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EXCEL - IDEA: XBRL DOCUMENT - CASTLE GROUP INCFinancial_Report.xls
EX-32 - 906 CERTIFICATION - CASTLE GROUP INCex32.htm
EX-21 - SUBSIDIARIES - CASTLE GROUP INCex21.htm
EX-31 - 302 CERTIFICATION - CASTLE GROUP INCex31.htm
EX-18 - PREFERABILITY LETTER - CASTLE GROUP INCexhibit181preferabilitylette.htm

UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.  20549


FORM 10-K



[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2011


[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from ______________________ to ________________________


Commission file number: 000-23338


THE CASTLE GROUP, INC.

(Exact name of registrant as specified in its charter)


 

 

Utah

99-0307845

(State or Other Jurisdiction of

(I.R.S. Employer Identification No.)

incorporation or organization)

 


500 Ala Moana Boulevard, 3 Waterfront Plaza, Suite 555, Honolulu HI 96813

(Address of principal executive office)


Registrant’s telephone number: (808) 524-0900


Securities registered under Section 12(b) of the Exchange Act:  None


Securities registered under Section 12(g) of the Exchange Act:


Common Stock, $0.02 par value

(Title of class)


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 


Yes [ ] No [X]


Check whether the Issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. [  ]


Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  


Yes [X]   No [  ]


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

                                                                                                   Yes [X]  No [  ]


Check if there is no disclosure of delinquent filers in response to Item 405 of regulation S-K contained in this form, and no disclosure will be contained, to the best of Issuer’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]






1









Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:


Large accelerated filer  [   ]

Accelerated filer            [   ]

Non-accelerated filer      [   ]  

(Do not check if a smaller reporting company)

Smaller reporting company  [X]


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  


[   ] Yes   [X] No


Aggregate Market Value of Non-Voting Common Stock Held by Non-Affiliates


As of June 30, 2011, there were approximately 4,889,989 shares of common voting stock of the Issuer held by non-affiliates. As of June 30, 2011, the closing price of the common stock on the OTC Bulletin board was $.15 per share or an aggregate value of $733,498.


Issuers Involved in Bankruptcy Proceedings During the Past Five Years

 

Not applicable.

 

Check whether the Issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court.


Not applicable. 

Applicable Only to Corporate Issuers


Number of shares outstanding of the Issuer’s common stock as of March 30, 2012:   10,026,392


Documents Incorporated by Reference


See Part IV, Item 15.  The Exhibit Index appears on page 40.




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TABLE OF CONTENTS



PART I


Item 1.  

Business.

 4


Item 1A.  

Risk Factors

 6


Item 2.  

Property.

 6


Item 3.  

Legal Proceedings.

 7


Item 4.  

Submission of Matters to a Vote of Security Holders.

 7



PART II


Item 5.  

Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 7


Item 6.  

Selected Financial Data and Supplementary Financial Information.

 8

 

Item 7.   

Management’s Discussion and Analysis of Financial Condition and Results of Operation.

 8


Item 7A.

Quantitative and Qualitative Disclosure about Market Risk

13


Item 8.  

Consolidated Financial Statements

15


Item 9.   

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

32


Item 9A(T).

Controls and Procedures.

32


Item 9B.

Other Information.

33



PART III


Item 10.  

Directors, Executive Officers and Corporate Governance.

34


Item 11.

Executive Compensation.

36


Item 12 .

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

37


Item 13.

Certain Relationships and Related Transactions, and Director Independence

38


Item 14.

Principal Accounting Fees and Services.

39



PART IV.


Item 15.

Exhibits and Consolidated Financial Statement Schedules.

40






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PART I



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 and investment income through our ownership of minority interests in certain hotel properties.


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 a variety of 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




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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 and this 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 does not fit all and we also believe that marketing efforts should be focused on the individual property 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 market loyalty for the individual properties.  We have developed a wide range of programs designed specifically to reflect the unique attributes of each of our resort properties, while providing various incentives.  We manage a number of marketing programs and promotions, some of which are seasonal to drive incremental room night revenues during valley or shoulder periods, and some of which are ongoing throughout the year.  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.






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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 2010 and through 2011, 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 it determines that the economic conditions would make it 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.  Risk Factors


Not required for smaller reporting companies.


Item 2.  Property.


We lease office space for our principal executive offices.  This lease expired on October 31, 2011 and was renewed for an additional three years, to October 31, 2014 at a rental cost that averages $7,970 per month, plus the cost of common area maintenance.

  

We also lease additional office space for our finance and accounting operations.  This lease expired on February 28, 2011 and was also renewed for an additional three years, to February 28, 2014 at a rental cost that averages $5,140 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, while a longer term contract is negotiated. Under the Net Contract, we receive fees based on the revenue and net operating profits of the properties room operations.  Previously, we collected room revenues and paid a fixed amount to the unit owners; any room revenue remaining after this fixed payment was used to cover room operating expenses and any remaining profits belonged to us and any shortfalls were funded by us. We continue our ownership 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.  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.  


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.  The Company will earn fees based on the revenues and operating profits of the room operations, with the balance (if any) of funds remaining after paying all room operating expenses to be paid to the unit owners.  Although the new terms of the contract do not call for a guaranteed amount or percentage to be paid to the unit owners, should there be an operating loss then the Company would be responsible for funding such losses.  The contract does include a force majeure clause to protect the Company from certain unforeseen and uncontrollable occurrences.  Although there can be no assurances given, Management is confident that the likelihood of the rooms division of the property experiencing an operating loss is minimal.




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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).   


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.  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.  Mine Safety Disclosures.


None; not applicable.

PART II


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 2011 price range per common share

$0 .12-$0.20

$0 .14-$0.25

$0 .15-$0.20

$0 .20-$0.30

Fiscal 2010 price range per common share

$0 .30-$0.25

$0 .30-$0.30

$0 .30-$0.16

$0 .35-$0.25


Holders of Record


There were approximately 280 owners of record of Castle’s common stock as of March 30, 2012.


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, 2011, undeclared and unpaid dividends on these shares totaled $1,035,939 or $93.75 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.  





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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 2009, there were no new issuances of registered or 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, 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, 2011.


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.


Item 6.  Selected Financial Data and Supplementary Financial Information.


Not Applicable


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




8




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, 2011 and 2010


For added clarity in the discussion below the Company’s Quarterly Statement of Operations for 2011 and 2010 are presented as reported in the Company’s Form 10-Q Quarterly Reports with the Securities and Exchange Commission:


THE CASTLE GROUP    INC.

