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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended July 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number: 0-23338
THE CASTLE GROUP, INC.
(Name of small business issuer in its charter)
Utah 99-037845
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
745 Fort Street, Tenth Floor, Honolulu, Hawaii 96813
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (808) 524-0900
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.02 par value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes [x] No [ ]
Page 1 of 67 sequentially numbered pages. The Exhibit Index appears on
page 60
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $4,337,283
Aggregate market value of issuer s common stock held by non-affiliates
as of July 31, 1999: $1,538,706
Number of shares outstanding of the issuer s common stock as of October
29, 1999: 5,407,031.
DOCUMENTS INCORPORATED BY REFERENCE: None
Transitional Small Business Disclosure Format (Check One):
Yes [x] No [ ]
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TABLE OF CONTENTS
Page
PART I
Item 1. Description of Business 4
Item 2. Description of Property 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of
Security Holders 14
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters 14
Item 6. Management's Discussion and Analysis or
Plan of Operation 15
Item 7. Financial Statements 30
Item 8. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 50
PART III
Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance with
Section 16(a) of the Exchange Act 50
Item 10. Executive Compensation 54
Item 11. Security Ownership of Certain Beneficial
Owners and Management 56
Item 12. Certain Relationships and Related
Transactions 58
PART IV
Item 13. Exhibits and Reports on Form 8-K 60
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The Castle Group, Inc. is a Utah corporation engaged in the business of
hotel and resort management, reservations, and sales and marketing.
The Castle Group, Inc. and Subsidiary (the "Company") operates its
business under the trade names "Hawaiian Pacific Resorts" and "Castle
Resorts and Hotels". At July 31, 1999, the Company had twenty eight
hotel and resort management contracts covering 3,000 rooms. The Company
plans to continue its expansion in the hotel and resort management
business and has been actively seeking to increase the number of hotel
and resort properties under management in the Hawaiian islands and the
Pacific Basin.
The properties under management include small budget inns as well as
larger condominium resort hotels on all of the major islands within the
State of Hawaii, in addition to a luxury condominium resort located in
Saipan, a hotel in Chuuk and a five star hotel in Guam under a lease
agreement which partially opened in October, 1999. The Company does not
own any of the properties under management and has no present or future
plans involving the purchase of equity positions in any such properties
other than described under the caption "Plan of Operations" under Item
1, Part I which follows.
The Company's executive offices are located at 745 Fort Street, Suite
1000, Honolulu, Hawaii, 96813. The Company's telephone number is
(808) 524-0900.
DEVELOPMENT OF BUSINESS
The Company was organized under the laws of the State of Utah on August
21, 1981, under the name "Vector Communications, Inc." The Company was
formed primarily for the purpose of conducting business activities in
the communications industry and to invest in real estate, minerals and
oil and gas development. On November 22, 1983, the Company changed its
name to "Quest National, Inc."
During the fiscal year ended July 31, 1984, the Company acquired a
fifty percent interest in Guam Productions, Inc., a corporation
organized under the laws of the Territory of Guam ("Guam Productions"),
in exchange for 11,000,000 shares of the Company's "unregistered" and
"restricted" common stock and $100,000, and persons affiliated with
Guam Productions were elected to serve as directors and executive
officers of the Company. Guam Productions sole asset was an exclusive
franchise to operate a lottery in the Territory of Guam through
December 31, 1988. The Company's investment in Guam Productions was
written off in fiscal year ended July 31, 1985, after initial attempts
to operate the Guam lottery profitably were unsuccessful. The Company
did not renew its annual option to extend the franchise. Its interest
in Guam Productions was abandoned, and the Company ceased business
operations in 1986.
The Company was inactive until fiscal 1993. On June 4, 1993, the
Company filed Articles of Amendment to its Articles of Incorporation
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with the Department of Commerce in the State of Utah, changing the
name of the Company to "The Castle Group, Inc.," reducing the
authorized shares of common stock from 50,000,000 shares of $.001 par
value per share to 20,000,000 shares of $.02 par value per share common
stock and effecting a reverse split of the outstanding shares on a
basis of one for twenty. As a result of the reverse split, the
21,330,500 outstanding shares of common stock were reduced to 1,066,530
shares (including an additional 5 shares resulting from "rounding"
following the reverse split . The reverse split did not affect the
proportional interest of any stockholder in the Company.
On November 8, 1993, the Company and all of the stockholders of Castle
Group, Ltd., a Hawaii corporation ("Castle Group Hawaii") entered into
an Agreement and Plan of Reorganization (the "Castle Plan"). Pursuant
to the Castle Plan the Company acquired all of the assets of Castle
Group Hawaii, consisting primarily of four hotel and resort management
contracts, in exchange for 2,100,000 post-split unregistered and
"restricted" shares of the Company's common stock. The Company did not
acquire any significant assets other than the management contracts and
did not assume any material liabilities. Following the closing of the
transaction, John G. Tedcastle and Hideo Nomura were appointed as
directors of the Company.
Castle Group Hawaii was originally organized in February 1989,
primarily for the purpose of managing 86 condominium units in the
Hanalei Bay Resort which had been recently acquired by Hanalei Bay
International Investors ("HBII"). HBII is a Hawaii limited partnership
formed for the purpose of acquiring the Hanalei Bay Resort, a 134 unit
resort condominium located in Princeville, Kauai, Hawaii. The partners
of HBII include HBII Management Inc. owned by Rick Wall, Voyage
Fourteen, Ltd. owned by John G. Tedcastle, L.C.C. Management Inc.,
owned by Judvhir Parmar, Nomura Firm and Nomura Holdings, owned by
Hideo Nomura and Kenji Nomura, and Siam Commercial Bank.
HBII made an offer to purchase all 134 condominium units of the Hanalei
Bay Resort in November, 1988. HBII was able to purchase 86 condominium
units. Rick Wall, John G. Tedcastle, and Judvhir Parmar then formed
Castle Group Hawaii to manage the acquired condominium units and
entered into a management contract with Castle Group Hawaii. The
contract was not modified after the acquisition of Castle Group Hawaii
by the Company. Management believes that the terms of the management
contract were no less favorable to Castle Group Hawaii than contracts
that could have been negotiated with non-affiliated third parties. The
management contract provided for full management of the condominium
units, including sales, staff supervision, accounting and maintenance.
Following the execution of the management contract, the Hanalei Bay
Resort was severely damaged by Hurricane Iniki, causing the resort to
cease hotel operations. The resort was initially scheduled to reopen on
May 1, 1994, but construction delays resulted in the opening being
postponed to August 1, 1994.
Between the time of its formation and the closing of the Castle Plan,
Castle Group Hawaii secured three more management contracts with the
Association of Apartment Owners of Hanalei Bay Resort, Kaluakoi Villas
and West Molokai Resort Condominium Owners Association. Each of these
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contracts were assigned to the Company in connection with the Castle
Plan.
The operations of Castle Group Hawaii were relatively small at the time
of the closing of the Castle Plan. Total revenues for the years ended
July 31, 1992 and 1993 were $231,156 and $317,532, respectively.
Expenses for these periods consisted mostly of management salaries and
rent for its principal executive offices in Honolulu, Hawaii. Castle
Group Hawaii had approximately ten employees, all of whom were hired by
the Company.
On November 8, 1993, in connection with the closing of the Castle Plan,
the Company sold 1,000,000 post-split shares of its common stock at a
price of $2.00 per share in a private placement. 250,000 shares were
sold to Akira Fujii, a resident of Japan, and 750,000 shares were sold
to N.K.C. Hawaii, Inc. ("NKC Hawaii"), a Hawaii corporation owned and
controlled by Ryoji Takahashi, a resident of Japan, and his family
which includes Ms. Motoko Takahashi. Following the sale of these
shares, Mr. Fujii and Mr. Takahashi were appointed as directors of the
Company. On March 15, 1995, Motoko Takahashi was also appointed as a
director and corporate secretary of the Company. Prior to their
purchase of shares in the Company, Mr. Fujii and NKC Hawaii had no
affiliation with the Company, Castle Group Hawaii or HBII, other than
an option Nichiman International, a Hong Kong based company owned by
Mr. Ryoji Takahashi, acquired in 1992 which entitled it to purchase a
3% interest in HBII.
On November 10, 1993, the Company purchased all of the stock of KRI,
Inc. ("KRI"), a Hawaii corporation doing business as "Hawaiian Pacific
Resorts," in exchange for 650,000 post-split "unregistered" and
"restricted" shares of the Company's common stock and $400,000 in cash,
subject to a holdback of $240,000 to cover any operating losses
incurred by KRI during the 18 months following November 10, 1993. An
additional $800,000 was paid to the selling stockholders of KRI in
exchange for certain non-competition covenants. Upon closing of the
purchase of KRI, KRI became a wholly owned subsidiary of the Company.
Prior to its acquisition by the Company, KRI managed several hotels and
resorts located in the State of Hawaii, including Waikiki Hana Hotel,
Queen Kapiolani Hotel, Kuhio Village Resort, Maui Beach Hotel, Maui
Palms Hotel, Hilo Hawaiian Hotel, Kauai Resort Hotel, Kona Reef Hotel
and Wailea Oceanfront Hotel.
The business operations of KRI at the time of its acquisition were far
more significant than those of Castle Group Hawaii. KRI managed and
controlled the operations of between five and nine hotels in 1992 and
1993, with total revenues of $1,120,041 and $1,284,804 for the years
ended July 31, 1992 and 1993, respectively. Its expenses consisted
primarily of management, accounting and reservation personnel payroll
and other sales related expenses. At the time of its acquisition by
the Company, KRI did not have any significant assets other than its
management contracts and accounts receivable, had no material
liabilities other than its trade accounts payable, and had
approximately 250 employees.
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The business operations of KRI at the time of its acquisition also
included a 62% interest in HPR Advertising, Inc. ("HPR Advertising") a
corporation organized under the laws of the State of Hawaii. HPR
Advertising was set up in 1989, with its primary operation being the
advertising of the hotels & resorts managed by KRI. The 38% minority
interest in HPR Advertising was owned by certain employees of KRI. On
July 31, 1995, KRI purchased all of the minority interests in HPR
Advertising for $380 and HPR Advertising became a wholly owned
subsidiary of KRI.
Several of KRI's management contracts cover hotels and resorts owned by
the former stockholders of KRI, including Waikiki Hana Hotel, Maui
Beach Hotel and Hilo Hawaiian Hotel. These contracts were not modified
after the acquisition of KRI by the Company. Management believes that
the terms of these management contracts are no less favorable to KRI
than contracts that could have been negotiated with non-affiliated
third parties.
On February 1, 1994, the Company filed with the Securities and Exchange
Commission a Registration Statement on Form 10-SB to register its
common stock, $.02 par value, under the Securities and Exchange Act of
1934. The Registration Statement became effective on May 2, 1994.
BUSINESS
With the completion of the acquisitions of Castle Group Hawaii and KRI
in November of 1993, the Company succeeded to the business operations
of these entities and was firmly engaged in the management of hotels
and resorts in the Hawaiian islands. The Company has since then added
a net of seventeen management contracts to its portfolio of hotel and
resort management contracts, and plans to continue with its expansion
by actively seeking and acquiring additional contracts with hotels and
resorts in the Hawaiian islands and the Pacific Basin.
Management believes the consolidation of the business operations of
Castle Group Hawaii and KRI into one entity which specializes in hotel
and resort management better serves the public by offering a wider
range of rooms and services at competitive prices. From the hotel and
resort owners point of view, management believes the size of the
consolidated entity provides increased visibility, cost savings by
consolidation and allows a hotel or resort a better opportunity to sell
its accommodations during periods of time when the market for such
accommodations is depressed. Management believes that the
concentration of this wider range of accommodations gives the Company
greater access to numerous wholesalers who book accommodations in large
blocks and who are more likely to deal with companies having a greater
range of locations and prices than individual hotel or resort
properties or companies with a limited product line. The large
concentration of accommodations also allows for more cost effective
sales, marketing and advertising due to the economies of scale, with an
economical apportionment of the expenses over a wider range of
accommodations. Management also believes that in markets where there
is a tendency to overbook accommodations, the Company has a greater
inventory of available rooms as backup accommodations.
Pursuant to the majority of the management contracts with the hotels
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and resorts, the Company provides total management of the hotel and
resort facilities, including supervision of staff and employees,
reservation services, food and beverage services, housekeeping,
accounting and the preparation of annual budgets and pro forma
operating statements, and physical maintenance. In some instances, the
Company's management contract provides for services which only include
sales, marketing and reservations.
Under the majority of the management contracts, the Company is not
responsible for any of the direct operating expenses of the client
hotels or resorts. All of the operating expenses of the hotel or
resort are paid directly by the hotel or resort. Examples of expenses
paid directly include payroll, repairs, food and room cleaning. The
Company may hire the personnel to perform these services, but the hotel
or resort is ultimately responsible for the payment of these services.
The Company is responsible for its own costs only, and those costs
usually include administrative, sales, marketing and reservation
expenses.
The Company is compensated by the client hotels and resorts by earning
a percentage of gross sales revenues accrued to the hotel or resort.
Many contracts also provide for additional compensation in the form of
incentive, marketing, reservation and accounting fees.
Under a few of the management contracts, the Company returns a fixed
percentage of gross revenues to the hotel or resort owners. The
balance of revenues remaining after such payment to the owners are used
to pay operating expenses associated with the property. The Company s
management fee under these types of agreement are the funds remaining
after the payment to the owners and the payment of operating expenses.
At July 31, 1999, the Company had twenty eight hotel and resort
management contracts. The Company plans to continue its expansion and
has been actively seeking to increase the number of hotel, resort and
condominium properties under management in the Hawaiian islands and the
emerging markets of other Pacific Basin countries.
Management believes that the emerging tourism markets of other Pacific
Basin countries such as Saipan, Guam and Indonesia will provide
additional opportunities for expansion and has focused efforts in these
regions. On August 1, 1997, the Company entered the foreign markets
with the signing of a full management agreement with the Aquarius Beach
Tower, located in Saipan. The Aquarius Beach is a 67 unit luxury
condominium resort which opened on November 1, 1997. On January 1,
1999, the Company signed a full management agreement with the 56 unit
Blue Lagoon Hotel located in Chuuk. In March of 1999 the Company
entered into a lease agreement for the Royal Orchid Hotel located in
Guam. The Royal Orchid is a brand new 200 room five star hotel which
was in the final stages of development as of July 31, 1999. The Royal
Orchid partially opened in late October of 1999.
CONFLICTS OF INTEREST
The potential exists for a conflict of interest when the Company enters
into a management contract with a hotel or resort in which stockholders
of the Company own or otherwise have an interest. Management will,
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whenever possible, require that material terms and provisions of the
management contracts negotiated with affiliated entities to be no less
favorable than those that could have been negotiated at arms length.
It is management's belief that all of its management contracts are on
terms which are no less favorable than those which are negotiated with
owners not affiliated with the Company.
PRINCIPAL PRODUCTS AND SERVICES
The principal services provided by the Company are the management,
reservations, sales and marketing of hotels and resort condominiums.
Principal clients include owners of these hotels and resorts which
includes individuals, general and limited partnerships, corporations
and associations.
