UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-08718
CT HOLDINGS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 75-2432011
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
8750 N. CENTRAL EXPRESSWAY, SUITE 100, DALLAS, TEXAS 75231
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(214) 520-9292
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 $.01 PER SHARE
(TITLE OF CLASS)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period 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 disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference to such filing requirements incorporated by reference
in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [_]
State issuer's revenue from continuing operations for its most recent fiscal
year $ 0
As of April 9, 2003, the last reported sale price of the Company's common stock
was $ 0.012 per share. The aggregate market value of the voting and non-voting
common stock held by non-affiliates of the Company was $463,825 as of April 9,
2003.
As of April 9, 2003, there were 57,770,928 shares of common stock, $.01 par
value per share, outstanding.
Transitional Small Business Disclosure Format. Yes [_] No [X]
CT HOLDINGS, INC.
FORM 10-KSB
ANNUAL REPORT
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2002
TABLE OF CONTENTS
PART I
Item 1. Description of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Description of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . 13
PART II
Item 5. Market for Common Equity and Related Stockholder Matters. . . . . . . . . . . 14
Item 6. Management's Discussion and Analysis. . . . . . . . . . . . . . . . . . . . . 15
Item 7. Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act . . . . . . . . . . . . . . . . . . . . . . 24
Item 10. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 11. Security Ownership of Certain Beneficial Owners and Management. . . . . . . . 28
Item 12. Certain Relationships and Related Transactions. . . . . . . . . . . . . . . . 29
Item 13. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . 32
Item 14. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
This Annual Report on Form 10-KSB contains forward-looking statements that
involve known and unknown risks and uncertainties. The statements contained in
this Report that are not purely historical are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including
statements regarding the Company's expectations, beliefs, intentions or
strategies regarding the future. In this Report, the words anticipates,
believes, expects, estimates, intends, future and similar expressions identify
forward-looking statements. All forward-looking statements included in this
document are based on information available to the Company on the date hereof,
and the Company assumes no obligation to update any such forward-looking
statements. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed elsewhere in this Report under
the heading Factors That May Affect Future Operating Results as well as those
discussed elsewhere in this Report, and the risks discussed in our Securities
and Exchange Commission filings.
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW OF CT HOLDINGS
CT Holdings, Inc. was incorporated in Delaware in 1992 and previously operated
under the name Citadel Technology Inc. Our business model is designed to enable
the companies in whom we invest or acquire to become market leaders in their
industries. Our strategy over the years has led to the development, acquisition
and operation of technology based businesses with strong business models and
compelling valuations. We believe that the anticipated growth in technology
creates strong opportunities for us to increase shareholder value by investing
in early stage ventures well positioned for growth in their respective
marketplaces. We will attempt to increase the value of each investee by
providing management, marketing and financial expertise along with financial
capital and then realize this new value through a subsequent liquidity event
such as a spin-off, sale, merger or initial public offering of the investee
companies.
At December 31, 2002 the Company held investments in Parago, Inc. ("Parago") and
River Logic, Inc. ("River Logic"). An overview of each business is provided
below. On May 17, 2002 the Company completed the spin-off of its Citadel
Security Software Inc. subsidiary as a special dividend to shareholders of CT
Holdings as of May 6, 2002. In October 2002 the Company's investment in Encore
Telecommunications, Inc. was liquidated.
THE CITADEL SECURITY SOFTWARE DISTRIBUTION
In November 2001, the board of directors of CT Holdings approved the spin-off of
Citadel through the declaration of a pro rata dividend distribution to the
holders of record of the outstanding shares of CT Holdings common stock (the
"Distribution"). The Distribution consisted of one (1) share of Citadel common
stock for every four (4) shares of CT Holdings (the Distribution Ratio) held by
CT Holdings shareholders as of May 6, 2002 (the "Record Date). Following the
Distribution on May 17, 2002 (the "Distribution Date"), Citadel became an
independent company and CT Holdings has no continuing ownership interest in
Citadel. The Distribution is intended to be a tax free distribution for U.S.
federal tax purposes although neither we nor Citadel have requested or obtained
any opinions as to the tax treatment of the Distribution. On the Distribution
Date, CT Holdings and Citadel entered into a series of agreements including a
distribution agreement, a transition services agreement and a tax disaffiliation
agreement which provide for, among other things, the principal corporate
transactions required to effect the Distribution, to provide for an orderly
transition to the status of two independent companies and to define the
continuing relationship between Citadel and CT Holdings after the Distribution.
After the Distribution, two of five directors of CT Holdings were also directors
of Citadel and the Chief Executive Officer and the Chief Financial Officer of CT
Holdings hold the same positions with Citadel. It is expected that 20% to 33%
of the officers' time will be allocated to CT Holdings. All other employees of
CT Holdings became employees of Citadel following the Distribution. Under the
transition services agreement Citadel will provide accounting, administrative,
information management and other services, including the services of the two
officers, to CT Holdings in return for a payment of a monthly administrative fee
initially estimated at $20,000 per month. The fee may be adjusted quarterly
subject to a reallocation of the estimated time devoted to each company.
OVERVIEW OF PARAGO
We formed Parago in 1999 through the contribution of some technology assets
acquired in the late 1990's during the growth period of Internet electronic
commerce businesses. Parago provides a proprietary, promotional marketing
technology platform that helps clients reduce promotional program costs,
increase sales, and enhance customer relationships.
Services include:
- Technology applications that automate and optimize both traditional
and non-traditional promotional marketing initiatives
- On-line and off-line rebate management
- Patent-pending upsell/cross-sell application
- Transaction data client reporting
3
Many companies today use promotional marketing programs such as rebates,
buy-one-get-one-free and instant discounts to entice customers and hopefully
drive some measure of customer satisfaction and loyalty. But while these
programs may be effective for acquisition, they most often fail when it comes to
retention as there is little focus on customer satisfaction.
Parago's solutions seek to change the way companies think about rebates and
other promotional tools. Currently rebates are viewed as a necessary evil
required to remain competitive. However, all parties are dissatisfied with the
status quo. By implementing Parago's solutions, clients can turn these flawed
tactical, one-way customer acquisition initiatives into strategic, two-way
customer retention imperatives. By leveraging the power of the Internet,
innovative technology Parago takes the pain of traditional, short-term
promotional marketing programs like rebates and converts it into long-term gain
and competitive advantage in the form of lower costs, increased sales and better
customer relationships.
Parago's products, PromoCenter, ClickChoice and KnowledgeCenter, have all been
developed collectively with the objective of leveraging Internet-based
technology, processes and resources to make promotional marketing programs more
efficient and effective resulting in an improved bottom line and happier
customers for our clients. Parago offers a Continuous Customer Interaction
business model powered by three fully integrated business centers dedicated to
automating and optimizing promotions like rebates thereby creating significant
competitive advantage for our clients:
- PromoCenter: A client-branded site where customers can search for
current promotional information, initiate the redemption process,
obtain continuously updated claim status and take advantage of
upsell/cross-sell opportunities.
- ClickChoice: A patent-pending, fully integrated application that
provides customers the ability to upgrade their promotion to higher
valued products or services while reducing client's promotional
expense.
- KnowledgeCenter: A powerful transactional data collection and
reporting environment that provides fresh, accurate and usable
information reporting.
At December 31, 2002 the Company holds 20,000 shares of Parago common stock and
warrants to purchase 28.8749 shares of Series A preferred stock (convertible
into 2,887 shares of common stock), after giving effect to 1 for 1000 reverse
stock split in connection with Parago's Series E preferred stock offering in
December 2001 to February 2002, in which the Company elected not to participate.
In December 2001 and January 2002 Parago raised equity financing of
approximately $15.0 million. We elected not to participate in the equity
financing and as a result, our ownership percentage in Parago was reduced to
approximately 1%. Our investment in Parago has no carrying value on our balance
sheet as a result of applying the equity method of accounting prior to our
investment falling below the 20% ownership requirement for applying the equity
method of accounting. While Parago continues to incur operational losses we
believe that our initial $50,000 investment in Parago represented by 20,000
shares of common stock and 28.8749 warrants (convertible into 2,887 shares of
Parago common stock) may ultimately provide an appropriate return.
OVERVIEW OF RIVER LOGIC
In May 2000 CT Holdings acquired a minority interest in River Logic. River Logic
develops decision-support applications for industry. River Logic develops and
markets enterprise optimization technologies and decision support applications.
Recognizing a need in the market place, River Logic created strategic-level,
process modeling tools and approaches for helping senior managers suggest,
evaluate, and understand the impact of business decisions as they relate to the
overall profitability of their organizations. River Logic's optimization tools
integrate several technologies such as mixed integer optimization, visual
process modeling, accounting, and constraint theory to bring together the best
active financial planning and profitability tool on the market.
The Enterprise Optimizer tool suite provides a structured process for modeling
an enterprise, identifying material relationships, uncovering hidden value, and
measuring the impact of decisions and relationships as they relate to the
bottom-line profit of the entire organization. With Enterprise Optimizer,
quickly developing a powerful and robust model that combines operational
processes, profit implications, and financial analysis can be achieved without
programming or understanding of the theoretical or mathematical principles used.
4
A new user of Enterprise Optimizer may quickly become a productive modeler and
financial analyst. River Logic's tools allow flexibility in abstracting
organizational data so that the time-to-value for building valid and valuable
models is very short without any loss in functionality. The power of the
embedded expert knowledge base is that it automatically translates visual
diagrams into mathematical representations that are validated, verified,
optimized, and processed by several hundred algorithms and analytical
procedures. Financial reports such as income statements, balance sheets, and
cash flow statements are automatically prepared and analyzed.
River Logic's XLerator Server enables users to quickly re-purpose content
products and other intellectual property using standard applications and
delivery mediums to reduce the product development cycle and quickly generate
new revenue streams. XLerator provides the power to securely and transparently
organize, share and publish internal and external information and data across an
extended organization or to customers.
The Company holds an ownership interest in River Logic of approximately 8% at
December 31, 2002. River Logic is an early stage software company, has a history
of operating losses and requires additional funding to continue operations and
to attain profitability. Since the initial investment in May 2000, River Logic
has raised additional capital through the issuance of preferred stock and other
equity securities. The Company periodically evaluates the carrying value of its
ownership interests in its investee companies taking into consideration, among
other factors, the investee company's valuation following recent infusions of
capital. The Company views the pricing of recent capital transactions with
unrelated third parties as a measure of the fair value of the investment in
River Logic.
A preferred stock financing in April 2001 reflected a valuation below the
carrying value River Logic. As a result, the Company determined that the
carrying value of its investment had a fair value of approximately $2,700,000
and accordingly reduced the carrying value by $360,000 at December 31, 2001. In
June 2002 River Logic entered into an equity credit line financing arrangement
at a valuation substantially below the carrying value of the investment in River
Logic. As a result of the lower valuation, general information technology
industry conditions and lower operational performance by River Logic, the
Company believes that the net realizable value of the investment has been
permanently impaired, is now zero and accordingly, the Company wrote down its
investment in River Logic to zero at December 31, 2002.
EMPLOYEES
As of December 31, 2002, CT Holdings had no employees. Pursuant to the
transition services agreement between Citadel and CT Holdings all employees
employed by CT Holdings prior to the Distribution were transferred to Citadel
after the Distribution. Approximately five employees of Citadel including the
CEO and CFO will spend 20% to 33% of their time managing the business
development activities of CT Holdings. Citadel will receive a transition
services fee from CT Holdings for administrative serves including the costs of
the shared employees. Our CEO also serves as a director of Citadel, Parago and
River Logic.
GOVERNMENT REGULATION
Government regulation has not had a material effect on the conduct of our
business to date.
ACCOUNTANT'S REPORT
We have received a report from our independent auditors for our year ended
December 31, 2002 containing an explanatory paragraph that describes the
uncertainty regarding our ability to continue as a going concern due to our
recurring operating losses and our significant working capital deficiency.
Please see Management's Discussion and Analysis - Liquidity and Capital
Resources and Note A to our financial statements that discuss some of the
conditions that could impact our ability to continue operations under the
current business conditions.
FORWARD-LOOKING STATEMENTS
The following discussion contains forward-looking statements that involve known
and unknown risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance, or achievements to be materially
different from any future results, levels of activity, performance, or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others things, those risk factors set forth in this
section and elsewhere in this report. We identify forward-looking statements by
words such as may, will, should, could, expects, plans, anticipates, believes,
estimates, predicts, potential, or continue or similar terms that refer to the
future. We cannot guarantee future results, levels of activity, performance or
achievements.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Investing in our common stock involves a high degree of risk. Any of the
following risks could materially adversely affect our business, operating
results and financial condition and could result in a complete loss of your
investment.
5
In addition to the other information in this Report, the following factors
should be considered carefully in evaluating the Company and its business. This
disclosure is for the purpose of qualifying for the safe harbor provisions of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. It contains factors that could
cause results to differ materially from such forward-looking statements. These
factors are in addition to any other cautionary statements, written or oral,
which may be made or referred to in connection with any such forward-looking
statement.
The following matters, among other things, may have a material adverse effect on
the business, financial condition, liquidity, or results of operations the
Company. Reference to these factors in the context of a forward-looking
statement or statements shall be deemed to be a statement that any one or more
of the following factors may cause actual results to differ materially from
those in such forward-looking statement or statements.
Before you invest in our common stock, you should be aware of various risks,
including those described below. Investing in our common stock involves a high
degree of risk. You should carefully consider these risk factors, together with
all of the other information included in this Report, before you decide whether
to purchase shares of our common stock. Our business and results of operations
could be seriously harmed by any of the following risks. The trading price of
our common stock could decline due to any of these risks, and you may lose part
or all of your investment.
GENERAL RISKS
OUR BUSINESS FOCUS IS THE DEVELOPMENT AND ACQUISITION OF EARLY STAGE COMPANIES;
HENCE, WE WILL ENCOUNTER NUMEROUS RISKS ASSOCIATED WITH OUR BUSINESS FOCUS AND
OUR PRIOR OPERATING HISTORY MAY NOT BE A MEANINGFUL GUIDE TO EVALUATING OUR
FUTURE PERFORMANCE.
Our business model is designed to enable the companies in whom we invest or
acquire to become market leaders in their industries. Our strategy over the
years has led to the development, acquisition and operation of technology based
businesses with strong business models and compelling valuations. We believe
that the anticipated growth in technology creates strong opportunities for us to
increase shareholder value by investing in early stage ventures well positioned
for growth in their respective marketplace. We will attempt to increase the
value of each investee by providing management, marketing and financial
expertise along with financial capital and then realize this new value through a
subsequent liquidity event such as a sale, merger or initial public offering of
the investee companies.
At December 31, 2002 the Company held investments in two companies, Parago and
River Logic. In May 2002, we were successful in spinning out Citadel into a
standalone company. During 2002 we looked at businesses and technologies in
which to invest but economic and market conditions along with a general decline
in the availability of capital prevented us from making investments.
Other than our formation and development of Citadel, Parago and River Logic, we
have a brief history in executing our business strategy. As a consequence, our
prior operating history may not provide a meaningful guide to our prospects in
emerging markets. Moreover, our business model and prospects must be considered
in light of the risk, expense and difficulties frequently encountered by
companies in early stages of development, particularly companies in new and
rapidly evolving markets. We may be unable to execute our strategy of developing
our business due to numerous risks, including the following:
- We may be unable to identify or develop relationships with attractive
emerging companies.
- Any companies that we are able to attract may not succeed and the
value of our assets and the price of our common stock could
consequently decline.
- Our business model is unproven and depends on the willingness of
companies to participate in our business development model and
collaborate with each other and us.
- Our expenses will increase as we build the infrastructure necessary to
implement this model.
6
- We face competition from incubators, some of which are publicly traded
companies, venture capital companies and large corporations; many of
these competitors have greater financial resources and brand name
recognition than we do, which may make it difficult for us to
effectively compete.
- We will require additional capital resources in order to implement our
business model and we may not be able to obtain these resources on
attractive terms, if at all.
WE HAVE INVESTED IN EARLY STAGE VENTURES; AND THERE CAN BE NO ASSURANCE THAT OUR
INVESTMENTS WILL PROVE TO BE FINANCIALLY ATTRACTIVE.
We have developed and invested in Citadel, Parago and River Logic (our
"investees" or "investee companies"). Inasmuch as our investee companies are
early stage ventures, it is difficult to judge their future prospects. Economic,
governmental, industry and internal company factors outside of our control
affect each of our investee companies. A significant portion of our assets is
comprised of ownership interests in our investee companies. If our investee
companies do not succeed, the value of our assets will and decline.
CT HOLDINGS WILL NOT HAVE ACCESS TO THE CASH FLOW OR ASSETS OF CITADEL, AND MAY
BE UNABLE TO OPERATE PROFITABLY FOLLOWING THE DISTRIBUTION
Historically, since the businesses that comprise each of Citadel and CT Holdings
have been under one ultimate parent, they have been able to rely, to some
degree, on the earnings, assets and cash flow of each other for capital
requirements. After the Distribution, CT Holdings has not been able to rely on
the security software business for such requirements. Following the
Distribution, CT Holdings continues to maintain its own credit and banking
relationships and perform its own financial and investor relations functions.
Because a significant number of key employees of CT Holdings have been employed
by Citadel following the Distribution, there can be no assurance that CT
Holdings will be able to successfully put in place the financial, administrative
and managerial structure necessary to continue to operate as an independent
public company, or that the development of such structure will not require a
significant amount of management's time and other resources.
WE MAY INCUR SIGNIFICANT COSTS TO AVOID INVESTMENT COMPANY STATUS AND MAY SUFFER
OTHER ADVERSE CONSEQUENCES IF WE ARE DEEMED TO BE AN INVESTMENT COMPANY.
We may incur significant costs to avoid investment company status and may suffer
other adverse consequences if we are deemed to be an investment company under
the Investment Company Act of 1940. Some of our contemplated equity investments
in other businesses may constitute investment securities under the 1940 Act. A
company may be deemed to be an investment company if it owns investment
securities with a value exceeding 40% of its total assets, subject to certain
exclusions. Investment companies are subject to registration under, and
compliance with, the 1940 Act unless a particular exclusion or Securities and
Exchange Commission safe harbor applies. If we were to be deemed an investment
company, we would become subject to the requirements of the 1940 Act. As a
consequence, we would be prohibited from engaging in some businesses or issuing
our securities and might be subject to civil and criminal penalties for
noncompliance. In addition, certain of our contracts might be voided, and a
court-appointed receiver could take control of us and liquidate our business.
Following the Distribution of Citadel, we may be deemed to be an investment
company unless we qualify for a safe harbor within the time permitted under the
1940 Act.
Although we have yet to make any investments in the investment securities of
companies other than Citadel, Parago, River Logic and Encore, such investments,
if and when made, could fluctuate in value, which may cause the value of such
securities to exceed 40% of our total assets. Unless an exclusion or safe harbor
were available to us, we would have to attempt to reduce our investment
securities as a percentage of our total assets. This reduction could be
accomplished in a number of ways, including the disposition of investment
securities and the acquisition of non-investment security assets. If we were
required to sell investment securities, we may sell them sooner than we may
otherwise have preferred. These sales may be at depressed prices and we might
never realize anticipated benefits from, and may incur losses on, these
investments. Some investments may not be sold due to contractual or legal
restrictions or the inability to locate a suitable buyer. Moreover, we may incur
tax liabilities when we sell assets. We may also be unable to purchase
additional investment securities that may be important to our operating
strategy. If we decide to acquire non-investment security assets, we may not be
able to identify and acquire suitable assets and businesses.
7
WE HAVE A HISTORY OF NET LOSSES AND WILL NEED ADDITIONAL FINANCING TO CONTINUE
AS A GOING CONCERN.
We have incurred recurring operating losses and have a significant working
capital deficiency at December 31, 2002 of approximately $3.4 million and a
stockholders' deficit of approximately $3.4 million. Cash used in operations
was approximately $418,000 during the year ended December 31, 2002. There was
no cash balance at December 31, 2002. Immediate funding needs of the business
are expected to be provided by financings through advances, short-term notes
payable and additional investments from related parties although there can be no
assurance that such financing will be available or on terms favorable to the
Company.
