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, 1998
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 77-0121957
(State or Other Jurisdiction of Incorporation) (I.R.S. Employer
Identification No.)
45 Church Street, Suite 25, 11520
Freeport, NY (Zip Code)
(Address of Principal Executive Offices)
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 ]
State issuer's revenues for its most recent fiscal year. $1,899,699
As of September 30, 1999, the aggregate market value of the registrant's
common stock (based on its $.1875
reported last bid price on the OTC Bulletin Board) held by non-affiliates of
the registrant was $505,500.
As of September 30, 1999, there were 6,640,500 common shares outstanding.
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") and Citadel Securities Corp. ("Citadel"). 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 Sheet" 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 35 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.
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 three execution methods. The first is SOES, a rapid
execution method that allows an
investor to buy on the offer and sell on the bid. The second is SelectNet,
whereby an investor can submit an
order on the bid, offer or in between. The third (and most used) is the ISLD
Electronic Communications
Network ("ECN"). By submitting an order on the ISLD ECN, an investor "posts"
the order to buy or sell a
security so that the entire market can see it and execute on it. The ISLD
symbol, which appears 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.
For the years ended September 30, 1997 and 1998, Online customer transactions
totaled 18,986 and 57,610,
respectively. At September 30, 1997, September 30, 1998 and June 30, 1999,
Online had funded customer
accounts numbering 90, 168, and 364, 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 1 full-time trader 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.
From December 22, 1992 to September 30, 1997, substantially all of Castle's
revenues were derived from the
AAP. During that time, the number of day trading customers at other firms
using automated order entry
systems increased steadily. The increased competition lowered AAP customer
performance, which in turn
resulted in departures of Castle AAP registered representatives and closings
of Castle branch offices in
Glendale, California ( in August 1997), Melville, New York ( in September
1997) and Garden City, New
York (in April 1998).
For the years ended September 30, 1997 and 1998, AAP customer transactions
totaled 184,654 and 33,041,
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, and 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.
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 December 31, 1998, CALP had net assets of approximately $177,938, including
its $160,000 investment
in the Company. Since inception, CAI has earned $525 in performance
incentive fees.
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.
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, 1998, $5,000 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 to occur 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, 1998, Castle had net capital of $43,395, which was $38,395 in
excess of its required net
capital, and its ratio of aggregate indebtedness to net capital was 1.58 to 1.
Citadel had net capital of
$144,082, which was $44,082 in excess of its required net capital, and its
ratio of aggregate indebtedness to
net capital was .08 to 1.
EMPLOYEES
At September 24, 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 13,000 square feet of office
space. The facilities are occupied
under six lease agreements that provide for total monthly rentals of $6,500
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.
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, 1998.
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, 1996
through June 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.
<TABLE>
<S> <C> <C>
QUARTER ENDED: HIGH BID LOW BID
December 31, 1996 $0.047 $0.047
March 31, 1997 0.047 0.016
June 30, 1997 0.031 0.016
September 30, 1997 0.031 0.031
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
</TABLE>
As of September 30, 1999, the number of holders of record of the company's
common stock was 139.
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.
RECENT SALES OF UNREGISTERED SECURITIES
Equity securities of the Registrant sold by the Registrant during the three
fiscal years ended
September 30, 1998 that were not registered under the Securities Act were:
(1) As adjusted for the 100% stock dividend paid December 28, 1998 and the
300% stock dividend paid June 25, 1999.
(2) Castle registered principal and key employee.
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.
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 investments, 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, 1998 compared to year ended September 30, 1997
Net loss for the year ended September 30, 1998 was $(186,718), or $(.04) per
share, compared to
a net loss of $(233,837), or $(.06) per share, for the year ended September
30, 1997. Total
revenues decreased $1,863,571 (50%) and total expenses decreased $1,935,481
(48%). Revenues
less commissions and clearing costs were $1,450,545 in 1998 compared to
$1,903,965 in 1997.
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 decrease in total revenues was due to a $2,299,024 decrease in Active
Account Program
("AAP") commissions, offset by a $679,443 increase in Castle Online
commissions. The total
number of AAP transactions decreased 82% from 184,654 transactions in 1997 to
33,041
transactions in 1998, which resulted from the reduction in the number of
registered
representatives involved in the AAP and Castle's closing of its Glendale
branch office in August
1997, its Melville office in September 1997 and its Garden City office in
April 1998. Castle
Online customer transactions increased from 18,986 in 1997 to 57, 610 in 1998.
