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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 17, 2000.
REGISTRATION NO. 333-65089
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
CT HOLDINGS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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DELAWARE 7372 75-2432011
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
3811 TURTLE CREEK BOULEVARD STEVEN B. SOLOMON
SUITE 770 CHIEF EXECUTIVE OFFICER
DALLAS, TEXAS 75219-4421 3811 TURTLE CREEK BOULEVARD, SUITE 770
(214) 520-9292 DALLAS, TEXAS 75219-4421
(Address and telephone number of (214) 520-9292
principal executive offices) (Name, address and telephone number of agent for service)
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COPIES TO:
DAVID A. WOOD, ESQ. JOHN B. MCKNIGHT, ESQ.
WOOD, EXALL & BONNET, L.L.P. LOCKE LIDDELL & SAPP LLP
714 JACKSON STREET, SUITE 300 2200 ROSS AVENUE, SUITE 2200
DALLAS, TEXAS 75202 DALLAS, TEXAS 75201
(214) 742-8844 (214) 740-8000
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE
AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
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 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(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 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 delivery of the prospectus is expected to be made pursuant to rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
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, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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The information in this prospectus is not complete and may be changed. The
selling stockholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission becomes effective.
This prospectus is not an offer to sell these securities and it is not
soliciting offers to buy these securities in any state where the offer or sale
is not permitted.
SUBJECT TO COMPLETION, DATED AUGUST 17, 2000
PROSPECTUS
CT HOLDINGS, INC.
786,784 SHARES OF COMMON STOCK
This prospectus relates to the offer and sale from time to time by
some selling stockholders of up to 786,784 shares of common stock of CT
Holdings, Inc., of which 589,755 shares are issuable upon the exercise of
outstanding warrants and 197,029 shares have already been issued upon the
exercise of the related warrants. This prospectus includes shares, the offer
and sale of which was originally registered pursuant to a registration
statement declared effective by the Securities and Exchange Commission in
November 1998. The offer and sale of the shares of common stock covered by this
prospectus is not being underwritten.
We will not receive any of the proceeds from the sale of the shares of
common stock offered by this prospectus. All the expenses related to the
registration of the shares will be paid by us, except that the selling
stockholders will pay any underwriting, brokerage or related fees, discounts,
commissions or the fees or expenses of counsel or advisors to the selling
stockholders. We would receive estimated gross proceeds of approximately
$364,650 if all of the warrants to purchase shares of our common stock that are
currently outstanding and covered by this Prospectus are exercised by their
holders. See "Use of Proceeds."
The selling stockholders may sell the shares of common stock directly
or through one or more broker-dealers in the Nasdaq Stock Market, in negotiated
transactions or otherwise, at prices related to the prevailing market prices or
at negotiated prices. See "Plan of Distribution."
Our common stock is now listed on the Nasdaq SmallCap Market under the
symbol "CITN." On August 15, 2000, the last reported sale price for the common
stock on the Nasdaq SmallCap Market was $0.94 per share.
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 9.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
THE DATE OF THIS PROSPECTUS IS AUGUST ___, 2000.
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TABLE OF CONTENTS
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Prospectus Summary 5
Risk Factors 9
Use of Proceeds 27
Selling Stockholders 28
Plan of Distribution 29
Market Prices of Common Stock and Dividend Policy 31
Management's Discussion and Analysis of Financial
Condition and Results of Operations 32
Our Business 40
Management 52
Certain Relationships and Related Transactions 56
Principal Stockholders 60
Description of Capital Stock 61
Legal Matters 63
Experts 64
Index to Consolidated Financial Statements F-1
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ABOUT THIS PROSPECTUS AND WHERE YOU CAN FIND MORE INFORMATION
Unless the context otherwise requires, "CT Holdings," the "Company,"
"we," "our," "us" and similar expressions refers to CT Holdings, Inc. and its
predecessors, but not to the selling stockholders. "Selling stockholders" refers
to the stockholders identified under the caption "Selling Stockholders."
We file annual, quarterly and special reports, proxy statements and
other information with the Securities Exchange Commission, or the SEC. You may
inspect and copy these materials at the public reference facilities maintained
by the SEC at:
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Judiciary Plaza Citicorp Center Seven World Trade Center
Room 1024 500 West Madison Street 13th Floor
450 Fifth Street, N.W. Suite 1400 New York, New York 10048
Washington, D.C. 20549 Chicago, Illinois 60661
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You also may obtain copies of these materials from the SEC at
prescribed rates by writing to the Public Reference Section of the SEC, 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for more information on the operation of the public reference
rooms. You also can find our SEC filings at the SEC's website at
http://www.sec.gov.
We have filed with the SEC a registration statement on Form SB-2 under
the Securities Act of 1933, as amended, or the Securities Act, with respect to
the shares of common stock offered in this prospectus. This prospectus is part
of that registration statement and, as permitted by the SEC's rules, does not
contain all of the information set forth in the registration statement. For
further information about us and our common stock, we refer you to those copies
of contracts or other documents that have been filed as exhibits to the
registration statement, and statements relating to such documents are qualified
in all respects by such reference. You can review and copy the registration
statement and its exhibits and schedules from the SEC at the address listed
above or from its Internet site.
Our World Wide Web site is located at http://www.ct-holdings.com.
Information contained on our Web site does not constitute, and shall not be
deemed to constitute, part of this prospectus.
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NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated by reference contain
forward looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act which are intended to be covered by the
safe harbors created thereby. Generally, these forward-looking statements
include but are not limited to statements about our plans, objectives,
expectations, intentions and other statements contained in this prospectus that
are not historical facts. You can identify these statements by forward-looking
words, such as "expect," "anticipate," "intend," "plan," "believe," "seek,"
"estimate," "may," "will" and "continue" or similar words. You should read
statements that contain these words carefully because they may discuss our
future expectations, contain projections of our future results of operations or
of our financial condition or state other forward-looking information. We
caution readers that these forward-looking statements are not guarantees of
future performance or events and are subject to a number of uncertainties, risks
and other influences, many of which are beyond our control and may influence the
accuracy of the statements and projections upon which the statements are based.
The factors listed in the sections captioned "Risk Factors" as well as any
cautionary language in this prospectus, provide examples of risks, uncertainties
and events that may cause our actual results to differ materially from the
expectations we describe in our forward-looking statements. Before you invest in
our common stock, you should be aware that the occurrence of the events
described in the "Risk Factors" section and elsewhere in this prospectus could
have a material adverse effect on our business, operating results and financial
condition.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. It is not complete and may not contain all of the information that
you should consider before investing in our common stock.
CT HOLDINGS
We are an incubator of Internet service companies that provides early
stage ventures with a single source of management capital, as well as consulting
on operations, marketing and strategic planning. Our incubator model is designed
to enable the start up companies with whom we partner to become online market
leaders in their industries. We began our Internet activities in 1999 with the
formation of Parago, Inc., an application service provider (ASP) and Internet
based business process outsourcer (BPO) that provides an online suite of
offerings designed to increase sales, reduce costs, retain customers and
increase client profitability. These services include online promotional
management, online rebate processing, proactive email, online surveys, online
multimedia product demonstrations and manuals, and online customer data
warehousing, analysis and reporting. Parago's comprehensive integrated suite of
outsourced customer care solutions are marketed across multiple industry lines.
In May 2000, we acquired a minority interest in River Logic, Inc., which is
headquartered in Beverly, Massachusetts and creates and operates integrated
decision support networks for industries such as K-12 education, utilities,
forest products, health care and others. These networks are designed to leverage
the flow and processing of knowledge and information to provide a competitive
advantage.
In addition to our incubation business, we continue to operate our
"Citadel Technology" security software line, which is focused on developing and
marketing security and administration software products for both computer
networks and desktop personal computers. Our integrated, easy-to-use software
products enable network administrators to control access to network resources,
automate routine network maintenance tasks, and automatically shutdown and
restart servers and desktop PCs in the event of a network crash. These software
products also enable individual PC users to control access to their desktops,
secure files, and index and retrieve files stored in a variety of storage media.
Our Citadel Technology software products are designed to reduce the direct and
indirect costs of computer network operations, protect proprietary networks and
information, and otherwise improve overall office productivity.
Our core focus is on our incubation services, and we are currently
analyzing various strategic alternatives for our Citadel Technology security
software business, including new strategic alliances with third parties, new
applications of the technology, new third party licensing or joint venture
arrangements or the sale of the business line. As a result, management believes
that the results of operations for our Citadel Technology security software
business will continue to be adversely affected in the future by our core focus
on incubation services.
OVERVIEW OF OUR PARAGO SUBSIDIARY
In January 1999, we announced that we had formed a subsidiary, Parago,
Inc. (formerly How2.com), to implement our Internet and e-commerce strategies.
Parago is an application service provider (ASP) and Internet based business
process outsourcer (BPO) that provides an online suite of continuous customer
interaction offerings designed to increase sales, reduce costs, retain customers
and increase client profitability. These services include online promotional
management (including online rebate processing), proactive email, online
surveys, online multimedia product demonstrations and manuals, and online
customer data warehousing, analysis and reporting. Parago's comprehensive
integrated suite of outsourced continuous customer interaction solutions are
marketed across multiple industry lines.
Parago provides Internet-based solutions that automate customer
relationship management. Parago's solutions enable both brick-and-mortar and
e-commerce businesses to more efficiently develop, retain and extend customer
relationships and improve sales, marketing and customer retention. Parago's
Internet-enabled enterprise solutions include PromoCenter, InfoCenter and
KnowledgeCenter. By automating customer care activities such as online and
traditional rebate processing and promotions, Parago allows its clients to
enhance customer retention, increase revenue opportunities and improve operating
efficiencies. Parago's Internet-based solutions seek to transform promotional
management and product information from customer service liabilities to
retention and extension opportunities.
Parago's online solutions provide a new vehicle for its clients to
conduct targeted marketing to customers with whom they have traditionally lost
contact subsequent to the point of purchase. Parago is developing proprietary
software that will provide an online mechanism for customers, many of whom have
immediate purchasing power in the form of promotional proceeds, to apply those
proceeds towards the purchase of additional products or services. Parago's
solutions also capture valuable customer
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information that can help its clients better understand customer behavior.
Parago plans to provide fee-based customer specific or aggregated data analyses
to assist clients in designing future promotions. Parago's solutions also enable
businesses to improve operating efficiencies by allowing them to analyze the
results of their promotions and manage these promotions on a real time basis.
Parago has increased the number of its clients to approximately 160 as
of July 15, 2000, which include leading national retailers, manufacturers and
service providers. For Parago's quarter ended June 30, 2000, Parago reported
record revenues of approximately $4,000,000, a 400% increase over the 1999
second quarter. Parago's gross margins improved to approximately 59% in the
second quarter of 2000 from 46% in the first quarter of 2000 (on a normalized
basis), as Parago expanded its offerings.
Parago has completed several acquisitions since its inception. In March
1999, Parago acquired 2-Lane Media, Inc., an award-winning
interactive/multimedia communications firm. The principal asset acquired in this
transaction was the technical expertise of the 2-Lane personnel, who, prior to
the acquisition, offered Web site and e-commerce design services for a diverse
client roster. In May 1999, Parago completed its acquisition of FCI Services,
Inc., Forward Communications, Inc. and Forward Freight, Inc. (collectively,
"Forward"), a product rebate and promotional fulfillment operation that offered
its clients solutions for designing, implementing and fulfilling merchandise and
consumer rebate programs. In addition to processing rebates, Forward handled
fulfillment assignments for e-commerce, high technology and other companies. In
August 1999, Parago completed its acquisition of some of the assets of Broadcast
Production Group, Inc. used in multimedia production and content conversion (to
convert traditional media formats into web-enabled content). In addition, in
connection with the acquisition, Parago retained certain members of Broadcast
Production Group's management team as employees of Parago. In connection with
Parago's acquisition of 2-Lane, we agreed to convert the Parago shares of common
stock issued in connection with the merger into up to 500,000 of our shares at
the option of the 2-Lane shareholders. In addition, pursuant to the terms of the
subscription agreements between Parago and some of its stockholders, we may be
required to issue up to 414,000 shares of our common stock to such stockholders
based upon a conversion price of $3.75 per share. These provisions could have
the effect of diluting our stockholders if the market price of our common stock
is above the effective conversion prices at the time of conversion.
At June 30, 2000, we owned 20,000,000 shares of the common stock of
Parago, representing 45.2% of the outstanding common stock of Parago (or 38.8%
including preferred stock on an as-if-converted basis). As a result, we account
for our ownership interest in Parago using the equity method of accounting.
Since its inception, Parago has incurred net losses and now has a substantial
accumulated deficit, which have had an impact upon and are reflected in our
financial statements. For example, for the quarter ended May 31, 2000, we
recorded an "equity in loss of unconsolidated affiliate" of $1,060,884. We
understand that Parago expects to incur net losses for the foreseeable future,
and, even though our investment in Parago is currently carried at zero and will
not be further reduced, we may record significant losses relating to our Parago
subsidiary as it continues to develop its business services in the future if
increases in Parago equity occur.
Parago filed a registration statement with the Securities and Exchange
Commission relating to an initial public offering of shares of its common stock
in October 1999, but applied to withdraw this registration statement in March
2000. Parago plans to refile a registration statement covering its proposed
initial public offering. We previously announced that we intend to distribute
15% of the shares of Parago common stock that we hold to our stockholders,
subject to compliance with the SEC requirements applicable to the proposed
distribution and upon the expiration of a 180-day lock-up agreement between the
underwriters of the Parago proposed initial public offering and us. If there are
some problems associated with compliance with SEC requirements or state law,
then the distribution of Parago shares may be delayed or may not occur. There
can be no assurance that Parago's initial public offering will be completed, or
that we will otherwise complete the distribution of a portion of our shares to
our stockholders on the proposed terms or at all.
OVERVIEW OF RIVER LOGIC
On May 5, 2000 we completed a previously announced transaction whereby
we acquired a minority interest in River Logic, Inc. (formerly iNetze.com,
Inc.). As part of this transaction we acquired approximately 5.9% of the
outstanding shares of capital stock of River Logic, Inc. from several of its
existing shareholders in exchange for 333,333 shares of our common stock. We
also acquired shares of Series A Convertible Preferred Stock from River Logic in
exchange for the contribution by one of our wholly-owned subsidiaries of the
ESRN Assets, as described below. The acquired shares of River Logic's preferred
stock are convertible into shares of common stock that represent approximately
13.1% of the currently outstanding shares of capital stock of River Logic on a
post conversion basis as of May 5, 2000.
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In July 2000, River Logic closed a $3 million private placement of
shares of its Series B preferred stock to a venture capital firm that
specializes in early stage technology firms that offer B2B Internet solutions
that provide strong value-oriented models for their prospective market-space.
In addition, one of River Logic's resellers, Heads Up! Systems, LLC,
and PriceWaterhouseCoopers, LLC entered into a strategic alliance offering
clients of process- and supply-chain modeling applications reliability in the
use of enterprise modeling tools. New software such as COR Technology(C) by
River Logic, provides business planners and managers with the ability to
identify profit improvement opportunities, design and communicate supply chain
and business process information, and to develop model-based tactical and
strategic plans. The crucial step of model validation - ensuring that these
complex and detailed models accurately and reliably represent business behaviors
and financial results - is vital for instilling confidence by users and ensuring
that models function properly.
Our Chief Executive Officer, Steven B. Solomon, serves on the board of
directors of River Logic.
In connection with our investment in River Logic, we also made two
$300,000 bridge loans to River Logic that together are convertible into 800,000
shares, in the aggregate, of common stock that would represent approximately
3.8% of the currently outstanding capital stock of River Logic on a post
conversion basis as of May 5, 2000. Each of the bridge loans (i) bears interest
at a rate of 12% per annum through its first anniversary and at one percent
above the prime rate per annum thereafter, (ii) is secured by certain assets of
River Logic, (iii) is payable upon our demand and (iv) is prepayable by River
Logic commencing on its third anniversary date. As a result of the transaction,
we owned approximately 19% (22.2% in the event the bridge loans and other
securities are converted in full) of the voting stock of River Logic as of May
5, 2000.
The ESRN Assets consist of the EBSCO School Resource Network (ESRN
Network), an educational network catering to kindergarten through 12th grade
(K-12). The ESRN Network is designed to support school administrators, teachers,
students and parents by providing them with a comprehensive set of tools and
resources targeting their specific needs. The ESRN Network is comprised of
learning applications that integrate EBSCO Industries' database of content
relating to K-12. The ESRN Network was acquired by a wholly-owned subsidiary of
CT Holdings from a subsidisry of EBSCO Industries in connection with this
transaction in exchange for 666,667 shares of CT Holdings' common stock.
We intend to file a resale registration statement relating to the
shares of our common stock issued in connection with this transaction within 90
days of the closing.
As we hold a less than 20% ownership interest in River Logic the
investment has been accounted for under the cost method of accounting. Under
this method, our share of the earnings or losses of River Logic is not included
in the consolidated statements of operations.
River Logic, headquartered in Beverly, Massachusetts, creates and
operates integrated decision support networks for industries such as K-12
Education, Utilities, Forest Products, Healthcare and others. These networks are
designed to leverage the flow and processing of knowledge and information to
provide a decisive competitive advantage. River Logic has several
industry-specific networks in development. Additionally, River Logic develops
and licenses its technologies to key industry partners.
LETTER OF INTENT WITH IDEAVILLAGE
As part of our strategy to fund early stage Internet companies, we
recently entered into a letter of intent with ideavillage.com and its
stockholders relating to a transaction in which we would gain the right to
acquire a substantial minority interest in ideavillage. ideavillage develops and
markets an Internet enabled consumer testing solution that enables businesses to
test market products to consumers in advance of the products' release,
permitting businesses to reduce the likelihood of a product that lacks consumer
interest and to reduce costly inventory returns. In addition to its proprietary
technology, ideavillage has created an inventor portal designed to permit
inventors to access markets for their inventions. ideavillage also markets and
distributes consumer products through retail channels. We currently anticipate
that this transaction will close in September 2000. The letter of intent
provides, among other things, that we will purchase shares of ideavillage
preferred stock convertible into 25% of the outstanding shares of ideavillage
common stock in exchange for options to purchase 750,000 shares of our common
stock at $1.00 per share and $4,500,000 in cash and Parago services and
technology to ideavillage, and the shareholders of ideavillage will grant us an
option to acquire up to an additional 26% of the outstanding common stock of
ideavillage for the next year for $9 million payable in cash or 1.8 million
shares of our common stock valued at $5.00 per share. We will also receive
preemptive rights covering certain future ideavillage equity offerings and
representation on ideavillage's board. There can be no assurance that the
foregoing transaction will close in September 2000 or at all.
We maintain our principal executive offices at 3811 Turtle Creek
Blvd., Suite 770, Dallas, Texas 75219-4421; the telephone number of this office
is (214) 520-9292.
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THE OFFERING
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Securities Offered 786,784 shares of common stockissued or
issuable upon exercise by selling
stockholders of the warrants.
Common Stock to be Outstanding
After this Offering (1) 49,439,473 shares of common stock.
Use of Proceeds We will not receive any of the proceeds
from the sale of the shares of common
stock offered by this prospectus. We
will receive estimated gross proceeds
of up to $364,650 if the selling
stockholders exercise all of the
currently outstanding warrants
to purchase the shares of our common
stock covered by this prospectus. We
currently intend to use such net
proceeds, if any, for working capital
and general corporate purposes. See
"Use of Proceeds."
Risk Factors An investment in the shares of common
stock offered hereby involves a high
degree of risk and should be made only
by investors who can afford the loss of
their entire investment. See "Risk
Factors."
Nasdaq SmallCap Market trading symbol CITN
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(1) Assumes conversion in full into shares of common stock of the warrants
covering 589,755 shares of common stock held by the selling stockholders as
described in "Selling Stockholders," as well as the conversion in full of
options covering 100,000 shares of common stock into shares of common stock.
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RISK FACTORS
Before you invest in our common stock, you should be aware of various
risks, including those described below. Investing in our common stock involves a
high degree of risk. You should carefully consider these risk factors, together
with all of the other information included in this prospectus, before you decide
whether to purchase shares of our common stock. Our business and results of
operations could be seriously harmed by any of the following risks. The trading
price of our common stock could decline due to any of these risks, and you may
lose part or all of your investment.
GENERAL RISKS
WE RECENTLY DECIDED TO CHANGE OUR BUSINESS TO FOCUS ON INCUBATION OF EARLY STAGE
B2B COMPANIES; HENCE, WE WILL ENCOUNTER NUMEROUS RISKS ASSOCIATED WITH OUR NEW
BUSINESS FOCUS AND OUR PRIOR OPERATING HISTORY MAY NOT BE A MEANINGFUL GUIDE TO
EVALUATING OUR FUTURE PERFORMANCE.
In January 2000 we announced that we were changing our business model
to focus on the incubation of early stage B2B ventures. Other than our formation
and development of Parago, we have little experience in this area. As a
consequence, our prior operating history may not provide a meaningful guide to
our prospects in the emerging B2B market. Moreover, our new business model and
prospects must be considered in light of the risk, expense and difficulties
frequently encountered by companies in early stages of development, particularly
companies in new and rapidly evolving markets such as B2B e-commerce. We may be
unable to execute our strategy of developing our B2B incubation business due to
numerous risks, including the following:
o We may be unable to identify or develop relationships with attractive
emerging B2B companies.
o Any B2B companies that we are able to attract may not succeed and the
value of our assets and the price of our common stock could consequently
decline.
o Our new business model is unproven and depends on the willingness of
companies to participate in our incubator and collaborate with us and each
other.
o Our expenses will increase as we refocus on our new B2B incubation
business model and seek to build the infrastructure necessary to implement this
model.
o We face competition from other incubators of B2B e-commerce companies,
some of which are publicly traded companies, venture capital companies and
large corporations; many of these competitors have greater financial resources
and brand name recognition than we do, which may make it difficult for us to
effectively compete.
o We will require additional capital resources in order to implement our
new B2B e-commerce business model and we may not be able to obtain these
resources on attractive terms, if at all.
WE RECENTLY COMPLETED OUR FIRST INVESTMENT IN AN EARLY STAGE B2B VENTURE
FOLLOWING OUR FORMATION AND DEVELOPMENT OF PARAGO; THERE CAN BE NO ASSURANCE
THAT THIS INVESTMENT WILL PROVE TO BE A FINANCIALLY ATTRACTIVE INVESTMENT.
We recently completed a transaction in which we acquired approximately 19%
of the shares of River Logic, Inc. We have never done business with River Logic
before and this is our first investment in an early stage B2B venture following
our formation and development of Parago. Inasmuch as River Logic is an early
stage venture, it is difficult to judge its future prospects.
WE RECENTLY ANNOUNCED OUR ENTRY INTO A LETTER OF INTENT TO MAKE AN INVESTMENT
IN IDEAVILLAGE.COM AND WE ANTICIPATE MAKING INVESTMENTS IN OTHER COMPANIES IN
THE FUTURE; THERE CAN BE NO ASSURANCE, HOWEVER, THAT WE WILL COMPLETE OUR
INVESTMENT IN IDEAVILLAGE OR IN ANY OTHER COMPANY OR, IF COMPLETED, ANY OF
THESE INVESTMENTS WILL PROVE ATTRACTIVE.
As part of our strategy to fund early stage Internet companies, we
recently entered into a letter of intent with ideavillage.com and its
stockholders relating to a transaction in which we would make an investment in
ideavillage. The letter of intent provides, among other things, that we will
purchase shares of ideavillage preferred stock convertible into 25% of the
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outstanding shares of ideavillage common stock in exchange for options to
purchase shares of our common stock, $4.5 million in cash and the provision of
Parago services and technology to ideavillage. We have not yet determined how
we will finance the cash required to complete this investment. We anticipate
closing the ideavillage transaction in September 2000, although our completion
of this transaction is subject to a number of conditions and circumstances,
many of which are beyond our control. Further, inasmuch as ideavillage is an
early-stage venture, it is difficult to judge its future prospects. Although we
expect to make an investment in ideavillage and other companies in the future,
there can be no assurance that any of these investments will be completed or,
if completed, will prove to be attractive.
WE MAY INCUR SIGNIFICANT COSTS TO AVOID INVESTMENT COMPANY STATUS AND MAY
SUFFER OTHER ADVERSE CONSEQUENCES IF WE ARE DEEMED TO BE AN INVESTMENT COMPANY.
We may incur significant costs to avoid investment company status and
may suffer other adverse consequences if we are deemed to be an investment
company under the Investment Company Act of 1940. Some of our contemplated
equity investments in other businesses may constitute investment securities
under the 1940 Act. A company may be deemed to be an investment company if it
owns investment securities with a value exceeding 40% of its total assets,
subject to certain exclusions. Investment companies are subject to registration
under, and compliance with, the 1940 Act unless a particular exclusion or
Securities and Exchange Commission safe harbor applies. If we were to be deemed
an investment company, we would become subject to the requirements of the 1940
Act. As a consequence, we would be prohibited from engaging in some businesses
or issuing our securities and might be subject to civil and criminal penalties
for noncompliance. In addition, certain of our contracts might be voidable, and
a court-appointed receiver could take control of us and liquidate our business.
Although we have yet to make any investments in the investment
securities of an incubation startup or existing company other than Parago and
River Logic, such investments, if and when made, could fluctuate in value,
which may cause the value of such securities to exceed 40% of our total assets.
Unless an exclusion or safe harbor were available to us, we would have to
attempt to reduce our investment securities as a percentage of our total
assets. This reduction could be accomplished in a number of ways, including the
disposition of investment securities and the acquisition of non-investment
security assets. If we were required to sell investment securities, we may sell
them sooner than we may otherwise have preferred. These sales may be at
depressed prices and we might never realize anticipated benefits from, and may
incur losses on, these investments. Some investments may not be sold due to
contractual or legal restrictions or the inability to locate a suitable buyer.
Moreover, we may incur tax liabilities when we sell assets. We may also be
unable to purchase additional investment securities that may be important to
our operating strategy. If we decide to acquire non-investment security assets,
we may not be able to identify and acquire suitable assets and businesses.
OUR EARNINGS AND STOCK PRICE ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS.
Due to the factors noted below, our earnings and stock price have been
and may continue to be subject to significant volatility, particularly on a
quarterly basis. We have previously experienced shortfalls in revenue and
earnings from levels expected by investors, which have had an immediate and
significant adverse effect on the trading price of our common stock. This may
occur again in the future.
Additionally, we have received requests from the staff of the
Securities and Exchange Commission for additional information regarding the
accounting for some of our acquisitions, including questions relating to the
write-off of associated in-process research and development costs and other
matters. While we have responded to these requests, we cannot determine at this
time the effect, if any, that the outcome of this matter will have on our
reported financial position or results of operations. However, should the staff
of the Securities and Exchange Commission require us to retroactively record
any adjustments, the effect could have a material adverse impact on the future
trading price of our common stock.
RISKS RELATED TO OUR INTERNET SUBSIDIARY, PARAGO, INC.
The following are some risks related to the business of Parago, Inc.,
our Internet subsidiary, and should be considered in addition to the risk
factors described in this prospectus. Any of these factors could have a
material adverse effect on us, as we owned 45.2% of the outstanding shares of
common stock (or 38.8% including preferred stock on an as-if converted basis)
of Parago at June 30, 2000. Parago filed a registration statement with the
Securities and Exchange Commission relating to an initial public offering of
shares of its common stock in October 1999, but applied to withdraw this
registration statement in March 2000. Parago plans to refile a registration
statement covering its proposed initial public offering.
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THERE CAN BE NO ASSURANCE THAT PARAGO'S CONTEMPLATED INITIAL PUBLIC OFFERING
WILL TIMELY, OR EVER, BE SUCCESSFULLY COMPLETED.
The delay or complete abandonment of the contemplated Parago initial
public offering could have a material adverse effect on our stock price due to
our substantial equity interest in Parago. You cannot be assured that the
initial public offering will occur in the near future or ever at all. In
addition, we have agreed to convert the shares of Parago common stock issued in
connection with the acquisition of 2-Lane Media by Parago into up to 500,000 of
our shares at the option of the 2-Lane Media shareholders. Pursuant to the terms
of the subscription agreements between Parago and some of its stockholders, we
may be required to issue up to 414,000 shares of our common stock based on a
conversion price of $3.75 per share (above the fair market value on the dates of
issuance) at the option of such stockholders. These provisions could have the
effect of diluting our stockholders if the market price for our stock is above
that price at the time of conversion.
WE MAY NOT BE ABLE TO EFFECT THE DISTRIBUTION OF PARAGO SHARES.
We previously announced that we intend to distribute shares of Parago
common stock to our shareholders upon compliance with the Securities and
Exchange Commission (SEC) requirements applicable in connection with the
proposed distribution and upon the expiration of a 180 day lockup agreement
between the underwriters of Parago's proposed initial public offering and us. If
there are problems associated with compliance with SEC requirements or state
law, then the distribution of Parago shares may be delayed or may not occur.
There can be no assurance that we will complete the distribution on the proposed
terms or at all.
PARAGO'S BUSINESS AND FUTURE PROSPECTS ARE EXTREMELY DIFFICULT TO EVALUATE
BECAUSE ITS OPERATING HISTORY IS VERY LIMITED AND ITS BUSINESS MODEL IS NEW,
UNPROVEN AND EVOLVING.
Parago was formed in January 1999. Since its formation, Parago has:
o acquired its rebates operation in May 1999;
o launched its Web site in September 1999; and
o completed the initial development of its online rebate
application in December 1999.
As a result, Parago has only a limited operating history on which one
can base an investment decision. You should consider its prospects in light of
the uncertainties and difficulties frequently encountered by companies in their
early stages of development.
In addition, its business model is new, unproven and evolving. In
December 1999, Parago focused its business to concentrate on its online
customer care solutions. Parago cannot assure that its new, focused business
model will be commercially successful. Parago cannot assure you that that its
online solutions will be accepted by businesses or consumers. If Parago is
unable to establish pricing and service models acceptable to manufacturers,
retailers and service providers and attractive to their customers, its
Internet-based solution may not be commercially successful.
SOME MAJOR COMPONENTS OF PARAGO'S BUSINESS STRATEGY HAVE NOT YET BEEN
IMPLEMENTED AND THE TECHNOLOGIES AND APPLICATIONS NECESSARY TO IMPLEMENT ITS
ENTIRE BUSINESS STRATEGY HAVE NOT YET BEEN DEVELOPED. IF PARAGO DOES NOT
DEVELOP THESE TECHNOLOGIES AND APPLICATIONS IN A TIMELY MANNER, ITS RESULTS OF
OPERATIONS WILL SUFFER.
Some of Parago's business strategies related to its Internet-based
solution have not yet been implemented. To implement these strategies Parago
must develop new applications and enhance its existing applications. Its online
promotional management and product information applications are new, unproven
and evolving and Parago continues to develop enhancements to these
applications. Its technology that enables its clients' customers to apply
promotional proceeds to additional products and services immediately following
submission has not yet been completed. Further, the more advanced aspects of
its technology that enables clients to access customized, real time customer
data analysis are still in the design phase. These applications and
technologies are critical to the success of its business. The development and
implementation of these technologies and applications is complicated and time
consuming. Parago cannot assure you that Parago will successfully develop all
of its planned technologies and
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applications. If Parago does not develop and implement these technologies and
applications in a timely manner, its results of operations will suffer.
PARAGO HAS A HISTORY OF NET LOSSES AND EXPECTS TO CONTINUE TO INCUR SUBSTANTIAL
NET LOSSES IN THE FUTURE.
Parago had a net loss of approximately $9.1 million for the three
months ended May 31, 2000 and an accumulated deficit of approximately $48.4
million at May 31, 2000. Parago anticipates that its operating expenses will
increase in the foreseeable future as Parago continues to develop its
technology and applications, increase its sales and marketing activities,
expand its outsourced solutions capabilities and improve its operational and
financial systems. In addition, because its increasing expense levels are
based, in part, on expectations of its future revenues, any decline in its
revenues below its expectations would have a disproportionately adverse impact
on its operating results. Accordingly, Parago expects to incur additional
losses for the foreseeable future. If its revenues do not grow as Parago
anticipates, Parago may never be profitable.
PARAGO'S REBATE AND RELATED SERVICES HAVE ACCOUNTED FOR SUBSTANTIALLY ALL OF
ITS REVENUES SINCE INCEPTION, AND PARAGO EXPECTS TO DEPEND ON ITS PROMOTIONAL
MANAGEMENT APPLICATION AND PROCESSING SERVICES FOR A SIGNIFICANT PORTION OF ITS
REVENUES FOR THE FORESEEABLE FUTURE.
Parago's rebate and related services accounted for approximately 96.5%
of its total revenues for the three months ended May 31, 2000. Parago
anticipates that revenues from its rebate solution will continue to constitute
the major portion of its revenues for the foreseeable future. A decrease in the
amount of promotional dollars spent on rebate programs by its clients or a
decrease in the rebate service fees Parago receives would negatively impact its
results of operations.
PARAGO IS DEPENDENT ON FOUR CLIENTS FOR A SUBSTANTIAL PORTION OF ITS BUSINESS.
Parago is dependent upon its relationship with a small number of
clients for a substantial portion of its existing and anticipated revenues.
Four of its rebate clients accounted for approximately 84.9% of its aggregate
invoiced revenue for the three months ended May 31, 2000. As a result of this
concentration of sales, Parago's business, operating results or financial
condition would suffer as a result of the termination of or adverse change in
its relationship with any of these clients.
In addition, Parago cannot assure you that its relationship with these
clients will continue, or if continued, that the revenues from these clients
will remain at current levels or increase in any future period. The initial
term of its agreement with Staples expired in July 2000. The agreement is
renewable annually upon mutual agreement. In addition, Staples' vendors may not
use, or may discontinue their use of, Parago's rebate solution. Parago
currently performs rebate services for eMachines under an oral agreement.
Consequently, its agreement with eMachines could be terminated. Based on the
nature of these agreements, Parago cannot assure you that Parago will generate
significant revenues in future periods from any of its principal rebate
clients. The loss of all or any part of Parago's relationship with any of these
clients would seriously harm its business.
MANY OF PARAGO'S CLIENT AGREEMENTS ARE TERMINABLE BY THE CLIENT AT WILL.
Parago does not have any long-term agreements with its clients. In
addition, many of its agreements with its clients are terminable by the client
at will. Therefore, Parago cannot assure you that any of its clients will
continue to use its online solutions for any period of time. The loss of a
significant number of its clients would seriously harm its business.
PARAGO'S REVENUE IS DEPENDENT UPON ITS CLIENTS' BUSINESS AND PRODUCT SALES.
Parago's revenue is primarily transaction based and will fluctuate
with the volume of transactions or levels of sales of products by its business
clients for which Parago provides its online customer relationship management
solutions. Its business would suffer if its clients decrease their activity
that relates to its online customer relationship management solutions.
PARAGO'S BUSINESS MODEL IS DEPENDENT ON ITS ABILITY TO SUCCESSFULLY ENTER INTO
RELATIONSHIPS WITH CLIENTS, OF WHICH PARAGO CURRENTLY HAS ONLY A LIMITED
NUMBER. MOST OF THESE RELATIONSHIPS WILL NOT BE EXCLUSIVE AND MAY BE TERMINATED
BY ITS CLIENTS AT ANY TIME.
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Parago's ability to become profitable depends on its ability to
successfully enter into relationships with manufacturers, retailers and service
providers that wish to use its online promotional management and product
information solutions. Parago currently has these business relationships with
only a limited number of clients. Currently, Parago has four principal
promotional management clients that use its promotional management application.
Parago only recently began marketing its online product information solution and
currently does not have any clients using this solution. Parago anticipates that
its arrangements with clients will typically not be exclusive and will be
subject to termination upon short notice. In addition, Parago cannot assure you
that these arrangements will result in revenues or be profitable for it. If
Parago cannot develop relationships with new clients, its results of operations
will be significantly and negatively impacted.
PARAGO'S QUARTERLY OPERATING RESULTS WILL LIKELY VARY SIGNIFICANTLY IN THE
FUTURE.
Parago expects that its revenues and operating results may vary
significantly from quarter to quarter. As a result, quarter-to-quarter
comparisons of its results of operations may not be meaningful. In some future
quarter or quarters, its operating results are likely to fall below
expectations. Any shortfall will likely adversely affect the price of its common
stock in a manner that may be unrelated to its long-term operating performance.
Its quarterly operating results, as well as its operating results
generally, may also vary depending on a number of factors, including but not
limited to:
o demand for its online promotional management and product information
solutions;
o fluctuations in the average promotion amount and number of the
transactions processed by it;
o seasonality in its clients' rebate promotions;
o its ability to develop, introduce and market new applications and
enhancements to its existing applications on a timely basis;
o its ability to attract and retain clients and to generate client
satisfaction;
o changes in its pricing policies or those of its competitors;
o changes in accounting standards and revenue recognition policies; and
o costs related to the acquisition of technologies and businesses.
Because of its limited operating history, Parago has limited insight
into trends that may emerge and affect its operating results.
THE AMOUNT OF REVENUES PARAGO RECOGNIZES AS A RESULT OF EXPIRED OR UNCASHED
REBATE CHECKS MAY BE REDUCED BY ABANDONED PROPERTY LAWS OR AN INCREASE IN THE
PERCENTAGE OF REBATE CHECKS CASHED BY CONSUMERS.
Parago bills its rebate clients for the full amount of the rebate
checks that it issues to its customers, plus a processing fee. Some customers
never cash their rebate checks. In the rebate industry, expired or uncashed
checks are referred to as "slippage". Slippage is recorded on its books as an
increase to revenues. The unclaimed property and escheat laws of each state
provide that under circumstances defined in that state's statutes, holders of
unclaimed or abandoned property, possibly including slippage, must surrender
that property to the state. As a result, any state into which Parago sends
rebate checks could assert that it is entitled to unclaimed rebate checks that
Parago has issued to consumers in that state.
Its operating results could suffer if any state is entitled to a
significant portion of these slippage amounts as a result of its unclaimed
property or escheat laws.
Furthermore, Parago expects that more of its clients' customers will
cash their rebate checks as a result of its online rebate solution, which would
reduce slippage. A decline in the amount of slippage that Parago retain could
decrease its revenues and negatively impact its results of operations.
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TO CONTINUE ITS OPERATIONS AND BUSINESS, PARAGO MUST COMPLETE ITS INITIAL
PUBLIC OFFERING OR FIND ALTERNATIVE FINANCING.
Parago's ability to maintain and grow its business is dependent on its
access to sufficient funds to support its working capital and capital
expenditure needs. If Parago does not complete its initial public offering,
Parago must find an alternative method of financing. If Parago does not
complete its initial public offering or find an alternative source of funds,
its business and results of operations will be seriously harmed. Parago
believes that the net proceeds from its initial public offering, if completed,
will be sufficient to fund its working capital and capital expenditure needs
for at least the next 12 months.
PARAGO'S BRAND MAY NOT ACHIEVE THE BROAD RECOGNITION AND LOYALTY NECESSARY TO
SUCCEED.
Parago believes that broad recognition and favorable business
perception of the Parago brand are essential to its future success.
