Item 1. Business.
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 Castle’s stockholders. Management believes that all statements that express expectations and projections with respect to future matters, as well as from developments beyond Castle’s 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 management’s views and assumptions, as of the time the statements are made, regarding future events and business performance. There can be no assurance; however, that management’s 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 and foreign exchange rate fluctuations; which may impede Castle’s 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.
Description of the Business
The Castle Group, Inc. (“the Company,” “Castle,” “we,” “our” 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, and New Zealand. The Company was incorporated in Utah on August 21, 1981 and on June 4, 1993 the name of the Company was changed to The Castle Group, Inc.
Principal Products or Services and Their Markets
General
We are a full service hospitality and hotel management company that prides itself on its ability to be both “Flexible and Focused,” our operations motto. Flexible, to meet the specific needs of property condo owners at the properties that it manages; and Focused, in its efforts to achieve enhanced rental income and profitability for those owners. We earn our 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. Our revenues are derived primarily from two sources: (1) the rental of hotel rooms and condominium accommodations along with food and beverage sales at the properties we manage and; (2) fees paid for services we provide to property owners. We also derive revenues from commissions at certain of our properties, rental of real estate owned in New Zealand, and investment income through our ownership of a minority interest in a domestic hotel property.
Corporate Culture
Our 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.
Marketing Strategy
Most of our marketing efforts are focused towards acquiring and retaining guests for the properties we manage. We have made investments in two of the properties that we manage, as we own the lobby and food and beverage areas in our New Zealand property, and have a minority interest in a property in Hawaii. Sales, advertising and marketing is handled by our sales staff and is done through various distribution channels including direct internet sales, wholesalers, online and traditional travel agencies, corporate and frequent traveler accounts, and group tour operators. We also manage and operate an interactive web site (www.Castleresorts.com) for customers to view information about the properties we manage and make reservations to stay at the properties. The website offers 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. The proprietary online booking and reservations engine supports a dynamic pricing model which maximizes revenues for all of our properties under management.
We support our online presence with a full service, reservation call center that provides a wide range of services from tour reservation processing and rooms control, to handling group bookings. Our reservation center electronically connects resort property inventory and rates to the four major Global Distribution Systems (“GDS”). This connectivity displays rates and inventory of our properties to over 500,000 travel agents worldwide as well as providing internet connectivity to over 1,200 travel websites around the globe.
Diversity
We have a diverse portfolio of properties located in desired island resort destinations throughout the Pacific Region. We represent hotels, resort condominiums, luxury villas and lodging accommodations throughout Hawaii, in Saipan, and in New Zealand.
In Hawaii, we are the only lodging chain that represents properties on the five major Hawaiian Islands of Oahu, Maui, Kauai, Molokai and Hawaii, allowing our customers the option to island-hop which provides us with cross-selling advantages. Our Honolulu headquarters serve as the epicenter for our international operations in Saipan and New Zealand. Our diverse destinations offer customers the opportunity to discover new experiences and varying cultures in the areas we represent.
We offer 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 300 guest rooms. Our collection of all-suite 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 Castle’s competency in managing and marketing a wide range of accommodations to our customers via multiple channels of distribution.
Brand Strategy
Each property we manage 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 sales and marketing resources, channel distribution, resort management expertise, industry partnerships and networks.
Our 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 plant, marketing and operational costs that the brand demands in order to fall into the brands cookie cutter image. There are also some tangible differences from the guest’s or customer’s perspective as well. At Castle, we believe that one size and one guest experience model does not fit all and we also believe that marketing efforts should be focused on the individual property with its unique culture instead of concentrating dollars on the advancement of the brand name instead of the individual property.
We market each property with its own independent brand identity and deploy customized marketing programs to target the specific demographics attracted to each of our unique properties. Through our property brand building efforts, we begin the process of positioning each of our resorts 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. 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. This ongoing trend towards smaller, independent hotels, as opposed to the familiar mid-range chains has been seen in recent years throughout the world tourism marketplace.
Marketing Programs and Promotions
We have implemented numerous marketing programs and promotions directed towards both the consumer and trade markets to generate incremental revenue and customer loyalty for each of our properties. We have developed a wide range of programs designed specifically to reflect the unique attributes of each of our resort properties, which also includes providing various incentives. We manage a number of marketing programs and promotions, some of which are seasonal to drive incremental room night revenues during valley periods, and some of which are ongoing throughout the year. During the past year we have emphasized programs relating to value travel and accommodations as well as increased consumer direct booking at the luxury properties we manage.
Growth Strategy
The majority of the properties we presently manage are located within the state of Hawaii, with one property each in New Zealand and Saipan.
During the course of 2008 and 2009, as a result of the declines in world economic conditions and the associated decrease in consumer expendable wealth, we have temporarily halted our expansion plans and efforts aimed at the Far East Asian region. While we believe that there are significant opportunities in this region, we have chosen to focus on obtaining additional contracts within our current markets due to the opportunities afforded by the economic downturn including sales of properties, foreclosures, underperformance of certain properties, and dissatisfaction with the current management of our competitors. Management will explore expansion again into the Asian region when we determine that the economic conditions would make it once again economically feasible to enter these regions.
As part of our strategy 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 Castle’s 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 hotel’s operation. Through our ownership of the Podium and a multi-year management contract for the Spencer on Byron hotel, we are assured of ongoing revenues in future years from this property.
In 2010 we took a major step forward in the domestic market as we secured an ownership interest in a Hawaii property that we manage.
In addition to focusing on growing our portfolio of properties, we will continue to focus efforts on securing additional equity ownership interests in properties in both the domestic and international markets.
Item 1A.
Item 1A. Risk Factors
Not required for smaller reporting companies.
Item 2.
Item 2. Property.
We lease office space for our principal executive offices. This lease expires on October 31, 2014 at a rental cost that averages $8,558 per month, plus the cost of common area maintenance.
We also lease additional office space for our finance and accounting operations. This lease expires on February 28, 2014 at a rental cost that averages $5,606 per month, plus the cost of common area maintenance.
In July 2001, we entered into lease agreements (in lieu of a traditional management agreements) with each of the owners of approximately 250 investment units of 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 were for a period of ten years expiring on July 18, 2011. Monthly lease rents were calculated as a percentage of the purchase price paid by the original owner of each condominium. This lease was extended to July 31, 2011 and upon expiration, we entered into a new management contract with the unit owners under a Net Contract arrangement through January 31, 2012.
In February 2012, the Company entered into a long term contract (10 years) with approximately 200 unit owners of our New Zealand property. Under the terms of the new contract, there is no guaranteed return to the unit owners of the property.
We continue our ownership (through Mocles) of certain common areas of the property which includes the lobby, restaurant and bar; therefore, we will continue to own and operate the food and beverage operation. The lobby area owned by us is also rented out to the rental program. Over the previous ten years, we had operated the room operations at a loss as the property was brand new and had not established itself in the marketplace. The property is now well known in the area, especially after the hosting of various teams that participated in the World Rugby Cup, and has a mature base of customers. Additionally, our food and beverage operations have won various culinary awards in the area and we believe that this combination of a net contract for the room operations and the profitable food & beverage operations will ensure future profitability for our New Zealand operation.
