U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-KSB /A
Amendment No. 1
(Mark One)
[x] ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended December 31, 2007
[ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from
to
Commission file number: 000-23338
THE
CASTLE GROUP, INC
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(Name of
small business issuer in its charter)
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Utah
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99-0307845
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(State or Other Jurisdiction of
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(I.R.S. Employer Identification No.)
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incorporation or organization)
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500 Ala Moana Boulevard, 3 Waterfront Plaza, Suite 555, Honolulu
HI
96813
(Address of principal executive office) (Zip Code)
Issuers telephone number: (808) 524-0900
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.02 par value
(Title
of class)
Check whether the
Issuer is not required to file reports pursuant to Section 13 or 15(d) of the
Exchange Act. [ ]
Check whether the
Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X]
No [ ]
Page 1
Check if there is no
disclosure of delinquent filers in response to Item 405 of regulation S-B
contained in this form, and no disclosure will be contained, to the best of
Issuers knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
[ ]
Indicate by check
mark whether the Issuer is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes [ ] No [X]
Issuers revenues for
its most recent fiscal year: December 31, 2007: $21,026,079
As of March 31, 2008,
there were approximately 4,708,655 shares of common voting stock of the Issuer
held by non-affiliates. As of April 8, 2008, the closing price of the common
stock on the OTC Bulletin board was $1.20 per share or an aggregate value of
$4,802,828.
Issuers Involved in Bankruptcy Proceedings During the Past Five
Years
Not
applicable.
Check whether the
Issuer has filed all documents and reports required to be filed by Section 12,
13 or 15(d) of the Exchange Act after the distribution of securities under a
plan confirmed by a court.
Not
applicable.
Applicable Only to Corporate Issuers
Number of shares
outstanding of the Issuers common stock as of March 31, 2008:
9,538,055
Documents Incorporated by Reference
See Part III, Item
13. The Exhibit Index appears on page 69.
Transitional Small Business Disclosure Format:
Yes [
] No [X]
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EXPLANATORY NOTE
The Castle Group,
Inc. is filing this Form 10-KSB/A Amendment No. 1 (the Form 10-KSB/A) to amend
Item 7 to more fully describe the Companys Income Recognition policies and Item
8A (T) to update the status of the Companys review of internal controls over
financial reporting for the period ending December 31, 2007 and the associated
management report on financial reporting.
All of the
information in this form 10-KSB/A is as of April 15, 2008, the date the Company
originally filed its Form 10-KSB with the Securities and Exchange Commission,
and does not reflect any subsequent information or events other than noted
above. For the convenience of the reader, this Form 10-KSB/A sets forth
the originally filed form 10-KSB as amended herein, in its entirety.
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TABLE OF CONTENTS
PART
I
ITEM
1. DESCRIPTION OF BUSINESS
ITEM
2. DESCRIPTION OF PROPERTY
ITEM
3. LEGAL PROCEEDINGS
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART
II
ITEM
5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
ITEM
6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
ITEM
7. FINANCIAL STATEMENTS
ITEM
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM
8A(T). CONTROLS AND PROCEDURES
ITEM
8B. OTHER INFORMATION.
PART
III
ITEM
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
ITEM
10. EXECUTIVE COMPENSATION
ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM
13. EXHIBITS
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
SIGNATURES
Forward-looking
Statements.
The Private
Securities Litigation Reform Act of 1995 (the Act) provides a safe harbor for
forward-looking statements made by or on behalf of Castle. Castle and its
representatives may from time to time make written or oral statements that are
forward-looking, including statements contained in this Annual Report and
other filings with the Securities and Exchange Commission, and in reports to
Castles stockholders. Management believes that all statements that express
expectations and projections with respect to future matters, as well as from
developments beyond Castles control, including changes in global economic
conditions, are forward-looking statements within the meaning of the Act.
These statements are made on the basis of managements views and
assumptions, as of the time the statements are made, regarding future events and
business performance. There can be no assurance; however, that
managements expectations will necessarily come to pass.
Factors that may
affect forward- looking statements include a wide range of factors that could
materially affect future developments and performance, including the
following:
Changes in company-wide strategies, which may result in
changes in the types or mix of businesses in which Castle is involved or chooses
to invest; changes in U.S., global or regional economic conditions; changes in
U.S. and global financial and equity markets; including significant interest
rate
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fluctuations;
which may impede Castles access to, or increase the cost of, external financing
for its operations and investments; increased competitive pressures, both
domestically and internationally; legal and regulatory developments, such as
regulatory actions affecting environmental activities; the imposition by foreign
countries of trade restrictions and changes in international tax laws or
currency controls; adverse weather conditions or natural disasters, such as
hurricanes and earthquakes; and labor disputes, which may lead to increased
costs or disruption of operations. This list of factors that may affect
future performance and the accuracy of forward-looking statements are
illustrative, but by no means exhaustive. Accordingly, all forward-looking
statements should be evaluated with the understanding of their inherent
uncertainty.
PART
I
ITEM 1.
DESCRIPTION OF BUSINESS
A.
SUMMARY OF SIGNIFICANT EVENTS DURING 2007
During 2007, Castle
entered into 6 new contracts with numerous properties in Hawaii, Guam, and
Thailand. These additions increased the total number of units under contract to
approximately 3,200, nearly doubling the number of units under contract as
compared to year-end 2006.
At midyear, the
Company entered into a new sales and marketing agreement with the Ocean Resort
Hotel and took over full management of the Hotel Santa Fe. The Ocean
Resort Hotel is a 450 room mid range hotel in the heart of Waikiki in Honolulu,
Hawaii. The Hotel Santa Fe is a 110 room beachfront boutique hotel on
Hagatna (Agana) Bay in Guam. On October 1, 2007, Castle began managing all
aspects of the 596 room Maile Sky Court mid-range hotel in Waikiki. In
December 2007, the Company began handling sales, marketing and reservations for
the 310 room Queen Kapiolani Hotel in Honolulu.
In 2007, the next
step in Castles global expansion plans unfolded with the procurement of two new
contracts in Thailand; the Katamanda resort on the southwest coast of Phuket
Island, and the Baan Taling Ngam Resort and Spa on the island of Koh Samui. The
addition of these two properties underscores the companys expansion of its high
end luxury vacation offerings. The 40-unit Katamanda is an exclusive villa
estate overlooking the beach areas of Kata Noi and Tata Beach. This luxury
resort features two, three and six bedroom villas which include living, kitchen
and dining areas and with some units, a private pool. The Baan Taling Ngam
Resort and Spa is a secluded exotic beachfront retreat set amongst thousands of
coconut treas. This 70-unit resort overlooks the Gulf of Thailand and Ang Thong
Marine National park and features deluxe hotel rooms and suites, as well as, two
and three bedroom private villas.
In the fall of 2007,
the Company filed Form 10-QSB reports for the quarters ending September 30,
2006, March 31, 2007 and June 30, 2007 and a Form 10-KSB for the year ending
December 31, 2007 (including audited financial statements for 2004, 2005 and
2006) with the Securities and Exchange Commission. Castle had not
previously filed such reports since 2000 and its common stock had not been
trading on any securities exchange since that time. The Company was
subsequently granted approval for the listing and trading of its common stock on
the OTC Bulletin Board under the symbol CAGU in late December. The
Companys common stock began trading on the OTC Bulletin Board on December 31,
2007
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In
October 2002, Castle filed an action against Manhattan Guam for damages caused
by Manhattan Guams breach of a compromise agreement of a previous dispute which
Castle and Manhattan Guam had signed in 2001. Manhattan Guam filed a
counterclaim seeking to rescind the compromise agreement and/or collect the
amounts which it contended were owed by Castle pursuant to that agreement.
In June, 2007, Castle and Manhattan Guam executed a new Settlement
Agreement whereby the previous compromise agreement, the promissory note and
900,000 shares of Castles common stock issued to Manhattan Guam in connection
with the previous compromise agreement, were all canceled upon Castles payment
of a total of $500,000 to Manhattan Guam. As of January 18, 2008, Castle
has paid in full all amounts owed to Manhattan Guam pursuant to the new
settlement agreement, and the prior compromise agreement, promissory note and
stock certificate for 900,000 shares of Castles common stock have been
cancelled.
B.
THE PRESENT STATUS OF CASTLE
Principal
products or services and their markets
The Castle Group,
Inc. (Castle, we, or us) through its subsidiaries manages luxury and
mid-range resort condominiums and hotels on all of the major islands within the
state of Hawaii, and resorts located in Saipan, New Zealand, Thailand and Guam.
We are considered one
of the leading hospitality and hotel management companies in Hawaii and have
earned the reputation of being both Flexible and Focused, which is Castles
operating philosophy. Flexible, to meet the specific needs of property owners
and condominium owners at the properties that we manage. Focused, in our
efforts to achieve enhanced rental income and profitability for our owners.
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Portfolio
of Properties Under Management
Castles quality of
services and value-added proposition to our properties under management has
allowed us to enjoy a consistently high level of contract renewals.
As of March 31, 2008
Castle provides services to the following properties:
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Hawaii
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Location
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Hotel and
Resort
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Since
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Kauai
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Kaha
Lani Resort
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2004
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Kiahuna Plantation
& The Beach Bungalows
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1997
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Lanikai
Resort
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1997
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Lae
Nani Resort
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1997
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Makahuena at
Poipu
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1995
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Poipu
Shores
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1994
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Oahu
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Hokele Suites
Waikiki
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2006
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Maile Sky
Court
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2007
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Pacific Marina
Inn
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1993
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Ocean Resort
Waikiki Hotel
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2007
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Queen Kapiolani
Hotel
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2007
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Waikiki
Shore
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2003
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Maui
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Kamaole
Sands
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1994
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Maui Beach
Hotel
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1999
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Molokai
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Kaluakoi
Villas
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1993
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Hawaii
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Hilo Hawaiian
Hotel
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1993
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Kona Bali
Kai
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2005
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Kona
Reef
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1993
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Nomura Hawaii
Village
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2001
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Waimea Country
Lodge
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1995
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Guam
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Hotel Santa Fe
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2007
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Imperial
Suites
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2006
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Thailand
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Phuket
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Katamanda
Villas
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2007
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Koh
Samui
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Baan Taling
Ngam
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2007
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Micronesia
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Saipan
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Aquarius Beach
Tower
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1997
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New
Zealand
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Auckland
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Spencer on
Byron
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2001
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During 2007 The
Diamond Resort, located on Maui, was in the process of being sold to a new
owner. The sales and marketing services previously provided by Castle were
in sourced by the current ownership team in anticipation of the sale. The
Company stopped providing sales and marketing services to the resort in November
of 2007. Also, during 2007 the Company entered into an interim agreement
to provide sales and marketing services to Kata Gardens, a small condominium
property in Thailand. Castle ceased providing such services after the
interim period was concluded.
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Castle
is a full service hospitality company which earns its revenues by providing
several types of services to property owners including, customized hotel and
resort management and operations; reservations staffing and operations; sales
and marketing; and accounting. In addition, Castle offers design services
to properties that are furnishing, refurnishing or remodeling, as well as
pre-opening technical services for new hotel and resort properties being planned
or under construction. Castles revenues are derived primarily from two
sources: (1) the rental of hotel rooms and condominium accommodations; food and
beverage sales at the properties it manages and; (2) fees paid for services it
provides to property owners. Castle also derives revenues from commissions and
incentive payments, based on sales and performance criteria at each
property.
Historically, Castle
has contracted its full management services to property owners and condominium
owners associations (AOAO) on either a Gross Contract or a Net Contract basis.
Under the Gross Contract basis, the remaining gross revenues for guest
stays and other sources of revenue are paid to Castle, after a portion of the
gross revenues are retained by the property or condominium owners. Castle
then pays for the expenses of operating the property from its portion of the
revenue. Castle recognizes this revenue as Revenues Attributed from
Properties in its consolidated financial statements. Under the Net
Contract basis, Castle receives a fixed percentage of the gross revenue
collected by the property as a fee, and the property owners are responsible for
paying the operating expenses from their portion. This revenue is included
as Revenues from Management and Services. In either case, Castle may be
required to meet certain minimum service or operating performance levels, such
as occupancy or daily rate, in order to achieve levels of compensation over and
above base levels. In most full management contracts, Castle is
responsible for setting prices, room rates and for maintaining favorable
occupancy levels in the units that it manages.
In addition to full
management service contracts, Castle has contracted with some property owners or
owners associations for selected services, such as sales and marketing only or
reservations only. In these cases, Castle receives its revenue on a fixed
or variable fee basis. Hotel and resort properties in general undergo
remodeling or redesign every few years, in order to provide a fresh and new
experience for the guest. Frequently, Castle has entered into one time or
restricted period contracts with property owners or associations, to provide
technical operating or design advice, when a new property is being planned or
built, or an existing property is in the process of a planned remodel or
repositioning.
C.
SUBSEQUENT EVENTS
Changes in
Directors and Officers:
In January 2008 the
Company announced the appointment of Mr. Robert Wu to its Board of Directors and
to the post of Executive Vice President of Asian Development for its Castle
Resorts & Hotels subsidiary.
On February 4, 2008
Mr. Edward Calvo Jr. resigned his seat on the Board of Directors of the Company
in order to avoid any conflicts of interest between his legal practice and the
operations and strategies of the Company. Mr. Calvos law firm is not
currently representing Castle or any other party involved in any legal
matters.
On March 1, 2008 Mr.
Howard Mendelsohn was named to the position of Executive Vice President of
Capital Markets Development. In his new role he is responsible for
establishing and managing the
Page 8
Companys
relationships with the investment community and individual investors. He
will provide leadership in developing financing strategies and executing
transactions which will enhance Castles overall value. Mr. Mendelsohn
formerly served as Castles Chief Financial Officer. A successor for the
CFO position has not yet been named.
Legal Settlement-
HBII
In March 2008 HBII
settled its legal dispute with the current timeshare developer of the Hanalei
Bay Resort. As more fully set forth in Item 3 below, and in Notes 2 and 4 to
Castles consolidated financial statements, Hanalei Bay International Investors
(HBII) owed Castle $4,420,003 as of December 31, 2007. HBII intended to
pay that amount from its share of proceeds owed to it pursuant to an agreement
with Quintus (HBR), LLC (HBR). However, HBR disputed the amount that it
was indebted to HBII, and HBII filed a lawsuit to collect the amounts owed by
HBR. Subsequent to the date of this report, HBII and Quintus Resorts, LLC
(Quintus), the parent company of HBR, entered into a settlement to resolve the
litigation by Quintus issuing a twenty percent (19.9%) membership interest in
Quintus to HBII or its designee, which included a preferred return as to the
first $6.2 million of future distributions of available cash flow.
Quintus is the owner
of a timeshare resort project in Genoa, Nevada, near Lake Tahoe. Quintus
has not yet completed its financial statements for 2007 but estimates that its
net loss incurred in 2007 will eliminate all or virtually all of its net equity
as calculated according to generally accepted accounting principles.
Quintus believes that the fair market value of its assets on a going
concern basis exceeds its liabilities by approximately $15,000,000.
According to Quintus projections, Quintus is projecting cash flows of
over $40,000,000 from the sale of time share intervals and/or real property
interests in its timeshare resort project over the next ten to fifteen years.
Neither Quintus estimates as to the fair market value of its assets nor
its projections have been verified or reviewed by any independent third party.
For at least the next
two or three years, Quintus will be required to use all of its available cash
flow to pay down the substantial indebtedness it incurred in purchasing the
resort. Based on Quintuss financial projection, HBIIs management
believes that it is likely to receive in excess of $6,000,000 from its ownership
interest in Quintus and that it will utilize these funds to pay its indebtedness
to Castle. In that the distributions from HBII will likely not be realized
for a number of years and are subject to uncertainty and risks over which Castle
has no control, there can be no assurance that Castle will receive any
distributions from HBIIs ownership interest in Quintus within the next ten
years, if at all.
In light of
such uncertainties,
as required by Generally Accepted Accounting
Principles (GAAP) t
he Company has
established a reserve for uncollectible amounts. The Company recorded an
expense during 2007 for $954,459, and reduced additional paid in capital for
$3,315,002 in providing for the reserve. In the fourth quarter the Company
reversed $150,542 in accrued Interest Income earned on the Note during
2007.
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D.
SOURCES OF REVENUE AND FEE INCOME
Castle typically
provides all services necessary to operate a hotel or resort, including
management, sales, marketing, reservations, maintenance and accounting.
Castle and other hotel management companies usually manage hotels on a Net
Contract basis, that is, they receive a fee for their services based on a
percentage of the rental proceeds, and also usually receive an incentive
management fee based on the net operating profit generated by the hotel.
Under a typical Net Contract management contract, the owner of the hotel,
not the management company, is responsible for all expenses of operating the
hotel, such as staffing the front desk, housekeeping and guest services
departments. For Net Contracts, Castle records as Management and Services
Revenue only, the fees it receives for its services and is responsible for the
costs of performing those services, such as payroll costs for administration,
sales, marketing and reservation services.
Management companies
frequently manage resort condominiums under a Net Contract basis much like a
standard hotel management contract. However, a key aspect of Castles
corporate culture is to be flexible and responsive to the needs and goals of the
owners of the properties it manages. Accordingly, Castle manages some of its
resort condominium projects under a Gross Contract arrangement, whereby Castle
pays the owner a fixed percentage of revenues from the rental of the hotel or
condominium units. For these contracts, other than the owners percentage
of gross revenues, all revenue from the rental of rooms and ancillary services
is included in Castles gross income for financial reporting purposes, and is
noted as Revenues Attributed from Properties. Castle is then responsible
for paying the operating expenses of the property, such as staffing the front
desk, housekeeping and guest services departments, and the costs for
administration, sales, marketing and reservation services. Castles profit
under a Gross Contract agreement is the amount remaining after the payment of
the owners percentage of revenue and Castles expenses.
At the Spencer on
Byron Hotel, Castle leases the individual condominium units on a long term basis
and pays each owner a fixed lease payment. Castle records as Revenues
Attributed from Properties all of the proceeds from the rental of the
condominium units and the operation of the restaurant, bar and the provision of
other hotel services and is responsible for all of the operating expenses for
the hotel operation.
Some properties
contract with Castle to provide only select services, such as sales and
marketing or reservations or accounting. For these services, Castle
charges a fee for the services provided, and this revenue is accounted for and
is included in Management and Services Revenue.
E.
POTENTIAL CONFLICTS OF INTEREST
The potential exists
for a conflict of interest if Castle were to enter into any management or
similar contracts with a property in which an officer, director or significant
stockholder of Castle has a material financial interest. Although it is
possible that this might occur, management has no plans to enter into any such
contract with any property in which an officer, director or significant
stockholder of Castle has a material financial interest. In any such
situation, management will require that material terms and provisions of any
management contracts negotiated with affiliated entities to be no less favorable
than those that could have been negotiated at arms length.
Page 10
F.
COMPETITION AND COMPETITIVE POSITION IN THE INDUSTRY
The executive
officers and key employees of Castle possess substantial experience in the
hotel, resort and condominium management industry. Management believes
that Castles sales and marketing, central accounting and administrative support
services meet or exceed the level of such services provided by its competitors.
