<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 0-23338
THE CASTLE GROUP, INC.
(Exact name of small business issuer as specified in its charter)
UTAH 99-037845
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
745 Fort Street, Tenth Floor
Honolulu, Hawaii 96813
Issuer's telephone number: (808) 524-0900
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes [ x ] No [ ]
Number of shares outstanding of each of the Registrant's classes of
stock, as of June 15, 2000:
Common stock, $.02 par value - 5,537,031
Transitional Small Business Disclosure Format (check one):
Yes [ x ] No [ ]
Page 1 of 34 sequentially numbered pages
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THE CASTLE GROUP, INC.
FORM 10-QSB
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of April 30, 2000
and 1999 (unaudited) 3
Consolidated Statements of Operations for the three and nine
months ended April 30, 2000 and 1999 (unaudited) 4
Consolidated Statements of Cash Flows for the nine
months ended April 30, 2000 and 1999 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 32
2
<PAGE>
PART 1 - FINANCIAL INFORMATION, Item 1 - Financial Statements
THE CASTLE GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets - April 30, 2000 and 1999 (Unaudited)
ASSETS April 2000 April 1999
Current Assets
Cash $ 45,702 $ 151,416
Accounts receivable, net 1,625,607 1,320,444
Prepaid expenses 335,190 123,143
Restricted cash 19,941 19,941
Notes receivable, current 114,810 144,406
Due from related parties 426,469 1,073,056
-------------------------
Total Current Assets 2,567,719 2,832,406
Furniture, fixtures & equipment, net 77,578 53,531
Intangible Assets, net 561,307 0
Other Assets:
Due from related parties, non-current 691,658 56,121
Deposits 211,238 181,750
-------------------------
Total Other Assets 902,896 237,871
-------------------------
TOTAL ASSETS $ 4,109,500 $ 3,123,808
=========================
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable $ 2,083,712 $ 902,426
Vacation payable 75,474 103,281
Wages payable 82,571 86,507
Taxes payable 54,484 26,835
Due to related parties, current 255,200 213,025
Notes payable, current 323,300 225,000
Deferred income 92,762 26,667
Other accrued liabilities 393,695 356,038
-------------------------
Total Current Liabilities 3,361,198 1,939,779
Notes payable, non-current 392,527 0
Due to related parties, non-current 229,473 48,977
Deferred income 46,993 139,625
-------------------------
Total Liabilities 4,030,191 2,128,381
Stockholders' Equity (Deficiency)
Common stock, $.02 par value, 20,000,000 shares
authorized, 5,537,031 and 5,311,130 issued and
outstanding, respectively 110,741 106,223
Common stock held by lessor ( 111,641) 0
Preferred stock, $100 par value 50,000 shares
authorized, 12,550 & 8,550 shares issued and
outstanding, respectively 1,255,000 858,363
Capital in excess of par value 2,893,856 2,501,000
Accumulated Deficit (4,068,647) (2,470,159)
--------------------------
Total Stockholders' Equity 79,309 995,427
Total Liabilities and --------------------------
Stockholders' Equity (Deficiency) $ 4,109,500 $ 3,123,808
==========================
The accompanying notes are an integral part of the consolidated financial
statements.
3
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THE CASTLE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
for the three and nine months ended April 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Apr 2000 Apr 1999 Apr 2000 Apr 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues
Management fees $ 788,735 $ 1,167,193 $ 2,205,939 $ 2,900,688
Hotel Operating Revenues 389,019 0 525,303 0
Other Income 90,033 163,079 329,818 589,429
------------ ------------ ------------ ------------
Total Revenues 1,267,787 1,330,272 3,061,060 3,490,117
------------ ------------ ------------ ------------
Expenses
Payroll and benefits 427,248 586,396 1,405,867 1,675,494
Hotel Operating Expenses 788,455 0 1,261,692 0
Professional fees ( 10,906) 7,963 53,841 83,433
Reservation services 214,423 243,417 671,685 729,506
Depreciation & Amortization 22,247 6,150 34,397 21,136
Rent 78,681 90,097 254,225 286,686
Travel and entertainment ( 43,238) 30,662 1,219 104,388
Office expense 11,007 20,085 31,297 51,320
Utilities 8,772 12,003 31,443 37,310
Taxes, other than income 35,625 50,220 102,536 139,477
Advertising and marketing 30,231 48,763 119,761 120,900
Outside sales offices 22,368 39,512 104,783 126,557
Insurance 25,301 17,879 79,111 53,288
Other 10,635 4,010 31,431 30,351
------------ ------------ ------------ ------------
Total Expenses 1,620,849 1,157,157 4,183,288 3,459,846
------------ ------------ ------------ ------------
Income (loss) from operations( 353,062) 173,115 (1,122,228) 30,271
Other Expenses
Interest Expense 18,962 29,715 53,023 94,498
------------ ------------ ------------ ------------
Net Income (Loss) $( 372,024) $ 143,400 $(1,175,251) $ ( 64,227)
============ ============ ============ ============
Per Share Data
Basic Earnings
Net Income (Loss) $( .07) $ .03 $( .21) $( .01)
============ ============ ============ ============
Diluted Earnings
Net Income (Loss) $( .07) $ .03 $( .21) $( .01)
============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
4
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THE CASTLE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine months ended April 30, 2000 and 1999
(Unaudited)
Nine Months Ended
04/30/2000 04/30/1999
-------------------------
Cash flows from operating activities
Net loss $(1,175,251) $( 64,227)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 34,397 21,136
Changes in assets and liabilities-
Increase in accounts receivable ( 338,315) ( 307,026)
Increase in due from related parties 0 ( 228,258)
Increase in prepaid expenses ( 170,523) ( 101,069)
Increase (Decrease) in deferred charges ( 21,620) 86,292
Increase in accounts payable 1,166,590 13,019
Increase in taxes payable 28,855 476
Increase (Decrease) in other liabilities ( 59,630) 78,581
-------------------------
Net cash used in operating activities ( 535,497) ( 501,076)
Cash flows from investing activities
Purchase of property & equipment ( 50,331) ( 10,945)
Deposits made ( 27,957) ( 180,000)
Purchase of Hawaii Reservations Center ( 350,000) 0
Receipt of deposits 0 23,897
Investment in HBII timeshare 0 2,787
-------------------------
Net cash used in investing activities ( 428,288) ( 164,261)
Cash flows from financing activities
Proceeds from issuance of preferred stock 400,000 820,188
Dividends on preferred stock ( 16,715) 0
Proceeds from notes payable 275,000 0
Repayment of notes payable ( 55,078) ( 525,000)
Collection of note receivable 31,389 540,594
Loans from related parties 300,000 0
Repayment to related parties ( 20,601) ( 264,998)
-------------------------
Net cash provided by financing activities 913,995 570,784
-------------------------
Net decrease in cash ( 43,738) ( 94,553)
Cash at beginning of period 93,440 245,969
-------------------------
Cash at end of period $ 45,702 $ 151,416
=========================
Supplemental disclosure of
cash flow information
Cash paid during the year for interest $ 53,023 $ 94,499
=========================
Supplemental disclosure of non-cash flow
related information
Stock issued to acquire management
contract $ 227,500 $ 0
=========================
The accompanying notes are an integral part of the consolidated financial
statements.
