UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-08718
CT HOLDINGS ENTERPRISES, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 75-2432011
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
TWO LINCOLN CENTRE, SUITE 1600, 5420 LYNDON B. JOHNSON FREEWAY
DALLAS, TEXAS 75240
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(214) 520-9292
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. [_]
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [_]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [_]
Indicate by check mark whether the issuer is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [X] No [_]
State issuer's revenues for its most recent fiscal year $ 0.
As of April 12, 2006, there were outstanding 58,545,928 shares of common stock,
par value $.01 per share.
The aggregate market value of common stock held by non-affiliates of the issuer
(39,427,091 shares) based on 42,221,891 shares and the closing price of the
issuer's common stock as reported on the OTC Bulletin Board of $0.0079 per
share, on April 12, 2006, was $333,553. For purposes of this computation, all
executive officers, directors, and 10% beneficial owners of the issuer are
deemed to be affiliates. Such determination should not be deemed an admission
that such officers, directors, or 10% beneficial owners are, in fact, affiliates
of the issuer.
Transitional Small Business Disclosure Format. Yes [_] No [X]
CT HOLDINGS ENTERPRISES, INC.
FORM 10-KSB
ANNUAL REPORT
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2005
TABLE OF CONTENTS
PART I
Item 1. Description of Business 4
Item 2. Description of Property 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 12
Item 6. Management's Discussion and Analysis or Plan of Operation 13
Item 7. Financial Statements 18
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 18
Item 8A. Control and Procedures 18
Item 8B. Other Information 18
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act 19
Item 10. Executive Compensation 22
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 23
Item 12. Certain Relationships and Related Transactions 24
Item 13. Exhibits 25
Item 14. Principal Accountant Fees and Services 25
Signatures 26
2
PART I
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-KSB contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. CT Holdings
Enterprises, Inc. ("CT Holdings" or the "Company") bases these forward-looking
statements on its expectations and projections about future events, which CT
Holdings has derived from the information currently available to it. In
addition, from time to time, CT Holdings or its representatives may make
forward-looking statements orally or in writing. Furthermore, forward-looking
statements may be included in CT Holdings' filings with the Securities and
Exchange Commission or press releases or oral statements made by or with the
approval of one of CT Holdings' executive officers. For each of these
forward-looking statements, CT Holdings claims the protection of the safe harbor
for forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995. These forward-looking statements relate to future events or
CT Holdings' future performance, including but not limited to:
- possible or assumed future results of operations;
- future revenue and earnings; and
- business and growth strategies
Forward-looking statements are those that are not historical in nature,
particularly those that use terminology such as may, could, will, should,
likely, expects, anticipates, contemplates, estimates, believes, plans,
projected, predicts, potential or continue or the negative of these or similar
terms. The statements contained in this Report that are not purely historical
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, including statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future.
Forward-looking statements are subject to certain known and unknown risks and
uncertainties that could cause actual results to differ materially from those
expressed in any forward-looking statements. These risks and uncertainties
include, but are not limited to, the following important factors with respect to
CT Holdings:
(1) the uncertainty of general business and economic conditions;
(2) the financial performance of our investments;
(3) adverse developments, outcomes and expenses in legal proceedings;
(4) those described under Risk Factors.
Forward-looking statements are only predictions as of the date they are made and
are not guarantees of performance. All forward-looking statements included in
this document are based on information available to CT Holdings on the date of
this Annual Report. Readers are cautioned not to place undue reliance on
forward-looking statements. The forward-looking events discussed in this report
on Form 10-KSB and other statements made from time to time by CT Holdings or its
representatives may not occur, and actual events and results may differ
materially and are subject to risks, uncertainties and assumptions about CT
Holdings including without limitation those discussed elsewhere in this Annual
Report under the heading Risk Factors as well as those discussed elsewhere in
this Annual Report, and the risks discussed in our Securities and Exchange
Commission filings. Except for their ongoing obligations to disclose material
information as required by the federal securities laws, CT Holdings is not
obligated to publicly update or revise any forward-looking statement, whether as
a result of new information, future events or otherwise. In light of these
risks, uncertainties and assumptions, the forward-looking events discussed in
this Annual Report on Form 10-KSB and in other statements made from time to time
by CT Holdings or its representatives might not occur.
3
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW OF CT HOLDINGS
Since 1996 CT Holdings has provided management expertise including consulting on
operations, marketing and strategic planning and has been a source of capital to
early stage technology companies. The Company was incorporated in Delaware in
1992. On March 13, 2006 the Company changed its name to CT Holdings Enterprises,
Inc. The business model was designed to enable the companies with whom the
Company acquires or invests to become market leaders in their industries. Our
business strategy since 1996 has led to the development, acquisition and
operation of technology based businesses with compelling valuations and strong
business models. The goal has been to realize the value of these investments for
the Company's shareholders through a subsequent liquidity event such as a sale,
merger, spin-off or initial public offering of the investee companies. However,
our business model is constrained by our lack of capital.
At December 31, 2005, we held investments in Parago, Inc. ("Parago") and River
Logic, Inc. ("River Logic"). Parago is a marketing services company that brings
transaction processing capabilities together with information-based marketing in
a way that transforms the way companies interact with their customers. Through
web-enabled products, processes and resources, Parago creates solutions to meet
their clients' marketing objectives. Parago provides a proprietary, promotional
marketing technology platform that helps their clients reduce promotional
program costs, increase sales, and enhance customer relationships. We account
for our investment in Parago using the cost method of accounting. The carrying
value of the investment in Parago was written down in prior periods and has no
carrying value at December 31, 2005 and 2004.
In May 2000, CT Holdings acquired a minority interest in River Logic, Inc.
("River Logic"), which develops decision-support applications for industries.
River Logic's applications enable industry professionals to model complex
enterprises and explore financial relationships on a desktop computer or laptop.
Embedded analytics allow end-users to understand the financial implications of
critical business decisions by manipulating graphical icons that model their
enterprise. We account for our investment in River Logic using the cost method
of accounting. The carrying value of the investment in River Logic was written
down in prior periods and has no carrying value at December 31, 2005 and 2004.
Other than its holdings of Parago and River Logic, the Company does not have any
products or services, customers or revenue, and the Company has no other lines
of business.
OVERVIEW OF PARAGO
We formed Parago in 1999 through the contribution of some technology assets
acquired in the late 1990's during the growth period of Internet electronic
commerce industry.
At December 31, 2005, the Company holds 25,000 shares of Parago common stock and
28.8749 shares of Series A-3 convertible preferred stock (convertible into 2,887
shares of Parago common stock). In February 2004, our Chief Executive Officer
("CEO") loaned us $30,000 in order for us to exercise our warrants to purchase
the shares of Series A-3 convertible preferred stock, pursuant to a promissory
note secured by a pledge of the preferred stock. Our CEO also elected to
exercise an exchange right whereby he exchanged 5,000,000 (before a 1:1000
reverse stock split that occurred in 2001) shares of Parago, Inc. common stock
for 6,000,000 shares of CT Holdings common stock. Our CEO has postponed his
right to receive these shares until such time as the shares become authorized.
In prior periods due to continuing operating losses and other factors we wrote
down the carrying value of our investment in Parago to zero. We believe that
our initial $50,000 investment along with the $30,000 to purchase warrants in
Parago, represented by 20,000 (20,000,000 pre 1:1000 reverse split shares)
shares of common stock, 28.8749 shares of Series A-3 convertible preferred stock
(convertible into 2,887 shares of Parago common stock) and an additional 5,000
shares (5,000,000 pre 1:1000 reverse split shares) received in February 2004 may
ultimately provide an appropriate return on our investment in Parago.
4
OVERVIEW OF RIVER LOGIC
In May 2000, CT Holdings acquired a minority ownership interest in River Logic.
River Logic develops and markets enterprise optimization technologies and
decision support software applications. Recognizing a need in the marketplace,
River Logic created strategic-level, process modeling tools and approaches for
helping senior managers suggest, evaluate, and understand the impact of business
decisions as they relate to the overall profitability of their organizations.
River Logic's optimization tools integrate several technologies such as mixed
integer optimization, visual process modeling, accounting, and constraint theory
to bring financial planning and profitability tools to market.
The Company holds an ownership interest in River Logic of approximately 8% at
December 31, 2005. Since our initial investment in May 2000, River Logic has
raised additional capital through the issuance of preferred stock and other
equity securities. In a prior period we wrote down the carrying value of our
investment in River Logic to zero. While we believe that our investment in River
Logic will be successful there can be no assurance that our investment in River
Logic will ultimately provide an appropriate return on our investment.
SPIN-OFF OF CITADEL SECURITY SOFTWARE INC.
On May 17, 2002, we effected a spin-off of Citadel Security Software Inc.
("Citadel"), a wholly-owned subsidiary of the Company at the time, through the
declaration of a pro rata dividend distribution to CT Holdings shareholders in a
ratio of one (1) share of Citadel common stock for every four (4) shares of CT
Holdings common stock (the "Distribution"). In connection with the
Distribution, we entered into a Plan and Agreement of Distribution, a Tax
Disaffiliation Agreement and a Transition Services Agreement with Citadel.
EMPLOYEES
As of December 31, 2005 and 2004, CT Holdings had no full-time employees. CT
Holdings receives services from Citadel pursuant to the Transition Services
Agreement referred to above.
GOVERNMENT REGULATION
Government regulation has not had a material effect on the conduct of our
business to date.
ACCOUNTANT'S REPORT
We have received a report from our independent registered public accounting firm
for our year ended December 31, 2005 containing an explanatory paragraph that
describes the uncertainty regarding our ability to continue as a going concern
due to our recurring operating losses and our significant working capital
deficiency. Please see Management's Discussion and Analysis - Liquidity and
Capital Resources, Risk Factors and Note A to our financial statements for
discussions of some of the conditions that could impact our ability to continue
operations under the current business conditions.
5
FORWARD-LOOKING STATEMENTS
The following discussion contains forward-looking statements that involve known
and unknown risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance, or achievements to be materially
different from any future results, levels of activity, performance, or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others things, those risk factors set forth in this
section and elsewhere in this report. We identify forward-looking statements by
words such as may, should, could, expects, plans, anticipates, believes,
estimates, predicts, potential, or continue or similar terms that refer to the
future. We cannot guarantee future results, levels of activity, performance or
achievements.
RISK FACTORS
Investing in our common stock involves a high degree of risk. Any of the
following risks could materially adversely affect our business, operating
results and financial condition and could result in a complete loss of your
investment.
In addition to the other information in this Report, the following factors
should be considered carefully in evaluating the Company and its business. This
disclosure is for the purpose of qualifying for the safe harbor provisions of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. It contains factors that could
cause results to differ materially from such forward-looking statements. These
factors are in addition to any other cautionary statements, written or oral,
which may be made or referred to in connection with any such forward-looking
statement.
The following matters, among other things, may have a material adverse effect on
the business, financial condition, liquidity, or results of operations of the
Company. Reference to these factors in the context of a forward-looking
statement or statements shall be deemed to be a statement that any one or more
of the following factors may cause actual results to differ materially from
those in such forward-looking statement or statements. Before you invest in our
common stock, you should be aware of various risks, including those described
below. Investing in our common stock involves a high degree of risk. You should
carefully consider these risk factors, together with all of the other
information included in this Report, before you decide whether to purchase
shares of our common stock. Our business and results of operations could be
seriously harmed by any of the following risks. The trading price of our common
stock could decline due to any of these risks, and you may lose part or all of
your investment.
GENERAL RISKS
WE HAVE RECEIVED A GOING CONCERN REPORT FROM OUR INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM, HAVE A HISTORY OF NET LOSSES AND WILL NEED ADDITIONAL FINANCING
TO CONTINUE AS A GOING CONCERN.
We received a report from our independent registered public accounting firm for
our year ended December 31, 2005 containing an explanatory paragraph that
describes the uncertainty regarding our ability to continue as a going concern
due to our recurring operating losses and our significant working capital
deficiency. Historically, we have incurred recurring operating losses and have a
significant stockholders' deficit at December 31, 2005 of approximately $5.8
million. We had a cash balance of $197 at December 31, 2005 and current
liabilities total approximately $5.8 million. We have limited access to capital,
no plans to raise capital, and we have not identified sources of capital at
December 31, 2005. Our past funding needs of the business have been provided by
financings through short-term notes payable and additional investments from
related parties, including our CEO and CITN Investment Inc. ("CII"), an entity
of which our CEO is an officer, director and 50% shareholder, however there can
be no assurance that such funds will be available from these related parties in
the future. The Company has been and continues to be dependent upon outside
financing to perform its business development activities, make investments in
new technology companies and to fund operations.
We have made investments in entities that we believe may provide liquidity to
the Company in the long term and we believe that Parago and River Logic may
ultimately be successful. Both Parago and River Logic are privately held
companies and because we hold minority interests in these companies, we have
received only limited information regarding their results of operations and
financial condition. We have not participated in the additional capital
infusions (other than the Series A-3 preferred stock of Parago) since our
initial investments and as a result, our ownership percentage in both investee
companies has been significantly diluted. Our ownership in Parago consists of
25,000 shares of common stock and 28.8749 shares of Series A-3 convertible
preferred stock (convertible to 2,887 shares of Parago common stock), and
approximately 8% of River Logic. The carrying value of the investments in Parago
and River Logic had been written down in prior periods and has no carrying value
at December 31, 2005 and 2004.
6
While we believe that the performance of the investee companies to date has been
as expected, there can be no assurance that we will ever achieve liquidity from
these investments. In addition, there can be no assurance that our plans will
be successful or what other actions may become necessary in the future. Until
we are able to create liquidity from our investments through sale to a strategic
investor, an initial public offering or some other liquidity transaction, we
will continue to require working capital to fund operating expenses. Although
we have been successful raising capital in the past, an inability to raise
capital may require us to sell assets. Such actions could have a material
adverse effect on our business operations and result in charges that could be
material to the Company's business and results of operations. At December 31,
2005 we have not identified sources of capital nor do we have any plans to raise
sufficient amounts of capital to settle liabilities or to fund business
development activities.
OUR CONVERTIBLE NOTE MAY ADVERSELY IMPACT THE COMPANY AND OUR COMMON
STOCKHOLDERS OR HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY.
