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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended July 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number: 0-23338
THE CASTLE GROUP, INC.
(Name of small business issuer in its charter)
Utah 99-037845
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
745 Fort Street, Tenth Floor, Honolulu, Hawaii 96813
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (808) 524-0900
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.02 par value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes [x] No [ ]
Page 1 of 68 sequentially numbered pages.
The Exhibit Index appears on page
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Check if there is no disclosure of delinquent filers in response to
Item 405 of regulation S-B contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
[ ]
Issuer's revenues for its most recent fiscal year: $4,189,369
Aggregate market value of issuer's common stock held by non-affiliates
as of July 31, 2000:
$1,434,532
Number of shares outstanding of the issuer s common stock as of
October 30, 2000:
5,928,055
DOCUMENTS INCORPORATED BY REFERENCE: None
Transitional Small Business Disclosure Format (Check One):
Yes [x] No [ ]
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TABLE OF CONTENTS
Page
PART I
Item 1. Description of Business 4
Item 2. Description of Property 12
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of
Security Holders 13
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters 13
Item 6. Management's Discussion and Analysis or
Plan of Operation 14
Item 7. Financial Statements 30
Item 8. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure 50
PART III
Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance with Section
16(a) of the Exchange Act 50
Item 10. Executive Compensation 53
Item 11. Security Ownership of Certain Beneficial
Owners and Management 55
Item 12. Certain Relationships and Related Transactions 59
PART IV
Item 13. Exhibits and Reports on Form 8-K 61
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The Castle Group, Inc. is a Utah corporation engaged in the business
of hotel and resort management, reservations, and sales and marketing.
The Castle Group, Inc. and Subsidiary (the "Company") operates its
business under the trade names "Hawaiian Pacific Resorts" and "Castle
Resorts and Hotels". At July 31, 2000, the Company had twenty-seven
hotel and resort management contracts covering 2,900 rooms. The
Company plans to continue its expansion in the hotel and resort
management business and has been actively seeking to increase the
number of hotel and resort properties under management in Hawaii and
the Pacific Basin.
The properties under management include small budget inns as well as
larger condominium resort hotels on all of the major islands within
the State of Hawaii, in addition to a luxury condominium resort
located in Saipan, a hotel in Chuuk, a five star hotel in Guam and a
luxury condominium project under construction in New Zealand which is
scheduled to open in mid-2001. The Company does not own any of the
properties under management and has no present or future plans
involving the purchase of equity positions in any such properties
other than described under the caption "Plan of Operations" under Item
1, Part I which follows.
The Company's executive offices are located at 745 Fort Street, Suite
1000, Honolulu, Hawaii, 96813. The Company's telephone number is
(808) 524-0900.
DEVELOPMENT OF BUSINESS
The Company was organized under the laws of the State of Utah on
August 21, 1981, under the name "Vector Communications, Inc." The
Company was formed primarily for the purpose of conducting business
activities in the communications industry and to invest in real
estate, minerals and oil and gas development. On November 22, 1983,
the Company changed its name to "Quest National, Inc."
During the fiscal year ended July 31, 1984, the Company acquired a
fifty percent interest in Guam Productions, Inc., a corporation
organized under the laws of the Territory of Guam ("Guam
Productions"), in exchange for 11,000,000 shares of the Company's
"unregistered" and "restricted" common stock and $100,000, and persons
affiliated with Guam Productions were elected to serve as directors
and executive officers of the Company. Guam Productions sole asset was
an exclusive franchise to operate a lottery in the Territory of Guam
through December 31, 1988. The Company's investment in Guam
Productions was written off in fiscal year ended July 31, 1985, after
initial attempts to operate the Guam lottery profitably were
unsuccessful. The Company did not renew its annual option to extend
the franchise. Its interest in Guam Productions was abandoned, and
the Company ceased business operations in 1986.
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The Company was inactive until fiscal 1993. On June 4, 1993, the
Company filed Articles of Amendment to its Articles of Incorporation
with the Department of Commerce in the State of Utah, changing the
name of the Company to "The Castle Group, Inc.," reducing the
authorized shares of common stock from 50,000,000 shares of $.001 par
value per share to 20,000,000 shares of $.02 par value per share
common stock and effecting a reverse split of the outstanding shares
on a basis of one for twenty. As a result of the reverse split, the
21,330,500 outstanding shares of common stock were reduced to
1,066,530 shares (including an additional 5 shares resulting from
"rounding" following the reverse split. The reverse split did not
affect the proportional interest of any stockholder in the Company.
On November 8, 1993, the Company and all of the stockholders of Castle
Group, Ltd., a Hawaii corporation, ("Castle Group Hawaii") entered
into an Agreement and Plan of Reorganization (the "Castle Plan").
Pursuant to the Castle Plan the Company acquired all of the assets of
Castle Group Hawaii, consisting primarily of four hotel and resort
management contracts, in exchange for 2,100,000 post-split,
unregistered and "restricted" shares of the Company's common stock.
The Company did not acquire any significant assets other than the
management contracts and did not assume any material liabilities.
Following the closing of the transaction, John G. Tedcastle and Hideo
Nomura were appointed as directors of the Company.
Castle Group Hawaii was originally organized in February 1989,
primarily for the purpose of managing 86 condominium units in the
Hanalei Bay Resort, which had been recently acquired by Hanalei Bay
International Investors ("HBII"). HBII is a Hawaii limited
partnership formed for the purpose of acquiring the Hanalei Bay
Resort, a 134-unit resort condominium located in Princeville, Kauai,
Hawaii. The partners of HBII include HBII Management Inc. owned by
Rick Wall, Voyage Fourteen, Ltd. owned by John G. Tedcastle, L.C.C.
Management Inc., owned by Judvhir Parmar, Nomura Firm and Nomura
Holdings, owned by Hideo Nomura and Kenji Nomura, and Siam Commercial
Bank.
Between the time of its formation and the closing of the Castle Plan,
Castle Group Hawaii secured three more management contracts with the
Association of Apartment Owners of Hanalei Bay Resort, Kaluakoi Villas
and West Molokai Resort Condominium Owners Association. Each of these
contracts was assigned to the Company in connection with the Castle
Plan.
The operations of Castle Group Hawaii were relatively small at the
time of the closing of the Castle Plan. Total revenues for the years
ended July 31, 1992 and 1993 were $231,156 and $317,532, respectively.
Expenses for these periods consisted mostly of management salaries and
rent for its principal executive offices in Honolulu, Hawaii. Castle
Group Hawaii had approximately ten employees, all of whom were hired
by the Company.
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On November 8, 1993, in connection with the closing of the Castle
Plan, the Company sold 1,000,000 post-split shares of its common stock
at a price of $2.00 per share in a private placement. 250,000 shares
were sold to Akira Fujii, a resident of Japan, and 750,000 shares were
sold to N.K.C. Hawaii, Inc. ("NKC Hawaii"), a Hawaii corporation owned
and controlled by Ryoji Takahashi, a resident of Japan, and his
family, which includes Ms. Motoko Takahashi. Following the sale of
these shares, Mr. Fujii and Mr. Takahashi were appointed as directors
of the Company. On March 15, 1995, Motoko Takahashi was also
appointed as a director and corporate secretary of the Company.
Prior to their purchase of shares in the Company, Mr. Fujii and NKC
Hawaii had no affiliation with the Company, Castle Group Hawaii or
HBII, other than an option Nichiman International; a Hong Kong based
company owned by Mr. Ryoji Takahashi, acquired in 1992, which entitled
it to purchase a 3% interest in HBII.
On November 10, 1993, the Company purchased all of the stock of KRI,
Inc. ("KRI"), a Hawaii corporation doing business as "Hawaiian Pacific
Resorts," in exchange for 650,000 post-split "unregistered" and
"restricted" shares of the Company's common stock and $400,000 in
cash, subject to a holdback of $240,000 to cover any operating losses
incurred by KRI during the 18 months following November 10, 1993. An
additional $800,000 was paid to the selling stockholders of KRI in
exchange for certain non-competition covenants. Upon closing of the
purchase of KRI, KRI became a wholly owned subsidiary of the Company.
Prior to its acquisition by the Company, KRI managed several hotels
and resorts located in the State of Hawaii, including Waikiki Hana
Hotel, Queen Kapiolani Hotel, Kuhio Village Resort, Maui Beach Hotel,
Maui Palms Hotel, Hilo Hawaiian Hotel, Kauai Resort Hotel, Kona Reef
Hotel and Wailea Oceanfront Hotel.
The business operations of KRI at the time of its acquisition were far
more significant than those of Castle Group Hawaii. KRI managed and
controlled the operations of between five and nine hotels in 1992 and
1993, with total revenues of $1,120,041 and $1,284,804 for the years
ended July 31, 1992 and 1993, respectively. Its expenses consisted
primarily of management, accounting and reservation personnel payroll
and other sales related expenses. At the time of its acquisition by
the Company, KRI did not have any significant assets other than its
management contracts and accounts receivable, had no material
liabilities other than its trade accounts payable, and had
approximately 250 employees.
The business operations of KRI at the time of its acquisition also
included a 62% interest in HPR Advertising, Inc. ("HPR Advertising") a
corporation organized under the laws of the State of Hawaii. HPR
Advertising was set up in 1989, with its primary operation being the
advertising of the hotels & resorts managed by KRI. Certain employees
of KRI owned the 38% minority interest in HPR Advertising. On July
31, 1995, KRI purchased all of the minority interests in HPR
Advertising for $380 and HPR Advertising became a wholly owned
subsidiary of KRI.
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Several of KRI's management contracts cover hotels and resorts owned
by the former stockholders of KRI, including Waikiki Hana Hotel, Maui
Beach Hotel and Hilo Hawaiian Hotel. The Company did not modify these
contracts after the acquisition of KRI. Management believes that the
terms of these management contracts are no less favorable to KRI than
contracts that could have been negotiated with non-affiliated third
parties.
On February 1, 1994, the Company filed with the Securities and
Exchange Commission a Registration Statement on Form 10-SB to register
its common stock, $.02 par value, under the Securities and Exchange
Act of 1934. The Registration Statement became effective on May 2,
1994.
In April 0f 2000, the Company purchased all of the outstanding stock
of Hawaii Reservations Center Corp. ("HRCC") from a previous director
of the Company for cash and preferred stock. HRCC processes all of
the reservations for the Company's properties.
BUSINESS
With the completion of the acquisitions of Castle Group Hawaii and KRI
in November of 1993, the Company succeeded to the business operations
of these entities and was firmly engaged in the management of hotels
and resorts in the Hawaiian Islands. The Company has since then added
a net of fourteen management contracts to its portfolio of hotel and
resort management contracts, and plans to continue with its expansion
by actively seeking and acquiring additional contracts with hotels and
resorts in the Hawaiian Islands and the Pacific Basin.
Management believes the consolidation of the business operations of
Castle Group Hawaii and KRI into one entity that specializes in hotel
and resort management better serves the public by offering a wider
range of rooms and services at competitive prices. From the hotel and
resort owners' point of view, management believes the size of the
consolidated entity provides increased visibility, cost savings by
consolidation and allows a hotel or resort a better opportunity to
sell its accommodations during periods of time when the market for
such accommodations is depressed. Management believes that the
concentration of this wider range of accommodations gives the Company
greater access to numerous wholesalers who book accommodations in
large blocks and who are more likely to deal with companies having a
greater range of locations and prices than individual hotel or resort
properties or companies with a limited product line. The large
concentration of accommodations also allows for more cost effective
sales, marketing and advertising due to the economies of scale, with
an economical apportionment of the expenses over a wider range of
accommodations. Management also believes that in markets where there
is a tendency to overbook accommodations, the Company has a greater
inventory of available rooms as backup accommodations.
With the completion of the purchase of HRCC by the Company, management
believes that it will be able to improve the central reservations
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function by taking advantage of new and emerging technology. By
upgrading and modernizing the reservations system, the Company will be
able to provide more efficiency for its managed properties and enhance
the services that the Company provides for its clients.
Pursuant to the majority of the management contracts with the hotels
and resorts, the Company provides total management of the hotel and
resort facilities, including supervision of staff and employees,
reservation services, food and beverage services, housekeeping,
accounting and the preparation of annual budgets and pro forma
operating statements, and physical maintenance. In some instances, the
Company's management contract provides for services that only include
sales, marketing and reservations.
Under the majority of the management contracts, the Company is not
responsible for any of the direct operating expenses of the client
hotels or resorts. All of the operating expenses of the hotel or
resort are paid directly by the hotel or resort. Examples of expenses
paid directly include payroll, repairs, food and room cleaning. The
Company may hire the personnel to perform these services, but the
hotel or resort is ultimately responsible for the payment of these
services. The Company is responsible for its own costs only, and
those costs usually include administrative, sales, marketing and
reservation expenses.
The client hotels and resorts compensate the Company by paying a
percentage of gross sales revenues accrued to the hotel or resort.
Many contracts also provide for additional compensation in the form of
incentive, marketing, reservation and accounting fees.
Under a few of the management contracts, the Company returns a fixed
percentage of gross revenues to the hotel or resort owners. The
balance of revenues remaining after such payment to the owners are
used to pay operating expenses associated with the property. The
Company's management fees under these types of agreement are the funds
remaining after the payment to the owners and the payment of operating
expenses.
At July 31, 2000, the Company had twenty-seven hotel and resort
management contracts. The Company plans to continue its expansion and
has been actively seeking to increase the number of hotel, resort and
condominium properties under management in the Hawaiian Islands and
the emerging markets of other Pacific Basin countries.
Management believes that the emerging tourism markets of other Pacific
Basin countries such as Saipan, Guam, Micronesia and New Zealand will
provide additional opportunities for expansion and has focused efforts
in these regions. On August 1, 1997, the Company entered the foreign
markets with the signing of a full management agreement with the
Aquarius Beach Tower, located in Saipan. The Aquarius Beach is a 67-
unit luxury condominium resort that opened on November 1, 1997. On
January 1, 1999, the Company signed a full management agreement with
the 56-unit Blue Lagoon Hotel located in Chuuk. In March of 1999 the
Company entered into a lease agreement for the Royal Orchid Hotel
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located in Guam. The Royal Orchid is a brand new 200 room five star
hotel that opened in October of 1999. In May of 1999, the Company
signed an agreement to manage a brand new 249-unit luxury condominium
project in Takapuna New Zealand, the Spencer on Byron. The Spencer on
Byron is currently under construction and is scheduled to open in mid-
2001.
CONFLICTS OF INTEREST
The potential exists for a conflict of interest when the Company
enters into a management contract with a hotel or resort in which
stockholders of the Company own or otherwise have an interest.
Management will, whenever possible, require that material terms and
provisions of the management contracts negotiated with affiliated
entities to be no less favorable than those that could have been
negotiated at arms length. It is management's belief that all of its
management contracts are on terms that are no less favorable than
those negotiated with owners not affiliated with the Company.
PRINCIPAL PRODUCTS AND SERVICES
The principal services provided by the Company are the management,
reservations, sales and marketing of hotels and resort condominiums.
Principal clients include owners of these hotels and resorts that
include individuals, general and limited partnerships, corporations
and associations.
In addition to management of transient rental operations of a
property, the Company also manages the Association of Apartment Owners
("AOAO") for its client properties. The Company operates and
supervises all aspects of the property's day-to-day operations,
subject to direction from the AOAO's board of directors. These
functions may include but are not limited to employee training,
property maintenance, accounting, finance, benefits administration and
purchasing. The Company earns a fixed monthly fee for providing these
services.
Under the majority of the Company's management contracts, the Company
provides total management of the facilities, including supervision of
staff and employees, reservation services, food and beverage services,
housekeeping, accounting, preparation of annual budgets and pro forma
operating statements and physical repairs & maintenance. Under
certain contracts, the Company only provides sales, marketing,
reservations and advertising services.
