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U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 0-23338
THE CASTLE GROUP, INC.
(Exact name of small business issuer as specified in its charter)
UTAH 99-037845
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
745 Fort Street, Tenth Floor
Honolulu, Hawaii 96813
Issuer's telephone number: (808) 524-0900
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes [ x ] No [ ]
Number of shares outstanding of each of the Registrant's classes of stock,
as of April 30, 1999:
Common stock, $.02 par value - 5,311,130
Transitional Small Business Disclosure Format (check one):
Yes [ x ] No [ ]
Page 1 of 78 sequentially numbered pages
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THE CASTLE GROUP, INC.
FORM 10-QSB
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of April 30, 1999
and 1998 (unaudited)............................................... 3
Consolidated Statements of Operations for the three and nine months
ended April 30, 1999 and 1998 (unaudited).......................... 4
Consolidated Statements of Cash Flows for the three and nine months
ended April 30, 1999 and 1998 (unaudited).......................... 5
Notes to the Consolidated Financial Statements (unaudited).......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders......... 23
Item 5. Other Information........................................... 23
Item 6. Exhibits and Reports on Form 8-K........................... 23
SIGNATURES.......................................................... 29
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PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated Balance Sheets - April 30, 1999 and 1998 (Unaudited)
ASSETS April 1999 April 1998
Current Assets
Cash $ 151,416 $ 133,746
Accounts Receivable, Net 1,320,444 1,172,086
Prepaid Expenses 157,955 257,391
Restricted Cash 19,941 19,941
Notes Receivable, current 144,406 0
Due from Related Parties 1,073,056 559,517
Total Current Assets 2,867,218 2,142,681
Property, Furniture Fixtures and
Equipment, Net 53,531 71,998
Other Assets:
Investment in HBII Timeshare Program 56,121 59,389
Deposits 181,750 158,230
Organization Costs 0 5,171
Total Other Assets 237,871 222,790
TOTAL ASSETS $ 3,158,620 $ 2,437,469
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 902,426 $ 940,249
Vacation Payable 103,281 99,004
Wages Payable 86,507 73,129
Taxes Payable 26,835 48,361
Due to Related Parties, current 213,025 293,200
Notes Payable, current 225,000 550,000
Deferred Income 26,667 0
Other Accrued Liabilities 356,038 157,442
Total Current Liabilities 1,939,779 2,161,385
Due to Related Parties, non-current 48,977 0
Deferred Income 139,625 80,000
Total Liabilities 2,128,381 2,241,385
Stockholders Equity
Common stock, $.02 par value, 20,000,000
Shares authorized, 5,311,130 Issued
& outstanding 106,223 106,223
Series "A" Preferred stock, $100 par
value, 50,000Shares authorized,
8,550 Issued & Outstanding 855,000 0
Capital in excess of par value 2,539,175 2,539,175
Accumulated Deficit (2,470,159) (2,449,314)
Total Stockholders' Equity 1,030,239 196,084
Total Liabilities and Stockholders' Equity $ 3,158,620 $ 2,437,469
The accompanying notes are an integral part of the consolidated financial
statements.
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Operations
for the three and nine months ended April 30, 1999 and 1998
(Unaudited)
Three Months Ended Nine Months Ended
April 1999 April 1998 April 1999 April 1998
Revenue
Management fees $ 1,167,193 $ 820,210 $ 2,900,688 $ 2,474,573
Hotel Operating Revenues 0 356,407 0 1,267,102
Other Income 163,079 306,629 589,429 675,653
Total Revenues 1,330,272 1,483,246 3,490,117 4,417,328
Expenses
Payroll and benefits 586,396 508,686 1,675,494 1,492,443
Hotel Operating Expenses 0 325,646 0 1,288,093
Professional fees 7,963 26,539 83,433 72,447
Reservation services 243,417 224,967 729,506 651,068
Depreciation and
Amortization 6,150 7,605 21,136 22,815
Rent 90,097 101,489 286,686 313,139
Travel and entertainment 30,662 22,683 104,388 96,689
Office expense 20,085 12,396 51,320 40,346
Utilities 12,003 7,854 37,310 30,574
Taxes, other than income 50,220 46,448 139,477 123,901
Advertising and marketing 48,763 21,178 120,900 86,632
Outside sales offices 39,512 22,665 126,557 46,296
Insurance 17,879 18,162 53,288 56,133
Other 4,010 7,878 30,351 33,358
Total Expenses 1,157,157 1,354,196 3,459,846 4,353,934
Income from operations 173,115 129,050 30,271 63,394
Other Expenses
Interest Expense 29,715 19,977 94,498 48,640
Net Income (Loss) $ 143,400 $ 109,073 $( 64,227) $ 14,754
Per Share Data
Basic Earnings
Net Income (Loss) $ .03 $ .02 $( .01) $ .00
Diluted Earnings
Net Income (Loss) $ .03 $ .02 $( .01) $ .00
The accompanying notes are an integral part of the consolidated financial
statements.
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the nine months ended April 30, 1999 and 1998
( Unaudited )
Nine Months Ended
April 1999 April 1998
Cash Flows From Operating Activities
Net Income (Loss) $( 64,227) $ 14,754
Adjustments to reconcile net income (loss) to net
cash used in operating activities-
Depreciation and amortization 21,136 22,814
Changes in assets and liabilities-
Increase in accounts receivable ( 307,026) ( 351,717)
Increase in due from related parties ( 228,258) ( 361,787)
Increase in prepaid expenses ( 135,881) ( 167,612)
Increase in deferred income 86,292 3,770
Increase in accounts payable 13,019 326,458
Increase in taxes payable 476 12,218
Increase (Decrease) in other accrued liabilities 78,581 ( 118,276)
Net cash used in operating activities ( 535,888) ( 619,378)
Cash Flows From Investing Activities
Purchase of property & equipment ( 10,945) ( 4,484)
Deposits made ( 180,000) 0
Stock subscription received 0 40,645
Receipt of deposits 23,897 37,374
Investment in HBII Timeshare Program 2,787 1,851
Net cash provided by (used in) investing activities ( 164,261) 75,386
Cash Flows from Financing Activities
Proceeds from Series "A" Preferred Stock Offering 855,000 0
Proceeds from notes payable 0 410,000
Collection of note receivable from HBII 435,000 0
Collection of note receivable 105,594 0
Repayment of notes payable ( 525,000) 0
Repayment to related parties ( 264,998) ( 1,200)
Net cash provided by financing activities 605,596 408,800
Net Decrease in Cash ( 94,553) ( 135,192)
Cash at Beginning of Period 245,969 268,938
Cash at end of Period $ 151,416 $ 133,746
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 94,499 $ 48,640
The accompanying notes are an integral part of the consolidated financial
statements.
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (unaudited)
The accompanying consolidated financial statements of The Castle Group,
Inc., its wholly owned subsidiary, KRI, Inc. and KRI, Inc. s wholly-owned
subsidiary, HPR Advertising, Inc. for the three and nine months ended
April 30, 1999 have been prepared in accordance with generally accepted
accounting principles. These consolidated financial statements have not
been audited by independent public accountants, but include all adjustments
(consisting of only normal recurring adjustments) which are, in the opinion
of management, necessary for a fair presentation of the financial condition,
results of operations and cash flows for such periods. The consolidated
financial statements of The Castle Group, Inc. and Subsidiary (the
"Company") does not include all disclosures associated with annual financial
statements and accordingly, should be read in conjunction with the annual
consolidated financial statements and notes thereto included in the
Company s Annual Report on Form 10-KSB for the year ended July 31, 1998, as
filed with the Securities and Exchange Commission. A copy of this report is
available from the Company upon request. The results of operations for the
three and nine months ended April 30, 1999 are not necessarily indicative of
the operating results for the remainder of the year.
MANAGEMENT ESTIMATES-
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
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. This statement is effective for fiscal years beginning
after December 15, 1997. The adoption of this standard is not expected to
have a material effect on the Company s consolidated financial statements.
In February 1998, the FASB issued SFAS No. 132 "Employers Disclosures about
Pensions and Other Postretirement Benefits," which standardized the
disclosure requirements for pensions and other post-retirement benefits.
This statement is effective for fiscal years beginning after December 15,
1997. As the Company does not have a pension plan or other post retirement
plan, the adoption of this statement is not expected to have an effect on
the Company s consolidated financial statements.
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statement (unaudited)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting
and reporting standards for derivative instruments and hedging activities.
SFAS No. 133 requires the recognition of all derivative instruments as
either assets or liabilities in the statement of financial position and
measurement of those derivative instruments at fair
value. SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. On May 19, 1999, the FASB voted to defer the implementation of SFAS
No. 133 for a one-year period to fiscal years beginning after June 15, 2000.
It is expected that the FASB will issue an amendment to SFAS No. 133 in this
regard. As the Company does not invest in derivative instruments or
participate in hedging activities, the adoption of this standard is not
expected to have an effect on the Company s consolidated financial
statements.
CASH AND CASH EQUIVALENTS-
The Company considers all highly liquid investments with an original
maturity date of three months or less when purchased to be cash equivalents.
INCOME RECOGNITION-
The Company recognizes income from the management of resort properties
according to terms of its various management contracts.
DEFERRED INCOME-
During the year ended July 31, 1998, the Company received a signing bonus of
$80,000 as a result of a contract entered into with a vendor to provide
services over a three-year period. Income is recognized on the straight
line method over the term of the contract.
During the quarter ended October 31, 1998, the Company received a tenant
improvement allowance of $56,475 and discounted rents for the first two
years as a result of a contract entered into with its landlord over a 69
month period. The allowance and discount is recognized on a straight line
method over the term of the contract.
PER SHARE DATA-
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share as of April 30, 1999 and 1998,
respectively.
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statement (unaudited)
Income Shares Per Share
(Numerator) (Denominator) Amount
THREE MONTHS ENDED 04/30/99:
Basic:
Net Income $ 143,400 5,311,130 $ .03
Effect of dilutive securities-
Stock subscriptions, options
and warrants -- -- --
Diluted
Net Income and assumed conversions $ 143,400 5,311,130 $ .03
NINE MONTHS ENDED 04/30/99:
Basic:
Net Loss $( 64,227) 5,311,130 $( .01)
Effect of dilutive securities-
Stock subscriptions, options
and warrants -- -- --
Diluted
Net loss and assumed conversions $( 64,227) 5,311,130 $( .01)
THREE MONTHS ENDED 04/30/98:
Basic:
Net Income $ 109,073 5,311,130 $ .02
Effect of dilutive securities-
Stock subscriptions, options
and warrants -- 20,070 --
Diluted
Net Income and assumed conversions $ 109,073 5,331,200 $ .02
NINE MONTHS ENDED 04/30/98:
Basic:
Net Income $ 14,754 5,311,130 $ .00
Effect of dilutive securities-
Stock subscriptions, options
and warrants -- 18,182 --
Diluted
Net Income and assumed conversions $ 14,754 5,329,312 $ .00
Note that the warrants and options outstanding for the nine month period
ended April 30, 1999 were not considered common stock equivalents since they
were anti-dilutive.
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statement (unaudited)
PROPERTY, FURNITURE, FIXTURES AND EQUIPMENT-
Property, furniture, fixtures and equipment are recorded at cost. When
assets are retired, sold or otherwise disposed of, the cost and the
related accumulated depreciation of the asset is removed from the
accounts, and any resulting gain or loss is reflected in income for the
period.
The cost of maintenance and repairs are charged against income as
incurred. Renewals and betterments are capitalized and depreciated over
their estimated useful lives.
At April 30, 1999 and 1998, property, furniture, fixtures and equipment
consisted of the following:
04/30/99 04/30/98
Office Furniture and Equipment $ 220,958 $ 210,013
Less Accumulated Depreciation ( 167,427) ( 138,015)
$ 53,531 $ 71,998
Depreciation of Office Furniture and Equipment is computed using the
declining balance and straight-line methods over the estimated useful life
of the assets ranging from five to seven years.
RELATED PARTY TRANSACTIONS-
Hanalei Bay International Investors-
The Company has a hotel management agreement with Hanalei Bay International
Investors ("HBII") to manage the Hanalei Bay Resort ("HBR"). The managing
general partner of HBII is also the Chairman and Chief Executive Officer of
the Company. Under the agreement, the Company is to receive management and
incentive fees based on a percentage of gross total revenue and net income
respectively. The Company also receives reservation fees based on a
percentage of gross room revenues and a marketing fee based on a percentage
of gross revenue. At April 30, 1999 and 1998, the Company had receivable
balances of $1,073,056 and $559,517, respectively, from HBII.
Reservation Services-
Reservation services are provided by Hawaii Reservation Center Corporation,
wholly owned by a stockholder/director who has a 2% interest in the Company.
Reservation services expense for the quarters ended April 30, 1999 and 1998
was $243,417 and $224,967, respectively. The Company had a payable balance
to Hawaii Reservation Center Corporation of $189,718 and $192,951 as of
April 30, 1999 and 1998, respectively.
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statement (unaudited)
Due to Related Parties-
The Company had the following related party loan balances as of April 30,
1999 and 1998:
April 1999 April 1998
6% loans from stockholders, $18,000 was due on
January 31, 1997 and $166,400 was extended to
August 1, 1998 $ 149,600 $ 184,400
10% loans from Officer, due August 15, 2000 69,273 --
10% loans from Officer, due August 15, 1999 43,129 108,800
$ 262,002 $ 293,200
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 a $175,000 loan made by a director. The loan was subsequently paid in
April of 1999. No warrants were exercised as of April 30, 1999.
In April 1999, a note to an officer was refinanced and the due date extended
to August 15, 2000. The new note calls for installments of $2,000 per
month.
LEASES-
The Company has leases for office space, vehicles and equipment expiring at
various dates through 2004. The office leases are renewable for an additional
five years.
At April 30, 1999, the future minimum rental commitment under these leases
were as follows:
Schedule of minimum lease payments
1999 $ 172,800
2000 180,000
2001 186,000
2002 191,000
2003 165,000
Thereafter 95,000
Total $ 989,800
RESTRICTED CASH-
Restricted cash consists of cash held in client trust accounts and cash
pledged as collateral for an equipment lease.
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statement (unaudited)
NOTES RECEIVABLE-
The Company had notes receivable balances as of April 30, 1999 and 1998 as
follows:
April 1999 April 1998
Notes receivable from third party in monthly
installments of $10,000 beginning September 15,
1998, including interest at 10% per annum.
Balance of principal and interest is due
September 1, 2000. Real estate is pledged
as collateral $ 144,406 $ --
COMMON STOCK WARRANTS-
In June 1998, the Company issued warrants to acquire up to 187,500 shares of
common stock for $2.00 per share, exercisable through June 2003 in exchange
for certain loans made to the Company. No warrants were exercised as of
April 30, 1999. The Warrants issued includes warrants to acquire up to
87,500 shares of common stock exercisable by a director of the Company is
(see "Due to Related Parties").
In May 1994, the Company issued warrants to acquire up to 25,000 shares of
common stock for $1.25 per share, exercisable through May 1999 in exchange
for consulting services rendered. No warrants were exercised as of
April 30, 1999.
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 Reservations
Center Corp., which is wholly owned by a director/ stockholder of the
Company. The option may be exercised between May 1997 and 2000 and had not
been exercised as of April 30, 1999.
LITIGATION-
There are various claims and lawsuits pending against the Company involving
complaints which are normal and reasonably foreseeable in light of the
nature of the Company s business. In the opinion of management, the
resolution of these claims will not have a material adverse effect on the
Company s consolidated financial position, results of operations or
liquidity. There were no new lawsuits filed during the quarter ended April
30, 1999.
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statement (unaudited)
DEFERRED INCOME-
At April 30, 1999 and 1998, deferred income consisted of the following:
04/30/99 04/30/98
Deferred income related to the receipt of a signing
bonus received on a contract entered into with a
vendor to provide services over a three year period. $ 60,000 $ 80,000
Deferred rent related to the receipt of a tenant
improvement allowance and reduced rental amount
as a result of a contract entered into for the lease
of office space. The allowance and reduced rental
amounts is recognized on a straight line method over
the term of the lease 106,292 --
166,292 80,000
Less current portion ( 26,667) --
Long term portion $ 139,625 $ 80,000
NOTES PAYABLE-
At April 30, 1999 and 1998, notes payable consisted of the following:
04/30/99 04/30/98
$300,000 line of credit from a bank with drawings
due on February 18, 1999, with interest at 2.0% above
the bank's base rate. The Company s accounts receivable
are pledged as collateral and the Chief Executive
Officer and several of the Company s directors are
guarantors. The note was repaid in full upon the sale
of the Hanalei Bay Resort on March 26, 1999. $ -- $ 300,000
$300,000 line of credit from a bank with drawings due on
May 1, 1999, with interest at 10.5% per annum.
The Company s furniture and equipment are pledged as
collateral and the Company s Chief Executive Officer is
a guarantor. 225,000 250,000
Notes Payable, current $ 225,000 $ 550,000
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statement (unaudited)
INCOME TAXES-
Significant components of the Company's deferred tax assets and
liabilities at April 30, 1999 and 1998 are:
04/30/99 04/30/98
Deferred tax assets-
Vacation Pay $ 7,000 $ 7,000
Noncompetition agreement 219,000 240,000
Deferred Income 32,000 31,000
Net Operating Loss Carryforward 834,000 766,000
Deferred tax asset 1,092,000 1,044,000
Deferred tax liability-
Property and equipment ( 8,000) ( 8,000)
Net Deferred Tax Asset 1,084,000 1,036,000
Valuation Allowance ( 1,084,000) ( 1,036,000)
$ -- $ --
The Company has a net operating loss carryforward for income tax purposes of
$1,745,600 at April 30, 1999 which expires at various dates through fiscal
year 2011.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FORWARD LOOKING STATEMENTS - "RISK FACTORS"
This "Management s Discussion and Analysis of Financial Condition and
Results of Operations" contains forward-looking statements that are subject
to a number of risks and uncertainties. These risks and uncertainties could
cause actual results to differ materially from the results anticipated in
such forward-looking statements.
GENERAL-
The Company is a Utah corporation which earns its revenues primarily by
providing management, reservations, and sales and marketing services to
hotels and resorts. The Company currently operates within the State of
Hawaii and the Commonwealth of Saipan under the trade names "Hawaiian
Pacific Resorts," and Castle Resorts and Hotels."
The Company s revenues are derived from management fees, sales and marketing
fees, reservation fees, accounting fees, commissions, incentive fees and
other fees from the properties it represents pursuant to the terms and
conditions of its management contracts. In 1998, in addition to the fees
described, the Company also earned revenues from transient and long term
rentals and other hotel related income from its leased hotel. The revenues
of the properties which are managed by the Company, except as mentioned
herein, are not recorded as revenues of the Company.
The Company s operating expenses are comprised of labor, reservation fees
and other costs associated with operating as a management company. The
expenses of the properties which are managed by the Company, except
as mentioned herein, are not recorded as expenses of the Company.
As of April 30, 1999, the Company had 29 contracts covering 2,983 rooms, all
except 68 rooms located in Saipan and 56 rooms located in Chuuk being
situated within the State of Hawaii. Under the management contracts, the
Company is typically responsible for the supervision and day-to-day
operations of the property in exchange for a base management fee which is
based on gross revenues. In some cases, the Company also participates in
the profitability of the properties it manages and may earn an incentive fee
which is based on the net operating profits of the managed property. Sales
and marketing and reservation fees earned from the properties are based
on the gross revenues of the property. The Company is also reimbursed for
direct advertising and marketing expenditures it makes on behalf of the
property, all in accordance with the terms and conditions of the management
contracts. The Company also earns commissions and other fees from the
properties managed by providing centralized purchasing services to the hotel
owners. Under these arrangements, the net savings to the property owner from
centralized purchasing are shared between the Company in the form of
commissions and to the property owner in the form of cost savings.
In 1998, hotel revenues consisted of revenues from 167 rooms leased by the
Company. Under this arrangement, the Company includes as its own revenues
the entire property revenues which includes hotel transient rental income as
well as the total expenses incurred to operate the property. The property is
situated in Waikiki, Hawaii. The Company terminated this lease effective
April 30, 1998.
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In January of 1999, the Company signed on as a co-lessee on a lease
agreement for real property located in the Cook Islands. The lease is for
land upon which is situated an uncompleted luxury resort which is
approximately 85% completed. The lease is for 60 years and calls for
monthly rentals of 1% of room revenues produced by the property. The
Company entered into an agreement to issue 50,000 shares of Series "B"
preferred stock in exchange for $5,000,000, payable through a 20%
ownership of the leasehold interest in the completed Cook Islands project.
