UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-18718
CT HOLDINGS ENTERPRISES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2432011
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
TWO LINCOLN CENTRE, SUITE 1600, 5420 LBJ FREEWAY, DALLAS, TEXAS 75240
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(214) 520-9292
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the issuer (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
[X] No [_]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Common Stock, Par value $.01 per share
Outstanding at November 14, 2005 58,545,928
Transitional Small Business Disclosure Format Yes [_] No [X]
CT HOLDINGS ENTERPRISES, INC.
FORM 10-QSB
QUARTERLY REPORT
FOR THE QUATERLY PERIOD ENDED
MARCH 31, 2006
Table of Contents Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Unaudited Balance Sheets as of March 31, 2006 and December 31, 2005 3
Unaudited Statement of Operations for the three months ended March 31, 2006 and 2005 4
Unaudited Statement of Cash Flows for the three months ended March 31, 2006 and 2005 5
Notes to Unaudited Interim Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of Operation 12
Item 3. Controls and Procedures 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 3. Defaults Upon Senior Securities 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CT HOLDINGS ENTERPRISES, INC.
UNAUDITED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2006 2005
------------- --------------
ASSETS
-----------------------------
CURRENT ASSETS
Cash $ 197 $ 197
------------- --------------
TOTAL ASSETS $ 197 $ 197
============= ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
--------------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 451,319 $ 387,654
Convertible secured note payable to related party including accrued
interest of $6,300 and $772, net of deferred debt
discount of $88,644 and $250,290 188,803 21,630
Demand note payable to Citadel including accrued interest of
$83,663 and $76,784 308,663 301,784
Payable to Citadel 660,000 650,000
Note payable to shareholder including accrued interest of
$6,545 and $6,128 15,545 15,128
Accrual for litigation including accrued interest of $1,473,197 and
$1,404,590 4,473,197 4,404,590
------------- --------------
Total current liabilities 6,097,527 5,780,786
COMMITMENTS AND CONTINGENCIES
Preferred stock, $0.01 stated value per share; 1,000,000 shares authorized;
no shares issued or outstanding - -
Common stock, $.01 par value per share; 60,000,000 shares authorized;
58,545,928 shares issued and outstanding 585,460 585,460
Common stock pending issuance 600,000 600,000
Additional paid-in capital 57,661,749 57,661,749
Accumulated deficit (64,944,539) (64,627,798)
------------- --------------
Total stockholders' deficit (6,097,330) (5,780,589)
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 197 $ 197
============= ==============
The accompanying notes are an integral part of these consolidated financial statements.
3
CT HOLDINGS ENTERPRISES, INC.
UNAUDITED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
MARCH 31,
2006 2005
------------ ------------
Revenue $ - $ -
General and administrative expense 73,665 33,838
Interest expense 243,076 104,975
------------ ------------
Loss before income taxes (316,741) (138,813)
Provision for income taxes - -
------------ ------------
Net loss $ (316,741) $ (138,813)
============ ============
Net loss per share - basic and diluted $ (0.00) $ (0.00)
============ ============
Weighted average common shares outstanding - basic and diluted 67,245,928 67,245,928
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
4
CT HOLDINGS ENTERPRISES, INC.
UNAUDITED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (316,741) $ (138,813)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of deferred debt discount 161,646 25,000
Accrual for litigation and related interest 68,607 68,607
Changes in operating assets and liabilities:
Accounts payable and accrued expenses 76,488 18,865
Payable to Citadel 10,000 22,500
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES 0 (3,841)
Cash and cash equivalents at the beginning of the period 197 4,168
----------- -----------
Cash and cash equivalents at the end of the period $ 197 $ 327
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
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CT HOLDINGS ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2006
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements and Basis of Presentation
These unaudited interim financial statements have been prepared on the
historical cost basis in accordance with accounting principles generally
accepted in the United States and in the opinion of management, reflect all
adjustments (consisting of normal, recurring adjustments) necessary to present
fairly, the financial position, results of operations and cash flows of CT
Holdings Enterprises, Inc. ("CT Holdings" or the "Company"). On March 13, 2006
the Company changed its name from CT Holdings, Inc. to CT Holdings Enterprises,
Inc.
Some information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
in the United States have been condensed or omitted pursuant to rules and
regulations promulgated by the Securities and Exchange Commission (the
"Commission"). The results of operations for the interim periods shown herein
are not necessarily indicative of the results to be expected for any future
interim period or for the entire year. These statements should be read together
with the audited financial statements and notes thereto included in the
Company's Form 10-KSB for the year ended December 31, 2005 on file with the
Commission.
Description of Business
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 March 31, 2006 the Company held investments in two companies, Parago, Inc.
("Parago") and River Logic, Inc. ("River Logic"). The investments at March 31,
2006 were represented by approximately 25,000 shares of Parago common stock and
28.8749 shares of Parago Series A-3 convertible preferred stock (convertible
into 2,887 shares of Parago common stock) and shares of stock representing
approximately 8% of River Logic. See Note E - Subsequent Event.
Parago is a marketing services company that brings transaction processing
capabilities together with information-based marketing in a way that transforms
the way companies interact with customers. Through web-enabled products,
processes and resources, Parago creates solutions that meet their client's
marketing objectives. Parago provides a proprietary, promotional marketing
technology platform that helps their clients reduce promotional program costs,
increase sales, and enhance customer relationships. The Company accounts for the
investment in Parago using the cost method of accounting. In prior periods due
to continuing operating losses, lack of cash flows generated from this
investment and other factors, the Company wrote down the carrying value of the
investment in Parago to zero. Accordingly, the investment has no carrying value
at March 31, 2006 and December 31, 2005. See Note E - Subsequent Event.