Management believes that Castle has a competitive advantage over its
principal competitors in that Castle focuses on providing cost effective
services, and is more flexible and responsive to the needs of the individual
owners of the properties it manages, than some of its competitors.
In order to
substantially increase its revenues and profits, Castle seeks to acquire
management contracts for additional properties. However, the management
and marketing of hotels and resorts is very competitive, particularly in Hawaii.
Castle competes with international, national, regional, and local
management companies, some of which have a larger network of locations, greater
financial resources, and brand name recognition. Some of Castles
competitors have greater financial resources and/or may be more willing to
assume risks inherent with making investments in properties and/or incurring
obligations, which Castle has not done historically. For these and
numerous other reasons, there is no assurance that Castle will be able to obtain
management contracts for additional properties on terms acceptable to
Castle.
G.
SOURCES AND PRINCIPAL SUPPLIERS
The principal sources
of the revenue generated by Castle for its clients and for itself are generated
through the on-line electronic distribution vendors, wholesalers, tour
operators, travel agents and Castles web site. Castle utilizes the major
electronic distribution vendors and has numerous tour operators and wholesalers
under contract. Castles contracts with these distribution channels give
these vendors the right to sell the hotel and resort rooms in properties managed
and/or marketed by Castle at rates that are typically less than full rack rates.
These contracts are non-exclusive and are typical of the industry.
Management believes, but no assurances can be given, that Castle will
continue to have access to such contracts and relationships on terms and
conditions satisfactory to Castle.
H.
DEPENDENCE ON ONE OR A FEW CUSTOMERS
Castles management
contracts vary in term from a few months to several years, and over its history
the Companys contracts have been renewed consistently for many years.
Pursuant to Hawaiis condominium law, all leases of property owned by the
Association of Apartment Owners (such as the front desk and other areas used in
the operation of a rental program) are terminable by the Association of
Apartment Owners on sixty days notice. This requirement extends to Castle
and all of its competitors operating in Hawaii. As a result of this
requirement and for competitive reasons, all of Castles management
contracts (except for the Spencer on Byron) contain terms, which provide for
cancellation or termination within one year or less. The loss of the property
wide management contract for one or more of the hotels or resorts managed by
Castle could have a significant adverse impact on Castles gross revenues and
earnings. Although management believes that the number of properties,
rooms and condominium units it manages will increase substantially over time, no
assurances can be given that the number of such properties, rooms and
condominium units will increase, and will not decrease in any quarter, year or
other period.
Page 11
I.
PATENTS, TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS,ROYALTY AGREEMENTS, AND
LABOR CONTRACTS
Castle does not have
any material patents, trademarks, licenses, franchises, concessions, or royalty
agreements, the loss or expiration of which would have a material adverse impact
on Castle.
At December 31, 2007,
employees at one of the smaller properties managed by Castle, which makes up
less than one percent of the total rooms represented, were subject to a union
labor contract.
J.
EFFECT OF EXISTING OR PROBABLE GOVERNMENTAL REGULATIONS
ON
THE BUSINESS
To the best of
managements knowledge, the products and services provided by Castle are not
subject to governmental approval except for health, liquor licensing, safety and
similar regulations of general applicability, which do not have a materially
adverse effect on its operations. The promulgation of new laws, rules or
regulations detrimental to the visitor industry (including, but not limited to
those, regulating wages, benefits, pricing, taxes and/or financing) could have a
substantial impact on Castles business and profitability. Management is not
presently aware of any proposed laws, rules or regulations which would have a
materially adverse effect on Castles business or profitability.
K.
COSTS AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS
To the best of
managements knowledge, Castle's products and services are not materially
affected by the presently existing environmental laws, rules and regulations.
Management believes that the regulations related to hazardous material and
waste disposal can be complied with by services provided by local governmental
agencies or numerous private contract suppliers. Castle is not aware of
any environmental claims pending or threatened against it, or against the owners
of the properties managed by Castle; however, no assurances can be given that
such a claim will not be asserted against Castle in the future, or that Castles
business or operations might not be affected by additional or amended
environmental laws, rules and/or regulations.
L.
RESEARCH AND DEVELOPMENT
Castle does not
engage in any significant research or development activities.
M.
EMPLOYEES
In the majority of
the properties managed by Castle, all of the property employees are employees of
Castle as agents for the owner, instead of being employed directly by the
property owner. As of December 31, 2007, Castle had approximately 795 full
time and 236 part time and casual employees. The number and categories in
which these employees serve may vary significantly from month to month,
depending on the season. Castle considers its relations with its
employees, and with employees of its clients whom it supervises to be
excellent.
N.
SEASONAL AND OTHER FLUCATIONS IN BUSINESS
Tourism in general is
seasonal, though to a lesser extent in the State of Hawaii, where tourism
represents one of the principal industries year round. Tourism in Hawaii
and Castles other markets
Page 12
is
also affected by fluctuations in the number and type of visitors to each of the
markets in which Castle has contracts with resort properties. Such
fluctuations affect occupancy, room rates or average daily rate (ADR), the
number of employees required for housekeeping other services, as well as
quarterly revenues, expenses and earnings.
The percentage of
Castles revenues and net profits earned in each quarter has varied
significantly from year to year in the past and is expected to vary
significantly from year to year in the future based on a number of factors which
are difficult to determine in advance. Consequently, no assurance can be
given that the percentages of revenue and net profits earned by Castle in any
quarter of 2007 or any other quarter or year will be a reliable indicator of the
revenues or net profits Castle will earn in any future quarter or year.
RISK
FACTORS
Our stock price
may be depressed and our common stock may be thinly traded.
On December 31, 2007,
the common stock of the Company began trading on the OTC Bulletin Board under
the symbol CAGU for the first time since 2000. Since the commencement of
trading, the stock has been very thinly traded. Prior to this our existing
stockholders have not had the opportunity to publicly sell the common stock they
own on a securities exchange or through a broker dealer since 2000. We
cannot assure you that these stockholders will not attempt to sell their
existing holdings at times or in such quantities or prices, that will not exceed
the demand for our common stock and/or which will not depress the market price
for our common stock. Our revenues, income, market capitalization and the
trading volume of our common stock may not be sufficient to induce securities
analysts to follow, analyze or recommend our stock or to induce or allow
institutional investors to purchase our common stock.
The following
factors, among others, may cause the market price to significantly increase or
decrease:
·
any projections of revenues or income which we announce and/or financial
research analysts estimates (if any) of our revenues or earnings may be
inaccurate;
·
our
annual or quarterly financial results may vary significantly from quarter to
quarter or from year to year, which variations may be greater than those of our
competitors;
·
conditions
in the general economy, or the vacation and property rental management or
leisure and travel industries in particular are subject to change for a variety
of reasons;
·
unfavorable
publicity about us or our industry; and
·
significant
price and volume volatility in the stock market in general for reasons unrelated
to us.
We may not be able
to successfully complete our planned expansion.
We intend to continue
to expand the markets we serve and to increase the number of properties we
manage both within our current markets and within other geographic areas weve
targeted. Expansion may occur in part, through the acquisition of
additional vacation rental and property management companies. We may also
make investments in or incur other obligations in connection with the
acquisition of management contracts for other properties. We cannot assure
you that we will
Page 13
be
able to identify, acquire or profitably manage additional properties or
businesses which we could profitably manage or successfully integrate acquired
properties or businesses into our existing operations without substantial costs,
delays or other operational or financial problems. It is possible that
competition may increase for properties or for companies that we might seek to
acquire. There may be fewer acquisition opportunities available to us than
we anticipate and/or less favorable terms or increased financial obligations,
expenses and/or risks than we anticipate.
We may also seek to
acquire management contracts, properties or companies in international locations
that may subject Castle to additional risks associated with doing business in
such countries. We continually review various strategic acquisition
opportunities and have held and continue to hold discussions with a number of
properties and/or companies, which are acquisition candidates.
Acquisitions of
properties or management companies also involve a number of special risks, which
could have a material adverse effect on our business and financial results.
These risks include but are not limited to the following:
·
failure of acquired properties or companies to
achieve expected financial results;
·
diversion
of managements attention;
·
failure
to retain key personnel;
·
amortization
of any acquired intangible assets;
·
increased
potential for customer dissatisfaction or performance problems of newly acquired
properties or companies which may adversely affect our reputation; and
·
fluctuations
in the value of the currencies of foreign countries in which we manage
properties are difficult or impossible to predict or hedge against and may
adversely affect our earnings and/or cause our earnings to vary significantly
from prior periods and are difficult to forecast.
We are unlikely to
collect the receivable owed to us by an affiliated company for at least several
years, if at all.
As more fully set
forth in Item 3 below, and in Notes 2 and 4 to Castles consolidated financial
statements, Hanalei Bay International Investors (HBII) owed Castle $4,420,003
as of December 31, 2007. HBII intended to pay that amount from its share
of proceeds owed to it pursuant to an agreement with Quintus (HBR), LLC (HBR).
However, HBR disputed the amount that it was indebted to HBII, and HBII
filed a lawsuit to collect the amounts owed by HBR. Subsequent to the date
of this report, HBII and Quintus Resorts, LLC (Quintus), the parent company of
HBR, entered into a settlement to resolve the litigation by Quintus issuing a
twenty percent (19.9%) membership interest in Quintus to HBII or its designee,
which included a preferred return as to the first $6.2 million of future
distributions of available cash flow.
Quintus is the owner
of a timeshare resort project in Genoa, Nevada, near Lake Tahoe. Quintus
has not yet completed its financial statements for 2007 but estimates that its
net loss incurred in 2007 will eliminate all or virtually all of its net equity
as calculated according to generally accepted accounting principles.
Quintus believes that the fair market value of its assets on a going
concern basis exceeds its liabilities by approximately $15,000,000; according to
Quintus projections, Quintus will earn up Quintus is projecting cash flows of
over $40,000,000 from the sale of time share intervals and/or real property
interests in its timeshare resort project over the next ten to fifteen years.
Neither Quintus estimates as to the fair market value of its assets nor
its projections have been verified or reviewed by any independent third
party.
Page 14
For at least the next
two or three years, Quintus will be required to use all of its available cash
flow to pay down the substantial indebtedness it incurred in purchasing the
resort. Based on Quintuss financial projection, HBIIs management
believes that it is likely to receive in excess of $6,000,000 from its ownership
interest in Quintus and that it will utilize these funds to pay its indebtedness
to Castle. In that the distributions from HBII will likely not be realized
for a number of years and are subject to uncertainty and risks over which Castle
has no control, there can be no assurance that Castle will receive any
distributions from HBIIs ownership interest in Quintus within the next ten
years, if at all.
In light of
such uncertainties,
as required by Generally Accepted Accounting
Principles (GAAP) t
he Company has
established a reserve for uncollectible amounts. The Company recorded an
expense during 2007 for $954,459, and reduced additional paid in capital for
$3,315,002 in providing for the reserve. In the fourth quarter the Company
reversed $150,542 in accrued Interest Income earned on the Note during
2007.
Our business may
be negatively affected if we are unable to manage our growth effectively.
We plan to continue
to grow internally and through the acquisition of additional management
contracts and/or companies. We will continue to expend significant time
and resources in expanding the existing operating companies and in identifying,
completing and integrating acquisitions. We cannot assure you that our
systems, procedures and controls will be adequate to support our operations as
they expand. Any future growth also will impose significant added
responsibilities on members of senior management, including the need to
identify, recruit and integrate new managers and executives. We cannot assure
you that we will be able to identify and retain such additional management.
If we are unable to manage our growth efficiently and effectively, or we
are unable to attract and retain additional qualified management, it could have
a material adverse effect on our business and financial results.
Business and
financial results depend upon factors that affect the vacation rental and
property management industries.
Factors such as the
following could have a negative impact on our business and financial results
·
changes
in general economic conditions, including the prospects for improved performance
in other parts of the world;
·
impact
of war and terrorist activity (including threatened terrorist activity) and
heightened travel security measures instituted in response thereto;
·
travelers
fears of exposures to contagious diseases;
·
domestic
and international political and geopolitical conditions;
·
a
downturn in the leisure and tourism industry;
·
decreases
in the demand for hotel rooms and/or vacation properties in the areas we serve
and related lodging services, including a reduction in business and leisure
travel as a result of general economic conditions;
·
reduction
in the demand and adverse changes in travel and vacation patterns
·
an
interruption of airline service, and/or the financial condition of the airline
industry and the impact on air travel; and,
·
adverse
weather conditions or natural disasters, such as hurricanes, tidal waves or
tornados,
Page 15
·
and/or
events such as terrorist attacks or outbreaks of disease, or the threats
thereof, which cause potential customers to cancel their vacation or travel
plans.
Our business and
operating results are seasonal.
The travel and
hospitality business is seasonal. Our financial results have been and will
continue to be subject to quarterly fluctuations caused primarily by the
combination of seasonal variations and our revenue recognition policies.
Our quarterly financial results may also be subject to fluctuations as a
result of the timing and cost of acquisitions, changes in relationships with
travel providers, extreme weather conditions or other factors affecting leisure
travel, and the vacation rental and property management industry.
Unexpected variations in our quarterly financial results could adversely
affect the price of our common stock.
The market for
leisure and vacation many not continue to grow.
Although travel and
tourism expenditures have generally increased over the years, there have been,
and there may be, years in which spending has or will declined. We cannot
assure you that we or the total market for hotel rooms and vacation property
rentals in the areas we serve will continue to experience growth. Factors
affecting our ability to continue to experience internal growth include our
ability to:
·
maintain
existing relationships with property owners;
·
expand
the number of properties under management;
·
increase
rental rates and/or occupancy; and
·
sustain
continued demand for our rental inventory.
Our operations are
geographically concentrated in four areas.
We manage properties
that are significantly concentrated in Hawaii, New Zealand, Thailand and
Micronesia (Guam and Saipan). Adverse events or conditions which affect these
areas in particular, such as economic recession, changes in regional travel
patterns, extreme weather conditions or natural disasters, would have a more
significant adverse effect on our operations than if our operations were more
geographically diverse.
Page 16
Our
business depends on attracting and retaining highly capable management and
employees.
Our business
substantially depends on the efforts and relationships of our senior management,
and we will likely be dependent on senior management for obtaining management
contracts for additional properties or businesses acquired in the future.
If any of our senior managers becomes unable or unwilling to continue in
his or her role, or if we are unable to attract and retain other qualified
employees, it could have a material adverse effect on our business and financial
results. Although we have entered into long term employment agreements
with our two principal executive officers, we cannot assure you that either
these individuals or other members of senior management will continue in his or
her present capacity for any particular period of time.
Renewal of the
Companys management contracts is important to the success of our business.
Castles management
contracts vary in term from a few months to several years and over its history
Castles contracts have been renewed consistently for many years (see the table
entitled Portfolio of Properties under Management in Item 1B above).
Pursuant to Hawaii's condominium law, all leases of property owned by the
Association of Apartment Owners (such as the front desk and other areas used in
the operation of a rental program) are cancelable by the Association of
Apartment Owners on sixty days notice. This requirement extends to Castle and
all of its competitors operating in Hawaii. As a result of this
requirement and for competitive reasons, most of Castles management contracts
contain terms, which provide for cancellation or termination within one year or
less. The loss of the property wide management contract for one or more of the
hotels or resorts managed by Castle could have a significant adverse impact on
Castles gross revenues and earnings. Although management believes that
the number of properties, rooms and condominium units it manages will increase
substantially over time, no assurances can be given that the number of such
properties, rooms and condominium units will increase and not decrease in any
quarter, year or other period. There can be no assurances that Castle will
be able to keep its current portfolio of property contracts, or that Castle
would be able to replace any contracts terminated by the property owners.
Our services may
be rendered uncompetitive.
The vacation rental
and property management industry is highly competitive and has low barriers to
entry. The industry has two distinct customer groups -- vacation property
renters and vacation property owners. We compete for vacation property owners
primarily (but not exclusively), with regional and local vacation rental and
property management companies located in our markets. Some of these competitors
are affiliated with the owners or operators of resorts where these competitors
provide their services. Certain of these competitors may have lower cost
structures and/or may provide their services at lower rates. We compete
for vacation property renters and owners with local competitors (including
owners of similar properties who manage the units themselves or through a
realtor or other management company) who may have lower cost structures and/or
may be willing to rent their units at lower rates than we can afford. We
also compete for vacation property renters and for vacation property owners with
regional, national and international management companies who have more
recognizable brand names, larger marketing budgets and have advantages of
marketing programs and relationships which are not available to us.
ITEM 2.
DESCRIPTION OF PROPERTY
Castle leases office
space for its principal executive offices. The current lease is for the period
from
Page 17
November
1, 2006, through October 31, 2008, at a monthly rental cost that averages $6,992
per month, plus the cost of common area maintenance. Castle has an option
to renew the lease for an additional five years at the then prevailing rental
rates.
On February 1, 2006,
Castle leased additional office space. The lease covers the period from
February 1, 2006, through February 28, 2008, at a monthly rental cost of $6,200
per month, plus the cost of common areas maintenance. In 2008, the Company
extended the lease of this office through February 28, 2011.
In July, 2001, Castle
entered into lease agreements (in lieu of a traditional management agreements)
with each of the owners of approximately 250 investment units the Spencer on
Byron condominium project for the purpose of having those units be part of the
rental program at the Spencer on Byron Hotel. The leases are for a period
of ten years expiring on July 18, 2011, and Castle has the option to extend
these leases for an additional 20 years. Monthly lease rent through 2011
is calculated as a percentage of the purchase price paid by the original owner
of each condominium.
On December 24, 2004,
the Company, through its wholly owned subsidiary NZ Castle Resorts and Hotels
Limited, entered into an agreement to purchase all of the shares of Mocles
Holdings Limited (Mocles), a New Zealand Corporation. Following are the
significant provisions of this agreement (with modifications according to a
Deed of Variation dated April 15, 2005):
·
Mocles
owns the Podium levels (Podium) of the Spencer on Byron Hotel in Auckland, New
Zealand.
·
The
purchase price for Mocles was $7,455,213 (NZ$10,367,048), net of imputed
interest $1,164,699 (NZ$1,632,952). The face value of the purchase price was
$8,619,912 (NZ$12,000,000).
·
The
purchase price is to be paid as follows:
1.
Partial
assignment of the Companys receivables from Hanalei Bay International Investors
(HBII) in the amount of US$3,018,000. In the event that this amount is not
realized from HBII, the Company is obligated to make up the difference by
December 24, 2009. This date was subsequently extended until December 24, 2010.
2.
Monthly
payments of the greater of NZ$20,000 (US$15,504), or Surplus Profits defined as
50% of net profits calculated in accordance with New Zealands Generally
Accepted Accounting Principles or International Reporting Standards.
3.
The
remaining balance is due December 24, 2009. Pursuant to an extension agreement
signed in March 2008. If the Company is current with its other
obligations as set forth herein, the remaining balance will be due on December
24, 2010. Further, if the Company is current with its other obligations as
set forth herein and has paid not less than $7,183,260 toward the purchase price
an additional six month extension is available.
4.
As a
result of the settlement between Quintus Resorts, LLC described in Item 1C
Subsequent Events above, it is unlikely that any proceeds will be received from
HBII prior to December 24, 2010. This will likely require Castle to pay
the full amount owed in connection with the purchase of Mocles from borrowed
funds and/or its available cash at that time.
