10KSB 1 cgi10k01.txt ANNUAL REPORT FOR DECEMBER 31, 2002 AND 2001 =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 ---------------- [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to __________ -------------------- Commission File Number 33-19980-D ---------------------- CGI Holding Corporation ----------------------------------- (Exact name of registrant as specified in charter) Nevada 87-0450450 ------------------------------ ------------------------- State or other jurisdiction of (I.R.S. Employer I.D. No.) incorporation or organization 300 N MANNHEIM ROAD, HILLSIDE, ILLINOIS 60162 --------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code (708) 547-0401 --------------- Securities registered pursuant to section 12(b) of the Act: Title of each class Name of each exchange on which registered None N/A ------------------ ----------------------------------------- Securities registered pursuant to section 12(g) of the Act: None --------------- (Title of class) Check whether the Issuer (1) filed all reports required to be filed by section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (1) Yes [X] No [ ] (2) Yes [ ] No [X] Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not 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. [ ] State issuer's revenues for its most recent fiscal year: $4,053,222 State the aggregate market value of the voting and nonvoting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of a specified date within the past 60 days: Based on the average bid and asked price of $0.15 per share for the issuer's common stock at March 13, 2003, the market value of the issuer's common stock held by non-affiliates would be $1,677,628. A list and description of affiliates can be found in Item 11. State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of February 6, 2003, there were 18,079,456 shares of the issuer's common stock issued and 16,579,455 outstanding. PART I ITEM 1. DESCRIPTION OF BUSINESS HISTORY AND ORGANIZATION CGI Holding Corporation (formerly known as North Star Petroleum, Inc.) (the "Company") was incorporated under the laws of the State of Nevada in October of 1987. From 1993 until July 1997, the Company had essentially no operations. The Company became operational on August 4, 1997, when it completed an agreement to acquire two private companies whereby it ussued 4,961,056 shares of its common stock to shareholders of the private companies resulting in 8,272,779 shares issued and oustanding. The Company acquired the common stock of WorldMall.Com on March 27, 2001. Pursuant to the merger all the issued and outstanding shares of common stock of WorldMall.Com were converted into shares of voting common stock of CGI Holding Corporation. At the time of the merger, 9,331,903 shares of WorldMall.Com were converted to 6,186,515 shares of CGI Holding Corporation. The market value of CGI stock on the date of the merger was $0.30 per share. The transaction was accounted for using the purchase method of accounting. WorldMall.com was reincorporated in the state of North Carolina as Websourced, Inc. in 2002. The Company sold the stock of its wholly owned Safe Environment Corporation division effective August 31, 2002. WEBSOURCED, INC. Websourced, Inc., d/b/a KeywordRanking.com was reincorporated in June 2002 in the State of North Carolina. It is primarily engaged in providing search engine enhancement services to web sites, under the name KeywordRanking.com. KeywordRanking.com assists its clients' websites in obtaining top twenty positioning on search engines worldwide. The websites benefit from top twenty positioning, which typically results in a significantly higher number of visits from potential customers. Websourced, Inc. currently employs 41 people. Websourced, Inc. is headquartered in Morrisville, North Carolina. ITEM 2. DESCRIPTION OF PROPERTIES CGI Holding Corporation has a month to month lease at $600.00 per month for its space requirements. The Company's current space is adequate for its daily operations. Websourced, Inc. rents space in Morrisville, North Carolina for $13,600 per month. The lease expires February 1, 2006. The rental amount is adjusted yearly for expenses. The current rent payment of $13,600 runs through February 1, 2003. This space is adequate for Websourced, Inc.'s needs. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS None. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock is quoted on the National Association of Securities Dealers Electronic Bulletin Board under the symbol "CGIH.OB" (the Common Stock formerly traded under the symbol "CGIH"). Set forth below are the high and low bid prices for the Common Stock for each quarter during the last two years. Quarter Ended High Bid Low Bid ------------- -------- ------- March 2001 0.43 0.23 June 2001 0.39 0.26 September 2001 0.39 0.19 December 2001 0.23 0.15 March 2002 0.40 0.15 June 2002 0.25 0.05 September 2002 0.17 0.12 December 2002 0.16 0.03 At March 13, 2003, the bid and asked price for the Common Stock were $0.13 and $0.18, respectively. All prices listed herein reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. Since its inception, the Company has not paid any dividends on the Common Stock, and the Company does not anticipate that it will pay dividends in the foreseeable future. At February 6, 2003, the Company had approximately 201 shareholders. RECENT SALES OF UNREGISTERED SECURITIES On December 1, 2001, the Company sold 200,000 shares of its common stock at a price of $0.15 per share. On December 17, 2001, the Company sold 333,333 shares of its common stock at a price of $0.15 per share. On December 31, 2001, the Company sold 50,000 shares of its common stock at a price of $0.15 per share. On January 2, 2002, the Company sold 100,000 shares of its common stock at a price of $0.15 per share. On September 11, 2002, the Company sold 744,000 shares of its common stock at a price of $0.16 per share. The above-described transactions were private placements pursuant to Section 4(2) of the Securities Act of 1933, as amended. The Company did not use underwriters for any of the above-described transactions and, therefore, the transactions did not involve underwriter discounts or commissions. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Liquidity and Capital resources Total assets from continuing operations of the Company at December 31, 2002 were $2,430,838, a decrease over the same period last year of $1,290,354. This decrease was attributable to the Company's decision to take a one time charge to write down the carrying value of goodwill associated with the purchase of its Webosurced, Inc. subsidiary. This amounted to $1,474,428 net of its tax effect. Liabilities from continuing operations at December 31, 2002 were $1,835,067, representing a increase from the prior year in the amount of $574,065. Debt from continuing operations increased from $707,176 at December 31, 2001 to $925,916 at December 31, 2002, or $218,740. As well the Company's deferred revenue increased from $304,835 on December 31, 2001 to $705,394 on December 31, 2002, an increase of $400,559. Working capital from continuing operations at December 31, 2002 was ($548,510), compared to December 31, 2001 of ($19,965). Cash flows from operations for the current year were a ($468,232) compared to a positive cash flow in 2001 of $865,986. The Company's cash flows from financing provided $720,782 and $436,880 for the years ended December 31, 2002 and 2001 respectively. The Company's cash position at on December 31, 2002 was $68,945. Results of Operations Sales for the year 2002 were $4,053,222, compared to sales in 2001 of $1,471,393, an increase of $2,581,829 or 175%. This increase is entirely attributable to Websourced, Inc. Cost of sales in 2002 was $1,841,083 compared to the prior year of $344,844, which resulted in an increase of gross profit in 2002 of $1,085,590 over the year 2001. The gross profit percentage decreased from 76% in 2001 to 55% in 2002. This was a direct result of the type of services that were provided by Websourced, Inc. and their compensation arrangement regarding their sales. Selling, general and administrative expenses were $2,165,381 in 2002 as compared to $2,655,745 in 2001, a decrease of $490,364; this decrease is attributable to the cost cutting efforts at Websourced, Inc. and at the corporate level. Interest expense decreased in 2002 from 2001 by $1,715. Net loss for the year from continuing operations was ($2,068,406) ($0.013 per share) compared to ($1,066,802) in 2001 ($0.07 cents per share). The Company faces a short-term liquidity problem in relation to the impending maturity