UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[X]
Annual Report Under Section 13 or 15(d) of The
Securities Exchange Act of 1934
For the Fiscal Year Ended September 30, 1999
[ ]
Transition Report Under Section 13 or 15(d) of The Securities Exchange Act of
1934 for the transition period from _____________ to ____________
Commission File Number 33-37809-NY
Castle Holding Corp.
(Name of Small Business Issuer in its Charter)
Nevada
(State or Other Jurisdiction of Incorporation)
77-0121957
(I.R.S. Employer Identification No.)
45 Church Street, Suite 25, Freeport, NY
(Address of Principal Executive Offices)
11520 (Zip Code)
Issuer's Telephone Number: (516)868-2000
Securities Registered under Section 12(b) of the Exchange Act: None
Securities Registered under Section 12(g) of the Exchange Act: Common Stock, Par
Value $.0025 per Share.
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
Check if there is no disclosure of delinquent filers in response to item 405
of Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part iii of this form 10-KSB or any amendment to
this form 10-KSB. [X ]
The issuer's revenues for its most recent fiscal year was $3,309,663
As of November 30, 1999, the aggregate market value of the registrant's common
stock (based on its $.25 reported
last bid price on the OTC Bulletin Board) held by non-affiliates of the
registrant was $ 679,000.
As of November 30, 1999, there were 6,660,500 common shares outstanding.
<PAGE>1
PART I
Item 1. DESCRIPTION OF BUSINESS
Castle Holding Corp. (The "Company" or the "Registrant") is a holding Company
incorporated in Nevada on June 13, 1986. The Company conducts substantially all
of its business through two subsidiaries, Castle Securities Corp.
("Castle" or "CSC-1") and Citadel Securities Corp. ("Citadel" or "CSC-2").
Castle was incorporated in New York on December 7, 1984 and operates as a
broker-dealer in securities. Its business activities include the underwriting
and brokerage of fixed income and equity securities. Citadel was incorporated
in New York on April 11, 1991 and also operates as a broker-dealer in
securities. Citadel makes markets in Nasdaq, OTC Bulletin Board and "Pink
Sheets" securities, has no retail customers, and conducts business
exclusively with other broker-dealers.
Castle and Citadel are broker-dealers registered with the Securities and
Exchange Commission ("SEC") and members of the National Association of
Securities Dealers ("NASD"), the Municipal Securities Rule Making Board
("MSRB"), and the Securities Investor Protection Corporation ("SIPC").
Castle is currently licensed to conduct its broker-dealer business in 36
states and the District of Columbia. Citadel is currently licensed to conduct
its broker-dealer business only in New York.
On December 28, 1998, the Company paid a 100% stock dividend and on June 25,
1999, the Company paid a 300% stock dividend. All references to shares and
per share amounts herein have been restated to retroactively reflect these
stock dividends.
<PAGE>2
Revenues By Source
For the years ended September 30, 1999 and 1998, revenues were derived as
follows:
<TABLE>
Years Ended September 30,
<S> 1999 1998
Commissions: <C> <C>
Castle Online $2,484,152 $1,017,136
Active Account Program 348,349 541,840
Other stocks and bonds 94,285 86,941
Mutual funds 16,566 13,527
Total commissions 2,943,352 1,659,444
Principal Transactions:
Trading accounts 358,933 257,701
Investment accounts 280 (21,931)
Total principal transactions 359,213 235,770
Interest and dividends 7,098 4,485
Total revenues $3,309,663 $1,899,699
</TABLE>
Castle Online
Castle Online ("Online") is a division of Castle started in July 1996 to allow
customers to engage in securities transactions directly over the Internet.
In April 1997, Online installed a T-1 fiber optics data feed expandable into a
T-3 data feed. To date, only securities listed on the New York Stock Exchange,
the American Stock Exchange and the Nasdaq Stock Market have been available to
Online customers.
Castle maintains a web site (www.castleonline.com) where parties interested in
online trading can both learn about the various features of this service and can
register for trading. This system offers customers the ability to execute
day trades (the practice of buying and selling securities, usually exiting
the position in the same day) using the Company's JavaTrader order entry
software.
With respect to the Nasdaq Stock Market (over 95% of Online transactions involve
securities listed there), the system offers five routing selections for
customers to transact their buying and selling. The first is SOES, an
automated execution method that allows an investor to buy at the offer and sell
at the bid. The second is Selectnet, whereby an investor can submit an order
within the spread for only Market Makers to view and possibly execute.
The newest option provided is routing orders to Knight Securities for
automated execution. This selection accepts the following types of orders:
market, limit, stop limit, and stop loss. Lastly, we offer two Electronic
Communications Networks ("ECN") to choose from: Island ("ISLD") and Nextrade
("NTRD"). By submitting an order on an ECN, an investor "posts" the order to
buy or sell a security on the Nasdaq Level 2 screen, so that the entire market
can see it and execute on it. The ISLD or NTRD symbol, which displays the
customer order like a Market Maker, will move to the price designated by an
investor's order.
Online software offers customers the ability to place unsolicited market and
limit orders and view executions without the necessity of telephone calls to
Castle registered representatives. For $150 per month ($0 if customer monthly
transactions exceed 100), customers are provided real time Nasdaq level II
quotes and other quotes, news and charts. Commissions start at $19.95 per
trade.
<PAGE>3
For the years ended September 30, 1997, 1998 and 1999, Online customer
transactions totaled 18,986, 57,610, and 149,107, respectively. At September
30, 1997, September 30, 1998 and September 30, 1999, Online had funded
customer accounts numbering 90, 168, and 360, respectively.
Registrant expects Online to become its primary source of future growth,
revenues and profitability.
Principal Transactions
In April 1994, Castle resumed market-making activities in over-the-counter
equity securities (Castle had ceased such activities on August 24, 1992).
In April 1996, such activities were transferred to Citadel. At September 30,
1999, Citadel employs two traders making markets in a total of 55 securities, 3
quoted on the Nasdaq Stock Market, 43 quoted on the OTC Bulletin Board, and 9
quoted on the "Pink Sheets."
Trading profits or losses are dependent upon the skill of the firm's employees
in market-making activities, the capital allocated to the firm's positions in
various securities and the general trend of prices and level of activity in the
securities markets. Trading as principal requires the commitment of capital and
creates an opportunity for profits and losses due to market fluctuations.
Citadel takes both long and short positions in those securities in which it
makes a market.
Under its present restriction agreement with the NASD, Citadel is limited to
making markets in 100 securities.
Active Account Program
The Active Account Program ("AAP") is a division of Castle started in December
1992 to afford active customers quick executions using automated order entry
systems (such as SOES, SelectNet and the ISLD ECN) at relatively low
commission rates. Most AAP customers opened margin accounts and gave trading
authorization to a Castle registered representative.
For the years ended September 30, 1997, 1998, and 1999, AAP customer
transactions totaled 184,654, 33,041, and 23,865, respectively.
At September 30, 1999, the AAP has only one remaining registered representative
day trading a discretionary account on a full time basis.
Investment Banking
Since inception, Castle has been the managing underwriter of completed
"best efforts" public offerings of equity securities for 23 issuers
(the last one was completed in 1991). Additionally, Castle has participated in
other equities and municipal bond offerings as a selected dealer or selling
group member.
In May 1999, Castle executed a letter of intent to act as managing underwriter
of a "best efforts" public offering of equity securities of Exhaust
Technologies, Inc. The related registration statement has not been filed as of
September 30, 1999 and accordingly the offering is not expected to commence
until the year 2000.
Castle is currently revising its website (www.castlesecurities.com) to display
prospectuses and offer new issues over the Internet.
