As filed with the Securities and Exchange Commission on November 4, 1997
Registration No. _________
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
THE CASTLE GROUP, INC.
(Exact name of registrant as specified in its charter)
Utah 7011 99037845
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Identification
organization) Number) Number)
745 Fort Street Suite 1000
Honolulu, Hawaii 96813
(808) 524-0900
(Address and telephone number,
principal executive offices and principal place of business)
Michael S. Nitta
Chief Financial Officer
745 Fort Street Suite 1000
Honolulu, Hawaii 96813
(808) 524-0900
(Name, address and telephone number, of agent for service)
Copies to:
William J. Carey, Esq.
Davis Wright Tremaine
1001 Bishop Street Suite 1360
Honolulu, Hawaii 96813
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number on the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for that offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
1
CALCULATION OF REGISTRATION FEE
Title of Proposed Proposed
each class of Amount Maximum Maximum Amount of
securities to to be offering price aggregate registration
be registered registered per share offering price Fee
Common Stock,
par value $.02 1,600,000 $ $ $ 1,655
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that the
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
2
THE CASTLE GROUP, INC.
Cross Reference Sheet Pursuant to Item 501(b) of Regulation S-K
Item of Form SB-2 Caption or Location in Prospectus
1 Forepart of the Registration
Statement and Outside Front Cover
Page of Prospectus .................. Outside Front Cover Page
2 Inside Front and Outside Back Cover
Pages of Prospectus ................. Inside Front Cover Page, Table of
Outside Back Cover Page
3 Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges .. Prospectus Summary, The Company, Risk
Factors, Selected Financial Data
4 Use of Proceeds ..................... Prospectus Summary, Use of Proceeds
5 Determination of Offering Price...... Risk Factors, Underwriting
6 Dilution ............................ Dilution
7 Selling Security Holders ............ Not Applicable
8 Plan of Distribution ................ Outside Front Cover Page of
Prospectus; Underwriting
9 Description of Securities to be
Registered .......................... Description of Capital Stock
10 Interests of Named Experts and
Counsel ............................. Not Applicable
11 Information with Respect to the
Registrant .......................... Outside Front Cover Page of
Prospectus; Inside Front Cover Page
of Prospectus; Prospectus Summary;
Risk Factors; The Company; Use of
Proceeds; Dividend policy; Dilution;
Capitalization; Pro Forma Financial
and Other Data of the Company;
Selected Historical Financial and
Pro Forma Financial and Other Data;
Management's Discussion and Analysis
of financial Condition and Results of
Operations; Business and Properties;
Formation and Refinancing of the
Company; Management; Certain
Relationships and Related
Transactions; Description of Capital
Stock; Ownership of Common Stock;
Shares Available for Future Sale;
Additional Information; Financial
Statements
12 Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities ..................... Not Applicable
3
1,600,000 Shares
THE CASTLE GROUP, INC.
COMMON STOCK
All of the shares of Common Stock offered hereby are being sold by The
Castle Group, Inc. (the "Company"). The Common Stock has filed an
application to be admitted for quotation on the NASDAQ National Market
System under the symbol "CAGU". See "Underwriting" for the information
relating to the factors to be considered in determining the public offering
price. On October 27, 1997, the last reported sale price of the Common
Stock on the "Electronic Bulletin Board" of the NASD was $2.125 per share.
See "Risk Factors" regarding matters which should be carefully considered by
prospective purchasers of the Common Stock offered hereby.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Underwriting
Price Discounts and Proceeds to
to Public Commissions Issuer (2)
Per Share
Total Minimum (3)
Total Maximum (3)
(1) See "Underwriting" for information concerning
indemnification of the Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated
at $220,000.
(3) The Company has granted the Underwriters a 30-day option to
purchase up to 160,000 additional shares of Common Stock solely
to cover over-allotments, if any. See "Underwriting." If such
option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company
will be $________, $_______ and $_________, respectively.
(4) The Underwriters have agreed to sell, on a best efforts
basis, a minimum of 800,000 shares of Common Stock up to
a maximum of 1,600,000 Shares, on a best efforts basis.
The shares of Common Stock are being offered by the Underwriters herein,
when, as and if delivered to and accepted by the Underwriters and subject to
their right to reject any order in whole or in part. It is expected that
delivery of certificates representing the shares will be made against
payment therefor at the office of Fortress Financial Group Limited on or
about __________________.
FORTRESS FINANCIAL GROUP LIMITED
The date of this Prospectus is November __, 1997
4
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BY ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
The Company intends to furnish to its shareholders annual reports
containing audited financial statements and quarterly reports for the first
three-quarters of each fiscal year containing unaudited interim financial
statements.
5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and the notes thereto appearing
elsewhere in this Prospectus. Unless the context otherwise indicates, (I) all
references to the "Company" refer to The Castle Group, Inc. and its wholly
owned subsidiaries, (ii) the proforma financial information assumes an
offering price of $3.00 per share, and (iii) all information in this
Prospectus assumes no exercise of the Underwriters' over-allotment option.
THE COMPANY
The Castle Group, Inc. is engaged in the business of hotel and resort
management, sales and marketing. The Company operates its business under the
trade names "Hawaiian Pacific Resorts" and "Castle Resorts and Hotels". At
September 22, 1997 the Company had 28 management, sales or marketing contracts
covering 3,055 rooms. The majority of the properties currently under
management are located on all of the major islands within the State of Hawaii.
The Company has one management contract for a 68 room condominium resort
located in Saipan.
The Company manages a wide variety of hotels and resorts from small
budget inns to luxury condominium resorts. Average room rates for the
properties average from $40 to over $450. With such a wide variety of
products, the Company is able to appeal to all levels of traveler. In times
of changing economic conditions, this diversity provides a wide base of
potential travel clientele as well as property owner.
The majority of hotels and resorts managed by the Company have
experienced substantial increases in both revenues and operating profits over
the past three years. In achieving higher net operating profits for the
managed properties, the Company at the same time increases its own revenues.
Many of the management contracts allow for the participation by the Company in
operating profits through incentive management fees. It is management's
belief that property owners have in recent years looked more favorably upon
management agreements based more on net profits than those based on gross
revenues. Management also believes that its past success in improving the
operating results for its managed properties will enhance its competitive
position when bidding for new properties.
The Company's principal business strategy is the expansion of its revenue
base. This entails two primary goals: (I) increasing the profitability of
the properties currently under management, and (ii) expansion through the
acquisition of additional management contracts.
Growth within the current client base is met by meeting the financial
goals of profitability and asset appreciation for its' clientele--the owners
of the hotels and resorts. This is accomplished through increasing revenues
and decreasing operating expenses. Revenues are enhanced through the
Company's' commitment to provide quality accommodations and service at a
reasonable price to the Company's equally important client--the leisure and
business traveler. Operating expenses may be decreased through the
implementation of bulk purchasing and centralized services. Each facet of the
Company's operations are tailored to effectively and efficiently meet the ever
changing needs of the individual properties whether it be assistance in
obtaining renovation financing or the implementation of value added marketing
programs.
The Company intends to increase its portfolio of management contracts by
expanding into new markets as well as the Hawaii market. Management believes,
although no assurances can be given, that there are numerous opportunities to
add properties outside of its existing geographical area. The expansion of
the Company's' management contract portfolio may include management contracts,
sales and marketing contracts, joint venture investments, and acquisitions.
6
THE OFFERING
Common Stock offered by the Company 1,600,000 shares (1)
Common Stock to be outstanding after the Offering 6,911,130 shares (2)
Use of Proceeds Repayment of debt,
acquisition of
management contracts
and/or companies,
and general and
corporate purposes.
NASDAQ Symbol "CAGU"
(1) Excludes up to 160,000 shares issuable upon exercise of the over-
allotment option granted to the Underwriters.
(2) Excludes 25,000 shares reserved for issuance upon the exercise of a
warrant held by Van Casper & Company. Excludes 1,000,000 shares of
Common Stock reserved for issuance upon the exercise of options granted
under the Company's Stock Option Plan. Excludes 500,000 shares reserved
for issuance upon the exercise of options granted under the
Company's Stock Purchase Plan. Excludes 50,000 shares reserved for
issuance upon the exercise of an option held by Hawaiian Reservations
Center Corp. Excludes up to 160,000 shares issuable upon exercise of the
over-allotment option granted to the Underwriters. Includes 222,100
shares sold in a private placement subscribed and paid for but unissued
as of September 22, 1997. See "Management -- Compensation Plans",
"Dilution", "Stock Option Plan", "Stock Purchase Plan" and "Options,
Warrants & Rights".
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," including statements regarding the anticipated
devilopment and expansion of the Company's business, the intent, belief or
current expectations of the Company, its directors or its officers, primarily
with respect to the future operating 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
"Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business."
7
RISK FACTORS
An investment in the Common Stock involves various risks. In addition to
general investment risks and those factors set forth elsewhere in this
Prospectus, prospective investors should carefully consider, among other
things, the following risk factors before making an investment.
Operating Losses and Limited Operating History
The Company has experienced net operating losses of approximately 2.5 million
dollars during the first three years of operations prior to the current year's
profit of $.2 million. These losses were not unexpected, as it was the
Company's plan to build the necessary corporate and personnel infrastructure
in order to properly service the additional hotel and resort management
contracts which the Company acquired. Since the current operations of the
Company commenced in November of 1993, there is limited operating history for
use to project future operations.
Liquidity and Absence of Public Market for Common Stock
There is no extensive public market for the Company's securities. Although
it is management's belief that the consummation of this offering shall
generate the interest of the general investment public, potential investors
should be aware that there may not be an extensive public market in the near
future. Accordingly, an investor may be unable to liquidate an investment in
the Shares and should be prepared to withstand the economic risk of an
investment in the Shares for an indefinite period.
Dependence on Acquisition of Management Contracts
The Company's success is highly dependent upon the acquisition and/or purchase
of additional management contracts. While the Company believes that the
financial strength provided by this offering would provide the Company with
the ability to purchase selective management contracts and/or companies, there
can be no assurance that the Company can acquire additional management
contracts and/or contracts. Investors should be aware that the failure of the
Company to acquire additional management contracts could adversely effect the
Company's results of operations and financial condition.
Dependence on Certain Property Owners
Management contracts are acquired, renegotiated or terminated in the ordinary
course of the Company's business. Some management contracts may be terminated
if certain financial criteria are not met in the profitability of the
property, while other management contracts may be terminated without cause on
short-term notice. There can be no assurances that the Company will be able
to keep its current portfolio of properties, nor that the Company would be
able to replace any contracts terminated by the property owner. Investors
should be aware that the loss of one or more management contracts could have
a material adverse effect on the Company's results of operations and financial
condition.
Competition for Management Contracts
The management and marketing of hotels and resorts is very competitive. The
Company competes with national, regional and local management companies, some
of which have a larger network of locations, greater financial resources, and
better name recognition than the Company. The Company currently operates only
within the State of Hawaii and there are a number of competitors within the
state with substantial operating histories and financial reserves.
8
Management of Growth
The Company's strategy is to expand its current portfolio of management
contracts. Some of this growth is expected to take place outside of the
geographic region of Hawaii, where the Company is situated and currently have
all of its management contracts located within. Management believes that it
will be able to put into place effective procedures, controls and management
systems to manage its expansion plan. There can be no assurance, however,
that the Company will have the financial and other resources necessary to
adequately support such expansion.
Need for Additional Financing
The Company is dependent upon the net proceeds of this offering, currently
available financing and anticipated cash flow from operations to implement its
business plan. There can be no assurance that the Company will be able to
raise additional capital on terms satisfactory to the Company or the holders
of Shares. See "Use of Proceeds", "Management Discussion and Analysis of
financial Condition and Results of Operations".
Dependence upon Management
The success of the Company is highly dependent on the continued involvement
of certain key personnel, including, in particular, Mr. Rick Wall, Chairman
and Chief Executive Officer and founder of the Company, and Mr. Kelvin Bloom,
Chief Operating Officer and Senior Vice President. The absence of Mr. Wall or
Mr. Bloom may have a material adverse effect upon the Company's operations and
expansion plans. The Company has an employment and non-competition agreement
with Mr. Bloom. The Company has no employment or non-competition agreement
with Mr. Wall, although he is one of the Company's largest shareholders. See
"Management".
Potential Conflicts of Interest
Certain of the current directors and officers owning stock in the Company are
direct or indirect parties to a management contract between the Company and
the Hanalei Bay Resort (HBR) Following this offering, directors and officers
with interests in HBR will beneficially own approximately 50% of the
outstanding shares of the Common Stock and will therefore have the ability to
direct its operations and financial affairs and the ability to influence the
election of members of the Board of Directors of the Company. Currently,
eight of the twelve board of directors are affiliated with HBR. These
relationships, coupled with these stockholders' ownership of Common Stock and
their representation on the Company's Board of Directors could give rise to
conflicts of interest. The Company believes that the terms and conditions of
the management contract with HBR are not at favorable rates to HBR, are at
rates commonly found within the industry and are similar to other contracts
entered into by the Company.
Voting Control
Following this offering, current holders of the Company's Common Stock will
beneficially own approximately 77% of the outstanding shares of the Common
Stock and will therefore have the ability to direct its operations and
financial affairs and to substantially influence the election of members of
the Board of Directors of the Company. Current officers and directors of the
Company will beneficially own 59% of the outstanding shares of the Common
Stock and will also have the ability to direct its operations and financial
affairs and to substantially influence the election of members of the Board of
Directors of the Company.
Quarterly Fluctuations in Earnings
The hotel industry is seasonal in nature. The first and third quarters of the
Company's fiscal year account for a large portion of the Company's management
fees. Because the operating expenses of the Company do not fluctuate with
seasonality, this will cause large quarterly fluctuations in the Company's
reported earnings. Other factors outside of the Company's control may also
adversely effect earnings such as poor weather conditions, economic factors,
competition and other occurrences affecting travel.
9
Dependence on Travel Industry
The Company is highly dependent on the travel industry as a whole. Certain
economic events such as recession, depression, competition and other factors
will adversely effect the results of operations and financial condition of the
Company. In addition to this, the Company is highly dependent upon the travel
industry for the State of Hawaii, as all of its current revenues are derived
within Hawaii. Hawaii's travel industry is highly dependent upon the airline
industry to provide the necessary volume of airline seats for visitors from
the United States and other International regions. A decrease in the number
of flights to Hawaii, or an airline labor dispute resulting in a strike could
adversely effect the earnings and financial condition of the Company.
Government Regulations
The Company is subject to both federal and state regulation. The Company is
not currently aware of any federal or state pending legislation that would
adversely effect the financial conditions and earnings of the Company. The
extent and future promulgation of new regulation detrimental to the visitor
industry could have a substantial impact on the Company's profitability. The
hotel industry may be adversely effected by regulations which cover wages,
benefits, pricing, taxes and availability of financing. In addition, the
Company is planning to expand outside of the United States and would become
subject to International laws and the laws and regulations of other countries.
Investors should be aware that there is a possibility of future changes in
these regulations which may adversely effect the Company's earnings.
Environmental Regulations
Under various federal, state and local environmental laws and regulations, a
current or previous owner or operator of real property may be liable for the
costs to remove or remedy hazardous or other toxic substances located on, in
or under such real property. These laws may impose such liability whether or
not the owner or operator had knowledge of the presence of these substances.
In connection with the Company's operation of its properties under contract,
the Company could be potentially liable for such removal and remediable costs.
The Company is not aware of any environmental claims pending or threatened
against it or against the owners of the properties operated by the Company,
however, no assurance can be given that such a claim will not be asserted
against the Company in the future. Investors should be aware that the
potential uninsured cost of defending the Company against such claims may have
a material adverse effect on the earnings and financial condition of the
Company.
Price Volatility
The market price of the Common Stock could be subject to significant
fluctuations in response to variations in quarterly or annual operating
results and other factors such as expansion or the loss of management
contracts. In addition, the securities markets in general have experienced
significant price and volume fluctuations from time to time in recent years
that may have been unrelated to the operating performances of certain
industries or individual companies. These broad fluctuations may adversely
affect the market price of the Common Stock.
CORPORATE ORGANIZATION
The Company is a Utah corporation engaged in the business of hotel and resort
management. The Company operates its business under the trade names "Hawaiian
Pacific Resorts" and "Castle Resorts & Hotels". 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 ending July 31, 1984, the Company acquired a fifty
10
percent interest in Guam Productions, Inc. ("GPI"), a corporation organized
under the laws of the Territory of Guam, in exchange for 11,000,000 shares of
the Company's "unregistered" and "restricted" common stock and $100,000.