5.
The
Company may pursue refinancing of this debt at some point prior to the due date
using real estate based mortgage obligations or other financing.
·
At
the time of purchase, Mocles had additional debts, namely:
1.
Bank
Mortgage There is $2,273,502 payable to a bank which is secured by the Podium.
The liability to the bank must be refinanced, paid in full, or
renegotiated to the extent that the current guarantors are released from all
obligations associated therewith, by December 31, 2009.
2.
Advances
from parties heretofore related to Mocles in the amount of $1,509,768. The
entire amount is due and payable by December 31, 2010. There is no
interest associated with this liability.
·
The
purchase price is deemed to be satisfied in part by NZ Castle procuring
repayment of Mocles additional debts. After NZ Castle has procured
repayment of the additional debts by or on behalf of Mocles, the total payable
to the seller of the Mocles shares under 1 and 2 above is $4,836,642.
·
Mocles
shares are being held legally by the seller of such shares until such time as
all obligations associated with this transaction are satisfied.
Page 18
·
An
amount equal to the interest payable by Mocles to the bank is to be paid
annually into Mocles by the Company as rental for the Podium.
·
A
replacement fund is to be established from 50% of the net profits from the
operation of the Podium, until such time as there is NZ$175,000 (US$135,660)
regularly available for the replacement of furniture, fixtures and equipment
installed in the Podium. The fund must be expended and cannot be
accumulated.
ITEM 3. LEGAL
PROCEEDINGS
As more fully set
forth in Item 3 below, and in Notes 2 and 4 to Castles consolidated financial
statements, Hanalei Bay International Investors (HBII) owed Castle $4,420,003
as of December 31, 2007. HBII intended to pay that amount from its share
of proceeds owed to it pursuant to an agreement with Quintus (HBR), LLC (HBR).
However, HBR disputed the amount that it was indebted to HBII, and HBII
filed a lawsuit to collect the amounts owed by HBR. Subsequent to the date
of this report, HBII and Quintus Resorts, LLC (Quintus), the parent company of
HBR, entered into a settlement to resolve the litigation by Quintus issuing a
twenty percent (19.9%) membership interest in Quintus to HBII or its designee,
which included a preferred return as to the first $6.2 million of future
distributions of available cash flow.
Quintus is the owner
of a timeshare resort project in Genoa, Nevada, near Lake Tahoe. Quintus
has not yet completed its financial statements for 2007 but estimates that its
net loss incurred in 2007 will
Page 19
eliminate
all or virtually all of its net equity as calculated according to generally
accepted accounting principles. Quintus believes that the fair market
value of its assets on a going concern basis exceeds its liabilities by
approximately $15,000,000; according to Quintus projections, Quintus is
projecting cash flows of over $40,000,000 from the sale of time share intervals
and/or real property interests in its timeshare resort project over the next ten
to fifteen years. Neither Quintus estimates as to the fair market value
of its assets nor its projections have been verified or reviewed by any
independent third party.
For at least the next
two or three years, Quintus will be required to use all of its available cash
flow to pay down the substantial indebtedness it incurred in purchasing the
resort. Based on Quintuss financial projection, HBIIs management
believes that it is likely to receive in excess of $6,000,000 from its ownership
interest in Quintus and that it will utilize these funds to pay its indebtedness
to Castle. In that the distributions from HBII will likely not be realized
for a number of years and are subject to uncertainty and risks over which Castle
has no control, there can be no assurance that Castle will receive any
distributions from HBIIs ownership interest in Quintus within the next ten
years, if at all.
In light of
such uncertainties,
as required by Generally Accepted Accounting
Principles (GAAP) t
he Company has
established a reserve for uncollectible amounts. The Company recorded an
expense during 2007 for $954,459, and reduced additional paid in capital for
$3,315,002 in providing for the reserve. In the fourth quarter the Company
reversed $150,542 in accrued Interest Income earned on the Note during
2007.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was
submitted to a vote of the security holders of record during 2007.
PART
II
ITEM 5.
MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET
INFORMATION
Castles common stock
was approved for trading on the OTC Bulletin Board on December 27, 2007 under
the trading symbol CAGU. During 2007, the stock traded for only one day,
on December 31, 2007 and its closing price on that day was $1.01 per share.
Prior to that time it traded sporadically on the pink sheets. The OTC Bulletin
Board is an over the counter market quotation system and as such, all stock
prices reflect as noted by the system are inter-dealer prices, without retail
mark-up, mark-down or commissions and may not represent actual transactions.
Page 20
Price
Range of Common Stock
The price range per
share of common stock presented below represents the highest and lowest sales
prices for the Company's common stock on OTC Bulletin Board during each quarter
of the two most recent fiscal years.
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Fourth Quarter
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Third Quarter
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Second Quarter
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First Quarter
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Fiscal 2007 price range per common share
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HOLDERS
There were
approximately 280 owners of record of Castles common stock as of March 31,
2008.
DIVIDENDS
Castle has not paid
any dividends with respect to its common stock, and does not intend to pay
dividends on its common stock in the foreseeable future. As more fully
described in Note 7 to Castles consolidated financial statements included
herein, in 1999 and 2000, the Company issued a total of 11,050 shares of $100
par value redeemable preferred stock. Dividends are cumulative from the
date of original issue and are payable semi-annually, when, and if declared by
the board of directors beginning July 15, 1999, at a rate of $7.50 per annum,
per share. At December 31, 2007, undeclared and unpaid dividends on these
shares totaled $704,233 or $63.73 per preferred share. These dividends are
not accrued as a liability, since no dividends have been declared. Castle
cannot pay dividends on its common stock until it declares and pays the
dividends on its preferred stock. It is the present intention of
management to utilize all available funds for the development and expansion of
Castles business, rather than for common stock dividend payments.
Castle does not have
a stock option or other equity compensation plan in place at this time.
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Castle does not have
any equity compensation plans and as such no securities have been authorized for
issuance subject to such a plan.
Recent Sales of
Unregistered Securities
During the last three
years, we issued the following unregistered securities:
During the year ended
December 31, 2005, Castle issued 100,000 shares of common stock that were
restricted securities as defined in Rule 144 of the Securities and Exchange
Commission as compensation to an unrelated party for services that had been
rendered for $2,000. This value approximated the fair value of the services that
were rendered, as well as the fair value of the shares on the issuance date
given the stocks trading range in the prior six months.
Castle issued all of
these securities to persons who were accredited investors or sophisticated
investors, as those terms are defined in Regulation D of the Securities and
Exchange Commission; and each such person had prior access to all material
information about us. We believe that the offer and sale of these
securities were exempt from the registration requirements of the Securities Act
of
Page 21
1933,
as amended (the Securities Act), pursuant to Sections 4(2) and 4(6) thereof,
and Rule 506 of Regulation D of the Securities and Exchange Commission. Sales to
accredited investors are preempted from state regulation.
During 2006, Castle
voided 900,000 shares of common stock. The shares were issued as part of a
compromise agreement reached in 2001 with the developer of a hotel that Castle
previously leased. As a result of a final settlement agreement occurring in
2007, between Castle and the hotel developer, the compromise agreement signed in
2001 was rescinded, and therefore, Castle voided the 900,000 shares that were
previously issued.
During 2007 there
were no issuances of unregistered securities.
Use of Proceeds of
Registered Securities
There were no
proceeds received by Castle from the sale of registered securities during the 12
months ending December 31, 2007.
Purchases of
Equity Securities by Us and Affiliated Purchasers
There were no
Purchases of Equity Securities or Affiliated Purchasers during the 12 months
ending December 31, 2007.
Smaller Reporting
Company
Regulation S-K of the
Securities and Exchange Commission defines the information and financial
requirements of a Smaller Reporting Company, defined to be an issuer that has
a public float of less than $75 million as of the last business day of its most
recently completed second fiscal quarter. We are deemed to be a Smaller
Reporting Company.
The Securities and
Exchange Commission, state securities commissions and the North American
Securities Administrators Association, Inc. (NASAA) have expressed an interest
in adopting policies that will streamline the registration process and make it
easier for a smaller reporting company to have access to the public capital
markets.
ITEM 6.
MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements
contained in Managements Discussion and Analysis of Financial Condition and
Results of Operations and Plan of Operations including statements regarding
the anticipated development and expansion of Castles business, the intent,
belief or current expectations of the performance of Castle, 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
Managements Discussion and Analysis of Financial Condition and Results of
Operations and Plan of Operations.
Page 22
Factors that may
affect forward- looking statements include a wide range of factors that could
materially affect future developments and performance, including the
following:
Changes in company-wide strategies, which may result in
changes in the types or mix of businesses in which Castle is involved or chooses
to invest; changes in U.S., global or regional economic conditions, changes in
U.S. and global financial and equity markets, including significant interest
rate fluctuations, which may impede Castles access to, or increase the cost of,
external financing for its operations and investments; increased competitive
pressures, both domestically and internationally, legal and regulatory
developments, such as regulatory actions affecting environmental activities, the
imposition by foreign countries of trade restrictions and changes in
international tax laws or currency controls; adverse weather conditions or
natural disasters, such as hurricanes and earthquakes, labor disputes, which may
lead to increased costs or disruption of operations. This list of factors
that may affect future performance and the accuracy of forward-looking
statements are illustrative, but by no means exhaustive. Accordingly, all
forward-looking statements should be evaluated with the understanding of their
inherent uncertainty.
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
General
Castle is a
hospitality and hotel management company that prides itself on its ability to be
both Flexible and Focused, the Companys operations motto. Flexible, to
meet the specific needs of property owners and condo owners at the properties
that it manages; Focused, in its efforts to achieve enhanced rental income and
profitability for those owners. Castle earns its revenues by providing
several types of services to property owners including, hotel and resort
management and operations; reservations staffing and operations; sales and
marketing; and accounting. In addition, Castle provides design services to
properties that are furnishing, refurnishing or remodeling, as well as,
pre-opening technical services for new hotel and resort properties being planned
or under construction. Castles revenues are derived primarily from two sources:
(1) the rental of hotel rooms and condominium accommodations; and food and
beverage sales at the properties it manages and; (2) fees paid for services it
provides to property owners. Castle also derives revenues from commissions
and incentive payments, based on sales and performance criteria at each
property.
Corporate
Culture
Castles corporate
culture has been internally branded as
F & F
, which means
Flexibility and Focus.
The organization and infrastructure
is solid; and designed for maximum flexibility to react to any and all
marketplace dynamics; while at the same time, allowing us to remain focused on
our objectives and overall strategy without losing focus or perspective.
Castles marketing
efforts are focused toward potential guests for those properties that Castle
manages. Castle does not own any hotels or resorts of its own; however it has
made an investment in the property that it manages in New Zealand.
Marketing is done through a variety of distribution channels including
direct Internet sales, wholesalers, online and traditional travel agencies and
group tour operators. Recently, Castle has expanded its sales and
marketing staff and implemented a redesign of its interactive web site
(www.Castleresorts.com). Unlike many other hotel and resort operators,
Castle does not market the properties it manages under the Castle brand.
Instead of emphasizing the Flag or chain name, the
Page 23
Companys strategy
is to promote the name and reputation of the individual properties under
management. Castle believes that this allows the consumer to better choose the
specific type of vacation experience desired based upon the specific attributes
of the property selected.
Marketing
Strategy
Most of our marketing
efforts are focused towards acquiring and retaining guests for the properties we
manage. Castle does not own any hotels or resorts; however, it has made an
investment in the property that it manages in New Zealand. Marketing is done
through a variety of distribution channels including direct Internet sales,
wholesalers, online and traditional travel agencies and group tour operators.
Recently, Castle has expanded its sales and marketing staff and
implemented a redesign of its interactive web site (www.Castleresorts.com).
Unlike many other hotel and resort operators, we do not market the
properties we manage under the Castle brand. Instead of emphasizing the Flag
or chain name, Castles strategy is to promote the name and reputation of the
individual properties under management. We believe that this allows the
consumer to better choose the specific type of vacation experience desired based
upon the specific attributes of the property selected.
We recently launched
our redesigned website which has a customized proprietary booking engine and
intuitive functionality, that we believe sets us apart from our
competitors. Our website (CastleResorts.com) offers state-of-the-art
functionalities, user-friendly navigation, interactive features and rich
content, while offering attractive rates and a travel booking engine that can
handle rate conversions for over 100 foreign currencies. Castles proprietary
online booking engine supports a dynamic pricing model which maximizes revenues
for all of our properties under management. We intend to continue to
invest in optimizing our on-line presence directed specifically towards our own
website, since revenue derived through our own branded website yields a higher
margin utilizing retail rates.
Castle supports its
online presence with its own full service, 7 day a week reservation call center
that provides a wide range of services from tour reservation processing and
rooms control, to handling group bookings. The reservation center
electronically connects resort property inventory and rates to the four major
Global Distribution Systems (GDS). This connectivity displays rates and
inventory of Castles properties to over 500,000 travel agents worldwide as well
as Internet connectivity to over 1,200 travel websites worldwide.
For customer
convenience, we offer direct to consumer online booking reservations of guest
rooms at resort and condominium properties under contract and also vacation
packages with attractions and activities related to our hotels and condominiums
through Castles interactive web site at www.CastleResorts.com.
Diversity
Castle has a diverse
portfolio of properties located in desired island resort destinations throughout
the Pacific Region and beyond. We represent 26 hotels, resort
condominiums, luxury villas and lodging accommodations throughout Hawaii,
Micronesia, New Zealand and Thailand.
In Hawaii, Castle is
the only lodging chain that represents properties on the five major Hawaiian
Islands of Oahu/Waikiki, Maui, Kauai, Molokai and Hawaii, which allows customers
the option to
Page 24
island-hop,
and provides Castle cross-selling opportunities. Our Honolulu headquarters
serves as the epicenter for international operations in Saipan, Guam, New
Zealand and in Thailand, and positions us for expansion in Southeast Asia as
well as throughout the Pacific. Our diverse destinations offer customers
the opportunity to discover new experiences and varying cultures.
Castle offers a wide
range of accommodations at various price points from exclusive private villas,
full-service all-suites hotels, oceanfront resort condominiums, to modestly
priced hotels with up to 600 guest rooms. Our collection of all-suites
condominium resorts, hotels, villas, lodges and vacation rentals allows
customers to select the best accommodation to suit their individual style and
budget.
Our ability to
deliver consistent financial returns to our property owners demonstrates
Castles competency in managing and marketing a wide range of accommodations to
our customers via multiple channels of distribution.
Brand
Strategy
Each property Castle
manages is individually branded in order to extract maximum value from its
strengths. The Castle brand stays in the background and our focus is on
marketing the uniqueness of each property, while satisfying the needs and
expectations of our owners. Each property we manage maintains its own
brand identity and personality, while utilizing the Castle advantage of our
powerful marketing resources, channel distribution, resort management expertise,
industry partnerships and networks.
Castles brand
strategy is one of the areas that clearly differentiate us from the high profile
branded hospitality companies. When a hotel owner or developer is
considering contracting a large worldwide hospitality company for possible hotel
management, there are several considerations that must be assessed. With major
worldwide brands, usually come the high costs that the owner must bear to
sustain the expensive marketing and operational expense that the brand demands
to offset their marketing costs. There are also some tangible differences
from the guests or customers perspective as well. At Castle, we believe
that one size does not fit all.
Castle markets each
property with its own independent brand identity and deploys customized
marketing programs to fit the specific demographics attracted to each of our
properties. Through our brand building efforts, we begin the process of
positioning each of our resort brands to our key market segments, niche targeted
customers and distribution channels.
We also do not flag
our properties with the Castle name. The advantages of doing so are
several. There is a high demand for the independent smaller boutique hotels and
condominiums, as travelers favor a more individualized and unique travel
experience. This ongoing trend towards smaller, independent hotels, as
opposed to the familiar mid-range chains, is not only occurring in Hawaii, but
seen throughout the world tourism marketplace. This increased demand is
fueled by the following travelers expectations:
·
Seeking
personalized recognition, attention, and service.
·
Desiring
hotel and condominium accommodations that impart a sense of place and provides a
unique guest experience.
·
Demanding
quality and personalized service, which creates high retention and repeat
customers.
Page 25
Marketing
Programs and Promotions
Castle has
implemented numerous marketing programs and promotions directed towards both the
consumer and trade markets to generate incremental revenue and market loyalty
for the individual properties. We have developed a wide range of programs
designed specifically to reflect the unique attributes of each of our resort
properties, while providing various incentives. At any given time, we may have
up to 50 ongoing marketing programs and promotions in place, some of which are
seasonal to drive incremental room night revenues during valley or shoulder
periods and some of which are ongoing throughout the year. Below is a
sampling of several ongoing marketing programs and promotions currently in
place:
Castles Best Rate
Guarantee:
The Castle Best Rate Guarantee program is a signature Castle
program which assures customers they will always be guaranteed the best pricing
via the Internet. This ensures that our distribution partners,
particularly the online travel agencies, do not undercut our retail pricing in
the marketplace. If qualified, the customer receives the best rate
along with a category upgrade, late checkout privileges, and other benefits such
as waiving the full advance payment and the ability to modify or cancel without
penalty.
Castle
Advantage:
The Castle Advantage program provides those aged 50 years and up,
special discounted programs and rates. Baby boomers enjoy traveling and
are an excellent target audience, as they have both the time and money to
explore the type of destination experiences Castle offers.
Tanks Hawaii:
Local resident business is pursued year-round, particularly during the
slower seasons when inbound travel slows and rooms are more readily available at
discounted rates. Each destination actively targets this market whether in
Guam, New Zealand for holiday periods or year-round in Hawaii. The benefit
to Castle is that the local residents will recommend Castle to incoming friends,
family and business associates in the destinations that Castle serves. In
Hawaii, the seasonal Tanks Hawaii program is offered, which includes
accommodations at a preferred Castle property, rental car and a free tank of
gas.
We also have
specialized marketing packages aimed at specific audiences such as our frequent
flyer programs with Hawaiian Airlines, Aloha Airlines and Japan Airlines.
Mileage points are awarded for stays at Castle properties and additional
promotional opportunities are provided by these select airlines. Additionally,
we offer benefits programs and discounts targeted towards the baby boomers
known as the new seniors for those aged 50 years and up; the military,
government employees, business travelers, industry personnel and membership
organizations, Castle provides bonus incentives to travel agents for referrals,
industry discounts to airline employees and travel agents, and specially
discounted rates are offered to members of clubs and associations with thousands
of members such as AAA, Entertainment and Quest, to name a few.
Guest Relations
and Quality Assurance
Rather than a generic
approach to the guest experience, Castle provides customized guest relations
programs that focus on the uniqueness of each resort property and the host
culture. Each aspect of the guest touch points is given careful consideration
from the welcome through to the farewell, as well as the in-room experience.
Castles Guest Relations Committee along with the feedback from each
properties staff and owners, customizes the program; establishes standards;
provides staff training;
Page 26
conducts
periodic inspections and on-going basis reviews; all of which evolves the
program for continual improvement. This effort is driven from within our
operations team and the primary objective is to positively differentiate the
Castle guests experience, from its competitors. Castles quality assurance
program helps monitor and ensure that we deliver the highest level of service.
