UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31,
2002 Commission File No. 333-54822
STRONGHOLD TECHNOLOGIES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Nevada 22-376235
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
450 Claremont Road, Bernardsville, NJ 07924
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(Address of Principal Executive Offices) (Zip Code)
(908) 630-9696
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(Registrant'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:
None.
Check whether the Registrant: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12
months (or for such shorter period that 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:
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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. [X]
State Registrant's revenues for fiscal year ended December 31, 2002:
$2,802,483
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant: $2,368,596 at February 28, 2003 based on the
closing sales price on that date.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of February 28, 2003:
Class Number of Shares
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Common Stock, $0.0001 par value 9,857,000
Transitional Small Business Disclosure Format
Yes: No: X
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The following documents are incorporated by reference into the Annual
Report on Form 10-KSB: None.
TABLE OF CONTENTS
Item Page
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PART I 1. Business.........................................................................1
2. Properties......................................................................15
3. Legal Proceedings...............................................................15
4. Submission of Matters to a Vote of Security Holders.............................15
PART II 5. Market for the Company's Common Equity and Related
Stockholder Matters.............................................................16
6. Management's Discussion and Analysis and Results of Operations..................17
7. Financial Statements............................................................23
8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure.............................................24
PART III 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act....................................................................25
10. Executive Compensation..........................................................27
11. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters..................................35
12. Certain Relationships and Related Transactions..................................36
13. Exhibits, List and Reports on Form 8-K..........................................39
14. Control and Procedures..........................................................39
SIGNATURES ........................................................................................40
CERTIFICATIONS.....................................................................................42
EXHIBIT INDEX .....................................................................................43
FINANCIAL STATEMENTS..............................................................................F-1
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PART I
ITEM 1. BUSINESS
OUR HISTORY
We were incorporated on September 8, 2000 in the State of Nevada, under
the name TDT Development, Inc. On May 16, 2002, we acquired Stronghold
Technologies, Inc., a New Jersey corporation, referred to herein as the
"Predecessor Entity", pursuant to a merger of such entity into our wholly-owned
subsidiary, TDT Stronghold Acquisition Corp., referred to herein as "Acquisition
Sub". As consideration for the merger, we issued 7,000,000 shares of our Common
Stock, par value $0.0001 per share, to the stockholders of the Predecessor
Entity in exchange for all of the issued and outstanding shares of the
Predecessor Entity. After the closing of the merger, Acquisition Sub, the
survivor of the merger, changed its name to Stronghold Technologies, Inc. and
remains our wholly-owned subsidiary. On July 11, 2002, we changed our name from
TDT Development, Inc. to Stronghold Technologies, Inc. Finally, on July 19,
2002, we exchanged all of the shares that we held in our two other wholly-owned
subsidiaries, Terre di Toscana, Inc. and Terres Toscanes, Inc., for 75,000
shares of our Common Stock held by Mr. Pietro Bortolatti, our former president.
These subsidiaries conducted an import and distribution business specializing in
truffle-based food products.
All references to "we," "us," "our," or similar terms used herein refer
to Stronghold Technologies, Inc., a Nevada corporation, formerly known as TDT
Development, Inc. or its wholly-owned subsidiary, Stronghold Technologies, Inc.
a New Jersey entity. All references to "Stronghold" used herein refer to just
our wholly-owned subsidiary, Stronghold Technologies, Inc., a New Jersey
corporation. All references to the "Predecessor Entity" refer to the New Jersey
corporation we acquired on May 16, 2002, Stronghold Technologies, Inc., which
was merged with and into Stronghold.
Our principal executive offices are located at 777 Terrace Avenue,
Hasbrouck Heights, New Jersey 07604. Our telephone number at that location is
201-727-1464 and our Internet address is www.strongholdtech.com. The information
contained on our website is not incorporated by reference herein.
SUMMARY OF DISCONTINUED TRUFFLE BUSINESS OPERATIONS
From our inception on September 8, 2000, through July 19, 2002, we
imported, marketed and distributed specialized truffle-based food products,
including fresh truffles, truffle oils, truffle pates, truffle creams and
truffle butter, through our former wholly-owned subsidiaries, Terre di Toscana,
Inc. and Terres Toscanes, Inc. Our target market included retailers such as
restaurants, specialty food stores, delicatessens and supermarkets. We imported
products directly from Italian producers and marketed our products in the
specialty food industry. We marketed our products primarily in Florida, South
Carolina, North Carolina and California, and also earned commissions on sales
made in Belgium, Holland and Germany.
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As a result of our receiving 75,000 shares of Common Stock from Mr.
Bortolatti and the concurrent transfer of our interest in the truffle business
to him, we are no longer involved in the truffle business. The sale of these
subsidiaries was part of our effort to focus on the handheld technology
business.
OVERVIEW OF HANDHELD TECHNOLOGY BUSINESS
On May 16, 2002, we entered the handheld wireless technology business
via our acquisition by merger of the Predecessor Entity. The Predecessor Entity
was founded on August 1, 2000 by Christopher J. Carey, our current Chief
Executive Officer and President, and two other executive officers of Stronghold:
Lenard J. Berger, Chief Technology Officer and Salvatore F. D'Ambra, Vice
President, Product Development. This founding group has substantial expertise in
systems design, software development, wireless technologies and automotive
dealer software applications. The Predecessor Entity was founded to develop
proprietary handheld wireless technology for the automotive dealer software
market. Since the merger of the Predecessor Entity into our subsidiary, now
Stronghold, Stronghold continues to conduct the Predecessor Entity's handheld
wireless technology business.
Stronghold's DealerAdvance(TM) suite of Customer Relationship
Management software, referred to as CRM, has been designed to maximize the
revenues and reduce the operating expenses of automobile dealerships. Stronghold
has completed the development of DealerAdvance Sales Solution(TM), a software
suite designed to increase sales by effectively capturing a greater percentage
of unsold customer prospects and maximizing customer "be-back" (return) and
closure rates. We plan to introduce a full range of CRM systems, including the
DealerAdvance Service Solution(TM) and the DealerAdvance Inventory Management
Solution(TM), products designed to increase revenues and maximize profitability
by effectively managing dealer service operations, customer information and
vehicle inventory. These products are similar to the handheld and wireless
systems used in the auto rental industry. Consumers are now accustomed to a
swift car return process wherein the attendant scans the car, brings up the
rental terms, completes the sale and prints out a receipt, all without having to
step over to a counter.
DESCRIPTION OF PRODUCTS
The DealerAdvance Sales Solution(TM) provides automobile dealerships
the following advantages:
o Ease of use associated with handheld mobile communications;
o The handheld unit is both an input and display device;
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o The handheld unit is programmed to access competitive and proprietary
industry information from a variety of sources;
o The system provides the capability for immediate management
involvement in the selling process;
o Provides for effective monitoring of sales performance and follow-up
by sales personnel; and
o Enables integration with existing automotive dealer accounting and
business systems.
The DealerAdvance Sales Solution(TM) is a comprehensive CRM system,
providing customer history and contact information, as well as a personal
calendar and instructions on follow-up tasks directly to the handheld, creating
a highly effective communications tool for business development.
The DealerAdvance Sales Solution(TM) offers the following unique
features:
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o Enables a high capture rate on walk-in traffic;
o Streamlines all sales and other follow-on processes;
o Provides current and comprehensive information and data for new and
used car inventory (on a real-time basis), all competing products, and
customer history with dealership;
o Provides performance data and analysis on each member of a sales team;
and
o Provides management with valuable and relevant transaction data on a
real-time basis.
The DealerAdvance Sales Solution(TM) offers the following services:
o Customer profiling;
o Drivers license scanning;
o Reverse phone look-up;
o Electronic signature capture;
o Dealer vehicle information and competitive product comparisons;
o Vehicle inventory status;
o Integrated purchase forms completion and printing;
o Used car appraisal;
o Management reports;
o Customer relationship management system functions;
o DMS integration capability; and
o E-mail and Internet access.
Stronghold installed Version 1.0 of the DealerAdvance Sales
Solution(TM) in six pilot dealerships during 2001. These dealerships were spread
throughout New Jersey, California and Connecticut. Stronghold introduced Version
2.0 of DealerAdvance Sales Solution(TM) at all of its sites by the end of
September 2001.
Stronghold introduced Version 3.0 of its software and installed another
3 dealership sites in the first quarter ending March 31, 2002, adding customers
in New York. In the second quarter ending June 30, 2002, Stronghold installed
another 7 sites, adding customers in Arizona, Southern California and South
Carolina. In the third quarter ending September 30, 2002, Stronghold implemented
another 10 sites, adding customers in Virginia, Florida, South Carolina and
Central California, and introduced Version 3.1 of its software. In the fourth
quarter ending December 31, 2002, Stronghold installed an additional 13
dealerships, adding customers in
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Texas, Indiana and Michigan. Overall, in 2002, Stronghold installed
DealerAdvance Sales Solution(TM), in a total of 33 dealerships sites
representing Toyota, Honda, Ford, Chevrolet, Nissan, Volkswagen, Buick, Pontiac,
Cadillac, Chrysler, Dodge, Kia and Hyundai.
Stronghold plans to utilize its direct sales force to market the
DealerAdvance Sales Solution(TM) on a national basis. Stronghold has established
a strong presence in most regions of the United States, and is continuing to add
business development and operations offices pursuant to an organized growth
plan. Stronghold began the year with business development managers in Northern
New Jersey and San Francisco, and ended the year with additional sales and
operations people operating in Atlanta, San Francisco, Los Angeles, Phoenix,
Miami, Cleveland and Washington, DC.
At December 31, 2002, a total of 37 dealers were using the
DealerAdvance Sales Solution(TM), of which approximately 32 had reached or
exceeded the 60-day performance period associated with installation.
NEW PRODUCT DEVELOPMENTS
The Stronghold development staff is currently developing DealerAdvance
Service Solution(TM), a handheld wireless system that allows service advisors to
leave their desks and greet clients at their cars to process their service
order. Initial beta installations of the product are expected to begin in the
fall of 2003, with general availability by the end of 2003.
The DealerAdvance Service Solution(TM) will provide for improved
customer service and reduced vehicle check time in and will allow dealer
representatives to scan a particular vehicle identification number from the
windshield or door. DealerAdvance Service Solution(TM) will also provide for
instant mobile access to client and vehicle history and will allow the dealer
representatives to access warrantee and service period advice instantly. This
product will also provide an up-selling application to increase revenue per
repair order and will include an application to allow service marketing through
the DealerAdvance(TM) CRM application.
The development plan includes the addition of a third product called
DealerAdvance Inventory Management Solution(TM), a handheld wireless system for
the management of new and used car inventory. DealerAdvance Inventory Management
Solution(TM) would provide a handheld device for the scanning of incoming and
outgoing vehicles, immediately adjusting inventory on hand for sale. In
addition, the system would provide for the printing of used car stickers, the
capture of Vehicle Identification Numbers for used car appraisal and estimates,
and the loading of vehicle specifics to the dealer web site.
RESEARCH AND DEVELOPMENT
Since inception, we have spent approximately $2,055,159 on research and
development activities. While we have been successful in meeting planned goals
in the development and introduction of DealerAdvance Sales Solution(TM), there
can be no assurance that our research and development efforts will be successful
with respect to additional products, or if successful, that we will be able to
successfully commercially exploit such additional products.
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COMPETITION RELATED TO HANDHELD TECHNOLOGY BUSINESS
The DealerAdvance Sales Solution(TM) is a wireless dealership sales
productivity system that improves sales performance, reduces costs and creates
operational efficiency. Currently, Stronghold does not believe that it has any
direct competition in this specific sector. However, Stronghold expects emerging
competitive players in the wireless handheld solutions market in the future.
Stronghold does compete with the traditional CRM providers and the emerging new
CRM providers in the retail automotive dealer software market. The leading CRM
companies that Stronghold competes against are:
o Automotive Directions, a division of ADP Dealer Services, and a
provider of PC-based customer relationship management systems as well
as marketing research and consulting services;
o Higher Gear, a provider of client server based front-end sales and
customer relationship management software which serves the retail
automotive industry exclusively;
o Autobase, a provider of PC based front-end software which serves the
retail automotive industry exclusively;
o Cowboy Corporation, recently acquired by Cobalt Corporation, and a
provider of ASP sales prospect management systems and customer
relationship management systems which services the retail automotive
industry exclusively; and
o Autotown, a provider of PC and web-based front-end sales systems,
which services the retail automotive industry exclusively.
We believe that our proprietary technology is unique and, therefore,
places it at a competitive advantage in the industry. However, there can be no
assurance that our competitors will not develop a similar product with
properties superior to our own or at greater cost-effectiveness.
MARKETING AND SALES
Stronghold has defined a target market of approximately 10,000
dealerships that meet the base criteria for potential use of our system. More
specifically, Stronghold has qualified a primary target market of 6,500
dealerships where the potential sale and use of the system is the greatest. The
primary target market includes dealerships that sell a minimum of 75 new and
used cars each month and do not have a CRM system currently installed.
Stronghold distributes its DealerAdvance Sales Solution(TM) through
direct sales, which Stronghold believes is most effective when introducing an
innovative new solution to the marketplace. Stronghold is continuing to grow its
Sales and Marketing team, which is aligned along geographic territory units.
EMPLOYEES
Stronghold currently has a total of 37 full-time employees and 3
part-time employees, of which 25 are dedicated to marketing and sales and
regional customer support. During
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Stronghold's initial expansion, Stronghold has hired senior and experienced
business development mangers to provide initial regional market penetration. As
regional managers are hired or promoted after the initial expansion, Stronghold
will place more responsibility on less senior, but equally aggressive and
professional, sales executives for continued expansion. Client consultants are
responsible for providing installation, training and ongoing support services to
Stronghold's new and existing customers. Client Consultants report to Regional
Managers who in turn report to a National Manager located in Virginia.
Stronghold anticipates hiring a Marketing Manager in 2003. The Marketing Manager
will work closely with the CEO and the Regional Vice Presidents of Sales to
execute Stronghold's marketing strategy and to enhance market awareness of the
DealerAdvance Sales Solution(TM). There are no collective bargaining
arrangements among Stronghold employees. We believe Stronghold's relationship
with its employees to be good.
OUR INTELLECTUAL PROPERTY
We have been granted a trademark for DealerAdvance(TM) and have a
patent application pending that seeks protection of a number of developments
pertaining to the management of information flow for automotive dealer-based
software. An additional application is currently being planned which will
address certain proprietary features pertaining to systems components, related
equipment and software modules.
SAFE HARBOR STATEMENT
The statements contained in this Annual Report on Form 10-KSB that are
not historical facts are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934 ("the Securities Act"), as
amended and the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements may be identified by, among other things, the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," or "anticipates" or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy that involve risks and
uncertainties. In particular, the our statements regarding the anticipated
growth in the markets for the our technologies, the continued development of our
products, the approval of the our Patent Applications, the successful
implementation of the our sales and marketing strategies, the anticipated longer
term growth of our business, and the timing of the projects and trends in future
operating performance are examples of such forward-looking statements. The
forward-looking statements include risks and uncertainties, including, but not
limited to, the timing of revenues due to the uncertainty of market acceptance
and the timing and completion of pilot project analysis, and other factors,
including general economic conditions, not within our control. The factors
discussed herein and expressed from time to time in our filings with the
Securities and Exchange Commission could cause actual results to be materially
different from those expressed in or implied by such statements. The
forward-looking statements are made only as of the date of this filing and we
undertake no obligation to publicly update such forward-looking statements to
reflect subsequent events or circumstances.
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FACTORS THAT MIGHT AFFECT OUR BUSINESS, FUTURE OPERATING RESULTS, FINANCIAL
CONDITION AND/OR STOCK PRICE
The more prominent risks and uncertainties inherent in our business are
described below. However, additional risks and uncertainties may also impair its
business operations. If any of the following risks actually occur, our business,
financial condition or results of operations may suffer.
RISKS CONCERNING OUR BUSINESS
WE HAVE A HISTORY OF INCURRING NET LOSSES; WE EXPECT OUR NET LOSSES TO CONTINUE
AS A RESULT OF PLANNED INCREASES IN OPERATING EXPENSES; AND WE MAY NEVER ACHIEVE
PROFITABILITY.