5
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THE CASTLE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
The accompanying consolidated financial statements of The Castle Group,
Inc., its wholly owned subsidiaries, Castle Resorts & Hotels, Inc.,
Hawaii Reservations Center Corp., and KRI, Inc., and KRI, Inc.'s
wholly-owned subsidiary, HPR Advertising, Inc. for the three and nine
months ended April 30, 2000 have been prepared in accordance with
generally accepted accounting principles. Our independent public
accountants have not audited these consolidated financial statements,
but they include all adjustments (consisting of only normal recurring
adjustments) that are, in management's opinion, necessary for a fair
presentation of the financial condition, results of operations and cash
flows for such periods. The consolidated financial statements of The
Castle Group, Inc. and Subsidiaries (the "Company") does not include all
disclosures associated with annual financial statements and accordingly,
should be read in conjunction with the annual consolidated financial
statements and notes thereto included in the Company's Annual Report on
Form 10-KSB for the year ended July 31, 1999, as filed with the Securities
and Exchange Commission. A copy of this report is available from the
Company upon request. The results of operations for the nine months
ended April 30, 2000 are not necessarily indicative of the operating
results for the remainder of the year.
MANAGEMENT ESTIMATES-
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments
and hedging activities. SFAS No. 133 requires the recognition of all
derivative instruments as either assets or liabilities in the statement of
financial position and measurement of those derivative instruments at fair
value. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective
Date of FASB Statement No. 133." The original effective date for SFAS No.
133 was for all fiscal years beginning after June 15, 1999. As a result of
SFAS No. 137, the effective date for SFAS No. 133 is for all fiscal
quarters of all fiscal years beginning after June 15, 2000. As the
Company does not invest in derivative instruments or participate in
hedging activities, the adoption of this standard is not expected to have
an effect on the Company's consolidated financial statements.
6
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
CASH AND CASH EQUIVALENTS-
The Company considers all highly liquid investments with an original
maturity date of three months or less when purchased to be cash
equivalents.
INCOME RECOGNITION-
The Company recognizes income from the management of resort properties
according to terms of its various management contracts.
DEFERRED INCOME-
During the year ended July 31, 1998, the Company received a signing bonus
of $80,000 as a result of a contract entered into with a vendor to
provide services over a three-year period. Income is recognized on the
straight-line method over the term of the contract.
During the quarter ended October 31, 1998, the Company received a tenant
improvement allowance of $56,785 as a result of a contract entered into
with its landlord over a 69-month period. The allowance is recognized on
a straight-line method over the term of the contract.
PER SHARE DATA-
The following is a reconciliation of the numerators and denominators used
to calculate the Company's basic and diluted earnings per share for the
periods indicated:
Income Shares Per Share
(Numerator) (Denominator) Amount
THREE MONTHS ENDED 04/30/00:
Basic:
Net Loss $( 372,024) 5,537,031 $( .07)
Effect of dilutive securities-
Stock subscriptions,
options and warrants -- -- --
Diluted
Net loss and assumed conversions $( 372,024) 5,537,031 $( .07)
NINE MONTHS ENDED 04/30/00:
Basic:
Net Loss $(1,175,251) 5,537,031 $( .21)
Effect of dilutive securities-
Stock subscriptions,
options and warrants -- -- --
Diluted
Net loss and assumed conversions $(1,175,251) 5,537,031 $( .21)
Note that the warrants and options outstanding for the three and nine
month periods ended April 30, 2000 were not considered common stock
equivalents since they were anti-dilutive.
7
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
FURNITURE, FIXTURES AND EQUIPMENT-
Furniture, fixtures and equipment are recorded at cost. When assets are
retired, sold or otherwise disposed of, the cost and the related accumulated
depreciation of the asset is removed from the accounts, and any resulting
gain or loss is reflected in income for the period.
The cost of maintenance and repairs are charged against income as
incurred. Renewals and betterments are capitalized and depreciated over
their estimated useful lives.
At April 30, 2000 and 1999, property and equipment consisted of the
following:
04/30/00 04/30/99
Office Furniture and Equipment $ 270,286 $ 220,958
Less Accumulated Depreciation ( 192,708) ( 167,427)
------------- -------------
$ 77,578 $ 53,531
============= =============
Depreciation of Office Furniture and Equipment is computed using the
declining balance and straight-line methods over the estimated useful
life of the assets ranging from five to seven years.
INTANGIBLE ASSETS-
Intangible assets consist of goodwill and contract acquisition costs. The
goodwill represents the excess of the purchase price over the fair market
value of the net assets aquired relative to the Company's acquisition on
April 30, 2000 of 100% of the outstanding stock of Hawaii Reservations Center
Corp. The goodwill will be amortized on a straight line basis over 20 years.
The contract acquisition costs represent the consideration paid to one of
the owners of a property that the Company manages, and is being amortized
over the life of the management contract (5 years) on a straight line basis.
At April 30, 2000, the balances of those intangibles were as follows:
Goodwill $ 348,974
Contract Acquisition Cost 227,500
----------
576,474
Less accumulated amortization ( 15,167)
----------
$ 561,307
==========
RELATED PARTY TRANSACTIONS-
Hanalei Bay International Investors-
The Company had a hotel management agreement with Hanalei Bay
International Investors ("HBII") to manage the Hanalei Bay Resort
8
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
("HBR"). The managing general partner of HBII is also the Chairman and
Chief Executive Officer of the Company. Under the agreement, the Company
was to receive management and incentive fees based on a percentage of
gross total revenues and net income respectively. The Company also
received reservation fees based on a percentage of gross room revenues
and a marketing fee based on a percentage of gross revenue. In March of
1999, HBII sold the HBR and the Company retained a sales, marketing and
reservations agreement with the new owners of the HBR. Upon the closing of
the sale, the Company was paid in full for various notes payable due from HBII
but the sale proceeds were not sufficient to allow the Company to collect on
$1,119,975 of other receivables. Under the sale agreement, HBII will
participate in the net cashflows generated by the new owners timeshare sales
program that will allow the Company to collect its receivable balances from
HBII in the future.