CONSOLIDATED    STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

By Quarter 2011 and 2010

($ in millions)

 

Q1/2011

Q2/2011

Q3/2011

Q4/2011

2011

Q1/2010

Q2/2010

Q3/2010

Q4/2010

2010

Revenues

 

 

 

 

 

 

 

 

 

 

   Attributed property revenue

 $  4.344

 $  4.022

 $  3.851

 $  3.193

 $15.410

 $  3.789

 $  3.474

 $  3.828

 $  4.068

 $15.159

   Management & Service

     2.723

     2.368

     2.586

     2.611

   10.287

     2.557

     2.426

     2.628

     2.446

   10.057

   Other Income

          -    

          -    

     0.191

     0.000

     0.191

          -    

          -    

     0.183

     0.014

     0.197

Total Revenues

     7.067

     6.390

     6.628

     5.804

   25.889

     6.346

     5.900

     6.639

     6.528

   25.413

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

   Attributed property expense

     3.882

     4.127

     3.386

     2.681

   14.076

     3.387

     3.517

     3.671

     3.824

   14.399

   Payroll and office expense

     2.655

     2.661

     2.538

     2.525

   10.378

     2.576

     2.494

     2.404

     2.469

     9.944

   Administrative and general

     0.161

     0.075

     0.106

     0.090

     0.432

     0.177

     0.081

     0.083

     0.101

     0.442

   Depreciation

     0.057

     0.061

     0.065

     0.061

     0.244

     0.060

     0.058

     0.061

     0.064

     0.243

Total Operating Expense

     6.755

     6.924

     6.095

     5.357

   25.130

     6.200

     6.150

     6.219

     6.458

   25.028

Operating Profit (Loss)

     0.312

   (0.534)

     0.533

     0.447

     0.758

     0.146

   (0.250)

     0.420

     0.070

     0.385

Foreign Exchange Gain (Loss)

     0.039

   (0.242)

     0.173

     0.009

   (0.021)

     0.028

     0.062

   (0.177)

   (0.128)

   (0.215)

Investment Income (Loss)

     0.023

   (0.032)

     0.020

     0.003

     0.014

          -    

          -    

          -    

     0.087

     0.087

Interest Expense

   (0.082)

   (0.086)

   (0.105)

   (0.087)

   (0.360)

   (0.100)

   (0.098)

   (0.098)

   (0.050)

   (0.346)

Income (Loss) before taxes

     0.292

   (0.894)

     0.621

     0.373

     0.392

     0.074

   (0.286)

     0.145

   (0.021)

   (0.089)

Income tax benefit (Expense)

   (0.051)

     0.152

   (0.108)

   (0.125)

   (0.132)

   (0.017)

     0.065

   (0.166)

   (0.034)

   (0.152)

Net Profit (Loss)

 $  0.241

 $(0.742)

 $  0.513

 $  0.249

 $  0.261

 $  0.057

 $(0.221)

 $(0.021)

 $(0.055)

 $(0.241)


Revenue


For 2011, 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 a 3.8% increase in visitor arrivals, a 5.4% increase in visitor days, and a 15.6% increase in visitor spending in Hawaii for 2011 as compared to 2010. 1   Total airline seat capacity to Hawaii also reflected this trend with an increase of 1.0% in 2011 as compared to 2010. 1


1 Hawaii State Department of Business, Economic Development and Tourism

(http://hawaii.gov/dbedt/info/visitor-stats/tourism/2011/Dec11.pdf)




9




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 $25,888,733 for the year ended December 31, 2011, representing a 2% increase from $25,413,139 in 2010.  This increase is attributed to the improvement in the tourism industries of both Hawaii and New Zealand.  The increase was attained despite the change in the management contract that we have in New Zealand and the loss of two properties.  Effective August 1, 2011, our contract for our New Zealand property changed from a gross to a net contract, where room revenues are no longer reported as our revenues.  When the contract changed from a gross contract to a net contract, the room revenues from each of our managed units belong to the unit owners going forward.  Room revenues for our New Zealand property between August 1, 2011 and December 31, 2011, were $3,837,560.  If not for the change in contract, our revenues would have been $29,726,293, representing an increase of 17% over 2010.  Our quarterly revenues increased 11% and 8% during the first and second quarters, were relatively flat for the third quarter, and decreased by 11% in the fourth quarter as a result of our New Zealand contract change, respectively, in 2011 as compared to 2010. Total revenue for the fourth quarter of 2011 totaled $5,804,367 as compared to $6,527,436 in the fourth quarter of 2010, which again is a result of Castle no longer including in our revenue the room revenues from our New Zealand properties commencing August 1, 2011.


Revenues attributed from Properties increased 2% to $15,409,947 for the year ended December 31, 2011, as compared to $15,159,427 in 2010, despite not including the room revenues from our New Zealand property since August 1, 2011.  Revenues attributed to Castle’s New Zealand operation decreased a total of 4% in 2011 to $7,887,540, as compared to $8,224,794 in 2010.  If not for the contract change for our New Zealand property, attributed revenues from New Zealand would have been $11,725,100, an increase of 43% compared to 2010.  Management and Service Revenues increased 2% to $10,287,337 in 2011 from $10,057,151 in 2010.  This increase was attained as a result of the increase in occupancy for both our domestic and foreign operations and was attained despite the loss of two net contract properties in 2011.  


Management and service revenue increased by 2% from $10,057,151 in 2010 to $10,287,337 in 2011.  The increase is attributed to the improvement in the overall world tourism economy and the change in our management contract in New Zealand, whereby effective August 1, we receive a management fee for the services rendered to the owners of the property.


Other income was flat at $191,449 in 2011 compared to $196,561 in 2010.  In 2011 we received an ownership interest in a hotel which was valued at $180,000 and in 2010 we received an ownership interest in a hotel which was valued at $188,173.

 

The Company reported investment income of $14,160 and $87,226 during 2011 and 2010, respectively, which represents the Company’s share of the income attributable to common ownership generated by the hotel.

 

Costs and Expenses


Total Operating Expenses were $25,130,259 for the 12 months ending December 31, 2011.  This was relatively flat when compared to Total Operating Expenses of $25,027,446 in 2010.  We were successful in maintaining our expenses despite increasing our total revenue by 2%.

 

Attributed Property Expenses decreased 2% to $14,076,386 in 2011, as compared to $14,398,550 in 2010.  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.

 

Payroll and office expense totaled $10,378,464 in 2011, as compared to $9,944,050 in the year earlier period. This increase is primarily related to additional salary and wages for our sales and marketing corporate headquarters and also for various positions at our properties that were previously unfilled in 2010.


Administrative and general expense totaled $431,708 in 2011, a reduction of 2% as compared to $441,591 for 2010.  The reduction in administrative and general expenses is due to a decrease in professional fees.





10




Depreciation expense in 2011 increased by $445, to $243,700 when compared to 2010.  This was due to the Company making only limited capital expenditures during 2011.

