<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
[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.
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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 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.
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Revenues By Source
For the years ended September 30, 1998 and 1997, revenues were derived as
follows:
<TABLE>
Years Ended September 30,
1998 1997
<S> <C> <C>
Commissions:
Castle Online $1,017,136 $ 337,693
Active Account Program 541,840 2,840,864
Other stocks and bonds 86,941 185,235
Mutual funds 13,527 16,127
Total commissions 1,659,444 3,379,919
Principal transactions:
Trading accounts 257,701 303,878
Investment account (21,931) 20,229
Total principal transactions 235,770 324,107
Investment banking:
Equities underwriting and other fees - 38,485
Designated commissions-
municipal bond offerings - 9,775
Total investment banking - 48,260
Investment management - -
Interest and dividends 4,485 10,984
Total revenues $1,899,699 $3,763,270
</TABLE>
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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.
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QUARTER ENDED: HIGH BID LOW BID
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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:
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Title of Number
Date of Sale Security Shares(1) Purchaser(s) Consideration
July 30, 1997 Common 400,000 CALP $ 50,000 Cash
Stock
August 27, 1997 Common 80,000 Glenn $ 10,000 Promissory
Stock Perkins(2) Note
August 27, 1997 Common 80,000 Frank $ 10,000 Promissory
Stock Ferraro(2) Note
September 26, 1997 Common 80,000 Thomas $ 5,000 Cash Plus
Stock Shaughnessy(2) 5,000 Promissory
Note
September 26, 1997 Common 240,000 CALP $ 30,000 Cash
Stock
September 26, 1997 Common 320,000 CHC Deferred $ 40,000 Cash
Stock Compensation Plan
November 15, 1997 Common 80,000 Ratan Halder Lease Concession
Stock Valued at $ 10,000
September 4, 1998 Common 56,000 Equities Advertising
Stock Magazine, LLC Valued at $21,000
</TABLE>
(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.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
<TABLE>
Description Page No.
<S> <C>
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
</TABLE>
<PAGE> 13
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.
<PAGE> 14
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
<PAGE> 15
<TABLE>
CASTLE HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
September 30,
<S> 1998 1997
Assets <C> <C>
Cash in bank and with clearing broker $ 253,243 $ 475,314
Securities owned, at market value 26,121 49,986
Equipment, less accumulated
depreciation of $143,838 and $87,040,
respectively 56,014 56,894
Equipment under capital leases, less
accumulated depreciation of $65,241
and $35,997, respectively 30,468 15,839
Leasehold improvements, less
accumulated amortization of
$50,668 and $26,631, respectively 85,017 94,130
Other assets 33,077 57,219
Total assets $ 483,940 $ 749,382
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable and accrued expenses $ 152,911 $ 214,365
Commissions payable 14,368 15,454
Income taxes payable 2,661 2,660
Securities sold, not yet purchased,
at market 2,983 14,662
Obligations under capital leases 33,376 18,678
Note payable - clearing agent - 100,204
Notes payable - related parties 127,500 77,500
Loan subordinated to claims of general
creditors 50,000 50,000
Total liabilities 383,799 493,523
Commitments and contingencies (Note 11)
Stockholders' equity:
Common stock, $.0025 par value; authorized
10,000,000 shares, issued and outstanding
5,034,400 and 4,898,400 shares, respectively 12,586 12,246
Additional paid - in capital 398,334 367,674
Accumulated deficit (285,779) ( 99,061)
Total 125,141 280,859
Less: stock subscriptions receivable (25,000) (25,000)
Total stockholders' equity 100,141 255,859
Total liabilities and stockholders' equity $ 483,940 $ 749,382
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 16
<TABLE>
CASTLE HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
Year Ended September 30,
1998 1997
<S>
Revenues: <C> <C>
Commissions $1,659,444 $3,379,919
Principal transactions 235,770 324,107
Investment banking - 48,260
Interest and dividends 4,485 10,984
Total revenues 1,899,699 3,763,270
Expenses:
Commissions 247,985 636,896
Clearing costs 201,169 1,222,409
Communications and selling 401,837 804,085
Administrative compensation
and employee benefits 586,421 742,479
Professional and consulting fees 195,624 94,207
Registration and regulatory fees 31,827 57,790