Reservation Services-
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. Reservation services expense for the quarters
ended April 20, 2000 & 1999 was $214,423 and $243,417 respectively. The
Company had a payable balance to Hawaii Reservation Center Corp. of zero
and $189,718 as of April 30, 2000 and 1999, respectively.
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 oustanding stock of
HRCC and assumed liabilities of $21,374. The Company allocated $10,000 of
the purchase price to the value of the furniture and equipment of HRCC, and
recorded $348,974 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.
Due to Related Parties-
The Company had the following related party loan balances as of 04/30/00
and 04/30/99:
04/30/00 04/30/99
---------------------
6% loans from stockholders, due August 1, 1998 $ 143,600 $ 149,600
10% loans from director, due August 15, 2000 0 69,273
10% loans from officer, due March 31, 2003 291,667 0
10% loans from Officer, due August 15, 2000 49,406 43,129
---------------------
$ 484,673 $ 262,002
Less Current Portion 255,200 213,025
---------------------
Non-current Portion $ 229,473 $ 48,977
=====================
9
<PAGE>
THE CASTLE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
LEASE COMMITMENTS-
The Company has leases for office space, vehicles and equipment expiring
at various dates through 2004. The office leases are renewable for an
additional five years.
In March 1999, the Company signed an agreement to lease and manage a
newly constructed hotel in Guam through December 2004. The Company began
leasing and managing this resort property in October 1999.
At April 30, 2000, the future minimum rental commitments under these
leases were as follows:
Schedule of minimum lease payments:
2000 $ 1,425,000
2001 2,728,000
2002 2,840,000
2003 2,894,000
2004 2,909,000
Thereafter 1,139,000
-------------
Total $ 13,935,000
=============
MANAGEMENT CONTRACTS-
The Company manages several hotels and resorts under agreements expiring
at various dates through December 2004. Several of these management
agreements contain automatic extensions for periods of 1 to 10 years.
Management fees received are based on the revenues and net available
cashflows of the hotels' operations as defined in the respective
management agreements.
In addition, the Company has sales, marketing and reservations agreements
with other hotels and resorts expiring at various dates through December
2000. The Company is in the final negotiating stages for the extension
of some these agreements. Several of these agreements contain automatic
extensions for periods of one month to three years. Management fees are
based on revenues, net available cashflows or commissions as defined in the
respective agreements.
LEASE OF PROPERTY IN COOK ISLANDS-
In January 1999, the Company signed an agreement as co-lessee for certain
real property located in the Cook Islands, upon which is situated an
uncompleted hotel development that is approximately 85% completed. Under
terms of the agreement with the government of Cook Islands, the lessees
collectively are to complete construction of the hotel and open
substantially all of the rooms of the hotel for business not later than
June 30, 2000. If substantially all of the rooms of the hotel are not
opened for business by June 30, 2000, the lessor of the property is
entitled to compensation in an amount to be determined by arbitration.
10
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
The Company has no obligation to infuse funds into the the cost of
reconstruction, any of the operating costs of the property or any
other costs associated with the property, which includes any losses,
settlements or awards resulting from any failure to comply with the
terms and conditions of the lease agreement. Funding for the completion
of the hotel development was to be provided by the Company's co-lessee.
However, as of June 15, 2000, the Company's co-lessee has been unable to
fund the completion of the hotel project. The Company is currently in the
process of securing an extension of the requirement to open the hotel and
is also in the process of securing a replacement for the co-lessee.
RESTRICTED CASH-
Restricted cash consists of cash held in client trust accounts and cash
pledged as collateral for an equipment lease.
NOTES RECEIVABLE-
The Company had notes receivable balances as of April 30, 2000 and
1999 as follows:
Apr 2000 Apr 1999
Notes receivable from third party in
monthly installments of $10,000 including
interest at 10% per annum. Real estate is
pledged as collateral $ 114,810 $ 144,406
=========================
COMMON STOCK WARRANTS-
In June 1998, the Company issued warrants to acquire up to 187,500 shares
of common stock for $2.00 per share, exercisable through June 2003 in
exchange for certain loans made to the Company. No warrants were
exercised as of April 30, 2000. The warrants issued includes warrants
to acquire up to 87,500 shares of common stock exercisable by a director
of the Company.
In May 1994, the Company issued warrants to acquire up to 25,000 shares
of common stock for $1.25 per share, exercisable through May 1999 in
exchange for consulting services rendered. During 1999, these common
stock warrants were exercised on a net basis, resulting in the issuance
of 12,244 shares of the Company's common stock.
COMMON STOCK OPTIONS-
In May 1997, the Company, as part of a renegotiation of its reservation
services agreement, granted an option to purchase 50,000 shares of the
Company's common stock at a price of $2.00 per share to Hawaii Reservations
Center Corp., which, prior to April 30, 2000, was wholly owned by a former
director of the Company. The option may be exercised between May 1997 and
2002 and had not been exercised as of April 30, 2000.
11
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
PREFERRED STOCK-
As of April 30, 2000, the Company has issued 12,550 shares of $100 par
value redeemable preferred stock to certain individuals and one director.
Dividends are cumulative from the date of original issue and are payable
semi-annually, beginning July 15, 1999 at a rate of $7.50 per annum per
share. These shares are also nonvoting and are convertible to the
Company's common stock at $3 per share. The preferred stock is redeemable
only at the option of the Company at a redemption price of $100 per share
plus accrued and unpaid dividends.
During the quarter ended April 30, 2000, the Company issued 2,000 shares
of its preferred stock to the sole shareholder of HRCC as payment for the
amounts due to HRCC by the Company for accrued reservation services.
Immediately following the issuance, the Company purchased 100% of the
outsanding shares of HRCC.
RESTRICTED COMMON STOCK-
In July 1999, the Company issued 22,500 shares of restricted and
unregistered 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 common 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.
In accordance with the renegotiation of one of its management contracts,
the Company issued 130,000 shares of restricted and unregistered common
stock to acquire the management contract on the property. The contract
is effective as of January 1, 2000 and called for the Company to acquire
the new contract by issuing 130,000 shares of the Company's common stock.
The Company recorded an intangible asset of $227,500 based on the fair
market value of the Company's common stock on the effective date of the
contract ($1.75 per share at January 1, 2000). The intangible asset is
being amortized over the life of the new management contract (5 years).
The holder of these shares is prohibited from selling these shares in
normal public trading.
