stock outstanding immediately after such issue or sale;
provided, however, that for the purposes of this section 2.2.1, (x)
immediately after any Additional Shares of Common Stock are deemed
to have been issued pursuant to section 2.3 or 2.4 of this section
2, such Additional Shares shall be deemed to be outstanding, and (y)
treasury shares shall not be deemed to be outstanding and the
disposition of any thereof by the Company shall be considered an
issue or sale of Common Stock for purposes of this section 2.
2.2.2 Extraordinary Dividends and Distributions. In case
the Company at any time or from time to time after the date hereof shall
declare, order, pay or make a dividend or other distribution (including,
without limitation, any distribution of other or additional stock or other
securities or property or Options by way of dividend or spin-off,
reclassification, recapitalization or similar corporate rearrangement) on
the Common Stock, other than (a) a dividend payable in Additional Shares of
Common Stock, or (b) a dividend payable in cash or other property and
declared out of the earned surplus of the Corporation as at the date hereof
as increased by any credits (other than credits resulting from a revaluation
of property) and decreased by any debits made thereto after such date,
determined in accordance with generally accepted accounting principles,
then, and in each such case, subject to section 2.8, the Warrant Price in
effect immediately prior to the close of business on the record date fixed
for the determination of holders of any class of securities entitled to
receive such dividend or distribution shall be reduced, effective as of the
close of business on such record date, to a price (calculated to the nearest
.01 of a cent) determined by multiplying such Warrant price by a fraction,
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(x) the numerator of which shall be the Current Market
Price in effect on such record date or, if the Common Stock trades
on an ex-dividend basis, on the date prior to the commencement of
ex-dividend trading, less the amount of such dividend or
distribution (as determined in good faith by the Board of Directors
of the Company) applicable to one share of Common Stock, and
(y) the denominator of which shall be such Current
Market Price.
2.3 Treatment of Options and Convertible Securities. In case the
Company at any time or from time to time after the date hereof shall issue,
sell, grant or assume, or shall fix a record date for the determination of
holders of any class of securities entitled to receive, any Options or
Convertible Securities, then, and in each such case, the maximum number of
Additional Shares of Common Stock (as set forth in the instrument relating
thereto, without regard to any provisions contained therein for a subsequent
adjustment of such number) issuable upon the exercise of such Options or, in
the case of Convertible Securities and Options therefor, the conversion or
exchange of such Convertible Securities, shall be deemed to be Additional
Shares of Common Stock issued as of the time of such issue, sale, grant or
assumption (or, in case such a record date shall have been fixed, as of the
close of business on such record date; or, if the Common Stock trades on an
ex-dividend basis, on the date prior to the commencement of ex-dividend
trading); provided, however, that such Additional Shares of Common Stock
shall not be deemed to have been issued unless the consideration per share
(determined pursuant to section 2.5) of such shares would be less than the
greater of the Current Market Price and the Warrant Price in effect on the
date of and immediately prior to such issue, sale, grant or assumption (or
immediately prior to the close of business on such record date or, if the
Common Stock trades on an ex-dividend basis, on the date prior to the
commencement of ex-dividend trading), as the case may be; and provided,
further, that in any such case in which Additional Shares of Common Stock
are deemed to be issued,
(a) no further adjustment of the Warrant Price shall be made
upon the subsequent issue or sale of Convertible Securities or
shares of Common Stock upon the exercise of such Options or the
conversion or exchange of such Convertible Securities;
(b) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any increase in
the consideration payable to the Company, or decrease in the number
of Additional Shares of Common Stock issuable, upon the exercise,
conversion or exchange thereof (by change of rate or otherwise), the
Warrant Price computed upon the original issue, sale, grant or
assumption thereof (or upon the occurrence of the record date with
respect thereto or, if the Common Stock trades on an ex-dividend
basis, on the date prior to the commencement of ex-dividend
trading), and any subsequent adjustments based thereon, shall, upon
any such increases or decreases becoming effective, be recomputed to
reflect such increase or decrease insofar as if affects such Options
or the rights of conversion or exchange under such Convertible
Securities, which are outstanding at such time;
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(c) upon the expiration (or purchase by the Company and
cancellation or retirement) of any such Options which shall not have
been exercised or the expiration of any rights of conversion or
exchange under any such Convertible Securities which (or purchase by
the Company and cancellation or retirement of any such convertible
Securities the rights of conversion or exchange under which) shall
not have been exercised, the Warrant Price computed upon the
original issue, sale, grant or assumption thereof (or upon the
occurrence of the record date, or date prior to the commencement of
ex-dividend trading, as the case may be, with respect thereto), and
any subsequent adjustments based thereon, shall, upon such
expiration (or such cancellation or retirement, as the case may be),
be recomputed as if:
(i) in the case of such Convertible Securities or
Options for Common Stock, the only Additional Shares of
Common Stock issued or sold were the shares of Common Stock,
if any, actually issued or sold upon the exercise of such
options or the conversion or exchange of such convertible
Securities and the consideration received therefor was the
consideration actually received by the Company for the issue,
sale, grant or assumption of all such Options, whether or not
exercised, plus the consideration actually received by the
Company upon such exercise, or for the issue or sale of all
such Convertible Securities which were actually converted or
exchanged, plus the additional consideration, if any,
actually received by the Company upon such conversion or
exchange, and
(ii) in the case of such Options for Convertible
Securities, only the Convertible Securities, if any, actually
issued or sold upon the exercise thereof were issued at the
time of the issue, sale, grant or assumption of such Options,
and the consideration received by the Company for the
Additional Shares of Common Stock deemed to have then been
issued was the consideration actually received by the Company
for the issue, sale, grant or assumption of all such Options,
whether or not exercised, plus the consideration deemed to
have been received by the Company (pursuant to section 2.5)
upon the issue or sale of the Convertible Securities with
respect to which such Options were actually exercised.
(d) no readjustment pursuant to clause (b) or (c) above shall
have the effect of increasing the Warrant Price by an amount in excess
of the amount of the adjustment thereof originally made in respect of
the issue, sale, grant or assumption of such Options or Convertible
Securities; and
(e) in the case of any such Options which expire by their terms
not more than 30 days after the date of issue, sale, grant or
assumption thereof, no adjustment of the Warrant price shall be made in
the manner provided in clause (c) above.