We have a history of operating losses in our wireless business and have
incurred significant net losses in such business in each fiscal quarter since
our inception. We had a net loss of $4,528,803 for the fiscal year ended
December 31, 2002. We had a net operating loss of $4,315,356 for the fiscal year
ended December 31, 2002 and a net operating loss of approximately $3,273,000 for
the period from May 17, 2002 through December 31, 2002 to offset future taxable
income. Loss prior to May 17, 2002 was passed directly to the shareholders and,
therefore, is not included in the loss carry-forward. We expect to continue to
incur net losses and negative cash flows because we intend to increase operating
expenses to develop the Stronghold brand through marketing, promotion and
enhancement of our services. As a result of this expected increase in operating
expenses, we will need to generate significant additional revenue to achieve
profitability. Our ability to generate and sustain significant additional
revenues or achieve profitability will depend upon the factors discussed
elsewhere in this "Risk Factors" section, as well as numerous other factors
outside of our control, including:
o Development of competing products that are more effective or less
costly than ours;
o Our ability to develop and commercialize our own products and
technologies; and
o Our ability to achieve increased sales for our existing products and
sales for any new products.
It is possible that we may never achieve profitability and, even if we
do achieve profitability, we may not sustain or increase profitability on a
quarterly or annual basis in the future. If we do not achieve sustained
profitability, we will be unable to continue our operations.
IF WE ARE UNABLE TO OBTAIN SUFFICIENT FUNDS, AND INCUR A CASH FLOW DEFICIT, OUR
BUSINESS COULD SUFFER.
We believe that the funds raised through our recent debt and equity
financings will only be sufficient for our needs for the immediate future,
raising substantial doubt about our ability to continue as a going concern. We
anticipate that we will be required to raise additional capital by the second
quarter of 2003 and over the next several years in order to operate according to
our business plan. We may have difficulty obtaining additional funds as and if
needed, and we may have to accept terms that would adversely affect our
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stockholders. For example, the terms of any future financings may impose
restrictions on our right to declare dividends or on the manner in which we
conduct our business. Also, lending institutions or private investors may impose
restrictions on future decisions by us to make capital expenditures,
acquisitions or asset sales.
We may not be able to locate additional funding sources at all or on
acceptable terms. If we cannot raise funds on acceptable terms, if and when
needed, we may not be able to develop or enhance our products, grow our business
or respond to competitive pressures or unanticipated requirements, each of which
could seriously harm our business.
Since inception, we have financed all of our operations through private
equity and debt financings and commercial bank loans. Our future capital
requirements depend on numerous factors, including:
o The scope of our research and development;
o Our ability to successfully commercialize our technology; and
o Competing technological and market developments.
WE HAVE A LIMITED OPERATING HISTORY.
We were formed in September 2000 to import and market truffle oil
products. As of May 16, 2002, our focus shifted to development and marketing of
handheld wireless technology for the automotive dealer software market. We
entered this business through the acquisition of an entity with only 23 months
of operating history. We must, therefore, be considered to be subject to all of
the risks inherent in the establishment of a new business enterprise. Our
limited operating history makes it difficult to evaluate our financial
performance and prospects. We cannot assure you at this time that we will
operate profitably or that we will have adequate working capital to meet our
obligations as they become due. Because of our limited financial history, we
believe that period-to-period comparisons of our results of operations will not
be meaningful in the short term and should not be relied upon as indicators of
future performance.
IF WE FAIL TO GAIN MARKET ACCEPTANCE OF OUR PRODUCTS, OUR BUSINESS AND RESULTS
OF OPERATIONS WOULD BE HARMED.
We are still in the verification and validation stages of our
DealerAdvance(TM) suite of products. Our first pilot system for DealerAdvance
Sales Solution(TM) was installed in April 2001 and our sixth and final pilot
system was installed in September 2001. We implemented a total of 33 additional
sites in 2002. We expect to introduce our DealerAdvance Service Solution(TM) and
DealerAdvance Inventory Management Solution(TM) over the next two years. These
solutions are still in the development stages and are not yet at the point where
they are ready to be installed in test sites. While we have received positive
feedback and market acceptance of DealerAdvance Sales Solution(TM) by the test
sites, thirty-nine systems is a small number and results in such sites may not
be indicative of the overall market acceptance and success of DealerAdvance
Sales Solutions(TM) or our entire DealerAdvance(TM) suite of products. We may
experience design, marketing, and other difficulties that could delay or prevent
our development, introduction, or marketing of these and other new products and
enhancements. In addition, the costs of developing and marketing our products
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may far outweigh the revenue stream generated by such products. Finally, our
prospects for success will depend on our ability to successfully sell our
products to key automobile dealerships that may be inhibited from doing business
with us because of their commitment to their own technologies and products, or
because of our relatively small size and lack of sales and production history.
The nature of our handheld product and technology requires us to market
almost exclusively to automobile dealerships. Should any particular dealership
or conglomerate of dealerships favor other providers of similar services or not
utilize our services to the extent anticipated, our business may be adversely
affected. The economy may also have an impact on the market acceptance of our
products. Big-ticket consumer purchases are sensitive to broad economic trends.
Therefore, our business could suffer if our customers, automobile dealerships,
are affected by the continuing poor economic conditions. For example, if dealer
sales are trending downward, capital expenditures, like those associated with
our DealerAdvance (TM) suite of products, may be delayed or abandoned.
IF WE FAIL TO PROPERLY MANAGE OUR GROWTH, OUR BUSINESS AND RESULTS OF OPERATIONS
WOULD BE HARMED.
We have begun expanding our operations in anticipation of an aggressive
rollout of our DealerAdvance(TM) product suite. In the past twelve months, our
sales, marketing and customer support team has increased from 7 to 25 employees.
We have strategically hired additional sales representatives in seven more
states in the past twelve months, expanding into Arizona, Virginia, Southern
California, Florida, Ohio, Texas and Georgia. Additionally, we must continue to
develop and expand our systems and operations as the number of automobile
dealerships installing our products and requiring our ongoing services
increases. The pace of our anticipated expansion, together with the level of
expertise and technological sophistication required to provide implementation
and support services, demands an unusual amount of focus on the operational
needs of our future customers for quality and reliability, as well as timely
delivery and post-installation and post-consultation field and remote support.
This development and expansion has placed, and we expect it to continue to
place, strain on our managerial, operational and financial resources.
We may be unable to develop and expand our systems and operations for
one or more of the following reasons:
o We may not be able to locate or hire at reasonable compensation rates
qualified and experienced sales staff and other employees necessary to
expand our capacity on a timely basis;
o We may not be able to obtain the hardware necessary to meet the demand
by automobile dealership of our products, in a timely manner;
o We may not be able to expand our customer service, billing and other
related support systems;
o We may not be able to integrate new management and employees into our
overall operations;
o We may not be able to establish improved financial and accounting
systems; and
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o We may not be able to successfully integrate our internal operations
with the operations of our product manufacturers, distributors and
suppliers to product and market commercially viable products.
If we cannot manage our growth effectively, our business and operating
results will suffer. Additionally, any failure on our part to develop and
maintain our wireless technology products during a period of rapid growth could
significantly adversely affect our reputation and brand name which could reduce
demand for our services and adversely affect our business, financial condition
and operating results.
WE DEPEND ON ATTRACTING AND RETAINING KEY PERSONNEL.
We are highly dependent on the principal members of our management,
research and sales staff. The loss of their services might significantly delay
or prevent the achievement of our strategic objectives. Our success depends on
our ability to retain key employees and to attract additional qualified
employees. Competition for personnel is intense, and we cannot assure you that
we will be able to retain existing personnel or attract and retain additional
highly qualified employees in the future.
Our subsidiary, Stronghold, has an employment agreement in place with
its President and Chief Executive Officer, Christopher J. Carey, which provides
for vesting of options exercisable for shares of our Common Stock based on
continued employment and on the achievement of performance objectives defined by
the board of directors. Stronghold does not have similar retention provisions in
employment agreements with its other key personnel. If we are unable to hire and
retain personnel in key positions, our business could be significantly and
adversely affected unless qualified replacements can be found.
Our success is dependent on the vision, technological knowledge,
business relationships and abilities of our current president, Mr. Carey. Any
reduction of Mr. Carey's role in the handheld technology business would have a
material adverse effect on us. Mr. Carey's employment contract expires on
December 31, 2004.
INCREASING POLITICAL AND SOCIAL TURMOIL, SUCH AS TERRORIST AND MILITARY ACTIONS,
INCREASE THE DIFFICULTY FOR US AND OUR STRATEGIC PARTNERS TO FORECAST ACCURATELY
AND PLAN FUTURE BUSINESS ACTIVITIES.
Recent political and social turmoil, including the terrorist attacks of
September 11, 2001 and the current conflict in the Middle East, can be expected
to put further pressure on economic conditions in the United States and
worldwide. These political, social and economic conditions may make it difficult
for us to plan future business activities. For example, if the current conflict
in the Middle East continues to escalate, our operations and general economic
conditions could be adversely affected. Specifically, if the current economic
conditions continue to decline, consumers may be less inclined to make large
purchases, such as automobiles. Consequently, if dealer sales suffer,
dealerships may decrease capital expenditures like those associated with our
products.
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RISKS CONCERNING OUR HANDHELD TECHNOLOGY
AN INTERRUPTION IN THE SUPPLY OF PRODUCTS AND SERVICES THAT WE OBTAIN FROM THIRD
PARTIES COULD CAUSE A DECLINE IN SALES OF OUR PRODUCTS AND SERVICES.
We are dependant upon certain providers of software, including
Microsoft Corporation and their Pocket PC software, to provide the operating
system for our applications. If there are significant changes to this software,
or if this software stops being available or supported, we will experience a
disruption to our product and to our development effort.
In designing, developing and supporting our wireless data services, we
rely on mobile device manufacturers, content providers, database providers and
software providers. These suppliers may experience difficulty in supplying us
products or services sufficient to meet our needs or they may terminate or fail
to renew contracts for supplying us these products or services on terms we find
acceptable. Any significant interruption in the supply of any of these products
or services could cause a decline in sales of our products and services, unless
and until we are able to replace the functionality provided by these products
and services. We also depend on third parties to deliver and support reliable
products, enhance their current products, develop new products on a timely and
cost-effective basis and respond to emerging industry standards and other
technological changes.
COMPETITION IN THE WIRELESS TECHNOLOGY INDUSTRY IS INTENSE AND TECHNOLOGY IS
CHANGING RAPIDLY.
Many wireless technology and software companies are engaged in research
and development activities relating to our range of products. The market for
handheld wireless technology is intensely competitive, rapidly changing and
undergoing consolidation. We may be unable to compete successfully against our
current and future competitors, which may result in price reductions, reduced
margins and the inability to achieve market acceptance for our products. Our
competitors in the field are companies that include major international car
dealership service companies, specialized technology companies, and,
potentially, our joint venture and strategic alliance partners. Such companies
include: ADP Dealer Services, Reynolds and Reynolds Company, Automotive
Directions, Higher Gear, Autobase, Third Coast Media, Cowboy Corporation and
Autotown, among others. Many of these competitors have substantially greater
financial, marketing, sales, distribution and technical resources than us and
have more experience in research and development, sales, service, manufacturing
and marketing. We anticipate increased competition in the future as new
companies enter the market and new technologies become available. Our technology
may be rendered obsolete or uneconomical by technological advances or entirely
different approaches developed by one or more of our competitors.
WE MAY NOT HAVE ADEQUATELY PROTECTED OUR INTELLECTUAL PROPERTY RIGHTS.
Our success depends on our ability to sell products and services for
which we may not have intellectual property rights. We currently do not have
patents on any of our intellectual property. We have filed for a patent, which
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protects a number of developments pertaining to the management of information
flow for automotive dealer-based software. An additional application is
currently being planned which will address certain proprietary features
pertaining to our systems components, related equipment and software modules. We
cannot assure you we will be successful in protecting our intellectual property
through patent law.
We rely primarily on trade secret laws, patent law, copyright law,
unfair competition law and confidentiality agreements to protect our
intellectual property. To the extent that intellectual property law does not
adequately protect our technology, other companies could develop and market
similar products or services, which could adversely affect our business.
WE MAY BE SUED BY THIRD PARTIES FOR INFRINGEMENT OF THEIR PROPRIETARY RIGHTS AND
WE MAY INCUR DEFENSE COSTS AND POSSIBLY ROYALTY OBLIGATIONS OR LOSE THE RIGHT TO
USE TECHNOLOGY IMPORTANT TO OUR BUSINESS.
The wireless technology and software industries are characterized by
the existence of a large number of patents and frequent litigation based on
allegations of patent infringement or other violations of intellectual property
rights. As the number of participants in our market increases, the possibility
of an intellectual property claim against us could increase. Any intellectual
property claims, with or without merit, could be time consuming and expensive to
litigate or settle and could divert management attention from the administration
of our business. A third party asserting infringement claims against us or our
customers with respect to our current or future products may adversely affect us
by, for example, causing us to enter into costly royalty arrangements or forcing
us to incur settlement or litigation costs.
RISKS CONCERNING OUR CAPITAL STRUCTURE
OUR MANAGEMENT AND OTHER AFFILIATES HAVE SIGNIFICANT CONTROL OF OUR COMMON STOCK
AND COULD CONTROL OUR ACTIONS IN A MANNER THAT CONFLICTS WITH OUR INTERESTS AND
THE INTERESTS OF OTHER STOCKHOLDERS.
As of February 28, 2003, our executive officers and directors
beneficially owned in the aggregate approximately 72%, and together with
affiliated entities beneficially owned approximately 80% of the outstanding
shares of our Common Stock, assuming the exercise of all options, warrants and
the conversion of any convertible securities held by such persons, which were
presently exercisable or will become exercisable within 60 days after February
28, 2003. As a result, these stockholders, acting together, will be able to
exercise considerable influence over matters requiring approval by our
stockholders, including the election of directors, and may not always act in the
best interests of other stockholders. Such a concentration of ownership may have
the effect of delaying or preventing a change in control, including transactions
in which our stockholders might otherwise receive a premium for their shares
over then current market prices.
WE ARE CONTROLLED BY OUR PRESIDENT, WHICH MAY RESULT IN YOU HAVING NO CONTROL IN
OUR DIRECTION OR AFFAIRS.
As of February 28, 2003, our president owned approximately 58% of our
current outstanding Common Stock, assuming the exercise of all options, warrants
and the conversion of any convertible securities held by him, which were
presently exercisable or will become exercisable within 60 days after February
28, 2003. As a result, he has the ability to control us
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and direct our affairs and business, including the approval of significant
corporate transactions. This concentration of ownership may have the effect of
delaying, deferring or preventing a change in control and may make some
transactions more difficult or impossible without the support of these
stockholders. Any of these events could decrease the market price of our Common
Stock.
STOCKHOLDERS MAY SUFFER DILUTION AS A RESULT OF SHARES ELIGIBLE FOR FUTURE
ISSUANCE.
As of February 28, 2003, we had 9,857,000 shares of our Common Stock
issued and outstanding. In addition, we had the potential to issue 1,364,847
shares of our Common Stock upon the exercise of all outstanding options, and
4,005,500 shares of our Common Stock upon the exercise of certain warrants
outstanding and upon the conversion of certain shares of our Series A Preferred
Stock. Consequently, sales of substantial amounts of our Common Stock in the
public market, or the perception that such sales could occur, may adversely
affect the market price of our Common Stock.
VOLATILITY OF TRADING MARKET MAY AFFECT YOUR INVESTMENT.
The market price for our securities is highly volatile. The following
factors have a significant impact on the market price of our securities: our
financial results; introduction of new products into the marketplace; various
factors affecting the automobile industry and the wireless industry generally,
including extreme volatility and extended steep declines in equity market values
of other wireless-related publicly traded companies; sharp declines in private
equity valuations of wireless-related privately-held companies; the price and
volume volatility affecting small and emerging growth companies in general,
which are not necessarily related to the operating performance of such
companies.
BECAUSE WE DO NOT INTEND TO PAY ANY CASH DIVIDENDS ON OUR SHARES OF COMMON
STOCK, OUR STOCKHOLDERS WILL NOT BE ABLE TO RECEIVE A RETURN ON THEIR SHARES
UNLESS THEY SELL THEM.
We have never paid or declared any cash dividends on our Common Stock
or other securities and intend to retain any future earnings to finance the
development and expansion of our business. We do not anticipate paying any cash
dividends on our Common Stock in the foreseeable future. Unless we pay
dividends, our stockholders will not be able to receive a return on their shares
unless they sell them.
OUR COMMON STOCK IS CONSIDERED A PENNY STOCK AND MAY BE DIFFICULT TO SELL.