COMMON STOCK HELD BY LESSOR-
In July 1999, the Company issued 61,157 shares of restricted common stock
to the lessor of a hotel as part of a security deposit. The lessor is
prohibited from selling these shares in public trading and will return
the shares to the Company at the termination of the lease agreement in
the year 2004. The Company recorded the common stock held by the lessor
as a contra equity item in the Consolidated Balance Sheet.
12
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
LITIGATION-
There are various claims and lawsuits pending against the Company
involving complaints that are normal and reasonably foreseeable in light
of the nature of the Company s business. In the opinion of management,
the resolution of these claims will not have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity. There were no new lawsuits filed against the Company during
the quarter ended April 30, 2000.
NOTES PAYABLE-
At April 30, 2000 and 1999, notes payable consisted of the following:
04/30/00 04/30/99
$300,000 line of credit from a bank was due on ----------------------
May 1, 1999, with interest at 10.5% per annum.
The Company's furniture and equipment were
pledged as collateral and the Company's Chief
Executive Officer was a guarantor. $ 0 $ 225,000
Notes payable to various individuals with
interest accruing at 7.5% per annum. Principal
and any unpaid interest due on July 31, 2000. 50,000 0
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, 2003. One third of the Company's
ownership interest in HRCC is pledged as collateral. 125,000 0
Term loan payable to a bank at an interest rate
of 9.25% with monthly payments of $8,352. The
balance of the loan and unpaid interest is due on
May 25, 2004. The Company's furniture, fixtures
and equipment are pledged as collateral and the
Chief Executive Officer is a guarantor. 340,827 0
Original $250,000 line of credit from a bank was
amended and reduced to $200,000 on May 25, 1999.
Drawings are due on June 30, 2000, with interest
(9.75% at January 31, 2000) at 1.75% above the
bank's base rate. The Company's accounts
receivable, furniture, fixtures and equipment
are pledged as collateral and the Company's
Chief Executive Officer is a guarantor. 200,000 0
----------------------
715,827 225,000
Less current portion 323,300 225,000
----------------------
Notes Payable, non-current $ 392,527 $ 0
======================
13
<PAGE>
THE CASTLE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
INCOME TAXES-
Significant components of the Company's deferred tax assets and
liabilities at April 30, 2000 and 1999 are:
04/30/00 04/30/99
---------------------------
Deferred tax assets-
Vacation Pay $ 8,000 $ 7,000
Noncompetition agreement 197,000 219,000
Deferred Income 21,000 32,000
Net Operating Loss Carryforward 920,000 834,000
---------------------------
Deferred tax asset 1,146,000 1,092,000
Deferred tax liability-
Property and equipment ( 5,000) ( 8,000)
---------------------------
Net Deferred Tax Asset 1,141,000 1,084,000
Valuation Allowance (1,141,000) (1,084,000)
---------------------------
$ -- $ --
===========================
The Company has a net operating loss carryforward for income tax purposes
of $1,745,725 at July 31, 1999 that expires at various dates through
fiscal year 2019.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS - "RISK FACTORS"
This filing contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended, which are intended to be covered by the
safe harbors thereby created. Investors are cautioned that all forward-
looking statements involve a number of risks and uncertainties. These risks
and uncertainties could cause actual results to differ materially from the
results anticipated in such forward-looking statements.
GENERAL-
The Company is a Utah corporation which earns its revenues primarily by
providing management, reservations, and sales and marketing services to
hotels and resorts. The Company currently operates within the State of
Hawaii, the Commonwealth of Saipan, the Territory of Guam and on the
island of Chuuk under the trade names "Hawaiian Pacific Resorts" and Castle
Resorts and Hotels."
The Company's revenues are derived from management fees, sales and
marketing fees, reservation fees, accounting fees, commissions, incentive
fees and other fees from the properties it represents pursuant to the
terms and conditions of its management contracts. For the fiscal year
ending July 31, 2000, in addition to the fees described, the Company also
earns revenues from transient and other hotel related income from its
leased hotel. Except for the leased hotel, the revenues of the
properties managed by the Company are not recorded as revenues of the
Company.
The Company's operating expenses include labor, reservation services fees
and other costs associated with operating as a management company. In
addition to the expenses described, the Company also records the expenses
associated with operating a leased hotel. Except for the leased hotel,
the expenses of the properties managed by the Company are not recorded as
expenses of the Company.
As of April 30, 2000, the Company had 26 contracts covering 2,682
rooms, with 2,105 rooms located within the State of Hawaii and the
balance of the rooms situated throughout the Pacific Basin, including
249 rooms which is currently under construction in Takapuna, New Zealand.
Under the terms of the contracts, the Company is typically responsible
for the supervision and day-to-day operations of the property in exchange
for a management fee based on gross revenues. In some cases, the Company
also participates in the profits of the properties it manages by earning an
incentive fee based on the net operating profits of the managed property.
Sales and marketing and reservation fees earned from the properties are
also based on the gross revenues of the property. The Company is also
reimbursed for direct advertising and marketing expenditures it makes on
behalf of the property, all in accordance with the terms and conditions
of the respective management contracts. The Company also earns
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commissions and other fees from the properties managed by providing
centralized purchasing services to the hotel owners. Under these
arrangements, the net savings to the property owner from centralized
purchasing are shared between the Company in the form of commissions and
to the property owner in the form of cost savings.
Hotel operating revenues consist of revenues from a property located in
Guam that the Company leases. Under this arrangement, the Company records
as its own revenues the entire property revenues including hotel
transient rental income as well as the total expenses incurred to operate
the property. The property partially opened for business on October 22,
1999, with 37 available rooms. On February 29, 2000, substantially
all of the rooms were completed and were made available for hotel
rentals.
In January of 1999, the Company signed on as a co-lessee on a lease
agreement for real property located in the Cook Islands. The lease is
for land upon which is situated an uncompleted luxury resort which is
approximately 85% completed. The lease is for 60 years and calls for
monthly rentals of 1% of room revenues produced by the property. The
Company's co-lessee is responsible for the reconstruction of the
property. The Company has no obligation to infuse funds into the costs
of reconstruction or any of the operating costs of the property following
its opening which was scheduled for the first quarter of calendar 2000.
The Company was to have been awarded the management contract of the
property and was to also have been involved with the construction
management of the property.
As of April 30, 2000, it is uncertain as to whether the co-lessee of
the property has the financial resources to fund the reconstruction of
the property. The reconstruction of the property is a condition of the
lease agreement and the Company is in the process of securing a
replacement for the co-lessee. If the Company and/or its co-lessee
cannot obtain an extension of time to complete the project under the
terms of the lease agreement and if the current co-lessee cannot complete
the project or a suitable replacement co-lessee cannot be found, the
lease agreement may be cancelled by the lessor.