 

A foreign exchange loss of $21,007 was recognized in 2011 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 2010, the Company recorded a foreign exchange loss of $215,534. These exchange losses were a result of the weakening of the US Dollar exchange rate against the New Zealand Dollar.


Interest expense totaled $359,557 for 2011, an increase of 4% as compared to 2010’s total of $346,315.  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$15,480) 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 2011 totaled $131,555, a decrease of $20,056 when compared to 2010’s $151,611.  The Company’s deferred tax asset balance of $1,913,922 on December 31, 2011 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 2012, 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 current portion of the deferred tax asset will be utilized in 2012 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

1999

$             

1,430,143

2019

2002

               

1,461,310

2022

2007

   

   138,950

2027

2008

   669,081

2028


Total Available

$

3,699,484


Net income for the year ended December 31, 2011, was $260,515, an improvement of $501,056 compared to the Net Loss of ($240,541) for the year ended December 31, 2010.   Net income for 2011 includes an exchange loss of $21,007 as compared to a loss of $215,534 in 2010.  Excluding the effects of the foreign exchange gains & losses, we were successful in achieving Net income of $281,522 for the year 2011 as compared to 2010’s loss of $25,007 representing an improvement of $306,529.


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 2011 and 2010 is shown below.  For the year ended 2011, EBITDA was $1,016,334 as compared to $716,174 for 2010, an increase of $300,160 or 42%.  EBITDA for the Fourth quarter of 2011 was $510,767 as compared to an EBITDA of $219,722 in the fourth quarter of 2010, an increase of $291,045 or 132%.   EBITDA is not a measure that is recognized within generally accepted accounting principles (GAAP).




11





Comparison of Net Income to EBITDA:


 

Q1/2011

Q2/2011

Q3/2011

Q4/2011

2011

Q1/2010

Q2/2010

Q3/2010

Q4/2010

2010

Net Income:

 $241,806

 $(743,015)

 $513,117

$248,606

$260,515

 $  57,414

 $(220,930)

 $ (20,447)

 $ (56,578)

 $(240,541)

 

 

 

 

 

 

   

   

   

 

 

Add Back:

 

 

 

 

 

   

   

   

 

 

Income Taxes

50,675

(151,743)

108,566

124,057

131,555

16,611

(65,113)

166,293

33,820

151,611

Interest Expense

82,190

86,277

104,833

86,256

359,557

100,279

98,208

97,441

50,387

346,315

Depreciation

57,057

60,885

65,087

60,671

243,700

59,637

58,548

60,701

64,369

243,255

Less

 

 

 

 

 

   

   

   

 

 

Foreign Exchange (Gain)   

  Loss:

(39,914)

242,843

(173,099)

(8,823)

21,007

(27,729)

(61,761)

177,300

127,724

215,534

EBITDA

$391,815

($504,752)

$618,504

$510,767

$1,016,334

$206,212

($191,048)

$481,288

$219,722

$716,174


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 2009 and 2010, consisting of a $500,000 term loan and a $150,000 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.


Expected uses of cash in fiscal 2012 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 $260,515 in 2011 as compared to a net loss in 2010 of $240,541. The Company has reported positive EBITDA in six of the last eight quarters, and five of the last six quarters.  We anticipate a continuation of the improvement in occupancy and average room rates for the properties currently under contract for the remainder of 2012.  We plan to expand the number of properties under management, which will increase the overall revenue stream in 2012.  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 2008 we implemented a number of cost saving and efficiency programs that began to improve the Company’s profitability and cash flows which resulted in EBITDA of $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.  We project that the Company will significantly improve the overall profitability, cash flows, and working capital liquidity through 2012 as compared to 2011.  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.




12





Based on current revenue forecasts and operating projections we anticipate recording an Operating Profit for the first quarter of 2012, and our current forecasts and projections anticipate that the Company will be profitable in 2012.  Our plans to manage our liquidity position in fiscal 2012 include:


·

Maintaining our focus on 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 2012.  


Other Borrowings


In October 2011, the Company extended, for another year, its available credit facilities by renewing its line of credit with a local bank in Hawaii. As of March 30, 2012, the Company has the full $150,000 line of credit available for use.  During 2011, the Company drew in the aggregate $250,000 against its line of credit and repaid $150,000; during 2010, the Company drew and repaid in the aggregate $150,000 against the line, leaving a balance of $150,000 owing as of December 31, 2011, resulting from a balance carrying forward at the beginning of 2010 of $50,000.  

 

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 March 30, 2012 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.


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.  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 2011 was $21,007 and $215,534 for 2010 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, 2011 and 2010 affected by the fluctuation in the value of the US dollar to the New Zealand dollar.





13




Our operations are affected to 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.




14







Item 8.  Financial Statements



The Castle Group, Inc. and Subsidiaries

Table of Contents





 

 

Report of Independent Registered Public Accounting Firm

Page  16

Consolidated Balance Sheets – December 31, 2011 and 2010

Page  17

Consolidated Statements of Operations and Comprehensive Income (Loss) -  Years Ending December 31, 2011 and 2010

Page  18

Consolidated Statements of Cash Flows – Years Ending December 31, 2011 and 2010

Page  19

Consolidated Statements of Stockholders’ Deficit - Years Ending December 31, 2011 and 2010

Page  20

Notes to Consolidated Financial Statements

Pages  21-31





15





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, 2011 and 2010, and the related consolidated statements of operations and comprehensive income (loss), cash flows, and stockholders’ deficit, for the years ended December 31, 2011 and 2010.  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, 2011 and 2010, and the consolidated results of operations and cash flows for the years ended December 31, 2011 and 2010, in conformity with accounting principles generally accepted in the United States of America.


As discussed in Note 12 to the consolidated financial statements, the Company has elected to change its method of accounting for certain costs related to hotel management operations.  