2.4 Treatment of Stock Dividends, Stock Splits, etc. In case the
Company at any time or from time to time after the date hereof shall declare
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or pay any dividend on the Common Stock payable in Common Stock, or shall
effect a subdivision of the outstanding shares of Common Stock into a
greater number of shares of Common Stock (by reclassification or otherwise
than by payment of a dividend in Common Stock), then, and in each such case,
Additional Shares of Common Stock shall be deemed to have been issued (a) in
the case of any such dividend, immediately after the close of business on
the record date for the determination of holders of any class of securities
entitled to receive such dividend, or (b) in the case of any such
subdivision, at the close of business on the day immediately prior to the
day upon which such corporate action becomes effective.
2.5 Computation of Consideration. For the purposes of this
section 2,
(a) the consideration for the issue or sale of any Additional
Shares of Common Stock shall, irrespective of the accounting treatment
of such consideration,
(i) insofar as it consists of cash, be computed at the net
amount of cash received by the Company, without deducting any
expenses paid or incurred by the Company or any commission or
compensations paid or concessions or discounts allowed to
underwriters, dealers or others performing similar services in
connection with such issue or sale,
(ii) insofar as it consists of property (including
securities) other than cash, be computed at the fair market value
thereof at the time of such issue or sale, as determined in good
faith by the Board of Directors of the Company, and
(iii) in case Additional Shares of Common Stock are
issued or sold together with other stock or securities or other
assets of the Company for a consideration which covers both, be the
portion of such consideration so received, computed as provided in
clauses (i) and (ii) above, allocable to such Additional Shares of
Common Stock, all as determined in good faith by the Board of
Directors of the Company.
(b) Additional Shares of Common Stock deemed to have been issued
pursuant to section 2.3, relating to Options and Convertible
Securities, shall be deemed to have been issued for a consideration per
share determined by dividing,
(i) the total amount, if any received and receivable by the
Company as consideration for the issue, sale, grant or assumption of
the Options or Convertible Securities in question, plus the minimum
aggregate amount of additional consideration (as set forth in the
instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such consideration)
payable to the Company upon the exercise in full of such Options or
the conversion or exchange of such Convertible Securities, or, in
the case of Options for Convertible Securities, the exercise of such
Options for Convertible Securities and the conversion or exchange of
such Convertible Securities, in each case computing such
consideration, as provided in the foregoing subdivision (a),
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by
(ii) the maximum number of shares of Common Stock (as set
forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such
number) issuable upon the exercise of such Options or the conversion
or exchange of such Convertible Securities; and
(c) Additional Shares of Common Stock deemed to have been issued
pursuant to section 2.4, relating to stock dividends, stock splits,
etc., shall be deemed to have been issued for no consideration.
2.6 Adjustments for Combinations, etc. In case the outstanding
shares of Common Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of Common
Stock, the Warrant Price in effect immediately prior to such combination or
consolidation shall, concurrently with effectiveness of such combination or
consolidation, be proportionately increased.
2.7 Dilution in Case of Other Securities. In case any Other
Securities shall be issued or sold or shall become subject to issue or sale
upon the conversion or exchange of any stock (or Other Securities) of the
Company (or any issuer of Other Securities or any other Person referred to
in this section 2) or to subscription, purchase or other acquisition
pursuant to any Options issued or granted by the Company (or any such other
issuer of Person) for a consideration such as to dilute, on a basis
consistent with the standards established in the other provisions of this
section 2, the rights granted by any Warrant, then, and in each such case,
the computations, adjustments and readjustments provided for in this section
2 with respect to the Warrant Price shall be made as nearly as possible in
the manner so provided an applied to determine the amount of Other
Securities from time to time receivable upon the exercise or conversion of
any Warrant, so as to protect the holder of the Warrant against the effect
of such dilution.
2.8 Minimum Adjustment of Warrant Price. If the amount of any
adjustment of the Warrant Price required pursuant to this section 2 would be
less than one-tenth (1/10) of 1% of the Warrant Price in effect at the time
such adjustment is otherwise so required to be made, such amount shall be
carried forward and adjustment with respect thereto made at the time of and
together with any subsequent adjustment which, together with such amount and
any other amount or amounts so carried forward, shall aggregate at least
one-tenth (1/10) of 1% of such Warrant Price; provided, however, upon the
exercise or conversion of any Warrant, all necessary adjustments (calculated
to the nearest .01 of a cent) and theretofore made to the Warrant Price
relating thereto, up to and including the date of such exercise or
conversion, shall be made.
3. Changes in Capital Stock. If any capital reorganization or
reclassification of the capital stock of the Company, or consolidation or
merger of the Company with another corporation, or the sale of all or
substantially all of its assets to another corporation, shall be effected in
such a way that holders of the Common Stock shall be entitled to receive
stock, securities or assets with respect to or in exchange for shares of the
Common Stock, then, prior to and as a condition of such reorganization,
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reclassification, consolidation, merger or sale, lawful and adequate
provision shall be made whereby each holder of a Warrant shall have the
right to receive upon the basis and upon the terms and conditions specified
in this section 3 and in lieu of the shares of the Common Stock immediately
theretofore receivable upon the exercise or conversion of such Warrant such
shares of Common Stock, securities or assets as may be issued or payable
with respect to or in exchange for a number of outstanding shares of the
Common Stock equal to the number of shares of Common Stock immediately
theretofore so receivable had such reorganization, reclassification,
consolidation, merger or sale not taken place, and in any such case
appropriate provisions shall be made with respect to the rights and
interests of such holder to the end that the provisions hereof (including,
without limitation, provisions for adjustment of the Warrant Price and of
the number of shares issuable upon exercise or conversion), shall thereafter
be applicable, as nearly as may be, in relation to any shares of stock,
securities or assets thereafter deliverable upon the exercise of such
Warrant. The Company shall not effect any such consolidation, merger or
sale unless prior to or simultaneously with the consummation thereof the
survivor or successor corporation (if other than the Company) resulting from
such consolidation or merger or the corporation purchasing such assets shall
assume by written instrument executed and delivered to each holder of a
Warrant, the obligation to deliver to such holder such shares of stock,
securities or assets as, in accordance with the foregoing provisions, such
holder may be entitled to receive, and containing the express assumption by
such successor corporation of the due and punctual performance and
observance of every provision of this Warrant to be performed and observed
by the Company and of all liabilities and obligations of the Company
hereunder.
