<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 8-K/A
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 (IRS Employer
of Incorporation) File Number) Identification No.)
3811 TURTLE CREEK BOULEVARD, SUITE 330, DALLAS, TEXAS 75219
(Address of Principal Executive Office)
(214) 520-9292
(Registrant's telephone number, including area code)
<PAGE>
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.
-1-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
The audited financial statements for Kent-Marsh and ADI, as of and for
the year ended December 31, 1995, are attached hereto following the signature
page. Neither audited nor unaudited financial statements were available for
the year ended December 31, 1994.
(b) PRO FORMA FINANCIAL INFORMATION.
Pro forma financial information that shows the effect of the acquisition
of Kent-Marsh and ADI as of January 1, 1995, is attached and follows the
financial statements for Kent-Marsh and ADI.
(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). (Incorporated by reference to the
Current Report on Form 8-K filed with the Commission on September
3, 1996.)
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). (Incorporated by
reference to the Current Report on Form 8-K filed with the
Commission on September 3, 1996.)
99.1 Press Release dated August 20, 1996. (Incorporated by reference
to the Current Report on Form 8-K filed with the Commission on
September 3, 1996.)
-2-
<PAGE>
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: November 4, 1996 By: /s/ Steven B. Solomon
-------------------------------------
Steven B. Solomon,
Chief Operating Officer
-3-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Combined Financial Statements of Kent-Marsh Ltd., Inc.
and
Astonishing Developments, Inc.
Independent Auditor's Report.......................... 1
Combined Balance Sheets............................... 2
Combined Statements of Operations..................... 3
Combined Statement of Shareholders' Deficit........... 4
Combined Statements of Cash Flows..................... 5
Notes to Combined Financial Statements................ 6
Pro Forma Condensed Statements of Operations.......... 9
Notes to Pro Forma Condensed Statements of Operations. 12
-4-
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Kent-Marsh Ltd., Inc. and Astonishing
Developments, Inc.
We have audited the accompanying combined balance sheet of Kent-Marsh Ltd., Inc.
and Astonishing Developments, Inc. as of December 31, 1995, and the related
combined statements of operations, shareholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the combined financial position of Kent-Marsh Ltd., Inc.
and Astonishing Developments, Inc. as of December 31, 1995, and the combined
results of their operations and their combined cash flows for the year then
ended, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Dallas, Texas
October 25, 1996
<PAGE>
KENT-MARSH LTD., INC. AND
ASTONISHING DEVELOPMENTS, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1995 1996
------------- -----------
(unaudited)
<S> <C> <C>
Current assets
Cash $ 16,607 $ 30,290
Accounts receivable, net of allowance of $10,869 40,867 99,870
Supplies and other current assets 30,596 23,101
--------- ---------
Total current assets 88,070 153,261
Property and equipment
Furniture and fixtures 75,124 75,124
Leasehold improvements 4,300 4,300
Computer equipment 123,960 139,081
--------- ---------
203,384 218,505
Less accumulated depreciation (185,150) (192,650)
--------- ---------
18,234 25,855
Other assets 6,818 -
--------- ---------
$ 113,122 $ 179,116
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 44,207 $ 20,122
Accrued liabilities 230,450 378,599
Note payable to bank 175,000 195,000
Current portion of long-term debt 13,188 -
--------- ---------
Total current liabilities 462,845 593,721
Royalty payable - related party 227,770 227,770
--------- ---------
Total liabilities 690,615 821,491
Shareholders' deficit
Common stock 129,071 129,071
Accumulated deficit (591,564) (656,446)
Less treasury stock, at cost (115,000) (115,000)
--------- ---------
Total shareholders' deficit (577,493) (642,375)
--------- ---------
$ 113,122 $ 179,116
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
KENT-MARSH LTD., INC. AND
ASTONISHING DEVELOPMENTS, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six months ended
Year ended June 30,
December 31, ------------------------
1995 1995 1996
------------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C>
Net sales $1,222,796 $644,591 $545,880
Cost of goods sold 215,204 71,899 101,351
---------- -------- --------
Gross profit 1,007,592 572,692 444,529
Selling, general and administrative expenses 1,113,890 592,673 500,595
---------- -------- --------
Operating loss (106,298) (19,981) (56,066)
Interest expense 20,930 10,057 8,816
---------- -------- --------
Net loss $ (127,228) $(30,038) $(64,882)
========== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
KENT-MARSH LTD., INC. AND
ASTONISHING DEVELOPMENTS, INC.