Products and services incidental to the management of hotels and
resorts are readily available from a number of suppliers, and include
bedding and toiletries, glassware, cleaning supplies and related
equipment and ground maintenance supplies and related equipment.
These products and supplies are usually provided by the hotel or
resort. In some instances the Company, as managing agent, may
contract for these products and services on behalf of the hotel or
resort owner.
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The Company also receives revenues in the form of commissions through
its centralized purchasing network. Fees are generated from the
sharing of savings enjoyed by its managed hotels and resorts by
centralizing the purchasing for the hotels and resorts managed by the
Company, thereby reducing the costs to the managed properties.
COMPETITION AND COMPETITIVE POSITION IN THE INDUSTRY
The management and marketing of hotels and resorts domiciled within
the State of Hawaii is very competitive, as the tourism industry is
one of the largest industries contributing to the State of Hawaii's
economy. The Company competes with national, regional and local
management companies, some of which may have a larger network of
locations, greater financial resources and better brand name
recognition than the Company. The primary competitors of the Company
and the number of years each has been in business are as follows:
Aston Hotels and Resorts (33 years), Classic Resorts (16 years), and
Outrigger Hotels & Resorts (53 years). Each of the competitors
offer the same type of services provided by the Company and has bid
against the Company in the past. The competition for management
contracts has led to reductions in profit margins and to more
management contracts under which a guaranteed return to the hotel or
condominium owner may be required in order to successfully acquire the
management contract to these properties.
The management and marketing of properties in the emerging market of
the Pacific Basin is also very competitive, as Aston Hotels
International and Outrigger Hotels & Resorts have recently focused
efforts in these areas.
The executive officers and key employees of the Company possess
substantial experience in the hotel, resort and condominium management
industry, much of which was with the principle competitors listed
above. The senior management and the Company's infrastructure relative
to sales and marketing, central accounting and administrative support
are believed by management to be as comprehensive and complete in the
Hawaiian segment of this industry as any of its competitors.
Although the Company commenced its operations in November 1993,
management has been successful in more than doubling the number of
contracts, many of which were previously managed by competitors of the
Company. In its six- year operating history, the Company has lost
only two properties to its competitors.
SOURCES AND PRINCIPAL SUPPLIERS
The sources of the Company's revenues are generated as a percentage of
the gross revenues of the hotels and resorts managed by the Company
and therefore, the sources of revenue for the hotels and resorts have
a substantial impact on the revenues of the Company. The sources of
the principal business generated by the Company for its clients are
the wholesalers, tour operators and general public with whom the
Company has established long-term relationships, including travel
agents throughout the world.
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The Company has hundreds of tour operators and wholesalers under
contract. These contracts give the tour operators and wholesalers the
right to sell the hotel and resort rooms that the Company manages at
rates, which are discounted due to the large volume of business.
These contracts are typical of the industry and provide the Company
with a ready market for the hotel and resort rooms it manages. These
contracts are not exclusive and the Company does market its rooms
under contract through its own reservation and marketing network.
DEPENDENCE ON ONE OR A FEW CUSTOMERS
The loss of one or more of the larger hotels or resorts managed by the
Company may have an adverse impact on the Company's gross revenues and
earnings. Management intends to increase the number of properties
under management and thereby minimize the potential adverse effects,
which may result from the loss of one of the larger hotels or resorts
currently under management. Management believes that it has made
significant progress in minimizing the adverse financial effects of
losing properties in its management portfolio.
PATENTS, TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS, ROYALTY
AGREEMENTS OR LABOR CONTRACTS
With the exception of the management contracts and the trade names
"Hawaiian Pacific Resorts" and "Castle Resorts & Hotels," the Company
does not have any material patents, trademarks, licenses, franchises,
concessions, or royalty agreements, the loss, or expiration, of which
would have a material adverse impact on the Company.
At July 31, 2000, employees at one of the smaller properties managed
by the Company was subject to a labor contract. Management considers
its relationship with these labor unions to be excellent.
GOVERNMENTAL APPROVALS AND REGULATIONS
To the best of management's knowledge, the products and services
provided by the Company are not subject to governmental approval. The
extent of future promulgation of new regulations detrimental to the
visitor industry could have a substantial impact on the Company's
profitability. The hotel industry may be adversely affected by
regulations, which cover wages, benefits, pricing, taxes and
availability of financing. In addition, the Company has expanded
outside of the United States and is subject to International laws and
the laws and regulations of foreign countries. To the best of
management's knowledge, there are no existing or probable governmental
regulations covering the present or intended business operations of
the Company that have or are anticipated to have a material adverse
impact on the Company's business, financial condition or otherwise.
ENVIRONMENTAL REGULATIONS
Management believes there are no material environmental laws, rules
and regulations that have or are likely to have a material adverse
impact on the Company, and such regulations as they apply to the
present and contemplated business operations of the Company.
Management also believes that those regulations related to hazardous
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material and waste disposal, can be readily complied with by services
provided by local governmental agencies or numerous private contract
suppliers. The Company is not aware of any environmental claims
pending or threatened against it or against the owners of the
properties managed by the Company, however, no assurances can be given
that such a claim will not be asserted against the Company in the
future.
EMPLOYEES
In some of the properties managed by the Company, all of the property
employees are employees of the Company instead of the property owner.
At July 31, 2000, the Company had approximately 600 employees.
Approximately 500 employees were full time and 100 were part-time. The
total number of employees employed at all properties represented by
the Company was approximately 900 at July 31, 2000, of which
approximately 750 were full time and 150 were part-time. The number
of categories in which these employees serve may vary greatly from
month to month, depending on the season. The Company considers its
relations with its employees and employees of its clients whom it
supervises to be excellent.
SEASONAL BUSINESS
Tourism in general is seasonal, though to a lesser extent in the State
of Hawaii where tourism represents one of the principal industries.
Seasonal fluctuations will occur, however, affecting occupancy rates,
the number of employees required for management related services and
quarterly revenues, expenses and earnings.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases 11,357 square feet of office space for its
principle executive offices at Suite 1000, 745 Fort Street, Honolulu,
Hawaii 96813. The initial lease for these premises was for a five
year period commencing June 1, 1994, and ending May 31, 1999, at a
monthly rental of $11,130 plus the costs of common area management.
Effective September 1, 1998, the Company renegotiated the lease for
the premises. The renegotiated lease covers the period through May
31, 2004 at a monthly rental cost that averages $9,516 per month, plus
the costs of common area management. The Company has an option to
renew the lease for an additional five years at a rental amount that
will be mutually agreed upon.
The Company's wholly-owned subsidiary, KRI, Inc. leased approximately
3,035 square feet of office space at a rental of $6,374 per month plus
the costs of common area management. The initial lease commenced on
April 1, 1988, and was extended on April 1, 1993, to March 31, 1998.
Effective April 1, 1998, the lease was renegotiated and assigned to
the Company by KRI, Inc. The renegotiated lease covers the period
from April 1, 1998 through March 31, 2003, with the Company having the
option to extend the lease for an additional five years. The average
monthly rental under the lease is $5,450 plus the costs of common area
management. The rent for the optional five-year period shall be
mutually agreed upon. The leased premises are used for the operation
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of the central reservations department, which is operated under the
name "Hawaii Reservations Center Corp."
In March of 1999, the Company entered into a lease for the building,
furnishings and improvements of the Royal Orchid Hotel located in
Guam. The lease commences upon the opening of the property following
the completion of its construction and terminates on December 31,
2004. The Company has the option to extend the lease through December
31, 2014. The terms of the lease call for a fixed monthly rental that
increases during the initial five-year term. The rent for the two
option periods provide for a monthly rent in an amount which is the
higher of a fixed minimum amount or a percentage of gross sales. The
property opened for business in October of 1999. The Company is in
the final stages of renegotiations with the owner of the Royal Orchid
Hotel, which will limit the Company's financial exposure for any
operating losses incurred by the property.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various other claims and lawsuits which are
normal and reasonably foreseeable in light of the nature of the
Company's business and the growth in the Company's business. In the
opinion of management, although no assurances can be given, the
resolution of these claims will not have a material adverse effect on
the Company's financial position, results of operations and liquidity.
Further, to the knowledge of management, no director, officer,
affiliate or record of beneficial owner of more than 5% of the common
voting stock of the Company is a party adverse to the Company or has a
material adverse interest to the Company in any material proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the security holders of record
during the fourth quarter ended July 31, 2000.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock is listed on the "Electronic Bulletin
Board" of the National Association of Securities Dealers, Inc., under
the symbol "CAGU." There has been only limited trading activity in
the common stock of the Company. The following table sets forth the
high asked and low bid prices for the Company's stock for each of the
full quarters during the year ended July 31, 2000. The following
market quotations reflect inter-dealer prices, without retail markup,
markdown or commission and may not necessarily represent actual
transactions.
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Quarter Ended Low Bid High Asked
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October 31, 1999 $ 1.750 $ 2.250
January 31, 2000 1.750 2.500
April 30, 2000 1.250 1.812
July 31, 2000 0.718 1.468
HOLDERS
The number of record holders of the Company's common stock as of July
31, 2000 was approximately 300.
DIVIDENDS
The Company has not paid any dividends with respect to its common
stock, and does not intend to pay dividends in the foreseeable future.
It is the present intention of management to utilize all available
funds for the development and expansion of the Company's business.
There are no present material restrictions that limit the ability of
the Company to pay dividends on common stock or that are likely to do
so in the future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION OR PLAN OF OPERATION
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Plan of
Operations" including statements regarding the anticipated development
and expansion of the Company's business, the intent, belief or current
expectations of the performance of the Company and the products and/or
services it expects to offer and other statements contained herein
regarding matters that are not historical facts, are "forward-looking"
statements. Because such statements include risks and uncertainties,
actual results may differ materially from those expressed or implied
by such forward-looking statements. Factors that could cause actual
results to differ materially from those expressed or implied by such
forward-looking statements include, but are not limited to, the
factors set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Plan of
Operations."
GENERAL
The Company is a Utah corporation that earns its revenues primarily by
providing management, reservations, and sales and marketing services
to hotels and resorts. The Company primarily operates within the
State of Hawaii under the trade names "Hawaiian Pacific Resorts" and
"Castle Resorts and Hotels."
The Company's revenues are derived from management fees, sales &
marketing fees, reservation fees, accounting fees, commissions,
incentive fees and other fees from the properties it represents
pursuant to the terms and conditions of its management contracts. The
revenues of the properties that are managed by the Company are
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generally not recorded as revenues of the Company. The revenues of the
Royal Orchid Hotel, however, are recorded as revenues belonging to the
Company. As of July 31, 2000 the Company had a lease agreement for
the Royal Orchid Guam Hotel and therefore, the Company is credited for
all of the revenues received by the Royal Orchid Guam, and is also
responsible for all of the operating expenses of the Royal Orchid.
The Company is in the final stages of renegotiations with the owner of
the Royal Orchid Hotel, which will limit the Company's financial
exposure for any operating losses incurred by the property.
The Company's operating expenses are comprised of labor, reservations
fees and other costs associated with operating as a management
company. The expenses of the properties that are managed by the
Company are not recorded as expenses of the Company, except for the
operating expenses of the Royal Orchid Guam, which is operated under a
lease agreement
As of July 31, 2000, the Company had 27 management or sales, marketing
and reservations contracts covering 2,900 rooms, all except 580 rooms
located in four properties, which are situated in Micronesia, being
situated within the State of Hawaii. Under the management contracts,
the Company is typically responsible for the supervision and day-to-
day operations of the property in exchange for a base management fee
based on gross revenues. In some cases, the Company also participates
in the profitability of the properties it manages and may earn an
incentive fee based on the net operating profits of the property
managed. Sales, marketing and reservation fees earned from the
properties are based on the gross revenues of the property. The
Company is also reimbursed for direct advertising and marketing
expenditures it makes on behalf of the property, all in accordance
with the terms and conditions of the management contracts. The
Company also earns commissions and other fees from the properties
managed by providing centralized purchasing services to the hotel
owners. Under these arrangements, the net savings to the property
owner from centralized purchasing are shared between the Company in
the form of commissions and to the property owner in the form of cost
savings.
OVERVIEW
The tourism industry has been, historically, seasonal in nature. The
Company generally reflects higher revenues from the fees generated by
its properties in the first and third quarters of its operating year,
which may cause expected fluctuations in the Company's quarterly
revenues and net earnings. The majority of the Company's properties
under contract are located in Hawaii. The tourism economy of the
State of Hawaii has been in a downward trend over the past few years.
The economic crisis in Asia, upon whom Hawaii depends upon for its
tourist market has resulted in a decrease in the eastbound traveler.
Although no assurances can be given, management believes that the
economy of the mainland United States will continue to improve, and
that the economic crisis in Asia will also show signs of improvement
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in the near future. Management also believes that the convention
center recently completed in Waikiki shall allow the State to capture
a portion of the lucrative convention travel market, further
increasing the demand for guest rooms.
Revenues grew at a compound annual rate of 24.6% from 1994 through
2000, from $1,118,386 to $4,189,369. The growth in revenues attained
by the Company over the past six years has been substantial, however
management gives no assurances that these increases shall continue in
future periods.
The increase in revenues together with smaller increases in operating
expenses resulted in the Company being able to reduce net losses from
1994 through 1996, and record a profit in 1997 and 1998. The loss for
1999 and 2000 is attributable to the expenses attributable to the
Company's expansion efforts in the Pacific Basin and the overall
decline in the tourism industry for the Hawaiian operations. Net
losses increased from $922,644 for the nine months ended July 31, 1994
to a net loss of $1,374,223 for the fiscal year ended July 31, 2000,
with the Company reporting profits in 1997 and 1998. Management is
confident that future improvements in operating income through the
growth in revenues coupled with effective cost controls will be
obtained, but there can be no assurance that these improvements to
operating income will be realized in future periods.
RESULTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 2000 AND 1999
SALES
For the years ended July 31, 2000 and 1999, the Company had total
revenues of $4,189,369 and $4,337,283, respectively, representing a
decrease of $147,914 or 3%. The decrease in revenue is attributed to
the loss of three management contracts during the year, which caused
management fees to decrease by $789,671, or 22%. This was offset by
an increase in hotel related revenues of $839,666, as the Company
opened its lease property located in Guam. At July 31, 2000, the
Royal Orchid in Guam was operated under a lease agreement and
therefore, the revenues received by the hotel are recorded as revenues
of the Company.
COSTS AND EXPENSES
Operating expenses were $5,484,041 for the year ended July 31, 2000 as
compared to $4,696,037 for the prior year, an increase of $788,004 or
17%. The increase in operating expenses is attributed to the expenses
of the Company's leased property, The Royal Orchid, located in Guam.
As of July 31, 2000, the property was operated under a lease agreement
and therefore, the operating expenses of the Royal Orchid are recorded
as operating expenses of the Company. Operating expenses attributed
to the Royal Orchid were $1,625,405. Operating expenses for the
Company's core business, management operations, decreased by $837,401,
or 18%, from $4,696,037 to $3,858,636.
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The following table summarizes the increases and decreases in
operating expenses for the fiscal year 2000 as compared to the prior
year by management related operations and hotel related operations:
(In Thousands)
Management Hotel
Operation Operation
Expense Increase(Decrease) Increase
Payroll & Benefits $( 422 ) $ 637
Rent ( 17 ) 138
Reservations Expense ( 140 ) 0
Repairs & Maintenance ( 3 ) 47
Taxes ( 44 ) 12
Advertising ( 68 ) 150
Travel & Entertainment ( 144 ) 13
Professional Fees ( 30 ) 26
Insurance 37 129
Utilities ( 6 ) 309
Office & Supplies ( 3 ) 124
Depreciation & Amortization 23 5
Other Expenses ( 20 ) 35
---------- --------
$( 837 ) $ 1,625
========== ========
As mentioned above, the operations of the Royal Orchid, located in
Tumon, Guam commenced in late October of 1999, and expenses incurred
by the Company from opening to July 31, 2000 was $1,625,405.