We have been and continue to be dependent upon outside financing to perform our
business development activities, make investments in new technology companies
and to fund operations. During the year ended December 31, 2002, related
parties provided substantially all of this financing. The financings during the
year ended December 31, 2002 included proceeds of $600,000 from the issuance of
a convertible note to a shareholder and advances and proceeds of notes payable
from the Company's CEO, directors and other related parties. Future cash may
come from the realization of the value of our investments in Parago and River
Logic, although there can be no assurance that any value will ever be realized
from these investments.
Our strategy to support and expand business development activities will not
generate positive cash flow in the foreseeable future. The complete
implementation of this element of our strategy requires us to obtain additional
capital. Achieving positive cash flow is highly dependent upon obtaining
liquidity from the Company's investments in unconsolidated affiliates. We
estimate that we will need to raise $1.5 million to $3.8 million to settle
liabilities and support our incubator and business development activities
through the next twelve months. Historically, we have obtained short-term
bridge funding from our Chief Executive Officer and Directors of the Company.
While this may occur in the future there can be no assurance that such financing
will be available or if available with terms that we would be willing to accept.
We have made investments in entities that we believe may provide liquidity to
the Company in the long term. We believe that our investments in Parago and
River Logic have been successful however as expected in early stage companies,
neither Parago nor River Logic have been profitable and have experienced cash
flow deficiencies as they implement there respective business plans. The
current economic and geopolitical conditions are inhibiting the availability of
investment capital in early stage companies. We have not participated in the
additional capital infusions made in 2001 and 2002 and as a result our ownership
percentage has been diluted. Our ownership percentage in Parago is less than 1%
and approximately 8% in River Logic and the carrying values of both investments
have been written down to zero.
While we are pleased with the performance of the investee companies to date,
there can be no assurance that we will ever achieve liquidity for these
investments. In addition there can be no assurance that our plans will be
successful or what other actions may become necessary in the future. Until we
are able to create liquidity from our investments through sale to a strategic
investor, an initial public offering or some other liquidity transaction, we
will continue to require working capital to fund operating expenses. Although
we have been successful raising capital in the past, an inability to raise
capital may require us to sell assets or to further reduce the level of
operations. Such actions could have a material adverse effect on our business
and operations and result in charges that could be material to the Company's
business and results of operations.
OUR STOCK IS TRADED IN THE OVER THE COUNTER MARKET.
Our common stock was de-listed from the NASDAQ SmallCap Market on May 17, 2001,
because we did not meet the NASDAQ's requirements for continued listing. Our
common stock now trades on the OTC Bulletin Board maintained by the National
Quotation Bureau, Inc. The OTC Bulletin Board is generally considered to be a
less efficient market, and our stock price, as well as the liquidity of our
common stock, may be adversely impacted as a result.
8
WE ARE INVOLVED IN LEGAL PROCEEDINGS THAT COULD HAVE A MATERIAL ADVERSE EFFECT
ON OUR BUSINESS
We are involved in legal proceedings as described in Item 3. Legal Proceedings
and from time to time, we may be subject to other legal proceedings, including
but not limited to claims that we have infringed the intellectual property
rights of others, product liability claims, or other claims incidental to our
business. While we intend to defend such lawsuits, adverse decisions or
settlements, and the costs of defending such suits, could have a material
adverse effect on our business.
OUR EARNINGS AND STOCK PRICE ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS.
Due to the factors noted in this Report, our earnings and stock price have been
and may continue to be subject to significant volatility, particularly on a
quarterly basis. We have previously experienced shortfalls in revenue and
earnings from levels expected by investors, which have had an immediate and
significant adverse effect on the trading price of our common stock. This may
occur again in the future.
FAILURE TO QUALIFY AS A TAX-FREE TRANSACTION COULD RESULT IN SUBSTANTIAL
LIABILITY
CT Holdings and Citadel intend for the Distribution to be tax-free for U.S.
federal income tax purposes. Neither CT Holdings nor Citadel has requested an
advance ruling from the Internal Revenue Service, or any opinion of their tax
advisors, as to the tax consequences of the Distribution. No assurance can be
given that the Internal Revenue Service or the courts will agree that the
Distribution is tax-free.
If the Distribution does not qualify for tax-free treatment, a substantial
corporate tax would be payable by the consolidated group of which CT Holdings is
the common parent measured by the difference between (1) the aggregate fair
market value of the Citadel Shares on the Distribution Date and (2) CT Holdings'
adjusted tax basis in the Citadel Shares on the Distribution Date. The corporate
level tax would be payable by CT Holdings. However, Citadel has agreed under
certain circumstances to indemnify CT Holdings for all or a portion of this tax
liability. This indemnification obligation, if triggered, could have a material
adverse effect on the results of operations and financial position of Citadel.
In addition, under the applicable treasury regulations, each member of CT
Holdings' consolidated group (including Citadel) is severally liable for such
tax liability.
Furthermore, if the Distribution does not qualify as tax-free, each CT Holdings
stockholder who receives Citadel Shares in the Distribution would be taxed as if
he had received a cash dividend equal to the fair market value of his Citadel
Shares on the Distribution Date.
Even if the Distribution qualifies as tax-free, CT Holdings could nevertheless
incur a substantial corporate tax liability under Section 355(e) of the Internal
Revenue Code of 1986, as amended (the Internal Revenue Code or the Code), if CT
Holdings or Citadel were to undergo a change in control (whether by acquisition,
additional share issuance or otherwise) pursuant to a plan or series of related
transactions which include the Distribution. Any transaction which occurs within
the four-year period beginning two years prior to the Distribution is presumed
to be part of a plan or series of related transactions which includes the
Distribution unless CT Holdings establishes otherwise. Under certain
circumstances, Citadel would be obligated to indemnify CT Holdings for all or a
portion of this substantial corporate tax liability under the tax disaffiliation
agreement. This indemnification obligation would have a material adverse effect
on the results of operations and financial position of Citadel.
RISKS RELATED TO OUR INVESTEES
The following are some risks related to the business of Parago and River Logic,
our investees, and should be considered in addition to the risk factors
described in this Report. Any of these factors could have a material adverse
effect on us.
9
THERE CAN BE NO ASSURANCE THAT OUR INVESTEES WILL COMPLETE AN INITIAL PUBLIC
OFFERING OR OTHER LIQUIDITY EVENT.
There can be no assurance that any of our investees will complete an initial
public offering, merger, sale or other liquidity event. The failure to complete
an offering or other liquidity event such as an acquisition by a third party
could have a material adverse effect on our stock price. You cannot be assured
that an initial public offering or other liquidity event will occur in the near
future or ever at all. In addition, we have agreed to convert the shares of
Parago common stock issued in connection with the acquisition of 2-Lane Media by
Parago into up to 500,000 of our shares at the option of the 2-Lane Media
shareholders, and in May 2002 we exchanged 1,200 Parago shares held by some of
the 2-Lane Media shareholders into 139,806 shares of our common stock. Pursuant
to the terms of the subscription agreements between Parago and some of its
stockholders, we may be required to issue up to 414,000 shares of our common
stock based on a conversion price of $3.75 per share (above the fair market
value on the dates of issuance) at the option of such stockholders. In May 2002,
the Company exchanged 16,000 shares of the Company's common stock for 40 shares
of Parago common stock with one of these shareholders. These provisions could
have the effect of diluting our stockholders if the market price for our stock
is above that price at the time of conversion.
WE MAY NOT BE ABLE TO EFFECT THE DISTRIBUTION OF PARAGO SHARES.
We previously announced that we intend to distribute shares of Parago common
stock to our shareholders upon compliance with the Securities and Exchange
Commission (SEC) requirements applicable in connection with the proposed
distribution and upon the expiration of a 180 day lockup agreement between the
underwriters of Parago's previously proposed initial public offering and us. If
there are problems associated with compliance with SEC requirements or state
law, then the distribution of Parago shares may be delayed or may not occur.
There can be no assurance that we will complete the distribution on the proposed
terms or at all.
OUR INVESTEES' BUSINESSES AND FUTURE PROSPECTS ARE EXTREMELY DIFFICULT TO
EVALUATE BECAUSE THEIR OPERATING HISTORIES ARE VERY LIMITED AND THEIR BUSINESS
MODELS ARE NEW, UNPROVEN AND EVOLVING.
Our investees are early stage companies, therefore each investee has only a
limited operating history on which one can base an investment decision. You
should consider their prospects in light of the uncertainties and difficulties
frequently encountered by companies in their early stages of development.
In addition, each investee's business model is new, unproven and evolving. We
cannot assure that our investees' business models will be commercially
successful, or that their solutions will be accepted by businesses or consumers.
If our investees are unable to establish pricing and service models acceptable
to manufacturers, retailers and service providers and attractive to their
customers, their solutions may not be commercially successful.
EACH INVESTEE HAS A HISTORY OF NET LOSSES AND EXPECTS TO CONTINUE TO INCUR
SUBSTANTIAL NET LOSSES IN THE FUTURE.
Each investee had unaudited net losses for the year ended December 31, 2002, and
we anticipate that each investee will incur additional losses for the
foreseeable future. If our investees' revenues do not grow as they anticipate,
our investees may never be profitable.
TO CONTINUE THEIR OPERATIONS AND BUSINESSES, OUR INVESTEES MUST RAISE ADDITIONAL
FINANCING.
Our investees' ability to maintain and grow their businesses is dependent on
access to sufficient funds to support their working capital and capital
expenditure needs. If our investees do not raise additional funds, their
businesses and results of operations will be seriously harmed, and our assets
and share price would be materially and adversely impacted. This additional
financing may not be available to our investees on a timely basis if at all, or,
if available, on terms acceptable to our investees. Moreover, additional
financing may cause material and immediate dilution to existing stockholders of
our investees, including us.
10
IN THE EVENT OF THE COMPLETION OF AN INITIAL PUBLIC OFFERING BY ANY OF OUR
INVESTEES, THEIR STOCK PRICE IS LIKELY TO BE VERY VOLATILE.
Currently, the securities of our investees cannot be bought or sold publicly.
There can be no assurance that any of our investees will be able to complete an
initial public offering. Although it is anticipated that the initial public
offering price (if an initial public offering is completed) would be determined
based on several factors, the market price after the offering may vary
significantly from the initial offering price. The market price of our
investees' common stock is likely to be highly volatile and could be subject to
wide fluctuations in response to factors that are beyond its control. A decline
in their stock price will adversely affect our stock price.
Domestic and international stock markets often experience extreme price and
volume fluctuations. Market fluctuations, as well as general political and
economic conditions, such as a recession or interest rate or currency rate
fluctuations, could adversely affect the market price of Parago's common stock,
if it becomes publicly traded.
Sales of a substantial number of shares of our investees' common stock in the
public market after its initial public offering could depress the market price
of their common stock and could impair their ability to raise capital through
the sale of additional equity securities.
11
ITEM 2. DESCRIPTION OF PROPERTY
CT Holdings shares office space with Citadel Security Software and as part of
the transition services agreement will be charged a monthly administrative fee
of approximately $20,000 per month which includes the cost of the space. We
believe that these facilities will be sufficient to meet our needs for the
foreseeable future.
The telephone number of our principal office is (214) 520-9292. The Company
maintains a site at http://www.ct-holdings.com.
ITEM 3. LEGAL PROCEEDINGS
Set forth below are litigation matters to which we are a party. We believe that
we have meritorious defenses and will vigorously defend ourselves. However, an
unfavorable resolution of, settlement, or defense costs related to one or more
of these lawsuits could have a material adverse effect on our business, results
of operations or financial condition.
In October 2001, Roan-Meyers Associates (formerly Janssen Meyers Associates
L.P.) filed suit in the Supreme Court of the State of New York, County of New
York against CT Holdings, Inc. to enforce a settlement term sheet arising out of
a prior lawsuit alleging breach of a Placement Agency Agreement. This case is
styled Roan Meyers Associates v. CT Holdings, Inc. In August 1998,
Janssen-Meyers Associates L.P. ("JMA") filed a lawsuit against CT Holdings
arising out of an alleged 1995 contract with CT Holdings' predecessor. The suit
alleged that this predecessor breached a letter of intent dated September 1995
and/or a Placement Agency Agreement dated November 1995 between JMA and the
predecessor. As its damages, JMA claimed that it was entitled to, among other
things, the cash value of warrants to purchase 1.8 million shares of CT Holdings
common stock at an exercise price of $0.89 per share, valued during May 1996.
According to JMA's valuation of those warrants, potential damages were alleged
to exceed $40 million. CT Holdings vigorously disputes that it breached either
the letter of intent or the Placement Agency Agreement or that it is liable to
JMA. The lawsuit was styled Janssen-Meyers Associates, L.P. v. Citadel
Technology, Inc., and was filed in the Supreme Court of the State of New York,
County of New York. CT Holdings removed the case to federal court in the
Southern District of New York. Following mediation in July 2000, CT Holdings and
JMA entered into a settlement term sheet to attempt to resolve the disputes
between it and JMA, pursuant to which CT Holdings and JMA agreed in principle to
settle the lawsuit for an aggregate of $3 million, in a combination of $1.5
million in cash and 300,000 shares of common stock with a guaranteed value of $5
per share as of January, April and October 2001 (with respect to 100,000 of the
shares for each period). The settlement was subject to execution of definitive
settlement documents and approval of the boards of directors of the companies.
CT Holdings and JMA were unable to negotiate the final definitive settlement
agreement and, as a result, the matter was not settled. The case was dismissed
in August 2000 without any resolution of this issue. On March 27, 2001, JMA
attempted to reopen this matter, but the Court hearing the JMA lawsuit issued a
Summary Order denying JMA's motion to enforce the settlement term sheet and
confirmed the prior dismissal of the lawsuit. The Court further ruled that JMA
would either have to bring an action on the proposed settlement or move to
re-open the dismissed case. The Court stated that it did not express any view
with respect to the merits of the proposed settlement that brought about the
dismissal of the case. There was no activity on the case from March 2001 through
August 2001. On August 27, 2001 JMA refiled its lawsuit with a federal court in
New York, and CT Holdings filed a motion to dismiss the case because the
plaintiffs lacked the required diversity jurisdiction to pursue the claims in
federal court. On October 31, 2001 the case was dismissed in federal court. In
December 2001, the plaintiffs refiled the lawsuit in the state court seeking to
enforce the settlement term sheet. The case was filed in Supreme Court of New
York, that state's trial court, in a case styled Roan Meyers v. CT Holdings. CT
Holdings intends to vigorously defend against this lawsuit and has filed a
counterclaim to, among other things, recover excess amounts charged by JMA in
connection with related bridge loans. Trial has not been set on this matter and
the parties are conducting discovery through September 2003.
In June 2000, CT Holdings was served with a lawsuit filed in the 157th State
District Court in Houston, Texas by Michael and Patricia Ferguson for breach of
contract, breach of fiduciary duty, tortious interference, violation of the
Texas Deceptive Trade Practices Act and negligence. The case was styled Michael
and Patricia Ferguson v. CT Holdings, Inc. Specifically, the Fergusons claim
that they were damaged when they attempted to exercise warrants during a time
when CT Holdings' related registration statement could not be used. In July,
2002, the plaintiffs were awarded damages of $575,510, pre-judgment interest of
$86,748.20, attorneys' fees of $103,818.31, post-judgment interest at 10% per
year, and costs. CT Holdings appealed the judgment in a case styled CT Holdings
Inc. v. Michael and Patricia Ferguson in the Fourteenth Court of Appeals in
Houston, Texas. In January 2003, the plaintiffs filed a motion to have the
District Court appoint a receiver to sell assets to satisfy the judgment. In
April 2003 the parties
12
settled the lawsuit for $225,000 in cash, which was obtained from Citadel as a
demand note payable bearing interest at 12% per year.
In June 2000, Tech Data Corporation filed suit against CT Holdings, alleging a
breach of a Software Distribution Agreement ("the Agreement") with CT Holdings.
The lawsuit is styled Tech Data Corporation v. Citadel Technology, Inc. (now
known as CT Holdings), and was filed in Dallas County Court at Law No. 2.
Because CT Holdings was not properly served, Tech Data obtained a default
judgment for $101,048.53. When CT Holdings discovered the default judgment, it
filed and won a motion to set aside this judgment. In June 2001, Tech Data
properly served CT Holdings. CT Holdings answered and demanded binding
arbitration pursuant to the agreement. The parties filed a Joint Motion to
Arbitrate in December 2001. The judge granted this motion and abated the lawsuit
pending arbitration. The arbitration was held in 2002, and in January 2003, the
arbitrator entered a judgment of $71,655 against CT Holdings in favor of Tech
Data, together with pre-judgment interest at the applicable rate under Florida
law for the period from January 2, 2000 to January 10, 2003, attorneys' fees of
$3,500, and interest on these amounts in the amount of 10% per year from
February 10, 2003 until the amounts are paid. In March 2003, Tech Data filed a
motion to revive the abated lawsuit for purposes of entering the arbitration
award as a judgment in the case and judgment was entered. As part of the
Distribution, we anticipate that Citadel Security Software will assume
responsibility for this lawsuit, although there can be no assurance that we will
be released from the lawsuit.
In October 2002, S&S Public Relations Inc. filed a lawsuit against CT Holdings
and Steven B. Solomon, its CEO, alleging breach of contract and fraud, and
seeking damages in the amount of at least $25,214.97, along with exemplary
damages, attorneys' fees, court costs, and pre- and post-judgment interest. CT
Holdings intends to vigorously defend the case. The parties are currently
conducting discovery. The case is styled S&S Public Relations Inc. v. CT
Holdings and Steven B. Solomon, and was filed in the County Court at Law No. 4,
Dallas County, Texas.
In August 2002, Pricewaterhousecoopers, LLP filed a lawsuit against CT Holdings
seeking payment of $131,816 for services performed pursuant to a contract with
CT Holdings related to the JMA lawsuit described above. The court ordered that
mediation be held by July 2003, and CT Holdings is preparing for the mediation
and conducting discovery. CT Holdings intends to vigorously defend the case. The
case is styled Pricewaterhousecoopers, LLP v. CT Holdings, and was filed in the
192nd District Court, Dallas County, Texas.
We may become involved from time to time in litigation on various matters which
are routine to the conduct of our business. We believe that none of these
actions, individually or in the aggregate, will have a material adverse effect
on our financial position or results of operations, though any adverse decision
in these cases or the costs of defending or settling such claims could have a
material adverse effect on our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
13
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our common stock trades on the OTC Bulletin Board under the symbol CITN. Between
February 2000 and May 2001 our stock was traded on the NASDAQ SmallCap Market.
In May 2001 our stock was delisted from the NASDAQ SmallCap Market because we
did not meet the requirements for continued listing. The following table sets
forth, for the periods indicated, the high and low closing sale prices for the
Common Stock as reported by the NASDAQ and displayed on its website. The
quotations reflect inter-dealer prices, without retail markup, markdown or
commission, and may not represent actual transactions.
HIGH LOW
------ ------
YEAR ENDED DECEMBER 31, 2001
1st Quarter. . . . . $ 0.81 $ 0.28
2nd Quarter. . . . . 0.60 0.16
3rd Quarter. . . . . 0.42 0.17
4th Quarter. . . . . 0.58 0.26
YEAR ENDED DECEMBER 31, 2002
1st Quarter. . . . . $0.449 $0.208
2nd Quarter. . . . . 0.343 0.060
3rd Quarter. . . . . 0.070 0.026
4th Quarter. . . . . 0.030 0.006
At December 31, 2002 there were approximately 789 holders of common stock of the
Company. Holders of common stock are entitled to dividends when and if declared
by the Board of Directors out of funds legally available therefore. The Company
has never paid cash dividends on its Common Stock, and management intends, for
the immediate future, to retain any earnings for the operation and expansion of
the Company's business. Any future determination regarding the payment of
dividends will depend upon results of operations, capital requirements, the
financial condition of the Company and such other factors that the Board of
Directors of the Company may consider. The Company has issued preferred stock,
which entitles the holders thereof to preferences as to payment of dividends and
liquidation proceeds.
The stock option information shown below is not subject to a stock option plan
approved by shareholders.
