<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 EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) February 29, 1996
CITADEL COMPUTER SYSTEMS INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 0-08718 75-2432011
(State or other jurisdiction (Commission File (IRS Employer
of Incorporation) Number) Identification No.)
1300 Post Oak Blvd., Ninth Floor, Houston, Texas 77056
3811 Turtle Creek Blvd., Suite 1080, Dallas, Texas 75219
---------------------------------------------------------
(Addresses of Principal Executive Offices)
Registrant's telephone numbers including area code: (713) 686-6400 and
(214) 520-9292
LoneStar Hospitality Corporation, 3131 Turtle Creek Blvd., Suite 1301,
--------------------------------------------------------------------------
Dallas, TX 75219
-------------------
(Former name or former address, if changed since last report)
<PAGE>
ITEM 1. CHANGES IN CONTROL OF REGISTRANT
Effective February 29, 1996, Citadel Computer Systems Incorporated ("Old
Citadel"), a Delaware corporation, merged into LSHC Acquisition, Inc. ("LSHC"),
a wholly owned Delaware subsidiary of LoneStar Hospitality Corporation (the
"Company") (the "Merger"). As a result of the Merger, a change in control of
the Company occurred. See Item 2 for a description of the Merger and related
transactions.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
A. Merger With Old Citadel.
Effective February 29, 1996, Old Citadel merged into LSHC, a wholly owned
Delaware subsidiary of the Company, pursuant to a Second Amended and Restated
Agreement and Plan of Merger, dated February 29, 1996 (the "Merger Agreement").
Pursuant to the terms of the Merger Agreement, each stockholder of Citadel
received 4.5 shares of common stock, par value $.01 per share (the "Common
Stock"), of the Company for each share of common stock of Citadel held by such
stockholder. Prior to the Merger, Citadel had 3,000,000 shares of common stock
outstanding. In addition, each outstanding option and warrant to purchase
capital stock of Old Citadel became an option or warrant to purchase a number of
shares of Common Stock of the Company equal to 4.5 times the number of shares
subject to the Old Citadel options and warrants at the same aggregate exercise
price of the Old Citadel options and warrants. Former stockholders of old
Citadel now own approximately 75% of the issued and outstanding shares of Common
Stock of the Company on a fully diluted basis. LSHC, now known as Citadel
Computer Systems Acquisitions, Inc., is now a wholly-owned subsidiary of the
Company. On May 1, 1996, after the effective date of the Merger, the Company
changed its name from LoneStar Hospitality Corporation to Citadel Computer
Systems Incorporated to better reflect the Merger and effected a one-for-two
reverse split. This reverse split had the effect of reducing the number of
shares of Common Stock received by Old Citadel stockholders and the number of
shares of Common Stock subject to Old Citadel options and warrants to 2.25
shares of Common Stock for each share of Old Citadel common stock. See "Item 5."
Gilbert Gertner, the former Chairman of Old Citadel, now serves as Chairman
of the Board of the Company. George Sharp, the former President and Chief
Executive Officer of Old Citadel, serves as President and Chief Executive
Officer of the Company and Steven Solomon, the former President and Chief
Executive Officer of the Company, now serves as Chief Operating Officer and
Secretary of the Company. See "Directors and Executive Officers." Pursuant to
the Merger Agreement, Mr. Gertner and Mr. Sharp beneficially own more than 50%
of the outstanding Common Stock of the Company.
Pursuant to the Merger Agreement, Messrs. Gertner and Sharp have become
directors of the Company. Three directors of the Company prior to the Merger
have remained on the Board of Directors: Chris A. Economou, Axel Sawallich and
Mr. Solomon. The other directors resigned effective as of the effective date of
the Merger. Jesse R. Marion was elected as a director on March 6, 1996. See
"Directors and Executive Officers."
Overview and Historical Background
The Company develops and markets computer software products that may be
broadly categorized as software management tools and network management
utilities. These products are designed to permit better management of, and
provide additional security to local area networks ("LANs"). Old Citadel was
formed and began operations in June 1992. (References herein to "Old Citadel,"
or the "Company" shall include the Company and Old Citadel, unless otherwise
indicated or unless the context requires otherwise.)
The Company's principal executive offices are located at 1300 Post Oak
Blvd., Ninth Floor, Houston, Texas 77056, and its telephone number is
(713) 686-6400. The Company also maintains executive offices at 3811 Turtle
Creek Boulevard, Suite 1080, Dallas, Texas 75219; the telephone number at this
office is (214) 520-9292.
1
<PAGE>
Products
The Company's products may broadly be categorized as software management
tools and network management utilities. The Company's products are designed to
better manage and provide additional security to LANs using Novell and Microsoft
network software. The Company's lead product, NetOFF, has been installed in
more than 15,000 computer networks worldwide, operating over one million
personal computers ("PCs"). According to industry sources, Novell, Inc. holds
approximately 65% of the market of network operating systems.
The Company's principal products currently are as follows:
NetOFF. The Company's principal product is NetOFF, which runs in Novell
and Microsoft Windows NT environments. NetOFF is a network management utility
and security program used primarily to shut down unattended PCs on a network
after a specified period of inactivity. Use of this program permits the
protection of network data gained through access to unattended network computer
terminals, and assures that a complete backup of network data (which requires
that users log out of the network) can occur.
NetCONSOLE. NetCONSOLE is designed to automate input tasks at the server
console, so that commands can be scheduled at an unattended server. For
example, prior to system backup, a network administration will want all Network
Loadable Modules (NLMs) unloaded and all users logged off. NetCONSOLE enables
the network administrator to schedule these tasks at a time just prior to system
backup.
NetPURGE. NetPURGE automatically searches for old or unused files and
moves them to archival storage. Because disk storage on large networks is
scarce, network administrators must carefully monitor and eliminate inactive
files to free up space. NetPURGE automates this function.