On December 24, 2004, Castle, 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. The purchase price for Mocles was $8,024,095 (NZ$10,367,048), net of imputed interest $1,263,905 (NZ$1,632,952). The face value of the purchase price was $9,288,000 (NZ$12,000,000). Mocles owns the lobby, bar and restaurant areas in the Spencer on Byron Hotel.
In July 2010, we acquired a 7% common series ownership interest in one of the hotels which we manage as compensation for consulting and due diligence work done during the acquisition of the property by a third party.
Item 3.
Item 3. Legal Proceedings.
We are subject to various claims and lawsuits which are normal and reasonably foreseeable in light of the nature of our business. In the opinion of management, although no assurances can be given, the resolution of these claims will not have a material adverse effect on our financial position, results of operations and liquidity. Further, to the knowledge of management, no director, officer, affiliate, or record of beneficial owner of more than 5% of the common voting stock of the Company is a party adverse to the Company or has a material adverse interest to the Company in any material proceeding.
Item 4.
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 2012.
PART II
Item 5.
Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock began trading on December 31, 2007 under the trading symbol CAGU. 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.
Price Range of Common Stock
The price range per share of common stock presented below represents the highest and lowest sales prices for our common stock on the OTC Bulletin Board during each quarter of the two most recent fiscal years.
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
Fiscal 2012 price range per common share
$0 .16-$0.25
$0 .15-$0.15
$0 .12-$0.12
$0 .15-$0.20
Fiscal 2011 price range per common share
$0 .12-$0.20
$0 .14-$0.25
$0 .15-$0.20
$0 .20-$0.30
Holders of Record
There were approximately 280 owners of record of Castle’s common stock as of March 15, 2013.
Dividends
We have not paid any dividends with respect to our common stock, and do not intend to pay dividends on our common stock in the foreseeable future. As more fully described in Note 7 to Castle’s consolidated financial statements included herein, in 1999 and 2000, we 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. During the fiscal year ended July 31, 2000, we paid dividends to holders of record as of July 15, 2000, in the amount of $16,715. At December 31, 2012, undeclared and unpaid dividends on these shares totaled $1,119,035 or $101.27 per preferred share. These dividends are not accrued as a liability, since no dividends have been declared. We cannot pay dividends on our common stock until we declare and pay the dividends on our preferred stock. It is the intention of management to utilize and reinvest all discretionary available funds into the development and expansion of our business, rather than for common stock dividend payments.
Securities Authorized for Issuance under Equity Compensation Plans
We do 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 2010 we issued 80,000 of our common stock to non-employee directors of the Company. The shares were valued at $.20 per share which equaled the closing price of the common stock on the date of issuance and the entire valuation was recorded as compensation
expense on that date. In addition to the shares, the non-employee directors also received, for every share issued, a warrant to purchase an additional share of our common stock at a price of $1.00. The warrants expire at the earlier of five years or 60 days after our common stock trades for an average price of $3.00 per share for 20 consecutive days and were valued using the Black-Scholes pricing model at $.12 per share or $9,440. The inputs for the pricing model included an expected term of 2.5 years and volatility of 131%.
We 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 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 2011 and 2012, there were no new issuances of registered or unregistered securities.
Use of Proceeds of Registered Securities.
There were no proceeds received by us from the sale of registered securities during the 12 months ending December 31, 2012.
Purchases of Equity Securities by Us and Affiliated Purchasers.
On July 23, 2010 the Company acquired a 7% common series interest in the ownership of a hotel located in Hawaii. The Company recognized $188,173 in revenue resulting from cash received in finder’s fees and consulting fees and then used those funds to acquire the 7% common series interest.
On September 22, 2011, the Company acquired a minority ownership interest in a hotel for consulting work done during the acquisition of the hotel units by another third party. The Company recorded $180,000 of consulting fee income as the value of the 2% ownership interest. The interest was subsequently sold in 2012.
Item 6.
Item 6. Selected Financial Data and Supplementary Financial Information.
Not Applicable
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Plan of Operations” including statements regarding the anticipated development and expansion of Castle’s 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Plan of Operations.”
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 or exchange rate fluctuations, which may impede Castle’s 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.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2012 and 2011
For added clarity in the discussion below the Company’s Quarterly Statement of Operations for 2012 and 2011 are presented as reported in the Company’s Form 10-Q Quarterly Reports with the Securities and Exchange Commission:
Revenue
For 2012, our revenue trend is reflective of a recovery in the tourism industry of Hawaii. The Hawaii State Department of Business, Economic Development, and Tourism (DBEDT) announced that overall there was an 8.9% increase in visitor days, a 9.2% increase in visitor arrivals, and a 5.6% increase in visitor spending in Hawaii for 2012 as compared to 2011. 1 Total airline seat capacity to Hawaii also reflected this trend with an increase of 8.7% in 2012 as compared to 2011. 1
1 Hawaii State Department of Business, Economic Development and Tourism (http://hawaii.gov/dbedt/info/vistors-stats/tourism/2012/Dec12.pdf).
The Company has two basic types of agreements. Under a “Gross Contract” the Company records revenue 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 owner’s unit and the Company also typically receives an incentive management fee, which is based on the net operating profit of the covered property. Additionally, under a net contract, in most cases we employ on-site personnel to provide services such as housekeeping, maintenance and administration to property owners under our management agreements and for such services, we recognize revenue in an amount equal to the expenses incurred. Revenues 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.
Castle’s Revenues totaled $22,774,487 for the year ended December 31, 2012, representing a 12% decrease from $25,888,733 in 2011. This decrease is attributed to the change in our New Zealand management contract. Effective August 1, 2011, our contract for our New Zealand property changed from a gross to a net contract and therefore room revenues after that date belonged to the owners and were no longer reported as our revenue. Room revenues for our New Zealand property between January 1 and August 1, 2011, were $3,850,174. If these revenues were excluded from our 2011 results, total revenues on a same store basis for 2011 would have been $22,038,559 and 2012 revenues would represent an increase of 3% over 2011.
Our quarterly revenues decreased 18%, 3% and 16% during the first, second and third quarters of 2012 compared to 2011, again as a result of our reporting the New Zealand room revenues in our financial statements through August 1, 2011. Total revenue for the fourth quarter of 2012 totaled $5,833,790 as compared to $5,804,367 in the fourth quarter of 2011, representing a slight increase of 1%.
Revenues attributed from Properties decreased 23% to $11,895,796 for the year ended December 31, 2012, as compared to $15,409,947 in 2011, again as a result of the change in our New Zealand contract. Excluding the room revenues from our New Zealand property from our 2011 results would bring 2011 revenues down to $11,559,773 on a same store basis and 2012 results would represent an increase of 3% over prior year.
Management and Service Revenues increased 6% to $10,865,044 in 2012 from $10,287,337 in 2011. This increase was attained as a result of the increase in occupancy for both our domestic and foreign operations and was attained despite the sale of one of our Hawaii based contracts in June of 2012. The increase is attributed to the improvement in the overall world tourism economy.
Other income was $13,647 in 2012 compared to $191,449 in 2011. In 2011 we received an ownership interest in a hotel which was valued at $180,000.
The Company reported investment income of $175,145 in 2012 compared to $14,160 in 2011, which represents the Company’s share of the income attributable to its minority ownership in a domestic hotel.