Operating expenses for the Royal Orchid did not exist for the fiscal
year ended July 31, 1999 and therefore, all of the costs incurred
during the fiscal year ended July 31, 2000 represented an increase in
operating expenses for the prior year.
Operating expenses for the Company's management operations as compared
to the prior year are as follows:
Payroll and benefits decreased by $422,000 as a result of management
restructuring its workforce during the fiscal year and eliminating six
positions. In addition, during the year ended July 31, 1999, the
Company issued stock as compensation to an officer of the Company and
recorded an expense of $41,000.
Reservations expense decreased by $140,000 due to the Company
purchasing all of the outstanding stock of Hawaii Reservations Center
Corp. in April of 2000, and due to the decrease in the number of rooms
represented by the Company.
Taxes decreased by $44,000 as a result of the Company's revenues from
management related activities decreasing by $1,080,000. The taxes
represent sales taxes imposed by the State of Hawaii on all gross
income received from sources within the State of Hawaii.
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Advertising and Marketing expenses decreased by $68,000 as a result of
the renegotiation of the Company's foreign sales offices. The Company
has three offices in Europe and one in Japan, and was successful in
renegotiating the compensation paid to these offices to be based more
on performance rather than a flat fee.
Travel and Entertainment expenses decreased by $144,000, as the
Company completed the opening of its Micronesian properties during the
prior fiscal year. The opening of properties located in Chuuk, Saipan
and Guam entailed increased travel to these destinations for pre-
opening related matters during the fiscal year ended July 31, 1999.
For the fiscal year ended July 31, 2000, travel to these areas was
limited.
Professional fees decreased by $30,000 as during the prior fiscal year
ended July 31, 1999 the Company recorded an expense of $31,000 for the
exercise of warrants previously issued to Van Kasper & Company.
Insurance expenses increased by $37,000 as a result of increases in
premiums paid by the Company for its insurance coverage. The
insurance coverage includes foreign liability premiums for the
Company's operations at three properties in Micronesia.
Depreciation & Amortization expense increased by $23,000 due to the
Company amortizing the cost of acquiring a contract through the
issuance of 130,000 shares of its common stock. The common stock was
issued as consideration for a new management contract and is being
amortized over the five-year life of the contract. In addition, the
Company recorded goodwill of $366,817 related to its acquisition of
Hawaii Reservations Center Corp. that is being amortized over a
twenty-year period.
Other expenses decreased by $20,000 as the Company reduced the amount
of dues, subscriptions and membership fees paid to various
organizations and associations. In addition, the Company experienced
decreases in computer service expenses of $8,000 as it installed its
computer network systems during the prior fiscal year ended July 31,
1999.
NET LOSS
The Company reported a net loss of $1,374,241 and $487,458 for the
fiscal years ended July 31, 2000 and 1999, respectively.
Included in the losses for the fiscal year ending July 31, 2000 is a
loss of $690,995 that the Company incurred for its leased property
located in Guam that opened in late October of 1999. The Company has
elected to expense all of these costs rather than capitalize them as
pre-opening expenses.
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FOR THE YEARS ENDED JULY 31, 1999 AND 1998
SALES
For the years ended July 31, 1999 and 1998, the Company had total
revenues of $4,337,283 and $5,609,619, respectively, representing a
decrease of $1,272,336 or 23%. The decrease in revenue was
attributable to a decrease of $1,247,320 in hotel revenues, and a
decrease of $25,016 in management and other management related income.
The decrease in hotel revenues is due to the Company terminating its
lease of 167 rooms operated as a hotel in April of 1998. The decrease
in management related income is due to the loss of $75,000 in fees on
the management contracts for two of the Company's properties in
December of 1998. The Company was successful in increasing its total
fees from the management contracts of its other properties.
COSTS AND EXPENSES
Operating expenses were $4,696,037 for the year ended July 31, 1999 as
compared to $5,480,813 for the prior year, a decrease of $784,776 or
14.3%. Operating expenses for management related operations increased
by $529,506 or 12.7% while operating expenses for hotel operations
decreased by $1,314,284 due to the Company terminating its lease on a
hotel property in April 1998.
Payroll and related costs for management operations increased by
$257,000 as a result of the Company increasing it's staffing to
service the expansion and anticipated future growth of the Company
into the Pacific Basin region.
Reservation Expenses increased by $130,000 as a result of an increase
in the room revenues from the properties represented by the Company.
Reservations expenses are based upon the room revenues of the hotels
and resorts managed by the Company. Total room revenues increased by
$4.8 million during the fiscal year ended July 1999 when compared to
the prior year.
Rent expense decreased by $605,000 or 61.9% when compared to the prior
year due to the Company terminating its lease on a 167-room hotel
effective April 1998 and the renegotiation of the monthly lease rents
on the Company's corporate offices. Rents related to the lease of the
hotel decreased by $554,200.
Sales & Marketing expense increased by $142,000 as the Company
increased its presence in the international marketplace through the
opening of foreign offices. The Company opened offices in Japan and
Europe during the fiscal year ended July 31, 1998 in order to secure
additional sources of international business for the properties it
represents. Additionally, the Company expended $20,000 in pre-opening
marketing efforts for properties that the Company will represent in
the future but have not yet opened as they are in the process of being
constructed.
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Taxes decreased by $38,000 as a result of the Company terminating its
lease on a 167-unit hotel in April of 1998. The Company incurred
taxes of $42,656 on the property for the fiscal year ended July 31,
1998.
Travel and entertainment expenses increased by $40,000 when compared
to the prior year as a result of the Company's expansion into the
Pacific Basin region. Travel costs associated with the acquisition
and pre-opening of the properties located within the Pacific Basin was
$60,000 for the fiscal year ended July 31, 1999.
Repairs and maintenance expenses decreased by $242,000 as a result of
the non-existence of the repair & maintenance expenses associated with
the Company's lease of a 167-room hotel in fiscal 1998. The lease was
terminated in April of 1998 and in the fiscal year ended July 31,
1998, incurred repairs and maintenance expenses of $233,347.
Other expenses decreased by $72,000 as a result of the non-existence
of the other expenses associated with the Company's lease of a 167-
room hotel in fiscal 1998. The lease was terminated in April of 1998
and in the fiscal year ended July 31, 1998, incurred other expenses of
$82,545.
Interest expense increased by $58,000 for the year ended July 31, 1999
as compared to the prior year. The increase in interest expense is
attributed to the Company securing and drawing on an additional bank
loan and line of credit during fiscal 1999. (See Note 5 to the
consolidated financial statements).
NET INCOME (LOSS)
The Company reported a net loss of $487,458 and a net income of
$58,133 for the fiscal years ended July 31, 1999 and 1998,
respectively.
Included in the losses for the fiscal year ending July 31, 1999 were
non-operational and pre-opening costs of $174,400 which were a result
of the issuance of common stock, travel and other pre-opening costs
and expenses related to the Company's unsuccessful underwriting of its
common stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of working capital are cash flows from
operations and borrowings. Net cash used for operations was $537,003
in fiscal 2000 and $606,906 in fiscal 1999. The Company had
unrestricted cash of $120,681 and $93,440 at July 31, 2000 and 1999,
respectively.
At July 31, 2000, the Company's balance sheet reflected $120,681 of
cash representing an increase of $27,241 from July 31, 1999. During
the year ended July 31, 2000, cash used in operating activities
exceeded cash provided by operating activities by $537,003. Cash used
in investing activities was $785,067 and cash provided by financing
activities was $1,349,311.
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During the fiscal year ended July 1999, the Company sold 8,550 shares
of Preferred Stock at a gross price of $100 per share through private
placements. Dividends are cumulative from the date of original issue
and are payable semi-annually, beginning July 15, 1999 at a rate of
$7.50 per annum per share. During the fiscal year ended July 2000,
the Company sold an additional 2,500 shares. Dividends of $16,715
were paid to holders of the Preferred Stock during the fiscal year
ended July 2000. The shares are nonvoting and are convertible to the
Company's common stock at $3.00 per share.
The Company has a $200,000 line of credit with a bank dated May 25,
1999, which is secured by the Company's accounts receivable,
furniture, fixtures and equipment and is personally guaranteed by the
Company's Chief Executive Officer. The Company made draws against the
line of credit of $100,000 during the fiscal year ended July 31, 1999.
The line of credit bears interest at 3% above the bank s base rate and
is the due on the line has been extended to November 30, 2000.
The Company has a $400,000 term loan with a bank dated May 25, 1999,
which is secured by the Company's accounts receivable, furniture,
fixtures and equipment and is personally guaranteed by the Company's
Chief Executive Officer. The term loan bears interest at the rate of
9.25% with monthly payments of $8,352 and is due on May 25, 2004.
The Company had a net working capital deficit of $1,232,566 as of July
31, 2000 and net working capital of $122,413 as of July 31, 1999.
As of July 31, 2000, net working capital included liabilities due to
related parties in the amount of $273,460 consisting of $159,960 in
notes and interest payable to former stockholders of KRI, Inc.
(representing the undistributed cost on the acquisition of the stock
of KRI, Inc.), and $113,500 in notes payable to officers who advanced
funds to the Company. Also included in net working capital is $94,691
in unamortized deferred revenues related to a signing bonus paid in
cash to the Company by one of its vendors in May of 1998 as a result
of the Company entering into a three year contract with the vendor and
a tenant improvement allowance received upon the renegotiation of the
lease rent for the Company's principal office. The deferred revenues
related to the signing bonus are being amortized over three years and
the tenant improvement allowance is being amortized over the length of
the office lease.
At July 31, 2000, accounts payable increased by $1,096,654 over the
prior fiscal year, to $2,012,748. The increase in accounts payable is
attributable to the Company commencing operations at the Royal Orchid
located in Guam, which as of July 31, 2000 had accounts payable of
$743,771. The balance of the expenses are related to legal and other
fees related to the Company's exploring and negotiating the potential
acquisition of other management companies
At July 31, 1999, the Company's accounts receivable consisted of
$1,198,652 in management related revenues and reimbursements, and
$533,293 of hotel related revenues. Fifty one percent (51%) of the
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total accounts receivable was current, twenty percent (20%) was 30 to
60 days past due, nine percent (9%) was 60 to 90 days past due, and
twenty percent (20%) was more than 90 days past due.
At July 31, 2000, the Company had a receivable balance of $1,105,001
from Hanalei Bay International Investors ("HBII"), representing fees
and reimbursed expenses charged to HBII through March of 1999. HBII
sold its principal asset, the Hanalei Bay Resort in March of 1999.
Upon the closing of the sale, the Company received $468,000, which was
applied to the $435,000 note receivable and accrued interest due from
HBII (see Note 3 to the Consolidated Financial Statements). The funds
received by HBII upon the closing of the sale were insufficient to
make full payment to the Company for its accounts receivable balance.
Under the terms of the sale, in addition to the sale proceeds to be
received, HBII shall share in the future cashflows generated by
timeshare unit sales located within the Hanalei Bay Resort, after
certain secured and preferential payments are made. HBII shall make
payments to the Company through the funds received from the future
cashflows generated by the timeshare sales of the Hanalei Bay Resort
units (see Note 2 to the Consolidated Financial Statements). Although
no assurances can be given, management is confident that the Company
shall receive payment in full of its accounts receivable balance from
HBII. Certain members of the Board of Directors of the Company have a
direct or indirect financial interest in HBII (See Item 12).
Subsequent to July 31, 2000, HBII executed two assignments of its
interest in the future cashflows generated by the timeshare unit sales
of the Hanalei Bay Resort. The first assignment is for $1,105,001,
which represents the outstanding receivable balance due to the Company
by HBII. The second assignment is for $3,315,003, which represents an
additional amount negotiated between the Company and HBII, in exchange
for the Company allowing the sale of the Hanalei Bay Resort to proceed
even though the Company was not paid in full from the cash proceeds
received at closing. Although no assurance can be given, the Company
expects to begin collecting funds from the assignment within the next
twelve to eighteen months.
In January of 1998, two officers loaned the Company $50,000 and
$60,000, respectively and the Company executed a note that called for
interest at the rate of 8.5% and a due date of April 15, 1998. In
July of 1998, one of the officers advanced an additional $60,000 to
the Company. In April of 1999, the note to one of the officers was
fully repaid. The note to the other officer was refinanced into a new
note that included the portion of the undistributed sales proceeds to
the former KRI, Inc. stockholders (see Item 1-Description of Business,
"Development of Business"). The terms of the new note call for
monthly payments of $2,000 per month and interest at the rate of ten
percent (10%) per annum. The note was due and payable on August 15,
2000, and was extended for an additional year to August 15, 2001.
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In July of 1998, the Company funded a loan of $435,000 to Hanalei Bay
International Investors ("HBII"). The terms of the loan called for
interest at the rate of 12% per annum and a percentage of the future
cashflows received from timeshare sales by the partners of HBII. The
loan was due on or before March 31, 1999 and was fully retired in
March of 1999 through the payment of $468,000 from the sale proceeds
received by HBII.
In July of 1998, a director of the Company advanced $175,000 and the
Company executed a note, which called for interest at the rate of 10%
per annum and a due date of March 31, 1999. The note was fully paid
in March of 1999. In addition to the return of principal plus
interest, warrants on the Company's common stock was issued to the
director. (See Item 11, Security Ownership of Certain Beneficial
Owners and Management).
In July of 1998, the Company received loans of $200,000 from four
unrelated parties. The terms of the notes call for interest at the
rate of 10% per annum and a due date of March 31, 1999. The loans were
fully paid in March of 1999. In addition to the return of principal
plus interest, warrants on the Company's common stock were also
issued. (See Item 11, Security Ownership of Certain Beneficial Owners
and Management).
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.
In April of 2000, an officer funded a note of $300,000 to the Company,
and the proceeds were used for the acquisition of Hawaii Reservations
Center Corp. and for working capital. The terms of the note call for
interest at 10% per annum and monthly payments of $9,642.03. The note
and any unpaid interest is due in full on March 31, 2003.
In April of 2000, the company received funds of $125,000 from an
unrelated party and entered into a promissory note, with the proceeds
being used to fund the acquisition of Hawaii Reservations Center Corp.
The terms of the note call for interest of one-third of the profits
generated by Hawaii Reservations Center Corp. Interest is payable
quarterly, and the principal and any unpaid interest is due on
December 31, 2003.
During the fiscal year ended July 31, 1999, the Company issued 8,550
shares of its convertible preferred stock. The preferred stock calls
for a cumulative dividend of 7.5%, payable semi-annually, when and if,
declared by the board of directors of the Company. Certain officers
and directors of the Company purchased shares of the preferred stock,
either directly or indirectly through other entities or family
members, during fiscal 1999; Mr. Thomas Blankley, Jr., 1,500 shares;
Mr. Judhvir Parmar, 1,000 shares; and Mr. K. Roger Moses, 300 shares.
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During the fiscal year ended July 31, 2000, the Company declared and
paid a dividend of $16,715 to holders of record as of January 15,
2000. During the fiscal year ended July 31, 2000, the Company issued
an additional 2,500 shares of preferred stock. Of the shares issued
during fiscal 2000, 2,000 shares were issued as consideration for the
outstanding balances due to HRCC prior to the Company's purchase of
HRCC in April of 2000. An officer of the Company, Mr. Thomas
Blankley, Jr., purchased the remaining 500 shares issued.