In addition to management of transient rental operations of a property,
the Company also manages the Association of Apartment Owners ("AOAO")
for its client properties. The Company operates and supervises all
aspects of the property's day to day operations, subject to direction
from the AOAO's board of directors. These functions may include but are
not limited to employee training, property maintenance, accounting,
finance, benefits administration and purchasing. The Company earns a
fixed monthly fee for providing these services.
Under the majority of the Company's management contracts, the Company
provides total management of the facilities, including supervision of
staff and employees, reservation services, food and beverage services,
housekeeping, accounting, preparation of annual budgets and pro forma
operating statements and physical repairs & maintenance. Under certain
contracts, the Company only provides sales, marketing, reservations and
advertising services.
Products and services incidental to the management of hotels and
resorts are readily available from a number of suppliers, and include
bedding and toiletries, glassware, cleaning supplies and related
equipment and ground maintenance supplies and related equipment. These
products and supplies are usually provided by the hotel or resort. In
some instances the Company, as managing agent, may contract for these
products and services on behalf of the hotel or resort owner.
The Company also receives revenues in the form of commissions through
its centralized purchasing network. Fees are generated from the sharing
of savings enjoyed by its managed hotels and resorts by centralizing
the purchasing for the hotels and resorts managed by the Company,
thereby reducing the costs to the managed properties.
COMPETITION AND COMPETITIVE POSITION IN THE INDUSTRY
The management and marketing of hotels and resorts domiciled within the
State of Hawaii is very competitive, as the tourism industry is one of
the largest industries contributing to the State of Hawaii's economy.
The Company competes with national, regional and local management
companies, some of which may have a larger network of locations,
greater financial resources and better brand name recognition than the
Company. The primary competitors of the Company and the number of
years each has been in business are as follows: Aston Hotels and
Resorts (32 years), Classic Resorts (15 years), and Outrigger Hotels
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& Resorts (52 years). Each of the competitors offer the same type
of services provided by the Company and has bid against the Company in
the past. The competition for management contracts has led to reduced
profit margins and to more management contracts under which a
guaranteed return to the hotel or condominium owner may be required in
order to successfully acquire the management contract to these
properties.
The management and marketing of properties in the emerging market of
the Pacific Basin is also very competitive, as Aston Hotels & Resorts
and Outrigger Hotels & Resorts have recently focused efforts in these
areas.
The executive officers and key employees of the Company possess
substantial experience in the hotel, resort and condominium management
industry, much of which was with the principle competitors listed
above. The senior management and the Company's infrastructure relative
to sales and marketing, central accounting and administrative support
are believed by management to be as comprehensive and complete in the
Hawaiian segment of this industry as any of its competitors.
Although the Company commenced its operations in November 1993,
management has been successful in more than doubling the number of
contracts, many of which were previously managed by competitors of the
Company. In its five year operating history, the Company has lost only
one property to one of its competitors.
SOURCES AND PRINCIPAL SUPPLIERS
The sources of the Company's revenues are generated as a percentage of
the gross revenues of the hotels and resorts managed by the Company and
therefore, the sources of revenue for the hotels and resorts have a
substantial impact on the revenues of the Company. The sources of the
principal business generated by the Company for its clients are the
wholesalers, tour operators and general public with whom the Company
has established long-term relationships, including travel agents
throughout the world.
The Company has hundreds of tour operators and wholesalers under
contract. These contracts give the tour operators and wholesalers the
right to sell the hotel and resort rooms that the Company manages at
rates which are discounted due to the large volume of business. These
contracts are typical of the industry and provide the Company with a
ready market for the hotel and resort rooms it manages. These
contracts are not exclusive and the Company does market its rooms under
contract through its own reservation and marketing network.
DEPENDENCE ON ONE OR A FEW CUSTOMERS
The loss of one or more of the larger hotels or resorts managed by the
Company may have an adverse impact on the Company's gross revenues and
earnings. Management intends to increase the number of properties
under management and thereby minimize the potential adverse effects
which may result from the loss of one of the larger hotels or resorts
currently under management. Management believes that it has made
significant progress in minimizing the adverse financial effects of
losing properties in its management portfolio.
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PATENTS, TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS, ROYALTY
AGREEMENTS OR LABOR CONTRACTS
With the exception of the management contracts and the trade names
"Hawaiian Pacific Resorts" and "Castle Resorts & Hotels," the Company
does not have any material patents, trademarks, licenses, franchises,
concessions, or royalty agreements, the loss, or expiration, of which
would have a material adverse impact on the Company.
At July 31, 1999 and 1998, employees at two of the smaller properties
managed by the Company were subject to labor contracts. Management
considers its relationship with these labor unions to be excellent.
GOVERNMENTAL APPROVALS AND REGULATIONS
To the best of management's knowledge, the products and services
provided by the Company are not subject to governmental approval. The
extent of future promulgation of new regulations detrimental to the
visitor industry could have a substantial impact on the Company's
profitability. The hotel industry may be adversely effected by
regulations which cover wages, benefits, pricing, taxes and
availability of financing. In addition, the Company has expanded
outside of the United States and are subject to International laws and
the laws and regulations of foreign countries. To the best of
management's knowledge, there are no existing or probable governmental
regulations covering the present or intended business operations of the
Company that have or are anticipated to have a material adverse impact
on the Company's business, financial condition or otherwise.
ENVIRONMENTAL REGULATIONS
Management believes there are no material environmental laws, rules and
regulations that have or are likely to have a material adverse impact
on the Company, and such regulations as they apply to the present and
contemplated business operations of the Company. Management also
believes that those regulations related to hazardous material and waste
disposal, can be readily complied with by services provided by local
governmental agencies or numerous private contract suppliers. The
Company is not aware of any environmental claims pending or threatened
against it or against the owners of the properties managed by the
Company, however, no assurances can be given that such a claim will not
be asserted against the Company in the future.
EMPLOYEES
In some of the properties managed by the Company, all of the property
employees are employees of the Company instead of the property owner.
At July 31, 1999, the Company had approximately 750 employees.
Approximately 550 employees were full time and 200 were part-time. The
total number of employees employed at all properties represented by the
Company was approximately 1,100 at July 31, 1999, of which approximately
850 were full time and 300 were part-time. The number of categories
in which these employees serve may vary greatly from month to month,
depending on the season. The Company considers its relations with its
employees and employees of its clients whom it supervises to be excellent.
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SEASONAL BUSINESS
Tourism in general is seasonal, though to a lesser extent in the State
of Hawaii where tourism represents one of the principal industries.
Seasonal fluctuations will occur, however, affecting occupancy rates,
the number of employees required for management related services and
quarterly revenues, expenses and earnings.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases 11,357 square feet of office space for its principle
executive offices at Suite 1000, 745 Fort Street, Honolulu, Hawaii
96813. The initial lease for these premises was for a five year period
commencing June 1, 1994, and ending May 31, 1999, at a monthly rental
of $11,130 plus the costs of common area management. Effective
September 1, 1998, the Company renegotiated the lease for the premises.
The renegotiated lease covers the period through May 31, 2004 at a
monthly rental cost that averages $9,516 per month, plus the costs of
common area management. The Company has an option to renew the lease
for an additional five years at a rental amount that will be mutually
agreed upon.
The Company's wholly-owned subsidiary, KRI, Inc. leased approximately
3,035 square feet of office space at a rental of $6,374 per month plus
the costs of common area management. The initial lease commenced on
April 1, 1988, and was extended on April 1, 1993, to March 31, 1998.
Effective April 1, 1998, the lease was renegotiated and assigned to the
Company by KRI, Inc. The renegotiated lease covers the period from
April 1, 1998 through March 31, 2003, with the Company having the
option to extend the lease for an additional five years. The average
monthly rental under the lease is $5,450 plus the costs of common area
management. The rent for the optional five year period shall be
mutually agreed upon. The leased premises are used for the operation
of the central reservations department, which is operated under the
name "Hawaii Reservations Center Corp."
In March of 1999, the Company entered into a lease for the building,
furnishings and improvements of the Royal Orchid Hotel located in Guam.
The lease commences upon the opening of the property following the
completion of its construction and terminates on December 31, 2004.
The Company has the option to extend the lease through December 31,
2014. The terms of the lease call for a fixed monthly rental which
increases during the initial five year term. The rent for the two
option periods provide for a monthly rent in an amount which is the
higher of a fixed minimum amount or a percentage of gross sales.
ITEM 3. LEGAL PROCEEDINGS
The Company was a named defendant in Hodge v. Castle Group, Ltd., et
al. Civil No. 96-00766, United States District Court, District of
Hawaii, filed on September 16, 1996 initially as Berke v. Castle Group,
Ltd., et al., but the court dismissed both the original and the first
amended complaint on procedural grounds. When a second amended
complaint was filed on January 2, 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
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the Company and several other defendants. On September 15, 1997, the
plaintiffs filed a third amended complaint, which finally corrected the
misidentification of the Company. The plaintiffs are the owners of one
apartment unit and the owners of partial interests in three other
apartments at the Hanalei Bay Resort. One of the plaintiffs purports to
be suing derivatively on behalf of the Association of Apartment Owners
of Hanalei Bay Resort ("AOAO"). The other plaintiffs claim injury only
to themselves. 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 AOAO. Remedies sought against the
Company include special and general damages of an unspecified amount,
and statutory treble and punitive damages. The case was set for trial
beginning June 8, 1999. The Company tendered defense of the case to
several insurers who had agreed to pay for the cost of defense.
In a related case of Hodge, et al. v. Castle Group, Ltd., et al., filed
as Civil No. 97-4161 in Hawaii First Circuit Court on October 10, 1997,
the same plaintiffs asserted state-law claims. In addition to claims
for damages, the plaintiffs seek to force the Company's removal as
managing agent for the AOAO. The Company tendered defense of this case
to its insurer, and two insurance companies agreed to pay for the cost
of defense.
Management vehemently disagreed that the Company acted without the
authorization of the AOAO and intends to defend itself vigorously
against the plaintiffs. The Litigation Committee of the AOAO conducted
an independent investigation of the allegations contained in the
lawsuit. Their investigation disclosed that the Company acted
properly in its capacity as the managing agent of the AOAO. Because of
the aforementioned, management believed that the lawsuit was without
merit and that it would be dismissed or adjudicated in favor of the
Company.
In May of 1999, all parties involved in the lawsuit reached a
settlement on the case. The Company received funds under the terms of
the settlement agreement and continues to represent the Hanalei Bay
Resort under a sales, marketing and reservations agreement. The
payment of the settlement proceeds to the plaintiffs and to the Company
was funded by the insurance companies of the Hanalei Bay Resort.
The Company is subject to various other claims and lawsuits which are
normal and reasonably foreseeable in light of the nature of the
Company's business and the growth in the Company's business. In the
opinion of management, although no assurances can be given, the
resolution of these claims will not have a material adverse effect on
the Company's financial position, results of operations and liquidity.
Further, to the knowledge of management, no director, officer,
affiliate or record of beneficial owner of more than 5% of the common
voting stock of the Company is a party adverse to the Company or has a
material adverse interest to the Company in any material proceeding.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the security holders of record
during the fourth quarter ended July 31, 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company's common stock is listed on the "Electronic Bulletin Board"
of the National Association of Securities Dealers, Inc., under the
symbol "CAGU." There has been only limited trading activity in the
common stock of the Company. The following table sets forth the high
asked and low bid prices for the Company's stock for each of the full
quarters during the year ended July 31, 1999. The following market
quotations reflect inter-dealer prices, without retail markup, markdown
or commission and may not necessarily represent actual transactions.
Quarter Ended Low Bid High Asked
October 31, 1998 $ 1.0625 $ 1.9375
January 31, 1999 1.1875 2.1250
April 30, 1999 1.3125 2.3438
July 31, 1999 1.8750 2.7500
HOLDERS
The number of record holders of the Company's common stock as of July
31, 1999 was approximately 300.
DIVIDENDS
The Company has not paid any dividends with respect to its common
stock, and does not intend to pay dividends in the foreseeable future.
It is the present intention of management to utilize all available
funds for the development and expansion of the Company's business.
There are no present material restrictions that limit the ability of
the Company to pay dividends on common stock or that are likely to do
so in the future.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
OR PLAN OF OPERATION.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Plan of
Operations" including statements regarding the anticipated development
and expansion of the Company's business, the intent, belief or current
expectations of the performance of the Company and the products and/or
services it expects to offer and other statements contained herein
regarding matters that are not historical facts, are "forward-looking"
statements. Because such statements include risks and uncertainties,
actual results may differ materially from those expressed or implied by
such forward-looking statements. Factors that could cause actual
results to differ materially from those expressed or implied by such
forward-looking statements include, but are not limited to, the factors
set forth in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Plan of Operations."
GENERAL
The Company is a Utah corporation which earns its revenues primarily by
providing management, reservations, and sales and marketing services
to hotels and resorts. The Company primarily operates within the
State of Hawaii under the trade names "Hawaiian Pacific Resorts" and
"Castle Resorts and Hotels."
The Company's revenues are derived from management fees, sales &
marketing fees, reservation fees, accounting fees, commissions,
incentive fees and other fees from the properties it represents
pursuant to the terms and conditions of its management contracts. The
revenues of the properties which are managed by the Company are not
recorded as revenues of the Company for the fiscal year ending July 31,
1999. The Company anticipates that the revenues of the Royal Orchid
Hotel located in Guam shall be consolidated into the financial
statements of the Company once the property opens in the fiscal year
ending July 31, 2000.
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 are
not recorded as expenses of the Company. The Company anticipates that
the operating expenses of the Royal Orchid Hotel located in Guam shall
be consolidated into the financial statements of the Company once the
property opens in the fiscal year ending July 31, 2000.
As of July 31, 1999, the Company had 28 management or sales, marketing
and reservations contracts covering 3,000 rooms, all except 330 rooms
located in three properties which are situated in Micronesia 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
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property managed. Sales, 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.
OVERVIEW
The tourism industry has been, historically, seasonal in nature. The
Company generally reflects higher revenues from the fees generated by
its properties in the first and third quarters of its operating year,
which may cause expected fluctuations in the Company's quarterly
revenues and net earnings. The majority of the Company's properties
under contract are located in Hawaii. The tourism economy of the
State of Hawaii has been in a downward trend over the past few years.
The economic crisis in Asia, upon whom Hawaii depends upon for its
tourist market has resulted in a decrease in the eastbound traveler.
Although no assurances can be given, management believes that the
economy of the mainland United States will continue to improve, and
that the economic crisis in Asia will not be a long term problem.
Management also believes that the convention center recently completed
in Waikiki shall allow the State to capture a portion of the lucrative
convention travel market, further increasing the demand for guest
rooms.
Revenues grew at a compound annual rate of 31.1% from 1994 through
1999, from $1,118,386 to $4,337,283. The growth in revenues attained
by the Company over the past five years has been substantial, however
management gives no assurances that these increases shall continue in
future periods.
The increase in revenues together with smaller increases in operating
expenses resulted in the Company being able to reduce net losses from
1994 through 1996, and record a profit in 1997 and 1998. The loss for
1999 is attributable to the expenses attributable to the Company's
expansion efforts in the Pacific Basin and the overall decline in the
tourism industry for the Hawaiian operations. Net losses decreased
from $922,644 for the nine months ended July 31, 1994 to a net loss of
$487,458 for the fiscal year ended July 31, 1999, with the Company
reporting profits in 1997 and 1998. Management attributes the
improvements in operating income to the growth in revenues coupled with
effective cost controls. There can be no assurance that these
improvements to operating income will continue in future periods.
RESULTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 1999 AND 1998
SALES
For the years ended July 31, 1999 and 1998, the Company had total
revenues of $4,337,283 and $5,609,619, respectively, representing a
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decrease of $1,272,336 or 23%. The decrease in revenues was
attributable to a decrease of $1,247,320 in hotel revenues, and a
decrease of $25,016 in management and other management related income.
The decrease in hotel revenues is due to the Company terminating its
lease of 167 rooms operated as a hotel in April of 1998. The decrease
in management related income is due to the loss of $75,000 in fees on
the management contracts for two of the Company's properties in
December of 1998. The Company was successful in increasing its total
fees from the management contracts of its other properties.
COSTS AND EXPENSES
Operating expenses were $4,696,037 for the year ended July 31, 1999 as
compared to $5,480,813 for the prior year, a decrease of $784,776 or
14.3%. Operating expenses for management related operations increased
by $529,506 or 12.7% while operating expenses for hotel operations
decreased by $1,314,284 due to the Company terminating its lease on a
hotel property in April 1998.
Payroll and related costs for management operations increased by
$257,151 or 12.6% as a result of the Company increasing its staffing to
service the expansion and anticipated future growth of the Company into
the Pacific Basin region.
Reservations services expense increased by $130,125, or 15.3% as a
result of an increase in the room revenues for the properties
represented by the Company. Reservations expenses are based upon the
room revenues of the hotels and resorts managed by the Company. Total
room revenues increased by $4.8 million during the fiscal year ended
July 1999 when compared to the prior year.
Rent expense decreased by $604,567 or 61.9% when compared to the prior
year due to the Company terminating its lease on a 167 room hotel
effective April 1998 and the renegotiation of the monthly lease rents
on the Company's corporate offices. Rents related to the lease of the
hotel decreased by $554,200.
Sales and Marketing expenses increased by $140,700 resulting from the
Company increasing its presence in the international marketplace. The
Company opened offices in Japan and Europe during the fiscal year ended
July 31, 1998 in order to secure additional sources of international
business for the properties represented. Additionally, the Company
expended $20,000 in pre-opening marketing efforts for properties which
the Company will represent in the future but have not yet opened as
they are in the process of being constructed.
Taxes decreased by $38,168 or 18% as a result of the Company
terminating its lease on a 167 unit hotel in April of 1998. The
Company incurred taxes of $42,656 on the property for the fiscal year
ended July 31, 1998.
Travel and entertainment expenses increased by $40,156 or 34.2% when
compared to the prior year as a result of the Company's expansion into
the Pacific Basin region. Travel costs associated with the acquisition
and pre-opening of the properties located within the Pacific Basin was
$60,000 for the fiscal year ended July 31, 1999.
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Repairs and maintenance expenses decreased by $242,375 or 92.3% as a
result of the non-existence of the repair & maintenance expenses
associated with the Company's lease of a 167 room hotel in fiscal 1998.
The lease was terminated in April of 1998 and in the fiscal year ended
July 31, 1998, incurred repairs and maintenance expenses of $233,347.
Other expenses decreased by $72,375 or 59.8% as a result of the non-
existence of the other expenses associated with the Company's lease of
a 167 room hotel in fiscal 1998. The lease was terminated in April of
1998 and in the fiscal year ended July 31, 1998, incurred other
expenses of $82,545.
Interest expense increased by $58,031 or 82.1% for the year ended July
31, 1999 as compared to the prior year. The increase in interest
expense is attributed to the Company securing and drawing on an
additional bank loan and line of credit during fiscal 1999. (See Note
5 to the consolidated financial statements).
NET INCOME (LOSS)
The Company reported a net loss of $487,458 and a net income of $58,133
for the fiscal years ended July 31, 1999 and 1998, respectively.
Included in the losses for the fiscal year ending July 31, 1999 were
non-operational and pre-opening costs of $174,400 which were a result
of the issuance of common stock, travel and other pre-opening costs and
expenses related to the Company's unsuccessful underwriting of its
common stock.
FOR THE YEARS ENDED JULY 31, 1998 AND 1997
SALES
For the years ended July 31, 1998 and 1997, the Company had total
revenues of $5,609,619 and $6,185,798, respectively, representing a
decrease of $576,179 or 9%. The decrease in revenues was attributable
to a decrease of $644,262 in hotel revenues, offset by an increase of
$68,083 in management and other management related income. The
decrease in hotel revenues is due to the Company terminating its lease
of 167 rooms operated as a hotel in April of 1998. The increase in
management related income is due to the expansion and maturing of the
Company's client base, and due to the addition of two properties during
the fiscal year ended July 31, 1998. The Company was also successful
in increasing the revenues of its managed properties which favorably
impacts the Company's management fees, which are generally based on the
room revenues for the property.
COSTS AND EXPENSES
Operating expenses for management operations were $4,166,531 for the
year ended July 31, 1998 as compared to $4,051,676 for the prior year,
an increase of $114,854 or 2.8%.
Operating expenses for hotel operations were $1,314,284 for the nine
months of operations during the year ended July 31, 1998 as compared to
$1,893,634 for the twelve months of operations ended July 31, 1997.
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The following table summarizes the increases and decreases in operating
expenses for the fiscal year 1998 as compared to the prior year by
management related operations and hotel related operations:
(In Thousands)
Management Operations Hotel Operations
Expense Increase (Decrease) Increase(Decrease)
Payroll & Benefits $ 287 ( $ 259 )
Rent 73 ( 174 )
Reservations Expense ( 70 ) 0
Repairs & Maintenance 5 ( 101 )
Taxes 1 ( 5 )
Advertising 32 0
Travel & Entertainment 38 ( 1 )
Professional Fees ( 22 ) ( 4 )
Insurance ( 10 ) ( 33 )
Utilities 1 ( 8 )
Office Expenses ( 1 ) ( 2 )
Depreciation & Amortization ( 227 ) 0
Other Expenses 8 8
----------- ------------
$ 115 ($ 579 )
=========== ============
Expenses for hotel operations decreased by $579,350 for the fiscal year
ended July 1998 as compared to the prior year due to the Company
terminating its lease of 167 rooms located within the Kuhio Village
Resort in April of 1998. On an average basis, hotel expenses were
$146,000 per month in fiscal 1998 as compared to $157,000 for fiscal
1997, a decrease of 7%.
Payroll and related costs for management operations increased by
$287,000 as a result of the Company increasing its staffing to properly
service the two additional properties and also in anticipation of
future growth in the Company's client base. Included in 1997 is the
elimination of deferred compensation payable of $250,000 and the
unamortized balance of the deferred compensation expense of $62,500
resulting from the forfeiture of a stock option granted to an officer
of the Company; this resulted in a reduction in payroll and benefits
expense of $187,500 in 1997.
Depreciation and amortization expense decreased by $227,000 for the
year ended July 31, 1998, primarily due to the amortization in full of
deferred costs and non-competition fees in fiscal July 1997. The
non-competition agreements were purchased for $800,000 in November of
1993 and covered a period of three years. Monthly amortization expense
of $22,222 was recorded between the months of November 1993 through
October 1996. Of the $227,000 decrease for fiscal 1997, $66,700 is
attributed to the non-existence of this amortization expense for the
fiscal year ended July 31, 1998. The deferred costs represents the cost
of obtaining management contracts and was amortized over a five year
period which ended in June of 1997. In fiscal 1997, the amortization
of the deferred costs were $157,500.
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Interest expense increased by $18,700, from $51,900 to $70,600 for the
year ended July 31, 1998 as compared to the prior year. The increase
in interest expense is attributed to the Company securing and drawing
on an additional line of credit for $250,000 in November of 1997.
(See Note 5 to the consolidated financial statements).
NET INCOME (LOSS)
The Company reported net income of $58,133 and $188,552 for the fiscal
years ended July 31, 1998 and 1997, respectively.
For the fiscal year 1998, the Company incurred a net loss of $67,000 in
its hotel operations at the Kuhio Village Resort as opposed to a net
loss of $2,100 for the prior year. The Company terminated its hotel
operations at the Kuhio Village Resort in April of 1998.
Net Income from the core business operations of the Company, management
and related services, decreased by $65,500 for fiscal 1998 as opposed
to the prior year. In fiscal 1997 the Company recorded a reduction of
$187,500 to its payroll & benefits expense to record the forfeiture of
a stock option by an officer of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of working capital are cash flows from
operations and borrowings. Net cash provided from operations was a
deficit of $696,906 in fiscal 1999 and a deficit of $506,443 in fiscal
1998. The Company had unrestricted cash of $93,440 and $245,969 at
July 31, 1999 and 1998, respectively.
At July 31, 1999, the Company's balance sheet reflected $93,440 of cash
representing a decrease of $152,529 from July 31, 1998. During the
year ended July 31, 1999, cash used in operating activities exceeded
cash provided by operating activities by $696,906. Cash provided by
investing activities was $269,205 and cash provided by financing
activities was $275,172.
In March and April of 1999, the Company sold 8,550 shares of Redeemable
Preferred Stock at a gross price of $100 per share through private
placements. Dividends are cumulative from the date of original issue
and are payable semi-annually, beginning July 15, 1999 at a rate of
$7.50 per annum per share. Upon certain tender offers to acquire
substantially all of the Company's common stock, the holders of the
redeemable preferred stock may require the shares be redeemed at a
redemption price of $100 per share plus accrued and unpaid dividends.
At July 31, 1999, accrued dividends on these shares were $16,715. The
shares are nonvoting and are convertible to the Company's common stock
at $3.00 per share.
The Company has a $200,000 line of credit with a bank dated May 25,
1999 which is secured by the Company's accounts receivable,
furniture, fixtures and equipment and is personally guaranteed by the
Company's Chief Executive Officer. The Company made draws against the
line of credit of $100,000 during the fiscal year ended July 31, 1999.
The line of credit bears interest at 1.75% above the bank s base rate
and is due on December 31, 1999.
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The Company has a $400,000 term loan with a bank dated May 25, 1999
which is secured by the Company's accounts receivable, furniture,
fixtures and equipment and is personally guaranteed by the Company's
Chief Executive Officer. The term loan bears interest at the rate of
9.25% with monthly payments of $8,352 and is due on May 25, 2004.
The Company had net working capital of $122,413 as of July 31, 1999 and
net working capital of $142,622 as of July 31, 1998.
As of July 31, 1999, net working capital included liabilities due to
related parties in the amount of $205,274 consisting of $143,600 in
notes payable to former stockholders of KRI, Inc. (representing the
undistributed cost on the acquisition of the stock of KRI, Inc.), and
$61,674 in notes payable to officers who advanced funds to the Company.
Also included in net working capital is $91,008 in unamortized deferred
revenues related to a signing bonus paid in cash to the Company by one
of its vendors in May of 1998 as a result of the Company entering into
a three year contract with the vendor and a tenant improvement
allowance received upon the renegotiation of the lease rent for the
Company's principal office. The deferred revenues related to the
signing bonus are being amortized over three years and the tenant
improvement allowance is being amortized over the length of the office
lease.
At July 31, 1999, accounts payable increased by $26,687 over the prior
fiscal year, to $916,094. The increase in accounts payable is
attributable to the Company increasing and diversifying its client
base. The Company incurred expenses of $60,000 related to its expansion
into the Pacific Basin. Over half of these expenses were for the
acquisition of management contracts on properties that are currently in
the development stages of completion. The balance of the expenses are
related to the Company's exploring and negotiating the potential
acquisition of other management companies
At July 31, 1999, the Company's accounts receivable consisted of
$324,287 in sales, marketing, reservations, and other reimbursements,
$931,067 of management and other fees, and $90,405 in receivables for
transient room rentals. Thirty percent (30%) of the total accounts
receivable was current, twenty nine percent (29%) was 30 to 60 days
past due, eleven percent (11%) was 60 to 90 days past due, and thirty
percent (30%) was more than 90 days past due.
At July 31, 1999, the Company had a receivable balance of $1,063,853
from Hanalei Bay International Investors ("HBII"), all of which was
more than 90 days past due. HBII sold it's principal asset, the Hanalei
Bay Resort in March of 1999. Upon the closing of the sale, the Company
received $468,000 which was applied to the $435,000 note receivable and
accrued interest due from HBII (see Note 3 to the Consolidated
Financial Statements). The funds received by HBII upon the closing of
the sale was insufficient to make full payment to the Company for it's
accounts receivable balance. Under the terms of the sale, in addition
to the sale proceeds to be received, the current HBII partners shall
share in the future cashflows generated by timeshare unit sales located
within the Hanalei Bay Resort, after certain secured and preferential
payments are made. HBII shall make payments to the Company through the
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funds received from the future cashflows generated by the timeshare
sales of the Hanalei Bay Resort units (see Note 2 to the Consolidated
Financial Statements). Although no assurances can be given, management
is confident that future sales will be made and that the Company shall
receive payment in full of its accounts receivable balance from HBII.
Certain members of the Board of Directors of the Company have a direct
or indirect financial interest in HBII (See Item 12).
In July of 1998, the Company funded a loan of $435,000 to Hanalei Bay
International Investors ("HBII"). The terms of the loan called for
interest at the rate of 12% per annum and a percentage of the future
cashflows received from timeshare sales by the partners of HBII. The
loan was due on or before March 31, 1999 and was fully retired in March
of 1999.
In January of 1998, two officers loaned the Company $50,000 and
$60,000, respectively and the Company executed a note which called for
interest at the rate of 8.5% and a due date of April 15, 1998. In July
of 1998, one of the officers advanced an additional $60,000 to the
Company. In April of 1999, the notes to one of the officers was fully
repaid. The note to the other officer was refinanced into a new note
which included the portion of the undistributed sales proceeds to the
former KRI, Inc. stockholders (see Item 1-Description of Business,
"Development of Business"). The terms of the new note call for monthly
payments of $2,000 per month and interest at the rate of ten percent
(10%) per annum. The note is due and payable on August 15, 2000..
In July of 1998, a director of the Company advanced $175,000 and the
Company executed a note which called for interest at the rate of 10%
per annum and a due date of March 31, 1999. The note was fully paid in
March of 1999. In addition to the return of principal plus interest,
warrants on the Company's common stock were issued to the director.
(see Item 11, Security Ownership of Certain Beneficial Owners and
Management).
In July of 1998, the Company received loans of $200,000 from four
unrelated parties. The terms of the notes call for interest at the
rate of 10% per annum and a due date of March 31, 1999. The loans were
fully paid in March of 1999. In addition to the return of principal
plus interest, warrants on the Company's common stock were also issued.
(see Item 11, Security Ownership of Certain Beneficial Owners and
Management).
The Company has, in the past, met its financial obligations through
borrowings from banks and related parties and through the issuance of
notes to the former stockholders of KRI, Inc. The Company plans to
further extend the due dates of the notes to the former stockholders of
KRI, Inc., and officers if necessary. Although no assurances may be
given, management believes that with the opening of the Royal Orchid
Hotel in Guam, it has built up its revenue base to a level which
will sustain a net operating profit, allowing the Company to meet its
current obligations. Management further believes that the Company
shall have sufficient cash flows for its business operations during
fiscal 2000.
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The Company filed a registration statement on Form SB-2 for the
issuance of 1,600,000 shares of its common stock. The registration
statement became effective on March 11, 1998. The public offering did
not materialized as planned and management did not proceed with the
underwriting. Management is instead negotiating to continue its
efforts in infusing capital through the issuance of its redeemable
preferred stock and although no assurances may be given, management is
confident that the private placement shall be successful. As of July
31, 1999, management was successful in raising $820,188 through the
issuance of the redeemable preferred stock.