Costs and Expenses
Total Operating Expenses were $21,867,788 in 2012, a decrease of 13% when compared to $25,130,259 in 2011. Similar to revenues, the decrease is attributable to approximately $2,800,000 of room departmental expenses we recorded in 2011 under our gross contract in New Zealand. Excluding these expenses in 2011, Total Operating Expenses on a same store basis in 2011 would be $22,330,259 and 2012 results would represent a decrease of 2% despite the increase in revenue.
Attributed Property Expenses decreased 25% to $10,531,679 in 2012, as compared to $14,076,386 in 2011. Attributed Property Expenses include the operating expenses of the properties which are managed under Gross Contracts. The decrease in expenses is a result of the change in our New Zealand management contract. Similarly with Attributed Property Revenues, as of August 1, 2011, we do not include the operating expenses for our room operations in New Zealand. Attributed Property Expenses from our New Zealand contract in 2011 were approximately $2,800,000 and excluding this from our 2011 expenses would translate to a same store expense of $11,276,386 and 2012 results would represent a decrease of 7%.
Payroll and office expense totaled $10,667,646 in 2012, as compared to $10,378,464 in the year earlier period, an increase of 3%. This increase is primarily related to additional salary and wages for our sales and marketing corporate headquarters that were previously unfilled in 2011.
Administrative and general expense totaled $445,935 in 2012, an increase of 3% as compared to $431,708 for 2011. The increase is due to increased travel expenses as our corporate headquarters performed more operational visits to our properties.
Depreciation expense in 2012 decreased by $21,172, to $222,528 when compared to $243,700 in 2011. This was due to the Company making only limited capital expenditures during 2012.
A foreign exchange loss of $191,585 was recognized in 2012 which resulted from the impact of an increase of the Guarantor Obligation of the Company that is payable in New Zealand Dollars (see Note 4 of the Notes to Consolidated Financial Statements). In 2011, the
Company recorded a foreign exchange loss of $21,007. These exchange losses were a result of the weakening of the US Dollar exchange rate against the New Zealand Dollar.
Interest expense totaled $374,996 for 2012, an increase of 4% as compared to 2011’s total of $359,557. This increase is due to the refinancing of our real estate loan in New Zealand whereby effective August 1, 2011, we commenced paying interest of NZ$20,000 per month (US$16,392) on the loan.
The Company provides for a deferred tax asset on its United States taxable income. Although the Company also has net operating losses that are available to carryforward from its non-US operations, due to the uncertainty of those tax benefits being used in future years, the Company has set up a provision for 100% of those tax benefits. Income tax expense for 2012 totaled $413,227, an increase of $281,672 when compared to 2011’s $131,555. The Company’s deferred tax asset balance of $1,500,695 on December 31, 2012 is derived from its taxable losses in previous years. This reflects the Company’s estimate of the amount which will offset tax liabilities from expected taxable income in future years. The Company expects to be profitable again in 2013, and in future years as the benefits of the cost savings measures noted above are realized and additional properties and management contracts are added. We believe that it is likely that the $431,000 current portion of the deferred tax asset as of December 31, 2012 will be utilized in 2013 and the remainder will be utilized in subsequent years. Since the majority of these losses occurred in recent years, the useful life of the tax asset extends well into the projected taxable periods. Further, the nature of the derivation of the tax asset is directly applicable to the nature of the expected tax liability in future periods; as such the ‘quality’ of the tax asset in relation to the expected utilization is high. (See Note 9 of the Notes to Consolidated Financial Statements.) The Company’s US based net operating losses available for future use are as follows:
Available
Year
Net Operating Loss
Expires
$
320,713
1,461,310
138,950
669,081
Total Available
$
2,590,054
Net income for the year ended December 31, 2012, was $497,036, an improvement of $236,521 compared to Net Income of $260,515 for the year ended December 31, 2011. Net income for 2012 includes an exchange loss of $191,585 as compared to a loss of $21,007 in 2011. Excluding the effects of the foreign exchange gains & losses, we were successful in achieving Net income of $688,621 for the year 2012 as compared to $281,522 for 2011, an improvement of $407,099, or a 145% increase in Net income.
EBITDA reflects the Company’s earnings without the effect of depreciation, interest income or expense or taxes. Castle’s management believes that EBITDA is a good alternative indicator of the Company’s 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 Castle’s borrowing history, fluctuations of foreign exchange rates, and 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 for 2012 and 2011 is shown below. For the year ended 2012, EBITDA was $1,699,372 as compared to $1,016,334 for 2011, an increase of $683,038 or 67%. EBITDA for the Fourth quarter of 2012 was $616,625 as compared to an EBITDA of $510,767 in the fourth quarter of 2011, an increase of $105,858 or 21%. EBITDA is not a measure that is recognized within generally accepted accounting principles (GAAP).
Comparison of Net Income to EBITDA:
Q1/2012
Q2/2012
Q3/2012
Q4/2012
Q1/2011
Q2/2011
Q3/2011
Q4/2011
Net Income (Loss):
$22,521
$216,990
$(105,201)
$362,727
$497,036
$241,806
$(743,015)
$513,117
$248,606
$260,515
Add Back:
Income Taxes
134,577
88,390
33,862
156,398
413,227
50,675
(151,743)
108,566
124,057
131,555
Interest Expense
95,639
94,362
97,302
87,693
374,996
82,190
86,277
104,833
86,256
359,557
Depreciation
57,473
55,730
56,242
53,083
222,528
57,057
60,885
65,087
60,671
243,700
Less
Foreign Exchange (Gain)
Loss:
191,585
(98,733)
142,008
(43,275)
191,585
(39,914)
242,843
(173,099)
(8,823)
21,007
EBITDA
$501,795
$356,739
$224,213
$616,625
$1,699,372
$391,815
($504,752)
$618,504
$510,767
$1,016,334
Liquidity:
Our primary sources of liquidity include available cash and cash equivalents, and borrowing under the credit facility which was secured in October 2008 and further modified in 2012, consisting of a $500,000 term loan and a $200,000 line of credit for our US operations and a NZ$300,000 line of credit for our New Zealand operations. These facilities contain representations and warranties, conditions, covenants and events of default that are customary for this type of credit facility but do not contain financial covenants. We do not believe the limitations contained in the credit facility will, in the foreseeable future, adversely affect our ability to use the credit facility and execute our business plan. As of December 31, 2012, the balance of our term loan was $83,350 and our US and NZ lines were fully available.
Expected uses of cash in fiscal 2013 include funds required to support our operating activities, including continuing to opportunistically and selectively expand the number of properties under our management.
The trend towards continued improvement in our bottom line is due to the improvement in the tourism industry that we have experienced since the economic downturn that occurred in 2008, together with various cost control initiatives undertaken by the Company since 2008. We experienced Net income of $497,036 in 2012 and net income in 2011 of $260,515. The Company has reported positive EBITDA in nine of the last ten quarters, and positive net income in six of the last eight quarters. We anticipate a continuation of the improvement in occupancy and average room rates for the properties currently under contract for the remainder of 2013 with more emphasis on increased average room rates. We plan to expand the number of properties under management, which will increase the overall revenue stream in 2013. The specific impact of these additions on revenue depends on the timing of when and if new properties are added during the year.