/s/Mantyla McReynolds LLC


Mantyla McReynolds LLC

Salt Lake City, Utah

March 30, 2012




16





THE CASTLE GROUP INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2011 & 2010

 

 

 

 

ASSETS

 

 

 

 

 

 

December 31

December 31

 

 

 2011

 2010

Current Assets

 

 

 

  Cash and cash equivalents

 

 $            710,487

 $             539,701

  Accounts receivable, net of allowance for bad debts

 

            2,580,371

             2,607,109

  Deferred tax asset

 

               277,000

                217,500

  Restricted cash

 

                           -

                151,975

  Prepaids and other current assets

 

               271,444

                279,890

Total Current Assets

 

            3,839,302

             3,796,175

Property plant & equipment, net

 

            7,171,329

             7,349,343

Goodwill

 

                 54,726

                  54,726

Deposits

 

                 24,477

                  24,477

Restricted cash

 

                   3,997

                191,501

Investment in limited liability company

 

               464,560

                270,399

Deferred tax asset

 

            1,636,922

             1,827,977

 

 

 

 

TOTAL ASSETS

 

 $       13,195,313

 $        13,514,598

 

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities

 

 

 

  Accounts payable

 

 $         3,095,560

 $          3,136,776

  Payable to related parties

 

               134,378

                139,464

  Deposits payable

 

               573,237

                676,635

  Current portion of long term debt

 

               590,828

                409,198

  Current portion of long term debt to related parties

 

                   6,250

                    6,250

  Accrued salaries and wages

 

            1,466,924

             1,289,824

  Accrued taxes

 

               123,211

                199,693

  Accrued interest

 

                 11,828

                  11,108

  Other current liabilities

 

                 15,172

                  13,107

Total Current Liabilities

 

            6,017,388

             5,882,055

Non Current Liabilities

 

 

 

  Long term debt, net of current portion

 

            4,472,356

             4,914,119

  Deposits payable

 

                           -

                354,337

  Notes payable to related parties, net of current portion

 

               138,671

                144,921

  Other long term obligations, net

 

            3,251,909

             3,230,902

Total Non Current Liabilities

 

            7,862,936

             8,644,279

Total Liabilities

 

          13,880,324

           14,526,334

Stockholders' Equity (Deficit)

 

 

 

  Preferred stock, $100 par value, 50,000 shares authorized, 11,050

 

            1,105,000

             1,105,000

    shares issued and outstanding in 2011 and 2010, respectively

 

 

 

  Common stock, $.02 par value, 20,000,000 shares authorized, 10,026,392

 

               200,529

                200,529

    shares issued and outstanding in 2011 and 2010, respectively

 

 

 

  Additional paid in capital

 

            4,423,984

             4,423,984

  Retained deficit

 

          (6,327,415)

           (6,587,930)

  Accumulated other comprehensive income (loss)

 

               (87,109)

              (153,319)

Total Stockholders' Deficit

 

             (685,011)

           (1,011,736)

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 $       13,195,313

 $        13,514,598

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

17

 



THE CASTLE GROUP INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

YEARS ENDING DECEMBER 31, 2011 & 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

2010

Revenues

 

 

 

  Revenue attributed from properties

 

 $      15,409,947

 $      15,159,427

  Management & Service

 

         10,287,337

         10,057,151

  Other Revenue

 

              191,449

              196,561

Total Revenues

 

         25,888,733

         25,413,139

 

 

 

 

Operating Expenses

 

 

 

  Attributed property expenses

 

         14,076,386

         14,398,550

  Payroll and office expenses

 

         10,378,464

           9,944,050

  Administrative and general

 

              431,709

              441,591

  Depreciation

 

              243,700

              243,255

Total Operating Expense

 

         25,130,259

         25,027,446

Operating Income

 

              758,474

              385,693

Foreign Currency Transaction Gain (Loss)

 

              (21,007)

            (215,534)

Investment Income (Loss)

 

                14,160

                87,226

Interest Expense

 

            (359,557)

            (346,315)

Income (Loss) before taxes

 

              392,070

              (88,930)

Income tax provision

 

            (131,555)

            (151,611)

Net Income (Loss)

 

              260,515

            (240,541)

 

 

 

 

Other Comprehensive Income

 

 

 

  Foreign currency translation adjustment

 

                66,210

              128,160

Total Comprehensive Income (Loss)

 

 $           326,725

 $         (112,381)

 

 

 

 

 

 

 

 

Earnings (Loss) Per Share

 

 

 

  Basic

 

 $                 0.03

 $               (0.02)

  Diluted

 

 $                 0.02

 $               (0.02)

Weighted Average Shares

 

 

 

  Basic

 

10,026,392

9,979,488

  Diluted

 

10,724,725

9,979,488

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements





18






THE CASTLE GROUP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDING DECEMBER 31, 2011 & 2010

 

 

 

 

 

 

 

2011

2010

Cash Flows from Operating Activities

 

 

  Net income (loss)

 $              260,515

 $            (240,541)

  Adjustments to reconcile from net income (loss) to net cash from

 

 

     operating activities:

 

 

  Depreciation

                 243,700

                 242,742

  Amortization of discount

                   57,234

                 103,660

  Foreign exchange (gain) loss on guarantor obligation

                   21,007

                 215,533

  Interest on guarantor obligation

                            -

                 159,238

  Issuance of stock for compensation

                            -

                   16,000

  Issuance of warrants for compensation

                            -

                     9,440

  Investment income

                 (14,160)

                 (87,226)

  Services in exchange for hotel ownership interest

               (180,000)

                            -

  Deferred taxes

                 131,555

                 151,611

  (Increase) decrease in

 

 

    Accounts receivable

                   37,939

               (241,014)

    Other current assets

                     8,185

                   17,183

    Restricted cash

                 349,526

               (176,274)

    Customer advance deposits

               (110,015)

                            -

  Increase (decrease) in

 

 

    Accounts payable and accrued expenses

                   55,905

                 394,160

Net Change From Operating Activities

                 861,391

                 564,512

 

 

 

Cash Flows from Investing Activities

 

 

  Purchase of assets

                 (12,886)

                 (12,960)

  Investment in Hotel

                            -

               (183,173)

Net Change from Investing Activities

                 (12,886)

               (196,133)

 

 

 

Cash Flows from Financing Activities

 

 

  Proceeds from notes

                 250,000

                 150,000

  Payments on notes to related parties

                   (6,250)

                   (6,250)

  Payments on notes

               (925,358)

               (604,912)

Net Change from Financing Activities

               (681,608)

               (461,162)

 

 

 

Effect of foreign currency exchange rate on changes in cash and cash equivalents

                     3,889

                     8,999

 

 

 

Net Change in Cash and Cash Equivalents

                 170,786

                 (83,784)

Beginning Balance

                 539,701

                 623,485

Ending Balance

 $              710,487

 $              539,701

 

 

 

Supplementary Information

 

 

 Cash Paid for Interest

 $            (133,298)

 $              (70,961)

 Cash Paid for Income Taxes

 $                          -

 $                          -

 Non-cash investment in property

 $                          -

 $            (145,000)

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements




19









THE CASTLE GROUP INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

YEARS ENDING DECEMBER 31, 2011 & 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

Preferred

 

Common

 

Additional

 

Other  

 

 

Stock

 

 Stock

 

Paid-in

Retained

Comprehensive

 

 

Shares

Amount

Shares

Amount

Capital

Deficit

Income (Loss)

Total

 

 

 

 

 

 

 

 

 

Balance 12/31/09

11,050

 $1,105,000

9,946,392

 $  198,929

 $ 4,240,906

 $(6,347,389)

 $     (281,479)

 $(1,084,033)

 

 

 

 

 

 

 

 

