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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 8, 2000.
REGISTRATION NO. 333-65089
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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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.)
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3811 TURTLE CREEK BOULEVARD STEVEN B. SOLOMON
SUITE 770 CHIEF EXECUTIVE OFFICER
DALLAS, TEXAS 75219-4421 3811 TURTLE CREEK BOULEVARD
(214) 520-9292 SUITE 770
(Address and telephone number of DALLAS, TEXAS 75219-4421
principal executive offices) (214) 520-9292
(Name, address and telephone number of
agent for service)
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COPIES TO:
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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
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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
<PAGE> 2
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. [ ]
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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.
<PAGE> 3
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 MARCH 8, 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 March 6, 2000, the last reported sale price for the
common stock on the Nasdaq SmallCap Market was $6.50 per share.
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INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
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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 MARCH ___, 2000.
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TABLE OF CONTENTS
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Prospectus Summary 4
Risk Factors 6
Use of Proceeds 25
Selling Stockholders 26
Plan of Distribution 27
Market Prices of Common Stock and Dividend Policy 28
Management's Discussion and Analysis of Financial
Condition and Results of Operations 29
Our Business 36
Management 46
Certain Relationships and Related Transactions 51
Principal Stockholders 54
Description of Capital Stock 57
Legal Matters 59
Experts 59
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," "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
CT Holdings, Inc. is an incubator of business-to-business (B2B)
Internet companies that provides early stage business-to-business ventures with
a single source of management capital, as well as consulting on operations,
marketing and strategic planning. Our B2B incubator model is designed to enable
the start up companies with whom we partner to become online market leaders in
their industries. We believe that by focusing on B2B Internet companies, we are
positioned to identify the latest trends and opportunities and attract promising
companies and talent in this industry. Our strategy is to leverage the B2B
expertise of our management and affiliates and to capitalize upon opportunities
to cross-pollinate the strongest qualities among our holdings. We believe that
the anticipated growth in B2B e-commerce creates strong opportunities for us to
increase shareholder value and for well-positioned early stage ventures in this
industry. Forrester Research estimates that the United States B2B e-commerce
market, defined as the intercompany trade of hard goods over the Internet, will
grow from $43 billion in 1998 to more than $1.3 trillion by 2003.
We began our Internet activities in 1999 with the formation of
How2.com, which provides Internet-based solutions that automate post-purchase
customer care processes such as rebate processing, extended warranty sales and
product manual access. How2.com's solutions enable businesses to work together
more efficiently to develop, retain and extend customer relationships. By
automating post-purchase customer care activities, How2.com allows its clients
to enhance customer retention, increase revenue opportunities and improve
operating efficiencies. How2.com's Internet-based solution seeks to transform
rebates, warranties and product manuals from customer service liabilities to
retention and extension opportunities. How2.com's approximately 130 clients
include retailers, manufacturers and service providers. How2.com recently
entered into a multi-year contract with GE Warranty, a leading national warranty
provider, to provide an online sales channel for their extended warranties.
As part of our strategy to fund early stage B2B Internet companies, we
recently announced that we have entered into a letter of intent relating to a
transaction in which we would gain the right to acquire approximately 51% of the
shares of iNetze,Inc., a Massachusetts company that creates and operates
integrated networks of decision support tools, e-learning solutions, and
e-commerce capabilities across multiple industries. In addition to its
proprietary technology, iNetze provides the knowledge database needed to take
advantage of its web-enabled decision support tools, and thereby offers
comprehensive and technologically advanced, value-added decision support
networks. The companies expect to close this transaction by April 1, 2000. The
letter of intent provides, among other things, that prior to closing we will
provide $350,000 of bridge financing to iNetze in exchange for a convertible
note. Upon closing the proposed transaction, we will receive 15% of the capital
stock of iNetze in exchange for 1,000,000 shares of our common stock. We will
also receive a three-month option to purchase an additional 36% of iNetze's
capital stock for a combination of cash and shares of our common stock with a
value of $25 million. This three-month option can be extended for an additional
three months if we pay iNetze $2 million in cash. There can be no assurance
that the transaction will close by April 1, 2000 or at all.
In addition to our B2B incubation business, we continue to operate our
"Citadel Technology" business 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 B2B
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 be adversely affected
in the future.
In December 1999, we changed our corporate name to CT Holdings, Inc. We
believe that our new name is more descriptive of our focus on incubation of
emerging B2B ventures and our current substantial investment in How2.com. We
believe that any goodwill associated with our former legal name will be
preserved due to the continued use of the name "Citadel Technology" to identify
our software business. Following the inadvertent failure of our outside
consultants to file a return with the Delaware franchise tax authority in
November 1999, another entity obtained the name Citadel Technology, Inc. in
Delaware. When we filed reinstatement materials in Delaware, we adopted our new
name CT Holdings, Inc. pursuant to statutory procedures.
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 stock
issued or issuable upon exercise
by selling stockholders of the
warrants.
Common Stock to be Outstanding
After this Offering (1) 48,178,577 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 held
by the selling stockholders as described in "Selling Stockholders."
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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 B2B INCUBATION OF EARLY
STAGE 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 B2B early stage ventures. Other than our formation
and development of How2.com, 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 ANNOUNCED OUR ENTRY INTO A LETTER OF INTENT THAT PROVIDES FOR THE
RIGHT TO ACQUIRE SHARES OF INETZE, WHICH WILL BE OUR FIRST INVESTMENT IN A B2B
EARLY STAGE VENTURE FOLLOWING OUR FORMATION AND DEVELOPMENT OF HOW2.COM; THERE
CAN BE NO ASSURANCE THAT THIS INVESTMENT WILL BE COMPLETED OR, IF COMPLETED,
WILL PROVE TO BE AN ATTRACTIVE INVESTMENT.
We recently announced that we have entered into a letter of intent relating
to a transaction in which we would gain the right to acquire approximately 51%
of the shares of iNetze, with 36% of the shares of iNetze being subject to a
three-month option that we will receive at closing. We will be entitled to
exercise this option for a combination of cash and shares of our common stock
with a value of $25 million. This option can be extended for an additional
three months if we pay iNetze $2 million in cash. We have not yet determined
how we will finance the cash required to extend or exercise the option.
We expect to close the iNetze transaction by April 1, 2000. There can be no
assurance that we will be successful in closing this transaction by that date or
at all. We have never done business with iNetze before and this is our first
proposed investment in a B2B early stage venture following our formation and
development of How2.com. Our completion of the iNetze transaction is subject to
a number of conditions and circumstances, many of which are beyond our control.
Further, inasmuch as iNetze is an early stage venture, it is difficult to judge
its future prospects.
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 business 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.
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Although we have yet to make any investments in the investment
securities of an incubation startup or existing company other than How2.com,
such investments, if and when made, could fluctuate in value, which may cause
the value of such securities to exceed 40 percent 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, HOW2.COM, INC.
The following are some risks related to the business of How2.Com, 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 a 45.2 % interest in How2.com at December 31,
1999. How2.com filed a registration statement with the Securities and Exchange
Commission relating to an initial public offering of shares of its common stock
on October 19, 1999.
THERE CAN BE NO ASSURANCE THAT HOW2.COM'S CONTEMPLATED INITIAL PUBLIC OFFERING
WILL TIMELY, OR EVER, BE SUCCESSFULLY COMPLETED.
The delay or complete abandonment of the contemplated How2.com initial
public offering could have a material adverse effect on our stock price due to
our substantial equity interest in How2.com. 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 How2.com common stock issued
in connection with the acquisition of 2-Lane Media by How2.com into up to
500,000 of our shares at the option of the 2-Lane Media shareholders in the
event How2.com does not become publicly traded by March 2000. Pursuant to the
terms of the subscription agreements between How2.com 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) in the event How2.com does not become publicly
traded by either February or March 2000, as the case may be. 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.
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WE MAY NOT BE ABLE TO EFFECT THE DISTRIBUTION OF HOW2.COM SHARES.
We previously announced that we intend to distribute shares of How2.com
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 How2.com's proposed initial public offering and us.
If there are problems associated with compliance with SEC requirements or state
law, then the distribution of How2.com 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.
HOW2.COM'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.
How2.com was formed in January 1999. Since its formation, How2.com has:
o acquired its rebates operation in May 1999;
o launched its Web site in September 1999;
o completed the initial development of its online rebate application in
December 1999;
o completed the initial development of its online product manual
application in February 2000; and
o commenced its promotion of the sale of extended warranties in December
1999.
As a result, How2.com 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, How2.com focused its business to concentrate on its online
post-purchase customer care solutions and offering tutorials that primarily
relate to those solutions. How2.com cannot assure that its new, focused business
model will be commercially successful. How2.com cannot assure you that that its
online solutions will be accepted by businesses or consumers. If How2.com 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 HOW2.COM'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 HOW2.COM DOES NOT
DEVELOP THESE TECHNOLOGIES AND APPLICATIONS IN A TIMELY MANNER, ITS RESULTS OF
OPERATIONS WILL SUFFER.
Some of How2.com's business strategies related to its Internet-based
solution have not yet been implemented. To implement these strategies How2.com
must develop new applications and enhance its existing applications. Its online
rebate and product manual applications are new, unproven and evolving and
How2.com continues to develop enhancements to these applications. How2.com has
not yet completed the initial development of its own online warranty
application. Its technology that enables its clients' customers to apply rebate
proceeds to additional products and services immediately following rebate
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. How2.com
cannot assure you that How2.com will successfully develop all of its planned
technologies and applications. If How2.com does not develop and implement these
technologies and applications in a timely manner, its results of operations will
suffer.
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HOW2.COM HAS A HISTORY OF NET LOSSES AND EXPECTS TO CONTINUE TO INCUR
SUBSTANTIAL NET LOSSES IN THE FUTURE.
How2.com had a net loss of approximately $31.8 million and an
accumulated deficit of approximately $31.8 million for the period from its
inception, January 7, 1999, through December 31, 1999. How2.com anticipates that
its operating expenses will increase in the foreseeable future as How2.com
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, How2.com expects to incur
additional losses for at least the next 12 months. If its revenues do not grow
as How2.com anticipates, How2.com may never be profitable.
HOW2.COM'S REBATE AND RELATED SERVICES HAVE ACCOUNTED FOR SUBSTANTIALLY ALL OF
ITS REVENUES SINCE INCEPTION, AND HOW2.COM EXPECTS TO DEPEND ON ITS REBATE
APPLICATION AND PROCESSING SERVICES FOR A SIGNIFICANT PORTION OF ITS REVENUES
FOR THE FORESEEABLE FUTURE.
How2.com's rebate and related services accounted for approximately
86.0% of its total revenues from inception through December 31, 1999. How2.com
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 How2.com receives would negatively impact
its results of operations.
HOW2.COM IS DEPENDENT ON FOUR CLIENTS FOR A SUBSTANTIAL PORTION OF ITS BUSINESS.
How2.com 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 88.0% of its aggregate
invoiced revenue for the year ended December 31, 1999. As a result of this
concentration of sales, How2.com'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, How2.com 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 expires in July 2000. The agreement
is renewable annually upon mutual agreement. In addition, Staples' vendors may
not use, or may discontinue their use of, How2.com's rebate solution. How2.com
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, How2.com cannot assure you that How2.com will
generate significant revenues in future periods from any of its principal rebate
clients. The loss of all or any part of How2.com's relationship with any of
these clients would seriously harm its business.
MANY OF HOW2.COM'S CLIENT AGREEMENTS ARE TERMINABLE BY THE CLIENT AT WILL.
How2.com 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, How2.com 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.
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HOW2.COM'S REVENUE IS DEPENDENT UPON ITS CLIENTS' BUSINESS AND PRODUCT SALES.
How2.com'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 How2.com provides its online post-purchase customer care
solutions. Its business would suffer if its clients decrease their activity that
relates to its online post-purchase customer care solutions.
HOW2.COM'S BUSINESS MODEL IS DEPENDENT ON ITS ABILITY TO SUCCESSFULLY ENTER INTO
RELATIONSHIPS WITH CLIENTS, OF WHICH HOW2.COM CURRENTLY HAS ONLY A LIMITED
NUMBER. MOST OF THESE RELATIONSHIPS WILL NOT BE EXCLUSIVE AND MAY BE TERMINATED
BY ITS CLIENTS AT ANY TIME.
How2.com'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 rebate, warranty and product manual
solutions. How2.com currently has these business relationships with only a
limited number of clients. Currently, How2.com has four principal rebate clients
that use its rebate application on its Web site and one principal warranty
client that continues to use its own warranty application that is hosted on a
Web site that is co-branded with How2.com as well as another Web site. How2.com
only recently began marketing its online product manual solution and currently
does not have any clients using this solution. How2.com anticipates that its
arrangements with clients will typically not be exclusive and will be subject to
termination upon short notice. In addition, How2.com cannot assure you that
these arrangements will result in revenues or be profitable for it. If How2.com
cannot develop relationships with new clients, its results of operations will be
significantly and negatively impacted.
HOW2.COM'S QUARTERLY OPERATING RESULTS WILL LIKELY VARY SIGNIFICANTLY IN THE
FUTURE.
How2.com 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 rebate, extended warranty and product manual
solutions;
o fluctuations in the average face amount and number of the rebates
processed and warranties sold by it;
o seasonality in its clients' rebate and warranty 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, How2.com has limited insight
into trends that may emerge and affect its operating results.
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THE AMOUNT OF REVENUES HOW2.COM 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.
How2.com bills its rebate clients for the full amount of the rebate
checks that How2.com issues to their 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 How2.com sends
rebate checks could assert that it is entitled to unclaimed rebate checks that
How2.com has issued to consumers in that state.
For the period from January 7, 1999 to December 31, 1999, its revenues
included $2.3 million of slippage, representing 39.7% of its revenues for the
period and approximately 6.6% of the face amount of rebate checks How2.com
issued to consumers. 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, How2.com 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 How2.com retain could
decrease its revenues and negatively impact its results of operations.
IN THE FUTURE, HOW2.COM WILL NEED TO RAISE ADDITIONAL CAPITAL, AND THIS CAPITAL
MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS, IF AT ALL.
How2.com expects the net proceeds from its initial public offering, if
completed, will be sufficient to meet its working capital and capital
expenditure needs for at least the next 12 months. After that, How2.com may need
to raise additional funds. In addition, within the next 12 months How2.com may
need to raise additional funds if How2.com wants to be able to take advantage of
new business opportunities, to react to unforeseen difficulties or to otherwise
respond to pressures from its competitors. If How2.com cannot raise funds on
acceptable terms, if and when needed, its business will suffer.
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TO CONTINUE ITS OPERATIONS AND BUSINESS, HOW2.COM MUST COMPLETE ITS INITIAL
PUBLIC OFFERING OR FIND ALTERNATIVE FINANCING.
How2.com'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 How2.com does not complete its initial public offering,
How2.com must find an alternative method of financing. If How2.com does not
complete its initial public offering or find an alternative source of funds, its
business and results of operations will be seriously harmed. How2.com 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.
HOW2.COM'S BRAND MAY NOT ACHIEVE THE BROAD RECOGNITION AND LOYALTY NECESSARY TO
SUCCEED.
How2.com believes that broad recognition and favorable business
perception of the How2.com brand are essential to its future success.
Accordingly, How2.com is pursuing an aggressive brand-enhancement strategy,
which includes advertising, trade shows, promotional programs and public
relations activities. Successful positioning of its How2.com 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 rebates;
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 How2.com brand How2.com 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, How2.com spent approximately $12.0
million on a brand advertising campaign that was partially related to
informational tutorials related to lifestyle topics How2.com offered on its Web
site. In December 1999, How2.com focused its business model to concentrate on
its online solutions, and offering tutorials that primarily relate to those
solutions. Therefore, How2.com 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 HOW2.COM'S COMPUTER AND COMMUNICATIONS EQUIPMENT
ARE DEPENDENT ON THIRD PARTIES. THE PERFORMANCE OF EXODUS COMMUNICATIONS, INC.
IS CRITICAL TO ITS OPERATIONS.
How2.com depends upon third parties for several critical elements of
its technology. How2.com 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 How2.com with its technical operations, Exodus maintains
How2.com's communications lines and manages the network data centers where its
network data is stored. If Exodus does not perform to its requirements, How2.com
would have to obtain similar services from another provider or perform these
functions themselves. How2.com 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, How2.com 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, HOW2.COM WILL NEED TO IMPROVE AND
IMPLEMENT NEW SYSTEMS, PROCEDURES AND CONTROLS.
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Since its formation, How2.com has experienced significant expansion of
its operations. Since its inception in January 1999, How2.com has expanded from
one employee to more than 225 employees. Further, since inception, How2.com has
expanded from operating solely from its Dallas headquarters to operating from
three additional facilities located in Coppell, Texas and the 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
How2.com 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 HOW2.COM MAY EXPEND RESOURCES ON DEVELOPING NEW
RELATIONSHIPS THAT DO NOT MATERIALIZE.
How2.com recruits clients to process their rebates, and their vendors'
rebates in the case of retail clients, offers their extended warranties and
includes their product manuals and other products as part of its online
solutions. Most of the clients How2.com 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
How2.com'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
How2.com'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
How2.com 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 HOW2.COM 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, How2.com 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.
How2.com does not have life insurance policies that would pay proceeds to it
upon the death of any of its key personnel. How2.com's business could be
negatively impacted if it were to lose the services of one or more of these
persons.
HOW2.COM HAS NO EXPERIENCE WITH LICENSING THE USE OF ITS APPLICATIONS TO OTHER
WEB SITES AND PRICING OF THESE LICENSES.
How2.com's business plan contemplates that it will license its
technology, for a fee, to businesses that want to provide its applications
through their own Web sites. However, How2.com has no experience with
negotiating or pricing these licenses.
How2.com intends to sell some licenses on an annual or fixed-price
basis. To do this, How2.com must estimate the amount of work involved in
implementing its application on a client's Web site and the value of the
application How2.com is licensing. If How2.com 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.
How2.com also intends to sell some licenses on a varying price basis
where How2.com 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, How2.com 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
How2.com underestimates these amounts and revenues, its revenues and results of
operations will suffer.
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HOW2.COM'S APPLICATIONS MAY CONTAIN ERRORS OR DEFECTS THAT COULD RESULT IN LOST
REVENUES, DELAYED OR LIMITED MARKET ACCEPTANCE OR PRODUCT LIABILITY CLAIMS.
How2.com'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 How2.com licenses the use of its applications, its applications may
contain serious defects of which How2.com is unaware.
Since How2.com plans to license its applications to clients for
critical post-purchase customer care activities, such as rebate processing and
hosting product manuals, 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 How2.com'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.
HOW2.COM WRITES ITS APPLICATIONS IN THE JAVA PROGRAMMING LANGUAGE AND ITS
BUSINESS COULD BE HARMED IF JAVA LOSES MARKET ACCEPTANCE OR IF HOW2.COM IS NOT
ABLE TO CONTINUE USING JAVA OR JAVA RELATED TECHNOLOGIES.
How2.com 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
How2.com could not continue to use Java or related Java technologies or if Java
support decreased, How2.com 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 How2.com failed to
implement or develop appropriate modifications to its applications in a timely
manner, How2.com could lose revenue opportunities and its business could be
harmed.
HOW2.COM'S MARKETS ARE HIGHLY COMPETITIVE.
The rebate and fulfillment industry is highly competitive and
fragmented. How2.com expects competition to persist and to intensify in the
future. Its competitors include small firms offering specific promotion
fulfillment 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 rebate 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 online rebate and fulfillment industry. Its performance and growth
could be negatively affected if its existing or potential rebate clients decide
to perform their own rebate operations that are currently outsourced or use
another provider. In addition, competitive pressures from current or future
competitors could cause its rebate 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, How2.com would
face increased competition.
In order to remain competitive, How2.com may need to acquire additional
businesses, applications, technologies, expertise, products or other resources.
How2.com may not be able to identify suitable acquisition
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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 How2.com consummates significant acquisitions in which
the consideration consists of stock or other equity securities, your ownership
could be significantly diluted. If How2.com proceeds with significant
acquisitions in which the consideration includes cash, How2.com 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, How2.com 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. How2.com
has no current plans, commitments or agreements with respect to any
acquisitions, and How2.com may not make any acquisitions.
HOW2.COM'S BUSINESS IS VERY DEPENDENT ON ITS TECHNICAL SUPPORT AND SALES
PERSONNEL.
How2.com's future success depends on its ability to attract, hire,
train and retain highly skilled personnel. In addition, How2.com 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 How2.com may fail to attract or retain these
personnel, in which case its business would be negatively impacted. How2.com
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, 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.
HOW2.COM MAY BE SUED FOR INFORMATION RETRIEVED FROM ITS WEB SITE OR FOR PRODUCTS
AND SERVICES OFFERED THROUGH ITS WEB SITE.
How2.com may be subject to claims for negligence, copyright or
trademark infringement, personal injury or other legal theories relating to the
information How2.com publishes on its Web site. While How2.com has never been
subject to claims of this nature, these types of claims have been brought,
sometimes successfully, against online services, as well as print publications,
in the past. How2.com could also be subjected to claims based upon the content
that is accessible from its Web site through links to other Web sites or through
content and materials that members may post in its chat rooms or on its bulletin
boards, but, to date, How2.com has not been subject to claims of this type. Its
insurance, which covers commercial general liability, may not adequately protect
it against these various types of claims. In addition to monetary damages, any
such claims could occupy significant amounts of its management's time and
attention, harm its reputation and public image and cause serious harm to its
business.
In addition, consumers may sue How2.com if any of the products or
services that its clients sell through its Web site are defective, fail to
perform properly or injure the user. To date, How2.com has had limited
experience in the sale of products online and have not been involved in any
product liability claims. However, How2.com plans to develop relationships with
its clients to offer products targeted specifically at its clients' customers
that are processing their rebates, purchasing extended warranties or accessing
product manuals through its Web site. This strategy involves numerous risks and
uncertainties. Any errors, defects or other performance problems with the
products could result in financial or other damage to those purchasing products
through its Web site. A product liability or other claim brought against it,
even if not successful, would likely be time consuming and costly and could
seriously harm its business. Liability claims could require it to spend
significant time and money in litigation or to pay significant damages. As a
result, any of these claims, whether or not successful, could seriously damage
its reputation and its business.
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IF THE PROTECTION OF HOW2.COM'S INTELLECTUAL PROPERTY IS INADEQUATE, ITS
COMPETITORS MAY GAIN ACCESS TO ITS CONTENT AND TECHNOLOGY.
How2.com 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 rebate and product manual applications,
How2.com relies primarily on a combination of contractual provisions,
confidentiality procedures, trade secrets and patent, copyright and trademark
laws. How2.com 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. How2.com seeks to protect its content, applications,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection. How2.com has no registered copyrights, but
claim copyright protection on most of the content on its Web site. How2.com
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 How2.com regards as proprietary.
Policing unauthorized use of its products is difficult, and while How2.com 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.
HOW2.COM HAS NO REGISTERED TRADEMARKS AND MAY NOT RECEIVE ANY TRADEMARKS.
How2.com has filed 23 trademark applications with respect to trademarks
that How2.com has used or is using in connection with its business, How2.com has
received no legal opinion and has not conducted full searches regarding the
registrability of its marks. The trademarks that are the most significant to its
business model and branding strategy, and for which How2.com has filed
applications, are "How2.com", "C.A.R.E. Customer Acquisition, Retention, and
Extension", "ManualsHQ" and "RebatesHQ". How2.com has not conducted extensive
searches regarding the availability of any of the trademarks for which How2.com
has filed applications. How2.com 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.
How2.com may not successfully carry out its business strategy of establishing a
strong brand name for How2.com if How2.com cannot prevent others from using its
trademarks. This could impair its ability to increase market share and revenues.
HOW2.COM HAS NO PATENTS, ITS PATENT APPLICATIONS MAY BE UNSUCCESSFUL AND OTHER
PARTIES MAY HAVE PRIOR CLAIMS TO PATENTS ISSUED TO IT.
Although How2.com has filed three patent applications and one
provisional patent application with respect to its online rebate systems and
processes, How2.com 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 rebate processing, its rebate processing system and method that
offers selectable disbursement options and its rebate 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 rebate fulfillment and customer
information gathering. How2.com has no patents, and may not receive any patents
related to its online rebate applications. If How2.com receives a patent related
to its rebate application either resulting from its current patent applications
or future applications, How2.com 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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How2.com 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.
HOW2.COM 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 How2.com has not
been the subject of any infringement claims, it is possible that in the future
third parties may claim that How2.com or its current or potential future
applications, content or services infringe upon their intellectual property.
How2.com 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.
HOW2.COM IS DEPENDENT ON ITS DOMAIN NAMES, AND HOW2.COM COULD SUFFER LOSSES IF
ITS DOMAIN NAMES ARE NOT protected.
How2.com currently owns and controls the Internet domain names that
How2.com currently uses, "www.how2.com", "www.how2hq.com" and "rebateshq.com",
as well as approximately 300 various other related names and names How2.com
acquired in acquisitions of businesses and assets that How2.com 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, How2.com may not acquire or maintain the
"www.how2.com", "www.how2hq.com" and "rebateshq.com" domain names in all of the
countries in which How2.com conduct business.
The relationship between regulations governing domain names and laws
protecting trademarks and similar proprietary rights is unclear. Therefore,
How2.com 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 HOW2.COM'S BUSINESS.
While How2.com has not experienced capacity constraint or system
failure problems in the past, if How2.com cannot expand its systems in the
future to cope with any increased demand, or its technology systems fail to
perform properly, How2.com 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 How2.com
brand and materially and adversely affect its business.
How2.com's ability to provide high quality client and consumer service
depends on the efficient, uninterrupted operation of its computer and
communications hardware systems. While How2.com 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,
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computer viruses, acts of vandalism and similar events. While How2.com plans to
establish redundant servers and a mirror site to provide limited service during
system disruptions, How2.com does not currently have fully redundant systems, a
formal disaster recovery plan, alternative providers of hosting services or a
mirror site.
How2.com's business is highly dependent on its computer and telephone
equipment and software systems. While How2.com 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 How2.com has
property and business interruption insurance, its insurance may not adequately
compensate it for all losses.
HOW2.COM'S MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND TO COMPETE
HOW2.COM MUST CONTINUALLY ENHANCE ITS SYSTEM AND APPLICATIONS TO COMPLY WITH
EVOLVING STANDARDS.
To remain competitive, How2.com must continue to enhance and improve
the responsiveness, functionality and features of its applications. If How2.com
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, How2.com
must internally develop and license leading technologies to enhance its existing
solutions and applications and develop new applications. How2.com 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. How2.com may fail to develop
new technologies effectively or to adapt its proprietary technology and systems
to client requirements or emerging industry standards.