In May 2000, CT Holdings acquired a minority interest in River Logic which
develops and markets enterprise optimization technologies and decision support
software applications. River Logic's applications 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 by manipulating graphical
icons that model their enterprise. The Company accounts for the investment in
River Logic using the cost method of accounting. In prior periods due to
continuing operating losses, lack of cash flows generated from this investment
and other factors, the Company wrote down the carrying value of the investment
in River Logic
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to zero. Accordingly, the investment has no carrying value at March 31, 2006 and
December 31, 2005. See Note E - Subsequent Event.
Liquidity
The Company has incurred recurring operating losses and has a significant
stockholders' deficit at March 31, 2006 of approximately $6.1 million. At March
31, 2006 there is a cash balance of $197 and current liabilities total
approximately $6.1 million. The Company has limited access to capital at March
31, 2006, no plans to raise capital, and management has not identified sources
of capital at March 31, 2006. Past funding needs of the business have been
provided by financings through notes payable, cash advances and additional
investments from related parties, including the Company's CEO and CITN
Investment Inc. ("CII"), an affiliate of the Company's CEO, however there can be
no assurance that such funds will be available from these related parties in the
future. 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.
The Company has made investments in entities that management believes may
provide liquidity to the Company in the long term and the management believes
that Parago and River Logic may ultimately be successful. Both Parago and River
Logic are privately held companies and because the Company holds minority
interests in these companies, the Company has received only limited information
regarding their results of operations and financial condition. The Company has
not participated in the additional capital infusions since the initial
investments and as a result, the ownership percentage in both investee companies
has been significantly diluted. The Company's ownership in Parago consists of
25,000 shares of common stock and 28.8749 shares of Parago Series A-3
convertible preferred stock (convertible to 2,887 shares of Parago common
stock), and approximately 8% of River Logic.
While management believes that the performance of the investee companies to date
has been as expected, there can be no assurance that the Company will ever
achieve liquidity from these investments. In addition, there can be no assurance
that the Company's plans will be successful or what other actions may become
necessary in the future. Until the Company achieves liquidity from the
investments through sale to a strategic investor, an initial public offering or
some other liquidity transaction, the Company will continue to require working
capital to fund operating expenses. Although the Company has been successful
raising capital in the past, an inability to raise capital may require us to
sell assets. Such actions could have a material adverse effect on the Company's
business operations and result in charges that could be material to the
Company's business and results of operations. At March 31, 2006 the Company has
not identified sources of capital nor does the Company have any plans to raise
sufficient amounts of capital to settle liabilities or to fund business
development activities. See Note E - Subsequent Event.
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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Investment in Unconsolidated Affiliates
At March 31, 2006 the Company held investments in two companies, Parago and
River Logic. The Company has 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% and the
Company's ownership does not allow it to have a significant influence on the two
investee Companies. At March 31, 2006 the Company held 20,000 (20,000,000 pre
1:1000 reverse stock split) 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) plus an additional 5,000 (5,000,000 pre 1:1000 reverse
stock split) shares received from the Company's CEO in February 2004 upon
exercising his exchange right for 6,000,000 shares of the Company's common
stock. In order for the Company to exercise its option in February 2004, the
Company's CEO loaned the Company $30,000 for the Company to exercise warrants to
purchase the Series A-3 convertible preferred stock, pursuant to a promissory
note secured by the preferred stock. At March 31, 2006 the Company owned
approximately 8% of River Logic for which the
7
investment has been accounted for under the cost method of accounting. Under the
cost method, the Company's share of income or loss of Parago and River Logic is
not included in the Company's Statements of Operations. Each of the investments
has no carrying value at March 31, 2006 and December 31, 2005. See Note E -
Subsequent Event.
Net Loss per Common Share
Basic net loss per common share is computed by dividing net loss to common
shareholders by the weighted average number of shares of common stock
outstanding during the period.
Included in the weighted average number of common shares outstanding for the
three months ended March 31, 2006 and 2005 are 2,700,000 shares that would have
been issued when a shareholder exercised his right to convert a note payable to
common stock and 6,000,000 shares that would have been issued to the Company's
CEO when he exercised his right to exchange Parago shares for CT Holdings'
shares if the Company had the available authorized shares. These shares have
been included in the computation from the dates that they would have been
issued. The effect of stock options for 2,887,500 and 2,917,500 shares of common
stock outstanding at March 31, 2006 and 2005, respectively, have been excluded
from the weighted average shares computation as they are antidilutive. At March
31, 2006 and 2005, the Company does not have any outstanding stock options or
warrants that have an exercise price below market value.
Stock-Based Compensation
On January 1, 2006, the Company adopted the modified prospective method of SFAS
No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R"), which is a
revision of SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No.
123"). SFAS No. 123R supersedes APB Opinion No. 25, and amends SFAS No. 95,
"Statement of Cash Flows". SFAS No. 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro forma disclosure is no longer
an alternative. Under the modified prospective application, SFAS No. 123R is
applied to new awards and to awards modified, repurchased or cancelled after the
effective date. Compensation cost for the portion of awards for which requisite
service has not been rendered that are outstanding as of the effective date is
recognized as the requisite service is rendered on or after the effective date.
The compensation cost for that portion of awards is based on the grant date fair
value of those awards as calculated for pro-forma disclosures under SFAS No.