Equity Compensation Plan Information
---------------------------------------------------------------------------------------------------------------------------
Number of
securities
remaining available
for future issuance
under equity
compensation plans
Number of securities to be issued Weighted-average exercise price (excluding
upon exercise of outstanding of outstanding options, warrants securities reflected
Plan category options, warrants and rights and rights in column (a))
----------------------------- --------------------------------- ----------------------------------- ---------------------
(a) (b) (c)
Equity compensation plans
approved by security holders. - - -
Equity compensation plans not
approved by security holders. 6,307,451 (1) $2.06 -
(1) Excludes common stock that may be issued in the event the Company's CEO
exercises a right to exchange 5,000,000 shares of Parago common stock for
6,000,000 shares of CT Holdings common stock.
Recent Sales of Unregistered Securities
None
14
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the financial
statements and notes thereto found elsewhere herein, as well as the disclosure
relating to forward-looking statements set forth above under the caption Factors
That May Affect Future Operating Results.
OVERVIEW
CT Holdings, Inc. provides management expertise and capital to early stage
companies. At December 31, 2002 we held investments in Parago and River Logic.
We were incorporated in Delaware in 1992 and previously operated under the name
Citadel Technology Inc. Our business model is designed to enable the companies
in whom we invest or acquire to become market leaders in their industries. Our
strategy has led to the development, acquisition and operation of primarily
technology based businesses with compelling valuations and strong business
models. We believe that the anticipated growth in technology creates strong
opportunities for us to increase shareholder value by investing in
well-positioned early stage ventures. Our goal is to realize the value of our
investments for our shareholders through a subsequent liquidity event such as a
spin-off, sale, merger or initial public offering of the investee companies.
In November 2001, as part of the execution of our strategy we announced the
spin-off of our subsidiary, Citadel, as a special dividend to our shareholders
(See "The Citadel Security Software Distribution and Discontinued Operations"
below). The distribution of the Citadel shares was completed on May 17, 2002,
the Distribution Date.
Recent geopolitical, economic and stock market conditions along with lack of
available capital have limited our ability to invest in additional companies and
technologies that could offer us and our shareholders a reasonable rate of
return on their investment in the foreseeable future. These factors have also
affected the businesses of our investee companies and as a result, the carrying
values of our investments in Parago and River Logic have been written down to
zero. We expect that if and when economic conditions improve that capital may
be available to support additional investments in companies that fit into our
strategy. Until such time the Company's business activities will be limited to
reviewing investment opportunities, filing of compliance documents and defending
the lawsuits disclosed in Item 3 - Legal Proceedings.
THE CITADEL SECURITY SOFTWARE DISTRIBUTION AND DISCONTINUED OPERATIONS
In November 2001, the board of directors of CT Holdings approved the spin-off of
Citadel through the declaration of a pro rata dividend distribution to the
holders of record of the outstanding shares of CT Holdings common stock (the
"Distribution"). The Distribution consisted of one (1) share of Citadel common
stock for every four (4) shares of CT Holdings (the Distribution Ratio) held by
CT Holdings shareholders as of May 6, 2002 (the "Record Date). Following the
Distribution on May 17, 2002 (the "Distribution Date"), Citadel became an
independent company and CT Holdings has no continuing ownership interest in
Citadel. The Distribution is intended to be a tax free distribution for U.S.
federal tax purposes although neither we nor Citadel have requested or obtained
any opinions as to the tax treatment of the Distribution. On the Distribution
Date, CT Holdings and Citadel entered into a series of agreements including a
distribution agreement, a transition services agreement and a tax disaffiliation
agreement which provide for, among other things, the principal corporate
transactions required to effect the Distribution, to provide for an orderly
transition to the status of two independent companies and to define the
continuing relationship between Citadel and CT Holdings after the Distribution.
After the Distribution, two of five directors of CT Holdings were directors of
Citadel and the Chief Executive Officer and the Chief Financial Officer of CT
Holdings hold the same positions with Citadel. It is expected that 20% to 33%
of the officers' time will be allocated to CT Holdings. All other employees of
CT Holdings became employees of Citadel following the Distribution. Under the
transition services agreement Citadel will provide accounting, administrative,
information management and other services, including the services of the two
officers, to CT Holdings in return for a payment of a monthly administrative fee
initially estimated at $20,000 per month. The fee may be adjusted quarterly
subject to a reallocation of the estimated time devoted to each company.
15
As a result of the Distribution, the financial statements and the results of
operations of Citadel are presented as discontinued operations in CT Holdings'
financial statements. Summary financial information with respect to Citadel is
provided below:
Period
January 1, 2002 Year Ended
Through May 17, 2002 December 31, 2001
---------------------- ------------------
Revenue $ 130,519 $ 580,039
Net loss (942,939) (1,865,981)
At December 31, 2001 summary balance sheet data of Citadel was as follows:
December 31, 2001
-----------------
Current assets $ 171,954
Current liabilities 1,107,647
Property and equipment, net 43,006
Capitalized software development costs 174,110
Stockholders' deficit (693,926)
OVERVIEW OF PARAGO
We began our business development activities in January 1999 with the formation
of Parago, Inc., an application service provider and Internet based business
process outsourcer that provides a suite of technology offerings (including
PromoCenter, ClickChoice and KnowledgeCenter) designed to increase sales, reduce
costs, and retain customers for retailers, manufacturers and service
organizations. Parago's continuous customer interaction services include online
promotional management (including online rebate processing), proactive email,
online surveys, and customer data analysis and reporting.
In connection with an acquisition by Parago in March 1999, we agreed to convert
the Parago shares of common stock issued in connection with the merger into a
maximum of 500,000 of our shares at the option of the shareholders of the
Company acquired by Parago. In May 2002 the Company exchanged 139,806 shares of
the Company's common stock for 1,200 shares of Parago common stock with some of
these shareholders. In addition, pursuant to the terms of the subscription
agreements between Parago and some of its stockholders, we may be required to
issue up to 414,000 shares of our common stock to such stockholders based upon a
conversion price of $3.75 per share. In May 2002, the Company exchanged 16,000
shares of the Company's common stock for 40 shares of Parago common stock with
one of these shareholders. These provisions could have the effect of diluting
our stockholders.
After a 1 for 1000 reverse stock split by Parago in connection with its Series E
preferred stock offering in December 2001 to February 2002, in which the Company
elected not to participate, the Company holds 20,000 shares of common stock of
Parago and warrants to purchase 28.8749 shares of Parago's Series A-3 Preferred
Stock (convertible into 2,887 shares of Parago's common stock) at December 31,
2002. In December 2001 Parago completed the first closing ($13.6 million) of an
equity financing of approximately $15.0 million. Approximately $1.4 million of
equity financing was closed in February 2002. As a result of the equity
financing our ownership percentage in Parago was reduced to less than 1%. Our
investment in Parago for the period from January 1, 2001 through December 12,
2001 was accounted for under the equity method of accounting for investments and
accordingly as a result of our ownership falling below 20%, has been accounted
for using the cost method of accounting since December 13, 2001. Under the cost
method of accounting, the Company's share of the income or loss from Parago is
not included in operations. Under the equity method of accounting, the Company's
share of the investee's income or losses is included in the statements of
operations. If the carrying value of the Company's net investment falls below
zero, the Company discontinues applying the equity method until the carrying
value of the net investment rises above zero. In addition, in the event the
Company's ownership percentage exceeds 20% and the value of the Company's equity
investment rises above zero, the Company will resume applying the equity method
16
and will recognize an investment in Parago after the Company's share of net
losses not recognized is recovered through our proportionate share of net income
if Parago turns profitable. While Parago continues to incur operational losses
we believe that our $50,000 investment in Parago represented by 20,000 shares of
Parago's common stock (plus 1,240 shares to be received from the exchanges in
May 2002) and warrants to purchase 28.8749 shares of Series A-3 preferred stock
(convertible into 2,887 shares of Parago common stock) may ultimately provide an
appropriate return.
OVERVIEW OF RIVER LOGIC
In May 2000, we made an investment in River Logic by acquiring shares of common
stock of River Logic from several of its existing shareholders in exchange for
333,333 shares of our common stock. We also acquired shares of Series A
Convertible Preferred Stock ("Series A") from River Logic in exchange for the
contribution of assets acquired from a third party by the Company through
exchange of 666,667 shares of our common stock. In connection with the
investment in River Logic, we also made two bridge loans totaling $600,000 to
River Logic that were convertible into shares of capital stock of River Logic.
Each of the bridge loans (i) bears interest at a rate of 12% per annum through
its first anniversary and at one percent above the prime rate per annum
thereafter, (ii) is secured by certain assets of River Logic, (iii) is payable
upon the Company's demand and (iv) is repayable by River Logic commencing on its
third anniversary date. In addition, we also incurred cash expenses for
professional fees related to these transactions and we issued 50,000 shares of
our common stock to a consultant for identifying this investment. After the
closing of the transaction the consultant became the Chief Operating Officer of
River Logic and we granted him 100,000 fully vested options to purchase our
common stock at $5 per share (which was above the fair market value at the date
of issuance).
In April 2001, River Logic received a strategic investment from the Intel 64
Fund, Cardinal Investment, Inc., eMed Ventures and Mercury Ventures, and the
Company converted $450,000 of the principal amount of the notes into shares of
the Series C Preferred Stock, and River Logic repaid the $216,000 balance of
these notes plus interest in April 2001. Since the Company's initial
investment, River Logic has made progress in executing its strategy through its
development and introduction of new products and establishment of new customer
relationships. Similar to the investments in Parago, the Company recognized
that this investment would be initially illiquid. However during the year ended
December 31, 2002 general economic conditions worsened, stock market valuations
declined from the values at December 31, 2001 and raising capital at previous
historical valuations became difficult. We considered all the facts and
circumstances of River Logic's business, marketplace and cost of new capital and
based on these considerations we determined that the fair market value of the
Company's investment in River Logic had been impaired and that our investment in
River Logic may never be realized. Accordingly we wrote down the carrying value
of our investment in River Logic to zero and recognized a writedown of
$2,703,975 during the year ended December 31, 2002. Our investment in River
Logic is accounted for using the cost method of accounting for investments in
common stock therefore no proportionate share of equity in income or loss is
recorded.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosure of contingent assets and liabilities. On an on
going basis, we evaluate our estimates, including those related to our
investments in our investee companies and commitments and contingencies. We
base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies are most important to the
presentation of our financial statements and require the most difficult,
subjective and complex judgments.
IMPAIRMENT CHARGES
We periodically evaluate the carrying value of our ownership interests in our
investee companies for possible impairment based on achievement of business plan
objectives and milestones, the value of each ownership interest in the investee
17
company relative to carrying value, the financial condition and prospects of the
investee company, and other relevant factors. The business plan objectives and
milestones we consider include, among others, those related to financial
performance such as achievement of planned financial results or completion of
capital raising activities, and those that are not primarily financial in nature
such as obtaining key business relationships or the hiring of key employees. If
an indication of impairment exists with respect to the carrying value of an
investee company, we perform an evaluation by comparing the estimated fair value
of the asset with its carrying value. Fair value is determined by estimating the
cash flows related to the asset, including estimated proceeds on disposition, if
any. If the fair value is less than the carrying value a loss is recorded.
COMMITMENTS AND CONTINGENCIES
From time to time, we are a defendant or plaintiff in various legal actions,
which arise in the normal course of business. We are also a guarantor of
various third-party obligations and commitments. We are required to assess the
likelihood of any adverse judgments or outcomes to these matters as well as
potential ranges of probable losses. A determination of the amount of reserves
required for these contingencies, if any, which would be charged to earnings, is
made after careful analysis of each individual issue. The required reserves may
change in the future due to new developments in each matter or changes in
circumstances, such as a change in settlement strategy. Changes in required
reserves could increase or decrease our earnings in the period the changes are
made.
EFFECT OF VARIOUS ACCOUNTING METHODS FOR EQUITY INVESTMENTS
The various interests that we acquire in our investee companies are accounted
for under three broad methods: consolidation, equity method and cost method.
The applicable accounting method is generally determined based on our percentage
ownership in an investee company.
CONSOLIDATION METHOD: Investee companies in which we directly or indirectly own
more than 50% of the outstanding securities or those where we have effective
control are generally accounted for under the consolidation method of
accounting. Under this method, an investee company's accounts are consolidated
within our financial statements. Participation of other unrelated stockholders
in the earnings or losses of a consolidated investee company would be reflected
as a minority interest in consolidated financial statements. Minority interest
adjusts our consolidated net results of operations to reflect only our share of
the earnings or losses of the consolidated investee company. At December 31,
2001 and December 31, 2002, we had no investee company qualified for this
accounting method.
EQUITY METHOD: Investee companies whose results we do not consolidate, but over
whom we exercise significant influence, are generally accounted for under the
equity method of accounting. Whether or not we exercise significant influence
with respect to an investee company depends on an evaluation of several factors
including, among others, representation on the investee company's board of
directors and percentage ownership level, which is generally a 20% to 50%
interest in the securities of the investee company, including our holdings in
common, preferred and other convertible instruments in the investee company
where we may have voting rights. Under the equity method of accounting, an
investee company's accounts are not reflected within our financial statements;
however, our share of the earnings or losses of the investee company is
reflected in our statements of operations.
COST METHOD: Investee companies not accounted for under either the
consolidation or the equity method of accounting are accounted for under the
cost method of accounting. Under this method, our share of the earnings or
losses of these companies is not included in our statements of operations.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
Our continuing operations consist of costs and expenses for providing services
to our investee companies and the activities to identify additional technologies
and companies in which we might invest. We do not generate any direct revenue
and because our investee companies are not consolidated, we do not report
revenue from investee businesses. Due to the spin-out distribution of Citadel
on May 17, 2002 the results of operations and the balance sheet of Citadel are
presented as discontinued operations in all periods presented prior to the
distribution date. Citadel's loss from operations from January 1, 2002 through
May 17, 2002 and for the year ended December 31, 2001 are presented as loss from
discontinued operations in the statements of operations.
18
Our investment in Parago prior to December 2001 was accounted for using the
equity method of accounting and as a result of recording our proportionate share
of net losses since our initial investment in 1999 our investment in Parago had
no carrying value. An additional investment in Parago in December 2001 by
unrelated third parties has caused our ownership percentage to fall below the
20% ownership threshold required to account for the investment under the equity
method and accordingly we record our investment in Parago using the cost method.
Our investment in River Logic is recorded using the cost method. During the
year 2002 River Logic raised an additional round of equity funds that we decided
to forego participation. River Logic raised approximately $1,500,000 and our
ownership percent dropped from approximately 12% at December 31, 2001 to
approximately 8% at December 31, 2002. Furthermore, in light of the valuation
of River Logic at the time of the new investment, River Logic's financial
performance and general economic and information technology industry conditions
caused us to re-evaluate the carrying value of our investment in River Logic.
Due to these factors we wrote down the carrying value of our investment by
$2,703,975 during the year ended December 31, 2002.
At December 31, 2001 we held an investment in Encore Telecommunications Inc.
represented by a note receivable from Encore that was subject to restructure
pursuant to a company reorganization. In October 2002 the assets in Encore
were sold and the Company was liquidated. We received proceeds of approximately
$2,000. Accordingly, we wrote off the $32,000 carrying value against the
liquidating proceeds.
Loss from continuing operations for the year ended December 31, 2002 includes
legal and administrative costs and the costs of shared personnel and office
costs allocated from Citadel under the transition services agreement entered
into as a part of the Distribution. Loss from continuing operations for the
year ended December 31, 2001 consists of the costs and expenses of maintaining
an office and legal and administrative expenses. For the periods prior to the
distribution date costs and expenses related to the Citadel security software
business have been allocated to Citadel based on an estimate of the proportion
of amounts allocable to Citadel utilizing such factors as revenues, number of
employees, and other relevant factors.
GENERAL AND ADMINISTRATIVE EXPENSES
We had general and administrative expenses for the years ended December 31, 2002
and 2001 of $909,838 and $735,379, respectively, an increase of $174,459 or 24%.
The increase in general and administrative expense is primarily a result of the
legal fees associated with ongoing legal matters and defense costs related to
the various legal claims and consulting fees associated with business
development and incubator activities.
COMMON STOCK ISSUED AS COMPENSATION
In May 2002 the Company issued 6,647,500 shares of common stock to employees and
directors of the Company pursuant to the exercise of stock options. The
aggregate exercise price of these stock options was approximately $1,347,000.
Notes receivable for $1,312,500 were received for the exercise price and
subsequently fully reserved and expensed as stock compensation expense. An
additional $34,500 was recorded as a stock bonus expense.
ACCRUAL FOR LITIGATION
In September 2000, CT Holdings was served with a lawsuit filed in state court in
Houston, Texas by Michael and Patricia Ferguson for breach of contract, tortious
interference and negligence. Specifically, the Fergusons claimed that they were
damaged when they attempted to exercise warrants during a time when CT Holdings'
related registration statement could not be used. CT Holdings continues to
believe that the claims asserted by the Fergusons are without merit and will
vigorously defend the claims. The trial in this case was held from April 22,
2002 until May 1, 2002, and the Company received the judgment from the trial
19
court in July 2002. The trial court awarded the Fergusons approximately $766,000
in damages, interest and legal fees. CT Holdings appealed the decision of the
trial court. Interest on the judgment accrues at a rate of 10% per annum and
accordingly the Company has recorded an additional $19,000 of interest expense
during the year ended December 31, 2002. As a result of the judgment, the
Company has recorded approximately $785,000 as a charge related to the
litigation pending appeal. In April 2003, we settled the lawsuit for a cash
payment in the amount of $225,000 and accordingly, we expect to reverse
approximately $560,000 of the accrual for the legal settlement in the second
quarter of 2003.
On November 11, 2002, CT Holdings was served with a lawsuit filed in the 192nd
District Court in Dallas, Texas by PriceWaterhouseCoopers LLP for breach of
contract and sworn account. The plaintiff claims that it is owed approximately
$132,000 plus interest and attorneys' fees related to services in connection
with the lawsuit filed by Janssen-Meyers described in the Report. Since CT
Holdings has only just received the lawsuit it has not yet engaged legal counsel
to review this lawsuit and accordingly has been unable to assess the merits of
the claims or the amount of liability, if any, at this time. No trial has been
set for the lawsuit.
REVERSAL OF LEGAL SETTLEMENT
In August 1998, Janssen-Meyers Associates L.P. (JMA) filed a lawsuit against the
Company arising out of an alleged 1995 contract with the Company's predecessor.
The suit alleged that this predecessor breached a letter of intent dated
September 1995 and/or a Placement Agency Agreement dated November 1995 between
JMA and the predecessor. As its damages, JMA claimed that it was entitled to,
among other things, the cash value of warrants to purchase of 1.8 million shares
of CT Holdings common stock at an exercise price of $0.89 per share valued
during May 1996. According to JMA's valuation of those warrants, potential
damages were alleged to exceed $40 million. The Company vigorously disputes that
it breached either the letter of intent or the Placement Agency Agreement or
that it is liable to JMA. The lawsuit was styled Janssen-Meyers Associates, L.P.
v. Citadel Technology, Inc., and was filed in the Supreme Court of the State of
New York, County of New York. We removed the case to federal court in the
Southern District of New York.
Following mediation in July 2000, the Company entered into a settlement term
sheet, to attempt to resolve the disputes between it and JMA, pursuant to which
the Company and JMA agreed in principle to settle the lawsuit for an aggregate
of $3 million, in a combination of $1.5 million in cash and 300,000 shares of
the Company's common stock with a guaranteed value of $5 per share as of
January, April and October 2001 (with respect to 100,000 of the shares for each
period). The settlement was subject to execution of definitive settlement
documents and approval of the boards of directors of the companies. As a result,
the Company recorded approximately $1,912,500 as a nonrecurring charge related
to the proposed settlement of the litigation.