Accordingly, Parago is pursuing an aggressive brand-enhancement strategy, which
includes advertising, trade shows, promotional programs and public relations
activities. Successful positioning of its Parago brand will largely depend
upon:
o its ability to provide high quality service to its clients and their
customers, including online and offline responses to customer inquiries
regarding the status of their promotional proceeds;
o the success of its promotional programs and public relations activities;
and
o the technical performance and visual appearance of its applications and
Web site.
To increase awareness of the Parago brand Parago spent significant
amounts in a sales and marketing campaign in the last half of 1999 and will
spend significant amounts in the future on marketing and promotions programs
targeted at decision makers within its prospective clients' organizations.
These expenditures may not result in a sufficient increase in net revenues to
cover these marketing and promotion expenses. Even if brand recognition
increases, its number of clients, the number of transactions processed through
its online solutions or number of licenses sold to use its applications may not
increase.
Between September and December 1999, Parago spent approximately $17.0
million on a brand advertising campaign that was partially related to
informational tutorials related to lifestyle topics Parago offered on its Web
site. In December 1999, Parago focused its business model to concentrate on its
online solutions. Therefore, Parago may not be able to realize the full benefit
of the advertising expenses that related to the information tutorials that did
not relate primarily to its online solutions.
THE DAY-TO-DAY OPERATIONS OF PARAGO'S COMPUTER AND COMMUNICATIONS EQUIPMENT ARE
DEPENDENT ON THIRD PARTIES. THE PERFORMANCE OF EXODUS COMMUNICATIONS, INC. IS
CRITICAL TO ITS OPERATIONS.
Parago depends upon third parties for several critical elements of its
technology. Parago has entered into material contracts with Exodus
Communications, Inc. for its data center hosting, and plans to continue to
enter into material contracts with other third parties, to manage, maintain and
expand the computer and communications equipment and software needed for the
day-to-day operations of its business.
To assist Parago with its technical operations, Exodus maintains
Parago's communications lines and manages the network data centers where its
network data is stored. If Exodus does not perform to its requirements, Parago
would have to obtain similar services from another provider or perform these
functions themselves. Parago may not be able to successfully obtain or perform
these services on a timely or cost-effective basis. Due to the third party
installation of the computers, communications equipment and software needed for
the day-to-day operations of its Web site, Parago may be entirely dependent on
that party to manage, maintain and provide security for this technology. Any
termination or breach of these contracts could have a material adverse effect
on its business.
IN ORDER TO MANAGE ITS GROWTH AND EXPANSION, PARAGO WILL NEED TO IMPROVE AND
IMPLEMENT NEW SYSTEMS, PROCEDURES AND CONTROLS.
Since its formation, Parago has experienced significant expansion of
its operations. Since its inception in January 1999, Parago has expanded from
one employee to more than 360 employees. Further, since inception, Parago has
expanded from operating solely from its Dallas headquarters to operating from
three additional facilities located in Coppell, Texas and the
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metropolitan areas of Los Angeles and San Jose, California. This expansion has
placed a strain upon its management systems by increasing management
responsibilities, consuming more of management's time and making close
coordination among its executive, finance, accounting, sales, marketing and
operations organizations more complex. Other resources, such as the cash
required to meet increased expenses associated with expansion, have also been
strained. Its ability to compete effectively and to manage future expansion of
its operations, if any, will require it to continue to improve its financial and
management controls, reporting systems and procedures as well as continue to
train and manage its employee work force. If Parago is unable to manage its
growth and expansion, its business will be materially adversely affected.
ADOPTION AND INTEGRATION OF ITS APPLICATIONS BY LARGE CLIENTS IS COMPLEX, TIME
CONSUMING AND EXPENSIVE AND PARAGO MAY EXPEND RESOURCES ON DEVELOPING NEW
RELATIONSHIPS THAT DO NOT MATERIALIZE.
Parago recruits clients to process their promotions, and their
vendors' promotions in the case of retail clients and includes their product
information as part of its online solutions. Most of the clients Parago
recruits are large companies. The adoption and integration of its solutions by
large companies tends to be complex, time consuming and expensive. In many
cases, its clients must change established business practices and conduct
business in new ways in order to use Parago's online solutions and associated
applications. In addition, they generally consider a wide range of other
issues, including the benefits, ease of use, ability to work with existing
systems, functionality and reliability of Parago's applications, before
committing to use its online solutions. It frequently takes several months to
complete the sale of an online solution to a client and requires approval at a
number of management levels within the client's organization. These long cycles
may cause delays in its sales and Parago may spend a large amount of time and
resources on potential clients who decide not to use any of its online
solutions, which could materially and adversely affect its business.
IF PARAGO LOSES ANY OF ITS KEY PERSONNEL, INCLUDING ITS CHAIRMAN AND CHIEF
EXECUTIVE OFFICER, PRESIDENT AND CHIEF OPERATING OFFICER, OR THE KEY EMPLOYEES
OF ITS FINANCE, TECHNOLOGY, LEGAL, SALES AND MARKETING OPERATIONS, ITS BUSINESS
MAY SUFFER.
Since formation in January 1999, Parago has employed many of its key
personnel, including Steven B. Solomon, its Chairman and Chief Executive
Officer, Kenneth R. Johnsen, its President and Chief Operating Officer, and the
key employees in its finance, technology, legal, sales and marketing
operations. Parago has applied for life insurance policies that would pay
proceeds to it upon the death of Messrs. Solomon and Johnsen. Parago's business
could be negatively impacted if it were to lose the services of one or more of
these persons.
PARAGO HAS LIMITED EXPERIENCE WITH THE HOSTING OF ITS APPLICATIONS ON OTHER WEB
SITES AND PRICING OF THESE TRANSACTIONS.
Parago's business plan contemplates that it will host its technology,
for a fee, to businesses that want to provide its applications through their
own Web sites. However, Parago has limited experience with negotiating or
pricing these transactions.
Parago intends to sell hosting services on an annual or fixed-price
basis. To do this, Parago must estimate the amount of work involved in
implementing its application on a client's Web site and the value of the
application. If Parago underestimates the amount of time or resources required
to implement its applications on clients' Web sites or the value of its
application, its revenues and results of operations will suffer.
Parago also intends to sell hosting services on a varying price basis
where Parago would receive an initial fee and share in revenues generated by
the use of its applications on a client's Web site. To do this, Parago must
estimate the amount of work involved in implementing an application on a
client's Web site, the value of the application and the revenues that will be
generated by the use of its application on a particular client's Web site. If
Parago underestimates these amounts and revenues, its revenues and results of
operations will suffer.
PARAGO'S APPLICATIONS MAY CONTAIN ERRORS OR DEFECTS THAT COULD RESULT IN LOST
REVENUES, DELAYED OR LIMITED MARKET ACCEPTANCE OR PRODUCT LIABILITY CLAIMS.
Parago's applications are complex. Complex applications often contain
errors or defects, particularly when first introduced or when new enhancements
to those applications are introduced. Despite internal testing and testing by
clients as Parago licenses the use of its applications, its applications may
contain serious defects of which Parago is unaware.
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Since Parago plans to license its applications to clients for critical
customer interaction activities, such as promotional processing and hosting
product information, and uses the same applications themselves for clients
outsourcing these activities to it, any errors, defects or other performance
problems in the applications could result in damage to its clients. Injured
clients could seek significant compensation for their losses from it. Even if
not successful, a product liability claim brought against it would likely be
time-consuming and costly. Errors or defects in Parago's applications could
also result in delayed market acceptance of its applications, diversion of its
developmental resources to correcting these errors or defects and lost
revenues.
PARAGO WRITES ITS APPLICATIONS IN THE JAVA PROGRAMMING LANGUAGE AND ITS
BUSINESS COULD BE HARMED IF JAVA LOSES MARKET ACCEPTANCE OR IF PARAGO IS NOT
ABLE TO CONTINUE USING JAVA OR JAVA RELATED TECHNOLOGIES.
Parago writes its applications in the Java computer programming
language which was developed by Sun Microsystems. While many companies have
introduced Internet-based applications based on Java, Java could fall out of
favor and support by Sun Microsystems or other companies could decline. If
Parago could not continue to use Java or related Java technologies or if Java
support decreased, Parago might have to rewrite the source code for its
applications to enable its products to run on other computer platforms. Changes
to Java could also require it to change its products. If Parago failed to
implement or develop appropriate modifications to its applications in a timely
manner, Parago could lose revenue opportunities and its business could be
harmed.
PARAGO'S MARKETS ARE HIGHLY COMPETITIVE.
The promotional management and product information industry is highly
competitive and fragmented. Parago expects competition to persist and to
intensify in the future. Its competitors include small firms offering specific
promotional applications, divisions of larger entities and large independent
firms, such as Young America Corporation and Continental Promotions Group. Some
companies are already engaged in various aspects of the promotional management
business online. A number of competitors have or may develop greater
capabilities and resources than it. Similarly, additional competitors with
greater resources than it may enter the industry. Its performance and growth
could be negatively affected if its existing or potential clients decide to
perform their own promotional management operations that are currently
outsourced or use another provider. In addition, competitive pressures from
current or future competitors could cause its promotional management
application to lose market acceptance or result in significant price erosion.
This could result in a material adverse effect upon its business.
Many of its current and potential competitors have longer operating
histories and significantly greater financial, technical, marketing, production
and other resources. In addition, some have significantly greater name
recognition and a larger base of clients, and many have well-established
relationships with its current and potential clients and have extensive
knowledge of its industry. Its current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to increase the ability of their products and services to address
clients' needs. Accordingly, it is possible that new competitors or alliances
among competitors may emerge and rapidly acquire significant market share.
Competition may also increase as a result of industry consolidations. In the
event a larger company acquires one or more of its competitors, Parago would
face increased competition.
In order to remain competitive, Parago may need to acquire additional
businesses, applications, technologies, expertise, products or other resources.
Parago may not be able to identify suitable acquisition candidates or negotiate
satisfactory terms for acquisitions successfully, finance the acquisitions or
integrate the acquired operations into its existing business. Further,
completing a potential acquisition and integrating the acquired businesses or
resources will cause significant diversions of management time and resources.
If Parago consummates significant acquisitions in which the consideration
consists of stock or other equity securities, your ownership could be
significantly diluted. If Parago proceeds with significant acquisitions in
which the consideration includes cash, Parago could have to use a substantial
portion of its available cash to consummate these acquisitions. Acquisition
financing may not be available on favorable terms, or at all. In addition,
Parago may be required to amortize significant amounts of goodwill and other
intangible assets in connection with past and future acquisitions, which would
adversely affect its results of operations. Parago has no current plans,
commitments or agreements with respect to any acquisitions, and Parago may not
make any acquisitions.
PARAGO'S BUSINESS IS VERY DEPENDENT ON ITS TECHNICAL SUPPORT AND SALES
PERSONNEL.
Parago's future success depends on its ability to attract, hire, train
and retain highly skilled personnel. In addition, Parago will need to add a
significant number of new technical support and sales personnel to develop and
market its existing and new applications. Competition for qualified personnel
is intense, and Parago may fail to attract or retain these personnel, in which
case
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its business would be negatively impacted. Parago expects to hire approximately
66 additional technical support and sales and marketing employees by the end of
2000.
Because labor costs are a significant portion of its costs, an
increase in wages, costs of employee benefits or employment taxes could
seriously harm its business. In addition, its facilities are located in areas,
including Dallas, Los Angeles and Silicon Valley (Campbell, California), with
high demand for technical and other personnel and relatively low unemployment
rates. It is more difficult and costly to hire qualified personnel in these
areas.
IF THE PROTECTION OF PARAGO'S INTELLECTUAL PROPERTY IS INADEQUATE, ITS
COMPETITORS MAY GAIN ACCESS TO ITS CONTENT AND TECHNOLOGY.
Parago depends on its ability to develop and maintain the intellectual
property aspects of its content and technology. To protect its content and
technology, including its promotional management and product information
applications, Parago relies primarily on a combination of contractual
provisions, confidentiality procedures, trade secrets and patent, copyright and
trademark laws. Parago seeks to avoid disclosure of its trade secrets through a
number of means including, but not limited to, requiring those persons with
access to its intellectual property to execute confidentiality agreements and
restricting access to its source codes. Parago seeks to protect its content,
applications, documentation and other written materials under trade secret and
copyright laws, which afford only limited protection. Parago has no registered
copyrights, but claim copyright protection on most of the content on its Web
site. Parago cannot assure you that any of its intellectual property with
respect to its solutions will be viable or of value in the future because the
validity, enforceability and type of protection of intellectual property in
Internet-related industries are uncertain and still evolving.
Despite its efforts to protect its intellectual property, unauthorized
parties may attempt to copy aspects of its content and other intellectual
property or to obtain and use information that Parago regards as proprietary.
Policing unauthorized use of its products is difficult, and while Parago is
unable to determine the extent to which piracy of its content or other
intellectual property exists, piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect its
intellectual property as well as the laws of the United States. Its means of
protecting its intellectual property may not be adequate and its competitors
may independently develop similar technology, duplicate its solutions or
applications or design around patents issued to it or its content or other
intellectual property.
PARAGO HAS NO REGISTERED TRADEMARKS AND MAY NOT RECEIVE ANY TRADEMARKS.
Parago has filed 23 trademark applications with respect to trademarks
that Parago has used or is using in connection with its business, but Parago
has received no legal opinion and has not conducted full searches regarding the
registrability of its marks. Parago has not conducted extensive searches
regarding the availability of any of the trademarks for which Parago has filed
applications. Parago has received no trademark registrations to date. Any of
its trademarks may be successfully challenged or may not provide it with any
competitive advantages. None of its trademarks may be registrable and other
parties may have priority of use of such trademarks or variants thereof. Parago
may not successfully carry out its business strategy of establishing a strong
brand name for Parago if Parago cannot prevent others from using its
trademarks. This could impair its ability to increase market share and
revenues.
PARAGO HAS NO PATENTS, ITS PATENT APPLICATIONS MAY BE UNSUCCESSFUL AND OTHER
PARTIES MAY HAVE PRIOR CLAIMS TO PATENTS ISSUED TO IT.
Although Parago has filed three patent applications and one
provisional patent application with respect to its online promotional
management systems and processes, Parago has not received any legal opinion or
conducted full searches regarding the patentability of its patent applications.
Its three patent applications specifically relate to its system and method of
computer-aided promotional management processing, its promotional management
processing system and method that offers selectable disbursement options and
its promotional management processing system and method that provides a
promotions database and interface. Its provisional patent application
specifically relates to its method and apparatus for a computer network system
designed to facilitate promotional fulfillment and customer information
gathering. Parago has no patents, and may not receive any patents related to
its online promotional management applications. If Parago receives a patent
related to its promotional management application either resulting from its
current patent applications or future applications, Parago may be unable to
claim the filing date of, and priority from, its existing provisional patent
application. Its future patents, if any, may be successfully challenged,
rendering them invalid or unenforceable, or may not provide it with any
competitive advantages.
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Parago may not develop technologies that are patentable and other
parties may have prior claims to those technologies. Additionally, other
parties may claim to have rights to any patents issued to it, and, if proven,
these parties would be able to use the patented technology or license it to
others without its consent. The validity and enforceability of its future
patents, if any, may also be affected by future legislative actions or judicial
decisions, especially to the extent such future patents may be deemed "method
of doing business" patents.
PARAGO MAY BE SUBJECT TO CLAIMS THAT ITS APPLICATIONS, CONTENT, OR SERVICES
INFRINGE ON THE INTELLECTUAL PROPERTY OF OTHERS.
There has been a substantial amount of litigation regarding
intellectual property rights relating to the Internet. While Parago has not
been the subject of any infringement claims, it is possible that in the future
third parties may claim that Parago or its current or potential future
applications, content or services infringe upon their intellectual property.
Parago expects that developers and providers of Internet-based solutions and
applications will increasingly be subject to infringement claims as the number
of products and competitors in this industry segment grows and products in
different industry segments overlap. Any claims, made against it, with or
without merit, could be time-consuming, result in costly litigation, cause
delays in implementation of its services or require it to enter into royalty or
licensing agreements. Royalty or licensing agreements, if required, may not be
available on terms acceptable to it, which could seriously harm its business.
PARAGO IS DEPENDENT ON ITS DOMAIN NAMES, AND PARAGO COULD SUFFER LOSSES IF ITS
DOMAIN NAMES ARE NOT PROTECTED.
Parago currently owns and controls the Internet domain names that
Parago currently uses, "www.parago.com" and "www.rebateshq.com" as well as
approximately 300 various other names, and names that Parago acquired in
acquisitions of businesses and assets that Parago does not currently use.
Generally, Internet regulatory bodies regulate domain names. The regulation of
domain names in the United States and in foreign countries is subject to
change. Regulatory bodies could establish additional top-level domains, appoint
additional domain name registrars or modify the requirements for holding domain
names. As a result, Parago may not acquire or maintain the domain names
"www.parago.com" and "www.rebateshq.com" in all of the countries in which
Parago conducts business.
The relationship between regulations governing domain names and laws
protecting trademarks and similar proprietary rights is unclear. Therefore,
Parago may be unable to prevent third parties from acquiring or using domain
names that infringe or otherwise decrease the value of its trademarks and other
intellectual property.
CAPACITY CONSTRAINTS AND SYSTEM FAILURES COULD HARM PARAGO'S BUSINESS.
While Parago has not experienced capacity constraint or system failure
problems in the past, if Parago cannot expand its systems in the future to cope
with any increased demand, or its technology systems fail to perform properly,
Parago could experience:
o unanticipated disruptions in service;
o slower response times;
o decreased client service and satisfaction;
o decreased customer service and satisfaction; or
o delays in the introduction of new products and services.
Any of these factors could impair its reputation, damage the Parago
brand and materially and adversely affect its business.
Parago's ability to provide high quality client and consumer service
depends on the efficient, uninterrupted operation of its computer and
communications hardware systems. While Parago has not had any computer or
communications hardware systems related interruptions in the past, its Web site
may experience periodic system interruptions from time to time. Its systems and
operations are also vulnerable to damage or interruption from human error,
natural disasters, power loss, telecommunication failures, break-ins, sabotage,
computer viruses, acts of vandalism and similar events. While Parago plans to
establish redundant
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servers and a mirror site to provide limited service during system disruptions,
Parago does not currently have fully redundant systems, a formal disaster
recovery plan, alternative providers of hosting services or a mirror site.
Parago's business is highly dependent on its computer and telephone
equipment and software systems. While Parago maintains backup systems, the
temporary or permanent loss of any of this equipment or these systems, through
casualty loss due to events such as fire, flood, earthquake or tornado, or
operating malfunction, could seriously harm its business. While Parago has
property and business interruption insurance, its insurance may not adequately
compensate it for all losses.
PARAGO'S MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND TO COMPETE PARAGO
MUST CONTINUALLY ENHANCE ITS SYSTEM AND APPLICATIONS TO COMPLY WITH EVOLVING
STANDARDS.
To remain competitive, Parago must continue to enhance and improve the
responsiveness, functionality and features of its applications. If Parago is
unable to adapt to changing market conditions, client requirements or emerging
industry standards, its business could be adversely affected. The Internet is
characterized by rapid technologic change, changes in user requirements and
preferences, frequent new product and service introductions embodying new
technologies and emergence of new industry standards and practices that could
render its technology and applications obsolete. To succeed, Parago must
internally develop and license leading technologies to enhance its existing
solutions and applications and develop new applications. Parago must continue
to address the increasingly sophisticated and varied needs of its clients and
respond to technological advances and emerging industry standards and practices
on a cost-effective and timely basis. The development of proprietary technology
involves significant technical and business risks. Parago may fail to develop
new technologies effectively or to adapt its proprietary technology and systems
to client requirements or emerging industry standards.
PARAGO MUST EXPAND EXISTING TECHNOLOGY SYSTEMS AND DEVELOP AND IMPLEMENT NEW
TECHNOLOGY SYSTEMS AS PARAGO INTRODUCES NEW AND ENHANCED SOLUTIONS AND
APPLICATIONS AND AS DEMAND FOR ITS SOLUTIONS AND APPLICATIONS INCREASES.
As Parago introduces new and enhanced solutions and applications,
Parago will need to develop and implement new technology systems. Parago uses
internally developed and third party systems to operate its Web site, including
transaction processing and order management systems designed to be scalable.
Parago does not know whether Parago will be able to accurately project the rate
or timing of any increases in demand to allow it to upgrade its systems and
infrastructure in a timely manner to accommodate these increases. Significant
outages, delays and other difficulties due to its failure to expand existing
technology systems or develop and implement new technology systems could cause
its clients and their customers that use its online applications to perceive
its applications as not functioning properly and, therefore, cause them to use
other online solutions.
PARAGO DEPENDS ON INCREASING USE OF THE INTERNET. IF THE USE OF THE INTERNET
DOES NOT GROW AS ANTICIPATED, ITS BUSINESS WILL BE MATERIALLY ADVERSELY
AFFECTED.
Parago's Internet-based solutions depend on the increased acceptance
and use of the Internet as a medium of commerce. Rapid growth in the use of the
Internet is a recent phenomenon. As a result, acceptance and use of the
Internet may not develop at projected rates and a sufficiently broad base of
users may not adopt the Internet as a medium of conducting commerce. If the
Internet is not broadly adopted as quickly as Parago anticipates, potential and
existing clients may not choose to use its solutions.
CONCERNS REGARDING THE SECURITY OF TRANSMISSION OF CONFIDENTIAL INFORMATION
OVER THE INTERNET MAY REDUCE CONSUMER CONFIDENCE IN PARAGO'S ONLINE SOLUTIONS
AND NEGATIVELY IMPACT ITS BUSINESS.
The secure transmission of confidential information over the Internet
is essential to maintaining consumer and client confidence in Parago's online
solutions. The secure transmission of confidential information over the
Internet is essential in maintaining consumer and supplier confidence in its
online solutions. While Parago has not had security breaches of its system in
the past, substantial or ongoing security breaches of its system or other
Internet-based systems could significantly harm its business. It is possible
that advances in computer capabilities, new discoveries or other developments
could result in a compromise or breach of the technology used by it to protect
client and customer transaction data.
A party that is able to circumvent its security systems could steal
proprietary information or cause interruptions in Parago's operations. Security
breaches also could damage its reputation and expose it to a risk of loss or
litigation and possible liability. Its insurance policies carry low coverage
limits, which may not be adequate to reimburse it for losses caused by security
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breaches. While Parago attempt to protect against and remedy security breaches,
Parago cannot guarantee that its security measures will prevent security
breaches.
Parago also faces risks associated with security breaches affecting
others conducting business over the Internet. Any publicized security problems
relating to third parties could heighten concern regarding security and privacy
on the Internet, inhibit the growth of the Internet and, therefore, its
Internet solutions.
PARAGO IS HEAVILY DEPENDENT ON TELEPHONE, POSTAL AND DELIVERY SERVICES.
Parago materially relies on services provided by various local and
long distance telephone companies in connection with its promotional management
solution. A significant increase in the cost of telephone services that Parago
cannot recover through an increase in the pricing of its solutions, or any
significant interruption in telephone services, could have a material adverse
effect on its business.
Its business is also materially dependent on the United States Postal
Service and, to a lesser degree, on private delivery companies. Postal and
delivery service rate increases affect the cost of its mailings and shipments
to consumers. Any increase in postal and other delivery service rates,
including the elimination of existing discounts, could have a material adverse
effect on its business.
PARAGO AND OUR COMPANY, CT HOLDINGS, COULD FACE POTENTIAL CONFLICTS OF
INTERESTS RELATING TO EACH OTHER.
o Because of Parago's relationship with us, and because we owned 45.2% of
its outstanding shares of common stock at May 31, 2000, and because of our
interlocking directors and officers, who collectively owned 16.7% of Parago's
outstanding shares of common stock as of May 31, 2000, Parago and we are likely
to face potential conflicts of interest relating to each other.
o Executives, employees and consultants associated with us assisted in the
development of Parago's business model. Steven B. Solomon, our CEO and
President, is the founder, Chairman and CEO of Parago. In addition, Lawrence
Lacerte, Victor K. Kiam II, and Steven B. Solomon serve as directors of both
Parago and us.
o Some of Parago's executive officers, key employees and directors also
beneficially own, or hold options or warrants to purchase, approximately 27.1%
of our outstanding common stock as of May 31, 2000. Steven B. Solomon owned
approximately 11.3% of our common stock as of May 31, 2000.
o Accordingly, conflicts of interest may arise from time to time between
Parago and us, particularly with respect to the pursuit of overlapping business
opportunities. Parago has not adopted any formal plan or arrangement to address
these potential conflicts of interest and intends to review related-party
transactions with CT Holdings on a case-by-case basis.
o Because Parago has interlocking directors and officers with us, there
may be inherent conflicts of interest for these directors and officers related
to transactions between Parago and us. Directors may be required to abstain
from voting with respect to matters involving both us and Parago. Parago may
lose valuable management input from the directors and officers who have
conflicts.
IN THE EVENT OF THE COMPLETION OF PARAGO'S INITIAL PUBLIC OFFERING, PARAGO'S
STOCK PRICE IS LIKELY TO BE VERY VOLATILE.
o Currently, Parago's common stock can not be bought or sold publicly.
Although it is anticipated that the initial public offering price will be
determined based on several factors, the market price after the offering may
vary significantly from the initial offering price. The market price of
Parago's common stock is likely to be highly volatile and could be subject to
wide fluctuations in response to factors that are beyond its control. A decline
in Parago's stock price will adversely affect our stock price.
o Domestic and international stock markets often experience extreme price
and volume fluctuations. Market fluctuations, as well as general political and
economic conditions, such as a recession or interest rate or currency rate
fluctuations, could adversely affect the market price of Parago's common stock.
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o The market prices for stocks of Internet-related and technology
companies, particularly following an initial public offering, frequently
increase to levels that bear no relationship to the operating performance of
these companies. Those market prices generally are not sustainable and are
subject to wide variations. If Parago's common stock trades at levels
significantly above its initial public offering price, its common stock likely
will experience a material decline.
o Sales of a substantial number of shares of Parago's common stock in the
public market after its initial public offering could depress the market price
of the Parago common stock and could impair Parago's ability to raise capital
through the sale of additional equity securities.
RISKS RELATED TO OUR CITADEL TECHNOLOGY BUSINESS
OUR INDUSTRY IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE AND WE WILL NEED TO
ADAPT OUR DEVELOPMENT TO THESE CHANGES.
We participate in a highly dynamic industry characterized by rapid
change and uncertainty relating to new and emerging technologies and markets.
The recent trend toward server-based applications in networks and applications
distributed over the Internet could have a material adverse affect on sales of
our products. Future technology or market changes may cause some of our
products to become obsolete more quickly than expected.
THE MARKET FOR OUR PRODUCTS IS INTENSELY COMPETITIVE AND WE EXPECT THAT
COMPETITION WILL CONTINUE AND MAY INCREASE.
The market in which we compete is influenced by the strategic
direction of major microcomputer hardware manufacturers and operating system
providers. Our competitiveness depends on our ability to enhance existing
products and to offer successful new products on a timely basis. We have
limited resources and must restrict product development efforts to a relatively
small number of projects.
INTRODUCTION OF NEW OPERATING SYSTEMS MAY CAUSE SIGNIFICANT FLUCTUATIONS IN OUR
FINANCIAL RESULTS AND STOCK PRICE.
If we are unable to successfully and timely develop products that
operate under existing or new operating systems, or if pending or actual
releases of the new operating systems delay the purchase of our products, our
future net revenues and operating results could be materially adversely
affected. Additionally, as hardware vendors incorporate additional server-based
network management and security tools into network operating systems, the
demand may decrease for some of our products, including those currently under
development.
THE TREND TOWARD CONSOLIDATION IN OUR INDUSTRY MAY IMPEDE OUR ABILITY TO
COMPETE EFFECTIVELY.
As consolidation in the software industry continues, fewer companies
dominate particular markets, changing the nature of the market and potentially
providing consumers with fewer choices. Also, many of these companies offer a
broader range of products than us, ranging from desktop to enterprise
solutions. We may not be able to compete effectively against these competitors.
Furthermore, we may use strategic acquisitions, as necessary, to acquire
technology, people and products for our overall product strategy. We have
completed a number of acquisitions and dispositions of technologies, companies
and products and may acquire and dispose of other technologies, companies and
products in the future. The trend toward consolidation in our industry may
result in increased competition in acquiring these technologies, people or
products, resulting in increased acquisition costs or the inability to acquire
the desired technologies, people or products. Any of these changes may have a
significant adverse effect on our future revenues and operating results.
WE MUST EFFECTIVELY ADAPT TO CHANGES IN THE DYNAMIC TECHNOLOGICAL ENVIRONMENT
OF THE INTERNET IN A TIMELY MANNER.
Critical issues concerning the commercial use of the Internet,
including security, reliability, cost, ease of use, accessibility, quality of
service or potential tax or other government regulation, remain unresolved and
may affect the use of the Internet as a medium to distribute or support our
software products and the functionality of some of our products. If we are
unsuccessful in timely assimilating changes in the Internet environment into
our business operations and product development efforts, our future net
revenues and operating results could be adversely affected.
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WE FACE INTENSE PRICE-BASED COMPETITION FOR SALES OF OUR PRODUCTS.
Price competition is often intense in the software market, especially
for utility and security products. Many of our competitors have significantly
reduced the price of their products. Price competition may continue to increase
and become even more significant in the future, resulting in reduced profit
margins.
THE TRANSITION TO INTEGRATED SUITES OF UTILITIES MAY RESULT IN REDUCED REVENUES.
We and our competitors now provide integrated suites of utility
products. The price of integrated utility suites is significantly less than the
aggregate price of stand-alone products that are included in these utility
suites when sold separately. As a result of the shift to integrated utility
suites, price competition is intense and we have experienced cannibalization of
our stand-alone products that are included within the suite. As a result, there
may be a negative impact on our revenues and operating income from selling
integrated utility suites rather than individual products, as the lower price
of integrated utility suites may not be offset by increases in the total volume
of utility suites sold. Additionally, our products may not compete effectively
with competitors' products or integrated utility suites introduced in the
future.
OUR QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS.
We have been subject to substantial fluctuations in quarterly net
revenues, and these fluctuations may occur in the future. Fluctuations may be
caused by a number of factors, including:
o the timing of announcements and releases of new or enhanced versions of
our products and product upgrades;
o the introduction of competitive products by existing or new competitors;
o reduced demand for any given product;
o seasonality in the end-of-period buying patterns of foreign and domestic
software markets; and
o the market's transition between operating systems.
Due to these factors, forecasts may not be achieved, either because
expected sales do not occur or because they occur at lower prices or on terms
that are less favorable to us. In addition, these factors increase the chances
that our results could diverge from the expectations of investors and analysts.
WE MAY BE UNSUCCESSFUL IN UTILIZING NEW DISTRIBUTION CHANNELS.
We currently offer products over the Internet. We may not be able to
effectively adapt our existing, or adopt new, methods of distributing our
software products utilizing the rapidly evolving Internet and related
technologies. The adoption of new channels may adversely impact existing
channels and/or product pricing, which may reduce our future revenues and
profitability.
PRODUCT RETURNS MAY AFFECT OUR NET REVENUES.
Product returns can occur when we introduce upgrades and new versions
of products or when distributors or retailers have excess inventories. Our
return policy allows distributors, subject to various limitations, to return
purchased products in exchange for new products or for credit towards future
purchases. End users may return our products through dealers and distributors
within a reasonable period from the date of purchase for a full refund. In
addition, retailers may return older versions of our products. We estimate and
maintain reserves for product returns. However, future returns could exceed the
reserves we have established, which could have a material adverse affect on our
operating results.
OUR INCREASED SALES OF SITE LICENSES MAY INCREASE FLUCTUATIONS IN OUR FINANCIAL
RESULTS AND COULD AFFECT OUR BUSINESS.
We sell corporate site licenses through the distribution channel and
through corporate resellers. We are increasingly emphasizing sales to
corporations and small businesses through volume licensing agreements. These
licensing arrangements tend to involve a longer sales cycle than sales through
other distribution channels, require greater investment of resources in
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establishing the enterprise relationship and can sometimes result in lower
operating margins. The timing of the execution of volume licenses, or their
non-renewal or renegotiation by large customers, could cause our results of
operations to vary significantly from quarter to quarter and could have a
material adverse impact on our results of operations. In addition, if the
corporate marketplace grows and becomes a larger component of the overall
marketplace, we may not be successful in expanding our corporate segment to
take advantage of this growth.
WE DEPEND ON DISTRIBUTION BY VALUE ADDED RESELLERS AND INDEPENDENT SOFTWARE
VENDORS FOR A SIGNIFICANT PORTION OF OUR REVENUES.
We distribute some of our products through value added resellers and
independent software vendors under arrangements through which our products are
included with these resellers' and vendors' hardware and software products
prior to sale by them through retail channels. If we are unsuccessful in
maintaining our current relationships and securing license agreements with
additional value added resellers and independent software vendors, or if these
resellers and vendors are unsuccessful in selling their products, our future
net revenues and operating results may be adversely affected.
THE RESULTS OF OUR RESEARCH AND DEVELOPMENT EFFORTS ARE UNCERTAIN.
We believe that we will need to make significant research and
development expenditures to remain competitive. While we perform extensive
usability and beta testing of new products, the products we are currently
developing or may develop in the future may not be technologically successful.
If they are not technologically successful, our resulting products may not
achieve market acceptance and our products may not compete effectively with
products of our competitors currently in the market or introduced in the
future.
THE LENGTH OF THE PRODUCT DEVELOPMENT CYCLE IS DIFFICULT TO PREDICT.
The length of our product development cycle has generally been greater
than we originally expected. We are likely to experience delays in future
product development. These delays could have a material adverse affect on the
amount and timing of future revenues.
WE MUST MANAGE AND RESTRUCTURE OUR OPERATIONS EFFECTIVELY.
We continually evaluate our product and corporate strategy. We have in
the past undertaken and will in the future undertake organizational changes
and/or product and marketing strategy modifications. These organizational
changes increase the risk that objectives will not be met due to the allocation
of valuable limited resources to implement changes. Further, due to the
uncertain nature of any of these undertakings, these efforts may not be
successful and we may not realize any benefit from these efforts.
WE MUST ATTRACT AND RETAIN PERSONNEL WHILE COMPETITION FOR PERSONNEL IN OUR
INDUSTRY IS INTENSE.
We believe that our future success will depend in part on our ability
to recruit and retain highly skilled management, marketing and technical
personnel. Competition in recruiting personnel in the software industry is
intense. To accomplish this, we believe that we must provide personnel with a
competitive compensation package, including stock options, which requires
ongoing stockholder approval.
WE RELY ON INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS.
We regard our software as proprietary and underlying technology as
proprietary. We seek to protect our proprietary rights through a combination of
confidentiality agreements and copyright, patent, trademark and trade secret
laws. However, we do not employ technology to prevent copying of our products.
Third parties may copy aspects of our products or otherwise obtain and use our
proprietary information without authorization or develop similar technology
independently. We do not have any patents or statutory copyrights on any of our
proprietary technology which we believe to be material to our future success,
although Parago has filed a provisional patent application with respect to some
of its business applications and intellectual property rights. In selling our
products, we rely primarily on "shrink wrap" licenses that are not signed by
licensees, and, therefore, such licenses may be unenforceable under the laws of
some jurisdictions. In addition, existing copyright laws afford limited
practical protection. Furthermore, the laws of some foreign countries do not
offer the same level of protection of our proprietary rights as the laws of the
United States. There can be no assurance that our means of protecting our
proprietary rights will be adequate or that our
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competitors will not independently develop similar technology substantially
equivalent or superseding proprietary technology. Furthermore, there can be no
assurance that any confidentiality agreements between us and our employees will
provide meaningful protection of our proprietary information, in the event of
any unauthorized use or disclosure thereof. Any legal action that we may bring
to protect proprietary information could be expensive and may distract
management from day-to-day operations.
WE ARE INVOLVED IN LITIGATION THAT COULD, AND FUTURE CLAIMS AGAINST US MAY,
AFFECT OUR FINANCIAL RESULTS.
From time to time, we may be subject to claims that we have infringed
the intellectual property rights of others, that our products are not Year 2000
compliant or other product liability claims, or other claims incidental to our
business. We are involved in a number of judicial and administrative
proceedings incidental to our business. We intend to defend and/or pursue all
claims against us. We may suffer an unfavorable outcome as a result of one or
more claims. We do not expect the final resolution of these claims to have a
material adverse effect on our financial position, individually or in the
aggregate. However, depending on the amount and timing of unfavorable
resolutions of claims against us, or the costs of settlement or litigation, our
future results of operations or cash flows could be materially adversely
affected in a particular period.
YEAR 2000 - PRODUCT LIABILITY LITIGATION.
We believe the software products that we currently develop and
actively market are Year 2000 compliant for significantly all functionality.
However, these products could contain errors or defects related to the Year
2000.
In addition, earlier versions of our products, those that are not the
most currently released or are not currently being developed, may not be Year
2000 compliant. We have sold some of our older products, which are not being
actively developed and updated. These older products are also not necessarily
Year 2000 compliant and are no longer sold by us.
SOFTWARE DEFECTS AND PRODUCT LIABILITY.
Software products frequently contain errors or defects, especially
when first introduced or when new versions or enhancements are released. For
example, in the past, our anti-virus software products have incorrectly
detected viruses that do not exist. We have not experienced any material
adverse effects resulting from any of these defects or errors to date and we
test our products prior to release. Nonetheless, defects and errors could be
found in current versions of our products, future upgrades to current products
or newly developed and released products. Software defects could result in
delays in market acceptance or unexpected reprogramming costs, which could
materially adversely affect our operating results. Most of our license
agreements with customers contain provisions designed to limit our exposure to
potential product liability claims. It is possible, however, that these
provisions limiting our liability may not be valid as a result of federal,
state, local or foreign laws or ordinances or unfavorable judicial decisions. A
successful product liability claim could have a material adverse affect on our
business, operating results and financial condition.
OUR SOFTWARE PRODUCTS AND WEB SITE MAY BE SUBJECT TO INTENTIONAL DISRUPTION.
While we have not been the target of software viruses specifically
designed to impede the performance of our products, such viruses could be
created and deployed against our products in the future. Similarly, experienced
computer programmers, or hackers, may attempt to penetrate our network security
or the security of our Web site from time to time. A hacker who penetrates our
network or Web site could misappropriate proprietary information or cause
interruptions of our services. We might be required to expend significant
capital and resources to protect against, or to alleviate, problems caused by
virus creators and hackers.
WE HAVE EXPERIENCED REDUCED DEMAND FOR OUR PRODUCTS DUE TO CHANGES IN CUSTOMER
BEHAVIOR RESULTING FROM YEAR 2000 PREPARATION.
As a result of Year 2000 compliance and functionality, many enterprise
customers used their Information Technology budgets in 1999 to focus on Year
2000 issues. In addition, some of our customer's Information Technology
organizations were unwilling to deploy new software until after the Year 2000
in order to reduce the complexity of any changes in their systems required by
any actual Year 2000 failures. We believe that these factors reduced sales of
our products and had an adverse affect on revenues. In addition, we have
experienced and may continue to experience significantly reduced revenues from
our product sales as demand may significantly decline and could adversely
affect our future operating results.
