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U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 0-23338
THE CASTLE GROUP, INC.
(Exact name of small business issuer as specified in its charter)
UTAH 99-037845
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
745 Fort Street, Tenth Floor
Honolulu, Hawaii 96813
Issuer's telephone number: (808) 524-0900
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [ x ] No [ ]
Number of shares outstanding of each of the Registrant's classes of stock,
as of October 31, 1997:
Common stock, $.02 par value - 5,311,130
Transitional Small Business Disclosure Format (check one):
Yes [ x ] No [ ]
Page 1 of 29 sequentially numbered pages
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THE CASTLE GROUP, INC.
FORM 10-QSB
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of
January 31, 1998 and 1997 (unaudited).............................. 3
Consolidated Statements of Operations for the Quarter
ended January 31, 1998 and 1997 (unaudited)........................ 4
Consolidated Statement of Cash Flows for the Quarter
ended January 31, 1998 and 1997 (unaudited)........................ 5
Notes to the Consolidated Financial Statements (unaudited).......... 6
Item 2. Management's Discussion and Analysis and Plan
of Operation.............................................. 11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 18
Item 5. Other Information......................................... 18
Item 6. Exhibits and Reports on Form 8-K.......................... 19
SIGNATURES.......................................................... 23
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PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated Balance Sheet - January 31, 1998 and 1997(Unaudited)
January 1998 January 1997
ASSETS
Current Assets
Cash $ 98,222 $ 63,210
Accounts Receivable, Net 1,165,555 812,048
Prepaid Expenses 261,609 45,398
Restricted Cash 19,941 26,536
Deferred Cost 0 73,913
Deferred Compensation Expense 0 50,000
Due from Related Party 366,988 280,987
------------ ------------
Total Current Assets 1,912,315 1,352,092
Non Current Assets
Furniture Fixtures & Equipment, Net 77,017 85,931
Investment in HBII Timeshare Program 59,973 100,000
Deposits & Other Assets 143,940 33,021
Intangibles, Net of Amortization 7,757 18,100
Deferred Compensation Expense 0 37,500
------------ ------------
Total Non Current Assets 288,687 274,552
------------ ------------
TOTAL ASSETS $2,201,002 $1,626,644
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 902,943 $ 995,097
Due to Related Parties 294,400 184,400
Vacation Payable 93,677 97,537
Wages Payable 84,797 108,568
Taxes Payable 31,851 16,114
Notes and Contract Payable, Current 550,000 348,914
Deferred Compensation 0 250,000
Deferred Income 25,410 101,640
Other Accrued Liabilities 130,913 68,586
----------- ----------
Total Current Liabilities 2,113,991 2,170,856
Long Term Debt 0 25,410
----------- ----------
Total Liabilities 2,113,991 2,196,266
Stockholders' Equity
Common stock, $.02 par, 20,000,000 shares
authorized, 5,311,130 and 5,089,030
issued and outstanding, respectively 106,223 101,781
Capital in excess of par 2,539,175 2,118,222
Accumulated Deficit (2,558,387) (2,789,625)
----------- -----------
Total Stockholders' Equity 87,011 ( 569,622)
----------- -----------
Total Liabilities and Stockholders' Equity $2,201,002 $1,626,644
=========== ===========
The accompanying notes are an integral part of the financial statements.
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated Statement of Operations
for the quarter and six months ended January 31, 1998 and 1997
(Unaudited)
Three Months Ending Six Months Ending
01/31/98 01/31/97 01/31/98 01/31/97
Revenue
Management Fees $ 892,955 $ 813,061 $1,654,363 $1,596,565
Hotel Operating Revenues 486,853 512,372 910,695 974,056
Other Income 206,400 200,029 369,024 396,404
---------- ---------- ---------- ----------
Total Revenues 1,586,208 1,525,462 2,934,082 2,967,025
---------- ---------- ---------- ----------
Expenses
Payroll and benefits 505,371 475,824 983,757 944,301
Hotel Operating Expenses 484,732 474,116 962,447 955,208
Professional fees ( 12,057) 26,765 45,908 49,584
Reservations 219,596 237,057 426,101 475,330
Depreciation and Amortization 7,605 53,177 15,210 172,099
Rent 107,563 101,247 211,650 203,390
Travel and entertainment 24,340 8,368 74,006 13,875
Office expenses 12,741 14,021 27,950 28,885
Utilities 11,349 9,803 22,720 19,143
Taxes, other than income 44,279 40,668 77,453 80,844
Advertising & marketing 40,795 17,197 65,454 43,653
Insurance 19,736 26,897 37,971 54,845
Other 24,235 15,641 49,111 33,831
---------- ---------- ---------- ----------
Total Expenses 1,490,285 1,500,781 2,999,738 3,074,988
Operating Profit (Loss) 95,923 24,681 ( 65,656) ( 107,563)
Other Expenses
Interest Expense 16,762 15,359 28,663 29,040
---------- ---------- ---------- ----------
Net Profit ( Loss ) 79,161 9,322 ( 94,319) ( 137,003)
========== ========== ========== ==========
Earnings per Share Data
Basic
Net Profit ( Loss ) $ .015 $ .002 ($ .018) ($ .027)
Fully Diluted
Net Profit ( Loss ) $ .015 $ .002 ($ .018) ($ .027)
The accompanying notes are an integral part of the financial statements.
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated statement of cash flows
Six months ended January 31, 1998 and 1997
( Unaudited )
Six Months Ended
January 1998 January 1997
Cash Flows From Operating Activities
Net Loss ($ 94,319) ($ 137,003)
Adjustments to reconcile net loss to
net cash used by operating activities-
Depreciation and amortization 15,210 86,577
Amortization of deferred
compensation expense 0 25,000
Changes in assets and liabilities-
Increase in accounts receivable ( 345,187) ( 74,319)
Decrease (Increase) in due from
related party ( 169,258) 90,730
Decrease (Increase) in prepaid expenses ( 171,831) 11,239
Decrease in deferred income ( 50,820) ( 50,820)
Increase in accounts payable 289,152 ( 67,422)
Increase (Decrease) in taxes payable ( 4,292) ( 17,497)
Increase (Decrease) in accrued liabilities ( 117,799) ( 46,441)
------------- ------------
Net cash flow from operating activities ( 649,144) ( 179,956)
------------- ------------
Cash Flows From Investing Activities
Purchase furniture, fixtures & equipment ( 4,484) ( 7,735)
Stock Subscription 40,645 0
Cash held as collateral for equipment 31,000 29,950
Investment in HBII Timeshare 1,267 0
------------- ------------
Net cash flow from investing activities 68,428 22,215
------------- ------------
Cash Flows from Financing Activities
Loan Proceeds Received 410,000 0
------------- ------------
Net cash flow from financing activities 410,000 0
------------- ------------
Net Increase (Decrease) in Cash ( 170,716) 157,741
Cash at Beginning of Period 268,938 220,951
------------- ------------
Cash at End of Period 98,222 63,210
============= ============
Supplemental disclosures of cash flow
Information
Cash paid during the year for interest 28,663 29,040
The accompanying notes are an integral part of the financial statements.