NetQ. NetQ enables network users to manage facility queues, such as those
for printing, archiving, or custom applications. NetQ constantly updates
queuing displays so that network administrators can manage queue assignments in
real time.
NetWATCH. NetWATCH detects and corrects un-owned network files. An un-
owned file is one to which no user has been assigned. For example, if a user is
deleted from a network (because of promotion, termination or other reason), all
files previously owned by that user will be designated as "un-owned" by the
network. Consequently, if an un-owned file is modified by a new user, NetWare
cannot update it, and hours of modifications may be lost. NetWATCH eliminates
this problem by assigning all un-owned files to a supervisor ID or other user
specified ID.
Phantom of the Console. Phantom of the Console automates certain routine
daily server tasks. Phantom of the Console automatically executes routine tasks
at scheduled times, as if the network administrator were sitting at the console
entering the commands to perform those tasks. Among the tasks performed are the
automatic loading and unloading of NLMs, a procedure often required to permit
the daily backup of data. This program also contains features that permit
automatic responses to NetWare operating system alerts, database messages, and
other network monitoring packages, and automatic execution of procedures to
manage such responses. Other features include optional password protection,
automatic logoff, automatic file transfers, broadcast messages, and file
operations on both remote and local servers.
Server Sentry. Server Sentry is a network monitoring system that
immediately restarts the file server, documents the cause of a system crash,
notifies network personnel, and produces downtime cost reports without any user
intervention. Server Sentry is an NLM-based software tool for Novell NetWare
servers. It can bring "crashed" servers back online automatically.
When a server crashes, the operating system typically provides limited
information about what was happening at the time of the crash. When an crash
occurs, Server Sentry captures critical data used to determine the cause of the
system crash. After recording the information, Server Sentry reboots the
NetWare server to bring it back on-line. In the event of a damaged volume,
Server Sentry can automatically run software to repair the damage. Server
Sentry
2
<PAGE>
enables the cause of the crash to be determined quickly, and troubleshooting
time can be substantially reduced. Server Sentry includes a pager notification
module that can cause network personnel to be paged to take care of any problems
Server Sentry cannot resolve.
Server Sentry also automatically generates downtime cost analysis reports
that detail the actual cost of downtime with Server Sentry installed, as well as
an estimated cost without having Server Sentry installed.
ServerCam. ServerCam emulates a time-lapse video recorder connected to the
server console for surveillance, quality control, problem-solving,
documentation, and training.
Properties
The Company leases the premises housing its principal offices located at
1300 Post Oak Blvd., Ninth Floor, Houston, Texas pursuant to a lease agreement
that expires December 31, 2001. The Company has an option, until December 31,
1996, to expand into adjacent space. The Company leases office space housing its
Dallas executive offices located at 3811 Turtle Creek Boulevard, Suite 1080,
Dallas, Texas. The Company believes that these facilities are adequate for its
current needs.
Directors and Executive Officers
The following table contains information about the Company's directors and
executive officers. The Company expects that these persons will serve as
directors until the next annual meeting or until their respective successors are
elected and qualified. There are currently two vacancies on the Board of
Directors.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Gilbert Gertner 70 Chairman of the Board
George T. Sharp 53 President and Chief Executive Officer
Steven B. Solomon 32 Secretary, Chief Operating Officer,
Director of Corporate Relations
Chris A. Economou 40 Director
Jesse R. Marion 41 Director
Axel Sawallich 52 Director
</TABLE>
Gilbert Gertner has been Chairman of the Company since February 29, 1996
and was president of Old Citadel from its inception in July 1992 until the
Merger. From 1990 to 1995, Mr. Gertner was president of Gertner Investments, an
investment firm specializing in identifying, capitalizing and developing high-
tech companies. Mr. Gertner served as a director of Microtel International,
Inc. (formerly known as CXR TELECOM CORP.) from 1986 to 1994, and as a director
of Data Systems and Software, Inc. (formerly known as Defense Software and
Systems, Inc.) from 1991 to 1994.
George Sharp has been President of the Company since February 29, 1996 and
was President of Old Citadel from its inception in July 1992 until the Merger.
From 1991 until founding Citadel, Mr. Sharp was president of Matrix Systems,
Inc., a developer of computer systems for the insurance industry.
Steven B. Solomon has been the Chief Operating Officer and Secretary of the
Company since February 29, 1996. He was the President and a Director of LoneStar
and its predecessor from its inception in February 1992 until the Merger, and
Chairman of the Board of Directors from December 1994 until the Merger. From
November 1991 to September 1992, Mr. Solomon served as Vice-President of
Corporate Development for Europa Cruises Corporation. He also served as a
business advisor and as a consultant in development and investment projects with
various cruise line companies. From May 1990, to November 1991, Mr. Solomon
served as President of Solomon Associates, a firm which offered consulting
services relating to investments and acquisitions in the shipping industry, and
venture capital projects.
Chris A. Economou was elected to the Board of Directors of the Company in
June 1993. He has been
3
<PAGE>
engaged in the private practice of law in Fort Lauderdale, Florida in the areas
of real estate, business and corporate law for more than ten years. He served
as Executive Vice President, Secretary, General Counsel and director of Miami
Subs Corporation from August 1992 until June 1994. He is also a director of Z-
Communications, Inc.
Jesse R. Marion has been a Director of the Company since March 1996. He is
Vice President and a Director of Seitel, Inc., a New York Stock Exchange listed
energy and seismic data company. He also serves as president of Seitel Data
Corp. and Seitel Data, Ltd., each being wholly-owned subsidiaries of Seitel,
Inc. Prior to joining Seitel, Inc. in April 1992, Mr. Marion was Executive Vice
President of Marketing for First Seismic Corp., a publicly traded seismic data
company, from January 1989 until April 1992. Since 1981, Mr. Marion has held
management and executive positions in both private and publicly traded seismic
data companies.
Axel Sawallich has been a Director of the Company since March 1993. Mr.