The proceeds from the private placement shall be used to retire the
outstanding term loan and line of credit of the Company and to fund
future expansion and growth for the Company.
In July 1999, the Company issued 61,157 shares of restricted common
stock to the lessor of a hotel as part of a security deposit. The
lessor is prohibited from selling these shares in public trading and
will return the shares to the Company at the termination of the lease
agreement in the year 2004. The Company recorded the common stock held
by the lessor as a contra equity item in the Consolidated Balance
Sheet.
Management believes, although no assurances can be given, that the
combination of the net proceeds of the private placement, net of
repayment of borrowing, net cashflow generated from operations, the
collection of the receivable balance from HBII, and the future
availability of credit facilities will be sufficient to fund the
operations of the Company and its future anticipated growth, which may
include the acquisition of other management companies.
The Company has done preliminary research into the possibility of
acquiring or merging with other management companies throughout the
Pacific Basin.
PLAN OF OPERATIONS
The Company is one of the leading regional hotel and resort management
companies within the State of Hawaii. At July 31, 1999, the Company
had 28 management or sales, reservations and marketing contracts
covering 3,000 rooms.
The properties represented by the Company appeals to a wide variety of
the public market as the Company manages a wide spectrum of property
types from the luxury condominium resorts with room rates exceeding
$1,500 per night to the small budget inns with a rates under $40. The
Company believes that the availability of differing products provides
appeal to all levels of business or leisure traveler.
The Company has experienced significant growth since its commencement
of operations in November of 1993. From November of 1993 through July
of 1999, the number of contracts has more than doubled, from 13 to 28
and the number of rooms managed also increased substantially during
this period, from 1,684 to 3,000.
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Although no assurances can be given, the Company plans to expand its
portfolio of management contracts both within the State of Hawaii and
outside of Hawaii in areas such as Saipan, Guam and other Pacific Basin
destinations. In addition to Hawaii, management believes that there
are many opportunities to expand its client base in the emerging
markets of the Pacific Basin. In addition to signing on independent
hotels and resorts, the Company may achieve its desired goals through
joint venture investments, leases and/or acquisitions of management
contracts and/or companies. Currently, the Company is engaged in
various stages of discussions for management of several properties
located both within Hawaii and the Pacific Basin area.
On August 1, 1997, the Company was successful in entering the foreign
market of the Pacific Basin when it signed a management agreement with
the Aquarius Beach Tower, a 68 unit luxury condominium resort located
in Saipan. On January 1, 1999, the Company acquired the management
contract for a 56 unit hotel located in Chuuk. In March of 1999 the
Company entered into a lease agreement for the Royal Orchid Hotel, a
five star 205 unit hotel located on Tumon Bay, Guam. In January of
1999, the Company signed an agreement as co-lessee for an uncompleted
200 unit hotel located in the Cook Islands. The Company is also
finalizing negotiations for an undeveloped 249 unit condominium project
in Takapuna, New Zealand. Although no assurance can be given, it is
management's belief that it will be able to continue its expansion into
the Pacific Basin.
The Royal Orchid in Guam partially opened in October of 1999. Based on
projections by management, although no assurance may be given,
management believes that the terms of the lease agreement will allow it
to attain acceptable profits once the hotel fully opens, tentatively
scheduled for the first quarter of calendar 2000.
In January 1999, the Company signed an agreement as a co-lessee for
certain real property located in the Cook Islands, upon which is
situated an uncompleted hotel development that is approximately 85%
completed. Under terms of the agreement with the government of Cook
Islands, the lessees collectively are to complete construction of the
hotel and open substantially all of the rooms of the hotel for business
not later than June 30, 2000. If substantially all of the rooms of the
hotel are not open for business by June 30, 2000, the lessor of the
property is entitled to compensation in an amount to be determined by
arbitration. Funding for the completion of the hotel development was
to be provided by the Company's co-lessee. However, as of July 31,
1999, the Company's co-lessee has been unable to fund the completion of
the hotel development. The Company is currently in the process of
securing a replacement for the co-lessee. Management believes, although
no assurances can be given, that it will be successful in securing a
co-lessee for the 200 room Cook Islands Hotel and that the Company
shall be retained as the managing agent for the property.
The Company is in the final stages of memorializing a management
agreement for a new 249 unit condominium projects to be constructed in
Takapuna, New Zealand. Although no assurance can be given, management
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is confident that the terms of the agreement will be favorable and that
the Company shall attain acceptable profit levels from the management
of this property. The property is scheduled to commence construction
in late 1999 with a tentative completion date in late 2000 or early
2001.
The Company continues to negotiate with other properties located in
Hawaii and the Pacific Basin and is optimistic that it will be
successful in securing additional contracts during the coming fiscal
year. Although no assurances may be given, management is optimistic
that the additional income generated by the three properties which the
Company has contracts with but have not yet opened will be sufficient
to allow the Company to attain profitability in future years.
The Company experienced losses during the fiscal year July 1999 as
expenses and overhead were incurred in anticipation of the commencement
of operations in Guam and other projects that will be coming on-line
within the next twelve to eighteen months. Although no assurances can
be given, management is confident that the Company will attain
profitability once the properties in Guam, the Cook Islands and New
Zealand open.
With the increase in the number of management contracts, the number of
hotel and resort employees that the Company will supervise may increase
significantly. The Company is presently negotiating for both small
budget hotels and large luxury condominium resorts and therefore, it is
impossible at this time to predict the number of additional employees
that it will supervise or that it will be required to hire for the
hotels and resorts during the next fiscal year.
On July 31, 1995, the Company invested $100,000 into a reorganization
plan instituted by HBII. Under terms of the HBII reorganization plan,
the eighty seven units owned by HBII will be sold under a timeshare
plan and investors in the timeshare plan may receive up to four times
their investment over the life of the timeshare plan. As of July 31,
1999, the Company has received a total of $175,516 from this
investment. Of the funds received, $43,879 represents a return of the
initial investment and $131,637 represents a gain to the Company. At
July 31, 1999, the balance of the investment was $56,121. In March of
1999, HBII sold its principal asset, the Hanalei Bay Resort and the
sale proceeds received at closing was insufficient to retire the
investment by the Company. Under the terms of the sale, in addition to
the sale proceeds received at closing, the current HBII partners shall
share in the future cashflows generated by timeshare sales of the units
located within the Hanalei Bay Resort, after certain secured and
preferential payments are made. HBII shall make payments to the
Company through the funds received from the future cashflows generated
by the timeshare sales of the Hanalei Bay Resort units (see Note 2 to
the Consolidated Financial Statements). Although no assurances can be
given, management is confident that the sale shall be consummated and
that upon closing, the Company shall receive payment in full of its
investment balance from HBII. Certain members of the Board of
Directors of the Company have a direct or indirect financial interest
in HBII (See Item 12).
25
<PAGE>
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. At the time of entering
into the contract, Mr. McGee was a director of the Company. Mr. McGee
tendered his resignation as a member of the board of directors on
February 16, 1999. Since the purchase of KRI, reservation services
have been provided by KRI. The fees to be paid by the Company include
a fixed monthly fee plus commissions. The Company also agreed to sell
to HRCC the assets of the reservation offices of KRI, which consisted
of office equipment. As consideration for the equipment, HRCC agreed
to employ the reservation department employees of KRI and to assume the
liability for the accrued vacation of such employees. KRI realized a
gain of $4,372 on the transaction, as the value of the accrued vacation
exceeded the net book value of the office equipment sold. In May of
1997, the Company renegotiated its contract with HRCC with regard to
the fees charged. Under the renegotiated agreement, the fees paid to
HRCC is based upon the monthly room revenues of the properties managed
by the Company, subject to a minimum monthly fee. 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.
THE TOURISM INDUSTRY
The majority of the Company's properties under contract are located in
Hawaii. According to WTTC Hawaii Tourism Report 1999 published by
the World Travel and Tourism Council, tourism is Hawaii's largest
industry, providing 26.3% of the Gross State Product. It is estimated
that in 1998, tourism accounted for approximately 32.1% of the State's
total work force. The outlook for 1999 is forecasted to be relatively
flat due to the economic prospects in the Asian visitor market, with a
projected decrease in visitors of 2.6% from Japan and 11.6% from Korea.
The outlook for the calendar year 2000 and beyond, however, is a
forecasted average growth of 4.3% per annum over the next twelve years,
which exceeds U.S. expectations of 2.6% and worldwide expectations of
3.4%. The World Travel and Tourism Council is also projecting that the
recently completed Hawaii Convention Center will have a positive impact
on the Hawaii tourism market. Projections call for the Hawaii
Convention Center attendees and delegates to add $126 million in
visitor exports in 1999, increasing to $362 million annually by the
year 2004. Management believes that the economy of the mainland United
States will continue to improve, the recently completed Hawaii
Convention Center shall attract new business to the State of Hawaii and
that the recent economic crisis in Asia will improve in the near future
and, therefore, that the tourism industry of Hawaii as a whole will
experience future growth in earnings.
GROWTH STRATEGY
The Company believes that the improving tourism industry together with
the current economic environment will provide excellent opportunities
for future growth. Under the current economy of the Hawaii hotel
industry, the Company is able to provide more benefits to the owners of
properties which are underperforming in the form of economies of scale
in advertising, reservations, sales and marketing which should
translate to higher revenues and profitability for the property. Since
26
<PAGE>
the Company allocates the cost of each expenditure to all of the
managed properties, property owners would enjoy a substantial increase
in the exposure to the general public, travel agents and wholesalers at
a much lower cost than could be accomplished by an independent hotel.
The operational expertise provided by the Company would also assist the
property owner in reducing operating expenses in the areas of staffing
and central purchasing. Other contributing factors to the future
growth of the Company over the next few years are:
Existing Contracts. The Company has been successful in improving or
maintaining the performance for its properties over the past three
years in spite of the decrease in the Hawaii tourist market. Further
improvements in revenues and net operating profits for the Company's
current portfolio of properties will result in higher management fees
for the Company. The additional fees from the Company's current
portfolio of properties would generally not entail additional
incremental expenses to the Company. Instead, an expansion of the
Company's management contract portfolio would provide better savings to
the existing properties which in certain contracts would translate into
higher management incentive fees.
Additional Contracts. Although no assurance can be given, management
believes that it will be successful in attaining additional management
contracts in the future. Opportunities for additional contracts may
arise from a myriad of factors which include sales of properties,
foreclosures, underperformance and dissatisfaction with current
management. A number of properties in Hawaii are underperforming and
cannot generate the cashflow necessary to service the debts of the
properties. Many of these properties were purchased by Japanese
investors at the height of the Asian bubble of the mid to late 1980s.
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 the majority of its
contracts located within the State of Hawaii. Management believes that
there are emerging markets in which the services provided by the
Company will be needed. These areas include Guam, Saipan and other
Pacific Basin regions. Management has been successful in securing
management contracts for five properties throughout the Pacific Basin,
with two properties currently operating, one property opening in
October of 1999 and two additional properties that are scheduled to
open within the next eighteen months. Although no assurance can be
given, management is confident that it will be able to continue to be
successful in acquiring additional management contracts in the Pacific
Basin and enhance the profitability of these properties through the
services it provides.
Acquisitions. The Company may also seek opportunities to acquire other
hotel management contracts and/or companies that would result in
further synergies for the Company and its managed properties. The
Company has investigated the potential acquisition of other management
companies throughout the Pacific Basin.
27
<PAGE>
YEAR 2000
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any
of the Company's computer programs that have date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar
normal business activities.
Based on recent assessments, the Company determined that it will be
required to modify or replace certain portions of hardware and software
so that those systems will properly interpret dates beyond December 31,
1999. The Company presently believes that with modifications and
replacement of existing hardware and software, the Year 2000 Issue can
be mitigated. However, if such modifications and replacements are not
made, or are not completed timely, the Year 2000 Issue could have a
material impact on the operations of the Company.
The Company's plan to resolve the Year 2000 Issue involves four phases;
assessment, remediation, testing and implementation. To date the
Company has fully completed its assessment of all material systems that
could be affected by the Year 2000 Issue. The completed assessment
indicated that some of the Company's significant information technology
systems could be affected. That assessment concluded that the affected
systems include a number of the Company's personal computers and the
Company's telephone system. If not resolved on a timely basis, these
systems could hamper the Company's ability to provide adequate and
timely customer services from which the Company derives a significant
portion of its revenues.
For its information technology and operating equipment exposures, to
date the Company is approximately 75% complete on the remediation phase
for all material systems and expects to complete software reprogramming
and/or replacement no later than December 15, 1999. After completing
the reprogramming and/or replacement of software, the Company's plans
call for testing and implementing it's information technology systems.
To date, the Company has completed 70% of its testing. The Company has
not yet begun its implementation phase. Completion of the testing
phase is expected by November 15, 1999, with all remediated systems
fully implemented by December 15, 1999.
With respect to third parties, for systems that interface directly with
significant vendors, the Company is 75% complete with its remediation
efforts. Testing of all material systems has been completed.
Implementation has commenced and is expected to be completed by
December 15, 1999. The Company has queried its important suppliers and
vendors that do not involve system interface. To date, the Company is
not aware of any problems that would materially impact the results of
operations, liquidity, or capital resources. The Company has no means
of ensuring that these parties will be Year 2000 ready. The inability
of those parties to complete their Year 2000 resolution process could
materially impact the Company. The affects for non-compliance by third
parties where no system interface exists is not determinable.
28
<PAGE>
The Company will utilize both internal and external resources to
reprogram, or replace, test, and implement the software and operating
equipment for Year 2000 modifications. The total cost of the Year 2000
project is estimated at $50,000 and will be funded through borrowings
and operating cash flows. To date, the Company has incurred
approximately $10,000 in expenses related to all phases of the Year
2000 project. Of the total remaining project costs, approximately
$40,000 is attributable to the purchase of new software and operating
equipment, which will be capitalized or financed through operating
leases.
The Company plans to complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of
certain resources, and other factors. Estimates on the status of
completion and expected completion dates are based on man-hours
incurred to date compared to total expected man-hours. However, there
can be no guarantee that these estimates will be achieved and actual
results could differ materially from those plans. Specific factors
that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer costs, and similar
uncertainties.
29
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
PART F/S
FINANCIAL STATEMENTS Page
No.