HOW2.COM MUST EXPAND EXISTING TECHNOLOGY SYSTEMS AND DEVELOP AND IMPLEMENT NEW
TECHNOLOGY SYSTEMS AS HOW2.COM INTRODUCES NEW AND ENHANCED SOLUTIONS AND
APPLICATIONS AND AS DEMAND FOR ITS SOLUTIONS AND APPLICATIONS INCREASES.
As How2.com introduces new and enhanced solutions and applications,
How2.com will need to develop and implement new technology systems. How2.com
uses internally developed and third party systems to operate its Web site,
including transaction processing and order management systems designed to be
scalable. How2.com does not know whether How2.com 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.
HOW2.COM 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.
How2.com'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 How2.com anticipates, potential and existing
clients may not choose to use its solutions.
INCREASED GOVERNMENT REGULATION COULD LIMIT THE MARKET FOR, OR IMPOSE SALES AND
OTHER TAXES ON THE SALE OF PRODUCTS AND SERVICES PURCHASED THROUGH HOW2.COM'S
WEB SITE.
As Internet commerce evolves, How2.com expects that federal, state or
foreign agencies will adopt regulations covering issues such as user privacy,
pricing, content and quality of products and services. It is possible that
legislation could expose companies involved in e-commerce to liability, which
could limit the growth of
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e-commerce. Legislation could dampen the growth in Internet usage and decrease
its acceptance as a communication and commercial medium. If enacted, these laws,
rules or regulations could limit the market for its solutions.
How2.com does not collect sales or similar taxes for goods and services
purchased through its Web site. However, one or more states may seek to impose
sales tax collection obligations on out-of-state companies like it that engage
in or facilitate e-commerce. A number of proposals have been made at the state
and local level that would impose additional taxes on the sale of goods and
services over the Internet. These proposals, if adopted, could substantially
impair the growth of e-commerce and could adversely affect its opportunity to
derive financial benefit from such activities. Moreover, a successful assertion
by one or more states or any foreign country that How2.com should collect sales
or other taxes on the exchange of goods and services through its Web site could
seriously harm its business.
CONCERNS REGARDING THE SECURITY OF TRANSMISSION OF CONFIDENTIAL INFORMATION OVER
THE INTERNET MAY REDUCE CONSUMER CONFIDENCE IN HOW2.COM'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 How2.com'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 How2.com 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 How2.com'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 breaches. While How2.com attempt to protect against and remedy security
breaches, How2.com cannot guarantee that its security measures will prevent
security breaches.
How2.com 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.
HOW2.COM IS HEAVILY DEPENDENT ON TELEPHONE, POSTAL AND DELIVERY SERVICES.
How2.com materially relies on services provided by various local and
long distance telephone companies in connection with its rebate solution. A
significant increase in the cost of telephone services that How2.com 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.
HOW2.COM AND OUR COMPANY, CT HOLDINGS, COULD FACE POTENTIAL CONFLICTS OF
INTERESTS RELATING TO EACH OTHER.
o Because of How2.com's relationship with us, and because we owned 45.2%
of its common stock at December 31, 1999, and because of our
interlocking directors, officers and stockholders, who collectively
owned 20.7% of How2.com's common stock as of December 31, 1999,
How2.com 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 How2.com's business model. Steven B. Solomon, our
CEO and President, is the founder, Chairman and CEO of
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of How2.com. In addition, Lawrence Lacerte, Victor K. Kiam II, and
Steven B. Solomon serve as directors of both How2.com and us.
o Some of How2.com's executive officers, key employees and directors also
beneficially own, or hold options or warrants to purchase,
approximately 33.0% of our outstanding common stock as of December 31,
1999. Steven B. Solomon owned approximately 13.0% of our common stock
as of December 31, 1999.
o Accordingly, conflicts of interest may arise from time to time between
How2.com and us, particularly with respect to the pursuit of
overlapping business opportunities. How2.com 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 How2.com has interlocking directors and officers with us, there
may be inherent conflicts of interest for these directors and officers
related to transactions between How2.com and us. Directors may be
required to abstain from voting with respect to matters involving both
us and How2.com. How2.com may lose valuable management input from the
directors and officers who have conflicts.
IN THE EVENT OF THE COMPLETION OF HOW2.COM'S INITIAL PUBLIC OFFERING, HOW2.COM'S
STOCK PRICE IS LIKELY TO BE VERY VOLATILE.
o Currently, How2.com'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 How2.com's common stock is likely to be highly volatile
and could be subject to wide fluctuations in response to factors which
are beyond its control. A decline in How2.com'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 How2.com's common stock.
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 How2.com'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 How2.com's common stock in
the public market after its initial public offering could depress the
market price of the How2.com common stock and could impair How2.com'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.
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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.
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.
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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 the aforementioned 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
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.
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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 How2.com 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 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.
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WE HAVE EXPERIENCED REDUCED DEMAND FOR OUR PRODUCTS DUE TO CHANGES IN CUSTOMER
BEHAVIOR RESULTING FROM YEAR 2000 PREPARATION.
With the emerging requirements 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.
WE MAY EXPERIENCE DISRUPTION OF OUR INTERNAL SYSTEMS AS A RESULT OF THE YEAR
2000.
Many currently installed computer systems and software products include
coding to accept only two digit entries in the date code field. These date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail.
We have conducted Year 2000 compliance reviews for our internal
systems. The review is comprised of four phases: (i) assessment of all of our
systems and technology; (ii) remediation; (iii) implementation and testing of
modifications to or replacements of existing systems and technology; and (iv)
contingency planning.
Failures of our internal software and hardware systems containing all
the necessary software routines and programs for the accurate calculation,
display, storage and manipulation of data involving dates would seriously harm
our business, operating results and financial condition. We are also vulnerable
to our key partners' and suppliers' potential failure to remediate their own
Year 2000 issues.
We believe the software and hardware we use internally complies with
Year 2000 requirements. However, serious, unanticipated negative consequences,
including material costs caused by undetected errors or defects in the
technology used in our internal systems may occur. The occurrence of any of the
foregoing could seriously harm our business, operating results or financial
condition.
We have funded our Year 2000 compliance review from operating cash
flows and have not separately accounted for these costs in the past. To date we
have not incurred material costs in addressing Year 2000 issues. However, there
can be no assurances that the actual costs of implementing our Year 2000 plan
will exceed our estimates or that our business will not be materially adversely
affected by Year 2000 issues.
WE MAY NEED ADDITIONAL FINANCING.
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.
ADDITIONAL RISKS RELATING TO THE OFFERING
WE HAVE BROAD DISCRETION REGARDING THE USE OF PROCEEDS, IF ANY, FROM THE
EXERCISE OF THE WARRANTS UNDERLYING SOME OF THE SHARES OFFERED HEREBY.
We currently intend to use any proceeds of the exercise of the
currently outstanding warrants underlying the shares of common stock in this
offering for working capital and general corporate purposes. There can be no
assurances that any of the holders of the warrants will choose to exercise their
warrants, and there can therefore be no assurances that we will receive any
proceeds from the exercise of such warrants. In the event the holders of
warrants do exercise the warrants, we will have broad discretion with respect to
the expenditure of the proceeds of any such exercises. See "Use of Proceeds."
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OUR MANAGEMENT AND AFFILIATED STOCKHOLDERS OWN A LARGE PERCENTAGE OF SHARES OF
OUR COMMON STOCK AND ARE IN A POSITION TO SIGNIFICANTLY INFLUENCE THE OUTCOME OF
SOME CORPORATE ACTIONS.
Prior to this offering, our present directors, executive officers and
affiliated stockholders, in the aggregate, beneficially owned approximately
28.0% of our outstanding common stock. Upon consummation of this offering and
assuming exercise of the warrants in full and the sale of all of the shares of
common stock covered by this prospectus, our present directors, executive
officers and affiliated stockholders will, in the aggregate, beneficially own
approximately 27.6% of our outstanding common stock. These stockholders, acting
together, may have the ability to significantly influence the election of our
directors and most other stockholders actions and, as a result, direct our
affairs and business. Such concentration may have the effect of delaying or
preventing a change of control of us. See "Principal Stockholders."
WE HAVE NOT PAID CASH DIVIDENDS IN THE PAST AND MAY NOT PAY DIVIDENDS IN THE
FUTURE.
It is our current policy that we will retain earnings, if any, for
continued expansion of our operations and other corporate purposes and that we
will not pay any cash dividends on our common stock in the foreseeable future.
THE ISSUANCE OF PREFERRED STOCK AND ANTI-TAKEOVER PROVISIONS MAY DELAY OR
PREVENT A CHANGE IN CONTROL.
Our Board of Directors has the authority to issue shares of preferred
stock and to determine the price, rights, preferences, qualifications,
limitations and restrictions, including voting rights, of those shares without
any further vote or action by the stockholders. The rights of the holders of
common stock will be subject to, and may be adversely affected by, the rights of
the holders of any preferred stock that may be issued in the future. The
issuance of preferred stock could have the effect of delaying or preventing a
change of control. Further, Section 203 of the General Corporation Law of
Delaware prohibits us from engaging in some business combinations with
interested stockholders. These provisions may have the effect of delaying or
preventing a change if control of us without action by the stockholders, and
therefore could adversely affect the price of the common stock and, to the
extent tender offers for shares of our common stock are discouraged or prevented
by these provisions, may reduce the likelihood that investors could receive a
premium for their shares of common stock. See "Description of Capital Stock."
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
NAME PRIOR TO REGISTERED OWNED AFTER OWNED AFTER
---- 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
J. Mitchell Hull 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>
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 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
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<PAGE> 30
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 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.
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 bid and ask prices for the common
stock as reported on the OTC Bulletin Board. The quotations 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
</TABLE>
On March 6, 2000, the last reported sale price for our common
stock on the Nasdaq SmallCap Market was $6.50 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> 31
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
CT Holdings, Inc. is an incubator of business-to-business (B2B)
Internet companies that provides early stage business-to-business ventures with
a single source of management capital, as well as consulting on operations,
marketing and strategic planning. Our B2B 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
How2.com, which provides online post-purchase customer care solutions.
How2.com's comprehensive suite of outsourced post-purchase customer care
solutions includes manufacturer rebate processing, extended warranties, product
information, customer data asset management and other services that are marketed
across multiple industry lines.
In addition to our B2B 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 B2B 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 be
adversely affected in the future.
In December 1999, we changed our corporate name to CT Holdings, Inc. We
believe that our new name is more descriptive of our focus on incubation of
emerging B2B ventures and our current substantial investment in How2.com. We
believe that any goodwill associated with our former legal name will be
preserved due to the continued use of the name "Citadel Technology" to identify
our software business. Following the inadvertent failure of our outside
consultants to file a return with the Delaware franchise tax authority in
November 1999 another entity obtained the name Citadel Technology, Inc. in
Delaware. When we filed reinstatement materials in Delaware, we adopted our new
name CT Holdings, Inc. pursuant to statutory procedures.
In February 2000, CT Holdings 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 a $140,000 promissory note and
438,750 stock purchase warrants at $.59 per share. The settlement results in an
immaterial gain to CT Holdings.
OVERVIEW OF HOW2.COM SUBSIDIARY
In January 1999, we announced that we had formed a subsidiary,
How2.com, Inc. ("How2.com"), to implement our Internet and e-commerce
strategies. How2.com provides online post-purchase customer care solutions.
How2.com's comprehensive suite of outsourced solutions includes manufacturer
rebate processing, extended warranties, product information, customer data asset
management and other services that are marketed across multiple industry lines.
How2.com's approximately 130 clients include retailers, manufacturers and
service providers. How2.com recently entered into a multi-year contract with GE
Warranty, a leading national warranty provider, to provide an online sales
channel for their extended warranties.
How2.com has completed several acquisitions since its inception. In
March 1999, How2.com 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
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<PAGE> 32
and e-commerce design services for a diverse client roster. In May 1999,
How2.com 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,
How2.com 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, How2.com retained certain members of Broadcast Production
Group's management team as employees of How2.com. In connection with How2.com's
acquisition of 2-Lane, we agreed to convert the How2.com shares of common stock
issued in connection with the merger into up to 500,000 of our shares at the
option of 2-Lane shareholders in the event How-2.com does not become publicly
traded by March 2000. In addition, pursuant to the terms of the subscription
agreements between How2.com and some of its stockholders, we may be required to
issue up to 414,000 shares of our common stock to such stockholders based upon a
conversion price of $3.75 per share in the event How2.com does not become
publicly traded within one year from the dates of such agreements. 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 December 31, 1999, we owned 20,000,000 shares of the common stock of
How2.com, representing 45.2% of the outstanding common stock of How2.com. As a
result, we account for our ownership interest in How2.com using the equity
method of accounting. Since its inception, How2.com 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 nine months ended
November 30, 1999, we recorded an "equity in loss of unconsolidated affiliate"
of $11,253,865. We understand that How2.com expects to incur net losses for at
least the next 12 months, so we expect that we will continue to record
significant losses relating to our How2.com subsidiary as it continues to
develop its business services.
How2.com filed a registration statement with the Securities and
Exchange Commission relating to an initial public offering of shares of its
common stock on October 19, 1999. We previously announced that we intend to
distribute 15% of the shares of How2.com 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 How2.com proposed initial public offering and
us. If there are some problems associated with compliance with SEC requirements
or state law, then the distribution of How2.com shares may be delayed or may not
occur. There can be no assurance that How2.com'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.
RESULTS OF OPERATIONS
Nine Months Ended November 30, 1999 Compared with Nine Months Ended November 30,
1998
Net Revenue
For the nine months ended November 30, 1999, we had net sales of
$1,413,449, a decrease of $2,635,516, or 65.1%, over net sales of $4,048,965 for
the nine months ended November 30, 1998. We attribute the decrease in our
software product revenues for the year to date to our focus on our activities as
an Internet business incubator, as well as the closing of our England
distributor, the reduction in purchases from our Japanese distributor, 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 the year we started to transition the sale of our
products to large corporate accounts. During the second quarter, we started to
see increased sales to this market segment with backlog starting to develop.
However, during the third quarter, we encountered significant unexpected sales
resistance from this market segment due to Y2K concerns. Most of the clients we
were working with went into a lock-down during the third quarter and as a
result, purchases were delayed. As such, we started to aggressively market our
products to smaller accounts which did not appear to be as sensitive to Y2K
issues; however, most of the quarter was over before we could react and as a
result, our sales during the third quarter were significantly adversely
affected. In addition to the Y2K issues, during the third quarter last year, we
had one large system integrator sale
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<PAGE> 33
that accounted for approximately 58% of our revenue during the quarter. While
this integrator accounted for approximately $315,000 of the revenues derived
during the second quarter of this fiscal year, they indicated to us last year
that they would be spending most of the rest of calendar year 1999 on Y2K
related issues.
Cost Of Sales
For the nine months ended November 30, 1999, cost of sales were
$54,610, a decrease of $110,412, or 66.9%, over cost of sales of $165,022 for
the nine months ended November 30, 1998. As a percentage of sales, cost of sales
for the nine months ended November 30, 1999 was 3.9%, versus 4.1% for the nine
months ended November 30, 1998. The decrease in our cost of sales for the nine
months ended November 30, 1999 over the comparable period last year can be
attributed to the increase in corporate sales as a percentage of total sales
this year over last year. The increase in the percentage during the third
quarter can be attributed to the large system integrator sale during the three
months ended November 30, 1998, as previously discussed.
Research And Development Expense
For the nine months ended November 30, 1999, research and development
costs were $344,607 versus $410,329 for the nine months ended November 30, 1998,
or a decrease of $65,722, or 16.0%. For the nine months ended November 30, 1999,
we capitalized approximately $461,000, versus $820,000 for the comparable period
last year. The decrease in costs capitalized for the nine months ended November
30, 1999 related primarily to a decrease in the level of development work being
performed by outside contract consultants during this period when compared to
the same period last year. Last year, we spent considerable resources in
upgrading their products to be both Windows 98 and NT compliant. This year, we
internally developed our WinShield Secure PC product, 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 is
expected to be launched in our fourth fiscal quarter of fiscal 2000 (originally
scheduled for release in October 1999). Due to our relatively limited
development resources it may be reasonable to expect that the development of new
products and enhancements and upgrades to existing products may continue to be
delayed in the future, which could have a negative impact of our Citadel
Technology software unit's operating results.
Selling And Marketing Expense
Selling and marketing expenses decreased from $2,413,595 for the nine
months ended November 30, 1998 to $2,177,547 for the nine months ended November
30, 1999. As a percentage of sales, selling and marketing expenses for the nine
months ended November 30, 1999 were 154.1%, versus 59.6% for the nine months
ended November 30, 1998.
During the first quarter of this year, we increased both our general
marketing expenditures, which were aimed at increasing our name and product
recognition, as well as our direct marketing expenditures, which were aimed at a
particular market segment, i.e., education, corporate, government, etc. The
majority of these direct marketing expenditures were front-loaded, i.e., the
costs were recognized then, while the benefits were not expected to be derived
until future quarters. During the third quarter of this year, we started the
implementation of our sales specific marketing program and general cost control
program and spent considerably less on general marketing. As a result, these
expenses were reduced 57.6% during the third quarter of this year. In addition,
in the past, we have allocated considerable resources to building our inside and
outside sales infrastructure. We do not anticipate that we will be required to
allocate the same amount of resources in the future due to operational
efficiencies introduced during the third quarter. As a result, we would
anticipate that, in future quarters, these expenses would continue to be reduced
on a dollar basis as we continue to look for ways to be more efficient in our
marketing and sales efforts.
General And Administrative Expenses
General and administrative expenses decreased $529,436, or 43.5%, from
$1,261,556 for the nine months ended November 30, 1998, to $687,120 for the nine
months ended November 30, 1999. The decrease can be attributed to the cost
control programs that we have implemented since May 1999. We continue to explore
ways to
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<PAGE> 34
reduce our general and administrative expenses even further, as evidenced by the
continued reduction in these expenses in the third quarter (reduction in the
third quarter was $277,630, versus an average reduction per quarter of $176,479
for the year).
Depreciation And Amortization Expense
For the nine months ended November 30, 1999, depreciation and
amortization expense was $1,015,598, compared to $1,134,270 for the nine months
ended November 30, 1998, or a decrease of $118,672, or 10.5%. During the last
quarter of the previous fiscal year, we wrote-off approximately $1,200,000 of
purchased software costs, which had the impact of reducing the depreciation and
amortization expense for the nine months ended November 30, 1999 by
approximately $375,000. This reduction was offset by the commencement of
amortization on some capitalized product development costs relating to products
that became available for sale during the periods.
Other Income (Expense)
Interest expense for the nine months ended November 30, 1999 was
$17,629, compared to $136,409 for the nine months ended November 30, 1998. This
decrease resulted primarily from the fact that we had less interest bearing debt
during this period than we did during the same period last year. Equity in loss
of unconsolidated affiliate was $11,253,865 for the nine months ended November
30, 1999. The large increase in the loss during the third quarter related to our
How2.com Internet subsidiary 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
will continue to be significant for at least the foreseeable future as our
Internet subsidiary continues to develop its business services.
Net Loss Before Extraordinary Item
As a result of the foregoing, for the nine months ended November 30,
1999, we reported a net loss before extraordinary items of $14,141,689 (which
included $11,253,865 related to our Internet subsidiary) compared to $2,108,131
for the same period last year.
Extraordinary Item - Forgiveness Of Debt
During the nine months ended November 30, 1998, we recognized a gain on
the settlement of debts of $806,421. These gains related primarily to the
restructuring of a note payable to Inxight, a division of Xerox. In connection
with the restructuring, Inxight agreed to reduce the principal amount of the
note and accrued interest due from us by $520,816. In exchange we agreed to a
shorter maturity on the note and the issuance of 250,000 shares of our common
stock to Inxight (valued at $92,500 as of the date of the transaction). The
value of the stock has been treated as a reduction in the gain associated with
the transaction. The remaining balance relates to miscellaneous gains recognized
by us associated with the settlement of balances due various vendors during the
period.
Net Loss
As a result of these factors, for the nine months ended November 30,
1999, we reported a net loss of $14,141,689 compared to a net loss of $1,301,710
for the nine months ended November 30, 1998.
Year Ended February 28, 1999, As Compared With Year Ended February 28, 1998
Net Revenue
During the fiscal year ended February 28, 1999, we had net sales of
$4,439,608, an increase of $2,826,282 or 175.3%, over net sales of $1,613,326
during the fiscal year ended February 28, 1998. We attribute the sales increase
to increased industry recognition of our products, our partnering with IBM
Global Services, our bundling relationships with Microsoft and Compaq, and our
distributor relationships recently established in Japan and Mexico. We
terminated our distribution agreement with our UK distributor during the fourth
quarter and do not
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<PAGE> 35
expect it to have a significant impact on our on-going business. While our
revenues for the 1999 fiscal year increased significantly over the previous
fiscal year, for the fourth quarter of fiscal 1999 and the first quarter of
fiscal 2000 we experienced a significant decline in sales. We attribute this
decline to the impact of delays in purchases as a result of Y2K issues and a
significant decrease in international distributor related sales.
Cost of Sales
The cost and expenses incurred in connection with producing our
products were $190,461 during the fiscal year ended February 28, 1999, an
increase of $112,032 or approximately 142.8%, from cost of sales of $78,429
incurred in the previous fiscal year. This resulted primarily from the increase
in sales during fiscal 1999. As a percentage of net sales, costs of sales
decreased in the fiscal year ended February 28, 1999, to 4.3% from 4.9% in the
prior period. The decrease in the cost of sales, on a percentage basis, was
primarily due to the increase of sales sold through corporate or OEM channels,
which tend to have a lower cost of sales expense on a per unit basis. In
addition, we continued to improve on our operational and order procurement and
fulfillment efficiencies during the year.
Selling, General and Administrative Expense
Selling, general and administrative expenses for the fiscal year ended
February 28, 1999, were $5,817,188, a increase of $2,760,780, or 90.3%, over
selling, general and administrative expenses of $3,056,408 during the prior
year. During the 1999 fiscal year, we increased both our general marketing
expenditures, which were aimed at increasing our name and product recognition,
as well as our direct marketing expenditures, which were aimed directly at a
particular market segment, i.e. education, corporate, government, etc. In
addition to these expenditures and in connection with our entry into the
international markets, we established marketing reserves to be used to help
promote our products overseas. We also continued to expand our inside and
outside sales force during the year.
Provision for Uncollectible Receivables
Provision for uncollectible accounts increased from $368,897 for the
fiscal year ended February 28, 1998 to $1,231,092 for fiscal year 1999, or an
increase of $862,195 or 233.7%. The majority of the provision in the current
year was specific in nature and related to our international sales. Given the
current economic difficulties internationally, we felt it would be prudent to
reserve part of these sales in the current year. In addition, a portion of the
reserve was general in nature and related to the increase in the sales for
fiscal year 1999 over fiscal 1998.
Depreciation and Amortization Expense
Depreciation and amortization expense increased to $1,569,519 in the
fiscal year ended February 28, 1999, from $1,270,708, or an increase of 23.5%
over the prior fiscal year. This increase is due to the commencement of
amortization on some capitalized software development costs relating to products
that became available for sale during the period and a full year's amortization
on those products that became available for sale last fiscal year.
Research and Development Expense
Research and development expenses charged to operations for the year
ended February 28, 1999 were $485,275, compared to $161,010 for the year ended
February 28, 1998, or an increase of $324,265 or 201.4%. During the year, we
spent more time on non-capitalizable activities and outsourced a major portion
of our new product development activities (approximately $600,000) to Metamor
Worldwide, Inc., a major shareholder of our's. We capitalized $882,101 and
$568,963 in software development costs for fiscal year 1999 and 1998,
respectively. The increase in capitalized costs related primarily to the
development of NT and Network versions of our products. These products were
generally completed within the time schedule originally established and
development costs were generally within the range that had been originally
projected. Metamor has recently announced plans to sell a number of its
operating units. We do not feel this will have a significant impact on our
ability to continue to development new products and enhance existing products in
the future. Sales of several of our products (CPR, Phantom of the Console,
Server Sentry) to date have been nominal. We do not believe that we will be able
to generate revenues from these products at a significant level, in the future,
based on our existing marketing model.
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Therefore, capitalized development costs relating to these products were written
down by $1,137,208, to $250,000 in the current year. We expect to recover the
remaining balance through product sales or sales of the underlying technologies.
We also incurred, during the year, significant costs in upgrading several of our
products to be Microsoft NT compliant. It was determined that the costs
associated with making two of our products (Server Sentry and Phantom of the
Console) NT compliant outweighed the potential benefit based on our existing
marketing model. Therefore, we abandoned the project on these products and
wrote-off the associated cost of approximately $285,489.
Litigation Settlement Expense
In connection with the settlement of a number of lawsuits, we
recognized a charge to earnings of $822,000 during the fiscal year ended
February 28, 1999. The major portion of this expense related to the settlement
of three suits styled Heredia v. Citadel, et. al., Zanett Lombardier v. Citadel,
and Lehndorff Four Oaks Place Joint Venture v. Citadel.
Other Income (Expense)
Interest expense for the year ended February 28, 1999 was $141,806
compared to $128,929 for the year ended February 28, 1998. The increase was due
to having more interest bearing debt outstanding during fiscal 1999 than in
fiscal 1998.
Net Loss Before Extraordinary Item
As a result of the foregoing, we reported a net loss before
extraordinary items of $7,209,498 for the fiscal year ended February 28, 1999,
compared to a net loss of $3,522,710 for the year ended February 28, 1998.
Extraordinary Item-Forgiveness of Debt
During fiscal year 1999, we 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 some accrued obligations. In connection with the
settlement of a note payable, the holder agreed to reduce the amount of the note
and accrued interest payable thereon by $520,816. In exchange, we agreed to a
shorter maturity and the issuance of 250,000 shares of restricted stock to the
holder, which were 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, we settled approximately $96,000 in
obligations for approximately $65,000.
Net Loss
As a result, for the year ended February 28, 1999, we reported a net
loss of $6,749,906, compared to a net loss of $3,522,710 for the year ended
February 28, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents at November 30, 1999 were $178,344.
Cash flows from operations were a negative $2,574,147 for the nine
months ended November 30, 1999, compared to negative $4,168,066 for the nine
months ended November 30, 1998. This decrease was primarily due to an increase
in our accounts receivable turnover offset by an increase in our accounts
payable turnover and an increase in the net loss for the period.
