|• QUARTERLY REPORT ON FORM 10Q FOR THE QUARTER ENDED MARCH 31, 2012 • 302 CERTIFICATION OF RICK WALL • 906 CERTIFICATION OF RICK WALL • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT|
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to____________
Commission File No. 000-23338
THE CASTLE GROUP, INC.
(Exact name of Registrant as specified in its charter)
500 Ala Moana Boulevard, 3 Waterfront Plaza, Suite 555
Honolulu, Hawaii 96813
(Address of Principal Executive Offices)
(Registrants Telephone Number)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (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 Web site, 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 [ ] No [ ]
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. (Check One):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check whether the Registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act subsequent to the distribution of securities under a plan confirmed by a court.
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the Registrants classes of common equity, as of the latest practicable date:
May 14, 2012 - 10,026,392 shares of common stock.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Notes to Condensed Consolidated Financial Statements:
Summary of Significant Accounting Policies
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 or Castle) conform with generally accepted accounting principles and practices within the hotel and resort management industry.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of The Castle Group, Inc. and its wholly-owned subsidiaries, Hawaii Reservations Center Corp., HPR Advertising, Inc., Castle Resorts & Hotels, Inc., Castle Resorts & Hotels Thailand Ltd., NZ Castle Resorts and Hotels Limited (a New Zealand Corporation), and NZ Castle Resorts and Hotels wholly-owned subsidiary, Mocles Holdings Limited (a New Zealand Corporation). All significant inter-company transactions have been eliminated in the consolidated financial statements.
Note 1 Basis of Presentation
The accompanying consolidated financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. In the opinion of management, the accompanying interim financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation. The results of operations for the three month period ended March 31, 2012, are not necessarily indicative of the results for a full-year period. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in Castles annual audited financial statements for the year ended December 31, 2011.
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 owners 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.
Note 2 New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by 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 Companys consolidated financial statements upon adoption.
Note 3 Foreign Currency Transaction Gain / Loss
As part of the Companys purchase of real estate in New Zealand, the Company has guaranteed an amount of up to NZ$4,201,433 (US$3,018,000) to the seller of the real estate and the Company recorded this guaranty as Other Long Term Obligations on its balance sheet. The loan issued upon the purchase of the New Zealand real estate is payable in New Zealand dollars. Due to the strengthening of the New Zealand dollar against the US dollar, the obligation has been increased to US$3,443,494 at March 31, 2012. For the three months ended March 31, 2012 and 2011, the Company recorded exchange gains (losses) of ($191,585) and $39,914, respectively.
Note 4 Income Taxes
Income tax expense reflects the expense or benefit only on the Companys domestic taxable income. Income tax expense and benefit from the Companys foreign operations are not recognized as they have been fully reserved.
Note 5 Equity-Based Compensation
None issued during the quarters ended March 31, 2012 or 2011.
Note 6 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 quarter ended March 31, 2011. The Condensed consolidated statement of operations for the quarter ended March 31, 2011 has been adjusted for comparability purposes as follows:
Note 7 Subsequent Events
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operation.
Forward Looking Statements
Statements made in this Quarterly Report of the Castle Group, Inc. (Castle or the Company) which are not purely historical are forward-looking statements with respect to the goals, plan objectives, intentions, expectations, financial condition, results of operations, future performance and business of the Company, including, without limitation, (i) Castles ability to raise capital, and (ii) statements preceded by, followed by or that include the words may, would, could, should, expects, projects, anticipates, believes, estimates, plans, intends, targets or similar expressions.
Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond the Companys control) that could cause actual results to differ materially from those set forth in the forward-looking statements, including the following, general economic or industry conditions, nationally and/or in the communities in which the Company conducts business, changes in the interest rate environment, legislation or regulatory requirements, conditions of the securities markets, the Companys ability to raise capital, changes in accounting principles, policies or guidelines, financial or political instability, acts of war or terrorism, other economic, competitive, governmental, regulatory and technical factors affecting Castles operations, products, services and prices.
Factors that may affect forward-looking statements include a wide range of factors that could materially affect future developments and performance, including the following: Changes in company-wide strategies, which may result in changes in the types or mix of businesses in which Castle is involved or chooses to invest; changes in U.S., global or regional economic conditions, changes in U.S. and global financial and equity markets, including significant interest rate fluctuations, which may impede Castles access to, or increase the cost of, external financing for its operations and investments; increased competitive pressures, both domestically and internationally, legal and regulatory developments, such as regulatory actions affecting environmental activities, the imposition by foreign countries of trade restrictions and changes in international tax laws or currency controls; adverse weather conditions or natural disasters, such as hurricanes and earthquakes, labor disputes, which may lead to increased costs or disruption of operations. This list of factors that may affect future performance and the accuracy of forward-looking statements are illustrative, but by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty.
