SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 13D
Under the Securities Exchange Act of 1934
(Amendment No. ________)*
CT HOLDINGS, INC.
(Name of Issuer)
Common Stock, $.01 par value per share
(Title of Class of Securities)
12643Y 10 3
(CUSIP Number)
STEVEN B. SOLOMON
CITN INVESTMENT, INC.
8750 NORTH CENTRAL EXPRESSWAY, SUITE 100
DALLAS, TEXAS 75231
(214) 520-9292
(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications)
May 24, 2004
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition that is the subject of this Schedule 13D, and is filing this
schedule because of Rule 13d-1(e), Rule 13d-1(f) or Rule 13d-1(g), check the
following box. [ ]
Note: Schedules filed in paper format shall include a signed original and five
copies of the schedule, including all exhibits. See Rule 13d-7(b) for other
parties to whom copies are to be sent.
* The remainder of this cover page shall be filled out for a reporting person's
initial filing on this form with respect to the subject class of securities, and
for any subsequent amendment containing information which would alter
disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be deemed
to be "filed" for the purpose of Section 18 of the Securities Exchange Act of
1934 (the "Act") or otherwise subject to the liabilities of that section of the
Act but shall be subject to all other provisions of the Act (however, see the
Notes).
CUSIP No. 12643Y 10 3
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1. Names of Reporting Persons . . . . . . . CITN Investment, Inc.
I.R.S. Identification Nos. of above persons (entities only) . . . 27-0092069
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2. Check the Appropriate Box if a Member of a Group (See Instructions)
(a) [ ]
(b) [X]
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3. SEC Use Only
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
--------------------------------------------------------------------------------
4. Source of Funds (See Instructions)
WC
--------------------------------------------------------------------------------
5. Check if Disclosure of Legal Proceedings is Required
Pursuant to Items 2(d) or 2(e) [ ]
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6. Citizenship or Place of Organization
Texas
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Number of Shares 7. Sole Voting Power
23,666,667
Beneficially -----------------------------------------------------------
Owned 8. Shared Voting Power
-0-
by Each -----------------------------------------------------------
Reporting 9. Sole Dispositive Power
23,666,667
Person -----------------------------------------------------------
With 10. Shared Dispositive Power
-0-
--------------------------------------------------------------------------------
11. Aggregate Amount Beneficially Owned by Each Reporting Person
23,666,667 shares*
--------------------------------------------------------------------------------
12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares
(See Instructions) [X]
--------------------------------------------------------------------------------
13. Percent of Class Represented by Amount in Row (11)
28.7%
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14. Type of Reporting Person (See Instructions)
CO
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* The Reporting Person has sole voting and investment power (as described in
Rule 13d-3 of the Exchange Act) with respect to these securities (which consists
of shares that may by issued upon conversion of a convertible note). The
Reporting Person does not hold or share voting or investment power with respect
to shares of Common Stock individually held by Steven B. Solomon and Lawrence
Lacerte, as disclosed herein.
2
CUSIP No. 12643Y 10 3
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1. Names of Reporting Persons I.R.S. Identification Nos. of above
persons (entities only).
Steven B. Solomon
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2. Check the Appropriate Box if a Member of a Group (See Instructions)
(a) [ ]
(b) [X]
--------------------------------------------------------------------------------
3. SEC Use Only
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
--------------------------------------------------------------------------------
4. Source of Funds (See Instructions)
00
--------------------------------------------------------------------------------
5. Check if Disclosure of Legal Proceedings is Required
Pursuant to Items 2(d) or 2(e) [ ]
--------------------------------------------------------------------------------
6. Citizenship or Place of Organization
United States Citizen
--------------------------------------------------------------------------------
Number of Shares 7. Sole Voting Power
16,285,993
Beneficially -----------------------------------------------------------
Owned 8. Shared Voting Power
23,666,667
by Each -----------------------------------------------------------
Reporting 9. Sole Dispositive Power
16,285,993
Person -----------------------------------------------------------
With 10. Shared Dispositive Power
23,666,667
--------------------------------------------------------------------------------
11. Aggregate Amount Beneficially Owned by Each Reporting Person
39,952,660 shares*
--------------------------------------------------------------------------------
12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares
(See Instructions) [X]
--------------------------------------------------------------------------------
13. Percent of Class Represented by Amount in Row (11) 48.6%
--------------------------------------------------------------------------------
14. Type of Reporting Person (See Instructions)
IN
--------------------------------------------------------------------------------
* The Reporting Person directly owns shares comprising 50% of the currently
outstanding shares of common stock of CITN Investment, Inc. CITN Investment,
Inc. beneficially owns 23,666,667 shares of Common Stock of the Issuer. CITN
Investment, inc. has sole voting and investment power (as described in Rule
13d-3 of the Exchange Act) with respect to securities held by CITN Investment,
Inc. As a shareholder, officer and director of CITN Investment Inc., the
Reporting Person may also be deemed to hold or share such power. The Reporting
Person beneficially owns 16,285,993 shares of Common Stock for which he
possesses sole voting and investment power. The Reporting Person does not hold
or share voting or investment power with respect to shares of Common Stock
individually held by Lawrence Lacerte, as disclosed herein.
3
CUSIP No. 12643Y 10 3
--------------------------------------------------------------------------------
1. Names of Reporting Persons I.R.S. Identification Nos. of above
persons (entities only).
Lawrence Lacerte
--------------------------------------------------------------------------------
2. Check the Appropriate Box if a Member of a Group (See Instructions)
(a) [ ]
(b) [X]
--------------------------------------------------------------------------------
3. SEC Use Only
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
--------------------------------------------------------------------------------
4. Source of Funds (See Instructions)
00
--------------------------------------------------------------------------------
5. Check if Disclosure of Legal Proceedings is Required
Pursuant to Items 2(d) or 2(e) [ ]
--------------------------------------------------------------------------------
6. Citizenship or Place of Organization
United States Citizen
--------------------------------------------------------------------------------
Number of Shares 7. Sole Voting Power
5,450,000
Beneficially -----------------------------------------------------------
Owned 8. Shared Voting Power
23,666,667
by Each -----------------------------------------------------------
Reporting 9. Sole Dispositive Power
5,450,000
Person -----------------------------------------------------------
With 10. Shared Dispositive Power
23,666,667
--------------------------------------------------------------------------------
11. Aggregate Amount Beneficially Owned by Each Reporting Person
29,116,667 shares*
--------------------------------------------------------------------------------
12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares
(See Instructions) [X]
--------------------------------------------------------------------------------
13. Percent of Class Represented by Amount in Row (11) 35.4%
--------------------------------------------------------------------------------
14. Type of Reporting Person (See Instructions)
IN
--------------------------------------------------------------------------------
* The Reporting Person directly owns shares comprising 50% of the currently
outstanding shares of common stock of CITN Investment, Inc. CITN Investment,
Inc. beneficially owns 23,666,667 shares of Common Stock of the Issuer. CITN
Investment, Inc. has sole voting and investment power (as described in Rule
13d-3 of the Exchange Act) with respect to securities held by CITN Investment,
Inc. As a shareholder of CITN Investment Inc., the Reporting Person may also be
deemed to hold or share such power. The Reporting Person beneficially owns
5,250,000 shares and 200,000 vested options for shares of Common Stock for which
he possesses sole voting and investment power. The Reporting Person does not
hold or share voting or investment power with respect to shares of Common Stock
individually held by Steven B. Solomon, as disclosed herein.
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ITEM 1. SECURITY AND ISSUER
This statement relates to the common stock, par value $.01 per share (the
"Common Stock") of CT Holdings, Inc. (the "Issuer"), whose principal executive
offices are located at 8750 North Central Expressway, Suite 100, Dallas, Texas
75231.
ITEM 2. IDENTITY AND BACKGROUND
This statement is being filed by CITN Investment, Inc., a Texas corporation
("CITN Investment"), Steven B. Solomon ("Mr. Solomon") and Lawrence Lacerte
("Mr. Lacerte").
CITN Investment is a Texas corporation with principal executive offices located
at 8750 North Central Expressway, Suite 100, Dallas, Texas 75251. Mr. Solomon
is the sole director and officer of CITN Investment, and CITN Investment's
outstanding shares of common stock are owned 50% by each of Mr. Solomon and Mr.
Lacerte. It was formed in May 2004 and its initial business purpose is to invest
in the Issuer.
Mr. Solomon's business address is 8750 North Central Expressway, Suite 100,
Dallas, Texas 75251 and his principal occupation or employment is as Chief
Executive Officer of Citadel Security Software Inc., a security software
company, and he also is Chief Executive Officer and a director of the Issuer. He
is a United States citizen.
