<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 January 31, 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 February 26, 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
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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 January 31, 1999
and 1998 (unaudited).............................................. 3
Consolidated Statements of Operations for the three and six months
ended January 31, 1999 and 1998 (unaudited)....................... 4
Consolidated Statements of Cash Flows for the three and six months
ended January 31, 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 Operation......................... 14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders........ 22
Item 5. Other Information.......................................... 23
Item 6. Exhibits and Reports on Form 8-K.......................... 23
SIGNATURES......................................................... 29
2
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PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated Balance Sheets January 31, 1999 and 1998 (Unaudited)
January 1999 January 1998
ASSETS
Current Assets
Cash $ 153,505 $ 98,222
Accounts Receivable, Net 1,100,952 1,165,555
Prepaid Expenses 144,342 261,608
Restricted Cash 19,941 19,941
Notes Receivable, current 579,406 0
Due from Related Parties 1,090,269 366,989
Total Current Assets 3,088,415 1,912,315
Property, Furniture Fixtures & Equipment, Net 59,681 77,017
Other Assets:
Investment in HBII Timeshare Program 56,943 59,973
Deposits 1,750 143,940
Organization Costs 0 7,757
Total Other Assets 58,693 211,670
TOTAL ASSETS $ 3,206,789 $ 2,201,002
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 1,203,172 $ 902,943
Vacation Payable 101,257 93,677
Wages Payable 88,198 84,797
Taxes Payable 32,565 31,851
Due to Related Parties, current 501,636 294,400
Notes Payable, current 750,000 550,000
Deferred Income 26,667 25,410
Other Accrued Liabilities 327,094 130,913
Total Current Liabilities 3,030,589 2,113,991
Deferred Charges 144,363 0
Total Liabilities 3,174,952 2,113,991
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 2,539,175 2,539,175
Accumulated Deficit (2,613,561) (2,558,387)
Total Stockholders' Equity 31,837 87,011
Total Liabilities and Stockholders' Equity $ 3,206,789 $ 2,201,002
The accompanying notes are an integral part of the consolidated financial
statements.
3
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<TABLE>
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Operations
for the three and six months ended January 31, 1999 and 1998
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
January 1999 January 1998 January 1999 January 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue
Management fees $ 823,314 $ 892,955 $ 1,733,495 $ 1,654,363
Hotel Operating Revenues 0 486,853 0 910,695
Other Income 215,935 206,400 426,350 369,024
------------ ------------ ------------ ------------
Total Revenues 1,039,249 1,586,208 2,159,845 2,934,082
------------ ------------ ------------ ------------
Expenses
Payroll and benefits 563,704 505,371 1,089,098 983,757
Hotel Operating Expenses 0 484,732 0 962,447
Professional fees 40,086 ( 12,057) 75,470 45,908
Reservation services 228,721 219,596 486,090 426,101
Depreciation and
Amortization 6,250 7,605 14,986 15,210
Rent 95,999 107,563 196,589 211,650
Travel and entertainment 27,431 24,340 73,726 74,006
Office expense 17,375 12,741 31,233 27,950
Utilities 13,103 11,349 25,307 22,720
Taxes, other than income 44,123 44,279 89,256 77,453
Advertising and marketing 38,578 40,795 72,137 65,454
Outside sales offices 51,686 12,201 87,044 23,631
Insurance 18,018 19,736 35,409 37,971
Other 14,564 12,034 26,342 25,480
------------ ------------ ------------ ------------
Total Expenses 1,159,638 1,490,285 2,302,687 2,999,738
------------ ------------ ------------ ------------
Income (Loss)
from operations ( 120,389) 95,923 ( 142,842) ( 65,656)
Other Expenses
Interest Expense 31,626 16,762 64,785 28,663
------------ ------------ ------------ ------------
Net Income (Loss) $( 152,015) $ 79,161 $( 207,627)$( 94,319)
============ ============ ============ ============
Per Share Data
Basic Earnings
Net Income (Loss) $( .03) $ .02 $( .04)$( .02)
Diluted Earnings
Net Income (Loss) $( .03) $ .02 $( .04)$( .02)
<FN>
The
accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
4
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the six months ended January 31, 1999 and 1998
( Unaudited )
Six Months Ended
