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U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 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 December 15, 1999:
Common stock, $.02 par value - 5,407,031
Transitional Small Business Disclosure Format (check one):
Yes [ x ] No [ ]
Page 1 of 30 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 (Unaudited)
Consolidated Balance Sheets as of October 31, 1999
and July 31, 1999.................................................. 3
Consolidated Statements of Operations for the three months
ended October 31, 1999 and 1998 ................................... 4
Consolidated Statements of Cash Flows for the three months
ended October 31, 1999 and 1998 ................................... 5
Notes to Consolidated Financial Statements ......................... 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
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PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated Balance Sheets - (Unaudited)
ASSETS Oct 31, 1999 Jul 31, 1999
Current Assets
Cash $ 115,718 $ 93,440
Accounts Receivable, Net 1,107,302 1,285,448
Due from related parties, current 428,316 428,316
Notes receivable, current 110,300 110,300
Prepaid Expenses 254,463 164,667
Restricted Cash 19,941 19,941
Total Current Assets 2,036,040 2,102,112
Furniture Fixtures and Equipment, Net 56,415 46,475
Other Assets:
Due from related parties, Noncurrent 635,537 635,537
Notes receivable, Noncurrent 35,900 35,900
Investment in HBII Timeshare Program 56,121 56,121
Deposits 188,558 183,281
TOTAL ASSETS $ 3,008,571 $ 3,059,426
LIABILITIES & STOCKHOLDERS'
EQUITY (DEFICIENCY)
Current Liabilities
Accounts Payable $ 1,152,723 $ 916,094
Vacation Payable 91,391 107,349
Wages Payable 90,453 82,771
Taxes Payable 40,736 25,629
Due to Related Parties, current 162,300 162,299
Notes Payable, current 198,300 173,300
Deferred Income 88,904 91,008
Other Accrued Liabilities 394,089 421,249
Total Current Liabilities 2,218,896 1,979,699
Notes Payable, noncurrent 300,113 322,606
Due to Related Parties, non-current 39,990 42,975
Deferred Income 65,264 70,368
Total Liabilities 2,624,263 2,415,648
Commitments and Contingencies
Redeemable Preferred Stock, $100 par
value, 50,000 shares authorized, 8,550
shares Issued and Outstanding - 871,715
Stockholders Equity
Preferred Stock, $100 par value,
50,000 shares authorized, 8,550 shares
Issued & outstanding 855,000 -
Common stock, $.02 par value, 20,000,000
Shares authorized, 5,407,031 Issued &
outstanding 108,141 108,141
Capital in excess of par 2,685,671 2,668,956
Common Stock held by lessor ( 111,641) ( 111,641)
Accumulated Deficit (3,152,863) (2,893,393)
Total Stockholders' Equity (Deficiency) 384,308 ( 227,937)
Total Liabilities and
Stockholders' Equity (Deficiency) $ 3,008,571 $ 3,059,426
The accompanying notes are an integral part of the consolidated financial
statements.
