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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
AUGUST 17, 1996
Date of Report
(Date of earliest event reported)
CITADEL COMPUTER SYSTEMS INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 0-08718 75-2242792
(State or other jurisdiction (Commission File Number) (IRS Employer
of Incorporation)
3811 TURTLE CREEK BOULEVARD, SUITE 330,
DALLAS, TEXAS 75219
(Address of Principal Executive Office)
(214) 520-9292
(Registrant's telephone number, including area code)
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
Effective August 17, 1996, Citadel acquired all of the issued and
outstanding shares of capital stock of Kent-Marsh Ltd., Inc. ("Kent-Marsh") and
Astonishing Developments, Inc. ("ADI"). Pursuant to the terms of the Stock
Purchase Agreements relating to the acquisitions (the "Agreements"), Citadel
paid $600,000 in cash, $400,000 in promissory notes and issued 360,000 shares of
its common stock. The Agreements and a press release related to the
acquisitions are included as exhibits to this Form 8-K and the disclosure in
this Form 8-K is qualified in its entirety by reference to the Agreements and
press release.
Kent-Marsh and ADI develop and market cross-platform desktop security
software for Windows and Macintosh operating systems. Their products include
WinShield, FolderBolt and NightWatch. Citadel is a developer and marketer of
computer software products designed to secure, manage and provide utility
services for computer networks and desktop PCs. Citadel's products include
NetOff, Phantom of the Console and Server Sentry. Citadel maintains offices in
Houston and Dallas, Texas.
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
It is impracticable to provide the required financial statements for Kent-
Marsh and ADI at this time. The registrant will file such financial statements
as soon as practicable, but no later than 60 days after this report.
(B) PRO FORMA FINANCIAL INFORMATION.
It is impracticable to provide the required pro forma financial statements
at this time. The registrant will file such financial statements as soon as
practicable, but no later than 60 days after this report.
(C) EXHIBITS.
The following exhibits are furnished in accordance with Item 601 of
Regulation S-B.
2.1 Stock Purchase Agreement, dated August 17, 1996, among Citadel
Computer Systems Incorporated, Kent-Marsh Ltd., Inc., Vance G.
Nesbitt and Robert C. Wesolek (without exhibits) (the exhibits
and schedules to the Agreement have been omitted pursuant to Item
601(b)(2) of Regulation S-B).
2.2 Stock Purchase Agreement, dated August 17, 1996, among Citadel
Computer Systems Incorporated, Astonishing Developments, Inc.,
Vance G. Nesbitt and Robert C. Wesolek (without exhibits) (the
exhibits and schedules to the Agreement have been omitted
pursuant to Item 601(b)(2) of Regulation S-B).
99.1 Press Release dated August 20, 1996.
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SIGNATURES
Pursuant to the requirements 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.
CITADEL COMPUTER SYSTEMS INCORPORATED
(Registrant)
DATE: September 3, 1996 By: /s/ STEVEN B. SOLOMON
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Steven B. Solomon, Chief Operating Officer
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EXHIBIT 2.1
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made and entered
into as of August 17, 1996 by and among Citadel Computer Systems Incorporated, a
Delaware corporation ("Citadel" or the "Buyer), Kent-Marsh Ltd., Inc., a Texas
corporation ("KML" or the "Company"), Vance G. Nesbitt ("Nesbitt"), and Robert
C. Wesolek ("Wesolek" and together with Nesbitt, the "Sellers").
BACKGROUND
WHEREAS, Sellers own all of the issued and outstanding shares of
capital stock of KML;
WHEREAS, Sellers desire to sell and convey to Buyer, and Buyer desires
to purchase from Sellers, all of the outstanding capital stock of KML; and
WHEREAS, the Sellers have agreed to sell to Buyer all of the issued
and outstanding shares of capital stock of Astonishing Developments, Inc., a
Texas corporation ("ADI"), pursuant to an agreement dated the date hereof;
WHEREAS, in connection with the purchase by Buyer from the Sellers of
the capital stock of KML and ADI, (i) Buyer and each of the Sellers will enter
into an employment agreement (the "Employment Agreements") and (ii) each of the
Sellers will enter into a noncompetition agreement (the "Noncompetition
Agreements") with the Buyer.
NOW, THEREFORE, for and in consideration of the premises and of the
mutual representations, warranties, covenants and agreements contained herein,
and of other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, and upon the terms and subject to the conditions
hereinafter set forth, the parties do hereby agree as follows:
ARTICLE I
EXERCISE OF OPTION AND PURCHASE AND SALE
Section 1.1 Exercise of Option and Purchase and Sale of Stock.
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On the Closing Date (as defined below), Buyer hereby agrees to purchase all of
the issued and outstanding shares of Common Stock, no par value, of KML (the
"KML Shares" or the "Shares"), for the exercise price of $1.00, and the Sellers
agree to sell to Buyer, all of the issued and outstanding KML Shares owned by
them for a total consideration of $1.00 (the "Consideration").
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF KML AND THE SELLERS
KML and the Sellers jointly and severally (except with respect to
Sections 2.3(b) and 2.3(c)) represent and warrant to Buyer as follows:
Section 2.1 Authorization of Sellers. This Agreement has been duly
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executed and delivered by each Seller and constitutes the valid and binding
obligation of such Seller, enforceable in accordance with its terms, except that
(i) such enforcement may be subject to bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors' rights generally, (ii) the
remedy of specific performance and injunctive relief are subject to certain
equitable defenses and to the discretion of the court before which any
proceedings may be brought and (iii) rights to indemnification hereunder may be
limited under applicable securities laws.
Section 2.2 Existence and Good Standing of KML. KML is a
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corporation duly organized, validly existing and in good standing under the laws
of the State of Texas with all requisite corporate power and authority to own,
lease and operate its properties and to carry on its business as now being
conducted. KML has no subsidiaries. KML is duly qualified or licensed as a
foreign corporation and in good standing in each jurisdiction in which the
character or location of the property owned, leased or operated by it or the
nature of the business conducted by it makes such qualification necessary,
except where the failure to be so duly qualified or licensed would not have a
material adverse effect on the business, financial condition, results of
operations or prospects of KML. Set forth on Schedule 2.2 is a list of the
jurisdictions in which KML is qualified or licensed to do business as a foreign
corporation.
Section 2.3 Capital Stock of KML.
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(a) KML's authorized capital stock consists of 100,000,000 shares of
Class A Voting Common Stock, no par value, of which 18,118,422 shares are issued
and outstanding, and 100,000,000 shares of Class B Non-voting Common Stock, no
par value, of which 183,683 shares are issued and outstanding. No other shares
of KML capital stock are issued or outstanding. All of the KML Shares have been
validly issued and are fully paid and nonassessable and have not been issued in
violation of any preemptive or similar rights. There are no outstanding
conversion or exchange rights, subscriptions, options, warrants or other
arrangements or commitments obligating KML to issue any shares of capital stock
or other securities except as set forth on Schedule 2.3.
(b) Nesbitt (but not Wesolek) represents and warrants that he (i)
owns beneficially and has good and marketable title to 18,018,422 shares of
KML's Class A Voting Common Stock, free and clear of any and all liens,
mortgages, security interests, encumbrances, pledges, charges, adverse claims,
options, rights or restrictions of any character whatsoever (collectively,
"Liens") of which 17,368,422 shares are owned of record and 650,000 have been
recently acquired and are not yet held of record by Nesbitt, and (ii) has the
right to vote his KML Shares on any matters as to which any shares of KML common
stock are entitled to be voted under the laws of the State of Texas, KML's
articles of incorporation and bylaws, free of any right of any other person.
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(c) Wesolek (but not Nesbitt) represents and warrants that he (i)
owns of record and beneficially and has good and marketable title to 100,000
shares of KML's Class A Voting Common Stock and 183,683 shares of KML's Class B
Non-voting Common Stock, free and clear of any and all Liens, and (ii) has the
right to vote his KML Class A Voting Common Stock shares on any matters as to
which any shares of KML common stock are entitled to be voted under the laws of
the State of Texas, KML's articles of incorporation and bylaws, free of any
right of any other person.
(d) The Sellers disclosed the existence and material terms of this
Agreement and the Stock Purchase Agreement among the Sellers, the Buyer and
Astonishing Developments, Inc., dated the date hereof, to The Andrew Marsh Utter
Testamentary Trust, Susan Blackburn, and Jill McKay, who were all of the other
stockholders of KML as of August 15, 1996.
Section 2.4 Authorization of KML. KML has full corporate power,
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capacity and authority to execute this Agreement and all other agreements and
documents contemplated hereby. The execution and delivery of this Agreement and
such other agreements and documents by KML and the consummation by KML of the
transactions contemplated hereby have been duly authorized by KML and no other
corporate action on the part of KML is necessary to authorize the transactions
contemplated hereby. This Agreement has been duly executed and delivered by KML
and constitutes the valid and binding obligation of KML, enforceable in
accordance with its terms except that (i) such enforcement may be subject to
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally, (ii) the remedy of specific performance and
injunctive relief are subject to certain equitable defenses and to the
discretion of the court before which any proceedings may be brought, and (iii)
rights to indemnification hereunder may be limited under applicable securities
laws.
Section 2.5 Financial Statements.
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(a) Sellers have previously furnished to Buyer the unaudited balance
sheet of KML as of June 30, 1996 and the related statements of operations for
the three fiscal years then ended (the "Financials"). The Financials present
fairly the financial position and results of operations of KML as of the
indicated dates and for the indicated periods and have been prepared in
accordance with KML's historical methods of accounting; provided, however, no
representation is made with respect to the capitalization of intangible property
as shown on the Financials or the effect of such capitalization on the retained
earnings of KML. KML shall permit Buyer full access to the work papers
pertaining to the Financials.
Except to the extent (and not in excess of the amounts) reflected in
the June 30, 1996 balance sheet included in the Financials or as disclosed on
Schedule 2.5, neither KML nor the Sellers know or should know of any liabilities
or obligations of KML (including, without limitation, Taxes payable required to
be reflected the Financials (or the notes thereto) in order to make the
Financials (or the notes thereto) consistent with KML's historical methods of
accounting and accounting principles other than current liabilities incurred in
the ordinary course of business, consistent with past practice, subsequent to
June 30, 1996.
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Section 2.6 Tax Matters. KML has filed all income tax returns
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required to be filed by it and all Taxes (as defined below) required to be filed
by it and has paid or provided for all Taxes shown to be due on such returns
except as set forth on Schedule 2.6. Except as set forth on Schedule 2.6, to the
knowledge of KML and Sellers, (i) no action or proceeding for the assessment or
collection of any Taxes is pending against KML; (ii) no deficiency, assessment
or other formal claim for any Taxes has been asserted or made against KML that
has not been fully paid or finally settled; and (iii) no issue has been formally
raised by any taxing authority in connection with an audit or examination of any
return of Taxes. No federal or state income tax returns of KML have been
examined, and there are no outstanding agreements or waivers extending the
applicable statutory periods of limitation for such Taxes for any period. Except
as set forth on Schedule 2.6, all Taxes that KML has been required to collect or
withhold have been duly withheld or collected and, to the extent required, have
been paid to the proper taxing authority. "Taxes" shall mean all taxes, charges,
fees, levies or other assessments including, without limitation, income, excise,
property, withholding, sales and franchise taxes, imposed by the United States,
or any state, county, local or foreign government or subdivision or agency
thereof, and including any interest, penalties or additions attributable
thereto.
Section 2.7 Assets and Properties.
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(a) Real Property. KML does not own and has never owned any real
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properties, except for leasehold interests.
(b) Personal Property. Except as set forth on Schedule 2.7 and
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except for inventory and supplies disposed of or consumed, and accounts
receivable collected or written off, and cash utilized, all in the ordinary
course of business consistent with past practice, KML owns all of its inventory,
equipment and other personal property (both tangible and intangible) reflected
on the latest balance sheet included in the Financials or acquired since June
30, 1996, free and clear of any Liens, except for statutory Liens for current
taxes, assessments or governmental charges or levies on property not yet due and
payable. Notwithstanding the foregoing, neither of the Sellers nor KML makes any
representation or warranty as to the value or collectibility of any of the
accounts receivable of KML.
(c) Condition of Properties. Except as set forth on Schedule 2.7,
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the leasehold estates the subject of the Real Property Leases (as defined below)
and the tangible personal property owned or leased by KML are in good operating
condition and repair, ordinary wear and tear excepted; and neither KML nor
Sellers has any knowledge of any condition or defect, not disclosed herein, of
the leasehold estate that would materially affect the fair market value, use or
operation of the Real Property, such Improvements or any leasehold estate or
otherwise have a material adverse effect on KML or its business or operations.
(d) Compliance. To the actual knowledge of KML and the Sellers, the
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continued, operation, use and occupancy of the leasehold estates the subject of
the Real Property Leases as currently operated, used and occupied will not
violate any zoning, building, health, flood control, fire or other law,
ordinance, order or regulation or any restrictive covenant. To the actual
knowledge of KML and the Sellers, there are no violations of any federal, state,
county or
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municipal law, ordinance, order, regulation or requirement affecting any portion
of the leasehold estates and no written notice of any such violation has been
issued by any governmental authority.
Section 2.8 Real Property Leases; Options. Schedule 2.8 sets forth a
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list of (i) all leases and subleases under which KML is lessor or lessee or
sublessor or sublessee of any real property, together with all amendments,
supplements, nondisturbance agreements, brokerage and commission agreements and
other agreements pertaining thereto ("Real Property Leases"); (ii) all material
options held by KML or contractual obligations on the part of KML to purchase or
acquire any interest in real property; and (iii) all options granted by KML or
contractual obligations on the part of KML to sell or dispose of any material
interest in real property. Copies of all Real Property Leases and such options
and contractual obligations have been delivered to Buyer. KML has not assigned
any Real Property Leases or any such options or obligations. There are no Liens
on KML's interest in the Real Property Leases, subject only to (i) Liens for
taxes and assessments not yet due and payable and (ii) those matters set forth
on Schedule 2.8. The Real Property Leases and options and contractual
obligations listed on Schedule 2.8 are in full force and effect and constitute
binding obligations of the applicable Company and the other parties thereto, and
(x) except as disclosed on Schedule 2.8, there are no defaults thereunder and
(y) no event has occurred that with notice, lapse of time or both would
constitute a default by KML or, to the best knowledge of KML and Sellers, by any
other party thereto.
Section 2.9 Environmental Laws and Regulations. Neither KML nor
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Sellers know or should know of any facts or circumstances which could subject
KML to liabilities or obligations with respect to environmental obligations.
Section 2.10 Contracts. The Company has provided the Buyer an
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opportunity to review all material contracts, arrangements and commitments
(whether oral or written) to which KML is a party or by which KML's assets or
business are bound including, without limitation, contracts, arrangements or
commitments that relate to (i) the sale, lease or other disposition by KML of
all or any substantial part of the business or assets of KML (otherwise than in
the ordinary course of business), (ii) the purchase or lease by KML of a
substantial amount of assets (otherwise than in the ordinary course of
business), (iii) the supply by KML of any customer's requirements for any item
or the purchase by KML of its requirements for any item or of a vendor's output
of any item, (iv) lending or advancing funds by KML, (v) borrowing of funds or
guarantying the borrowing of funds by any other person, whether under an
indenture, note, loan agreement or otherwise, (vi) any transaction or matter
with any Affiliate of KML, (vii) noncompetition or employment, (viii) licenses
and grants to or from KML relating to any intangible property listed on Schedule
2.17, (ix) the acquisition by KML of any operating business or the capital stock
of any person since June 30, 1996, or (x) any other matter that is material to
the business, assets or operations of KML ("Contracts").