Mr. Lacerte's business address is 5950 Sherry Lane, Suite 900, Dallas, Texas
75225 and his principal occupation or employment is as Chief Executive Officer
of Lacerte Technology, Inc., a company specializing in technology and
Internet-related ventures. He is a United States citizen.
During the last five years, to the knowledge of the Reporting Persons, none of
the Reporting Persons has been convicted in a criminal proceeding (excluding
traffic violations or similar misdemeanors).
During the last five years, to the knowledge of the Reporting Persons, none of
the Reporting Persons has been a party to a civil proceeding or a judicial or
administrative body of competent jurisdiction and as a result of such proceeding
was or is subject to a judgment, decree or final order enjoining future
violations of, or prohibiting or mandating activities subject to, federal or
state securities laws or finding any violation with respect to such laws.
ITEM 3.
Source and Amount of Funds or Other Consideration.
The funds used by CITN Investment to acquire the Issuer's securities consisted
of CITN Investment's working capital provided by its shareholders in exchange
for their shares.
Mr. Solomon acquired his shares pursuant to the exercise of options to purchase
Common Stock as a result of his employment with the Issuer, and from the
exercise of a conversion right to acquire shares of Common Stock from the Issuer
in exchange for shares of a subsidiary of the Issuer.
Mr. Lacerte acquired his options to purchase Common Stock as a result of his
prior service as a director of the Issuer, and acquired his shares of Common
Stock pursuant to the exercise of options granted to him as a result of his
prior service as a director of the Issuer, and from purchases of shares from the
Issuer in private placements.
ITEM 4.
PURPOSE OF TRANSACTION
Mr. Solomon and Mr. Lacerte acquired their shares in CITN Investment solely for
investment purposes. Mr. Solomon, as president, director and 50% shareholder of
CITN Investment, and Mr. Lacerte, as 50% shareholder of CITN Investment, have
sole voting and investment power (as described in Rule 13d-3 of the Exchange
Act) with respect to the Issuer's securities held by CITN Investment.
CITN Investment (and Mr. Solomon and Mr. Lacerte, through CITN Investment)
acquired beneficial ownership of shares of Common
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Stock of the Issuer for investment purposes and with the intent of obtaining
some influence over the future strategic direction and operations of the Issuer.
Through their beneficial ownership of the shares of Common Stock, as well as Mr.
Solomon's positions as Chief Executive Officer and a director of the Issuer, Mr.
Solomon and Mr. Lacerte will have some influence regarding the disposition of
certain matters as to which the shareholders of the Issuer are entitled to vote.
Mr. Solomon or Mr. Lacerte may seek out and consider strategic alternatives for
enhancing the value of CITN Investment's investment in the Issuer or other
extraordinary matters relating to the Issuer which are or may become available
to CITN Investment with respect to its holdings in the Issuer on a continuing
basis. Such strategic alternatives include, among other things: continued
ownership of the shares of Common Stock currently beneficially owned by CITN
Investment and acquiring additional securities of the Issuer in the directly
from the Issuer pursuant to further advances to the Issuer pursuant to the Loan
and Security Agreement which is filed as Exhibit A and described in Item 6 of
this Schedule 13D, in the open market, in privately negotiated transactions or
otherwise; proposing or seeking to effect an extraordinary corporate
transaction, such as a merger, reorganization or security issuance; proposing or
effecting a capital raising transaction; or proposing or effecting any other
transaction or matter that would constitute or result in one or more of the
transactions, matters or effects enumerated in Item 4(a)-(j) of Schedule 13D.
The consummation of any of the strategic alternatives described above may result
in a change of control of the Issuer and may result in Mr. Solomon and Mr.
Lacerte (through CITN Investment and their holdings) obtaining shared control of
the Issuer. In considering or negotiating strategic alternatives for enhancing
the value of CITN Investment's investment in the Issuer or other extraordinary
matters relating to the Issuer, Mr. Solomon and Mr. Lacerte intend to consider,
among other things the availability of other strategic alternatives, the effects
of a change of control of the Issuer, current and anticipated future trading
prices for the Common Stock, the Issuer's business, results of operations,
financial condition and future prospects, conditions in the securities markets,
general economic and industry conditions and tax considerations.
Such review and the considerations noted above may lead to the taking of any of
the actions set forth above or may lead Mr. Solomon or Mr. Lacerte to consider
other alternatives. However, there can be no assurance that Mr. Solomon or Mr.
Lacerte will develop any plans or proposals with respect to any of the foregoing
matters or take any particular action or actions with respect to some or all of
CITN Investment's holdings in the Issuer. There can be no assurance as to the
timing of any such matters should they be so pursued by Mr. Solomon or Mr.
Lacerte.
As a substantial beneficial owner of shares of Common Stock and an executive
officer and director of the Issuer, Mr. Solomon expects to have significant
influence on the Issuer on an ongoing basis with respect to strategic
alternatives, as described above or otherwise, and the operations of the Issuer.
Mr. Solomon has in the past and may in the future receive compensation from the
Issuer for service in these roles.
Mr. Solomon is also an executive officer, director and significant shareholder
of, and Mr. Lacerte is a shareholder of, Citadel Security Software Inc.
("Citadel"). Citadel provides services to the Issuer under a Transition
Services Agreement between Citadel and the Issuer, which the parties entered
into in connection with the spinoff distribution of Citadel from the Issuer.
Citadel receives compensation from the Issuer pursuant to this agreement.
The Issuer does not have a sufficient number of authorized shares of common
stock available to permit the conversion of the Note at this time. The Issuer
has agreed to use its best efforts to obtain shareholder approval to (a)
increase the number of authorized shares of common stock to a number sufficient
to permit conversion, or (b) to effect a reverse stock split to reduce the
number of currently outstanding shares of common stock to a number small enough
to permit the conversion of the Note.
Except as noted above, as of the date of this Schedule 13D, the Reporting
Persons have not at the present time, either individually or as a group,
formulated any plans or proposals which relate to or would result in any of the
transactions, matters or effects enumerated in Item 4(a)-(j) of Schedule 13D.
Mr. Solomon was appointed to the Issuer's Board of Directors in February 1996,
and was appointed President of the Issuer in May 1997. Mr. Lacerte served as a
director of the Issuer from January 1999 until May 2002. These appointments
were prior to and unrelated to (i) Mr. Solomon's and Mr. Lacerte's investment in
CITN Investment and (ii) CITN Investment's investment in the Issuer.
ITEM 5.
INTEREST IN SECURITIES OF THE ISSUER
(a)(i) CITN Investment beneficially owns 23,666,667 shares or approximately
28.7% of the outstanding shares of Common Stock. These shares consist of
23,666,667 shares of Common Stock issuable upon conversion of a Secured
Convertible Promissory Note (which is currently convertible), dated as of May
24, 2004 by the Issuer and granted in favor of CITN Investment which is filed as
6
Exhibit B hereto (the "Note"). In accordance with Rule 13d-4 of the Exchange
Act, CITN Investment disclaims beneficial ownership of (a) 16,285,993 shares of
Common Stock beneficially owned by Mr. Solomon and (b) 5,450,000 shares of
Common Stock beneficially owned by Mr. Lacerte.
(ii) As executive officer, director and shareholder of CITN Investment, Mr.
Solomon beneficially owns 23,666,667 shares beneficially owned by CITN
Investment or approximately 28.7% of the outstanding shares of Common Stock.
These shares consist of 23,666,667 shares of Common Stock issuable upon
conversion of the Note. Mr. Solomon beneficially owns 16,285,993 shares of the
Issuer's Common Stock. In accordance with Rule 13d-4 of the Exchange Act, Mr.
Solomon disclaims beneficial ownership of 5,450,000 shares of Common Stock
beneficially owned by Mr. Lacerte.
(iii) As shareholder of CITN Investment, Mr. Lacerte beneficially owns
23,666,667 shares beneficially owned by CITN Investment or approximately 28.7%
of the outstanding shares of Common Stock. These shares consist of 23,666,667
shares of Common Stock issuable upon conversion of the Note. Mr. Lacerte
beneficially owns 5,450,000 shares of the Issuer's Common Stock, including
200,000 shares subject to exercisable options. In accordance with Rule 13d-4 of
the Exchange Act, Mr. Lacerte disclaims beneficial ownership of 16,285,993
shares of Common Stock beneficially owned by Mr. Solomon.