3
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Operations
for the three months ended October 31, 1999 and 1998
(Unaudited)
Three Months Ended
Oct 31, 1999 Oct 31, 1998
Revenue
Management fees $ 839,678 $ 910,181
Hotel Operating Revenues 2,671 0
Other Income 136,358 210,415
------------ ------------
Total Revenues 978,707 1,120,596
Expenses
Payroll and benefits 498,985 525,394
Hotel Operating Expenses 168,386 1,655
Professional fees 26,953 35,384
Reservation services 230,677 257,369
Depreciation and
Amortization 6,074 8,736
Rent 87,317 100,590
Travel and entertainment 33,690 46,295
Office expense 14,556 13,858
Utilities 9,817 12,204
Taxes, other than income 39,116 45,133
Advertising and marketing 34,616 33,559
Outside sales offices 41,121 35,358
Insurance 27,422 17,391
Other 4,605 10,123
------------ ------------
Total Expenses 1,223,335 1,143,049
------------ ------------
Loss from operations ( 244,628) ( 22,453)
Other Expenses
Interest Expense 14,839 33,159
------------ ------------
Net Loss $( 259,467) $( 55,612)
============ ============
Per Share Data
Basic Earnings
Net Loss $( .05) $( .01)
============ ============
Diluted Earnings
Net Loss $( .05) $( .01)
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
4
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the three months ended October 31, 1999 and 1998
( Unaudited )
Three Months Ended
Oct 31, 1999 Oct 31, 1998
Cash Flows From Operating Activities
Net Loss $( 259,467) $( 55,612)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities-
Depreciation and amortization 6,075 8,736
Changes in assets and liabilities-
Decrease (Increase) in accounts receivable 178,143 ( 108,053)
Increase in due from related parties - ( 119,795)
Increase in prepaid expenses ( 89,796) ( 14,218)
Increase (Decrease) in deferred income ( 7,207) 69,149
Increase in accounts payable 236,629 147,613
Increase in wages payable 7,682 8,705
Increase (Decrease) in vacation payable ( 15,958) 5,600
Increase in taxes payable 15,108 2,639
Decrease in other accrued liabilities ( 27,160) ( 13,731)
------------ ------------
Net cash provided by (used) in operating activities 44,049 ( 68,967)
Cash Flows From Investing Activities
Purchase of property & equipment ( 16,015) ( 9,451)
Payment of deposits ( 6,809) 0
Receipt of deposits 1,531 23,897
Investment in HBII Timeshare Program 0 1,304
------------ ------------
Net cash provided by (used in) investing activities ( 21,293) 15,750
Cash Flows from Financing Activities
Loans received from banks 25,000 0
Payment of Notes Payable ( 22,493) 0
Repayment to related parties ( 2,985) ( 21,632)
------------ ------------
Net cash used in financing activities ( 478) ( 21,632)
------------ ------------
Net Increase (Decrease) in Cash 22,278 ( 74,849)
Cash at Beginning of Period 93,440 245,969
------------ ------------
Cash at end of Period $ 115,718 $ 171,120
============ ============
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 14,840 $ 33,159
============ ============
Supplemental schedule of noncash investing and
financing activities:
Redeemable preferred stock converted to
preferred stock $ 855,000 $ 0
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
5
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (unaudited)
The accompanying consolidated financial statements of The Castle Group,
Inc., its wholly owned subsidiaries, Castle Resorts & Hotels, Inc.,
and KRI, Inc., and KRI, Inc.'s wholly-owned subsidiary, HPR Advertising,
Inc. for the three months ended October 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, 1999, 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 ended
October 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 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. In June 1999,
the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of FASB Statement No.
133." The original effective date for SFAS No. 133 was for all fiscal
years beginning after June 15, 1999. As a result of SFAS No. 137, the
effective date for SFAS No. 133 is for all fiscal quarters of all fiscal
years beginning after June 15, 2000. As the Company does not invest in
derivative instruments or participate in hedging activities, the adoption
of this standard is not expected to have an effect on the Company's
consolidated financial statements.
6
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THE CASTLE GROUP INC. AND SUBSIDIARY
Notes to Consolidated Financial Statement (unaudited)
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
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 year ended July 31, 1999, the Company received a tenant
improvement allowance 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 for the three months ended October 31,
1999 and 1998, respectively.
7
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statement (unaudited)
Loss Shares Per Share
(Numerator) (Denominator) Amount
THREE MONTHS ENDED 10/31/99:
Net Loss $( 259,467) 5,407,031 $( .05)
Basic:
Net Loss available to common
stockholders $( 259,467) 5,407,031 $( .05)
Effect of dilutive securities-
Stock subscriptions, options
and warrants -- -- --
Diluted
Net Loss and assumed conversions $( 259,467) 5,407,031 $( .05)
THREE MONTHS ENDED 10/31/98:
Net Loss $( 55,612) 5,311,130 $( .01)
Basic:
Net Loss available to common
stockholders $( 55,612) 5,311,130 $( .01)
Effect of dilutive securities-
Stock subscriptions, options
and warrants -- -- --
Diluted
Net loss and assumed conversions $( 55,612) 5,311,130 $( .01)
Note that the warrants and options outstanding for the three month periods
ended October 31, 1999 and 1998 were not considered common stock equivalents
since they were anti-dilutive.