Persons affiliated with GPI were elected to serve as directors and executive
officers of the Company. GPI's sole asset was an exclusive franchise to
operate a lottery in the Territory of Guam through December 31, 1988. The
Company's investment in GPI was written off in fiscal year ending 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 GPI was abandoned, and the Company ceased business
operations in 1986.
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 of the State of Utah, changing its name 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 of the
Company's stockholders.
On November 8, 1993, the Company and all of the stockholders of Castle Group,
Ltd., a Hawaii corporation ("Castle Limited") 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 Limited, consisting primarily of
management contracts on two resort properties located in Hawaii, 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. In connection with the closing of the Castle Plan, the Company
sold 1,000,000 post-split "unregistered" and "restricted" shares of its common
stock at a price of $2.00 per share in a private placement.
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. An additional $800,000 was paid
to the selling stockholders of KRI in exchange for certain non-competition
covenants.
The business operations of KRI at the time of its acquisition were far more
significant than those of Castle Limited. KRI was a twenty-five year old
management company that managed and controlled the operations of nine hotels
within the State of Hawaii. 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 acquisition also included a 62% interest in
HER Advertising, Inc. ("HPR Advertising"), a Hawaii corporation. HPR
Advertising was incorporated in 1989, with its primary operation being the
advertising of hotels & resorts managed by KRI. The 38% minority interest in
HPR Advertising was owned by certain employees of KRI. On July 31, 1995, KRI
purchased all of the minority interests in HPR Advertising for $380 in cash
and HPR Advertising became a wholly owned subsidiary of KRI.
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.
References to the "Company" herein include the Company and its subsidiaries.
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 and
its facsimile number is (808) 521-9994.
11
USE OF PROCEEDS
The net cash proceeds to the Company from this Offering is estimated to be
$4,087,500 (approximately $4,495,500 if the Underwriters' over-allotment
option is exercised in full) after giving effect to estimated underwriting
discounts and commissions and expenses payable by the Company.
The Castle Group intends to use the net proceeds from the sale of the shares
of Common stock to repay approximately $200,000 of notes payable and interest
representing the balance of the purchase price payable on the acquisition of
KRI, Inc., (see "The Company"), $200,000 in accounts payable and $250,000
representing the outstanding balance of the line of credit. The notes payable
to the former stockholders of KRI, Inc. are dated January 1, 1996 and bear
interest at the rate of 6% per annum. The line of credit is personally
guaranteed by four of the Company's directors and bears interest at the rate
of prime plus 2%.
The balance of the net proceeds will be used for general corporate purposes,
which may include making debt and equity investments in hotel properties
and/or management companies in connection with the acquisition of future
management contracts and/or management companies. Expenditures may also be
infused into staffing and equipment necessary to fund the operations necessary
to manage and control the possible growth in the Company's management contract
portfolio. Pending such use, the Company intends to invest the funds in
short-term, interest bearing investment grade securities.
DETERMINATION OF OFFERING PRICE
The stock of the Company is currently trading at $1.625 - $2.00. The stock
has been thinly traded as the current Board of Directors and Executive
Officers own over 80% of the outstanding stock.
The Board of Directors determined the offering price for the Shares based upon:
1. Directors and Executive Officers own 80% of the issued and authorized stock.
2. Because the stock is very thinly traded, it would be difficult for an
investor to acquire a large number of shares.
3. It is the Company's belief, although no assurance can be given, that as
a result of the financial resources provided by this offering, the
Company would be able to acquire additional management contracts,
enhancing the profitability and earnings per share of the Company.
4. The acquisition of additional management contracts and/or companies could
have a significant impact on the profitability of the Company.
DIVIDEND POLICY
The Company has never paid cash dividends. The Company currently intends to
retain any future earnings, if any, for use in the Company's operations and
does not anticipate the payment of cash dividends in the near foreseeable
future.
12
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as of
the fiscal year ending July 31, 1997 and the pro forma capitalization of the
Company after giving effect to the sale of 1,600,000 shares of Common Stock
offered hereby at an assumed public offering price of $3.00 per share and the
application of the net proceeds therefrom as described under "Use of
Proceeds."
July 31, 1997
Actual Proforma
------------- ------------
Short-Term debt............................. $ 1,309,431 $ 825,831
Long-Term debt.............................. 166,400 0
Shareholders' equity:
Common Stock, $.02 par value, 20,000,000
shares authorized; 5,311,130 shares issued
and outstanding; 6,911,130 shares issued
and outstanding proforma (1)............... 106,223 138,223
Additional paid-in Capital (2).............. 2,539,175 6,594,675
Retained Earnings........................... ( 2,464,068) ( 2,464,068)
Total shareholders' equity (deficit)........ 181,330 4,268,830
Total capitalization........................ $ 1,657,161 $ 5,094,661
(1) Excludes 25,000 shares reserved for issuance upon the exercise of a
warrant held by Van Casper & Company. Excludes 50,000 shares reserved for
issuance upon the exercise of an option held by Hawaiian Reservations
Center Corp. Excludes 160,000 shares issuable upon the exercise of the
Underwriters over-allotment option. Excludes 1,000,000 shares of Common
Stock reserved for issuance upon the exercise of options granted under
the Company's Stock Option Plan. Excludes 500,000 shares reserved for
issuance upon the exercise of options granted under the Company's Stock
Purchase Plan. See "Management -- Compensation Plans", "Dilution",
"Stock Option Plan", "Stock Purchase Plan" and "Options, Warrants &
Rights". Includes a private placement sale of 222,100 shares subscribed
and paid for as of September 22, 1997, but not yet issued to Development
Funding, Ltd.
(2) Includes a private placement sale of 222,100 shares subscribed and paid
for as of September 22, 1997, but not yet issued to Development Funding,
Ltd..
13
DILUTION
The following pro forma net tangible book value of the Company at July 31,
1997 was $.03 per share of Common Stock, taking into account the 222,100
shares subscribed and paid for but unissued private placement shares. Pro
forma book value per share represents the total assets of the Company less its
total liabilities, divided by the number of shares outstanding as of July 31,
1997. Without taking into account any changes in net book value of the
Company at July 31, 1997, other than to give effect to the sale of Common
Stock offered hereby (after deduction of the Underwriter's discount and
commissions, and the application of the estimated net proceeds therefrom, and
assuming that the Underwriter's do not exercise their over-allotment option),
the pro forma net book value of the Company at July 31, 1997 would have been
4,268,830 or $.62 per share. This represents an immediate increase in net
book value of $.59 per share of Common Stock to existing stockholders and an
immediate dilution of approximately $2.38 per share of common stock to new
investors purchasing shares in this offering. The following table illustrates
the per share dilution to new investors:
Assumed initial offering price per share of Common Stock (1) $ 3.00
Pro forma net book value (deficit) per share
as of July 31, 1997 (2) $ .03
Increase in per share attributable to new investors .59
--------
Pro forma net tangible book value per share after offering .62
--------
Dilution per share to new investors $ 2.38
========
(1) Before subtracting underwriting discount and commissions and estimated
expenses of the Offering.
(2) Includes 222,100 shares subscribed and paid for but unissued to
Development Funding, Ltd. under a private placement.
The following table summarizes, on a pro forma basis as of July 31, 1997, the
number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share of Common
Stock paid by the existing stockholders and by the new investors participating
in this Offering:
Shares Purchased Total Consideration Average Price
Number Percent Amount Percent per Share
Existing
stockholders.. 5,311,130 77% 2,645,400 36% $ .50
New Investors. 1,600,000 23% 4,800,000 64 3.00
--------- ------ --------- ----- --------
6,911,130 100% 7,445,400 100% $ 1.08
========= ====== ========= ===== ========
The foregoing table includes a private placement sale of 222,100 shares for
an net aggregate of $425,395 subscribed and paid for as of September 22, 1997,
but not yet issued to Development Funding, Ltd. and excludes 25,000 shares
reserved for issuance upon the exercise of a warrant held by Van Casper &
Company, 1,000,000 shares of Common Stock reserved for issuance upon the
exercise of options granted under the Company's Stock Option Plan, 500,000
shares reserved for issuance upon the exercise of options granted under the
Company's Stock Purchase Plan, 50,000 shares reserved for issuance upon the
exercise of an option granted to Hawaii Reservations Center Corp.and 160,000
shares issuable upon the exercise of the Underwriters over-allotment option.
See "Management -- Compensation Plans", "Dilution", "Stock Option Plan",
"Stock Purchase Plan" and "Options, Warrants & Rights".
14
SELECTED FINANCIAL DATA
The following tables set forth selected combined historical financial data for
The Castle Group, Inc. as of and for each of the years in the four year period
ended July 31, 1997 . In the opinion of management, the financial statements
include all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the information set forth herein.
The following selected financial information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and all of the financial statements and notes thereto included
elsewhere in this Prospectus.
Year Ended July 31, (Thousands)
1994 1995 1996 1997
----------- ---------- ---------- ----------
Statement of Operations Data:
Operating Revenues
Management Operations 1,118 2,790 3,659 4,294
Hotel Operations 0 0 452 1,892
----------- ---------- ---------- ----------
Total Revenues 1,118 2,790 4,111 6,186
----------- ---------- ---------- ----------
Operating Expenses
Management Operations 1,816 3,300 3,671 3,788
Hotel Operations 0 0 452 1,894
----------- ---------- ---------- ----------
Total Department Expenses 1,816 3,301 4,123 5,682
Depreciation & Amortization 220 453 465 263
Interest Expense 4 54 68 52
----------- ---------- ---------- ----------
Total Operating Expense 2,040 3,807 4,656 5,997
----------- ---------- ---------- ----------
Net Income ( Loss )
before income taxes ( 922) ( 1,017) ( 545) 189
----------- ---------- ---------- ----------
Net Income (Loss) ( 922) ( 1,017) ( 545) 189
----------- ---------- ---------- ----------
Net Income (Loss) per share ( .23) ( .20) ( .11) .04
----------- ---------- ---------- ----------
Weighted Average Shares
Outstanding (2) 3,933,859 5,066,530 5,085,280 5,109,903
Consolidated Balance
Sheet Data:
Cash and Cash Equivalents $ 207 277 221 269
Total Assets 2,530 2,312 2,031 1,617
Long-term debt, net of
current portion 348 772 76 166
Total Liabilities 1,409 2,208 2,464 1,476
Stockholders' equity 1,121 104 ( 433) 141
Other Related Data
Property Contracts, beginning 13 17 25 28
Property Contracts,
end of year 27 25 28 27
Rooms Covered, beginning
of year 1,684 1,909 2,349 3,129
Rooms Covered, end of year 1,909 2,349 2,808 2,987
<FN>
(1) Represents nine month's operating results from inception at November
1993 to July 1994.
(2) Excludes 25,000 shares reserved for issuance upon the exercise of a
warrant held by Van Casper & Company. Excludes 1,000,000 shares of
Common Stock reserved for issuance upon the exercise of options granted
under the Company's Stock Option Plan. Excludes 500,000 shares
reserved for issuance upon the exercise of options granted under the
Company's Stock Purchase Plan. Excludes 50,000 shares reserved for
issuance upon the exercise of an option held by Hawaiian Reservations
Center Corp. Excludes up to 160,000 shares issuable upon exercise of
the over-allotment option granted to the Underwriters. Includes 222,100
shares sold in a private placement subscribed and paid for but unissued
as of September 22, 1997. See "Management -- Compensation Plans",
"Dilution", "Stock Option Plan", "Stock Purchase Plan" and "Options,
Warrants & Rights".
</FN>
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The Company is a Utah corporation which earns revenues primarily by providing
management, reservations and sales and marketing services to hotels and
resorts. The Company currently 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. In addition to the fees described, the Company also
earns revenues from transient and long term rentals and other hotel related
income from its leased hotel. The revenues of the properties which are
managed by the Company, except as mentioned herein, are not recorded as
revenues of the Company.
The Company's operating expenses are comprised of labor, reservations fees and
other costs associated with operating as a management company. The expenses
of the properties which are managed by the Company, except as mentioned
herein, are not recorded as expenses of the Company.
As of September 22, 1997, the Company had 28 contracts covering 3,055 rooms,
all except 68 rooms located in Saipan 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 with is based on gross revenues. In some cases, the
Company also participates in the profitability of the properties it manages
and may earn an incentive fee based on the net operating profits of the
property managed. Sales and marketing and reservation fees earned from the
properties are based on the gross revenues of the property. The Company is
also reimbursed for direct advertising and marketing expenditures it makes on
behalf of the property, all in accordance with the terms and conditions of the
management contracts. The Company also earns commissions and other fees from
the properties managed by providing centralized purchasing services to the
hotel owners. Under these arrangements, the net savings to the property owner
from centralized purchasing are shared between the Company in the form of
commissions and to the property owner in the form of cost savings.
Hotel revenues consist of revenues from 167 rooms leased by the Company.
Under this arrangement, the Company includes as its own revenues the entire
property revenues which includes hotel transient rental income as well as the
total expenses incurred to operate the property. The property is situated in
Waikiki, Hawaii. The Company does not currently own any other real property
interest in fee or leasehold.
Overview
The lodging 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.
Revenues from management operations grew at a compound annual rate of 56.6%
from 1994 through 1997, from $1,118,386 to $4,294,216. Total revenues grew at
a compound annual rate of 76.9% from 1994 through 1997, from $1,118,386 to
$6,185,798. The growth in revenues attained by the Company over the past
three years has been impressive, however, management gives no assurances that
these increases will continue in future periods.
The increase in revenues together with smaller increases in operating
expenses resulted in the Company being able to reduce it's net
losses from 1994 through 1996, and record a profit in 1997. Net
losses decreased from $922,644 for the nine months ended July 31, 1994 to a
16
profit of $188,552 for the twelve months ended July 31, 1997. Included in
fiscal 1997 was a reduction in expenses of $187,500 for the forfeiture of an
option granted to an officer of the Company. Even without this adjustment,
the Company would have reported a net profit of $1,052 for the twelve months
ended July 31, 1997. Management attributes the improvements in operating
losses to the growth in revenues coupled with effective cost control. There
can be no assurance that these improvements will continue in future periods.
Results of Operations
For the Years Ended July 31, 1997 and 1996
For the year ended July 31, 1997 and 1996, the Company had total revenues of
$6,185,798 and $4,111,626, respectively, representing an increase of
$2,074,172 or 51%. The increase in revenues was attributable to $1,439,195 in
hotel revenues and $634,977 in management and other management related income.
Because the Company acquired the leasehold interest to 167 rooms operated as
a hotel in May of 1996, total revenues for the two periods does not provide an
accurate comparison for means of measuring increased revenue performance. For
the nine months ended April 30, 1997 and 1996, the Company had unaudited
management related revenues of $3,239,276 and $2,811,895, an increase of
$427,381 or 15%.
Operating expenses for management operations were $3,788,482 for the year
ended July 31, 1997 as compared to $3,671,369 for the prior year, a decrease
of $117,113 or 3%. Operating expenses for hotel operations were $1,893,635
for the year ended July 31, 1997 as compared to $452,386 for the three months
of hotel operations ending July 31, 1996.
Depreciation and amortization expense decreased by $201,674 for the year ended
July 31, 1997, primarily due to the amortization in full of the non-competition
agreements incurred upon the purchase of KRI, Inc. as of October 31, 1996. See
"Corporate Organization". The non-competition agreements were purchased for
$800,000 in November of 1993 and covered a period of three years. Monthly
amortization expense of $22,222 was recorded between the months of November
1993 through October 1996. The decrease of $201,674 is mainly attributed
to the non-existence of this amortization expense for the months of November
1996 through July, 1997.
Interest expense decreased by $16,033, to $51,934 from $67,966 for the years
ended July 31, 1997 and 1996, respectively. The decrease in interest expense
is attributed to a lower amount of indebtedness. The Company fully paid off
its contract payable in June of 1997 and during the year reduced its
indebtedness on the line of credit by $25,000 in February of 1997 (See Note 5
to the financial statements).
For the Years Ended July 31, 1996 and 1995
Total revenues for the year ended July 31, 1996 were $4,111,626, an increase
of $1,321,294 or 47% over total revenues for 1995. Revenues from management
operations were $3,659,239 as opposed to $2,790,332 for the prior year, an
increase of $868,907 or 31%. Revenues from hotel operations were $452,387,
representing the revenues attributed to a lease agreement on 167 hotel rooms
entered into on May 1, 1996.
Operating expenses for management operations were $3,671,369 for the year
ended July 31, 1996 as compared to $3,300,427 for the prior year, and increase
of $370,942 or 11%. The increase in operating expenses for the management
operations were primarily attributable to the increase in management related
income. Operating expenses for hotel operations were $452,386 for year ended
July 31, 1996 on revenues of $452,387.