(b)(i) CITN Investment holds the sole power to vote and/or dispose of 23,666,667
shares of Common Stock (which consists of shares issuable upon conversion of an
immediately convertible Secured Convertible Promissory Note). As executive
officer and director of CITN Investment, Mr. Solomon, holds the sole power to
vote and/or dispose of any of the 23,666,667 shares of Common Stock beneficially
owned by CITN Investment. No other person or entity holds or shares the power to
vote and/or dispose of any of the 23,666,667 shares of Common Stock beneficially
owned by CITN Investment.
(ii) Mr. Solomon holds the sole power to dispose of 16,285,993 shares of Common
Stock beneficially owned by Mr. Solomon. Mr. Solomon holds the sole power to
vote and/or dispose of such shares of Common Stock. No other person or entity
holds or shares the power to vote and/or dispose of any of Mr. Solomon's
16,285,993 shares of Common Stock.
(iii) Mr. Lacerte holds the sole power to dispose of 5,250,000 shares and
200,000 options to purchase shares of Common Stock. Mr. Lacerte holds the sole
power to vote and/or dispose of the shares of Common Stock, and upon exercise of
the options, Mr. Lacerte will hold the sole power to vote and/or dispose of such
shares of Common Stock. No other person or entity holds or shares the power to
vote and/or dispose of any of Mr. Lacerte's 5,250,000 shares and 200,000 options
to purchase shares of Common Stock.
(c) In the past 60 days, (i) CITN Investment acquired a Secured Convertible
Promissory Note, dated May 24, 2004 and attached hereto as Exhibit B, which is
convertible at the option of CITN Investment, in whole or in part, into up to
23,666,667 shares of Common Stock. In the past 60 days, to the knowledge of the
Reporting Persons, no other Reporting Person was involved in a transaction
involving the Issuer's securities.
(d)(i) Mr. Solomon, as executive officer and director of CITN Investment, has
the right to direct the receipt of dividends from, and the proceeds of the sale
of, any of the shares of Common Stock beneficially owned by CITN Investment.
(ii) Mr. Solomon individually owns 16,285,993 shares of Common Stock and has the
right to direct the receipt of dividends from, and the proceeds of the sale of,
any of the shares of Common Stock beneficially owned by Mr. Solomon.
(iii) Mr. Lacerte individually owns 5,250,000 shares of Common Stock and 200,000
options to purchase shares of Common Stock, and has the right to direct the
receipt of dividends from, and the proceeds of the sale of, any of the shares of
Common Stock beneficially owned by Mr. Lacerte.
(e) To the knowledge of the Reporting Persons, none of the Reporting Persons has
ceased to be the beneficial owner of more than five percent of the Common Stock.
ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO
SECURITIES OF THE ISSUER
Except as noted below and included in Item 7 hereof, there are no contracts,
arrangements, understandings or relationships (legal or otherwise) with respect
to the Common Stock.
On May 24, 2004, the Issuer and CITN Investment entered into a Loan and Security
Agreement (the "Loan Agreement"), which is filed as Exhibit A to this Schedule
13D. The Loan Agreement provides for advances by CITN Investment to the Issuer
of up to
7
$600,000, such advances to be made in the sole discretion of CITN Investment. In
the event the entire $600,000 is advanced to the Issuer, the loans would be
convertible, at the option of CITN Investment, into 71,000,000 shares of the
Issuer's common stock, representing 51% of the Issuer's common stock. The loans
are also secured by a pledge of all of the Issuer's assets.
On May 24, 2004, CITN Investment advanced $200,000 to the Issuer pursuant to the
Loan Agreement, evidenced by a Secured Convertible Promissory Note (the "Note"),
which is filed as Exhibit B to this Schedule 13D. This Note is convertible in
whole or in part, at the option of CITN Investment, into up to 23,666,667 shares
of the Issuer's common stock (approximately 28.7% of the Issuer's common stock
on a fully diluted basis), and is secured by a pledge of all of the Issuer's
assets.
CITN Investment is owned 50% by Steven B. Solomon, the Issuer's Chief Executive
Officer and Chairman of the Board, and 50% by Lawrence Lacerte, a shareholder
and former director of the Issuer. Prior to the loans, Mr. Solomon beneficially
owned 16,285,993 shares of the Issuer's common stock, and Mr. Lacerte
beneficially owned 5,450,000 shares of the Issuer's common stock. Because he is
an executive officer, director and 50% shareholder of CITN Investment, Mr.
Solomon may be deemed the beneficial owner of the shares of common stock owned
by CITN Investment. Therefore, on May 24, 2004, Mr. Solomon and CITN Investment
beneficially owned a total of 39,952,660 shares of the Issuer's common stock (if
the Note were converted into shares of the Issuer's common stock), or more than
50% of the Issuer's common stock outstanding on that date, giving him potential
control of the Issuer through the voting power over a majority of the shares of
the Issuer's outstanding common stock.
The Issuer does not have a sufficient number of authorized shares of common
stock available to permit the conversion of the Note at this time. The Issuer
has agreed to use its best efforts to obtain shareholder approval to (a)
increase the number of authorized shares of common stock to a number sufficient
to permit conversion, or (b) to effect a reverse stock split to reduce the
number of currently outstanding shares of common stock to a number small enough
to permit the conversion of the Note.
The Reporting Persons expressly disclaim that the Reporting Persons comprise a
"group" within the meaning of Section 13(d)(3) of the Exchange Act.
Pursuant to Rule 13d-4 under the Exchange Act, (i) Mr. Solomon and Mr. Lacerte
expressly disclaim beneficial ownership of shares of Common Stock beneficially
owned by CITN Investment; (ii) CITN Investment and Mr. Solomon expressly
disclaim beneficial ownership of shares of Common Stock beneficially owned by
Mr. Lacerte; and (iii) CITN Investment and Mr. Lacerte expressly disclaim
beneficial ownership of shares of Common Stock beneficially owned by Mr.
Solomon.
ITEM 7. MATERIAL TO BE FILED AS EXHIBITS
Exhibit A Loan and Security Agreement between CITN Investment and the Issuer
Exhibit B Secured Convertible Promissory Note in favor of CITN Investment
Exhibit C Power of Attorney by Mr. Lacerte in favor of Mr. Solomon
8
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
CITN INVESTMENT, INC.
By: /s/ Steven B. Solomon
Steven B. Solomon, President
Date: June 2, 2004
Date: June 2, 2004 By: /s/ Steven B. Solomon
Steven B. Solomon
Date: June 2, 2004 *
Lawrence Lacerte
* By: Steven B. Solomon
Attorney-in-Fact
9
Exhibit A
LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT is dated as of May 22, 2004 between CITN
Investment, Inc. (Lender), and CT Holdings, Inc., a Delaware corporation
(Borrower), 8750 North Central Expressway, Suite 100, Dallas, Texas 75231. The
parties agree as follows:
1. DEFINITIONS AND CONSTRUCTIONS
1.1 Terms. In addition to the terms that are defined within this Agreement,
the following terms shall have the following definitions when used in this
Agreement:
Agreement means this Loan and Security Agreement and any riders, addenda,
extensions, supplements, amendments or modifications to or in connection with
this Loan and Security Agreement.
Bankruptcy Code means the United States Bankruptcy Code (11 U.S.C. Sections 101
et seq.), as amended, and any successor statute.
-- ---
Business Day means any day which is not a Saturday, Sunday or other day on which
banks in the State of Texas are authorized or required to close.
Code means the Texas Uniform Commercial Code, as amended from time to time.
Collateral means all of the assets of the Borrower, including without limitation
all of the securities of Parago, Inc. and River Logic, Inc. owned by Borrower
and all proceeds and products, whether tangible or intangible, of the foregoing,
and any and all tangible or intangible property resulting from the sale or other
disposition of the Collateral, or any portion thereof or interest therein, and
the proceeds thereof.
Event of Default means each of the events specified in Section 8.
Lender Expenses means all of the following: costs and expenses (including taxes
or assessments) required to be paid by Borrower under any of the Loan Documents
which are paid or advanced by Lender in connection with Lender's transactions
with Borrower; costs and expenses incurred by Lender in the disbursement or
collection of funds to or from Borrower; charges resulting from the dishonor of
checks; costs and expenses paid or incurred by Lender to correct any default or
enforce any provision of the Loan Documents, or in gaining possession of,
maintaining, handling, preserving, storing, shipping, selling, preparing for
sale or advertising to sell the Collateral, or any portion thereof, irrespective
of whether a sale is consummated; costs and expenses paid or incurred by Lender
that result from third party claims against Lender covered by Borrower's
indemnification of Lender in Section 11.4; costs and expenses paid or incurred
by Lender in enforcing or defending the Loan Documents; and Lender's reasonable
attorneys fees and expenses incurred in advising, structuring, drafting,
reviewing, administering, amending, terminating, enforcing, defending or
otherwise representing Lender in connection with the Loan Documents or the
Obligations (including attorneys fees and expenses incurred in connection with a
workout, a restructuring, an action to lift the automatic stay of Section 362 of
the Bankruptcy Code, any other action or participation by Lender in an
Insolvency Proceeding concerning Borrower or any defense or participation by
Lender in any lender liability, preference or fraudulent conveyance actions).