As an underwriter, Castle is subject to liability under the Securities Act of
1933, as amended, state and other laws in the event, among other matters, that
the registration statement or prospectus contains a material misstatement or
omission. Castle's potential liability as an underwriter is not generally
covered by insurance.
<PAGE>4
Investment Management
On December 23, 1993, Castle Advisers Inc. ("CAI") was formed to operate as a
general partner for limited partnerships in the business of securities
investment. On March 29, 1994, CAI executed a limited partnership agreement
with Castle Advisors Limited Partnership 94-1 ("CALP") to operate as its general
partner. Under the agreement, CAI receives a performance incentive allocation
equal to 1% of the profits (which exceed cumulative losses previously
allocated to limited partners).
At September 30, 1999, CALP had net assets of approximately $134,955,
including its $120,000 investment in the Company. Since inception, CAI has
earned $525 in performance incentive fees.
<PAGE>5
Clearing Broker
In executing customers' orders to buy or sell listed securities and other
securities in which it does not make a market, Castle generally acts as an agent
and charges a commission.
Castle and Citadel have clearing agreements with JB Oxford & Company. The
clearing broker clears transactions on a fully disclosed basis for Citadel
and for Castle's account and the accounts of its customers. The services
provided by the clearing broker include billing and receipt, and custody and
delivery of securities, for which Castle and Citadel pays the clearing broker
certain transaction fees and miscellaneous charges.
Competition
The Company, through Castle and Citadel, both registered broker/dealers and
members of the NASD, is engaged in a highly competitive business. Its principal
competition includes, with respect to one or more aspects of its business,
all of the member organizations of the New York Stock Exchange ("NYSE") and
other registered securities exchanges, all members of the NASD, and commercial
banks and thrift institutions. Many of these organizations are national firms
and have substantially greater financial and human resources than Castle or
Citadel.
Discount brokerage firms seeking to expand their share of the retail market,
including firms affiliated with commercial banks and thrift institutions, are
devoting substantial funds to advertising and direct solicitation of
customers. In many instances, Castle and Citadel are competing directly with
such organizations. In addition, there is competition for investment funds
from the real estate, insurance, banking and savings and loan industries.
The Company believes that the principal factors affecting competition for the
securities industry are the quality and ability of professional personnel and
relative prices of services and products offered.
Regulation
The securities industry in the United States is subject to extensive regulation
under federal and state laws. The SEC is the federal agency charged with
administration of the federal securities laws. Much of the regulation of
broker-dealers, however, has been delegated to self-regulatory organizations,
principally the NASD and the national securities exchanges, although the SEC
maintains jurisdiction and is not necessarily bound by the actions or
recommendations of the NASD. These self-regulatory organizations adopt rules
(which are subject to approval by the SEC) that govern the industry and conduct
periodic examinations of member broker-dealers. Securities firms are also
subject to regulation by state securities commissions in the states in which
they are registered.
The regulations to which broker-dealers are subject cover all aspects of the
securities business, including sales methods, trade practices among
broker-dealers, capital structure of securities firms, record-keeping and
conduct of directors, officers and employees. Additional legislation, changes
in rules promulgated by the SEC and self-regulatory organizations, or changes
in the interpretation or enforcement of existing laws and rules often directly
affect the method of operation and profitability of broker-dealers. The SEC,
self-regulatory organizations and state security regulators may conduct
administrative proceedings, which can result in censure, fine, suspension
or expulsion of a broker-dealer, its officers or employees. The principal
purpose of regulation and discipline of broker-dealers is the protection of
customers and the securities markets rather than protection of creditors and
stockholders of broker-dealers.
<PAGE>6
Net Capital Requirements
As broker-dealers, Castle and Citadel are subject to the SEC's Net Capital Rule
(the "Rule") which is designed to measure the general financial integrity and
liquidity of a broker-dealer. The Rule requires the maintenance of minimum
net capital (at September 30, 1999, $8,944 for Castle and $100,000 for Citadel)
and requires that the ratio of aggregate indebtedness, as defined, to net
capital, not exceed 15 to 1. In computing net capital, various adjustments to
net worth are made with a view to excluding assets that are not readily
convertible into cash and making a conservative statement of other assets, such
as a firm's position in securities. Compliance with the rule limits those
operations of securities firms that require the intensive use of their capital,
such as underwriting commitments and principal trading activities, and limits
the ability of securities firms to pay dividends.
Both Castle and Citadel are required to file "Focus" reports with the NASD. The
purpose of these reports is to provide the NASD with a current financial status
for each Company and to evidence compliance with the net capital requirements.
In addition to the above requirements, funds invested as equity capital may not
be withdrawn, nor may any unsecured advances or loans be made to any
stockholder of a registered broker-dealer, if, after giving effect to such
withdrawal, advance or loan and to any other such withdrawal, advance or loan
as well as to any scheduled payments of subordinated debt which are scheduled
tooccur within six months, the net capital of the broker-dealer would fail to
equal 120% of the minimum dollar amount of net capital required or the ratio of
aggregate indebtedness to net capital would exceed 10 to 1. Finally, any funds
invested in the form of subordinated debt generally must be invested for a
minimum term of one year and repayment of such debt may be suspended if the
broker-dealer fails to maintain certain minimum net capital levels. For
example, scheduled payments of subordinated debt are suspended in the event
that the ratio of aggregate indebtedness to net capital of the broker-dealer
would exceed 12 to 1 or if its net capital would be less than 120% of the
minimum dollar amount of net capital required.
At September 30, 1999, Castle had net capital of $88,496, which was $79,552 in
excess of its required net capital, and its ratio of aggregate indebtedness to
net capital was 1.52 to 1. Citadel had net capital of $213,582, which was
$113,582 in excess of its required net capital, and its ratio of aggregate
indebtedness to net capital was .08 to 1.
Employees
At September 30, 1999, the Company employed a total of 48 persons, including 2
executive personnel, 33 other registered representatives (17 part-time), and 13
other full-time administrative persons.
Registered representatives are required to take examinations given by the NASD
and approved by the NYSE and all principal exchanges as well as state
securities authorities in order to be registered. There is intense competition
among securities firms for registered representatives with proven sales
production records.
The Company considers its employee relations to be good and believes that its
compensation and employee benefits are competitive with those offered by
other securities firms. None of the Company's employees are covered by a
collective bargaining agreement.
Item 2. DESCRIPTION OF PROPERTY
The Company, Castle, and Citadel maintain their business headquarters at 45
Church Street, Freeport, New York 11520, where they occupy approximately
16,000 square feet of office space. The facilities are occupied under six
lease agreements that provide for total monthly rentals of $6,417 and
expire October, 2002. At the option of a wholly owned subsidiary of the
Company, the leases are renewable for periods extending the terms to
October 2007. The facilities provide the Company with sufficient space in
which to conduct its present activities and store required business records
pursuant to rules and regulations of the SEC and the NASD.
<PAGE>7
Item 3. LEGAL PROCEEDINGS
Since inception Castle and certain of its principals have been the targets of
various legal and administrative proceedings brought by the SEC, the NASD or
other state securities commissions. Additionally, in the normal course of
its business, Castle, from time to time, is involved in claims, lawsuits and
arbitrations brought by its customers.
Material legal proceedings outstanding at September 30. 1999 follows:
(1) SEC V. U.S. Environmental, Inc., Castle, Michael T. Studer et. al.
On September 13, 1994, the SEC filed a civil action against Castle, its
president, a former registered representative, and eight other defendants.
The action alleges violations of Section 5(a) and (c), and 17(a) of
the Securities Act of 1933, Section 10(b) and 15c of the Securities Exchange Act
of 1934 and Rules 10b-3, 10b-5, 10b-6, and 15cl-2 thereunder.