Occupancy 45,143 149,700
Interest 27,276 27,864
Other 345,812 283,145
Total expenses 2,083,094 4,018,575
Loss before provision for income taxes (183,395) (255,305)
Provision for (benefit from) income taxes 3,323 (21,468)
Net loss $ (186,718) $ (233,837)
Net loss per share:
Basic and diluted $ (.04) $ (.06)
Weighted average number of common
shares outstanding 4,976,400 3,782,912
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 17
<TABLE>
CASTLE HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended September 30, 1998 and 1997
(Accum-
ulated Stock Total
Common Stock Additional Deficit) Sub- Stock-
$.0025 Par Value Paid-in Retained scription holders'
Shares Amount Par Value Earnings Receivable Equity
<S>
Balances,
September 30, 1996 <C> <C> <C> <C> <C> <C>
3,664,000 $9,160 $216,460 $134,776 $ - $360,396
Issuance of common
shares to employees
in December 1996
and charged to
operations 34,400 86 4,214 - - 4,300
Sales of common
shares in July,
August, and
September 1997 at
$ .125 per share 1,200,000 3,000 147,000 - (25,000) 125,000
Net loss - - - (233,837) - (233,837)
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
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 18
<TABLE>
CASTLE HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended September 30,
1998 1997
<S>
Cash flows from operating activities: <C> <C>
Net loss $ (186,718) $ (233,837)
Adjustments to reconcile net income (loss)
to net cash provided by (used for) operating
activities:
Depreciation 88,039 107,337
Issuance of common stock for services and rent 31,000 4,300
Changes in assets and liabilities:
Securities owned 23,865 20,881
Other assets 24,142 (28,837)
Accounts payable and accrued expenses (61,454) (21,173)
Commissions payable (1,086) (92,625)
Income taxes payable 1 (28,417)
Securities sold, not yet purchased (11,679) 14,601
Net cash used for operating activities (93,890) (257,770)
Cash flows from investing activities:
Purchases of equipment and leasehold improvements (48,802) (76,386)
Net cash used for investing activities (48,802) (76,386)
Cash flows from financing activities:
Proceeds from issuance of notes payable 50,000 70,000
Proceeds from sales of common stock - 125,000
Repayment of notes payable (100,204) (35,156)
Repayment of obligations under capital leases (29,175) (17,359)
Net cash (used for) provided by financing activities (79,379) 142,485
Net decrease in cash (222,071) (191,671)
Cash, beginning of year 475,314 666,985
Cash, end of year $ 253,243 $ 475,314
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 19
<TABLE>
CASTLE HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended September 30,
1998 1997
<S>
Supplemental disclosures of cash flow information: <C> <C>
Interest paid $ 20,163 $ 27,864
Income taxes paid $ 3,207 $ 6,949
Schedule of non-cash operating activities:
Issuance of common stock for services and rent $ 31,000 $ 4,300
Schedule of non-cash investing activities:
Acquisition of computer equipment in connection
with capital lease obligations $ 43,873 $ -
Schedule of non-cash financing activities:
Issuance of stock subscriptions receivable in
connection with sale of common stock $ - $ 25,000
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 20
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.
<PAGE> 21
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 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, 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.
<PAGE> 22
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.
<PAGE> 23
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1998 and 1997
3. SECURITIES OWNED AT MARKET VALUE AND SECURITIES SOLD, NOT YET PURCHASED
<TABLE>
September 30,
<S> 1998 1997
Securities owned at market value consist of:
Trading accounts: <C> <C>
Corporate equities - listed on Nasdaq Stock
Market $ 1,188 $ 1,095
Corporate equities - listed on OTC Bulletin
Board 20,753 21,033
Total trading accounts 21,941 22,128
Investment accounts 4,180 27,858
Totals $ 26,121 $ 49,986
Securities sold, not yet purchased consist of:
Trading accounts:
Corporate equities - listed on Nasdaq Stock
Market $ 2,983 $ 995
Corporate equities - listed on OTC Bulletin
Board - 13,667
Totals $ 2,983 $ 14,662
</TABLE>
4. NOTE 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.
<PAGE> 24
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1998 and 1997
5. NOTES PAYABLE - RELATED PARTIES
<TABLE>
September 30,
<S> 1998 1997
Notes payable consist of:
Note payable to officer, interest at 12% paid <C> <C>
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
Totals $127,500 $ 77,500
</TABLE>
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.