As mentioned previously, the hotel industry is subject to seasonal
fluctuations in revenues. The first and third quarters of the
Company's fiscal year are typically busier months for the tourist
industry. The Company signed the lease agreement for the 167 hotel units
on May 1, 1996. As of July 31, 1996, the results of operations from
hotel operations encompassed the fourth quarter ended July 31, 1996.
The hotel operations reported an operating loss of $14,000 for the
three month period, as this quarter is one of the low seasons for
17
tourism in Hawaii, where the property is situated and is not indicative of the
results of operations for a whole year. (See "Quarterly Fluctuations in
Earnings").
Depreciation and amortization expense increased by $12,000 for the year ended
July 31, 1996 due to the depreciation of equipment and furnishings exceeding
the decrease caused by assets becoming fully depreciated or amortized.
Interest expense increased by $14,000, from $54,000 to $68,000 for the year
ended July 31, 1996 when compared to the prior year. The increase in interest
expense is attributed to interest incurred on the borrowing against a line of
credit and the conversion of advances received from former KRI, Inc.
stockholders to a note payable at 6% interest on July 31, 1995. See "Use of
Proceeds" and "The Company".
For the Years Ended July 31, 1995 and 1994
The fiscal year ended July 31, 1994 encompassed nine months of hotel
management operations, as the Company commenced its hotel management
operations on November 8, 1993 with the acquisition of Castle Limited and KRI,
Inc. See "Corporate Organization".
Total revenues for the year ended July 31, 1995 was $2,790,332, an increase
of $1,671,946 or 149% over total revenues of $1,118,386 for 1994. The
revenue increase is attributed to the fiscal year ending July 1995
encompassing twelve months of operations as opposed to nine months for the
previous year. On an average basis, monthly revenues for the fiscal year
ended July 31, 1995 averaged $232,528 as opposed to an average of $124,265 for
the prior year, an increase of 87%. Revenues also increased due to the
addition of eight management contracts during the fiscal year. The number of
rooms managed increased by 440 rooms, from 1,909 to 2,349.
Operating expenses were $3,300,427 for the year ended July 31, 1995 as
compared to $1,816,274 for the prior year, an increase of $1,484,153 or 82%.
The increase in operating expenses is attributed to the fiscal year ending
July 1995 encompassing twelve months of operations as opposed to nine months
for the previous year. On an average basis, monthly operating expenses for
the fiscal year ended July 31, 1995 averaged $290,000 as opposed to an average
of $202,000 for the prior year, an increase of 44% which is attributed to the
99.2% increase in management operation revenues.
Depreciation and amortization expense increased by $12,000 for the year ended
July 31, 1996 over the prior year due to the depreciation of equipment and
furnishings exceeding the decrease caused by assets becoming fully depreciated
or amortized.
Interest expense increased by $49,764, from $4,314 to $54,078 for the year
ended July 31, 1995 when compared to the prior year. The increase in interest
expense is attributed to interest incurred on the borrowing against a line of
credit dated October 21, 1994. The increase in interest is also attributed to
the amortization of a discount on a contract payable dated July 1, 1994 to a
property manager to secure management contracts on behalf of the Company,
payable in monthly installments of $14,500 plus tax through June 1997. The
contract payable is discounted at an effective interest rate of 8%.
Liquidity and Capital Resources
The Company's primary sources of working capital are cash flow from operations
and borrowing. Net cash provided from operations was a deficit of $805,779 in
fiscal 1994, a deficit of $292,929 in fiscal 1995, $890 in fiscal 1996 and a
deficit of $374,600 in fiscal 1997. The Company had unrestricted cash of
$207,675, $277,706, $220,951 and $268,938 at July 31, 1994, 1995, 1996 and
1997, respectively.
At July 31, 1997, the Company's balance sheet reflected $268,938 of cash
representing an increase of $47,987 from July 31, 1996. During the year ended
July 31, 1997, cash used in operating activities exceeded cash provided by
operating activities by $333,957. Cash provided by in investing activities was
$22,199 and cash provided by financing activities was $359,750.
18
The Company has available a $300,000 line of credit dated October 21, 1994
which is personally guaranteed by four of the directors of the Company. The
line of credit was initially due on October 21, 1995, and has been extended
for periods of three months each through September 1997. The Company
subsequently applied for and received an extension of the line of credit
through April 15, 1998. The Company made draws against the line of credit for
$275,000 during the fiscal year ended July 31, 1995. The Company subsequently
repaid $25,000 of the line of credit in April 1997. Proceeds received from
the sale of shares of Common Stock offered hereby will be utilized to repay
the outstanding balance of $250,000 on the line of credit. Management plans
to have the line of credit available following the payment of the outstanding
balance, in order to provide additional liquidity to the Company if needed.
Management believes, although no assurances can be given, that the line of
credit may be further extended if necessary.
The Company had net working capital of $158,097 and $11,750 as of July 31,
1994 and 1995, respectively, a net working capital deficit of $764,731 as of
July 31, 1996 and net working capital of $87,325 as of July 31, 1997.
As of July 31, 1997, net working capital included liabilities due to
affiliates in the amount is $40,128 consisting of $18,000 in notes payable to
former stockholders of KRI, Inc. representing the undistributed cost on the
acquisition of the stock of KRI, Inc., and $22,128 in interest accrued on the
notes payable. See "Corporate Organization". Proceeds received from the sale
of shares of common Stock offered hereby will be utilized to repay the
outstanding notes payable of $184,400, together with interest accrued through
the repayment dates. Also included in net working capital is $76,230 in
unamortized deferred revenues related to a signing bonus of $316,000 in cash
paid to the Company by one of its vendors in April of 1994 as a result of the
Company entering into a three year contract with the vendor. The deferred
revenues are being amortized over three years.
Management believes, although no assurances can be given, that the combination
of the net proceeds of this offering, net of repayment of borrowing, net
cashflow generated from operations, and the future availability of credit
facilities will be sufficient to fund the operations of the Company and its
future anticipated growth.
PLAN OF OPERATION
The Company is one of the leading regional hotel and resort management
companies within the State of Hawaii. At September 22, 1997, the Company had
28 management or sales, reservations and marketing contracts covering 3,055
rooms. The Company also leases and operates as a hotel 167 rooms in a
condominium complex domiciled in Waikiki in the State of Hawaii.
The properties represented by the Company appeals to a wide variety of the
public market as the Company manages a wide spectrum of property types from
the luxury condominium resorts with room rates of $450 to the small budget
inns with an average rate of $40. The Company believes that the availability
of differing products provides appeal to all levels of business or leisure
traveler.
The Company has experienced significant growth since its commencement of
operations in November of 1993. From November of 1993 through September of
1997, the number of contracts has more than doubled, from 13 to 28; the
number of rooms managed also increased substantially during this period, from
1,684 to 3,055.
The Company plans to expand its portfolio of management contracts
both within the State of Hawaii and outside of Hawaii in areas such
as Saipan, Guam and other Pacific Basin destinations, however no
assurances can be given that the Company will be successful in
expanding outside of Hawaii. In addition to opportunities within the State
of Hawaii, management believes that there are many opportunities to
expand its portfolio in emerging markets within the Pacific Basin. In
addition to signing on independent hotels & resorts, The Company may achieve
its desired expansion goals through joint venture investments, leases and
19
acquisitions of management contracts and/or companies. Currently, the Company
is engaged in various stages of discussions for the management of several
properties located in Hawaii and the Pacific Basin.
Effective 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 condominium resort located in Saipan.
Although no assurance can be given, it is management's belief that it will be
able to effectively manage this property and to also continue its expansion in
the Pacific Basin.
Upon the completion of the sale of Common Stock offered hereunder, the Company
will have substantial capital available for growth. The working capital may
be used to acquire management contracts and/or management companies. The
Company may use a portion of the capital to make improvements to properties in
consideration of long-term leases or management contracts. Management
believes that the ability to make such investments in the properties makes the
Company more attractive to hotel and resort owners.
The Lodging Industry
Overview
The lodging industry has experienced substantial improvement in recent years.
According to "Trends in the Hotel Industry - USA Edition 1996" published by
PKF Consulting, 73.2% of hotels surveyed reported increases in Income Before
Other Fixed Charges for the year ended December 31, 1995 when compared to the
prior year, and that Income Before Other Fixed Charges increased an average of
16.5% for all hotels surveyed. Hawaii's statewide occupancy has, over the
past ten years, ranged from the low seventies to the low eighties. Statewide
occupancy in 1994, 1995 and 1996 averaged 76.0%, 76.6%, and 76.0%,
respectively. Room rates in Hawaii experienced steady growth in the late
1980s and were relatively flat from 1990 to 1994. Statewide average daily
rates increased from $68.84 in 1985 to $102.90 in 1990. Average rates from
1990 to 1994 increased only marginally to $113.70, but increased by 5.2% to
$119.65 in 1995 and by 7.3% in 1996 to $128.38.
The majority of the Company's properties under contract are located in Hawaii.
According to "Travel and Tourism and Hawaii's Economy - Impact and Perspective
Millennium Vision 1997" published by the World Travel and Tourism Council,
tourism is Hawaii's largest industry, providing 24% of the Gross State
Product. It is estimated that in 1997, Tourism will account for approximately
31% of the State's total work force. During the last ten years, the average
statewide occupancy has ranged from the low seventies to the low eighties.
Management believes that the improving economy of the mainland United States
will continue to improve and therefore the lodging industry as a whole will
continue to experience growth in earnings. Management also believes that the
convention center currently under construction in Waikiki and scheduled to
open in 1998 shall allow the State to capture a portion of the lucrative
convention travel market, further increasing the demand for guest rooms.
Hotel Management
Other than the large chains, many hotels are often owned by entities that are
not in the hotel management business nor are affiliated with any brand name.
It is these properties that are likely to seek management, sales and marketing
and other services from third parties. The hotel owner, whether it be a
single owner of a hotel or individual condominium resort unit owners, would
benefit through cost savings and exposure. The management company would
provide economies of scale in the areas of centralized services such as
reservations, sales and marketing, advertising and purchasing. Certain
management companies such as the national chains provide a name brand for
which the hotel owner must pay a franchise or royalty fee. The Company does
not brand name its properties but instead promotes the hotel on its own. It
is management's belief that in the long term, brand naming a property may
cause a loss of identity for the individual property.
20
Management believes that over the past ten years, hotel owners have moved
towards favoring management contracts where a portion of the risks involved in
owning or developing a hotel is shifted to the management company as well.
This may be accomplished by the management company earning less fees which are
based on gross revenues and more fees based upon performance such as incentive
management fees. In some cases, if performance levels are not met, a
management company may not earn any fees from an underperforming property; in
certain cases, this may lead to an actual loss as the Company expends certain
resources in the management of a property. The Company believes that it has
the ability and resources available to make improvements to a hotel's
operations and thus, improve the operating profits and earn an acceptable fee.
Management carefully analyzes all aspects of risk sharing prior to entering
into any management contract and has earned acceptable fees from each of its
properties.
Business Strategy
The Company's principal business strategy is to provide the property owners
with efficient and effective services which are tailored to the individual
needs of each of its properties. By meeting these goals, the Company believes
that it will be able to sustain the growth that it has experienced over the
past three years. Major components of the Company's strategy are:
Profitability for Hotels. The Company focuses on increasing the profitability
for each of its properties, whether it be through increased revenues or
control of operating expenses. Management believes that operating profits for
its properties have shown marked increases in operating profits when compared
to operating results prior to the Company's acquisition of the contract.
Management accomplishes its revenue goals through its advertising, sales and
marketing network, which management believes is as complete as many of its
competitors. The Company is also committed to providing quality
accommodations and guest services for the business and leisure traveler. This
is accomplished through employee training, guest satisfaction surveys, guest
history, and value added programs for our visitors. The Company's goal is to
exceed the expectations of our guests in order to build customer loyalty and
repeat business. Operating expenses are reduced through centralized services
such as advertising, reservation, sales and marketing, and centralized
purchasing. For a small property, there are advertising, marketing and other
expenses which may have been cost prohibitive for the property on its own,
however, the property can participate in these programs under the combined
group represented by the Company. As the Company continues its expansion,
future reduction in costs may be obtained as the purchasing power of the
Company as a whole will increase.
Homeowner Associations. The Company also provides savings through economies
of scale in the operating expenses of homeowner associations, which results in
lower monthly common area maintenance fees paid by the individual condominium
unit owners. Management works closely with the board of directors of the
associations to reduce operating expenses and increase the asset values of the
property as a whole.
Asset Appreciation. In addition to adding value to the asset through
increased profitability, the Company provides services to enhance the physical
plant of each property. Management is experienced in the renovation of
properties whether it be cosmetic improvements such as carpeting, drapery and
furniture packages, or the reconstruction of a property as a whole. The
Company focuses on attaining the best value for the amount of funds spent on
the physical plant.
Direct Sales & and Marketing. The Company has an extensive corporate and
consumer direct network, including its own membership club. The Company has
a sales force which concentrates on soliciting both local, national and
international group business. The Company also participates in cooperative
direct mailouts with other travel industry partners such as airlines and car
rental companies. A successful program results in higher yields which further
enhances the operating results for the properties.
Flexible Management Terms. The Company does not have a standard
management contract which it offers to prospective clients. The
Company, instead, tailors its agreements specifically for the needs
and requests of each individual property. The Company provides a
21
full array of management services from full management of a property to
reservation, sales and marketing services. Following the receipt of net
proceeds from the sale of Common Stock hereunder, management believes that it
will have the ability to provide capital to prospective hotel owners in
exchange for a longer term contract. It is management's belief that the
flexibility in contract terms which the Company offers allows it to have a
competitive edge over some of its competitors.
Product Lines. The Company does not concentrate its efforts on a single
product line. Instead, the Company accepts responsibility for the management
of a full variety of products from small budget inns with average room rates
under $40 to the luxury condominium resorts with average room rates exceeding
$200. Sales and marketing and operational management programs are instituted
to accommodate the needs and objectives of each product line. Management
believes that it has the ability to effectively manage the operations of these
diverse product lines and that this ability allows the Company to bid on a
wide variety of hotels and resort management contracts.
Property Identity. The Company keeps in constant communication with the
property owners and reacts immediately to reasonable requests from the owners.
The Company does not focus its efforts on selling the Company, but rather the
individual property itself. This allows the properties to keep their
identities while at the same time benefit from the management services
provided by the Company. Management believes that this also provides a
competitive edge when bidding for hotel and resort management contracts.
Growth Strategy
The Company believes that the improving lodging industry together with the
current economic environment will provide excellent opportunities for future
growth. Under the current sluggish economy of the hotel industry, the Company
would be able to provide more benefits to the owners of properties which are
underperforming in the form of economies of scales in advertising, sales and
marketing which should translate to higher revenues for the property. Since
the Company allocates the cost of each individual advertisement to all of the
managed properties, property owners would enjoy a substantial increase in the
exposure to the general public, travel agents and wholesalers. The
operational expertise provided by the Company would also assist the property
owner in reducing operating expenses through staffing and centralized
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 the
performance for its properties over the past three years. 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 which include sales of properties, foreclosures, underperformance and
dissatisfaction with current management. Management has a proven track record
over the past three years of 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 all 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 and other Pacific Basin regions. Although no
assurance can be given, management is confident that it will be able to obtain
management contracts for properties located within this region and will be
successful in enhancing the profitability of these properties through the
services it provides.
22
Acquisitions. The net proceeds received from the sale of Common Stock offered
hereby will give the Company the ability to acquire management contracts
and/or management companies. Management contracts may be acquired from other
companies that do not have the ability to effectively operate a property for
reasons such as geographic location. The Company would also seek
opportunities to acquire other hotel management companies that would result in
further synergies for the Company and its managed properties.
Operations
The Company provides management and other related services for hotels,
resorts, and condominium resorts. Principle clients include owners of these
hotels and resorts which may include individuals, general and limited
partnerships, corporations and associations.
The management of the properties represented by the Company is coordinated
from the Company's corporate offices located in Honolulu, Hawaii. The Company
also has sale and marketing representatives situated on the West Coast,
Pacific Northwest and Europe. Most of the properties currently managed by the
Company are located in Hawaii.
Hotel Rental Management
The Company provides total management of the facilities, including
supervision, training and staffing of employees, food and beverage services,
housekeeping, accounting, budgeting and physical repairs and maintenance. The
Company earns a base management fee for these services which is typically
based on a percentage of gross revenues. The Company may also participate in
the profitability of the property through an incentive fee based on a
percentage of the net operating profits generated by the property. The
Company also provides centralized services such as reservations for which the
Company typically receives a reservations fee to cover its costs which is
based on a percentage of gross revenues. In addition, the Company is
reimbursed for its sales and marketing costs by collecting a sales and
marketing fee which is also based on gross revenues. Other costs which are
reimbursed to the Company are for corporate support in areas such as
accounting, training and advertising. The Company also earns a commission on
its centralized advertising and purchasing services provided to its
properties. Under this arrangement, the Company contracts with its vendors to
supply all of its properties with various products or services at a discount.