July 31, 1999 and July 31, 1998
Report of Independent Accountants -
PricewaterhouseCoopers, LLP 32
Consolidated Balance Sheets -
July 31, 1999 and 1998 33
Consolidated Statements of Operations
for the years ended July 31, 1999 and 1998 34
Consolidated Statements of Stockholder's Equity
for the years ended July 31, 1999 and 1998 35
Consolidated Statements of Cash Flows
for the years ended July 31, 1999 and 1998 36
Notes to Consolidated Financial Statements 38
30
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999 AND 1998
31
<PAGE>
Report of Independent Accountants
The Board of Directors and Stockholders
The Castle Group, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity
(deficiency) and cash flows present fairly, in all material respects,
the financial position of The Castle Group, Inc. and Subsidiary (the
"Company") at July 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards, which require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Honolulu, Hawaii
October 8, 1999
32
<PAGE>
The Castle Group, Inc. and Subsidiary
Consolidated Balance Sheets
For the years ended July 31, 1999 and 1998
ASSETS 1999 1998
Current Assets
Cash $ 93,440 $ 245,969
Accounts receivable, less allowance for
doubtful accounts of $60,311 and $60,658
in 1999 and 1998, respectively 1,285,448 1,013,418
Due from related parties, current (Note 2) 428,316 844,798
Notes receivable, current (Note 3) 110,300 530,600
Prepaid Expenses 164,667 22,074
Restricted Cash 19,941 19,941
Total current assets 2,102,112 2,676,800
Furniture, Fixtures and Equipment,
net (Note 1) 46,475 61,136
Due from related party, noncurrent (Note 2) 635,537 -
Notes Receivable, Noncurrent (Note 3) 35,900 154,400
Deposits 183,281 25,647
Investment in HBII Timeshare Program 56,121 58,906
Organization Costs - 2,585
Total assets $ 3,059,426 $ 2,979,474
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable 916,094 889,407
Vacation payable 107,349 108,855
Wages payable 82,771 76,485
Taxes payable 25,629 26,359
Due to related parties, current (Note 2) 162,299 374,500
Notes payable, current (Note 5) 173,300 750,000
Deferred income (Note 1) 91,008 26,667
Other accrued liabilities 421,249 281,905
Total current liabilities 1,979,699 2,534,178
Due to Related Parties, noncurrent (Note 2) 42,975 152,500
Notes Payable, noncurrent (Note 5) 322,606 -
Deferred Income (Note 1) 70,368 53,333
Total liabilities 2,415,648 2,740,011
Commitments and Contingencies (Note 4)
Redeemable Preferred Stock, $100 par value,
50,000 shares authorized, 8,500 shares
issued and outstanding in 1999 (Note 7) 871,715 -
Stockholders' Equity (Deficiency) (Note 8):
Common stock, $.02 par value, 20,000,000
shares authorized, 5,407,031 and 5,311,130
shares issued and outstanding in 1999 and
1998, respectively 108,141 106,223
Common stock held by lessor (111,641) -
Capital in excess of par 2,668,956 2,539,175
Accumulated deficit (2,893,393) (2,405,935)
Total stockholders' equity (deficiency) (227,937) 239,463
Total liabilities and stockholders'
equity (deficiency) $ 3,059,426 $ 2,979,474
The accompanying notes are an part of the consolidated financial
statements
33
<PAGE>
The Castle Group, Inc. and Subsidiary
Consolidated Statements of Operations
For the years ended July 31, 1999 and 1998
1999 1998
Revenues:
Hotel revenue and management fees (includes
excise tax of $173,005 and $169,896 in
1999 and 1998 $ 4,032,122 $ 5,056,622
Other income 305,161 552,997
------------ ------------
Total revenues 4,337,283 5,609,619
------------ ------------
Expenses:
Payroll and benefits 2,291,910 2,429,167
Reservations services 979,759 849,634
Rent 372,078 976,645
Sales and marketing 352,346 211,646
Taxes 174,058 212,226
Travel and entertainment 157,405 117,249
Professional fees 106,266 104,756
Insurance 68,825 59,505
Office expense 49,003 47,684
Utilities 47,505 52,604
Depreciation and amortization 28,192 36,257
Repairs and maintenance 20,073 262,448
Other 48,617 120,992
----------- ------------
Total expenses 4,696,037 5,480,813
Income (Loss) from Operations (358,754) 128,806
Other Expenses:
Interest expense 128,704 70,673
------------ ------------
Net Income (Loss) $ (487,458) $ 58,133
============ ============
Per Common Share Data (Note 8):
Basic earnings (loss) $ (0.09) $ 0.01
Diluted earnings (loss) $ (0.09) $ 0.01
The accompanying notes are an part of the consolidated financial
statements
34
<PAGE>
The Castle Group, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity (Deficiency)
For the years ended July 31, 1999 and 1998
<TABLE>
<CAPTION>
Common
Stock Common
Subscribed Stock Capital in
Common Stock and Held By Excess of Accumulated
Shares Amount Unissued Lessor Par Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, August 1, 1997 5,311,130 $108,781 $384,750 $ - $2,118,222 $(2,464,068) $ 140,685
Stock subscription redeemed (222,100) - (384,750) - - - (384,750)
Subscription receivable 222,100 4,442 - - 420,953 - 425,395
Net income for the year
ended July 31, 1998 - - - - - 58,133 58,133
--------- --------- --------- --------- ----------- ------------ -----------
Balance July 31, 1998 5,311,130 106,223 - - 2,539,175 (2,405,935) 239,463
Exercise of common stock
warrants 12,244 245 - - 30,559 - 30,804
Issuance of common stock
as compensation 22,500 450 - - 40,331 - 40,781
Costs related to issuance
of redeemable preferred
stock (Note 7) - - - - (34,812) - (34,812)
Redeemable preferred stock
dividend accrual (Note 7) - - - - (16,715) - (16,715)
Issuance of common stock
to lessor (Note 8) 61,157 1,223 - (111,641) 110,418 - -
Net loss for the year
ended July 31, 1999 - - - - - (487,458) (487,458)
--------- -------- -------- ---------- ---------- ------------ -----------
Balance July 31, 1999 5,407,031 $108,141 $ - $(111,641) $2,668,956 $(2,893,393) $ (227,937)
========= ======== ======== ========== ========== ============ ===========
</TABLE>
The accompanying notes are an part of the consolidated financial
statements
35
<PAGE>
The Castle Group, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Years ended July 31, 1999 and 1998
1999 1998
Cash Flows from Operating Activities:
Net Income (loss) $(487,458) $ 58,133
Adjustments to reconcile net income (loss)
to net cash used in operating activities-
Depreciation and amortization 28,192 36,257
Issuance of common stock as compensation 40,781 -
Changes in assets and liabilities-
Increase in accounts receivable (272,030) (193,050)
Increase in due from related parties (219,055) (647,068)
Decrease (increase) in prepaid expenses (142,593) 67,705
Decrease (increase) in notes receivable 103,800 (250,000)
Increase in deferred income 81,376 3,770
Increase in accounts payable 26,687 275,616
Increase (decrease) in wages payable 6,286 (8,082)
Decrease in vacation payable (1,506) (378)
Decrease in taxes payable (730) (9,784)
Increase in other accrued liabilities 139,344 160,438
---------- ----------
Net cash used in operating activities (606,906) (506,443)
Cashflows from Investing Activities:
Loan to Hanalei Bay International Investors - (435,000)
Repayment of loan by Hanalei Bay
International Investors 435,000 -
Purchase of furniture, fixtures & equipment (10,946) (4,483)
Decrease in investment in HBII Time Share Program 2,785 2,334
Receipt (payment) of deposits (157,634) 37,374
---------- ---------
Net cash provided by (used in)
investing activities 269,205 (399,775)
Cashflows from Financing Activities:
Proceeds from exercise of common stock warrants 30,804 -
Proceeds from issuance of redeemable preferred
stock, net of issuance costs 820,188 -
Repayment to related parties (321,726) (2,400)
Proceeds from related parties - 345,000
Proceeds from stock subscription - 40,649
Repayment of notes payable (700,000) (250,000)
Proceeds from notes payable 445,906 750,000
---------- ----------
Net cash provided by financing activities 275,172 883,249
---------- ----------
Net Decrease in Cash (152,529) (22,969)
Cash at Beginning of Year 245,969 268,938
---------- ----------
Cash at End of Year 93,440 245,938
========== ==========
The accompanying notes are an part of the consolidated financial
statements
36
<PAGE>
The Castle Group, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Continued)
For the Years ended July 31, 1999 and 1998
1999 1998
Supplemental Disclosures:
Cash paid during the year for interest $ 145,070 $ 66,766
Supplemental Schedule of Noncash Investing
and Financing Activities:
Issuance of common stock, 222,200 shares for
subscriptions redeemed $ - $ 4,442
Additional paid in capital on subscriptions
redeemed - 420,950
Issuance of common stock to lessor 111,641 -
Redeemable preferred stock dividend accrual 16,715 -
The accompanying notes are an part of the consolidated financial
statements
37
<PAGE>
The Castle Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Organization
The Castle Group, Inc. was incorporated under the laws of the State of
Utah on August 21, 1981. The Castle Group, Inc. operates in the hotel
and resort management industry in the State of Hawaii, Guam, and the
Commonwealth of Saipan under the trade names "Hawaiian Pacific Resorts"
and "Castle Resorts and Hotels."
The accounting and reporting policies of The Castle Group, Inc. and
Subsidiary (the "Company") conform with generally accepted accounting
principles and practices within the hotel and resort management
industry.
Principles of Consolidation
The consolidated financial statements of the Company include the
accounts of 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.
New Accounting Pronouncements
Effective August 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes
standards for reporting operating segments and requires certain other
disclosures about products and services, geographic areas and major
customers. The adoption of this statement did not have a material
effect on the Company's consolidated financial statements, as
management does not evaluate the Company based on the performance of
operating segments.
Effective August 1, 1998, the Company adopted SFAS No. 132, "Employers
Disclosures about Pensions and Other Postretirement Benefits," which
standardized the disclosure requirements for pensions and other
postretirement benefits. Since the Company does not have a pension
plan or other postretirement plan, the adoption of this statement did
not have an effect on the Company's consolidated financial statements.
In June 1998, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS No.
133 requires the recognition of all derivative instruments in the
statement of financial position as either assets or liabilities and the
measurement of derivative instruments at fair value. In June 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement
No. 133." The original effective date for SFAS No. 133 was for all
38
<PAGE>
The Castle Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
fiscal years beginning after June 15, 1999. As a result of SFAS No.
137, the effective date for SFAS No. 133 is for all fiscal quarters of
all fiscal years beginning after June 15, 2000. As the Company does
not invest in derivative instruments or participate in hedging
activities, the adoption of SFAS No. 133, as amended by SFAS No. 137,
is not expected to have a material effect on the Company's consolidated
financial statements.
Reclassifications
Certain reclassifications were made to the 1998 consolidated financial
statements to conform to the 1999 presentation. Such reclassifications
did not have an effect on net income as previously reported.
Income Taxes
The Company records deferred tax assets and liabilities for expected
future tax consequences of events that have been recognized in the
Company's consolidated financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement carrying amounts and tax
bases of assets and liabilities using enacted tax rates in effect in
the years in which the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets
to the amount expected to be realized.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Restricted Cash
Restricted cash consists of cash held in client trust accounts and cash
pledged as collateral for an equipment lease.
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 accounting records, and any resulting
gain or loss is reflected in the Consolidated Statement of Operations
for the period.
The cost of maintenance and repairs are charged to income as incurred.
Renewals and betterments are capitalized and depreciated over their
estimated useful lives.
39
<PAGE>
The Castle Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
At July 31, 1999 and 1998, furniture, fixtures and equipment consisted
of the following:
1999 1998
Office equipment $ 220,959 $ 210,013
Less accumulated depreciation 174,484 148,877
--------- -----------
$ 46,475 $ 61,136
========= ===========
Depreciation is computed using the declining balance and straight-line
methods over the estimated useful life of the assets (5 to 7 years).
For the years ended July 31, 1999 and 1998, depreciation expense was
$25,607 and $25,918, respectively.
Income Recognition
The Company recognizes income from the management of resort properties
according to terms of its various management contracts.
Deferred Income
During the year ended July 31, 1999, the Company renegotiated its
office lease. In connection with this renegotiation, the Company
received six months of free office rent and a tenant improvement
allowance of $56,785. The free office rent and tenant improvement
allowance is recorded as deferred income and is recognized on the
straight-line method over the term of the lease agreement.
During the year ended July 31, 1998, the Company received a signing
bonus of $80,000 as a result of a contract entered into with a vendor
to provide services over a three-year period. Income is recognized on
the straight-line method over the term of the contract.
Sales and Marketing Expenses
The Company incurs sales and marketing expenses in conjunction with the
production of promotional materials, trade shows, retainers for out-of-
state sales agents, and related travel costs. Such costs are expensed
as incurred. During the years ended July 31, 1999 and 1998, the
Company incurred sales and marketing expenses of $352,346 and $211,646,
respectively.
Concentration of Credit Risks
The Company maintains its cash with several financial institutions in
Hawaii. Balances maintained with these institutions are occasionally
in excess of federally insured limits.
Concentration in Market Area
The Company manages hotel properties primarily in Hawaii and is
dependent on the state's visitor industry. During the years ended
40
<PAGE>
The Castle Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
July 31, 1999 and 1998, the Company expanded its operation to Guam and
Saipan, respectively. The Company is also contemplating expansion into
other areas in the Pacific.
Use of Management Estimates in Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Fair Value of Financial Instruments
The carrying value of notes receivable and notes payable approximates
fair values as these notes have interest rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities. The fair value of the Company's investment in
Hanalei Bay International Investors ("HBII") Time Share Program is
estimated based on future cash flow projections.
2. Related Party Transactions
Hanalei Bay International Investors
The Company had a hotel management agreement with HBII to manage the
Hanalei Bay Resort ("HBR"). The managing general partner of HBII is
also the chairman and chief executive officer of the Company. Under
the management agreement with HBII, the Company was to receive
management and incentive fees based on a percentage of gross total
revenue and net income, respectively. The Company also received
reservation and marketing fees based on a percentage of room revenue.
During the year ended July 31, 1999 and 1998, total fee income from HBR
amounted to $739,346 and $712,451, respectively.
In March 1999, HBII consummated the sale of its interest in HBR to an
unrelated third party. The proceeds from the sale of HBR were not
sufficient to satisfy all claims of HBR s creditors. At July 31, 1999
and 1998, the Company's receivable from HBR amounted to $1,063,853 and
$844,798, respectively. Under the terms and conditions of the
agreement to sell HBR, HBII is entitled to receive a percentage of the
future cash flows from HBR s hotel operations and the sale of certain
time share units. The current portion of the receivable of $428,316 as
of July 31, 1999 represents the projected available cash flow of HBII
to repay the Company during fiscal 2000. The remaining noncurrent
portion of $635,537 is expected to be collected in future years.
Management expects that such proceeds will be sufficient to allow HBII
to repay its debt to the Company.
41
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Castle Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
HBII Time Share Program
In July 1995, the Company invested $100,000 in the HBII Time Share
Program of Hanalei Bay Resort. The Company receives moneys based on a
percentage of timesharing unit sales. The Company records proceeds
from the investment on the installment method, whereby a portion of the
proceeds represents a return of initial investment and a portion
represents gains.
During 1999, the Company received $11,100 from this investment of which
$2,800 represents a return of initial investment and $8,400 represents
a gain recognized by the Company. During 1998, the Company received
$9,300 from this investment of which $2,300 represents a return of
initial investment and $7,000 represents a gain recognized by the
Company. At July 31, 1999 and 1998, the investment in the HBII Time
Share Program was $56,121 and $58,906, respectively. The fair value of
the Company's investment in the HBII Time Share Program is estimated to
be approximately $224,000 and $236,000 at July 31, 1999 and 1998,
respectively, based on future cash flow projections.
Reservations Services
Reservations services are provided by Hawaii Reservation Center
Corporation, wholly owned by a former director who has a 2% interest in
the Company. The Company had a payable balance to Hawaii Reservation
Center Corporation of $78,684 and $140,868 as of July 31, 1999 and
1998, respectively. Reservations services expense related to Hawaii
Reservation Center Corporation is included in the Reservations Services
caption in the Consolidated Statements of Operations.