Investing in our stock involves a particular risk that does not exist
with many other companies - our stock is a penny stock. The Securities and
Exchange Commission has adopted regulations, which generally define penny stock
to be an equity security that has a market price of less than $5.00 per share or
an exercise price of less than $5.00 per share, subject to specific exemptions.
Presently, the market price of our Common Stock is less than $5.00 per share.
Therefore, the SEC "penny stock" rules govern the trading in our Common Stock.
These rules require, among other things, that any broker engaging in a
transaction in our securities provide its customers with the following:
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o A risk disclosure document;
o Disclosure of market quotations, if any;
o Disclosure of the compensation of the broker and its salespersons in
the transaction; and
o Monthly account statements showing the market values of our securities
held in the customer's accounts.
The broker must provide the bid and offer quotations and compensation
information before effecting the transaction. This information must be contained
on the customer's confirmation. Generally, brokers may be less willing to effect
transactions in penny stocks due to these additional delivery requirements. This
may make it more difficult for investors to dispose of our Common Stock. In
addition, the broker prepares the information provided to the broker's customer.
Because we do not prepare the information, we cannot assure you that such
information is accurate, complete or current.
ITEM 2. PROPERTIES
At present, we own no real property. We lease a 6,000 square foot
development facility in Sterling, Virginia, which is staffed with 15 development
and field support personnel. We also operate and lease business development and
operations offices in Hasbrouck Heights, New Jersey; Walnut Creek, California;
and Cincinnati, Ohio.
We are obligated under these leases through April 2006. In addition to
the base rent, one lease requires us to pay a proportionate share of operating
costs and other expenses.
Future aggregate minimum annual rent payments under these leases are
approximately as follows:
Year ended December 31,
2003 $ 128,000
2004 129,000
2005 108,000
2006 27,000
---------
$ 392,000
Rent expense was approximately $128,000 for the year ended December 31,
2002.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, we may be a party to legal
proceedings. We are not currently a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded on the OTC Bulletin Board, referred to
herein as the OTCBB, under the symbol "SGHT". The following table sets forth the
high and low bid prices of our Common Stock, as reported by the OTCBB for each
quarter since July 2001 when our Common Stock was first listed on the OTCBB. The
quotations set forth below reflect inter-dealer prices, without retail mark-up,
markdown or commission and may not represent actual transactions.
2001 HIGH LOW
---- ---- ---
July 1, 2001 - September 30, 2001 $0.14 $0.05
October 1, 2001 - December 31, 2001 $0.14 $0.14
2002 HIGH LOW
---- ---- ---
January 1, 2002 - March 31, 2002 $0.14 $0.14
April 1, 2002 - June 30, 2002 $1.15 $0.14
July 1, 2002 - September 30, 2002 $1.60 $0.25
October 1, 2002 - December 31, 2002 $2.25 $1.25
As of February 28, 2003, there were approximately 49 holders of record
of our Common Stock.
We have appointed Continental Stock Transfer & Trust Company, 17
Battery Place, New York, New York 10004 as transfer agent for our shares of
Common Stock.
On September 30, 2002, we entered into a loan agreement with CC Trust
Fund to borrow an amount up to $355,128. This bridge loan is for a period of
twelve months, with all principle due and payable on September 30, 2003. We will
pay 12.5% interest on the outstanding principle each month. At the end of the
loan period, the Fund will be entitled to exercise 25,000 warrants at $1.50 per
share. As of December 31, 2002, $305,000 was outstanding under the CC Trust Fund
loan agreement. Christopher Carey Jr., Mr. Carey's son, is the beneficiary of
the trust, and Mary Carey, Mr. Carey's wife, is the trustee of the trust.
On September 30, 2002 we entered into a loan agreement with AC Trust
Fund to borrow an amount up to $375,404. This bridge loan is for a period of
twelve months, with all principle due and payable on September 30, 2003. We will
pay 12.5% interest on the outstanding principle each month. At the end of the
loan period, the Fund will be entitled to exercise 25,000 warrants at $1.50 per
share. As of December 31, 2002, $305,000 was outstanding under the AC Trust Fund
loan agreement. Amie Carey, Mr. Carey's daughter, is the beneficiary of the
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trust, and Mary Carey, Mr. Carey's wife, is the trustee of the trust.
No underwriter was employed by the Registrant in connection with the
issuance of the securities described above. The Registrant believes that the
issuance of the foregoing securities was exempt from registration under Section
4(2) of the Securities Act of 1933, as amended, as transactions not involving a
public offering. Each of the recipients were either accredited or sophisticated
investors as defined under Section 501 of the Securities Act, and acquired the
securities for investment purposes only and not with a view to distribution and
had adequate information about the Registrant. Neither the Registrant, nor any
person acting on its behalf, offered or sold the securities by means of any form
of general solicitation or general advertising. A legend was placed on the stock
certificates stating that the securities have not been registered under the
Securities Act and cannot be sold or otherwise transferred without an effective
registration or an exemption therefrom.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATION
OVERVIEW
The following discussion should be read in conjunction with our
financial statements and the accompanying notes appearing subsequently under the
caption "Financial Statements", along with other financial and operating
information included elsewhere in this annual report. Certain statements under
this caption "Management's Discussion and Analysis and Results of Operation"
constitute "forward-looking statements" under the Private Securities Litigation
Reform Act of 1995. See "Risk Factors-Cautionary Note Regarding Forward Looking
Statements". For a more complete understanding of our operations see "Risk
Factors" and "Description of Business".
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
As of December 31, 2002, our cash balance was $13,384. We had a net
loss of $4,528,803 for the fiscal year ended December 31, 2002. We had a net
operating loss of $4,315,356 for the fiscal year ended December 31, 2002 and a
net operating loss of approximately $3,273,000 for the period from May 17, 2002
through December 31, 2002 to offset future taxable income. Loss prior to May 17,
2002 was passed directly to the shareholders and, therefore, is not included in
the loss carry-forward. There can be no assurance, however, that we will be able
to take advantage of any or all tax loss carry-forwards, in future fiscal years.
Our accounts receivable at December 31, 2002 was $1,192,451 (less allowances for
doubtful accounts of $200,000), as compared to $282,360 for the fiscal year
ended December 31, 2001. The increase in accounts receivable represents amounts
owed to Stronghold for new installations and maintenance, service, training
services, software customization and additional systems components.
FINANCING NEEDS
To date, we have not generated revenues in excess of operating
expenses. We have not been profitable since our inception, we will incur
additional operating losses in the future, and we may require additional
financing to continue the development and subsequent commercialization of our
technology.
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We expect our capital requirements to increase significantly over the
next several years as we continue to develop and test the DealerAdvance(TM)
suite of products and as we increase marketing and administration infrastructure
and embark on developing in-house business capabilities and facilities. Our
future liquidity and capital funding requirements will depend on numerous
factors, including, but not limited to, the levels and costs of our research and
development initiatives, the cost of hiring and training additional sales and
marketing personnel to promote our products and the cost and timing of the
expansion of our marketing efforts.
FINANCINGS
On July 31, 2000, the Predecessor Entity entered into a line of credit
with our President, Christopher Carey, who is also the President of Stronghold.
According to such line of credit, Mr. Carey made available $1,989,500, which the
Predecessor Entity could borrow from time to time until August 1, 2001. The
outstanding amounts accrued interest at the per annum rate equal to the floating
base rate, as defined therein, computed daily, for the actual number of days
elapsed as if each full calendar year consisted of 360 days. The first interest
payment under the line of credit was due on August 1, 2001. On such date, the
parties agreed to extend the line of credit for one more year, until August 1,
2002.
On November 1, 2001, the Predecessor Entity entered into a line of
credit with UnitedTrust Bank pursuant to which the Predecessor Entity borrowed
$1.5 million. The line of credit was due to expire by its terms, and all
outstanding amounts were due to be paid, on June 30, 2002.
On April 22, 2002, the Predecessor Entity issued 500,000 shares of its
Common Stock to Mr. Carey (which converted into 1,093,750 shares of our Common
Stock when we acquired the Predecessor Entity on May 16, 2002) in exchange for
cancellation of $1 million of outstanding debt under the line of credit.
On May 15, 2002, we entered into a Securities Purchase Agreement with
Stanford Venture Capital Holdings, Inc., referred to herein as Stanford, in
which we agreed to issue to Stanford (i) such number of shares of our Series A
$1.50 Convertible Preferred Stock, referred to herein as Series A Preferred
Stock, that would in the aggregate equal 20% of the total issued and outstanding
shares of our Common Stock, and (ii) such number of warrants for shares of our
Common Stock that would equal the number of shares of Series A Preferred Stock
issued to Stanford. The total aggregate purchase price for the Series A
Preferred Stock and warrants paid by Stanford was $3,000,000. The issuance of
the Series A Preferred Stock and warrants took place on each of four separate
closing dates (May 16, 2002 and July 3, 11, and 19, 2002), at which we issued an
aggregate of 2,002,750 shares of our Series A Preferred Stock to Stanford and
warrants for 2,002,750 shares of our Common Stock.
On May 16, 2002, the total amount outstanding under the line of credit
with Mr. Carey was $2.2 million. On such date, we issued 666,667 shares of our
Common Stock to Mr. Carey in exchange for the cancellation of $1 million of the
then outstanding amount under the line of credit. We will pay Mr. Carey the
remaining $1.2 million according to the terms of a non-negotiable promissory
note, which was issued on May 16, 2002.
On June 30, 2002, our line of credit with UnitedTrust Bank expired and
a three-month extension was granted. On September 30, 2002, we converted our
outstanding line of credit with UnitedTrust Bank into a $1,500,000 promissory
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note, pursuant to which Stronghold will pay UnitedTrust Bank all amounts
outstanding under the line of credit. Such promissory note will be paid in 36
monthly installments, which will begin in February 2003 and will terminate on
January 1, 2006. Interest accrues on the note at the prime rate, which is the
highest New York City prime rate as is published in The Wall Street Journal. The
initial prime rate that applies to the promissory note is 4.750%.
During August and September 2002, we entered into 9 subscription
agreements with private investors, pursuant to which we issued an aggregate of
179,333 shares of our Common Stock at $1.50 per share. These private investments
generated total proceeds to us of $269,000.
On September 30, 2002, we renegotiated the $1,200,000 promissory note
with Mr. Carey as required by the promissory note with UnitedTrust Bank.
According to the new terms of the loan, Mr. Carey extended the repayment of the
principle amount until December 1, 2005. Until such time as the principle is
paid, we will pay an interest only fee of 12% per month. Mr. Carey's promissory
note is expressly subordinated in right of payment to the prior payment in full
of all of Stronghold's senior indebtedness. Subject to the payment in full of
all senior indebtedness, Mr. Carey is subrogated to the rights of the holders of
such senior indebtedness to receive principle payments or distribution of
assets. As of December 31, 2002, $970,749 was outstanding under the promissory
note issued to Mr. Carey.
On September 30, 2002, we entered into a loan agreement with CC Trust
Fund to borrow an amount up to $355,128. This bridge loan is for a period of
twelve months, with all principle due and payable on September 30, 2003. We will
pay 12.5% interest on the outstanding principle each month. At the end of the
loan period, the Fund will be entitled to exercise 25,000 warrants at $1.50 per
share. As of December 31, 2002, $305,000 was outstanding under the CC Trust Fund
loan agreement. Christopher Carey Jr., Mr. Carey's son, is the beneficiary of
the trust, and Mary Carey, Mr. Carey's wife, is the trustee of the trust.
On September 30, 2002 we entered into a loan agreement with AC Trust
Fund to borrow an amount up to $375,404. This bridge loan is for a period of
twelve months, with all principle due and payable on September 30, 2003. We will
pay 12.5% interest on the outstanding principle each month. At the end of the
loan period, the Fund will be entitled to exercise 25,000 warrants at $1.50 per
share. As of December 31, 2002, $305,000 was outstanding under the AC Trust Fund
loan agreement. Amie Carey, Mr. Carey's daughter, is the beneficiary of the
trust, and Mary Carey, Mr. Carey's wife, is the trustee of the trust.
In October 2002, we issued a promissory note to Christopher J. Carey
for the amount of $165,000. Such promissory note is due on or before December
31, 2003. Until such time as the principle is paid, interest on the note will
accrue at the rate of 12.5%
We believe we have sufficient cash on hand to support our operating
plan for at least the next six months. To enable us to fund our research and
development and commercialization efforts, during the next several months, we
may enter into additional private placement transactions with individual
investors.
RESULTS OF OPERATIONS
Operations through May 16, 2002 were comprised solely of our truffle
business, which was conducted through our wholly-owned subsidiaries, Terre di
Toscana, Inc. and Terres Toscanes, Inc. Operations from May 16, 2002 through
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June 30, 2002 were comprised of our truffle business (which was divested on July
19, 2002, as described above) and our handheld wireless technology business. Our
results of operations as described below reflect the treatment of the truffle
business as discontinued operations and, therefore, figures from those periods
reflect operations of our handheld wireless technology business only, other than
with respect to other expenses. We believe that a comparison of our truffle
business to our handheld wireless technology business is not a relevant analysis
for purposes of this periodic filing. As a result, we believe that
period-to-period comparisons of our results of operations will not be meaningful
and should not be relied upon as indicators of future performance. Therefore,
results of operations for the fiscal years ended 2001 and 2002 reflect
operations of our handheld wireless technology business only.
We entered the handheld wireless technology business through the
acquisition of the Predecessor Entity, which had only twenty-two months of
operating history. We must, therefore, be considered to be subject to all of the
risks inherent in the establishment of a new business enterprise. Our limited
operating history makes it difficult to evaluate our financial performance and
prospects. We cannot make assurances at this time that we will operate
profitably or that we will have adequate working capital to meet our obligations
as they become due. Because of our limited financial history, we believe that
period-to-period comparisons of our results of operations will not be meaningful
in the short term and should not be relied upon as indicators of future
performance.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND RISKS
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. The notes to the consolidated financial statements include
a summary of significant accounting policies and methods used in the preparation
of the our Consolidated Financial Statements. The following is a brief
discussion of the more significant accounting policies and methods used by us.
In addition, Financial Reporting Release No. 61 was recently released
by the SEC to require all companies to include a discussion to address, among
other things, liquidity, off-balance sheet arrangements, contractual obligations
and commercial commitments.
The discussion and analysis of our financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of financial statements in accordance with
generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, including the recoverability of tangible and intangible
assets, disclosure of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenues and expenses during
the reported period.
On an on-going basis, we evaluate our estimates. The most significant
estimates relate to our recognition of revenue and the capitalization of our
software development.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
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REVENUE RECOGNITION POLICY
Revenue related to the sale of our products is comprised of one-time
charges to the dealerships for hardware (including server, wireless
infrastructure, desktop PC, printer, interior/exterior access points/antennas
and handheld devices), software licensing fees and installation/training
services. We charged each of our DealerAdvance Sales Solution(TM) pilot dealers
and all of our subsequent dealers for all costs associated with installation.
The average installation for DealerAdvance Sales Solution(TM) from inception
through September 30, 2002 was $83,000. The most significant variable in pricing
is the number of handheld devices. We have not qualified our pricing for
DealerAdvance Service Solution(TM), but expect that it will be approximately
$50,000.
Once DealerAdvance Sales Solution(TM) is installed, Stronghold provides
hardware and software maintenance services for a yearly fee equal to
approximately 10% of the one-time implementation fees. All dealerships contract
these services and pay on a monthly basis. Stronghold provides other services,
including software and report customization, business and operations consulting,
and sales training services. All of these services are contracted on an as
needed basis and typically are charged on a time and expenses basis. In
addition, we offer a sixty-day performance trial period. After this time, a
large portion of the dealerships may convert the one-time fee into a third party
lease. Stronghold has entered into a number of relationships with leasing
companies in which the leasing company finances the implementation fees for the
dealership in a direct contractual relationship with the dealership. Stronghold
accepts no liability under these arrangements, and the lease is based on the
creditworthiness of the dealership. The leasing company receives the invoice
from Stronghold, and remits funds upon acceptance by the dealership. Stronghold
receives all funds as invoiced, with all interest costs passed to the
dealership. These leases typically run 36 months in duration, during which time
Stronghold contracts for service and maintenance services. Stronghold charges
separately for future software customization after the initial installation, for
additional training, and for additions to the base system (e.g., more handheld
devices for additional sales people). Depending upon the dealership arrangement,
the support and maintenance contracts are either billed monthly and recorded as
revenue monthly, or are recorded up front to unearned maintenance fees at the
present value of the 36-month revenue stream and amortized monthly to revenue
over the life of the agreement.