FURNITURE, FIXTURES AND EQUIPMENT-
Furniture, fixtures and equipment are recorded at cost. When assets are
retired, sold or otherwise disposed of, the cost and the related
accumulated depreciation of the asset is removed from the accounts, and
any resulting gain or loss is reflected in 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 October 31, 1999 and July 31, 1999, furniture, fixtures and equipment
consisted of the following:
10/31/99 07/31/99
Office Furniture and Equipment $ 236,972 $ 220,959
Less Accumulated Depreciation ( 180,558) ( 174,484)
----------- ------------
$ 56,415 $ 46,475
=========== ============
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statement (unaudited)
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 had 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 was to receive management and
incentive fees based on a percentage of gross total revenue and net income
respectively. The Company also received reservation fees based on a
percentage of gross room revenues and a marketing fee based on a percentage
of gross revenue. In March of 1999, HBII sold the Hanalei Bay Resort
and the Company retained a sales, marketing and reservations agreement with
the new owners of the HBR. Upon the closing of the sale, the Company was
paid in full for various notes payable due from HBII but the sale proceeds
were not sufficient to allow the Company to collect on $1,119,975 of other
receivables. Under the sale agreement, HBII will participate in the net
cashflow generated by the new owners timeshare sales program which will
allow the Company to collect its receivable balances from HBII in the future.
Reservation Services-
Reservation services are provided by Hawaii Reservation Center Corporation,
wholly owned by a former director who has a 2% interest in the Company.
Reservation services expense for the quarters ended October 31, 1999
and 1998 was $230,677 and $257,369 respectively. The Company had a payable
balance to Hawaii Reservation Center Corporation of $125,979 and $78,684 as
of October 31, 1999 and July 31, 1999, respectively.
Due to Related Parties-
The Company had the following related party loan balances as of October 31,
1999 and July 31, 1999:
Oct 31,1999 Jul 31,1999
6% loans from stockholders, due on
August 1, 1998 $ 143,600 $ 143,600
10% loans from Officer, due August 15, 2000 58,690 61,674
---------- ----------
$ 202,290 $ 205,274
Less Current Portion 162,300 162,299
---------- ----------
$ 39,990 $ 42,975
========== ==========
9
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statement (unaudited)
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.
In March 1999, the Company signed an agreement to lease and manage a newly
constructed hotel in Guam through December 2004. The Company began leasing
and managing this resort property in October 1999.
At October 31, 1999, the future minimum rental commitments under these leases
were as follows:
Schedule of minimum lease payments
2000 $ 1,408,000
2001 2,655,000
2002 2,799,000
2003 2,894,000
2004 2,909,000
Thereafter 1,139,000
Total $ 13,804,000
MANAGEMENT CONTRACTS-
The Company manages several hotels and resorts under management agreements
expiring at various dates through December 2004. Several of these
management agreements contain automatic extensions for periods of 1 to 10
years. Management fees received are based on the revenues and net available
cashflows of the hotels' operations as defined in the respective management
agreements.
In addition, the Company has sales, marketing and reservations agreements
with other hotels and resorts expiring at various dates through December
2000. The Company is in the final negotiating stages for some of these
agreements. Several of these agreements contain automatic extensions for
periods of one month to three years. Fees received are based on revenues,
net available cashflows or commissions as defined in the respective agreements.
LEASE OF PROPERTY IN COOK ISLANDS-
In January 1999, the Company signed an agreement as co-lessee for certain
real property located in the Cook Islands, upon which is situated an
uncompleted hotel development that is approximately 85% completed. Under
terms of the agreement with the government of Cook Islands, the lessees
collectively are to complete construction of the hotel and open
substantially all of the rooms of the hotel for business not later than
June 30, 2000. If substantially all of the rooms of the hotel are not
opened for business by June 30, 2000, the lessor of the property is
entitled to compensation in an amount to be determined by arbitration.