More importantly, since the recession of 2008-2009 we implemented a number of cost saving and efficiency programs that together with increases in revenue, continually improved our profitability and cash flows which resulted in EBITDA of $1,699,372 in 2012, $1,016,334 in 2011, $716,174 in 2010 and $153,093 in 2009 as compared to an EBITDA loss of $418,085 in 2008. We believe that this represents a significant turnaround during these difficult times as our EBITDA continued to improve since our cost saving programs went into effect and have remained as our operating model through 2012. We project that the Company will continue to improve the overall profitability, cash flows, and working capital liquidity through 2013 as compared to 2012. This view is based on the following assumptions:
·
Continued improvement in global macroeconomic trends in consumer spending and especially travel spending by consumers, and the resulting visitation trends to Hawaii and New Zealand.
·
A slight increase in occupancy levels and higher increases in average daily rates at the properties we manage as compared to recent years.
·
A continuation of the reduction in business development in other geographic regions.
·
Expansion of the number of properties under management, with emphasis on Hawaii and New Zealand.
·
A stabilization of the exchange rate between the US and New Zealand currency.
·
The change in our contract for our New Zealand Property in August of 2011 from a gross contract to a net contract.
·
The emergence of travelers from China, Korea and other Asian countries as airlines add more flights from these destinations.
·
An increase in air capacity to Hawaii and the introduction of direct flights from foreign destinations in 2013 such as from Taiwan and New Zealand.
Based on current revenue forecasts and operating projections we anticipate recording an Operating Profit for the first quarter of 2013, and our current forecasts and projections anticipate that the Company will be profitable in 2013. Our plans to manage our liquidity position in fiscal 2013 include:
·
Maintaining our operating plan for controlling expenses; while maintaining strong relationships with our owners and travel wholesalers and partners to ensure continuity and good communication.
·
Continuing with only limited capital expenditures and projects.
·
Maintain our relationships with banks and other institutions and through improved profitability and financial stability increase our borrowing availability under our credit facility.
We have considered the impact of the financial outlook on our liquidity and have performed an analysis of the key assumptions in our forecast such as sales, gross margin and expenses; an evaluation of our relationships with our travel partners and property owners and an
analysis of cash requirements, other working capital changes, capital expenditures and borrowing availability under our credit facility. Based upon these analyses and evaluations, we expect that our anticipated sources of liquidity will be sufficient to meet our obligations without disposition of assets outside of the ordinary course of business or significant revisions of our planned operations through 2013.
Other Borrowings
In October 2012, the Company extended, for another year, its available credit facilities by renewing its line of credit with a local bank in Hawaii. In addition to the extension, the Company also increased the funds available through this facility from $150,000 to $200,000. As of March 15, 2013, the Company has the full $200,000 line of credit available for use. During 2012, the Company drew in the aggregate $150,000 against its line of credit and repaid $300,000, leaving the full line of credit available as of December 31, 2012; during 2011, the Company drew $250,000 repaid $150,000 against the line, leaving a balance of $150,000 owing as of December 31, 2011.
We have a NZ$300,000 line of credit with a New Zealand bank to finance its general working capital flows in New Zealand. As of December 31, 2011, we utilized NZ$184,842 of this line and as of December 31, 2012 and March 25, 2013 there were no borrowings against this line of credit.
In December of 2011, the Company received a short term loan of $50,000 from an officer of one of its domestic subsidiaries which was fully paid off in 2012.
Off-Balance Sheet Arrangements
None
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 7A.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Foreign Currency Exchange Risk
In addition to our US operations, we conduct business in New Zealand. Our foreign currency risk primarily relates to our New Zealand loan guaranty and investments in foreign subsidiaries that transact business in a functional currency other than the U.S. Dollar. The exposure to this risk is minimized as we have generally reinvested profits or funded operations via local currencies for our international operations. In addition, we are exposed to foreign currency risk related to our assets and liabilities denominated in a currency other than the functional currency.
As currency exchange rates change, translation of the income statements of our international businesses into U.S. dollars affects year-over-year comparability of operating results. We have not hedged translation risks because cash flows from international operations were generally reinvested locally. Non-operating foreign transaction exchange net loss for 2012 was $191,585 and $21,007 for 2011 attributable to the guaranty of debts in currency other than the functional currency. This was principally driven by U.S. dollar positions held at December 31, 2012 and 2011 affected by the fluctuation in the value of the US dollar to the New Zealand dollar.
Our operations are affected by potentially volatile movements in currency exchange rates. The economic impact of currency exchange rate movements on us is often linked to macroeconomic factors such as GDP growth, inflation, interest rates, governmental actions and other factors. These changes, if material, could cause us to adjust our financing, operating and hedging strategies. We have not made any changes to our currency exchange risk exposures between the current and preceding fiscal years.
Item 8.
Item 8. Financial Statements
The Castle Group, Inc. and Subsidiaries
Report of Independent Registered Public Accounting Firm
Page 15
Consolidated Balance Sheets - December 31, 2012 and 2011
Page 16
Consolidated Statements of Operations and Comprehensive Income (Loss) - Years Ending December 31, 2012 and 2011
Page 17
Consolidated Statements of Cash Flows - Years Ending December 31, 2012 and 2011
Page 18
Consolidated Statements of Stockholders’ Deficit - Years Ending December 31, 2012 and 2011
Page 19
Notes to Consolidated Financial Statements
Pages 20-29
Mantyla McReynolds LLC [letterhead]
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, 2012 and 2011, and the related consolidated statements of operations and comprehensive income, cash flows, and stockholders’ deficit, for the years ended December 31, 2012 and 2011. These financial statements are the responsibility of the Company’s 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 Company’s 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Castle Group, Inc. and Subsidiaries as of December 31, 2012 and 2011, and the consolidated results of operations and cash flows for the years ended December 31, 2012 and 2011, in conformity with accounting principles generally accepted in the United States of America.
/s/ Mantyla McReynolds LLC
Mantyla McReynolds LLC
Salt Lake City, Utah
March 25, 2013
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, 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), NZ Castle Resorts and Hotels’ wholly-owned subsidiary, Mocles Holdings Limited (a New Zealand Corporation), Castle Resorts & Hotels NZ Ltd., Castle Group LLC (Guam), Castle Resorts & Hotels Guam Inc. and KRI Inc. dba Hawaiian Pacific Resorts (Interactive). All significant inter-company transactions have been eliminated in the consolidated financial statements.
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.
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.
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 $146,958 and $140,169 as of December 31, 2012 and 2011, respectively.
Property, Plant, and Equipment
Property, plant, 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 is expensed as incurred. Renewals and betterments are capitalized and depreciated over their estimated useful lives.
At December 31, 2012 and 2011, property, plant, and equipment consisted of the following:
2012 2011
Real estate - Podium
$ 8,496,798 $ 8,024,064
Equipment and furnishings
1,658,014 1,559,183
Less accumulated depreciation
(2,774,433) (2,411,918)
Net property, furniture and equipment
$ 7,380,379 $ 7,171,329
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, 2012 and 2011, depreciation expense was $222,528 and $243,700, respectively.
