As filed with the Securities and Exchange Commission on March 10, 1998
Registration No. _________
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------
Form SB-2/A-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
--------------------------------
THE CASTLE GROUP, INC.
(Exact name of registrant as specified in its charter)
Utah 7011 99037845
(State or jurisdiction of Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identificatio No.)
---------------------------------
745 Fort Street
Suite 1000
Honolulu, Hawaii 96813
(808) 524-0900
(Address and telephone number,
principal executive offices and principal place of business)
Michael S. Nitta
Chief Financial Officer
745 Fort Street Suite 1000
Honolulu, Hawaii 96813
(808) 524-0900
(Name, address and telephone number,
of agent for service)
---------------------------------
Copies to:
William J. Carey, Esq.
Davis Wright Tremaine
1001 Bishop Street Suite 1360
Honolulu, Hawaii 96813
---------------------------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective
---------------------------------
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number on the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for that offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
Title of Proposed Proposed
each class of Amount Maximum Maximum Amount of
securities to to be offering price aggregate registration
be registered registered per share offering price fee
- ----------------- ---------- -------------- -------------- ------------
Common Stock, par
value $.02 1,600,000 $ $ $ 1,455
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that the
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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THE CASTLE GROUP, INC.
Cross Reference Sheet Pursuant to Item 501(b) of Regulation S-K
Caption or Location
Item of Form SB-2 in Prospectus
1. Forepart of the Registration Statement and
Outside Front Cover page of Prospectus...... Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus......................... Inside Front Cover Page;
Table on Outside Back
Cover Page
3. Summary Information and Risk Factors........ Prospectus Summary; The
Company, Risk Factors,
Selected Financial Data
4. Use of Proceeds............................. Prospectus Summary; Use of
Proceeds
5. Determination of Offering Price............. Risk Factors; Underwriting
6. Dilution.................................... Dilution
7. Selling Security Holders.................... Not Applicable
8. Plan of Distribution........................ Outside Front Cover Page
of Prospectus;
Underwriting
9. Legal Proceedings.......................... Legal Proceedings
10. Directors, Executive Officers,
Promoters and Control Persons............... Management
11. Security Ownership of Certain
Beneficial Owners and Management............ Security Ownership of
Certain Beneficial Owners
& Management; Certain
Transactions; Risk Factors
12. Description of Securities to be Registered.. Description of Capital
Stock
13. Interests of Named Experts and Counsel...... Not Applicable
14. Disclosure of Commission Position on
Indemnification for Indemnification for
Securities Act Liabilities.................. Not Applicable
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15. Organization Within Last Five Years......... Management; Certain
Transactions; Corporate
Organization; Security
Ownership of Certain
Beneficial Owners and
Management; The Company
16. Description of Business.................... The Company; Management's
Discussion and Analysis of
Financial Condition and
Results of Operation; Plan
of Operation
17. Management's Discussion and
Analysis or Plan of Operation............... Management's Discussion
and Analysis of Financial
Condition and Results of
Operation; Plan of
Operation
18. Description of Property..................... Management's Discussion
and Analysis of Financial
Condition and Results of
Operation; Financial
Statements
19. Certain Relationships and
Related Transactions........................ Security Ownership of
Certain Beneficial Owners
& Management; Certain
Transactions; Risk Factors
20. Market for Common Equity and
Related Stockholder Matters................. Description of Capital
Stock; Market Information
21. Executive Compensation...................... Executive Compensation
22. Financial Statements........................ Financial Statements
23. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure.................................. Not Applicable
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BY ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION, PRELIMINARY PROSPECTUS DATED MARCH 10, 1998
1,600,000 Shares
THE CASTLE GROUP, INC. COMMON STOCK
All of the shares of Common Stock, par value $.02 per share (the
"Common Stock"), of The Castle Group, Inc., a Utah corporation (the
"Company"), are being offered herewith (the "Offering") on behalf of the
Company, of which 800,000 shares (the "Minimum") are being offered on a
"best efforts, all or none" basis and all 800,000 shares above the Minimum,
up to a total of 1,600,000 shares (the "Maximum") are being offered on a
"best efforts" basis.
Prior to the Offering, the Common Stock of the Company has been listed
on the Over-The-Counter Bulletin Board of the National Association of
Securities Dealers, Inc. (the "Bulletin Board") under the ticker "CAGU."
Prior to the Offering, there has been extremely limited public market for
the Common Stock. See "Rick Factors - Liquidity and Absence of Public Market
for Common Stock" and "Determination of Offering Price." It is currently
expected that the offering price of the Common Stock offered herewith will
be between $__________ and $ __________ per share. For information relating
to the determination of such offering price, see "Underwriting" and
"Determination of Offering Price." See also "Risk Factors - Penny Stock
Regulation," On January 31, 1998, the last reported sale price of the
Common Stock on the Bulletin Board was $2.6875 per share.
The Company expects to use the net proceeds of the Offering to repay
certain indebtedness and for general corporate purposes. See "Use of
Proceeds."
The Company intends to apply to have the Common Stock listed for
trading on the NASDAQ SmallCap Market ("NASDAQ SmallCap"). The Company
believes that if all Common Stock offered herewith is sold, the Company may
satisfy the NASDAQ qualifications for its Common Stock to be listed on
NASDAQ SmallCap. However, the Company believes it will not qualify for
SmallCap if only the Minimum offered herewith is sold. There can be no
assurance that such listing on NASDAQ SmallCap can or will be obtained by
the Company, or that the Common Stock will ever be listed in NASDAQ
SmallCap. See "Risk Factors - No Assurance of Approval for Listing on
NASDAQ SmallCap."
SEE "RISK FACTORS" REGARDING MATTERS WHICH SHOULD BE CAREFULLY
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
--------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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Price Underwriting Proceeds to
to Public Commissions(1) Issuer(2)
Per Share $ $ $
Total Minimum (3)
Total Maximum (3)
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $220,000.
(3) The Underwriters have agreed to sell, on a best efforts basis, all or
none basis, a minimum of 800,000 shares of Common Stock and, on a best
efforts basis, all shares above the minimum, up to a maximum of
1,600,000 shares.
__________________
The shares of Common Stock are being offered by the Underwriters
herein, when, as and if delivered to and accepted by the Underwriters and
subject to their right to reject any order in whole or in part.
__________________________________________________________________________
FORTRESS FINANCIAL GROUP LIMITED
The date of this Prospectus is March 10, 1998
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The Company intends to furnish to its shareholders annual reports containing
audited financial statements and quarterly reports for the first three-quarters
of each fiscal year containing unaudited interim financial statements.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and the notes thereto appearing
elsewhere in this Prospectus. Unless the context otherwise indicates, (i)
all references to the "Company" refer to The Castle Group, Inc. and its
wholly owned subsidiaries, and (ii), the proforma financial information
assumes an offering price of $3.00 per share.
THE COMPANY
The Castle Group, Inc. is engaged in the business of hotel and resort
management, sales and marketing. The Company operates its business through
its subsidiaries "KRI, Inc. dba Hawaiian Pacific Resorts" and "Castle
Resorts and Hotels Inc.". At February 1, 1998 the Company had 31
management, sales or marketing contracts covering 3,383 rooms. The majority
of the properties currently under management are located on all of the major
islands within the State of Hawaii. The Company has one management contract
for a 68 room condominium resort located in Saipan.
The Company manages a wide variety of hotels and resorts from small
budget inns to luxury condominium resorts. Room rates for the properties
range from $40 to over $1,000. With such a wide variety of products, the
Company is able to appeal to all levels of traveler. In times of changing
economic conditions, this diversity provides a wide base of potential travel
clientele as well as property owner.
The majority of hotels and resorts managed by the Company have
experienced substantial increases in both revenues and operating profits
over the past three years. In achieving highest operating profits for the
managed properties, the Company at the same time increases its own revenues.
Many of the management contracts allow for the participation by the Company
in operating profits through incentive management fees. It is management's
belief that property owners have in recent years looked more favorably upon
management agreements based more on net profits than those based on gross
revenues. Management also believes that its past success in improving the
operating results for its managed properties will enhance its competitive
position when bidding for new properties.
The Company's principal business strategy is the expansion of its
revenue base. This entails two primary goals: (i) increasing the
profitability of the properties currently under management, and (ii)
expansion through the acquisition of additional management contracts.
Growth within the current client base is met by meeting the financial
goals of profitability and asset appreciation for its clientele--the owners
of the hotels and resorts. This is accomplished through increasing revenues
and decreasing operating expenses. Revenues are enhanced through the
Company's' commitment to provide quality accommodations and service at a
reasonable price to the Company's equally important client--the leisure and
business traveler. Operating expenses may be decreased through the
implementation of bulk purchasing and centralized services. Each facet of
the Company's operations are tailored to effectively and efficiently meet
the ever changing needs of the individual properties whether it be
assistance in obtaining renovation financing or the implementation of value
added marketing programs.
The Company intends to increase its portfolio of management contracts
by expanding into new markets as well as the Hawaii market. Management
believes, although no assurances can be given, that there are numerous
opportunities to add properties outside of its existing geographical area.
The expansion of the Company's' management contract portfolio may include
management contracts, sales and marketing contracts, joint venture
investments, and acquisitions.
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THE OFFERING
Common Stock offered by the Company 1,600,000 shares
Common Stock to be outstanding after the Offering 6,911,130 shares (1)
Use of Proceeds Repayment of debt,
acquisition of
management contracts
and/or companies, and
general and corporate
purposes.
NASDAQ Symbol "CAGU"
(1) Excludes 25,000 shares reserved for issuance upon the exercise of a
warrant held by Van Kasper & Company. Excludes 1,000,000 shares of
Common Stock reserved for issuance upon the exercise of options granted
under the Company's Stock Option Plan. Excludes 500,000 shares
reserved for issuance upon the exercise of options granted under the
Company's Stock Purchase Plan. Excludes 50,000 shares reserved for
issuance upon the exercise of an option held by Hawaiian Reservations
Center Corp. Includes 222,100 shares sold in a private placement. See
"Management -- Compensation Plans", "Dilution", "Stock Option Plan",
"Stock Purchase Plan" and "Options, Warrants & Rights".
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," including statements regarding the anticipated
development and expansion of the Company's business, the intent, belief or
current expectations of the Company, its directors or its officers,
primarily with respect to the future operating 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 "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business."
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RISK FACTORS
An investment in the Common Stock involves various risks. In addition
to general investment risks and those factors set forth elsewhere in this
Prospectus, prospective investors should carefully consider, among other
things, the following risk factors before making an investment.
Operating Losses and Limited Operating History. The Company has
experienced net operating losses of $2,652,620 during the first three years
of operations prior to the current year's profit of $188,552. These losses
were not unexpected, as it was the Company's plan to build the necessary
corporate and personnel infrastructure in order to properly service the
additional hotel and resort management contracts which the Company acquired.
Since the current operations of the Company commenced in November of 1993,
there is limited operating history for use to project future operations
(see "Selected Financial Data").
Lack of Liquidity and Absence of Public Market for Common Stock.
There is no extensive public market for the Company's securities. Potential
investors should be aware that there may not be an extensive public market
in the near future. Accordingly, an investor may be unable to liquidate an
investment in the Shares and should be prepared to withstand the economic
risk of an investment in the Shares for an indefinite period.
Dependence on Acquisition of Management Contracts. The Company's
success is highly dependent upon the acquisition and/or purchase of
additional management contracts. There can be no assurance that the Company
can acquire additional management contracts and/or contracts. Investors
should be aware that the failure of the Company to acquire additional
management contracts could adversely affect the Company's results of
operations and financial condition (see "Plan of Operation").
Dependence on Certain Property Owners. Management contracts are
acquired, renegotiated or terminated in the ordinary course of the Company's
business. Some management contracts may be terminated if certain financial
criteria are not met in the profitability of the property, while other
management contracts may be terminated without cause on short-term notice.
There can be no assurances that the Company will be able to keep its current
portfolio of properties, nor that the Company would be able to replace any
contracts terminated by the property owner. Investors should be aware that
the loss of one or more management contracts could have a material adverse
effect on the Company's results of operations and financial condition (see
"Plan of Operation").
Competition for Management Contracts. The management and marketing of
hotels and resorts is very competitive. The Company competes with national,
regional and local management companies, some of which have a larger network
of locations, greater financial resources, and better name recognition than
the Company. The Company currently operates substantially within the State
of Hawaii and there are a number of competitors within the state with
substantial operating histories and financial reserves. (see "Plan of
Operation").
Inexperience in Regions Outside of Hawaii. The Company's strategy is
to expand its current portfolio of management contracts. Some of this
growth is expected to take place outside of the geographic region of Hawaii,
where the Company is situated and currently has all but one of its
management contracts located within. There can be no assurance, however,
that the Company has the experience or financial and other resources
necessary to adequately support such expansion (see "Plan of Operation").
Need for Additional Financing. The Company is dependent upon the net
proceeds of this offering, currently available financing and anticipated
cash flow from operations to implement its business plan. There can be no
assurance that the Company will be able to raise additional capital on terms
satisfactory to the Company or the holders of Shares (see "Use of Proceeds",
"Management Discussion and Analysis of Financial Condition and Results of
Operations").
Dependence upon Management. The success of the Company is highly
dependent on the continued involvement of certain key personnel, including,
in particular, Mr. Rick Wall, Chairman and Chief Executive Officer and
founder of the Company, and Mr. Kelvin Bloom, Chief Operating Officer and
Senior Vice President. The absence of Mr. Wall or Mr. Bloom may have a
material adverse effect upon the Company's operations and expansion plans.
The Company has an employment and non-competition agreement with Mr. Bloom.
The Company has no employment or non-competition agreement with Mr. Wall,
although he is one of the Company's largest shareholders. See "Management".
The Company does not currently have any key man insurance covering any of
its personnel.
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Potential Conflicts of Interest. Certain of the current directors and
officers owning stock in the Company are direct or indirect parties to a
management contract between the Company and the Hanalei Bay Resort (HBR)
Following this offering, directors and officers with interests in HBR will
beneficially own approximately 50% of the outstanding shares of the Common
Stock of the Company and will therefore have the ability to direct the
Company's operations and financial affairs and the ability to influence the
election of members of the Board of Directors of the Company. Currently,
eight of the twelve board of directors are affiliated with HBR. These
relationships, coupled with these stockholders' ownership of Common Stock
and their representation on the Company's Board of Directors could give rise
to conflicts of interest (see "Certain Transactions").
Voting Control. Following this offering, current holders of the
Company's Common Stock will beneficially own approximately 77% of the
outstanding shares of the Common Stock and will therefore have the ability
to direct its operations and financial affairs and to substantially
influence the election of members of the Board of Directors of the Company.
Current officers and directors of the Company will beneficially own 59% of
the outstanding shares of the Common Stock and will also have the ability to
direct its operations and financial affairs and to substantially influence
the election of members of the Board of Directors of the Company (see
"Security Ownership of Certain Beneficial Owners and Management").
Shareholder Approval of Acquisitions. Management shall have the
discretion and flexibility to use a substantial percentage of the proceeds
received in this offering to make investments and acquisitions (see Use of
Proceeds). Shareholders shall not be able to review or vote on any such
investments or acquisitions. There can be no assurance that any investments
or acquisitions made by the Company with the proceeds received in this
offering shall be profitable.
Quarterly Fluctuations in Earnings. The hotel industry is seasonal in
nature. The first and third quarters of the Company's fiscal year account
for a large portion of the Company's management fees. Because the operating
expenses of the Company do not fluctuate with seasonality, this will cause
large quarterly fluctuations in the Company's reported earnings. Other
factors outside of the Company's control may also adversely affect earnings
such as poor weather conditions, economic factors, competition and other
occurrences affecting travel.
Dependence on Travel Industry. The Company is highly dependent on the
travel industry as a whole. Certain economic events such as recession,
depression, competition and other factors will adversely affect the results
of operations and financial condition of the Company. In addition to this,
the Company is highly dependent upon the travel industry for the State of
Hawaii, as the majority of its current revenues are derived within Hawaii.
Hawaii's travel industry is highly dependent upon the airline industry to
provide the necessary volume of airline seats for visitors from the United
States and other International regions. A decrease in the number of flights
to Hawaii, or an airline labor dispute resulting in a strike could adversely
affect the earnings and financial condition of the Company.
Government Regulations. The Company is subject to both federal and
state regulation. The Company is not currently aware of any federal or
state pending legislation that would adversely affect the financial
conditions and earnings of the Company. The extent and future promulgation
of new regulation detrimental to the visitor industry could have a
substantial impact on the Company's profitability. The hotel industry may
be adversely affected by regulations which cover wages, benefits, pricing,
taxes and availability of financing. In addition, the Company is planning
to expand outside of the United States and would become subject to
International laws and the laws and regulations of other countries.
Investors should be aware that there is a possibility of future changes in
these regulations which may adversely affect the Company's earnings.
Environmental Regulations. Under various federal, state and local
environmental laws and regulations, a current or previous owner or operator
of real property may be liable for the costs to remove or remedy hazardous
or other toxic substances located on, in or under such real property. These
laws may impose such liability whether or not the owner or operator had
knowledge of the presence of these substances. In connection with the
Company's operation of its properties under contract, the Company could be
potentially liable for such removal and remediable costs. The Company is
not aware of any environmental claims pending or threatened against it or
against the owners of the properties operated by the Company, however, no
assurance can be given that such a claim will not be asserted against the
Company in the future. Investors should be aware that the potential
uninsured cost of defending the Company against such claims may have a
material adverse affect on the earnings and financial condition of the
Company.
Price Volatility. The market price of the Common Stock could be subject
to significant fluctuations in response to variations in quarterly or annual
operating results and other factors such as expansion or the loss of
management contracts. In addition, the securities markets in general have
experienced significant price and volume fluctuations from time to time in
recent years that may have been unrelated to the operating performances of
certain industries or individual companies. These broad fluctuations may
adversely affect the market price of the Common Stock.
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Dilution. Assuming a purchase price of $3.00, the proforma book value
per share of the Company will be $.62. Purchasers of shares under this
offering shall receive an immediate and substantial dilution of $2.38 or 79%
of the share price (see "Dilution").
Management's Discretion in Allocating Proceeds. Investors should be
aware that management of the Company shall have broad discretion in the
allocation of the proceeds received in this offering. Although management
has stated herein the allocation of the proceeds (see "Use of Proceeds"),
there can be no assurance that the funds received shall be allocated
according to managements current plan.
Pending Litigation. There is current litigation pending against the
Company (see "Legal Proceedings"). Investors should be aware that an
uninsured judgement against the Company , or a judgement in excess of
insurance coverage could have a material adverse affect on the financial
condition of the Company.
Inexperience of Underwriters. Although the principals of the
Underwriters have experience in investment banking and the brokerage
industry, the Underwriters have no prior experience with respect to public
offerings (see "Underwriters").
No Assurance of Listing Upon NASDAQ SmallCap Market; Risks of Potential
Reduced Liquidity. The Common Stock is currently traded upon the Over-The-
Counter Bulletin Board (the "Bulletin Board"). The Company intends to apply
to have the Common Stock listed upon the NASDAQ SmallCap Market ("NASDAQ
SmallCap") after the Offering. The Company believes that if the Maximum of
this Offering is not sold, the Company will not satisfy NASDAQ requirements
and the Common Stock will not be listed. There can be no assurance that
either the Minimum or the Maximum will be sold, that the successful sale of
the Maximum will result in the Common Stock being approved for listing on
NASDAQ SmallCap, or that approval of such listing will be timely forthcoming
or not conditioned on the Company's continued satisfaction of other equity
or net revenue requirements.
If the Company does not obtain NASDAQ SmallCap listing approval, the
Common Stock will remain listed for trading on the Bulletin Board. As a
consequence, investors could find it more difficult to sell or dispose of,
or obtain accurate quotations as to the price of, the Common Stock. The
continued listing of the Common Stock on the Bulletin Board may result in
reduced liquidity of the Common Stock. In addition, reduced liquidity and
difficulty in establishing an accurate or current market price may result in
the inability or difficulty of prospective sellers of the Common Stock to
receive a sale price at or near to the actual then-current market value of
the Common Stock. Furthermore, if the Company's Common Stock is not quoted
on NASDAQ SmallCap trading in the Common Stock would be subject to Rule 15g-9
promulgated under the Exchange Act for non-NASDAQ and non-exchange listed
securities ("Rule 15g-9"). Under Rule 15g-9 broker-dealers who recommend
such securities to persons other than established customers and accredited
investors must make a special written suitability determination for the
purchaser and receive the purchaser's written agreement to a transaction
prior to sale. Moreover, the Common Stock will not be eligible for exemption
from Rule 15g-9 unless it is offered at a price of at least $5.00 per share,
and it is anticipated that the price of the Common Stock offered herein will
be less than $5.00 per share. See "Determination of Offering Price."
Penny Stock Regulation. The Common Stock offered herein will be
considered "penny stock" and subject to certain regulations and the
imposition of certain delivery requirements. The Commission has adopted
regulations that generally define a "penny stock" to be any equity security
that has a market price of less than $5.00 per share or an exercise price of
less than $5.00 per share, subject to certain exceptions. Such exceptions
include an equity security listed on NASDAQ, and an equity security issued
by an issuer that has (i) net tangible assets of at least $2,000,000, if
such issuer has been in continuous operation for three years, (ii) net
tangible assets of at least $5,000,000, if such issuer has been in
continuous operation for less than three years, or (iii) average revenue of
at least $6,000,000 for the preceding three years. Unless an exception is
available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a risk disclosure schedule explaining the penny
stock market and the risks associated therewith.
The Offering Price of the Common Stock is expected to be less than
$5.00 per share. Accordingly, the Company expects that the Common Stock will
be considered "penny stock"and thus subject to the regulations applicable to
penny stock, in which event the market liquidity for the securities will in
all likelihood be severely affected, limiting the ability of broker-dealers
to sell the securities and the ability of purchasers in this Offering to
sell their securities in the secondary market or at an acceptable price.
There is no assurance that trading in the Company's securities will not be
subject to these or other regulations that would adversely affect the market
for such securities.
CORPORATE ORGANIZATION
The Company is a Utah corporation engaged in the business of hotel and
resort management. The Company operates its business under its
subsidiaries, "KRI, Inc. dba Hawaiian Pacific Resorts" and "Castle Resorts &
Hotels Inc.", both organized under the laws of the State of Hawaii.
The Company was organized under the laws of the State of Utah on August 21,
1981, under the name "Vector Communications, Inc." The Company was formed
primarily for the purpose of conducting business activities in the
communications industry and to invest in real estate, minerals and oil and
gas development. On November 22, 1983, the Company changed its name to
"Quest National, Inc.".
During the fiscal year ending July 31, 1984, the Company acquired a
fifty percent interest in Guam Productions, Inc. ("GPI"), a corporation
organized under the laws of the Territory of Guam, in exchange for
11,000,000 shares of the Company's "unregistered" and "restricted" common
stock and $100,000. Persons affiliated with GPI were elected to serve as
directors and executive officers of the Company. GPI's sole asset was an
exclusive franchise to operate a lottery in the Territory of Guam through
December 31, 1988. The Company's investment in GPI was written off in
fiscal year ending July 31, 1985 after initial attempts to operate the Guam
lottery profitably were unsuccessful. The Company did not renew its annual
option to extend the franchise. Its interest in GPI was abandoned, and the
Company ceased business operations in 1986.
The Company was inactive until fiscal 1993. On June 4, 1993, the
Company filed Articles of Amendment to its Articles of Incorporation with
the Department of Commerce of the State of Utah, changing its name 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 of the Company's stockholders.
On November 8, 1993, the Company and all of the stockholders of Castle
Group, Ltd., a Hawaii corporation ("Castle Limited") 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 Limited,
consisting primarily of management contracts on two resort properties
located in Hawaii, 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. In connection with the closing of the
Castle Plan, the Company sold 1,000,000 post-split "unregistered" and
"restricted" shares of its common stock at a price of $2.00 per share in a
private placement.
The beneficial owners of Castle Limited prior to its acquisition by the
Company were Mr. Rick Wall, Mr. John Tedcastle, Mr. Hideo Nomura and LCC
Management, Inc., a corporation owned and controlled by Ms. Janet Parmar,
spouse of Mr. Judhvir Parmar.
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. An additional
$800,000 was paid to the selling stockholders of KRI in exchange for certain
non-competition covenants.
The beneficial owners of KRI, Inc. prior to its acquisition by the
Company were Keawe Resorts, Inc., a corporation owned and controlled by Mr.
Kimo Keawe; Maui Beach Hotel, Inc.; TN Group Hawaii, Inc.; M.K. & Sons,
Inc.; Michael S. Nitta, Saburo Maruyama, James Kurita and Shigeru Shinno.
On December 29, 1993, the Company purchased all of the stock of TQCG,
Ltd., a Hawaii corporation, for $1,000, and on January 24, 1994, changed the
name of TQCG, Inc. to Castle Resorts & Hotels, Inc., to manage condominium
resorts and associations of apartment owners ("AOAO"). TQCG was an inactive
corporation prior to its acquisition by the Company.
The business operations of KRI at the time of its acquisition were far
more significant than those of Castle Limited. KRI was a twenty-five year
old management company that managed and controlled the operations of nine
hotels within the State of Hawaii. 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 acquisition also included a 62%
interest in HPR Advertising, Inc. ("HPR Advertising"), a Hawaii corporation.
HPR Advertising was incorporated in 1989, with its primary operation being
the advertising of 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 in cash and HPR Advertising became a wholly owned subsidiary of KRI.
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.
References to the "Company" herein include the Company and its
subsidiaries. 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 and its facsimile number is (808) 521-9994.
13
<PAGE>
USE OF PROCEEDS
The net cash proceeds to the Company from this Offering under the minimum
and maximum shares to be sold, is estimated to be $4,087,500 and $1,827,500,
respectively, after giving effect to estimated underwriting commissions and
expenses payable by the Company.
Although no assurance can be given, the Company intends to use the net
proceeds from the maximum shares and minimum shares offered herein,
respectively, in accordance with the following table:
Maximum Shares Minimum Shares
--------------------- ---------------------
Repayment of Notes
Payable and Interest $ 200,000 5% $ 200,000 11%
Repayment of Lines of Credit 550,000 13 550,000 30
Working Capital 200,000 5 200,000 11
General Corporate Purposes 3,137,500 77 877,500 48
------------ ----- ------------ -----
Total Proceeds $ 4,087,500 100% $ 1,827,500 100%
============ ===== ============ =====
The Castle Group intends to use the net proceeds from the sale of the
shares of Common stock to repay approximately $200,000 of notes payable and
interest representing the balance of the purchase price payable on the
acquisition of KRI, Inc., (see "The Company"), $200,000 in accounts payable
and $550,000 representing the outstanding balance of the lines of credit. The
notes payable to the former stockholders of KRI, Inc. are dated January 1,
1996 and bear interest at the rate of 6% per annum. The lines of credit are
personally guaranteed by certain of the Company's directors and bears interest
at the rate of prime plus 2%.
The balance of the net proceeds will be used for general corporate
purposes, which may include making debt and equity investments in hotel
properties and/or management companies in connection with the acquisition of
future management contracts and/or management companies. Expenditures may
also be infused into staffing and equipment necessary to fund the operations
necessary to manage and control the possible growth in the Company's
management contract portfolio. Pending such use, the Company intends to
invest the funds in short-term, interest bearing investment grade securities.
DETERMINATION OF OFFERING PRICE
The stock of the Company is currently trading at $2.00 - $2.125. The stock
has been thinly traded as the current Board of Directors and Executive
Officers own over 80% of the outstanding stock.
The Board of Directors determined the offering price for the Shares based
upon:
1. Directors and Executive Officers own 80% of the issued and authorized
stock.
2. Because the stock is very thinly traded, it would be difficult for an
investor to acquire a large number of shares.
3. It is the Company's belief, although no assurance can be given, that
as a result of the financial resources provided by this offering, the
Company would be able to acquire additional management contracts,
enhancing the profitability and earnings per share of the Company.
4. The acquisition of additional management contracts and/or companies
could have a significant impact on the profitability of the Company.
DIVIDEND POLICY
The Company has never paid cash dividends. The Company currently intends
to retain any future earnings, if any, for use in the Company's operations and
does not anticipate the payment of cash dividends in the near foreseeable
future.
14
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company
as of October 31, 1997 and the pro forma capitalization of the Company after
giving effect to the sale of 1,600,000 (the maximum shares), and 800,000 (the
minimum shares) of Common Stock offered hereby at an assumed public offering
price of $3.00 per share and the application of the net proceeds therefrom as
described under "Use of Proceeds."