 

Net Loss 12/31/10

 

 

 

 

 

      (240,541)

 

      (240,541)

 

 

 

 

 

 

 

 

 

Interest on Guarantor Obligation

 

 

 

 

       159,238

 

 

        159,238

 

 

 

 

 

 

 

 

 

Issuance of stock for compensation

 

 

           80,000

         1,600

         14,400

 

 

          16,000

 

 

 

 

 

 

 

 

 

Issuance of warrants for compensation

 

 

 

 

           9,440

 

 

            9,440

 

 

 

 

 

 

 

 

 

Foreign Currency

 

 

 

 

 

 

 

 

Translation Adjustment

 

 

 

 

 

 

         128,160

        128,160

 

 

 

 

 

 

 

 

 

Balance 12/31/10

     11,050

   1,105,000

    10,026,392

     200,529

    4,423,984

   (6,587,930)

        (153,319)

   (1,011,736)

 

 

 

 

 

 

 

 

 

Net Income 12/31/11

 

 

 

 

 

        260,515

 

        260,515

 

 

 

 

 

 

 

 

 

Foreign Currency

 

 

 

 

 

 

 

 

Translation Adjustment

 

 

 

 

 

 

           66,210

          66,210

 

 

 

 

 

 

 

 

 

Balance 12/31/11

     11,050

 $1,105,000

    10,026,392

 $  200,529

 $ 4,423,984

 $(6,327,415)

 $       (87,109)

 $   (685,011)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements





20




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.


Restricted Cash


The Company holds funds on behalf of the unit owners for one of the properties it manages.  These funds are to be used only for the replacement and refurbishment of the furniture and equipment within the rooms owned by the unit owner.  As of December 31, 2011 and 2010, the Company had $3,997 and $191,501 respectively, of funds held for this purpose.  The Company recorded an offsetting liability as a long term deposit payable on its balance sheet.  As of December 31, 2010, the Company held $151,975 in deposits for room rentals in New Zealand, which the New Zealand government required to be kept in a separate bank account that the Company would not be able to use until the World Rugby Cup event held in the fall of 2011.  The room deposits are classified as current deposits payable on the Company’s balance sheet.


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 $140,169 and $134,257 as of December 31, 2011 and 2010, respectively.    


Property, Plant, and Equipment


Property, furniture, and equipment are recorded at cost.  When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounting records, and any resulting gain or loss is reflected in the Consolidated Statement of Operations for the period.  The cost of maintenance and repairs is expensed as incurred.  Renewals and betterments are capitalized and depreciated over their estimated useful lives.





21




At December 31, 2011 and 2010, property, furniture, and equipment consisted of the following:


         2011                  2010        

     Real estate - Podium (see Note 11)

                 $  8,024,064        $ 7,972,228

     Equipment and furnishings

                     1,559,183           1,537,135

     Less accumulated depreciation

   (2,411,918)         (2,160,020)

            

Net property, furniture and equipment

 $  7,171,329        $ 7,349,343  


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, 2011 and 2010, depreciation expense was $243,700 and $243,255, 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, 2011 and 2010, total advertising expense was $939,514 and $936,865 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.




22





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, 2011 and 2010, 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, 2011 and 2010, 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 2011 includes 698,333 shares which would be issued upon conversion of the outstanding $100 par value redeemable preferred stock of the Company, and shares issuable pursuant to the exercise of vested warrants as of December 31, 2011.   The calculation of basic and diluted earnings per share for 2010 did not include 368,335 shares which would be issued upon conversion of the outstanding $100 par value redeemable preferred stock of the Company, nor does it include 663,337 shares issuable pursuant to the exercise of vested warrants as of December 31, 2010 as the effect would be anti-dilutive.


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, 2011 and 2010, the Company had balances of $208,874 and $0, 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, 2011 and 2010.


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.  





23




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.


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, 2011 and 2010, the Company recognized $14,160 and $87,226, 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 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.


Through December 2011, the Company has accrued but not paid the Chairman and CEO a total of $57,740 for expenses incurred on behalf of the Company, and $72,745 for interest accrued on a note payable.


Through December 2011, the Company has accrued but not paid the Company’s COO a total of $3,893 for expenses incurred on behalf of the Company.





24




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 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.


3.   Notes Receivable


Notes receivable consisted of the following:

       2011               2010

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


Notes Receivable, Non-current

$                -       $               -


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, 2011 and 2010, the Company paid $352,940 and $372,484, respectively, in lease expense for these leases. As of December 31, 2011, the future minimum rental commitment under these leases was $804,278.


Year

Amount

2012

$        305,177

2013

308,135

2014

190,966

Thereafter

-

Total

$        804,278


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, 2011 and 2010 was $1,439,425 and $2,258,221, 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.  The Company will earn fees based on the revenues and operating profits of the room operations, with the balance (if any) of funds remaining after paying all room operating expenses to be paid to the unit owners.  Although the new terms of the contract do not call for a guaranteed amount or percentage to be paid to the unit owners, should there be an operating loss then the Company would be responsible for funding such losses.  The contract does include a force majeure clause to protect the Company from certain unforeseen and uncontrollable occurrences.  Although there can be no assurances given, Management is confident that the likelihood of the rooms division of the property experiencing an operating loss is minimal.


Guaranty


As part of the Company’s purchase of real estate in New Zealand (see Note 11), an assignment of $3,018,000 of the total note receivable from HBII was made to the seller of the real estate, with the Company remaining as guarantor should the note receivable not be collected before December 31, 2014 (see Note 2).  In 2010, 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 $3,230,902; with the difference of $215,534 recorded as a foreign exchange loss as of December 31, 2010.   In 2011, the New Zealand dollar further strengthened against the US dollar,




25




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 assignment does not have a provision for interest and in 2007 the Company had fully amortized the imputed interest on the assignment. For calendar year 2010, the Company recorded interest expense of $159,238 based on 5.25% on the guaranty of the NZ $4,201,433 assignment and an increase in Additional Paid in Capital for the same amount.  Interest on the purchase note commenced in 2011 and therefore, there was no interest imputed during 2011.


The Company has recognized a guarantor liability for these assignments, amounting to $3,251,909 as of December 31, 2011, and $3,230,902 as of December 31, 2010, 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, 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, 2011 and 2010, 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.






