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, the Territory of Guam and the Commonwealth of Saipan under the trade name “Castle Resorts and Hotels.”
Castle has contracts to provide management and/or marketing or other services to resort condominium and hotel properties around the Pacific Rim. Castle manages luxury and mid-range condominium resort hotels on all of the major islands within the state of Hawaii, a luxury condominium resort located in Saipan, a full service luxury condominium resort in New Zealand and full service hotels in Honolulu, Hilo and Guam. Castle has a wide range of products available to the leisure traveler, from luxury condominium resorts with room rates exceeding $1,500 per night, to small budget inns with rates under $100 per night. Castle has adopted a strategic plan to expand not only in Hawaii, but also in Micronesia, New Zealand, other Pacific Basin markets, Thailand, and other select Asian markets and Central American locales.
Castle earns its revenues by providing several types of services to property owners including, hotel and resort management and operations; reservations staffing and operations; sales and marketing; and accounting. In addition, Castle provides design services to properties that are furnishing, refurnishing or remodeling, as well as, pre-opening technical services for new hotel and resort properties being planned or under construction. Castle’s revenues are derived primarily from two sources: (1) the rental of hotel rooms and condominium accommodations; and food and beverage sales at the properties it manages and; (2) fees paid for services it provides to property owners. Castle also derives revenues from commissions and incentive payments, based on sales and performance criteria at each property.
Castle’s marketing efforts are focused toward potential guests for those properties that Castle manages. Castle does not own any hotels or resorts of its own; however, it has made an investment in the property that it manages in New Zealand. Marketing is done through a variety of distribution channels including direct Internet sales, wholesalers, online and traditional travel agencies and group tour operators. Recently, Castle has expanded its sales and marketing staff and implemented a redesign of its interactive web site (www.Castleresorts.com). Unlike many other hotel and resort operators, Castle does not market the properties it manages under the Castle brand. Instead of emphasizing the “Flag” or chain name, the Company’s strategy is to promote the name and reputation of the individual properties under management. Castle believes that this allows the consumer to better choose the specific type of vacation experience desired based upon the specific attributes of the property selected.
Castle is focused on growing the number of management contracts within its existing portfolio by further expanding its geographic markets. The Company has recently implemented a strategic growth plan which addresses expansion within the regional Pacific markets of Hawaii; Micronesia and New Zealand; and select Asian markets, Thailand and Central American locales. An experienced acquisition team has been formed and strategic alliances are being pursued with various hospitality development companies and prominent investment banks, that wish to team up in pursuing growth opportunities within these key targeted geographic areas.
Existing Contracts . In the past few years, Castle has been very successful in improving the performance of the properties it manages. Further improvements in revenues and/or decreases in expenses for Castle’s current properties should result in higher management fees for Castle through increased incentive fees and/or fees based on a percentage of revenue.
Expansion in Hawaii . Castle is one of the leading hotel and resort management companies in the state of Hawaii. In the hotel and resort industry, management companies often acquire and lose management contracts for properties over time. Fortunately for Castle, its track record in maintaining contracts with its portfolio properties has remained consistently high. Significant opportunities for Castle to obtain additional contracts are available due to a myriad of factors that include sales of properties, foreclosures, underperformance and dissatisfaction with the current management of Castle’s competitors. The real estate boom experienced throughout the United States has also affected the hotel and resort condominium markets of Hawaii, as many properties have been sold or are now on the market. Castle’s history and experience of managing properties in Hawaii has positioned the Company as a market leader in new property acquisition. Most members of Castle’s executive management team are career hospitality industry executives with big brand experience and strong ties to Hawaii and the Pacific Rim. Through decades of experience within its local markets, Castle’s management possesses market intelligence that is not easily available to others. The Company is closely involved with current efforts to support Hawaii’s visitor industry through its involvement and tenures with the Hawaii Visitors & Convention Bureau (HVCB), as well as the American Society of Travel Agents (ASTA), Hawaii Hotel & Lodging Association (HHLA) and other professional and trade organizations.
Castle strives to be more flexible and creative than its larger competitors both in structuring agreements that meet the needs and goals of property owners and/or owner associations, and its approach to marketing its properties. The Company has ramped up for expansion in the number and scope of properties it manages in Hawaii and its targeted new markets, and it intends to compete very aggressively for this new business.
Expansion Outside of Hawaii . The majority of the properties presently managed by Castle are located within the state of Hawaii. In addition, Castle manages properties in New Zealand, Guam, Micronesia, and most recently in Thailand. The Company’s management believes that there are significant opportunities to expand Castle’s operations both in the markets it currently serves, as well as in other Pacific Basin and Asian vacation destinations and Central American locales. Castle recently announced several new key management appointments and promotions as part of its strategic plan to position the Company for significant growth within its current markets and to capitalize on the emerging growth opportunities particularly within the Asian markets. In 2007, the Company formed its Thailand division to support its new business initiatives in Thailand.
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The Company has engaged in strategic alliances with partners such as the Anthology Marketing Group and others who have core competencies to support its global growth plans. The Company is actively in discussions and/or negotiations with numerous companies and plans to expand its acquisition of property management contracts in these targeted areas.