The Company s co-lessee is responsible for the reconstruction of the
property. The Company has no obligation to infuse funds into the costs of
reconstruction or any of the operating costs of the property following its
opening which was scheduled for the first quarter of calendar 2000. The
Company was to have been awarded the management contract of the property
and was to also have been involved with the construction management of the
property.
As of April 30, 1999, it is uncertain as to whether the co-lessee of the
Company has the financial resources to fund the reconstruction of the
property. The reconstruction of the property is a condition of the lease
agreement and the Company is in the process of securing a replacement for
the co-lessee. If the current co-lessee cannot complete the project or if
a suitable replacement co-lessee cannot be found, the lease agreement may
be cancelled by the lessor.
With virtually all of the key personnel and corporate infrastructure in
place, the focus for the Company shall be to continue its success in
increasing revenues through the expansion of its client base; and to
accomplish this at a minimal incremental cost. Although no assurances can
be given, based on the success experienced to date, management believes
that it will be able to further add to its portfolio of management
contracts. Management also believes, although no assurances can be given,
that the Company will be able to handle a much larger customer base without
expending significant amounts of additional resources due to the solid
foundation and management team which the Company currently has.
The Company is presently in the negotiating stages with various other
properties located throughout the State of Hawaii and in other Pacific Rim
regions.
RESULTS OF OPERATIONS-
FOR THE QUARTERS ENDED APRIL 30, 1999 AND 1998
SALES
For the quarters ended April 30, 1999 and 1998, the Company had total
revenues of $1,330,272 and $1,483,246, respectively, a decrease of $152,974
or 10%. The decrease in revenues for the quarter ended April 30, 1999 as
opposed to the prior year is attributed to the termination of a lease of 167
units operated as a hotel. The lease was terminated on April 30, 1998 and
therefore, hotel revenues were zero for the quarter ended April 30, 1999 as
compared to $356,407 for the quarter ended April 30, 1998. For the quarter
ended April 30, 1999, revenues from the Company s primary source of income,
(management fees and management related services,) increased by $203,433, or
18%, from $1,126,839 to $1,330,272. The increase in management related
income is attributed to the Company recording fees of $177,000 related to
the Hanalei Bay Resort (see "Related Party Transactions"). The fees of
$177,000 is related to a Settlement Agreement pertaining to a lawsuit
regarding the Hanalei Bay Resort. Under the terms of the Settlement
Agreement, the Company will resign as the general managing agent of
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the Association of Apartment Owners of the Hanalei Bay Resort and
terminated its day to day management of the hotel rental pool at the
Hanalei Bay Resort in exchange for the sum of $177,000 and a release of
the insurance companies involved from any further claim. The Company has
retained a Sales, Marketing and Reservations Agreement for the Hanalei Bay
Resort and will continue to represent the property in those respects. All
parties to the lawsuit have agreed to the settlement and a hearing in
Federal Court is being scheduled to approve the claim. Although no
assurances may be given, it is management's belief that the Settlement
Agreement will be approved by the court as all parties involved have
agreed to the terms of the Settlement Agreement.
COSTS AND EXPENSES
Operating expenses for the quarters ended April 30, 1999 and 1998 were
$1,157,157 and $1,354,196, respectively, a decrease of $197,039 or 15%.
The decrease in operating expenses as opposed to the prior year is
attributed to the termination of a lease of 167 units operated as a hotel.
The lease was terminated on April 30, 1998 and therefore, operating
expenses for the quarter ended April 30, 1999 was zero as compared to
$325,646 for the quarter ended April 30, 1998. For the quarter ended April
30, 1999, operating expenses from the Company s primary source of income,
(management fees and management related services,) increased over the prior
year by $128,607, or 13%, from $1,028,550 to $1,157,157.
Payroll and benefits increased by $77,710 as a result of the Company
increasing its staffing in order to effectively service the increase in the
Company s portfolio of management agreements located outside of the State of
Hawaii and to also increase the number of properties in the Company s non-
Hawaii portfolio of hotels and resorts.
Professional fees decreased by $18,576 due to the Company recording a credit
to this expense in the amount of $29,800 during the quarter ended April 30,
1999 as a result of renegotiating its professional and consulting fees
with various attorneys and consultants. Without taking this credit into
account, professional fees for the quarter ended April 30, 1999 decreased by
$11,224 when compared to the quarter ended April 30, 1998 resulting from
increased attorney fees related to the acquisition of the lease for the Cook
Islands property.
Reservation services increased by $18,450, or 8% due to the higher room
revenues for the quarter ending April 1999 as compared to April 1998.
Reservation services are based on a percentage of the room revenues recorded
for the properties represented by the Company. The increase in room
revenues also contributed to an increase in management fees of $169,983,
after excluding the $177,000 recorded as a settlement on the Hanalei Bay
Resort.
Rent expense decreased by $11,392, or 11% for the quarter ended April 1999
as compared to the prior year as a result of the Company renegotiating its
office lease which resulted in a decrease in the base monthly rental paid
by the Company to its landlord.
Advertising and marketing expenses increased by $27,585, or 130% due to
increased tradeshow participation for the purpose of generating additional
room revenues for the properties represented by the Company. The Company
also incurred expenses related to the marketing of its services to various
properties located in the Pacific Rim area.
Outside sales offices increased by $16,847, or 74% as compared to the
quarter ended April 30, 1998 as a result of the Company opening satellite
sales offices in Europe and Asia. For the quarter ended April 30, 1999, the
Company had an Asian office which was not present during the quarter ended
April 30, 1998. The base monthly costs for the Asian office is
approximately $5,000 per month.
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Interest expense increased by $9,738, or 49% for the quarter ended April
30, 1999 as compared to the prior year due to increased borrowing by the
Company to fund its operating and expansion costs.
NET INCOME
The Company reported net income of $143,400 and $109,073 for the quarters
ended April 30, 1999 and 1998, respectively, an increase of $34,327.
As discussed previously, the increase in profitability is attributed to
the settlement of a lawsuit involving the Hanalei Bay Resort in the amount
of $177,000.
LIQUIDITY AND CAPITAL RESOURCES-
As of April 30, 1999, total current assets were $2,867,218 and consisted
primarily of $1,320,444 in accounts receivable and $1,073,056 in due from
related parties. Total current liabilities were $1,939,779 leaving a net
working capital of $927,439.
The Company s primary sources of working capital are cash flows from
operations and borrowings. Net cash used in operations was $535,888 for
the nine months ended April 30, 1999 as compared to $619,378 for the
prior year. Net cash used in investing activities was $164,261 as
compared to net cash provided by investing activities of $75,386 for the
nine months ended April 30, 1999 and 1998, respectively. Net cash used to
repay amounts due to related parties was $264,998 for the nine months
ended April 30, 1999 as compared to $1,200 for the prior year. In March
and April of 1999, the Company was successful in raising additional equity
through the issuance of it's Series "A" Preferred Stock. The Preferred
Stock has a $100 par value and each share is convertible into 33.33 shares
of the Company's Common Stock at a price of $3.00 per share. Dividends
are payable semi-annually, commencing July 15, 1999 at the rate of $7.50
per annum per share. As of April 30, 1999, the Company issued 8,550
shares of the Series "A" Preferred Stock and received proceeds totaling
$855,000.
The Company had unrestricted cash of $151,416 and $133,746 at April 30,
1999 and 1998, respectively.
The Company had a $300,000 line of credit which is guaranteed by four of
the directors of the Company. The note was due on February 18, 1999 and was
paid in full on March 26, 1999.
In November of 1997, the Company secured an additional line of credit for
$250,000 from a local bank. In April of 1999, the line of credit was
increased to $300,000. The line of credit is due on May 1, 1999 and is
personally guaranteed by the Chairman and Chief Executive Officer of the
Company. In April of 1999, the Company paid down the line of credit by
$75,000, leaving a balance of $225,000 as of April 30, 1999. In May
of 1999, the Company refinanced the line of credit via a term loan in the
amount of $400,000 and an additional line of credit in the amount of
$200,000.
The Company had a net working capital $927,439 and a net working capital
deficit of $18,704 as of April 30, 1999 and 1998, respectively.
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As of April 30, 1999 and 1998, net working capital included due to related
parties in the amount of $213,025 and $293,200, respectively. Also
included in net working capital is $26,667 in unamortized deferred income
related to a signing bonus paid to the Company by one of its vendors in
July 1998 which is being amortized over three years.
The Company has, in the past, met its financial obligations through its
line of credit, the issuance of notes to the former stockholders of KRI,
Inc. and a private placement of stock in 1997.
In November of 1998, Hanalei Bay International Investors ("HBII") entered
into an agreement for the sale of its interest in the Hanalei Bay Resort.
The sale was initially scheduled to close in December of 1998 and after
various delays, the sale closed in March 1999. Upon the sale, the Company
received payment of it's note receivable in the amount of $435,000 which
was used to retire notes payable of $200,000 and amounts due to related
parties of $264,998. At April 30, 1999, the Company had a receivable
balance of $1,073,056 related to fees, interest and reimbursements. Based
on preliminary projections, the sale proceeds received by the owners of
HBII will not be sufficient to satisfy all of the claims of its creditors
upon the closing of the sale. It is projected that the Company shall not
receive its receivable of $1,073,056 from the initial sale proceeds.
Under the terms and conditions of the HBII Sale Agreement, HBII shall be
entitled to a percentage of the future cashflows received upon the sale of
timeshare intervals which the new owner of the Hanalei Bay Resort shall
receive. The Company shall receive payments to be applied to the
receivable balance from the future cashflows received by HBII from the new
owners of the Hanalei Bay Resort. Although no assurance can be given,
management is confident that the future cashflows received by HBII will
allow the full repayment to the Company for all amounts due from HBII.
The Company is also continuing in its effort of raising additional equity
through the private placement of its Series "A" Preferred Stock. As of
April 30, 1999, the Company was successful in acquiring $855,000 in equity
through the private placements. Although no assurances can be given,
management is confident that it shall be successful in raising additional
capital to fund its operations through the private placement of the Series
"A" Preferred Stock.
The Company is also in the final negotiating stages for numerous properties
located in the Pacific Basin. Although no assurances may be given, management
is confident that these properties will enter into management contracts with
the Company, and that the Company will increase its profitability and
liquidity as a result of the increased mange fee income.
As discussed previously, the Company entered into an agreement to issue
50,000 shares of its Series "B" Preferred Stock via a private placement in
exchange for a 20% ownership interest in a lease for a property located in
the Cook Islands. In January of 1999, the Company signed and was
approved as a co-lessee by the government of the Cook Islands. The
property is currently not in operation, having been abandoned by its
previous developer after completing approximately 85% of the project. Based
upon estimates received by construction experts in the area, the property is
valued in excess of $25,000,000. The construction of this property was
scheduled to commence in August of 1999 and an opening of the project was
projected in early 2000.
As of April 30, 1999, it is uncertain as to whether the co-lessee of the
Company has the financial resources to fund the reconstruction of the
property. The reconstruction of the property is a condition of the lease
agreement and the Company is in the process of securing a replacement for
the co-lessee. If the current co-lessee cannot complete the project or if
a suitable replacement co-lessee cannot be found, the lease agreement may be
cancelled by the lessor.
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<PAGE>
In April of 1999, the Company refinanced two loans with an officer. One
loan was in the principal amount of $16,800 due in August 1998 with
interest of $3,696 and the other loan was in the principle amount of
$47,001 due in March, 1999. The two loans were combined into one note in
the principal amount of $67,497, with interest at 10%. The note calls for
monthly payments of $2,000 per month and is due upon the occurrence
of certain events or August 15, 2000, whichever is earlier.
Although no assurances can be given, management believes that the
combination of the increase in the Company s hotel and resort portfolio,
the private placement of equity, net cashflow generated from operations
and the future availability of credit facilities will be sufficient to
fund the operations of the Company in the future.
The Company has considered expansion into the Pacific Rim through the
acquisition of management companies located in these areas and has made
inquiries to several acquisition prospects.
PLAN OF OPERATION
The Company is one of the leading regional hotel and resort management
companies in the State of Hawaii. At April 30, 1999, the Company had 29
management or sales, reservations and marketing contracts covering 2,983
rooms.
The properties represented by the Company appeal to a wide variety of the
public market as the Company manages a wide spectrum of property types
from the luxury condominium resorts with room rates of $450 to the
small budget inns with room rates of $40. The Company believes that the
availability of differing product lines appeals to all levels of business
or leisure traveler.
The Company has experienced significant growth since it began operations
in November of 1993. From inception to April 30, 1999, the number of
contracts has more than doubled, from 13 to 29 and the number of rooms
managed also increased from 1,684 to 2,983.
In January of 1999, the Company signed and was approved as a co-lessee by
the government of the Cook Islands. The property is currently not in
operation, having been abandoned by its previous developer after completing
approximately 85% of the project. Based upon estimates received by
construction experts in the area, the property is valued in excess of
$25,000,000. Reconstruction of the property was scheduled to commence in
August of 1999 and is scheduled to be completed in early 2000.
As of April 30, 1999, it is uncertain as to whether the co-lessee of the
Company has the financial resources to fund the reconstruction of the
property. The reconstruction of the property is a condition of the lease
agreement and the Company is in the process of securing a replacement for
the co-lessee. If the current co-lessee cannot complete the project or if
a suitable replacement co-lessee cannot be found, the lease agreement may be
cancelled by the lessor. Although no assurance can be given, management
believes that it will be successful in securing a replacement co-lessee and
that it will also sign a contract for the mange of the property once
construction is completed. Based on preliminary projections, management
believes, although no assurances can be given, that the property shall be
profitable and the management fees earned by the Company will be
substantial.
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<PAGE>
In April of 1999, the Company acquired the lease for a new property
located in Guam. The property is currently in the final phases of
construction and is scheduled to open in October of 1999. Based on
preliminary projections and although no assurances can be given,
management believes that the property shall be profitable and that the
fees earned by the Company on this property will be substantial.
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 the Federated States of Micronesia,
Guam and other Pacific Rim countries. In addition to Hawaii, management
believes that there are many opportunities to expand its client base in
the emerging markets of the Pacific Basin. In addition to signing on
independent hotels and resorts, the Company may achieve its growth through
joint venture investments and leases and/or acquisitions of management
contracts and/or companies.
With the increase in management contracts, the number of hotel and resort
employees that the Company will supervise may increase significantly. The
Company is presently negotiating for both small budget hotels and large
luxury condominium resorts and therefore, it is impossible at this time to
predict the number of additional employees that it will supervise or that it
will be required to hire for the hotels and resorts during the next fiscal
year. At April 30, 1999, the Company employed approximately 800 employees
and managed an additional 400 on behalf of the property owners.
On July 31, 1995, the Company invested $100,000 into a reorganization plan
instituted by HBII. Under terms of the HBII reorganization plan, the eighty
seven units owned by HBII will be sold under a timeshare plan and investors
in the timeshare plan may receive up to four times their investment over the
life of the timeshare plan. As of April 30, 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. Although no assurance can be given, management is
confident that it will be able to collect the remaining principal balance
of this investment through the timeshare proceeds received by HBII (See
"Liquidity & Capital Resources").
On August 1, 1994, the Company entered into a contract with Hawaii
Reservations Center Corp. ("HRCC"), a company controlled by Charles M.
McGee, pursuant to which HRCC shall provide reservation services for hotels
and resorts managed by the Company. Since the purchase of KRI, Inc.,
reservation services for hotels and resorts managed by the Company were
provided by KRI, Inc. The fees paid by the Company include a fixed monthly
fee plus commissions. The Company also agreed to sell to HRCC the assets
of the reservation offices of KRI, Inc., which consisted of office
equipment. As consideration for the equipment, HRCC agreed to employ the
reservation department employees of KRI, Inc. and to assume the liability
for the accrued vacation of such employees. The Company realized a gain of
$4,372 on the transaction, as the value of the accrued vacation exceeded
the net book value of the office equipment sold. It is management s belief
that the contract with HRCC are on terms which are no less favorable than
those which could be negotiated with companies not affiliated with the
Company, however, in May of 1997, the Company renegotiated its contract
with HRCC with regard to the fees charged. Under the new agreement, the
fees paid to HRCC are based upon the monthly room revenues of the properties
managed by the Company, subject to a minimum monthly fee. Management
believes, although no assurances can be given, that the Company shall enjoy
lower reservations costs under the new agreement.
20
<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 utilize dates beyond December 31, 1999.
The Company presently believes that with modifications and replacement of
existing hardware and software, the Year 2000 Issue can be mitigated.
However, if such modifications and replacements are not made, or are not
completed timely, the Year 2000 Issue could have a material impact on the
operations of the Company.
The Company s plan to resolve the Year 2000 Issue involves four phases;
assessment, remediation, testing and implementation. To date the Company
has fully completed its assessment of all material systems that could be
affected by the Year 2000 Issue. The completed assessment indicated that
some of the Company s significant information technology systems could be
affected. That assessment concluded that the affected systems include
a number of the Company s personal computers and the Company s telephone
system. If not resolved on a timely basis, these systems could hamper the
Company s ability to provide adequate and timely customer services from
which the Company derives a significant portion of its revenues.
For its information technology and operating equipment exposures, to date
the Company is approximately 70% complete on the remediation phase for all
material systems and expects to complete software reprogramming and/or
replacement no later than September 30, 1999. After completing the
reprogramming and/or replacement of software, the Company s plans call for
testing and implementing its information technology systems. To date,
the Company has completed 75% of its testing. The Company has not yet
begun its implementation phase. The Company expects that all remediated
systems will be fully implemented by September 30, 1999.
With respect to third parties, for systems that interface directly with
significant vendors, the Company is 70% complete with its remediation
efforts. Testing of all material systems was completed in April 1999.
Implementation has not yet taken place but is expected to be completed by
June 30, 1999. The Company has queried its important suppliers and
vendors that do not involve system interface. To date, the Company is not
aware of any problems that would materially impact the results of
operations, liquidity, or capital resources. The Company has no means of
ensuring that these third parties will be Year 2000 ready. The inability
of those parties to complete their Year 2000 resolution process could
materially impact the Company. The affects for non-compliance by third
parties where no system interface exists is not determinable.
The Company will utilize both internal and external resources to reprogram,
or replace, test, and implement the software and operating equipment for
Year 2000 modifications. The total cost of the Year 2000 project is
estimated at $50,000 and will be funded through operating cash flows. To
date, the Company has incurred approximately $11,000 in expenses related to
all phases of the Year 2000 project. Of the total remaining project
costs, approximately $39,000 is attributable to the purchase of new software
and operating equipment, which will be capitalized or financed through an
operating lease.
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<PAGE>
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.
22
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PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
There were no matters voted on by the Security Holders of the Company
during the quarter ended April 30, 1999. annual meeting of the
shareholders of The Castle Group, Inc. was held on January 22, 1999.
Item 5. OTHER INFORMATION
There is no other information being reported for the current quarter.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
There were not reports on Form 8-K filed during the quarter ended April
30, 1999.
(a) Exhibits
The exhibits designated by an asterisk are incorporated herein by
reference. The exhibits with page references are filed herewith.