The complaint seeks injunctive relief and disgorgement of profits in the
approximate amount of $175,000. An answer and amended answer has been filed
on behalf of Castle and its president and discovery has commenced but no
trial date has yet been set.
(2) National Association of Securities Dealers, Inc. Market Surveillance
Committee V. Castle, Michael T. Studer et. al.
On October 6, 1994, the National Association of Securities Dealers, Inc.
Market Surveillance Committee (the "MSC") commenced a disciplinary proceeding
against Castle, its president, and two former registered representatives.
The complaint alleges violations of Article III, Sections 1, 4, 18, and 27 of
the Association's Rules of Fair Practice and Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder.
After a hearing on June 20, 1995, in MSC's Decision dated February 7, 1996,
Castle and its president were fined, jointly and severally, $25,000 and were
ordered to make restitution to specified customers totaling approximately
$10,000. Castle and its president appealed the decision to the National
Business Conduct Committee (the "NBCC") of the NASD and a hearing of the appeal
was held on June 7, 1996. In its Amended Decision dated October 21, 1996, the
NBCC affirmed the fines and restitution order. On November 15, 1996, Castle
and its president appealed the NBCC Amended Decision to the SEC. On January 7,
1998, the SEC affirmed the NBCC Amended Decision. On May 18, 1998, the SEC
denied Castle's Motion for Reconsideration filed January 21, 1998.
On February 5, 1998 and June 15, 1998, Castle and its president filed petitions
for review of the NASD and SEC actions to the Second Circuit of the United
States Court of Appeals, which matters are still pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to Security holders during the two fiscal years ended
September 30, 1999.
<PAGE>8
Part II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock, $.0025 par value, is traded in the over-the-counter
market under the OTC Bulletin Board symbol "CHOD". However, there is no
established trading market as actual transactions are infrequent. The
following table sets forth the range of high and low closing bid quotations
by calendar quarters as reported by the National Quotation Bureau from
October 1, 1997 through September 30, 1999, as adjusted for the 100% stock
dividend paid December 28, 1998 and the 300% stock dividend paid June
25, 1999. Bid quotations represent prices between dealers, do not include
retail mark-ups, mark-downs or other fees or commissions, and do not
necessarily represent actual transactions.
Quarter Ended: High Bid Low Bid
December 31, 1997 0.031 0.031
March 31, 1998 0.031 0.031
June 30, 1998 0.047 0.031
September 30, 1998 0.063 0.047
December 31, 1998 0.594 0.063
March 31, 1999 1.000 0.281
June 30, 1999 1.750 0.422
September 30, 1999 0.938 0.156
As of September 30, 1999, the number of holders of record of the company's
common stock was 155. There were ten (10) market makers for the company's
common stock, 6,640,500 shares outstanding and the closing bid price was
$0.1875.
Registrant has paid no cash dividends and has no present plan to pay cash
dividends, intending instead to reinvest its earnings, if any. However,
payment of future cash dividends will be determined from time to time by its
Board of Directors, based upon its future earnings, financial condition,
capital requirements and other factors.
<PAGE>9
Recent Sales of Unregistered Securities
Equity securities of the Registrant sold by the Registrant during the quarterly
period ended September 30, 1999 that were not registered under the Securities
Act were:
<TABLE>
<S>
Title of Number
Date of Sale Security Shares Purchases Consideration
<C> <C> <C> <C>
July 1, 1999 Common 1,500 Three employees Services valued
Stock of vendor at $750
July 15, 1999 Common 800 Two employees Services valued
Stock at $500
July 15, 1999 Common 6,000 Sandor Marketing Prepaid services
Stock Group Inc. valued at $3,750
August 5, 1999 Common 12,000 Mitchell Menik Prepaid services
Stock valued at $7,500
August 5, 1999 Common 800 Eight employees Services valued
Stock at $800
August 11, 1999 Common 10,000 Ferdinand Schmid $6,250
Stock Promissory Notes
September 8, 1999 Common 3,000 Three employees $1,875
Stock Promissory Notes
</TABLE>
No underwriting discounts or commissions were paid in connection with any of
the above sales. For all of the above sales, the registrant claimed
exemption from registration under Section 4(2) of the Securities Act of 1933.
<PAGE>10
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
General - Substantial positive and negative fluctuations can occur in the
Registrant's business due to a variety of factors, including variations in
the market value of Securities, the volatility and liquidity of trading
markets, and the level of market activity. As a result, net income and
revenues in any particular period may not be representative of full-year
results and may vary significantly from year to year and from quarter to
quarter. In addition, results of operations have been in the past and may
in the future continue to be materially affected by many factors of a
national and international nature, including economic and market conditions,
currency values, inflation, the availability of capital, the level and
volatility of interest rates, the valuation of Securities positions and
nvestments, and legislative and regulatory developments, as well as the
size, number and timing of transactions. The Registrant's results of operations
also may be materially affected by competitive factors and its ability to
attract and retain highly skilled individuals.
Year ended September 30, 1999 compared to year ended September 30, 1998
Net loss for the year ended September 30, 1999 was $(63,865), or $(.01) per
share, compared to a net loss of $(186,718), or $(.04) per share, for the
year ended September 30, 1998. Total revenues increased $1,409,964 (74%) to
$3,309,663 and total expenses increased $1,288,016 (62%). Revenues less
commissions and clearing and execution costs were $2,044,817 in 1999
compared to $1,403,171 in 1998. In 1998, clearing and execution costs were
reduced by $266,162 received from CSC-1's clearing agent in settlement of prior
fee disputes.
The increase in total revenues was due to $1,467,016 higher commissions
derived from Castle Online. Castle Online customer transactions increased from
57,610 in 1998 to 149, 107 in 1999. Castle Online funded customers increased
from 90 at September 30, 1997 to 168 at September 30, 1998 to 360 at September
30, 1999.
Commissions expense as a percentage of total revenues was 14% and 13% in 1999
and 1998, respectively.
Excluding the $266,162 settlement in 1998 noted above (which reduced 1998
clearing and execution costs), clearing and execution costs as a percentage
of total revenues was 24% and 27% in 1999 and 1998, respectively.
Communications expense increased $123,965 from $179,728 in 1998 to $303,693 in
1999. This increase was due to higher NASDAQ network charges and the addition
of a second internet service in 1999.
Administrative compensation and employee benefits increased $166,121 (28%) and
professional and consulting fees increased $112,773. These increases were due
primarily to the addition of personnel and consultants for software
development, marketing, and service support of Castle Online
Liquidity and Capital Resources
The majority of the Registrant's assets are highly liquid and short-term in
nature. Cash, due from brokers, and securities owned at September 30, 1999
totaled $556,208, 68% of the Registrant's assets.
Cash and cash equivalents increased $195,867 from $187,266 at September 30,
1998 to $383,133 at September 30, 1999. This increase was due primarily to
sales of common shares with net proceeds totaling $227,500.
Castle and Citadel, the Registrant's broker-dealer subsidiaries, are subject to
"net capital" requirements of the SEC. Among other things, these requirements
limit the number of markets which they may make and the value of securities
inventories which they may carry. Presently, a broker or dealer engaged in
activities as a market maker must maintain net capital in an amount not less
than $2,500 for each security in which it makes a market (unless a security in
which it makes a market has a market value of $5.00 or less in which event the
amount of net capital shall be not less than $1,000 for each such security).
At September 30, 1999, Castle had net capital of $88,496, which was $79,552 in
excess of its required net capital of $8,944, and Citadel had net capital of
$213,582, which was $113,582 in excess of its required net capital of $100,000.
<PAGE>11
Item 7. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
Description Page No.