The Company earns a fee based on the discount and passes on a portion of the
savings to the properties, further enhancing the profitability of the
property. The Company also earns fees from the properties by providing
reconstruction and design fees for hotels under renovation.
Under the majority of the management contracts, the Company is not responsible
for any of the direct operating expenses of the client hotels and resorts.
All of the operating expenses are paid directly and are the responsibility of
the facility owners. These expenses may include payroll, employee benefits,
repairs and capital improvements, supplies, taxes, inventory, advertising,
sales and marketing and other operating expenses.
Condominium Association Management
In addition to management of the hotel rental operations of a property, the
Company may also manage the Association of Apartment Owners ("AOAO") of a
property. 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, including employee training, property maintenance, accounting,
finance, benefits administration, and purchasing. The Company earns a fixed
monthly fee for providing these services.
The management of the AOAO of a property together with the hotel
operations creates synergies in the operation of the property as a whole. In
instances such as these, the property owners ( the AOAO ) and the individual
owners participating in the hotel rental operations, can benefit through
reduced costs in areas such as personnel. By reducing the operating expenses
to the rental operation through cost sharing with the AOAO, the Company is
23
able to return higher profits to the individual owners participating in the
hotel rental operation which results in higher incentive management fees to
the Company. The AOAO also benefits from this cost sharing through reduced
annual common area maintenance fees.
The Properties
The properties represented by the Company are all located within the State of
Hawaii. The Company manages or represents both hotel operations and
condominium operations for the properties. The following table sets forth, as
of September 22, 1997 certain information with respect to the existing
properties under contract.
Type of Hotel AOAO Total
Island Management Room(1) Room Managed
Property Name Location Contract Managed Managed Room (2)
- --------------------- --------- ----------- -------- -------- --------
Queen Kapiolani Hotel Oahu Sales & Mktg. 315 0 315
Hilo Hawaiian Hotel Hawaii Full Management 285 0 285
Inn on the Park Oahu Full Management 96 0 96
Kuhio Village Resort Oahu Lease Agreement 167 225 225
Maui Beach Hotel Maui Sales & Mktg 150 0 150
Maui Palms Hotel Maui Sales & Mktg 96 0 96
Maui Oceanfront Inn Maui Full Management 85 0 85
Pacific Marina Inn Oahu Sales & Mktg 110 0 110
Waikiki Hana Hotel Oahu Full Management 73 0 73
Waimea Country Lodge Hawaii Full Management 21 0 21
Elima Lani Resort Hawaii Full Management 216 0 216
Hanalei Bay Resort Kauai Full Management 200 134 200
Kaluakoi Villas Molokai Full Management 78 148 148
Kamaole Sands Resort Maui Full Management 310 440 440
Kona Reef Resort Hawaii Full Management 60 130 130
Maui Park Hotel Maui Full Management 220 0 220
Lanikai Resort Kauai Full Management 7 10 10
Poipu Shores Resort Kauai Full Management 33 40 40
Makahuena Resort Kauai Full Management 15 80 80
Aquarius Beach Tower Saipan Full Management 68 0 68
------ -------- -------
2,605 1,207 3,055
====== ======== =======
<FN>
(1) The Company may have numerous individual management agreements with
each owner of a unit in a condominium, or one agreement for a hotel
property owned or controlled by one entity.
(2) The total number of rooms managed represents the number of rooms under
management contract for the property whether the agreement be for
operation of the individual room as a hotel rental or for the
management of the property as a whole under the AOAO management
contract. The Company in these cases may have two management
contracts for one room, one management contract between the Company
and the individual condominium unit owner for the operation of the
room as a hotel rental, and the other contract between the Company and
the AOAO of the property for the management of the project and its
common areas.
</FN>
24
Competition
The management and marketing of hotels and resorts is very competitive. The
Company competes with national, regional and local management companies, some
of which have a larger network of locations, greater financial resources, and
better name recognition than The Company. The Company primarily operates
within the State of Hawaii and there are a number of competitors within the
state with substantial operating histories and financial reserves.
The Company's properties under management are also subject to competition
within the lodging industry such as room rates, geographic location, name
recognition, supply and demand, service levels, value added services and
quality of accommodations. Each of the properties under contract are located
in areas that includes competing facilities. Increases in the number of
competitive lodging facilities in these areas could have an adverse effect on
the occupancy and average room rates of the property. To the best of
management's knowledge, there are no new planned development of competitive
properties in any of the areas in which the Company is present.
The executive officers and key employees of the Company possess substantial
experience in the hotel and resort management industry. The senior management
team and the Company's infrastructure relative to sales and marketing, central
accounting, central reservations and administrative support are believed by
management to be as comprehensive and complete as many of its competitors.
Although the Company commenced operations in November 1993 with thirteen
contracts, management has been successful in more than doubling the number of
contracts, many of which were previously managed by competitors of the
Company. The Company has over its brief history lost only one property to one
of its competitors.
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 and future
promulgation of new regulation detrimental to the visitor industry could have
a substantial impact on the Company's profitability. The hotel industry may
be adversely effected by regulations which cover wages, benefits, pricing,
taxes and availability of financing. In addition, the Company is planning to
expand outside of the United States and would become subject to International
laws and the laws and regulations of other countries.
Environmental Regulations
Under various federal, state and local environmental laws and regulations, a
current or previous owner or operator of real property may be liable for the
costs to remove or remedy hazardous or other toxic substances located on, in
or under such real property. These laws may impose such liability whether or
not the owner or operator had knowledge of the presence of these substances.
In connection with the Company's operation of its properties under contract,
the Company could be potentially liable for such removal and remediable costs.
The Company is not aware of any environmental claims pending or threatened
against it or against the owners of the properties operated by the Company,
however, no assurance can be given that such a claim will not be asserted
against the Company in the future.
Employees
At July 31, 1997, the Company had approximately 650 employees. Approximately
500 employees were full time and 150 were part time. The Company considers
its relationships with employees to be excellent. The total number of
employees employed at all properties represented by the company was
approximately 1,100 at July 31, 1997, of which approximately 850 were full
time and 250 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.
25
The wages, salaries, taxes and other employee benefits of personnel employed
at the properties are paid out of the operations of the property. The wages
and other related payroll costs for personnel of the corporate headquarters
are paid directly out of the Company's operations.
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or
Labor Contracts
With the exception of the management contracts and the trade names "Castle
Resorts and Hotels" and "Hawaiian Pacific Resorts", the Company does not have
any material patents, trademarks, licenses, franchises, concessions or royalty
agreements, the loss, or expiration, of with would have a material adverse
impact on the Company. None of the employees of the Company are subject to
collective bargaining agreements or labor unions.
Research and Development
The Company's present business operations do not center in areas where the
Company is or believes it is necessary to conduct material research and
development activities. The Company and its competitors often receive
information derived from research conducted by federal, state and private
foundations related to tourism and marketing statistics. The Company also
expends minimal costs (which are reimbursed by the hotels managed) to develop
internet web pages and other computer related marketing programs.
Property
The Company's corporate headquarters are located in Honolulu, Hawaii. The
Company leases 11,357 square feet of office space on the tenth floor of 745
Fort Street, Honolulu, Hawaii. 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 maintenance. The
Company has the right to an additional five year extension at a monthly rental
rate to be mutually determined and agreed upon by the lessor and the Company.
The Company also leases approximately 3,035 square feet of office space at a
rental of $6,374 per month plus the costs of common area maintenance, located
at 1150 South King Street, Honolulu, Hawaii. These premises are used for the
operation of the central reservations department. The initial lease commenced
on April 1, 1988, and was extended on April 1, 1993 to March 31, 1998. The
Company has the right to an additional five year extension at a monthly rental
rate to be mutually determined and agreed upon by the lessor and the Company.
The Company also leases 167 rooms and the furniture and equipment included
within the rooms in the Kuhio Village Resort, located in Waikiki, Hawaii. The
Company operates the 167 rooms as a hotel. The initial lease commenced in May
1996 under a non-cancelable agreement ending in March 1998. The lessor is
entitled to a fixed monthly rental plus a percentage of operating profits for
the hotel operation in excess of certain thresholds of return. The Company
has the option to extend the lease for an additional four years.
Other than the leases mentioned above, the Company does not have any other
tangible fixed assets other than office equipment, computer equipment and
furniture.
Insurance
The Company currently has various types of insurance coverage,
including comprehensive general liability insurance with an occurrence
limit of $1,000,000, including bodily injury, The Company also has
additional excess umbrella liability insurance with a coverage limit of
$10,000,000. The Company believes that these coverages and limits are
appropriate for its line of business. While management believes that these
coverages are adequate, if the Company were held liable for a claim for
amounts exceeding the policy limits or for claims not covered under the scope
of its insurance coverages, the Company's business, results of operations and
26
financial condition could be materially and adversely affected.
Legal Proceedings
The Company is a named defendant in "Hodge v. Castle Group, Ltd., et al.,"
Civil No. 96-00766., United States District Court, District of Hawaii. The
case was filed on September 16, 1996 as "Berke v. Castle Group, Ltd., et
al.," but the court dismissed both the original and the first amended
complaint on procedural grounds. When the second amended complaint was
filed on January 27, 1997, the identity of the plaintiffs and therefore the
title of the case changed. However, the original, first amended, and second
amended complaints all improperly identified the Company and several other
defendants. On September 15, 1997, plaintiffs filed a third amended
complaint, which finally corrected the misidentification of the Company. The
plaintiffs are the owners of nine apartments and the owners of partial
interests in three other apartments. One of the plaintiffs purports bo be
suing derivatively on behalf of the Association of Apartment Owners of
Hanalei Bay Resort. The other plaintiffs claim injury only to themselves.
The plaintiffs allege that the Company and the other defendants are liable
under the federal Racketeer Influenced and Corrupt Organizations Act. So
far as the Company is concerned, the allegations in the third amended
complaint relate to the company's performance of its functions as managing
agent for the Association. Remedies sought against the Company include
special and general damages of an unspecified amount and statutory treble
and punitive damages.
Management vehemently disagrees that the Company acted without the
authorization of the AOAO Hanalei Bay Resort and intends to vigorously
defend against the plaintiffs. The AOAO Hanalei Bay Resort set up a
litigation committee and has conducted an independent investigation of the
allegations contained in the claim. Their investigation has determined that
the Company acted properly and with authorization in its capacity as
managing agent. The Company has filed a motion to dismiss the lawsuit.
Because of the foregoing, management believes that the lawsuit is frivolous
and without merit and will be dismissed or adjudicated in favor of the
Company, although no assurances can be given.
The Company is a named defended in connection with a discrimination
complaint, Federal No. 3343, filed by Gregory Dean Broyles with the Hawaii
Civil Rights Commission ("HCRC"). Mr. Broyles alleges that during the
course of his employment at Hanalei Bay Resort, he was subjected to sexual
orientation harassment. Currently, the HCRC is investigating the complaint
and the merits of the case have not been determined. Because the case is
still under investigation, it is too soon to predict whether the HCRC will
find reasonable cause to believe discrimination occurred in this case, or
the outcome of the case if it ultimately went to trial. The complaint does
not state any dollar amount of damages actually suffered by Mr. Broyles.
There are various other 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. Management believes that such
litigation is not material to the business of the Company, either
individually or in the aggregate. In the opinion of management, although no
assurance can be given, the resolution of these claims will not have a
material adverse effect on the Company's financial position. Further, to
the knowledge of management, no director, officer, affiliate or beneficial
owner of record 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 legal proceeding.
27
MANAGEMENT
The following table sets forth certain information concerning the directors
and executive officers of the Company as of September 22, 1997. 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 54 Chief Executive Officer, Director and
Chairman of the Board
John Tedcastle 64 Vice Chairman of the Board and Director
Kelvin M. Bloom 38 Chief Operating Officer, Director and
Senior Vice President
Kimo M. Keawe 48 Director
Hideo Nomura 47 Director
Charles E. McGee 61 Director
Ryoji Takahashi 57 Director
Judhvir Parmar 54 Director
Motoko Takahashi 53 Secretary and Director
Michael S. Nitta 38 Chief Financial Officer and Vice President
Finance
Shari W. Chang 47 Senior Vice President Sales & Marketing
Steve Townsend 43 Senior Vice President Operations
Stanley Mukai 65 Interim Director
Edward Calvo, Sr. 60 Interim Director
Noboru Sekiguchi 70 Interim Director
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 Limited, the negotiation and
consummation of the Castle Plan and the acquisition of KRI. He was the
president, director and founder of Castle Limited. During the past six years,
Mr. Wall has been the managing director of HBII, which owns 62% of the Hanalei
Bay Resort. Mr. Wall has been elected to the board of directors of the Hawaii
Visitors & Convention Bureau and resides in Honolulu, Hawaii.
Charles E. McGee. Mr. McGee was appointed as director of the Company in
November, 1993. Mr. McGee has 36 years of diversified experience in
marketing, management and computer technology. From 1975 until 1992, he was
senior vice president of First Insurance Company of Hawaii, Ltd., overseeing
the marketing, information systems, administration and service departments.
Mr. McGee had previously been president of two independent data processing
services companies. In addition, he has held various senior management
positions with IBM Corporation, including division manager of the Pacific
region. Mr. McGee has been a resident of Hawaii for over thirty years. Mr.
McGee is a graduate of LaSalle University, and has studied at Massachusetts
Institute of Technology.
Kimo M. Keawe. Mr. Keawe was appointed as senior vice president
and director of the Company in November, 1993 following the
acquisition of KRI, Inc. Mr. Keawe was also the president and chief
operating officer of KRI, the company's wholly owned subsidiary doing
28
business as Hawaiian Pacific Resorts. Mr. Keawe was instrumental in the
formation of KRI in 1988, purchasing Hawaiian Pacific Resorts from its
original founders. He has held numerous senior management positions
throughout his hotel and resort management career, which spans over 20 years.
Mr. Keawe left the companies' employ in July 1997 to pursue other interest and
resigned as senior vice president of the Company and as chief operating
officer of KRI, Inc. to pursue other interests. Mr. Keawe is on the advisory
board of the Travel Industry Management School of Hawaii Pacific University.
Mr. Keawe is a graduate of Oregon State University, and was born and raised in
the State of Hawaii.
Kelvin M. Bloom. Mr. Bloom was appointed senior vice president and director
of the Company in November, 1993, and was appointed Chief Operating Officer in
July, 1995. Mr. Bloom is also president of Castle Hotels and Resorts, Inc.,
a wholly-owned subsidiary of the Company, responsible for all facets of the
Condominium Resort Management Division of the Company. Prior to joining the
Company, Mr. Bloom was the vice president of the Hawaii Region of Village
Resorts, Inc./Horizon Hospitality Group, responsible for all Hawaiian
interests and operations of that company. During his 15 years with Village
Resorts, Mr. Bloom served as general manager for the Kiahuna Plantation Resort
in Poipu, Kauai, and the Lakeland Village Beach and Ski Resort in Lake Tahoe,
California; and executive assistant manager for the Whaler on Kaanapali Beach
in Kaanapali, Maui. Mr. Bloom was previously employed by Menefee Resorts in
Kihei, Maui and Sheraton Hotels in Hawaii.
Hideo Nomura. Mr. Nomura was appointed as a director of the Company in
November, 1993. Since 1987, Mr. Nomura has been president of Nomura Holdings
and Nomura Hitchcock Corporation, Ltd., a property related investment
consulting firm based in Tokyo, Japan. 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. from 1982-1987. Mr. Nomura is a
resident of Japan.
Ryoji Takahashi. Mr. Takahashi was appointed as a director of the Company in
November, 1993. Mr. Takahashi, a resident of Japan, has, for over thirty
years, been a substantial principal of Nichiman Kosan, a corporation which
specializes in coordinating the installation of air conditioning and sound
control systems in commercial buildings and subcontracts with over 300
companies. He is also the major stockholder of Nikkankyo Group which consists
of six independent companies and has over five hundred employees. Mr.
Takahashi is a graduate of Hosei University in Tokyo, Japan, where he majored
in economics.
Motoko Takahashi. Ms. Takahashi is the sister of Ryoji Takahashi and 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 currently 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.
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 20 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. Mr. Parmar has served on the Board
since November of 1995.
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 is also the owner/operator
of the Takapuna Golf course in Auckland, New Zealand, where he resides.