Insolvency Proceeding means any proceeding commenced by or against any Person
under any provision of the Bankruptcy Code or under any other bankruptcy or
insolvency law, including assignments for the benefit of creditors, formal or
informal moratoria, compositions, extensions generally with its creditors or
proceedings seeking reorganization, liquidation, arrangement or other similar
relief.
Loan Documents means, collectively, this Agreement, any Notes, any security or
pledge agreements, or other
10
encumbrances or agreements which secure the Obligations, and any other agreement
entered into between Borrower and Lender relating to or in connection with this
Agreement.
Maximum Rate means the maximum non-usurious rate of interest permitted by
applicable law that at any time, or from time to time, may be contracted for,
taken, reserved, charged or received on the Obligations or, to the extent
permitted by applicable law, under such applicable laws that may hereafter be in
effect and which allow a higher maximum non-usurious interest rate than
applicable laws now allow. Notwithstanding any other provision in this
Agreement, the Maximum Rate shall be calculated on a dally basis (computed on
the actual number of days elapsed over a year of 365 or 365 days, as the case
may be).
Note means any promissory note made by Borrower to the order of Lender
concurrently herewith or at any time hereafter.
Obligations means all loans, advances, debts, liabilities (including all amounts
charged to Borrower's loan account pursuant to any agreement authorizing Lender
to charge Borrower's loan account), obligations, fees, covenants and duties
owing by Borrower to Lender of any kind and description (whether pursuant to or
evidenced by the Loan Documents), whether direct or indirect, absolute or
contingent, due or to become due, now existing or hereafter arising, including
any interest that, but for the provisions of the Bankruptcy Code, would have
accrued, and all Lender Expenses which Borrower is required to pay or reimburse
pursuant to the Loan Documents, by law or otherwise.
Term Loan means any term loan made by Lender to Borrower, evidenced by and
repayable in accordance with the terms and conditions of a Note.
1.2 Construction. Unless the context of this Agreement clearly requires
otherwise, references to the plural include the singular and vice versa, the
term "including" is not limiting and the term "or" has the inclusive meaning
generally represented by the phrase "and/or". The words hereof, herein, hereby,
hereunder, and similar terms in this Agreement refer to this Agreement as a
whole and not to any particular provision of this Agreement. Section,
subsection, clause, exhibit and schedule references are to this Agreement unless
otherwise specified. Any reference in this Agreement or in any of the other
Loan Documents to this Agreement or any of the other Loan Documents shall
include all alterations, amendments, changes, extensions, modifications,
renewals, replacements, substitutions and supplements thereto and thereof. All
exhibits, addenda and schedules to this Agreement shall be deemed incorporated
herein by reference. Any terms used in this Agreement which are defined in the
Code shall be construed and defined as set forth in the Code unless otherwise
defined herein.
2. ADVANCES AND TERMS OF PAYMENT
2.1 Loans. Upon request of the Borrower, Lender may, in its sole
discretion, make a Term Loan to Borrower in the original principal amount of One
Hundred Sixty Five Thousand Dollars ($165,000) to be evidenced by and repayable
in accordance with the terms and conditions of a Secured Convertible Promissory
Note. In Lender's sole discretion, Lender may also make additional Term Loans
after the date of this Agreement in an aggregate amount of up to Six Hundred
Thousand Dollars ($600,000) (the "Maximum Loan Amount"). Lender is under no
obligation to advance any funds. Such Term Loan and any other Term Loan
subsequently made by Lender to Borrower shall constitute Obligations and shall
be secured by the Collateral. The occurrence of a default under such Note or
under any Note made in respect of any subsequent Term Loan shall constitute an
Event of Default hereunder.
2.2 Initial Advance. Lender agrees that, upon satisfaction on or before May
24, 2004 of each of the conditions precedent set forth in this Agreement, Lender
shall advance to Borrower, on Borrower's request, the amount of Two Hundred
Thousand Dollars ($200,000) as Lender's initial Advance under this Agreement,
and all future Advances under this Agreement shall be deemed to be and
constitute, together with the initial Advance, one general obligation of
Borrower and a single loan from Lender to Borrower, and shall be secured by
Lender's security interest in and lien upon all of the Collateral, and by all
other security interests and liens heretofore, now or at any time or times
hereafter granted by Borrower to Lender.
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2.3 Overadvances. All Advances made hereunder shall be added to and deemed
part of the Obligations when made. If, at any time and for any reason, the
aggregate amount of the outstanding Revolving Advances exceeds the dollar or
percentage limitations contained in Section 2. 1A (an Overadvance), then
Borrower shall, upon demand by Lender, immediately pay to Lender, in cash, the
amount of such excess.
2.4 Authorization to Make Revolving Advances. Borrower hereby authorizes
Lender to make Advances based upon telephonic or other instructions received
from Borrower, or, at the sole discretion of Lender without instructions from or
notice to Borrower, if such Advances are necessary to satisfy any Obligations.
All requests for Advances hereunder shall specify the date on which the
requested Advance is to be made (which day shall be a business day in Dallas,
Texas) and the amount of the requested Advance. Requests received after 11:00
a.m. Central time on any day shall be deemed to have been made as of the opening
of business on the immediately following Business Day. All Advances made under
this Agreement shall be conclusively presumed to have been made to, at the
request of, and for the benefit of Borrower when deposited to the credit of
Borrower or otherwise disbursed in accordance with the instructions of Borrower
or in accordance with the terms and conditions of this Agreement.
2.5 Interest. Basic Rate; Default Rate. Except where specified to the
contrary in any Loan Document, the outstanding principal balances of all
Obligations shall bear interest at the lesser of (a) interest at the Maximum
Rate or (b) the rate of eight percent (8%) per annum. The outstanding principal
balances of all Obligations shall bear interest, from and after written notice
by Lender to Borrower of the occurrence of an Event of Default and without
constituting a waiver of any such Event of Default, at the lesser of (a)
interest at the Maximum Rate or (b) the rate of eighteen percent (18%) per
annum; provided, however, that in the event an Insolvency Proceeding is
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commenced by or against Borrower, Lender may charge such default rate of
interest without providing written notice thereof to Borrower. All interest
payable under the Loan Documents shall be computed on the basis of a three
hundred sixty (360) day year for the actual number of days elapsed, based on the
aggregate principal amount of the Obligations that are outstanding on each day.
Interest shall continue to accrue until all of the Obligations are paid in full.
2.6 Maximum Charges. Notwithstanding any provision contained in this
Agreement or any of the other Loan Documents, in no contingency or event
whatsoever shall the aggregate of all amounts that are contracted for, charged
or collected pursuant to the terms of this Agreement or any of the other Loan
Documents and that are deemed interest under applicable law exceed that highest
rate permissible under any applicable law. No agreements, conditions,
provisions or stipulations contained in this Agreement or any of the other Loan
Documents or the exercise by Lender of the right to accelerate the payment or
maturity of all or any portion of the Obligations, or the exercise of any option
whatsoever contained in any of the Loan Documents, or the prepayment by Borrower
of any of the Obligations, or the occurrence of any contingency whatsoever,
shall entitle Lender to charge or receive in any event, interest or any charges,
amounts, premiums or fees deemed interest by applicable law (such interest,
charges, amounts, premiums and fees referred to in this Section collectively as
Interest) in excess of the Maximum Rate and in no event shall Borrower be
obligated to pay Interest exceeding the Maximum Rate, and all agreements,
conditions or stipulations, if any, which may in any event or contingency
whatsoever operate to bind, obligate or compel Borrower to pay Interest
exceeding the Maximum Rate shall be without binding force or effect, at law or
in equity, to the extent only of the excess of Interest over the Maximum Rate.