Sawallich is in the business of providing investment advisory services in
Vienna, Austria. Since 1993 Mr. Sawallich has been the Managing Partner of
Global Invest, an investment firm located in Vienna, Austria, since 1994. From
1991 until 1994 he was employed by SERCO Investment Counseling Corporation, an
investment firm located in Vienna, and was its Executive Director from 1992
until 1993. From November 1989 to November 1990 Mr. Sawallich was the General
Manager and Director of the Vienna, Austria regional branch of Allegmeine
Sparkasse Bank AG, Linz, a banking firm. From May 1985 to November 1989, Mr.
Sawallich was with Bank fur Arbeit und Wirtschaft AG, a Vienna, Austria banking
firm, serving as the deputy head of the credit department until 1986, and
serving as the Executive Vice President of the Bank's Bureau for Commercial
Customers thereafter. Mr. Sawallich received a Doctor of Law from the
University of Vienna.
There are no family relationships among any of the directors of executive
officers of the Company.
B. Sale of the Restaurant Assets
On March 1, 1996, the Company consummated the sale of the five Miami Subs
Grill restaurants in the Dallas, Texas area owned by its wholly-owned
subsidiary, LS Holding Corp. to Miami Subs of Fort Lauderdale, Florida. Miami
Subs is also the franchisor of the Miami Subs Grill restaurants. In addition,
Miami Subs has also acquired from LS Holding Corp. the right to develop
additional Miami Subs Grill restaurants in the Dallas/Fort Worth area and will
assume LoneStar's indebtedness of $1,500,000 to Stephens Diversified Leasing,
Inc. ("Stephens").
The Company received 1,325,000 shares of Miami Subs' common stock (the
"Miami Subs Stock"), and Miami Subs agreed to file a registration statement with
the Securities and Exchange Commission (the "SEC") covering the Miami Subs Stock
within 60 days after the closing. A registration statement relating to these
shares was filed with the SEC in May 1996. During the six months following the
closing, The Company cannot sell any of the Miami Subs Stock, except with the
consent of Miami Subs, and Miami Subs will have the right to acquire the Miami
Subs Stock for $2.50 per share. Thereafter, the Company will be able to sell
the Miami Subs Stock in private transactions, or in open market transactions not
to exceed 240,000 shares per calendar quarter or 20,000 shares per week. All
sales by the Company will be subject to a right of first refusal by Miami Subs.
Miami Subs assumed no liabilities of the Company, except for the Company's
loan from Stephens and certain restaurant and equipment leases. The Company also
issued to Miami Subs a promissory note in the principal amount of $1,500,000,
and secured by the Miami Subs Stock. The note bears no interest and will be due
on or before July 1, 1996. The current principal balance of the note is
$1,275,000.
C. Acquisition of Assets of Circuit Masters Software, Inc.
As of February 29, 1996, the Company consummated the acquisition of certain
software programs of Circuit Masters Software, Inc. ("Circuit Masters"). As
consideration for the sale, the Company is paying a total of $266,230 in cash
and notes to Circuit Master and its stockholders, has assumed the liability for
the payment of certain trade payables and will issue Company Common Stock valued
at $2,000,000, based on the average closing trading price of LoneStar Common
Stock for the 30 trading days following February 29, 1996, the effective date of
this transaction.
4
<PAGE>
The software programs acquired from Circuit Masters are designed to
automate network functions and secure network applications. Included in the
software products that were acquired form Circuit Masters are "Phantom of the
Console," a scripting software that automates repetitive tasks for Novell
NetWare file servers, and "Server Sentry," software that automatically reboots a
NetWare file server after it crashes. See "Products," above, for a brief
description of these products.
ITEM 5. OTHER EVENTS
Reverse Stock Split. On March 6, 1996, the Board of Directors approved a
one-for-two reverse stock split. The reverse stock split has been approved by
stockholders possessing more than 50% of the issued and outstanding shares of
Company Common Stock. The reverse stock split became effective on May 1, 1996.
Change of Name. The Board of Directors also approved changing the name of
LoneStar Hospitality Corporation to Citadel Computer Systems Incorporated to
better reflect the recent merger of LoneStar and Citadel. The name change was
effected May 1, 1996.
Forward Looking Information.
The statements contained in this Current Report on Form 8-K/A ("Current
Report") that are not historical facts, are forward looking statements and
involve a number of risks and uncertainties. The actual results of the future
events described in such forward-looking statements in this Current Report could
differ materially from those stated in such forward-looking statements. Among
the factors that could cause actual results to differ materially are: general
economic conditions, competition, the market for the network software products,
software development costs and possible future litigation, as well as the risks
and uncertainties discussed in this Current Report, including, without
limitation, the portions referenced above, and the uncertainties set forth from
time to time in the Company's other public reports and filings and public
statements.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired.
The audited financial statements for Old Citadel and Circuit Masters as of
and for the year ended December 31, 1995, are attached hereto following the
signature page.
(b) Pro Forma Financial Information.
Pro forma financial information that shows the effect of the Merger and
acquisition of Circuit Masters as of December 31, 1995 is attached, and follows
the financial statements for Circuit Master.
(c) Exhibits.
The following exhibits are furnished in accordance with Item 601 of
Regulation S-K.
2.1 Second Amended and Restated Plan of Merger, dated February 29, 1996,
by and among LoneStar Hospitality Corporation, LSHC Acquisition, Inc.
and Citadel Computer Systems Incorporated (without exhibits).
(Incorporated by reference to Current Report on Form 8-K filed with
the Commission on March 13, 1996.)
2.2 Purchase and Sale Agreement, dated March 1, 1996, by and among
LoneStar Hospitality Corporation, LS Holding Corp. and Miami Subs USA,
Inc (without exhibits). (Incorporated by reference to Current Report
on Form 8-K filed with the Commission on March 13, 1996.)
2.3 Technology Transfer Agreement, by and between LoneStar Hospitality
Corporation and Circuit
5
<PAGE>
Masters Software, Inc., dated February 29, 1996 (without exhibits).