Our guest satisfaction program gives us the feedback from the guests
perspective, which is reflected in our hospitality report card. Utilizing
a third-party research and polling firm, we are able to benchmark our service
levels and compare them to Castles aggregate. We share the quarterly
reports with our owners and use this quantifiable data to help us determine what
areas we are doing well in and what areas need attention. This guest
satisfaction program is tied into the general managers responsibilities and
bonus plan. As a hotel management company, our guest satisfaction is our
highest priority and focus, alongside with our owners satisfaction and
favorable financial returns.
Growth
Strategy
The majority of the
properties presently managed by Castle are located within the state of Hawaii.
In addition, Castle manages properties in New Zealand, Guam, Micronesia,
and most recently in Thailand. We believe that there are significant
opportunities to expand Castles operations both in the markets it currently
serves, as well as other Pacific Basin and Asian vacation destinations including
Vietnam. Consequently over the last several quarters we have announced new
key management appointments and promotions as part of our strategic plan to
position Castle for significant growth within our current markets and to
capitalize on the emerging growth opportunities particularly within the Asian
markets. In 2007, Castle formed its Thailand division to support its new
business initiatives in Thailand.
Also as a part of our
growth initiatives, we have formed an experienced acquisition team and have
engaged in strategic alliances with various hospitality development companies
and prominent investment banks, who wish to team up with us in pursuing growth
opportunities within our key targeted markets
.
Significant
opportunities for Castle to obtain additional contracts within the State of
Hawaii are also available to us due to a myriad of factors that include sales of
properties, foreclosures, underperformance, and dissatisfaction with the current
management of our competitors.
As part of Castles
strategies to secure long term, multi- year management contracts, from time to
time, we have found it advantageous to purchase or lease selected real property
within a resort or condominium project. This occurred in 2004, when
Castles wholly owned subsidiary, NZ Castle Resorts and Hotels Limited, entered
into an agreement to purchase all of the shares of Mocles Holdings Limited
(Mocles), a New Zealand Corporation. Mocles owns the Podium levels
(Podium) of the Spencer on Byron Hotel in Auckland, New Zealand, which
includes the front desk, restaurant, bar, ballroom, board room, conference
rooms, back of the house facilities and other areas necessary for the hotels
operation. Through our ownership of the Podium and a multi-year management
contract for the Spencer on Byron hotel, Castle is assured of ongoing revenues
in future years from this property.
RESULTS OF
OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2007 and 2006
The financial
statements presented for the year ended December 31, 2006 have been adjusted to
reflect a change in the accounting methodology which the Company has adopted.
The Company
Page 27
previously
recorded Management and Service Fees from its properties that were operated
under a Gross Contract as described above, and an offsetting amount was recorded
as an expense under Property operating expenses. The Company adopted a
change in the accounting for these fees and expenses, and the financial
statements for the year ended December 31, 2006 have been adjusted by reducing
both Management & Service revenues and Payroll & Office Expense by
$1,566,171, which reflects the amount of Management & Service fees that were
recorded for properties operated under a Gross Contact.
The Company believes
that this method properly allocates the corporate office overhead costs to the
Gross Contract properties. Corporate overhead costs for management, sales &
marketing, reservations and accounting expenses are allocated to the properties
operated under a Gross contract, providing a more accurate measurement of the
profitability of these contracts since the associated expenses of operations
will be properly matched with the revenues produced by the property operation.
The adjustment did
not affect net income, operating income, EBITDA or any balance sheet accounts.
Revenues
For the years ended
December 31, 2007 and 2006, Castle had total revenues of $21,026,079 and
$19,505,585 respectively, representing an increase of $1,520,494 or 8% in
2007 as compared to 2006. This increase in revenue includes a $1.1 million or 6%
increase in Revenues Attributed from Properties i.e. Gross Contracts. The
increase is primarily a result of $1.1 million from changes in the exchange rate
between the US and New Zealand Dollar for revenues recognized from the Spencer
on Byron hotel in New Zealand. In addition, Management and Service
revenues increased by $385,507 or 21% between 2006 and 2007 primarily as a
result of revenues recognized during 2007 for the new contracts that Castle
signed in mid 2007.
Costs and
Expenses
Total operating
expenses were $21,972,232 and $18,437,851 for the years ended December 31, 2007
and 2006 representing a year over year increase of $3,534,380 or 19%.
Property Expenses increased $1.3 million for Gross Contracts which was
primarily caused by the fluctuation in exchange rate between the US dollar and
the New Zealand dollar during 2007 as compared to 2006. In addition,
payroll and office expenses increased by $555,013, or 33% as the Company
increased staffing and administrative services to accommodate the additional
property management contracts signed in 2007 and to enhance its reservations and
technology platform. Further, the Company incurred additional expenses of
$681,137 primarily relating to two strategic initiatives during 2007. First, the
Company incurred travel, legal and administrative costs related to establishing
a subsidiary operating company in Thailand. This effort was successful in that
the Company signed contracts with and began to operate under contract with the
Katamanda Villas in Phuket Thailand in October 2007 and the Baan Talig Nam in
Koh Samui Thailand in December 2007. The Company expects revenues and
profits from these and additional contracts in Thailand in the coming years to
far exceed the start up costs incurred in 2007. Secondly, the Company incurred
legal, consulting, accounting, and related costs associated with bringing
the Companys SEC filings current which allowed the Companys common stock to
begin actively trading. This effort was successful in that the stock
was
Page 28
approved
for trading on December 27, 2007. The Company believes that this
initiative will allow the Companys shareholders additional visibility into the
Companys operations, strategies and over time increase the value and liquidity
of the common stock. In addition, the Company recognized an expense of
$954,459
as part of an
adjustment in the carrying value of the receivable from HBII as a result of the
settlement of legal matters between the current timeshare developers of
Hanalei Bay Resort and HBII. (See notes 2 and 4 to the
Companys financial statements)
The following table
summarizes the revenues and operating expenses for the calendar years 2007 and
2006:
|
|
|
|
|
|
|
|
|
|
THE CASTLE GROUP, INC.
STATEMENT OF OPERATIONS
|
|
(In Thousands)
|
Revenues:
|
|
|
|
|
Revenue Attributed from Properties
|
$
|
18,408
|
$
|
17,315
|
Management services and other income
|
|
2,618
|
|
2,191
|
Total Revenues
|
|
21,026
|
|
19,506
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
Property operating expenses
|
|
17,354
|
|
16,023
|
Payroll & Office Expenses
|
|
2,239
|
|
1,684
|
Administrative & General Expenses
|
|
2,171
|
|
535
|
Total Operating Expenses for EBITDA purposes
|
|
21,764
|
|
18,242
|
EBITDA(1)
|
$
|
(738)
|
$
|
1,264
|
Depreciation
|
|
208
|
|
196
|
Net interest expense
|
|
542
|
|
338
|
Income Taxes
|
|
(371)
|
|
358
|
Net Income (Loss)
|
$
|
(1,117)
|
$
|
372
|
|
|
|
|
|
Foreign Currency Adjustments
|
|
221
|
|
(34)
|
Total Comprehensive Income
|
$
|
(896)
|
$
|
338
|
(1)
EBITDA - Earnings before interest, income taxes,
depreciation, income taxes, and amortization
For the year 2007 as
compared to 2006, Total Revenues attributed from Properties increased by
$1,092,674 or 6%. Castles New Zealand operation provided $820,063 of this
increase as measured in US Dollars. The effect of the change in exchange
rates experienced between 2006 and 2007 resulted in an increase in year over
year revenues from the New Zealand operations of $1,099,504 as measured in US
dollars. Revenues attributed from properties in Hawaii increased by
$272,611 in 2007 as compared to 2006 as revenues from properties added late in
2006 were recognized for the full year in 2007.
Comparing 2007 to
2006, property expenses increased by $1,331,110, or 8% as Castles New Zealand
operation experienced a $1,031,904, or 13% increase in operating expenses as
measured in US Dollars. Without the effect of the strengthening of the New
Zealand Dollar, Property Expenses at the New Zealand operation would have
decreased by $66,584 a result of slightly fewer guest stays during 2007 as
compared to 2006. Property expenses in Hawaii increased by $299,206 due to
the costs of managing two of the twenty properties in the portfolio for a full
year in 2007 as compared to partial years in 2006.
Page 29
Management and
Service income is usually charged by Castle based on a percentage of gross
revenues or fixed fee basis for services contracted in this way.
Management and Service Income for 2007 increased by $385,507, or 21%
compared to 2006. This increase is primarily the result of fees from the 6
new properties which were contracted during the latter part of 2007. Castle
received incremental fees from the Ocean Resort Hotel in Hawaii and Hotel Santa
Fe in Guam and the Katamanda Villas in Thailand during the third quarter of
2007. In addition, fees from the Maile Sky Court, Baan Taling Ngam and
Queen Kapiolani Hotel began being recorded during the fourth quarter.
Other income
increased by $42,312 or 13% during 2007 as compared to 2006 due to incremental
fees and design projects undertaken in 2007.
Comparing 2007 and
2006, payroll and office expenses increased by $555,013 or 33% as Castle added
operational positions to improve the services provided by the additional
properties contracts and the previously existing portfolio of properties under
contract. Staffing levels in the areas of reservations, sales and
marketing, accounting and finance, and infrastructure and technology were
increased in 2007 in response to the growth in the number of units under
contract, the anticipated geographical expansion of the Company in 2007 and
continued expected growth in the future.
Administrative and
general expenses increased by a total of $1,635,597 or 301% in 2007 from 2006
levels. $681,137 of this increase relates primarily to two strategic initiatives
during 2007. First, the Company incurred travel, legal and administrative
costs related to establishing a subsidiary operating company in Thailand.
Secondly, the company incurred legal, consulting, accounting and related
costs associated with bringing the companys SEC filings current which allowed
the companys common stock to begin actively trading. Both of these initiatives
were successful during 2007. In addition, the Company recognized an
expense of
$954,459
as part of
an adjustment in the carrying value of the receivable from HBII as a result of
the legal settlement between the current timeshare developers of Hanalei Bay
Resort and HBII. (See notes 2 and 4 to the Companys financial
statements)
EBITDA reflects the
Companys earnings without the effect of depreciation, interest income or
expense or taxes. Castles management believes that EBITDA is a good
alternative indicator of the Companys financial performance, because it removes
the effects of non-cash depreciation and amortization of assets as well as the
fluctuations of interest costs based on Castles borrowing history along with
increases and decreases in tax expense brought about by changes in the provision
for future tax effects rather than current income. A comparison of EBITDA
and Net Income is shown below. For the year ended 2007, EBITDA was
($737,515) compared to $1,263,711 for 2006. This reflects a decrease of
$1,046,767 from operations for 2007 as compared to 2006 due to strategic
investments which the Company made to establish a subsidiary in Thailand and to
bring the Companys SEC filings current and achieve approval for the Companys
common stock to begin trading on the OTC:BB. In addition EBITDA decreased
by an additional
$954,459
as a
result of the recognition of an adjustment in the carrying value of the
receivable from HBII as a result of the settlement of legal matters between the
current timeshare developers of Hanalei Bay Resort and HBII. (See notes 2 and 4
to the Companys financial statements)
Page 30
Comparison
of Net Income to EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
2006
|
Net
Income
|
|
( $
1,117)
|
$
372
|
|
|
|
|
Add
Back:
|
|
|
|
Income
Taxes
|
|
(371)
|
358
|
Net interest
expense
|
|
542
|
338
|
Depreciation
|
|
208
|
196
|
EBITDA
|
|
($
738)
|
$
1,264
|
Depreciation expense
in 2007 increased by $12,660 when compared to 2006, due to a slight increase in
depreciable assets as compared to the prior year and a weakening US Dollar as
compared to the NZ Dollar.
Net interest expense
for 2007 increased by $204,347, or 60% compared to 2006 due to a decrease in the
amount of interest income recognized on the note receivable from HBII during
2007 as compared to 2006, financing of the payments made to Manhattan Guam, and
the effects of the New Zealand exchange rate on interest expense incurred in New
Zealand
Income tax expense
for 2007 decreased by $729,160 when compared to 2006 due to a decrease of the
tax provision related to a decrease in the taxable income for the year as
compared to the prior year
Net Loss for the year
ended December 31, 2007, was $1,117,118, a change of $1,489,074 compared
to the Net Profit of $372,000 for the year ended December 31, 2006.
Other Borrowings
Until 2006, Castle
met its financial obligations primarily through operating cash flow and
borrowings from related parties. In November, 2006, Castle obtained a term
loan for $600,000 and lines of credit totaling $400,000 with a local bank, with
the proceeds of the term loan being used to pay a debt to the former owner of
the Podium at the Spencer on Byron, and the lines of credit available for use to
provide working capital in connection with Castles present and newly acquired
management contracts and for the purchase of equipment. The Company drew
funds under the line of credit with a local bank for $100,000 as of December 31,
2007. In 2008, the Company increased its total line of credit with the
local bank from $400,000 to $850,000 consisting of a working capital line of
credit of $500,000 and an equipment lease line of credit in the amount of
$350,000.
In December of 2007,
as part of the Company acquiring a new hotel management agreement, the Company
allowed the hotel owner to purchase computer hardware using the Companys
equipment lease line of credit in the amount of $76,501. The hotel owner
shall be responsible for making the operating lease payments to the bank, and
also agreed to assume, refinance, or retire the lease should the management
agreement between the Company and the hotel be terminated.
Based on future
operating forecasts and financing plans, the Companys management believes that
Castle will have sufficient cash flows for its business operations during
calendar 2008.
Page 31
Off-Balance
Sheet Arrangements
There are no off
balance sheet arrangements as of December 31, 2007.
Foreign
Currency
The U.S. dollar is
the functional currency of our consolidated entities operating in the United
States. The functional currency for our consolidated entities operating outside
of the United States is generally the currency of the country in which the
entity primarily generates and expends cash. For consolidated entities
whose functional currency is not the U.S. dollar, Castle translates its
financial statements into U.S. dollars. Assets and liabilities are translated at
the exchange rate in effect as of the financial statement date, and results of
operations are translated using the weighted average exchange rate for the
period. Translation adjustments from foreign exchange are included as a separate
component of stockholders equity.
ITEM 7.
FINANCIAL STATEMENTS
The
Castle Group, Inc. and Subsidiaries
Table of
Contents
|
|
|
|
Report of
Independent Registered Public Accounting Firm
|
Page 33
|
Consolidated
Balance Sheets December 31, 2007 and 2006
|
Page 34
|
Consolidated
Statements of Operations and Comprehensive Income (Loss) - Years
Ending December 31, 2007 and 2006
|
Page 35
|
Consolidated
Statements of Cash Flows Years Ending December 31, 2007 and 2006
|
Page 36
|
Consolidated
Statements of Stockholders Equity (Deficit) - Years Ending December 31,
2007 and 2006
|
Page 37
|
Notes to
Consolidated Financial Statements
|
Pages 38-55
|
Page 32
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of
Directors and Shareholders
The Castle Group,
Inc. and Subsidiaries
We have audited the
accompanying consolidated balance sheets of The Castle Group, Inc. and
Subsidiaries as of December 31, 2007 and 2006, and the related
consolidated statements of operations and comprehensive income, stockholders
equity (deficit), and cash flows for the years ended December
31, 2007 and 2006. These financial statements are the responsibility
of the Companys management. Our responsibility is to express an opinion
on these financial statements based on our audit.
We conducted our
audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company has determined
that it is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the
financial statements referred to above present fairly, in all material respects,
the financial position of The Castle Group, Inc. and Subsidiaries as of December
31, 2007 and 2006, and the results of operations and cash flows for
the years ended December 31, 2007 and 2006, in conformity with accounting
principles generally accepted in the United States of America.
/s/Mantyla McReynolds
LLC
Mantla McReynolds
LLC
Salt Lake City,
Utah
March 20, 2008
Page 33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THE
CASTLE GROUP INC.
|
CONSOLIDATED BALANCE SHEETS
|
DECEMBER 31, 2007 & 2006
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
2007
|
2006
|
Current
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
$
494,089
|
$
1,100,302
|
Accounts
receivable, net of allowance for bad debts
|
|
|
3,262,058
|
2,548,529
|
Deferred
tax asset
|
|
|
|
642,000
|
130,000
|
Prepaid
and other current assets
|
|
|
|
339,620
|
273,773
|
Total Current
Assets
|
|
|
|
4,737,767
|
4,052,604
|
Property plant
& equipment, net
|
|
|
|
8,050,563
|
7,420,726
|
Goodwill
|
|
|
|
|
54,726
|
54,726
|
Deposits
|
|
|
|
|
28,070
|
28,070
|
Restricted
cash
|
|
|
|
|
163,157
|
363,215
|
Deferred tax
asset
|
|
|
|
|
1,319,475
|
1,460,127
|
Note Receivable
- related party, net of allowance for bad debts
|
|
0
|
4,269,151
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
|
|
|
$
14,353,758
|
$
17,648,619
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
Current
Liabilities
|
|
|
|
|
|
|
Accounts
payable
|
|
|
|
$
3,489,311
|
$
2,450,453
|
Deposits
payable
|
|
|
|
|
386,359
|
429,164
|
Current
portion of long term debt
|
|
|
|
1,308,262
|
1,144,715
|
Current
portion of long term debt to related parties
|
|
|
110,850
|
35,250
|
Accrued
salaries and wages
|
|
|
|
944,459
|
916,751
|
Accrued
taxes
|
|
|
|
|
158,948
|
65,300
|
Accrued
interest
|
|
|
|
|
66,250
|
95,311
|
Other
current liabilities
|
|
|
|
8,267
|
17,064
|
Total Current
Liabilities
|
|
|
|
$
6,472,706
|
$ 5,154,008
|
Non Current
Liabilities
|
|
|
|
|
|
Long
term debt, net of current portion
|
|
|
4,916,997
|
5,174,172
|
Deposits
payable
|
|
|
|
|
163,157
|
363,215
|
Notes
payable to related parties
|
|
|
|
223,770
|
259,762
|
Other
long term obligations, net
|
|
|
|
3,018,000
|
2,927,534
|
Total Non
Current Liabilities
|
|
|
|
8,321,924
|
8,724,683
|
Total
Liabilities
|
|
|
|
|
$
14,794,630
|
$
13,878,691
|
Stockholders'
Equity (Deficit)
|
|
|
|
|
|
Preferred
stock, $100 par value, 50,000 shares authorized, 11,050
|
|
1,105,000
|
1,105,000
|
shares
issued and outstanding in 2007 and 2006, respectively
|
|
|
|
Common
stock, $.02 par value, 20,000,000 shares authorized, 9,538,055
|
190,761
|
190,761
|
shares
issued and outstanding in 2007 and 2006, respectively
|
|
|
|
Additional
paid in capital
|
|
|
|
3,366,928
|
6,681,930
|
Retained
deficit
|
|
|
|
|
(5,034,930)
|
(3,917,812)
|
Accumulated
other comprehensive income (loss)
|
|
|
(68,631)
|
(289,951)
|
Total
Stockholders' Equity (Deficit)
|
|
|
|
(440,872)
|
3,769,928
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
$
14,353,758
|
$
17,648,619
|
The accompanying notes are an integral part of these
consolidated financial statements
|
Page 34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THE CASTLE GROUP, INC.