Sequential
Exhibit Page
Number Description Number
1.1 Form of Placement Agency Agreement incorporated by
reference to Exhibit 1.1 to the Company s Registration
Statement on Form SB2/A-1 filed on March 10, 1998. *
2.1 Restated Articles of Incorporation, incorporated by reference
to Exhibit 2.1 to the Company's Registration Statement on
Form 10-SB. *
2.2 Bylaws, as amended effective February 1, 1995, incorporated
by reference to Exhibit 2.2 to the Company's Quarterly Report
on Form 10-QSB for the quarter ending 04/30/96 *
6.1 Agreement and Plan of Reorganization dated as of November 8,
1993, by and among The Castle Group, Inc., Bernard Wall Trust,
LCC, Ltd., John Tedcastle, Hideo Nomura, and Castle Group,
Limited, with exhibits, incorporated by reference to Exhibit 10.1
to the Company's Registration Statement on Form 10-SB. *
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6.2 Stock Purchase Agreement dated as of November 10, 1993, by and
among The Castle Group, Inc., Keawe Resorts, Inc., Maui Beach
Hotel, Inc., M.K. & Sons, Inc., TN Group, Inc., Michael S. Nitta,
Saburo & Mitsue Maruyama, Shigeru Shinno, James Kurita, and
KRI, Inc., with exhibits, incorporated by reference to Exhibit
10.2 to the Company's Registration Statement on Form 10-SB. *
6.3 Kelvin Bloom Employment Agreement dated December 2, 1993
between the Company and Kelvin Bloom, incorporated by
reference to Exhibit 10.3 to the Company's Registration
Statement on Form 10-SB. *
6.4 Kimo M. Keawe Employment Agreement dated July 30, 1994,
effective as of November 10, 1993 between Kimo M. Keawe and
the Company, incorporated by reference to Exhibit 6.4 to the
Company's Annual Report on Form 10-KSB for the year ended
July 31, 1994. *
6.5 Michael S. Nitta Employment Agreement dated June 23, 1994,
effective as of November 10, 1993 between Michael S. Nitta and
the Company, incorporated by reference to Exhibit 6.5 to the
Company's Annual Report on Form 10-KSB for the year ended July
31, 1994. *
6.6 Shari Chang Employment Agreement dated July 15, 1994, effective
as of July 16, 1994 between Shari Chang and the Company,
incorporated by reference to Exhibit 6.6 to the Company's Annual
Report on Form 10-KSB for the year ended July 31, 1994. *
6.7 Sublease Agreement dated September 16, 1993 between Rush
Moore Craven Sutton Morry & Beh and The Castle Group, Ltd. for
the Company's principle executive offices, incorporated by
reference to Exhibit 10.4 to the Company's Registration Statement
on form 10-SB. *
6.8 Lease Agreement dated April 1, 1988, between Hirano Enterprises,
Cen Pac Properties, Inc., and KRI, Inc., dba Hawaiian Pacific
Resorts, as renewed by agreement dated May 3, 1993, incorporated
by reference to Exhibit 10.5 to the Company's Registration
Statement on Form 10-SB. *
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. *
24
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. *
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. *
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<PAGE>
6.17 Extension of Revolving Line of Credit Agreement dated December
11, 1996 between The Castle Group, Inc., KRI, Inc., Castle
Resorts & Hotels, Inc., and Hawaii National Bank incorporated by
reference to Exhibit 6.17 to the Company s Annual Report on Form
10-KSB for the year ended July 31, 1997. *
6.18 Extension of Revolving Line of Credit Agreement dated March 5,
1997 between The Castle Group, Inc., KRI, Inc., Castle Resorts &
Hotels, Inc., and Hawaii National Bank incorporated by reference
to Exhibit 6.18 to the Company s Annual Report on Form 10-KSB
for the year ended July 31, 1997. *
6.19 Extension of Revolving Line of Credit Agreement dated June 30,
1997 between The Castle Group, Inc., KRI, Inc., Castle Resorts &
Hotels, Inc., and Hawaii National Bank incorporated by reference
to Exhibit 6.19 to the Company s Annual Report on Form 10-KSB
for the year ended July 31, 1997. *
6.20 Stock Option Agreement dated May 21, 1997 between Hawaii
Reservations Center Corp. and The Castle Group, Inc. incorporated
by reference to Exhibit 6.20 to the Company s Annual Report on
Form 10-KSB for the year ended July 31, 1997. *
6.21 Steve Townsend Employment Agreement dated May 31, 1997,
effective as of July 28, 1997 between Steve Townsend and the
Company incorporated by reference to Exhibit 6.21 to the
Company s Annual Report on Form 10-KSB for the year ended
July 31, 1997. *
6.22 Consulting Agreement between Kimo M. Keawe, Keawe Resorts,
Inc. and the Company dated April 16, 1997 incorporated by
reference to Exhibit 6.22 to the Company s Annual Report on
Form 10-KSB for the year ended July 31, 1997. *
6.23 Amendment to Consulting Agreement between Kimo M. Keawe,
Keawe Resorts, Inc. and The Castle Group, Inc. dated April 16,
1997 incorporated by reference to Exhibit 6.23 to the Company s
Annual Report on Form 10-KSB for the year ended July 31, 1997. *
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. *
26
<PAGE>
6.25 Amendment to Promissory Notes from the Company to Saburo or
Mitsue Maruyama for $3,600; Michael S. Nitta for $16,800; Keawe
Resorts, Inc. for $122,000; M.K. & Sons, Inc. for $12,000;
Shigeru Shinno for $6,000; and T.N. Group Hawaii, Inc. for
$6,000 incorporated by reference to Exhibit 6.25 to the
Company's Annual Report on Form 10-KSB for the year ended July
31, 1997. *
6.26 Commercial Promissory Note between the Company and City Bank
dated November 14, 1997 incorporated by reference to Exhibit
6.26 to the Company s quarterly report on Form 10-QSB for the
quarter ended January 31, 1998 *
6.27 Promissory note for $50,000 dated January 15, 1998 between the
Company and Michael S. Nitta incorporated by reference to
Exhibit 6.26 to the Company s quarterly report on Form 10-QSB
for the quarter ended January 31, 1998 *
6.28 Promissory note for $60,000 dated January 29, 1998 between the
Company and Kelvin M. Bloom incorporated by reference to
Exhibit 6.26 to the Company s quarterly report on Form 10-QSB
for the quarter ended January 31, 1998 *
6.29 Letter from Hawaii National Bank extending the due date on the
$300,000 revolving line of credit to July 15, 1998, incorporated
by reference to Exhibit 6.29 to the Company s quarterly report
on form 10-QSB for the quarter ended April 30, 1998 *
6.30 Amendment of promissory note dated January 29, 1998 between the
Company and Kelvin M. Bloom extending the due date on the note
to July 15, 1998, incorporated by reference to Exhibit 6.38 to
the Company s quarterly report on form 10-QSB for the quarter
ended April 30, 1998 *
6.31 Amendment of promissory note dated January 15, 1998 between
the Company and Michael S. Nitta extending the due date on the
note to July 15, 1998, incorporated by reference to Exhibit
6.31 to the Company s quarterly report on form 10-QSB for the
quarter ended April 30, 1998 *
6.32 Letter from City Bank extending the due date on the $250,000
line of credit to August 15, 1998, incorporated by reference
to Exhibit 6.32 to the Company s form 10Q-SB for the quarter
ended April 30, 1998. *
27
<PAGE>
6.33 Amendment of Lease between The Castle Group, Inc. and Hirano
Enterprises effective April 1, 1998, incorporated by reference
to Exhibit 6.33 to the Company s form 10Q-SB for the quarter
ended April 30, 1998. *
6.34 Consulting agreement dated July 22, 1998 and effective as of
June 1, 1998 between the Company and Kimo M. Keawe, incorporated
by reference to Exhibit 6.34 to the Company's form 10K-SB for
the year ended July 31, 1998. *
6.35 Form of promissory notes dated June 30, 1998 between the Company
and Judvhir Parmar for $175,000, K. Roger Moses for $50,000,
Gary J. Stevens, Susanne L. Blankley for $50,000, and Thomas S.
Blankley for $50,000, 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. *
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 10, 1998,
incorporated by reference to Exhibit 6.41 to the Company's form
10Q-SB for the quarter ended October 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
10Q-SB for the quarter ended October 31, 1998. *
6.43 Private Offering Memorandum for the issuance of the Company's
Series "A" Preferred Stock 30
DESCRIPTION OF EXHIBITS
See item 1 above.
28
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
THE CASTLE GROUP, INC.
(Registrant)
June 18, 1999 /s/ Rick Wall
-------------------------
Chairman of the Board and
Chief Executive Officer
June 18, 1999 /s/ Michael S. Nitta
-------------------------
Chief Financial Officer
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CONFIDENTIAL PRIVATE OFFERING MEMORANDUM
THE CASTLE GROUP, INC.
$5,000,000 (Five Million Dollars U.S.)
$7.50 Cumulative Convertible Exchangeable Series "A" Preferred Stock
The Series "A" Preferred Stock (the "Preferred Stock") offered hereby is
convertible into shares of the Company s Common Stock at any time at the
option of the holder, at a conversion price of $3.00 per share of Common
Stock, subject to adjustment (equivalent to a conversion rate of 33.33
shares of Common Stock for each share of Preferred Stock). On January 15,
1999, the last reported sale price of the Company s Common Stock listed on
the "Electronic Bulletin Board" of the National Association of Securities
Dealers, Inc. (the "NASD") under the symbol "CAGU" was $2.00 per share.
Dividends on the Preferred Stock are cumulative from the date of
original issue and will be payable semi-annually, commencing July 15, 1999,
at the rate of $7.50 per annum per share. Commencing January 15, 2001,
the Preferred Stock will be redeemable at the option of the Company, in
whole or in part, at the redemption price set forth herein plus accrued and
unpaid dividends. The Preferred Stock also will be redeemable at the option
of the holder in certain events.
See "Risk Factors" regarding matters which should be carefully considered by
prospective investors.
THE PREFERRED STOCK OFFERED BY THIS MEMORANDUM HAVE NOT BEEN REGISTERED WITH
THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC") UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT"), IN RELIANCE, (1) WITH RESPECT TO
REGISTRATION REQUIREMENTS PROVIDED BY SECTION 4 (2) OF THE SECURITIES ACT
AND BY REGULATION D, PROMULGATED THEREUNDER. THE PREFERRED STOCK HAVE NOT
BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES LAW OF ANY STATE IN THE
UNITED STATES IN RELIANCE UPON EXEMPTIONS FOR NON PUBLIC OFFERINGS, THE
PREFERRED STOCK MAY BE OFFERED AND SOLD ONLY TO A LIMITED NUMBER OF
INVESTORS IN THE UNITED STATES WHO MEET CERTAIN SUITABILITY STANDARDS AND
WHO ARE PURCHASING FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION.
ACCORDINGLY, DISTRIBUTION OF THIS MEMORANDUM IN THE UNITED STATES IS LIMITED
TO PERSONS WHO MEET CERTAIN MINIMUM FINANCIAL QUALIFICATIONS AND DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY WITH
RESPECT TO ANY OTHER PERSONS.
Price to Selling Proceeds to
Description Investor Commissions Company (1)
Per Share. $100 0% 100%
Per Minimum Purchase. 500 $ 0 $ 50,000
Total Offering $5,000,000 $ 0 $ 5,000,000
The Preferred Stock shares are being offered on a "best efforts" basis by
the Company through its officers and directors. Officers and directors
will not be compensated in connection with any sales efforts. This
offering will terminated on March 15, 1999, unless extended in the sole
discretion of the Company.
(1)Before deducting certain offering expenses for legal, accounting and
printing and other costs estimated at $50,000.
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THESE PREFERRED SHARES ARE OFFERED FOR CASH SUBJECT TO PRIOR SALE AND
WITHDRAWAL, CANCELLATION OR MODIFICATION OF THE OFFER WITHOUT NOTICE.
BY PROVIDING THIS CONFIDENTIAL PRIVATE OFFERING MEMORANDUM, THE COMPANY
UNDERTAKES TO MAKE AVAILABLE TO EVERY OFFEREE DURING THE COURSE OF THIS
TRANSACTION AND PRIOR TO SALE, ANY REASONABLE AND RELEVANT INFORMATION
REQUESTED, AND UNDERTAKES TO GIVE THE OPPORTUNITY TO ASK QUESTIONS OF AND
RECEIVE ANSWERS FROM THE COMPANY CONCERNING THE TERMS AND CONDITIONS OF
THE OFFERING AND CONCERNING THE ACCURACY AND ADEQUACY OF THE INFORMATION
AVAILABLE HEREIN.
IF YOU HAVE ANY QUESTIONS REGARDING THIS OFFERING, OR DESIRE ANY ADDITIONAL
INFORMATION OR DOCUMENTS TO VERIFY OR SUPPLEMENT THE INFORMATION CONTAINED
IN THIS CONFIDENTIAL PRIVATE OFFERING MEMORANDUM, PLEASE WRITE, RICK WALL,
CEO, THE CASTLE GROUP, INC., 745 BISHOP STREET, 10th FLOOR, HONOLULU, HAWAII
96813, TELEPHONE (808) 524-0900 OR FACSIMILE (808) 533-2267.
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AVAILABLE INFORMATION
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, as filed by the Company with the Commission,
are incorporated in this Prospectus by reference and made a part hereof:
Annual Report on Form 10-KSB for the fiscal year ended July 31, 1998; and
Current Report on Form 10-QSB for the quarterly period ended October 31, 1998.
All reports and documents filed by the Company with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the
date of this and prior to the termination of this offering shall be deemed
to be incorporated in this by reference to be a part hereof from the
respective dates of filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Offering
Memorandum to the extent that a statement contained herein or in any other
subsequently filed document that also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement
so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this.
The Company will provide without charge to each person to whom a copy
of this Offering Memorandum is delivered, upon the written or oral request
of such person, a copy of any or all of the documents incorporated by
reference herein, except for the exhibits to such documents (unless such
exhibits are specifically incorporated by reference in such documents).
Such requests should be directed to The Castle Group, 745 Fort Street, 10th
Floor, Honolulu, Hawaii 96813.
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<PAGE>
PRIVATE PLACEMENT OFFERING SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements included elsewhere herein
or incorporated by reference in this Offering Memorandum.
The Company
The Castle Group, Inc. is engaged in the business of hotel and resort
management, sales and marketing. The Company operates its business under
the trade names "Hawaiian Pacific Resorts" and "Castle Resorts and Hotels".
At January 1, 1999 the Company had 29 management, sales or marketing
contracts covering 2,983 rooms. The majority of the properties currently
under management are located on all of the major islands within the State
of Hawaii. The Company has one management contract for a 68 room
condominium resort located in Saipan and one management contract for a 56
room hotel resort located in Chuuk.
The Company manages a wide variety of hotels and resorts from small
budget inns to luxury condominium resorts. Daily room rates for the
properties average from $40 to over $1,000. With such a wide variety of
products, the Company is able to appeal to all levels of traveler. In times
of changing economic conditions, this diversity provides a wide base of
potential travel clientele as well as property owner.
The majority of hotels and resorts managed by the Company have
experienced substantial increases in both revenues and operating profits
over the past three years. In achieving higher net operating profits for
the managed properties, the Company at the same time increases its own
revenues. Many of the management contracts allow for the participation by
the Company in operating profits through incentive management fees. It
is management's belief that property owners have in recent years looked more
favorably upon management agreements based more on net profits than those
based on gross revenues. Management also believes that its past success in
improving the operating results for its managed properties will enhance its
competitive position when bidding for new properties.
The Company's principal business strategy is the expansion of its
revenue base. This entails two primary goals: (i) increasing the
profitability of the properties currently under management, and (ii)
expansion through the acquisition of additional management contracts.
Growth within the current client base is met by meeting the financial
goals of profitability and asset appreciation for its' clientele--the owners
of the hotels and resorts. This is accomplished through increasing
revenues and decreasing operating expenses. Revenues are enhanced through
the Company s' commitment to provide quality accommodations and service at
a reasonable price to the Company's equally important client--the leisure
and business traveler. Operating expenses may be decreased through the
implementation of bulk purchasing and centralized services. Each facet of
the Company's operations are tailored to effectively and efficiently meet
the ever changing needs of the individual properties whether it be
assistance in obtaining renovation financing or the implementation of value
added marketing programs.
The Company intends to increase its portfolio of management contracts
by expanding into new markets as well as the Hawaii market. Management
believes, although no assurances can be given, that there are numerous
opportunities to add properties outside of its existing geographical area.
The expansion of the Company s' management contract portfolio may include
management contracts, sales and marketing contracts, joint venture
investments, and acquisitions.
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<PAGE>
The Offering
The Company is offering $5,000,000 of $7.50 Cumulative Convertible
Exchangeable Series "A" Preferred Stock (the "Preferred Stock"). The
minimum subscription per investor is $50,000 in Preferred Stock. However,
the Company may, in its sole discretion accept subscriptions from qualified
investors for less than $50,000. Dividends on the Preferred Stock are
cumulative from the date of original issue and will be payable semi-
annually, commencing July 15, 1999, at the rate of $7.50 per annum per
share. Commencing January 15, 2001, the Preferred Stock will be redeemable
at the option of the Company, in whole or in part, at the redemption price
set forth herein plus accrued and unpaid dividends. The Preferred Stock
also will be redeemable at the option of the holder in certain events.
Issue 50,000 shares of $7.50 Cumulative Convertible
Exchangeable Series "A" Preferred Stock (the
"Preferred Stock").
Dividends $7.50 per annum per share.
Dividend Payment Dates July 15 and January 15, commencing July 15, 1999,
when, as and if declared by the Board of Directors
of the Company.
Conversion Convertible at any time, unless previously
redeemed, into the Company s common stock, par
value $0.02 per share (the "Common Stock"), at
$3.00 per share of Common Stock, subject to
adjustment under certain conditions.
Optional Redemption At the Company s option, the Preferred Stock will
be redeemable, in whole or in part, commencing
January 15, 2001 at the redemption price set forth
herein plus accrued and unpaid dividends.
Liquidation Preference $100.00 per share, plus accrued and unpaid dividends.
Voting Rights The Preferred Stock will be non-voting.
Ranking The Preferred Stock will rank senior to the Company's
Common Stock with respect to dividends and liquidating
distributions and will rank pari passu with or senior
to all existing and future preferred stock.
Listing The Company has no current plans of listing the
Preferred Stock on any Exchange.
Use of Proceeds The net proceeds to be received by the Company
from the sale of the Preferred Stock offered
hereby are estimated to be $5,000,000. The
Company intends to use the net proceeds for
general corporate purposes, which may include
acquisitions. See "Use of Proceeds.
34
<PAGE>
THE OFFERING
General
The Company is offering suitable investors a maximum of $5,000,000 of $7.50
Cumulative Convertible Exchangeable Series "A" Preferred Stock pursuant to
this Confidential Private Offering Memorandum. The minimum purchase per
investor is $50,000 of Preferred Stock. The Company may, in its sole
discretion, accept subscriptions for less than $50,000.
This Offering will terminate at 5:00 P.M. (Honolulu, Hawaii Time) on March
15, 1999, unless, in the sole determination of the Company, the offering is
extended. The term "Expiration Date" shall mean time and date on which the
offering, as extended (if such is the case) shall terminate.
Conversion into Common Stock
The Preferred Stock offered hereby is convertible into shares of the
Company s Common Stock at any time at the option of the holder, at a
conversion price of $3.00 per share of Common Stock, subject to adjustment
(equivalent to a conversion rate of 33.33 shares of Common Stock for each
share of Preferred Stock). On January 15, 1999, the last reported sale
price of the Company s Common Stock listed on the "Electronic Bulletin
Board" of the National Association of Securities Dealers, Inc. (the "NASD")
under the symbol "CAGU" was $2.00 per share.
Method of Subscription
Investors may subscribe for the Preferred Stock by completing, signing and
delivering the appropriated Prospective Investor Suitability Questionnaire
and/or Subscription Agreement, together with payment for the full purchase
price of the Preferred Stock, to the Company at 745 Bishop Street, Suite
1000, Honolulu, Hawaii 96813, before the Expiration Date. Payment shall be
in the form of a cashier's check or money order payable to "The Castle
Group, Inc. - Preferred Stock Account." Foreign Investors must deliver
their payment for the Preferred Stock to a representative of the Company in
the foreign Country.
The Company shall determine, in accordance with the suitability standards
set forth herein, whether a prospective investor may subscribe to purchase
any of the Preferred Stock offered hereby. In addition the Company may in
its sole and absolute discretion, accept or reject subscriptions, in whole
or in part (even from investors who meet the suitability requirements.)
Each prospective investor should obtain the advice of his or her attorney,
tax consultant and business advisor with respect to the legal, tax and
business aspects of this investment before subscribing for these Preferred
Stock.
Subscriptions must be delivered to the Company on or before the Expiration
Date. The Expiration Date may, however, be extended with or without notice
by the Company in its sole discretion.
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<PAGE>
Acceptance of Subscription
The Company in its sole discretion, may accept or reject any potential
purchaser's subscription in whole or in part. Subscriptions are not
binding until accepted or rejected, in whole or in part, by the Company.
The Company shall notify each subscriber of any such determination no
later than ten business days after receipt of the subscription. If the
Company does not accept a subscription, in whole or in part, whether
because of the nonsuitability of any investor or any other reason, refund
of the subscription amount shall be made to the subscriber as described
below under "The Offering - Handling of Sale Proceeds and Issuance of
Preferred Stock."