<TABLE>
<CAPTION>
Maximum Shares Sold Minimum Shares Sold
July 31, 1997 October 31, 1997 July 31, 1997 October 31, 1997
Actual Proforma Actual Proforma Actual Proforma Actual Proforma
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short-Term debt...... $ 268,000 $ 0 $ 434,400 $ 0 $ 268,000 $ 0 $ 434,400 $ 0
=========== =========== =========== =========== =========== =========== =========== ===========
Long-Term debt....... 166,400 0 0 0 166,400 0 0 0
Shareholders' equity:
Common Stock, $.02
par value,
20,000,000 shares
authorized;
5,311,130 shares
issued and
outstanding actual;
6,911,130 shares
issued and
outstanding
proforma(1)......... 101,781 133,781 106,223 138,223 101,781 117,781 106,223 122,223
Additional paid-
in Capital (2)...... 2,502,972 6,558,472 2,539,175 6,594,675 2,502,972 4,312,472 2,539,175 4,348,675
Retained Earnings.... (2,464,068) (2,464,068) (2,637,548) (2,637,548) (2,464,068) (2,464,068) (2,637,548) (2,637,548)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total shareholders'
equity ............. 140,685 4,228,185 7,850 4,095,350 140,685 1,966,185 7,850 1,833,350
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total capitalization. $ 575,085 $4,228,185 $ 442,250 $4,095,350 $ 575,085 $1,966,185 $ 442,250 $1,833,350
=========== =========== =========== =========== =========== =========== =========== ===========
</TABLE>
(1) Excludes 25,000 shares reserved for issuance upon the exercise of a
warrant held by Van Kasper & Company. Excludes 50,000 shares reserved
for issuance upon the exercise of an option held by Hawaiian
Reservations Center Corp. Excludes 1,000,000 shares of Common Stock
reserved for issuance upon the exercise of options granted under the
Company's Stock Option Plan. Excludes 500,000 shares reserved for
issuance upon the exercise of options granted under the Company's Stock
Purchase Plan. See "Management -- Compensation Plans", "Dilution",
"Stock Option Plan", "Stock Purchase Plan" and "Options, Warrants &
Rights". Excludes, as of July 31, 1997, a private placement sale of
222,100 shares subscribed for but not yet issued as of July 31, 1997 to
Development Funding, Ltd.
(2) Excludes as of July 31, 1997, subscription receivable of $40,649 related
to a private placement sale of 222,100 shares subscribed for but
not yet issued as of July 31, 1997 to Development Funding, Ltd.
15
<PAGE>
DILUTION
The following pro forma net tangible book value of the Company at July
31, 1997 was $.03 per share of Common Stock, taking into account the
222,100 shares subscribed and paid for but subsequently issued private
placement shares. Pro forma book value per share represents the total
assets of the Company less its total liabilities, divided by the number of
shares outstanding as of July 31, 1997. Without taking into account any
changes in net book value of the Company at July 31, 1997, other than to
give effect to the sale of Common Stock offered hereby (after deduction of
the Underwriter's commissions, and the application of the estimated net
proceeds therefrom), the pro forma net book value of the Company at July 31,
1997 if the maximum or minimum shares under this offering is sold would have
been 4,268,830 or $.62 per share and 2,006,830 or $.36 per share,
respectively . This represents an immediate increase in net book value of
$.59 or $.33 per share should the maximum or minimum number of shares be
sold, respectively, of Common Stock to existing stockholders and an
immediate dilution of approximately $2.38 or $2.64, respectively, per share
of common stock to new investors purchasing shares in this offering. The
following table illustrates the per share dilution to new investors:
<TABLE>
<CAPTION>
Maximum Shares Sold Minimum Shares Sold
<S> <S> <S> <S> <S>
Assumed initial offering price per
share of Common Stock (1) $ 3.00 100% $ 3.00 100%
Pro forma net book value per share
as of July 31, 1997 (2) .03 1 .03 1
Increase in per share attributable
to new investors .59 20 .33 11
--------- ----- ---------- -----
Pro forma net tangible book value
per share after offering .62 21 .36 12
--------- ----- ---------- -----
Dilution per share to new investors $ 2.38 79% $ 2.64 88%
========= ===== ========== =====
</TABLE>
(1) Before subtracting underwriting commissions and estimated expenses of
the Offering.
(2) Includes 222,100 shares subscribed and paid for but unissued as of July
31, 1997 to Development Funding, Ltd. under a private placement. The
shares were subsequently issued on November 5, 1997.
The following table summarizes, on a pro forma basis as of July 31,
1997, the number of shares of Common Stock purchased from the Company, the
total consideration paid to the Company and the average price per share of
Common Stock paid by the existing stockholders and by the new investors
participating in this Offering if the maximum or minimum shares under this
offering are sold:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average Price
Number Percent Amount Percent Per Share
----------- ------- ---------- ------- --------------
<S> <C> <C> <C> <C> <C>
Maximum Shares Sold:
Existing stockholders.. 5,311,130 7% 2,645,400 36% $ .50
----------- ------- ----------- ------- -------------
New Investors.......... 1,600,000 23% 4,800,000 64 3.00
----------- ------- ----------- ------- -------------
6,911,130 100% 7,445,400 100% $ 1.08
=========== ======= =========== ======= =============
Minimum Shares Sold:
Existing stockholders.. 5,311,130 87% 2,645,400 52 $ .50
New Investor........... 800,000 13% 2,400,000 48 3.00
----------- ------- ---------- ------- ------------
6,111,130 100% 5,045,400 100% $ 1.08
=========== ======= ========== ======= ============
</TABLE>
The foregoing table includes a private placement sale of 222,100
shares for an net aggregate of $425,395 subscribed and paid for as of
September 22, 1997, and subsequently issued to Development Funding, Ltd.
and excludes 25,000 shares reserved for issuance upon the exercise
16
<PAGE>
of a warrant held by an Kasper & Company, 1,000,000 shares of Common Stock
reserved for issuance upon the exercise of options granted under the
Company's Stock Option Plan, 500,000 shares reserved for issuance upon the
exercise of options granted under the Company's Stock Purchase Plan and
50,000 shares reserved for issuance upon the exercise of an option granted
to Hawaii Reservations Center Corp. See "Management -- Compensation Plans",
"Dilution", "Stock Option Plan", "Stock Purchase Plan" and "Options,
Warrants & Rights".
17
<PAGE>
SELECTED FINANCIAL DATA
The following tables set forth selected combined historical financial
data for The Castle Group, Inc. as of and for each of the years in the four
year period ended July 31, 1997. In the opinion of management, the
financial statements include all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the information set forth
herein.
The following selected financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and all of the financial statements and
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Three Months Ended October 31
Year Ended July 31, (Thousands) (Unaudited)
1994(1) 1995 1996 1997 1997 1996
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Operating Revenues
Management Operations 1,118 2,790 3,659 4,294 924 981
Hotel Operations 0 0 452 1,892 424 461
---------- ---------- ---------- ---------- ---------- ----------
Total Revenues 1,118 2,790 4,111 6,186 1,348 1,442
---------- ---------- ---------- ---------- ---------- ----------
Operating Expenses
Management Operations 1,816 3,300 3,671 3,788 1,023 974
Hotel Operations 0 0 452 1,894 478 482
---------- ---------- ---------- ---------- ---------- ----------
Total Department Expenses 1,816 3,300 4,123 5,682 1,501 1,456
Depreciation & Amortization 220 453 465 263 8 119
Interest Expense 4 54 68 52 12 13
---------- ---------- ---------- ---------- ---------- ----------
Total Operating Expense 2,040 3,807 4,656 5,997 1,521 1,588
---------- ---------- ---------- ---------- ---------- ----------
Net Income (Loss)
before income taxes ( 922) ( 1,017) ( 545) 189 ( 173) ( 146)
---------- ---------- ---------- ---------- ---------- ----------
Net Income (Loss) ( 922) ( 1,017) ( 545) 189 ( 173) ( 146)
---------- ---------- ---------- ---------- ---------- ----------
Net Income (Loss) per share ( .23) ( .20) ( .11) .04 ( .03) ( .03)
========== ========== ========== ========== ========== ==========
Weighted Average Shares
Outstanding (2) 3,933,859 5,066,530 5,085,280 5,109,903 5,311,130 5,089,030
Consolidated Balance
Sheet Data:
Cash and Cash Equivalents 207 277 221 269 110 200
Total Assets 2,530 2,312 2,031 1,617 1,570 1,773
Long-term debt, net of
current portion 348 772 76 166 166 64
Total Liabilities 1,409 2,208 2,464 1,476 1,562 2,352
Stockholders' equity 1,121 104 ( 433) 141 8 ( 579)
Other Related Data
Property Contracts, beginning 13 17 25 28 28 25
Property Contracts,
end of year/quarter 17 25 28 28 28 28
Rooms Covered, beginning
of year 1,678 2,032 2,805 3,193 2,948 2,805
Rooms Covered, end of
year/quarter (3) 2,032 2,805 3,193 2,948 3,016 2,749
</TABLE>
(1) Represents nine month's operating results from inception at November
1993 to July 1994.
18
<PAGE>
(2) Excludes 25,000 shares reserved for issuance upon the exercise of a
warrant held by Van Kasper & Company. Excludes 1,000,000 shares of
Common Stock reserved for issuance upon the exercise of options granted
under the Company's Stock Option Plan. Excludes 500,000 shares
reserved for issuance upon the exercise of options granted under the
Company's Stock Purchase Plan. Excludes 50,000 shares reserved for
issuance upon the exercise of an option held by Hawaii Reservations
Center Corp. Includes 222,100 shares sold in a private placement
subscribed for as of July 31, 1997, but subsequently issued in November
1997. See "Management -- Compensation Plans", "Dilution", "Stock
Option Plan", "Stock Purchase Plan" and "Options, Warrants & Rights".
(3) On November 1, 1997, the Company acquired the management contract for
125 condominium units located within the Kiahuna Plantation Resort.
Also on November 1, 1997, the Company acquired the AOAO management
agreement for a 29 condominium unit association located within the
Kiahuna Plantation Resort. On February 1, 1998, the Company acquired
the management contract for the Waikiki Terrace Hotel, a 242 room
hotel located in Waikiki.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
The Company is a Utah corporation which earns revenues primarily by
providing management, reservations and sales and marketing services to
hotels and resorts. The Company currently operates within the State of
Hawaii under the trade names "Hawaiian Pacific Resorts" and "Castle Resorts
and Hotels".
The Company's revenues are derived from management fees, sales &
marketing fees, reservation fees, accounting fees, commissions, incentive
fees and other fees from the properties it represents pursuant to the terms
and conditions of its management contracts. In addition to the fees
described, the Company also earns revenues from transient and long term
rentals and other hotel related income from its leased hotel. The revenues
of the properties which are managed by the Company, except as mentioned
herein, are not recorded as revenues of the Company.
The Company's operating expenses are comprised of labor, reservations
fees and other costs associated with operating as a management company. The
expenses of the properties which are managed by the Company, except as
mentioned herein, are not recorded as expenses of the Company.
As of February 1, 1998, the Company had 31 contracts covering 3,383
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 the
property owner in the form of cost savings.
Hotel revenues consist of revenues from 167 rooms leased by the
Company. Under this arrangement, the Company includes as its own revenues
the entire property revenues which includes hotel transient rental income as
well as the total expenses incurred to operate the property. The property
is situated in Waikiki, Hawaii. The Company does not currently own any
other real property interest in fee or leasehold.
Overview
The lodging industry has been, historically, seasonal in nature. The
Company generally reflects higher revenues from the fees generated by its
properties in the first and third quarters of its operating year, which may
cause expected fluctuations in the Company's quarterly revenues and net
earnings.
Revenues from management operations grew at a compound annual rate of
56.6% from 1994 through 1997, from $1,118,386 to $4,294,216. Total revenues
grew at a compound annual rate of 76.9% from 1994 through 1997, from
$1,118,386 to $6,185,798. The growth in revenues attained by the Company
over the past three years has been impressive, however, management gives no
assurances that these increases will 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. Net losses decreased from
$922,644 for the nine months ended July 31, 1994 to a profit of $188,552 for
the twelve months ended July 31, 1997. Included in fiscal 1997 was a
reduction in expenses of $187,500 for the forfeiture of an option granted to
an officer of the Company. Even without this adjustment, the Company would
have reported a net profit of $1,052 for the twelve months ended July 31,
1997. Management attributes the improvements in operating losses to the
growth in revenues coupled with effective cost control. There can be no
assurance that these improvements will continue in future periods.
20
<PAGE>
Results of Operations
For the Quarters Ended October 31, 1997 and 1996
For the quarters ended October 31, 1997 and 1996, the Company had total
revenues of $1,347,875 and $1,441,563, respectively, a decrease of $93,688
or 6.5%. Revenues from management operations decreased by $55,846 or 6%.
The decrease in revenues is attributed to a decrease in fees collected from
two properties managed by the Company. The first property is located in
Maui and hotel revenues for the quarter ended October 31, 1997 were $45,000
lower than the prior year; the other property is located on Oahu and net
fees from this property were $32,500 lower than the prior year. Also
contributing to the variance is other income of $45,000 earned for the
quarter ended October 1996, representing commissions and consulting fees
earned by the Company on the renovation of one of the properties managed by
the Company. Much of the variance occurred during the month of October and
management is confident, although no assurances can be given, that the
revenue decrease when compared to the prior year shall be made up during the
balance of fiscal year July 1998. Although no assurance can be given, other
properties managed by the Company will also be renovating during fiscal July
1998 and the Company is confident that it shall be retained as the project
manager for these projects. Revenues from hotel operations decreased by
$37,842, or 8%. The decrease in hotel revenues is attributed to the
deferred maintenance work on the hotel property by the building owner.
Management is currently evaluating the feasibility of renewing the lease for
this property in fiscal year 1998, due to the possibility that the deferred
maintenance shall continue.
Operating expenses for the quarters ended October 31, 1997 and 1996
were $1,501,848 and $1,455,285, respectively, an increase of $46,563 or 3%.
Operating expenses for management operations increased by $49,940, or 5%,
and operating expenses for hotel operations decreased by $3,377, or 1%.
Depreciation and amortization expenses decreased by $111,317 for the
quarter ended October 31, 1997 primarily due to the absence of the
amortization of the non-competition agreements for $67,000 and the absence
of the amortization of property rights of $42,000. The non-competition
agreements were fully amortized in October 1996 and the amortization of
property rights was fully amortized in June of 1997.
Interest expense decreased by $1,779, from $13,681 to $11,902 for the
quarter ended October 31, 1997. The decrease in interest expense is related
to the full amortization in June of 1997 of the discount on the contract
payable. (See note 5 to the financial statements).
For the Years Ended July 31, 1997 and 1996
For the year ended July 31, 1997 and 1996, the Company had total
revenues of $6,185,798 and $4,111,626, respectively, representing an
increase of $2,074,172 or 51%. The increase in revenues was attributable to
$1,439,195 in hotel revenues and $634,977 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
will not provide an accurate comparison for means of measuring increased
revenue performance. For the nine months ended April 30, 1997 and 1996, the
Company had unaudited management related revenues of $3,239,276 and
$2,811,895, an increase of $427,381 or 15%.
Operating expenses for management operations were $3,788,482 for the
year ended July 31, 1997 as compared to $3,671,369 for the prior year, an
increase of $117,113 or 3%. Operating expenses for hotel operations were
$1,893,635 for the year ended July 31, 1997 as compared to $452,386 for the
three months of hotel operations ending July 31, 1996.
Depreciation and amortization expense decreased by $201,574 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. See "Corporate Organization". 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. The decrease of
$201,574 is mainly attributed to the non-existence of this amortization
expense for the months of November 1996 through July, 1997.
Interest expense decreased by $16,032, to $51,934 from $67,966 for the
years ended July 31, 1997 and 1996, respectively. The decrease in interest
expense is attributed to a lower amount of indebtedness. The Company fully
paid off its contract payable in June of 1997 and during the year reduced
its indebtedness on the line of credit by $25,000 in February of 1997 (See
Note 5 to the financial statements).
21
<PAGE>
For the Years Ended July 31, 1996 and 1995
Total revenues for the year ended July 31, 1996 were $4,111,626, an
increase of $1,321,294 or 47% over total revenues for 1995. Revenues from
management operations were $3,659,239 as opposed to $2,790,332 for the prior
year, an increase of $868,907 or 31%. Revenues from hotel operations were
$452,387, representing the revenues attributed to a lease agreement on 167
hotel rooms entered into on May 1, 1996.
Operating expenses for management operations were $3,671,369 for the
year ended July 31, 1996 as compared to $3,300,427 for the prior year, an
increase of $370,942 or 11%. The increase in operating expenses for the
management operations were primarily attributable to the increase in
management related income. Operating expenses for hotel operations were
$452,386 for year ended July 31, 1996 on revenues of $452,387.
As mentioned previously, the hotel industry is subject to seasonal
fluctuations in revenues. The first and third quarters of the Company's
fiscal year are typically busier months for the tourist industry. The
Company signed the lease agreement for the 167 hotel units on May 1, 1996.
As of July 31, 1996, the results of operations from hotel operations
encompassed the fourth quarter ended July 31, 1996. The hotel operations
reported an operating loss of $14,000 for the three month period, as this
quarter is one of the low seasons for tourism in Hawaii, where the property
is situated and is not indicative of the results of operations for a whole
year. (See "Quarterly Fluctuations in Earnings").
Depreciation and amortization expense increased by $12,000 for the year
ended July 31, 1996 due to the depreciation of equipment and furnishings
exceeding the decrease caused by assets becoming fully depreciated or
amortized.
Interest expense increased by $14,000, from $54,000 to $68,000 for the
year ended July 31, 1996 when compared to the prior year. The increase in
interest expense is attributed to interest incurred on the borrowing against
a line of credit and the conversion of advances received from former KRI,
Inc. stockholders to a note payable at 6% interest on July 31, 1995. See
"Use of Proceeds" and "The Company".
For the Years Ended July 31, 1995 and 1994
The fiscal year ended July 31, 1994 encompassed nine months of hotel
management operations, as the Company commenced its hotel management
operations on November 8, 1993 with the acquisition of Castle Limited and
KRI, Inc. See "Corporate Organization".
Total revenues for the year ended July 31, 1995 was $2,790,332, an
increase of $1,671,946 or 149% over total revenues of $1,118,386 for 1994.
The revenue increase is attributed to the fiscal year ending July 1995
encompassing twelve months of operations as opposed to nine months for the
previous year. On an average basis, monthly revenues for the fiscal year
ended July 31, 1995 averaged $232,528 as opposed to an average of $124,265
for the prior year, an increase of 87%. Revenues also increased due to the
addition of eight management contracts during the fiscal year. The number
of rooms managed increased by 440 rooms, from 1,909 to 2,349.
Operating expenses were $3,300,427 for the year ended July 31, 1995 as
compared to $1,816,274 for the prior year, an increase of $1,484,153 or 82%.
The increase in operating expenses is attributed to the fiscal year ending
July 1995 encompassing twelve months of operations as opposed to nine months
for the previous year. On an average basis, monthly operating expenses for
the fiscal year ended July 31, 1995 averaged $290,000 as opposed to an
average of $202,000 for the prior year, an increase of 44% which is
attributed to the 99.2% increase in management operation revenues.
Depreciation and amortization expense increased by $233,000 for the
year ended July 31, 1995 over the prior year due to the depreciation of
equipment and amortization covering twelve months in fiscal 1995 as opposed
to nine months for fiscal 1994.
Interest expense increased by $49,764, from $4,314 to $54,078 for the
year ended July 31, 1995 when compared to the prior year. The increase in
interest expense is attributed to interest incurred on the borrowing against
a line of credit dated October 21, 1994. The increase in interest is also
attributed to the amortization of a discount on a contract payable dated
July 1, 1994 to a property manager to secure management contracts on behalf
of the Company, payable in monthly installments of $14,500 plus tax through
June 1997. The contract payable is discounted at an effective interest rate
of 8%.
Liquidity and Capital Resources
The Company's primary sources of working capital are cash flow from
operations and borrowing. Net cash provided from operations was a deficit
of $805,779 in fiscal 1994, a deficit of $292,929 in fiscal 1995, $890 in
fiscal 1996 and a deficit of $374,600 in fiscal 1997. Net cash used in
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<PAGE>
operations was $172,689 for the quarter ended October 31, 1997 as compared
to cash provided of $7,979 for the quarter ended October 31, 1996. The
Company had unrestricted cash of $207,675, $277,706, $220,951, $268,938,
$110,242 and $199,771 at July 31, 1994, 1995, 1996 and 1997, and October 31,
1997 and 1996, respectively.
At July 31, 1997, the Company's balance sheet reflected $268,938 of
cash representing an increase of $47,987 from July 31, 1996. During the
year ended July 31, 1997, cash used in operating activities exceeded cash
provided by operating activities by $333,957. Cash provided by investing
activities was $22,194 and cash provided by financing activities was
$359,750. At October 31, 1997, the Company's balance sheet reflected
$110,242 of cash representing a decrease of $89,529 from October 31, 1996.
During the quarter ended October 31, 1997, cash used in operating activities
exceeded cash provided by operating activities by $172,689. Cash provided
by investing activities was $39,403 and cash used in financing activities
was $25,410.
The Company has available a $300,000 line of credit dated October 21,
1994 which is personally guaranteed by four of the directors of the Company.
The line of credit was initially due on October 21, 1995, and has been
extended for periods of three months each through September 1997. The
Company subsequently applied for and received an extension of the line of
credit through April 15, 1998. The Company made draws against the line of
credit for $275,000 during the fiscal year ended July 31, 1995. The Company
subsequently repaid $25,000 of the line of credit in April 1997 and
subsequently drew down $50,000 against the line in December of 1997.
In November of 1997, the Company secured an additional $250,000 line of
credit from a Hawaii bank which is personally guaranteed by the Chairman of
the Company. The line of credit is due on May 17, 1998.
Proceeds received from the sale of shares of Common Stock offered
hereby will be utilized to repay the outstanding balance of $550,000 on the
lines of credit. Management plans to have the line of credit available
following the payment of the outstanding balance, in order to provide
additional liquidity to the Company if needed. Management believes,
although no assurances can be given, that the line of credit may be further
extended if necessary.
The Company had net working capital of $158,097 and $11,750 as of July
31, 1994 and 1995, respectively, a net working capital deficit of $764,731
as of July 31, 1996 and net working capital of $87,325 as of July 31, 1997.
At October 31, 1997 and 1996, the Company had a net working capital deficit
of $213,856 and $821,129, respectively.
As of July 31, 1997, net working capital included liabilities due to
affiliates in the amount is $40,128 consisting of $18,000 in notes payable
to former stockholders of KRI, Inc. representing the undistributed cost on
the acquisition of the stock of KRI, Inc., and $22,128 in interest accrued
on the notes payable. See "Corporate Organization". Proceeds received from
the sale of shares of Common Stock offered hereby will be utilized to repay
the outstanding notes payable of $184,400, together with interest accrued
through the repayment dates. Also included in net working capital is
$76,230 in unamortized deferred revenues related to a signing bonus of
$316,000 in cash paid to the Company by one of its vendors in April of 1994
as a result of the Company entering into a three year contract with the
vendor. The deferred revenues are being amortized over three years.
Management believes, although no assurances can be given, that the
combination of the net proceeds of this Offering, net of repayment of
borrowing, net cashflow generated from operations, and the future
availability of credit facilities will be sufficient to fund the operations
of the Company and its future anticipated growth.
23
<PAGE>
PLAN OF OPERATION
The Company is one of the leading regional hotel and resort management
companies within the State of Hawaii. At February 1, 1998, the Company had
31 management or sales, reservations and marketing contracts covering 3,383
rooms. The Company also leases and operates as a hotel 167 rooms in a
condominium complex domiciled in Waikiki in the State of Hawaii.
The properties represented by the Company appeal to a wide variety of
the public market as the Company manages a wide spectrum of property types
from the luxury condominium resorts with room rates of $1,000 to the small
budget inns with an average rate of $40. The Company believes that the
availability of differing products provides appeal to all levels of business
or leisure traveler.
The Company has experienced significant growth since its commencement
of operations in November of 1993. From November of 1993 through February
of 1998, the number of contracts has more than doubled, from 13 to 31; the
number of rooms managed also increased substantially during this period,
from 1,678 to 3,383.
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, however no assurances can be
given that the Company will be successful in expanding outside of Hawaii.
In addition to opportunities within the State of Hawaii, management believes
that there are many opportunities to expand its portfolio in emerging
markets within the Pacific Basin. In addition to signing on independent
hotels & resorts, The Company may achieve its desired expansion goals
through joint venture investments, leases and acquisitions of management
contracts and/or companies. Currently, the Company is engaged in various
stages of discussions for the management of several properties located in
Hawaii and the Pacific Basin.
Effective November 1, 1997, the Company acquired the management
contract for 125 condominium units located within the Kiahuna Plantation
Resort. Also on November 1, 1997, the Company acquired the AOAO management
agreement for a 29 condominium unit association located within the Kiahuna
Plantation Resort. The Kiahuna Plantation Resort is located in Poipu on the
island of Kauai.
On February 1, 1998, the Company acquired the management contract for
the Waikiki Terrace Hotel, a 242 room hotel located in Waikiki.
Effective 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 condominium resort located in
Saipan. Although no assurance can be given, it is management's belief that
it will be able to effectively manage this property and to also continue its
expansion in the Pacific Basin.
Upon the completion of the sale of Common Stock offered hereunder, the
Company will have substantial capital available for growth. The working
capital may be used to acquire management contracts and/or management
companies. The Company may use a portion of the capital to make
improvements to properties in consideration of long-term leases or
management contracts. Management believes that the ability to make such
investments in the properties makes the Company more attractive to hotel and
resort owners.
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<PAGE>
The Lodging Industry
Overview
The lodging industry has experienced substantial improvement in recent
years. According to "Trends in the Hotel Industry - USA Edition 1996"
published by PKF Consulting, 73.2% of hotels surveyed reported increases in
Income Before Other Fixed Charges for the year ended December 31, 1995 when
compared to the prior year, and that Income Before Other Fixed Charges
increased an average of 16.5% for all hotels surveyed. Hawaii's statewide
occupancy has, over the past ten years, ranged from the low seventies to the
low eighties. Statewide occupancy in 1994, 1995 and 1996 averaged 76.0%,
76.6%, and 76.0%, respectively. Room rates in Hawaii experienced steady
growth in the late 1980s and were relatively flat from 1990 to 1994.
Statewide average daily rates increased from $68.84 in 1985 to $102.90 in
1990. Average rates from 1990 to 1994 increased only marginally to $113.70,
but increased by 5.2% to $119.65 in 1995 and by 7.3% in 1996 to $128.38.
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 will account 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 improving economy of the
mainland United States will continue to improve and therefore the lodging
industry as a whole will continue to experience growth in earnings.
Management also believes that the convention center currently under
construction in Waikiki and scheduled to open in 1998 shall allow the State
to capture a portion of the lucrative convention travel market, further
increasing the demand for guest rooms.
Hotel Management
Other than the large chains, many hotels are often owned by entities
that are not in the hotel management business nor are affiliated with any
brand name. It is these properties that are likely to seek management,
sales and marketing and other services from third parties. The hotel owner,
whether it be a single owner of a hotel or individual condominium resort
unit owners, would benefit through cost savings and exposure. The management
company would provide economies of scale in the areas of centralized
services such as reservations, sales and marketing, advertising and
purchasing. Certain management companies such as the national chains
provide a name brand for which the hotel owner must pay a franchise or
royalty fee. The Company does not brand name its properties but instead
promotes the hotel on its own. It is management's belief that in the long
term, brand naming a property may cause a loss of identity for the
individual property.
Management believes that over the past ten years, hotel owners have
moved towards favoring management contracts where a portion of the risks
involved in owning or developing a hotel is shifted to the management
company as well. This may be accomplished by the management company earning
less fees which are based on gross revenues and more fees based upon
performance such as incentive management fees. In some cases, if
performance levels are not met, a management company may not earn any fees
from an underperforming property; in certain cases, this may lead to an
actual loss as the Company expends certain resources in the management of a
property. The Company believes that it has the ability and resources
available to make improvements to a hotel's operations and thus, improve the
operating profits and earn an acceptable fee. Management carefully analyzes
all aspects of risk sharing prior to entering into any management contract
and has earned acceptable fees from each of its properties.