of its $200,000 CIB Bank loan in April 2003, and in relation to $50,000 owed by the Company on a demand note which has been called for payment. In order to remain solvent, the Company will likely be required to raise additional capital during the next six months. In addition, as of December 31, 2002, the assets of the Company included approximately $596,884 of notes receivable from GMP, LLC, the entity which purchased the Company's SECO subsidiary and the Company's interest in Acadian Builders, LLC effective August 31, 2002. GMP, LLC is an affiliate of John Giura, one of the Company's directors. GMP, LLC is currently in default on a significant portion of those notes, which, along with goodwill write-downs, has resulted in a 2002 loss that has eliminated a significant portion of the Company's net worth. Management of the Company cannot guarantee that GMP, LLC will complete the payment of all or any significant portion of its remaining $596,884 of obligations. During the past year the Company's Websourced subsidiary experienced disruption of its relationship with one of its credit card processing companies. This disruption has created a short-term liquidity issue for Websourced, which is continuing. In addition, price pressure from lower priced competitors has caused Websourced to restructure some of its pricing plans. The nation's troubled economy, as well as fears regarding the impacts of a possible war in Iraq, have also negatively impacted Websourced's business in 2002, and are expected to negatively impact Websourced's business in 2003. Cautionary Statement Regarding Forward-Looking Statements Statements made in this document that express the Company's or management's Intentions, plans, beliefs, expectations or predictions of future events, are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are made pursuant to and in reliance on the safe harbor provisions of such sections. The words "believe", "expect", "intend", "estimate", "anticipate", "will" and similar expressions are intended to further identify such forward-looking statements, although not all forward-looking statements contain these identifying words. Those statements are based on many assumptions and are subject to many known and unknown risks, uncertainties and other factors that could cause the Company's actual activities, results or performance to differ materially from those anticipated or projected in such forward-looking statements, including risk factors summarized below. The Company cannot guarantee future results, levels of activity, performance or achievements and investors should not place undue reliance on the Company's forward-looking statements. The forward-looking statements contained herein represent the judgment of the Company as of the date of this document, and the Company expressly disclaims any intent, obligation or undertaking to update or revise such forward-looking statements to reflect any change in the Company's expectations with regard thereto or any changes in events, conditions or circumstances on which any such statements are based. Risk Factors Factors that could cause the Company's actual activities and results of performance to differ materially from the Company's or management's intentions, plans, beliefs, expectations or predictions of future events include risks and uncertainties relating to the following: The Company has lost money historically. The Company had net losses for the years ended December 31, 2002 and 2001. The Company's future operations may not be profitable. If the Company is not profitable in the future, the value of the Company's common stock may fall and the Company could have difficulty obtaining funds to continue its operations. The Company's balance sheet is weak. The Company lacks the capital to compete aggressively. The Company's growth is capital constrained. The Company may not generate sufficient cash flow from operations to meet its current and future obligations. The Company's leverage is significant, and significant interest and principal payments will become due and payable during the next 12 months. The Company's corporate overhead is also significant. The Company may not be able to generate sufficient free cash flow from its operations to meet all of its current and future payments obligations. Any debt incurred to finance acquisitions will increase the Company's future payment obligations. The Company needs to raise additional capital, which capital may not be available on acceptable terms or at all. The Company needs to raise additional funds, both for operating capital and for acquisitions. The Company may not be able to obtain the needed additional financing on favorable terms or at all. If the Company cannot raise capital on acceptable terms, the Company may not be able to: meet all of its current and future payment obligations; expand its existing Websourced, Inc. business; pursue acquisition opportunities; enhance its infrastructure and leveragable assets; open new offices; hire, train and retain employees; or respond to competitive pressures or unanticipated requirements. The Company's failure to do any of these things could seriously harm the Company and the Company's stock. The Company may not be able to negotiate, finance or close acquisitions. The Company intends to pursue one or more acquisitions of companies engaged in businesses that may or may not be similar to its Websourced, Inc. subsidiary. The Company may not be able to negotiate such acquisitions on acceptable terms or at all. If such acquisitions are successfully negotiated, the terms thereof may require the Company to incur additional indebtedness or issue equity. The Company may not be able to obtain such financing on acceptable terms or at all. The terms and conditions of acquiring businesses could adversely affect the price of the Company's stock. In order to consummate acquisitions, the Company may be required to take action that could adversely affect the price of the Company's stock, such as issuing common stock, convertible preferred stock, convertible subordinated debt, or other equity-linked securities, potentially resulting in the dilution of existing shareholders or in other adverse effects upon existing shareholders; undertaking a reverse stock split; changing the name, Board of Directors, or officers of the Company; entering into new lines of business; forming business combinations or strategic alliances with potential business partners; or taking other actions. Any one or more of these actions may adversely affect the Company and the Company's common stock. The Company may be unable to successfully integrate acquired businesses. The Company may acquire other businesses in the future, which may significantly complicate the management of the company. The Company may need to integrate widely dispersed operations with different corporate cultures, operating margins, competitive environments, computer systems, compensation schemes, business plans and growth potential. Such integration efforts may not succeed, or may distract the Company's management from servicing its existing clients. Any failure to manage acquisitions successfully could seriously harm the Company's operating results. Also, the acquisition costs could cause the Company's quarterly operating results to vary significantly. The Company may experience difficulty in handling growth. The Company expects to grow both by hiring new employees and by servicing new business and geographic markets. The Company's growth will place a significant strain on the Company's management and on the Company's operating and financial systems. The Company's personnel, systems, procedures and controls may be inadequate to support the Company's future operations. In order to accommodate the increased size of the Company's operations, the Company will need to hire, train and retain appropriate personnel to manage the Company's operations. The Company will also need to improve its financial and management personnel, controls, reporting systems and operating systems. The Company depends on the availability of skilled labor, which is difficult to attract and retain. The success of the Company's growth strategy will depend to a significant extent upon the Company's ability to attract, train and retain skilled operational, technical, financial, management, sales and marketing personnel. Competition for skilled personnel is intense. The Company may not be successful in attracting and retaining the personnel necessary to conduct the Company's business successfully. If the Company is unable to attract, hire, assimilate, and retain such personnel, it could