Cash used in investing activities was approximately $547,557 for the
nine months ended November 30, 1999, compared to approximately $946,521 for the
same period last year. This decreased resulted from our spending less on
software development activities this period.
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Cash flows provided by financing activities were $1,089,671 for the
nine months ended November 30, 1999, compared to $5,721,801 for the nine months
ended November 30, 1998. This decrease was due primarily to less capital being
raised by us during this period.
As a result of the aforementioned factors, cash and cash equivalents
decreased by $2,032,033 for the nine months ended November 30, 1999, versus an
increase of approximately $607,214 for the same period last year.
During the second quarter of the fiscal year, we started to implement
various cost control and reduction measures aimed at decreasing our operational
overhead and made various operational changes aimed at making us more efficient.
For the quarter ended November 30, 1999, these changes alone saved us over
$950,000 ($1,095,163 for the quarter ended November 30, 1999 versus $2,147,713
for the quarter ended November 30, 1998). We continue to look for ways to cut
our overhead costs, while not impairing our operational efficiencies or our
software products' competitive advantage.
Unless software sales increase, we may need to seek additional capital
to fund our Citadel Technology operations for at least the remainder of the
fiscal year. 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.
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.
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.
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OUR BUSINESS
OVERVIEW OF CT HOLDINGS
We are an incubator of business-to-business (B2B) Internet companies
that provides early stage business-to-business ventures with a single source of
management capital, as well as consulting on operations, marketing and strategic
planning. Our B2B incubator model is designed to enable the start up companies
with whom we partner to become online market leaders in their industries. We
believe that by focusing on B2B Internet companies, we are positioned to
identify the latest trends and opportunities and attract promising companies and
talent in this industry. Our strategy is to leverage the B2B expertise of our
management and affiliates and to capitalize upon opportunities to
cross-pollinate the strongest qualities among our holdings. We believe that the
anticipated growth in B2B e-commerce creates strong opportunities for us to
increase shareholder value and for well-positioned early stage ventures in this
industry. Forrester Research estimates that the United States B2B e-commerce
market, defined as the intercompany trade of hard goods over the Internet, will
grow from $43 billion in 1998 to more than $1.3 trillion by 2003.
We began our Internet activities in 1999 with the formation of
How2.com, which provides online post-purchase customer care solutions.
How2.com's comprehensive suite of outsourced post-purchase customer care
solutions includes manufacturer rebate processing, extended warranties, product
information, customer data asset management and other services that are marketed
across multiple industry lines.
As part of our strategy to fund early stage B2B Internet companies, we
recently announced that we have entered into a letter of intent relating to a
transaction in which we would gain the right to acquire approximately 51% of the
shares of iNetze, Inc., a Massachusetts company that creates and operates
integrated networks of decision support tools, e-learning solutions, and
e-commerce capabilities across multiple industries. In addition to its
proprietary technology, iNetze provides the knowledge database needed to take
advantage of its web-enabled decision support tools, and thereby offers
comprehensive and technologically advanced, value-added decision support
networks. The companies expect to close this transaction by April 1, 2000. The
letter of intent provides, among other things, that prior to closing we will
provide $350,000 of bridge financing to iNetze in exchange for a convertible
note. Upon closing the proposed transaction, we will receive 15% of the capital
stock of iNetze in exchange for 1,000,000 shares of our common stock. We will
also receive a three-month option to purchase an additional 36% of iNetze's
capital stock for a combination of cash and shares of our common stock with a
value of $25 million. This three-month option can be extended for an additional
three months if we pay iNetze $2 million in cash. There can be no assurance that
the transaction will close by April 1, 2000 or at all.
In addition to our B2B incubation business, we continue to operate our
"Citadel Technology" business 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 B2B
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. As a result, management believes that our results of operations for
our Citadel Technology security software business will be adversely affected in
the future.
In December 1999, we changed our corporate name to CT Holdings, Inc. We
believe that our new name is more descriptive of our focus on incubation of
emerging B2B ventures and our current substantial investment in How2.com. We
believe that any goodwill associated with our former legal name will be
preserved due to the continued use of the name "Citadel Technology" to identify
our software business. Following the inadvertent failure of our outside
consultants to file a return with the Delaware franchise tax authority in
November 1999 another entity obtained the name Citadel Technology, Inc. in
Delaware. When we filed reinstatement materials in Delaware, we adopted our new
name CT Holdings, Inc. pursuant to statutory procedures.
OVERVIEW OF HOW2.COM, INC.
Our How2.com Internet subsidiary provides an Internet-based solution
that automates post-purchase customer care processes. How2.com's solution
enables businesses to work together more efficiently to develop, retain and
extend customer relationships. By automating post-purchase customer care
activities such as rebate processing, extended warranty sales and product manual
access, How2.com allows its clients to enhance customer retention, increase
revenue opportunities and improve operating efficiencies. How2.com's
Internet-based solution seeks to transform rebates, warranties and product
manuals from customer service liabilities to retention and extension
opportunities.
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How2.com's online solution reduces the time it takes for customers to
receive their rebate checks, allows customers to check the status of their
rebates online and provides customers easy access to replacement product
manuals, all of which it believes enhances customer satisfaction and retention.
Additionally, How2.com's online solution provides 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. How2.com is developing
proprietary software that will provide an online mechanism for customers, many
of whom have immediate purchasing power in the form of rebate proceeds, to apply
those proceeds towards the purchase of additional products or services.
How2.com's solution also captures valuable customer information that can help
its clients better understand customer behavior. How2.com plans to provide
fee-based customer specific or aggregated data analyses to assist clients in
designing future promotions. How2.com's solution also enables businesses to
improve operating efficiencies by allowing them to analyze the results of their
rebate promotions and manage these promotions on a real time basis. How2.com
creates additional efficiencies by reducing the number of post-purchase customer
inquiries received by its clients and lowering the costs associated with the
production and distribution of replacement product manuals.
How2.com markets solutions to retailers, manufacturers and service
providers across multiple industries. How2.com currently provides its online
rebate solution to approximately 130 clients, including retailers, manufacturers
and service providers. How2.com has entered into a multi-year contract with GE
Warranty, a leading national warranty provider, to provide an online sales
channel for their extended warranties.
OUR CITADEL TECHNOLOGY BUSINESS LINE
CITADEL TECHNOLOGY OVERVIEW
Our Citadel Technology network products are designed to:
o reduce clients' costs;
o improve the accuracy of clients' information;
o maintain the operation of networks;
o secure networks from fraud or unauthorized use; and
o generally enable the administrator to devote more time to improving
the service to the network rather than focusing on operational
details.
Our network software products operate on operating systems designed by
Novell, Microsoft, IBM and Apple. Our focus is on the two largest, Novell and
Microsoft, whose NetWare and Windows NT software control in excess of 70% of the
market for network operating systems. Our desktop products are designed to
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 primary Citadel Technology products include NetOFF, WinShield,
WinShield Secure PC, WinShield 95/NT and FolderBolt. See "Our Citadel Technology
Products." Our clients and OEM partners ("original equipment manufacturers" that
bundle our software with their product offerings) include many Fortune 2000
companies, government and educational agencies and individual PC users.
Our core focus will be on our B2B 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. As a result, management
believes that our results of operations for our Citadel Technology security
software business will be adversely affected in the future.
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 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, as well as timed application usage.
WinShield Secure PC is available for network or stand alone workstations.
Our WinShield Secure PC product won the "Best of Breed" award from
WinMag.com in October 1999, and our products were featured in the following:
Curriculum Administrator, Technology & Learning, Windows NT Systems, WinMag.com,
Media & Methods, and Windows NT Magazine.
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In April 1999, we announced that we were selected by Microsoft Corp.
and CMP Media (Nasdaq: CMPX) as one of the fastest growing independent software
vendors (ISVs) for Windows. We were ranked as the 15th fastest growing ISV in
the first ever "Winning on Windows." The "Winning on Windows" ranking was
announced in April at an awards reception in Chicago at the Spring
Comdex/Windows World Show. The announcement of the ISV 75 marks the first annual
"Winning on Windows" awards campaign, which is designed to identify and promote
the fastest-growing Windows software companies and recognize industry growth and
innovation. Top companies were selected and ranked according to the highest
percentage revenue growth between 1997 and 1998. The research and selection
process was conducted by Austin, Texas-based researcher, Reality Research (a
wholly owned subsidiary of CMP Media).
In December 1998, we announced that we were selected to join the
Schools 2000 program created by Microsoft, MCI/Worldcom, HP, and Dell and 15
other technology companies. The Schools 2000 Program is designed to integrate
"best-of-breed" products to create the educational computer system of the
future. It incorporates the visions of what leading technology companies foresee
as the design and configuration of network and desktop computing in schools
across the world in the 21st century. These hand-picked technology companies
will showcase their products in a collaborative solution in schools located in
Washington DC, Los Angeles, Dallas, Redmond, and other locations around the
world. Each school will provide a living showcase of how this premier technology
can be used, in the year 2000 and beyond, to enhance the educational process the
same way it enhances business productivity across the globe.
In January 1999, we announced that Washington Mutual, Inc. (NYSE: WM),
the sixth largest bank in the US, deployed a WinShield and NetOFF suite to
secure their networks and desktops. IBM Global Services, Inc. (NYSE: IBM)
selected us to provide computer security for Washington Mutual. We issued an
enterprise site license to Washington Mutual, for the WinShield and NetOFF
security suite, with an order in excess of $1 million. Our security solution was
chosen over a number of competitive products evaluated by IBM Global Services
because it combined features and services designed to meet the customer's needs.
The combination of NetOFF and WinShield provided Washington Mutual with the
availability to lock down desktop configuration settings, secure unattended
workstations, control access to applications and directories, prevent the use of
unauthorized CDs, and prevent the unauthorized renaming and deleting of folders
and files.
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.
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
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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 strategy is to develop long-term client relationships and to
maintain a high level of lifetime client satisfaction, which we believe will
result in additional recurring revenues from new products and upgrades on
existing software products. We have focused our development efforts on the
client-server LAN and PC market due to the rapid growth of this market as
companies, government agencies and educational users shift from mainframes to
client server networks and intranets. We believe our products are positioned to
capitalize on this trend. We have successfully developed strategic alliances or
partnerships with other technology companies in the past.
OUR CITADEL TECHNOLOGY SOLUTION
Our current line of software products addresses computer security and
administration problems at both the network and desktop levels. Key features of
our products include:
o Integrated Product Capabilities. Our integrated security and
administration solution enables a network administrator from a
single console to automatically shutdown and restart in an
orderly manner servers and desktop units in the event of a
network crash, control access to network resources, log off
inactive desktop users and save all desktop work in progress,
and automate routine network maintenance tasks.
o PC Configuration Protection. Our solution also enables
individual PC users, particularly those who share a desktop
unit with a co-worker or other students, to protect their PC
configurations and data.
o Enhanced Customer Productivity. Our products are designed to
improve overall office productivity, particularly by reducing
the direct and indirect costs of network operations by
reducing
o the personnel resources required to administer the
network
o the disruption (including data loss) caused by
network crashes
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o software license fees charged to inactive users, and
o unauthorized use of network and desktop resources.
o Ease of Use, Optimize Products for Leading Technologies. Our
major products are easy to install and are fully compatible
with the major network and desktop operating systems,
including Windows NT, NetWare, and Windows 3.1, 95 and 98. The
intuitive look and feel of the products' graphical user
interface enhances their usability.
o Modular Product Design. Our programs can be added on a
plug-and-play basis to our Citadel Network Administrator - a
centralized program manager included with all of our network
products. This modularity provides a migration path for
network administrators. As their network security and
administration needs become more complex, they can utilize
more of our products and operate them all through an existing,
familiar program manager.
o Cost Effectiveness. We believe our products can reduce the
cost of overall system support and maintenance by ensuring an
orderly backup, reducing license fees by logging off inactive
users, and reducing the personnel resources required to
administrate networks.
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 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.
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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 evaluated the estimated net realizable value of each
software product at each balance sheet date and records 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 some write-downs taken in fiscal
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.
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<PAGE> 45
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
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 customers of our's 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
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<PAGE> 46
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.
EMPLOYEES
As of December 31, 1999, we had approximately 21 employees, including
eight in sales and marketing, eight in product research and development, one in
production and operations, one in customer service and technical support, one in
business development, and two in administration, finance and MIS. In addition,
How2.com employs more than 200 persons, which includes former employees of the
2-Lane and Forward companies as well as management. Our future success depends
in significant part upon the continued service of our key technical and senior
management personnel and our continuing ability to attract and 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 attract, 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.
LEGAL PROCEEDINGS
We and one of our officers were involved in an arbitration proceeding
with Vestcom Ltd., which claimed compensation and a finder's fee for introducing
us to a third party. Vestcom sought damages of the value of 100,000 shares of
our common stock (alleged to be valued at $1,900,000), plus 50% of additional
compensation paid by us to the third party. We filed a declaratory judgment
action against Vestcom to determine that the alleged contract was not valid
based on our 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 us and our officer that the purported
agreement was a forgery. As a result, the arbitration proceeding was dismissed
by the American Arbitration Association. The
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<PAGE> 47
defendant appealed the decision of the Texas court. In November 1998, Vestcom
filed a lawsuit against us 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).
In August 1998, Janssen Meyers Associates L.P. filed a lawsuit against
us. The suit alleges that we owe the plaintiffs a fee in the amount of
$6,000,000 plus interest and attorney's fees in connection with services
allegedly performed by Janssen Meyers in respect of the merger between LoneStar
Hospitality Corp., a predecessor of CT Holdings, and another predecessor of CT
Holdings and related matters. We believe these claims are without merit and
intend to vigorously defend against the 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.
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> 48
MANAGEMENT
DIRECTORS
The following table contains information about our directors. We expect
that these persons will serve as directors until the next annual meeting or
until their respective successors are elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH CT HOLDINGS DIRECTOR SINCE
- ----- --- ------------------------- --------------
<S> <C> <C> <C>
Steven B. Solomon 35 Director, President, Chief Executive
Officer, and Assistant Secretary 1992
Victor K. Kiam, II 72 Chairman of the Board
of Directors 1996
Lawrence Lacerte 47 Director 1999
Chris A. Economou 45 Director 1993
Mark Rogers 40 Director 1996
Michael Ruff 24 Director 1998
Dr. Axel Sawallich 55 Director 1993
</TABLE>
STEVEN B. SOLOMON has served as the President and Chief Executive Officer of CT
Holdings since May 1997 and as a director of CT Holdings since February 1996.
From February 1996 through April 1997, Mr. Solomon served as Chief Operating
Officer of CT Holdings. He was the President and a director of LoneStar
Hospitality Corp., a predecessor of CT Holdings that owned and operated Miami
Subs franchised restaurants in Dallas and Houston, Texas, from its inception in
February 1992 until its merger with CT Holdings 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. Mr. Solomon is also Chairman of the Board of
Directors and Chief Executive Officer of How2.com, Inc., a subsidiary of CT
Holdings.
VICTOR K. KIAM, II has served as a director of CT Holdings since July 1996 and
has served as Chairman of CT Holdings 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 How2.com.
LAWRENCE LACERTE has served as a director of CT Holdings 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 How2.com.
CHRIS A. ECONOMOU has served as a director of CT Holdings since February 1996,
and was a director of LoneStar from June 1993 until its merger with CT Holdings.
Mr. Economou has been engaged in the private
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<PAGE> 49
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.
MARK ROGERS has served as a director of CT Holdings 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.
MICHAEL RUFF has served as a director of CT Holdings since July 1998. Mr. Ruff
served as chairman of the board of directors of Texas Central Bank, N.A., from
February 1998, and as a member of the board of directors of the bank from
December 1995, until the sale of Texas Central Bank to BankUnited in August
1999. Mr. Ruff has served as president of Lennox Properties Inc., a real estate
development company specializing in single and multi family developments in
Dallas, Colorado Springs and Atlanta, since June 1997 and as vice president
since June 1995. Mr. Ruff is President of Icarus Investments, Inc. (formerly
ALR, Inc.), a non-diversified hedge fund specializing in public securities
investments. He also served as Vice President of Icarus from August 1994 until
his appointment as President in August 1996. Mr. Ruff received his degree in
economics from Rice University. Mr. Ruff also serves on the Board of Directors
of Newsmax.com, an online news organization.
DR. AXEL SAWALLICH has served as a director of CT Holdings since February 1996
and was a director of LoneStar from March 1993 until its merger with CT
Holdings. 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 our directors or
executive officers. See "Certain Relationships and Related Transactions" for a
description of transactions between us and our directors, executive officers or
their affiliates.
EXECUTIVE OFFICERS
Our executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH CT HOLDINGS
- ---- --- -------------------------
<S> <C> <C>
Steven B. Solomon 35 President, Chief Executive Officer, Assistant 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 our other executive officers.
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 CT Holdings 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
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<PAGE> 50
1995 of Circuit Masters Software, Inc., a software company which developed and
marketed network management utilities for Novell NetWare environments, and was
acquired by CT Holdings 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 CT
Holdings in January 1999. Mr. Sideropoulos has over 20 years experience in
sales. Prior to joining CT Holdings, 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.
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.
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<PAGE> 51
COMPENSATION OF EXECUTIVE OFFICERS
The total compensation for the three fiscal years ended February 28,
1999 of Steven B. Solomon, our Chief Executive Officer (and the chief executive
officer of LoneStar prior to its merger with CT Holdings); Richard L. Travis,
Jr., our former Chief Operating Officer and Chief Financial Officer; Carl E.
Banzhof, our Chief Technology Officer; and Bennett Klein, our 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 $100,000 during the fiscal year ended February 28,
1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
-------------------------------------------------- COMPENSATION
AWARDS
------
OTHER
ANNUAL SHARES
NAME AND POSITION FISCAL COMPENSATION UNDERLYING ALL OTHER
----------------- YEAR SALARY($) BONUS($) ($) OPTIONS (#) COMPENSATION ($)
----- --------- -------- ------------ ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Steven B. Solomon ............ 1999 150,538 120,500 11,400(2) 0(3) 9,975(2)
President, .................. 1998 135,000 104,000(1) 11,400(2) 0 8,342(2)
CEO and Asst ................ 1997 120,000 66,496 11,400(2) 7,446(2)
Sect'y
Richard L. Travis, Jr ........ 1999 136,667 25,000 11,400(4) 0(3) 5,400
Former COO/CFO and .......... 1998 130,000 10,000 11,400(4) 1,150,000 23,552(4)
Sect'y ...................... 1997 29,791(4) 0 11,400(4) 0 0
Carl E. Banzhof .............. 1999 115,000 0 0 0 4,093
Chief Technology ............ 1998 100,625 500 0 100,000 3,552
Officer ..................... 1997 103,228 1,000 0 0 0
Bennett Klein
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) During fiscal 1998, in connection with the discharge of a debt owed to
us, Mr. Solomon forgave $79,000 in accrued compensation due him. See
"Certain Relationships and Related Transactions."
(2) Mr. Solomon received a car allowance of $950 per month and health, life
and disability insurance during each fiscal year. Subsequent to the end
of fiscal 1999, Mr. Solomon entered into an employment agreement with
How2.com, pursuant to which How2.com now pays Mr. Solomon's salary.
(3) Excludes 6,600,000 and 60,000 shares underlying options granted during
the year by How2.com 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 us, 60,000 of such shares
underlying options were forfeited and the remaining 60,000 options were
vested immediately. See "Employment Contracts and Termination of
Employment Agreements" and "Certain Relationships and Related
Transactions."
(4) Mr. Travis received a car allowance of $950 per month for fiscal years
1997 (December 1996 through February 1997), 1998 and 1999 and health,
life and disability insurance during each fiscal year. Pursuant to Mr.
Travis' employment agreement, Mr. Travis could elect to receive our
common stock in lieu of some raises in salary. Mr. Travis exercised
this option during fiscal year 1998, and in connection therewith,
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<PAGE> 52
received 70,000 shares of our common stock (valued at $20,000). Mr.
Travis commenced working for us in December 1996 and resigned from CT
Holdings effective January 14, 2000.
(5) Mr. Klein commenced working for us in January 1998 and resigned from CT
Holdings effective March 1, 2000. In connection with his employment
agreement, Mr. Klein received a relocation package of $56,542 and
100,000 shares of our common stock as a sign-on bonus, valued at
$37,000 as of the date of grant. Mr. Klein also received, as part of
his employment agreement, health, life and disability insurance.
OPTION GRANTS DURING FISCAL YEAR 1999
We did not grant any stock options or stock appreciation rights to the
named executive officers during the fiscal year ended February 28, 1999.
How2.com granted stock options to the named executive officers during the 1999
fiscal year, as described in "Certain Relationships and Related Transactions."
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table describes, for each of the named executive
officers, options exercised and the potential values for their unexercised
in-the-money options at February 28, 1999 (we issued no SARs during the 1999
fiscal year):
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
SECURITIES IN-THE-MONEY
UNDERLYING OPTIONS/SARS AT
UNEXERCISED FISCAL YEAR END
OPTIONS/SARS AT ($) (2)
SHARES FISCAL YEAR END($) -------
ACQUIRED ON VALUE ------------------
EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) (1) UNEXERCISABLE UNEXERCISABLE
---- ----------- --------- -------------------- -----------------
<S> <C> <C> <C> <C>
Steven B. Solomon ............ 3,175,000(3) 878,750(3) 0/0(4) 0/0(4)
Richard L. Travis, Jr ........ 1,100,000 363,750 0/0(4) 0/0(4)
Carl E. Banzhof .............. 0 0 100,000/0(4) 298,000/0(4)
Bennett Klein ................ 0 0 133,328/166,672 387,984/485,016
</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 our common stock at February 28, 1999
per share less the exercise price payable for each share.
(3) Excludes options to purchase 4,000,000 shares of How2.com granted to
and exercised by Mr. Solomon during the 1999 fiscal year and 1,000,000
options to purchase shares of How2.com granted to and exercised by Mr.
Solomon subsequent to the end of the 1999 fiscal year.
(4) Excludes How2.com options to purchase 1,600,000 shares for Mr. Solomon
(1,000,000 of which are currently unexercisable), 60,000 shares for Mr.
Travis (all of which are currently exercisable), and 100,000 for Mr.
Banzhof (all of which are currently unexercisable).
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<PAGE> 53
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AGREEMENTS
CT Holdings has entered into employment agreements with each of Messrs.
Solomon and Klein. The annual base salaries being paid to Messrs. Solomon and
Klein were $165,000 and $135,000, respectively, as of February 28, 1999, and the
employment agreements provide for periodic salary increases and bonuses. The
employment agreements continue until February 2002 and January 2001,
respectively for Messrs. Solomon and Klein, and annually thereafter until
terminated by either party. In addition, the employment agreements provide for
severance benefits ranging from six months of base salary (for Mr. Klein), or
the greater of (i) the remaining term of the contract, discounted at a rate of
six percent, or (ii) 24 months of base salary (for Mr. Solomon), in the event of
termination without cause or constructive termination. Mr. Solomon has entered
into an Employment Agreement with How2.com effective as of January 1, 1999, and
CT Holdings ceased paying Mr. Solomon's salary effective as of July 1, 1999.
Richard L. Travis, Jr., CT Holdings' former Chief Operating Officer and
Chief Financial Officer, resigned from CT Holdings and his employment agreement
was terminated effective as of January 14, 2000. In connection with his
resignation from CT Holdings and the termination of his employment agreement,
Mr. Travis and CT Holdings 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 CT
Holdings. The Settlement and Release Agreement also provides for Mr. Travis to
perform some financial consulting services for CT Holdings (as an independent
contractor) until April 14, 2000. See "Certain Relationships and Related
Transactions."
Bennett Klein, CT Holdings' former Vice President of Business
Development, resigned from CT Holdings and his employment agreement was
terminated effective March 1, 2000. In connection with his resignation from 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 our Chief Executive Officer and President and one or our
directors and serves as the Chief Executive Officer and Chairman of the Board of
Directors of How2.com. Other than Mr. Solomon, none of our 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 How2.com and CT Holdings and its officers,
directors and principal shareholders.
During January 2000, CT Holdings entered into a Settlement and Release
Agreement with Mr. Travis in connection with his resignation as CT Holdings'
Chief Operating Officer and Chief Financial Officer and the termination of his
employment agreement. The Settlement and Release Agreement provides 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 CT Holdings. Also, in connection
with the Settlement and Release Agreement, CT Holdings agreed to forgive an
aggregate of $295,000, plus accrued interest, of indebtedness owed by Mr. Travis
to CT Holdings.
During fiscal year 1999, CT Holdings advanced funds to Mr. Solomon in
the amount of approximately $780,000 during the third quarter and $745,000
during the fourth quarter. Both advances were evidenced by unsecured promissory
notes bearing interest at 5%. The entire balance with the exception of $145,000
was repaid prior to the end of the fiscal year. The remaining balance was paid
as of April 30, 1999.
CT Holdings contracted with Metamor Software Solutions, a division of
Metamor Worldwide, Inc. (formerly CORESTAFF, Inc.) to provide various
development services for CT Holdings. CT Holdings incurred
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<PAGE> 54
approximately $600,000 and $115,000 in expenses related to these services during
the fiscal years ended February 28, 1999 and 1998, respectively. Mr. Johnsen, a
former director of CT Holdings, was the Executive Vice President of Metamor
during this time period, and Mr. Pierce, a former director of CT Holdings, was
Chief Financial Officer of Metamor during that time and is now a director of
Metamor. In June 1999, Mr. Johnsen joined How2.com as President and Chief
Operating Officer and a director, and Mr. Pierce joined the board of How2.com.
During the fiscal year ended February 28, 1999, CT Holdings and
How2.com incurred legal fees in the amount of approximately $140,000 to Wood,
Exall & Bonnet, L.L.P. In fiscal 1998, CT Holdings incurred approximately
$70,000 in legal fees to that firm. David Wood, a partner of such firm, is the
brother-in-law of Steven B. Solomon. Mr. Wood also serves as General Counsel of
How2.com.
In connection with a $1,125,000 8% redeemable convertible note offering
dated June 9, 1997, CT Holdings former chairman, Gilbert Gertner, pledged stock
of a company controlled by him to secure the repayment of up to $500,000 of this
indebtedness. In connection with this pledge, CT Holdings paid Mr. Gertner a fee
of $25,000. On February 15, 1998 CT Holdings restructured this indebtedness and
in connection therewith Mr. Gertner's collateral was released.