Goodwill and Intangibles
In accordance with authoritative guidance, goodwill and intangible assets with indefinite lives are not amortized, but rather tested for impairment at least annually unless certain interim triggering events or circumstances require more frequent testing. The Company has completed its annual impairment testing of its goodwill at December 31 of each of the years presented. The Company has not recognized any impairment losses during the periods presented. This determination is made by comparing the carrying value of the asset with its estimated fair value, which is calculated using estimates including discounted projected future cash flows. If the carrying value of goodwill exceeds the fair value, a second step would measure the carrying value and implied fair value of goodwill.
Revenue Recognition
The Company recognizes revenue 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 revenue 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 owner’s unit and the Company also typically receives an incentive management fee, which is based on the net operating profit of the covered property. Additionally, under a net contract, in most cases we employ on-site personnel to provide services such as housekeeping, maintenance and administration to property owners under our management agreements and for such services the Company recognizes revenue in an amount equal to the expenses incurred. Revenues 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.
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 expenses of the property covered by the agreement, other than the personnel costs mentioned in the previous paragraph. The difference between the Gross and Net contracts is that under a Gross Contract, all expenses, and therefore the ownership of any profits or the covering of any operating loss, belong to and is the responsibility of the Company; under a Net Contract, all expenses, and therefore the ownership or any profits or the covering of any operating loss belong to and is the responsibility of the owner of the property. The operating expenses of properties managed under a Gross Contract are recorded as “Attributed Property 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. The Company expenses advertising and marketing costs as incurred or as the advertising takes place. For the years ended December 31, 2012 and 2011, total advertising expense was $877,834 and $939,514 respectively.
Stock-Based Compensation
The Company has accounted for stock-based compensation by recording an expense associated with the fair value of stock-based compensation. The Company currently uses the Black-Scholes option valuation model to calculate the valuation of stock options and warrants 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.
Income Taxes
Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. We have recorded tax benefits for our US based operations as these benefits have been used in the past, and are likely to be used in the future. We do not recognize any tax benefits from our net operating losses from our foreign operations, as it is not certain that these tax benefits will be realized in the future. 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. Our policy is to recognize potential interest and penalties accrued related to unrecognized tax benefits within income tax expense. For the years ended December 31, 2012 and 2011, the Company did not recognize any interest or penalties in its
Statement of Operations, nor did it have any interest or penalties accrued in its Balance Sheet at December 31, 2012 and 2011, 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. The calculation of diluted earnings per share for 2012 and 2011 includes 368,333 shares which would be issued upon conversion of the outstanding $100 par value redeemable preferred stock of the Company, and 80,000 and 330,000 shares issuable pursuant to the exercise of vested warrants as of December 31, 2012 and 2011, respectively.
Concentration of Credit Risks
The Company maintains its cash with several financial institutions in Hawaii and New Zealand. Balances maintained with these institutions are occasionally in excess of federally, insured limits. As of December 31, 2012 and 2011, the Company had balances of $252,720 and $208,874, respectively, in excess of US federally insured, limits of $250,000 per financial institution.
Concentration in Market Area
The Company manages hotel properties in Hawaii, New Zealand and Saipan, and is dependent on the visitor industries in these geographic areas.
Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. A fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, may be used to measure fair value. 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.
Long-Lived Assets
We regularly evaluate whether events or circumstances have occurred that indicate the carrying value of our long-lived assets may not be recoverable. When factors indicate the asset may not be recoverable, we compare the related undiscounted future net cash flows to the carrying value of the asset to determine if impairment exists. If the expected future net cash flows are less than the carrying value, an impairment charge is recognized based on the fair value of the asset. No impairments were indicated or recorded during the years ended December 31, 2012 and 2011.
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. Guarantees are presented as other long term obligations on the balance sheet.
Investment in Limited Liability Company
On September 22, 2011, the Company acquired a 2% common series interest in a limited liability company that purchased the majority of the units in a condo hotel located in Hawaii. The Company received the ownership as compensation for the Company’s assistance to the buyers of the units in negotiating the purchase, performing due diligence and other consulting work. The Company valued this investment at $180,000 and recorded the value received as other income. The investment is accounted for as a cost basis investment. There was no income during the year ended December 31, 2011 as the limited liability company has certain preferred returns that must be satisfied prior to the distribution of income to its members. In January 2012, the Company sold its interest for $350,000 and recorded a gain on sale of $170,000.
On July 23, 2010, the Company acquired a 7% common series interest in the ownership of a hotel located in Hawaii. The Company received a finder’s fee in exchange for the Company’s assistance to the buyers of the hotel in negotiating the purchase, performing due diligence and other consulting work. The Company recognized $188,173 in revenue resulting from cash received in finder’s fees and consulting fees and then used those funds to acquire the 7% common series interest. The investment is accounted for as an equity method
investment and during the year ended December 31, 2012 and 2011, the Company recognized $175,145 and $14,160, respectively, in other income resulting from their portion of the net income attributable to the common series ownership interest.
Foreign Currency Translation and Transaction Gains/Losses
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 the line items of the results of operations are translated using the weighted average exchange rate for the year. Translation adjustments from foreign exchange are included as a separate component of shareholders’ equity. Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations.
New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB that are adopted by the Company as of the specified effective date. If not discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s financial statements upon adoption.
2. Related Party Transactions
Hanalei Bay International Investors (“HBII”)
The Company has a receivable of $4,269,151 from 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 that the collection of this receivable is subject to uncertainty and risks over which the Company has no control, there can be no assurance that the Company will be able to collect this receivable within the next ten years, if at all. In light of such uncertainties, as required by Generally Accepted Accounting Principles (“GAAP”) the Company has established a reserve for uncollectible amounts equal to the entire amount of the receivable. See Note 4 regarding the assignment of this receivable.
Investment in LLC
In July 2010, the Company acquired a minority interest in a limited liability company that purchased one of the properties managed by the Company. After the purchase, the chief financial officer of Castle Resorts & Hotels, Inc. was appointed treasurer of a subsidiary of the limited liability company that owns the property.
Related Party Loans
In June 2004, a former director loaned the Company $125,000 with interest at the rate of 8% per annum and monthly payments of interest plus $521, and a maturity date of January 1, 2014. The balance of the note as of December 31, 2012 was $21,355.
Through December 2012, the Company has accrued but not paid the Company’s COO a total of $3,985 for expenses incurred on behalf of the Company.
In December 2011, the Company received a $50,000 short term loan from an officer of the Company’s domestic subsidiary. This short term loan bears interest at 10% and is payable on demand. The loan was repaid on January 31, 2012.
During 2002, the Company’s Chairman and CEO advanced $117,316 to the Company for general working capital. The note bears interest at 10% and is due on or before January 1, 2014. At December 31, 2012, the balance of the note was $117,316.
Through December 2012, the Company has accrued but not paid the Chairman and CEO a total of $24,219 for expenses incurred on behalf of the Company, and $84,477 for interest accrued on the $117,316 note payable.
3. Notes Receivable
Notes receivable consisted of the following:
2012 2011
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) (4,269,151)
Note receivable from Oceanfront Realty. Note is payment
for the sale of one of the Company’s management contracts.
225,000
-
Notes Receivable, Total
225,000 -
Less Current Portion
( 40,000)
-
Notes Receivable, Non-current
$ 185,000 $ -
See Note 2 above. Pursuant to GAAP, the Company has established a reserve for uncollectible amounts. This line item does not appear on the balance sheet due to its $0 carrying value.