123. All awards outstanding at March 31, 2006 had been fully vested in periods
prior to the first quarter of 2006 and therefore, the financial statements do
not reflect any compensation expense related to stock-based compensation.
8
The Company does not have any employees or significant operations and does not
anticipate issuing any share-based payments in the future, therefore the
adoption of SFAS 123R is not expected to have a significant effect on the
Company's financial condition, cash flows or results of operations. However
should the Company's operations change, and include the issuance of share-based
payments, the adoption of SFAS No. 123R would require the recording of stock
compensation expense in the future. The future impact of the adoption of SFAS
123R cannot be predicted at this time because it will depend on the levels of
share-based payments granted by the Company in the future. However, had the
Company adopted SFAS 123R in prior periods, the impact of the standard would
have approximated the impact of SFAS No. 123 as described in the pro forma net
loss attributable to common shareholders reported in those prior periods.
Prior to January 1, 2006, the Company accounted 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
complied 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, of the fair value of the
Company's stock over the exercise price and is recognized on a straight-line
basis over the vesting term of the option.
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 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 Nos.
123R for the quarter ended March 31, 2005, the pro forma effect on net loss
would not have differed from reported net loss.
NOTE B - NOTES PAYABLE TO SHARHOLDERS
The Company has presented $600,000 as "Common stock pending issuance", a
separate component of Stockholders' Deficit at March 31, 2006 and December 31,
2005. This represents 2,700,000 shares of CT Holdings that were to be issued
upon the conversion of a note payable to a shareholder in 2003. Due to the lack
of available authorized shares, the shareholder has waived his right to receive
these shares until such time as the shares become authorized.
The Company has a note payable which was originally due June 30, 2002 for $9,000
to a shareholder which was in default at March 31, 2006 and December 31, 2005
and because it is in default, bears interest at 18% per annum. Accrued interest
on the note payable was $6,545 and $6,128 at March 31, 2006 and December 31,
2005, respectively.
NOTE C - RELATED PARTY TRANSACTIONS
On May 24, 2004, the Company was advanced $200,000 by CII pursuant to a loan
agreement and evidenced by a Secured Convertible Promissory Note (the "Note").
In December 2005, the Company and CII entered into an Amended and Restated
Secured Convertible Promissory Note (the "Amended Note"). Pursuant to the
Amended Note, the principal was increased to $271,148 resulting from the
combination of the principal and accrued interest from the original note with
CII and advances of $43,800 plus accrued interest of $1,222 through the issue
date of the Amended Note. The Amended Note is convertible into 240 million
shares, and if the Amended Note is repaid by the Company, CII has an option to
purchase up to 71 million shares at an exercise price of $0.01 per share. The
note accrues interest at 8% per annum and is due the earlier of May 24, 2006 or
demand by CII. This Amended Note is secured by a pledge of all of the Company's
assets. The accrued interest on the Amended Note at March 31, 2006 and December
9
31, 2005 was $6,300 and $772, respectively.
The conversion price of the Amended Note of approximately $0.00113 per share was
below the fair value per share of the common stock at the date the note was
issued. Accordingly, the Company recorded the fair value of the beneficial
conversion feature of the note payable of $271,148 as debt discount. The debt
discount is being amortized over the life of the Note and charges of $161,646
and $25,000 were recorded as interest expense during the three months ended
March 31, 2006 and 2005, respectively. The Amended Note is recorded net of
deferred debt discount of $88,644 and $250,290 at March 31, 2006 and December
31, 2005, respectively. See Note E - Subsequent Event.
In April 2003, CT Holdings obtained $225,000 from Citadel to pay a legal
settlement for an unsecured Note Payable to Citadel due on demand and bearing
interest at 12% per year. The accrued interest on the note payable at March 31,
2006 and December 31, 2005, was $88,663 and $76,784, respectively.
During 2005, the Company's CEO advanced $38,800 and in December 2005, this
amount plus a $5,000 note due to the Company's CEO were converted to principle
in the Amended Note previously discussed. In October 2004, the Company obtained
a $5,000 90-day note, bearing interest at 5% per year, from the CEO of the
Company. In December 2005, these amounts were converted into the Amended Note
previously discussed.
Pursuant to the terms of the transition services agreement with Citadel Security
Software Inc., ("Citadel") the Company has agreed to pay Citadel $10,000 per
quarter (reduced in July 2005 from $7,500 per month) for the services of its
CEO, CFO and accounting and information management staff, as well as office rent
and indirect overhead expenses. The Company has a liability recorded for
$660,000 and $650,000 for amounts payable to Citadel under this agreement at
March 31, 2006 and December 31, 2005, respectively. The transition services
agreement was extended to May 2006 by approval of the independent members of
each company's board of directors.
In June 2001, the Company's CEO and a director 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 CEO to exchange up
to 5,000,000 (pre 1:1000 reverse stock split) Parago shares into up to 6,000,000
shares of CT Holdings' common stock. The CEO exercised the exchange right in
February 2004. The CEO waived his right to receive the shares of CT Holdings
until the authorized shares become available.
NOTE D - 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
10
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.
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. CT Holdings
has filed counterclaims for breach of the term sheet as well as breach of the
placement agency agreement. Cross motions for partial summary judgments have
been argued but on June 9, 2004 the court entered judgment in favor of
Roan-Meyers in the amount of $3,000,000 and granted interest at the rate of 9%
from October 31, 2000 through the date of final judgment, and thereafter at the
statutory rate allowed by law. The judgment of $3,000,000 as well as the
interest from October 2000 through March 31, 2006 of $1,473,197 has been
accrued. The Company appealed the final judgment but the appellate court
affirmed the trial court's decision. The Company is assessing its alternatives
and intends to vigorously defend this case.