The Company and JMA were unable to negotiate the final definitive settlement
agreement and, as a result, the matter is still not settled. The case was
dismissed in August 2000 without any resolution of this issue. On March 27,
2001, JMA attempted to reopen this matter, but the Court hearing the JMA lawsuit
issued a Summary Order denying JMA's motion to enforce the settlement term sheet
and confirmed the prior dismissal of the lawsuit. The Court further ruled that
JMA would either have to bring an action on the proposed settlement or move to
re-open the dismissed case. The Court stated that it did not express any view
with respect to the merits of the proposed settlement that brought about the
dismissal of the case. There was no activity on the case from March 2001
through August 2001. On August 27, 2001 JMA refiled its lawsuit with a federal
court in New York, and the Company filed its motion to dismiss the case because
the plaintiffs lacked the required diversity jurisdiction to pursue the claims
in federal court. On October 31, 2001 the case was dismissed in federal court.
In December 2001, the plaintiffs refiled the lawsuit in the state court seeking
to enforce the proposed settlement term sheet. The case was filed in Supreme
Court of New York, that state's trial court, in a case styled Roan Meyers v. CT
Holdings. Given these recent events, the Company is unable to estimate the
potential loss related to this matter and therefore has removed the previously
recorded accrual for legal settlement of $1,912,500. The Company has also filed
a lawsuit against JMA to recover excess amounts charged by JMA in connection
with related bridge loans.
WRITEDOWN OF INVESTMENT IN AFFILIATES
During the year ended December 31, 2002 general economic conditions worsened,
stock market valuations declined from the values at December 31, 2001 and
raising capital at previous historical valuations became difficult.
20
We considered all the facts and circumstances of River Logic's business
including its operating results, the spending trends and priorities by
corporations on information technology products and the cost of acquiring new
capital by an early stage company. Based on these factors we determined that the
fair market value of our investment in River Logic had been impaired and
recoverability was unlikely in the foreseeable future. Accordingly wrote down
the investment by $2,703,975. At December 31, 2001 we wrote down our investment
in River Logic by $360,000 to reflect the valuation determined by an equity
financing in River Logic during the year ended December 31, 2001.
In October 2002, the assets of Encore were sold and the company was liquidated.
Our share of the liquidating proceeds was approximately $2,000 and accordingly
we wrote down the investment by $30,000 during the year December 31, 2002.
INTEREST EXPENSE, INTEREST INCOME AND OTHER INCOME
Interest expense for the years ended December 31, 2002 and 2001 was $128,961 and
$9,255, respectively. The increase is due to higher average debt balances
outstanding during the three and nine month periods ended December 31, 2002 as
well as the recognition of $51,300 of interest expense in the year ended
December 31, 2002 associated with the beneficial conversion feature of the
$600,000 convertible note from a shareholder. In addition the Company is in
default on notes and advances from related parties bearing default interest at
18% per annum.
No interest income was earned in the year or year ended December 31, 2002.
Interest income for the years ended December 31, 2001 represented interest on
notes receivable from affiliates.
Other expense for the year ended December 31, 2002 was $27,346 and is net of a
$9,000 gain resulting from the issuance of common stock to settle a liability
and $38,452 for the fair market value of common stock issued for the exercise of
exchange rights granted by the Company.
NET LOSS
As a result of these factors, for the year ended December 31, 2002 we reported a
loss from continuing operations of $5,932,120 versus income from continuing
operations of $774,185 for the year ended December 31, 2001 . The loss from
discontinued operations related to Citadel for the period January 1, 2002 to May
17, 2002 and the year ended December 31, 2001 was $942,939 and $1,865,981,
respectively. In addition to the loss from discontinued operations we recorded
transaction costs directly related to the spin-off transaction, primarily, legal
and accounting fees, of $185,431 for the year ended December 31, 2002. No
transaction costs were recorded during the year ended December 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred recurring operating losses and have a significant working
capital deficiency at December 31, 2002 of approximately $3.4 million and a
stockholders' deficit of approximately $3.4 million. Cash used in operations was
approximately $418,000 during the year ended December 31, 2002. The Company has
no cash balance or current assets at December 31, 2002. Immediate funding needs
of the business are expected to be provided by financings through advances,
short-term notes payable and additional investments from related parties
although there can be no assurance that such financing will be available or on
terms favorable to the Company.
We have been and continue to be dependent upon outside financing to perform our
business development activities, make investments in new technology companies
and to fund operations. During the year ended December 31, 2002, related
parties provided substantially all of this financing. The financings during the
year ended December 31, 2002 included proceeds of $600,000 from the issuance of
a convertible note to a shareholder and advances and proceeds of notes payable
from the Company's CEO, directors and other related parties. Future cash may
come from the realization of the value of our investments in Parago and River
Logic, although there can be no assurance that any value will ever be realized
from these investments.
21
Our strategy to support and expand business development activities will not
generate positive cash flow in the foreseeable future. The complete
implementation of this element of our strategy requires us to obtain additional
capital. Achieving positive cash flow is highly dependent upon obtaining
liquidity from the Company's investments in unconsolidated affiliates. We
estimate that we will need to raise $1.5 million to $3.8 million to settle
liabilities and support our incubator and business development activities
through the next twelve months. Historically, we have obtained short-term
bridge funding from our Chief Executive Officer and Directors of the Company.
While this may occur in the future there can be no assurance that such financing
will be available or if available with terms that we would be willing to accept.
We have made investments in entities that we believe may provide liquidity to
the Company in the long term. We believe that our investments in Parago and
River Logic have been successful however as expected in early stage companies,
neither Parago nor River Logic have been profitable and have experienced cash
flow deficiencies as they implement there respective business plans. The
current economic and geopolitical conditions are inhibiting the availability of
investment capital in early stage companies. We have not participated in the
additional capital infusions made in 2001 and 2002 and as a result our ownership
percentage has been diluted. Our ownership percentage in Parago is less than 1%
and approximately 8% in River Logic and the carrying values of both investments
have been written down to zero.
While we are pleased with the performance of the investee companies to date,
there can be no assurance that we will ever achieve liquidity for these
investments. In addition there can be no assurance that our plans will be
successful or what other actions may become necessary in the future. Until we
are able to create liquidity from our investments through sale to a strategic
investor, an initial public offering or some other liquidity transaction, we
will continue to require working capital to fund operating expenses. Although
we have been successful raising capital in the past, an inability to raise
capital may require us to sell assets or to further reduce the level of
operations. Such actions could have a material adverse effect on our business
and operations and result in charges that could be material to the Company's
business and results of operations.
CT Holdings has no cash at December 31, 2002. The net cash used in operations
of approximately $418,000 for the year ended December 31, 2002 is principally a
result of the net loss of $7,060,490 offset by a net loss from discontinued
operations of $942,939, stock compensation expense of $1,347,000, a writedown of
our investment in affiliates of $2,733,975, a legal settlement accrual of
$785,000 and the changes in operating assets and liabilities of $747,843. In
the year ended December 31, 2001 net cash used in operating activities was
$112,714 primarily consisting of the net loss of $1,091,796 partially offset by
a net loss from discontinued operations of $1,865,981 partially offset by the
reversal of a legal settlement accrual in the amount of $1,912,500, the
writedown of River Logic investment of $360,000, the writedown of $98,000 for
the Encore note receivable to estimated realizable value and the changes in
operating assets and liabilities of $567,601.
There were no cash flows from investing activities in the year ended December
31, 2002. This compares to $738,560 of net cash provided from notes receivable
to related parties of $588,559 and payments from non related party notes
receivable of $150,000. Cash flows provided by financing activities was $618,466
for the year ended December 31, 2002, primarily resulting from the proceeds of a
convertible note from a shareholder of $600,000, proceeds of notes and advances
payable from related parties of $517,034 offset by payments on notes payable to
related parties of $533,034 and $25,000 in proceed from the sale of common
stock. For the year ended December 31, 2001, cash flows provided by financing
activities were $434,093 primarily resulting from the proceeds of notes payable
from a director of the Company for $250,000 and cash advances from the Company's
CEO for $290,330. Separately the Company repaid a note payable to an insurance
company of $27,501 and repaid advances to the Company's CEO of $126,029.
Proceeds of $47,293 from the exercise of warrants resulted in the issuance of
168,904 shares of the Company's common stock.
As a result of the aforementioned factors, net cash provided by continuing
operations was $200,132 and $1,059,939 for the years ended December 31, 2002 and
2001 respectively. The net contribution by CT Holdings to Citadel was $200,132
and $1,059,939 for the same periods, respectively. The net result was no cash
balance to the Company.
In the future, CT Holdings will incur expenses relating to corporate overhead
related to the execution of its business model and the operations of businesses
acquired. The Company will require cash from financing activities to fund the
deficits expected over the next year. The Company's operation requires the
Company to obtain additional capital. The Company will need to raise additional
capital to fund its incubator and business development activities through 2003
and the foreseeable future.
22
Historically, the Company obtained short-term bridge loans from its Chief
Executive Officer or Directors of the Company. The Company has been and
continues to be dependent upon related party financing to fund its business
development and incubator activities. During the years ended December 31, 2002
and 2001, related parties have provided substantially all financing and
management will continue to rely on related parties to fund future operations.
We may need to rely on similar funding from related parties for future funding
needs. While this may occur in the future there can be no assurance that such
financing will be available or if available, on terms the Company would be
willing to accept. There can be no assurance that management's plans for CT
Holdings incubator business model will be successful or what other actions may
become necessary. Although the Company has been successful raising capital in
the past, the inability of the Company to raise capital may require the Company
to sell assets or reduce the level of its operations. Such actions could have a
material adverse effect on the Company's investee companies, its business or
operations and may result in charges that could be material to the Company's
business and results of operations. The Company has no material purchase
commitments for property and equipment at December 31, 2002.
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements for the years ended December 31, 2002 and 2001 are
found following the signature page of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL MATTERS
On March 7, 2003 the Company filed a Report on Form 8-K to report a change in
accountants due to a merger of accounting firms. Effective March 1, 2003, King
Griffin & Adamson P.C. merged with BDA&K Business Services, Inc. and formed a
new entity, KBA Group LLP. The personnel that the Registrant has dealt with at
King Griffin & Adamson P.C. are now employees of KBA Group LLP. As a result of
this merger, on March 1, 2003, King Griffin & Adamson P.C. resigned to allow its
successor entity KBA Group LLP to be engaged as the Registrants independent
public accountants.
23
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
DIRECTORS The names of our directors, their principal occupations and the year
in which each current Director of CT Holdings, Inc. (the "Company") initially
joined the Board of Directors are set forth below.
NAME AGE POSITION WITH THE COMPANY DIRECTOR
------------------ --- ------------------------------------------------- --------
SINCE
--------
Steven B. Solomon 38 President, Chief Executive Officer, and Secretary 1992
Chris A. Economou 47 Director 1993
Mark Rogers 42 Director 1996
Dr. Axel Sawallich 57 Director 1993
STEVEN B. SOLOMON has served as President and Chief Executive Officer of CT
Holdings since May 1997 and as a director of CT Holdings since February 1996,
and as the President, Chief Executive Officer and a director of Citadel Security
since its formation in December 1996. Mr. Solomon also serves as a Director of
Parago, Inc., an incubation venture of CT Holdings that is an application
solution provider and Internet-based business process outsourcer that provides
an on-line suite of promotional offerings designed to automate promotional
management and optimize the customer care services offered by its clients, and
he served as Chairman of the Board of Directors of Parago from January 1999 to
April 2001, and Chief Executive Officer of Parago from January 1999 to August
2000. From February 1996 through April 1997, Mr. Solomon served as Chief
Operating Officer of CT Holdings. Since May 5, 2000, Mr. Solomon has also served
as a director of River Logic, Inc., an incubation venture of CT Holdings that
creates and operates integrated networks of decision support tools, elearning
solutions and ecommerce capabilities designed to enable decision makers to
leverage knowledge and information to gain competitive advantage. We anticipate
that Mr. Solomon devotes approximately 20-33% of his business time to CT
Holdings following the Citadel Distribution.
CHRIS A. ECONOMOU has served as a director of the Company since February 1996,
and was a director of LoneStar Hospitality Corp. from June 1993 until its merger
with the Company. Mr. Economou has been engaged in the private practice of law
in Fort Lauderdale, Florida, primarily in the transactional and corporate areas
since 1988. Mr. Economou also served as a director of Parago during its
incubation phase from January 1999 to February 2000. Mr. Economou serves as a
director of Citadel.
MARK ROGERS has served as a director of the Company since July 1996. Since 1989,
Mr. Rogers has served as a partner and Chief Operating Officer of NFT Ventures,
a venture capital fund established by Ray Noorda, the founder of Novell, Inc. In
connection with his position at NFT Ventures, Mr. Rogers advises several
computer software companies in Texas, Utah and Silicon Valley, with respect to
various strategic and developmental matters. Mr. Rogers also serves on the
boards of directors of CollegeLink.com Incorporated, an online college
application assistance company, and several other high-tech companies. Mr.
Rogers also served as a director of Parago during its incubation phase from
January 1999 to February 2000.
DR. AXEL SAWALLICH has served as a director of the Company since February 1996
and was a director of LoneStar from March 1993 until its merger with the
Company. Since January 1997, Dr. Sawallich has been chief investment consultant
for Lifeplan Investments, Vienna, Austria. Since 1993, he has been the managing
partner of Global Invest, an investment firm located in Vienna. From 1991 until
1994, he also was a consultant for Serco Investment Counseling Corporation. From
1989 to 1990, Dr. Sawallich was the general manager and director of the Vienna
regional branch of Allgemeine Sparkasse Bank AG. From 1985 to 1989, Dr.
Sawallich was with Bank fur Arbeit und Wirtschaft AG, Vienna, serving as the
deputy head of the credit department until 1986 and as the Executive Vice
President of the Bank's Bureau for Commercial Customers thereafter. Dr.
Sawallich has also been acting as an independent, publicly certified, investment
advisor since 1993.
There are no family relationships among any of the directors or executive
officers of the Company. See "Certain Relationships and Related Transactions"
for a description of transactions between the Company and its directors,
executive officers or their affiliates. Section 16(a) of the Exchange Act, as
amended, requires the Company's Directors, executive officers and persons who
own more than 10% of a registered class of the Company's equity securities to
file certain reports regarding ownership of the Company's Common Stock with the
24
SEC. These insiders are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file. To the Company's knowledge, based
solely on a review of the copies of the Section 16(a) forms furnished to the
Company during 2002, or written representations from certain reporting persons
that no Forms 5 were required for those persons, all Section 16(a) filing
requirements applicable to the Company's officers, Directors and beneficial
owners of more than 10% of the outstanding shares of Common Stock were filed on
a timely basis, other than a Form 3 for Mr. Billy Austin which was filed late
due to an administrative oversight.
EXECUTIVE OFFICERS
The executive officers of the Company as of March 31, 2001 are as follows:
NAME AGE POSITION WITH THE COMPANY
----------------- --- -------------------------------------------------
Steven B. Solomon 38 President, Chief Executive Officer, Secretary and
Director
Richard Connelly 51 Chief Financial Officer
STEVEN B. SOLOMON has served as President and Chief Executive Officer of CT
Holdings since May 1997 and as a director of CT Holdings since February 1996,
and as the President, Chief Executive Officer, and a director of Citadel
Security since its formation in December 1996. Mr. Solomon also serves as a
Director of Parago, Inc., an incubation venture of CT Holdings that is an
application solution provider and Internet-based business process outsourcer
that provides an on-line suite of promotional offerings designed to automate
promotional management and optimize the customer care services offered by its
clients, and he served as Chairman of the Board of Directors of Parago from
January 1999 to April 2001, and Chief Executive Officer of Parago from January
1999 to August 2000. From February 1996 through April 1997, Mr. Solomon served
as Chief Operating Officer of CT Holdings. Since May 5, 2000, Mr. Solomon has
also served as a director of River Logic, Inc., an incubation venture of CT
Holdings that creates and operates integrated networks of decision support
tools, elearning solutions and ecommerce capabilities designed to enable
decision makers to leverage knowledge and information to gain competitive
advantage. Mr. Solomon also serves as a director of Citadel. We anticipate that
Mr. Solomon devotes approximately 20-33% of his business time to CT Holdings
after the Citadel Distribution.
RICHARD CONNELLY joined the Company in March 2002 and serves as its Chief
Financial Officer. Mr. Connelly also serves as Chief Financial Officer of
Citadel Security Software. Prior to joining the Company, Mr. Connelly served as
a financial consultant to Citadel and CT Holdings from January 2002 until March
2002. Prior to this, he served as Chief Financial Officer for several venture
funded technology companies including from February 2000 until December 2000 at
ASSET InterTech, Inc. a boundary scan software tool developer, from September
1998 through November 1999 at JusticeLink, Inc., an ecommerce legal services
provider and from April 1997 through July 1998 at AnswerSoft, Inc. a developer
of computer telephony software. From February 1987 through March 1997 Mr.
Connelly served in various financial management capacities at Sterling Software
Inc., an enterprise software development company, including Vice President
Corporate Controller, Vice President Treasurer and Group Vice President Finance
& Administration of Sterling's Systems Management Group. We anticipate that Mr.
Connelly devotes approximately 20-33% of his business time to CT Holdings
following the Citadel Distribution.
25
ITEM 10. EXECUTIVE COMPENSATION
The table below sets forth certain information with respect to the annual and
long term compensation of the named executives for services to CT Holdings for
its chief executive officer and chief financial officer who are the only
officers of CT Holdings. See note 1 to the Summary Compensation Table for a
further description of how these officers are compensated.
SUMMARY COMPENSATION TABLE (1)
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------- --------------
OTHER SECURITIES
PERIOD ANNUAL UNDERLYING ALL OTHER
ENDED SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#) COMPENSATION ($)
------- ----------- ---------- ----------------- ------------- -----------------
Steven B. Solomon 12/2002 $200,000 $150,000 $0 2,000,000 (2) $48,887 ( 4 )
Chief Executive Officer 12/2001 200,000 150,000 0 5,000,000 (2) 17,548 ( 5 )
12/2000 140,000 120,500 0 0 12,619 ( 6 )
Richard Connelly 12/2002 $118,750 $ 0 $0 0 (3) $36,516 ( 7 )
Chief Financial Officer
(1) Since the Distribution on May 17, 2002 Messrs. Solomon and Connelly have
been employed by Citadel, also as Citadel's CEO and CFO, respectively.
During the year ended December 31, 2001 and the period from January 1, 2002
through May 17, 2002 compensation was paid by CT Holdings and has been
allocated to the operations of Citadel as if paid by Citadel. Pursuant to
the transition services agreement CT holdings is charged $20,000 per month
for the services of Messrs. Solomon and Connelly as CEO and CFO
respectively. Except for share information the compensation table presents
the total compensation paid by Citadel or allocated to CT Holdings for
Messrs. Solomon and Connelly as if CT Holdings had paid the entire amounts.
(2) Excludes 6,000,000 shares of CT Holdings common stock that may be issued in
the event Mr. Solomon exercises his right to exchange 5,000,000 shares of
Parago common stock.
(3) During the year 2002, Mr. Connelly was granted and exercised options to
acquire 250,000 shares of common stock of the Company.
(4) Includes a payment of $28,077 for unused vacation, a car allowance of
$11,400, and payments for life, health and disability insurance premiums.
(5) Includes a car allowance of $11,400 plus $6,048 for payments of life
insurance premiums.
(6) Includes a car allowance of $11,400 plus payments of life insurance
premiums.
(7) Includes $25,000 in cash payments plus $7,273 paid with 25,000 pre
Distribution shares of CT Holdings common stock in lieu of cash for
consulting services performed prior to employment as CFO for Citadel plus
payments of life, health and disability insurance premiums.
INDIVIDUAL GRANTS
----------------------------------------------------------------
PERCENT OF
NUMBER OF SECURITIES TOTAL OPTIONS EXERCISE
UNDERLYING OPTIONS GRANTED TO PRICE EXPIRATION
NAME GRANTED EMPLOYEES IN 2002 ($/SH) DATE
----------------- -------------------- ------------------ ---------- ----------
Steven B. Solomon 0 0.0% $ 0.00 -
Richard Connelly. 250,000 100.0% $ 0.32 03/16/2012
26
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
The following table describes, for each of the Named Executive Officers, options
exercised and the potential values for their unexercised in-the-money options at
December 31, 2002:
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS
SHARES AT FISCAL YEAR- AT FISCAL YEAR-
ACQUIRED ON VALUE END(EXERCISABLE/ END(EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE) UNEXERCISABLE)(2)
----------------- ----------- --------- -------------------- ------------------
Steven B. Solomon 3,000,000 $0 1,250,000 / 750,000 $0 / $0
Richard Connelly 250,000 $0 0 / 0 $0 / $0
(1) Based on the market price on the date exercised less the exercise price
payable for each share.