With virtually all of the key personnel and corporate infrastructure in
place, the focus for the Company shall be to continue its success in
increasing revenues through the expansion of its client base; and to
accomplish this at a minimal incremental cost. Based on the success the
Company has experienced to date, management believes that it will be able
to further add to its portfolio of management contracts. Management also
believes, although no assurances can be given, that the Company will be
able to handle a much larger customer base without expending significant
amounts of additional resources due to the solid foundation and management
team which the Company has built.
In June of 2000, the Company successfully renegotiated one of its
management contracts for a property located in Waikiki. The new
contract took effect as of January 1, 2000 and is for five years with
options to extend for additional years. The terms of the contract
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called for a payment of $390,000 to the property owner in order to
aquire the management contract. As consideration for the payment,
the Company issued 130,000 shares of it's unregistered and restricted
common stock to the hotel owner, which the Company valued at $227,500,
representing the fair market value of the Company's common stock
($1.75 per share) at January 1, 2000.
The Company is presently in the negotiating stages with various other
properties located throughout the State of Hawaii and in other Pacific
Rim regions.
On April 30, 2000, the Company has also purchased all of the outstanding
stock of Hawaii Reservations Center Corp. The purchase of the stock
was be financed through a combination of the related and non-related party
financing. Management is confident that the purchase of the reservations
center will greatly reduce the operating expenses of the Company. In
addition to reducing operating expenses, management will endeavor to
customize and standardize the reservations function to more effectively
service the needs of the properties represented by the Company. Management
plans to have the reservations center allow for real-time online bookings
through the internet.
Management is currently in the process of updating its website on the
internet and following the consummation of the purchase of the
reservations center, the Company plans to update its website to allow
users to book reservations by directly accessing the reservations
database. It is management's belief that direct bookings over the
internet shall increase substantially in the future and the planned
website of the Company shall allow users a simple and easy means
of booking reservations. The redesigned website shall have added
features to promote specials, distressed inventory sales, virtual
property tours and itinerary planning. Management may also integrate its
website with other travel related businesses such as airlines,
attractions and tours in order to provide a one-stop website for clients
to book all of their travel related reservations.
In March of 2000, the Company entered into a marketing agreement with
Japan Airlines ("JAL") to promote certain properties represented by the
Company. JAL is Japan's largest airline carrier, providing over 60% of
the total lift capacity from Japan to Hawaii with 12 daily flights. The
Company is the first regional hotel affiliate of JAL, as all of their
previous affilations have been with worldwide brands such as Hilton,
Hyatt etc. The Company will participate in: 1) JAL's mileage bank
program, providing exposure to 6.6 million frequent flyers; 2) JAL's
World Hotel Program, which links 15,000 reservations terminals and 7,000
Japan travel agencies in 32 JAL branches and over 35 JAL over-seas
offices; and 3) JAL discount program which offers discounts of retail
rates to the 6.6 million frequent flyers. Although no assurances may be
given, management believes that the affiliation with JAL shall result in
large increases in hotel reservations for the selected properties.
During the quarter, the Company's property portfolio decreased by two
management contracts. Management contracts are typically lost in the
ordinary course of business due to various reasons which include the sale
of a property, conversion into into other uses such as long term rentals
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or competition. The Company has been successful in that in its history,
it has only lost one sales and marketing contract to its competitors. The
Company is currently in various stages of negotiation with a number of
properties located within the Pacific Basin area and is confident that it
will be successful in expanding its management portfolio.
RESULTS OF OPERATIONS-
FOR THE QUARTERS ENDED APRIL 30, 2000 AND 1999
SALES
For the quarters ended April 30, 2000 and 1999, the Company had total
revenues of $1,267,787 and $1,330,272, respectively, a decrease of $62,485
or 5%. The decrease in revenues for the quarter ended April 30, 2000
as opposed to the prior year is attributed to the loss of three management
contracts and the renegotiation of one other management contract.
COSTS AND EXPENSES
Operating expenses for the quarters ended April, 2000 and 1999 were
$1,620,849 and $1,157,157, respectively, an increase of $463,692 or 40%.
The increase in operating expenses is attributed to the operating and
pre-opening costs in the amount of $788,455 associated with the Company's
leased hotely in Guam. The property contains 207 rooms, of which 37 were
opened on October 22, 1999. The Company incurred expenses associated with
hiring and training employees, sales & marketing, administrative payroll
and other pre-opening expenses. Such costs were expensed as incurred.
Management related operating expenses for the quarters ended April,
2000 and 1999 were $832,394 and $1,157,157, respectively, a decrease of
$324,763 or 28%. The decrease in operating expenses is attributed to a
restructuring of the operating personnel and other operating expenses.
Payroll and benefits decreased by $159,148, or 27% as a result of the
Company reducing its staffing in accordance with the restructuring of
operating personnel.
Professional fees decreased by $18,869 or 237% for the quarter ended
April 2000 as compared with the prior year due to negotiating decreases
in the amounts of accrued professional fees payable to various business
consultants.
Reservations fees decreased by $28,994, or 12% for the quarter ended
April 2000 as compared with the prior year due to the lower number of
transient rooms represented by the Company.
Depreciation and amortization increased by $16,097 or 261% due to the
Company amortizing the cost of acquiring a renegotiated management contract
for one of the properties represented by the Company. The contract was
renegotiated effective on January 1, 2000 and therefore, the Company
amortized $15,167 during the current quarter.
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Rent expense decreased by $11,416 or 13% for the quarter ended April
2000 as compared to the prior year due to the Company receiving a credit
from its landlord which adjusted the amount of common area expenses paid
by the Company in calendar year 1999.
Travel and entertainment decreased by $73,900, or 241% for the quarter
ended April 2000 as compared to the prior year due to various officers
forgiving amounts due to them for accrued travel expenses.
NET INCOME
The Company reported a net loss of $372,024 and net income of $143,400 for
the quarters ended April 30, 2000 and 1999, respectively, a decrease of
$515,424.
As discussed previously, the decrease in profitability is primarily
attributed to the loss of two management contracts and the renegotiation
of one other contract and the startup expenses of the Company's leased
property located in Guam of $788,455 against revenues of $389,019,
representing $399,436 of the net loss for the quarter.
Management is confident that the operating results of the Guam property
will improve over the next several quarters as the majority of the rooms
were placed into inventory on February 29, 2000. With most of the
construction completed, the Company will be able to increase its sales
& marketing efforts in order to secure future business for the hotel. In
addition, the property will be featured in the Asian market travel agent
brochures starting in October of 2000 which should provide substantial
increases in the number of Asian bookings for the hotel.