Business Strategy
The Company's principal business strategy is to provide the property
owners with efficient and effective services which are tailored to the
individual needs of each of its properties. By meeting these goals, the
Company believes that it will be able to sustain the growth that it has
experienced over the past three years. Major components of the Company's
strategy are:
Profitability for Hotels. The Company focuses on increasing the
profitability for each of its properties, whether it be through increased
revenues or control of operating expenses. Management believes that
operating profits for its properties have shown marked increases in
operating profits when compared to operating results prior to the Company's
acquisition of the contract. Management accomplishes its revenue goals
through its advertising, sales and marketing network, which management
believes is as complete as many of its competitors. The Company is also
committed to providing quality accommodations and guest services for the
business and leisure traveler. This is accomplished through employee
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<PAGE>
training, guest satisfaction surveys, guest history, and value added
programs for our visitors. The Company's goal is to exceed the expectations
of our guests in order to build customer loyalty and repeat business.
Operating expenses are reduced through centralized services such as
advertising, reservation, sales and marketing, and centralized purchasing.
For a small property, there are advertising, marketing and other expenses
which may have been cost prohibitive for the property on its own, however,
the property can participate in these programs under the combined group
represented by the Company. As the Company continues its expansion, future
reduction in costs may be obtained as the purchasing power of the Company as
a whole will increase.
Homeowner Associations. The Company also provides savings through
economies of scale in the operating expenses of homeowner associations,
which results in lower monthly common area maintenance fees paid by the
individual condominium unit owners. Management works closely with the board
of directors of the associations to reduce operating expenses and increase
the asset values of the property as a whole.
Asset Appreciation. In addition to adding value to the asset through
increased profitability, the Company provides services to enhance the
physical plant of each property. Management is experienced in the
renovation of properties whether it be cosmetic improvements such as
carpeting, drapery and furniture packages, or the reconstruction of a
property as a whole. The Company focuses on attaining the best value for
the amount of funds spent on the physical plant.
Direct Sales & and Marketing. The Company has an extensive corporate
and consumer direct network, including its own membership club. The Company
has a sales force which concentrates on soliciting both local, national and
international group business. The Company also participates in cooperative
direct mailouts with other travel industry partners such as airlines and car
rental companies. A successful program results in higher yields which
further enhances the operating results for the properties.
Flexible Management Terms. The Company does not have a standard
management contract which it offers to prospective clients. The Company,
instead, tailors its agreements specifically for the needs and requests of
each individual property. The Company provides a full array of management
services from full management of a property to reservation, sales and
marketing services. Following the receipt of net proceeds from the sale of
Common Stock hereunder, management believes that it will have the ability to
provide capital to prospective hotel owners in exchange for a longer term
contract. It is management's belief that the flexibility in contract terms
which the Company offers allows it to have a competitive edge over some of
its competitors.
Product Lines. The Company does not concentrate its efforts on a
single product line. Instead, the Company accepts responsibility for the
management of a full variety of products from small budget inns with average
room rates under $40 to the luxury condominium resorts with average room
rates exceeding $200. Sales and marketing and operational management
programs are instituted to accommodate the needs and objectives of each
product line. Management believes that it has the ability to effectively
manage the operations of these diverse product lines and that this ability
allows the Company to bid on a wide variety of hotel and resort management
contracts.
Property Identity. The Company keeps in constant communication with
the property owners and reacts immediately to reasonable requests from the
owners. The Company does not focus its efforts on selling the Company, but
rather the individual property itself. This allows the properties to keep
their identities while at the same time benefit from the management services
provided by the Company. Management believes that this also provides a
competitive edge when bidding for hotel and resort management contracts.
Growth Strategy
The Company believes that the improving lodging industry together with
the current economic environment will provide excellent opportunities for
future growth. Under the current sluggish economy of the 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, sales and marketing which should translate to higher revenues
for the property. Since the Company allocates the cost of each individual
advertisement 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 centralized 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.
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<PAGE>
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.
Emerging Markets. The Company currently has all 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 net proceeds received from the sale of Common Stock
offered hereby will give the Company the ability to acquire management
contracts and/or management companies. Management contracts may be acquired
from other companies that do not have the ability to effectively operate a
property for reasons such as geographic location. The Company would also
seek opportunities to acquire other hotel management companies that would
result in further synergies for the Company and its managed properties.
Operations
The Company provides management and other related services for hotels,
resorts, and condominium resorts. Principal clients include owners of these
hotels and resorts which may include individuals, general and limited
partnerships, corporations and associations.
The management of the properties represented by the Company is
coordinated from the Company's corporate offices located in Honolulu,
Hawaii. The Company also has sales and marketing representatives situated
on the West Coast, Pacific Northwest and Europe. Most of the properties
currently managed by the Company are located in Hawaii.
Hotel Rental Management
The Company provides total management of the facilities, including
supervision, training and staffing of employees, food and beverage services,
housekeeping, accounting, budgeting and physical repairs and maintenance.
The Company earns a base management fee for these services which is
typically based on a percentage of gross revenues. The Company may also
participate in the profitability of the property through an incentive fee
based on a percentage of the net operating profits generated by the
property. The Company also provides centralized services such as
reservations for which the Company typically receives a reservations fee to
cover its costs which is based on a percentage of gross revenues. In
addition, the Company is reimbursed for its sales and marketing costs by
collecting a sales and marketing fee which is also based on gross revenues.
Other costs which are reimbursed to the Company are for corporate support in
areas such as accounting, training and advertising. The Company also earns
a commission on its centralized advertising and purchasing services provided
to its properties. Under this arrangement, the Company contracts with its
vendors to supply all of its properties with various products or services at
a discount. The Company earns a fee based on the discount and passes on a
portion of the savings to the properties, further enhancing the
profitability of the property. The Company also earns fees from the
properties by providing reconstruction and design fees for hotels under
renovation.
Under the majority of the management contracts, the Company is not
responsible for any of the direct operating expenses of the client hotels
and resorts. All of the operating expenses are paid directly and are the
responsibility of the facility owners. These expenses may include payroll,
employee benefits, repairs and capital improvements, supplies, taxes,
inventory, advertising, sales and marketing and other operating expenses.
Condominium Association Management
In addition to management of the hotel rental operations of a property,
the Company may also manage the Association of Apartment Owners ("AOAO") of
a property. 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, including employee training, property maintenance, accounting,
finance, benefits administration, and purchasing. The Company earns a fixed
monthly fee for providing these services.
The management of the AOAO of a property together with the hotel
operations creates synergies in the operation of the property as a whole.
In instances such as these, the property owners (the AOAO) and the
individual owners participating in the hotel rental operations, can benefit
through reduced costs in areas such as personnel. By reducing the operating
expenses to the rental operation through cost sharing with the AOAO, the
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Company is able to return higher profits to the individual owners
participating in the hotel rental operation which results in higher
incentive management fees to the Company. The AOAO also benefits from this
cost sharing through reduced annual common area maintenance fees.
The Properties
The properties represented by the Company are all located within the
State of Hawaii. The Company manages or represents both hotel operations
and condominium operations for the properties. The following table sets
forth, as of February 1, 1998 certain information with respect to the
existing properties under contract.
<TABLE>
<CAPTION>
Type of Hotel AOAO Total
Island Management Room(1) Room Managed
Property Name Location Contract Managed Managed Room(2)
- ----------------------- -------- ------------------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Queen Kapiolani Hotel Oahu Sales & Marketing 315 315
Waikiki Terrace Hotel Oahu Full Management 242 242
Kuhio Village Resort Oahu Lease Agreement 167 225 225
Pacific Marina Inn Oahu Sales & Marketing 110 110
Inn on the Park Oahu Full Management 96 96
Waikiki Hana Hotel Oahu Full Management 73 73
Hilo Hawaiian Hotel Hawaii Full Management 285 285
Elima Lani Resort Hawaii Full Management 216 216
Kona Reef Resort Hawaii Full Management 60 130 130
Waimea Country Lodge Hawaii Full Management 21 21
Hanalei Bay Resort Kauai Full Management 200 134 200
Kiahuna Plantation Resort Kauai Full Management 125 29 125
Makahueana Resort Kauai Full Management 32 79 79
Poipu Shores Resort Kauai Full Management 33 40 40
Lanikai Resort Kauai Full Management 11 18 18
Kamaole Sands Resort Maui Full Management 295 440 440
Maui Park Hotel Maui Full Management 220 220
Maui Beach Hotel Maui Sales & Marketing 150 150
Maui Palms Hotel Maui Sales & Marketing 96 96
Maui Oceanfront Hotel Maui Full Management 86 86
Kaluakoi Villas Molokai Full Management 78 148 148
Aquarius Beach Towers Saipan Full Management 68 68
------- ------- -------
2,979 1,243 3,383
======= ======= =======
</TABLE>
(1) The Company may have numerous individual management agreements with
each owner of a unit in a condominium, or one agreement for a hotel
property owned or controlled by one entity.
(2) The total number of rooms managed represents the number of rooms under
management contract for the property whether the agreement be for
operation of the individual room as a hotel rental or for the
management of the property as a whole under the AOAO management
contract. The Company in these cases may have two management contracts
for one room, one management contract between the Company and the
individual condominium unit owner for the operation of the room as a
hotel rental, and the other contract between the Company and the AOAO
of the property for the management of the project and its common areas.
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<PAGE>
Competition
The management and marketing of hotels and resorts is very competitive.
The Company competes with national, regional and local management companies,
some of which have a larger network of locations, greater financial
resources, and better name recognition than the Company. The Company
primarily operates within the State of Hawaii and there are a number of
competitors within the state with substantial operating histories and
financial reserves.
The Company's properties under management are also subject to
competition within the lodging industry such as room rates, geographic
location, name recognition, supply and demand, service levels, value added
services and quality of accommodations. Each of the properties under
contract is located in areas that includes competing facilities. Increases
in the number of competitive lodging facilities in these areas could have an
adverse effect on the occupancy and average room rates of the property. To
the best of management's knowledge, there are no new planned development of
competitive properties in any of the areas in which the Company is present.
The executive officers and key employees of the Company possess
substantial experience in the hotel and resort management industry. The
senior management team and the Company's infrastructure relative to sales
and marketing, central accounting, central reservations and administrative
support are believed by management to be as comprehensive and complete as
many of its competitors. Although the Company commenced operations in
November 1993 with thirteen contracts, management has been successful in
more than doubling the number of contracts, many of which were previously
managed by competitors of the Company. The Company has over its brief
history lost only one property to one of its competitors.
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 and future promulgation of new regulation 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 is planning to expand outside of the United States and would
become subject to International laws and the laws and regulations of other
countries.
Environmental Regulations
Under various federal, state and local environmental laws and
regulations, a current or previous owner or operator of real property may be
liable for the costs to remove or remedy hazardous or other toxic substances
located on, in or under such real property. These laws may impose such
liability whether or not the owner or operator had knowledge of the presence
of these substances. In connection with the Company's operation of its
properties under contract, the Company could be potentially liable for such
removal and remediable costs. The Company is not aware of any environmental
claims pending or threatened against it or against the owners of the
properties operated by the Company, however, no assurance can be given that
such a claim will not be asserted against the Company in the future.
Employees
At October 31, and July 31, 1997, the Company had approximately 650
employees. Approximately 500 employees were full time and 150 were part
time. The Company considers its relationships with employees to be
excellent. The total number of employees employed at all properties
represented by the Company was approximately 1,100 at October 31, and July
31, 1997, of which approximately 850 were full time and 250 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.
The wages, salaries, taxes and other employee benefits of personnel
employed at the properties are paid out of the operations of the property.
The wages and other related payroll costs for personnel of the corporate
headquarters are paid directly out of the Company's operations.
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<PAGE>
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements
or Labor Contracts
With the exception of the management contracts and the trade names
"Castle Resorts and Hotels" and "Hawaiian Pacific Resorts", 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. None of the employees of the Company
are subject to collective bargaining agreements or labor unions.
Research and Development
The Company's present business operations do not center in areas where
the Company is or believes it is necessary to conduct material research and
development activities. The Company and its competitors often receive
information derived from research conducted by federal, state and private
foundations related to tourism and marketing statistics. The Company also
expends minimal costs (which are reimbursed by the hotels managed) to
develop internet web pages and other computer related marketing programs.
Property
The Company's corporate headquarters are located in Honolulu, Hawaii.
The Company leases 11,357 square feet of office space on the tenth floor of
745 Fort Street, Honolulu, Hawaii. 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 maintenance. The
Company has the right to an additional five year extension at a monthly
rental rate to be mutually determined and agreed upon by the lessor and the
Company.
The Company also leases approximately 3,035 square feet of office space
at a rental of $6,374 per month plus the costs of common area maintenance,
located at 1150 South King Street, Honolulu, Hawaii. These premises are
used for the operation of the central reservations department. The initial
lease commenced on April 1, 1988, and was extended on April 1, 1993 to March
31, 1998. The Company has the right to an additional five year extension at
a monthly rental rate to be mutually determined and agreed upon by the
lessor and the Company.
The Company also leases 167 rooms and the furniture and equipment
included within the rooms in the Kuhio Village Resort, located in Waikiki,
Hawaii. The Company operates the 167 rooms as a hotel. The initial lease
commenced in May 1996 under a non-cancelable agreement ending in March 1998.
The lessor is entitled to a fixed monthly rental plus a percentage of
operating profits for the hotel operation in excess of certain thresholds of
return. The Company has the option to extend the lease for an additional
four years.
Other than the leases mentioned above, the Company does not have any
other tangible fixed assets other than office equipment, computer equipment
and furniture.
Insurance
The Company currently has various types of insurance coverage,
including comprehensive general liability insurance with an occurrence limit
of $1,000,000, including bodily injury, The Company also has additional
excess umbrella liability insurance with a coverage limit of $10,000,000.
The Company believes that these coverages and limits are appropriate for its
line of business. While management believes that these coverages are
adequate, if the Company were held liable for a claim for amounts exceeding
the policy limits or for claims not covered under the scope of its insurance
coverages, the Company's business, results of operations and financial
condition could be materially and adversely affected.
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<PAGE>
Legal Proceedings
The Company is a named defendant in HODGE V. CASTLE GROUP, LTD., ET
AL., Civil No. 96-00766., United States District Court, District of Hawaii.
The case was filed on September 16, 1996 as BERKE V. CASTLE GROUP, LTD., ET
AL., but the court dismissed both the original and the first amended
complaint on procedural grounds. When the second amended complaint was
filed on January 27, 1997, the identity of the plaintiffs and therefore the
title of the case changed. However, the original, first amended, and second
amended complaints all improperly identified the Company and several other
defendants. On September 15, 1997, plaintiffs filed a third amended
complaint, which finally corrected the misidentification of the Company. The
plaintiffs are the owners of nine apartments and the owners of partial
interests in three other apartments. One of the plaintiffs purports to be
suing derivatively on behalf of the Association of Apartment Owners of
Hanalei Bay Resort. The other plaintiffs claim injury only to themselves.
The plaintiffs allege that the Company and the other defendants are liable
under the federal Racketeer Influenced and Corrupt Organizations Act. So
far as the Company is concerned, the allegations in the third amended
complaint relate to the Company's performance of its functions as managing
agent for the Association. Remedies sought against the Company include
special and general damages of an unspecified amount and statutory treble
and punitive damages.
Management vehemently disagrees that the Company acted without the
authorization of the AOAO Hanalei Bay Resort and intends to vigorously
defend against the plaintiffs. The AOAO Hanalei Bay Resort set up a
litigation committee and has conducted an independent investigation of the
allegations contained in the claim. Their investigation has determined that
the Company acted properly and with authorization in its capacity as
managing agent. The Company has filed a motion to dismiss the lawsuit.
Because of the foregoing, management believes that the lawsuit is frivolous
and without merit and will be dismissed or adjudicated in favor of the
Company, although no assurances can be given.
The Company is a named defended in connection with a discrimination
complaint, Federal No. 3343, filed by Gregory Dean Broyles with the Hawaii
Civil Rights Commission ("HCRC"). Mr. Broyles alleges that during the
course of his employment at Hanalei Bay Resort, he was subjected to sexual
orientation harassment. Currently, the HCRC is investigating the complaint
and the merits of the case have not been determined. Because the case is
still under investigation, it is too soon to predict whether the HCRC will
find reasonable cause to believe discrimination occurred in this case, or
the outcome of the case if it ultimately went to trial. The complaint does
not state any dollar amount of damages actually suffered by Mr. Broyles.
There are various other claims and lawsuits pending against the
Company involving complaints which are normal and reasonably foreseeable in
light of the nature of the Company's business. Management believes that
such litigation is not material to the business of the Company, either
individually or in the aggregate. In the opinion of management, although no
assurance can be given, the resolution of these claims will not have a
material adverse effect on the Company's financial position. Further, to
the knowledge of management, no director, officer, affiliate or beneficial
owner of record 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 legal proceeding.
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MANAGEMENT
The following table sets forth certain information concerning the
directors and executive officers of the Company as of February 1, 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 Tedcastle 64 Vice Chairman of the Board and Director
Kelvin M. Bloom 38 Chief Operating Officer, Director and
Senior Vice President
Kimo M. Keawe 48 Director
Hideo Nomura 47 Director
Charles E. McGee 61 Director
Ryoji Takahashi 57 Director
Judhvir Parmar 54 Director
Motoko Takahashi 53 Secretary and Director
Michael S. Nitta 38 Chief Financial Officer and Vice
President Finance
Shari W. Chang 47 Senior Vice President Sales & Marketing
Steve Townsend 43 Senior Vice President Operations
Stanley Mukai 65 Interim Director
Edward Calvo, Sr. 60 Interim Director
Noboru Sekiguchi 70 Interim 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 Limited, the negotiation
and consummation of the Castle Plan and the acquisition of KRI. He was the
president, director and founder of Castle Limited. During the past six
years, Mr. Wall has been the managing director of HBII, which owns 62% of
the Hanalei Bay Resort. Mr. Wall has been elected to the board of directors
of the Hawaii Visitors & Convention Bureau and resides in Honolulu, Hawaii.
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
senior vice president of First Insurance Company of Hawaii, Ltd., 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. 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 was 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
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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 is also president of Castle Resorts &
Hotels, 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 for the Kiahuna
Plantation Resort in Poipu, Kauai, and 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. Since 1987, Mr. Nomura has been president of Nomura
Holdings and Nomura Hitchcock Corporation, Ltd., a property related
investment consulting firm based in Tokyo, Japan. 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. from 1982-
1987. Mr. Nomura is a resident of Japan.
Ryoji Takahashi. Mr. Takahashi was appointed as a director of the
Company in November, 1993. Mr. Takahashi, a resident of Japan, has, for
over thirty years, been a substantial principal of Nichiman Kosan, a
corporation which specializes in coordinating the installation of air
conditioning and sound control systems in commercial buildings and
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 currently
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.
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 20 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. Mr. Parmar has served
on the Board since November of 1995.
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.
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. 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.
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 Vice
President of Island Holiday Tours. She has also served as consultant to the
Hawaii Visitors Bureau. Ms. Chang graduated from the University of Hawaii,
and resides in Honolulu, Hawaii.
Steve Townsend. Mr. Townsend joined the Company in July, 1997 as
Senior Vice President of Operations. Mr. Townsend 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, managing properties located in
Hawaii. Mr Townsend is a graduate of the Hotel and Restaurant
Administration School at Florida State University.
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Stanley Mukai. Mr. Mukai was appointed interim director on September
22, 1997. Mr. Mukai is a graduate of the Harvard Law School and a partner
in the law firm of McCorriston Miho Miller Mukai located in Honolulu,
Hawaii. His expertise is in the area of taxation and Mr. Mukai has held
various positions such as Advisory Board Member, Hawaii Tax Institute;
Trustee, Tax Foundation of Hawaii; Co-Chairman, Tax Subcommittee, American
Bar Association; Chairman, Tax Subcommittee on U.S. District and Portfolio
Investment by Foreigners; and Chairman, Section of Taxation, Hawaii Bar
Association.
Edward Calvo, Sr. Mr. Calvo was appointed interim director on September
22, 1997. Mr. Calvo is vice president of Calvo Enterprises, Inc., a
conglomerate of ten businesses with fifteen hundred employees. They are the
largest private employer on Guam. Mr. Calvo has served as a Senator in the
Guam legislature and is currently the Board Chairman of the Guam Waterworks
Authority.
Noboru Sekiguchi. Mr. Sekiguchi was appointed interim director on
September 22, 1997. Mr. Sekiguchi is a graduate of Waseda University and is
a Director and controller of Nikkankyo Group, which is the parent company of
N.K.C. Hawaii. He has worked for Toyo Menka Company, one of the leading
trading companies in Japan for forty years as a financial officer.
Committees of the Board of Directors
Audit Committee. The Board has established an Audit Committee to make
recommendations concerning the engagement of independent public accountants,
review with the independent public accountants the plans and results of the
audit engagement, approve professional services provided by the independent
public accountants, review the independence of the independent public
accountants, consider the range of audit and non-audit fees and review the
adequacy of the Company's internal accounting controls. The Audit Committee
is made up of Messrs. Mukai, Calvo and Ms. Takahashi.
Compensation Committee. The Board has established a Compensation
Committee to determine compensation for the Company's executive officers and
to administer the Company's benefit plans. Messrs. Mukai, Parmar, Tedcastle
and Ms. Takahashi are the members of the Compensation Committee.
Executive Committee. The Board has established an Executive Committee
to provide additional direction to management. The Executive Committee is
an advisory committee only and does not have authority to vote and approve
any actions on behalf of the board of directors. Messrs. Parmar, Tedcastle,
Wall and Takahashi are members of the Executive Committee.
Nominating Committee. The Board has established a Nominating Committee
to recommend to the board the slate of nominees of directors to be elected
by the shareholders (and any directors to be elected to the Board to fill
vacancies) and to recommend directors to be selected for membership on the
various Board Committees. Messrs. Tedcastle and Calvo are members of the
Nominating Committee.
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Executive Compensation
The following table shows for the fiscal year ended July 31, 1997, the
aggregate annual remuneration of each of the three highest paid persons who
were executive officers or directors of the Company and the executive
officers and directors as a group. The reported compensation is based on
cash compensation.
Name of Individual Capacities in which renumeration Aggregate
or identity of group was received renumeration
- -------------------- -------------------------------- ------------
Rick Wall Chairman of the Board and $120,000
Chief Executive Officer
Kelvin M. Bloom Chief Operating Officer and $126,500
Senior Vice President
Kimo M. Keawe Senior Vice President $124,050(1)
Officers and Directors as a Group $624,200(1)
(1) Includes payments made under consulting agreement between the Company
and Kimo M. Keawe
Compensation of Directors
The Company does not have any present arrangements regarding
compensation of directors for service as a director, attendance at meetings
of the Board of Directors, 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 No compensation for service as a director is presently
contemplated.
The Company entered into a Consulting Agreement with Mr. Keawe on April
16, 1997. Under the terms of the agreement, Mr. Keawe will receive a
monthly fee of $10,000 per month for the months of May through and including
November of 1997, and a monthly fee of $5,000 per month for the months of
December 1997 through and including May 1998. See "Employment Contracts".
There were no arrangements pursuant to which any director of the
Company was compensated during the current and most recent fiscal year for
services 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 Messrs. Bloom,
Keawe, Nitta, Townsend and Ms. Chang, the Company has entered into no
employment contract with any director or executive officer.
The remaining employment agreements provide for a base salary, to be
increased annually by a percentage no less than the increase in the Honolulu
Consumer Price Index for the preceding twelve months. Under their
respective employment agreements, the current base salary for 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
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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 and employee 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. 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 Mr. Keawe to the Company upon the occurrence
of certain events as set forth in the Consulting Agreement.
Long Term Incentive Plans
No Options (with the exception of the Options discussed below in the
section entitled "Options, Warrants and Rights"), stock appreciation rights
or long term incentive plan awards were issued or granted to the Company's
management.
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.
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, 1997. The summaries of the 1995 Stock Option Plan and the
1995 Stock Purchase Plan set forth below are qualified in their entirety by
reference to the text of plans which have been filed as exhibits to the
Registration Statement of which this Prospectus is a part.
1995 Stock Option Plan
Amount of Stock. A total of 1,000,000 shares of Common Stock shall be
reserved for issuance under the Plan. Shares of Common Stock issued
hereunder may be authorized and reissued or issued shares acquired by the
company or its Subsidiaries on the market or otherwise.
Administration. The Plan will be administered by the Compensation
Committee (the "Committee") of the Company's Board of Directors. The
Committee, which is composed of a majority of non-employee directors, has
the authority under the Plan, subject to its provisions, to select the
individuals to receive grants of options and to specify the terms and
conditions of such grants.
Eligibility. Options may be granted only to present or future officers
and key employees of the Company and its Subsidiaries, including
Subsidiaries which become such after the adoption of the Plan. Any officer
or key employee of the Company or of any such Subsidiary shall be eligible
to receive one or more options under the Plan. Any director who is not an
officer or employee of the Company or one of its Subsidiaries and any member
of the Committee, during the time of the member's service as such or
thereafter, shall be ineligible to receive an option or award under the
Plan. The adoption of this Plan shall not be deemed to give any officer or
employee any right to be granted an Option to purchase Common Stock of the
Company, except to the extent and upon such terms and conditions as may be
determined by the Committee.
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Options. Both nonqualified stock options ("NQOs") and incentive stock
options ("ISOs"), as defined in Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), may be granted under the Plan. Options will
have a maximum term of ten years. The Option exercise price must be at
least 100% of the Fair Market Value of the Common Stock on the date of the
Option grant.
Share Authorizations. All awards made under the Plan shall be
evidenced by a written Stock Option Agreement executed by the Company and
the optionee in such form as the Committee shall approve, which may be
subject to and contain additional terms and conditions not inconsistent with
the Plan, and in the case of an ISO, shall not be inconsistent with the
provisions of the Code applicable to incentive stock options, as the
Committee shall prescribe.
Nontransferability. No Options granted under the Plan shall be
transferable by the optionee otherwise than by will or by the laws of
descent and distribution, and such Option shall be exercisable, during the
optionee's lifetime, only by the optionee.
Consideration. Each optionee, as consideration for the grant of an
Option, shall remain in the continuous employ of the Company or one of its
Subsidiaries for at least one year from the date of the granting of such
Option. No Option shall be exercisable until after the completion of such
one year period of employment by the optionee.
Shareholder Rights. An optionee will have no rights as a shareholder
with respect to the shares subject to the Option granted until such Option
is exercised and the shares are issued to the optionee.
Tax Consequences. Under the present provisions of the Code, the
federal income tax consequences of the Option Plan are summarized as
follows:
1. Nonqualified Stock Options. The granting of a NQO to an optionee
will not result in taxable income to the optionee or a deduction
in computing the income tax of the Company. Upon exercise of an
NQO, the excess of the fair market value of the shares acquired
over the option price is (a) taxable to the optionee as ordinary
income and (b) deductible in computing the Company's income tax,
subject to satisfying applicable withholding requirements and
general rules relating to reasonableness of compensation.
2. Incentive Stock Options. An optionee will not be deemed to
receive any income at the time an ISO is granted or exercised,
although the exercise may give rise to alternative tax liability
for the optionee. If an optionee does not dispose of the shares
acquired on exercise of an ISO within the two year period
beginning on the day after the day of the grant of the ISO or
within the one year period beginning on the day after the day of
the transfer of the shares to the optionee, the gain (if any) on a
subsequent sales (i.e., the excess of the proceeds received over
the option price) will be long term capital gain and any loss the
optionee may sustain on such sale will be a long term capital
loss.
If the optionee disposes of the shares within the two year or one year
period referred to above, the disposition is a "disqualifying disposition,"
and the optionee will generally realize ordinary income taxable as
compensation in the year of the disqualifying disposition to the extent of
the excess of the fair market value of the shares on the date of purchase
over the option price, and the balance, if any, will be long term or short
term capital gain depending, generally, on whether the shares were held more
than one year after the ISO was exercised. To the extent the optionee
recognizes compensation income with respect to a disqualifying disposition,
the Company will be entitled to a corresponding deduction, subject to
general rules relating to reasonableness of compensation.
Amendment of the Plan. The Board of Directors may amend or suspend the
Plan at any time and from time to time. No such amendment of the Plan may,
however, increase the maximum number of shares to be offered under options,
or change the manner of determining the option price, or change the
designation of employees or class of employees eligible to receive options,
or permit the transfer or issue of stock before payment therefore in full
or, without the written consent of the optionee, alter or impair any option
previously granted under the Plan.