During the fiscal year ended July 31, 2000, the Company issued 130,000
shares of its common "unregistered" and "restricted" common stock to
the owner of one of its properties in exchange for a five-year
management contract. The management contract took effect on January
1, 2000 and the Company's stock was issued and valued as of that date
at $1.75 per share, which was the closing price on December 31, 1999.
The value of the shares was recorded as an intangible asset on the
books of the Company and is being amortized over the five-year life of
the management contract.
During the fiscal year ended July 31, 2000, the Company issued 391,024
shares of its common "unregistered" and "restricted" common stock to
various individuals and entities for $1.25 per share. In addition to
the shared, the Company granted a warrant for each share purchased
under the private placement, which entitles the purchasers to purchase
on additional share of the Company's common stock for $1.50 per share,
exercisable at any time prior to July 15, 2002. Under the private
placement, certain directors of the Company purchased shares of the
Company's common stock either directly or indirectly: Mr. Judhvir
Parmar, 120,000 shared; Mr. K. Roger Moses, 20,000 shares; Mr. Roy
Tokujo, 80,000 shares; and Mr. Stanley Mukai, 40,000 shares.
The Company has, in the past, met its financial obligations through
borrowings from banks and related parties and the issuance of preferred
and common stock. The Company will continue in its efforts to raise
additional equity through the issuance of its common stock through
private placements in order to fund its operations and expansion
plans. The Company believes, although no assurance may be given, that
it shall begin to collect its receivable balance from HBII within the
next twelve to eighteen months. Management also believes that the
Company shall have sufficient cash flows for its business operations
during fiscal 2001.
The Company has done preliminary research and due diligence in
attaining growth through the acquisition of other management companies
throughout the Pacific Basin.
PLAN OF OPERATIONS
The Company is one of the leading regional hotel and resort management
companies within the State of Hawaii. At July 31, 2000, the Company
had 27 management or sales, reservations and marketing contracts
covering 2,900 rooms.
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The Company has a wide range of product available to the leisure
traveler, from luxury condominium resorts with room rates exceeding
$1,500 per night to the small budget inns with a rates under $40. The
Company has also expanded its base to include other Pacific Basin
destinations such as Saipan, Guam, Chuuk and most recently, New
Zealand. The Company believes that the availability of differing
product lines and provides appeal to more levels of business or
leisure traveler, while the diversity of geographic locations helps by
not making the Company dependent upon the economies of one particular
region.
The Company has experienced successful growth in the past, almost
doubling the number of rooms under management since it began in 1994.
During the fiscal year ended July 31, 2000, the Company lost
management contracts on three of its properties, representing
approximately 500 rooms. It is common in the management industry to
acquire and lose management contracts on an annual basis, and it
should be noted that all three of the properties that it lost during
the fiscal year were due to changes in the use of the properties; two
of the properties converted to long term rental use and the other
shifted its focus on strictly timeshare interval sales. Since 1994,
the Company has acquired the bulk of its contracts from its
competitors and has only lost only two over the Company's six years.
The Company plans to expand by entering into various types of
agreements with properties which is not limited to a "full" management
agreement under which the day to day operations as a whole of the
property is the responsibility of the Company. The Company has the
flexibility to tailor its services based upon the needs and desires of
each property owner. Agreements may take the form of full management
contracts or sales & marketing contracts or reservation agreements.
With the acquisition of Hawaii Reservations Center Corp. the Company
intends to aggressively seek independent properties in need of an
efficient central reservations department.
On August 1, 1997, the Company was successful in entering the foreign
market of the Pacific Basin when it signed a management agreement with
the Aquarius Beach Tower, a 68-unit luxury condominium resort located
in Saipan. On January 1, 1999, the Company acquired the management
contract for a 56-unit hotel located in Chuuk. In March of 1999 the
Company entered into a lease agreement for the Royal Orchid Hotel, a
five star 205-unit hotel located on Tumon Bay, Guam. In January of
1999, the Company signed an agreement as co-lessee for an uncompleted
200 unit hotel located in the Cook Islands. In May of 2000, the
Company signed an agreement to manage a 249-unit condominium project
in Takapuna, New Zealand, which is currently under construction and
scheduled to open in May of 2001. Management will continue to seek
expansion in the Pacific Rim area through the assistance of its
geographically diverse board of directors.
Although no assurance can be given, the Company plans to expand its
portfolio of management contracts both within the State of Hawaii and
outside of Hawaii and to increase its exposure in Micronesia and other
Pacific Basin destinations. In addition to Hawaii, management
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believes that there are many opportunities to expand its client base
in the emerging markets of the Pacific Basin. In addition to signing
on independent hotels and resorts, the Company may achieve its desired
goals through joint venture investments, leases and/or acquisitions of
management contracts and/or companies. Currently, the Company is
engaged in various stages of discussions for management of several
properties located both within Hawaii and the Pacific Basin area, as
well as exploring the possibility of the acquisition of other
management companies in the region.
The Company finalized a contract for a management agreement on a brand
new 249-unit condominium projects to be constructed in Takapuna, New
Zealand. The terms of the lease call for the Company to pay a lease
determined by a percentage of the total cost of developing the
property, estimated to be NZ $56 million. The property recently broke
ground and construction is ongoing on the project, with opening
currently scheduled for May of 2001. Although no assurance can be
given, management is confident that the Company shall attain
acceptable profit levels from the management of this property.
The Company continues to negotiate with other properties located in
Hawaii and the Pacific Basin and is optimistic that it will be
successful in securing additional contracts during the coming fiscal
year.
The Company experienced losses during the fiscal year July 2000 as
expenses and overhead were incurred in anticipation of the
commencement of operations in Guam and other projects that will be
coming on-line within the next twelve to eighteen months.
The Company is in the final stages of renegotiations with the owner of
the Royal Orchid Hotel and management is confident, although no
assurance may be given that it will be successful in finalizing an
agreement that will limit the Company's financial exposure for any
operating losses incurred by the property.
Although no assurances can be given, management is optimistic that the
Company will attain profitability once the renegotiation is finalized,
the operations of the property in Guam mature, and the New Zealand
property opens.
With the increase in the number of management contracts, the number of
hotel and resort employees that the Company will supervise may
increase significantly. The Company is presently negotiating for both
small budget hotels and large luxury condominium resorts and
therefore, it is impossible at this time to predict the number of
additional employees that it will supervise or that it will be
required to hire for the hotels and resorts during the next fiscal
year.
On July 31, 1995, the Company invested $100,000 into a reorganization
plan instituted by HBII. Under terms of the HBII reorganization plan,
the eighty-seven units owned by HBII will be sold under a timeshare
26
<PAGE>
plan and investors in the timeshare plan may receive up to four times
their investment over the life of the timeshare plan. As of July 31,
2000, the Company has received a total of $175,516 from this
investment. Of the funds received, $43,879 represents a return of the
initial investment and $131,637 represents a gain to the Company. At
July 31, 1999, the balance of the investment was $56,121. The Company
has classified the remaining principal balance as a due from related
party as the principal asset of HBII, the units located in Hanalei Bay
Resort, was sold in 1999.
Subsequent to July 31, 2000, HBII executed two assignments of its
interest in the future cashflows generated by the timeshare unit sales
of the Hanalei Bay Resort. The first assignment is for $1,105,001,
which represents the outstanding receivable balance due to the Company
by HBII. The second assignment is for $3,315,003, which represents an
additional amount negotiated between the Company and HBII, in exchange
for the Company allowing the sale of the Hanalei Bay Resort to proceed
even though the Company was not paid in full from the cash proceeds
received at closing. Although no assurance can be given, the Company
expects to begin collecting funds from the assignment within the next
twelve to eighteen months.
In March of 1999, HBII sold its principal asset, the Hanalei Bay
Resort and the sale proceeds received at closing was insufficient to
retire the investment by the Company. Under the terms of the sale, in
addition to the sale proceeds received at closing, the current HBII
partners shall share in the future cashflows generated by timeshare
sales of the units located within the Hanalei Bay Resort, after
certain secured and preferential payments are made. HBII shall make
payments to the Company through the funds received from the future
cashflows generated by the timeshare sales of the Hanalei Bay Resort
units (see Note 2 to the Consolidated Financial Statements). Although
no assurances can be given, management is confident that the Company
shall receive payment in full of its receivable balance from HBII.
Certain members of the Board of Directors of the Company have a direct
or indirect financial interest in HBII (See Item 12).
On August 1, 1994, the Company entered into a contract with Hawaii
Reservations Center Corp. ("HRCC"), a company controlled by Charles M.
McGee, pursuant to which HRCC shall provide reservation services for
hotels and resorts managed by the Company. At the time of entering
into the contract, Mr. McGee was a director of the Company. Mr. McGee
tendered his resignation as a member of the board of directors on
February 16, 1999. Since the purchase of KRI, reservation services
have been provided by KRI. The fees to be paid by the Company include
a fixed monthly fee plus commissions. The Company also agreed to sell
to HRCC the assets of the reservation offices of KRI, which consisted
of office equipment. As consideration for the equipment, HRCC agreed
to employ the reservation department employees of KRI and to assume
the liability for the accrued vacation of such employees. KRI
realized a gain of $4,372 on the transaction, as the value of the
accrued vacation exceeded the net book value of the office equipment
sold. In May of 1997, the Company renegotiated its contract with
27
<PAGE>
HRCC with regard to the fees charged. Under the renegotiated
agreement, the fees paid to HRCC is based upon the monthly room
revenues of the properties managed by the Company, subject to a
minimum monthly fee. It is management's belief that the contract with
HRCC are on terms which are no less favorable than those which could
be negotiated with companies not affiliated with the Company.
On April 30, 2000, the Company purchased all of the outstanding stock
of Hawaii Reservations Center Corp. ("HRCC") from Mr. Charles McGee, a
former director of the Company. Immediately prior to the Company's
purchase of HRCC, the assets of HRCC except for accounts receivable of
$12,400 and furniture & equipment were distributed to Mr. McGee.
Under the terms of the purchase agreement, the Company paid as
consideration $350,000 for 100% of the outstanding stock of HRCC and
assumed liabilities of $26,817. The Company allocated $10,000 of the
purchase price to the value of the furniture and equipment of HRCC,
and recorded $366,817 of goodwill, which shall be written off over 20
years. In addition, prior to the acquisition of the stock of HRCC,
the Company issued 2,000 shares of its $100 par value Preferred Stock
to Mr. McGee in settlement of the accounts payable of the Company due
to HRCC for past reservation services.
THE TOURISM INDUSTRY
The majority of the Company's properties under contract are located in
Hawaii. According to WTTC Hawaii Tourism Report 1999 published by the
World Travel and Tourism Council, tourism is Hawaii's largest
industry, providing 26.3% of the Gross State Product. It is estimated
that in 1998, tourism accounted for approximately 32.1% of the State's
total work force. The outlook for 1999 is forecasted to be relatively
flat due to the economic prospects in the Asian visitor market, with a
projected decrease in visitors of 2.6% from Japan and 11.6% from
Korea. The outlook for the calendar year 2000 and beyond, however, is
a forecasted average growth of 4.3% per annum over the next twelve
years, which exceeds U.S. expectations of 2.6% and worldwide
expectations of 3.4%. The World Travel and Tourism Council is also
projecting that the recently completed Hawaii Convention Center will
have a positive impact on the Hawaii tourism market. Projections call
for the Hawaii Convention Center attendees and delegates to add $126
million in visitor exports in 1999, increasing to $362 million
annually by the year 2004. Management believes that the economy of the
mainland United States will continue to improve, the recently
completed Hawaii Convention Center shall attract new business to the
State of Hawaii and that the recent economic crisis in Asia will
improve in the near future and, therefore, that the tourism industry
of Hawaii as a whole will experience future growth in earnings.
GROWTH STRATEGY
The Company believes that the improving tourism industry together with
the current economic environment will provide excellent opportunities
for future growth. Under the current economy of the Hawaii hotel
industry, the Company is able to provide more benefits to the owners
of properties which are under performing in the form of economies of
scale in advertising, reservations, sales and marketing which should
translate to higher revenues and profitability for the property.
28
<PAGE>
Since the Company allocates the cost of expenditures to all of the
managed properties, property owners would enjoy a substantial increase
in the exposure to the general public, travel agents and wholesalers
than an independent hotel could accomplish. The Company also provides
this at a much lower cost than an independent hotel could. The
operational expertise provided by the Company would also assist the
property owner in reducing operating expenses in the areas of staffing
and central purchasing. Other contributing factors to the future
growth of the Company over the next few years are:
Existing Contracts. The Company has been successful in improving or
maintaining the performance for its properties over the past few
years in spite of the decrease in the Hawaii tourist market. Further
improvements in revenues and net operating profits for the Company's
current portfolio of properties will result in higher management fees
for the Company. The additional fees from the Company's current
portfolio of properties would generally not entail additional
incremental expenses to the Company. Instead, an expansion of the
Company's management contract portfolio would provide better savings
to the existing properties, which in certain contracts would translate
into higher management incentive fees.
Additional Contracts. Although no assurance can be given, management
believes that it will be successful in attaining additional management
contracts in the future. Opportunities for additional contracts may
arise from a myriad of factors that include sales of properties,
foreclosures, underperformance and dissatisfaction with current
management. A number of properties in Hawaii are under performing and
cannot generate the cashflow necessary to service the debts of the
properties. Many of these properties were purchased by Japanese
investors at the height of the Asian bubble of the mid to late 1980s.
Management has a proven track record over the past six years in
improving the performance of the properties it manages. Management is
constantly looking for properties in need of the Company's services.
Emerging Markets. The Company currently has the majority of its
contracts located within the State of Hawaii. Management believes
that there are emerging markets in which the services provided by the
Company will be needed. These areas include Guam, Saipan, Chuuk, New
Zealand and other Pacific Basin regions. Management has been
successful in securing management contracts for four properties
throughout the Pacific Basin, on of which is scheduled to open within
the next eight months. Although no assurance can be given, management
is confident that it will be able to continue to be successful in
acquiring additional management contracts in the Pacific Basin and
enhance the profitability of these properties through the services it
provides.
Acquisitions. The Company may also seek opportunities to acquire
other hotel management contracts and/or companies that would result in
further synergies for the Company and its managed properties. The
Company has had preliminary discussions and investigated and
researched the potential acquisition of other management companies
throughout the Pacific Basin.
29
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
PART F/S
The financial statements of the Company have not been audited as of
this filing date due to a change in the independent auditors of the
Company. The Company shall file Form 10K-SB/A and include the audited
financial statements upon the completion of the audit.
FINANCIAL STATEMENTS Page No.