LIQUIDITY AND CAPITAL RESOURCES-
As of April 30, 2000, total current assets were $2,567,719 and
consisted primarily of $1,625,607 in accounts receivable and $426,469 in
amounts due from related parties. Total current liabilities were $3,361,198
leaving a net working capital deficit of $793,479. The Company's primary
sources of working capital are cash flows from borrowings and the proceeds
from the issuance of the Company's preferred stock.
Net cash used in operations was $535,497 for the nine months ended
April 30, 2000 as compared to net cash used in operations of $501,076 for
the prior year. Net cash used in investing activities was $428,288 and
$164,261 for the nine months ended April 30, 2000 & 1999, respectively.
Net cash provided by financing activities was $913,995 for the nine
months ended April, 2000 as compared to $570,784 for the prior year.
In March and April of 1999, the Company was successful in raising
additional equity through the issuance of its Preferred Stock. The
Preferred Stock has a $100 par value and each share is convertible into
33.33 shares of the Company's Common Stock at a price of $3.00 per share.
Dividends are payable semi-annually, commencing July 15, 1999 at the rate
of $7.50 per annum per share. During the quarter ended April 30, 2000,
the Company raised an additional $200,000 through the issuance of preferred
stock. As of April 30, 2000, the Company issued a total of 12,550 shares
of the Preferred Stock and received net proceeds totaling $1,255,000.
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The Company had unrestricted cash of $45,702 and $151,416 at April 30,
2000 and 1999, respectively.
The Company has a $200,000 line of credit that is guaranteed by the
Chairman and Chief Executive Officer of the Company. At April 30, 2000,
the Company had fully drawn against the line of credit.
In May of 1999, the Company obtained a term loan for $400,000 from a
local bank. The term loan is personally guaranteed by the Chairman and
Chief Executive Officer of the Company. The term loan is due and payable
in May of 2004 and calls for a monthly payment of $8,352.
The Company had a net working capital deficit of $793,479 and net working
capital of $892,627 as of April 30, 2000 and 1999, respectively.
As of April 30, 2000 net working capital included amounts due to related
parties in the amount of $255,200. Also included in net working capital
is $92,762 in deferred income related to a signing bonus paid to the
Company by one of its vendors in July 1998, free office rent and a
tenant improvement allowance which was received from the landlord of the
Company's corporate offices. The deferred income is being amortized over
the lives of the agreements.
The Company has, in the past, met its financial obligations through its
line of credit, the issuance of notes to the former stockholders of KRI,
Inc., a private placement of stock in 1997 and the issuance of preferred
stock in 1999 and 2000.
In November of 1998, Hanalei Bay International Investors ("HBII") entered
into an agreement for the sale of its interest in the Hanalei Bay Resort.
The sale was initially scheduled to close in December of 1998 and after
various delays, the sale closed in March 1999. Upon the sale, the
Company received payment of its note receivable in the amount of $435,000
and subsequently used part of the proceeds to retire notes payable of
$200,000 and amounts due to related parties of $264,998. At April 30,
2000, the Company had a receivable balance of $1,118,127 related to fees,
interest and reimbursements. The sale proceeds received by the owners of
HBII were not sufficient to satisfy all of the claims of its creditors
upon the closing of the sale. The Company did not collect its receivable
from the initial sale proceeds. Under the terms and conditions of the
HBII Sale Agreement, HBII shall be entitled to a percentage of the future
cashflows received upon the sale of timeshare intervals that the new
owner of the Hanalei Bay Resort shall receive. The Company shall receive
payments to be applied to the receivable balance from the future
cashflows received by HBII from the new owners of the Hanalei Bay Resort.
Although no assurance can be given, management is confident that the
future cashflows received by HBII will allow the full repayment to the
Company for all amounts due from HBII.
The Company is also continuing in its effort of raising additional equity
through the private placement of its Preferred Stock. As of April 30,
2000, the Company was successful in acquiring $1,255,000 in equity through
the private placements. Although no assurances can be given, management
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is confident that it shall be successful in raising additional capital to
fund its operations on an as needed basis through the private placement
of the Preferred Stock.
The Company is also in the final negotiating stages for numerous
properties located in the Pacific Basin. Although no assurances may be
given, management is confident that these properties will enter into
management contracts with the Company, and that the Company will increase
its profitability and liquidity as a result of the increased management
fee income.
In April of 1999, the Company refinanced two loans with an officer. One
loan was in the principal amount of $16,800 due in August 1998 with
interest of $3,696 and the other loan was in the principle amount of
$47,001 due in March, 1999. The two loans were combined into one note in
the principal amount of $67,497, with interest at 10%. The note calls
for monthly payments of $2,000 per month and is due upon the occurrence
of certain events or August 15, 2000, whichever is earlier.
In April of 2000, the Company received a loan of $300,000 from another
officer and the proceeds were used to finance the purchase of the stock
of HRCC and for working capital. The note calls for monthly payments of
$9,642, is due on March 31, 2003 and calls for interest at the rate of
10% per annum. The note is secured by the assets of HRCC.
In April of 2000, the Company received a loan of $125,000 from a private
party and the proceeds were used to finance the purchase of the stock of
HRCC and for working capital. The note calls for quarterly payments in
an amount equal to 1/3 of the net income of HRCC, and the principal is
due on December 31, 2003. 1/3 of the stock of HRCC has been pledged as
collateral against the loan.
Although no assurances can be given, management believes that the
combination of the increase in the Company's hotel and resort portfolio,
the private placement of equity, net cashflow generated from operations
and the future availability of credit facilities will be sufficient to
fund the operations of the Company in the future.
The Company has considered expansion into the Pacific Rim through the
acquisition of management companies located in these areas and has made
inquiries to several acquisition prospects. In February of 2000, the
Company signed an investment banking Agreement with First Security Van
Kasper to assist the Company in the acquisition of management companies
based in the Pacific Rim areas. Preliminary discussions with potential
target companies have been made and the Company is confident, although
no assurances can be given, that it will be successful in expanding
through the acquisition of other Pacific Rim based management companies.
PLAN OF OPERATION
The Company is one of the leading regional hotel and resort management
companies in the State of Hawaii. At April 30, 2000, the Company had 26
management or sales, reservations and marketing contracts covering 2,682
rooms.
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The properties represented by the Company appeal to a wide variety of the
public market as the Company manages a wide spectrum of property types
from the luxury condominium resorts with room rates of $1,000 to the
small budget inns with room rates of $40. The Company believes that the
availability of differing product lines appeals to all levels of business
or leisure traveler.
The Company has experienced significant growth since it began operations
in November of 1993. From inception to April 30, 2000, the number of
contracts has doubled, from 13 to 26 and the number of rooms managed also
increased from 1,684 to 2,682.
