As filed with the Securities and Exchange Commission on September 24, 2002
Registration Statement No.
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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STRONGHOLD TECHNOLOGIES, INC.
(Name of small business issuer in its charter)
Nevada 3576 22-376235
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(State of incorporation or (Primary Standard Industrial (I.R.S. Employer
jurisdiction of organization) Classification Code Number) Identification No.)
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777 Terrace Avenue
Hasbrouck Heights, New Jersey 07604
(201) 727-1464
(Address and telephone number of principal executive offices)
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Christopher J. Carey
President and Chief Executive Officer
Stronghold Technologies, Inc.
777 Terrace Avenue
Hasbrouck Heights, New Jersey 07604
(201) 727-1464
(Name, address and telephone number of agent for service)
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Copies of all communications, including all communications sent to
the agent for service, should be sent to:
Raymond P. Thek, Esq.
Hale and Dorr LLP
650 College Avenue East
Princeton, New Jersey 08540
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Approximate date of proposed sale to the public: From time to time after
the effective date of the registration statement until such time that all of the
shares of common stock registered hereunder have been sold.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check and following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. |_|
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CALCULATION OF REGISTRATION FEE
-------------------------------------------------- ----------------- ----------- ----------------- -----------------
Proposed
Maximum Proposed
Amount Offering Maximum
to be Price Per Aggregate Amount of
Title of Shares to be Registered Registered Share(1) Offering Price (1) Registration Fee
-------------------------------------------------- ----------------- ----------- ------------------- -----------------
Common Stock, par value $0.0001 per share:
Shares issued and outstanding................... 10,013,750 $ 1.80 (2) $ 18,024,750 (2) $ 1,658.28
Shares issued pursuant to outstanding warrants.. 2,002,750 1.88 (3) 3,765,170 (3) 346.40
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TOTAL............................................. 12,016,500 $ 21,789,920 $ 2,004.68
(1) For the sole purpose of calculating the registration fee, the number of
shares to be registered under this Registration Statement has been divided
between two (2) subtotals.
(2) Pursuant to Rule 457(c), this price is calcuated based upon the average of
the bid and asked price as reported on the Over-the-Counter Bulletin Board on
September 19, 2002.
(3) Pursuant to Rule 457(g), this price is calculated based on a weighted
average exercise price of $1.88 per share covering 2,002,750 shares subject to
outstanding warrants.
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THE COMPANY HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE COMPANY SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
SHALL DETERMINE.
Pursuant to Rule 429, this is a combined registration statement that covers
2,011,000 shares being carried forward from Registration Statement No. 333-54822
and 12,016,500 shares being registered for the first time by this registration
statement. As such, this Registration Statement also serves as post-effective
Amendment No. 2 to the Registration Statement on Form SB-2, Registration No.
333-54822.
In accordance with the undertaking of the Registrant set forth in
Registration Statement No. 333-54822, effective as of the date and time this
registration statement is declared effective, the Registrant hereby deregisters
such shares of its common stock that were registered on such registration
statement but were cancelled.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL, NOR DOES IT SEEK AN OFFER TO BUY, THESE SECURITIES IN ANY STATE WHERE
THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
STRONGHOLD TECHNOLOGIES, INC.
14,027,500 Shares of Common Stock
This prospectus relates to the resale by the selling stockholders of 14,027,500
shares of our common stock. The selling stockholders may sell the shares from
time to time at the prevailing market price or in negotiated transactions.
We will not receive any of the proceeds from the sale of the shares by the
selling stockholders.
Our common stock is quoted on the NASD Over-The-Counter Bulletin Board under the
trading symbol "SGHT".
AS YOU REVIEW THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE MATTERS
DESCRIBED IN "RISK FACTORS" BEGINNING ON PAGE 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed on the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is , 2002
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY.......................................................................................................1
RISK FACTORS.............................................................................................................4
Risks Concerning Our Business...................................................................................4
We have a history of incurring net losses, we expect our net losses to continue as a result of planned
increases in operating expenses and we may never achieve profitability.................................4
We Have A Limited Operating History....................................................................4
If We Fail to Gain Market Acceptance of our Products, our Business and Results of Operations Would be
Harmed.................................................................................................5
If We Fail to Properly Manage Our Growth, Our Business and Results of Operations Would be Harmed.......5
If We Are Unable To Obtain Sufficient Funds, And Incur A Cash Flow Deficit, Our Business Could Suffer..6
We Depend On Attracting And Retaining Key Personnel....................................................7
Risks Concerning Our Handheld Technology........................................................................7
An Interruption In the Supply of Products and Services that We Obtain From Third Parties Could Cause a
Decline in Sales of Our Products and Services..........................................................7
Competition in the Wireless Technology Industry Is Intense and Technology Is Changing Rapidly..........7
We May Not Have Adequately Protected Our Intellectual Property Rights..................................8
We May be Sued by Third Parties for Infringement of Their Proprietary Rights and We May Incur Defense
Costs and Possibly Royalty Obligations or Lose the Right to Use Technology Important to Our Business...8
Risks Concerning Our Capital Structure..........................................................................9
Our Management and Other Affiliates Have Significant Control of Our Common Stock and Could Control Our
Actions in a Manner That Conflicts with Our Interests and the Interests of Other Stockholders..........9
We Are Controlled by Our President, Which May Result in You Having No Control in Our Direction or
Affairs................................................................................................9
Shares Eligible for Public Sale........................................................................9
Risks Concerning Our Offering...................................................................................9
Unless A Public Market Develops For Our Common Stock, You May Not Be Able To Sell Your Shares..........9
Our Stock Price May Fluctuate After This Offering.....................................................10
Volatility Of Trading Market May Affect Your Investment...............................................10
Our Common Stock is Considered a Penny Stock and May Be Difficult to Sell.............................10
Because We Do Not Intend to Pay Any Cash Dividends On Our Shares of Common Stock, Our Stockholders
Will Not Be Able to Receive a Return on Their Shares Unless They Sell Them............................11
FORWARD-LOOKING STATEMENTS..............................................................................................11
USE OF PROCEEDS.........................................................................................................11
DETERMINATION OF OFFERING PRICE.........................................................................................11
DILUTION................................................................................................................11
SELLING SECURITY HOLDERS................................................................................................12
PLAN OF DISTRIBUTION....................................................................................................13
LEGAL PROCEEDINGS.......................................................................................................14
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS............................................................14
EXECUTIVE COMPENSATION..................................................................................................17
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..........................................................25
DESCRIPTION OF SECURITIES...............................................................................................26
INTEREST OF NAMED EXPERTS AND COUNSEL...................................................................................28
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES.....................................28
ORGANIZATION WITHIN LAST FIVE YEARS.....................................................................................29
DESCRIPTION OF BUSINESS.................................................................................................30
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION...............................................................35
DESCRIPTION OF PROPERTY.................................................................................................40
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........................................................................41
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................................................................43
LEGAL MATTERS...........................................................................................................44
EXPERTS.................................................................................................................44
WHERE YOU CAN FIND MORE INFORMATION.....................................................................................44
INDEX TO FINANCIAL STATEMENTS..........................................................................................F-1
YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN
THIS PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF COMMON
STOCK MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE
DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION
OF ANY OFFER TO BUY THESE SHARES OF COMMON STOCK IN ANY CIRCUMSTANCES UNDER
WHICH THE OFFER OR SOLICITATION IS UNLAWFUL.
PROSPECTUS SUMMARY
THIS IS ONLY A SUMMARY AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE
IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, ESPECIALLY "RISK
FACTORS" AND OUR FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED IN THIS
PROSPECTUS, BEFORE DECIDING TO INVEST IN SHARES OF OUR COMMON STOCK.
OUR BUSINESS
OUR COMPANY
We market and sell an integrated wireless technology, called
DEALERADVANCE(TM) , through our wholly-owned subsidiary, a New Jersey entity,
Stronghold Technologies, Inc. Among many features, DEALERADVANCE(TM) allows
automobile dealers to capture a customer's purchasing requirements, search
inventory at multiple locations, locate an appropriate vehicle in stock and
print out the necessary forms. DEALERADVANCE(TM) is a handheld device, which
allows sales professionals to increase sales, improve customer follow-up, and
reduce administrative costs.
OUR PRODUCTS
Our DEALERADVANCE(TM) suite of software systems has been designed to
maximize revenues and reduce operating expenses at the dealer level. We have
completed development of our DEALERADVANCE SALES SOLUTION(TM), designed to
increase sales by effectively capturing a greater percentage of unsold customer
prospects and maximizing their "be-back" (return) and closure rates. Our first
pilot system for DEALERADVANCE SALES SOLUTION(TM) was installed in April 2001
and we completed our pilot phase with a sixth installation in September 2001.
Currently DEALERADVANCE SALES SOLUTION(TM) is operating in 34 total sites in
Connecticut, Georgia, Florida, Arizona, California, New York, New Jersey,
Virginia, Nevada and North Carolina.
Our future products are intended to include the DEALERADVANCE SERVICE
SOLUTION(TM)and the DEALERADVANCE INVENTORY MANAGEMENT SOLUTIONS(TM), which are
products also designed to increase revenues and maximize profitability by
effectively managing dealer service operations, their customers and vehicle
inventory. DEALERADVANCE SERVICE SOLUTION(TM) is intended to allow automobile
service advisors to leave their desks and meet and greet clients in their cars
in the service lanes at the dealership to process their service orders.
DEALERADVANCE INVENTORY MANAGEMENT SOLUTION(TM) is intended to provide a
handheld device for the scanning of incoming and outgoing vehicles, which will
immediately adjust inventory on hand for sale. These products are not unlike the
handheld and wireless systems used in the auto rental industry. We are now
accustomed to returning our car where the attendant scans the car, brings up the
rental terms, completes the sale and prints out a receipt, all without having to
step over to a counter.
OUR CHALLENGES
Currently there are no other front-end or Customer Relationship Management
("CRM") systems that perform comparably to DEALERADVANCE SALES SOLUTION(TM).
However, we expect emerging competitive players in the wireless handheld
solutions market in the future.
We have a history of operating losses and have incurred significant net
losses in each fiscal quarter since our inception. From inception to the quarter
ending June 30, 2002, we incurred net losses totaling $4,013,797 and we had a
net loss of $2,420,088 for the fiscal year ended December 31, 2001. We expect to
continue to incur net losses and negative cash flows as we develop our products
and market the Stronghold brand. We are still in the verification and validation
stages of our DealerAdvance(TM) suite of products. We expect to introduce our
DEALERADVANCE SERVICE SOLUTION(TM)
1
and DEALERADVANCE INVENTORY MANAGEMENT SOLUTION(TM) over the next two years.
These solutions are still in the development stages and are not yet at the point
where they are ready to be installed in test sites. While we have received
positive feedback and market acceptance of DEALERADVANCE SALES SOLUTION(TM) by
the test sites, thirty-four systems is a small number and results in such sites
may not be indicative of the overall market acceptance and success of
DealerAdvance Sales Solution(TM) or our entire DEALERADVANCE(TM) suite of
products. The economy may also have an impact on the market acceptance of our
products. Big-ticket consumer purchases are sensitive to broad economic trends.
Therefore, our business could suffer if our customers - automobile dealerships -
are affected by the continuing poor economic conditions. For example, if dealer
sales are trending downward, capital expenditures like those associated with our
DEALERADVANCE(TM) suite of products may be delayed or abandoned.
OUR HISTORY
We were created on September 8, 2000, under the name TDT Development, Inc.
On May 16, 2002 we acquired Stronghold Technologies, Inc., a New Jersey
corporation, pursuant to a merger of such entity into our wholly-owned
subsidiary, TDT Stronghold Acquisition Corp. ("Acquisition Sub"). After the
closing of the merger, Acquisition Sub, the survivor of the merger, changed its
name to Stronghold Technologies, Inc. and remains our wholly-owned subsidiary.
On July 11, 2002 we changed our name from TDT Development, Inc. to Stronghold
Technologies, Inc. Finally, on July 19, 2002 we exchanged all of the shares that
we held in our two other wholly-owned subsidiaries, Terre di Toscana, Inc. and
Terres Toscanes, Inc., for 75,000 shares of our common stock held by Mr. Pietro
Bortolatti, our former president. These subsidiaries conducted an import and
distribution business specializing in truffle-based food products. As a result
of the exchange with Mr. Bortolatti, we are no longer involved in the truffle
business. The sale of these subsidiaries was part of our effort to focus on the
handheld technology business.
The selling stockholders referred to in this prospectus are the owners of
our common stock and warrants that may be exercised for shares of our common
stock. All references to "we," "us," "our," or similar terms used in this
prospectus refer to Stronghold Technologies, Inc., a Nevada corporation,
formerly known as TDT Development, Inc., and the filer of this prospectus. All
references to "Stronghold" used in this prospectus refer to our wholly-owned
subsidiary, Stronghold Technologies, Inc., a New Jersey corporation. All
references to the "Predecessor Entity" refer to the New Jersey corporation we
acquired on May 16, 2002, Stronghold Technologies, Inc., which was merged with
and into Stronghold.
Our principal executive offices are located at 777 Terrace Avenue,
Hasbrouck Heights, New Jersey 07604. Our telephone number at that location is
201-727-1464 and Stronghold's Internet address is www.strongholdtech.com. The
information contained on such website is not incorporated by reference in this
prospectus.
2
The Offering
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Shares offered by the selling stockholders 14,027,500
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Common stock outstanding 10,022,000
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Use of proceeds The selling
stockholders will
receive the net
proceeds from the sale
of shares. We will
receive none of the
proceeds from the sale
of shares offered by
this prospectus.
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Trading symbol "SGHT" quoted on the
NASD Over-The-Counter
Bulletin Board
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3
RISK FACTORS
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW BEFORE YOU
PURCHASE ANY OF OUR COMMON STOCK. THESE RISKS AND UNCERTAINTIES ARE NOT THE ONLY
ONES WE FACE. UNKNOWN ADDITIONAL RISKS AND UNCERTAINTIES, OR ONES THAT WE
CURRENTLY CONSIDER IMMATERIAL, MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. IF ANY
OF THESE RISKS OR UNCERTAINTIES ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL
CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED. IN
THIS EVENT YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS CONCERNING OUR BUSINESS
WE HAVE A HISTORY OF INCURRING NET LOSSES, WE EXPECT OUR NET LOSSES TO CONTINUE
AS A RESULT OF PLANNED INCREASES IN OPERATING EXPENSES AND WE MAY NEVER ACHIEVE
PROFITABILITY
We have a history of operating losses in our wireless business and have
incurred significant net losses in such business in each fiscal quarter since
our inception. From inception to the quarter ending June 30, 2002, we incurred
net losses totaling $4,013,797 and we had a net loss of $2,420,088 for the
fiscal year ended December 31, 2001. We expect to continue to incur net losses
and negative cash flows throughout 2002 because we intend to increase operating
expenses to develop the Stronghold brand through marketing, promotion and
enhancement of our services. As a result of this expected increase in operating
expenses, we will need to generate significant additional revenue to achieve
profitability. Our ability to generate and sustain significant additional
revenues or achieve profitability will depend upon the factors discussed
elsewhere in this "Risk Factors" section, as well as numerous other factors
outside of our control, including:
o Development of competing products that are more effective or less costly
than ours;
o Our ability to develop and commercialize our own products and technologies;
and
o Our ability to achieve increased sales for our existing products and sales
for any new products.
It is possible that we may never achieve profitability and, even if we do
achieve profitability, we may not sustain or increase profitability on a
quarterly or annual basis in the future. If we do not achieve sustained
profitability, we will be unable to continue our operations.
WE HAVE A LIMITED OPERATING HISTORY
We were formed in September 2000 to import and market truffle oil products.
Our focus has recently shifted to development and marketing of handheld wireless
technology for the automotive dealer software market. We entered this business
through the acquisition of an entity with only 23 months of operating history.
We must, therefore, be considered to be subject to all of the risks inherent in
the establishment of a new business enterprise. Our limited operating history
makes it difficult to evaluate our financial performance and prospects. We
cannot assure you at this time that we will operate profitably or that we will
have adequate working capital to meet our obligations as they become due.
Because of our limited financial history, we believe that period-to-period
comparisons of our results of operations will not be meaningful in the short
term and should not be relied upon as indicators of future performance.
4
IF WE FAIL TO GAIN MARKET ACCEPTANCE OF OUR PRODUCTS, OUR BUSINESS AND RESULTS
OF OPERATIONS WOULD BE HARMED
We are still in the verification and validation stages of our
DEALERADVANCE(TM) suite of products. Our first pilot system for DEALERADVANCE
SALES SOLUTION(TM) was installed in April 2001 and our sixth and final pilot
system was installed in September 2001. We have implemented a total of 29
additional sites during 2002, 28 of which are still operating. We expect to
introduce our DEALERADVANCE SERVICE SOLUTION(TM) and DEALERADVANCE INVENTORY
MANAGEMENT SOLUTION(TM) over the next two years. These solutions are still in
the development stages and are not yet at the point where they are ready to be
installed in test sites. While we have received positive feedback and market
acceptance of DEALERADVANCE SALES SOLUTION(TM) by the test sites, we have
overall limited commerical sales to dealers. Thirty-five total systems is a
small number and results in such sites may not be indicative of the overall
market acceptance and success of DEALERADVANCE SALES SOLUTIONS(TM) or our entire
DEALERADVANCE(TM) suite of products. We may experience design, marketing, and
other difficulties that could delay or prevent our development, introduction, or
marketing of these and other new products and enhancements. In addition, the
costs of developing and marketing our products may far outweigh the revenue
stream from our products. Finally, our prospects for success will depend on our
ability to successfully sell our products to key automobile dealerships that may
be inhibited from doing business with us because of their commitment to their
own technologies and products or because of our relatively small size and lack
of sales and production history.
The nature of our handheld product and technology requires us to market
almost exclusively to automobile dealerships. Should any particular dealership
or conglomerate of dealerships favor other providers of similar services or not
utilize our services to the extent anticipated, our business may be adversely
affected. The economy may also have an impact on the market acceptance of our
products. Big-ticket consumer purchases are sensitive to broad economic trends.
Therefore, our business could suffer if our customers - automobile dealerships -
are affected by the continuing poor economic conditions. For example, if dealer
sales are trending downward, capital expenditures like those associated without
our DEALERADVANCE (TM) suite of products may be delayed or abandoned.
IF WE FAIL TO PROPERLY MANAGE OUR GROWTH, OUR BUSINESS AND RESULTS OF OPERATIONS
WOULD BE HARMED
We have begun expanding our operations in anticipation of an aggressive
rollout of our DEALERADVANCE(TM) product suite. In the past eight months our
sales and marketing team has increased from 7 to 20 employees. We have
strategically hired additional sales representatives in six more states in the
past six months, expanding into Arizona, Virginia, Southern California, Florida,
Illinois, Ohio, Texas and Georgia. Additionally, we must continue to develop and
expand our systems and operations as the number of automobile dealerships
installing our products and requiring our ongoing services increases. The pace
of our anticipated expansion, together with the level of expertise and
technological sophistication required to provide implementation and support
services, demands an unusual amount of focus on the operational needs of our
future customers for quality and reliability, as well as timely delivery and
post-installation and post-consultation field and remote support. This
development and expansion has placed, and we expect it to continue to place,
strain on our managerial, operational and financial resources.
We may be unable to develop and expand our systems and operations for one
or more of the following reasons:
5
o We may not be able to locate or hire at reasonable compensation rates
qualified and experienced sales staff and other employees necessary to
expand our capacity on a timely basis;
o We may not be able to obtain the hardware necessary to expand the
automobile dealership capacity of our products on a timely basis;
o We may not be able to expand our customer service, billing and other
related support systems;
o We may not be able to integrate new management and employees into our
overall operations;
o We may not be able to establish improved financial and accounting systems;
and
o We may not be able to successfully integrate our internal operations with
the operations of our product manufacturers, distributors and suppliers to
product and market commercially viable products.
If we cannot manage our growth effectively, our business and operating
results will suffer. Additionally, any failure on our part to develop and
maintain our wireless technology products if we experience rapid growth could
significantly adversely affect our reputation and brand name which could reduce
demand for our services and adversely affect our business, financial condition
and operating results.
IF WE ARE UNABLE TO OBTAIN SUFFICIENT FUNDS, AND INCUR A CASH FLOW DEFICIT, OUR
BUSINESS COULD SUFFER
Although we believe that the funds raised through our recent private
placement offerings of common stock to certain private investors and Series A
Preferred Stock and warrants for common stock to Stanford Venture Capital
Holdings, Inc. will be sufficient for our needs for the immediate future, we
anticipate that we will be required to raise additional capital by the end of
2002 and over the next several years in order to operate according to our
business plan. We may have difficulty obtaining additional funds as and if
needed, and we may have to accept terms that would adversely affect our
shareholders. For example, the terms of any future financings may impose
restrictions on our right to declare dividends or on the manner in which we
conduct our business. Also, lending institutions or private investors may impose
restrictions on future decisions by us to make capital expenditures,
acquisitions or asset sales.
We may not be able to locate additional funding sources at all or on
acceptable terms. If we cannot raise funds on acceptable terms, if and when
needed, we may not be able to develop or enhance our products to customers, grow
our business or respond to competitive pressures or unanticipated requirements,
which could seriously harm our business.
Since inception, we have financed all of our operations through private
equity financings and a commerical bank loan. Our future capital requirements
depend on numerous factors, including:
o The scope of our research and development;
o Our ability to attract business partners willing to share in our
development costs;
o Our ability to successfully commercialize our technology;
o Competing technological and market developments; and
o Our ability to enter into collaborative arrangements for the development,
regulatory approval and commercialization of other products.
6
WE DEPEND ON ATTRACTING AND RETAINING KEY PERSONNEL
We are highly dependent on the principal members of our management,
research and sales staff. The loss of their services might significantly delay
or prevent the achievement of development or strategic objectives. Our success
depends on our ability to retain key employees and to attract additional
qualified employees. Competition for personnel is intense, and we cannot assure
you that we will be able to retain existing personnel or attract and retain
additional highly qualified employees in the future.
Our subsidiary, Stronghold, has an employment agreement in place with its
President and Chief Executive Officer, Christopher J. Carey, which provides for
vesting of stock options for the purchase of shares of our common stock based on
continued employment or on the achievement of performance objectives as set
forth in the employment agreement. Stronghold does not have similar retention
provisions in employment agreements with its other key personnel. If we are
unable to hire and retain personnel in key positions, our business could be
significantly and adversely affected unless qualified replacements can be found.
Our success is dependent on the vision, technological knowledge, business
relationships and abilities of our current president, Mr. Carey. Any reduction
of Mr. Carey's role in the handheld technology business would have a material
adverse effect on us. Mr. Carey's employment contract expires on December 31,
2004.