Due to Related Parties
The Company had the following related party loan balances as of July
31, 1999 and 1998:
1999 1998
6% loans from stockholders, due August 31, 1998 $ 143,600 $ 184,400
10% loans from Director, due March 31, 1999 - 175,000
10% loans from Officers, due August 15, 2000 61,674 167,600
--------- ---------
205,274 527,000
Less current portion 162,299 374,500
--------- ---------
Due to related parties, non-current $ 42,975 $ 152,500
========= =========
In June 1998, the Company issued warrants to acquire up to 87,500
shares of common stock for $2.00 per share, exercisable through June
2003 in exchange for the $175,000 loan made by a Director. No warrants
were exercised during 1999 or 1998.
42
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Castle Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
3. Notes Receivable
At July 31, 1999 and 1998, notes receivable consisted of the following:
1999 1998
Notes receivable from third party in monthly
installments of $10,000, including interest
at 10% per annum. Balance of principal and
interest is due September 1, 2000. Real
estate is pledged as collateral. $ 146,200 $ 250,000
Notes receivable from related parties - 435,000
--------- ---------
$ 146,200 $ 685,000
Less current portion 110,300 530,600
--------- ---------
Notes receivable, non-current $ 35,900 $ 154,400
========= =========
4. Commitments and Contingencies
Leases
The Company leases office space, vehicles and equipment expiring at
various dates through 2004. The office lease may be renewed for an
additional five years.
In March 1999, the Company signed an agreement to lease and manage a
newly constructed hotel in Guam through December 2004. The Company
expects to begin leasing and managing this resort property in November
1999.
At July 31, 1999, the future minimum rental commitments under these
leases was as follows:
Schedule of future minimum lease payments
2000 $ 1,408,000
2001 2,655,000
2002 2,799,000
2003 2,894,000
2004 2,909,000
2005 1,139,000
-------------
$ 13,804,000
=============
Rent expense under these leases amounted to approximately $317,000 and
$922,000 for the years ended July 31, 1999 and 1998, respectively.
43
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Castle Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Management Contracts
The Company manages several hotels and resorts under management
agreements expiring at various dates through December 2004. 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
respective management agreements.
In addition, the Company has sales, marketing and reservations
agreements with other hotels and resorts expiring at various dates
through December 1999. 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 respective agreements.
Lease of Real Property in Cook Islands
In January 1999, the Company signed an agreement as a co-lessee for
certain real property located in the Cook Islands, upon which is
situated an uncompleted hotel development that is approximately 85%
completed. Under terms of the agreement with the government of Cook
Islands, the lessees collectively are to complete construction of the
hotel and open substantially all of the rooms of the hotel for business
not later than June 30, 2000. If substantially all of the rooms of the
hotel are not open for business by June 30, 2000, the lessor of the
property is entitled to compensation in an amount to be determined by
arbitration. funding for the completion of the hotel development was
to be provided by the Company's co-lessee. However, as of July 31,
1999, the Company's co-lessee has been unable to fund the completion of
the hotel development. The Company is currently in the process of
securing a replacement for the co-lessee.
44
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Castle Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
5. Notes Payable
At July 31, 1999 and 1998, notes payable consisted of the following:
1999 1998
Term loan payable to a bank at an interest
rate of 9.25% with monthly payments of
$8,352. The balance and any unpaid interest
is due on May 24, 2004. The Company's
accounts receivable, furniture, fixtures
and equipment are pledged as collateral
and the Company's Chief Executive Officer
is a guarantor $ 355,906 $ -
$300,000 line of credit from a bank with
drawings due on December 20, 1998, with
interest (10.5% at July 31, 1998) at 2.5%
above the bank's base rate. The Company's
accounts receivable were pledged as
collateral and the Chief Executive
Officer and several of the Company's
directors were guarantors. - 300,000
Original $250,000 line of credit from a
bank was amended and reduced to $200,000
on May 25, 1999. Drawings are due on
December 31, 1999, with interest (9.25%
at July 31, 1999) at 1.75% above the
bank's base rate. The Company's accounts
receivable, furniture, fixtures and
equipment are pledged as collateral and
the Company's Chief Executive Officer is
a guarantor on the line of credit 100,000 250,000
Notes payable to various individuals with
interest accruing at 10% per annum.
Principal and any unpaid interest due on
March 31, 1999. In connection with the
notes, certain common stock warrants were
issued (see Note 8). - 200,000
---------- ----------
495,906 750,000
Less current portion 173,300 750,000
---------- ----------
Notes payable, non-current $ 322,606 $ -
========== ==========
45
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Castle Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
6. Employee Benefits
The Company has a 401(k) Profit Sharing Plan (the "Plan") available for
its employees. Under the terms of the Plan, the Company may match 50%
of the compensation reduction of the participants in the Plan up to 1%
of compensation. Any employee with one-year service and 1,000 credit
hours of service, who is at least twenty-one years old, is eligible to
participate. For the years ended July 31, 1999 and 1998, no
contributions were made by the Company.
The Company also has a Flexible Benefits Plan (the "Benefits Plan").
The participants in the Benefits Plan are allowed to make pre-tax
premium elections which are intended to be excluded from income as
provided by Section 125 of the Internal Revenue Code of 1986. To be
eligible, an employee must have been employed for 90 days. The
benefits include group medical insurance, vision care insurance,
disability insurance, cancer insurance, group dental coverage, group
term life insurance and accident insurance.
7. Redeemable Preferred Stock
In March and April of 1999, the Company issued a total of 8,550 shares
of $100 par value redeemable preferred stock to certain officers and
directors. Dividends are cumulative from the date of original issue
and are payable semi-annually, beginning July 15, 1999 at a rate of
$7.50 per annum per share. Upon certain tender offers to acquire
substantially all of the Company's common stock, the holders of the
redeemable preferred stock may require the shares be redeemed at a
redemption price of $100 per share plus accrued and unpaid dividends.
At July 31, 1999, accrued dividends on these shares of $16,715 ($1.95
per share), is included in redeemable preferred stock in the
accompanying Consolidated Balance Sheet. These shares are also
nonvoting and are convertible to the Company's common stock at $3 per
share. As of January 15, 2001, the redeemable preferred stock will be
redeemable at the option of the Company at a redemption price of $100
per share plus accrued and unpaid dividends.
46
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Castle Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
8. Common Stock
Restricted Common Stock
In July 1999, the Company issued 22,500 shares of restricted common
stock as compensation to an employee. The Company recorded payroll and
benefits expense of approximately $40,781 based on the fair market
value of the Company's stock on the date of issuance ($1.8125 per share
at July 30, 1999). The holder of these shares is prohibited from
selling these shares in normal public trading.
Common Stock Held by Lessor
In July 1999, the Company issued 61,157 shares of restricted common
stock to the lessor of a hotel as part of a security deposit. The
lessor is prohibited from selling these shares in public trading and
will return the shares to the Company at the termination of the lease
agreement in the year 2004. The Company recorded the common stock held
by the lessor as a contra equity item in the Consolidated Balance
Sheet.
Common Stock Warrants
In June 1998, the Company issued common stock warrants to acquire up to
187,500 shares of common stock for $2.00 per share, exercisable through
June 2003 in exchange for certain loans made to the Company. No common
stock warrants were exercised during 1999 and 1998.
In May 1994, the Company issued common stock 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. During 1999,
these common stock warrants were exercised on a net basis, resulting in
the issuance of 12,244 shares of the Company's common stock.
Common Stock Options
In May 1997, the Company, as part of a renegotiation of its reservation
services agreement, granted an option to purchase 50,000 shares of the
Company's common stock at a price of $2 per share to Hawaii Reservation
Center Corporation, which is wholly-owned by a stockholder/director of
the Company. The options are exercisable at any time between May 1997
and 2002 and no options were exercised as of July 31, 1999 or 1998.
No other stock options were issued during the years ended July 31, 1999
or 1998.
47
<PAGE>
Castle Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Per Common Share Data
The following is a reconciliation of the numerators and denominators of
the basic and diluted common earnings (loss) per share:
1999
Per Common
Income Shares Share
(Numerator) (Denominator) Amount
Net Loss $ (487,458)
Less: Redeemable preferred
stock dividend accrual ( 16,715)
-----------
BASIC:
Loss available to common
stockholders (504,173) $ 5,313,912 $ (0.09)
Effect of dilutive securities:
Redeemable preferred stock,
stock subscriptions,
options and warrants - - -
DILUTED: ----------- ------------ --------
Loss available to common
stockholders and assumed
conversions $ (504,173) $ 5,313,912 $ (0.09)
=========== ============ ========
1998
Per Common
Income Shares Share
(Numerator) (Denominator) Amount
BASIC:
Net Income $ 58,133 $ 5,274,113 $ 0.01
Effect of dilutive securities:
Stock subscriptions, options
and warrants - 16,837 -
DILUTED: ----------- ------------ --------
Net Income and assumed
conversions $ 58,133 $ 5,257,276 $ 0.01
=========== ============ ========
In 1999, 8,550 shares of redeemable preferred stock, 187,500 common
stock warrants, and 50,000 common stock options were not considered
common stock equivalents since they had an anti-dilutive effect on
basic loss per share.
In 1998, 212,500 common stock warrants and 50,000 common stock options
were considered common stock equivalents since they had a dilutive
effect on basic earnings per share.
48
<PAGE>
Castle Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
9. Income Taxes
Significant components of the Company's deferred tax assets and
liabilities as of July 31, 1999 and 1998 are as follows:
1999 1998
Deferred Tax Assets:
Net operating loss carryforward $ 920,000 $ 673,000
Noncompetition agreement 197,000 219,000
Deferred income 21,000 32,000
Vacation pay 8,000 7,000
------------ ------------
1,146,000 $ 931,000
Deferred Tax Liability:
Furniture, fixtures and equipment (5,000) (8,000)
------------ ------------
Net Deferred Tax Asset 1,141,000 923,000
Valuation Allowance (1,141,000) (923,000)
------------ ------------
$ - $ -
============ ============
The net change during 1999 and 1998 in the valuation allowance was an
increase of $218,000 and a decrease of $85,000, respectively.
The Company has a net operating loss carryforward for income tax
purposes of $2,299,057 at July 31, 1999, which expires at various dates
through fiscal year 2019.
In 1998, net operating losses of $89,000 were utilized to offset
current taxable income.
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. The ultimate liability
of the Company, if any, cannot be determined at this time. Based upon
consultation with counsel, management does not expect that the
aggregate liability, if any, resulting from these proceedings would
have a material effect on the Company's consolidated financial
position, results of operations or liquidity.
49
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
The Company did not change nor have any disagreements with its
principal accountant during the fiscal year ended July 31, 1999.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth certain information concerning the
directors and executive officers of the Company as of September 30,
1999. 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 56 Chief Executive Officer,
Director and
Chairman of the Board
John G. Tedcastle 66 Vice Chairman of the Board and
Director
Alan K. Cambra 55 Chief Operating Officer
Hideo Nomura 48 Director
Ryoji Takahashi 59 Director
Motoko Takahashi 55 Secretary and Director
Michael S. Nitta 40 Chief Financial Officer
Thomas S. Blankley, Jr. 46 Vice President, Finance
Alan R. Mattson 43 Senior Vice President,
Sales & Marketing
Judhvir Parmar 64 Director
Steve Townsend 45 Sr. Vice President, Operations
Stanley Mukai 67 Director
Edward Calvo Sr. 63 Director
Noboru Sekiguchi 72 Director
Rick Wall. Mr. Wall was appointed the Company's chief executive
officer and chairman of the board upon consummation of the Castle Plan.
Mr. Wall was instrumental in the formation of Castle Group Hawaii, the
negotiation and consummation of the Castle Plan and the acquisition of
KRI. He was the president, director and founder of Castle Group
Hawaii. During the past ten years, Mr. Wall has been the managing
director of HBII, which owns 62% of the Hanalei Bay Resort. Mr. Wall
has been elected to the board of directors of the Hawaii Visitors &
Convention Bureau and resides in Honolulu, Hawaii.
50
<PAGE>
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.
Alan K. Cambra. Mr. Cambra joined the Company on January 1, 1999 as
chief operating officer. Mr. Cambra has over thirty year of experience
in the hotel industry, most recently as Executive Vice President of
Omni Hotels where he supervised and actively participated in Omni's
growth from four hotels to forty over a four year period. Prior to
Omni, Mr. Cambra was involved with various management companies
including Marriott Hotels and Resorts, Interstate Hotels, Mariner
Corporation and Shoreline Operating Company. Mr. Cambra was born in
Hawaii and is a graduate of Oklahoma State University. Mr. Cambra
resides in Hawaii, where he was born and raised.
Hideo Nomura. Mr. Nomura was appointed as a director of the Company in
November, 1993. Mr. Nomura is president of Nomura Holdings and of
Nomura Hitchcock Corporation, Ltd., a property related investment
consulting firm based in Tokyo, Japan, and has held this position since
1987. Mr. Nomura is the operational executive of the Marina del Rey
Residential Development in California, and was the manager of Mitsui &
Company (N.Z.) Ltd. for five years until 1987. Mr. Nomura is a
resident of Japan.
Ryoji Takahashi. Mr. Takahashi was appointed as a director of the
Company in November, 1993. Mr. Takahashi, a resident of Japan, has,
for over thirty years, been a substantial principal of Nichiman Kosan,
a corporation which specializes in coordinating the installation of air
conditioning and sound control systems in commercial buildings and
subcontracts with over 300 companies. He is also the major stockholder
of Nikkankyo Group which consists of six independent companies and has
over five hundred employees. Mr. Takahashi is a graduate of Hosei
University in Tokyo, Japan, where he majored in economics.
Motoko Takahashi. Ms. Takahashi is the sister of Ryoji Takahashi and
was appointed secretary of the Company in August of 1994 and as
director in March of 1995. Ms. Takahashi had previously served as
director for various Japanese investment companies in the United
States. She also holds the position as Vice President of N.K.C.
Hawaii, Inc. Ms. Takahashi was born and completed her education in
Tokyo, Japan and has resided in the United States for more than 30
years.
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<PAGE>
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 and was instrumental
in the formation of KRI Inc. and the acquisition of Hawaiian Pacific
Resorts in 1987 from its former founders. Prior to the formation of
KRI, Inc. Mr. Nitta served as secretary and treasurer of Hawaiian
Pacific Resort Hotels Inc. from 1982. Born and residing in Hawaii, he
is a graduate of the University of Hawaii and holds a Masters of
Accounting Degree.
Thomas S. Blankley, Jr. Mr. Blankley joined the Company in September,
1998. Prior to joining the Company, Mr. Blankley was president of
PAHIO Vacation Resorts, Inc., Hawaii's largest timeshare sales and
marketing company. A native of New York, Mr. Blankley was a Managing
Director for Merrill Lynch in Tokyo and Drexel Burnham Lambert in
London before moving to Hawaii in 1988. Mr. Blankley resides on the
island of Kauai, Hawaii.
Alan R. Mattson. Mr. Mattson has over 20 years of experience of
marketing and sales in the tourism industry. Mr. Mattson joined the
Company in September of 1999 and was formerly vice president of sales
and marketing for Dollar Rent a Car, responsible for all sales and
marketing efforts for Hawaii, Asia and the Pacific. Prior to Dollar
Rent a Car, Mr. Mattson was director of marketing for Avis Car Rental,
operating out of the Avis worldwide headquarters in New York. Mr.