We have issued an amended and restated convertible secured promissory note (the
"Note") for approximately $271,000 payable to CII, an entity owned 50% by Steven
B. Solomon, our CEO and Chairman of the Board, and 50% by Lawrence Lacerte, a
shareholder and former director of our Company. Pursuant to the terms of the
note and the related Loan and Security Agreement (the "Agreement"), the Note is
secured by a pledge of all of our assets and the Note is convertible into
approximately 240 million shares of our common stock, at the option of CII, and
if the Note is repaid, CII has an option to purchase up to 71 million shares of
our common stock at an exercise price of $0.01 per share. CT Holdings has the
option to borrow up to $600,000 under the Agreement (at the sole discretion of
CII). We have also agreed to use our best efforts to amend our certificate of
incorporation or undertake a reverse stock split to permit conversion if CII
elects to convert the Note. The terms of the Note and the Agreement will make it
more difficult or impossible for us to raise additional funds in the future and
may have a material adverse effect on us and our financial condition and results
of operations. The Note is senior to our common stock on any liquidation or sale
of our Company, so the Note must be paid before common stockholders would
receive funds in the event of a liquidation or sale. In addition, the Note is
due and payable on the earlier to occur of May 24, 2006 or demand by CII. In the
event of a default to CT Holdings under the Note or Agreement or demand for
payment by CII, CII could foreclose on the loans and obtain all of our assets or
force us into bankruptcy, in which case our common stock would most likely be
worthless. These terms and conditions could have a material adverse effect on us
and our financial condition and results of operations.
OUR BUSINESS FOCUS IS THE DEVELOPMENT AND ACQUISITION OF EARLY STAGE COMPANIES;
HENCE, WE WILL ENCOUNTER NUMEROUS RISKS ASSOCIATED WITH OUR BUSINESS FOCUS AND
OUR PRIOR OPERATING HISTORY MAY NOT BE A MEANINGFUL GUIDE TO EVALUATING OUR
FUTURE PERFORMANCE.
Our business model is designed to enable the companies in whom we invest or
acquire to become market leaders in their industries. Our strategy over the
years has led to the development, acquisition and operation of technology based
businesses with strong business models and compelling valuations. We believe
that the anticipated growth in technology creates strong opportunities for us to
increase shareholder value by investing in early stage ventures well positioned
for growth in their respective marketplaces. Our business strategy seeks to
increase the value of each investee by providing management, marketing and
financial expertise along with financial capital and then realize this new value
through a subsequent liquidity event such as a sale, merger or initial public
offering of the investee companies. However, the impact of any advice and
expertise may be limited due to a lack of a significant ownership percentage in
any of our investees and the lack of available capital.
In May 2002, we were successful in spinning off of Citadel Security Software
Inc. ("Citadel") into a standalone company through the pro-rata dividend
distribution of Citadel common stock to shareholders of CT Holdings. At the time
of the spin-off, which was first considered in November 2001, Citadel was losing
substantial amounts of money and the investee assets of CT Holdings were more
valuable than the assets in Citadel. At December 31, 2005 we held investments in
two companies, Parago and River Logic. The respective carrying values of the
investments in Parago and River Logic were written down in prior periods and
have no carrying value at December 31, 2005 and 2004. The lack of availability
of private and public capital available to us has prevented us from making any
additional investments and there can be no assurance that the availability of
capital will improve so that we can execute our business plan.
7
We have a limited history in executing our business strategy. As a consequence,
our prior operating history may not provide a meaningful guide to our prospects
in emerging markets. Moreover, our business model and prospects must be
considered in light of the risk, expense and difficulties frequently encountered
by companies in early stages of development, particularly companies in new and
rapidly evolving markets. We may be unable to execute our strategy of developing
our business due to numerous risks, including the following:
- We may be unable to identify or develop relationships with emerging
companies.
- Any companies that we are able to attract may not succeed and the
value of our assets and the price of our common stock could
consequently decline.
- Our business model is unproven and depends on the willingness of
companies to participate in our business development model and
collaborate with each other and us.
- Our expenses may increase as we build the infrastructure necessary to
implement this model.
- We face competition from other incubators, some of which are publicly
traded companies, venture capital companies and large corporations;
many of these competitors have greater financial resources and brand
name recognition than we do, which may make it difficult for us to
effectively compete.
- We will require additional capital resources in order to implement our
business model and we may not be able to obtain these resources on
attractive terms, if at all.
WE HAVE INVESTED IN EARLY STAGE VENTURES; AND THERE CAN BE NO ASSURANCE THAT OUR
INVESTMENTS WILL PROVE TO BE FINANCIALLY ATTRACTIVE.
We have developed and invested in Parago and River Logic (our "investees" or
"investee companies"). Inasmuch as our investee companies are early stage
ventures, it is difficult to judge their future prospects. Economic,
governmental, industry and internal company factors outside of our control may
materially and adversely affect each of our investee companies. These investee
companies have had losses in the past and may have substantial losses in the
future. To continue in business, the investee companies may need to raise
capital and may not be able to do so on reasonable terms or at all. In addition,
if the investee companies are able to raise capital, our ownership stake in
these companies would be diluted. Our investee companies may also never be able
to complete an initial public offering of stock, or successfully close a sale,
merger or other liquidity event whereby we would realize a return on our
investment.
WE HAVE LIMITED ACCESS TO FINANCIAL AND OPERATING REPORTS OF OUR INVESTEE
COMPANIES.
Both Parago and River Logic are privately held entities and as such are not
required to provide financial information to its minority shareholders.
Consequently we have limited access to financial operating reports on
performance measures. As a result, we cannot measure or estimate the long-term
prospects of these investments and while we believe that both Parago and River
Logic have been successful, we cannot assure you that because of the limited
financial reporting that they may be successful in the future or that they will
provide an appropriate return on our investment.
8
CT HOLDINGS DOES NOT HAVE ACCESS TO THE CASH FLOW OR ASSETS OF ITS INVESTEE
COMPANIES AND HAS BEEN UNABLE TO OPERATE PROFITABLY.
Historically, businesses and technologies in which we have invested are not
controlled by us and as such we have been unable to rely on the investee company
businesses for a source of cash flow, earnings, assets or capital. There can be
no assurance that CT Holdings will be able to successfully put in place the
financial, administrative and managerial structure necessary to continue to
operate as an independent public company, or that the development of such
structure will not require a significant amount of management's time and other
resources.
WE MAY INCUR SIGNIFICANT COSTS TO AVOID INVESTMENT COMPANY STATUS AND MAY SUFFER
OTHER ADVERSE CONSEQUENCES IF WE ARE DEEMED TO BE AN INVESTMENT COMPANY.
We may incur significant costs to avoid investment company status and may suffer
other adverse consequences if we are deemed to be an investment company under
the Investment Company Act of 1940. Some of our contemplated equity investments
in other businesses may constitute investment securities under the 1940 Act. A
company may be deemed to be an investment company if it owns investment
securities with a value exceeding 40% of its total assets, subject to certain
exclusions. Investment companies are subject to registration under, and
compliance with, the 1940 Act unless a particular exclusion or Securities and
Exchange Commission safe harbor applies. If we were to be deemed an investment
company, we would become subject to the requirements of the 1940 Act. As a
consequence, we would be prohibited from engaging in some businesses or issuing
our securities and might be subject to civil and criminal penalties for
noncompliance. In addition, certain of our contracts might be voided, and a
court-appointed receiver could take control of us and liquidate our business.
Following the Distribution of Citadel, we may be deemed to be an investment
company unless we qualify for a safe harbor within the time permitted under the
1940 Act.
Although we have yet to make any investments in the investment securities of
companies other than Parago and River Logic, such investments, if and when made,
could fluctuate in value, which may cause the value of such securities to exceed
40% of our total assets. Unless an exclusion or safe harbor were available to
us, we would have to attempt to reduce our investment securities as a percentage
of our total assets. This reduction could be accomplished in a number of ways,
including the disposition of investment securities and the acquisition of
non-investment security assets. If we were required to sell investment
securities, we may sell them sooner than we may otherwise have preferred. These
sales may be at depressed prices and we might never realize anticipated benefits
from, and may incur losses on, these investments. Some investments may not be
sold due to contractual or legal restrictions or the inability to locate a
suitable buyer. Moreover, we may incur tax liabilities when we sell assets. We
may also be unable to purchase additional investment securities that may be
important to our operating strategy. If we decide to acquire non-investment
security assets, we may not be able to identify and acquire suitable assets and
businesses.
OUR STOCK IS TRADED IN THE OVER THE COUNTER MARKET.
Our common stock was de-listed from the NASDAQ SmallCap Market on May 17, 2001,
because we did not meet the NASDAQ's requirements for continued listing. Our
common stock now trades on the OTC Bulletin Board. The OTC Bulletin Board is
generally considered to be a less efficient market, and our stock price, as well
as the liquidity of our common stock, may be adversely impacted as a result.
The OTC Bulletin Board requires that listed companies remain current in their
filings with the Securities and Exchange Commission. If we are unable to remain
current in our SEC filings, due to lack of funds or personnel or otherwise, we
could be delisted from the OTC Bulletin Board, and our stock would trade, if at
all, on the pink sheets.
WE ARE INVOLVED IN LEGAL PROCEEDINGS THAT COULD HAVE A MATERIAL ADVERSE EFFECT
ON OUR BUSINESS
We are involved in legal proceedings as described in PART I Item 3. Legal
Proceedings and from time to time, we may be subject to other legal proceedings,
including but not limited to claims that we have infringed the intellectual
property rights of others, product liability claims, or other claims incidental
to our business. While we intend to defend such lawsuits, adverse decisions or
settlements, and the costs of defending such suits, could have a material
adverse effect on our business.
IF WE LOSE THE SERVICES OF CITADEL UNDER THE TRANSITION SERVICES AGREEMENT, OUR
BUSINESS WILL SUFFER.
We are dependent on the services provided by employees of Citadel under the
Transition Services Agreement. Our business would be negatively impacted if we
were to lose the availability of these services.
MEMBERS OF OUR BOARD OF DIRECTORS MAY HAVE INTERCOMPANY CONFLICTS OF INTEREST
AFTER OUR SPIN-OFF.
Members of the board of directors and management of CT Holdings own shares of
both Citadel and CT Holdings common stock after the spin-off of Citadel to our
shareholders. In addition, following the spin-off, three of the four directors
of CT Holdings are also directors of Citadel, and the Chief Executive Officer
and Chief Financial Officer of CT Holdings also continue to serve as Chief
Executive Officer and Chief Financial Officer of Citadel. These relationships
could create, or appear to create, potential conflicts of interest when our
directors and executives are faced with decisions that could have different
implications for Citadel and CT Holdings. Examples of these types of decisions
might include the resolution of disputes arising out of the agreements governing
the relationship between CT Holdings and Citadel following the spin-off. Also,
the appearance of conflicts, even if such conflicts do not materialize, might
adversely affect the public's perception of CT Holdings following the spin-off.
9
OUR EARNINGS AND STOCK PRICE ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS.
Due to the factors noted in this Report, our earnings and stock price have been
and may continue to be subject to significant volatility, particularly on a
quarterly basis. We have experienced no revenue or earnings which have had an
immediate and significant adverse effect on the trading price of our common
stock. This may occur again in the future.
FAILURE TO QUALIFY AS A TAX-FREE TRANSACTION COULD RESULT IN SUBSTANTIAL
LIABILITY
In May 2002, CT Holdings effected a pro rata distribution of the common stock of
Citadel to Stockholders of CT Holdings in a ratio of one (1) share of Citadel
common stock for every four (4) shares of CT Holdings common stock. CT Holdings
and Citadel intend for the Distribution to be tax-free for U.S. federal income
tax purposes. Neither CT Holdings nor Citadel has requested an advance ruling
from the Internal Revenue Service, or any opinion of their tax advisors, as to
the tax consequences of the Distribution. No assurance can be given that the
Internal Revenue Service or the courts will agree that the Distribution is
tax-free.
If the Distribution does not qualify for tax-free treatment, a substantial
corporate tax would be payable by the consolidated group of which CT Holdings is
the common parent measured by the difference between (1) the aggregate fair
market value of the Citadel Shares on the Distribution Date and (2) CT Holdings'
adjusted tax basis in the Citadel Shares on the Distribution Date. The
corporate level tax would be payable by CT Holdings. However, Citadel has
agreed under certain circumstances to indemnify CT Holdings for all or a portion
of this tax liability. In addition, under the applicable treasury regulations,
each member of CT Holdings' consolidated group (including Citadel) is severally
liable for such tax liability.
Furthermore, if the Distribution does not qualify as tax-free, each CT Holdings
stockholder who received Citadel Shares in the Distribution would be taxed as if
he had received a cash dividend equal to the fair market value of his Citadel
Shares on the Distribution Date.
Even if the Distribution qualifies as tax-free, CT Holdings could nevertheless
incur a substantial corporate tax liability under Section 355(e) of the Internal
Revenue Code of 1986, as amended (the Internal Revenue Code or the Code), if CT
Holdings or Citadel were to undergo a change in control (whether by acquisition,
additional share issuance or otherwise) pursuant to a plan or series of related
transactions which include the Distribution. Any transaction which occurs
within the four-year period beginning two years prior to the Distribution is
presumed to be part of a plan or series of related transactions which includes
the Distribution unless CT Holdings establishes otherwise. Under certain
circumstances, Citadel would be obligated to indemnify CT Holdings for all or a
portion of this substantial corporate tax liability under the tax disaffiliation
agreement.
ITEM 2. DESCRIPTION OF PROPERTY
CT Holdings shares office space with Citadel Security Software Inc. and as part
of an agreement, CT Holdings is charged an administrative fee of $10,000 per
calendar quarter, reduced from $7,500 per month in July 2005, which includes an
estimate of the cost of the space. We believe that this space will be sufficient
to meet our needs for the foreseeable future.
The telephone number of our principal office is (214) 520-9292 and the Company
maintains a website at http://www.ct-holdings.com.
10
ITEM 3. LEGAL PROCEEDINGS
Set forth below are litigation matters to which we are a party. We believe that
we have meritorious defenses and will vigorously defend ourselves. However, an
unfavorable resolution of, settlement, or defense costs related to one or more
of these lawsuits could have a material adverse effect on our business, results
of operations or financial condition.