have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, even if the Company is able to expand its employee base, the resources required to attract and retain such employees may adversely affect the Company's operating margins. The Company's growth heavily depends on its key personnel, the loss of whom would materially adversely affect the Company. The Company believes that its success will depend on the continued employment of its key personnel, including Gerard M. Jacobs, the CEO of the Company, and S. Patrick Martin, the CEO of the Company's Websourced, Inc. subsidiary. If one or more of the Company's key management personnel were unable of unwilling to continue their present positions, such persons would be very difficult to replace and the Company's business could be seriously harmed. In addition, if any of Websourced, Inc.'s key employees joins a competitor or forms a competing company, some of the Company's clients might choose to use the services of that competitor or new company instead of the Company's. Weak general economic and business conditions may adversely affect the Company's revenues and operating margins. Weak general economic and business conditions, international tensions and wars, globally, nationally, regionally or locally, may have a significant adverse effect on the Company's revenues and operating margins. The Company faces competition from bigger, more established competitors. Competition in technology service markets is intense. If the Company fails to compete successfully against current or future competitors, the Company's business, financial condition and operating results would be seriously harmed. Because relatively low barriers to entry characterize the Company's current and many prospective markets, the Company expects other companies to enter its markets. In addition, some of the Company's competitors may develop services that are superior to, or have greater market acceptance than, the services that the Company offers. Also, if the Company's market sectors appear attractive, then numerous existing companies that have greater financial and human resources may be expected to enter those markets. The superior financial and marketing resources of those potential competitors may provide a substantial advantage to those competitors over the Company. The Company lacks long-term contracts with clients. Few if any of the Company's clients retain the Company under long-term contracts. As a result, the Company's revenues may be difficult to predict. Because the Company sometimes incurs costs based on expectations of future revenues, the Company's failure to predict future revenues accurately may seriously harm the Company's financial condition and results of operations. There is a lack of brand awareness of the Company's services. Due to lack of marketing resources, the Company has not been able to develop any widespread awareness of the company's brand name. Any increase in the Company's advertising and marketing expenditures could cause the Company's operating margins to decline. Moreover, the Company's brand may be closely associated with the business success or failure of some of the Company's Internet clients, some of who are pursuing unproven business models in competitive markets. As a result, the failure or difficulties of one of the Company's clients may damage the Company's reputation. If the Company fails to successfully promote and maintain the Company's brand name or incurs significant related expenses, the Company's operating margins and the Company's growth may decline. A failure by the Company to meet client expectations could result in losses and negative publicity. Any failure to meet the Company's clients' expectations could result in: delayed or lost revenues due to adverse client reactions; requirements to provide additional services to clients at no charge; negative publicity regarding the Company and its services, which could adversely affect the Company's ability to attract or retain clients; and claims for damages against the Company, regardless of the Company's responsibility for such failure. The Company cannot be sure that its contracts will protect the Company from liability for damages in the event the Company is sued. Also, if the Company is sued, the legal fees involved in defending a lawsuit may exceed the amount of the claim in question. The Company's success depends upon increased adoption of the Internet as a means for commerce. The Company's success depends heavily on the continued use and acceptance of the Internet as a means for commerce. The widespread acceptance and adoption of the Internet for conducting business is likely only in the event that the Internet provides businesses with greater efficiencies and improvements. If commerce on the Internet does not continue to grow, or grows more slowly than expected, the Company's business would be seriously harmed. Consumers and businesses may reject the Internet as a viable commercial medium for a number of reasons, including: Potentially inadequate network infrastructure; delays in the development of Internet enabling technologies and performance improvements; delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity; delays in the development of security and authentication technology necessary to effect secure transmission of confidential information; changes in, or insufficient availability of, telecommunications services to support the Internet; and failure of companies to meet their customers' expectations in delivering goods and services over the Internet. Increasing government regulations or taxation could adversely affect the Company's business. The Company is affected not only by regulations applicable to businesses generally, but also by laws, regulations and taxes directly applicable to eBusiness. Although there are currently few such laws, regulations and taxes, state, federal and foreign governments may adopt a number of these laws, regulations and taxes. Any such legislation, regulation or tax could dampen the growth of the Internet and decrease its acceptance as a communications and commercial medium. If such a decline occurs, companies may decide in the future not to use the Company's services. This decrease in the demand for the Company's services would seriously harm the Company's business and operating results. Any new laws, regulation and taxes may govern, restrict, tax or affect any of the following issues: user privacy, the pricing and taxation of goods and services offered over the Internet; the content of websites; consumer protection; and the characteristics and quality of products and services offered over the Internet. Inability to protect the Company's intellectual property. The Company cannot guarantee that it can safeguard or deter misappropriation of the Company's intellectual property. In addition, the Company may not be able to detect unauthorized use of the Company's intellectual property and take appropriate steps to enforce the Company's rights. If former employees or third parties infringe or misappropriate the Company's trade secrets, copyrights, trademarks or other proprietary information or intellectual property, the Company's business could be seriously harmed. In addition, although the Company believes that their proprietary rights do not infringe the intellectual property rights of others, other parties may assert infringement claims against the Company or claim that the Company has violated their intellectual property rights. Such claims, even if not true, could result in significant legal and other costs and may be a distraction to the Company's management. The Company's stock is illiquid. The Company's stock is extremely illiquid, typically with no shares trading for days at a time. Consequently, shareholders may find it difficult to sell their common stock in the Company, and the owners of potential acquisition target companies may find the Company's common stock to be unacceptable consideration in any proposed transaction. A significant portion of the Company's stock is owned by insiders. The current directors and officers of the Company and its subsidiary Websourced, Inc., as a group, together with their affiliates, beneficially own a significant percentage of the Company's outstanding shares of common stock. Accordingly, these stockholders will have substantial influence over the Company's policies and management. The Company has not paid dividends and does no expect to do so in the foreseeable future. The Company has not paid dividends since it inception and does not expect to in the foreseeable future, so the Company's stockholders will not be able to receive