Mattson also has seven years of sales and marketing experience with
Hilton Hotels Corporation, performing in a variety of senior level
sales and marketing positions in Hawaii and the domestic United States.
Mr. Mattson resides in Honolulu, Hawaii.
Judhvir Parmar. Mr. Parmar was formerly Senior Vice President of
Investment Operations for International Finance Corporation ("IFC"), a
wholly owned subsidiary of the World Bank. IFC was responsible for all
private sector operations of the World Bank. A specialist in project
corporate finance, Mr. Parmar was with IFC for more than twenty years
and was responsible for the worldwide investment program at IFC. In
August, 1993, Mr. Parmar retired from IFC to form his own consulting
company.
Steve Townsend. Mr. Townsend joined the Company in July, 1997 and has
23 years of hotel and resort management experience. During his career
he has held numerous senior management positions with resort and hotel
management companies. Prior to joining the Company, Mr. Townsend was
director of operations for Interstate Hotels prior to a one year
assignment entailing rebuilding and re-opening a hurricane damaged
resort in the Virgin Islands. Prior to Interstate, Mr. Townsend spent
8 years with Village Resorts. Mr. Townsend is a graduate of the Hotel
and Restaurant Administration School at Florida State University.
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Stanley Mukai. Mr. Mukai is a graduate of the Harvard Law School and a
partner in the law firm of McCorriston Miho Miller Mukai located in
Honolulu, Hawaii. His expertise is in the area of taxation and Mr.
Mukai has held various positions such as Advisory Board Member, Hawaii
Tax Institute; Trustee, Tax Foundation of Hawaii; Co-Chairman, Tax
Subcommittee, American Bar Association; Chairman, Tax Subcommittee on
U.S. District and Portfolio Investment by Foreigners; and Chairman,
Section of Taxation, Hawaii Bar Association.
Edward Calvo, Sr. Mr. Calvo is vice president of Calvo Enterprises,
Inc., a conglomerate of ten businesses with fifteen hundred employees.
They are the largest private employer on Guam. Mr. Calvo has served
as a Senator in the Guam legislature and is currently the Board
Chairman of the Guam Waterworks Authority.
Noboru Sekiguchi. Mr. Sekiguchi is a graduate of Waseda University
and is a Director and controller of Nikkankyo Group, which is the
parent company of N.K.C. Hawaii. He has worked for Toyo Menka Company,
one of the leading trading companies in Japan for forty years as a
financial officer.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES ACT.
Section 16 of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers and persons who own more
than 10% of a registered class of the Company's equity securities to
file with the Securities and Exchange Commission initial reports of
beneficial ownership (Form 3) and reports of changes in beneficial
ownership (Forms 4 and 5) of the Company's common stock and other
equity securities of the Company. Officers, directors and greater than
10% shareholders are required by SEC regulation to furnish the Company
with copies of all Section 16(a) reports they file.
To the Company's knowledge, all directors, officers and holders of more
than 5% of the Company's common stock, filed all reports required of
Section 16(a) of the Securities Exchange Act of 1934 during the fiscal
year ending July 31, 1999.
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ITEM 10. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
The following table shows for the fiscal year ended July 31, 1999, 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. Mr. Townsend's
compensation includes the issuance of 22,500 unregistered shares of the
Company's common stock.
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
Steve Townsend Senior Vice President $181,562
Michael Nitta Chief Financial Officer $ 90,000
Thomas Blankley, Jr. Vice President Finance $ 90,000
COMPENSATION OF DIRECTORS
The Company does not have any present standard arrangements regarding
compensation of directors for service as a director, or for attendance
at meetings of the Board of Directors or for participation on
committees or other special assignments. The Board of Directors may
adopt resolutions providing for reasonable compensation for
participation in committees or special assignments and reimbursement
for reasonable expenses incurred in attending any meeting of the Board
of Directors. No compensation for service as a director is presently
contemplated.
There were no arrangements pursuant to which any director of the
Company was compensated during its most recent fiscal year for service
provided solely as a director, or for attendance at any meeting of the
board of directors.
EMPLOYMENT CONTRACTS
The Company has entered into written employment contracts with Mr.
Nitta, effective as of November 1, 1993 and Mr. Cambra effective as of
January 1, 1999, and Mr. Townsend effective as of July 31, 1997. Other
than Mr. Nitta, Mr. Cambra and Mr. Townsend, the Company has entered
into no employment contract with any director or executive officer.
The above-mentioned employment agreements are for five years and
provide for a base salary, to be increased annually by a percentage no
less than the increase in the Honolulu Consumer Price Index for the
preceding twelve months. Under their respective employment agreements,
the current base salary Mr. 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 Mr. Townsend is $100,000 and
for Mr. Cambra, $150,000. The employment agreements further provide
for paid vacation; a monthly automobile allowance; an annual
54
<PAGE>
performance bonus potential of up to 15% of the base salary (up to 20%
for Mr. Nitta), depending upon attaining pre-determined goal criteria;
membership in a pension plan (not yet established) that would
contribute the equivalent of 10% of base salary annually; a business
development bonus (which has been waived in the past and current fiscal
years); membership in a 401(k) plan; and full medical, dental and
disability insurance.
The employment agreements contain a "change-in-control" provision which
gives each of the employees under contract the right, upon the
occurrence of a "change-in-control," to terminate their employment and
receive as severance pay the total compensation remaining to be paid
under the agreement as of the date of such termination or the total
compensation for three years following the date of termination,
whichever is greater. The term "change-in-control" is defined in each
agreement as the date when persons other than the shareholders of
record on the date of commencement of the term of such agreement become
the beneficial owner of 51% of the Company's voting stock.
LONG TERM INCENTIVE PLANS
On July 31, 1999, the Company awarded Mr. Townsend 22,500 shares of
unregistered and restricted common stock as a bonus. No other options,
awards, options or stock appreciation rights or long term incentive
plan awards were issued or granted to the Company's management during
the fiscal year ending July 31, 1999.
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 100% 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 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. A
total of 1,000,000 shares of common stock has been reserved for
issuance under the Plan. No stock grants were issued for the years
ended July 31, 1995 through July 31, 1999.
The Company's stockholders have approved a 1995 Stock Purchase Plan for
the purposes of providing an employee benefit which will allow
employees of the Company to purchase shares of common stock at a
discount of 15% of the fair market value of the stock. A total of
500,000 shares of common stock has been reserved for issuance under the
Plan. As of July 31, 1999, the Stock Purchase Plan had not been
instituted.
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<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth the number of shares of the Company's
common stock beneficially owned as of July 31, 1999 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 and Address Beneficially Owned(1) Shares %of Class(2)
- --------------------- ---------------------- --------------------
Rick Wall
745 Fort Street
Honolulu, HI 96813 815,000(3) 14%
John G. Tedcastle
745 Fort Street
Honolulu, HI 96813 525,000(5) 9%
Hideo Nomura
745 Fort Street
Honolulu, HI 96813 525,000 9%
L.C.C. Management Inc.
745 Fort Street
Honolulu, HI 96813 645,833(6) 11%
N.K.C. Hawaii, Inc.
745 Fort Street
Honolulu, HI 96813 900,000(7) 15%
Thomas S. Blankley, Jr.
745 Fort Street
Honolulu, Hawaii 96813 78,000(4) 1%
Michael S. Nitta
98-1722 Halakea St.
Aiea, Hawaii 96701 45,500 < 1%
Steve Townsend
745 Fort Street
Honolulu, Hawaii 95813 22,500 < 1%
Directors and officers
as a group (12 persons) 3,631,833 61%
(1) Except as otherwise noted, the Company believes the persons named
in the table have sole voting and investment power with respect to
the shares of the Company's common stock set forth opposite such
persons names. Amounts shown include the shares issuable
pursuant to various stock options and warrants exercisable in
1999.
56
<PAGE>
(2) Determined on the basis of 5,929,531 shares outstanding. Amount
includes shares issuable under certain stock options and warrants
exercisable as of July 31, 1999.
(3) Includes 375,000 shares held by HBII Management, Inc., which is
owned and controlled by Mr. Wall.
(4) Includes 25,000 shares issuable pursuant to warrants held by Mr.
Thomas Blankley Jr. Includes 50,000 shares issuable pursuant
to warrants held by the parents of Mr. Thomas Blankley Jr.
(5) Includes 525,000 shares held by The John Tedcastle Family Trust,
of which Mr. John Tedcastle is trustee with control over voting
rights.
(6) Includes 525,000 shares held by L.C.C. Management, Inc., a
corporation owned and controlled by Ms. Janet Parmar, spouse of
Mr. Judvhir Parmar, a director of the Company. Includes 87,500
shares issuable pursuant to warrants held by Mr. Parmar.
Includes 33,333 shares issuable pursuant to redeemable
preferred stock held by Mr. Parmar.
(7) Includes 900,000 shares held by N.K.C. Hawaii, Inc. which is owned
and controlled by the family of Mr. Takahashi
OPTIONS, WARRANTS AND RIGHTS
In May 1994, the Company entered into a Common Stock Purchase Warrant
with Van Kasper and company for services provided. The Warrant is for
25,000 shares exercisable on or before May 12, 1994 for a price of
$1.25 per share. In May of 1999, the warrants were exercised on a net
basis, resulting in the issuance of 12,244 shares of the Company's
common stock.
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 Corp. is a
wholly owned corporation of Mr. Charles McGee, a former director of the
Company. As of July 31, 1999, the option had not yet been exercised.
Mr. McGee tendered his resigned as a member of the board of directors
on February 16, 1999.
In June 1998, certain individuals advanced a total of $375,000 to the
Company in the form of a Promissory Note from the Company to the
individual. The Notes specify that if the principle amounts are not
returned to the individuals on or before March 31, 1999, then the
entire principle balance shall be converted into common stock of the
Company at a 50% discount of the then fair value of the Company's
common stock. The notes were paid in full in March of 1999. The notes
also provide for the issuance of a warrant to the individuals whereby
the individual has the right to acquire 1 share of the Company's common
stock for every $2.00 of funds advanced to the Company. The exercise
price under the warrant agreements is $2.00 per share and the warrants
may be exercised at any time between June 30, 1998 and June 29, 2003.
57
<PAGE>
As of July 31, 1999, no warrants had been exercised by any of the
holders. Mr. Judvhir Parmar, a director of the Company, advanced
$175,000 of the $375,000 received and is therefore entitled to a
warrant to purchase 87,500 shares of the Company's common stock.
In March of 1999 the certain individuals purchased 8,550 shares through
a private placement of the Company's Redeemable Preferred Stock for a
gross consideration of $855,000. The stock bears cumulative dividends
at the rate of $7.50 per annum for each share of stock. Upon certain
tender offers to acquire substantially all of the Company's common
stock, the holders of the Redeemable Preferred Stock may require the
shares be redeemed at a redemption price of $100 per share plus accrued
and unpaid dividends. The shares are nonvoting and entitles the holder
to convert each share of Redeemable Preferred Stock into 33.33 shares
of the Company's common stock. On January 15, 2001, the Redeemable
Preferred Stock will be redeemable at the option of the Company at a
redemption price of $100 per share plus accrued and unpaid dividends.
Other than the warrants issued to the individuals who advanced funds to
the Company, the option granted to Hawaii Reservations Center Corp. and
the redeemable preferred stock, there were no outstanding options,
warrants or rights to purchase common stock held by any of the officers
or directors of the Company or its principal shareholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
TRANSACTIONS WITH MANAGEMENT AND OTHERS.
As noted in section "Development of Business," Item 1, Part I, the
Hanalei Bay Resort is a 134 unit condominium located in Princeville,
Kauai, Hawaii. HBII was formed through the efforts of HBII Management
Inc., owned by Mr. Wall, with the following partners: Siam Commercial
Bank; Voyage Fourteen Ltd., owned by John G. Tedcastle; L.C.C.
Management, Inc., owned by Judhvir Parmar; Nomura Firm and Nomura
Holdings, owned by Hideo Nomura and Don Nomura. In 1988 HBII made an
offer to purchase all 134 units of the Hanalei Bay Resort and eighty
six owners accepted the offer. HBII elected to form its own management
company and entered into a management contract with Castle Group
Hawaii, which was one of the assets acquired by the Company pursuant to
the Castle Plan. Under terms of the management contract between HBII
and Castle Group Hawaii and as acquired by the Company, the Company is
required to provide full management, including sales, supervision of
staff, accounting and maintenance. Mr. Tedcastle and Mr. Hideo Nomura
were elected to serve on the board of directors of the Company
following completion of the Castle Plan. Mr. Parmar was appointed
interim director in November 1995. Mr. Parmar is a general partner of
HBII and is the owner of L.C.C. Management, Inc., which is the holder
of approximately 10% of the Company's common stock (see Item 11, Part
III). Nichiman International later became an investor in HBII and
Nichiman International s owner, Mr. Ryoji Takahashi was appointed as a
director of the Company. In March of 1995, Mr. Takahashi s sister, Ms.
Motoko Takahashi, was appointed Secretary and director of the Company.
In March of 1997, Mr. Michael Nitta was appointed Assistant Vice
President of HBII Management, Inc. Until the date that HBII sold its
principal asset, the Hanalei Bay Resort, Mr. Wall received a monthly
retainer from HBII.
58
<PAGE>
In March of 1999, HBII sold it's principal asset which consisted of 85
condominium units in the Hanalei Bay Resort. Upon the closing of the
sale, the Company received $468,000 which was applied to the $435,000
note receivable and accrued interest due from HBII (see Note 3 to the
Consolidated Financial Statements). The funds received by HBII upon
the closing of the sale was insufficient to make full payment to the
Company for it's accounts receivable balance. Under the terms of the
sale, in addition to the sale proceeds to be received, the current HBII
partners shall share in the future cashflows generated by timeshare
sales of the units located within the Hanalei Bay Resort, after certain
secured and preferential payments are made. HBII shall make payments
to the Company through the funds received from the future cashflows
generated by the timeshare sales of the Hanalei Bay Resort units (see
Note 2 to the Consolidated Financial Statements). Although no
assurances can be given, management is confident that the future sales
will be made and that the Company shall receive payment in full of its
accounts receivable balance from HBII. Certain members of the Board of
Directors of the Company have a direct or indirect financial interest
in HBII (See Item 12).
Management believes that the terms of the management contract between
the Company and HBII were on terms which are no less favorable to HBII
or the Company than those which are negotiated with other owners not
affiliated with the Company.
On August 1, 1994, the Company entered into a contract with HRCC (as
described in section "Plan of Operations" Item 6, Part II, and
incorporated herein by reference), a company owned and controlled by
Charles M. McGee, a former director of the Company. It is management's
belief that the contract with HRCC are on terms which are no less
favorable than those which could be negotiated with companies not
affiliated with the Company, however, in May of 1997, the Company
renegotiated its contract with HRCC with regard to the fees charged.
Under the renegotiated agreement, the fees paid to HRCC shall be based
upon the monthly room revenues of the properties managed by the
Company, subject to a minimum monthly fee. Management believes,
although no assurances can be given, that the Company shall enjoy lower
reservations costs under the new agreement.