Section 2.11 No Violations. The execution, delivery and performance
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of this Agreement and the other agreements and documents contemplated hereby by
KML and the Sellers and the consummation of the transactions contemplated hereby
will not (i) violate any provision of the respective articles of incorporation
or bylaws of KML, (ii) violate any statute, rule, regulation, order or decree of
any public body or authority by which KML or a Seller or its respective
properties or
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assets are bound, or (iii) to the knowledge of Sellers or KML, result in a
violation or breach of, or constitute a default under, or result in the creation
of any encumbrance upon, or create any rights of termination, cancellation or
acceleration in any person with respect to any material Contract or any material
license, franchise or permit of KML.
Section 2.12 Consents. Except as set forth on Schedule 2.12, no
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consent, approval or other authorization of any governmental authority is
required as a result of or in connection with the execution or delivery of this
Agreement and the other agreements and documents to be executed by KML and
Sellers or the consummation by KML and Sellers of the transactions contemplated
hereby.
Section 2.13 Litigation and Related Matters. Set forth on Schedule
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2.13 is a list of all actions, suits, proceedings, investigations or grievances
pending against KML or, to the best knowledge of KML and Sellers, threatened
against KML, KML's business or any property or rights of KML, at law or in
equity, before or by any court or federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign ("Agencies"). Based on the respective pleadings, none of
the actions, suits, proceedings or investigations listed on Schedule 2.13 either
(i) results or would, if adversely determined, result in any material adverse
change in the business, operations or assets or the condition, financial or
otherwise, or results of operations or prospects of KML or (ii) affects or
would, if adversely determined, affect the right or ability of KML to carry on
its business substantially as now conducted. KML is not subject to any
continuing court or Agency order, writ, injunction or decree applicable
specifically to the business, operations or assets of KML or employees of KML,
nor in default with respect to any order, writ, injunction or decree of any
court or Agency with respect to its assets, business, operations or employees.
Schedule 2.13 and Schedule 2.18 lists (x) all worker's compensation claims
outstanding against KML as of the date hereof and (y) all actions, suits or
proceedings filed by or against KML and currently pending.
Section 2.14 Product Liability and Warranty Proceedings. No product
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liability or warranty actions, suits or proceedings arising from the manufacture
or sale of goods by KML have been asserted against KML, except as set forth in
Schedule 2.14.
Section 2.15 Compliance with Laws. KML (a) is in compliance with all
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applicable laws, regulations (including federal, state and local procurement
regulations), orders, judgments and decrees except where the failure to so
comply would not have a material adverse effect on the business, prospects,
financial condition or results of operation or prospects of KML and (b)
possesses all necessary licenses, franchises, permits and governmental
authorizations to conduct its business in the manner in which and in the
jurisdictions and places where such business is now conducted. Set forth on
Schedule 2.15 is a list of all material licenses, franchises, permits and
governmental authorizations and all applications pending before any agency or
authority for the issuance of any licenses, franchises, permits or governmental
authorizations or the renewal thereof.
Section 2.16 Intellectual Property. Schedule 2.16 lists the
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domestic and foreign patents, patent applications, patent licenses, software
licenses, trade names, trademarks, service marks, trademark registrations and
applications, service mark registrations and applications, and copyright
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registrations and applications owned by KML or used in the operation of the
business of KML (collectively, the "Intellectual Property"), which Schedule
indicates whether each item of Intellectual Property is owned or licensed by
KML, and if licensed, the licensor and the license fees therefor. Unless
otherwise indicated in Schedule 2.16, KML has the right to use and license the
Intellectual Property, and the consummation of the transactions contemplated
hereby will not result in the loss or material impairment of any rights of KML
in the Intellectual Property. Each item constituting part of the Intellectual
Property has been, to the extent indicated in Schedule 2.16, registered with,
filed in or issued by, as the case may be, the United States Patent and
Trademark Office or such other government entity, domestic or foreign, as is
indicated in Schedule 2.16; all such registrations, filings and issuances remain
in full force and effect; and all fees and other charges with respect thereto
are current. Except as stated in Schedule 2.16, there are no pending proceedings
or adverse claims made or, to the best knowledge of KML and Sellers, threatened
against KML with respect to the Intellectual Property; there has been no
litigation commenced or threatened in writing within the past five (5) years
with respect to the Intellectual Property or the rights of KML therein; and KML
and Sellers have no knowledge that (i) the Intellectual Property or the use
thereof by KML conflicts with any patents, patent applications, patent licenses,
trade names, trademarks, service marks, trademark or service mark registrations
or applications or copyright registrations or applications of others ("Third
Party Intellectual Property"), or (ii) such Third Party Intellectual Property or
its use by others or any other conduct of a third party conflicts with or
infringes upon the Intellectual Property or its use by KML. Notwithstanding the
foregoing, neither the Sellers nor KML has conducted a search which would reveal
the existence of any registered or common law trademark or service mark and the
foregoing representation with respect to registered trademarks is accordingly
limited to the actual knowledge of the parties, absent such search.
Section 2.17 Employee Benefit Plans. Neither KML or any of its Group
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Members (as defined below) participates in, maintains or contributes to any
employee benefit plan within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). Neither KML nor
any Group Member has incurred any liability or taken any action, or has any
knowledge of any action or event, that could cause it to incur any liability (i)
under Section 412 of the Code or Title IV of ERISA with respect to any "single
employer plan" (within the meaning of Section 4001(a)(15) of ERISA), (ii) on
account of a partial or complete withdrawal (within the meaning of Section 4205
and 4203 of ERISA, respectively) with respect to any "multi-employer plan"
(within the meaning of Section 3(37) of ERISA), (iii) on account of unpaid
contributions to any such multi-employer plan, or (iv) to provide health
benefits or other non-pension benefits to retired or former employees, except as
specifically required by Section 4980B(f) of the Code. Except as set forth in
Schedule 2.17, neither the execution and delivery of this Agreement by KML or
the consummation of the transactions contemplated hereby will (i) entitle any
current or former employee of KML to severance pay, unemployment compensation or
any similar payment, (ii) accelerate the time of payment or vesting, or increase
the amount of, any compensation due to any such employee or former employee, or
(iii) directly or indirectly result in any payment made or to be made to or on
behalf of any person to constitute a "parachute payment" (within the meaning of
Section 280G of the Code). For purposes of this Agreement, "Group Member" shall
mean any member of any "affiliated service group" as defined in Section 414(m)
of the Code that includes KML, any member of any "controlled group of
corporations" as defined in
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Section 1563 of the Code that includes KML, or any member of any group of
"trades or businesses under common control" as defined by Section 414(c) of the
Code that includes KML.
Section 2.18 Employees; Employee Relations.
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(a) Schedule 2.18 sets forth (i) the name and current annual salary
(or rate of pay) and other compensation (including, without limitation, normal
bonus, profit-sharing and other compensation) now payable by KML to each
employee whose current total annual compensation or estimated compensation is
$50,000 or more, (ii) any increase to become effective after the date of this
Agreement in the total compensation or rate of total compensation payable by KML
to each such person, (iii) any increase to become payable after the date of this
Agreement by KML to employees other than those specified in clause (i) of this
Section 2.18(a), (iv) all presently outstanding loans and advances (other than
routine travel advances to be repaid or formally accounted for within sixty (60)
days) made by KML to, or made to KML by, any director, officer or employee, (v)
all other transactions between KML and any director, officer or employee of KML
and (vi) all accrued but unpaid vacation pay owing to any officer or employee
that is not disclosed on the Financials.
(b) Except as disclosed on Schedule 2.18, KML is not a party to, nor
bound by, the terms of any collective bargaining agreement, and KML has not
experienced any material labor difficulties during the last five years. Except
as set forth on Schedule 2.18, there are no labor disputes existing, or to the
best knowledge of KML and Sellers, threatened involving, by way of example,
strikes, work stoppages, slowdowns, picketing, or any other interference with
work or production, or any other concerted action by employees. No charges or
proceedings before the National Labor Relations Board, or similar agency, exist,
or to the best knowledge of KML and Sellers, are threatened.
(c) KML's relationship with its employees is good and KML and Sellers
have no knowledge of any facts that would indicate that KML's employees will not
continue in its employ following the Closing on a basis similar to that existing
on the date of this Agreement. Except as disclosed on Schedule 2.18, KML is not
a party to any employment contract with any individual or employee, either
express or implied. Except as set forth in Schedule 2.18, no unresolved or
unsettled legal proceedings, charges, complaints, or similar actions exist under
any federal, state or local laws affecting the employment relationship
including, but not limited to: (i) anti-discrimination statutes such as Title
VII of the Civil Rights Act of 1964, as amended (or similar state or local laws
prohibiting discrimination because of race, sex, religion, national origin, age
and the like); (ii) the Fair Labor Standards Act or other federal, state or
local laws regulating hours of work, wages, overtime and other working
conditions; (iii) requirements imposed by federal, state or local governmental
contracts such as those imposed by Executive Order 11246; (iv) state laws with
respect to tortious employment conduct, such as slander, false light, invasion
of privacy, negligent hiring or retention, intentional infliction of emotional
distress, assault and battery, or loss of consortium; or (v) the Occupational
Safety and Health Act, as amended, as well as any similar state laws, or other
regulations respecting safety in the workplace; and to the best knowledge of KML
and Sellers, no proceedings, charges, or complaints are threatened under any
such laws or regulations and no facts or circumstances exist that would give
rise to any such proceedings,
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charges, complaints, or claims, whether valid or not. KML is not subject to any
settlement or consent decree with any present or former employee, employee
representative or any government or Agency relating to claims of discrimination
or other claims in respect to employment practices and policies; and no
government or Agency has issued a judgment, order, decree or finding with
respect to the labor and employment practices (including practices relating to
discrimination) of KML.
(d) KML has not incurred any liability or obligation under the Worker
Adjustment and Retraining Notification Act or similar state laws. KML has not
laid off more than ten percent (10%) of its employees at any single site of
employment in any ninety (90) day period during the twelve (12) month period
ending July 31, 1996. It shall be the obligation of KML and Sellers to provide
any notice required by said Act by reason of the provisions, execution or
operation of this Agreement.
Section 2.19 Insurance. Schedule 2.19 contains a list of the
------------ ---------
policies and contracts (including insurer, named insured, type of coverage,
limits of insurance, required deductibles or co-payments, annual premiums and
expiration date) for fire, casualty, liability and other forms of insurance
maintained by, or for the benefit of, KML. All such policies are in full force
and effect. Neither KML nor either Seller has received any notice of
cancellation or non-renewal or of significant premium increases with respect to
any such policy. Except as disclosed on Schedule 2.19, no pending claims made by
or on behalf of KML under such policies have been denied or are being defended
against third parties under a reservation of rights by an insurer of KML. All
premiums due prior to the date hereof for periods prior to the Closing Date for
periods before the Closing Date have been paid.
Section 2.20 Accounts Receivable. The accounts receivable set forth
------------ -------------------
in the Financials and those accounts receivable accruing through the Closing
Date represent valid and bona fide sales to related or third parties, as
indicated, incurred in the ordinary course of business.
Section 2.21 Interests in Customers, Suppliers, Etc. No shareholder,
------------ --------------------------------------
officer, director or Affiliate of KML possesses, directly or indirectly, any
financial interest in, or is a director, officer, employee or Affiliate of, any
corporation, firm, association or business organization that is a client,
supplier, customer, lessor, lessee or competitor of KML. Notwithstanding the
foregoing, Buyer acknowledges that Sellers are officers, directors and
stockholders of KML and ADI. Ownership of securities of a corporation whose
securities are registered under the 1934 Act not in excess of five percent (5%)
of any class of such securities shall not be deemed to be a financial interest
for purposes of this Section 2.21.
Section 2.22 Business Relations. Schedule 2.22 contains an accurate
------------ ------------------
list of all significant customers of KML (i.e., those customers representing 5%
or more of KML's revenues for the 12 months ended June 30, 1996 or who have paid
to KML $25,000 or more in any fiscal quarter. Except as set forth in Schedule
2.22, to the best knowledge of KML and Sellers, no customer or supplier of KML
will cease to do business with KML after the consummation of the transactions
contemplated hereby, which cessation would have a material adverse effect on the
business, operations or financial condition of KML. Except as set forth in
Schedule 2.22, KML has not experienced any difficulties in obtaining any
inventory items necessary to the operation of its
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<PAGE>
business, and, to the best knowledge of KML and Sellers, no such shortage of
supply of inventory items is threatened or pending. KML is not required to
provide any bonding or other financial security arrangements in any material
amount in connection with any transactions with any of its customers or
suppliers.
Section 2.23 Officers and Directors. Set forth on Schedule 2.23 is a
------------ ----------------------
list of the current officers and directors of KML.
Section 2.24 Bank Accounts and Powers of Attorney. Schedule 2.24
------------ ------------------------------------
sets forth each bank, savings institution and other financial institution with
which KML has an account or safe deposit box and the names of all persons
authorized to draw thereon or to have access thereto. Each person holding a
power of attorney or similar grant of authority on behalf of KML is identified
on Schedule 2.24. Except as disclosed on such Schedule, KML has not given any
revocable or irrevocable powers of attorney to any person, firm, corporation or
organization relating to its business for any purpose whatsoever.
Section 2.25 Accuracy of Information Furnished. Any information
------------ ---------------------------------
furnished to Buyer by KML or Sellers prior to, at or after the date of this
Agreement, in the Schedules hereto, or otherwise is, or when furnished will be,
true and correct in all material respects as of the date such information is
furnished. Such information states, or when furnished will state, all material
facts required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which the statements are made, not
misleading.
Section 2.26 Availability of Documents. KML has made available for
------------ -------------------------
inspection by Buyer and its representatives true, correct, and complete copies
of the articles of incorporation (and amendments thereto) and bylaws of KML, all
written agreements, arrangements, commitments, and documents referred to in the
Schedules attached hereto, and the corporate minute books of KML. Such
corporate minute books contain the minutes of all of the meetings of
shareholders, board of directors, and any committees of KML that have been held
preceding the date hereof and all written consents to action executed in lieu
thereof. Prior to Closing, except as may be required by law or court order, all
information delivered to Buyer in connection with this Agreement, including the
information described in this Section 2.26, will be held in confidence and not
disclosed to any third party without the consent of Sellers or KML.
Section 2.27 Brokerage, Financial Advisor or Finder Fees. No agent,
------------ -------------------------------------------
advisor, broker, person or firm acting on behalf of KML or the Sellers is, or
will be, entitled to any commission or broker's, advisor's or finder's fees from
any of the parties hereto, or from any of their respective Affiliates in
connection with any of the transactions contemplated hereby.