any return on their investment without selling their shares. The Company presently anticipates that all earnings, if any, will be retained for development of the Company's business. Any future dividends will be subject to the discretion of the Board of Directors and will depend on, among other things, the Company's future earnings, operating and financial condition, capital requirements, and general business conditions. SEGMENT ANALYSIS The Company's operations are divided into operating segments using individual products or services or groups of related products and services. Each segment has separate management that reports to a person that makes decisions about performance assessment and resource allocation for all segments. The Company has one operating segment at the end of 2002, search engine enhancement. The Company disposed of its Asbestos Abatement division in August of 2002 and its liquid filling division in September 2001, and they are included as discontinued operations. The Company evaluates the performance of each segment using before-tax income or loss from continuing operations. There are no sales transactions between segments. Listed below is a presentation of sales, operating profit and total assets for all reportable segments. The other segment category consists of the management company CGI Holding Corporation. NET SALES BY INDUSTRY SEGMENT INDUSTRY SEGMENT 2002 2001 AMOUNT PERCENT AMOUNT PERCENT WEBSOURCED, INC. $4,053,222 100.00% $1,471,393 100.00% OTHER - 0.00% - 0.00% ----------- --------- ---------- -------- TOTAL SALES $4,053,222 100.00% $1,471,393 100.00% =========== ========= ========== ======== OPERATING PROFIT BY INDUSTRY SEGMENT INDUSTRY SEGMENT 2002 2001 -------------- -------------- WEBSOURCED, INC. ($1,910,726) ($851,538) OTHER (642,353) (591,278) -------------- -------------- TOTAL OPERATING PROFIT ($2,553,079) ($1,442,816) ============== ============== TOTAL ASSETS BY INDUSTRY SEGMENT 2002 2001 INDUSTRY SEGMENT AMOUNT PERCENT AMOUNT PERCENT OTHER 1,487,249 61.18% 1,127,167 21.15% WEBSOURCED,INC. 943,589 38.82% 2,737,013 51.35% DISCONTINUED - 0.00% 1,465,847 27.50% ------------ -------- ----------- ------- TOTAL ASSETS $2,430,838 100.00% $5,330,027 100.00% ============ ======== =========== ======= ITEM 7. FINANCIAL STATEMENTS The financial statements of the Company are set forth immediately following the signature page to this form 10-KSB. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The following table sets forth the executive officers, directors and significant employees of the Company: Name Age Position -------------------- --- ----------------------- Gerard M.Jacobs 47 President, Chief Executive Officer, Secretary T Benjamin Jennings 38 Director John Giura 70 Chairman, Vice President Gerard M.Jacobs assumed his position in December of 2001. From March 1999 until he assumed this position, Mr. Jacobs was involved as an officer and board member of several privately held companies. Prior to March of 1999, Mr Jacobs was chief executive officer of Metal Management Inc. of Chicago, Illinois. Mr Jacobs holds degrees from Harvard University and the University of Chicago Law School. T. Benjamin Jennings is currently the chief executive officer of Ceira Technologies Inc. in Irvine, California. He has served in this position since June of 2000. Prior to this, Mr Jennings was chairman of Metal Management, Inc. Mr Jennings is a graduate of Rice University. John Giura, chairman, served as a Director, President, Chief Executive Officer and Chief Financial Officer of the Company from August of 1997 until December 2001. Mr. Giura received his BA degree from the University of Naples (Italy) in 1956 and an MA in economics from the University of Chicago in 1961. Mr. Jacobs, a Director, President and Chief Executive Officer of the Company, and Mr. Jennings, a Director of the Company, both served as Directors and officers of Metal Management, Inc., Chicago, Illinois, within the two year period prior to the time that Metal Management, Inc. filed a petition under the federal bankruptcy laws. Except as set forth above, to the knowledge of management, during the past five years, no present or former director or executive officer of the Company: (1) filed a petition under the federal bankruptcy laws or any state insolvency law, nor had a receiver, fiscal agent or similar officer appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which such person was an executive officer at or within two years before the time of such filing; (2) was convicted in a criminal proceeding or named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining such person from or otherwise limiting, the following activities: (i) acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, associated person of any of the foregoing, or as an investment advisor, underwriter, broker or dealer in securities, or as an affiliate person, director or employee of any investment company, or engaging in or continuing any conduct or practice in connection with such activity; (ii) engaging in any type of business practice; or (iii) engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state securities laws or federal commodities laws; (4) was the subject of any order, judgment, or decree, not subsequently reversed, suspended, or vacated, of any federal or state authority barring, suspending, or otherwise limiting for more than 60 days the right of such person to engage in any activity described above, or to be associated with persons engaged in any such activity; (5) was found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission to have violated any federal or state securities law, and the judgment in such civil action or finding by the Securities and Exchange Commission has not been subsequently reversed, suspended, or vacated. (6) was found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT The Company is not subject to the requirements of Section 16(a) of the Exchange Act. ITEM 10. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth certain summary information concerning the compensation paid or accrued for each of the Company's last three completed fiscal years for the Company's or its subsidiary's chief executive officer, and each of its other executive officers who received compensation in excess of $100,000 during such periods (as determined at December 31, 2002):
Long Term Compensation ---------------------- Annual Compensation Awards Payouts Other Restricted Name and Annual Stock Options All Principal Year Salary Bonus($) Compensation Awards /SARs Other Position Compensation -------------- ----- ------ -------- ------------ ------ ------- ------------ John Giura 2002 113,000 -0- 7,200 -0- -0- -0- John Giura 2001 90,000 -0- 7,200 -0- -0- -0- John Giura 2000 177,058 -0- 7,200 -0- -0- 2,000 Chairman S. Patrick Martin 2002 150,000 17,164 0 4,650 -0- -0- CEO of Websourced 2001 103,899 -0- 0 0 -0- -0-
Cash Compensation John Giura was paid $35,000 by SECO Indiana, and $78,000 by CGI Holding Corporation for the year ended December 31, 2002. John Giura was paid $45,000 by SECO Indiana, and $45,000 by CGI Holding Corporation for the year ended December 31, 2001.John Giura was paid $177,058 by RIC for the year ended December 31, 2000. Mr. Giura does not have an employment contract with the Company and no set compensation arrangement has been set for Mr. Giura for the fiscal year ended December 31, 2003. S. Patrick Martin was paid by Websourced, Inc. for the years ended December 31, 2002 and 2001. Bonuses and Deferred Compensation Inlcuded in S. Patrick Martin's salary for 2002 is a bonus of $17,164. Compensation Pursuant to Plans. None. Pension Table None. Other Compensation None. Compensation of Directors. None. Employment Contracts and Termination of Employment, and Change-in-Control Arrangements There are no compensatory plans or arrangements, including payments to be received from the Company, with respect to any person named in the Cash Compensation section set out above which would in any way result in payments to any such person because of his resignation, retirement, or other termination of such person's employment with the Company or its subsidiaries, or any change in control of the Company, or a change in the person's responsibilities following a change in control of the Company. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding beneficial ownership of the Common Stock as of December 31, 2002 by (i) each person who is known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock, (ii) each director of the Company, (iii) each of the named executives and (iv) all directors and executive officers of the Company as a group. At December 31, 2002, there were approximately 19,012,573 shares of Common Stock issued and 16,512,573 outstanding. Title of Name and Address of Amount and Nature of Percent Class Beneficial Owner Beneficial Ownership(1) of Class ----- ---------------- -------------------- ---------- Common John Giura Chairman C/O CGI Holding Corporation 300 N Mannheim Rd. Hillside, IL 60126 3,228,144 (2) 19.54% S. Patrick Martin c/o Websourced, Inc. 630 Davis Drive Ste 140 Morrisville, NC 27560 2,270,891 (3) 13.75% T. Benjamin Jennings c/o CGI Holding Corporation 300 N Mannheim Rd Hillside, IL 60126 Director 62,500 0.39% Common Directors and Officers as a 5,561,535 33.68% Group (3 persons) (1) John Giura and S. Patrick Martin have each executed irrevocable Proxies granting Gerard M. Jacobs the right to vote all or the vast majority of his shares in favor of Gerard M. Jacobs' slate of nominees for the Board of Directors of the Company, so lang as Gerard M. Jacobs is serving as the chief executive officer of the Company and so long as John Giura and S. Patrick Martin are included in such slate of nominees. (2) Includes 135,300 shares which are held jointly by Mr. Giura and Mr. James Spachman, a shareholder of the Company and 1,021,900 held by CIB Bank Hillside as custodian for Mr. Giura. (3) Includes 233,147 shares which Mr. Martin has the right to acquire upon the exercise of outstanding options and warrants. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS TRANSACTIONS WITH MANAGEMENT AND OTHERS During 2001 the Company entered into an arms length transaction with a related party to lease their employees. Employee leasing is utilized to bring a large number of employees under one workers compensation insurance policy to receive a better rate from the insurance carrier. For each pay period the Company is billed by Nexus Management Solutions(NMS) for the employees wages, payroll tax liabilities, workers compensation premiums and a management fee. The total amount paid to NMS in 2001 was $2,098,431. This agreement was discontinued January 1, 2002. During 2001, CGI Holding Corporation leased its corporate headquarters from a partnership which is owned and controlled by John Giura, the Chairman of the Company, and James Spachman, a major shareholder of the Company. The lease was on a month-to-month term and the rental amount was $700.00 per month. The Company moved out of the building in February of 2002. Gerard M. Jacobs, a Director, President and Chief Executive Officer of the Company, and T. Benjamin Jennings, a Director of the Company, have had for over 10 years, and in the future will continue to have, a substantial number of business relationships. Mr. Jacobs is a Director of Ceira Technologies, Inc., a company of which Mr. Jennings is a Director, President and Chief Executive Officer. Messrs. Messrs. Jacobs and Jennings are both members of J&J Investments LLC, and otherwise frequently engage in common business enterprises and common investments. The Company and Websourced, Inc have borrowed funds from shareholders to cover operating expenses. The total outstanding principal balance due as of December 31, 2002 was $63,276. The details of this principal balance as of December 31, 2002 is as follows: Pat Martin $63,276 - No repayment terms. TRANSACTIONS WITH PROMOTERS Not applicable. ITEM 13. EXHIBITS AND REPORTS (a)(1)FINANCIAL STATEMENTS. The following financial statements are filed as part of this report: Title of Document ----------------- Report of Poulos & Bayer, Certified Public Accountants Consolidated Balance Sheets December 31, 2002, and 2001 Consolidated Statements of Stockholders' Equity For the years ended December 31, 2002, and 2001 Consolidated Statements of Operations For the years ended December 31, 2002, and 2001 Consolidated Statements of Cash Flows For the years ended December 31, 2002, and 2001 Consolidated Notes to Financial Statements (a)(2)FINANCIAL STATEMENT SCHEDULES. The following financial statement schedules are included as part of this report: None. (a)(3)EXHIBITS. The following exhibits are filed as part of this report: NONE (b) REPORTS ON FORM 8-K. (1) The Company filed Form 8-K during the second quarter of 2001 in reference to the purchase of the assets of WorldMall.Com. (2) The Company filed Form 8-K during the fourth quarter of 2001 in reference to the sale of the assets of Trifinity, Inc. (3) The Company filed Form 8-K during the third quarter of 2002 in reference to the sale of the stock of Safe Environment Corporation of Indiana. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 25th day of March, 2003. CGI Holding Corporation By: /s/ Gerard M. Jacobs ---------------------------------- Gerard M. Jacobs President and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated on this 25th day of March, 2003. Signature Title /s/ John Giura Chairman and Vice President ------------------------ John Giura /s/ T Benjamin Jennings Director ------------------------ T Benjamin Jennings Independent Auditor's Report To the Board of Directors CGI Holding Corporation 300 N Mannheim Road Hillside, Illinois 60162 We have audited the accompanying consolidated balance sheets of CGI Holding Corporation (a Nevada Corporation) as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholder's equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of CGI Holding Corporation as of December 31, 2002 and 2001 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. By: /s/ Poulos & Bayer Poulos & Bayer Chicago, Illinois March 15, 2003 CGI HOLDING CORPORATION, INC. CONSOLIDATED BALANCE SHEET DECEMBER 31, 2002 AND 2001 2002 2001 ---------- ---------- CURRENT ASSETS Cash 68,945 31,882 Accounts Receivable 554,894 179,771 Allowance for Bad Debts (89,866) (14,999) Other Current Assets 215,644 31,686 Refundable Corporate Income Taxes 4,202 0 Deferred Tax Asset 90,954 158,250 Notes Receivable 326,884 550,000 Current Assets of Discontinued Operations - 1,070,669 ---------- ---------- Total Current Assets 1,171,657 2,007,259 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT Property, Plant and Equipmet 127,727 111,084 Less:Accumulated Depreciation (23,652) (5,285) ---------- ---------- Subtotal 104,075 105,799 Fixed Assets of Discontinued Operations(Net) - 89,316 ---------- ---------- NET PROPERTY, PLANT AND EQUIPMENT 104,075 195,115 ---------- ---------- OTHER ASSETS Goodwill - 2,154,052 Other Assets 137,182 153,701 Deferred Tax Asset 1,017,924 371,050 Other Assets of Discontinued Operations - 448,850 ---------- ---------- TOTAL OTHER ASSETS 1,155,106 3,127,653 ---------- ---------- TOTAL ASSETS 2,430,838 5,330,027 ========== ========== CURRENT LIABILITIES Current Portion of Long Term Debt 785,531 332,729 Notes Payable-Line of Credit 25,485 70,000 Accounts Payable 180,048 231,577 Accrued Liabilities 23,709 17,414 Deferred Revenue 705,394 304,835 Current Liabilities of Discontinued Operations - 1,018,727 ---------- ---------- TOTAL CURRENT LIABILITIES 1,720,167 1,975,282 ---------- ---------- LONG TERM LIABILITIES Long-Term Debt, Net of Current Portion 51,624 151,415 Loan Payable-Shareholder 63,276 153,032 Long Term Liabilities of Discontinued Operations - 100 ---------- ---------- TOTAL LONG TERM LIABILITIES 114,900 304,547 ---------- ---------- STOCKHOLDERS' EQUITY Preferred Stock, $0.001 par value, 5,000,000 shares authorized; no shares issued or outstanding - - Common Stock, $0.001 par value, 100,000,000 shares authorized, 19,012,573 shares issued and 16,512,573 outstanding in 2002, 17,999,627 shares issued and 16,499,627 outstanding in 2001, 19,012 17,999 Additional Paid In Capital 5,209,368 5,056,067 Accumulated Deficits (4,092,609)(1,623,868) Treasury Stock (540,000) (400,000) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 595,771 3,050,198 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 2,430,838 5,330,027 ========== ========== The accompanying notes are an integral part of these financial statement. CGI HOLDING CORPORATION, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 COMMON COMMON PAID-IN ACCUMULATED TREASURY SHARES STOCK CAPITAL DEFICITS STOCK ---------- ---------- ---------------------- --------- BALANCE:JANUARY 1, 2001 10,229,779 11,230 3,119,381 (1,133,961)(350,000) ISSUED 6,186,515 IN THE PURCHASE OF WORLDMALL.COM ON MARCH 27, 2001 6,186,515 6,186 1,849,769 PURCHASED 500,000 SHARES ON JULY 20, 2001 FOR $0.10/SHARE (500,000) (50,000) SOLD 200,000 SHARES AT $.15 PER SHARE ON 12/1/01 200,000 200 29,800 SOLD 333,333 SHARES AT $.15 PER SHARE ON 12/17/01 333,333 333 49,667 SOLD 50,000 SHARES AT $.15 PER SHARE ON 12/31/01 50,000 50 7,450 2001 NET LOSS (489,907) ---------- ---------- ---------- ---------- ---------- BALANCE:DECEMBER 31, 2001 16,499,627 17,999 5,056,067 (1,623,868)(400,000) SOLD 100,000 SHARES AT $.15 PER SHARE ON 1/2/02 100,000 100 14,900 PURCHASED 1,000,000 SHARES ON APRIL 29, 2002 FOR $.14 PER SHARE (1,000,000) (140,000) SOLD 744,000 SHARES ON 9/11/02 AT $.16 PER SHARE 744,000 744 118,296 ISSUED 168,946 SHARES OF STOCK ON 12/31/02 FOR EMPLOYEE STOCK BONUS 168,946 169 20,105 NET LOSS (2,468,741) ---------- ---------- ---------- ---------- ---------- BALANCE:DECEMBER 31, 2002 16,512,573 19,012 5,209,368 (4,092,609)(540,000) ========== ========== ========== ========== ========== The accompanying notes are an integral part of these financial statement. CGI HOLDING CORPORATION, INC. CONSOLIDATED STATEMENTS OF OPERATIONS TWELVE MONTHS ENDED DECEMBER 31, 2002 AND 2001 2002 2001 ---------- ----------- SALES 4,053,222 1,471,393 COST OF GOODS SOLD 1,841,083 344,844 ---------- ----------- GROSS PROFIT 2,212,139 1,126,549 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,165,381 2,457,328 ---------- ----------- PROFIT (LOSS) FROM OPERATIONS 46,758 (1,330,779) ----------- ----------- OTHER INCOME (EXPENSES) Impairment of Goodwill (2,154,052) - Other Income/(Expense) (333,000) - Interest Income 645 3,108 Interest Expense (113,430) (115,145) ---------- ----------- TOTAL OTHER INCOME (EXPENSE) (2,599,837) (112,037) ---------- ----------- NET(LOSS) BEFORE CORPORATE INCOME TAXES (2,553,079) (1,442,816) INCOME TAX PROVISION (484,673) (504,985) ---------- ----------- NET (LOSS) FROM CONTINUING OPERATIONS (2,068,406) (937,831) ---------- ----------- DISCONTINUED OPERATIONS: Income(Loss) from operations of discontinued operations (less applicable tax - See Note) 119,044 747,834 Gain(Loss) on disposal of discontinued operations(less applicable tax of - See Notes) (519,379) (299,910) ----------- ----------- TOTAL DISCONTINUED OPERATIONS (400,335) 447,924 ----------- ----------- NET INCOME (LOSS) (2,468,741) (489,907) =========== =========== NET INCOME PER COMMON SHARE FROM CONTINUING OPERATIONS (0.13) (0.06) =========== =========== NET INCOME PER COMMON SHARE FROM DISCONTINUED OPERATIONS (0.02) 0.03 =========== =========== NET INCOME PER COMMON SHARE (0.15) (0.03) =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 16,401,801 14,753,398 =========== =========== The accompanying notes are an integral part of these statements. CGI HOLDING CORPORATION, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS TWELVE MONTHS ENDED DECEMBER 31, 2002 AND 2001 2002 2001 ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net (Loss) (2,468,741) (489,907) Non-Cash Items Included in Net (Loss) Loss on Disposition of Assets 646,386 377,155 Stock Bonus 20,274 - Depreciation 129,109 79,292 Amortization 2,367,041 406,208 Allowance for Bad Debts 81,995 (35,001) Allowance for Impaired Assets 350,000 205,281 Deferred Income Taxes (579,578) (357,687) OTHER CHANGES: Change in Accounts Receivable (1,546,320) 890,736 Change in Inventory 31,686 (29,191) Change in Refundable Income Taxes (4,202) - Change in Other Current Assets (287,363) (67,148) Change in other Assets 357,427 89,192 Change in Accounts Payable 56,912 (286,271) Change in Accrued Expenses 6,295 64,109 Change in Accrued Income Taxes (29,712) (102,096) Change in Deferred Revenue 400,559 121,314 ------------ ------------- NET CASH CHANGE FROM OPERATING ACTIVITIES (468,232) 865,986 ------------ ------------- CASH FLOWS FROM INVESTING ACTIVITIES Fixed Assets Acquired (39,174) (190,695) Change in Other Notes Receivable - (435,000) Escrow Deposit (400,000) - Change in Advances to ACS Construction - (1,035,989) Received from ACS Construction 210,000 - Purchase of WorldMall.Com, Net of cash received - (246,830) Proceeds from Sale of Assets, Net of Cash Transferred (27,549) 95,794 ------------ ------------- NET CASH CHANGE FROM INVESTING ACTIVITIES (256,723) (1,812,720) ------------ ------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from Notes Payable 1,004,474 1,784,850 Principal Payments made on Notes Payable (404,204) (1,355,470) Change in Line of Credit 126,472 - Proceeds from Sale of Stock 134,040 57,500 Purchase of treasury Stock (140,000) (50,000) ------------ ------------- NET CASH CHANGE FROM FINANCING ACTIVITIES 720,782 436,880 ------------ ------------- NET CASH CHANGE (4,173) (509,854) CASH BALANCE:JANUARY 1 73,118 582,972 ------------ ------------- CASH BALANCE: DECEMBER 31 68,945 73,118 ============ ============= The accompanying notes are an integral part of these financial statement. Supplemental Information Interest Paid 62,565 222,519 Income Taxes Paid 29,712 131,808 Supplemental Schedule Of Noncash Investing and Financing Activities On March 27, 2001, the Company issued 6,186,515 shares of its common stock in a merger with WorldMall.Com. The Company received assets of $681,568 and liabilities of $841,557 and recognized goodwill in the amount of $2,534,179. On July 2, 2001, the Company disposed of part of its SECO operating unit. The assets and liabilities of SECO Illinois were disposed of in a sale to Focus Environmental Consultants. The Company disposed of assets totalling $1,303,757, debt of $813,490 and liabilities of $464,799, resulting in a loss of $25,467. On September 30, 2001, the Company disposed of its subsidiary Trifinty, Inc. The Company disposed of total assets of $1,546,592, debt of $823,941 and liabilities of $170,964. The Company also received a $200,000 note receivable which was paid in full in October, 2001. In December of 2001, $30,000 of the Company's debt was converted into 200,000 shares of the Company's common stock. During the first quarter of 2002, the Company received equipment in the amount of $697,460, and assumed liabilities totalling $76,752 from ACS Construction Company in lieu of part of their outstanding obligations to the Company. The Company received notes receivable in the amount of $845,00 relating to its sale of its subsidiary 'SECO of Indiana' during the third quarter of 2002. The accompanying notes are an integral part of these financial statement. CGI HOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 HISTORY AND ORGANIZATION CGI Holding Corporation (formerly known as North Star Petroleum, Inc.) (the "Company") was incorporated under the laws of the State of Nevada in October of 1987. From 1993 until July 1997, the Company had essentially no operations. The Company became operational on August 4, 1997, when it completed an agreement to acquire two private companies whereby it issued 4,961,056 shares of common stock to shareholders of the private companies resulting in 8,272,779 shares issued and oustanding. The Company acquired the common stock WorldMall.Com on March 27, 2001. Pursuant to the merger all the issued and outstanding shares of common stock of WorldMall.Com were converted into shares of voting common stock of CGI Holding Corporation. At the time of the merger, 9,331,903 shares of WorldMall.Com were converted to 6,186,515 shares of CGI Holding Corporation. The market value of CGI stock on the date of the merger was $0.30 per share. The transaction was accounted for using the purchase method of accounting. WorldMall.com was reincorporated in the state of North Carolina as Websourced, Inc. in 2002. The results of operations of Websourced, Inc. are included in the Statement of Operations from the date of acquisition. NATURE OF BUSINESS CGI Holding Corporation is a holding company which owns 100% of one operating subsidiary, Websourced, Inc.