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WE MAY STILL EXPERIENCE DISRUPTION IN OUR BUSINESS AS A RESULT OF THE YEAR
2000.
Even though the date is now past January 1, 2000, and the Company has
not experienced any immediate adverse impact from the transition to the year
2000, it cannot provide any assurance that its suppliers and customers have not
been affected in a manner that is not yet apparent. In addition, certain
computer programs which were date sensitive to the year 2000 may not have been
programmed to process the year 2000 as a leap year, and any negative
consequential effects remain unknown. As a result, the Company will continue to
monitor its year 2000 compliance and the year 2000 compliance of its suppliers
and customers. In assessing the effect of the year 2000 problem, management
determined that there existed two general areas that needed to be evaluated: -
Internal infrastructure and - Supplier/third-party relationships. A discussion
of the various activities related to assessment and actions resulting from
those evaluations is set forth below.
INTERNAL INFRASTRUCTURE. The Company verified that all of its personal
computers and software are Year 2000 compliant. The Company replaced or
upgraded all items that were not to Year 2000 compliant. The costs related to
these efforts were not material.
SUPPLIERS/THIRD-PARTY RELATIONSHIPS. The Company relies on its outside vendors
for water, electrical, and telecommunications services as well as climate
control, building access, and other infrastructure services. Although the
Company has not experienced any delays or interruptions in its service, it has
received any assurance of compliance from the providers of these services. Any
failure of these third-parties to resolve year 2000 problems with their systems
could have a material adverse effect on the Company's operations.
CONTINGENCY PLANS. Based on the above actions, the Company has not developed a
formal contingency plan to be implemented as part of its efforts to identify
and correct year 2000 problems affecting our internal systems. However, if it
deems necessary, the Company may take the following actions: - Accelerated
replacement of affected equipment or software; - Short to medium-term use of
backup equipment and software; - Increased work hours for Company personnel; -
Other similar approaches. If the Company is required to implement any of these
contingency plans, such plans could have a material adverse effect on its
business. Based on the actions taken to date, and the lack of any problems to
date, the Company is reasonably certain that it has identified and resolved all
year 2000 problems that could hurt its business.
WE HAVE A HISTORY OF NET LOSSES AND WILL NEED ADDITIONAL FINANCING.
Since inception, we have incurred losses, and at May 31, 2000, we had an
accumulated deficit of $48,734,245 and our current liabilities exceeded our
current assets by $2,500,838. Our ultimate success in fully implementing our
new strategy, continuing our existing business line and meeting our cash flow
obligations is dependent on our ability to raise additional capital, as to
which there can be no assurances. While the Company currently believes that it
has the ability to obtain additional equity or debt financing, we have received
a commitment from our President to fund up to $1,500,000 of our expected
operating cash flow needs through March 1, 2001 in the event the Company's cash
flows from operating, investing and financing activities are insufficient to
meet the expected operating obligations of the Company as they come due. We
have used approximately $400,000 of this commitment through July 17,2000. We
also plan to sell stock in private equity financings during fiscal year 2001 to
cover cash flow deficiencies not covered by the commitment by our President and
to repay amounts advanced by our President. We expect that our equity investee,
Parago, will incur losses in the foreseeable future as it continues to develop
and upgrade its technology and infrastructure, develop and expand its product
and service offerings, establish and sustain relationships with manufacturers,
retailers and service organizations.
We currently fund our Citadel Technology product development and sales and
marketing activities through existing cash reserves and cash from operations
and issuances of securities. In the event that cash from operations and other
available funds prove to be insufficient to fund our Citadel Technology
anticipated operations, we will be required to seek additional financing. There
can be no assurance that, if additional financing is required, it will be
available on acceptable terms, or at all. Additional financing may involve
substantial dilution to the interests of our then-current shareholders.
WE RELY ON MICROSOFT AND NOVELL TECHNOLOGY.
Our software products are designed for Microsoft technologies,
including Windows NT and Windows 95/98, and Novell NetWare. Although we believe
that Microsoft and Novell technologies are and will be widely utilized by
businesses in the corporate market, no assurances can be given that these
businesses will actually adopt such technologies as anticipated or will not in
the future migrate to other computing technologies that the Company does not
support. Moreover, if our products and
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<PAGE> 26
technology are not compatible with new developments in Microsoft and Novell
technologies, as to which there can be no assurances, our business, results of
operations and financial condition could be materially and adversely affected.
WE FACE INCREASED RISK AS A RESULT OF OUR INTERNATIONAL OPERATIONS.
We have entered into affiliations in Japan and Mexico. While we have
taken steps to minimize the financial exposure of such ventures, there can be
no assurances that its products will be successful overseas and that these
ventures will not have an adverse impact on our financial condition. In
addition, in order to successfully expand international sales significant
management attention and financial resources could be required and could have
an adverse effect on our operating margins. In addition, we rely significantly
on our distributors and other resellers in international sales efforts, that
are not our employees and do not offer our products exclusively, and there can
be no assurance that they will continue to market our products. Additional
risks inherent in our international business activities generally include
unexpected changes in regulatory requirements, fluctuations in the values of
currencies, tariffs and other trade barriers, costs to localize products, lack
of acceptance of localized products, if any, in foreign countries, longer
accounts receivable payment cycles, difficulties in managing international
operations, potentially adverse tax consequences including restrictions on the
repatriation of earnings, and the burdens of complying with a wide variety of
foreign laws. There can be no assurance that such factors will not have a
material adverse effect on our future international sales and, consequently,
our business, operating results and financial condition.
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<PAGE> 27
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of
common stock offered by the selling stockholders under this prospectus. If all
currently outstanding warrants to purchase the shares of common stock offered
in this offering were exercised, CT Holdings would receive aggregate gross
proceeds of approximately $364,650.
The net proceeds that we receive from the exercise of warrants will be
used for working capital and general corporate purposes. We may also use all or
a portion of the net proceeds for the acquisition of businesses, products and
technologies that are complementary to our own, or otherwise to enter into
strategic alliances. While we from time to time have engaged, and expect to
continue to engage, in preliminary discussions with other business entities
with regard to the possibility of such acquisitions or strategic alliances, as
of the date hereof no such discussions have resulted in any pending definitive
acquisition or strategic alliance agreements. No assurances can be given that
we will be able to reach a definitive agreement on or consummate any related
transaction. Pending any uses, we intend to invest the net proceeds from the
warrant exercises in short-term, interest bearing securities or accounts.
The foregoing represents our current best estimate of our use of the
net proceeds derived from the exercise of the warrants to purchase the shares
of common stock offered hereby, if any, based upon our present plans, the state
of our business operations and current conditions in the industries in which we
operate. We reserve the right to change the use of the net proceeds if
unanticipated developments in our business, business opportunities, or changes
in economic, regulatory or competitive conditions, make shifts in the
allocations of proceeds necessary or desirable.
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<PAGE> 28
SELLING STOCKHOLDERS
This prospectus relates to the offer and sale by the following selling
stockholders of the indicated number of shares that are issuable pursuant to
warrants held by these selling stockholders. We are not aware that any of these
selling stockholders has any plan, arrangement, understanding, agreement,
commitment or intention to sell their securities. See "Plan of Distribution."
None of the following shareholders has held any position or office within CT
Holdings, nor has had any other material relationship with us in the past three
years, other than in connection with the transactions pursuant to which the
selling stockholders acquired the warrants. The following table sets forth some
information about the selling stockholders for whom we are registering shares
of common stock for resale to the public. The information in the table assumes
no sales are effected by the selling stockholders other than pursuant to this
registration statement, and that all shares of common stock being registered
pursuant to this registration statement are sold.
<TABLE>
<CAPTION>
NUMBER
OF NUMBER OF
SHARES SHARES NUMBER OF PERCENT
OWNED BEING SHARES BENEFICIALLY
PRIOR TO REGISTERED OWNED AFTER OWNED AFTER
NAME OFFERING FOR RESALE OFFERING OFFERING
---- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
David Gerstenhaber 84,375 84,375 0 0
Stuart and Paula Graff 168,904 168,904 0 0
Duck Partners, L.P.(1) 168,904 168,904 0 0
Jack Nagel 42,226 42,226 0 0
Michael Ferguson 233,000 233,000 0 0
Wayne Pence, Jr. 28,125 28,125 0 0
Peter Weih 56,250 56,250 0 0
John Winter Smith 5,000 5,000 0 0
---------- ------------ -------- --------
TOTAL 786,784 786,784 0 0
========== ============ ======== ========
</TABLE>
(1) The general partner of Duck Partners, L.P. is J. Mitchell Hull, who
holds voting and dispositive power with respect to the indicated shares.
Of the shares of common stock covered by this prospectus, 197,029 have
been issued pursuant to the exercise of the related warrants and 589,755 have
not yet been issued and the related warrants remain outstanding.
In connection with the issuance of some of the warrants to some selling
stockholders, we agreed to file and use our best efforts to cause to be declared
effective the registration statement of which this prospectus is a part. We have
also agreed to use our best efforts to keep the registration statement effective
until the earliest of:
o February 28, 2001, or
o such time as all of the shares have been sold, or
o such date as all of the shares may be sold under Rule 144.
We have agreed to indemnify the selling stockholders against some
expenses, claims, losses, damages and liabilities (or action in respect
thereof). We have agreed to pay the expenses of registering the shares under
the Securities Act, including registration and filing fees, blue sky expenses,
printing expenses, accounting fees, administrative expenses and our own counsel
fees.
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<PAGE> 29
PLAN OF DISTRIBUTION
The shares covered by this prospectus may be offered and sold from
time to time by the selling stockholders. As used in this prospectus, "selling
stockholders" includes donees and pledgees selling shares received from a named
selling stockholder after the date of this prospectus. The selling stockholders
will act independently of us in making decisions with respect to the timing,
manner and size of each sale. The selling stockholders may sell the shares
being offered hereby in the over-the-counter market, the Nasdaq Stock Market or
otherwise, at prices and under terms then prevailing or at prices related to
the then current market price or at negotiated prices, shares may be sold by
one or more of the following means of distribution:
o Block trades in which the broker-dealer so engaged will
attempt to sell such 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 such
broker-dealer for its own account pursuant to this prospectus;
o Over-the-counter or Nasdaq Stock Market distributions in
accordance with the rules of the Nasdaq Stock Market;
o Ordinary brokerage transactions and transactions in which the
broker solicits purchasers; and
o Privately negotiated transactions.
To the extent required, this prospectus may be amended and
supplemented from time to time to describe a specific plan of distribution. In
connection with distributions of such shares or otherwise, the selling
stockholders may enter into hedging transactions with broker-dealer or other
financial institutions. In connection with such transactions, broker-dealer or
other financial institutions may engage in short sales of our common stock in
the course of hedging the positions they assume with the selling stockholders.
The selling stockholders may also sell our common stock short and redeliver the
shares to close out such short positions. The selling stockholders may also
enter into option or other transactions with broker-dealers or other financial
institutions which require the delivery to such broker-dealer or other
financial institution of the shares offered hereby, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction). The
selling stockholders may also pledge such shares to a broker-dealer or other
financial institution, and, upon a default, such broker-dealer or other
financial institution may effect sales of such pledged shares pursuant to this
prospectus (as supplemented or amended to reflect such transaction). In
addition, any such shares that qualify for sale pursuant to Rule 144 may be
sold under Rule 144 rather than pursuant to this prospectus.
In effecting sales, brokers, dealers or agents engaged by the selling
stockholders may arrange for other brokers or dealers to participate. Brokers,
dealers or agents may receive commissions, discounts or concessions from the
selling stockholders in amounts to be negotiated prior to the sale. Such
brokers or dealers and any other participating brokers or dealers may be deemed
to be "underwriters" within the meaning of the Securities Act in connection
with such sales, and any such commissions, discounts or concessions may be
deemed to be underwriting discounts or commissions under the Securities Act.
The selling stockholders have advised us that they have not entered into any
agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their securities, nor is there an
underwriter or coordinating broker acting in connection with the proposed sale
of shares by the selling stockholders.
In order to comply with the securities laws of some states, if
applicable, the shares being offered hereby must be sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in some
states such shares may not be sold unless they have been registered or
qualified for sale in the applicable state or an exemption from the
registration or qualification requirement is available and there has been
compliance thereof.
We have advised the selling stockholders that the anti-manipulation
rules of Regulation M under the Securities Exchange Act of 1934 may apply to
sales of shares in the market and to the activities of the selling stockholders
and their affiliates. In addition, we will make copies of this prospectus
available to the selling stockholders and have informed them of the need for
delivery of copies of this prospectus to purchasers at or prior to the time of
any sale of the shares offered hereby. The selling
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<PAGE> 30
shareholders may indemnify any broker-dealer that participates in transactions
involving the sale of the shares against some liabilities, including liabilities
arising under the Securities Act.
At the time a particular offer of shares is made, if required, a
prospectus supplement will be filed and distributed that will set forth the
number of shares being offered and the terms of the offering, including the
name of any underwriter, dealer or agent, the purchase price paid by any
underwriter, any discount, commission and other item constituting compensation,
any discount commission or concession allowed or reallowed or paid to any
dealer, and the proposed selling price to the public. In addition, upon being
notified by a selling stockholder that a donee or pledgee intends to sell more
than 500 shares, a prospectus supplement will be filed and distributed.
We will pay all the expenses related to the registration of the shares
offered by this prospectus, except for any underwriting, brokerage or related
fees, discounts, commissions or the fees or expenses of counsel or advisors to
the selling stockholders.
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MARKET PRICES OF COMMON STOCK AND DIVIDEND POLICY
Our common stock is currently traded on the Nasdaq SmallCap Market
under the symbol CITN. Until February 29, 2000, our common stock was traded on
the OTC Bulletin Board under the symbol CITN. The following table sets forth,
for the periods indicated, the high and low sale price per share of our common
stock on the Nasdaq SmallCap Market and the high and low bid and ask prices for
the common stock as reported on the OTC Bulletin Board. The quotations may
reflect inter-dealer prices, without retail mark-up, mark-down or commission
and may not represent actual transactions. The common stock was traded under
the symbol NOFF from May 4, 1996 to March 26, 1998.
<TABLE>
<CAPTION>
FISCAL YEAR BID ASK
QUARTER HIGH LOW HIGH LOW
------- ---- --- ----- ---
<S> <C> <C> <C> <C> <C>
1999
1st Quarter 1.94 .35 1.97 .35
2nd Quarter 2.20 .80 2.25 .85
3rd Quarter 1.05 .40 1.09 .47
4th Quarter 4.09 .65 4.12 .68
2000
1st Quarter 3.62 1.94 3.65 2.00
2nd Quarter 2.97 1.38 2.75 1.38
3rd Quarter 3.09 1.81 3.19 1.25
4th Quarter 7.13 4.22 7.13 4.25
2001 HIGH LOW
---- ---
1st Quarter 7.38 1.44
2nd Quarter 2.19 0.78
(through August 15, 2000)
</TABLE>
On August 15, 2000, the last reported sale price for our common stock
on the Nasdaq SmallCap Market was $0.94 per share. On December 30, 1999, we had
986 stockholders of record of our common stock.
Holders of our common stock are entitled to dividends when, as and if
declared by the Board of Directors out of funds legally available therefor. We
have never paid cash dividends on our common stock, and management intends, for
the immediate future, to retain any earnings for the operation and expansion of
our business. Any future determination regarding the payment of dividends will
depend upon results of operations, capital requirements, our financial
condition and such other factors that our Board of Directors may consider.
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<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and notes found elsewhere in this prospectus.
OVERVIEW
We are an incubator of Internet service companies that provides early
stage ventures with a single source of management capital, as well as
consulting on operations, marketing and strategic planning. Our incubator model
is designed to enable the start up companies with whom we partner to become
online market leaders in their industries. We began our Internet activities in
1999 with the formation of Parago, an application service provider (ASP) and
Internet based business process outsourcer (BPO) that provides an online suite
of offerings designed to increase sales, reduce costs, retain customers and
increase client profitability. These services include online promotional
management, online rebate processing, proactive email, online surveys, online
multimedia product demonstrations and manuals, and online customer data
warehousing, analysis and reporting. Parago's comprehensive integrated suite of
outsourced customer care solutions are marketed across multiple industry lines.
In May 2000, we acquired a minority interest in River Logic, Inc., which is
headquartered in Beverly, Massachusetts and creates and operates integrated
decision support networks for industries such as K-12 education, utilities,
forest products, health care and others. These networks are designed to
leverage the flow and processing of knowledge and information to provide a
competitive advantage.
In addition to our incubation business, we continue to operate our
"Citadel Technology" security software line, which is focused on developing and
marketing security and administration software products for both computer
networks and desktop personal computers. Our integrated, easy-to-use software
products enable network administrators to control access to network resources,
automate routine network maintenance tasks, and automatically shutdown and
restart servers and desktop PCs in the event of a network crash. These software
products also enable individual PC users to control access to their desktops,
secure files, and index and retrieve files stored in a variety of storage
media. Our Citadel Technology software products are designed to reduce the
direct and indirect costs of computer network operations, protect proprietary
networks and information, and otherwise improve overall office productivity.
Our core focus will be on our incubation services, and we are
currently analyzing various strategic alternatives for our Citadel Technology
security software business, including new strategic alliances with third
parties, new applications of the technology, new third party licensing or joint
venture arrangements or the sale of the business line. As a result, management
believes that the results of operations for our Citadel Technology security
software business will continue to be adversely affected in the future by our
core focus on incubation services.
OVERVIEW OF PARAGO SUBSIDIARY
In January 1999, we announced that we had formed a subsidiary, Parago
(formerly How2.com), to implement our Internet and e-commerce strategies.
Parago is an application service provider (ASP) and Internet based business
process outsourcer (BPO) that provides an online suite of continuous customer
interaction offerings designed to increase sales, reduce costs, retain
customers and increase client profitability. These services include online
promotional management (including online rebate processing), proactive email,
online surveys, online multimedia product demonstrations and manuals, and
online customer data warehousing, analysis and reporting. Parago's
comprehensive integrated suite of outsourced continuous customer interaction
solutions are marketed across multiple industry lines.
Parago provides Internet-based solutions that automate customer
relationship management. Parago's solutions enable both brick-and-mortar and
e-commerce businesses to more efficiently develop, retain and extend customer
relationships and improve sales, marketing and customer retention. Parago's
Internet-enabled enterprise solutions include PromoCenter, InfoCenter and
KnowledgeCenter. By automating customer care activities such as online and
traditional rebate processing and promotions, Parago allows its clients to
enhance customer retention, increase revenue opportunities and improve
operating efficiencies. Parago's Internet-based solutions seek to transform
promotional management and product information from customer service
liabilities to retention and extension opportunities.
Parago's online solutions provide a new vehicle for its clients to
conduct targeted marketing to customers with whom they have traditionally lost
contact subsequent to the point of purchase. Parago is developing proprietary
software that will provide an online mechanism for customers, many of whom have
immediate purchasing power in the form of promotional proceeds, to apply those
proceeds towards the purchase of additional products or services. Parago's
solutions also capture valuable customer
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<PAGE> 33
information that can help its clients better understand customer behavior.
Parago plans to provide fee-based customer specific or aggregated data analyses
to assist clients in designing future promotions. Parago's solutions also enable
businesses to improve operating efficiencies by allowing them to analyze the
results of their promotions and manage these promotions on a real time basis.
Parago has increased the number of its clients to approximately 160 as
of July 15, 2000, which include leading national retailers, manufacturers and
service providers. For Parago's quarter ended June 30, 2000, Parago reported
record revenues of approximately $4,000,000, a 400% increase over the 1999
second quarter. Parago's gross margins improved to approximately 59% in the
second quarter of 2000 from 46% in the first quarter of 2000 (on a normalized
basis), as Parago expanded its offerings.
Parago has completed several acquisitions since its inception. In
March 1999, Parago acquired 2-Lane Media, Inc., an award-winning
interactive/multimedia communications firm. The principal asset acquired in
this transaction was the technical expertise of the 2-Lane personnel, who,
prior to the acquisition, offered Web site and e-commerce design services for a
diverse client roster. In May 1999, Parago completed its acquisition of FCI
Services, Inc., Forward Communications, Inc. and Forward Freight, Inc.
(collectively, "Forward"), a product rebate and promotional fulfillment
operation that offered its clients solutions for designing, implementing and
fulfilling merchandise and consumer rebate programs. In addition to processing
rebates, Forward handled fulfillment assignments for e-commerce, high
technology and other companies. In August 1999, Parago completed its
acquisition of some of the assets of Broadcast Production Group, Inc. used in
multimedia production and content conversion (to convert traditional media
formats into web-enabled content). In addition, in connection with the
acquisition, Parago retained certain members of Broadcast Production Group's
management team as employees of Parago. In connection with Parago's acquisition
of 2-Lane, we agreed to convert the Parago shares of common stock issued in
connection with the merger into up to 500,000 of our shares at the option of
the 2-Lane shareholders. In addition, pursuant to the terms of the subscription
agreements between Parago and some of its stockholders, we may be required to
issue up to 414,000 shares of our common stock to such stockholders based upon
a conversion price of $3.75 per share. These provisions could have the effect
of diluting our stockholders if the market price of our common stock is above
the effective conversion prices at the time of conversion.
At August 7, 2000, we owned 20,000,000 shares of the common stock of
Parago, representing 45.2% of the outstanding common stock of Parago (or 38.8%
including preferred stock on an as-if-converted basis). As a result, we account
for our ownership interest in Parago using the equity method of accounting.
Since its inception, Parago has incurred net losses and now has a substantial
accumulated deficit, which have had an impact upon and are reflected in our
financial statements. For example, for the quarter ended May 31, 2000, we
recorded an "equity in loss of unconsolidated affiliate" of $1,060,884. We
understand that Parago expects to incur net losses for the foreseeable future,
and, even though our investment in Parago is currently carried at zero and will
not be further reduced, we may record significant losses relating to our Parago
subsidiary as it continues to develop its business services in the future if
increases in Parago equity occur.
Parago filed a registration statement with the Securities and Exchange
Commission relating to an initial public offering of shares of its common stock
in October 1999, but applied to withdraw this registration statement in March
2000. Parago plans to refile a registration statement covering its proposed
initial public offering. We previously announced that we intend to distribute
15% of the shares of Parago common stock that we hold to our stockholders,
subject to compliance with the SEC requirements applicable to the proposed
distribution and upon the expiration of a 180-day lock-up agreement between the
underwriters of the Parago proposed initial public offering and us. If there
are some problems associated with compliance with SEC requirements or state
law, then the distribution of Parago shares may be delayed or may not occur.
There can be no assurance that Parago's initial public offering will be
completed, or that we will otherwise complete the distribution of a portion of
our shares to our stockholders on the proposed terms or at all.
OVERVIEW OF RIVER LOGIC
On May 5, 2000 we completed a previously announced transaction whereby
we acquired a minority interest in River Logic, Inc. (formerly iNetze.com,
Inc.). As part of this transaction we acquired approximately 5.9% of the
outstanding shares of capital stock of River Logic, Inc. from several of its
existing shareholders in exchange for 333,333 shares of our common stock. We
also acquired shares of Series A Convertible Preferred Stock from River Logic
in exchange for the contribution by one of our wholly-owned subsidiaries of the
ESRN Assets, as described below. The acquired shares of River Logic's preferred
stock are convertible into shares of common stock that represent approximately
13.1% of the currently outstanding shares of capital stock of River Logic on a
post conversion basis as of May 5, 2000.
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<PAGE> 34
In July 2000, River Logic closed a $3 million private placement of
shares of its Series B preferred stock to a venture capital firm that
specializes in early stage technology firms that offer B2B Internet solutions
that provide strong value-oriented models for their prospective market-space.
In addition, one of River Logic's resellers, Heads Up! Systems, LLC,
and PriceWaterhouseCoopers, LLC entered into a strategic alliance offering
clients of process- and supply-chain modeling applications reliability in the
use of enterprise modeling tools. New software such as COR Technology(C) by
River Logic, provides business planners and managers with the ability to
identify profit improvement opportunities, design and communicate supply chain
and business process information, and to develop model-based tactical and
strategic plans. The crucial step of model validation - ensuring that these
complex and detailed models accurately and reliably represent business
behaviors and financial results - is vital for instilling confidence by users
and ensuring that models function properly.
Our Chief Executive Officer, Steven B. Solomon, serves on the board of
directors of River Logic.
In connection with our investment in River Logic, we also made two
$300,000 bridge loans to River Logic that together are convertible into 800,000
shares, in the aggregate, of common stock that would represent approximately
3.8% of the currently outstanding capital stock of River Logic on a post
conversion basis as of May 5, 2000. Each of the bridge loans (i) bears interest
at a rate of 12% per annum through its first anniversary and at one percent
above the prime rate per annum thereafter, (ii) is secured by certain assets of
River Logic, (iii) is payable upon our demand and (iv) is prepayable by River
Logic commencing on its third anniversary date. As a result of the transaction,
we owned approximately 19% (22.2% in the event the bridge loans and other
securities are converted in full) of the voting stock of River Logic as of May
5, 2000.
The ESRN Assets consist of the EBSCO School Resource Network (ESRN
Network), an educational network catering to kindergarten through 12th grade
(K-12). The ESRN Network is designed to support school administrators, teachers,
students and parents by providing them with a comprehensive set of tools and
resources targeting their specific needs. The ESRN Network is comprised of
learning applications that integrate EBSCO Industries' database of content
relating to K-12. The ESRN Network was acquired by a wholly-owned subsidiary of
CT Holdings from a subsidiary of EBSCO Industries in connection with this
transaction in exchange for 666,667 shares of CT Holdings' common stock.
We intend to file a resale registration statement relating to the
shares of our common stock issued in connection with this transaction within 90
days of the closing.
As we hold a less than 20% ownership interest in River Logic the
investment has been accounted for under the cost method of accounting. Under
this method, our share of the earnings or losses of River Logic is not included
in the consolidated statements of operations.
River Logic, headquartered in Beverly, Massachusetts, creates and
operates integrated decision support networks for industries such as K-12
Education, Utilities, Forest Products, Healthcare and others. These networks
are designed to leverage the flow and processing of knowledge and information
to provide a decisive competitive advantage. River Logic has several
industry-specific networks in development. Additionally, River Logic develops
and licenses its technologies to key industry partners.
LETTER OF INTENT WITH IDEAVILLAGE
As part of our strategy to fund early stage Internet companies, we
recently entered into a letter of intent with ideavillage.com and its
stockholders relating to a transaction in which we would gain the right to
acquire a substantial minority interest in ideavillage. ideavillage develops
and markets an Internet enabled consumer testing solution that enables
businesses to test market products to consumers in advance of the products'
release, permitting businesses to reduce the likelihood of a product that lacks
consumer interest and to reduce costly inventory returns. In addition to its
proprietary technology, ideavillage has created an inventor portal designed to
permit inventors to access markets for their inventions. ideavillage also
markets and distributes consumer products through retail channels. We currently
anticipate that this transaction will close in September 2000. The letter of
intent provides, among other things, that we will purchase shares of
ideavillage preferred stock convertible into 25% of the outstanding shares of
ideavillage common stock in exchange for options to purchase 750,000 shares of
our common stock at $1.00 per share and $4,500,000 in cash and Parago services
and technology to ideavillage, and the shareholders of ideavillage will grant
us an option to acquire up to an additional 26% of the outstanding common stock
of ideavillage for the next year for $9 million payable in cash or 1.8 million
shares of our common stock valued at $5.00 per share. We will also receive
preemptive rights covering certain future ideavillage equity offerings and
representation on ideavillage's board. There can be no assurance that the
foregoing transaction will close in September 2000 or at all.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED MAY 31, 2000 COMPARED WITH THREE MONTHS ENDED MAY 31, 1999
NET REVENUE
During the three months ended May 31, 2000, the Company had net sales of
$176,849, a decrease of $1,415,636, or 88.9%, over net sales of $1,592,485
during the three months ended May 31, 1999. The Company attributes the sales
decrease primarily to the effect of the deconsolidation of Parago. During the
three months ended May 31, 1999, the Company held a majority interest ownership
in the outstanding shares of Parago and, as a result, reflected the operating
results of Parago within its consolidated statement of operations in accordance
with the consolidated method of accounting. However, as of May 31, 2000, the
Company's ownership interest has decreased to approximately 45% and the Company
is accounting for its subsidiary's results of operations using the equity
method of accounting. Excluding the financial results of Parago in the fiscal
quarter ended May 31, 1999, the sales attributed to the Company's software
products declined from $200,573 for the three months ended May 31, 1999 to
$176,849 for the three months ended May 31, 2000, or a decrease of $23,724, or
11.8%. We attribute the decrease in our software product revenues for the three
months ended May 31, 2000 to our focus on our activities as an Internet
business incubator, as well as the deferral of OEM/system integrator purchases
as a result of year 2000 issues, and the late introduction of our WinShield
Secure PC products (desktop and network versions).
COST OF SALES, EXCLUDING DEPRECIATION AND AMORTIZATION
The costs and expenses incurred in connection with producing the Company's
products were $3,814 during the quarter, a decrease of $934,104, or 99.6%, over
cost of sales of $937,918 for the same period last year. As a percentage of
sales, the Company's cost of sales for the quarter decreased from 58.9% for the
three months ended May 31, 1999 to 2.2% for the three months ended May 31,
2000. The decrease in cost of sales for the current quarter over the same
quarter last year can be attributed to the deconsolidation of the results of
operations of Parago, as the Company is now accounting for its investment under
the equity method of accounting. The actual cost of sales attributed to the
Company's software products decreased from $25,921, or 12.9% of software sales,
for the quarter ended May 31, 1999 to $3,814, or 2.2% of software sales, for
the three months ended May 31, 2000. This decrease was the result of the
Company maintaining an increased supply of its product materials during the
current quarter as compared to the lower supply maintained for the same period
last year, which required the Company to incur additional expenditures to meet
product orders.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended May 31,
2000 were $936,426 as compared to $1,989,466 for the three months ended May 31,
1999, or a decrease of $1,053,040, or 52.9%. Excluding Parago's operating
results, which were reflected in the consolidated statement of operations for
the three months ended May 31, 1999, the Company's selling, general and
administrative expenses decreased $402,796 from $1,339,222 for the three months
ended May 31, 1999 to $936,426 for the three months ended May 31, 2000, or
30.1%. The decrease in our selling, general and administrative expenses for the
three months ended May 31, 2000 resulted primarily from the shift in our
business to an Internet business incubator model and our decreased emphasis on
selling and marketing activities related to our software business. Accordingly,
we have incurred significantly lower costs in advertising, marketing and other
general and administrative activities, as well as reduced employee and
recruiting expenses, which resulted from our reduced headcount.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development costs charged to expense for the quarter ended May 31,
2000, were $112,992 as compared to $303,076 for the same period last year, or a
decrease of $190,084, or 62.7%. Excluding the results of Parago for the three
months ended May 31, 1999, research and development costs related to the
Company's software products were $150,583 resulting in a decrease of $37,591,
or 25.0% in the current fiscal quarter. For the quarters ended May 31, 2000 and
May 31, 1999, we capitalized approximately $102,261 and $130,000, respectively.
The decrease in costs capitalized for the three months ended May 31, 2000
related primarily to a decrease in the level of development work being
performed by outside contract consultants during this quarter when compared to
the same quarter last year. In fiscal 2000, we internally developed our
WinShield Secure PC product
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("Secure PC"), the total security solution for desktops, while we have just
completed upgrading Secure PC to become Office 2000 compatible during the
current fiscal year quarter.
NONRECURRING LITIGATION SETTLEMENT CHARGE
In July 2000, we entered into a settlement term sheet to resolve the disputes
between us and Janssen-Meyers Associates L.P. ("JMA"), pursuant to which we and
JMA agreed to settle the lawsuit for an aggregate of $3 million, in a
combination of $1.5 million in cash and 300,000 shares of common stock with a
guaranteed value of $5 per share as of January, April and October 2001 (with
respect to 100,000 of the shares for each period). The settlement is subject to
execution of definitive settlement documents and approval of the boards of
directors of the companies. As a result, we recorded approximately $1,912,500
as a nonrecurring charge related to the settlement of the litigation. We may be
required to record additional charges (in the amount of the difference between
$1,500,000 and the gross proceeds from the sales of the stock by JMA at the
relevant periods) in the event our shares of common stock do not trade above $5
per share for five consecutive trading days during the guarantee periods.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense decreased $222,859, or 42.9%, to $296,844
from $519,703 for the three months ended May 31, 2000 and 1999, respectively.
This decrease resulted primarily from the depreciation and amortization expense
associated with Parago included in the results of operations for the three
months ended May 31, 1999. Excluding the effect of Parago's depreciation and
amortization expense for the three months ended May 31, 1999, the Company's
depreciation and amortization expense decreased by $25,549, or 7.9%, to the
current quarter. During the last quarter of the previous fiscal year, the
Company wrote-off approximately $1,400,000 of purchased software costs. This
reduction in depreciation and amortization expense was offset by the
commencement of amortization on certain capitalized product development costs.
OTHER INCOME (EXPENSE)
Interest expense for the three months ended May 31, 2000 and May 31, 1999 was
$909 and $11,478, respectively. This decrease in expense resulted primarily
from the fact that we had less interest bearing debt during this current fiscal
quarter than we did in the same quarter last year. Equity in loss of
unconsolidated affiliate was $1,060,884 for the three months ended May 31,
2000, resulting primarily from Parago allocating a considerable amount of
resources to development and sales of its business-to-business services. We
expect that these losses would continue to be significant for at least the
foreseeable future as our Internet subsidiary continues to develop its business
services.
Included in other income (expense) for the three months ended May 31, 1999 is a
charge to earnings of $25,000 reserved in connection with the settlement of a
number of lawsuits.
Other income of $28,276 during the quarter ended May 31, 1999 primarily
represents interest income received on interest bearing deposits during the
quarter.
OPERATING LOSS BEFORE MINORITY INTEREST
For the three months ended May 31, 1999 the Company reported a loss before
minority interest of $2,165,880, compared to a loss of $4,147,520 for the three
months ended May 31, 2000.
NET LOSS
As a result of the aforementioned, the Company, for the three months ended May
31, 2000, reported a net loss of $4,147,520 compared to a net loss of
approximately $1,882,869 for the same period last year.
DIVIDENDS ON PREFERRED STOCK
For the three months ended May 31, 1999, preferred stock dividends consisted
primarily of dividends accrued on Series D preferred stock. In June 1999, the
Company converted the $2,000,000 of Series D preferred stock, plus dividends in
arrears of approximately $238,000, into 2,081,937 shares of the Company's
common stock.
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LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents at May 31, 2000 were $39,533.
Cash flows used in operations were $1,021,377 for the three months ended May
31, 2000, as compared to $3,022,261 for the three months ended May 31, 1999.
Excluding the cash used in operations by Parago for the three months ended May
31, 1999, which totaled approximately $999,000, the decrease results primarily
from an increase in our accrued liabilities resulting primarily from our
nonrecurring legal settlement charge, offset by an increase in the net loss
funded for the three months ended May 31, 2000, which includes the $1,912,500
nonrecurring charge in addition to $1,060,884, which represents our portion of
equity losses in Parago. Also offsetting this decrease in cash used for
operations is a slight increase resulting from a reduction in our accounts
receivable turnover for the three months ended May 31, 2000.
The Company did not use cash for investing activities for the three months
ended May 31, 2000 as compared to cash used of $5,208,586 for the same period
last fiscal year. The change results from the inclusion of Parago's investing
activities related to acquisitions incurred during the three months ended May
31, 1999, which totaled $5,057,280, as reported under the consolidated method
of accounting. At May 31, 1999, the Company held a majority-interest ownership
in the outstanding shares of Parago and, as a result, reported consolidated
results of operations. However, as of May 31, 2000, the Company's ownership
interest has decreased to approximately 45% and the Company is accounting for
Parago's results of operations using the equity method of accounting.
Cash flows provided by financing activities were $353,498 for the three months
ended May 31, 2000, as compared to $12,479,488 for the three months ended May
31, 1999. The decrease primarily results from the inclusion of $11,642,502 of
proceeds raised by our subsidiary, Parago, for the sale of its common stock
during the three months ended May 31, 1999. This decrease was also due to the
fact that during the three months ended May 31, 1999 we received $931,328 from
the exercise of stock options and warrants, net of related underwriting fees.
In the quarter ended May 31, 2000, our primary source of cash provided by
financing activities resulted from $350,000 received from the issuance of a
note payable to the Company's Chief Executive Officer and $36,400 from the
issuance of common stock through the exercise of stock options and warrants.
As a result of the aforementioned factors, cash and cash equivalents decreased
by $667,879 for the three months ended May 31, 2000, versus an increase of
$4,248,641 for the same period last fiscal year.
Since inception, we have incurred losses, and at May 31, 2000, we had an
accumulated deficit of $48,734,245 and our current liabilities exceed our
current assets by $2,500,838. Our ultimate success in fully implementing our
new strategy, continuing our existing business line and meeting our cash flow
obligations is dependent on our ability to raise additional capital, as to
which there can be no assurances. While the Company currently believes that it
has the ability to obtain additional equity or debt financing, we have received
a commitment from our President to fund up to $1,500,000 of our expected
operating cash flow needs through March 1, 2001 in the event the Company's cash
flows from operating, investing and financing activities are insufficient to
meet the expected operating obligations of the Company as they come due. We
have used approximately $400,000 of this commitment through July 17,2000. We
also plan to sell stock in private equity financings during fiscal year 2001 to
cover cash flow deficiencies not covered by the commitment by our President and
to repay amounts advanced by our President. We expect that our equity investee,
Parago, will incur losses in the foreseeable future as it continues to develop
and upgrade its technology and infrastructure, develop and expand its product
and service offerings, establish and sustain relationships with manufacturers,
retailers and service organizations.
We currently fund our operations through existing cash reserves, cash from
operations and issuances of securities. In the event that cash from operations
and other available funds prove to be insufficient to fund our anticipated
operations, we will be required to seek additional financing. There can be no
assurance that, if additional financing is required, it will be available on
acceptable terms, or at all. Additional financing may involve substantial
dilution to the interests of our then-current shareholders.
YEAR ENDED FEBRUARY 29, 2000 AS COMPARED WITH YEAR ENDED FEBRUARY 28, 1999
NET REVENUE
During the year ended February 29, 2000, we had net sales of $1,292,250, a
decrease of $3,147,358, or 70.9%, compared to net sales of $4,439,608 for the
year ended February 28, 1999. We attribute the decrease in our software product
revenues for fiscal
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2000 to our focus on our activities as an Internet business incubator, as well
as the deferral of OEM/system integrator purchases as a result of year 2000
issues, and the late introduction of our WinShield Secure PC products (desktop
and network versions). In addition, during fiscal 1999, we had one large system
integrator sale that accounted for approximately $1,200,000, or 27% of our
revenues.