In August 1998, Janssen-Meyers Associates L.P. ("JMA") filed a lawsuit against
the Company arising out of an alleged 1995 contract with the Company's
predecessor ("Old Citadel"). The suit alleged that Old Citadel breached a letter
of intent dated September 1995 and/or a Placement Agency Agreement dated
November 1995 between JMA and Old Citadel. As its damages, JMA claimed that it
was entitled to, among other things, the cash value of warrants to purchase 1.8
million shares of CT Holdings common stock at an exercise price of $0.89 per
share, valued during May 1996. According to JMA's valuation of those warrants,
potential damages were alleged to exceed $40 million. The Company vigorously
disputes that it breached either the letter of intent or the Placement Agency
Agreement or that it is liable to JMA. The lawsuit was styled Janssen-Meyers
Associates, L.P. v. Citadel Technology, Inc., and was filed in the Supreme Court
of the State of New York, County of New York. The Company removed the case to
federal court in the Southern District of New York.
Following mediation in July 2000, the Company entered into a settlement term
sheet, to attempt to resolve the disputes between it and JMA, pursuant to which
the Company and JMA agreed in principle to settle the lawsuit for an aggregate
of $3 million, in a combination of $1.5 million in cash and 300,000 shares of
the Company's common stock with a guaranteed value of $5 per share as of
January, April and October 2001 (with respect to 100,000 of the shares for each
period). The settlement was subject to execution of definitive settlement
documents and approval of the boards of directors of both parties.
However, the Company and JMA were unable to negotiate the final definitive
settlement agreement. The case was dismissed in August 2000 without any
resolution of this issue. On March 27, 2001, JMA attempted to reopen this
matter, but the Court hearing the JMA lawsuit issued a Summary Order denying
JMA's motion to enforce the settlement term sheet and confirmed the prior
dismissal of the lawsuit. The Court further ruled that JMA would either have to
bring an action on the proposed settlement or move to re-open the dismissed
case. The Court stated that it did not express any view with respect to the
merits of the settlement that brought about the dismissal of the case. There was
no activity on the case from March 2001 through August 2001. On August 27, 2001
JMA refiled its lawsuit with a federal court in New York, and the Company filed
its motion to dismiss the case because the plaintiffs lacked the required
diversity jurisdiction to pursue the claims in federal court. On October 31,
2001 the case was dismissed in federal court. In December 2001, the plaintiffs
refiled the lawsuit in the state court seeking to enforce the proposed
settlement term sheet. The case was filed in Supreme Court of New York, that
state's trial court, in a case styled Roan Meyers v. CT Holdings. CT Holdings
has filed counterclaims for breach of the term sheet as well as breach of the
placement agency agreement. Cross motions for partial summary judgments have
been argued but on June 9, 2004 the court entered judgment in favor of
Roan-Meyers in the amount of $3,000,000 and granted interest at the rate of 9%
from October 31, 2000 through the date of final judgment, and thereafter at the
statutory rate allowed by law. The $3,000,000 judgment as well as the interest
from October 2000 through December 31, 2005 of $1,404,590 has been accrued. The
Company has appealed the final judgment, and the appellate court affirmed the
trial court's decision. The Company intends to vigorously defend this case.
On April 8, 2005, Meyers Associates, L.P. f/k/a Roan/Meyers Associates, L.P. and
f/k/a Janssen-Meyers Associates, L.P. ("Meyers") filed a lawsuit in the Court of
Chancery of the State of Delaware, in New Castle County, against the Company,
Citadel Security Software, Inc. (Citadel) including Steven B. Solomon, the Chief
Executive and a Director of the Company, Chris A. Economou, a Director of the
Company, Lawrence Lacerte, a former Director of the Company, and Phillip J.
Romano, a former Director of the Company (the "Individual Defendants"). The suit
alleges that in connection with an action filed in the Supreme Court of New
York, New York County, to enforce a Settlement Term Sheet executed on July 7,
2000 by Meyers and CT Holdings, Meyers was awarded a judgment against CT
Holdings in the amount of $3 million plus interest on the judgment at the rate
of 9% from October 31, 2000 until the date of entry of that judgment and
thereafter at the statutory rate (the "Judgment"). CT Holdings has appealed the
Judgment and that appeal is pending. The suit alleges that CT Holdings' May 2002
spin-off of its interests in Citadel to CT Holdings' shareholders rendered CT
Holdings insolvent and constituted a fraudulent conveyance to defraud CT
Holdings' creditors, including Meyers. The suit asserts fraudulent conveyance
claims against Citadel and CT Holdings pursuant to Delaware statutory and common
law. The suit also asserts a claim against Citadel for successor liability as
the alleged successor in interest or alter ego of CT Holdings. The suit alleges
that the Individual Defendants who were officers and/or directors of CT Holdings
at the time of the spin-off breached fiduciary duties allegedly owed to
creditors of CT Holdings, including Meyers, by approving and allowing the
spin-off transaction. The suit seeks to void the spin-off transaction or
alternatively to hold Citadel liable for the Judgment including interest, to
recover damages against the Individual Defendants in an amount not less than the
Judgment including interest, plus an unspecified amount of punitive,
consequential and incidental damages, as well as attorneys' fees and costs. The
Company believes that this suit is without merit and intends to vigorously
defend this action. The ultimate outcome is not currently predictable. Currently
the Company is unable to estimate the ultimate liability, if any, related to
this suit, and therefore has not recorded a liability for this suit at December
31, 2005.
The Company may become involved from time to time in litigation on various
matters which are routine to the conduct of our business. The Company believes
that none of these actions, individually or in the aggregate, will have a
material adverse effect on our financial position or results of operations,
though any adverse decision in these cases or the costs of defending or settling
such claims could have a material adverse effect on our business.
11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the fourth
quarter of 2005.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our common stock trades on the OTC Bulletin Board ("OTCBB") under the symbol
CITN. The following table sets forth, for the periods indicated, the high and
low closing sale prices for the Common Stock as reported by the OTCBB and
displayed on its website. The quotations reflect inter-dealer prices, without
retail markup, markdown or commission, and may not represent actual
transactions.
HIGH LOW
---------- ------
YEAR ENDED DECEMBER 31, 2005
1st Quarter $0.015 $0.010
2nd Quarter 0.011 0.006
3rd Quarter 0.017 0.006
4th Quarter 0.009 0.005
YEAR ENDED DECEMBER 31, 2004
1st Quarter $0.100 $0.030
2nd Quarter 0.050 0.030
3rd Quarter 0.040 0.020
4th Quarter 0.030 0.010
At December 31, 2005 there were approximately 762 record holders of common stock
of the Company. Holders of common stock are entitled to dividends when and if
declared by the Board of Directors out of funds legally available therefore. The
Company has never paid cash dividends on its common stock, and management
intends, for the immediate future, to retain any earnings for the operation and
expansion of the Company's business. Any future determination regarding the
payment of dividends will depend upon results of operations, capital
requirements, the financial condition of the Company and such other factors that
the Board of Directors of the Company may consider.
The stock option information shown below is not subject to a stock option plan
approved by shareholders.
Equity Compensation Plan Information
---------------------------------------------------------------------------------------------
Number of
securities
remaining available
for future issuance
under equity
Number of securities to Weighted-average compensation plans
be issued upon exercise exercise price of (excluding
of outstanding options, outstanding options, securities reflected
Plan category warrants and rights warrants and rights in column (a))
(a) (b) (c)
--------------------- ------------------------ ---------------------- --------------------
Equity compensation
plans approved by
security holders. - - -
Equity compensation
plans not approved by
security holders. 2,887,500 (1) $0.23 -
(1) Excludes common stock that may be issued in connection with the Company's
CEO exercise of a right to exchange 5,000,000 (pre 1:1000 reverse stock split)
shares of Parago common stock for 6,000,000 shares of CT Holdings common stock
exercised in February 2004. The CEO has waived his right to receive these shares
until such time as shares become authorized.
The options were issued under individual arrangement and were not issued
pursuant to a plan.
Recent Sales of Unregistered Securities
The Company issued an amended and restated promissory note during the fourth
quarter of 2005 and filed a Current Report on Form 8-K.
Repurchases of Securities
The Company made no repurchases of shares during the fourth quarter of 2005.
12
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto found elsewhere in this Form 10-KSB, as well as the
disclosure relating to forward-looking statements set forth above under the
caption Factors That May Affect Future Operating Results.
OVERVIEW
CT Holdings Enterprises, Inc. provides management expertise and sources of
capital to early stage companies. At December 31, 2005 and 2004 we held
investments in Parago and River Logic. We were incorporated in Delaware in 1992.
On March 13, 2006 the Company changed its name to CT Holdings Enterprises, Inc.
Our business model is designed to enable the companies in which we invest or
acquire to become market leaders in their industries. Our strategy is expected
to lead to the development, acquisition and operation of technology based
businesses with compelling valuations and strong business models. We believe
that the anticipated growth in technology creates strong opportunities for us to
increase shareholder value by investing in well-positioned early stage ventures.
Our goal is to realize the value of our investments for our shareholders through
a subsequent liquidity event such as a spin-off, sale, merger or initial public
offering of the investee companies.
At December 31, 2005 our lack of available capital has limited our ability to
raise sufficient capital to invest in additional companies and technologies that
could offer us and our shareholders a reasonable rate of return on their
investment in the foreseeable future. We expect that if and when capital becomes
available to us, we may continue our business development and investment
activities, however there can be no assurance that any capital will be available
to us. Until such time as capital becomes available the Company's business
activities will be limited to reviewing investment opportunities, filing of
compliance documents and defending the lawsuits disclosed in Part I, Item 3 -
Legal Proceedings.
OVERVIEW OF PARAGO
We formed Parago in 1999 through the contribution of some technology assets
acquired in the late 1990's during the growth period of Internet electronic
commerce industry. At December 31, 2005, the Company holds 25,000 shares of
Parago common stock and 28.8749 shares of Series A-3 convertible preferred stock
(convertible into 2,887 shares of Parago common stock). In February 2004, our
CEO loaned us $30,000 in order for us to exercise our warrants to purchase the
shares of Series A-3 convertible preferred stock, pursuant to a promissory note
secured by a pledge of the preferred stock. Our CEO also elected to exercise an
exchange right whereby he exchanged 5,000,000 (before a 1:1000 reverse stock
split that occurred in 2001) shares of Parago, Inc. common stock for 6,000,000
shares of CT Holdings common stock. Our CEO has waived his right to receive
these shares until such time as the shares become authorized. The carrying
value of the investment in Parago was written down in prior periods and has no
carrying value at December 31, 2005 and 2004. While we believe that our initial
$50,000 investment along with the $30,000 to purchase warrants in Parago,
represented by 20,000 shares of common stock, 28.8749 shares of Series A-3
convertible preferred stock (convertible into 2,887 shares of Parago common
stock) and an additional 5,000 shares (5,000,000 pre reverse split shares)
received in February 2004 will be successful, there can be no assurance that our
investment in Parago will ultimately provide an appropriate return on our
investment.
OVERVIEW OF RIVER LOGIC
In May 2000, CT Holdings acquired a minority ownership interest in River Logic.
River Logic develops and markets enterprise optimization technologies and
decision support applications. Recognizing a need in the marketplace, River
Logic created strategic-level, process modeling tools and approaches for helping
senior managers suggest, evaluate, and understand the impact of business
decisions as they relate to the overall profitability of their organizations.
River Logic's optimization tools integrate several technologies such as mixed
integer optimization, visual process modeling, accounting, and constraint theory
to bring together the best active financial planning and profitability tools on
the market.
The Company holds an ownership interest in River Logic of approximately 8% at
December 31, 2005. Since our initial investment in May 2000, River Logic has
raised additional capital through the issuance of preferred stock and other
equity securities. In a prior period, we wrote down the carrying value of our
investment in River Logic to zero. While we believe that our investment in
River Logic will be successful there can be no assurance that our investment in
River Logic will ultimately provide an appropriate return on our investment.
13
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates, including those related to our
investments in our investee companies and commitments and contingencies. We base
our estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities.
Actual results may differ from these estimates under different assumptions or
conditions.
We believe the following critical accounting policies are most important to the
presentation of our financial statements and require the most difficult,
subjective and complex judgments.
IMPAIRMENT CHARGES
We periodically evaluate the carrying value of our ownership interests in our
investee companies for possible impairment based on achievement of business plan
objectives and milestones, the value of each ownership interest in the investee
company relative to carrying value, the financial condition and prospects of the
investee company, and other relevant factors. The business plan objectives and
milestones we consider include, among others, those related to financial
performance such as achievement of planned financial results or completion of
capital raising activities, and those that are not primarily financial in nature
such as obtaining key business relationships or the hiring of key employees. If
an indication of impairment exists with respect to the carrying value of an
investee company, we perform an evaluation by comparing the estimated fair value
of the asset with its carrying value. Fair value is determined by estimating
the cash flows related to the asset, including estimated proceeds on
disposition, if any. If the fair value is less than the carrying value a loss
is recorded.
COMMITMENTS AND CONTINGENCIES
From time to time, we are a defendant or plaintiff in various legal actions. We
are also a guarantor of various third-party obligations and commitments. We are
required to assess the likelihood of any adverse judgments or outcomes to these
matters as well as potential ranges of probable losses. A determination of the
amount of reserves required for these contingencies, if any, which would be
charged to earnings, is made after careful analysis of each individual issue.
The required reserves may change in the future due to new developments in each
matter or changes in circumstances, such as a change in settlement strategy.
Changes in required reserves could increase or decrease our earnings in the
period the changes are made.
EFFECT OF VARIOUS ACCOUNTING METHODS FOR EQUITY INVESTMENTS
The interests that we acquire in our investee companies are accounted for under
three broad methods: consolidation, equity method and cost method. The
applicable accounting method is generally determined based on our percentage
ownership in an investee company.
CONSOLIDATION METHOD: Investee companies in which we directly or indirectly own
more than 50% of the outstanding securities or those where we have effective
control are generally accounted for under the consolidation method of
accounting. Under this method, an investee company's accounts are consolidated
within our financial statements. Participation of other unrelated stockholders
in the earnings or losses of a consolidated investee company would be reflected
as a minority interest in consolidated financial statements. Minority interest
adjusts our consolidated net results of operations to reflect only our share of
the earnings or losses of the consolidated investee company. At December 31,
2005 and 2004, we had no investee company that qualified for this accounting
method.