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statement
The accompanying consolidated financial statements of The Castle Group,
Inc. and subsidiary for the three months and six months ended January 31,
1998 and 1997 have been prepared in accordance with generally accepted
accounting principles. These financial statements have not been audited by
independent public accountants, but include all adjustments (consisting of
only normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial condition, results of
operations and cash flows for such periods. The consolidated financial
statements do not include all disclosures associated with annual financial
statements and accordingly, should be read in conjunction with the annual
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended July 31, 1997,
as filed with the Securities and Exchange Commission. A copy of this report
is available from the Company upon request. The results of operations for
the three and six months ended January 31, 1998 and 1997 are not necessarily
indicative of the operating results for the remainder of the year.
NEW ACCOUNTING PRONOUNCEMENTS-
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" which is effective for periods ending after December 15, 1997. This
statement had no impact on the Company's disclosures since the Company has
no comprehensive income for the six month periods and quarters ended January
31, 1998 and 1997.
In February 1997, the FASB issued SFAS No. 132, "Employers Disclosures
about Pensions and Other Post Retirement Benefits" which is effective for
fiscal years ending after December 15, 1997. This statement will have no
impact on the Company's disclosures since they do not have a pension plan
or other post retirement plan.
The Company implemented statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings Per Share" which specifies the computation,
presentation and disclosure requirements of earnings per share. Prior
period earnings per share data has been expanded to comply with the
provisions of SFAS No 128.
The following is a reconciliation of the numerators and denominators
of the basic and diluted earnings per share:
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INCOME SHARES PER SHARE
NUMERATOR DENOMINATOR AMOUNT
THREE MONTHS ENDED 01/31/98:
BASIC
Net Income $ 79,161 5,311,130 $ .015
Effect of dilutive securities
Stock options and warrants - 24,519 -
FULLY DILUTED
Net income and assumed conversions $ 79,161 5,335,649 $ .015
SIX MONTHS ENDED 01/31/98:
BASIC
Net Income ( 94,319) 5,311,130 $( .018)
Effect of dilutive securities - - -
FULLY DILUTED
Net income and assumed conversions $( 94,319) 5,311,130 $( .018)
THREE MONTHS ENDED 01/31/97:
BASIC
Net Income $ 9,322 5,089,030 $ .002
Effect of dilutive securities - - -
FULLY DILUTED
Net income and assumed conversions $ 9,322 5,089,030 $ .002
SIX MONTHS ENDED 01/31/97:
BASIC
Net Income $(137,003) 5,089,030 $( .027)
Effect of dilutive securities - ( 68,130) -
FULLY DILUTED
Net income and assumed conversions $(137,003) 5,020,900 $( .027)
Note that the warrants and options outstanding for the six month period ended
January 31, 1998 and the three month period ended January 31, 1997 were not
considered common stock equivalents since they were anti-dilutive.
FURNITURE, FIXTURES AND EQUIPMENT-
Furniture, fixtures and equipment are recorded at cost. When assets
are retired, sold or otherwise disposed of, the cost and the related
accumulated depreciation of the asset is removed from the accounts, and any
resulting gain or loss is reflected in the income statement for the period.
The cost of maintenance and repairs are charged to income as the expense
is incurred. Renewals and betterments are capitalized in the accounts and
depreciated over the estimated useful life of the asset acquired.
At January 31, 1998 and 1997, furniture, fixtures and equipment
consisted of the following:
01/31/98 01/31/97
-------- ---------
Office Furniture and Equipment 210,013 209,456
Less Accumulated Depreciation (132,996) (123,525)
--------- ---------
Net Book Value 77,017 85,931
========= =========
Depreciation is computed using the declining balance and straight-line
methods over the estimated useful life of the assets (5 to 7 years).
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INTANGIBLES-
Intangible assets consist of organizational costs which are amortized on a
straight-line basis over 5 years. At January 31, 1998 and 1997, the balances
of this intangible was as follows:
01/31/98 01/31/97
---------- ----------
Noncompetition Agreements 0 800,000
Organizational Costs 51,714 51,714
---------- ----------
Total Cost 51,714 851,714
Less Accumulated Amortization ( 43,957) ( 833,614)
---------- ----------
Net Book Value 7,757 18,100
========== ==========
MANAGEMENT ESTIMATES-
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RELATED PARTY TRANSACTIONS: HANALEI BAY INTERNATIONAL INVESTORS-
The Company has a hotel management agreement with Hanalei Bay
International Investors (HBII) to manage the Hanalei Bay Resort (HBR). The
managing general partner of HBII is also the Chairman and Chief Executive
Officer of the Castle Group, Inc. Under the agreement, the Company is to
receive management and incentive fees based on a percentage of gross total
revenue and net income respectively. The Company also receives reservation
fees based on a percentage of gross room revenues and a marketing fee based
on a percentage of gross revenue. At January 31, 1998 and 1997, The Company
had receivable balances of $366,988 and $280,987 respectively, from HBII.
HAWAII RESERVATIONS CENTER CORP. -
On August 1, 1994, the Company contracted with Hawaii Reservations
Center Corp. (HRCC) to provide the company reservations services for the
hotels and resorts the Company manages. HRCC is owned and operated by a
director of the Company who has a 2% interest in the Company. On May 1,
1997, the Company and HRCC amended the contract for reservation services
and reduced the amount of certain fees paid by the Company to HRCC. It is
managements' belief that the terms and conditions of the agreement are no
more favorable to HRCC or the Company than could have been obtained from
other companies which provide reservation services.
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STOCKHOLDER ADVANCES -
On January 15, 1998, an officer of the Company advanced $50,000 to the
Company. On January 29, 1998, another officer of the Company advanced
$60,000 to the Company. The advances are due on or before April 15, 1998
and bear interest at the rate of 8.5% per annum.
LEASES-
The Company has leases for office space, vehicles and equipment expiring
at various dates through 1999. The office leases are renewable for an
additional five years. In May 1996, the Company leased a hotel under a
non-cancelable agreement expiring in April 1998. The Company has no
intention of renewing the lease, although the lease may be renewed for an
additional four years. All assets and liabilities of the hotel operations
have been included as net assets in the Company's operations.
At January 31, 1998, the future minimum rental commitment under these leases
were as follows:
Schedule of minimum lease payments
1998 623,000
1999 261,000
---------
Total 884,000
=========
COMMON STOCK WARRANTS-
In May 1994, the Company issued warrants to acquire up to 25,000 shares
of common stock for $1.25 per share, exercisable through May 1999 in exchange
for consulting services rendered. No warrants have been exercised as of
January 31, 1998.
COMMON STOCK OPTIONS-
In November 1993, as an inducement to enter into an employment
contract with the Company, the Company issued options to an officer of the
Company to obtain 125,000 shares of common stock for one dollar,
exercisable by December 2, 1998. The transaction was recorded as deferred
compensation expense and deferred compensation payable of $250,000,
representing the fair value of the common stock option at the date of
grant. In 1995, the option period was amended to be only exercisable after
August 1, 1996 but before December 2, 1998. No options have been exercised
and in July 1997, the options were forfeited by the officer. The
historical financial statements presented as of January 1997 includes the
deferred compensation expense and deferred compensation payable as of
January 31, 1997.