Technology Improvements. The Company recently launched a redesigned website with a customized proprietary booking engine and intuitive functionality that sets it apart from its competitors. Castle Resorts’ website (CastleResorts.com) offers state-of-the-art functionalities, user-friendly navigation, interactive features and rich content, while offering great rates, and a travel booking engine that can handle rate conversions for over 100 foreign currencies. The Company’s proprietary system is customizable and supports a dynamic pricing model to maximize revenues for all of the properties under its management. The Company intends to continue to invest in optimizing its on-line presence directed towards its own website, since revenue derived through the Company’s branded website yields a higher margin.
Revenues
Total Revenues for the three months ended June 30, 2007, increased to $5.2 million, compared to $5.0 million for the three months ended June 30, 2006. Total Revenues were also up during the first six months ended June 30, 2007, to $10.7 million, compared to $10.3 million in the same period the prior year. The increase reflects increases in revenue from both domestic operations in both the first and second quarters of 2007, primarily as a result of the addition of two properties in 2006, one in June 2006, the other in October 2006, and modest increases in rates and occupancy at the properties under Castle’s management. Revenues Attributed from Properties under Castle’s New Zealand operations increased by approximately $148,000 for the second quarter of 2007 and $357,000 for the first six months of 2007, as compared to the comparable periods of 2006, due to a strengthening of the New Zealand dollar. Castle’s revenues in the second quarter of 2007 were impacted by the exchange rate of the US dollar, as compared to the New Zealand dollar. Without the exchange effect, Castle’s Revenues Attributed from Properties for the second quarter and first half would have decreased by approximately $156,000 and $37,000 as compared to the comparative year earlier periods. Management and Service Revenues during the second quarter increased from $822,381 in 2006 to $845,372 in 2007,
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but remained relatively flat at $1.7 million for the six months ended June 30 of both 2006 and 2007. Other income also remained flat for the second quarter ended June 30, at $86,844 for 2007 and $79,979 for 2006, while the six month totals reflect a slight decrease to $162,184 for 2007 as compared to $188,032 for the year earlier period. This decrease is a result of a special project undertaken for one of the properties managed by Castle during 2006, which contributed to additional Other Income.
Property Expenses are those expenses related to the management of the resort and condominium properties which are operated on a Gross Revenue contract basis. Property Expenses increased to $4.2 million for the three months ended June 30, 2007, from $4.0 million in the three months ended June 30, 2006. Similarly, Property Expenses increased to $8.4 million in the six months ended June 30, 2007, from $7.9 million in the same period last year. These expense increases are in line with revenue increases and reflect cost increases relating to general inflationary increases in operating costs including wages and other costs of management of the properties under contract. Due to its dependence on shipping, costs in Hawaii are particularly sensitive to overall energy price increases. In addition, the recorded Property Expenses for Castle’s operations in New Zealand are subject to the effects of the exchange rate of the U.S. dollar as compared to the New Zealand dollar. Without the effects of the exchange rate, the Property Expenses for the second quarter would have decreased by approximately $86,000 for the second quarter and increased approximately $66,000 for the 2007 six month period as compared to 2006. Gross profit from Gross Revenue Contract properties decreased from $161,080 to $78,760 during the second quarter ended June 30, 2007, as compared to the year earlier period. Similarly, Gross profit from Gross Revenue Contract properties decreased to $485,210 for the six months ended June 30, 2007, from $526,498 in the year earlier period. These decreases reflect the general inflationary increases in operating costs including wages and other costs of management of the properties under contract which were not recovered through increased revenues.
Other Operating Expenses, not including Property Expenses, increased to $1.2 million for the three months ended June 30, 2007, from $1.0 million in the same quarter in 2006. Similarly, these expenses increased to $2.4 million for the six months ended June 30, 2007, from $1.8 million during the same period in 2006. Payroll and Office expenses increased during the second quarter of 2007 to $931,837 from $787,222 in the second quarter of 2006 and to $1.8 million from $1.5 million for the six month periods ending June 30, 2007, and June 30, 2006, respectively. These increases were primarily related to increased staffing and personnel costs to support the properties under management, as well as additional staffing to enhance Castle’s online booking engine and reservations center and costs related to establishing the Castle Design Group. Administrative and General Expenses totaled $225,505 for the three months ended June 30, 2007, as compared to $132,143 for the same period last year and totaled $456,869 for the first six months of 2007 as compared to $234,605 for the similar period last year. This increase is a result of legal and professional fees related to the settlement of legal matters, as well as travel and other costs related to the execution of the Castle’s stated strategy to expand into other Pacific Basin and Asian vacation destinations .
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EBITDA (Earnings before Interest, Depreciation, Taxes and Amortization) reflects the Company’s earnings without the effect of depreciation, interest income or expense or taxes. Castle’s management believes that in many ways it is a good alternative indicator of the Company’s financial performance as it removes the effects of non cash depreciation and amortization of assets as well as the fluctuations of interest costs based on the Company’s borrowing history 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 is shown below. For the six months ended June 30, 2007, EBITDA was $40,791 compared to $624,224 for the same period in 2006. For the three months ended June 30, 2007, EBITDA was negative $146,367 compared to $144,076 for the same period in 2006. The decrease in EBIDTA in both the three months and six months ended June 30, 2007, as compared to 2006, is due to investments which the Company made in increased staffing and systems to support the growth in the number of properties and the expansion into new geographic regions.
Shares outstanding: August 20, 2007 - 9,538,055 shares of common stock.
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