Consolidated Balance Sheets -
July 31, 2000 and 1999 31
Consolidated Statements of Operations
for the years ended July 31, 2000 and 1999 33
Consolidated Statements of Stockholder's Equity
for the years ended July 31, 2000 and 1999 34
Consolidated Statements of Cash Flows
for the years ended July 31, 2000 and 1999 35
Notes to Consolidated Financial Statements 37
30
<PAGE>
The Castle Group, Inc. and Subsidiary
Consolidated Balance Sheets
For the years ended July 31, 2000 and 1999
(Unaudited)
ASSETS
2000 1999
-----------------------
Current Assets
Cash $ 120,682 $ 93,440
Accounts receivable, less allowance for
doubtful accounts of $28,612 & $60,311
in 2000 and 1999, respectively 1,703,333 1,285,448
Due from related parties,
current (Note 2) 0 428,316
Notes receivable, current (Note 3) 70,184 110,300
Prepaid Expenses 189,029 164,667
Restricted Cash 19,941 19,941
-----------------------
Total current assets 2,103,169 2,102,112
Furniture, Fixtures and Equipment,
net (Note 1) 66,786 46,475
Due from related party,
noncurrent (Note 2) 1,105,001 635,537
Notes Receivable, Noncurrent (Note 3) 0 35,900
Deposits 324,970 183,281
Investment in HBII Timeshare Program 0 56,121
Intangible Assets, net (Note 1) 563,190 0
-----------------------
Total assets $ 4,163,116 $3,059,426
=======================
The accompanying notes are an integral part of the consolidated
financial statements
31
<PAGE>
The Castle Group, Inc. and Subsidiary
Consolidated Balance Sheets
For the years ended July 31, 2000 and 1999
(Unaudited)
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY)
2000 1999
-----------------------
Current Liabilities:
Accounts payable $ 2,012,748 $ 916,094
Vacation payable 101,729 107,349
Wages payable 114,589 82,771
Taxes payable 77,977 25,629
Due to related parties,
current (Note 2) 257,100 162,299
Notes payable, current (Note 5) 273,400 173,300
Deferred income (Note 1) 94,691 91,008
Other accrued liabilities 403,501 421,249
-----------------------
Total current liabilities 3,335,735 1,979,699
Due to Related Parties,
noncurrent (Note 2) 199,352 42,975
Notes Payable, noncurrent (Note 5) 375,062 322,606
Deferred Income (Note 1) 37,856 70,368
-----------------------
Total liabilities 3,948,005 2,415,648
-----------------------
Commitments and Contingencies (Note 4)
Redeemable Preferred Stock, $100 par
value, 50,000 shares authorized, 8,550
shares issued & outstanding in 1999
(see Note 7) 0 871,715
Stockholders' Equity
Preferred Stock, $100 par value, 50,000
shares authorized, 11,020 & 8,500 shares
issued and outstanding,in 2000 & 1999,
respectively (Note 7) 1,105,000 0
Stockholders' Equity (Deficiency) (Note 8):
Common stock, $.02 par value, 20,000,000
Shares authorized, 5,928,055 & 5,407,031
issued and outstanding in 2000 and
1999, respectively 118,561 108,141
Common stock held by lessor (111,641) (111,641)
Capital in excess of par 3,370,828 2,668,956
Accumulated deficit (4,267,637) (2,893,393)
----------------------
Total stockholders' equity (deficiency) 215,111 ( 227,937)
----------------------
Total liabilities and stockholders'
equity (deficiency) $4,163,116 $3,059,426
======================
The accompanying notes are an integral part of the consolidated
financial statements
32
<PAGE>
The Castle Group, Inc. and Subsidiary
Consolidated Statements of Operations
For the years ended July 31, 2000 and 1999
(Unaudited)
2000 1999
Revenues:
Hotel revenue and management fees
(includes excise tax of $130,345 and
$173,005 in 2000 and 1999 $ 3,773,806 $ 4,032,122
Other income 415,563 305,161
-----------------------
Total revenues 4,189,369 4,337,283
-----------------------
Expenses:
Payroll and benefits 2,460,603 2,291,910
Reservations services 839,595 979,759
Rent 493,538 372,078
Sales and marketing 434,021 352,346
Taxes 142,133 174,058
Travel and entertainment 30,994 157,405
Professional fees 147,072 106,266
Insurance 234,591 68,825
Office & Supplies 169,882 49,003
Utilities 350,437 47,505
Depreciation and amortization 55,797 28,192
Repairs and maintenance 64,424 20,073
Other 60,954 48,617
----------------------
Total expenses 5,484,041 4,696,037
----------------------
Income (Loss) from Operations (1,314,672) (358,754)
Other Expenses:
Interest expense 79,569 128,704
-----------------------
Net Income (Loss) $(1,374,241)$( 487,458)
=======================
Per Common Share Data (Note 8):
Basic earnings (loss) $ (0.23) $ (0.09)
Diluted earnings (loss) $ (0.23) $ (0.09)
The accompanying notes are an integral part of the consolidated
financial statements
33
<PAGE>
The Castle Group, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity (Deficiency)
For the years ended July 31, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Stock
Subscribed Stock Capital in
Stock and Held By Excess of Accumulated
Shares Amount Unissued Lessor Par Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance July 31, 1998 5,311,130 106,223 - - 2,539,175 (2,405,938) 239,460
Exercise of common stock
warrants 12,244 245 - - 30,559 - 30,804
Issuance of common stock
as compensation 22,500 450 - - 40,331 - 40,781
Costs related to issuance
of redeemable preferred
stock (Note 7) - - - - (34,812) - (34,812)
Redeemable preferred stock
dividend accrual (Note 7) - - - - (16,715) - (16,715)
Issuance of common stock
to lessor (Note 8) 61,157 1,223 - (111,641) 110,418 - -
Net loss for the year
ended July 31, 1999 - - - - - (487,458) (487,458)
---------------------------------------------------------------------------
Balance July 31, 1999 5,407,031 $108,141 $ - $(111,641) $2,668,956 $(2,893,396) $ (227,941)
Common Stock Sold 391,024 7,820 - - 476,972 - 484,792
Issuance of common stock
For contract 130,000 2,600 - - 224,900 - 227,500
Net loss for the year
Ended July 31, 2000 - - - - - (1,374,241) (1,374,241)
---------------------------------------------------------------------------
Balance July 31, 2000 5,928,055 118,561 - $(111,641) 3,370,828 (4,267,637) ( 889,889)
---------------------------------------------------------------------------
Preferred Stock at
July 31, 1999 8,550 855,000 - - - - 855,000
Accrued Dividends on
Preferred Stock - - - - - - 16,715
--------------------------------------------------------------------------
Balance July 31, 1999 8,550 855,000 - - - - 871,715
Issuance of preferred
Stock 2,500 250,000 - - - - 250,000
Payment of dividends
On preferred stock - - - - - - (16,715)
---------------------------------------------------------------------------
Preferred stock at
July 31, 2000 11,050 1,105,000 - - - - 1,105,000
---------------------------------------------------------------------------
Stockholders' Equity
At July 31, 2000 n/a n/a - - - - 215,111
===========================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
34
<PAGE>
The Castle Group, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Years ended July 31, 2000 and 1999
(Unadited)
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income (loss) $(1,374,241) $( 487,458)
Adjustments to reconcile net loss to
net cash used in operating activities-
Depreciation and amortization 59,877 28,192
Issue of common stock as compensation - 40,781
Changes in assets and liabilities-
Increase in accounts receivable (417,889) (272,030)
Increase (decrease) in due from related parties 14,973 (219,055)
Decrease (increase) in prepaid expenses (24,362) (142,593)
Decrease (increase) in notes receivable 76,016 103,800
Increase (decrease) in deferred income (28,829) 81,376
Increase in accounts payable 1,096,654 26,687
Increase (decrease) in wages payable 31,818 6,286
Decrease in vacation payable (5,620) (1,506)
Decrease in taxes payable 52,348 (730)
Increase in other accrued liabilities (17,748) 139,344
----------------------------
Net cash used in operating activities (537,003) (696,906)
Cashflows from Investing Activities: ----------------------------
Repayment of loan by Hanalei Bay Int'l Investors - 435,000
Purchase of furniture, fixtures & equipment (49,061) ( 10,946)
Decrease in investment in HBII Time Share Program - 2,785
Receipt (payment) of deposits (141,689) (157,634)
Purchase of Hawaii Reservations Center (366,817) -
Purchase of management contract (227,500) -
Net cash provided by (used in) ----------------------------
investing activities (785,067) 269,205
Cashflows from Financing Activities: ----------------------------
Proceeds from exercise of common stock warrants - 30,804
Proceeds from issuance of preferred stock, net of
issuance cost 250,000 820,188
Proceeds from issuance of common stock 712,292 -
Payment of dividends on preferred stock ( 16,715) -
Repayment to related parties ( 48,822) (321,726)
Proceeds from related parties 300,000 -
Repayment of notes payable (172,444) (700,000)
Proceeds from notes payable 325,000 445,906
----------------------------
Net cash provided by financing activities 1,349,311 275,172
----------------------------
Net Increase (Decrease) in Cash 27,241 (152,529)
Cash at Beginning of Year 93,440 245,969
----------------------------
Cash at End of Year 120,681 93,440
============================
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
35
<PAGE>
The Castle Group, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Continued)
For the Years ended July 31, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Supplemental Disclosures:
Cash paid during the year for interest $ 79,569 $ 145,070
========== =========
Supplemental Schedule of Noncash Investing
and Financing Activities:
Isuance of common stock to lessor $ - $ 111,641
Redeemable preferred stock dividend accrual - 16,715
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
36
<PAGE>
The Castle Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
1. Summary of Significant Accounting Policies
Organization
The Castle Group, Inc. was incorporated under the laws of the State of
Utah on August 21, 1981. The Castle Group, Inc. operates in the hotel
and resort management industry in the State of Hawaii, Guam, The
Federated States of Micronesia and the Commonwealth of Saipan under
the trade names "Hawaiian Pacific Resorts" and "Castle Resorts and
Hotels."
The accounting and reporting policies of The Castle Group, Inc. and
Subsidiary (the "Company") conform with generally accepted accounting
principles and practices within the hotel and resort management
industry.
Principles of Consolidation
The consolidated financial statements of the Company include the
accounts of The Castle Group, Inc. and its wholly-owned subsidiaries,
Hawaii Reservations Center Corp., KRI, Inc. and KRI, Inc.'s wholly-
owned subsidiary, HPR Advertising, Inc. All significant inter-company
transactions have been eliminated in the consolidated financial
statements.
New Accounting Pronouncements
Effective August 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes
standards for reporting operating segments and requires certain other
disclosures about products and services, geographic areas and major
customers. The adoption of this statement did not have a material
effect on the Company's consolidated financial statements, as
management does not evaluate the Company based on the performance of
operating segments.
Effective August 1, 1998, the Company adopted SFAS No. 132, "Employers
Disclosures about Pensions and Other Postretirement Benefits," which
standardized the disclosure requirements for pensions and other
postretirement benefits. Since the Company does not have a pension
plan or other postretirement plan, the adoption of this statement did
not have an effect on the Company's consolidated financial statements.
37
<PAGE>
The Castle Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
In June 1998, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities.
SFAS No. 133 requires the recognition of all derivative instruments in
the statement of financial position as either assets or liabilities
and the measurement of derivative instruments at fair value. In June
1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133." The original effective date for SFAS No. 133
was for all fiscal years beginning after June 15, 1999. As a result
of SFAS No. 137, the effective date for SFAS No. 133 is for all fiscal
quarters of all fiscal years beginning after June 15, 2000. As the
Company does not invest in derivative instruments or participate in
hedging activities, the adoption of SFAS No. 133, as amended by SFAS
No. 137, is not expected to have a material effect on the Company's
consolidated financial statements.
Reclassifications
Certain reclassifications were made to the 1999 consolidated financial
statements to conform to the 2000 presentation. Such reclassifications
did not have an effect on net income as previously reported.
Income Taxes
The Company records deferred tax assets and liabilities for expected
future tax consequences of events that have been recognized in the
Company's consolidated financial statements or tax returns. Under
this method, deferred tax assets and liabilities are determined based
on the difference between the financial statement carrying amounts and
tax bases of assets and liabilities using enacted tax rates in effect
in the years in which the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Restricted Cash
Restricted cash consists of cash held in client trust accounts and
cash pledged as collateral for an equipment lease.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are recorded at cost. When assets
are retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounting records, and any resulting
gain or loss is reflected in the Consolidated Statement of Operations
for the period.
38
<PAGE>
The Castle Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
The cost of maintenance and repairs are charged to income as incurred.
Renewals and betterments are capitalized and depreciated over their
estimated useful lives.
At July 31, 2000 and 1999, furniture, fixtures and equipment consisted
of the following:
2000 1999
Office equipment $ 270,019 $ 220,959
Less accumulated depreciation 203,233 174,484
---------------------
$ 66,786 $ 46,475
=====================
Depreciation is computed using the declining balance and straight-line
methods over the estimated useful life of the assets (5 to 7 years).
For the years ended July 31, 2000 1999 depreciation expense was
$28,750 and $25,607 respectively.
Intangibles
Intangible assets consist of contract acquisition costs and goodwill.
The contract acquisition cost is being amortized over the life of the
contract acquired (5 years) on a straight-line basis. Goodwill costs
are being amortized on a straight-line basis over 20 years. At July
31, 2000 and 1999, the balances of those intangibles were as follows:
2000 1999
Contract Acquisition Costs $ 227,500 $ -
Goodwill 366,817 -
-------------------------
594,317 -
Less Accumulated Amortization ( 31,127) -
-------------------------
$ 563,190 -
=========================
Income Recognition
The Company recognizes income from the management of resort properties
according to terms of its various management contracts.
Deferred Income
During the year ended July 31, 1999, the Company renegotiated its
office lease. In connection with this renegotiation, the Company
received six months of free office rent and a tenant improvement
allowance of $56,785. The free office rent and tenant improvement
allowance is recorded as deferred income and is recognized on the
straight-line method over the term of the lease agreement.
39
<PAGE>
The Castle Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
During the year ended July 31, 1998, the Company received a signing
bonus of $80,000 as a result of a contract entered into with a vendor
to provide services over a three-year period. Income is recognized on
the straight-line method over the term of the contract.
Sales and Marketing Expenses
The Company incurs sales and marketing expenses in conjunction with
the production of promotional materials, trade shows, retainers for
out-of-state sales agents, and related travel costs. Such costs are
expensed as incurred. During the years ended July 31, 2000 and 1999,
the Company incurred sales and marketing expenses of $434,021 and
$352,346, respectively.
Concentration of Credit Risks
The Company maintains its cash with several financial institutions in
Hawaii. Balances maintained with these institutions are occasionally
in excess of federally insured limits.
Concentration in Market Area
The Company manages hotel properties primarily in Hawaii and is
dependent on the state's visitor industry. During the years ended
July 31, 2000 and 1999, the Company expanded its operation to Guam,
New Zealand and Saipan, respectively. The Company is also
contemplating expansion into other areas in the Pacific.
Use of Management Estimates in Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Fair Value of Financial Instruments
The carrying value of notes receivable and notes payable approximates
fair values as these notes have interest rates at which similar loans
would be made to borrowers with similar credit ratings and for the
same remaining maturities. The fair value of the Company's investment
in Hanalei Bay International Investors ("HBII") Time Share Program is
estimated based on future cash flow projections.
40
<PAGE>
Castle Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
2. Related Party Transactions
Hanalei Bay International Investors
The Company had a hotel management agreement with HBII to manage the
Hanalei Bay Resort ("HBR"). The managing general partner of HBII is
also the chairman and chief executive officer of the Company. Under
the management agreement with HBII, the Company was to receive
management and incentive fees based on a percentage of gross total
revenue and net income, respectively. The Company also received
reservation and marketing fees based on a percentage of room revenue.
During the year ended July 31, 1999, total fee income from HBR
amounted to $739,346.
In March 1999, HBII consummated the sale of its interest in HBR to an
unrelated third party. The proceeds from the sale of HBR were not
sufficient to satisfy all claims of HBR's creditors. At July 31, 2000
and 1999, the Company's receivable from HBR amounted to $1,119,974
(including the principal balance of the Company's timeshare
investment) and $1,105,001, respectively. Under the terms and
conditions of the agreement to sell HBR, HBII is entitled to receive a
percentage of the future cash flows from HBR s hotel operations and
the sale of certain time-share units. The current portion of the
receivable of $428,316 as of July 31, 1999 represents the projected
available cash flow of HBII to repay the Company during fiscal 2000.
The Company has received updated projections from the current owner of
HBR and based on those projections, HBII shall receive distributions
in the calendar year 2002. Based on this, the entire receivable from
HBII has been reclassified as a non-current asset as of July 31, 2000.
Management expects that such proceeds will be sufficient to allow HBII
to repay its debt to the Company.