4. Other Dilutive Events. In case any event shall occur as to which
the provisions of section 2 or section 3 are not strictly applicable but the
failure to make any adjustment would not in the opinion of any holder of a
Note or the Company fairly protect the purchase or conversion rights
represented by any Warrant in accordance with the essential intent and
principles of such sections, then, in each such case, upon the written
request of such holder or on its own motion, the Company shall appoint a
firm of independent certified public accountants of recognized national
standing (which may be the regular auditors of the Company), which shall
give their opinion upon the adjustment, if any, on a basis consistent with
the essential intent and principles established in sections 2 and 3,
necessary to preserve, without dilution, the purchase or conversion rights
represented by such Warrant. Upon receipt of such opinion, the Company will
promptly mail a copy thereof to the holder of such Warrant and shall make
the adjustments described therein.
5. No Dilution or Impairment. The Company will not, by amendment of
its certificate of incorporation or through any consolidation, merger,
reorganization, transfer of assets, dissolution, issue or sale of securities
or any other voluntary action, avoid or seed to avoid the observance or
performance of any of the terms of this Warrant, but will at all times in
good faith assist in carrying out all of such terms and in the taking of all
such action as may be necessary or appropriate in order to protect the
rights of each holder of a Warrant against dilution or other impairment.
Without limiting the generality of the foregoing, the Company (a) will not
permit the par value of any shares of stock receivable upon the exercise of
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any Warrant to exceed the amount payable therefor upon such exercise, (b)
will take all such action as may be necessary or appropriate in order that
the Company may validly and legally issue fully paid and non-assessable
shares of stock on the exercise of the Warrants from time to time
outstanding, (c) will not take any action which results in any adjustment of
the Warrant Price if the total number of shares of Common Stock (or Other
Securities) issuable after the action upon the exercise of all of the
Warrants would exceed the total number of shares of Common Stock (or Other
Securities) then authorized by the certificate of incorporation and
available for the purpose of issue upon such exercise, and (d) will not
issue any capital stock of any class which is preferred as to dividends or
as to the distribution of assets upon voluntary or involuntary dissolution,
liquidation or winding-up, unless the rights of the holders thereof shall be
limited to a fixed sum or percentage of par value in respect of
participation in dividends and in any such distribution of assets.
6. Accountant's Report as to Adjustments. In each case of any
adjustment or readjustment in the shares of Common Stock (or Other
Securities) issuable upon the exercise or conversion of any Warrant, the
Company at its expense will promptly compute such adjustment or readjustment
in accordance with the terms of the Warrants and cause independent certified
public accountants of recognized national standing (which may be the regular
auditors of the Company) selected by the Company to verify such computation
and prepare a report setting forth such adjustment or readjustment and
showing in detail the method of calculation thereof and the facts upon which
such adjustment or readjustment is based, including a statement of (a) the
consideration received or to be received by the Company for any Additional
Shares of Common Stock issued or sold or deemed to have been issued, (b) the
number of shares of Common Stock outstanding or deemed to be outstanding,
and (c) the Warrant Price in effect immediately prior to such issue or sale
and as adjusted and readjusted (if required by section 2) on account
thereof. The Company will forthwith (and in any event not later than 20
days following the occurrence of the event requiring such adjustment)
furnish a copy of each such report to each holder of a Warrant, and will,
upon the written request at any time of any holder of a Warrant, furnish to
such holder a like report setting forth the Warrant Price at the time in
effect and showing how it was calculated. The Company will also keep copies
of all such reports at its principal office, and will cause the same to be
available for inspection at such office during normal business hours by any
holder of a Warrant or any prospective purchaser of a Warrant designated by
the holder thereof.
7. Notices of Corporate Action. In the event of:
(a) any taking by the Company of a record of the holders of any
class of securities for the purpose of determining the holders thereof
who are entitled to receive any dividend (other than (i) a regular
periodic dividend payable in cash out of earned surplus in an amount
not in excess of the amount of the immediately preceding cash dividend
for such period, or (ii) or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any
class or any other securities or property, or to receive any other
right, or
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(b) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the
Company, any consolidation or merger involving the Company and any
other Person or any transfer of all or substantially all the assets of
the Company to any other Person, or
(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
the Company will deliver to each holder of a Warrant a notice specifying (i)
the date or expected date on which any such record is to be taken for the
purpose of such dividend, distribution or right, and the amount and
character of such dividend, distribution or right, or (ii) the date or
expected date on which any such reorganization, reclassification,
recapitalization, consolidation, merger, transfer, dissolution, liquidation
or winding-up is to take place and the time, if any such time is to be
fixed, as of which the holders of record of Common Stock (or Other
Securities) shall be entitled to exchange their shares of Common Stock (or
Other Securities) for the securities or other property deliverable upon such
reorganization, reclassification, recapitalization, consolidation, merger,
transfer, dissolution, liquidation or winding-up. Such notice shall be
furnished at least 30 days prior to the date therein specified.
8. Restrictions on Transfer.
8.1 Restrictive Legends. Except as otherwise permitted by this
section 8, each Warrant originally issued pursuant to the Purchase Agreement
and each Warrant issued upon direct or indirect transfer or in substitution
for any Warrant pursuant to section 12 shall be stamped or otherwise
imprinted with a legend in substantially the following form:
"This Warrant and any shares acquired upon the exercise of
this Warrant have not been registered under the Securities Act of
1933, as amended, and may not be transferred in the absence of such
registration or an exemption therefrom under such Act, except under
circumstances where neither such registration nor such an exemption
is required by law."
Except as otherwise permitted by this section 8, each certificate for Common
Stock (or other Securities) issued upon the exercise of any Warrant, and
each certificate issued upon the direct or indirect transfer of any such
Common Stock (or Other Securities), shall be stamped or otherwise imprinted
any with a legend in substantially the following form:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as lie amended, and may
not be transferred in the absence of such registration or an
exemption therefrom under such Act, except under circumstances where
neither such registration nor such an exemption is required by law."