|
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
|
YEARS ENDING DECEMBER 31, 2007 AND
2006
|
|
|
|
|
|
|
|
|
|
|
2007
|
2006
|
Revenues
|
|
|
|
|
|
Revenue attributed from
properties
|
|
|
$ 18,407,645
|
$ 17,314,971
|
Management & Service
|
|
|
2,249,777
|
1,864,270
|
Other Income
|
|
|
|
368,657
|
326,344
|
Total Revenues
|
|
|
|
21,026,079
|
19,505,585
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
Property
|
|
|
|
17,353,863
|
16,022,752
|
Payroll and office expenses
|
|
|
2,238,559
|
1,683,546
|
Administrative and general
|
|
|
2,171,173
|
535,576
|
Depreciation
|
|
|
|
208,637
|
195,977
|
Total Operating Expense
|
|
|
21,972,232
|
18,437,851
|
Operating Income (Loss)
|
|
|
(946,153)
|
1,067,734
|
Interest Income
|
|
|
|
0
|
173,950
|
Interest Expense
|
|
|
|
(542,313)
|
(511,916)
|
Income (loss) before taxes
|
|
|
(1,488,466)
|
729,768
|
Income Tax Provision (Benefit)
|
|
|
(371,348)
|
357,812
|
Net Income (Loss)
|
|
|
$ (1,117,118)
|
$371,956
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss)
|
|
|
|
|
Foreign currency translation
adjustment
|
|
221,320
|
(33,542)
|
Total Comprehensive Income (Loss)
|
|
|
$ ( 895,798)
|
$ 338,414
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Per Share
|
|
|
|
|
Basic
|
|
|
|
$(0.12)
|
$0.04
|
Diluted
|
|
|
|
$(0.12)
|
$0.03
|
Weighted Average Shares
|
|
|
|
|
Basic
|
|
|
|
9,538,055
|
10,338,055
|
Diluted
|
|
|
|
9,538,055
|
10,756,388
|
The accompanying notes are an integral part of these
consolidated financial statements
|
Page 35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THE CASTLE GROUP INC.
|
CONSOLIDATED STAEMENTS OF CASH
FLOWS
|
YEARS ENDING DECEMBER 31, 2007 &
2006
|
|
|
|
|
|
2007
|
2006
|
Cash Flows from Operating Activities
|
|
|
|
|
Net income (loss)
|
|
|
|
$ (1,117,118)
|
371,956
|
Depreciation
|
|
|
|
|
208,637
|
195,977
|
Amortization of discount
|
|
|
|
387,738
|
209,342
|
Provision for uncollectible note
receivable
|
|
|
954,459
|
0
|
Stock issued for services
|
|
|
|
0
|
(18,000)
|
(Increase) decrease in
|
|
|
|
|
|
Accounts receivable
|
|
|
|
(620,162)
|
(36,000)
|
Other current assets
|
|
|
|
0
|
33,517
|
Deposits and other
assets
|
|
|
|
(57,795)
|
(426)
|
Restricted cash
|
|
|
|
|
224,431
|
(24,968)
|
Deferred taxes
|
|
|
|
|
(371,348)
|
357,813
|
Increase (decrease) in
|
|
|
|
|
|
Settlement agreement
|
|
|
|
(260,000)
|
260,000
|
Accounts payable and
accrued expenses
|
|
|
695,922
|
(707,212)
|
Net Cash From Operating Activities
|
|
|
44,764
|
641,999
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
Purchase of assets
|
|
|
|
(108,979)
|
(143,248)
|
Net Cash from Investing Activities
|
|
|
(108,979)
|
(143,248)
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
Proceeds from notes
|
|
|
|
175,000
|
600,000
|
Payments on notes
|
|
|
|
(733,884)
|
(1,047,167)
|
Net Cash from Financing Activities
|
|
|
(558,884)
|
(447,167)
|
|
|
|
|
|
|
|
Effect of exchange rate on changes in cash
|
|
|
16,886
|
17,226
|
|
|
|
|
|
|
|
Net Change in Cash
|
|
|
|
(606,213)
|
68,810
|
Beginning Balance
|
|
|
|
|
1,100,302
|
1,031,492
|
Ending Balance
|
|
|
|
|
$ 494,089
|
$ 1,100,302
|
|
|
|
|
|
|
|
Supplementary Information
|
|
|
|
|
|
Cash Paid for Interest
|
|
|
|
$ (150,972)
|
$ (102,452)
|
Cash Paid for Income Taxes
|
|
|
|
0
|
0
|
|
|
|
|
|
|
|
The accompanying notes are an
integral part of these consolidated financial
statements
|
Page 36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THE
CASTLE GROUP, INC.
|
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DEFICIT)
|
YEARS ENDING DECEMBER 31, 2007 & 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Additional
|
|
Other
|
|
|
Preferred Stock
|
Common Stock
|
Paid-in
|
Retained
|
Comprehensive
|
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Income (Loss)
|
Total
|
Balance
|
|
|
|
|
|
|
|
|
|
December 31,
2005
|
11,050
|
$
1,105,000
|
10,438,055
|
$
208,761
|
$6,681,930
|
$(4,289,768)
|
$(256,409)
|
$3,449,514
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
December 31,
2006
|
|
|
|
|
|
371,956
|
|
371,956
|
|
|
|
|
|
|
|
|
|
|
Voided
Stock
|
|
|
|
|
|
|
|
|
|
December 31,
2006
|
|
|
|
|
|
|
|
|
See Note
13
|
|
|
|
(900,000)
|
(18,000)
|
|
|
|
(18,000)
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
|
|
|
|
|
|
|
|
|
|
Translation
Adjustment
|
|
|
|
|
|
|
(33,542)
|
(33,542)
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
December 31,
2006
|
11,050
|
1,105,000
|
9,538,055
|
190,761
|
6,681,930
|
(3,917,812)
|
(289,951)
|
3,769,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
December 31,
2007
|
|
|
|
|
|
(1,117,118)
|
|
(1,117,118)
|
|
|
|
|
|
|
|
|
|
|
Reduction of
Paid in
|
|
|
|
|
|
|
|
|
Capital
|
|
|
|
|
|
(3,315,002)
|
|
|
(3,315,002)
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
|
|
|
|
|
|
|
|
|
|
Translation
Adjustment
|
|
|
|
|
|
|
221,320
|
221,320
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
December 31,
2007
|
11,050
|
$1,105,000
|
9,538,055
|
$190,761
|
$3,366,928
|
$(5,034,930)
|
$(68,631)
|
$(440,872)
|
The accompanying notes are an
integral part of these consolidated financial
statements
|
Page 37
The
Castle Group, Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Summary of Significant Accounting Policies
Organization
The Castle Group,
Inc. was incorporated under the laws of the State of Utah on August 21, 1981.
The Castle Group, Inc. operates in the hotel and resort management industry in
the State of Hawaii, New Zealand, Thailand, The Federated States of Micronesia,
the Territory of Guam and the Commonwealth of Saipan under the trade name
Castle Resorts and Hotels.
The accounting and
reporting policies of The Castle Group, Inc. (the Company) conform with
generally accepted accounting principles and practices within the hotel and
resort management industry.
Principles of
Consolidation
The consolidated
financial statements of the Company include the accounts of The Castle Group,
Inc. and its wholly-owned subsidiaries, Hawaii Reservations Center Corp., HPR
Advertising, Inc., Castle Resorts & Hotels, Inc., Castle Resorts &
Hotels Thailand Ltd., NZ Castle Resorts and Hotels Limited (a New Zealand
Corporation), and NZ Castle Resorts and Hotels wholly-owned subsidiary, Mocles
Holdings Limited (a New Zealand Corporation). All significant
inter-company transactions have been eliminated in the consolidated financial
statements.
New Accounting
Pronouncements
In February 2007, the
FASB issued FAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement no. 115 (FAS
159). FAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value. This provides entities
with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without being required to
apply complex hedge accounting provisions. FAS 159 is effective for fiscal
years beginning after November 15, 2007, and the Company is currently evaluating
the impact that FAS 159 will have on its financial position and results of
operations once adopted.
In June 2006, the
FASB ratified the consensus of Emerging Issues Task Force Issue No. 06-3, How
Taxes Collected from Customers and Remitted to Governmental Authorities Should
be Presented in the Income Statement (That is, Gross versus Net Presentation)
(EITF 06-3). EITF 06-3 concluded that the presentation of taxes imposed on
revenue producing transactions (sales, use, value add, and excise taxes) on
either a gross (included in revenues and costs) or a net (excluded from
revenues) basis is an accounting policy that should be disclosed. We have
adopted the gross basis for presentation in the first quarter of 2007, which did
not have any impact on our results of operations or financial condition.
In September 2006,
the Securities and Exchange Commission issued Staff Accounting Bulletin 108,
Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current
Page 38
Year
Financial Statements (SAB 108). SAB 108 provides interpretive guidance
on the consideration of the effects of prior year misstatements in quantifying
current year misstatements for the purpose of a materiality assessment and is
effective for fiscal years ending after November 15, 2006. The adoption of
SAB 108 had no impact on the Companys financial statements in 2007.
In September 2006,
the FASB issued FAS No. 157, Fair Value Measurements (FAS 157). FAS
157 defines fair value, establishes a framework for measuring fair value,
expands disclosures about fair value measurements and is effective for fiscal
years beginning after November 15, 2007. Management is currently
evaluating the impact this statement will have on its consolidated financial
statements.
In June 2003, the
Securities and Exchange Commission (SEC) adopted final rules under Section 404
of the Sarbanes-Oxley Act of 2002 (Section 404). Commencing with the
Companys Annual Report for the year ending December 31, 2007, the Company is
required to include a report of management on the Companys internal control
over financial reporting. The internal control report must include a
statement of managements responsibility for establishing and maintaining
adequate internal control over financial reporting for the Company; of
managements assessment of the effectiveness of the Companys internal control
over financial reporting as of yearend; of the framework used by management to
evaluate the effectiveness of the Companys internal control over financial
reporting; and for the year ending December 31, 2008, the Companys independent
accounting firm has issued an attestation report on managements assessment of
the Companys internal control over financial reporting, which report is also
required to be filed as part of the Annual Report on form 10-K.
In December 2007, the
FASB issued SFAS No. 141(R), Business Combinations. SFAS No. 141(R)
changes the accounting for and reporting of business combination transactions in
the following way: Recognition with certain exceptions, of 100% of the
fair values of assets acquired, liabilities assumed, and non controlling
interests of acquired businesses; measurement of all acquirer shares issued in
consideration for a business combination at fair value on the acquisition date;
recognition of contingent consideration arrangements at their acquisition date
fair values, with subsequent changes in fair value generally reflected in
earnings; recognition of pre-acquisition gain and loss contingencies at their
acquisition date fair value; capitalization of in-process research and
development (IPR&D) assets acquired at acquisition date fair value;
recognition of acquisition-related transaction costs as expense when incurred;
recognition of acquisition-related restructuring cost accruals in acquisition
accounting only if the criteria in Statement No. 146 are met as of the
acquisition date; and recognition of changes in the acquirers income tax
valuation allowance resulting from the business combination separately from the
business combination as adjustments to income tax expense. SFAS No.
141(R) is effective for the first annual reporting period beginning on or after
December 15, 2008 with earlier adoption prohibited. The adoption of
SFAS No. 141(R) will affect valuation of business acquisitions made in 2009 and
forward.
In December 2007, the
FASB issued SFAS No. 160 "Noncontrolling Interest in Consolidated Financial
Statements an Amendment of ARB 51" (SFAS 160). SFAS 160 clarifies
that a noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. It also requires consolidated net income to be
reported at amounts that include the amounts attributable to both the parent and
the
Page 39
noncontrolling
interest, and requires disclosure, on the face of the consolidated statement of
income, of the amounts of consolidated net income attributable to the parent and
to the noncontrolling interest. SAFS 160 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited. We do
not anticipate a material impact upon adoption.
In March 2008, the
FSAB issued FASS No. 161, Disclosures about Derivative Instruments and Hedging
Activities. SFAS 161 is intended to improve financial reporting
about derivative instruments and hedging activities by requiring enhanced
disclosures to enable investors to better understand their effects on an
entity's financial position, financial performance, and cash
flows. SFAS 161 is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with early
application encouraged. We do not anticipate a material impact upon
adoption.
Cash and Cash
Equivalents
The Company considers
all highly liquid investments with a maturity of three months or less when
purchased to be cash equivalents.
Restricted
Cash
The Company holds
funds on behalf of the unit owners for one of the properties it manages.
These funds are to be used only for the replacement and refurbishment of
the furniture and equipment within the rooms owned by the unit owner. As
of December 31, 2007 and 2006, the Company had $163,157 and $363,215,
respectively, of funds held for this purpose. The Company records an
offsetting liability as a long term deposit payable on its balance sheet.
Property,
Furniture, and Equipment
Property, furniture,
and equipment are recorded at cost. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from the
accounting records, and any resulting gain or loss is reflected in the
Consolidated Statement of Operations for the period. The cost of
maintenance and repairs are charged to income as incurred. Renewals and
betterments are capitalized and depreciated over their estimated useful
lives.
At December 31, 2007
and 2006, property, furniture, and equipment consisted of the following:
|
|
|
|
|
|
|
2006
|
2006
|
Real Estate -
Podium (see Note 11)
|
$
8,036,503
|
$7,308,739
|
Equipment and
furnishings
|
1,396,993
|
1,173,237
|
Less
accumulated depreciation
|
(1,382,933)
|
(1,061,250)
|
|
$8,050,563
|
$7,420,726
|
Depreciation is
computed using the declining balance and straight-line methods over the
estimated useful life of the assets (Equipment and furnishings 5 to 7 years,
Podium 50 years). For the years ended December 31, 2007 and 2006,
depreciation expense was $208,637 and $195,977, respectively.
Page 40
Intangibles
Under SFAS No. 142,
Goodwill and Other Intangible Assets, goodwill related to our historical
acquisitions are subject to annual review for impairment or upon the occurrence
of certain events, and, if impaired, are written down to its fair value.
The Company has not recognized any impairment losses during the periods
presented.
Income
Recognition
The Company
recognizes income from the management of resort properties according to terms of
its various management contracts.
The Company has two
basic types of agreements. Under a Gross Contract the Company records
income which is based on a percentage of the gross rental proceeds received from
the rental of hotel or condominium units. Under a Gross Contract the
Company pays a portion of the gross rental proceeds to the owner of the rental
unit. The Company only records the difference between the gross rental
proceeds and the amount paid to the owner of the rental unit as Revenue
Attributed from Properties.
Under the Gross Contract, the Company is
responsible for all of the operating expenses for the hotel or condominium unit.
Under a Net Contract, the Company receives a management fee that is
based on a percentage of the gross rental proceeds received from the rental of
hotel or condominium units. Under the Net Contract, the owner of the hotel
or condominium unit is responsible for all of the operating expenses of the
rental program covering the owners unit. Under the Net Contract, the
Company also typically receives an incentive management fee, which is based on
the net operating profit of the covered property. R
evenues received under the net contract are recorded as
Management and Service Income. Under both types of agreements, revenues
are recognized after services have been rendered. A liability is
recognized for any deposits received for which services have not yet been
rendered.
The financial
statements presented for the year ended December 31, 2006 have been adjusted to
reflect a change in the accounting methodology which the Company has adopted.
The Company previously recorded Management and Service Fees from its
properties that were operated under a Gross Contract as described above, and an
offsetting amount was recorded as an expense under Property operating
expenses. The Company adopted a change in the accounting for these fees
and expenses, and the financial statements for the year ended December 31, 2006
have been adjusted by reducing both Management & Service revenues and
Payroll & Office Expense by $1,566,171, which reflects the amount of
Management & Service fees that were recorded for properties operated under a
Gross Contract as described above. The Company believes that this method
properly allocates the corporate office overhead costs to the Gross Contract
properties. The adjustment did not affect net income, operating income,
EBITDA or any balance sheet accounts.
Page 41
Expense
Recognition
Under a Gross
Contract, the Company records the expenses of operating the rental program at
the property covered by the agreement. These expenses include
housekeeping, food & beverage, maintenance, front desk, sales &
marketing, advertising and all other operating costs at the property covered by
the agreement. Under a Net Contract, the Company does not record the operating
Page 42
expenses
of the property covered by the agreement. The basic difference between the
Gross and Net contracts is that under a Gross Contract, all expenses, and
therefore the covering of any operating loss, belong to and is the
responsibility of the Company; under a Net Contract, the responsibility for
covering expenses or any operating losses belong to and therefore remains with
the owner of the property. The operating expenses of properties managed
under a Gross Contract are recorded as Property operating expenses.
Advertising, Sales
and Marketing Expenses
The Company incurs
sales and marketing expenses in conjunction with the production of promotional
materials, trade shows, and retainers for out-of-state sales agents, and related
travel costs. In accordance with the AICPAs Statement of Position No. 93-7
Reporting on Advertising Costs, the Company expenses advertising and marketing
costs as incurred or as the advertising takes place. For the years ended
December 31, 2007 and 2006, total advertising expense was $1,590,475 and
$1,371,032 respectively.
Stock-Based
Compensation
The Company has
accounted for stock-based compensation under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 123(R), Share Based
Payment. This statement requires us to record an expense associated
with the fair value of stock-based compensation. We currently use the
Black-Scholes option valuation model to calculate stock based compensation at
the date of grant. Option pricing models require the input of highly
subjective assumptions, including the expected price
volatility. Changes in these assumptions can materially affect the
fair value estimate.
The average risk-free
interest rate is determined using the U. S. Treasury rate in effect as of the
date of grant, based on the expected term of the warrant.
Concentration of
Credit Risks
The Company maintains
its cash with several financial institutions in Hawaii, New Zealand, and
Thailand. Balances maintained with these institutions are occasionally in
excess of federally, insured limits. As of December 31, 2007 and 2006 the
Company had balances of $496,423 and $714,949, respectively, in excess of US
federally insured, limits of $100,000 per financial institution.
Concentration in
Market Area
The Company manages
hotel properties in Hawaii, Thailand, New Zealand and Micronesia, and is
dependent on the visitor industries in these geographic areas.
Use of Management
Estimates in Financial Statements
The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Page 43
Fair Value of
Financial Instruments
The carrying value of
notes receivable and notes payable approximates fair values as these notes have
interest rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
Guarantees
We record a liability
for the fair value of a guarantee on the date a guarantee is issued or modified.
The offsetting entry depends on the circumstances in which the guarantee was
issued. Funding under the guarantee reduces the recorded liability. When no
funding is forecasted, the liability is amortized into income on a straight-line
basis over the remaining term of the guarantee.
Foreign Currency
Translation
The U.S. dollar is
the functional currency of our consolidated entities operating in the United
States. The functional currency for our consolidated entities operating outside
of the United States is generally the currency of the country in which the
entity primarily generates and expends cash. For consolidated entities whose
functional currency is not the U.S. dollar, we translate their financial
statements into U.S. dollars. Assets and liabilities are translated at the
exchange rate in effect as of the financial statement date, and income statement
accounts are translated using the weighted average exchange rate for the period.