<PAGE> 25
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:
<TABLE>
Year Ended
September 30, Amount
<C> <C>
1999 $ 20,136
2000 21,814
Total 41,950
Less amount representing interest (8,574)
Net present value of capital lease obligations $ 33,376
</TABLE>
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 8). 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.
<PAGE> 26
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1998 and 1997
<TABLE>
The provisions for income taxes consist of:
Year Ended September 30,
1998 1997
<S>
Current: <C> <C>
Federal $ - $(18,197)
State 3,323 (3,271)
Total 3,323 (21,468)
Deferred:
Federal (55,622) (46,566)
State (16,894) (14,143)
Valuation allowance 72,516 60,709
Total - -
Total provision for (benefit from) income
taxes $ 3,323 $(21,468)
</TABLE>
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% $(61,366) $(86,804)
State income taxes (benefit) less Federal
income tax benefit (11,150) (15,772)
Change in valuation allowance 72,516 60,709
Utilization of lower income tax brackets - 11,750
Minimum state income tax 3,323 3,339
Other - net - 5,310
Total provision for (benefit from) income
taxes $ 3,323 $(21,468)
</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 $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.
<PAGE> 27
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.
<PAGE> 28
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1998 and 1997
Rent expense under all operating leases consisted of:
<TABLE> Year Ended September 30,
1998 1997
<S> <C> <C>
Headquarters office space $ 45,143 $ 38,700
Branches' office space - 111,000
Autos and equipment 98,464 85,737
Totals $ 143,607 $ 235,437
</TABLE>
At September 30, 1998, the aggregate future minimum lease payments under
noncancellable operating lease agreements are as follows:
<TABLE>
Year Ended Headquarters Autos and
September 30, Office Space Equipment Totals
<C> <C> <C> <C>
1999 $ 53,358 $ 79,744 $ 133,102
2000 29,840 49,611 79,451
2001 27,600 7,022 34,622
2002 27,600 - 27,600
2003 2,300 - 2,300
Thereafter - - -
Totals $ 140,698 $ 136,377 $ 277,075
</TABLE>
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.
<PAGE> 29
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 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.
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 respet 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 diffrent
from the contract amount of the transactions.
<PAGE> 30
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 2000,000 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.
<PAGE> 31
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 shares of CHC common stock in
exchange for certain specified advertising (valued at $36,000) to be provided
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.
<PAGE> 32
PART III
Item 9. DIRECTORS AND EXECUTIVE OFFICERS
(a) The directors of the Registrant are:
<TABLE>
Director:
<S> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
Officer:
<S> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<S> <C> <C> <C> <C>
Annual Deferred Comp- All Other
Name and Principal Position Year Salary ensation Plan Compensation
George R. Hebert, President 1998 $44,200(2) $ - $ 21,000 (1)
1997 44,200(3) - 24,000 (1)
1996 44,200 18,000 24,000 (1)
Michael T. Studer, 1998 44,200 - 21,000 (1)
Secretary/Treasurer 1997 44,200 - 24,000 (1)
1996 44,200 18,000 24,000 (1)
Daniel Priscu, Chairman 1998 - - 400 (2)
of the Board 1997 - - 400 (2)
1996 - - 400 (2)
</TABLE>
(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:
<TABLE>
<S> <C> <C>
Name and Address Amount and Nature Percent of
of Beneficial Owner of Beneficial Owner (1) Class
Daniel J. Priscu 49,600 0.7%
4555 Blackstone Drive
Indianapolis, Indiana 46237
George R. Hebert 1,965,300 29.6%
183 Gordon Place
Freeport, NY 11520
Michael T. Studer 1,929,600 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, 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.
<PAGE>
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.
<TABLE>
<S> <S> <S>
Signature Title Date
Chairman of the Board October 4, 1999
Daniel J. Priscu of Directors
/s/ George R. Hebert President, Director October 4, 1999
George R. Hebert
/s/ Michael T. Studer Secretary, Treasurer, October 4, 1999
Michael T. Studer Principal Financial
and Accounting
Officer, Director
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
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
</TABLE>
<PAGE>
Exhibit No. 16.2
MASSELLA, TOMARO & CO., LLP
375 NORTH BROADWAY, SUITE 103
JERICHO, NEW YORK 11753
October 4, 1999
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 8 of its Form 10-KSB dated
October 4, 1999 and agree with such statements.