January 1999 January 1998
Cash Flows From Operating Activities
Net Loss $( 207,627) $( 94,319)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 14,986 15,210
Changes in assets and liabilities-
Increase in accounts receivable ( 87,534) ( 345,187)
Increase in due from related parties ( 245,471) ( 169,258)
Increase in prepaid expenses ( 122,268) ( 171,831)
Increase (Decrease) in deferred charges 91,030 ( 50,820)
Increase in accounts payable 313,765 289,152
Increase (Decrease) in taxes payable 6,206 ( 4,292)
Increase (Decrease) in other accrued liabilities 49,304 ( 117,799)
Net cash used in operating activities ( 187,609) ( 649,144)
Cash Flows From Investing Activities
Purchase of property & equipment ( 10,945) ( 4,484)
Stock subscription received 0 40,645
Receipt of deposits 23,897 31,000
Investment in HBII Timeshare 1,963 1,267
Net cash provided by investing activities 14,915 68,428
Cash Flows from Financing Activities
Proceeds from notes payable 0 410,000
Collection of Note Receivable 105,594 0
Repayment to related parties ( 25,364) 0
Net cash provided by financing activities 80,230 410,000
Net Decrease in Cash ( 92,464) ( 170,716)
Cash at Beginning of Period 245,969 268,938
Cash at End of Period $ 153,505 $ 98,222
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 64,785 $ 28,663
5
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 Statement (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 months and six months ended
January 31, 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 months and six months ended January 31, 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 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
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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. 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 CHARGES-
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 as a result of a contract entered into with
its landlord over a 69 month period. The allowance is recognized on a
straight line method over the term of the contract.
7
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PER SHARE DATA-
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share as of January 31, 1999 and 1998,
respectively.
Income Shares Per Share
(Numerator) (Denominator) Amount
THREE MONTHS ENDED 1/31/99:
Basic:
Net Loss $( 152,015) 5,311,130 $( .03)
Effect of dilutive securities-
Stock subscriptions, options
and warrants -- -- --
Diluted
Net loss and assumed conversions $( 152,015) 5,311,130 $( .03)
SIX MONTHS ENDED 1/31/99:
Basic:
Net Loss $( 207,627) 5,311,130 $( .04)
Effect of dilutive securities-
Stock subscriptions, options
and warrants -- -- --
Diluted
Net loss and assumed conversions $( 207,627) 5,311,130 $( .04)
THREE MONTHS ENDED 01/31/98:
Basic:
Net Income $ 79,161 5,311,130 $ .02
Effect of dilutive securities-
Stock subscriptions, options
and warrants -- 24,519 --
Diluted
Net loss and assumed conversions $ 79,161 5,335,649 $ .02
SIX MONTHS ENDED 1/31/98:
Basic:
Net Loss $( 94,319) 5,311,130 $( .02)
Effect of dilutive securities-
Stock subscriptions, options
and warrants -- -- --
Diluted
Net loss and assumed conversions $( 94,319) 5,311,130 $( .02)
Note that the warrants and options outstanding for the three and six months
period ended January 31, 1999 and the six month period ended January 31,
1998 were not considered common stock equivalents since they were anti-
dilutive.
8
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PROPERTY AND EQUIPMENT-
Property 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 January 31, 1999 and 1998, property and equipment consisted of the
following:
01/31/99 01/31/98
Office Furniture and Equipment $ 220,958 $ 210,013
Less Accumulated Depreciation ( 161,277) ( 132,996)
------------ -------------
$ 59,681 $ 77,017
============ =============
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.
ORGANIZATION COSTS-
Organization costs are recorded at cost and are being amortized on a
straight-line basis over 5 years. At January 31, 1999 and 1998, the balances
were as follows:
01/31/99 01/31/98
Organization Costs $ 51,714 $ 51,714
Less Accumulated Amortization ( 51,714) ( 43,956)
----------- -----------
-- $ 7,757
=========== ===========
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 January 31, 1999 and 1998, the Company had receivable
9
<PAGE>
balances of $1,090,269 and $366,989, respectively, from HBII.
The Company also had a note receivable as of January 31, 1999 in the amount
of $435,000. The loan was made to HBII to fund the operations of HBII.