RISKS CONCERNING OUR HANDHELD TECHNOLOGY
AN INTERRUPTION IN THE SUPPLY OF PRODUCTS AND SERVICES THAT WE OBTAIN FROM THIRD
PARTIES COULD CAUSE A DECLINE IN SALES OF OUR PRODUCTS AND SERVICES
We are dependant upon certain providers of operating software, including
Microsoft and their Pocket PC software, to provide the backdrop for our
applications work. If there are significant changes to this software, or if this
software stops being available or supported, we will experience a disruption to
our product and to our development effort.
In designing, developing and supporting our wireless data services, we rely
on mobile device manufacturers, content providers, database providers and
software providers. These suppliers may experience difficulty in supplying us
products or services sufficient to meet our needs or they may terminate or fail
to renew contracts for supplying us these products or services on terms we find
acceptable. Any significant interruption in the supply of any of these products
or services could cause a decline in sales of our products and services, unless
and until we are able to replace the functionality provided by these products
and services. We also depend on third parties to deliver and support reliable
products, enhance their current products, develop new products on a timely and
cost- effective basis and respond to emerging industry standards and other
technological changes.
COMPETITION IN THE WIRELESS TECHNOLOGY INDUSTRY IS INTENSE AND TECHNOLOGY IS
CHANGING RAPIDLY
Many wireless technology and software companies are engaged in research and
development activities relating to our range of products. The market for
handheld wireless technology is intensely competitive, rapidly changing and
undergoing consolidation. We may be unable to compete successfully against our
current and future competitors, which may result in price reductions, reduced
margins and the inability to achieve market acceptance for our products. Our
competitors in the field
7
are companies that include major international car dealership service companies,
specialized technology companies, and, potentially, our joint venture and
strategic alliance partners. Such companies include: Automotive Directions,
Higher Gear, Autobase, Cowboy Corporation and Autotown, among others. Many of
these competitors have substantially greater financial, marketing, sales,
distribution and technical resources than us and have more experience in
research and development, sales, service, manufacturing and marketing. We
anticipate increased competition in the future as new companies enter the market
and new technologies become available. Our technology may be rendered obsolete
or uneconomical by technological advances or entirely different approaches
developed by one or more of our competitors.
WE MAY NOT HAVE ADEQUATELY PROTECTED OUR INTELLECTUAL PROPERTY RIGHTS
Our success depends on our ability to sell products and services for which
we may not have intellectual property rights. We currently do not have patents
on any of our intellectual property. We have filed for a patent, which protects
a number of developments pertaining to the management of information flow for
automotive dealer-based software. An additional application is currently being
planned which will address certain proprietary features pertaining to our
systems components, related equipment and software modules. We cannot assure you
we will be successful in protecting our intellectual property through patent
law. In addition, although we have applied for U.S. federal trademark
protection, we do not have any U.S. federal trademark registrations for the
marks "DealerAdvance Sales Solution", "DealerAdvance Service Solution",
"DealerAdvance Inventory Management Solution", or certain of our other marks and
we may not be able to obtain such registrations due to conflicting marks or
otherwise. We rely primarily on trade secret laws, patent law, copyright law,
unfair competition law and confidentiality agreements to protect our
intellectual property. To the extent that intellectual property law does not
adequately protect our technology, other companies could develop and market
similar products or services, which could adversely affect our business.
WE MAY BE SUED BY THIRD PARTIES FOR INFRINGEMENT OF THEIR PROPRIETARY RIGHTS AND
WE MAY INCUR DEFENSE COSTS AND POSSIBLY ROYALTY OBLIGATIONS OR LOSE THE RIGHT TO
USE TECHNOLOGY IMPORTANT TO OUR BUSINESS
The wireless technology and software industries are characterized by the
existence of a large number of patents and frequent litigation based on
allegations of patent infringement or other violations of intellectual property
rights. As the number of participants in our market increases, the possibility
of an intellectual property claim against us could increase. Any intellectual
property claims, with or without merit, could be time consuming and expensive to
litigate or settle and could divert management attention from administering our
business. A third party asserting infringement claims against us or our
customers with respect to our current or future products may adversely affect us
by, for example, causing us to enter into costly royalty arrangements or forcing
us to incur settlement or litigation costs.
8
RISKS CONCERNING OUR CAPITAL STRUCTURE
OUR MANAGEMENT AND OTHER AFFILIATES HAVE SIGNIFICANT CONTROL OF OUR COMMON STOCK
AND COULD CONTROL OUR ACTIONS IN A MANNER THAT CONFLICTS WITH OUR INTERESTS AND
THE INTERESTS OF OTHER STOCKHOLDERS
As of September 19, 2002, our executive officers, directors and affiliated
entities together beneficially own approximately 77.3% of the outstanding shares
of our common stock, assuming the exercise of warrants which are currently
exercisable and held by such persons, and the conversion of outstanding shares
of our Series A $1.50 Convertible Preferred Stock held by such persons. As a
result, these stockholders, acting together, will be able to exercise
considerable influence over matters requiring approval by our stockholders,
including the election of directors, and may not always act in the best
interests of other stockholders. Such a concentration of ownership may have the
effect of delaying or preventing a change in control of our company, including
transactions in which our stockholders might otherwise receive a premium for
their shares over then current market prices.
WE ARE CONTROLLED BY OUR PRESIDENT, WHICH MAY RESULT IN YOU HAVING NO CONTROL IN
OUR DIRECTION OR AFFAIRS
Our president owns approximately 57% of our current outstanding common
stock. As a result, he has the ability to control our company and direct our
affairs and business, including the approval of significant corporate
transactions. This concentration of ownership may have the effect of delaying,
deferring or preventing a change in control of our company and may make some
transactions more difficult or impossible without the support of these
stockholders. Any of these events could decrease the market price of our common
stock.
SHARES ELIGIBLE FOR PUBLIC SALE
As of September 19, 2002, we had 10,022,000 shares of our common stock
issued and outstanding. We are registering 8,011,000 of such shares hereunder.
In addition, we are registering 4,005,500 shares of our common stock, which will
be issued upon the exercise of certain warrants outstanding and upon the
conversion of certain shares of our preferred stock. Consequently, sales of
substantial amounts of our common stock in the public market, whether by
purchasers in this offering or stockholders holding shares of our registered
common stock, or the perception that such sales could occur, may adversely
affect the market price of our common stock.
RISKS CONCERNING OUR OFFERING
UNLESS A PUBLIC MARKET DEVELOPS FOR OUR COMMON STOCK, YOU MAY NOT BE ABLE TO
SELL YOUR SHARES
There has been no active market for our common stock. There can be no
assurance, moreover, that an active trading market will ever develop or, if
developed, that it will be maintained. Failure to develop or maintain an active
trading market could negatively affect the price of our securities, and you may
be unable to sell your shares. In addition, you may find it difficult to obtain
accurate quotations as to the value of shares of our common stock and may suffer
a loss of all or a substantial portion of your investment.
9
OUR STOCK PRICE MAY FLUCTUATE AFTER THIS OFFERING
We cannot guarantee that you will be able to resell the shares of our
common stock at or above your purchase price. The market price of our common
stock may fluctuate significantly in response to a number of factors, some of
which are beyond our control. These factors include:
o Quarterly variations in operating results;
o The progress or perceived progress of our research, development and sales
efforts;
o Changes in accounting treatments or principles;
o Announcements by us or our competitors of new product and service
offerings, significant contracts, acquisitions or strategic relationships;
o Additions or departures of key personnel;
o Future public and private offerings or resale of our common stock or other
securities;
o Stock market price and volume fluctuations of publicly-traded companies in
general and development companies in particular; and
o General political, economic and market conditions.
VOLATILITY OF TRADING MARKET MAY AFFECT YOUR INVESTMENT
The market price for our securities is highly volatile. Factors such as our
financial results, introduction of new products in the marketplace, and various
factors affecting the automobile industry and the wireless industry generally,
including extreme volatility and extended steep declines in equity market values
of other wireless-related publicly traded companies, as well as sharp declines
in private equity valuations of wireless-related privately-held companies, may
have a significant impact on the market price of our securities, as well as
price and volume volatility affecting small and emerging growth companies, in
general, and not necessarily related to the operating performance of such
companies.
OUR COMMON STOCK IS CONSIDERED A PENNY STOCK AND MAY BE DIFFICULT TO SELL
The SEC has adopted regulations, which generally define penny stock to be
an equity security that has a market price of less than $5.00 per share or an
exercise price of less than $5.00 per share, subject to specific exemptions.
Presently, the market price of our common stock is less than $5.00 per share.
Therefore, the SEC "penny stock" rules govern the trading in our common stock.
These rules require, among other things, that any broker engaging in a
transaction in our securities provide its customers with the following:
o A risk disclosure document;
o Disclosure of market quotations, if any;
o Disclosure of the compensation of the broker and its salespersons in the
transaction; and
o Monthly account statements showing the market values of our securities held
in the customer's accounts.
The broker must provide the bid and offer quotations and compensation
information before effecting the transaction. This information must be contained
on the customer's confirmation. Generally, brokers may be less willing to effect
transactions in penny stocks. This may make it more difficult for investors to
dispose of our common stock. In addition, the broker prepares the information
provided to the broker's customer. Because we do not prepare the information, we
cannot assure you that such information is accurate, complete or current.
10
BECAUSE WE DO NOT INTEND TO PAY ANY CASH DIVIDENDS ON OUR SHARES OF COMMON
STOCK, OUR STOCKHOLDERS WILL NOT BE ABLE TO RECEIVE A RETURN ON THEIR SHARES
UNLESS THEY SELL THEM
We have never paid or declared any cash dividends on our common stock or
other securities and intend to retain any future earnings to finance the
development and expansion of our business. We do not anticipate paying any cash
dividends on our common stock in the foreseeable future. Unless we pay
dividends, our stockholders will not be able to receive a return on their shares
unless they sell them.
FORWARD-LOOKING STATEMENTS
This prospectus contains certain financial information and statements
regarding our operations and financial prospects of a forward-looking nature.
Any statements contained in this prospectus which are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the generality of the foregoing, words such as, "may", "will", "intend",
"expect", "believe", "anticipate", "could", "estimate", "plan" or "continue" or
the negative variations of those words or comparable terminology are intended to
identify forward-looking statements. There can be no assurance of any kind that
such forward-looking information and statements will be reflective in any way of
our actual future operations and/or financial results, and any of such
information and statements should not be relied upon either in whole or in part
in connection with any decision to invest in the shares. There are a number of
important factors that could cause actual events or our actual results to differ
materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth above under the caption
"Risk Factors" included in this prospectus and other factors expressed from time
to time in our filings with the Securities and Exchange Commission. We do not
undertake to update any forward-looking statements.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the stockholder's shares
offered by this prospectus. All proceeds from the sale of the stockholders'
shares will be for the account of the selling shareholders.
DETERMINATION OF OFFERING PRICE
The selling security holders may sell all or a portion of their shares in
the over-the-counter market at prices prevailing at the time of sale, or related
to the market price at the time of sale, or at other negotiated prices. The
offering price has no relationship to any established criteria of value, such as
book value or earnings per share. Consequently, we cannot determine what the
actual offering price will be either now or at the time of sale.
DILUTION
10,022,000 of the shares offered for sale by the selling security holders
are already outstanding and, therefore, do not contribute to dilution. 2,002,750
shares offered for sale by the selling security holders relate to shares
issuable upon exercise of outstanding warrants. To the extent such warrants are
exercised at an exercise price less than the price per share paid by purchasers
pursuant to this offering, there would be dilution to such purchasers. In
addition, as of
11
September 13, 2002, there were options outstanding pursuant to our stock plans
to purchase 1,400,056 shares of common stock at a weighted average exercise,
price of $.53. To the extent any of these options are exercised, there will be
further dilution to existing or future shareholders.
SELLING SECURITY HOLDERS
All of the shares of our common stock offered under this prospectus are
being sold by the holders thereof and not by the Company. We will not receive
any of the proceeds from sales of shares offered under this prospectus.
All costs, expenses and fees in connection with the registration of the
selling stockholders' shares will be borne by us. All brokerage commissions, if
any, attributable to the sale of shares by selling stockholders will be borne by
such holders.
The selling stockholders are offering a total of 14,027,500 shares of our
common stock. The selling stockholders are not themselves, nor are they
affiliated with, broker-dealers. The following table sets forth:
o the name of each person or entity who is a selling stockholder;
o the number of securities owned by each such person at the time of this
offering;
o the number of shares of common stock which may be offered under this
prospectus; and
o the number of shares of common stock such person will own after the
completion of this offering.
The column "Number of Shares Owned After the Offering" gives effect to the sale
of all the shares of common stock being offered by this prospectus. However, the
selling stockholders may sell none of the shares or less than all of the shares
listed on the table. In addition, the shares listed below may be sold pursuant
to this prospectus or in privately negotiated transactions. Accordingly, we
cannot estimate the number of shares of common stock that the selling
stockholders will sell under this prospectus.
Number of Shares Number of Shares
Offered Owned After
in the Offering the Offering
--------------------- ---------------
Number of
Selling Stockholder Shares Owned %(1) # # %
--------------------------- --------------- ---- ------- - -
Jenadosa Holdings Limited .................. 125,000 * 125,000 0 0
South Edge International Ltd. .............. 125,000 * 125,000 0 0
Highgate Resources, Ltd. ................... 125,000 * 125,000 0 0
Effingham Investments, Ltd.................. 125,000 * 125,000 0 0
Viking Investment Group II, Inc. ........... 275,000 2 275,000 0 0
DePasquale, Joseph Francois, Dr. ........... 150,000 * 150,000 0 0
Ellul, Adrien .............................. 150,000 * 150,000 0 0
Turf Holding Ltd. .......................... 40,000 * 40,000 0 0
Ming Capital Enterprises Ltd. .............. 50,000 * 50,000 0 0
Private Investment Company, Ltd. ........... 40,000 * 40,000 0 0
Partner Marketing AG ....................... 40,000 * 40,000 0 0
HAPI Handels-und ........................... 40,000 * 40,000 0 0
CCD Consulting ............................. 40,000 * 40,000 0 0
Seloz Gestion & Finance S.A ................ 40,000 * 40,000 0 0
Tel-Ex-Ka AG................................ 40,000 * 40,000 0 0
UG Overseas Ltd. .......................... 200,000 1.4 200,000 0 0
Sylvia Paris ............................... 1,000 * 1,000 0 0
Pierre Desmarais ........................... 1,000 * 1,000 0 0
Marie-Claude Jacques ....................... 1,000 * 1,000 0 0
Richard Hull ............................... 1,000 * 1,000 0 0
12
Julie Bourne ............................... 1,000 * 1,000 0 0
Samuel Coustant ............................ 1,000 * 1,000 0 0
Genevieve Sabourin ......................... 1,000 * 1,000 0 0
Laliberte Normande ......................... 1,000 * 1,000 0 0
France Desgagne ............................ 1,000 * 1,000 0 0
Sylvia Ianiri Phelps ....................... 1,000 * 1,000 0 0
Parenteau Corporation ...................... 320,000 2.3 320,000 0 0
Alain Trottier ............................. 1,000 * 1,000 0 0
Pierre Marcotte ............................ 1,000 * 1,000 0 0
Claude Paris ............................... 1,000 * 1,000 0 0
Greg Derkevorkina .......................... 1,000 * 1,000 0 0
Linda Moses ................................ 1,000 * 1,000 0 0
Eirini Demetelin ........................... 1,000 * 1,000 0 0
KGL Investments, Ltd. ...................... 30,000 * 30,000 0 0
David Rector (2) ........................... 15,000 * 15,000 0 0
CEDE & Co. ................................. 25,000 * 25,000 0 0
Christopher J. Carey (3).................... 5,697,917 40.6 5,697,917 0 0
Salvatore D'Ambra (4)....................... 437,500 3.1 437,500 0 0
Lenard J. Berger (5)........................ 437,500 3.1 437,500 0 0
James J. Cummiskey (6)...................... 437,500 3.1 437,500 0 0
Amie Carey.................................. 218,750 1.6 218,750 0 0
Christopher Carey Jr........................ 218,750 1.6 218,750 0 0
Carol Carlson............................... 43,750 * 43,750 0 0
Hertha Codey................................ 43,750 * 43,750 0 0
William Carey Jr............................ 43,750 * 43,750 0 0
Michael Carey............................... 43,750 * 43,750 0 0
Susan Weaver Sanders........................ 43,750 * 43,750 0 0
Stanford Venture Capital Holdings, Inc. (7). 3,004,124 21.4 3,004,124 0 0
Osvaldo Pi (8) ............................. 250,344 1.8 250,344 0 0
Daniel T. Bogar (8) ........................ 250,344 1.8 250,344 0 0
William R. Fuselmann (8) ................... 250,344 1.8 250,344 0 0
Ronald H. Stein (8) ........................ 250,344 1.8 250,344 0 0
Frank A. and Maria T. Cirino ............... 2,000 * 2,000 0 0
Joseph Kelly................................ 200,000 1.4 200,000 0 0
Robert Cox.................................. 60,000 * 60,000 0 0
Hugh Abernathy.............................. 50,000 * 50,000 0 0
John Dudzik................................. 20,000 * 20,000 0 0
Geoff Pleau................................. 5,000 * 5,000 0 0
Geraldine S. Cummiskey...................... 4,000 * 4,000 0 0
Catherine M. Cummiskey...................... 3,333 * 3,333 0 0
--------------------------------------------------------------------
Total ...................................... 14,027,500 100% 14,027,500 0 0
----------------------
(1) Percentages assume the conversion of Stanford's 2,002,750 shares of Series A
$1.50 Convertible Preferred Stock into the same number of shares of our common
stock and the exercise of outstanding warrants to purchase a total of 2,002,750
shares of common stock.
(2) David Rector was a director of TDT Development, Inc. prior to the merger
between TDT and the Predecessor Entity. Mr. Rector is no longer our director.
(3) 3,937,500 of these shares are owned by Christopher J. Carey and his wife,
Mary Carey, as Joint Tenants with Right of Survivorship. Christopher J. Carey is
our President and Chief Executive Officer and is a director.
(4) Salvatore D'Ambra is our Chief Engineer and Vice President.
(5) Lenard J. Berger is our Chief Technology Officer and Vice President.
(6) James J. Cummiskey is our Vice President of Sales and Marketing.
(7) Consists of 2,002,750 shares of common stock issuable upon the conversion of
2,002,750 shares of our Series A $1.50 Convertible Preferred Stock and 1,001,374
shares of common stock issuable upon the exercise of a warrant.
(8) Consists of 250,344 shares of common stock issuable upon the exercise of
warrants.
* Indicates less than one percent of the total outstanding common stock.
PLAN OF DISTRIBUTION
The selling stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock covered by this prospectus at prevailing market prices or
privately negotiated prices. We will pay the expenses incurred to register the
shares being offered by the selling stockholders for resale, but the selling
stockholders will pay any
13
underwriting discounts and brokerage commissions associated with these sales.
Any commission or discount will be negotiated immediately prior to the sale with
the broker-dealer or agent. The selling stockholders may use any one or more of
the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;
o privately negotiated transactions; and
o a combination of any such methods of sale.
In addition, any shares that qualify for sale under Rule 144 may be sold
under Rule 144 rather than through this prospectus.
In offering the shares covered by this prospectus, the selling stockholders
and any broker-dealers who execute sales for the selling stockholders may be
deemed to be an "underwriter" within the meaning of the Securities Act in
connection with such sales. Any profits realized by the selling stockholders and
the compensation of any broker-dealer may be deemed to be underwriting discounts
and commissions.
Selling shareholders may sell their shares in all 50 states in the U.S.
LEGAL PROCEEDINGS
We are not a party to, nor are we aware of, any existing, pending or
threatened lawsuits or other legal actions.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Our executive officers and directors and their respective ages and
positions as of September 19, 2002 are as follows:
Name Age Position(s)
------------------------------------------------------------------------------------------------
Christopher J. Carey....... 50 President, Chief Executive Officer and Director
Lenard Berger.............. 33 Chief Technology Officer and Vice President
James Cummiskey............ 38 Vice President of Sales and Marketing
Salvatore D'Ambra.......... 42 Chief Engineer and Vice President
Robert J. Corliss*......... 49 Director
Robert Cox*................ 61 Director
William Lenahan*........... 51 Director
Luis Delahoz*.............. 42 Director
----------
* Member of audit, compensation and governance/nominating committees.
CHRISTOPHER J. CAREY has served as our President and Chief Executive
Officer since May 2002. Mr. Carey is also the founder, President and Chief
Executive Officer of our wholly-owned subsidiary, also called Stronghold
Technologies, Inc. ("Stronghold"). Since its founding in 2000, Mr. Carey has set
the strategic direction and corporate vision for Stronghold, drawing on over 25
years of experience
14
building successful, technology-focused businesses. From 1976 until 1996, Mr.
Carey was President and Chief Executive Officer of Datatec Industries, Inc.,
which became North America's largest specialist in the rapid deployment of
network and computing systems. After negotiating a merger with Glasgal
Communications in 1996, Mr. Carey became President of Datatec Systems, Inc., the
combined entity. Mr. Carey is currently a member of Board of Trustees of The
Albert Dorman Honors College, New Jersey Institute of Technology, and a past
Chairman of the New Jersey Chapter of the Young President's Organization.
ROBERT J. CORLISS has been our director since May 2002. Mr. Corliss has
been, since 1998, the President and Chief Executive Officer of the Athlete's
Foot Group, Inc., a privately owned, 800-store retail chain with operations in
50 countries. Since 1999, Mr. Corliss has been a member of the board of Kahala
Corporation, a publicly traded franchising corporation dedicated to the design,
development and marketing of quick service restaurants serving nutritious
products. From 1996 until 1998, Mr. Corliss was the President and Chief
Executive Officer of Infinity Sports, Inc., a manufacturer, distributor and
licensor of athletic products primarily under the brand Bike Athletic. Prior to
founding Infinity Sports, Inc., Mr. Corliss was the Chief Executive Officer and
President of Hermann's Sporting Goods retail chain. Mr. Corliss is very active
in the sporting goods industry and serves on the Board of Directors of The
Athlete's Foot Group, Inc. He is on the Advisory Council for the Sporting Goods
Manufacturers Association's recently announced Physical Education for Progress
(P.E.P.) initiative. Additionally, Mr. Corliss serves as a Director and
Executive Committee member of the National Retail Federation and the National
Retail Foundation and serves on the Board of Directors for The World Federation
of the Sporting Goods Industry. He is also an Advisor for Emory University's
Goizueta Business School.
ROBERT COX has been our director since May 2002. Mr. Cox is a retired
business executive. From 1996 until 2000, Mr. Cox served as President and a
Director of Summit Bancorp, a $39 billion NJ bank holding company. Mr. Cox was
the Chief Executive Officer of The Summit Bancorporation from 1994 until 1996,
when Summit Bancorporation merged into UJB Financial. Mr. Cox is currently a
member the Board of Trustees of NJ SEEDS, a state-wide educational
not-for-profit. Mr. Cox also sits on the Board of Directors of the Bay View Bank
and the Bay View Capital Corporation in San Mateo, CA. Active in New Jersey's
business and community service organizations, Mr. Cox is a former Chairman of
the New Jersey Bankers Association (NJBA) and is an honorary chairman of its
Board of Directors.