Plan of Operation
Principal products or services and their markets
Castle is a hospitality and hotel management company that prides itself on its ability to be both Flexible and Focused, which is the Companys 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. Castle earns its revenues by providing several types of services to property owners including, hotel and resort management and operations; reservations staffing and operations; sales and marketing; and accounting. In addition, Castle provides design services to properties that are furnishing, refurnishing or remodeling, as well as, pre-opening technical services for new hotel and resort properties being planned or under construction. Castles revenues are derived primarily from two sources: (1) the rental of hotel rooms and condominium accommodations;
and food and beverage sales at the properties it manages and; (2) fees paid for services it provides to property owners. Castle also derives revenues from commissions and incentive payments, based on sales and performance criteria at each property.
Most of our marketing efforts are focused towards acquiring and retaining guests for the properties we manage. Castle does not own any hotels or resorts; however, it has made real estate investments in the properties that it manages in Hilo, Hawaii and 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. Unlike many other hotel and resort operators, we do not market the properties we manage under the Castle brand. Instead of emphasizing the Flag or Chain name, Castles strategy is to promote the name and reputation of the individual properties under management. We believe that this allows the consumer to better choose the specific type of vacation experience desired based upon the specific attributes of the property selected.
Our website (www.CastleResorts.com) offers state-of-the-art functionalities, user-friendly navigation, interactive features and rich content, while offering attractive rates and a travel booking engine that supports a dynamic pricing model which maximizes revenues for all of our properties under management. We intend to continue to invest in optimizing our on-line presence directed specifically towards our own website, since revenue derived through our own branded website yields a higher margin utilizing retail rates. Castle supports its online presence with its own full service, reservation call center that provides a wide range of services from tour reservation processing and rooms control, to handling group bookings. The reservation center electronically connects resort property inventory and rates to the four major Global Distribution Systems (GDS). This connectivity displays rates and inventory of Castles properties to over 500,000 travel agents worldwide as well as Internet connectivity to over 1,200 travel websites worldwide.
For customer convenience, we offer direct to consumer online booking reservations of guest rooms at resort and condominium properties under contract and also vacation packages with attractions and activities related to our hotels and condominiums through Castles interactive web site at www.CastleResorts.com.
Castle has a diverse portfolio of properties located in desired island resort destinations throughout the Pacific Region and beyond. We represent hotels, resort condominiums, and lodging accommodations throughout Hawaii, as well as in Saipan and New Zealand.
In Hawaii, Castle represents properties on all of the five major Hawaiian Islands of Oahu (Waikiki), Maui, Kauai, Molokai and Hawaii, (Big Island). This allows customers the option to island-hop, and provides Castle cross-selling opportunities. Our Honolulu headquarters serves 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 geographic areas and cultures.
Castle offers a wide range of accommodations at various price points from exclusive private villas, full-service all-suites hotels, oceanfront resort condominiums, to modestly priced hotels with up to 450 guest rooms. Our collection of all-suites condominium resorts, hotels, lodges and vacation rentals allows customers to select the best accommodation to suit their individual style and budget.
Our ability to deliver consistent financial returns to our property owners demonstrates Castles competency in managing and marketing a wide range of accommodations to our customers via multiple channels of distribution.
Castle does not brand the properties under its management. Each property Castle manages is individually marketed in order to extract maximum value from its unique strengths. Our strategy is that we do not promote Castle as a brand name but instead, we focus on our customers, the owners of the properties we manage. As Castle does represent a diverse range of properties it represents, its brand strategy is that one size does not fit all. The Castle brand stays in the background and our focus is on marketing the uniqueness of each property, while satisfying the needs and expectations of our owners. Each property we manage maintains its own brand identity and personality, while utilizing the Castle advantage of our powerful marketing resources, channel distribution, resort management expertise, industry partnerships, and networks.
Castles brand strategy is one of the areas that clearly differentiate us from the high profile branded hospitality companies. When a hotel owner or developer is considering contracting a large worldwide hospitality company for possible hotel management, there are several considerations that must be assessed. With major worldwide brands, usually come the high costs that the owner must bear to sustain the expensive marketing and operational expense that the brand demands to offset their marketing costs. There are also some tangible differences from the guests or customers perspective as well.