Interest on this note receivable is due on a monthly basis with interest
accruing at 12% per annum. The principal and any unpaid interest on the
note is due on March 31, 1999.
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.
Reservations services expense for the quarters ended January 31, 1999 and
1998 was $228,721 and $219,596, respectively. The Company had a payable
balance to Hawaii Reservation Center Corporation of $248,000 and $56,845 as
of January 31, 1999 and 1998, respectively.
Due to Related Parties-
The Company had the following related party loan balances as of January 31,
1999 and 1998
January 1999 January 1998
6% loans from stockholders, $18,000 was due on
January 31, 1997 and $166,400 was extended to
August 1, 1998 $ 166,400 $ 184,400
10% loan from Director, due March 31, 1999 175,000 --
10% loans from Officers, due August 15, 1999 160,236 110,000
------------ ------------
$ 501,636 $ 294,400
============ ============
In June 1998, the Company issued warrants to acquire up to 87,500 shares of
common stock for $2.00 per share, exercisable through June 2003 in exchange
for the $175,000 loan made by a director. No warrants were exercised as of
January 31, 1999.
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 January 31, 1999, the future minimum rental commitment under these leases
were as follows:
10
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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.
NOTES RECEIVABLE-
The Company had notes receivable balances as of January 31, 1999 and 1998 as
follows:
January 1999 January 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 $ --
Notes receivable from related parties 435,000 --
------------ -------------
Notes Receivable $ 579,406 $ --
============ =============
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
January 31, 1999. The Warrants includes 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 October
31, 1998.
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
11
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Reservations Center Corp., which is wholly owned by a director/ stockholder
of the Company. The option may be exercised between May 1997 and 2000 and
had not been exercised as of January 31, 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
January 31, 1999.
DEFERRED CHARGES
At January 31, 1999 and 1998, deferred charges consisted of the following:
01/31/99 01/31/98
--------- ---------
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. $ 66,667 $ 25,410
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 104,363 0
--------- ---------
171,030 25,410
Less current portion ( 26,667) ( 25,410)
--------- ---------
Long term portion $ 144,363 $ 0
========= =========
12
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NOTES PAYABLE-
At January 31, 1999 and 1998, notes payable consisted of the following:
01/31/99 01/31/98
$300,000 line of credit from a bank with drawings
due on February 18, 1999, with interest (10.5% at
January 31, 1999) 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 shall be repaid in full upon
the sale of the Hanalei Bay Resort scheduled to
close on March 19, 1999. $ 300,000 $ 300,000
$250,000 line of credit from a bank with drawings
due on April 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. 250,000 250,000
Note payable to various individuals with interest
accruing at 10% per annum. Principal and any
unpaid interest due on March 31, 1999. In
connection with the notes, certain common
stock warrants were issued. 200,000 --
----------- ----------
Notes Payable, current $ 750,000 $ 550,000
========== =========
INCOME TAXES-
Significant components of the Company's deferred tax assets and liabilities
as of January 31, 1999 and 1998 are:
01/31/99 01/31/98
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
$1,682,000 at July 31, 1998 which expires at various dates through fiscal
year 2011.
13
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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 addition to the fees
described, the Company also earns revenues from transient and long term
rentals and other hotel related income from its leased hotel. The revenues
of the properties which are managed by the Company, except as mentioned
herein, are not recorded as revenues of the Company.
The Company s operating expenses are comprised of labor, reservation
fees and other costs associated with operating as a management company.
The expenses of the properties which are managed by the Company, except as
mentioned herein, are not recorded as expenses of the Company.
As of January 31, 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 reservations 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.
14
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Hotel revenues consist of revenues from 167 rooms leased by the
Company. Under this arrangement, the Company includes as its own revenues
the entire property revenues which includes hotel transient rental income as
well as the total expenses incurred to operate the property. The property is
situated in Waikiki, Hawaii. The Company 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 entered into an agreement to issue 50,000 shares of Series B
preferred stock to its co-lessee in exchange for a 20% ownership of the
leasehold interest for the completed property. The Company's co-lessee
shall be responsible for the reconstruction of the property which is
scheduled to commence in April of 1999. The Company shall have no
obligation to infuse funds into the costs of reconstruction or any of the
operating costs of the property following its opening which is scheduled for
the first quarter of calendar 2000. The Company shall be awarded the
management contract of the property and shall also be involved with the
construction management of the property. Although no assurances can be
given, management estimates that it shall earn substantial management fees
from the hotel operations following the opening of the hotel.