WILLIAM LENAHAN has been our director since May 2002. Mr. Lenahan has been
the Chief Executive Officer of KMC Telecom Holdings, Inc. since 2000. KMC is a
$500 million nationwide provider of next generation telecommunications,
including outsourcing services, consulting and financing for metro access and
advanced voice, data and Internet services to business customers. Mr. Lenahan
was the President and CEO of BellSouth Wireless Data (currently Cingular
Wireless) from 1984 to 2000 responsible for financial performance and nationwide
wireless data strategy for this division of BellSouth Corporation. Mr. Lenahan
has served nearly 30 years in the information technology, telecommunications and
data industries. Presently, Mr. Lenahan serves on the Board of Broadbeam
Corporation.
LUIS DELAHOZ has been our director since May 2002. Mr. Delahoz is the
current President and Chief Executive Officer of TWS International, Inc., a
leading provider of professional technical consulting services to the rapidly
growing telecommunications industry. From 1998 until 2001, Mr. Delahoz was the
Executive Vice President of Client Soft, Inc., a provider of e-business
solutions. In 1996, Mr. Delahoz co-founded TOC Global Communications, Inc.,
where he served as Vice President
15
until 1998. Currently, Mr. Delahoz is a member of the Boards of Directors of
TWS, Inc. and TWS International, Inc.
LENARD BERGER has served as our Chief Technology Officer and Vice President
since May 2002. Mr. Berger is also the Chief Technology Officer and Vice
President of Stronghold. Prior to the founding of Stronghold's predecessor
entity in 2000, Mr. Berger was the President of eBNetworks, a division of
Computer Horizons, Inc. From 1990 until 1999, Mr. Berger was the Vice President
of RPM Consulting, Inc.
JAMES CUMMISKEY has served as our Vice President of Sales and Marketing
since May 2002. Mr. Cummiskey is also the Vice President of Sales and Marketing
of Stronghold. Prior to the founding of Stronghold's predecessor entity in 2000,
Mr. Cummiskey was the Vice President of Sales and Marketing for Payback Training
Systems, Inc. From 1996 until 1998, Mr. Cummiskey was the Vice President of
Sales and Marketing for Datatec Industries, Inc.
SALVATORE D'AMBRA has served as our Vice President and Chief Engineer since
May 2002. Mr. D'Ambra is also the Vice President and Chief Engineer of
Stronghold. Prior to the founding of Stronghold's predecessor entity in 2000,
Mr. D'Ambra was the President and Chief Executive Officer of Pagecount, Inc.
From 1985 until 1996 Mr. D'Ambra was a Professor of Graduate Engineering at
Loyola College of Maryland.
EXECUTIVE OFFICERS
Each executive officer serves at the discretion of our board of directors
and holds office until his successor is elected and qualified or until his
earlier resignation or removal. There are no family relationships among any of
our directors or executive officers.
BOARD COMMITTEES
Our board of directors has an audit committee, compensation committee and
governance/nominating committee. The audit committee reviews the results and
scope of the audit and other services provided by our independent public
accountant. The compensation committee establishes the compensation policies
applicable to our executive officers and administers and grants stock options
pursuant to our stock plans. The governance/nominating committee oversees board
procedures and nominates prospective members of the board should a vacancy
arise. The current members of each of the audit, compensation and
governance/nominating committees are Messrs. Corliss, Cox, Lenahan and Delahoz.
DIRECTOR COMPENSATION
Each director is paid an annual fee of $10,000. Directors that serve on one
or more committees of the board are paid $1,000 per committee per year. In
addition, each non-employee board member will receive an option grant to
purchase 40,000 shares of common stock, which will vest 50% on each of the first
and second anniversaries of the date of grant. We also reimburse directors for
reasonable out-of-pocket expenses incurred in attending meetings of the board of
directors and any meetings of its committees.
16
EXECUTIVE COMPENSATION
We have not paid any salaries or bonuses to any of our officers from our
inception through the date hereof. All of our executive officers also serve as
officers of and are paid by our operating subsidiary, Stronghold. The following
table shows other compensation paid during the fiscal years ended December 31,
2001 and 2000 to our former president and other former executive officers. The
table also provides information regarding executive compensation for our current
president and three other most highly compensated executive officers. We refer
to all of these officers collectively as our "named executive officers".
Summary Compensation Table
--------------------------
Annual Compensation
-------------------
Other Annual All Other
Name and Principal Position Year Salary Bonus Compensation (1) Compensation (2)
--------------------------- ---- ------ ----- ---------------- ---------------
Former Officers and Directors
Pietro Bortolatti................. 2001 $ 0 $ 0 $20,500 $ --
President, Chief Executive 2000 0 0 4,000 --
Officer and Chairman of the
Board
Tiziana DiRocco................... 2001 0 0 15,370 --
Vice President and 2000 0 0 20,800 --
Director of European
Operations
David Rector...................... 2001 0 0 0 16,224
Director 2000 0 0 0 37,677
Current Officers(3)
Christopher J. Carey.............. 2002 (4) -- -- --
President, Chief Executive
Officer and Chairman of the
Board
Lenard Berger..................... 2002 (5) -- -- --
Vice President and Chief
Technology Officer
Salvatore D'Ambra................. 2002 (6) -- -- --
Vice President - Development
James J. Cummiskey................ 2002 (7) -- -- --
Vice President - Sales
---------------------
(1) Commissions of sales from Terre Di Toscana, Inc., and Terres Toscanas, Inc.
(2) Includes consulting service fees paid to the David Stephen Group, of which
David Rector, our former director, is a principal.
(3) On May 16, 2002, our wholly-owned subsidiary merged with a New Jersey
corporation, Stronghold Technologies, Inc. (the "Predecessor Entity"). Our
wholly-owned subsidiary survived and changed its name to Stronghold
Technologies, Inc. ("Stronghold"). Pursuant to the merger, the stockholders of
the Predecessor Entity acquired a controlling interest in us. As a condition to
the merger, our existing executive officers were required to resign and a new
management team resumed operations.
(4) Christopher J. Carey became our President and Chief Executive Officer on May
16, 2002, following the merger. Mr. Carey also remains the President, Chief
Executive Officer and the sole Director of Stronghold. Mr. Carey's base salary
from May 15, 2002 until December 31, 2002 will be $260,000, as set forth in his
Employment Agreement with Stronghold. The terms of Mr. Carey's Employment
Agreement are more fully set forth below.
(5) Lenard Berger has been our Vice President and Chief Technology Officer since
the merger, and holds the same positions at Stronghold. Mr. Berger's base salary
for the period of August 2001 through August 2002 is $150,000, as set forth in
his Employment Agreement with Stronghold. As of August 2002, Mr. Berger's salary
increases to $175,000. The terms of Mr. Berger's Employment Agreement are more
fully set forth below.
17
(6) Salvatore D'Ambra has been our Vice President - Development of Stronghold
since the merger, and holds the same position at Stronghold. Mr. D'Ambra's base
salary for the period of August 2001 through August 2002 is $150,000, as set
forth in his Employment Agreement with Stronghold. As of August 2002, Mr.
D'Ambra's salary increases to $175,000. The terms of Mr. D'Ambra's Employment
Agreement are more fully set forth below.
(7) James J. Cummiskey has been our Vice President - Sales of Stronghold since
the merger, and holds the same position at Stronghold. Mr. Cummiskey's base
salary for the period of August 2001 through August 2002 is $150,000, as set out
in his Employment Agreement with Stronghold. As of August 2002, Mr. Cummiskey's
salary increases to $175,000. The terms of Mr. Cummiskey's Employment Agreement
are more fully set forth below.
OPTION GRANTS
We did not grant any stock options or stock appreciation rights to any of
our named executive officers during 2001.
The Predecessor Entity granted options to its named executive officers
during the years 2000 and 2002. When we acquired the Predecessor Entity on May
16, 2002, each outstanding option was automatically converted into an option to
acquire, on the same terms and conditions as were applicable under the original
option, such number of shares of our common stock as was equal to the number of
existing options multiplied by 2.1875. The exercise price was also adjusted to
the exercise price that was equal to the existing exercise price divided by
2.1875.
Options granted to certain of the Predecessor Entity's named executive
officers in 2000 vest only if certain fiscal year net sales goals are achieved
for fiscal years 2002 and 2003. Certain options which were subject to vesting
based on net sales goals for fiscal year 2001 failed to vest because the
Predecessor Entity did not achieve the established goals. Such unvested options,
and any future unvested options, lapse and are not subject to further vesting.
The vesting schedules for certain of the named executive officers are set forth
below (amounts reflect the number of shares of Predecessor Entity common stock,
except for the column entitled "Options Remaining As Converted"):
Number of
Options
Total Subject to Vest Number of Options Maximum
Predecessor in 2002 Subject to Vest in 2003 Options
Entity Options Maximum Remaining
Named Executive Grant Options Lapsed Net Sales Net Sales Options As Converted
Officer Date Granted in 2001 > $5m >$ 10m > $10m > $20 > $30 Remaining (x 2.1855)
------- ---- ------- ------- ------ ------ --------------------------- --------- -----------
Lenard Berger 11/12/00 100,000 (20,000) 15,000 15,000 10,000 15,000 25,000 40,000 87,500
Salvatore 11/12/00 45,000 (10,000) 10,000 15,000 10,000 15,000 20,000 35,000 76,563
D'Ambra
James 11/12/00 45,000 (10,000) 10,000 15,000 10,000 15,000 20,000 35,000 76,563
Cummiskey
On May 15, 2002, the Predecessor Entity granted an option for 200,000
shares of its common stock to Christopher J Carey. While Mr. Carey is employed
by Stronghold, the options will vest on the earlier of: (i) the seventh
anniversary of May 15, 2002; or (ii) the achievement of the performance goals
based on the plan and budget approved by the Board of Directors, as set forth
below (amounts reflect the number of shares of Predecessor Entity common stock,
except for the column entitled "Cumulative Options Vested As Converted"):
18
Total Options Vesting For Fiscal Year For Achieving the Specified
Percentage of the Planned EBITDA(1)
Total
Cumulative Options
Vested As Converted
Fiscal Year Ending 80-100% 100-120% Over 120% (x 2.1875)
------------------ ------- -------- ---------- ----------
2002 12,500 24,000 40,000 87,500
2003 23,000 45,750 80,000 175,000
2004 23,000 45,750 80,000 175,000
--------------
(1) "EBITDA" refers to our earnings before interest, taxes, depreciation and amortization.
2002 STOCK INCENTIVE PLAN
On July 17, 2002, our board of directors adopted, and on July 31, 2002, our
stockholders approved, our 2002 stock incentive plan. The 2002 plan replaced our
2000 stock option plan. Up to 300,000 shares of our common stock (subject to
adjustment in the event of stock splits and other similar events) may be issued
pursuant to awards granted under the 2002 Plan.
The 2002 plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code, nonstatutory stock
options, restricted stock awards and other stock-based awards.
Our officers, employees, directors, consultants and advisors and those of
our subsidiaries are eligible to receive awards under the 2002 plan. Under
present law, however, incentive stock options may only be granted to employees.
No participant may receive any award for more than 50,000 shares in any calendar
year. As of September 13, 2002, options to purchase an aggregate of 141,550
shares of our common stock at a weighted average exercise price per share of
$1.50 were outstanding under the 2002 plan.
Optionees receive the right to purchase a specified number of shares of our
common stock at a specified option price and subject to such other terms and
conditions as are specified in connection with the option grant. We may grant
options at an exercise price less than, equal to or greater than the fair market
value of our common stock on the date of grant. Under present law, incentive
stock options and options intended to qualify as performance-based compensation
under Section 162(m) of the Internal Revenue Code may not be granted at an
exercise price less than the fair market value of the common stock on the date
of grant or less than 110% of the fair market value in the case of incentive
stock options granted to optionees holding more than 10% of our voting power.
The 2002 plan permits our board of directors to determine how optionees may pay
the exercise price of their options, including by cash, check or in connection
with a "cashless exercise" through a broker, by surrender to us of shares of
common stock, by delivery to us of a promissory note, or by any combination of
the permitted forms of payment.
As of September 13, 2002, approximately 38 persons were eligible to receive
awards under the 2002 plan, including our four executive officers and our four
non-employee directors. The granting of awards under the 2002 plan is
discretionary.
Our board of directors administers the 2002 plan. Our board of directors
has the authority to adopt, amend and repeal the administrative rules,
guidelines and practices relating to the plan and to interpret its provisions.
It may delegate authority under the 2002 plan to one or more committees of the
board of directors. Subject to any applicable limitations contained in the 2002
plan, our board of
19
directors or a committee of the board of directors or executive officer to whom
our board of directors delegates authority, as the case may be, selects the
recipients of awards and determines:
o the number of shares of common stock covered by options and the dates upon
which such options become exercisable;
o the exercise price of options;
o the duration of options; and
o the number of shares of common stock subject to any restricted stock or
other stock-based awards and the terms and conditions of such awards,
including the conditions for repurchase, issue price and repurchase price.
In the event of a merger, liquidation or other acquisition event, our board
of directors is authorized to provide for outstanding options or other
stock-based awards to be assumed or substituted for by the acquiror. If the
acquiror refuses to assume or substitute for outstanding options, they will
accelerate, becoming fully exercisable and free of restrictions, prior to
consummation of the acquisition event. In addition, following an acquisition
event, under some circumstances, an assumed or substituted award will accelerate
if the employment of its holder with the acquiror is terminated within one year
of the acquisition event.
No award may be granted under the 2002 plan after July 2012, but the
vesting and effectiveness of awards previously granted may extend beyond that
date. Our board of directors may at any time amend, suspend or terminate the
2002 plan, except that no award granted after an amendment of the 2002 plan and
designated as subject to Section 162(m) of the Internal Revenue Code by our
board of directors shall become exercisable, realizable or vested, to the extent
the amendment was required to grant such award, unless and until such amendment
is approved by our stockholders.
2002 CALIFORNIA STOCK INCENTIVE PLAN
On August 20, 2002, our board of directors adopted, and our stockholders
approved, our 2002 California stock incentive plan. The California plan is
identical to our 2002 plan described above, except that options under the
California plan may only be granted to employees who are California residents.
Up to 100,000 shares of our common stock (subject to adjustment in the event of
stock splits and other similar events) may be issued pursuant to awards granted
under the California plan. As of September 13, 2002, options to purchase an
aggregate of 69,600 shares of our common stock at a weighted average exercise
price per share of $1.50 were outstanding under the 2002 California plan. As of
September 13, 2002, seven persons were eligible to receive awards under the 2002
California Stock Incentive Plan
2000 STOCK OPTION PLAN THAT WE ASSUMED WHEN WE ACQUIRED THE PREDECESSOR ENTITY
On May 16, 2002 we acquired the Predecessor Entity and we assumed the
Predecessor Entity's 2000 Stock Option Plan so that all of its issued and
outstanding options would remain intact. However, each outstanding option was
automatically converted into an option to acquire, on the same terms and
conditions as were applicable under the original option, such number of shares
of our common stock as was equal to the number of outstanding options multiplied
by 2.1875. The exercise price was also adjusted to the exercise price that was
equal to the existing exercise price divided by 2.1875. The total number of the
Predecessor Entity's options that we assumed was 543,500 (after cancellations)
at a weighted average exercise price per share of $.78, which converted into
options to purchase 1,188,907 shares of our common stock at a weighted average
exercise price of $.36.
20
Optionees under the 2000 Stock Option Plan received the right to purchase a
specified number of shares common stock at a specified option price and subject
to such other terms and conditions as were specified in connection with the
option grant. The predecessor entity's board had the authority to grant options
at an exercise price less than, equal to or greater than the fair market value
of its common stock on the date of grant. The 2000 plan permitted the
predecessor entity's board of directors to determine how optionees may pay the
exercise price of their options, including by cash, check or in connection with
a "cashless exercise" through a broker, by surrender to us of shares of common
stock, by delivery to us of a promissory note, or by any combination of the
permitted forms of payment. The board of directors also had the authority to
adopt, amend and repeal the administrative rules, guidelines and practices
relating to the plan and to interpret its provisions. The board could delegate
authority under the 2000 plan to one or more committees of the board of
directors.
The board of directors or a committee of the board of directors or
executive officer to whom the board of directors delegated authority, as the
case may have been, selected the recipients of awards and determined:
o the number of shares of common stock covered by options and the dates upon
which such options became exercisable;
o the exercise price of options; and
o the duration of options.
The 2000 plan provided that in the event of a merger, the board of
directors was authorized to provide for outstanding options or other stock-based
awards to be assumed by the acquiror. If we had chosen not to assume the
outstanding options, the board has the authority to accelerate the options such
that they would have become fully exercisable and free of restrictions, prior to
consummation of the acquisition event.
No more awards may be granted under the 2000 plan, although the vesting and
effectiveness of awards previously granted will continue according to the terms
of the grant agreement and the 2000 plan.
EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS
CHRISTOPHER J. CAREY
On May 15, 2002, our wholly-owned subsidiary, Stronghold Technologies, Inc.
("Stronghold") assumed the employment agreement that was in place between
Christopher J. Carey and the Predecessor Entity. Under the terms of the
agreement, Mr. Carey's employment as Chairman of the Board, President and Chief
Executive Officer of Stronghold will continue until December 31, 2004, unless
sooner terminated. Mr. Carey receives a base salary of $260,000 per year. Such
base salary shall be raised, effective January 1, 2003 to the annualized rate of
$300,000 and raised, effective January 1, 2004 to the annualized rate of
$350,000. Such salary will be reviewed annually and is subject to increase as
determined by the Board of Directors of Stronghold (the "Board") or the
Compensation Committee in its sole discretion.
The employment agreement provides that each fiscal year after fiscal year
2002, Mr. Carey will be eligible to receive an annual bonus based upon
Stronghold meeting and exceeding its annual budget, as same has been reviewed
and approved by the Board for earnings before interest, taxes, depreciation and
amortization ("EBITDA"). This bonus will be earned according to the following:
(i) if Stronghold
21
achieves 90-100% of budgeted EBITDA, Mr. Carey will receive a bonus of 10% of
his then current annual base salary; (ii) if Stronghold achieves 101-110% of
budgeted EBITDA, Mr. Carey will receive a total bonus of 20% of his then current
annual base; and (iii) if Stronghold achieves 111-120% of budgeted EBITDA, Mr.
Carey will receive a total bonus of 30% of his then current annual base salary;
(iv) if Stronghold achieves 121-130% of budgeted EBITDA, Mr. Carey will receive
a total bonus of 40% of his then current annual base salary; (v) if Stronghold
achieves 131-140% of budgeted EBITDA, Mr. Carey will receive a total bonus of
50% of his then current annual base salary; (vi) if Stronghold achieves 141-150%
of budgeted EBITDA, Mr. Carey will receive a total bonus of 55% of his then
current annual base salary; and (vii) if Stronghold achieves 151% or more of
budgeted EBITDA, Mr. Carey will receive a total bonus of 60% of his then current
annual base salary. The bonus, if any, shall be paid in one lump sum within
sixty (60) days after the close of the fiscal year for which it was earned.
In accordance with the agreement, the Predecessor Entity granted to Mr.
Carey stock options under the 2000 Stock Option Plan for the purchase of an
aggregate of 200,000 shares of the predecessor entity's common stock at an
option exercise price equal of $1.50 per share, the fair market value of the
underlying common stock on the date of the grant. Such option converted into an
option to purchase 437,500 shares of our common stock when we merged with the
Predecessor Entity and our wholly-owned subsidiary, Stronghold, assumed the 2000
Stock Option Plan. While Mr. Carey is employed by Stronghold, the option will
become exercisable on the earlier of: (i) the seventh anniversary of May 15,
2002; or (ii) the achievement of the performance goals set forth above in the
Section entitled "Option Grants".
Upon a change in control of Stronghold, the unvested portion of the options
shall immediately vest and become exercisable by Mr. Carey
If Stronghold terminates Mr. Carey's employment (i) after the expiration of
the term of employment; or (ii) with cause; or if Mr. Carey resigns for no good
reason, he will receive all accrued compensation and vested benefits. If
Stronghold terminates his employment without cause, Mr. Carey will receive all
unpaid accrued compensation, vested benefits and a severance benefit equal to
his base salary until the earlier of the balance of the term of his agreement,
the renewal term or twelve months following the date of termination.
Mr. Carey's agreement contains a confidentiality provision and further
provides that Mr. Carey may not work for, or hold 1% or more of the outstanding
capital stock of a publicly traded corporation, which is a competing business
anywhere in the world for one year after the conclusion of his employment.
LENARD BERGER
On August 1, 2000, the Predecessor Entity entered into an employment
agreement with Lenard Berger, which Stronghold assumed. Under the terms of the
agreement, Mr. Berger's employment as Vice President - Chief Technology Officer
will continue until July 31, 2005 unless sooner terminated. Mr. Berger received
a base salary of $10,500 per month during the first six months of the term of
the agreement and $12,500 per month commencing February 1, 2001. During the
second year of the term of the agreement, Mr. Berger's base salary will be
$150,000, but may increase to $175,000 if Stronghold's Net Sales, as defined
below, achieved in the first year of the term of the agreement equal or exceed
$2,000,000. During the third year of the term of the agreement, Mr. Berger's
base salary will be $175,000, but may increase to $200,000 if Stronghold's Net
Sales, as defined below, achieved in the
22
second year of the term of the agreement equal or exceed $10,000,000. During the
fourth and fifth years of the term of his agreement, Mr. Berger's base salary
will be increased annually by a percentage determined by the Consumers Price
Index. Beginning his second year of employment, Mr. Berger is eligible for a
commission not to exceed $50,000 for any year during the balance of the term of
the agreement. The commission is equal to 1% of net sales, which is determined
by subtracting certain costs from the gross sales of products and services. Mr.
Berger is also eligible to receive extra compensation at the discretion of
Stronghold's board of directors, a car allowance and any insurance and 401(k)
plans provided by the employer.
Pursuant to his employment agreement, Mr. Berger received an option grant
to purchase 100,000 shares of Stronghold's predecessor entity's common stock.
Such option converted into an option to purchase 218,750 shares of our common
stock when we merged with the predecessor entity. The vesting schedule for such
grant is set forth above under the section entitled "Option Grants". Upon a
change of control of Stronghold, 50% of any unvested options shall become vested
and exercisable immediately. If we or Stronghold register shares of common stock
in an initial public offering, Mr. Berger has the right to include any shares of
common stock that he owns in the registration.
If Stronghold terminates Mr. Berger's employment without cause, he will
receive payment of his base salary in effect at the time of his termination for
a period of one month, if termination occurs during the first six months of the
initial term of the agreement and the lesser of (x) base salary payable for the
balance of the term of the agreement or (y) two months base salary, if
termination occurs during the second six months during the initial term of the
agreement. If Mr. Berger resigns for good reason after the first full year of
employment, Mr. Berger shall receive as his severance pay the lesser of (x) base
salary payable for the balance of the then existing term of the agreement or (y)
two months' base salary, plus one week's base salary for each full or part year
worked after the first year of employment. In addition, Mr. Berger will be paid
his allocable share of the "Accumulated Adjustments Account", which is his share
of any amounts taxable to S Corporation shareholders but not fully distributed
to such shareholders.