On April 8, 2005, Meyers Associates, L.P. f/k/a Roan/Meyers Associates, L.P. and
f/k/a Janssen-Meyers Associates, L.P. ("Meyers") filed a lawsuit in the Court of
Chancery of the State of Delaware, in New Castle County, against the Company,
Citadel Security Software, Inc. (Citadel) including Steven B. Solomon, the Chief
Executive and a Director of the Company, Chris A. Economou, a Director of the
Company, Lawrence Lacerte, a former Director of the Company, and Phillip J.
Romano, a former Director of the Company (the "Individual Defendants"). The suit
alleges that in connection with an action filed in the Supreme Court of New
York, New York County, to enforce a Settlement Term Sheet executed on July 7,
2000 by Meyers and CT Holdings, Meyers was awarded a judgment against CT
Holdings in the amount of $3 million plus interest on the judgment at the rate
of 9% from October 31, 2000 until the date of entry of that judgment and
thereafter at the statutory rate (the "Judgment"). The suit alleges that CT
Holdings' May 2002 spin-off of its interests in Citadel to CT Holdings'
shareholders rendered CT Holdings insolvent and constituted a fraudulent
conveyance to defraud CT Holdings' creditors, including Meyers. The suit asserts
fraudulent conveyance claims against Citadel and CT Holdings pursuant to
Delaware statutory and common law. The suit also asserts a claim against Citadel
for successor liability as the alleged successor in interest or alter ego of CT
Holdings. The suit alleges that the Individual Defendants who were officers
and/or directors of CT Holdings at the time of the spin-off breached fiduciary
duties allegedly owed to creditors of CT Holdings, including Meyers, by
approving and allowing the spin-off transaction. The suit seeks to void the
spin-off transaction or alternatively to hold Citadel liable for the Judgment
including interest, to recover damages against the Individual Defendants in an
amount not less than the Judgment including interest, plus an unspecified amount
of punitive, consequential and incidental damages, as well as attorneys' fees
and costs. The Company believes that this suit is without merit and intends to
vigorously defend this action. The ultimate outcome is not currently
predictable. Currently the Company is unable to estimate the ultimate liability,
if any, related to this suit, and therefore has not recorded a liability for
this suit at March 31, 2006.
NOTE E - Subsequent Event
On May 18, 2006 the Company and CII enter into a settlement, pursuant to which
CII agreed to release the Company from indebtedness and accrued interest under
the Amended Note of approximately $277,447 at March 31, 2006 plus amounts
advanced to the Company, and interest accrued, after March 31, 2006 through May
18, 2006, in exchange for the delivery to CII of the shares of Parago and River
Logic owned by the Company. CII has agreed to return to the Company the excess,
if any, of the proceeds realized from a future sale of the shares over the
amounts owed at May 18, 2006 under the Amended Note plus any costs related to
the sale of the shares or collection of the proceeds. While CII has agreed to
return the excess, if any, of the proceeds realized from a future sale of the
shares over amounts owed under the Amended Note plus any costs of sale of the
shares or collection of the proceeds, there can be no assurance that a future
sale will occur, nor that the Company will receive any proceeds following the
sale of the shares.
11
The Company may become involved from time to time in litigation on various
matters which are routine to the conduct of our business. The Company believes
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 2. MANAGEMENT'S DISCUSSION AND ANALYSIS' OR PLAN OF OPERATIONS
The following discussions should be read in conjunction with our audited
financial statements and related notes included in our Annual Report on Form
10-KSB for the year ended December 31, 2005. Our year ends on December 31, and
each of our quarters end on the final day of a calendar quarter (March 31, June
30, and September 30). The following discussions contain forward-looking
statements. Please see Cautionary Statement Regarding Forward-Looking
Statements and Risk Factors for a discussion of uncertainties, risks and
assumptions associated with these statements.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-QSB contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. CT Holdings
Enterprises, Inc. ("CT Holdings" or the "Company") bases these forward-looking
statements on its expectations and projections about future events, which CT
Holdings has derived from the information currently available to it. In
addition, from time to time, CT Holdings or its representatives may make
forward-looking statements orally or in writing. Furthermore, forward-looking
statements may be included in CT Holdings' filings with the Securities and
Exchange Commission or press releases or oral statements made by or with the
approval of one of CT Holdings' executive officers. For each of these
forward-looking statements, CT Holdings claims the protection of the safe harbor
for forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995. These forward-looking statements relate to future events or
CT Holdings' future performance, including but not limited to:
- possible or assumed future results of operations;
- future revenue and earnings; and
- business and growth strategies.
Forward-looking statements are those that are not historical in nature,
particularly those that use terminology such as may, could, will, should,
likely, expects, anticipates, contemplates, estimates, believes, plans,
projected, predicts, potential or continue or the negative of these or similar
terms. 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.
Forward-looking statements are subject to certain known and unknown risks and
uncertainties that could cause actual results to differ materially from those
expressed in any forward-looking statements. These risks and uncertainties
include, but are not limited to, the following important factors with respect to
CT Holdings:
- the uncertainty of general business and economic conditions;
- the financial performance of our investments;
- adverse developments, outcomes and expenses in legal proceedings; and
- those described under Risk Factors included in this document.