If any Interest is charged or received in excess of the Maximum Rate (Excess),
Borrower acknowledges and stipulates that any such charge or receipt shall be
the result of an accident and bona fide error, and such Excess, to the extent
received, shall be applied first to reduce the principal Obligations and the
balance, if any, returned to Borrower, it being the intent of the parties hereto
not to enter at any time into a usurious or otherwise illegal relationship. The
right to accelerate the maturity of any of the Obligations does not include the
right to accelerate any interest that has not otherwise accrued on the date of
such acceleration, and Lender does not intend to collect any unearned interest
in the event of any such acceleration. Borrower recognizes that, with
fluctuations in the rates of interest set forth above and the Maximum Rate, such
an unintentional result could inadvertently occur but for the agreements of the
parties to limit interest to the Maximum Rate and to apply, credit or return any
Excess as provided herein. All monies paid to Lender hereunder or under any of
the other Loan Document, whether at maturity or by prepayment, shall be subject
to any rebate of unearned interest as and to the extent required by applicable
law. By the execution of this Agreement, Borrower covenants that (a)
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the credit or return of any Excess shall constitute the acceptance by Borrower
of such Excess, and (b) Borrower shall not seek or pursue any other remedy,
legal or equitable, against Lender, based in whole or in part upon contracting
for, charging or receiving any Interest in excess of the Maximum Rate. For the
purpose of determining whether or not any Excess has been contracted for,
charged or received by Lender, all Interest at any time contracted for, charged
or received from Borrower in connection with this Agreement shall, to the extent
permitted by applicable law, be amortized, prorated, allocated and spread in
equal parts throughout the full term of the Obligations. Borrower and Lender
shall, to the extent permitted by applicable law, (a) characterize any
non-principal payment as an expense, fee or premium rather than as Interest and
(b) exclude voluntary prepayments and the effects thereof. The provisions of
this Section shall be deemed to be incorporated into every Loan Document
(whether or not any provision of this Section is referred to therein). All such
Loan Documents and communications relating to any Interest owed by Borrower and
all figures set forth therein shall, for the sole purpose of computing the
extent of the Obligations, be automatically recomputed by Borrower, and by any
court considering the same, to give effect to the adjustments or credits
required by this Section. Notwithstanding any provisions contained in this
Agreement or any of the other Loan Documents providing that interest is to be
computed on the basis of a 360 day year, interest shall never exceed the Maximum
Rate computed on the basis of a 365 or 366 year, as the case may be. In no event
shall Borrower be obligated to pay any of the fees payable under this Agreement
to the extent that the amount of such fees otherwise payable under such
sections, when added to the amount of interest charged hereunder or otherwise,
would result in the assessment or collection of sums deemed to be Interest in
excess of the Maximum Rate (it being the express intent and understanding of the
parties hereto that such fees not constitute interest or a charge for the use or
detention of money).
2.7 Repayment of the Obligations. All of the Obligations shall be payable
by Borrower to Lender upon the earliest of (a) the receipt by Lender or Borrower
of any collections or proceeds of any of the Collateral, to the extent of such
collections or proceeds, (ii) the occurrence of an Event of Default in
consequence of which Lender elects to accelerate the maturity and payment of the
Obligations or (iii) termination of the Loan Agreement pursuant to Section 3.1
or Section 3.2; provided, however, that any portion of the Obligations payable
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on demand under any of the Loan Documents shall be paid on demand. All Notes
shall be due and payable upon termination of the Loan Agreement.
2.8 Conversion Rights. The Lender shall have the right to convert any or
all of the Obligations into up to 71,000,000 shares of common stock of the
Borrower (if the Maximum Loan Amount is advanced to the Borrower), and a pro
rata amount of such number of shares in the event less than the Maximum Loan
Amount is advanced to the Borrower.
3. TERM OF AGREEMENT AND EARLY TERMINATION
3.1 Term. This Agreement shall become effective in accordance with Section
14.1 and shall continue in full force and effect for a term ending two (2) years
after the date hereof and shall be deemed automatically renewed for successive
terms of one (1) year thereafter until terminated as of the end of the initial
term or any renewal term (each a Term) by either party giving the other written
notice at least sixty days prior to the end of the then current Term.
3.2 Effect of Termination. Upon termination of this Agreement, all of the
Obligations shall be immediately due and payable in full. No termination of
this Agreement shall relieve or discharge Borrower of Borrower's duties,
obligations and covenants hereunder until all of the Obligations have been fully
and indefeasibly paid and satisfied, and Lender's continuing security interest
in the Collateral shall remain in effect until all of the Obligations have been
fully and indefeasibly paid and satisfied.
4. CREATION OF SECURITY INTEREST
4.1 Grant of Security Interest. Borrower hereby grants to Lender a
continuing security interest in all presently existing and hereafter acquired or
arising Collateral to secure prompt repayment of any and all Obligations and in
order to secure prompt performance by Borrower of each and all of its covenants
and duties under the Loan Documents. Lender's security interest in the
Collateral shall attach to all Collateral without further act on the part of
Lender or Borrower. Other than sales of Inventory to buyers in the ordinary
course of business, Borrower has no authority, express or implied, to
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dispose of any item or portion of the Collateral.
4.2 Negotiable Collateral. In the event that any Collateral, including
proceeds, is evidenced by or consists of negotiable Collateral, Borrower shall
immediately endorse and assign such negotiable Collateral to Lender and deliver
physical possession of such negotiable Collateral to Lender.
4.3 Delivery of Additional Documentation Required. Borrower shall execute
and deliver to Lender, concurrently with Borrower's execution and delivery of
this Agreement and at any time thereafter at the request of Lender, all security
agreements, pledges, assignments, endorsements of certificates, affidavits,
reports, notices, letters of authority, and all other documents that Lender may
reasonably request, in form satisfactory to Lender, to perfect and continue
perfected Lender's security interest in the Collateral and in order to fully
consummate all of the transactions contemplated hereunder and under the Loan
Documents.
4.4 Power of Attorney. Borrower hereby irrevocably designates, makes,
constitutes and appoints Lender (and any of Lender's agents designated by
Lender) as Borrower's true and lawful attorney-in-fact, and Lender, or Lender's
agent, may, without notice to Borrower and in either Borrower's or Lender's
name, but at the cost and expense of Borrower, at such time or times as Lender
in its sole discretion may determine: (a) take control, in any manner, of any
item of payment or proceeds relating to any Collateral; (b) prepare, file and
sign Borrower's name to any notice of lien, assignment or satisfaction of lien
or similar document in connection with any of the Collateral; (c) sign
Borrower's name on any of documents described in Section 4.3 or on any other
similar documents to be executed, recorded or filed in order to perfect or
continue perfected Lender's security interest in the Collateral; (d) sign
Borrower's name on any documents, instruments or agreements relating to the
Collateral; (e) endorse Borrower's name on any checks, notes, acceptances, money
orders, drafts or other items of payment or proceeds relating to any Collateral
that may come into Lender's possession and deposit the same to the account of
Lender for application to the Obligations; (f) do all other acts and things
necessary, in Lender's determination, to fulfill Borrower's obligations under
this Agreement or any of the other Loan Documents; (g) at any time that an Event
of Default has occurred and is continuing, notify the post office authorities to
change the address for delivery of Borrower's mail to an address designated by
Lender, to receive and open all mail addressed to Borrower, and to retain all
mail relating to the Collateral and forward all other mail to Borrower; (h) at
any time that an Event of Default has occurred and is continuing, use the
information recorded on or contained in any data processing equipment and
computer hardware and software relating to the Collateral and to which Borrower
has access; and (i) at any time that an Event of Default has occurred and is
continuing, sell or assign any Collateral upon such terms, for such amounts and
at such time or times as Lender deems advisable. The appointment of Lender as
Borrower's attorney-in-fact and each and every one of Lender's rights and
powers, being coupled with an interest, is irrevocable until all of the
Obligations have been fully repaid and performed and this Agreement has been
terminated.
4.5 Right To Inspect. Lender, through any of his agents, shall have the
right at any time or times during Borrower's business hours, to inspect
Borrower's Books in order to verify the amount or condition of, or any other
matter relating to, the Collateral. If an Event of Default has occurred or if
Lender reasonably believes that an Event of Default has occurred, Lender may
conduct any of the inspections referenced in this Section at any time without
regard to Borrower's or any third party's business hours.
5. REPRESENTATIONS AND WARRANTIES. Borrower makes the following
representations and warranties to Lender and each such representation and
warranty shall be deemed to be repeated with each Advance made by Lender and
shall be conclusively presumed to have been relied on by Lender regardless of
any investigation made or information possessed by Lender. The following
representations and warranties shall be cumulative and in addition to any and
all other representations and warranties which Borrower shall now or hereafter
give, or cause to be given, to Lender.
5.1 No Prior Encumbrances; Security Interests. Borrower has good and
indefeasible title to the Collateral, free and clear of liens, claims, security
interests or encumbrances.