14
EQUITY METHOD: Investee companies whose results we do not consolidate, but over
whom we exercise significant influence, are generally accounted for under the
equity method of accounting. Whether or not we exercise significant influence
with respect to an investee company depends on an evaluation of several factors
including, among others, representation on the investee company's board of
directors and percentage ownership level, which is generally a 20% to 50%
interest in the securities of the investee company, including our holdings in
common, preferred and other convertible instruments in the investee company
where we may have voting rights. Under the equity method of accounting, an
investee company's accounts are not reflected within our financial statements;
however, our share of the earnings or losses of the investee company is
reflected in our statements of operations. At December 31, 2005 and 2004, we had
no investee company qualified for this accounting method.
COST METHOD: Investee companies not accounted for under either the consolidation
or the equity method of accounting are accounted for under the cost method of
accounting. Under this method, our share of the earnings or losses of these
companies is not included in our statements of operations. Our investments in
Parago and River Logic were accounted for using this method of accounting at
December 31, 2005 and 2004.
RESULTS OF OPERATIONS
THE YEAR ENDED DECEMBER 31, 2005 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2004
Our operations consist of costs and expenses for providing services to our
investee companies and the activities to identify additional technologies and
companies in which we might invest, as well as legal defense costs and costs
associated with SEC reporting. We do not generate any direct revenue and
because our investee companies are not consolidated, we do not report revenue
from investee businesses.
GENERAL AND ADMINISTRATIVE EXPENSES
During the year ended December 31, 2005 general and administrative expenses were
$177,631 representing a increase of $70,283 or 65% over the $107,348 of general
and administrative expenses recorded for the year ended December 31, 2004. Total
general and administrative expense in 2004 was favorably impacted by
approximately $112,000 for the reversal of a bonus accrual. Excluding the
favorable effect of this reversal, general and administrative expenses declined
approximately $42,000 in 2005 versus 2004 due to lower management fees charged
by Citadel partially offset by higher legal defense costs.
LITIGATION ACCRUAL
On August 27, 2001 JMA refiled its lawsuit with a federal court in New York, and
the Company filed its motion to dismiss the case because the plaintiffs lacked
the required diversity jurisdiction to pursue the claims in federal court. On
October 31, 2001 the case was dismissed in federal court. In December 2001, the
plaintiffs refiled the lawsuit in the state court seeking to enforce the
proposed settlement term sheet. The case was filed in Supreme Court of New York,
that state's trial court, in a case styled Roan Meyers v. CT Holdings. CT
Holdings has filed counterclaims for breach of the term sheet as well as breach
of the placement agency agreement. Cross motions for partial summary judgments
have been argued but the court entered judgment in favor of Roan-Meyers in the
amount of $3,000,000 and granted interest at the rate of 9% from October 31,
2000 through the date of final judgment, and thereafter at the statutory rate
allowed by law. The Company has accrued for the amount of the partial summary
judgment plus interest of approximately $1,126,000 as of December 31, 2004.
Interest expense of approximately $279,000 was accrued in 2005. The Company has
appealed the final judgment, although the appellate court affirmed the trial
court's judgment, and the Company is assessing its alternatives and intends to
vigorously defend this case.
REVERSAL OF LITIGATION ACCRUALS
During the year ended December 31, 2004 we settled three lawsuits and reversed
approximately $75,000 of the related litigation accruals in excess of the
settlements.
REVERSAL OF RESERVE FOR NOTE RECEIVABLE FROM RELATED PARTY AND RELATED INTEREST
INCOME
In May 2004 the Company received a payment of $55,000 plus interest of $5,500 on
a note receivable from a related party secured by shares of stock of the
Company. The note receivable had been previously reserved and accordingly the
Company reversed the reserve of $55,000 and recorded interest income of $5,500.
15
INTEREST EXPENSE
Interest expense for the years ended December 31, 2005 and 2004 was $494,341 and
$1,225,320, respectively, representing interest expense on litigation accrual,
advances and notes payable to officers and shareholders, the demand note payable
to Citadel and the convertible note payable to CITN Investment Inc. ("CII"). The
year 2004 includes interest expense of approximately $1,126,000 for the period
October 2002 through December 31, 2004 related to the judgment entered by the
court for JMA in June 2004. By comparison interest expense of approximately
$278,000 was accrued in 2005 related to this judgment. Interest expense also
includes amortization of the beneficial conversion feature associated with the
CITN Investment note which totaled approximately $160,858 and $60,000 for the
years ended December 31, 2005 and 2004, respectively. The remaining interest
expense is associated with the advances and the notes payable and was
approximately $55,000 in 2005 versus approximately $39,000 for 2004.
WRITE-OFF OF AFFILIATES SHARES ACQUIRED THROUGH THE EXERCISE OF WARRANTS
The $30,000 write-off of investment in affiliates during the year ended December
31, 2004 is related to the warrant exercised by the Company to obtain shares of
Parago's Series A-3 Preferred Stock, which was determined by the Company to have
no fair market value and was immediately written off.
LIQUIDITY AND CAPITAL RESOURCES
We received a report from our independent registered public accounting firm for
our year ended December 31, 2005 containing an explanatory paragraph that
describes the uncertainty regarding our ability to continue as a going concern
due to our recurring operating losses and our significant working capital
deficiency. Historically, we have incurred recurring operating losses and have a
significant stockholders' deficit at December 31, 2005 of approximately $5.8
million. We had a cash balance of $197 at December 31, 2005 and current
liabilities total approximately $5.8 million. We have limited access to capital,
no plans to raise capital and we have not identified sources of capital at
December 31, 2005. Our past funding needs of the business have been provided by
financings through short-term notes payable and additional investments from
related parties, including our CEO, and CII however there can be no assurance
that such funds will be available from these related parties in the future. The
Company has been and continues to be dependent upon outside financing to perform
its business development activities, make investments in new technology
companies and to fund operations.
Our plans to continue to support and expand our business development activities
are limited due to a lack of identification and availability of near term
capital. As a result, it is unlikely that the implementation of the Company's
business strategy will generate positive cash flow in the foreseeable future.
Achieving positive cash flow is currently highly dependent upon obtaining
liquidity from our investments in unconsolidated affiliates. We have no plans at
December 31, 2005 to raise additional capital to invest in new business
opportunities. To do so we estimate that we will need to raise up to $5.8
million to settle recorded liabilities at December 31, 2005 after which we may
then need to raise additional funds to support our incubator and business
development activities. However there can be no assurance that we will raise
additional funds needed to settle our liabilities.
There can be no assurance that management's plans will be successful or what
other actions may become necessary. There can be no assurance that the Company
will ever achieve liquidity for its investments. Until we are able to create
liquidity from an additional inflow of new capital or from our investments
through sale to a strategic investor, an initial public offering or some other
liquidity transaction, we will continue to require external sources of working
capital to fund our operating expenses. Our inability to raise capital could
have a material adverse effect on our business and operations that could be
material to our results of operations.
16
Cash Flows From Operating Activities
The net cash used in operating activities was approximately $43,000 for the year
ended December 31, 2005 resulting from a net loss of approximately $672,000
offset by non-cash amortization of deferred debt discount of approximately
$161,000 recorded as interest expense, a non-cash interest accrual on the
litigation judgment of approximately $279,000 plus a change in operating
liabilities of approximately $189,000.
For the year ended December 31, 2004 the net cash used in operating activities
was approximately $226,000. This is the result of a net loss of approximately
$4,227,000 for the year ended December 31, 2004 and non-cash adjustments for the
amortization of debt discount of $60,000 recorded as interest expense, an
accrual for a legal settlement of $3,000,000 plus accrued interest of
approximately $1,126,000, the reversal of an excess litigation accrual of
approximately $75,000, the $60,500 reversal of a reserve for a note receivable
and interest from a related party and the write-off of the $30,000 cost of
shares of an affiliate which were acquired through the exercise of warrants. In
addition, the Company paid a legal settlement of $165,000 in May 2004. A
decrease in accounts payable and accrued expenses of approximately $117,000 and
a $203,000 increase in the payable to Citadel partially offset the operating
cash items previously noted.
Cash Flows From Financing Activities
During the year ended December 31, 2005, our CEO advanced funds to the Company
in the amount of $38,800 representing the total amount of cash flows provided by
financing activities in 2005.
On May 24, 2004, the Company was advanced $200,000 by CITN Investment, Inc., a
Texas corporation ("CII") pursuant to the Loan Agreement and evidenced by a
Secured Convertible Promissory Note (the "Note"). The Loan Agreement provides
for advances by CII to the Company of up to $600,000, such advances to be made
in the sole discretion of CII. In December 2005, the Company and CII entered
into an Amended and Restated Secured Convertible Promissory Note (the "Amended
Note"). Pursuant to the Amended Note, the principal was increased to $271,148
resulting from the combination of the principal and accrued interest from the
Note of $226,126 plus advances of $43,800 plus accrued interest of $1,222
through the date of the Amended Note. The Amended Note is convertible into 240
million shares, and if the Amended Note is repaid by the Company, CII has an
option to purchase up to 71 million shares at an exercise price of $0.01 per
share. The note accrues interest at 8% per annum and is due the earlier of May
24, 2006 or demand by CII. This Amended Note is is secured by a pledge of all of
the Company's assets. The accrued interest on the Amended Note at December 31,
2005 was $772.
The conversion price of the Amended Note of approximately $0.00113 per share was
below the fair value per share of the common stock at the date the note was
issued. Accordingly, the Company recorded the fair value of the beneficial
conversion feature of the note payable of $271,148 as debt discount. The debt
discount is being amortized over the life of the Note and a $20,858 charge was
recorded as interest expense during the year ended December 31, 2005. The
Amended Note is recorded net of deferred debt discount of $250,290 at December
31, 2005.
As a result of the amendment, the debt discount of $140,000 related to the Note
was fully amortized to interest expense during the year ended December 31, 2005.
Debt discount of $60,000 related to the Note was amortized to interest expense
during the year ended December 31, 2004.
CII is owned 50% by Steven B. Solomon, the Company's CEO and Chairman of the
Board, and 50% by Lawrence Lacerte, a shareholder and former director of the
Company. Prior to the loans, Mr. Solomon beneficially owned 14,285,992 shares
of the Company's common stock. As a result of his stock ownership in CII, Mr.
Solomon is deemed the beneficial owner of the shares of common stock owned by
CII. Therefore, on May 24, 2004, Mr. Solomon and CII beneficially owned a total
of 39,952,660 shares of our common stock (if the Note were converted into shares
of our common stock), or more than 50% of our common stock outstanding on that
date, giving him potential control of the Company through the voting power over
a majority of the shares of our outstanding common stock. The conversion price
of approximately $0.00845 per share was below the fair value per share of the
common stock at the date the note was issued. Accordingly, the Company recorded
the fair value of the beneficial conversion feature of the note payable of
$200,000 as a debt discount.
The Company does not have a sufficient number of authorized shares of common
stock available to permit the conversion of the Note at this time. The Company
has agreed 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 Company was loaned $35,000 by an officer during the year ended December 31,
2004. The officer was paid back $30,000 of this loan in the same period.
17
CONTRACTUAL OBLIGATIONS
At December 31, 2005 we have a note payable to CII of $271,148 secured by all
the assets of the Company, a demand note payable to Citadel of $225,000 plus
accrued interest of approximately $77,000, a $5,000 unsecured note payable to an
officer and a $9,000 unsecured note payable plus accrued interest of
approximately $6,000 to a shareholder which is in default at December 31, 2005.
There are no other long-term debt obligations, capital lease obligations,
operating lease obligations or long-term capital purchase commitments. However
at December 31, 2005 we have accrued for payments to Citadel under the
transition services agreement and demand note payable, none of which may be paid
until such time as the Company has sufficient cash to pay these obligations.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements that have had, or are
reasonably likely to have, a current or future effect on the Company's financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that are
material to investors.
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements for the years ended December 31, 2005 and 2004 are
found following the signature page of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
The Company's management, including the Company's principal executive officer
and principal financial officer, has evaluated the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13(a) - 15(e)
and 15(d) - 15(e) under the Securities Exchange Act of 1934) as of the year
ended December 31, 2005, the period covered by the Annual Report on Form 10-KSB.
Based upon that evaluation, the Company's principal executive officer and
principal financial officer have concluded that the disclosure controls and
procedures were effective as of December 31, 2005 to provide reasonable
assurance that material information relating to the Company is made known to
management including the CEO and CFO.
There were no changes in the Company's internal control over financial reporting
that occurred during the Company's last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
Inherent Limitation on the Effectiveness of Internal Controls
The effectiveness of any system of internal control over financial reporting,
including CT Holdings', is subject to inherent limitations, including the
exercise of judgment in designing, implementing, operating, and evaluating the
controls and procedures, and the inability to eliminate misconduct completely.
Accordingly, any system of internal control over financial reporting, including
CT Holdings', can only provide reasonable, not absolute assurances. In addition,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate. We intend to continue to monitor and upgrade our internal controls
as necessary or appropriate for our business, but cannot assure you that such
improvements will be sufficient to provide us with effective internal control
over financial reporting.
ITEM 8B. OTHER INFORMATION
None.
18
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The names of our directors, their principal occupations and the year in which
each current Director of CT Holdings Enterprises, Inc. (the "Company") initially
joined the Board of Directors are set forth below.
DIRECTOR
NAME AGE POSITION WITH THE COMPANY SINCE
------------------ --- ----------------------------------- -----
Steven B. Solomon 41 President, Chief Executive Officer,
and Secretary 1992
Chris A. Economou 50 Director 1993
Mark Rogers 45 Director 1996
Dr. Axel Sawallich 60 Director 1993
STEVEN B. SOLOMON has served as President and Chief Executive Officer of CT
Holdings since May 1997 and as a director of CT Holdings since February 1996, as
the President and Chief Executive Officer of Citadel Security Software Inc.