COST OF SALES
The costs and expenses incurred in connection with producing our products for
the year ended February 29, 2000 were $61,564 compared to $190,461 for the year
ended February 28, 1999, or a decrease of $128,897, or 67.7%. As a percentage
of sales, cost of sales for the years ended February 29, 2000 and February 28,
1999 were 4.8% and 4.3%, respectively. The increase in our cost of sales on a
percentage basis for the year ended February 29, 2000 over last year can be
attributed to the large sale in fiscal 1999 to a system integrator, which had a
higher margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the year ended February 29,
2000 were $4,334,755 as compared to $5,817,188 for the year ended February 29,
1999, or a decrease of $1,482,433, or 25.5%. The decrease in our selling,
general and administrative expenses for fiscal year 2000 resulted primarily
from the shift in our business to an Internet business incubator model and our
decreased emphasis on selling and marketing activities related to our software
business. Accordingly, we have incurred significantly lower costs in
advertising, marketing and other general and administrative activities, as well
as reduced employee and recruiting expenses which resulted from our reduced
headcount, and we expect to continue to decrease these costs over the first two
quarters of fiscal year 2001.
PROVISION FOR UNCOLLECTIBLE RECEIVABLES
For the year ended February 28, 1999, the provision for uncollectible
receivables totaled $1,231,092. In fiscal 1999, the provision was primarily
established to reserve part of the international sales made, given the
international economic difficulties that were being experienced in fiscal 1999.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense for the year ended February 29, 2000 was
$1,361,556, compared to $1,569,519 for the year ended February 29, 1999, or a
decrease of $207,963, or 13.3%. This decrease resulted from the write-off of
approximately $1,400,000 of software costs in the fourth quarter of fiscal year
1999. This reduction in depreciation and amortization expense was offset by the
commencement of amortization on certain capitalized product development costs
relating to products that became available for sale during the current fiscal
year.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development costs charged to expense for the year ended February
29, 2000, were $392,315 as compared to $485,275 for the year ended February 29,
1999, or a decrease of $92,960, or 19.2%. For the years ended February 29, 2000
and February 28, 1999, we capitalized approximately $649,000 and $882,000,
respectively. The decrease in costs capitalized for the year ended February 29,
2000 related primarily to a decrease in the level of development work being
performed by outside contract consultants during this fiscal year when compared
to last year. In fiscal 1999, we spent considerable resources in upgrading our
products to be both Windows 98 and NT compliant. In fiscal 2000, we internally
developed our WinShield Secure PC product ("Secure PC"), the total security
solution for desktops. We launched the desktop version of Secure PC in August
1999, originally scheduled to be launched in May 1999. The delay was caused by
product enhancements determined to be beneficial to the product after the
product's initial alpha and beta testing. The network version of this product
was launched in December 1999 (originally scheduled for release in October
1999).
WRITE-OFF OF PURCHASED AND CAPITALIZED SOFTWARE COSTS
In fiscal year 2000, purchased and capitalized software costs were written down
by $625,336 as compared to $1,422,697 for fiscal 1999, resulting in a decrease
of $797,361 or 56.0%. These write-offs were recognized as a result of the net
book value of some of our products exceeding the net realizable value
associated with those same products.
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OTHER INCOME (EXPENSE)
Interest expense for the years ended February 29, 2000 and February 28, 1999
was $53,340 and $141,806, respectively. This decrease in expense resulted
primarily from the fact that we had less interest bearing debt during this
fiscal year than we did last year. Equity in loss of unconsolidated affiliate
was $18,122,874 for the year ended February 29, 2000, resulting primarily from
Parago allocating a considerable amount of resources to its marketing and
advertising programs aimed at building name/brand awareness for its web site
and business-to-business services. We expect that these losses would continue
to be significant for at least the foreseeable future as our Internet
subsidiary continues to develop its business services.
Included in other income (expense) for fiscal year 1999 is a charge to earnings
of $822,000 incurred in connection with the settlement of a number of lawsuits.
The major portion of this expense related to the settlement of three lawsuits.
OPERATING LOSS BEFORE EXTRAORDINARY ITEM
As a result of the foregoing, for the year ended February 29, 2000, we reported
a net loss before extraordinary items of $23,656,939 (which included the
$18,122,874 related to Parago as referred to above), compared to a net loss of
$7,209,498 for last year.
EXTRAORDINARY ITEM - FORGIVENESS OF DEBT
During fiscal year 1999, the Company recognized gains on the settlement of
debts of $459,592. The gains resulted primarily from the restructuring of a
note payable and the settlement of accrued obligations. In connection with the
settlement of the note payable, the holder agreed to reduce the amount of the
note and accrued interest payable thereon by $520,816. In exchange, the Company
agreed to a shorter maturity and the issuance of 250,000 shares of restricted
stock to the holder (valued at $92,500 as of the date of the transaction). The
value of the stock was treated as a reduction in the gain and the transaction
resulted in a net gain of approximately $428,000. In connection with the
settlement of accrued obligations, the Company settled approximately $96,000 in
obligations for approximately $65,000.
NET LOSS
As a result of these factors, for the year ended February 29, 2000, we reported
a net loss of $23,656,939 and $6,749,906 for the year ended February 29, 1999.
DIVIDENDS ON PREFERRED STOCK
Preferred stock dividends consisted primarily of dividends accrued on Series D
preferred stock. In June 1999, we converted $2,000,000 of Series D preferred
stock, plus dividends in arrears of approximately $238,000, into 2,081,937
shares of our common stock.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents at February 29, 2000 were $707,412.
Cash flows used in operations were $3,365,629 for the year ended February 29,
2000, as compared to $5,209,211 for the year ended February 29, 1999. This
decrease results primarily from a decrease in the net loss funded during fiscal
year 2000, as compared to fiscal year 1999, in addition to an increase in our
accounts receivable turnover. The decrease in cash flows for operating
activities was also offset by an increase in our accounts payable turnover.
Cash used in investing activities was $1,387,466 for the year ended February
29, 2000, as compared to $197,095 for last fiscal year. Of the $1,190,371
difference in cash flows from the prior fiscal year, $1,176,292 represents the
effect of the deconsolidation of Parago. In fiscal 1999, the Company owned
approximately 63% of the outstanding shares of Parago and, as a result,
reported consolidated results of operations. However, as of February 29, 2000,
the Company's ownership interest has decreased to approximately 45% and the
Company is accounting for its subsidiary's results of operations using the
equity method of accounting. In addition, during fiscal year 2000 the Company
made a capital contribution of approximately $140,000 to Parago.
Cash flows provided by financing activities were $2,074,138 for the year ended
February 29, 2000, as compared to $8,784,120 for the year ended February 29,
1999. This decrease was due to the fact that in fiscal year 1999 we received
$1,936,904 from the exercise of stock options and warrants, $2,253,642 from the
sale of preferred stock and $3,735,000 from the sale of common
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stock. In fiscal year 2000, our primary source of cash provided by financing
activities resulted from $1,872,808 received from the exercise of stock options
and warrants and $500,000 from the sale of common stock.
As a result of the aforementioned factors, cash and cash equivalents decreased
by $2,678,957 for the year ended February 29, 2000, versus an increase of
approximately $3,377,814 for last fiscal year.
Unless software sales increase, we may need to seek additional capital to fund
our Citadel Technology operations for at least the next 12 months. Moreover, we
will need additional capital resources to implement our new B2B incubation
business model. While we have been successful in the past in raising additional
capital when needed, there can be no assurances that we will be successful in
the future, or if successful, that capital will be available on acceptable
terms or will not have a dilutive effect on existing shareholders. While the
Company currently believes that it has the ability to obtain additional equity
or debt financing, we have received a commitment from our President to fund up
to $1,500,000 of our expected operating cash flow needs, if any, through March
1, 2001 in the event the Company's cash flows from operating, investing and
financing activities are insufficient to meet the expected operating
obligations of the Company as they come due.
YEAR 2000 COMPLIANCE
Even though the date is now past January 1, 2000, and we experienced no
immediate adverse impact from the transition to the year 2000, we cannot
provide any assurance that our key partners, suppliers or customers have not
been affected in a manner that is not yet apparent. In addition, some computer
programs which were date sensitive to the year 2000 may not have been
programmed to process the year 2000 as a leap year, and any negative
consequential effects remain unknown. As a result, we will continue to monitor
our year 2000 compliance and the year 2000 compliance of our key partners,
suppliers and customers. The financial impact of Year 2000 compliance has not
been, and is not expected to be, material to our financial position or results
of operations in any given year.
INFLATION
Inflation did not have a material effect on our results during the periods
discussed.
OUR BUSINESS
OVERVIEW OF CT HOLDINGS
CT Holdings, Inc. is an incubator of Internet service companies that
provides early stage ventures with a single source of management capital, as
well as consulting on operations, marketing and strategic planning. Our
incubator model is designed to enable the start up companies with whom we
partner to become online market leaders in their industries.
We began our Internet activities in 1999 with the formation of Parago,
an application service provider (ASP) and Internet based business process
outsourcer (BPO) that provides an online suite of offerings designed to
increase sales, reduce costs, retain customers and increase client
profitability. These services include online promotional management, online
rebate processing, proactive email, online surveys, online multimedia product
demonstrations and manuals, and online customer data warehousing, analysis and
reporting. Parago's comprehensive integrated suite of outsourced customer care
solutions are marketed across multiple industry lines.
Parago has increased the number of its clients to approximately 160 as
of July 15, 2000, which include leading national retailers, manufacturers and
service providers. For Parago's quarter ended June 30, 2000, Parago reported
record revenues of approximately $4,000,000, a 400% increase over the 1999
second quarter. Parago's gross margins improved to approximately 59% in the
second quarter of 2000 from 46% in the first quarter of 2000 (on a normalized
basis), as Parago expanded its offerings.
In March 2000, Parago announced that it had received $36.5 million in
new private equity financing from four investors led by THLee.Putnam Internet
Partners. Co-investors were Dain Rauscher Wessels Investors LLC, Watershed
Capital and Seaboard Ventures. The investments will be used to expand Parago's
proprietary Internet-based solutions, which optimize and redefine customer care
processes. We continue to hold 20 million shares of Parago common stock.
In May 2000 we completed a previously announced transaction whereby we
acquired a minority interest in River Logic, Inc. (formerly iNetze.com, Inc.).
River Logic creates and operates integrated decision support networks for
industries such as
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K-12 Education, Utilities, Forest Products, Healthcare and others. These
networks are designed to leverage the flow and processing of knowledge and
information to provide a decisive competitive advantage. River Logic has several
industry-specific networks in development. Additionally, River Logic develops
and licenses its technologies to key industry partners. As part of this
transaction we acquired approximately 5.9% of the outstanding shares of capital
stock of River Logic, Inc. from several of its existing shareholders in exchange
for 333,333 shares of our common stock. We also acquired shares of Series A
Convertible Preferred Stock from River Logic in exchange for the contribution by
one of our wholly-owned subsidiaries of the ESRN Assets, as described below. The
acquired shares of River Logic's preferred stock are convertible into shares of
common stock that represent approximately 13.1% of the currently outstanding
shares of capital stock of River Logic on a post conversion basis as of May 5,
2000. In July 2000, River Logic closed a $3 million private placement of shares
of its Series B preferred stock to a venture capital firm that specializes in
early stage technology firms that offer B2B Internet solutions that provide
strong value-oriented models for their prospective market-space.
As part of our strategy to fund early stage Internet companies, we
recently entered into a letter of intent with ideavillage.com and its
stockholders relating to a transaction in which we would gain the right to
acquire a substantial minority interest in ideavillage. ideavillage develops
and markets an Internet enabled consumer testing solution that enables
businesses to test market products to consumers in advance of the products'
release, permitting businesses to reduce the likelihood of a product that lacks
consumer interest and to reduce costly inventory returns. In addition to its
proprietary technology, ideavillage has created an inventor portal designed to
permit inventors to access markets for their inventions. ideavillage also
markets and distributes consumer products through retail channels. We currently
anticipate that this transaction will close in September 2000. The letter of
intent provides, among other things, that we will purchase shares of
ideavillage preferred stock convertible into 25% of the outstanding shares of
ideavillage common stock in exchange for options to purchase 750,000 shares of
our common stock at $1.00 per share and $4,500,000 in cash and Parago services
and technology to ideavillage, and the shareholders of ideavillage will grant
us an option to acquire up to an additional 26% of the outstanding common stock
of ideavillage for the next year for $9 million payable in cash or 1.8 million
shares of our common stock valued at $5.00 per share. We will also receive
preemptive rights covering certain future ideavillage equity offerings and
representation on ideavillage's board. There can be no assurance that the
foregoing transaction will close in September 2000 or at all.
In addition to our incubation business, we continue to operate our
"Citadel Technology" security software line, which is focused on developing and
marketing security and administration software products for both computer
networks and desktop personal computers. Our integrated, easy-to-use software
products enable network administrators to control access to network resources,
automate routine network maintenance tasks, and automatically shutdown and
restart servers and desktop PCs in the event of a network crash. These software
products also enable individual PC users to control access to their desktops,
secure files, and index and retrieve files stored in a variety of storage
media. Our Citadel Technology software products are designed to reduce the
direct and indirect costs of computer network operations, protect proprietary
networks and information, and otherwise improve overall office productivity.
Our core focus will be on our incubation services, and we are
currently analyzing various strategic alternatives for our Citadel Technology
security software business, including new strategic alliances with third
parties, new applications of the technology, new third party licensing or joint
venture arrangements or the sale of the business line. As a result, management
believes that the results of operations for our Citadel Technology security
software business will continue to be adversely affected in the future by our
core focus on incubation services.
OVERVIEW OF PARAGO
Parago provides Internet-based solutions that automate customer
relationship management. Parago's solutions enable both brick-and-mortar and
e-commerce businesses to more efficiently develop, retain and extend customer
relationships and improve sales, marketing and customer retention. Parago's
Internet-enabled enterprise solutions include PromoCenter, InfoCenter and
KnowledgeCenter. By automating customer care activities such as online and
traditional rebate processing and promotions, Parago allows its clients to
enhance customer retention, increase revenue opportunities and improve
operating efficiencies. Parago's Internet-based solutions seek to transform
promotional management and product information from customer service
liabilities to retention and extension opportunities.
Parago's online solutions provide a new vehicle for its clients to
conduct targeted marketing to customers with whom they have traditionally lost
contact subsequent to the point of purchase. Parago is developing proprietary
software that will provide an online mechanism for customers, many of whom have
immediate purchasing power in the form of promotional proceeds, to apply those
proceeds towards the purchase of additional products or services. Parago's
solutions also capture valuable customer information that can help its clients
better understand customer behavior. Parago plans to provide fee-based customer
specific or
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aggregated data analyses to assist clients in designing future promotions.
Parago's solutions also enable businesses to improve operating efficiencies by
allowing them to analyze the results of their promotions and manage these
promotions on a real time basis.
Parago markets its solutions to retailers, manufacturers and service
providers across multiple industries. Parago currently provides its online
solutions to approximately 130 clients.
Parago is committed to providing exemplary service to each of its
clients. As part of this commitment, Parago is pursuing COPC Certification
(www.copc.com), the industry standard for customer service excellence in the
call center and fulfillment industry. In addition, Parago has applied for three
patents with the United States Patent and Trademark Office involving the
technical innovations of Parago's Promotion Tracking System (PTSystem) and the
proprietary promotion technology Parago has developed.
PromoCenter. Parago's PromoCenter offers its business clients the
opportunity to increase sales, strengthen brand loyalty and increase customer
retention via a fully functional web-based promotion center, branded with the
"look and feel" of the clients' own web sites and "powered by Parago". To the
clients' end-customers, the PromoCenter will be a part of the clients' web
sites, while behind the scenes, it will be completely developed, maintained and
serviced by Parago.
PromoCenter is capable of supporting multiple promotion styles and can
scale with clients' business needs. It supports continuous customer interaction
through online promotion entry and status check, and targeted email campaigns.
These solutions strengthen brand equity and distinguish clients' promotional
offerings from competitors'. Moreover, providing these services demonstrates to
clients' customer bases their commitment to the highest levels of quality with
respect to customer experience.
PromoCenter is powered by Parago's Promotion Tracking System
(PTSystem). The PTSystem enables Parago to support a suite of promotion
offerings throughout the lifecycle of clients' products, from pre-purchase to
post-purchase.
The PTSystem can be used to help clients shape their promotion
strategies by customizing the information captured from end-customers. This
data can then be analyzed to determine the effectiveness of a specific
promotion. This continuous evaluation streamlines promotional strategy and
enables clients to implement more efficient and effective programs. The
PTSystem's design allows for quick and customized implementation of the
PromoCenter solution, allowing clients' promotional ideas to work at the speed
of Internet business.
Parago's promotional offerings extend beyond traditional rebate
processing to create new lines of revenue for its business clients. Currently,
a common promotional strategy is to offer customers a rebate on a specific
product purchase. Even though many manufacturers' rebate processing budgets
match or exceed their advertising budgets, the return on investment from this
promotional method is often limited. The standard rebate process concludes when
businesses mail the rebate check to a customer, with no ability to recapture
those dollars. Parago's patent-pending process allows clients to recapture
promotion expenses and encourage their customers to apply those dollars to new
products and services, creating new revenue streams.
Benefits of Parago's PromoCenter include:
o Increase clients' sales and bottom line performance
o Increase customer retention
o Strengthen brand equity
o Convert promotion cost centers into profit centers
InfoCenter. Clients are often overwhelmed with the challenge of
getting timely and relevant information to their customers about new products
or advancements. Parago will offer an online solution. Parago's InfoCenter
combines its video and audio production studio, extensive expertise in static
and animated content development, a substantial investment in technology and
the power of the Internet to create state-of-the-art, comprehensive product
information mega-centers. This leading edge solution represents a higher level
of product information management.
Although InfoCenter is branded with the "look and feel" of clients'
own web sites, behind the scenes it will be developed, hosted, maintained and
serviced by Parago. This extension of clients' web sites will strengthen their
brand and provide their
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customers with innovative products and services, resulting in increased customer
satisfaction, retention and loyalty to clients' businesses.
The InfoCenter solution contains a host of modules designed to serve
as the optimal product information and support package for clients' customers.
This robust platform will allow clients' customers to quickly retrieve
multimedia product specific information, configuration assistance, online
installation help, lost user manuals and other important product support
services. InfoCenter provides clients' customers with product information,
throughout the lifecycle of clients' products, from pre-launch demonstrations
to new product cross sales opportunities.
InfoCenter has been designed to provide the following tangible and
immediate bottom-line benefits to clients' organizations:
o Increase product sales
o Increase profit margin
o Increase customer retention
o Reduce product returns
o Reduce product support expenses
o Strengthen brand equity
KnowledgeCenter. Parago's KnowledgeCenter is a robust data management
solution that is designed to provide clients with a wealth of previously
unexplored customer data. With a substantial investment in hardware and
software, Parago has built a solid, scalable, world-class data management
solution. Parago offers KnowledgeCenter to clients who find their information
systems littered with mountains of unexplored customer data, as well as to
clients using Parago's PromoCenter and/or InfoCenter solutions. KnowledgeCenter
and Parago's team of data management experts will help clients effortlessly
turn their gigabytes of useless data into a wealth of information about the
clients' customers. KnowledgeCenter can aggregate and analyze the following
types of data:
o Promotional data gathered through PromoCenter
o Product information gathered through InfoCenter
o Data from other sources
o Any combination of the above
KnowledgeCenter turns clients' data into value-added information that will
enhance sales and marketing efforts, improve strategic analysis, support
business planning and much more. This information is presented in a user
friendly format via a dynamic, easy-to-use interface for viewing, analyzing,
exporting data, and printing reports or charts right on clients' desktops.
KnowledgeCenter empowers clients to interact with their customer data, enabling
them to better understand their customers and their customers' buying trends.
Clients can "drill down" for more information, reveal new data relationships
with pivot tables, export data and print professional quality charts, tables,
and reports from a familiar web browser interface. Additionally, Parago's team
of data management experts offers consulting services to help clients get the
most valuable information out of their data.
KnowledgeCenter offers various levels of information access to meet the
different needs that drive clients' organizations. For example:
o Managers can utilize predefined Performance Tracking and Business
Intelligence categories for fast insight into promotion performance
and customer behavior;
o Executives can gather at-a-glance information, graphically presented in
Executive Snapshots; and
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o Business analysts can employ the full power of online analytical
processing (OLAP) to get the most business value from every byte of
data collected.
Interactive Customer Care. Interactive Customer Care is the anchor in
Parago's philosophy of providing customer satisfaction through the use of
technology. The Parago Customer Service Team supports customers through five
individual interfaces to facilitate access for all customers. Parago recognizes
that its clients' highest priority is their customer base and Parago has
invested heavily to provide world-class customer care. In its continuing effort
to offer unsurpassed customer response, Parago is constantly reviewing new
channels to support customers. Listed below are Parago's current support
mediums:
Live Phone Support. Parago's world-class Customer Service Team is
trained to respond to customer calls with client specific scripts. This allows
clients to control the entire customer experience including interaction with the
Parago customer service representatives. By utilizing scripts, Parago ensures
consistency in customer response across all of the clients' promotions. The
Customer Service Team has drawn on its service background to compile an outline
of suggested responses that can be custom tailored to fit the clients' specific
marketing needs. In addition to the monthly training programs, each of the
customer service representatives undergoes a live monitoring process weekly,
whereby their customer calls are monitored at random to ensure quality and
service.
Interactive Voice Response (IVR) Phone Support. In addition to Live
Phone Support, Parago offers IVR technology to permit customers to receive
automated information 24 hours a day. This application offers customers a
specific menu of options, again fully scripted by the client and the Customer
Service Team. IVR gives customers the ability to check the status of their
promotions at their convenience, in real-time, over the phone, 24 hours a day, 7
days a week. For advanced questions, the IVR application rolls customers
directly over to Live Phone Support for personal assistance.
Email and Fax Support. Customer Service offers unique email addresses
tied directly to a client to provide targeted email support. These emails are
answered by the Customer Service Team, which has complete access to the PTSystem
and is able to research any questions or issues. Additionally, customer can fax
their questions, comments and suggestions 24 hours a day.
Online Chats. The Parago Customer Service Team will be adding Online
Chat as a support channel. Online Chat employs the Internet to provide live
interaction with Parago's customer representatives. This service permits online
users to ask questions or request information in real-time. Parago expects this
to become one of the most utilized support methods as it provides immediate
online gratification.
Online Customer Status Checking for Promotions. In an industry first,
Parago leverages the power of the Internet by allowing customers to check the
status of their promotion online, 24 hours a day. Online Status Checking allows
customers to track their promotion as it progresses through each step of the
process. The web interface is tied directly into Parago's PTSystem, ensuring
accurate and timely information. By empowering the customer to view their status
online, Parago decreases its clients' cost for live-person support while
enhancing the overall customer experience.
OVERVIEW OF RIVER LOGIC
On May 5, 2000 we completed a previously announced transaction whereby
we acquired a minority interest in River Logic, Inc. (formerly iNetze.com,
Inc.). As part of this transaction we acquired approximately 5.9% of the
outstanding shares of capital stock of River Logic, Inc. from several of its
existing shareholders in exchange for 333,333 shares of our common stock. We
also acquired shares of Series A Convertible Preferred Stock from River Logic in
exchange for the contribution by one of our wholly-owned subsidiaries of the
ESRN Assets, as described below. The acquired shares of River Logic's preferred
stock are convertible into shares of common stock that represent approximately
13.1% of the currently outstanding shares of capital stock of River Logic on a
post conversion basis as of May 5, 2000.
In connection with this transaction, we also made two $300,000 bridge
loans to River Logic that together are convertible into 800,000 shares, in the
aggregate, of common stock that would represent approximately 3.8% of the
currently outstanding capital stock of River Logic on a post conversion basis as
of May 5, 2000. Each of the bridge loans (i) bears interest at a rate of 12% per
annum through its first anniversary and at one percent above the prime rate per
annum thereafter, (ii) is secured by certain assets of River Logic, (iii) is
payable upon the Company's demand and (iv) is prepayable by River Logic
commencing on its third anniversary date. As a result of the transaction, the
Company owns approximately 19% (22.2% in the event the bridge loans and other
securities are converted in full) of the voting stock of River Logic.
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The ESRN Assets consist of the EBSCO School Resource Network (ESRN
Network), an educational network catering to kindergarten through 12th grade
(K-12). The ESRN Network is designed to support school administrators, teachers,
students and parents by providing them with a comprehensive set of tools and
resources targeting their specific needs. The ESRN Network is comprised of
learning applications that integrate EBSCO Industries' database of content
relating to K-12. The ESRN Network was acquired by a wholly-owned subsidiary of
the Company from a subsidiary of EBSCO Industries in connection with this
transaction in exchange for 666,667 shares of the Company's common stock.
We intend to file a resale registration statement relating to the
shares of our common stock issued in connection with this transaction within 90
days of the closing.
River Logic, headquartered in Beverly, Massachusetts, creates and
operates integrated decision support networks for industries such as K-12
Education, Utilities, Forest Products, Healthcare and others. These networks are
designed to leverage the flow and processing of knowledge and information to
provide a decisive competitive advantage. River Logic has several
industry-specific networks in development. Additionally, River Logic develops
and licenses its technologies to key industry partners.
OVERVIEW OF IDEAVILLAGE
As part of our strategy to fund early stage Internet companies, we
recently entered into a letter of intent with ideavillage.com and its
stockholders relating to a transaction in which we would gain the right to
acquire a substantial minority interest in ideavillage. ideavillage develops and
markets an Internet enabled consumer testing solution that enables businesses to
test market products to consumers in advance of the products' release,
permitting businesses to reduce the likelihood of a product that lacks consumer
interest and to reduce costly inventory returns. In addition to its proprietary
technology, ideavillage has created an inventor portal designed to permit
inventors to access markets for their inventions. ideavillage also markets and
distributes consumer products through retail channels. We currently anticipate
that this transaction will close in September 2000. The letter of intent
provides, among other things, that we will purchase shares of ideavillage
preferred stock convertible into 25% of the outstanding shares of ideavillage
common stock in exchange for options to purchase 750,000 shares of our common
stock at $1.00 per share and $4,500,000 in cash and Parago services and
technology to ideavillage, and the shareholders of ideavillage will grant us an
option to acquire up to an additional 26% of the outstanding common stock of
ideavillage for the next year for $9 million payable in cash or 1.8 million
shares of our common stock valued at $5.00 per share. We will also receive
preemptive rights covering certain future ideavillage equity offerings and
representation on ideavillage's board. There can be no assurance that the
foregoing transaction will close in September 2000 or at all.
ideavillage, headquartered in New Jersey, was launched in August 1999 to take
new and innovative product ideas from concept to mass retail shelves at
Internet speed. In a "clicks and mortar" process, ideavillage's total solution
integrates online product evaluation, direct-response television (DRTV), and
in-store media into a comprehensive innovative process that selects and markets
only the strongest products. We believe that retail stores, etailers and
manufacturers will come to rely on ideavillage's offering as the surest,
simplest way to confidently add new and tested products to their offerings.
ideavillage seeks to re-engineer and automate the broken process of launching
quality new innovative products to market. ideavillage intends to offer its
solutions which will allow companies to implement the results of the online
product evaluation process. ideavillage also provides an innovative new
Internet enabled entrepreneur portal designed to help innovators to develop and
market their new products in a joint venture with ideavillage.
OUR CITADEL TECHNOLOGY BUSINESS LINE
INDUSTRY BACKGROUND RELATING TO OUR CITADEL TECHNOLOGY BUSINESS LINE
Network Security and Administration. Largely as a result of the
increasing power, ease of use, and low cost of PCs, many businesses and other
organizations have shifted from a centralized mainframe computer platform,
usually procured from a single vendor, to a distributed multiple-PC networked
platform, the elements of which are procured from a variety of vendors. These
organizations have invested heavily in client-server networks, intranets, and
other distributed computing networks to realize the cost and productivity
benefits of sharing applications, files, data, and printers and other
peripherals among PC users across a work group, department or entire enterprise.
As a result of the migration of mainframe applications to network servers,
mission critical functions are increasingly performed over such distributed
networks. These functions include e-mail; electronic funds transfer; reservation
entry for airlines, hotels and rental car companies; and telemarketing and order
entry.
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The use of complex, heterogeneous distributed networks linking
multiple host servers and client PCs creates substantial risk. Unauthorized
interception, alteration, and theft of proprietary information, as well as
electronic vandalism or terrorism aimed at disrupting network operations, can
have major adverse effects on the organizations that own, operate, and/or use
those distributed networks. This risk grows every day because of the deployment
of more capable PCs, growth in the number of network access points,
enhancements in the ability of different types of computers to communicate with
one another, and expansion in the number of public and private communications
networks used to support distributed computing environments. As a result of
these developments, protecting distributed networks and the information
transmitted over those networks is an increasingly important and difficult
task.
Another challenge facing organizations that depend on distributed
computing networks is network administration. In many cases, because of
budgetary or other constraints, organizations are hard pressed to address the
network administration needs that arise as their networks grow in size and
complexity. Some organizations outsource some or all network administration
tasks to a service bureau or VAR. Some smaller organizations have no formally
trained network administrator available on a daily basis. Organizations without
a substantial (and usually expensive) in-house network administration effort
are vulnerable to network disruptions. Such disruptions can reduce top-line
revenue by preventing the entry of order information and delaying transaction
processing, reducing internal productivity by idling network users, alienating
customers by interfering with customer service functions, and increasing
overall workplace tension.
PC Security and Administration. Even in a distributed computing
environment, many users prefer to maintain all or a substantial portion of
their business, personal and other important files on their desktop hard drive
or other desktop storage media like diskettes and Zip drives. Desktop computer
storage continues to grow and new systems provide on average more than 5 GB of
storage for each user's data, e-mail, and Internet downloads. Storage of large
amounts of information at the desktop level increases the risk of security
breaches by inviting unauthorized access, viewing and copying of confidential
information, and access to network information during the many times a user is
away from his or her desk, including lunch breaks or meetings. Moreover,
organizations are moving to expand sharing of desktop PCs by employees,
particularly in functions that require 24-hour service. Shared PCs are found
often in service bureaus, call center operations, government and education
agencies, libraries, and the home. Protecting an individual user's data and PC
settings and configuration is critical, especially in a shared PC environment.
OUR CITADEL TECHNOLOGY STRATEGY
Our core focus will be on our incubation services, and we are
currently analyzing various strategic alternatives for our Citadel Technology
security software business, including new strategic alliances with third
parties, new applications of the technology, new third party licensing or joint
venture arrangements or the sale of the business. Management has reduced
operating expenses related to the software business while we implement our new
strategic focus. As a result, management believes that our results of
operations for our Citadel Technology security software business will continue
to be adversely affected in the future.
OUR CITADEL TECHNOLOGY PRODUCTS
WinShield. WinShield is designed to address the problems that arise
when users share desktop PCs in work environments such as schools, libraries,
government offices, and resource centers such as Kinkos and AlphaGraphics. The
product enables a network administrator (or in a smaller office, individual
users) to establish different profiles for different users that can only be
modified by the administrator. These profiles include desktop appearance,
configuration, and initialization, as well as restrictions on user access to
various PC and network resources (including hard drives, diskettes, CD-ROMs,
printers, Internet access, etc.). The same desktop PC can then toggle between
several user profiles.
WinShield prevents deliberate or accidental configuration changes that
can disrupt use of a desktop PC, abuse of PC or network resources (such as
unauthorized Internet surfing or installation of unauthorized software), and
interception or alteration of proprietary information. The user can govern
access to CD-ROM or disk drives and control the specific CDs that can be used.
WinShield is currently available for Windows 95, 98 and NT. A WinShield network
version was released in June 1998. The product has been included in Compaq's
and Microsoft's software bundles for the educational market and has been a
feature product of the month on Microsoft's website.
WinShield Secure PC. In August 1999, we completed beta testing and
launched our new WinShield Secure PC product, the next generation WinShield
desktop security and configuration tool. The network version of WinShield
Secure PC was completed and launched in December 1999. This product provides
powerful new Internet security features that allow Internet filtering and
blocking which permit the administrator to specify the Internet protocols and
Web sites that are available for users of
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the protected computer. Desktop administrators will have the ability to assign
access rights to files and folders for all Windows 95, 98, NT and Windows 2000
systems. Other new features WinShield Secure PC provides are security mechanisms
such as screen saver control with network authentication, event management for
automatic logoff, a well as timed application usage. WinShield Secure PC is
available for network or stand alone workstations.
WinShield 95/NT. In 1998, we introduced WinShield 95/NT, our solution
for desktop users who want to protect their PC system from unauthorized
modification or access. WinShield was the Spotlight product for February 1998
on Microsoft's educational software Web site.
NetOFF. NetOFF is designed to protect a network by shutting down
unattended client PCs automatically after a specified period of inactivity.
Network administrators may also use NetOFF to shut down such PCs to complete a
clean backup. The product ensures an orderly shutdown by automatically closing
all open files and applications on the PC and saving the information. NetOFF is
available for the Windows NT and NetWare platforms and supports Windows 3.1,
95, 98 and NT desktop PCs. The benefits of NetOFF include:
o Enhancing Overall Computer Security. Unattended desktop PCs subject
the network and PC to a heightened risk of data theft. NetOFF protects
confidential files and information by loading a password protected screensaver
and logging off the unattended PCs, thus shutting off access to PC hard drives
and the network.
o Facilitating Clean Back-Ups. To protect important information,
almost every company employs a back-up system. The back-up system is a magnetic
tape drive or other storage medium that periodically copies all of the data
stored in the network. Should a data loss occur from a power failure,
mechanical failure or other error, the lost information can be restored in a
relatively short time, saving the company the time and effort necessary to
attempt to reconstruct lost data and files. The back-up system, however, backs
up only closed files. If a PC is logged on during the process, data in open
files can be corrupted or omitted from the back-up tape. NetOFF eliminates
these problems by automatically logging off network client stations at a time
pre-selected by the network administrator.
o Conserving Resources. Software license fees are often based on the
number of actual users of the licensed product. Many companies pay excess
license fees for programs that are left open on unattended computers. NetOFF
helps customers reduce costs by logging off unattended PCs.
FolderBolt. FolderBolt provides desktop users, particularly users in a
shared desktop PC environment, such as education, with several tools to protect
proprietary information. Users can protect groups of directories, individual
directories, or files by designating them as locked or read-only protected or
as a secure drop box. Optional data encryption adds another layer of security
against more sophisticated intruders. Users are able to send self-extracting
encrypted e-mails within the company or across the Internet. FolderBolt is
available for Windows 3.1, 95, 98 and NT.
SALES AND MARKETING FOR CITADEL TECHNOLOGY
Our multi-channel sales strategy includes an enterprise sales group,
OEM distribution arrangements, VAR and dealer channels, direct sales channels,
strategic alliances with industry leaders, and trade shows.
o Enterprise Sales Group and VARs. This direct sales group is
responsible for end users owning or operating large, sophisticated enterprise
networks, including corporations and educational institutions. These end users
place orders primarily for our products and have a sales cycle from two to six
months depending on the size of the network and the resources they have
available for testing. In addition to managing our relationship with these end
users, the Enterprise Sales Group is responsible for recruiting and managing
VARs nationwide. Each sales person is responsible for developing relationships
with VARs and end users in their geographic territory. VARs and other resellers
broaden our exposure to corporate and educational accounts. VARs can purchase
our products through wholesale distributors or direct from us, depending on
their business model.
o Direct Sales Group. This group, which is primarily composed of
in-house telemarketers, focuses on qualifying leads for the Enterprise Sales
Group. This function includes cold calls and follow-up calls from marketing
events and trade shows. The group does the majority of the prospecting and
qualifying of large deals, thus allowing the Enterprise Sales Group to focus on
closing the sale. The Direct Sales Group also closes sales on small deals and
inbound calls.
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o OEM Sales. We have entered into arrangements with OEMs that focus on
creating bundled solutions to permit customers to purchase total desktop
applications incorporating our software. These partners include Compaq, IBM,
Microsoft, Hewlett-Packard and Dell, which resell our products with their
hardware, software and networking solutions.
PRODUCT DEVELOPMENT
In developing new Citadel Technology products, we strive to meet the
following standards in product development:
o Standards Compliance and Network Compatibility. Our products comply
with industry standards and are designed to be compatible with the leading
network and desktop PC operating systems, including Novell's NetWare and
Microsoft's Windows NT. To that end, our products are currently developed using
Microsoft Visual C++ and Novell toolkits.
o Ease of Use. Our products are designed to function without extensive
and continual user involvement. The aim is to simplify, not complicate, the
user's work environment.
o Ease of Administration. We have extended our ease-of-use concept to
network administration with our Citadel Network Administrator, which is
designed to provide central management and security features with the ability
to "plug and play" additional functions at a low cost.
o Cost Effectiveness. We provide products at a price and performance
level that we believe offers superior network and PC security and
administration options at affordable prices.
Schedules for the development of high technology products are
inherently difficult to predict, and there can be no assurance that we will
achieve targeted initial customer shipment dates for any of our products, or at
all.
We account for software development costs in accordance with SFAS No.
86 ("accounting for the costs of computer software to be sold, leased or
otherwise marketed") issued by FASB. Under this pronouncement, we are required
to capitalize software development costs after technological feasibility of a
project is established and must cease capitalizing such costs when the products
derived from the project are available for sale, lease or otherwise marketed.
The capitalized costs are then amortized on a product-by-product basis, based
on the greater of (a) the amount computed by the straight-line method over the
estimated useful life of the product or (b) the amount computed by using the
ratio that current gross revenues bear to the total of current and anticipated
future revenues. We evaluate the estimated net realizable value of each
software product at each balance sheet date and record write-downs to net
realizable value for any product for which the net book value is in excess of
its net realizable value. For a discussion of the write-downs taken in fiscal
2000 and 1999, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
We maintain a core software development staff at our corporate office
to maintain existing code bases and define our approach in developing new
technologies and products to meet market opportunities. Once a product design
has been finalized, the actual final development work is either performed
in-house or by third party contractors, depending on project scope and resource
schedules.
CLIENT SUPPORT AND WARRANTIES
We believe that retention of customers is a critical element.
Therefore, we are dedicated to customer support and satisfaction. We encourage
our sales employees in their interaction with a customer to be flexible and
innovative to ensure that the customer's needs are met. Our information systems
also further our customer service goals. They enable our employees to enter
comments regarding a customer's order, as well as comments regarding feedback,
both positive and negative, from the customer. These comments can then be
accessed by other employees, allowing them to quickly reference a particular
customer's preferences, needs, and past ordering practices, among other
information. Our Citadel Technology products are generally warranted to be free
of defects in materials and workmanship for 90 days. We offer yearly
maintenance contracts on most of our software and basic technical support and
replacement of defective media.
MANUFACTURING AND SUPPLIERS
We prepare master software disks, user manuals and packaging for some
products and out-source production of other products. Certain of our disk
duplication, as well as our product packaging, is performed by us at our
offices, while the other disk duplication and product packaging and printing of
user manuals and related materials is performed to our specifications by
outside
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sources. During peak demand, we may use outside sources to perform disk
duplication and product packaging services. To date, we have not experienced any
material difficulties or delays in manufacture through an interruption in our
own production or the production of any suppliers. Because of the generally
short cycle between order and shipment, we do not believe that our backlog as of
a particular date is indicative of future sales.