Translation adjustments from foreign exchange are included as a separate
component of shareholders equity.
Accounts
Receivable
The Company records
an account receivable for revenue earned but net yet collected. If the Company
determines any account to be uncollectible based on significant delinquency or
other factors, it is immediately written off. An allowance for bad debts
has been provided based on estimated losses amounting to $214,559 and $217,064
as of December 31, 2007 and 2006, respectively.
Relating to the HBII
Note Receivable, pursuant to GAAP, the Company
has established a reserve for uncollectible
amounts during 2007. The Company recorded an expense during 2007 for
$954,459, and reduced additional paid in capital for $3,315,002 in providing for
the uncollectible debt reserve (See Note 2), which
is a reflection of the
nature of the original accounting treatment
.
In the fourth quarter the Company reversed
$150,542 in accrued Interest Income earned on the Note during 2007.
Income Taxes
Provisions for income
taxes are based on taxes payable or refundable for the current year and deferred
taxes on temporary differences between the amount of taxable income and pretax
financial income and between the tax basis of assets and liabilities and their
reported amounts in the financial statements. Deferred tax assets and
liabilities are included in the financial statements at currently enacted
income tax rates applicable to the period in which the deferred tax assets and
liabilities are expected to be realized or settled, as prescribed in
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting
for Income Taxes. As changes in tax laws or rate are enacted,
Page 44
deferred
tax assets and liabilities are adjusted through the provision for income taxes.
A valuation allowance is recognized if it is more likely than not that
some portion or the entire deferred tax asset will not be realized. Deferred
income tax asset and liability balances are netted, as applicable, when they
represent deferred amounts within the same taxing jurisdiction. Deferred tax
assets are classified between current and non-current according to the estimated
periods in which the deferred tax assets are expected to be realized.
In June 2006, the
FASB issued Interpretation No. 48 Accounting for Uncertainty in Income Taxes,
and Interpretation of FASB Statement No. 109 (FIN 48). We adopted
FIN 48 on January 1, 2007. Under FIN 48, tax benefits are recognized
only for tax positions that are more likely than not to be sustained upon
examination by tax authorities. The amount recognized is measured as
the largest amount of benefit that is greater than 50 percent likely to be
realized upon ultimate settlement. Unrecognized tax benefits are tax
benefits claimed in our tax returns that do not meet these recognition and
measurement standards. Upon the adoption of FIN 48, we had no liabilities for
unrecognized tax benefits and, as such, the adoption had no impact on our
financial statements, and we have recorded no additional interest or
penalties. The adoption of FIN 48 did not impact our effective tax
rates. Our policy is to recognize potential interest and penalties accrued
related to unrecognized tax benefits within income tax expense. For
the year ended December 31, 2007, we did not recognize any interest or penalties
in our Statement of Operations, nor did we have any interest or penalties
accrued in our Balance Sheet at December 31, 2007 relating to unrecognized
benefits.
Basic and Diluted
Earnings per Share
Basic earnings per
share of common stock were computed by dividing income available to common
stockholders, by the weighted average number of common shares outstanding.
Diluted earnings per share were computed using the treasury stock method
under SFAS No. 128 Earnings per Share. The calculation of Basic and
Diluted earnings per share for 2007 did not include 368,335 shares which would
be issued upon conversion of the outstanding $100 par value redeemable preferred
stock of the company, nor does it include 150,000 shares issuable pursuant to
the exercise of vested warrants as of December 31, 2007 as the effect would be
anti-dilutive.
2.
Related Party Transactions
Hanalei Bay
International Investors (HBII)
The Chairman and CEO
of the Company is the sole shareholder of HBII Management, Inc, the managing
General Partner of HBII. In March 1999, HBII consummated the sale of its
interest in Hanalei Bay Resort to an unrelated third party. The cash
proceeds received by HBII on the closing of the sale were not sufficient to
satisfy all claims of HBIIs creditors, including the Company, and the Company
accepted a note receivable in the amount of $4,420,003 as settlement for its
account receivable balance of $1,105,001 at the time of the sale. The
excess amount ($3,315,002) over the receivable balance was accounted for as a
shareholder contribution. Under the terms and conditions of the agreement to
sell Hanalei Bay Resort, HBII was entitled to receive a percentage of the future
cash flows from the resorts hotel operations and the sale of certain time-share
units.
As part of the
Companys purchase of real estate in New Zealand (see Note 11), an assignment of
$3,018,000 of the total note receivable from HBII was made to the seller of the
real estate, with the
Page 45
Company
remaining as guarantor should the note receivable not be collected before
December 24, 2010. (See Note 3).
During 2006, the
Company also assigned $600,000 of the HBII note receivable to a bank as security
for a term loan.
During 2006 HBR
disputed the amount that it was indebted to HBII, and HBII filed a lawsuit to
collect the amounts owed by HBR. In March 2008, HBII and Quintus Resorts, LLC
(Quintus), the parent company of HBR, entered into a settlement to resolve the
litigation by Quintus issuing a 19.9% membership interest in Quintus to HBII or
its designee, which included a preferred return as to the first $6.2 million of
future distributions of available cash flow.
Quintus is the owner
of a timeshare resort project in Genoa, Nevada, near Lake Tahoe. Quintus
has not yet completed its financial statements for 2007 but estimates that its
net loss incurred in 2007 will eliminate all or virtually all of its net equity
as calculated according to generally accepted accounting principles.
Quintus believes that the fair market value of its assets on a going
concern basis exceeds its liabilities by approximately $15,000,000; according to
Quintus projections, Quintus is projecting cash flows of over
$40,000,000 from the sale of time share intervals and/or real property interests
in its timeshare resort project over the next ten to fifteen years.
Neither Quintus estimates as to the fair market value of its assets nor
its projections have been verified or reviewed by any independent third party.
For at least the next
two or three years, Quintus will be required to use all of its available cash
flow to pay down the substantial indebtedness it incurred in purchasing the
resort. Based on Quintuss financial projection, HBIIs management
believes that it is likely to receive in excess of $6,000,000 from its ownership
interest in Quintus and that it will utilize these funds to pay its indebtedness
to Castle. In that the distributions from HBII will likely not be realized
for a number of years and are subject to uncertainty and risks over which Castle
has no control, there can be no assurance that Castle will receive any
distributions from HBIIs ownership interest in Quintus within the next ten
years, if at all.
In light of
such uncertainties,
as required by Generally Accepted Accounting
Principles (GAAP) t
he Company has
established a reserve for uncollectible amounts. The Company recorded an
expense during 2007 for $954,459, and reduced additional paid in capital for
$3,315,002 in providing for the reserve. In the fourth quarter the Company
reversed $150,542 in accrued Interest Income earned on the Note during
2007.
Loan Fees
In 2006, the Company
secured $600,000 financing from a bank (see note 6 to the financial statements)
and the CEO of the Company acted as guarantor. As consideration for the
guaranty, the Company pays a quarterly guaranty fee of 2% per annum to the CEO
of the Company. During 2007, the Company paid $8,156 in guaranty fees to
the Companys CEO. No fees were paid in 2006 as the bank financing was
consummated in December of 2006.
Related Party
Loans
In December of 2007,
the Chairman and CEO of the Company advanced $75,000 to the Company to
capitalize the Companys Thailand subsidiary.
Page 46
3.
Notes Receivable
Notes receivable
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2007
|
2006
|
Note Receivable
from Hanalei Bay International Investors, secured by a direct assignment
of Hanalei Bay International Investors right to receive future proceeds
from HBII's ownership interest in Quintus. (Assigned to third parties- see
Note 2)
|
4,269,151
|
4,269,151
|
|
Less
Reserve for Uncollectible Notes
|
4,269,151
|
0
|
Notes
Receivable, Non-current
|
$
0
|
$4,269,151
|
See Note 2 above.
Pursuant to GAAP, the Company
has
established a reserve for uncollectible amounts. The Company recorded an
expense during 2007 for $954,459, and reduced additional paid in capital for
$3,315,002 in providing for the reserve.
4.
Commitments and Contingencies
Leases
The Company leases
two office spaces expiring March 1, 2008 and October 31, 2008 and for the years
ended December 31, 2007 and 2006, the Company paid $351,149 and $269,247,
respectively, in lease expense for these leases.
As of December 31,
2007, the future minimum rental commitment under these leases was $295,097.
As part of our NZ
Castle Resorts and Hotels operations, we lease approximately 250 investment
units, which are leased to and managed by the Company. Total lease expense
for the year ending December 31, 2007 and 2006 was $2,294,177 and $2,219,493,
respectively.
As of December 31,
2007, the future lease commitments are as follows:
|
|
|
|
|
|
Year
|
Amount
|
2008
|
$
|
2,565,943
|
2009
|
|
2,480,101
|
2010
|
|
2,482,061
|
2011
|
|
1,621,112
|
Total
|
$
|
9,149,217
|
Subsequent to
December 31, 2007, the Company amended the lease for the office space that
expired on March 1, 2008, and extended the term of the lease for an additional
three years, through February 28, 2011.
Page 47
The purchase of
Mocles Holdings Limited (see Note 11) includes a requirement for monthly
payments of the greater of $15,504 or Surplus Profits, as defined at Note 11.
Using the monthly rate of $15,504, total annual payments will be
approximately $186,048 per year, beginning in 2008. The Company has not
yet determined whether the Surplus Profits will be greater than $186,048 per
year. The approximate term is 4 years.
As of December 31,
2007, the Company had an available lease line of credit with a bank for up to
$150,000. In December of 2007, as part of the Company acquiring a new
hotel management agreement, the Company allowed the hotel owner to purchase
computer hardware using the Companys equipment lease line of credit in the
amount of $76,501. The hotel owner shall be responsible for making the
operating lease payments to the bank, and also agreed to assume, refinance, or
retire the lease should the management agreement between the Company and the
hotel be terminated.
Guaranty
As part of the
Companys purchase of real estate in New Zealand (see Note 11), an assignment of
$3,018,000 of the total note receivable from HBII was made to the seller of the
real estate, with the Company remaining as guarantor should the note receivable
not be collected before December 24, 2010.
The Company has
recognized a guarantor liability for these assignments, amounting to $3,018,000
as of December 31, 2007 and $2,927,534 net of discounts of $90,466 as of
December 31, 2006, which represents the present fair value of the obligation
undertaken in becoming a guarantor of the payment of the assigned receivables.
This obligations term is estimated to expire on or before December 24,
2009. Pursuant to an extension agreement signed in March 2008, if the Company is
current with its other obligations in connection with the purchase of the New
Zealand Real Estate, the remaining balance will be due on December 24, 2010.
Further, if the Company is current with those obligations as of December 24,
2010, and has paid not less than $7,183,260 toward the purchase price an
additional six month extension is available. The company may refinance this
obligation using real estate based mortgage or debt and or other funding sources
prior to the due date.
During 2006, the
Company also assigned another portion of the HBII receivable of $600,000 as
security to the bank.
Management
Contracts
The Company manages
several hotels and resorts under management agreements expiring at various
dates. Several of these management agreements contain automatic extensions for
periods of 1 to 10 years.
In addition, the
Company has sales, marketing and reservations agreements with other hotels and
resorts expiring at various dates through December 2008. Several of these
agreements contain automatic extensions for periods of one month to three years.
Fees received are based on revenues, net available cash flows or
commissions as defined in the respective agreements.
Page 48
5.
Employee Benefits
The Company has a
401(k) Profit Sharing Plan (the Plan) available for its employees. Under
the terms of the Plan, the Company may match 50% of the compensation reduction
of the participants in the Plan up to 1% of compensation. Matching
contributions for the years ended December 31, 2007, and 2006 were $13,193 and
$11,619, respectively. 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 December 31, 2007 and 2006, the Company
made no profit contributions.
The Company also has
a Flexible Benefits Plan (the Benefits Plan). The participants in the
Benefits Plan are allowed to make pre-tax premium elections which are intended
to be excluded from income as provided by Section 125 of the Internal Revenue
Code of 1986. To be eligible, an employee must have been employed for 90
days. The benefits include group medical insurance, vision care insurance,
disability insurance, cancer insurance, group dental coverage, group term life
insurance, and accident insurance.
6. Notes
Payable
Notes payable
consisted of the following:
2007
2006
Note dated 4/26/04 to
the Companys CEO with interest
at prime plus 2.5%,
with monthly payments of $2,544
balance due on
4/26/09,
unsecured
$ 39,699
$ 65,842
Note dated 6/6/04 to
a director, with interest at the rate
of 8%, monthly
payments of interest plus $521,
balance due 1/1/09,
unsecured
102,604
108,854
Note dated 6/16/04 to
unrelated party with interest at the
rate of 15% due on
1/1/09 with monthly payments of
NZ$3,225 (US$2,500),
unsecured 200,002
181,890
Notes dated 7/31/95
to former stockholders, due 8/31/98
with interest at 6%,
unsecured. No formal demand has
been made on the
Company.
12,000
12,000
Note dated 12/31/02
from the Companys CEO, with
interest at 10%, due
on or before 1/1/09,
unsecured
117,316
117,316
Note dated 12/31/04,
payable in New Zealand, net of
discount of $0.9
million and $0.9 million, as of 2007
and 2006,
respectively, with a face value of $8.6
million and which is
secured by general security
agreement including
an assignment of $3.1 million,
net of discount of
$0.5 million, of the note receivable
due from HBII.
The Company acts as a guarantor for
Page 49
the
payment of the assigned receivable, and therefore,
the obligation
undertaken as a guarantor is included in
this amount.
The guarantor obligation is referred to as
Other long term
obligations on the Balance Sheet
(See Note 4).
The effective interest rate is 5.25% per
annum. The
maturity date is December 31,2009,
subject to extension
as described in Note 11.
This obligation has
been subsequently extended until
December 24,
2010. 8,028,868
7,368,410
Note dated 12/31/04
payable to unrelated
party, with interest
at 10% due 3/01/12
with monthly payments
of $2,975,
unsecured
117,277 140,000
Note dated 12/14/06
payable to a bank, with interest
at the bank s base
lending rate plus 1.25%, secured by
up to $600,000 of the
note receivable from Hanalei Bay
Resort. Balance
is due
12/8/08.
449,880 600,000
Note payable to
former developer of a hotel located in
Guam, which resulted
from a settlement agreement
Reached between the
Company and the developer. The
Note is non-interest
bearing and is due on or before
January 18, 2008 (See
Note
13) 100,000 500,000
Advance from CEO
dated 12/31/07, with no
specified interest or
repayment
terms.
75,000
-
Loan of $100,000
dated 11/16/07 from the Companys
$250,000 revolving
line of credit with a bank. The
line is secured by
the personal guaranty of the Companys
Chairman & CEO,
and a general security interest in
The Companys assets.
Note bears interest at the banks
base lending rate
plus 1% (8.25% at 12/31/07) and is
due
4/1/09 100,000
-
Note dated 12/31/04
payable to unrelated party,
secured by up to
$800,000 of the note receivable from
Hanalei Bay Resort
(see note 3) with interest at 8%,
balance is due on
12/31/08
235,233
447,121
Subtotal $
9,577,879 $ 9,541,433
Less
Current
Portion
1,419,112
1,179,965
Notes
payable,
non-current
$
8,158,767 $ 8,361,468
Page 50
The
five year payout schedule for notes payable is as follows:
|
|
|
|
|
|
Year
|
Amount
|
2008
|
$
|
1,419,112
|
2009
|
|
8,094,321
|
2010
|
|
30,634
|
2011
|
|
33,812
|
Total
|
$
|
9,577,879
|
7. Redeemable
Preferred Stock
In 1999 and 2000, the
Company issued a total of 11,050 shares of $100 par value redeemable preferred
stock to certain officers and directors. Dividends are cumulative from the date
of original issue and are payable semi-annually, when, and if declared by the
board of directors beginning July 15, 1999 at a rate of $7.50 per annum per
share. During the fiscal year ended July 31, 2000, the Company paid
dividends to holders of record as of July 15, 2000 in the amount of $16,715.
At December 31, 2007, undeclared and unpaid dividends on these shares were
$704,233 or $63.73 per preferred share. These dividends are not accrued as
a liability, as no declaration has occurred. The shares are nonvoting, and
are convertible into the Companys common stock at an exercise price of $3.00
per share. As of January 15, 2001, the redeemable preferred stock is
redeemable at the option of the Company at a redemption price of $100 per share
plus accrued and unpaid dividends.
8. Common
Stock
The Company did not
issue any of its $.02 par value common stock during the years 2007 or 2006.
Common Stock Options
and Warrants
The Company does not
have a Stock Based Incentive, Stock Purchase or Stock Option or Warrant Plans.
During 2007 the Company granted the Warrants for the purchase of up to 250,000
shares of the Companys common stock. None of these Warrants has been exercised
as of 12/31/07. In applying the Black-Sholes methodology to the warrant grants
the fair value of the Companys stock-based awards granted was estimated using
an expected annual dividend yield of 0%, a risk free interest rate of 4.87%, an
expected warrant life of between 0 and 2.0 years and expected price
volatility of 39.02%. The overall impact on the consolidated
statement of operations for stock-based compensation expense for the year ended
December 31, 2007 was negligible. No options or warrants were issued prior to
January 1, 2007.
The average risk-free
interest rate is determined using the U.S. Treasury rate in effect as of the
date of grant, based on the expected term of the stock warrant. The
Company determined the expected term of the stock warrants as being equal to one
half of the contractual term of the warrants due to a lack of forfeiture history
and the thinly traded volume of the Companys common stock. The
expected price volatility was determined using the average historical volatility
of the stock prices of a group of 15 publically traded peer companies in the
Companys industry. The stock price used was equal to the historical
average stock price over the 6 month period prior to grant, which approximately
represented the book value of the stock at the time of grant. For warrants
with a
Page 51
vesting
period, compensation expense is recognized on a straight line basis over the
service period which corresponds to the vesting period.
Changes in warrants
for the years ended December 31, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Remaining Contractual Term (in Years)
|
|
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
2007:
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
0
|
|
|
|
|
|
|
|
Granted
|
|
250,000
|
|
|
$2.20
|
|
|
|
|
|
Exercised
|
|
0
|
|
|
|
|
|
|
|
Forfeited/expired
|
|
0
|
|
|
|
|
|
|
|
Outstanding
at December 31
|
|
250,000
|
|
$2.20
|
|
4.5
|
|
|
$
0
|
|
Exercisable
|
|
150,000
|
|
$2.33
|
|
4.5
|
|
$
0
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average fair value of warrants granted during year
|
|
|
|
|
$.00
|
|
|
|
|
|
The following table summarizes information about
compensatory warrants outstanding at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Outstanding
|
|
Warrants Exercisable
|
|
Range of
Exercise Prices
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining Contractual
Life
(in years)
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$2.00
|
|
200,000
|
|
4.5
|
|
$
|
2.00
|
|
100,000
|
|
$
|
2.00
|
|
$3.00
|
|
50,000
|
|
4.6
|
|
3.00
|
|
50,000
|
|
3.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$2.00-$3.00
|
|
250,000
|
|
4.5
|
|
$
|
2.20
|
|
150,000
|
|
$
|
2.33
|
|
Page 52
9.