Section 2.28 Absence of Certain Changes or Events. Except as set
------------ ------------------------------------
forth in Schedule 2.28 or as otherwise contemplated by this Agreement,
subsequent to June 30, 1996, there has not been (a) any damage, destruction or
casualty loss to the physical properties of KML (whether or not covered by
insurance), materially and adversely affecting the business, operations,
prospects or financial condition of KML, (b) any material adverse change in the
business, operations, financial condition or results of operations or prospects
of KML, (c) any entry into any transaction,
-10-
<PAGE>
commitment or agreement (including, without limitation, any borrowing) material
to KML, except transactions, commitments or agreements in the ordinary course of
business consistent with past practice, (d) any declaration, setting aside or
payment of any dividend or other distribution in cash, stock or property with
respect to KML's capital stock or other securities, any repurchase, redemption
or other acquisition by KML of any capital stock or other securities, or any
agreement, arrangement or commitment by KML to do so, (e) any increase that is
material in the compensation payable or to become payable by KML to its
directors, officers, employee or agents or any increase in the rate or terms of
any bonus, pension or other employee benefit plan, payment or arrangement made
to, for or with any such directors, officers, employees or agents, except as set
forth in Schedule 2.28, (f) any sale, transfer or other disposition of, or the
creation of any Lien upon, any part of KML's assets, tangible or intangible,
except for sales of inventory and use of supplies and collections of accounts
receivable in the ordinary course of business consistent with past practice, or
any cancellation or forgiveness of any debts or claims by KML, (g) any change in
the relations of KML with or loss of its customers or suppliers, of any loss of
business or increase in the cost of inventory items or change in the terms
offered to customers, which would materially and adversely affect the business,
operations or financial condition of KML, or (i) any capital expenditure
(including any capital leases) or commitment therefor by KML in excess of
$25,000.
Section 2.29 Inventories. The inventories reflected in the
------------ -----------
Financials and inventories acquired since June 30, 1996, consist of items of a
quality and quantity that are useable or saleable in the ordinary course of
business of KML, and inventories of below standard quality or not useable in the
business of KML have been written down in value in accordance with good business
practices to estimated net realizable market values or adequate reserves have
been provided therefor in the Financials. Since June 30, 1996, all of the
inventories have been maintained at adequate levels for the business of KML in
its normal course consistent with past practice and taking into account normal
seasonality, no change has occurred in such inventories that affects or will
affect their useability or saleability, no writedown of the value of such
inventories has occurred or is required under KML's normal valuation policy or
GAAP, and no additional amounts have been reserved with respect to such
inventories.
ARTICLE III
INTENTIONALLY OMITTED
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Sellers as follows:
Section 4.1 Organization and Authorization. Buyer is a corporation
----------- ------------------------------
duly organized, validly existing and in good standing under the laws of the
State of Delaware with all requisite corporate power and authority to own, lease
and operate its properties and to carry on its business as now being conducted.
Buyer has all requisite corporate power, capacity and authority to execute and
deliver this Agreement and all other agreements and documents contemplated
hereby.
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<PAGE>
The execution and delivery of this Agreement and such other agreements and
documents by Buyer and the consummation by Buyer of the transactions
contemplated hereby have been duly authorized by Buyer and no other corporate
action on the part of Buyer is necessary to authorize the transactions
contemplated hereby. This Agreement has been duly executed and delivered by
Buyer and constitutes the valid and binding obligation of Buyer, enforceable in
accordance with its terms except that (i) such enforcement may be subject to
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally, (ii) the remedy of specific performance and
injunctive relief are subject to certain equitable defenses and to the
discretion of the court before which any proceedings may be brought, and (iii)
rights to indemnification hereunder may be limited under applicable securities
laws.
Section 4.2 No Violations. The execution and delivery of this
----------- -------------
Agreement and the other agreements and documents contemplated hereby by Buyer
and the consummation of the transactions contemplated hereby will not (a)
violate any provision of the certificate of incorporation or bylaws of Buyer,
(b) violate any statute, rule, regulation, order or decree of any public body or
authority by which Buyer or its properties or assets are bound, or (c) result in
a violation or breach of, or constitute a default under or result in the
creation of any encumbrance upon, or create any rights of termination,
cancellation or acceleration in any person with respect to any agreement,
contract, indenture, mortgage or instrument to which Buyer is a party or any of
its properties or assets is bound.
Section 4.3 Consents. Except as set forth in Schedule 4.3, no
----------- --------
consent, approval or other authorization of any governmental authority or third
party is required as a result of or in connection with the execution and
delivery of this Agreement and the other agreements and documents to be executed
by Buyer or the consummation by Buyer of the transactions contemplated hereby.
Section 4.4 Brokerage, Financial Advisor or Finder Fees. No agent,
----------- -------------------------------------------
advisor, broker, person or firm acting on behalf of Buyer is, or will be,
entitled to any commission or broker's, advisor's or finder's fees from any of
the Sellers, the Company, or from any of their respective Affiliates, in
connection with any of the transactions contemplated hereby.
Section 4.5 ADI Note. Buyer acknowledges that ADI has assumed that
--------
certain October 1, 1995 promissory note, executed by Wesolek and payable to the
order of Kent-Marsh Ltd., Inc. in the original principal amount of Eighty-Nine
Thousand and No/100 Dollars ($89,000.00), as provided therein ("ADI Note").
Sellers, ADI and KML will execute releases on terms and conditions acceptable to
Buyer, contingent upon the acquisition of ADI.
ARTICLE V
CONDITIONS TO OBLIGATIONS OF BUYER
The obligation of Buyer to purchase the KML Shares, and to cause the
other transactions contemplated hereby to occur at the Closing, shall be subject
to the satisfaction of each of the following conditions:
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<PAGE>
Section 5.1 Consents and Approvals. All material authorizations,
------------ ----------------------
consents, approvals, waivers and releases, if any, necessary for Sellers and the
Company to consummate the transactions contemplated hereby shall have been
obtained and copies thereof shall be delivered to Buyer.
Section 5.2 Certificates. The Company and the Sellers shall have
----------- ------------
delivered to Buyer (i) certificates of the appropriate governmental authorities,
dated as of a date not more than fifteen (15) days prior to the Closing Date,
attesting to the existence and good standing of the Company in the State of
Texas; (ii) a copy, certified by the Secretary of State of Texas as of a date
not more than fifteen (15) days prior to the Closing Date, of the charter and
all amendments thereto of the Company; (iii) a copy certified by the Secretary
of the Company, dated the Closing Date, of the bylaws of the Company; and (iv)
certificates, dated the Closing Date, of the Secretary of the Company, relating
to the incumbency and corporate proceedings in connection with the consummation
of the transactions contemplated hereby.
Section 5.3 [Intentionally Omitted]
-----------
Section 5.4 Opinion of Counsel. Buyer shall have received an opinion
----------- ------------------
of Mark Everett, counsel to Sellers and the Company, dated the Closing Date and
in form and substance satisfactory to Buyer, substantially to the effect that:
(a) The Company is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Texas;
(b) The authorized capital stock of KML is as set forth in Section
2.3; to counsel's knowledge (subject to compliance with applicable federal and
state securities laws), all of such shares are validly issued, fully paid and
nonassessable and were not issued in violation of any preemptive rights of any
shareholder of the Company; such shares are owned of record as set forth in
Section 2.3; and such counsel has no actual knowledge of any outstanding
securities convertible into, exchangeable for or carrying the right to acquire
capital stock of the Company, or any subscriptions, warrants, options, rights or
other arrangements or commitments obligating the Company to issue or dispose of
any capital stock or any ownership therein;
(c) The execution and delivery of this Agreement and all other
agreements and documents contemplated hereby by the Company and Sellers and the
performance by the Company and Sellers of their respective obligations under
this Agreement and such other agreements and documents do not constitute a
violation of or a default under its articles of incorporation or bylaws;
(d) The Company has the corporate power and authority to execute,
deliver and perform its obligations under this Agreement and the other
agreements and documents contemplated hereby (to which it is a party); the
execution and delivery of this Agreement and the other agreements and documents
by the Company and the performance by the Company of its obligations hereunder
and under the other agreements and documents have been duly authorized by all
requisite corporate action on the part of the Company. This Agreement and each
other agreement and document contemplated hereby is a valid and binding
obligation of the Company and each Seller, respectively, enforceable against the
Company and each Seller (to the extent each is a party) in
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<PAGE>
accordance with their respective terms, except that (i) such enforcement may be
subject to bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally, (ii) the remedy of specific performance
and injunctive relief are subject to certain equitable defenses and to the
discretion of the court before which any proceedings may be brought, and (iii)
rights to indemnification hereunder may be limited under applicable securities
laws;
(e) To such counsel's actual knowledge, there are no actions, suits
or proceedings pending or threatened that are required by the terms of Section
2.13 to be described in Schedule 2.13 that are not described therein; and
(f) No consent, approval, authorization or other action by, or filing
with, any governmental authority, regulatory body or other person is required to
be obtained by the Company or any Seller in connection with the execution,
delivery or performance by them of their respective obligations under this
Agreement, except for such as have been duly obtained or made.
Section 5.5 No Material Adverse Change. There shall not have been
----------- --------------------------
any material adverse change since June 30, 1996, in respect of the financial
condition, results of operations, business, assets or prospects of the Company
and the Company shall not have suffered any loss (whether or not insured) by
reason of physical damage caused by fire, earthquake, flood, wind, accident or
other calamity which could have a material adverse effect on the condition,
financial or otherwise, results of operations or business, assets or prospects
of the Company.
Section 5.6 Nonforeign Affidavit. Sellers shall have furnished to
----------- --------------------
Buyer an affidavit, stating, under penalty of perjury, that the indicated number
is the transferor's United States taxpayer identification number and that the
transferor is not a foreign person, pursuant to Section 1445(b)(2) of the Code.
Section 5.7 Noncompetition Agreements. Nesbitt and Wesolek shall have
----------- -------------------------
executed and delivered to Buyer a noncompetition agreement (the "Noncompetition
Agreements").
Section 5.8 Employment Agreements. Nesbitt and Wesolek shall have
----------- ---------------------
executed and delivered to Buyer an employment agreement ("Employment
Agreements").
Section 5.9 Stock Certificates. Sellers shall have tendered
----------- ------------------
certificates representing the KML Shares, duly endorsed in blank or accompanied
by appropriate stock powers, in proper form for transfer, with all transfer
taxes paid.
Section 5.10 Resignations and Releases of Directors and Officers.
------------ ---------------------------------------------------
Buyer shall have received the resignations of and releases from each of the
directors and officers of the Company, effective as of the Closing.
Section 5.11 ADI Stock Purchase. Buyer, ADI and the ADI stockholders
------------ ------------------
shall have entered into a purchase agreement dated the date hereof with respect
to the purchase of the shares of ADI stock.
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<PAGE>
ARTICLE VI
CONDITIONS TO OBLIGATIONS OF SELLERS
The obligations of Sellers to sell the Shares and to cause the other
transactions contemplated hereby to occur at the Closing shall be subject,
except as Sellers may waive in writing, to the satisfaction of each of the
following conditions at or prior to the Closing:
Section 6.1 Absence of Litigation. No inquiry, action, suit or proceeding
----------- ---------------------
shall have been asserted, threatened or instituted in which it is sought to
restrain or prohibit the carrying out of the transactions contemplated by this
Agreement or to challenge the validity of such transactions or any part thereof.
Section 6.2 Consents and Approvals. All material authorizations,
----------- ----------------------
consents, approvals, waivers and releases, if any, necessary for Buyer to
consummate the transactions contemplated hereby shall have been obtained and
delivered to Sellers.
Section 6.3 Certificates. Buyer shall have delivered to Sellers (i) a
----------- ------------
certificate of the appropriate governmental authority, dated as of a date not
more than fifteen (15) days prior to the Closing Date, attesting to the
existence and good standing of Buyer in the State of Delaware; (ii) copies,
certified by the Secretary of State of Delaware as of a date not more than
fifteen (15) days prior to the Closing Date, of the certificate of incorporation
and all amendments thereto of Buyer; (iii) a copy, certified by the Secretary of
Buyer, dated the Closing Date, of the bylaws of Buyer; and (iv) a certificate,
dated the Closing Date, of the Secretary of Buyer relating to the incumbency and
corporate proceedings in connection with the consummation of the transactions
contemplated hereby.
Section 6.4 Transfer of Funds. Buyer shall have delivered to Sellers the
----------- -----------------
amounts specified in Section 7.3.
Section 6.5 Noncompetition Agreements. Buyer shall have executed and
----------- -------------------------
delivered to Sellers the Noncompetition Agreements.
Section 6.6 Employment Agreements. Buyer shall have executed and
----------- ---------------------
delivered to the Sellers the Employment Agreements.
Section 6.7 Stock Certificates. Buyer shall have tendered certificates
----------- ------------------
representing the Citadel Shares to the Sellers.
Section 6.8 ADI Stock Purchase. Buyer, ADI and the Sellers shall have
----------- ------------------
entered into a purchase agreement dated the date hereof with respect to the
purchase of the shares of ADI stock.
-15-
<PAGE>
ARTICLE VII
CLOSING
Section 7.1 Closing. Subject to the satisfaction or waiver of all the
----------- -------
conditions set forth in Articles V and VI, the closing of the transactions
contemplated hereby (the "Closing") shall take place at the offices of the Buyer
or such other location as is agreed to by Buyer and Sellers, on (i) August 16
1996 or (ii) such other date as the parties may agree upon in writing (the
"Closing Date").
Section 7.2 Delivery of the Shares. At the Closing, Sellers shall deliver
----------- ----------------------
or cause to be delivered to Buyer the stock certificate(s) evidencing all of the
Shares owned by them, duly endorsed or accompanied by duly executed stock powers
assigning the Shares to Buyer and otherwise in good form for transfer.
Section 7.3 Payments to Sellers. In payment for the exercise of the
----------- -------------------
option to purchase the KML Shares, at the Closing, Buyer shall deliver to
Sellers $1.00 in cash to the Sellers.
ARTICLE VIII
INDEMNIFICATION
Section 8.1 Buyer's Losses.
----------- --------------
(a) Sellers agree to indemnify and hold harmless Buyer and the Company and
their respective directors, officers, employees, representatives, agents and
attorneys from, against and in respect of any and all Buyer's Losses (as defined
below) suffered, sustained, incurred or required to be paid by any of them by
reason of (i) any representation or warranty made the Company or Sellers in or
pursuant to this Agreement being untrue or incorrect in any respect; and (ii)
any failure by the Company or Sellers to observe or perform their covenants and
agreements set forth in this Agreement or any other agreement or document
executed by them in connection with the transactions contemplated hereby, save
and except for any reformation by a court of competent jurisdiction after August
17, 1999 of the Noncompetition Agreements; except in any instance to the extent
Buyer's Losses result from Buyer's own gross negligence or willful misconduct.
This Section 8.1 is intended to indemnify Buyer, the Company and their
respective directors, officers, employees, representatives, agents and attorneys
from the results of their negligence. The obligations of each Seller shall be
in that proportion which the number of shares of ADI owned by such Seller bears
to the total number of shares of ADI issued and outstanding as of the Closing
Date.