Castle Online
funded customers increased from 90 at September 30, 1997 to 168 at September
30, 1998.
Commissions expense as a percentage of total revenues less clearing costs was
15% and 25% in
1998 and 1997, respectively. The decrease in the average commission payout
percentage was due
to a higher proportion of revenues derived from Castle Online in 1998 (where
the payout
percentages are lower).
Excluding the $266,162 settlement in 1998 noted above (which reduced 1998
clearing costs),
clearing costs as a percentage of total revenues was 25% and 32% in 1998 and
1997,
respectively. The lower percentage in 1998 is due to a higher proportion of
revenues derived from
Castle Online (where the average gross commission revenue per transaction is
higher than with
the AAP).
Communications and selling expenses decreased $402,250 from $804,085 in 1997
to $401,835
in 1998. This decrease was due to lower NASDAQ workstation and execution
charges in 1998 as
a result of the reduced number of AAP transactions and the three branch office
closings noted
above.
Administrative compensation and employee benefits decreased $156,058 from
$742,479 in 1997
to $586,421 in 1998. This decrease was due primarily to reduced administrative
personnel
resulting from the branch closings.
Liquidity and Capital Resources
The majority of the Registrant's assets are highly liquid and short-term in
nature. Cash and
Securities owned at September 30, 1998 totaled $279,364, 58% of the
Registrant's assets.
Cash decreased $222,071 from $475,314 at September 30, 1997 to $253,243 at
September 30,
1998. This decrease was due to $93,890 net cash used for operating activities;
$48,802 used for
capital additions and $79,379 used for financing activities, including the
$100,204 note payable
repayment to Castle's clearing agent.
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, 1998, Castle had net capital of $43,395, which was $38,395 in
excess of its
required net capital of $5,000, and Citadel had net capital of $144,082, which
was $44,082 in
excess of its required net capital of $100,000.
On December 31, 1997, Castle advised the NASD that it would no longer make
markets and
would conduct only activities requiring net capital of $5, 000.
ITEM 7. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
Description
Page No.
Index to Consolidated Financial Statements
13
Auditors' Opinions 14-15
Consolidated Statements of Financial Condition,
September 30, 1998 and 1997 16
Consolidated Statements of Operations,
Years ended September 30, 1998 and 1997 17
Consolidated Statements of Changes in Stockholders' Equity,
Years ended September 30, 1998 and 1997 18
Consolidated Statements of Cash Flows,
Years ended September 30, 1998 and 1997
19-20
Notes to Consolidated Financial Statements,
Years ended September 30, 1998 and 1997 21-32
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Castle Holding Corp.
We have audited the accompanying statement of consolidated financial condition
of Castle Holding
Corp. and Subsidiaries ("the Company") as of September 30, 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards
require that we plan and perform the audit 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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material
respects, the financial position of the Company as of September 30, 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
March 3, 1999, except for the third paragraph
of Note 13E which is as of March 12, 1999, the
fourth paragraph of Note 13E which is as of
March 24, 1999, and Notes 1,2,and 7 and the fifth
paragraph of Note 13E which is as of September 30, 1999.
SCARANO & TOMARO, P. C 125 Michael
Drive,Suite 101
Certified Public Accountants & Consultants
Syosset, New York 11791
516-364-0300
Fax:516-364-3003
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Castle Holding Corp.
We have audited the accompanying statements of consolidated financial
condition of Castle
Holding Corp. and Subsidiaries ("the Company") as of September 30, 1997 and
1996 and the
related consolidated statements of operations changes in stockholder's equity,
and cash flows for
the years 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, based on our audits, the consolidated financial statements
referred to above
present fairly, in all material respects, the financial position of the
Company as of September 30,
1997 and 1996 and the results of its consolidated operations and cash flows
for the years then
ended in conformity with generally accepted accounting principles.
Scarano & Tomaro, P.C.
Syosset, New York
February 11, 1998
CASTLE HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
See accompanying notes tp consolidated financial statements
CASTLE HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
See accompanying notes to consolidated financial statements.
CASTLE HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended September 30, 1998 and 1997
See accompanying notes to consolidated financial statements.
CASTLE HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
See accompanying notes to consolidated financial statements.
CASTLE HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
See accompanying notes to consolidated financial statements.
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1998 and 1997
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, 1998.
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, 1998.
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, 1998.
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 subsidiaries and others.
8. Chinamer International Corp. (100 % owned) (incorporated in Nevada
October
18, 1994) - inactive at September 30, 1998.