COMBINED STATEMENT OF SHAREHOLDERS' DEFICIT
Year ended December 31, 1995 and
six months ended June 30, 1996 (unaudited)
<TABLE>
<CAPTION>
Common stock Treasury stock
-------------------- --------------------- Accumulated
Shares Amount Shares Amount deficit Total
---------- -------- --------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1995 18,302,105 $128,071 4,380,000 $(115,000) $(464,336) $(451,265)
Issuance of common stock 1,000 1,000 - - - 1,000
Net loss - - - - (127,228) (127,228)
---------- -------- --------- --------- --------- ---------
Balances at December 31, 1995 18,303,105 129,071 4,380,000 (115,000) (591,564) (577,493)
Net loss - - - - (64,882) (64,882)
---------- -------- --------- --------- --------- ---------
Balances at June 30, 1996
(unaudited) 18,303,105 $129,071 4,380,000 $(115,000) $(656,446) $(642,375)
========== ======== ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE>
KENT-MARSH LTD., INC. AND
ASTONISHING DEVELOPMENTS, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
Year ended June 30,
December 31, ----------------
1995 1995 1996
------------ ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(127,228) $(30,038) $(64,882)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation 14,140 6,533 7,500
Changes in operating assets and liabilities
Accounts receivable (39,217) (65,908) (59,003)
Other assets (5,084) (34,575) 15,312
Accounts payable 10,349 (12,615) (24,084)
Accrued liabilities 92,882 105,766 147,149
--------- -------- --------
Net cash provided by (used in) operating
activities (54,158) (30,837) 21,992
Cash flows from investing activities
Purchase of capital assets - - (15,121)
Cash flows from financing activities
Principal payments on long-term debt (6,446) (6,833) (13,188)
Borrowings under long-term debt 30,000 10,000 20,000
Issuance of common stock 1,000 - -
--------- -------- --------
Net cash provided by financing activities 24,554 3,167 6,812
--------- -------- --------
Net increase (decrease) in cash (29,604) (27,670) 13,683
Cash at beginning of period 46,211 46,211 16,607
--------- -------- --------
Cash at end of period $ 16,607 $ 18,541 $ 30,290
========= ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
5
<PAGE>
KENT-MARSH LTD., INC. AND
ASTONISHING DEVELOPMENTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
--------------------
Kent-Marsh Ltd., Inc. (KML) and Astonishing Developments, Inc. (ADI)
(collectively, the Company) design and manufacture security software for
MacIntosh and Windows 95 users.
Accounting Policies
-------------------
A summary of the Company's significant accounting policies applied in the
preparation of the accompanying financial statements follows:
Basis of Presentation
---------------------
The accompanying financial statements combine the accounts of KML and ADI
because both companies are under common control. All significant intercompany
accounts and transactions have been eliminated.
Software
--------
The Company capitalizes significant software development costs when
technological feasibility has been established. Software development costs not
qualifying for capitalization are expensed as incurred. There were no software
development costs capitalized during the year ended December 31, 1995.
Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation is provided in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives, by the straight-line method.
Interim Financial Statements
----------------------------
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and Rule 310 of Regulation S-B. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
the unaudited interim financial statements for the six months ended June 30,
1995 and 1996 include all adjustments necessary to present fairly the
Company's financial position, results of operations and cash flows. Operating
results for the interim periods are not necessarily indicative of the results
that may be expected for the full year.
Fair Value of Financial Instruments
-----------------------------------
The carrying amounts for cash and bank debt approximate fair value because of
the short-term nature of these items. The estimated fair value of royalties
payable is $150,000.