8.2 Registration of Common Stock. If any shares of Common Stock
required to be reserved for purposes of exercise of this Warrant require
registration with or approval of any governmental authority under any
federal or state law (other than the Securities Act) before such shares may
be issued upon exercise, the Company will, at its expense and as
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expeditiously as possible, use its best efforts to cause such shares to be
duly registered or approved, as the case may be; provided, however, that the
Company will not be required to qualify as a foreign corporation or subject
itself to taxation in any jurisdiction or to file a consent to service of
process in any jurisdiction in any action other than one arising out of the
offering or sale of such shares. The shares of Common Stock (and Other
Securities) issuable upon exercise of this Warrant shall constitute
Restricted Securities.
8.3 Resale of Securities. If the Purchaser should decide to
dispose of any Restricted Securities, other than pursuant to (x) the last
sentence of this section 8.3, (y) an effective registration statement under
the Securities Act or (z) Rule 144 (or any successor provision) under the
Securities Act, the Purchaser shall designate counsel (who may be its in-house
counsel or other counsel reasonably acceptable to the Company) in
connection with such disposition and the Purchaser will be entitled to
transfer such Restricted Securities free of the restrictions imposed by this
section 8 upon the issuance to the Company of the opinion of such counsel,
provided that such opinion is reasonably acceptable to the Company and to
the effect that be the proposed distribution would not be in violation of
the Securities Act or any applicable state securities or blue sky law. Each
certificate and/or warrant, if any, issued upon or in connection with such
transfer shall bear the applicable restrictive legend set forth in section
8.1 of this section 8, unless in the opinion of such counsel such legend is
no longer required to ensure compliance with the Securities Act or
applicable state securities or blue sky laws. Notwithstanding the
foregoing, the Purchaser shall be permitted to transfer any Restricted
Securities to one or more institutional investors or to a nominee in
accordance with such laws, provided, that (i) each such investor or nominee
represents in writing that it is acquiring such Restricted Securities for
investment and not with a view to the distribution thereof (subject,
however, to any requirement of law that the disposition thereof shall at all
times be within the control of such transferee) aid (ii) each such investor
or nominee agrees in writing to be bound by all the restrictions of transfer
of such Restricted Securities contained in this section 8.
8.4 Expenses, Benefits to Certain Transferees. The Company will
pay the reasonable fees, expenses and disbursements of counsel to the
Purchaser (if the Purchaser designates counsel who is not one of its
officers or employees) in connection with all opinions rendered to the
Company pursuant to this section 8. The Company agrees to afford the
benefits of sections 8.3 and 8.5 to any institutional investor to whom any
Restricted Security has been transferred pursuant to the last sentence of
section 8.3.
8.5 Termination of Restrictions. The restrictions imposed by
this section 8 upon the transferability of Restricted Securities shall cease
and terminate as to any particular Restricted Securities (i) when such
securities shall have been effectively registered under the Securities Act
and disposed of in accordance with the registration statement covering such
securities, or (ii) when, in the opinions of both counsel for the holder
thereof (who may be its in-house counsel or other counsel reasonably
acceptable to the Company) and counsel for the Company, such restrictions
are no longer required in order to ensure compliance with the Securities
Act. The Company agrees to request an opinion of its counsel as
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contemplated by clause (ii) of the preceding sentence upon receipt of such
an opinion of counsel for the holder of a Restricted Security, it shall not
be necessary that any opinion of the Company's counsel be delivered in order
for the requirements of said clause (ii) to be satisfied. Whenever such
restrictions shall terminate as to any Restricted Securities, the holder
thereof shall be entitled to receive from the Company, without expense
(other than transfer taxes, if any), new securities of like tenor not
bearing the restrictive legend set forth in section 8.1.
9. Availability of Information. At any time after any of the Common
Stock is registered under the Exchange Act, the Company will comply with the
reporting requirements of sections 13 and 15(d) of such Act (whether or not
it shall be required to do so pursuant to such sections) and will comply
with all other public information reporting requirements of the Commission
(including Rule 144 promulgated by the Commission under the Securities Act)
from time to time in effect and relating to the availability of an exemption
from the Securities Act for the sale of any Restricted Securities. The
Company will also cooperate with each holder of any Restricted Securities in
supplying such information as may be necessary for such holder to complete
and file any information reporting forms presently or hereafter required by
the commission as a condition to the availability of an exemption from the
Securities Act of the sale of any Restricted Securities. The Company will
furnish to each holder of any Warrants, promptly upon their becoming
available, copies of all financial statements, reports, notices and proxy
statements sent or made available generally by the Company to its
stockholders in their capacity as stockholders, and copies of all regular
and periodic reports and all registration statements and prospectuses filed
by the Company with any securities exchange or with the Commission.
10. Reservation of Stock, etc. The Company will at all times
reserve and keep available, solely for issuance and delivery upon the
exercise of the Warrants, the number of shares of Common Stock of each class
(or Other Securities) from time to time issuable upon the exercise of all
Warrants at the time outstanding. All such securities shall be duly
authorized and, when issued upon such exercise, shall be validly issued and,
in the case of shares, fully paid and nonassessable with no liability on the
part of the holders thereof.
11. Listing on Securities Exchange. At any time after any of
the Common Stock is registered under the Exchange Act, the Company will, at
its expense, use its best efforts to obtain and maintain the approval for
listing on any national securities exchange or NASDAQ upon official notice
of issuance of all shares of the Common Stock receivable upon the exercise
of the Warrants at the time outstanding and to maintain the listing of such
shares after their issuance; and the Company will use its best efforts to so
list on such national securities exchange or NASDAQ, as the case may be, and
to maintain such listing of, any Other Securities that at any time are
issuable upon exercise of the Warrants after any such Other Securities have
been registered under the Securities Exchange Act of 1934.