(2) Based on the fair market value of the Company's Common Stock (at December
31, 2002) per share less the exercise price payable for each share.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AGREEMENTS
The transition services agreement between Citadel and CT Holdings calls for the
sharing of the salaries and benefits of the CEO, CFO and some administrative
employees of Citadel that perform services for CT Holdings but whose payroll and
benefits are assigned to Citadel. The agreement allows for a cross charge to CT
Holdings of $20,000 per month representing an allocation of the payroll,
benefits and an allocation of overhead (includes rent and general office
expenses applied as a percentage of payroll & benefits) associated with the
shared employees.
Citadel and Mr. Solomon have entered into an employment agreement with Mr.
Solomon, Chief Executive Officer of Citadel. The annual base salary payable to
Mr. Solomon was $200,000 as of January 2002, and the employment agreement
provides for an annual bonus of $150,000. The employment agreement has an
initial term of five years and is renewable for one year terms following the
initial term unless terminated. If Mr. Solomon is terminated for any reason
other than for cause, he is entitled to a severance payment equal to three times
his base salary and up to three times his bonus.
27
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of April 9, 2003, there were issued and outstanding approximately 57,770,928
shares of Common Stock. There is no other class of voting security of the
Company issued or outstanding. The following table sets forth the number of
shares of the Company's Common Stock beneficially owned, as of April 9, 2003 by
(i) each person known to the Company to own more than 5% of the Common Stock of
the Company (the only class of voting securities now outstanding), (ii) each
director, (iii) each executive officer named in the Summary Compensation Table
and (iv) all directors, named executive officers and other executive officers as
a group. The number and percentage of shares beneficially owned is determined
in accordance with Rule 13d-3 of the Securities Exchange Act and the information
is not necessarily indicative of beneficial ownership for any other purpose.
Under this rule, beneficial ownership includes any shares to which the
individual has the right to acquire within 60 days of April 9, 2003 through the
exercise of any stock option or other right. Unless otherwise indicated in the
footnotes or table, each person or entity has sole voting and investment power
(or shares such powers with his or her spouse) with respect to the shares shown
as beneficially owned and has an address of c/o CT Holdings, 8750 North Central
Expressway, Suite 100, Dallas, Texas 75231.
NUMBER OF APPROXIMATE
PERCENT
NAME AND ADDRESS SHARES OWNED OF CLASS
----------------------------------------- ------------ ------------
Steven B. Solomon (1) . . . . . . . . . . 16,285,993 27. 9%
Richard Connelly. . . . . . . . . . . . . 275,000 *
Chris A. Economou . . . . . . . . . . . . 724,400 1.3%
150 North Federal Highway, Suite 210
Fort Lauderdale, Florida 33301
Mark Rogers . . . . . . . . . . . . . . . 651,500 1.1%
751 Laurel St. #19
San Carlos, California
Dr. Axel Sawallich. . . . . . . . . . . . 387,144 *
Beatrixgasse 3
1030 Vienna, Austria.
Lawrence Lacerte (2). . . . . . . . . . . 5,450,000 9.3%
5950 Sherry Lane
Dallas, Texas 75225
Thomas E. Oxley (3) . . . . . . . . . . . 6,244,800 10.7%
2727 South Ocean Blvd., #803
Highland Beach, FL 33487
All officers and directors
as a group (5 persons)(4) . . . . . . . 18,324,037 31.7%
* Less than 1%
(1) Includes 1,625,000 shares of Common Stock subject to fully vested options
and 375,000 shares of Common Stock subject to options vesting within 60
days of April 9, 2002. Includes 6,000,000 shares of CT Holdings common
stock that may be issued in the event Mr. Solomon exercises his right to
exchange 5,000,000 shares of Parago common stock.
(2) Includes 200,000 shares of Common Stock subject to fully vested options.
(3) During the first quarter of 2003, Mr. Oxley converted a $600,000 note
convertible note payable into 2,700,000 shares of common stock of the
Company. Since the issuance of all 2,700,000 would cause the number of
shares outstanding to exceed the authorized shares of 60,000,000, Mr. Oxley
has waived his right to these shares until such time as the shares become
authorized.
(4) Includes 2,000,000 shares issuable pursuant to presently exercisable
options or warrants and options or warrants exercisable within 60 days of
April 9, 2002 held by all directors and executive officers as a group,
and/or their affiliates, and 6,000,000 shares of CT Holdings Common Stock
that may be issued in the event Mr. Solomon exercises his right to exchange
5,000,000 shares of Parago common stock for shares of CT Holdings Common
Stock.
28
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a description of the material terms of the agreements and
arrangements involving the Company and its subsidiaries.
AGREEMENTS RELATING TO THE CITADEL SECURITY SOFTWARE DISTRIBUTION
We have entered into several agreements with Citadel to define our ongoing
relationship after the Distribution and to allocate tax and other specified
liabilities and obligations arising from periods prior to the distribution date.
We entered into these agreements prior to the Distribution while Citadel was a
wholly owned subsidiary of CT Holdings.
DISTRIBUTION AGREEMENT
On or before the Distribution Date, CT Holdings and Citadel entered into the
distribution agreement, which provides for, among other things, the principal
corporate transactions required to effect the Distribution and certain other
agreements relating to the continuing relationship between Citadel and CT
Holdings after the Distribution.
The distribution agreement provides that prior to the Distribution Date, Citadel
will have issued to CT Holdings a number of Citadel Shares equal to one fourth
of the total number of shares of CT Holdings common stock outstanding on the
Distribution Date (plus an additional immaterial number of Citadel Shares to be
distributed with respect to fractional shares that are rounded up). CT Holdings
effected the Distribution by delivering a certificate representing 100% of the
Citadel Shares to the Distribution Agent.
Under the distribution agreement and effective as of the Distribution Date,
Citadel assumed and agreed to indemnify CT Holdings against all liabilities,
litigation and claims, including related insurance costs, arising out of
Citadel's businesses (including discontinued or sold security software
businesses), and CT Holdings retained and agreed to indemnify Citadel against
all other liabilities, litigation and claims, including related insurance costs.
The foregoing obligations do not entitle an indemnified party to recovery to the
extent any such liability is covered by proceeds received by such party from any
third party insurance policy.
Under the distribution agreement for a two-year period beginning on the
Distribution Date, except in limited circumstances, Citadel will not solicit or
recruit any CT Holdings employee without CT Holdings' prior written consent and
likewise, CT Holdings will not solicit or recruit any Citadel employee without
Citadel's prior written consent.
The distribution agreement also provides that each of CT Holdings and Citadel
shall be granted access to certain records and information in the possession of
the other, and requires the retention by each of CT Holdings and Citadel for a
period of six years following the Distribution Date of all such information in
its possession.
TRANSITION SERVICES AGREEMENT
On the Distribution Date, Citadel entered into a transition services agreement
with CT Holdings. This agreement provides that CT Holdings and Citadel will
provide each other services in such areas as information management and
technology, sharing of office space, personnel and indirect overhead expenses,
employee benefits administration, payroll, financial accounting and reporting,
claims administration and reporting, and other areas where CT Holdings and
Citadel may need transitional assistance and support. The transition services
agreement provides generally that each of Citadel and CT Holdings will undertake
to provide substantially the same level of service and use substantially the
same degree of care as their respective personnel provided and used in providing
such services prior to the execution of the agreement. The agreement generally
will extend for a one year term, but may be terminated earlier under certain
circumstances, including a default, and may be renewed for additional one-year
terms. Initially, CT Holdings will pay Citadel a monthly fee of $20,000,
subject to adjustment on a quarterly basis. No adjustments to the fee have been
made through December 31, 2002. We believe that the terms and conditions of the
transition services agreement are as favorable to Citadel as those available
from unrelated parties for a comparable arrangement.
29
TAX DISAFFILIATION AGREEMENT
On the Distribution Date CT Holdings and Citadel entered into a tax
disaffiliation agreement which sets out each party's rights and obligations with
respect to deficiencies and refunds, if any, of federal, state, local or foreign
taxes for periods before and after the Distribution Date and related matters
such as the filing of tax returns and the conduct of Internal Revenue Service
and other audits. Under the tax disaffiliation agreement, Citadel will
indemnify CT Holdings for all taxes and liabilities incurred as a result of
Citadel's or an affiliate's post-Distribution action or omission contributing to
an Internal Revenue Service determination that the Distribution was not
tax-free. CT Holdings will indemnify Citadel for all taxes and liabilities
incurred solely because CT Holdings or an affiliate's post-Distribution action
or omission contributes to an Internal Revenue Service determination that the
Distribution was not tax-free. If the Internal Revenue Service determines that
the Distribution was not tax-free for any other reason, CT Holdings and Citadel
will indemnify each other against all taxes and liabilities pro rata based on
relative values as of the Distribution Date.
Citadel will indemnify CT Holdings against any taxes resulting from any internal
realignment undertaken to facilitate the Distribution on or before the
Distribution Date.
CT HOLDINGS' RELATED PARTY TRANSACTIONS
Mr. Solomon, our CEO, and a director, is also CEO, and a director of Citadel,
and a director of Parago and River Logic. Messrs. Lacerte and Romano, are
former directors of CT Holdings having resigned from the CT Holdings Board
effective with the Distribution. Messrs. Lacerte and Romano are former
directors of Citadel having resigned from the Citadel Board in October 2002.
Both are shareholders in Citadel and CT Holdings. Mr. Lacerte is also a former
director and shareholder of Parago. Mr. Romano served as a director of Encore
an investment that was liquidated in 2002.
During the years ended December 31, 2002 and 2001 CT Holdings received
substantially all of its financing from its CEO, directors and other related
parties. The related party transactions of CT Holdings are described below.
Other than transactions related to the agreements related to the Distribution
described above there were no transactions with Citadel following the
Distribution Date.
On January 1, 2001 CT Holdings had recorded a $1.2 million note receivable from
its CEO recorded on its balance sheet. This note was issued in October 2000 by
CT Holdings with approval from its board of directors. The note receivable was
due October 2001, bore interest at 5% per year and was repaid in full prior to
its maturity by cash payments of approximately $700,000 and by the offset of
approximately $506,000 in accrued salary and bonus due to him in 2001 pursuant
to his employment agreement.
In June 2001, the CEO loaned CT Holdings approximately $855,000 in connection
with CT Holdings' participation in a bridge loan transaction for Parago, an
affiliated company. Our CEO is also a director of Parago, and through several
transactions advanced approximately $4 million of his personal assets to Parago
for working capital needs all of which was repaid to him in payments in January
and April 2001.
During the years ended December 31, 2002 and 2001, CT Holdings incurred legal
fees in the amount of approximately $134,000 and $60,000 respectively to a law
firm in which David Wood, an attorney who was a former CT Holdings' employee and
is a relative of our CEO, is a partner. After leaving CT Holdings in 1997, his
law firm continued to provide legal services to CT Holdings. Mr. Wood was also
employed as an executive officer of Parago from March 1999 through October 2001
for which he had received an annual salary of $150,000 per year.
During the year ended December 31, 2001, CT Holdings issued an 8% note payable
to Mr. Lacerte for $250,000 and payable April 30, 2002. This note was unpaid at
December 31, 2002 and is in default. In May 2002, prior to the Distribution
Date, Mr. Lacerte exercised stock options for 2,250,000 shares of CT Holdings'
common stock by entering into a note payable to CT Holdings for $450,000, the
aggregate exercise price of the options.
At December 31, 2001 CT Holdings had a liability to its CEO of approximately
$290,000 for cash advances received to fund operations in 2001. From January 1,
2002 through the Distribution Date CT Holdings received approximately $267,500
of additional advances from its CEO, repaid $322,500 of the total advances to
its CEO and offset $8,934 of the CEO's business expenses against the net amount
due the CEO. The remaining amount due the CEO of approximately $226,000 was
30
converted by CT Holdings into a 5% note payable due July 1, 2002, and at
December 31, 2002 is in default and accruing interest at 18% per annum.
At December 31, 2001 CT Holdings had a $130,000 note receivable due from Encore.
CT Holdings' investment in Encore was liquidated in October 2002.
In June 2001, two directors, Messrs. Solomon and Lacerte, funded and guaranteed
CT Holdings' participation in a bank bridge loan financing of Parago. In
consideration for this funding and guarantees, CT Holdings has agreed to permit
the directors to exchange up to 5,000,000 Parago shares into up to 6,000,000
shares of CT Holdings' common stock including a right to any dividends. The
exercise of the exchange right will require Citadel to issue up to 1,500,000
shares of Citadel common stock.
On April 1, 2002, prior to the Distribution, CT Holdings entered into a $600,000
non-interest bearing convertible note payable due April 1, 2003 to Thomas Oxley,
a greater than 5% shareholder. Subsequent to December 31, 2002, the note payable
was converted by the shareholder into 2,700,000 shares of CT Holdings common
stock and 675,000 shares of Citadel common stock. Since the issuance of all
2,700,000 shares of CT Holdings common stock would cause the number of shares
outstanding to exceed the number of authorized shares of 60,000,000, the
shareholder waived his right to these shares until such time as the shares
become authorized.
In May 2002 Mr. Solomon exercised options for 3,000,000 shares of common stock
in exchange for a note in the amount of $600,000 and as noted above, Mr. Lacerte
exercised options for 2,250,000 shares of common stock in exchange for a note in
the amount of $450,000. In addition, options for 1,250,000 shares were
exercised in May 2002 for notes in the amount of $262,500 from officers, key
employees and consultants to the Company. The aggregate amount of all of the
notes for $1,312,500 was written off as stock compensation expense. In addition
options for 147,500 shares of common stock were exercised by an officer and key
employees of the Company for which the aggregate exercise price of $34,500 was
forgiven and recorded as stock compensation expense. The holders of these
shares received approximately 1,661,875 shares of Citadel common stock as a
result of the Distribution.
In May 2002, prior to the record date of the Distribution, CT Holdings entered
into negotiations to settle approximately $860,000 of operating liabilities in
exchange for 1,662,500 shares of CT Holdings common stock. As of December 31,
2002 the extinguishment of approximately $163,000 of these liabilities was
completed and approximately 612,500 shares of CT Holdings common stock was
issued including 100,000 shares for services provided by an independent
consultant, 12,500 shares to a consultant for services performed prior to
employment as the CT Holdings' and Citadel's Chief Financial Officer, 250,000
shares to a shareholder for consulting services, and 250,000 shares to David
Wood for the performance of professional services to the Company. At the
Distribution Date approximately 153,125 shares of Citadel common stock were
issued to these same individuals. At December 31, 2002 approximately $697,000
of CT Holdings operating liabilities were not yet settled with approximately
1,050,000 shares of the CT Holdings' common stock which if issued will require
Citadel to issue approximately 262,500 shares of Citadel common stock. We
believe that the negotiations will ultimately be concluded with the issuance of
the shares in full settlement of these liabilities however there can be no
assurance that such settlement will be finalized or on terms favorable to the
Company.
31
Our CEO, Steve Solomon advanced CT Holdings $290,330 in the year ended December
31, 2001.
As of December 31, 2001 CT Holdings also had a $130,000 note receivable due from
Encore that one of the Company's directors, Mr. Romano, also served on the board
of directors until its liquidation in October 2002.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as part of this Annual Report.
(b) REPORTS ON FORM 8-K
On March 7, 2003 the Company filed a Report on Form 8-K to report a change in
accountants due to a merger of accounting firms. Effective March 1, 2003, King
Griffin & Adamson P.C. merged with BDA&K Business Services, Inc. and formed a
new entity, KBA Group LLP. The personnel that the Registrant has dealt with at
King Griffin & Adamson P.C. are now employees of KBA Group LLP. As a result of
this merger, on March 1, 2003, King Griffin & Adamson P.C. resigned to allow its
successor entity KBA Group LLP to be engaged as the Registrants independent
public accountants.
ITEM.14. CONTROLS AND PROCEDURES
a) Evaluation of disclosure controls and procedures. Based on their evaluation
of the Company's disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date
within 90 days of the filing date of this Annual Report on Form 10-KSB, the
Company's chief executive officer and chief financial officer have concluded
that the Company's disclosure controls and procedures are designed to ensure
that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms and are
operating in an effective manner.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their most recent evaluation.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this Annual Report on
Form 10-KSB to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: April 15, 2003 CT HOLDINGS, INC.
By: /s/ STEVEN B. SOLOMON
-------------------------------------
STEVEN B. SOLOMON, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Steven B. Solomon his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
to sign any and all amendments to this Annual Report on Form 10-KSB and to file
the same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection therewith, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, or any of them, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
------------------------ ----------------------------------- --------------
/s/ STEVEN B. SOLOMON President, Chief Executive Officer April 15, 2003
------------------------ and Director
Steven B. Solomon (Principal Executive Officer)
/s/ RICHARD CONNELLY Chief Financial Officer April 15, 2003
------------------------ (Principal Accounting Officer)
Richard Connelly
/s/ CHRIS A. ECONOMOU Director April 15, 2003
------------------------
Chris A. Economou
/s/ MARK ROGERS Director April 15, 2003
------------------------
Mark Rogers
/s/ DR. AXEL SAWALLICH Director April 15, 2003
------------------------
Dr. Axel Sawallich
33
CERTIFICATIONS
I, Steven B. Solomon, Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-KSB of CT Holdings, Inc., a
Delaware corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 15, 2003
/s/ STEVEN B. SOLOMON
---------------------
Steven B. Solomon, Chief Executive Officer
Principal Executive Officer
34
I, Richard Connelly, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-KSB of CT Holdings, Inc., a
Delaware corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 15, 2003
/s/ RICHARD CONNELLY
--------------------
Richard Connelly, Chief Financial Officer
Principal Financial Officer
35
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1 Second Amended and Restated Plan of Merger, dated February 29, 1996,
by and between LoneStar Hospitality Corporation, LSHC Acquisition,
Inc. and Citadel Computer Systems Incorporated (without exhibits)
(incorporated by reference to Exhibit 2.1 of the Company's Current
Report on Form 8-K dated February 29, 1996).
2.2 Purchase and Sale Agreement, dated March 1, 1996, by and between the
LoneStar Hospitality Corporation, LS Holding Corp. and Miami Subs USA,
Inc. (without exhibits) (incorporated by reference to Exhibit 2.2 of
the Company's Current Report on Form 8-K dated February 29, 1996).
2.3 Technology Transfer Agreement, by and between LoneStar Hospitality
Corporation and Circuit Masters Software, Inc., dated February 29,
1996 (without exhibits) (incorporated by reference to Exhibit 2.3 of
the Company's Current Report on Form 8-K dated February 29, 1996).
2.4 Technology Transfer Agreement, by and between the Company and Bill
Mulvany, dated February 29, 1996 (without exhibits) (incorporated by
reference to Exhibit 2.4 of the Company's Current Report on Form 8-K
dated February 29, 1996).
2.5 Technology Transfer Agreement, by and between the Company and Kim
Marie Newman, dated February 29, 1996 (without exhibits) (incorporated
by reference to Exhibit 2.5 of the Company's Current Report on Form
8-K dated February 29, 1996).
2.6 Agreement, by and between the Company, Circuit Masters Software, Inc.,
Patrick William Mulvany and Kim Marie Newman, dated May 16, 1996,
effective as of February 29, 1996 (incorporated by reference to
Exhibit 2.6 of the Current Report on Form 8-K/A filed with the
Securities and Exchange Commission on June 10, 1996).
3.1 Certificate of Incorporation (incorporated by reference to the
registration statement on Form S-1, File No. 33-25462, for Apollo
Resources, Inc., on November 10, 1988, and declared effective January
4, 1989).
3.3 Certificate of Amendment to Certificate of Incorporation filed with
the Delaware Secretary of State on June 4, 1990 (incorporated by
reference to Exhibit 3.2 of the Company's Annual Report on Form 10-KSB
for the fiscal year ended February 29, 1996).