Very truly yours,
/S/ Anthony Tomaro
Anthony Tomaro, CPA
Partner
AT:cmr
<PAGE>
Exhibit No. 22 - Subsidiaries of the Registrant
Castle Holding Corp.
Form 10-KSB for the fiscal year ended September 30, 1998
<TABLE>
<C> <C>
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. (New York)
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)
</TABLE>
<PAGE>
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)
<PAGE>
EXHIBIT 99.2
Index to Consolidated Financial Statements - Years Ended September 30, 1996
and 1995
<TABLE>
<S> <C>
Description Page No.
Index to Consolidated Financial Statements F-1
Auditors' Opinion F-2
Consolidated Statements of Financial Condition,
September 30, 1996 and 1995 F-3
Consolidated Statements of Net Income,
Years Ended September 30, 1996 and 1995 F-4
Consolidated Statements of Changes in Stockholders' Equity,
Years Ended September 30, 1996 and 1995 F-5
Consolidated Statements of Cash Flows,
Years Ended September 30, 1996 and 1995 F-6
Notes to Consolidated Financial Statements,
Years Ended September 30, 1996 and 1995 F-7
</TABLE>
<PAGE> 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
<PAGE> F-2
<TABLE>
CASTLE HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
September 30,
<S> 1996 1995
Assets <C> <C>
Cash in bank and with clearing broker $666,985 $1,009,459
Securities owned 70,867 67,745
Equipment, less accumulated depreciation of
$32,558 and $26,670, respectively 96,685 85,470
Equipment under capital leases, less
accumulated depreciation of $18,719
and $1,440, respectively 33,117 50,396
Leasehold improvements, less
accumulated amortization of
$13,094 and $2,300, respectively 68,012 48,080
Other assets 28,382 18,002
Total assets $964,048 $1,279,152
Liabilities and Stockholders' Equity
Liabilities:
Notes payable $142,860 $ 158,119
Accounts payable and accrued expenses
including cash overdrafts of $0 and
$19,134, respectively 235,538 313,289
Commissions payable 108,079 394,983
Income taxes payable 31,077 19,970
Securities sold not yet purchased 61 5,625
Obligations under capital leases 36,037 50,720
Loan subordinated to claims of general creditors 50,000 50,000
Total liabilities 603,652 992,706
Commitments and contingencies (Note 9) - -
Stockholders' equity:
Common stock, $.0025 par value; authorized
10,000,000 shares, issued and outstanding
458,000 and 458,000 shares, respectively 1,145 1,145
Additional paid in capital 224,475 224,475
Retained earnings 134,776 60,826
Total stockholders' equity 360,396 286,446
Total liabilities and stockholders' equity $964,048 $1,279,152
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> F-3
<TABLE>
CASTLE HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Net Income
Year Ended September 30,
<S> 1996 1995
Revenues: <C> <C>
Commissions $ 7,888,828 $ 9,151,580
Principal transactions 262,672 61,570
Investment banking 36,426 73,750
Interest and dividends 22,117 14,852
Total revenues 8,210,043 9,301,752
Expenses:
Commissions 2,868,544 3,525,213
Clearing costs 2,553,159 2,707,752
Communications and selling 896,589 1,079,129
Administrative compensation
and employee benefits 925,068 746,753
Professional and consulting fees 150,256 111,904
Registration and regulatory fees 48,571 43,106
Occupancy 205,708 331,293
Interest 30,588 13,531
Other 427,356 633,742
Total expenses 8,105,839 9,192,423
Income before income taxes 104,204 109,329
Provision for income taxes 30,254 29,800
Net income $ 73,950 $ 79,529
Net income per common share $ .16 $ .17
Weighted average number of common
shares outstanding 458,000 456,750
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> F-4
<TABLE>
CASTLE HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended September 30, 1996 and 1995
Retained
Common Stock Additional Earnings Total
$.0025 Par Value Paid in (Accumulated Stockholders'
Shares Amount Capital Deficit) Equity
<S>
Balances, September <C> <C> <C> <C> <C>
30, 1994 453,000 $1,133 $223,237 $(18,703) $205,667
Value of 5,000
common shares
issued to
employees and
charged to
operations 5,000 12 1,238 - 1,250
Net income - - - 79,529 79,529
Balances, September
30, 1995 458,000 1,145 224,475 60,826 286,446
Net income - - - 73,950 73,950
Balances, September
30, 1996 458,000 $1,145 $224,475 $134,776 $360,396
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> F-5
<TABLE>