Forward-looking statements are only predictions as of the date they are made and
are not guarantees of performance. All forward-looking statements included in
this document are based on information available to CT Holdings on the date of
this Report on Form 10-QSB. Readers are cautioned not to place undue reliance on
forward-looking statements. The forward-looking events discussed in this Report
on Form 10-QSB and other statements made from time to time by CT Holdings or its
representatives may not occur, and actual events and results may differ
materially
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and are subject to risks, uncertainties and assumptions about CT Holdings
including without limitation those discussed elsewhere in this Form 10-QSB under
the heading Risk Factors as well as those discussed elsewhere in this Form
10-QSB, and the risks discussed in our Securities and Exchange Commission
filings. Except for their ongoing obligations to disclose material information
as required by the federal securities laws, CT Holdings is not obligated to
publicly update or revise any forward-looking statement, whether as a result of
new information, future events or otherwise. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this
Report on Form 10-QSB and in other statements made from time-to-time by CT
Holdings or its representatives might not occur.
RISK FACTORS
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.
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 of 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
WE HAVE RECEIVED A GOING CONCERN REPORT FROM OUR INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM, HAVE A HISTORY OF NET LOSSES AND WILL NEED ADDITIONAL FINANCING
TO CONTINUE AS A GOING CONCERN.
We received a report from our independent registered public accounting firm for
our year ended December 31, 2005 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. Historically, we have incurred recurring operating losses and have a
significant stockholders' deficit at March 31, 2006 of approximately $6.1
million. We had a cash balance of $197 at March 31, 2006 and current liabilities
total approximately $6.1 million. We have limited access to capital, no plans to
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raise capital, and we have not identified sources of capital at March 31, 2006.
Our past funding needs of the business have been provided by financings through
short-term notes payable and additional investments from related parties,
including our CEO and CITN Investment Inc. ("CII"), an entity of which our CEO
is an officer, director and 50% shareholder, however there can be no assurance
that such funds will be available from these related parties in the future. 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.
We have made investments in entities that we believe may provide liquidity to
the Company in the long term and we believe that Parago and River Logic may
ultimately be successful. Both Parago and River Logic are privately held
companies and because we hold minority interests in these companies, we have
received only limited information regarding their results of operations and
financial condition. We have not participated in the additional capital
infusions (other than the Series A-3 preferred stock of Parago) since our
initial investments and as a result, our ownership percentage in both investee
companies has been significantly diluted. Our ownership in Parago consists of
25,000 shares of common stock and 28.8749 shares of Series A-3 convertible
preferred stock (convertible to 2,887 shares of Parago common stock), and
approximately 8% of River Logic. The carrying value of the investments in Parago
and River Logic had been written down in prior periods and has no carrying value
at March 31, 2006 or December 31, 2005. In May 2006, pursuant to a settlement,
we exchanged the shares of Parago and River Logic for a release of obligations
under the CII note.
While we believe that the performance of the investee companies to date has been
as expected, there can be no assurance that we will ever achieve liquidity from
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. Such actions could have a material
adverse effect on our business operations and result in charges that could be
material to the Company's business and results of operations. At March 31, 2006
we have not identified sources of capital nor do we have any plans to raise
sufficient amounts of capital to settle liabilities or to fund business
development activities.
OUR CONVERTIBLE NOTE MAY ADVERSELY IMPACT THE COMPANY AND OUR COMMON
STOCKHOLDERS OR HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY.
We have issued an amended and restated convertible secured promissory note (the
"Note") for approximately $271,000 payable to CII, an entity owned 50% by Steven
B. Solomon, our CEO and Chairman of the Board, and 50% by Lawrence Lacerte, a
shareholder and former director of our Company. Pursuant to the terms of the
note and the related Loan and Security Agreement (the "Agreement"), the Note is
secured by a pledge of all of our assets and the Note is convertible into
approximately 240 million shares of our common stock, at the option of CII, and
if the Note is repaid, CII has an option to purchase up to 71 million shares of
our common stock at an exercise price of $0.01 per share. CT Holdings has the
option to borrow up to $600,000 under the Agreement (at the sole discretion of
CII). We have also agreed to use our best efforts to amend our certificate of
incorporation or undertake a reverse stock split to permit conversion if CII
elects to convert the Note. The terms of the Note and the Agreement will make it
more difficult or impossible for us to raise additional funds in the future and
may have a material adverse effect on us and our financial condition and results
of operations. The Note is senior to our common stock on any liquidation or sale
of our Company, so the Note must be paid before common stockholders would
receive funds in the event of a liquidation or sale. In addition, the Note is
due and payable on the earlier to occur of May 24, 2006 or demand by CII. In the
event of a default by CT Holdings under the Note or Agreement or demand for
payment by CII, CII could foreclose on the loans and obtain all of our assets or
force us into bankruptcy, in which case our common stock would most likely be
worthless. These terms and conditions could have a material adverse effect on us
and our financial condition and results of operations. In May 2006, pursuant to
a settlement, we exchanged the shares of Parago and River Logic for a release of
obligations under the CII note.
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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 marketplaces. Our business strategy seeks 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. However, the impact of any advice and
expertise may be limited due to a lack of a significant ownership percentage in
any of our investees and the lack of available capital.
In May 2002, we were successful in spinning off of Citadel Security Software
Inc. ("Citadel") into a standalone company through the pro-rata dividend
distribution of Citadel common stock to shareholders of CT Holdings. At the time
of the spin-off, which was first considered in November 2001, Citadel was losing
substantial amounts of money and the investee assets of CT Holdings were more
valuable than the assets in Citadel. At December 31, 2005 we held investments in
two companies, Parago and River Logic. The respective carrying values of the
investments in Parago and River Logic were written down in prior periods and
have no carrying value at March 31, 2006 or December 31, 2005 and were
transferred to CII following a settlement in May 2006. See Note E to the
financial statements for a description of the subsequent event. The lack of
availability of private and public capital available to us has prevented us from
making any additional investments and there can be no assurance that the
availability of capital will improve so that we can execute our business plan.