Index to Consolidated Financial Statements 12
Independent Auditors' Report 13
Consolidated Statements of Financial Condition,
September 30, 1999 and 1998 14
Consolidated Statements of Operations,
Years ended September 30, 1999 and 1998 15
Consolidated Statements of Changes in Stockholders' Equity,
Years ended September 30, 1999 and 1998 16-17
Consolidated Statements of Cash Flows,
Years ended September 30, 1999 and 1998 18-19
Notes to Consolidated Financial Statements,
Years ended September 30, 1999 and 1998 20-29
<PAGE>12
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Castle Holding Corp.
We have audited the accompanying consolidated statement of financial condition
of Castle Holding Corp. and Subsidiaries ("the Company") as of September 30,
1999 and 1998 and the related consolidated statements of operations, changes in
stockholder's equity, and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
September 30, 1999 and 1998 and the results of its consolidated operations and
cash flows for the year then ended in conformity with generally accepted
accounting principles.
Massella, Tomaro & Co., LLP
Jericho, New York
December 23, 1999
<PAGE>13
CASTLE HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
September 30,
<S> 1999 1998
Assets <C> <C>
Cash and cash equivalents $ 383,133 $ 187,266
Due from brokers 137,455 65,977
Securities owned, at market value 35,620 26,121
Equipment, less accumulated depreciation
of $164,151 and $143,838, respectively 31,667 56,014
Equipment under capital leases, less accumulated
depreciation of $89,090 and $65,241, respectively 66,482 30,468
leasehold improvements, less accumulated
amortization of $77,296 and $50,668, respectively 105,086 85,017
Other assets 55,996 33,077
Total assets $ 815,439 $ 483,940
Liabilities and Stockholders' Equity
Liabilities:
Notes payable $ 87,500 $ 127,500
Accounts payable and accrued expenses 245,256 152,911
Commissions payable 17,175 14,368
Income taxes payable 1,998 2,661
Securities sold, not yet purchased, at market 806 2,983
Obligations under capital leases 71,428 33,376
Loan subordinated to claims of general creditors 50,000 50,000
Total liabilities 474,163 383,799
Commitments and contingencies (Note 11) - -
Stockholders' equity:
Common stock, $.0025 par value; authorized
10,000,000 shares, issued and outstanding
6,640,500 and 5,034,400 shares, respectively 16,601 12,586
Additional paid - in capital 862,444 398,334
Accumulated deficit (349,644) (285,779)
Total 529,401 125,141
Less: stock subscriptions receivable (188,125) (25,000)
Total stockholders' equity 341,276 100,141
Total liabilities and stockholders' equity $ 815,439 $ 483,940
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>14
CASTLE HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
Year Ended September 30,
<S> 1999 1998
Revenues: <C> <C>
Commissions $ 2,943,352 $ 1,659,444
Principal transactions 359,213 235,770
Interest and dividends 7,098 4,485
Total revenues 3,309,663 1,899,699
Expenses:
Commissions 461,035 247,985
Clearing and execution costs 803,811 248,543
Communications 303,693 179,728
Advertising 44,724 23,963
Administrative compensation
and employee benefits 752,542 586,421
Professional and consulting fees 308,397 195,624
Registration and regulatory fees 29,192 31,827
Occupancy 64,220 45,143
Interest 31,829 27,276
Other 571,667 496,584
Total expenses 3,371,110 2,083,094
Loss before provision for income taxes (61,447) (183,395)
Provision for income taxes 2,418 3,323
Net loss $ (63,865) $ (186,718)
Net loss per share:
Basic and diluted $ (.01) $ (.04)
Weighted average number of common
shares outstanding 5,828,017 4,976,400
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>15
CASTLE HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended September 30, 1999 and 1998
(Page 1 of 2)
<TABLE>
Total
Common Stock, Additional (Accum- Stock Sub- Stock-
$.0025 Par Value Paid - in ulated scriptions holders'
Shares Amount Capital Deficit) Receivable Equity
<S> <C> <C> <C> <C> <C> <C>
Balances, September 30, 1997 4,898,400 $ 12,246 $ 367,674 $ (99,061) $ (25,000) $255,859
Issuance of common shares to lessor in
November 1997 and charged to operations 80,000 200 9,800 - - 10,000
Issuance of common shares to advertiser
in September 1998 and charged to
operations 56,000 140 20,860 - - 21,000
Net loss - - - (186,718) - (186,718)
Balances, September 30, 1998 5,034,400 12,586 398,334 (285,779) (25,000) 100,141
Issuance of common shares to lessor in
October 1998 and charged to operations 108,000 270 13,230 - - 13,500
Issuance of common shares to two
customers in November 1998 in
legal settlement and charged to operations 80,000 200 9,800 - - 10,000
Sale of common shares to investor in
February 1999 at $.25 per share 40,000 100 9,900 - (10,000) -
Sale of common shares to investor in
March 1999 at $.3125 per share 40,000 100 12,400 - - 12,500
Sale of common shares to three CHC
directors (302,000 shares) and
three key employees (178,000 shares)
in March 1999 at $.3125 per share 480,000 1,200 148,800 - (150,000) -
Sale of common shares to investor in
April 1999 at $.3125 per share pursuant
to Rule 504 offering, less $35,000 offering
costs 800,000 2,000 213,000 - - 215,000
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>16
CASTLE HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended September 30, 1999 and 1998
(Page 2 of 2)
<TABLE>
Total
Common Stock, Additional (Accum- Stock Sub- Stock-
$.0025 Par Value Paid -in ulated scriptions holders'
Shares Amount Capital Deficit) Receivable Equity
<S> <C> <C> <C> <C> <C> <C>
Issuance of common shares to advertiser
in May 1999 for prepaid advertising 24,000 60 35,940 - - 36,000
Issuance of common shares to vendor in
July 1999 and charged to operations 1,500 4 746 - - 750
Issuance of common shares to two
employees in July 1999 and charged to
operations 800 2 498 - - 500
Issuance of common shares to consultant
in July 1999 for prepaid services 6,000 15 3,735 - - 3,750
Issuance of common shares to employee in
August 1999 for prepaid services 12,000 30 7,470 - - 7,500
Issuance of common shares to eight
employees in August 1999 and charged
to operations 800 2 498 - - 500
Sale of common shares to key employee
in August 1999 at $.625 per share 10,000 25 6,225 - (6,250) -
Sale of common shares to three key
employees in September 1999 at
$.625 per share 3,000 7 1,868 - (1,875) -
Collection of stock subscriptions
receivable in July 1999 - - - - 5,000 5,000
Net loss - - - (63,865) - (63,865)
Balances, September 30, 1999 6,640,500 $ 16,601 $ 862,444 $(349,644) $ (188,125) $341,276
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>17
CASTLE HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Page 1 of 2)
<TABLE>
Year Ended September 30,
<S> <C> <C>
1999 1998
Cash flows from operating activities:
Net loss $ (63,865) $ (186,718)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation 80,912 88,039
Issuance of common stock for services and rent 72,500 31,000
Changes in assets and liabilities:
Due from brokers (71,478) 49,501
Securities owned (9,499) 23,865
Other assets (22,919) 24,142
Accounts payable and accrued expenses 92,345 (61,454)
Commissions payable 2,807 (1,086)
Income taxes payable (663) 1
Securities sold, not yet purchased (2,177) (11,679)
Net cash provided by (used for) operating activities 77,963 (44,389)
Cash flows from investing activities:
Purchases of equipment and leasehold improvements (52,785) (48,802)
Net cash used for investing activities (52,785) (48,802)
Cash flows from financing activities:
Proceeds from issuance of notes payable 60,000 50,000
Net proceeds from sales of common stock 227,500 -
Collection of stock subscriptions receivable 5,000 -
Repayment of notes payable (100,000) (100,204)
Repayment of obligations under capital leases (21,811) (29,175)
Net cash provided by (used for) financing activities 170,689 (79,379)
Net increase (decrease) in cash and cash equivalents 195,867 (172,570)
Cash and cash equivalents, beginning of year 187,266 359,836
Cash and cash equivalents, end of year $ 383,133 $ 187,266
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>18
CASTLE HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Page 2 of 2)
<TABLE>
Year Ended September 30,
1999 1998
<S> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid $ 34,579 $ 20,163
Income taxes paid $ 3,081 $ 3,207
Schedule of non-cash operating activities:
Issuance of common stock for services and rent $ 72,500 $ 31,000
Schedule of non-cash investing activities:
Acquisition of equipment in connection
with capital lease obligations $ 59,863 $ 43,87
Retirement of fully depreciated equipment $ 10,122 $ -
Schedule of non-cash financing activities:
Issuance of stock subscriptions receivable in
connection with sale of common stock $ 168,125 $ -
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>19
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1999 and 1998
1. GENERAL
Castle Holding Corp. ("CHC") is a holding company which was
incorporated in Nevada on June 13, 1986. CHC conducts substantially
all of its business through its subsidiaries.