Handling of Sale Proceeds and Issuance of Preferred Stock
Until acceptance of a subscription, such subscription proceeds will be
deposited and held in "The Castle Group, Inc. - Preferred Stock Account",
established by the Company for such purpose.
Subscription proceeds will earn interest from the date of receipt until
the Expiration Date, or such earlier date as the Company accepts all or a
portion of the subscriptions as described above, at the rate which the
Company earns generally on its deposit accounts. If the offering is
canceled in its entirety for any reason, if a subscription is rejected in
whole or in part, or if subscription funds are returned to any subscriber
for any other reason, the amount returned to the subscriber shall be the
amount remitted (or a portion thereof in the case of a partial rejection)
with the Subscription Agreement without interest.
Any subscription funds to be refunded will be mailed promptly after the
Expiration Date. Following any repayment of subscription funds, the
Company will have no further liability to any subscriber.
Preferred Stock will be issued as soon as practicable after successful
completion of the offering.
Restrictions on Transfer. The Preferred Stock covered by this Memorandum
and the shares of common stock into which they may be converted have not
been registered with the SEC under the Securities Act in reliance (i)
with respect to Preferred Stock offered or sold in the United States, upon
an exemption from the registration requirements thereof provided by
Section 4(2) of the Securities Act and by Regulation D promulgated
thereunder, and (ii) with respect to Preferred Stock offered and sold
outside of the United States to foreign persons, upon the "exemption"
provided by the interpretation of SEC Release No. 33-4708 and Regulation S
relating to offshore sales of securities effected in a manner that will
result in such securities qualified under the applicable securities laws
of any state in reliance upon exemptions for nonpublic offerings contained
in such laws in the states in which the Shares are being offered.
Each Share of Preferred Stock and certificate evidencing the shares into
which the Preferred Stock is converted, sold in the United States pursuant
to this Memorandum shall bear a restrictive legend in the following form in
addition to any additional restrictions required by the applicable
securities laws of any state.
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS (A)
COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR (B) THE COMPANY HAS BEEN FURNISHED WITH AN OPINION OF
COUNSEL ACCEPTABLE TO THE COMPANY TO THE EFFECT THAT NO REGISTRATION IS
LEGALLY REQUIRED FOR SUCH TRANSFER.
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<PAGE>
The Preferred Stock, and the shares into which they may be converted,
which are sold in the United States may not be sold, pledged or otherwise
transferred except as permitted under various exemptions contained in the
Securities Act, or upon satisfaction of the registration and prospectus
delivery requirements of the Act. The Preferred Stock and the shares into
which they may be converted which are sold in the United States pursuant
to this Memorandum will be deemed "restricted securities" under Rule 144
promulgated by the SEC under the Securities Act and cannot be sold in such
public market without registration except as permitted by that rule which
requires, among other things, at least a two-year holding period. The
Shares sold in the United States may be subject to additional restrictions
on transfer pursuant of the applicable state securities laws of the
various states in which the Preferred Stock is being offered.
Accordingly, each investor must bear the economic risk of its investment
in the Preferred Stock and shares for an indefinite period of time.
Each Share of Preferred Stock, and each certificate evidencing the shares
into which the Preferred Stock may be converted, which are sold outside of
the United States to foreign persons shall bear a restrictive legend in
the following form:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, PURSUANT TO SECURITIES RELEASE NO. 334708 AND REGULATIONS
RELATING TO OFFSHORE SALES OF SECURITIES EFFECTING IN A MANNER THAT WILL
RESULT IN SUCH SECURITIES COMING TO REST ABROAD, AND MAY NOT BE SOLD,
TRANSFERRED, PLEDGED, OR OTHERWISE DISPOSED OF FOR A PERIOD OF ONE YEAR
AFTER COMPLETION OF THE OFFERING PURSUANT TO WHICH THE SHARES OFFERED
HEREIN WERE PURCHASED, AND THEREAFTER MAY NOT BE SOLD, TRANSFERRED,
PLEDGED, OR OTHERWISE DISPOSED OF IN WHOLE OR IN PART, DIRECTLY OR
INDIRECTLY IN THE UNITED STATES OF AMERICA, ITS TERRITORIES, OR POSSESSIONS,
OR TO A CITIZEN, NATIONAL OR RESIDENT OF, OR ENTITY ORGANIZED OR CHARTERED
UNDER THE LAWS OF OR RESIDENT IN, THE UNITED STATES OF AMERICA, ITS
TERRITORIES OR POSSESSIONS, UNLESS (i) THE TRANSACTION IS REGISTERED UNDER
THE SECURITIES ACT AND ANY APPLICABLE STATE LAW, OR (ii) AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OR ANY APPLICABLE STATE LAW IS
AVAILABLE AND THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL ACCEPTABLE TO
THE COMPANY TO THAT EFFECT.
The Company shall grant to each investor who converts Preferred Stock into
shares of the Company's common stock the right to have such common stock
registered if and when the Company registers additional shares of the
Company s common stock with the SEC under the Securities Act in connection
with certain underwritten public offerings of the Company s common stock.
In the event that a majority of the investors of Preferred Stock have
converted into shares of the Company s common stock and a majority of the
investors who have converted the Preferred Stock into the Company s common
stock desire to have such common stock registered, then the Company shall
commence the registration process with the SEC to register such shares no
later than July 31, 2000. Such registration rights shall be afforded only
to investors who purchase Preferred Stock directly from the Company
hereunder, and shall expire on the second anniversary of the date such
Preferred Stock is converted into shares of the Company's common stock.
SUITABILITY STANDARDS FOR U.S. INVESTORS
The Company is offering and will sell the Preferred Stock in the United
States only to a limited number of investors who meet the standards of
suitability set forth below. The term "investor" includes an individual, a
corporation, a partnership, an association, a trust and an unincorporated
association. The Preferred Stock will be offered in the United States only
to a limited number of selected sophisticated investors, each of whom the
Company has reasonable grounds to believe and does believe, immediately
before making an offer, either (a)
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<PAGE>
qualifies as an "accredited investor," as that term is defined in Rule 501
of Regulation D promulgated under the Securities Act of 1933, as amended,
or (b) either alone or with one or more personal representatives, has
such knowledge and experience of financial and business matters that such
prospective purchaser is capable of evaluating the merits and risks of
investing in the Preferred Stock. Sales will be made only to a person whom
the Company reasonably believes, after reasonable investigation, immediately
before making such a sale, (a) qualifies as an "accredited investor," (b)
has knowledge and experience in financial and business matters such that he
or she can evaluate the merits and risks of investing in the Preferred
Stock, or (c) is represented by a "purchaser representative" (as defined in
Rule 501) who, either alone or together with the prospective purchaser or
one or more other purchaser representatives, has the requisite knowledge and
experience to evaluate the merits and risks of investing in the Preferred
Stock.
An "accredited investor," as that term is defined in Regulation D
promulgated under the 1933 Act, is a subscriber who:
is a bank as defined in Section 3 (a) (2), or any savings and loan
institution as defined in Section 3 (a) (5)(A) of the 1933 Act whether
acting in its individual or fiduciary capacity; any broker or dealer
registered pursuant to Section 15 of the Securities Exchange Act of 1934;
any insurance company as defined in Section 2(13) of the Act, an investment
company registered under the Investment Company Act of 1940 or a business
development company as defined in Section 2(a)(48) of that Act; a Small
Business Investment Company licensed by the U.S. Small Business
Administration under Section 301(c) of (d) of the Small Business Investment
Act of 1958; any plan established and maintained by a state, its political
subdivisions for the benefit of its employees, its investment decisions are
made by a planned fiduciary which is a bank, savings and loan association,
insurance company, or registered investment adviser and the plan establishes
principles the same as or similar to those contained in Sections 404-407 of
Title I of the Employee Retirement Income Security Act of 1974, employee
benefit plan within the meaning of the Employee Retirement Income Security
Act of 1974 if the investment decision is made by a plan fiduciary, as
defined in Section 3(21) of such Act, which is either a bank, savings and
loan association, insurance company or registered investment adviser, or if
the employee benefit plan has total assets in excess of $5,000,000 or, if a
self-directed plan, with investment decisions made solely by persons that
are accredited investors;
is a private business development company as defined in Section 202(a)(22)
of the Investment Advisers Act of 1940;
is an organization described in Section 501(c)(3) of the Internal Revenue
Code, corporation, Massachusetts or similar business trust or partnership
not formed for the specific purpose of acquiring Preferred Stock offered
hereby, with total assets in excess of $5,000,000;
is a director, executive officer, or general partner of the partnership or
any director, executive officer or general partner of a general partner of
the partnership;
is a natural person whose individual net worth, individually or together
with his or her spouse, at the time of the purchase exceeds $1,000,000;
is a natural person who had an individual income in excess of $200,000 in
each of the two most recent years or joint income with that person's spouse
in excess of $300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the current year;
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<PAGE>
is a trust with total assets in excess of $5,000,000, not formed for the
specific purpose of acquiring the Preferred Stock offered hereby, whose
purchase is directed by a sophisticated person;
is an entity in which all of the equity owners are accredited investors.
If any of the Preferred Stock is subscribed for by a person acting in a
fiduciary capacity for any other person who, or an entity which, is deemed
to be a "purchaser" of the Preferred Stock, the suitability standards set
forth above will be applied to such "purchaser."
The term "net worth" as used above means the excess of total assets over
liabilities. In computing net worth, the principal residence of the
investor must be valued (i) at cost, including cost of improvements, or
(ii) at the value recently appraised by an institutional lender making a
secured loan, net of encumbrances. An investor may determine income by
adding to his adjusted gross income for federal income tax purposes any
amounts attributable to take exempt income receive, losses claimed as a
limited partner in any limited partnership, deductions or claims for
depletion, contributions to an IRA or KEOGH retirement plan, alimony
payments and any amount by which income from long-term capital gains has
been reduced in arriving at adjusted gross income.
In addition to the foregoing requirements, offers and sales will be made
only to persons who, by reason of their knowledge and experience in
business and financial matters (or of their qualified "Purchaser
Representatives") could be reasonably assumed to have the capacity to
evaluate the risks and merits of an investment in the Preferred Stock and
to protect their own interests in connection with the transaction. Only
persons who have substantial liquid assets and who can afford a total loss
of their investment should consider investing in the Preferred Stock.
Each prospective investor is required to make certain representations to
support a conclusion that the standards set forth above are satisfied.
Since the Preferred Stock (and the shares of common stock into which the
Preferred Stock may be converted) are being offered without registration
under the Securities Act, or registration or qualification under any state
securities laws, prospective investors will be required to make additional
representations.
Each prospective investor will be required to represent that (i) the
investor knows that the Preferred Stock (and the shares of common stock
into which the Preferred Stock may be converted) have not been registered
under the Securities Act or under any state securities laws, and has no
right to require such registration, (ii) the Preferred Stock is being
purchased for his own account and not on behalf of any other person and
not with a view to resale in a distribution, and (iii) the investor
understands that his right to transfer the Preferred Stock (and the shares
of commons stock into which the Preferred Stock may be converted) will be
restricted, including restrictions against transfer to prevent a violation
of the Securities Act of applicable state securities laws.
If the Company is incorrect in its evaluation of the circumstances of a
particular prospective investor's qualifications to receive this Memorandum,
then delivery of this Memorandum to such prospective investor shall not be
deemed an offer, and the Company shall require such prospective investor to
return this Memorandum to it immediately.
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CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in "Private Placement Offering Summary," "Risk
Factors," "Management s Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," including statements regarding the
anticipated development and expansion of the Company s business, the intent,
belief or current expectations of the Company, its directors or its
officers, primarily with respect to the future operating performance
of the Company and the products and/or services it expects to offer and
other statements contained herein regarding matters that are not historical
facts, are "forward-looking" statements. Because such statements include
risks and uncertainties, actual results may differ materially from those
expressed or implied by such forward-looking statements. Factors that could
cause actual results to differ materially from those expressed or implied
by such forward-looking statements include, but are not limited to, the
factors set forth in "Risk Factors," "Management s Discussion and Analysis
of Financial Condition and Results of Operations",and "Business."
RISK FACTORS
THE PURCHASE OF THE PREFERRED STOCK BEING OFFERED INVOLVE A HIGH DEGREE OF
RISK AND, THEREFORE, SHOULD BE CONSIDERED EXTREMELY SPECULATIVE. THEY
SHOULD NOT BE PURCHASED BY PERSONS WHO CANNOT AFFORD THE POSSIBILITY OF THE
LOSS OF THEIR ENTIRE INVESTMENT. PROSPECTIVE INVESTORS SHOULD READ THE
ENTIRE CONFIDENTIAL PRIVATE OFFERING MEMORANDUM AND CAREFULLY CONSIDER AMONG
THE OTHER FACTORS AND FINANCIAL DATA DESCRIBED HEREIN, THE FOLLOWING RISK
FACTORS INHERENT IN AND AFFECTING THE BUSINESS OF THE COMPANY:
Operating Losses and Limited Operating History
The Company has experienced net operating losses of approximately 2.4
million dollars during the first five years of operations prior. These
losses were not unexpected, as it was the Company's plan to build the
necessary corporate and personnel infrastructure in order to properly
service the additional hotel and resort management contracts which the
Company acquired. Since the current operations of the Company commenced in
November of 1993, there is limited operating history for use to project
future operations.
Dependence on Acquisition of Management Contracts
The Company's success is highly dependent upon the acquisition and/or
purchase of additional management contracts. While the Company believes
that the financial strength provided by this offering would provide the
Company with the ability to purchase selective management contracts and/or
companies, there can be no assurance that the Company can acquire additional
management contracts and/or contracts. Investors should be aware that
the failure of the Company to acquire additional management contracts could
adversely effect the Company's results of operations and financial
condition.
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Dependence on Certain Property Owners
Management contracts are acquired, renegotiated or terminated in the
ordinary course of the Company's business. Some management contracts may
be terminated if certain financial criteria are not met in the
profitability of the property, while other management contracts may be
terminated without cause on short-term notice. There can be no assurances
that the Company will be able to keep its current portfolio of properties,
nor that the Company would be able to replace any contracts terminated by
the property owner. Investors should be aware that the loss of one or
more management contracts could have a material adverse effect on the
Company's results of operations and financial condition.
Competition for Management Contracts
The management and marketing of hotels and resorts is very competitive.
The Company competes with national, regional and local management
companies, some of which have a larger network of locations, greater
financial resources, and better name recognition than the Company. The
Company currently operates only within the State of Hawaii and there are a
number of competitors within the state with substantial operating
histories and financial reserves.
Management of Growth
The Company's strategy is to expand its current portfolio of management
contracts. Some of this growth is expected to take place outside of the
geographic region of Hawaii, where the Company is situated and currently
have all of its management contracts located within. Management believes
that it will be able to put into place effective procedures, controls and
management systems to manage its expansion plan. There can be no
assurance, however, that the Company will have the financial and other
resources necessary to adequately support such expansion.
Need for Additional Financing
The Company is dependent upon the net proceeds of this offering, currently
available financing and anticipated cash flow from operations to implement
its business plan. There can be no assurance that the Company will
be able to raise additional capital on terms satisfactory to the Company
or the holders of Shares. See "Use of Proceeds", "Management Discussion
and Analysis of financial Condition and Results of Operations".
Dependence upon Management
The success of the Company is highly dependent on the continued involvement
of certain key personnel, including, in particular, Mr. Rick Wall, Chairman
and Chief Executive Officer and founder of the Company. The absence of Mr.
Wall may have a material adverse effect upon the Company's operations and
expansion plans. The Company has no key man insurance, employment or non-
competition agreement with Mr. Wall, although he is one of the Company's
largest shareholders. See "Management".
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Potential Conflicts of Interest
Certain of the current directors and officers owning stock in the Company
are direct or indirect parties to a management contract between the
Company and the Hanalei Bay Resort (HBR) Following this offering,
directors and officers with interests in HBR will beneficially own
approximately 50% of the outstanding shares of the Common Stock and will
therefore have the ability to direct its operations and financial affairs
and the ability to influence the election of members of the Board of
Directors of the Company. Currently, seven of the eleven board of
directors are affiliated with HBR. These relationships, coupled with
these stockholders' ownership of Common Stock and their representation on
the Company's Board of Directors could give rise to conflicts of interest.
The Company believes that the terms and conditions of the management
contract with HBR are not at favorable rates to HBR, are at rates commonly
found within the industry and are similar to other contracts entered into
by the Company.
Voting Control
Current holders of the Company's Common Stock will beneficially have the
ability to direct its operations and financial affairs and to
substantially influence the election of members of the Board of Directors
of the Company. Current officers and directors of the Company will
beneficially own 80% of the outstanding shares of the Common Stock and
will also have the ability to direct its operations and financial affairs
and to substantially influence the election of members of the Board of
Directors of the Company. Even after the conversion of the preferred
shares offered hereunder, current holders and current officers and directors
of the Company will beneficially own more than 50% of the outstanding shares
of Common Stock and will have the ability to direct its operations and
financial affairs and to substantially influence the election of members of
the Board of Directors of the Company.
Quarterly Fluctuations in Earnings
The hotel industry is seasonal in nature. The first and third quarters of
the Company's fiscal year account for a large portion of the Company's
management fees. Because the operating expenses of the Company do not
fluctuate with seasonality, this will cause large quarterly fluctuations
in the Company's reported earnings. Other factors outside of the Company's
control may also adversely effect earnings such as poor weather conditions,
economic factors, competition and other occurrences affecting travel.
Dependence on Travel Industry
The Company is highly dependent on the travel industry as a whole. Certain
conomic events such as recession, depression, competition and other factors
will adversely effect the results of operations and financial condition of
the Company. In addition to this, the Company is highly dependent upon the
travel industry for the State of Hawaii, as all of its current revenues are
derived within Hawaii. Hawaii's travel industry is highly dependent upon
the airline industry to provide the necessary volume of airline seats for
visitors from the United States and other International regions. A decrease
in the number of flights to Hawaii, or an airline labor dispute resulting in
a strike could adversely effect the earnings and financial condition of the
Company.
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Government Regulations
The Company is subject to both federal and state regulation. The Company
is not currently aware of any federal or state pending legislation that
would adversely effect the financial conditions and earnings of the
Company. The extent and future promulgation of new regulation detrimental
to the visitor industry could have a substantial impact on the Company's
profitability. The hotel industry may be adversely effected by
regulations which cover wages, benefits, pricing, taxes and availability
of financing. In addition, the Company is planning to expand outside of
the United States and would become subject to International laws and the
laws and regulations of other countries. Investors should be aware that
there is a possibility of future changes in these regulations which may
adversely effect the Company's earnings.
Environmental Regulations
Under various federal, state and local environmental laws and regulations,
a current or previous owner or operator of real property may be liable for
the costs to remove or remedy hazardous or other toxic substances located
on, in or under such real property. These laws may impose such liability
whether or not the owner or operator had knowledge of the presence of
these substances. In connection with the Company's operation of its
properties under contract, the Company could be potentially liable for
such removal and remediable costs. The Company is not aware of any
environmental claims pending or threatened against it or against the
owners of the properties operated by the Company, however, no assurance
can be given that such a claim will not be asserted against the Company in
the future. Investors should be aware that the potential uninsured
cost of defending the Company against such claims may have a material
adverse effect on the earnings and financial condition of the Company.
Price Volatility
The market price of the Common Stock could be subject to significant
fluctuations in response to variations in quarterly or annual operating
results and other factors such as expansion or the loss of management
contracts. In addition, the securities markets in general have experienced
significant price and volume fluctuations from time to time in recent years
that may have been unrelated to the operating performances of certain
industries or individual companies. These broad fluctuations may adversely
affect the market price of the Common Stock.
Determination of Conversion Rate
The Preferred Stock are convertible into shares of the Company's common
stock at the rates described elsewhere in this Memorandum. The shares into
which the Preferred Stock may be converted will be "restricted" shares as
that term is defined in Rule 144 of the Securities Act of 1933. The
conversion rate of the Preferred Stock was arbitrarily determined by the
Board of Directors of the Company, and does not necessarily bear any
relationship to the value of the Company's assets, net worth, revenues or
any other commonly accepted criteria of value. (See "Description of
Preferred Stock")
Limited Market for Common Stock - No Market for Preferred Stock
The Company's common stock is listed and traded on NASD BULLETIN BOARD.
However, there is only a limited market for the Company's common stock and
there can be no assurance that an active market will ever develop, or if
developed, that it will be sustained. There is no secondary market for the
Preferred Stock and no assurance that any market for the Preferred Stock
will ever develop.