5.2 Due Authorization; No Conflict. The execution, delivery and performance
of the Loan Documents to which
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Borrower is a party are within Borrower's powers and are not in conflict with
nor create a default under any material agreement to which Borrower is a party.
5.3 Litigation. There are no actions or proceedings pending by or against
Borrower before any court or administrative agency and Borrower has no knowledge
or notice of any pending, threatened or imminent litigation, governmental
investigations, or claims, complaints, actions or prosecutions involving
Borrower or any guarantor of the Obligations, except for ongoing collection
matters in which Borrower is the plaintiff and such matters as have been
disclosed to Lender in writing.
6. AFFIRMATIVE COVENANTS. Borrower covenants and agrees that during the
term of this Agreement and until payment in full of the Obligations, and unless
Lender shall otherwise consent in writing, Borrower shall do all of the
following:
6.1 No Offsets or Counterclaims. All payments hereunder and under the other
Loan Documents made by or on behalf of Borrower shall be made without offset or
counterclaim, and Borrower hereby waives any right to offset, against the
repayment of the Obligations, any claims it may have against Lender.
6.2 Compliance with Law. Borrower shall comply with the requirements of all
applicable laws, rules, regulations and orders of governmental authorities
relating to Borrower and the conduct of his business.
7. NEGATIVE COVENANTS. Borrower covenants and agrees that during the term
of this Agreement and until payment in full of the Obligations, Borrower will
not, without Lender's prior written consent, create, incur, assume or permit to
exist any security interest, lien, pledge, mortgage or encumbrance on any
Collateral in which Lender holds a lien, except the security interests granted
to Lender by Borrower.
8. EVENTS OF DEFAULT. The occurrence of any one or more of the following
events shall constitute an "Event of Default" under this Agreement:
8.1 Failure to Pay. Borrower fails to pay when due and payable, or when
declared due and payable, any portion of the Obligations (whether principal,
interest, fees and charges due Lender, reimbursement of Lender Expenses, or
other amounts constituting Obligations);
8.2 Failure to Perform. Borrower fails or neglects to perform, keep or
observe any term, provision, condition, representation, warranty, covenant or
agreement contained in this Agreement, in any of the other Loan Documents or in
any other present or future agreement between Borrower and Lender;
8.3 Misrepresentation. Any misstatement or misrepresentation now or
hereafter exists in any warranty, representation, statement or report made to
Lender by Borrower or any officer, employee, agent or director of Borrower, or
if any such warranty or representation is withdrawn by any of them;
8.4 Misrepresentation of Collateral. Any writing, document, aging,
certificate or other evidence of the Collateral shall be incomplete, incorrect
or misleading at the time the same is furnished to Lender;
8.5 Material Adverse Change. There is a material adverse change in
Borrower's business or financial condition;
8.6 Material Impairment. There is a material impairment of the prospect of
repayment of any portion of the Obligations owing to Lender or a material
impairment of the value or priority of Lender's security interests in the
Collateral;
8.7 Levy or Attachment. Any material portion of Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any judicial officer;
15
8.8 Insolvency by Borrower. An Insolvency Proceeding is commenced by
Borrower;
8.9 Insolvency Against Borrower. An Insolvency Proceeding is commenced
against Borrower;
8.10 Injunction Against Borrower. Borrower is enjoined, restrained or in
any way prevented by court order from continuing to conduct all or any material
part of its business affairs;
8.11 Government Lien. A notice of lien, levy or assessment is filed of
record with respect to any of Borrower's assets by the United States government,
or any department, agency or instrumentality thereof, or by any state, county,
municipal or other governmental agency, or any taxes or debts owing at any time
hereafter to any one or more of such entities becomes a lien, whether choate or
otherwise, upon any of Borrower's assets and the same is not paid on the payment
date thereof;
8.12 Judgment. A judgment is entered against Borrower;
8.13 Cross Default to Material Agreements. There is a default in any
material agreement to which Borrower is a party with one or more third parties
or by which Borrower or his property or assets are bound;
Notwithstanding anything contained in this Section 8 to the contrary, Lender
shall refrain from exercising its rights and remedies and an Event of Default
shall not be deemed to have occurred by reason of the occurrence of any of the
events set forth in Sections 8.7, 8.9 8.11 or 8.12 of this Agreement if, within
ten days from the date thereof, the same is released, discharged, dismissed,
bonded against or satisfied; provided, however, Lender shall not be obligated to
make Advances to Borrower during such period.
9. LENDER'S RIGHTS AND REMEDIES
9.1 Rights and Remedies. Upon the occurrence of an Event of Default, Lender
may, at its election, without notice of its election and without demand, do any
one or more of the following, all of which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this Agreement, any of the
other Loan Documents or otherwise, immediately due and payable in full;
(b) Cease advancing money or extending credit to or for the benefit of
Borrower under this Agreement, any of the other Loan Documents or any other
agreement between Borrower and Lender;
(c) Terminate this Agreement and any of the other Loan Documents as to any
future liability or obligation of Lender, but without affecting Lender's rights
and security interest in the Collateral and without affecting the Obligations;
(d) Settle or adjust disputes and claims directly with Account Debtors for
amounts and upon terms which Lender considers advisable and, in such cases,
Lender will credit Borrower's loan account with only the net amounts received by
Lender in payment of such disputed Accounts, after deducting all Lender Expenses
incurred or expended in connection therewith;
(e) Without notice to or demand upon Borrower or any guarantor, make such
payments and do such acts as Lender considers necessary or reasonable to protect
its security interest in the Collateral. Borrower agrees to assemble the
Collateral if Lender so requires and to deliver or make the Collateral available
to Lender at a place designated by Lender. Borrower authorizes Lender to enter
any premises where the Collateral is located, to take and maintain possession of
the Collateral, or any part of it, and to pay, purchase, contest or compromise
any encumbrance, charge or lien that in Lender's determination appears to be
prior or superior to its security interest and to pay all expenses incurred in
connection therewith. With respect to any of Borrower's owned premises,
Borrower hereby grants Lender a license to enter into
16
possession of such premises and to occupy the same, without charge, in order to
exercise any of Lender's rights or remedies provided herein, at law, in equity,
or otherwise;
(f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for
sale, advertise for sale and sell (in the manner provided for herein) the
Collateral. Lender is hereby granted a license or other right to use, without
charge, Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale and selling any Collateral. Borrower's
rights under all licenses and all franchise agreements shall inure to Lender's
benefit;
(g) Sell the Collateral at either a public or private sale, or both, by way
of one or more contracts or transactions, for cash or on terms, in such manner
and at such places (including Borrower's premises) as Lender determines is
commercially reasonable. It is not necessary that the Collateral be present at
any such sale;
(h) Lender shall give notice of the disposition of the Collateral as
follows:
(1) Lender shall give the Borrower a notice in writing of the time and
place of public sale or, if the sale is a private sale or some other disposition
other than a public sale is to be made, then the time on or after which the
private sale or other disposition is to be made;
(2) The notice shall be personally delivered or mailed, postage
prepaid, to Borrower as provided in Section 12, at least five (5) calendar days
before the date fixed for the sale, or at least five (5) calendar days before
the date on or after which the private sale or other disposition is to be made,
unless the Collateral is perishable or threatens to decline speedily in value.
Notice to Persons other than Borrower claiming an interest in the Collateral
shall be sent to such addresses as they have furnished to Lender;
(i) Lender may credit bid and purchase at any public sale;
(j) Any deficiency that exists after disposition of the Collateral as
provided above shall be paid immediately by Borrower. Any excess will be
remitted without interest by Lender to the party or parties legally entitled to
such excess; and
(k) In addition to the foregoing, Lender shall have all rights and remedies
provided by law and any rights and remedies contained in any other Loan
Documents. All such rights and remedies shall be cumulative.
9.2 No Waiver. No delay on the part of Lender in exercising any right,
power or privilege under this Agreement shall operate as a waiver, nor shall any
single or partial exercise of any right, power or privilege under this Agreement
or otherwise, preclude other or further exercise of the right, power or
privilege or the exercise of any other right, power or privilege.