CITADEL TECHNOLOGY CUSTOMERS
Our customers include many Fortune 2000 companies and educational
users. There are no assurances that these companies or institutions will
continue to utilize our products in the future.
CITADEL TECHNOLOGY COMPETITION
The security and administration software industry is intensely
competitive and rapidly changing. We compete against large companies (such as
Microsoft, Novell, Computer Associates, Network Associates, Symantec and
others) that offer network and desktop PC security and administration software
as a segment of their businesses. We also compete with a large number of small
companies that offer security and administration software for networks and
desktop PCs as a portion of their product line. Some of these competitors offer
products that address multiple aspects of network and desktop security and
administration and management, while other competitors market products that
provide narrow solutions. Many of our competitors have longer operating
histories and significantly greater financial, technical, sales, marketing and
other resources, as well as greater name recognition and a larger installed
customer base, than we do. Further, many competitors have established
relationships with our customers and end users of our products. Our competitors
could, in the future, introduce products with more features and lower prices
than our product offerings. These companies could also bundle existing or new
products with other, more established products in order to compete with us.
We generally compete on the basis of product features and functions,
product architecture, product quality, the ability of products to run on a
variety of different network and desktop operating systems, technical support
and other related services, and price/performance features. Based on these
factors, we believe that our products are well positioned in the market and
that we have targeted promising niche opportunities.
We also expect that competition may increase as a result of software
industry consolidations, which have occurred in the past. In addition, current
and potential competitors have established or may establish cooperative
relationships among themselves or with third parties. Accordingly, it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. In addition, network and desktop PC
operating system vendors could introduce new or upgrade existing operating
systems or environments that include security and administration functionality
offered by our products, which could render our products obsolete and
unmarketable. There can be no assurance that we will be able to compete
successfully against current or future competitors or that competitive
pressures faced by us will not materially adversely affect our business,
operating results and financial conditions.
INTELLECTUAL PROPERTY RIGHTS
We regard some features of our Citadel Technology internal operations,
software and documentation to be proprietary intellectual property. We have
been and will be dependent in part on our ability to protect our proprietary
technology. We rely primarily upon a combination of copyright, trademarks,
trade secret laws, confidentiality agreements and other measures to establish
and protect our rights in our proprietary technology. We do not have any
patents or statutory copyrights on any of our proprietary technology which we
believes to be material to our future success, and we cannot be certain that
others will not develop substantially equivalent or superseding proprietary
technology. Furthermore, there can be no assurance that any confidentiality
agreements between our employees and us will provide meaningful protection of
our proprietary information in the event of any unauthorized use or disclosure
of such proprietary information.
There can be no assurance that we will not become the subject of
claims of infringement with respect to intellectual property rights associated
with our products. In addition, we may initiate claims or litigation against
third parties for infringement of our proprietary rights or to establish the
validity of our proprietary rights. Any such claims could be time consuming and
could result in costly litigation or lead us to enter into royalty or licensing
agreements rather than disputing the merits of such claims.
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EMPLOYEES
As of July 26, 2000, we had nine employees, including three in
business development, sales and marketing, three in product research and
development, two in administration, finance, MIS, production and operations and
one in customer service and technical support, and Parago employs more than 340
persons. Our future success depends in significant part upon the continued
service of our key technical and senior management personnel and our continuing
ability to retain highly qualified technical and managerial personnel.
Competition for such personnel is intense, and there can be no assurance that
we can retain our key technical and managerial employees or that we can
assimilate or retain other highly qualified technical and managerial personnel
in the future. None of our employees are represented by a labor union. We have
not experienced any work stoppages and consider our relations with our
employees to be good.
GOVERNMENT REGULATION
Government regulation has not had a material effect on the conduct of
our business to date.
PROPERTIES
We lease approximately 7,200 square feet as our principal executive
office premises located at 3811 Turtle Creek Blvd., Suite 770, Dallas, Texas,
pursuant to a lease that expires in 2001 with two five-year renewal options. We
believe that these facilities are adequate for our current needs and that
suitable additional or alternative space will be available in the future on
commercially reasonable terms as needed.
Our Internet subsidiary, Parago, also leases approximately 14,500
square feet of office space in Dallas, Texas, 99,000 square feet of warehouse
and office space in Coppell, Texas, approximately 4,800 square feet in
Campbell, California and 4,500 square feet in Los Angeles, California.
The telephone number of our principal office is (214) 520-9292. The
Company maintains a site on the World Wide Web at http://www.ct-holdings.com.
LEGAL PROCEEDINGS
Set forth below are certain litigation matters in which we are a
party. We believe that they have meritorious defenses and will vigorously
defend ourself. However, an unfavorable resolution of or settlement or defense
costs related to one or more of these lawsuits could have a material adverse
effect on our business, results of operations or financial condition.
In February 2000, we settled a lawsuit filed by Argos Capital I, LP,
by the issuance of 400,000 shares of common stock in exchange for the
plaintiffs' relinquishment of rights under (i) a $140,000 promissory note
(exclusive of interest and attorneys' fees) and (ii) 438,750 stock purchase
warrants at $.59 per share.
The Company and one of its officers were involved in an arbitration
proceeding with Vestcom Ltd., which claimed compensation and a finder's fee for
introducing the Company to a third party. Vestcom sought damages of the value
of 100,000 shares of Company common stock (alleged to be valued at $1,900,000),
plus 50% of additional compensation paid by the Company to the third party. The
Company filed a declaratory judgment action against Vestcom to determine that
the alleged contract was not valid based on its defenses. The case was styled
Citadel Computer Systems, Inc. and Steven B. Solomon v. Vestcom, Ltd., in the
193rd Judicial District Court in Dallas County, Texas. In October 1998, the
Texas court entered a judgment and preliminary injunction in favor of the
Company and its officer that the purported agreement was a forgery. As a
result, the arbitration proceeding was dismissed by the American Arbitration
Association. The defendant appealed the decision of the Texas court. In
November 1998, Vestcom filed a lawsuit against the Company in Texas state court
styled Vestcom v. Citadel in the 68th Judicial Court, Dallas County, Texas,
reasserting the same basic claims as in the arbitration proceeding. In January
2000 the parties reached an agreement to settle the suit for the original
amount of the warrants claimed (100,000 shares with an exercise price of $1.375
per share). This action was dismissed for want of prosecution on the
announcement of settlement by the parties. Assuming Vestcom received actual or
constructive notice of that dismissal near the time of its entry, the Company
believes that the time to seek reinstatement of the case, a new trial, or
review before the Court of Appeals has expired. However, as of the date of
issuance of this prospectus, no binding agreement has been signed by both
parties.
In July 2000, following mediation of the disputes between us and
Janssen-Meyers Associates L.P. ("JMA"), we and JMA entered into an agreement to
settle the lawsuit for an aggregate of $3 million, in a combination of $1.5
million in cash and 300,000 shares of common stock with a guaranteed value of
$5 per share as of January, April and October, 2001, subject to execution of
definitive settlement documents and approval of the boards of directors of the
companies. In August 1998, JMA filed a lawsuit
50
<PAGE> 51
against us arising out of an alleged 1995 contract with our predecessor "("Old
Citadel"). The suit alleged that Old Citadel breached a letter of intent dated
September 1995 and/or a Placement Agency Agreement dated November 1995 between
JMA and Old Citadel. As its damages, JMA claimed that it was entitled to, among
other things, the cash value of 1.8 million $0.89 warrants valued during May
1996. According to JMA's valuation of those warrants, potential damages were
alleged to exceed $40 million. The Company vigorously disputes that it breached
either the letter of intent or the Placement Agency Agreement or that it is
liable to JMA. The lawsuit was styled Janssen-Meyers Associates, L.P. v. Citadel
Technology, Inc., and was filed in the Supreme Court of the State of New York,
County of New York.
In June 2000, the Company was served with a lawsuit filed in state
court in Houston, Texas by Michael and Patricia Ferguson for breach of
contract, tortious interference and negligence. Specifically, the Fergusons
claim that they were damaged when they attempted to exercise certain warrants
during a time when the Company's related registration statement could not be
used. On June 29, 2000, the Company moved to transfer venue from Harris County,
Texas, to Dallas County, Texas. On June 30, 2000, the Company answered (subject
to its Motion to Transfer Venue). On July 28, 2000, also subject to its Motion
to Transfer, the Company filed a third party petition against Yorkton
Securities, Inc. and Yorkton Capital, Inc., which acted as the Fergusons'
broker in connection with the transaction at issue. In the third party
petition, the Company contends that the Yorkton entities are liable to the
Company based on negligence and contribution for, among other things, failing
to disclose to the Fergusons that the registration statement could not be used.
The Company will vigorously defend the claims asserted by the Fergusons.
At this time, the Company is unable to predict the ultimate outcome of
these suits, the costs associated with defending the claims and pursuing
counterclaims, and monetary compensation awarded, if any. Unfavorable
resolutions of these lawsuits or costs of litigation and settlement could have
a material adverse effect on our results of operations or financial condition.
We are a party to some other legal proceedings. At this time, we are
unable to predict the ultimate outcome of these proceedings, the costs
associated with defending the claims and pursuing counterclaims, and monetary
compensation awarded, if any. Unfavorable resolutions of these proceedings or
the costs of litigation and settlement could have a material adverse effect on
our results of operations or financial condition.
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<PAGE> 52
MANAGEMENT
DIRECTORS
The names of our directors, their principal occupations and the year
in which each current Director of the Company initially joined the Board of
Directors are set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY DIRECTOR SINCE
----- --- -------------------------- --------------
<S> <C> <C> <C>
Steven B. Solomon 35 President, Chief Executive
Officer, and Secretary 1992
Victor K. Kiam, II 72 Director 1996
Lawrence Lacerte 47 Director 1999
Chris A. Economou 45 Director 1993
Mark Rogers 40 Director 1996
Dr. Axel Sawallich 55 Director 1993
</TABLE>
STEVEN B. SOLOMON has served as the President and Chief Executive Officer of
the Company since May 1997 and as a director of the Company since February
1996. Mr. Solomon has also served as Chairman of the Board of Directors and
Chief Executive Officer of Parago, Inc., a subsidiary of the Company that is an
application solution provider and Internet-based business process outsourcer
that provides an on-line suite of promotional offerings designed to automate
promotional management and optimize the customer care services offered by its
clients. From February 1996 through April 1997, Mr. Solomon served as Chief
Operating Officer of the Company. He was the President and a director of
LoneStar Hospitality Corp., a predecessor of the Company that owned and
operated a chain of franchised restaurants, from its inception in February 1992
until its merger with the Company in February 1996 and was Chairman of the
Board of Directors of LoneStar from December 1994 until February 1996. During
his tenure at LoneStar, Mr. Solomon also served as developer and executive
producer of SportsWaves!, a division of LoneStar that produced syndicated
television programs covering the National Football League and other
professional and collegiate sports. Since May 5, 2000, Mr. Solomon has also
served as a director of River Logic, Inc., an incubation venture of the Company
that creates and operates integrated networks of decision support tools,
elearning solutions and ecommerce capabilities designed to enable decision
makers to leverage knowledge and information to gain competitive advantage.
VICTOR K. KIAM, II has served as a director of the Company since July 1996 and
has served as Chairman of the Company since January 1998. Mr. Kiam is Chairman
of Remington Products, L.L.C., a manufacturer, distributor and marketer of
electrical shavers and other consumer products, and has served in various
managerial capacities at Remington since 1979. From 1988 to 1992, Mr. Kiam was
Chairman of the New England Patriots Football Team. Mr. Kiam also serves on the
boards of directors of several other consumer product companies (including
Ronson, plc, a marketer of lighters and consumer products). Mr. Kiam also serves
on the Board of Directors of Parago.
LAWRENCE LACERTE has served as a director of the Company since January 1999. Mr.
Lacerte has served as President of Lacerte Technologies, Inc., a Dallas based
investment firm, since July 1998. From 1978 until July 1998, Mr. Lacerte served
as Chairman and Chief Executive Officer of Lacerte Software Corporation, a tax
and accounting software company. In June 1998, Lacerte Software was acquired by
Intuit Corporation. Mr. Lacerte also serves on the Boards of Directors of
Universal Display Corporation, a publicly traded company engaged in the research
and development of flat panel displays, and Teraglobal Communications Corp., a
publicly traded communications technology company that designs and markets
microprocessor and software-based products and services for real-time
communications. Mr. Lacerte also serves as Vice Chairman of the Board of
Directors of Parago.
CHRIS A. ECONOMOU has served as a director of the Company since February 1996,
and was a director of LoneStar from June 1993 until its merger with the
Company. Mr. Economou has been engaged in the private practice of law in Fort
Lauderdale, Florida, primarily in the transactional and corporate areas since
1988. He served as Executive Vice President, Secretary and General Counsel of
Miami Subs Corporation from August 1992 until June 1994 and as a director from
1989 to 1994.
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<PAGE> 53
MARK ROGERS has served as a director of the Company since July 1996. Since
1989, Mr. Rogers has served as a partner and Chief Operating Officer of NFT
Ventures, a venture capital fund established by Ray Noorda, the founder of
Novell, Inc. In connection with his position at NFT Ventures, Mr. Rogers
advises several computer software companies in Texas, Utah and Silicon Valley,
with respect to various strategic and developmental matters. Mr. Rogers also
serves on the boards of directors of CollegeLink.com Incorporated, an online
college application assistance company, and several other high-tech companies.
DR. AXEL SAWALLICH has served as a director of the Company since February 1996
and was a director of LoneStar from March 1993 until its merger with the
Company. Since January 1997, Dr. Sawallich has been chief investment consultant
for Lifeplan Investments, Vienna, Austria. Since 1993, he has been the managing
partner of Global Invest, an investment firm located in Vienna. From 1991 until
1994, he also was a consultant for Serco Investment Counseling Corporation.
From 1989 to 1990, Dr. Sawallich was the general manager and director of the
Vienna regional branch of Allgemeine Sparkasse Bank AG. From 1985 to 1989, Dr.
Sawallich was with Bank fur Arbeit und Wirtschaft AG, Vienna, serving as the
deputy head of the credit department until 1986 and as the Executive Vice
President of the Bank's Bureau for Commercial Customers thereafter. Dr.
Sawallich has also been acting as an independent, publicly certified,
investment advisor since 1993.
There are no family relationships among any of the directors or
executive officers of the Company. See "Certain Relationships and Related
Transactions" for a description of transactions between the Company and its
directors, executive officers or their affiliates.
EXECUTIVE OFFICERS
The executive officers of the Company as of August 7, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Steven B. Solomon 35 President, Chief Executive Officer,
Secretary and Director
Carl E. Banzhof 33 Chief Technology Officer
Lester Sideropoulos 44 Vice President of Sales
</TABLE>
Information concerning the business experience of Mr. Solomon is
provided under the caption "Directors" above. Set forth below is information
concerning the business experience of the other executive officers of the
Company.
CARL E. BANZHOF has served as Chief Technology Officer since July 1997, prior
to which he served as Vice President - Development of Network Products since
joining the Company in February 1996. Mr. Banzhof has more than 15 years of
experience in the software industry, including designing, developing and
marketing software products, building software development teams and
organizations and managing products in network management and PC desktop
markets. He was the founding partner and Vice President of Software Engineering
from 1992 to 1995 of Circuit Masters Software, Inc., a software company which
developed and marketed network management utilities for Novell NetWare
environments, and was acquired by the Company in February 1996. Prior to
joining Circuit Masters, Mr. Banzhof was lead software developer from 1988 to
1992 at Fluor Daniel Engineering, a software development and worldwide
engineering company.
LESTER SIDEROPOULOS has served as Vice President of Sales since joining the
Company in January 1999. Mr. Sideropoulos has over 20 years experience in
sales. Prior to joining the Company, Mr. Sideropoulos was Director of Business
Technology at Constellation Technology, a developer of data acquisition systems
from January 1998 to January 1999, Director of Sales for Oxford Instruments, a
developer of nuclear detection systems from May 1993 to January 1998, and has
held various other product management and direct sales positions during his 20
year career.
The Company and its former Chief Operating Officer and Chief Financial Officer,
Richard L. Travis, Jr., agreed to terminate Mr. Travis' employment with the
Company effective as of January 14, 2000, and the Company and its former Vice
President of Business Development, Bennett Klein, agreed to terminate Mr.
Klein's employment with the Company effective as of March 1, 2000. In connection
with the termination of employment of Mr. Travis and Mr. Klein, the Company
entered into Settlement and
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<PAGE> 54
Release Agreements with each of Mr. Travis and Mr. Klein. See "Employment
Agreements" and "Certain Relationships and Related Transactions."
DIRECTORS' COMPENSATION
Our directors do not receive cash compensation for attendance at Board
of Directors or committee meetings, but may be reimbursed for some expenses in
connection with attendance at Board and committee meetings.
COMPENSATION OF EXECUTIVE OFFICERS
The total compensation for the three fiscal years ended February 29,
2000 of Steven B. Solomon, the Company's Chief Executive Officer, Richard L.
Travis, Jr., the Company's former Chief Operating and Financial Officer; Carl
E. Banzhof, the Company's Chief Technology Officer; and Bennett Klein, the
Company's former Vice President of Business Development (the "Named Executive
Officers"), is set forth below in the following Summary Compensation Table. No
other person received cash compensation in excess of $100,000 during the fiscal
year ended February 29, 2000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
------------------- COMPENSATION
AWARDS
------------
OTHER
ANNUAL SHARES
FISCAL COMPENSATION UNDERLYING ALL OTHER
NAME AND POSITION YEAR SALARY($) BONUS($) ($) OPTIONS COMPENSATION
----------------- ------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Steven B. Solomon 2000 62,000(1) 0 4,750(2) 0 3,119(2)
President, 1999 150,538 120,500 11,400(2) 0 (3) 9,975(2)
CEO and Secretary .......... 1998 135,000 104,000(1) 11,400(2) 2,000,000 8,342(2)
Richard L. Travis, Jr. 2000 122,084 50,000 9,500(4) 0 627,833(4)
Former COO/CFO ............. 1999 136,667 25,000 11,400(4) 0 (3) 5,400
1998 130,000 10,000 11,400(4) 1,150,000 23,552(4)
Carl E. Banzhof 2000 115,000 10,000 0 0 0
Chief Technology 1999 115,000 0 0 0 4,093
Officer .................... 1998 100,625 500 0 100,000 3,552
Bennett Klein 2000 135,000 0 0 0 10,933(5)
Former V.P. - Business 1999 135,000 37,000(5) 0 0 61,467(5)
Development ................ 1998 21,548(5) 0 0 300,000 0
</TABLE>
(1) Mr. Solomon has entered into an employment agreement with Parago, pursuant
to which Parago now pays Mr. Solomon's salary. During fiscal 1998, in
connection with the discharge of a debt owed to the Company, Mr. Solomon
forgave $79,000 in accrued compensation due him.
(2) Mr. Solomon received a car allowance of $950 per month and health, life and
disability insurance during each fiscal year.
(3) Excludes 6,600,000 and 60,000 shares underlying options granted during the
year by Parago to Messrs. Solomon and Travis, respectively. Mr. Travis was
originally granted 120,000 shares underlying options that vested over a three
year period but pursuant to the terms of his Settlement and Release Agreement
with the Company, 60,000 of such shares underlying options were forfeited. See
"Employment Agreements" and "Certain Relationships and Related Transactions."
(4) Mr. Travis received a car allowance of $950 per month for fiscal years
1998, 1999 and 2000 and health, life and disability insurance during each
fiscal year. Pursuant to Mr. Travis' employment agreement, Mr. Travis could
elect to receive Company Common Stock in lieu of certain raises in salary. Mr.
Travis exercised this option during fiscal year 1998, and in connection
therewith, received 70,000 shares of the Company's common stock (valued at
$20,000). Mr. Travis commenced working for the Company in December 1996, and
Mr. Travis and the Company agreed to terminate his employment with the Company
effective January 14, 2000. As a result of the termination of Mr. Travis'
employment agreement and the severance provisions therein, "All Other
Compensation" for 2000 includes $295,000 relating to the forgiveness of
indebtedness owed to the Company by Mr. Travis and $285,000 in compensation
expense recognized by the Company in connection with the acceleration of
certain Parago options granted to Mr. Travis, which forgiveness of indebtedness
and acceleration of options were negotiated in connection with Mr. Travis'
termination and the cancellation of Mr. Travis' remaining options to purchase
60,000 Parago shares.
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<PAGE> 55
(5) Mr. Klein commenced working for the Company in January 1998. In connection
with his employment agreement, Mr. Klein received a relocation package of
$56,542 and 100,000 shares of the Company's Common Stock as a sign-on bonus,
valued at $37,000 as of the date of grant. Mr. Klein also received, as part of
his employment agreement, health, life and disability insurance. Mr. Klein
commenced working for the Company in January 1998 and his employment with the
Company was terminated effective March 1, 2000.
OPTION GRANTS DURING FISCAL YEAR 2000
The Company did not grant any stock options or stock appreciation
rights to the Named Executive Officers during the fiscal year ended February
29, 2000. Parago granted stock options to some of the Named Executive Officers
during the 2000 fiscal year, as described in "Certain Relationships and Related
Transactions."
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table describes, for each of the Named Executive
Officers, options exercised and the potential values for their unexercised
in-the-money options at February 29, 2000 (the Company issued no SARs during
the 2000 fiscal year):
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FISCAL YEAR END($) FISCAL YEAR END
---------------------- ($) (2)
---------------
SHARES VALUE
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) ($) (1) UNEXERCISABLE UNEXERCISABLE
---- ----------- ------- ------------- ---------------
<S> <C> <C> <C> <C>
Steven B. Solomon.......... 0 0 0/0(4) 0/0(4)
Richard L. Travis, Jr. .... 0 0 0/0(4) 0/0(4)
Carl E. Banzhof............ 0 0 100,000/0 618,750/0(4)
Bennett Klein.............. 208,337 1,194,270 0/91,667 0/560,773(4)
</TABLE>
(1) Based on the market price on the date exercised less the exercise
price payable for each share.
(2) Based on the fair market value of the Company's Common Stock (at
February 29, 2000) per share less the exercise price payable for each
share.
(3) Excludes options to purchase 4,000,000 shares of Parago exercised by
Mr. Solomon during the 1999 fiscal year and options to purchase
1,000,000 shares of Parago granted to and exercised by Mr. Solomon
during the 2000 fiscal year (after giving effect to the four-for-one
stock split of Parago's common stock effective in July 1999).
(4) Excludes Parago options to purchase 1,600,000 shares (400,000 of which
are currently exercisable), 60,000 shares (all of which are currently
exercisable), 100,000 shares (all of which are unexcercisable), and
60,000 shares (of which all were canceled subsequent to fiscal year
2000) for Messrs. Solomon, Travis, Banzhof and Klein respectively
(after giving effect to the four-for-one stock split of Parago's
common stock effective in July 1999).
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Mr. Solomon.
The annual base salary payable to Mr. Solomon was $168,000 as of February 29,
2000, and the employment agreement provides for periodic salary increases and
bonuses. The employment agreement continues until February 2002 and annually
thereafter until terminated by either party. In addition, the employment
agreement provides for a severance benefit of the greater of (i) the remaining
term of the contract,
55
<PAGE> 56
discounted at a rate of six percent, or (ii) 24 months of base salary, in the
event of termination without cause or constructive termination. Mr. Solomon has
entered into an Employment Agreement with Parago effective as of January 1,
1999, and the Company ceased paying Mr. Solomon's salary effective as of July 1,
1999.
Richard L. Travis, Jr., the Company's former Chief Operating Officer
and Chief Financial Officer, and the Company agreed to terminate his employment
with the Company and his employment agreement was terminated effective as of
January 14, 2000. In connection with his resignation from the Company and the
termination of his employment agreement, Mr. Travis and the Company entered
into a Settlement and Release Agreement which provided, among other things, for
the payment of an aggregate of $50,001 to Mr. Travis in three equal monthly
installments of $16,667 commencing on the last day of each of the first three
months following Mr. Travis' resignation from the Company, forgiveness of
indebtedness of $295,000, acceleration of options to purchase 60,000 Parago
shares, and termination of Mr. Travis' remaining 60,000 options to purchase
Parago shares. The Settlement and Release Agreement also provided for Mr.
Travis to perform certain financial consulting services for the Company (as an
independent contractor) until April 14, 2000. See "Certain Relationships and
Related Transactions."
Bennett Klein, CT Holdings' former Vice President of Business
Development, and CT Holdings agreed to terminate Mr. Klein's employment with CT
Holdings and his employment agreement was terminated effective March 1, 2000.
In connection with the termination of his employment with CT Holdings and the
termination of his employment agreement, Mr. Klein and CT Holdings entered into
a Settlement and Release Agreement which provides, among other things, for the
accelerated vesting of his 83,342 remaining options, the waiver of payment of
the exercise price of those options, and Mr. Klein's forfeiture of any right to
severance payments.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Solomon is the Chief Executive Officer and President and a
director of the Company and serves as the Chief Executive Officer and Chairman
of the Board of Directors of Parago. Other than Mr. Solomon, none of the
Company's executive officers serve as members of the board of directors or
compensation committee of any entity that has one or more executive officers
who serve on our board or compensation committee. See "Certain Relationships
and Related Transactions" for information regarding transactions with members
of the compensation committee.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a discussion of some relationships and related
transactions between CT Holdings and its officers, directors and principal
shareholders. Please see below for a discussion of some relationships and
related transactions between Parago and CT Holdings and its officers, directors
and principal shareholders.
The Company has contracted with a major shareholder in the Company, PSINet
Consulting Solutions, Inc., formerly known as Metamor Software Solutions, a
division of Metamor Worldwide, Inc. (PSINet) to provide various development
services for the Company. The Company incurred approximately $2,000 and
$600,000 in expenses related to these services during fiscal years ended
February 29, 2000 and February 28, 1999, respectively. Kenneth R. Johnsen, one
of the Company's former directors, was the Executive Vice President of PSINet
during this time. In June 1999, Mr. Johnsen joined the Company's subsidiary,
Parago, as its President and Chief Operating Officer. In connection therewith,
Mr. Johnsen was granted options to purchase 2,000,000 shares of Parago common
stock at $0.025 per share and options to purchase 1,800,000 shares at $0.25 per
share.
We have received a commitment from our President to fund up to $1,500,000
of our expected operating cash flow needs through March 1, 2001 in the event
our cash flows from operating, investing and financing activities are
insufficient to meet our expected operating obligations as they come due. We
have used approximately $400,000 of this commitment through July 17, 2000.
On January 7, 1999, the Company acquired 20,000,000 shares of Parago
common stock in an organizational subscription for an aggregate purchase price
of $50,000 and sharing of the Company's resources, including personnel,
administrative and financial resources. The Company continued to provide these
resources to Parago through June 30, 1999. In consideration for these
resources, the Company allocated a portion of its overhead costs related to
these services to Parago. These allocated expenses, totaling approximately
$141,000, were recognized by Parago as a contribution to equity, as the
services were provided in connection with the Company's initial equity
investment.
During the fiscal year ended February 29, 2000, the Company borrowed cash
from Parago to cover short-term cash requirements. As a result, Parago issued
promissory notes to the Company for approximately $571,299 for its initial
investment of
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<PAGE> 57
$50,000 in Parago and sharing of other cash disbursements made to assist the
Company in meeting short-term cash requirements. The promissory notes are
secured by 300,000 shares of Parago common stock, are due on demand, and bear
interest at five percent. In December 1999, the Company paid $500,000 of its
outstanding note balance.
The Company has announced that, subject to compliance with SEC and state
regulations and the expiration of a lock-up agreement with Parago's
underwriters of its proposed initial public offering, the Company intends to
initiate a distribution of fifteen percent of the shares of Parago's common
stock that the Company owns. If there are problems associated with compliance
with SEC requirements or state law, then the distribution of Parago shares may
be delayed or may not occur. There can be no assurance that the Company will
complete the distribution on the proposed terms or at all.
Richard L. Travis, Jr., the Company's former Chief Operating Officer and
Chief Financial Officer, and the Company agreed to terminate Mr. Travis'
employment with the Company and his employment agreement was terminated
effective as of January 14, 2000. In connection with the termination of his
employment with the Company and the termination of his employment agreement,
Mr. Travis and the Company entered into a Settlement and Release Agreement
which provides, among other things, for the payment of an aggregate of $50,001
to Mr. Travis in three equal monthly installments of $16,667 commencing on the
last day of each of the first three months following Mr. Travis' termination of
employment with the Company. The Settlement and Release Agreement also provides
for Mr. Travis to perform certain financial consulting services for the Company
(as an independent contractor) until April 14, 2000. Also, in connection with
the Settlement and Release Agreement, the Company agreed to forgive an
aggregate of $295,000, plus accrued interest, of indebtedness owed by Mr.
Travis to the Company. In addition, Parago accelerated certain of the Parago
options granted to Mr. Travis, which resulted in compensation expense of
$285,000 to the Company and agreed to cancel his remaining options to purchase
60,000 Parago shares.
Bennett S. Klein, the Company's former Vice President of Business
Development, and the Company agreed to the termination of Mr. Klein's
employment with the Company and his employment agreement was terminated
effective as of March 1, 2000. In connection with his termination of employment
with the Company and the termination of his employment agreement, Mr. Klein and
the Company entered into a Settlement and Release Agreement which provides,
among other things, for Mr. Klein to forgive the remaining amounts due to him
from the Company under his Employment Agreement in exchange for the Company's
agreement to accelerate the vesting of Mr. Klein's remaining options and to pay
the exercise price related to such shares.
In August 1998, the Company granted stock options to a stockholder and
reduced the exercise price of certain other stock options in consideration for
the stockholder's assumption of indebtedness of the Company in the principal
amount of $500,000. The transactions resulted in no gain or loss. At February
28, 1999, the Company had a $125,000 receivable from the stockholder. This
outstanding balance was repaid in full during fiscal 2000.
During the year ended February 28, 1999, the Company loaned approximately
$1,525,000, exclusive of financing provided for the exercise of stock options,
to its Chief Executive Officer, Mr. Solomon. At February 29, 2000 and February
28, 1999, $209,000 and $354,000, respectively, remained unpaid.
During fiscal years ended February 29, 2000 and February 28, 1999, the
Company and Parago incurred legal fees in the amount of approximately $86,000
and $140,000, respectively to Wood, Exall & Bonnet, L.L.P. David Wood, a
partner of such firm, is a relative of Mr. Solomon. Subsequent to February 28,
1999, Mr. Wood joined Parago as its General Counsel.
CERTAIN TRANSACTIONS BETWEEN CT HOLDINGS' EXECUTIVE OFFICERS, DIRECTORS AND
PRINCIPAL STOCKHOLDERS AND PARAGO
Since its inception on January 7, 1999, Parago has issued and sold
common stock to CT Holdings and the executive officers and directors listed
below:
<TABLE>
<CAPTION>
SHARES OF AGGREGATE
INVESTOR COMMON STOCK (1)(#) PURCHASE PRICE($)
-------- ------------------- -----------------
<S> <C> <C>
Lawrence Lacerte ................. 2,400,000 4,000,000
CT Holdings, Inc. ................ 20,000,000 191,000(2)
Michael Ruff (3) ................. 2,300,000 3,075,000
</TABLE>
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<PAGE> 58
(1) Does not include shares issued pursuant to the exercise of options.
(2) $141,000 of which represents an intercompany payable for services performed
by and expenditures paid by CT Holdings in support of Parago's initial
operations, which amount was converted into equity subsequent to June 30,
1999.
(3) Represents shares owned by Icarus Investments I, Ltd., of which Mr. Ruff is
the president of the general partner.
Parago sold the shares of its common stock to finance its development
activities, operations and acquisitions. Parago issued the shares of common
stock to CT Holdings on January 7, 1999 in a private transaction for a
promissory note plus the provision of services including administrative,
personnel, facilities and financial services through June 30, 1999. None of the
investors were affiliated with Parago prior to purchasing these shares, other
than Mr. Lacerte, who served as a director of CT Holdings at the time, and Mr.
Ruff, who also served as a director of CT Holdings at the time.
Parago has granted options to purchase Parago shares to some of CT
Holdings' directors and executive officers and some of the directors and
executive officers have exercised such options. Parago granted options to
purchase 6,600,000 shares of its common stock to Mr. Solomon (5,000,000 of
which have been exercised at a weighted average exercise price of $0.07 per
share), 600,000 shares to Mr. Rogers (100,000 of which have been exercised at a
weighted average exercise price of $0.25 per share), 60,000 to Mr. Travis,
100,000 to Mr. Banzhof and 40,000 to Mr. Sideropoulos. Parago has also granted
Icarus Investments warrants to purchase 1,000,000 shares of Parago common stock
(300,000 of which have been exercised at an exercise price of $.25 per share).
During 1999 Parago loaned an aggregate of $700,000 to Mr. Solomon,
which loans have been repaid in full. These loans bore interest at five percent
per annum, had a maturity of less than two years, were full recourse and were
secured by a pledge of 4,000,000 shares of CT Holdings' stock owned by Mr.
Solomon. In addition, in July 1999 after repayment of the $700,000 in loans,
Parago loaned $250,000 to Mr. Solomon, which loan has been repaid in full. This
loan which bore interest at five percent per annum was full recourse, had a
maturity of less than three months, and was secured by a pledge of 1,000,000
shares of Parago common stock owned by Mr. Solomon. In December 1999, Mr.
Solomon loaned Parago $4,000,000 pursuant to promissory notes bearing interest
at 5 percent per year.
CERTAIN TRANSACTIONS BETWEEN CT HOLDINGS AND PARAGO
As of May 31, 2000, CT Holdings owned approximately 45.2% of Parago's
outstanding shares of common stock (or 38.8% if Parago's preferred stock were
converted to common). Through June 30, 1999, CT Holdings provided various
services to Parago, including the professional services of a number of its
executives and employees. In consideration for these services, CT Holdings
allocated a portion of its overhead costs related to such services to Parago.
These allocated expenses, totaling approximately $141,000, were contributed to
Parago as a portion of the consideration for the shares of Parago issued to CT
Holdings. Management of CT Holdings believes that the amounts allocated to
Parago have been no less favorable to it than the expenses it would have
incurred to provide such services on its own or from unaffiliated third
parties. None of these services have been provided to Parago pursuant to any
written agreement between Parago and CT Holdings. In addition, CT Holdings has
guaranteed the obligations of Parago under an office lease in Santa Monica,
California.
In the past, CT Holdings has borrowed cash from Parago to cover
short-term cash requirements. Parago has made those loans to CT Holdings,
totaling approximately $578,000, pursuant to a promissory note secured by
300,000 shares of Parago common stock owned by CT Holdings. The note is due
upon demand and bears interest at five percent per annum. As of December 31,
1999, CT Holdings had repaid Parago $500,000 under these notes.
CT Holdings has announced that, subject to compliance with SEC and
state regulations and the expiration of a lock-up agreement with Parago's
underwriters of its proposed initial public offering, CT Holdings intends to
initiate a distribution of 15% of the shares of Parago's common stock that CT
Holdings owns. If there are problems associated with compliance with SEC
requirements or state law, then the distribution of Parago shares may be
delayed or may not occur. There can be no assurance that CT Holdings will
complete the distribution on the proposed terms or at all.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
CT Holdings' Bylaws provide that CT Holdings will indemnify its
directors and officers and may indemnify its employees and other agents to the
fullest extent permitted by law. CT Holdings believes that indemnification
under its Bylaws covers at least negligence and gross negligence by indemnified
parties, and permits CT Holdings to advance litigation expenses in
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<PAGE> 59
the case of stockholder derivative actions or other actions, against an
undertaking by the indemnified party to repay such advances if it is ultimately
determined that the indemnified party is not entitled to indemnification. CT
Holdings has in place liability insurance for its officers and directors.
In addition, CT Holdings' Certificate of Incorporation provides that,
pursuant to Delaware law, its directors shall not be liable for monetary
damages for breach of the directors' fiduciary duty as a director to CT
Holdings and its stockholders. This provision in the Certificate of
Incorporation does not eliminate the directors' fiduciary duty, and in
appropriate circumstances equitable remedies such as injunctive or other forms
of non-monetary relief will remain available under Delaware law. In addition,
each director will continue to be subject to liability for breach of the
director's duty of loyalty to CT Holdings for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
actions leading to improper personal benefit to the director, and for payment
of dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers or persons
controlling CT Holdings pursuant to the foregoing provisions, CT Holdings has
been informed that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is
therefore unenforceable. CT Holdings believes that its Certificate of
Incorporation and Bylaw provisions and indemnification agreements are necessary
to attract and retain qualified persons as directors and officers.
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<PAGE> 60
PRINCIPAL STOCKHOLDERS
As of August 7, 2000, there were issued and outstanding 48,749,718
shares of Common Stock. There is no other class of voting security of the
Company issued or outstanding. The following table sets forth the number of
shares of the Company's Common Stock beneficially owned, as of August 7, 2000 by
(i) each person known to the Company to own more than 5% of the Common Stock of
the Company (the only class of voting securities now outstanding), (ii) each
director, (iii) each executive officer named in the Summary Compensation Table
and (iv) all directors, named executive officers and other executive officers as
a group. Unless otherwise indicated, the number of shares and percentage of
ownership of Common Stock for each of the stockholders set forth below assumes
that shares of Common Stock that the stockholder may acquire within sixty days
of August 7, 2000 are outstanding. Except as otherwise indicated, all shares are
owned directly and the owner has the sole voting and investment power with
respect thereto.
<TABLE>
<CAPTION>
NUMBER OF APPROXIMATE PERCENT OF
NAME AND ADDRESS SHARES OWNED CLASS
---------------- ------------ ----------------------
<S> <C> <C>
Carl E. Banzhof(1)
3811 Turtle Creek Blvd., Suite 770
Dallas, Texas 75219 ............................. 159,401 *
Chris A. Economou
150 North Federal Highway, Suite 210
Fort Lauderdale, Florida 33301 .................. 474,400 *
Icarus Investments I, Ltd.(2)
200 Crescent Court, Suite 600
Dallas, Texas 75201 ............................. 3,000,000 6.2%
Victor K. Kiam
RPI Corporation
350 Fifth Avenue, Suite 5408
New York, New York 10018 ........................ 744,452 1.5%
Bennett Klein
3811 Turtle Creek Blvd., Suite 770
Dallas, Texas 75219 ............................. 300,000 *
Lawrence Lacerte(4)
5950 Sherry Lane #900
Dallas, Texas 75225 ............................. 1,200,000 2.5%
PSINet Consulting Solutions, Inc.(5)
4400 Post Oak Parkway, Suite 1100
Houston, Texas 77027 ............................ 5,031,937 9.9%
Mark Rogers
NFT Ventures, Inc.