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No Independent Review
The Company has not engaged any securities firms to place the Preferred
Stock with investors. This offering is not underwritten. Thus, there has
not been an independent review of matters covered by this Memorandum
such as would be conducted by an underwriter.
Dividends
At the present time, the Company does not anticipate paying dividends on
its common stock in the foreseeable future. Any future dividends will
depend on earnings of the Company, its financial requirements and other
factors. Investors who anticipate the need of an immediate income from
their investment in the Company's common stock should refrain from
converting their Notes into shares of common stock. (See "Description of
Common Stock.")
No Minimum Offering
The Company may terminate the offering at any time without receiving any
minimum offering proceeds. Accordingly, the proceeds raised by the Company
in this offering may be insufficient to enable it to carry out its proposed
activities. (See "Plan of Distribution.")
Risk of Loss of Entire Investment
Because of the limited capital of the Company, its limited operating history
and other factors, each investor should be prepared to risk the entire loss
of his investment in the Preferred Stock purchased.
CORPORATE ORGANIZATION
The Company is a Utah corporation engaged in the business of hotel and
resort management. The Company operates its business under the trade names
"Hawaiian Pacific Resorts" and "Castle Resorts & Hotels". The Company was
organized under the laws of the State of Utah on August 21, 1981, under the
name "Vector Communications, Inc." The Company was formed primarily for the
purpose of conducting business activities in the communications industry and
to invest in real estate, minerals and oil and gas development. On November
22, 1983, the Company changed its name to "Quest National, Inc.".
During the fiscal year ending July 31, 1984, the Company acquired a fifty
percent interest in Guam Productions, Inc. ("GPI"), a corporation organized
under the laws of the Territory of Guam, in exchange for 11,000,000 shares
of the Company's "unregistered" and "restricted" common stock and $100,000.
Persons affiliated with GPI were elected to serve as directors and executive
officers of the Company. GPI's sole asset was an exclusive franchise
to operate a lottery in the Territory of Guam through December 31, 1988.
The Company's investment in GPI was written off in fiscal year ending July
31, 1985 after initial attempts to operate the Guam lottery profitably were
unsuccessful. The Company did not renew its annual option to extend the
franchise. Its interest in GPI was abandoned, and the Company ceased
business operations in 1986.
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The Company was inactive until fiscal 1993. On June 4, 1993, the Company
filed Articles of Amendment to its Articles of Incorporation with the
Department of commerce of the State of Utah, changing its name to "The
Castle Group, Inc.", reducing the authorized shares of common stock from
50,000,000 shares of $.001 par value per share to 20,000,000 shares of
$.02 par value per share common stock and effecting a reverse split of
the outstanding shares on a basis of one for twenty. As a result of the
reverse split, the 21,330,500 outstanding shares of common stock were
reduced to 1,066,530 shares (including an additional 5 shares resulting
from "rounding" following the reverse split. The reverse split did not
affect the proportional interest of any of the Company's stockholders.
On November 8, 1993, the Company and all of the stockholders of Castle
Group, Ltd., a Hawaii corporation ("Castle Limited") entered into an
Agreement and Plan of Reorganization (the "Castle Plan"). Pursuant to the
Castle Plan the Company acquired all of the assets of Castle Limited,
consisting primarily of management contracts on two resort properties
located in Hawaii, in exchange for 2,100,000 post-split "unregistered" and
"restricted" shares of the Company's common stock. The Company did not
acquire any significant assets other than the management contracts and did
not assume any material liabilities. In connection with the closing of
the Castle Plan, the Company sold 1,000,000 post-split "unregistered" and
"restricted" shares of its common stock at a price of $2.00 per share in a
private placement.
On November 10, 1993, the Company purchased all of the stock of KRI, inc.
("KRI"), a Hawaii corporation doing business as "Hawaiian Pacific
Resorts," in exchange for 650,000 post-split "unregistered" and
"restricted" shares of the Company's common stock and $400,000 in cash.
An additional $800,000 was paid to the selling stockholders of KRI in
exchange for certain non-competition covenants.
The business operations of KRI at the time of its acquisition were far
more significant than those of Castle Limited. KRI was a twenty-five year
old management company that managed and controlled the operations of nine
hotels within the State of Hawaii. At the time of its acquisition by the
Company, KRI did not have any significant assets other than its management
contracts and accounts receivable, had no material liabilities other than
its trade accounts payable, and had approximately 250 employees. The
business operations of KRI at the time of acquisition also included a 62%
interest in HPR Advertising, Inc. ("HPR Advertising"), a Hawaii
corporation. HPR Advertising was incorporated in 1989, with its primary
operation being the advertising of hotels & resorts managed by KRI. The
38% minority interest in HPR Advertising was owned by certain employees of
KRI. On July 31, 1995, KRI purchased all of the minority interests in HPR
Advertising for $380 in cash and HPR Advertising became a wholly owned
subsidiary of KRI.
On February 1, 1994, the Company filed with the Securities and Exchange
Commission a Registration Statement on Form 10-SB to register its common
stock, $.02 par value, under the Securities and Exchange Act of 1934. The
Registration Statement became effective on May 2, 1994.
References to the "Company" herein include the Company and its subsidiaries.
The Company's executive offices are located at 745 Fort Street, 10tth Floor,
Honolulu, Hawaii 96813. The Company's telephone number is (808) 524-0900
and its facsimile number is (808) 521-9994.
USE OF PROCEEDS
The net cash proceeds to the Company from this Offering is estimated to be
$4,950,000 after giving effect to estimated expenses payable by the Company.
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The Castle Group intends to use the net proceeds from the sale of the
shares of Common stock to repay approximately $180,000 in notes payable
representing the outstanding balance of the purchase price of KRI, Inc.,
$550,000 representing the outstanding balance of the lines of credit,
561,000 in other notes payable, and $900,000 to fund the Company s start
up costs for its acquisition of a lease on an upscale resort hotel located
in Guam. The lines of credit are personally guaranteed by certain members
of the Company s directors and bears interest at the rate of prime plus
2%.
The balance of the net proceeds will be used for general corporate
purposes, which may include making debt and equity investments in hotel
properties and/or management companies in connection with the acquisition
of future management contracts and/or management companies and reductions
in debt, including notes payable to officers and directors. Expenditures
may also be infused into staffing and equipment necessary to fund the
operations necessary to manage and control the possible growth in the
Company's management contract portfolio. Pending such use, the Company
intends to invest the funds in short-term, interest bearing investment
grade securities.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Market Information
The Company's common stock is listed on the "Electronic Bulletin Board" of
the National Association of Securities Dealers, Inc., under the symbol
"CAGU." There has been only limited trading activity in the common
stock of the Company. The following table sets forth the high asked and low
bid prices for the Company's stock for each of the full quarters during the
year ended July 31, 1998. The following market quotations reflect
inter-dealer prices, without retail markup, markdown or commission and may
not necessarily represent actual transactions.
Quarter Ended Low Bid High Asked
October 31, 1997 $ 1.500 $ 2.375
January 31, 1998 1.625 3.000
April 30, 1998 2.000 2.875
July 31, 1998 1.250 2.438
Holders
The number of record holders of the Company's common stock as of July 31,
1998 was approximately 280.
Dividends
The Company has not paid any dividends with respect to its common stock,
and does not intend to pay dividends in the foreseeable future. It is
the present intention of management to utilize all available funds for
the development and expansion of the Company's business. There are no
present material restrictions that limit the ability of the Company to
pay dividends on common stock or that are likely to do so in the future.
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CAPITALIZATION
The following table sets forth the actual capitalization of the Company
as of the fiscal year ending July 31, 1998 and the pro forma
capitalization of the Company after giving effect to the sale of 50,000
shares of Series "A" Preferred Stock offered hereby at an assumed
offering price of $100.00 per share and the application of the net
proceeds therefrom as described under "Use of Proceeds."
July 31, 1998
Actual Proforma
Short-Term debt $ 2,534,178 $ 1,396,178
Long Term debt 205,833 53,333
Shareholders equity-
Common Stock, $.02 par value, 20,000,000
shares authorized, 5,311,130 shares issued
and outstanding (1) 106,223 106,223
Series "A" Preferred Stock, 7.5%, 50,000
shares issued and outstanding 0 5,000,000
Additional paid-in capital 2,539,175 5,539,175
Retained Deficit (2,405,935) (2,405,935)
Total shareholders equity 239,463 5,239,463
Total Capitalization $ 2,970,474 $ 6,688,974
Excludes 25,000 shares reserved for issuance upon the exercise of a
warrant held by Van Casper & Company. Excludes 50,000 shares reserved
for issuance upon the exercise of an option held by Hawaiian Reservations
Center Corp. Excludes 1,000,000 shares of Common Stock reserved for
issuance upon the exercise of options granted under the Company's Stock
Option Plan. Excludes 187,500 shares reserved for issuance upon the
exercise of warrants granted under Promissory Notes. See "Management --
Compensation Plans", "Dilution", "Stock Option Plan", "Stock Purchase
Plan" and "Options, Warrants & Rights".
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DILUTION
The following pro forma net tangible book value of the Company at July
31, 1998 was $.05 per share of Common Stock. Pro forma book value per
share represents the total assets of the Company less its total
liabilities, divided by the number of shares outstanding as of July 31,
1998. Without taking into account any changes in net book value of the
Company at July 31, 1998, other than to give effect to the sale by the
Company of the Preferred Stock and assuming an immediate conversion of
the Preferred Stock into Common Stock at the conversion price of $3.00,
(after deduction of the costs, and the application of the estimated net
proceeds therefrom, the pro forma net book value of the Company at July
31, 1998 would have been 5,239,463 or $.75 per share. This represents
an immediate increase in net book value of $.70 per share of Common
Stock to existing stockholders and an immediate dilution of
approximately $2.25 per share of common stock to new investors
purchasing shares in this offering. Excludes 187,500 shares reserved
for issuance upon the exercise of warrants granted under Promissory
Notes. The following table illustrates the per share dilution to new
investors:
Assumed immediate conversion initial offering price
per share of Common Stock (1) $ 3.00
Pro forma net book value per share of Common Stock as
of July 31, 1998 $ .05
Increase in per share attributable to new investors .70
Pro forma net tangible book value per share after offering .75
Dilution per share to new investors before subtracting
estimated expenses of the Offering $ 2.25
The following table summarizes, on a pro forma basis as of July 31, 1998,
the number of shares of Common Stock purchased from the Company, the
total consideration paid to the Company and the average price per
share of Common Stock paid by the existing stockholders and by the new
investors participating in this Offering:
Shares Purchased Total Consideration Average Price
Number Percent Amount Percent Per share
Existing Stockholders 5,311,130 76% $2,645,400 35% $ .50
New Investors 1,666,666 24% 5,000,000 65% $ 3.00
6,977,796 100% $7,645,400 100% $ 1.10
The foregoing table excludes 25,000 shares reserved for issuance upon the
exercise of a warrant held by Van Casper & Company, 1,000,000 shares of
Common Stock reserved for issuance upon the exercise of options granted
under the Company s Stock Option Plan, 500,000 shares reserved for
issuance upon the exercise of options granted under the Company s Stock
Purchase Plan and 50,000 shares reserved for issuance upon the exercise
of an option granted to Hawaii Reservations Center Corp. Excludes
187,500 shares reserved for issuance upon the exercise of warrants
granted under Promissory Notes. See "Management Compensation Plans",
"Dilution", "Stock Option Plan", "Stock Purchase Plan" and "Options,
Warrants & Rights."
SELECTED FINANCIAL DATA
The following tables set forth selected combined historical
financial data for The Castle Group, Inc. as of and for each of the years
in the four year period ended July 31, 1998 . In the opinion of
management,
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the financial statements include all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the
information set forth herein.
The following selected financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and all of the financial statements
and Preferred Stock thereto included elsewhere in this Prospectus.
Year Ended July 31,
(Thousands)
1994 1995 1996 1997 1998
Statement of Operations Data:
Operating Revenues
Management Operations 1,118 2,790 3,659 4,294 4,362
Hotel Operations 0 0 452 1,892 1,248
Total Revenues 1,118 2,790 4,111 6,186 5,610
Operating Expenses
Management Operations 1,816 3,300 3,671 3,788 4,130
Hotel Operations 0 0 452 1,894 1,315
Total Department Expenses 1,816 3,301 4,123 5,682 5,445
Depreciation & Amortization 220 453 465 263 36
Interest Expense 4 54 68 52 71
Total Operating Expense 2,040 3,807 4,656 5,997 5,552
Net Income (Loss)
before income taxes ( 922) ( 1,017) ( 545) 189 58
Net Income (Loss) ( 922) ( 1,017) ( 545) 189 58
Net Income (Loss) per share ( .23) ( .20) ( .11) .04 .01
Weighted Average Shares
Outstanding (2) 3,933,859 5,066,530 5,085,280 5,109,903 5,311,130
Consolidated Balance
Sheet Data:
Cash and Cash Equivalents 207 277 221 269 246
Total Assets 2,530 2,312 2,031 1,617 2,979
Long-term debt, net of
current portion 348 772 76 166 206
Total Liabilities 1,409 2,208 2,464 1,476 2,740
Stockholders' equity 1,121 104 ( 433) 141 239
Other Related Data
Property Contracts, beginning 13 17 25 28 27
Property Contracts, ending 17 25 28 27 30
Rooms Covered, beginning 1,684 1,909 2,349 2,808 2,987
Rooms Covered, ending 1,909 2,349 2,808 2,987 3,400
(1) Represents nine month's operating results from inception at November
1993 to July 1994.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company is a Utah corporation which earns revenues primarily by
providing management, reservations and sales and marketing services to
hotels and resorts. The Company currently operates within the State of
Hawaii under the trade names "Hawaiian Pacific Resorts" and "Castle
Resorts and Hotels".
The Company's revenues are derived from management fees, sales &
marketing fees, reservation fees, accounting fees, commissions, incentive
fees and other fees from the properties it represents pursuant to the
terms and conditions of its management contracts. In addition to the
fees described, the Company also earns revenues from transient and long
term rentals and other hotel related income from its leased hotel. The
revenues of the properties which are managed by the Company, except as
mentioned herein, are not recorded as revenues of the Company.
The Company's operating expenses are comprised of labor, reservations
fees and other costs associated with operating as a management company.
The expenses of the properties which are managed by the Company, except
as mentioned herein, are not recorded as expenses of the Company.
As of January 1, 1999, the Company had 29 contracts covering 2,983 rooms,
all except 68 rooms located in Saipan and 56 rooms located in Chuuk 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 with is
based on gross revenues. In some cases, the Company also participates in
the profitability of the properties it manages and may earn an incentive
fee based on the net operating profits of the property managed. Sales
and marketing and reservation fees earned from the properties are based
on the gross revenues of the property. The Company is also reimbursed
for direct advertising and marketing expenditures it makes on behalf of
the property, all in accordance with the terms and conditions of the
management contracts. The Company also earns commissions and other fees
from the properties managed by providing centralized purchasing services
to the hotel owners. Under these arrangements, the net savings to the
property owner from centralized purchasing are shared between the
Company in the form of commissions and to the property owner in the form
of cost savings.
Hotel revenues during the period May 1, 1996 to April 30, 1998 consist of
revenues from 167 rooms leased by the Company. Under this arrangement,
the Company includes as its own revenues the entire property revenues
which includes hotel transient rental income as well as the total
expenses incurred to operate the property. The property is situated in
Waikiki, Hawaii. The Company does not currently own any other real
property interest in fee or leasehold.
Overview
The lodging industry has been, historically, seasonal in nature. The
Company generally reflects higher revenues from the fees generated by its
properties in the first and third quarters of its operating year, which
may cause expected fluctuations in the Company's quarterly revenues and
net earnings.
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Revenues from management operations grew at a compound annual rate of
40.6% from 1994 through 1997, from $1,118,000 to $4,362,000. Total
revenues grew at a compound annual rate of 49.7% from 1994 through
1998, from $1,118,000 to $5,610,000. The growth in revenues attained by
the Company over the past three years has been impressive, however,
management gives no assurances that these increases will continue
in future periods.
The increase in revenues together with smaller increases in
operating expenses resulted in the Company being able to reduce its net
losses from 1994 through 1996, and record profits in 1997 and 1998.
Net losses decreased from $922,000 for the nine months ended July 31,
1994 to a profit of $58,000 for the twelve months ended July 31, 1998.
Management attributes the improvements in operating losses to the
growth in revenues coupled with effective cost control. There can be no
assurance that these improvements will continue in future periods.
Results of Operations
For the years ended July 31, 1998 and 1997
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.
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).
The Company reported net income of $58,133 and $188,552 for the fiscal
years ended July 31, 1998 and 1997, respectively.
For the fiscal year 1998, the Company incurred a net loss of $67,000 in
its hotel operations at the Kuhio Village Resort as opposed to a net loss
of $2,100 for the prior year. The Company terminated its hotel
operations at the Kuhio Village Resort in April of 1998.
Net Income from the core business operations of the Company, management
and related services, decreased by $65,500 for fiscal 1998 as opposed to
the prior year. In fiscal 1997 the Company recorded a reduction of
$187,500 to its payroll & benefits expense to record the forfeiture of a
stock option by an officer of the Company.
For the Years Ended July 31, 1997 and 1996
For the year ended July 31, 1997 and 1996, the Company had total revenues
of $6,185,798 and $4,111,626, respectively, representing an increase of
$2,074,172 or 51%. The increase in revenues was attributable to
$1,439,195 in hotel revenues and $634,977 in management and other
management related income. Because the Company acquired the leasehold
interest to 167 rooms operated as a hotel in May of 1996, total revenues
for the two periods does not provide an accurate comparison for means of
measuring increased revenue performance. For the nine months ended April
30, 1997 and 1996, the Company had unaudited management related revenues
of $3,239,276 and $2,811,895, an increase of $427,381 or 15%.
Operating expenses for management operations were $3,788,482 for the year
ended July 31, 1997 as compared to $3,671,369 for the prior year, a
decrease of $117,113 or 3%. Operating expenses for hotel operations were
$1,893,635 for the year ended July 31, 1997 as compared to $452,386 for
the three months of hotel operations ending July 31, 1996.
Depreciation and amortization expense decreased by $201,674 for the year
ended July 31, 1997, primarily due to the amortization in full of the
non-competition agreements incurred upon the purchase of KRI, Inc. as of
October 31, 1996. See "Corporate Organization". The non-competition
agreements were purchased for $800,000 in November of 1993 and covered a
period of three years. Monthly amortization expense of $22,222 was
recorded between the months of November 1993 through October 1996. The
decrease of $201,674 is mainly attributed to the non-existence of this
amortization expense for the months of November 1996 through July, 1997.
Interest expense decreased by $16,033, to $51,934 from $67,966 for the
years ended July 31, 1997 and 1996, respectively. The decrease in
interest expense is attributed to a lower amount of indebtedness. The
Company fully paid off its contract payable in June of 1997 and during
the year reduced its indebtedness on the line of credit by $25,000 in
February of 1997 (See Note 5 to the financial statements).
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For the Years Ended July 31, 1996 and 1995
Total revenues for the year ended July 31, 1996 were $4,111,626, an
increase of $1,321,294 or 47% over total revenues for 1995. Revenues
from management operations were $3,659,239 as opposed to $2,790,332 for
the prior year, an increase of $868,907 or 31%. Revenues from hotel
operations were $452,387, representing the revenues attributed to a
lease agreement on 167 hotel rooms entered into on May 1, 1996.
Operating expenses for management operations were $3,671,369 for the year
ended July 31, 1996 as compared to $3,300,427 for the prior year, and
increase of $370,942 or 11%. The increase in operating expenses for the
management operations were primarily attributable to the increase in
management related income. Operating expenses for hotel operations were
$452,386 for year ended July 31, 1996 on revenues of $452,387.
As mentioned previously, the hotel industry is subject to seasonal
fluctuations in revenues. The first and third quarters of the Company's
fiscal year are typically busier months for the tourist industry. The
Company signed the lease agreement for the 167 hotel units on May 1,
1996. As of July 31, 1996, the results of operations from hotel
operations encompassed the fourth quarter ended July 31, 1996. The hotel
operations reported an operating loss of $14,000 for the three month
period, as this quarter is one of the low seasons for tourism in Hawaii,
where the property is situated and is not indicative of the results of
operations for a whole year. (See "Quarterly Fluctuations in Earnings").