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<PAGE> 55
CERTAIN TRANSACTIONS BETWEEN CT HOLDINGS' EXECUTIVE OFFICERS, DIRECTORS AND
PRINCIPAL STOCKHOLDERS AND HOW2.COM
Since its inception on January 7, 1999, How2.com has issued and sold
common stock to CT Holdings and the executive officers and directors listed
below:
<TABLE>
<CAPTION>
SHARES OF AGGREGATE
INVESTOR COMMON STOCK (1)(#) PURCHASE PRICE($)
-------- ------------------- -----------------
<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>
- ------------------
(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 How2.com.'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.
How2.com sold the shares of its common stock to finance its development
activities, operations and acquisitions. How2.com 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 How2.com 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.
How2.com has granted options to purchase How2.com shares to some of CT
Holdings' directors and executive officers and some of the directors and
executive officers have exercised such options. How2.com 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. How2.com has also granted Icarus
Investments warrants to purchase 1,000,000 shares of How2.com common stock
(300,000 of which have been exercised at an exercise price of $.25 per share).
During 1999 How2.com 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,
How2.com 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 How2.com common stock owned by Mr. Solomon. In December 1999, Mr.
Solomon loaned How2.com $4,000,000 pursuant to promissory notes bearing interest
at 5 percent per year.
CERTAIN TRANSACTIONS BETWEEN CT HOLDINGS AND HOW2.COM
As of November 30, 1999, CT Holdings owned approximately 45.6% of
How2.com's outstanding shares of common stock. Through June 30, 1999, CT
Holdings provided various services to How2.com, 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 How2.com. These allocated expenses, totaling approximately $141,000,
were contributed to How2.com as a portion of the consideration for the shares of
53
<PAGE> 56
How2.com issued to CT Holdings. Management of CT Holdings believes that the
amounts allocated to How2.com 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
How2.com pursuant to any written agreement between How2.com and CT Holdings. In
addition, CT Holdings has guaranteed the obligations of How2.com under an office
lease in Santa Monica, California.
In the past, CT Holdings has borrowed cash from How2.com to cover
short-term cash requirements. How2.com has made those loans to CT Holdings,
totaling approximately $578,000, pursuant to a promissory note secured by
300,000 shares of How2.com 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 How2.com $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 How2.com's
underwriters of its proposed initial public offering, CT Holdings intends to
initiate a distribution of 15% of the shares of How2.com's common stock that CT
Holdings owns. If there are problems associated with compliance with SEC
requirements or state law, then the distribution of How2.com 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 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.
PRINCIPAL STOCKHOLDERS
As of December 30, 1999, there were issued and outstanding 44,870,698
shares of our common stock. There is no other class of voting security of ours
issued or outstanding.
The following table sets forth the number of shares of CT Holdings'
common stock beneficially owned, as of December 30, 1999 by:
54
<PAGE> 57
o each person known to CT Holdings to own more than 5% of the
outstanding common stock of CT Holdings (the only class of
voting securities now outstanding);
o each director;
o each named executive officer; and
o 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 December 30, 1999 are outstanding. Except as otherwise indicated, all shares
are owned directly and the owner has the sole voting and investment power with
respect thereto.
55
<PAGE> 58
<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 *
Gilbert Gertner (2)
1300 Post Oak Blvd., Suite 1985
Houston, Texas 77056 ...................... 2,345,000 5.2%
Chris A. Economou
150 North Federal Highway, Suite 210
Fort Lauderdale, Florida 33301 ............. 474,400 1.1%
Icarus Investments I, Ltd. (3)
8144 Walnut Hill Lane, Suite 172
Dallas, Texas 75231 ....................... 4,750,000 10.6%
Victor K. Kiam, II (4)
RPI Corporation
350 Fifth Avenue, Suite 5408
New York, New York 10018 .................. 744,452 1.7%
Bennett Klein (5)
3811 Turtle Creek Blvd., Suite 770
Dallas, Texas 75219 ....................... 208,325 *
Lawrence Lacerte
13155 Noel Road - Suite 2200
Dallas, Texas 75225 ....................... 600,000 1.3%
Metamor Worldwide, Inc. (6)
4400 Post Oak Parkway, Suite 1100
Houston, Texas 77027 ...................... 5,781,937 12.9%
Mark Rogers
NFT Ventures, Inc. .........................
751 Laurel Street, No.19
San Carlos, California 94070 .............. 401,500 *
Michael Ruff (3)
Icarus Investments I, Ltd. .................
8144 Walnut Hill Lane, Suite 172
Dallas, Texas 75231 ....................... 4,895,000 10.9%
Dr. Axel Sawallich (7)
Beatrixgasse 3
A-1030 Vienna, Austria .................... 137,144 *
Steven B. Solomon
3811 Turtle Creek Blvd., Suite 600
Dallas, Texas 75219 ....................... 5,485,993 12.2%
Lester Sideropoulos (8)
3811 Turtle Creek Blvd., Suite 770
Dallas, Texas 75219 ...................... 66,668 *
Richard L. Travis, Jr
3811 Turtle Creek Blvd., Suite 770
Dallas, Texas 75219 ....................... 1,220,000 2.7%
All executive officers and directors
as a group (10 persons) (9) ................ 13,172,483 29.4%
</TABLE>
- --------------------
*Less than 1%.
56
<PAGE> 59
(1) Includes 100,000 shares presently issuable pursuant to options to
purchase common stock and 2,000 shares owned by his spouse.
(2) Includes 1,462,500 shares presently issuable pursuant to options to
purchase common stock held by Mr. Gertner.
(3) Includes 1,750,000 shares presently issuable pursuant to warrants to
purchase common stock owned by Icarus Investments I, Ltd. ("Icarus").
Based solely on the 13G/A (Amendment No. 1) filed with the Securities
and Exchange Commission ("SEC") on July 15, 1998 with respect to CT
Holdings' 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. Mr. Ruff's
shares include the Icarus shares and shares owned by Mr. Ruff,
individually.
(4) Includes 250,000 shares held by RPI, Inc., a company owned and
controlled by Mr. Kiam.
(5) Consists of 208,325 shares presently issuable pursuant to options to
purchase common stock subject to options vesting within 60 days of
December 30, 1999.
(6) 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 CT Holdings'
common stock owned by Metamor.
(7) Includes 12,144 shares held by Dr. Sawallich as trustee, over which he
has voting and dispositive power.
(8) Includes 66,668 shares presently issuable pursuant to options to
purchase common stock held by Mr. Sideropoulos.
(9) Includes shares issuable pursuant to presently exercisable options or
warrants or options or warrants exercisable within 60 days of December
30, 1999, held by Messrs. Banzhof, Klein, Ruff, 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 44,870,698 shares of our common stock outstanding and held
of record by approximately 986 stockholders as of December 30, 1999.
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
57
<PAGE> 60
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, 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 and to Icarus Investments I, Ltd. warrants to purchase 1,750,000
shares of our common stock.
DELAWARE LAW AND CERTAIN 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."
58
<PAGE> 61
REGISTRATION RIGHTS
The holders of approximately 4,536,537 shares of common stock, also
referred to as the Registrable Securities, 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 its 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.
STOCK TRANSFER AGENT AND REGISTRAR
The stock transfer agent and registrar for our common stock is American
Securities Transfer & Trust, Inc., 12039 West Alameda Parkway, Suite Z-2,
Lakewood, Colorado 80228.
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 Solomon, our Chief Executive
Officer. Mr. Wood owns 100,000 shares of our common stock. Mr. Wood is also
General Counsel of How2.com.
EXPERTS
Our consolidated financial statements as of February 28, 1999 and 1998,
and for the years then ended have been included in the registration statement in
reliance upon the report of Grant Thornton LLP, independent auditors, given upon
their authority as experts in accounting and auditing.
59
<PAGE> 62
CT HOLDINGS, INC.
(FORMERLY CITADEL TECHNOLOGY, INC.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Annual Financial Statements
Report of Independent Accountants dated June 11, 1999.......................... F-2
Consolidated Balance Sheets as of February 28, 1999 and 1998................... F-3
Consolidated Statements of Operations for the years ended
February 28, 1999 and 1998.................................................. F-5
Consolidated Statements of Stockholders' Equity for the years ended
February 28, 1999 and 1998.................................................. F-6
Consolidated Statements of Cash Flows for the years ended
February 28, 1999 and 1998.................................................. F-9
Notes to Consolidated Financial Statements..................................... F-11
Interim Consolidated Financial Statements
Consolidated Balance Sheets as of November 30, 1999 (unaudited) and
February 28, 1999 (audited)................................................. F-27
Consolidated Statement of Operations for the nine months ended
November 30, 1999 and 1998 (unaudited)...................................... F-29
Consolidated Statements of Cash Flows for the nine months ended
November 30, 1999 and 1998 (unaudited)...................................... F-30
Notes to Consolidated Financial Statements..................................... F-31
</TABLE>
F-1
<PAGE> 63
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
CT Holdings, Inc.
We have audited the accompanying consolidated balance sheets of CT Holdings,
Inc. (formerly Citadel Technology, Inc.) as of February 28, 1999 and 1998, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 audits provide 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.
as of February 28, 1999 and 1998, and the consolidated results of its operations
and its consolidated cash flows for each of the years then ended, in conformity
with generally accepted accounting principles.
GRANT THORNTON LLP
Dallas, Texas
June 11, 1999
F-2
<PAGE> 64
CT HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
February 28,
-------------------------
ASSETS 1999 1998
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,386,369 $ 8,555
Accounts receivable-trade, less allowance for returns and
doubtful accounts of $1,208,000 and $681,000 466,288 435,615
Receivables from sale of common stock of subsidiary 6,042,000 --
Notes receivable from related parties 478,933 376,487
Inventory 148,676 57,513
Prepaid expenses 208,223 71,980
----------- -----------
Total current assets 10,730,489 950,150
PROPERTY AND EQUIPMENT, NET 386,901 387,923
PURCHASED SOFTWARE, net of accumulated
amortization of $2,718,486 and $1,788,000 1,394,706 3,462,879
CAPITALIZED SOFTWARE DEVELOPMENT COSTS,
net of accumulated amortization of $577,000 and $150,000 1,181,052 1,011,432
OTHER ASSETS 448,372 350,650
----------- -----------
$14,141,520 $ 6,163,034
=========== ===========
</TABLE>
F-3
<PAGE> 65
CT HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS - CONTINUED
<TABLE>
<CAPTION>
February 28,
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Cash overdraft $ -- $ 10,249
Current maturities of long-term debt 311,812 1,270,565
Notes payable 347,424 842,174
Accounts payable and accrued expenses 2,247,600 2,274,141
------------ ------------
Total current liabilities 2,906,836 4,397,129
OTHER LIABILITIES
Debt, less current maturities -- 478,044
Minority interest in consolidated subsidiary 2,742,432 --
------------ ------------
Total liabilities 5,649,268 4,875,173
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Common stock, $.01 par value per share; authorized,
60,000,000 shares; issued and outstanding, 43,259,274
shares in 1999 and 25,881,327 shares in 1998 432,592 258,813
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
Series C convertible, 5,000 shares in 1998 (liquidation
value, $500,000) -- 50
Series D convertible, 2,000 shares in 1999 (liquidation
value, $2,000,000) 20 --
Equity notes 150,000 944,000
Additional paid-in capital 32,985,018 16,058,442
Accumulated deficit (20,641,875) (13,473,206)
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 (1,857,577) --
Others (75,688) --
------------ ------------
Total stockholders' equity 8,492,252 1,287,861
------------ ------------
$ 14,141,520 $ 6,163,034
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 66
CT HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended February 28,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
NET SALES $ 4,439,608 $ 1,613,326
COST OF SALES, EXCLUDING DEPRECIATION AND AMORTIZATION 190,461 78,429
------------ ------------
Gross profit 4,249,147 1,534,897
OPERATING EXPENSES
Selling, general and administrative expenses 5,817,188 3,056,408
Provision for uncollectible receivables 1,231,092 368,897
Depreciation and amortization 1,569,519 1,270,708
Research and development expense 485,275 161,010
Write-off of capitalized software costs 1,422,697 --
------------ ------------
10,525,771 4,857,023
Operating loss (6,276,624) (3,322,126)
OTHER INCOME (EXPENSE)
Interest expense (141,806) (128,929)
Loss on sales of marketable securities -- (199,672)
Litigation settlement expense (822,000) --
Other 30,932 128,017
------------ ------------
(932,874) (200,584)
Loss before extraordinary item (7,209,498) (3,522,710)
EXTRAORDINARY ITEM - FORGIVENESS OF DEBT 459,592 --
------------ ------------
Net loss (6,749,906) (3,522,710)
Preferred stock dividend requirement (128,956) (14,557)
------------ ------------
Net loss allocable to common stockholders $ (6,878,862) $ (3,537,267)
============ ============
Loss per share-basic and diluted
Loss before extraordinary item $ (0.26) $ (0.21)
Extraordinary item 0.01 --
------------ ------------
Net loss $ (0.25) $ (0.21)
============ ============
Weighted average shares outstanding 27,807,748 16,801,818
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 67
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, 1997 16,501,980 $ 165,020 $ 5 $ 300,000 $ 13,370,627
Exercise of stock options
and warrants 1,258,100 12,581 -- -- 376,197
Sale of equity notes, net of
issuance costs of $182,244 -- -- -- 1,625,000 (182,244)
Sale of Series C Preferred Stock -
5,000 shares, net of
issuance costs of $78,835 -- -- 50 -- 421,115
Conversions to common stock
Debt, net of unamortized
debt issuance costs of
$38,667 2,964,093 29,641 -- -- 871,685
Series B preferred stock
and equity notes 2,285,257 22,852 (4) (481,000) 458,152
Redemption of equity notes -- -- -- (500,000) (100,000)
Payment of dividends on
equity notes 275,897 2,759 -- -- 93,670
Common stock issued for
services 96,000 960 -- -- 24,240
Sale of common stock 2,500,000 25,000 -- -- 725,000
Purchase of treasury stock-
3,900,000 shares -- -- -- -- --
Comprehensive income (loss)
Change in unrealized
loss on securities
available for sale -- -- -- -- --
Net loss -- -- -- --
Total
------------ ------------ ------------ ------------ ------------
Balance at February 28, 1998 25,881,327 258,813 51 944,000 16,058,442
</TABLE>
<TABLE>
<CAPTION>
Accumulated
other
Accumulated comprehensive Treasury Notes
deficit income stock receivable Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at March 1, 1997 $ (9,854,067) $ (355,772) $ (353,590) $ -- $ 3,272,223
Exercise of stock options
and warrants -- -- -- -- 388,778
Sale of equity notes, net of
issuance costs of $182,244 -- -- -- -- 1,442,756
Sale of preferred stock -
5,000 shares, net of
issuance costs of $78,835 -- -- -- -- 421,165
Conversions to common stock
Debt, net of unamortized
debt issuance costs of
$38,667 -- -- -- -- 901,326
Series B preferred stock and
equity notes -- -- -- -- --
Redemption of equity notes -- -- -- -- (600,000)
Payment of dividends on
equity notes (96,429) -- -- -- --
Common stock issued for
services -- -- -- -- 25,200
Sale of common stock -- -- -- -- 750,000
Purchase of treasury stock-
3,900,000 shares -- -- (2,146,649) -- (2,146,649)
Comprehensive income (loss)
Change in unrealized
loss on securities
available for sale -- 355,772 -- -- 355,772
Net loss (3,522,710) -- -- -- (3,522,710)
------------
Total -- -- -- -- (3,166,938)
------------ ------------ ------------ ------------ ------------
Balance at February 28, 1998 (13,473,206) -- (2,500,239) -- 1,287,861
</TABLE>
F-6
<PAGE> 68
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>
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>
<TABLE>
<CAPTION>
Accumulated
other
Accumulated comprehensive Treasury Notes
deficit income stock receivable Total
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
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)
</TABLE>
F-7
<PAGE> 69
<TABLE>
<S> <C> <C> <C> <C> <C>
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> 70
CT HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended February 28,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (6,749,906) $ (3,522,710)
Adjustments to reconcile net loss to net cash used
by operating activities
Depreciation and amortization 1,569,519 1,270,708
Common stock and options issued as payment of expenses 349,600 25,200
Loss on sale of securities -- 199,672
Write-down of software development costs 1,422,697 --
Extraordinary item (459,592) --
Provision for losses on accounts receivable
and sales returns 1,231,092 368,897
Other 49,054 --
Changes in operating assets and liabilities
Accounts receivable (1,261,765) (280,803)
Notes receivable (102,446) (131,487)
Prepaid expenses (136,243) (44,887)
Inventory (91,163) (27,500)
Software development costs (895,546) (568,963)
Cash overdraft (10,249) (157,007)
Accounts payable and accrued expenses (26,541) 294,984
Other assets (97,722) (87,430)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (5,209,211) (2,661,326)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (197,095) (160,880)
Proceeds from sale of securities -- 156,100
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (197,095) (4,780)
</TABLE>
F-9
<PAGE> 71
CT HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
Years ended February 28,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable $ (355,167) $ (628,441)
Proceeds from notes payable 471,900 514,528
Proceeds from long-term debt -- 489,865
Repayments on long-term debt (40,659) (119,090)
Proceeds from sale of preferred stock 2,253,642 421,165
Proceeds from sale of equity notes -- 1,442,756
Proceeds from sale of common stock 5,821,904 1,138,778
Proceeds from sale of subsidiary stock 1,200,000 --
Redemption of equity notes -- (600,000)
Redemption of preferred stock (567,500) --
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 8,784,120 2,659,561
----------- -----------
Net increase (decrease) in cash 3,377,814 (6,545)
Cash at beginning of the year 8,555 15,100
----------- -----------
Cash at end of the year $ 3,386,369 $ 8,555
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-10
<PAGE> 72
CT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 1999 and 1998
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
The Company develops, markets and supports security and administration
products for both computer network and desktop personal computers. The
Company licenses the products through resellers, and directly to end-users,
in North America, Europe and Asia Pacific. The Company also licenses its
products for initial licensing fees to original equipment manufacturers
("OEM's") and receives ongoing royalties from OEMs' product sales. In
January 1999, The Company incorporated How2.com, inc., which was a 63% owned
subsidiary at February 28, 1999. How2.com, inc. had not begun operations at
February 28, 1999. See Note L.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
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
The consolidated financial statements include the accounts of CT Holdings,
Inc. (formerly Citadel Technology, Inc.) and its majority-owned subsidiaries
(collectively, "The Company"). All material intercompany accounts and
transactions have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and all highly liquid
investments with initial maturities of three months or less. Revenue
Recognition
The Company recognizes revenues when a customer's purchase order has been
received, the software has been shipped (or electronically delivered), the
remaining obligations are insignificant and the collection of the resulting
receivables 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.
F-11
<PAGE> 73
CT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1999 and 1998
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
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.
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 $485,275 and $161,010 in 1999 and 1998,
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. 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. Amortization expense was
$1,371,402 and $1,083,479 in fiscal 1999 and 1998, respectively. During
fiscal 1999, software costs were written down by $1,422,697. 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.
Stock-Based Compensation
The Company accounts for stock-based employee compensation as prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock issued to
Employees" (Opinion No. 25) and the related interpretations. The pro forma
information required by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (Statement No. 123) is disclosed
in Note F.
F-12
<PAGE> 74
CT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1999 and 1998
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
marketable securities, notes receivable and debt instruments. Carrying
values approximate fair value because of their short-term maturities. Net
Income (Loss) Per common Share
The Company computes basic income (loss) per common share based on the
weighted average number of common shares outstanding. Income (loss) per
common share - diluted is computed based on the weighted average number of
common shares outstanding plus the number of additional common shares that
would have been outstanding if dilutive potential common shares, consisting
of stock options, warrants and shares issuable upon conversion of debt, had
been issued; income is adjusted for interest on the convertible debt. Per
share data - diluted has not been presented because the effect of potential
common shares is antidilutive.
Securities and Exchange Commission Matters
The Company has received requests from the staff of the Securities and
Exchange Commission for additional information regarding the accounting for
certain of its acquisitions, including questions relating to the write-off
of associated in-process research and development costs, and certain other
matters. While the Company has responded to these requests, the Company
cannot determine at this time the effect, if any, that the outcome of this
matter will have on its reported financial position or results of
operations. It is possible that annual and quarterly financial statements
for fiscal 1998 and 1999 will need to be restated.
NOTE B - PROPERTY AND EQUIPMENT
Major classes of property and equipment and their estimated useful lives are
as follows:
<TABLE>
<CAPTION>
February 28,
----------------------------
Lives 1999 1998
------------- ------------ ------------
<S> <C> <C> <C>
Furniture 5-10 years $ 138,770 $ 82,978
Office equipment 3-7 years 82,712 74,339
Leasehold improvements Lease term 68,672 62,184
Computer equipment 3-7 years 606,798 480,671
------------ ------------
896,952 700,172
Less accumulated depreciation (510,051) (312,249)
------------ ------------
Net property and equipment $ 386,901 $ 387,923
============ ============
</TABLE>
F-13
<PAGE> 75
CT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1999 and 1998
NOTE C - NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
February 28,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Unsecured notes payable to individuals, including $80,000 in 1998 to related
parties, due at various dates in 1999 and 1998, bearing interest at rates
ranging from 0% to 10%; weighted average
interest rate is approximately 6.1% (1) $192,500 $652,500
Note payable to bank, bearing interest at 11.50% -- 102,340
Note payable to banks, bearing interest at 7.35% to 7.45% 120,833 --
Other notes payable 34,091 87,334
-------- --------
$347,424 $842,174
======== ========
</TABLE>
(1) Certain of these notes have 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.
NOTE D - LONG-TERM DEBT
<TABLE>
<CAPTION>
February 28,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Redeemable convertible notes, interest at 5% payable in common
stock, due in March 2000 (1) $ -- $ 330,000
Note payable to Xerox Corporation, non-interest bearing, due
September 1998, interest imputed at 10% (net of discount ) 200,000 995,918
Note payable to a bank, payable in monthly installments with interest
at 9.75%, through January 2000 111,812 162,781
Note payable to an individual, non-interest-bearing, payable by an
initial payment of $25,000, and monthly payments of $10,000 -- 259,910
---------- ----------
311,812 1,748,609
Less current maturities 311,812 1,270,565
---------- ----------
$ -- $ 478,044
========== ==========
</TABLE>
(1) These notes were converted into common stock at $.82 per share during
the year ended February 28, 1999.
F-14
<PAGE> 76
CT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1999 and 1998
NOTE E - INCOME TAXES
Following is a reconciliation of the Company's income tax provision with
the amount of tax computed at the statutory rate:
<TABLE>
<CAPTION>
Years ended February 28,
----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Tax benefit at statutory rate $ 2,295,000 $ 1,159,000
Change in valuation allowance (2,228,000) (1,136,000)
Other (67,000) (23,000)
--------------- ---------------
$ -- $ --
=============== ===============
</TABLE>
Significant components of deferred income tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
February 28,
----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Deferred tax assets
Net operating loss carryovers $ 6,044,000 $ 3,933,000
Accounts receivable 410,000 232,000
Property and equipment -- 32,000
Accounts payable and accrued expenses -- 26,000
Other -- 3,000
--------------- ---------------
6,454,000 4,226,000
Valuation allowance (6,454,000) (4,226,000)
--------------- ---------------
Net deferred tax asset $ -- $ --
=============== ===============
</TABLE>
The Company has net operating loss carryovers of approximately $17,500,000
at February 28, 1999. 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.
F-15
<PAGE> 77
CT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1999 and 1998
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%.
The Series C preferred stock was converted into common stock, at various
prices ranging from $.31 to $.75 per share, during the year ended February
28, 1999.
The Series D preferred Stock is convertible into shares of common stock at
$1.075 per share. Dividends accrue at 11%. Dividends in arrears, related to
these shares, were approximately $174,000 at February 28, 1999. 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 Company has issued equity notes which are unsecured and are convertible
into common stock at 80% of the average market price of the common stock and
are payable at maturity only in common stock. Interest at 8% is payable only
in common stock. At February 28, 1999, all but $150,000 of the notes had
been converted. The outstanding balance of unconverted notes is classified
on the balance sheet as a component of stockholders' equity. Subsequent to
February 28, 1999, the remaining balance of the notes were converted into
approximately 533,850 shares of common stock.
Common stock
See Note L regarding potential obligation to issue common shares in
connection with acquisitions.
F-16
<PAGE> 78
CT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1999 and 1998
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, 1997:
<TABLE>
<CAPTION>
Weighted
average
exercise
shares price
---------- ----------
<S> <C> <C>
Outstanding at March 1, 1997 5,922,685 $ 1.86
Granted 8,611,000 0.33
Exercised (800,000) 0.28
Expired or canceled (3,936,935) 2.53
---------- ----------
Outstanding at February 28, 1998 9,796,750 $ 0.41
Granted 1,804,088 0.82
Exercised (8,124,181) 0.32
Expired or cancelled (514,500) 1.31
---------- ----------
Outstanding at February 28, 1999 2,962,157 $ 0.55
========== ==========
Exercisable at February 28, 1998 7,786,750 $ 0.44
Exercisable at February 29, 1999 1,163,170 $ 0.63
Weighted-average fair value of options granted during
the year ended February 28, 1998 - $0.18
Weighted-average fair value of options granted during
the year ended February 28, 1999 - $0.73
</TABLE>
In July 1997, following a significant decline in the market price of the
Company's common stock, the terms of options covering 3,375,000 shares with
exercise prices ranging from $.89 to $7.00 per share (weighted average of
$2.34 per share) were revised in order to encourage the option holders to
increase their investments in the Company at a time when additional funds
were needed in connection with the operations and growth of the Company's
business and to enhance the Company's ability to retain the services of such
individuals by reducing the exercise price of the options closer to the
then-current market levels. The exercise price was reduced to $.25 per share
for employees and $.40 per share for directors. These options have been
reflected as cancelled and granted in the above summary of option
transactions. In January 1999, the vesting date on 1,125,000 stock options
held by certain officers was accelerated. The options were exercised in
exchange for collateralized notes in the amount of $318,750. These notes,
along with other notes given in payment of option exercises of $1,614,515,
have been deducted from stockholders' equity in the balance sheet at
February 28, 1999.