We have a limited 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 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 may increase as we build the infrastructure necessary to
implement this model.
- We face competition from other 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.
15
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.
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
16
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.
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. 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. The
OTC Bulletin Board requires that listed companies remain current in their
filings with the Securities and Exchange Commission. If we are unable to remain
current in our SEC filings, due to lack of funds or personnel or otherwise, we
could be delisted from the OTC Bulletin Board, and our stock would trade, if at
all, on the pink sheets.
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 PART II Item 1. 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.
IF WE LOSE THE SERVICES OF CITADEL UNDER THE TRANSITION SERVICES AGREEMENT, OUR
BUSINESS WILL SUFFER.
We are dependent on the services provided by employees of Citadel under the
Transition Services Agreement. Our business would be negatively impacted if we
were to lose the availability of these services.
MEMBERS OF OUR BOARD OF DIRECTORS MAY HAVE INTERCOMPANY CONFLICTS OF INTEREST
AFTER OUR SPIN-OFF.
Members of the board of directors and management of CT Holdings own shares of
both Citadel and CT Holdings common stock after the spin-off of Citadel to our
shareholders. In addition, following the spin-off, three of the four directors
of CT Holdings are also directors of Citadel, and the Chief Executive Officer
and Chief Financial Officer of CT Holdings also continue to serve as Chief
Executive Officer and Chief Financial Officer of Citadel. These relationships
could create, or appear to create, potential conflicts of interest when our
directors and executives are faced with decisions that could have different
implications for Citadel and CT Holdings. Examples of these types of decisions
might include the resolution of disputes arising out of the agreements governing
the relationship between CT Holdings and Citadel following the spin-off. Also,
the appearance of conflicts, even if such conflicts do not materialize, might
adversely affect the public's perception of CT Holdings following the spin-off.
17
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 experienced no revenue or earnings 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
In May 2002, CT Holdings effected a pro rata distribution of the common stock of
Citadel to Stockholders of CT Holdings in a ratio of one (1) share of Citadel
common stock for every four (4) shares of CT Holdings common stock. 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. 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 received 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.
OUR BUSINESS
CT Holdings Enterprises, Inc. provides management expertise and sources of
capital to early stage companies. At March 31, 2006 we held investments in
Parago and River Logic. In May 2006 we transferred these shares to CII pursuant
to a settlement. We were incorporated in Delaware in 1992. On March 13, 2006 the
Company changed its name to CT Holdings Enterprises, Inc. Our business model is
designed to enable the companies in which we invest or acquire to become market
leaders in their industries. Our strategy is expected to lead to the
development, acquisition and operation of 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.
At March 31, 2006 our lack of available capital has limited our ability to raise
sufficient capital to invest in additional companies and technologies that could
offer us and our shareholders a reasonable rate of return on their
18
investment in the foreseeable future. We expect that if and when capital becomes
available to us, we may continue our business development and investment
activities, however there can be no assurance that any capital will be available
to us. Until such time as capital becomes available the Company's business
activities will be limited to reviewing investment opportunities, filing of
compliance documents and defending the lawsuits disclosed in Part II, Item 1 -
Legal Proceedings.
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 industry. At March 31, 2006, the Company holds 25,000 shares of Parago
common stock and 28.8749 shares of Series A-3 convertible preferred stock
(convertible into 2,887 shares of Parago common stock). In February 2004, our
CEO loaned us $30,000 in order for us to exercise our warrants to purchase the
shares of Series A-3 convertible preferred stock, pursuant to a promissory note
secured by a pledge of the preferred stock. Our CEO also elected to exercise an
exchange right whereby he exchanged 5,000,000 (before a 1:1000 reverse stock
split that occurred in 2001) shares of Parago, Inc. common stock for 6,000,000
shares of CT Holdings common stock. Our CEO has waived his right to receive
these shares until such time as the shares become authorized. The carrying value
of the investment in Parago was written down in prior periods and has no
carrying value at March 31, 2006. While we believe that our initial $50,000
investment along with the $30,000 to purchase warrants in Parago, represented by
20,000 shares of common stock, 28.8749 shares of Series A-3 convertible
preferred stock (convertible into 2,887 shares of Parago common stock) and an
additional 5,000 shares (5,000,000 pre reverse split shares) received in
February 2004 will be successful, there can be no assurance that our investment
in Parago will ultimately provide an appropriate return on our investment. In
May 2006 we transferred these shares to CII pursuant to a settlement.
OVERVIEW OF RIVER LOGIC
In May 2000, CT Holdings acquired a minority ownership interest in River Logic.
River Logic develops and markets enterprise optimization technologies and
decision support applications. Recognizing a need in the marketplace, 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 tools on
the market.
The Company held an ownership interest in River Logic of approximately 8% at
March 31, 2006. Since our initial investment in May 2000, River Logic has raised
additional capital through the issuance of preferred stock and other equity
securities. In a prior period, we wrote down the carrying value of our
investment in River Logic to zero. While we believe that our investment in River
Logic will be successful there can be no assurance that our investment in River
Logic will ultimately provide an appropriate return on our investment. In May
2006 we transferred these shares to CII pursuant to a settlement.
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
ongoing 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.