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In May 1997, the Company, as part of a renegotiation of its reservation
services agreement, granted an option to purchase 50,000 shares of the
Company's common stock at a price of $2 per share to Hawaii Reservations
Center Corp., which is wholly owned by a director/ stockholder of the
Company. The option may be exercised between May 1997 and 2000 and had not
been exercised as of January 31, 1998.
STOCK SUBSCRIPTIONS-
In July 1997, 222,100 common shares were subscribed at $2 per share.
As of January 31, 1998, the Company received $425,399, net of stock
issuance expenses of $18,806. The shares were issued in November of 1997
to the subscriber.
LITIGATION
There are various claims and lawsuits pending against the Company
involving complaints which are normal and reasonably foreseeable in light of
the nature of the Company's business. In the opinion of management, the
resolution of these claims will not have a material adverse effect on the
Company's financial position. There were no new lawsuits filed during
the quarter ended January 31, 1998.
INCOME TAXES-
For the fiscal year ended July 31, 1994, the Company implemented the
provisions of Statement of Financial Accounting Standards No. 109 (SFAS No.
109), "Accounting for Income Taxes," which changed the criteria for measuring
the provisions for income taxes and recognizing deferred tax assets and
liabilities on the balance sheet. Under the provisions of SFAS No. 109, the
Company elected not to restate prior years and has determined that the
cumulative effect of implementation was immaterial.
No net deferred tax asset was recorded in accordance with SFAS No. 109
because it could not be reasonably determined if the net operating loss
available to carryforward would be used by the Company. Significant
components of the Company's deferred tax assets and liabilities as of January
31, 1998 and 1997 are:
01/31/98 01/31/97
Deferred tax assets-
Vacation Pay 7,000 37,000
Deferred Compensation Expense 0 35,000
Noncompetition agreement 240,000 240,000
Deferred Income 31,000 120,000
Net Operating Loss 766,000 1,115,000
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Deferred tax asset 1,044,000 1,547,000
Deferred tax liability-
Furniture, fixtures and equipment ( 8,000) ( 34,000)
----------- -----------
Net Deferred Tax Asset 1,036,000 1,513,000
Valuation Allowance (1,036,000) (1,513,000)
----------- -----------
-0- -0-
=========== ===========
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The Company has a net operating loss carryforward for income tax
purposes of $1,915,000 at January 31, 1998 which expires at various dates
through fiscal year 2012. Net operating losses were utilized to offset
year to date taxable income.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FORWARD LOOKING STATEMENTS - "RISK FACTORS"
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains forward-looking statements that are subject
to a number of risks and uncertainties. These risks and uncertainties
could cause actual results to differ materially from the results
anticipated in such forward-looking statements.
GENERAL-
The Company is a Utah corporation which earns its revenues primarily
by providing management, reservations, and sales and marketing services to
hotels and resorts. The Company currently operates within the State of
Hawaii and the Commonwealth of Saipan under the trade names "Hawaiian
Pacific Resorts," and Castle Resorts and Hotels."
The Company's revenues are derived from management fees, sales and
marketing fees, reservation fees, accounting fees, commissions, incentive
fees and other fees from the properties it represents pursuant to the terms
and conditions of its management contracts. In addition to the fees
described, the Company also earns revenues from transient and long term
rentals and other hotel related income from its leased hotel. The revenues
of the properties which are managed by the Company, except as mentioned
herein, are not recorded as revenues of the Company.
The Company's operating expenses are comprised of labor, reservation
fees and other costs associated with operating as a management company.
The expenses of the properties which are managed by the Company, except as
mentioned herein, are not recorded as expenses of the Company.
As of January 31, 1998, the Company had 30 contracts covering 3,141
rooms, all except 68 rooms located in Saipan being situated within the
State of Hawaii. Under the management contracts, the Company is typically
responsible for the supervision and day to day operations of the property
in exchange for a base management fee which is based on gross revenues. In
some cases, the Company also participates in the profitability of the
properties it manages and may earn an incentive fee which is based on the
net operating profits of the managed property. Sales and marketing and
reservation fees earned from the properties are based on the gross
revenues of the property. The Company is also reimbursed for direct
advertising and marketing expenditures it makes on behalf of the property,
all in accordance with the terms and conditions of the management
contracts. The Company also earns commissions and other fees from the
properties managed by providing centralized purchasing services to the
hotel owners. Under these arrangements, the net savings to the property
owner from centralized purchasing are shared between the Company, in the
form of commissions, and to the property owner in the form of cost savings.
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Hotel revenues consist of revenues from 167 rooms leased by the
Company. Under this arrangement, the Company includes as its own revenues
the entire property revenues which includes hotel transient rental income
as well as the total expenses incurred to operate the property. The
property is situated in Waikiki, Hawaii. The Company does not currently
own any other real property interests in fee or leasehold.
With virtually all of the key personnel and corporate infrastructure
in place, the focus for the Company shall be to continue its success in
increasing revenues through the expansion of its client base; and to
accomplish this at a minimal incremental cost. Although no assurances can
be given, based on the success experienced to date, management believes
that it will be able to further add to its portfolio of management
contracts. Management also believes, although no assurances can be given,
that the Company will be able to handle a much larger customer base without
expending significant amounts of additional resources due to the solid
foundation and management team which the Company currently has.
The Company is presently in the negotiating stages with various other
properties located throughout the State of Hawaii and in other Pacific Rim
regions.
RESULTS OF OPERATIONS-
FOR THE QUARTERS ENDED JANUARY 31, 1998 AND 1997
SALES
For the quarters ended January 31, 1998 and 1997, the Company had
total revenues of $1,586,208 and $1,525,462 respectively, an increase of
$60,746 or 4%.
The increase in revenues for the quarter ended January 31, 1998 as
opposed to the prior year is attributed to the addition of properties to
the Company's portfolio of hotels. In October of 1997, the Company
acquired the contract for a 68 unit condominium resort located in Saipan.
In January of 1997, the Company acquired the management contract for two
condominium associations located in Waikiki. The Company also received an
advertising credit of $68,000 for its leased property located in Waikiki,
in settlement of a dispute regarding circulation representations made by a
company which published various travel trade indices and magazines.
COSTS AND EXPENSES
With the 4% increase in revenues, operating expenses decreased by 1%
for the quarter ended January 31, 1998 as opposed to the prior year.
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Payroll and related costs increased by $29,547, or 6%, as a result of
increases in sales, accounting and operations personnel hired to service the
additional properties managed by the Company.
Professional fees decreased by $38,822, or 145%, as a result of a
renegotiation of an agreement the Company entered into with GC Corporation
to assist the Company in attaining additional management contracts. The
Company also negotiated previous billings for consulting fees rendered in
prior months. These negotiations resulted in the Company recording a
credit to the expense for the quarter ended January 31, 1998.