F-17
<PAGE> 79
CT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1999 and 1998
NOTE F - STOCKHOLDERS' EQUITY - CONTINUED
The following table summarizes other information regarding stock options at
February 28, 1999:
<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>
$ 0.20 - 0.50 1,949,907 3.7 $ 0.36 573,702 $ 0.31
0.51 - 1.00 908,750 3.0 0.83 551,528 0.89
1.01 - 3.00 103,500 3.5 1.75 38,500 1.75
---------- ------ --------- ------
2,962,157 $ 0.55 1,163,730 $ 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 the years ended February 28, 1999 and 1998, the effect on net loss
and loss per share would have been as follows:
<TABLE>
<CAPTION>
Years ended February 28,
-----------------------------
1999 1998
------------ -----------
<S> <C> <C>
Net loss
As reported $ (6,749,906) (3,522,710)
Pro forma (7,194,115) (4,197,423)
Loss per common share
As reported (.25) (.21)
Pro forma (.26) (.25)
</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 28,
-----------------------------
1999 1998
------------ -----------
<S> <C> <C>
Expected volatility 134-149% 137-147%
Risk-free interest rates 4.2-5.6% 5.7-6.2%
Dividend yield 0% 0%
Expected option lives 1-2 years 1- 4 years
</TABLE>
F-18
<PAGE> 80
CT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1999 and 1998
NOTE F - STOCKHOLDERS' EQUITY - CONTINUED
The following summarizes the warrant transactions for 1999 and 1998:
<TABLE>
<CAPTION>
Weighted
average
shares exercise price
---------- --------------
<S> <C> <C>
Outstanding at March 1, 1997 3,834,989 $ 0.95
Issued 3,362,500 2.89
Exercised (451,437) 0.36
Expired or canceled (640,914) 1.55
---------- ----------
Outstanding at February 28, 1998 6,105,138 2.00
Issued 5,557,383 1.60
Exercised (3,400,453) 0.58
Expired or cancelled (2,222,263) 1.04
---------- ----------
Outstanding at February 28, 1999 6,039,805 $ 2.82
========== ==========
</TABLE>
During fiscal 1998, the Company issued warrants to purchase 3,050,000 shares
of common stock in connection with the sale of common stock, and 312,500
shares of common stock in connection with the issuance of convertible debt.
During fiscal 1999, the Company issued warrants to purchase 1,750,000 shares
of common stock in connection with the sale of common stock, 150,000 shares
in connection with the sale of preferred stock, 200,000 shares as payment of
liabilities, and 351,125 shares 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.
Subsidiary Transactions
During February 1999, How2.com, Inc. (How2.com) issued 5,502,664 shares of
common stock in private placements for $7,242,000, of which $6,042,000 was
evidenced by subscriptions which were paid prior to June 30, 1999. Certain
of the shares issued are convertible into a maximum of 414,000 shares of the
Company at a conversion price of $3.75 per share in the event How2.com has
not completed a public offering before March 2000. Options to purchase
shares of common stock of How2.com, were granted to officers and directors
in January 1999. Options to purchase 6,300,000 shares of common stock at
$.025 to $.25 per share vested immediately and were exercised for notes. The
remaining options granted cover 7,120,000 shares at a price of $.25 per
share and vest in varying amounts through October 2001.
F-19
<PAGE> 81
CT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1999 and 1998
NOTE G - RELATED PARTY TRANSACTIONS
Joint Venture
In November 1996, the Company made a one-year, $625,000, 8% loan to GGS
Investment Company (GGS), a joint venture owned by Gilbert Gertner, former
Chairman of the Board of the Company, George Sharp, former Chief Executive
Officer of the Company and Steven B. Solomon, President and Chief Executive
Officer of the Company, who were also directors and owned approximately 46%
of the Company's outstanding common stock at that time. The purpose of the
joint venture was to invest in securities for short-term profits. The loan
agreement provided that (1) interest would be waived for the first six
months, (2) 100% of the net profits, while the loan was outstanding, would
be paid to the Company, and (3) net losses would be borne by GGS. The loan
was guaranteed by each of the officers, and the guaranty was secured by the
pledge of a total of 754,000 shares of the Company's common stock, valued at
approximately $1,282,000 as of the date of the transaction. The joint
venture was not profitable, and the loan was discharged by GGS during fiscal
1998 in the following manner:
o Mr. Solomon forgave $78,000 due from the Company to him.
o Mr. Gertner assumed debt of the Company to a corporation controlled by
Mr. Gertner in the principal amount of $250,000 plus accrued interest
of approximately $25,000.
o Mr. Sharp received a credit against the loan of $200,000 as
consideration for agreeing to terminate his noncancellable employee
contract aggregating approximately $700,000 through November 2000.
o $72,000 of the loan was forgiven in connection with the asset sale
agreement discussed below.
Asset Sale Agreement
In April 1997, the Company entered into an asset sale agreement with its
former Chief Executive Officer and its former Chairman of the Board (the
Purchasers) jointly. At the date of the agreement, the Purchasers owned
approximately 31% of the Company's outstanding common stock at that date.
The Company sold to the Purchasers, $3,750,000 of trade accounts receivable
and forgave indebtedness owed by the Purchasers to the Company in the amount
of $155,000 ($72,000 of which related to the discharge of the joint venture
indebtedness noted earlier.) The carrying value of the receivables at
February 28, 1997, net of allowance, was $1,992,000. Consideration received
consisted of 3,900,000 shares of the Company's common stock with a market
value of approximately $2,750,000 as of the date of the transaction. For
accounting purposes, the Company has valued the shares at approximately
$2,147,000. The agreement provides that the Company will also receive 50% of
the proceeds in excess of $2,250,000 from collection of the receivables. The
transaction resulted in no gain or loss.
F-20
<PAGE> 82
CT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1999 and 1998
NOTE G - RELATED PARTY TRANSACTIONS - CONTINUED
Other
During the years ended February 28, 1999 and 1998, the Company loaned
approximately $1,525,000 and $122,000, respectively, exclusive of financing
provided for the exercise of stock options, to its Chief Executive Officer,
Mr. Solomon. At February 28, 1999 and 1998, $354,000 and $226,000,
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 $600,000 and $115,000 in expenses related to these services
during fiscal years ended February 28, 1999 and 1998, respectively. Mr. Ken
Johnsen, one of the Company's directors, was the Executive Vice President of
Metamor during this time. In June 1999, Mr. Johnsen joined the Company's
subsidiary, How2.com as its President and Chief Operating Officer. In
connection therewith, Mr. Johnsen was granted options to purchase 500,000
shares of How2.com common stock at $.10 per share and options to purchase
450,000 shares at $1.00 per share.
During fiscal years ended February 28, 1999 and 1998, the Company and
How2.com incurred legal fees in the amount of approximately $140,000 and
$70,000, respectively to Wood, Exall & Bonnet, L.L.P. Mr. David Wood, a
partner of such firm is a relative of Mr. Solomon. Subsequent to February
28, 1999, Mr. Wood joined How2.com 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.
NOTE H - COMMITMENTS AND CONTINGENCIES
The Company leases office space under noncancellable operating lease
agreements expiring at various dates through 2003. Future minimum lease
payments under these leases at February 28, 1999, were as follows:
Year ending
February 28,
------------
2000 $ 301,204
2001 312,416
2002 289,468
2003 9,490
-----------
Total $ 912,578
===========
Rental expense totaled approximately $316,000 and $303,000 for the years
ended February 28, 1999 and 1998, respectively.
F-21
<PAGE> 83
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.
The Company and its president are involved in an arbitration proceeding with
Vestcom Ltd., a group that claims it is entitled to compensation and a
finder's fee for introducing the Company to a third party, and is seeking
damages of the value of 100,000 shares of the Company's common stock
(alleged to be $1,900,000) plus 50% of additional compensation paid by the
Company to such third party. The Company believes it has defenses to such
claims. The Company and its president filed a declaratory judgment action
against Vestcom seeking to determine that the alleged contract was not valid
based on the Company's defenses. The case is 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 state
court entered a judgment and preliminary injunction in favor of the Company
and its president that the purported agreement was a forgery. As a result
the arbitration proceeding was dismissed by the American Arbitration
Association. The defendant has 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 District Court, Dallas
County, Texas, reasserting the same basic claims as in the arbitration
proceeding. This case is set for mediation in September, 1999.
In August 1998, Janssen Meyers Associates, L.P. ("JM") filed a lawsuit
against the Company. The suit alleges that the Company owes the plaintiffs a
fee in the amount of $16,500,000 plus interest and attorney's fees in
connection with services allegedly performed by JM in respect of the merger
between the Company and the Company's predecessor in 1996, and related
matters. The Company believes such claims are without merit and intends to
vigorously defend against the claim.
F-22
<PAGE> 84
CT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1999 and 1998
NOTE H - COMMITMENTS AND CONTINGENCIES - CONTINUED
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 28, 1999, the Company has employment agreements with three of
its officers. The agreements expire in 2000 to 2002. How2.com has an
employment agreement with its chief executive officer, who is also the
Company's chief executive officer, that expires in 2004.
NOTE I - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Years ended February 28,
------------------------
1999 1998
-------- ----------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ -- $ 128,929
Non-cash investing and financing transactions:
Notes payable converted to preferred stock 253,600 --
Payment of dividends in common stock -- 96,429
Conversions to common stock
Debt 844,083 901,326
preferred stock and equity notes 1,956,956 481,004
Liquidation of note payable by transfer of collateral -- 1,250,000
Sale of receivables for treasury stock -- 2,146,649
Notes receivable satisfied through debt assumptions -- 425,000
common stock and stock options
issued in satisfaction of debt 849,600 --
common stock sold for notes or subscriptions 8,245,265 --
</TABLE>
NOTE J - 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).
NOTE K - FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of fiscal 1999, the Company wrote off software
development costs of approximately $1,400,000 and increased the allowance
for doubtful accounts by approximately $866,000.
F-23
<PAGE> 85
CT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1999 and 1998
NOTE L - ACQUISITIONS BY SUBSIDIARY SUBSEQUENT TO FEBRUARY 28, 1999 AND PLANNED
SPIN-OFF (UNAUDITED)
How2.com completed the acquisitions of 2-Lane Media, Inc. (2-Lane) and The
Forward Companies subsequent to February 28, 1999. Each acquisition will be
accounted for by the purchase method.
2-Lane offers Web site and e-commerce design for its clients. The purchase
price was 1,200,000 shares of How2.com common stock with a guaranteed value
of $1.25 per share; in the event the common stock of How2.com is not
publicly traded by February 1, 2000, the sellers have the option to convert
the How2.com shares into common stock of the Company having a value of
$1,500,000. Also, options were granted to the shareholders of 2-Lane to
purchase 200,000 shares of How2.com common stock at $.25 per share.
The Forward Companies provides product rebate promotional fulfillment
services relating to merchandise and consumer rebate programs. The purchase
price consisted of $8,000,000 in cash and 2,200,000 shares of How2.com
common stock with a guaranteed value of $2.50 per share. Also, options were
granted to the shareholders of The Forward Companies to purchase 800,000
shares of How2.com common stock at $2.50 per share if certain earn-out
provisions are met.
Subsequent to February 28, 1999, How2.com issued 4,743,004 shares of common
stock in private placements for $8,725,500. How2.com also granted options to
purchase 8,892,000 shares of its common stock to employees, directors and
others at exercise prices ranging from $.25 to $2.50 per share. As a result
of the above acquisitions and sales of common stock, CT Holdings' ownership
of How2.com was reduced to approximately 50.1% at July 31, 1999. CT Holdings
has announced that it will distribute to its shareholders, 15% of the shares
of common stock of How2.com that CT Holdings held on March 18, 1999 upon
compliance with Securities and Exchange Commission (SEC) requirements
applicable to CT Holdings and How2.com in connection with the proposed
spin-off. 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
How2.com to CT Holdings' stockholders on a timely basis or at all.
In addition, the Company has agreed to convert certain shares of How2.com
common stock issued in connection with certain acquisitions completed or
proposed by How2.com as well as issued pursuant to the terms of the
subscription agreements between How2.com and its stockholders into shares of
CT Holdings' common stock, in the event How2.com does not become publicly
traded within one year. This could result in the issuance of up to 414,000
additional shares of CT Holdings common stock at a conversion price of $3.75
per share, which would have the effect of diluting CT Holdings' stockholders
if the market price for CT Holdings' stock is above that price at the time
of conversion.
F-24
<PAGE> 86
CT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1999 and 1998
NOTE M - LOSS PER SHARE
<TABLE>
<CAPTION>
Loss before
extraordinary Extraordinary
credit credit Net loss
--------------- --------------- ---------------
<S> <C> <C> <C>
1999
Earnings (loss) $ (7,209,498) $ 459,592 $ (6,749,906)
Preferred dividend requirement (128,956) -- (128,956)
--------------- --------------- ---------------
Earnings loss allocable to common stockholders $ (7,338,454) $ 459,592 $ (6,878,862)
=============== =============== ===============
Weighted average common shares outstanding 27,807,748 -- 27,807,748
Earnings (loss) per share - basic and diluted $ (0.26) $ 0.01 $ (0.25)
=============== =============== ===============
1998
Loss $ (3,522,710) $ -- $ (3,522,710)
Preferred dividend requirement (14,557) -- (14,557)
--------------- --------------- ---------------
Loss allocable to common stockholders $ (3,537,267) $ -- $ (3,537,267)
=============== =============== ===============
Weighted average common shares outstanding 16,801,818 -- 16,801,818
Loss per share - basic and diluted $ (.21) $ -- $ (.21)
=============== =============== ===============
</TABLE>
F-25
<PAGE> 87
CT HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30, FEBRUARY 28,
ASSETS 1999 1999
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash $ 178,344 $ 2,210,377
Accounts receivable, less allowance for returns and
doubtful accounts of $963,729 and $1,208,000 323,899 466,288
Notes receivable from related parties 208,934 478,933
Inventory 144,522 148,676
Other 92,287 208,223
--------------- ---------------
Total current assets 947,986 3,512,497
INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED
SUBSIDIARY 6,536,639 4,458,819
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $681,494 and $510,051 285,847 386,901
PURCHASED SOFTWARE, net of accumulated amortization
of $3,085,944 and $2,718,486 1,027,248 1,394,706
CAPITALIZED SOFTWARE DEVELOPMENT COSTS,
net of accumulated amortization of $1,037,422
and $577,000 1,181,524 1,181,052
OTHER ASSETS 327,390 448,372
--------------- ---------------
$ 10,306,634 $ 11,382,347
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<PAGE> 88
CT HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS - CONTINUED
<TABLE>
<CAPTION>
NOVEMBER 30, FEBRUARY 28,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1999
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term debt $ 174,587 $ 311,812
Notes payable 249,084 347,424
Accounts payable and accrued expenses 875,478 2,230,859
--------------- ---------------
Total current liabilities 1,299,149 2,890,095
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Common stock, $.01 par value per share; authorized
60,000,000 shares; issued, shares 47,443,301
at 11/30/99 and 43,259,274 shares at 2/28/99 474,433 432,592
Preferred stock, $.01 par value per share;
authorized 1,000,000 shares; issued and outstanding
Series B convertible, 50 shares (liquidation value $50,000);
none outstanding as of 11/30/99 -- 1
Series D convertible, 2,000 shares (liquidation value $ 2,000,000
at 2/28/99); none outstanding as of 11/30/99 -- 20
Equity notes -- 150,000
Additional paid-in capital 47,639,911 32,835,018
Accumulated deficit (35,023,916) (20,641,875)
Notes receivable for exercise of options/warrants (1,582,704) (1,783,265)
Treasury stock, at cost (4,164,613 shares) (2,500,239) (2,500,239)
--------------- ---------------
Total stockholders' equity 9,007,485 8,492,252
--------------- ---------------
$ 10,306,634 $ 11,382,347
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE> 89
CT HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
NOVEMBER 30, NOVEMBER 30,
1999 1998
--------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net sales $ 1,413,449 $ 4,048,965
Cost of sales (excludes depreciation
and amortization expense) 54,610 165,022
--------------- ---------------
Gross profit 1,358,839 3,883,943
Operating expenses
Research and development expenses 344,607 410,329
Selling and marketing expenses 2,177,547 2,413,595
General and administrative expenses 687,120 1,261,556
Provision for doubtful accounts -- 115,000
Depreciation and amortization expenses 1,017,598 1,134,270
--------------- ---------------
4,226,872 5,334,750
--------------- ---------------
Operating loss (2,868,033) (1,450,807)
Other income (expense)
Interest expense (17,629) (136,409)
Other (2,162) 16,085
Litigation expense -- (537,000)
Equity in loss of unconsolidated
affiliate (11,253,865) --
--------------- ---------------
(11,273,656) (657,324)
--------------- ---------------
Net loss before extraordinary item (14,141,689) (2,108,131)
Extraordinary item - forgiveness of debt -- 806,421
--------------- ---------------
Net loss (14,141,689) (1,301,710)
Preferred stock dividend requirement (64,493) (118,982)
--------------- ---------------
Net loss allocable to common stockholders $ (14,206,182) $ (1,420,692)
=============== ===============
Basic and diluted loss per share data
Net loss before extraordinary item (.34) (0.09)
Extraordinary item -- 0.03
--------------- ---------------
Net loss per share (.34) (0.05)
=============== ===============
Shares used in computing loss per share
Basic and diluted 42,144,252 25,970,307
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE> 90
CT HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
NOVEMBER 30, NOVEMBER
1999 1998
--------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (14,141,689) $ (1,301,710)
Adjustments to reconcile net loss to net cash
used by operating activities
Depreciation and amortization 1,015,598 1,134,270
Equity in loss of unconsolidated affiliate 11,253,865 --
Gain on settlement of debt -- (806,421)
Provision for uncollectible accounts -- 115,000
Changes in operating assets and liabilities
Accounts receivable 142,389 (2,578,972)
Notes receivable from related parties 269,999 (352,947)
Other current assets 115,936 (315,753)
Inventory 4,154 (103,254)
Bank overdraft -- (10,249)
Accounts payable and accrued expenses (1,355,381) (53,231)
Other assets 120,982 105,201
--------------- ---------------
NET CASH USED BY OPERATING ACTIVITIES (2,574,147) (4,168,066)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (86,656) (126,314)
Development of software (460,901) (820,207)
--------------- ---------------
NET CASH USED BY INVESTING ACTIVITIES (547,557) (946,521)
CASH FLOW FROM FINANCING ACTIVITIES
Net change in notes payable 135,010 (354,355)
Proceeds from sale of preferred stock -- 2,567,391
Proceeds from sale of common stock 954,661 4,076,265
Redemption of preferred stock -- (567,500)
--------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,089,671 5,721,801
--------------- ---------------
Net increase (decrease) in cash (2,032,033) 607,214
Cash at the beginning of the period 2,210,377 8,555
--------------- ---------------
Cash at the end of the period $ 178,344 $ 615,769
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<PAGE> 91
CT HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements of CT Holdings, Inc., formerly Citadel
Technology, Inc., and its majority-owned subsidiaries (collectively, "CT
Holdings") as of November 30, 1999 and for the nine months November 30, 1999
and November 30, 1998 are unaudited and, in the opinion of management,
contain all adjustments, consisting of only normal recurring items,
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 herein for the year ended February 28, 1999. The
results of operations for the nine months ended November 30, 1999 are not
necessarily indicative of the results to be expected for the entire year
(see "Risk Factors"). All significant intercompany accounts and transactions
have been eliminated.
In December 1998, CT Holdings received a comment letter from the Securities
and Exchange Commission with respect to its Form 10-KSB for the fiscal year
ended February 28, 1998 and Quarterly Reports on Form 10-QSB for the periods
ended May 31, 1998 and November 30, 1998. The comment letter contained
questions relating to accounting for certain acquisitions, including
questions relating to the write-off of associated in-process research and
development costs, and certain other matters. While CT Holdings has
responded to these questions, CT Holdings cannot determine at this time the
effect, if any, that the outcome of this matter may have on its reported
financial position or results of operations. As a result, it is possible
that annual and quarterly financial statements for fiscal 1998, 1999 and
2000 may need to be restated.
NOTE 2. CAPITAL TRANSACTIONS
CT Holdings has previously announced that it will distribute to its
shareholders of record as of March 18, 1999, shares of common stock of
How2.com, Inc. upon compliance with Securities and Exchange Commission
("SEC") requirements applicable to the proposed distribution. In addition,
in connection with the proposed initial public offering of How2.com, the
underwriters will require CT Holdings, as a major stockholder of How2.com,
to enter into a lockup agreement that will cause the distribution to be
commenced 180 days after the initial public offering. Compliance with SEC
requirements and state law could delay or prevent the distribution, as
proposed. There can be no assurances that the proposed initial public
offering of How2.com will be completed or that CT Holdings will be able to
effect the distribution of the shares of How2.com to CT Holdings
stockholders on a timely basis, on the previously disclosed terms or at all.
CT Holdings has agreed to convert certain shares of How2.com common stock
issued in connection with certain subscription agreements into shares of CT
Holdings common stock in the event How2.com does not become publicly traded
within one year from the dates of such agreements. This could result in the
issuance of up to 414,000 additional shares of CT Holdings common stock at a
conversion price of $3.75 per share. In addition, CT Holdings has agreed to
convert the shares of How2.com common stock issued in connection with the
acquisition of 2-Lane Media by How2.com into up to 500,000 CT Holdings
shares at the option of the 2-Lane Media shareholders in the event How2.com
does not become publicly traded by March 2000. These potential issuances
would have the effect of diluting CT Holdings' stockholders if the market
price for CT Holdings' common stock is above that price at the time of
conversion.
F-30
<PAGE> 92
NOTE 3. COMMITMENTS AND CONTINGENCIES
On January 7, 1999, our former Houston landlord filed a lawsuit against us
alleging a breach of a lease covering our former Houston office space. The
suit sought damages in excess of $750,000, plus attorney's fees, pre and
post interest and court costs. In July 1999, the parties reached an
agreement to settle the suit for $325,000 to be paid over nine months. We
are, to date, in compliance with all the terms and conditions of the
settlement agreement.
CT Holdings and its President were involved in an arbitration proceeding
with Vestcom Ltd., a group that claimed it was entitled to compensation and
a finder's fee for introducing CT Holdings to a third party. Vestcom Ltd.
sought damages of the value of 100,000 shares of CT Holdings' common stock
(alleged to be valued at $1,900,000), plus 50% of additional compensation
paid by CT Holdings to such third party. CT Holdings and its President filed
a declaratory judgment action against Vestcom seeking to determine that the
alleged contract was not valid based on CT Holdings' 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 state court entered a judgment and preliminary
injunction in favor of CT Holdings and its president 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 CT Holdings 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 at $1.375). CT Holdings expects that this settlement may
result in a charge to earnings in the fourth quarter of fiscal 2000 in the
amount of up to $500,000.
In August 1998, Janssen Meyers Associates L.P. ("JM") filed a lawsuit
against CT Holdings. The suit alleges that CT Holdings owes the plaintiffs a
fee in the amount of $6,000,000 plus interest and attorney's fees in
connection with services allegedly performed by JM in respect of the merger
between LoneStar and Citadel Technology, Inc. and related matters. CT
Holdings believes such claims are without merit and intends to vigorously
defend against the 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. CT Holdings has removed the case to
federal court in the Southern District of New York. Subsequent to the end of
the most recent fiscal quarter, Janssen Meyers filed a motion for partial
summary judgment and CT Holdings filed a motion for summary judgment in the
matter.
NOTE 4. INVESTMENT IN UNCONSOLIDATED AFFILIATE
CT Holdings' ownership interest in How2.com as of February 28, 1999 was 62%.
As of November 30, 1999 CT Holdings' ownership interest in How2.com was
45.6%. As such, CT Holdings no longer has a majority ownership interest. CT
Holdings accounts for its ownership interest in How2.com using the equity
method of accounting. For comparability purposes, the February 28, 1999
balance sheet has been reclassified to account for CT Holdings' investment
in How2.com under the equity method of accounting. The effect of this
reclassification on the balance sheet at February 28, 1999 is as follows:
F-31
<PAGE> 93
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
<S> <C>
Cash $(1,175,992)
Receivables from sale of common $(6,042,000)
stock of subsidiary
Investment in, and advances to $ 4,458,819
unconsolidated subsidiary
Accounts payable and accrued expenses $ (16,741)
Minority interest $ 2,742,432
</TABLE>
The following is a summary of condensed unaudited financial information
pertaining to How2.com:
<TABLE>
<CAPTION>
SUMMARIZED BALANCE SHEET NOVEMBER 30, 1999
- ------------------------ -----------------
<S> <C>
Current assets $ 8,682,933
Other assets 20,964,231
---------------
Total assets $ 29,647,164
===============
Current liabilities $ 14,408,389
Long-term debt 494,451
---------------
Total liabilities 14,902,840
---------------
Shareholders' equity 14,744,324
---------------
$ 29,647,164
===============
</TABLE>
<TABLE>
<CAPTION>
SUMMARIZED STATEMENT OF 9 MONTHS ENDED
OPERATIONS NOVEMBER 30, 1999
- ----------------------- -----------------
<S> <C>
Revenues $ 5,021,382
Gross profit 3,028,767
Sales and marketing expenses 12,532,116
Operating loss (25,459,692)
Net loss (24,541,880)
</TABLE>
NOTE 5. SUBSEQUENT EVENTS
In February 2000, CT Holdings 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 a $140,000 promissory note and
438,750 stock purchase warrants at $.59 per share. The settlement results in an
immaterial gain to CT Holdings.
F-32
<PAGE> 94
================================================================================
786,784 SHARES
CT HOLDINGS, INC.
COMMON STOCK
---------------
PROSPECTUS
---------------
MARCH ___, 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> 95
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.
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<PAGE> 96
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; 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.
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<PAGE> 97
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 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.
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<PAGE> 98
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.
ITEM 27. EXHIBITS.
2.1 Second Amended and Restated Plan of Merger, dated February 29, 1996, by
and between LoneStar Hospitality Corporation, LSHC Acquisition, Inc.
and Citadel Computer Systems Incorporated (without exhibits)
(incorporated by reference to Exhibit 2.1 of the Company's Current
Report on Form 8-K dated February 29, 1996).
2.2 Purchase and Sale Agreement, dated March 1, 1996, by and between the
LoneStar Hospitality Corporation, LS Holding Corp. and Miami Subs USA,
Inc. (without exhibits) (incorporated by reference to Exhibit 2.2 of
the Company's Current Report on Form 8-K dated February 29, 1996).
2.3 Technology Transfer Agreement, by and between LoneStar Hospitality
Corporation and Circuit Masters Software, Inc., dated February 29, 1996
(without exhibits) (incorporated by reference to Exhibit 2.3 of the
Company's Current Report on Form 8-K dated February 29, 1996).
2.4 Technology Transfer Agreement, by and between the Company and Bill
Mulvany, dated February 29, 1996 (without exhibits) (incorporated by
reference to Exhibit 2.4 of the Company's Current Report on Form 8-K
dated February 29, 1996).
2.5 Technology Transfer Agreement, by and between the Company and Kim Marie
Newman, dated February 29, 1996 (without exhibits) (incorporated by
reference to Exhibit 2.5 of the Company's Current Report on Form 8-K
dated February 29, 1996).