CASTLE HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended September 30,
1996 1995
<S>
Cash flows from operating activities: <C> <C>
Net income $ 73,950 $79,529
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 49,892 42,728
Value of 5,000 common shares issued to
employees and charged to operations - 1,250
Changes in assets and liabilities:
Securities owned (3,122) (37,369)
Other assets (10,380) (279)
Accounts payable and accrued expenses (72,246) 114,297
Commissions payable (286,904) 245,215
Income taxes payable 11,107 13,734
Securities sold not yet purchased (5,564) 4,334
Net cash provided by operating activities (243,267) 463,439
Cash flows from investing activities:
Purchases of equipment, equipment under
capital leases, and leasehold improvements (69,265) (107,521)
Net cash used for investing activities (69,265) (107,521)
Cash flows from financing activities:
Proceeds from issuance of notes payable 50,000 100,000
Obligations under capital leases - 51,836
Proceeds from issuance of loan subordinated
to claims of general creditors - 50,000
Repayment of notes payable (65,259) (19,381)
Repayment of obligations under capital leases (14,683) (1,116)
Net cash provided by (used for) financing activities(29,942) 181,339
Net increase (decrease) in cash (342,474) 537,257
Cash, beginning of year 1,009,459 472,202
Cash, end of year $ 666,985 $1,009,459
Supplemental disclosure of cash flow information:
Interest paid $ 24,588 $ 13,531
Income taxes paid $ 6,302 $ 11,066
Supplemental disclosures of noncash investing and
financing activities:
Retirement of fully depreciated assets and
related accumulated depreciation $ (48,300) $ (91,348)
Loan subordinated to claims of general creditors
repaid by return of secured demand note receivable$ - $ 50,000
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> F-6
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1996 and 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation - The consolidated financial statements include Castle
Holding Corp. ("CHC") and its twelve subsidiaries (collectively, the "Company").
CHC is a holding company which was incorporated in Nevada on June 13, 1986.
CHC's principal operating subsidiary, Castle Securities Corp. ("CSC"), is a
securities broker-dealer headquartered in Freeport, New York with three branch
offices in Garden City, New York, Melville, New York, and Glendale, California.
Another Subsidiary, Citadel Securities Corp. ("CSC-2"), is also a securities
broker-dealer and, since April 1996, has made markets in Nasdaq and OTC Bulletin
Board securities from its office in Freeport, New York. All significant
intercompany balances and transactions have been eliminated in consolidation.
The other ten (10) subsidiaries of CHC are:
<TABLE>
<S> <S>
1. Citadel Capital Corp. (incorporated in Delaware March 29, 1988) -
inactive at December 31, 1996.
2. Beverage King, Ltd. (incorporated in Delaware January 2, 1990) -
subleases automobiles to other CHC subsidiaries.
3. Meroke Capital Corp. (incorporated in New York October 7, 1992) -
subleased office space to CSC-1 and others to August 31, 1995;
inactive at December 31, 1996.
4. Castle Trucking Corp. (incorporated in New York May 4, 1993) -
provided transportation services to business customers to
September 15, 1993; inactive at December 31, 1996.
5. Castle Advisors Inc. (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. (incorporated in Nevada December 23, 1993) -
inactive at December 31, 1996.
7. Wall Street Indians, Ltd. (incorporated in New Yrok May 27, 1994) -
since August 1995, has provided office services to CSC-1 and others.
8. Chinamer International Corp. (incorporated in Nevada October 18, 1994)
- inactive at December 31, 1996.
9. Galaxynet Inc. (incorporated in Nevada December 15, 1995) - provides
marketing and communications services to CSC-1.
10. Rocketnet Inc. (incorporated in Nevada December 20, 1995) - provides
marketing and communications services to CSC-1.
</TABLE>
Business concentration - For the years ended September 30, 1996 and 1995,
approximately 91% and 94% respectively, of the Company's revenues were derived
from customer transactions in securities listed on the NASDAQ Stock Market
executed by Company registered representatives using NASDAQ's Small Order
Execution System ("SOES") and Select Net ("SNET") automated systems.