Except for the Castle Plan, the HBII Plan and the purchase agreement
involving KRI described under the caption "Development of Business" of
Item 1, Part I and incorporated herein by reference, the employment
contracts and other matters described in Item 10, "Remuneration of
Directors and Officers," the HBII management contract, the issuance of
warrants as described in Item 11 "Security Ownership of Certain
Beneficial Owners and Management," the issuance of Reedeemable
Preferred Stock and the HRCC contract, there were no transactions or
proposed transactions during 1999 and 1998, to which the Company or
any of its subsidiaries was or is to be a party, in which the amount
involved exceeds $50,000 and in which any director or executive
officer, or any shareholder who is known to the Company to own of
record or beneficially more than 10% of the Company's common stock, or
any member of the immediate family of any of the foregoing persons, had
a direct or indirect material interest.
59
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
REPORTS ON FORM 8-K.
The Company filed a current report on Form 8-K on July 21, 1999
reporting the resignation of Kimo M. Keawe from its board of directors.
The Company filed a current report on Form 8-K on August 4, 1999
reporting the resignation of Charles E. McGee from its board of
directors.
INDEX TO EXHIBITS
The following exhibits are filed as a part of this report:
Sequential
Exhibit Page
Number Description Number
- ------- ------------------------------------------------ ---------
1.1 Form of Placement Agency Agreement incorporated
by reference to Exhibit 1.1 to the Company's
Registration Statement on Form SB2/A-1 filed
on March 10, 1998. *
2.1 Restated Articles of Incorporation, incorporated
by reference to Exhibit 2.1 to the Company's
Registration Statement on Form 10-SB. *
2.2 Bylaws, as amended effective February 1, 1995,
incorporated by reference to Exhibit 2.2 to the
Company's Quarterly Report on Form 10-QSB for
the quarter ending 04/30/96 *
6.1 Agreement and Plan of Reorganization dated as
of November 8, 1993, by and among The Castle
Group, Inc., Bernard Wall Trust, LCC, Ltd.,
John Tedcastle, Hideo Nomura, and Castle Group,
Limited, with exhibits, incorporated by
reference to Exhibit 10.1 to the Company's
Registration Statement on Form 10-SB. *
6.2 Stock Purchase Agreement dated as of November
10, 1993, by and among The Castle Group, Inc.,
Keawe Resorts, Inc., Maui Beach Hotel, Inc.,
M.K. & Sons, Inc., TN Group, Inc., Michael S.
Nitta, Saburo & Mitsue Maruyama, Shigeru
Shinno, James Kurita, and KRI, Inc., with
exhibits, incorporated by reference to Exhibit
10.2 to the Company's Registration Statement
on Form 10-SB. *
60
<PAGE>
6.3 Kelvin Bloom Employment Agreement dated
December 2, 1993 between the Company and Kelvin
Bloom, incorporated by reference to Exhibit
10.3 to the Company's Registration Statement on
Form 10-SB. *
6.4 Kimo M. Keawe Employment Agreement dated July
30, 1994, effective as of November 10, 1993
between Kimo M. Keawe and the Company,
incorporated by reference to Exhibit 6.4 to the
Company's Annual Report on Form 10-KSB for the
year ended July 31, 1994. *
6.5 Michael S. Nitta Employment Agreement dated
June 23, 1994, effective as of November 10,
1993 between Michael S. Nitta and the Company,
incorporated by reference to Exhibit 6.5 to the
Company's Annual Report on Form 10-KSB for the
year ended July 31, 1994. *
6.6 Shari Chang Employment Agreement dated July 15,
1994, effective as of July 16, 1994 between
Shari Chang and the Company, incorporated by
reference to Exhibit 6.6 to the Company's Annual
Report on Form 10-KSB for the year ended July
31, 1994. *
6.7 Sublease Agreement dated September 16, 1993
between Rush Moore Craven Sutton Morry & Beh
and The Castle Group, Ltd. for the Company's
principle executive offices, incorporated by
reference to Exhibit 10.4 to the Company's
Registration Statement on form 10-SB. *
6.8 Lease Agreement dated April 1, 1988, between
Hirano Enterprises, Cen Pac Properties, Inc.,
and KRI, Inc., dba Hawaiian Pacific Resorts, as
renewed by agreement dated May 3, 1993,
incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form 10-SB. *
6.9 Reservations Services Agreement dated August 1,
1994 between the Company and Hawaii Reservations
Center Corp., incorporated by reference to
Exhibit 6.9 to the Company's quarterly report on
Form 10-QSB for the quarter ended October 31,
1994. *
61
<PAGE>
6.10 Stock Acquisition Agreement between the Company
and Shari W. Chang dated September 10, 1995,
incorporated by reference to Exhibit 6.10 to the
Company's Annual Report on Form 10-KSB for the
year ended July 31, 1995. *
6.11 Revolving Line of Credit Loan Agreement dated
October 21, 1994 between the Company, and Castle
Resorts & Hotels, Inc., KRI, Inc., Hawaii
National Bank, Rick Wall, John Tedcastle, Hideo
Nomura and Kimo Keawe, incorporated by reference
to Exhibit 6.11 to the Company's Annual Report
on Form 10-KSB for the year ended July 31, 1995. *
6.12 Letter dated October 17, 1995 from Kimo M. Keawe
to KRI, Inc. Stockholders, together with
Promissory Notes dated July 31, 1995 payable to
Maui Beach Hotel, Inc. for $12,000, James Kurita
for $6,000, Saburo or Mitsue Maruyama for
$3,600, TN Group Hawaii, Inc. for $6,000, M.K. &
Sons, Inc. for $12,000, Shigeru Shinno for
$6,000, Michael S. Nitta for $16,800, and Keawe
Resorts, Inc. for $122,000, incorporated by
reference to Exhibit 6.12 to the Company's
Annual Report on Form 10-KSB for the year ended
July 31, 1995. *
6.13 Second Amendment to Letter of Agreement Dated
December 2, 1993 between Kelvin Bloom and The
Castle Group, Inc. incorporated by reference to
Exhibit 6.13 to the Company's Annual Report on
Form 10-KSB for the year ended July 31, 1995. *
6.14 Extension of Revolving Line of Credit Agreement
dated December 18, 1995 between The Castle
Group, Inc., KRI, Inc., Castle Resorts & Hotels,
Inc., and Hawaii National Bank incorporated by
reference to Exhibit 6.14 to the Company's
Annual Report on Form 10-KSB for the year ended
July 31, 1996. *
6.15 Extension of Revolving Line of Credit Agreement
dated January 18, 1996 between The Castle Group,
Inc., KRI, Inc., Castle Resorts & Hotels, Inc.,
and Hawaii National Bank incorporated by
reference to Exhibit 6.15 to the Company's
Annual Report on Form 10-KSB for the year ended
July 31, 1996. *
62
<PAGE>
6.16 Extension of Revolving Line of Credit Agreement
dated June 5, 1996 between The Castle Group,
Inc., KRI, Inc., Castle Resorts & Hotels, Inc.,
and Hawaii National Bank incorporated by
reference to Exhibit 6.16 to the Company's
Annual Report on Form 10-KSB for the year ended
July 31, 1996. *
6.17 Extension of Revolving Line of Credit Agreement
dated December 11, 1996 between The Castle
Group, Inc., KRI, Inc., Castle Resorts & Hotels,
Inc., and Hawaii National Bank incorporated by
reference to Exhibit 6.17 to the Company's
Annual Report on Form 10-KSB for the year ended
July 31, 1997. *
6.18 Extension of Revolving Line of Credit Agreement
dated March 5, 1997 between The Castle Group,
Inc., KRI, Inc., Castle Resorts & Hotels, Inc.,
and Hawaii National Bank incorporated by
reference to Exhibit 6.18 to the Company's
Annual Report on Form 10-KSB for the year ended
July 31, 1997. *
6.19 Extension of Revolving Line of Credit Agreement
dated June 30, 1997 between The Castle Group,
Inc., KRI, Inc., Castle Resorts & Hotels, Inc.,
and Hawaii National Bank incorporated by
reference to Exhibit 6.19 to the Company's
Annual Report on Form 10-KSB for the year ended
July 31, 1997. *
6.20 Stock Option Agreement dated May 21, 1997
between Hawaii Reservations Center Corp. and
The Castle Group, Inc. incorporated by reference
to Exhibit 6.20 to the Company's Annual Report
on Form 10-KSB for the year ended July 31, 1997. *
6.21 Steve Townsend Employment Agreement dated May
31, 1997, effective as of July 28, 1997 between
Steve Townsend and the Company incorporated by
reference to Exhibit 6.21 to the Company's
Annual Report on Form 10-KSB for the year ended
July 31, 1997. *
6.22 Consulting Agreement between Kimo M. Keawe,
Keawe Resorts, Inc. and the Company dated April
16, 1997 incorporated by reference to Exhibit
6.22 to the Company's Annual Report on Form
10-KSB for the year ended July 31, 1997. *
63
<PAGE>
6.23 Amendment to Consulting Agreement between Kimo
M. Keawe, Keawe Resorts, Inc. and The Castle
Group, Inc. dated April 16, 1997 incorporated
by reference to Exhibit 6.23 to the Company's
Annual Report on Form 10-KSB for the year ended
July 31, 1997. *
6.24 Letter dated July 31, 1997 from Kelvin Bloom
forfeiting his stock option and all amendments
incorporated by reference to Exhibit 6.24 to the
Company's Annual Report on Form 10-KSB for the
year ended July 31, 1997. *
6.25 Amendment to Promissory Notes from the Company
to Saburo or Mitsue Maruyama for $3,600; Michael
S. Nitta for $16,800; Keawe Resorts, Inc. for
$122,000; M.K. & Sons, Inc. for $12,000; Shigeru
Shinno for $6,000; and T.N. Group Hawaii, Inc.
for $6,000 incorporated by reference to Exhibit
6.25 to the Company's Annual Report on Form
10-KSB for the year ended July 31, 1997. *
6.26 Commercial Promissory Note between the Company
and City Bank dated November 14, 1997
incorporated by reference to Exhibit 6.26
to the Company's quarterly report on Form
10-QSB for the quarter ended January 31, 1998 *
6.27 Promissory note for $50,000 dated January 15,
1998 between the Company and Michael S. Nitta
incorporated by reference to Exhibit 6.26 to
the Company's quarterly report on Form 10-QSB
for the quarter ended January 31, 1998. *
6.28 Promissory note for $60,000 dated January 29,
1998 between the Company and Kelvin M. Bloom
incorporated by reference to Exhibit 6.26 to the
Company's quarterly report on Form 10-QSB for
the quarter ended January 31, 1998. *
6.29 Letter from Hawaii National Bank extending the
due date on the $300,000 revolving line of credit
to July 15, 1998, incorporated by reference to
Exhibit 6.29 to the Company's quarterly report on
Form 10-QSB for the quarter ended April 30, 1998. *
6.30 Amendment of promissory note dated January 29,
1998 between the Company and Kelvin M. Bloom
extending the due date on the note to July 15,
1998, incorporated by reference to Exhibit 6.38
to the Company's quarterly report on form 10-QSB
for the quarter ended April 30, 1998. *
64
<PAGE>
6.31 Amendment of promissory note dated January 15,
1998 between the Company and Michael S. Nitta
extending the due date on the note to July 15,
1998, incorporated by reference to Exhibit 6.31
to the Company's quarterly report on form 10-QSB
for the quarter ended April 30, 1998 *
6.32 Letter from City Bank extending the due date on
the $250,000 line of credit to August 15, 1998,
incorporated by reference to Exhibit 6.32 to
the Company's form 10Q-SB for the quarter ended
April 30, 1998. *
6.33 Amendment of Lease between The Castle Group,
Inc. and Hirano Enterprises effective April 1,
1998, incorporated by reference to Exhibit 6.33
to the Company's form 10Q-SB for the quarter
ended April 30, 1998. *
6.33 Consulting agreement dated July 22, 1998 and
effective as of June 1, 1998 between the Company
and Kimo M. Keawe incorporated by reference to
exhibit 6.34 to the Company's form 10K-SB for the
year ended July 31, 1998 *
6.34 Form of promissory notes dated June 30, 1998
between the Company and Judvhir Parmar for
$175,000, K. Roger Moses for $50,000, Gary
J. Stevens, Susanne L. Blankley for $50,000, and
Thomas S. Blankley for $50,000 incorporated by
reference to exhibit 6.35 to the Company's form
10K-SB for the year ended July 31, 1998 *
6.36 Form of Common Stock Purchase Warrants dated
June 30, 1998 between the Company and Judvhir
Parmar for 87,500 shares, K. Roger Moses for
25,000 shares, Gary J. Stevens for 25,000
shares, Susanne L. Blankley for 25,000 shares,
and Thomas S. Blankley for 25,000 shares
incorporated by reference to exhibit 6.36 to the
Company's form 10K-SB for the year ended July
31, 1998 *
6.37 Promissory note dated August 13, 1998 in favor
of the Company from Fortress LLC for $250,000
incorporated by reference to exhibit 6.37 to
the Company's form 10K-SB for the year ended
July 31, 1998 *
65
<PAGE>
6.38 Promissory note in favor of the Company from
Hanalei Bay International Investors for $435,000
dated July 31, 1998 incorporated by reference
to exhibit 6.38 to the Company's form 10K-SB for
the year ended July 31, 1998 *
6.39 Promissory note dated July 15, 1998 between the
Company and Kelvin M. Bloom for $118,800,
incorporated by reference to exhibit 6.39 to the
Company's form 10K-SB for the year ended July
31, 1998 *
6.40 Promissory note dated July 15, 1998 between the
Company and Michael S. Nitta for $48,800,
incorporated by reference to exhibit 6.40
to the Company's form 10K-SB for the year ended
July 31, 1998 *
6.41 Letter of extension from Hawaii National Bank
extending the due date on the $300,000 line of
credit to December 20, 1998, incorporated by
reference to exhibit 6.41 to the Company's form
10K-SB for the year ended July 31, 1998 *
6.42 Letter of extension from City Bank extending the
due date on the $250,000 line of credit to
December 31, 1998, incorporated by reference to
exhibit 6.42 to the Company's form 10K-SB for
the year ended July 31, 1998 *
6.43 Private Offering Memorandum for the issuance
of the Company's Series "A" Preferred Stock,
incorporated by reference to exhibit 6.33 to
the Company's form 10Q-SB for the quarter ended
April 30, 1999. *
Description of Exhibits
See Item 1 Above.
66
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE CASTLE GROUP, INC.
Date: November 10, 1999 By /s/ Rick Wall
Rick Wall, Chief Executive Officer
and Chairman of the Board
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Date: November 10, 1999
/s/ Rick Wall /s/ John Tedcastle
Rick Wall John Tedcastle
Chief Executive Officer and Vice Chairman of the Board and
Chairman of the Board Director
/s/ Michael S. Nitta /s/ Hideo Nomura
Michael S. Nitta Hideo Nomura
Chief Financial Officer Director
/s/ Motoko Takahashi /s/ Judvhir Parmar
Motoko Takahashi Judvhir Parmar
Director and Secretary Director
/s/ Noboru Sekiguchi /s/ Ryoji Takahashi
Noboru Sekiguchi Ryoji Takahashi
Director Director
/s/ Stanley Mukai /s/ Edward Calvo, Sr.
Stanley Mukai Edward Calvo, Sr.
Director Director
/s/ Thomas S. Blankley, Jr.
Thomas S. Blankley, Jr.
Vice President Finance
67
<PAGE>
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