2.6 Agreement, by and between the Company, Circuit Masters Software, Inc.,
Patrick William Mulvany and Kim Marie Newman, dated May 16, 1996,
effective as of February 29, 1996 (incorporated by reference to Exhibit
2.6 of the Current Report on Form 8-K/A filed with the Securities and
Exchange Commission on June 10, 1996).
3.1 Certificate of Incorporation (incorporated by reference to the
registration statement on Form S-1, File No. 33-25462, for Apollo
Resources, Inc., on November 10, 1988, and declared effective January
4, 1989).
3.2 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).
II-4
<PAGE> 99
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).
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).
**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).
II-5
<PAGE> 100
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 Citadel 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 How2HQ.com, Inc.,
2-Lane Media, Inc., and the shareholders of 2-Lane Media, Inc.
(incorporated by reference to Exhibit 10.15 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended February 28, 1999).
10.16 Stock Purchase Agreement, dated May 20, 1999, among How2HQ.com, inc.,
Forward Communications, Inc., FCI Services Inc., and the shareholders
of Forward Communications, Inc. and FCI Services Inc. (incorporated by
reference to Exhibit 2.1 to the Company's Current Report on Form 8-K
filed June 3, 1999).
10.17 Agreement and Plan of Reorganization, dated May 20, 1999, among
How2HQ.com, inc., Forward Freight, Inc., and the shareholders of
Forward Freight Inc. (incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed June 3, 1999).
*10.18 Settlement and Release Agreement dated January 14, 2000 by and among
Richard L. Travis, How2.com, Inc. and the Company.
*10.19 Severance and Release Agreement dated March 1, 2000 by and among
Bennett Klein and the Company.
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 28, 1999).
*23.1 Consent of Grant Thornton LLP.
**23.2 Consent of Wood, Exall & Bonnet, L.L.P. (included in Exhibit 5.1).
II-6
<PAGE> 101
**24.1 Power of Attorney (included with signature pages).
- --------------------
* Filed herewith.
** Previously filed.
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
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<PAGE> 102
(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.
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<PAGE> 103
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. 1 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 March 6, 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 March 6, 2000
- ----------------------------
Victor K. Kiam, II
/s/ STEVEN B. SOLOMON Chief Executive Officer, President & Director March 6, 2000
- ---------------------------- (Principal Executive Officer and Principal
Steven B. Solomon Financial and Accounting Officer)
Director March 6, 2000
- ----------------------------
Lawrence Lacerte
* Director March 6, 2000
- ----------------------------
Chris A. Economou
* Director March 6, 2000
- ----------------------------
Mark Rogers
* Director March 6, 2000
- ----------------------------
Michael A. Ruff
* Director March 6, 2000
- ----------------------------
Dr. Axel Sawallich
</TABLE>
*By: /s/ STEVEN B. SOLOMON
-----------------------------------
Steven B. Solomon, Attorney-in-fact
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<PAGE> 104
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 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).
</TABLE>
<PAGE> 105
<TABLE>
<S> <C>
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).
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).
**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).
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<TABLE>
<S> <C>
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 Citadel 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 How2HQ.com, Inc.,
2-Lane Media, Inc., and the shareholders of 2-Lane Media, Inc.
(incorporated by reference to Exhibit 10.15 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended February 28, 1999).
10.16 Stock Purchase Agreement, dated May 20, 1999, among How2HQ.com, inc.,
Forward Communications, Inc., FCI Services Inc., and the shareholders
of Forward Communications, Inc. and FCI Services Inc. (incorporated by
reference to Exhibit 2.1 to the Company's Current Report on Form 8-K
filed June 3, 1999).
10.17 Agreement and Plan of Reorganization, dated May 20, 1999, among
How2HQ.com, inc., Forward Freight, Inc., and the shareholders of
Forward Freight Inc. (incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed June 3, 1999).
*10.18 Settlement and Release Agreement dated January 14, 2000 by and among
Richard L. Travis, How2.com, Inc. and the Company.
*10.19 Severance and Release Agreement dated March 1, 2000 by and among
Bennett Klein and the Company.
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 28, 1999).
*23.1 Consent of Grant Thornton 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.
<PAGE> 1
EXHIBIT 10.18
SETTLEMENT AND RELEASE AGREEMENT
This Settlement and Release Agreement (this "Agreement") is made and
entered into effective as of January 1, 2000 by and among Richard L. Travis,
Jr., a resident of the State of Texas (the "Employee"), CT Holdings, Inc.
(formerly Citadel Technology, Inc.), a Delaware corporation ("CT"), How2.com,
Inc., a Delaware corporation ("How2"), and the respective subsidiaries and
affiliates of CT and How2 (other than the Employee) (collectively with CT and
How2, the "Company").
RECITALS
Employee is presently employed by CT and serves as an officer of CT.
The continuation of the employment and officer relationships is no longer
desired by Employee or CT.
Employee and the Company mutually wish to fully and finally resolve any
potential or existing disputes arising out of the employment and other
relationships among Employee and the Company.
Employee agrees and acknowledges that the Company has special expertise
in its businesses that has enabled it to provide unique career opportunities for
its employees, and its growth depends, to a significant degree, on its
possession of certain information that may not be available to its competitors
concerning a number of matters, including, but not limited to, the computer
network security software business. To obtain such information and use it
successfully, the Company has made significant investments in research, business
development, quality assurance, customer satisfaction methods and techniques,
manufacturing and business process improvements and other developments in
marketing methods and providing services to their customers.
Employee agrees and acknowledges that a covenant not to compete and a
restriction on disclosure of confidential information is essential to the
continued growth and stability of the Company's businesses and to the continuing
viability of such businesses as expressly permitted under the terms and
limitations of this Agreement.
NOW, THEREFORE, in consideration of the mutual acts, payments and
promises described and agreed to be performed herein, Employee and the Company
agree as follows:
1. RESIGNATION. Employee hereby tenders his resignation from all
positions that he holds with CT and its subsidiaries and affiliates, including
without limitation his position as Chief Financial Officer, Chief Operating
Officer and Secretary of CT, which will be effective on January 1, 2000 (such
date being referred to as the "Resignation Date"). CT accepts Employee's
resignations as of the Resignation Date.
2. SEVERANCE FROM EMPLOYMENT AND TERMINATION OF EMPLOYMENT AGREEMENT.
It is understood and agreed that with the full and complete agreement of
Employee, Employee's employment by, and status as an officer of, CT will cease
as of the Resignation Date. Except as otherwise expressly provided for herein,
as of the Resignation Date, Employee shall cease to accrue any rights under any
pension or compensation plan of the Company (including, without limitation, any
stock option plan, grant or agreement, except as set forth in this Agreement).
CT and the Employee further agree that the Employment Agreement, as amended (the
"Employment Agreement"), between CT and the Employee shall be terminated in all
respects effective as of the Resignation Date, and the parties shall have no
further obligations or liabilities arising under or related to the Employment
Agreement, except as set forth in this Agreement.
3. PAYMENT OF WAGES AND EARNED BENEFITS. Employee acknowledges the
receipt of all wages, vacation and sick pay to which Employee is entitled as of
the Resignation Date, and further acknowledges that he has been fully paid for
all hours worked with the exception of outstanding expense reimbursements and
other payments set forth below. Until the Resignation Date, CT will continue to
pay Employee at his
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annualized salary level, payable in accordance with CT's standard payroll
practices (but not less than two times each month), and Employee will be
entitled to medical and dental benefits on the same terms and conditions as
provided to Employee immediately prior to the Resignation Date. Any outstanding
reimbursable expenses will be paid to Employee upon submission and approval of
those expenses in accordance with CT's customary practices. Such approval and
payments will not be unreasonably withheld or delayed.
4. PAYMENTS TO EMPLOYEE.
(a) (i) In consideration of this Agreement (including, without
limitation, the covenants and agreements made in Sections 6, 7 and 8), CT agrees
to pay Employee the sum of $50,001 , payable in three monthly installments of
$16,667 commencing on the last day of each of the first three months following
the Resignation Date, at the address specified in Section 16 of this Agreement;
provided that Employee is not in breach of this Agreement. All cash
consideration paid to Employee after the Resignation Date shall be made without
any withholdings or deductions, including without limitation, deductions or
withholdings for social security, Medicare or income taxes, unless otherwise
required to do so by law.
(ii) CT's payment obligations under this Agreement shall bear interest
at an annualized rate of 18% with respect to any payment that is late and shall
be secured by the agreement contained in Section 23 by How2 to accelerate the
vesting of options to purchase up to an additional 3,000 shares of How2 common
stock for each of the three payments referred to above, in the event notice of
non-payment is given to CT and the relevant payment is not made by CT within 30
days after such notice.
(b) In consideration of this Agreement (including, without limitation,
the covenants and agreements made in Sections 6, 7 and 8), CT agrees to forgive
the indebtedness of Employee to CT as evidenced by two promissory notes payable
by Employee to CT in the original aggregate principal amount of $295,000, plus
accrued interest through the Resignation Date.
(c) To the extent available under CT's current medical and dental
plans, CT shall provide Employee with medical and dental benefits until April
30, 2000 on the same terms and conditions as provided to Employee immediately
prior to the Resignation Date; provided that Employee is not in breach of this
Agreement. If such medical and dental benefits are not available to Employee
during such period, Employee shall be entitled to COBRA continuation benefits at
CT's expense for such period.
5. CONSULTING AGREEMENT. Notwithstanding the foregoing, for the period
beginning on the Resignation Date until March 31, 2000, Employee shall serve as
a consultant (on an independent contractor basis) to CT to assist in filings
with the Securities and Exchange Commission and related financial and
shareholder matters; provided, however, Employee shall in no case be deemed to
be an employee of CT but instead shall serve as an independent contractor for
all purposes. Employee agrees to be available for consulting upon the reasonable
request of CT by telephone and in person. In connection with the services to be
rendered by Employee to CT as set forth in this Section 5 (the "Services"),
Employee will not, without the consent or direction of CT, act or attempt to act
or represent himself, directly or by implication, as an agent of CT or the
Company, or in any manner assume or create, or attempt to create, any obligation
on behalf of, or in the name of CT or the Company. In the event that CT requests
Employee to incur any expenses in connection with the Services, CT agrees to
pay, in accordance with CT's normal reimbursement policies, all reasonable
pre-approved expenses actually incurred by Employee in connection with providing
the Services. Employee further agrees that following the Resignation Date,
Employee will cooperate with and assist CT in the prosecution or defense of any
litigation, including providing truthful testimony as a witness upon reasonable
request.
The cash and other consideration paid to Employee under Section 4 shall
also constitute sufficient consideration for the Services after the Resignation
Date pursuant to this Section 5 and the covenants and
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agreements in this Agreement, including without limitation Sections 6 and 7, and
the Company shall have no other compensation obligations to Employee with
respect to the Services, except as set forth in this Agreement.
6. NON-COMPETITION AGREEMENT. Employee understands that during the
course of his employment by CT, Employee has had access to and the benefit of
the information referred to in the Recitals above, and represented the Company
and developed contacts and relationships with other persons and entities on
behalf of the Company, including but not limited to customers, potential
customers and other employees of the Company. To protect the Company's interest
in this information and in these contacts and relationships and in consideration
of the promises made by the Company in this Agreement, Employee agrees and
covenants that for a period beginning on the Resignation Date and ending on the
second anniversary of the Resignation Date, without the prior written approval
of CT, Employee will not, in connection with any business that is engaged in, or
is about to be engaged in, by the Company as of the date of execution of this
Agreement (the "Business", as defined below), directly or indirectly, either as
an individual or as an employee, partner, officer, director, shareholder,
advisor, or consultant or in any other capacity whatsoever, of any person (other
than providing the services to CT pursuant to Section 5 and the ownership of
less than 5% of the issued and outstanding securities of an entity): (a)
recruit, hire, assist others in recruiting or hiring, discuss employment with,
or refer to others for employment any person who is, or within the twelve month
period immediately preceding the date of any such activity was, an employee of
the Company or its affiliates; or (b) conduct or assist others in conducting any
business or activity that competes with the Business in the United States or its
territories or possessions or Mexico, the United Kingdom, France or Japan. The
"Business" is defined as the research, development, manufacture, sale or
marketing of products, services, software, methods or techniques (or any related
services or activities) substantially similar to any products, services,
software, methods or techniques which the Company is engaged in the research of;
development of; manufacture, selling, or marketing, or has under active
consideration to do the same as to which the Employee has actual knowledge.
Employee understands and agrees that the scope of the foregoing
covenant is reasonable as to time, area and persons and is necessary to protect
the legitimate business interests of the Company and its affiliates. Employee
further agrees that such covenant will be regarded as divisible and will be
operative as to time, area and persons to the extent that it may be so
operative, and if any part of such covenant is declared invalid, unenforceable,
or void as to time, area or persons, the validity and enforceability of the
remainder will not be affected.
If Employee violates the restrictive covenants of this Section 6 and
the Company brings legal action for injunctive or other relief, the Company
shall not be deprived of the benefit of the full period of the restrictive
covenant as a result of the time involved in obtaining the relief in the event
the Company is successful in its actions. Accordingly, Employee agrees that the
regularly scheduled expiration date of such covenant shall be extended by the
same amount of time that Employee is determined to have violated such covenant.
7. CONFIDENTIALITY. Employee acknowledges that he has learned and will
learn Confidential Information (as defined below) relating to the Business. In
consideration of the promises made in this Agreement by the Company, Employee
agrees that he will not disclose or use or authorize any third party to disclose
or use any such Confidential Information, without prior written approval of the
Company. As used in this Section 7, "Confidential Information" shall mean
information disclosed to or known to Employee as a direct or indirect
consequence of or through his employment with CT, about the Business, the
Company's methods, business plans, operations, products, processes and services,
including, but not limited to, information relating to research, development,
inventions, recommendations, programs, systems, and systems analyses, flow
charts, finances, and financial statements, marketing plans and strategies,
merchandising, pricing strategies, merchandise sources, client sources, system
designs, procedure manuals, automated data programs, financing methods,
financial projections, terms and conditions of arrangements of
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<PAGE> 4
any business, computer software, terms and conditions of business arrangements
with clients or suppliers, reports, supply and services resources, names and
addresses of clients, the Company's contacts, names of professional advisors,
and all other information pertaining to clients and suppliers of the Business,
including, but not limited to, assets, business interests, personal data and all
other information pertaining to the Business, clients or suppliers whatsoever,
including all accompanying documentation therefor. All information disclosed to
Employee, or to which Employee had access or will have access during the period
of his employment with or consulting for CT, for which there is any reasonable
basis to be believed is, or which appears to be treated by the Company as
Confidential Information, shall be presumed to be Confidential Information
hereunder. Confidential Information shall not, however, include information that
(a) is publicly known or becomes publicly known through no fault of Employee, or
(b) is generally or readily obtainable by the public, or (c) constitutes general
skills, knowledge and experience acquired by Employee during his employment with
CT. This provision shall terminate with respect to a particular portion of the
Confidential Information when (i) (a) it enters the public domain through no
fault of the Employee, (b) it is in the Employee's possession free of any
confidentiality obligation, or (c) it was developed independently of and without
reference to any Confidential Information or other information disclosed in
confidence to any third party; or (ii) when it is communicated to a third party
free of any confidentiality obligation; or (iii) in any event, three years after
communication.
Employee agrees that all documents of any nature pertaining to
activities of the Company, or that include any Confidential Information, in his
possession now or at any time during the term of his employment with or
consulting for the Company, including without limitation, memoranda, notebooks,
notes, data sheets, records and computer programs, are and shall be the property
of such entity. All copies of such Confidential Information in Employee's
possession shall be surrendered to the appropriate entity on the Resignation
Date and upon termination of his consulting services to CT, as applicable.
8. INVENTIONS AND DEVELOPMENTS. Employee represents and warrants that
he has notified and will notify CT of all discoveries, inventions, innovations,
improvements, and copyrightable or potentially copyrightable works which are
related to the Business (collectively called "Developments") and are conceived
or developed, either in whole or in part, by Employee during the term of
Employee's employment with or consulting for CT. Developments shall include,
without limitation, the CT software and any or all other intellectual properties
related to the Business. All Developments, including but not limited to all
written documents pertaining thereto, shall be the exclusive property of the
Company, as the case may be, and shall be considered Confidential Information
subject to the terms of this Agreement.
Employee hereby assigns to CT or How2, as appropriate, all of
Employee's rights, title and interest in and to the property described below and
relating to the Business that has been, is, or is about to be engaged in by CT
or How2, if any, whether now owned or hereafter arising or acquired
(collectively the "Intellectual Property"), including:
(a) All patents issued by the United States, any other country, or any
political subdivisions thereof ("Patents"), all registrations and recordings
thereof ("Patent Registrations"), and all applications for patents of the United
States, any other country, or any political subdivisions thereof ("Patent
Applications"), including, without limitation, all provisional patent
applications and all reissues, divisionals, continuations, continuations-in-part
or extensions of any Patent, Patent Registration, or Patent Application, and any
license or other agreement now in existence granting to Employee any right to
use or practice any invention, and any other proprietary and confidential
information, inventions (whether patented or patentable or not), technical
information, procedures, designs, drawings, know-how, software databases, data,
expertise, processes, models, materials, and royalty payments;
(b) All trademarks, trade names, corporate names, company marks,
business names, fictitious business names, trade dress, trade styles, service
marks, logos, other source or business identifiers, prints and labels on which
any of the foregoing have appeared or appear, designs and general intangibles of
like nature
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("Trademarks"), all registrations and recordings thereof ("Trademark
Registrations"), and all applications in connection therewith ("Trademark
Applications"), including, without limitation, Trademark Registrations and
Applications in the United States, any other country, or any political
subdivision thereof, including, without limitation, all reissues, extensions or
renewals thereof, and any license or other agreement now in existence granting
to Employee any right to use any of the foregoing, all rights in Intellectual
Property, logos, trade names, service marks, trade secrets, permits and licenses
and the goodwill of the business associated therewith;
(c) All copyrights (including, without limitation, copyrights for
computer programs and data bases) and all tangible property embodying any
copyright, and all applications, permits, licenses and sublicenses and other
rights in connection therewith, and all registrations and recordations thereof,
and all reissues, extensions, and renewals thereof;
(d) All domain names and all rights of access, control, and programming
thereto; and Employee shall cooperate in transferring: (1) the administrative
and billing contacts for said domain names to the designee of CT's or How2's
choice and shall execute all papers required by Network Solutions for such
transfer; and (2) all passwords or other requirements necessary to control,
program, or otherwise modify or access websites associated with said domain
names; and
(e) All general intangibles of every nature, including, without
limitation, all trade secrets, all rights of actions accrued and to accrue under
and by virtue thereof, including the right to sue and recover for past
infringement of any Intellectual Property or other right, books, correspondence,
customer listings, licenses, permits, records, and other papers and documents in
the possession or control of Employee, claims, choses in action, judgments, all
rights under all contracts and agreements, all amounts received as an award in
or settlement of a suit in damages, cash, deposit accounts, interest in joint
ventures or general or limited partnerships and in any event, all general
intangibles within the meaning of the Uniform Commercial Code in effect in any
applicable jurisdiction.
Employee agrees that within seven (7) days of any request from the
Company, he shall execute all requested assignments and conveyances necessary to
vest in the Company any and all rights, title and interest that he may hold in
and to the Intellectual Property. Employee agrees that when appropriate, and
upon written request of the Company, as the case may be, the Employee will
acknowledge that Developments and Intellectual Property are "works for hire,"
and will sign documentation reasonably necessary to evidence ownership of
Developments and Intellectual Property in the Company. Employee agrees to
cooperate fully with the Company, at the expense of the Company, in connection
with the preparation, filing, and prosecution of any and all Trademark
Applications, Patent Applications, and copyright registration applications,
whether previously or hereinafter filed, in any country, with regard to any or
all Developments and Intellectual Property. Employee agrees to cooperate fully
with the Company, at the expense of the Company, in connection with the
maintenance and retention by the Company of any and all Trademark Registrations,
Patent Registrations, copyright registrations, and domain name registrations,
whether now owned by the Company or hereinafter acquired, in any country, with
regard to any or all Developments and Intellectual Property. Employee further
agrees to cooperate with and assist the Company at the expense of the Company in
the prosecution or defense of any litigation involving any Intellectual Property
claimed by the Company, including providing truthful testimony as a witness upon
reasonable request.
All costs of documentation, recordation or transfer of title related to
the assignment of this Section 8 shall be borne by the Company. Employee shall
execute all appropriate documents reasonably required to effectuate the
assignment of this Section 8 in a timely manner, so long as said documents are
consistent with the terms of this Agreement.
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9. COMPLETE RELEASES. In consideration of the promises made in this
Agreement, Employee, on behalf of himself, his affiliates, trustees, agents, and
servants, their predecessors, successors, assigns and insurers, irrevocably,
unconditionally and fully RELEASES, ACQUITS, and FOREVER DISCHARGES the Company
and their respective past and present parents, subsidiaries, divisions,
affiliates, partners, shareholders, directors, officers, attorneys, accountants,
trustees, agents, servants, employees and representatives, their predecessors,
successors, assigns and insurers, from ANY and ALL charges, causes of action,
complaints, claims, liabilities, damages, costs, obligations, debts and expenses
(including attorney's fees and costs actually incurred), of any nature
whatsoever (excluding any felonious acts), whether known or unknown, suspected
or unsuspected, including, without limitation, any rights arising out of:
alleged violations of any contract, express or implied, written or verbal; any
covenant of good faith and fair dealing, express or implied; any tort; any legal
restrictions on the right of the Company to terminate, discipline, or otherwise
manage employees; any federal, state or other governmental statute, regulation,
or ordinance; Employee's employment or separation from employment with CT;
Employee's service as an officer or director of CT; or any other matter related
to his association with the Company. Notwithstanding the foregoing, nothing
herein shall constitute a release of the Company from any charges, causes of
action, complaints, claims, liabilities, damages, costs, obligations, debts and
expenses (including attorney's fees and costs actually incurred) that may arise
after the Resignation Date relating to the Company's obligations under this
Agreement.
These releases and waivers include, but are not limited to, charges,
causes of action, complaints, claims, liabilities and damages under Title VII of
the Civil Rights Act of 1954, the Civil Rights Act of 1991, the Age
Discrimination in Employment Act, the Employee Retirement Income Security Act of
1974, the Americans with Disabilities Act, the Rehabilitation Act of 1973, the
Equal Pay Act, the False Claims Act, the Civil Rights Act of 1966, the Fair
Labor Standards Act, the Occupational Safety and Health Act, the Family and
Medical Leave Act, the Texas Commission on Human Rights Act, the Texas Payday
Law, the Texas Workers' Compensation Act, any causes of action or claims arising
under analogous state laws or local ordinances or regulations, any common law
principle or public policy, including all suits in tort or contract, or under
the Company's personnel policies or any contract of employment that may exist
between Employee and the Company.
Employee knowingly and voluntarily waives any existing rights he may
have pursuant to the Age Discrimination in Employment Act of 1967 and the Older
Workers Benefit Protection Act. Further, Employee acknowledges the receipt of
good and valuable consideration set forth in this Agreement in exchange for this
waiver of potential claims.
In consideration of the promises made in this Agreement, the Company,
on behalf of themselves, their affiliates, trustees, agents, servants, attorneys
and employees, their predecessors, successors, assigns, and insurers,
irrevocably unconditionally and fully RELEASES, ACQUITS, and FOREVER DISCHARGES
Employee and each of his past and present affiliates, partners, and
representatives, their predecessors, successors, assigns and insurers, from ANY
and ALL charges, causes of action, complaints, claims, liabilities, damages,
costs, obligations, debts and expenses (including attorney's fees and costs
actually accrued), of any nature whatsoever (excluding felonious act), whether
known or unknown, suspected or unsuspected, including, without limitation, any
rights arising out of: alleged violations of any contract, express or implied,
written or verbal; any covenant of good faith and fair dealing, express or
implied; any tort; any federal, state or other governmental statute, regulation,
or ordinance; Employee's employment or separation from employment with CT;
Employee's service as an officer of CT; or any other matter related to his
association with the Company. Notwithstanding the foregoing, nothing herein
shall constitute a release of Employee from any charges, causes of action,
complaints, claims, liabilities, damages, costs, obligations, debts and expenses
(including reasonable attorney's fees and costs actually accrued), that may
arise after the Resignation Date relating to Employee's service as a consultant
to CT pursuant to Section 5 or relating to the Employee's obligations under this
Agreement.
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It is expressly agreed and understood by Employee and the Company that
this Agreement is a general release.
The Company shall indemnify and hold harmless the Employee in respect
of acts or omissions as an officer, employee or consultant occurring up to and
including the Resignation Date and the end of the consultant period pursuant to
Section 5, to the same extent and with the same limitations as if he was an
officer of the Company to the fullest extent permitted by the Delaware General
Corporation Law, as amended, and the Company's certificate of incorporation and
bylaws in effect on the date of this Agreement.
10. PROMISE NOT TO SUE. Employee represents that Employee, and to
Employee's knowledge Employee's affiliates, partners, attorneys, accountants,
trustees agents, servants and representatives, have not heretofore filed any
charges or complaints against the Company, their respective parents,
subsidiaries, affiliates, divisions, partners, shareholders, officers,
directors, attorneys, accountants, trustees, agents, servants, employees or
representatives, with any federal, state or local governmental agencies.
Employee agrees, in consideration of the promises made by the Company in this
Agreement, that Employee will not file or cause to be filed, either directly or
indirectly, any charges, causes of action, complaints, or claims against the
Company, their respective parents, subsidiaries, affiliates, divisions,
partners, shareholders, officers, directors, attorneys, accountants, trustees,
agents, servants, employees or representatives, based on Employee's employment
or association with the Company or Employee's severance therefrom (other than
based on a breach of this Agreement).
In consideration of the promises made by the Company in this Agreement,
Employee further promises and agrees never to voluntarily join in, or commence
any action, or proceeding on behalf of himself, or any other person, or entity
before any court, administrative agency, or other forum against the Company,
pertaining in any way to or arising out of his employment or association with
the Company, his resignation or employment, or any other event that occurs on
or before the Resignation Date, except as may be necessary to enforce: (a) this
Agreement; (b) Employee's rights under state worker's compensation laws (for
occupational illness or injury only) or unemployment compensation laws; or (c)
Employee's rights under the Company's medical or dental benefit plans.
