<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB/A
(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 29 sequentially numbered pages
<PAGE>
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
2
<PAGE>
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 123,143 257,391
Restricted Cash 19,941 19,941
Notes Receivable, current 144,406 0
Due from Related Parties 1,073,056 559,517
Total Current Assets 2,832,406 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 $ 3,123,808 $ 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
Commitments and Contingencies
Redeemable Preferred Stock, $100 par
value, 50,000 shares authorized, 8,550
Issued and Outstanding 858,363 0
Stockholders Equity
Common stock, $.02 par value, 20,000,000
Shares authorized, 5,311,130 Issued
& outstanding 106,223 106,223
Capital in excess of par value 2,501,000 2,539,175
Accumulated Deficit (2,470,159) (2,449,314)
Total Stockholders' Equity 137,064 196,084
Total Liabilities and Stockholders' Equity $ 3,123,808 $ 2,437,469
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
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.
4
<PAGE>
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 ( 101,069) ( 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 ( 501,076) ( 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 issuance of redeemable
preferred stock 820,188 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 570,784 408,800
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.
5
<PAGE>
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.
6
<PAGE>
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.
7
<PAGE>
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:
Net Income $ 143,400
Less: Redeemable preferred
stock dividend accrual ( 3,363)
Basic:
Net Income availale to common
stockholders $ 140,037 5,311,130 $ .03
Effect of dilutive securities-
Stock subscriptions, options
and warrants -- -- --
Diluted
Net Income and assumed conversions $ 140,037 5,311,130 $ .03
NINE MONTHS ENDED 04/30/99:
Net Loss $( 64,227)
Less: Redeemable preferred stock
dividend accrual ( 3,363)
Basic:
Net Loss available to common
stockholders $( 67,590) 5,311,130 $( .01)
Effect of dilutive securities-
Stock subscriptions, options
and warrants -- -- --
Diluted
Net loss and assumed conversions $( 67,590) 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.
8
<PAGE>
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.
9
<PAGE>
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
March of 1999. No warrants were exercised as of April 30, 1999.
In March 1999, the Company issued $100 par value redeemable preferred stock
to a director who purchased 1,000 shares. Each share of the redeemable
preferred stock is convertible into 33.33 shares of the Company's common
stock. The redeemable preferred stock bears cumulative dividends at the
rate of 7.5% per annum, payable semi-annually.
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.
10
<PAGE>
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.
REDEEMABLE PREFERRED STOCK-
In March and April of 1999, the Company issued 8,550 shares of $100 par value
redeemable preferred stock to certain individuals and one director. Dividends
are cumulative from the date of original issue and are payable semi-annually,
beginning July 15, 1999 at a rate of $7.50 per annum per share. Upon certain
tender offers to acquire substantially all of the Company's common stock, the
holders of the redeemable preferred stock may require the shares be redeemed
at a redemption price of $100 per share plus accrued and unpaid dividends. At
April 30, 1999, accrued dividends on these shares of $3,363 is included in
redeemable preferred stock in the accompanying consolidated balance sheet.
These shares are also nonvoting and are convertible to the Company's common
stock at $3 per share. As of January 15, 2001, the redeemable preferred stock
will be redeemable at the option of the Company at a redemption price of $100
per share plus accrued and unpaid dividends.
11
<PAGE>
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.
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
12
<PAGE>
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.
13
<PAGE>
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
14
<PAGE>
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.
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'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
15
<PAGE>
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
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.
16
<PAGE>
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.
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 $501,076 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 provided
by financing activities was $570,784 for the nine months ended April 30,
1999 as compared to $408,800 for the prior year. In March and April of
1999, the Company was successful in raising additional equity through the
issuance of it's Redeemable Preferred Stock. The Redeemable 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 Redeemable Preferred Stock and received net proceeds totaling
$820,188.
17
<PAGE>
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 $892,627 and a net working capital
deficit of $18,704 as of April 30, 1999 and 1998, respectively.
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 Redeemable 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,
18
<PAGE>
management is confident that it shall be successful in raising additional
capital to fund its operations through the private placement of the
Redeemable 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.
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.
19
<PAGE>
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.
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.