26




6. Notes Payable

 

 

Notes payable consisted of the following:

2011

 

2010

 

 

 

 

Note dated 6/6/04 to a director, with interest at the rate  of 8%, monthly payments of interest plus $521, balance due 1/1/14, unsecured

$               27,604

 

$          33,855

 

 

 

 

Note dated 6/16/04 to unrelated party with interest at the rate of 15% due on 1/1/12 with monthly payments of  NZ$3,225 (US$2,315), unsecured

0

 

198,402

 

 

 

 

Note dated 12/31/02 from the Company’s CEO, with  interest at 10%, due on or before 1/1/14, unsecured

117,316

 

117,316

 

 

 

 

Note dated 7/31/95 to former stockholder, due 8/31/98 with interest at 6%, unsecured.  No formal demand has been made on the Company

12,000

 

12,000

 

 

 

 

Note dated 12/31/04, payable in New Zealand, net of discount of $0 and  $0.057 million, as of 2011 and 2010, respectively, with an original face  value of $8.6 million and which is 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 $30,960) 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 banks prime rate plus 2%.   The maturity date is December 31, 2014 (See Note 11).

7,826,680

 

7,947,837

 

 

 

 

Note dated 12/31/04 payable to unrelated party, with interest  at 10% due 3/01/12 with monthly payments of $2,975, unsecured

0

 

33,810

 

 

 

 

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.

183,346

 

283,342

 

 

 

 

Revolving line of credit with a bank for up to $150,000. 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, 2012

150,000

 

50,000

 

 

 

 

Revolving line of credit with a bank for up to (NZ $300,000). 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

 

0

 

 

 

 

Note dated 5/15/09 payable to unrelated party, unsecured, with interest at 10% and monthly payments of $4,946.  The note is due on or before June 15, 2011.

0

 

28,828

 

 

 

 

Subtotal

$ 8,460,014

 

$ 8,705,390

Less Current Portion

597,078

 

415,448

 

 

 

 

Notes payable, non-current

$ 7,862,936

 

$ 8,289,942


The five year payout schedule for notes payable is as follows:


 Year

       Amount   

2012

   $    597,078

 

2013

         275,352  

 

2014

      7,587,584       


 

Total

   $ 8,460,014  






27




7. Redeemable Preferred Stock


In 1999 and 2000, the Company issued a total of 11,050 shares of $100 par value redeemable preferred stock to certain officers and directors.  Dividends are cumulative from the date of original issue and are payable semi-annually, when, and if declared by the board of directors beginning July 15, 1999, at a rate of $7.50 per annum per share.  During the fiscal year ended July 31, 2000, the Company paid dividends to holders of record as of July 15, 2000, in the amount of $16,715.  At December 31, 2011, undeclared and unpaid dividends on these shares were $1,035,939 or $93.75 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


During 2010 the Company issued 80,000 shares of its common stock to non-employee directors of the Company.  The shares were valued at $0.20 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 of $16,000 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 the Company’s common stock at a price of $1.00.  The warrants expire at the earlier of five years or 60 days after the Company’s common stock trades for an average price of $3.00 per share for 20 consecutive days.  The warrants 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, .27% risk free interest rate, and volatility of 131%.


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, 2011 and 2010 were as follows: 


 

 

 

 

 

 

 

Number
of
Shares

Weighted
Average
Exercise Price

Remaining Contractual Term (in Years)

Intrinsic
Value

 

Outstanding at December 31, 2009

583,337

$2.95

Various

$         -

 

Vested at December 31, 2009

583,337

$2.95

Various

$         -

 

Granted in 2010

80,000

$1.00

5

$         -

 

Outstanding at December 31, 2010

663,337

$2.71

Various

$         -

 

Exercisable at December 31, 2010

663,337

$2.71

Various

$         -

 

Expired at December 31, 2011

333,337

$3.50

-

$         -

 

Outstanding at December 31, 2011

330,000

$1.91

Various

$         -

 

Exercisable at December 31, 2011

330,000

$1.91

Various

$         -

 





28




The following table summarizes information about compensatory warrants outstanding at December 31, 2011:


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

4.0

$       1.00

-

$         -

$2.00

200,000

  .5

         2.00

-

$         -

$3.00

50,000

  .6

         3.00

-

$         -

Total:

 

 

 

 

 

$1.00-$3.00

330,000

1.4

$       1.91

-

$         -


9.            Income Taxes


The provision for income taxes consists of the following:


 

 

 

 

2011

2010

Current

$              0

$              0

Deferred

 

 

 Federal  

       117,017

      127,353

 State

         14,538

        24,258

 Foreign

     -

     -

 Total Provision (Benefit)

$     131,555

$     151,611


The components of the Company’s deferred tax assets and liabilities are as follows:


 

2011

2010

Deferred Tax Assets

 

 

Current

 

 

Accounts Receivable

$              42,174

$              49,559

Accrued Vacation

                91,779

              105,957

Net Operating Loss

              143,047

              105,045

Less:  Current portion of Valuation  Allowance

                         0

              (43,061)

Total Current, Net

              277,000

              217,500

Non-Current

 

 

Note Receivable

              364,832

              385,601

Goodwill

                30,379

                19,879

Net Operating Loss Carryforwards

           1,241,711

           1,545,601

Less: Valuation Allowance

                         0

            (123,104)

Total Non-Current, Net

           1,636,922

           1,827,977

Total Deferred Tax Asset, Net

$         1,913,922

$         2,045,477


As of December 31, 2011, the Company had net operating loss carry forwards amounting to $3,699,484 for domestic jurisdictions which expire on various dates through 2028. The Company expects to utilize $346,500 of the loss carryforward for the year ended December 31, 2012, 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’s US based net operating losses available for future use are as follows:


        Available

Year

Net Operating Loss

Expires

1999

$             

1,430,143

2019

2002

               

1,461,310

2022

2007

   

   138,950

2027

2008

   669,081

2028


Total Available

$

3,699,484





29




Income tax expense differs from amounts computed by applying the statutory Federal rate to pretax income as follows:


 

 

 

 

2011

2010

Expected US Income Tax (Benefit) on Consolidated Income before Tax

$    133,304  

$ ( 30,236)

Effects of:

 

 

Expected State Income Tax (Benefit) on Consolidated Income before Tax

2,269  

(   5,691)

Change in valuation allowance

(166,165)                                           

66,939                                           

Permanent Differences

75,481

151,313

Earnings/(Losses) in foreign jurisdictions taxes at rates different from the statutory U.S. federal rate

(  17,589)

(  11,068)

Change in future expected tax rate

104,255

0

Foreign Net Operating Losses

 0

 (  19,646)

 Effective Tax Provision (Benefit)

  $     131,555

$   151,611 


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, 2011 and 2010 is presented in the table below:


 

 

 

 

2011

2010

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 2002 through 2011 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 $8,730,608 in 2011 and $8,224,794 in 2010; net income (loss) of $338,348 in 2011 and ($89,432) in 2010; and net fixed assets of $7,167,448 in 2011 and $7,341,390 in 2010.    