4. Commitments and Contingencies
Leases
The Company leases two office spaces that expire on February 28, 2014 and October 31, 2014. Both of these leases had expired in 2011 and were extended during 2011 for an additional three years. For the years ended December 31, 2012 and 2011, the Company paid $351,317 and $352,940, respectively, in lease expense for these leases. As of December 31, 2012, the future minimum rental commitment under these leases was $501,680.
Year
Amount
310,690
190,990
Thereafter
-
Total
$ 501,680
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 of 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 were for a period of ten years expiring on July 18, 2011, which was extended by mutual agreement through July 31, 2011. Monthly lease rent through July 2011 is calculated as a percentage of the purchase price paid by the original owner of each condominium. Total lease expense for the year ending December 31, 2012 and 2011 was $0 and $1,439,425 respectively. The lease agreements terminated effective July 31, 2011 and the Company entered into a traditional management agreement with the unit owners under a net contract through January 31, 2012, during which time a long term contract was negotiated with the unit owners. In February 2012, the Company entered into a new 10 year contract with the majority of the unit owners. Under the terms of the new contract, there is no guaranteed return to the unit owners of the property.
Guaranty
As part of the Company’s purchase of real estate in New Zealand, 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 31, 2014 (see Note 2). In 2012, due to the strengthening of the New Zealand dollar against the US dollar, the amount recorded as “Other long term obligations” on the Company’s balance sheet was increased to $3,443,494; with the difference of $191,585 recorded as a foreign exchange loss as of December 31, 2012. In 2011, the New Zealand dollar also strengthened against the US dollar, and the Company recorded a foreign exchange loss of $21,007, and increased the amount recorded as “Other long term obligations” to $3,251,909.
The Company has recognized a guarantor liability for these assignments, amounting to $3,443,494 as of December 31, 2012, and $3,251,909 as of December 31, 2011, which represents the present fair value of the obligation undertaken in becoming a guarantor of the payment of the assigned receivables. In March 2012, the Company extended the due date such that if the Company remains current with its obligations in connection with the purchase of the New Zealand Real Estate (which the Company has complied with during 2012), an extension to December 31, 2014 is available.
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 2020. 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.
Litigation
There are various claims and lawsuits pending against the Company involving complaints, which are normal and reasonably foreseeable in light of the nature of the Company’s business. The ultimate liability of the Company, if any, cannot be determined at this time. Based upon consultation with counsel, management does not expect that the aggregate liability, if any, resulting from these proceedings would have a material effect on the Company’s consolidated financial position, results of operations or liquidity.
5. Employee Benefits
The Company has a 401(k) Profit Sharing Plan (the “Plan”) available for its employees. Any employee with one-year of continuous 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, 2012 and 2011, 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
Note dated 6/6/04 to a former director, with interest at the rate
of 8%, monthly payments of interest plus $521,
balance due 1/1/14, unsecured
$ 21,355
$ 27,604
Note 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 and the Company wrote off
the note in 2012
-
12,000
Note dated 12/31/02 to the Company’s CEO, with
interest at 10%, due on or before 1/1/14, unsecured
117,316
117,316
Note dated 12/31/04, payable in New Zealand, with an original face
value of $8.6 million and secured by real estate in New Zealand and
a general security agreement including an assignment of $3.018 million of the
note receivable due from HBII. The Company acts as a guarantor for 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 note
calls for payments of NZ $40,000 (US $32,784) per month, one half of which
represents interest. The note also calls for monthly interest payments to a NZ
bank for a loan in favor of Mocles at the bank’s prime rate plus 2%.
The maturity date is December 31, 2014.
8,136,645
7,826,680
Note dated 10/20/08 payable to a bank, with interest at the bank’s
prime rate plus 1%, secured by a security interest in all personal
property of the Company and by the personal guaranty of the Company’s
Chairman & CEO, with monthly payments of $8,333 plus interest.
The note is due on or before 10/20/2013.
83,350
183,346
Revolving line of credit with a bank for up to $200,000.
The line is secured by a general security interest in the
Company’s assets and by a personal guaranty of the Company’s
Chairman & CEO. Draws against the line will bear interest
at the bank’s base lending rate plus 2%. The line has a
termination date of October 31, 2013.
- 150,000
Revolving line of credit with a bank for up to NZ $300,000 (US$232,200).
The line is secured by a general security interest in the Company’s
assets in New Zealand. Draws against the line will bear interest at
the bank’s base lending rate plus 2%. The line is cancellable at
any time by the bank.
- 143,068
Subtotal
$ 8,358,666
$ 8,460,014
Less Current Portion
286,304
597,078
Notes payable, non-current
$ 8,072,362
$ 7,862,936
The five year payout schedule for notes payable is as follows:
Year
Amount
$ 286,304
8,072,362
Total
$ 8,358,666
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. At December 31, 2012, undeclared and unpaid dividends on these shares were $1,119,035 or $100.77 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 Company’s 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
There were no issuances of Common Stock of the Company in 2012 or 2011.
Common Stock Options and Warrants
The Company does not have Stock Based Incentive, Stock Purchase or Stock Option or Warrant Plans. No options or warrants were outstanding 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 exercise and forfeiture history and the thinly traded volume of the Company’s common stock.
Changes in warrants for the years ended December 31, 2012 and 2011 were as follows:
Number
of
Shares
Weighted
Average
Exercise Price
Remaining Contractual Term (in Years)
Intrinsic
Value
Outstanding at December 31, 2011
330,000
$1.91
Various
$ -
Expired during the year ended December 31, 2012
250,000
$2.20
-
$ -
Outstanding and exercisable at December 31, 2012
80,000
$1.00
2.58
$ -
The following table summarizes information about compensatory warrants outstanding at December 31, 2012:
Range of Exercise Prices
Number
Outstanding
Weighted Average
Remaining Contractual Life
(in years)
Weighted
Average
Exercise
Price
Number
Exercisable
Weighted
Average
Exercise
Price
$1.00
80,000
2.58
$ 1.00
-
$ -
9. Income Taxes
The provision for income taxes consists of the following:
Current
$ 0
$ 0
Deferred
Federal
367,562
117,017
State
45,665
14,538
Foreign
-
-
Total Provision (Benefit)
$ 413,227
$ 131,555
The components of the Company’s deferred tax assets and liabilities are as follows:
Deferred Tax Assets
Current
Accounts Receivable
$ 69,973
$ 51,067
Accrued Vacation
166,115
117,394
Net Operating Loss
262,764
143,047
Less: Current portion of Valuation Allowance
(67,852)
(34,508)
Total Current, Net
431,000
277,000
Non-Current
Note Receivable
364,832
364,832
Goodwill
21,031
30,379
Net Operating Loss Carryforwards
1,281,821
1,959,866
Less: Valuation Allowance
(597,989)
(718,155)
Total Non-Current, Net
1,069,695
1,636,922
Total Deferred Tax Asset, Net
$ 1,500,695
$ 1,913,922
As of December 31, 2011, the Company had net operating loss carry forwards amounting to $2,590,054 for domestic jurisdictions which expire on various dates through 2028 and $2,575,320 for foreign jurisdictions that do not expire. The Company expects to utilize $500,000 of the domestic net operating losses for the year ended December 31, 2013, and has therefore classified the deferred tax asset associated with the loss carryforward as a current asset on the Company’s consolidated balance sheet. The Company has reported a full valuation allowance on deferred tax assets in foreign jurisdictions, which changed from $752,663 to $665,841 during the year ended December 31, 2012 resulting in a decrease of $86,822.