(b) "Buyer's Losses" shall mean all damages (including, without
limitation, amounts paid in settlement with Sellers' consent, which consent may
not be unreasonably withheld), losses, obligations, liabilities, liens,
deficiencies, costs (including, without limitation, reasonable attorneys' fees),
penalties, fines, interest, monetary sanctions and expenses, including, without
limitation, reasonable attorneys' fees and costs incurred to comply with
injunctions and other court and agency orders, and other costs and expenses
incident to any suit, action, investigation, claim or proceeding or to establish
or enforce Buyer's or such other persons' right to indemnification hereunder.
-16-
<PAGE>
Section 8.2 Sellers' Losses.
----------- ---------------
(a) Buyer and the Company jointly and severally agree to indemnify and
hold harmless Sellers, and their respective directors, officers, employees,
representatives, agents and attorneys from, against, for and in respect of any
all Sellers' Losses (as defined below) suffered, sustained, incurred or required
to be paid by either Seller by reason of (i) any representation or warranty made
by Buyer in or pursuant to this Agreement (including, without limitation, the
representations and warranties contained in any certificate delivered pursuant
to Section 6.3) being untrue or incorrect in any respect; (ii) any failure by
Buyer to observe or perform its covenants and agreements set forth in this
Agreement or any other agreement or document executed by it in connection with
the transactions contemplated hereby; or (iii) any liability for warranty claims
arising from the sale of goods or services by the Company subsequent to the
Closing Date, except in any instance described in subsections (i), (ii) or (iii)
above to the extent Sellers' Losses result from Sellers' own gross negligence or
willful misconduct; or (iv) any "Special Sellers' Losses," which shall mean any
Sellers' Losses arising out of or in connection with (i) any obligations of
either Seller to Southwest Bank of Texas, N.A. ("Southwest Bank") disclosed in
the Schedules hereto, including, without limitation, obligations of Nesbitt
arising under one or more personal guarantees of loans from Southwest to KML,
and (ii) any obligations disclosed in the Schedules hereto of either Seller for
the trust fund portion of any payroll taxes of KML assessed against such Seller,
whether under Section 6672 of the Internal Revenue Code of 1986, as amended, or
otherwise. This Section 8.2 is intended to indemnify Sellers and their
directors, officers, employees, representatives, agents and attorneys from the
results of their negligence.
(b) "Sellers' Losses" shall mean all damages (including, without
limitation, amounts paid in settlement with Buyer's consent, which consent may
not be reasonably withheld), losses, obligations, liabilities, claims,
deficiencies, costs (including, without limitation, reasonable attorneys' fees)
and expenses, including, without limitation, reasonable attorneys' fees and
costs incurred to comply with injunctions and other court and agency orders, and
other costs and expenses incident to any suit, action, investigation, claim or
proceeding or to establish or enforce Sellers' or such other persons' right to
indemnification hereunder.
Section 8.3 Notice of Loss. Except to the extent set forth in the next
----------- --------------
sentence, Buyer and Sellers will not have any liability under the indemnity
provisions of this Agreement with respect to a particular matter unless a notice
setting forth in reasonable detail the breach or other matter which is asserted
has been given to the Indemnifying Party (as defined below) and, in addition, if
such matter arises out of a suit, action, investigation, proceeding or claim,
such notice is given promptly, but in any event within thirty (30) days after
the Indemnified Party (as defined below) is given notice of the claim or the
commencement of the suit, action, investigation or proceeding. Notwithstanding
the preceding sentence, failure of the Indemnified Party to give notice
hereunder shall not release the Indemnifying Party from its obligations under
this Article VIII, except to the extent the Indemnifying Party is actually
prejudiced by such failure to give notice. With respect to Buyer's Losses,
Sellers shall be the Indemnifying Party and Buyer, the Company and their
respective directors, officers, employees, representatives, agents and attorneys
shall be the Indemnified Parties. With respect to Sellers' Losses, Buyer shall
be the Indemnifying Party and Sellers and their respective directors, officers,
employees, representatives, agents and attorneys shall be the Indemnified Party.
-17-
<PAGE>
Section 8.4 Right to Defend. Upon receipt of notice of any suit, action,
----------- ---------------
investigation, claim or proceeding for which indemnification might be claimed by
an Indemnified Party, the Indemnifying Party shall be entitled to defend,
contest or otherwise protect against any such suit, action, investigation, claim
or proceeding at its own cost and expense, and the Indemnified Party must
cooperate in any such defense or other action. The Indemnified Party shall have
the right, but not the obligation, to participate at its own expense in defense
thereof by counsel of its own choosing, but the Indemnifying Party shall be
entitled to control the defense unless the Indemnified Party has relieved the
Indemnifying Party from liability with respect to the particular matter or the
Indemnifying Party fails to assume defense of the matter. In the event the
Indemnifying Party shall fail to defend, contest or otherwise protect in a
timely manner against any such suit, action, investigation, claim or proceeding,
the Indemnified Party shall have the right, but not the obligation, thereafter
to defend, contest or otherwise protect against the same and make any compromise
or settlement thereof and recover the entire cost thereof from the Indemnifying
Party including, without limitation, reasonable attorneys' fees, disbursements
and all amounts paid as a result of such suit, action, investigation, claim or
proceeding or the compromise or settlement thereof; provided, however, that the
Indemnified Party must send a written notice to the Indemnifying Party of any
such proposed settlement or compromise, which settlement or compromise the
Indemnifying Party may reject, in its reasonable judgment, within thirty (30)
days of receipt of such notice. Failure to reject such notice within such
thirty (30) day period shall be deemed an acceptance of such settlement or
compromise. The Indemnified Party shall have the right to effect a settlement
or compromise over the objection of the Indemnifying Party; provided, that if
(i) the Indemnifying Party is contesting such claim in good faith or (ii) the
Indemnifying Party has assumed the defense from the Indemnified Party, the
Indemnified Party waives any right to indemnity therefor. If the Indemnifying
Party undertakes the defense of such matters, the Indemnified Party shall not,
so long as the Indemnifying Party does not abandon the defense thereof, be
entitled to recover from the Indemnifying Party any legal or other expenses
subsequently incurred by the Indemnified Party in connection with the defense
thereof other than the reasonable costs of investigation undertaken by the
Indemnified Party with the prior written consent of the Indemnifying Party.
Section 8.5 Cooperation. The Company, Buyer, Sellers and each of their
----------- -----------
Affiliates, successors and assigns shall cooperate with each other in the
defense of any suit, action, investigation, proceeding or claim by a third party
and, during normal business hours, shall afford each other access to their books
and records and employees relating to such suit, action, investigation,
proceeding or claim and shall furnish each other all such further information
that they have the right and power to furnish as may reasonably be necessary to
defend such suit, action, investigation, proceeding or claim, including, without
limitation, reports, studies, correspondence and other documentation relating to
Environmental Protection Agency, Occupational Safety and Health Administration,
and Equal Employment Opportunity Commission matters.
Section 8.6 Waiver of Contribution and Indemnification. Sellers hereby
----------- ------------------------------------------
waive and release any rights of indemnification or contribution they may have
against the Company as a result of any payment made under this Article VIII.
Section 8.7 Limits on Indemnification. No amount shall be payable by an
----------- -------------------------
indemnifying party until the aggregate amount of loss indemnifiable by such
indemnifying party exceeds $50,000
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<PAGE>
at which time the indemnifying party shall be liable for all losses incurred in
excess of $50,000 (other than with respect to the Special Sellers' Losses).
ARTICLE IX
MISCELLANEOUS
Section 9.1 Entire Agreement. This Agreement (including the exhibits and
----------- ----------------
schedules hereto and related documents described herein) constitutes the entire
agreement and supersedes all prior agreements and understandings, both written
and oral, between the parties hereto with respect to the subject matter hereof,
and no party shall be liable or bound to the other in any manner by any
representations or warranties not set forth herein.
Section 9.2 Successors and Assigns. The terms and conditions of this
----------- ----------------------
Agreement shall inure to the benefit of and be binding upon the parties hereto
and their respective successors and permitted assigns. Neither this Agreement
nor any rights, interests, or obligations hereunder may be assigned by any party
hereto without the prior written consent of all other parties hereto, and any
purported assignment in violation of this Section 9.2 shall be null and void.
Section 9.3 Counterparts. This Agreement may be executed in one or more
----------- ------------
counterparts, each of which shall for all purposes be deemed to be an original
and all of which shall constitute the same instrument.
Section 9.4 Headings. The headings of the articles and sections of this
----------- --------
Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction hereof.
Section 9.5 Construction. As used in this Agreement, the words "herein,"
----------- ------------
"hereof" and "hereunder" and other words of similar import refer to this
Agreement as a whole and not to any particular article, section, paragraph or
other subdivision.
Section 9.6 Modification and Waiver. Any of the terms or conditions of
----------- -----------------------
this Agreement may be waived in writing at any time by the party which is
entitled to the benefits thereof, and this Agreement may be modified or amended
by a written instrument executed by Buyer, the Company and each Seller. No
supplement, modification or amendment of this Agreement shall be binding unless
executed in writing by all of the parties hereto. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of any
other provision hereof (whether or not similar) nor shall such waiver constitute
a continuing waiver.
Section 9.7 Schedules, Etc. All exhibits and schedules annexed hereto are
----------- --------------
expressly made a part of this Agreement as though fully set forth herein.
Section 9.8 Notices. Any notice, request, instruction, document or other
----------- -------
communication to be given hereunder by any party hereto to any other party
hereto shall be in writing and validly given if (i) delivered personally, (ii)
sent by telecopy with electronic confirmation of receipt, (iii)
-19-
<PAGE>
delivered by overnight express, or (iv) sent by registered or certified mail,
postage prepaid, as follows:
If to Buyer, to:
Citadel Computer Systems Incorporated
3811 Turtle Creek Boulevard, Suite 330
Dallas, Texas 75219
Attention: Steven B. Solomon
Telecopy No. : (214) 520-9293
If to Sellers:
Robert C. Wesolek
Bayou Bend Towers, Unit 304
101 Westcott
Houston, Texas 77007
Vance G. Nesbitt
3260 Sul Ross
Houston, Texas 77098
If to the Company, to:
Kent-Marsh Ltd., Inc.
3260 Sul Ross
Houston, Texas 77098
Attention: President
With a copy to:
J. Mark Everett, Esq.
608 West 12/th/ Street
Austin, Texas 78701
or at such other address for a party as shall be specified by like notice. Any
notice that is delivered personally, or sent by telecopy or overnight express in
the manner provided herein shall be deemed to have been duly given to the party
to whom it is directed upon actual receipt by such party. Any notice that is
addressed and mailed in the manner herein provided shall be conclusively
presumed to have been given to the party to whom it is addressed at the close of
business, local time of the recipient, on the fourth day after the day it is so
placed in the mail.
-20-
<PAGE>
Section 9.9 GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED, ENFORCED,
----------- -------------
AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF TEXAS (WITHOUT REGARD TO ITS
CHOICE OF LAW PRINCIPLES). VENUE FOR ALL PURPOSES SHALL BE IN DALLAS COUNTY,
TEXAS.
Section 9.10 Survival of Covenants, Agreements, Representations and
------------ ------------------------------------------------------
Warranties.
- ----------
(a) Covenants and Agreements. All covenants and agreements made hereunder
------------------------
or pursuant hereto or in connection with the transactions contemplated hereby
shall survive the Closing and shall continue in full force and effect thereafter
according to their terms without limit as to duration.
(b) Representations and Warranties. All representations and warranties
------------------------------
contained herein shall survive the Closing and shall continue in full force and
effect thereafter for a period of two years following the Closing, except that
(i) the representations and warranties contained in Section 2.6 hereof shall
survive until the earlier of (x) the expiration of the applicable periods
(including any extensions) of the respective statutes of limitation applicable
to the payment of the Taxes to which such representations and warranties relate
without an assertion of a deficiency in respect thereof by the applicable taxing
authority or (y) the completion of the final audit and determinations by the
applicable taxing authority and final disposition of any deficiency resulting
therefrom, (ii) the representations and warranties contained in Section 2.17
shall survive until the expiration of the applicable period of the statutes of
limitation applicable to ERISA matters, and (iii) the representations and
warranties contained in Sections 2.1, 2.2, 2.3, 2.4, and 2.9, shall survive
indefinitely.
Section 9.11 Invalid Provisions. If any provision of this Agreement is
------------ ------------------
held to be illegal, invalid or unenforceable under present or future laws, such
provision shall be fully severable, this Agreement shall be construed and
enforced as if such illegal, invalid or unenforceable provision had never
comprised a part of this Agreement, and the remaining provisions of this
Agreement shall remain in full force and effect and shall not be affected by the
illegal, invalid or unenforceable provision or by its severance from this
Agreement.
Section 9.12 Expenses. Sellers, on the one hand, and Buyer, on the other
------------ --------
hand, shall be solely responsible for their respective costs and expenses
incurred in connection with the transactions contemplated hereby.
Section 9.13 Third Party Beneficiaries. Except as otherwise specifically
------------ -------------------------
provided in Article VIII, no individual or firm, corporation, partnership or
other entity shall be a third-party beneficiary of the representations,
warranties, covenants and agreements made by any party hereto.
Section 9.14 Number and Gender of Words. Whenever the singular number is
------------ --------------------------
used, the same shall include the plural where appropriate, and words of any
gender shall include each other gender where appropriate.
-21-
<PAGE>
Section 9.15 Further Assurances. From time to time after the Closing, at
------------ ------------------
the request of any other party but at the expense of the requesting party,
Buyer, the Company or Sellers, as the case may be, will execute and deliver any
such other instruments of conveyance, assignment and transfer, and take such
other action as the other party may reasonably request in order to consummate or
evidence the transactions contemplated hereby.
-22-
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first above written.
BUYER:
Citadel Computer Systems Incorporated
By:
-----------------------------------------------
Steven B. Solomon
Chief Operating Officer
KML:
Kent-Marsh Ltd., Inc.
By:
-----------------------------------------------
Vance G. Nesbitt
Chairman, CEO and President
SELLERS:
--------------------------------------------------
Robert C. Wesolek
--------------------------------------------------
Vance G. Nesbitt
-23-
<PAGE>
EXHIBIT 2.2
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made and entered
into as of August 17, 1996 by and among Citadel Computer Systems Incorporated, a
Delaware corporation ("Citadel" or the "Buyer"), Astonishing Developments, Inc.,
a Texas corporation ("ADI" or the "Company"), Vance G. Nesbitt ("Nesbitt"), and
Robert C. Wesolek ("Wesolek" and together with Nesbitt, the "Sellers").