751 Laurel Street, No.19
San Carlos, California 94070 .................... 401,500 *
Dr. Axel Sawallich(6)
Beatrixgasse 3
A-1030 Vienna, Austria .......................... 137,144 *
Steven B. Solomon
3811 Turtle Creek Blvd., Suite 600
Dallas, Texas 75219 ............................. 5,485,993 11.3%
Lester Sideropoulos(7)
3811 Turtle Creek Blvd., Suite 770
Dallas, Texas 75219 ............................. 100,000 *
Richard L. Travis, Jr
7067 Inwood Lane
Dallas, Texas 75209 ............................. 933,000 1.9%
Thomas E. Oxley(8)
2727 South Ocean Blvd., Apt. 803
Highland Beach, FL 33487 ...................... 4,000,000 7.8%
All officers and directors
As a group (10 persons)(9) ...................... 13,085,483 26.6%
</TABLE>
*Less than 1%.
(1) Includes 100,000 shares presently issuable pursuant to options to purchase
Common Stock and 2,000 shares owned by his spouse.
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<PAGE> 61
(2) Based solely on the 13G/A (Amendment No. 1) filed with the Securities and
Exchange Commission ("SEC") on July 15, 1998 with respect to the Company's
Common Stock owned by Icarus. According to the 13G/A (Amendment No. 1), Icarus
may be deemed to own beneficially 3,000,000 shares of Common Stock, acquired
for investment purposes.
(3) Includes 250,000 shares held by RPI, Inc., a company owned and controlled by
Mr. Kiam.
(4) Includes 200,000 shares of Common Stock subject to options vesting within 60
days of August 7, 2000.
(5) Includes 2,000,000 shares presently issuable pursuant to warrants to
purchase Common Stock. Based solely on the 13D/A (Amendment No. 2) filed with
the SEC on November 24, 1999 with respect to the Company's Common Stock owned
by PSINet.
(6) Includes 12,144 shares held by Dr. Sawallich as trustee, over which he has
voting and dispositive power.
(7) Includes 100,000 shares presently issuable or issuable within 60 days of
August 7, 2000 pursuant to options to purchase Common Stock held by Mr.
Sideropoulos.
(8) Based solely on the Schedule 13G/A (Amendment No. 4) filed with the SEC on
March 20, 2000.
(9) Includes shares issuable pursuant to presently exercisable options or
warrants or options or warrants exercisable within 60 days of August 7, 2000,
held by Messrs. Banzhof, Lacerte, Sideropoulos and/or their affiliates.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 60,000,000 shares of common
stock, $.01 par value per share, and 1,000,000 shares of preferred stock, $.01
par value per share.
COMMON STOCK
There were 48,749,718 shares of our common stock outstanding and held
of record by approximately 986 stockholders as of August 7, 2000.
Holders of our common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Because the shares of common
stock do not have cumulative voting rights, the holders of more than 50 percent
of the shares voting for the election of directors can elect all the directors
if they choose to do so and, in such event, the holders of the remaining shares
will not be able to elect any person to the Board of Directors. Subject to
preferences that may be applicable to the holders of outstanding shares of
preferred stock, if any, the holders of our common stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
the Board of Directors out of funds legally available therefor. In the event of
liquidation, dissolution or winding-up, and subject to the prior distribution
rights of the holders of outstanding shares of preferred stock, if any, the
holders of shares of our common stock shall be entitled to receive pro rata all
the remaining assets available for distribution to our stockholders. Our common
stock has no preemptive or conversion rights or other subscription rights.
There are no redemption or sinking fund provisions applicable to our common
stock. All outstanding shares of our common stock are fully paid and
nonassessable, and the shares to be issued pursuant to this Offering shall be
fully paid and nonassessable, assuming compliance with the exercise provisions
of the related warrants.
Our Board of Directors is authorized to issue additional shares of
common stock, not to exceed the amount authorized by our Certificate of
Incorporation, and to issue options and warrants for the purchase of such
shares, on such terms and conditions and for such consideration as the Board
may deem appropriate without further stockholder action. The above description
concerning our common stock does not purport to be complete. Reference is made
to our Certificate of Incorporation and By-laws which are available for
inspection upon proper notice at our offices, as well as to the applicable
statutes of the State of Delaware for a more complete description concerning
the rights and liabilities of stockholders.
PREFERRED STOCK
We currently have no outstanding shares of preferred stock. The Board
of Directors has the authority, without further action by our stockholders, to
issue up to one million shares of preferred stock in one or more series and to
fix the rights, preferences and privileges thereof, including dividend rates
and preferences, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of such series,
61
<PAGE> 62
without further vote or action by the stockholders. Although they presently have
no intention to do so, the Board of Directors, without stockholder approval,
could issue preferred stock with voting and conversion rights which could
adversely affect the voting power of the holders of common stock. The issuance
of preferred stock may also have the effect of delaying or preventing a change
of control of us.
WARRANTS
In addition to the shares of our common stock that are issuable upon
the exercise of the warrants held by the several selling stockholders, we have
issued to Metamor Worldwide, Inc. warrants to purchase 2,000,000 shares of our
common stock.
DELAWARE LAW AND SOME OF OUR CHARTER PROVISIONS
We are subject to the provisions of Section 203 of the Delaware
General Corporation law and anti-takeover law. In general, the statute
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless either (i) prior to the date at which the person becomes an
interested stockholder, the Board of Directors approves such transaction or
business combination, (ii) the stockholder acquires more than 85% of the
outstanding voting stock of the corporation (excluding shares held by directors
who are officers or held in some employee stock plans) upon consummation of
such transaction, or (iii) the business combination is approved by the Board of
Directors and by two-thirds of the outstanding voting stock of the corporation
(excluding shares held by the interested stockholder) at a meeting of
stockholders (and not by written consent). A "business combination" includes a
merger, asset sale or other transaction resulting in a financial benefit to
such interested stockholder. For purposes of Section 203, "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years prior, did own) 15% or more of the corporation's voting
stock.
Our Certificate of Incorporation includes a provision that allows the
Board of Directors to issue preferred stock in one or more series with such
voting rights and other provisions as the Board of Directors may determine.
This provision may be deemed to have a potential anti-takeover effect and the
issuance of preferred stock in accordance with such provisions may delay or
prevent a change of control of us. See "-- Preferred Stock."
REGISTRATION RIGHTS
The holders of approximately 4,536,537 shares of common stock, also
referred to as the Registrable Securities for purposes of this paragraph, or
some of their transferees, will be entitled to some rights with respect to the
registration of such shares for sale under the Securities Act. Such holders may
request that we file a registration statement under the Securities Act with
respect to such common stock, after which we must use our best efforts to
effect such registration, subject to some conditions. The registration
statement of which this prospectus forms a part was filed as a result of the
demand of some of such Holders. Holders of such registration rights may have
two requests for registration until such time as we qualify for registration of
the offer and sale of our securities on Form S-3 under the Securities Act.
After such qualification, such Holders may make an unlimited number of requests
for registration of such shares on Form S-3, subject to the limitation that we
will not be obligated to effect a registration more than once during any year.
Finally, if we propose to register any of our securities for sale under the
Securities Act (with some exceptions), either for our own account or the
account of other shareholders, holders of Registrable Securities are entitled
to "piggyback" onto our registration by requesting inclusion of their
Registrable Securities in the registration. However, the underwriters of any
offering which includes Registrable Securities retain the right to limit the
number of shares to be included in the offering. These registration rights will
expire as to any holder when such holder has disposed of all of its Registrable
Securities or may resell under Rule 144. In general, we are required to bear
the expenses of all requested registrations, provided that holders
participating in the registration are required to bear their pro rata share of
underwriting discounts and commissions.
The holders of approximately 1,150,000 shares of common stock (or
options convertible into shares of common stock) are entitled to some rights
with respect to the registration of such shares for sale under the Securities
Act. We expect to file a registration statement covering the resale of such
shares shortly. With respect to 483,333 of such shares, we are obligated to use
commercially reasonable efforts to cause such registration statement to become
and remain effective until the earlier of 120 days from the date of
effectiveness of the registration statement or the period of time required to
allow for the holders of such shares to dispose of the shares. With respect to
the remaining 666,667 shares, we are obligated to use reasonable best efforts
to cause such registration statement to become and remain effective until the
earlier of the seller's disposition of such shares, the eligibility for resale
of such shares under Rule 144 or one year from the date of effectiveness of the
registration statement. In general, we are required to bear the expenses of
registration of the registration statement.
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<PAGE> 63
STOCK TRANSFER AGENT AND REGISTRAR
The stock transfer agent and registrar for our common stock is
Computershare Trust Company, Inc., 12039 West Alameda Parkway, Suite Z-2,
Lakewood, Colorado 80228.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON FINANCIAL AND ACCOUNTING
MATTERS
In April 2000, we filed current reports on Form 8-K related to our
determination to dismiss our former independent public accountants, Grant
Thornton LLP, and to engage Ernst & Young LLP as our independent public
accountants for fiscal year 2000 and a disagreement with Grant Thornton. Ernst
& Young serves as the independent public accountants for our subsidiary, Parago
and we believe that using that firm to provide audit services is in our best
interests.
Grant Thornton's reports on the financial statements for the past two
years contained no adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
Except as set forth below, during the past two years there were no
disagreements with Grant Thornton on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure which,
if not resolved to the satisfaction of Grant Thornton, would have caused it to
make a reference to the disagreement in connection with its reports. We have
been advised by Grant Thornton that Grant Thornton believes that the following
matter meets the criteria of the Securities and Exchange Commission for a
reportable disagreement, even though the matter was resolved to the
satisfaction of Grant Thornton: We recorded in our preliminary year-end
financial statements for the fiscal year ended February 28, 1999 a $500,000
sale in the fourth quarter of fiscal 1999 to our distributor in Mexico under an
international distribution agreement dated November 24, 1998. While management
initially believed that the sales commitment schedule included in the
distribution agreement, combined with receipt of the master licenses by the
distributor, warranted the recognition of revenues, in accordance with the
advice of Grant Thornton, we did not include the sale in our financial
statements.
During our two most recent fiscal years and the subsequent interim
periods preceding Grant Thornton's dismissal:
(i) Grant Thornton has not advised us that the internal controls
necessary for us to develop reliable financial statements do not exist;
(ii) Grant Thornton has not advised us that information has come to
its attention that has led it to no longer be able to rely on management's
representations or that has made it unwilling to be associated with the
financial statements prepared by management;
(iii) Grant Thornton has not advised us (a) of the need to expand
significantly the scope of our audit, or that information has come to its
attention, during the two most recent fiscal years and the subsequent interim
periods preceding the dismissal, that if further investigated may (i)
materially impact the fairness or reliability of either a previously issued
audit report or the underlying financial statements, or the financial
statements issued or to be issued covering the fiscal periods subsequent to the
date of the most recent financial statements covered by an audit report
(including information that may prevent it from rendering an unqualified audit
report on those financial statements), or (ii) cause it to be unwilling to rely
on management's representations or be associated with the Registrant's
financial statements or, (b) that due to its dismissal, or for any other
reason, it did not so expand the scope of its audit or conduct such further
investigation;
We have been advised by Ernst & Young that neither the firm nor any of
its associates has any material relationship with us or any affiliate of ours.
During our two most recent fiscal years and the subsequent interim periods
prior to engaging Ernst & Young, we have not consulted Ernst & Young regarding
either: (i) the application of accounting principles to a specific transaction,
either completed or proposed, or the type of audit opinion that might be
rendered on our financial statements, for which advice was provided that Ernst
& Young concluded was an important factor considered by us in reaching a
decision as to an accounting, auditing or financial reporting issue; or (ii)
any matter that was either the subject of a disagreement (as defined in
paragraph (a)(1)(iv) of Regulation S-K Item 304) or a reportable event (as
described in paragraph (a)(1)(v) of Regulation S-K, Item 304).
LEGAL MATTERS
The validity of the shares offered hereby has been passed upon for us
by Wood, Exall & Bonnet, L.L.P. Mr. David Wood, a partner of Wood, Exall &
Bonnet, L.L.P., is the brother-in-law of Steven B. Solomon, our Chief Executive
Officer. Mr. Wood owns 100,000 shares of our common stock and options to
purchase 50,000 shares of our common stock, and Mr. Exall owns
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<PAGE> 64
options to purchase 35,000 shares of our common stock. Mr. Wood serves as
General Counsel of Parago and Mr. Exall serves as Deputy General Counsel and
Vice President of Acquisitions of Parago.
EXPERTS
The consolidated financial statements of CT Holdings at February 29,
2000, and for the year then ended, appearing in this Registration Statement have
been audited by Ernst & Young LLP, independent auditors, and at February 28,
1999, and for the year then ended, by Grant Thornton LLP, independent auditors,
as set forth in their respective reports thereon appearing elsewhere herein, and
are included in reliance upon such reports given on the authority of such firms
as experts in accounting and auditing.
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<PAGE> 65
CT HOLDINGS, INC.
(FORMERLY CITADEL TECHNOLOGY, INC.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Annual Financial Statements
Reports of Independent Accountants ............................................ F-2
Consolidated Balance Sheets as of February 29, 2000 and February 28, 1999 ..... F-4
Consolidated Statements of Operations for the years ended
February 29, 2000 and February 28, 1999 .................................... F-6
Consolidated Statements of Stockholders' Equity for the years ended
February 29, 2000 and February 28, 1999 ................................... F-7
Consolidated Statements of Cash Flows for the years ended
February 29, 2000 and February 28, 1999.................................... F-10
Notes to Consolidated Financial Statements..................................... F-11
Interim Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of May 31, 2000 (unaudited) and
February 29, 2000 (audited)................................................. F-26
Condensed Consolidated Statement of Operations for the three months ended
May 31, 2000 and 1999 (unaudited)................... ....................... F-28
Condensed Consolidated Statements of Cash Flows for the three months ended
May 31, 2000 and 1999 (unaudited)........................................... F-29
Notes to Condensed Consolidated Financial Statements........................... F-30
</TABLE>
F-1
<PAGE> 66
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS - FISCAL YEAR 2000
The Board of Directors
CT Holdings, Inc.
We have audited the accompanying consolidated balance sheet of CT
Holdings, Inc. and subsidiaries (the Company) as of February 29, 2000, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of CT Holdings, Inc. and subsidiaries as of February 29, 2000, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
Dallas, Texas
June 2, 2000
F-2
<PAGE> 67
REPORT OF GRANT THORNTON LLP, INDEPENDENT AUDITORS - FISCAL YEAR 1999
Board of Directors
Citadel Technology, Inc.
We have audited the accompanying consolidated balance sheet of CT Holdings,
Inc. (formerly Citadel Technology, Inc.) as of February 28, 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year 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 generally accepted auditing
standards. 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 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 consolidated financial position of CT Holdings, Inc.
(formerly Citadel Technology, Inc.) as of February 28, 1999, and the
consolidated results of its operations and its consolidated cash flows for the
year then ended, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Dallas, Texas
June 11, 1999
F-3
<PAGE> 68
CT HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
February 29, February 28,
ASSETS 2000 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 707,412 $ 3,386,369
Accounts receivable-trade, less allowance for returns and
doubtful accounts of $1,100,000 and $1,208,000 55,241 466,288
Receivables from sale of common stock of subsidiary -- 6,042,000
Notes receivable from related parties 208,934 478,933
Inventory 80,617 148,676
Prepaid expenses 78,535 208,223
------------ ------------
Total current assets 1,130,739 10,730,489
INVESTMENT IN UNCONSOLIDATED AFFILIATE 827,350 --
PROPERTY AND EQUIPMENT, NET 228,102 386,901
PURCHASED SOFTWARE, net of accumulated
amortization of $1,505,536 and $2,718,486 546,864 1,394,706
CAPITALIZED SOFTWARE DEVELOPMENT COSTS,
net of accumulated amortization of $785,762 and $577,000 944,674 1,181,052
OTHER ASSETS 154,308 448,372
------------ ------------
$ 3,832,037 $ 14,141,520
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 69
CT HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS - CONTINUED
<TABLE>
<CAPTION>
February 29, February 28,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses 1,030,501 2,247,600
Payable to affiliate 71,299 --
Current maturities of long-term debt 150,000 311,812
Notes payable 111,288 347,424
------------ ------------
Total current liabilities 1,363,088 2,906,836
OTHER LIABILITIES
Minority interest in consolidated subsidiary -- 2,742,432
------------ ------------
Total liabilities 1,363,088 5,649,268
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Common stock, $.01 par value per share; authorized,
60,000,000 shares; issued and outstanding, 50,136,400
shares in 2000 and 43,259,274 shares in 1999 501,364 432,592
Preferred stock, $.01 par value per share; authorized, 1,000,000
shares; issued and outstanding
Series B convertible, 50 shares in 2000 and 1999
(liquidation value, $50,000) 1 1
Series D convertible, 2,000 shares in 1999 (liquidation
value, $2,000,000) -- 20
Equity notes -- 150,000
Additional paid-in capital 50,390,070 32,985,018
Accumulated deficit (44,586,725) (20,641,875)
Treasury stock, at cost (4,164,613 common shares) (2,500,239) (2,500,239)
Notes receivable for the exercise of stock options
Officers and directors (1,335,522) (1,857,577)
Others -- (75,688)
------------ ------------
Total stockholders' equity 2,468,949 8,492,252
------------ ------------
$ 3,832,037 $ 14,141,520
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 70
CT HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended
----------------------------
February 29, February 28,
2000 1999
------------ ------------
<S> <C> <C>
NET SALES $ 1,292,250 $ 4,439,608
COST OF SALES, EXCLUDING DEPRECIATION, AMORTIZATION
AND WRITE-OFF OF CAPITALIZED SOFTWARE COSTS 61,564 190,461
------------ ------------
Gross profit 1,230,686 4,249,147
OPERATING EXPENSES
Selling, general and administrative expenses 4,334,755 5,817,188
Provision for uncollectible receivables -- 1,231,092
Depreciation and amortization 1,361,556 1,569,519
Research and development expense 392,315 485,275
Write-off of capitalized software costs 625,336 1,422,697
------------ ------------
6,713,962 10,525,771
Operating loss (5,483,276) (6,276,624)
OTHER INCOME (EXPENSE)
Interest expense (53,340) (141,806)
Other 2,551 30,932
Litigation settlement expense -- (822,000)
Equity in loss of unconsolidated affiliate (18,122,874) --
------------ ------------
(18,173,663) (932,874)
Loss before extraordinary item (23,656,939) (7,209,498)
EXTRAORDINARY ITEM - FORGIVENESS OF DEBT -- 459,592
------------ ------------
Net loss (23,656,939) (6,749,906)
Preferred stock dividend requirement (64,493) (128,956)
------------ ------------
Net loss allocable to common stockholders $(23,721,432) $ (6,878,862)
============ ============
Loss per share-basic and diluted
Loss before extraordinary item $ (0.56) $ (0.26)
Extraordinary item -- 0.01
------------ ------------
Net loss $ (0.56) $ (0.25)
============ ============
Weighted average shares outstanding 42,503,070 27,807,748
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 71
CT HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common stock Additional
--------------------------- Preferred Equity paid-in
Shares Amount stock notes capital
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at March 1, 1998 25,881,327 $ 258,813 $ 51 $ 944,000 $ 16,058,442
Exercise of stock options
and warrants 10,943,099 109,431 -- -- 3,760,738
Sale of preferred stock -
2,000 shares of Series D
and 5,000 shares of
Series E -- -- 70 -- 2,253,572
Conversion of debt to 253
shares of Series D
preferred stock -- -- 3 -- 252,997
Conversions to common stock
Debt 1,254,766 12,548 -- -- 831,535
Equity notes and preferred
stock - 5,000 shares of
Series C and 253 shares
of Series D 1,735,082 17,350 (53) (794,000) 1,190,466
Redemption of Series E
preferred stock - 5,000
shares -- -- (50) -- (562,450)
Stock options and common
stock granted as payment
of liabilities 445,000 4,450 -- -- 345,150
Sale of common stock,
net of issuance costs
of $268,855 3,000,000 30,000 -- -- 3,705,000
Stock options granted as
consideration for
assumption of debt by
stockholder -- -- -- -- 500,000
Equity in sales of common
stock by subsidiary -- -- -- -- 4,649,568
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balances at February 28, 1999 43,259,274 $ 432,592 $ 21 $ 150,000 $ 32,985,018
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-7
<PAGE> 72
CT HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED
<TABLE>
<CAPTION>
Accumulated Treasury Notes
deficit stock receivable Total
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at March 1, 1998 $ (13,473,206) $ (2,500,239) $ -- $ 1,287,861
Exercise of stock options
and warrants $ -- $ -- $ (1,933,265) $ 1,936,904
Sale of preferred stock -
2,000 shares of Series D
and 5,000 shares
of Series E -- -- -- 2,253,642
Conversion of debt to 253
shares of Series D
preferred stock -- -- -- 253,000
Conversions to common stock
Debt -- -- -- 844,083
Equity notes and preferred
stock - 5,000 shares of
Series C and 253 shares
of Series D (413,763) -- -- --
Redemption of Series E
preferred stock - 5,000
shares (5,000) -- -- (567,500)
Stock options and common
stock granted as payment
of liabilities -- -- -- 349,600
Sale of common stock,
net of issuance costs
of $268,855 -- -- -- 3,735,000
Stock options granted as
consideration for
assumption of debt by
stockholder -- -- -- 500,000
Equity in sales of common
stock by subsidiary -- -- -- 4,649,568
Net loss (6,749,906) -- -- (6,749,906)
-------------- -------------- -------------- --------------
Balances at February 28, 1999 $ (20,641,875) $ (2,500,239) $ (1,933,265) $ 8,492,252
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of this statement.
F-8
<PAGE> 73
CT HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED
<TABLE>
<CAPTION>
Common stock Additional
--------------------------- Preferred Equity paid-in
Shares Amount stock notes capital
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances at March 1, 1999 43,259,274 $ 432,592 $ 21 $ 150,000 $ 32,985,018
Exercise of stock options
and warrants 3,652,505 36,526 -- -- 1,892,142
Conversions to common stock
Equity notes 533,684 5,337 -- (150,000) 194,492
Preferred stock -
Series D 2,081,937 20,819 (20) -- 217,283
Debt 400,000 4,000 -- -- 193,000
Sale of common stock 200,000 2,000 -- -- 498,000
Shares issued for legal
settlement 7,500 75 -- -- 21,225
Equity in sales of common
stock by subsidiary -- -- -- -- 14,157,466
Repayment of notes receivable -- -- -- -- --
Forgiveness of note receivable
issued as payment for the
exercise of stock options -- -- -- -- --
Stock-based compensation -- -- -- -- 285,000
Other 1,500 15 -- -- (53,556)
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balances at February 29, 2000 50,136,400 $ 501,364 $ 1 $ -- $ 50,390,070
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Accumulated Treasury Notes
deficit stock receivable Total
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balances at March 1, 1999 $ (20,641,875) $ (2,500,239) $ (1,933,265) $ 8,492,252
Exercise of stock options
and warrants -- -- (55,860) 1,872,808
Conversions to common stock
Equity notes (49,829) -- -- --
Preferred stock -
Series D (238,082) -- -- --
Debt -- -- -- 197,000
Sale of common stock -- -- -- 500,000
Shares issued for legal
settlement -- -- -- 21,300
Equity in sales of common
stock by subsidiary -- -- -- 14,157,466
Repayment of notes receivable -- -- 224,603 224,603
Forgiveness of note receivable
issued as payment for the
exercise of stock options -- -- 295,000 295,000
Stock-based compensation -- -- -- 285,000
Other -- -- 134,000 80,459
Net loss (23,656,939) -- -- (23,656,939)
-------------- -------------- -------------- --------------
Balances at February 29, 2000 $ (44,586,725) $ (2,500,239) $ (1,335,522) $ 2,468,949
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of this statement.
F-9
<PAGE> 74
CT HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended
----------------------------
February 29, February 28,
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(23,656,939) $ (6,749,906)
Adjustments to reconcile net loss to net cash used
by operating activities
Depreciation and amortization 1,361,556 1,569,519
Equity in loss of unconsolidated affiliate 18,122,874 --
Common stock and options issued as payment of expenses 25,482 349,600
Write-down of software development costs 625,336 1,422,697
Extraordinary item -- (459,592)
Noncash employee severance expense 580,000 --
Provision for losses on accounts receivable
and sales returns -- 1,231,092
Other 91,999 49,054
Changes in operating assets and liabilities
Accounts receivable 411,047 (1,261,765)
Notes receivable 369,603 (102,446)
Prepaid expenses 129,686 (136,243)
Inventory 68,059 (91,163)
Software development costs (649,131) (895,546)
Cash overdraft -- (10,249)
Accounts payable and accrued expenses (1,170,572) (26,541)
Payable to affiliate 71,299 --
Other assets 254,072 (97,722)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (3,365,629) (5,209,211)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (70,388) (197,095)
Reduction in cash due to deconsolidation of Parago, Inc. (1,176,292) --
Capital contributions to unconsolidated affiliate (140,786) --
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (1,387,466) (197,095)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable (149,362) (355,167)
Proceeds from notes payable 70,226 471,900
Proceeds from long-term debt -- --
Repayments on long-term debt (161,812) (40,659)
Proceeds from sale of preferred stock -- 2,253,642
Proceeds from sale of equity notes -- --
Proceeds from sale of common stock 2,315,086 5,821,904
Proceeds from sale of subsidiary stock -- 1,200,000
Redemption of equity notes -- --
Redemption of preferred stock -- (567,500)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,074,138 8,784,120
------------ ------------
Net increase (decrease) in cash (2,678,957) 3,377,814
Cash at beginning of the year 3,386,369 8,555
------------ ------------
Cash at end of the year $ 707,412 $ 3,386,369
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-10
<PAGE> 75
CT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
The Company is an incubator of business-to-business (B2B) Internet companies
that provides Internet-based early stage business-to-business ventures with a
single source of management capital, as well as consulting on operations,
marketing and strategic planning.
The Company began its Internet activities in 1999 with the formation of Parago,
Inc. (formerly How2.com, Inc.). Parago is an application service provider (ASP)
and business process outsourcer (BPO) which provides online promotional
services, online multimedia product information and support services, and
online data aggregation and management services to its business clients.
Parago's comprehensive integrated suite of outsourced customer care solutions
includes manufacturer rebate processing, product information, customer data
asset management and other services that are marketed across multiple industry
lines. At February 29, 2000 and February 28, 1999, the Company had a 45% and
63% ownership interest in Parago, respectively. See Note G.
In addition to its B2B incubation business, the Company continues to operate
its "Citadel Technology" business line, which is focused on developing and
marketing security and administration software products for both computer
networks and desktop personal computers.
Since its inception the Company has incurred losses, and at February 29, 2000
has an accumulated deficit of $44,586,725. The Company's ultimate success in
fully implementing its new strategy and continuing its existing business line
is dependent on its ability to raise additional capital. While the Company
currently believes that it has the ability to obtain additional equity or debt
financing, the Company has received a commitment from its President to fund up
to $1,500,000 of the expected operating cash flow needs, if any, of the Company
through March 1, 2001 in the event the Company's cash flows from operating,
investing and financing activities are insufficient to meet the expected
operating obligations of the Company as they come due. Additionally, the
Company also plans to sell stock in private equity financings during fiscal
year 2001. The Company expects that its equity investee, Parago, will incur
losses in the foreseeable future as it continues to develop and upgrade its
technology and infrastructure, develop and expand its product and service
offerings, and establish and sustain relationships with manufacturers,
retailers and service organizations. Parago believes that the net proceeds from
its private equity financings will be sufficient to fund its working capital
needs for at least the next 12 months.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Principles of Consolidation
For the year ended February 28, 1999, the consolidated financial statements
include the accounts of the Company and its then 50% or more owned subsidiary,
Parago, Inc. All significant intercompany accounts and transactions were
eliminated in consolidation. For the year ended February 29, 2000, the
Company's investment in Parago, Inc. is presented under the equity method of
accounting, for the Company has the ability to exercise significant influence,
but not control, of the investee. Significant influence generally represents an
ownership interest of the affiliate's voting stock of between 20% and 50%.
Accordingly, under the equity method of accounting, the Company's share of the
investee's earnings or loss is included in the consolidated statements of
operations. The Company records it investments in equity-method investees on
the consolidated balance sheets as "Investment in Unconsolidated Affiliate" and
its share of the investee's earnings or losses in "Equity in Loss of
Unconsolidated Affiliate."
F-11
<PAGE> 76
CT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
Under the equity method, when Parago sells its stock to unrelated parties at a
price in excess of its book value, the Company's net investment in that
affiliate increases. The Company records a contribution to additional paid in
capital representing the difference between the carrying value of the Company's
investment and its proportionate share of the underlying net book value of the
affiliate after sales of the affiliate's common stock to unrelated parties.
All other investments for which the Company does not have the ability to
exercise significant influence or for which there is not a readily determinable
market value, are accounted for under the cost method of accounting.
Revenue Recognition
The Company recognizes revenues when persuasive evidence of a sale arrangement
exists, delivery has occurred, the fee is fixed or determinable and
collectibility is probable.
Revenues generated from products sold through traditional channels where the
right of return exist are reduced by reserves for estimated product returns.
Such reserves are based on estimates developed by management. As unused
products in these channels are exposed to rapid changes in consumer preferences
or technological obsolescence due to new operating systems or computing
products, it is reasonably possible that these estimates may change in the
future.
Revenues related to significant post-contract support agreements (generally
product maintenance agreements) are deferred and recognized over the period of
the agreements.
Royalty revenues are recognized as earned unless collection of such revenues is
not probable. When collection is not probable, revenues are recognized as
payments are received.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an initial
maturity of three months or less to be cash equivalents.
Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over estimated useful lives of the assets.
Software Costs
Purchased software is recorded at cost and is amortized by the greater of the
revenue method or the straight-line method over four to seven years.
The Company capitalizes software development costs when technological
feasibility has been established. Software development costs not qualifying for
capitalization are expensed as research and development costs. Research and
development expense totaled $392,315 and $485,275 in 2000 and 1999,
respectively. Capitalized costs are amortized using the greater of the revenue
method or the straight-line method with useful lives ranging from three to five
years. Amortization expense was $1,108,017 and $1,371,402 in fiscal 2000 and
1999, respectively. The Company evaluates the estimated net realizable value of
each software product at each balance sheet date and records write-downs to net
realizable value for any products for which the net book value is in excess of
net realizable value. In the fourth quarters of fiscal 2000 and fiscal 1999,
software costs were written
F-12
<PAGE> 77
CT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
down by $625,336 and $1,422,697, respectively. It is reasonably possible that
future events could cause a reduction in the amortization period of software
costs, or additional write downs may be required.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of," the Company reviews long-lived assets pertaining to those
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. If conditions indicate
an asset might be impaired , the Company estimates the future cash flows
expected to result from the use of the asset and its eventual disposition. The
impairment would be measured by the amount by which the asset exceeds the
future discounted cash flow.
Income Taxes
Deferred income tax expenses are provided based upon estimated future tax
effects of differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes
calculated based upon provisions of enacted laws.
Advertising and Marketing Expense
The Company expenses costs associated with advertising and marketing as they
are incurred and includes these costs in selling, general and administrative
expense. Advertising and marketing expense for fiscal year 2000 and fiscal year
1999 was $748,605 and $1,509,758, respectively.
Stock-Based Compensation
The Company has elected to account for stock-based compensation to employees
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations. Accordingly, compensation cost for stock options is measured
as the excess, if any, of the fair market value of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the stock.
See Note F regarding the pro forma net loss and earnings per share information
as required by the alternative fair value accounting provided for under
Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123).
The Company accounts for stock based awards issued to non-employees in
accordance with the fair value method of SFAS 123 and Emerging Issues Task
Force Issue No. 96-18, "Accounting for Equity Instruments with Variable Terms
that are Issued for Consideration other than Employee Services under FASB
Statement No. 123." See Note F.
Fair Value of Financial Instruments
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and long-term obligations are carried at
cost, which approximates fair value due to the short maturity of these
instruments.
Net Loss Per Common Share
Basic loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the period. Basic
loss per share excludes any dilutive effects of options. Diluted
F-13
<PAGE> 78
CT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
loss per common share includes the dilutive effect of options and warrants
calculated using the treasury stock method, and, includes the effect of
convertible preferred stock using the if-converted method. Stock options and
warrants to purchase 5,823,022 shares of common stock have been excluded from
the computation of diluted loss per share, as the effect would be
anti-dilutive. In addition, approximately 9,400 shares (based on the price per
share for the Company's common stock on February 29, 2000), which would be
issued upon the conversion of Series B preferred stock, have been excluded from
the computation of loss per share.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 requires that an entity recognize
all derivatives as either assets or liabilities and measure those instruments
at fair value. It also provides guidance for accounting changes in the fair
value of the derivative (i.e., gains and losses). SFAS 133 is effective for all
fiscal years beginning after June 15, 2000. The Company does not expect the
adoption of SFAS 133 will have a material effect on its financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements". SAB No. 101 summarizes certain of
the SEC's views in applying generally accepted accounting principles to revenue
recognition in financial statements. It is effective for the fourth fiscal
quarter beginning after December 15, 1999. We do not expect the adoption of SAB
No. 101 will have a material effect on our results of operation or financial
condition.
NOTE B - PROPERTY AND EQUIPMENT
Major classes of property and equipment and their estimated useful lives are as
follows:
<TABLE>
<CAPTION>
February 29, February 28,
Lives 2000 1999
------------ ------------ ------------
<S> <C> <C> <C>
Furniture 5-10 years $ 170,981 $ 138,770
Office equipment 3-7 years 83,935 82,712
Leasehold improvements Lease term 68,672 68,672
Computer equipment 3-7 years 643,753 606,798
------------ ------------
967,341 896,952
Less accumulated depreciation (739,239) (510,051)
------------ ------------
Net property and equipment $ 228,102 $ 386,901
============ ============
</TABLE>
F-14
<PAGE> 79
CT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
February 29, February 28,
2000 1999
------------ ------------
<S> <C> <C>
Unsecured notes payable to individuals,
due at various dates in 1999, bearing
interest at rates ranging from 0% to 10%; weighted average
interest rate is approximately 6.1% (1) $ 27,500 $ 192,500
Note payable to banks, bearing interest at 7.35% to 7.45% 55,833 120,833
Other notes payable 27,955 34,091
------------ ------------
$ 111,288 $ 347,424
============ ============
</TABLE>
(1) Certain of these notes were issued with warrants to purchase
common stock. The total number of warrants issued was 509,375 with an
exercise price ranging from $0.32 to $0.89 per share. A note for
$400,000 was converted into common stock, at $1.075 per share during
the year ended February 28, 1999. Additionally, a note for $140,000
plus accrued interest was converted into 400,000 shares of common
stock in fiscal year 2000.
NOTE D - LONG-TERM DEBT
<TABLE>
<CAPTION>
February 29, February 28,
2000 1999
------------ ------------
<S> <C> <C>
Note payable to Xerox Corporation, non-interest bearing, which matured
September 1998, interest imputed at 10% (net of discount) 150,000 200,000
Note payable to a bank, payable in monthly installments with interest
at 9.75%, through January 2000 -- 111,812
------------ ------------
150,000 311,812
Less current maturities 150,000 311,812
------------ ------------
$ -- $ --
============ ============
</TABLE>
F-15
<PAGE> 80
CT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E - INCOME TAXES
Following is the reconciliation of the Company's income tax provision with the
amount of tax computed at the statutory rate:
<TABLE>
<CAPTION>
February 29, February 28,
2000 1999
------------ ------------
<S> <C> <C>
Expense (benefit) computed at federal statutory rate $ (7,885,000) $ (2,295,000)
Losses not benefited 8,815,000 2,228,000
Other (930,000) 67,000
------------ ------------
$ -- $ --
============ ============
</TABLE>
The significant components of the Company's deferred tax liabilities and assets
are as follows:
<TABLE>
<CAPTION>
February 29, February 28,
2000 1999
------------ ------------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $ 7,432,000 $ 6,044,000
Accounts receivable 479,000 410,000
Investment in subsidiary (257,000) --
Accounts payable and accrued expenses (15,000) --
------------ ------------
Total deferred tax assets 7,639,000 6,454,000
Valuation allowance (7,639,000) (6,454,000)
------------ ------------
Total deferred tax assets, net $ -- $ --
============ ============
</TABLE>
For federal income tax purposes, at February 29, 2000, the Company had a net
operating loss carryforward of approximately $22,500,000. The net operating
loss carryover, which is subject to annual limitations as prescribed by the
Internal Revenue Code, is available to offset future taxable income through
2013. A valuation allowance has been recorded for the entire amount of the net
deferred tax asset as management does not believe it is more likely than not
that the deferred tax assets will be utilized in future years.
F-16
<PAGE> 81
CT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - STOCKHOLDERS' EQUITY
Preferred Stock
The Company's outstanding Series B preferred stock is convertible into shares
of common stock at 83% of the average market price of the common stock for the
five days preceding conversion. Each share of Series B preferred stock has a
conversion value of $1,000. Dividends accrue at 5%. As of February 29, 2000 all
but 50 shares have been converted into common stock. If the shares had been
converted on February 29, 2000, approximately 9,400 shares of common stock
would be issued.
The Series D preferred stock is convertible into shares of common stock at
$1.075 per share. Dividends accrue at 11%. As of February 29, 2000 all
outstanding shares and accrued dividends have been converted into common stock.
Holders of Series B and Series D convertible preferred stock have voting rights
only to the extent required under Delaware corporate law.
During fiscal 1999, the Company issued and redeemed 5,000 shares of Series E
convertible preferred stock for $452,920 and $567,500, respectively.
Dividends on all series of preferred stock are payable in cash or common stock
at the option of the Company.
Equity Notes
The equity notes are unsecured and are convertible at any time until maturity
into common stock at 80% of the average market price of the Company's common
stock. The equity notes bear interest at 8% and the principal and interest due
at maturity is payable only in common stock. Any unpaid balance past the
maturity date bears interest at 15%. During fiscal year 2000, the remaining
balance of the equity notes were converted to common stock.
F-17
<PAGE> 82
CT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - STOCKHOLDERS' EQUITY - CONTINUED
Stock Options and Warrants
The Company has issued stock options to directors, employees, and others.
Options are granted at no less than fair value at date of grant, as determined
by the board of directors. Generally, the options vest over no more than three
years. Following is a summary of option transactions for the periods beginning
March 1, 1998:
<TABLE>
<CAPTION>
Weighted
average
exercise
Shares price
---------- ----------
<S> <C> <C>
Outstanding at March 1, 1998 9,796,750 $ 0.41
Granted 1,804,088 0.82
Exercised (8,124,181) 0.32
Expired or canceled (514,500) 1.31
---------- ----------
Outstanding at February 28, 1999 2,962,157 0.55
Granted 728,000 4.92
Exercised (2,169,455) 0.47
Expired or cancelled (254,435) 1.06
---------- ----------
Outstanding at February 29, 2000 1,266,267 $ 3.07
========== ==========
Exercisable at February 28, 1999 1,163,170 $ 0.63
Exercisable at February 29, 2000 377,821 $ 0.63
Weighted-average fair value of options granted during
the year ended February 28, 1999 - $0.73
Weighted-average fair value of options granted during
the year ended February 29, 2000 - $2.88
</TABLE>
At February 29, 2000, $1,335,000 of notes receivable are outstanding in
connection with notes issued in fiscal 1999 for the exercise of certain stock
options. These notes were issued with recourse, bear interest at 5%, and mature
in fiscal year 2001.