HBII Time Share Program
In July 1995, the Company invested $100,000 in the HBII Time Share
Program of Hanalei Bay Resort. The Company receives moneys based on a
percentage of timesharing unit sales. The Company records proceeds
from the investment on the installment method, whereby a portion of
the proceeds represents a return of initial investment and a portion
represents gains.
During 1999, the Company received $11,100 from this investment of
which $2,800 represents a return of initial investment and $8,400
represents a gain recognized by the Company. At July 31, 1999, the
investment in the HBII Time Share Program was $56,121.
As of July 31, 2000, the Company reclassified the remaining principal
balance of $56,121 as a "Due from Related Party".
41
<PAGE>
Castle Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
Reservations Services
Reservations services were provided by Hawaii Reservation Center
Corporation ("HRCC"), wholly owned by a former director of the
Company. The Company had a payable balance to Hawaii Reservation
Center Corporation of $78,684 as of July 31, 1999.
In April of 2000, the Company purchased all of the outstanding stock
of HRCC for $350,000 in cash and the assumption of $26,817 of
liabilities, and HRCC became a wholly owned subsidiary of the Company.
Reservations services expense related to Hawaii Reservation Center
Corporation is included in the Reservations Services caption in the
Consolidated Statements of Operations. Through July 31, 2000, HRCC
recorded a net profit of $3,045 that is also included in the
Reservations Services caption in the Consolidated Statements of
Operations.
Due to Related Parties
The Company had the following related party loan balances as of July
31, 2000 and 1999:
2000 1999
6% loans from stockholders, due
August 31, 1998 $ 143,600 $ 143,600
10% loans from Officer, due 03/31/2003 269,851 -
10% loans from Officer, due 08/15/2001 43,001 61,674
-------------------
456,452 205,274
Less current portion 257,100 162,299
-------------------
Due to related parties, non-current $ 199,352 $ 42,975
===================
In June 1998, the Company issued warrants to acquire up to 87,500
shares of common stock for $2.00 per share, exercisable through June
2003 in exchange for the $175,000 loan made by a Director. No
warrants were exercised during 2000 or 1999.
In July 2000, the Company issued warrants to acquire up to 391,024
shares of Common Stock for $1.50 per share, exercisable through
July 15, 2002 in exchange for participation in a private placement
of the Company's common stock at $1.25 per share. Four directors
of the Company invested $208,000 in the aggregate through the private
placement and were issued warrants to acquire up to 260,000 shares of
the Company's Common Stock.
In February of 2000, an officer of the Company purchased 500 shares of
the Company's $100 par value preferred stock.
42
<PAGE>
Castle Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
3. Notes Receivable
At July 31, 2000 and 1999, notes receivable consisted of the
following:
2000 1999
Notes receivable from third party in
Monthly installments of $10,000,
including interest at 10% per annum.
Balance of principal and interest is
due September 1, 2000. Real estate is
pledged as collateral. 70,184 146,200
Less current portion 70,184 110,300
----------------------
Notes receivable, non-current $ - $ 35,900
======================
4. Commitments and Contingencies
Leases
The Company leases office space, vehicles and equipment expiring at
various dates through 2004. The office lease may be renewed for an
additional five years.
In March 1999, the Company signed an agreement to lease and manage a
newly constructed hotel in Guam through December 2004. The Company
began leasing and managing this resort property in October 1999.
At July 31, 2000, the future minimum rental commitments under these
leases was as follows:
Schedule of future minimum lease payments
2001 $ 2,655,000
2002 2,799,000
2003 2,894,000
2004 2,909,000
2005 1,139,000
--------------
$ 13,804,000
==============
Rent expense under these leases amounted to approximately $317,000 for
the years ended July 31, 2000 and 1998, respectively.
43
<PAGE>
Castle Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
Management Contracts
The Company manages several hotels and resorts under management
agreements expiring at various dates through December 2004. Several
of these management agreements contain automatic extensions for
periods of 1 to 10 years. Management fees received are based on the
revenues and net available cash flows of the hotels operations as
defined in the respective management agreements.
In addition, the Company has sales, marketing and reservations
agreements with other hotels and resorts expiring at various dates
through December 2000. Several of these agreements contain automatic
extensions for periods of one month to three years. Fees received are
based on revenues, net available cash flows or commissions as defined
in the respective agreements.
Lease of Real Property in Cook Islands
In January 1999, the Company signed an agreement as a co-lessee for
certain real property located in the Cook Islands, upon which is
situated an uncompleted hotel development that is approximately 85%
completed. Under terms of the agreement with the lessor, the lessees
collectively are to complete construction of the hotel and open
substantially all of the rooms of the hotel for business not later
than June 30, 2000. If substantially all of the rooms of the hotel
are not open for business by June 30, 2000, the lessor of the property
is entitled to compensation in an amount to be determined by
arbitration. Funding for the completion of the hotel development was
to be provided by the Company's co-lessee. However, as of July 31,
2000, the Company's co-lessee has been unable to fund the completion
of the hotel development. The Company's co-lessee is responsible for
any compensation awarded to the lessor and the Company has no
responsibility to contribute to any compensation paid to the lessor.
The Company attempted to secure a replacement for the co-lessee but
was unsuccessful and therefore, considers its involvement in the Cook
Islands project to be terminated.
44
<PAGE>
Castle Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
5. Notes Payable
At July 31, 2000 and 1999, notes payable consisted of the following:
2000 1999
Term loan payable to a bank at an
interest rate of 9.25% with monthly
payments of $8,352. The balance and
any unpaid interest is due on May 24,
2004. The Company's accounts receivable,
furniture, fixtures and equipment are
pledged as collateral and the Company's
Chief Executive Officer is a guarantor $ 323,462 $ 395,906
$200,000 line of credit from a bank dated
May 25, 1999. Drawings are due on
September 30, 2000, with interest (11%
at July 31, 2000) at 3% 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 200,000 100,000
Note payable to unrelated party with
interest determined based on 1/3 the
profits of the Company's wholly owned
subsidiary, HRCC. Principal and any
unpaid interest due on December 31, 2001 125,000 0
----------------------
647,635 495,906
Less current portion 273,400 173,300
----------------------
Notes payable, non-current $ 375,062 $ 322,606
======================
6. Employee Benefits
The Company has a 401(k) Profit Sharing Plan (the "Plan") available
for its employees. Under the terms of the Plan, the Company may match
50% of the compensation reduction of the participants in the Plan up
to 1% of compensation. Any employee with one-year service and 1,000
credit hours of service, who is at least twenty-one years old, is
eligible to participate. For the years ended July 31, 2000 and 1999,
the Company made no contributions.
45
<PAGE>
Castle Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
The Company also has a Flexible Benefits Plan (the "Benefits Plan").
The participants in the Benefits Plan are allowed to make pre-tax
premium elections which are intended to be excluded from income as
provided by Section 125 of the Internal Revenue Code of 1986. To be
eligible, an employee must have been employed for 90 days. The
benefits include group medical insurance, vision care insurance,
disability insurance, cancer insurance, group dental coverage, group
term life insurance and accident insurance.
7. Redeemable Preferred Stock
In March and April of 1999, the Company issued a total of 8,550 shares
of $100 par value redeemable preferred stock to certain officers and
directors. Dividends are cumulative from the date of original issue
and are payable semi-annually, when, and if declared by the board of
directors beginning July 15, 1999 at a rate of $7.50 per annum per
share. During the fiscal year ended July 31, 2000, the Company paid
dividends to holder of record as of July 15, 2000 in the amount of
$16,715. At July 31, 1999, accrued dividends on these shares of
$16,715 ($1.95 per share), is included in redeemable preferred stock
in the accompanying Consolidated Balance Sheet. The shares are
nonvoting, and are convertible into the Company's common stock at an
exercise price of $3 per share. As of January 15, 2001, the
redeemable preferred stock will be redeemable at the option of the
Company at a redemption price of $100 per share plus accrued and
unpaid dividends. In February and April of 2000, the Company issued an
additional 2,500 shares.
Of the shares issued during the fiscal year ended July 31, 2000, 2,000
shares were issued to the former sole stockholder of HRCC in settlement
of amounts due to HRCC for past reservation services performed through
April 30, 2000. An additional 500 shares were issued to an officer of
the Company.
8. Common Stock
Restricted Common Stock
In July 1999, the Company issued 22,500 shares of restricted common
stock as compensation to an employee. The Company recorded payroll
and benefits expense of approximately $40,781 based on the fair market
value of the Company's stock on the date of issuance ($1.8125 per
share at July 30, 1999). The holder of these shares is prohibited
from selling these shares in normal public trading.
During the fiscal year ended July 31, 2000, the Company issued 521,024
shares of restricted common stock. 130,000 shares were issued to the
owner of one of the properties managed by the Company in exchange for
a new five-year management agreement. The shares were valued as of
the date of the new management contract, January 1, 2000, at $1.75 per
46
<PAGE>
Castle Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
share. The remaining 391,024 shares were issued to various
individuals and entities through private placements of stock at a
price of $1.25 per share. The purchasers of the 391,024 shares also
received a warrant for each share purchased. The warrants entitle the
holder to purchase one additional share of the Company's common stock
for $1.50 per share, exercisable anytime prior to July 15, 2002.
Directors of the Company purchased, directly or indirectly, 260,000 of
the 391,024 shares issued.
Common Stock Held by Lessor
In July 1999, the Company issued 61,157 shares of restricted common
stock to the lessor of a hotel as part of a security deposit. The
lessor is prohibited from selling these shares in public trading and
will return the shares to the Company at the termination of the lease
agreement in the year 2004. The Company recorded the common stock
held by the lessor as a contra equity item in the Consolidated Balance
Sheet.
Common Stock Warrants
In June 1998, the Company issued common stock warrants to acquire up
to 187,500 shares of common stock for $2.00 per share, exercisable
through June 2003 in exchange for certain loans made to the Company.
No common stock warrants were exercised during 1999 and 1998. A
director of the Company was issued warrants for 87,500 shares in
exchange for a loan made to the Company.
In May 1994, the Company issued common stock warrants to acquire up to
25,000 shares of common stock for $1.25 per share, exercisable through
May 1999 in exchange for consulting services rendered. During 1999,
these common stock warrants were exercised on a net basis, resulting
in the issuance of 12,244 shares of the Company's common stock.
During the fiscal year ended July 31, 2000, the Company issued
warrants to acquire up to 391,024 shares of common stock for $1.50 per
share, exercisable through July 15, 2002, in exchange for the purchase
of common stock at a price of $1.25 per share. Directors of the
Company were issued, directly or indirectly, warrants to acquire
260,000 shares of the Company's common stock.
Common Stock Options
In May 1997, the Company, as part of a renegotiation of its
reservation services agreement, granted an option to purchase 50,000
shares of the Company's common stock at a price of $2 per share to
Hawaii Reservation Center Corporation ("HRCC"), which is wholly-owned
by a stockholder/director of the Company. The options are exercisable
at any time between May 1997 and 2002 and no options were exercised as
of July 31, 2000 or 1999. In April of 2000, immediately prior to the
Company's acquisition of HRCC, HRCC assigned the option to its sole
shareholder, a former director of the Company.
47
<PAGE>
Castle Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
No other stock options were issued during the years ended July 31,
2000 or 1999.
Per Common Share Data
The following is a reconciliation of the numerators and denominators
of the basic and diluted common earnings (loss) per share:
<TABLE>
<CAPTION>
2000
-------------------------------------------
Per Common
Income Shares Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
BASIC:
Net Income $(1,374,241) 5,928,055 $ (0.23)
Effect of dilutive securities:
Stock subscriptions, options
and warrants - - -
-------------------------------------------
DILUTED:
Net Income and assumed conversions $(1,374,241) 5,928,055 $ (0.23)
===========================================
1999
-------------------------------------------
Per Common
Income Shares Share
(Numerator) (Denominator) Amount
Net Loss $ (487,458)
Less: Redeemable preferred
stock dividend accrual ( 16,715)
-----------
BASIC:
Loss available to common
stockholders (504,173) $ 5,313,912 $ (0.09)
Effect of dilutive securities:
Redeemable preferred stock,
Stock subscriptions, options
and warrants - - -
-------------------------------------------
DILUTED:
Loss available to common
Stockholders and assumed
Conversions $ (504,173) $ 5,313,912 $ (0.09)
===========================================
</TABLE>
48
<PAGE>
Castle Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
In 2000, 1,105 shares of preferred stock, 578,524 shares covered under
stock warrants and 50,000 common stock options were not considered
common stock equivalents since they had an anti-dilutive effect on
basic loss per share.
In 1999, 8,550 shares of preferred stock, 187,500 common stock
warrants, and 50,000 common stock options were not considered common
stock equivalents since they had an anti-dilutive effect on basic loss
per share.
9. Income Taxes
Significant components of the Company's deferred tax assets and
liabilities as of July 31, 2000 and 1999 are as follows:
2000 1999
Deferred Tax Assets:
Net operating loss carryforward $1,500,000 920,000
Noncompetition agreement 176,000 197,000
Deferred income 10,000 21,000
Vacation pay 6,000 8,000
-----------------------
$1,692,000 $1,146,000
Deferred Tax Liability:
Furniture, fixtures and equipment (5,000) (5,000)
-----------------------
Net Deferred Tax Asset 1,687,000 1,141,000
Valuation Allowance (1,687,000) (1,141,000)
-----------------------
$ 0 $ 0
=======================
The net change during 2000 and 1999 in the valuation allowance was an
increase of $546,000 and a decrease of $218,000, respectively.
The Company has a net operating loss carryforward for income tax
purposes of $3,746,000 at July 31, 2000, which expires at various
dates through fiscal year 2020.
Litigation
There are various claims and lawsuits pending against the Company
involving complaints, which are normal and reasonably foreseeable in
light of the nature of the Company's business. The ultimate liability
of the Company, if any, cannot be determined at this time. Based upon
consultation with counsel, management does not expect that the
aggregate liability, if any, resulting from these proceedings would
have a material effect on the Company's consolidated financial
position, results of operations or liquidity.
49
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
The Company dismissed PricewaterhouseCoopers LLP as its principal
accountant during the fiscal year ended July 31, 2000. There were no
disagreements with PricewaterhouseCoopers LLP.
The Company is in the process of finalizing an agreement with its new
accountants and therefore, the financial statements included in this
filing have not been audited. The Company shall file Form 10K-SB/A
upon the completion of its audit for the fiscal year ended July 31,
2000.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT.
The following table sets forth certain information concerning the
directors and executive officers of the Company as of October 30,
2000. Except as otherwise stated below, the directors will serve
until the next annual meeting of stockholders or until their
successors are elected or appointed, and the executive officers will
serve until their successors are appointed by the Board of Directors.
Name Age Position
----------------------- --- ---------------------------------
Rick Wall 57 Chief Executive Officer, Director
And Chairman of the Board
John G. Tedcastle 66 Vice Chairman of the Board
and Director
Hideo Nomura 48 Director
Motoko Takahashi 56 Secretary and Director
Judhvir Parmar 65 Director
Stanley Mukai 67 Director
Edward Calvo Sr. 63 Director
K. Roger Moses 58 Director
Roy Tokujo 59 Director
Michael S. Nitta 41 Chief Financial Officer
Thomas S. Blankley, Jr. 47 Executive Vice President
Alan R. Mattson 44 Senior Vice President,
Sales & Marketing
Rick Wall. Mr. Wall was appointed the Company's chief executive
officer and chairman of the board upon consummation of the Castle
Plan. Mr. Wall was instrumental in the formation of Castle Group
Hawaii, the negotiation and consummation of the Castle Plan and the
acquisition of KRI. He was the president, director and founder of
Castle Group Hawaii. Mr. Wall has served on the board of directors of
the Hawaii Visitors & Convention Bureau and is chair of the HVCB's
Governmental Affairs Committee. Mr. Wall resides in Honolulu, Hawaii.