With virtually all of the key personnel and corporate infrastructure
in place, the focus for the Company shall be to continue its success in
increasing revenues through the expansion of its client base; and to
accomplish this at a minimal incremental cost. Although no assurances can
be given, based on the success experienced to date, management believes that
it will be able to further add to its portfolio of management contracts.
Management also believes, although no assurances can be given, that the
Company will be able to handle a much larger customer base without expending
significant amounts of additional resources due to the solid foundation and
management team which the Company currently has.
The Company is presently in the negotiating stages with various other
properties located throughout the State of Hawaii and in other Pacific Rim
regions.
RESULTS OF OPERATIONS-
FOR THE QUARTERS ENDED JANUARY 31, 1999 AND 1998
SALES
For the quarters ended January 31, 1999 and 1998, the Company had total
revenues of $1,039,249 and $1,586,208, respectively, a decrease of $546,959
or 34%. The decrease in revenues for the quarter ended January 31, 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
15
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and therefore, hotel revenues were zero for the quarter ended January 31, 1999
as compared to $486,853 for the quarter ended January 31, 1998. For the
quarter ended January 31, 1999, revenues from the Company s primary source
of income, (management fees and management related services,) decreased by
$60,106, or 5%, from $1,099,355 to $1,039,249. The decrease in management
related income is attributed to the economic downturn of Hawaii s tourism
industry. Hawaii s tourism industry depends greatly on the westbound
traveler from Asia and the economic turmoil of the Asian nations has
contributed to the decline in the number of Hawaii visitor arrivals.
COSTS AND EXPENSES
Operating expenses for the quarters ended January 31, 1999 and 1998 were
$1,159,638 and $1,490,285, respectively, a decrease of $330,647 or 22%. 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 January 31, 1999 was zero as compared to $484,732 for the
quarter ended January 31, 1998. For the quarter ended January 31, 1999,
operating expenses from the Company s primary source of income, (management
fees and management related services,) increased over the prior year by
$154,085, or 15%, from $1,005,553 to $1,159,638.
Payroll and benefits increased by $58,333 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 increased by $52,143 due to the Company recording a credit
to this expense in the amount of $64,250 during the quarter ended January
31, 1998 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 January 31, 1999 decreased
by $12,107 when compared to the quarter ended January 31, 1998.
Rent expense decreased by $11,564, or 11% for the quarter ended January
1999 when 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.
Outside sales offices increased by $39,485, or 324% when compared to the
quarter ended January 31, 1998 as a result of the Company opening satellite
sales offices in Europe and Asia. For the quarter ended January 31, 1999,
the Company had three additional offices which were not present during the
quarter ended January 31, 1998. The base monthly costs for the three
offices is approximately $9,000 per month.
Interest expense increased by $14,864, or 89% for the quarter ended January
31, 1999 as compared to the prior year due to increased borrowing by the
Company to fund its operating and expansion costs.
16
<PAGE>
NET INCOME (LOSS)
The Company reported a net loss of $152,015 and a net profit of $79,161 for
the quarters ended January 31, 1999 and 1998, respectively, a decrease of
$231,176.
As discussed previously, the decrease in profitability is attributed to the
downturn in the tourism industry of Hawaii and the funding of expansion
costs for the Company. The Company is seeking properties outside of the
state of Hawaii in order to diversify it s geographic markets. Part of the
expansion entails additional travel and staffing costs which the Company
must fund in order to penetrate these markets. In addition, the Company
hired a new Vice President of Finance to assist in the acquisition of equity
for the Company which will be necessary in order for the Company to be
successful with it s growth strategy.
LIQUIDITY AND CAPITAL RESOURCES-
As of January 31, 1999, total current assets were $3,088,415 and consisted
primarily of $1,100,952 in accounts receivable and $1,090,269 in due from
related parties. Total current liabilities were $3,028,367 leaving a net
working capital of $60,048.