The Company’s US based net operating losses available for future use are as follows:
Available
Year
Net Operating Loss
Expires
$
320,713
1,461,310
138,950
669,081
Total Available
$
2,590,054
Income tax expense differs from amounts computed by applying the statutory Federal rate to pretax income as follows:
Expected US Income Tax (Benefit) on Consolidated Income before Tax
$ 309,489
$ 133,304
Effects of:
Expected State Income Tax (Benefit) on Consolidated Income before Tax
42,654
2,269
Change in valuation allowance
(86,822)
(166,165)
Permanent Differences
76,425
75,481
Earnings/(Losses) in foreign jurisdictions taxes at rates different from the statutory U.S. federal rate
48,442
(17,589)
Change in future expected tax rate
104,255
Other, net
23,039
Effective Tax Provision (Benefit)
$ 413,227
$ 131,555
The Company has evaluated its uncertain tax positions and determined that any required adjustments would not have a material impact on the Company's balance sheet, income statement, or statement of cash flows.
A reconciliation of the unrecognized tax benefits for the years ending December 31, 2012 and 2011 is presented in the table below:
Beginning Balance
$ -
$ -
Additions based on tax positions related to the current year
-
-
Reductions for tax positions of prior years
-
-
Reductions due to expiration of statute of limitations
-
-
Settlements with taxing authorities
-
-
Ending Balance
$ -
$ -
The tax years 2009 through 2012 remain open to examination for federal income tax purposes and by other major taxing jurisdictions to which we are subject.
10. 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): Revenues of $8,884,171 in 2012 and $8,730,608 in 2011; net income of $100,408 in 2012 and $338,348 in 2011; and net fixed assets of $7,379,578 in 2012 and $7,167,448 in 2011.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A(T).
Item 9A(T). Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company’s management conducted an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer (who is also the Acting Chief Financial Officer), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2012. Our Chief Executive Officer has concluded that all disclosure controls and procedures were effective as of December 31, 2012, in providing reasonable assurance that information required to be disclosed by us in the reports we file under the Exchange Act are recorded, processed, summarized, and reported as specified in the Securities and Exchange Commission’s 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, 2012.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s 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 of 2012 that have materially affected, or are reasonably likely to materially affect its internal control over financial reporting.
Management’s Report on 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 are 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.
Management’s assessment of the effectiveness of our internal controls is based principally on our financial reporting as of December 31, 2012. 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. Our management, with the participation of our Chief Executive Officer (who is also the Acting Chief Financial Officer), has evaluated the effectiveness of our internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as of December 31, 2012. Those rules define internal control over financial reporting as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”) and includes those policies and procedures that:
·
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
·
Provide reasonable assurance that the transactions are recorded as necessary to permit the preparation of financial statements in accordance with GAAP, and the receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
·
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Based on our assessment and those criteria, management believes that, as of December 31, 2012, the Company’s internal control over financial reporting is effective. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
This Annual Report does not include an attestation report of the Company’s registered public accounting firm due to rules established by the Securities and Exchange Commission for Smaller Reporting Companies. 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, 2012, and 2011.
Item 9B.
Item 9B. Other Information.
None reported
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
The following table sets forth certain information concerning the directors and executive officers of Castle as of December 31, 2012. 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
Position Held Since
Rick Wall
Chief Executive Officer, acting Chief Financial Officer, Director and Chairman of the Board
Alan R. Mattson
Chief Operating Officer and Director
Motoko Takahashi
Secretary and Director
John Brogan
Director
Michael Irish*
Director
Rick Humphreys
Director
Stanley Mukai
Director
Roy Tokujo*
Director
Tony Vericella
Director
Robert Wu*
Director
* In March 2013 Mr. Michael Irish, Mr. Roy Tokujo, Mr. Robert Wu resigned from the Company .There were no disagreement between these individuals and the Company.
Director and Officer Backgrounds
Rick Wall. - Mr. Wall was appointed Castle’s Chief Executive Officer and Chairman of the Board in 1993. Mr. Wall is the founder of Castle, and has served as a member of the board of directors and the executive committee of the Hawaii Visitors and Convention Bureau.
Alan Mattson - Mr. Mattson possesses over 30 years of executive level hospitality and travel industry experience. Mr. Mattson 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 and responsible for the marketing within the US rental car division. In addition, Mr. Mattson 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.
John Brogan - Mr. Brogan is a well-respected and recognized leader in the hotel industry, Mr. Brogan’s 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. Mr. Humphreys is currently the President of Hawaii Receivables Management, LLC. Additionally, he is a trustee of Pacific Capital Funds, and also a board member of the Bishop Museum, and Cancer Research Center of Hawaii.
Stanley Mukai - Mr. Mukai is a partner practicing commercial and tax law in the Hawaii law firm of McCorriston, Miller, Mukai, MacKinnon. He holds a law degree from the Harvard Law School. He is a member of the Board of Directors of Waterhouse, Inc., AIG Hawaii, and on the Board of Governors of Iolani School. Mr. Mukai has also served as Chairman of the Board of Regents of the University of Hawaii and on the Board of Governors of the East-West Center.
Motoko Takahashi - Ms. Takahashi was appointed Secretary of Castle in August 2010 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 thirty years.
Tony Vericella - Mr. Vericella is the Managing Director of Island Partners Hawaii, 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 Hawaii Visitors and Convention Bureau.
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 current 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.
Compliance with Section 16(a) of the Securities Exchange Act.
Section 16 of the Securities Exchange Act of 1934 requires Castle’s directors and executive officers and persons who own more than 10% of a registered class of Castle’s equity securities to file with the Securities and Exchange Commission initial reports of beneficial ownership (Form 3) and reports of changes in beneficial ownership (Forms 4 and 5) of Castle’s 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. Appropriate beneficial ownership forms have been filed with the Securities and Exchange Commission and may be found at (www.sec.gov).
To Castle’s knowledge, as of the date hereof, all directors, officers and holders of more than 10% of Castle’s 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 as the sole member of the Audit Committee. Mr. Humphreys, is independent as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.
Item 11.
Item 11. Executive Compensation.
Executive Compensation
The following table shows for the fiscal years ended December 31, 2012 and 2011 the aggregate annual remuneration of the highly paid persons who are executive officers of Castle:
SUMMARY COMPENSATION TABLE
Name and Principal Position
Year
Salary
Bonus
Stock Awards
Option Awards
Non-Equity Incentive Plan Compensation
Nonqualified Deferred Compensation
All Other Compensation
Total
Earnings
Rick Wall
CEO & Director
12/31/12
12/31/11
$198,000
194,500
$ 0
$ 0
$ 0
$ 0
$ 0
$ 0
$ 198,000
194,500
Alan Mattson COO & Director
12/31/12
12/31/11
160,500
159,900
160,500
159,900
Mr. Wall earns salary commensurate with his Employment Agreement dated July 1, 2004.
Mr. Mattson earns salary commensurate with his Employment Agreement January 1, 2006.