11. Purchase of Mocles Holdings Limited


On December 24, 2004, the Company, through its wholly owned subsidiary NZ Castle Resorts and Hotels Limited, entered into an agreement to purchase all of the shares of Mocles Holdings Limited (“Mocles”), a New Zealand Corporation that owns the Podium of the Spencer on Byron Hotel located in Auckland, New Zealand.  Following are the significant provisions of this agreement, as amended:


The purchase price for Mocles was $8,024,095 (NZ$10,367,048), net of imputed interest of $1,263,905 (NZ$1,632,952).  The face value of the purchase price was $9,288,000 (NZ$12,000,000).   


The purchase price is to be paid as follows:


A partial assignment of the Company’s receivable from HBII in the amount of US$3,018,000 (see note 2).  In the event that this amount is not realized from HBII, the Company is obligated to make up the difference by December 31, 2014.


Through July 31, 2011, monthly payments of the greater of NZ$20,000 (US$15,480), or Surplus Profits defined as 50% of net profits, whichever is higher, calculated in accordance with New Zealand’s Generally Accepted Accounting Principles or International Reporting Standards.  The Company is also required to pay interest on the bank mortgage note payable of Mocles.  Beginning on August 1, 2011,




30




monthly payments increased by NZ$20,000 (US$15,480), which represents interest on the outstanding obligation.  The vendor has the right to increase the interest payable on the then outstanding balance of the purchase price provided that the interest rate does not exceed the Westpac Banking Corporation indicator lending rate plus a margin of 3%.


At the time of purchase, Mocles had additional debts, namely:


(1)

Bank Mortgage – There is $2,273,502 payable to a bank which is secured by the Podium.  The liability to the bank must be refinanced, paid in full, or renegotiated to the extent that the current guarantors are released from all obligations associated therewith, by December 31, 2014.

 

(2)

Advances from parties heretofore related to Mocles in the amount of $1,509,768.  The entire amount is due and payable by December 31, 2014 (See Note 6).  


The purchase price is deemed to be satisfied in part by NZ Castle procuring repayment of Mocles additional debts.  After NZ Castle has procured repayment of the additional debts by or on behalf of Mocles, the total payable to the seller of the Mocles shares under 1 and 2 above is $4,836,642.


Mocles shares are being held legally by the seller of such shares until such time as all obligations associated with this transaction are satisfied.


The Company is required to make interest payments on behalf of Mocles on the bank mortgage mentioned in paragraph 1 above.


12.  Change in Accounting Policy


During the fourth quarter of 2011, the Company changed the accounting policy for recognizing personnel costs for on-site Company employees that are contractually paid by funds belonging to resort and hotel ownership.  Previously, the Company recognized such costs on a net basis under the agent provisions of FASB ASC 605-45-45 Principal Agent Considerations resulting from the owners’ position as the primary obligor and the lack of credit risk incurred by the Company.  In an effort to promote greater comparability and consistency with industry practices and other companies within our industry, the Company now reports such costs on a gross basis and recognizes revenue in an amount equal to the expenses incurred.  As a result of this change in accounting policy, there is no change to the previously reported net income, stockholders’ equity, or cash flows for the years ended December 31, 2011 and 2010.  The following financial statement line items for the year ended December 31, 2010 have been adjusted for comparability purposes as follows:  


 

Prior to Change

 

As Adjusted

Consolidated Balance Sheet:

 

 

 

Accounts receivable

$    2,038,211

 

$    2,607,109

Accrued salaries and wages

$       720,926

 

$    1,289,824

 

 

 

 

Consolidated Statement of Operations:

 

 

 

Management and service revenue

$    1,971,913

 

$  10,057,151

Payroll and office expenses

$    1,858,812

 

$    9,944,050


13. Subsequent Events


In February 2012, the Company sold its ownership interest in the limited liability company that was acquired in September 2011 for $350,000.


In February 2012, the Company negotiated a ten year agreement for the management of its New Zealand property.  Under the terms of the new contract, there is no guaranteed return to the unit owners of the property.  The Company will earn fees based on the revenues and operating profits of the room operations, with the balance (if any) of funds remaining after paying all room operating expenses to be paid to the unit owners.  Although the new terms of the contract do not call for a guaranteed amount or percentage to be paid to the unit owners, should there be an operating loss then the Company would be responsible for funding such losses.  The contract does include a force majeure clause to protect the Company from certain unforeseen and uncontrollable occurrences.  Although there can be no assurances given, Management is confident that the likelihood of the rooms division of the property experiencing an operating loss is minimal.







31




Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.


None.


Item 9A. 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, 2011.  Our Chief Executive Officer has concluded that all disclosure controls and procedures were effective as of December 31, 2011, 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, 2011.


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 2011 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, 2011.  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, 2011. 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, 2011, 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




32




in our internal controls in connection with auditing our consolidated financial statements for the years ended December 31, 2011, and 2010. 


Item 9B. Other Information.


None reported





33




PART III


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, 2011. 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

68

Chief Executive Officer, acting Chief Financial Officer, Director and Chairman of the Board

1993

Alan R. Mattson

55

Chief Operating Officer and Director

2004

Motoko Takahashi

67

Secretary and Director

1993

John Brogan

79

Director

2007

Michael Irish

58

Director

2004

Rick Humphreys

68

Director

2005

Stanley Mukai

79

Director

2004

Roy Tokujo

70

Director

1998

Tony Vericella

59

Director

2004

Robert Wu

44

Director

2007


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.


Mike Irish - Mr. Irish has been a successful businessman in Hawaii for over 30 years.  Mr. Irish began his career in hotel management, but moved to real estate and business acquisitions during the 1980s.  He became part of the Hawaii food service industry with the purchase of Parks Brand Products in 1985, Halm’s Kim Chee in 1986, and Diamond Head Seafood in 1995, where he continues to serve as CEO.  


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.





34




Roy Tokujo - Mr. Tokujo was elected to the board of directors in March 2000.  Mr. Tokujo has over 45 years of experience in the hotel, restaurant and entertainment business in Hawaii, and he is the President and CEO of Cove Enterprises and Cove Marketing.  Mr. Tokujo was a founding member of the Hawaii Tourism Authority and is managing partner of Ko Olina Activities, LLC and Ko Olina Marketing & Licensing, LLC.


Tony Vericella - Mr. Vericella is the Managing Director of Island Partners 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.


Robert Wu- Mr. Wu currently serves as Executive Vice President for Asian development for Castle Resorts & Hotels a subsidiary of the Castle Group, Inc.  He joined the Company in January 2008 and became an integral part of Castle’s business development in the Asia region.  Mr. Wu serves as the Chief Executive Officer for the Wu Group, a Hawaii based firm that specializes in Asia imports, management of several Hawaii businesses and business consultation services for the Asia-Pacific region.


Significant Employees


None, not applicable.


Family Relationships


There are no family relationships between any Castle officers and directors.