Further, Employee agrees to withdraw with prejudice any previously
filed charges or suits arising out of his employment or association with or
resignation from the Company. Employee further agrees not to actively or
materially encourage or aid any person in contemplating, filing, or prosecuting
any action or proceeding against the Company in any way related to matters that
occur during the course of Employee's employment or association with the Company
prior to the Resignation Date, except to the extent the Employee is required to
do so by court, regulatory agency or similar order.
The Company represents that it, and to the Company's knowledge their
respective affiliates, partners, attorneys, accountants, trustees agents,
servants and representatives, have not heretofore filed any charges or
complaints against Employee, his affiliates, partners, attorneys, accountants,
trustees, agents, servants, employees or representatives, with any federal,
state or local governmental agencies. The Company agrees, in consideration of
the promises made by Employee in this Agreement, that it will not file, or cause
to be filed, either directly or indirectly, any charges, causes of action,
complaints, or claims against Employee, his affiliates, partners, attorneys,
accountants, trustees, agents, servants, employees or representatives, based on
Employee's employment or association with the Company or Employee's severance
therefrom.
In consideration of the promises made by Employee in this Agreement,
the Company further promises and agrees never to voluntarily join in, or
commence any action, or proceeding on behalf of itself, or any other person, or
entity before any court, administrative agency, or other forum against Employee,
pertaining in any way to or arising out of Employee's employment or association
with the Company, his resignation of employment, or any other event that occurs
on or before the Resignation Date, except as may be necessary to enforce this
Agreement.
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Further, the Company agrees to withdraw with prejudice any previously
filed charges or suits arising out of Employee's employment or association with
or resignation from the Company. The Company further agrees not to actively or
materially encourage or aid any person in contemplating, filing, or prosecuting
any action or proceeding against Employee in any way related to matters that
occur during the course of Employee's employment or association with the Company
prior to the Resignation Date.
11. NO ADMISSION. Each of Employee and the Company understands and
acknowledges that by entering into this Agreement, neither of Employee or the
Company admits to any unlawful conduct or wrongdoing in connection with
Employee's employment with CT or association with the Company or the termination
thereof.
12. REMEDIES FOR BREACH. Notwithstanding Section 19 of this Agreement,
each of the Company and Employee hereby acknowledges that a violation or
attempted violation of any of the covenants contained in Sections 6, 7 and 8 of
this Agreement will cause irreparable damage to the other parties, and
accordingly each party agrees that the other parties shall be entitled as a
matter of right to an injunction, out of any court of competent jurisdiction,
restraining any violation or further violation of such agreements by the
violating party or any employees, partners or agents of the violating party;
such right to an injunction, however, shall be cumulative and in addition to
whatever other remedies the injured party may have.
13. NATURE OF THE AGREEMENT. This Agreement and all its provisions are
contractual, not mere recitals, and shall continue in permanent force and
effect, unless revoked as provided herein. In the event that any portion of this
Agreement is found to be unenforceable for any reason whatsoever, the
unenforceable provision shall be severed and the remainder of the Agreement
shall continue in full force and effect. This Agreement is intended to create
obligations only between the parties, there are no third party beneficiaries
under this Agreement, except for How2.
14. ADVICE OF COUNSEL. The Company has advised Employee to seek the
advice of legal counsel prior to signing this Agreement, and the Employee
acknowledges that he has had the opportunity to seek counsel in connection with
this Agreement and his separation from the Company. The parties hereto
acknowledge, warrant and represent that (a) they have relied solely on their own
judgment and that of their attorneys and representatives regarding the
consideration for, and the terms of this Agreement, (b) they have been given a
reasonable period to consider this Agreement, (c) they have read and understand
the Agreement, (d) they understand that it includes a general release of claims
against each other, and (e) no statements made by the other have in any way
coerced or unduly influenced the execution of this Agreement. Employee
acknowledges that counsel represents the Company in connection with the
negotiation and preparation of this Agreement and that he has been advised by
counsel to the Company and the Company's management to obtain independent legal
counsel regarding the legal, tax and other consequences of this Agreement.
Furthermore, Employee acknowledges that in accordance with the Age
Discrimination in Employment Act and the Older Workers Benefit Protection Act,
he has been given the opportunity to review this Agreement for at least
twenty-one (21) days and if Employee executes this Agreement prior to the end of
such twenty-one (21) day period, Employee knowingly and voluntarily waives any
rights he may have with respect thereto. The Company further advises Employee
that in accordance with the Age Discrimination in Employment Act and the Older
Workers Benefit Protection Act, he has seven (7) days after execution of this
Agreement to revoke this Agreement.
15. ATTORNEY'S FEES. Each party shall be responsible for his or its own
expenses, including attorney's fees incurred in connection with the negotiation,
preparation and execution of this Agreement.
16. NOTICES. Any notice, demand or request required or permitted to be
given or made under this Agreement shall be in writing and shall be deemed given
or made when delivered in person, when sent
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15. ATTORNEY'S FEES. Each party shall be responsible for his or its own
expenses, including attorney's fees incurred in connection with the negotiation,
preparation and execution of this Agreement.
16. NOTICES. Any notice, demand or request required or permitted to be
given or made under this Agreement shall be in writing and shall be deemed given
or made when delivered in person, when sent by United States registered or
certified mail, postage prepaid, or when faxed to a party at its address or
facsimile number specified below:
If to the Company:
CT Technology, Inc.
3811 Turtle Creek Blvd., Suite 770
Dallas, Texas 75219
Facsimile number: (214) 520-0034
Attention: Steven B. Solomon
With a copy to:
How2.com, Inc.
Legal Department
3811 Turtle Creek Blvd., Suite 600
Dallas, Texas 75219
Facsimile number: (214) 520-0034
If to Employee:
Richard L. Travis, Jr.
7067 Inwood Lane
Dallas, Texas 75209
Facsimile number: (214) 902-2282 (must call prior to submission)
The parties to this Agreement may change their addresses for notice in
the manner provided above.
17. COUNTERPARTS AND PHOTOCOPIES. This Agreement may be executed in
counterparts and each executed counterpart shall be as effective as a signed
original. Photographic copies of such signed counterparts may be used in lieu of
the originals for any purpose.
18. PARAGRAPH TITLES NOT BINDING. The use of section titles in this
Agreement is for ease of reference only. Such titles are not to be considered
terms of this Agreement.
19. GOVERNING LAW; ARBITRATION.
(a) THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED
BY THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS
OF LAW.
(b) The matters, claims, rights, and obligations subject to these
arbitration provisions include all rights, claims and obligations arising out of
or relating to this Agreement or to the Employee's employment and/or
resignation, including, without limitation, any and all claims, rights or causes
of action which may ever arise or be asserted under any federal, state, local or
foreign statutory, regulatory or common law, and including, without limitation,
claims of discrimination under Title VII of the Civil Rights of 1964, Age
Discrimination in Employment Act, the Americans with Disabilities Act, the Civil
Rights Act of 1991 and
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Notice") and to the American Arbitration Association ("AAA"), 13455 Noel Road,
Suite 1750, Two Galleria Plaza, Dallas, Texas 75240, telephone (972) 702-8222,
the controversy or dispute shall be submitted to a sole arbitrator who is
independent and impartial, for binding arbitration in Dallas, Texas, in
accordance with AAA's National Rules for the Resolution of Employment Disputes
(the "Rules") as modified or supplemented hereby. The parties agree that they
will faithfully observe this Agreement to arbitrate and the Rules and that they
will abide by and perform any award rendered by the arbitrator. The arbitration
shall be governed by the Federal Arbitration Act, 9 U.S.C. Section 1-16 (or by
the same principles enunciated by such Act in the event it may not be
technically applicable). The award or judgment of the arbitrator shall be final
and binding on all parties (and their successors and permitted assignees) and
judgment upon the award rendered by the arbitrator may be entered and enforced
by any court having jurisdiction thereof. If any party becomes the subject of a
bankruptcy, receivership or other similar proceeding under the laws of the
United States of America, any state or commonwealth or any other national or
political subdivision thereof; then, to the extent permitted or not prohibited
by applicable law, any factual or substantive legal issues arising in or during
the pendency of any such proceeding shall be subject to all of the foregoing
mandatory mediation and arbitration provisions and shall be resolved in
accordance therewith. The agreements contained herein have been given for
valuable consideration, are coupled with an interest and are not intended to be
executory contracts. The fees and expenses of the arbitrator will be shared
equitably (as determined by the arbitrator) by all parties engaged in the
dispute or controversy.
(c) Promptly after the Arbitration Notice is given, AAA will select
five possible arbitrators, to whom AAA will give the identities of the parties
and the general nature of the controversy. If any of those arbitrators
disqualifies himself or declines to serve, AAA shall continue to designate
potential arbitrators until the parties have five to select from. After the
panel of five potential arbitrators has been completed, a two-page summary of
the background of each of the potential arbitrators will be given to each of the
parties, and the parties will have a period of 10 days after receiving the
summaries in which to attempt to agree upon the arbitrator to conduct the
arbitration. If the parties are unable to agree upon an arbitrator, then one of
the parties shall notify AAA and the other party, and AAA will notify each party
that it has five days from the AAA notice to strike two names from the list and
advise AAA of the two names stricken. After expiration of the strike period, if
all but one candidate has been stricken, the remaining one will be the
arbitrator, but, if two or more have not been stricken, AAA shall select the
arbitrator from one of those not stricken. The decision of AAA with respect to
the selection of the arbitrator will be final and binding in such case.
(d) Unless and only to the extent mandatory arbitration is validly
prohibited or limited by applicable statute or regulation, no litigation or
other proceeding may ever be instituted at any time in any court or before any
administrative agency or body for the purpose of adjudicating, interpreting or
enforcing any of the rights, duties, liabilities or obligations of the parties
hereto or any rights, duties, liabilities or obligations relating to any Subject
Claim, whether or not covered by the express terms of this Agreement, or for the
purpose of adjudicating a breach or determination of the validity of this
Agreement, or for the purpose of appealing any decision of an arbitrator, except
a proceeding instituted (i) for the purpose of having the award or judgment of
an arbitrator entered and enforced or (ii) to seek an injunction or restraining
order (but not damages in connection therewith) in circumstances where such
relief is available. Unless and only to the extent a limitation of damages is
validly prohibited or limited by applicable statute or regulation, no punitive,
exemplary or consequential damages may ever be awarded by the arbitrator or
anyone else, and each of the parties hereby waives any and all rights to make,
claim or recover any such damages.
(e) The arbitration and any discovery conducted in connection therewith
will be conducted in accordance with the Rules in effect at the time of the
arbitration, including without limitation the expedited procedures set forth
therein. The arbitration hearing will commence no later than 60 days after the
arbitrator is selected. The arbitrator will render a decision no later than 30
days after the close of the hearing, in accordance with Rules.
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20. DEATH OF EMPLOYEE. In the event Employee should die before all of
the payments referred to in Section 4 are paid, the Company shall continue to
make such payments to Employee's designated beneficiaries or if there are no
such designated beneficiaries, to the Employee's estate.
21. ASSIGNMENT. The obligations and duties of the parties set forth in
this Agreement may not be assigned or delegated; provided, however, that nothing
in this Agreement shall preclude the Company from consolidating or merging with,
or transferring all or substantially all of its assets to, another corporation,
person or entity ("Entity"). Upon such a consolidation, merger or transfer of
assets, the term "Company" shall mean such other Entity or Entities that the
Company consolidates or merges into or with, or transfers all or substantially
all of the assets of the Company to, and in any such event, the Entity or
Entities shall be bound and automatically assume, without any specific action on
the part of the Entity or Entities, this Agreement and all obligations and
undertakings of the Company set forth in this Agreement, and this Agreement
shall continue in full force and effect, including, but not limited to, the
obligation of the Company to make the payments set forth in Section 4. The
obligations and duties of Employee hereunder shall be personal and not
assignable or delegable by the Employee in any manner whatsoever.
Notwithstanding the foregoing, the Company in its sole discretion shall have the
right to assign its rights under Sections 6, 7 and 8 of this Agreement to any
Entity or Entities which may purchase any part or all of the Company's business
(whether by asset purchase, stock sale, merger or otherwise).
22. ENTIRE AGREEMENT. This Agreement constitutes the entire and
exclusive statement of the agreement between the parties with respect to its
subject matter, and there are no oral or written representations, understandings
or agreements relating to this Agreement which are not fully expressed herein.
The parties agree that any other terms or conditions included in written or
verbal exchanges or representations made by the parties shall not be
incorporated herein or be binding unless expressly agreed upon in writing by
authorized representatives of the parties subsequent to the date hereof.
23. ACCELERATION OF HOW2 OPTIONS; REGISTRATION RIGHTS AND LOCKUP. In
consideration for the benefits to CT and How2 under this Agreement, How2 agrees
that the vesting date for Employee's options to purchase up to 60,000 post-split
shares of How2 common stock shall be accelerated to the Resignation Date and
such options shall remain exercisable for a period of two years as long as
Employee is not in breach under this Agreement (notwithstanding anything to the
contrary in the option agreement). In addition, in order to secure the payment
obligations of CT under Section 4(i) of this Agreement, How2 agrees that that
the vesting date for Employee's options to purchase up to an additional 3,000
post-split shares of How2 common stock shall be accelerated to the date of any
payment not made as required pursuant to Section 4(i) by CT, and such options
shall remain exercisable for a period of two years as long as Employee is not in
breach under this Agreement (notwithstanding anything to the contrary in the
option agreement). The Employee's option to purchase the remaining 51,000
post-split shares of How2 common stock shall terminate as of the Resignation
Date, and the Employee's option to purchase the remaining 9,000 post-split
shares of How2 common stock shall terminate with respect to 3,000 shares as of
the date each of the required payments are actually made by CT. The remaining
terms and conditions of Employee's options shall remain the same.
How2 agrees to provide written notice to the Employee of How2's
intention to file a registration statement with the Commission (other than a
registration statement on Form S-4) in connection with a public offering
involving How2's Common Stock (other than How2's initial public offering). If
the Employee desires to elect to sell shares underlying his options ("Restricted
Securities") in connection with the registration statement, the Employee shall
provide written notice to How2, within five days of transmission by How2 of the
aforesaid written notice, of his intention to sell all or any multiple of 20% of
his original Restricted Securities. How2 shall use its best efforts to include
such Restricted Securities requested by the Employee in such registration
statement (subject to the lock up and underwriter cutback provisions of this
Section), to the extent requisite to permit the public offering and sale of the
Restricted Securities, and will
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use its reasonable efforts to cause such registration statement to become
effective as promptly as practicable. In the event the managing underwriter or
underwriters of the proposed offering advises How2 that the success of the
offering would be materially and adversely affected by the inclusion of the
shares requested to be included, then the number of shares to be included for
any persons other than How2 shall be reduced or limited (i) as between the
selling shareholders and How2, in the sole and absolute discretion of the Board
of Directors of How2, and (ii) as between the selling shareholders, pro rata
based upon the total number of shares held by such shareholders on a fully
diluted basis. As used herein, the "Restricted Securities" shall not include
Shares that have been previously sold or that may be resold pursuant to Rule 144
promulgated under the Act or other available exemption. The Employee hereby
agrees not to sell any of the shares if requested by the managing underwriter or
underwriters of a proposed offering, and agrees to enter into "lock up" or
similar agreements if requested by the managing underwriter or underwriters of a
proposed offering, for a period of up to 180 days following such offering.
Notwithstanding the foregoing, How2 shall in no event be required to keep any
such registration or qualification in effect for a period in excess of 90 days
or after two years from the date on which the Employee purchased such Restricted
Securities. In connection with registration of securities pursuant to this
Section, Employee shall pay all fees and expenses with respect to his shares,
including the proportionate part, based upon the number of Employee's shares
sold in relation to all shares to be sold, of broker/dealer commissions,
underwriting discounts, and fees and disbursements of counsel of Employee and
any stock transfer taxes incurred with respect of the Restricted Securities of
Employee. How2 shall bear all other expenses incurred in connection with such
registration statement, including SEC filing fees.
Notwithstanding the foregoing, the Employee agrees that, for a period
of 180 days from the date of the prospectus as first filed with the Securities
and Exchange Commission ("SEC") pursuant to Rule 424(b) of its rules and
regulations in connection with How2's proposed initial public offering (the
"IPO"), the Employee will not, without the prior written consent of the managing
underwriter of the IPO, offer, pledge, sell, contract to sell, grant any option
for the sale of, or otherwise dispose of (or announce any offer, pledge, sale,
grant of any option to purchase or other disposition), directly or indirectly,
any shares of How2 Common Stock or securities convertible into, or exercisable
or exchangeable for, shares of How2 Common Stock.
The Employee acknowledges that the proposed IPO will benefit all of the
shareholders and option holders of How2, including the Employee. It is
understood that this Agreement is provided as an inducement to, and may be
relied upon by, How2 and the underwriters in connection with the IPO. The
provisions of this Agreement shall be binding upon the undersigned and the
successors, assigns, executors, heirs, and personal representatives of the
Employee.
24. NONDISPARAGEMENT. Employee, his employees, affiliates, trustees,
agents, confederates, and servants shall immediately and permanently refrain
from disseminating to the public or any third party any disparaging or otherwise
negative statements, remarks, or comments, whether direct or indirect, literal
or implied, true or untrue, regarding the Company, their respective directors,
officers, employees, servants, trustees, representatives, shareholders,
attorneys, accountants, agents, confederates, subsidiaries, parents, and
affiliates, their successors, assigns and insurers, or any products or services
provided thereby wherever located.
The Company, their respective directors, officers, employees, servants,
agents, confederates, trustees, representatives, subsidiaries, and affiliates
shall immediately and permanently refrain from disseminating to the public or
any third-party any disparaging or otherwise negative statements, remarks, or
comments, whether direct or indirect, literal or implied, true or untrue,
regarding Employee, his employees, servants, agents, trustees, representatives,
shareholders, attorneys, accountants, confederates, and affiliates, or any
products or services provided thereby wherever located.
25. REPRESENTATIONS. Employee represents that he is unaware of any
prior or impending, actual or potential, violations of municipal, county, state,
federal, or foreign laws, rules, or regulations by the Company or
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their respective directors, officers, employees, servants, agents, confederates,
trustees, representatives, subsidiaries, and affiliates, which are or may be
based, either in whole or in part, upon the actions or failures to act of
Employee. Employee further represents that he is unaware of any prior or
impending, actual or potential, charges, causes of action, complaints, claims,
liabilities, obligations, debts and expenses to which the Company or their
respective directors, officers, employees, servants, agents, confederates,
trustees, representatives, subsidiaries and affiliates may be subject or may
have rights, and which are or may be based, either in whole or in part, upon the
actions or failures to act of Employee.
PLEASE READ THIS AGREEMENT CAREFULLY. IT CONTAINS A RELEASE OF ALL
KNOWN AND UNKNOWN CLAIMS.
THE UNDERSIGNED ACKNOWLEDGE THAT WE HAVE CAREFULLY READ THE FOREGOING
AGREEMENT, THAT WE UNDERSTAND ALL OF ITS TERMS, AND THAT WE ARE ENTERING INTO IT
VOLUNTARILY.
Executed at Dallas, Texas by Employee, acting in his individual capacity,
and by an authorized representative of the Company as of the date first stated
above.
CT HOLDINGS, INC.
(formerly Citadel Technology, Inc.)
By: /s/ STEVE B. SOLOMON
------------------------------------------
Steve B. Solomon, Chief Executive Officer
/s/ RICHARD L. TRAVIS, JR.
---------------------------------------------
Richard L. Travis, Jr.
For purposes only of Section 23 of this
Agreement:
HOW2.COM, INC.
By: /s/ STEVE B. SOLOMON
------------------------------------------
Steve B. Solomon, Chief Executive Officer
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EXHIBIT 10.19
SEVERANCE AND RELEASE AGREEMENT
This Severance and Release Agreement (this "Agreement") is made and
entered into effective as of March 1, 2000 by and among Bennett Klein, a
resident of the State of Texas ("Employee"), and CT. Holdings, Inc., a Delaware
corporation ("CT").
RECITALS
Employee is presently employed by CT and serves as an officer of CT.
The continuation of the employment and officer relationships is no longer
desired by Employee or CT.
Employee and CT mutually wish to fully and finally resolve any
potential or existing disputes arising out of the employment and other
relationships among Employee and CT.
Employee agrees and acknowledges that CT has special expertise in its
businesses that has enabled it to provide unique career opportunities for its
employees, and its growth depends, to a significant degree, on its possession of
certain information that may not be available to its competitors concerning a
number of matters, including, but not limited to, the computer security software
business. To obtain such information and use it successfully, CT has made
significant investments in research, business development, quality assurance,
customer satisfaction methods and techniques, manufacturing and business process
improvements and other developments in marketing methods and providing services
to their customers.
Employee agrees and acknowledges that a covenant not to compete and a
restriction on disclosure of confidential information is essential to the
continued growth and stability of CT's businesses and to the continuing
viability of such businesses as expressly permitted under the terms and
limitations of this Agreement.
NOW, THEREFORE, in consideration of the mutual acts, payments and
promises described and agreed to be performed herein, Employee and CT agree as
follows:
1. RESIGNATION. Employee hereby tenders his resignation from all
positions that he holds with CT and its subsidiaries and affiliates, which will
be effective on March 1, 2000 (such date being referred to as the "Resignation
Date"). CT accepts Employee's resignations as of the Resignation Date.
2. SEVERANCE FROM EMPLOYMENT AND TERMINATION OF EMPLOYMENT AGREEMENT.
It is understood and agreed that with the full and complete agreement of
Employee, Employee's employment by, and status as an officer of, CT will cease
as of the Resignation Date. Except as otherwise expressly provided for herein,
as of the Resignation Date, Employee shall cease to accrue any rights under any
pension or compensation plan of CT (including, without limitation, any stock
option plan, grant or agreement, except as set forth in this Agreement). CT and
Employee further agree that the Employment Agreement dated as of January 5,
1998, between CT and Employee (the "Employment Agreement") shall be terminated
in all respects effective as of the Resignation Date, and the parties shall have
no further obligations or liabilities arising under or related to the Employment
Agreement or any other oral or written agreement between CT and Employee, except
as set forth in this Agreement.
3. PAYMENT OF WAGES AND EARNED BENEFITS. Employee will be paid all
wages, vacation and sick pay to which Employee is entitled as of the Resignation
Date, and further acknowledges that he will be fully paid for all hours worked
with the exception of outstanding expense reimbursements and other payments set
forth below. Until the Resignation Date, CT will continue to pay Employee at his
annualized salary level, payable in accordance with CT's standard payroll
practices. Employee will be entitled to medical and dental benefits on the same
terms and conditions as provided to Employee immediately prior to
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the Resignation Date through March 31, 2000. Beginning April 1, 2000, Employee
shall have the option to elect up to eighteen (18) months of continuation
coverage under the Employer's group health care plan, at Employee's expense, as
provided by COBRA.
4. PAYMENTS TO EMPLOYEE. Pursuant to the terms of the Employment
Agreement, Employee was granted the option to purchase 300,000 shares of CT
common stock. Employee and CT acknowledge that as of the Resignation Date
216,658 of such shares have vested. In consideration of this Agreement
(including, without limitation, the covenants and agreements made in Sections 6,
7 and 8), CT shall accelerate the vesting of the remaining options to purchase
up to 83,342 shares of CT common stock and shall waive the exercise price of
such options. Such certificate shall be delivered to Employee within fifteen
days of the Resignation Date.
5. CONSULTING ARRANGEMENT. Notwithstanding the mutual agreement to
terminate Employee's employment with CT provided for pursuant to the terms of
this Agreement, Employee agrees to cooperate with and assist CT in its efforts
to license its technology and or sale its technology or assets. This cooperation
will be limited to assisting in leads or contacts.
6. NON-COMPETITION AGREEMENT. Employee understands that during the
course of his employment by CT, Employee has had access to and the benefit of
the information referred to in the Recitals above, and represented CT and
developed contacts and relationships with other persons and entities on behalf
of CT, including but not limited to customers, potential customers and other
employees of CT. To protect CT's interest in this information and in these
contacts and relationships and in consideration of the promises made by CT in
this Agreement, Employee agrees and covenants that for a period beginning on the
Resignation Date and ending on the third anniversary of the Resignation Date,
without the prior written approval of CT, Employee will not, in connection with
any business that is engaged in, or is about to be engaged in, by CT as of the
date of execution of this Agreement, directly or indirectly, either as an
individual or as an employee, partner, officer, director, shareholder, advisor,
or consultant or in any other capacity whatsoever, of any person (other than the
ownership of less than 5% of the issued and outstanding securities of an
entity): (a) recruit, hire, assist others in recruiting or hiring, discuss
employment with, or refer to others for employment any person who is, or within
the twelve month period immediately preceding the date of any such activity was,
an employee of CT or its affiliates; or (b) conduct or assist others in
conducting any business or activity that competes directly with CT's current
products in the United States, or its territories or possessions or Mexico, the
United Kingdom, France or Japan.
Employee understands and agrees that the scope of the foregoing
covenant is reasonable as to time, area and persons and is necessary to protect
the legitimate business interests of CT and its affiliates. Employee further
agrees that such covenant will be regarded as divisible and will be operative as
to time, area and persons to the extent that it may be so operative, and if any
part of such covenant is declared invalid, unenforceable, or void as to time,
area or persons, the validity and enforceability of the remainder will not be
affected.
If Employee violates the restrictive covenants of this Section 6 and CT
brings legal action for injunctive or other relief, CT shall not be deprived of
the benefit of the full period of the restrictive covenant as a result of the
time involved in obtaining the relief in the event CT is successful in its
actions. Accordingly, Employee agrees that the regularly scheduled expiration
date of such covenant shall be extended by the same amount of time that Employee
is determined to have violated such covenant.