F-18
<PAGE> 83
CT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - STOCKHOLDERS' EQUITY - CONTINUED
The following table summarizes other information regarding stock options at
February 29, 2000:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------------------------------------- ----------------------
Weighted
average
remaining Weighted Weighted
contractual average average
Range of life exercise exercise
exercise prices Shares (in years) price Shares price
--------------- ---------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.25 - 0.50 273,017 4.4 $ 0.31 173,393 $ 0.30
0.67 - 1.75 275,250 3.2 0.86 204,428 0.90
3.00 - 5.00 718,000 5.0 4.96 -- --
---------- ------ --------- ------
1,266,267 $ 3.07 377,821 $ 0.63
========== ====== ========= ======
</TABLE>
The Company has adopted the disclosure provisions of Statement No. 123, as
discussed in Note A, and continues to apply Opinion 25 for stock options
granted to employees. If the Company had recognized compensation expense based
upon the fair value at the grant date for options granted to employees during
fiscal years ended February 29, 2000 and February 28, 1999, the effect on net
loss and loss per share would have been as follows:
<TABLE>
<CAPTION>
Years ended
--------------------------------
February 29, February 28,
2000 1999
-------------- --------------
<S> <C> <C>
Net loss
As reported $ (23,656,939) $ (6,749,906)
Pro forma (24,130,110) (7,194,115)
Loss per common share
As reported (.56) (.25)
Pro forma (.57) (.26)
</TABLE>
The fair value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
Years ended
---------------------------------
February 29, February 28,
2000 1999
------------- ------------
<S> <C> <C>
Expected volatility 113.5% 134-149%
Risk-free interest rates 6.0% 4.2-5.6%
Dividend yield 0% 0%
Expected option lives 1-3 years 1-2 years
</TABLE>
F-19
<PAGE> 84
CT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - STOCKHOLDERS' EQUITY - CONTINUED
The following summarizes the warrant transactions for 2000 and 1999:
<TABLE>
<CAPTION>
Weighted
average
Shares exercise price
-------------- --------------
<S> <C> <C>
Outstanding at March 1, 1998 6,105,138 $ 2.00
Issued 5,557,383 1.60
Exercised (3,400,453) 0.58
Expired or canceled (2,222,263) 1.04
-------------- --------------
Outstanding at February 28, 1999 6,039,805 2.82
Issued -- --
Exercised (1,483,050) 0.58
Expired or cancelled -- --
-------------- --------------
Outstanding at February 29, 2000 4,556,755 $ 3.55
============== ==============
</TABLE>
During fiscal 1999, the Company issued warrants to purchase:
o 1,750,000 shares of common stock in connection with the sale of common
stock,
o 150,000 shares of common stock in connection with the sale of preferred
stock,
o 200,000 shares of common stock as payment of legal fees, and
o 351,125 shares of common stock in other transactions.
Also, the terms of warrants to purchase 2,172,263 shares at $.89 per share were
adjusted pursuant to antidilution provisions of the warrant agreements to
increase the number of warrants to 3,106,258 and reduce the price to $.59 per
share; these warrants have been reflected as cancelled and granted in the table
above for fiscal 1999.
NOTE G. INVESTMENT IN UNCONSOLIDATED AFFILIATE
At February 28, 1999, the Company owned 63% of Parago's common stock and
accounted for its investment under the consolidation method. Through subsequent
sale and distribution by Parago of shares of its common stock, the Company's
ownership was reduced below 50% beginning in July 1999. As a result, beginning
July 1999, the Company began accounting for its remaining investment in Parago
under the equity method of accounting rather than the consolidated method.
Prior to these events, the operating results of Parago were consolidated in the
Company's consolidated financial statements. At February 29, 2000, the Company
owns 45% of Parago's outstanding shares of common stock.
In connection with acquisitions, exercise of stock options and warrants, and
various private placement transactions during the fiscal year 1999 and 2000,
Parago issued 24,207,913 shares of common stock to other
F-20
<PAGE> 85
CT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G. INVESTMENT IN UNCONSOLIDATED AFFILIATE - CONTINUED
unrelated parties for a total value of $39,783,832, and at prices ranging from
$0.025 to $10.00 per share. During fiscal year 2000, the Company recorded to
additional paid in capital contributions totaling $14,157,466, which represents
the difference between the carrying value of the Company's investment in Parago
and its proportionate share of the underlying net book value of Parago after
the issuance of Parago's common stock to unrelated parties.
In January 2000, Parago raised $15,000,000 through the issuance of 200,000
shares of Series A Convertible Preferred Stock to Seaboard Ventures, LLC and
100,000 shares of Series B Convertible Preferred Stock to Watershed Capital I,
L.P. At the time of issuance, the Series A and B preferred stock is convertible
into 3,000,000 shares of Parago common stock. Subsequent to fiscal year 2000,
Parago raised $21,500,000 through the issuance of 430,000 shares of Series C
Convertible Preferred Stock to THLee.Putnam Internet Partners LP, Dain Rauscher
Wessels Investors LLC and Watershed Capital I, L.P. At the time of issuance,
the Series C preferred stock is convertible into 4,300,000 shares of Parago
common stock. In connection with the Series A, B, and C financing, the
preferred stockholders were issued 3,300,000 warrants to purchase common stock.
The warrants vest immediately and have a weighted average exercise price of
$2.13.
At February 29, 2000, Parago has 16,757,317 stock options outstanding with a
weighted average exercise price of $1.47, and 5,458,813 of the options
outstanding are exercisable at a weighted average exercise price of $0.96.
The following is the condensed financial information of Parago at February 29,
2000 and for the fiscal year then ended.
<TABLE>
<CAPTION>
SUMMARIZED BALANCE SHEET FEBRUARY 29, 2000
------------------------ ------------------
<S> <C>
Current assets $ 18,880,751
Noncurrent assets 21,931,528
------------------
Total assets $ 40,812,279
==================
Current liabilities $ 23,870,338
Long-term debt 623,140
------------------
Total liabilities 24,493,478
------------------
Redeemable common stock 2,000,000
Shareholders' equity 14,318,801
------------------
$ 40,812,279
==================
</TABLE>
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
SUMMARIZED STATEMENT OF OPERATIONS FEBRUARY 29, 2000
---------------------------------- ------------------
<S> <C>
Revenues $ 8,293,650
Gross profit 4,807,836
Sales and marketing expenses 20,171,534
Operating loss (40,491,249)
Net loss (39,307,459)
</TABLE>
F-21
<PAGE> 86
CT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G. INVESTMENT IN UNCONSOLIDATED AFFILIATE - CONTINUED
The Company has announced that it intends to distribute to its shareholders,
shares of common stock of Parago upon compliance with Securities and Exchange
Commission (SEC) requirements applicable to CT Holdings and Parago in
connection with the proposed spin-off and upon the expiration of a 180 day
lockup agreement between the underwriters of Parago's proposed initial public
offering and Parago. Compliance with SEC requirements and state law
requirements could delay or prevent the completion of the spin-off. There can
be no assurances that CT Holdings will be able to effect the distribution of
the shares of Parago to CT Holdings' stockholders on a timely basis or at all.
In addition, CT Holdings has agreed to convert certain shares of Parago common
stock issued in connection with certain acquisitions by Parago as well as
issued pursuant to the terms of the stock purchase agreements between Parago
and some of its stockholders into shares of CT Holdings common stock. This
could result in the issuance of up to 500,000 additional shares of CT Holdings
common stock (in connection with Parago's acquisition of 2-Lane Media) and up
to 414,000 additional shares of CT Holdings common stock at a conversion price
of $3.75 per share (in connection with the stock purchase agreements), which
would have the effect of diluting CT Holding's stockholders if the market price
for CT Holding's stock is above that price at the time of conversion.
NOTE H - RELATED PARTY TRANSACTIONS
During the year ended February 28, 1999, the Company loaned approximately
$1,525,000, exclusive of financing provided for the exercise of stock options,
to its Chief Executive Officer, Mr. Solomon. At February 29, 2000 and February
28, 1999, $209,000 and $354,000, respectively, remained unpaid.
The Company has contracted with a major shareholder in the Company, Metamor
Software Solutions, a division of Metamor Worldwide, Inc. (Metamor) to provide
various development services for the Company. The Company incurred
approximately $2,000 and $600,000 in expenses related to these services during
fiscal years ended February 29, 2000 and February 28, 1999, respectively.
Kenneth R. Johnsen, one of the Company's former directors, was the Executive
Vice President of Metamor during this time. In June 1999, Mr. Johnsen joined
the Company's subsidiary, Parago, as its President and Chief Operating Officer.
In connection therewith, Mr. Johnsen was granted options to purchase 2,000,000
shares of Parago common stock at $0.025 per share and options to purchase
1,800,000 shares at $0.25 per share.
During fiscal years ended February 29, 2000 and February 28, 1999, the Company
and Parago incurred legal fees in the amount of approximately $86,000 and
$140,000, respectively to Wood, Exall & Bonnet, L.L.P. David Wood, a partner of
such firm, is a relative of Mr. Solomon. Subsequent to February 28, 1999, Mr.
Wood joined Parago as its General Counsel.
In August 1998, the Company granted stock options to a stockholder and reduced
the exercise price of certain other stock options in consideration for the
stockholder's assumption of indebtedness of the Company in the principal amount
of $500,000. The transactions resulted in no gain or loss. At February 28,
1999, the Company had a $125,000 receivable from the stockholder. This
outstanding balance was repaid in full during fiscal 2000.
Richard L. Travis, Jr., the Company's former Chief Operating Officer and Chief
Financial Officer, resigned from the Company and his employment agreement was
terminated effective as of January 14, 2000. In connection with his resignation
from the Company and the termination of his employment agreement, Mr. Travis
and the Company entered into a Settlement and Release Agreement which provides,
among other things, for the payment of an aggregate of $50,001 to Mr. Travis in
three equal monthly installments of $16,667 commencing on the last day of each
of the first three months following Mr. Travis' resignation from the Company.
The Settlement and Release Agreement also provides for Mr. Travis to perform
certain financial consulting services for the Company (as an independent
contractor) until April 14, 2000. Also, in connection with the Settlement and
Release
F-22
<PAGE> 87
CT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - RELATED PARTY TRANSACTIONS - CONTINUED
Agreement, the Company agreed to forgive an aggregate of $295,000, plus accrued
interest, of indebtedness owed by Mr. Travis to the Company. In addition,
Parago accelerated certain of the Parago options granted to Mr. Travis, which
resulted in compensation expense of $285,000 to the Company.
On January 7, 1999, the Company acquired 20,000,000 shares of Parago common
stock in an organizational subscription for an aggregate purchase price of
$50,000 and sharing of the Company's resources, including personnel,
administrative and financial resources. The Company continued to provide these
resources to Parago through June 30, 1999. In consideration for these
resources, the Company allocated a portion of its overhead costs related to
these services to Parago. These allocated expenses, totaling approximately
$141,000, were recognized by Parago as a contribution to equity, as the
services were provided in connection with the Company's initial equity
investment.
During the fiscal year ended February 29, 2000, the Company borrowed cash from
Parago to cover short-term cash requirements. As a result, Parago issued
promissory notes to the Company for approximately $571,299 for its initial
investment of $50,000 in Parago and sharing of other cash disbursements made to
assist the Company in meeting short-term cash requirements. The promissory
notes are secured by 300,000 shares of Parago common stock, are due on demand,
and bear interest at five percent. In December 1999, the Company paid $500,000
of its outstanding note balance.
NOTE I - COMMITMENTS AND CONTINGENCIES
The Company leases office space and certain equipment under noncancellable
operating lease agreements expiring at various dates through 2003. Future
minimum lease payments under these leases at February 29, 2000, were as
follows:
<TABLE>
<CAPTION>
Year ending
February 29,
------------
<S> <C>
2001 $ 170,085
2002 170,085
2003 22,715
-----------
Total $ 362,885
===========
</TABLE>
Rental expense totaled approximately $228,000 and $316,000 for the years ended
February 29, 2000 and February 28, 1999, respectively.
On January 7, 1998, the Company's former Houston landlord filed a lawsuit
against the Company alleging that the Company breached a certain lease covering
the Company's former Houston office space. The suit seeks damages to date of
approximately $486,000, plus attorney's fees, pre and post judgment interest
and court costs. In July 1999, the parties reached an agreement in principle to
settle the suit for $325,000 to be paid over nine months ending in April 2000.
The Company and one of its officers were involved in an arbitration proceeding
with Vestcom Ltd., which claimed compensation and a finder's fee for introducing
the Company to a third party. Vestcom sought damages of the value of 100,000
shares of Company common stock (alleged to be valued at $1,900,000), plus 50% of
additional compensation paid by the Company to the third party. The Company
filed a declaratory judgment action against Vestcom to determine that the
alleged contract was not valid based on its defenses. The case was styled
Citadel Computer Systems, Inc. and Steven B. Solomon v. Vestcom, Ltd., in the
193rd Judicial District Court in Dallas County, Texas. In October 1998, the
Texas court entered a judgment and preliminary injunction in favor of the
Company and its officer that the purported agreement was a forgery. As a result,
the arbitration proceeding was
F-23
<PAGE> 88
CT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - COMMITMENTS AND CONTINGENCIES - CONTINUED
dismissed by the American Arbitration Association. The defendant appealed the
decision of the Texas court. In November 1998, Vestcom filed a lawsuit against
the Company in Texas state court styled Vestcom v. Citadel in the 68th Judicial
Court, Dallas County, Texas, reasserting the same basic claims as in the
arbitration proceeding. In January 2000 the parties reached an agreement to
settle the suit for the original amount of the warrants claimed (100,000 shares
with an exercise price of $1.375 per share). This action was dismissed for want
of prosecution on the announcement of settlement by the parties. Assuming
Vestcom received actual or constructive notice of that dismissal near the time
of its entry, the Company believes that the time to seek reinstatement of the
case, a new trial, or review before the Court of Appeals has expired. However,
as of the date of issuance of these financial statements, no binding agreement
has been signed by both parties.
In August 1998, Janssen-Meyers Associates L.P. ("JMA") filed a lawsuit against
us. The suit alleges that we breached a letter of intent dated September 1995
and/or a Placement Agency Agreement dated November 1995 between JMA and Citadel
Computer Systems Incorporated, which merged with a subsidiary of the Company in
February 1996. As its damages, JMA claims that it is entitled to, among other
things, the cash value of 1.8 million $0.89 warrants valued during May 1996.
According to JMA's valuation of those warrants, potential damages are alleged
to exceed $25 million. The Company vigorously disputes that it breached either
the letter of intent or the Placement Agency Agreement or that it is liable to
JMA. The Company has retained a valuation expert to address JMA's valuation
claims. The lawsuit, styled Janssen-Meyers Associates, L.P. v. Citadel
Technology, Inc., was filed in the Supreme Court of the State of New York,
County of New York. We removed the case to federal court in the Southern
District of New York. Subsequent to November 30, 1999, Janssen-Meyers filed a
motion for partial summary judgment and we filed a motion for summary judgment
in the matter. On March 30, 2000, the court heard the motions for summary
judgment and denied the motions filed by the Company and JMA. The case is
scheduled for mediation on June 27, 2000, and is set for trial on August 14,
2000. In addition to vigorously defending the claims asserted by JMA, the
Company will be filing a separate lawsuit to recover some potential
overpayments to JMA.
At this time, the Company is unable to predict the ultimate outcome of these
suits, the costs associated with defending the claims and pursuing
counterclaims, and monetary compensation awarded, if any.
The Company is also involved in other litigation. Such litigation is not
material to the Company's consolidated financial condition or results of
operations.
At February 29, 2000, the Company had an employment agreement with one of its
officers. The agreement expires in 2002. Parago has an employment agreement
with its chief executive officer, who is also the Company's chief executive
officer, that expires in 2004. Parago has been paying the chief executive
officer's salary since July 1999.
NOTE J - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Years ended
---------------------------
February 29, February 28,
2000 1999
------------ ------------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ -- $ --
Non-cash investing and financing transactions:
Notes payable converted to preferred stock -- 253,600
Payment of dividends in common stock -- --
Conversions to common stock
Debt 197,000 844,083
Preferred stock and equity notes 437,931 1,956,956
Common stock and stock options
issued in satisfaction of debt -- 849,600
Common stock sold for notes or subscriptions -- 8,245,265
</TABLE>
NOTE K - EXTRAORDINARY ITEM
The extraordinary item in fiscal 1999 results from gains on debt forgiveness,
which consists principally of a $428,316 reduction in the note payable to Xerox
Corporation (Note D).
F-24
<PAGE> 89
CT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - MAJOR CUSTOMERS
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral. The Company maintains an allowance for doubtful
accounts based on the expected collectibility of all trade accounts receivable.
To date, the losses incurred by the Company have not exceeded management's
expectations.
Major customer information is presented based on the aggregate amount of sales
net of any returns. In fiscal year 2000, four customers accounted for
approximately 29% of our net sales, while in fiscal year 1999, four customers
accounted for approximately 54% of net sales.
NOTE M - SUBSEQUENT EVENTS
On May 5, 2000 the Company completed a previously announced transaction whereby
it acquired a significant minority interest in River Logic, Inc., a Delaware
corporation formerly known as iNetze.com, Inc. The Company acquired an
aggregate of approximately 5.9% of the outstanding shares of common stock of
River Logic, Inc. ("River Logic") from Robert C. Whitehair, Tim Collins, and F.
Shanahan McAdoo in exchange for 333,333 shares of the Company's common stock.
The Company also acquired shares of Series A Convertible Preferred Stock from
River Logic in exchange for the contribution by a wholly-owned subsidiary of
the Company of certain assets (the "ESRN Network"), as described below. The
acquired preferred stock, upon conversion, would represent approximately 13.1%
of the outstanding shares of common stock of River Logic as of May 5, 2000. In
connection with the transaction, the Company, River Logic and certain of River
Logic's stockholders entered into a Stockholders Agreement providing for, among
other things, restrictions on the transferability of River Logic securities,
rights of first refusal and co-sale with respect to River Logic securities, and
registration rights with respect to River Logic securities. The Stockholders
Agreement also provides the Company with the right to appoint one member of
River Logic's Board of Directors so long as the Company continues to own at
least 10% of River Logic's capital stock on a fully diluted basis.
In connection with the transaction, the Company also made two $300,000 bridge
loans to River Logic, convertible into 800,000 shares, in the aggregate, of
common stock that would represent approximately 3.8% of the outstanding common
stock of River Logic as of May 5, 2000. Each of the bridge loans (i) bears
interest at a rate of 12% per annum through its first anniversary and at one
percent above the prime rate per annum thereafter, (ii) is secured by certain
assets of River Logic, (iii) is payable upon the Company's demand and (iv) is
prepayable by River Logic commencing on its third anniversary date. As a result
of the transaction, the Company possesses approximately 19% (22.2% in the event
the bridge loans and other securities are converted in full) of the voting
power with respect to River Logic.
The ESRN Assets consist of the EBSCO School Resource Network (ESRN Network), an
educational network catering to kindergarten through 12th grade (K-12). The
ESRN Network is designed to support school administrators, teachers, students
and parents by providing them with a comprehensive set of tools and resources
targeting their specific needs. The ESRN Network is comprised of learning
applications that integrate EBSCO Industries' database of content relating to
K-12. The ESRN Network was acquired by a wholly-owned subsidiary of the Company
from EBSCO Industries in connection with this transaction in exchange for
666,667 shares of the Company's common stock.
We intend to file a resale registration statement relating to the shares of our
common stock issued in connection with this transaction within 90 days of the
closing.
River Logic, headquartered in Beverly, Massachusetts, creates and operates
integrated decision support networks for industries such as K-12 Education. In
addition to K-12 education, River Logic has several other industry-specific
networks in development.
The Company has valued its investment in River Logic at $2,380,000 based on the
fair value of the 1,000,000 shares of common stock issued and will account for
its investment using the cost method.
F-25
<PAGE> 90
CT HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31, FEBRUARY 29,
ASSETS 2000 2000
----------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 39,533 $ 707,412
Accounts receivable, less allowance for returns and
doubtful accounts of $1,100,000 and $1,100,000 64,171 55,241
Notes receivable from related parties 208,934 208,934
Notes receivable from affiliates 600,000 --
Inventory 78,277 80,617
Prepaid expenses 40,297 78,535
---------- ----------
Total current assets 1,031,212 1,130,739
INVESTMENT IN UNCONSOLIDATED AFFILIATES 2,486,917 827,350
PROPERTY AND EQUIPMENT, net 170,360 228,102
PURCHASED SOFTWARE, net of accumulated
amortization of $1,601,584 and $1,505,536 450,816 546,864
CAPITALIZED SOFTWARE DEVELOPMENT COSTS,
net of accumulated amortization of $922,728 and $785,762 909,969 944,674
OTHER ASSETS 148,221 154,308
---------- ----------
$5,197,495 $3,832,037
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<PAGE> 91
CT HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
<TABLE>
<CAPTION>
MAY 31, FEBRUARY 29,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 2000
------------ ------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 969,865 $ 1,030,501
Accrual for legal settlement 1,912,500 --
Payable to affiliate 71,299 71,299
Current maturities of long-term debt 150,000 150,000
Notes payable 428,386 111,288
------------ ------------
Total current liabilities 3,532,050 1,363,088
Total liabilities 3,532,050 1,363,088
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Common stock, $.01 par value per share; authorized
60,000,000 shares; issued, 51,325,325 shares
at May 31, 2000 and 50,136,400 shares at February 29, 2000 513,253 501,364
Preferred stock, $.01 par value per share;
authorized 1,000,000 shares; issued and outstanding
Series B convertible, 50 shares (liquidation value $50,000) 1 1
Additional paid-in capital 53,722,197 50,390,070
Accumulated deficit (48,734,245) (44,586,725)
Notes receivable for exercise of options/warrants (1,335,522) (1,335,522)
Treasury stock, at cost (4,164,613 shares) (2,500,239) (2,500,239)
------------ ------------
Total stockholders' equity 1,665,445 2,468,949
------------ ------------
$ 5,197,495 $ 3,832,037
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE> 92
CT HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MAY 31,
2000 1999
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net sales $ 176,849 $ 1,592,485
Cost of sales, excluding depreciation and
amortization 3,814 937,918
------------ ------------
Gross profit 173,035 654,567
Operating expenses
Selling, general and administrative expense 936,426 1,989,466
Research and development expenses 112,992 303,076
Nonrecurring litigation settlement charge 1,912,500 --
Depreciation and amortization expense 296,844 519,703
------------ ------------
3,258,762 2,812,245
------------ ------------
Operating loss (3,085,727) (2,157,678)
Other income (expense)
Interest, net (909) (11,478)
Settlement of lawsuits -- (25,000)
Other -- 28,276
Equity in loss of unconsolidated affiliate (1,060,884) --
------------ ------------
(1,061,793) (8,202)
------------ ------------
Loss before minority interest (4,147,520) (2,165,880)
Minority interest in loss of consolidated
subsidiary -- 283,011
------------ ------------
Net loss (4,147,520) (1,882,869)
Preferred stock dividend requirement -- (55,452)
------------ ------------
Net loss allocable to common stockholders $ (4,147,520) $ (1,938,321)
============ ============
Loss per share - basic and diluted
Net loss per share $ (0.09) $ (0.05)
============ ============
Weighted average shares outstanding 46,366,436 40,490,633
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE> 93
CT HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MAY 31,
2000 1999
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (4,147,520) $ (1,882,869)
Adjustments to reconcile net loss to net cash
used by operating activities
Depreciation and amortization 296,844 519,703
Minority interest in loss of consolidated
subsidiary -- (283,011)
Equity in loss of unconsolidated affiliate 1,060,884 --
Common stock and options issued as payment
of expenses 30,439 --
Noncash employee severance 556,725 --
Changes in operating assets and liabilities
Accounts receivable (8,930) (594,197)
Notes receivable from related parties -- 144,460
Note receivable (600,000) --
Prepaid expenses 38,238 73,729
Inventory 2,340 1,722
Software development costs (102,261) (129,867)
Accounts payable and accrued expenses (60,636) (891,258)
Accrual for legal settlement 1,912,500 --
Promotional payable -- 254,949
Other assets -- (235,622)
------------ ------------
NET CASH USED BY OPERATING ACTIVITIES (1,021,377) (3,022,261)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures -- (151,306)
Acquisition of companies, net -- (5,057,280)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES -- (5,208,586)
CASH FLOW FROM FINANCING ACTIVITIES
Payments on notes payable (32,902) (48,149)
Proceeds from notes payable 350,000 --
Payments on long-term debt -- (46,193)
Proceeds from the sale of subsidiary stock -- 11,642,502
Proceeds from sale of common stock 36,400 931,328
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 353,498 12,479,488
------------ ------------
Net increase (decrease) in cash
and cash equivalents (667,879) 4,248,641
Cash and cash equivalents at the beginning
of the period 707,412 3,386,369
------------ ------------
Cash and cash equivalents at the end
of the period $ 39,533 $ 7,635,010
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<PAGE> 94
CT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements of CT Holdings, Inc., formerly Citadel
Technology, and its majority-owned subsidiaries (collectively, "CT Holdings")
as of May 31, 2000 and for the three month period ended May 31, 2000 and May
31, 1999 are unaudited and, in the opinion of management, contain all
adjustments necessary for the fair presentation of the financial position and
results of operations for the interim period. These consolidated financial
statements should be read in conjunction with the Consolidated Financial
Statements and notes thereto included in CT Holdings' Form 10-KSB for the year
ended February 29, 2000. The results of operations for the three months ended
May 31, 2000 are not necessarily indicative of the results to be expected for
the entire year (see "Part II. Item 1. Management's Discussion and Analysis of
Results of Operations and Financial Condition - Risk Factors"). All significant
intercompany accounts and transactions have been eliminated.
Principles of Accounting for Ownership Interests in Investees
The ownership interests that the Company holds in Parago, Inc. ("Parago"),
formerly How2.com, and River Logic, Inc. ("River Logic") as of May 31, 2000
have been accounted for under the equity method for Parago and the cost method
for River Logic. The Company records its investments in equity-method and
cost-method investees on its consolidated balance sheets as "Investment in
Unconsolidated Affiliates" and its share of the equity-method investee's losses
in "Equity in Loss of Unconsolidated Affiliate."
For the three months ended May 31, 2000, the Company's investment in Parago is
presented under the equity method of accounting, because the Company has the
ability to exercise significant influence, but not control, of the investee.
Significant influence generally represents an ownership interest of the
affiliate's voting stock of between 20% and 50%. Accordingly, under the equity
method of accounting, the Company's share of the investee's income or losses is
included in the consolidated statements of operations. Under the equity method,
when Parago sells its common stock to unrelated parties at a price in excess of
its book value, the Company's net investment in that affiliate increases. The
Company records a contribution to additional paid in capital representing the
difference between the carrying value of the Company's investment and its
proportionate share of the underlying net book value of the affiliate after
sales of the affiliate's common stock to unrelated parties. If the carrying
value of the Company's net investment falls below zero, the Company is required
by the guidelines set forth under the equity method of accounting to
discontinue applying the equity method until the carrying value of the net
investment rises above zero. In addition, in the event the value of the
Company's equity investment rises above zero, the Company will resume applying
the equity method and will recognize an investment in Parago after the
Company's share of net losses not recognized during the period the equity
method was suspended are recovered by income or an increase in equity. As of
May 31, 2000, the Company's share of Parago's net losses during the period the
equity method was suspended was approximately $3 million. The Company continues
to hold 20,000,000 shares of Parago which represents 45.2% of the outstanding
shares of common stock of Parago at May 31, 2000.
At May 31, 1999, the Company had originally accounted for its investment in
Parago under the consolidated method of accounting, because the Company held a
majority interest in Parago. Under this method, Parago's results of operations
were reflected within the Company's consolidated statements of operations. All
significant intercompany accounts were eliminated. Participation by other
shareholders in the losses of Parago for the three months ended May 31, 1999 is
reflected in the caption "Minority interest in loss of consolidated subsidiary"
in the Company's consolidated statement of operations for the three months
ended May 31, 1999. Minority interest adjusts the Company's consolidated
results of operations to reflect only the Company's share of the losses
recognized by Parago.
Because the Company owned less than 20% of the ownership interest in River
Logic at May 31, 2000 the investment has been accounted for under the cost
method of accounting. Under this method, the Company's share of the income or
losses of River Logic is not included in the Company's consolidated statements
of operations. As discussed above, our investment in Parago was reduced to
below zero for accounting purposes and, therefore, not recognized on our
consolidated balance sheet at May 31, 2000. Accordingly, the investment in
affiliate at May 31, 2000 represents our investment in River Logic.
F-30
<PAGE> 95
CT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 1. BASIS OF PRESENTATION -- CONTINUED
Reclassifications
Certain amounts for the period ended May 31, 1999 have been reclassified to
conform to the presentation for the period ended May 31, 2000.
Net Loss Per Common Share
Basic loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the period. Basic
loss per share excludes any dilutive effects of options. Diluted loss per
common share includes the dilutive effect of options and warrants calculated
using the treasury stock method, and, includes the effect of convertible
preferred stock using the if-converted method. Stock options and warrants to
purchase 5,784,105 shares of common stock have been excluded from the
computation of diluted loss per share, as the effect would be anti-dilutive. In
addition, approximately 41,000 shares (based on the price per share for the
Company's common stock on May 31, 2000), which would be issued upon the
conversion of Series B preferred stock, have been excluded from the computation
of loss per share.
Cash Flow Requirements
Since inception, we have incurred losses, and at May 31, 2000, we had an
accumulated deficit of $48,734,245 and our current liabilities exceeded our
current assets by $2,500,838. Our ultimate success in fully implementing our
new strategy, continuing our existing business line and meeting our cash flow
obligations is dependent on our ability to raise additional capital, as to
which there can be no assurances. While the Company currently believes that it
has the ability to obtain additional equity or debt financing, we have received
a commitment from our President to fund up to $1,500,000 of our expected
operating cash flow needs through March 1, 2001 in the event the Company's cash
flows from operating, investing and financing activities are insufficient to
meet the expected operating obligations of the Company as they come due. We
have used approximately $400,000 of this commitment through July 17, 2000. We
also plan to sell stock in private equity financings during fiscal year 2001 to
cover cash flow deficiencies not covered by the commitment by our President and
to repay amounts advanced by our President. We expect that our equity investee,
Parago, will incur losses in the foreseeable future as it continues to develop
and upgrade its technology and infrastructure, develop and expand its product
and service offerings, establish and sustain relationships with manufacturers,
retailers and service organizations. If Parago does not complete its initial
public offering or find an alternative source of funds, its business and
results of operations will be seriously harmed.
We currently fund our Citadel Technology product development and sales and
marketing activities through existing cash reserves and cash from operations
and issuances of securities. In the event that cash from operations and other
available funds prove to be insufficient to fund our Citadel Technology
anticipated operations, we will be required to seek additional financing. There
can be no assurance that, if additional financing is required, it will be
available on acceptable terms, or at all. Additional financing may involve
substantial dilution to the interests of our then-current shareholders.
F-31
<PAGE> 96
CT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 2. CAPITAL TRANSACTIONS
During the quarter CT Holdings issued 55,583 shares of its common stock in
connection with the exercise of certain options and warrants for net proceeds
of $36,400. The Company's former Vice President of Business Development
resigned from the Company and his employment agreement was terminated effective
March 1, 2000. In connection with his resignation and the termination of his
employment agreement, the former employee and the Company entered into a
Settlement and Release Agreement which provides, among other things, for the
accelerated vesting of his 83,342 remaining options, the waiver of payment of
the exercise price of those options, and the former employee's forfeiture of
any right to severance payments, resulting in a charge of $556,725 for the
quarter ended May 31, 2000.
On May 5, 2000, CT Holdings completed a previously announced transaction
whereby it acquired a significant minority interest in River Logic, Inc., a
Delaware corporation formerly known as iNetze.com, Inc. The Company acquired an
aggregate of approximately 5.9% of the outstanding shares of capital stock (as
of May 5, 2000) of River Logic, Inc. ("River Logic") from Robert C. Whitehair,
Tim Collins, and F. Shanahan McAdoo in exchange for 333,333 shares of the
Company's common stock. The Company also acquired shares of Series A
Convertible Preferred Stock from River Logic in exchange for the contribution
by a wholly-owned subsidiary of the Company of certain assets (the "ESRN
Network"), as described below. The acquired shares of Series A Convertible
Preferred Stock are convertible into shares of common stock that, upon
conversion, would represent approximately 13.1% of the outstanding shares of
capital stock of River Logic as of May 5, 2000. In connection with the
transaction, the Company, River Logic and certain of River Logic's stockholders
entered into a Stockholders Agreement providing for, among other things,
restrictions on the transferability of River Logic securities, rights of first
refusal and co-sale with respect to River Logic securities, and registration
rights with respect to River Logic securities. The Stockholders Agreement also
provides the Company with the right to appoint one member of River Logic's
Board of Directors so long as the Company continues to own at least 10% of
River Logic's capital stock on a fully diluted basis.
In connection with the transaction, the Company also made two $300,000 bridge
loans to River Logic that together are convertible into 800,000 shares, in the
aggregate, of common stock that, upon conversion, would represent approximately
3.8% of the outstanding capital stock of River Logic as of May 5, 2000. Each of
the bridge loans (i) bears interest at a rate of 12% per annum through its
first anniversary and at one percent above the prime rate per annum thereafter,
(ii) is secured by certain assets of River Logic, (iii) is payable upon the
Company's demand and (iv) is prepayable by River Logic commencing on its third
anniversary date. As a result of the transaction, the Company possesses
approximately 19% (22.2% in the event the bridge loans are converted in full)
of the voting power with respect to River Logic as of May 5, 2000.
The ESRN Network consists of the EBSCO School Resource Network, an educational
network catering to kindergarten through 12th grade ("K-12"). The ESRN Network
is designed to support school administrators, teachers, students and parents by
providing them with a comprehensive set of tools and resources targeting their
specific needs and is comprised of learning applications that integrate EBSCO
Industries' database of content relating to K-12. The ESRN Network was acquired
by a wholly-owned subsidiary of the Company from EBSCO Industries in connection
with the transaction in exchange for 666,667 shares of the Company's common
stock.
The consideration paid by the Company in connection with the transaction was
determined on the basis of arm's-length negotiations between the parties. In
accordance with the terms of the transaction agreements, CT Holdings intends to
file a resale registration statement relating to the shares of its common stock
issued in connection with the transaction within 90 days of May 5, 2000.
Although the Company also received an option to purchase certain additional
shares of capital stock of River Logic, the Company elected not to exercise
this option prior to its expiration.
River Logic, headquartered in Beverly, Massachusetts, creates and operates
integrated decision support networks for industries such as K-12 Education. In
addition to K-12 education, River Logic has several other industry-specific
networks in development.
The Company has announced that it intends to distribute to its shareholders,
shares of common stock of Parago upon compliance with Securities and Exchange
Commission (SEC) requirements applicable to CT Holdings and Parago in
connection with the proposed spin-off and upon the expiration of a 180 day
lockup agreement between the underwriters of Parago's proposed initial public
offering and Parago. Compliance with SEC requirements and state law
requirements could delay or prevent the completion
F-32
<PAGE> 97
CT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 2. CAPITAL TRANSACTIONS - CONTINUED
of the spin-off. There can be no assurances that CT Holdings will be able to
effect the distribution of the shares of Parago to CT Holdings' stockholders on
a timely basis or at all.
In addition, CT Holdings has agreed to convert certain shares of Parago common
stock issued in connection with certain acquisitions by Parago as well as
issued pursuant to the terms of the stock purchase agreements between Parago
and some of its stockholders into shares of CT Holdings common stock. This
could result in the issuance of up to 500,000 additional shares of CT Holdings
common stock (in connection with Parago's acquisition of 2-Lane Media) and up
to 414,000 additional shares of CT Holdings common stock at a conversion price
of $3.75 per share (in connection with the stock purchase agreements), which
would have the effect of diluting CT Holding's stockholders if the market price
for CT Holding's stock is above that price at the time of conversion.
NOTE 3. INVESTMENT IN UNCONSOLIDATED AFFILIATE
At May 31, 1999, the Company accounted for its investment under the
consolidation method. Through subsequent sale and distribution by Parago of
shares of its common stock, the Company's ownership was reduced below 50%
beginning in July 1999. As a result, beginning July 1999, the Company began
accounting for its remaining investment in Parago under the equity method of
accounting rather than the consolidated method. Prior to these events, the
operating results of Parago were consolidated in the Company's consolidated
financial statements. At May 31, 2000, the Company owns 45% of Parago's
outstanding shares of common stock.
During the first quarter of fiscal year 2001, Parago raised $21,500,000 through
the issuance of 430,000 shares of Series C Convertible Preferred Stock to
THLee.Putnam Internet Partners LP, Dain Rauscher Wessels Investors LLC and
Watershed Capital I, L.P. At the time of issuance, the Series C preferred stock
is convertible into 4,300,000 shares of Parago common stock. In connection with
the Series A, B, and C financing, the preferred stockholders were issued
3,300,000 warrants to purchase common stock. The warrants vest immediately and
have a weighted average exercise price of $2.13.
The following is the unaudited condensed financial information of Parago at May
31, 2000 and for the three months then ended.
<TABLE>
<CAPTION>
SUMMARIZED BALANCE SHEET MAY 31, 2000
------------------------ ------------------
<S> <C>
Current assets $ 28,418,226
Noncurrent assets 23,512,340
------------------
Total assets $ 51,930,566
==================
Current liabilities $ 21,796,688
Long-term debt 869,445
------------------
Total liabilities 22,666,133
------------------
Redeemable common stock 2,000,000
Shareholders' equity 27,264,433
------------------
$ 51,930,566
==================
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SUMMARIZED STATEMENT OF OPERATIONS MAY 31, 2000
---------------------------------- ------------------
<S> <C>
Revenues $ 3,429,996
Gross profit 1,892,184
Sales and marketing expenses 1,177,166
Operating loss (9,039,214)
Net loss (9,073,221)
</TABLE>
F-33
<PAGE> 98
CT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 4. COMMITMENTS AND CONTINGENCIES
On January 7, 1998, the Company's former Houston landlord filed a lawsuit
against the Company alleging that the Company breached a certain lease covering
the Company's former Houston office space. The suit seeks damages to date of
approximately $486,000, plus attorney's fees, pre and post judgment interest
and court costs. In July 1999, the parties reached an agreement in principle to
settle the suit for $325,000 to be paid over nine months. This settlement was
paid in full as of May 31, 2000.