Castle markets each property with its own independent brand identity and deploys customized marketing programs to fit the specific demographics attracted to each of our properties. Through our brand building efforts, we begin the process of positioning each of our resort brands to our key market segments, niche targeted customers and distribution channels.
We also do not flag our properties with the Castle name. The advantages of doing so are several. There is a high demand for the independent smaller boutique hotels and condominiums, as travelers favor a more individualized and unique travel experience. This ongoing trend towards smaller, independent hotels, as opposed to the familiar chains, is not only occurring in Hawaii, but seen throughout the world tourism marketplace. This increased demand is fueled by the following travelers expectations:
· Travelers seek individualized recognition, attention, and service.
· Guests desire hotel and condominium accommodations that impart a sense of place and provide a
unique, hospitable guest experience.
· Customers demand quality and personalized service, which creates high retention and repeat customers.
· Customers seek Hawaii due to the feeling of Ohana, or family, experiencing the unique feeling of Aloha imparted by the people of Hawaii.
Marketing Programs and Promotions
Castle has implemented numerous marketing programs and promotions directed towards both the consumer and trade markets to generate incremental revenue and market loyalty for the individual properties. We have developed a wide range of programs designed specifically to reflect the unique attributes of each of our resort properties, while providing various incentives. At any given time, we may have a number of ongoing marketing programs and promotions in place, some of which are seasonal to drive incremental room night revenues during valley or shoulder periods and some of which are ongoing throughout the year.
The majority of the properties presently managed by Castle are located within the state of Hawaii. Significant opportunities for Castle to obtain additional contracts within the State of Hawaii are also available to us due to a myriad of factors that include sales of properties, foreclosures, underperformance, and dissatisfaction with the
current management of our competitors. In addition, Castle manages properties in New Zealand and Saipan, while at the same time keeping the option to strategically expand operations into Thailand and Guam. We believe that there are significant opportunities to expand Castles operations both in the markets it currently serves, as well as other Pacific Basin and Asian vacation destinations.
As part of Castles strategies to secure long term, multi-year management contracts, from time to time, we have found it advantageous to purchase or lease selected real property within a resort or condominium project. This occurred in 2004, when Castles wholly owned subsidiary, NZ Castle Resorts and Hotels Limited, entered into an agreement to purchase all of the shares of Mocles Holdings Limited (Mocles), a New Zealand Corporation. Mocles owns the Podium levels (Podium) of the Spencer on Byron Hotel in Auckland, New Zealand, which includes the front desk, restaurant, bar, ballroom, board room, conference rooms, back of the house facilities and other areas necessary for the hotels operation. Through our ownership of the Podium and a ten year management contract for the Spencer on Byron hotel, Castle is assured of ongoing revenues in future years from this property.
In addition to seeking new hotel and resort condominium management contracts, we will continue to seek investment opportunities with hotel owners. Castle has been successful over the past two years, as in July 2010, the Company acquired a 7% common series ownership interest in one of the hotels managed by the Company and in September of 2011, the Company acquired a minority interest in a Waikiki hotel, which was subsequently sold at a gain in 2012.
Managements Discussion and Analysis of Financial Condition and Results of Operations
Certain statements contained in Managements Discussion and Analysis of Financial Condition and Results of Operations and Plan of Operation including statements regarding the anticipated development and expansion of Castles business, the intent, belief or current expectations of the performance of Castle and the products and/or services it expects to offer and other statements contained herein regarding matters that are not historical facts, are forward-looking statements. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, the factors set forth in Managements Discussion and Analysis of Financial Condition and Results of Operations and Plan of Operation.
Total Revenues decreased from the quarter ended March 31, 2011 by 18% to $5,551,493 for the three months ended March 31, 2012. The decrease is attributed to a change in our New Zealand contract from a Gross contract to a Net contract. During the prior year, we recorded $1,749,239 of room revenues from our New Zealand contract which operated under a Gross contract; this contract subsequently changed in August 2011 to a Net contract whereby we no longer record the room revenues since they belong to the unit owners instead of the Company. Excluding the New Zealand room revenues from our prior year revenues, Total Revenues show an increase of 10% from prior year. The increases are attributed to increased demand and a recovery of the travel industries of New Zealand and Hawaii, and a strengthening of the New Zealand dollar against the US dollar. Both domestic and international operations in 2011 were affected by the decreasing room rates in the markets in which our properties are located. In response to the worldwide weakening of the economy that began in 2008, the hospitality business experienced severe discounting as travel companies compete to re-capture market share that was substantially reduced during to the worldwide financial crisis. The trend of severe discounting has diminished, and the Company has experienced an increase in REVPAR (Revenue per Available Room) of 20% when comparing the first quarter of 2012 with 2011.