50
<PAGE>
John G. Tedcastle. Mr. Tedcastle was appointed as a director of the
Company in November 1993. Mr. Tedcastle is experienced in the travel
and hotel industry, having been involved for several years as part
owner and developer of an eleven-property hotel chain in New Zealand.
He has also been a senior partner in a prominent law firm in Auckland,
where he specialized in property, financing and general business law.
Mr. Tedcastle resides in Auckland, New Zealand.
Hideo Nomura. Mr. Nomura was appointed as a director of the Company
in November 1993. Mr. Nomura is president of Nomura Holdings and of
Nomura Hitchcock Corporation, Ltd., a property related investment and
consulting firm based in Tokyo, Japan, and has held this position
since 1987. Mr. Nomura is the operational executive of the Marina del
Rey Residential Development in California, and was the manager of
Mitsui & Company (N.Z.) Ltd. for five years until 1987. Mr. Nomura is
a resident of Japan.
Motoko Takahashi. Ms. Takahashi was appointed secretary of the
Company in August of 1994 and as director in March of 1995. Ms.
Takahashi had previously served as director for various Japanese
investment companies in the United States. She also holds the
position as Vice President of N.K.C. Hawaii, Inc. Ms. Takahashi was
born and completed her education in Tokyo, Japan and has resided in
the United States for more than 30 years, the past six being in
Hawaii.
Judhvir Parmar. Mr. Parmar was formerly Senior Vice President of
Investment Operations for International Finance Corporation ("IFC"), a
wholly owned subsidiary of the World Bank. IFC was responsible for
all private sector operations of the World Bank. A specialist in
project corporate finance, Mr. Parmar was with IFC for more than
twenty years and was responsible for the worldwide investment program
at IFC. In August 1993, Mr. Parmar retired from IFC to form his own
consulting company, and resides in Washington, D.C.
Stanley Mukai. Mr. Mukai is a graduate of the Harvard Law School and
a partner in the law firm of McCorriston Miho Miller Mukai located in
Honolulu, Hawaii. His expertise is in the area of taxation and Mr.
Mukai has held various positions such as Advisory Board Member, Hawaii
Tax Institute; Trustee, Tax Foundation of Hawaii; Co-Chairman, Tax
Subcommittee, American Bar Association; Chairman, Tax Subcommittee on
U.S. District and Portfolio Investment by Foreigners; and Chairman,
Section of Taxation, Hawaii Bar Association.
Edward Calvo, Sr. Mr. Calvo is vice president of Calvo Enterprises,
Inc., a conglomerate of ten businesses with fifteen hundred employees.
They are the largest private employer on Guam, where Mr. Calvo
resides. Mr. Calvo has served as a Senator in the Guam legislature
and is currently the Board Chairman of the Guam Waterworks Authority.
51
<PAGE>
K. Roger Moses. Mr. Moses, a resident of New Zealand, was elected to
the board of directors in March 2000. He is a non-executive director
of Harts Reeves Moses & Company Ltd. Mr. Moses is one of New
Zealand's most experienced financial and investment planners and has
been involved in most facets of the investment industry. Mr. Moses is
a past chairman of the Financial Planners and Insurance Advisors
Association and is a former member of the Association's Board of
Trustees. He has also co-authored four successful books on investment
and financial planning.
Roy Tokujo. Mr. Tokujo, a resident of Hawaii, was elected to the
board of directors in March 2000. Mr. Tokujo has over 40 years of
experience in the hotel, restaurant and entertainment business in
Hawaii and is currently the President and CEO of Cover Entertainment,
Inc. Mr. Tokujo has also served as acting president and chairman of
the board of the Hawaii Visitor's and Convention Bureau, and is a
current board member of the Hawaii Tourism Authority, a State of
Hawaii agency that administers a $60 million annual budget to promote
tourism for Hawaii.
Michael S. Nitta. Mr. Nitta joined the Company in November, 1993
following the acquisition of KRI, Inc. Prior to joining the Company,
Mr. Nitta served as secretary and treasurer of KRI and was
instrumental in the formation of KRI Inc. and the acquisition of
Hawaiian Pacific Resorts in 1987 from its former founders. Prior to
the formation of KRI, Inc. Mr. Nitta served as secretary and treasurer
of Hawaiian Pacific Resort Hotels Inc. from 1982. Born and residing
in Hawaii, he is a graduate of the University of Hawaii and holds a
Masters of Accounting Degree.
Thomas S. Blankley, Jr. Mr. Blankley joined the Company in September
1998. Prior to joining the Company, Mr. Blankley was president of
PAHIO Vacation Resorts, Inc., Hawaii's largest timeshare sales and
marketing company. A native of New York, Mr. Blankley was a Managing
Director for Merrill Lynch in Tokyo and Drexel Burnham Lambert in
London before moving to Hawaii in 1988. Mr. Blankley resides on the
island of Kauai, Hawaii.
Alan R. Mattson. Mr. Mattson has over 20 years of experience of
marketing and sales in the tourism industry. Mr. Mattson joined the
Company in September of 1999 and was formerly vice president of sales
and marketing for Dollar Rent a Car, responsible for all sales and
marketing efforts for Hawaii, Asia and the Pacific. Prior to Dollar
Rent a Car, Mr. Mattson was director of marketing for Avis Car Rental,
operating out of the Avis worldwide headquarters in New York. Mr.
Mattson also has seven years of sales and marketing experience with
Hilton Hotels Corporation, performing in a variety of senior level
sales and marketing positions in Hawaii and the domestic United
States. Mr. Mattson resides in Honolulu, Hawaii.
52
<PAGE>
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES ACT.
Section 16 of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers and persons who own more
than 10% of a registered class of the Company's equity securities to
file with the Securities and Exchange Commission initial reports of
beneficial ownership (Form 3) and reports of changes in beneficial
ownership (Forms 4 and 5) of the Company's common stock and other
equity securities of the Company. Officers, directors and greater
than 10% shareholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) reports they file.
To the Company's knowledge, all directors, officers and holders of
more than 5% of the Company's common stock, filed all reports required
of Section 16(a) of the Securities Exchange Act of 1934 during the
fiscal year ending July 31, 2000.
ITEM 10. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
The following table shows for the fiscal year ended July 31, 2000, the
aggregate annual remuneration of each of the three highest paid
persons who are executive officers or directors of the Company as of
October 30, 2000 and the executive officers and directors as a group.
Name of Individual Capacities in which renumeration
Aggregate
or identity of group was received renumeration
Rick Wall Chairman of the Board and $120,000
Chief Executive Officer
Alan Mattson Senior Vice President $102,603
Michael S. Nitta Chief Financial Officer $ 98,400
COMPENSATION OF DIRECTORS
The Company does not have any present standard arrangements regarding
compensation of directors for service as a director, or for attendance
at meetings of the Board of Directors or for participation on
committees or other special assignments. The Board of Directors may
adopt resolutions providing for reasonable compensation for
participation in committees or special assignments and reimbursement
for reasonable expenses incurred in attending any meeting of the Board
of Directors. No compensation for service as a director is presently
contemplated.
There were no arrangements pursuant to which any director of the
Company was compensated during its most recent fiscal year for service
provided solely as a director, or for attendance at any meeting of the
board of directors.
53
<PAGE>
EMPLOYMENT CONTRACTS
The Company has entered into written employment contracts with Mr.
Nitta, effective as of November 1, 1993 and Mr. Mattson effective as
of September 7, 1999. Other than Mr. Nitta and Mr. Mattsond, the
Company has entered into no employment contract with any director or
executive officer.
The employment agreements are for three to five years and provide for
a base salary, to be increased annually by a percentage no less than
the increase in the Honolulu Consumer Price Index for the preceding
twelve months. Under their respective employment agreements, the
current base salary Mr. Nitta is $120,000 per year. However, Mr.
Nitta has agreed to reduce his base salary for the current fiscal year
to $90,000. The base salary for Mr. Mattson is $115,000. The
employment agreements further provide for vacation leave; a monthly
automobile allowance; an annual performance bonus potential of up to
15%, depending upon attaining pre-determined goal criteria; membership
in a pension plan (not yet established) that would contribute the
equivalent of 10% of base salary annually; a business development
bonus (which has been waived in the past and current fiscal years);
membership in a 401(k) plan; and full medical, dental and disability
insurance.
Mr. Nitta's employment agreement contains a "change-in-control"
provision which gives him the right, upon the occurrence of a "change-
in-control," to terminate their employment and receive as severance
pay the total compensation remaining to be paid under the agreement as
of the date of such termination or the total compensation for three
years following the date of termination, whichever is greater. The
term "change-in-control" is defined in the agreement as the date when
persons other than the shareholders of record on the date of
commencement of the term of such agreement become the beneficial owner
of 51% of the Company's voting stock.
LONG TERM INCENTIVE PLANS
On July 31, 1999, the Company awarded Mr. Townsend 22,500 shares of
unregistered and restricted common stock as a bonus. No other
options, awards, options or stock appreciation rights or long term
incentive plan awards were issued or granted to the Company's
management during the fiscal year ending July 31, 1999.
The Company has a 401(k) profit sharing plan generally available to
all of its employees. Under the terms of the plan, the Company is
required to match 100% of the amounts contributed by participants
through payroll deductions, up to a maximum of 1% of their
compensation. Any employee with one year of service who is at least
21 years of age is eligible to participate.
54
<PAGE>
STOCK PLANS
The Company's stockholders have approved a 1995 Stock Option Plan for
the purposes of: (i) attracting and retaining employees, executive
management and key employees with ability and initiative; (ii)
providing incentives to those deemed material to the success of the
Company; and (iii) attaining a common interest for these individuals
to coincide with the interests of the Company and its shareholders. A
total of 1,000,000 shares of common stock has been reserved for
issuance under the Plan. No stock grants were issued for the years
ended July 31, 1995 through July 31, 2000.
The Company's stockholders have approved a 1995 Stock Purchase Plan
for the purposes of providing an employee benefit that will allow
employees of the Company to purchase shares of common stock at a
discount of 15% of the fair market value of the stock. A total of
500,000 shares of common stock has been reserved for issuance under
the Plan. As of July 31, 2000, the Stock Purchase Plan had not been
instituted.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth the number of shares of the Company's
common stock beneficially owned as of October 29, 2000 by: (i) each
of the three highest paid persons who were officers and directors of
the Company, (ii) all officers and directors of the Company as a
Group, and (iii) each shareholder who owned more than 10% of the
Company's common stock, including those shares subject to outstanding
options, warrants and other convertible items. Amounts also reflect
shares held both directly and indirectly by the persons named.
Name and Address Beneficially Owned(1) Shares %of Class(2)
--------------------------------------------------------------------
Rick Wall
745 Fort Street
Honolulu, HI 96813 815,000(3) 12%
John G. Tedcastle
745 Fort Street
Honolulu, HI 96813 525,000(4) 8%
Hideo Nomura
745 Fort Street
Honolulu, HI 96813 525,000 8%
Judhvir Parmar
745 Fort Street
Honolulu, HI 96813 915,833(5) 14%
Motoko Takahashi
745 Fort Street
Honolulu, HI 96813 927,000(6) 14%
55
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Name and Address Beneficially Owned(1) Shares %of Class(2)
--------------------------------------------------------------------
K. Roger Moses
745 Fort Street
Honolulu, HI 96813 274,600(7) 4%
Thomas S. Blankley, Jr.
745 Fort Street
Honolulu, Hawaii 96813 152,000(8) 2%
Stanley Mukai
500 Ala Moana Blvd 4th Floor
Honolulu, HI 96813 211,000(9) 3%
Roy Tokujo
1580 Makaloa St.
Honolulu, HI 96814 160,000(10) 2%
Michael S. Nitta
98-1722 Halakea St.
Aiea, Hawaii 96701 45,500 <1%
Directors and officers
as a group (12 persons) 4,573,433 69%
(1) Except as otherwise noted, the Company believes the persons named
in the table have sole voting and investment power with respect
to the shares of the Company's common stock set forth opposite
such persons names. Amounts shown include the shares issuable
pursuant to various stock options and warrants exercisable in
2000.
(2) Determined on the basis of 6,585,555 shares outstanding. Amount
includes shares issuable under certain stock options and warrants
exercisable as of July 31, 2000.
(3) Includes 375,000 shares held by HBII Management, Inc., which is
owned and controlled by Mr. Wall.
(4) Includes 525,000 shares held by The John Tedcastle Family Trust,
of which Mr. John Tedcastle is trustee with control over voting
rights.
(5) Includes 525,000 shares held by L.C.C. Management, Inc., a
corporation owned and controlled by Ms. Janet Parmar, spouse of
Mr. Judvhir Parmar, a director of the Company. Includes 207,500
shares issuable pursuant to warrants held by Mr. Parmar. Includes
33,333 shares issuable pursuant to preferred stock held by Mr.
Parmar.
(6) Includes 900,000 shares held by N.K.C. Hawaii, Inc., which is
owned and controlled by the family of Ms. Motoko Takahashi.
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<PAGE>
(7) Includes 30,000 shares issuable pursuant to warrants held by Mr.
Moses. Includes 222,100 shares held by Moses Management Ltd., a
company controlled by Mr. Moses.
(8) Includes 50,000 shares issuable pursuant to warrants held by the
parents of Mr. Thomas Blankley Jr. Includes 66,667 shares
issuable pursuant to preferred stock held by the parents and
siblings of Mr. Thomas Blankley Jr. Includes 33,333 shares
issuable pursuant to preferred stock held by Mr. Thomas Blankley,
Jr.
(9) Includes 171,000 shares and 40,000 shares issuable pursuant to
warrants held by various entities controlled by Mr. Mukai.
(10) Includes 80,000 shares and 80,000 shares issuable pursuant to
warrants held by various entities controlled by Mr. Tokujo.
OPTIONS, WARRANTS AND RIGHTS
In May 1994, the Company entered into a Common Stock Purchase Warrant
with Van Kasper and company for services provided. The Warrant is for
25,000 shares exercisable on or before May 12, 1994 for a price of
$1.25 per share. In May of 1999, the warrants were exercised on a net
basis, resulting in the issuance of 12,244 shares of the Company's
common stock.
In May, 1997, The Company, as part of a renegotiation of its
reservation services agreement, granted to Hawaii Reservations Center
Corp. "HRCC" an option to purchase 50,000 shares of the Company's
common stock at a price of $2.00 per share. The option may be
exercised between May 21, 1997 and May 20, 2002. HRCC is a wholly
owned corporation of Mr. Charles McGee, a former director of the
Company. As of July 31, 2000, the option had not yet been exercised.
Mr. McGee tendered his resignation as a member of the board of
directors on February 16, 1999. On April 30, 2000, the Company
purchased all of the outstanding stock of HRCC and HRCC became a
wholly owned subsidiary of the Company. Immediately prior to the
purchase of HRCC, the stock option was assigned to Mr. McGee.
Immediately prior to the purchase of HRCC by the Company, the Company
issued 2,000 shares of its convertible preferred stock to Mr. McGee as
consideration for amounts due to HRCC for past reservation services.
In June 1998, certain individuals advanced a total of $375,000 to the
Company in the form of a Promissory Note from the Company to the
individual. The Notes specify that if the principle amounts are not
returned to the individuals on or before March 31, 1999, then the
entire principle balance shall be converted into common stock of the
Company at a 50% discount of the then fair value of the Company's
common stock. The notes were paid in full in March of 1999. The
notes also provide for the issuance of a warrant to the individuals,
whereby the individual has the right to acquire 1 share of the
Company's common stock for every $2.00 of funds advanced to the
Company. The exercise price under the warrant agreements is $2.00 per
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<PAGE>
share and the warrants may be exercised at any time between June 30,
1998 and June 29, 2003. As of July 31, 2000, no warrants had been
exercised by any of the holders. Mr. Judvhir Parmar, a director of the
Company, advanced $175,000 of the $375,000 received and is therefore
entitled to a warrant to purchase 87,500 shares of the Company's
common stock.