BACKGROUND
WHEREAS, Sellers own all of the issued and outstanding shares of
capital stock of ADI;
WHEREAS, Sellers desire to sell and convey to Buyer, and Buyer desires
to purchase from Sellers, all of the outstanding capital stock of ADI;
WHEREAS, in connection with the purchase by Buyer from Sellers of the
capital stock of ADI, (i) Buyer and each Seller will enter into an employment
agreement (the "Employment Agreements") and (ii) each Seller will enter into a
noncompetition agreement (the "Noncompetition Agreements") with the Buyer; and
NOW, THEREFORE, for and in consideration of the premises and of the
mutual representations, warranties, covenants and agreements contained herein,
and of other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, and upon the terms and subject to the conditions
hereinafter set forth, the parties do hereby agree as follows:
ARTICLE I
PURCHASE AND SALE
Section 1.1 Purchase of Stock. On the Closing Date (as defined
----------- -----------------
below), Buyer agrees to purchase from Sellers, and Sellers each agree to sell to
Buyer, all of the issued and outstanding shares of Class A Voting Common Stock,
no par value, of ADI (the "ADI Shares") owned by them for a total consideration
of $2,800,000 (the "Consideration"), consisting of (i) $1,000,000 in cash,
payable (1) $200,000, which has been paid by Buyer pursuant to promissory notes
executed by each of the Sellers (which promissory notes will be canceled as of
the Closing Date), (2) $400,000, which will be paid upon execution of this
Agreement, and (3) $400,000, which will be evidenced by promissory notes and be
payable on a date within six months following the date of this Agreement, plus
(ii) 360,000 shares of the Common Stock of Citadel (the "Citadel Shares") . The
Consideration shall be paid to the Sellers in proportion to their relative
ownership of the ADI Shares. The Citadel Shares will be freely tradeable upon
compliance with Rule 144 under the Securities Act of 1933, as amended. For the
period commencing on the Closing Date and ending on the earlier to occur of (a)
the date two years following the Closing Date or (b) the date on which the
Citadel Shares are freely tradeable as a result of the registration of the
Citadel
1
<PAGE>
Shares, available exemptions from registration (including pursuant to Rule 144
or otherwise), or otherwise, in the event of (i) the sale of all of the capital
stock of Citadel, whether by tender offer, merger or otherwise or (ii) the sale
of all of the capital stock owned by Gilbert Gertner, George S. Sharp and Steven
B. Solomon to a third party (an "Acquisition Transaction"), the Citadel Shares
shall be subject to a minimum value of $1,800,000 as of the consummation of such
transaction (the "Minimum Value"). Citadel or its principals will include the
Citadel Shares in the Acquisition Transaction. In the event the Citadel Shares
do not have the Minimum Value in connection with the Acquisition Transaction,
Seller shall be entitled to receive from Citadel an amount equal to the
difference between the Minimum Value and the value of the Citadel Shares sold or
disposed of in connection with the Acquisition Transaction, payable in
additional shares of Citadel Common Stock or a cash payment, at the option of
the Buyer.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF ADI AND THE SELLERS
ADI and the Sellers jointly and severally (except with respect to
Sections 2.3(b) and (c)) represent and warrant to Buyer as follows:
Section 2.1 Authorization of Sellers. This Agreement has been duly
----------- ------------------------
executed and delivered by each Seller and constitutes the valid and binding
obligation of such Seller, enforceable in accordance with its terms, except that
(i) such enforcement may be subject to bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors' rights generally, (ii) the
remedy of specific performance and injunctive relief are subject to certain
equitable defenses and to the discretion of the court before which any
proceedings may be brought and (iii) rights to indemnification hereunder may be
limited under applicable securities laws.
Section 2.2 Existence and Good Standing of ADI. ADI is a
----------- ----------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Texas with all requisite corporate power and authority to own,
lease and operate its properties and to carry on its business as now being
conducted. ADI has no subsidiaries. ADI is duly qualified or licensed as a
foreign corporation and in good standing in each jurisdiction in which the
character or location of the property owned, leased or operated by it or the
nature of the business conducted by it makes such qualification necessary,
except where the failure to be so duly qualified or licensed would not have a
material adverse effect on the business, financial condition, results of
operations or prospects of ADI.
Section 2.3 Capital Stock of ADI.
----------- --------------------
(a) ADI's authorized capital stock consists of 100,000,000
shares of Class A Voting Common Stock, no par value, of which 1,000 shares are
issued and outstanding and 100,000,000 shares of Class B Non-voting Common
Stock, no par value, of which no shares are issued and outstanding. No other
shares of ADI capital stock are issued or outstanding. All of the ADI Shares
have been validly issued and are fully paid and nonassessable and have not been
issued in violation of any preemptive or similar rights. There are no
outstanding conversion or exchange
2
<PAGE>
rights, subscriptions, options, warrants or other arrangements or commitments
obligating ADI to issue any shares of capital stock or other securities except
as set forth on Schedule 2.3.
(b) Nesbitt (but not Wesolek) represents and warrants that he
(i) owns of record and beneficially and has good and marketable title to 600
shares of ADI's Class A Voting Common Stock, free and clear of any and all
liens, mortgages, security interests, encumbrances, pledges, charges, adverse
claims, options, rights or restrictions of any character whatsoever
(collectively, "Liens"), and (ii) has the right to vote his ADI Shares on any
matters as to which any shares of ADI common stock are entitled to be voted
under the laws of the State of Texas, ADI's articles of incorporation and
bylaws, free of any right of any other person.
(c) Wesolek (but not Nesbitt) represents and warrants that he
(i) owns of record and beneficially and has good and marketable title to 400
shares of ADI's Class A Voting Common Stock, free and clear of any and all
Liens, and (ii) has the right to vote his ADI Shares on any matters as to which
any shares of ADI common stock are entitled to be voted under the laws of the
State of Texas, ADI's articles of incorporation and bylaws, free of any right of
any other person.
Section 2.4 Authorization of ADI. ADI has full corporate power,
----------- --------------------
capacity and authority to execute this Agreement and all other agreements and
documents contemplated hereby. The execution and delivery of this Agreement and
such other agreements and documents by ADI and the consummation by ADI of the
transactions contemplated hereby have been duly authorized by ADI and no other
corporate action on the part of ADI is necessary to authorize the transactions
contemplated hereby. This Agreement has been duly executed and delivered by ADI
and constitutes the valid and binding obligation of ADI, enforceable in
accordance with its terms except that (i) such enforcement may be subject to
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally, (ii) the remedy of specific performance and
injunctive relief are subject to certain equitable defenses and to the
discretion of the court before which any proceedings may be brought, and (iii)
rights to indemnification hereunder may be limited under applicable securities
laws.
Section 2.5 Financial Statements. Sellers have previously furnished
----------- --------------------
to Buyer the unaudited balance sheet of ADI as of June 30, 1996 and the related
statements of operations for the periods from inception to June 30, 1996 (the
"Financials"). The Financials present fairly the financial position and results
of operations of ADI as of the indicated dates and for the indicated periods and
have been prepared in accordance with ADI's historical methods of accounting,
consistently applied except as noted in Schedule 2.5. ADI shall permit Buyer
full access to the work papers pertaining to the Financials.
Except to the extent (and not in excess of the amounts) reflected in
the June 30, 1996 balance sheet included in the Financials or as disclosed on
Schedule 2.5 or as previously disclosed to Buyer or Citadel in writing in ADI's
Response to Initial Document and Information Request as updated (the
"Response"), neither ADI nor Sellers know or should know of any liabilities or
obligations of ADI (including, without limitation, Taxes payable required to be
reflected in the Financials (or the notes thereto) in order to make the
Financials consistent with ADI's historical
3
<PAGE>
methods of accounting and accounting principles other than current liabilities
incurred in the ordinary course of business, consistent with past practice,
subsequent to June 30, 1996.
Section 2.6 Tax Matters. ADI has filed all income tax returns
----------- -----------
required to be filed by it and all returns of other Taxes (as defined below)
required to be filed by it and has paid or provided for all Taxes shown to be
due on such returns except as previously disclosed to Buyer or Citadel in
writing in the Response or as set forth on Schedule 2.6. Except as set forth on
Schedule 2.6 or in the Response, to the knowledge of Sellers or ADI (i) no
action or proceeding for the assessment or collection of any Taxes is pending
against ADI; (ii) no deficiency, assessment or other formal claim for any Taxes
has been asserted or made against ADI that has not been fully paid or finally
settled; and (iii) no issue has been formally raised by any taxing authority in
connection with an audit or examination of any return of Taxes. No federal or
state income tax returns of ADI have been examined, and there are no outstanding
agreements or waivers extending the applicable statutory periods of limitation
for such Taxes for any period. Except as set forth in Schedule 2.6 or as
previously disclosed to Buyer or Citadel in writing in the Response, all Taxes
that ADI has been required to collect or withhold have been duly withheld or
collected and, to the extent required, have been paid to the proper taxing
authority. "Taxes" shall mean all taxes, charges, fees, levies or other
assessments including, without limitation, income, excise, property,
withholding, sales and franchise taxes, imposed by the United States, or any
state, county, local or foreign government or subdivision or agency thereof, and
including any interest, penalties or additions attributable thereto.
Section 2.7 Assets and Properties.
----------- ---------------------
(a) Real Property. ADI does not own and has never owned any
-------------
real properties except for leasehold interests as a sublessee.
(b) Personal Property. Except as set forth on Schedule 2.7 and
-----------------
except for inventory and supplies disposed of or consumed, and accounts
receivable collected or written off, and cash utilized, all in the ordinary
course of business consistent with past practice, ADI owns all of its inventory,
equipment and other personal property (both tangible and intangible) reflected
on the latest balance sheet included in the Financials or acquired since June
30, 1996, free and clear of any Liens, except for statutory Liens for current
taxes, assessments or governmental charges or levies on property not yet due and
payable. Notwithstanding the foregoing, neither of the Sellers nor ADI makes any
representation or warranty as to the value or collectibility of any of the
accounts receivable of ADI.
(c) Condition of Properties. Except as set forth on Schedule
-----------------------
2.7, the real property subleased and the tangible personal property owned or
leased by ADI are in good operating condition and repair, ordinary wear and tear
excepted; and neither ADI nor Sellers has any knowledge of any condition or
defect, not disclosed herein, of the subleasehold estate that would materially
affect the fair market value, use or operation of the subleasehold estate or
otherwise have a material adverse effect on ADI or its business or operations.
(d) Compliance. To the actual knowledge of ADI and the Sellers,
----------
the continued operation, use and occupancy of the subleasehold estates as
currently operated, used and occupied
4
<PAGE>
will not violate any zoning, building, health, flood control, fire or other law,
ordinance, order or regulation or any restrictive covenant. To the actual
knowledge of ADI and the Sellers, there are no violations of any federal, state,
county or municipal law, ordinance, order, regulation or requirement affecting
any portion of the leasehold estates and no written notice of any such violation
has been issued by any governmental authority.
Section 2.8 Real Property Leases; Options. Schedule 2.8 sets forth
----------- -----------------------------
a list of (i) all leases and subleases under which ADI is lessor or lessee or
sublessor or sublessee of any real property, together with all amendments,
supplements, nondisturbance agreements, brokerage and commission agreements and
other agreements pertaining thereto ("Real Property Leases"); (ii) all material
options held by ADI or contractual obligations on the part of ADI to purchase or
acquire any interest in real property; and (iii) all options granted by ADI or
contractual obligations on the part of ADI to sell or dispose of any material
interest in real property. Copies of all Real Property Leases and such options
and contractual obligations have been delivered to Buyer. ADI has not assigned
any Real Property Leases or any such options or obligations. There are no Liens
on ADI's interest in the Real Property Leases, subject only to (i) Liens for
taxes and assessments not yet due and payable and (ii) those matters set forth
on Schedule 2.8. The Real Property Leases and options and contractual
obligations listed on Schedule 2.8 are in full force and effect and constitute
binding obligations of the applicable Company and the other parties thereto, and
(x) except as disclosed on Schedule 2.8, there are no defaults thereunder and
(y) no event has occurred that with notice, lapse of time or both would
constitute a default by ADI or, to the best knowledge of ADI and Sellers, by any
other party thereto.
Section 2.9 Environmental Laws and Regulations. Neither ADI nor the
----------- ----------------------------------
Sellers know or should know of any facts or circumstances which could subject
Company to liabilities or obligations based on environmental obligations.
Section 2.10 Contracts. The Company has provided the Buyer an
------------ ---------
opportunity to review all material contracts, arrangements and commitments
(whether oral or written) to which ADI is a party or by which ADI's assets or
business are bound including, without limitation, contracts, arrangements or
commitments that relate to (i) the sale, lease or other disposition by ADI of
all or any substantial part of the business or assets of ADI (otherwise than in
the ordinary course of business), (ii) the purchase or lease by ADI of a
substantial amount of assets (otherwise than in the ordinary course of
business), (iii) the supply by ADI of any customer's requirements for any item
or the purchase by ADI of its requirements for any item or of a vendor's output
of any item, (iv) lending or advancing funds by ADI, (v) borrowing of funds or
guarantying the borrowing of funds by any other person, whether under an
indenture, note, loan agreement or otherwise, (vi) any transaction or matter
with any Affiliate of ADI, (vii) noncompetition or employment, (viii) licenses
and grants to or from ADI relating to any intangible property listed on Schedule
2.17, (ix) the acquisition by ADI of any operating business or the capital stock
of any person since June 30, 1996, or (x) any other matter that is material to
the business, assets or operations of ADI ("Contracts").
Section 2.11 No Violations. The execution, delivery and performance
------------ -------------
of this Agreement and the other agreements and documents contemplated hereby by
ADI and the Sellers and the consummation of the transactions contemplated hereby
will not (i) violate any provision of the
5
<PAGE>
articles of incorporation or bylaws of ADI, or (ii) violate any statute, rule,
regulation, order or decree of any public body or authority by which ADI or a
Seller or its respective properties or assets are bound, or (iii) to the
knowledge of Sellers or ADI except as disclosed in the Response, result in a
violation or breach of, or constitute a default under, or result in the creation
of any encumbrance upon, or create any rights of termination, cancellation or
acceleration in any person with respect to any material Contract or any material
license, franchise or permit of ADI.
Section 2.12 Consents. Except as set forth on Schedule 2.12, no
------------ --------
consent, approval or other authorization of any governmental authority is
required as a result of or in connection with the execution or delivery of this
Agreement and the other agreements and documents to be executed by ADI and
Sellers or the consummation by ADI and Sellers of the transactions contemplated
hereby.
Section 2.13 Litigation and Related Matters. Set forth on Schedule
------------ ------------------------------
2.13 is a list of all actions, suits, proceedings, investigations or grievances
pending against ADI or, to the best knowledge of ADI and Sellers, threatened
against ADI, ADI's business or any property or rights of ADI, at law or in
equity, before or by any court or federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign ("Agencies"). Based on the respective pleadings, none of
the actions, suits, proceedings or investigations listed on Schedule 2.13 either
(i) results or would, if adversely determined, result in any material adverse
change in the business, operations or assets or the condition, financial or
otherwise, or results of operations or prospects of ADI or (ii) affects or
would, if adversely determined, affect the right or ability of ADI to carry on
its business substantially as now conducted. ADI is not subject to any
continuing court or Agency order, writ, injunction or decree applicable
specifically to the business, operations or assets of ADI or employees of ADI,
nor in default with respect to any order, writ, injunction or decree of any
court or Agency with respect to its assets, business, operations or employees.
Schedule 2.13 and Schedule 2.18 lists (x) all worker's compensation claims
outstanding against ADI as of the date hereof and (y) all actions, suits or
proceedings filed by or against ADI and currently pending.
Section 2.14 Product Liability and Warranty Proceedings. No product
------------ ------------------------------------------
liability or warranty actions, suits or proceedings arising from the manufacture
or sale of goods by ADI have been asserted against ADI, except as set forth in
Schedule 2.14.