In January of 1999, the Company signed and was approved as a co-lessee by
the government of the Cook Islands. The property is currently not in
operation, having been abandoned by its previous developer after
completing approximately 85% of the project. Based upon estimates
received by construction experts in the area, the property is valued in
excess of $25,000,000.
As of April 30, 2000, it is uncertain as to whether the co-lessee of
the Company has the financial resources to fund the reconstruction of the
property. The reconstruction of the property is a condition of the lease
agreement and the Company is in the process of securing a replacement for
the co-lessee. If the current co-lessee cannot complete the project or
if a suitable replacement co-lessee cannot be found, the lease agreement
may be cancelled by the lessor. Management is currently negotiating with
the property owner for an extension of the time required to open the
hotel. Although no assurance can be given, management believes that it
will be successful in negotiating an extension, securing a replacement
co-lessee and that it will also sign a contract for the management of the
property once construction is completed. Based on preliminary
projections, management believes, although no assurances can be given,
that the property shall be profitable and the management fees earned by
the Company will be substantial.
In April of 1999, the Company acquired the lease for a new property
located in Guam. The property is currently in the final phases of
construction and opened partially for business in October of 1999. As of
the quarter ended April 30, 2000, the Company has expended substantial
amounts of funds in sales & marketing and other start-up expenses.
The property opened for business on October 22, 1999 with 37 rooms
available for transient rentals while the remaining 170 rooms were in
various stages of completion. The revenues for the quarter ended April
30, 2000 were insignificant compared to the funds expended for the start-
up of the project, due to the fact that not all of the rooms were
available and that there was visible construction going on at the
property, prohibiting the Company from accepting reservations for
Asian business. Expenses of $788,455 were incurred during the current
fiscal year through April 30, 2000 and have been expensed in the
Consolidated Statement of Operations. As of February 29, 2000, the rooms
of the property have been substantially completed and management can now
move forward with its full sales and marketing efforts to ensure that the
property shall be profitable in the future.
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In April of 2000, the Company entered into an Agreement to lease a
brand new, yet to be constructed property located in Takapuna, New
Zealand. The project recently broke ground and when completed, will
contain 249 condominium units which will be operated as a hotel. With
the growth of business in the Takapuna area, management will target
both the leisure and corporate business traveler for the property.
The property is scheduled to open in May of 2001.
The Company intends to expand its portfolio of management contracts both
within the State of Hawaii and outside of Hawaii in areas such as the
Federated States of Micronesia, Guam and other Pacific Rim countries.
In addition to Hawaii, management believes that there are many
opportunities to expand its client base in the emerging markets of the
Pacific Basin. In addition to signing on independent hotels and resorts,
the Company may achieve its growth through joint venture investments and
leases and/or acquisitions of management contracts and/or companies.
The Company has engaged the services of First Security Van Kasper to
assist it in targeting and acquiring management companies in the Pacific
Basin.
With the increase in management contracts, the number of hotel and resort
employees that the Company will supervise may increase significantly.
The Company is presently negotiating for both small budget hotels and
large luxury condominium resorts and therefore, it is impossible at this
time to predict the number of additional employees that it will supervise
or that it will be required to hire for the hotels and resorts during the
next fiscal year. At April 30, 2000, the Company employed approximately
600 employees and managed an additional 300 on behalf of property owners.
On July 31, 1995, the Company invested $100,000 into a reorganization
plan instituted by HBII. Under terms of the HBII reorganization plan,
the eighty-seven units owned by HBII will be sold under a timeshare plan
and investors in the timeshare plan may receive up to four times their
investment over the life of the timeshare plan. As of April 30, 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. Management believes that
it will be able to collect the remaining principal balance of this investment
through the timeshare proceeds received by HBII (See "Related Parties").
In June of 2000, the Company was notified by one of its properties that
the rooms managed by the Company would be converted to long-term usage.
The property contains 60 units which the Company currently manages as
transient rentals. The termination of this contract will take effect
on August 31, 2000.
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PART II OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
(a) The annual meeting of the shareholders of The Castle Group, Inc. was
held on March 31, 2000.
(b) At the annual meeting, the shareholders voted to elect each of the
Company's board of director nominees as listed in the Company's proxy
statement, to ratify the selection of PricewaterhouseCoopers, LLP
as the independent auditors for the fiscal year ending July 31, 2000,
and to approve an amendment to the Company's articles of incorporation
to allow the issuance of other classes of equity. The number of votes
cast for, against or witheld, as well as the number of abstentions as
to each matter is set forth below:
1. Election of Directors:
Nominee Votes Cast For Against Witheld
Rick Wall 3,357,894 3,357,894 0 250
John Tedcastle 3,357,894 3,357,894 0 0
Ryoji Takahashi 3,358,144 3,358,144 0 250
Hideo Nomura 3,358,144 3,358,144 0 0
Motoko Takahashi 3,357,894 3,357,894 0 250
Judhvir Parmar 3,358,144 3,358,144 0 0
Noboru Sekiguchi 3,358,144 3,358,144 0 0
Stanley Y. Mukai 3,358,144 3,358,144 0 0
Edward Calvo, Sr. 3,358,144 3,358,144 0 0
Roy Tokujo 3,358,144 3,358,144 0 0
Roger K. Moses 3,358,144 3,358,144 0 0
2. Ratification of PricewaterhouseCoopers LLP as the Company's
independent auditors for the fiscal year ending July 31, 2000:
Votes Cast For Against Abstain
3,365,894 3,344,076 0 9,250
3. Approval of an Amendment to the Company's Articles of Incorporation
to allow the issuance of other classes of equity:
Votes Cast For Against Abstain
3,365,894 3,353,926 0 5,468
There were no other matters voted on by the Security Holders of the Company
during the quarter ended April 30, 2000.
Item 5. OTHER INFORMATION
There is no other information being reported for the current quarter.
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K
There were not reports on Form 8-K filed during the quarter ended April
30, 2000.
(a) Exhibits
The exhibits designated by an asterisk are incorporated herein by
reference. The exhibits with page references are filed herewith.