Mr. Berger's agreement provides that all rights to discoveries, inventions,
improvements, and innovations related to Stronghold's business that originates
during the term of Mr. Berger's employment will be the exclusive property of
Stronghold. Mr. Berger's agreement also contains a confidentiality provision and
further provides that Mr. Berger may not work for or hold 5% or more of the
outstanding capital stock of a publicly traded corporation, which is a competing
business anywhere in the world for one year after the conclusion of his
employment.
SALVATORE D'AMBRA
On July 10, 2000, the Predecessor Entity entered into an employment
agreement with Salvatore D'Ambra, which Stronghold assumed. Under the terms of
the agreement, Mr. D'Ambra's employment as Vice President - Development will
continue until July 9, 2005 unless sooner terminated. Mr. D'Ambra's base salary
is $102,000, $112,000 and $122,000 for his first, second and third years of
employment, respectively. Thereafter, Mr. D'Ambra's base salary will be
increased annually by a percentage determined by the Consumers Price Index.
Beginning his second year of employment, Mr. D'Ambra is also eligible for a
commission not to exceed $8,000 for the second year of the term of the agreement
and $28,000 for any year during the balance of the term of the agreement. The
commission is equal to 1% of net sales, as defined above. Mr. D'Ambra is also
eligible to receive extra compensation at the discretion of the board of
directors, a car allowance and any insurance and 401(k)
23
plans provided by the employer. If we or Stronghold register shares of common
stock in an initial public offering, Mr. D'Ambra has the right to include any
shares of common stock that he owns in the registration.
Mr. D'Ambra received an option grant to purchase 45,000 shares of
Stronghold's common stock. Such option converted into an option to purchase
98,438 shares of our common stock when we merged with the predecessor entity.
The vesting schedule for such grant is set forth above under the section
entitled "Option Grants". Upon a change of control of Stronghold, 50% of any
unvested options shall become vested and exercisable immediately. If we or
Stronghold register shares of common stock in an initial public offering, Mr.
D'Ambra has the right to include any shares of common stock that he owns in the
registration.
If Stronghold terminates Mr. D'Ambra's employment without cause, he will
receive payment of his base salary in effect at the time of his termination for
a period of one month, if termination occurs during the first six months of the
initial term of the agreement and the lesser of (x) base salary payable for the
balance of the term of the agreement or (y) two months base salary, if
termination occurs during the second six months during the initial term of the
agreement. If Mr. D'Ambra resigns for good reason after the first full year, the
Mr. D'Ambra will receive as severance pay the lesser of (x) base salary payable
for the balance of the then existing term of the agreement or (y) two months'
base salary, plus one week's base salary for each full or part year worked after
the first year of employment. In addition, Mr. D'Ambra shall be paid his
allocable share of the Accumulated Adjustments Account, as described above.
Mr. D'Ambra's agreement provides that all rights to discoveries,
inventions, improvements, and innovations related to Stronghold's business that
originates during the term of Mr. D'Ambra 's employment will be the exclusive
property of Stronghold. Mr. D'Ambra's agreement also contains a confidentiality
provision and further provides that Mr. D'Ambra may not work for or hold 5% or
more of the outstanding capital stock of a publicly traded corporation, which is
a competing business anywhere in the world for one year after the conclusion of
his employment.
JAMES J. CUMMISKEY
On August 14, 2000, the Predecessor Entity entered into an employment
agreement with James J. Cummiskey, which Stronghold assumed. Under the terms of
the agreement, Mr. Cummiskey's employment as Vice President - Sales and
Marketing will continue until August 13, 2004 unless sooner terminated. Mr.
Cummiskey's base salary is $180,000 and $192,000 for his first and second years
of employment, respectively. Thereafter, Mr. Cummiskey's base salary will be
increased annually by a percentage determined by the Consumers Price Index. Mr.
Cummiskey is also eligible for a commission not to exceed $20,000 for the first
year of the term of the agreement and $50,000 for any year during the balance of
the term of the agreement. The commission is equal to 1% of net sales, as
defined above. Mr. Cummiskey is also eligible to receive extra compensation at
the discretion of the board of directors, a car allowance and any insurance and
401(k) plans provided by the employer. If we or Stronghold register shares of
common stock in an initial public offering, Mr. Cummiskey has the right to
include any shares that he owns in the registration.
Mr. Cummiskey also received an option grant to purchase 45,000 shares of
Stronghold's common stock. Such option converted into an option to purchase
98,438 shares of our common stock when we merged with the predecessor entity.
The vesting schedule for such grant is set forth above under the section
entitled "Option Grants". Upon a change of control of Stronghold, 50% of any
24
unvested options shall become vested and exercisable immediately. If we or
Stronghold register shares of common stock in an initial public offering, Mr.
Cummiskey has the right to include any shares of common stock that he owns in
the registration.
If Stronghold terminates Mr. Cummiskey's employment without cause, he will
receive payment of his base salary in effect at the time of his termination for
a period of one month, if termination occurs during the first six months of the
initial term of the agreement and the lesser of (x) base salary payable for the
balance of the term of the agreement or (y) two months base salary, if
termination occurs during the second six months during the initial term of the
agreement. If Mr. Cummiskey resigns for good reason after the first full year,
the Mr. Cummiskey will receive as severance pay the lesser of (x) base salary
payable for the balance of the then existing term of the agreement or (y) two
months' base salary, plus one week's base salary for each full or part year
worked after the first year of employment. In addition, Mr. Cummiskey will be
paid his allocable share of the Accumulated Adjustments Account, described
above.
Mr. Cummiskey's agreement provides that all rights to discoveries,
inventions, improvements, and innovations related to Stronghold's business that
originates during the term of Mr. Cummiskey 's employment will be the exclusive
property of Stronghold. Mr. Cummiskey's agreement also contains a
confidentiality provision and further provides that Mr. Cummiskey may not work
for or hold 5% or more of the outstanding capital stock of a publicly traded
corporation, which is a competing business anywhere in the world for one year
after the conclusion of his employment.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of our common stock as of September 19, 2002. The information in this
table provides the ownership information for:
o each person known by us to be the beneficial owner of more than 5% of our
common stock;
o each of our directors;
o each of our executive officers; and
o our executive officers and directors as a group.
Beneficial ownership has been determined in accordance with the rules and
regulations of the SEC and includes voting or investment power with respect to
the shares. Unless otherwise indicated, the persons named in the table below
have sole voting and investment power with respect to the number of shares
indicated as beneficially owned by them. Common stock beneficially owned and
percentage ownership are based on 10,022,000 shares outstanding on September 19,
2002.
SECURITY OWNERSHIP OF BENEFICIAL OWNERS
Number of Shares Percentage
Name and Address of Beneficial Owner Beneficially Owned Outstanding
------------------------------------ ------------------ --------------
5% Stockholders
---------------
Christopher J. Carey 5,697,917 (1) 56.9
450 Claremont Road
Benardsville, NJ 07924
Stanford Venture Capital Holdings, Inc. 3,004,124 (2) 23.1
6075 Poplar Avenue
Memphis, TN 38119
25
OTHER EXECUTIVE OFFICERS AND DIRECTORS
--------------------------------------
Lenard Berger 437,500 4.4
James Cummiskey 437,500 4.4
Salvatore D'Ambra 437,500 4.4
Robert J. Corliss 0 --
Robert Cox 60,000 *
William Lenahan 0 --
Luis Delahoz 0 --
------------------ ---------------
Executive Officers and Directors as a Group
(8 people) 10,074,541 77.3
---------
(1) 3,937,500 of these shares are owned by Christopher J. Carey and his
wife, Mary Carey, as Joint Tenants with Right of Survivorship.
(2) The total beneficial ownership of Stanford Venture Capital Holdings,
Inc. is 3,004,124 shares which consists of (i) 2,002,750 shares of common
stock issuable upon the conversion of 2,002,750 shares of our Series A $1.50
Convertible Preferred Stock; and (ii) 1,001,374 shares of common stock
issuable upon the exercise of warrants.
* Indicates less than one percent of the total outstanding common stock.
DESCRIPTION OF SECURITIES
Our authorized capital stock currently consists of 50,000,000 shares of
Common Stock, par value $0.0001 per share, of which 10,022,000 shares are issued
and outstanding as of the date of the prospectus, and 5,000,000 shares of
preferred stock, par value $0.0001 per share, of which 2,002,750 shares are
issued and outstanding.
The following description of our securities contains all material
information. However it is a summary only and may be exclusive of certain
information that may be important to you. For more complete information, you
should read our Certificate of Incorporation and its restatements, together with
our corporate bylaws and any certificates of designations we may file.
COMMON STOCK
Holders of our common stock are entitled to one vote for each share held on
all matters submitted to a vote of stockholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the shares of our common
stock entitled to vote in any election of directors may elect all of the
directors standing for election. Subject to preferences that may be applicable
to any shares of preferred stock outstanding at the time, holders of our common
stock are entitled to receive dividends ratably, if any, as may be declared from
time to time by our board of directors out of funds legally available therefor.
Upon our liquidation, dissolution or winding up, the holders of our common
stock are entitled to receive ratably, our net assets available after the
payment of:
o all secured liabilities, including any then outstanding secured debt
securities which we may have issued as of such time;
o all unsecured liabilities, including any then unsecured outstanding
secured debt securities which we may have issued as of such time; and
o all liquidation preferences on any then outstanding preferred stock.
26
Holders of our common stock have no preemptive, subscription, redemption or
conversion rights, and there are no redemption or sinking fund provisions
applicable to the common stock. The outstanding shares of our common stock are,
and the shares offered by us in this offering will be, when issued and paid for,
duly authorized, validly issued, fully paid and nonassessable. The rights,
preferences and privileges of holders of common stock are subject to, and may be
adversely affected by, the rights of the holders of shares of any series of
preferred which is designated and issued.
PREFERRED STOCK
On May 16, 2002, we filed a Certificate of Designations with the Secretary
of State of the State of Nevada to create 2,017,200 shares of our Series A $1.50
Convertible Preferred Stock. Holders of our Series A shares may convert such
shares into shares of our common stock at the then-existing conversion rate. The
conversion rate is determined by dividing the stated value of the Series A
shares, $1.50, by a conversion price. The conversion price, which is currently
$1.50, may be adjusted in case of the following events:
o our consolidation or merger with or into another corporation;
o the sale, lease or conveyance of all or substantially all of our
assets; o the issuance of stock dividends;
o the subdivision, reclassification or combination of our outstanding
shares of common stock;
o the issuance of our common stock at a purchase price per share that is
less than the conversion price in effect immediately prior to such
issuance; or
o the issuance of securities covertible into or exercisable for our
common stock with a conversion or exercise price pers share that is
less than the conversion price in effect immediately prior to such
issuance.
In the event of our liquidation, dissolution or winding up, the holders of
our Series A shares are entitled to receive, prior and before any distribution
of assets are made to the holders of our common stock, an amount equal to the
stated value, $1.50, per share of our Series A shares. After all Series A
holders receive their full payment, and all holders of any other preferred stock
are paid, if any, then the holders of our Series A shares may share with the
holders of our common stock for distribution of the assets in proportion to the
number of shares which the holders of Series A shares have the right to acquire
upon conversion of the Series A shares. If upon liquidation, dissolution or
winding up, our net assets are insufficient to pay the holders of our Series A
shares in full, then our assets will be distributed ratably in proportion to the
full amounts to which the Series A holders would otherwise be entitled to
receive among the holders of Series A. A sale of our assets and certain mergers
or acquisitions of us into another corporation will be treated as a liquidation,
dissolution or winding up and will entitle the holders of the Series A shares to
receive at the closing in cash, securities or other property, the amounts set
forth above.
Holders of our Series A shares are entitled to vote at any stockholder
meeting with respect to any matters presented to our stockholders. Each share of
Series A is entitled to such number of votes as is represented by the number of
shares of common stock which such share of Series A would be convertible into at
the record date set for such voting. So long as shares of Series A are
outstanding, we may not, without first obtaining the approval of the holders of
at least a majority of the then outstanding shares of Series A shares, alter or
change the rights and preferences of the Series A shares or create any new class
of stock having preferences over the Series A shares. Holders of Series A shares
are not entitled to dividends. So long as any shares of Series A are outstanding
and held by Stanford, Stanford has preemptive rights to maintain its percentage
ownership with respect to any additional securities we may issue, with certain
exceptions.
27
So long as any shares of Series A are outstanding, we may not, without the
approval of the holders of a majority of the outstanding shares of Series A,
voting as a separate class:
o sell all or substantially all of our assets or take any other action
that will result in the holders of our capital stock prior to the
transaction owning less than 50% of the voting power of our capital
stock after the transaction;
o amend our charter, by-laws or any certificate of designation;
o change the nature of our business or the business of our subsidiaries;
o issue stock, or allow our subsidiaries to issue stock, with
preferences over, or being on parity with, the Series A shares with
respect to voting, dividends or upon liquidation;
o make certain capital expenditures in any 12-month period exceeding
$50,000;
o enter into any credit facility or issue any debt, except for debt
already outstanding, exceeding $50,000;
o sell our shares in a public offering registered under the Securities
Act of 1933;
o increase the number of our directors above five;
o enter into any transaction with any affiliate or modify any existing
agreement with an affiliate; or
o file for, or consent to, bankruptcy or insolvency proceedings.
Pursuant to a Stockholders' Agreement which we entered into with Stanford,
and Christopher J. Carey and his wife, both Stanford and the Careys agreed to
certain voting obligations. Stanford and the Careys have the right to nominate
one and four members of the board respectively, and the parties agreed to vote
their shares in favor of the nominee(s) of the other parties. In the case of a
material adverse event related to us, the Careys agreed to vote their shares as
directed by Stanford, including to remove and replace the members of the board
with designees nominated by Stanford. If either Stanford or the Careys desire to
sell their shares, the selling party must first offer such shares to be
purchased by the other party to the Stockholders' Agreement and if the
non-selling party decides not to buy the offered shares, we have the right to
purchase such shares. In such case, with respect to any vote on any question
concerning our election to exercise our option to purchase any of the offered
shares, the selling party has agreed to vote its shares as directed by the
non-selling stockholder. In the case of death or dissolution of the parties to
the Stockholders' Agreement, the legal representative of the estate of such
stockholder or any transferee by operation of law must vote such stockholder's
shares in the same manner as the surviving stockholders vote.
INTEREST OF NAMED EXPERTS AND COUNSEL
KGL Investments, Ltd. received 30,000 shares of our common stock in
exchange for $3,000 worth of legal services rendered by Kaplan Gottbetter &
Levenson, LLP, our former legal counsel (the shares were valued at $.10 per
share). Kaplan Gottbetter & Levenson, LLP is the beneficial owner of these
shares. The legal services did not include the preparation of this prospectus.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Our Articles of Incorporation provide that, to the fullest extent permitted
by Nevada law (as it now exists or may in the future be amended) our directors
and officers will not be personally liable to us or our stockholders for
monetary damages due to the breach of a fiduciary duty as a director or officer.
Nevada Revised Statute 78.7502, provides that we may indemnify any officer,
director, employee or agent who is party to any threatened, pending or completed
action, suit or proceeding,
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whether civil, criminal, administrative or investigative, provided he was acting
in good faith and in a manner which he reasonably believed to be in, or not
opposed to, our best interests, and, with respect to any criminal action or
proceeding, he had no reasonable cause to believe that his conduct was unlawful.
The indemnification includes all actual and reasonable expenses, including
attorney's fees, judgments, fines and settlement amounts. The termination of any
action, suit or proceeding by judgment, order, settlement or conviction, does
not of itself prevent indemnification so long as the officer or director acted
in good faith and in a manner which he reasonably believed to be in, or not
opposed to, our best interests, or, with respect to any criminal action or
proceeding, he had no reasonable cause to believe that his conduct was unlawful.
In addition, Nevada Revised Statute 78.7502 provides that we may indemnify
any officer, director, employee or agent who is party to any threatened, pending
or completed action or suit brought by us or by our stockholders on our behalf,
provided he was acting in good faith and in a manner which he reasonably
believed to be in, or not opposed to, our best interests. The indemnification
includes all actual and reasonable expenses, including attorney's fees,
judgments, fines and settlement amounts. However, indemnification is prohibited
as to any suit brought in our right in which the director or officer is adjudged
by a court to be liable to us.
To the extent that the officer or director is successful on the merits in
any proceeding pursuant to which such person is to be indemnified, we must
indemnify him against all actual and reasonable expenses incurred, including
attorney's fees.
The foregoing indemnity provisions will limit your ability as shareholders
to hold officers and directors liable and collect monetary damages for breaches
of fiduciary duty, and require us to indemnify officers and directors to the
fullest extent permitted by law.
To the extent that indemnification may be available to our directors and
officers for liabilities arising under the Securities Act of 1933 as amended, we
have been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy and therefore
unenforceable.
ORGANIZATION WITHIN LAST FIVE YEARS
We were incorporated under the laws of Nevada on September 8, 2000. On
September 14, 2000 we acquired all of the outstanding shares of Terre di
Toscana, Inc. in exchange for 5,000,000 shares of our common stock, which were
issued to Terre di Toscana, Inc.'s sole shareholder Pietro Bortolatti, who was
also our president, CEO, secretary, treasurer and Chairman of the Board of
Directors at the time. This transaction was a reorganization of entities under
common control accounted for at historical in a manner similar to a pooling of
interests. Our original operations were conducted through Terre di Toscana,
Inc., incorporated under the laws of the state of Florida on November 10, 1999,
and Terres Toscanas, Inc., incorporated under the laws of Quebec, Canada on
October 18, 2000. Terre di Toscana Inc. began operations in January 2000 and
handled our truffle business operations in the United States and Europe. Terres
Toscanes, Inc. began operations in April 2001 and handled our truffle business
operations in Canada.
On July 19, 2002 we exchanged all of the shares that we held in our two
wholly-owned subsidiaries, Terre di Toscana, Inc. and Terres Toscanes, Inc., for
75,000 shares of our common stock held by Mr. Bortolatti. The sale of our
subsidiaries was part of our overarching goal to focus our
29
business efforts on the handheld technology business of our wholly-owned
subsidiary, Stronghold Technologies, Inc.
Stronghold Technologies, Inc. became our wholly-owned subsidiary on May 16,
2002 pursuant to a merger of its predecessor, Stronghold Technologies, Inc., a
New Jersey corporation (the "Predecessor Entity"), with and into our
wholly-owned subsidiary, TDT Stronghold Acquisition Corp. ("Acquisition Sub").
Acquisition Sub was created on May 9, 2002 for the purpose of merging with
Predecessor Entity. After the closing of the merger, Acquisition Sub, the
survivor of the merger, changed its name to Stronghold Technologies, Inc. and
remains our wholly-owned subsidiary. Pursuant to the merger, the Predecessor
Entity's stockholders surrendered all of the outstanding shares of the
Predecessor Entity's common stock in exchange for a total of 7,000,000 shares of
our common stock.
On May 15, 2002, we entered into a Securities Purchase Agreement with
Stanford Venture Capital Holdings, Inc. ("Stanford"), in which we agreed to
issue to Stanford (i) such number of shares of our Series A $1.50 Convertible
Preferred Stock that would in the aggregate equal 20% of the total issued and
outstanding shares of our common stock, and (ii) such number of warrants for
shares of our common stock that would equal the number of shares of Series A
Preferred Stock issued to Stanford. The total aggregate purchase price for the
Series A Preferred Stock and warrants paid by Stanford was $3,000,000. The
issuance of the Series A Preferred Stock and warrants took place on each of four
separate closing dates, in which we issued an aggregate of 2,002,750 shares of
our Series A $1.50 Convertible Preferred Stock to Stanford and warrants for
2,002,750 shares of our common stock. After the closings, Stanford assigned
warrants for a total of 1,001,376 shares of common stock to four of its
affiliates.
Prior to the merger, there were a total of 8,381,000 shares of our common
stock outstanding. In connection with the merger, certain of our stockholders
surrendered a total of 6,295,000 shares of our common stock for cancellation.
Specifically, our former president, Mr. Pietro Bortolatti, the controlling
stockholder who owned 60%, or 5,000,000 shares of the total outstanding common
stock prior to the merger, surrendered 4,925,000 of his shares for cancellation.
As a result, after the merger, the Predecessor Entity's stockholders owned
approximately 79% of our outstanding common stock, representing 50% on a
fully-converted basis. The Predecessor Entity was owned substantially by our
current president, Christopher J. Carey. Mr. Carey currently owns an aggregate
of 5,697,917 shares out of 10,022,000 shares, or 57% of our common stock
outstanding. Mr. Carey owns 3,937,500 of such shares together with his wife as
joint tenants.
On July 11, 2002 we changed our name from TDT Development, Inc. to
Stronghold Technologies, Inc.
See also the section titled "Certain Relationships and Related
Transactions" below for additional information regarding the above-mentioned
transactions.
DESCRIPTION OF BUSINESS
SUMMARY OF DISCONTINUED TRUFFLE BUSINESS OPERATIONS
From our inception on September 8, 2000, through July 19, 2002, we
imported, marketed and distributed specialized truffle based food products,
which included fresh truffles, truffle oils, truffle pates, truffle creams and
truffle butter, through our former wholly-owned subsidiaries, Terre di Toscana,
Inc. and Terres Toscanes, Inc. Our target market included retailers such as
restaurants, specialty food stores, delicatessens and supermarkets. We imported
products directly from Italian producers and marketed our products in the
specialty food industry. We marketed our products
30
primarily in Florida, South Carolina, North Carolina and California, and also
earned commissions from Italy on sales made in Belgium, Holland and Germany.
On July 19, 2002 we exchanged all of the shares that we held in our two
wholly-owned subsidiaries, Terre di Toscana, Inc. and Terres Toscanes, Inc., for
75,000 shares of our common stock held by Mr. Pietro Bortolatti. As a result, we
no longer own any portion of the truffle business. Mr. Bortolatti, however,
continues to operate the truffle business.
OVERVIEW OF HANDHELD TECHNOLOGY BUSINESS
On May 16, 2002, we entered the handheld wireless technology business via
our acquisition by merger of the Predecessor Entity. The Predecessor Entity was
founded on August 1, 2000 by Christopher J. Carey, our current Chief Executive
Officer and President, and three other executive officers of Stronghold: Lenard
J. Berger, Chief Technology Officer; James J. Cummiskey, Vice President, Sales &
Marketing; and Salvatore F. D'Ambra, Vice President, Product Development. This
founding group has substantial expertise in systems design, software
development, wireless technologies and automotive dealer software applications.
The Predecessor Entity was founded to develop proprietary handheld wireless
technology for the automotive dealer software market. Since the merger of the
Predecessor Entity into our subsidiary (now Stronghold), Stronghold continues to
conduct the Predecessor Entity's handheld wireless technology business.