REVENUE RESTATEMENT
On December 26, 2002, we reclassified our consolidated financial
statements for the first three quarters of 2002. This step was taken on the
advice of Rothstein, Kass & Company, P.C., our accounting firm, to reflect
accounting changes in accordance with revenue recognition guidelines released by
the Securities and Exchange Commission.
Accordingly, our revenue was reclassified such that it may be
recognized in future quarters. For the nine months ended September 30, 2002,
revenue was reclassified from $2,952,076 to $1,898,884.
Historically, we have recorded revenue as a three-stage process: at the
time the equipment and software were delivered, installed and the personnel
trained. We will now recognize each sale with an additional stage as outlined in
the analysis provided by our accounting firm, which includes a fourth stage
defined as, "the system is handed over to the customer to run on their own."
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This four-stage delivery process will result in current sales revenues being
carried into future quarters. We estimate that this change will delay the
recognition of revenue from installed dealership sites by 20-50 days.
SOFTWARE DEVELOPMENT CAPITALIZATION POLICY
Software development costs, including significant product enhancements
incurred subsequent to establishing technological feasibility in the process of
software production, are capitalized according to Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
Be Sold, Leased, or Otherwise Marketed." Costs incurred prior to the
establishment of technological feasibility are charged to research and
development expenses. For the fiscal year ended December 31, 2002, Stronghold
capitalized $223,224 of development costs in developing enhanced functionality
of its DealerAdvance(TM) product.
Year Ended December 31, 2002 and Year Ended December 31, 2001
-------------------------------------------------------------
For the fiscal year ended December 31, 2002, we had total revenue of
$2,802,483. Revenue for the year ended December 31, 2001 was $614,540,
representing an increase of 356%. This increase is due to the progress of
Stronghold's business from beta-test phase to sales and marketing phase and the
related installation of Stronghold's DealerAdvance(TM) products in 33 new
dealerships from January 1, 2002 through December 31, 2002, compared with 6
dealerships implemented in the comparable twelve-month period in 2001.
Revenue is comprised of one-time charges to the dealerships for
hardware (including server, wireless infrastructure, desktop PC, printer,
interior/exterior access points/antennas and handheld devices), software
licensing fees and installation/training services. The average installation is
$80,000. The most significant variable in pricing is the number of handheld
devices. Other sources of revenue include monthly support and maintenance
contracts (required with purchase of DealerAdvance(TM)) and fee-based business
development consulting and sales training services. Depending upon the
dealership arrangement, the support and maintenance contracts are either billed
monthly and recorded as revenue monthly, or are recorded up front to unearned
maintenance fees at the present value of the 36-month revenue stream and
amortized monthly to revenue.
Total operating expenses for the fiscal year ended December 31, 2002
and December 31, 2001 were comprised of general and administrative expenses
(which includes research and development expenses, consulting and professional
costs, recruiting fees, office rent and investor relations expenses) and
professional salaries and benefits. Operating expenses for the year ended
December 31, 2002 and December 31, 2001 were $5,490,419 and $2,645,396,
respectively, an increase of $2,845,023, or 93%. The increase in operating
expenses is attributable to the general increase in overhead which accompanies
the expansion of a business, and specifically includes an increase in product
development, the build-out of a support network for Stronghold's dealership
sites and salaries for sales personnel and project managers who oversee the
dealerships where Stronghold's DealerAdvance(TM) products are installed.
Gross profit contribution, after cost of sales, totaled $1,175,063 for
the fiscal year ended December 31, 2002, and was 42% of revenue. Prior to an
inventory write down of $300,000, gross profit was $1,475,063, or 53% of
revenue. This is compared to $366,743 for the fiscal year ended December 31,
2001, which was 60% of revenue.
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After all operating expenses and interest costs, we reported a loss of
$4,528,803 for the fiscal year ended December 31, 2002. This compares with a
loss for the fiscal year ended December 31, 2001 of $2,420,088, an increase of
$2,180,715, or 87%. This increase is attributable to a one time write down of
inventory of $300,000 and increased expenditures for sales and marketing, and
product development to substantially complete DealerAdvance Sales Solution(TM).
Stronghold's business operations and financial results for prior
periods were representative of a start-up company in a beta-testing phase and,
therefore, not in a position to generate significant revenue. As Stronghold
moved out of its beta-testing phase and into a marketing and sales position,
revenues increased as the number of dealerships installing Stronghold's
DealerAdvance(TM) suite of products increased. We can offer no assurance,
however, that revenues in future accounting periods will increase at the rate
that revenues grew during the twelve months ended December 31, 2002.
Notwithstanding the revenue and gross profit growth, Stronghold has yet to
generate a profit in any accounting period.
INDUSTRY TRENDS
The automotive industry has identified sales productivity tools and CRM
systems to be of high priority. Many consolidators and independent dealership
owners have begun to explore and pilot some of these solutions to determine the
most effective means for managing and exploiting prospects and customers to
increase car sales. To date, only a small number of the 22,600-dealership sites
in the United States have implemented these systems. There remains substantial
uncertainty as to the type of systems that will be implemented as well as the
pace at which implementation will take place.
Since big-ticket consumer purchases are sensitive to broad economic
trends, our operations may be affected by general economic conditions. Our
business could suffer if Stronghold's customers, automobile dealerships, are
affected by the continuing poor economic conditions. For example, if dealer
sales are trending downward, capital expenditures like those associated with
Stronghold's DealerAdvance(TM) suite of products may be delayed or abandoned.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our Common Stock.
We anticipate that any earnings will be retained for development and expansion
of our business and we do not anticipate paying any cash dividends in the
foreseeable future. Our board of directors has sole discretion to pay cash
dividends based on our financial condition, results of operations, capital
requirements, contractual obligations and other relevant factors.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required to be filed pursuant to this Item 7
are included in this Annual Report on Form 10-KSB. A list of the financial
statements filed herewith is found at "Item 13. Exhibits, List and Reports on
Form 8-K."
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
On July 10, 2002, we determined to change our independent public
accountants from Rogoff & Company, P.C. to Rothstein, Kass & Company, P.C.
Rothstein has served as the independent public accountants of Stronghold since
its inception. Our board of directors determined that because our business focus
has transitioned toward the business of Stronghold (the development and sale of
hand-held wireless technology to be used by automobile dealerships), Rothstein
would provide a better fit as our independent public accountants. The dismissal
of Rogoff and the engagement of Rothstein were approved by unanimous consent of
our board of directors.
Rogoff acted as our independent public accountants for the period from
our inception (September 2000) through July 10, 2002. During such period, there
were no disagreements with Rogoff on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which,
if not resolved to the satisfaction of Rogoff, would have caused it to make
reference to the subject matter of the disagreement in connection with its
reports on the financial statements for such years. Rogoff's reports on our
financial statements since our inception did not contain an adverse opinion or a
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope or accounting principles. Since our inception, there were no
reportable events as discussed in Regulation S-B Item 304(a)(1)(iv)(B).
We requested that Rogoff furnish us with a letter addressed to the
Securities and Exchange Commission stating that it agreed with the above
statements. A copy of that letter dated July 15, 2002 was filed with the
Securities and Exchange Commission as an exhibit to the Form 8-K dated July 17,
2002.
We engaged Rothstein as our independent public accountants effective as
of July 10, 2002 for the fiscal year ending December 31, 2002. Our board of
directors approved the engagement. Since our inception, neither we nor anyone on
our behalf consulted with Rothstein regarding either (i) the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on our financial statements,
and neither a written report nor oral advice was provided to us by Rothstein
that was an important factor considered by us in reaching a decision as to any
accounting, auditing or financial reporting issue; or (ii) any matter that was
either the subject of a disagreement, as that term is discussed in Item
304(a)(1)(iv)(A) of Regulation S-B and the related instructions to Item 304 of
Regulation S-B, or an event that is identified in response to paragraph
(a)(1)(iv)(B) of Regulation S-B.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Our executive officers and directors and their respective ages and positions as
of December 31, 2002 are as follows:
NAME AGE POSITION(S)
--------------------------- --- -----------------------------------------------
Christopher J. Carey....... 50 President, Chief Executive Officer and Director
Lenard Berger.............. 33 Chief Technology Officer and Vice President
James Cummiskey............ 38 Vice President of Sales and Marketing
Salvatore D'Ambra.......... 42 Chief Engineer and Vice President
Robert J. Corliss*......... 49 Director
Robert Cox*................ 61 Director
William Lenahan*........... 51 Director
Luis Delahoz*.............. 42 Director
* Member of audit, compensation and governance/nominating committees.
CHRISTOPHER J. CAREY has served as our President and Chief Executive
Officer since May 2002. Mr. Carey is also the founder, President and Chief
Executive Officer of Stronghold, our wholly-owned subsidiary. Since founding
Stronghold in 2000, Mr. Carey has set the strategic direction and corporate
vision for Stronghold, drawing on over 25 years of experience building
successful, technology-focused businesses. From 1976 until 1996, Mr. Carey was
President and Chief Executive Officer of Datatec Industries, Inc., which became
North America's largest specialist in the rapid deployment of network and
computing systems. After negotiating a merger with Glasgal Communications in
1996, Mr. Carey became President of Datatec Systems, Inc., the combined entity
until May 2002. Mr. Carey is currently a member of Board of Trustees of The
Albert Dorman Honors College, New Jersey Institute of Technology, and a past
Chairman of the New Jersey Chapter of the Young President's Organization.
ROBERT J. CORLISS has been our director since May 2002. Mr. Corliss has
been, since 1998, the President and Chief Executive Officer of the Athlete's
Foot Group, Inc., a privately owned, 800-store retail chain with operations in
50 countries. Since 1999, Mr. Corliss has been a member of the board of Kahala
Corporation, a publicly traded franchising corporation dedicated to the design,
development and marketing of quick service restaurants serving nutritious
products. From 1996 until 1998, Mr. Corliss was the President and Chief
Executive Officer of Infinity Sports, Inc., a manufacturer, distributor and
licensor of athletic products primarily under the brand Bike Athletic. Prior to
founding Infinity Sports, Inc., Mr. Corliss was the Chief Executive Officer and
President of Hermann's Sporting Goods retail chain. Mr. Corliss is very active
in the sporting goods industry and serves on the board of directors of The
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Athlete's Foot Group, Inc. He is on the Advisory Council for the Sporting Goods
Manufacturers Association's recently announced Physical Education for Progress
(P.E.P.) initiative. Additionally, Mr. Corliss serves as a Director and
Executive Committee member of the National Retail Federation and the National
Retail Foundation and serves on the board of directors for The World Federation
of the Sporting Goods Industry. He is also an Advisor for Emory University's
Goizueta Business School.
ROBERT COX has been our director since May 2002. Mr. Cox is a retired
business executive. From 1996 until 2000, Mr. Cox served as President and a
Director of Summit Bancorp, a $39 billion NJ bank holding company. Mr. Cox was
the Chief Executive Officer of The Summit Bancorporation from 1994 until 1996,
when Summit Bancorporation merged into UJB Financial. Mr. Cox is currently a
member the Board of Trustees of NJ SEEDS, a statewide educational
not-for-profit. Mr. Cox also sits on the board of directors of the Bay View Bank
and the Bay View Capital Corporation in San Mateo, CA. Active in New Jersey's
business and community service organizations, Mr. Cox is a former Chairman of
the New Jersey Bankers Association (NJBA) and is an honorary chairman of its
board of directors.
WILLIAM LENAHAN has been our director since May 2002. Mr. Lenahan has
been the Chief Executive Officer of KMC Telecom Holdings, Inc. since 2000. KMC
is a $500 million nationwide provider of next generation telecommunications,
including outsourcing services, consulting and financing for metro access and
advanced voice, data and Internet services to business customers. Mr. Lenahan
was the President and CEO of BellSouth Wireless Data (currently Cingular
Wireless) from 1984 to 2000 responsible for financial performance and nationwide
wireless data strategy for this division of BellSouth Corporation. Mr. Lenahan
has served nearly 30 years in the information technology, telecommunications and
data industries. He presently serves on the board of directors of Broadbeam
Corporation.
LUIS DELAHOZ has been our director since May 2002. Mr. Delahoz is the
current President and Chief Executive Officer of TWS International, Inc., a
leading provider of professional technical consulting services to the rapidly
growing telecommunications industry. From 1998 until 2001, Mr. Delahoz was the
Executive Vice President of Client Soft, Inc., a provider of e-business
solutions. In 1996, Mr. Delahoz co-founded TOC Global Communications, Inc.,
where he served as Vice President until 1998. Currently, Mr. Delahoz is a member
of the board of directors of TWS, Inc. and TWS International, Inc.
LENARD BERGER has served as our Chief Technology Officer and Vice
President since May 2002. Mr. Berger is also the Chief Technology Officer and
Vice President of Stronghold. Prior to the founding of Stronghold's predecessor
entity in 2000, Mr. Berger was the President of eBNetworks, a division of
Computer Horizons, Inc. From 1990 until 1999, Mr. Berger was the Vice President
of RPM Consulting, Inc.
JAMES CUMMISKEY has served as our Vice President of Sales and Marketing
since May 2002. Mr. Cummiskey is also the Vice President of Sales and Marketing
of Stronghold. Prior to the founding of Stronghold's predecessor entity in 2000,
Mr. Cummiskey was the Vice President of Sales and Marketing for Payback Training
Systems, Inc. From 1996 until 1998, Mr. Cummiskey was the Vice President of
Sales and Marketing for Datatec Industries, Inc.
SALVATORE D'AMBRA has served as our Vice President and Chief Engineer
since May 2002. Mr. D'Ambra is also the Vice President and Chief Engineer of
Stronghold. Prior to the founding of Stronghold's predecessor entity in 2000,
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Mr. D'Ambra was the President and Chief Executive Officer of Pagecount, Inc.
From 1985 until 1996, Mr. D'Ambra was a Professor of Graduate Engineering at
Loyola College of Maryland.
EXECUTIVE OFFICERS
Each executive officer serves at the discretion of our board of
directors and holds office until his successor is elected and qualified or until
his earlier resignation or removal. There are no family relationships among any
of our directors or executive officers.
BOARD COMMITTEES
Our board of directors has an audit committee, compensation committee
and governance/nominating committee. The audit committee reviews the results and
scope of the audit and other services provided by our independent public
accountant. The compensation committee establishes the compensation policies
applicable to our executive officers and administers and grants stock options
pursuant to our stock plans. The governance/nominating committee oversees board
procedures and nominates prospective members of the board should a vacancy
arise. The current members of each of the audit, compensation and
governance/nominating committees are Messrs. Corliss, Cox, Lenahan and Delahoz.
DIRECTOR COMPENSATION
Upon the initial election to our board of directors, each non-employee
board member will receive an option grant to purchase 40,000 shares of Common
Stock, which will vest 50% on each of the first and second anniversaries of the
date of grant. In addition, each non-employee director is granted, on an annual
basis, an option to purchase 30,000 shares of our Common Stock, which will vest
50% on each of the first and second anniversaries of the date of grant. All
stock options granted to members of our board of directors will have an exercise
price equal to the fair market value of the Common Stock on the date of grant.
We also reimburse directors for reasonable out-of-pocket expenses incurred in
attending meetings of the board of directors and any meetings of its committees.
We have not yet granted any of the foregoing options to our board of directors,
but intend to do so as soon as reasonably practicable after the filing of this
Form 10-KSB.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth executive compensation for fiscal 2002, 2001
and 2000. We have not paid any salaries or bonuses to any of our officers from
our inception through the date hereof. All of our executive officers also serve
as officers of and are paid by our operating subsidiary, Stronghold. The
following table shows other compensation paid during the fiscal years ended
December 31, 2002, 2001 and 2000 to our former president and other former
executive officers. The table also provides information regarding executive
compensation for our current president and three other most highly compensated
executive officers. We refer to all of these officers collectively as our "named
executive officers."