On December 28, 1998, CHC paid a 100% stock dividend to holders of
record at the close of business on December 22, 1998, thereby
increasing the number of issued and outstanding common shares from
652,800 to 1,305,600. On June 25, 1999, CHC paid a 300% stock
dividend to holders of record at the close of business on June 18,
1999, thereby increasing the number of issued and outstanding common
shares from 1,651,600 to 6,606,400. All references to shares and
per share amounts in the accompanying consolidated financial
statements have been restated to retroactively reflect these stock
dividends.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation - The consolidated financial statements include
the accounts of CHC and its fifteen subsidiaries (collectively,
the "Company"). CHC's principal operating subsidiaries are
Castle Securities Corp. ("CSC-1"), incorporated in the state of
New York on December 7, 1984 and a securities broker-dealer
headquartered in Freeport, New York and Citadel Securities Corp.
("CSC-2 " ), incorporated in the state of New York on April 11, 1991
and also a securities broker-dealer and, since April 1996, market
maker in NASDAQ, OTC Bulletin Board, and "Pink Sheets" securities
from its office in Freeport, New York.
The remaining thirteen (13) subsidiaries of CHC are as follows:
1. Citadel Capital Corp. (95.0 % owned) (incorporated in
Delaware March 29, 1988) - inactive at September 30, 1999.
2. Beverage King, Ltd. (100 % owned) (incorporated in Delaware
January 2, 1990) - subleases automobiles and equipment to
other CHC subsidiaries.
3. Meroke Capital Corp. (100 % owned) (incorporated in New
York October 7, 1992) - inactive at September 30, 1999.
4. Castle Trucking Corp. ( 100 % owned) (incorporated in
New York May 4, 1993) - subleases office space to other CHC
subsidiaries and others.
5. Castle Advisors Inc. (100 % owned) (incorporated in
New York December 23, 1993) - acts as general partner for
a limited partnership in the business of securities
investment.
6. Sparta Holding Corp. (100 % owned) (incorporated in Nevada
December 23, 1993) - inactive at September 30, 1999.
7. Wall Street Indians, Ltd. (100 % owned) (incorporated in New
York May 27, 1994) - subleases office space and provides
communications and office services and supplies to other
CHC. CHC subsidiaries and others.
8. Chinamer International Corp. (100 % owned) (incorporated in
Nevada October 18, 1994) - inactive at September 30, 1999.
<PAGE>20
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1999 and 1998
9. Galaxynet Inc. (87.7 % owned) (incorporated in New York
December 15, 1995) - provides marketing, programming, and
communications services to other CHC subsidiaries.
10. Rocketnet Inc. (87.7 % owned) (incorporated in Nevada
December 20, 1995) - provides software, marketing, and
communications services to other CHC subsidiaries.
11. U Trade Inc. (100 % owned) (incorporated in New York
November 17, 1997) - inactive at September 30, 1999.
12. Java Trader Inc. (100% owned) (incorporated in Nevada
March 10, 1999) - inactive at September 30, 1999.
13. Long Island Web TV.Com Corp. (100% owned) (incorporated in
New York September 22, 1999) - inactive at September 30, 1999.
All significant intercompany balances and transactions have been
eliminated in consolidation.
Revenue recognition - Securities transactions ( related revenue and
expenses, including commissions and principal transactions revenue
and commissions expense) are recorded on a settlement date basis,
which is generally three business days after trade date. Revenues
and expenses on a trade date basis are not materially different
from revenues and expenses on a settlement date basis.
Use of estimates - The preparation of the financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Fair value disclosures - The carrying value of cash and cash
equivalents, due from brokers, securities owned, accounts
payable and accrued expenses, commissions payable, income taxes
payable, and securities sold, not yet purchased are a reasonable
estimate of their fair value. The carrying value of the Company's
notes payable, obligations under capital leases and, loan
subordinated to claims of general creditors, at September 30, 1999
are a reasonable estimate of their fair value based upon currently
available interest rates of similar instruments available with
similar maturities.
Cash and cash equivalents - At September 30, 1999, cash and cash
equivalents included $152,589 in money market funds and $47,213 in
cash not covered by FDIC insurance. The Company considers such risk
to be minimal.
Securities owned and securities sold, not yet purchased - Marketable
securities are valued at market and unrealized gains and losses are
reflected in income. Securities for which no ready market exists are
valued at estimated fair value as determined by the Board of
Directors.
Equipment, equipment under capital leases, and leasehold improvements
- Equipment, equipment under capital leases, and leasehold
improvements are stated at cost. Equipment, and equipment under
capital leases are depreciated using the straight-line method over
the estimated useful lives of the respective assets, generally three
to seven years. Leasehold improvements are amortized over the
respective remaining lease terms on a straight-line basis.
Income taxes - The Company accounts for income taxes in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting For Income Taxes". Deferred tax assets and liabilities
are determined based on the difference between the financial
statement and tax bases of assets and liabilities, using enacted
tax rates in effect for the year in which the differences are
expected to reverse. Current income taxes are based on the year's
income taxable for Federal and State income tax reporting
purposes. Deferred income taxes, if any, reflect the net effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes.
<PAGE>21
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1999 and 1998
Earnings per share - During 1997, the Financial Accounting Standards Board
issued SFAS No. 128, "Earnings Per Share." SFAS No. 128 replaced the
previously required reporting of primary and fully diluted earnings per
share with basic and diluted earnings per share, respectively. Unlike the
previously reported primary earnings per share, basic earnings per share
excludes the dilutive effects of stock options. Diluted earnings per
share is similar to the previously reported fully diluted earnings per
share. Earnings per share amounts for all periods presented have been
calculated in accordance with the requirements of SFAS No. 128.
Impact of recently issued accounting standards - The Company does not believe
that any recently issued accounting standards, not yet adopted by the
Company, will have a material impact on its consolidated financial position
and results of operations when adopted.
Reclassifications - Certain prior year balances have been reclassified to
conform to current year presentation.