10
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statement (unaudited)
Funding for the completion of the hotel development was to be provided by
the Company's co-lessee. However, as of October 31, 1999, the Company's
co-lessee has been unable to fund the completion of the hotel development.
The Company is currently in the process of securing a replacement for the
co-lessee.
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 October 31, 1999 and July
31,1999 as follows:
Oct 1999 Jul 1999
Notes receivable from third party in monthly
installments of $10,000 including interest
at 10% per annum. Real estate is pledged
as collateral $ 146,200 $ 146,200
Less current portion 110,300 110,300
----------- ---------
$ 35,900 $ 35,900
=========== =========
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
October 31, 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. During 1999, these common stock warrants
were exercised on a net basis, resulting in the issuance of 12,244 shares of
the Company's common stock.
COMMON STOCK OPTIONS-
In May 1997, the Company, as part of a renegotiation of its reservation
services agreement, granted an option to purchase 50,000 shares of the
Company s common stock at a price of $2 per share to Hawaii Reservations
Center Corp., which is wholly owned by a director/ stockholder of the
Company. The option may be exercised between May 1997 and 2002 and had not
been exercised as of October 31, 1999.
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THE CASTLE GROUP, INC.
Notes to Consolidated Financial Statement (unaudited)
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. The preferred stock memorandum provided that 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. In December 1999, the Company, with the consent of the
preferred stockholders, amended the preferred stock memorandum to eliminate
the ability of the holders to redeem the shares. Accordingly, the preferred
stock is classified in stockholders' equity at October 31, 1999 as opposed
to the mezzanine at July 31, 1999. At July 31, 1999, accrued dividends on
these shares of $3,363 and is included in redeemable preferred stock in the
accompanying consolidated balance sheet. As a result of the amendment to the
preferred stock memorandum, dividends on the shares shall no longer be accrued
and will instead be recorded when declared by the board of directors. These
shares are also nonvoting and are convertible to the Company's common stock at
$3 per share. As of January 15, 2001, the preferred stock is redeemable at
the option of the Company at a redemption price of $100 per share plus
accrued and unpaid dividends.
RESTRICTED COMMON STOCK-
In July 1999, the Company issued 22,500 shares of restricted common stock
as compensation to an employee. The Company recorded payroll and benefits
expense of approximately $40,781 based on the fair market value of the
Company's stock on the date of issuance ($1.8125 per share at July 30,
1999). The holder of these shares is prohibited from selling these shares
in normal public trading.
COMMON STOCK HELD BY LESSOR-
In July 1999, the Company issued 61,157 shares of restricted common stock
to the lessor of a hotel as part of a security deposit. The lessor is
prohibited from selling these shares in public trading and will return the
shares to the Company at the termination of the lease agreement in the
year 2004. The Company recorded the common stock held by the lessor as a
contra equity item in the Consolidated Balance Sheet.
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 against the Company during
the quarter ended October 31, 1999.
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THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statement (unaudited)
NOTES PAYABLE-
At October 31, 1999 and July 31, 1999, notes payable consisted of the
following:
10/31/99 07/31/99
Term loan payable to a bank at an interest rate of
9.25% with monthly payments of $8,352. The balance
of any unpaid interest is due on May 25, 2004. The
The Company's furniture, fixtures and equipment are
pledged as collateral and the Chief Executive
Officer is a guarantor. $ 373,413 $ 395,906
Original $250,000 line of credit from a bank was
amended and reduced to $200,000 on May 25, 1999.