10. TAXES AND EXPENSES REGARDING THE COLLATERAL. If Borrower fails to pay
any monies (whether taxes, assessments, insurance premiums or otherwise) due to
third parties regarding the Collateral, or fails to make any deposits or furnish
any required proof of payment or deposit, or fails to perform any of Borrower's
other covenants under the terms of this Agreement, then in its discretion and
without prior notice to Borrower, Lender may do any or all of the following:
(a) make any payment which Borrower has failed to pay or any part thereof; (b)
set up such reserves in Borrower's loan account as Lender deems necessary to
protect Lender from the exposure created by such failure; or (c) take any other
action deemed necessary by Lender to preserve and protect its interests and
rights under this Agreement. Any payments made by Lender shall not constitute
an agreement by Lender to make similar payments in the future or a waiver by
Lender of any Event of Default under this Agreement. Lender need not inquire as
to, or contest the validity of, any such expense, tax, security interest,
encumbrance or lien and the receipt of notice for the payment thereof shall be
conclusive evidence that the same was validly due and owing.
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11. WAIVERS AND INDEMNIFICATIONS
11.1 Waivers. Borrower waives demand, protest, notice of protest, notice of
default or dishonor, notice of payment and nonpayment, notice of any default,
notice of nonpayment at maturity, notice of intention to accelerate and notice
of acceleration, so that Lender may exercise any and all rights and remedies
under the Loan Agreement or any other Loan Documents, or as otherwise provided
at law or in equity, immediately upon the occurrence of any Event of Default,
without any further notice, grace or opportunity to cure whatsoever. Borrower
further waives notice prior to Lender's taking possession or control of the
Collateral, any bond or security which might be required by any court prior to
allowing Lender to exercise any of Lender's remedies, and the benefit of all
valuation, appraisement and exemption laws.
11.2 No Marshaling. Borrower, on its own behalf and on behalf of its
successors and assigns, hereby expressly waives all rights, if any, to require a
marshaling of assets by Lender or to require that Lender first resort to some or
any portion of the Collateral before foreclosing upon, selling or otherwise
realizing on any other portion thereof.
11.3 Lender's Liability for Collateral. Lender shall not in any way or
manner be liable or responsible for: (a) the safekeeping of the Collateral; (b)
any loss or damage thereto occurring or arising in any manner or fashion from
any cause; (c) any diminution in the value thereof; or (d) any act or default of
any carrier, warehouseman, bailee, forwarding agency or other Person. All risk
of loss, damage or destruction of the Collateral shall be borne by Borrower.
11.4 Indemnification. Borrower shall defend, indemnify and hold harmless
Lender, its successors, agents and assigns, from and against any and all claims,
suits, actions, causes of action, debts, liabilities, damages, losses,
obligations, charges, judgments and expenses, including attorneys fees and
costs, of any nature whatsoever, in any way relating to or arising from the
transactions contemplated by this Agreement or any Loan Document (including
those relating to or arising from any alleged or actual violation of any law,
and including those relating to or arising from any intangibles tax, stamp tax,
franchise tax, indebtedness tax and any other tax that may be payable by Lender
or Borrower on account of execution or delivery of this Agreement or any of the
other Loan Documents or the creation of any of the Obligations); provided that
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the foregoing indemnification shall not extend to liabilities, damages, losses,
obligations, judgments and expenses proximately caused by the gross negligence
or willful misconduct of Lender or his agents, participants or assigns. This
indemnification provision shall survive the termination of this Agreement.
12. NOTICES. Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement, the Loan Documents or any other
agreement entered into in connection herewith shall be in writing and shall be
personally delivered or sent by registered or certified mail, postage prepaid,
return receipt requested, or by receipted overnight delivery service to Borrower
or to Lender, as the case may be, at their addresses set forth below:
If to Borrower: CT Holdings, Inc.
8750 North Central Expressway, Suite 100
Dallas, Texas 75231
If to Lender: CITN Investment, Inc.
8750 North Central Expressway, Suite 100
Dallas, Texas 75231
The parties may change the address at which they are to receive notices
hereunder by notice in writing in the foregoing manner given to the other. All
notices or demands sent in accordance with this Section, other than notices by
Lender in connection with the Code, shall be deemed received on the earlier of
the date of actual receipt or three calendar days after the deposit thereof in
the mail. Borrower acknowledges and agrees that notices sent by Lender in
connection with the Code shall be deemed sent when deposited in the mail or
otherwise sent by Lender in accordance with the delivery methods set forth
above.
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13. DESTRUCTION OF BORROWER'S DOCUMENTS. All documents or other papers
delivered to Lender may be destroyed or otherwise disposed of by Lender four
months after they are delivered to or received by Lender unless Borrower
requests in writing the return of the documents or other papers and makes
arrangements, at Borrower's expense, for their return.
14. GENERAL PROVISIONS
14.1 Effectiveness; Time of the Essence. This Agreement and the other Loan
Documents shall be binding and deemed effective when executed by Borrower and
Lender. Time is of the essence of this Agreement and the other Loan Documents.
14.2 Successors and Assigns. This Agreement shall bind and inure to the
benefit of the respective successors and assigns of each of the parties;
provided, however, that Borrower may not assign this Agreement or any rights or
duties hereunder without Lender's prior written consent and any prohibited
assignment shall be void and of no effect as against Lender. No consent to an
assignment by Lender shall release Borrower from its Obligations. Lender and
its successors and assigns may assign this Agreement and any other Loan Document
and its rights and duties hereunder and thereunder. Lender reserves the right
to sell, assign, transfer, negotiate or grant participations in all or any part
of, or any interest in Lender's rights and benefits hereunder. In connection
therewith, Lender may disclose all documents and information which Lender now or
hereafter may have relating to Borrower or Borrower's business.
14.3 Headings. Headings and numbers have been set forth herein for
convenience only. Unless the contrary is compelled by context, everything
contained in each paragraph applies equally to this Agreement.
14.4 Interpretation. Neither this Agreement nor any uncertainty or
ambiguity herein shall be construed or resolved against Lender or Borrower,
whether under any rule of construction or otherwise. On the contrary, this
Agreement has been reviewed by all parties and shall be construed and
interpreted according to the ordinary meaning of the words used so as to fairly
accomplish the purposes and intentions of all parties hereto.
14.5 Severability of Provisions. Each provision of this Agreement shall be
severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of any specific provision.
14.6 Amendments in Writing. Neither this Agreement nor any provision hereof
shall be amended, modified, waived or terminated orally or by course of conduct
or pattern of dealing, but only by a written agreement signed by Lender. Any
purported amendment, modification, waiver or termination of this Agreement or
any provision hereof that is not in writing and signed by Lender shall be void
and of no effect.
14.7 Integration. This Agreement, together with the other Loan Documents,
reflects the entire agreement between the parties with respect to the subject
matter hereof. This Agreement, together with the other Loan Documents,
supersedes all prior agreements, understandings and negotiations, if any, which
are merged into this Agreement and the other Loan Documents.
14.8 Counterparts. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts each of which,
when executed and delivered, shall be deemed an original and all of which, when
taken together, shall constitute but one and the same Agreement.
14.9 Revival and Reinstatement of Obligations. If the incurrence or payment
of Obligations by Borrower or the transfer by Borrower to Lender of any property
of Borrower should for any reason subsequently be declared to be void or
voidable under any state or federal law relating to creditors' rights, including
provisions of the Bankruptcy Code relating to fraudulent conveyances,
preferences and other voidable or recoverable payments of money or transfers of
property (a Voidable Transfer), and if Lender is required to repay or restore,
in whole or in part, any such Voidable Transfer, or elects to do so upon the
advice of its counsel, then, as to any Voidable Transfer, or the amount thereof
that Lender is required or
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elects to repay or restore, and as to all reasonable costs, expenses and
attorneys fees of Lender related thereto, the liability of Borrower
automatically shall be revived, reinstated and restored and shall exist as
though such Voidable Transfer had never been made.
14.10 Consultation with Counsel. Borrower and Lender acknowledge that they
have been given the opportunity to consult with counsel of their choice prior to
entering into this Agreement. Lender acknowledges that the Borrower's counsel
does not represent Lender in any manner in connection with this Agreement or the
transactions contemplated hereby.
14.11 Limitation of Liability. No claim may be made by Borrower or any
other person or entity against Lender or the agents of Lender for any special,
indirect, punitive or consequential damages in respect of any claim for breach
of contract or any other theory of liability arising out of or related to the
transactions contemplated by this Agreement, or any act, omission or event
occurring in connection therewith, and Borrower hereby waives, releases and
agrees not to sue upon any claim for any such damages.
14.12 Fax Execution. Delivery of an executed counterpart of this Agreement
or any other Loan Document by fax transmission shall be equally as effective as
delivery of an executed hard copy of the same. Any party delivering an executed
counterpart of this Agreement or any other Loan Document by fax transmission
shall also deliver an executed hard copy of the same, but the failure by such
party to deliver an executed hard copy shall not affect the validity,
enforceability and binding effect of this Agreement or such other Loan Document.