Revenues Attributed from Properties decreased from $4,343,809 to $3,101,143, a decrease of 29% for the three months ended March 31, 2012 compared to 2011. Again, this decrease is due to the change of our agreement in New Zealand from a Gross to a Net Contract. Excluding the effects of the contract change, Revenues Attributed from Properties show an increase of 20% when comparing the three months ended March 2012 and March 2011.
The increase for the quarter is attributed to an increase in demand in both our domestic and international operations. Management and Service Revenues showed a slight increase for the quarter, from $2,443,512 in 2011 to $2,450,028 in 2012.
The Company recorded investment income of $96,145 and $23,000, for quarters ended March 31, 2012 and 2011, respectively, which represents the Companys 7% share of the income from the limited liability company that owns one of the hotels managed by the Company.
During the first quarter of 2012, the Company also sold its 2% ownership share in another property located in Hawaii and recorded a gain on the sale of $170,000.
As part of the Companys purchase of real estate in New Zealand, the Company has guaranteed an amount of up to $3,018,000 to the seller of the real estate and the Company recorded this guaranty as Other Long Term Obligations on its balance sheet. The loan issued upon the purchase of the New Zealand real estate is payable in New Zealand dollars. Due to the strengthening of the New Zealand dollar against the US dollar, the obligation has been increased to $3,443,494. For the three months ended March 31, 2012 and 2011, the Company recorded exchange gains (losses) of ($191,585) and $39,914, respectively.
Attributed 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 decreased by $1,235,176 or 32% to $2,646,619 from $3,881,795 for the three months ended March 31, 2012 compared to 2011. Similar to Revenues, this decrease is a result of the change in our New Zealand contract from a Gross to a Net contract and we no longer record the room operating expenses as expenses of the Company. For the quarter ended March 31, 2011, expenses that would not be reflected had the Company been operating under a Net contract were $1,298,691, and excluding those expenses from 2011, 2012 Attributed property expenses would show a slight 2% increase.
Compared to the prior year, payroll and office expenses increased by 5% to from $2,375,220 to $2,498,098 for the quarter ended March 31, 2012. The increase in cost is a result of the Company hiring more employees in order to market the properties under management, as well as the 10% increase (excluding the effects of our New Zealand Contract change) in Total Revenue.
Administrative and general expenses increased by 6% from $161,492 to $171,126 for the quarter ended March 31, 2012 as compared to 2011. This increase was due to additional travel expenses incurred by our corporate operations department in performing operational reviews of our properties, including those in Saipan and New Zealand.
On July 23, 2010 the Company acquired a 7% common series interest in the ownership of a hotel located in Hawaii. The Company received the interest in exchange for the Companys assistance to the buyers of the hotel in negotiating the purchase, performing due diligence work and other consulting services. The hotel was purchased for $17,300,000, of which $13,000,000 was financed through a first mortgage on the hotel. The Company recognized $188,173 in revenue resulting from cash received in finders fees and consulting fees and then used those funds to acquire the 7% common series interest. During the three months ended March 31, 2012 and 2011, the Company recorded investment income of $96,145 and $23,000, respectively, representing the Companys 7% allocation of net income from its investment.
Castles business does not require a great deal of capital expenditure for equipment or fixed assets. As a result, depreciation expense was $57,473 and $57,057 for the three months ended March 31, 2012 and 2011, respectively.
Interest Expense was $95,639 and $82,190, respectively, for the three months ended March 31, 2012 and 2011. The increase in expense is due to the interest we now pay on the mortgage note for our Podium located in New Zealand.
Net income for the three months ending March 31, 2012 and 2011 was $22,521 and $241,806, respectively.
Foreign Currency Translation Adjustment
For consolidated entities whose functional currency is not the U.S. dollar, Castle translates their financial statements into U.S. dollars. Assets and liabilities are translated at the exchange rate currently 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. Changes in the carrying value of the assets and liabilities of the consolidated entities outside of the United States due to foreign exchange changes are reflected as Foreign Currency Adjustments. Foreign Currency Translation adjustments totaled $158,139 and $16,197 for the three months ended March 31, 2012 and 2011, respectively.