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SUMMARY COMPENSATION TABLE
---------------------------
ANNUAL COMPENSATION
--------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION
--------------------------- ---- ------ ----- ------------ ------------
Former Officers and Directors
-----------------------------
Pietro Bortolatti......... 2002 $ -- $ -- $ -- $ --
President, Chief Executive 2001 -- -- 20,500 (1) --
Officer and Chairman of the 2000 -- -- 4,000 (1) --
Board
Tiziana DiRocco........... 2002 -- -- -- --
Vice President and 2001 -- -- 15,370 (1) --
Director of European 2000 -- -- 20,800 (1) --
Operations
David Rector.............. 2002 -- -- -- --
Director 2001 -- -- -- 16,224 (2)
2000 -- -- -- 37,677 (2)
Current Officers(3)
Christopher J. Carey(4)... 2002 264,000 -- -- 9,600
President, Chief Executive 2001 165,000 -- -- 6,600
Officer and Chairman of the 2000 -- -- -- --
Board
Lenard Berger(5).......... 2002 160,416 22,558 28,025 7,100
Vice President and Chief 2001 150,000 -- 2,804 7,150
Technology Officer 2000 52,500 -- -- 3,300
Salvatore D'Ambra(6)...... 2002 121,397 -- 8,000 6,600
Vice President - Development 2001 106,782 -- 2,818 6,600
2000 48,875 -- -- 3,300
James J. Cummiskey(7)..... 2002 195,763 -- 20,000 6,830
Vice President - Sales 2001 184,500 -- 2,786 6,250
2000 72,436 -- -- 2,296
-------------------
1 Commissions of sales from Terre Di Toscana, Inc., and Terres Toscanas, Inc.
2 Includes consulting service fees paid to the David Stephen Group, of which
David Rector, our former director, is a principal.
3 On May 16, 2002, our wholly-owned subsidiary merged with a New Jersey
corporation, Stronghold Technologies, Inc. (the "Predecessor Entity"). Our
wholly-owned subsidiary survived and changed its name to Stronghold
Technologies, Inc. ("Stronghold"). Pursuant to the merger, the stockholders of
the Predecessor Entity acquired a controlling interest in us. As a condition to
the merger, our existing executive officers were required to resign and a new
management team resumed operations.
4 Christopher J. Carey became our President and Chief Executive Officer on May
16, 2002, following the merger. Mr. Carey also remains the President, Chief
Executive Officer and the sole Director of Stronghold. Mr. Carey's base salary
from May 15, 2002 until December 31, 2002 was $260,000, as set forth in his
Employment Agreement with Stronghold. The terms of Mr. Carey's Employment
Agreement are more fully set forth below. "All Other Compensation" consists
solely of the reimbursement of automobile expenses. All of Mr. Carey's salary
for 2002 has been deferred and accrued.
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5 Lenard Berger has been our Vice President and Chief Technology Officer since
the merger, and holds the same positions at Stronghold. Mr. Berger's base salary
for the period of August 2001 through August 2002 was $150,000, as set forth in
his Employment Agreement with Stronghold. As of August 2002, Mr. Berger's salary
increased to $175,000. The terms of Mr. Berger's Employment Agreement are more
fully set forth below. "Other Annual Compensation" consists solely of sales
commissions. "All Other Compensation" consists solely of the reimbursement of
automobile expenses.
6 Salvatore D'Ambra has been our Vice President - Development of Stronghold
since the merger, and holds the same position at Stronghold. Mr. D'Ambra's base
salary for the period of July 2001 through July 2002 was $112,000, as set
forth in his Employment Agreement with Stronghold. As of July 2002, Mr.
D'Ambra's salary increased to $122,000. The terms of Mr. D'Ambra's Employment
Agreement are more fully set forth below. "Other Annual Compensation" consists
solely of sales commissions. "All Other Compensation" consists solely of the
reimbursement of automobile expenses. $4,667 of Mr. D'Ambra's salary for 2002,
representing a retroactive pay increase for November and December of 2002, has
been deferred and is payable as funds allow.
7 James J. Cummiskey has been our Vice President - Sales of Stronghold since the
merger, and holds the same position at Stronghold. Mr. Cummiskey's base salary
for the period of August 2001 through August 2002 was $192,000, as set out in
his Employment Agreement with Stronghold. As of August 2002, Mr. Cummiskey's
salary increased to $195,763. The terms of Mr. Cummiskey's Employment Agreement
are more fully set forth below. "Other Annual Compensation" consists solely of
sales commissions. "All Other Compensation" consists solely of the reimbursement
of automobile expenses.
OPTIONS GRANTS
The Predecessor Entity granted options to its named executive officers
during fiscal 2002. When we acquired the Predecessor Entity on May 16, 2002, we
assumed the 2000 Stock Option Plan of the Predecessor Entity, and each
outstanding option was automatically converted into an option to acquire, on the
same terms and conditions as were applicable under the original option, such
number of shares of our Common Stock as was equal to the number of existing
options multiplied by 2.1875. The exercise price was also adjusted to the
exercise price that was equal to the existing exercise price divided by 2.1875.
The following table sets forth information concerning individual grants
of stock options made pursuant to the 2000 Stock Option Plan and the 2002 Stock
Incentive Plan during Fiscal 2002 to each of the named executive officers. We
have never granted any stock appreciation rights.
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
Number of Securities % of Total Options Granted Exercise or Base Grant
Name Underlying Options to Employees in 2002 Price ($/Sh) Date
---- -------------------- -------------------------- ---------------- -----
Christopher J. Carey 437,500 (1) 47% $1.50 5/5/02
Lenard Berger 100 * $1.50 8/20/02
Salvatore D'Ambra 100 * $1.50 8/20/02
James Cummiskey 100 * $1.50 8/20/02
* less than one percent
------------
(1) On May 15, 2002, the Predecessor Entity granted an option for 200,000 shares
of its common stock to Christopher J. Carey. While Mr. Carey is employed by
Stronghold, the options will vest on the earlier of: (i) the seventh anniversary
of May 15, 2002; or (ii) the achievement of the performance goals based on the
plan and budget approved by the board of directors, as set forth below (amounts
reflect the number of shares of Predecessor Entity common stock, except for the
column entitled "Cumulative Options Vested As Converted"):
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TOTAL OPTIONS VESTING FOR FISCAL YEAR FOR ACHIEVING THE SPECIFIED
PERCENTAGE OF THE PLANNED EBITDA(1)
TOTAL
CUMULATIVE OPTIONS
VESTED AS CONVERTED
FISCAL YEAR ENDED 80-100% 100-120% OVER 120% (X 2.1875)
----------------- ------- -------- ---------- ----------
2002 27,300 52,500 87,500 87,500
2003 50,300 100,100 175,000 175,000
2004 50,300 100,100 175,000 175,000
--------------
(1) "EBITDA" refers to our earnings before interest, taxes, depreciation and
amortization.
Options granted to certain of the Predecessor Entity's named executive
officers in 2000 vest only if certain fiscal year net sales goals are achieved
for fiscal years 2002, 2003, and 2004. Certain options which were subject to
vesting based on net sales goals for fiscal year 2001 failed to vest because the
Predecessor Entity did not achieve the established goals. Such unvested options,
and any future unvested options, lapse and are not subject to further vesting.
The vesting schedules for certain of the named executive officers are set forth
below (amounts reflect the number of shares of Predecessor Entity Common Stock,
except for the column entitled "Options Remaining As Converted"):
OPTIONS GRANTED IN 2000
-----------------------
TOTAL NUMBER OF OPTIONS
OPTIONS SUBJECT TO VEST IN NUMBER OF OPTIONS
NAMED GRANTED AS OPTIONS 2002 SUBJECT TO VEST IN 2003 MAXIMUM
EXECUTIVE CONVERTED LAPSED NET SALES NET SALES OPTIONS
OFFICER GRANT DATE (X 2.1855) IN 2001 > $5M > $ 5.8M > $10M > $15 > $20 REMAINING
------- ---------- ---------- ------- ----- --------- --------------------------- ---------
LENARD BERGER 11/12/00 218,000 (43,600) 32,700 32,700 21,800 32,700 54,500 174,400
SALVATORE D'AMBRA 11/12/00 98,100 (21,800) 21,800 32,700 21,800 32,700 43,600 76,300
JAMES CUMMISKEY 11/12/00 98,100 (21,800) 21,800 32,700 21,800 32,700 43,600 76,300
OPTIONS TO BE GRANTED IN 2003 (1)
----------------------------------
NUMBER OF OPTIONS
SUBJECT TO VEST IN NUMBER OF OPTIONS NUMBER OF OPTIONS
NAMED TOTAL 2002 SUBJECT TO VEST IN 2003 SUBJECT TO VEST IN 2004
EXECUTIVE GRANT OPTIONS NET SALES NET SALES NET SALES
OFFICER DATE GRANTED > $5.8M >$ 10M > $15M > $18 > $30 > $20M > $27 > $30
------- ---- ------- ------- ------ -------------------------- ---------------------------
LENARD BERGER 100,000 -- -- -- -- -- 15,000 30,000 60,000
SALVATORE D'AMBRA 158,100 21,800 -- 21,850 54,500 -- 15,000 30,000 60,000
JAMES CUMMISKEY -- -- -- -- -- -- -- -- --
----------------
(1) We did not grant any options in fiscal 2001 and fiscal 2002 to our named
executive officers, but we intend to grant the following options as soon as
reasonably practicable in fiscal 2003.
EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS
Christopher J. Carey
On May 15, 2002, Stronghold assumed the employment agreement that was
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in place between Christopher J. Carey and the Predecessor Entity. Under the
terms of the agreement, Mr. Carey's employment as Chairman of the Board,
President and Chief Executive Officer of Stronghold will continue until December
31, 2004, unless sooner terminated. Mr. Carey receives a base salary of $260,000
per year. Such base salary was increased effective January 1, 2003, to the
annualized rate of $300,000 and increased, effective January 1, 2004, to the
annualized rate of $350,000. Such salary will be reviewed annually and is
subject to increase as determined by the board of directors of Stronghold or the
Compensation Committee in its sole discretion.
The employment agreement provides that each fiscal year after fiscal
year 2002, Mr. Carey will be eligible to receive an annual bonus based upon
Stronghold meeting and exceeding its annual budget, as same has been reviewed
and approved by the board of directors for earnings before interest, taxes,
depreciation and amortization, referred to as EBITDA. This bonus will be earned
according to the following: (i) if Stronghold achieves 90-100% of budgeted
EBITDA, Mr. Carey will receive a bonus of 10% of his then current annual base
salary; (ii) if Stronghold achieves 101-110% of budgeted EBITDA, Mr. Carey will
receive a total bonus of 20% of his then current annual base; and (iii) if
Stronghold achieves 111-120% of budgeted EBITDA, Mr. Carey will receive a total
bonus of 30% of his then current annual base salary; (iv) if Stronghold achieves
121-130% of budgeted EBITDA, Mr. Carey will receive a total bonus of 40% of his
then current annual base salary; (v) if Stronghold achieves 131-140% of budgeted
EBITDA, Mr. Carey will receive a total bonus of 50% of his then current annual
base salary; (vi) if Stronghold achieves 141-150% of budgeted EBITDA, Mr. Carey
will receive a total bonus of 55% of his then current annual base salary; and
(vii) if Stronghold achieves 151% or more of budgeted EBITDA, Mr. Carey will
receive a total bonus of 60% of his then current annual base salary. The bonus,
if any, shall be paid in one lump sum within sixty (60) days after the close of
the fiscal year for which it was earned.
In accordance with the agreement, the Predecessor Entity granted to Mr.
Carey stock options under the 2000 Stock Option Plan for the purchase of an
aggregate of 200,000 shares of the Predecessor Entity's common stock at an
option exercise price equal of $1.50 per share, the fair market value of the
underlying common stock on the date of the grant. Such option converted into an
option to purchase 437,500 shares of our Common Stock when we merged with the
Predecessor Entity and our wholly-owned subsidiary, Stronghold, assumed the 2000
Stock Option Plan. While Mr. Carey is employed by Stronghold, the option will
become exercisable on the earlier of: (i) the seventh anniversary of May 15,
2002; or (ii) the achievement of the performance goals set forth above in the
Section entitled "Option Grants".
Upon a change in control of Stronghold, the unvested portion of the
options shall immediately vest and become exercisable by
Mr. Carey
If Stronghold terminates Mr. Carey's employment (i) after the
expiration of the term of employment; or (ii) with cause; or if Mr. Carey
resigns for no good reason, he will receive all accrued compensation and vested
benefits. If Stronghold terminates his employment without cause, Mr. Carey will
receive all unpaid accrued compensation, vested benefits and a severance benefit
equal to his base salary until the earlier of the balance of the term of his
agreement, the renewal term or twelve months following the date of termination.
Mr. Carey's agreement contains a confidentiality provision and further
provides that Mr. Carey may not work for, or hold 1% or more of the outstanding
capital stock of a publicly traded corporation, which is a competing business
anywhere in the world for one year after the conclusion of his employment.
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Lenard Berger
On August 1, 2000, the Predecessor Entity entered into an employment
agreement with Lenard Berger, which Stronghold assumed. Under the terms of the
agreement, Mr. Berger's employment as Vice President, Chief Technology Officer
will continue until July 31, 2005 unless sooner terminated. Mr. Berger received
a base salary of $10,500 per month during the first six months of the term of
the agreement and $12,500 per month commencing February 1, 2001. During the
second year of the term of the agreement, Mr. Berger's base salary will be
$150,000, but may increase to $175,000 if Stronghold's Net Sales, as defined
below, achieved in the first year of the term of the agreement equal or exceed
$2,000,000. During the third year of the term of the agreement, Mr. Berger's
base salary will be $175,000, but may increase to $200,000 if Stronghold's Net
Sales, as defined below, achieved in the second year of the term of the
agreement equal or exceed $10,000,000. During the fourth and fifth years of the
term of his agreement, Mr. Berger's base salary will be increased annually by a
percentage determined by the Consumers Price Index. Beginning his second year of
employment, Mr. Berger is eligible for a commission not to exceed $50,000 for
any year during the balance of the term of the agreement. The commission is
equal to 1% of net sales, which is determined by subtracting certain costs from
the gross sales of products and services. Mr. Berger is also eligible to receive
extra compensation at the discretion of Stronghold's board of directors, a car
allowance and any insurance and 401(k) plans provided by the employer.
Pursuant to his employment agreement, Mr. Berger received an option
grant to purchase 100,000 shares of the Predecessor Entity's common stock. Such
option converted into an option to purchase 218,750 shares of our Common Stock
when Stronghold merged with the Predecessor Entity. The vesting schedule for
such grant is set forth above under the section entitled "Option Grants". Upon a
change of control of Stronghold, 50% of any unvested options shall become vested
and exercisable immediately. If we register shares of Common Stock in an initial
public offering, Mr. Berger has the right to include any shares of Common Stock
that he owns in the registration.
If Stronghold terminates Mr. Berger's employment without cause, he will
receive payment of his base salary in effect at the time of his termination for
a period of one month, if termination occurs during the first six months of the
initial term of the agreement and the lesser of (x) base salary payable for the
balance of the term of the agreement or (y) two months base salary, if
termination occurs during the second six months during the initial term of the
agreement. If Mr. Berger resigns for good reason after the first full year of
employment, Mr. Berger shall receive as his severance pay the lesser of (x) base
salary payable for the balance of the then existing term of the agreement or (y)
two months' base salary, plus one week's base salary for each full or part year
worked after the first year of employment. In addition, Mr. Berger will be paid
his allocable share of the "Accumulated Adjustments Account", which is his share
of any amounts taxable to S Corporation stockholders but not fully distributed
to such stockholders.
Mr. Berger's agreement provides that all rights to discoveries,
inventions, improvements, and innovations related to Stronghold's business that
originates during the term of Mr. Berger's employment will be the exclusive
property of Stronghold. Mr. Berger's agreement also contains a confidentiality
provision and further provides that Mr. Berger may not work for or hold 5% or
more of the outstanding capital stock of a publicly traded corporation, which is
a competing business anywhere in the world for one year after the conclusion of
his employment.
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Salvatore D'Ambra
On July 10, 2000, the Predecessor Entity entered into an employment
agreement with Salvatore D'Ambra, which Stronghold assumed. Under the terms of
the agreement, Mr. D'Ambra's employment as Vice President, Development will
continue until July 9, 2005 unless sooner terminated. Mr. D'Ambra's base salary
is $102,000, $112,000 and $122,000 for his first, second and third years of
employment, respectively. Thereafter, Mr. D'Ambra's base salary will be
increased annually by a percentage determined by the Consumers Price Index.