Section 2.15 Compliance with Laws. ADI (a) is in compliance with all
------------ --------------------
applicable laws, regulations (including federal, state and local procurement
regulations), orders, judgments and decrees except where the failure to so
comply would not have a material adverse effect on the business, prospects,
financial condition or results of operation or prospects of ADI and (b)
possesses all necessary licenses, franchises, permits and governmental
authorizations to conduct its business in the manner in which and in the
jurisdictions and places where such business is now conducted. Set forth on
Schedule 2.15 is a list of all material licenses, franchises, permits and
governmental authorizations and all applications pending before any agency or
authority for the issuance of any licenses, franchises, permits or governmental
authorizations or the renewal thereof.
Section 2.16 Intellectual Property. Schedule 2.16 lists the
------------ ---------------------
domestic and foreign patents, patent applications, patent licenses, software
licenses, trade names, trademarks, service marks,
6
<PAGE>
trademark registrations and applications, service mark registrations and
applications, and copyright registrations and applications owned by ADI or used
in the operation of the business of ADI (collectively, the "Intellectual
Property"), which Schedule indicates whether each item of Intellectual Property
is owned or licensed by ADI, and if licensed, the licensor and the license fees
therefor. Unless otherwise indicated in Schedule 2.16, ADI has the right to use
and license the Intellectual Property, and the consummation of the transactions
contemplated hereby will not result in the loss or material impairment of any
rights of ADI in the Intellectual Property. Each item constituting part of the
Intellectual Property has been, to the extent indicated in Schedule 2.16,
registered with, filed in or issued by, as the case may be, the United States
Patent and Trademark Office or such other government entity, domestic or
foreign, as is indicated in Schedule 2.16; all such registrations, filings and
issuances remain in full force and effect; and all fees and other charges with
respect thereto are current. Except as stated in Schedule 2.16, there are no
pending proceedings or adverse claims made or, to the best knowledge of ADI and
Sellers, threatened against ADI with respect to the Intellectual Property; there
has been no litigation commenced or threatened in writing within the past five
(5) years with respect to the Intellectual Property or the rights of ADI
therein; and ADI and Sellers have no knowledge that (i) the Intellectual
Property or the use thereof by ADI conflicts with any patents, patent
applications, patent licenses, trade names, trademarks, service marks, trademark
or service mark registrations or applications or copyright registrations or
applications of others ("Third Party Intellectual Property"), or (ii) such Third
Party Intellectual Property or its use by others or any other conduct of a third
party conflicts with or infringes upon the Intellectual Property or its use by
ADI. Notwithstanding the foregoing, neither the Sellers nor ADI has conducted a
search which would reveal the existence of any registered or common law
trademark or service marks and the foregoing representation with respect to
registered trademarks are accordingly limited to the actual knowledge of the
parties, absent such search.
Section 2.17 Employee Benefit Plans. Neither ADI nor any of its
------------ ----------------------
Group Members (as defined below) participates in, maintains or contributes to
any employee benefit plan within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). Neither ADI nor
any Group Member has incurred any liability or taken any action, or has any
knowledge of any action or event, that could cause it to incur any liability (i)
under Section 412 of the Code or Title IV of ERISA with respect to any "single
employer plan" (within the meaning of Section 4001(a)(15) of ERISA), (ii) on
account of a partial or complete withdrawal (within the meaning of Section 4205
and 4203 of ERISA, respectively) with respect to any "multi-employer plan"
(within the meaning of Section 3(37) of ERISA), (iii) on account of unpaid
contributions to any such multi-employer plan, or (iv) to provide health
benefits or other non-pension benefits to retired or former employees, except as
specifically required by Section 4980B(f) of the Code. Except as set forth in
Schedule 2.17, neither the execution and delivery of this Agreement by ADI or
the consummation of the transactions contemplated hereby will (i) entitle any
current or former employee of ADI to severance pay, unemployment compensation or
any similar payment, (ii) accelerate the time of payment or vesting, or increase
the amount of, any compensation due to any such employee or former employee, or
(iii) directly or indirectly result in any payment made or to be made to or on
behalf of any person to constitute a "parachute payment" (within the meaning of
Section 280G of the Code). For purposes of this Agreement, "Group Member" shall
mean any member of any "affiliated service group" as defined in Section 414(m)
of the Code that includes ADI, any member of any "controlled group of
corporations" as defined in
7
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Section 1563 of the Code that includes ADI, or any member of any group of
"trades or businesses under common control" as defined by Section 414(c) of the
Code that includes ADI.
Section 2.18 Employees; Employee Relations.
------------ -----------------------------
(a) Schedule 2.18 sets forth (i) the name and current annual
salary (or rate of pay) and other compensation (including, without limitation,
normal bonus, profit-sharing and other compensation) now payable by ADI to each
employee whose current total annual compensation or estimated compensation is
$50,000 or more, (ii) any increase to become effective after the date of this
Agreement in the total compensation or rate of total compensation payable by ADI
to each such person, (iii) any increase to become payable after the date of this
Agreement by ADI to employees other than those specified in clause (i) of this
Section 2.18(a), (iv) all presently outstanding loans and advances (other than
routine travel advances to be repaid or formally accounted for within sixty (60)
days) made by ADI to, or made to ADI by, any director, officer or employee, (v)
all other transactions between ADI and any director, officer or employee of ADI
and (vi) all accrued but unpaid vacation pay owing to any officer or employee
that is not disclosed on the Financials.
(b) Except as disclosed on Schedule 2.18, ADI is not a party to,
nor bound by, the terms of any collective bargaining agreement, and ADI has not
experienced any material labor difficulties during the last five years. Except
as set forth on Schedule 2.18, there are no labor disputes existing, or to the
best knowledge of ADI and Sellers, threatened involving, by way of example,
strikes, work stoppages, slowdowns, picketing, or any other interference with
work or production, or any other concerted action by employees. No charges or
proceedings before the National Labor Relations Board, or similar agency, exist,
or to the best knowledge of ADI and Sellers, are threatened.
(c) ADI's relationship with its employees, if any, is good and
ADI and Sellers have no knowledge of any facts that would indicate that ADI's
employees will not continue in its employ following the Closing on a basis
similar to that existing on the date of this Agreement. Except as disclosed on
Schedule 2.18, ADI is not a party to any employment contract with any individual
or employee, either express or implied. Except as disclosed on Schedule 2.18, no
unresolved or unsettled legal proceedings, charges, complaints, or similar
actions exist under any federal, state or local laws affecting the employment
relationship including, but not limited to: (i) anti-discrimination statutes
such as Title VII of the Civil Rights Act of 1964, as amended (or similar state
or local laws prohibiting discrimination because of race, sex, religion,
national origin, age and the like); (ii) the Fair Labor Standards Act or other
federal, state or local laws regulating hours of work, wages, overtime and other
working conditions; (iii) requirements imposed by federal, state or local
governmental contracts such as those imposed by Executive Order 11246; (iv)
state laws with respect to tortious employment conduct, such as slander, false
light, invasion of privacy, negligent hiring or retention, intentional
infliction of emotional distress, assault and battery, or loss of consortium; or
(v) the Occupational Safety and Health Act, as amended, as well as any similar
state laws, or other regulations respecting safety in the workplace; and to the
best knowledge of ADI and Sellers, no proceedings, charges, or complaints are
threatened under any such laws or regulations and no facts or circumstances
exist that would give rise to any such proceedings, charges, complaints, or
claims, whether valid or not. ADI is not subject to any
8
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settlement or consent decree with any present or former employee, employee
representative or any government or Agency relating to claims of discrimination
or other claims in respect to employment practices and policies; and no
government or Agency has issued a judgment, order, decree or finding with
respect to the labor and employment practices (including practices relating to
discrimination) of ADI.
(d) ADI has not incurred any liability or obligation under the
Worker Adjustment and Retraining Notification Act or similar state laws. ADI has
not laid off more than ten percent (10%) of its employees at any single site of
employment in any ninety (90) day period during the twelve (12) month period
ending July 31, 1996. It shall be the obligation of ADI and Sellers to provide
any notice required by said Act by reason of the provisions, execution or
operation of this Agreement.
Section 2.19 Insurance. Schedule 2.19 contains a list of the
------------ ---------
policies and contracts (including insurer, named insured, type of coverage,
limits of insurance, required deductibles or co-payments, annual premiums and
expiration date) for fire, casualty, liability and other forms of insurance
maintained by, or for the benefit of, ADI. All such policies are in full force
and effect . Neither ADI nor either Seller has received any notice of
cancellation or non-renewal or of significant premium increases with respect to
any such policy. Except as disclosed on Schedule 2.19, no pending claims made by
or on behalf of ADI under such policies have been denied or are being defended
against third parties under a reservation of rights by an insurer of ADI. All
premiums due before the Closing Date for periods before the Closing Date have
been paid.
Section 2.20 Accounts Receivable. The accounts receivable set forth
------------ -------------------
in the Financials and those accounts receivable accruing through the Closing
Date represent valid and bona fide sales to related and third parties, as
indicated, incurred in the ordinary course of business.
Section 2.21 Interests in Customers, Suppliers, Etc. No shareholder,
------------ --------------------------------------
officer, director or Affiliate of ADI possesses, directly or indirectly, any
financial interest in, or is a director, officer, employee or Affiliate of, any
corporation, firm, association or business organization that is a client,
supplier, customer, lessor, lessee or competitor of ADI. Notwithstanding the
foregoing, Buyer acknowledges that Sellers are officers, directors and
stockholders of ADI and Kent-Marsh Ltd., Inc. Ownership of securities of a
corporation whose securities are registered under the 1934 Act not in excess of
five percent (5%) of any class of such securities shall not be deemed to be a
financial interest for purposes of this Section 2.21.
Section 2.22 Business Relations. Schedule 2.22 contains an accurate
------------ ------------------
list of all significant customers of ADI (i.e., those customers representing 5%
or more of ADI's revenues for the 12 months ended June 30, 1996 or who have paid
to ADI $25,000 or more in any fiscal quarter). Except as set forth in Schedule
2.22, to the best knowledge of ADI and Sellers, no customer or supplier of ADI
will cease to do business with ADI after the consummation of the transactions
contemplated hereby, which cessation would have a material adverse effect on the
business, operations or financial condition of ADI. Except as set forth in
Schedule 2.22, ADI has not experienced any difficulties in obtaining any
inventory items necessary to the operation of its business, and, to the best
knowledge of ADI and Sellers, no such shortage of supply of inventory
9
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items is threatened or pending. ADI is not required to provide any bonding or
other financial security arrangements in any material amount in connection with
any transactions with any of its customers or suppliers.
Section 2.23 Officers and Directors. Set forth on Schedule 2.23 is
------------ ----------------------
a list of the current officers and directors of ADI.
Section 2.24 Bank Accounts and Powers of Attorney. Schedule 2.24
------------ ------------------------------------
sets forth each bank, savings institution and other financial institution with
which ADI has an account or safe deposit box and the names of all persons
authorized to draw thereon or to have access thereto. Each person holding a
power of attorney or similar grant of authority on behalf of ADI is identified
on Schedule 2.24. Except as disclosed on such Schedule, ADI has not given any
revocable or irrevocable powers of attorney to any person, firm, corporation or
organization relating to its business for any purpose whatsoever.
Section 2.25 Accuracy of Information Furnished. Any information
------------ ---------------------------------
furnished to Buyer by ADI or Sellers prior to, at or after the date of this
Agreement, in the Schedules hereto, or otherwise is, or when furnished will be,
true and correct in all material respects as of the date such information is
furnished. Such information states, or when furnished will state, all material
facts required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which the statements are made, not
misleading.
Section 2.26 Availability of Documents. ADI has made available for
------------ -------------------------
inspection by Buyer and its representatives true, correct, and complete copies
of the articles of incorporation and bylaws of ADI, all written agreements,
arrangements, commitments, and documents referred to in the Schedules attached
hereto, and the corporate minute books of ADI. Such corporate minute books
contain the minutes of all of the meetings of shareholders, board of directors,
and any committees of ADI that have been held preceding the date hereof and all
written consents to action executed in lieu thereof. Prior to Closing, except
as may be required by law or court order, all information delivered to Buyer in
connection with this Agreement, including the information described in this
Section 2.26, will be held in confidence and not disclosed to any third party
without the consent of Sellers or ADI.
Section 2.27 Brokerage, Financial Advisor or Finder Fees. No agent,
------------ -------------------------------------------
advisor, broker, person or firm acting on behalf of ADI or the Sellers is, or
will be, entitled to any commission or broker's, advisor's or finder's fees from
any of the parties hereto, or from any of their respective Affiliates in
connection with any of the transactions contemplated hereby.
Section 2.28 Absence of Certain Changes or Events. Except as set
------------ ------------------------------------
forth in Schedule 2.28 or as otherwise contemplated by this Agreement,
subsequent to June 30, 1996, there has not been (a) any damage, destruction or
casualty loss to the physical properties of ADI (whether or not covered by
insurance), materially and adversely affecting the business, operations,
prospects or financial condition of ADI, (b) any material adverse change in the
business, operations, financial condition or results of operations or prospects
of ADI, (c) any entry into any transaction, commitment or agreement (including,
without limitation, any borrowing) material to ADI, except
10
<PAGE>
transactions, commitments or agreements in the ordinary course of business
consistent with past practice, (d) any declaration, setting aside or payment of
any dividend or other distribution in cash, stock or property with respect to
ADI's capital stock or other securities, any repurchase, redemption or other
acquisition by ADI of any capital stock or other securities, or any agreement,
arrangement or commitment by ADI to do so, (e) any increase that is material in
the compensation payable or to become payable by ADI to its directors, officers,
employee or agents or any increase in the rate or terms of any bonus, pension or
other employee benefit plan, payment or arrangement made to, for or with any
such directors, officers, employees or agents, except as set forth in Schedule
2.28, (f) any sale, transfer or other disposition of, or the creation of any
Lien upon, any part of ADI's assets, tangible or intangible, except for sales of
inventory and use of supplies and collections of accounts receivable in the
ordinary course of business consistent with past practice, or any cancellation
or forgiveness of any debts or claims by ADI, (g) any change in the relations of
ADI with or loss of its customers or suppliers, of any loss of business or
increase in the cost of inventory items or change in the terms offered to
customers, which would materially and adversely affect the business, operations
or financial condition of ADI, or (i) any capital expenditure (including any
capital leases) or commitment therefor by ADI in excess of $25,000.
Section 2.29 Inventories. The inventories reflected in the
------------ -----------
Financials and inventories acquired since June 30, 1996, consist of items of a
quality and quantity that are useable or saleable in the ordinary course of
business of ADI, and inventories of below standard quality or not useable in the
business of ADI have been written down in value in accordance with good business
practices to estimated net realizable market values or adequate reserves have
been provided therefor in the Financials. Since June 30 , 1996, all of the
inventories have been maintained at adequate levels for the business of ADI in
its normal course consistent with past practice and taking into account normal
seasonality, no change has occurred in such inventories that affects or will
affect their useability or saleability, no writedown of the value of such
inventories has occurred or is required under ADI's normal valuation policy or
GAAP, and no additional amounts have been reserved with respect to such
inventories.
Section 2.30 Investment Representations.