("Citadel") since its formation in December 1996 and as a director of LoneStar
Hospitality Corp from 1992 until its merger with the Company in 1996. Until May
2004 Mr. Solomon also served as a Director of Parago, Inc., an incubation
venture of CT Holdings, and he served as Chairman of the Board of Directors of
Parago from January 1999 to April 2001, and Chief Executive Officer of Parago
from January 1999 to August 2000. Mr. Solomon has also served as a director of
River Logic, Inc., an incubation venture of CT Holdings, since May 5, 2000.
CHRIS A. ECONOMOU has served as a director of CT Holdings since February 1996
and as a director of Citadel since November 2001, and as a director of LoneStar
Hospitality Corp. from June 1993 until its merger with the Company in 1996. Mr.
Economou has been engaged in the private practice of law in Fort Lauderdale,
Florida, primarily in the transactional and corporate areas since 1981. Mr.
Economou also served as a director of Parago during its incubation phase from
January 1999 to February 2000.
MARK ROGERS has served as a director of the Company since July 1996. Since 1999
Mr. Rogers has been President of Alchemy Consulting, Inc., a business advisor
firm focusing on venture-backed technology companies throughout their life
cycle. He has been involved with several turnarounds and has also advised and
assisted start-up companies with strategy and financings including mergers and
acquisitions. From 1989 to 1999 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 advised several computer software companies in Texas, Utah
and Silicon Valley, with respect to various strategic and developmental matters.
Mr. Rogers also served as a director of Parago during its incubation phase from
January 1999 to February 2000, and has served as a director of Citadel since
July 2005.
DR. AXEL SAWALLICH has served as a director of the Company since February 1996
and was a director of LoneStar from March 1993 until its merger with the Company
in 1996. 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. Dr. Sawallich
has also been acting as an independent, publicly certified, investment advisor
since 1993.
There are no family relationships among any of the directors or executive
officers of the Company. See "Certain Relationships and Related Transactions"
for a description of transactions between the Company and its directors,
executive officers or their affiliates. Section 16(a) of the Exchange Act, as
amended, requires the Company's Directors, executive officers and persons who
own more than 10% of a registered class of the Company's equity securities to
file certain reports regarding ownership of the Company's Common Stock with the
SEC. These insiders are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file. To the Company's knowledge, based
solely on a review of the copies of the Section 16(a) forms furnished to the
Company during 2005, or written representations from certain reporting persons
that no Forms 5 were required for those persons, all Section 16(a) filing
requirements applicable to the Company's officers, Directors and beneficial
owners of more than 10% of the outstanding shares of Common Stock were filed on
a timely basis, other than a Form 4 that was filed late for Mr. Solomon in
connection with the Amended Note which was reported on a Form 8-K in December
2005.
19
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
POSITION WITH Officer
NAME AGE THE COMPANY Since
----------------- --- ------------------------ -------
Steven B. Solomon 41 President,
Chief Executive Officer,
Secretary and Director 1992
Richard Connelly 54 Chief Financial Officer 2002
STEVEN B. SOLOMON has served as President and Chief Executive Officer of CT
Holdings since May 1997 and as a director of CT Holdings since February 1996, as
the President and Chief Executive Officer of Citadel since its formation in
December 1996 and as a director of LoneStar Hospitality Corp from 1992 until its
merger with the Company in 1996. Until May 2004 Mr. Solomon also served as a
Director of Parago, Inc., an incubation venture of CT Holdings, and he served as
Chairman of the Board of Directors of Parago from January 1999 to April 2001,
and Chief Executive Officer of Parago from January 1999 to August 2000. Mr.
Solomon has also served as a director of River Logic, Inc., an incubation
venture of CT Holdings, since May 5, 2000.
RICHARD CONNELLY joined the Company in March 2002 and serves as Chief Financial
Officer. Mr. Connelly also serves as Chief Financial Officer of Citadel. Mr.
Connelly initially served as a financial consultant to CT Holdings from January
2002 until March 2002. Prior to this, he served as Chief Financial Officer for
several venture funded technology companies, including from February 2001 until
December 2001 at ASSET InterTech, Inc., a boundary scan software tool developer;
from September 1998 through November 2000 at JusticeLink, Inc., an ecommerce
legal services provider; and from April 1997 through July 1998 at AnswerSoft,
Inc., a developer of computer telephony software. From February 1987 through
March 1997, Mr. Connelly served in various financial management capacities at
Sterling Software Inc., an enterprise software development company, including
Vice President Corporate Controller, Vice President Treasurer and Group Vice
President Finance & Administration of Sterling's Systems Management Group.
Committees of the Board of Directors
During fiscal year 2005, there were two meetings of the Company's Board of
Directors. All directors attended 75% or more of the aggregate of meetings of
the Board and their committees held during their respective terms.
The Company's Board of Directors has established a standing Audit Committee
composed exclusively of outside directors, Mr. Economou and Mr. Rogers to assist
in the discharge of its responsibilities.
The Audit Committee meets with the Company's financial management and
independent registered public accounting firm and reviews the accounting
principles and the scope and control of the Company's financial reporting
practices, and makes reports and recommendations to the Board with respect to
audit matters. The Audit Committee also recommends to the Board the appointment
of the firm selected to be the independent registered public accounting firm for
the Company and monitors the performance of such firm; reviews and approves the
scope of the annual audit and evaluates with the independent registered public
accounting firm the Company's annual audit and annual financial statements; and
reviews with management the status of internal accounting controls and internal
audit procedures and results. The Audit Committee met four times during fiscal
year 2005 and took action by written consent one time. The Audit Committee is
required to have and will continue to have at least two members, all of whom
must be "independent directors" as defined in the Marketplace Rules of the
Nasdaq Stock Market. Messrs. Economou and Rogers are the current members of the
Audit Committee. The Board has determined that Messrs. Economou and Rogers are
financially literate in the areas that are of concern to the Company, and are
able to read and understand fundamental financial statements. The Board has also
determined that Messrs. Economou and Rogers each meet the independence
requirements set forth in the Marketplace Rules of the Nasdaq Stock Market.
The Securities and Exchange Commission ("SEC") has adopted rules to implement
certain requirements of the Sarbanes-Oxley Act of 2002 pertaining to public
company audit committees. One of the rules adopted by the SEC requires a company
to disclose whether it has an "audit committee financial expert" serving on its
audit committee. Based on its review of the criteria of an audit committee
financial expert under the rule adopted by the SEC, the Board of Directors does
not believe that any member of the Board of Directors' Audit Committee would be
described as an audit committee financial expert. At this time, the Board of
Directors believes it would be desirable for the Audit Committee to have an
audit committee financial expert serving on the committee, though the Company
believes that its current financial position, small size and limited resources
will render it difficult to engage an audit committee financial expert at this
time. Because of the Company's small size and limited resources, the Company
believes that it would be difficult to recruit an audit committee financial
expert. The Company's Board of Directors has adopted a written charter for the
Audit Committee of the Board. A copy of the written Audit Committee charter will
be attached as an exhibit to the proxy statement for CT Holdings annual
shareholder meeting and will be made available on the Company's website,
www.ct-holdings.com.
20
The Company does not have a Compensation Committee, but the entire Board reviews
the compensation and employee benefits of officers of the Company.
The Board does not have a Nominating Committee, as nominations are made by the
independent members of the Board as a whole.
The Board seeks to identify qualified individuals to become board members and
determine the composition of the Board and its committees. When considering a
potential director candidate, the Board looks for personal and professional
integrity, demonstrated ability and judgment and business experience. The Board
will review and consider director nominees recommended by stockholders. There
are no differences in the manner in which the Board evaluates director nominees
based on whether the nominee is recommended by a shareholder.
Our Board of Directors adopted a Code of Business Conduct for all of our
directors, officers and employees and a Code of Ethics for our CEO and Senior
Financial Executives in April 2004. Stockholders may request a free copy of our
Code of Business Conduct and Code of Ethics from:
CT Holdings Enterprises, Inc.
Attention: Investor Relations
Two Lincoln Centre
5420 LBJ Freeway, Suite 1600
Dallas, Texas 75240
214/520-9292
To date, there have been no waivers under our Code of Business Conduct and
Ethics. We will post any waivers, if and when granted, of our Code of Business
Conduct and Ethics on our website at www.ct-holdings.com.
21
ITEM 10. EXECUTIVE COMPENSATION
The table below sets forth certain information with respect to the annual and
long term compensation of the named executives for services to CT Holdings for
its CEO and CFO who are the only officers of CT Holdings. Since the Distribution
on May 17, 2002 Mr. Solomon has been employed by Citadel as Citadel's CEO.
Neither the CEO nor the CFO are paid compensation by CT Holdings. Pursuant to
the transition services agreement CT Holdings is charged $10,000 per calendar
quarter, in part, for the services of Mr. Solomon as CEO and Mr. Connelly as
CFO. Except for share information the compensation table presents the total
compensation paid by CT Holdings to Mr. Solomon.
SUMMARY COMPENSATION TABLE LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------------- -------------------------------
SECURITIES
PERIOD ANNUAL OTHER UNDERLYING ALL OTHER
ENDED SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#) COMPENSATION ($)
------- ----------- ---------- ----------------- ----------- -----------------
Steven B. Solomon 12/2005 $ 0 $ 0 $ 0 0 $ 0
Chief Executive 12/2004 $ 0 $ 0 $ 0 0 $ 0
Officer 12/2003 $ 0 $ 0 $ 0 0 $ 0
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
----------------------------------------------------------------
PERCENT OF
NUMBER OF SECURITIES TOTAL OPTIONS EXERCISE
UNDERLYING OPTIONS GRANTED TO PRICE EXPIRATION
NAME GRANTED EMPLOYEES IN 2005 ($/SH) DATE
----------------- -------------------- ------------------ ---------- ----------
Steven B. Solomon 0 100.0% $ 0.01 [ ]
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
December 31, 2005:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS
SHARES AT FISCAL YEAR- AT FISCAL YEAR-
ACQUIRED ON VALUE END (EXERCISABLE/ END (EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE) UNEXERCISABLE) (2)
----------------- ----------- --------- -------------------- -------------------
Steven B. Solomon 0 $ 0 2,000,000 / 0(1) $ 0 / $0
(1) Based on the market price on the date exercised less the exercise price
payable for each share.
(2) Based on the fair market value of the Company's Common Stock (at December
31, 2005) per share less the exercise price payable for each share.
Compensation of Directors
CT Holdings reviews its compensation arrangements for directors from time to
time and may alter these arrangements. Directors will receive no cash
compensation for services as a director or as a member of a committee of CT
Holdings' board. CT Holdings will reimburse each director for out-of-pocket
expenses incurred in connection with attendance at board and committee meetings.
We may, in our discretion, grant stock options and other equity awards to our
non-employee directors. Our outside directors hold no options to purchase common
stock of the Company at December 31, 2005.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AGREEMENTS
The transition services agreement between Citadel and CT Holdings calls for the
sharing of the salaries and benefits of the CEO, CFO and some administrative
employees of Citadel that perform services for CT Holdings but whose payroll and
benefits are assigned to Citadel. The agreement allows for a charge to CT
Holdings of $10,000 per calendar quarter, representing an allocation of the
payroll, benefits and an allocation of overhead (includes rent and general
office expenses applied as a percentage of payroll and benefits) associated with
the shared employees. The transition service agreement expires May 2006. At
December 31, 2005, Mr. Solomon does not have an employment agreement with CT
Holdings.
22
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
As of April 12, 2006, there were issued and outstanding approximately 58,545,928
shares of Common Stock. There is no other class of voting security of the
Company issued or outstanding. The following table sets forth the number of
shares of the Company's Common Stock beneficially owned, as of April 12, 2006 by
(i) each person known to the Company to own more than 5% of the Common Stock of
the Company (the only class of voting securities now outstanding), (ii) each
director, (iii) each executive officer named in the Summary Compensation Table
and (iv) all directors, named executive officers and other executive officers as
a group. The number and percentage of shares beneficially owned is determined
in accordance with Rule 13d-3 of the Securities Exchange Act and the information
is not necessarily indicative of beneficial ownership for any other purpose.
Under this rule, beneficial ownership includes any shares to which the
individual has the right to acquire within 60 days of April 12, 2006 through the
exercise of any stock option or other right. Unless otherwise indicated in the
footnotes or table, each person or entity has sole voting and investment power
(or shares such powers with his or her spouse) with respect to the shares shown
as beneficially owned and has an address of c/o CT Holdings, Two Lincoln Centre,
5420 LBJ Freeway, Suite 1600, Dallas, TX 75240.
NUMBER OF APPROXIMATE
PERCENT
NAME AND ADDRESS SHARES OWNED OF CLASS
-------------------------------------- ------------ ------------
Steven B. Solomon (1) 136,285,993 75.5%
Lawrence Lacerte (2) 125,250,000 70.2%
5950 Sherry Lane
Dallas, Texas 75225
Thomas E. Oxley (3) 3,544,800 5.8%
2727 South Ocean Blvd., #803
Highland Beach, FL 33487
Chris A. Economou 724,400 1.2%
150 North Federal Highway, # 210
Fort Lauderdale, Florida 33301
Mark Rogers 651,500 1.1%
751 Laurel St. #19
San Carlos, California
Dr. Axel Sawallich 387,144 *
Beatrixgasse 3
1030 Vienna, Austria.
CITN Investment Inc. 240,000,000 80.4%
All officers and directors
as a group (5 persons)(4) 138,324,037 76.6%
* Less than 1%
(1) Includes 2,000,000 shares of Common Stock subject to fully vested options.
Includes 6,000,000 shares of CT Holdings common stock that were issuable in
February 2004 when Mr. Solomon exercised his right to exchange 5,000,000 (pre
1:1000 reverse stock split) shares of Parago common stock. Since the issuance of
all 6,000,000 shares would cause the number of shares outstanding to exceed the
authorized shares of 60,000,000, Mr. Solomon has waived his right to these
shares until such time as the shares become authorized. Includes 120,000,000
shares of Common Stock that are issuable upon conversion of the demand note by
CII.
(2) Includes 120,000,000 shares of Common Stock that are issuable upon
conversion of the demand note by CII.
(3) Includes 2,700,000 shares of common stock to be issued at such time as they
become authorized. During the first quarter of 2003, Mr. Oxley converted a
$600,000 note convertible note payable into 2,700,000 shares of common stock of
the Company. Since the issuance of all 2,700,000 would cause the number of
shares outstanding to exceed the authorized shares of 60,000,000, Mr. Oxley has
waived his right to these shares until such time as the shares become
authorized.