Reservations expenses decreased by $17,461, or 7%, as a result of the
renegotiated agreement with Hawaii Reservations Center Corp. ("HRCC").
Through April of 1997, reservation fees paid to HRCC were based upon a
fixed monthly amount plus a percentage of certain revenues. The new
agreement is based on a percentage of revenues, subject to a minimum
monthly fee which is lower than the fixed fees incurred during the quarter
ending January 31, 1997.
Travel and entertainment costs increased by $15,972, or 191%, due to
airfare and hotel charges to various regions within the Pacific Basin, as
the Company is focusing its expansion efforts into these areas.
Depreciation and amortization expenses decreased by $45,572, or 86%,
as a result of the non-existence of the amortization of property rights
during the quarter ended January 31, 1998. The property rights were fully
amortized in June of 1997. During the quarter ended January 31, 1997, the
Company incurred amortization expense of $43,185 on the property rights.
Advertising and marketing expenses increased by $23,598 or 137% when
compared to the prior quarter as a result of the Company increasing its
marketing efforts for its managed properties. Much of the increase is due
to increased attendance at various travel tradeshows in the mainland United
States and Asia.
Insurance costs decreased by $7,161, or 26%, when compared to the
prior year as a result of a renegotiated insurance policy which encompassed
the Company and some of the hotels managed by the Company. Although the
policy premiums decreased substantially, the coverages provided to the
Company increased.
Other expenses increased by $8,594, or 55%, as a result of the Company
opening a sales office in Europe for the purpose of securing travel
clientele for the properties managed by the Company.
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NET INCOME (LOSS)
The Company reported net income of $79,161 and $9,322 for the quarters
ended January 31, 1998 and 1997, respectively.
As discussed previously, the increase in revenues combined with the
decrease in expenses resulted in the Company improving its earnings for the
quarter by $69,839, or 749% when compared to the prior year. Although no
assurances can be given, management will continue it's attempts to enhance
it's revenue base through growth and expansion, while maintaining strict
controls over operating expenses.
LIQUIDITY AND CAPITAL RESOURCES-
As of January 31, 1998, total current assets were $1,912,315 and
consisted primarily of $1,532,543 in accounts receivable from its managed
properties. Total current liabilities of $2,113,991 exceeded total current
assets by $201,676.
The Company's primary sources of working capital are cash flow from
operations and borrowing. Net cash used in operations was $649,144 for the
six months ended January 31, 1998 as compared to $179,956 for the prior year.
Net cash provided by investing activities was $68,428 as compared to
$22,215 for the six months ended January 31, 1998 and 1997, respectively.
Net cash provided form financing activities was $410,000 for the six months
ended January 31, 1998.
The Company had unrestricted cash of $98,222 and $63,210 at January
31, 1998 and 1997, respectively.
In July of 1997, the Company sold 222,100 shares of "unregistered" and
"restricted" stock for a gross price of $2.00 per share, or an aggregate
of $425,399 (net of commissions and other issuance fees) in a private
placement. The shares were subscribed and $384,754 was received in July
1997, with the balance of $40,645 received in September 1997. The stock
certificate was issued in November of 1997.
The Company has a $300,000 line of credit which is guaranteed by four
of the directors of the Company. The line expired in September 1997. The
Company extended the line of credit through April 15, 1998. During the
fiscal year July 1995, the Company drew $275,000 against the line, and in
April of 1997, repaid $25,000 leaving a balance of $50,000. In December of
1997, the Company subsequently drew down the remaining balance of $50,000.
In November of 1997, the Company secured an additional line of credit
for $250,000 from a local bank. The line of credit is due in May of 1998
and is personally guaranteed by the Chairman and Chief Executive Officer of
the Company. The Company borrowed the full amount against the line of
credit in December 1997 and January 1998.
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In January 1998, two officers of the Company made short term advances
to the Company for $60,000 and $50,000, respectively. The advances are due
on April 15, 1998 and provide for interest at 8.5% per annum.
The Company had a net working capital deficit of $201,676 and $818,764
as of January 31, 1998 and 1997, respectively.
As of January 31, 1998 and 1997, net working capital included
liabilities due to affiliates in the amount of $212,060 and $209,294,
respectively, with both amounts consisting of $184,400 representing the
undistributed cost on the acquisition of the stock of KRI, Inc. and interest
of $27,660 and $24,894, respectively. Also included in net working capital
is $25,410 and $101,640 at January 31, 1998 and 1997, respectively, in
unamortized deferred revenues related to a signing bonus paid to the Company
by one of its suppliers in April 1994 which is being amortized over three
years. At January 31, 1998, net working capital also includes $110,000 in
advances received from two officers of the Company.
The Company has, in the past, met its financial obligations through
its line of credit, the issuance of notes to the former stockholders of
KRI, Inc., advances from officers and a private placement of stock in 1997.
On March 10, 1998, the Company registered with the Securities and Exchange
Commission on form SB2/A-1, 1,600,000 shares of its Common Stock, and went
effective as of said date. Although no assurances may be given, the
Company plans to be successful in obtaining additional working capital
through the offering of the 1,600,000 shares of Common Stock.
Management believes that it has increased its revenue base to a level
which will sustain an annual net operating profit, allowing the Company to
meet its current obligations. Management also believes that the
combination of the net proceeds from the secondary offering, net cashflow
generated from operations and the future availability of credit facilities
will be sufficient to fund the operations of the Company in the future.
The Company has no present plans involving the sale or purchase of any
properties, assets or business.
PLAN OF OPERATION
The Company is one of the leading regional hotel and resort
management companies in the State of Hawaii. At February 1, 1998, the
Company had 31 management or sales, reservations and marketing contracts
covering 3,383 rooms. Included in the rooms managed is 167 rooms in a
condominium complex domiciled in Waikiki which the Company leases.
The properties represented by the Company appeal to a wide variety of
the public market as the Company manages a wide spectrum of property types
from the luxury condominium resorts with room rates exceeding $1,000 to the
small budget inns with room rates of $40. The Company believes that the
availability of differing product lines appeals to all levels of business
or leisure traveler.
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The Company has experienced significant growth since it began
operations in November of 1993. From inception to February 1, 1998, the
number of contracts has more than doubled, from 13 to 31 and the number of
rooms managed also increased from 1,684 to 3,383.
Although no assurances can be given, the Company plans to expand its
portfolio of management contracts both within the State of Hawaii and
outside of Hawaii in areas such as Saipan, Guam and other Pacific Rim
countries. In addition to Hawaii, management believes that there are many
opportunities to expand its client base in the emerging markets of the
Pacific Basin. In addition to signing on independent hotels and resorts,
the Company may achieve its growth through joint venture investments and
leases and/or acquisitions of management contracts and/or companies.
On August 1, 1997, the Company was successful in entering the foreign
market of the Pacific Basin when it consummated a management agreement with
the Aquarius Beach Tower, a 68 unit luxury resort located in Saipan.