Involvement in Certain Legal Proceedings


During the past five years, no 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.








35




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. Executive Compensation.


Executive Compensation


The following table shows for the fiscal years ended December 31, 2011 and 2010 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

12/31/11

12/31/10

$194,500

110,250

$         0

0

$           0

0

$           0

0

$                     0

0

$                       0

0

$                     0

0

$   194,500

110,250

Alan Mattson COO & Director

12/31/11

12/31/10

159,900

159,900

0

0

0

0

0

0

0

0

0

0

               0

0

    159,900

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 has 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 year 2011.


During 2010 the Company issued 80,000 shares of its 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 the Company’s common stock at a price of $1.00.  The warrants expire at the earlier of five years or 60 days after the Company’s common stock trades for an average price of $3.00 per share for 20 consecutive days and the 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%.





36




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 31, 2011 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



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



1.0%

Michael Irish

3 Waterfront Plaza, Suite #555

Honolulu, HI 96813

35,000

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.  


Changes in Control


There are no current or planned transactions that would or are expected to result in a change of control of Castle.








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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 2011 or 2010.


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, 2011, undeclared and unpaid dividends on these shares were $1,035,939 or $93.75 per preferred share.


In July 2007, the Company issued warrants to purchase 200,000 shares of its common stock at a price of $2.00 per share to its former CFO.  The warrants were for 5 years and expire on July 1, 2012.


In July 2007, the Company issued warrants to purchase 50,000 shares of its common stock at a price of $2.00 per share to an investment consultant.  These warrants were for 5 years and expire on July 1, 2012.


In April, 2008, the Company raised additional capital from the completion of a Unit offering which resulted in the issuance of 333,337 Units at a price of $1.50 per Unit.  Each unit consists of one share of the Company’s common stock and a warrant to purchase an additional share of the Company’s common stock at a price of $3.50 for a period of three years, subject to certain restrictions.  Through this financing the Company raised a net amount of $224,744 for use as working capital and converted $227,500 in outstanding debt and short term obligations.  None of the warrants issued were executed and the warrants expired in 2011.


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 for a period of three years.  The stock and warrants were issued in blocks of 10,000 to each of the non-employee directors of the Company.  


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 for a period of three years.  The stock and warrants were issued in blocks of 10,000 to each of the non-employee directors of the Company.  


In October 2008, the Company secured a line of credit with a local bank for up to $250,000.  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.  The line is due in October 2012.


In April, 2008, the Company raised additional capital from the completion of a Unit offering which resulted in the issuance of 333,337 Units at a price of $1.50 per Unit.  Each unit consists of one a of the Company’s common stock and a warrant to purchase an additional share of the Company’s common stock at a price of $3.50 for a period of three years, subject to certain restrictions.  Through this financing the Company raised a net amount of $224,744 for use as working capital and converted $227,500 in outstanding debt and short term obligations.  Directors and Officers of the Company purchased a total of 260,003 Units in this offering.


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 (see Note 11), an assignment of $3,018,000 of the total note receivable from HBII was made to the seller of the real estate, with the Company remaining as guarantor should the note receivable not be collected before December 31, 2014 (See Note 6 to the Consolidated Financial Statements).






38




Related Party Loans


In June, 2004, a 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 2011, the Company has accrued but not paid the Chairman and CEO a total of $57,740 for expenses incurred on behalf of the Company, and $72,745 for interest accrued on a note payable.


Through December 2011, the Company has accrued but not paid the Company’s COO a total of $3,893 for expenses incurred on behalf of the Company. 


In December 2011, an officer of the Company’s domestic subsidiary gave the Company a short term advance of $50,000.


Except for the transactions with HBII, the issuance of stock and warrants described above, the financing guarantee arrangement, the related party loans and unpaid fees, 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. 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, 2011 and 2010:

 

 

 

Fee Category

2011

2010

Audit Fees

$       109,378

$       98,480

Audit-related Fees

0

0

Tax Fees

4,454

4,914

All Other Fees

400

3,516

Total Fees

$     114,232

$     106,910


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 2011 and 2010 were $109,378 and $98,480, 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 2011 and 2010.

.




39




TAX FEES


The aggregate fees billed by Castle’s auditors for professional services for tax compliance, tax advice, and tax planning for 2011 and 2010 were $4,454 and $4,914, 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 2011 and 2010 were $400 and $3,516, respectively.


PART IV.


Item 15. Exhibits and Financial Statement Schedules.


Exhibit Index


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit No.

Title of Document

Location if other than attached hereto

Previously Filed

3.1 *

Restated Articles of Incorporation

Part I, Item 1 *

*

3.2 *

Certificate of Designation

Part I, Item 1 *

*

3.3 *

By-Laws

Part I, Item 1 *

*

3.4 *

By-Law Amendment

Part I, Item 1 *

*

10.1

Settlement Agreement Manhattan Guam

Part I, Item 1 *

*

10.2

Employment Agreement with Rick Wall as amended

Part III, Item 10 *

*

10.3

Employment Agreement with Alan Mattson

Part III, Item 10 *

*

14

Code of Ethics

Part III, Item 10

*

18

Preferability Letter

 

 

21

Subsidiaries of the Company

 

 

31.1

302 Certification of Rick Wall

 

 

 32

 906 Certification

 

 


* Incorporated herein by reference and Filed as exhibit to Form 10KSB for the year ended December 31, 2006 on September 19, 2007.




40




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 30, 2012


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:

3/30/12

Rick Wall

 

 

Chief Executive Officer and

 

 

Chairman of the Board

 

 


 

 

 

 

 

 

 

/s/ Alan R. Mattson

Date:

3/30/12

 

/s/ Robert Wu

Date

3/30/12

Alan R. Mattson

 

 

 

Robert Wu

 

 

Director and Chief Operating Officer

 

 

 

Director

 

 


 

 

 

 

 

 

 

/s/ John Brogan

Date:

3/30/12

 

/s/ Mike Irish

Date

3/30/12

John Brogan

 

 

 

Mike Irish

 

 

Director

 

 

 

Director

 

 


 

 

 

 

 

 

 

/s/ Rick Humphreys

Date:

3/30/12

 

/s/ Stanley Mukai

Date

3/30/12

Rick Humphreys

 

 

 

Stanley Mukai

 

 

Director

 

 

 

Director

 

 


 

 

 

 

 

 

 

/s/ Motoko Takahashi

Date:

3/30/12

 

/s/ Roy Tokujo

Date

3/30/12

Motoko Takahashi

 

 

 

Roy Tokujo

 

 

Director

 

 

 

Director

 

 


 

 

 

 

 

 

 

/s/ Tony Vericella

Date:

3/30/12

 

 

 

 

Tony Vericella

 

 

 

 

 

 

Director

 

 

 

 

 

 




















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