7. CONFIDENTIALITY. Employee acknowledges that he has learned
Confidential Information (as defined below) relating to the business of CT, its
subsidiaries and affiliates. In consideration of the promises made in this
Agreement by CT, Employee agrees that he will not disclose or use or authorize
any third party to disclose or use any such Confidential Information, without
prior written approval of CT. As used in this Section 7, "Confidential
Information" shall mean information disclosed to or known to Employee as a
direct
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or indirect consequence of or through his employment with CT, about the business
of CT, its subsidiaries and affiliates, CT's methods, business plans,
operations, products, processes and services, including, but not limited to,
information relating to research, development, inventions, recommendations,
programs, systems, and systems analyses, flow charts, finances, and financial
statements, marketing plans and strategies, merchandising, pricing strategies,
merchandise sources, client sources, system designs, procedure manuals,
automated data programs, financing methods, financial projections, terms and
conditions of arrangements of any business, computer software, terms and
conditions of business arrangements with clients or suppliers, reports, supply
and services resources, names and addresses of clients, CT's contacts, names of
professional advisors, and all other information pertaining to clients and
suppliers of CT's business, including, but not limited to, assets, business
interests, personal data and all other information pertaining to CT's business,
clients or suppliers whatsoever, including all accompanying documentation
therefor. All information disclosed to Employee, or to which Employee had access
or will have access during the period of his employment with or consulting for
CT, for which there is any reasonable basis to be believed is, or which appears
to be treated by CT as Confidential Information, shall be presumed to be
Confidential Information hereunder. Confidential Information shall not, however,
include information that (a) is publicly known or becomes publicly known through
no fault of Employee, or (b) is generally or readily obtainable by the public,
or (c) constitutes general skills, knowledge and experience acquired by Employee
during his employment with CT. This provision shall terminate with respect to a
particular portion of the Confidential Information when (i) (a) it enters the
public domain through no fault of Employee, (b) it is in Employee's possession
free of any confidentiality obligation, or (c) it was developed independently of
and without reference to any Confidential Information or other information
disclosed in confidence to any third party; or (ii) when it is communicated to a
third party free of any confidentiality obligation; or (iii) in any event, three
years after communication.
Employee agrees that all documents of any nature pertaining to
activities of CT, or that include any Confidential Information, in his
possession now or at any time during the term of his employment with or
consulting for CT, including without limitation, memoranda, notebooks, notes,
data sheets, records and computer programs, are and shall be the property of
such entity. All copies of such Confidential Information in Employee's
possession shall be surrendered to the appropriate entity on the Resignation
Date and upon termination of his consulting services to CT, as applicable.
8. INVENTIONS AND DEVELOPMENTS. Employee represents and warrants that
he has notified CT of all discoveries, inventions, innovations, improvements,
and copyrightable or potentially copyrightable works which are related to the
business of CT, its subsidiaries and affiliates (collectively called
"Developments") and are conceived or developed, either in whole or in part, by
Employee during the term of Employee's employment with or consulting for CT.
Developments shall include, without limitation, any or all intellectual
properties related to the business of CT, its subsidiaries and affiliates. All
Developments, including but not limited to all written documents pertaining
thereto, shall be the exclusive property of CT and shall be considered
Confidential Information subject to the terms of this Agreement.
Employee hereby assigns to CT all of Employee's rights, title and
interest in and to the property described below and relating to the business of
CT, its subsidiaries and affiliates that has been, is, or is about to be engaged
in by CT, its subsidiaries and affiliates, if any, whether now owned or
hereafter arising or acquired (collectively the "Intellectual Property"),
including:
(a) All patents issued by the United States, any other country, or any
political subdivisions thereof ("Patents"), all registrations and recordings
thereof ("Patent Registrations"), and all applications for patents of the United
States, any other country, or any political subdivisions thereof ("Patent
Applications"), including, without limitation, all provisional patent
applications and all reissues, divisionals, continuations, continuations-in-part
or extensions of any Patent, Patent Registration, or Patent Application, and any
license or other agreement now in existence granting to Employee any right to
use or practice any invention, and any other proprietary and confidential
information, inventions (whether patented or patentable or not), technical
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information, procedures, designs, drawings, know-how, software databases, data,
expertise, processes, models, materials, and royalty payments;
(b) All trademarks, trade names, corporate names, company marks,
business names, fictitious business names, trade dress, trade styles, service
marks, logos, other source or business identifiers, prints and labels on which
any of the foregoing have appeared or appear, designs and general intangibles of
like nature ("Trademarks"), all registrations and recordings thereof ("Trademark
Registrations"), and all applications in connection therewith ("Trademark
Applications"), including, without limitation, Trademark Registrations and
Applications in the United States, any other country, or any political
subdivision thereof, including, without limitation, all reissues, extensions or
renewals thereof, and any license or other agreement now in existence granting
to Employee any right to use any of the foregoing, all rights in Intellectual
Property, logos, trade names, service marks, trade secrets, permits and licenses
and the goodwill of the business associated therewith;
(c) All copyrights (including, without limitation, copyrights for
computer programs and data bases) and all tangible property embodying any
copyright, and all applications, permits, licenses and sublicenses and other
rights in connection therewith, and all registrations and recordations thereof,
and all reissues, extensions, and renewals thereof;
(d) All domain names and all rights of access, control, and programming
thereto; and Employee shall cooperate in transferring: (1) the administrative
and billing contacts for said domain names to the designee of CT's choice and
shall execute all papers required by Network Solutions for such transfer; and
(2) all passwords or other requirements necessary to control, program, or
otherwise modify or access websites associated with said domain names; and
(e) All general intangibles of every nature, including, without
limitation, all trade secrets, all rights of actions accrued and to accrue under
and by virtue thereof, including the right to sue and recover for past
infringement of any Intellectual Property or other right, books, correspondence,
customer listings, licenses, permits, records, and other papers and documents in
the possession or control of Employee, claims, choses in action, judgments, all
rights under all contracts and agreements, all amounts received as an award in
or settlement of a suit in damages, cash, deposit accounts, interest in joint
ventures or general or limited partnerships and in any event, all general
intangibles within the meaning of the Uniform Commercial Code in effect in any
applicable jurisdiction.
Employee agrees that within seven (7) days of any request from CT, he
shall execute all requested assignments and conveyances necessary to vest in CT
any and all rights, title and interest that he may hold in and to the
Intellectual Property. Employee agrees that when appropriate, and upon written
request of CT Employee will acknowledge that Developments and Intellectual
Property are "works for hire," and will sign documentation reasonably necessary
to evidence ownership of Developments and Intellectual Property in CT. Employee
agrees to cooperate fully with CT, at the expense of CT, in connection with the
preparation, filing, and prosecution of any and all Trademark Applications,
Patent Applications, and copyright registration applications, whether previously
or hereinafter filed, in any country, with regard to any or all Developments and
Intellectual Property. Employee agrees to cooperate fully with CT, at the
expense of CT, in connection with the maintenance and retention by CT of any and
all Trademark Registrations, Patent Registrations, copyright registrations, and
domain name registrations, whether now owned by CT or hereinafter acquired, in
any country, with regard to any or all Developments and Intellectual Property.
Employee further agrees to cooperate with and assist CT at the expense of CT in
the prosecution or defense of any litigation involving any Intellectual Property
claimed by CT, including providing truthful testimony as a witness upon
reasonable request.
All costs of documentation, recordation or transfer of title related to
the assignment of this Section 8 shall be borne by CT. Employee shall execute
all appropriate documents reasonably required to effectuate
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the assignment of this Section 8 in a timely manner, so long as said documents
are consistent with the terms of this Agreement.
9. COMPLETE RELEASES. In consideration of the promises made in this
Agreement, Employee, on behalf of himself, his affiliates, trustees, agents, and
servants, their predecessors, successors, heirs, assigns and insurers (or anyone
claiming through any such individuals), irrevocably, unconditionally and fully
RELEASES, ACQUITS, and FOREVER DISCHARGES CT and its past and present parents,
subsidiaries, divisions, affiliates, partners, shareholders, directors,
officers, attorneys, accountants, trustees, agents, servants, employees and
representatives, their predecessors, successors, assigns and insurers, from ANY
and ALL charges, causes of action, complaints, claims, liabilities, damages,
costs, obligations, debts and expenses (including attorney's fees and costs
actually incurred), of any nature whatsoever (excluding any felonious acts),
whether known or unknown, suspected or unsuspected, including, without
limitation, any rights arising out of: alleged violations of any contract,
express or implied, written or verbal; any covenant of good faith and fair
dealing, express or implied; any tort; any legal restrictions on the right of CT
to terminate, discipline, or otherwise manage employees; any federal, state or
other governmental statute, regulation, or ordinance; Employee's employment or
separation from employment with CT; Employee's service as an officer or director
of CT; or any other matter related to his association with CT. Notwithstanding
the foregoing, nothing herein shall constitute a release of CT from any charges,
causes of action, complaints, claims, liabilities, damages, costs, obligations,
debts and expenses (including attorney's fees and costs actually incurred) that
may arise after the Resignation Date relating to CT's obligations under this
Agreement.
These releases and waivers include, but are not limited to, charges,
causes of action, complaints, claims, liabilities and damages under Title VII of
the Civil Rights Act of 1954, the Civil Rights Act of 1991, the Age
Discrimination in Employment Act, the Employee Retirement Income Security Act of
1974, the Americans with Disabilities Act, the Rehabilitation Act of 1973, the
Equal Pay Act, the False Claims Act, the Civil Rights Act of 1966, the Fair
Labor Standards Act, the Occupational Safety and Health Act, the Family and
Medical Leave Act, the Texas Commission on Human Rights Act, the Texas Payday
Law, the Texas Workers' Compensation Act, any causes of action or claims arising
under analogous state laws or local ordinances or regulations, any common law
principle or public policy, including all suits in tort or contract, or under
CT's personnel policies or any contract of employment that may exist between
Employee and CT.
In consideration of the promises made in this Agreement, CT, on behalf
of itself, its affiliates, trustees, agents, servants, attorneys and employees,
its predecessors, successors, assigns, and insurers, irrevocably unconditionally
and fully RELEASES, ACQUITS, and FOREVER DISCHARGES Employee and each of his
past and present affiliates, partners, and representatives, their predecessors,
successors, assigns and insurers, from ANY and ALL charges, causes of action,
complaints, claims, liabilities, damages, costs, obligations, debts and expenses
(including attorney's fees and costs actually accrued), of any nature whatsoever
(excluding felonious act), whether known or unknown, suspected or unsuspected,
including, without limitation, any rights arising out of: alleged violations of
any contract, express or implied, written or verbal; any covenant of good faith
and fair dealing, express or implied; any tort; any federal, state or other
governmental statute, regulation, or ordinance; Employee's employment or
separation from employment with CT; Employee's service as an officer of CT; or
any other matter related to his association with CT.
It is expressly agreed and understood by Employee and CT that this
Agreement is a general release.
10.
(a) PROMISE NOT TO SUE. Employee represents that Employee, and
to Employee's knowledge Employee's affiliates, partners, attorneys, accountants,
trustees, heirs, agents, servants and representatives (or anyone claiming
through any such individuals), have not heretofore filed any charges or
complaints against CT, their respective parents, subsidiaries, affiliates,
divisions, partners, shareholders,
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officers, directors, attorneys, accountants, trustees, agents, servants,
employees or representatives, with any federal, state or local governmental
agencies. Employee agrees, in consideration of the promises made by CT in this
Agreement, that Employee will not file or cause to be filed, either directly or
indirectly, any charges, causes of action, complaints, or claims against CT,
their respective parents, subsidiaries, affiliates, divisions, partners,
shareholders, officers, directors, attorneys, accountants, trustees, agents,
servants, employees or representatives, based on Employee's employment or
association with CT or Employee's severance therefrom (other than based on a
breach of this Agreement).
In consideration of the promises made by CT in this Agreement, Employee
further promises and agrees never to voluntarily join in, assist, or commence
any action, or proceeding on behalf of himself, or any other person, or entity
before any court, administrative agency, or other forum against CT, pertaining
in any way to or arising out of his employment or association with CT, his
resignation or employment, or any other event that occurs on or before the
Resignation Date, except as may be necessary to enforce: (a) this Agreement; (b)
Employee's rights under state worker's compensation laws (for occupational
illness or injury only) or unemployment compensation laws; or (c) Employee's
rights under CT's medical or dental benefit plans.
Further, Employee agrees to withdraw with prejudice any previously
filed charges or suits arising out of his employment or association with or
resignation from CT. Employee further agrees not to actively or materially
encourage or aid any person in contemplating, filing, or prosecuting any action
or proceeding against CT in any way related to matters that occur during the
course of Employee's employment or association with CT prior to the Resignation
Date, except to the extent Employee is required to do so by court, regulatory
agency or similar order.
CT represents that it, and to CT's knowledge their respective
affiliates, partners, attorneys, accountants, trustees agents, servants and
representatives, have not heretofore filed any charges or complaints against
Employee, his affiliates, partners, attorneys, accountants, trustees, agents,
servants, employees or representatives, with any federal, state or local
governmental agencies. CT agrees, in consideration of the promises made by
Employee in this Agreement, that it will not file, or cause to be filed, either
directly or indirectly, any charges, causes of action, complaints, or claims
against Employee, his affiliates, partners, attorneys, accountants, trustees,
agents, servants, employees or representatives, based on Employee's employment
or association with CT or Employee's severance therefrom.
In consideration of the promises made by Employee in this Agreement, CT
further promises and agrees never to voluntarily join in, or commence any
action, or proceeding on behalf of itself, or any other person, or entity before
any court, administrative agency, or other forum against Employee, pertaining in
any way to or arising out of Employee's employment or association with CT, his
resignation of employment, or any other event that occurs on or before the
Resignation Date, except as may be necessary to enforce this Agreement.
Further, CT agrees to withdraw with prejudice any previously filed
charges or suits arising out of Employee's employment or association with or
resignation from CT. CT further agrees not to actively or materially encourage
or aid any person in contemplating, filing, or prosecuting any action or
proceeding against Employee in any way related to matters that occur during the
course of Employee's employment or association with CT prior to the Resignation
Date.
(b) WAIVER OF ADDITIONAL CLAIMS. Employee hereby agrees to
waive any provisions of state or federal law which might require more detailed
specifications of the claims or at least pursuant to the provisions of Sections
9 & 10(a).
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11. NO ADMISSION. Each of Employee and CT understands and acknowledges
that by entering into this Agreement, neither of Employee or CT admits to any
unlawful conduct or wrongdoing in connection with Employee's employment by or
association with CT or the termination thereof.
12. REMEDIES FOR BREACH. Notwithstanding Section 19 of this Agreement,
each of CT and Employee hereby acknowledges that a violation or attempted
violation of any of the covenants contained in Sections 6, 7 and 8 of this
Agreement will cause irreparable damage to the other parties, and accordingly
each party agrees that the other parties shall be entitled as a matter of right
to an injunction, out of any court of competent jurisdiction, restraining any
violation or further violation of such agreements by the violating party or any
employees, partners or agents of the violating party; such right to an
injunction, however, shall be cumulative and in addition to whatever other
remedies the injured party may have.
13. NATURE OF THE AGREEMENT. This Agreement and all its provisions are
contractual, not mere recitals, and shall continue in permanent force and
effect, unless revoked as provided herein. In the event that any portion of this
Agreement is found to be unenforceable for any reason whatsoever, the
unenforceable provision shall be severed and the remainder of the Agreement
shall continue in full force and effect.
14. ADVICE OF COUNSEL. CT has advised Employee to seek the advice of
legal counsel prior to signing this Agreement, and Employee acknowledges that he
has had the opportunity to seek counsel in connection with this Agreement and
his separation from CT. The parties hereto acknowledge, warrant and represent
that (a) they have relied solely on their own judgment and that of their
attorneys and representatives regarding the consideration for, and the terms of
this Agreement, (b) they have been given a reasonable period to consider this
Agreement, (c) they have read and understand the Agreement, (d) they understand
that it includes a general release of claims against each other, and (e) no
statements made by the other have in any way coerced or unduly influenced the
execution of this Agreement. Employee acknowledges that counsel represents CT in
connection with the negotiation and preparation of this Agreement and that he
has been advised by counsel to CT and CT's management to obtain independent
legal counsel regarding the legal, tax and other consequences of this Agreement.
Furthermore, Employee acknowledges that in accordance with the Age
Discrimination in Employment Act and the Older Workers Benefit Protection Act,
he has been given the opportunity to review this Agreement for at least
twenty-one (21) days and if Employee executes this Agreement prior to the end of
such twenty-one (21) day period, Employee knowingly and voluntarily waives any
rights he may have with respect thereto. CT further advises Employee that in
accordance with the Age Discrimination in Employment Act and the Older Workers
Benefit Protection Act, he has seven (7) days after execution of this Agreement
to revoke this Agreement.
15. ATTORNEY'S FEES. Each party shall be responsible for his or its own
expenses, including attorney's fees incurred in connection with the negotiation,
preparation and execution of this Agreement.
16. NOTICES. Any notice, demand or request required or permitted to be
given or made under this Agreement shall be in writing and shall be deemed given
or made when delivered in person, when sent by United States registered or
certified mail, postage prepaid, or when faxed to a party at its address or
facsimile number specified below:
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If to CT:
CT Holdings, Inc.
3811 Turtle Creek Blvd., Suite 770
Dallas, Texas 75219
Facsimile number: (214) 520-9292
Attention: Legal Department
If to Employee:
Bennett Klein
- --------------------------------
- --------------------------------
- --------------------------------
The parties to this Agreement may change their addresses for notice in
the manner provided above.
17. COUNTERPARTS AND PHOTOCOPIES. This Agreement may be executed in
counterparts and each executed counterpart shall be as effective as a signed
original. Photographic copies of such signed counterparts may be used in lieu of
the originals for any purpose.
18. PARAGRAPH TITLES NOT BINDING. The use of section titles in this
Agreement is for ease of reference only. Such titles are not to be considered
terms of this Agreement.
19. GOVERNING LAW; ARBITRATION.
(a) THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED
BY THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS
OF LAW.
(b) The matters, claims, rights, and obligations subject to these
arbitration provisions include all rights, claims and obligations arising out of
or relating to this Agreement or to Employee's employment and/or resignation,
including, without limitation, any and all claims, rights or causes of action
which may ever arise or be asserted under any federal, state, local or foreign
statutory, regulatory or common law, and including, without limitation, claims
of discrimination under Title VII of the Civil Rights of 1964, Age
Discrimination in Employment Act, the Americans with Disabilities Act, the Civil
Rights Act of 1991, the Texas Commission on Human Rights Act, the Texas Payday
Law and the Texas Workers' Compensation Act as well as any common law claims for
wrongful termination or related claims, wrongful discharge or termination,
breach of contract, tort (such as intentional infliction of emotional distress,
libel, slander, wrongful invasion of privacy or person injury), workers
compensation or unemployment compensation. All of the foregoing types of
matters, claims, rights and obligations subject to these arbitration provisions
are herein called "Subject Claims." In the event of a dispute relating to any
Subject Claim, then, upon notice by any party to the other parties (an
"Arbitration Notice") and to the American Arbitration Association ("AAA"), 13455
Noel Road, Suite 1750, Two Galleria Plaza, Dallas, Texas 75240, telephone (972)
702-8222, the controversy or dispute shall be submitted to a sole arbitrator who
is independent and impartial, for binding arbitration in Dallas, Texas, in
accordance with AAA's National Rules for the Resolution of Employment Disputes
(the "Rules") as modified or supplemented hereby. The parties agree that they
will faithfully observe this Agreement to arbitrate and the Rules and that they
will abide by and perform any award rendered by the arbitrator. The arbitration
shall be governed by the Federal Arbitration Act, 9 U.S.C. Section 1-16 (or by
the same principles enunciated by such Act in the event it may not be
technically applicable). The award or judgment of the arbitrator shall be final
and binding on all parties (and their successors and permitted assignees) and
judgment upon the award rendered by the arbitrator may be entered and enforced
by any court having jurisdiction thereof. If any party becomes the subject of a
bankruptcy, receivership or other similar proceeding under the laws of the
United States of America, any state or commonwealth or any other national or
political subdivision thereof; then, to the extent permitted or not prohibited
by applicable law, any factual or substantive legal issues arising in or during
the pendency of any such proceeding shall be subject to all of the foregoing
mandatory mediation and arbitration provisions and shall be resolved in
accordance therewith. The agreements contained herein have been given for
valuable consideration, are coupled with an interest and are not intended to be
executory contracts. The fees and
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expenses of the arbitrator will be shared equitably (as determined by the
arbitrator) by all parties engaged in the dispute or controversy.
(c) Promptly after the Arbitration Notice is given, AAA will select
five possible arbitrators, to whom AAA will give the identities of the parties
and the general nature of the controversy. If any of those arbitrators
disqualifies himself or declines to serve, AAA shall continue to designate
potential arbitrators until the parties have five to select from. After the
panel of five potential arbitrators has been completed, a two-page summary of
the background of each of the potential arbitrators will be given to each of the
parties, and the parties will have a period of 10 days after receiving the
summaries in which to attempt to agree upon the arbitrator to conduct the
arbitration. If the parties are unable to agree upon an arbitrator, then one of
the parties shall notify AAA and the other party, and AAA will notify each party
that it has five days from the AAA notice to strike two names from the list and
advise AAA of the two names stricken. After expiration of the strike period, if
all but one candidate has been stricken, the remaining one will be the
arbitrator, but, if two or more have not been stricken, AAA shall select the
arbitrator from one of those not stricken. The decision of AAA with respect to
the selection of the arbitrator will be final and binding in such case.
(d) Unless and only to the extent mandatory arbitration is validly
prohibited or limited by applicable statute or regulation, no litigation or
other proceeding may ever be instituted at any time in any court or before any
administrative agency or body for the purpose of adjudicating, interpreting or
enforcing any of the rights, duties, liabilities or obligations of the parties
hereto or any rights, duties, liabilities or obligations relating to any Subject
Claim, whether or not covered by the express terms of this Agreement, or for the
purpose of adjudicating a breach or determination of the validity of this
Agreement, or for the purpose of appealing any decision of an arbitrator, except
a proceeding instituted (i) for the purpose of having the award or judgment of
an arbitrator entered and enforced or (ii) to seek an injunction or restraining
order (but not damages in connection therewith) in circumstances where such
relief is available. Unless and only to the extent a limitation of damages is
validly prohibited or limited by applicable statute or regulation, no punitive,
exemplary or consequential damages may ever be awarded by the arbitrator or
anyone else, and each of the parties hereby waives any and all rights to make,
claim or recover any such damages.
(e) The arbitration and any discovery conducted in connection therewith
will be conducted in accordance with the Rules in effect at the time of the
arbitration, including without limitation the expedited procedures set forth
therein. The arbitration hearing will commence no later than 60 days after the
arbitrator is selected. The arbitrator will render a decision no later than 30
days after the close of the hearing, in accordance with Rules.
20. DEATH OF EMPLOYEE. In the event Employee should die before all of
the payments referred to in Section 4 are paid, CT shall continue to make such
payments to Employee's designated beneficiaries or if there are no such
designated beneficiaries, to Employee's estate.
21. ASSIGNMENT. The obligations and duties of the parties set forth in
this Agreement may not be assigned or delegated; provided, however, that nothing
in this Agreement shall preclude CT from consolidating or merging with, or
transferring all or substantially all of its assets to, another corporation,
person or entity ("Entity"). Upon such a consolidation, merger or transfer of
assets, the term "Company" shall mean such other Entity or Entities that CT
consolidates or merges into or with, or transfers all or substantially all of
the assets of CT to, and in any such event, the Entity or Entities shall be
bound and automatically assume, without any specific action on the part of the
Entity or Entities, this Agreement and all obligations and undertakings of CT
set forth in this Agreement, and this Agreement shall continue in full force and
effect, including, but not limited to, the obligation of CT to make the payments
set forth in Section 4. The obligations and duties of Employee hereunder shall
be personal and not assignable or delegable by Employee in any manner
whatsoever. Notwithstanding the foregoing, CT in its sole discretion shall have
the right to assign its rights under Sections 6, 7 and 8 of this Agreement to
any Entity or Entities which may purchase any part or all of CT's business
(whether by asset purchase, stock sale, merger or otherwise).
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22. ENTIRE AGREEMENT. This Agreement constitutes the entire and
exclusive statement of the agreement between the parties with respect to its
subject matter, and there are no oral or written representations, understandings
or agreements relating to this Agreement which are not fully expressed herein.
The parties agree that any other terms or conditions included in written or
verbal exchanges or representations made by the parties shall not be
incorporated herein or be binding unless expressly agreed upon in writing by
authorized representatives of the parties subsequent to the date hereof.
23. NONDISPARAGEMENT. Employee, his affiliates, trustees, agents,
confederates, and servants shall immediately and permanently refrain from
disseminating to the public or any third party any disparaging or otherwise
negative statements, remarks, or comments, whether direct or indirect, literal
or implied, true or untrue, regarding CT, its directors, officers, employees,
servants, trustees, representatives, shareholders, attorneys, accountants,
agents, confederates, subsidiaries, parents, and affiliates, their successors,
assigns and insurers, or any products or services provided thereby wherever
located.
CT, its directors, officers, employees, servants, agents, confederates,
trustees, representatives, subsidiaries, and affiliates shall immediately and
permanently refrain from disseminating to the public or any third-party any
disparaging or otherwise negative statements, remarks, or comments, whether
direct or indirect, literal or implied, true or untrue, regarding Employee, his
employees, servants, agents, trustees, representatives, shareholders, attorneys,
accountants, confederates, and affiliates, or any products or services provided
thereby wherever located.
24. REPRESENTATIONS. Employee represents that he is unaware of any
prior or impending, actual or potential, violations of municipal, county, state,
federal, or foreign laws, rules, or regulations by CT or its directors,
officers, employees, servants, agents, confederates, trustees, representatives,
subsidiaries, and affiliates, which are or may be based, either in whole or in
part, upon the actions or failures to act of Employee. Employee further
represents that he is unaware of any prior or impending, actual or potential,
charges, causes of action, complaints, claims, liabilities, obligations, debts
and expenses to which CT or their respective directors, officers, employees,
servants, agents, confederates, trustees, representatives, subsidiaries and
affiliates may be subject or may have rights, and which are or may be based,
either in whole or in part, upon the actions or failures to act of Employee.
PLEASE READ THIS AGREEMENT CAREFULLY. IT CONTAINS A RELEASE OF ALL
KNOWN AND UNKNOWN CLAIMS.
THE UNDERSIGNED ACKNOWLEDGE THAT WE HAVE CAREFULLY READ THE FOREGOING
AGREEMENT, THAT WE UNDERSTAND ALL OF ITS TERMS, AND THAT WE ARE ENTERING INTO IT
VOLUNTARILY.
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Executed by Employee, acting in his individual capacity, and by an
authorized representative of CT as of the date first stated above.
CT Holdings, Inc.
By: /s/ STEVEN B. SOLOMON
----------------------------------
Steven B. Solomon,
Chief Executive Officer
/s/ BENNETT KLEIN
-------------------------------------
Bennett Klein
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EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated June 11, 1999 accompanying the consolidated
financial statements of CT Holdings, Inc. contained in the Registration
Statement and Prospectus. We consent to the use of the aforementioned report in
the Registration Statement and Prospectus, and to the use of our name as it
appears under the caption "Experts."
GRANT THORNTON LLP
Dallas, Texas
March 6, 2000