In March of 1999 the certain individuals purchased 8,550 shares
through a private placement of the Company's Preferred Stock for a
gross consideration of $855,000. The stock bears cumulative dividends
at the rate of $7.50 per annum for each share of stock. Upon certain
tender offers to acquire substantially all of the Company's common
stock, the holders of the Redeemable Preferred Stock may require the
shares be redeemed at a redemption price of $100 per share plus
accrued and unpaid dividends. The shares are nonvoting and entitles
the holder to convert each share of Preferred Stock into 33.33 shares
of the Company's common stock. During the fiscal year ended July 31,
2000, the Company issued an additional 2,500 shares of Preferred
Stock. 2,000 shares were issued to Mr. Charles McGee as settlement of
amounts due to HRCC and 500 shares were issued to Mr. Thomas Blankley,
Jr.
During the fiscal year ended July 31, 2000, the Company issued
warrants to acquire common stock of the Company in accordance with a
private placement of the Company's restricted stock. The Company
issued 391,024 shares to various entities under a private placement at
$1.25 per share. Each participant in the private placement also
received a warrant to acquire an additional share of the Company's
common stock at a price of $1.50 per share, exercisable at any time
through July 15, 2002. Four directors of the Company acquired 240,000
shares and warrants under the private placement.
Other than the warrants issued to the individuals who advanced funds
to the Company, the warrants issued under a private placement
agreement to acquire the Company's stock, the option granted to Hawaii
Reservations Center Corp. and the preferred stock, there were no
outstanding options, warrants or rights to purchase common stock held
by any of the officers or directors of the Company or its principal
shareholders.
58
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
As noted in section "Development of Business," Item 1, Part I, the
Hanalei Bay Resort is a 134- unit condominium located in Princeville,
Kauai, Hawaii. HBII was formed through the efforts of HBII Management
Inc., owned by Mr. Wall, with the following partners: Siam Commercial
Bank; Voyage Fourteen Ltd., owned by John G. Tedcastle; L.C.C.
Management, Inc., owned by Judhvir Parmar; Nomura Firm and Nomura
Holdings, owned by Hideo Nomura and Don Nomura. In 1988 HBII made an
offer to purchase all 134 units of the Hanalei Bay Resort and eighty-
six owners accepted the offer. HBII elected to form its own
management company and entered into a management contract with Castle
Group Hawaii, which was one of the assets acquired by the Company
pursuant to the Castle Plan. Under terms of the management contract
between HBII and Castle Group Hawaii and as acquired by the Company,
the Company is required to provide full management, including sales,
supervision of staff, accounting and maintenance. Mr. Tedcastle and
Mr. Hideo Nomura were elected to serve on the board of directors of
the Company following completion of the Castle Plan. Mr. Parmar was
appointed interim director in November 1995. Mr. Parmar is a general
partner of HBII and is the owner of L.C.C. Management, Inc., which is
the holder of approximately 10% of the Company's common stock (see
Item 11, Part III). Nichiman International later became an investor in
HBII and Nichiman International s owner, Mr. Ryoji Takahashi was
appointed as a director of the Company. In March of 1995, Mr.
Takahashi s sister, Ms. Motoko Takahashi, was appointed Secretary and
director of the Company. In March of 1997, Mr. Michael Nitta was
appointed Assistant Vice President of HBII Management, Inc. Until the
date that HBII sold its principal asset, the Hanalei Bay Resort, Mr.
Wall received a monthly retainer from HBII.
In March of 1999, HBII sold its principal asset, which consisted of 85
condominium units in the Hanalei Bay Resort. Upon the closing of the
sale, the Company received $468,000, which was applied to the $435,000
note receivable and accrued interest due from HBII (see Note 3 to the
Consolidated Financial Statements). The funds received by HBII upon
the closing of the sale were insufficient to make full payment to the
Company for its accounts receivable balance. Under the terms of the
sale, in addition to the sale proceeds to be received, the current
HBII partners shall share in the future cashflows generated by
timeshare sales of the units located within the Hanalei Bay Resort,
after certain secured and preferential payments are made. HBII shall
make payments to the Company through the funds received from the
future cashflows generated by the timeshare sales of the Hanalei Bay
Resort units (see Note 2 to the Consolidated Financial Statements).
Although no assurances can be given, management is confident that the
future sales will be made and that the Company shall receive payment
in full of its accounts receivable balance from HBII. Certain members
of the Board of Directors of the Company have a direct or indirect
financial interest in HBII (See Item 12).
59
<PAGE>
Management believes that the terms of the management contract between
the Company and HBII were on terms that are no less favorable to HBII
or the Company than those that are negotiated with other owners not
affiliated with the Company.
On August 1, 1994, the Company entered into a contract with HRCC (as
described in section "Plan of Operations" Item 6, Part II, and
incorporated herein by reference), a company owned and controlled by
Charles M. McGee, a former director of the Company. It is
management's belief that the contract with HRCC are on terms which are
no less favorable than those which could be negotiated with companies
not affiliated with the Company, however, in May of 1997, the Company
renegotiated its contract with HRCC with regard to the fees charged.
Under the renegotiated agreement, the fees paid to HRCC shall be based
upon the monthly room revenues of the properties managed by the
Company, subject to a minimum monthly fee. Management believes,
although no assurances can be given, that the Company shall enjoy
lower reservations costs under the new agreement.
On April 30, 2000, the Company purchased all of the outstanding stock
of Hawaii Reservations Center Corp. ("HRCC") from Mr. Charles McGee, a
former director of the Company. Immediately prior to the Company's
purchase of HRCC, the assets of HRCC except for accounts receivable of
$12,400 and furniture & equipment were distributed to Mr. McGee.
Under the terms of the purchase agreement, the Company paid as
consideration $350,000 for 100% of the outstanding stock of HRCC and
assumed liabilities of $26,817. The Company allocated $10,000 of the
purchase price to the value of the furniture and equipment of HRCC,
and recorded $366,817 of goodwill, which shall be written off over 20
years. In addition, prior to the acquisition of the stock of HRCC,
the Company issued $200,000 worth of its $100 par value Preferred
Stock to Mr. McGee in settlement of the accounts payable of the
Company due to HRCC for past reservation services.
Except for the Castle Plan, the HBII Plan and the purchase agreement
involving KRI described under the caption "Development of Business" of
Item 1, Part I and incorporated herein by reference, the employment
contracts and other matters described in Item 10, "Remuneration of
Directors and Officers," the HBII management contract, the issuance of
warrants as described in Item 11 "Security Ownership of Certain
Beneficial Owners and Management," the issuance of Preferred Stock and
the HRCC contract, there were no transactions or proposed transactions
during 2000 and 1999, to which the Company or any of its subsidiaries
was or is to be a party, in which the amount involved exceeds $50,000
and in which any director or executive officer, or any shareholder who
is known to the Company to own of record or beneficially more than 10%
of the Company's common stock, or any member of the immediate family
of any of the foregoing persons, had a direct or indirect material
interest.
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PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
REPORTS ON FORM 8-K.
The Company filed a current report on Form 8-K on July 14, 2000
reporting the resignation of Mr. Ryoji Takahashi and Mr. Noboru
Sekiguchi from its board of directors.
The Company filed a current report on Form 8-K on September 19, 2000
reporting the dismissal of PricewaterhouseCoopers LLP as its auditor
for the fiscal year ended July 31, 2000.
INDEX TO EXHIBITS
The following exhibits are filed as a part of this report:
Sequential
Exhibit Page
Number Description Number
----------------------------------------------------------------------
1.1 Form of Placement Agency Agreement incorporated by
reference to Exhibit 1.1 to the Company's
Registration Statement on Form SB2/A-1 filed on
March 10, 1998. *
2.1 Restated Articles of Incorporation, incorporated by
reference to Exhibit 2.1 to the Company's Registration
Statement on Form 10-SB. *
2.2 Bylaws, as amended effective February 1, 1995,
incorporated by reference to Exhibit 2.2 to the
Company's Quarterly Report on Form 10-QSB for the
quarter ending 04/30/96. *
2.3 Certificate of Amendment to the Articles of
Incorporation of The Castle Group, Inc. filed on
May 22, 2000 with the Utah Division of Corporations
and Commercial Code incorporated by reference to
exhibit 2.3 to the Company's Quarterly Report on
Form 10-QSB for the quarter ending 04/30/00. *
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. *
61
<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. *
62
<PAGE>
6.10 Stock Acquisition Agreement between the Company and
Shari W. Chang dated September 10, 1995, incorporated
by reference to Exhibit 6.10 to the Company's Annual
Report on Form 10-KSB for the year ended July 31,
1995. *
6.11 Revolving Line of Credit Loan Agreement dated October
21, 1994 between the Company, and Castle Resorts &
Hotels, Inc., KRI, Inc., Hawaii National Bank, Rick
Wall, John Tedcastle, Hideo Nomura and Kimo Keawe,
incorporated by reference to Exhibit 6.11 to the
Company's Annual Report on Form 10-KSB for the year
ended July 31, 1995. *
6.12 Letter dated October 17, 1995 from Kimo M. Keawe to
KRI, Inc. Stockholders, together with Promissory Notes
dated July 31, 1995 payable to Maui Beach Hotel, Inc.
for $12,000, James Kurita for $6,000, Saburo or Mitsue
Maruyama for $3,600, TN Group Hawaii, Inc. for $6,000,
M.K. & Sons, Inc. for $12,000, Shigeru Shinno for
$6,000, Michael S. Nitta for $16,800, and Keawe
Resorts, Inc. for $122,000, incorporated by reference
to Exhibit 6.12 to the Company's Annual Report on
Form 10-KSB for the year ended July 31, 1995. *
6.13 Second Amendment to Letter of Agreement Dated
December 2, 1993 between Kelvin Bloom and The Castle
Group, Inc. incorporated by reference to Exhibit 6.13
to the Company's Annual Report on Form 10-KSB for the
year ended July 31, 1995. *
6.14 Extension of Revolving Line of Credit Agreement dated
December 18, 1995 between The Castle Group, Inc., KRI,
Inc., Castle Resorts & Hotels, Inc., and Hawaii
National Bank incorporated by reference to Exhibit
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
to the Company's Annual Report on Form 10-KSB for the
year ended July 31, 1996. *
63
<PAGE>
6.17 Extension of Revolving Line of Credit Agreement
dated December 11, 1996 between The Castle Group,
Inc., KRI, Inc., Castle Resorts & Hotels, Inc., and
Hawaii National Bank incorporated by reference to
Exhibit 6.17 to the Company's Annual Report on Form
10-KSB for the year ended July 31, 1997. *
6.18 Extension of Revolving Line of Credit Agreement
dated March 5, 1997 between The Castle Group, Inc.,
KRI, Inc., Castle Resorts & Hotels, Inc., and Hawaii
National Bank incorporated by reference to Exhibit
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
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. *
64
<PAGE>
6.25 Amendment to Promissory Notes from the Company to
Saburo or Mitsue Maruyama for $3,600; Michael S.
Nitta for $16,800; Keawe Resorts, Inc. for $122,000;
M.K. & Sons, Inc. for $12,000; Shigeru Shinno for
$6,000; and T.N. Group Hawaii, Inc. for $6,000
incorporated by reference to Exhibit 6.25 to the
Company's Annual Report on Form 10-KSB for the year
ended July 31, 1997. *
6.26 Commercial Promissory Note between the Company and
City Bank dated November 14, 1997 incorporated by
reference to Exhibit 6.26 to the Company's quarterly
report on Form 10-QSB for the quarter ended January
31, 1998. *
6.27 Promissory note for $50,000 dated January 15, 1998
between the Company and Michael S. Nitta incorporated
by reference to Exhibit 6.26 to the Company's
quarterly report on Form 10-QSB for the quarter ended
January 31, 1998. *
6.28 Promissory note for $60,000 dated January 29, 1998
between the Company and Kelvin M. Bloom incorporated
by reference to Exhibit 6.26 to the Company's
quarterly report on Form 10-QSB for the quarter
ended January 31, 1998. *
6.29 Letter from Hawaii National Bank extending the due
date on the $300,000 revolving line of credit to July
15, 1998, incorporated by reference to Exhibit 6.29
to the Company's quarterly report on Form 10-QSB for
the quarter ended April 30, 1998. *
6.30 Amendment of promissory note dated January 29, 1998
between the Company and Kelvin M. Bloom extending the
due date on the note to July 15, 1998, incorporated
by reference to Exhibit 6.38 to the Company's
quarterly report on form 10-QSB for the quarter
ended April 30, 1998. *
6.31 Amendment of promissory note dated January 15, 1998
between the Company and Michael S. Nitta extending the
due date on the note to July 15, 1998, incorporated by
reference to Exhibit 6.31 to the Company's quarterly
report on form 10-QSB for the quarter ended April 30,
1998. *
6.32 Letter from City Bank extending the due date on the
$250,000 line of credit to 08/19/98, incorporated by
reference to Exhibit 6.32 to the Company's form 10Q-SB
for the quarter ended April 30, 1998. *
65
<PAGE>
6.33 Amendment of Lease between The Castle Group, Inc. and
Hirano Enterprises effective 4/1/98, 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 6/30/98
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 7/31/98. *
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 7/31/98. *
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 7/31/98. *
6.40 Promissory note dated 7/15/98 between the Company
and Michael S. Nitta for $48,800. Incorporated
by reference to exhibit 6.40 to the Company's form
10K-SB for the year ended July 31, 1998. *
6.41 Letter of extension from Hawaii National Bank
extending the due date on the $300,000 line of
credit to December 20, 1998. Incorporated by
reference to exhibit 6.41 to the Company's form
10K-SB for the year ended July 31, 1998. *
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<PAGE>
6.42 Letter of extension from City Bank extending the
due date on the $250,000 line of credit to December
31, 1998. Incorporated by reference to exhibit 6.42
to the Company's form 10K-SB for the year ended
July 31, 1998. *
6.43 Private Offering Memorandum for the issuance of the
Company's Series "A" Preferred Stock. Incorporated
by reference to exhibit 6.33 to the Company's form
10Q-SB for the quarter ended April 30, 1999. *
6.44 Amendment To Private Offering Memorandum for the
issuance of the Company's Series "A" Preferred Stock
incorporated by reference to exhibit 6.44 to the
Company's form 10Q-SB for the quarter ended October
31, 1999. *
Description of Exhibits
See Item 1 Above.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE CASTLE GROUP, INC.
Date: October 30, 2000 By /s/ Rick Wall
-----------------------------------
Rick Wall, Chief Executive Officer
and Chairman of the Board
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Date: October 30, 2000
/s/ Rick Wall /s/ John Tedcastle
----------------------------- ---------------------------
Rick Wall John Tedcastle
Chief Executive Officer and Vice Chairman of the Board
Chairman of the Board and Director
/s/ Michael S. Nitta /s/ Hideo Nomura
----------------------------- ---------------------------
Michael S. Nitta Hideo Nomura
Chief Financial Officer Director
/s/ Motoko Takahashi /s/ Judvhir Parmar
----------------------------- ---------------------------
Motoko Takahashi Judvhir Parmar
Director and Secretary Director
/s/ Stanley Mukai /s/ Edward Calvo, Sr.
----------------------------- ---------------------------
Stanley Mukai Edward Calvo, Sr.
Director Director
/s/ Thomas S. Blankley, Jr. /s/ K. Roger Moses
----------------------------- ---------------------------
Thomas S. Blankley, Jr. K. Roger Moses
Executive Vice President Director
68
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