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1995 Stock Purchase Plan
Amount of Stock. There shall be reserved for the granting of Options
under the Plan and for issuance and sale pursuant to such Options 500,000
shares of Common Stock of the Company. The shares of Common Stock issued
upon the exercise of Options under the Plan shall be made available from
authorized and unissued shares of Common Stock. If for any reason shares of
Common Stock as to which an Option has been granted cease to be subject to
purchase thereunder, then such shares of Common Stock again shall be
available for issuance pursuant to Options under the Plan.
Offering Date. The Offering Date shall be semi-annual dates as set by
the Board of Directors in each of the years 1996 through 2000. The Company
has made no offerings in 1996.
Offering Period. The Offering Period shall be each of the six-month
periods commencing on an Offering Date.
Eligibility. Eligible Employees shall mean all Employees who have been
in the employ of the Company or any of its Subsidiaries continuously for at
least one year other than persons who after purchasing shares of Common
Stock under the Plan would own shares of capital stock possessing five
percent or more of the total combined voting power or value of all classes
of outstanding capital stock of the Company or any of its Subsidiaries.
Eligible Employees must be active, regular full-time or active, regular
part-time employees of the Company or any of its Subsidiaries, including but
not limited to officers of the Company and its Subsidiaries, provided that
such employee's normal work week is at least 20 hours per week and whose
customarily employment by the Company for at least five months in the
calendar year and provided further that and Eligible Employee shall not
include any employee who is on leave or layoff status or is otherwise
inactive. For purposes of the preceding sentence, capital stock that any
person may purchase under outstanding stock options shall be treated as
owned by the person and the provisions of Section 425(d) of the Code shall
apply. As of any Offering Date, each Eligible Employee shall be granted an
Option, which shall entitle the Eligible Employee to purchase shares of
Common Stock in accordance with the terms and conditions of the Plan. The
maximum number of shares of Common Stock that an eligible Employee shall be
entitled to purchase pursuant to such Option shall equal the lesser of (1)
the number of whose shares of Common Stock purchasable for $25,000 based on
the Stock Price on the applicable offering date, or (2) the number of whole
shares of Common Stock purchasable for 15% of the Eligible Employee's Base
Salary based on the Stock Price on the applicable offering date.
Subscription Agreements. Approximately 30 days prior to each offering
date the Company will make subscription agreements available to all Eligible
Employees. To subscribe for shares of Common Stock in connection with an
offering period, an Eligible Employee must complete and execute a
subscription agreement and deliver it to the Company prior to the offering
date, or such later date as may be established by the Board of Directors of
the Company for all Eligible Employees. A separate subscription agreement
must be executed for each offering period under the Plan.
Purchase Date. The purchase date for the purchase of the Common Stock
under the Plan shall be the last day of the offering period.
Purchase Price. The purchase price per share of Common Stock
purchasable under Options granted in respect to each offering period under
the Plan shall be equal to the lesser of 85% of ( i) the Stock Price on the
offering date, or (ii) the Stock Price on the Purchase Date, adjusted down
to the nearest one-eighth point. No fractional shares of Common Stock shall
be issued under any circumstances under the Plan. In lieu of any such
fractional shares, Participants shall receive a cash payment based on the
stock price of the applicable purchase date.
Payment. Payment for the shares of Common Stock shall be made either
(i) in cash in a single lump sum on or before the purchase date, or (ii)
through payroll deductions in equal installments over a period of 25 weeks,
with no right of prepayment. The Participant shall select the method of
payment in the subscription agreement. If a Participant electing to make a
lump sum payment fails to make such payment on or before the purchase date,
the Option shall terminate automatically without any further action by the
Company.
Cancellation of Participation. A Participant may cancel his or her
subscription in respect of any offering period at any time prior to the
applicable purchase date by giving written notice of cancellation of the
subscription to the Company. As soon as practicable after receipt of such
notice, the Company will return the funds previously deposited by the
Participant, without interest thereon.
Termination of Employment. In the event that a Participant's
employment with the Company and its Subsidiaries is terminated as a result
of death, retirement or any other reason (other than as a result of layoff
subject to recall within 90 days) prior to the purchase date applicable to
an offering period in which the Participant is participating in the Plan,
his or her subscription and the Option relating thereto shall be deemed
canceled automatically without further action by the Participant or Company.
In the event that a Participant is laid off or is on leave of absence prior
to the purchase date applicable to an offering period in which such
Participant is participating in the plan, the Participant shall continue to
participate in the Plan, unless he or she does not resume employment within
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90 days beginning on the date such layoff or leave commenced, in which case
his or her subscription and the Option relating thereto shall be deemed
automatically canceled at the close of business on the 90th day after the
date such layoff or leave commenced. As soon as practicable after any such
cancellation, the Company will return the funds previously deposited by such
Participant, without interest thereon.
Transferability. Except for the issuance of shares to a Participant in
the name of the Participant and his or her spouse as tenants by the entirety
or as joint tenants with full rights of survivorship, an Eligible Employee's
rights to subscribe for shares of Common Stock under the Plan and rights in
respect to any Option granted under the Plan belong to the Eligible Employee
alone and may not be transferred, assigned to or availed of for any purpose
or for any other person. Any attempt to transfer or assign any rights
granted under the Plan would constitute withdrawal from the Plan.
Tax Consequences. The Stock Purchase Plan is intended to qualify under
Section 423 of the Code. As such, if no disposition of the shares of Common
Stock purchased by an employee occurs within two years of the applicable
offering date or within one year from the applicable purchase date, no tax
consequences will arise for the employee at the time of purchase. The
employee will instead be subject to tax on the shares at the time of their
disposition, and there will be no tax consequences to the Company. If the
employee disposes of the shares of Common Stock prior to the time periods
referenced in the preceding sentence, the employee will be deemed to have
received compensation equal to the difference between the value of the
shares on the date of purchase and the purchase price paid by the employee,
and the Company will be allowed a tax deduction equal to the amount of
compensation deemed to have been received by the employee.
Voting Required. The adoption of the Stock Purchase Plan received an
affirmative vote of the holders of a majority of the shares of Common Stock
at the annual meeting of the shareholders held on March 15, 1995.
Amendment and Termination. The Board of Directors of the Company may
amend or terminate the Stock Purchase Plan at any time without notice;
provided, however, that no participating employee's existing rights are
adversely affected and that no such amendment may ( i) decrease the purchase
price for shares, (ii) increase the maximum number of shares purchasable by
a participating employee, (iii) extend the duration of the Stock Purchase
Plan or (iv) increase the number of shares offered under the Stock Purchase
Plan.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of the Company's
Common Stock beneficially owned as of February 1, 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.
Name Beneficially Shares %
and Address Owned (1) of Class (2)(3)
- ------------------------------- -------------- -----------------
Rick Wall
745 Fort Street
Honolulu, HI 96813 815,000 15%
Kimo M. Keawe
745 Fort Street
Honolulu, HI 96813 322,500 (3) 6%
John G. Tedcastle
745 Fort Street
Honolulu, HI 96813 525,000 10%
Hideo Nomura
745 Fort Street
Honolulu, HI 96813 525,000 10%
LCC Management Inc. (4)
745 Fort Street
Honolulu, HI 96813 525,000 10%
N.K.C. Hawaii, Inc. (5)
745 Fort Street
Honolulu, HI 96813 900,000 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 are as of February 1, 1998 and are presented
prior to the sale of the Shares in this offering.
(2) Determined on the basis of 5,386,130 shares outstanding, exclusive of
the shares in this offering and including 50,000 shares issuable to a
wholly owned company of Mr. Charles E. McGee, a director of the
Company. Also includes 25,000 shares issuable to Van Kasper & Company
pursuant to a Common Stock Purchase Warrant.
(3) 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 Mr. Keawe and the Company. The shares are owned by
Mr. Keawe through Keawe Resorts, Inc., a corporation owned and
controlled by Mr. Keawe.
(4) A corporation owned and controlled by Ms. Janet Parmar, spouse of Mr.
Judhvir Parmar, a director of the Company.
(5) A corporation owned and controlled by the family of Mr. Ryoji
Takahashi, a director of the Company.
(6) Includes 50,000 shares issuable to Hawaii Reservations Center
Corporation, a wholly owned corporation of Mr. Charles E. McGee, a
director of the Company, exercisable as of February 1, 1998 Includes
32,250 shares which Mr. Keawe has agreed to return to the Company.
40
<PAGE>
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. Mr. Bloom did not exercise any of his options in
1994, 1995, 1996 or 1997. 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, 1999 for a price of $1.25 per
share.
In August, 1994, the Company, as part of the employment agreement with
Shari W. Chang, agreed to give to Shari W. Chang as a bonus, 22,500 shares
of the Company's Common Stock. The shares were issued in September 1995 and
represents 0.4% of the Company's Common stock currently outstanding.
In May, 1997, the Company, as part of a renegotiation of its
reservation services agreement, granted to Hawaii Reservations Center Corp.
an option to purchase 50,000 shares of the Company's Common Stock at a price
of $2.00 per share. The option may be exercised between May 21, 1997 and
May 20, 2002. Hawaii Reservations Center is a wholly owned corporation of
Mr. Charles E. McGee, a director of the Company.
Other than the option granted to Mr. McGee 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.
CERTAIN TRANSACTIONS
The Company has a management contract with Hanalei Bay International
Investors ("HBII"), a Hawaii limited partnership, for eighty seven
condominium units located within the Hanalei Bay Resort. The Company also
has a management contract with the Association of Apartment Owners of the
Hanalei Bay Resort ("AOAO HBR") to manage the common areas of the resort.
HBII was formed through the efforts of HBII Management, Inc., owned by Mr.
Rick Wall, with the following partners: Siam Commercial Bank; Voyage
Fourteen, Ltd., owned by Mr. John Tedcastle; L.C.C. Management Inc., owned
by Ms. Janet Parmar, spouse of Mr. Judvihr Parmar; and Nomura Firm and
Nomura Holdings, owned by Hideo Nomura and Kenji Nomura. In 1988 HBII made
an offer to purchase all 134 units within the Hanalei Bay Resort and eighty
five owners accepted the offer. Subsequently, Nichiman International became
an investor in HBII. Nichiman International's controlling stockholder is Mr.
Ryoji Takahashi and Mr. Takahashi is also the controlling stockholder of
N.K.C. Hawaii, Inc. HBII subsequently acquired two other units. Following
the acquisitions, 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. See
"Corporate Organization". 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 services to HBII. Mr. Wall, Mr.
Tedcastle, Mr. Hideo Nomura and Mr. Ryoji Takahashi were elected to serve on
the Board of Directors of the Company following completion of the Castle
Plan. In March of 1995, Mr. Takahashi's sister, Ms. Motoko Takahashi, was
appointed Secretary and director of the Company. In November 1995, Mr.
Judvihr Parmar was elected to serve on the Company's Board of Directors. In
November of 1995, Mr. Kelvin Bloom married the daughter of Mr. James Binger,
who is a limited partner in HBII. In March of 1997, Mr. Michael Nitta was
appointed Assistant Vice President of HBII Management Inc. Management
believes that the terms of the management agreement between the Company and
HBII are not at rates favorable to HBII, and are at rates commonly found in
the industry and are similar or more profitable to the Company than other
management contracts entered into by the Company.
On July 31, 1995, HBII paid the Company $150,000 to be applied against
HBII's account receivable as shown in the Company's books and records in
anticipation of HBII receiving the sum of $150,000 on August 1, 1995 from
one of its partners. The $150,000 was not received by HBII and as a result,
the Company returned to HBII the $150,000 in the form of a note receivable.
On September 19, 1995, HBII repaid the note to the Company in full, together
with interest.
On July 31, 1995, the Company invested $100,000 into a reorganization
plan instituted by HBII. Under terms of the HBII Plan, the eighty seven
units owned by HBII will be sold under a timeshare plan and investors in the
timeshare plan will receive up to four times their investment over the life
of the timeshare plan. It is estimated that the investors in the timeshare
plan shall be paid over a period of three years. As of July 31, 1997, the
Company has received a total of $155,040 from HBII, representing a return of
its initial investment in the amount of $38,760, and an additional return of
$116,280 representing a gain on the investment.
41
<PAGE>
On August 1, 1994, the Company entered into a contract with Hawaii
Reservations Center Corp. ("HRCC"), a company wholly owned by Charles E.
McGee, pursuant to which HRCC shall provide reservation services for the
hotels and resorts managed by the Company. Since the purchase of KRI, Inc.
in accordance with the completion of the Castle Plan, reservation services
had been provided by KRI, Inc. until July 31, 1994. The terms of the
contract called for the Company to pay a fixed fee plus commissions and the
cost of office space. See "Property". The Company also agreed to sell to
HRCC the central reservations system previously owned by KRI, Inc., which
consisted of computer and other office equipment. As consideration for the
equipment, HRCC agreed to employ the reservation employees of KRI, Inc. and
assume the liability for the accrued vacation due to said employees. The
Company realized a gain of $4,372 on the transaction, as the value of the
accrued vacation exceeded the net book value of the equipment sold.
Effective May 1, 1997, the Company and HRCC renegotiated the fees paid
to HRCC by the Company to provide exclusive central reservations services.
The renegotiated fees are based on a percentage of the room revenues for the
properties managed by the Company, subject to a minimum monthly amount.
Management believes that the contract between HRCC and the Company are not
under favorable terms to HRCC and are at rates commonly found in the
industry.
On October 31, 1994, the Company secured a line of credit with a
financial institution in the amount of $300,000. As of July 31, 1997, and
October 31, 1997, the Company had an outstanding balance of $250,000 on the
line of credit. The line of credit is personally guaranteed by Messrs.
Wall, Keawe, Nomura and Tedcastle. The Company has received an extension of
the due date for the line of credit through April 15, 1998. In December of
1997, the Company drew down the remaining $50,000 on the line, bringing the
outstanding balance to $300,000.
In November of 1997, the Company secured an additional $250,000 line of
credit from a Hawaii bank which is personally guaranteed by the Mr. Wall.
The line of credit is due on May 17, 1998.
In July of 1997, the Company completed a private placement of 222,100
shares of its stock to Development Funding, Ltd. for $2.00 per share. The
Company received $425,395 after the payment of commissions charged on the
private placement by Reeves Moses Hudig & Co., Ltd., a merchant banker
located in New Zealand. The proceeds from the private placement were
received by the Company as of September 18, 1997, and the stock certificate
was subsequently issued to Development Funding, Ltd.
DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock does not
purport to be complete and is subject in all respects to applicable Utah law
and to the provisions of the Company's Articles of Incorporation and By-Laws,
copies of which have been filed as exhibits to the Registration Statement of
which this Prospectus is a part.
General
The Articles of Incorporation of the Company, as amended, provide that
the Company may issue up to 20,000,000 capital shares, consisting of
20,000,000 shares of Common Stock, par value $.02 per share. Upon
completion of the sale of Common Stock offered hereby, 6,911,130 shares of
Common Stock will be issued and outstanding, exclusive of the exercise of
various stock options and warrants and exclusive of shares reserved for
issuance under the Company's' Stock Plans.
Common Stock
Each outstanding share of Common Stock entitles the holder to one vote
on all matters submitted to a vote of shareholders, including the election
of directors and, except as otherwise required by law or except as provided
in the Articles of Incorporation or Bylaws with respect to any other class
or series of shares of beneficial interest, the holders of Common Stock will
possess exclusive voting power over matters submitted to a vote of
shareholders. The Articles of Incorporation do not provide for cumulative
voting.
Holders of Common Stock have no preemptive, subscription, sinking fund
or conversion rights. Holders of Common Stock will be entitled to receive
dividends as may be declared by the Board of Directors out of legally
available funds. See "Dividend Policy". In the event of the dissolution,
liquidation or winding up of the Company's' business, holders of Common
Stock will be entitled to share in all net assets remaining after payment,
or provision for, all known liabilities.
There is no provision in the Articles of Incorporation or By-Laws that
would delay, defer or prevent a change in control of the Company.
42
<PAGE>
Transfer Agent
The Transfer Agent and Registrar for the Common Stock is American
Registrar and Transfer Co.
SHARES ELIGIBLE FOR FUTURE SALE
The sale of the Company's Common Stock in the public market after this
offering could adversely affect the market price of the company's Common
Stock. Upon completion of this offering, the Company will have 6,911,130
shares of Common Stock outstanding immediately following this offering,
(exclusive of the exercise of certain stock options and warrants). The
1,600,000 shares offered hereby will generally be freely tradeable, except
by affiliates and insiders of the Company. The shares owned by the officers
and directors may not be sold in the absence of a registration under the
Securities Act unless an exemption from registration is available, including
the exemption contained in Rule 144. These stockholders have agreed, subject
to certain limitations, not to offer or sell their shares of Common Stock
for a period of 180 days after the date of this Prospectus. In addition, the
Company has registered with the Securities and Exchange Commission a total
of 1,000,000 and 500,000 reserved for issuance under the Company's Stock
Option Plan and Employee Stock Purchase Plan, respectively. See "Stock
Plans". The Company has also reserved 50,000 shares for issuance under a
Reservations Agreement, and 25,000 for issuance in accordance with a stock
warrant. See "Certain Transactions" and "Options Warrants and Rights".
42
<PAGE>
UNDERWRITERS
The Underwriters named below, represented by Fortress Financial Group,
Ltd. (the "Representatives"), have agreed to sell, on a best efforts basis,
a minimum of 800,000 shares of Common Stock up to a maximum of 1,600,000
shares. The offering will commence on the date of this Prospectus and will
continue until the earlier to occur of (i) the sale of 1,600,000 shares or
(ii) 60 days from the date of this Prospectus, unless extended by the
Company and the Underwriters for an additional 30 days. Once the minimum of
800,000 shares is sold, the Company will conduct a closing on such shares.
Subsequent closings may be held at the discretion of the Company with sales
of the additional shares up to the maximum of 1,600,000 shares.
Tendered subscription for all shares shall be subject to acceptance by
the Company, which subscriptions may be reduced in the sole discretion of
the Company and the Underwriters or rejected for any reason at the sole
discretion of the Company or the Underwriters.
Proceeds from the sale of the shares shall be held in escrow by
American Stock Transfer & Trust Company (The Escrow Agent) pending a closing
on the shares and if no such closing is conducted, all funds shall be
returned to the subscribers, without interest, after termination of the
offering period. All funds received will be held in a bank money market
account insured by the Federal Deposit Insurance Company until closing.
Fortress Financial Group, Ltd. was formed as a Broker-Dealer/Investment
Banking Company in late 1996. Fortress Financial Group, Ltd. has no prior
experience with respect to public offerings; however, the Principals of the
firm have over twenty years of experience in the investment banking and
brokerage industry. The principal business function of the investment
banking department of Fortress Financial Group is to provide top-quality
services to entrepreneurial corporate clients, and to assist them in
implementing their capital and financial goals.
The Company and each of the executive officers and directors of the
Company have agreed that for a period of 180 days from the date this
Registration Statement is declared effective by the Securities Exchange
Commission and thereafter for a period of one year will refrain from selling
in any three-month period more than 10 percent of the Common Stock owned by
such person.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under
the Securities Act, or will contribute to payments the Underwriters may be
required to make in respect thereof.
44
<PAGE>
LEGAL MATTERS
The validity of the Common Stock and certain other legal matters will
be passed upon for the Company by Davis Wright Tremaine and Leonard W.
Burningham and certain legal matters will be passed upon for the Underwriters
by Krage & Janvey, L.L.P.
ACCOUNTANTS
The Board of Directors has appointed Coopers & Lybrand, L.L.P. as the
Company's independent public accountants. Coopers & Lybrand has audited the
Company's financial statements for the fiscal years ended July 31, 1997 and
1996.
EXPERTS
The audited financial statements of the Company included in this
Registration Statement, to the extent and for the periods indicated in their
reports, have been audited by Coopers & Lybrand, L.L.P., independent
auditors, and are included herein in reliance upon the authority of said
firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the Securities Act
with respect to the Common Stock offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement and
the exhibits and schedules thereto, certain portions of which have been
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock,
reference is made to the Registration Statement, including the exhibits and
schedules. Copies of such material may also be obtained from the Commission
upon the payment of prescribed fees.
Statements contained in the Prospectus as to any contracts, agreements
or other documents filed as an exhibit to the Registration Statement are not
necessarily complete, and each such statement is qualified in its entirety
by reference to the full text of such contract or document.
The Company will be required to file reports and other information with
the Commission pursuant to the Securities Exchange Act of 1934. In addition
to applicable legal or NASDAQ requirements, if any, holders of the Common
Stock will receive annual reports containing audited financial statements
with a report thereon by the Company's independent certified public
accountants.
The Company will provide without charge to each person who receives a
Prospectus, upon written or oral request of such person, a copy of any of
the information that was incorporated by reference in the Prospectus (not
including exhibits of the information that is incorporated by reference
unless the exhibits are themselves specifically incorporated by reference).
Such requests should be directed to Company's principal executive offices
located at 745 Fort Street, Suite 1000, Honolulu, Hawaii 96813 (telephone:
(808) 524-0900)).
45
<PAGE>
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 and low bid and asked
prices for the Company's stock for each full quarter for each of the last
three fiscal years ending July 31, 1997, and through January 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 Bid Price Asking Price
October 31, 1994 .6250 1.2500
January 31, 1995 1.0000 1.3750
April 30, 1995 .3750 1.0000
July 31, 1995 .3750 .6875
October 31, 1995 .6250 .8125
January 31, 1996 .6250 1.1250
April 30, 1996 .7500 1.5000
July 31, 1996 .8750 1.7500
October 31, 1996 .7500 1.6250
January 31, 1997 .7500 1.7500
April 30, 1997 .7500 1.7500
July 31, 1997 1.1250 2.3750
October 31, 1997 1.5000 2.3750
January 31, 1998 2.5000 2.7500
Holders
The number of record holders of the Company's Common Stock as of
February 1, 1998 was approximately 260.
Dividends
The Company has not paid any dividends with respect to its Common
Stock, and does not intend to pay dividends in the foreseeable future. It
is the present intention of management to utilize all available funds for
the development of the Company's business. There are no present material
restrictions that limit the ability of the Company to pay dividends on
Common Stock or that are likely to do so in the future.
Compliance With Section 16(a) of the Securities Act
Section 16 of the Securities Exchange Act of 1934 requires the
Company's directors, 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 the
Commission's regulations 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 10% of the Company's Common Stock filed all reports required of Section
16(a) of the Securities Exchange Act of 1934 during the current fiscal year
as of the date of this Registration, summarized as follows:
46
<PAGE>
Name of Reporting Person Form Filed Date Filed
- ------------------------ ---------- ----------------------
John Tedcastle Form 5 September 13, 1996
Motoko Takahashi Form 4 August 09, 1996
Motoko Takahashi Form 4 February 7, 1997
Charles McGee Form 5 September 12, 1997
Kelvin Bloom Form 5 September 12, 1997
Kelvin Bloom Form 5 (1) September 26, 1997
Kimo M. Keawe Form 3 August 8, 1997
Steve Townsend Form 3 August 8, 1997
Stanley Mukai Form 3 October 9, 1997
Edward Calvo, Sr. Form 3 October 10, 1997
Noboru Sekiguchi Form 3 October 9, 1997
(1) Amended filing.
Reports on Form 8-K
The Company filed a current report on Form 8-K on August 15, 1997
regarding its potential acquisition of 51% of the authorized issued and
outstanding stock of a management company situated in Indonesia.
The Company filed a current report on Form 8-K on September 26, 1997
regarding the resignation of Mr. Akira Fujii from its Board of Directors.
46
<PAGE>
INDEX TO FINANCIAL STATEMENTS
THE CASTLE GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
(ALL REFERENCES TO THE QUARTERS ENDED OCTOBER 31, 1997 AND 1996 ARE
UNAUDITED)
Page
Report of Independent
Accountants......................................................... F-2
Consolidated balance sheets at July 31, 1997 and
1996 and October 31, 1997 and 1996.................................. F-3
Consolidated statements of operations for the years
ended July 31, 1997 and 1996 and for the quarters ended
October 31, 1997 and 1996........................................... F-4
Consolidated statements of shareholder's equity for the
years ended July 31, 1997 and 1996 and the quarter ended
October 31, 1997.................................................... F-5
Consolidated statements of cash flows for the years
ended July 31, 1997 and 1996 and for the quarters ended
October 31, 1997 and 1996........................................... F-6
Notes to consolidated financial statements.......................... F-8
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
The Castle Group, Inc.
We have audited the accompanying consolidated balance sheets of The
Castle Group, Inc. and Subsidiary as of July 31, 1997 and 1996 and the
related statements of operations, stockholder's equity (deficit) and cash
flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Castle Group, Inc. and Subsidiary as of July 31, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
Coopers & Lybrand,
L.L.P.
Honolulu, Hawaii
September 19, 1997
F-2
<PAGE>
THE CASTLE GROUP, INC.