(4) Consists of 240,000,000 shares of Common Stock that are issuable upon
conversion of the demand note by CII. Voting and investment power with respect
to the shares, if acquired, are by Messrs. Steven B. Solomon and Lawrence
Lacerte.
(5) Includes 2,000,000 shares issuable pursuant to presently exercisable
options or warrants and 6,000,000 shares of CT Holdings Common Stock that were
issuable in February 2004 when Mr. Solomon exercised his right to exchange
5,000,000 pre 1:1000 split shares of Parago common stock for shares of CT
Holdings common stock. Mr. Solomon has elected not to receive the actual shares
until such time as the shares become authorized.
23
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a description of the material terms of the agreements and
arrangements involving the Company and its subsidiaries.
AGREEMENTS RELATING TO THE CITADEL SECURITY SOFTWARE DISTRIBUTION
We have entered into several agreements with Citadel to define our ongoing
relationship after the Distribution and to allocate tax and other specified
liabilities and obligations arising from periods prior to the distribution date.
We entered into these agreements prior to the Distribution while Citadel was a
wholly owned subsidiary of CT Holdings.
TRANSITION SERVICES AGREEMENT
In connection with the Distribution, Citadel entered into a transition services
agreement with CT Holdings. This agreement provides that CT Holdings and Citadel
will provide each other services in such areas as information management and
technology, sharing of office space, personnel and indirect overhead expenses,
employee benefits administration, payroll, financial accounting and reporting,
claims administration and reporting, and other areas where CT Holdings and
Citadel may need transitional assistance and support. The transition services
agreement provides generally that each of Citadel and CT Holdings will undertake
to provide substantially the same level of service and use substantially the
same degree of care as their respective personnel provided and used in providing
such services prior to the execution of the agreement. The agreement provided
for an initial one year term and may be renewed for additional one year terms.
The current agreement was renewed in July 2005 and expires in May 2006, but may
be terminated earlier under certain circumstances, including a default, and may
be renewed for additional years upon approval from the Board of Directors of
both companies. Initially, CT Holdings paid Citadel a monthly fee of $20,000,
subject to adjustment on a quarterly basis. In May 2004, the monthly fee was
reduced to $7,500 a month. In July 2005, the fee was again reduced to $10,000
per calendar quarter. We believe that the terms and conditions of the
transition services agreement are as favorable to us as those available from
unrelated parties for a comparable arrangement.
TAX DISAFFILIATION AGREEMENT
On the Distribution date CT Holdings and Citadel entered into a tax
disaffiliation agreement which sets out each party's rights and obligations with
respect to deficiencies and refunds, if any, of federal, state, local or foreign
taxes for periods before and after the Distribution Date and related matters
such as the filing of tax returns and the conduct of Internal Revenue Service
and other audits. Under the tax disaffiliation agreement, Citadel will
indemnify CT Holdings for all taxes and liabilities incurred as a result of
Citadel's or an affiliate's post-Distribution action or omission contributing to
an Internal Revenue Service determination that the Distribution was not
tax-free. CT Holdings will indemnify Citadel for all taxes and liabilities
incurred solely because CT Holdings or an affiliate's post-Distribution action
or omission contributes to an Internal Revenue Service determination that the
Distribution was not tax-free. If the Internal Revenue Service determines that
the Distribution was not tax-free for any other reason, CT Holdings and Citadel
will indemnify each other against all taxes and liabilities pro rata based on
relative values as of the Distribution Date.
Citadel will indemnify CT Holdings against any taxes resulting from any internal
realignment undertaken to facilitate the Distribution on or before the
Distribution date.
CT HOLDINGS' RELATED PARTY TRANSACTIONS
During February 2004, the CEO exercised his conversion right to exchange
5,000,000 (pre 1:1000 reverse stock split) shares of Parago common stock for
6,000,000 shares of common stock of the Company. This exchange right was
granted during June 2001 as consideration for the CEO funding the Company's
participation in a Parago bridge loan. Since the issuance of these shares would
exceed the number of authorized shares, the CEO has waived his right to receive
the shares until such time as the shares become authorized. When the Company is
able to issue the shares, it will record a $60,000 (par value) increase to
common stock and an offsetting reduction to additional paid in capital.
During 2005, our CEO advanced the Company $38,800 and in December 2005, this
amount plus a $5,000 note due to our CEO were converted to a note payable to
CITN Investment, Inc, further discussed below. In February 2004, our CEO loaned
the Company $30,000 in order for the Company to exercise the Company's warrants
to purchase 28.8749 shares of Series A-3 convertible preferred stock. The
promissory note to our CEO was secured by a pledge of the Parago Series A-3
preferred stock and was repaid in May 2004. In November 2004, the Company's CEO
loaned the Company $5,000 in order for the Company to have the ability to pay
off the balance on a legal settlement.
In May 2004, the Company received $55,000 for payment of note receivable from an
officer plus interest of $5,500. The note receivable was issued in May 2002
upon the exercise of stock options by the officer and had been fully reserved.
Accordingly the Company reversed the $55,000 reserve and recognized $5,500 of
interest income.
On May 24, 2004, we entered into a Loan and Security Agreement (the "Loan
Agreement") with CITN Investment, Inc., a Texas corporation ("CII"). The Loan
Agreement provides for advances by CII to the Company of up to $600,000, such
advances to be made in the sole discretion of CII. In the event the entire
$600,000 is advanced to the Company, the loans would be convertible, at the
option of CII, into 71,000,000 shares of the Company's common stock,
representing 51% of the Company's common stock. The loans are also secured by a
pledge of all the Company's assets.
24
On May 24, 2004, we were advanced $200,000 by CII pursuant to the Loan Agreement
and evidenced by a Secured Convertible Promissory Note (the "Note"). The note
accrues interest at 8% per annum and is due the earlier of May 24, 2006 or
demand by CII. This Note is convertible in whole or in part, at the option of
CII, into up to 23,666,667 shares of the Company's common stock (approximately
25% of the Company's common stock on a fully diluted basis), and is secured by a
pledge of all of the Company's assets.
CII is owned 50% by Steven B. Solomon, the Company's Chief Executive Officer and
Chairman of the Board, and 50% by Lawrence Lacerte, a shareholder and former
director of the Company. Prior to the loans, Mr. Solomon beneficially owned
14,285,992 shares of the Company's common stock. As a result of his stock
ownership in CII, Mr. Solomon is deemed the beneficial owner of the shares of
common stock owned by CII. Therefore, on May 24, 2004, Mr. Solomon and CII
beneficially owned a total of 39,952,660 shares of our common stock (if the Note
were converted into shares of our common stock), or more than 50% of our common
stock outstanding on that date, giving him potential control of the Company
through the voting power over a majority of the shares of our outstanding common
stock. The conversion price of approximately $0.00845 per share was below the
fair value per share of the common stock at the date the note was issued.
Accordingly, the Company recorded the fair value of the beneficial conversion
feature of the note payable of $200,000 as a debt discount.
In December 2005, the Company and CII entered into an Amended and Restated
Secured Convertible Promissory Note (the "Amended Note"). Pursuant to the
Amended Note, the principal was increased to approximately $271,000, the Amended
Note is convertible into 240 million shares, and if the Amended Note is repaid
by the Company, CII has an option to purchase up to 71 million shares at an
exercise price of $0.01 per share. As a result of the amendment to the note the
remaining debt discount of $140,000 was charged to interest expense during the
year ended December 31, 2005. In addition, approximately $21,000 of discount
amortization related to the Amended Note was charged to interest expense.
The Company does not have a sufficient number of authorized shares of common
stock available to permit the conversion of the Note at this time. The Company
has agreed 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.
ITEM 13. EXHIBITS
(a) EXHIBITS
The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as part of this Annual Report.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(1) Audit Fees:
Fees for audit services provided by KBA Group LLP total approximately $36,000
for 2005 and approximately $38,000 for 2004, including fees associated with the
annual audit and the reviews of the Company's quarterly reports on Form 10-QSB.
(2) Audit Related Fees:
KBA Group LLP did not bill the Company any audit related fees during 2005 or
2004.
(3) Tax Fees:
KBA Group LLP did not bill the Company any tax fees during 2005 or 2004.
(4) All Other Fees:
KBA Group LLP did not bill the Company any other fees during 2005 or 2004.
(5) Audit Committee's Pre-Approval Policies and Procedures
(i) The Audit Committee of the Board of Directors approves the scope of
services and fees of the outside accountants on an annual basis, generally prior
to the beginning of the services.
(ii) The Audit Committee of the Board of Directors reviewed and approved 100% of
the fees for the services above.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this Annual Report on
Form 10-KSB to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: April 13, 2006 CT HOLDINGS ENTERPRISES, INC.
By: /s/ STEVEN B. SOLOMON
---------------------------------------
STEVEN B. SOLOMON, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Steven B. Solomon his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
to sign any and all amendments to this Annual Report on Form 10-KSB and to file
the same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection therewith, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, or any of them, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
------------------------ ----------------------------------- --------------
/s/ STEVEN B. SOLOMON President, Chief Executive Officer April 13, 2006
------------------------ and Director
Steven B. Solomon (Principal Executive Officer)
/s/ RICHARD CONNELLY Chief Financial Officer April 13, 2006
------------------------ (Principal Accounting Officer)
Richard Connelly
/s/ CHRIS A. ECONOMOU Director April 13, 2006
------------------------
Chris A. Economou
/s/ MARK ROGERS Director April 13, 2006
------------------------
Mark Rogers
Director April , 2006
------------------------
Dr. Axel Sawallich
26
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
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
year June 30, 1994).
27
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
year 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 year 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 year 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).
3.14 Certificate for Renewal and Revival of Charter filed with the Delaware
Secretary of State on October 29, 1999. (incorporated by reference to
Exhibit 3.14 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended February 29, 2000).
*3.15 Certificate for Renewal and Revival of Charter filed with the Delaware
Secretary of State on March 10, 2005.
4.1 Loan and Security Agreement dated May 22, 2004 between the Company and
CITN Investment (filed as Exhibit 4.1 to the Form 8-K filed with the
Commission on May 26, 2004 and incorporated herein by reference).
4.2 Secured Convertible Note in the principal amount of $200,000 dated May
22, 2004 payable by the Company to CITN Investment (filed as Exhibit
4.2 to the Form 8-K filed with the Commission on May 26, 2004 and
incorporated herein by reference).
4.3 Amended Secured Convertible Promissory Note payable to CITN Investment
Inc., dated December 19, 2005(filed as Exhibit 10.1 to the Form 8-K
filed with the Commission on December 23, 2005 and incorporated herein
by reference).
28
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 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).
10.3 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).
10.4 Agreement, dated April 11, 1997, among the Company, George Sharp and
Gil Gertner (incorporated by reference to Exhibit 99.1 of the
Company's Current Report on Form 8-K filed April 11, 1997).
10.5 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).
10.6 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).
10.7 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).
10.8 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).
10.9 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).
10.10 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).
10.11 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).
29
10.12 Stock Purchase Agreement between the Company and Icarus Investments I,
Ltd., dated May 27, 1998 (incorporated by reference to Exhibit 10.14
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended February 28, 1998).
10.13 Stock Purchase Agreement, dated March 11, 1999, among inLighten.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).
10.14 Stock Purchase Agreement, dated May 20, 1999, among inLighten.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).
10.15 Agreement and Plan of Reorganization, dated May 20, 1999, among
inLighten.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).
10.16 Settlement and Release Agreement dated January 14, 2000 by and among
Richard L. Travis, How2.com, Inc. and the Company (incorporated by
reference to Exhibit 10.18 to Post-Effective Amendment No. 1 to the
Company's Registration Statement on Form SB-2 filed March 23, 2000).
10.17 Settlement and Release Agreement dated March 1, 2000 by and among
Bennett Klein and the Company (incorporated by reference to Exhibit
10.19 to Post-Effective Amendment No. 1 to the Company's Registration
Statement on Form SB-2 filed March 23, 2000).
10.18 Standard Office Lease, dated August 2, 1999, between Arden Realty
Limited Partnership and How2HQ.com, Inc. (Santa Monica, California).
(incorporated by reference to Exhibit 10.18 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended February 29, 2000).
10.19 Guaranty of Lease, dated August 2, 1999, by the Company to Arden
Realty Limited Partnership, with respect to certain obligations of
How2HQ.com, Inc. under Standard Office Lease. (incorporated by
reference to Exhibit 10.19 to the Company's Annual Report on Form
10-KSB for the fiscal year ended February 29, 2000).
10.20 Promissory Note dated September 30, 1999 payable to How2HQ.com, Inc.
(incorporated by reference to Exhibit 10.20 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended February 29, 2000).
10.21 Asset Purchase Agreement dated as of May 5, 2000 by and between EBSCO
CASIAS, Inc., iNetze.com, Inc., ESRN Acquisition, LLC and the Company
(incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K filed June 12, 2000).
10.22 Asset Contribution Agreement dated as of May 5, 2000 by and between
iNetze.com, Inc., ESRN Acquisition, LLC, the Company and the
stockholders set forth on the signature pages attached hereto
(incorporated by reference to Exhibit 2.2 to the Company's Current
Report on Form 8-K filed June 12, 2000).
30
10.23 Stock Purchase Agreement dated as of May 5, 2000 by and between the
Company, Tim Collins, F. Shanahan McAdoo and Robert C. Whitehair
(incorporated by reference to Exhibit 2.3 to the Company's Current
Report on Form 8-K filed June 12, 2000).
10.24 Form of Plan and Agreement of Distribution between the Company and
Citadel Security Software Inc.
10.25 Form of Tax Disaffiliation Agreement between the Company and Citadel
Security Software Inc.
10.26 Form of Transition Services Agreement between the Company and Citadel
Security Software Inc.
10.27 Secured Promissory Note dated as of February 17, 2004 payable by the
Company to the order of Steven B. Solomon (Filed as Exhibit 10.27 to
the Form 10-KSB filed with the Commission on April 14, 2004 and
incorporated herein by reference).