12. Ownership, Transfer and Substitution of Warrants.
12.1 Ownership of Warrants. The Company may treat the Person in
whose name any Warrant is registered on the register kept at the principal
office of the Company as the owner and holder thereof for all purposes,
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notwithstanding any notice to the contrary, except that, if and when any
Warrant is properly assigned in blank, the company may (but shall not be
obligated to) treat the bearer thereof as the owner of such Warrant for all
purposes, notwithstanding any notice to the contrary. Subject to section 8,
a Warrant, if properly assigned, may be exercised by a new holder without
first having a new Warrant issued.
12.2 Transfer and Exchange of Warrants. Upon the surrender of
any Warrant, properly endorsed, for registration of transfer of for exchange
at the principal office of the Company, the company at its expense will
(subject to compliance with section 8, if applicable) execute and deliver to
or upon the order of the holder thereof a new Warrant or Warrants of like
tenor, in the name of such holder or as such holder (upon payment by such
holder of any applicable transfer taxes) may direct, calling in the
aggregate on the face or faces thereof for the number of shares of Common
Stock called for on the face or faces of the Warrant or Warrants so
surrendered.
12.3 Replacement of Warrants. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of any Warrant and, in the case of such loss, theft or
destruction of any Warrant held by a Person other than the Purchaser or any
institutional investor, upon delivery of indemnity reasonably satisfactory
to the Company in form and amount or, in the case of any such mutilation,
upon surrender of such Warrant for cancellation at the office of the Company
maintained pursuant to paragraph (a) of section 12.2 or the principal office
of the Company, the Company at its expense will execute and deliver, in lieu
thereof, a new Warrant of like tenor.
13. Definitions. As used herein, unless the context otherwise
requires, the following terms have the following respective meanings:
Additional Shares of Common Stock: all shares (including treasury
shares) of Common Stock issued or sold (or, pursuant to section 2.3 or 2.4,
deemed to be issued) by the Company after the date hereof, whether or not
subsequently reacquired or retired by the Company, other than shares issued
upon the exercise of (a) the Company's Series A Warrants initially
exercisable for 187,500 shares of Common Stock of the Company.
Business Day: any day other than a Saturday, Sunday or any other
day on which commercial banks are authorized by law to be closed in
Honolulu, Hawaii.
Commission: the Securities and Exchange Commission or any other
Federal agency at the time administering the Securities Act.
Common Stock: the meaning specified in the opening paragraphs of
this Warrant, including any corporation which shall succeed to or assume the
obligations of the Company hereunder in compliance with section 3.
Consolidated Net Operating Income: for any period, net income (or
loss), excluding extraordinary items, of the Company and its Subsidiaries
for the period in question, determined in accordance with generally accepted
accounting principles on a consolidated basis, after restoring thereto
amounts deducted for (a) depreciation and amortization; (b) the aggregate
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<PAGE>
amount (determined in accordance with generally accepted accounting
principles on a consolidated basis) of interest paid or payable during such
period by the Company and its Subsidiaries in respect of all indebtedness
for borrowed money and capitalized leases; and (c) taxes in respect of
income and profits.
Convertible Securities: any evidences of indebtedness, shares of
stock (other than Common Stock) or other securities directly or indirectly
convertible into or exchangeable for Common Stock.
Current Market Price: on any date specified herein for the
determination thereof, (a) the average daily Market Price for those days
during the period of 20 days, ending on such date, on which the national
securities exchanges were open for trading, and (b) if the Common Stock is
not then listed or admitted to trading on any national securities exchange
or quoted in the over-the-counter market, the Market Price on such date.
Exchange Act: the Securities Exchange Act of 1934, or any similar
Federal statute, and the rules and regulations of the Commission thereunder,
all as the same shall be in effect at the time.
Market Price: per share of Common Stock on any date specified
herein, (a) the last sale price, regular way, on such date or, if no such
sale takes place on such date, the average of the closing bid and asked
prices on such date, in each case as officially reported on the principal
national securities exchange on which the Common Stock is then listed or
admitted to trading, or (b) if the Common Stock is not then listed or
admitted to trading on any national securities exchange but is designated as
a national market system security by the NASD, the last trading price of the
Common Stock on such date, or (c) if there shall have been no trading on
such date or if the common Stock is not so designated, the average of the
reported closing bid and asked prices of the Common Stock on such date as
shown by NASDAQ and reported by any member firm of the New York Stock
Exchange selected by the Company, or (d) if neither (a), (b) nor (c) is
applicable, a price per share equal to (i) the product of ten multiplied by
Consolidated net Operating Income of the Company for the most recently
completed period of 12 consecutive months ending prior to the date of
determination thereof, less Total Debt as of such date, plus cash and
marketable securities included in the assets of the Company and its
subsidiaries as of such date in accordance with generally accepted
accounting principles, divided by (ii) the total number of shares of Common
Stock outstanding on the date of determination thereof (assuming for such
purpose the exercise of all other Warrants then outstanding).
NASD: the National Association of Securities Dealers.
NASDAQ: the National Association of Securities Dealers Automated
Quotation System.
Options: rights, options or warrants to subscribe for, purchase or
otherwise acquire either Common Stock or Convertible Securities.
Other Securities: any stock (other than Common Stock) and other
securities of the Company or any other Person (corporate or otherwise) which
the holders of the Warrants at any time shall be entitled to receive, or
81
<PAGE>
shall have received, upon the exercise of the Warrants, in lieu of or in
addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to section 3 or otherwise.
Person: a corporation, an association, a partnership, an
organization, or business, an individual, a government or political
subdivision thereof or a governmental agency.
Purchase Agreement: the meaning specified in the opening paragraphs
of this Warrant.
Purchaser: the meaning specified in the opening paragraphs of this
Warrant.
Restricted Shares: (a) any Warrants bearing the applicable legend
set forth in section 8.1, (b) any shares of Common Stock (or Other
Securities) issued upon the exercise of Warrants which are evidenced by a
certificate or certificates bearing the applicable legend set forth in such
section, (c) any shares of Common Stock (or Other Securities) issued
subsequent to the exercise of any of the Warrants as a dividend or other
distribution with respect to, or resulting from a subdivision of the
outstanding shares of common Stock (or Other Securities) into a greater
number of shares by reclassification, stock splits or otherwise, or in
exchange for or in replacement of the Common Stock (or other Securities)
issued upon such exercise, which are evidenced by a certificate or
certificates bearing the applicable legend set forth in such section, and
9d) unless the context otherwise requires, any shares of Common Stock (or
Other Securities) issuable upon the exercise of Warrants, which, when so
issued, will be evidenced by a certificate or certificates bearing the
applicable legend set forth in such section.