AND SUBSIDIARY
Consolidated balance sheets
10/31/97
07/31/97 07/31/96 (Unaudited)
------------- ------------- -------------
Assets
Current Assets:
Cash $ 268,938 $ 220,951 $ 110,242
Accounts receivable, less
allowance for doubtful
accounts of $25,405 and
$18,200 in 1997 and 1996,
respectively 820,368 737,729 802,181
Due from related party 197,730 371,717 269,512
Prepaid expenses 89,779 56,637 146,144
Restricted cash 19,941 26,536 19,941
Deferred cost, current -- 159,432 --
Deferred compensation
expense, current -- 50,000 --
------------- ------------- -------------
Total current assets 1,396,756 1,623,002 1,348,020
------------- ------------- -------------
Furniture, Fixtures and
Equipment, Net 82,571 92,936 79,343
Other Assets:
Deposits 63,021 62,971 71,330
Investment in HBII
Timeshare Program 61,240 100,000 60,691
Intangibles, net 12,928 89,937 10,342
Deferred compensation
expense, non-current -- 62,500 --
Total other assets 137,189 315,408 142,363
------------- ------------- -------------
Total Assets $ 1,616,516 $ 2,031,346 $ 1,569,726
============= ============= =============
Liabilities And Stockholders' Equity (Deficit)
Current Liabilities:
Accounts payable $ 613,791 $ 1,062,517 $ 793,759
Vacation payable 109,233 111,183 88,099
Wages payable 84,567 94,269 81,333
Taxes payable 36,143 33,611 11,457
Due to related party, current 18,000 184,400 184,400
Long-term debt, current 250,000 434,432 250,000
Deferred compensation payable -- 250,000 --
Deferred income 76,230 101,640 50,820
Other accrued liabilities 121,467 115,681 102,008
------------- ------------- -------------
Total current liabilities 1,309,431 2,387,733 1,561,876
------------- ------------- -------------
Due to Related Party,
non-current 166,400 -- --
Deferred Income -- 76,230 --
Commitments and Contingencies -- -- --
Stockholders' Equity (Deficit)
Common stock, $.02 par value,
20,000,000 shares authorized,
5,089,030 shares issued and
outstanding on July 31, 1997
and 1996 and 5,311,130 on
October, 31 1997 101,781 101,781 106,223
Common stock subscribed and
unissued, 222,100 shares 384,750 -- --
Capital in excess of par 2,118,222 2,118,222 2,539,175
Accumulated deficit ( 2,464,068) ( 2,652,620) ( 2,637,548)
------------- ------------- -------------
Total stockholders'
equity (deficit) 140,685 ( 432,617) 7,850
------------- ------------- -------------
Total Liabilities and
Stockholder Equity (Deficit) $ 1,616,516 $ 2,031,346 $ 1,569,726
============= ============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated statements of operations
for the years ended July 31, 1997 and 1996 and for the quarters ended
October 31, 1997 and 1996
<TABLE>
<CAPTION>
OCTOBER OCTOBER
1997 1996
1997 1996 (Unaudited) (Unaudited)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Hotel revenues and
management fees (includes
$167,053 and $142,082 in
July 1997 and 1996 and
$33,174 and $40,176 in
October 1997 and 1996
of Hawaii general
excise taxes) $ 5,219,506 $ 3,742,408 $ 1,185,251 $ 1,245,188
Other income 966,292 369,218 162,624 196,375
------------- ------------- ------------- -------------
Total revenues 6,185,798 4,111,626 $ 1,347,875 $ 1,441,563
------------- ------------- ------------- -------------
Expenses:
Payroll and benefits 2,401,567 1,968,255 621,225 610,245
Rent 1,155,212 584,548 291,203 283,163
Reservation expense 919,857 912,279 206,505 238,273
Repairs and maintenance 358,655 103,995 87,620 88,720
Depreciation and amortization 263,322 464,867 7,605 118,922
Taxes 215,470 151,522 45,017 51,981
Professional fees 131,271 88,822 57,965 22,819
Advertising 102,351 66,220 53,922 55,387
Insurance 101,984 93,351 18,235 27,948
Travel and entertainment 80,881 37,906 49,666 5,507
Utilities 60,257 41,152 20,275 19,616
Office expense 50,197 35,408 25,800 31,365
Other 104,288 40,297 24,415 20,261
------------- ------------- ------------- -------------
Total expenses 5,945,312 4,588,622 1,509,453 1,574,207
------------- ------------- ------------- -------------
Income (loss) from operations 240,486 ( 476,996) ( 161,578) ( 132,644)
Other Expenses:
Interest expense 51,934 67,966 11,902 13,681
------------- ------------- ------------- -------------
Net Income (Loss) $ 188,552 ($ 544,962) ($ 173,480) ($ 146,325)
Per Share Data
Net income (loss) $ .04 ($ .11) ($ .03) ($ .03)
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-4
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated statements of stockholders' equity (deficit)
for the years ended July 31, 1997 and 1996
and for the quarter ended October 31, 1997
<TABLE>
<CAPTION>
Common
Stock Capital in
Common Stock Subscribed Excess of Accumulated
Shares Amount & Unissued Par Value Deficit
<S> <C> <C> <C> <C> <C>
Balances, August 1, 1995 5,066,530 $ 101,331 $ -- $ 2,110,235 $(2,107,658)
Issuance of common stock 22,500 450 -- 7,987 --
Net loss for the year
ended July 31, 1996 -- -- -- -- ( 544,962)
----------- --------- ---------- ------------ -------------
Balance, July 31, 1996 5,089,030 101,781 -- 2,118,222 (2,652,620)
Stock subscriptions sold 222,100 -- 425,399 -- --
Subscription receivable -- -- ( 40,649) -- --
Net income for the year
ended July 31, 1997 -- -- -- -- 188,552
----------- ---------- ---------- ------------ -------------
Balance, July 31, 1997 $5,311,130 $ 101,781 $ 384,750 $ 2,118,222 $(2,464,068)
Subscription receivable -- 4,442 (384,750) 420,953 --
Net loss for the quarter
ended October 31, 1997
(Unaudited) -- -- -- -- ( 173,480)
----------- ---------- ---------- ------------ -------------
Balance October 31, 1997
(Unaudited) 5,311,130 $ 106,223 $ -- $ 2,539,175 $(2,637,548)
=========== ========== ========== ============ =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated statements of cash flows
for the years ended July 31, 1997 and 1996 and for the quarters ended
October 31, 1997 and 1996
<TABLE>
<CAPTION>
October October
1997 1996
1997 1996 (Unaudited) (Unaudited)
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 188,552 $( 544,962) $( 173,480) $( 146,325)
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities -
Depreciation and amortization 263,322 464,867 7,605 118,921
Amortization of deferred compensation
expense 112,500 50,000 -- 12,500
Issuance of common stock for compensation -- 8,437 -- --
Changes in assets and liabilities -
Decrease (increase) in restricted cash 6,595 ( 26,536) -- --
Decrease (increase) in accounts receivab 91,348 ( 192,621) 18,187 135,428
Increase in prepaid expenses ( 33,142) ( 14,010) ( 56,365) 10,717
Decrease in deferred income ( 101,640) ( 101,640) ( 25,410) ( 25,410)
Decrease in contract payable ( 159,432) ( 161,138) -- ( 42,333)
(Decrease) increase in accounts payable ( 448,726) 393,461 179,968 ( 93,079)
(Decrease) increase in wages payable ( 9,702) 14,965 ( 3,234) 33,261
(Decrease) increase in vacation payable ( 1,950) 33,687 ( 21,134) ( 19,234)
(Decrease) in deferred compensation payable ( 250,000) -- -- --
Decrease in due from related party -- -- ( 71,782) ( 66,256)
Increase in taxes payable 2,532 21,682 ( 24,686) ( 18,298)
Increase in accrued liabilities 5,786 54,698 ( 19,459) 52,677
------------- ------------ ------------- -----------
Net cash provided by (used in)
operating activities ( 333,957) 890 ( 189,790) ( 47,431)
------------- ------------ ------------- -----------
Cash Flows From Investing Activities:
Purchase of furniture, fixtures & equipment ( 16,516) ( 27,645) ( 1,791) ( 3,749)
Decrease in investment in HBII Timesharing 38,760 -- 549 --
(Payment) Receipt of deposits ( 50) ( 30,000) ( 8,309) 30,000
------------- ------------ ------------- -----------
Net cash provided by (used in)
investing activities 22,194 ( 57,645) ( 9,551) 26,251
------------- ------------ ------------- -----------
Cash Flows From Financing Activities
Proceeds from stock subscription 384,750 -- 40,645 --
Repayment of long-term debt ( 275,000) ( 275,000) -- --
Proceeds of long-term debt 250,000 275,000 -- --
------------- ------------ ------------- -----------
Net cash provided by financing activities 359,750 -- 40,645 --
------------- ------------ ------------- -----------
Net Increase (Decrease) In Cash 47,987 ( 56,755) ( 158,696) ( 21,180)
Cash At Beginning Of Period 220,951 277,706 268,938 220,951
------------- ------------ ------------- -----------
Cash At End Of Period $ 268,938 $ 220,951 $ 110,242 $ 199,771
============= ============ ============= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-6
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated statements of cash flows (continued)
for the years ended July 31, 1997 and 1996 and for the quarters ended
October 31, 1997 and 1996
<TABLE>
<CAPTION>
October October
July July 1997 1996
1997 1996 (Unaudited) (Unaudited)
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
Supplemental disclosure of cash
flow information:
Cash paid during the year
for interest $ 43,434 $ 53,844 $ 11,901 $ 13,681
Supplemental schedule of noncash
investing and financing
activities:
Issuance of common stock, 22,500
shares for compensation
and services $ -- $ 8,437 $ -- $ --
Assignment of the leased
hotel's accounts receivable to
the Company also recorded as
an accounts payable to the
lessor -- 150,000 -- --
Stock subscription receivable 40,649 -- -- --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-7
<PAGE>
THE CASTLE GROUP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Items referring to October 31, 1997 or October 31, 1996 are unaudited)
The accompanying consolidated financial statements of The Castle Group,
Inc. and subsidiary for the three months ended October 31, 1997 and 1996 have
been prepared in accordance with generally accepted accounting principles.
These financial statements have not been audited by independent public
accountants, but include all adjustments (consisting of only normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial condition, results of operations and cashflows
for such periods. The consolidated financial statements do not include all
disclosures associated with annual financial statements and accordingly,
should be read in conjunction with the annual consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10K-SB for the year ended July 31, 1997, as filed with the Securities and
Exchange Commission. A copy of this report is available from the Company upon
request. The results of operations for the three months ended October 31,
1997 and 1996 are not necessarily indicative of the operating results for the
remainder of the year.
1. Summary of Significant Accounting Policies
Organization -
The Castle Group, Inc. (the Company) was incorporated under the laws of the
State of Utah on August 21, 1981. The Company operates in the hotel and
resort management industry in the State of Hawaii.
New Accounting Pronouncements -
In February 1997, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 128, "Earnings Per Share" and SFAS No. 129, "Disclosure of
Information About Capital Structure," which improves the earnings per share
information provided in financial statements by simplifying the existing
computational guidelines and revising the disclosure requirements. These
statements are effective for financial statements issued for periods ending
after December 15, 1997, including interim periods, and earlier application is
not permitted. In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which are both effective for fiscal
periods beginning after December 15, 1997. The impact of these statements on
the Company's current disclosures is not expected to be significant.
Principles Of Consolidation -
The consolidated financial statements include The Castle Group, Inc. and its
wholly-owned subsidiary, KRI, Inc. and KRI, Inc.'s wholly-owned subsidiary,
HPR Advertising, Inc. All significant intercompany transactions have been
eliminated in the consolidated financial statements.
Per Share Data -
Per share data is based on the weighted average number of shares outstanding
during the period without regards to common stock equivalents due to their
anti-dilutive effect. In 1997 and 1996, the weighted average shares
outstanding was 5,109,903 and 5,085,280, respectively. As of October 31,
1997, the weighted average shares outstanding was 5,311,630.
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.
F-8
<PAGE>
THE CASTLE GROUP, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Items referring to October 31, 1997 or October 31, 1996 are unaudited)
Cash And Cash Equivalents -
The Company considered all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Furniture, Fixtures And Equipment -
Furniture, fixtures and equipment are recorded at cost. When assets are
retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss
is reflected in income for the period.
The costs of maintenance and repairs are charged to income as incurred.
Renewals and betterments are capitalized and depreciated over their
estimated useful lives.
At July 31, 1997 and 1996, and October 31, 1997, furniture, fixtures and
equipment consisted of the following:
July 1997 July 1996 October 1997
Office equipment $ 205,529 $ 201,721 $ 207,320
Less accumulated depreciation ( 122,958) ( 108,785) (127,977)
----------- ----------- -----------
$ 82,571 $ 92,936 $ 79,343
=========== =========== ===========
Depreciation is computed using the declining balance and straight-line
methods over the estimated useful life of the assets (5 to 7 years). For
the years ended 1997 and 1996, depreciation expense was $26,881 and $26,719,
respectively. For the quarter ended October 31, 1997 and 1996, depreciation
expense was $5,019 and $14,173, respectively.
Intangibles -
Intangible assets consist of noncompetition agreements and organization
costs. The noncompetition fees are being amortized over the life of the
agreements (3 years) on a straight-line basis. Organization costs are being
amortized on a straight-line basis over 5 years. At July 31, 1997 and 1996,
and October 31, 1997, the balances of those intangibles were as follows:
July 1997 July 1996 October 1997
Noncompetition agreements $ -- $ 800,000 $ --
Organization costs 51,714 51,714 51,714
---------- ----------- -----------
51,714 851,714 51,714
Less accumulated amortization ( 38,786) ( 761,777) ( 41,372)
---------- ----------- -----------
$ 12,928 $ 89,937 $ 10,342
========== =========== ===========
F-9
<PAGE>
THE CASTLE GROUP, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Items referring to October 31, 1997 or October 31, 1996 are unaudited)
Deferred Cost -
Deferred cost represents the cost of obtaining management contracts and is
being amortized on a straight-line basis over the life of the contract (see
Note 4).
Deferred Compensation Expense -
Deferred compensation expense represents the cost of common stock options
issued to an officer as an inducement to enter into an employment contract.
The deferred compensation expense is being amortized on a straight-line
basis over the life of the contract (5 years). In 1997, the stock options
were forfeited by the above mentioned officer (see Note 6).
Income Recognition -
The Company recognizes income from the management of resort properties
according to terms of its various management contracts.
Concentrations of Credit Risks -
The Company's cash is deposited in savings and demand deposit accounts with
financial institutions in Hawaii.
Concentration In Market Area -
The Company manages hotels primarily in Hawaii and is dependent on the state's
visitor industry. Subsequent to year end, the Company expanded its operation
to Saipan and is currently contemplating expansion into other areas of the
Pacific Basin.
Restricted Cash -
Restricted cash consists of cash held in client trust accounts and cash
pledged as collateral for an equipment lease.
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.
F-10
<PAGE>
THE CASTLE GROUP, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Items referring to October 31, 1997 or October 31, 1996 are unaudited)
Fair Value Of Financial Instruments -
The carrying value of long-term debt, and deferred compensation payable
approximate the fair value because of the short maturity of those
instruments. The fair value of the investment in HBII Time Share Program is
estimated to be $400,000 at July 31, 1997 based on future cash flow
projections.
2. Related Party Transactions
Hanalei Bay International Investors -
The Company has a hotel management agreement with Hanalei Bay International
Investors (HBII) to manage the Hanalei Bay Resort (HBR). The managing
general partner of HBII is also the chairman and chief executive officer of
the Castle Group, Inc. Under the agreement, the Company is to receive
management and incentive fees based on a percentage of gross total revenue
and net income respectively. The Company also receives reservation and
marketing fees based on a percentage of room revenue. During the year ended
July 31, 1997, and 1996, total fee income from HBR amounted to $774,372 and
$649,263, respectively. For the quarters ended October 31, 1997 and 1996,
total fee income from HBR amounted to $226,997 and $229,707, respectively.
At July 31, 1997 and 1996, the Company's receivable from HBR amounted to
$197,730 and $371,717, respectively. At October 31, 1997, the Company's
receivable from HBII was $269,512.
On July 31, 1995, HBII paid the Company $150,000 to be applied against HBR's
accounts receivable balance in anticipation of HBII receiving cash inflows
on August 1, 1995. The anticipated cash was not received by HBII.
Therefore, on August 2, 1995, the Company issued a $150,000, 6% promissory
note to HBII. The promissory note matured on August 31, 1995. On October
3, 1995, HBII repaid the note in full.
On July 31, 1995, the Company invested $100,000 in HBII Time Share Program
of the Hanalei Bay Resort. The Company will receive moneys based on a
percentage of timesharing sales. During 1997, the Company received $155,000
from this investment of which $38,800 represents a return of the initial
investment and $116,200 represents a gain recognized by the Company. At
July 31, 1997, the investment was $61,240. As of October 31, 1997, the
Company received an additional $2,236 from the investment of which $559
represents a return of the initial investment and $1,677 represents a gain
recognized by the Company. At October 31, 1997, the investment was $60,691.
Reservations System -
Reservations services are provided by Hawaii Reservation Center Corporation,
wholly owned by a stockholder/director who has a 2% interest in the Company.
The expense in 1997 and 1996 was $919,857 and $912,279, respectively. For the
quarters ended October 31, 1997 and 1996, the expense was $206,505 and
$238,273, respectively.
F-11
<PAGE>
THE CASTLE GROUP, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Items referring to October 31, 1997 or October 31, 1996 are unaudited)
Due to Related Party -
July 1997 July 1996 October 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 $ 184,400
Less current portion 18,000 184,400 184,400
---------- ---------- ----------
Long-term portion due in
fiscal year 1999 $ 166,400 $ -- $ --
========== ========== ==========
3. Commitments and Contingencies
Leases -
The Company leases office space, vehicles and equipment expiring at various
dates through 1999. The office leases may be renewed for an additional five
years. Additionally, in May 1996, the Company leased a hotel under a
noncancelable agreement expiring in March 1998. The lease may be renewed for
an additional four years. The lessor is entitled to a percentage of the
operating profit of the hotel in excess of $100,000 until April 1997. All
assets, liabilities, revenues and expenses have been included in the Company's
operations.
At July 31, 1997, the future minimum rental commitment under these leases was
as follows:
Schedule of minimum lease payments:
1998 $ 863,000
1999 261,000
-------------
$ 1,124,000
=============
Rent expense under these leases amounted to $1,076,000 and $513,400 for the
years ended July 31, 1997 and 1996, respectively. Rent expense for the
quarters ended October 31, 1997 and 1996 amounted to $114,600 and $113,300,
respectively.
Management Contracts -
The Company manages several hotels and resorts under management agreements
expiring at various dates through December 1999. Several of these management
agreements contain automatic extensions for periods of 1 to 10 years.
Management fees received are based on the revenues and net available cash
flows of the hotels' operations as defined in the management agreements.
In addition, the Company has sales, marketing and reservations agreements with
other hotels and resorts expiring at various dates through December 1997.
Several of these agreements contain automatic extensions for periods of one
month to three years. Fees received are based on revenues, net available cash
flows or commissions as defined in the agreements.
F-12
<PAGE>
THE CASTLE GROUP, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Items referring to October 31, 1997 or October 31, 1996 are unaudited)
4. Loan And Contract Payable
At July 31, 1997 and 1996, and as of October 31, 1997, loan and contracts
payable consisted of the following:
July 1997 July 1996 October 1997
Contract payable in
monthly installments of
$15,080, expiring in June
1997 (see below). $ -- $ 159,432 $ --
$300,000 line of credit from
a bank with drawings due within
90 days from withdrawal, with
interest (10.50% at July 31,
1997) at 2.00% above the bank's
base rate due on April 15,
1998. The Company's accounts
receivable are pledged as
collateral and several of the
Company's directors are named
as guarantors. 250,000 275,000 250,000
---------- ----------- -----------
$ 250,000 $ 434,432 $ 250,000
========== =========== ===========
In November of 1997, the Company obtained an additional $250,000 line of
credit from a bank which is personally guaranteed by an officer of the
Company. The line of credit is due in May, 1998. Additionally, the Company
drew down the remaining $50,000 against its existing line in December of
1997. The Company expects to pay down both lines with the proceeds of their
public offering, should it be successful. If the offering is not
successful, an officer of the Company has agreed to personally meet debt
service and operating cash requirements in fiscal 1998.
5. Employee Benefits
The Company and its subsidiary have a 401(k) Profit Sharing Plan
for its employees. Under the terms of the Plan, the Company may
match 50% of the compensation reduction of the participants in the Plan
up to 1% of compensation. Any employee with one year service and 1,000
credit hours of service, who is at least twenty-one years old is eligible
to participate. For the years ended July 31, 1997 and 1996, no contributions
were made by the Company.
The subsidiary has a flexible benefits plan. The participants in the plan
are allowed to make pre-tax premium deductions 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.
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.
F-13
<PAGE>
THE CASTLE GROUP, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Items referring to October 31, 1997 or October 31, 1996 are unaudited)
6. Capital Stock
Capital Stock Issuances -
On September 30, 1995, the Company issued to an officer 22,500 shares of
common stock as compensation for services rendered. The compensation
recorded was equivalent to the fair market value of the stock on September
30, 1995.
Common Stock Warrants -
In May 1994, the Company issued warrants to acquire up to 25,000 shares of
common stock for $1.25 per share, exercisable through May 1999 in exchange
for consulting services rendered. No warrants have been exercised for 1997
and 1996.
Common Stock Options -
In November 1993, as an inducement to enter into an employment contract with
the Company, the Company issued options to an officer of the Company to
obtain 125,000 shares of common stock for one dollar, exercisable by
December 2, 1998. The transaction was recorded as deferred compensation
expense and deferred compensation payable of $250,000, representing the fair
value of the common stock option at the date of grant. In 1995, the option
period was amended to be only exercisable after August 1, 1996 but before
December 2, 1998. No options have been exercised for 1996 and in 1997, the
options were forfeited by the officer. The deferred compensation payable of
$250,000 and the unamortized balance of the deferred compensation expense of
$62,500 were eliminated which reduced payroll and benefits expense by
$187,500 in 1997.
In May 1997, the Company, as part of a renegotiation of its reservation
services agreement, granted an option to purchase 50,000 shares of the
Company's common stock at a price of $2 per share to Hawaii Reservation
Center Corporation which is wholly owned by a stockholder/director of the
Company. The option may be exercised between May 1997 and 2000 and had not
been exercised as of July 31, 1997.
Stock Subscriptions -
In July 1997, 222,100 common shares were subscribed at $2 per share. As of
July 31, 1997, the Company received $384,750, net of stock issuance expenses
of $18,806, with a receivable balance of $40,649 at July 31, 1997. The
subscription receivable was collected in September 1997, and the shares were
subsequently issued to the subscriber.
F-14
<PAGE>
THE CASTLE GROUP, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Items referring to October 31, 1997 or October 31, 1996 are unaudited)
7. Income Taxes
Significant components of the Company's deferred tax assets and liabilities
as of July 31, 1997 and 1996 are as follows:
July 1997 July 1996 October 1997
Deferred tax assets-
Vacation pay $ 7,000 $ 7,000 $ 7,000
Deferred compensation expense -- 55,000 --
Noncompetition agreement 240,000 235,000 240,000
Deferred income 31,000 71,000 23,000
Net operating loss 738,000 775,000 793,000
------------ ------------ ------------
1,016,000 1,143,000 1,063,000
Deferred tax liability-
Furniture, fixtures
and equipment ( 8,000) ( 7,000) ( 8,000)
------------ ------------ ------------
Net deferred tax asset 1,008,000 1,136,000 1,055,000
Valuation allowance (1,008,000) (1,136,000) (1,055,000)
------------ ------------ ------------
$ -- $ -- $ --
============ ============ ============
In fiscal July 1997, $37,000 of net operating losses was utilized to offset
current year taxable income.
The net change during 1997 and 1996 in the total valuation allowance was a
decrease of $128,000 and an increase of $304,000, respectively.
The Company has a net operating loss carryforward for income tax purposes of
$1,844,400 at July 31, 1997 which expires at various dates through fiscal
year 2011.
8. Litigation
There are various claims and lawsuits pending against the Company involving
complaints which are normal and reasonably foreseeable in light of the
nature of the Company's business. In the opinion of management, the
resolution of these claims will not have a material adverse effect on the
Company's financial position.
F-15
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 1. Indemnification of Directors and Officers
There is no provision in the Articles of Incorporation, Bylaws or any
contract or other instrument that insures or indemnifies a controlling
person, director or officer of the Company against liability in any of these
capacities; however, the Utah Revised Business Corporation Act (the "Act")
does contain provisions regarding such indemnity.
The Act provides that a corporation may indemnify an individual who has
been made a party to a proceeding because he or she was a director against
liability incurred if the conduct was in good faith and he or she reasonably
believed that the conduct was in or not opposed to the corporation's best
interests; and in the case of any criminal proceeding, he or she had no
reasonable cause to believe the conduct was unlawful. A corporation may not
indemnify a director under this Section in connection with a proceeding by
or in the right of a corporation in which the director was adjudged liable
to the corporation or in connection with any proceeding claiming the
director derived an improper personal benefit, whether involving action in
his or her official capacity, in which proceeding he or she was adjudged
liable on the basis that he or she derived an improper personal benefit.
The indemnification permitted by this Section is limited to reasonable
expenses incurred in connection with the proceeding. The Act further
provides that unless limited by the Articles of Incorporation, a corporation
shall indemnify a director who is successful on the merits or otherwise in
the defense of any proceeding or in the defense of any claim, issue or
matter in the proceeding, to which he or she was a party because he or she
was a director of the corporation, against reasonable expenses incurred in
connection with the successful defense of any such proceeding or claim.
A corporation may pay for or reimburse the reasonable expenses incurred
by a director who is a party to a proceeding in advance of final disposition
of the director furnishes the corporation with written affirmation of his or
her good faith belief that he or she has met the applicable standard of
conduct described in the Act; the director furnishes the corporation with a
written undertaking to repay the advance if it is ultimately determined that
he or she did not meet such standard of conduct; and a determination is made
that the facts then known to those making such determination would not
preclude such indemnification.
A director may also seek court-ordered indemnification under the Act,
provided that such indemnification is limited to reasonable expenses
incurred, and the court may order such indemnification regardless of whether
the director has met the applicable standard of conduct set forth in the
Act.
The Act outlines the requirements for determining and authorizing
indemnification of directors, and provides that a determination shall be
made by a majority vote of the Board of Directors, with only those directors
not party to the proceeding being counted in satisfying the presence of a
quorum; or, if a quorum cannot be obtained, by a majority vote of a
committee of the Board of Directors designated by the Board of Directors,
which committee shall consist of two or more directors not party to the
proceeding, except that directors who are party to the proceeding may
participate in the designation of directors for the committee; or by special
legal counsel selected by a quorum of the Board of Directors or its
committee, or if a quorum cannot be obtained and a committee cannot be
designated, selected by a majority vote of the full Board of Directors, in
which selection directors who are party to the proceeding may participate;
or by the stockholders, by a majority of the votes entitled to be cast by
the holders of qualified shares present in person or by proxy at a meeting.
Officers, employees, fiduciaries and agents may also be indemnified
pursuant to the Act, unless the Articles of Incorporation provide otherwise.
An officer is entitled to mandatory indemnification and may apply for
court-ordered indemnification to the same extent as a director under the Act.
A corporation may also indemnify and advance expenses to an officer, employee,
fiduciary or agent to the same extent as to any director; and may also
indemnify and advance expenses to an officer, employee, fiduciary or agent
who is not a director to a greater extent, if not inconsistent with public
policy, and if provided for by its Articles of Incorporation, Bylaws,
general or specific action of its Board of Directors or contract. A
corporation may purchase insurance to indemnify any such persons pursuant to
the Act, regardless of whether the corporation has the power to indemnify
any such persons under other provisions of this Act.
The Act provides that provisions concerning a corporation's
indemnification of or advance for expenses to a director contained in its
Articles of Incorporation or Bylaws, or a resolution of its stockholders or
Board of Directors, or in a contract (except an insurance policy) or
otherwise, are valid only if and to the extent the provision is not
inconsistent with the Utah Revised Business Corporation Act. If the Articles
of Incorporation limit indemnification or advance of expenses, indemnification
and advance of expenses are valid only to the extent not inconsistent with the
Articles of Incorporation.
63
<PAGE>
There is no provision in the Articles of Incorporation or Bylaws of the
Company granting, limiting or denying the right to indemnify directors,
executive officers, employees, fiduciaries or agents of the Company.
Item 2. Other Expenses of Issuance and Distribution
The following table sets forth the estimated costs and expenses, other
than underwriting commissions, payable by the Company in connection with the
sale of the Common Stock being registered:
SEC Registration Fee $ 1,455
NASD Filing Fee 1,000
Nasdaq National Market application fee 10,000
Blue Sky fees and expenses 15,000
Printing and engraving expenses 50,000
Legal fees and expenses 100,000
Accounting fees and expenses 25,000
Transfer Agent and Registrar fees 5,000
Miscellaneous 12,545
------------
Total $ 220,000
============
Item 3. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question as to
whether such indemnification by it is against public policy as expressed in
the Securities Act, and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of the Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
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Item 4. Unregistered Securities Issued or Sold Within One Year.
In May, 1997, The Company, as part of a renegotiation of its
reservation services agreement, granted to Hawaii Reservations Center Corp. an
option to purchase 50,000 shares of the Company's common stock at a price of
$2.00 per share. The option may be exercised between May 21, 1997 and May 20,
2002. Hawaii Reservations Center is a wholly owned corporation of Mr. Charles
E. McGee, a director of the Company.
Other than the option to Mr. McGee, there were no other issuances of
unregistered securities within the last year.
Item 5. Exhibits and Financial Statement Schedules
(a) Exhibits
Sequential
Exhibit Page
Number Description Number
1.1 Form of Placement Agency Agreement 69
2.1 Restated Articles of Incorporation of The Castle Group,
Inc., incorporated by reference to the Company's
Registration Statement on Form 10-SB *
2.2 By-Laws as amended of The Castle Group, Inc.,effective
02/01/95, incorporated by reference to Exhibit 2.2 to
the Company's quarterly report on form 10-QSB for the
quarter ending 04/30/96 *
5.2 Opinion of Davis Wright Tremaine 104
5.3 Opinion of Leonard W. Burningham 106
6.1 Agreement and Plan of Reorganization dated 11/08/93 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 11/10/93, by and among The
Castle Group, Inc., Keawe Resorts, Inc., Maui Beach Hotel,
Inc., M.K. & Sons, Inc., TN Group Hawaii, Inc., Michael S.