------------ --------------------------
(a) Each Seller has (i) received from Buyer copies of the Annual
Report on Form 10-KSB of Citadel for the fiscal year ended February 29, 1996,
and the Quarterly Report on Form 10-QSB of Citadel for the quarter ended May 31,
1996, and (ii) had the opportunity to ask questions of and receive answers from
Buyer concerning the terms and conditions of this Agreement and to obtain from
Buyer any additional information that Buyer possesses or can acquire without
unreasonable effort or expense necessary to verify the accuracy of the
information described in the preceding clause (i).
(b) Each Seller is an "accredited investor" as that term is
defined under Regulation C under the Securities Act of 1933, as amended, and has
such knowledge or experience in financial and business matters that it is
capable of evaluating the merits and risks of engaging in the transactions
described in this Agreement , including without limitation its acquisition of
the Citadel Shares.
11
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ARTICLE III
[INTENTIONALLY OMITTED]
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Sellers as follows:
Section 4.1 Organization and Authorization. Buyer is a corporation
----------- ------------------------------
duly organized, validly existing and in good standing under the laws of the
State of Delaware with all requisite corporate power and authority to own, lease
and operate its properties and to carry on its business as now being conducted.
Buyer has all requisite corporate power, capacity and authority to execute and
deliver this Agreement and all other agreements and documents contemplated
hereby. The execution and delivery of this Agreement and such other agreements
and documents by Buyer and the consummation by Buyer of the transactions
contemplated hereby have been duly authorized by Buyer and no other corporate
action on the part of Buyer is necessary to authorize the transactions
contemplated hereby. This Agreement has been duly executed and delivered by
Buyer and constitutes the valid and binding obligation of Buyer, enforceable in
accordance with its terms except that (i) such enforcement may be subject to
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally, (ii) the remedy of specific performance and
injunctive relief are subject to certain equitable defenses and to the
discretion of the court before which any proceedings may be brought, and (iii)
rights to indemnification hereunder may be limited under applicable securities
laws.
Section 4.2 No Violations. The execution and delivery of this
----------- -------------
Agreement and the other agreements and documents contemplated hereby by Buyer
and the consummation of the transactions contemplated hereby will not (a)
violate any provision of the certificate of incorporation or bylaws of Buyer,
(b) violate any statute, rule, regulation, order or decree of any public body or
authority by which Buyer or its properties or assets are bound, or (c) result in
a violation or breach of, or constitute a default under or result in the
creation of any encumbrance upon, or create any rights of termination,
cancellation or acceleration in any person with respect to any agreement,
contract, indenture, mortgage or instrument to which Buyer is a party or any of
its properties or assets is bound.
Section 4.3 Consents. Except as set forth in Schedule 4.3, no
----------- --------
consent, approval or other authorization of any governmental authority or third
party is required as a result of or in connection with the execution and
delivery of this Agreement and the other agreements and documents to be executed
by Buyer or the consummation by Buyer of the transactions contemplated hereby.
Section 4.4 Brokerage, Financial Advisor or Finder Fees. No agent,
----------- -------------------------------------------
advisor, broker, person or firm acting on behalf of Buyer is, or will be,
entitled to any commission or broker's, advisor's or finder's fees from any of
the Sellers, the Company, or from any of their respective Affiliates, in
connection with any of the transactions contemplated hereby.
Section 4.5 Buyers acknowledge that ADI has assumed that certain
-----------
promissory note, dated October 1, 1995, executed by Wesolek and payable to the
order of Kent-Marsh Ltd., Inc.
12
<PAGE>
("KML") in the original principal amount of $89,000, as provided therein (the
"ADI Note"). Sellers, ADI and KML will execute releases on terms and conditions
acceptable to Buyer and Citadel, contingent upon the acquisition of KML.
ARTICLE V
CONDITIONS TO OBLIGATIONS OF BUYER
The obligation of Buyer to purchase the ADI Shares, and to cause the
other transactions contemplated hereby to occur at the Closing, shall be subject
to the satisfaction of each of the following conditions:
Section 5.1 Consents and Approvals. All material authorizations,
----------- ----------------------
consents, approvals, waivers and releases, if any, necessary for Sellers and the
Company to consummate the transactions contemplated hereby shall have been
obtained and copies thereof shall be delivered to Buyer.
Section 5.2 Certificates. The Company and the Sellers shall have
----------- ------------
delivered to Buyer (i) certificates of the appropriate governmental authorities,
dated as of a date not more than fifteen (15) days prior to the Closing Date,
attesting to the existence and good standing of the Company in the States of
Texas; (ii) a copy, certified by the Secretary of State of Texas as of a date
not more than fifteen (15) days prior to the Closing Date, of the charter and
all amendments thereto of the Company; (iii) a copy certified by the Secretary
of the Company, dated the Closing Date, of the bylaws of the Company; and (iv)
certificates, dated the Closing Date, of the Secretary of the Company, relating
to the incumbency and corporate proceedings in connection with the consummation
of the transactions contemplated hereby.
Section 5.3 [Intentionally Omitted]
-----------
Section 5.4 Opinion of Counsel. Buyer shall have received an opinion
----------- ------------------
of Mark Everett, counsel to Sellers and the Company, dated the Closing Date and
in form and substance satisfactory to Buyer, substantially to the effect that:
(a) The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Texas;
(b) The authorized capital stock of ADI consists of 100,000,000
shares of Class A Voting Common Stock, no par value, of which 1,000 shares are
outstanding, and 100,000,000 shares of Class B Non-voting Common Stock, no par
value, of which no shares are outstanding; to counsel's knowledge (subject to
compliance with applicable federal and state securities laws), all of such
shares are validly issued, fully paid and nonassessable and were not issued in
violation of any preemptive rights of any shareholder of the Company; such
shares are owned of record as set forth in Section 2.3; and such counsel has no
actual knowledge of any outstanding securities convertible into, exchangeable
for or carrying the right to acquire capital stock of the Company, or any
subscriptions, warrants, options, rights or other arrangements or commitments
obligating the Company to issue or dispose of any capital stock or any ownership
therein;
13
<PAGE>
(c) The execution and delivery of this Agreement and all other
agreements and documents contemplated hereby by the Company and Sellers and the
performance by the Company and Sellers of their respective obligations under
this Agreement and such other agreements and documents do not constitute a
violation of or a default under its articles of incorporation or bylaws;
(d) The Company has the corporate power and authority to
execute, deliver and perform its obligations under this Agreement and the other
agreements and documents contemplated hereby (to which it is a party); the
execution and delivery of this Agreement and the other agreements and documents
by the Company and the performance by the Company of its obligations hereunder
and under the other agreements and documents have been duly authorized by all
requisite corporate action on the part of the Company. This Agreement and each
other agreement and document contemplated hereby is a valid and binding
obligation of the Company and each Seller, respectively, enforceable against the
Company and each Seller (to the extent each is a party) in accordance with their
respective terms, except that (i) such enforcement may be subject to bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally, (ii) the remedy of specific performance and injunctive relief
are subject to certain equitable defenses and to the discretion of the court
before which any proceedings may be brought, and (iii) rights to indemnification
hereunder may be limited under applicable securities laws;
(e) To such counsel's actual knowledge, there are no actions,
suits or proceedings pending or threatened that are required by the terms of
Section 2.13 to be described in Schedule 2.13 that are not described therein;
and
(f) No consent, approval, authorization or other action by, or
filing with, any governmental authority, regulatory body or other person is
required to be obtained by the Company or either Seller in connection with the
execution, delivery or performance by them of their respective obligations under
this Agreement, except for such as have been duly obtained or made.
Section 5.5 No Material Adverse Change. There shall not have been
----------- --------------------------
any material adverse change since June 30, 1996 in respect of the financial
condition, results of operations, business, assets or prospects of the Company
and the Company shall not have suffered any loss (whether or not insured) by
reason of physical damage caused by fire, earthquake, flood, wind, accident or
other calamity which could have a material adverse effect on the condition,
financial or otherwise, results of operations or business, assets or prospects
of the Company.
Section 5.6 Nonforeign Affidavit. Sellers shall have furnished to
----------- --------------------
Buyer an affidavit, stating, under penalty of perjury, that the indicated number
is the transferor's United States taxpayer identification number and that the
transferor is not a foreign person, pursuant to Section 1445(b)(2) of the Code.
Section 5.7 Noncompetition Agreements. Each Seller shall have
----------- -------------------------
executed and delivered to Buyer a noncompetition agreement (the "Noncompetition
Agreements").
Section 5.8 Employment Agreements. Each Seller shall have executed
----------- ---------------------
and delivered to Buyer an employment agreement (the "Employment Agreements").
14
<PAGE>
Section 5.9 Stock Certificates. Sellers shall have tendered
----------- ------------------
certificates representing the ADI Shares, duly endorsed in blank or accompanied
by appropriate stock powers, in proper form for transfer, with all transfer
taxes paid.
Section 5.10 Resignations and Releases of Directors and Officers.
------------ ---------------------------------------------------
Buyer shall have received the resignations of and releases from each of the
directors and officers of the Company, effective as of the Closing.
Section 5.11 KML Option Exercise. Buyer, KML and the KML
------------ -------------------
stockholders shall have entered into a purchase agreement dated the date hereof
with respect to the exercise of the option to purchase the shares of KML stock.
ARTICLE VI
CONDITIONS TO OBLIGATIONS OF SELLERS
The obligations of Sellers to sell the Shares and to cause the other
transactions contemplated hereby to occur at the Closing shall be subject,
except as Sellers may waive in writing, to the satisfaction of each of the
following conditions at or prior to the Closing:
Section 6.1 Absence of Litigation. No inquiry, action, suit or
----------- ---------------------
proceeding shall have been asserted, threatened or instituted in which it is
sought to restrain or prohibit the carrying out of the transactions contemplated
by this Agreement or to challenge the validity of such transactions or any part
thereof.
Section 6.2 Consents and Approvals. All material authorizations,
----------- ----------------------
consents, approvals, waivers and releases, if any, necessary for Buyer to
consummate the transactions contemplated hereby shall have been obtained and
delivered to Sellers.
Section 6.3 Certificates. Buyer shall have delivered to Sellers (i)
----------- ------------
a certificate of the appropriate governmental authority, dated as of a date not
more than fifteen (15) days prior to the Closing Date, attesting to the
existence and good standing of Buyer in the State of Delaware; (ii) copies,
certified by the Secretary of State of Delaware as of a date not more than
fifteen (15) days prior to the Closing Date, of the certificate of incorporation
and all amendments thereto of Buyer; (iii) a copy, certified by the Secretary of
Buyer, dated the Closing Date, of the bylaws of Buyer; and (iv) a certificate,
dated the Closing Date, of the Secretary of Buyer relating to the incumbency and
corporate proceedings in connection with the consummation of the transactions
contemplated hereby.
Section 6.4 Transfer of Funds. Buyer shall have delivered to Sellers
----------- -----------------
the amounts and promissory notes specified in Section 7.3.
Section 6.5 Noncompetition Agreements. Buyer shall have executed and
----------- -------------------------
delivered to Sellers the Noncompetition Agreements.
15
<PAGE>
Section 6.6 Employment Agreements. Buyer shall have executed and
----------- ---------------------
delivered to the Sellers the Employment Agreements.
Section 6.7 Stock Certificates. Buyer shall have tendered
----------- ------------------
certificates representing the Citadel Shares to the Sellers.
Section 6.8 Option Exercise. Buyer, KML and the KML stockholders
----------- ---------------
shall have entered into a purchase agreement dated the date hereof with respect
to the exercise of the option to purchase the shares of KML stock.
ARTICLE VII
CLOSING
Section 7.1 Closing. Subject to the satisfaction or waiver of all
----------- -------
the conditions set forth in Articles V and VI, the closing of the transactions
contemplated hereby (the "Closing") shall take place at the offices of the Buyer
or such other location as is agreed to by Buyer and Sellers, on (i) August 16,
1996 or (ii) such other date as the parties may agree upon in writing (the
"Closing Date").
Section 7.2 Delivery of the Shares. At the Closing, Sellers shall
----------- ----------------------
deliver or cause to be delivered to Buyer the stock certificate(s) evidencing
all of the Shares owned by them, duly endorsed or accompanied by duly executed
stock powers assigning the Shares to Buyer and otherwise in good form for
transfer.
Section 7.3 Payments to Sellers. In payment for the ADI Shares, at
----------- -------------------
the Closing, Buyer shall deliver to Sellers $400,000 by Citadel check or wire
transfer of next day funds to the account(s) designated by Sellers and the Buyer
shall deliver stock certificates representing the Citadel Shares to be delivered
to Sellers. On a date within six months following the Closing Date, Buyer shall
deliver by wire transfer of next day funds to the account(s) designated by
Sellers $400,000 to be evidenced by promissory notes. The promissory notes of
Sellers in the aggregate amount of $200,000 will be canceled at the Closing and
the original notes returned to Sellers.
ARTICLE VIII
INDEMNIFICATION
Section 8.1 Buyer's Losses.
----------- --------------
(a) Sellers agree to indemnify and hold harmless Buyer and the
Company and their respective directors, officers, employees, representatives,
agents and attorneys from, against and in respect of any and all Buyer's Losses
(as defined below) suffered, sustained, incurred or required to be paid by any
of them by reason of (i) any representation or warranty made the Company or
Sellers in or pursuant to this Agreement being untrue or incorrect in any
respect; and (ii) any failure by the Company or Sellers to observe or perform
their covenants and agreements set forth in this Agreement or any other
agreement or document executed by them in connection with the transactions
contemplated hereby, save and except for any reformation by a court of competent
jurisdiction after August 17, 1999 of the Noncompetition Agreements; except in
any instance to
16
<PAGE>
the extent Buyer's Losses result from Buyer's own gross negligence or willful
misconduct. This Section 8.1 is intended to indemnify Buyer, the Company and
their respective directors, officers, employees, representatives, agents and
attorneys from the results of their negligence. The obligations of each Seller
shall be in that proportion which the number of ADI Shares owned by such
Seller's bears to the total number of issued and outstanding ADI shares as of
the Closing Date.
(b) "Buyer's Losses" shall mean all damages (including, without
limitation, amounts paid in settlement with Sellers' consent, which consent may
not be unreasonably withheld), losses, obligations, liabilities, liens,
deficiencies, costs (including, without limitation, reasonable attorneys' fees),
penalties, fines, interest, monetary sanctions and expenses, including, without
limitation, reasonable attorneys' fees and costs incurred to comply with
injunctions and other court and agency orders, and other costs and expenses
incident to any suit, action, investigation, claim or proceeding or to establish
or enforce Buyer's or such other persons' right to indemnification hereunder.
Section 8.2 Sellers' Losses.
----------- ---------------
(a) Buyer and the Company jointly and severally agree to
indemnify and hold harmless Sellers, and their respective directors, officers,
employees, representatives, agents and attorneys from, against, for and in
respect of any all Sellers' Losses (as defined below) suffered, sustained,
incurred or required to be paid by either Seller by reason of (i) any
representation or warranty made by Buyer in or pursuant to this Agreement
(including, without limitation, the representations and warranties contained in
any certificate delivered pursuant to Section 6.3) being untrue or incorrect in
any respect; (ii) any failure by Buyer to observe or perform its covenants and
agreements set forth in this Agreement or any other agreement or document
executed by it in connection with the transactions contemplated hereby; or (iii)
any liability for warranty claims arising from the sale of goods or services by
the Company subsequent to the Closing Date, except in any instance to the extent
Sellers' Losses result from Sellers' own gross negligence or willful misconduct.