Although no assurance can be given, management believes that it will be
able to effectively manage this property and to also continue its growth in
the Pacific Basin.
Effective November 1, 1997, the Company acquired the management
contract for approximately 130 rooms located in the Kiahuna Plantation
Resort, an upscale condominium resort located in Poipu, Kauai.
On February 1, 1998, the Company acquired the management contract for
a 242 room hotel located in Waikiki on the island of Oahu.
With the increase in management contracts, the number of hotel and
resort employees that the Company will supervise may increase
significantly. The Company is presently negotiating for both small budget
hotels and large luxury condominium resorts and therefore, it is impossible
at this time to predict the number of additional employees that it will
supervise or that it will be required to hire for the hotels and resorts
during the next fiscal year. At January 31, 1998, the Company employed
approximately 700 employees and managed an additional 350 on behalf of the
property owners.
On July 31, 1995, the Company invested $100,000 into a reorganization
plan instituted by HBII. Under terms of the HBII reorganization plan, the
eighty seven units owned by HBII will be sold under a timeshare plan and
investors in the timeshare plan may receive up to four times their
investment over the life of the timeshare plan. As of January 31, 1998,
the Company has received a total of $160,108 from this investment. Of the
funds received, $40,027 represents a return of the initial investment and
$120,081 represents a gain to the Company. Although no assurance can be
given, management is confident that the HBII reorganization plan shall
continue to be profitable.
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On August 1, 1994, the Company entered into a contract with Hawaii
Reservations Center Corp. ("HRCC"), a company controlled by Charles M.
McGee, pursuant to which HRCC shall provide reservation services for hotels
and resorts managed by the Company. Since the purchase of KRI, Inc.,
reservation services for hotels and resorts managed by the Company were
provided by KRI, Inc. The fees paid by the Company include a fixed
monthly fee plus commissions. The Company also agreed to sell to HRCC the
assets of the reservation offices of KRI, Inc., which consisted of office
equipment. As consideration for the equipment, HRCC agreed to employ the
reservation department employees of KRI, Inc. And to assume the liability
for the accrued vacation of such employees. The Company realized a gain
of $4,372 on the transaction, as the value of the accrued vacation exceeded
the net book value of the office equipment sold.
It is management's belief that the contract with HRCC are on terms
which are no less favorable than those which could be negotiated with
companies not affiliated with the Company, however, in May of 1997, the
Company renegotiated its contract with HRCC with regard to the fees
charged. Under the new agreement, the fees paid to HRCC are based upon the
monthly room revenues of the properties managed by the Company, subject to
a minimum monthly fee. Management believes, although no assurances can be
given, that the Company shall enjoy lower reservations costs under the new
agreement.
YEAR 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company utilizes and is dependent upon data processing systems and
software to conduct its business. The data processing systems and software
utilized for the operating and accounting functions were purchased from
independent vendors and are fun on in-house computer networks. In 1997,
the Company initiated a review and assessment of all related hardware and
software to confirm that it will function properly in the year 2000. To
date, those vendors which have been contacted have indicated that their
hardware or software is or will by Year 2000 compliant before the end of
1998. Primarily all of the costs associated with the compliance efforts
have already been incurred and did not have a significant impact on the
Company's operations. Management is currently investigating the utilization
of independent consultants to assess the less critical components of the
operations which may also be impacted by the Year 2000 such as the telephone
systems. Management does not expect that any additional costs will have a
material impact on the Company's results of future operations.
17
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PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
(a) The annual meeting of the shareholders of The Castle Group, Inc.
was held on February 27, 1998.
(b) At the annual meeting, the shareholders voted to elect each of
management's board of director nominees as listed in the Company's proxy
statement, and to ratify the selection of Coopers & Lybrand, L.L.P. as the
independent auditors for the Company for the fiscal year ending July 31,
1998. The number of votes cast for, against, or withed, as well as the
number of abstentions as to each matter is set forth below:
1. Election of Directors
Nominee Votes Cast For Against Abstentions
Rick Wall 3,345,317 3,345,317 0 0
Kelvin M. Bloom 3,345,317 3,345,317 0 0
Kimo M. Keawe 3,345,317 3,345,317 0 0
Charles E. McGee 3,345,317 3,345,317 0 0
John Tedcastle 3,345,317 3,345,317 0 0
Ryoji Takahashi 3,345,317 3,345,317 0 0
Hideo Nomura 3,345,317 3,345,317 0 0
Motoko Takahashi 3,345,317 3,345,317 0 0
Judhvir Parmar 3,345,317 3,345,317 0 0
Noboru Sekiguchi 3,345,317 3,345,317 0 0
Stanley Y. Mukai 3,345,317 3,345,317 0 0
Edward Calvo, Sr. 3,345,317 3,345,317 0 0
2. Ratification of Coopers & Lybrand, L.L.P. as the Company's independent
auditor for the year ending July 31, 1998.
Votes Cast For Against Abstentions
3,345,317 3,340,599 0 4,718
Item 5. OTHER INFORMATION
There is no other information being reported for the current quarter.
18
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits designated by an asterisk are incorporated herein by
reference. The exhibits with page references are filed herewith.
Sequential
Exhibit Page
Number Description Number
- -------- ------------------------------ ---------
1.1 Form of Placement Agency Agreement incorporated by
reference to Exhibit 1.1 to the Company's Registration
Statement on Form SB2/A-1 filed on March 10, 1998. *
2.1 Restated Articles of Incorporation, incorporated by
reference to Exhibit 2.1 to the Company's Registration
Statement on Form 10-SB. *
2.2 Bylaws, as amended effective February 1, 1995,
incorporated by reference to Exhibit 2.2 to the
Company's Quarterly Report on Form 10-QSB for the
quarter ending 04/30/96 *
6.1 Agreement and Plan of Reorganization dated as of
November 8, 1993, by and among The Castle Group, Inc.,
Bernard Wall Trust, LCC, Ltd., John Tedcastle, Hideo
Nomura, and Castle Group, Limited, with exhibits,
incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form 10-SB. *
6.2 Stock Purchase Agreement dated as of November 10, 1993, by
and among The Castle Group, Inc., Keawe Resorts, Inc., Maui
Beach Hotel, Inc., M.K. & Sons, Inc., TN Group, Inc.,
Michael S. Nitta, Saburo & Mitsue Maruyama, Shigeru Shinn,
James Kurita, and KRI, Inc., with exhibits, incorporated
by reference to Exhibit 10.2 to the Company's Registration
Statement on Form 10-SB. *
6.3 Kelvin Bloom Employment Agreement dated December 2, 1993
between the Company and Kelvin Bloom, incorporated by
reference to Exhibit 10.3 to the Company's Registration
Statement on Form 10-SB. *
6.4 Kimo M. Keawe Employment Agreement dated July 30, 1994,
effective as of November 10, 1993 between Kimo M. Keawe
and the Company, incorporated by reference to Exhibit 6.4 to
the Company's Annual Report on Form 10-KSB for the year ended
July 31, 1994. *
19
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6.5 Michael S. Nitta Employment Agreement dated June 23, 1994,
effective as of November 10, 1993 between Michael S. Nitta
and the Company, incorporated by reference to Exhibit 6.5 to
the Company's Annual Report on Form 10-KSB for the year ended
July 31, 1994. *
6.6 Shari Chang Employment Agreement dated July 15, 1994,
effective as of July 16, 1994 between Shari Chang and the
Company, incorporated by reference to Exhibit 6.6 to the
Company's Annual Report on Form 10-KSB for the year ended
July 31, 1994. *
6.7 Sublease Agreement dated September 16, 1993 between Rush
Moore Craven Sutton Morry & Beh and The Castle Group, Ltd.