3. SECURITIES OWNED, AT MARKET VALUE AND SECURITIES SOLD, NOT YET PURCHASED,
AT MARKET
<TABLE>
September 30,
<S>
Securities owned, at market value consist of: 1999 1998
<C> <C>
Trading accounts:
Corporate equities - listed on Nasdaq Stock Market $ - $ 1,188
Corporate equities - listed on OTC Bulletin Board
or "Pink Sheets" 34,972 20,753
Total trading accounts 34,972 21,941
Investment accounts 648 4,180
Totals $ 35,620 $ 26,121
Securities sold, not yet purchased, at market consist of:
Trading accounts:
Corporate equities - listed on Nasdaq Stock Market $ - $ 2,983
Corporate equities - listed on OTC Bulletin Board
or "Pink Sheets" 806 -
Totals $ 806 $ 2,983
</TABLE>
<PAGE>22
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1999 and 1998
<TABLE>
4. NOTES PAYABLE
September 30,
<S> <C> <C>
Notes payable consist of: 1999 1998
Note payable to officer, interest at 12% paid annually,
due on demand $ 22,500 $ 22,500
Note payable to affiliate of officer, interest at 12%
paid annually, due on demand - 50,000
Note payable to The OTC Equity
Fund, Inc. ("OEF"), interest at 12% paid
annually, due on demand 55,000 55,000
Note payable to investor, interest at 6%, convertible
into 40,000 shares of CHC common stock, due
March 31, 2000 10,000 -
Totals $ 87,500 $ 127,500
</TABLE>
On December 21, 1998, CHC obtained a $100,000 business revolving
credit line from a financial institution. Such line of credit is
personally guaranteed by CHC's president and treasurer and is
available for one year and borrowings thereunder bear interest at prime
rate plus .5% and amortize over 36 equal monthly installments.
In December 1998, CHC borrowed $50,000 under the line which was
subsequently repaid.
5. OBLIGATIONS UNDER CAPITAL LEASES
The Company, through its subsidiaries, has acquired office machinery
and equipment pursuant to various noncancellable capital lease
agreements. All of the lease agreements are secured by the
related equipment.
At September 30, 1999, the aggregate future minimum remaining
lease payments under noncancellable capital lease agreements were
as follows:
<TABLE>
Year Ended
September 30, Amount
<S> <C>
2000 $ 44,863
2001 26,404
2002 13,296
Total 84,563
Less amount representing interest (13,135)
Net present value of capital lease obligations $ 71,428
</TABLE>
<PAGE>23
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1999 and 1998
6. LOAN FROM RELATED PARTY SUBORDINATED TO CLAIMS OF GENERAL CREDITORS
On September 6, 1995, CSC-2 executed a loan agreement with OEF, a
corporation whose secretary is also the president of CHC, whereby OEF
advanced $50,000 to CSC-2. The $50,000 subordinated loan payable
bears interest at 12% per annum payable annually each September 30 and is
due on September 30, 2001.
The loan is pursuant to an agreement filed with the NASD and is permitted
in computing net capital under the Securities and Exchange Commission's
Uniform Net Capital Rule (see note 9). To the extent that such borrowing is
used by CSC-2 for continued compliance with minimum net capital rules,
said loan will not be repaid.
7. 1998 INCENTIVE STOCK OPTION PLAN
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and
complies with the disclosure provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Under APB No. 25, unearned compensation
is based on the difference, if any, on the date of the grant, between the
fair value of the Company's stock and the exercise price. Unearned
compensation is amortized and expensed in accordance with Financial
Accounting Standards Board Interpretation No. 28 using the multiple
option approach. The Company accounts for stock-based compensation
issued to non-employees in accordance with the provisions of SFAS No.
123 and Emerging Issues Task Force No. 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring or in
Conjunction with Selling, Goods or Services".
On December 31, 1998, CHC granted stock options (for a total of 394,000
shares of its common stock) to 40 employees of the Company. The
options provide the respective employees the right to purchase CHC
common stock at a price of $.75 per share and are exercisable and vest
at a rate of 20% for each year commencing December 31, 1999.
Activity relating to the Company's stock options follows:
<TABLE>
Number of
Shares
<S> <C>
Balance at September 30, 1998 -
Granted during the year 394,000
Forfeited during the year (34,000)
Balance at September 30, 1999 360,000
</TABLE>
<PAGE>24
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1999 and 1998
The Company has adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock- Based Compensation". Accordingly, no
compensation costs have been recognized for the options granted. Had
compensation cost been determined based on the fair value at the date of
grant consistent with the provision of SFAS No. 123, the Company's
net loss and net loss per share would have been as follows:
<TABLE>
Year Ended
September 30, 1999
<S> <C>
Net loss - as reported $ (63,865)
Net loss - pro forma $ (67,805)
Basic net loss per share - as reported $ (.01)
Basic net loss per share - pro forma $ (.01)
Diluted net loss per share - as reported $ (.01)
Diluted net loss per share - pro forma $ (.01)
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model
8. INCOME TAXES
CHC files a consolidated income tax return with its subsidiaries for
federal reporting purposes.
CHC and its subsidiaries file separate income tax returns for state
reporting purposes.
The provisions for income taxes consist of: Year Ended September 30,
<TABLE>
1999 1998
<S> <C> <C>
Current:
Federal $ - $ -
State 2,418 3,323
Total 2,418 3,323
Deferred:
Federal (18,938) (55,622)
State (5,751) (16,894)
Valuation allowance 24,689 72,516
Total - -
Total provision for income taxes $ 2,418 $ 3,323
</TABLE>
<PAGE>25
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1999 and 1998
A reconciliation of the computed expected income tax expense to the
provision for income taxes follows:
<TABLE>
<S> <C> <C>
Computed Federal income tax at 34% $(20,892) $ (61,366)
State income taxes (benefit) less Federal
income tax benefit (3,797) (11,150)
Change in valuation allowance 24,689 72,516
Minimum state income tax 2,418 3,323
Total provision for income taxes $ 2,418 $ 3,323
</TABLE>
Based on management's present assessment, the Company has not yet
determined it to be more likely than not that a deferred tax asset
of $157,914 attributable to the future utilization of $393,035 of net
operating loss carryforwards as of September 30, 1999 will be
realized. Accordingly, the Company has provided a 100 % allowance
against the deferred tax asset in the financial statements at
September 30, 1999. The Company will continue to review this
valuation allowance and make adjustments as appropriate. The net
operating loss carryforwards expire $148,193 in year 2012, $183,395
in year 2013, and $61,447 in year 2014.
9. NET CAPITAL REQUIREMENTS
As broker-dealers, CSC-1 and CSC-2 are subject to the Securities and
Exchange Commission Uniform Net Capital Rule (the "Rule"). The Rule
requires the maintenance of minimum net capital and requires that the
ratio of aggregate indebtedness, as defined, to net capital, as
defined, not exceed 15 to 1. At September 30, 1999, CSC-1 had net
capital of $88,496, which was $79,552 in excess of its required net
capital of $8,944 and its ratio of aggregate indebtedness to net
capital was 1.52 to 1. At September 30, 1999, CSC-2 had net
capital of $213,582, which was $113,582 in excess of its required
net capital of $100,000 and its ratio of aggregate indebtedness
to net capital was .08 to 1.
Pursuant to a restrictive agreement dated October 26, 1995 with the
NASD, CSC-2 agreed to maintain minimum net capital of at least
$120,000. Accordingly, at September 30, 1999, the Company had net
capital in excess of the NASD minimum required amount of $93,582.
10. RELATED PARTY TRANSACTIONS
Expense allowance - For the years ended September 30, 1999 and 1998,
the Company paid $64,000 and $42,000, respectively, to its
president and treasurer for accountable expenses pursuant to an
agreement with the Company.
Sea Friends Incorporated - During the year ended September 30, 1999,
the Company received $13,000 from Sea Friends Incorporated, a
not-for profit corporation, for usage of the Company's facilities.
The Company's president and secretary /treasurer are also directors of
Sea Friends Incorporated.
<PAGE>26
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1999 and 1998
11. COMMITMENTS AND CONTINGENCIES
Year 2000 - The Company has evaluated the potential impact of the year
2000 on its business, including its information systems and those of
its clearing agent, and does not expect this issue to have a
significant effect on its results of operations.