Stronghold's DEALERADVANCE(TM) suite of software systems has been designed
to maximize revenues and reduce operating expenses. Stronghold has completed
development of the DEALERADVANCE SALES SOLUTION(TM), designed to increase sales
by effectively capturing a greater percentage of unsold customer prospects and
maximizing their "be-back" (return) and closure rates. Currently there are no
other front-end or Customer Relationship Management ("CRM") systems that perform
comparably to DEALERADVANCE SALES SOLUTION(TM). Future products to be included
in the suite are intended to include the DEALERADVANCE SERVICE SOLUTION(TM), and
the DEALERADVANCE INVENTORY MANAGEMENT SOLUTIONS(TM), which are products also
designed to increase revenues and maximize profitability by effectively managing
dealer service operations, their customers and vehicle inventory. These products
are not unlike the handheld and wireless systems used in the auto rental
industry. We are now accustomed to returning our car where the attendant scans
the car, brings up the rental terms, completes the sale and prints out a
receipt, all without having to step over to a counter. We may experience design,
development and other difficulties that could delay or prevent the development
or introduction of our future products. There can be no assurance that we will
successfully develop and market these products.
DESCRIPTION OF PRODUCTS
The DEALERADVANCE SALES SOLUTION(TM) provides the following advantages:
o Ease of use associated with handheld mobile communications;
o The handheld unit is both an input and display device;
o The handheld unit is programmed to access competitive and proprietary
industry information from a variety of sources;
o The system provides the capability for immediate management
involvement in the selling process;
o Provides for effective monitoring of sales performance and follow-up
by sales personnel; and
o Enables integration with existing automotive dealer accounting and
business systems.
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The DEALERADVANCE SALES SOLUTION(TM) is a comprehensive CRM system,
providing customer history and contact information, as well as a personal
calendar and instructions on follow-up tasks directly to the handheld, creating
a highly effective communications tool for business development.
The DEALERADVANCE SALES SOLUTION(TM) offers the following unique features:
o Enables a high capture rate on walk-in traffic;
o Streamlines all sales and other follow-on processes;
o Provides current and comprehensive information and data for new and
used car inventory (on a real-time basis), all competing products, and
customer history with dealership;
o Provides performance data and analysis on each member of a sales team;
and
o Provides management with valuable and relevant transaction data on a
real-time basis.
The DEALERADVANCE SALES SOLUTION(TM) offers the following services:
o Customer profiling;
o Drivers license scanning;
o Electronic signature capture;
o Dealer vehicle information and competitive product comparisons;
o Vehicle inventory status;
o Financial calculator;
o Integrated purchase forms completion and printing;
o Used car appraisal;
o Management reports;
o Customer relationship management system functions;
o DMS integration capability; and
o E-mail and Internet access.
Stronghold's first pilot system for DEALERADVANCE SALES SOLUTION(TM) was
installed in April 2001 at a Honda dealership in Clifton, New Jersey. In May
2001, Stronghold installed a second pilot system at a Jeep GMC dealership in
Concord, California and a third followed in June 2001 at a Honda dealership in
Roseville, California. Stronghold installed a fourth pilot system at another
Honda location in Passaic, New Jersey in July 2001. A fifth pilot at BMW in
Greenwich, Connecticut followed in August 2001. In September 2001, Stronghold
completed its pilot phase with a sixth installation at a Nissan dealership in
Roseville, California and introduced Version 2.0 of DealerAdvance Sales
Solution(TM) at all of its sites by the end of September 2001.
Stronghold installed another 7 dealership sites in the first quarter ending
March 31, 2002, including sites in Georgia, Arizona, California, New York and
New Jersey. In the second quarter ending June 30, 2002, it installed another 13
sites including dealerships in California, Arizona, Virginia and North Carolina.
Since the close of the second quarter, Stronghold has installed another 9 sites,
including dealerships in Nevada and Florida.
Revenue related to the sale of our products is comprised of one-time
charges to the dealerships for hardware (including server, wireless
infrastructure, desktop PC, printer, interior/exterior access points/antennas
and handheld devices), software licensing fees and installation/training
services. We charged each of our pilot dealers and all of our subsequent dealers
for all costs associated with installation. The average installation is $85,000.
The most significant variable in pricing is the number of handheld devices.
Other sources of revenue include monthly support and maintenance contracts
(required with purchase of DealerAdvance(TM)) and fee-based business development
consulting and sales training services. With all of our products we charge an
initial system implementation fee. A portion of our dealers convert this into a
third party lease, based on their creditworthiness, and a monthly maintenance
and service fee. In addition, we will charge separately for future software
customization after the initial installation, for additional training, and for
additions to the base system (e.g., more handheld devices for additional sales
people).
Stronghold's marketing strategy is to utilize its growing direct sales
force to market the DEALERADVANCE SALES SOLUTION(TM) on a national basis.
Stronghold has established a strong presence in the Northeast, the Southeast and
on the West Coast, and is adding additional business development and
32
operations offices pursuant to an organized growth plan. Stronghold began this
quarter with Business Development Managers in New Jersey, Atlanta, San
Francisco, Los Angeles and Phoenix, and in the 2nd quarter Stronghold added
Miami, Chicago and Washington, DC. Stronghold has added Business Development
Managers in Cleveland and Dallas in the third quarter.
NEW PRODUCT DEVELOPMENTS
The Stronghold development staff has begun development efforts on our next
application, DEALERADVANCE SERVICE SOLUTION(TM). Stronghold is developing a
handheld wireless system for dealership Service Advisors to allow them to leave
their desks and meet and greet clients in their cars in the service lanes, and
process their service order. The product is expected to be introduced at the
January 2003 National Automobile Dealers Association Conference. Initial Beta
installations are expected to begin in March 2003.
The DEALERADVANCE SERVICE SOLUTION(TM) is intended to provide for improved
customer service and reduced time to vehicle check in and will allow the dealer
representatives to scan a particular vehicle identification number from the
windshield or door. DEALERADVANCE SERVICE SOLUTION(TM) will also provide for
instant mobile access to client and vehicle history and will allow the dealer
representatives to access warrantee and service period advice instantly. This
product will also provide an up selling application to increase revenue per
repair order and will include an application to allow service marketing through
the DEALERADVANCE(TM) CRM application.
The development plan includes the addition of a third product called
DEALERADVANCE INVENTORY MANAGEMENT SOLUTION(TM). The intention is to provide a
handheld wireless system for the management of new and used car inventory. The
system would provide a handheld device for the scanning of incoming and outgoing
vehicles, which would immediately adjust inventory on hand for sale. In
addition, the system would provide for the printing of used car stickers, the
capture of Vehicle Identification Number for used car appraisal and estimates,
and the loading of vehicle specifics to the dealer web site. This product is
expected to be introduced in early 2004. Development efforts are in the initial
feasibility stages of operational analysis and client ROI calculations.
Since August 1, 2000, we have spent approximately $1,658,173 on research
and development activities. While Stronghold has been successful in meeting
planned goals in the development and introduction of DEALERADVANCE SALES
SOLUTION(TM), there can be no assurance that its research and development
efforts will be successful with respect to additional products, or if
successful, that Stronghold will be able to successfully commercially exploit
such additional products.
COMPETITION RELATED TO HANDHELD TECHNOLOGY BUSINESS
The DEALERADVANCE SALES SOLUTION(TM) is a wireless dealership sales
productivity system that improves sales performance, reduces costs and creates
operational efficiency. Currently, Stronghold does not believe that it has any
direct competition in this specific sector. However, Stronghold expects emerging
competitive players in the wireless handheld solutions market in the future.
Stronghold does compete with the traditional CRM providers and the emerging new
CRM providers in the retail automotive dealer software market. The leading CRM
solutions that Stronghold competes against are:
o Automotive Directions, a division of ADP Dealer Services, and a
provider of PC-based customer relationship management systems as well
as marketing research and consulting services;
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o Higher Gear, a provider of client server based front-end sales and
customer relationship management software which serves the retail
automotive industry exclusively;
o Autobase, a provider of PC based front-end software which serves the
retail automotive industry exclusively;
o Cowboy Corporation, a provider of ASP sales prospect management
systems and customer relationship management systems which services
the retail automotive industry exclusively; and
o Autotown, a provider of PC and web-based front-end sales systems,
which services the retail automotive industry exclusively.
Stronghold believes that its proprietary technology is unique and,
therefore, places it at a competitive advantage in the industry. However, there
can be no assurance that Stronghold's competitors will not develop a similar
product with properties superior to its own or at greater cost-effectiveness.
MARKETING AND SALES
Stronghold has defined a target market of approximately 10,000 dealerships
that meet the base criteria for potential use of its system. In addition,
Stronghold has qualified a primary target market of 6,500 dealerships where the
potential sale and use of the system is the greatest. It includes dealerships
that sell a minimum of 75 new and used cars each month and do not have a CRM
system currently installed.
Stronghold distributes its DEALERADVANCE SALES SOLUTION(TM) through direct
sales, which Stronghold believes is most effective when introducing an
innovative new solution to the marketplace. Stronghold is currently forming its
Sales and Marketing team, which will be aligned along geographic territory
units.
Stronghold currently has a total of 43 full-time employees of which 20 are
dedicated to marketing and sales, and 1 part-time employee. During Stronghold's
initial expansion, Stronghold has hired senior and experienced Business
Development Mangers to provide initial regional market penetration. As Regional
Managers are hired or promoted after the initial expansion, Stronghold will
shift to less senior, but equally aggressive and professional, sales executives
for continued expansion. Project Managers will be responsible for providing
installation, training and ongoing support services to Stronghold's new and
existing customers. Project Managers will report to the Business Development
Managers. In 2003, Stronghold anticipates hiring both a Marketing Manager and a
Director of Customer Service. The Marketing Manager will work closely with the
CEO and the Vice President of Sales and Marketing to execute Stronghold's
marketing strategy and to enhance market awareness of the DEALERADVANCE SALES
SOLUTION(TM). The Director of Customer Service will have responsibility for
customer satisfaction and support and will be responsible for managing all
internal project management training programs, customer satisfaction
measurements, additional consulting services, and fee-based customer training
programs.
OUR INTELLECTUAL PROPERTY
We have trademark and patent applications pending in connection with our
technology business. We have filed trademarks for "DealerAdvance,"
"DealerAdvance Sales Solution," "Dealer Advance Service Solution" and
"DealerAdvance Inventory Management Solution." Our patent application seeks
protection of a number of developments pertaining to the management of
information
34
flow for automotive dealer-based software. An additional application is
currently being planned which will address certain proprietary features
pertaining to systems components, related equipment and software modules.
Despite our efforts to protect our proprietary rights, unauthorized parties may
misappropriate our proprietary technology or obtain and use information that we
regard as proprietary. We may not be able to detect these or any other
unauthorized uses of our intellectual property or take appropriate steps to
enforce our proprietary rights. In addition, others could independently develop
substantially equivalent intellectual property.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
The following discussion should be read in conjunction with our financial
statements and the accompanying notes appearing subsequently under the caption
"Financial Statements", along with other financial and operating information
included elsewhere in this prospectus. Certain statements under this caption
"Management's Discussion and Analysis or Plan of Operation" constitute
"forward-looking statements" under the Reform Act. See "Risk Factors-Cautionary
Note Regarding Forward Looking Statements". For a more complete understanding of
our operations see "Risk Factors" and "Description of Business".
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
As of June 30, 2002, our cash balance was $312. As of June 30, 2002, we had
a net operating loss of approximately $220,000 to offset future taxable income.
There can be no assurance, however, that we will be able to take advantage of
any or all of such tax loss carry-forwards, in future fiscal years. Our accounts
receivable at June 30, 2002 were $1,610,484, as compared to $282,360 for the
fiscal year ended December 31, 2001. The increase in accounts receivable
represents amounts owed to Stronghold from twenty new dealership sites, which
installed Stronghold's DEALERADVANCE(TM) products during the first and second
quarters of 2002.
FINANCING NEEDS
To date, we have not generated revenues in excess of operating expenses. We
have not been profitable since our inception, we will incur additional operating
losses in the future, and we may require additional financing to continue the
development and subsequent commercialization of our technology.
We expect our capital requirements to increase significantly over the next
several years as we continue to develop and test the DEALERADVANCE(TM) suite of
products and as we increase marketing and administration infrastructure and
embark on developing in-house business capabilities and facilities. Our future
liquidity and capital funding requirements will depend on numerous factors,
including, but not limited to, the levels and costs of our research and
development initiatives, the cost of hiring and training additional sales and
marketing personnel to promote our products and the cost and timing of the
expansion of our marketing efforts.
FINANCINGS
During August and September 2002, we entered into eight subscription
agreements with private investors, pursuant to which we issued an aggregate of
344,333 shares of our common stock at $1.50 per share. These private investments
generated total proceeds to us of $516,500.
On May 15, 2002, we entered into a Securities Purchase Agreement with
Stanford Venture Capital Holdings, Inc. ("Stanford"), in which we agreed to
issue to Stanford (i) such number of shares
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of our Series A $1.50 Convertible Preferred Stock that would in the aggregate
equal 20% of the total issued and outstanding shares of our common stock, and
(ii) such number of warrants for shares of our common stock that would equal the
number of shares of Series A Preferred Stock issued to Stanford. The total
aggregate purchase price for the Series A Preferred Stock and warrants paid by
Stanford was $3,000,000. The issuance of the Series A Preferred Stock and
warrants took place on each of four separate closing dates (May 16, 2002 and
July 3, 11, and 19, 2002), in which the Company issued an aggregate of 2,002,750
shares of our Series A $1.50 Convertible Preferred Stock to Stanford and
warrants for 2,002,750 shares of our common stock. After the closings, Stanford
assigned warrants for a total of 1,001,376 shares of common stock to four of its
affiliates.
On July 31, 2000, the Predecessor Entity entered into a line of credit loan
arrangement with our President, Christopher Carey, who is also president of
Stronghold. According to such arrangement, Mr. Carey made available $1,989,500,
which the Predecessor Entity could borrow from time to time until August 1,
2001. The outstanding amounts accrued interest at the rate of interest per annum
equal to the floating Base Rate, computed daily, for the actual number of days
elapsed as if each full calendar year consisted of 360 days. Under the
agreement, the first interest payment was due on August 1, 2001. On such date,
the line of credit was extended for one more year, until August 1, 2002. On
April 22, 2002, the Predecessor Entity issued 500,000 shares of its common stock
(which converted into 1,093,750 shares of our common stock when we acquired the
Predecessor Entity on May 16, 2002) in exchange for cancellation of $1 million
of outstanding debt under such line of credit. On May 16, 2002, the total amount
outstanding under the line of credit was $2.2 million. On such date, we issued
666,667 shares of our common stock to Mr. Carey in exchange for cancellation of
$1 million of the then outstanding amount. Stronghold will pay Mr. Carey the
remaining $1.2 million according to the terms of a Non-Negotiable Promissory
Note, which was issued on May 16, 2002.
Under the promissory note, the principal amount and accrued interest is due
and payable in six equal consecutive quarterly installments commencing on the
date which is two business days after we have filed our Annual report on Form
10-K for the year ended December 31, 2002. Each subsequent quarterly installment
will be paid two days after we file each subsequent Form 10-Q. Interest accrues
under the promissory note at an annual rate of 10%. If Stronghold's net income
does not meet certain benchmarks, then either the principal balance and accrued
interest due for the quarter will be deferred and the repayment will be
amortized during the remaining quarters or, depending upon the net income amount
achieved, the principal balance and accrued interest due will be automatically
converted into shares of our common stock, at a conversion price equal to the
average closing price of our common stock for the twenty (20) trading days
immediately preceding the date of conversion. The promissory note is expressly
subordinated in right of payment to the prior payment in full of all of
Stronghold's senior indebtedness. Subject to the payment in full of all senior
indebtedness, Mr. Carey is subrogated to the rights of the holders of such
senior indebtedness to receive payments or distribution of assets.
On November 1, 2001, the Predecessor Entity entered into a loan arrangement
with United Trust Bank pursuant to which the Predecessor Entity borrowed $1.5
million. The loan arrangement was due to expire by its terms, and all
outstanding amounts were due to be paid, on June 30, 2002. On such date,
Stronghold (as successor to the Predecessor Entity) entered into a loan
arrangement and promissory note with United Trust Bank, pursuant to which
Stronghold will pay back all amounts outstanding under the loan in 36 monthly
installments, which will begin on February 2003 and will terminate on January 1,
2006. Interest accrues on the loan at the Prime Rate, which is the highest New
York City Prime Rate as is published in The Wall Street Journal. The initial
Prime Rate that applies to the promissory note is 4.750%. The annual interest
rate is computed on a 365/360 basis.
We believe we have sufficient cash on hand to support our operating plan
for at least the next
36
six months. To enable us to fund our research and development and
commercialization efforts, during the next several months we may enter into
additional private placement transactions with individual investors.
RESULTS OF OPERATIONS
Operations through May 16, 2002 were comprised solely of our Truffle
Business, which was conducted through our wholly owned subsidiaries, Terre di
Toscana, Inc. and Terres Toscanes, Inc. Operations from May 16, 2002 through
June 30, 2002 were comprised of our Truffle Business (which was discontinued on
July 19, 2002, as described above) and our handheld wireless technology
business. Results of operations for the three months and six months ended June
30, 2002 reflect the treatment of the Truffle Business as discontinued
operations and, therefore, figures from those periods reflect operations of our
handheld wireless technology business only, other than Other Expenses. Results
of operations for the fiscal years ended 2001 and 2002 reflect operations of our
handheld wireless technology business only. As a result, we believe that
period-to-period comparisons of our results of operations will not be meaningful
and should not be relied upon as indicators of future performance.
We entered the handheld wireless technology business through the
acquisition of the Predecessor Entity, which had only twenty-two months of
operating history. We must, therefore, be considered to be subject to all of the
risks inherent in the establishment of a new business enterprise. Our limited
operating history makes it difficult to evaluate our financial performance and
prospects. We cannot make assurances at this time that we will operate
profitably or that we will have adequate working capital to meet our obligations
as they become due. Because of our limited financial history, we believe that
period-to-period comparisons of our results of operations will not be meaningful
in the short term and should not be relied upon as indicators of future
performance.
Three Months Ended June 30, 2002 and Three Months Ended June 30, 2001
---------------------------------------------------------------------
For the three months ending June 30, 2002, we had total revenue of
$1,054,928. For the three months ending June 30, 2001, we had revenues of
$315,719, representing an increase of 234%. This increase is due to the progress
of Stronghold's business from beta-test phase to sales and marketing phase and
the related installation of Stronghold's DealerAdvance(TM) products in 13 new
dealerships from April 1, 2002 through June 30, 2002, versus the installation of
3 dealerships in the comparable period in 2001.
Revenue is comprised of one-time charges to the dealerships for hardware
(including server, wireless infrastructure, desktop PC, printer,
interior/exterior access points/antennas and handheld devices), software
licensing fees and installation/training services. The average installation is
$85,000. The most significant variable in pricing is the number of handheld
devices. Other sources of revenue include monthly support and maintenance
contracts (required with purchase of DealerAdvance(TM)) and fee-based business
development consulting and sales training services. Depending upon the
dealership arrangement, the support and maintenance contracts are either billed
monthly and recorded as revenue monthly, or are recorded up front to unearned
maintenance fees at the present value of the 36-month revenue stream and
amortized monthly to revenue.
Total operating expenses in each of the three-month periods ended June 30,
2002 and June 30, 2001 were comprised of general and administrative expenses
(which includes research and development expenses, consulting and professional
costs, recruiting fees, office rent and investor
37
relations expenses) and professional salaries and benefits. Operating expenses
for the three-month periods ended June 30, 2002 and June 30, 2001 were
$1,061,832 and $621,650, respectively, an increase of $440,182, or 71%. The
increase in operating expenses is attributable to the general increase in
overhead which accompanies the expansion of a business, and specifically
includes an increase in product development, the build-out of a support network
for Stronghold's dealership sites and salaries for sales personnel and project
managers who oversee the dealerships where Stronghold's DEALERADVANCE(TM)
products are installed.
Gross profit contribution, after cost of sales, totaled $674,019 for the
three months ending June 30, 2002, and was 64% of revenue. This is compared to
$184,783 in the same three-month period in 2001, which was 59% of revenue. The
increase in our gross profit is due to Stronghold's tighter control and
monitoring of the costs associated with the installation of its
DEALERADVANCE(TM) products.
Stronghold's business operations and financial results for the prior
quarter were representative of a start-up company in a beta-testing phase and,
therefore, not in a position to generate significant revenue. As Stronghold
moved out of its beta testing phase and into a marketing and sales position,
revenues increased as the number of dealerships installing Stronghold's
DEALERADVANCE(TM) suite of products increased. By monitoring costs and through
increased efficiencies, Stronghold has been able to realize an increase in gross
margins. We can offer no assurance, however, that revenues in future quarters
will increase at the rate that revenues grew during the quarter ended June 30,
2002 or that gross margins will continue to increase. Notwithstanding the
revenue and gross profit growth, Stronghold has yet to generate an operating
profit in any accounting period.
Six Months Ended June 30, 2002 and Six Months Ended June 30, 2001
-----------------------------------------------------------------
For the six months ended June 30, 2002, we had total revenue of $1,748,566.
Revenue for the six-month period ended June 30, 2001 was $315,719, representing
an increase of 454%. This increase is due to the progress of Stronghold's
business from beta-test phase to sales and marketing phase and the related
installation of Stronghold's DEALERADVANCE(TM) products in 20 new dealerships
from January 1, 2002 through June 30, 2002, compared with 3 dealerships
implemented in the comparable six-month period in 2001.
Total operating expenses in each of the six month periods ended June 30,
2002 and June 30, 2001 were comprised of general and administrative expenses
(which includes research and development expenses, consulting and professional
costs, recruiting fees, office rent and investor relations expenses) and
professional salaries and benefits. Operating expenses for the six-month periods
ended June 30, 2002 and June 30, 2001 were $2,087,777 and $1,096,440,
respectively, an increase of $991,337, or 90%. The increase in operating
expenses is attributable to the general increase in overhead which accompanies
the expansion of a business, and specifically includes an increase in product
development, the build-out of a support network for Stronghold's dealership
sites and salaries for sales personnel and project managers who oversee the
dealerships where Stronghold's DEALERADVANCE(TM) products are installed.
Gross profit contribution, after cost of sales, totaled $1,158,531 for the
six months ending June 30, 2002, and was 66% of revenue. This is compared to
$184,783 in the same six-month period in 2001, which was 59% of revenue. The
increase in our gross profit is due to Stronghold's tighter control and
monitoring of the costs associated with the installation of its
DEALERADVANCE(TM) products.