for the Company's principle executive offices, incorporated
by reference to Exhibit 10.4 to the Company's Registration
Statement on form 10-SB. *
6.8 Lease Agreement dated April 1, 1988, between Hirano
Enterprises, Cen Pac Properties, Inc., and KRI, Inc., dba
Hawaiian Pacific Resorts, as renewed by agreement dated May
3, 1993, incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form 10-SB. *
6.9 Reservations Services Agreement dated August 1, 1994 between
the Company and Hawaii Reservations Center Corp.,
incorporated by reference to Exhibit 6.9 to the Company's
quarterly report on Form 10-QSB for the quarter ended
October 31, 1994. *
6.10 Stock Acquisition Agreement between the Company and Shari
W. Chang dated September 10, 1995, incorporated by reference
to Exhibit 6.10 to the Company's Annual Report on Form 10-KSB
for the year ended July 31, 1995. *
6.11 Revolving Line of Credit Loan Agreement dated October 21,
1994 between the Company, and Castle Resorts & Hotels, Inc.,
KRI, Inc., Hawaii National Bank, Rick Wall, John Tedcastle,
Hideo Nomura and Kimo Keawe, incorporated by reference to
Exhibit 6.11 to the Company's Annual Report on Form 10-KSB
for the year ended July 31, 1995. *
6.12 Letter dated October 17, 1995 from Kimo M. Keawe to KRI, Inc.
Stockholders, together with Promissory Notes dated July 31,
1995 payable to Maui Beach Hotel, Inc. for $12,000, James
Kurita for $6,000, Saburo or Mitsue Maruyama for $3,600, TN
Group Hawaii, Inc. for $6,000, M.K. & Sons, Inc. for $12,000,
Shigeru Shinno for $6,000, Michael S. Nitta for $16,800, and
Keawe Resorts, Inc. for $122,000, incorporated by reference
to Exhibit 6.12 to the Company's Annual Report on Form 10-KSB
for the year ended July 31, 1995. *
20
<PAGE>
6.13 Second Amendment to Letter of Agreement Dated December 2,
1993 between Kelvin Bloom and The Castle Group, Inc.
incorporated by reference to Exhibit 6.13 to the Company's
Annual Report on Form 10-KSB for the year ended July 31, 1995. *
6.14 Extension of Revolving Line of Credit Agreement dated
December 18, 1995 between The Castle Group, Inc., KRI, Inc.,
Castle Resorts & Hotels, Inc., and Hawaii National Bank
incorporated by reference to Exhibit 6.14 to the Company's
Annual Report on Form 10-KSB for the year ended July 31, 1996. *
6.15 Extension of Revolving Line of Credit Agreement dated January
18, 1996 between The Castle Group, Inc., KRI, Inc., Castle
Resorts & Hotels, Inc., and Hawaii National Bank incorporated
by reference to Exhibit 6.15 to the Company's Annual Report on
Form 10-KSB for the year ended July 31, 1996. *
6.16 Extension of Revolving Line of Credit Agreement dated June 5,
1996 between The Castle Group, Inc., KRI, Inc., Castle Resorts
& Hotels, Inc., and Hawaii National Bank incorporated by
reference to Exhibit 6.16 to the Company's Annual Report on
Form 10-KSB for the year ended July 31, 1996. *
6.17 Extension of Revolving Line of Credit Agreement dated
December 11, 1996 between The Castle Group, Inc., KRI, Inc.,
Castle Resorts & Hotels, Inc., and Hawaii National Bank
incorporated by reference to Exhibit 6.17 to the Company's
Annual Report on Form 10-KSB for the year ended July 31,
1997. *
6.18 Extension of Revolving Line of Credit Agreement dated March
5, 1997 between The Castle Group, Inc., KRI, Inc., Castle
Resorts & Hotels, Inc., and Hawaii National Bank incorporated
by reference to Exhibit 6.18 to the Company's Annual Report on
Form 10-KSB for the year ended July 31, 1997. *
6.19 Extension of Revolving Line of Credit Agreement dated June 30,
1997 between The Castle Group, Inc., KRI, Inc., Castle Resorts
& Hotels, Inc., and Hawaii National Bank incorporated by
reference to Exhibit 6.19 to the Company's Annual Report on
Form 10-KSB for the year ended July 31, 1997. *
6.20 Stock Option Agreement dated May 21, 1997 between Hawaii
Reservations Center Corp. and The Castle Group, Inc.
incorporated by reference to Exhibit 6.20 to the Company's
Annual Report on Form 10-KSB for the year ended July 31, 1997. *
21
<PAGE>
6.21 Steve Townsend Employment Agreement dated May 31, 1997,
effective as of July 28, 1997 between Steve Townsend and the
Company incorporated by reference to Exhibit 6.21 to the
Company's Annual Report on Form 10-KSB for the year ended
July 31, 1997. *
6.22 Consulting Agreement between Kimo M. Keawe, Keawe Resorts,
Inc. and the Company dated April 16, 1997 incorporated by
reference to Exhibit 6.22 to the Company's Annual Report on
Form 10-KSB for the year ended July 31, 1997. *
6.23 Amendment to Consulting Agreement between Kimo M. Keawe, Keawe
Resorts, Inc. and The Castle Group, Inc. dated April 16, 1997
incorporated by reference to Exhibit 6.23 to the Company's
Annual Report on Form 10-KSB for the year ended July 31, 1997. *
6.24 Letter dated July 31, 1997 from Kelvin Bloom forfeiting his
stock option and all amendments incorporated by reference to
Exhibit 6.24 to the Company's Annual Report on Form 10-KSB for
the year ended July 31, 1997. *
6.25 Amendment to Promissory Notes from the Company to Saburo or
Mitsue Maruyama for $3,600; Michael S. Nitta for $16,800;
Keawe Resorts, Inc. for $122,000; M.K. & Sons, Inc. for
$12,000; Shigeru Shinno for $6,000; and T.N. Group Hawaii,
Inc. for $6,000 incorporated by reference to Exhibit 6.25 to
the Company's Annual Report on Form 10-KSB for the year ended
July 31, 1997. *
6.26 Commercial Promissory Note between the Company and City Bank
dated November 14, 1997. 24
6.27 Promissory note for $50,000 dated January 15, 1998 between
the Company and Michael S. Nitta 28
6.28 Promissory note for $60,000 dated January 29, 1998 between
the Company and Kelvin M. Bloom 29
16.2 Letter of resignation as a board of director from Akira Fujii
dated September 22, 1997, incorporated by reference to exhibit
16.2 to the Company's 8-K filed on September 26, 1997. *
DESCRIPTION OF EXHIBITS
See item 1 above.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended January 31,
1998.