(Incorporated by reference to Current Report on Form 8-K filed with
the Commission on March 13, 1996.)
2.4 Technology Transfer Agreement, by and between Citadel Computer
Systems Incorporated and Bill Mulvany, dated February 29, 1996
(without exhibits). (Incorporated by reference to Current Report on
Form 8-K filed with the Commission on March 13, 1996.)
2.5 Technology Transfer Agreement, by and between Citadel Computer
Systems Incorporated and Kim Marie Newman, dated February 29, 1996
(without exhibits). (Incorporated by reference to Current Report on
Form 8-K filed with the Commission on March 13, 1996.)
2.6* Agreement, by and between Citadel Computer Systems, Inc., Circuit
Masters Software, Inc., Patrick William Mulvany and Kim Marie Newman,
dated May 16, 1996 but effective as of February 29, 1996 (the
exhibits and schedules to the Agreement have been omitted pursuant to
Item 601(b)(2) of Regulation S-K.).
27* Financial Data Schedule
*Filed Herewith
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 hereunto duly authorized.
CITADEL COMPUTER SYSTEMS INCORPORATED
(Registrant)
Date: June 10, 1996 By: Steven B. Solomon
-------------------------------------------
Steven B. Solomon, Chief Operating Officer
and Secretary
6
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
A. Consolidated Financial Statements of
Citadel Computer Systems Incorporated............................... A-1
Independent Auditor's Reports....................................... A-2
Consolidated Balance Sheets......................................... A-5
Consolidated Statements of Operations............................... A-6
Consolidated Statement of Stockholders' Equity...................... A-7
Consolidated Statements of Cash Flows............................... A-8
Notes to Financial Statements....................................... A-10
B. Combined Financial Statements of
Circuit Masters and Circuit Masters Software, Inc................... B-1
Independent Auditor's Report........................................ B-2
Combined Balance Sheet.............................................. B-3
Combined Statement of Operations.................................... B-4
Combined Statement of Cash Flows.................................... B-5
Combined Statement of Changes in Equity............................. B-6
Notes to Combined Financial Statements.............................. B-7
C. Pro Forma Financial Statements...................................... C-1
Pro Forma Condensed Balance Sheet................................... C-2
Pro Forma Condensed Statement of Operations......................... C-4
Notes to Pro Forma Financial Statements............................. C-5
<PAGE>
FINANCIAL STATEMENTS AND
REPORTS OF INDEPENDENT
CERTIFIED PUBLIC
ACCOUNTANTS
CITADEL COMPUTER SYSTEMS
INCORPORATED
DECEMBER 31, 1995 AND 1994
A-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Citadel Computer Systems Incorporated
We have audited the accompanying balance sheet of Citadel Computer Systems
Incorporated as of December 31, 1995, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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.
A-2
<PAGE>
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Citadel Computer Systems
Incorporated at December 31, 1995, and the results of its options and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
Houston, Texas
May 8, 1996
A-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
Citadel Computer Systems Incorporated
Houston, Texas
We have audited the accompanying balance sheet of Citadel Computer Systems
Incorporated as of December 31, 1994, and the related statements of operations,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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 financial position of Citadel Computer Systems
Incorporated, at December 31, 1994, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
May 26, 1995
A-4
<PAGE>
CITADEL COMPUTER SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
ASSETS 1995 1994
----------- ---------
<S> <C> <C>
CURRENT ASSETS
Cash $ 53,822 $ -
Accounts receivables, less allowance for doubtful
accounts of $490,000 and $80,000 452,016 155,605
Other 87,335 4,333
----------- ---------
Total current assets 593,173 159,938
PROPERTY AND EQUIPMENT, net 52,118 27,274
INTANGIBLE ASSETS, net of accumulated amortization of
$169,000 and $56,000 492,804 504,000
OTHER ASSETS 195,632 64,850
----------- ---------
$ 1,333,727 $ 756,062
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Bank overdraft $ - $ 6,272
Notes payable 1,576,067 200,000
Accounts payable and accrued expenses 664,405 356,007
----------- ---------
Total current liabilities 2,240,472 562,279
ACCOUNTS PAYABLE - long-term 27,430 73,830
----------- ---------
Total liabilities 2,267,902 636,109
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value per share; authorized,
10,000,000 shares in 1995 and 3,000 shares in 1994;
issued and outstanding, 3,000,000 shares in 1995
and 2,895 shares in 1994 30,000 29
Additional paid-in capital 851,034 825,485
Accumulated deficit (1,815,209) (705,561)
----------- ---------
Total stockholders' equity (deficit) (934,175) 119,953
----------- ---------
$ 1,333,727 $ 756,062
=========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
A-5
<PAGE>
CITADEL COMPUTER SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
<TABLE>
<CAPTION>
1995 1994
------------ ----------
<S> <C> <C>
Sales $ 2,562,530 $1,020,745
Returns and allowances (1,214,148) (294,284)
----------- ----------
Net Sales 1,348,382 726,461
Cost of sales (127,583) (168,075)
----------- ----------
Gross profit 1,220,799 558,386
Selling, general and administrative expenses (1,718,465) (716,109)
Depreciation and amortization expense (153,224) (69,353)
Research and development costs (136,355) -
----------- ----------
Operating loss (787,245) (227,076)
Other expense
Interest expense (250,525) (20,797)
Other expense (23,978) (39,925)
Loss on disposal of asset (47,900) -
----------- ----------
Total other expense (322,403) (60,722)
----------- ----------
Loss before extraordinary item (1,109,648) (287,798)
Extraordinary item
Gain on the forgiveness of debt - 110,062
----------- ----------
NET LOSS (1,109,648) (177,736)
=========== ==========
Loss per share $(.38) $(.10)
=========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
A-6
<PAGE>
CITADEL COMPUTER SYSTEMS INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1994 and 1995
<TABLE>
<CAPTION>
Common
stock Additional
------------------ paid-in Accumulated
Shares Amounts capital deficit Total
--------- ------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 1,400 $ 14 $ - $ (527,825) $ (527,811)
Conversion of debt to equity 1,495 15 825,485 - 825,500
Net loss - - (177,736) (177,736)