(formerly WorldMall.com). WEBSOURCED, INC Websourced, Inc., d/b/a KeywordRanking.com was reincorporated in June 2002 in the State of North Carolina. It is primarily engaged in providing search engine enhancement services to web sites, under the name KeywordRanking.com. KeywordRanking.com assists its clients' websites in obtaining top twenty positioning on search engines worldwide. The websites benefit from top twenty positioning, which typically results in a significantly higher number of visits from potential customers. Websourced, Inc. currently employs 41 people. Websourced, Inc. is headquartered in Morrisville, North Carolina. SIGNIFICANT ACCOUNTING POLICIES A. Revenue and Cost Recognition WEBSOURCED, INC. The Company recognizes revenues and costs in the period that they are deemed to be earned and incurred under the accrual method of accounting. B. BASIS OF PRESENTATION The consolidated statements include the accounts of the company and its subsidiaries. All intercompany transactions have been eliminated. The financial statements are prepared in accordance with generally accepted accounting principles and include amounts based on management's prudent judgments and estimates. Actual results may differ from those estimates. C. PROPERTY, PLANT & EQUIPMENT All assets are depreciated over their estimated useful life using the straight-line method. Property, Plant & Equipment consist of the following, 2001 2000 -------- --------- Furniture and Fixtures $115,227 $98,584 Vehicles 12,500 12,500 -------- --------- Total $127,727 $111,084 ======== ========= D. INCOME TAXES The company provides for federal and state income taxes on items included in the Consolidated Statements of Operations regardless of the period when such taxes are payable. Deferred taxes are recognized for temporary differences between financial and income tax reporting based on enacted tax laws and rates. E. GOODWILL WRITE DOWN The results reflect the write down of the company's goodwill according to FASB 142. FASB 142 is required for fiscal years beginning after December 15, 2001. The new FASB requires an annual valuation of the goodwill as opposed to the periodic amortization under old rules. The Company, in conjunction with the implementation of Statement of Financial Accounting Standards 142, has elected to take a one time charge, reflected as 'Impairment of Asset' in the amount of $2,367,041. This goodwill was associated with the Company's acquisitions of Worldmall.Com in March of 2001 and Safe Environment Corporation in August of 1997. Management has elected to value its goodwill acquired in the purchase of WorldMall.com and Safe Environment Corporation at zero in light of their current operating results. The total recorded cost of the goodwill at the time of acquisition of WorldMall.com was $2,534,179 and the amount amortized through 2001 was $380,127. The original amount of goodwill associated with Safe Environment Corporation was $301,924 with $88,935 being recognized through 2001. SALE OF TRIFINITY, INC. The Company sold its wholly-owned subsidiary, Trifinity, Inc. effective September 30, 2001. The terms of the sale were $200,000 cash and the assumption of all liabilities for the assets of Trifinity, Inc. This transaction resulted in a pre-tax loss of $351,687 including the write down of its unamortized goodwill relating to the acquisition of Trifinity, Inc. in 1999 in the amount of $77,646. Form 8-K reflects the terms of the sale. SALE OF SAFE ENVIRONMENT CORPORATION OF INDIANA The Company sold its wholly-owned subsidiary, Safe Environment Corporation of Indiana and certain other assets effective August 31, 2002. This transaction resulted in a pre-tax loss of ($646,386). Form 8-K reflects the terms of the sale. DISPOSITION OF ASSETS The Company's wholly owned subsidiary Safe Environment Corporation liquidated its Illinois branch in July 2001. This liquidation was accomplished by selling its assets for the assumption of all its liabilities. The amount of liabilities assumed was $1,278,290 resulting in a one time pre tax loss of $25,468. SEGMENT ANALYSIS The Company's operations are divided into operating segments using individual products or services or groups of related products and services. Each segment has separate management that reports to a person that makes decisions about performance assessment and resource allocation for all segments. The Company has one operating segment at the end of 2002, search engine enhancement. The Company disposed of its Asbestos Abatement division in August of 2002 and its liquid filling division in September 2001, and they are included as discontinued operations. The Company evaluates the performance of each segment using before-tax income or loss from continuing operations. There are no sales transactions between segments. Listed below is a presentation of sales, operating profit and total assets for all reportable segments. The other segment category consists of the management company CGI Holding Corporation. NET SALES BY INDUSTRY SEGMENT INDUSTRY SEGMENT 2002 2001 AMOUNT PERCENT AMOUNT PERCENT WEBSOURCED, INC. $4,053,222 100.00% $1,471,393 100.00% OTHER - 0.00% - 0.00% ----------- --------- ---------- -------- TOTAL SALES $4,053,222 100.00% $1,471,393 100.00% =========== ========= ========== ======== OPERATING PROFIT BY INDUSTRY SEGMENT INDUSTRY SEGMENT 2002 2001 -------------- -------------- WEBSOURCED, INC. ($1,910,726) ($851,538) OTHER (642,353) (591,278) -------------- -------------- TOTAL OPERATING PROFIT ($2,553,079) ($1,442,816) ============== ============== TOTAL ASSETS BY INDUSTRY SEGMENT 2002 2001 INDUSTRY SEGMENT AMOUNT PERCENT AMOUNT PERCENT OTHER 1,487,249 61.18% 1,127,167 21.15% WEBSOURCED,INC. 943,589 38.82% 2,737,013 51.35% DISCONTINUED - 0.00% 1,465,847 27.50% ------------ -------- ----------- ------- TOTAL ASSETS $2,430,838 100.00% $5,330,027 100.00% ============ ======== =========== ======= ALLOWANCE FOR DOUBTFUL ACCOUNTS The allowance for doubtful accounts was $89,866 and $14,999 on December 31, 2002 and 2001 respectively. NOTE RECEIVABLE GMP, L.L.C., a limited liability company of which John Giura, the Chairman and Vice-President of the Company, is a member, owes CGI as follows: 1. In connection with the sale of the stock of its wholly-owned subsidiary SECO Indiana, CGI is owed by GMP,L.L.C. at the balance sheet date, $126,.884, non-interest bearing. The contractual obligation was originally in the amount of $175,000, due November 30, 2002. The Company verbally granted an extension to March 31, 2003. Partial payments have been made since the balance sheet date. 2. In connection with the sale of its interest in Acadian Builders, LLC, the Company received a note from GMP, LLC in the amount of $470,000, which was payable quarterly in the amount of $35,000 per quarter beginning on December 31, 2002. The note provided for zero interest through 2003 and 6% per anum thereafter. The note is in default because the first quarterly installment was not paid on December 31, 2002. It is the opinion of management that GMP, LLC does not have the resources to meet this obligation and consequently this asset has been written down to zero. As security for the payment of the obligations of GMP, LLC described above, GMP, LLC has pledged to the Company all of the common stock of SECO Indiana. The Company is currently negotiating with GMP, LLC regarding these obligations. Management of the Company is aware that since the closing of the sale of the stock of SECO Indiana to GMP, LLC, SECO Indiana has operated at a loss. Management of the Company is also aware that since the closing of the sale of its interest in Acadian Builders, LLC to GMP, LLC, Acadian Builders, LLC has failed to complete the construction of the infrastructure for its proposed housing development in St. Charles, Missouri, and is in default on its bank loans. Management of the Company is hopeful that GMP, LLC will complete its contractual payment obligation in connection with its purchase of the stock of SECO Indiana by its extended due date of March 31, 2003, but this payment cannot be guaranteed. Management of the Company also is hopeful that a settlement can be reached with GMP, LLC regarding a significant payment or payments against the $470,000 note payable by GMP, LLC to CGI in connection with the sale of its interest in Acadian Builders, LLC, but such a settlement cannot be guaranteed. If such a settlement is not achieved, the Company intends to exercise its remedies in regard to the stock of SECO Indiana pledged as collateral for GMP, LLC's obligations to the Company. NOTES PAYABLE 2002 2001 ----------- -------------- M & T BANK This is a demand loan due 3/23/02. The maximum amount available is $100,000. Interest is paid at prime plus one floating. It is secured by the general assets of Websourced, Inc. 25,485 70,000 ----------- -------------- TOTAL LINE OF CREDIT $25,485 $70,000 ----------- -------------- The Thomas More Association Note payable due June 30, 2002 with an interest rate of 8.50%. Note is unsecured. 50,000 100,000 OTTO BARTH Note payable due June 30, 2002 with interest rate of 8.25%. Note is unsecured. - 50,000 AUDREY LOVE Note payable due October 30, 2002 with an interest rate of 8.25%. This note is unsecured. 70,000 70,000 PAUL DOLL TRUST Note payable due June 1, 2002 with interest rate of 10.00%. This note is unsecured. 28,000 35,000 High Falls Development This note carries an interest rate of 11.50% and payments are being made monthly in the amount of $4,292.06. 