Securities Act: the Securities Act of 1933, or any similar Federal
statute, and the rules and regulations of the commission thereunder, all as
the same shall be in effect at the time.
Total Debt: all indebtedness of the Company and its Subsidiaries
(without duplication), determined in accordance with generally accepted
accounting principles, in respect of borrowed money and capitalized leases.
Warrants: the meaning specified in the opening paragraphs of this
Warrant.
Warrant Price: the meaning specified in section 2.
14. Remedies. The Company stipulates that the remedies at law
of the holder of this Warrant in the event of any default or threatened
default by the Company in the performance of or compliance with any of the
terms of this Warrant are not and will not be adequate, and that, to the
extent permitted by applicable law, such terms may be specifically enforced
by a decree for the specific performance of any agreement contained herein
or by an injunction against a violation of any of the terms hereof or
otherwise.
15. No Rights or Liabilities as Stockholder. Nothing contained
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<PAGE>
in this Warrant shall be construed as conferring upon the holder hereof any
rights as a stockholder of the Company or as imposing any obligation on such
holder to purchase any securities or as imposing any liabilities on such
holder as a stockholder of the Company, whether such obligation or
liabilities are asserted by the Company or by creditors of the Company.
16. Notices. All notices an other communications provided for
herein shall be delivered or mailed by first class mail, postage prepaid,
addressed (a) if to any holder of any Warrant, at the registered address of
such holder as set forth in the register kept at the principal office of the
Company or (b) if to the Company, at its principal office, 745 Fort Street,
10th Floor, Honolulu, Hawaii 96813, or at the address of such other
principal office of the Company as the Company shall have furnished to each
holder of any Warrants in writing; provided, however, that the exercise of
any Warrant shall be effective in the manner provided in section 1.
17. Miscellaneous. This Warrant and any term hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of such change, waiver,
discharge or termination is sought. Any provision of this Warrant which
shall be prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and
any such prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other jurisdiction.
To the extend permitted by applicable law, the Company waives any provision
of law which shall render any provision hereof prohibited or unenforceable
in any respect. This Warrant shall be governed by the laws of the State of
Hawaii. The headings of this Warrant are inserted for convenience only and
shall not be deemed to constitute a part hereof.
18. Expiration. The Company will give the holder of this
Warrant no less than six months nor more than nine months written notice of
the expiration of the right to exercise this Warrant. The right to expire
at 5:00 p.m., Hawaii time, on June 29, 2003 unless the Company shall fail to
give such notice as aforesaid, in which event the right to exercise this
Warrant shall not expire until 5:00 p.m., Hawaii time, on a date six months
after the date on which the Company shall give written notice of the
expiration of the right to exercise this Warrant.
THE CASTLE GROUP, INC.
By: /s/ Rick Wall
--------------------------------------------
Name: Rick Wall
Title: Chairman, Chief Executive Officer
83
<PAGE>
FORM OF SUBSCRIPTION
[To be executed only upon exercise of Warrant]
to THE CASTLE GROUP, INC.
The undersigned registered holder of the within Warrant hereby
irrevocably exercises such Warrant for and purchases thereunder,
_______________* shares of Common Stock of THE CASTLE GROUP, INC. and
herewith makes payment of $__________________ therefor, and requests that
the certificates for such shares be issued in the name of, and delivered to
_______________________________ whose address is:__________________________
____________________________.
Dated:
_________________________________________________
(Signature must conform in all respects to name
of holder as specified on the face of Warrant)
_________________________________________________
(Street Address)
_________________________________________________
(City)(State)(Zip Code)
* Insert here the number of shares called for on the face of this Warrant
(or in the case of a partial exercise, the portion thereof as to which this
Warrant is being exercised), in either case without making any adjustment
for additional Common Stock or any other stock or other securities or
property or cash which, pursuant to the adjustment provisions of this
Warrant, may be delivered upon exercise. In the case of a partial exercise,
a new Warrant or Warrants will be issued and delivered, representing the
unexercised portion of the Warrant, to the holder surrendering the Warrant.
84
<PAGE>
FORM OF ASSIGNMENT
[To be executed only upon transfer of Warrant]
For value received, the undersigned registered holder of the within
Warrant hereby sells, assigns and transfers unto
_________________________________________________ the right represented by
such Warrant to purchase ________________________ shares of Common Stock of
THE CASTLE GROUP, INC. to which such Warrant relates, and appoints
___________________________________________ Attorney to make such transfer
on the books of THE CASTLE GROUP, INC. maintained for such premises purpose,
with full power of substitution in the premises.
________________________________________________
(Signature must conform in all respects to name
of holder as specified on the face of Warrant)
________________________________________________
(Street Address)
________________________________________________
(City)(State)(Zip Code)
Signed in the presence of:
________________________________________________
85
<PAGE>
PROMISSORY NOTE
U.S. $250,000 Honolulu, Hawaii
August 13, 1998
FOR VALUE RECEIVED, FORTRESS LLC, a South Carolina limited liability
corporation ("Maker") promises to pay to the order of The Castle Group,
Inc., a Utah corporation (the "Holder") whose address is 745 Fort Street,
10th Floor, Honolulu, Hawaii 96813, or to such other place as the Holder
shall from time to time designate in writing, the principal sum of TWO
HUNDRED FIFTH THOUSAND AND 00/100 DOLLARS ($250,000.00), or so much thereof
as is, from time to time disbursed, together with interest thereon from
October 15, 1998 until fully paid at a rate of TEN PERCENT (10%) per annum.
Interest shall be calculated, but not compounded, beginning on the basis of
365-day year and the actual number of days elapsed.
Monthly payments shall be payable on the outstanding principal
balance beginning with the first payment on September 15, 1998, the second
payment due October 15, 1998 and continuing on the first day of each of the
twenty-three (23) months thereafter up to and through September 1, 2000 (the
"Maturity Date").