Total Comprehensive Income
Total Comprehensive Income for the three months ended March 31, 2012 was $180,660 as compared to $258,003 for the prior year period. This is primarily a result of the changes in Revenue and Property and Operating Expenses, Investment Income, and foreign exchange rates noted above.
EBITDA (Earnings before Interest, Depreciation, Taxes and Amortization) reflects the Companys earnings without the effect of depreciation, interest income or expense, or taxes. EBITDA is a non-GAAP measure. Castles management believes that in many ways it is a good alternative indicator of the Companys financial performance. It removes the effects of non-cash depreciation and amortization of assets, as well as the fluctuations of interest costs based on the Companys 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. EBITDA totaled $501,795 and $391,814 for the three months ended March 31, 2012 and 2011, respectively, representing a 28% improvement over prior year. The increase for the quarter is attributable to the sale of our minority interest in a Waikiki hotel resulting in a gain of $170,000. In addition, the Company recorded $96,145 of investment income in 2012 against $23,000 in 2011, representing its 7% common series ownership interest in one of the properties it manages.
Comparison of Net Income to EBITDA:
Our primary sources of liquidity include available cash and cash equivalents, and borrowing under the credit facility which was secured in October 2008, consisting of a $500,000 term loan and a $150,000 line of credit. As of March 31, 2012, the Company has the total $150,000 available to use of the line of credit. Additionally, our New Zealand subsidiary has an available NZ$300,000 (US$227,850) line of credit of which NZ$33,408 (US$27,381) was utilized as of March 31, 2012. 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. The Company is in compliance with the terms and conditions of these borrowing 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.
We experienced net income of $22,521 for the first quarter of 2011 despite an exchange loss of $191,585, and our Total Current Assets were maintained at $3.9 million at the end of March 2012. The first quarter of the year is typically the high season for the travel industry in Hawaii and we have established a trend of Operating Profitability in recent quarters as we reported Operating Profits in three of our four previous quarters. We anticipate a continuation of a slight increase in current occupancy levels, together with a slight increase in average rate trends and levels for the properties currently under contract for the remainder of 2012 when compared to 2011. We will continue our efforts to expand the number of properties under management through the remainder of 2012, 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, over the past two fiscal years we implemented a number of cost saving and efficiency programs that began to improve our profitability and cash flows. We are beginning to see the results of our operational changes as we reported positive EBITDA in six of the last seven quarters. We project that we will continue to improve the overall profitability, cash flows, and working capital liquidity through 2012. This view is based on the following assumptions:
· An increase in occupancy levels as the global economy stabilizes rather than deteriorates resulting in increased visitor trends to Hawaii and New Zealand.
·A slight increase in average daily rates at the properties we manage as compared to recent years.
·Focus of our corporate office on increasing our properties room revenue through increased sales, advertising and marketing efforts.
·Careful monitoring of our costs and expenses which will provide the basis for improved operating trends throughout 2012.
·Expansion of the number of properties under management, with emphasis on Hawaii and New Zealand.
·A stabilization of the United States / New Zealand exchange rates.
Our plans to manage our liquidity position in fiscal 2012 include:
·Continued improvement in our accounts receivable collection rates which will have a positive impact on our liquidity.
·Accessing additional sources of debt or equity financing at competitive rates.
·Continuing with only limited capital expenditures and projects.
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.
None; not applicable.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures
Our management, with the participation of our chief executive officer (and acting chief financial officer), evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design 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. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Based on that evaluation, our chief executive officer (and acting chief financial officer) concluded that, as of March 31, 2012, our disclosure controls and procedures were, subject to the limitations noted above, effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules, regulations and forms, and that such information is accumulated and communicated to our management, including our chief executive officer (and acting chief financial officer), as appropriate, to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting
Our management, with the participation of the chief executive officer (and acting chief financial officer), has concluded there were no significant changes in our internal controls over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None during the quarter ended March 31, 2012.
Item 1A. Risk Factors.
Not required to be enumerated by smaller reporting companies.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Securities
None during the quarter ended March 31, 2012.
Use of Proceeds of Registered Securities
No proceeds were received from the sale of registered securities during the quarter ended March 31, 2012.
Purchases of Equity Securities by Us and Affiliated Purchasers
None during the quarter ended March 31, 2012.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
None, not applicable.
Item 5. Other Information.
Item 6. Exhibits
(a) Exhibits and index of exhibits.
31.1 302 Certification of Rick Wall, Chief Executive Officer
32 Section 906 Certification
In accordance with the requirements of the Exchange Act, the Registrant has caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE CASTLE GROUP, INC.