Beginning his second year of employment, Mr. D'Ambra is also eligible for a
commission not to exceed $8,000 for the second year of the term of the agreement
and $28,000 for any year during the balance of the term of the agreement. The
commission is equal to 1% of net sales, as defined above. Mr. D'Ambra is also
eligible to receive extra compensation at the discretion of the board of
directors, a car allowance and any insurance and 401(k) plans provided by the
employer. If we register shares of Common Stock in an initial public offering,
Mr. D'Ambra has the right to include any shares of Common Stock that he owns in
the registration.
Mr. D'Ambra received an option grant to purchase 45,000 shares of the
Predecessor Entity's common stock. Such option converted into an option to
purchase 98,438 shares of our Common Stock when Stronghold merged with the
Predecessor Entity. The vesting schedule for such grant is set forth above under
the section entitled "Option Grants". Upon a change of control of Stronghold,
50% of any unvested options shall become vested and exercisable immediately. If
we register shares of Common Stock in an initial public offering, Mr. D'Ambra
has the right to include any shares of Common Stock that he owns in the
registration.
If Stronghold terminates Mr. D'Ambra's employment without cause, he
will receive payment of his base salary in effect at the time of his termination
for a period of one month, if termination occurs during the first six months of
the initial term of the agreement and the lesser of (x) base salary payable for
the balance of the term of the agreement or (y) two months base salary, if
termination occurs during the second six months during the initial term of the
agreement. If Mr. D'Ambra resigns for good reason after the first full year, the
Mr. D'Ambra will receive as severance pay the lesser of (x) base salary payable
for the balance of the then existing term of the agreement or (y) two months'
base salary, plus one week's base salary for each full or part year worked after
the first year of employment. In addition, Mr. D'Ambra shall be paid his
allocable share of the Accumulated Adjustments Account, as described above.
Mr. D'Ambra's agreement provides that all rights to discoveries,
inventions, improvements, and innovations related to Stronghold's business that
originates during the term of Mr. D'Ambra 's employment will be the exclusive
property of Stronghold. Mr. D'Ambra's agreement also contains a confidentiality
provision and further provides that Mr. D'Ambra may not work for or hold 5% or
more of the outstanding capital stock of a publicly traded corporation, which is
a competing business anywhere in the world for one year after the conclusion of
his employment.
James J. Cummiskey
On August 14, 2000, the Predecessor Entity entered into an employment
agreement with James J. Cummiskey, which Stronghold assumed. Under the terms of
the agreement, Mr. Cummiskey's employment as Vice President of Sales and
Marketing will continue until August 13, 2004 unless sooner terminated. Mr.
Cummiskey's base salary is $180,000 and $192,000 for his first and second years
of employment, respectively. Thereafter, Mr. Cummiskey's base salary
-33-
will be increased annually by a percentage determined by the Consumers Price
Index. Mr. Cummiskey is also eligible for a commission not to exceed $20,000 for
the first year of the term of the agreement and $50,000 for any year during the
balance of the term of the agreement. The commission is equal to 1% of net
sales, as defined above. Mr. Cummiskey is also eligible to receive extra
compensation at the discretion of the board of directors, a car allowance and
any insurance and 401(k) plans provided by the employer. If we register shares
of Common Stock in an initial public offering, Mr. Cummiskey has the right to
include any shares that he owns in the registration.
Mr. Cummiskey also received an option grant to purchase 45,000 shares
of the Predecessor Entity's common stock. Such option converted into an option
to purchase 98,438 shares of our Common Stock when Stronghold merged with the
Predecessor Entity. The vesting schedule for such grant is set forth above under
the section entitled "Option Grants". Upon a change of control of Stronghold,
50% of any unvested options shall become vested and exercisable immediately. If
we register shares of Common Stock in an initial public offering, Mr. Cummiskey
has the right to include any shares of Common Stock that he owns in the
registration.
If Stronghold terminates Mr. Cummiskey's employment without cause, he
will receive payment of his base salary in effect at the time of his termination
for a period of one month, if termination occurs during the first six months of
the initial term of the agreement and the lesser of (x) base salary payable for
the balance of the term of the agreement or (y) two months base salary, if
termination occurs during the second six months during the initial term of the
agreement. If Mr. Cummiskey resigns for good reason after the first full year,
the Mr. Cummiskey will receive as severance pay the lesser of (x) base salary
payable for the balance of the then existing term of the agreement or (y) two
months' base salary, plus one week's base salary for each full or part year
worked after the first year of employment. In addition, Mr. Cummiskey will be
paid his allocable share of the Accumulated Adjustments Account, described
above.
Mr. Cummiskey's agreement provides that all rights to discoveries,
inventions, improvements, and innovations related to Stronghold's business that
originates during the term of Mr. Cummiskey 's employment will be the exclusive
property of Stronghold. Mr. Cummiskey's agreement also contains a
confidentiality provision and further provides that Mr. Cummiskey may not work
for or hold 5% or more of the outstanding capital stock of a publicly traded
corporation, which is a competing business anywhere in the world for one year
after the conclusion of his employment.
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth information regarding the beneficial
ownership of our Common Stock as of February 28, 2003. The information in this
table provides the ownership information for:
o each person known by us to be the beneficial owner of more than 5% of
our Common Stock;
o each of our directors;
o each of our executive officers; and
o our executive officers and directors as a group.
Beneficial ownership has been determined in accordance with the rules
and regulations of the SEC and includes voting or investment power with respect
to the shares. Unless otherwise indicated, the persons named in the table below
have sole voting and investment power with respect to the number of shares
indicated as beneficially owned by them. Common Stock beneficially owned and
percentage ownership is based on 9,857,000 shares outstanding on February 28,
2003, and assuming the exercise of any options or warrants or conversion of any
convertible securities held by such person, which are presently exercisable or
will become exercisable within 60 days after February 28, 2003.
SECURITY OWNERSHIP OF BENEFICIAL OWNERS
NUMBER OF SHARES PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OUTSTANDING
------------------------------------ ------------------ -----------
5% STOCKHOLDERS
---------------
Christopher J. Carey 5,697,917 (1) 57.8
450 Claremont Road
Benardsville, NJ 07924
Stanford Venture Capital Holdings, Inc. 4,005,500 (2) 28.9
6075 Poplar Avenue
Memphis, TN 38119
OTHER EXECUTIVE OFFICERS AND DIRECTORS
--------------------------------------
Lenard Berger 437,600 (3) 4.4
James Cummiskey 437,600 (3) 4.4
Salvatore D'Ambra 437,600 (3) 4.4
Robert J. Corliss 0 --
Robert Cox 60,000 *
William Lenahan 0 --
Luis Delahoz 0 --
---------- -----
EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP
(8 PEOPLE) 7,070,717 71.7
------------
(1) 3,937,500 of these shares are owned by Christopher J. Carey and
his wife, Mary Carey, as Joint Tenants with Right of
Survivorship.
(2) The total beneficial ownership of Stanford Venture Capital
Holdings, Inc. is 4,004,300 shares which consists of: (i)
2,002,750 shares of Common Stock issuable upon the conversion of
2,002,750 shares of our Series A Preferred Stock; and (ii)
2,002,750 shares of Common Stock issuable upon the exercise of
warrants.
(3) Includes an option grant to purchase 100 shares of Common Stock
which was immediately exercisable on the date of grant.
* Indicates less than one percent of the total outstanding Common
Stock.
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EQUITY COMPENSATION IN FISCAL 2002
The following table provides information about the securities
authorized for issuance under our equity compensation plans as of December 31,
2002.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities
to be issued upon Weighted-average Number of securities remaining
exercise of outstanding exercise price of available for future issuance
options (1) outstanding options under equity compensation plans (2)
----------------------------------- ------------------------ ---------------------- ------------------------------------
Equity compensation plans approved
by security holders 1,364,847 $0.50 161,350
----------------------------------- ------------------------ ---------------------- ------------------------------------
Equity compensation plans not
approved by security holders -- -- --
----------------------------------- ------------------------ ---------------------- ------------------------------------
Total 1,364,847 $0.50 161,350
----------------------------------- ------------------------ ---------------------- ------------------------------------
---------------------
(1) Issued pursuant to our 2002 Stock Incentive Plan, our 2002 California Stock
Incentive Plan, and our 2000 Stock Option Plan.
(2) 134,350 shares are available for future issuance pursuant to the 2002 Stock
Incentive Plan and 27,000 shares are available for future issuance pursuant
to the 2002 California Stock Incentive Plan. We do not intend to issue any
additional options under our 2000 Stock Option Plan.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Stronghold became our wholly-owned subsidiary on May 16, 2002 pursuant
to a merger of the Predecessor Entity with and into Acquisition Sub. Pursuant to
the merger, the Predecessor Entity's stockholders surrendered all of the
outstanding shares of the Predecessor Entity's common stock in exchange for a
total of 7,000,000 shares of our Common Stock. Of these shares, Christopher J.
Carey and his wife received a total of 3,937,500 shares held jointly, and Mr.
Carey received an additional 1,093,750 shares individually.
Pursuant to a Securities Purchase Agreement which we entered into on
May 15, 2002, with Stanford, Stronghold, Pietro Bortolatti and Mr. Carey, we
agreed to issue to Stanford (i) such number of shares of our Series A Preferred
Stock that would in the aggregate equal 20% of the total issued and outstanding
shares of our Common Stock, and (ii) such number of warrants for shares of our
Common Stock that would equal the number of shares of Series A Preferred Stock
issued to Stanford. The total aggregate purchase price for the Series A
Preferred Stock and warrants paid by Stanford was $3,000,000. The issuance of
the Series A Preferred Stock and warrants took place on each of four separate
closing dates (May 16, 2002 and July 3, 11, and 19, 2002), in which we issued an
aggregate of 2,002,750 shares of our Series A Preferred Stock to Stanford and
warrants for 2,002,750 shares of our Common Stock. So long as any shares of
Series A Preferred Stock are outstanding and held by Stanford, Stanford has the
right to maintain its percentage ownership with respect to any additional
securities we may issue, with certain exceptions.
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Pursuant to a Stockholders' Agreement which we entered into on May 16,
2002 with Stanford, Mr. Carey and his wife, if either Stanford or the Careys
should ever want to sell any shares of our Series A Preferred Stock or Common
Stock that they own, the other party has a (i) right of first refusal regarding
such sale and, if such non-selling party does not want to exercise its right of
first refusal, we have the residual right to purchase such shares, and (ii)
right of co-sale under the same terms and for the same type of consideration. In
the case of a material adverse event related to us, the Careys agreed to vote
their shares as directed by Stanford, including removing and replacing the
members of the board with designees nominated by Stanford. Finally, Stanford has
the right to nominate one member of our board and the Carey's have agreed to
vote for such nominee.
On July 31, 2000, the Predecessor Entity entered into a line of credit
loan arrangement with our President, Christopher Carey, who is also president of
Stronghold. According to such arrangement, Mr. Carey made available $1,989,500,
which the Predecessor Entity could borrow from time to time until August 1,
2001. Any borrowing under the facility could be reborrowed during the term of
the agreement and the outstanding amounts accrued interest at the rate of
interest per annum equal to the floating Base Rate, computed daily, for the
actual number of days elapsed as if each full calendar year consisted of 360
days. Any overdue amounts accrued interest at an annual rate of 2% greater than
the base rate, which is 2% above the floating base rate announced from time to
time by Citibank, N.A. Under the agreement, the first interest payment was due
on August 1, 2001. On such date, the line of credit was extended for one more
year, until August 1, 2002. On April 22, 2002, the Predecessor Entity issued
500,000 shares of its common stock (which converted into 1,093,750 shares of our
Common Stock when we acquired the Predecessor Entity on May 16, 2002) in
exchange for cancellation of $1 million of outstanding debt under such line of
credit. On May 16, 2002, the total amount outstanding under the line of credit
was $2.2 million. On such date, we issued 666,667 shares of our Common Stock to
Mr. Carey in exchange for cancellation of $1 million of the then outstanding
amount. Stronghold will pay Mr. Carey the remaining $1.2 million according to
the terms of a non-negotiable promissory note, which was issued on May 16, 2002.
Under the promissory note, the principal amount and accrued interest is
due and payable in six equal consecutive quarterly installments commencing on
the date which is two business days after we have filed our Annual Report on
Form 10-K for the year ended December 31, 2002. Each subsequent quarterly
installment will be paid two days after we file each subsequent Form 10-Q.
Interest accrues under the promissory note at an annual rate of 10%. If
Stronghold's net income does not meet certain benchmarks, then either the
principal balance and accrued interest due for the quarter will be deferred and
the repayment will be amortized during the remaining quarters or, depending upon
the net income amount achieved, the principal balance and accrued interest due
will be automatically converted into shares of our Common Stock, at a conversion
price equal to the average closing price of our Common Stock for the twenty (20)
trading days immediately preceding the date of conversion. The promissory note
is expressly subordinated in right of payment to the prior payment in full of
all of Stronghold's senior indebtedness. Subject to the payment in full of all
senior indebtedness, Mr. Carey is subrogated to the rights of the holders of
such senior indebtedness to receive payments or distribution of assets.
On September 14, 2002, we issued 5,000,000 shares of our Common Stock
to our former president, Pietro Bortolatti, in exchange for the transfer from
-37-
Mr. Bortolatti of all of the outstanding shares of Terre di Toscana, Inc. to us.
The assets of Terre di Toscana, Inc. included rights in several customer
agreements. We valued the 5,000,000 shares issued to Mr. Bortolatti at par
value, $.0001 per share. As part of our merger with the Predecessor Entity and
the exchange of shares for our truffle business, Mr. Bortolatti has either
surrendered or exchanged all of such shares.
In August 2002, our outside director, Robert Cox, purchased 60,000
shares of our Common Stock at a purchase price of $1.50 per share for aggregate
proceeds to us of $90,000. Such purchase was pursuant to a Subscription
Agreement between Mr. Cox and us in which Mr. Cox made certain investment
representations and warranties.
Stanford is an affiliate of Stanford Financial Group, which is the
majority stockholder of TWS International, Inc. Luis Delahoz, one of our outside
directors, is the president and chief executive officer of TWS International,
Inc. and is Stanford's representative on our board of directors.
David Rector is a former director of ours and is also a principal of
The David Stephens Group. In the past, we have engaged The David Stephens Group
to perform certain management consulting services for which we paid The David
Stephens Group $26,243.70 through January 31, 2001.
Lenard Berger, our Chief Technology Officer and Vice President, James
Cummiskey, our Vice President of Sales and Marketing, and Salvatore D'Ambra, our
Vice President and Chief Engineer, each received 200,000 shares of common stock
from the Predecessor Entity as founders of such entity, at a per share price of
$0.005. Such shares converted into 437,400 shares of our Common Stock.
On September 30, 2002, we entered into a loan agreement with CC Trust
Fund to borrow an amount up to $355,128. This bridge loan is for a period of
twelve months, with all principle due and payable on September 30, 2003. We will
pay 12.5% interest on the outstanding principle each month. At the end of the
loan period, the Fund will be entitled to exercise 25,000 warrants at $1.50 per
share. As of December 31, 2002, $305,000 was outstanding under the CC Trust Fund
loan agreement. Christopher Carey Jr., Mr. Carey's son, is the beneficiary of
the trust, and Mary Carey, Mr. Carey's wife, is the trustee of the trust.
On September 30, 2002 we entered into a loan agreement with AC Trust
Fund to borrow an amount up to $375,404. This bridge loan is for a period of
twelve months, with all principle due and payable on September 30, 2003. We will
pay 12.5% interest on the outstanding principle each month. At the end of the
loan period, the Fund will be entitled to exercise 25,000 warrants at $1.50 per
share. As of December 31, 2002, $305,000 was outstanding under the AC Trust Fund
loan agreement. Amie Carey, Mr. Carey's daughter, is the beneficiary of the
trust, and Mary Carey, Mr. Carey's wife, is the trustee of the trust.
In October 2002, we issued a promissory note to Christopher J. Carey
for the amount of $165,000. Such promissory note is due on or before December
31, 2003. Until such time as the principle is paid, interest on the note will
accrue at the rate of 12.5%
We believe that the terms of the above transactions are commercially
reasonable and no less favorable to us than we could have obtained from an
unaffiliated third party on an arm's length basis.
-38-
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORMS 8K
(a) (1) Financial Statements.
Reference is made to the Index to Financial Statements on Page
F-1.
(a) (2) Financial Statement Schedules.
None.
(a) (3) Exhibits.
Reference is made to the Exhibit Index on Page 42.