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1998 and 1997
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, 1998.
12. Java Trader, Inc. (100% owned) (incorporated in Nevada March 10,
1999)-
inactive at September 30, 1998.
13. Long Island Web TV.com Corp. (100% owned) (incorporated in New York
September 22, 1999) - inactive at September 30, 1998.
All significant intercompany balances and transactions have been
eliminat ed 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, 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
loan subordinated to claims of general creditors, obligations under capital
leases and notes
payable at September 30, 1998 are a reasonable estimate of their fair value
based upon currently
available interest rates of similar instruments available with similar
maturities.
Cash in bank and with clearing broker - At September 30, 1998, CSC-1 had
$28,352 cash held at
its clearing agent not covered by SIPC insurance and CSC-2 had $37,625 cash
held at its clearing
agent not covered by SIPC insurance. Management believes the clearing agent
to be in sound
financial condition and therefore the credit risk exposure is limited.
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1998 and 1997
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.
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.
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1998 and 1997
4. NOTES PAYABLE - CLEARING AGENT
Pursuant to an agreement with its clearing broker, CHC borrowed a total of
$120,000 bearing
interest at 9% per annum and payable in monthly installments of $5,482 through
April 1997, and
$914 through August 1999. In connection with CSC-1 renewing its clearing
agreement for a two
year period, such note was paid in full during November 1997.
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1998 and 1997
6. OBLIGATIONS UNDER CAPITAL LEASES
In September 1995, a CHC subsidiary executed a lease agreement to lease
certain equipment
valued at $51,836 for a term of three years requiring monthly payments of
$1,845.
During October 1997, a CHC subsidiary executed a lease agreement to lease
certain computer
equipment valued at $43,873 for a term of three years requiring monthly
payments of $1,678,
inclusive of principal and interest. At September 30, 1998, equipment under
capital leases is
carried at a book value of $30,468.
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1998 and 1997
At September 30, 1998, the aggregate future minimum remaining
lease payments under
noncancellable capital lease agreements were as follows:
7. 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.
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.
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1998 and 1997
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 $133,225
attributable to the future utilization of
$331,588 of net operating loss carryforwards as of September
30, 1998 will be realized.
Accordingly, the Company has provided a 100 % allowance against
the deferred tax asset in the
financial statements at September 30, 1998. The Company will
continue to review this valuation
allowance and make adjustments as appropriate. The net
operating loss carryforwards will
expire between the year 2012 and 2013.
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1998 and 1997
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, 1998,
CSC-1 had net
capital of $43,395, which was $38,395 in excess of its required net
capital of $5,000 and
its ratio of aggregate indebtedness to net capital was 1.58 to 1. At
September 30, 1998,
CSC-2 had net capital of $144,082, which was $44,082 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, 1998, the Company had net capital in excess of the NASD
minimum
required amount of $24,082.
10. RELATED PARTY TRANSACTIONS
Capital contributions - In July 1997 and September 1997, CHC sold
640,000 shares of
common stock to a limited partnership, which a CHC subsidiary acts
as general partner
for, at a price of $.125 per share. In September 1997, CHC sold
320,000 shares of
common stock to CHC's deferred compensation plans for the benefit of
CHC's president
(160,000 shares) and CHC's treasurer (160,000 shares) at a price of
$ .125 per share. In
August 1997 and September 1997, CHC sold 240,000 shares of common
stock to three
key CSC-1 employees (80,000 shares each) at a price of $ .125 per
share; $5,000 was
paid in cash and the remaining $25,000 of the purchase price was
paid by delivery of
subscription notes due CHC on March 31, 2000, as extended.
Expense allowance - For the years ended September 30, 1998 and 1997, the
Company
paid $42,000 and $48,000, respectively, to its president and treasurer
for accountable
expenses pursuant to an agreement with the Company.
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
7900 square feet) under five noncancellable operating lease
agreements which expire
between October 1999 and October 2002, with renewal options
available to October
2007. Such lease agreements require minimum monthly rental payments
of $ 3,418.
The Company leases its autos and equipment under noncancellable
operating lease
agreements which expire between January 2000 and October 2001 and
require
minimum monthly rental payments of approximately $ 5400.
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1998 and 1997
At September 30, 1998, the aggregate future minimum lease payments under
noncancellable
operating lease agreements are as follows:
Clearing agreement - On November 5, 1997, CSC-1 renewed its clearing
agreement for a two
year period commencing October 1997 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
costs.