This Section 8.2 is intended to indemnify Sellers and their directors, officers,
employees, representatives, agents and attorneys from the results of their
negligence.
(b) "Sellers' Losses" shall mean all damages (including, without
limitation, amounts paid in settlement with Buyer's consent, which consent may
not be reasonably withheld), losses, obligations, liabilities, claims,
deficiencies, costs (including, without limitation, reasonable attorneys' fees)
and expenses, including, without limitation, reasonable attorneys' fees and
costs incurred to comply with injunctions and other court and agency orders, and
other costs and expenses incident to any suit, action, investigation, claim or
proceeding or to establish or enforce Sellers' or such other persons' right to
indemnification hereunder.
Section 8.3 Notice of Loss. Except to the extent set forth in the
----------- --------------
next sentence, Buyer and Sellers will not have any liability under the indemnity
provisions of this Agreement with respect to a particular matter unless a notice
setting forth in reasonable detail the breach or other matter which is asserted
has been given to the Indemnifying Party (as defined below) and, in addition, if
such matter arises out of a suit, action, investigation, proceeding or claim,
such notice is given promptly, but in any event within thirty (30) days after
the Indemnified Party (as defined below) is given notice of the claim or the
commencement of the suit, action, investigation or
17
<PAGE>
proceeding. Notwithstanding the preceding sentence, failure of the Indemnified
Party to give notice hereunder shall not release the Indemnifying Party from its
obligations under this Article VIII, except to the extent the Indemnifying Party
is actually prejudiced by such failure to give notice. With respect to Buyer's
Losses, Sellers shall be the Indemnifying Party and Buyer, the Company and their
respective directors, officers, employees, representatives, agents and attorneys
shall be the Indemnified Parties. With respect to Sellers' Losses, Buyer shall
be the Indemnifying Party and Sellers and their respective directors, officers,
employees, representatives, agents and attorneys shall be the Indemnified Party.
Section 8.4 Right to Defend. Upon receipt of notice of any suit,
----------- ---------------
action, investigation, claim or proceeding for which indemnification might be
claimed by an Indemnified Party, the Indemnifying Party shall be entitled to
defend, contest or otherwise protect against any such suit, action,
investigation, claim or proceeding at its own cost and expense, and the
Indemnified Party must cooperate in any such defense or other action. The
Indemnified Party shall have the right, but not the obligation, to participate
at its own expense in defense thereof by counsel of its own choosing, but the
Indemnifying Party shall be entitled to control the defense unless the
Indemnified Party has relieved the Indemnifying Party from liability with
respect to the particular matter or the Indemnifying Party fails to assume
defense of the matter. In the event the Indemnifying Party shall fail to defend,
contest or otherwise protect in a timely manner against any such suit, action,
investigation, claim or proceeding, the Indemnified Party shall have the right,
but not the obligation, thereafter to defend, contest or otherwise protect
against the same and make any compromise or settlement thereof and recover the
entire cost thereof from the Indemnifying Party including, without limitation,
reasonable attorneys' fees, disbursements and all amounts paid as a result of
such suit, action, investigation, claim or proceeding or the compromise or
settlement thereof; provided, however, that the Indemnified Party must send a
written notice to the Indemnifying Party of any such proposed settlement or
compromise, which settlement or compromise the Indemnifying Party may reject, in
its reasonable judgment, within thirty (30) days of receipt of such notice.
Failure to reject such notice within such thirty (30) day period shall be deemed
an acceptance of such settlement or compromise. The Indemnified Party shall have
the right to effect a settlement or compromise over the objection of the
Indemnifying Party; provided, that if (i) the Indemnifying Party is contesting
such claim in good faith or (ii) the Indemnifying Party has assumed the defense
from the Indemnified Party, the Indemnified Party waives any right to indemnity
therefor. If the Indemnifying Party undertakes the defense of such matters, the
Indemnified Party shall not, so long as the Indemnifying Party does not abandon
the defense thereof, be entitled to recover from the Indemnifying Party any
legal or other expenses subsequently incurred by the Indemnified Party in
connection with the defense thereof other than the reasonable costs of
investigation undertaken by the Indemnified Party with the prior written consent
of the Indemnifying Party.
Section 8.5 Cooperation. The Company, Buyer, Sellers and each of
----------- -----------
their Affiliates, successors and assigns shall cooperate with each other in the
defense of any suit, action, investigation, proceeding or claim by a third party
and, during normal business hours, shall afford each other access to their books
and records and employees relating to such suit, action, investigation,
proceeding or claim and shall furnish each other all such further information
that they have the right and power to furnish as may reasonably be necessary to
defend such suit, action, investigation, proceeding or claim, including, without
limitation, reports, studies, correspondence
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and other documentation relating to Environmental Protection Agency,
Occupational Safety and Health Administration, and Equal Employment Opportunity
Commission matters.
Section 8.6 Waiver of Contribution and Indemnification. Sellers
----------- ------------------------------------------
hereby waive and release any rights of indemnification or contribution they may
have against the Company as a result of any payment made under this Article
VIII.
Section 8.7 Limits on Indemnification. No amount shall be payable by
----------- -------------------------
an indemnifying party until the aggregate amount of loss indemnifiable by such
indemnifying party exceeds $50,000 at which time the indemnifying party shall be
liable for all losses incurred in excess of $50,000 (other than with respect to
the Special Sellers' Losses).
ARTICLE IX
MISCELLANEOUS
Section 9.1 Entire Agreement. This Agreement (including the exhibits
----------- ----------------
and schedules hereto and related documents described herein) constitutes the
entire agreement and supersedes all prior agreements and understandings, both
written and oral, between the parties hereto with respect to the subject matter
hereof, and no party shall be liable or bound to the other in any manner by any
representations or warranties not set forth herein.
Section 9.2 Successors and Assigns. The terms and conditions of this
----------- ----------------------
Agreement shall inure to the benefit of and be binding upon the parties hereto
and their respective successors and permitted assigns. Neither this Agreement
nor any rights, interests, or obligations hereunder may be assigned by any party
hereto without the prior written consent of all other parties hereto, and any
purported assignment in violation of this Section 9.2 shall be null and void.
Section 9.3 Counterparts. This Agreement may be executed in one or
----------- ------------
more counterparts, each of which shall for all purposes be deemed to be an
original and all of which shall constitute the same instrument.
Section 9.4 Headings. The headings of the articles and sections of
----------- --------
this Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction hereof.
Section 9.5 Construction. As used in this Agreement, the words
------------ ------------
"herein," "hereof" and "hereunder" and other words of similar import refer to
this Agreement as a whole and not to any particular article, section, paragraph
or other subdivision.
Section 9.6 Modification and Waiver. Any of the terms or conditions
----------- -----------------------
of this Agreement may be waived in writing at any time by the party which is
entitled to the benefits thereof, and this Agreement may be modified or amended
by a written instrument executed by Buyer, the Company and each Seller. No
supplement, modification or amendment of this Agreement shall be binding unless
executed in writing by all of the parties hereto. No waiver of any of the
provisions of this
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Agreement shall be deemed or shall constitute a waiver of any other provision
hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver.
Section 9.7 Schedules, Etc. All exhibits and schedules annexed
----------- --------------
hereto are expressly made a part of this Agreement as though fully set forth
herein.
Section 9.8 Notices. Any notice, request, instruction, document or
----------- -------
other communication to be given hereunder by any party hereto to any other party
hereto shall be in writing and validly given if (i) delivered personally, (ii)
sent by telecopy with electronic confirmation of receipt, (iii) delivered by
overnight express, or (iv) sent by registered or certified mail, postage
prepaid, as follows:
If to Buyer, to:
Citadel Computer Systems Incorporated
3811 Turtle Creek Boulevard, Suite 600
Dallas, Texas 75219
Attention: Steven B. Solomon
Telecopy No. (214) 520-9293
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If to Sellers, to:
Robert C. Wesolek
Bayou Bend Towers, Unit 304
101 Westcott
Houston, Texas 77007
Vance G. Nesbitt
3260 Sul Ross
Houston, Texas 77098
with a copy to:
J. Mark Everett, Esq.
608 West 12/th/ Street
Austin, Texas 78701
If to ADI, to:
Astonishing Developments, Inc.
3260 Sul Ross
Houston, Texas 77098
or at such other address for a party as shall be specified by like notice. Any
notice that is delivered personally, or sent by telecopy or overnight express in
the manner provided herein shall be deemed to have been duly given to the party
to whom it is directed upon actual receipt by such party. Any notice that is
addressed and mailed in the manner herein provided shall be conclusively
presumed to have been given to the party to whom it is addressed at the close of
business, local time of the recipient, on the fourth day after the day it is so
placed in the mail.
Section 9.9 GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED,
----------- -------------
ENFORCED, AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF TEXAS (WITHOUT
REGARD TO ITS CHOICE OF LAW PRINCIPLES). VENUE FOR ALL PURPOSES SHALL BE IN
DALLAS COUNTY, TEXAS.
Section 9.10 Survival of Covenants, Agreements, Representations and
------------ ------------------------------------------------------
Warranties.
- ----------
(a) Covenants and Agreements. All covenants and agreements made
------------------------
hereunder or pursuant hereto or in connection with the transactions contemplated
hereby shall survive the Closing and shall continue in full force and effect
thereafter according to their terms without limit as to duration.
(b) Representations and Warranties. All representations and
------------------------------
warranties contained herein shall survive the Closing and shall continue in full
force and effect thereafter for a period of two years following the Closing,
except that (i) the representations and warranties
21
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contained in Section 2.6 hereof shall survive until the earlier of (x) the
expiration of the applicable periods (including any extensions) of the
respective statutes of limitation applicable to the payment of the Taxes to
which such representations and warranties relate without an assertion of a
deficiency in respect thereof by the applicable taxing authority or (y) the
completion of the final audit and determinations by the applicable taxing
authority and final disposition of any deficiency resulting therefrom, (ii) the
representations and warranties contained in Section 2.17 shall survive until the
expiration of the applicable period of the statutes of limitation applicable to
ERISA matters, and (iii) the representations and warranties contained in
Sections 2.1, 2.2, 2.3, 2.4, and 2.9, shall survive indefinitely.
Section 9.11 Invalid Provisions. If any provision of this Agreement
------------ ------------------
is held to be illegal, invalid or unenforceable under present or future laws,
such provision shall be fully severable, this Agreement shall be construed and
enforced as if such illegal, invalid or unenforceable provision had never
comprised a part of this Agreement, and the remaining provisions of this
Agreement shall remain in full force and effect and shall not be affected by the
illegal, invalid or unenforceable provision or by its severance from this
Agreement.
Section 9.12 Expenses. Sellers, on the one hand, and Buyer, on the
------------ --------
other hand, shall be solely responsible for their respective costs and expenses
incurred in connection with the transactions contemplated hereby.
Section 9.13 Third Party Beneficiaries. Except as otherwise
------------ -------------------------
specifically provided in Article VIII, no individual or firm, corporation,
partnership or other entity shall be a third-party beneficiary of the
representations, warranties, covenants and agreements made by any party hereto.
Section 9.14 Number and Gender of Words. Whenever the singular
------------ --------------------------
number is used, the same shall include the plural where appropriate, and words
of any gender shall include each other gender where appropriate.
Section 9.15 Further Assurances. From time to time after the
------------ ------------------
Closing, at the request of any other party but at the expense of the requesting
party, Buyer, the Company or Sellers, as the case may be, will execute and
deliver any such other instruments of conveyance, assignment and transfer, and
take such other action as the other party may reasonably request in order to
consummate or evidence the transactions contemplated hereby.
22
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IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first above written.
BUYER:
Citadel Computer Systems Incorporated
By:
-----------------------------------------------
Steven B. Solomon
Chief Operating Officer
ADI:
Astonishing Developments, Inc.
By:
-----------------------------------------------
Robert C. Wesolek
President and Chief Operating Officer
SELLERS:
--------------------------------------------------
Robert C. Wesolek
--------------------------------------------------
Vance G. Nesbitt
23
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EXHIBIT 99.1
[LETTERHEAD OF CITADEL COMPUTER SYSTEMS, INC. APPEARS HERE]
NEWS RELEASE
For: Citadel Computer Systems, Inc.
3811 Turtle Creek Boulevard
Dallas, Texas 75219
http://www.citadel.com
Company Contact: Steven B. Solomon, COO
(214) 520-9292
Agency Contact: Warren J. Cavior
(212) 687-6070 / [email protected]
CITADEL COMPUTER SYSTEMS ACQUIRES
COMPETITOR KENT-MARSH
ESTABLISHES NEW DESKTOP SOFTWARE DIVISION
Dallas, Texas, August 20, 1996, Citadel Computer Systems, Inc. (OTC
Bulletin Board: NOFF), a market pacesetter in network security software,
announced today that it has acquired for cash and stock Kent-Marsh Ltd., Inc.
and Astonishing Developments, Inc., the acknowledged industry leaders in cross-
platform desktop security software for Windows and Macintosh operating systems.
Citadel previously announced that it had signed a letter of intent to acquire
Astonishing Developments, Inc.
"With Kent-Marsh on board, Citadel enhances its leadership position in
network and desktop security," said Steven B. Solomon, Chief Operating Officer
of Citadel. "By expanding our expertise across platforms -- indeed, over the
entire spectrum of computer users -- this acquisition furthers Citadel's goal to
provide complete solutions for all our customers' security needs. So from the
individual with one home PC to the networked multinational
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corporation, Citadel has all the bases covered. Marketing legend, Victor Kiam,
who recently joined our board of directors, now has an even stronger consumer
product line to leverage."
"Kent-Marsh has time-proven, award-winning products, shelf-presence and a
large and loyal customer base," noted Vance Nesbitt, Chief Executive Officer of
Kent-Marsh. "We are bringing to Citadel our entire management team with over a
decade of expertise and strong long-term channel relationships. The addition of
these assets to Citadel, already a leader in the security software industry,
creates an instant powerhouse in the market." Nesbitt, a seasoned security
software industry veteran, has been appointed chief technology officer of
Citadel's newly formed Desktop Software Division.
Since its founding in 1984, Kent-Marsh has consistently provided the
industry's best-selling desktop products, such as WinShield, FolderBolt and
NightWatch, to address the growing privacy and configuration protection needs of
personal computer users. Kent-Marsh has established relationships with the
industry's preeminent software distributors, as well as extensive bundling and
market-specific program collaborations with such giants as Microsoft, Compaq,
IBM, Ingram and Apple Computer. Solomon said that Kent-Marsh is nearing release
on a variety of easy-to-use network tools directed at supporting Microsoft's
Windows NT platform. In addition, the company has signed an agreement with
Microsoft to localize certain of its products for European distribution.
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Citadel Computer Systems is a developer and marketer of computer software
products, broadly characterized as network and PC security and management
utilities and software management tools. Its products, including NetOFF,
ServerSentry and Phantom of the Console, are designed to better manage and
provide additional security to local area networks using Novell and Microsoft
network software and now, through the Kent-Marsh product line, to individual PCs
as well.
//////////
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