Income Taxes
The provision for
income taxes consists of the following:
|
|
|
|
|
|
|
2007
|
2006
|
Deferred
|
|
|
Federal
|
$ (
312,521)
|
$
306,496
|
State
|
(
58,827)
|
51,316
|
Foreign
|
-
|
-
|
Total deferred
provision
|
$ (
371,348)
|
$
357,812
|
At December 31, 2007,
the Company had a net operating loss carryforward, which expires on various
dates through 2027. The following information describes the tax effects of
the carryforward and the associated valuation allowance.
|
|
|
|
|
|
|
|
2006
|
Balance
|
Tax %
|
Tax
|
Federal
loss carryforward
|
$
3,935,958
|
34.0%
|
$
1,338,226
|
State
loss carryforward
|
3,935,958
|
6.4%
|
251,901
|
Foreign
loss carryforward
|
958,439
|
33.0%
|
316,285
|
Valuation
allowance
|
|
|
(316,285)
|
Deferred
Tax Asset
|
|
|
$
1,590,127
|
|
|
|
|
2007
|
Balance
|
Tax %
|
Tax
|
Federal
loss carryforward
|
$
4,855,135
|
34.0%
|
$
1,650,746
|
State
loss carryforward
|
4,855,135
|
6.4%
|
310,729
|
Foreign
loss carryforward
|
1,636,461
|
33.0%
|
540,032
|
Valuation
allowance
|
|
|
(540,032)
|
Deferred
Tax Asset
|
|
|
$
1,961,475
|
The Company expects
to utilize $642,000 of the loss carryforward for the year ended December 31,
2008, and has therefore classified the deferred tax asset associated with the
loss carryforward as a current asset on the Companys consolidated balance
sheet.
The valuation
allowance increased by $223,747 to $540,032 during the period from 2006 to 2007.
Income tax expense
differs from amounts computed by applying the statutory Federal rate to pretax
income as follows:
|
|
|
|
|
|
|
2007
|
2006
|
Expected US
Income Tax (Benefit) on Consolidated Income before Tax
|
$
(506,078)
|
$
248,121
|
Effects
of:
|
|
|
Expected State
Income Tax (Benefit) on Consolidated Income before Tax
|
(
95,262)
|
46,705
|
Page 53
|
|
|
Change in
valuation allowance
|
223,747
|
63,445
|
Other
|
6,245
|
(
459)
|
|
|
|
Effective
Tax Provision (Benefit)
|
$(371,348
)
|
$
357,812
|
10.
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 Companys
business. The ultimate liability of the Company, if any, cannot be
determined at this time. Based upon consultation with counsel, management
does not expect that the aggregate liability, if any, resulting from these
proceedings would have a material effect on the Companys consolidated financial
position, results of operations or liquidity.
11. Purchase of
Mocles Holdings Limited
On December 24, 2004,
the Company, through its wholly owned subsidiary NZ Castle Resorts and Hotels
Limited, entered into an agreement to purchase all of the shares of Mocles
Holdings Limited (Mocles), a New Zealand Corporation. Following are the
significant provisions of this agreement (with modifications according to a
Deed of Variation dated April 15, 2005):
·
Mocles
owns the Podium levels (Podium) of the Spencer on Byron Hotel in Auckland, New
Zealand.
·
The
purchase price for Mocles was $7,455,213 (NZ$10,367,048), net of imputed
interest $1,164,699 (NZ$1,632,952). The face value of the purchase price was
$8,619,912 (NZ$12,000,000).
·
The
purchase price is to be paid as follows:
1. Partial
assignment of the Companys receivables from Hanalei Bay International Investors
(HBII) in the amount of US$3,018,000. In the event that this amount is
not realized from HBII, the Company is obligated to make up the difference by
December 24, 2009. This obligation has been subsequently extended until December
24, 2010.
2. Monthly
payments of the greater of NZ$20,000 (US$15,504), or Surplus Profits defined as
50% of net profits calculated in accordance with New Zealands Generally
Accepted Accounting Principles or International Reporting Standards.
3.
The remaining balance is due December 24, 2009. Pursuant to an extension
agreement signed in March 2008. If the Company is current with its other
obligations as set forth herein, the remaining balance will be due on December
24, 2010. Further, if the Company is current with its other obligations as
set forth herein and has paid not less than $7,183,260 toward the purchase price
an additional six month extension is available.
4.
As a result of the settlement between Quintus Resorts, LLC described in
Item 1C Subsequent Events above, it is unlikely that any proceeds will be
received from HBII prior to December 24, 2010. This will likely require
Castle to pay the full amount owed in connection with the purchase of Mocles
from borrowed funds and/or its available
Page 54
cash
at that time.
5.
The Company may pursue refinancing of this debt at some point prior to the
due date using real estate based mortgage obligations or other financing.
·
At
the time of purchase, Mocles had additional debts, namely:
1.
Bank
Mortgage There is $2,273,502 payable to a bank which is secured by the Podium.
The liability to the bank must be refinanced, paid in full, or
renegotiated to the extent that the current guarantors are released from all
obligations associated therewith, by December 31, 2009.
2.
Advances
from parties heretofore related to Mocles in the amount of $1,509,768. The
entire amount is due and payable by December 24, 2010. There is no
interest associated with this liability.
·
The
purchase price is deemed to be satisfied in part by NZ Castle procuring
repayment of Mocles additional debts. After NZ Castle has procured
repayment of the additional debts by or on behalf of Mocles, the total payable
to the seller of the Mocles shares under 1 and 2 above is $4,836,642.
·
Mocles
shares are being held legally by the seller of such shares until such time as
all obligations associated with this transaction are satisfied.
·
An
amount equal to the interest payable by Mocles to the bank is to be paid
annually to Mocles by the Company as rental for the Podium.
·
A
replacement fund is to be established from 50% of the net profits from the
operation of the Podium, until such time as there is NZ$175,000 (US$135,660)
regularly available for the replacement of furniture, fixtures and equipment
installed in the Podium. The fund must be expended and cannot be
accumulated.
12. Business
Segments
As stated in Note 1,
the Company has two basic types of hotel management agreements: Gross
Contracts and Net Contracts. As described in Note 1, the revenues and
expenses are disclosed separately on the statements of operations for each type
of agreement. The assets included in the consolidated financial statements only
consist of assets owned in relation to the Gross Contract agreements and other
assets used for general corporate purposes. The financial statements do
not include any assets the Company manages under the Net Contract agreements,
since the Company does not have the same level of responsibility that it has
under Gross Contracts.
The consolidated
financial statements include the following related to international operations
(which are predominately in New Zealand and related to Gross Contract
agreements): Revenues of $9,332,026 in 2007 and $8,494,364 in 2006;
results from operations of $(482,931) in 2007 and ($192,258) in 2006; and fixed
assets of $8,008,070 in 2007 and $7,379,298 in 2006.
13. Settlement
Agreement
On June 7, 2007, the
Company entered into a Settlement Agreement with the developer of a hotel that
was previously leased by the Company between 1999 and 2001. The Company
and the developer had previously entered into a Compromise Agreement in 2001
which called for the Company to make
Page 55
certain
payments to the developer, and also to issue 900,000 shares of its restricted
common stock to the developer. In 2001, the Company recorded the issuance
of 900,000 shares of common stock to the developer and recorded a note payable
for $240,000, representing the balance of the payments due to the developer.
The Settlement Agreement reached in June 2007 voided the Compromise
Agreement and therefore as of December 31, 2006, the Company voided the 900,000
shares that were previously issued. Under the terms of the Settlement Agreement,
the Company was also required to pay an additional $260,000, for a total of
$500,000 to the developer, in monthly installments commencing in June 2007, with
the total amount to be paid on or before January 18, 2008. In accordance
with the terms of the Settlement Agreement, the Company increased the note
payable to the developer by $260,000 as of December 31, 2006.
14. Subsequent
Events
In 2008, the Company
negotiated an extension of the note due for the purchase of Mocles (see note 11)
for an additional year through December 24, 2010.
Page 56
ITEM 8.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
The Board of
Directors of Castle appointed its current audit and accounting firm of Mantyla
McReynolds LLC in 2004, and this firm has been its primary accounting firm since
then.
During the Castles
two most recent fiscal years prior to this appointment, and since then, Castle
has not consulted Mantyla McReynolds LLC regarding the application of accounting
principles to a specified transaction, either completed or proposed; or the type
of audit opinion that might be rendered on Castles financial statements or any
other financial presentation whatsoever.
ITEM 8A(T).
CONTROLS AND PROCEDURES.
Evaluation of
Disclosure Controls and Procedures
Changes in
Internal Control over Financial Reporting
There have not
been any changes in the Companys internal control over financial reporting, as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act, during its fourth fiscal quarter that have materially affected, or are
reasonably likely to materially affect its internal control over financial
reporting.
Our management is
responsible for establishing and maintaining adequate internal control over
financial reporting. Our internal control system is intended to provide
reasonable assurance to our management and board of directors regarding the
preparation and fair presentation of published financial statements and that we
have controls and procedures designed to ensure that the information required to
be disclosed by us in our reports that we will be required to file under the
Exchange Act is accumulated and communicated to our management, including our
principal executive and our principal financial officers or persons performing
similar functions, as appropriate to allow timely decisions regarding financial
disclosure.
Managements
assessment of the effectiveness of our internal controls is based principally on
our financial reporting as of December 31, 2007. In making our assessment
of internal control over financial reporting, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control Integrated Framework.
Accordingly, as of
October 15, 2008, our management, with the participation of our Chief Executive
Officer (and Acting Chief Financial Officer), has evaluated the effectiveness of
our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, as of December 31, 2007. Our Chief
Executive Officer has further concluded that based on the fact that an
evaluation of internal controls over financial reporting was not completed prior
to our original filing of our Annual Report on April 15, 2008, and managements
report on internal control over financial reporting was not included in that
filing, he has concluded that the Annual Report as filed was materially
deficient and rendered the Company not current in its reporting requirements at
that time. As such, the disclosure controls and procedures were not
effective as of that date nor as of December 31, 2007.
Page 57
For the period
referenced above, management has recently completed the assessment and has
identified no material deficiencies in our internal control over financial
reporting, except for the failure to complete its assessment of internal
controls as noted above. Our Chief Executive Officer has concluded that
all other disclosure controls and procedures were effective as of that date in
providing reasonable assurance that information required to be disclosed by us
in the reports we file under the Exchange Act were recorded, processed,
summarized, and reported as specified in the Securities and Exchange
Commissions rules, regulations, and forms.
The design and
evaluation of disclosure controls and procedures must reflect the fact that
there are resource constraints and that management is required to apply its
judgment in evaluating the benefits of possible controls and procedures relative
to their costs. Management has determined that any identified
deficiencies, in the aggregate, do not constitute material weaknesses in the
design and operation of our internal controls in effect prior to December 31,
2007.
This Annual Report
does not include an attestation report of the Companys registered public
accounting firm due to a transition period established by rules of the
Securities and Exchange Commission for Smaller Reporting Companies.
Management's report was not subject to attestation by the company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management's report
in this Annual Report. Our auditors have not advised us of any material
weaknesses in our internal controls in connection with auditing our consolidated
financial statements for the years ended December 31, 2007, and 2006.
ITEM 8B.
OTHER INFORMATION.
None.
Page 58
PART III
ITEM 9.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table
sets forth certain information concerning the directors and executive officers
of Castle as of December 31, 2007
(1).
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
|
64
|
Chief Executive
Officer, Director and Chairman of the Board
|
Alan R.
Mattson
|
51
|
Chief Operating
Officer and Director
|
Howard
Mendelsohn
|
50
|
Chief Financial
Officer (2)
|
Jerry
Ruthruff
|
60
|
Secretary and
Director
|
John
Brogan
|
75
|
Director
|
Eduardo
Calvo
|
52
|
Director
(3)
|
Michael
Irish
|
54
|
Director
|
Rick
Humphreys
|
64
|
Director
|
Stanley
Mukai
|
75
|
Director
|
Motoko
Takahashi
|
63
|
Director
|
Roy
Tokujo
|
66
|
Director
|
Tony
Vericella
|
55
|
Director
|
(1) In January 2008
the Company announced the appointment of Mr. Robert Wu to its Board of Directors
and to the post of Executive Vice President of Asian Development for its Castle
Resorts & Hotels subsidiary.
(2) On March 1, 2008
Mr. Mendelsohn was named to the position of Executive Vice President of Capital
Markets Development. In his new role he is responsible for establishing
and managing the Companys relationships with the investment community and
individual investors. He will provide leadership in developing financing
strategies and executing transactions which will enhance Castles overall value.
Mr. Mendelsohn formerly served as Castles Chief Financial Officer.
A successor for the CFO position has not yet been named.
(3) On February 4,
2008 Mr. Calvo resigned his seat on the Board of Directors of the Company in
order to avoid any conflicts of interest between his legal practice and the
operations and strategies of the Company. Mr. Calvos law firm is not currently
representing Castle or any other party involved in any legal matters.
Director and
Officer Backgrounds
Rick Wall. - Mr.
Wall was appointed Castles Chief Executive Officer and Chairman of the Board in
1993. Mr. Wall is the founder of Castle, and has served on the board of
directors, and the executive committee of the Hawaii Visitors and Convention
Bureau.
Page 59
Alan Mattson Mr.
Mattson possesses over 20 years of senior level hospitality and travel industry
experience. Alan was formerly vice president of sales and marketing for Dollar
Rent a Car, responsible for all sales and marketing efforts for Hawaii, Asia,
and the Pacific. Prior to that, he was director of
marketing for Avis Car Rental, operating out of the Avis worldwide
headquarters in New York. In addition, Alan has seven years of sales and
marketing experience with Hilton Hotels Corporation, performing in a variety of
senior level sales and marketing positions in Hawaii and the domestic United
States. He joined Castle in September 1999 as senior vice president of
sales and marketing and was later promoted to president in July 2005. Mr.
Mattson was appointed to the position of Chief Operating Officer of the Castle
Group, Inc. in June, 2007.
Jerry Ruthruff -
Mr. Ruthruff joined Castle in 2003 as general counsel. He is a
graduate of the University of Washington and earned his law degree from Harvard
Law School in 1972. Mr. Ruthruff has been in private practice since 1972
focusing on commercial matters and is a former trustee of the State of Hawaii
Employees Retirement System.
John Brogan - Mr.
Brogan is a well-respected and recognized leader in the hotel industry, Mr.
Brogans last position before retirement was president of Starwood Hotels and
Resorts - Hawaii. Previously he chaired various boards, including Hawaii
Visitors & Convention Bureau, Hawaii Hotel Association, American Heart
Association-Hawaii, Blood Bank of Hawaii, Waikiki Improvement Association and
Chaminade University.
Rick Humphreys -
Mr. Humphreys has almost 40 years of financial expertise. He started his
career with Bank of California and was formerly president of both First Federal
S & L and Hawaiian Trust Company. He also served as chairman of Bank of
America in Hawaii. Rick is currently president of Hawaii Receivables Management,
LLC. Additionally, he is a trustee of Menlo College and Pacific Capital Funds,
and also a board member of the Bishop Museum, and Cancer Research Center of
Hawaii.
Mike Irish -
Mr. Irish has been a successful businessman in Hawaii for over 30 years.
Mr. Irish began his career in hotel management, but moved to real estate
and business acquisitions during the 1980s. He became part of the Hawaii food
service industry with the purchase of Parks Brand Products in 1985, Halms Kim
Chee in 1986, and Diamond Head Seafood in 1995 where he continues to serve as
CEO.
Stanley Mukai -
Mr. Mukai is a partner in the Hawaii law firm of McCorriston, Miller,
Mukai, MacKinnon. where he practices commercial and tax law. Mr. Mukai
holds a law degree from the Harvard Law School. He is the Chairman of the Board
of Waterhouse, Inc. and on the board of AIG Hawaii. He is past Chairman of
the Board of Regents of the University of Hawaii and a member of the Board of
Governors of the East-West Center. He presently serves on the Board of
Governors of Iolani School
Motoko Takahashi -
Ms. Takahashi was appointed Secretary of Castle in August of 1994 and as
director in March of 1995. Ms. Takahashi had previously served as director
for various Japanese investment companies in the United States. She also
holds the position as Vice President of N.K.C. Hawaii, Inc. Ms. Takahashi
was born in Tokyo, Japan where she completed her education and has resided in
the United States for more than 30 years, with the past six being in Hawaii.
Page 60
Roy Tokujo -
Mr. Tokujo was elected to the board of directors in March 2000. Mr.
Tokujo has over 45 years of experience in the hotel, restaurant and
entertainment business in Hawaii, and he is the President and CEO of Cove
Enterprises and Cove Marketing. Mr. Tokujo was a founding member of the Hawaii
Tourism Authority and is managing partner of Ko Olina Activities, LLC and Ko
Olina Marketing & Licensing, LLC.
Tony Vericella -
Mr. Vericella is the Managing Director of Island Partners Hawai`i, a
premier destination management company servicing the meeting and incentive
travel needs of corporations and organizations, primarily from North America,
Asia/Pacific and Europe. He has 30 years of extensive leadership experience
in all aspects of the travel and tourism industry. His career in Hawaii began
with Hawaiian Airlines and evolved to American Express Travel Related Services,
Budget Rent a Car-Asia/Pacific and the Hawai`i Visitors and Convention
Bureau.
Robert Wu- Mr. Wu
currently serves as executive vice president for Asian development for Castle
Resorts & Hotels a subsidiary of the Castle Group, Inc. He joined the
Company in January 2008 and became an integral part of Castle's business
development in the Asia region. Mr. Wu services as the chief executive offer for
the Wu Group, a Hawaii based firm that specializes in Asia imports, management
of several Hawaii businesses and business consultation services for the
Asia-Pacific region
Significant
Employees
None, not
applicable.
Family
Relationships
There are no family
relationships between any Castle officers and directors.
Involvement in
Certain Legal Proceedings
During the past five
years, no director, person nominated to become a director, executive officer,
promoter or control person of Castle:
(1) was a general
partner or executive officer of any business against which any bankruptcy
petition was filed, either at the time of the bankruptcy or two years prior to
that time;
(2) was convicted in
a criminal proceeding or named subject to a pending criminal proceeding
(excluding traffic violations and other minor offenses);
(3) was subject to
any order, judgment or decree, not subsequently reversed, suspended or vacated,
of any court of competent jurisdiction, permanently or temporarily enjoining,
barring, suspending or otherwise limiting his involvement in any type of
business, securities or banking activities; or
(4) was found by a
court of competent jurisdiction (in a civil action), the Securities and Exchange
Commission or the Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law, and the judgment has not been
reversed, suspended or vacated.
Page 61
Compliance
with Section 16(a) of the Securities Exchange Act.
Section 16 of the
Securities Exchange Act of 1934 requires Castles directors and executive
officers and persons who own more than 10% of a registered class of Castles
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 Castles common stock and other equity securities
of Castle. Officers, directors and greater than 10% shareholders are required by
SEC regulation to furnish Castle with copies of all Section 16(a) reports they
file.