--------- ------- -------- ---------- -----------
Balance at December 31,
1994 2,895 29 825,485 (705,561) 119,953
Issuance of common stock 105 1 55,519 - 55,520
1,000 for 1 stock split 2,997,000 29,970 (29,970) - -
Net loss - - - (1,109,648) (1,109,648)
--------- ------- -------- ----------- -----------
Balance at December 31,
1995 3,000,000 $30,000 $851,034 $(1,815,209) $ (934,175)
========= ======= ======== ========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
A-7
<PAGE>
CITADEL COMPUTER SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
<TABLE>
<CAPTION>
1995 1994
------------ ----------
<S> <C> <C>
Cash flows from operating activities
Net loss $(1,109,648) $(177,736)
Adjustments to reconcile net loss to net cash
used by operating activities
Depreciation and amortization 153,224 69,353
Stock issued for services 5,520 -
Forgiveness of debt - (110,062)
Loss on disposal of asset 47,900 -
Provision for losses on accounts receivable 410,314 88,633
Changes in operating assets and liabilities
Accounts receivable (706,725) (129,479)
Other receivables (83,002) 9,640
Other current assets (139,299) (540)
Bank overdraft (6,272) 6,272
Accounts payable and accrued expenses 261,998 176,726
Due to affiliates - 39,938
----------- ---------
Net cash used by operating activities (1,165,990) (27,255)
Cash flows from investing activities
Capital expenditures (158,355) (25,237)
Proceeds from sale of asset 2,100 -
----------- ---------
Net cash used by investing activities (156,255) (25,237)
Cash flows from financing activities
Payments on notes payable (742,000) (120,000)
Proceeds from notes payable 1,850,595 170,000
Net proceeds from factor 267,472 -
----------- ---------
Net cash provided by financing activities 1,376,067 50,000
----------- ---------
Net increase (decrease) in cash 53,822 (2,492)
Cash and cash equivalents at beginning of year - 2,492
----------- ---------
Cash and cash equivalents at end of year $ 53,822 $ -
=========== =========
</TABLE>
A-8
<PAGE>
Citadel Computer Systems Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
------------ -----------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for interest 234,212 20,797
Non-cash transactions:
During the year ended December 31, 1995,
the Company issued common stock valued at
$50,000 in exchange for certain assets.
During the year ended December 31, 1994, the
Company acquired marketing and selling rights
and issued a note payable of $560,000.
During the year ended December 31, 1994, the Company
converted notes payable totaling $825,500 to equity and
issued 1,510 shares of the company's common stock.
</TABLE>
The accompanying notes are an integral part of these statements.
A-9
<PAGE>
CITADEL COMPUTER SYSTEMS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
1. NATURE OF BUSINESS
------------------
Citadel Computer Systems Incorporated (the Company), was incorporated in the
state of Delaware on June 30, 1992. The company develops and markets,
throughout the United States, computer network management, security and utility
software. To date, the Company's activities have primarily been limited to
marketing and selling software products directly to end users, through value
added resellers and to potential original equipment manufacturers.
2. PROPERTY, EQUIPMENT AND DEPRECIATION
------------------------------------
Property and equipment are stated at cost. Depreciation is computed over
estimated useful lives of the assets using the straight-line method for
financial reporting purposes and accelerated methods for income tax purposes.
3. INTANGIBLE ASSETS
-----------------
Intangible assets consist of capitalized software development costs and the
purchase of certain software products.
The software is recorded at cost and is amortized by the straight-line method
over a five year period. During the year ended December 31, 1994, the Company
capitalized software totaling $560,000. It is reasonably possible that events
could occur that might cause the amortization period to be shortened.
The Company capitalizes software development costs when technical feasibility
has been established. Software development costs not qualifying for
capitalization are expensed as research and development costs, which totaled
$136,355 during the year ended December 31, 1995. Capitalized costs are
amortized on a product-by-product basis, based on the greater amount computed by
using (a) the ratio that current gross revenue for a product bear to the total
of current and anticipated future gross revenues for that product, or (b)
straight-line amortization using useful lives of 3 to 7 years. The Company
evaluates the estimated net realizable value of each software product at each
balance sheet date and records write-downs to net realizable value for any
products for which the net book value is in excess of net realizable value.
4. REVENUE RECOGNITION
-------------------
The Company ships its products to customers on a thirty day trial basis. The
Company recognizes revenues at the end of the trial period.
A-10
<PAGE>
CITADEL COMPUTER SYSTEMS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
5. INCOME TAXES
------------
Deferred incomes taxes result from temporary differences between the financial
statement and income tax bases of assets and liabilities.
6. USE OF ESTIMATES
----------------
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the 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.
7. RECLASSIFICATIONS
-----------------
Certain of the 1994 amounts have been reclassified to conform to the 1995
presentation.
NOTE B - LIQUIDITY
The Company has sustained net losses in 1994 and 1995 and through May 31,
1996, which were within management's expectations due to the Company's status as
a developing company, certain expenses related to the acquisitions of LoneStar
Hospitality Corporation and Circuit Masters Software, Inc. and establishment of
reserves associated with write-downs of accounts receivable. At December 31,
1995, it has an excess of current liabilities over current assets of $1,647,299
and a stockholders' deficit of $934,175. The Company and LSHC have raised
additional funds from debt and equity financings as described in Note J.
The Company's viability as a going concern is dependent upon raising
additional capital and, ultimately, achieving profitability. The Company is
involved in negotiations for additional debt and equity financing, including the
sale of approximately $4,200,000 of convertible debentures that management
expects will close in June 1996 and will, in the opinion of management, be
sufficient to meet the Company's near-term working capital needs. However, there
can be no assurance that the Company will be successful in raising capital and
becoming profitable.