Depreciation and amortization expense increased by $12,000 for the year
ended July 31, 1996 due to the depreciation of equipment and furnishings
exceeding the decrease caused by assets becoming fully depreciated
or amortized.
Interest expense increased by $14,000, from $54,000 to $68,000 for the
year ended July 31, 1996 when compared to the prior year. The increase
in interest expense is attributed to interest incurred on the borrowing
against a line of credit and the conversion of advances received from
former KRI, Inc. stockholders to a note payable at 6% interest on July
31, 1995. See "Use of Proceeds" and "The Company".
For the Years Ended July 31, 1995 and 1994
The fiscal year ended July 31, 1994 encompassed nine months of hotel
management operations, as the Company commenced its hotel management
operations on November 8, 1993 with the acquisition of Castle Limited and
KRI, Inc. See "Corporate Organization".
Total revenues for the year ended July 31, 1995 was $2,790,332, an
increase of $1,671,946 or 149% over total revenues of $1,118,386 for
1994. The revenue increase is attributed to the fiscal year ending July
1995 encompassing twelve months of operations as opposed to nine months
for the previous year. On an average basis, monthly revenues for the
fiscal year ended July 31, 1995 averaged $232,528 as opposed to an
average of $124,265 for the prior year, an increase of 87%. Revenues
also increased due to the addition of eight management contracts during
the fiscal year. The number of rooms managed increased by 440 rooms,
from 1,909 to 2,349.
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Operating expenses were $3,300,427 for the year ended July 31, 1995 as
compared to $1,816,274 for the prior year, an increase of $1,484,153 or
82%. The increase in operating expenses is attributed to the fiscal
year ending July 1995 encompassing twelve months of operations as opposed
to nine months for the previous year. On an average basis, monthly
operating expenses for the fiscal year ended July 31, 1995 averaged
$290,000 as opposed to an average of $202,000 for the prior year, an
increase of 44% which is attributed to the 99.2% increase in management
operation revenues.
Depreciation and amortization expense increased by $12,000 for the year
ended July 31, 1996 over the prior year due to the depreciation of
equipment and furnishings exceeding the decrease caused by assets
becoming fully depreciated or amortized.
Interest expense increased by $49,764, from $4,314 to $54,078 for the
year ended July 31, 1995 when compared to the prior year. The increase
in interest expense is attributed to interest incurred on the borrowing
against a line of credit dated October 21, 1994. The increase in
interest is also attributed to the amortization of a discount on a
contract payable dated July 1, 1994 to a property manager to secure
management contracts on behalf of the Company, payable in monthly
installments of $14,500 plus tax through June 1997. The contract payable
is discounted at an effective interest rate of 8%.
Liquidity and Capital Resources
Liquidity and Capital Resources
The Company's primary sources of working capital are cash flows from
operations and borrowings. Net cash provided from operations was a
deficit of $506,443 in fiscal 1998 and a deficit of $333,957 in fiscal
1997. The Company had unrestricted cash of $245,969 and $268,938 at July
31, 1998 and 1997, respectively.
At July 31, 1998, the Company's balance sheet reflected $245,969 of cash
representing a decrease of $22,969 from July 31, 1997. During the year
ended July 31, 1998, cash used in operating activities exceeded cash
provided by operating activities by $506,443. Cash used by investing
activities was $399,775 and cash provided by financing activities was
$883,249.
In July of 1997, the Company sold 222,100 shares of "unregistered" and
"restricted" stock for a gross price of $2.00 per share, or an aggregate
of $425,399 (net of commissions and other fees) in a private placement.
The shares were subscribed and paid for as of September 18, 1997, and the
stock certificate was subsequently issued.
The Company has a $300,000 line of credit dated October 21, 1994 which is
personally guaranteed by four directors of the Company. The Company made
draws against the line of credit for $275,000 during the fiscal year
ended July 31, 1995. The Company subsequently repaid $25,000 of the line
of credit in April 1997, and subsequently drew the remaining $50,000 in
December of 1997. The line of credit which was due on November 10, 1998
was subsequently extended to December 20, 1998. Management has currently
applied for a further extension of the line of credit through February
18, 1999. The proceeds received upon the sale of shares offered
hereunder shall be used to repay the $300,000 outstanding balance on this
line of credit. Management believes, although no assurances can be
given, that the line of credit will be extended.
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In November of 1997, the Company received and drew an additional line of
credit for $250,000 dated November 14, 1997. The line of credit was
initially due on May 17, 1998 and has been extended through December 31,
1998. Management has currently applied for a further extension of the
line of credit through March 31, 1999. The proceeds received upon the
sale of shares offered hereunder shall be used to repay the $250,000
outstanding balance on this line of credit. Management believes,
although no assurances can be given, that the line of credit will be
extended.
The Company had net working capital of $142,622 as of July 31, 1998 and
net working capital of $87,325 as of July 31, 1997.
As of July 31, 1998, net working capital included liabilities due to
affiliates in the amount of $386,263 consisting of $195,464 in notes
payable and accrued interest to former stockholders of KRI, Inc.
(representing the undistributed cost on the acquisition of the stock of
KRI, Inc.), and $190,799 in notes payable and accrued interest to
directors and officers who advanced funds to the Company. Also included
in net working capital is $26,667 in unamortized deferred revenues
related to a signing bonus of $80,000 in cash paid to the Company by one
of its vendors in May of 1998 as a result of the Company entering into a
three year contract with the vendor. The deferred revenues are being
amortized over three years.
At July 31, 1998, accounts payable increased by $275,616 over the prior
fiscal year, to $889,407. The increase in accounts payable is
attributable to the Company increasing its client base. During the
fiscal year, the Company added three management contracts and terminated
a lease on another. The increased advertising and marketing costs to
promote the three properties contributed to the increase in accounts
payable. The increase in accounts payable is also attributed to the
increase in accounts receivable.
At July 31, 1998, the Company's accounts receivable consisted of $310,297
in sales, marketing, reservations, and other reimbursements, $653,619 of
management and other fees, and $110,160 in receivables for transient
room rentals. Sixty three percent (40%) of the total accounts receivable
was current, twenty seven percent (27%) was 30 to 60 days past due, nine
percent (9%) was 60 to 90 days past due, and twenty three percent
(23%) was more than 90 days past due.
At July 31, 1998, the Company had a receivable balance of $844,798 from
Hanalei Bay Resort, of which fifteen percent (15%) was current, ten
percent (10%) was 30 to 60 days past due, ten percent (10%) was 60
to 90 days past due, and sixty five percent (65%) was more than 90 days
past due. HBII is currently negotiating a sale of all or a portion of
its ownership interests in the Hanalei Bay Resort to a regional timeshare
sales organization. Under the terms of the sale, in addition to the sale
proceeds to be received, the current HBII partners shall share in the
future cashflows generated by timeshare sales of the units located
within the Hanalei Bay Resort, after certain secured and preferential
payments are made. Although no assurances can be given, management is
confident that the sale shall be consummated and that upon closing,
the Company shall receive payment in full of its accounts receivable from
Hanalei Bay Resort. HBII currently has backup alternatives should the
currently negotiated sale not be consummated. Should the receivable not
be collected during fiscal 1999, management shall be forced to seek other
financing alternatives. Certain members of the Board of Directors of the
Company have a direct or indirect financial interest in HBII (See
Item 12).
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In July of 1998, the Company also funded a loan of $435,000 to Hanalei
Bay International Investors ("HBII"). The terms of the loan call for
interest at the rate of 12% per annum and a percentage of the future
cashflows received from timeshare sales by the partners of HBII. The
loan is due on or before March 31, 1999. HBII is currently negotiating
a sale of all or a portion of its ownership interests in the Hanalei Bay
Resort to a regional timeshare sales organization. Under the terms of
the sale, the current HBII partners shall share in the future cashflows
generated by timeshare sales of the units located within the Hanalei Bay
Resort, after certain secured and preferential payments are made.
Although no assurances can be given, management is confident that the
sale shall be consummated and that upon closing, the Company shall
receive payment in full on the note receivable, together with interest.
Should the note not be collected when due, management shall be forced to
seek other financing alternatives. Certain members of the Board of
Directors of the Company have a direct or indirect financial interest in
HBII.
The funds collected from Hanalei Bay Resort upon the closing of its sale
shall be used to reduce the accounts payable balances of the Company and
for working capital to fund operations.
In January of 1998, two officers loaned the Company $50,000 and $60,000,
respectively and the Company executed a note which called for interest at
the rate of 8.5% and a due date of April 15, 1998. In July of 1998,
one of the officers advanced an additional $60,000 to the Company. The
notes were thereafter amended to include interest at the rate of 10% per
annum and the due dates were extended to August 15, 1999. The terms
of the notes call for monthly payments of $600 and $2,000, respectively.
In July of 1998, a director of the Company advanced $175,000 and the
Company executed a note which called for interest at the rate of 10% per
annum and a due date of March 31, 1999. In addition to the return of
principal plus interest, warrants on the Company s common stock shall
also be issued to the director. (see Item 11,"Security Ownership of
Certain Beneficial Owners and Management").
In July of 1998, the Company received loans of $200,000 from four
unrelated parties. The terms of the notes call for interest at the rate
of 10% per annum and a due date of March 31, 1999. In addition to the
return of principal plus interest, warrants on the Company s common stock
were also be issued.
The Company has, in the past, met its financial obligations through its
lines of credit, private placements of its stock and through the issuance
of notes to the former stockholders of KRI, Inc. The Company plans to
further extend the due dates of the notes to the former stockholders of
KRI, Inc., officers and directors if necessary. Although no assurances
may be given, management believes that it has built up its revenue base
to a level which will sustain a net operating profit, allowing the
Company to meet its current obligations. Management further believes
that the Company shall have sufficient cash flow for its business
operations for the next year.
The Company filed a registration statement on Form SB-2 for the issuance
of 1,600,000 shares of its common stock. The registration statement
became effective on March 11, 1998. The public offering has not
materialized as planned and management is considering the withdrawal of
the registration statement in the near future.
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Management believes, although no assurances can be given, that the
combination of the net proceeds of the shares offered herein, net of
repayment of borrowing, net cashflow generated from operations, the
collection of the receivable balance from HBII, and the future
availability of credit facilities will be sufficient to fund the
operations of the Company and its future anticipated growth.
The Company has no present plans involving the sale or purchase of any
properties, assets or business.
Tax Consequences
It is management s belief that the dividends received on the Preferred
Stock offered hereunder shall be fully taxable as ordinary income when
received. It is also the belief of management that any gain or loss
realized upon the sale of the shares offered, or the sale of the common
stock which the shares offered are convertible into shall be subject to
capital gains taxes. However, each investor should confer with their tax
advisors for the proper treatment of the ownership, purchase, sale or
gains or losses which may be realized on transactions related to the
Preferred Stock offered hereunder.
Recent Developments
The Company is in the final stages of negotiations related to the
acquisition of two management contracts. Based on forecasts prepared on
the two properties, the Company is projected to earn substantial fees and
profits from these two hotels. Investors should be aware, however, that
these two contracts have not yet been signed. Investors should also be
aware that should the two contracts be consummated, the actual results of
the properties could differ substantially from the projected results
which could have a material adverse affect on the financial position of
the Company.
Under one of the contracts, the Company will be a co-lessee on the land
upon which the property is situated, and will receive a 20% carried
interest in the leasehold improvements situated on the land in exchange
for Preferred Stock. The Company has already signed as the co-lessee of
the land and the buyer of the improvements is in the final stages of
closing the purchase of the improvements.
Under the other property, the Company will be a lessee of the hotel for
a fixed monthly rent and shall, therefore, be the owner and operator of
the hotel operations. The property is currently in the final stages of
construction and is projected to be opened in late summer or early autumn
of 1999.
PLAN OF OPERATION
The Company is one of the leading regional hotel and resort management
companies within the State of Hawaii. At January 1, 1999, the Company
had 29 management or sales, reservations and marketing contracts covering
2,983 rooms.
The properties represented by the Company appeals to a wide variety of
the public market as the Company manages a wide spectrum of property
types from the luxury condominium resorts with room rates exceeding
$1,000 per 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.
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The Company has experienced significant growth since its commencement of
operations in November of 1993. From November of 1993 through January of
1999, the number of contracts has more than doubled, from 13 to 29 and
the number of rooms managed also increased substantially during this
period, from 1,684 to 2,983.
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 its second foreign property when it signed a management agreement
with the Blue Lagoon Resort, a 56 unit resort located in Chuuk. Although
no assurance can be given, it is management's belief that it will be able
to continue its expansion into the Pacific Basin.
With the increase in the management contracts, the number of hotel and
resort employees that the Company will supervise may increase
significantly. The Company is presently negotiating for both small
budget hotels and large luxury condominium resorts and therefore, it is
impossible at this time to predict the number of additional employees
that it will supervise or that it will be required to hire for the hotels
and resorts during the next fiscal year.
On July 31, 1995, the Company invested $100,000 into a reorganization
plan instituted by HBII. Under terms of the HBII reorganization plan,
the eighty seven units owned by HBII will be sold under a timeshare plan
and investors in the timeshare plan may receive up to four times their
investment over the life of the timeshare plan. As of July 31, 1998, the
Company has received a total of $164,376 from this investment. Of the
funds received, $41,094 represents a return of the initial investment and
$123,282 represents a gain to the Company. HBII is currently negotiating
a sale of all or a portion of its ownership interests in the Hanalei Bay
Resort to a regional timeshare sales organization. Although no
assurances can be given, management is confident that the sale shall be
consummated and that the Company shall receive payment in full on its
investment. Certain members of the Board of Directors of the Company
have a direct or indirect financial interest in HBII.
On August 1, 1994, the Company entered into a contract with Hawaii
Reservations Center Corp. ("HRCC"), a company controlled by Charles M.
McGee, pursuant to which HRCC shall provide reservation services for
hotels and resorts managed by the Company. Since the purchase of KRI,
reservation services have been provided by KRI. The fees to be paid by
the Company include a fixed monthly fee plus commissions. The Company
also agreed to sell to HRCC the assets of the reservation offices of KRI,
which consisted of office equipment. As consideration for the equipment,
HRCC agreed to employ the reservation department employees of KRI and to
assume the liability for the accrued vacation of such employees. KRI
realized a gain of $4,372 on the transaction, as the value of the accrued
vacation exceeded the net book value of the office equipment sold.
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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 are based upon
the monthly room revenues of the properties managed by the Company,
subject to a minimum monthly fee. Management believes, although no
assurances can be given, that the Company shall enjoy lower reservations
costs under the new agreement.
The Tourism Industry
The majority of the Company s properties under contract are located in
Hawaii. According to Travel and Tourism and Hawaii s Economy - Impact
and Perspective Millennium Vision 1997" published by the World Travel and
Tourism Council, tourism is Hawaii s largest industry, providing 24% of
the Gross State Product. It is estimated that in 1997, tourism accounted
for approximately 31% of the State s total work force. During the last
ten years, the average statewide occupancy has ranged from the low
seventies to the low eighties. Management believes that the economy of
the mainland United States will continue to improve, and that the
recent economic crisis in Asia will not be a long term problem, and
therefore the tourism industry as a whole will experience future growth
in earnings. Management also believes that the convention center
recently completed in Waikiki shall allow the State to capture a portion
of the lucrative convention travel market, further increasing the demand
for guest rooms.
Growth Strategy
The Company believes that the improving tourism industry together with
the current economic environment will provide excellent opportunities for
future growth. Under the current sluggish economy of the Hawaii hotel
industry, the Company would be able to provide more benefits to the
owners of properties which are underperforming in the form of economies
of scales in advertising, reservations, sales and marketing which
should translate to higher revenues for the property. Since the Company
allocates the cost of each expenditure to all of the managed properties,
property owners would enjoy a substantial increase in the exposure to the
general public, travel agents and wholesalers. The operational expertise
provided by the Company would also assist the property owner in reducing
operating expenses through staffing and central purchasing. Other
contributing factors to the future growth of the Company over the next
few years are:
Existing Contracts. The Company has been successful in improving the
performance for its properties over the past three years. Further
improvements in revenues and net operating profits for the Company's
current portfolio of properties will result in higher management fees for
the Company. The additional fees from the Company's current portfolio of
properties would generally not entail additional incremental expenses
to the Company. Instead, an expansion of the Company's management
contract portfolio would provide better savings to the existing
properties which in certain contracts would translate into higher
management incentive fees.
Additional Contracts. Although no assurance can be given, management
believes that it will be successful in attaining additional management
contracts in the future. Opportunities for additional contracts may
arise from a myriad of factors which include sales of properties,
foreclosures, underperformance and dissatisfaction with current
management. Management has a proven track record over the past three
years of improving the performance of the properties it manages.
Management is constantly looking for properties in need of the Company s
services.
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Emerging Markets. The Company currently has the majority of its
contracts located within the State of Hawaii. Management believes that
there are emerging markets in which the services provided by the Company
will be needed. These areas include Guam, Saipan and other Pacific Basin
regions. Although no assurance can be given, management is confident
that it will be able to obtain management contracts for properties
located within this region and will be successful in enhancing the
profitability of these properties through the services it provides.
Acquisitions. The Company may also seek opportunities to acquire other
hotel management contracts and/or companies that would result in further
synergies for the Company and its managed properties.
MANAGEMENT
The following table sets forth certain information concerning the
directors and executive officers of the Company as of January 1, 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 55 Chief Executive Officer, Director and Chairman
of the Board
John G. Tedcastle 65 Vice Chairman of the Board and Director
Alan Cambra 54 Chief Operating Officer and President
Kimo M. Keawe 49 Director
Hideo Nomura 48 Director
Charles E. McGee 63 Director
Ryoji Takahashi 58 Director
Motoko Takahashi 54 Secretary and Director
Michael S. Nitta 39 Chief Financial Officer
Shari W. Chang 48 Senior Vice President, Sales & Marketing
Judhvir Parmar 63 Director
Steve Townsend 44 Sr. Vice President, Operations
Stanley Mukai 66 Director
Edward Calvo Sr. 62 Director
Noboru Sekiguchi 72 Director
Thomas S. Blankley, Jr. 45 Executive Vice President, Finance
Rick Wall. Mr. Wall was appointed the Company's chief executive
officer and chairman of the board upon consummation of the Castle Plan.
Mr. Wall was instrumental in the formation of Castle Group Hawaii, the
negotiation and consummation of the Castle Plan and the acquisition of
KRI. He was the president, director and founder of Castle Group Hawaii.
During the past ten years, Mr. Wall has been the managing director of
HBII, which owns 62% of the Hanalei Bay Resort. Mr. Wall has been
elected to the board of directors of the Hawaii Visitors & Convention
Bureau and resides in Honolulu, Hawaii.
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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 Cambra. Mr. Cambra joined the Company on January 1, 1999 as chief
operating officer. Mr. Cambra has over thirty years 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 will be residing in Hawaii, where
he was born and raised.
Charles E. McGee. Mr. McGee was appointed as director of the Company in
November, 1993. Mr. McGee has 36 years of diversified experience in
marketing, management and computer technology. From 1975 until 1992, he
was employed by First Insurance Company of Hawaii, Ltd., most recently as
senior vice president, overseeing the marketing, information systems,
administration and service departments. Mr. McGee had previously been
president of two independent data processing services companies. In
addition, he has held various senior management positions with IBM
Corporation, including division manager of the Pacific region. As
discussed in the caption "Plan of Operation for 1999", Item 6, Part II,
Mr. McGee currently operates and controls Hawaii Reservations Center
Corporation, a company which provides reservations for hotels and
resorts. Mr. McGee has been a resident of Hawaii for over thirty years.
Mr. McGee is a graduate of LaSalle University, and has studied at
Massachusetts Institute of Technology.
Kimo M. Keawe. Mr. Keawe was appointed as senior vice president and
director of the Company in November, 1993 following the acquisition of
KRI, Inc. Mr. Keawe is also the president and chief operating officer of
KRI, the company's wholly owned subsidiary doing business as Hawaiian
Pacific Resorts. Mr. Keawe was instrumental in the formation of KRI in
1988, purchasing Hawaiian Pacific Resorts from its original founders. He
has held numerous senior management positions throughout his hotel and
resort management career, which spans over 20 years. Mr. Keawe left the
companies employ in July 1997 to pursue other interests and resigned as
senior vice president of the Company and as chief operating officer of
KRI, Inc. Mr. Keawe is on the advisory board of the Travel Industry
Management School of Hawaii Pacific University. Mr. Keawe is a graduate
of Oregon State University, and was born and raised in the State of
Hawaii.