10.28 Security and Pledge Agreement dated as of February 17, 2004 between
the Company and Steven B. Solomon as Secured Party (Filed as Exhibit.
10.28 to the Form 10-KSB filed with the Commission on April 14, 2004
and incorporated herein by reference).
10.29 Approval and Release Agreement dated December 31, 2003 between the
Company and Steven B. Solomon (Filed as Exhibit 10.29 to the Form
10-KSB filed with Commission on April 14, 2004 and incorporated herein
by reference).
*23.1 Consent of KBA Group LLP.
*24.1 Power of Attorney (included as part of the signature page of this
Annual Report on Form 10-KSB).
*31.1 Certification of Principal Executive Officer.
*31.2 Certification of Principal Financial Officer.
*32.1 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
* Filed Herewith
31
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm . . . . . . . . . F-2
Balance Sheets as of December 31, 2005 and 2004 . . . . . . . . . . . . . F-3
Statements of Operations for the years ended December 31, 2005 and 2004 . F-4
Statements of Stockholders' Deficit for the years ended
December 31, 2005 and 2004 . . . . . . . . . . . . . . . . . . . . . F-5
Statements of Cash Flows for the years ended
December 31, 2005 and 2004 . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
CT Holdings Enterprises, Inc.
We have audited the accompanying balance sheets of CT Holdings Enterprises,
Inc., formerly CT Holdings, Inc., (the Company) as of December 31, 2005 and
2004, and the related statements of operations, stockholders' deficit and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have nor were we engaged to perform, audits of their internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that 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 financial position of CT Holdings Enterprises, Inc.
as of December 31, 2005 and 2004, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note A,
the Company has incurred recurring operating losses and has a significant
working capital deficiency at December 31, 2005. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note A. The
financial statements do not include any adjustments that may result from the
outcome of this uncertainty.
/s/KBA Group LLP
Dallas, Texas
April 7, 2006
CT HOLDINGS ENTERPRISES, INC.
(formerly CT Holdings, Inc.)
BALANCE SHEETS
DECEMBER 31,
2005 2004
------------- --------------
ASSETS
------
CURRENT ASSETS
Cash $ 197 $ 4,168
------------- --------------
TOTAL ASSETS $ 197 $ 4,168
============= ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 387,654 $ 310,851
Convertible secured note payable to
related party, including accrued interest of
$772 and $9,995 and net of deferred debt
discount of $250,290 and $140,000 21,630 69,995
Demand note payable to Citadel including accrued
interest payable of $76,784 and $48,895 301,784 273,895
Payable to Citadel 650,000 585,000
Note payable to officer - 5,000
Note payable to shareholder including accrued
interest of $6,128 and $4,454 15,128 13,454
Accrual for litigation including accrued
interest of $1,404,590 and $1,125,738 4,404,590 4,125,738
------------- --------------
Total current liabilities 5,780,786 5,383,933
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred stock, $.01 par value per share;
1,000,000 shares authorized; no shares issued
or outstanding - -
Common stock, $.01 par value per share;
60,000,000 shares authorized; 58,545,928
shares issued and outstanding 585,460 585,460
Common stock pending issuance 600,000 600,000
Additional paid-in capital 57,661,749 57,390,601
Accumulated deficit (64,627,798) (63,955,826)
------------- --------------
Total stockholders' deficit (5,780,589) (5,379,765)
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 197 $ 4,168
============= ==============
The accompanying notes are an integral part of these financial statements.
F-3
CT HOLDINGS ENTERPRISES, INC.
(formerly CT Holdings, Inc.)
STATEMENTS OF OPERATIONS
Years Ended
December 31,
2005 2004
------------ ------------
Revenue $ - $ -
General and administrative expense 177,631 107,348
Litigation accrual - 3,000,000
Reversal of litigation accrual - (74,733)
Reversal of reserve for note receivable
from related party - (55,000)
Interest income (5,500)
Interest expense 215,489 99,582
Interest expense related to litigation 278,852 1,125,738
Write-off of affiliate shares acquired
through exercise of warrants - 30,000
------------ ------------
Net loss (671,972) (4,227,435)
============ ============
Net loss per share - basic and diluted $ (0.01) $ (0.06)
============ ============
Weighted average shares outstanding -
basic and diluted 67,245,928 66,311,502
============ ============
The accompanying notes are an integral part of these financial statements.
F-4
CT HOLDINGS ENTERPRISES, INC.
(formerly CT Holdings, Inc.)
STATEMENTS OF STOCKHOLDERS' DEFICIT
Common Stock
------------------------- Common
Stock Additional
Pending Paid Accumulated
Shares Amount Issue Capital Deficit Total
----------- ------------ ------------ ------------ ------------- -------------
Balances at
December 31, 2003 58,545,928 $ 585,460 $ 600,000 $ 57,190,601 $(59,728,391) $ (1,352,330)
Beneficial conversion
feature of note
payable to related party - - - 200,000 - 200,000
Net loss - - - - (4,227,435) (4,227,435)
-----------------------------------------------------------------------------------
Balances at
December 31, 2004 58,545,928 585,460 600,000 57,390,601 (63,955,826) (5,379,765)
Beneficial conversion
feature of note
payable to related party - - - 271,148 - 271,148
Net loss - - - - (671,972) (671,972)
-----------------------------------------------------------------------------------
Balances at
December 31, 2005 58,545,928 $ 585,460 $ 600,000 $ 57,661,749 $(64,627,798) $ (5,780,589)
=========== ============ ============ ============ ============= =============
The accompanying notes are an integral part of these financial statements.
F-5
CT HOLDINGS ENTERPRISES, INC.
(formerly CT Holdings, Inc.)
STATEMENTS OF CASH FLOWS
Years Ended
December 31,
2005 2004
---------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(671,972) $(4,227,435)
Adjustments to reconcile net income loss to
net cash used in operating activities:
Amortization of deferred debt discount
recorded as interest expense 160,858 60,000
Accrual for litigation and related interest
Expense 278,852 4,125,738
Reversal of accrual for litigation - (74,733)
Reversal of reserve for collectibility
of related party note receivable - (60,500)
Write-off affiliate shares acquired through
the exercise of warrants - 30,000
Changes in operating assets and liabilities:
Accounts payable and accrued expenses 124,491 (116,863)
Payable to Citadel 65,000 202,961
Accrual for legal settlement - (165,000)
---------- ------------
NET CASH USED IN OPERATING ACTIVITIES (42,771) (225,832)
CASH FLOWS FROM INVESTING ACTIVITIES
Exercise of warrants to acquire affiliate's
Series A-3 preferred stock - (30,000)
Payment received on notes receivable from
related party - 55,000
---------- ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES - 25,000
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from advances and notes payable
to related party - 200,000
Proceeds from note and advances
payable to officer 38,800 35,000
Payment on note payable to officer - (30,000)
---------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 38,800 205,000
---------- ------------
Net change in cash and cash equivalents (3,971) 4,168
Cash and cash equivalents at the beginning
of the year 4,168 -
---------- ------------
Cash and cash equivalents at the end of the year $ 197 $ 4,168
========== ============
SUPPLEMENTAL CASH FLOW ITEMS
Interest paid $ - $ 519
========== ============
Income taxes paid $ - $ -
========== ============
Beneficial conversion feature of note payable
to related party recorded as deferred
debt discount $ 271,148 $ 200,000
========== ============
Conversion of advances and accrued interest
into new note payable $ 71,148 $ -
========== ============
The accompanying notes are an integral part of these financial statements.
F-6
CT HOLDINGS ENTERPRISES, INC.
(formerly CT Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
CT Holdings Enterprises, Inc. (the "Company" or "CT Holdings") provides
management expertise including consulting on operations, marketing and strategic
planning and a single source of capital to early stage technology companies.
The Company was incorporated in Delaware in 1992. On March 13, 2006 the Company
changed its name to CT Holdings Enterprises, Inc. The business model is designed
to enable the companies with whom the Company acquires or invests to become
market leaders in their industries. The strategy over the years has led to the
development, acquisition and operation of technology based businesses with
compelling valuations and strong business models. The goal is to realize the
value of these investments for the Company's shareholders through a subsequent
liquidity event such as a sale, merger or initial public offering of the
investee companies.
At December 31, 2005 the Company held investments in two companies, Parago, Inc.
("Parago") and River Logic, Inc. ("River Logic"). The investments at December
31, 2005 were represented by approximately 25,000 shares of Parago common stock
and 28.8749 shares of Parago Series A-3 convertible preferred stock (convertible
into 2,887 shares of Parago common stock) and shares of stock representing
approximately 8% of River Logic.
Parago is a marketing services company that brings transaction processing
capabilities together with information-based marketing in a way that transforms
the way companies interact with customers. Through web-enabled products,
processes and resources, Parago creates solutions that meet their client's
marketing objectives. Parago provides a proprietary, promotional marketing
technology platform that helps their clients reduce promotional program costs,
increase sales, and enhance customer relationships. The Company accounts for the
investment in Parago using the cost method of accounting. In prior periods due
to continuing operating losses, lack of cash flows generated from this
investment and other factors, the Company wrote down the carrying value of the
investment in Parago to zero. Accordingly, the investment has no carrying value
at December 31, 2005 and 2004.
In May 2000, CT Holdings acquired a minority interest in River Logic which
develops and markets enterprise optimization technologies and decision support
software applications. River Logic's applications enable industry professionals
to model complex enterprises and explore financial relationships on a desktop
computer or laptop. Embedded analytics allow end-users to understand the
financial implications of critical business decisions by manipulating graphical
icons that model their enterprise. The Company accounts for the investment in
River Logic using the cost method of accounting. In prior periods due to
continuing operating losses, lack of cash flows generated from this investment
and other factors, the Company wrote down the carrying value of the investment
in River Logic to zero. Accordingly, the investment has no carrying value at
December 31, 2005 and 2004.
LIQUIDITY
The Company has incurred recurring operating losses and has a significant
stockholders' deficit at December 31, 2005 of approximately $5.8 million. At
December 31, 2005 there is a cash balance of $197 and current liabilities total
approximately $5.8 million. The Company has limited access to capital at
December 31, 2005, no plans to raise capital, and management has not identified
sources of capital at December 31, 2005. During the year ended December 31,
2005, the Company received $38,800 in advances from its CEO. Past funding needs
of the business have been provided by financings through notes payable, cash
advances and additional investments from related parties, including the
Company's CEO and CITN Investment Inc ("CII"), however there can be no assurance
that such funds will be available from these related parties in the future. The
Company has been and continues to be dependent upon outside financing to perform
its business development activities, make investments in new technology
companies and to fund operations.
The Company has made investments in entities that management believes may
provide liquidity to the Company in the long term and the management believes
that Parago and River Logic may ultimately be successful. Both Parago and River
Logic are privately held companies and because the Company holds minority
interests in these companies, the Company has received only limited information
regarding their results of operations and financial condition. The Company has
not participated in the additional capital infusions since the initial
investments and as a result, the ownership percentage in both investee companies
has been significantly diluted. The Company's ownership in Parago consists of
25,000 shares of common stock and 28.8749 shares of Parago Series A-3
convertible preferred stock (convertible to 2,887 shares of Parago common
stock), and approximately 8% of River Logic.
F-7
While management believes that the performance of the investee companies to date
has been as expected, there can be no assurance that the Company will ever
achieve liquidity from these investments. In addition, there can be no assurance
that the Company's plans will be successful or what other actions may become
necessary in the future. Until the Company achieves liquidity from the
investments through sale to a strategic investor, an initial public offering or
some other liquidity transaction, the Company will continue to require working
capital to fund operating expenses. Although the Company has been successful
raising capital in the past, an inability to raise capital may require us to
sell assets. Such actions could have a material adverse effect on the Company's
business operations and result in charges that could be material to the
Company's business and results of operations. At December 31, 2005 the Company
has not identified sources of capital nor does the Company have any plans to
raise sufficient amounts of capital to settle liabilities or to fund business
development activities.
BASIS OF PRESENTATION
The accompanying financial statements of CT Holdings have been prepared in
accordance with accounting principles generally accepted in the United States.
Certain 2004 amounts have been reclassified to conform to 2005 financial
statement presentations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements. Actual results could
differ from those estimates.
INVESTMENT IN UNCONSOLIDATED AFFILIATES
At December 31, 2005 the Company held investments in two companies, Parago and
River Logic. The Company has recorded the carrying amount of these investments
under the cost method of accounting because the Company's percentage ownership
in each Company was a non-controlling interest of less than 20%. At December 31,
2005 the Company holds 20,000 (20,000,000 pre 1:1000 reverse stock split) shares
of common stock of Parago and warrants to purchase 28.8749 shares of Series A-3
preferred stock (convertible into 2,887 shares of common stock) plus an
additional 5,000 (5,000,000 pre 1:1000 reverse stock split) shares received from
our CEO in February 2004 upon exercising his exchange right for 6,000,000 shares
of the Company's common stock. In order for the Company to exercise its option
in February 2004, the Company's CEO loaned the Company $30,000 for the Company
to exercise warrants to purchase the Series A-3 convertible preferred stock,
pursuant to a promissory note secured by the preferred stock. At December 31,
2005 the Company owns approximately 8% of River Logic for which the investment
has been accounted for under the cost method of accounting. Under the cost
method, the Company's share of income or loss of Parago and River Logic is not
included in the Company's Statements of Operations. Each of the investments has
no carrying value at December 31, 2005 and 2004.
INCOME TAXES
Deferred income taxes are recognized using the asset and liability method.
Deferred income taxes are provided based upon estimated future tax effects of
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes calculated based
upon provisions of enacted laws.
F-8
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion No.25,
"Accounting for Stock Issued to Employees," and complies with the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" as amended
by SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure, an amendment of FASB Statement No. 123". Under APB Opinion No. 25,
compensation expense for employees is based on the excess, if any, on the date
of grant, of the fair value of the Company's stock over the exercise price.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and SFAS No. 148 and Emerging
Issues Task Force ("EITF") Issue No. 96-18, "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services." All transactions in which goods or services are the
consideration received for the issuance of equity instruments are accounted for
based on the fair value of the consideration received or the fair value of the
equity instrument issued, whichever is more reliably measurable. The measurement
date of the fair value of the equity instrument issued is the earlier of the
date on which the counterparty's performance is complete or the date on which it
is probable that performance will occur.