3.3 Bylaws (incorporated by reference to the registration statement on
Form S-1, File No. 33-25462, filed with the Securities and Exchange
Commission on November 10, 1988).
3.4 Certificate of Amendment to Certificate of Incorporation filed with
the Delaware Secretary of State on October 15, 1991 (incorporated by
reference to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1991).
3.5 Certificate of Amendment to Certificate of Incorporation filed with
the Delaware Secretary of State on July 20, 1994 (incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the
year June 30, 1994).
3.6 Certificate of Amendment to Certificate of Incorporation filed with
the Delaware Secretary of State on December 11, 1995 (incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the
year December 31, 1995).
3.7 Certificate of Amendment to Certificate of Incorporation filed with
the Delaware Secretary of State on May 1, 1996 (incorporated by
reference to Exhibit 3.7 of the Company's Annual Report on Form 10-KSB
for the fiscal year ended February 29, 1996).
36
3.8 Certificate of Designations of Series A Preferred Stock. (incorporated
by reference to Exhibit 4 of the Company's Quarterly Report on Form
10-QSB for the fiscal year May 31, 1996).
3.9 Certificate of Designations of Series B Preferred Stock (incorporated
by reference to Exhibit 4.2 of the Company's Quarterly Report on Form
10-QSB for the fiscal year August 31, 1996).
3.10 Certificate of Amendment to Certificate of Incorporation filed with
the Delaware Secretary of State on February 27, 1998 (incorporated by
reference to Exhibit 4.2 of the Company's registration statement on
Form S-8 filed May 20, 1998, File No. 333-53131).
3.11 Certificate of Designations of Series C Preferred Stock (incorporated
by reference to Exhibit 4.6 of the Company's registration statement on
Form S-8 filed May 20, 1998, File No. 333-53131).
3.12 Certificate of Designations of Series D Preferred Stock (incorporated
by reference to Exhibit 4.8 of the Company's registration statement on
Form S-8 filed May 20, 1998, File No. 333-53131).
3.13 Certificate of Designations of Series E Preferred Stock (incorporated
by reference to Exhibit 4.7 of the Company's registration statement on
Form S-8 filed May 20, 1998, File No. 333-53131).
3.14 Certificate for Renewal and Revival of Charter filed with the Delaware
Secretary of State on October 29, 1999. (incorporated by reference to
Exhibit 3.14 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended February 29, 2000).
10.1 Employment Agreement dated July 15, 1997, by and between the Company
and Steven Solomon (incorporated by reference to Exhibit 10.1 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
February 28, 1998).
10.2 Stock Purchase Agreement, dated August 16, 1996, among the Company,
Kent- Marsh Ltd., Inc., Bob Wesolek and Vance Nesbitt. (incorporated
by reference to Exhibit 2.1 of the Company's Current Report on Form
8-K filed September 3, 1996).
10.3 Stock Purchase Agreement, dated August 16, 1996, among the Company,
Astonishing Developments, Inc., Bob Wesolek and Vance Nesbitt
(incorporated by reference to Exhibit 2.2 of the Company's Current
Report on Form 8-K filed September 3, 1996).
10.4 Agreement, dated April 11, 1997, among the Company, George Sharp and
Gil Gertner (incorporated by reference to Exhibit 99.1 of the
Company's Current Report on Form 8-K filed April 11, 1997).
10.5 Form of Offshore Securities Subscription Agreement, Convertible Notes,
Warrants and Registration Rights Agreement between the Company and
First Bermuda Securities Limited (incorporated by reference to
Exhibits 99.1 through 99.4 of the Company's Current Report on Form 8-K
filed March 26, 1997).
10.6 Form of Offshore Securities Subscription Agreement, Convertible Notes,
Warrants and Registration Rights Agreement between the Company and
Willora Company Ltd. (incorporated by reference to Exhibits 99.1
through 99.4 of the Company's Current Report on Form 8-K filed April
28, 1997).
10.7 Form of Offshore Securities Subscription Agreement, Convertible Notes,
Warrants and Registration Rights Agreement between the Company and
Silenus Ltd. (incorporated by reference to Exhibits 99.1 through 99.4
of the Company's Current Report on Form 8-K filed June 24, 1997).
37
10.8 Purchase Agreement between the Company and CORESTAFF, Inc., dated
October 6, 1997 (incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
February 28, 1997).
10.9 Warrant to Purchase Common Stock of the Company issued to Worldwide
PetroMoly Inc. (incorporated by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
February 28, 1997).
10.10 Series D Preferred Stock Purchase Agreement between the Company and
METAMOR WORLDWIDE, Inc., dated May 15, 1998 (incorporated by reference
to Exhibit 10.12 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended February 28, 1998).
10.11 Stock Purchase Agreement between the Company and Precision Capital
Limited Partnership I, dated April 30, 1998 (incorporated by reference
to Exhibit 10.13 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended February 28, 1998).
10.12 Stock Purchase Agreement between the Company and Icarus Investments
I, Ltd., dated May 27, 1998 (incorporated by reference to Exhibit
10.14 to the Company's Annual Report on Form 10-KSB for the fiscal
year ended February 28, 1998).
10.13 Stock Purchase Agreement, dated March 11, 1999, among inLighten.com,
Inc., 2-Lane Media, Inc., and the shareholders of 2-Lane Media,
Inc.(incorporated by reference to Exhibit 10.15 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended February 28,
1999).
10.14 Stock Purchase Agreement, dated May 20, 1999, among inLighten.com,
Inc., Forward Communications, Inc., FCI Services Inc., and the
shareholders of Forward Communications, Inc. and FCI Services Inc.
(incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K filed June 3, 1999).
10.15 Agreement and Plan of Reorganization, dated May 20, 1999, among
inLighten.com, Inc., Forward Freight, Inc., and the shareholders of
Forward Freight Inc. (incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed June 3, 1999).
10.16 Settlement and Release Agreement dated January 14, 2000 by and among
Richard L. Travis, How2.com, Inc. and the Company (incorporated by
reference to Exhibit 10.18 to Post-Effective Amendment No. 1 to the
Company's Registration Statement on Form SB-2 filed March 23, 2000).
10.17 Settlement and Release Agreement dated March 1, 2000 by and among
Bennett Klein and the Company (incorporated by reference to Exhibit
10.19 to Post-Effective Amendment No. 1 to the Company's Registration
Statement on Form SB-2 filed March 23, 2000).
10.18 Standard Office Lease, dated August 2, 1999, between Arden Realty
Limited Partnership and How2HQ.com, Inc. (Santa Monica, California).
(incorporated by reference to Exhibit 10.18 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended February 29, 2000).
10.19 Guaranty of Lease, dated August 2, 1999, by the Company to Arden
Realty Limited Partnership, with respect to certain obligations of
How2HQ.com, Inc. under Standard Office Lease. (incorporated by
reference to Exhibit 10.19 to the Company's Annual Report on Form
10-KSB for the fiscal year ended February 29, 2000).
38
10.20 Promissory Note dated September 30, 1999 payable to How2HQ.com, Inc.
(incorporated by reference to Exhibit 10.20 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended February 29, 2000).
10.21 Asset Purchase Agreement dated as of May 5, 2000 by and between EBSCO
CASIAS, Inc., iNetze.com, Inc., ESRN Acquisition, LLC and the Company
(incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K filed June 12, 2000).
10.22 Asset Contribution Agreement dated as of May 5, 2000 by and between
iNetze.com, Inc., ESRN Acquisition, LLC, the Company and the
stockholders set forth on the signature pages attached hereto
(incorporated by reference to Exhibit 2.2 to the Company's Current
Report on Form 8-K filed June 12, 2000).
10.23 Stock Purchase Agreement dated as of May 5, 2000 by and between the
Company, Tim Collins, F. Shanahan McAdoo and Robert C. Whitehair
(incorporated by reference to Exhibit 2.3 to the Company's Current
Report on Form 8-K filed June 12, 2000).
10.24 Form of Plan and Agreement of Distribution between the Company and
Citadel Security Software Inc.
10.25 Form of Tax Disaffiliation Agreement between the Company and Citadel
Security Software Inc.
10.26 Form of Transition Services Agreement between the Company and Citadel
Security Software Inc.
21 Subsidiaries of the Company (incorporated by reference to Exhibit 21
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended February 29, 2000).
*23.1 Consent of KBA Group LLP.
39
INDEX TO FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants. . . . . . . . . . . F-2
Balance Sheets as of December 31, 2002 and 2001 . . . . . . . . . . . . F-3
Statements of Operations for the years ended December 31, 2002 and 2001 F-4
Statements of Stockholders' (Deficit) Equity for the years ended
December 31, 2002 and 2001. . . . . . . . . . . . . . . . . . . . . F-5
Statements of Cash Flows for the years ended
December 31, 2002 and 2001. . . . . . . . . . . . . . . . . . . . . F-6
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . F-7
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
CT Holdings, Inc.
We have audited the accompanying balance sheets of CT Holdings, Inc. (the
Company) as of December 31, 2002 and 2001, and the related statements of
operations, stockholders' (deficit) equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CT Holdings, Inc. as of
December 31, 2002 and 2001, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note A,
the Company has incurred recurring operating losses and has a significant
working capital deficiency at December 31, 2002. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note A. The
financial statements do not include any adjustments that may result from the
outcome of this uncertainty.
/s/KBA Group LLP
Dallas, Texas
March 14, 2003, except for paragraph 6 of Note H for which the date is
April 3, 2003.
F-2
CT HOLDINGS, INC.
BALANCE SHEETS
DECEMBER 31,
2002 2001
--------------- --------------
ASSETS
------
INVESTMENT IN UNCONSOLIDATED AFFILIATES $ - $ 2,735,975
NET LONG-TERM ASSETS OF DISCONTINUED OPERATIONS - 241,767
--------------- --------------
$ - $ 2,977,742
=============== ==============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
----------------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,344,051 $ 911,333
Payable to Citadel 150,000 -
Advances and notes payable to related parties 524,796 540,330
Notes payable to shareholders 609,000 -
Accrual for legal settlement 785,000 -
Net current liabilities of discontinued operations - 935,693
--------------- --------------
Total current liabilities 3,412,847 2,387,356
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' (DEFICIT) EQUITY
Preferred stock, $.01 par value per share;
1,000,000 shares authorized; no shares issued
at December 31, 2002 and 2001
Common stock, $.01 par value per share;
60,000,000 shares authorized; 57,545,928
and 53,994,221 shares issued at
December 31, 2002 and 2001 575,460 539,943
Additional paid-in capital 56,950,601 56,429,100
Accumulated deficit (60,938,908) (53,878,418)
Treasury stock, at cost (4,164,613 shares) - (2,500,239)
--------------- --------------
Total stockholders' (deficit) equity (3,412,847) 590,386
--------------- --------------
$ - $ 2,977,742
=============== ==============
The accompanying notes are an integral part of these financial statements.
F-3
CT HOLDINGS, INC.
STATEMENTS OF OPERATIONS
Years Ended
December 31,
2002 2001
----------- ------------
Revenue $ - $ -
General and administrative expense 909,838 735,379
Common stock issued as compensation 1,347,000 -
Reversal of legal settlement - (1,912,500)
Accrual for litigation 785,000 -
Writedown in investments of affiliates 2,733,975 360,000
Writedown of note receivable from affiliate - 98,000
Interest expense 128,961 9,255
Interest income - (64,319)
Other expense 27,346 -
----------- ------------
Income(Loss) from continuing operations (5,932,120) 774,185
Costs incurred in connection with
spin-off of subsidiary (185,431) -
Loss from discontinued operations (942,939) (1,865,981)
----------- ------------
Net loss $(7,060,490) $(1,091,796)
=========== ============
Net loss per share - basic and diluted
Continuing operations $ (0.11) $ 0.02
Discontinued operations (0.02) (0.04)
----------- ------------
$ (0.13) $ (0.02)
=========== ============
Weighted average shares outstanding -
basic and diluted 55,078,095 49,733,710
=========== ============
The accompanying notes are an integral part of these financial statements.
F-4
CT HOLDINGS, INC.
STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
Common Stock
--------------------------
Additional Accumulated Treasury
Shares Amount Paid-in Capital Deficit Stock Total
----------- ------------- --------------- --------------- --------------- -------------
Balances at December 31, 2001 53,825,317 $ 538,254 $ 56,383,496 $ (52,786,622) $ (2,500,239) $ 1,634,889
Issuance of common stock
pursuant to the exercise of
warrants 168,904 1,689 45,604 47,293
Net loss (1,091,796) (1,091,796)
----------- ------------- --------------- --------------- --------------- -------------
Balances at December 31, 2001 53,994,221 539,943 56,429,100 (53,878,418) (2,500,239) 590,386
Sale of common stock 100,000 1,000 24,000 25,000
Issuance of common stock
pursuant to the exercise
of stock options in exchange
for notes receivable which
were simultaneously fully
reserved and recorded as
compensation expense 6,500,000 65,000 1,247,500 1,312,500
Issuance of common stock
pursuant to the exercise
of stock options recorded as
compensation expense 147,500 1,475 33,025 34,500
Common stock issued in lieu of cash
for settlement of liabilities
and for services 625,000 6,250 152,023 158,273
Common stock issued in
exchange for shares of
an affiliate 155,806 1,558 37,393 38,951
Cancellation of treasury shares (4,164,613) (41,646) (2,458,593) 2,500,239 -
Beneficial conversion feature of
convertible debt 51,300 51,300
Net stockholders' deficit of
subsidiary at date of spin-off 1,436,733 1,436,733
Other 188,014 1,880 (1,880) -
Net loss (7,060,490) (7,060,490)
----------- ------------- --------------- --------------- --------------- --------------
Balances at December 31, 2002 57,545,928 $ 575,460 $ 56,950,601 $ (60,938,908) $ - $ (3,412,847)
=========== =========== =============== =============== =============== ==============
The accompanying notes are an integral part of these financial statements.
F-5
CT HOLDINGS, INC.
STATEMENTS OF CASH FLOWS
Years Ended
December 31,
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(7,060,490) $(1,091,796)
Less net loss from discontinued operations 942,939 1,865,981
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for loss on accounts receivable from affiliate - 98,000
Common stock issued as compensation 1,347,000 -
Beneficial conversion feature of convertible debt
recognized as interest expense 51,300 -
Writedown of investment in affiliate 2,733,975 360,000
Adjustment for participation in debt financing
guarantee of affiliate - -
Accrual for legal settlement 785,000 -
Reversal of accrual from legal settlement - (1,912,500)
Common stock and options issued in lieu of
cash for services 4,148 -
Other non-cash expense 29,951 -
Changes in operating assets and liabilities
Accounts receivable - 45,249
Other 2,000 -
Accounts payable and accrued expenses 595,843 522,352
Payable to Citadel 150,000 -
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (418,334) (112,714)
CASH FLOWS FROM INVESTING ACTIVITIES
Notes receivable with related parties - 588,560
Notes receivable - 150,000
------------ ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES - 738,560
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable - (27,501)
Proceeds from notes payable - 250,000
Proceeds from notes payable to shareholders 609,000 -
Proceeds from advances and notes payable
to related parties 517,500 290,330
Payments on advances and notes payable
to related parties (533,034) (126,029)
Proceeds from sale of common stock 25,000 47,293
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 618,466 434,093
Net cash provided by continuing operations 200,132 1,059,939
Net cash used by discontinued operations (200,132) (1,059,939)
------------ ------------
Net change in cash - -
Cash and cash equivalents at the beginning of the year - -
------------ ------------
Cash and cash equivalents at the end of the year $ - $ -
============ ============
NON-CASH INVESTING AND FINANCING ACTIVITIES: During the year ending December 31,
2002 the Company issued 625,000 shares of common stock to settle $158,273 of
liabilities and exchanged 155,806 shares of common stock for shares of common
stock of an affiliate expensing $38,951 representing the fair value of the
common stock issued. During the year ending December 31, 2001, the Company
converted $450,000 of notes receivable from River Logic into River Logic
preferred stock and a $130,000 note receivable from Encore into an investment
in Encore with a fair value of $32,000.
The accompanying notes are an integral part of these financial statements.
F-6
CT HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
CT Holdings, Inc. (the "Company" or "CT Holdings") provides management expertise
including consulting on operations, marketing and strategic planning and a
single source of capital to early stage technology companies. The Company was
incorporated in Delaware in 1992. The business model is designed to enable the
companies with whom the Company acquires or invests to become market leaders in
their industries. The strategy over the years has led to the development,
acquisition and operation of technology based businesses with compelling
valuations and strong business models. The goal is to realize the value of
these investments for the Company's shareholders through a subsequent liquidity
event such as a sale, merger or initial public offering of the investee
companies.
At December 31, 2002 the Company held investments in two companies, Parago, Inc.
("Parago") and River Logic, Inc. ("River Logic"). At December 31, 2002 the
Company owns less than 1% of Parago and approximately 8% of River Logic. In
addition to investments Parago and River Logic at December 31, 2001, the Company
held an investment in Citadel Security Software Inc. ("Citadel") and Encore
Telecommunications Inc. ("Encore"). In May 2002 shares in Citadel were
distributed to CT Holdings shareholders in a pro rata dividend distribution in
May 2002. In October 2002, the Company received approximately $2,000 in
liquidating proceeds for its investment in Encore.
Parago was formed in 1999 as an application service provider ("ASP") and
Internet based business process outsourcer that provides an online suite of
offerings designed to increase sales, reduce costs, retain customers and
increase client profitability. These services include online promotional
management, online rebate processing, proactive email, online surveys, and
customer data warehousing, analysis and reporting. Parago's comprehensive
integrated suite of outsourced customer care solutions are marketed across
multiple industry lines.
Prior to December 2001, the investment in Parago had been accounted for under
the equity method of accounting. However, the Company declined to participate in
an equity financing in December 2001 which resulted in the Company's ownership
percentage falling to less than 1%. Prior to the decline in ownership
percentage, the carrying value of the investment in Parago was reduced to zero
due to the recognition of the proportionate share of equity in Parago's losses
under the equity method of accounting.
In May 2000, CT Holdings acquired a minority interest in River Logic, Inc.
("River Logic"), which develops decision-support applications for industry.
Using COR Technology, a rapid-application development system, developers at
River Logic create applications that enable industry professionals to model
complex enterprises and explore financial relationships on a desktop computer or
laptop. Embedded analytics allow end-users to understand the financial
implications of critical business decisions easily by manipulating graphical
F-7
icons that model their enterprise. The Company accounted for its investment in
River Logic using the cost method. Due to the economic conditions affecting
information technology spending in 2002 and River Logic's results of operation
in 2002 the Company wrote down the carrying value of the investment in River
Logic to zero during the year ended December 31, 2002.
In January 2002 CT Holdings filed a registration statement and in March and
April 2002 filed amendments to the registration statement with the Securities
and Exchange Commission ("SEC") to spin-off as a separate public company its
wholly owned subsidiary Citadel in a pro rata dividend distribution of the
common stock of Citadel to CT Holdings' shareholders. (See the Citadel
Distribution below.) The registration statement became effective in April 2002,
a declaration date was set and the pro rata dividend distribution was completed
on May 17, 2002. The financial statements of Citadel previously consolidated
with the financial statements of the Company are presented in these financial
statements as discontinued operations pursuant to the completion of the
Distribution.
CITADEL DISTRIBUTION
In November 2001, the board of directors of CT Holdings approved the spin-off of
Citadel through the declaration of a pro rata dividend distribution to the
holders of record of the outstanding shares of CT Holdings common stock (the
"Distribution"). The Distribution consisted of one (1) share of Citadel common
stock for every four (4) shares of CT Holdings (the Distribution Ratio) held by
CT Holdings shareholders as of a May 6, 2002, the Record Date. The Distribution
was completed on May 17, 2002, the Distribution Date. Following the
Distribution, Citadel became an independent company and CT Holdings retained no
ownership interest in Citadel. The Distribution is intended to be a tax free
distribution for U.S. federal tax purposes.