Operating leases - The Company leases its headquarters office space
(approximately 16,000 square feet) under six noncancellable operating
lease agreements which expire between October 2000 and October 2002,
with renewal options available to October 2007. Such lease
agreements require minimum monthly rental payments of $ 6,417.
The Company leases its autos and equipment under noncancellable
operating lease agreements which expire between January 2000 and
July 2004 and require minimum monthly rental payments of
approximately $5,369.
Rent expense under all operating leases consisted of:
<TABLE>
Year Ended September 30,
1999 1998
<C> <C>
<S>
Headquarters office space $ 64,220 $ 45,143
Autos and equipment 68,692 98,464
Totals $ 132,912 $ 143,607
</TABLE>
At September 30, 1999, the aggregate future minimum lease payments
under noncancellable operating lease agreements are as follows:
<TABLE>
<S>
Headquarters
Year Ended Office Autos and
September 30, Space Equipment Totals
<C> <C> <C> <C>
2000 $ 76,627 $ 35,739 $ 112,366
2001 48,217 10,170 58,387
2002 45,600 4,732 50,332
2003 3,800 2,591 6,391
2004 - 1,943 1,943
Thereafter - - -
Totals $ 174,244 $ 55,175 $ 229,419
</TABLE>
<PAGE>27
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1999 and 1998
Clearing agreement - On November 5, 1997, CSC-1 renewed its clearing
agreement for a two year period and released the clearing agent
from any prior clearing fee disputes. In connection therewith,
CSC-1 received a $200,000 signing bonus from the clearing agent on
November 12, 1997 and received $66,162 free clearing charges in
December 1997 and January 1998. The $266,162 total is reflected
in the consolidated statement of operations for the year ended
September 30, 1998 as a reduction in clearing and execution costs.
Litigation - On September 13, 1994, the Securities and Exchange
Commission (the "SEC") filed a civil action against CSC-1, its
president, a former registered representative, and eight other
defendants. The action alleges violations of Sections 5(a) and
(c), and 17(a) of the Securities Act of 1933, Sections 10 (b) and
15c of the Securities Exchange Act of 1934 and Rules l0b3, l0b-5,
l0b-6, and 15cl-2 thereunder. The complaint seeks injunctive relief
and disgorgement of profits approximating $175,000. CSC-1 answered
the complaint and is vigorously defending the action.
On October 6, 1994, the NASD Market Surveillance Committee
(the "MSC") commenced a disciplinary proceeding against CSC-1, its
president, and two former registered representatives. The
Complaint alleges violations of Article III, Sections 1, 4, 18, and 27
of the Association's Rules of Fair Practice and Section 10(b) of
the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
After a hearing on June 20, 1995, the MSC, in its Decision dated
February 7, 1996, fined CSC-1 and its president jointly and
severally $25,000 and ordered them to make restitution to specified
customers totaling approximately $10,000. CSC-1 and its president
appealed the Decision to the National Business Conduct Committee
(the "NBCC") of the NASD and a hearing of the appeal was held on
June 7, 1996. In its Amended Decision dated October 21, 1996, the
NBCC affirmed the fines and restitution order. On November 15,
1996, CSC-1 and its president appealed the NBCC Amended Decision
to the SEC. On January 7, 1998, the SEC affirmed the NBCC Amended
Decision. On May 18, 1998, the SEC denied CSC-1's Motion for
Reconsideration filed January 21, 1998. On February 5, 1998 and
June 15, 1998, CSC-1 and its president filed petitions for review
of the SEC actions to the Second Circuit of the United States
Court of Appeals, which matters are pending.
Other CHC subsidiaries have also been named as defendants in civil
cases arising in the ordinary course of business. The Company
believes that it has meritorious defenses to these actions and
intends to vigorously contest them.
Management believes, based upon discussions with counsel, that the
outcome of the litigation described above will not have a material
effect on the Company's consolidated financial position. The
materiality of legal matters on the Company's future operating
results depends on the level of future results of operations as
well as the timing and ultimate outcome of such legal matters.
As of September 30, 1999, the Company accrued approximately $50,000 in
connection with the above litigations. Such amount is included in
accounts payable and accrued expenses.
<PAGE>28
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1999 and 1998
12. CONCENTRATION OF CREDIT RISK
In the normal course of business, CSC-1 executes as agent
transactions on behalf of customers and CSC-2 executes principal
transactions with other broker-dealers. If the agency or principal
transactions do not settle because of failure to perform by either
the customer or the counterparty, CSC-1 or CSC-2 may be obligated
to discharge the obligation of the nonperforming party and, as a
result, may incur a loss if the market value of the securities are
different from the contract amount of the transactions.
CSC-l's clearing agent seeks to control the risks associated with
CSC-l's customer activities by requiring customers to maintain
margin collateral in compliance with various regulatory and
internal guidelines. CSC-l's clearing agent monitors required
margin levels daily, and pursuant to such guidelines, requires the
customers to deposit additional collateral, or to reduce positions,
when necessary.
Business concentration - For the year ended September 30, 1999,
approximately 75% of the Company's revenues were derived from
unsolicited customer transactions ordered online over the internet.
<PAGE>29
PART III
Item 9. DIRECTORS AND EXECUTIVE OFFICERS
(a) The directors of the Registrant are:
Director:
Name Age Other Offices Held Since
Daniel J. Priscu 77 Chairman 1987
George R. Hebert 55 President 1987
Michael T. Studer 49 Secretary, Treasurer 1987
Each director will hold office until the next annual meeting of shareholders
(expected to be held in March 2000) and until their successors have been
elected and qualified.
The executive officers of the Registrant are:
Officer:
Name Age Other Offices Held Since
Daniel J. Priscu 77 Chairmam 1987
George R. Hebert 55 President 1987
Michael T. Studer 49 Secretary, Treasurer 1987
Officers of the Registrant are elected by the Board of Directors at the annual
meetings of the Registrant's shareholders, and hold office until their death, or
until they shall resign or have been removed from office.
The business experience during the last five years for each director and
executive officer of the Registrant follows:
Daniel J. Priscu has been Chairman and a director of the Registrant since
September 1987. Mr. Priscu received a B.A. degree from De Pauw University in
1947.
George R. Hebert has been President and a director of the Registrant since
September 1987. He also has been a registered representative and economist
with CSC-1 since September 1987 and CSC-2 since October 1995. Mr. Hebert
received a B.S. degree from Stevens Academy, Pennsylvania Military College
(now Widener University) in 1967.
Michael T. Studer has been Secretary, Treasurer, and a Director of the
Registrant since September 1987. He has also been President of
Michael T. Studer, CPA, P.C., a public accounting firm, since July 1987,
President of CSC-1 since its inception in December 1984, and President of
CSC-2 since October 1995. Mr. Studer received a B.S.B.A. degree from Babson
College in 1971.
<PAGE>30
(b) Another significant employee of the Registrant is Thomas Shaughnessy, age
45. Mr. Shaughnessy has been general securities principal and chief
compliance officer of CSC-1 since July 1, 1993, general securities
principal and chief compliance officer of CSC-2 since October 1995, and
was Assistant to the President of CSC-1 from December 1992 to June 1993.
Since May 1972, he has served in the United States Marine Corps on both a
full-time and part-time basis. Mr. Shaughnessy received a B.S.B.A.
degree from State University of New York at Brockport in 1978 and a
M.B.A. degree from National University in 1988.
(c) There is no family relationship between any director, executive officer or
significant employee of the Registrant.