If the Company had recognized compensation expense, in accordance with SFAS Nos.
123 and 148, based upon the fair value at the grant date for options granted to
employees, officers and directors during the years ended December 31, 2005 and
2004, the pro forma effect on net loss would not have differed from reported net
loss.
On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued
FASB Statement No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123R"),
which is a revision of FASB Statement No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123R supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows.
Generally, the approach in SFAS No. 123R is similar to the approach described in
SFAS No. 123. However, SFAS 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no longer an
alternative. The Company adopted SFAS No. 123R on January 1, 2006 using the
modified prospective method. The adoption of SFAS 123R is not expected to have a
significant effect on the Company's financial condition, cash flows or results
of operations. The future impact of the adoption of SFAS 123R cannot be
predicted at this time because it will depend on the levels of share-based
payments granted by the Company in the future. However, had the Company adopted
SFAS 123R in prior periods, the impact of the standard would not have been
material to the financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including accounts payable and notes
payable are carried at cost, which approximates fair value due to the short
maturity of these instruments.
NET LOSS PER COMMON SHARE
Net loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the period. Included
in the weighted average number of common shares outstanding for the years ended
December 31, 2005 and 2004 are 2,700,000 shares that would have been issued when
a shareholder exercised his right to convert a note payable to common stock (as
discussed in Note D) and 6,000,000 shares that would have been issued to the CEO
when he exercised his right to exchange Parago shares for CT Holdings shares if
the Company had the available authorized shares (as discussed in Note E). These
shares have been included in the computation from the date that they would have
been issued. Basic loss per share excludes any dilutive effects of stock
options. Stock options to purchase 2,887,500 and 2,917,500 shares of common
stock at December 31, 2005 and 2004, respectively have been excluded from the
computation of diluted loss per share, as the effect would be anti-dilutive. At
December 31, 2005 and 2004, the Company does not have any outstanding stock
options or warrants that have an exercise price below market value.
F-9
NOTE B - INCOME TAXES
The significant components of the Company's deferred tax assets are as follows:
December 31,
2005 2004
------------- -------------
Deferred tax assets
Net operating loss carryforwards $ 10,948,000 $ 10,894,000
Reserve on investments 1,059,000 1,059,000
Accounts payable and accrued expenses 1,498,000 1,403,000
------------- -------------
Total deferred tax assets, net 13,505,000 13,356,000
Valuation allowance (13,505,000) (13,356,000)
------------- -------------
Total deferred tax assets, net $ - $ -
============= =============
The difference between the provision for income taxes and the amount computed by
applying the federal statutory rate to loss before provision for income taxes
are as follows:
December 31,
2005 2004
------------ ------------
Provision (benefit) computed at federal statutory rate $ (228,000) $(1,437,000)
Increase in valuation allowance 149,000 1,393,000
Other 79,000 44,000
------------ ------------
$ - $ -
============ ============
For federal income tax purposes, at December 31, 2005 the Company had a net
operating loss carryforward of approximately $32,000,000, which is subject to
annual limitations as prescribed by the Internal Revenue Code, is available to
offset future taxable income and expires at various dates through 2025. A
valuation allowance has been recorded for the entire amount of the net deferred
tax asset due to uncertainty of realization.
NOTE C - STOCK OPTIONS AND WARRANTS
The Company has issued stock options to purchase common stock to directors,
employees and consultants. Options are granted at no less than fair value at the
date of grant. Generally, the options vest over no more than three years. There
were no stock option granted during the years ended December 31, 2005 and 2004.
During the year ended December 31, 2005, 15,000 options expired and 15,000
options were cancelled. At December 31, 2005 and 2004 there were 2,887,500 and
2,917,500 stock options outstanding and exercisable, respectively. The following
table summarizes other information regarding stock options at December 31, 2005:
Weighted-average Weighted-
Outstanding/ remaining average
Range of exercise Exercisable contractual life exercise
Prices Shares (in years) price
------------------ ------------ ----------------- -----------
$ 0.200 2,387,500 5.33 $ 0.200
$ 0.375 500,000 5.14 $ 0.375
------------ -----------
2,887,500 $ 0.230
============ ===========
No stock options were granted during the years ended December 31, 2005 or 2004,
therefore no fair value estimate has been presented.
F-10
NOTE D - NOTES PAYABLE TO SHAREHOLDERS
The Company has presented $600,000 as "Common stock pending issuance", a
separate Component of Stockholders' Deficit at December 31, 2005 and 2004. This
represents 2,700,000 shares of CT Holdings that were to be issued upon the
conversion of a note payable to a shareholder in 2003. Due to the lack of
available authorized shares, the shareholder has waived his right to receive
these shares until such time as the shares become authorized.
The Company has a note payable which was originally due June 30, 2002 for $9,000
to a shareholder which was in default at December 31, 2005 and 2004 and because
it is in default, bears interest at 18% per annum. Accrued interest on the note
payable was $6,128 and $4,454 at December 31, 2005 and 2004,
NOTE E - RELATED PARTY TRANSACTIONS
On May 24, 2004, the Company was advanced $200,000 by CII pursuant to the Loan
Agreement and evidenced by a Secured Convertible Promissory Note (the "Note").
In December 2005, the Company and CII entered into an Amended and Restated
Secured Convertible Promissory Note (the "Amended Note"). Pursuant to the
Amended Note, the principal was increased to $271,148 resulting from the
combination of the principal and accrued interest from the original note with
CII and advances of $43,800 plus accrued interest of $1,222 through the issue
date of the Amended Note. The Amended Note is convertible into 240 million
shares, and if the Amended Note is repaid by the Company, CII has an option to
purchase up to 71 million shares at an exercise price of $0.01 per share. The
note accrues interest at 8% per annum and is due the earlier of May 24, 2006 or
demand by CII. This Amended Note is is secured by a pledge of all of the
Company's assets. The accrued interest on the Amended Note at December 31, 2005
was $772.
The conversion price of the Amended Note of approximately $0.00113 per share was
below the fair value per share of the common stock at the date the note was
issued. Accordingly, the Company recorded the fair value of the beneficial
conversion feature of the note payable of $271,148 as debt discount. The debt
discount is being amortized over the life of the Note and a $20,858 charge was
recorded as interest expense during the year ended December 31, 2005. The
Amended Note is recorded net of deferred debt discount of $250,290 at December
31, 2005.
As a result of the amendment, the debt discount of $140,000 related to the Note
was fully amortized to interest expense during the year ended December 31, 2005.
Debt discount of $60,000 related to the Note was amortized to interest expense
during the year ended December 31, 2004.
In April 2003, CT Holdings obtained $225,000 from Citadel to pay a legal
settlement for an unsecured Note Payable to Citadel due on demand and bearing
interest at 12% per year. The accrued interest on the note payable at December
31, 2005 and 2004, was $76,784 and $48,895, respectively.
During 2005, the Company's CEO advanced $38,800 and in December 2005, this
amount plus a $5,000 note due to the Company's CEO were converted to principle
in the Amended Note previously discussed. In October 2004, the Company obtained
a $5,000 90-day note, bearing interest at 5% per year, from the CEO of the
Company. In December 2005, these amounts were converted into the Amended Note
previously discussed.
In February 2004, the CEO loaned the Company $30,000 in order for the Company to
exercise the Company's warrants to purchase 28.8749 shares of Series A-3
convertible preferred stock. The promissory note was paid back plus interest in
May 2004.
In May 2004, the Company received $55,000 for payment of note receivable from an
officer plus interest of $5,500. The note receivable was issued upon the
exercise of stock options by the officer and had been fully reserved.
Accordingly the Company reversed the $55,000 reserve and recognized $5,500 of
interest income.
Pursuant to the terms of the transition services agreement with Citadel, the
Company has agreed to pay Citadel $10,000 per quarter (reduced in July 2005 from
$7,500 per month) for the services of its CEO, CFO and accounting and
information management staff, as well as office rent and indirect overhead
expenses. The Company has a liability recorded for $650,000 and $585,000 for
amounts payable to Citadel under this agreement at December 31, 2005 and 2004,
respectively. The transition services agreement was extended to May 2006 by
approval of the independent members of each company's board of directors.
In June 2001, the Company's CEO and a director funded and guaranteed CT
Holdings' participation in the Parago bridge loan. In consideration for this
funding and guarantees, CT Holdings has agreed to permit the CEO to exchange up
to 5,000,000 (pre 1:1000 reverse stock split) Parago shares into up to 6,000,000
shares of CT Holdings' common stock. The CEO exercised the exchange right in
February 2004. The CEO waived his right to receive the shares of CT Holdings
until the authorized shares become available.
NOTE G - COMMITMENTS AND CONTINGENCIES
In August 1998, Janssen-Meyers Associates L.P. (JMA) filed a lawsuit against the
Company arising out of an alleged 1995 contract with the Company's predecessor
(Old Citadel). The suit alleged that Old Citadel breached a letter of intent
dated September 1995 and/or a Placement Agency Agreement dated November 1995
between JMA and Old Citadel. As its damages, JMA claimed that it was entitled
to, among other things, the cash value of warrants to purchase 1.8 million
shares of CT Holdings common stock at an exercise price of $0.89 per share,
valued during May 1996. According to JMA's valuation of those warrants,
potential damages were alleged to exceed $40 million. The Company vigorously
disputes that it breached either the letter of intent or the Placement Agency
Agreement or that it is liable to JMA. The lawsuit was styled Janssen-Meyers
Associates, L.P. v. Citadel Technology, Inc., and was filed in the Supreme Court
of the State of New York, County of New York. The Company removed the case to
federal court in the Southern District of New York.
F-11
Following mediation in July 2000, the Company entered into a settlement term
sheet, to attempt to resolve the disputes between it and JMA, pursuant to which
the Company and JMA agreed in principle to settle the lawsuit for an aggregate
of $3 million, in a combination of $1.5 million in cash and 300,000 shares of
the Company's common stock with a guaranteed value of $5 per share as of
January, April and October 2001 (with respect to 100,000 of the shares for each
period). The settlement was subject to execution of definitive settlement
documents and approval of the boards of directors of both parties.
However, the Company and JMA were unable to negotiate the final definitive
settlement agreement. The case was dismissed in August 2000 without any
resolution of this issue. On March 27, 2001, JMA attempted to reopen this
matter, but the Court hearing the JMA lawsuit issued a Summary Order denying
JMA's motion to enforce the settlement term sheet and confirmed the prior
dismissal of the lawsuit. The Court further ruled that JMA would either have to
bring an action on the proposed settlement or move to re-open the dismissed
case. The Court stated that it did not express any view with respect to the
merits of the settlement that brought about the dismissal of the case. There was
no activity on the case from March 2001 through August 2001. On August 27, 2001
JMA refiled its lawsuit with a federal court in New York, and the Company filed
its motion to dismiss the case because the plaintiffs lacked the required
diversity jurisdiction to pursue the claims in federal court. On October 31,
2001 the case was dismissed in federal court. In December 2001, the plaintiffs
refiled the lawsuit in the state court seeking to enforce the proposed
settlement term sheet. The case was filed in Supreme Court of New York, that
state's trial court, in a case styled Roan Meyers v. CT Holdings. CT Holdings
has filed counterclaims for breach of the term sheet as well as breach of the
placement agency agreement. Cross motions for partial summary judgments have
been argued but on June 9, 2004 the court entered judgment in favor of
Roan-Meyers in the amount of $3,000,000 and granted interest at the rate of 9%
from October 31, 2000 through the date of final judgment, and thereafter at the
statutory rate allowed by law. The judgment of $3,000,000 as well as the
interest from October 2000 through December 31, 2005 of $1,404,590 has been
accrued. The Company has appealed the final judgment. The Company intends to
vigorously defend this case.
On April 8, 2005, Meyers Associates, L.P. f/k/a Roan/Meyers Associates, L.P. and
f/k/a Janssen-Meyers Associates, L.P. ("Meyers") filed a lawsuit in the Court of
Chancery of the State of Delaware, in New Castle County, against the Company,
Citadel Security Software, Inc. (Citadel) including Steven B. Solomon, the Chief
Executive and a Director of the Company, Chris A. Economou, a Director of the
Company, Lawrence Lacerte, a former Director of the Company, and Phillip J.
Romano, a former Director of the Company (the "Individual Defendants"). The suit
alleges that in connection with an action filed in the Supreme Court of New
York, New York County, to enforce a Settlement Term Sheet executed on July 7,
2000 by Meyers and CT Holdings, Meyers was awarded a judgment against CT
Holdings in the amount of $3 million plus interest on the judgment at the rate
of 9% from October 31, 2000 until the date of entry of that judgment and
thereafter at the statutory rate (the "Judgment"). CT Holdings has appealed the
Judgment and that appeal is pending. The suit alleges that CT Holdings' May 2002
spin-off of its interests in Citadel to CT Holdings' shareholders rendered CT
Holdings insolvent and constituted a fraudulent conveyance to defraud CT
Holdings' creditors, including Meyers. The suit asserts fraudulent conveyance
claims against Citadel and CT Holdings pursuant to Delaware statutory and common
law. The suit also asserts a claim against Citadel for successor liability as
the alleged successor in interest or alter ego of CT Holdings. The suit alleges
that the Individual Defendants who were officers and/or directors of CT Holdings
at the time of the spin-off breached fiduciary duties allegedly owed to
creditors of CT Holdings, including Meyers, by approving and allowing the
spin-off transaction. The suit seeks to void the spin-off transaction or
alternatively to hold Citadel liable for the Judgment including interest, to
recover damages against the Individual Defendants in an amount not less than the
Judgment including interest, plus an unspecified amount of punitive,
consequential and incidental damages, as well as attorneys' fees and costs. The
Company believes that this suit is without merit and intends to vigorously
defend this action. The ultimate outcome is not currently predictable. Currently
the Company is unable to estimate the ultimate liability, if any, related to
this suit, and therefore has not recorded a liability for this suit at December
31, 2005.
The Company may become involved from time to time in litigation on various
matters which are routine to the conduct of our business. The Company believes
that none of these actions, individually or in the aggregate, will have a
material adverse effect on our financial position or results of operations,
though any adverse decision in these cases or the costs of defending or settling
such claims could have a material adverse effect on our business.
F-12