Nitta, Saburo and 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 12/02/93, 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 07/30/94,
effective as of 11/10/93 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 07/31/94. *
6.5 Michael S. Nitta Employment Agreement dated 07/30/94,
effective as of 11/10/93 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 07/31/94. *
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6.6 Shari W. Chang Employment Agreement dated 07/15/94,
effective as of 07/16/94, between Shari W. 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 07/31/94. *
6.7 Sublease Agreement dated 09/16/93, between rush Moore
Craven Sutton Morry & Beh and The Castle Group Limited
for the Company's principle executive offices,
incorporated by reference to the Company's Registration
Statement on Form 10-SB. *
6.8 Lease Agreement dated 04/01/88, between Hirano
Enterprises, Cen Pac Properties, Inc., and KRI, Inc.,
dba Hawaiian Pacific Resorts, as renewed by agreement
dated 05/03/93, incorporated by reference to Exhibit
10.5 to the Company's Registration Statement on
Form 10-SB. *
6.9 Reservation Services Agreement dated 08/01/94 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 10/31/94. *
6.10 Stock Acquisition Agreement between the Company and
Shari Chang dated 09/10/95, incorporated by reference
to the Company's Annual Report on Form 10-KSB for the
year ended 07/31/95. *
6.11 Revolving Line of Credit Loan Agreement dated 10/21/94
between the Company, Castle Resorts & Hotels, Inc., KRI,
Inc., Hawaii National Bank, Rick Wall, John Tedcastle,
Kimo M. Keawe and Hideo Nomura, incorporated by
reference to Exhibit 6.11 to the Company's Annual Report
on Form 10-KSB for the year ended 07/31/95. *
6.12 Letter dated 10/17/95 from Kimo M. Keawe to KRI, Inc.
stockholders, together with Promissory Notes dated
07/31/95 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 $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 07/31/95. *
6.13 Second Amendment to Letter of Agreement dated 12/02/93
between Kelvin Bloom and the Company, incorporated by
reference to Exhibit 6.13 to the Company's Annual Report
on Form 10-KSB for the year ended 07/31/95. *
6.14 Extension of Revolving Line of Credit Agreement dated
12/18/95 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 07/31/96. *
6.15 Extension of Revolving Line of Credit Agreement dated
01/18/96 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 07/31/96. *
6.16 Extension of Revolving Line of Credit Agreement dated
06/05/96 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 07/31/96. *
6.17 Extension of Revolving Line of Credit Agreement dated
12/11/96 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 07/31/97. *
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6.18 Extension of Revolving Line of Credit Agreement dated
03/05/97 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 07/31/97. *
6.19 Extension of Revolving Line of Credit Agreement dated
06/30/97 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 07/31/97. *
6.20 Stock Option Agreement Dated May 1, 1997 between the
Company and Hawaii Reservation Center Corporation,
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 Employment Agreement dated May 1, 1997 between the Company
and Steve Townsend 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 Castle Group, Inc. dated April 16, 1997
incorporated by reference to Exhibit 6.22 to the Company's
Annual Report on Form 10-KSB for the year ended July 31,
1997. *
6.23 Amendment to Consulting Agreement between Kimo M. Keawe,
Keawe Resorts, Inc. And The Castle Group, Inc. dated April
16, 1997 incorporated by reference to Exhibit 6.23 to the
Company's Annual Report on Form 10-KSB for the year ended
July 31, 1997. *
6.24 Letter dated July 31, 1997 from Kelvin Bloom forfeiting
his stock option and all amendments incorporated by
reference to Exhibit 6.24 to the Company's Annual Report
on Form 10-KSB for the year ended July 31, 1997. *
6.25 Amendment to Promissory Notes from the Company to Saburo
or Mitsue Maruyama for $3,600; Michael S. Nitta for
$16,800; Keawe Resorts, Inc. for $122,000; M.K. & Sons,
Inc. for $12,000; Shigeru Shinno for $6,000; and T.N.
Group Hawaii, Inc. for $6,000 incorporated by reference
to Exhibit 6.25 to the company's Annual Report on Form
10-KSB for the year ended July 31, 1997. *
23.1 Consent of Coopers & Lybrand L.L.P. 103
(b) Financial Statement Schedules
None
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the city of
Honolulu, State of Hawaii, on March 10, 1998.
THE CASTLE GROUP, INC.
a Utah corporation
By: /s/ Rick Wall
----------------------------------
Rick Wall
Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on the 10th
day of March, 1998 in the capacities indicated.
Name Title
/s/ Rick Wall Chairman of the Board of Directors and
- ------------------------- Chief Executive Officer and Director
Rick Wall
/s/ John Tedcastle Vice Chairman of the Board of Directors
- ------------------------- and Director
John Tedcastle
/s/ Judvihr Parmar Director
- -------------------------
Judvihr Parmar
/s/ Ryoji Takahashi Director
- -------------------------
Ryoji Takahashi
/s/ Kimo M. Keawe Director
- -------------------------
Kimo M. Keawe
/s/ Charles E. McGee Director
- -------------------------
Charles E. McGee
/s/ Hideo Nomura Director
- -------------------------
Hideo Nomura
/s/ Motoko Takahashi Secretary and Director
- -------------------------
Motoko Takahashi
/s/ Kelvin Bloom Chief Operating Officer, Director,
- ------------------------- and Senior Vice President
Kelvin Bloom
/s/ Michael S. Nitta Chief Financial Officer and
- ------------------------- and Vice President Finance
Michael S. Nitta
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EXHIBIT 1.1
THE CASTLE GROUP, INC.
1,600,000 Shares of Common Stock, $.02 par value per share
FORM OF
PLACEMENT AGENCY AGREEMENT
February 19, 1998
Fortress Financial Group, Limited
As Placement Agent
1204 Palm Blvd. - 2nd Floor
Isle of Palms, South Carolina 29451
Dear Sirs:
The Castle Group, Inc., a Utah corporation (the "Company"), proposes to
issue and sell, on a best efforts basis, a minimum of 800,000 shares of
common stock and up to a maximum of 1,600,000 shares (the "Shares") of
common stock, $.02 par value per share (the "Common Stock"), to certain
investors (collectively, the "Investors"). The Company desires to engage you
as its placement agent (the "Placement Agent") in connection with such
issuance and sale. The Common Stock is more fully described in the
Registration Statement (as hereinafter defined).
The Company hereby confirms as follows its agreements with the
Placement Agent.
1. Agreement to Act as Placement Agent. On the basis of the
representations, warranties and agreements of the Company herein contained
and subject to all the terms and conditions of this Agreement, the Placement
Agent agrees to act as the Company's exclusive placement agent in connection
with the issuance and sale, on a best efforts basis, by the Company of the
Shares to the Investors. The Company shall (i) pay to the Placement Agent a
commission equal to 10% of the gross proceeds received by the Company from
the sale of the Shares as set forth on the cover page of the Prospectus (as
hereinafter defined) and (ii) pay to the Placement Agent a 3% nonaccountable
expense allowance. In the event that the offering is terminated, the
Placement Agent will be reimbursed only for its actual out-of-pocket
expenses.
2. Delivery and Payment. Concurrently with the execution
and delivery of this Agreement, the Company, the Placement Agent
and American Stock Transfer & Trust Company, as escrow agent (the "Escrow
Agent"), shall enter into an escrow agreement substantially in the
form of Exhibit A attached hereto (the "Escrow Agreement"), pursuant
to which an escrow account will be established, at the Company's
expense, for the benefit of the Investors (the "Escrow Account").
Prior to the Closing Date (as defined below), (i) each of the Investors
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will deposit an amount equal to the price per share multiplied by the number
of Shares purchased by it in the Escrow Account, (ii) the Investor's checks
will be made payable in the name of the Escrow Agent and the Placement Agent
will transmit all checks directly to the Escrow Agent by noon of the next
business day after receipt; and (iii) the Escrow Agent will notify the
Company and the Placement Agent in writing whether the Investors have
deposited in the Escrow Account funds in the amount equal to the proceeds of
the sale of all of the Shares offered hereby (the "Requisite Funds") into
the Escrow Account. At 10:00 a.m., ______________ time, on ________________,
1998, or at such other time on such other date as may be agreed upon by the
Company and the Placement Agent but in no event prior to the date on which
the Escrow Agent shall have received all of the Requisite Funds (such date
is hereinafter referred to as the "Closing Date"), the Escrow Agent will
release the Requisite Funds from the Escrow Account for collection by the
Company and the Placement Agent as provided in the Escrow Agreement and the
Company shall deliver the Shares to the Investors, which delivery may be
made through the facilities of _________________________. The closing (the
"Closing") shall take place at the office of ____________________. All
actions taken at the Closing shall be deemed to have occurred
simultaneously.
Certificates evidencing the Shares shall be in definitive form and
shall be registered in such names and in such denominations as the Placement
Agent shall request by written notice to the Company. For the purpose of
expediting the checking and packaging of certificates for the Shares, the
Company agrees to make such certificates available for inspection at least
24 hours prior to delivery to the Investors.
3. Representations and Warranties of the Company. The Company
represents and warrants and covenants to the Placement Agent that:
(a) A registration statement (Registration No. 33-_____) on Form SB-2
relating to the Shares, including a preliminary prospectus relating to the
Shares and such amendments to such registration statement as may have been
required to the date of this Agreement, has been prepared by the Company,
under the provisions of the Securities Act of 1933, as amended (the
"Act"), and the rules and regulations (collectively referred to as the
"Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") thereunder, and has been filed with the Commission. The
Commission has not issued any order preventing or suspending the use of
the Prospectus or the Preliminary Prospectus (as defined below). The term
"Preliminary Prospectus" as used herein means a preliminary prospectus
relating to the Shares as contemplated by Rule 430 or Rule 430A ("Rule
430A") of the Rules and Regulations included at any time as part of the
registration statement. Copies of such registration statement and
amendments and of each related Preliminary Prospectus have been delivered
to the Placement Agent. If such registration statement has not become
effective, a further amendment to such registration statement, including
a form of final prospectus, necessary to permit such registration
statement to become effective will be filed promptly by the Company
with the Commission. If such registration statement has become effective,
a final prospectus relating to the Shares containing information
permitted to be omitted at the time of effectiveness by Rule 430A
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<PAGE>
will be filed by the Company with the Commission in accordance with Rule
424(b) of the Rules and Regulations promptly after execution and delivery
of this Agreement. The term "Registration Statement" means the
registration statement as amended at the time it becomes or became
effective (the "Effective Date"), including all material incorporated by
reference therein and any information deemed to be included by Rule 430A.
The term "Prospectus" means the prospectus relating to the Shares as first
filed with the Commission pursuant to Rule 424(b) of the Rules and
Regulations or, if no such filing is required, the form of final
prospectus relating to the Shares included in the Registration Statement
at the Effective Date, in either case, including all material, if any,
incorporated by reference therein.
(b) On the date that any Preliminary Prospectus was filed with the
Commission, the date the Prospectus is first filed with the Commission
pursuant to Rule 424(b) (if required), at all times subsequent to and
including the Closing Date and when any post-effective amendment to the
Registration Statement becomes effective or any amendment or supplement to
the Prospectus is filed with the Commission, the Registration Statement,
each Preliminary Prospectus and the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any
amendment or supplement thereto), including the financial statements
included in the Prospectus, did or will comply with all applicable
provisions of the Act and the Rules and Regulations and did or will
contain all statements required to be stated therein in accordance with
the Act and the Rules and Regulations. On the Effective Date and when any
post-effective amendment to the Registration Statement becomes effective,
no part of the Registration Statement or any such amendment did or will
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make
the statements therein not misleading. At the Effective Date, at the date
the Prospectus or any amendment or supplement to the Prospectus is filed
with the Commission and at the Closing Date the Prospectus did not or will
not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading. The Company
has not distributed any offering material in connection with the offering
or sale of the Common Stock, other than the Registration Statement, the
Preliminary Prospectus and the Prospectus.
(c) Each of the Company and its subsidiaries listed on Schedule I
hereto (the "Subsidiaries") and at the Closing Date will be duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation. Each of the Company and its Subsidiaries
has, and at the Closing Date will have, full power and authority to
conduct all the activities conducted by it, to own or lease all the
assets owned or leased by it and to conduct its business as described
in the Registration Statement and the Prospectus (or, if the Prospectus
is not in existence, in the most recent Preliminary Prospectus). Each of
the Company and its Subsidiaries is, and at the Closing Date will be,
duly licensed or qualified to do business and in good standing as a
foreign organization in all jurisdictions in which the nature of the
activities conducted by it or the character of the assets owned or
leased by it makes such licensing or qualification necessary. Except
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<PAGE>
for the stock of the Subsidiaries and as otherwise disclosed in the
Registration Statement, the Company does not own, and at the Closing Date
will not own, directly or indirectly, any shares of stock or any other
equity or long-term debt securities of any corporation or have any equity
interest in any firm, partnership, joint venture, association or other
entity. Complete and correct copies of the articles or certificate of
incorporation and of the bylaws of each of the Company and its
Subsidiaries and all amendments thereto have been delivered to the
Placement Agent, and no changes therein will be made subsequent to the
date hereof and prior to the Closing Date.
(d) The issued and outstanding shares of capital stock of the Company
have been duly authorized, validly issued, are fully paid and
nonassessable and are not subject to any preemptive or similar rights. The
Company has an authorized, issued and outstanding capitalization as set
forth in the Prospectus (or, if the Prospectus is not in existence, in the
most recent Preliminary Prospectus). The issued shares of capital stock of
each of the Subsidiaries have been duly authorized and validly issued, are
fully paid and nonassessable and are owned by the Company free and clear
of any security interests, liens, encumbrances, equities or claims. The
description of the securities of the Company in the Registration Statement
and the Prospectus (or, if the Prospectus is not in existence, in the most
recent Preliminary Prospectus) is, and at the Closing Date will be,
complete and accurate in all respects. Except as set forth in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, in the most recent Preliminary Prospectus), neither the Company
nor its Subsidiaries has outstanding, and at the Closing Date will not
have outstanding, any options to purchase, or any rights or warrants to
subscribe for, or any securities or obligations convertible into, or
exchangeable for, or any contracts or commitments to issue or sell, any
shares of capital stock or other securities.
(e) This Agreement has been duly authorized and validly executed and
delivered by the Company and is a legal, valid and binding agreement of
the Company enforceable against the Company in accordance with its terms.
The Escrow Agreement has been duly authorized and validly executed and
delivered by the Company and is a legal, valid and binding agreement of
the Company enforceable against the Company in accordance with its terms.
The Escrow Agreement will conform to the descriptions thereof set forth in
the Prospectus.
(f) The issuance and sale of the Shares have been duly authorized by the
Company, and the Shares, when issued and paid for in accordance with this
Agreement, will be duly and validly issued, fully paid and nonassessable
and will not be subject to preemptive or similar rights. The holders of
the Shares will not be subject to personal liability by reason of being
such holders. The Shares, when issued, will conform to the respective
descriptions thereof set forth in the Prospectus.
(g) The consolidated financial statements and the related notes and
schedules included in the Registration Statement and the Prospectus (or,
if the Prospectus is not in existence, in the most recent Preliminary
Prospectus) present fairly the financial condition of the Company, and
its Subsidiaries, as of the date thereof and the results of operations,
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stockholders' equity (deficit) and cash flows of the Company and its
Subsidiaries at the respective dates and for the respective periods
covered thereby, all in conformity with generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the entire
period involved, except as otherwise disclosed therein. No other financial
statements or schedules of the Company, its Subsidiaries or any other
entity are required by the Act or the Rules and Regulations to be included
in the Registration Statement or the Prospectus. Coopers & Lybrand L.L.P.
(the "Accountants"), who have reported on such financial statements and
schedules, are independent accountants with respect to the Company and its
Subsidiaries, as required by the Act and the Rules and Regulations. The
statements included in the Registration Statement with respect to the
Accountants pursuant to Rule 509 of Regulation S-B of the Rules and
Regulations are true and correct in all material respects. The
consolidated financial statements of the Company and the related notes and
schedules included in the Registration Statement and the Prospectus (or,
if the Prospectus is not in existence, in the most recent Preliminary
Prospectus) have been prepared in conformity with the requirements of the
Act and the Rules and Regulations and present fairly the information shown
therein.
(h) The pro forma financial information included in the Registration
Statement and the Prospectus (or if the Prospectus is not in existence,
the most recent Preliminary Prospectus) has been prepared in conformity
with the applicable published rules and regulations of the Commission with
respect to pro forma financial information, all adjustments have been
properly applied and the assumptions used in preparing such information
are reasonable; and the other financial and statistical information and
data included in the Registration Statement and the Prospectus (or if the
Prospectus is not in existence, the most recent Preliminary Prospectus)
are accurately presented and prepared on a basis consistent with such
financial statements and the books and records of the Company and its
Subsidiaries, as the case may be.
(i) The Company and its Subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with GAAP and to
maintain accountability for assets; (iii) access to assets is permitted
only in accordance with management's general or specific authorization;
and (iv) the recorded accountability for assets is compared with existing
assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(j) Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus and prior to the Closing
Date, except as set forth in or contemplated by the Registration
Statement and the Prospectus, (i) there has not been and will not have
been any change in the capitalization of the Company or its Subsidiaries
other than nonmaterial changes in the ordinary course of business, or any
material adverse change in the business, properties, business prospects,
condition (financial or otherwise) or results of operations of the Company
and its Subsidiaries, taken as a whole, arising for any reason whatsoever,
(ii) neither the Company nor any of its Subsidiaries has incurred
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nor will any of them incur any material liabilities or obligations, direct
or contingent, nor has the Company entered into nor will it enter into any
material transactions other than pursuant to this Agreement, the
Registration Statement and the transactions referred to herein and
therein, and (iii) the Company has not and will not have paid or declared
any dividends or other distributions of any kind on any class of its
capital stock.
(k) Any real property and buildings held under lease to the Company or
its Subsidiaries are held or leased by the Company or its Subsidiaries, as
the case may be, under valid, binding and enforceable leases conforming to
the description thereof set forth in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, in the most recent
Preliminary Prospectus), with such exceptions as do not interfere with the
use made and proposed to be made of such property and buildings by the
Company or its Subsidiaries.
(l) The Company is not an "investment company" or an "affiliated person"
of, or "promoter" or "principal underwriter" for, an "investment company",
as such terms are defined in the Investment Company Act of 1940, as
amended (the "Investment Company Act"). The Company is not required to be
registered under the Investment Company Act.
(m) Except as set forth in the Registration Statement and the Prospectus
(or, if the Prospectus is not in existence, in the most recent Preliminary
Prospectus), there are no actions, suits or proceedings pending or to the
Company's best knowledge, threatened against or affecting the Company or
any of its officers in their capacity as such, before or by any Federal or
state court, commission, regulatory body, administrative agency or other
governmental body, domestic or foreign, wherein an unfavorable ruling,
decision or finding might materially adversely affect the business,
properties, prospects, condition (financial or otherwise) or results of
operations of the Company and its Subsidiaries, taken as a whole.
(n) Each of the Company and its Subsidiaries has, and at the Closing
Date will have, (i) all governmental licenses, permits, consents,
orders, approvals and other authorizations necessary to carry on its
business as contemplated in the Prospectus (or if the Prospectus is
not in existence, the most recent Preliminary Prospectus), (ii) complied
with all laws, regulations and orders applicable to either it or its
business, where the failure to so comply would have a material adverse
effect on the business, properties, prospects, condition (financial or
otherwise) or results of operations of the Company and its Subsidiaries,
taken as a whole, and (iii) performed all its obligations required to be
performed, and is not, and at the Closing Date will not be, to the
Company's best knowledge, in default, under any indenture, mortgage, deed
of trust, voting trust agreement, loan agreement, bond, debenture, note
agreement, lease, contract or other agreement or instrument
(collectively, a "contract or other agreement") to which it is a party
or by which its property is bound or affected, except as otherwise
set forth in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, in the most recent Preliminary Prospectus)
and except where such default would not have a material adverse effect on
the business, properties, prospects, condition (financial or
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otherwise) or results of operations of the Company and its Subsidiaries,
taken as a whole, and, to the Company's best knowledge, no other party
under any contract or other agreement to which it is a party is in default
in any respect thereunder. None of the Company or its Subsidiaries is in
violation of any provision of its organizational or governing documents.
(o) The Company has all corporate power and authority to enter into this
Agreement and the Escrow Agreement, and to carry out the provisions and
conditions hereof and thereof, and all consents, authorizations, approvals
and orders required in connection herewith and therewith have been
obtained.
(p) Neither (i) the issuance, offering and sale of the Shares pursuant
hereto, nor (ii) the compliance by the Company with the other provisions
hereof require the consent, approval, authorization, registration or
qualification of or with any governmental authority, except such as have
been obtained, such as may be required under state securities or Blue Sky
laws or the bylaws and rules of the National Association of Securities
Dealers, Inc. (the "NASD") and, if the Registration Statement is not
effective under the Act as of the time of execution hereof, such as may be
required (and shall be obtained as provided in this Agreement) under the
Act.
(q) Neither the execution of this Agreement or the Escrow Agreement nor
the issuance, offering or sale of the Shares, nor the consummation of any
of the transactions contemplated herein, in the Escrow Agreement, nor the
compliance by the Company with the terms and provisions hereof or thereof
will conflict with, or will result in a breach of, any of the terms and
provisions of, or has constituted or will constitute a default under, or
has resulted in or will result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or of its
Subsidiaries pursuant to the terms of any contract or other agreement to
which the Company or its Subsidiaries may be bound or to which any of the
property or assets of the Company or of its Subsidiaries is subject; nor
will such action result in any violation of the provisions of the
Company's or of its Subsidiaries' organizational or governing documents,
or any statute or any order, rule or regulation applicable to the Company
or its Subsidiaries or of any court or of any Federal, state or other
regulatory authority or other government body having jurisdiction over the
Company or its Subsidiaries.
(r) There is no document or contract of a character required to be
described in the Registration Statement or the Prospectus or to be filed
as an exhibit to the Registration Statement which is not described or
filed as required. All such contracts to which the Company or its
Subsidiaries are a party have been duly authorized, executed and delivered
by the Company or its Subsidiaries, as the case may be, constitute valid
and binding agreements of the Company or its Subsidiaries, as the case may
be, and are enforceable against the Company or its Subsidiaries, as the
case may be in accordance with the terms thereof.
(s) No statement, representation or warranty made by the Company in this
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Agreement or the Escrow Agreement or made in any certificate or document
required by this Agreement or the Escrow Agreement to be delivered to the
Placement Agent, the Investors or the Escrow Agent was or will be, when
made, inaccurate, untrue or incorrect in any material respect.
(t) Neither the Company nor any of its directors, officers or controlling
persons has taken, directly or indirectly, any action intended, or which
might reasonably be expected, to cause or result, under the Act or
otherwise, in, or which has constituted, stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale
of the Common Stock.
(u) No holder of securities of the Company has rights to the registration
of any securities of the Company as a result of the filing of the
Registration Statement, other than rights which are not exercisable due to
the Placement Agent's determination to include only securities sold
directly from the Company.
(v) The Company has filed an application for the Common Stock to be
listed on The Nasdaq Stock Market's National Market (the "Nasdaq National
Market") under the symbol "CAGU".
(w) Neither the Company nor any of its Subsidiaries is involved in any
material labor dispute nor is any such dispute threatened.
(x) The Company has common law trademark rights in all material
trademarks, service marks and trade names which are used in or necessary
for the conduct of their respective businesses as described in the
Prospectus. To the Company's best knowledge, none of such trademarks,
service marks and trade names are subject to license or other agreements
to or from other parties, and no other parties have any legal or
contractual right to terminate or limit the Company's right to continue
using such trademarks, service marks and trade names.
(y) Neither the Company nor its Subsidiaries nor any of their respective
employees or agents has made any payment of funds of the Company or
received or retained any funds in violation of any law, rule or regulation
of a character required to be disclosed in the Prospectus (or, if the
Prospectus is not in existence, in the most recent Preliminary
Prospectus).
(z) The Company and its Subsidiaries are insured by insurers against such
losses and risks and in such amounts as are customary in the business; and
neither the Company nor its Subsidiaries has any reason to believe that it
will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as
may be necessary to continue its business at a cost that would not
materially adversely affect the Company or its Subsidiaries or their
business, assets, prospects, condition (financial or otherwise) or results
of operations.
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(aa) The business, operations and properties of the Company and its
Subsidiaries have been and are being conducted in compliance with all
applicable laws, ordinances, rules, regulations, licenses, permits,
approvals, plans, authorizations or requirements relating to occupational
safety and health, or pollution, or protection of health or the environ-
ment (including, without limitation, those relating to emissions,
discharges, releases or threatened releases of pollutants, contaminants or
hazardous or toxic substances, materials or wastes into ambient air,
surface water, ground water or land, or relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of chemical substances, pollutants, contaminants or hazardous or
toxic substances, materials or wastes, whether solid, gaseous or liquid in
nature) of any governmental department, commission, board, bureau, agency
or instrumentality of the United States, any state or political
subdivision thereof, or any foreign jurisdiction, and all applicable
judicial or administrative agency or regulatory decrees, awards, judgments
and orders relating thereto; and neither the Company nor any of its
Subsidiaries has received any notice from any governmental instrumentality
or any third party alleging any violation thereof or liability thereunder
(including, without limitation, liability for costs of investigating or
remediating sites containing hazardous substances and/or damages to
natural resources).
(bb) Each officer, director and security holder of the Company has
delivered to the Placement Agent an agreement in the form of Attachment A
hereto to the effect that he or she will not, for a period of 180 days
after the date hereof, without the prior written consent of the Placement
Agent, offer to sell, sell, contract to sell, grant any option to purchase
or otherwise dispose (or announce any offer, sale, grant of any option to
purchase or other disposition) of any shares of capital stock of the
Company or securities convertible into, or exchangeable or exercisable
for, shares of capital stock of the Company.
(cc) Any certificate signed by any officer of the Company and delivered to
the Placement Agent or to counsel for the Placement Agent shall be deemed
a representation or warranty by the Company to the Placement Agent as to
matters covered thereby.
4. Agreements of the Company. The Company covenants and agrees with
the Placement Agent as follows:
(a) The Company will not, either prior to the Effective Date or
thereafter during such period as the Prospectus would be required by law
to be delivered in connection with sales of the Shares by an underwriter
or dealer, file any amendment or supplement to the Registration Statement
or the Prospectus, unless a copy thereof shall first have been submitted
to the Placement Agent within a reasonable period of time prior to the
filing thereof and the Placement Agent shall not have objected thereto in
good faith.
(b) The Company will use its best efforts to cause the
Registration Statement to become effective, and will notify the
Placement Agent promptly, and will confirm such advice in writing,
1) when the Registration Statement has become effective and when any
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post-effective amendment thereto becomes effective, (2) of any request
by the securities or other governmental authority (including, without
limitation, the Commission) of any jurisdiction for amendments or
supplements to the Registration Statement or the Prospectus or for
additional information, (3) of the issuance by any securities or other
governmental authority (including, without limitation, the Commission) of
any jurisdiction of any stop order suspending the effectiveness of the
Registration Statement or the initiation of any proceedings for that
purpose or the threat thereof, (4) of the happening of any event during
the period mentioned in the second sentence of Section 4( c) that in the
judgment of the Company makes any statement made in the Registration
Statement or the Prospectus untrue or that requires the making of any
changes in the Registration Statement or the Prospectus in order to make
the statements therein, in light of the circumstances in which they are
made, not misleading and (5) of receipt by the Company or any
representative or attorney of the Company of any other communication from
the securities or other governmental authority (including, without limi-
tation, the Commission) of any jurisdiction relating to any of the
Registration Statement, any Preliminary Prospectus or the Prospectus. If
at any time any securities or other governmental authority (including,
without limitation, the Commission) of any jurisdiction shall issue any
order suspending the effectiveness of the Registration Statement, the
Company will make every reasonable effort to obtain the withdrawal of
such order at the earliest possible moment. If the Company has omitted
any information from the Registration Statement, pursuant to Rule 430A,
it will use its best efforts to comply with the provisions of and make all
requisite filings with the Commission pursuant to said Rule 430A and to
notify the Placement Agent promptly of all such filings.
(c) If, at any time when a Prospectus relating to the Shares is required
to be delivered under the Act, any event occurs as a result of which the
Prospectus, as then amended or supplemented, would, in the judgment of
counsel to the Company or counsel to the Placement Agent, include any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or the
Registration Statement, as then amended or supplemented, would, in the
judgment of counsel to the Company or counsel to the Placement Agent,
include any untrue statement of a material fact or omit to state a mate-
rial fact necessary to make the statements therein not misleading, or if
for any other reason it is necessary, in the judgment of counsel to the
Company or counsel to the Placement Agent, at any time to amend or
supplement the Prospectus or the Registration Statement to comply with the
Act or the Rules and Regulations, the Company will promptly notify the
Placement Agent and, subject to Section 4(a) hereof, will promptly
prepare and file with the Commission, at the Company's expense, an
amendment to the Registration Statement or an amendment or supplement to
the Prospectus that corrects such statement or omission or effects such
compliance and will deliver to the Placement Agent, without charge,
such number of copies thereof as the Placement Agent may reasonably
request. The Company consents to the use of the Prospectus or any
amendment or supplement thereto by the Placement Agent.
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(d) The Company will furnish to the Placement Agent and its counsel,
without charge, (i) two signed copies of the registration statement
described in Section 3(a) hereof and each pre-effective amendment thereto,
including financial statements and schedules, and all exhibits thereto and
(ii) so long as a prospectus relating to the Shares is required to be
delivered under the Act, as many copies of each Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto as the Placement
Agent may reasonably request.
(e) The Company will comply with all the undertakings contained in the
Registration Statement.