A-11
<PAGE>
CITADEL COMPUTER SYSTEMS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
NOTE C - PROPERTY AND EQUIPMENT
Major classes of property and equipment and their estimated useful lives at
December 31, were as follows:
<TABLE>
<CAPTION>
Lives 1995 1994
--------- --------- -------
<S> <C> <C> <C>
Furniture 5 years $18,309 $15,136
Office equipment 3 years 13,866 9,031
Computer equipment 3 years 37,598 7,185
------- -------
69,773 31,352
Less accumulated depreciation (17,655) (4,078)
-------- -------
Net property and equipment $ 52,118 $27,274
======== =======
</TABLE>
NOTE D - INTANGIBLE ASSETS
Effective June 24, 1994, the Company acquired exclusive rights to market and
sell certain software from Danasoft Incorporated (Danasoft) for $560,000,
payable in non-interest bearing monthly installments ranging from $15,000 to
$25,000. On October 31, 1994, the Company entered into an agreement to issue 5%
of the Company's common stock to Danasoft to satisfy the unpaid obligation of
$465,000. Under the terms of the agreement Danasoft has the right to redeem
their shares of common stock for $250,000 at any time from October 1996 through
October 1999. The Company has the right to redeem these shares of common stock
for $450,000 during the same period.
NOTE E - NOTES PAYABLE
Notes payable consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---------- --------
<S> <C> <C>
Unsecured notes payable to individuals, including
$203,412 from related parties, due at various dates
in 1996 bearing interest rates ranging from 12% to
20% (1) $1,258,595 $ -
Revolving line of credit facility with a bank due
January 1996 bearing interest at the bank's base rate
plus 1%; paid in full at maturity 50,000 200,000
</TABLE>
A-12
<PAGE>
CITADEL COMPUTER SYSTEMS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
NOTE E - NOTES PAYABLE - CONTINUED
<TABLE>
<CAPTION>
1995 1994
---------- --------
<S> <C> <C>
Note payable to factor collateralized by receivables (2) 267,472 -
---------- --------
$1,576,067 $200,000
========== ========
</TABLE>
1) Certain of these notes are convertible into warrants to purchase common
stock or have warrants to purchase common stock attached. The aggregate number
of such warrants is 790,000 at prices ranging from $2 to $4 per share and are
exercisable at various dates through April 1996.
2) During 1995, the Company entered into agreements to factor accounts
receivable with recourse on an as needed basis to supplement cash flow. Under
the terms of the agreements, the Company incurred fees on all accounts that were
factored. Included in interest expense for 1995 is $186,138 in fees on factored
receivables.
NOTE F - RELATED PARTY TRANSACTIONS
Effective February 9, 1994, the Company entered into an agreement with a
related company whereby the Company has the right to advertise, market and sell
a certain software program. The Company pays the affiliated company an amount,
as defined by the agreement for each program sold. For the year ended December
31, 1994, the Company paid approximately $22,000 under this agreement. This
agreement was discontinued after 1994.
During the year ended December 31, 1994, non-interest bearing related party
notes payable totaling $360,500 were converted to equity.
NOTE G - FORGIVENESS OF DEBT
During the year ended December 31, 1994, the Company negotiated a reduction in
amounts due to certain vendors and extended the payment terms. Accordingly, the
Company has recorded a gain on the forgiveness of debt totaling $110,062 and has
classified a portion of accounts payable as long-term.
A-13
<PAGE>
CITADEL COMPUTER SYSTEMS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
NOTE H - INCOME TAXES
The deferred income tax asset is comprised of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Deferred tax asset
Net operating losses $368,000 $ 213,000
Allowance for doubtful accounts 168,000 27,000
Other 77,000 -
--------- ---------
Deferred income tax asset 613,000 240,000
Valuation allowance (613,000) (240,000)
--------- ---------
Net deferred income tax asset $ - $ -
========= =========
</TABLE>
The Company has estimated its net operating loss carry-forward for tax
reporting purposes to be approximately $1,080,000 at December 31, 1995. The net
operating loss carry-forward is available to offset future taxable income
through 2007 and will fully expire in 2010.
NOTE I - COMMITMENTS AND CONTINGENCIES
The Company leases its office space under an operating lease agreement. Future
minimum lease payments under this operating lease at December 31 1995, were as
follows:
<TABLE>
<CAPTION>
Amount
--------
<S> <C>
1996 $ 45,408
1997 45,408
1998 18,920
--------
Total $109,736
========
</TABLE>
Rental expense under the operating lease totaled approximately $54,000 and
$44,000 for the years ended December 31, 1995 and 1994, respectively.
In March 1996, the Company entered into a lease for office space under an
operating lease agreement and vacated the office space discussed above. The
lease is for seventy months with monthly base rent of $14,555 through December
1996 increasing to $18,194 for the remainder of the lease term.
A-14
<PAGE>
CITADEL COMPUTER SYSTEMS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
NOTE I - COMMITMENTS AND CONTINGENCIES - CONTINUED
The Company is involved in various legal actions arising in the normal course
of business. Management is of the opinion that their outcome will not have a
material adverse effect on the company's financial position or results of
operations.
Effective June 1994, the Company entered into a two year employment agreement
with an individual. The employee is responsible for developing Company products
on an as-needed basis. Under the terms of the agreement, the employee will
receive $50,000 per year.
In December 1995, the Company entered into five year employment or consulting
agreements with two officers of the Company. Under the agreements, in the event
of death or termination of the officers, the obligations for the remaining
portion of the five year term are automatically accelerated and become
immediately due and payable.
NOTE J - SUBSEQUENT EVENTS
Effective February 29, 1996, all of the outstanding common stock of the
Company was acquired by LoneStar Hospitality Corporation (LSHC) in exchange for
shares of LSHC. The acquisition resulted in the stockholders of the Company
owning approximately 75% of the outstanding common stock of LSHC, on a fully
diluted basis. Therefore, the Company is deemed to be the acquiror for
accounting purposes. LSHC has been consolidated effective March 1, 1996.