On the Distribution Date, CT Holdings and Citadel entered into a series of
agreements including a distribution agreement, a transition services agreement,
a sublease agreement, an indemnity agreement and a tax disaffiliation agreement
which will provide for, among other things, the principal corporate transactions
required to effect the Distribution, to provide for an orderly transition to the
status of two independent companies and to define the continuing relationship
between Citadel and CT Holdings after the Distribution.
LIQUIDITY
The Company has incurred recurring operating losses and has a significant
working capital and stockholders' deficiency at December 31, 2002. Cash used in
operations was approximately $418,000 during the year ended December 31, 2002.
The Company had no cash balance or current assets at December 31, 2002 and
current liabilities total approximately $3.4 million. Immediate funding needs of
the business are expected to be provided by financings through short-term notes
payable and additional investments from related parties. The Company has been
and continues to be dependent upon outside financing to perform its business
development activities, make investments in new technology companies and to fund
operations. However current economic conditions and limited investment
opportunities have limited the Company's ability to raise funds. During the
years ended December 31, 2002 and 2001, related parties provided substantially
all of the Company's financing. Future cash may come from the realization of the
value of
F-8
our investments in Parago and River Logic however there can be no assurance that
any value will ever be realized from these investments. (See below).
The Company's strategy of continuing to support and expand its business
development activities requires the Company to obtain additional capital. The
complete implementation of this element of the Company's strategy will not
generate positive cash flow in the foreseeable future. Achieving positive cash
flow is currently highly dependent upon obtaining liquidity from the Company's
investments in unconsolidated affiliates. The Company estimates it will need to
raise $1.5 million to $3.8 million to settle liabilities and support its
incubator and business development activities for the next twelve months.
Historically, the Company has obtained short-term bridge funding from its Chief
Executive Officer or Directors of the Company. While this may occur in the
future there can be no assurance that such financing will be available or if
available with terms that the Company would be willing to accept.
The Company has made investments in entities that it believes may provide
liquidity to the Company in the long term. The Company believes that the
investment in Parago has been successful; however, as expected in an early stage
company, Parago has a history of operating losses and has experienced cash flow
deficiencies as it implements its business plan. Parago has been successful in
raising capital to support its operations but there is no assurance that it will
be able to raise sufficient capital in the future to support operations or that
its operations will attain profitability. During 2001, the Company's percentage
ownership in Parago was reduced to less than 1% as a result of an additional
equity financing raised by Parago in December 2001. The Company believes,
however, that the investment of 20,000 common shares of Parago (following a
1-for-1000 reverse stock split) and warrants to purchase 28.8749 shares of
Series A-3 preferred stock (convertible into 2,887 shares of common stock) may
ultimately provide an appropriate return.
Since the Company's initial investment, River Logic has made progress in
executing its strategy through its development and introduction of new products
and establishment of new customer relationships. In addition, during April 2001
River Logic obtained a significant strategic investment from the Intel 64 Fund,
Cardinal Investments, eMed Ventures, and Mercury Ventures. As part of this
equity financing, the Company converted $450,000 of demand notes receivable into
River Logic Series C Preferred stock, the same equity instruments purchased by
the other investees. The remainder of the notes receivable plus interest
totaling approximately $216,000 was collected in April 2001. During the year
ended December 31, 2002 River Logic entered into an equity line of credit for
$1.5 million. Through December 31, 2002 River Logic has drawn down $750,000 of
this equity line further reducing the Company's ownership percentage in River
Logic. River Logic will issue shares of its common stock as it draws down the
equity line of credit. Due to the lower per share valuation of the equity line
of credit, River Logic's continuing operating losses and negative cash flow
coupled with the general decline in the economy and spending for information
technology products during the year ended December 31, 2002, the Company
determined that the investment in River Logic should be written down to a net
realizable value of zero. Similar to the investment in Parago, the Company
recognized that its investment in River Logic would be illiquid in the early
stages of its business.
F-9
There can be no assurance that management's plans will be successful or what
other actions may become necessary. There can be no assurance that the Company
will ever achieve liquidity for its investments. Until the Company is able to
create liquidity from its investments through sale to a strategic investor, an
initial public offering or some other liquidity transaction, the Company will
continue to require external sources of working capital to fund its own
operating expenses. Although the Company has been successful raising capital in
the past, the inability of the Company to raise capital could have a material
adverse effect on the Company's business and operations that could be material
to the Company's business and results of operations.
BASIS OF PRESENTATION
The accompanying financial statements of CT Holdings have been prepared in
accordance with accounting principles generally accepted in the United States.
Accordingly, all material intercompany transactions with its unconsolidated
affiliates have been eliminated pursuant to the applicable accounting principles
for consolidation and the equity method of accounting. The balance sheet,
results of operations and the cash flows of Citadel are presented as
discontinued operations as a result of the Distribution. Where appropriate,
prior year amounts have been reclassified to conform to the current period
presentation.
USE OF ESTIMATES
The preparation of 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. Actual results could
differ from those estimates.
INVESTMENT IN UNCONSOLIDATED AFFILIATES
At December 31, 2002 the Company held investments in two companies, Parago and
River Logic. The Company recorded the carrying amount of these investments
under the cost method of accounting because the Company's percentage ownership
in each Company was a non-controlling interest of less than 20%. At December
31, 2001 the Company held investments in four companies including Parago, River
Logic, Citadel and Encore. The Company recorded the carrying amount of these
investments under the equity method or the cost method of accounting as
applicable to the individual investee company.
Except for Citadel, which has been presented as discontinued operations, the
Company presents its investments in these companies on its balance sheets as
Investment in Unconsolidated Affiliates and its share of the equity-method
investee's losses, when applicable, on the statements of operations as Equity in
Loss of Unconsolidated Affiliate.
After a 1 for 1000 reverse stock split, the Company holds 20,000 shares of
common stock of Parago and warrants to purchase 28.8749 shares of Series A-3
preferred stock (convertible into 2,887 shares of common stock) at December 31,
2002. In December 2001 Parago completed an equity financing of approximately
$13.6 million of a total $15 million financing. Approximately $1.4 million of
equity financing was closed in February 2002. As a result of the equity
financing, the Company's ownership percentage in Parago was reduced to less than
F-10
1%. The Company's investment in Parago for the period from January 1, 2001
through December 12, 2001 was accounted for under the equity method of
accounting for investments and accordingly as a result of the Company's
ownership falling below 20%, has been accounted for using the cost method of
accounting beginning December 13, 2001. Under the cost method, the Company's
share of income or loss of Parago is not included in the Company's Statements of
operations. Under the equity method of accounting, the Company's share of the
investee's income or losses is included in the statements of operations. If the
carrying value of the Company's net investment falls below zero, as it did
during the ten months ended December 31, 2000, the Company discontinues applying
the equity method until the carrying value of the net investment rises above
zero. In addition, in the event the Company's ownership percentage exceeds 20%
and the value of the Company's equity investment rises above zero, the Company
will resume applying the equity method and will recognize an investment in
Parago after the Company's share of net losses not recognized is recovered
through its proportionate share of net income if Parago turns profitable.
During the second quarter of 2001 the Company, along with other investors in
Parago, participated in a bridge loan financing transaction completed by Parago
totaling $692,740 and guaranteed $1,406,472 of a bank term loan to Parago. In
accordance with Accounting Principles Board Opinion No. 18, The Equity Method of
Accounting for Investments in Common Stock the Company recognized a charge to
earnings of $2,099,212 in June 2001. Upon closing of the Parago Equity Financing
in December 2001, Parago repaid the bridge loan and the bank guarantee was
released. As a result the Company reversed the $2,099,212 in the fourth quarter
of 2001.
As the Company owned approximately 8% of the outstanding shares in River Logic
at December 31, 2002, the investment has been accounted for under the cost
method of accounting. Under this method, the Company's share of the income or
losses of River Logic is not included in the Company's statements of operations.
The Company's carrying value of its investment in River Logic was $2,703,975 at
December 31, 2001. In July 2002 River Logic entered into an equity line of
credit at a per share valuation below the carrying value of the Company's
investment in River Logic. Management determined that due to the new valuation,
lower spending in the information technology industry, and continuing operating
losses by River Logic that the carrying value of the investment in River Logic
should be reduced to zero. The Company periodically evaluates the carrying value
of its investments in investee companies for impairment based upon the prospects
of the entity and the value of the investment when compared to other investments
in the entity from other unrelated parties. If these factors indicate that an
other than temporary impairment exists, then the Company will write down the
value of the investment to its realizable value. For reasons noted above, during
the year ended December 31, 2002 the Company wrote down its investment in River
Logic in the amount of $2,703,975. The Company had written down the carrying
value of its investment in River Logic by $360,000 during the year ended
December 31, 2001 due to the lower per share valuation of a capital infusion in
2001.
At December 31, 2001 the Company held an investment in Encore with a carrying
value of $32,000. In October 2002 the shareholders of Encore sold its assets
and liquidated the entity. The Company received approximately $2,000 of
liquidating proceeds. Accordingly, the Company wrote off approximately $30,000
of the excess carrying value in Encore during the year ended December 31, 2002.
The investment in Parago was written down to zero in years prior to those
presented through equity accounted losses.
F-11
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, the Company
reviews its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable and exceeds its fair value. If conditions indicate an asset might
be impaired, the Company estimates the future cash flows expected to result from
the use of the asset and its eventual disposition. The impairment would be
measured by the amount by which the asset exceeds its fair value typically
represented by the future discounted cash flow associated with the asset. At
December 31, 2002 the Company had no long lived assets.
INCOME TAXES
Deferred income taxes are recognized using the asset and liability method.
Deferred income tax expenses are provided based upon estimated future tax
effects of differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes
calculated based upon provisions of enacted laws.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion No.25,
"Accounting for Stock Issued to Employees," and complies with the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" as amended
by SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure, an amendment of FASB Statement No. 123". Under APB Opinion No. 25,
compensation expense for employees is based on the excess, if any, on the date
of grant, between the fair value of the Company's stock over the exercise price.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and SFAS No. 148 and Emerging
Issues Task Force ("EITF") Issue No. 96-18, "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services." All transactions in which goods or services are the
consideration received for the issuance of equity instruments are accounted for
based on the fair value of the consideration received or the fair value of the
equity instrument issued, whichever is more reliably measurable. The measurement
date of the fair value of the equity instrument issued is the earlier of the
date on which the counterparty's performance is complete or the date on which it
is probable that performance will occur.
If the Company had recognized compensation expense, in accordance with SFAS No.
123 and 148, based upon the fair value at the grant date for options granted to
employees, officers and directors during the years ended December 31, 2002 and
2001, the pro forma effect on net loss and net loss per share would have been as
follows:
F-12
2002 2001
------------ ------------
Net loss attributable
to common stockholders
as reported $(7,060,490) $(1,091,796)
Add: Stock-based employee
compensation expense included
in reported net loss - -
Deduct: Stock-based employee
compensation expense
determined under fair value
based method (383,625) (1,151,150)
------------ ------------
Pro forma net loss $(7,444,115) $(2,242,946)
============ ============
Net loss per common share - basic and diluted
As reported $ (0.13) $ (0.02)
============ ============
Pro forma $ (0.14) $ (0.05)
============ ============
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and notes payable are carried at cost,
which approximates fair value due to the short maturity of these instruments.
NET LOSS PER COMMON SHARE
Basic loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the period. Basic
loss per share excludes any dilutive effects of options and warrants. Stock
options and warrants to purchase 6,307,451 and 13,029,951 shares of common stock
at December 31, 2002 and 2001, respectively, have been excluded from the
computation of diluted loss per share, as the effect would be anti-dilutive.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2002, Statement of Financial Accounting Standards No. 148 (SFAS
148), "Accounting for Stock-Based Compensation-Transition and Disclosure-an
amendment of Statement of Financial Accounting Standards No. 123 (SFAS 123)" was
issued. This statement amends SFAS 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results of operations. This
F-13
statement is effective for fiscal years ending after December 15, 2002. The
Company has not voluntarily changed to fair value accounting for employee stock
options but has adopted the disclosure requirements of SFAS 148. The adoption
of this standard had no material effect on the Company's financial position,
cash flows or results of operations.
NOTE B - DISCONTINUED OPERATIONS
In January 2002 Citadel filed a registration statement with the SEC to be spun
off as a pro rata dividend distribution to the shareholders of CT Holdings. (See
the "Citadel Distribution") The operating results for the period January 1, 2002
through May 17, 2002 (Distribution Date) and the year ended December 31, 2001
are as follows:
Period
January 1, 2002
Through Year Ended December
May 17, 2002 31, 2001
----------------- ---------------------
Revenue $ 130,519 $ 580,039
Costs of revenue 3,045 26,459
Software amortization 17,511 594,923
----------------- ---------------------
Total costs of revenue 20,556 621,382
Operating costs:
Selling, general and administrative expenses 949,541 1,610,922
Product development expense 83,303 118,432
Depreciation expense 20,058 95,284
----------------- ---------------------
Total operating expenses 1,052,902 1,824,638
----------------- ---------------------
Operating loss (942,939) (1,865,981)
----------------- ---------------------
Provision for income taxes - -
----------------- ---------------------
Net loss $ (942,939) $ (1,865,981)
================= =====================
At December 31, 2001 the net current liabilities and the net long-term assets of
Citadel were as follows:
Current assets
Cash and cash equivalents. . . . . . . . . . . . $ 75,030
Accounts receivable, net . . . . . . . . . . . . 24,222
Prepaid expenses . . . . . . . . . . . . . . . . 72,702
----------
Total current assets . . . . . . . . . . . . . . . 171,954
Current liabilities
Accounts payable and accrued expenses. . . . . . 862,262
Payroll tax obligations. . . . . . . . . . . . . 245,385
----------
Total current liabilities. . . . . . . . . . . . . 1,107,647
----------
Net current liabilities of discontinued operations $ 935,693
==========
Property and equipment, net. . . . . . . . . . . . $ 43,006
Capitalized software development costs, net. . . . 174,110
Other assets . . . . . . . . . . . . . . . . . . . 24,651
----------
Net long-term assets of discontinued operations. . $ 241,767
==========
F-14
NOTE C - INCOME TAXES
The significant components of the Company's deferred tax liabilities and assets
are as follows:
December 31,
2002 2001
---------- ----------
Deferred tax assets (liabilities)
Net operating loss carryforwards $1,405,000 $ 702,000
Reserve on investments 1,074,000 141,000
Accounts payable and accrued expenses 311,000 28,000
---------- ----------
Total deferred tax assets, net 2,790,000 871,000
Valuation allowance (2,790,000) (871,000)
---------- ----------
Total deferred tax assets, net $ - $ -
========== ==========
The difference between the provision for income taxes and the amount computed by
applying the federal statutory rate to loss before provision for income taxes
are as follows:
December 31,
2002 2001
------------ -----------
Benefit computed at federal statutory rate $(2,401,000) $ 371,000
Increase (decrease) in valuation allowance 1,919,000 329,000
Other 482,000 (700,000)
------------ -----------
$ - $ -
============ ===========
For federal income tax purposes, at December 31, 2002 the Company had a net
operating loss carryforward of approximately $4,000,000, which is subject to
annual limitations as prescribed by the Internal Revenue Code, is available to
offset future taxable income and expires at various dates through 2022. A
valuation allowance has been recorded for the entire amount of the net deferred
tax asset due to uncertainty of realization.
NOTE D - STOCK OPTIONS AND WARRANTS
The Company has issued stock options to purchase common stock to directors,
employees and consultants. Options are granted at no less than fair value at the
date of grant. Generally, the options vest over no more than three years.
Following is a summary of option transactions for the years ended December 31,
2002 and 2001:
F-15
Weighted
average
exercise
price per
Shares share
----------- ----------
Outstanding at December 31, 2000 1,298,600 $ 3.41
Granted. . . . . . . . . . . . . 9,990,000 $ 0.25
Exercised. . . . . . . . . . . . -
Expired or cancelled . . . . . . (610,250) $ 4.01
-----------
Outstanding at December 31, 2001 10,678,350 $ 0.51
Granted. . . . . . . . . . . . . 250,000 $ 0.22
Exercised. . . . . . . . . . . . (6,647,500) $ 0.20
Expired or cancelled . . . . . . (325,000) $ 0.38
-----------
Outstanding at December 31, 2002 3,955,850 $ 0.93
===========
Exercisable at December 31, 2001 7,519,157 $ 0.63
Exercisable at December 31, 2002 3,040,428 $ 1.48
The following table summarizes other information regarding stock options at
December 31, 2002:
Weighted-average Weighted- Weighted-
remaining average average
Range of exercise Outstanding contractual life exercise Exercisable exercise
prices Shares (in years) price Shares price
------------------ ----------- ---------------- ----------- ---------- -----------
0.20 - $0.26 2,607,500 8.34 $ 0.20 1,702,078 $ 0.20
0.27 - $0.40 575,350 7.91 $ 0.38 565,350 $ 0.37
0.41 - $2.00 220,000 1.22 $ 0.79 220,000 $ 0.79
2.01 - $5.00 553,000 6.28 $ 5.00 553,000 $ 5.00
----------- ----------
3,955,850 $ 0.93 3,040,428 $ 1.48
=========== ==========
The fair value of the options granted was estimated at the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions:
Year Ended December 31,
2002 2001
----------- ----------
Expected volatility . . . . . 147% 160%
Risk-free interest rates. . . 4.79% 4.75%
Dividend yield. . . . . . . . 0.0% 0.0%
Expected option lives . . . . 5 years 5 years
F-16
The following summarizes the activity of warrants to purchase common stock for
the years ended December 31, 2002 and 2001.
Weighted
average
exercise
Shares price
----------- ---------
Outstanding at December 31, 2000. 4,525,505 $ 2.68
Terminated and cancelled. . . . . (2,005,000) $ 3.36
Exercised (168,904) $ 0.28
-----------
Outstanding at December 31, 2001. 2,351,601 $ 3.95
Terminated and cancelled. . . . . - -
Exercised . . . . . . . . . . . . - -
-----------
Outstanding at December 31, 2002. 2,351,601 $ 3.95
===========
All the outstanding warrants are exercisable at December 31, 2002 and 2001 and
expire at varying times through September 2003.
NOTE E - INVESTMENT IN UNCONSOLIDATED AFFILIATES
PARAGO INVESTMENT
From January 1, 2001 through December 12, 2001, the Company accounted for its
investment in Parago under the equity method of accounting. On December 12,
2001 Parago closed approximately $13.6 million of a $15 million Series E
Preferred Stock issuance (the "Series E Financing"). The additional amount of
approximately $1.4 million was closed in February 2002. The Company did not
participate in the Series E Financing and as a result, the Company's ownership
percentage in Parago was reduced to less than 1% of the capital stock
outstanding. Following the Series E Financing the Company accounted for its
investment in Parago under the cost method of accounting.
In May 2001, Parago obtained a term loan from a bank with a principal amount of
$8.0 million. The funds from the term loan were necessary to enable Parago to
continue operations, as Parago's cash resources were depleted. As a condition
to the extension of the term loan, the bank required a guarantee of Parago's
obligations under the term loan from certain affiliates of Parago including the
Company. The Company's share of the guarantee was $2,099,211. The Company was
advanced $692,739 from two directors of the Company and signed a guaranty for
the remaining $1,406,472. The same directors personally guaranteed the guaranty
provided by the Company. The guarantee was recorded as an adjustment to equity
in losses of $2,099,211 in the quarter ended June 30, 2001. Parago repaid the
term loan with proceeds from the sale of shares of the Series E Financing and
the Company's guarantee was released. Accordingly the adjustment to equity in
losses of $2,099,211 was reversed in the fourth quarter of 2001. In addition,
the Company paid the directors the money advanced and released their guaranty.
F-17
In consideration of certain of its directors' funding of the Company's
participation in the Parago bridge loan, the Company has agreed to permit the
directors to exchange up to 5,000,000 pre-reverse stock split Parago shares into
up to 6,000,000 shares of the Company's common stock.