Drawings are due on December 31, 1999, with interest
(9.50% at October 31, 1999) at 1.75% above the
bank's base rate. The Company's accounts receivable,
furniture, fixtures and equipment are pledged as
collateral and the Company's Chief Executive Officer
is a guarantor on the line of credit. 125,000 100,000
--------- ---------
498,413 495,906
Less current portion 198,300 173,300
--------- ---------
Notes Payable, current $ 300,113 $ 322,606
========= =========
INCOME TAXES-
Significant components of the Company's deferred tax assets and
liabilities at October 31, 1999 and July 31, 1999 are:
10/31/99 07/31/99
Deferred tax assets-
Vacation Pay $ 8,000 $ 8,000
Noncompetition agreement 191,500 197,000
Deferred Income 20,000 21,000
Net Operating Loss Carryforward 1,070,000 920,000
------------- ------------
Deferred tax asset 1,289,500 1,146,000
Deferred tax liability-
Property and equipment ( 5,000) ( 5,000)
------------- ------------
Net Deferred Tax Asset 1,284,500 1,141,000
Valuation Allowance ( 1,284,500) ( 1,141,000)
------------- ------------
$ -- $ --
============= ============
The Company has a net operating loss carryforward for income tax purposes of
$2,299,057 at July 31, 1999 which expires at various dates through fiscal
year 2019.
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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. For the fiscal year ending July
31, 2000, in addition to the fees described, the Company also earned
revenues from transient and other hotel related income from its leased
hotel. Except for the leased hotel, the revenues of the properties
which are managed by the Company are not recorded as revenues of the Company.
The Company's operating expenses are comprised of labor, reservation
services fees and other costs associated with operating as a management
company. In addition to the expenses described, the Company also records the
expenses associated with operating a leased hotel. Except for the leased
hotel, the expenses of the properties which are managed by the Company are not
recorded as expenses of the Company.
As of October 31, 1999, the Company had 28 contracts covering 3,000 rooms,
with 2,669 rooms located within the State of Hawaii and the balance of the
rooms situated throughout the Pacific Basin. 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 respective
management contracts. The Company also earns commissions and other fees from
the properties managed by providing centralized purchasing services to the
hotel owners. Under these arrangements, the net savings to the property owner
from centralized purchasing are shared between the Company in the form of
commissions and to the property owner in the form of cost savings.
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Hotel operating revenues consist of revenues from a property located in Guam
which the Company leases. 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 partially opened for business on October 22, 1999, with 37
available rooms. The remaining 170 rooms are in the process of completion
and shall be turned over to the Company for hotel operations as they are
completed. It is anticipated that all of the rooms shall be completed by
February of 2000.
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 October 31, 1999, it is uncertain as to whether the co-lessee of the
property 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.
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RESULTS OF OPERATIONS-
FOR THE QUARTERS ENDED OCTOBER 31, 1999 AND 1998
SALES
For the quarters ended October 31, 1999 and 1998, the Company had total
revenues of $978,707 and $1,120,596, respectively, a decrease of $141,889
or 13%. The decrease in revenues for the quarter ended October 31, 1999 as
opposed to the prior year is attributed to the loss of two managment
contracts and the renegotiation of two other management contracts.
COSTS AND EXPENSES
Operating expenses for the quarters ended October, 1999 and 1998 were
$1,223,335 and $1,143,049, respectively, an increase of $80,286 or
7%. The increase in operating expenses is attributed to the pre-opening
costs in the amount of $168,386 associated with the Company's lease of a
property in Guam. The property contains 207 rooms, of which 37 were opened
on October 22, 1999. The Company incurred expenses associated with hiring and
training employees, sales & marketing, administrative payroll and other
pre-opening expenses. Such costs were expensed as incurred.
Management related operating expenses for the quarters ended October,
1999 and 1998 were $1,054,949 and $1,143,049, respectively, a decrease of
$88,100 or 8%. The decrease in operating expenses is attributed to a
restructuring of the operating personnel and other operating expenses.
Payroll and benefits decreased by $26,409, or 5% as a result of the Company
reducing its staffing in accordance with the restructuring of operating
personnel.
Professional fees decreased by $8,431 due to the Company incurring legal
fees in fiscal July 1999 in connection with the recovery of certain
underwriting costs. The underwriting costs were expended in connection with
the Company's unsuccessful efforts to raise capital through a secondary
stock offering. The underwriters have agreed to reimburse the Company for
the legal, accounting and other fees for the unsuccessful underwriting.