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. Together with Mr. Keawe, Mr. Nitta was
instrumental in the formation of KRI Inc. and the acquisition of Hawaiian
Pacific Resorts in 1987. Prior to the formation of KRI, Inc. Mr. Nitta served
as secretary and treasurer of Hawaiian Pacific Resort Hotels Inc. from
29
1982. Born and residing in Hawaii, he is a graduate of the University of
Hawaii and holds a Masters of Accounting Degree.
Shari W. Chang. Ms. Chang joined the Company in July, 1994 as senior vice
president of sales and marketing. Prior to joining the Company, Ms. Chang was
vice president of sales for Aston Hotels and Resorts and vice president of
Holiday Tours. She has also served as consultant to the Hawaii Visitors
Bureau. Ms. Chang graduated from the University of Hawaii, and resides in
Honolulu, Hawaii.
Steve Townsend. Mr. Townsend joined the Company in July, 1997 as Senior Vice
President of Operations. Mr. Townsend has 23 years of hotel and resort
management experience. During his career he has held numerous senior
management positions with resort and hotel management companies. Prior to
joining the Company, Mr. Townsend was director of operations for Interstate
Hotels prior to a one year assignment entailing rebuilding and re-opening a
hurricane damaged resort in the Virgin Islands. Prior to Interstate, Mr.
Townsend spent 8 years with Village Resorts, managing properties located in
Hawaii. Mr Townsend is a graduate of the Hotel and Restaurant Administration
School at Florida State University.
Stanley Mukai. Mr. Mukai was appointed interim director on September 22, 1997.
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 was appointed interim director on September 22,
1997. 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. Mr. Calvo has served as a Senator in the Guam
legislature and is currently the Board Chairman of the Guam Waterworks
Authority.
Noboru Sekiguchi. Mr. Sekiguchi was appointed interim director on September
22, 1997. Mr. Sekiguchi is a graduate of Waseda University and is a Director
and controller of Nikkankyo Group, which is the parent company of N.K.C.
Hawaii. He has worked for Toyo Menka Company, one of the leading trading
companies in Japan for forty years as a financial officer.
Committees of the Board of Directors
Audit Committee. The Board has established an Audit Committee to make
recommendations concerning the engagement of independent public accountants,
review with the independent public accountants the plans and results of the
audit engagement, approve professional services provided by the independent
public accountants, review the independence of the independent public
accountants, consider the range of audit and non-audit fees and review the
adequacy of the Company's internal accounting controls. The Audit Committee
is made up of Messrs. Mukai, Calvo and Ms. Takahashi.
Compensation Committee. The Board has established a Compensation Committee
to determine compensation for the Company's executive officers and to
administer the Company's benefit plans. Messrs. Mukai, Parmar, Tedcastle and
Ms. Takahashi are the members of the Compensation Committee.
Executive Committee. The Board has established an Executive Committee to
provide additional direction to management. The Executive Committee is an
advisory committee only and does not have authority to vote and approve any
actions on behalf of the board of directors. Messrs. Parmar, Tedcastle, Wall
and Takahashi are members of the Executive Committee.
Nominating Committee. The Board has established a Nominating
Committee to recommend to the board the slate of nominees of
directors to be elected by the shareholders (and any directors to be
elected to the Board to fill vacancies) and to recommend directors to be
30
selected for membership on the various Board Committees. Messrs. Tedcastle
and Calvo are members of the Nominating Committee.
Executive Compensation
The following table shows for the fiscal year ended July 31, 1997, the
aggregate annual remuneration of each of the three highest paid persons who
were executive officers or directors of the Company and the executive officers
and directors as a group. The reported compensation is based on cash
compensation without consideration of a restricted stock grant to Charles E.
McGee described below under "Compensation of Directors".
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
Kelvin M. Bloom Chief Operating Officer and $126,500
Senior Vice President
Kimo M. Keawe Senior Vice President $124,050(1)
Officers and Directors as a Group $624,200(1)
(1) Includes payments made under consulting agreement between the Company and
Kimo M. Keawe.
Compensation of Directors
The Company does not have any present arrangements regarding compensation of
directors for service as a director, attendance at meetings of the Board of
Directors, 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 No compensation for
service as a director is presently contemplated.
The Company entered into a Consulting Agreement with Mr. Keawe on April 16,
1997. Under the terms of the agreement, Mr. Keawe will receive monthly fee of
$10,000 per month for the months of May through and including November of
1997, and a monthly fee of $5,000 per month for the months of December 1997
through and including May 1998. See "Employment Contracts".
There were no arrangements pursuant to which any director of the Company was
compensated during the current and most recent fiscal year for services
provided solely as a director, or for attendance at any meeting of the board
of directors.
Employment Contracts
The Company has entered into written employment contracts with Messrs. Bloom,
Keawe and Nitta, as of November 1, 1993, Ms. Chang as of August 1, 1994, and
Mr. Townsend as of July 31, 1997. Other than Messrs. Bloom, Keawe, Nitta,
Townsend and Ms. Chang, the Company has entered into no employment contract
with any director or executive officer.
The remaining employment agreements 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 for each of
Messrs. Bloom, Keawe and Nitta is $120,000 per year. However, Mr. Nitta
has agreed to reduce his base salary for the current fiscal year $90,000. The
current base salary for Ms. Chang and Mr. Townsend under the terms of their
agreements is $100,000. The employment agreements further provide for paid
vacation; a monthly automobile allowance; an annual performance bonus
potential of up to 20% of the base salary (up to 15% for Ms. Chang and Mr.
31
Townsend), 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.
The employment agreements contain a "change-in-control" provision which gives
each of the employees under contract 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 each 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.
Mr. Keawe resigned as an officer and employee of the Company in accordance
with an Agreement dated April 16, 1997 and the Company and Mr. Keawe have
agreed to a termination of his employment contract and its related terms and
conditions, to be effective as of April 1997. The Agreement specifies that
the Company shall pay to Mr. Keawe a fee of $10,000 per month for the seven
months ending November 1997 and $5,000 per month for the six months ending
May, 1998 for a total consulting fee of $100,000. Mr. Keawe, for the
consideration given, shall render consulting and advisory services to the
Company on marketing, managerial and operational matters. The Agreement also
calls for Mr. Keawe to transfer 32,250 shares of the Company's Common Stock
owned by Mr. Keawe to the Company upon the occurrence of certain events as set
forth in the Consulting Agreement.
Long Term Incentive Plans
No options (with the exception of the options discussed below in the section
entitled "Options, Warrants and Rights"), stock appreciation rights or long
term incentive plan awards were issued or granted to the Company's management.
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 50%
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.
Stock Plans
The Company's stockholders have approved a 1995 Stock Option Plan and a 1995
Stock Purchase 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. No stock
grants were issued for the years ended July 31, 1995 through July 31, 1997.
The summaries of the 1995 Stock Option Plan and the 1995 Stock Purchase Plan
set forth below are qualified in their entirety by reference to the text of
plans which have been filed as exhibits to the Registration Statement of which
this Prospectus is a part.
1995 Stock Option Plan
Amount of Stock. A total of 1,000,000 shares of Common Stock shall be
reserved for issuance under the Plan. Shares of Common Stock issued hereunder
may be authorized and reissued or issued shares acquired by the company or its
Subsidiaries on the market or otherwise.
Administration. The Plan will be administered by the
Compensation Committee ( the "Committee" ) of the Company's Board of
Directors. The Committee, which is composed of a majority of
non-employee directors, has the authority under the Plan, subject to its
32
provisions, to select the individuals to receive grants of Options and to
specify the terms and conditions of such grants.
Eligibility. Options may be granted only to present or future officers and
key employees of the Company and its Subsidiaries, including Subsidiaries
which become such after the adoption of the Plan. Any officer or key employee
of the Company or of any such Subsidiary shall be eligible to receive one or
more options under the Plan. Any director who is not an officer or employee
of the Company or one of its Subsidiaries and any member of the Committee,
during the time of the member's service as such or thereafter, shall be
ineligible to receive an option or award under the Plan. The adoption of this
Plan shall not be deemed to give any officer or employee any right to be
granted an option to purchase Common Stock of the Company, except to the
extent and upon such terms and conditions as may be determined by the
Committee.
Options. Both nonqualified stock options ("NQOs") and incentive stock options
("ISOs"), as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), may be granted under the Plan. Options will have a
maximum term of ten years. The Option exercise price must be at least 100% of
the Fair Market Value of the Common Stock on the date of the Option grant.
Share Authorizations. All awards made under the Plan shall be evidenced by
a written Stock Option Agreement executed by the Company and the optionee in
such form as the Committee shall approve, which may be subject to and contain
additional terms and conditions not inconsistent with the Plan, and in the
case of an ISO, shall not be inconsistent with the provisions of the Code
applicable to incentive stock options, as the Committee shall prescribe.
Nontransferability. No options granted under the Plan shall be transferable
by the optionee otherwise than by will or by the laws of descent and
distribution, and such option shall be exercisable, during the optionee's
lifetime, only by the optionee.
Consideration. Each optionee, as consideration for the grant of an option,
shall remain in the continuous employ of the Company or one of its
Subsidiaries for at least one year from the date of the granting of such
option. No option shall be exercisable until after the completion of such one
year period of employment by the optionee.
Shareholder Rights. An optionee will have no rights as a shareholder with
respect to the shares subject to the option granted until such option is
exercised and the shares are issued to the optionee.
Tax Consequences. Under the present provisions of the Code, the federal
income tax consequences of the Option Plan are summarized as follows:
1. Nonqualified Stock Options. The granting of a NQO to an optionee will
not result in taxable income to the optionee or a deduction in computing
the income tax of the Company. Upon exercise of an NQO, the excess of
the fair market value of the shares acquired over the option price is (a)
taxable to the optionee as ordinary income and (b) deductible in
computing the Company's income tax, subject to satisfying applicable
withholding requirements and general rules relating to reasonableness of
compensation.
2. Incentive Stock Options. An optionee will not be deemed to receive any
income at the time an ISO is granted or exercised, although the exercise
may give rise to alternative tax liability for the optionee. If an
optionee does not dispose of the shares acquired on exercise of an ISO
within the two year period beginning on the day after the day of the
grant of the ISO or within the one year period beginning on the day after
the day of the transfer of the shares to the optionee, the gain (if any)
on a subsequent sales (i.e., the excess of the proceeds received over the
option price) will be long term capital gain and any loss the optionee
may sustain on such sale will be a long term capital loss.
If the optionee disposes of the shares within the two year or one year period
referred to
33
above, the disposition is a "disqualifying disposition," and the optionee will
generally realize ordinary income taxable as compensation in the year of the
disqualifying disposition to the extent of the excess of the fair market value
of the shares on the date of purchase over the option price, and the balance,
if any, will be long term or short term capital gain depending, generally, on
whether the shares were held more than one year after the ISO was exercised.
To the extent the optionee recognizes compensation income with respect to a
disqualifying disposition, the Company will be entitled to a corresponding
deduction, subject to general rules relating to reasonableness of
compensation.
Amendment of the Plan. The Board of Directors may amend or suspend the Plan
at any time and from time to time. No such amendment of the Plan may,
however, increase the maximum number of shares to be offered under options, or
change the manner of determining the option price, or change the designation
of employees or class of employees eligible to receive options, or permit the
transfer or issue of stock before payment therefore in full or, without the
written consent of the optionee, alter or impair any option previously granted
under the Plan.
1995 Stock Purchase Plan
Amount of Stock. There shall be reserved for the granting of Options under
the Plan and for issuance and sale pursuant to such Options 500,000 shares of
Common Stock of the Company. The shares of Common Stock issued upon the
exercise of Options under the Plan shall be made available from authorized and
unissued shares of Common Stock. If for any reason shares of Common Stock as
to which an Option has been granted cease to be subject to purchase
thereunder, then such shares of Common Stock again shall be available for
issuance pursuant to options under the Plan.
Offering Date. The Offering Date shall be semi-annual dates as set by the
Board of Directors in each of the years 1996 through 2000. The Company has
made no offerings in 1996.
Offering Period. The Offering Period shall be each of the six-month periods
commencing on an Offering Date.
Eligibility. Eligible Employees shall mean all Employees who have been in the
employ of the Company or any of its Subsidiaries continuously for at least one
year other than persons who after purchasing shares of Common Stock under the
Plan would own shares of capital stock possessing five percent or more of the
total combined voting power or value of all classes of outstanding capital
stock of the Company or any of its Subsidiaries. Eligible Employees must be
active, regular full-time or active, regular part-time employees of the
Company or any of its Subsidiaries, including but not limited to officers of
the Company and its Subsidiaries, provided that such employee's normal work
week is at least 20 hours per week and whose customarily employment by the
Company for at least five months in the calendar year and provided further
that and Eligible Employee shall not include any employee who is on leave or
layoff status or is otherwise inactive. For purposes of the preceding
sentence, capital stock that any person may purchase under outstanding stock
options shall be treated as owned by the person and the provisions of Section
425(d) of the Code shall apply. As of any Offering Date, each Eligible
Employee shall be granted an Option, which shall entitle the Eligible Employee
to purchase shares of Common Stock in accordance with the terms and conditions
of the Plan. The maximum number of shares of Common Stock that an eligible
Employee shall be entitled to purchase pursuant to such Option shall equal the
lesser of (1) the number of whose shares of Common Stock purchasable for
$25,000 based on the Stock Price on the applicable offering date, or (2) the
number of whole shares of Common Stock purchasable for 15% of the Eligible
Employee's Base Salary based on the Stock Price on the applicable offering
date.
Subscription Agreements. Approximately 30 days prior to each offering date
the Company will make subscription agreements available to all Eligible
Employees. To subscribe for shares of Common Stock in connection with an
offering period, an Eligible Employee must complete and execute a subscription
agreement and deliver it to the Company prior to the offering date, or such
later date as may be established by the Board of Directors of the Company for
all Eligible Employees. A separate subscription agreement must be executed
for each offering period under the Plan.
34
Purchase Date. The purchase date for the purchase of the Common Stock under
the Plan shall be the last day of the offering period.
Purchase Price. The purchase price per share of Common Stock purchasable
under Options granted in respect to each offering period under the Plan shall
be equal to the lesser of 85% of (I) the Stock Price on the offering date, or
(ii) the Stock Price on the Purchase Date, adjusted down to the nearest
one-eighth point. No fractional shares of Common Stock shall be issued under
any circumstances under the Plan. In lieu of any such fractional shares,
participants shall receive a cash payment based on the stock price of the
applicable purchase date.
Payment. Payment for the shares of Common Stock shall be made either (I) in
cash in a single lump sum on or before the purchase date, or (ii) through
payroll deductions in equal installments over a period of 25 weeks, with no
right of prepayment. The participant shall select the method of payment in
the subscription agreement. If a participant electing to make a lump sum
payment fails to make such payment on or before the purchase date, the option
shall terminate automatically without any further action by the Company.
Cancellation of Participation. A participant may cancel his or her
subscription in respect of any offering period at any time prior to the
applicable purchase date by giving written notice of cancellation of the
subscription to the Company. As soon as practicable after receipt of such
notice, the Company will return the funds previously deposited by the
Participant, without interest thereon.
Termination of Employment. In the event that a participant's employment with
the Company and its Subsidiaries is terminated as a result of death,
retirement or any other reason (other than as a result of layoff subject to
recall within 90 days) prior to the purchase date applicable to an offering
period in which the participant is participating in the Plan, his or her
subscription and the option relating thereto shall be deemed canceled
automatically without further action by the participant or Company. In the
event that a participant is laid off or is on leave of absence prior to the
purchase date applicable to an offering period in which such participant is
participating in the plan, the participant shall continue to participate in
the Plan, unless he or she does not resume employment within 90 days beginning
on the date such layoff or leave commenced, in which case his or her
subscription and the option relating thereto shall be deemed automatically
canceled at the close of business on the 90th day after the date such layoff
or leave commenced. As soon as practicable after any such cancellation, the
Company will return the funds previously deposited by such participant,
without interest thereon.
Transferability. Except for the issuance of shares to a participant in the
name of the participant and his or her spouse as tenants by the entirety or as
joint tenants with full rights of survivorship, an Eligible Employee's rights
to subscribe for shares of Common Stock under the Plan and rights in respect
to any Option granted under the Plan belong to the Eligible employee alone and
may not be transferred, assigned to or availed of for any purpose or for any
other person. Any attempt to transfer or assign any rights granted under the
Plan would constitute withdrawal from the Plan.
Tax Consequences. The Stock Purchase Plan is intended to qualify under
Section 423 of the Code. As such, if no disposition of the shares of Common
Stock purchased by an employee occurs within two years of the applicable
offering date or within one year from the applicable purchase date, no tax
consequences will arise for the employee at the time of purchase. The
employee will instead be subject to tax on the shares at the time of their
disposition, and there will be no tax consequences to the Company. If the
employee disposes of the shares of Common Stock prior to the time periods
referenced in the preceding sentence, the employee will be deemed to have
received compensation equal to the difference between the value of the shares
on the date of purchase and the purchase price paid by the employee, and the
Company will be allowed a tax deduction equal to the amount of compensation
deemed to have been received by the employee.