38
Stronghold's business operations and financial results for prior periods
were representative of a start-up company in a beta-testing phase and,
therefore, not in a position to generate significant revenue. As Stronghold
moved out of its beta-testing phase and into a marketing and sales position,
revenues increased as the number of dealerships installing Stronghold's
DEALERADVANCE(TM) suite of products increased. By monitoring costs and through
increased efficiencies, Stronghold has been able to realize an increase in gross
margins. We can offer no assurance, however, that revenues in future accounting
periods will increase at the rate that revenues grew during the six months ended
June 30, 2002 or that gross margins will continue to increase. Notwithstanding
the revenue and gross profit growth, Stronghold has yet to generate a profit in
any accounting period.
Fiscal Year ended December 31, 2001 and Fiscal Year ended December 31, 2000
---------------------------------------------------------------------------
For the fiscal year ended December 31, 2001, the Predecessor Entity had
total revenue of $614,539. For the fiscal year ended December 31, 2000, the
Predecessor Entity had no revenues. The increase in revenues in 2001 is due to
the progress of the Predecessor Entity's beta-test phase during 2001, in which
the Predecessor Entity installed six pilot systems throughout the year and
introduced Version 2.0 of DEALERADVANCE SALES SOLUTION(TM) at all of its sites
by the end of September 2001. After completion of the pilot systems, the
operations moved from the beta-test phase to the sales and marketing phase.
Total operating expenses in each of the fiscal years ended December 31,
2001 and 2000 were comprised of general and administrative expenses (which
includes research and development expenses, consulting and professional costs,
recruiting fees, office rent and investor relations expenses) and professional
salaries and benefits. Operating expenses for the fiscal years ended December
31, 2001 and 2000 were $2,642,727 and $542,670, respectively, an increase of
$2,100,057, or 387%. The increase in operating expenses is attributable to the
general increase in overhead which accompanies the expansion of a business, and
specifically includes an increase in product development, the build-out of a
support network for the Predecessor Entity's dealership sites and pilot systems
sites and salaries for sales personnel and project managers who oversee the
dealerships where the Predecessor Entity's DEALERADVANCE(TM) products are
installed.
Gross profit contribution, after cost of sales, totaled $364,074 for the
fiscal year ended December 31, 2001, and was 59% of revenue. As there were no
revenues or cost of sales during fiscal year 2000, there was also no gross
profit contribution for such year.
The Predecessor Entity's business operations and financial results for
fiscal years 2001 and 2000 were representative of a start-up company in a
beta-testing phase and, therefore, not in a position to generate significant
revenue. As the Predecessor Entity moved out of its beta testing phase and into
a marketing and sales position near the end of 2001, revenues increased as the
number of dealerships installing the Predecessor Entity's DEALERADVANCE(TM)
suite of products increased. By monitoring costs and through increased
efficiencies, the Predecessor Entity was able to realize an increase in gross
margins. We can offer no assurance, however, that revenues in future quarters
will increase at the rate that revenues grew during the year ended December 31,
2001 or that gross margins will continue to increase.
39
Period From Inception in September 2000 through June 30, 2002
-------------------------------------------------------------
We have incurred losses each year since our inception and we have an
accumulated deficit of $4,013,797 at June 30, 2002. We expect to continue to
incur losses from expenditures on research, product development, marketing and
administrative activities.
We do not expect to generate revenues in excess of operating expenses in
the near future, during which time we will engage in significant research and
development, and marketing and sales efforts. While Stronghold has entered into
relationships with 26 automobile dealerships to use the DEALERADVANCE SALES
SOLUTION(TM) products, there can be no assurance that Stronghold will be
successful in attracting other dealerships willing to use newly developed
technology. Furthermore, no assurance can be given that our research and
development efforts will result in any commercially viable products, or that our
marketing and sales efforts will result in increased product exposure that would
create sufficient revenues to support the business. Successful future operations
will depend on our ability to transform our newly integrated and developed
technology into commercially viable products.
INDUSTRY TRENDS
The automotive industry has identified sales productivity tools and
customer relationship management systems to be of high priority. Many
consolidators and independent dealership owners have begun to explore and pilot
some of these solutions to determine the most effective means for managing and
exploiting prospects and customers to increase car sales. To date, only a small
number of the 22,600-dealership sites have implemented these systems. There
remains substantial uncertainty as to the type of systems that will be
implemented as well as the pace at which implementation will take place.
Since big-ticket consumer purchases are sensitive to broad economic trends,
our operations may be affected by general economic conditions. Our business
could suffer if Stronghold's customers - automobile dealerships - are affected
by the continuing poor economic conditions. For example, if dealer sales are
trending downward, capital expenditures like those associated with Stronghold's
DEALERADVANCE(TM) suite of products may be delayed or abandoned.
Finally, seasonality may have some impact on our operations. Consumers tend
to purchase automobiles during the summer months. This factor may have an impact
on our third quarter results as automobile dealerships may determine to try
Stronghold's DEALERADVANCE(TM) suite of products during such months. The
resulting impact is that our revenues may have a corresponding decrease during
the winter months. Due to our limited operating history and the developmental
stage of Stronghold's products, it is difficult to determine precisely what
effect seasonality will have on our operations.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
anticipate that any earnings will be retained for development and expansion of
our business and we do not anticipate paying any cash dividends in the
foreseeable future. Our board of directors has sole discretion to pay cash
dividends based on our financial condition, results of operations, capital
requirements, contractual obligations and other relevant factors.
DESCRIPTION OF PROPERTY
At present, we own no real property. We lease a 6,000 square foot
development facility in Sterling, Virginia, which is staffed with 17 development
personnel. We also operate and lease
40
business development and operations offices in Hasbrouck Heights, New Jersey;
Walnut Creek, California; and Cincinnati, Ohio.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Stronghold Technologies, Inc. became our wholly-owned subsidiary on May 16,
2002 pursuant to a merger of the Predecessor Entity with and into Acquisition
Sub. Pursuant to the merger, the Predecessor Entity's stockholders surrendered
all of the outstanding shares of the Predecessor Entity's common stock in
exchange for a total of 7,000,000 shares of our common stock. Of these shares,
Christopher J. Carey and his wife received a total of 3,937,500 shares held
jointly, and Mr. Carey received an additional 1,093,750 shares individually.
Pursuant to a Securities Purchase Agreement which we entered into on May
15, 2002, with Stanford, our subsidiary, Stronghold, Pietro Bortolatti and Mr.
Carey, we agreed to issue to Stanford (i) such number of shares of our Series A
$1.50 Convertible Preferred Stock that would in the aggregate equal 20% of the
total issued and outstanding shares of our common stock, and (ii) such number of
warrants for shares of our common stock that would equal the number of shares of
Series A Preferred Stock issued to Stanford. The total aggregate purchase price
for the Series A Preferred Stock and warrants paid by Stanford was $3,000,000.
The issuance of the Series A Preferred Stock and warrants took place on each of
four separate closing dates (May 16, 2002 and July 3, 11, and 19, 2002), in
which we issued an aggregate of 2,002,750 shares of our Series A $1.50
Convertible Preferred Stock to Stanford and warrants for 2,002,750 shares of our
common stock. After the closings, Stanford assigned warrants for a total of
1,001,376 shares of common stock to four of its affiliates. So long as any
shares of Series A are outstanding and held by Stanford, Stanford has the right
to maintain its percentage ownership with respect to any additional securities
we may issue, with certain exceptions.
Pursuant to a Stockholders' Agreement which we entered into on May 16, 2002
with Stanford, Christopher Carey and his wife, if either Stanford or the Careys
should ever want to sell any shares of our Series A stock or common stock that
they own, the other party has a (i) right of first refusal regarding such sale
and, if such non-selling party does not want to exercise its right of first
refusal, we have the residual right to purchase such shares, and (ii) right of
co-sale under the same terms and for the same type of consideration. In the case
of a material adverse event related to us, the Careys agreed to vote their
shares as directed by Stanford, including to remove and replace the members of
the board with designees nominated by Stanford. Finally, Stanford has the right
to nominate one member of our board and the Carey's have agreed to vote for such
nominee.
On July 31, 2000, the Predecessor Entity entered into a line of credit loan
arrangement with our President, Christopher Carey, who is also president of
Stronghold. According to such arrangement, Mr. Carey made available $1,989,500,
which the Predecessor Entity could borrow from time to time until August 1,
2001. Any borrowing under the facility could be reborrowed during the term of
the agreement and the outstanding amounts accrued interest at the rate of
interest per annum equal to the floating Base Rate, computed daily, for the
actual number of days elapsed as if each full calendar year consisted of 360
days. Any overdue amounts accrued interest at an annual rate of 2% greater than
the base rate, which is 2% above the floating base rate announced from time to
time by Citibank, N.A. Under the agreement, the first interest payment was due
on August 1, 2001. On such date, the line of credit was extended for one more
year, until August 1, 2002. On April 22, 2002, the Predecessor Entity issued
500,000 shares of its common stock (which converted into 1,093,750 shares of our
common stock when we acquired the Predecessor Entity on May 16, 2002) in
exchange for cancellation of $1 million of outstanding debt under such line of
credit. On May 16, 2002, the total
41
amount outstanding under the line of credit was $2.2 million. On such date, we
issued 666,667 shares of our common stock to Mr. Carey in exchange for
cancellation of $1 million of the then outstanding amount. Stronghold will pay
Mr. Carey the remaining $1.2 million according to the terms of a Non-Negotiable
Promissory Note which was issued on May 16, 2002.
Under the promissory note, the principal amount and accrued interest is due
and payable in six equal consecutive quarterly installments commencing on the
date which is two business days after we have filed our Annual Report on Form
10-K for the year ended December 31, 2002. Each subsequent quarterly installment
will be paid two days after we file each subsequent Form 10-Q. Interest accrues
under the promissory note at an annual rate of 10%. If Stronghold's net income
does not meet certain benchmarks, then either the principal balance and accrued
interest due for the quarter will be deferred and the repayment will be
amortized during the remaining quarters or, depending upon the net income amount
achieved, the principal balance and accrued interest due will be automatically
converted into shares of our common stock, at a conversion price equal to the
average closing price of our common stock for the twenty (20) trading days
immediately preceding the date of conversion. The promissory note is expressly
subordinated in right of payment to the prior payment in full of all of
Stronghold's senior indebtedness. Subject to the payment in full of all senior
indebtedness, Mr. Carey is subrogated to the rights of the holders of such
senior indebtedness to receive payments or distribution of assets.
On September 14, 2000, we issued 5,000,000 shares of our common stock to
our former president, Pietro Bortolatti, in exchange for the transfer from Mr.
Bortolatti of all of the outstanding shares of Terre di Toscana, Inc. to us. The
assets of Terre di Toscana, Inc. included rights in several customer agreements.
We valued the 5,000,000 shares issued to Mr. Bortolatti at par value, $.0001 per
share. As part of our merger with the Predecessor Entity and the exchange of
shares for our truffle business, Mr. Bortolatti has either surrendered or
exchanged all of such shares. KGL Investments, Ltd. received 30,000 shares of
our common stock in exchange for $3,000 worth of legal services rendered by
Kaplan Gottbetter & Levenson, LLP, our former legal counsel (the shares were
valued at $.10 per share). Kaplan Gottbetter & Levenson, LLP is the beneficial
owner of these shares. The legal services did not include the preparation of
this prospectus.
In August 2002, our outside director, Robert Cox, purchased 60,000 shares
of our common stock at a purchase price of $1.50 per share for aggregate
proceeds to us of $90,000. Mr. Cox's shares are included herein for
registration. Such purchase was pursuant to a Subscription Agreement between Mr.
Cox and us in which Mr. Cox made certain investment representations and
warranties.
Stanford Venture Capital Holdings, Inc. ("Stanford") is the holder of
2,002,750 shares of our Series A $1.50 Convertible Preferred Stock and warrants
to purchase 1,001,374 shares of our common stock. Stanford is an affiliate of
Stanford Financial Group, which is the majority stockholder of TWS
International, Inc. Luis Delahoz, one of our outside directors, is the president
and chief executive officer of TWS International, Inc. and is Stanford's
representative on our board of directors.
David Rector is a former director of ours and is also a principal of The
David Stephens Group. In the past we have engaged The David Stephens Group to
perform certain management consulting services for which we paid The David
Stephens Group $26,243.70 through January 31, 2001.
Lenard Berger, our Chief Technology Officer and Vice President, James
Cummiskey, our Vice President of Sales and Marketing, and Salvatore D'Ambra, our
Vice President and Chief Engineer, each received 200,000 shares of common stock
from the Predecessor Entity as founders of such entity, at a per share price of
$.005. Such shares converted into 437,400 shares of our common stock.
42
We believe that the terms of the above transactions are commercially
reasonable and no less favorable to us than we could have obtained from an
unaffiliated third party on an arm's length basis.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the NASD Over-The-Counter Bulletin Board
("OTCBB") under the symbol "SGHT". The following table sets forth the high and
low bid prices of our common stock, as reported by the OTCBB for the fourth
quarter of 2001, and the first and second quarters of 2002. The quotations set
forth below reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
2001 High Bid Low Bid
---- -------- -------
Fourth Quarter........................... $0.14 $0.14
2002 High Bid Low Bid
---- -------- -------
First Quarter............................ $0.14 $0.14
Second Quarter........................... $1.15 $0.14
There are currently options outstanding under out stock plans to purchase
1,400,056 shares of our common stock, warrants outstanding to purchase 2,002,750
shares of our common stock, and 2,002,750 shares of Series A $1.50 Convertible
Preferred Stock outstanding which are convertible into the same number of shares
of our common stock.
We have outstanding 10,022,000 shares of our common stock and 56 holders of
record. Of these shares, 2,011,000 shares are tradable pursuant to Rule 144
under the Securities Act. Shares are eligible for sale in the public market,
subject to certain volume limitations and the expiration of applicable holding
periods under Rule 144 under the Securities Act. In general, under Rule 144 as
currently in effect, a person (or persons whose shares are aggregated) who has
beneficially owned restricted shares for at least one year (including the
holding period of any prior owner an affiliate) would be entitled to sell within
any three-month period a number of shares that does not exceed the greater of
(1)% of the number of shares of common stock then outstanding or (2) the average
weekly trading volume of the common stock during the four calendar weeks
preceding the filing of a From 144 with respect to such sale. Sales under Rule
144 are also subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been an affiliate of us at
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, is entitled to sell
such shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144. We have not filed a
registration statement relating to the shares of our common stock that are (i)
subject to outstanding options under our 2002 Stock Incentive Plan, 2002
California stock Incentive Plan or the 2000 Stock Option Plan of the Predecessor
Entity, which we assumed, (ii) issuable upon the conversion of the shares of our
Series A $1.50 Convertible Preferred Stock or (iii) issuable upon the conversion
of warrants for our common stock.
We can offer no assurance that an active public market in our shares will
develop. Future sales of substantial amounts of our shares (including shares
issued upon exercise of outstanding options) in the public market could
adversely affect market prices prevailing from time to time and could impair
43
our ability to raise capital through the sale of our equity securities. In
addition, we may engage in financing transactions in which additional restricted
shares are issued.
We have appointed Continental Stock Transfer & Trust Company, 2 Broadway,
New York, New York 10004 as transfer agent for our shares of common stock.
LEGAL MATTERS
Certain legal matters, including the legality of the issuance of the shares
of common stock offered herein, are being passed upon for us by our counsel,
Hale and Dorr LLP, 650 College Road East, Princeton, New Jersey, 08540.
EXPERTS
The financial statements of Stronghold Technologies, Inc. and its
subsidiary, as of June 30, 2002, have been included herein and in the
registration statement in reliance upon the report of Rothstein, Kass & Company,
P.C., independent certified public accountants, appearing elsewhere herein, and
upon the authority of that firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, registration statements and other documents with the Securities
and Exchange Commission. The registration statement of which this prospectus is
a part contains additional relevant information about us and our common stock,
and you should refer to the registration statement and its exhibits to read that
information. References in this prospectus to any of our contracts or other
documents are not necessarily complete, and you should refer to the exhibits
attached to the registration statement for copies of the actual contract or
document.
You may read and copy the registration statement, the related exhibits and
our other filings with the SEC at the SEC's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. You also may request copies of those
documents at prescribed rates by writing to the SEC. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the Public Reference
Room.
The SEC also maintains an Internet site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the SEC. The site's address is http://www.sec.gov. You also
may request copies of these documents, which will be provided to you at no cost,
by writing or telephoning us as follows: 777 Terrace Avenue, Hasbrouck Heights,
New Jersey 07604, Attn: Christopher J. Carey, or (201) 727-1464.
If we are not required to deliver an annual report to our stockholders for
fiscal year 2002, we will not voluntarily make such delivery.
44
INDEX TO FINANCIAL STATEMENTS
Stronghold Technologies, Inc.
The financial statement information for the three and six months ended June
30, 2002 and 2001 reflects the consolidated financial information of Stronghold
Technologies, Inc., a Nevada corporation (the "Registrant") and its wholly-owned
subsidiary, Stronghold Technologies, Inc., a New Jersey corporation. All
references in the notes to the financial statements for the three six months
ended June 30, 2002 and 2001 to the "Company" refer to the wholly-owned
subsidiary and all references to the "Parent" refer to the Registrant, as set
forth in Note 1.
The financial statement information for the fiscal years ended December 31,
2001 and 2000 reflects the financial information of the wholly-owned subsidiary
only, since the wholly-owned subsidiary represents the operating entity of the
Registrant and was not consolidated with the Registrant's financials until the
quarter ended June 30, 2002. All references in the notes thereto to the
"Company" refer to the wholly-owned subsidiary, as set forth in Note 1.
FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)
Balance Sheets........................................................... F-2
Statements of Operations ................................................ F-3
Statements of Cash Flows................................................. F-4
Notes to Financial Statements............................................ F-5
FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000
Independent Auditors' Report............................................. F-12
Balance Sheets........................................................... F-13
Statements of Operations................................................. F-14
Statements of Changes in Stockholders' Deficit........................... F-15
Statements of Cash Flows................................................. F-16
Notes to Financial Statements............................................ F-17
F-1
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
BALANCE SHEET
--------------------------------------------------------------------------------
June 30, 2002 (Unaudited)
--------------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 312
Accounts receivable, less allowance for doubtful
accounts of $69,000 1,610,484
Other receivables, current portion 30,000
Inventories 164,803
Prepaid expenses 7,292
-------
Total current assets 1,812,891
---------
Property and equipment, net 151,196
---------
Other assets
Other receivables, less current portion 112,500
Security deposits 27,587
---------
Total other assets 140,087
---------
$2,104,174
---------
---------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 671,694
Accrued expenses and other current liabilities, including
interest payable, stockholder of $50,496 553,884
Obligations under capital leases, current portion 5,182
Note payable, current portion 500,000
Note payable, stockholder, current portion 183,600
---------
Total current liabilities 1,914,360
---------
Long-term liabilities
Obligations under capitalized leases, less current portion 9,500
Note payable, less current portion 1,000,000
Note payable, stockholder less current portion 908,647
---------
Total long term liabilities 1,918,147
---------
Commitments and contingencies
Stockholders' deficit
Preferred stock, $.0001 par value; authorized 5,000,000
shares, 2,002,750 issued and outstanding (aggregate
liquidation preference of $3,004,125) 201
Common stock, $.0001 par value, authorized 50,000,000
shares, 9,752,667 issued and outstanding 976
Additional paid-in capital 4,450,287
Stock subscription receivable (2,166,000)
Accumulated deficit (4,013,797)
----------
Total stockholders' deficit (1,728,333)
----------
$2,104,174
----------
----------
See accompanying notes to financial statements.
F-2
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
STATEMENTS OF OPERATIONS
------------------------------------------------------------------------------------------------------------------------------------
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Sales $ 1,054,928 $ 315,719 $ 1,748,566 $ 315,719
Cost of sales 380,909 130,936 590,035 130,936
----------------------------------- -----------------------------------
Gross profit 674,019 184,783 1,158,531 184,783
----------------------------------- -----------------------------------
Operating expenses
General and administrative 993,432 576,650 1,953,377 1,021,440
Officer's salary 68,400 45,000 134,400 75,000
----------------------------------- -----------------------------------
1,061,832 621,650 2,087,777 1,096,440
----------------------------------- -----------------------------------
Loss from operations (387,813) (436,867) (929,246) (911,657)
Interest expense 53,276 30,903 109,315 52,268
----------------------------------- -----------------------------------
Net loss $ (441,089) $ (467,770) $ (1,038,561) $(963,925)
----------------------------------- -----------------------------------
----------------------------------- -----------------------------------
Basic and diluted loss per
common share $ (0.06) $ (0.08) $ (0.15) $ (0.16)
----------------------------------- -----------------------------------
----------------------------------- -----------------------------------
Weighted average number of
common shares outstanding 7,829,459 5,906,250 6,867,854 5,906,250
----------------------------------- -----------------------------------
----------------------------------- -----------------------------------
See accompanying notes to financial statements.
F-3
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------------------------------------
Six months Six months
ended ended
June 30, June 30,
2002 2001
(Unaudited) (Unaudited)
Cash flows from operating activities
Net loss $(1,038,561) $(963,925)
Adjustments to reconcile net loss to
net cash used in operating activities:
Bad debt expense 47,459
Depreciation and amortization 10,538 8,247
Changes in operating assets and liabilities:
Accounts receivable (1,375,583)
Inventories (83,455)
Prepaid expenses (2,407) (345,560)
Other receivables 107,639 (22,830)
Accounts payable 614,053 903
Accrued expenses and other current liabilities 290,693 317,861
--------------------------------------
Net cash used in operating activities (1,429,624) (1,005,304)
--------------------------------------
Net cash used in investing activities,
Payments for purchase of property and equipment (50,236) (63,285)
--------------------------------------
Cash flows from financing activities
Proceeds from issuance of preferred stock and warrants, net of financing costs 478,287
Principal payments obligations under capital leases (864)
Proceeds from stockholder loan 964,482
Proceeds from issuance of note payable 1,035,440
--------------------------------------
Net cash provided by financing activities 1,441,905 1,035,440
--------------------------------------
Net decrease in cash (37,955) (33,149)
Cash, beginning of period 38,267 41,040
--------------------------------------
Cash, end of period $ 312 $ 7,891
--------------------------------------
--------------------------------------
Supplemental disclosure of cash flow information,
cash paid during the period for interest $ 114,859 $ 897
--------------------------------------
--------------------------------------
Supplemental disclosure of noncash investing and financing activities
During the six months ended June 30, 2002 the Company entered into two
separate agreements to convert $2,000,000 of loans payable, stockholder
into common stock.
On May 15, 2002 the Company consolidated approximately $1,200,000 due to
the majority stockholder with balances in loans payable, stockholder and
accrued expenses and other current liabilities, into a promissory note
classified as note payable, stockholder.
On June 30, 2002 the Company converted their outstanding line of credit
with a non affiliated bank into a note payable of $1,500,000.
Obligations under capital leases aggregating $15,545 were incurred when the
Company entered into various leases for computer equipment.
See accompanying notes to financial statements.