The Company s primary sources of working capital are cash flow from
operations and borrowings. Net cash used in operations was $187,609 for the
six months ended January 31, 1999 as compared to $649,144 for the prior
year. Net cash provided by investing activities was $14,915 as compared to
$68,428 for the six months ended January 31, 1999 and 1998, respectively.
Net cash used to repay amounts due to related parties was $25,364 for the
six months ended January 31, 1999.
The Company had unrestricted cash of $153,505 and $98,222 at January 31,
1999 and 1998, respectively.
In July of 1997, the Company sold 222,100 shares of unregistered and
restricted stock for a gross price of $2.00 per share, or an aggregate of
$425,399 (net of commissions and other issuance fees) in a private
placement. The shares were subscribed and $384,754 was received in July
1997, with the balance of $40,645 received in September 1997. The stock
certificate was issued in November of 1997.
The Company has a $300,000 line of credit which is guaranteed by four of the
directors of the Company. The Company note was due on February 18, 1999.
The note shall be paid in full by the Company with the proceeds received by
the Company upon the sale of the Hanalei Bay Resort. The sale is scheduled
to close on March 19, 1999.
In November of 1997, the Company secured an additional line of credit for
$250,000 from a local bank. The line of credit is due on April 1, 1999 and
is personally guaranteed by the Chairman and Chief Executive Officer of the
Company.
17
<PAGE>
The Company had a net working capital $60,048 and a net working capital
deficit $201,676 as of January 31, 1999 and 1998, respectively.
As of January 31, 1999 and 1998, net working capital included due to related
parties in the amount of $501,636 and $294,400, respectively. Also included
in net working capital is $24,445 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 has been
delayed to a closing date of March 18, 1999. At January 31, 1999, the
Company had a receivable balance of $1,090,269 related to fees, interest and
reimbursements, and $435,000 in advances for a total of $1,525,269. Based
on preliminary projections, although no assurances can be given, 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 all of the funds due from HBII
upon the closing of the sale. 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 in the process of raising additional equity through the
private placement of convertible preferred stock. Upon the closing of the
HBII sale, certain creditors of HBII have tentatively agreed to participate
in this private placement. Although no assurances can be given, management
is confident that it shall be successful in raising the necessary capital to
fund its operations through the private placement of the convertible
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 management 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
18
<PAGE>
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 on this property is scheduled to
commence in April of 1999 and is scheduled to be completed in early 2000.
Although no assurance can be given, management believes that it will be
hired as a consultant to oversee the reconstruction of the project and that
it will also sign a contract for the management 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.
Although no assurances can be given, management believes that the
combination of the impending sale of HBII, 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 January 31, 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 January 31, 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.
Although no assurances can be given, the Company plans to expand its
portfolio of management contracts both within the State of Hawaii and
outside of Hawaii in areas such as Saipan, Guam and other Pacific Rim
countries. In addition to Hawaii, management believes that there are many
opportunities to expand its client base in the emerging markets of the
Pacific Basin. In addition to signing on independent hotels and resorts,
the Company may achieve its growth through joint venture investments and
leases and/or acquisitions of management contracts and/or companies.
With the increase in management contracts, the number of hotel and resort
employees that the Company will supervise may increase significantly.
19
<PAGE>
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 October 31, 1998, 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 January 31, 1999, the Company has
received a total of $172,228 from this investment. Of the funds received,
$43,057 represents a return of the initial investment and $129,171
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 upon the sale of 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.
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.
20
<PAGE>
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 50% complete on the remediation phase for all
material systems and expects to complete software reprogramming and/or
replacement no later than June 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 June 30, 1999.
With respect to third parties, for systems that interface directly with
significant vendors, the Company is 60% complete with its remediation
efforts. Testing of all material systems is expected no later than March
31, 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 $10,000 in expenses related to
all phases of the Year 2000 project. Of the total remaining project costs,
approximately $40,000 is attributable to the purchase of new software and
operating equipment, which will be capitalized or financed through an
operating lease.
21
<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.
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The annual meeting of the shareholders of The Castle Group, Inc. was held on
January 22, 1999.