All outstanding amounts of principal and any accrued interest then
unpaid, together with all other unpaid fees, charges or expenses due
hereunder, shall become due and payable in full on the Maturity Date, unless
sooner due as provided herein.
The Note may be prepaid in whole or in part at any time without
penalty.
The Maker promises to pay the Holder's reasonable attorney's fees
and such other expenses as are incurred to induce or compel the payment of
this Note or any portion of the indebtedness, whether suit is brought hereon
or not. In the event of a default, and to the extent permitted by law, all
payments hereunder will be applied first to charges then due, then to
interest, and then to principal.
If a petition under the Federal Bankruptcy Code or any other similar
statute is filed by or against the Maker, or if the Maker shall fail to make
any payment of principal, interest or other fees or charges then due under
this Note, then, and in any such event, the Holder shall have the option to
declare the unpaid principal sum of this Note, together with all charges and
interest accrued thereon, to be immediately due and payable, and such
principal sum, charges and interest shall thereupon become and be due and
payable without presentment, demand, protest or notice of any kind, all of
which are hereby expressly waived, and, upon such maturity by acceleration
or otherwise, the unpaid principal balance shall thereafter bear interest
until fully paid at the rate of Twelve Percent (12%) per annum (based on
actual number of days elapsed). Failure to exercise this option shall not
constitute a waiver of the right to exercise the same in the event of the
same or any subsequent default.
Except as otherwise provided herein, the Maker, and all others who
86
<PAGE>
are now or may become liable for any part of this obligation severally waive
presentment, protest, demand and notice of protest, demand, dishonor and
nonpayment of this Note and consent to any and all extensions of the time of
payment or other provisions hereof, to any other modification hereof, to the
release of any security at any time given for the payment hereof, or any
part thereof, with or without substitution, and to any release of any
parties obligated hereunder or forbearance in the enforcement hereof.
This Note shall be governed by and construed in accordance with the
laws of the State of Hawaii.
Principal and interest shall be payable to the Holder in lawful
money of the United States.
No provision in this Note may be waived, modified, or canceled
orally, but only by an agreement in writing, signed by the Maker and the
Holder of this Note.
IN WITNESS WHEREOF, the Maker has caused this Note to be duly
executed.
FORTRESS LLC,
a South Carolina limited liability corporation
By /s/ Greg Walker
---------------------------------------------
Name: Greg Walker
Title: Managing Member
"Maker"
87
<PAGE>
Honolulu, Hawaii July 31, 1998
PROMISSORY NOTE
Whereas, as of July 31, 1998, THE CASTLE GROUP, INC., a Utah
corporation, hereinafter referred to as "CGI" advanced $435,000 to HANALEI
BAY INTERNATIONAL INVESTORS, a Hawaii limited partnership, hereinafter
referred to as "HBII",
Whereas, HBII is currently in the negotiating stages of either a joint
venture agreement or a sale of its interest in approximately 85 individual
condominium units, a restaurant and a bar located within the Hanalei Bay
Resort, located in Princeville, Hawaii,
Whereas, the new owners or joint venture shall proceed to sell the 85
individual condominium units via timeshare,
Whereas, the sale/joint venture agreement currently being negotiated by
HBII shall provide for HBII receiving a share of the future cashflows from
the sale of the 85 condominium units via timeshare,
Now therefore, the parties agree to the following:
1. Interest on the amounts advanced shall accrue at the rate of 12% per
annum until the entire principal is paid in full. Interest shall
commence as of August 1, 1998 and shall be paid monthly, on or before
the end of each month.
2. The entire principal and unpaid interest shall be due in full on or
before March 31, 1999.
3. HBII shall pay to CGI the sum of one percent (1%) of the net cashflows
it receives from the sale of timeshare intervals, such cashflows being
received from the new joint venture entity or the acquiror of the 85
individual condominium units, restaurant and bar operations.
4. All payments shall be in lawful monies of the United States of America.
5. HBII hereby waives presentment, demand for payment, notice of protest,
and protest, and all other notices or demand in connection with the
delivery, acceptance, performance, default or guaranty of this
Agreement.
6. In the event of default in the payment of this note at maturity and this
note is placed in the hands of an attorney for collection, a reasonable
amount will be added as a collection charge.
88
<PAGE>
7. This agreement shall be construed under the laws of the State of Hawaii.
If any clause or section in this agreement is deemed to be in violation
of any laws or statutes, it shall not affect the validity of any other
clauses in this agreement.
In witness thereof, the parties have set their hands to this Promissory
Note effective as of the day and year written above.
HANALEI BAY INTERNATIONAL INVESTORS THE CASTLE GROUP, INC.
"HBII" "CGI"
By HBII Management, Inc.
Its Managing General Partner
By /s/ Rick Wall By /s/ Michael S. Nitta
-------------------------------- -----------------------------
Its President Its CFO
89
<PAGE>
Honolulu, Hawaii July 15, 1998
PROMISSORY NOTE
Whereas, on January 15, 1998, Kelvin M. Bloom advanced $60,000 to The
Castle Group, Inc. and both parties executed a Promissory Note (the "note")
for $60,000;
Whereas, on January 29, 1998, the note was amended to extend the due
date to July 15, 1998,
Whereas, as of July 15, 1998, the outstanding principle balance on the
note was $58,800,
Whereas, on July 1, 1998, Kelvin Bloom advanced an additional $60,000 to
The Castle Group,
Now therefore, the parties agree to the following:
The note dated January 15, 1998, as amended, is canceled and replaced
with this Promissory Note under the following terms and conditions:
1. The initial principle balance shall be $118,800 and shall bear interest
at 10% per annum.
2. The Castle Group will make monthly principle and interest payments of
TWO THOUSAND DOLLARS ( $2,000.00 ) per month, which includes principle
and interest, on or before the fifteenth day of each month beginning
August 15, 1998.
3. All payments shall be in lawful monies of the United States of America.
4. The Promissory Note shall be due in full at the earliest to occur of:
a. August 15, 1999,
b. The Castle Group receives funding from the secondary offering it has
registered with the Securities & Exchange Commission,
c. When The Castle Group receives funding via any private placement,
equity infusion or bank financing in addition to what is currently
outstanding to any financial or other institution.