Voting Required. The adoption of the Stock Purchase Plan received an
affirmative vote of the holders of a majority of the shares of Common Stock
at the annual meeting of the shareholders held on March 15, 1995.
35
Amendment and Termination. The Board of Directors of the Company may amend
or terminate the Stock Purchase Plan at any time without notice; provided,
however, that no participating employee's existing rights are adversely
affected and that no such amendment may (I) decrease the purchase price for
shares, (ii) increase the maximum number of shares purchasable by a
participating employee, (iii) extend the duration of the Stock Purchase Plan
or (iv) increase the number of shares offered under the Stock Purchase Plan.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of the Company's common
stock beneficially owned as of July 31, 1997 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.
Name Beneficially Shares %
and Address Owned (1) of Class (2)
- -------------------------------------- ------------- -------------
Rick Wall
745 Fort Street
Honolulu, HI 96813 815,000 15%
Kimo M. Keawe
745 Fort Street
Honolulu, HI 96813 322,500 (3) 6%
John G. Tedcastle
745 Fort Street
Honolulu, HI 96813 525,000 10%
Hideo Nomura
745 Fort Street
Honolulu, HI 96813 525,000 10%
LCC Management Inc.
745 Fort Street
Honolulu, HI 96813 525,000 10%
N.K.C. Hawaii, Inc.
745 Fort Street
Honolulu, HI 96813 900,000 17%
All directors and officers
as a group (12 persons) 4,263,500 80%
(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 are as of July 31, 1997 and are presented prior to the sale
of the Shares in this offering.
(2) Determined on the basis of 5,386,130 shares outstanding, exclusive of the
Shares in this offering and including 50,000 shares issuable to a wholly
owned company of Mr. Charles E. McGee, a director of the Company. Also
includes 25,000 shares issuable to Van Kasper & Company pursuant to a
Common Stock Purchase Warrant.
(3) Includes 32,250 shares which Mr. Keawe has agreed to return to the
Company in accordance
36
with the terms and conditions of the Consulting Agreement between Mr. Keawe
and the Company. The shares are owned by Mr. Keawe through Keawe Resorts,
Inc., a corporation owned and controlled by Mr. Keawe.
(4) Includes 50,000 shares issuable to Hawaii Reservations Center
Corporation, a wholly owned corporation of Mr. Charles E. McGee, a
director of the Company, exercisable as of July 31, 1997. Includes
32,250 shares which Mr. Keawe has agreed to return to the Company.
Options, Warrants and Rights
In November, 1993, the Company granted an option to Kelvin Bloom to purchase
125,000 shares of the Company's common stock at an exercise price of $0.000008
per share. Mr. Bloom did not exercise any of his options in 1994, 1995, 1996
or 1997. In July 1997, Mr. Bloom forfeited all of his rights, title and
interest in the stock option.
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, 1999 for a price of $1.25 per share.
In August, 1994, The Company, as part of the employment agreement with Shari
Chang, agreed to give to Shari W. Chang as a bonus, 22,500 shares of the
Company's common stock. The shares were issued in September 1995 and
represents 0.4% of the Company's common stock currently outstanding.
In May, 1997, The Company, as part of a renegotiation of its reservation
services agreement, granted to Hawaii Reservations Center Corp. 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.
Hawaii Reservations Center is a wholly owned corporation of Mr. Charles E.
McGee, a director of the Company.
Other than the option granted to Mr. McGee 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.
CERTAIN TRANSACTIONS
The Company has a management contract with Hanalei Bay International Investors
("HBII"), a Hawaii limited partnership, for eighty seven condominium units
located within the Hanalei Bay Resort. The Company also has a management
contract with the Association of Apartment Owners of the Hanalei Bay Resort
("AOAO HBR") to manage the common areas of the resort. HBII was formed
through the efforts of HBII Management, Inc., owned by Mr. Rick Wall, with the
following partners: Siam Commercial Bank; Voyage Fourteen, Ltd., owned by Mr.
John Tedcastle; L.C.C. Management Inc., owned by Mr. Judvihr Parmar; and
Nomura Firm and Nomura Holdings, owned by Hideo Nomura and Kenji Nomura. In
1988 HBII made an offer to purchase all 134 units within the Hanalei Bay
Resort and eighty five owners accepted the offer. Subsequently, Nichiman
International became an investor in HBII. Nichiman International's controlling
stockholder is Mr. Ryoji Takahashi and Mr. Takahashi is also the controlling
stockholder of N.K.C. Hawaii, Inc. HBII subsequently acquired two other units.
Following the acquisitions, 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. See
"Corporate Organization". 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 services to HBII. Mr. Wall, Mr.
Tedcastle, Mr. Hideo Nomura and Mr. Ryoji Takahashi were elected to serve on
the board of directors of the Company following completion of the Castle Plan.
In March of 1995, Mr. Takahashi's sister, Ms. Motoko Takahashi, was appointed
Secretary and director of the Company. In November 1995, Mr. Judvihr Parmar
was elected to serve on the Company's board of Directors. In November of
1995, Mr. Kelvin Bloom married the daughter of Mr. James Binger, who is a
limited partner in HBII. In March of 1997, Mr. Michael Nitta was appointed
Assistant Vice President of HBII Management Inc. Management believes that
37
the terms of the management agreement between the Company and HBII are not at
rates favorable to HBII, and are at rates commonly found in the industry and
are similar or more profitable to the Company than other management contracts
entered into by the Company.
On July 31, 1995, HBII paid the Company $150,000 to be applied against HBII's
account receivable as shown in the Company's books and records in anticipation
of HBII receiving the sum of $150,000 on August 1, 1995 from one of its
partners. The $150,000 was not received by HBII and as a result, the Company
returned to HBII the $150,000 in the form of a note receivable. On September
19, 1995, HBII repaid the note to the Company in full, together with interest.
On July 31, 1995, the Company invested $100,000 into a reorganization plan
instituted by HBII. Under terms of the HBII Plan, the eighty seven units
owned by HBII will be sold under a timeshare plan and investors in the
timeshare plan will receive up to four times their investment over the life of
the timeshare plan. It is estimated that the investors in the timeshare plan
shall be paid over a period of three years. As of April 30, 1997, the Company
has received a total of $152,448 from HBII, representing a return of its
initial investment in the amount of $38,112, and an additional return of
$114,336 representing a gain on the investment.
On August 1, 1994, the Company entered into a contract with Hawaii
Reservations Center Corp. ("HRCC"), a company wholly owned by Charles E.
McGee, pursuant to which HRCC shall provide reservation services for the
hotels and resorts managed by the Company. Since the purchase of KRI, Inc. in
accordance with the completion of the Castle Plan, reservation services had
been provided by KRI, Inc. until July 31, 1994. The terms of the contract
called for the Company to pay a fixed fee plus commissions and the cost of
office space. See "Property". The Company also agreed to sell to HRCC the
central reservations system previously owned by KRI, Inc., which consisted of
computer and other office equipment. As consideration for the equipment, HRCC
agreed to employ the reservation employees of KRI, Inc. and assume the
liability for the accrued vacation due to said employees. The Company
realized a gain of $4,372 on the transaction, as the value of the accrued
vacation exceeded the net book value of the equipment sold.
Effective May 1, 1997, the Company and HRCC renegotiated the fees paid to HRCC
by the Company to provide exclusive central reservations services. The
renegotiated fees are based on a percentage of the room revenues for the
properties managed by the Company, subject to a minimum monthly amount.
Management believes that the contract between HRCC and the Company are not
under favorable terms to HRCC and are at rates commonly found in the industry.
On October 31, 1994, the Company secured a line of credit with a financial
institution in the amount of $300,000. As of July 31, 1997, the Company had
an outstanding balance of $250,000 on the line of credit. The line of credit
is personally guaranteed by Messrs. Wall, Keawe, Nomura and Tedcastle. The
Company has received an extension of the due date for the line of credit
through April 15, 1998.
In July of 1997, the Company completed a private placement of 222,100 shares
of its stock to Development Funding, Ltd. for $2.00 per share. The Company
received $425,395 after the payment of commissions charged on the private
placement by Reeves Moses Hudig & Co., Ltd., a merchant banker located in New
Zealand. The proceeds from the private placement were received by the Company
as of September 18, 1997, and the stock certificate was subsequently issued to
Development Funding, Ltd.
DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock does not purport to
be complete and is subject in all respects to applicable Utah law and to the
provisions of the Company's Articles of Incorporation and By-Laws, copies of
which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.
38
General
The Articles of Incorporation of the Company, as amended, provide that the
Company may issue up to 20,000,000 capital shares, consisting of 20,000,000
shares of Common Stock, par value $.02 per share. Upon completion of the sale
of Common Stock offered hereby, 6,911,130 shares of Common Stock will be
issued and outstanding, exclusive of the exercise of the Underwriters'
over-allotment option and exclusive of the exercise of various stock options
and warrants to and exclusive of shares reserved for issuance under the
Company's' Stock Plans.
Common Stock
Each outstanding share of Common Stock entitles the holder to one vote on all
matters submitted to a vote of shareholders, including the election of
directors and, except as otherwise required by law or except as provided in
the Articles of Incorporation or Bylaws with respect to any other class or
series of shares of beneficial interest, the holders of Common Stock will
possess exclusive voting power over matters submitted to a vote of
shareholders. The Articles of Incorporation do not provide for cumulative
voting.
Holders of Common Stock have no preemptive, subscription, sinking fund or
conversion rights. Holders of Common stock will be entitled to receive
dividends as may be declared by the Board of Directors out of legally
available funds. See "Dividend Policy". In the event of the dissolution,
liquidation or winding up of the Company's' business, holders of Common Stock
will be entitled to share in all net assets remaining after payment, or
provision for, all known liabilities.
There is no provision in the Articles of Incorporation or By-Laws that would
delay, defer or prevent a change in control of the Company.
Transfer Agent
The Transfer Agent and Registrar for the Common Stock is American Registrar
and Transfer Co.
SHARES ELIGIBLE FOR FUTURE SALE
The sale of the Company's Common stock in the public market after this
offering could adversely affect the market price of the company's Common
Stock. Upon completion of this offering, the Company will have 6,911,130
shares of Common Stock outstanding immediately following this offering,
(assuming the no exercise of the Underwriters' over-allotment option and
exclusive of the exercise of certain stock options and warrants). The
1,600,000 shares offered hereby will generally be freely tradeable, except by
affiliates and insiders of the Company. The shares owned by the officers and
directors may not be sold in the absence of a registration under the
Securities Act unless an exemption from registration is available, including
the exemption contained in Rule 144. These stockholders have agreed, subject
to certain limitations, not to offer or sell their shares of Common Stock for
a period of 180 days after the date of this Prospectus. In addition, the
Company has registered with the Securities and Exchange Commission a total of
1,000,000 and 500,000 reserved for issuance under the Company's Stock Option
Plan and Employee Stock Purchase Plan, respectively. See "Stock Plans". The
Company has also reserved 50,000 shares for issuance under a Reservations
Agreement, and 25,000 for issuance in accordance with a stock warrant. See
"Certain Transactions" and "Options Warrants and Rights".
39
UNDERWRITERS
The Underwriters named below, represented by Fortress Financial (the
"Representatives"), have severally agreed, subject to the terms and conditions
contained in the Underwriting Agreement, to purchase from the Company the
number of shares of Common Stock indicated below opposite their respective
names at the public offering price less the underwriting discount set forth on
the cover page of this Prospectus. The Underwriting Agreement provides that
the obligations of the Underwriters are subject to certain conditions
precedent and that the Underwriters are committed to purchase all of the
shares, if they purchase any. In the event of a default by an Underwriter,
the Underwriting Agreement provides that, in certain circumstances, the
purchase commitments of the non-defaulting Underwriters may be increased or
the Underwriting Agreement may be terminated.
Number of Shares
Underwriter To be Purchased
- ---------------------------------- ----------------
Fortress Financial 1,600,000
The Representatives have agreed to sell, on a best efforts basis, a minimum
of 800,000 shares of Common Stock up to a maximum of 1,600,000 shares, on a
best efforts basis. The Company has granted the Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to
160,000 additional shares of Common Stock at the Price to Public set forth on
the cover page of this Prospectus minus the Underwriting Discounts and
Commissions set forth on the cover page. The Underwriters may exercise such
option solely for the purpose of covering over-allotments, if any, in
connection with the Offering. to the extent that such option is exercised,
each Underwriter will be obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number of
shares set forth opposite each Underwriter's name in the preceding table bears
to the total number of shares listed in such table.
Fortress Financial Group, Ltd. Was formed as a Broker-Dealer/Investment
Banking Company in late 1996. Fortress Financial Group, Ltd. Has no prior
experience with respect to public offerings; however, the Principals of the
firm have over twenty years of experience in the investment banking and
brokerage industry. The principal business function of the investment banking
department of Fortress Financial Group is to provide top-quality services to
entrepreneurial corporate clients, and to assist them in implementing their
capital and financial goals.
The Company and each of the executive officers and directors of the Company
have agreed that for a period of 180 days from the date this Registration
Statement is declared effective by the Securities Exchange Commission and
thereafter for a period of one year will refrain from selling in any
three-month period more than 10 percent of the Common Stock owned by such
person.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under
the Securities Act, or will contribute to payments the Underwriters may be
required to make in respect thereof.
The Representatives propose initially to offer the Common Stock to
the public at the public offering price set forth on the cover
page of this Prospectus. The Common Stock is
40
offered subject to receipt and acceptance by the Underwriters, and to certain
other conditions, including the right to reject orders in whole or in part.
LEGAL MATTERS
The validity of the Common Stock and certain other legal matters will be
passed upon for the Company by Davis Wright Tremaine and certain legal matters
will be passed upon for the Underwriters by Casmir & Krage.
ACCOUNTANTS
The Board of Directors has appointed Coopers & Lybrand, L.L.P. as the
Company's independent public accountants. Coopers & Lybrand has audited the
Company's financial statements for the fiscal years ended July 31, 1997 and
1996.
EXPERTS
The audited financial statements of the Company included in this Registration
Statement, to the extent and for the periods indicated in their reports, have
been audited by Coopers & Lybrand, L.L.P., independent auditors, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the Securities Act
with respect to the Common Stock offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto, certain portions of which have been omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock, reference is
made to the Registration Statement, including the exhibits and schedules.
Copies of such material may also be obtained from the Commission upon the
payment of prescribed fees.
Statements contained in the Prospectus as to any contracts, agreements or
other documents filed as an exhibit to the Registration Statement are not
necessarily complete, and each such statement is qualified in its entirety by
reference to the full text of such contract or document.
The Company will be required to file reports and other information with the
Commission pursuant to the Securities Exchange Act of 1934. In addition to
applicable legal or NASDAQ requirements, if any, holders of the Common Stock
will receive annual reports containing audited financial statements with a
report thereon by the Company's independent certified public accountants.
The Company will provide without charge to each person who receives a
prospectus, upon written or oral request of such person, a copy of any of the
information that was incorporated by reference in the prospectus (not
including exhibits of the information that is incorporated by reference unless
the exhibits are themselves specifically incorporated by reference). Such
requests should be directed to Company's principal executive offices located
at 745 Fort Street, Suite 1000, Honolulu, Hawaii 96813 (telephone:
(808) 524-0900).
41
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 and low bid and asked prices
for the Company's stock for each full quarter for each of the last three
fiscal years ending July 31, 1997, and through October 27, 1997. The
following market quotations reflect inter-dealer prices, without retail
markup, markdown or commission and may not necessarily represent actual
transactions.
Quarter Ended Bid Price Asking Price
- -------------------------- ----------- ----------------
October 31, 1994 .6250 1.2500
January 31, 1995 1.0000 1.3750
April 30, 1995 .3750 1.0000
July 31, 1995 .3750 .6875
October 31, 1995 .6250 .8125
January 31, 1996 .6250 1.1250
April 30, 1996 .7500 1.5000
July 31, 1996 .8750 1.7500
October 31, 1996 .7500 1.6250
January 31, 1997 .7500 1.7500
April 30, 1997 .7500 1.7500
July 31, 1997 1.1250 2.3750
October 31, 1997 1.5000 2.3750
Holders
The number of record holders of the Company's common stock as of October 31,
1997 was approximately 270.
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 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.