At December 31, 2002 and 2001 after consideration of the effect to a 1 for 1000
reverse stock split in 2001, the Company held 21,240 shares of common stock of
Parago and warrants to purchase 28.8749 shares of Series A-3 preferred stock
(convertible into 2,887 shares of common stock). In addition, after
consideration of the effect of the 1 for 1000 reverse stock split, the Company
holds warrants to purchase 28.8749 shares of Series A-3 Preferred Stock,
convertible into 2,887.49 shares of Parago common stock, issued in connection
with the guarantee participation. The warrants expire on the earlier of the
filing of a registration statement for an initial public offering or after
January 9, 2004.
The Company has also agreed to convert shares of Parago common stock issued in
connection with a 1999 acquisition by Parago into up to 500,000 of the Company's
common shares at the option of the acquired entity's shareholders. In May 2002,
139,806 shares of the Company's common stock were exchanged for 1,200 shares of
Parago common stock. Pursuant to the terms of the subscription agreements
between Parago and some of its stockholders, the Company may be required at the
option of such stockholders to issue up to 414,000 shares of the Company's
common stock and in May 2002, 16,000 shares of the Company's common stock were
exchanged for 40 shares of Parago common stock. These two stock issuances
totaling 155,806 shares were recorded as other expense at the fair value of the
stock issued of $38,951.
RIVER LOGIC INVESTMENT
At December 31, 2002 the Company holds an investment in River Logic, a software
company that develops and markets decision support tools. The Company's
ownership percentage is approximately 8% of the outstanding shares and is
accounted for using the cost method of accounting for investments in common
stock. The original investment in River Logic came about through a series of
equity and asset transactions with total value of approximately $3,064,000. The
Company holds an ownership interest in River Logic of approximately 8% at
December 31, 2002.
River Logic is an early stage software company, has a history of operating
losses and requires additional funding to continue operations and to attain
profitability. Since the initial investment in May 2000, River Logic has raised
additional capital through the issuance of preferred stock and other equity
securities. The Company periodically evaluates the carrying value of its
ownership interests in its investee companies taking into consideration, among
other factors, the investee company's valuation following recent infusions of
capital. The Company views the pricing of recent capital transactions with
unrelated third parties as a measure of the fair value of the investment in
River Logic.
A preferred stock financing in April 2001 reflected a valuation below the
Company's carrying value River Logic. As a result, the Company determined that
the carrying value of its investment had a fair value of approximately
$2,700,000 and accordingly reduced the carrying value by $360,000 at December
31, 2001.
F-18
In June 2002 River Logic entered into an equity credit line financing
arrangement at a valuation substantially below the carrying value of the
investment in River Logic. In addition, the Company's potential return of any
proceeds is subordinate to the investors in the equity credit line financing who
first receive $3 million of any proceeds in a liquidity transaction. As a result
of the lower valuation, general information technology industry conditions and
lower operational performance by River Logic, the Company believes that the net
realizable value of the investment has been permanently impaired, is now zero
and accordingly, the Company wrote down its investment in River Logic to zero at
December 31, 2002.
INVESTMENT IN ENCORE
At December 31, 2000 the Company held a $130,000, 10% bearing convertible note
with a conversion price of $1 per share in an entity that was later sold to
Encore. As part of a financial restructure transaction the Company agreed to
restructure the note into an investment in Encore with a fair value of $32,000.
During the year ended December 31, 2002 Encore went into liquidation and the
assets of Encore were sold. The Company received liquidating proceeds of
approximately $2,000 and wrote off the remaining $30,000 investment in Encore.
NOTE F - NOTES PAYABLE TO SHAREHOLDERS
On April 1, 2002, the Company entered into a $600,000 non-interest bearing
convertible note payable due April 1, 2003 to a shareholder. The note payable
may be converted, at the option of the shareholder, into a maximum of 2,700,000
shares of CT Holdings common stock and 675,000 shares of Citadel common stock.
Interest expense of $51,300 representing the beneficial conversion feature
associated with the principal outstanding at December 31, 2002 has been recorded
during the year ended December 31, 2002 with an offset to paid-in-capital.
Subsequent to December 31, 2002 the shareholder exercised the conversion
feature. Since the issuance of all 2,700,000 would cause the number of shares
outstanding to exceed the number of authorized shares of 60,000,000, the
shareholder waived his right to these shares until such time as the shares
become authorized.
In addition, the Company has recorded an 8% note payable due June 30, 2002 for
$9,000 to a shareholder which is in default at December 31, 2002 and continues
to bear interest at 8% per annum.
NOTE G - RELATED PARTY TRANSACTIONS
During the year ended December 31, 2002 an entity related to an employee of the
Company advanced $239,000 to the Company and the Company repaid $190,000 of the
advances. At December 30, 2002 the Company had an 8% note payable due June 30,
2002 for the remaining $49,000 outstanding and is currently in default on this
note.
Pursuant to the terms of the transition services agreement with Citadel, the
Company has agreed to pay Citadel a monthly fee of $20,000 per month for the
services of its CEO, CFO and accounting and information management staff, as
well as office rent and indirect overhead expenses. During the year ended
December 31, 2002 the Company recorded $240,000 of expense related to this
agreement. Prior to the Distribution Date $90,000 was allocated to the Company
from Citadel for these services as part of the allocation procedures used to
carve out the Citadel results of operations from the combined operations of both
companies. Following the Distribution Date the Company has been invoiced by
F-19
Citadel for these services and has a liability recorded for $150,000 for amounts
payable to Citadel at December 31, 2002.
At December 31, 2002 and 2001 the Company holds a $250,000, 8% note payable to a
former director that was due April 30, 2002 and is currently in default.
Additionally, in May 2002 the former director exercised stock options for
2,250,000 shares of the Company's common stock with an aggregate exercise price
of $450,000 and entered into a note receivable secured by the shares and
recorded stock compensation expense of $450,000 to fully reserve this receivable
as the ultimate collection of the receivable is doubtful.
At December 31, 2001 the Company had a liability recorded of approximately
$290,000 for cash advances received from its CEO. During the year ended
December 31, 2002 the Company received $267,500 of additional advances from the
CEO, repaid $322,500 of the total advances and offset approximately $9,500 of
the CEO's business expenses against the net amount due the CEO. The remaining
amount due the CEO of approximately $226,000 was converted into a 5% note
payable due July 1, 2002, is currently in default and accruing interest at 18%.
In addition, stock options for 3,000,000 shares of the Company's common stock
were exercised for an aggregate exercise price of $600,000 in exchange for a
note receivable. The principal balance of $600,000 note receivable was reserved
and recorded as stock compensation expense as the ultimate collection of the
note receivable is doubtful.
On January 1, 2001 CT Holdings had recorded a $1.2 million note receivable from
its CEO recorded on its balance sheet. This note was issued in October 2000 by
CT Holdings with approval from its board of directors. The note receivable was
due October 2001, bore interest at 5% per year and was repaid in full prior to
its maturity by cash payments of approximately $700,000 and by the offset of
approximately $506,000 in accrued salary and bonus due to him in 2001 pursuant
to his employment agreement.
In June 2001, the CEO loaned CT Holdings approximately $855,000 in connection
with CT Holdings' participation in a bridge loan transaction for Parago. The
Company's CEO is also a director of Parago, and through several transactions
advanced approximately $4 million of his personal assets to Parago for working
capital needs all of which was repaid to him in payments in January and April
2001.
In addition to the options exercised by the CEO for 3,000,000 shares of common
stock in exchange for a note and the options exercised by a former director for
2,250,000 share of common stock in exchange for a note, options for 1,250,000
shares of common stock were exercised in May 2002 for notes from officers, key
employees and consultants to the Company. The aggregate amount of the notes for
$1,312,500 was written off as stock compensation expense. Options for 147,500
shares of common stock were exercised by an officer and key employees of the
Company for which the aggregate exercise price of $34,500 was forgiven and
recorded as stock compensation expense.
During years ended December 31, 2002 and 2001 the Company incurred $134,000 and
$60,000, respectively, of legal fees to an attorney who is a former employee and
a relative of the Company's CEO. Part of these fees were settled through the
issuance of 250,000 shares of common a stock with a fair value at the time of
issuance of $62,500 and the remainder is an outstanding liability at December
31, 2002.
Another shareholder received 250,000 shares of the Company's common stock for
consulting with the Company in the first quarter of 2002. These services were
valued at $62,500. In addition, the Company incurred fees of $36,250 related to
services performed by a consultant in the first quarter of 2002 prior to
becoming employed as the Company's Chief Financial Officer. Of this amount
$11,250 was settled through the issuance of 25,000 shares of common stock of the
Company and the remainder of $25,000 in cash of which $15,000 remains
outstanding at December 31, 2002.
In connection with an acquisition by Parago in 1999 the Company agreed to
exchange up to 500,000 shares of the Company's common stock for shares of Parago
common stock at the option of the stockholders of the entity acquired by
Parago. In May 2002 the Company exchanged 139,806 shares of the Company's common
stock for 1,240 shares of common stock of Parago subject to this conversion
F-20
feature. The fair value of the stock issued of approximately $34,951 was
recorded as other expense with the offset to common stock and additional paid in
capital.
Pursuant to subscription agreements between Parago and some of its stockholders,
the Company may be required at the option of such stockholders, to issue up to
414,000 shares of the Company's common stock. In May 2002 one such stockholder
was issued 16,000 restricted shares of common stock of the Company. The fair
value of the stock issued of approximately $4,000 was recorded as other expense
with the offset to common stock and additional paid in capital.
In June 2001, two directors funded and guaranteed CT Holdings' participation in
the Parago bridge loan. In consideration for this funding and guarantees, CT
Holdings has agreed to permit the directors to exchange up to 5,000,000 pre
reverse stock split Parago shares into up to 6,000,000 shares of CT Holdings'
common stock.
Until March 31, 2002 the Company subleased a portion of its headquarters' office
space to Parago and remained fully obligated on such lease. Approximately,
$90,000 and $360,000 in the years ended December 31, 2002 and 2001, respectively
was paid directly by Parago to the Company's lessor based upon square footage
utilized by Parago. During the year ended December 31, 2001 the Company paid
Parago $54,729 for services it provided to the Company.
NOTE H - COMMITMENTS AND CONTINGENCIES
In August 1998, Janssen-Meyers Associates L.P. (JMA) filed a lawsuit against the
Company arising out of an alleged 1995 contract with the Company's predecessor
(Old Citadel). The suit alleged that Old Citadel breached a letter of intent
dated September 1995 and/or a Placement Agency Agreement dated November 1995
between JMA and Old Citadel. As its damages, JMA claimed that it was entitled
to, among other things, the cash value of warrants to purchase 1.8 million
shares of CT Holdings common stock at an exercise price of $0.89 per share,
valued during May 1996. According to JMA's valuation of those warrants,
potential damages were alleged to exceed $40 million. The Company vigorously
disputes that it breached either the letter of intent or the Placement Agency
Agreement or that it is liable to JMA. The lawsuit was styled Janssen-Meyers
Associates, L.P. v. Citadel Technology, Inc., and was filed in the Supreme Court
of the State of New York, County of New York. The Company removed the case to
federal court in the Southern District of New York.
Following mediation in July 2000, the Company entered into a settlement term
sheet, to attempt to resolve the disputes between it and JMA, pursuant to which
the Company and JMA agreed in principle to settle the lawsuit for an aggregate
of $3 million, in a combination of $1.5 million in cash and 300,000 shares of
the Company's common stock with a guaranteed value of $5 per share as of
January, April and October 2001 (with respect to 100,000 of the shares for each
period). The settlement was subject to execution of definitive settlement
documents and approval of the boards of directors of both parties. As a result,
the Company recorded approximately $1,912,500 ($1.5 million in cash and 300,000
shares of the Company's Common Stock at the market price of $1.375 per share) as
a nonrecurring charge related to the settlement of the litigation in the ten
months ended December 31, 2000.
However, the Company and JMA were unable to negotiate the final definitive
settlement agreement. The case was dismissed in August 2000 without any
resolution of this issue. On March 27, 2001, JMA attempted to reopen this
matter, but the Court hearing the JMA lawsuit issued a Summary Order denying
JMA's motion to enforce the settlement term sheet and confirmed the prior
dismissal of the lawsuit. The Court further ruled that JMA would either have to
bring an action on the proposed settlement or move to re-open the dismissed
case. The Court stated that it did not express any view with respect to the
merits of the settlement that brought about the dismissal of the case. There was
no activity on the case from March 2001 through August 2001. On August 27, 2001
JMA refiled its lawsuit with a federal court in New York, and the Company filed
its motion to dismiss the case because the plaintiffs lacked the required
diversity jurisdiction to pursue the claims in federal court. On October 31,
2001 the case was dismissed in federal court. In December 2001, the plaintiffs
refiled the lawsuit in the state court seeking to enforce the proposed
settlement term sheet. The case was filed in Supreme Court of New York, that
state's trial court, in a case styled Roan Meyers v. CT Holdings. Given these
events, including the dismissal of the lawsuit and the failure of the plaintiffs
to refile a lawsuit for more than one year after the date of the dismissal, the
Company, in the year ended December 31, 2001, reversed the $1,912,500
nonrecurring charge that the Company had previously recorded related to the
settlement of the lawsuit.
In October 2001, Roan-Meyers Associates (formerly Janssen Meyers Associates
L.P.) filed suit in the Supreme Court of the State of New York, County of New
York against CT Holdings, Inc. to enforce a settlement term sheet arising out of
a prior lawsuit alleging breach of a Placement Agency Agreement. This case is
styled Roan Meyers Associates v. CT Holdings, Inc. In August 1998,
Janssen-Meyers Associates L.P. ("JMA") filed a lawsuit against CT Holdings
arising out of an alleged 1995 contract with CT Holdings' predecessor. The suit
alleged that this predecessor breached a letter of intent dated September 1995
and/or a Placement Agency Agreement dated November 1995 between JMA and the
predecessor. As its damages, JMA claimed that it was entitled to, among other
things, the cash value of warrants to purchase 1.8 million shares of CT Holdings
common stock at an exercise price of $0.89 per share, valued during May 1996.
According to JMA's valuation of those warrants, potential damages were alleged
to exceed $40 million. CT Holdings vigorously disputes that it breached either
the letter of intent or the Placement Agency Agreement or that it is liable to
JMA. The lawsuit was styled Janssen-Meyers Associates, L.P. v. Citadel
Technology, Inc., and was filed in the Supreme Court of the State of New York,
County of New York. CT Holdings removed the case to federal court in the
Southern District of New York. Following mediation in July 2000, CT Holdings and
JMA entered into a settlement term sheet to attempt to resolve the disputes
between it and JMA, pursuant to which CT Holdings and JMA agreed in principle to
settle the lawsuit for an aggregate of $3 million, in a combination of $1.5
million in cash and 300,000 shares of common stock with a guaranteed value of $5
per share as of January, April and October 2001 (with respect to 100,000 of the
shares for each period). The settlement was subject to execution of definitive
settlement documents and approval of the boards of directors of the companies.
CT Holdings and JMA were unable to negotiate the final definitive settlement
agreement and, as a result, the matter was not settled. The case was dismissed
in August 2000 without any resolution of this issue. On March 27, 2001, JMA
F-21
attempted to reopen this matter, but the Court hearing the JMA lawsuit issued a
Summary Order denying JMA's motion to enforce the settlement term sheet and
confirmed the prior dismissal of the lawsuit. The Court further ruled that JMA
would either have to bring an action on the proposed settlement or move to
re-open the dismissed case. The Court stated that it did not express any view
with respect to the merits of the proposed settlement that brought about the
dismissal of the case. There was no activity on the case from March 2001 through
August 2001. On August 27, 2001 JMA refiled its lawsuit with a federal court in
New York, and CT Holdings filed a motion to dismiss the case because the
plaintiffs lacked the required diversity jurisdiction to pursue the claims in
federal court. On October 31, 2001 the case was dismissed in federal court. In
December 2001, the plaintiffs refiled the lawsuit in the state court seeking to
enforce the settlement term sheet. The case was filed in Supreme Court of New
York, that state's trial court, in a case styled Roan Meyers v. CT Holdings. CT
Holdings intends to vigorously defend against this lawsuit and has filed a
counterclaim to, among other things, recover excess amounts charged by JMA in
connection with related bridge loans. Trial has not been set on this matter and
the parties are conducting discovery through September 2003.
In June 2000, CT Holdings was served with a lawsuit filed in the 157th State
District Court in Houston, Texas by Michael and Patricia Ferguson for breach of
contract, breach of fiduciary duty, tortious interference, violation of the
Texas Deceptive Trade Practices Act and negligence. The case was styled Michael
and Patricia Ferguson v. CT Holdings, Inc. Specifically, the Fergusons claim
that they were damaged when they attempted to exercise warrants during a time
when CT Holdings' related registration statement could not be used. In July,
2002, the plaintiffs were awarded damages of $575,510, pre-judgment interest of
$86,748, attorneys' fees of $103,818, post-judgment interest at 10% per year,
and costs. The Company has a liability of $785,000 recorded at December 31, 2002
for this judgment.
CT Holdings appealed the judgment in a case styled CT Holdings Inc. v. Michael
and Patricia Ferguson in the Fourteenth Court of Appeals in Houston, Texas. In
January 2003, the plaintiffs filed a motion to have the District Court appoint a
receiver to sell assets to satisfy the judgment. In April 2003 the parties
settled the lawsuit for $225,000 in cash, which was obtained from Citadel as a
demand note payable bearing interest at 12% per year.
In June 2000, Tech Data Corporation filed suit against CT Holdings, alleging a
breach of a Software Distribution Agreement ("the Agreement") with CT Holdings.
The lawsuit is styled Tech Data Corporation v. Citadel Technology, Inc. (now
known as CT Holdings), and was filed in Dallas County Court at Law No. 2.
Because CT Holdings was not properly served, Tech Data obtained a default
judgment for $101,048. When CT Holdings discovered the default judgment, it
filed and won a motion to set aside this judgment. In June 2001, Tech Data
properly served CT Holdings. CT Holdings answered and demanded binding
arbitration pursuant to the agreement. The parties filed a Joint Motion to
Arbitrate in December 2001. The judge granted this motion and abated the lawsuit
pending arbitration. The arbitration was held in 2002, and in January 2003, the
arbitrator entered a judgment of $71,655 against CT Holdings in favor of Tech
Data, together with pre-judgment interest at the applicable rate under Florida
F-22
law for the period from January 2, 2000 to January 10, 2003, attorneys' fees of
$3,500, and interest on these amounts in the amount of 10% per year from
February 10, 2003 until the amounts are paid. In March 2003, Tech Data filed a
motion to revive the abated lawsuit for purposes of entering the arbitration
award as a judgment in the case and judgment was entered. As part of the
Distribution, Citadel assumed responsibility for this lawsuit; and has recorded
a liability of approximately $101,000, although there can be no assurance that
CT Holdings will be released from the lawsuit.
In October 2002, S&S Public Relations Inc. filed a lawsuit against CT Holdings
and Steven B. Solomon, its CEO, alleging breach of contract and fraud, and
seeking damages in the amount of at least $25,215, along with exemplary damages,
attorneys' fees, court costs, and pre- and post-judgment interest. CT Holdings
intends to vigorously defend the case. The parties are currently conducting
discovery. The case is styled S&S Public Relations Inc. v. CT Holdings and
Steven B. Solomon, and was filed in the County Court at Law No. 4, Dallas
County, Texas. The Company cannot reasonably estimate the ultimate liability, if
any, and therefore no liability has been recorded in association with this
lawsuit.
In August 2002, PriceWaterhouseCoopers, LLP filed a lawsuit against CT Holdings
seeking payment of $131,816 for services performed pursuant to a contract with
CT Holdings related to the JMA lawsuit described above. The court ordered that
mediation be held by July 2003, and CT Holdings is preparing for the mediation
and conducting discovery. CT Holdings intends to vigorously defend the case. The
case is styled PriceWaterhouseCoopers, LLP v. CT Holdings, and was filed in the
192nd District Court, Dallas County, Texas. The Company cannot reasonably
estimate the ultimate liability, if any, and therefore no liability has been
recorded in association with this lawsuit.
We may become involved from time to time in litigation on various matters which
are routine to the conduct of our business. We believe that none of these
actions, individually or in the aggregate, will have a material adverse effect
on our financial position or results of operations, though any adverse decision
in these cases or the costs of defending or settling such claims could have a
material adverse effect on our business.
F-23