On May 1, 1996, LSHC changed its name to Citadel Computer Systems Incorporated
and effected a 1 for 2 reverse split of its common stock.
Effective February 29, 1996 the Company acquired certain assets of Circuit
Masters Software, Inc. for 720,851 shares of common stock (before giving
consideration to the reverse split and acquisition discussed above) and cash of
approximately $250,000.
In January 1996, certain key employees elected to forego their management
overrides totaling approximately $59,000 in exchange for options.
In January and February 1996, the Company raised approximately $500,000 in
debt financing. Pursuant to agreements which pre-date the LSHC transactions,
certain holders of debentures converted $730,000 of debentures (including a
portion of the $500,000 in debt securities discussed in the prior sentence) in
April and May 1996 into warrants to purchase shares of common stock at $.88 per
share, adjusted for the one-for-two reverse split. The Company and LSHC also
raised approximately $1,300,000 of private equity financings (including through
conversion of warrants) and $900,000 in private debt financings subsequent to
the balance sheet date.
In May 1996, the Company executed a letter of intent to acquire Astonishing
Developments, Inc., a developer of security software for stand alone PCs, for
total consideration of approximately $1,800,000 in common stock (subject to
sales limitations for two years) and $1,000,000 in cash over six months.
In March 1996, the Company assumed the employment agreement of an officer of
LSHC, who is now an officer of the Company. Under the agreement, in the event of
death or termination of the officer, payments in the amount of the greater of
the remaining portion of the term or twenty four months will be accelerated and
become due and payable.
A-15
<PAGE>
As of March 1, 1996, LSHC consummated the sale of its restaurants in the
Dallas, Texas area and related development rights to Miami Subs USA, Inc.
("Miami Subs"), the franchisor of the restaurants. In addition, Miami Subs
assumed LSHC's indebtedness of $1,500,000 to Stephens Diversified Leasing, Inc.
("Stephens"). LSHC received 1,325,000 shares of Miami Subs' common stock (the
"Miami Subs Stock"), and Miami Subs has filed a registration with the Securities
and Exchange Commission (the "SEC") covering the Miami Subs Stock. During the
six months following the closing, LSHC is not able to sell any of the Miami Subs
Stock, except with the consent of Miami Subs, and Miami Subs will have the right
to acquire the Miami Subs Stock for $2.50 per share. Thereafter, LSHC will be
able to sell the Miami Subs Stock in private transactions, or in open market
transactions not to exceed 240,000 shares per calendar quarter, or 20,000 shares
per week. All sales by the Company are subject to a right of first refusal by
Miami Subs. Miami Subs has assumed no liabilities of LSHC, except for LSHC's
loan from Stephens and certain restaurant and equipment leases. LSHC has also
issued to Miami Subs a promissory note in the principal amount of $1,500,000
which is secured by the Miami Subs Stock. The note will not bear interest and
the maturity date of the note was extended to July 1, 1996 as a result of LSHC's
principal payment of $50,000.
A-16
<PAGE>
CIRCUIT MASTERS AND CIRCUIT MASTERS SOFTWARE, INC.
COMBINED FINANCIAL STATEMENTS AND
INDEPENDENT AUDITOR'S REPORT
December 31, 1995
B-1
<PAGE>
BARRY MORGAN & COMPANY, P.C.
Certified Public Accountants
5220 Spring Valley Rd., Suite 600
Dallas, Texas 75240
(214) 701-9447 Fax # (214) 387-1490
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Board of Directors and Owners
Circuit Masters and Circuit Masters Software, Inc.
Houston, Texas
We have audited the accompanying combined balance sheet of Circuit Masters (a
proprietorship) and Circuit Masters Software, Inc. (a Texas corporation) as of
December 31, 1995 and the related combined statements of operations, combined
statement of changes in equity and combined statement of cash flows for the year
then ended. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined 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 combined financial statements referred to above present
fairly, in all material respects, the financial condition of Circuit Masters
and Circuit Masters Software, Inc. as of December 31, 1995, and the results of
its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
Barry Morgan & Company, P.C.
Dallas, Texas
June 3, 1996
B-2
<PAGE>
Circuit Masters and Circuit Masters Software, Inc.
COMBINED BALANCE SHEET
December 31, 1995
ASSETS
<TABLE>
<CAPTION>
CURRENT ASSETS
<S> <C>
Cash $ 4,403
Accounts receivable - net of reserves
of $5,000 (Note B) 27,480
Inventory (Note B) 8,386
-------
Total Current Assets 40,269
PROPERTY AND EQUIPMENT - AT COST (Notes B)
Office furniture and equipment 6,145
Less accumulated depreciation
and amortization (6,145)
-------
OTHER ASSETS
Software copyrights acquired - net of
amortization of $ 53,687 (Notes B & C) 42,954
Capitalized software development costs - net
of amortization of $ 22,322 (Note B) 7,087
Deposits 1,182
-------
51,223
-------
$91,492
=======
</TABLE>
LIABILITIES AND EQUITY
<TABLE>
<CAPTION>
CURRENT LIABILITIES
<S> <C>
Accounts payable and accrued liabilities $43,229
Income taxes payable (Note B) 3,059
Note due related party 6,800
-------
Total current liabilities 53,088
EQUITY
Common stock $1.00 par, authorized 100,000 shares;
issued and outstanding 1,000 shares 1,000
Additional paid-in capital 96,241
Retained deficit (41,060)
Proprietor's capital (17,777)
-------
38,404
-------
$91,492
=======
</TABLE>
The accompanying notes are an integral part of this statement
B-3
<PAGE>
Circuit Masters and Circuit Masters Software, Inc.