F-4
STRONGHOLD TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. NATURE OF OPERATIONS
Stronghold Technologies, Inc. (the "Company") was incorporated in the state of
New Jersey on August 1, 2000. The Company is engaged principally as a developer
of wireless and internet based systems for auto dealers in the United States,
which began operations on April 1, 2001.
On May 15, 2002, the Company entered into a Merger Agreement (the "Agreement")
with Stronghold Technologies, Inc. (formerly known as TDT Development, Inc. (the
"Parent")) whereby Parent issued 7,000,000 shares of its common stock in
exchange for all of the Company's outstanding shares in a transaction accounted
for as a reverse purchase acquisition. As a result, the Company is considered
for accounting purposes, to be the acquiring company since the stockholders of
the Company acquired more than 50% of the issued and outstanding stock of
Parent. Pursuant to this agreement, the outstanding options of the Company were
also converted into options to purchase Parent common stock based on a
conversion rate of 2.1875 as defined in the agreement. Prior to the merger,
Parent's operations were comprised solely of a business that sold truffles
imported from Italy through its wholly owned subsidiaries, Terre di Toscana,
Inc. and Terres Toscanes, Inc.(the "Subsidiaries"). The Subsidiaries were sold
on July 19, 2002 (Note 12) and had virtually no material operations for the
period of May 16, 2002 through July 19, 2002. Since this transaction resulted in
a change in reporting entity, the historical financial statements prior to May
16, 2002 are those of the Company. The stockholders' equity of the Company has
been retroactively restated.
2. UNAUDITED STATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED STATEMENTS
The accompanying condensed consolidated financial statements of the Company as
of June 30, 2002 and for the six and three-month periods ended June 30, 2002 and
2001 are unaudited and reflect all adjustments of a normal and recurring nature
to present fairly the financial position, results of operations and cash flows
for the interim periods. These unaudited condensed consolidated financial
statements have been prepared by the Company pursuant to instructions to Form
10-QSB. Pursuant to such instructions, certain financial information and
footnote disclosures normally included in such financial statements have been
omitted. The results of operations for the six and three-month periods ended
June 30, 2002 are not necessarily indicative of the results that may occur for
the year ending December 31, 2002.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation and
amortization. The Company provides for depreciation and amortization as follows:
ESTIMATED
ASSET USEFUL LIFE PRINCIPAL METHOD
Computer equipment 5 Years Declining-balance
Computer software 3 Years Declining-balance
Furniture and fixtures 7 Years Declining-balance
Leasehold improvements 10 Years Straight-line
INVENTORIES
Inventories, which are comprised of hardware for resale, are stated at cost, on
an average cost basis, which does not exceed market value.
F-5
RETIREMENT PLAN
The Company has a retirement plan under Section 401(k) of the Internal Revenue
Code ("the Plan"), which covers all eligible employees. The Plan provides for
voluntary deduction of the employee's salary, subject to Internal Revenue Code
limitations. The Company can make a matching contribution to the Plan which is
at the discretion of the Company and is determined annually. There were no
matching contributions for the three-month and six-month periods ended June 30,
2002 and 2001.
INCOME TAXES
The Company complies with SFAS 109, "Accounting for Income Taxes," which
requires an asset and liability approach to financial accounting and reporting
for income taxes. Deferred income tax assets and liabilities are computed for
differences between the financial statement and tax bases of assets and
liabilities that will result in future taxable or deductible amounts, based on
enacted tax laws and rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's assets and liabilities that qualify as
financial instruments under SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments," approximate their carrying amounts presented in the
balance sheet at June 30, 2002.
REVENUE RECOGNITION
The Company recognizes revenue at the time the product is installed. Sales
revenue and cost of sales reported in the statement of operations is reduced to
reflect estimated returns.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 revenues and expenses
during the reporting period. Actual results could differ from those estimates.
LOSS PER COMMON SHARE
Loss per common share is based on the weighted average number of common shares
outstanding. The Company complies with SFAS 128, "Earnings Per Share", which
requires dual presentation of basic and diluted earnings (loss) per share. Basic
earnings (loss) per share excludes dilution and is computed by dividing net loss
applicable to common stockholders by the weighted-average number of common
shares outstanding for the year. Diluted earnings (loss) per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the loss of the entity. Since the
effect of the outstanding options and convertible debt is antidilutive, they
have been excluded from the Company's computation of loss per common share.
F-6
3. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2002 consists of the following:
Computer equipment $ 149,516
Computer software 18,001
Furniture and fixtures 14,963
Computer equipment recorded under capital lease 15,546
Leasehold improvements 7,982
-----------------
206,008
Less accumulated depreciation
and amortization 54,812
-----------------
$ 151,196
-----------------
-----------------
4. NOTE PAYABLE, STOCKHOLDER
Note payable, stockholder at June 30, 2002 (unaudited) consists of a promissory
note that was entered into on May 15, 2002 with the Company that consolidated
the outstanding balances of advances, expenses paid by the stockholder, accrued
salary and accrued interest. The balance of the outstanding loan at June 30,
2002 is approximately $1,092,000. The loan principal is due in six equal
quarterly installments, plus interest of 10% per annum, commencing in March
2003. At each payment date, if the Company does not meet certain benchmarks,
then either the principal balance and accrued interest due for the quarter will
be deferred and the repayment will be amortized during the remaining quarters
or, depending upon the net income achieved, the principal and accrued interest
due will be automatically converted into shares of common stock (Note 11).
Interest expense on the note payable, stockholder for the three and six months
ended June 30, 2002 were approximately $35,000 and $74,000, respectively.
5. NOTE PAYABLE
At June 30, 2002, the Company converted their outstanding line of credit into a
note payable of $1,500,000. The loan bears interest at a rate of 4.750% per
annum and is due in monthly installments of $41,667 plus interest to United
Trust Bank through January 1, 2006. The note is collateralized by substantially
all the assets of the Company and is guaranteed by the majority stockholder of
the Company. The note payable, stockholder is subordinated to this note. The
principal portion due for each of the next three years will be $500,000.
6. STOCK SUBSCRIPTION RECEIVABLE
The stock subscription receivable represents 600,000 shares of the Company's
original common stock (restated to 1,312,500 as defined in the Agreement) due
from three key employees and 1,502,750 shares of the Company's preferred stock
due from a minority shareholder.
F-7
7. STOCK OPTION PLANS
The Company adopted a stock option plan ("Plan") providing for incentive stock
options ("ISOs") and non-qualified stock options ("NQSOs"). The Company has
reserved 500,000 shares of common stock for issuance upon the exercise of stock
options granted under the Plan. In May 2002, the Board of Directors increased
the shares reserved under the plan to 725,000. The exercise price of an ISO or
NQSO will not be less than 100% of the fair market value of the Company's common
stock at the date of the grant. The exercise price of an ISO granted to an
employee owning greater than 10% of the Company's common stock will not be less
than 110% of the fair market value of the Company's common stock at the date of
the grant. The Plan further provides that the maximum period in which stock
options may be exercised will be determined by the board of directors, except
that they may not be exercisable after ten years from the date of grant.
The status of the Company's restated stock options per the Agreement are
summarized below:
RESTATED WEIGHTED
PER SHARE AVERAGE
PLAN EXERCISE EXERCISE
OPTIONS PRICE PRICE
Outstanding at
December 31, 2001 675,938 $0.05 - $0.12 $0.12
Granted 2002 644,218 $0.12 - $0.69 $0.32
Terminated 2002 (131,250) $0.05 $0.05
-----------
Outstanding at
June 30, 2002 1,188,906 $0.05 - $0.69 $0.11
-----------
-----------
There were 8,332 shares exercisable at June 30, 2002.
The Company has adopted the disclosure requirements of Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation". SFAS 123 requires compensation expense to be recorded (i) using
the new fair value method or (ii) using existing accounting rules prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related interpretations with pro forma disclosure of
what net income would have been had the Company adopted the new fair value
method. If the Company adopted the new fair value method using the Black-Scholes
option-pricing model, the Company's net loss would not have been materially
impacted for the three-month and six-month periods ended June 30, 2002 and 2001.
The Company accounts for its stock based compensation plans in accordance with
the provisions of APB 25 and, accordingly, no compensation cost has been
recognized because stock options granted under the plan were at exercise prices
which were equal to or above the market value of the underlying stock at date of
grant.
The fair value of issued stock options is estimated on the date of grant using
the Black-Scholes option-pricing model including the following assumptions:
expected volatility of 0%, expected dividend yield rate of 0%, expected life of
10 years, and a risk-free interest rate of 4.68% and 5.35% in 2002 and 2001,
respectively.
F-8
8. INCOME TAXES
Until May 16, 2002, the date of the Agreement, the Company operated as an "S"
corporation and, as a result, the earnings and losses were included in the
personal income tax returns of the respective stockholders. From the date of the
Agreement through June 30, 2002, the Company operated as a "C" corporation and
had net operating losses ("NOL") of approximately $220,000 that will expire
between 2009 and 2022. The deferred tax asset from the Company's NOL's
approximated $88,000 for which a valuation allowance in an equal amount has been
established.
9. COMMITMENTS AND CONTINGENCIES
SECURITIES PURCHASE AGREEMENT
The Company, along with Parent, and certain stockholders of the Company
(together the "Parties"), entered into a Securities Purchase Agreement (the
"Purchase Agreement") dated and executed on May 15, 2002, with Stanford Venture
Capital Holdings, Inc. ("Stanford"). Pursuant to the Purchase Agreement, the
parties agreed to issue to Stanford a total of 2,002,750 shares of the Company's
Series A $1.50 Convertible Preferred Stock ("Series A Preferred Stock"), which
is equal to 20% of the total issued and outstanding shares of the Company's
common stock (excluding certain shares which may be issued upon the occurrence
of certain events as disclosed in the Purchase Agreement), plus five-year
warrants to purchase 2,002,750 shares of the Company's common stock at an
exercise price of $1.50 or $2.25, for an aggregate purchase price of $3,000,000.
Pursuant to the Purchase Agreement, the issuance of the Series A Preferred Stock
and Warrants will take place on four separate closing dates beginning on May 16,
2002 and closing on July 19, 2002.
In connection with the Purchase Agreement, Parent and Stanford entered into a
Registration Rights Agreement, dated May 16, 2002, in which the Company agreed
to register the shares of the Company's Common Stock issuable upon conversion of
the Series A Preferred Stock and upon conversion of the Warrants with the
Securities and Exchange Commission within 180 days from the date of the last
closing under the Purchase Agreement, which was July 19, 2002. In addition,
certain stockholders of the Company entered into a Lock-Up Agreement in which
the parties agreed not to sell, assign, transfer, pledge, mortgage, encumber or
otherwise dispose of their shares of the Company's capital stock for a period of
two years, with certain exceptions, as defined in the Lock-up Agreement.
F-9
LEASES
The Company rents facilities under leases in New Jersey, Virginia and
California. The Company is obligated under these leases through April 2006. In
addition to the base rent, one lease provides for the Company to pay a
proportionate share of operating costs and other expenses.
Future aggregate minimum annual rent payments under these leases are
approximately as follows:
YEAR ENDING JUNE 30,
2003 $ 72,000
2004 102,000
2005 105,000
2006 108,000
------------
$ 387,000
------------
------------
Rent expense was approximately $39,000 and $34,000 for the three-month periods
ended June 30, 2002 and 2001 and approximately $80,000 and $71,000 for the six-
month periods ended June 30, 2002 and 2001.
OBLIGATIONS UNDER CAPITAL LEASES
For the year ended June 30, 2002, the Company has computer equipment under
capital leases expiring at various dates through 2005. The assets and
liabilities under capital leases are recorded at the lower of the present values
of the minimum lease payments or the fair values of the assets. The assets are
included in property and equipment and are depreciated over their estimated
useful lives.
As of June 30, 2002, minimum future lease payments are as follows:
YEAR ENDING JUNE 30,
2003 $ 6,160
2004 6,160
2005 5,133
------------
Total minimum lease payments 17,453
Less amounts representing interest 2,771
------------
present value of net minimum lease payments 14,682
Less current portion 5,182
------------
Long-term portion $ 9,500
------------
------------
F-10
EMPLOYMENT AND NON-COMPETITION AGREEMENTS
The Company is obligated under employment and non-competition agreements with
four key employees through July 2005. The first agreement provides for a base
salary of $180,000 per annum for the first year, increasing to $192,000 per
annum for the second year (through August 13, 2002). The second agreement
provides for a minimum annual salary of $138,000 for the first year, increasing
to $150,000 for the second year, which may increase to $175,000 based on
earnings for such year, and increasing to $175,000 for the third year, which may
increase to $200,000 based on earnings for such year (through July 31, 2003).
The third agreement provides for a base salary of $102,000 for the first year,
increasing to $112,000 for the second year, and increasing to $122,000 for the
third year (through July 9, 2003). Thereafter, for each succeeding year during
the term of these three agreements, base salary shall be increased annually by a
percentage equal to the percentage by which the Consumers Price Index has
increased over the preceding year. These three agreements further provide for a
commission equal to one percent of net sales during each year of their term. The
fourth agreement provides for a base salary of $260,000 from May 15, 2002
through December 31, 2002, which increases to $300,000 from January 1, 2003
through December 31, 2003 and $350,000 from January 1, 2004 through December 31,
2004. The four agreements also provide for the key employees not to engage in
certain competitive activities for one year after termination of employment.
LICENSE AGREEMENT
On February 27, 2001, the Company entered into a software license agreement
expiring June 30, 2003. Future aggregate payments under this agreement total
$75,000. In addition, the agreement provides for an option to renew from July 1,
2003 to June 30, 2005. The Company will be required to pay $100,000 a year plus
a percentage equal to the last published Consumer Price Index.
10. LIQUIDITY
The Company has incurred a loss from operations for the six months ended June
30, 2002 of approximately $1,039,000 and has a working capital deficit of
approximately $101,000 and a stockholders' deficit of approximately $1,728,000
as of June 30, 2002. The majority stockholder of the Company has committed to
fund additional long-term debt financing, on an as needed basis. Long-term
liquidity is dependent on the Company's ability to obtain additional long-term
financing and attain profitable operations.
11. STOCKHOLDERS' DEFICIT
On April 22, 2002 and May 16, 2002, the majority stockholder converted and
exchanged an aggregate of $2,000,000 of borrowings that were outstanding under a
line of credit agreement for an aggregate of 1,093,750 and 666,667 shares of the
Company's common stock, at a per share value of $.91 and $1.50, respectively.
The remaining amounts outstanding under the line of credit, plus accrued
interest, accrued officer compensation and un-reimbursed expenses were converted
into a promissory note (Note 4).
12. SUBSEQUENT EVENTS
On July 19, 2002 the Subsidiaries were sold to a minority stockholder for the
consideration of all his outstanding common stock in the Company.
F-11
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Stronghold Technologies, Inc.
We have audited the accompanying balance sheets of Stronghold Technologies, Inc.
as of December 31, 2001 and 2000, and the related statements of operations,
changes in stockholders' deficit, 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit 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 audit provides 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 Stronghold Technologies, Inc.
as of December 31, 2001 and 2000, 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 of America.
/s/ Rothstein, Kass & Company, P.C.
Roseland, New Jersey
March 1, 2002
F-12
STRONGHOLD TECHNOLOGIES, INC. (a New Jersey corporation)
BALANCE SHEETS
================================================================================
December 31, 2001 2000
-----------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 38,267 $ 41,040
Accounts receivable 282,360
Other receivables, current portion 60,000
Inventories 81,348
Prepaid expenses 4,885 24,502
---------------------------------
Total current assets 466,860 65,542
---------------------------------
Property and equipment, net 95,953 46,800
---------------------------------
Other assets
Other receivables, less current portion 190,139
Security deposits 27,087
---------------------------------
Total other assets 217,226
---------------------------------
$ 780,039 $ 112,342
---------------------------------
---------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 57,641 $ 22,114
Accrued expenses and other current liabilities 262,691 39,827
Loan payable 1,500,000
---------------------------------
Total current liabilities 1,820,332 61,941
---------------------------------
Loan and accrued interest payable, stockholder 1,924,443 595,049
---------------------------------
Commitments and contingencies
Stockholders' equity (deficit)
Common stock, $.0001 par value; authorized 50,000,000
shares, 5,906,250 shares issued and outstanding 591 591
Additional paid-in capital 12,909 12,909
Stock subscription receivable (3,000) (3,000)
Accumulated deficit (2,975,236) (555,148)
---------------------------------
Total stockholders' equity (deficit) (2,964,736) (544,648)
---------------------------------
$ 780,039 $ 112,342
---------------------------------
---------------------------------
See accompanying notes to financial statements.
F-13
STRONGHOLD TECHNOLOGIES, INC. (a New Jersey corporation)
STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2001 2000
----------------------------------------------------------------------------
SALES $ 614,539 $ -
Cost of sales 250,465
--------------------------------
Gross profit 364,074
--------------------------------
Operating expenses
General and administrative 2,477,727 298,704
Officer's salary 165,000 243,966
--------------------------------
2,642,727 542,670
--------------------------------
Loss from operations (2,278,653) (542,670)
Other expense, interest expense 141,435 12,478
--------------------------------
Net loss $(2,420,088) $ (555,148)
================================
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.41) $ (0.23)
================================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 5,906,250 2,460,938
================================
See accompanying notes to financial statements.
F-14
STRONGHOLD TECHNOLOGIES, INC. (a New Jersey corporation)
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
================================================================================
ADDITIONAL STOCK
COMMON STOCK PAID-IN SUBSCRIPTION ACCUMULATED
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT
Common stock issuance 5,906,250 $ 591 $ 12,900 $ (3,000) $
Net loss (555,148)
--------------------------------------------------------------------------------------
Balances, December 31, 2000 5,906,250 591 12,900 (3,000) (555,148)
Net loss (2,420,088)
-------------------------------------------------------------------------------------
Balances, December 31, 2001 5,906,250 $ 591 $ 12,900 $ (3,000) $ (2,975,236)
=====================================================================================
See accompany notes to financial statements.
F-15
STRONGHOLD TECHNOLOGIES, INC. (a New Jersey corporation)
STATEMENTS OF CASH FLOWS
================================================================================
For the years ended December 31, 2001 2000
--------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,420,088) $ (555,148)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 32,986 4,362
Increase (decrease) in cash
attributable to changes in assets
and liabilities:
Accounts receivable (282,360)
Inventories (81,348)
Other receivables (250,139)
Other assets (7,185)
Prepaid expenses (285) (24,502)
Accounts payable 35,528 22,114
Accrued expenses and other
current liabilities 222,863 39,827
Accrued interest and expenses
to stockholder 344,394
----------------------------------
NET CASH USED IN OPERATING ACTIVITIES (2,405,634) (513,347)
----------------------------------
CASH FLOWS FROM INVESTING ACTIVITES
Capital expenditures (51,162)
Purchases of property and equipment (82,139)
----------------------------------
NET CASH USED IN INVESTING ACTIVITIES (82,139) (51,162)
----------------------------------
CASH FLOWS FROM FINANCING ACTIVITES
Proceeds from loan payable,
stockholder 985,000 605,549
Proceeds from loan payable 1,500,000
----------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,485,000 605,549
----------------------------------
NET INCREASE (DECREASE) IN CASH (2,773) 41,040
CASH, beginning of year 41,040
----------------------------------
CASH, end of year $ 38,267 $ 41,040
==================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
cash paid during the year for interest $ 19,512 $ -
==================================
See accompanying notes to financial statements.
F-16
STRONGHOLD TECHNOLOGIES, INC. (a New Jersey corporation)
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. NATURE OF OPERATIONS
Stronghold Technologies, Inc. (the "Company") was incorporated in the state of
New Jersey on August 1, 2000. The Company is engaged principally as a developer
of wireless and intemet based systems for auto dealers in the United States,
which began operations on April 1, 2001.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. The Company provides for depreciation and amortization as follows:
ESTIMATED
ASSET USEFUL LIFE PRINCIPAL METHOD
Computer equipment 5 Years Declining-balance
Computer software 3 Years Declining-balance
Furniture and fixtures 7 Years Declining-balance
Leasehold improvements 10 Years Straight-line
Inventories
Inventories, which are comprised of hardware for resale, are stated at cost, on
an average cost basis, which does not exceed market value.
Income Taxes
The Company is an "S" corporation and, as a result, the earnings and losses have
been included in the personal income tax returns of the respective stockholders.
Retirement Plan
The Company has a retirement plan under Section 401 (k) of the Internal Revenue
Code ("the Plan"), which covers all eligible employees. The Plan provides for
voluntary deduction of the employee's salary, subject to Internal Revenue Code
limitations. The Company can make a matching contribution to the Plan which is
at the discretion of the Company and is determined annually. There were no
matching contributions for the years ended December 31, 2001 and 2000.
F-17
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
The Company recognizes revenue at the time the product is installed. Sales
revenue and cost of sales reported in the statement of operations is reduced to
reflect estimated returns.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain 2000 amounts have been reclassified to conform to the 2001 presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31 2001 and 2000:
2001 2000
Computer equipment $ 94,407 $ 49,381
Computer software 16,616 1,781
Furniture and fixtures 14,296
Leasehold improvements 7,982
----------------------------
133,301 51,162
Less accumulated depreciation
and amortization 37,348 4,362
----------------------------
$ 95,953 $ 46,800
============================
4. LOAN AND ACCRUED INTEREST PAYABLE, STOCKHOLDER
Loan and accrued interest payable, stockholder at December 31, 2001 includes a
line of credit under which the Company can borrow up to $1,989,500 in principal
plus accrued interest. The loan bears interest at 2% above the prime rate (4.75%
at December 31, 2001) and is due on August 1, 2002, whereas, the stockholder has
represented that he will not demand payment prior to January 2003. The loan and
accrued interest payable, stockholder is comprised of advances of approximately
$1,580,000, expenses paid by the shareholder of approximately $210,000, and
accrued interest of approximately $134,000. As a result of the above, the
Company has approximately $409,500 available on the line of credit. Interest
expense for the years ending December 31, 2001 and December 31, 2000 amounted to
approximately $122,000 and 12,000, respectively.
F-18
5. LOAN PAYABLE
Loan payable is a line of credit under which the Company can borrow up to
$1,500,000 and bear an interest rate equal to the prime rate and is due on June
30, 2002. The agreement requires monthly payments of accrued interest. The note
is collateralized by substantially all the assets of the Company and is
guaranteed by the majority stockholder of the Company. The loan payable and
accrued interest payable, stockholder is subordinated to this note. Interest
expense relating to this loan amounted to approximately $20,000 for the year
ended December 31, 2001.
6. STOCK SUBSCRIPTION RECEIVABLE
The stock subscription receivable represents 1,312,500 shares of the Company's
common stock due from three key employees at approximately $.0023 a share.