(f) Prior to the sale of the Shares to the Investors, the Company will
cooperate with the Placement Agent and its counsel in connection with the
registration or qualification of the Shares for offer and sale under the
state securities or Blue Sky laws of such jurisdictions as the Placement
Agent may request; provided, that in no event shall the Company be
obligated to qualify to do business in any jurisdiction where it is not
now so qualified or to take any action which would subject it to general
service of process in any jurisdiction where it is not now so subject.
(g) During the period of five years commencing on the Effective Date, the
Company will furnish to the Placement Agent copies of such financial
statements and other periodic and special reports as the Company may from
time to time distribute generally to the holders of any class of its
capital stock and will furnish to the Placement Agent a copy of each
annual or other report it shall be required to file with the Commission.
(h) The Company will make generally available to holders of its
securities, as soon as may be practicable, but in no event later than the
last day of the fifteenth full calendar month following the calendar
quarter in which the Effective Date falls, a consolidated earnings
statement (which need not be audited but shall be in reasonable detail)
for a period of 12 months ended commencing after the Effective Date,
and satisfying the provisions of Section 11(a) of the Act (including Rule
158 of the Rules and Regulations).
(i) The Company will not at any time, directly or indirectly, take any
action intended, or which might reasonably be expected, to cause or result
in, or which will constitute, stabilization of the price of the Shares to
facilitate the sale or resale of any of the Shares.
(j) The Company will apply the net proceeds from the offering and sale
of the Shares in the manner set forth in the Prospectus under the caption
"Use of Proceeds".
5. Expenses. Whether or not the transactions contemplated by this
Agreement are consummated or this Agreement is terminated, the Company will
pay all costs and expenses incident to the performance of the obligations
of the Company under this Agreement, including but not limited to costs and
expenses of or relating to (1) the preparation, printing and filing of the
Registration Statement (including each pre- and post-effective amendment
thereto) and exhibits thereto, each Preliminary Prospectus, the Prospectus
and any amendment or supplement to the Prospectus, including all fees,
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disbursements and other charges of counsel to the Company, (2) the
preparation and delivery of certificates representing the Shares, (3)
furnishing (including costs of shipping and mailing) such copies of the
Registration Statement (including all pre- and post-effective amendments
thereto), the Prospectus and any Preliminary Prospectus, and all amendments
and supplements to the Prospectus, as may be requested for use in connection
with the direct placement of the Shares, (4) the listing of the Common Stock
on the NASDAQ SmallCap Market, (5) any filings required to be made by the
Placement Agent with the NASD, and the fees, disbursements and other charges
of counsel for the Placement Agent in connection therewith, (6) the
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions designated pursuant to
Section 4(f), including the reasonable fees, disbursements and other charges
of counsel to the Placement Agent in connection therewith and the
preparation and printing of preliminary, supplemental and final Blue Sky
memoranda and (7) the fees of the Escrow Agent. The Company shall reimburse
the Placement Agent, on a fully accountable basis, for all travel, legal and
other out-of-pocket expenses incurred in connection with the engagement
hereunder.
6. Conditions of the Obligations of the Placement Agent. The
obligations of the Placement Agent hereunder are subject to the following
conditions:
(a) Notification that the Registration Statement has become effective
shall be received by the Placement Agent not later than 5:00 p.m.,
_____________________ time, on the date of this Agreement or at such later
date and time as shall be consented to in writing by the Placement Agent
and all filings required by Rule 424 of the Rules and Regulations and
Rule 430A shall have been made.
(b) (i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued, and no proceedings for that purpose
shall be pending or threatened by any securities or other governmental
authority (including, without limitation, the Commission), (ii) no
order suspending the effectiveness of the Registration Statement or the
qualification or registration of the Shares under the securities or Blue
Sky laws of any jurisdiction shall be in effect and no proceeding for
such purpose shall be pending before or threatened or contemplated by any
securities or other governmental authority (including, without
limitation, the Commission), (iii) any request for additional
information on the part of the staff of any securities or other
governmental authority (including, without limitation, the Commission)
shall have been complied with to the satisfaction of the staff of the
Commission or such authorities, and (iv) after the date hereof no
amendment or supplement to the Registration Statement or the Prospectus
shall have been filed unless a copy thereof was first submitted to the
Placement Agent and the Placement Agent did not object thereto in good
faith, and the Placement Agent shall have received certificates, dated the
Closing Date and signed by the President and Chief Executive Officer or
the Chairman of the Board of Directors of the Company and the Chief
Financial Officer of the Company (who may, as to proceedings threatened,
rely upon the best of their information and belief), to the effect of
clauses (i), (ii) and (iii).
(c) Since the respective dates as of which information is given in the
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Registration Statement and the Prospectus, (i) there shall not have been a
material adverse change in the general affairs, business, business
prospects, properties, management, condition (financial or otherwise) or
results of operations of the Company or its Subsidiaries, whether or not
arising from transactions in the ordinary course of business, in each case
other than as set forth in or contemplated by the Registration
Statement and the Prospectus and (ii) neither the Company nor its
Subsidiaries shall not have sustained any material loss or interference
with its business or properties from fire, explosion, flood or other
casualty, whether or not covered by insurance, or from any labor
dispute or any court or legislative or other governmental action, order or
decree, which is not set forth in the Registration Statement and the
Prospectus, if in the judgment of the Placement Agent any such
development makes it impracticable or inadvisable to consummate the
sale and delivery of the Shares to Investors at the public offering price.
(d) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there shall have been no
litigation or other proceeding instituted against the Company, its
Subsidiaries, or any of their respective officers or directors in their
capacities as such, before or by any Federal, state or local court,
commission, regulatory body, administrative agency or other
governmental body, domestic or foreign, in which litigation or proceeding
an unfavorable ruling, decision or finding would materially and adversely
affect the business, properties, business prospects, condition (financial
or otherwise) or results of operations of the Company or its Subsidiaries.
(e) The representations and warranties of each of the Company and its
Subsidiaries contained herein shall be true and correct in all material
respects at the Closing Date, as if made on such date, and all covenants
and agreements herein contained to be performed on the part of the Company
or its Subsidiaries and all conditions herein contained to be fulfilled or
complied with by the Company or its Subsidiaries at or prior to the
Closing Date shall have been duly performed, fulfilled or complied with.
(f) The Placement Agent shall have received an opinion, dated the Closing
Date, of Davis Wright Tremaine, counsel for the Company, to the effect
that:
(i) each of the Company and its Subsidiaries has been duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has full power and authority to
conduct all the activities conducted by it, to own or lease all the
assets owned or leased by it and to conduct its business as described
in the Registration Statement and the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), are duly
licensed or qualified to do business and in good standing as a foreign
organization under the laws of all other jurisdictions in which the
nature of the activities conducted by it or the character of the assets
owned or leased by it makes such licensing or qualification necessary,
except where the failure to be so qualified does not amount to a material
liability or disability to the Company or its Subsidiaries;
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(ii) the Company has the requisite power to conduct its business as
described in the Registration Statement and the Prospectus, and the
Company has the corporate power to enter into this Agreement and to carry
out all the terms and provisions hereof to be carried out by it;
(iii) the Company has an authorized capitalization as set forth
in the Prospectus; all of the issued and outstanding shares of capital
stock of the Company have been duly authorized, validly issued, are fully
paid and nonassessable and are not subject to any preemptive or similar
rights; the Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus (or, if the Prospectus is
not in existence, in the most recent Preliminary Prospectus); the issued
shares of capital stock of each of the Subsidiaries have been duly
authorized and validly issued, are fully paid and nonassessable and are
owned by the Company free and clear of any security interests, liens,
encumbrances, equities or claims; except as set forth in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, in the most recent Preliminary Prospectus), neither the
Company nor its Subsidiaries have outstanding any options to purchase, or
any rights or warrants to subscribe for, or any securities or obligations
convertible into, or exchangeable for, or any contracts or commitments
to issue or sell, any shares of capital stock or other securities; the
Shares have been duly authorized for listing, subject to official notice
of issuance, on the NASDAQ SmallCap Market; except as disclosed in the
Registration Statement, no holders of outstanding shares of capital
stock of the Company are entitled as such to any preemptive or other
rights to subscribe for any of the Shares; and no holders of
securities of the Company are entitled to have such securities registered
under the Registration Statement;
(iv) the statements set forth under the heading "Description of
Capital Stock" in the Prospectus, insofar as such statements purport to
summarize certain provisions of the securities of the Company, provide a
fair summary of such provisions;
(v) the execution and delivery of this Agreement and the Escrow
Agreement have been duly authorized and validly executed by all
necessary action of the Company and each has been duly executed and
delivered by the Company, and is a legal, valid and binding agreement
of the Company enforceable against the Company in accordance with its
terms, subject, as to enforcement, to bankruptcy, insolvency, reorganiza-
tion and other laws of general applicability relating to or affecting
creditors' rights and to general principles of equity and in the case of
this Agreement, except as rights to indemnity and contribution may be
limited by Federal or state securities laws or the public policy
underlying such laws; the Escrow Agreement conforms to the
descriptions thereof set forth in the Prospectus;
(vi) except as set forth in the Registration Statement and
the Prospectus (or, if the Prospectus is not in existence, in the
most recent Preliminary Prospectus), there are no actions, suits
or proceedings pending or to the Company's best knowledge,
threatened against or affecting the Company or any of its
officers in their capacity as such, before or by any Federal or
state court, commission, regulatory body, administrative agency or
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other governmental body, domestic or foreign, wherein an unfavorable
ruling, decision or finding might materially adversely affect the
business, properties, prospects, condition (financial or otherwise) or
results of operations of the Company and its Subsidiaries, taken as a
whole; and no contract or other document is required to be described in
the Registration Statement or the Prospectus or to be filed as an exhibit
to the Registration Statement that is not described therein or filed as
required;
(vii) the Registration Statement is effective under the Act; any
required filing of the Prospectus pursuant to Rule 424(b) has been made in
the manner and within the time period required by Rule 424(b); and, to
such counsel's knowledge after due inquiry, no stop order suspending the
effectiveness of the Registration Statement or any post-effective
amendment thereto and no order directed at any amendment or supplement
thereto has been issued, and no proceedings for that purpose have been
instituted or threatened or are contemplated by the Commission;
(viii) the Company is not an "investment company" or an "affiliated
person" of, or "promoter" or "principal underwriter" for, an "investment
company", as such terms are defined under the Investment Company Act, and
is not required to be registered under the Investment Company Act;
(ix) the statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as such statements constitute
matters of law or legal conclusions, have been reviewed by such counsel
and are accurate in all material respects;
(x) the Registration Statement originally filed with respect to the
Shares and each amendment thereto and the Prospectus (in each case,
not including the financial statements and other financial and
statistical information contained therein, as to which such counsel need
express no opinion) comply as to form in all material respects with the
applicable requirements of the Act and the respective Rules and
Regulations of the Commission thereunder;
(xi) no default exists, and no event has occurred which, with notice
or lapse of time or both, would constitute a default in the due
performance and observance of any term, covenant or condition of any
indenture, mortgage, deed of trust, voting trust agreement, loan
agreement, bond, debenture, note agreement, lease, contract or other
agreement or instrument (collectively, a "contract or other agreement") to
which the Company is a party or by which the Company or its Subsidiaries
is bound or may be affected, except where such default would not have a
material adverse effect on the business, properties, prospects, condition
(financial or otherwise) of results of operations of the Company and its
Subsidiaries, taken as a whole, and, to the Company's best knowledge,
no other party under any contract or other agreement to which it is a
party is in default in any respect thereunder; and none of the Company or
its Subsidiaries is in violation of any provision of its organizational or
governing documents; and
(xii) neither the execution of this Agreement or the Escrow Agreement
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nor the issuance, offering or sale of the Shares, nor the consummation of
any of the transactions contemplated in the Agreement or in the Escrow
Agreement, nor the compliance by the Company with the other terms and
provisions of the Agreement or the Escrow Agreement do not (A) require the
consent, approval, authorization, registration or qualification of or with
any governmental authority, except such as have been obtained or such as
may be required under state securities or Blue Sky laws, or (B) conflict
with, or will result in a breach of, any of the terms and provisions of,
or has constituted or will constitute a default under, or has resulted in
or will result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or of its
Subsidiaries pursuant to the terms of any contract or other agreement to
which the Company or its Subsidiaries may be bound or to which any of the
property or assets of the Company or of its Subsidiaries is subject;
nor will such action result in any violation of the provisions of the
Company's or of its Subsidiaries' organizational or governing documents,
or any statute or any order, rule or regulation applicable to the
Company or its Subsidiaries or of any court or of any Federal, state or
other regulatory authority or other government body having jurisdiction
over the Company or its Subsidiaries.
Such counsel shall also state that in the course of the preparation of
the Registration Statement and the Prospectus, such counsel has
participated in conferences with officers and representatives of the
Company and with the Accountants, at which conferences the contents of the
Registration Statement and the Prospectus were discussed and, on the
basis of the foregoing, that they have no reason to believe that the
Registration Statement, as of its effective date and as of the date of
such opinion, contained or contains any untrue statement of a material
fact or omitted or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading or that
the Prospectus, as of its date or the date of such opinion, included or
includes any untrue statement of a material fact or omitted or omits to
state a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not
misleading.
In rendering any such opinion, such counsel may rely, as to matters
of fact, to the extent such counsel deems proper, on certificates of
responsible officers of the Company and public officials and, as to
matters involving the application of laws of any jurisdictions in which
such counsel are not admitted to practice, to the extent satisfactory in
form and scope to counsel for the Placement Agent, upon the opinion of
local counsel. The foregoing opinion shall also state that the
Placement Agent is justified in relying upon such opinions of local
counsel, and copies of such opinions shall be delivered to the Placement
Agent and their counsel.
References to the Registration Statement and the Prospectus in this
paragraph (f) shall include any amendment or supplement thereto at the
date of such opinion.
(g) Concurrently with the execution and delivery of this Agreement,
or, if the Company elects to rely on Rule 430A, on the date of the
Prospectus, the Accountants shall have furnished to the Placement
Agent a letter, dated the date of its delivery (the "Original
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Letter"), addressed to the Placement Agent and in form and substance
satisfactory to the Placement Agent, confirming that (i) they are
independent public accountants with respect to the Company and its
Subsidiaries within the meaning of the Act and the Rules and Regulations;
(ii) in their opinion, the financial statements and any supplementary
financial information and schedules (and pro forma financial information)
included in the Registration Statement and examined by them comply as to
form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations; (iii) on the
basis of procedures. not constituting an examination in accordance with
generally accepted auditing standards, set forth in detail in the
Original Letter, including a reading of the unaudited financial
statements and other information referred to below, a reading of the
latest available interim financial statements of each of the Company and
its Subsidiaries, inspections of the minute books of each of the Company
and its Subsidiaries since the latest audited financial statements
included in the Prospectus, inquiries of officials of each of the
Company and its Subsidiaries responsible for financial and accounting
matters and such other inquiries and procedures as may be specified in
the Original Letter to a date not more than five days prior to the date
of the Original Letter, nothing came to their attention that caused them
to believe that (a) the unaudited financial statements and schedules of
each of the Company and its Subsidiaries included in the Prospectus do
not comply as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and Regulations, or
are not fairly presented in conformity with GAAP applied on a basis
substantially consistent with the basis for the audited financial
statements included in the Prospectus; (b) any other unaudited income
statement data and balance sheet items included in the Prospectus do
not agree with the corresponding items in the unaudited financial
statements from which such data and items were derived, and any such
unaudited data and items were not determined on a basis substantially
consistent with the basis for the corresponding amounts in the audited
financial statements included in the Prospectus; (c) the unaudited
financial statements which were not included in the Prospectus but from
which were derived any unaudited financial statements referred to in
clause (a) and any unaudited income statement data and balance sheet
items included in the Prospectus and referred to in clause (b) were to
be determined on a basis substantially consistent with the basis for
the audited financial statements included in the Prospectus; (c) the
unaudited pro forma financial statements included in the Prospectus do
not comply as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and Regulations or
the pro forma adjustments have not been properly applied to the
historical amounts in the compilation of those statements; (e) as of a
specified date not more than five days prior to the date of the
Original Letter, there have been any changes in the capital stock of
any of the Company or its Subsidiaries or any increase in the
long-term debt of any of the Company or its Subsidiaries or any
decreases in net current assets or net assets or other items specified
by the Placement Agent, or any increases in any items specified by the
Placement Agent, in each case as compared with amounts shown in the latest
balance sheet included in the Prospectus, except in each case for changes,
increases or decreases which the Prospectus discloses have occurred or may
occur or which are described in the Original Letter; and (f) for the
period from the date of the latest financial statements included in the
Prospectus to the specified date referred to in Clause (e), there
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were any decreases in revenues or the total or per share amounts of net
income or other items specified by the Placement Agent, or any increases
in any items specified by the Placement Agent, in each case as compared
with the comparable period of the preceding year and with any other period
of corresponding length specified by the Placement Agent, except in each
case for decreases or increases which the Prospectus discloses have
occurred or may occur or which are described in the Original Letter; and
(iv) in addition to the examination referred to in their reports included
in the Prospectus and the procedures referred to in clause (iii) above,
they have carried out certain specified procedures, not constituting an
examination in accordance with generally accepted auditing standards,
with respect to certain amounts, percentages and financial information
specified by the Placement Agent, which are derived from the general
accounting, financial or other records of the Company and its Subsidiaries
as the case may be, which appear in the Prospectus or in Part II of, or in
exhibits or schedules to, the Registration Statement, and have compared
such amounts, percentages and financial information with such accounting,
financial and other records and have found them to be in agreement. At the
Closing Date, the Accountants shall have furnished to the Placement Agent
a letter, dated the date of its delivery, which shall confirm, on the
basis of a review in accordance with the procedures set forth in the
Original Letter, that nothing has come to their attention during the
period from the date of the Original letter referred to in the prior
sentence to a date (specified in the letter) not more than five days
prior to the Closing Date which would require any change in the Original
Letter if it were required to be dated and delivered at the Closing Date.
(h) At the Closing Date, there shall be furnished to the Placement Agent
a certificate, dated the date of its delivery, signed by each of the Chief
Executive Officer and the Chief Financial Officer of the Company, in form
and substance satisfactory to the Placement Agent to the effect that:
(i) Each signer of such certificate has carefully examined the
Registration Statement and the Prospectus and (a) as of the date of such
certificate, (x) the Registration Statement does not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein not
misleading and (y) the Prospectus does not contain any untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading and (b) since
the Effective Date no event has occurred as a result of which it is
necessary to amend or supplement the Prospectus in order to make the
statements therein not untrue or misleading in any material respect;
(ii) Each of the representations and warranties of the Company
contained in this Agreement were, when originally made, and are, at the
time such certificate is delivered, true and correct in all material
respects;
(iii) Each of the covenants required herein to be performed by the
Company on or prior to the date of such certificate has been duly, timely
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and fully performed and each condition herein required to be complied with
by the Company on or prior to the delivery of such certificate has been
duly, timely and fully complied with;
(iv) No stop order suspending the effectiveness of the Registration
Statement or of any part thereof has been issued and no proceedings for
that purpose have been instituted or are contemplated by the Securities
and Exchange Commission; and
(v) Subsequent to the date of the most recent financial statements in
the Prospectus, there has been no material adverse change in the financial
position or results of operations of the Company, except as set forth in
or contemplated by the Prospectus.
(i) The Shares shall be qualified for sale in such states as the
Placement Agent may reasonably request, each such qualification shall be
in effect and not subject to any stop order or other proceeding on the
Closing Date.
(j) The Company shall have furnished to the Placement Agent such
certificates, in addition to those specifically mentioned herein, as the
Placement Agent may have reasonably requested as to the accuracy and
completeness at the Closing Date of any statement in the Registration
Statement or the Prospectus, as to the accuracy at the Closing Date of the
representations and warranties of the Company as to the performance by the
Company of its obligations hereunder, or as to the fulfillment of the
conditions concurrent and precedent to the obligations hereunder of the
Placement Agent.
(k) Each officer, director and security holder of the Company shall have
furnished to the Placement Agent an agreement in the form of Attachment A
hereto.
7. Indemnification.
(a) The Company shall indemnify and hold harmless the Placement Agent, the
directors, officers, employees and agents of the Placement Agent and each
person, if any, who controls the Placement Agent within the meaning of
Section 15 of the Act or Section 20 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), from and against any and all losses,
claims, liabilities, expenses and damages, joint or several (including any
and all investigative, legal and other expenses reasonably incurred in
connection with, and any amount paid in settlement of, any action, suit
or proceeding or any claim asserted), to which it, or any of them, may
become subject under the Act or other Federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims,
liabilities, expenses or damages arise out of or are based on (i) any
untrue statement or alleged untrue statement made by the Company in
Section 3 of this Agreement, (ii) any untrue statement or alleged untrue
statement of any material fact contained in (a) any Preliminary
Prospectus, the Registration Statement or the Prospectus or any
amendment or supplement to the Registration Statement or the
Prospectus and (b) any application or other document, or any amendment
or supplement thereto, executed by the Company based upon written
information furnished by or on behalf of the Company filed in any
jurisdiction in order to qualify the Shares under the securities or
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Blue Sky laws thereof or filed with the Commission or any securities
association or securities exchange (each, an "Application") or (iii) the
omission or alleged omission to state in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any supplement to the
Registration Statement or the Prospectus or any Application a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not
misleading; provided, however, that the Company will not be liable to the
extent that such loss, claim, liability, expense or damage arises from
the sale of the Shares in the public offering to any person and is based
solely on an untrue statement or omission or alleged untrue statement or
omission made in reliance on and in conformity with information relating
to the Placement Agent furnished in writing to the Company by the
Placement Agent expressly for inclusion in the Registration Statement,
any Preliminary Prospectus or the Prospectus; and provided further, that
such indemnity with respect to any Preliminary Prospectus shall not
inure to the benefit of any Placement Agent (or any person controlling
such Placement Agent) from whom the person asserting any such loss,
claim, damage, liability or action purchased Shares which are the
subject thereof to the extent that any such loss, claim, damage or
liability (i) results from the fact that such Placement Agent failed to
send or give a copy of the Prospectus (as amended or supplemented)
to such person at or prior to the confirmation of the sale of such
Shares to such person in any case where such delivery is required by the
Act and (ii) arises out of or is based upon an untrue statement or
omission of a material fact contained in such Preliminary Prospectus that
was corrected in the Prospectus (or any amendment or supplement thereto),
unless such failure to deliver the Prospectus (as amended or supplemented)
was the result of noncompliance by the Company with Section 5(d). This
indemnity agreement will be in addition to any liability which the Company
may otherwise have. The Company will not, without the prior written
consent of the Placement Agent, settle or compromise or consent to the
entry of any judgment in any pending or threatened claim, action, suit
or proceeding in respect of which indemnification may be sought here-
under (whether or not such Placement Agent or any person who controls
such Placement Agent within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act is a party to each claim, action, suit or
proceeding), unless such settlement, compromise or consent includes an
unconditional release of the Placement Agent and each such controlling
person from all liability arising out of such claim, action, suit or
proceeding.
(b) The Placement Agent will indemnify and hold harmless the Company,
each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, each director of
the Company and each officer of the Company who signs the Registration
Statement to the same extent as the foregoing indemnity from the Company
to the Placement Agent, but only insofar as losses, claims, liabilities,
expenses or damages arise out of or are based on any untrue statement or
omission or alleged untrue statement or omission made in reliance on and
in conformity with information relating to the Placement Agent furnished
in writing to the Company by the Placement Agent expressly for use in the
Registration Statement, any Preliminary Prospectus or the Prospectus. This
indemnity agreement will be in addition to any liability that the
Placement Agent might otherwise have. The Company acknowledges that, for
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all purposes under this Agreement, the statements set forth under the
heading "Plan of Distribution" in any Preliminary Prospectus and the
Prospectus constitute the only information relating to the Placement Agent
furnished in writing to the Company by the Placement Agent expressly for
inclusion in the Registration Statement, any Preliminary Prospectus or the
Prospectus.
(c) Any party that proposes to assert the right to be indemnified under
this Section 7 will, promptly after receipt of notice of commencement of
any action against such party in respect of which a claim is to be made
against an indemnifying party or parties under this Section 7, notify each
such indemnifying party of the commencement of such action, enclosing a
copy of all papers served, but the omission so to notify such indemnifying
party will not relieve it from any liability that it may have to any
indemnified party under the foregoing provisions of this Section 7 unless,
and only to the extent that, such omission results in the forfeiture of
substantive rights or defenses by the indemnifying party. If any such
action is brought against any indemnified party and it notifies the
indemnifying party of its commencement, the indemnifying party will be
entitled to participate in and, to the extent that it elects by delivering
written notice to the indemnified party promptly after receiving notice of
the commencement of the action from the indemnified party, jointly with
any other indemnifying party similarly notified, to assume the defense of
the action, with counsel satisfactory to the indemnified party, and after
notice from the indemnifying party to the indemnified party of its
election to assume the defense, the indemnifying party will not be liable
to the indemnified party for any legal or other expenses except as
provided below and except for the reasonable costs of investigation
subsequently incurred by the indemnified party in connection with the
defense. The indemnified party will have the right to employ its own
counsel in any such action, but the fees, expenses and other charges of
such counsel will be at the expense of such indemnified party unless (1)
the employment of counsel by the indemnified party has been authorized in
writing by the indemnifying party, (2) the indemnified party has
reasonably concluded (based on advice of counsel) that there may be legal
defenses available to it or other indemnified parties that are different
from or in addition to those available to the indemnifying party, (3) a
conflict or potential conflict exists (based on advice of counsel to the
indemnified party) between the indemnified party and the indemnifying
party (in which case the indemnifying party will not have the right to
direct the defense of such action on behalf of the indemnified party) or
(4) the indemnifying party has not in fact employed counsel to assume the
defense of such action within a reasonable time after receiving notice of
the commencement of the action, in each of which cases the reasonable
fees, disbursements and other charges of counsel will be at the expense of
the indemnifying party or parties. It is understood that the
indemnifying party or parties shall not, in connection with any proceeding
or related proceedings in the same jurisdiction, be liable for the
reasonable fees, disbursements and other charges of more than one separate
firm admitted to practice in such jurisdiction at any one time for all
such indemnified party or parties. All such fees, disbursements and
other charges will be reimbursed by the indemnifying party promptly as
they are incurred. The Company will not, without the prior written
consent of the Placement Agent, settle or compromise or consent to the
entry of any judgment in any pending or threatened claim, action, suit or
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proceeding in respect of which indemnification may be sought hereunder
(whether or not the Placement Agent or any person who controls the
Placement Agent within the meaning of Section 15 of the Act or Section
20 of the Exchange Act is a party to such claim, action, suit or
proceeding), unless such settlement, compromise or consent includes an
unconditional release of the Placement Agent and each such controlling
person from all liability arising out of such claim, action, suit or
proceeding. An indemnifying party will not be liable for any settlement
of any action or claim effected without its written consent (which consent
will not be unreasonably withheld).
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in the foregoing
paragraphs of this Section 7 is applicable in accordance with its terms
but for any reason is held to be unavailable from the Company or the
Placement Agent, the Company and the Placement Agent will contribute to
the total losses, claims, liabilities, expenses and damages (including any
investigative, legal and other expenses reasonably incurred in connection
with, and any amount paid in settlement of, any action, suit or proceeding
or any claim asserted, but after deducting any contribution received by
the Company from persons other than the Placement Agent such as persons
who control the Company within the meaning of the Act or the Exchange Act,
officers of the Company who signed the Registration Statement and direc-
tors of the Company, who also may be liable for contribution) to which the
Company and the Placement Agent may be subject in such proportion as shall
be appropriate to reflect the relative benefits received by the Company on
the one hand and the Placement Agent on the other. The relative benefits
received by the Company on the one hand and the Placement Agent on the
other shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting Company expenses) received by
the Company as set forth in the table on the cover page of the Prospectus
bear to the fee received by the Placement Agent hereunder. If, but only
if, the allocation provided by the foregoing sentence is not permitted by
applicable law, the allocation of contribution shall be made in such
proportion as is appropriate to reflect not only the relative benefits
referred to in the foregoing sentence but also the relative fault of the
Company, on the one hand, and the Placement Agent on the other, with
respect to the statements or omissions which resulted in such loss,
claim, liability, expense or damage, or action in respect thereof, as well
as any other relevant equitable considerations with respect to such offer-
ing. Such relative fault shall be determined by reference to whether the
untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied
by the Company or the Placement Agent, the intent of the parties and their
relative knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and the Placement Agent
agree that it would not be just and equitable if contributions pursuant to
this Section 7(d) were to be determined by pro rata allocation or by any
other method of allocation which does not take into account the
equitable considerations referred to herein. The amount paid or payable
by an indemnified party as a result of the loss, claim, liability,
expense or damage, or action in respect thereof, referred to above in
this Section 7(d) shall be deemed to include, for purpose of this Section
7(d), any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action
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or claim. Notwithstanding the provisions of this Section 7(d), the
Placement Agent shall not be required to contribute any amount in excess of
the fee received by it, and no person found guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) will be
entitled to contribution from any person who was not guilty of such fraudu-
lent misrepresentation. For purposes of this Section 7(d), any person who
controls a party to this Agreement within the meaning of the Act or the
Exchange Act will have the same rights to contribution as that party, and
each officer of the Company who signed the Registration Statement will
have the same rights to contribution as the Company, subject in each case
to the provisions hereof. Any party entitled to contribution, promptly
after receipt of notice of commencement of any action against such party in
respect of which a claim for contribution may be made under this Section
7(d), will notify any such party or parties from whom contribution may be
sought, but the omission so to notify will not relieve the party or parties
from whom contribution may be sought from any other obligation it or they
may have under this Section 7(d). No party will be liable for contribution
with respect to any action or claim settled without its written consent
(which consent will not be unreasonably withheld).