Sequential
Exhibit Page
Number Description Number
1.1 Form of Placement Agency Agreement incorporated by
reference to Exhibit 1.1 to the Company's
Registration Statement on Form SB2/A-1 filed on
March 10, 1998. *
2.1 Restated Articles of Incorporation, incorporated by
reference to Exhibit 2.1 to the Company's Registration
Statement on Form 10-SB. *
2.2 Bylaws, as amended effective February 1, 1995,
incorporated by reference to Exhibit 2.2 to the
Company's Quarterly Report on Form 10-QSB for the
quarter ending 04/30/96. *
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 34
6.1 Agreement and Plan of Reorganization dated as of
November 8, 1993, by and among The Castle Group,
Inc., Bernard Wall Trust, LCC, Ltd., John
Tedcastle, Hideo Nomura, and Castle Group, Limited,
With exhibits, incorporated by reference to Exhibit
10.1 to the Company's Registration Statement on Form
10-SB. *
6.2 Stock Purchase Agreement dated as of November 10,
1993, by and among The Castle Group, Inc., Keawe
Resorts, Inc., Maui Beach Hotel, Inc., M.K. & Sons,
Inc., TN Group, Inc., Michael S. Nitta, Saburo &
Mitsue Maruyama, Shigeru Shinno, James Kurita, and
KRI, Inc., with exhibits, incorporated by reference
to Exhibit 10.2 to the Company's Registration
Statement on Form 10-SB. *
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6.3 Kelvin Bloom Employment Agreement dated December
2, 1993 between the Company and Kelvin Bloom,
incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form 10-SB. *
6.4 Kimo M. Keawe Employment Agreement dated July 30,
1994, effective as of November 10, 1993 between Kimo
M. Keawe and the Company, incorporated by reference
to Exhibit 6.4 to the Company's Annual Report on
Form 10-KSB for the year ended July 31, 1994. *
6.5 Michael S. Nitta Employment Agreement dated June 23,
1994, effective as of November 10, 1993 between
Michael S. Nitta and the Company, incorporated by
reference to Exhibit 6.5 to the Company's Annual
Report on Form 10-KSB for the year ended July 31,
1994. *
6.6 Shari Chang Employment Agreement dated July 15,
1994, effective as of July 16, 1994 between Shari
Chang and the Company, incorporated by reference to
Exhibit 6.6 to the Company's Annual Report on Form
10-KSB for the year ended July 31, 1994. *
6.7 Sublease Agreement dated September 16, 1993 between
Rush Moore Craven Sutton Morry & Beh and The Castle
Group, Ltd. for the Company's principle executive
offices, incorporated by reference to Exhibit 10.4 to
the Company's Registration Statement on form 10-SB. *
6.8 Lease Agreement dated April 1, 1988, between Hirano
Enterprises, Cen Pac Properties, Inc., and KRI, Inc.,
dba Hawaiian Pacific Resorts, as renewed by agreement
dated May 3, 1993, incorporated by reference to
Exhibit 10.5 to the Company's Registration Statement
on Form 10-SB. *
6.9 Reservations Services Agreement dated August 1, 1994
between the Company and Hawaii Reservations Center
Corp., incorporated by reference to Exhibit 6.9 to
the Company's quarterly report on Form 10-QSB for
the quarter ended October 31, 1994. *
6.10 Stock Acquisition Agreement between the Company and
Shari W. Chang dated September 10, 1995, incorporated
by reference to Exhibit 6.10 to the Company's Annual
Report on Form 10-KSB for the year ended July 31,
1995. *
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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. *
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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. *
28
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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. *
29
<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. *
30
<PAGE>
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. *
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.
31
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE CASTLE GROUP, INC.
(Registrant)
June 19, 2000 /s/ Rick Wall
---------------------------
Chairman of the Board and
Chief Executive Officer
June 19, 2000 /s/ Michael S. Nitta
--------------------------
Chief Financial Officer
32
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EXHIBIT 2.3
CERTIFICATE OF AMENDMENT
TO THE ARTICLES OF INCORPORATION OF
THE CASTLE GROUP, INC.
I, the undersigned, Motoko Takahashi, Secretary, of The Castle Group,
Inc., a Utah corporation (the "Corporation"), do hereby certify:
I
Pursuant to the provisionf of Section 16-10a-1003 of the Utah Revised
Business Corporation Act, the undersigned Corporation hereby adopts the
following Articles of Amendment to its Articles of Incorporation.
ARTICLE IV
The Corporation is authorized to issue Common Stock and, as approved by
the Board of Directors, other classes of equity, as follows:
The Board is authorized to issue a total of twenty million shares of
Common Stock, fully diluted, at $.02 par value, and when issued shall all
have unlimited voting rights and be entitled to participate in the net assets
of the Corporation on dissolution; and
Other classes of Corporate Equity providing that such issuance does
not impact the rights and priviliges of the Common shareholders or provide
the circumstances by which the total number of issued Common Shares shall
exceed the authorized limit.
The Board of Directors has disignated as Cumulative Convertible
Exchangeable Series "A" Preferred Stock, with the following rights,
preferences and priviliges:
50,000 shares of $7.50 Cumulative Convertible Exchangeable
Series "A" Preferred Stock (the "Preferred Stock").
Face Value of $100
Redemption Value is Face Value, plus any unpaid and accrued
dividends.
Dividends: $7.50 per annum per share, subject to declaration
by the Board of Directors.
Dividend Payment Dates: July 15 and January 15, commencing
July 15, 1999, when, as and if declared by the Board of
Directors of the Company.
Conversion: Convertible at any time, unless previously
redeemed, into the Company's common stock, par value $.02
per share (the Common Stock"), at $3.00 per share of Common
Stock, subject to adjustment under certain conditions.
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Optional Redemption: At the Corporation's option, the
Preferred Stock will be redeemable, in whole or in part,
commencing January 15, 2001 at the redemption price set
forth herein plus accrued and unpaid dividends.
Liquidation Preference: $100.00 per share, plus accrued
and unpaid dividends.
Voting Rights: The Preferred Stock shall be non-voting.
Ranking: The Preferred Stock will rank senior to the
Corporation's Common Stock with respect to dividends and
liquidating distributions and will rank pari passu with or
senior to all existing and future preferred stock.
The amendment setting forth rights, priviliges and preferences of a
class of series of Preferred Stock designated as "Series A Convertible
Preferred Stock" was adopted by the Board of Directors and by persons
owning a majority of the outstanding voting securities of the Corporation
pursuant to Section 16-10a-1003 of the Utah Revised Business Corporation
Act, as follows:
(a) The designation and number of outstanding shares of each class
entitled to vote thereon were as follows, to-wit:
CLASS NUMBER OF SHARES
Common 5,407,031
(b) The number of shares voted for the amendment to add Cumulative
Convertible Exchangeable Series "A" Preferred Stock of the Corporation to
Article IV to the Articles of Incorporation, was 3,365,894 with no opposing
and 5,468 abstaining.
IN WITNESS THEREOF, the undersigned officer of the Corporation,
certifying that the foregoing is true and correct under penalty of perjury,
have set their hand this 2nd day of April, 2000.
/s/ Motoko Takahashi
-------------------------------
Motoko Takahashi, Secretary
34
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