The Company and one of its officers were involved in an arbitration proceeding
with Vestcom Ltd., which claimed compensation and a finder's fee for
introducing the Company to a third party. Vestcom sought damages of the value
of 100,000 shares of Company common stock (alleged to be valued at $1,900,000),
plus 50% of additional compensation paid by the Company to the third party. The
Company filed a declaratory judgment action against Vestcom to determine that
the alleged contract was not valid based on its defenses. The case was styled
Citadel Computer Systems, Inc. and Steven B. Solomon v. Vestcom, Ltd., in the
193rd Judicial District Court in Dallas County, Texas. In October 1998, the
Texas court entered a judgment and preliminary injunction in favor of the
Company and its officer that the purported agreement was a forgery. As a
result, the arbitration proceeding was dismissed by the American Arbitration
Association. The defendant appealed the decision of the Texas court. In
November 1998, Vestcom filed a lawsuit against the Company in Texas state court
styled Vestcom v. Citadel in the 68th Judicial Court, Dallas County, Texas,
reasserting the same basic claims as in the arbitration proceeding. In January
2000 the parties reached an agreement to settle the suit for the original
amount of the warrants claimed (100,000 shares with an exercise price of $1.375
per share). This action was dismissed for want of prosecution on the
announcement of settlement by the parties. Assuming Vestcom received actual or
constructive notice of that dismissal near the time of its entry, the Company
believes that the time to seek reinstatement of the case, a new trial, or
review before the Court of Appeals has expired. However, as of the date of
issuance of these financial statements, no binding agreement has been signed by
both parties.
In July 2000, following mediation of the disputes between us and Janssen-Meyers
Associates L.P. ("JMA"), we and JMA entered into an agreement to settle the
lawsuit for an aggregate of $3 million, in a combination of $1.5 million in
cash due on or before October 31, 2000 and 300,000 shares of common stock with
a guaranteed value of $5 per share as of January, April and October, 2001. The
settlement is subject to execution of definitive settlement documents and
approval of the boards of directors of the companies. We recognized a charge of
approximately $1.9 million based on the cash portion of the settlement and the
current value of the 300,000 shares to be issued. We may be required to
recognize additional charges to the extent of any difference between the $1.5
million guaranteed value of the shares and the gross proceeds from the sale of
the shares by JMA at the relevant periods, in the event our common stock does
not trade above $5 per share for five consecutive trading days during the
guarantee periods. In August 1998, JMA filed a lawsuit against us arising out
of an alleged 1995 contract with our predecessor "("Old Citadel"). The suit
alleged that Old Citadel breached a letter of intent dated September 1995
and/or a Placement Agency Agreement dated November 1995 between JMA and Old
Citadel. As its damages, JMA claimed that it was entitled to, among other
things, the cash value of 1.8 million $0.89 warrants valued during May 1996.
According to JMA's valuation of those warrants, potential damages were alleged
to exceed $40 million. The Company vigorously disputes that it breached either
the letter of intent or the Placement Agency Agreement or that it is liable to
JMA. The lawsuit was styled Janssen-Meyers Associates, L.P. v. Citadel
Technology, Inc., and was filed in the Supreme Court of the State of New York,
County of New York.
In June, 2000, the Company was served with a lawsuit filed in state court in
Houston, Texas by Michael and Patricia Ferguson for breach of contract,
tortious interference and negligence. Specifically, the Fergusons claim that
they were damaged when they attempted to exercise certain warrants during a
time when the Company's related registration statement could not be used. On
June 29, 2000, the Company moved to transfer venue from Harris County, Texas,
to Dallas County, Texas. On June 30, 2000, the Company answered (subject to its
Motion to Transfer Venue). The Company will vigorously defend the claims
asserted by the Fergusons.
At this time, the Company is unable to predict the ultimate outcome of some of
these suits, the costs associated with defending the claims and pursuing
counterclaims, and monetary compensation awarded, if any. The Company has, when
appropriate, recorded its current estimate of the amounts necessary to settle
the litigation.
The Company is also involved in other litigation. Such litigation is not
material to the Company's consolidated financial condition or results of
operations.
F-34
<PAGE> 99
786,784 SHARES
CT HOLDINGS, INC.
COMMON STOCK
PROSPECTUS
AUGUST ___, 2000
You should rely only on information contained in this prospectus. We
have not authorized anyone to give any information or make any representations
in connection with this offering other than those contained in this prospectus.
If anyone gives you any such information or makes any such representations, you
should not rely on it or them as having been authorized by us. This prospectus
is not an offer to sell common stock and it is not soliciting an offer to buy
common stock in any state where the offer and sale is not permitted. The
information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or of
any sale of our common stock.
<PAGE> 100
PART II
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law authorizes a court to award, or a
corporation's board of directors to grant, indemnity to directors and officers
in terms sufficiently broad to permit such indemnification under certain
circumstances (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended (the "Securities Act"). The Certificate of
Incorporation and Bylaws of CT Holdings, Inc. (together with certain of its
predecessors in interest, the "Company") provide that the Company shall
indemnify its directors and officers to the fullest extent permitted by
Delaware law and include a provision limiting director liability to the Company
or its shareholders for monetary damages arising from certain acts or omissions
in the director's capacity as a director. In addition, the Company has the
ability to maintain insurance on behalf of its directors and executive officers
to insure them against any liability asserted against them in their capacities
as directors or officers or arising out of such status. See "Management --
Indemnification and Limitation of Liability."
Certain of the Company's registration rights agreements contain
reciprocal agreements of indemnity between the Company and certain of the
selling stockholders as to certain liabilities, including liabilities under the
Securities Act and in certain circumstances could provide for indemnification
of the Company's directors and officers.
Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table indicates the estimated expenses that have been or
will be incurred in connection with the Offering, all of which will be paid by
the Company.
<TABLE>
<S> <C>
SEC registration fee .................................. $ 1,874
Accounting fees and expenses .......................... 27,500
Legal fees and expenses ............................... 59,000
Printing and shipping ................................. 20,000
Blue Sky fees and expenses (including counsel fees) ... 4,000
Miscellaneous expenses ................................ 5,000
----------
Total ............................................ $ 117,374
==========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following sets forth information regarding all sales of
unregistered securities of the Company during the past three years. All such
shares were exempt from registration under the Securities Act by reason of
Section 4(2) of the Securities Act, or Regulation D or Regulation S promulgated
thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act,
as transactions by an issuer not involving a public offering or transactions
relating to compensatory benefit plans and contracts relating to compensation
as provided under such Rule 701. The recipients of securities in each such
transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the share
certificates and warrants issued in such transactions. All recipients had
adequate access, through their relationships with the Company or otherwise, to
information about the Company. Unless otherwise indicated, the issuances of the
securities described below were effected without the involvement of
underwriters.
On March 11, 1997, the Company sold $1,080,000 of 5% redeemable
convertible notes due February 2000 (before fees and expenses). The notes were
sold to certain offshore accredited investors pursuant to Section 4(2) of the
Securities Act of 1933, as amended, and Regulation S. For each $25,000 of notes
purchased, each investor received warrants to purchase 5,000 shares of the
common stock of the Company at $2.00 per share. The warrants have a two year
term and will vest as follows: (a) 33-1/3% vest in respect of that portion of
the note still held by the holder after the expiration of 90 days following the
closing date; (b) 33-1/3% vest in respect of that portion of the note still
held by the holder after the expiration of 135 days following the closing date;
II-1
<PAGE> 101
and (c) 33-1/3% vest in respect of that portion of the note still held by the
holder after the expiration of 180 days following the closing date. First
Bermuda, as placement agent, received a commission of eight percent (8%) of the
proceeds, payable in shares of the Company's stock, and a warrant to purchase
approximately 120,000 shares of Company common stock at an exercise price of
$2.00 per share.
In April 1997, the Company issued an aggregate of $500,000 of its 8%
Convertible Notes due April 2000 (the "Willora Notes") to Willora Company Ltd.
The notes were sold to certain offshore accredited investors pursuant to
Section 4(2) under the Securities Act and Regulation S. The notes are
convertible into shares of common stock based on a discount to the market price
at the time of conversion.
In May 1997, the Company issued an aggregate of $150,000 of its 10%
Convertible Notes due May 7, 2000 to Offshore Nominees Limited. The notes were
sold to certain offshore accredited investors pursuant to Section 4(2) under
the Securities Act and Regulation S. The notes are convertible into shares of
common stock based on a discount to the market price at the time of conversion.
In June 1997, the Company issued an aggregate of $1,125,000 ($500,000
of which was used to redeem the Willora Notes and $125,000 was paid to the
lender as a premium) of its 8% Convertible Notes due June 2000 to Silenus
Limited. The notes were sold to certain offshore accredited investors pursuant
to Section 4(2) under the Securities Act and Regulation S. The notes are
convertible into shares of common stock based on a discount to the market price
at the time of conversion.
On October 6, 1997, the Company entered into a Purchase Agreement with
CORESTAFF, Inc. ("CORESTAFF") wherein CORESTAFF purchased 2,500,000 shares of
common stock for $750,000, together with other valuable consideration. Pursuant
to the Agreement, CORESTAFF also received warrants to purchase 1,000,000 shares
of the common stock of Citadel at a purchase price of $4.00 per share and to
purchase 1,000,000 shares of the common stock of Citadel at a purchase price of
$5.00 per share for a ten-year term. Such securities were not registered under
the Securities Act, in reliance upon Section 4(2) of the Securities Act and
Rule 506 of Regulation D thereunder. No underwriters were involved in
connection with the sale of the securities.
In November 1997, the Company, pursuant to Regulation D, issued 5,000
shares of convertible Series C Preferred Stock to Lakeshore International, Ltd.
McGinn, Smith & Co., Inc. served as the placement agent for the issuance. These
shares are convertible, at the option of the holder, after a 4 month lock-up
period, into shares of common stock of the Company, at conversion rates ranging
from between 70% to 80% of the average market price of the common stock for
five days preceding conversion, depending on the date of conversion. Each share
of preferred stock has a conversion value of $100 and warrants for five years
to purchase 10 shares of common stock, of the Company, at a price of $1.00 per
share. Dividends accrue at 8% and are payable, at the option of the Company, in
cash or common stock at the time of conversion.
In January 1998, the Company received a loan in the amount of $400,000
from Thomas E. Oxley. In connection with the loan, Mr. Oxley received warrants
to purchase 200,000 shares of common stock at $.32 per share (the then fair
market value of the Company's common stock at the date of the transaction). The
warrants vested immediately and expire on January 5,1999. In May 1998, Mr.
Oxley converted this debt into shares of the Company's common stock. Such
securities were not registered under the Securities Act, in reliance upon
Section 4(2) of the Securities Act and Rule 506 of Regulation D thereunder. No
underwriters were involved in connection with the sale of the securities.
In April 1998, the Company received a loan in the amount of $250,000
from Edward Coppola. The loan bore interest at 10% per annum and is payable in
full on or before July 13, 1998. In connection with the loan, the Company
issued warrants to purchase 100,000 shares of the Company's common stock at
$.50 per share (the fair market value of the Company's common stock at the date
of the transaction). The warrants vest immediately and expire on April 1, 2001.
Mr. Coppola has the right to convert this debt into shares of the Company's
Series D Convertible Redeemable preferred stock (the terms of which are
described below under Series D preferred). Such securities were not registered
under the Securities Act, in reliance upon Section 4(2) of the Securities Act
and Rule 506 of Regulation D thereunder. No underwriters were involved in
connection with the sale of the securities. On May 26, 1998, Mr. Coppola
converted this debt into shares of the Company's Series D Convertible
Redeemable preferred stock.
On April 30, 1998, the Company and Precision Capital Investors Limited
Partnership I ("Precision") entered into a Securities Purchase Agreement (the
"Purchase Agreement") pursuant to which Precision purchased shares of 6% Series
E Convertible Redeemable preferred stock for $500,000. The Series E preferred
stock was redeemed by the Company at a redemption price in cash equal to 112.5%
of the original issue price, plus accrued and unpaid dividends to the
redemption date. In connection with the transaction, the Company also issued
warrants to purchase up to 100,000 shares of the Company's common
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<PAGE> 102
stock at $0.75 per share (above the fair market value of the Company's common
stock at the date of the transaction), which expire on April 30, 2001. Such
securities were not registered under the Securities Act, in reliance upon.
On May 15, 1998, the Company and Metamor Worldwide, Inc. (formerly
Corestaff, Inc.) ("Metamor") entered into a Stock Purchase Agreement (the
"Stock Purchase Agreement") pursuant to which Metamor purchased 2,000 shares of
Citadel's 11% Series D Convertible Redeemable preferred stock for proceeds of
$2,000,000. The preferred shares are convertible into common stock of the
Company at the election of the holder at a conversion price equal to 150% of
the twenty day average of the closing bid price of the Company's common stock
prior to the closing of the purchase ($1.07 per share). The preferred shares
will automatically convert into shares of common stock upon (i) the closing of
an underwritten public offering that values the Company at a minimum equity
value of $20,000,000 with proceeds to the Company of a minimum of $10,000,000
before expenses, or (ii) the date at which the Company's common stock maintains
a closing bid price that is 100% greater than the conversion price for at least
20 consecutive days. Such shares were not registered under the Securities Act,
in reliance upon Section 4(2) of the Securities Act and Rule 506 of Regulation
D thereunder. No underwriters were involved in connection with the sale of the
shares under the Stock Purchase Agreement. Beginning one year from the date of
closing, the Company may redeem all or part of the unconverted preferred shares
based on a redemption price equal to 120% of the issuance price if redeemed
prior to two years after the closing, 115% of the issuance price if redeemed
prior to three years after the closing, or 100% of the issuance price if
redeemed prior to four years after the closing.
On May 26, 1998, the Company and Icarus Investments I, Ltd. ("Icarus")
entered into a Stock Purchase Agreement pursuant to which Icarus purchased
2,000,000 shares of Citadel's common stock for proceeds of $2,500,000. Such
shares were not registered under the Securities Act, in reliance upon Section
4(2) of the Securities Act and Rule 506 of Regulation D thereunder. In
connection with the transaction, the Company issued warrants to purchase
500,000 shares of the Company's common stock at $4.00 per share and 500,000 at
$5.00. No underwriters were involved in connection with the sale of the shares
under the Stock Purchase Agreement.
On June 30, 1998, the Company and Icarus entered into a Stock Purchase
Agreement pursuant to which Icarus purchased 1,000,000 shares of Citadel's
common stock for proceeds of $1,500,000. In connection with the transaction,
the Company issued warrants to purchase 500,000 shares of the Company's common
stock at $3.00 per share and 250,000 at $2.00 per share. Such securities were
not registered under the Securities Act, in reliance upon Section 4(2) of the
Securities Act. No underwriters were involved in connection with the sale of
the shares under the Stock Purchase Agreement.
In January 1999, the Company issued 25,000 and 220,000 shares of its
common stock, respectively, to two former employees. The shares of common stock
were issued in connection with the settlement of two separate lawsuits filed
against the Company. Such securities were not registered under the Securities
Act, in reliance upon Section 4(2) of the Securities Act.
In December 1999, the Company issued 200,000 shares to Tom Oxley. Such
securities were not registered under the Securities Act, in reliance upon
Section 4(2) of the Securities Act.
In January 2000, the Company issued Vestcom Ltd. warrants to purchase
100,000 shares of its common stock at an exercise price of $1.375 per share in
connection with the settlement of a lawsuit. Such securities were not
registered under the Securities Act, in reliance upon Section 4(2) of the
Securities Act.
In May 2000, the Company issued 1,050,000 shares of its common stock
to various shareholders of River Logic, Inc. in consideration for the receipt
of approximately 19% of the outstanding shares of capital stock of River Logic
and certain services provided to the Company by one of River Logic's
shareholders, Morris D. Presley. In addition, the Company separately issued to
Mr. Presley options to purchase 100,000 shares of the Company's common stock at
an exercise price of $5.00 per share in partial consideration for the services
rendered to the Company by Mr. Presley. The foregoing securities were not
registered under the Securities Act in reliance upon Section 4(2) of the
Securities Act. No underwriters were involved in connection with the sale of
the securities in these transactions.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
<S> <C>
2.1 Second Amended and Restated Plan of Merger, dated February 29, 1996,
by and between LoneStar Hospitality Corporation, LSHC Acquisition,
Inc. and Citadel Computer Systems Incorporated (without exhibits)
(incorporated by reference to Exhibit 2.1 of the Company's Current
Report on Form 8-K dated February 29, 1996).
</TABLE>
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<PAGE> 103
<TABLE>
<CAPTION>
<S> <C>
2.2 Purchase and Sale Agreement, dated March 1, 1996, by and between the
LoneStar Hospitality Corporation, LS Holding Corp. and Miami Subs USA,
Inc. (without exhibits) (incorporated by reference to Exhibit 2.2 of
the Company's Current Report on Form 8-K dated February 29, 1996).
2.3 Technology Transfer Agreement, by and between LoneStar Hospitality
Corporation and Circuit Masters Software, Inc., dated February 29,
1996 (without exhibits) (incorporated by reference to Exhibit 2.3 of
the Company's Current Report on Form 8-K dated February 29, 1996).
2.4 Technology Transfer Agreement, by and between the Company and Bill
Mulvany, dated February 29, 1996 (without exhibits) (incorporated by
reference to Exhibit 2.4 of the Company's Current Report on Form 8-K
dated February 29, 1996).
2.5 Technology Transfer Agreement, by and between the Company and Kim
Marie Newman, dated February 29, 1996 without exhibits) (incorporated
by reference to Exhibit 2.5 of the Company's Current Report on Form
8-K dated February 29, 1996).
2.6 Agreement, by and between the Company, Circuit Masters Software, Inc.,
Patrick William Mulvany and Kim Marie Newman, dated May 16, 1996,
effective as of February 29, 1996 (incorporated by reference to
Exhibit 2.6 of the Current Report on Form 8-K/A filed with the
Securities and Exchange Commission on June 10, 1996).
3.1 Certificate of Incorporation (incorporated by reference to the
registration statement on Form S-1, File No. 33-25462, for Apollo
Resources, Inc., on November 10, 1988, and declared effective January
4, 1989).
3.2 Certificate of Amendment to Certificate of Incorporation filed with
the Delaware Secretary of State on June 4, 1990 (incorporated by
reference to Exhibit 3.2 of the Company's Annual Report on Form 10-KSB
for the fiscal year ended February 29, 1996).
3.3 Bylaws (incorporated by reference to the registration statement on
Form S-1, File No. 33-25462, filed with the Securities and Exchange
Commission on November 10, 1988).
3.4 Certificate of Amendment to Certificate of Incorporation filed with
the Delaware Secretary of State on October 15, 1991 (incorporated by
reference to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1991).
3.5 Certificate of Amendment to Certificate of Incorporation filed with
the Delaware Secretary of State on July 20, 1994 (incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 1994).
3.6 Certificate of Amendment to Certificate of Incorporation filed with
the Delaware Secretary of State on December 11, 1995 (incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarter ended December 31, 1995).
3.7 Certificate of Amendment to Certificate of Incorporation filed with
the Delaware Secretary of State on May 1, 1996 (incorporated by
reference to Exhibit 3.7 of the Company's Annual Report on Form 10-KSB
for the fiscal year ended February 29, 1996).
3.8 Certificate of Designations of Series A preferred stock (incorporated
by reference to Exhibit 4 of the Company's Quarterly Report on Form
10-QSB for the fiscal quarter ended May 31, 1996).
3.9 Certificate of Designations of Series B preferred stock (incorporated
by reference to Exhibit 4.2 of the Company's Quarterly Report on Form
10-QSB for the fiscal quarter ended August 31, 1996).
3.10 Certificate of Amendment to Certificate of Incorporation filed with
the Delaware Secretary of State on February 27, 1998 (incorporated by
reference to Exhibit 4.2 of the Company's registration statement on
Form S-8 filed May 20, 1998, File No. 333-53131).
3.11 Certificate of Designations of Series C preferred stock (incorporated
by reference to Exhibit 4.6 of the Company's registration statement on
Form S-8 filed May 20, 1998, File No. 333-53131).
3.12 Certificate of Designations of Series D preferred stock (incorporated
by reference to Exhibit 4.8 of the Company's registration statement on
Form S-8 filed May 20, 1998, File No. 333-53131).
</TABLE>
II-4
<PAGE> 104
<TABLE>
<CAPTION>
<S> <C>
3.13 Certificate of Designations of Series E preferred stock (incorporated
by reference to Exhibit 4.7 of the Company's registration statement on
Form S-8 filed May 20, 1998, File No. 333-53131).
3.14 Certificate of Renewal and Revival of Charter filed with the Delaware
Secretary of State on October 29, 1999 (incorporated by reference to
Exhibit 3.14 of the Company's Annual Report on Form 10-KSB for the
fiscal year ended February 29, 2000).
**5.1 Opinion of Wood, Exall & Bonnet, L.L.P.
10.1 Employment Agreement dated July 15, 1997, by and between the Company
and Steven Solomon (incorporated by reference to Exhibit 10.1 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
February 28, 1998).
10.2 Employment Agreement dated January 1998, by and between the Company
and Bennett Klein (incorporated by reference to Exhibit 10.2 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
February 28, 1998).
10.3 Employment Agreement dated May 1, 1997, by and between the Company and
Richard L. Travis, Jr. (incorporated by reference to Exhibit 10.10 to
the Company's Annual Report on Form 10-KSB for the fiscal year ended
February 28, 1998).
10.4 Stock Purchase Agreement, dated August 16, 1996, among the Company,
Kent-Marsh Ltd., Inc., Bob Wesolek and Vance Nesbitt. (incorporated by
reference to Exhibit 2.1 of the Company's Current Report on Form 8-K
filed September 3, 1996).
10.5 Stock Purchase Agreement, dated August 16, 1996, among the Company,
Astonishing Developments, Inc., Bob Wesolek and Vance Nesbitt
(incorporated by reference to Exhibit 2.2 of the Company's Current
Report on Form 8-K filed September 3, 1996).
10.6 Agreement, dated April 11, 1997, among the Company, George Sharp and
Gil Gertner (incorporated by reference to Exhibit 99.1 of the
Company's Current Report on Form 8-K filed April 11, 1997).
10.7 Form of Offshore Securities Subscription Agreement, Convertible Notes,
warrants and Registration Rights Agreement between the Company and
First Bermuda Securities Limited (incorporated by reference to
Exhibits 99.1 through 99.4 of the Company's Current Report on Form 8-K
filed March 26, 1997).
10.8 Form of Offshore Securities Subscription Agreement, Convertible Notes,
warrants and Registration Rights Agreement between the Company and
Willora Company Ltd. (incorporated by reference to Exhibits 99.1
through 99.4 of the Company's Current Report on Form 8-K filed April
28, 1997).
10.9 Form of Offshore Securities Subscription Agreement, Convertible Notes,
warrants and Registration Rights Agreement between the Company and
Silenus Ltd. (incorporated by reference to Exhibits 99.1 through 99.4
of the Company's Current Report on Form 8-K filed June 24, 1997).
10.10 Purchase Agreement between the Company and CORESTAFF, Inc., dated
October 6, 1997 (incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
February 28, 1997).
10.11 Warrant to Purchase common stock of the Company issued to Worldwide
PetroMoly Inc. (incorporated by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
February 28, 1997).
10.12 Series D Preferred Stock Purchase Agreement between the Company and
METAMOR WORLDWIDE, Inc., dated May 15, 1998 (incorporated by reference
to Exhibit 10.12 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended February 28, 1998).
10.13 Stock Purchase Agreement between the Company and Precision Capital
Limited Partnership I, dated April 30, 1998 (incorporated by reference
to Exhibit 10.13 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended February 28, 1998).
10.14 Stock Purchase Agreement between the Company and Icarus Investments I,
Ltd., dated May 27, 1998 (incorporated by reference to Exhibit 10.14
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended February 28, 1998).
</TABLE>
II-5
<PAGE> 105
<TABLE>
<CAPTION>
<S> <C>
10.15 Stock Purchase Agreement, dated March 11, 1999, among Parago, Inc.,
2-Lane Media, Inc., and the shareholders of 2-Lane Media, Inc.
(incorporated by reference to Exhibit 10.15 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended February 28, 1999).
10.16 Stock Purchase Agreement, dated May 20, 1999, among Parago, Inc.,
Forward Communications, Inc., FCI Services Inc., and the shareholders
of Forward Communications, Inc. and FCI Services Inc. (incorporated by
reference to Exhibit 2.1 to the Company's Current Report on Form 8-K
filed June 3, 1999).
10.17 Agreement and Plan of Reorganization, dated May 20, 1999, among
Parago, Inc., Forward Freight, Inc., and the shareholders of Forward
Freight Inc. (incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed June 3, 1999).
**10.18 Settlement and Release Agreement dated January 14, 2000 by and among
Richard L. Travis, Parago, Inc. and the Company.
**10.19 Severance and Release Agreement dated March 1, 2000 by and among
Bennett Klein and the Company.
10.20 Standard Office Lease, dated August 2, 1999, between Arden Realty
Limited Partnership and How2HQ.com, Inc. (Santa Monica, California)
(incorporated by reference to Exhibit 10.18 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended February 29, 2000).
10.21 Guaranty of Lease, dated August 2, 1999, by the Company to Arden
Realty Limited Partnership, with respect to certain obligations of
How2HQ.com, Inc. under Standard Office Lease (incorporated by
reference to Exhibit 10.19 to the Company's Annual Report on Form
10-KSB for the fiscal year ended February 29, 2000).
10.22 Promissory Note dated September 30, 1999 payable to How2HQ.com, Inc.
(incorporated by reference to Exhibit 10.20 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended February 29, 2000)
10.23 Asset Purchase Agreement dated as of May 5, 2000 by and between EBSCO
CASIAS, Inc., iNetze.com, Inc., ESRN Acquisition, LLC and the Company
(incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K filed June 12, 2000).
10.24 Asset Contribution Agreement dated as of May 5, 2000 by and between
iNetze.com, Inc., ESRN Acquisition, LLC, the Company and the
stockholders set forth on the signature pages attached hereto
(incorporated by reference to Exhibit 2.2 to the Company's Current
Report on Form 8-K filed June 12, 2000).
10.25 Stock Purchase Agreement dated as of May 5, 2000 by and between the
Company, Tim Collins, F. Shanahan McAdoo and Robert C. Whitehair
(incorporated by reference to Exhibit 2.3 to the Company's Current
Report on Form 8-K filed June 12, 2000).
21.1 Subsidiaries of the Company (incorporated by reference to exhibit 21
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended February 29, 2000).
*23.1 Consent of Grant Thornton LLP.
*23.2 Consent of Ernst & Young LLP.
**23.2 Consent of Wood, Exall & Bonnet, L.L.P. (included in Exhibit 5.1).
**24.1 Power of Attorney (included with signature pages).
</TABLE>
----------
* Filed herewith.
** Previously filed.
II-6
<PAGE> 106
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant by the Company pursuant to the Company's Certificate of
Incorporation, Bylaws, Delaware law or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission, 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 Company of expenses
incurred or paid by a director, officer or controlling person of the Company 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 such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The Company hereby undertakes that for purposes of determining any
liability under the Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in reliance upon Rule
430A and contained in a form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared effective by
the Securities and Exchange Commission.
The Company also hereby undertakes:
(1) to file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by
Section 10(a)(3) of 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. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective 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 the registration
statement;
(2) that, for the purpose of determining any liability under
the Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and
(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.
II-7
<PAGE> 107
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 the requirements for filing on Form SB-2 and has duly caused this
Post-Effective Amendment No. 2 to this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Dallas, State of Texas, on August 16, 2000.
CT HOLDINGS, INC.
By: /s/ STEVEN B. SOLOMON
Steven B. Solomon,
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this registration statement on Form SB-2 has been signed below by the
following persons on behalf of the Registrant in the capacities indicated on
the date stated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
* Chairman of the Board of Directors August 16, 2000
----------------------------
Victor K. Kiam, II
/s/ STEVEN B. SOLOMON Chief Executive Officer, President & Director August 16, 2000
---------------------------- (Principal Executive Officer and Principal
Steven B. Solomon Financial and Accounting Officer)
* Director August 16, 2000
----------------------------
Lawrence Lacerte
* Director August 16, 2000
----------------------------
Chris A. Economou
* Director August 16, 2000
----------------------------
Mark Rogers
* Director August 16, 2000
----------------------------
Dr. Axel Sawallich
</TABLE>
*By: /s/ STEVEN B. SOLOMON
Steven B. Solomon, Attorney-in-fact
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<PAGE> 108
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2.1 Second Amended and Restated Plan of Merger, dated February 29,
1996, by and between LoneStar Hospitality Corporation, LSHC
Acquisition, Inc. and Citadel Computer Systems Incorporated
(without exhibits)(incorporated by reference to Exhibit 2.1 of
the Company's Current Report on Form 8-K dated February 29,
1996).
2.2 Purchase and Sale Agreement, dated March 1, 1996, by and
between LoneStar Hospitality Corporation, LS Holding Corp. and
Miami Subs USA, Inc. (without exhibits) (incorporated by
reference to Exhibit 2.2 of the Company's Current Report on
Form 8-K dated February 29, 1996).
2.3 Technology Transfer Agreement, by and between LoneStar
Hospitality Corporation and Circuit Masters Software, Inc.,
dated February 29, 1996 (without exhibits) (incorporated by
reference to Exhibit 2.3 of the Company's Current Report on
Form 8-K dated February 29, 1996).
2.4 Technology Transfer Agreement, by and between the Company and
Bill Mulvany, dated February 29, 1996 (without exhibits)
(incorporated by reference to Exhibit 2.4 of the Company's
Current Report on Form 8-K dated February 29, 1996).
2.5 Technology Transfer Agreement, by and between the Company and
Kim Marie Newman, dated February 29, 1996 (without exhibits)
(incorporated by reference to Exhibit 2.5 of the Company's
Current Report on Form 8-K dated February 29, 1996).
2.6 Agreement, by and between the Company, Circuit Masters
Software, Inc., Patrick William Mulvany and Kim Marie Newman,
dated May 16, 1996, effective as of February 29, 1996
(incorporated by reference to Exhibit 2.6 of the Current
Report on Form 8-K/A filed with the Securities and Exchange
Commission on June 10, 1996).
3.1 Certificate of Incorporation (incorporated by reference to the
registration statement on Form S-1, File No. 33-25462, for
Apollo Resources, Inc., on November 10, 1988, and declared
effective January 4, 1989).
3.2 Certificate of Amendment to Certificate of Incorporation filed
with the Delaware Secretary of State on June 4, 1990
(incorporated by reference to Exhibit 3.2 of the Company's
Annual Report on Form 10-KSB for the fiscal year ended
February 29, 1996).
3.3 Bylaws (incorporated by reference to the registration
statement on Form S-1, File No. 33-25462, filed with the
Securities and Exchange Commission on November 10, 1988).
3.4 Certificate of Amendment to Certificate of Incorporation filed
with the Delaware Secretary of State on October 15, 1991
(incorporated by reference to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1991).
3.5 Certificate of Amendment to Certificate of Incorporation filed
with the Delaware Secretary of State on July 20, 1994
(incorporated by reference to the Company's Quarterly Report
on Form 10-QSB for the quarter ended June 30, 1994).
3.6 Certificate of Amendment to Certificate of Incorporation filed
with the Delaware Secretary of State on December 11, 1995
(incorporated by reference to the Company's Quarterly Report
on Form 10-QSB for the quarter ended December 31, 1995).
3.7 Certificate of Amendment to Certificate of Incorporation filed
with the Delaware Secretary of State on May 1, 1996
(incorporated by reference to Exhibit 3.7 of the Company's
Annual Report on Form 10-KSB for the fiscal year ended
February 29, 1996).
3.8 Certificate of Designations of Series A preferred stock
(incorporated by reference to Exhibit 4 of the Company's
Quarterly Report on Form 10-QSB for the fiscal quarter ended
May 31, 1996).
3.9 Certificate of Designations of Series B preferred stock
(incorporated by reference to Exhibit 4.2 of the Company's
Quarterly Report on Form 10-QSB for the fiscal quarter ended
August 31, 1996).
</TABLE>
<PAGE> 109
<TABLE>
<S> <C>
3.10 Certificate of Amendment to Certificate of Incorporation filed
with the Delaware Secretary of State on February 27, 1998
(incorporated by reference to Exhibit 4.2 of the Company's
registration statement on Form S-8 filed May 20, 1998, File
No. 333-53131).
3.11 Certificate of Designations of Series C Preferred Stock
(incorporated by reference to Exhibit 4.6 of the Company's
registration statement on Form S-8 filed May 20, 1998, File
No. 333-53131).
3.12 Certificate of Designations of Series D Preferred Stock
(incorporated by reference to Exhibit 4.8 of the Company's
registration statement on Form S-8 filed May 20, 1998, File
No. 333-53131).
3.13 Certificate of Designations of Series E preferred stock
(incorporated by reference to Exhibit 4.7 of the Company's
registration statement on Form S-8 filed May 20, 1998, File
No. 333-53131).
3.14 Certificate of Renewal and Revival of Charter filed with the
Delaware Secretary of State on October 29, 1999 (incorporated
by reference to Exhibit 3.14 of the Company's Annual Report on
Form 10-KSB for the fiscal year ended February 29, 2000).
**5.1 Opinion of Wood, Exall & Bonnet, L.L.P.
10.1 Employment Agreement dated July 15, 1997, by and between the
Company and Steven Solomon (incorporated by reference to
Exhibit 10.1 to the Company's Annual Report on Form 10-KSB for
the fiscal year ended February 28, 1998).
10.2 Employment Agreement dated January 1998, by and between the
Company and Bennett Klein (incorporated by reference to
Exhibit 10.2 to the Company's Annual Report on Form 10-KSB for
the fiscal year ended February 28, 1998).
10.3 Employment Agreement dated May 1, 1997, by and between the
Company and Richard L. Travis, Jr. (incorporated by reference
to Exhibit 10.10 to the Company's Annual Report on Form 10-KSB
for the fiscal year ended February 28, 1998).
10.4 Stock Purchase Agreement, dated August 16, 1996, among the
Company, Kent-Marsh Ltd., Inc., Bob Wesolek and Vance Nesbitt.
(incorporated by reference to Exhibit 2.1 of the Company's
Current Report on Form 8-K filed September 3, 1996).
10.5 Stock Purchase Agreement, dated August 16, 1996, among the
Company, Astonishing Developments, Inc., Bob Wesolek and Vance
Nesbitt (incorporated by reference to Exhibit 2.2 of the
Company's Current Report on Form 8-K filed September 3, 1996).
10.6 Agreement, dated April 11, 1997, among the Company, George
Sharp and Gil Gertner (incorporated by reference to Exhibit
99.1 of the Company's Current Report on Form 8-K filed April
11, 1997).
10.7 Form of Offshore Securities Subscription Agreement,
Convertible Notes, warrants and Registration Rights Agreement
between the Company and First Bermuda Securities Limited
(incorporated by reference to Exhibits 99.1 through 99.4 of
the Company's Current Report on Form 8-K filed March 26,
1997).
10.8 Form of Offshore Securities Subscription Agreement,
Convertible Notes, warrants and Registration Rights Agreement
between the Company and Willora Company Ltd. (incorporated by
reference to Exhibits 99.1 through 99.4 of the Company's
Current Report on Form 8-K filed April 28, 1997).
10.9 Form of Offshore Securities Subscription Agreement,
Convertible Notes, warrants and Registration Rights Agreement
between the Company and Silenus Ltd. (incorporated by
reference to Exhibits 99.1 through 99.4 of the Company's
Current Report on Form 8-K filed June 24, 1997).
10.10 Purchase Agreement between the Company and CORESTAFF, Inc.,
dated October 6, 1997 (incorporated by reference to Exhibit
10.10 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended February 28, 1997).
10.11 Warrant to Purchase common stock of the Company issued to
Worldwide PetroMoly Inc. (incorporated by reference to Exhibit
10.11 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended February 28, 1997).
</TABLE>
<PAGE> 110
<TABLE>
<S> <C>
10.12 Series D Preferred Stock Purchase Agreement between the Company and
METAMOR WORLDWIDE, Inc., dated May 15, 1998 (incorporated by reference
to Exhibit 10.12 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended February 28, 1998).
10.13 Stock Purchase Agreement between the Company and Precision Capital
Limited Partnership I, dated April 30, 1998 (incorporated by reference
to Exhibit 10.13 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended February 28, 1998).
10.14 Stock Purchase Agreement between the Company and Icarus Investments I,
Ltd., dated May 27, 1998 (incorporated by reference to Exhibit 10.14
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended February 28, 1998).
10.15 Stock Purchase Agreement, dated March 11, 1999, among Parago, Inc.,
2-Lane Media, Inc., and the shareholders of 2-Lane Media, Inc.
(incorporated by reference to Exhibit 10.15 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended February 28, 1999).
10.16 Stock Purchase Agreement, dated May 20, 1999, among Parago, Inc.,
Forward Communications, Inc., FCI Services Inc., and the shareholders
of Forward Communications, Inc. and FCI Services Inc. (incorporated by
reference to Exhibit 2.1 to the Company's Current Report on Form 8-K
filed June 3, 1999).
10.17 Agreement and Plan of Reorganization, dated May 20, 1999, among
Parago, Inc., Forward Freight, Inc., and the shareholders of Forward
Freight Inc. (incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed June 3, 1999).
**10.18 Settlement and Release Agreement dated January 14, 2000 by and among
Richard L. Travis, Parago, Inc. and the Company.
**10.19 Severance and Release Agreement dated March 1, 2000 by and among
Bennett Klein and the Company.
10.20 Standard Office Lease, dated August 2, 1999, between Arden Realty
Limited Partnership and How2HQ.com, Inc. (Santa Monica, California)
(incorporated by reference to Exhibit 10.18 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended February 29, 2000).
10.21 Guaranty of Lease, dated August 2, 1999, by the Company to Arden
Realty Limited Partnership, with respect to certain obligations of
How2HQ.com, Inc. under Standard Office Lease (incorporated by
reference to Exhibit 10.19 to the Company's Annual Report on Form
10-KSB for the fiscal year ended February 29, 2000).
10.22 Promissory Note dated September 30, 1999 payable to How2HQ.com, Inc.
(incorporated by reference to Exhibit 10.20 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended February 29, 2000)
10.23 Asset Purchase Agreement dated as of May 5, 2000 by and between EBSCO
CASIAS, Inc., iNetze.com, Inc., ESRN Acquisition, LLC and the Company
(incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K filed June 12, 2000).
10.24 Asset Contribution Agreement dated as of May 5, 2000 by and between
iNetze.com, Inc., ESRN Acquisition, LLC, the Company and the
stockholders set forth on the signature pages attached hereto
(incorporated by reference to Exhibit 2.2 to the Company's Current
Report on Form 8-K filed June 12, 2000).
10.25 Stock Purchase Agreement dated as of May 5, 2000 by and between the
Company, Tim Collins, F. Shanahan McAdoo and Robert C. Whitehair
(incorporated by reference to Exhibit 2.3 to the Company's Current
Report on Form 8-K filed June 12, 2000).
21.1 Subsidiaries of the Company (incorporated by reference to exhibit 21
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended February 29, 2000).
*23.1 Consent of Grant Thornton LLP.
*23.2 Consent of Ernst & Young LLP.
**23.2 Consent of Wood, Exall & Bonnet, L.L.P. (included in Exhibit 5.1).
**24.1 Power of Attorney (included with signature pages).
</TABLE>
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* Filed herewith.
** Previously filed.