From July 2000 until
September 2007 , Castle ceased filing public reports and other documents which
it was required to file with the Securities and Exchange Commission. No
officer, director or 10% shareholder of Castle sold any of Castles equity
securities during the period from July 31, 2000, to the date hereof. During that
period from July 31, 2000, and continuing until the date of this filing,
no officer, director or 10% shareholder of Castle reported his or her
acquisition of Castle common stock received in exchange of forgiveness of
indebtedness and/or in exchange for services rendered. Appropriate beneficial
ownership forms have been filed with the Securities and Exchange Commission and
may be found at .(www.sec.gov)
To Castles
knowledge, as of the date hereof, all directors, officers and holders of more
than 10% of Castles common stock, have filed all reports required of Section
16(a) of the Securities Exchange Act of 1934.
Code of
Ethics
Castle has adopted a
Code of Ethics that applies to all of its directors and executive officers
serving in any capacity, including our principal executive officer, principal
financial officer, and principal accounting officer or controller or persons
performing similar functions. See Part III, Item 13.
Nominating
Committee
The Board of
Directors has not established a Nominating and Corporate Governance Committee
because Castle management believes that the Board of Directors is able to
effectively manage the issues normally considered by a Nominating and Corporate
Governance Committee.
Audit
Committee
The Board of
Directors has appointed Richard Humphreys, Stanley Mukai and Motoko Takahashi as
the Audit Committee. Mr. Humphreys, Mr. Mukai and Ms. Takahashi are
independent as that term is used in Item 7(d)(3)(iv) of Schedule 14A under
the Exchange Act.
ITEM 10. EXECUTIVE
COMPENSATION.
Executive
Compensation
The following table
shows for the fiscal years ended December 31, 2005, 2006 and 2007, the aggregate
annual remuneration of both highly paid persons who are executive officers or
directors of Castle:
Page 62
SUMMARY COMPENSATION TABLE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Principal Position
(a)
|
Year
(b)
|
Salary
($)
(c)
|
Bonus
($)
(d)
|
Stock Awards
($)
(e)
|
Option Awards
($)
(f)
|
Non-Equity Incentive Plan
Compensation
($)
(g)
|
Nonqualified Deferred
Compensation
($)
(h)
|
All Other Compensation
($)
(i)
|
Total
Earnings
($)
(j)
|
Rick Wall
CEO & Director
|
12/31/07
12/31/06
12/31/05
|
$220,490
201,250
198,105
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
1,117
2,013
1,981
|
221,607
203,263
200,086
|
Alan Mattson COO & Director
|
12/31/07
12/31/06
12/31/05
|
$198,083
163,950
141,325
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
1,740
1,667
1,438
|
199,823
165,617
142,763
|
Outstanding Equity
Awards
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
________________________________________________________________________
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
Number of Securities Underlying
Unexercised Options (#) Exercisable
|
Number of Securities underlying
Unexercised Options (#) Unexercisable
|
Equity Incentive Plan Awards Number of
Securities Underlying Unexercised Unearned Options (#)
|
Option Exercise Price
($)
|
Option Expiration Date
|
Number of Shares or Units of Stock
That Have Not Vested (#)
|
Market Value of Shares or Units of
Stock That Have Not Vested
($)
|
Equity Incentive Plan Awards: Number
of Unearned Shares, Vested Units or Other Rights That Have Not Vested
(#)
|
Equity Incentive Plan Awards: Market
or Payout Value of Unearned Shares, Units or Other Rights That Have Not
Vested ($)
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
None
|
None
|
None
|
None
|
None
|
None
|
None
|
None
|
None
|
None
|
Page 63
DIRECTOR COMPENSATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
Fees Earned or Paid in Cash ($)
|
Stock Awards ($)
|
Option Awards ($)
|
Non-Equity Incentive Plan Compensation ($)
|
Nonqualified Deferred Compensation Earnings ($)
|
All Other Compensation ($)
|
Total ($)
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
Rick
Humphreys
|
$2,750
|
0
|
0
|
0
|
0
|
0
|
$
2,750
|
John
Brogan
|
2,750
|
0
|
0
|
0
|
0
|
0
|
2,750
|
Tony
Vericella
|
2,750
|
0
|
0
|
0
|
0
|
0
|
2,750
|
Stanley
Mukai
|
2,250
|
0
|
0
|
0
|
0
|
0
|
2,250
|
Jerry
Ruthruff
|
2,250
|
0
|
0
|
0
|
0
|
0
|
2,250
|
Michael
Irish
|
1,750
|
0
|
0
|
0
|
0
|
0
|
1,750
|
Roy
Tokujo
|
1,500
|
0
|
0
|
0
|
0
|
0
|
1,500
|
Eduardo Calvo
Jr.
|
1,250
|
0
|
0
|
0
|
0
|
0
|
1,250
|
Compensation of
Directors
Non-employee
Directors are paid $500 for each meeting of the Board which they attend. Members
of the Executive Committee, Compensation Committee and Audit Committee are paid
$250 for each meeting of the respective committees which they attend. Castle
does not presently have a stock option or similar compensation or incentive plan
for members of the Board of Directors. Mr. Calvo resigned as a Director in
February 2008.
Employment
Contracts
Castle has entered
into a written employment contract with Alan Mattson effective as of January 1,
2006 and with Rick Wall effective as of January 1, 2004, which was subsequently
amended on January 1, 2006, each of which is for the period ending December 31,
2010; each of these agreements has been previously filed and incorporated herein
by reference to Exhibits 10.2 and 10.3 to the Companys Annual Report on Form
10KSB for the year ended December 31, 2006.
During 2007 the
Company entered into a written agreement with Howard Mendelsohn, effective as of
July 1, 2007 for his professional services to the Company. This agreement
has been previously filed and incorporated herein by reference to Exhibits 10.1
Companys Report on Form 8K on September 20, 2007.
Long Term
Incentive Plans
As part of the
compensation under its agreement with Howard Mendelsohn the Companys the
Companys Executive Vice President of Capital Markets Development, on July 1,
2007 the Company granted Mr. Mendelsohn a warrant to purchase up to 200,000
shares of the Companys common stock at a price of $2.00 per share for a period
of up to 5 years. As of December 31, 2007 Mr. Mendelsohn had vested the right to
purchase up to 100,000 shares under this warrant. There were no other
Page 64
options,
awards, options or stock appreciation rights or long term incentive plan awards
that were issued or granted to Castles management during the fiscal year ending
December 31, 2007.
Castle has a 401(k)
profit sharing plan generally available to all of its employees. Under the
terms of the plan, Castle is required to match 100% of the amounts contributed
by participants through payroll deductions, up to a maximum of 1% of their
compensation. Any employee with one year of service who is at least 21
years of age is eligible to participate.
Stock
Plans
There were no stock
plans in effect by Castle as of December 31, 2007.
ITEM 11. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
Security Ownership
of Certain Beneficial Owners
The following table
sets forth the number of shares of Castles common stock beneficially owned as
of March 31, 2008 by: (i) each of the two highest paid persons who were
officers and directors of Castle, (ii) all officers and directors of Castle as a
Group, and (iii) each shareholder who owned more than 5% of Castles common
stock, including those shares subject to outstanding options, warrants and other
convertible items. Amounts also reflect shares held both directly and
indirectly by the persons named.
|
|
|
|
|
|
|
|
|
Name and
Address
|
Beneficially Owned (1)
|
Shares % of Class (2)
|
Rick Wall
3 Waterfront
Plaza, Suite 555
500 Ala Moana
Boulevard
Honolulu, HI
96813
|
2,761,500
|
29.0%
|
Motoko
Takahashi
3 Waterfront
Plaza, Suite 555
500 Ala Moana
Boulevard
Honolulu, HI
96813
|
1,138,900
|
11.9%
|
Roy Tokujo
1580 Makaloa
St.
Honolulu, HI
96814
|
380,000
|
4.0%
|
Jerry
Ruthruff
700 Richards
Street, Apt. 2709,
Honolulu, HI
96813
|
300,000
|
3.1%
|
Stanley
Mukai
500 Ala Moana
Blvd 4th Floor
Honolulu, HI
96813
|
147,000
|
1.5%
|
Page 65
|
|
|
Alan R.
Mattson
3 Waterfront
Plaza, Suite 555
500 Ala Moana
Boulevard
Honolulu, HI
96813
|
102,000
|
1.1%
|
Directors and
officers
as a group (8
persons)
|
4,829,400
|
50.6%
|
|
|
|
(1) Except as
otherwise noted, Castle believes the persons named in the table have sole voting
and investment power with respect to the shares of Castles common stock set
forth opposite such persons names. Amounts shown include the shares owned
directly by the holder and shares held indirectly by family members of the
holder or entities controlled by the holder.
(2) Determined
on the basis of 9,538,055 shares outstanding.
Changes in
Control
There are no current
or planned transactions that would or are expected to result in a change of
control of Castle.
Securities
Authorized for Issuance under Equity Compensation Plans
|
|
|
|
|
|
|
|
|
|
|
|
Plan Category
|
Number of Securities to be issued upon
exercise of outstanding options, warrants and rights
|
Weighted-average exercise price of
outstanding options, warrants and rights
|
Number of securities remaining
available for future issuance under equity compensation plans excluding
securities reflected in column (a)
|
|
(a)
|
(b)
|
(c)
|
Equity compensation plans approved by security
holders
|
None
|
None
|
None
|
Equity compensation plans not approved by security
holders
|
None
|
None
|
None
|
Total
|
None
|
None
|
None
|
Options, Warrants
and Rights
In 1999 and 2000,
Castle issued 11,105 shares of Castles $100 par value redeemable Preferred
Stock through a private placement for a gross consideration of $1,105,000.
The stock bears cumulative dividends at the rate of $7.50 per annum for
each share of stock. Upon certain tender offers to acquire substantially
all of Castles common stock, the holders of the Redeemable Preferred Stock may
require that the shares be redeemed at a redemption price of $100 per share plus
accrued and unpaid dividends. The shares are nonvoting and entitle the
holder to convert each share of Preferred Stock into 33.33 shares of Castles
common stock. Dividends are cumulative from the date of original issue and
are payable, semi-annually, when, and if, declared by the board of directors.
At December 31, 2006, undeclared and unpaid dividends on these shares were
$704,233 or $63.73 per preferred share.
Page 66
ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Transactions with
Related Persons
Hanalei Bay
International Investors (HBII)
The Chairman and CEO
of the Company is the sole shareholder of HBII Management, Inc, the managing
General Partner of HBII. In March 1999, HBII consummated the sale of its
interest in Hanalei Bay Resort to an unrelated third party. The cash
proceeds received by HBII on the closing of the sale were not sufficient to
satisfy all claims of HBIIs creditors, including the Company, and the Company
accepted a note receivable in the amount of $4,420,003 as settlement for its
account receivable balance of $1,105,001 at the time of the sale. The
excess amount ($3.315M) over the receivable balance was accounted for as a
shareholder contribution. Under the terms and conditions of the agreement to
sell Hanalei Bay Resort, HBII is entitled to receive a percentage of the future
cash flows from the resorts hotel operations and the sale of certain time-share
units.
As part of the
Companys purchase of real estate in New Zealand (see Note 11), an assignment of
$3,018,000 of the total note receivable from HBII was made to the seller of the
real estate, with the Company remaining as guarantor should the note receivable
not be collected before December 24, 2009. This obligation has been subsequently
extended until December 24, 2010.
During 2006, the
Company also assigned $600,000 of the HBII note receivable to a bank as security
for a term loan.
Castle had recorded a
note receivable from Hanalei Bay International Investors (HBII) which amounted
to $4,420,003 including interest as of December 31, 2007. HBII intended to
pay that amount from its share of proceeds owed to it pursuant to an agreement
with Quintus (HBR), LLC (HBR). However, HBR disputed the amount that it
was indebted to HBII, and HBII filed a lawsuit to collect the amounts owed by
HBR. In March 2008, HBII and Quintus Resorts, LLC (Quintus), the parent
company of HBR, entered into a settlement to resolve the litigation by Quintus
issuing a twenty percent (19.9%) membership interest in Quintus to HBII or its
designee, which included a preferred return as to the first $6.2 million of
future distributions of available cash flow.
Quintus is the owner
of a timeshare resort project in Genoa, Nevada, near Lake Tahoe. Quintus
has not yet completed its financial statements for 2007 but estimates that its
net loss incurred in 2007 will eliminate all or virtually all of its net equity
as calculated according to generally accepted accounting principles.
Quintus believes that the fair market value of its assets on a going
concern basis exceeds its liabilities by approximately $15,000,000; according to
Quintus projections, Quintus is projecting cash flows of over $40,000,000 from
the sale of time share intervals and/or real property interests in its timeshare
resort project over the next ten to fifteen years. Neither Quintus
estimates as to the fair market value of its assets nor its projections have
been verified or reviewed by any independent third party.
For at least the next
two or three years, Quintus will be required to use all of its available cash
flow to pay down the substantial indebtedness it incurred in purchasing the
resort. Based on Quintuss financial projection, HBIIs management
believes that it is likely to receive in excess of $6,000,000 from its ownership
interest in Quintus and that it will utilize these funds to pay its indebtedness
to
Page 67
Castle.
In that the distributions from HBII will likely not be realized for a
number of years and are subject to uncertainty and risks over which Castle has
no control, there can be no assurance that Castle will receive any distributions
from HBIIs ownership interest in Quintus within the next ten years, if at all.
As required by Generally Accepted Accounting Principles (GAAP) t
he Company has established a reserve for
uncollectible amounts. The Company recorded an expense during 2007 for
$954,459, and reduced additional paid in capital for $3,315,002 in providing for
the reserve. In the fourth quarter the Company reversed $150,542 in
accrued Interest Income earned on the Note during 2007.
Loan Fees
In 2006, the Company
secured $600,000 financing from a bank (see note 6 to the financial statements)
and the CEO of the Company acted as guarantor. As consideration for the
guaranty, the Company pays a quarterly guaranty fee of 2% per annum to the CEO
of the Company. During 2007, the Company paid $8,156 in guaranty fees to
the Companys CEO.
Related Party
Loans
During 2002, the
Companys CEO advanced $117,316 to the Company for general working capital. The
note bears interest at 10% and is due on or before 1/1/09.
During 2004, the
Companys CEO advanced $125,000 to the Company for general working capital. The
note calls for monthly payments of $2,544, including interest at prime plus
2.5%, with the remaining principle balance due on 4/26/09.
During 2004, a
director of the Company advanced $125,000 to the Company for general working
capital. The note calls for monthly payments of $520.83, plus interest on the
unpaid balance at 10%. The unpaid principle balance is due on 1/1/09.
In December of 2007,
the Chairman and CEO of the Company advanced $75,000 to the Company to
capitalize the Companys Thailand subsidiary.
Through December
2007, the Company has accrued but not paid Mr. Jerry Ruthruff a total of $72,000
for professional fees earned during 2007.
Except for the
transactions with HBII, the issuance of stock described above, the financing
guarantee arrangement, the related party loans and unpaid fees, and the
employment agreements with Rick Wall and Alan Mattson, there were no
transactions, proposed transactions or outstanding transactions to which Castle
or any of its subsidiaries was or is to be a party, in which the amount involved
exceeds $50,000 and in which any director or executive officer, or any
shareholder who is known to Castle to own of record or beneficially more than
10% of Castles common stock, or any member of the immediate family of any of
the foregoing persons, had a direct or indirect material interest.
Parents of the
Issuer:
Not applicable.
Page 68
Transactions
with Promoters and Control Persons
Except as indicated
under the heading Transactions with Related Persons of this Item 12, above,
there were no material transactions, or series of similar transactions, during
Castles last five fiscal years, or any currently proposed transactions, or
series of similar transactions, to which we or any of our subsidiaries was or is
to be a party, in which the amount involved exceeded $120,000 and in which any
promoter or founder of ours or any member of the immediate family of any of the
foregoing persons, had an interest.
ITEM 13. EXHIBITS.
Exhibit Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit No.
|
Title of Document
|
Location if other than attached
hereto
|
Previously Filed
|
3.1 *
|
Restated Articles of Incorporation
|
Part I, Item 1 *
|
*
|
3.2 *
|
Certificate of Designation
|
Part I, Item 1 *
|
*
|
3.3 *
|
By-Laws
|
Part I, Item 1 *
|
*
|
3.4 *
|
By-Law Amendment
|
Part I, Item 1 *
|
*
|
10.1
|
Settlement Agreement Manhattan Guam
|
Part I, Item 1 *
|
*
|
10.2
|
Employment Agreement with Rick Wall as
amended
|
Part III, Item 10 *
|
*
|
10.3
|
Employment Agreement with Alan Mattson
|
Part III, Item 10 *
|
*
|
14
|
Code of Ethics
|
Part III, Item 10
|
*
|
21
|
Subsidiaries of the Company
|
|
|
31.1
|
302 Certification of Rick Wall
|
|
|
32
|
906 Certification
|
|
|
|
|
|
|
* Incorporated herein by reference and Filed as exhibit
to Form 10KSB for the year ended December 31, 2006 on September 19, 2007.
ITEM 14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
The Following is a
summary of the fees billed to us by our principal accountants during the fiscal
years ended December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Fee
Category
|
2007
|
2006
|
Audit
Fees
|
$
148,915
|
$
|
83,468
|
Audit-related
Fees
|
0
|
|
0
|
Tax Fees
|
4,715
|
|
5,960
|
All Other
Fees
|
0
|
|
3,372
|
Total
Fees
|
$ 153,630
|
$
|
92,800
|
AUDIT FEES
The aggregate fees
billed by Castles auditors for professional services rendered in connection
with
Page 69
the
audit of Castles annual consolidated financial statements and reviews of the
interim consolidated financial statements for 2007 and 2006 were $148,915 and
$83,468 respectively.
AUDIT-RELATED
FEES
The aggregate fees
billed by Castles auditors for any additional fees for assurance and related
services that are reasonably related to the performance of the audit or review
of Castles financial statements and are not reported under Audit Fees above
for 2007 and 2006 were $0 for all years.
TAX FEES
The aggregate fees
billed by Castles auditors for professional services for tax compliance, tax
advice, and tax planning for 2007 and 2006 were $4,715 and $5,960
respectively.
ALL OTHER
FEES
The aggregate fees
billed by Castles auditors for all other non-audit services rendered to Castle,
such as attending meetings and other miscellaneous financial consulting, for
2007 and 2006 were $0 and $3,372, respectively.
SIGNATURES
In accordance with
Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
THE
CASTLE GROUP, INC.
Date:
October 28,
,
2008
By
/s/ Rick Wall
Rick
Wall, Chief Executive Officer
and
Chairman of the Board
In accordance with
the Exchange Act, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
/s/ Rick Wall
Date:
10
/ 28
/08
Rick Wall
Chief Executive
Officer and
Chairman of the Board
/s/ Alan R.
Mattson Date: 10/28/08
Alan R. Mattson
Director and Chief
Operating
Officer, President,
Castle Resorts & Hotels, Inc.
/s/ Motoko Takahashi
Date:
10/28/08
Motoko
Takahashi
Director
/s/ Tony Vericella
Date:
10/28/08
/s/ Roy Tokujo
Date:
10/28/08
Tony Vericella
Roy Tokujo
Director
Director
/s/Jerry
Ruthruff Date:
10/28/08 /s/John
Brogan
Date: 10/28/08
Jerry
Ruthruff
John Brogan
Director Director
Page 70