22
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
THE CASTLE GROUP, INC.
(Registrant)
March 17, 1998 /s/ Rick Wall
---------------------------
Chairman of the Board and
Chief Executive Officer
March 17, 1998 /s/ Michael S. Nitta
----------------------------
Chief Financial Officer and
Vice President Finance
23
<PAGE>
COMMERCIAL PROMISSORY NOTE - SINGLE PAYMENT
Loan No. 88-028635-50 Date: November 14, 1997
For value received, on demand, but if no demand is made, then on or before
May 17, 1998, (the "Maturity Date") the undersigned Borrower (jointly and
severally, if more than one) promises to pay to the Order of CITY BANK
(hereinafter called the "Bank") at 201 Merchant Street, Honolulu, Hawaii
96813, or at such other place or to such other party as the holder of this
Note may from time to time designate in writing, the principal sum of TWO
HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS ($250,000), or so much thereof as
may be disbursed hereunder, plus interest on the outstanding balance form
the date hereof until paid, at the rate of (applicable box checked):
X 10.000 percent per annum; or
___ ____ percentage points above the "City Bank Base Rate" which is in
effect from time to time. The "City Bank Base Rate" is defined below.
In no event shall the interest rate for this loan exceed the maximum
permitted by law. The interest rate will change on the same day the
City Bank Base Rate changes. Any change in the city Bank Base Rate
and the interest rate may be made without notice to the Borrower. The
initial rate of interest on this Note will be _____ percent per annum.
The "City Bank Base Rate" is that rate which corresponds with and is
the same rate as the "Prime Rate" as published in the Money Rates
section of The Wall Street Journal. This rate is the base rate on
corporate loans posted by at least 75% of the thirty (30) largest
banks in the United States of America. The City Bank Base Rate shall
be adjusted on the same date as or within three (3) business days
after the Prime Rate changes. If the Prime Rate is no longer
published, then a comparable index shall be selected by City Bank's
Administration department in its sole discretion; or
___ percentage points above the Regular Savings Account interest rate (the
"Savings Rate") which is in effect from time to time. The Savings
Rate is the interest rate paid by City Bank on its Regular Savings
Accounts which is subject to increase or change from time to time in
the sole discretion of City Bank. The initial rate of interest on
this Note will be _____ percent per annum. The interest rate will
change on the same day as or within three (3) business days after the
Savings Rate changes.
In paying this Note, the following paragraph which box is checked shall
apply:
___ All unpaid principal and accrued interest under this Note, as well as
other unpaid fees, charges or expenses due hereunder or under any
instrument or document securing this note, shall be due and payable on
the Maturity Date.
24
<PAGE>
X Interest only shall be payable monthly, in arrears, and on the 17th
day of each month thereafter. All unpaid and accrued interest under
this Note, as well as all other unpaid fees, charges or expenses due
hereunder or under any instrument or document securing this Note,
shall be due and payable on the Maturity Date.
Interest shall be calculated, but not compounded, daily on the basis of the
actual number of days elapsed over a 365-day year (or 366-day year, as the
actual case may be).
After the Maturity Date or upon default, the unpaid principal balance shall
accrue interest at the rate of 5% above the interest rate of this Note
until the entire principal balance is paid.
This Note may be prepaid in whole or in part without penalty. If any
prepayment of principal is less than the unpaid principal balance, Borrower
promises to continue to make payments in accordance with the payment
schedule until all amounts owed under this Note shall have been paid in
full.
This Note is secured by (applicable if box is checked):
X Security Agreement(s) of even date herewith.
___ Real Estate Mortgage(s) dated:
___ Other:
Page 1 of 2
ADDITIONAL TERMS AND CONDITIONS
DEFAULT. The Borrower shall be in default hereunder upon the occurrence of
any of the following events:
(a) Failure to pay any amount which may be due under this Note.
(b) Failure to comply with the terms of this Note, or any security or
other agreement made in connection with this Note.
(c) A change in the financial condition of the Borrower or any endorser,
guarantor or surety for the liability of the borrower to the Bank
which in the opinion of the Bank impairs the Borrower's
creditworthiness.
(d) Death, termination of business, insolvency or commencement of any
bankruptcy or debtor proceedings by or against any Borrower. If the
Borrower is a corporation, partnership or other organization, the
dissolution, termination, or failure of such corporation, partnership
or organization.
(e) If Borrower does or fails to do something which causes Bank to believe
the Bank will have difficulty collecting amounts owed to it by
Borrower.
(f) When any event occurs which results in the acceleration of the
maturity date of any obligation of Borrower to others.
(g) When any endorser or guarantor of any of the indebtedness terminates
the endorsement or the guaranty or defaults in any obligation to Bank.
25
<PAGE>
(h) If a judgement is entered by any court against the Borrower.
(i) If Borrower is a corporation, it merges or consolidates with another
entity or ownership of 25% or more of the Borrower changes. If
Borrower is a partnership, a general partner changes.
(j) If Borrower changes its name or assumes an additional name without
first notifying Bank before making such change.
(k) Any other creditor attempts to collect any debt Borrower owes it
through court proceedings.
REMEDIES/ACCELERATION OF PAYMENT. Upon the occurrence of an event of
default, the Bank may accelerate this loan, that is, this Note shall become
immediately due and payable, and the Bank may exercise any other rights and
remedies available to the Bank under State of Federal law without prior
notice. In addition, upon any default, Bank may demand security,
additional security, or additional parties to be obligated to pay this Note
as a condition for not using any other remedy.
SET-OFF. Borrower agrees that Bank may set-off any amount due and payable
under this Note against any of Borrower's accounts or any multiple-party
account to which Borrower is a party. "Account" includes any liability or
indebtedness of Bank to Borrower, including but not limited to time,
savings, checking, money market or "NOW" deposit accounts; certificates of
deposit; any money owing to Borrower on any items presented to Bank or in
Bank's possession for collection or exchange; and any repurchase agreement
or other non-deposit obligation. This right of set-off may be exercised
upon Borrower's default without prior demand of notice and without regard
to the existence or value of any property securing this Note and without
regard to the creditworthiness of any other persons who have agreed to pay
this Note.
COLLECTION COSTS. If there is any default, except where prohibited by
applicable laws, the Borrower further promises to pay reasonable attorney's
fees and costs and expenses incurred by the holder hereof in connection
with any such default or in any action or other proceeding brought to
enforce any of the provisions of this Note.
WAIVERS. The Borrower and all others who may become liable for all or any
part of this obligation, severally waive presentment for payment, demand
and protest and notice of protest, and dishonor and nonpayment of this
Note, and expressly consent to any extension of time of payment hereof, or
of any installment hereof, to any other modification hereof, to the release
of any party liable for this obligation, and any such extension,
modification or release may be made without notice to any of said parties
and without in any way affecting or discharging their liability. By Bank
selecting one or more remedies available to it, Bank does not waive its
right to later consider the event as a default if it continues or happens
again.