Compliance With Section 16(a) of the Securities Act
Section 16 of the Securities Exchange Act of 1934 requires the Company's
directors, 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 the Commissions
regulations 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 10% of the Company's common stock filed all reports required of
Section 16(a) of the Securities Exchange Act of 1934 during the current
fiscal year as of the date of this Registration, summarized as
42
follows:
Name of Reporting Person Form Filed Date Filed
- ------------------------- ---------- -----------------------
John Tedcastle Form 5 September 13, 1996
Motoko Takahashi Form 4 August 09, 1996
Motoko Takahashi Form 4 February 7, 1997
Charles McGee Form 5 September 12, 1997
Kelvin Bloom Form 5 September 12, 1997
Kelvin Bloom Form 5 (1) September 26, 1997
Kimo M. Keawe Form 3 August 8, 1997
Steve Townsend Form 3 August 8, 1997
Stanley Mukai Form 3 October 9, 1997
Edward Calvo, Sr. Form 3 October 10, 1997
Noboru Sekiguchi Form 3 October 9, 1997
(1) Amended filing
REPORTS ON FORM 8-K
The Company filed a current report on Form 8-K on August 15, 1997 regarding
its potential acquisition of 51% of the authorized issued and outstanding
stock of a management company situated in Indonesia.
The Company filed a current report on Form 8-K on September 26, 1997 regarding
the resignation of Mr. Akira Fujii from its board of directors.
43
INDEX TO FINANCIAL STATEMENTS
THE CASTLE GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Page
-----
Report of Independent Accountants ................................ F-2
Consolidated balance sheets at July 31, 1997 and 1996............. F-3
Consolidated statements of operations for the years
ended July 31, 1997 and 1996...................................... F-4
Consolidated statements of shareholder's equity for the
years ended July 31, 1997 and 1996.............................. F-5
Consolidated statements of cash flows for the years
ended July 31, 1997 and 1996.................................... F-6
Notes to consolidated financial statements ....................... F-8
F-1
44
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
The Castle Group, Inc.
We have audited the accompanying consolidated balance sheets of The Castle
Group, Inc. and Subsidiary as of July 31, 1997 and 1996 and the related
statements of operations, stockholder's equity (deficit) and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Castle
Group, Inc. and Subsidiary as of July 31, 1997 and 1996, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ Coopers & Lybrand, L.L.P.
Honolulu, Hawaii
September 19, 1997
F-2
45
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated balance sheets - July 31, 1997 and 1996
1997 1996
Assets
Current Assets:
Cash $ 268,938 $ 220,951
Accounts receivable, less allowance for doubtful
accounts of $25,405 and $18,200 in 1997 and
1996, respectively 820,368 737,729
Due from related party 197,730 371,717
Prepaid expenses 89,779 56,637
Restricted cash 19,941 26,536
Deferred cost, current -- 159,432
Deferred compensation expense, current -- 50,000
----------- -----------
Total current assets 1,396,756 1,623,002
----------- ------------
Furniture, Fixtures and Equipment, Net 82,571 92,936
Other Assets:
Deposits 63,021 62,971
Investment in HBII Timeshare Program 61,240 100,000
Intangibles, net 12,928 89,937
Deferred compensation expense, non-current -- 62,500
----------- -----------
Total other assets 137,189 315,408
----------- -----------
Total Assets $1,616,516 $2,031,346
=========== ===========
Liabilities And Stockholders' Equity (Deficit)
Current Liabilities:
Accounts payable $ 613,791 $1,062,517
Vacation payable 109,233 111,183
Wages payable 84,567 94,269
Taxes payable 36,143 33,611
Due to related party, current 18,000 184,400
Long-term debt, current 250,000 434,432
Deferred compensation payable -- 250,000
Deferred income 76,230 101,640
Other accrued liabilities 121,467 115,681
----------- -----------
Total current liabilities 1,309,431 2,387,733
----------- -----------
Due to Related Party, non-current 166,400 --
Deferred Income -- 76,230
Commitments and Contingencies
Stockholders' Equity (Deficit):
Common stock, $.02 par value, 20,000,000
shares authorized, 5,089,030 shares issued
and outstanding in 1997 and 1996 101,781 101,781
Common stock subscribed and unissued,
222,100 shares 384,750 --
Capital in excess of par 2,118,222 2,118,222
Accumulated deficit (2,464,068) ( 2,652,620)
----------- -----------
Total stockholders' equity (deficit) 140,685 ( 432,617)
----------- -----------
Total Liabilities and Stockholders'
Equity (Deficit) $1,616,516 $2,031,346
=========== ===========
[FN]
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
F-3
46
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated statements of operations
for the years ended July 31, 1997 and 1996
1997 1996
Revenues:
Hotel revenues and management fees (includes
$167,053 in 1997 and $142,082 in 1996
of Hawaii general excise taxes) $ 5,219,506 $ 3,742,408
Other income 966,292 369,218
----------- -----------
Total revenues 6,185,798 4,111,626
----------- -----------
Expenses:
Payroll and benefits 2,401,567 1,968,255
Rent 1,155,212 584,548
Reservation expense 919,857 912,279
Repairs and maintenance 358,655 103,995
Depreciation and amortization 263,322 464,867
Taxes 215,470 151,522
Professional fees 131,271 88,822
Advertising 102,351 66,220
Insurance 101,984 93,351
Travel and entertainment 80,881 37,906
Utilities 60,257 41,152
Office expense 50,197 35,408
Other 104,288 40,297
------------ ------------
Total expenses 5,945,312 4,588,622
------------ ------------
Income (loss) from operations 240,486 ( 476,996)
Other Expenses:
Interest expense 51,934 67,966
------------ ------------
Net Income (Loss) $ 188,552 $( 544,962)
============ ============
Per Share Data
Net income (loss) $ .04 $( .11)
============ ============
[FN]
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
F-4
47
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated statements of stockholders' equity (deficit)
for the years ended July 31, 1997 and 1996
Common
Stock Capital in
Common Stock Subscribed Excess of Accumulated
Shares Amount & Unissued Par Value Deficit
Balances,
August 1, 1995 5,066,530 $ 101,331 $ -- $ 2,110,235 $(2,107,658)
Issuance of
common stock 22,500 450 -- 7,987 --
Net loss for
the year ended
July 31, 1996 -- -- -- -- ( 544,962)
---------- ---------- --------- ----------- ------------
Balance,
July 31, 1996 5,089,030 101,781 -- 2,118,222 (2,652,620)
Stock
subscriptions
sold 222,100 -- 425,399 -- --
Subscription
receivable -- -- ( 40,649) -- --
Net income for
the year ended
July 31, 1997 -- -- -- -- 188,552
---------- ---------- ---------- ----------- ------------
Balance,
July 31, 1997 5,311,130 $ 101,781 $ 384,750 $ 2,118,222 $(2,464,068)
========== ========== ========== =========== ============
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
F-5
48
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated statements of cash flows
for the years ended July 31, 1997 and 1996
1997 1996
Cash Flows From Operating Activities:
Net income (loss) $ 188,552 $( 544,962)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities -
Depreciation and amortization 263,322 464,867
Amortization of deferred compensation expense 112,500 50,000
Issuance of common stock for compensation -- 8,437
Changes in assets and liabilities -
Decrease (increase) in restricted cash 6,595 ( 26,536)
Decrease (increase) in accounts receivable 91,348 ( 192,621)
Increase in prepaid expenses ( 33,142) ( 14,010)
Decrease in deferred income ( 101,640) ( 101,640)
Decrease in contract payable ( 159,432) ( 161,138)
(Decrease) increase in accounts payable ( 448,726) 393,461
(Decrease) increase in wages payable ( 9,702) 14,965
(Decrease) increase in vacation payable ( 1,950) 33,687
(Decrease) in deferred compensation payable ( 250,000) --
Increase in taxes payable 2,532 21,682
Increase in accrued liabilities 5,786 54,698
------------ ------------
Net cash provided by (used in)
operating activities ( 333,957) 890
Cash Flows From Investing Activities:
Purchase of furniture, fixtures & equipment ( 16,516) ( 27,645)
Decrease in investment in HBII Timesharing 38,760 --
Payment of deposits ( 50) ( 30,000)
------------ ------------
Net cash provided by (used in)
investing activities 22,194 ( 57,645)
------------ ------------
Cash Flows From Financing Activities
Proceeds from stock subscription 384,750 --
Repayment of long-term debt ( 275,000) ( 275,000)
Proceeds of long-term debt 250,000 275,000
------------ ------------
Net cash provided by financing activities 359,750 --
------------ ------------
Net Increase (Decrease) In Cash 47,987 ( 56,755)
Cash At Beginning Of Year 220,951 277,706
------------ ------------
Cash At End Of Year $ 268,938 $ 220,951
============ ============
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
F-6
49
THE CASTLE GROUP, INC. AND SUBSIDIARY
Consolidated statements of cash flows (continued)
for the years ended July 31, 1997 and 1996
1997 1996
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 43,434 $ 53,844
Supplemental schedule of noncash investing
and financing activities:
Issuance of common stock, 22,500 shares for
compensation and services $ -- $ 8,437
Assignment of the leased hotel's accounts
receivable to the Company also recorded
as an accounts payable to the lessor -- 150,000
Stock subscription receivable 40,649 --
[FN]
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
F-7
50
THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to the consolidated financial statements
1. Summary of Significant Accounting Policies
Organization -
The Castle Group, Inc. (the Company) was incorporated under the laws of the
State of Utah on August 21, 1981. The Company operates in the hotel and
resort management industry in the State of Hawaii.
New Accounting Pronouncements -
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 128, "Earnings Per Share" and SFAS No. 129, "Disclosure of
Information About Capital Structure," which improves the earnings per share
information provided in financial statements by simplifying the existing
computational guidelines and revising the disclosure requirements. These
statements are effective for financial statements issued for periods ending
after December 15, 1997, including interim periods, and earlier application
is not permitted. In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which are both effective for fiscal
periods beginning after December 15, 1997. The impact of these statements
on the Company's current disclosures is not expected to be significant.
Principles Of Consolidation -
The consolidated financial statements include The Castle Group, Inc. and
its wholly-owned subsidiary, KRI, Inc. and KRI, Inc.'s wholly-owned
subsidiary, HPR Advertising, Inc. All significant intercompany transactions
have been eliminated in the consolidated financial statements.
Per Share Data -
Per share data is based on the weighted average number of shares
outstanding during the period without regards to common stock equivalents
due to their anti-dilutive effect. In 1997 and 1996, the weighted average
shares outstanding was 5,109,903 and 5,085,280, respectively.
Income Taxes -
The Company records deferred tax assets and liabilities for expected future
tax consequences of events that have been recognized in a Company's
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
F-8
51
THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to the consolidated financial statements
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 considered all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
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 accounts, and any resulting gain or loss
is reflected in income for the period.
The costs 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, 1997 and 1996, furniture, fixtures and equipment consisted of
the following:
1997 1996
Office equipment $ 205,529 $ 201,721
Less accumulated depreciation ( 122,958) ( 108,785)
----------- -----------
$ 82,571 $ 92,936
=========== ===========
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 1997 and 1996, depreciation expense was $26,881 and $26,719,
respectively.
Intangibles -
Intangible assets consist of noncompetition agreements and organization
costs. The noncompetition fees are being amortized over the life of the
agreements (3 years) on a straight-line basis. Organization costs are being
amortized on a straight-line basis over 5 years. At July 31, 1997 and 1996,
the balances of those intangibles were as follows:
F-9
52
THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to the consolidated financial statements
1997 1996
Noncompetition agreements $ -- $ 800,000
Organization costs 51,714 51,714
------------ ------------
51,714 851,714
Less accumulated amortization ( 38,786) ( 761,777)
------------ ------------
$ 12,928 $ 89,937
============ ============
Deferred Cost -
Deferred cost represents the cost of obtaining management contracts and is
being amortized on a straight-line basis over the life of the contract (see
Note 4).
Deferred Compensation Expense -
Deferred compensation expense represents the cost of common stock options
issued to an officer as an inducement to enter into an employment contract.
The deferred compensation expense is being amortized on a straight-line
basis over the life of the contract (5 years). In 1997, the stock options
were forfeited by the above mentioned officer (see Note 6).
Income Recognition -
The Company recognizes income from the management of resort properties
according to terms of its various management contracts.
Concentrations of Credit Risks -
The Company's cash is deposited in savings and demand deposit accounts with
financial institutions in Hawaii.
Concentration In Market Area -
The Company manages hotels primarily in Hawaii and is dependent on the
state's visitor industry. Subsequent to year end, the Company expanded its
operation to Saipan and is currently contemplating expansion into other
areas of the Pacific Basin.
Restricted Cash -
Restricted cash consists of cash held in client trust accounts and cash
pledged as collateral for an equipment lease.
F-10
53
THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to the consolidated financial statements
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.
Fair Value Of Financial Instruments -
The carrying value of long-term debt, and deferred compensation payable
approximate the fair value because of the short maturity of those
instruments. The fair value of the investment in HBII Time Share Program is
estimated to be $400,000 at July 31, 1997 based on future cash flow
projections.
2. Related Party Transactions
Hanalei Bay International Investors -
The Company has a hotel management agreement with Hanalei Bay International
Investors (HBII) to manage the Hanalei Bay Resort (HBR). The managing
general partner of HBII is also the chairman and chief executive officer of
the Castle Group, Inc. Under the agreement, the Company is to receive
management and incentive fees based on a percentage of gross total revenue
and net income respectively. The Company also receives reservation and
marketing fees based on a percentage of room revenue. During the year ended
July 31, 1997, and 1996, total fee income from HBR amounted to $774,372 and
$949,263, respectively. At July 31, 1997 and 1996, the Company's receivable
from HBR amounted to $197,720 and $371,717, respectively.
On July 31, 1995, HBII paid the Company $150,000 to be applied against
HBR's accounts receivable balance in anticipation of HBII receiving cash
inflows on August 1, 1995. The anticipated cash was not received by HBII.
Therefore, on August 2, 1995, the Company issued a $150,000, 6% promissory
note to HBII. The promissory note matured on August 31, 1995. On October
3, 1995, HBII repaid the note in full.
On July 31, 1995, the Company invested $100,000 in HBII Time Share Program
of the Hanalei Bay Resort. The Company will receive moneys based on a
percentage of timesharing sales. During 1997, the Company received $155,000
from this investment of which $38,800 represents a return of the initial
investment and $116,200 represents a gain recognized by the Company. At
July 31, 1997, the investment was $61,240.
F-11
54
THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to the consolidated financial statements
Reservations System -
Reservations services are provided by Hawaii Reservation Center
Corporation, wholly owned by a stockholder/director who has a 2% interest in
the Company. The expense in 1997 and 1996 was $919,857 and $912,279,
respectively.
Due to Related Party -
1997 1996
6% loans from stockholders, $18,000 was due
on January 31, 1997 and $166,400 was
extended to August 1, 1998 $ 184,400 $ 184,400
Less current portion 18,000 184,400
---------- ----------
Long-term portion due in fiscal year 1999 $ 166,400 $ --
========== ==========
3. Commitments and Contingencies
Leases -
The Company leases office space, vehicles and equipment expiring at various
dates through 1999. The office leases may be renewed for an additional five
years. Additionally, in May 1996, the Company leased a hotel under a
noncancelable agreement expiring in March 1998. The lease may be renewed
for an additional four years. The lessor is entitled to a percentage of the
operating profit of the hotel in excess of $100,000 until April 1997. All
assets, liabilities, revenues and expenses have been included in the
Company's operations.
At July 31, 1997, the future minimum rental commitment under these leases
was as follows:
Schedule of minimum lease payments:
1998 $ 863,000
1999 261,000
------------
$ 1,124,000
============
Rent expense under these leases amounted to $1,076,000 and $513,400 for the
years ended July 31, 1997 and 1996, respectively.
F-12
55
THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to the consolidated financial statements
Management Contracts -
The Company manages several hotels and resorts under management agreements
expiring at various dates through December 1999. 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 management
agreements.
In addition, the Company has sales, marketing and reservations agreements
with other hotels and resorts expiring at various dates through December
1997. 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 agreements.
4. Loan And Contract Payable
At July 31, 1997 and 1996, long-term debt consisted of the following:
1997 1996
Contract payable in monthly installments of
$15,080, expiring in June 1997 (see below). $ -- $ 159,432
$300,000 line of credit from a bank with drawings
due within 90 days from withdrawal, with interest
(10.50% at July 31, 1997) at 2.00% above the
bank's base rate due on September 30, 1997. The
Company's accounts receivable are pledged as
collateral and several of the Company's
directors are named as guarantors. 250,000 275,000
----------- -----------
$ 250,000 $ 434,432
=========== ===========
5. Employee Benefits
The Company and its subsidiary have a 401(k) Profit Sharing Plan for its
employees. Under the terms of the Plan, the Company may match 50% of the
compensation reduction of the participants
F-13
58
THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to the consolidated financial statements
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, 1997 and 1996, no
contributions were made by the Company.