At the annual meeting, the shareholders voted to elect each of management s
board of director nominees as listed in the Company s proxy statement, and
to ratify the selection of Coopers & Lybrand, L.L.P. as the independent
auditors for the Company for the fiscal year ending July 31, 1999. The
number of votes cast for, against or withheld, as well as the number of
abstentions as to each matter is set forth below:
1. Election of Directors
Nominee Votes Cast For Against Abstentions
Rick Wall 3,186,641 3,186,641 0 0
Kimo M. Keawe 3,186,641 3,186,641 0 0
Charles E. McGee 3,186,641 3,186,641 0 0
John Tedcastle 3,186,641 3,186,641 0 0
Ryoji Takahashi 3,186,641 3,186,641 0 0
Hideo Nomura 3,186,641 3,186,641 0 0
Motoko Takahashi 3,186,641 3,186,641 0 0
Judhvir Parmar 3,186,641 3,186,641 0 0
Noboru Sekiguchi 3,186,641 3,186,641 0 0
Stanley Y. Mukai 3,186,641 3,186,641 0 0
Edward Calvo, Sr. 3,186,641 3,186,641 0 0
Ratification of Pricewaterhouse Coopers, L.L.P. as the Company s independent
auditor for the year ending July 31, 1999.
Votes Cast For Against Abstentions
3,186,641 3,186,641 0 0
22
<PAGE>
A special meeting of the shareholders of The Castle Group, Inc. was
held on March 4, 1999. At the special meeting, the shareholders voted to
approve the issuance of Convertible Preferred Stock
Votes Cast For Against Abstentions
2,941,178 2,934,250 1,200 5,728
Item 5. OTHER INFORMATION
There is no other information being reported for the current quarter.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
On December 15, 1998, the Company filed Form 8-K to report the resignation
by M. Kelvin Bloom as Senior Vice President, Chief Operating Officer and
Director of the Company. Mr. Bloom had no disagreements with the Company.
(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. *
23
<PAGE>
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. *
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. *
24
<PAGE>
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. *
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. *
25
<PAGE>
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. *
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. *
26
<PAGE>
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 6.30 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. *
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. *
27
<PAGE>
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. *
6.37 Promissory note dated August 13, 1998 in favor of the
Company from Fortress LLC for $250,000. *
6.38 Promissory note in favor of the Company from Hanalei Bay
International Investors for $435,000 dated July 31, 1998. *
6.39 Promissory note dated July 15, 1998 between the Company and
Kelvin M. Bloom for $118,800. *
6.40 Promissory note dated July 15, 1998 between the Company and
Michael S. Nitta for $48,800. *
6.41 Letter of extension from Hawaii National Bank extending the
due date on the $300,000 line of credit to December 10,
1998. *
6.42 Letter of extension from City Bank extending the due date
on the $250,000 line of credit to December 31, 1998. *
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)
June 18, 1999 /s/ Rick Wall
---------------------------
Chairman of the Board and
Chief Executive Officer
June 18, 1999 /s/ Michael S. Nitta
---------------------------
Chief Financial Officer
29
<PAGE>
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<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> JUL-31-1999 JUL-31-1998
<PERIOD-END> JAN-31-1999 JAN-31-1998
<CASH> 153,505 98,222
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<INVENTORY> 0 0
<CURRENT-ASSETS> 3,088,415 1,912,315
<PP&E> 220,958 210,013
<DEPRECIATION> 161,277 132,996
<TOTAL-ASSETS> 3,206,789 2,201,002
<CURRENT-LIABILITIES> 3,030,589 2,113,991
<BONDS> 0 0
0 0
0 0
<COMMON> 106,223 106,223
<OTHER-SE> ( 74,386) ( 19,212)
<TOTAL-LIABILITY-AND-EQUITY> 3,206,789 2,201,002
<SALES> 2,159,845 2,934,082
<TOTAL-REVENUES> 2,159,845 2,934,082
<CGS> 0 0
<TOTAL-COSTS> 2,302,687 2,999,738
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 64,785 28,663
<INCOME-PRETAX> ( 207,627) ( 94,319)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> ( 207,627) ( 94,319)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> ( 207,627) ( 94,319)
<EPS-BASIC> ( .04) ( .02)
<EPS-DILUTED> ( .04) ( .02)
<FN>
UNAUDITED
</FN>
</TABLE>