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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
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. 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 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 March 31, 2006
and December 31, 2005, we had no investee company that 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. At March 31, 2006 and December 31,
2005, we had no investee company qualified for this accounting method.
20
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. Our investments in
Parago and River Logic were accounted for using this method of accounting at
March 31, 2006 and December 31, 2005. In May 2006, we transferred the shares of
Parago and River Logic to CII pursuant to a settlement.
RESULTS OF OPERATIONS FOR QUARTER ENDED MARCH 31, 2006 AS COMPARED WITH THE
QUARTER ENDED MARCH 31, 2005
Our 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, as well as legal defense costs and costs
associated with SEC reporting. We do not generate any direct revenue and
because our investee companies are not consolidated, we do not report revenue
from investee businesses.
GENERAL AND ADMINISTRATIVE EXPENSE
During the three months ended March 31, 2006 general and administrative expenses
were $73,665 representing a increase of $39,827 or 118% over the $33,838 of
general and administrative expenses recorded for the three months ended March
31, 2005. The increase is primarily due to higher legal fees in first quarter
2006 compared to first quarter 2005.
LITIGATION ACCRUAL
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. CT
Holdings filed counterclaims for breach of the term sheet as well as breach of
the placement agency agreement. Cross motions for partial summary judgments have
been argued but the court entered judgment in favor of Roan-Meyers in the amount
of $3,000,000 and granted interest at the rate of 9% from October 31, 2000
through the date of final judgment, and thereafter at the statutory rate allowed
by law. The Company has accrued for the amount of the partial summary judgment
plus interest of approximately $1,473,197 and $1,404,590 as of March 31, 2006
and December 31, 2005, respectively. Interest expense of approximately $68,607
was accrued in both the first quarter of 2006 and 2005, respectively. The
Company appealed the final judgment, although the appellate court affirmed the
trial court's judgment, and the Company is assessing its alternatives and
intends to vigorously defend this case.
INTEREST EXPENSE
Interest expense for the three months ended March 31, 2006 and 2005 was $243,076
and $104,975, respectively, representing interest expense on litigation accrual,
advances and notes payable to officers and shareholders, the demand note payable
to Citadel and the convertible note payable to CITN Investment Inc. ("CII").
Interest expense of approximately $68,607 related to the judgment entered by the
court for JMA in June 2004 was recorded in both the three months ended March 31,
2006 and 2005. Interest expense also includes amortization of the beneficial
conversion feature associated with the CITN Investment note and amended note
which totaled approximately $161,646 and $25,000 for the three months ended
March 31, 2006 and 2005, respectively. The remaining interest expense is
associated with the advances and the notes payable and was approximately $12,823
in first quarter 2006 versus approximately $11,368 for first quarter 2005.
21
LIQUIDITY AND CAPITAL RESOURCES
We received a report from our independent registered public accounting firm for
our year ended December 31, 2005 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. Historically, we have incurred recurring operating losses and have a
significant stockholders' deficit at March 31, 2006 of approximately $6.1
million. We had a cash balance of $197 at March 31, 2006 and current liabilities
total approximately $6.1 million. We have limited access to capital, no plans to
raise capital and we have not identified sources of capital at March 31, 2006.
Our past funding needs of the business have been provided by financings through
short-term notes payable and additional investments from related parties,
including our CEO, and CII however there can be no assurance that such funds
will be available from these related parties in the future. 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.
Our plans to continue to support and expand our business development activities
are limited due to a lack of identification and availability of near term
capital. As a result, it is unlikely that the implementation of the Company's
business strategy will generate positive cash flow in the foreseeable future.
Achieving positive cash flow is currently highly dependent upon obtaining
liquidity from our investments in unconsolidated affiliates. We have no plans at
March 31, 2006 to raise additional capital to invest in new business
opportunities. To do so we estimate that we will need to raise up to $6.1
million to settle recorded liabilities at March 31, 2006 after which we may then
need to raise additional funds to support our incubator and business development
activities. However there can be no assurance that we will raise additional
funds needed to settle our liabilities.
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 we are able to create
liquidity from an additional inflow of new capital or from our investments
through sale to a strategic investor, an initial public offering or some other
financing transaction, we will continue to require external sources of working
capital to fund our operating expenses. Our inability to raise capital could
have a material adverse effect on our business and operations that could be
material to our results of operations.
Cash Used in Operating Activities
The net cash used in operating activities was approximately $0 for the three
months ended March 31, 2006 resulting from a net loss of $316,741 offset by
non-cash amortization of deferred debt discount of $161,646 recorded as
interest expense, a non-cash interest accrual on the litigation judgment of
$68,607 plus a change in operating liabilities of $86,488.
For the three months ended March 31, 2005 the net cash used in operating
activities was approximately $3,841. This is the result of a net loss of
$138,813 for the three months ended March 31, 2005 and non-cash adjustments for
the amortization of debt discount of $25,000 recorded as interest expense and an
accrual for interest related to litigation of $68,607 and an increase in
operating liabilities of $41,365.
CONTRACTUAL OBLIGATIONS
At March 31, 2006 we have a note payable to CII of $271,148 secured by all the
assets of the Company, a demand note payable to Citadel of $225,000 plus accrued
interest of approximately $84,000, and a $9,000 unsecured note payable plus
accrued interest of approximately $6,500 to a shareholder which is in default at
March 31, 2006. In May 2006, we were released from our obligations under the CII
note, pursuant to a settlement with CII exchanging the shares of Parago and
River Logic for the release. There are no other long-term debt obligations,
capital lease obligations, operating lease obligations or long-term capital
purchase commitments. However at March 31, 2006 we have accrued for payments to
Citadel under the transition services agreement and demand note payable, none of
which may be paid until such time as the Company has sufficient cash to pay
these obligations.