The Subsidiary has a Flexible Benefits Plan. The participants in this 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. On October 1, 1995, the Plan was
amended to include all employees of the Company effective January 1, 1997.
6. Capital Stock
Capital Stock Issuances -
On September 30, 1995, the Company issued to an officer 22,500 shares of
common stock as compensation for services rendered. The compensation
recorded was equivalent to the fair market value of the stock on September
30, 1995.
Common Stock Warrants -
In May 1994, the Company issued warrants to acquire up to 25,000 shares of
common stock for $1.25 per share, exercisable through May 1999 in exchange
for consulting services rendered. No warrants have been exercised for 1997
and 1996.
Common Stock Options -
In November 1993, as an inducement to enter into an employment contract
with the Company, the Company issued options to an officer of the Company to
obtain 125,000 shares of common stock for one dollar, exercisable by
December 2, 1998. The transaction was recorded as deferred compensation
expense and deferred compensation payable of $250,000, representing the fair
value of the common stock option at the date of grant. In 1995, the option
period was amended to be only exercisable after August 1, 1996 but before
December 2, 1998. No options have been exercised for 1996 and in 1997, the
options were forfeited by the officer. The deferred compensation payable of
$250,000 and the unamortized balance of the deferred compensation expense of
$62,500 were eliminated which reduced payroll and benefits expense by
$187,500 in 1997.
F-14
57
THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to the consolidated financial statements
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 which is wholly owned by a stockholder/director of the
Company. The option may be exercised between May 1997 and 2000 and had not
been exercised as of July 31, 1997.
Stock Subscriptions -
In July 1997, 222,100 common shares were subscribed at $2 per share. As of
July 31, 1997, the Company received $384,750, net of stock issuance expenses
of $18,806, with a receivable balance of $40,649 at July 31, 1997. The
subscription receivable was collected in September 1997, at which time, the
shares were issued to the subscriber.
7. Income Taxes
Significant components of the Company's deferred tax assets and liabilities
as of July 31, 1997 and 1996 are as follows:
1997 1996
Deferred tax assets-
Vacation pay $ 7,000 $ 7,000
Deferred compensation expense -- 55,000
Noncompetition agreement 240,000 235,000
Deferred income 31,000 71,000
Net operating loss 738,000 775,000
------------ ------------
1,016,000 1,143,000
Deferred tax liability-
Furniture, fixtures and equipment ( 8,000) ( 7,000)
------------ ------------
Net deferred tax asset 1,008,000 1,136,000
Valuation allowance ( 1,008,000) ( 1,136,000)
------------ ------------
$ -- $ --
============ ============
In 1997, $37,000 of net operating losses was utilized to offset current
year taxable income.
The net change during 1997 and 1996 in the total valuation allowance was a
decrease of $128,000 and an increase of $304,000, respectively.
F-15
58
THE CASTLE GROUP, INC. AND SUBSIDIARY
Notes to the consolidated financial statements
The Company has a net operating loss carryforward for income tax purposes
of $1,844,400 at July 31, 1997 which expires at various dates through fiscal
year 2011.
8. Litigation
There are various claims and lawsuits pending against the Company involving
complaints which are normal and reasonably foreseeable in light of the
nature of the Company's business. In the opinion of management, the
resolution of these claims will not have a material adverse effect on the
Company's financial position.
F-16
59
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 1. Indemnification of Directors and Officers
There is no provision in the Articles of Incorporation, Bylaws or any
contract or other instrument that insures or indemnifies a controlling
person, director or officer of the Company against liability in any of these
capacities; however, the Utah Revised Business Corporation Act (the "Act")
does contain provisions regarding such indemnity.
The Act provides that a corporation may indemnify an individual who has
been made a party to a proceeding because he or she was a director against
liability incurred if the conduct was in good faith and he or she reasonably
believed that the conduct was in or not opposed to the corporation's best
interests; and in the case of any criminal proceeding, he or she had no
reasonable cause to believe the conduct was unlawful. A corporation may not
indemnify a director under this Section in connection with a proceeding by
or in the right of a corporation in which the director was adjudged liable
to the corporation or in connection with any proceeding claiming the
director derived an improper personal benefit, whether involving action in
his or her official capacity, in which proceeding he or she was adjudged
liable on the basis that he or she derived an improper personal benefit.
The indemnification permitted by this Section is limited to reasonable
expenses incurred in connection with the proceeding. The Act further
provides that unless limited by the Articles of Incorporation, a corporation
shall indemnify a director who is successful on the merits or otherwise in
the defense of any proceeding or in the defense of any claim, issue or
matter in the proceeding, to which he or she was a party because he or she
was a director of the corporation, against reasonable expenses incurred in
connection with the successful defense of any such proceeding or claim.
A corporation may pay for or reimburse the reasonable expenses incurred by
a director who is a party to a proceeding in advance of final disposition of
the director furnishes the corporation with written affirmation of his or
her good faith belief that he or she has met the applicable standard of
conduct described in the Act; the director furnishes the corporation with a
written undertaking to repay the advance if it is ultimately determined that
he or she did not meet such standard of conduct; and a determination is made
that the facts then known to those making such determination would not
preclude such indemnification.
A director may also seek court-ordered indemnification under the Act,
provided that such indemnification is limited to reasonable expenses
incurred, and the court may order such indemnification regardless of whether
the director has met the applicable standard of conduct set forth in the
Act.
The Act outlines the requirements for determining and authorizing
indemnification of directors, and provides that a determination shall be
made by a majority vote of the Board of Directors, with only those directors
not party to the proceeding being counted in satisfying the presence of a
quorum; or, if a quorum cannot be obtained, by a majority vote of a
committee of the Board of Directors designated by the Board of Directors,
which committee shall consist of two or more directors not party to the
proceeding, except that directors who are party to the proceeding may
participate in the designation of directors for the committee; or by special
legal counsel selected by a quorum of the Board of Directors or its
committee, or if a quorum cannot be obtained and a committee cannot be
designated, selected by a majority vote of the full Board of Directors, in
which selection directors who are party to the proceeding may participate;
or by the stockholders, by a majority of the votes entitled to be cast by
the holders of qualified shares present in person or by proxy at a meeting.
Officers, employees, fiduciaries and agents may also be indemnified
pursuant to the Act, unless the Articles of Incorporation provide
otherwise. An officer is entitled to mandatory indemnification and may
apply for court-ordered indemnification to the same extent as a director
under the Act. A corporation may also indemnify and advance expenses to an
officer, employee, fiduciary or agent to the same extent as to any director;
and may also indemnify and advance expenses to an officer, employee,
fiduciary or agent who is not a director to a greater extent, if not
inconsistent with public policy, and if provided for by its Articles of
60
Incorporation, Bylaws, general or specific action of its Board of Directors
or contract. A corporation may purchase insurance to indemnify any such
persons pursuant to the Act, regardless of whether the corporation has the
power to indemnify any such persons under other provisions of this Act.
The Act provides that provisions concerning a corporation's indemnification
of or advance for expenses to a director contained in its Articles of
Incorporation or Bylaws, or a resolution of its stockholders or Board of
Directors, or in a contract (except an insurance policy) or otherwise, are
valid only if and to the extent the provision is not inconsistent with the
Utah Revised Business Corporation Act. If the Articles of Incorporation
limit indemnification or advance of expenses, indemnification and advance of
expenses are valid only to the extent not inconsistent with the Articles of
Incorporation.
There is no provision in the Articles of Incorporation or Bylaws of the
Company granting, limiting or denying the right to indemnify directors,
executive officers, employees, fiduciaries or agents of the Company.
Item 2. Other Expenses of Issuance and Distribution
The following table sets forth the estimated costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of the Common Stock being registered:
SEC Registration Fee $ 1,655
NASD Filing Fee 1,000
Nasdaq National Market application fee 10,000
Blue Sky fees and expenses 15,000
Printing and engraving expenses 50,000
Legal fees and expenses 100,000
Accounting fees and expenses 25,000
Transfer Agent and Registrar fees 5,000
Miscellaneous 12,345
------------
Total $ 220,000
============
Item 3. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense
of any action, suit, or proceeding) is asserted by such director, officer,
or controlling person in connection with the securities being registered,
the Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question as to whether such indemnification by it is
against public policy as expressed in the Securities Act, and will be
governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters
to permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
61
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of the Prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Item 4. Unregistered Securities Issued or Sold Within One Year.
In May, 1997, The Company, as part of a renegotiation of its reservation
services agreement, granted to Hawaii Reservations Center Corp. 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.
Hawaii Reservations Center is a wholly owned corporation of Mr. Charles E.
McGee, a director of the Company.
Other than the option to Mr. McGee, there were no other issuances of
unregistered securities within the last year.
(indicate section of Act relied upon for exemption from the registration
requirements)
Item 5. Exhibits and Financial Statement Schedules
(a) Exhibits
Sequential
Exhibit Page
Number Description Number
- ------ ------------------------------------------------------------ ---------
1.1 Form of Underwriting Agreement
2.1 Restated Articles of Incorporation of The Castle Group, Inc.,
incorporated by reference to the Company's Registration
Statement on Form 10-SB *
2.2 By-Laws as amended of The Castle Group, Inc.,effective
02/01/95, incorporated by reference to Exhibit 2.2 to the
Company's quarterly report on form 10-QSB for the quarter
ending 04/30/96 *
6.1 Agreement and Plan of Reorganization dated 11/08/93 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 11/10/93, by and among The
Castle Group, Inc., Keawe Resorts, Inc., Maui Beach Hotel,
Inc., M.K. & Sons, Inc., TN Group Hawaii, Inc., Michael S.
Nitta, Saburo and 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 12/02/93, between the
Company and Kelvin Bloom, incorporated by reference to Exhibit
10.3 to the Company's Registration Statement on Form 10-SB. *
62
6.4 Kimo M. Keawe Employment Agreement dated 07/30/94, effective
as of 11/10/93 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 07/31/94. *
6.5 Michael S. Nitta Employment Agreement dated 07/30/94,
effective as of 11/10/93 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
07/31/94. *
6.6 Shari W. Chang Employment Agreement dated 07/15/94, effective
as of 07/16/94, between Shari W. 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 07/31/94. *
6.7 Sublease Agreement dated 09/16/93, between rush Moore Craven
Sutton Morry & Beh and The Castle Group Limited for the
Company's principle executive offices, incorporated by
reference to the Company's Registration Statement on Form
10-SB. *
6.8 Lease Agreement dated 04/01/88, between Hirano Enterprises,
Cen Pac Properties, Inc., and KRI, Inc., dba Hawaiian Pacific
Resorts, as renewed by agreement dated 05/03/93, incorporated
by reference to Exhibit 10.5 to the Company's Registration
Statement on Form 10-SB. *
6.9 Reservation Services Agreement dated 08/01/94 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 10/31/94. *
6.10 Stock Acquisition Agreement between the Company and Shari
Chang dated 09/10/95, incorporated by reference to the
Company's Annual Report on Form 10-KSB for the year ended
07/31/95. *
6.11 Revolving Line of Credit Loan Agreement dated 10/21/94 between
the Company, Castle Resorts & Hotels, Inc., KRI, Inc., Hawaii
National Bank, Rick Wall, John Tedcastle, Kimo M. Keawe and
Hideo Nomura, incorporated by reference to Exhibit 6.11 to the
Company's Annual Report on Form 10-KSB for the year ended
07/31/95. *
6.12 Letter dated 10/17/95 from Kimo M. Keawe to KRI, Inc.
stockholders, together with Promissory Notes dated 07/31/95
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 $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
07/31/95. *
6.13 Second Amendment to Letter of Agreement dated 12/02/93
between Kelvin Bloom and the Company, incorporated by
reference to Exhibit 6.13 to the Company's Annual Report on
Form 10-KSB for the year ended 07/31/95. *
6.14 Extension of Revolving Line of Credit Agreement dated
12/18/95 between The Castle Group, Inc., KRI, inc., Castle
Resorts & Hotels, Inc., and Hawaii National Bank, incorporated
by reference to Exhibit 6.14 to the Company's Annual Report on
Form 10-KSB for the year ended 07/31/96. *
6.15 Extension of Revolving Line of Credit Agreement dated 1/18/96
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 07/31/96. *
6.16 Extension of Revolving Line of Credit Agreement dated 6/5/96
between The Castle Group, Inc., KRI, inc., Castle Resorts &
Hotels, Inc., and Hawaii National Bank, incorporated by
reference to Exhibit 6.16 to the Company's Annual Report on
Form 10-KSB for the year ended 07/31/96. *
63
6.17 Extension of Revolving Line of Credit Agreement dated
12/11/96 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 07/31/97. *
6.18 Extension of Revolving Line of Credit Agreement dated 3/5/97
between The Castle Group, Inc., KRI, Inc., Castle Resorts &
Hotels, Inc., and Hawaii National Bank, incorporated by
reference to Exhibit 6.18 to the Company's Annual Report on
Form 10-KSB for the year ended 07/31/97. *
6.19 Extension of Revolving Line of Credit Agreement dated 6/30/97
between The Castle Group, Inc., KRI, Inc., Castle Resorts &
Hotels, Inc., and Hawaii National Bank, incorporated by
reference to Exhibit 6.18 to the Company's Annual Report on
Form 10-KSB for the year ended 07/31/97. *
6.20 Stock Option Agreement Dated May 1, 1997 between the Company
and Hawaii Reservation Center Corporation, 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 Employment Agreement dated May 1, 1997 between the Company
and Steve Townsend 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 Castle Group, Inc. dated April 16, 1997
incorporated by reference to Exhibit 6.22 to the Company's
Annual Report on Form 10-KSB for the year ended July 31, 1997. *
6.23 Amendment to Consulting Agreement between Kimo M. Keawe,
Keawe Resorts, Inc. And The Castle Group, Inc. dated April
16, 1997 incorporated by reference to Exhibit 6.23 to the
Company's Annual Report on Form 10-KSB for the year ended
July 31, 1997. *
6.24 Letter dated July 31, 1997 from Kelvin Bloom forfeiting his
stock option and all amendments incorporated by reference to
Exhibit 6.24 to the Company's Annual Report on Form 10-KSB for
the year ended July 31, 1997. *
6.25 Amendment to Promissory Notes from the Company to Saburo or
Mitsue Maruyama for $3,600; Michael S. Nitta for $16,800;
Keawe Resorts, Inc. for $122,000; M.K. & Sons, Inc. for
$12,000; Shigeru Shinno for $6,000; and T.N. Group Hawaii,
Inc. for $6,000 incorporated by reference to Exhibit 6.25 to
the Company's Annual Report on Form 10-KSB for the year ended
July 31, 1997. *
23.1 Consent of Coopers & Lybrand L.L.P. 66
23.2 Opinion of Davis Wright Tremaine
(b) Financial Statement Schedules
None
64
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the city of Honolulu, State of Hawaii,
on November 4, 1997.
THE CASTLE GROUP, INC.
a Utah corporation
By: \s\ Rick Wall
----------------------------------
Rick Wall
Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons on the 4th day of November,
1997 in the capacities indicated.
Name Title
\s\ Rick Wall Chairman of the Board of Directors and
- ------------------------- Chief Executive Officer and Director
Rick Wall
\s\ John Tedcastle Vice Chairman of the Board of Directors
- ------------------------- and Director
John Tedcastle
\s\ Judvihr Parmar Director
- -------------------------
Judvihr Parmar
\s\ Ryoji Takahashi Director
- -------------------------
Ryoji Takahashi
\s\ Kimo M. Keawe Director
- -------------------------
Kimo M. Keawe
\s\ Charles E. McGee Director
- -------------------------
Charles E. McGee
\s\ Hideo Nomura Director
- -------------------------
Hideo Nomura
\s\ Motoko Takahashi Secretary and Director
- -------------------------
Motoko Takahashi
\s\ Kelvin Bloom Chief Operating Officer, Director,
- ------------------------- and Senior Vice President
Kelvin Bloom
\s\ Michael S. Nitta Chief Financial Officer and
- ------------------------- and Vice President Finance
Michael S. Nitta
65
COOPERS & LYBRAND L.L.P.
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement of The Castle Group,
Inc. on Form SB-2 to be filed on or about November 3, 1997, of our report dated
September 19, 1997, on our audits of the financial statements of The Castle
Group, Inc. and Subsidiary as of July 31, 1997 and 1996, and for the years then
ended, which report is included in the 1997 Annual Report on Form 10-KSB and in
this registration statement. We also consent to the reference to our firm
under the caption "Experts".
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Honolulu, Hawaii
November 3, 1997
66