Litigation - On September 13, 1994, the United States 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.
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1998 and 1997
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 SEC 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 totalling 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.
CSC-1 has also been named as defendant in one arbitration case and other
CHC
subsidiaries have also been named as defendants in civil cases arising
in the ordinary
course of business. With respect to the arbitration, the matter was
settled in November
1998 (see note 13B). With respect to the civil cases, 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, 1998, the Company accrued approximately $45,000 in
connection with
the above litigations. Such amount is included in accounts payable and
accrued expenses.
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.
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1998 and 1997
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, 1998,
approximately 53% of the
Company's revenues were derived from unsolicited customer transactions
ordered online
over the Internet.
13. SUBSEQUENT EVENTS
A. Lease
On October 5, 1998, the Company executed an agreement to lease an
additional 6000
square feet of office space from its present lessor. The lease
provides for monthly rentals
of $1,500 from November 1998 to October 2002 and is renewable for an
additional five
years to October 2007 at monthly rentals of $1,650. In connection with
such lease
agreement, CHC issued the lessor 108,000 restricted shares of its common
stock valued at
$13,500.
B. Litigation
On November 18, 1998, CSC-1 paid $10,000 to two customers in settlement
of an
arbitration proceeding brought by the customers. Also as part of the
settlement, CHC
issued the customers 80,000 restricted shares of common stock valued at
$10,000 and a 90
day option to acquire an additional 200,000 shares of CHC common stock at
a price of $.25
per share (which option was not exercised).
C. 1998 Incentive Stock Option Plan
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.
D. Line of Credit
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 its 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.
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1998 and 1997
E. Private Placements of Common Stock
On February 10, 1999, CHC sold a private investor 40,000 shares of its common
stock at a price
of $.25 per share in exchange for a non interest bearing promissory note due
CHC on March 31,
2000.
On February 17, 1999, CHC was advanced $250,000 from a private investor with
the agreement
that the investor would convert such advance to 800,000 shares of CHC common
stock at a price
of $.3125 per share under a CHC offering pursuant to an exemption afforded by
Rule 504 or
Rule 506 of Regulation D of the Securities Act of 1933.
On March 12, 1999, CHC sold a private investor 40,000 shares of CHC common
stock at a price
of $.3125 per share for $12,500 cash.
On March 24, 1999, CHC sold the three CHC directors a total of 302,000 shares
and three key
CSC-1 employees a total of 178,000 shares of common stock at a price of $.3125
per share in
exchange for non interest bearing promissory notes due CHC on September 30,
2000.
On May 7, 1999, CHC issued an advertiser 24,000 restricted shares of CHC
common stock in
exchange for certain specified advertising (valued at $36,000) to be provided
to the Company.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Effective October 20, 1998, the firm of Massella, Tomaro & Co., LLP was
engaged by Castle
Holding Corp. (the "Registrant"). This change in accountants was due to the
cessation of the
Registrant's former accounting firm (Scarano & Tomaro, P.C.) and not due to
any discrepancies
or disagreements between the Registrant and its former accounting firm on any
matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedure.
The reports of Scarano & Tomaro, P.C. on the financial statements of the
Registrant as of
September 30, 1997 and for the years ended September 30, 1997 and 1996 did not
contain an
adverse opinion or disclaimer of opinion and were not qualified or modified as
to uncertainty,
audit scope or accounting principles.
PART III
Item 9. DIRECTORS AND EXECUTIVE OFFICERS
(a) The directors of the Registrant are:
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:
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.
(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
operating 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, 1996, 1997 and 1998 to each executive officer and director of
the Company:
(1) Represents an allowance for accountable expenses.
(2) Represents directors fees.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, at August 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:
_________________________________________________
(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, 1998, 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, 1998, 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 July 1997 and September 1997, the Registrant sold 640,000 common shares to
CALP at a price of
$.125 per share. CAI is the general partner of CALP and Castle Holding Corp.
Deferred Compensation
Plans for benefit of George R. Hebert and Michael T. Studer, president and
Secretary-treasurer of the
Registrant, respectively, each own a 50% limited partnership interest in
CALP.
In September 1997, the Registrant sold 160,000 common shares to the Castle
Holding Corp. Deferred
Compensation Plan for benefit of George R. Hebert, president of the
Registrant, at a price of $.125 per
share.