20
<PAGE>
McGee, pursuant to which HRCC shall provide reservation services for hotels
and resorts managed by the Company. Since the purchase of KRI, Inc.,
reservation services for hotels and resorts managed by the Company were
provided by KRI, Inc. The fees paid by the Company include a fixed monthly
fee plus commissions. The Company also agreed to sell to HRCC the assets
of the reservation offices of KRI, Inc., which consisted of office
equipment. As consideration for the equipment, HRCC agreed to employ the
reservation department employees of KRI, Inc. and to assume the liability
for the accrued vacation of such employees. The Company realized a gain of
$4,372 on the transaction, as the value of the accrued vacation exceeded
the net book value of the office equipment sold. It is management s belief
that the contract with HRCC are on terms which are no less favorable than
those which could be negotiated with companies not affiliated with the
Company, however, in May of 1997, the Company renegotiated its contract
with HRCC with regard to the fees charged. Under the new agreement, the
fees paid to HRCC are based upon the monthly room revenues of the properties
managed by the Company, subject to a minimum monthly fee. Management
believes, although no assurances can be given, that the Company shall enjoy
lower reservations costs under the new agreement.
YEAR 2000
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company s computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar
normal business activities.
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
21
<PAGE>
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.
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
<PAGE>
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. *
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. *
23
<PAGE>
6.3 Kelvin Bloom Employment Agreement dated December 2, 1993
between the Company and Kelvin Bloom, incorporated by
reference to Exhibit 10.3 to the Company's Registration
Statement on Form 10-SB. *
6.4 Kimo M. Keawe Employment Agreement dated July 30, 1994,
effective as of November 10, 1993 between Kimo M. Keawe and
the Company, incorporated by reference to Exhibit 6.4 to the
Company's Annual Report on Form 10-KSB for the year ended
July 31, 1994. *
6.5 Michael S. Nitta Employment Agreement dated June 23, 1994,
effective as of November 10, 1993 between Michael S. Nitta and
the Company, incorporated by reference to Exhibit 6.5 to the
Company's Annual Report on Form 10-KSB for the year ended July
31, 1994. *
6.6 Shari Chang Employment Agreement dated July 15, 1994, effective
as of July 16, 1994 between Shari Chang and the Company,
incorporated by reference to Exhibit 6.6 to the Company's Annual
Report on Form 10-KSB for the year ended July 31, 1994. *
6.7 Sublease Agreement dated September 16, 1993 between Rush
Moore Craven Sutton Morry & Beh and The Castle Group, Ltd. for
the Company's principle executive offices, incorporated by
reference to Exhibit 10.4 to the Company's Registration Statement
on form 10-SB. *
6.8 Lease Agreement dated April 1, 1988, between Hirano Enterprises,
Cen Pac Properties, Inc., and KRI, Inc., dba Hawaiian Pacific
Resorts, as renewed by agreement dated May 3, 1993, incorporated
by reference to Exhibit 10.5 to the Company's Registration
Statement on Form 10-SB. *
6.9 Reservations Services Agreement dated August 1, 1994 between the
Company and Hawaii Reservations Center Corp., incorporated by
reference to Exhibit 6.9 to the Company's quarterly report on Form
10-QSB for the quarter ended October 31, 1994. *
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. *
24
<PAGE>
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. *
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. *
25
<PAGE>
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. *
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 *
26
<PAGE>
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. *
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. *
27
<PAGE>
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 incorporated by reference to the
Company's form 10Q-SB for the quarter ended April 30, 1999 *
DESCRIPTION OF EXHIBITS
See item 1 above.
28
<PAGE>
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)
October 28, 1999 /s/ Rick Wall
-------------------------
Chairman of the Board and
Chief Executive Officer
October 28, 1999 /s/ Michael S. Nitta
-------------------------
Chief Financial Officer
29
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<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> 2,832,406 2,142,681
<PP&E> 220,958 210,013
<DEPRECIATION> 167,427 138,015
<TOTAL-ASSETS> 3,123,808 2,437,469
<CURRENT-LIABILITIES> 1,939,779 2,161,385
<BONDS> 0 0
0 0
858,363 0
<COMMON> 106,223 106,223
<OTHER-SE> 30,841 89,861
<TOTAL-LIABILITY-AND-EQUITY> 3,123,808 2,437,469
<SALES> 3,490,117 4,417,328
<TOTAL-REVENUES> 3,490,117 4,417,328
<CGS> 0 0
<TOTAL-COSTS> 3,459,846 4,353,934
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 94,498 48,640
<INCOME-PRETAX> ( 64,227) 14,754
<INCOME-TAX> 0 0
<INCOME-CONTINUING> ( 64,227) 14,754
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> ( 64,227) 14,754
<EPS-BASIC> ( .01) .00
<EPS-DILUTED> ( .01) .00
<FN>
UNAUDITED
</FN>
</TABLE>