In addition, both Mr. Wall and Mr. Mattson participate in Castle’s employee voluntary 401(k) benefit plan, which has no matching provision by the Company.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
None as the Company does not have, nor has it had in the past, an equity compensation program.
Compensation of Directors
DIRECTOR COMPENSATION
There was no compensation paid to Directors of the Company during the calendar years 2012 and 2011.
Item 12
Item 12 . 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 Castle’s common stock beneficially owned as of March 25, 2013 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 Castle’s common stock, including those shares subject to outstanding options, warrants and other convertible items. Amounts also reflect shares held both directly and indirectly by the persons named.
Name and Address
Beneficially Owned (1)
Shares % of Class (4)
Rick Wall
3 Waterfront Plaza, Suite 555
500 Ala Moana Boulevard
Honolulu, HI 96813
2,719,833 (2)
27.1%
Motoko Takahashi
3 Waterfront Plaza, Suite 555
500 Ala Moana Boulevard
Honolulu, HI 96813
1,138,900
11.4%
Roy Tokujo
1580 Makaloa St.
Honolulu, HI 96814
423,334(5)
4.2%
Stanley Mukai
500 Ala Moana Blvd 4th Floor
Honolulu, HI 96813
190,334(3)
1.9%
Alan R. Mattson
3 Waterfront Plaza, Suite 555
500 Ala Moana Boulevard
Honolulu, HI 96813
102,000
1.0%
Robert Wu
P.O Box 11119
Honolulu, HI 96828
103,667(5)
1.0%
Michael Irish
3 Waterfront Plaza, Suite #555
Honolulu, HI 96813
35,000(5)
0.4%
John Brogan
797 Moanila St.
Honolulu, HI 96821
43,334
0.4%
Tony Vericella
1909 Ala Wai Blvd #1603
Honolulu, HI 96815
26,667
0.3%
Directors and officers
as a group (9 persons)
4,783,069
47.7%
(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 Castle’s 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)
Includes 310,000 shares owned by HBII Management.
(3)
Includes 180,344 shares held by a family foundation and pension plan.
(4)
Determined on the basis of 10,026,392 shares outstanding.
(5)
In March 2013, Mr. Roy Tokujo, Mr. Robert Wu, and Mr. Michael Irish resigned as directors of the Company. There were no disagreements between any of these individuals and the Company.
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
There are no current of planned issuances of securities under any equity compensation plan.
Options, Warrants and Rights
No Options, warrants or stock rights were exercised in 2012 or 2011.
In 1999 and 2000, Castle issued 11,105 shares of Castle’s $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 Castle’s 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 Castle’s 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, 2012, undeclared and unpaid dividends on these shares were $1,119,035 or $100.77 per preferred share.
In August of 2010, the Company issued 80,000 shares of its common stock and 80,000 warrants to purchase one share of the Company’s common stock at a price of $1.00. The warrants expire on August 3, 2015. The stock and warrants were issued in blocks of 10,000 to each of the eight non-employee directors of the Company. No warrants were exercised as of December 31, 2012.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Transactions with Related Persons
In August of 2010, the Company issued 80,000 shares of its common stock and 80,000 warrants to purchase one share of the Company’s common stock at a price of $1.00. The warrants expire on August 3, 2015. The stock and warrants were issued in blocks of 10,000 to each of the eight non-employee directors of the Company. No warrants were exercised as of December 31, 2012.
In October 2008, the Company secured a line of credit with a local bank. The line is secured by the personal guaranty of the Company’s Chairman and CEO, and a general security interest in the Company’s assets. As of December 31, 2011, the line was for $150,000 and the Company renewed and increased the line up to $200,000 in October 2012. The line is due in October 2013.
Hanalei Bay International Investors (“HBII”)
The Company has a receivable of $4,269,151 from 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 that the collection of this receivable is subject to uncertainty and risks over which the Company has no control, there can be no assurance that the Company will be able to collect this receivable within the next ten years, if at all. In light of such uncertainties, as required by Generally Accepted Accounting Principles (“GAAP”) the Company has established a reserve for uncollectible amounts equal to the entire amount of the receivable.
As part of the Company’s purchase of real estate in New Zealand, 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 31, 2014 (See Note 6 to the Consolidated Financial Statements).
Related Party Loans
In June, 2004, a former director loaned the Company $125,000 with interest at the rate of 8% per annum and monthly payments of interest plus $521, and a maturity date of January 1, 2014. In March 2008, $50,000 of the principle balance was converted to common stock and warrants as part of the Company’s 2008 unit offering.
During 2002, the Company’s CEO advanced $117,316 to the Company for general working capital. The note bears interest at 10% and is due on or before January 1, 2014.
Through December 2012, the Company has accrued but not paid the Chairman and CEO a total of $24,219 for expenses incurred on behalf of the Company, and $84,477 for interest accrued on a note payable.
Through December 2012, the Company has accrued but not paid the Company’s COO a total of $3,985 for expenses incurred on behalf of the Company.
At December 31, 2012, except for the transaction with HBII, the issuance of stock and warrants described above, the financing guarantee arrangement, the related party loans, the accrued reimbursable expenses, and the employment agreements with Rick Wall, Alan Mattson and Michael Nitta, 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 Castle’s 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.
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 Castle’s 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 14.
Item 14. Principal Accounting 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, 2012 and 2011:
Fee Category
Audit Fees
$ 107,529
$ 109,378
Audit-related Fees
Tax Fees
4,181
4,454
All Other Fees
Total Fees
$ 111,710
$ 114,232
AUDIT FEES
The aggregate fees billed by Castle’s auditors for professional services rendered in connection with the audit of Castle’s annual consolidated financial statements and reviews of the interim consolidated financial statements for 2012 and 2011 were $107,529 and $109,378, respectively.
AUDIT-RELATED FEES
There were no aggregate fees billed by Castle’s auditors for any additional fees for assurance and related services that are reasonably related to the performance of the audit or review of Castle’s financial statements and are not reported under “Audit Fees” above for 2012 and 2011.
TAX FEES
The aggregate fees billed by Castle’s auditors for professional services for tax compliance, tax advice, and tax planning for 2012 and 2011 were $4,181 and $4,454, respectively.
ALL OTHER FEES
The aggregate fees billed by Castle’s auditors for all other non-audit services rendered to Castle, such as attending meetings and other miscellaneous financial consulting, for 2012 and 2011 were $0 and $400, respectively.
PART IV.
Item 15.
Item 15. Exhibits and Financial Statement Schedules.
Exhibit Index
* Incorporated herein by reference and Filed as exhibit to Form 10KSB for the year ended December 31, 2006 on September 19, 2007.
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.
March 25, 2013
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:
3/25/13
Rick Wall
Chief Executive Officer and
Chairman of the Board
/s/ Alan R. Mattson
Date:
3/25/13
/s/ Tony Vericella
Date
3/25/13
Alan R. Mattson
Tony Vericella
Director and Chief Operating Officer
Director
/s/ John Brogan
Date:
3/25/13
/s/ Motoko Takahashi
Date
3/25/13
John Brogan
Motoko Takahashi
Director
Director
/s/ Rick Humphreys
Date:
3/25/13
/s/ Stanley Mukai
Date
3/25/13
Rick Humphreys
Stanley Mukai
Director
Director