In September 1997, the Registrant sold 160,000 common shares to the Castle
Holding Corp. Deferred
Compensation Plan for benefit of Michael T. Studer, Secretary and treasurer of
the Registrant, at a
price of $.125 per share.
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.
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 October 4, 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.
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)
10.1* Fully Disclosed Correspondent Agreement dated May 4,1990 between
Otra Clearing, Inc. and Castle Securities Corp. (Form S-18 Registration
No. 33-37809-NY, effective February 11, 1991)
10.2* Promissory Note dated December 10, 1992 issued to RKS Financial
Group, Inc. (Form 8-K dated December 10, 1992)
10.3* Amendment (dated December 15, 1992) to Promissory Note dated
December 10, 1992 (Form 8-K dated December 10, 1992
16.1* Letter from John S. Gray, CPA, P.C. dated October 31, 1994 (Form
8-K dated October 31, 1994)
16.2 Letter from Massella, Tomaro & Co., LLP dated October 20, 1998
(Filed herewith)
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)
99.2 Financial Statements - Years Ended September 30, 1996 and 1995
(Filed herewith)
* Previously filed
Exhibit No. 16.2
MASSELLA, TOMARO & CO., LLP
375 NORTH BROADWAY, SUITE 103
JERICHO, NEW YORK 11753
November 9, 1998
Securities and Exchange Commission
Washington, D.C. 20549
Gentlemen:
The accounting firm of Scarano & Tomaro, P.C. was the principal accountant
for
Castle Holding Corp. (The "Company"), and on February 11, 1998 it reported
on the
consolidated financial statements of the Company as of September 30, 1997
and
for the
two years then ended. During June 1998, Scarano & Tomaro, P.C. ceased to
operate
as a firm and on October 20, 1998, the firm of Massella, Tomaro & Co., LLP
was
engaged.
As a partner in the former firm of Scarano & Tomaro, P.C., I have read the
Company's statements included under Item 4 of its Form 8-K dated November
9, 1998
and agree with such statements.
Very truly yours,
/S/ Anthony Tomaro
Anthony Tomaro, CPA
Partner
AT:cmr
Exhibit No. 22 - Subsidiaries of the Registrant
Castle Holding Corp.
Form 10-KSB for the fiscal year ended September 30, 1998
EXHIBIT 27
Financial Data Schedule for the year ended September 30, 1998 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-30-1998
[PERIOD-START]OCT-01-1997
[PERIOD-END]SEP-30-1998
[EXCHANGE-RATE] 1
[CASH] 253,243
[RECEIVABLES] 0
[SECURITIES-RESALE] 0
[SECURITIES-BORROWED] 0
[INSTRUMENTS-OWNED] 26,121
[PP&E] 171,499
[TOTAL-ASSETS] 483,940
[SHORT-TERM] 127,500
[PAYABLES] 169,940
[REPOS-SOLD] 0
[SECURITIES-LOANED] 0
[INSTRUMENTS-SOLD] 2,983
<LONG TERM> 83,376
[COMMON] 12,586
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 87,555
[TOTAL-LIABILITY-AND-EQUITY] 483,940
[TRADING-REVENUE] 235,770
[INTEREST-DIVIDENDS] 4,485
[COMMISSIONS] 1,659,444
[INVESTMENT-BANKING-REVENUES] 0
[FEE-REVENUE] 0
[INTEREST-EXPENSE] 27,276
[COMPENSATION] 834,406
[INCOME-PRETAX] (183,395)
[INCOME-PRE-EXTRAORDINARY] (183,395)
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (186,718)
[EPS-BASIC] (.04)
[EPS-DILUTED] (.04)
EXHIBIT 99.2
Index to Consolidated Financial Statements - Years Ended September 30, 1996
and 1995
F-1
SCARANO & TOMARO, P. C 125
Michael Drive,Suite 101
Certified Public Accountants &
Consultants Syosset, New York 11791
516-364-0300
Fax:516-364-3003
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Castle Holding Corp.
We have audited the accompanying statements of consolidated financial
condition of Castle Holding
Corp. and Subsidiaries ("the Company") as of September 30, 1996 and 1995
and
the related
consolidated statements of operations changes in stockholder's equity, and
cash flows for the years 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, based on our audits, the consolidated financial statements
referred to above present
fairly, in all material respects, the financial position of the Company as of
September 30, 1996 and
1995 and the results of its consolidated operations and cash flows for the
years then ended in
conformity with generally accepted accounting principles.
Scarano & Tomaro, P.C.
Syosset, New York
February 11, 1998
F-2