<PAGE> F-7
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1996 and 1995
Revenue recognition - Securities transactions (and related revenue and
expense, including commissions 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. Investment banking
revenue is recorded when earned.
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.
Financial instruments - Except for equipment, equipment under capital leases,
leasehold improvements, and other assets, which are carried at net cost on
the consolidated statements of financial condition, the estimated fair value
of all assets and liabilities approximate their carrying amounts.
Cash in bank and with clearing broker - At September 30, 1996, CSC-1 had
$202,055 cash in one bank in excess of the federally insured amount and
$48,175 cash held at its clearing agent not covered by SIPC insurance and
CSC-2 had $33,531 cash in one bank in excess of the federally insured amount
and $25,956 cash held at its clearing agent not covered by SIPC insurance.
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 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.
Net income per common share - Net income per common share is computed using
the weighted average number of common shares outstanding during the period.
<PAGE> F-8
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1996 and 1995
2. SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED
<TABLE>
<S>
Securities owned consist of: September 30,
1996 1995
Trading account:
Corporate stocks and warrants - <C> <C>
listed on NASDAQ Stock Market $ 4,900 $ 3,830
Corporate stocks and warrants-
listed on OTC Bulletin Board 42,545 7,573
Total trading account 47,445 11,403
Investment accounts 23,422 56,342
Total $ 70,867 $ 67,745
</TABLE>
<TABLE>
<S>
Securities sold not yet purchased consist of:
Trading account:
Corporate stocks and warrants - <C> <C>
listed on NASDAQ Stock Market $ 61 $ 5,625
Corporate stocks and warrants -
listed on OTC Bulletin Board - -
Totals $ 61 $ 5,625
</TABLE>
3. NOTES PAYABLE
<TABLE>
<S>
Notes payable consist of: September 30,
1996 1995
Note payable to officer, interest at 12% <C> <C>
paid annually, due on demand $ 22,500 $ 22,500
Note payable to The OTC Equity Fund, Inc.
("OEF"), interest at 12% paid annually, due
on demand 55,000 55,000
Note payable to CSC-1 and CSC-2 clearing
agent, interest at 9%, due in monthly
installments of $4,568 through January 1998 65,360 80,619
Totals $142,860 $158,119
</TABLE>
<PAGE> F-9
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1996 and 1995
4. 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 at a monthly
rental of $1,845. The CHC subsidiary has an option to purchase the leased
equipment at the end of the term for $1. At September 30, 1996, the
aggregate future minimum remaining lease payments under noncancellable
capital lease agreements are:
<TABLE>
Year Ended
September 30, Amount
<C> <C>
1997 $ 22,134
1998 20,290
Total 42,424
Less amount representing interest (6,387)
Obligations under capital leases $ 36,037
</TABLE>
5. LOAN FROM RELATED PARTY SUBORDINATED TO CLAIMS
OF GENERAL CREDITORS
On May 31, 1994, CSC-2 received a secured demand note receivable from The
OTC Equity Fund, Inc. ("OEF"), a corporation which owns the remaining 1%
of CSC-2 and whose secretary is also the president of CHC. Simultaneously
with obtaining the note receivable, CSC-2 issued a promissory note to OEF
which was subordinated to claims of any general creditors of CSC-2. On
September 6, 1995, CSC-2 and OEF terminated the May 31, 1994 agreement and,
accordingly, CSC-2 returned the secured demand note receivable and underlying
collateral to the lender.
On September 6, 1995, CSC-2 executed a new loan agreement with OEF and OEF
advanced $50,000 cash to CSC-2. The $50,000 subordinated loan payable bears
interest at 12% per annum and is due to OEF on September 30, 1999. The
initial interest accrual commenced October 1, 1995 and is payable on
September 30, 1996 and annually thereafter.
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 7). 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.
6. 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.
<PAGE> F-10
<TABLE>
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1996 and 1995
The provisions for income taxes consist of:
Year Ended
September 30,
<S> 1996 1995
Current: <C> <C>
Federal $ 20,292 $ 18,911
State 9,962 10,889
Total 30,254 29,800
Deferred:
Federal - -
State - -
Valuation allowance - -
Total - -
Total provision for income taxes $ 30,254 $ 29,800
</TABLE>
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% $ 35,429 $ 37,172
Utilization of net operating loss carryforward - (4,652)
State income taxes - net of Federal income tax
benefit 6,575 7,187
Utilization of lower federal income tax
brackets (11,750) (11,750)
Other - net - 1,843
Total provision for income taxes $ 30,254 $ 29,800
</TABLE>
7. 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, 1996, CSC-1 had net capital of $144,028, which was $44,028
in excess of its required net capital of $100,000, and CSC-2 had net capital
of $224,810, which was $124,810 in excess of its required net capital of
$100,000.