6
<PAGE>
KENT-MARSH LTD., INC. AND
ASTONISHING DEVELOPMENTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE B - LIQUIDITY MATTERS
As reflected in the accompanying financial statements, the Company has
experienced losses and has an excess of liabilities over assets and negative
working capital. In addition, the Company is in violation of certain financial
covenants contained in the note agreement with the bank.
The Company's continued existence as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a timely
basis, to comply with the terms and covenants of its financing agreements and
to obtain additional financing as may be required. As a result of the
acquisition of the Company in August 1996 (Note H), its new parent has
committed to provide funds that management believes will be adequate to
continue operations.
NOTE C - NOTE PAYABLE TO BANK
The note payable to bank is outstanding under a $200,000 line of credit which
matured in August 1996. Borrowings under the line of credit bear interest at
the prime rate plus 2.25% (11% at December 31, 1995). Substantially all assets
of the Company are pledged as collateral on this note. In August 1996, the
note was extended until August 2000. The note agreement contains various
financial covenants, some of which the Company is not in compliance with.
Accordingly, the note has been classified as a current liability.
NOTE D - ROYALTY PAYABLE
The Company has an agreement with the Company's majority shareholder prior to
August 17, 1996 that provides for royalties based upon sales of certain
products. Royalty expense for 1995 was $14,456.
At December 31, 1995, royalties of $227,770 accruing prior to August 1993 were
due. Under the Company's bank loan agreement, these royalties cannot be paid
until the bank loan is retired.
7
<PAGE>
KENT-MARSH LTD., INC. AND
ASTONISHING DEVELOPMENTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
NOTE E - COMMON STOCK
Kent-Marsh Ltd., Inc. common stock consisted of the following:
Class A voting, no par value; authorized, 100,000,000 shares;
issued, 18,118,422 shares, of which 4,380,000 have been
reacquired for the treasury $ 126,234
Class B non-voting, no par value; authorized, 100,000,000
shares; issued and outstanding, 183,683 shares 1,837
Astonishing Developments, Inc. common stock consists of the
following:
Class A voting, no par value; authorized, 100,000,000
shares; issued and outstanding, 1,000 shares 1,000
Class B non-voting, no par value; authorized,
100,000,000 shares; none issued -
---------
$ 129,071
=========
NOTE F - INCOME TAXES
The Company has deferred tax assets of approximately $220,000 and deferred tax
liabilities of approximately $1,000. A valuation allowance of $219,000 has
been established against the net deferred tax asset because of uncertainties
regarding recoverability. The deferred tax assets arise primarily from
receivables, property, equipment and payables.
NOTE G - COMMITMENTS AND CONTINGENCIES
The Company leases office space under an operating lease that expires in
December 1996. Rent expense approximated $ 42,000 for the year ended December
31, 1995. Minimum future rental commitments under this lease are $44,532.
The Company is self-insured with respect to workers' compensation claims. As a
result, it is exposed to uninsured losses from workplace occurrences that are
normally covered by insurance and it has surrendered certain common law
defenses to negligence claims which may be asserted by employees who sustain
employment-related injuries.
NOTE H - SUBSEQUENT EVENT
On August 17, 1996, all of the capital stock of the Company was acquired by
Citadel Computer Systems Incorporated for $600,000 in cash, notes of $400,000
and 360,000 shares of common stock.
NOTE I - SIGNIFICANT CUSTOMER
During the year ended December 31, 1995, the Company had sales of $186,000 to
one customer. Loss of this customer could have a material adverse effect on
the operations of the Company.
8
<PAGE>
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
The accompanying pro forma condensed statements of operations are presented for
illustrative purposes only and are not necessarily indicative of the operating
results that would have occurred if the acquisition of Kent-Marsh Ltd., Inc.
(KML) and Astonishing Developments, Inc. (ADI) had been consummated as of the
time reflected herein, nor are they necessarily indicative of the future results
of operations of Citadel Computer Systems Incorporated. The acquisition has been
accounted for using the purchase method of accounting. Allocation of purchase
price is based on preliminary estimates of fair value and is subject to change.