Hideo Nomura. Mr. Nomura was appointed as a director of the Company in
November, 1993. Mr. Nomura is president of Nomura Holdings and of Nomura
Hitchcock Corporation, Ltd., a property related investment consulting
firm based in Tokyo, Japan, and has held this position since 1987. Mr.
Nomura is the operational executive of the Marina del Rey Residential
Development in California, and was the manager of Mitsui & Company (N.Z.)
Ltd. for five years until 1987. Mr. Nomura is a resident of Japan.
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Ryoji Takahashi. Mr. Takahashi was appointed as a director of the
Company in November, 1993. Mr. Takahashi, a resident of Japan, has, for
over thirty years, been a substantial principal of Nichiman Kosan, a
corporation which specializes in coordinating the installation of air
conditioning and sound control systems in commercial buildings and
subcontracts with over 300 companies. He is also the major stockholder
of Nikkankyo Group which consists of six independent companies and has
over five hundred employees. Mr. Takahashi is a graduate of Hosei
University in Tokyo, Japan, where he majored in economics.
Motoko Takahashi. Ms. Takahashi is the sister of Ryoji Takahashi and
was appointed secretary of the Company in August of 1994 and as director
in March of 1995. Ms. Takahashi had previously served as director for
various Japanese investment companies in the United States. She also
holds the position as Vice President of N.K.C. Hawaii, Inc. Ms.
Takahashi was born and completed her education in Tokyo, Japan and
has resided in the United States for more than 30 years.
Shari W. Chang. Ms. Chang joined the Company in July, 1994 as senior
vice president of sales and marketing. Prior to joining the Company, Ms.
Chang was vice president of sales for Aston Hotels and Resorts and a vice
president of Island Holiday Tours. She has also served as consultant to
the Hawaii Visitors Bureau in the past. Ms. Chang is a graduate of the
University of Hawaii, and resides in Honolulu, Hawaii.
Michael S. Nitta. Mr. Nitta joined the Company in November, 1993
following the acquisition of KRI, Inc. Prior to joining the Company, Mr.
Nitta served as secretary and treasurer of KRI. Together with Mr.
Keawe, Mr. Nitta was instrumental in the formation of KRI Inc. and the
acquisition of Hawaiian Pacific Resorts in 1987 from its former founders.
Prior to the formation of KRI, Inc. Mr. Nitta served as secretary
and treasurer of Hawaiian Pacific Resort Hotels Inc. from 1982. Born and
residing in Hawaii, he is a graduate of the University of Hawaii and
holds a Masters of Accounting Degree.
Judhvir Parmar. Mr. Parmar was formerly Senior Vice President of
Investment Operations for International Finance Corporation ("IFC"), a
wholly owned subsidiary of the World Bank. IFC was responsible for all
private sector operations of the World Bank. A specialist in project
corporate finance, Mr. Parmar was with IFC for more than twenty years and
was responsible for the worldwide investment program at IFC. In August,
1993, Mr. Parmar retired from IFC to form his own consulting company.
Steve Townsend. Mr. Townsend joined the Company in July, 1997 and has
23 years of hotel and resort management experience. During his career he
has held numerous senior management positions with resort and hotel
management companies. Prior to joining the Company, Mr. Townsend was
director of operations for Interstate Hotels prior to a one year
assignment entailing rebuilding and re-opening a hurricane damaged
resort in the Virgin Islands. Prior to Interstate, Mr. Townsend spent 8
years with Village Resorts. Mr. Townsend is a graduate of the Hotel and
Restaurant Administration School at Florida State University.
Stanley Mukai. Mr. Mukai is a graduate of the Harvard Law School and a
partner in the law firm of McCorriston Miho Miller Mukai located in
Honolulu, Hawaii. His expertise is in the area of taxation and Mr.
Mukai has held various positions such as Advisory Board Member, Hawaii
Tax Institute; Trustee, Tax Foundation of Hawaii; Co-Chairman, Tax
Subcommittee, American Bar Association; Chairman, Tax Subcommittee on
U.S. District and Portfolio Investment by Foreigners; and Chairman,
Section of Taxation, Hawaii Bar Association.
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Edward Calvo, Sr. Mr. Calvo is vice president of Calvo Enterprises,
Inc., a conglomerate of ten businesses with fifteen hundred employees.
They are the largest private employer on Guam. Mr. Calvo has served as
a Senator in the Guam legislature and is currently the Board Chairman of
the Guam Waterworks Authority.
Noburu Sekiguchi. Mr. Sekiguchi is a graduate of Waseda University and
is a Director and controller of Nikkankyo Group, which is the parent
company of N.K.C. Hawaii. He has worked for Toyo Menka Company, one of
the leading trading companies in Japan for forty years as a financial
officer.
Thomas S. Blankley, Jr.. Mr. Blankley joined the company in September,
1998. Prior to joining The Castle Group, Inc., 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.
Committees of the Board of Directors
Audit Committee. The Board has established an Audit Committee to make
recommendations concerning the engagement of independent public
accountants, review with the independent public accountants, review
with the independent public accountants the plans and results of the
audit engagement, approve professional services provided by the
independent public accountants, review the independence of the
independent public accountants, consider the range of audit and non-audit
fees and review the adequacy of the Company s internal accounting
controls. The Audit Committee is made of Messrs. Mukai, Calvo and Ms.
Takahashi.
Compensation Committee. The Board has established a Compensation
Committee to determine compensation for the Company s executive officers
and to administer the Company s benefit plans. Messrs. Mukai, Parmar,
Tedcastle and Ms. Takahashi are the members of the Compensation
Committee.
Executive Committee. The Board has established an Executive Committee to
provide additional direction to management. The Executive Committee is
an advisory committee only and does not have authority to vote and
approve any actions on behalf of the board of directors. Messrs. Parmar,
Tedcastle, Wall, Takahashi and Mukai are members of the Executive
Committee.
Nominating Committee. The Board has established a Nominating Committee
to recommend to the board the slate of nominees of directors to be
elected by the shareholders (any directors to be elected to the Board to
fill vacancies) and to recommend directors to be selected for membership
on the various Board Committees. Messrs. Tedcastle and Calvo are members
of the Nominating Committee.
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Executive Compensation
The following table shows for the fiscal year ended July 31, 1998, the
aggregate annual remuneration of each of the three highest paid persons
who were executive officers or directors of the Company and the executive
officers and directors as a group. The reported compensation is based on
cash compensation without consideration of a restricted stock grant to
Charles E. McGee described below under "Compensation of Directors".
Name of Individual or Capacities in which Aggregate
Identity of group Remuneration was received remuneration
Rick Wall Chairman of the Board
and Chief Executive Officer $120,000
Shari W. Chang Senior Vice President
Sales & Marketing $100,000
Steve Townsend Senior Vice President Operations $100,000
Officers and Directors
as a group Various $634,800(1)
(1) Includes payments made under consulting agreement between the
Company and Kimo M. Keawe.
Compensation of Directors
The Company does not have any present standard arrangements regarding
compensation of directors for service as a director, or for attendance
at meetings of the Board of Directors or for participation on committees
or other special assignments. The Board of Directors may adopt
resolutions providing for reasonable compensation for participation in
committees or special assignments and reimbursement for reasonable
expenses incurred in attending any meeting of the Board of Directors. No
compensation for service as a director is presently contemplated.
There were no arrangements pursuant to which any director of the Company
was compensated during its most recent fiscal year for service provided
solely as a director, or for attendance at any meeting of the board of
directors.
Employment Contracts
The Company has entered into written employment contracts with Mr. Nitta,
as of November 1, 1993, Ms. Chang as of August 1, 1994 and Mr. Townsend
as of July 31, 1997. Other than Mr. Mr. Nitta, Mr. Townsend and Ms.
Chang, the Company has entered into no employment contract with any
director or executive officer.
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The above-mentioned employment agreements are for five years and provide
for a base salary, to be increased annually by a percentage no less than
the increase in the Honolulu Consumer Price Index for the preceding
twelve months. Under their respective employment agreements, the current
base salary for 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 Ms. Chang and Mr. Townsend under the terms of
their agreements is $100,000. The employment agreements provide for paid
vacation; a monthly automobile allowance; an annual performance bonus
potential of up to 20% of the base salary (up to 15% for Ms. Chang and
Mr. Townsend), depending upon attaining pre-determined goal criteria;
membership in a pension plan (not yet established) that would contribute
the equivalent of 10% of base salary annually; a business development
bonus (which has been waived in the past and current fiscal years);
membership in a 401(k) plan; and full medical, dental and disability
insurance.
The employment agreements contain a "change-in-control" provision which
gives each of the employees under contract the right, upon the occurrence
of a "change-in-control," to terminate their employment and receive
as severance pay the total compensation remaining to be paid under the
agreement as of the date of such termination or the total compensation
for three years following the date of termination, whichever is greater.
The term "change-in-control" is defined in each agreement as the date
when persons other than the shareholders of record on the date of
commencement of the term of such agreement become the beneficial owner of
51% of the Company s voting stock.
The Company has a consulting agreement with Mr. Keawe effective as of
June 1, 1998 which specifies that the Company shall pay to Mr. Keawe a
fee of $3,000 per month for the period beginning June 1, 1998 and
ending on December 31, 1998. The agreement was subsequently extended for
an additional three months, through March 31, 1999.
Long Term Incentive Plans
No options (with the exception of the option discussed in the section
entitled "Options, Warrants and Rights" in Item 5), stock appreciation
rights or long term incentive plan awards were issued or granted to the
Company's management during the fiscal year ending July 31, 1998.
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 and a
1995 Stock Purchase Plan for the purposes of: (i) attracting and
retaining employees, executive management and key employees with ability
and initiative; (ii) providing incentives to those deemed material to the
success of the Company; and (iii) attaining a common interest for these
individuals to coincide with the interests of the Company and its
shareholders. No stock grants were issued for the years ended July 31,
1995 through July 31, 1998.
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1995 Stock Option Plan
Amount of Stock. A total of 1,000,000 shares of Common Stock shall be
reserved for issuance under the Plan. Shares of Common Stock issued
hereunder may be authorized and reissued or issued shares acquired by
the company or its Subsidiaries on the market or otherwise.
Administration. The Plan will be administered by the Compensation
Committee (the Committee ) of the Company s Board of Directors. The
Committee, which is composed of a majority of non-employee directors,
has the authority under the Plan, subject to its provisions, to select
the individuals to receive grants of options and to specify the terms and
conditions of such grants.
Eligibility. Options may be granted only to present or future officers
and key employees of the Company and its Subsidiaries, including
Subsidiaries which become such after the adoption of the plan. Any
officer or key employee of the Company or of any such Subsidiary shall be
eligible to receive one or more options under the Plan. Any director who
is not an officer or employee of the Company or one of its Subsidiaries
and any member of the Committee, during the time of the member s service
as such or thereafter, shall be ineligible to receive an option or award
under the Plan. The adoption of this Plan shall not be deemed to give
any officer or employee any right to be granted an Option to purchase
Common Stock of the Company, except to the extent and upon such terms and
conditions as may be determined by the Committee.
Options. Both nonqualified stock options ( NQOs ) and incentive stock
options ( ISOs ), as defined in Section 422 of the Internal Revenue Code
of 1986, as amended (the Code ), may be granted under the Plan.
Options will have a maximum term of ten years. The Option exercise price
must be at least 100% of the Fair Market Value of the Common Stock on the
date of the Option grant.
Share Authorizations. All awards made under the Plan shall be evidenced
by a written Stock Option Agreement executed by the Company and the
optionee in such form as the Committee shall approve, which may be
subject to and contain additional terms and conditions not inconsistent
with the Plan, and in the case of an ISO, shall not be inconsistent with
the provisions of the Code applicable to incentive stock options, as
the Committee shall prescribe.
Nontransferability. No Options granted under the Plan shall be
transferable by the optionee otherwise than by will or by the laws of
descent and distribution, and such Option shall be exercisable, during
the optionee s lifetime, only by the optionee.
Consideration. Each optionee, as consideration for the grant of an
Option, shall remain in the continuous employ of the Company or one of
its Subsidiaries for at lease one year from the date of the granting of
such Option. No Option shall be exercisable until after the completion
of such one year period or employment by the optionee.
Shareholder Rights. An optionee will have no rights as a shareholder
with respect to the shares subject to the Option granted until such
Option is exercised and the shares are issued to the optionee.
Tax Consequences. Under the present provisions of the Code, the federal
income tax consequences of the Option Plan are summarized as follows:
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Nonqualified Stock Options. The granting of a NQO to an optionee will
not result in taxable income to the optionee or a deduction in
computing the income tax of the Company. Upon exercise of an NQO, the
excess of the fair market value of the shares acquired over the option
price is (a) taxable to the optionee as ordinary income and (b)
deductible in computing the Company s income tax, subject to satisfying
applicable withholding requirements and general rules relating to
reasonableness of compensation.
Incentive Stock Options. An optionee will not be deemed to receive any
income at the time an ISO is granted or exercised, although the exercise
may give rise to alternative tax liability for the optionee. If an
optionee does not dispose of the shares acquired on exercised of an ISO
within the two year period beginning on the day after the day of the
grant of the ISO or within the one year period beginning on the day after
the day of the transfer of the shares of the optionee, the gain (if any)
on a subsequent sales (i.e., the excess of the proceeds received over the
option price) will be long term capital gain and any loss the optionee
may sustain on such sale will be a long term capital loss.
If the optionee disposes of the shares within the two year or one year
period referred to above, the disposition is a "disqualifying
disposition," and the optionee will generally realize ordinary income
taxable as compensation in the year of the disqualifying disposition to
the extent of the excess of the fair market value of the share son the
date of purchase over the option price, and the balance, if any, will be
long term or short term capital gain depending, generally, on whether the
shares were held more than one year after the ISO was exercised. To the
extent the optionee recognizes compensation income with respect to a
disqualifying disposition, the Company will be entitled to a
corresponding deduction, subject to general rules relating to
reasonableness of compensation.
Amendment of Plan. The Board of Directors may amend or suspend the Plan
at any time and from time to time. No such amendment of the Plan, may,
however, increase the maximum number of shares to be offered under
options, or change the manner of determining the option price, or change
the designation of employees or class of employees eligible to receive
options, or permit the transfer or issue of stock before payment
therefore in full or, without the written consent of the optionee, alter
or impair any option previously granted under the Plan.
1995 Stock Purchase Plan
Amount of Stock. There shall be reserved for the granting of Options
under the Plan and for issuance and sale pursuant to such Options 500,000
shares of Common Stock of the Company. The shares of Common Stock issued
upon the exercise of Options under the Plan shall be made available from
authorized and unissued shares of Common Stock. If for any reason shares
of Common Stock as to which an Option has been granted cease to be
subject to purchase thereunder, then such shares of Common Stock again
shall be available for issuance pursuant to Options under the Plan.
Offering Date. The Offering Date shall be semi-annual dates as set by
the Board of Directors in each of the years 1996 through 2000. The
Company has made no offerings under the plan as of January 31, 1999.
Offering Period. The Offering Period shall be each of the six-month
periods commencing on an Offering Date.
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Eligibility. Eligible Employees shall mean all Employees who have been
in the employ of the Company or any of its Subsidiaries continuously for
at least one year other than persons who after purchasing shares of
Common Stock under the Plan would own shares of capital stock possession
five percent or more of the total combined voting shares of capital stock
possessing five percent or more of the total combined voting power
or value of all classes of outstanding capital stock of the Company or
any of its Subsidiaries. Eligible Employees must be active, regular
full-time or active, regular part-time employees of the Company or any of
its Subsidiaries, including but not limited to officers of the Company
and its Subsidiaries, provided that such employee s normal work week is
at least 20 hours per week and whose customarily employment by the
Company for at least five months in the calendar year and provided
further that and Eligible Employee shall not include any employee who is
on leave or layoff status or is otherwise inactive. For purposes of the
preceding sentence, capital stock than any person may purchase under
outstanding stock options shall be treated as owned by the person and the
provisions of Section 425(d) of the Code shall apply. As of any Offering
Date, each Eligible Employee shall be granted an Option, which shall
entitle the Eligible Employee to purchase shares of Common Stock in
accordance with the terms and conditions of the Plan. The maximum
number of shares of Common Stock that an eligible Employee shall be
entitled to purchase pursuant to such Options shall equal the lesser of
(1) the number of whose shares of Common Stock purchasable for $25,000
based on the Stock Price on the applicable offering date, or (23) the
number of whole shares of Common Stock purchasable for 15% of the
Eligible Employee s Base Salary based on the Stock Price on the
applicable offering date.
Subscription Agreements. Approximately 30 days prior to each offering
date the Company will make subscription agreements available to all
Eligible Employees. To subscribe for shares of Common Stock in
connection with an offering period, an Eligible Employee must complete
and execute a subscription agreement and deliver it to the Company prior
the offering date, or such other date as may be established by the Board
of Directors of the Company for all Eligible Employees. A separate
subscription agreement must be executed for each offering period under
the Plan.
Purchase Date. The purchase date for the purchase of the Common Stock
under the Plan shall be the last day of the offering period.
Purchase Price. The purchase price per share of Common Stock purchasable
under Options granted in respect to each offering period under the Plan
shall be equal to the lesser of 85% of (i) the Stock Price on the
offering date, or (ii) the Stock Price on the Purchase Date, adjusted
down tot he nearest one-eight point. No fractional shares of Common
Stock shall be issued under any circumstances under the Plan. In lieu of
any such fractional shares, Participants shall receive a cash payment
based on the stock price of the applicable purchase date.
Payment. Payment for the shares of Common Stock shall be made either (i)
in cash in a single lump sum on or before the purchase date, or (ii)
through payroll deductions in equal installments over a period of
25 weeks, with no right of prepayment. The Participant shall select he
method of payment in the subscription agreement. If a Participant
electing to make a lump sum payment fails to make such payment on or
before the purchase date, the Option shall terminate automatically
without any further action by the Company.
Cancellation of Participation. A Participant may cancel his or her
subscription in respect of any offering period at any time prior to the
applicable purchase date by giving written notice of cancellation of
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the subscription to the Company. As soon as practicable after receipt
of such notice, the Company will return the funds previously deposited
by the Participant, without interest thereon.
Termination of Employment. In the event that a participant s employment
with the Company and its Subsidiaries is terminated as a result of death,
retirement or any other reason (other than as a result of layoff subject
to recall within 90 days) prior to the purchase date applicable to an
offering period in which the Participant is participating in the Plan,
his or her subscription and the Option relating thereto shall be deemed
canceled automatically without further action by the Participant or
Company. In the event that a Participant is laid off or is on leave of
absence prior the purchase date applicable to an offering period in which
such Participant is participant in the plan, the Participant is laid off
or is on leave of absence prior to the purchase date applicable to an
offering period in which such Participant is participating in the plan,
the Participant shall continue to participate in the Plan, unless he or
she does not resume employment within 90 days beginning on the date such
layoff or leave commenced, in which case his or her subscription and the
Option relating thereto shall be deemed automatically canceled at the
close of business on the 90th day after the date such layoff or leave
commenced. As soon as practicable after any such cancellation, the
Company will return the funds previously deposited by such Participant,
without interest thereon.
Transferability. Except for the issuance of shares to a Participant in
the name of the Participant and his or her spouse as tenants by the
entirety or as joint tenants with full rights of survivorship, an
Eligible Employee s rights to subscribe for shares of Common Stock under
the Plan and rights in respect to any Option granted under the Plan
belong to the Eligible Employee alone and may not be transferred,
assigned to or availed of for any purpose or for any other reason. Any
attempt to transfer or assign any rights granted under the Plan would
constitute withdrawal from the Plan.
Tax Consequences. The Stock Purchase Plan is intended to qualify under
Section 423 of the Code. As such, if no disposition of the shares of
Common Stock purchased by an employee occurs within two years of the
applicable offering date or within one year from the applicable purchase
date, not tax consequences will arise for the employee at the time of
purchase. The employee will instead be subject to tax on the shares at
the time of their disposition, and there will be not tax consequences to
the Company. If the employee disposes of the shares of Common stock
prior to the time periods referenced in the preceding sentence, the
employee will be deemed to have received compensation equal to the
difference between the value of the shares on the date of purchase and
the purchase price paid by the employee, and the Company will be allowed
a tax deduction equal to the amount of compensation deemed to have been
received by the employee.