Item 10. EXECUTIVE COMPENSATION
The following table sets forth all cash compensation paid by the
Company during the years ended September 30, 1997, 1998 and 1999
to each executive officer and director of the Company:
<TABLE>
<S> Annual All Other
Name and Principal Position Year Salary Compensation
<C> <C> <C>
George R. Hebert, President 1999 $44,200 $32,000 (1)
1998 44,200 21,000 (1)
1997 44,200 24,000 (1)
Michael T. Studer, Secretary, 1999 44,200 32,000 (1)
Treasurer 1998 44,200 21,000 (1)
1997 44,200 24,000 (1)
Daniel J. Priscu, Chairman of 1999 - 600 (2)
The Board 1998 - 400 (2)
1997 - 400 (2)
(1) Represents an allowance for accountable expenses.
(2) Represents directors fees.
</TABLE>
<PAGE>31
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, at September 30, 1999, the stock ownership of
each person known by the Company to be the beneficial owner of five percent
or more of the Company's common stock, all executive officers and directors
individually, and all executive officers and directors of the Company as a
group:
<TABLE>
<S>
Name and Address Amount and Nature Percent of
of Beneficial Owner of Beneficial Owner (1) Class
<C> <C>
Daniel J. Priscu 49,600 0.7%
4555 Blackstone Drive
Indianapolis, Indiana 46237
George R. Hebert 1,965,300 (2) 29.6%
183 Gordon Place
Freeport, NY 11520
Michael T. Studer 1,929,600 (3) 29.1%
410 McDermott Road
Rockville Centre, NY 11570
Plymouth Partners, LP 533,500 8.0%
10826 Omaha Trace
Union, KY 41091
All executive officers and
Directors as a group (3 persons) 3,944,500 59.4%
</TABLE>
_________________________________________
(1) Unless otherwise indicated below, the Company has been advised that each
person named above is the record owner of and exercises the sole voting
and investment power over the shares shown opposite his name.
(2) Includes 164,500 shares held in trust for the benefit of Mr. Hebert's
daughter, 114,800 shares owned by Mr. Hebert's wife, and 50% of 40,000
shares owned by Sea Friends Incorporated, of which organization Mr. Hebert
is president and a director, all of which Mr. Hebert disclaims beneficial
ownership of. Includes 50% of 640,000 shares owned by CALP (CHC Deferred
Compensation Plan for benefit of George R. Hebert owns a 50% limited
partnership interest therein) which Mr. Hebert doesn't exercise sole
voting and investment power over.
(3) Includes 120,000 shares held in trust for Mr. Studer's children and 50% of
40,000 shares owned by Sea Friends Incorporated, of which organization
Mr. Studer is treasurer and a director, which Mr. Studer disclaims
beneficial ownership of. Includes 50% of 640,000 shares owned by CALP
(CHC Deferred Compensation Plan for benefit of Michael T. Studer owns a 50%
limited partnership interest therein) which Mr. Studer does not exercise
sole voting and investment power over.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of September 30, 1999, the Registrant had notes payable to The OTC Equity
Fund, Inc., a corporation whose secretary is also president of the Registrant,
and Michael T. Studer, secretary and treasurer of the Registrant, in amounts of
$55,000 and $22,500, respectively. Such notes bear interest at the rate of 12%
per annum and are due on demand.
As of September 30, 1999, Citadel had a loan payable subordinated to claims of
general creditors to The OTC Equity Fund, Inc. in the amount of $50,000. The
loan bears interest at the rate of 12% per annum and is due September 30, 2001.
In April 1998, the Registrant borrowed $50,000 from the wife of the president of
the Registrant. The note, which was repaid in April 1999, beared interest at
the rate of 12% per annum and was due on demand.
In March 1999, the Registrant sold 8000 common shares to Daniel J. Priscu
(chairman of the Registrant), 98,000 common shares to George R. Hebert
(president of the Registrant), 196,000 common shares to Michael T Studer
(secretary and treasurer of the Registrant) and 98,000 common shares to
Teresa M. Hebert (wife of the president of the Registrant), at a price of
.3125 per share, in exchange for promissory notes in the amounts of $2,500,
$30,625, $61,250, and $30,625, respectively.
<PAGE>32
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CASTLE HOLDING CORP.
By /s/ George R. Hebert
George R. Hebert, President
Dated December 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant
and in the capacities indicated on the dates indicated.
Signature Title Date
_______________________________________________________________________________
___________________________ Chairman of the Board of December 29, 1999
Daniel J. Priscu Directors, Director
/s/ George R. Hebert President, Director December 29, 1999
George R. Hebert
/s/ Michael T. Studer Secretary, Treasurer, December 29, 1999
Michael T. Studer Principal Financial and
Accounting Officer,
Director
<PAGE>33
EXHIBIT INDEX
3.1* Articles of Incorporation (Form S-18 Registration
No. 33-8395-LA, effective November 14, 1986)
3.2* Amendments to Articles of Incorporation (Form S-18 Registration
No. 33-37809-NY, effective February 11, 1991)
3.3* By-laws (Form S-18 Registration No. 33-8395-LA, effective
November 14,1986)
4.4* Specimen Stock Certificate (Form S-18 Registration No. 33-37809-NY,
effective February 11, 1991)
22 Subsidiaries of the Registrant (Filed herewith)
27 Financial Data Schedule (Filed herewith)
99.1* Complaint for Injunctive and Other Relief (dated September 13, 1994) -
Securities and Exchange Commission, Plaintiff (Form 8-K dated
September 13, 1994)
* Previously filed
<PAGE>34
Exhibit No. 22- Subsidiaries of the Registrant
Castle Holding Corp.
Form 10-KSB for the fiscal year ended September 30, 1999
1. Castle Securities Corp. (New York)
2. Citadel Capital Corp. (Delaware)
3. Beverage King, Ltd. (Delaware)
4. Citadel Securities Corp. (New York)
5. Meroke Capital Corp. (New York)
6. Castle Trucking Corp. (New York)
7. Castle Advisors Inc. (New York)
8. Sparta Holding Corp. (Nevada)
9. Wall Street Indians, Ltd. (New York)
10. Chinamer International Corp. (Nevada)
11. Galaxynet Inc. (New York)
12. Rocketnet Inc. (Nevada)
13. U Trade Inc. (New York)
14. Java Trader Inc. (Nevada)
15. Long Island Web TV.Com Corp. (New York)
<PAGE>35
EXHIBIT 27
Financial Data Schedule for the year ended September 30, 1999 required pursuant
to Item 601(c) of Regulation S-B
[NAME] CASTLE HOLDING CORP.
[MULTIPLIER] 1
[CURRENCY] 1
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END]SEP-30-1999
[PERIOD-START]OCT-01-1998
[PERIOD-END]SEP-30-1999
[EXCHANGE-RATE] 1
[CASH] 383,133
[RECEIVABLES] 137,455
[SECURITIES-RESALE] 0
[SECURITIES-BORROWED] 0
[INSTRUMENTS-OWNED] 35,620
[PP&E] 203,235
[TOTAL-ASSETS] 815,439
[SHORT-TERM] 87,500
[PAYABLES] 264,429
[REPOS-SOLD] 0
[SECURITIES-LOANED] 0
[INSTRUMENTS-SOLD] 806
<LONG TERM> 121,428
[COMMON] 16,601
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 324,675
[TOTAL-LIABILITY-AND-EQUITY] 815,439
[TRADING-REVENUE] 359,213
[INTEREST-DIVIDENDS] 7,098
[COMMISSIONS] 2,943,352
[INVESTMENT-BANKING-REVENUES] 0
[FEE-REVENUE] 0
[INTEREST-EXPENSE] 31,829
[COMPENSATION] 1,213,577
[INCOME-PRETAX] (61,447)
[INCOME-PRE-EXTRAORDINARY] (61,447)
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (63,865)
[EPS-BASIC] (.01)
[EPS-DILUTED] (.01)
<PAGE>36
1
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