Reservation services decreased by $26,692, or 11% due to lower room
revenues for the quarter ended October 31, 1999 as compared to October 31,
1998. Reservation services are based on a percentage of the room revenues
recorded for the properties represented by the Company. The decrease in room
revenues resulted from the Company's loss of two management contracts in
fiscal July 1999.
Rent expense decreased by $13,274, or 14% for the quarter ended October
1999 as compared to the prior year as a result of the Company renegotiating
its office lease in September 1998 which resulted in a decrease in the base
monthly rental paid by the Company to its landlord.
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Travel and entertainment decreased by $12,605, or 28% for the quarter ended
October 1999 as compared to the prior year due to the absence of travel
related expenses associated with the Company's underwriting of its stock
during the fiscal year ended July 31, 1999. During the quarter ended
October 31, 1998, the Company also expended funds for travel to various
areas in the Pacific Basin in order to investigate expansion plans into
that region.
Taxes for the quarter ended October 1999 decreased by $6,017 or 14% when
compared to the prior year due to the decrease in revenues. State of
Hawaii sales taxes are assessed against gross income and due to the
decrease in revenues, the amount of taxes declined.
Outside sales offices increased by $5,673, or 17% as compared to the
quarter ended October 30, 1998 as a result of the Company opening satellite
sales offices in Europe and Asia. The Company entered into an agreement
with a representative in Japan on September 1, 1998.
Insurance expense increased by $10,031 or 58% for the quarter ended October
31, 1999 as compared to the prior year due to the Company adding coverage
for its foreign operations in Guam, Chuuk and Saipan. Additionally, the
Company experienced an increase in premiums for its directors & officers
coverage.
Other expenses decreased by $5,518, or 55% for the quarter ended October
31, 1999 as compared to the prior year due to a decrease in repairs and
maintenance costs. These costs are expended on an as needed basis and
repairs for the quarter ended October 31, 1999 were minimal.
Interest expense decreased by $18,320, or 124% for the quarter ended October
31, 1999 as compared to the prior year due to decreased borrowing by the
Company to fund its operating and expansion costs. In addition, certain
notes payable to various individuals and directors of approximately
$500,000 were retired with the proceeds received from HBII upon the sale of
the Hanalei Bay Resort in March of 1999.
NET INCOME
The Company reported net losses of $259,467 and $55,612 for the quarters
ended October 31, 1999 and 1998, respectively, an increase of $203,855.
As discussed previously, the decrease in profitability is primarily
attributed to the pre-opening expenses of the Company's leased property
located in Guam of $168,385 against revenues of $2,671, representing
$165,714 of the net losses for the quarter.
LIQUIDITY AND CAPITAL RESOURCES-
As of October 31, 1999, total current assets were $2,036,040 and consisted
primarily of $1,107,302 in accounts receivable and $428,316 in due from
related parties. Total current liabilities were $2,218,896 leaving a net
working capital deficit of $182,856.
The Company's primary sources of working capital are cash flows from
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operations and borrowings. Net cash provided by operations was $44,049
for the three months ended October 1999 as compared to net cash used
in operations of $68,967 for the prior year. Net cash used in investing
activities was $21,293 as compared to net cash provided by investing
activities of $15,750 for the three months ended October 30, 1999 and 1998,
respectively. Net cash used in financing activities was $478 for the three
months ended October 31, 1999 as compared to $21,632 for the prior year.
In March and April of 1999, the Company was successful in raising
additional equity through the issuance of its Preferred Stock. The
Preferred Stock has a $100 par value and each share is convertible into
33.33 shares of the Company's Common Stock at a price of $3.00 per share.
Dividends are payable semi-annually, commencing July 15, 1999 at the rate
of $7.50 per annum per share. As of October 31, 1999, the Company issued
8,550 shares of the Preferred Stock and received net proceeds totaling
$820,188. In December of 1999, the Company, with the consent of the
preferred stockholders, amended the preferred stock memorandum to eliminate
the ability of the holders to redeem the shares. On January 15, 2001, the
preferred stock is redeemable at the option of the Company at a redemption
price of $100 per share plus accrued and unpaid dividends.
The Company had unrestricted cash of $115,718 and $171,120 at October 31,
1999 and 1998, respectively.