118,291 150,749 Note Payable -Unicyn Note dated 2/14/01 and is for 36 months at $2,196.19 principal plus interest per month. Secured by equipment of Websourced, Inc. 26,671 57,101 Note Payable - American Express 36 month note dated August 2000. Interest rate is 14.50%. Note is unsecured 9,643 21,294 Roberti Jacobs Family Trust Note dated October 31, 2002 with a maturity date of April 28, 2003. Interest rate is 15% per annum, payable monthly 28,871 - Roberti Jacobs Family Trust Note dated November 7, 2002 with a maturity date of April 28, 2003. Interest rate is 18% per annum, payable monthly 55,680 - Roberti Jacobs Family Trust Note dated December 23, 2002 with a maturity date of December 15, 2003. Interest rate is 13% per annum, payable monthly. 1,000,000 warrants were issued with this note. 250,000 - ----------- -------------- TOTALS $862,640 $554,144 =========== ============== Principal payments for the next five years are as follows: 2003 $811,016 2004 51,624 2005 0 2006 0 2007 0 ---------- $862,640 ========== DEFERRED REVENUE The Company enters into long term contracts with clients in which they make a down payment for a portion of the contract and are invoiced monthly for the balance. The Company then recognizes this revenue over the period of the contract. The contracts are usually for a one year period and therefore all deferred revenue is a recorded as a current obligation. ADVERTISING COSTS Advertising costs are expenses when incurred, and were $107,801 in 2002 and $18,666 in 2001. Included on the balance sheet at December 31, 2002 are prepaid advertising costs of $272,576 resulting from two advertising contracts in the amounts of $78,220 and $300,000. These contracts began on January 1, 2002 and July 1, 2002 and are for 60 and 20 months respectively. The related expense is being recognized over the terms of the contract. LEASING COMMITMENTS CGI Holding Corporation has a month to month lease at $600.00 per month for its space requirements. The Company's current space is adequate for its daily operations. Websourced, Inc rents space in Morrisville, North Carolina for $13,600 per month. The lease expires February 1, 2006. The rental amount is adjusted yearly for expenses. The current rent payment of $13,600 runs through February 1, 2004. Websourced, Inc. deposit on their office space of $90,875 is being used to reduce their yearly rental payments. On February 1 of each year, Websourced, Inc. will receive a credit of $20,000 towards its rental payments until the end of the lease on February 1, 2006, at which time the remaining deposit of $20,000 will be refunded. This space is adequate for Websourced, Inc's needs. Rent expense was $178,069 and $251,191 for the years ended December 31, 2002 and 2001, respectively. Minimum Lease Payments for the next five years are: 2003 $143,200 2004 143,200 2005 143,200 2006 13,600 2007 - RELATED PARTY TRANSACTIONS During 2001 the Company entered into an arms length transaction with a related party to lease their employees. Employee leasing is utilized to bring a large number of employees under one workers compensation insurance policy to receive a better rate from the insurance carrier. For each pay period the Company is billed by Nexus Management Solutions(NMS) for the employees wages, payroll tax liabilities, workers compensation premiums and a management fee. The total amount paid to NMS in 2001 was $2,098,431. This agreement was discontinued January 1, 2002. During 2001, CGI Holding Corporation leased its corporate headquarters from a partnership which is owned and controlled by John Giura, the Chairman of the Company, and James Spachman, a major shareholder of the Company. The lease was on a month-to-month term and the rental amount was $700.00 per month. The Company moved out of the building in February of 2002. LOAN FROM SHAREHOLDERS The Company and Websourced, Inc have borrowed funds from shareholders to cover operating expenses. The detail of these principal balances as of December 31, 2002 and 2001 were as follows: 2002 2001 ----------- ------------ John Giura $0 $410 No repayment terms. Interest paid quarterly at 1/2% over the prime rate (loan to the Company). Jim Spachman - $25,000 No repayment terms. No interest paid or accrued Pat Martin $63,276 $127,722 No repayment terms PROVISION FOR INCOME TAXES The provision for income taxes consists of the following: 2002 2001 ------------ ------------- Current Tax Provion ($4,202) $29,520 Deferred Tax Provision (579,578) (357,687) ------------ ------------- TOTAL TAX PROVISION ($583,780) ($328,167) ============= ============= The provision for income taxes was allocated as follows: 2002 2001 Allocated to continuing operations Current Tax Expense $0 $0 Deferred Tax Expense (484,673) (504,985) --------- --------- ($484,673) ($504,985) Allocated to discontinued operations Current Tax Expense ($4,202) $29,520 Deferred Tax Expense (94,905) 147,298 --------- --------- (99,107) 176,818 ------------ ------------- TOTAL TAX PROVISION ($583,780) ($328,167) ============ ============= DEFERRED INCOME TAXES Deferred income taxes are the result of timing differences between book and tax depreciation and book and tax amortization of goodwill, allowance for doubtful accounts and net operating loss carryforwards. The following is a schedule of the deferred tax assets and liabilities. The components of the deferred tax asset at December 31, 2002 and 2001 were: 2002 2001 ---------------- --------------- Deferred Tax Assets Net Operating Loss Carryforwards $999,951 $523,444 Valuation Allowance (601,251) - ---------------- --------------- Subtotal $398,700 $523,444 Timing Difference relating to Goodwill Amortization 679,624 - Timing difference relating to bad debt recognition 30,554 5,856 ---------------- --------------- Total Deferred Tax Assets $1,108,878 $529,300 ================ =============== The Company has a net operating loss carryforward in the amount of $2,941,031. According to the internal revenue code, these losses can be carried forward twenty years. The expiration dates of the available net operating losses are: Year ended December 31, 2019 $208,336 Year ended December 31, 2021 1,757,721 Year ended December 31, 2022 974,974 -------------- Total Net Operating Loss Carryforward $2,941,031 ============== TREASURY STOCK The Company purchased 500,000 shares from Pat Martin on July 20, 2001 for $0.10 per share or $50,000. The Company purchased 1,000,000 shares from Pat Martin on April 29, 2002 for $0.14 per share or $140,000. DISCONTINUED OPERATIONS-TRIFINTY, INC. AND SAFE ENVIRONMENT CORP OF INDIANA In accordance with APB 30, the financial statement activities of Trifinity, Inc. and Safe Environment Corporation of Indiana are reported as discontinued operations. The following summarizes the results and tax consequences of the sale of these Divisions in 2001 and 2002. 2002 2001 --------------------- ----------------------- Net Profit(Loss) from operations of discontinued operations $146,944 $1,053,185 Tax Related to operations of discontinued operations 27,900 305,351 ----------- ----------- Net Profit(Loss) from discontinued operations $119,044 $747,834 Net Gain(Loss) on Disposition of Discontinued Operation ($646,386) ($428,443) Tax Related to disposition of Discontinued Operations (127,007) (128,533) ----------- ----------- Net Loss on disposition of Discontinued Operations (519,379) (299,910) ---------- --------- Total Profit(Loss) from discontinued operations ($400,335) $447,924 ========== ========= Total Sales from Discontinued Operations Were $2,105,240 $6,706,875 ========== ========= PRO FORMA RESULTS OF OPERATIONS The following pro forma results of operations inclue the operations of Websourced, Inc. for the periods presented. CGI HOLDING CORPORATION, INC. PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS TWELVE MONTHS ENDED DECEMBER 31, 2001 2001 ---------- SALES 1,865,804 COST OF GOODS SOLD 752,357 ---------- GROSS PROFIT 1,113,447 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,831,699 ---------- INCOME FROM OPERATIONS (1,718,252) ----------- OTHER INCOME (EXPENSES) Other Income/(Expense) - Interest Income 3,108 Interest Expense (125,133) ---------- TOTAL OTHER INCOME (EXPENSE) (122,025) ---------- INCOME BEFORE CORPORATE INCOME TAXES (1,840,277) INCOME TAX PROVISION (569,851) ---------- NET (LOSS) FROM CONTINUING OPERATIONS (1,270,426) ---------- DISCONTINUED OPERATIONS: Income from operations of discontinued operations (less applicable tax - See Notes) 747,834 (Loss) on disposal of discontinued operations(less applicable tax - See Notes) (299,910) ----------- TOTAL DISCONTINUED OPERATIONS 447,924 ----------- NET (LOSS) (822,502) =========== NET (LOSS) PER COMMON SHARE FROM CONTINUING OPERATIONS (0.09) =========== NET INCOME PER COMMON SHARE FROM DISCONTINUED OPERATIONS 0.03 =========== NET (LOSS) PER COMMON SHARE (0.06) =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 14,753,398 ===========