Voting Required. The adoption of the Stock Purchase Plan received an
affirmative vote of the holders of a majority of the shares of Common
Stock at the annual meeting of the shareholders held on March 15, 1995.
Amendment and Termination. The Board of Directors of the Company may
amend or terminate the Stock Purchase Plan at any time without notice;
provided, however, that no participating employee s existing rights
are adversely affected and that no such amendment may (i) decrease the
purchase price for shares, (ii) increase the maximum number of shares
purchasable by a participating employee, (iii) extend the duration of the
Stock Purchase Plan or (iv) increase the number of shares offered under
the Stock Purchase Plan.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of the Company's
common stock beneficially owned as of July 31, 1998 by: (i) each of the
three highest paid persons who were officers and directors of the
Company, (ii) all officers and directors of the Company as a Group, and
(iii) each shareholder who owned more than 10% of the company's common
stock, including those shares subject to outstanding options.
Beneficially % of
Name Owned (1) Shares Class (2)
Rick Wall 815,000(3) 15%
Kimo M. Keawe 322,500(4) 6%
John G. Tedcastle 525,000(5) 10%
Hideo Nomura 525,000 10%
L.C.C. Management Inc. 525,000(6) 10%
N.K.C. Hawaii, Inc. 900,000(7) 17%
All directors and officers as a group
(12 persons) 4,263,500 80%
(1) Except as otherwise noted, the Company believes the persons named in the
table have sole voting and investment power with respect to the shares of
the Company's common stock set forth opposite such persons' names.
Amounts shown exclude the shares issuable pursuant to various stock
options exercisable in 1999.
(2) Determined on the basis of 5,311,130 shares outstanding. Amount excludes
shares issuable under certain stock options and stock warrants
exercisable as of January 1, 1999.
(3) Includes 375,000 shares held by HBII Management, Inc., which is owned and
controlled by Mr. Wall.
(4) Includes 322,500 shares held by Keawe Resorts, Inc., which is owned and
controlled by Mr. Keawe. Includes 32,250 shares which Mr. Keawe has
agreed to return to the Company in accordance with the terms and
conditions of the Consulting Agreement between the Company and Mr. Keawe.
(5) Includes 525,000 shares held by The John Tedcastle Family Trust, of which
Mr. John Tedcastle is trustee with control over voting rights.
(6) Includes 525,000 shares held by L.C.C. Management, Inc., a corporation
owned and controlled by Ms. Janet Parmar, spouse of Mr. Judvhir Parmar,
a director of the Company.
(7) Includes 900,000 shares held by N.K.C. Hawaii, Inc. which is owned and
controlled by the family of Mr. Takahashi.
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. As of January 31, 1999, the warrant had not yet been
exercised.
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In August, 1994, the Company, as part of the employment agreement with
Shari Chang, agreed to give to Shari W. Chang as a bonus, 22,500 shares
of the Company's common stock. On September 30, 1995, Ms. Chang accepted
delivery of the shares under the employment agreement.
In May, 1997, The Company, as part of a renegotiation of its reservation
services agreement, granted to Hawaii Reservations Center Corp. an option
to purchase 50,000 shares of the Company's common stock at a price of
$2.00 per share. The option may be exercised between May 21, 1997 and
May 20, 2002. Hawaii Reservations Center Corp. is a wholly owned
corporation of Mr. Charles McGee, a director of the Company. As of
January 31, 1999, the option had not yet been exercised.
In July 1998, certain individuals advanced a total of $375,000 to the
Company in the form of a Promissory Note from the Company to the
individual. The Notes specify that if the principle amounts are not
returned to the individuals on or before March 31, 1999, then the entire
principle balance shall be converted into common stock of the Company at
a 50% discount of the then fair value of the Company s common stock.
The notes also provide for the issuance of a warrant to the individuals
whereby the individual has the right to acquire 1 share of the Company s
common stock for every $2.00 of funds advanced to the Company. The
exercise price under the warrant agreements is $2.00 per share and the
warrants may be exercised at any time between June 30, 1998 and June 29,
2003. As of the date of this filing, the notes and warrant agreements
had been sent out to the individuals for execution, but have note yet
been returned to the Company. Management believes, although no assurance
may be given, that the notes and the warrants shall be executed and
returned to the Company. No warrants were exercised during the fiscal
year ended July 31, 1998. Mr. Judvhir Parmar, a director of the Company,
advanced $175,000 of the $375,000 received. The parents of Thomas S.
Blankley, Jr. advanced $100,000 of the $375,000 received.
Other than the warrants issued to the individuals who advanced funds to
the Company, and the option granted to Hawaii Reservations Center Corp.,
there were no outstanding options, warrants or rights to purchase
common stock held by any of the officers or directors of the Company or
its principal shareholders.
CERTAIN TRANSACTIONS
As noted in section "Risk Factors" and "Management s Discussion and
Analysis and Results of Operation", 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 Security
Ownership of
72
<PAGE>
Certain Beneficial Owners and Management). 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. Mr. Wall receives a monthly retainer from HBII.
Management believes that the terms of the management contract between
the Company and HBII are on terms which are no less favorable to HBII
or the Company than those which are negotiated with other owners not
affiliated with the Company.
On August 1, 1994, the Company entered into a contract with HRCC (as
described in section "Plan of Operation"), a company owned and
controlled by Charles M. McGee, a director of the Company. It is
management's belief that the contract with HRCC are on terms which are no
less favorable than those which could be negotiated with companies not
affiliated with the Company, however, in May of 1997, the Company
renegotiated its contract with HRCC with regard to the fees charged.
Under the renegotiated agreement, the fees paid to HRCC shall be based
upon the monthly room revenues of the properties managed by the Company,
subject to a minimum monthly fee. Management believes, although no
assurances can be given, that the Company shall enjoy lower reservations
costs under the new agreement.
Except for the Castle Plan, the HBII Plan and the purchase agreement
involving KRI described under the caption "Corporate Organization", the
employment contracts and other matters described in "Remuneration
of Directors and Officers," the HBII management contract, the issuance of
warrants as described in Item 11 "Security Ownership of Certain
Beneficial Owners and Management," and the HRCC contract, there were no
transactions or proposed transactions during 1998 and 1997, to which the
Company or any of its subsidiaries was or is to be a party, in which the
amount involved exceeds $50,000 and in which any director or executive
officer, or any shareholder who is known to the Company to own of record
or beneficially more than 10% of the Company's common stock, or any
member of the immediate family of any of the foregoing persons, had
a direct or indirect material interest.
DESCRIPTION OF PREFERRED STOCK
General
The authorized capital stock of the Company includes 5,000,000 shares of
Series A Preferred Stock, par value $.001 per share, of which none are
outstanding (the Preferred Stock ). The Board of Directors is authorized
to issue such preferred stock in one or more series and to fix the
designations, powers, preferences and relative, participating, optional
and other special rights of each such series and the qualifications,
limitations or restrictions thereof.
Dividends
The holders of shares of the Preferred Stock will be entitled to receive,
when, as and if declared by the Company s Board of Directors out of funds
legally available therefor, cumulative cash dividends, payable semi-
annually on July 15 and January 15 of each year, commencing July 15,
1999, at the rate of $7.50 per annum per share. Dividends will be
cumulative and will accrue from the date of original issue of shares of
Preferred Stock. The Company will pay each declared dividend to the
holders of record shares of Preferred Stock on the record date for such
dividend (which shall not be more than 30 days preceding the dividend
payment date to which such record date relates).
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<PAGE>
Unless full cumulative dividends on the Preferred Stock have been paid or
declared in full and sums set aside for the payment thereof, no dividends
may be declared or paid or set aside for payment or other distribution
upon the Company s Common Stock, nor may any Common Stock be redeemed,
purchased or otherwise acquired for any consideration by the Company or
any entity controlled by the Company (except by conversion into or
exchange for or payments of dividends or other distributions in stock of
the Company ranking junior to or on a parity with the Preferred Stock as
to dividend and liquidation rights).
Dividends payable on the Preferred Stock for any period less than a full
quarterly dividend period will be computed on the basis of a 360-day year
of twelve 30-day months and the actual number of days elapsed in the
period for which payable.
Conversion
Holders of shares of Preferred Stock will have the right, exercisable at
any time (except in the case of Preferred Stock called for redemption),
to convert such shares of Preferred Stock into shares of Common Stock at
the conversion price of $3.00 per share, subject to adjustment as
described below. In the case of Preferred Stock called for redemption
conversion rights will expire at the close of business on the fifth day
preceding the redemption date.
No payment or adjustment for accrued dividends on the Preferred Stock
will be made on conversion. However, if a share of Preferred Stock
(other than a share of Preferred Stock called for redemption within
such period) is converted between the record date with respect to any
dividend payment and the dividend payment date to which such record date
relates, such share of Preferred Stock must be accompanied by funds
equal to the dividend payable on such dividend payment date on Preferred
Stock so converted. No fractional shares will be issued upon conversion,
and if the conversion results in a fractional interest, an amount will
be paid in cash equal to the value of such fractional interest based on
the market price of the Common Stock on the last trading day prior to the
date of conversion.
The conversion price will be subject to adjustment in certain events,
including (a) the payment of a dividend to holders of Common Stock
payable in shares of Common Stock of the Company, (b) the subdivision,
combination or reclassification of outstanding shares of Common Stock,
(c) the issuance of certain rights or warrants to purchase shares of
Common Stock at a price per share (or having an exercise or conversion
price per share) less than the then current market price of the Common
Stock, (d) the distribution to holders of Common Stock of shares of
capital stock (other than Common Stock), evidences of indebtedness
or assets (excluding cash dividends) or rights or warrants (other than
those referred to above) to purchase shares of Common Stock and (e)
certain mergers, consolidations and sales of assets. No adjustment in
the conversion price will be required unless such adjustment would
require a change of at least $0.10 in the price then in effect, but any
adjustment that would otherwise be required to be made will be carried
forward and taken into account in any subsequent adjustment. The Company
may at any time reduce the conversion price (or increase the conversion
rate) for at least ten business days, by any amount, provided that
the resulting conversion price is not less than the par value of a share
of Common Stock. If the Company consolidates with or merges into or
transfers or leases all or substantially all of its assets to any person,
or is a party to a merger that reclassifies or changes its outstanding
Common Stock, the Preferred Stock will, without the consent of the
holders thereof, be convertible into the kind and amount of securities,
cash or other assets which such holders would have owned immediately
after such transaction if they had converted such shares immediately
before the effective date of the transaction.
74
<PAGE>
The Company shall grant to each investor who converts Preferred Stock
into shares of the Company's common stock the right to have such common
stock registered if and when the Company registers additional shares of
the Company s common stock with the SEC under the Securities Act in
connection with certain underwritten public offerings of the Company s
common stock. In the event that a majority of the investors of
Preferred Stock have converted into shares of the Company s common
stock and a majority of the investors who have converted the Preferred
Stock into the Company s common stock desire to have such common stock
registered, then the Company shall commence the registration process
with the SEC to register such shares no later than July 31, 2000. Such
registration rights shall be afforded only to investors who purchase
Preferred Stock directly from the Company hereunder, and shall expire
on the second anniversary of the date such Preferred Stock is converted
into shares of the Company's common stock.
Optional Redemption
Redemption at Option of the Company. The Preferred Stock will be
redeemable at the option of the Company, at any time, in whole or from
time to time in part, commencing January 15, 2001, at the redemption
price of $100.00 per share plus, in each case, all dividends accrued
and unpaid on such Preferred Stock to the date fixed for redemption.
If fewer than all of the outstanding shares of Preferred Stock are to be
redeemed, the shares to be redeemed will be determined pro rata or by lot
or by such other manner as prescribed by the Company s Board of Directors
which is consistent with the rules of the NASD.
At least 30 but not more than 60 days prior to the date fixed for the
redemption of shares of Preferred Stock, a written notice will be mailed
to each holder of record of the shares to be redeemed, notifying such
holder of the Company s election to redeem such shares, stating the date
fixed for redemption thereof (the "Redemption Date") and calling upon
such holder to surrender to the Company on the Redemption Date at
the place designated in such notice the certificate or certificates
representing the number of shares specified therein. On or after the
Redemption Date, each holder of shares of Preferred Stock to be redeemed
must present and surrender such certificate or certificates to the
company at the place designated in such notice and thereupon the
redemption price of such shares will be paid to the holder or to the
order of the person whose name appears on such certificate or
certificates as the owner thereof, and each surrendered certificate will
be cancelled. Should fewer than all the shares represented by any such
certificate be redeemed, a new certificate representing the unredeemed
shares will be issued.
If a notice of redemption has been given, and if on or before the
Redemption Date the funds necessary for such redemption have been set
aside by the Company, then, on the Redemption Date, dividends will cease
to accrue on the shares of Preferred Stock so called for redemption, and
at the close of business on the Redemption Date, such shares will no
longer be deemed to be outstanding and all rights of the holders of such
shares as stockholders of the Company will cease except the right to
receive the moneys payable upon such redemption, without interest, upon
surrender of the certificates evidencing such shares.
Redemption at Option of Holder. Each holder of the shares of Preferred
Stock shall have the right, at such holder s option, to require the
Company to purchase immediately prior to an Operative Event (as defined)
(the "Repurchase Date"), all of such holder s shares at a redemption
price of $100.00 per share, plus accrued and unpaid dividends to the
Repurchase Date if (i) any entity offers to acquire all or substantially
75
<PAGE>
all of the shares of Common Stock of the Company pursuant to a merger,
consolidation, tender offer or other acquisition transaction (an
"Acquisition") and (ii) all or substantially all of the consideration
to be paid for the Common Stock of the Company in such Acquisition is
not common equity securities regularly traded on a national securities
exchange or reported on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") (an "Operative Event").
On or before the 30th day before the consummation of a Operative Event,
the Company shall cause to be mailed to the holders of Preferred Stock
notice of the event causing such notice to be given and of the purchase
right arising as a result thereof. The Company shall also cause a copy
of such notice to be published in a newspaper of national circulation.
Liquidation Rights of Preferred Stock
In the event of any liquidation, dissolution or winding up of the affairs
of the Company, whether voluntary or otherwise, the holders of the
Preferred Stock will be entitled to receive for each share of Preferred
Stock outstanding, an amount in cash equal to $100.00 plus all dividends
accrued and unpaid up to the date fixed for distribution, before any
distribution is made to the holders of Common Stock or any other capital
stock of the Company ranking (as to any such distribution) junior to the
Preferred Stock. Upon such payment, the holders of Preferred Stock will
not be entitled to any further participation in any remaining assets of
the Company thereafter.
If the assets of the Company are not sufficient to pay in full the
liquidation value payable to the holders of shares of Preferred Stock the
holders of all such shares will share ratably in such distribution of
assets. Neither a consolidation or merger of the Company with another
corporation nor a sale or transfer of all or part of the Company s assets
for cash, securities or other property will be considered a liquidation,
dissolution or winding up of the Company.
Voting Rights of Preferred Stock
Except as set forth below or as required by applicable law, the holders
of the Preferred Stock will have no voting rights.
If and whenever (i) accrued dividends on the shares of Preferred Stock
have not been paid in an aggregate amount equal to or greater than four
quarterly dividends (whether consecutive or not) on such shares, or (ii)
any accrued dividends have not been paid on the next quarterly dividend
payment date for the Preferred Stock and the full amount of such accrued
dividends has not been paid within two years of such quarterly dividend
payment date, then the number of directors of the Company will
automatically be increased by two and the holders of the Preferred Stock
voting together as a single class, will be entitled to elect such
additional two directors. Such right to vote as a single class to elect
two directors will, once vested, continue until all such dividends in
arrears have been paid in full.
Limitations
So long as any shares of Preferred Stock are outstanding, the Company may
not, without the affirmative vote of the holders of at least two-thirds
of the outstanding shares of Preferred Stock, voting as a class:
76
<PAGE>
create, authorize or issue any other series of preferred stock ranking
either as to payment of dividends or distribution of assets senior to the
Preferred Stock; or
amend the Certificate of Designation or the Company s Certificate of
Incorporation so as to affect adversely in any material respect the
voting power or other rights or preferences of the Preferred Stock; or
Notwithstanding the foregoing, the Company s Certificate of Incorporation
may be amended to increase or decrease the number of authorized shares of
Preferred Stock (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the
stock of the company entitled to vote.
DESCRIPTION OF COMMON STOCK
The following description of the Company's capital stock does not purport
to be complete and is subject in all respects to applicable Utah law and
to the provisions of the Company's Articles of Incorporation and By-Laws,
copies of which have been filed as exhibits to the Registration Statement
of which this Prospectus is a part.
General
The Articles of Incorporation of the Company, as amended, provide that
the Company may issue up to 20,000,000 capital shares, consisting of
20,000,000 shares of Common Stock, par value $.02 per share.
Common Stock
Each outstanding share of Common Stock entitles the holder to one vote on
all matters submitted to a vote of shareholders, including the election
of directors and, except as otherwise required by law or except as
provided in the Articles of Incorporation or Bylaws with respect to any
other class or series of shares of beneficial interest, the holders of
Common Stock will possess exclusive voting power over matters submitted
to a vote of shareholders. The Articles of Incorporation do not provide
for cumulative voting.
Holders of Common Stock have no preemptive, subscription, sinking fund or
conversion rights. Holders of Common stock will be entitled to receive
dividends as may be declared by the Board of Directors out of legally
available funds. See "Dividend Policy". In the event of the
dissolution, liquidation or winding up of the Company s' business,
holders of Common Stock will be entitled to share in all net assets
remaining after payment, or provision for, all known liabilities.
There is no provision in the Articles of Incorporation or By-Laws that
would delay, defer or prevent a change in control of the Company.
Transfer Agent
The Transfer Agent and Registrar for the Common Stock is American
Registrar and Transfer Co.
77
<PAGE>
SHARE ELIGIBLE FOR FUTURE SALE
The shares of Common Stock into which the Preferred Stock offered
hereunder are convertible into will be "unregistered" and "unrestricted
shares" and may not be sold in the absence of a registration under the
Securities Act unless an exemption from registration is available,
including the exemption contained in Rule 144. In addition, the Company
has registered with the Securities and Exchange Commission a total of
1,000,000 and 500,000 reserved for issuance under the Company's Stock
Option Plan and Employee Stock Purchase Plan, respectively. See "Stock
Plans". The Company has also reserved 50,000 shares for issuance
under a Reservations Agreement, and 187,500 for issuance in accordance
witha Promissory Notes issued in July 1998. See "Certain Transactions"
and "Options Warrants and Rights".
UNDERWRITERS
The shares offered herein are being offered through the Board of
Directors of the Company.
LEGAL MATTERS
The validity of the Common Stock and certain other legal matters will be
passed upon for the Company by Davis Wright Tremaine.
ACCOUNTANTS
The Board of Directors has appointed Coopers & Lybrand, L.L.P. as the
Company's independent public accountants. Coopers & Lybrand has audited
the Company's financial statements for the fiscal years ended July 31,
1998 and 1997.
EXPERTS
The audited financial statements of the Company included in this Private
Placement Memorandum, to the extent and for the periods indicated in
their reports, have been audited by Coopers & Lybrand, L.L.P.,
independent auditors, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
78
<PAGE>
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<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> JUL-31-1999 JUL-31-1998
<PERIOD-END> APR-30-1999 APR-30-1998
<CASH> 151,416 133,746
<SECURITIES> 0 0
<RECEIVABLES> 2,408,339 1,746,442
<ALLOWANCES> 14,839 14,839
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,867,218 2,142,681
<PP&E> 220,958 210,013
<DEPRECIATION> 167,427 138,015
<TOTAL-ASSETS> 3,158,620 2,437,469
<CURRENT-LIABILITIES> 1,939,779 2,161,385
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0 0
855,000 0
<COMMON> 106,223 106,223
<OTHER-SE> 69,016 89,861
<TOTAL-LIABILITY-AND-EQUITY> 3,158,620 2,437,469
<SALES> 3,490,117 4,417,328
<TOTAL-REVENUES> 3,490,117 4,417,328
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<TOTAL-COSTS> 3,459,846 4,353,934
<OTHER-EXPENSES> 0 0
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<INTEREST-EXPENSE> 94,498 48,640
<INCOME-PRETAX> ( 64,227) 14,754
<INCOME-TAX> 0 0
<INCOME-CONTINUING> ( 64,227) 14,754
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<NET-INCOME> ( 64,227) 14,754
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