The Company has a $200,000 line of credit which is guaranteed by the
Chairman and Chief Executive Officer of the Company. At October 31, 1999,
the Company had drawn $125,000 against the line of credit.
In May of 1999, the Company obtained a term loan for $400,000 from a local
bank. The term loan is personally guaranteed by the Chairman and Chief
Executive Officer of the Company. The term loan is due and payable in
May of 2004 and calls for a monthly payment of $8,352.
The Company had a net working capital deficit of $182,856 and net working
capital of $122,413 as of October 31, 1999 and July 31, 1999, respectively.
As of October 31, 1999 net working capital included due to related
parties in the amount of $162,300. Also included in net working capital
is $88,904 in unamortized deferred income related to a signing bonus paid
to the Company by one of its vendors in July 1998, free office rent and a
tenant improvement allowance which was received from the landlord of the
Company's corporate offices. The deferred income is being amortized over
the lives of the agreements.
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., a private placement of stock in 1997 and the issuance of preferred
stock in 1999.
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 October 31, 1999, the Company had a receivable
18
<PAGE>
balance of $1,063,853 related to fees, interest and reimbursements. The
sale proceeds received by the owners of HBII were not sufficient to
satisfy all of the claims of its creditors upon the closing of the sale.
The Company did not collect its receivable 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 Preferred Stock. As of October 31,
1999, the Company was successful in acquiring $855,000 in equity through
the private placements. Although no assurances can be given, management is
confident that it shall be successful in raising additional capital to fund
its operations on an as needed basis through the private placement of the
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 mangement 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 October 31, 1999, the Company had 28
management or sales, reservations and marketing contracts covering 3,000
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
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from the luxury condominium resorts with room rates of $1,000 to the
small budget inns with room rates of $40. The Company believes that the
availability of differing product lines appeals to all levels of business
or leisure traveler.
The Company has experienced significant growth since it began operations
in November of 1993. From inception to October 31, 1999, the number of
contracts has more than doubled, from 13 to 28 and the number of rooms
managed also increased from 1,684 to 3,000.
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.
As of October 31, 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 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.
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 opened partially for business in October of 1999. As
of the quarter ended October 31, 1999, the Company has expended
substantial amounts of funds in sales & marketing and other pre-opening
expenses. The property opened for business on October 22, 1999 with
37 rooms available for transient rentals while the remaining 170 rooms
were in various stages of completion. The revenues for the quarter ended
October 31, 1999 were insignificant compared to the funds expended for
the pre-opening of the project, due to the fact that only 37 rooms were
available and that there were only 9 days of available rentals during
the quarter. Pre-opening expenses of $168,385 were incurred during the
months of August - October of 1999 and have been expensed in the
Consolidated Statement of Operations. 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
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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 October 31, 1999, the Company employed approximately 700 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 October 31, 1999, the Company has received
a total of $175,516 from this investment. Of the funds received, $43,879
represents a return of the initial investment and $131,637 represents a
gain to the Company. 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
"Related Parties").
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, The
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Company completed its remediation phase for all material systems and
completed software reprogramming and/or replacement on December 15, 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 90% of its testing. The
Company has also commenced with its implementation phase. The Company
expects that all remediated systems will be fully implemented by December
24, 1999.
With respect to third parties, for systems that interface directly with
significant vendors, the Company is 95% complete with its remediation
efforts. Testing of all material systems was completed in April 1999.
Implementation was completed on December 15, 1999. The Company has queried
its important suppliers and vendors that do not involve system interface.
To date, the Company is not aware of any problems that would materially impact
the results of operations, liquidity, or capital resources. The Company has
no means of ensuring that these 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 $80,000 and has been funded through operating cash flows. To
date, the Company has incurred approximately $70,000 in expenses related to
all phases of the Year 2000 project. Of the total remaining project
costs, approximately $5,000 is attributable to the purchase of new software
and operating equipment, which will be capitalized or financed through
operating cash flows.
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.