22
ITEM 3. CONTROLS AND PROCEDURES
The Company's management, including the Company's principal executive officer
and principal financial officer, has evaluated the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13(a) - 15(e)
and 15(d) - 15(e) under the Securities Exchange Act of 1934) as of the three
months ended March 31, 2006, the period covered by the Form 10-QSB. Based upon
that evaluation, the Company's principal executive officer and principal
financial officer have concluded that the disclosure controls and procedures
were effective as of March 31, 2006 to provide reasonable assurance that
material information relating to the Company is made known to management
including the CEO and CFO.
There were no changes in the Company's internal control over financial reporting
that occurred during the Company's last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
INHERENT LIMITATION ON THE EFFECTIVENESS OF INTERNAL CONTROLS
The effectiveness of any system of internal control over financial reporting,
including CT Holdings', is subject to inherent limitations, including the
exercise of judgment in designing, implementing, operating, and evaluating the
controls and procedures, and the inability to eliminate misconduct completely.
Accordingly, any system of internal control over financial reporting, including
CT Holdings', can only provide reasonable, not absolute assurances. In addition,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate. We intend to continue to monitor and upgrade our internal controls
as necessary or appropriate for our business, but cannot assure you that such
improvements will be sufficient to provide us with effective internal control
over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. 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 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. However, the
Company and JMA were unable to negotiate the final definitive
23
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. CT Holdings
has filed counterclaims for breach of the term sheet as well as breach of the
placement agency agreement. Cross motions for partial summary judgments have
been argued but on June 9, 2004 the court entered judgment in favor of
Roan-Meyers in the amount of $3,000,000 and granted interest at the rate of 9%
from October 31, 2000 through the date of final judgment, and thereafter at the
statutory rate allowed by law. The $3,000,000 judgment as well as the interest
from October 2000 through March 31, 2006 of $1,473,197 has been accrued. The
Company has appealed the final judgment, and the appellate court affirmed the
trial court's decision. The Company intends to vigorously defend this case.
On April 8, 2005, Meyers Associates, L.P. f/k/a Roan/Meyers Associates, L.P. and
f/k/a Janssen-Meyers Associates, L.P. ("Meyers") filed a lawsuit in the Court of
Chancery of the State of Delaware, in New Castle County, against the Company,
Citadel Security Software, Inc. (Citadel) including Steven B. Solomon, the Chief
Executive and a Director of the Company, Chris A. Economou, a Director of the
Company, Lawrence Lacerte, a former Director of the Company, and Phillip J.
Romano, a former Director of the Company (the "Individual Defendants"). The suit
alleges that in connection with an action filed in the Supreme Court of New
York, New York County, to enforce a Settlement Term Sheet executed on July 7,
2000 by Meyers and CT Holdings, Meyers was awarded a judgment against CT
Holdings in the amount of $3 million plus interest on the judgment at the rate
of 9% from October 31, 2000 until the date of entry of that judgment and
thereafter at the statutory rate (the "Judgment"). The suit alleges that CT
Holdings' May 2002 spin-off of its interests in Citadel to CT Holdings'
shareholders rendered CT Holdings insolvent and constituted a fraudulent
conveyance to defraud CT Holdings' creditors, including Meyers. The suit asserts
fraudulent conveyance claims against Citadel and CT Holdings pursuant to
Delaware statutory and common law. The suit also asserts a claim against Citadel
for successor liability as the alleged successor in interest or alter ego of CT
Holdings. The suit alleges that the Individual Defendants who were officers
and/or directors of CT Holdings at the time of the spin-off breached fiduciary
duties allegedly owed to creditors of CT Holdings, including Meyers, by
approving and allowing the spin-off transaction. The suit seeks to void the
spin-off transaction or alternatively to hold Citadel liable for the Judgment
including interest, to recover damages against the Individual Defendants in an
amount not less than the Judgment including interest, plus an unspecified amount
of punitive, consequential and incidental damages, as well as attorneys' fees
and costs. The Company believes that this suit is without merit and intends to
vigorously defend this action. The ultimate outcome is not currently
predictable. Currently the Company is unable to estimate the ultimate liability,
if any, related to this suit, and therefore has not recorded a liability for
this suit at March 31, 2006.
The Company may become involved from time to time in litigation on various
matters which are routine to the conduct of our business. The Company believes
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 3. DEFAULTS UPON SENIOR SECURITIES
At March 31, 2006 and December 31, 2005, the Company was in default on the
following indebtedness:
- $9,000, an 8% note payable to shareholder. The note continues to bear
interest at 8% with accrued interest at March 31, 2006 of $6,545.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT
NUMBER DESCRIPTION
------- -----------------------------------------------------------------------------
10.1 Release dated May 22, 2006 between the Company and CITN Investments, Inc.
31.1 Certification of Principal Executive Officer, filed herewith.
31.2 Certification of Principal Financial Officer, filed herewith.
32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant
to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.
25
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-QSB to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: May 22, 2006 CT HOLDINGS ENTERPRISES, INC.
By:/s/ STEVEN B. SOLOMON
----------------------------------------------
Steven B. Solomon, President and
Chief Executive Officer
(Duly Authorized Signatory and Principal
Executive Officer)
By:/s/ RICHARD CONNELLY
----------------------------------------------
Richard Connelly, Chief Financial Officer
(Duly Authorized Signatory and Principal
Accounting and Financial Officer)
26