(b) Reports on Form 8-K.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on his
-----------------------------------------------------
evaluation of the our disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date
within 90 days of the filing date of this Annual Report on Form 10-KSB, our
chief executive officer and acting chief financial officer has concluded that
our disclosure controls and procedures are designed to ensure that the
information we are required to disclose in the reports we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms and are operating in an effective
manner.
In the course of evaluation during the period in question, we
identified the need for, and hired, a chief financial officer with the purpose
of having such person, among other duties, supervise disclosure controls and
procedures. However, shortly after being hired, such person resigned his
position on December 2, 2002. We are continuing to search for an appropriate
person to serve as chief financial officer. In the interim, supervision of our
disclosure controls and procedures remains with our chief executive officer.
(b) Changes in internal controls. There were no significant changes in
---------------------------
our internal controls or in other factors that could significantly affect these
controls subsequent to the date of their most recent evaluation.
-39-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this ____ day of
April, 2003.
STRONGHOLD TECHNOLOGIES, INC.
By:
------------------------------------
Christopher J. Carey, President,
Chief Executive Officer and Acting
Chief Financial Officer
-40-
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Christopher J. Carey his true and lawful
attorneys-in-fact and agents, each with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this registration statement, and
to file the same, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that each of said
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
Christopher J. Carey
-------------------------------------- President, Chief Executive Officer and Acting April 15, 2003
Chief Financial Officer
(Principal Executive Officer and Principal
Financial Officer) and Chairman of the Board
of Directors
------------------------------------- Controller April 15, 2003
Karen Jackson (Principal Accounting Officer)
------------------------------------- Director April 15, 2003
Robert J. Corliss
------------------------------------- Director April 15, 2003
Robert Cox
------------------------------------- Director April 15, 2003
William Lenahan
------------------------------------- Director April 15, 2003
Luis Delahoz
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CERTIFICATIONS
I, Christopher J. Carey, certify that:
1. I have reviewed this annual report on Form 10-KSB of Stronghold
Technologies, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: April 15, 2003
-------------------------------------------
Christopher J. Carey
President, Chief Executive Officer and
Acting Chief Financial Officer
(Principal Executive Officer and Principal
Financial Officer)
-42-
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1 (1)(4) Merger Agreement and Plan of Merger, dated May 15, 2002, by and among TDT Development,
Inc., Stronghold Technologies, Inc., TDT Stronghold Acquisition Corp., Terre Di Toscana,
Inc., Terres Toscanes, Inc., certain stockholders of TDT Development, Inc. and
Christopher J. Carey.
2.2 (5) Stock Purchase Agreement, dated July 19, 2002, by and between TDT Development, Inc. and
Mr. Pietro Bortolatti.
3.1 (2) Articles of Incorporation, as amended on July 11, 2002.
3.2 (3) By-Laws.
4.1 (2) Certificate of Designations filed on May 16, 2002.
4.2 (5) Specimen Certificate of Common Stock.
10.1 (2) 2002 Stock Incentive Plan.
10.2 (2) Form of Incentive Stock Option Agreement to be issued under the 2002 Stock Incentive Plan.
10.3 (2) Form of Nonstatutory Stock Option Agreement to be issued under the 2002 Stock Incentive Plan.
10.4 (5) California 2002 Stock Incentive Plan.
10.5 (5) Form of Incentive Stock Option Agreement to be issued under the California 2002 Stock
Incentive Plan.
10.6 (5) Form of Nonstatutory Stock Option Agreement to be issued under the California 2002 Stock
Incentive Plan.
10.7 (2) Executive Employment Agreement by and between Stronghold Technologies, Inc. and Christopher J.
Carey, dated May 15, 2002.
10.8 (2) Employment and Non-Competition Agreement by and between Stronghold Technologies, Inc. and
Lenard Berger, dated August 1, 2000.
10.9 (2) Employment and Non-Competition Agreement by and between Stronghold Technologies, Inc. and
Salvatore D'Ambra, dated July 10, 2000.
10.10 (2) Employment and Non-Competition Agreement by and between Stronghold Technologies, Inc. and
James J. Cummiskey, dated August 14, 2000.
10.11 (4) Securities Purchase Agreement, dated May 15, 2002, by and among TDT Development, Inc.,
Stanford Venture Capital Holdings, Inc., Pietro Bortolatti, Stronghold Technologies, Inc.
and Christopher J. Carey.
10.12 (4) Registration Rights Agreement, dated May 16, 2002, by and among TDT Development, Inc. and
Stanford Venture Capital Holdings, Inc.
10.13 (4) Lock-Up Agreement, dated May 16, 2002, by and among TDT Development, Inc.
-43-
10.14 (4) Stockholders' Agreement, dated May 16, 2002, by and among TDT Development, Inc.,
Christopher J. Carey, Mary Carey and Stanford Venture Capital Holdings, Inc.
10.15 (4) Form of Warrant to be issued pursuant to the Securities Purchase Agreement (Exhibit
10.11).
10.16 (2) Business Loan Agreement by and between Stronghold Technologies, Inc. and UnitedTrust
Bank, dated June 30, 2002.
10.17 (2) Promissory Note issued by Stronghold Technologies, Inc. made payable to UnitedTrust Bank,
dated June 30, 2002.
10.18 (2) Commercial Security Agreement by and between Stronghold Technologies, Inc. and
UnitedTrust Bank, dated June 30, 2002.
10.19 (2) Promissory Note issued by Stronghold Technologies, Inc. made payable to Christopher J.
Carey, dated May 16, 2002.
10.20 (6) Loan Agreement by and among Stronghold Technologies, Inc., its subsidiary and UnitedTrust
Bank, dated September 30, 2002.
10.21 (6) Commercial Loan Note issued by Stronghold Technologies, Inc. and its subsidiary made
payable to UnitedTrust Bank, dated September 30, 2002.
10.22 (6) Security Agreement by and between Stronghold Technologies, Inc. and UnitedTrust Bank,
dated September 30, 2002.
10.23 (6) Security Agreement by and between Stronghold's subsidiary and UnitedTrust Bank, dated
September 30, 2002.
10.24 (6) Subordination Agreement by and among Christopher J. Carey, Stronghold Technologies, Inc.
and UnitedTrust Bank, dated September 30, 2002.
10.25 (6) Subordination Agreement by and among Christopher J. Carey, Stronghold's subsidiary and
UnitedTrust Bank, dated September 30, 2002.
10.26 (6) Guaranty by Christopher J. Carey in favor UnitedTrust Bank, dated September 30, 2002.
10.27 (6) Loan Agreement by and among Stronghold Technologies, Inc., its subsidiary and AC Trust
Fund, dated September 30, 2002.
10.28 (6) Loan Agreement by and among Stronghold Technologies, Inc., its subsidiary and CC Trust
Fund, dated September 30, 2002.
10.29 (6) Form of Subscription Agreement by and between Stronghold Technologies, Inc. and each of
the parties listed on the schedule of purchasers attached thereto.
10.30 (6) Promissory Note issued by Stronghold Technologies, Inc. made payable to Christopher J.
Carey, dated September 30. 2002.
21 (5) Subsidiaries of the Registrant.
23.1 (6) Consent of Rothstein, Kass & Company, P.C.
24 (6) Power of Attorney (included on page 40).
99.1 (6) Section 906 Certification for principal executive officer and principal financial officer.
-44-
---------------------
(1) The exhibits and schedules to the Merger Agreement have been omitted from
this filing pursuant to Item 601(b)(2) of Regulation S-K. TDT will furnish
copies of any of the exhibits and schedules to the U.S. Securities and Exchange
Commission upon request
(2) Incorporated herein by reference to the exhibits to Registrant's Quarterly
Report on Form 10-QSB for the fiscal quarter ended June 30, 2002.
(3) Incorporated herein by reference to the exhibits to the Registrant's
Registration Statement on Form SB-2 as filed with the Securities and Exchange
Commission on February 1, 2001 (No. 333-54822).
(4) Incorporated herein by reference to the exhibits to the Registrant's Current
Report on Form 8-K dated May 16, 2002.
(5) Incorporated herein by reference to the exhibits to the Registrant's
Registration Statement on Form SB-2 as filed with the Securities and Exchange
Commission on September 24, 2002.
(6) Filed herewith.
-45-
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
DECEMBER 31, 2002
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONTENTS
================================================================================
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet 2
Consolidated Statements of Operations 3
Consolidated Statements of Stockholders' Deficit 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-16
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Stronghold Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Stronghold
Technologies, Inc. and Subsidiary as of December 31, 2002, and the related
statements of operations, stockholders' deficit, and cash flows for the years
ended December 31, 2002 and 2001. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Stronghold
Technologies, Inc. and Subsidiary as of December 31, 2002, and the results of
their operations and their cash flows for the years ended December 31, 2002 and
2001, in conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the Company's
ability to continue in the normal course of business is dependent upon the
success of future operations. The Company has recurring losses, a substantial
working capital deficit and negative cash flows from operations, which raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. These
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Rothstein, Kass & Company, P.C.
Roseland, New Jersey
February 28, 2003
1
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
================================================================================
December 31, 2002
--------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 13,384
Accounts receivable, less allowance for doubtful
accounts of $200,000 1,192,451
Inventories 228,413
Prepaid expenses 19,906
-----------
Total current assets 1,454,154
-----------
PROPERTY AND EQUIPMENT, NET 173,743
-----------
OTHER ASSETS
Software development costs 223,224
Other 27,075
-----------
Total other assets 250,299
-----------
$ 1,878,196
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 851,660
Accrued expenses and other current liabilities 511,905
Interest payable, stockholders 193,118
Notes payable, stockholders, current portion 775,000
Note payable, current portion 458,333
Obligations under capital leases, current portion 15,033
-----------
Total current liabilities 2,805,049
-----------
LONG-TERM LIABILITIES
Notes payable, stockholders, less current portion 970,749
Note payable, less current portion 1,041,667
Obligations under capital leases, less current portion 21,791
-----------
Total long-term liabilities 2,034,207
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred stock, $.0001 par value; authorized 5,000,000
shares, 2,002,750 issued and outstanding
(aggregate liquidation preference of $3,004,125) 201
Common stock, $.0001 par value, authorized 50,000,000
shares, 9,857,000 issued and outstanding 986
Additional paid-in capital 4,839,635
Stock subscription receivable (3,000)
Accumulated deficit (7,798,882)
-----------
Total stockholders' deficit (2,961,060)
-----------
$ 1,878,196
===========
See accompanying notes to consolidated financial statements. 2
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
YEARS ENDED DECEMBER 31, 2002 2001
--------------------------------------------------------------------------------
SALES $ 2,802,483 $ 614,540
COST OF SALES 1,627,420 247,797
---------------------------
GROSS PROFIT 1,175,063 366,743
SELLING, GENERAL AND ADMINISTRATIVE 5,490,419 2,645,396
---------------------------
LOSS FROM OPERATIONS (4,315,356) (2,278,653)
INTEREST EXPENSE 213,447 141,435
---------------------------
NET LOSS (4,528,803) (2,420,088)
DIVIDENDS (294,843)
---------------------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $(4,823,646) $(2,420,088)
===========================
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.55) $ (0.41)
===========================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 8,834,730 5,906,250
===========================
See accompanying notes to consolidated financial statements. 3
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
=====================================================================================================
YEARS ENDED DECEMBER 31, 2002 AND 2001
-----------------------------------------------------------------------------------------------------
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
BALANCES, January 1, 2001 -- $ -- 5,906,250 $ 591 $ 12,909
NET LOSS
----------------------------------------------------------------------
BALANCES, December 31, 2001 5,906,250 591 12,909
ISSUANCE OF PREFERRED STOCK
AND WARRANTS, net of costs 2,002,750 201 2,264,778
WARRANTS ISSUED AS DIVIDENDS 294,843
ISSUANCE OF COMMON STOCK 2,190,333 219 267,281
CONVERSION OF STOCKHOLDER
LOAN TO COMMON STOCK 1,760,417 176 1,999,824
NET LOSS
----------------------------------------------------------------------
BALANCES, December 31, 2002 2,002,750 $ 201 $ 9,857,000 $ 986 $ 4,839,635
======================================================================
========================================================================
YEARS ENDED DECEMBER 31, 2002 AND 2001
------------------------------------------------------------------------
STOCK TOTAL
SUBSCRIPTION ACCUMULATED STOCKHOLDERS'
RECEIVABLE DEFICIT DEFICIT
BALANCES, January 1, 2001 $ (3,000) $ (555,148) $ (544,648)
NET LOSS (2,420,088) (2,420,088)
-----------------------------------------
BALANCES, December 31, 2001 (3,000) (2,975,236) (2,964,736)
ISSUANCE OF PREFERRED STOCK
AND WARRANTS, net of costs 2,264,979
WARRANTS ISSUED AS DIVIDENDS (294,843)
ISSUANCE OF COMMON STOCK 267,500
CONVERSION OF STOCKHOLDER
LOAN TO COMMON STOCK 2,000,000
NET LOSS (4,528,803) (4,528,803)
-----------------------------------------
BALANCES, December 31, 2002 $ (3,000) $(7,798,882) $(2,961,060)
=========================================
See accompanying notes to consolidated financial statements. 4
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
==============================================================================================
YEARS ENDED DECEMBER 31, 2002 2001
----------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,528,803) $(2,420,088)
Adjustments to reconcile net loss to
net cash used in operating activities:
Provision for doubtful accounts 200,000
Depreciation and amortization 61,905 32,986
Increase (decrease) in cash attributable to
changes in operating assets and liabilities:
Accounts receivable (1,110,091) (282,360)
Inventories (147,065) (81,348)
Prepaid expenses (15,021) (285)
Other receivables 250,139 (250,139)
Accounts payable 794,019 35,528
Accrued expenses and other current liabilities 645,923 445,334
Interest payable, stockholders 58,715 121,923
--------------------------
NET CASH USED IN OPERATING ACTIVITIES (3,790,279) (2,398,449)
--------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for purchase of property and equipment (94,585) (82,139)
Payments for software development costs (223,224)
Payments for security deposits (7,185)
--------------------------
NET CASH USED IN INVESTING ACTIVITIES (317,809) (89,324)
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable, stockholders 1,781,000 985,000
Principal repayments of notes payable, stockholders (222,000)
Proceeds from note payable 1,500,000
Proceeds from issuance of preferred stock, net of financing costs 2,264,979
Proceeds from issuance of common stock 267,500
Principal payments for obligations under capital leases (8,274)
--------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,083,205 2,485,000
--------------------------
NET DECREASE IN CASH (24,883) (2,773)
CASH, beginning of year 38,267 41,040
--------------------------
CASH, end of year $ 13,384 $ 38,267
==========================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION,
cash paid during the period for interest $ 154,732 $ 19,512
==========================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 2002, the Company entered into two separate
agreements to convert $2,000,000 of notes payable, stockholders into
1,760,417 shares of common stock.
On May 15, 2002, the Company consolidated the outstanding amounts due to the
majority stockholder into a promissory note of approximately $1,200,000
classified as a note payable, stockholder. Approximately $262,000 of accrued
expenses has been reclassified to notes payable, stockholders.
On June 30, 2002, the Company converted their outstanding line of credit with
a non-affiliated bank into a note payable of $1,500,000.
During the year ended December 31, 2002, obligations under capital leases
aggregating $45,099 were incurred when the Company entered into various
leases for computer equipment.
See accompanying notes to consolidated financial statements. 5
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. NATURE OF OPERATIONS
Stronghold Technologies, Inc. (the "Company") was incorporated in the state of
New Jersey on August 1, 2000. The Company is engaged principally as a developer
of wireless and internet-based systems for auto dealers in the United States.
On May 15, 2002, the Company entered into a Merger Agreement (the "Agreement")
with Stronghold Technologies, Inc. a Nevada corporation (formally known as TDT
Development, Inc. ("Parent")) whereby Parent issued 7,000,000 shares of its
common stock in exchange for all of the Company's outstanding shares in a
transaction accounted for as a reverse purchase acquisition. As a result, the
Company is considered for accounting purposes, to be the acquiring company since
the stockholders of the Company acquired more than 50% of the issued and
outstanding stock of Parent. Pursuant to this Agreement, the outstanding options
of the Company were also converted into options to purchase Parent common stock
based on a conversion rate of 2.1875 as defined in the Agreement. Prior to the
merger, Parent's operations were comprised solely of a business that sold
truffles imported from Italy through its wholly-owned subsidiaries, Terre di
Toscana, Inc. and Terres Toscanes, Inc. (the "Subsidiaries"). The Subsidiaries
were sold on July 19, 2002 and had virtually no material operations for the
period of May 16, 2002 through July 19, 2002. Since this transaction resulted in
a change in reporting entity, the historical financial statements prior to May
16, 2002 are those of the Company. The stockholders' deficit of the Company has
been retroactively restated.
2. GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has incurred a
net loss of approximately $4,529,000 and has negative cash flow from operations
of approximately $3,790,000 for the year ended December 31, 2002, and has a
working capital deficit of approximately $1,351,000 and a stockholders' deficit
of approximately $2,961,000 as of December 31, 2002. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
During 2003, management of the Company will rely on raising additional capital
to fund its future operations. If the Company is unable to generate sufficient
revenues or raise sufficient additional capital, there could be a material
adverse effect on the consolidated financial position, results of operations and
cash flows of the Company. The accompanying consolidated financial statements do
not include any adjustments that might be necessary if the Company is unable to
continue as a going concern.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. The Company provides for depreciation and amortization as follows:
ESTIMATED
ASSET USEFUL LIFE PRINCIPAL METHOD
Computer equipment 5 Years Declining-balance
Computer software 3 Years Declining-balance
Furniture and fixtures 7 Years Declining-balance
Leasehold improvements 4 Years Straight-line
6
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts Receivable
The Company carries its accounts receivable at cost less an allowance for
doubtful accounts. On a periodic basis, the Company evaluates its accounts
receivable and establishes an allowance for doubtful accounts, based on a
history of past write-offs and collections and current credit conditions.
Inventories
Inventories, which are comprised of hardware for resale, are stated at cost, on
an average cost basis, which does not exceed market value.
Software Development Costs
Capitalized software development costs, including significant product
enhancements, incurred subsequent to establishing technological feasibility in
the process of software development and production, are capitalized according to
Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." Costs
incurred prior to the establishment of technological feasibility are charged to
research and development expenses. For the years ended December 31, 2002 and
2001, software development costs incurred were approximately $1,322,000 and
$633,000, respectively.
Fair Value of Financial Instruments
Financial instruments held by the Company include cash, accounts receivable,
notes payable and accounts payable. The book value of cash, accounts receivable
and accounts payable are considered to be representative of fair value because
of the short maturity of these instruments. The fair values of the notes payable
approximate book values primarily because the contractual interest rates
approximate prevailing market rates.
Impairment of Long-Lived Assets
The Company periodically assesses the recoverability of the carrying amounts of
long-lived assets, including intangible assets. A loss is recognized when
expected discounted future cash flows are less than the carrying amount of the
asset. The impairment loss is the difference by which the carrying amount of the
asset exceeds its fair value.
7
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Retirement Plan
The Company has a retirement plan under Section 401(k) of the Internal Revenue
Code ("the Plan"), which covers all eligible employees. The Plan provides for
voluntary deduction of the employee's salary, subject to Internal Revenue Code
limitations. The Company can make a matching contribution to the Plan, which is
at the discretion of the Company and is determined annually. There were no
matching contributions for the years ended December 31, 2002 and 2001.
Income Taxes
The Company complies with SFAS No. 109, "Accounting for Income Taxes," which
requires an asset and liability approach to financial accounting and reporting
for income taxes. Deferred income tax assets and liabilities are computed for
differences between the financial statement and tax bases of assets and
liabilities that will result in future taxable or deductible amounts, based on
enacted tax laws and rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized.
Stock-Based Compensation
In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure,"
which amended SFAS No. 123, "Accounting for Stock-Based Compensation." This
Statement provides alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based compensation. It also
amends the disclosure provisions to require more prominent disclosure about the
effects on reported net income (loss) of an entity's accounting policy decisions
with respect to stock-based employee compensation. As permitted by the
Statement, the Company does not plan to adopt the fair value recognition
provisions of SFAS No. 123 at this time. However, the Company has adopted the
disclosure provisions of the Statement as of December 31, 2002.
The Company accounts for its stock-based employee compensation plans under
Accounting Principles Board Opinion No. 25, under which no compensation cost has
been recognized in the accompanying consolidated statements of operations, as
all options granted under those plans had an exercise price equal to or in
excess of the market value of the underlying common stock at the date of grant
(see Note 10).
Had compensation cost for these options been determined consistent with the fair
value method provided by SFAS No. 123, the Company's net loss and net loss per
common share would have been the following pro forma amounts for the years ended
December 31, 2002 and 2001.
8
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
2002 2001
NET LOSS APPLICABLE TO COMMON
SHAREHOLDERS, as reported $(4,823,646) $(2,420,088)
DEDUCT
Total stock-based compensation
expense determined under fair
value method for all awards, net
of related tax effect 73,329 2,372
-----------------------------
PRO FORMA $(4,896,975) $(2,422,460)
=============================
BASIC AND DILUTED EPS
As reported $ (0.55) $ (0.41)
Pro forma $ (0.55) $ (0.41)
The fair value of issued stock options is estimated on the date of grant using
the Black-Scholes option-pricing model including the following assumptions:
expected volatility of 0%, expected dividend yield rate of 0%, expected life of
10 years, and a risk-free interest rate of 4.03% and 5.09% for December 31, 2002
and 2001, respectively.
Revenue Recognition
Revenue is recognized under the guidelines of SFAS No. 48 "Revenue Recognition
When Right of Return Exists" and has a four step process that must be met prior
to the recording of revenue. The steps consist of the following: signing of
sales contract, installation of hardware, completion of the training period and
a signed contract from the customer stating they accept the product for the
sixty-day trial period. Payment is due upon the completion of the trial period.
The sales revenue and cost of sales reported in the consolidated statements of
operations is reduced to reflect estimated returns. Service revenue is
recognized when earned.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
9
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loss Per Common Share
Loss per common share is based on the weighted average number of common shares
outstanding. The Company complies with SFAS No. 128, "Earnings Per Share," which
requires dual presentation of basic and diluted earnings (loss) per share. Basic
earnings (loss) per share excludes dilutions and is computed by dividing net
loss applicable to common stockholders by the weighted average number of common
shares outstanding for the year. Diluted earnings (loss) per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. Since
the effect of the outstanding options and warrants are anti-dilutive, they have
been excluded from the Company's computation of loss per common share.
New Accounting Pronouncements
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities", which addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 is effective for exit or disposal activities that
are initiated after December 31, 2002, with earlier application encouraged. The
Company does not anticipate that this pronouncement will have a significant
impact on its consolidated financial position, results of operations or cash
flows.
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2002 consists of the following:
Computer equipment $ 180,799
Computer software 18,593
Furniture and fixtures 20,523
Computer equipment recorded under capital leases 45,099
Leasehold improvements 7,982
---------
272,996
Less accumulated depreciation
and amortization, including $15,031
relating to computer equipment recorded
under capital leases (99,253)
---------
$ 173,743
=========
10
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
5. SOFTWARE DEVELOPMENT COSTS
For the years ended December 31, 2002 and 2001, amortization of software
development costs charged to operations was nil due to the release of the
capitalized product being projected in the second quarter of 2003. Technological
feasibility was met as of July 1, 2002.
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following at
December 31, 2002:
Deferred maintenance fees $209,043
Commissions 137,332
Compensation 100,461
Payroll taxes 65,069
--------
$511,905
========
7. NOTES PAYABLE, STOCKHOLDERS
At December 31, 2002, notes payable, stockholders consists of the following:
Note payable, stockholder bearing interest at 12.5%
per annum and due on September 30, 2003,
collateralized by the assets of the Company. Up
to $375,404 can be borrowed by the Company $ 305,000
Note payable, stockholder bearing interest at 12.5%
per annum and due on September 30, 2003,
collateralized by the assets of the Company. Up
to $355,128 can be borrowed by the Company 305,000
Note payable, stockholder bearing interest
at 12.5% is due prior to December 31, 2003 165,000
Note payable, stockholder bearing interest at 12.5%
is subordinated to the note payable of $1,500,000
(Note 8) and is due after the terms of that note
in 2006 970,749
----------
1,745,749
Less current portion 775,000
----------
$ 970,749
==========
11
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
8. NOTE PAYABLE
At June 30, 2002, the Company converted its outstanding line of credit into a
note payable of $1,500,000. The note bears interest at a variable rate equal to
the prime rate (4.25% at December 31, 2002), and is due in monthly installments
of $41,667 plus interest to United Trust Bank, commencing in February 2003
through January 1, 2006. The note is collateralized by substantially all the
assets of the Company and is guaranteed by the majority stockholder of the
Company. The note payable, stockholder, of $970,749 is subordinated to this
note. Interest expense on the note payable for year ended December 31, 2002 was
approximately $76,000.
9. STOCK SUBSCRIPTION RECEIVABLE
The stock subscription receivable represents 600,000 shares of the Company's
original common stock (restated to 1,312,500 as defined in the Agreement) due
from two key employees and one stockholder.
10. STOCK OPTION PLANS
The Company has adopted three stock option plans ("Plans") providing for
incentive stock options ("ISOs") and non-qualified stock options ("NQSOs"). The
Company has reserved 1,985,938 shares of common stock for issuance upon the
exercise of stock options granted under the Plans. The exercise price of an ISO
or NQSO will not be less than 100% of the fair market value of the Company's
common stock at the date of the grant. The exercise price of an ISO granted to
an employee owning greater than 10% of the Company's common stock will not be
less than 110% of the fair market value of the Company's common stock at the
date of the grant. The Plans further provide that the maximum period in which
stock options may be exercised will be determined by the board of directors,
except that they may not be exercisable after ten years from the date of grant.
The status of the Company's restated stock options per the Plans are summarized
below:
RESTATED WEIGHTED
PLAN PER SHARE AVERAGE
OPTIONS EXERCISE PRICE EXERCISE PRICE
Outstanding at
January 1, 2001 415,625 $0.05 - $0.12 $0.12
Granted in the year
ended December 31, 2001 260,312 $0.12 - $0.69 $0.32
Terminated in the year
ended December 31, 2001 (113,750) $ 0.05 $0.05
---------
Outstanding at
December 31, 2001 562,187 $0.05 - $0.69 $0.11
Granted in the year
ended December 31, 2002 1,090,900 $0.25 - $2.25 $1.53
Terminated in the year
ended December 31, 2002 (288,240) $0.10 - $2.00 $0.69
---------
Outstanding at
December 31, 2002 1,364,847 $0.05 - $1.50 $0.50
=========
12
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
10. STOCK OPTION PLANS (CONTINUED)
The exercise price ranges for options outstanding and exercisable at December
31, 2002 were:
WEIGHTED
NUMBER OF SHARES NUMBER OF SHARES WEIGHTED AVERAGE
Exercise OUTSTANDING AS OF EXERCISABLE AT AVERAGE REMAINING
Price DECEMBER 31, DECEMBER 31, EXERCISE CONTRACTUAL
Range 2002 2002 PRICE LIFE
--------------------- --------------------------------------------------------------
$.05 through $ 50 203,333 21,498 $0.08 9 Years
$.51 through $1.50 1,102,514 72,854 $1.50 10 Years
$1.51 through $2.25 59,000 2,000 $1.74 10 Years
------------------------------------
1,364,847 96,352
====================================
11. INCOME TAXES
Until May 15, 2002, the date of the Merger Agreement, the Company operated as an
"S" corporation and, as a result, the earnings and losses were included in the
personal income tax returns of the respective stockholders. From the date of the
Merger Agreement through December 31, 2002, the Company operated as a "C"
corporation and had net operating losses ("NOL") of approximately $3,273,000
that will expire between 2009 and 2022.
The components of the Company's deferred tax asset at December 31, 2002 is
approximately as follows:
Net operating loss carryforwards $ 1,327,000
Allowance for doubtful accounts 81,000
Accrued shareholder interest 78,000
Accrued officer's compensation 41,000
Deferred maintenance fees 85,000
-----------
1,612,000
Less valuation allowance (1,612,000)
-----------
Net deferred income tax asset $ --
===========
13
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
11. INCOME TAXES (CONTINUED)
The components of the Company's income tax benefit for the year ended December
31, 2002 are approximately as follows:
DEFERRED
Federal $ 1,373,000
State 239,000
-----------
1,612,000
Change in valuation allowance (1,612,000)
-----------
$ --
===========
A reconciliation of the statutory federal income tax rate and the effective tax
rate follows:
2002 2001
Federal statutory rate 34 % 34 %
State income taxes, net of federal effect 7 7
S-Corporation earnings passes to shareholders and other (4) (41)
Change in valuation allowance (37)
---- ----
Effective income tax rate 0 % 0 %
==== ====
12. COMMITMENTS AND CONTINGENCIES
Securities Purchase Agreement
The Company, along with Parent, and certain stockholders of the Company
(together the "Parties"), entered into a Securities Purchase Agreement (the
"Purchase Agreement") dated and executed on May 15, 2002, with Stanford Venture
Capital Holdings, Inc. ("Stanford"). Pursuant to the Purchase Agreement, the
Parties agreed to issue to Stanford a total of 2,002,750 shares of the Company's
Series A $1.50 Convertible Preferred Stock ("Series A Preferred Stock"), plus
five-year warrants to purchase 2,002,750 shares of the Company's common stock at
an exercise price of $1.50 for the first 1,001,375 shares and $2.25 for the
remaining shares. The value of the warrants was treated as a dividend for
approximately $295,000 (computed using the Black-Scholes model with the
following assumptions: expected volatility of 0%, expected dividend yield rate
of 0%, expected life of 5 years, and a risk-free interest rate of 4.03% for
December 31, 2002) on May 15, 2002, the date of issuance. Pursuant to the
Purchase Agreement, the issuance of the Series A Preferred Stock and Warrants
took place on four separate closing dates beginning on May 16, 2002 and closing
on July 19, 2002.
14
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In connection with the Purchase Agreement, Parent and Stanford entered into a
Registration Rights Agreement, dated May 16, 2002, in which the Company agreed
to register the shares of the Company's common stock issuable upon conversion of
the Series A Preferred Stock and upon conversion of the warrants with the
Securities and Exchange Commission within 180 days from the date of the last
closing under the Purchase Agreement, which was July 19, 2002. In addition,
certain stockholders of the Company entered into a Lock-Up Agreement in which
the Parties agreed not to sell, assign, transfer, pledge, mortgage, encumber or
otherwise dispose of their shares of the Company's capital stock for a period of
two years, with certain exceptions, as defined in the Lock-up Agreement.
Leases
The Company rents facilities under leases in New Jersey, Virginia and
California. The Company is obligated under these leases through April 2006. In
addition to the base rent, one lease provides for the Company to pay a
proportionate share of operating costs and other expenses.
Future aggregate minimum annual rent payments under these leases are
approximately as follows:
YEAR ENDING DECEMBER 31,
2003 $ 128,000
2004 129,000
2005 108,000
2006 27,000
---------
$ 392,000
=========
Rent expense was approximately $128,000 and $132,000 for the years ended
December 31, 2002 and 2001, respectively.
Obligations Under Capital Leases
At December 31, 2002, the Company has computer equipment recorded under capital
leases expiring at various dates through 2005. The assets and liabilities under
capital leases are recorded at the lower of the present values of the minimum
lease payments or the fair values of the assets. The assets are included in
property and equipment and are depreciated over their estimated useful lives.
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STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
As of December 31, 2002, minimum future lease payments are approximately as
follows:
YEARS ENDING DECEMBER 31,
2003 $18,000
2004 18,000
2005 11,000
-------
Total minimum lease payments 47,000
Less amounts representing interest 10,000
-------
Present value of net minimum lease payments 37,000
Less current portion 15,000
-------
Long-term portion $22,000
=======
License Agreement
On February 27, 2001, the Company entered into a software license agreement
expiring June 30, 2003. Future payments under this agreement total $75,000. In
addition, the agreement provides for an option to renew from July 1, 2003 to
June 30, 2005. The Company will be required to pay $100,000 a year plus a
percentage equal to the last published Consumer Price Index.
13. STOCKHOLDERS' DEFICIT
On April 22, 2002 and May 16, 2002, the majority stockholder converted and
exchanged an aggregate of $2,000,000 of borrowings that were outstanding under a
line of credit agreement for an aggregate of 1,093,750 and 666,667 shares of the
Company's common stock, at a conversion price of $0.914 and $1.50, respectively.
The remaining amounts outstanding under the line of credit, plus accrued
interest, accrued officer compensation and un-reimbursed expenses were converted
into a promissory note for approximately $1,200,000 on May 15, 2002 (Note 7).
16