7. STOCK OPTION PLANS
The Company adopted a stock option plan ("Plan") providing for incentive stock
options ("ISOs") and non-qualified stock options ("NQSOs"). The Company has
reserved 500,000 shares of common stock for issuance upon the exercise of stock
options granted under the Plan. The exercise price of an ISO or NQSO will not be
less than 100% of the fair market value of the Company's common stock at the
date of the grant. The exercise price of an ISO granted to an employee owning
greater than 10% of the Company's common stock will not be less than 110% of the
fair market value of the Company's common stock at the date of the grant. The
Plan further provides that the maximum period in which stock options may be
exercised will be determined by the board of directors, except that they may not
be exercisable after ten years from the date of grant.
The status of the Company's stock options are summarized below:
WEIGHTED
PER SHARE AVERAGE
PLAN EXERCISE EXERCISE
OPTIONS PRICE PRICE
Outstanding at
January 1, 2001 415,625 $0.07 $0.07
Granted 2001 260,313 $0.05 - $0.12 $0.08
-------
Outstanding at
December 31, 2001 675,938 $0.05 - $0.12 $0.07
=======
There were no shares exercisable at December 31, 2001.
F-19
7. STOCK OPTION PLANS (CONTINUED)
The Company has adopted the disclosure requirements of Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation". SFAS 123 requires compensation expense to be recorded (i) using
the new fair value method or (ii) using existing accounting rules prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related interpretations with pro forma disclosure of
what net income would have been had the Company adopted the new fair value
method. If the Company adopted the new fair value method using the Black-Scholes
option-pricing model, the result would be a decrease in net income and an
increase in paid in capital of $5,000. The Company accounts for its stock based
compensation plans in accordance with the provisions of APB 25 and, accordingly,
no compensation cost has been recognized because stock options granted under the
plan were at exercise prices which were equal to or above the market value of
the underlying stock at date of grant.
The fair value of issued stock options is estimated on the date of grant using
the Black-Scholes option-pricing model including the following assumptions:
expected volatility of 0%, expected dividend yield rate of 0%, expected life of
10 years, and a risk-free interest rate of 5.35% in 2001.
8. COMMITMENTS AND CONTINGENCIES
Leases
The Company rents facilities under leases in New Jersey, Virginia and
California. The Company is obligated under these leases through April 2006. In
addition to the base rent, one lease provides for the Company to pay a
proportionate share of operating costs and other expenses.
Future aggregate minimum annual rent payments under these leases are
approximately as follows:
YEAR ENDING DECEMBER 31,
2002 $ 147,000
2003 102,000
2004 105,000
2005 108,000
2006 27,000
-----------
$ 489,000
===========
Rent expense was approximately $132,000 and $170,000 for the years ending
December 31, 2001 and December 31, 2000, respectively.
F-20
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Employment and Non-Competition Agreements
The Company is obligated under employment and non-competition agreements with
three key employees through July 2005. The first agreement provides for base
salary of $192,000 per annum. The second agreement provides for base salary of
$150,000, beginning in August 2002 through July 31, 2003, and $175,000 in the
next year. The third agreement provides for base salary of $112,000, beginning
in August 2002 through July 31, 2003, and $122,000 in the next year. Thereafter,
for each succeeding year during the term of these agreements, base salary shall
be increased annually by a percentage equal to the percentage by which the
Consumers Price Index has increased over the preceding year. The agreements
further provide for a commission equal to one percent of net sales during each
year of their term. The agreements also provide for the key employees not to
engage in certain competitive activities for one year after termination of
employment.
License Agreement
On February 27, 2001, the Company entered into a software license agreement
expiring June 30, 2003.
Future aggregate annual payments under this agreement are as follows:
YEAR ENDING DECEMBER 31,
2002 $ 75,000
2003 37,500
-----------
$ 112,500
===========
In addition, the agreement provides for an option to renew from July 1, 2003 to
June 30, 2005. The Company will be required to pay $100,000 a year plus a
percentage equal to the last published Consumer Price Index.
9. LIQUIDITY
The Company has incurred a loss from operations for the years ended December 31,
2001 and 2000 of approximately $2,420,000 and $555,000, respectively. The
Company also had a working capital deficit of approximately $1,353,000 and
$610,000 at December 31, 2001 and 2000, respectively. The majority stockholder
of the Company has committed to fund additional long-term debt financing, on an
as needed basis. Long-term liquidity is dependent on the Company's ability to
obtain additional long-term financing and attain profitable operations.
F-21
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The General Corporation Law of Nevada provides for the indemnification of
the officers, directors and corporate employees and agents of Stronghold
Technologies, Inc. (the "Registrant") under certain circumstances as follows:
78.747 LIABILITY OF STOCKHOLDER, DIRECTOR OR OFFICER FOR DEBT OR LIABILITY OF
CORPORATION.
1. Except as otherwise provided by specific statute, no stockholder,
director or officer of a corporation is individually liable for a debt or
liability of the corporation, unless the stockholder, director or officer acts
as the alter ego of the corporation.
2. A stockholder, director or officer acts as the alter ego of the
corporation if:
(a) The corporation is influenced and governed by the stockholder,
director or officer;
(b) There is such unity of interest and ownership that the
corporation and the stockholder, director or officer are
inseparable from each other and;
(c) Adherence to the corporate fiction of a separate entity would
sanction fraud or promote a manifest injustice.
3. The question of whether a stockholder, director or officer acts as the
alter ego of a corporation must be determined by the court as a matter of law
78.7502 DISCRETIONARY AND MANDATORY INDEMNIFICATION OF OFFICERS DIRECTORS,
EMPLOYEES AND AGENTS: GENERAL PROVISIONS.
1. A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
except an action by or in the right of the corporation, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses, including attorneys' fees, judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with the action, suit or proceeding if he:
(a) is not liable pursuant to NRS 78.138; or
(b) acted in good faith and in a manner which he reasonably believed
to be in or not opposed to the best interests of the corporation,
and, with respect to any
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criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent, does
not, of itself, create a presumption that the person is liable pursuant to NRS
78.138 or did not act in good faith and in a manner which he reasonably believed
to be in or not opposed to the best interests of the corporation, or that, with
respect to any criminal action or proceeding, he had reasonable cause to believe
that his conduct was unlawful.
2. A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving as the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses, including amounts paid in
settlement and attorneys' fees actually and reasonably incurred by him in
connection with the defense or settlement of the action or suit if he:
(a) is not liable pursuant to NRS 78.138; or
(b) acted in good faith and in a manner which he reasonably believed
to be in or not opposed to the best interests of the corporation.
Indemnification may not be made for any claim, issue or matter as to which
such a person has been adjudged by a court of competent jurisdiction, after
exhaustion all appeals therefrom, to be liable to the corporation or for amounts
paid in settlement to the corporation, unless and only to the extent that the
court in which the action or suit was brought or other court of competent
jurisdiction determines upon the application that in view of all the
circumstances of the case, the person is fairy and reasonably entitled to
indemnify for such expenses as the court deems proper.
3. To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections 1 and 2, or in defense of
any claim, issue or matter therein, the corporation shall indemnify him against
expenses, including attorneys' fees, actually and reasonably incurred by him in
connection with the defense.
78.751 AUTHORIZATION REQUIRED FOR DISCRETIONARY INDEMNIFICATION; ADVANCEMENT OF
EXPENSES; LIMITATION ON INDEMNIFICATION AND ADVANCEMENT OF EXPENSES.
1. Any discretionary indemnification pursuant to NRS 78.7502, unless
ordered by a court or advanced pursuant to subsection 2, may be made by the
corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances. The determination must be made:
(a) By the stockholders;
(b) By the board of directors by majority vote of a quorum consisting
of directors who were not parties to the action, suit or
proceeding;
(c) If a majority vote of a quorum consisting of directors who were
not parties to
II-2
the action, suit or proceeding so orders, by independent legal
counsel in a written opinion; or
(d) If a quorum consisting of directors who were not parties to the
action, suit or proceeding cannot be obtained, by independent
legal counsel in a written opinion.
2. The articles of incorporation, the bylaws or an agreement made by the
corporation may provide that the expenses of officers and directors incurred in
defending a civil or criminal action, suit or proceeding must be paid by the
corporation as they are incurred and in advance of the final disposition of the
action, suit or proceeding, upon receipt of an undertaking by or on behalf of
the director or officer to repay the amount if it is ultimately determined by a
court of competent jurisdiction that he is not entitled to be indemnified by the
corporation. The provisions of this subsection do not affect any rights to
advancement of expenses to which corporate personnel other than directors or
officers may be entitled under any contract or otherwise by law.
3. The indemnification pursuant to NRS 78.502 and advancement of expenses
authorized in or ordered by a court pursuant to this section:
(a) Does not exclude any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under
the articles of incorporation or any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, for either
an action in his official capacity or an action in another
capacity while holding his office, except that indemnification,
unless ordered by a court pursuant to NRS 78.7502 or for the
advancement of expenses made pursuant to subsection 2, may not be
made to or on behalf of any director or officer if a final
adjudication establishes that his acts or omissions involved
intentional misconduct, fraud or a knowing violation of the law
and was material to the cause of action.
(b) Continues for a person who has ceased to be a director, officer,
employee or agent and inures to the benefit of the heirs,
executors and administrators of such a person.
78.752 INSURANCE AND OTHER FINANCIAL ARRANGEMENTS AGAINST LIABILITY OF
DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS.
1. A corporation may purchase and maintain insurance or make other
financial arrangements on behalf of any person who is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise for any
liability asserted against him and liability and expenses incurred by him in his
capacity as a director, officer, employee or agent, or arising out of his status
as such, whether or not the corporation has the authority to indemnify him
against such liability and expenses.
2. The other financial arrangements made by the corporation pursuant to
subsection 1 may include the following:
(a) The creation of a trust fund.
II-3
(b) The establishment of a program of self-insurance.
(c) The securing of its obligation of indemnification by granting a
security interest or other lien on any assets of the corporation.
(d) The establishment of a letter of credit, guaranty or surety.
No financial arrangement made pursuant to this subsection may provide
protection for a person adjudged by a court of competent jurisdiction, after
exhaustion of all appeals therefrom, to be liable for intentional misconduct,
fraud or a knowing violation of law, except with respect to the advancement of
expenses or indemnification ordered by a court.
3. Any insurance or other financial arrangement made on behalf of a person
pursuant to this section may be provided by the corporation or any other person
approved by the board of directors, even if all or part of the other person's
stock or other securities is owned by the corporation.
4. In the absence of fraud:
(a) The decision of the board of directors as to the propriety of the
terms and conditions of any insurance or other financial
arrangement made pursuant to this section and the choice of the
person to provide the insurance or other financial arrangement is
conclusive; and
(b) The insurance or other financial arrangement:
(1) Is not void or voidable; and
(2) Does not subject any director approving it to personal
liability for his action, even if a director approving
the insurance or other financial arrangement is a
beneficiary of the insurance or other financial
arrangement.
5. A corporation or its subsidiary which provided self-insurance for itself
or for another affiliated corporation pursuant to this section is not subject to
the provisions of Title 57 of NRS.
ARTICLES NINE AND TEN OF THE REGISTRANT'S AMENDED CERTIFICATE OF INCORPORATION
PROVIDE AS FOLLOWS:
9. Limitation on Liability. To the fullest extent permitted by Chapter 78
of the Nevada Revised Statutes as the same exists or may hereafter be amended,
an officer or director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages due to breach of fiduciary
duty as such officer or director.
10. Indemnification. The Corporation is authorized to provide
indemnification of agents for breach of duty to the Corporation and its
stockholders through bylaw provisions or through agreements with agents, or
both, in excess of the indemnification otherwise permitted by law, subject to
any limits on such excess indemnification as set forth therein.
II-4
As is permitted by the Nevada Revised Statutes and our charter, we
presently have directors and officers liability insurance for the benefit of our
directors and certain of our officers.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
All costs, expenses and fees in connection with the registration of the
selling stockholders' shares will be borne by the Registrant. All brokerage
commissions, if any, attributable to the sale of shares by selling stockholders
will be borne by such holders.
The expenses payable by the Registrant in connection with the registration
of the securities are estimated as follows:
Securities and Exchange Commission Registration Fee .............$ 2,004.68
Legal Fees ......................................................$75,000.00
Accounting Fees..................................................$ 8,000.00
TOTAL ...........................................................$84,989.00
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
OPTIONS
From the Registrant's inception through May 16, 2002, the Registrant did
not grant any stock options. In connection with the Registrant's acquisition of
the Predecessor Entity on May 16, 2002, the Registrant assumed the Predecessor
Entity's 2000 Stock Option Plan so that all of its issued and outstanding
options would remain intact. No further options will be issued under the assumed
Predecessor Entity's plan. Each outstanding option was automatically converted
into an option to acquire, on the same terms and conditions as were applicable
under the original option, such number of shares of the Registrant's common
stock as was equal to the number of options outstanding multiplied by 2.1875.
The exercise price was also adjusted to the exercise price that was equal to the
existing exercise price divided by 2.1875. The total number of the Predecessor
Entity's options that the Registrant assumed was 543,500 (after cancellations)
at a weighted average exercise price per share of $.78, which converted into
options to purchase 1,188,907 shares of the Registrant's common stock at a
weighted average exercise price of $.36. 253,750 of the assumed outstanding
options vest according to a three-year vesting schedule, 913,281 vest according
to the achievement of certain performance goals, and the remaining 21,875
options were fully vested upon grant.
In addition to the above employee options of the Predecessor Entity, the
Registrant assumed certain outstanding options that were granted, or committed
to be granted, by the Predecessor Entity to automobile dealerships. On May 16,
2002, the Registrant assumed a total of 77,500 options, which the Predecessor
Entity granted, or committed to grant, to three automobile dealerships for
services rendered, including providing the Predecessor Entity with consulting
services. These options converted into options for a total of 169,531 shares of
the Registrant's common stock. Certain of the options vest upon the achievement
of certain performance goals. Each of the dealerships is an accredited investor.
On July 17, 2002 the Registrant's board of directors adopted, and on July
31, 2002 the Registrant's approved, the adoption of the 2002 Stock Incentive
Plan. Under such plan the Registrant has granted 141,550 options to certain
employees at a weighted average exercise price of $1.50. Of the employee
options, 10,550 were
II-5
fully vested upon grant, 61,000 vest according to a three-year vesting schedule,
and 70,000 vest according to the achievement of certain performance goals.
On August 20, 2002, the Registrant's board of directors and stockholders
approved the adoption of the 2002 California Stock Incentive Plan. Under such
plan the Registrant has granted 69,600 options to certain employees at a
weighted average exercise price of $1.50. 15,600 of such options were fully
vested upon grant, 34,000 vest according to a three-year vesting schedule, and
20,000 vest according to the achievement of certain performance goals.
COMMON STOCK
During August and September 2002, the Registrant entered into eight
subscription agreements with private investors, pursuant to which the Registrant
issued an aggregate of 344,333 shares of its common stock at $1.50 per share.
These private investments generated total proceeds to the Registrant of
$513,500.
On May 16, 2002, the Registrant issued 7,000,000 shares of its common stock
to the stockholders of Stronghold Technologies, Inc., a New Jersey corporation,
in exchange for all of the issued and outstanding shares of such entity. All of
the recipients were either accredited investors or had alone, or together with a
purchaser representative, such knowledge and experience in financial and
business matters as to be capable of evaluating the merits and risks of an
investment in securities in general and of an investment in the Registrant in
particular. Each recipient had sufficient access to information about the
Registrant necessary to make an informed investment decision.
On May 16, 2002, the Registrant issued 666,667 shares of its common stock
to Christopher J. Carey, President of the Registrant, in exchange for the
cancellation in full of $1 million owed to Mr. Carey by the Registrant's
wholly-owned subsidiary, Stronghold Technologies, Inc. Mr. Carey is an
accredited investor.
From November 2000 to January 2001, the Registrant issued 3,351,000 shares
of its common stock at $.10 per share. This sale was part of its private
placement offering. In October 2000, the Registrant issued 30,000 shares of its
common stock to KGL Investments, Ltd, the beneficial owner of which is Kaplan
Gottbetter & Levenson, LLP, counsel to the Registrants, in exchange for legal
services rendered. These shares were valued at $.10 per share. All purchasers
represented in writing that they acquired the securities for their own accounts.
In September 2000, the Registrant issued 5,000,000 shares of its common
stock to its founder and former president, Pietro Bortolatti, in exchange for
all of the outstanding shares of Terre di Toscana, Inc.
PREFERRED STOCK AND WARRANTS
On each of May 16, July 3, July 11, and July 19, 2002, the Registrant
issued (i) 500,000, 500,000, 500,000 and 502,750 shares, respectively, of its
Series A $1.50 Convertible Preferred Stock and (ii) warrants to purchase
500,000, 500,000, 500,000 and 502,750 shares, respectively, of its common stock,
to Stanford Venture Capital Holdings, Inc. for an aggregate purchase price of $3
million. Stanford subsequently assigned warrants for a total of 1,001,376 shares
of common stock to four of its affiliates. Stanford is an accredited investor.
II-6
No underwriter was employed by the Registrant in connection with the
issuance of the securities described above. The Registrant believes that the
issuance of the foregoing securities was exempt from registration under Section
4(2) of the Securities Act of 1933, as amended, as transactions not involving a
public offering. Each of the recipients acquired the securities for investment
purposes only and not with a view to distribution and had adequate information
about the Registrant. Neither the Registrant, nor any person acting on its
behalf, offered or sold the securities by means of any form of general
solicitation or general advertising. A legend was placed on the stock
certificates stating that the securities have not been registered under the
Securities Act and cannot be sold or otherwise transferred without an effective
registration or an exemption therefrom.
II-7
ITEM 27. INDEX of EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1 (1)(4) Merger Agreement and Plan of Merger, dated May 15, 2002, by and
among TDT Development, Inc., Stronghold Technologies, Inc., TDT
Stronghold Acquisition Corp., Terre Di Toscana, Inc., Terres
Toscanes, Inc., certain stockholders of TDT Development, Inc. and
Christopher J. Carey.
2.2* Stock Purchase Agreement, dated July 19, 2002, by and between TDT
Development, Inc. and Mr. Pietro Bortolatti.
3.1 (2) Articles of Incorporation, as amended on July 11, 2002.
3.2 (3) By-Laws.
4.1 (2) Certificate of Designations filed on May 16, 2002.
4.2* Specimen Certificate of Common Stock Certificate.
5** Opinion of Hale and Dorr LLP.
10.1 (2) 2002 Stock Incentive Plan.
10.2 (2) Form of Incentive Stock Option Agreement to be issued under the
2002 Stock Incentive Plan.
10.3 (2) Form of Nonstatutory Stock Option Agreement to be issued under
the 2002 Stock Incentive Plan.
10.4* 2002 California Stock Incentive Plan.
10.5* Form of Incentive Stock Option Agreement to be issued under the
2002 California Stock Incentive Plan.
10.6* Form of Nonstatutory Stock Option Agreement to be issued under
the 2002 California Stock Incentive Plan.
10.7 (2) Executive Employment Agreement by and between Stronghold
Technologies, Inc. and Christopher J. Carey dated May 15, 2002.
10.8 (2) Employment and Non-Competition Agreement by and between
Stronghold Technologies, Inc. and Lenard Berger, dated August 1,
2000.
10.9 (2) Employment and Non-Competition Agreement by and between
Stronghold Technologies, Inc. and Salvatore D'Ambra, dated July
10, 2000.
10.10 (2) Employment and Non-Competition Agreement by and between
Stronghold Technologies, Inc. and James J. Cummiskey, dated
August 14, 2000.
10.11 (4) Securities Purchase Agreement, dated May 15, 2002, by and among
TDT Development, Inc., Stanford Venture Capital Holdings, Inc.,
Pietro Bortolatti, Stronghold Technologies, Inc. and Christopher
J. Carey.
10.12 (4) Registration Rights Agreement, dated May 16, 2002, by and among
TDT Development, Inc. and Stanford Venture Capital Holdings, Inc.
10.13 (4) Lock-Up Agreement, dated May 16, 2002, by and among TDT
Development, Inc.
10.14 (4) Stockholders' Agreement, dated May 16, 2002, by and among TDT
Development, Inc., Christopher J. Carey, Mary Carey and Stanford
Venture Capital Holdings, Inc.
10.15 (4) Form of Warrant to be issued pursuant to the Securities Purchase
Agreement (Exhibit 10.11).
10.16 (2) Business Loan Agreement by and between the registrant and United
Trust Bank, dated June 30, 2002.
10.17 (2) Promissory Note issued to the Registrant by United Trust Bank,
dated June 30, 2002.
10.18 (2) Commercial Security Agreement by and between the Registrant and
United Trust Bank, dated June 30, 2002.
10.19 (2) Promissory Note issued to Christopher J. Carey by Stronghold
Technologies, Inc., dated May 16, 2002.
21* Subsidiaries of the Registrant.
23.1* Consent of Rothstein, Kass & Company, P.C.
23.2** Consent of Hale and Dorr LLP (included in Exhibit 5).
24* Power of Attorney (included on page II-11).
---------------------
* Submitted herewith.
** To be filed by amendment.
(1) The exhibits and schedules to the Merger Agreement have been omitted from
this filing pursuant to Item 601(b)(2) of Regulation S-K. The Registrant will
furnish copies of any of the exhibits and schedules to the U.S.
II-8
Securities and Exchange Commission upon request.
(2) Incorporated herein by reference to the exhibits to the Registrant's
Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30, 2002.
(3) Incorporated herein by reference to the exhibits to the Registrant's
Registration Statement on Form SB-2 as filed with the Securities and Exchange
Commission on February 1, 2001 (No. 333-54822).
(4) Incorporated herein by reference to the exhibits to the Registrant's Current
Report on Form 8-K dated May 16, 2002.
ITEM 28. UNDERTAKINGS.
The Registrant undertakes:
(1) To file, during any period in which offers or sales are being made,
post-effective amendment to this registration statement (the "Registration
Statement"):
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising after
the Effective Date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement;
(iii)To include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in this
registration statement, including (but not limited to) the
addition of an underwriter.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be treated as a new registration
statement of the securities offered, and the offering of the securities at that
time to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to any provisions contained in its Certificate of
Incorporation, or by-laws, or otherwise, the Registrant has been advised that in
the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-9
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in Hasbrouck Heights,
New Jersey on September 24, 2002.
STRONGHOLD TECHNOLOGIES, INC.
/s/ Christopher J. Carey
----------------------------------
Christopher J. Carey
President and Chairman of the Board
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POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Christopher J. Carey his true and lawful
attorneys-in-fact and agents, each with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this registration statement, and
to file the same, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that each of said
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
Signature Title Date
--------- ----- ----
/s/ Christopher J. Carey
------------------------ President and Chief Executive September 24, 2002
Christopher J. Carey Officer (Principal Executive
Officer, Principal Financial
Officer and Principal Accounting
Officer) and Chairman of the
Board of Directors
/s/ Robert J. Corliss
----------------------- Director September 24, 2002
Robert J. Corliss
/s/ Robert Cox
----------------------- Director September 24, 2002
Robert Cox
/s/ William Lenahan
----------------------- Director September 24, 2002
William Lenahan
/s/ Luis Delahoz
----------------------- Director September 24, 2002
Luis Delahoz
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