8. RELATED PARTY TRANSACTIONS
Office space - CSC-1 rents its executive office space from another CHC
subsidiary. In addition to furnished space, CSC-1 receives communications
and other office services and supplies. For the years ended September 30,
1995 and 1996, CSC-1 paid this CHC subsidiary $547,000 and $570,000,
respectively, for rent and office services under this agreement, which has
been eliminated in consolidation.
Selling expense - The Company provides financial and other support to a non-
profit organization whose officers and directors are also officers and
directors of CHC. For the years ended September 30, 1995 and 1996, the
Company paid this non-profit organization $69,000 and $18,000, respectively,
for expenses relating to an anticipated bond offering. Since such offering
has not yet commenced, the Company has expensed all such costs.
<PAGE> F-11
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1996 and 1995
Deferred compensation plan - CHC has adopted a nonqualified deferred
compensation plan for key employees. In the year ended September 30, 1995,
CHC paid a total of $20,000 ($9,000 for CHC's president, $9,000 for CHC's
treasurer, and $2,000 for CSC-1's compliance officer) to separate CHC bank
accounts for the benefit of the respective employees. In the year ended
September 30, 1996, CHC paid a total of $42,000 ($18,000 for CHC's president,
$18,000 for CHC's treasurer and $6,000 for CSC-1's compliance officer) to these
accounts. These payments were expensed and included in other expenses in the
consolidated statements of net income.
COMMITMENTS AND CONTINGENCIES
Operating leases - The Company leases its autos and equipment under
noncancellable operating lease agreements which expire between February 1997
and August 2000. The leases covering the executive space provide for renewal
options that extend to October 2002. Pursuant to several verbal sublease
agreements, CSC-1 rents office space for its three branches on a month to
month basis.
Rent expense under all operating leases consisted of :
Year Ended September 30,
<TABLE> 1996 1995
<S> <C> <C>
Executive office space $ 38,113 $ 44,888
Branches' office space 195,696 286,406
Autos and equipment 75,380 57,754
Total $ 309,189 $ 389,048
</TOTAL>
At September 30, 1996, the aggregate future minimum remaining lease payments
under noncancellable operating lease agreements are:
</TABLE>
<TABLE>
Year Ended Office Autos and
September 30, Space Equipment Total
<C> <C> <C> <C>
1996 $ 34,463 $ 71,914 $ 106,377
1997 37,200 40,227 77,427
1998 3,100 13,789 16,889
1999 - 4,835 4,835
2000 - 3,657 3,657
Total $ 74,763 $ 134,422 $ 209,185
</TABLE>
Litigation - On September 13, 1994,the United States Securities and Exchange
Commission 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 10b-3,
10b-5, 10b-6, and 15c1-2 thereunder. The complaint seeks injunctive relief and
disgorgement of profits approximating $175,000. CSC -1 answered the complaint
and is vigorously defending the action.
<PAGE> F-12
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1996 and 1995
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
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 United States Securities and Exchange Commission and are presently
waiting for a decision.
CHC and its subsidiaries have also been named as defendants in certain other
legal actions in the ordinary course of business. The Company believes that
it has meritorious defenses to these actions and intends to vigorously contest
them.
It is the opinion of management and legal counsel that the legal proceedings
and actions described above may expose the Company in the aggregate to estimated
losses ranging from $67,000 to $117,000. The Company recorded a loss accrual
of $92,000 for these contingencies during the year ended September 30, 1995,
which is included in the statement of financial condition in accounts payable
and accrued expenses. The Company believes that after recording the loss
accrual, the ultimate resolution of the aforementioned legal matters will not
have a material adverse effect on the Company's consolidated financial position.
10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, CSC-1 executes, as agent or principal,
transactions on behalf of customers and CSC-2 executes 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-1's clearing agent seeks to control the risks associated with CSC-1's
customer activities by requiring customers to maintain margin collateral in
compliance with various regulatory and internal guidelines. CSC-1'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.
<PAGE> F-13