The following pro forma condensed statements of operations give effect to the
acquisition of KML and ADI, which was effective August 17, 1996, as though it
had taken place at January 1, 1995.
9
<PAGE>
KENT-MARSH LTD., INC. AND
ASTONISHING DEVELOPMENTS, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
For the six months ended August 31, 1996
<TABLE>
<CAPTION>
Citadel
Computer
Systems KML/ADI Pro Forma
Incorporated Combined Adjustments Pro Forma
------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 2,676,884 $ 545,880 $ - $ 3,222,764
Cost of goods sold 123,427 101,351 - 224,778
----------- ----------- ----------- -----------
Gross profit 2,553,457 444,529 - 2,997,986
Selling, general and administrative
expenses (3,079,565) (500,595) (56,903)(1) (3,637,063)
Research and development
expenses (4,007,792) - 1,990,000 (2) (2,017,792)
----------- ----------- ----------- -----------
Operating loss (4,533,900) (56,066) 1,933,097 (2,656,869)
Other expense - net (1,414,220) (8,816) (60,000)(3) (1,483,036)
----------- ----------- ----------- -----------
Net loss from continuing
operations $(5,948,120) $ (64,882) $1,873,097 $(4,139,905)
=========== =========== =========== ===========
Loss per share $(.50) $(.34)
=========== ===========
Weighted average shares
outstanding 11,888,385 360,000 (4) 12,248,385
=========== =========== ===========
</TABLE>
10
<PAGE>
KENT-MARSH LTD., INC. AND
ASTONISHING DEVELOPMENTS, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
For the year ended December 31, 1995
<TABLE>
<CAPTION>
Citadel
Computer
Systems KML/ADI Pro Forma
Incorporated Combined Adjustments Pro Forma
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 1,348,382 $ 1,222,796 $ - $2,571,178
Cost of goods sold 127,583 215,204 - 342,787
----------- ----------- ----------- ----------
Gross profit 1,220,799 1,007,592 - 2,228,391
Selling, general and
administrative expenses (1,871,689) (1,113,890) (113,806)(1) (3,099,385)
Research and development
expenses (136,355) - - (136,355)
----------- ----------- ----------- ----------
Operating loss (787,245) (106,298) (113,806) (1,007,349)
Other expense - net (322,403) (20,930) (120,000)(3) (463,333)
----------- ----------- ----------- -----------
Net loss from continuing
operations $(1,109,648) $ (127,228) $(233,806) $(1,470,682)
=========== =========== =========== ===========
Loss per share $(.17) $(.21)
=========== ===========
Weighted average shares
outstanding 6,570,284 360,000(4) 6,930,284
=========== =========== ===========
</TABLE>
11
<PAGE>
KENT-MARSH LTD., INC. AND
ASTONISHING DEVELOPMENTS, INC.
NOTES TO PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
NOTE A - GENERAL
In August 1996, Citadel Computer Systems Incorporated (Citadel) acquired all
of the outstanding capital stock of KML and ADI for $1,000,000 in cash and
noninterest-bearing notes and 360,000 shares of restricted common stock valued
at $1,200,000. The excess of purchase price over the deficit of KML and ADI
was allocated to software ($800,000) and purchased research and development
technology that had not reached the working model stage and for which there is
not alternative use ($1,990,000).
The 1996 pro forma condensed statement of operations includes (i) Citadel for
the six months ended August 31, 1996 (the first six months of its changed
fiscal year) and (ii) KML and ADI for the six months ended June 30, 1996.
NOTE B - PRO FORMA ADJUSTMENTS
(1) Amortization over 7 years of purchase price assigned to software.
(2) Elimination of Citadel write-off in August 1996 for purchased research
and development technology.
(3) Interest at 12% on notes given in acquisition and borrowings that would
have been required to finance the cash portion of the purchase price.
(4) Shares issued in the acquisition.
12