5. The Castle Group Inc. hereby waives presentment, demand for payment,
notice of protest, and protest, and all other notices or demand in
connection with the delivery, acceptance, performance, default or
guaranty of this Agreement.
90
<PAGE>
6. In the event of default in the payment of this note at maturity and this
note is placed in the hands of an attorney for collection, a reasonable
amount will be added as a collection charge.
In witness thereof, the parties have set their hands to this Promissory
Note effective as of the day and year written above.
THE CASTLE GROUP, INC. KELVIN M. BLOOM
By /s/ Michael S. Nitta By /s/ Kelvin M. Bloom
----------------------------- --------------------------
Its Chief Financial Officer
By /s/ Motoko Takahashi
-----------------------------
Its Secretary
91
<PAGE>
Honolulu, Hawaii July 15, 1998
PROMISSORY NOTE
Whereas, on January 15, 1998, Michael S. Nitta advanced $50,000 to The
Castle Group, Inc. and both parties executed a Promissory Note (the "note")
for $50,000;
Whereas, on January 29, 1998, the note was amended to extend the due
date to July 15, 1998,
Whereas, as of July 15, 1998, the outstanding principle balance on the
note was $48,800,
Now therefore, the parties agree to the following:
The note dated January 15, 1998, as amended, is canceled and replaced
with this Promissory Note under the following terms and conditions:
1. The interest rate on the Promissory Note will be at 10% per annum.
2. The Castle Group will make monthly principle and interest payments of
SIX HUNDRED DOLLARS ( $600.00 ) per month, which includes principle and
interest, on or before the fifteenth day of each month beginning August
15, 1998.
3. All payments shall be in lawful monies of the United States of America.
4. The Promissory Note shall be due in full at the earliest to occur of:
a. August 15, 1999,
b. The Castle Group receives funding from the secondary offering it has
registered with the Securities & Exchange Commission,
c. When The Castle Group receives funding via any private placement,
equity infusion or bank financing in addition to what is currently
outstanding to any financial or other institution.
5. The Castle Group Inc. hereby waives presentment, demand for payment,
notice of protest, and protest, and all other notices or demand in
connection with the delivery, acceptance, performance, default or
guaranty of this Agreement.
6. In the event of default in the payment of this note at maturity and this
note is placed in the hands of an attorney for collection, a reasonable
amount will be added as a collection charge.
92
<PAGE>
In witness thereof, the parties have set their hands to this Promissory
Note effective as of the day and year written above.
THE CASTLE GROUP, INC. MICHAEL S. NITTA
By /s/ Kelvin M. Bloom By /s/ Michael S. Nitta
------------------------------ -----------------------------
Its Chief Operating Officer
By /s/ Motoko Takahashi
------------------------------
Its Secretary
93
<PAGE>
(Bank Logo)
HAWAII NATIONAL BANK
October 27, 1998
Mr. Michael Nitta
Chief Financial Officer
THE CASTLE GROUP, INC.
745 Fort Street Mall, 10th Flr.
Honolulu, Hawaii 96813
Dear Mr. Nitta
Please be advised that Hawaii National Bank ("the Bank") has approved
your request to extend its loan no. 1181-000262 in the current principal
amount of $300,000.00 to a new maturity date of December 20, 1998. The said
loan represents the sole remaining outstanding advance drawn under the
Bank's former line of credit to Castle Group, Inc., Castle Resorts & Hotels,
Inc. and KRI, Inc. (collectively referred to as "the Borrower") that was
terminated on July 15, 1998. Inasmuch as the subject loan is supported by
the personal guaranties of Rick Wall, Hideo Nomura, Kimo Keawe and John
Tedcastle, the said maturity extension is subject to the Bank obtaining
written concurrence of the extension from each of the respective guarantors.
Should you have any questions, please feel free to call me at 524-1311.
Sincerely,
/s/ Dwight H. Asato
----------------------------------
Dwight H. Asato
Vice President & Regional Manager
841 Bishop Street * Honolulu, Hawaii 96813 * Phone (808) 524-1311
Mailing address: P.O. Box 3740 * Honolulu, Hawaii 96812 * Fax (808) 545-4822
94
<PAGE>
(Bank Logo)
CITY BANK
Main Office
201 Merchant Street
Honolulu, Hawaii 96813-2992
October 27, 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 December 31, 1998.
With the payment of an extension fee of $250.00, the interest rate, terms
and conditions of the loan shall remain unchanged except for the new
maturity date. Also, we will need to collect accrued loan interest up to
the date of extension (October 28, 1998) of $8,493.15 and shall debit the
corporate account per your instructions.
Please call me at 535-2812 if you have any questions.
Thank you.
Sincerely,
/s/ Roy Yanaoshi
- ------------------------------
Roy Yanaoshi
Vice President
Corporate Loan Department
95
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> JUL-31-1998 JUL-31-1997
<PERIOD-END> JUL-31-1998 JUL-31-1997
<CASH> 245,969 268,938
<SECURITIES> 0 0
<RECEIVABLES> 1,074,076 1,043,503
<ALLOWANCES> 60,658 25,405
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,676,800 1,396,756
<PP&E> 210,013 205,529
<DEPRECIATION> 148,877 122,958
<TOTAL-ASSETS> 2,979,474 1,616,516
<CURRENT-LIABILITIES> 2,534,178 1,309,431
<BONDS> 0 0
0 0
0 0
<COMMON> 106,223 101,781
<OTHER-SE> 133,240 38,904
<TOTAL-LIABILITY-AND-EQUITY> 2,979,474 1,616,516
<SALES> 5,609,619 6,185,798
<TOTAL-REVENUES> 5,609,619 6,185,798
<CGS> 0 0
<TOTAL-COSTS> 5,480,813 5,945,312
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 70,673 51,934
<INCOME-PRETAX> 58,133 188,552
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 58,133 188,552
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 58,133 188,552
<EPS-PRIMARY> .01 .04
<EPS-DILUTED> .01 .04
<PAGE>
</TABLE>