8. Termination.
(a) The obligations of the Placement Agent under this Agreement may be
terminated at any time prior to the Closing Date, by notice to the Company
from the Placement Agent, without liability on the part of the Placement
Agent to the Company if, prior to delivery and payment for the Shares, in
the sole judgment of the Placement Agent (i) trading in the Common Stock
of the Company shall have been suspended by the Commission, (ii) trading
in securities generally on the New York Stock Exchange or the Nasdaq Stock
Market's National Market shall have been suspended or limited or minimum
or maximum prices shall have been generally established on any of such
exchanges, or additional material governmental restrictions, not in force
on the date of this Agreement, shall have been imposed upon trading in
securities generally by any of such exchanges or by order of the
Commission or any court or other governmental authority, (iii) a general
banking moratorium shall have been declared by Federal or South Carolina
authorities, (iv) any material adverse change in the financial or
securities markets in the United States or any outbreak or material
escalation of hostilities or declaration by the United States of a
national emergency or war or other calamity or crisis shall have occurred,
the effect of any of which is such as to make it, in the sole judgment of
the Placement Agent, impracticable or inadvisable to market the Shares on
the terms and in the manner contemplated by the Prospectus.
(b) The obligations of the parties under this Agreement shall be
automatically terminated in the event that the Requisite Funds have not
been deposited by the Investors into the Escrow Account by the close of
business on the Closing Date.
9. Notices. Notice given pursuant to any of the provisions of
this Agreement shall be in writing and, unless otherwise specified,
shall be mailed or delivered (a) if to the Company, at the office
of the Company, 745 Fort Street, Suite 1000, Honolulu, Hawaii
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96813, Attention: Rick Wall, Chairman and Chief Executive Officer, or (b)
if to the Placement Agent, at the office of Fortress Financial Group,
Limited, 1204 Palm Blvd., 2nd Floor, Isle of Palms, South Carolina 29451,
Attention: Gregory D. Walker, President. Any such notice shall be effective
only upon receipt. Any notice under Section 9 may be made by facsimile or
telephone, but if so made shall be subsequently confirmed in writing.
10. Survival. The respective representations, warranties, agreements,
covenants, indemnities and other statements of the Company, its officers and
the Placement Agent set forth in this Agreement or made by or on behalf of
them, respectively, pursuant to this Agreement shall remain in full force
and effect, regardless of (i) any investigation made by or on behalf of the
Company, any of its officers or directors, the Placement Agent or any
controlling person referred to in Section 7 hereof and (ii) delivery of and
payment for the Shares. The respective agreements, covenants, indemnities
and other statements set forth in Sections 5 and 7 hereof shall remain in
full force and effect, regardless of any termination or cancellation of this
Agreement.
11. Right of First Refusal. Subject to the sale of the entire 1,600,000,
the Placement Agent shall have the right, but not the obligation, for a
period of three years from the effective date of the Registration Statement
to act as managing underwriter or managing placement agent (including the
right to name co-managers if desirable) for the Company's private or public
offerings of securities.
12. Successors. This Agreement shall inure to the benefit of and
shall be binding upon the Placement Agent, the Company and their respective
successors and legal representatives, and nothing expressed or mentioned in
this Agreement is intended or shall be construed to give any other person
any legal or equitable right, remedy or claim under or in respect of this
Agreement, or any provisions herein contained, this Agreement and all
conditions and provisions hereof being intended to be and being for the sole
and exclusive benefit of such persons and for the benefit of no other person
except that (i) the indemnification and contribution contained in Sections
7(a) and (d) of this Agreement shall also be for the benefit of the
directors, officers, employees and agents of the Placement Agent and any
person or persons who control the Placement Agent within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act and (ii) the
indemnification and contribution contained in Sections 7(b) and (d) of this
Agreement shall also be for the benefit of the directors of the Company, the
officers of the Company who have signed the Registration Statement and any
person or persons who control the Company within the meaning of Section 15
of the Act or Section 20 of the Exchange Act. No Investor shall be deemed a
successor because of such purchase.
13. APPLICABLE LAW. THE VALIDITY AND INTERPRETATION OF THIS AGREEMENT,
AND THE TERMS AND CONDITIONS SET FORTH HEREIN, SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF SOUTH CAROLINA,
WITHOUT GIVING EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAWS.
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14. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the Placement Agent.
Very truly yours,
THE CASTLE GROUP, INC.
By:_____________________________
Rick Wall
Chairman and Chief Executive
Officer
Confirmed as of the date first above mentioned:
FORTRESS FINANCIAL GROUP, LIMITED
By: __________________________________
Gregory D. Walker
President
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<PAGE>
Schedule I
List of Subsidiaries
(1) KRI, Inc. dba Hawaiian Pacific Resorts
(2) Castle Resorts and Hotels, Inc.
(3) HPR Advertising, Inc.
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EXHIBIT A
ESCROW AGREEMENT
ESCROW AGREEMENT dated as of this 12th day of February, 1998 by and
among THE CASTLE GROUP, INC., a Utah Corporation (the "Corporation"),
FORTRESS FINANCIAL GROUP, LTD., a Delaware Corporation ("FORTRESS"), and
AMERICAN STOCK TRANSFER & TRUST COMPANY, a New York Corporation (the
"Agent").
W I T N E S S E T H :
WHEREAS, the Corporation is offering a minimum of 800,000 (the
"Minimum Offering") and a maximum of 1,600,000 (the "Maximum Offering")
shares ("Shares")(the "Offering"), pursuant to a Prospectus dated February
19, 1998, as amended or supplemented from time to time.
WHEREAS, the Prospectus provides that:
a. The Offering will commence on March 2, 1998 and will continue
until the earlier to occur of (i) the sale of all the Maximum
Offering or (ii) sixty (60) days unless extended by the
Corporation and Fortress for an additional thirty (30) (with an
additional period of fourteen (14) days to permit the clearance of
funds held in escrow) days (the "Offering Period");
b. Once the Minimum Offering has been sold the Corporation will
conduct a closing (the "Closing") on the sale of such Shares.
Subsequent closings may be held at the discretion of the
Corporation with respect to additional sales of Shares up to the
Maximum Offering during the Offering Period, any of which Closings
may be held up to fourteen (14) days thereafter;
c. Tendered subscriptions for all Shares shall be subject to
acceptance by the Corporation, which subscriptions may be reduced
in the sole discretion of the Corporation and Fortress or rejected
for any reason at the sole discretion of either the Corporation or
Fortress; and
d. Proceeds from the sale of Shares shall be held in escrow by the
Agent pending a Closing on the Shares, and disbursed upon such
closing; and if no such Closing is conducted, then such funds
shall be returned to the subscribers, without interest to the
extent obtained by the Corporation, after the termination of the
Offering Period (the "Termination Date").
NOW, THEREFORE, in consideration of the mutual promises herein
contained and intending to be legally bound, the parties hereby agree as
follows:
1. Appointment of Agent. The Corporation hereby appoints American Stock
Transfer & Trust Company of New York as escrow agent in accordance
with the terms and conditions set forth herein, and the Agent hereby
accepts such appointment.
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2. Delivery of Subscription Proceeds. All checks, drafts or other
instruments received from subscribers for the Shares will be delivered
by the Corporation to the Agent, made payable to "American Stock
Transfer & Company", Special Account Re: The Castle Group, Inc. with,
as to each subscriber, his name, address, social security number or
employer identification number, number of Shares subscribed for, and
the amount paid in connection with such subscription. The Agent is
hereby empowered on behalf of the Corporation to endorse and collect
all check, drafts, or other instruments received on account of
subscriptions for Shares.
3. Agent to Hold and Disburse Funds. The Agent will hold and disburse
all funds received by it pursuant to the terms of this Escrow
Agreement, as follows;
3.1 In the event that prior to the Termination Date the Agent has received
funds (and such funds are cleared within fourteen (14) days of the
Termination Date) aggregating the proceeds from at least 800,000
shares from the sale of the Minimum Offering, the Agent will, on the
date of such Closing (the "Closing Date"), pursuant to written
instructions signed by the Corporation and Fortress; pay to the
Corporation, and/or to any other person designated in such
instruction, the proceeds received by the Agent from the sale of such
Shares provided that the Corporation's counsel as confirmed in writing
that a closing has taken place and that all conditions relating to the
release of the funds have been met. After the Minimum Closing and
prior to the Termination Date, if the Agent receives any funds from
the sale of Shares, it will promptly, upon written instructions signed
by the Corporation and Fortress, pay to the Corporation, and/or to any
other person designated in such instruction, the proceeds received by
the Agent from the sale of such Shares.
3.2 All funds received by the Agent pursuant to the terms of this Escrow
Agreement may be held in a bank money market account insured by the
Federal Deposit Insurance Company.
3.3 In the event that by the Termination Date the Agent has not received
funds (and such funds are cleared within fourteen (14) days of the
Termination Date) in the aggregate amount of the proceeds from the sale
of the Minimum Offering, then the Agent shall, within 15 business days
of the Termination date, return to the subscribers for the Shares the
respective amounts which such subscribers have paid, without interest.
3.4 If no written instructions are received by the Agent from the
corporation and fortress relative to the admission of one or more
subscribers to the Corporation within 14 days of the Termination Date,
the Agent will return all subscriber funds to the subscribers, for
which no written instructions were received, without interest.
3.5 If the Corporation or Fortress reject any subscription for which the
Agent has already collected funds, the Agent shall, within two (2)
business days, issue a refund check to the rejected subscriber pursuant
to written instructions signed by the Corporation and Fortress. If the
Corporation or Fortress rejects any subscription for which the Agent
has not yet received collected funds but has submitted the subscriber's
check for collection, the Agent shall within two (2) business days,
issue a check in the amount of the subscriber's check to the rejected
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subscriber after the Agent has cleared such funds. If the Agent has
not yet submitted a rejected subscriber's check for collection, the
Agent shall promptly remit the subscriber's check directly to the
subscriber.
4. Exculpation and Indemnification of Agent:
4.1 The Agent shall have no duties or responsibilities other than those
expressly set forth herein. The Agent shall have no duty to enforce
any obligation of any person to make any payment or delivery, or to
direct or cause any payment or delivery to be made, or to enforce any
obligation of any person to perform any other act. The Agent shall be
under no liability to the other parties hereto or to anyone else by
reason of any failure on the part of any party hereto or any maker,
guarantor, endorser or other signatory of any document or any other
person to perform such person's obligations under such document.
Except for amendments to this Agreement referred to below, and except
for instructions given to the Agent by the Corporation relating to the
escrow deposit under this Agreement, the Agent shall not be obligated
to recognize any agreement between any and all of the persons referred
to herein, notwithstanding that references thereto may be made herein
and whether or not it has knowledge thereof.
4.2 The agent shall not be liable to the Corporation or to anyone else for
any action taken or omitted by it, or any action suffered by it to be
taken or omitted, in good faith and in the exercise of its own best
judgement. The Agent may rely conclusively and shall be protected in
acting upon any order, notice, demand, certificate, opinion or advice
of counsel (including counsel chosen by the Agent), statement,
instrument, report or other paper or document (not only as to its due
execution and the validity and effectiveness of its provisions, but
also as to the truth and acceptability of any information therein
contained), which is believed by the Agent to be genuine and to be
signed or presented by the proper person or persons. The Agent shall
not be bound by any notice or demand, or any waiver, modification,
termination or rescission of this Agreement or any of the terms
thereof, unless evidenced by a writing delivered to the Agent signed by
the proper party and, if the duties or rights of the Agent are
affected, unless it shall give its prior written consent thereto.
4.3 The Agent shall not be responsible for the sufficiency or accuracy of
the form of, or the execution, validity, value or genuineness of, any
document or property received, held or delivered by it hereunder, or of
any signature or endorsement thereon, or for any lack of endorsement
thereon, or for any description therein; nor shall the Agent be
responsible or liable to the other parties hereto or to anyone else in
any respect on account of the identity, authority or rights of the
persons executing or delivering or purporting to execute or deliver any
documents or property of this Agreement. The Agent shall have no
responsibility with respect to the use or application of any funds or
other property paid or delivered by the Agent pursuant to the
provisions hereof. The Agent shall not be liable to the Corporation or
to anyone else for any loss which may be incurred by reason of any
investment of any monies which it holds hereunder provided the Agent
has complied with the provisions of Section 3.2 hereunder.
-3-
97
<PAGE>
4.4 The Agent shall have the right to assume in the absence of written
notice to the contrary from the proper person or persons that a fact or
an event by reason of which an action would or might be taken by the
Agent does not exist or has nor occurred, without any action suffered
by it to be taken or omitted, in good faith an din the exercise of its
own best judgement, in reliance upon such assumption.
4.5 The Agent will be indemnified and held harmless by the Corporation from
and against any and all expenses, including reasonable counsel fees and
disbursements, or loss claim, or in connection with any claim or
demand, which in any way, directly or indirectly arises out of or
relates to this Agreement, the services of the Agent hereunder, the
monies or other property held by it hereunder.
4.6 For the purposes hereof, the term "expense or loss" shall include all
amounts paid or payable to satisfy any claim, demand or liability, or
in settlement of any claim, demand, action, suit or proceeding settled
with express written consent of Agent, and all costs and expenses,
including, but not limited to, reasonable counsel fees and
disbursements, paid or incurred in investigating or defending against
any such claim, demand, action, suit or proceeding.
5. Termination of Agreement and Resignation of Agent.
5.1 This Escrow Agreement shall terminate on the final disposition of the
monies and property held in escrow hereunder, provided that the rights
of the Agent and the obligations of the other parties hereto under
Sections 4 and 7 shall survive the termination hereof.
5.2 The Agent may resign at any time and be discharged from its duties as
Agent hereunder by giving the Corporation at least thirty (30) days
written notice thereof. As soon as practicable after its resignation,
the Agent shall turn over to a successor escrow agent appointed by the
Corporation all monies and property held hereunder (less such amount as
the Agent is entitled to retain pursuant to Section 7) upon
presentation of the document appointing the new escrow agent and its
acceptance thereof. If no new Agent is so appointed within the sixty
(60 day period following such notice of resignation, the Agent may
deposit the aforesaid monies and property with any court it deems
appropriate.
6. Form of Payment by Agent.
6.1 Any payments by the Agent to subscribers or to persons other than the
Corporation pursuant to the terms of this Agreement shall be made by
check, payable to the order of each respective subscriber or other
person.
6.2 All amounts referred to herein are expressed in United States Dollars
and all payments by the Agent shall be made in such dollars.
-4-
98
<PAGE>
7. Compensation of Agent. For services rendered, the Agent shall receive
as compensation all interest income earned on the funds received
pursuant to this Agreement. The Agent shall also be entitled to
reimbursement form the Corporation for all expenses paid or incurred by
it in the administration of its duties hereunder, including, but not
limited to, all counsel, advisors and Agents fees and disbursements and
all reasonable taxes or other governmental charges. It is anticipated
that such disbursements shall not exceed $500 barring any unforseen
circumstances.
8. Notices. All notices, requests, demands and other communications
provided for herein shall be in writing, shall be delivered by hand or
by first-class mail, shall be deemed given when received and shall be
addressed tot he parties hereto at their respective addresses listed
below or to such other persons or addresses as the relevant party shall
designate as to itself from time to time in writing delivered in like
manner.
If to the Corporation:
The Castle Group, Inc.
745 Fort Street, 10th Floor
Honolulu, HI 96813
Attention: Rick Wall
Tel #: 808-524-0900
Fax #: 808-521-9994
If to the Agent:
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
Attention: Michael Karfunkle
Tel #: 212-936-5100
Fax #: 718-236-4588
If to Fortress:
Fortress Financial Group, Ltd.
1204 Palm Boulevard, 2nd FL
Isle of Palms, SC 29451
Attention: Gregory D. Walker
Tel #: 800-304-3181
Fax #: 803-886-5799
-5-
99
<PAGE>
9. Further Assurances. From time to time on and after the date hereof,
the Corporation shall deliver or cause to be delivered to the Agent
such further documents and instruments and shall do and cause to be
done such further acts as the Agent shall reasonably request (it being
understood that the Agent shall have no obligation to make any such
requests) to carry out more effectively the provisions and purposes of
this Agreement, to evidence compliance herewith or to assure itself
that it is protected in acting hereunder.
10. Consent to Service of Process. The Corporation hereby irrevocably
consents to the jurisdiction of the courts of the State of New York and
of any federal court located in such State in connection with any
action, suit or other proceeding arising out of or relating to this
Agreement or any action taken or omitted hereunder, and waives personal
service of any summons, complaint or other process and agrees that the
service thereof may be made by certified or registered mail directed to
the Corporation at its address for purposes of notices hereunder.
11. Miscellaneous.
11.1 If for any reason the escrow deposit if not received by the Agent as
contemplated herein, the Corporation shall reimburse the Agent for
all expenses, including reasonable counsel fees and disbursements,
paid or incurred by it in making preparations for providing the
services contemplated hereby in an amount not to exceed $500.
11.2 This Agreement shall be construed without regard to any presumption
or other rule requiring construction against the party causing such
instrument to be drafted. The terms "hereby", "hereto", "hereunder"
and any similar terms as used in this Agreement refer to the
Agreement in its entirety and not only to the particular portion of
this Agreement where term is used. The word "person" shall mean any
natural person, partnership, corporation, government and any other
form of business or legal entity. All words or terms used in this
Agreement, regardless of the number or gender in which they are used,
shall be deemed to include any other number and any other gender as
the context may require. This Agreement shall not be admissible in
evidence to construe the provisions of any prior agreement. The rule
of EJUSDEM GENERIS shall not be applicable herein to limit a general
statement, which is followed by or referable to an enumeration of
specific matters, to matters similar to the matters specifically
mentioned.
11.3 This Agreement and the rights and obligations hereunder of the
Corporation may be assigned by the Corporation only to a successor
to the Corporation's entire business. This Agreement and the
rights and obligations hereunder of the Agent may be assigned by
the Agent only to a successor to its entire business. This Agreement
shall be binding upon and inure to the benefit of each party's
respective successors, heirs and permitted assigns. No other
person shall acquire or have any rights under or by virtue of
this Agreement. This Agreement may not be changed orally or
modified, amended or supplemented without an express written
-6-
100
<PAGE>
agreement executed by the Agent, the Corporation and Fortress. This
Agreement is intended to be for the sole benefit of the parties
hereto, and (subject to the provisions of this Section 11.3) their
respective successors, heirs and assigns, and none of the provisions
of this Agreement are intended to be, nor shall they be construed to
be, for the benefit of any third person.
11.4 This Agreement shall be governed by and construed in accordance with
the internal laws of the State of New York. The representations and
warranties contained in this Agreement shall survive the executive
and delivery hereof and any investigations made by any party. The
headings in this Agreement are for purposes of reference only and
shall not limit or otherwise affect any of the terms hereof.
12. Executions in Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an
original as against any party whose signature appears thereon, and
all of which shall together constitute one of the same instrument.
This Agreement shall become binding when one or more counterparts
hereof, individually or taken together, shall bear the signature of
all the parties reflected hereon as the signatures.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
on the day and year first above written.
AMERICAN STOCK TRANSFER & TRUST COMPANY
By: _______________________________________
Name: Herbert J. Lemmer
Title: Vice President
THE CASTLE GROUP, INC.
By: _______________________________________
Name: Rick Wall
Title: Chief Executive Officer
FORTRESS FINANCIAL GROUP, LTD.
By: _______________________________________
Name: Gregory D. Walker
Title: President
-7-
101
<PAGE>
ATTACHMENT A
Fortress Financial Group, Limited
As Placement Agent
1204 Palm Blvd. - 2nd Floor
Isle of Palms, South Carolina 29451
Gentlemen:
Reference is made to a Placement Agency Agreement (the "Placement Agency
Agreement"), which will be executed between The Castle Group, Inc., a Utah
corporation, and its subsidiaries listed on Schedule I hereto (collectively,
the "Company"), and Fortress Financial Group, Limited (the "Placement
Agent").
In consideration of the Placement Agency Agreement, the undersigned
hereby agrees not to, without the prior written consent of the Placement
Agent, offer, sell or otherwise dispose of any shares of the Company's
Common Stock, $.02 par value per share (the "Common Stock"), or any
securities convertible into or exercisable or exchangeable for, or any
rights to purchase or acquire, Common Stock owned by the undersigned for a
period of 180 days after the date of the Placement Agency Agreement.
Dated: _________________, 1998
Very truly yours,
102
<PAGE>
COOPERS Coopers & Lybrand L.L.P. First Hawaiian Center
telephone (808) 531-3400 999 Bishop Street
facsimile (808) 531-3433 Suite 1900
& LYBRAND a professional services firm Honolulu, Hawaii 96813
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement of The Castle
Group, Inc. on Form SB-2/A-1 to be filed on or about March 10, 1998, of
our report dated September 19, 1997, on our audits of the financial
statements of The Castle Group, inc. and Subsidiary as of July 31, 1997 and
1996, and for the years then ended, which report is included in the 1997
Annual Report on Form 10-KSB and in this registration statement. We also
consent to the reference to our firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Honolulu, Hawaii
March 10, 1998
103
<PAGE>
104
<PAGE>
DAVIS WRIGHT TREMAINE
Anchorage Bellevue Boise Charlotte Honolulu Los Angeles Portland
San Francisco Seattle Washington, D.C. Shanghai
1360 Pauahi Tower Tel (808) 538-3360
1001 Bishop Street Fax (808) 526-0101
Honolulu, Hawaii 96813 www.dwt.com
EXHIBIT 5.1
March 10, 1998
The Castle Group, Inc.
745 Fort Street
10th Floor
Honolulu, Hawaii 96813
Ladies and Gentlemen:
We have acted as counsel to The Castle Group, Inc. (the "Company"), a
corporation organized under the laws of the State of Utah, in connection with
the preparation of a registration statement on Form SB-2 (as amended, the
"Registration Statement") relating to the offer and sale of up to 1,600,000
shares of the common stock of the Company, par value $.02 per share (the
"Common Stock"), to be sold by the Company.
We have examined copies of the certificate of incorporation and by-laws of the
Company, and the amendments thereto, the Registration Statement, certain
resolutions adopted by the Company's Board of Directors and other records and
documents that we have deemed necessary for the purpose of this opinion. We
have also examined such other documents, papers, statutes and authorities as
we have deemed necessary to form a basis for the opinion hereinafter expressed.
In our examination, we have assumed the genuineness of all signatures and the
conformity to original documents of all copies submitted to us. As to various
questions of fact material to our opinion, we have relied on statements and
certificates of officers and representatives of the Company and public
officials.
Based on the foregoing, we are of the opinion that (i) the Common Stock to
be sold by the Company, when duly sold, issued and paid for in accordance
with the terms of the Prospectus included as part of the Registration
Statement, will be validly issued, fully paid and nonassessable, and (ii)
the Common Stock to be sold by the selling shareholders in accordance
105
<PAGE>
March 10, 1998
Page 2
with the terms of the Prospectus included as part of the Registration Statement
has been validly issued and is fully paid and nonassessable.
We are not admitted to practice in the State of Utah and, to the extent that
our opinions expressed herein contain conclusions as to matters of Utah law,
we have relied upon the opinion of even date herewith delivered to you by
Leonard W. Burningham, counsel to the Company, a copy of which opinion is
attached hereto. Our opinion is limited to the laws of the State of Hawaii and
the federal laws of the United States of the typically applicable transactions
contemplated by the proposed offering, and we do not express any opinion with
respect to the laws of any other country, state or jurisdiction.
This opinion letter is limited to the matters stated herein and no opinion is
implied or may be inferred beyond the matters expressly stated.
This letter speaks only as of the date hereof and is limited to present
statutes, regulations and administrative and judicial interpretations. We
undertake no responsibility to update or supplement this letter after the
date hereof.
We consent to being named in the Registration Statement and related Prospectus
as counsel who are passing upon the legality of the Common Stock for the
company and to the reference to our name under the caption "Validity of Shares"
in such Registration Statement or any amendment thereto. In giving such
consents, we do not hereby admit that we are in the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended.
Very Truly Yours,
/s/ Davis Wright Tremaine
106
<PAGE>
LEONARD W. BURNINGHAM
LAWYER
HERMES BUIILDING - SUITE 200
455 EAST FIFTH SOUTH
SALT LAKE CITY, UTAH 84111-3323
TELEPHONE (801) 363-7411
FAX (801) 359-1242
March 10, 1998
The Castle Group, Inc.
745 Fort Street
10th Floor
Honolulu, Hawaii 96813
Re: Opinion respecting certain common stock (the "Common Stock") of The
Castle Group, Inc., a Utah corporation (the "Company") to be included
in a Form SB-2 Registration Statement filed with the Securities and
Exchange Commission, with an expected "effective date" of March 10, 1998.
Ladies and Gentlemen:
I represent The Castle Group, Inc. (the "Company"), a corporation organized
under the laws of the State of Utah. I am providing this opinion letter at
the request of the Company in connection with the preparation of a registration
statement on Form SB-2 (as amended, the "Registration Statement") by other
counsel relating to the offer and sale of up to 1,600,000 shares of the common
stock of the Company, par value $.02 per share (the "Common Stock") to be sold
by the Company.
I have examined copies of the Certificate of Incorporation and Bylaws of the
Company, and the amendments thereto; certain resolutions adopted by the
Company's Board of Directors and other records and documents as I have
deemed necessary or appropriate to form a basis for the opinion. I have also
examined such other documents, papers, statutes and authorities as I have
deemed necessary to or appropriate to form a basis for the opinion expressed
herein. In my examination, I have assumed the geniuneness of all signatures
and the conformity to original documents of all copies submitted to me.
As to various questions of fact material to my opinion, I have relied on
statements and certificates of officers and representatives of the Company and
public officials.
Based on the foregoing, I am of the opinion that (i) the Common Stock to be
sold by the Company, when duly sold, issued and paid for in accordance with
the terms of the Prospectus included as part of the Registration Statement,
will be validly issued, fully paid and nonassessable, and (ii) the Common
Stock to be sold by the selling shareholder in accordance with the terms of
106
<PAGE>
The Castle Group, Inc.
Page 2
March 10, 1998
the Prospectus included as part of the Registration Statement has been validly
issued and is fully paid and non assessable.
My opinion is limited to the laws of the State of Utah of the type typically
applicable to transactions contemplated by the proposed offering, and I do
not express any opinion with respect to the laws of any other state or
jurisdiction.
This opinion letter is limited to the matters stated herein and no opinion is
implied or may be inferred beyond the matters expressly stated.
This letter speaks only as of the date hereof and is limited to present
statutes, regulations and administrative and judicial interpretations. I
undertake no responsibility to update or supplement this letter after the
date hereof.
I consent to being named in the Registration Statement and related Prospectus
as counsel who is passing upon the legality of the Common Stock for the
Company and to the reference to my name under the caption "Validity of Shares"
in such Registration Statement and Prospectus. I further consent to your
filing copies of this opinion as an exhibit to the Registration Statement or
any amendment thereto. In giving such consents, I do not hereby admit that
I are in the category of persons whose consent is required under Section 7 of
the Securities Act of 1933, as amended.
Very Truly Yours,
/s/ Leonard W. Burningham
LWB
107
<PAGE>
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