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PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
There were no matters voted on by the Security Holders of the Company
during the quarter ended October 31, 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. *
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<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. *
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<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 *
6.44 Amendment To Private Offering Memorandum for the issuance of
the Company's Series "A" Preferred Stock 30
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)
December 15, 1999 /s/ Rick Wall
-------------------------
Chairman of the Board and
Chief Executive Officer
December 15, 1999 /s/ Michael S. Nitta
-------------------------
Chief Financial Officer
29
<PAGE>
AMENDMENT TO PRIVATE OFFERING MEMORANDUM
Whereas, on or abount _______, 1999 _______________ purchased _____ shares of
$7.50 Cumulative Convertible Exchangeable Series "A" Preferred Stock (the
"Shares") of THE CASTLE GROUP, INC.,
Whereas, _________ purchased such stock in accordance with the terms and
conditions contained in the CONFIDENTIAL PRIATE OFFERING MEMORANDUM OF THE
CASTLE GROUP, INC. (the "Memorandum") dated January 27, 1999,
Whereas, _________ and THE CASTLE GROUP, INC. desire to amend the Memorandum
dated January 27, 1999 by removing the Option of the Holders to Redeem their
Shares,
Now, therefore, _________ and THE CASTLE GROUP, INC. agree to this AMENDMENT
TO PRIVATE OFFERING MEMORANDUM, to be effective as of the date of purchase of
the Shares:
1. The third and fourth paragraphs on page 51 of the Memorandum which reads:
"REDEMPTION AT OPTION OF HOLDER. Each holder of the shares of Preferred
Stock shall have the right, at such holder's option, to require the Company to
purchase immediately prior to an Operative Event (as defined)(the "Repurchase
Date"), all of such holder's shares at a redempiton price of $100.00 per
share, plus accrued and unpaid dividends to the Repurchase Date if (i) any
entity offers to acquire all or substantially all of the consideration to be
paid for the Common Stock of the Company pursuant to a merger, consolidation,
tender offer or other acquisition transaction (an "Acquisition") and (ii) all
or substantially all of the consideration to be paid for the Common Stock of
the Company in such Acquisition is not common equity securities regularly
traded on a national securities exchange or reported on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ")(an
"Operative Event").
On or befoer the 30th day before the consummation of an Operative Event,
the Company shall cause to be mailed to the holders of the Preferred Stock
notice of the event causing such notice to be given and of the purchase right
arising as a result thereof. The company shall also cause a copy of such
notice to be published in a newspaper of national circulation."
is hereby deleted in its entirety from the Memorandum.
2. All other terms and conditions as contained in the Memorandum shall
remain in full force and effect.
In witness thereof, the parties have set their hands to be effective as of the
date mentioned above.
THE CASTLE GROUP, INC. _______________________
By ____________________ By ____________________
Its Its
30
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> JUL-31-2000 JUL-31-1999
<PERIOD-END> OCT-31-1999 OCT-31-1998
<CASH> 115,718 171,120
<SECURITIES> 0 0
<RECEIVABLES> 1,122,141 1,136,310
<ALLOWANCES> 14,839 14,839
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,036,040 2,844,017
<PP&E> 236,972 219,466
<DEPRECIATION> 180,558 155,027
<TOTAL-ASSETS> 3,008,571 3,122,208
<CURRENT-LIABILITIES> 2,218,896 2,815,872
<BONDS> 0 0
0 0
855,000 0
<COMMON> 108,141 106,223
<OTHER-SE> (578,833) 77,631
<TOTAL-LIABILITY-AND-EQUITY> 3,008,571 3,122,208
<SALES> 978,707 1,120,596
<TOTAL-REVENUES> 978,707 1,120,596
<CGS> 0 0
<TOTAL-COSTS> 1,223,335 1,143,049
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 14,839 33,159
<INCOME-PRETAX> ( 259,467) ( 55,612)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> ( 259,467) ( 55,612)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> ( 259,467) ( 55,612)
<EPS-BASIC> ( .05) ( .01)
<EPS-DILUTED> ( .05) ( .01)
<FN>
UNAUDITED
</FN>
</TABLE>