STATUTORY LIMITATIONS. Notwithstanding any other terms contained herein,
the annual interest rate payable hereunder shall at no time exceed the
highest annual interest rate permitted by applicable law. If any payment
is received by the holder hereof which would otherwise be deemed to be a
26
<PAGE>
payment of interest in excess of the maximum allowed by law, such payment
shall be deemed to have been paid on account of principal at the time of
receipt. This provision shall never be superseded or waived and shall
control every other provision of this Note and all agreements between the
Borrower and the holder hereof.
JOINT AND SEVERAL LIABILITY. If there is more than one Borrower, all
obligations of each of the Borrowers are joint and several and are incurred
by each of the Borrowers without regard to, and independently of, the
obligations of each of the other Borrowers. Each of the Borrowers agrees
that his, her or its obligation shall continue in full force and effect
notwithstanding the death, bankruptcy (or commencement thereof),
dissolution or release of any other Borrower or guarantor and
notwithstanding the taking, release or waiver of or other dealings with any
security for this Note or the taking or release of other or additional
security and notwithstanding any waiver, amendment or modification
(including but not limited to extensions of time for performance) by the
holer hereof as to the obligations hereunder or under any other loan
document of any of the other Borrowers, with or without notice. Without
limiting the generality of the foregoing, each of the Borrowers agrees that
a separate action or actions may be brought against him, her or it, whether
or not such an action is brought against any of the other Borrowers.
SEVERALABILITY. Any term of this Note which is contrary to applicable law
will not be effective unless the law permits Borrower and Bank to agree to
such a variation. If any provision of this Note can not be enforced
according to its terms, this fact will not affect the enforceability of any
of the remainder of this Note.
APPLICABLE LAW. This Note is governed by and shall be construed in
accordance with the laws of the State of Hawaii. In the event there is any
conflict between the terms of this Note and the terms of any security
instrument or other agreement, the terms of the former shall control.
BORROWER
THE CASTLE GROUP, INC.
By: \s\ Rick Wall \s\ Motoko Takahashi
------------------------ ----------------------
Its CEO Its Secretary/Director
By: \s\ Michael S. Nitta
-----------------------
Its CFO
GUARANTY. The person(s) who signs below (the "Guarantor") unconditionally
guaranties the payment of all amounts that the Borrower owes you under this
Note. The Guarantor also guaranties the performance by the Borrower of all
the terms and agreements of Borrower under this Note.
GUARANTOR:
/s/ Rick Wall
- --------------------
Page 2 0f 2
27
<PAGE>
HONOLULU, HAWAII $ 50,000.00
JANUARY 15, 1998
PROMISSORY NOTE
FOR VALUE RECEIVED, THE CASTLE GROUP, INC. does hereby promise to pay
to the order of Michael S. Nitta on or before April 15, 1998, or upon the
receipt of funds from the secondary offering it has registered with the
Securities & Exchange Commission, whichever is earlier, the principal sum
of FIFTY THOUSAND DOLLARS ( $50,000.00 ) in lawful monies of the United
States of America.
THE CASTLE GROUP, INC. will make monthly principal payments of TWO
HUNDRED DOLLARS ( $200.00 ) plus interest at the rate of eight and one half
percent ( 8.5% ) per annum in lawful monies of the United States of
America. Payments will commence on February 15, 1998, and will continue on
the fifteenth day of each month until the principal balance is paid in
full.
THE CASTLE GROUP, INC. does hereby waive presentment, demand for
payment, notice of protest, and protest, and all other notices or demand in
connection with the delivery, acceptance, performance, default or guaranty
of this Agreement.
In the event of default in the payment of this note at maturity and
this note is placed in the hands of an attorney for collection, a
reasonable amount will be added as a collection charge.
In witness thereof, the parties have set their hands to this
Promissory Note effective as of the day and year written above.
THE CASTLE GROUP, INC. MICHAEL S. NITTA
By /s/ Rick Wall By /s/ Michael S. Nitta
Its Chairman and CEO
By /s/ Motoko Takahashi
Its Secretary
28
<PAGE>
HONOLULU, HAWAII $ 60,000.00
JANUARY 29, 1998
PROMISSORY NOTE
FOR VALUE RECEIVED, THE CASTLE GROUP, INC. does hereby promise to pay
to the order of Kelvin M. Bloom on or before April 15, 1998, or upon the
receipt of funds from the secondary offering it has registered with the
Securities & Exchange Commission, whichever is earlier, the principal sum
of SIXTY THOUSAND DOLLARS ( $60,000.00 ) in lawful monies of the United
States of America.
THE CASTLE GROUP, INC. will make monthly principal payments of TWO
HUNDRED DOLLARS ( $200.00 ) plus interest at the rate of eight and one half
percent ( 8.5% ) per annum in lawful monies of the United States of
America. Payments will commence on February 15, 1998, and will continue on
the fifteenth day of each month until the principal balance is paid in
full.
THE CASTLE GROUP, INC. does hereby waive presentment, demand for
payment, notice of protest, and protest, and all other notices or demand in
connection with the delivery, acceptance, performance, default or guaranty
of this Agreement.
In the event of default in the payment of this note at maturity and
this note is placed in the hands of an attorney for collection, a
reasonable amount will be added as a collection charge.
In witness thereof, the parties have set their hands to this
Promissory Note effective as of the day and year written above.
THE CASTLE GROUP, INC. KELVIN M. BLOOM
By /s/ Rick Wall By /s/ Kelvin M. Bloom
Its Chairman and CEO
By /s/ Motoko Takahashi
Its Secretary
29
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> JUL-31-1998 JUL-31-1997
<PERIOD-END> JAN-31-1998 JAN-31-1997
<CASH> 98,222 63,210
<SECURITIES> 0 0
<RECEIVABLES> 1,547,382 1,107,874
<ALLOWANCES> 14,839 14,839
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,912,315 1,352,092
<PP&E> 210,013 209,456
<DEPRECIATION> 132,996 123,525
<TOTAL-ASSETS> 2,201,002 1,626,644
<CURRENT-LIABILITIES> 2,113,991 2,170,856
<BONDS> 0 0
0 0
0 0
<COMMON> 106,223 101,781
<OTHER-SE> ( 19,212) ( 671,403)
<TOTAL-LIABILITY-AND-EQUITY> 2,201,002 1,626,644
<SALES> 2,934,082 2,967,025
<TOTAL-REVENUES> 2,934,082 2,967,025
<CGS> 0 0
<TOTAL-COSTS> 2,999,738 3,074,988
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 28,663 29,040
<INCOME-PRETAX> ( 94,319) ( 137,003)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> ( 94,319) ( 137,003)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> ( 94,319) ( 137,003)
<EPS-PRIMARY> ( .018) ( .027)
<EPS-DILUTED> ( .018) ( .027)
<FN>
UNAUDITED
</FN>
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