15. CHOICE OF LAW; VENUE. THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION,
INTERPRETATION, AND ENFORCEMENT AND THE RIGHTS OF THE PARTIES SHALL BE
DETERMINED UNDER, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS
OF TEXAS. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN
CONNECTION WITH THIS AGREEMENT SHALL BE LITIGATED ONLY IN THE STATE COURTS
LOCATED IN DALLAS COUNTY, TEXAS OR FEDERAL COURTS WHOSE VENUE INCLUDES DALLAS
COUNTY, TEXAS. THE PARTIES EXPRESSLY SUBMIT AND CONSENT IN ADVANCE TO SUCH
JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED IN ANY SUCH COURT, AND THE
PARTIES HEREBY WAIVE ANY OBJECTION WHICH EITHER MAY HAVE BASED UPON LACK OF
PERSONAL JURISDICTION AND HEREBY CONSENT TO THE GRANTING OF SUCH LEGAL OR
EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. FURTHER, BORROWER AND
LENDER EACH WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT EACH
MAY HAVE TO ASSERT THE DOCTRINE OF "FORUM NON CONVENIENS" OR TO OBJECT TO VENUE
TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION.
16. JURY TRIAL WAIER. TO THE EXTENT PERMITTED BY APPLICABLE LAW, BORROWER
AND LENDER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR
CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE OTHER
LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN OR THEREIN,
INCLUDING CONTRACT, TORT, BREACH OF DUTY, AND ALL OTHER COMMON LAW OR STATUTORY
CLAIMS. BORROWER AND LENDER REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND
EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING
CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS
AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement at Dallas,
Texas.
BORROWER:
CT Holdings, Inc.
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By: _____________________________
Name: ___________________________
Title: __________________________
LENDER:
CITN Investment, Inc.
By: _____________________________
Name: ___________________________
Title: __________________________
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Exhibit B
SECURED CONVERTIBLE PROMISSORY NOTE
$200,000.00 May 24, 2004
FOR VALUE RECEIVED, the undersigned, CT Holdings, Inc., a Delaware corporation
("CT"), promises to pay to the order of CITN Investment, Inc. ("Payee"), at such
place as Payee may designate in writing, in lawful money of the United States of
America, the principal sum of Two Hundred Thousand Dollars ($200,000.00) on the
terms and conditions hereinafter set forth. This Note shall bear interest at
the rate of eight percent (8%) per year and shall mature on the earlier of May
24, 2006 or demand by the Payee (the "Payment Date"), at which time all
outstanding principal shall be due and payable.
Events of Default. The entire unpaid principal balance of this Note shall
immediately become due and payable, at the option of Payee, upon the failure by
CT to pay any installment of principal and interest hereof as and when the same
becomes due and payable in accordance with the terms hereof (the "Event of
Default"). In the event an Event of Default shall occur, the unpaid principal
shall accrue interest in the amount of 18% per annum and Payee may proceed to
protect and enforce its rights either by suit in equity and/or by action at law,
by other appropriate proceedings. No delay on the part of Payee in the exercise
of any power or right under this Note, or under any other instrument executed
pursuant thereto shall operate as a waiver thereof, nor shall a single or
partial exercise of any other power or right preclude further exercise thereof.
Loan Agreement and Security Interest. This Note is made pursuant to that
certain Loan and Security Agreement dated the date hereof and is governed by the
terms thereof. The obligations under this Note are secured by the Loan and
Security Agreement dated of even date herewith by and between CT and Payee.
Conversion. Payee is entitled, at its option, at any time prior to the Payment
Date, to convert all or a portion of the outstanding principal and accrued
interest under this Note into up to 23,666,667 shares of common stock of CT (the
"Conversion Shares"), on a pro rata basis based on the amount of the Note that
is converted. No fractional shares or scrip representing fractions of shares
will be issued on conversion, but the number of Conversion Shares issuable shall
be rounded to the nearest whole share. Upon the surrender of this Note
accompanied by a conversion request, CT shall issue and deliver to Payee that
number of Conversion Shares as shall be determined in accordance herewith. If
CT at any time subdivides (by any stock split, stock dividend, recapitalization
or otherwise) its outstanding shares of common stock into a greater number of
shares, the number of Conversion Shares into which this Note is convertible
immediately prior to such subdivision will be proportionately increased, and if
CT at any time combines (by reverse stock split or otherwise) its outstanding
shares of common stock into a smaller number of shares, the number of Conversion
Shares into which this Note is convertible immediately prior to such combination
will be proportionately decreased. CT and the Payee understand and acknowledge
that CT does not have a sufficient number of shares of common stock available to
permit the conversion of this Note at this time. CT agrees to use its best
efforts to obtain shareholder approval to (a) increase the number of authorized
shares of common stock to a number sufficient to permit conversion, or (b) to
effect a reverse stock split to reduce the number of currently outstanding
shares of common stock to a number small enough to permit the conversion of this
Note.
Costs of Collection. It is hereby specially agreed that if this Note is placed
into the hands of an attorney for collection, or if proved, established, or
collected in any court, CT agrees to pay to Payee an amount equal to all
expenses incurred in enforcing or collecting this Note, including court costs
and reasonable attorneys' fees.
Waiver of Rights. Except for the notice expressly provided herein, the
undersigned and all endorsers, sureties, and guarantors hereof hereby jointly
and severally waive presentment for payment, demand, notice of nonpayment,
protest, notice of protest, and without further notice hereby consent to
renewals, extensions, or partial payments either before or after maturity.
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Usury Limitation. All agreements between CT and Payee, whether now existing or
hereafter arising and whether written or oral, are expressly limited so that in
no contingency or event whatsoever shall the amount paid, or agreed to be paid,
to Payee hereof for the use, forbearance, or detention of the money advanced to
CT, or for the performance or payment of any covenant or obligation contained
herein, exceed the maximum amount permissible under applicable federal or state
law. If, from any circumstance whatsoever, fulfillment of any provision hereof
at the time performance of such provision shall be due shall involve
transcending the limit of validity prescribed by law, then the obligation to be
fulfilled shall be reduced to the limit of such validity, and if from any such
circumstance Payee shall ever receive as interest under this Note or otherwise
an amount that would exceed the highest lawful rate, such amount that would be
excessive interest shall be applied to the reduction of the principal amount
owing under this Note and not to the payment of interest or, if such excessive
interest exceeds the unpaid principal balance of this Note, such excess shall be
refunded to CT. All sums paid or agreed to be paid to Payee for the use,
forbearance, or detention of the indebtedness evidenced hereby shall, to the
extent permitted by applicable law, be amortized, prorated, allocated, and
spread throughout the full term of such indebtedness until payment in full so
that the actual rate of interest on account of such indebtedness is uniform
throughout the term thereof. The terms and provisions of this paragraph shall
control every other provision of all agreements between CT and Payee.
Governing Law. This Note shall be governed by and construed in accordance with
the laws of the State of Texas and the laws of the United States applicable to
transactions in Texas.
CT:
CT Holdings, Inc.
By: ______________________________
Name: ____________________________
Title: ___________________________
PAYEE:
CITN Investment, Inc.
By: ______________________________
Name: ____________________________
Title: ___________________________
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EXHIBIT C
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Lawrence Lacerte, both individually and in
his capacity as the owner of common stock of CITN Investment, Inc., has made,
constituted and appointed and by these presents does make, constitute and
appoint Steven B. Solomon, to be his true and lawful attorney-in-fact to act in,
manage and conduct the affairs described below and for that purpose for me and
in my name, place and stead, and for my use and benefit and as my act and deed,
to do and execute, in the doing or executing of all or any of the following
acts, deeds, and things:
To deliver or to sign, execute and have acknowledged in my name a Schedule 13D
and all other necessary filings (including amendments and exhibits thereto) and
any and all instruments whatsoever in connection therewith, with the Securities
and Exchange Commission relating to the acquiring, holding or disposing of
shares of CT Holdings, Inc., by CITN Investment, Inc.
GIVING AND GRANTING unto said attorney-in-fact, full power and authority to do
and perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as I might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
I hereby declare that any act or thing lawfully done hereunder by said attorney
shall be binding on myself, and on my heirs, legal and personal representatives
and assigns.
This Power of Attorney shall be construed, administered and governed in
accordance with the laws of the State of Texas without regard to principles of
conflict of laws.
IN WITNESS WHEREOF, I have hereunto set my hand this __th day of June 2, 2004.
Witness:
/s/ Lawrence Lacerte
Lawrence Lacerte
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