COMBINED STATEMENT OF OPERATIONS
For the year ended December 31, 1995
<TABLE>
<CAPTION>
<S> <C>
REVENUES (Note B) $232,945
COST OF REVENUES 45,970
--------
Gross Profit 186,975
OPERATING EXPENSES 151,283
--------
Net income before taxes 35,692
FEDERAL INCOME TAX EXPENSE (Note B) 3,059
--------
NET INCOME $ 32,633
========
</TABLE>
The accompanying notes are an integral part of this statement
B-4
<PAGE>
Circuit Masters and Circuit Masters Software, Inc.
COMBINED STATEMENT OF CASH FLOWS
For the year ended December 31, 1995
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C>
Net Income $ 32,633
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization (Note B) 47,424
Changes in assets and liabilities:
Decrease in accounts payable and
accrued liabilities (693)
(Increase) in accounts receivable (10,628)
(Increase) in inventory (8,386)
(Increase) in deposits (642)
(Increase) in other assets (16,430)
Increase in taxes payable 3,059
--------
Net cash provided (required) by operating activities 46,337
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment (1,454)
--------
Net cash provided (required) by investing
activities (1,454)
CASH FLOWS FROM FINANCING ACTIVITIES
Proprietor's draws (42,077)
--------
Net cash provided (required) by financing
activities (42,077)
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,806
Cash and cash equivalents at beginning of year 1,597
--------
Cash and cash equivalents at end of year $ 4,403
========
</TABLE>
The accompanying notes are an integral part of this statement
B-5
<PAGE>
Circuit Masters and Circuit Masters Software, Inc.
COMBINED STATEMENT OF CHANGES IN EQUITY
For the year ended December 31, 1995
<TABLE>
<CAPTION>
Common Additional Retained Proprietor's
Stock Paid-in Deficit Capital Total
------ ---------- --------- ------------- --------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $1,000 $96,241 $(21,473) $(27,920) $ 47,848
Net income (loss) - - (19,587) 52,220 32,633
Proprietor's draw - - - (42,077) (42,077)
------ ------- -------- -------- --------
Balance at December 31, 1995 $1,000 $96,241 $(41,060) $(17,777) $ 38,404
====== ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement
B-6
<PAGE>
Circuit Masters and Circuit Masters Software, Inc.
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1995
A - BASIS OF PRESENTATION
Circuit Masters, a proprietorship, commenced operations prior to January of
1994 for the purpose of designing and marketing computer software products.
Circuit Masters Software, Inc. (a Texas corporation), and the successor of
Circuit Masters, was incorporated on January 4, 1994 and began operations
in 1995. The accompanying financial statements present the combined
operations of these two entities for the year ending December 31, 1995.
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Trade Receivable and Revenue Recognition Policies
--------------------------------------------------
The Company recognizes revenue from software sales and licenses upon
the delivery of the software product to a customer.
2. Inventory
---------
Inventory is stated at cost on a first-in first-out basis. At
December 31, 1995 inventory consisted principally of manuals and
software packaging for existing software products.
3. Office Furniture and Equipment
------------------------------
Office furniture and equipment is stated at cost. Depreciation is
provided for financial purposes over the estimated useful life of the
assets acquired on a straight line basis from 1 to 3 years. Cost and
accumulated depreciation applicable to assets retired or otherwise
disposed of are eliminated from the accounts, and any gains or losses
are reflected in income.
4. Software Costs
--------------
The Company classifies the cost of planning, designing and
establishing the technical feasibility of a computer software product
as research and development costs and charges these costs to expense
when incurred. After technical feasibility of the software is
established, but prior to the actual sale of the product, the Company
capitalizes certain software development costs and amortizes these
cost over the estimated market life of the product. Software costs
capitalized in 1995 totaled $16,430 and consisted principally of
contract labor paid to the software developer in addition to an
overhead allocation.
B-7
<PAGE>
Circuit Masters and Circuit Masters Software, Inc.
NOTES TO COMBINED FINANCIAL STATEMENT (continued)
December 31, 1995
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
5. Amortization of Intangible Assets
---------------------------------
Amortization of intangible assets is provide for under the following
methods and over the following expected useful lives:
Software copyrights acquired 3 years Straight-line
Capitalized software development costs 3 years Double
Declining Balance
6. Income Taxes
------------
Income from the proprietorship is combined with the income and
expenses of the proprietor from other sources and reported in the
proprietor's individual tax return. The proprietorship is not a tax
paying entity for federal tax purposes and thus no taxes have been
recorded for the portion of the combined income associated with the
activities of the proprietorship. Current income taxes payable reflect
federal and state taxes due on the taxable transactions recorded in
the books of the corporation in 1995.
7. Research and Development Costs
------------------------------
Research and development costs for new products are expensed until
feasibility for the product is established. The amount of research and
development cost expensed in 1995 was approximately $16,430.
8. Estimates
---------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect 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 reported period. Actual results could differ from those
estimates.
9. Cash and Cash Equivalents
-------------------------
For the purposes of the combined statement of Cash Flows, the Company
considers all highly liquid debt instruments purchased with an
original maturity of less than three months to be cash equivalents.
B-8
<PAGE>
Circuit Masters and Circuit Masters Software, Inc.
NOTES TO COMBINED FINACIAL STATEMENTS (continued)
December 31, 1995
C - SOFTWARE COPYRIGHTS ACQUIRED
On March 8, 1994, the Company acquired the copyrights to four developed
software products in exchange for 40% ownership in the Company. Management
has assigned a value of $96,641 related to the software acquired and the
common stock issued in exchange.
D - COMMITMENTS AND CONTINGENCIES
The Company conducts its operations in leased facilities pursuant to a one
year sublease agreement dated September 1995. Total lease expense under
this agreements for 1995 is $6,104.
E - MAJOR PRODUCTS AND CUSTOMERS
Currently, two products, Phantom of the Console-Gold and Server Sentry,
account for approximately 91 % of all software sales for the Company. At
December 31, 1995, no single customer accounted for more than 5% of
combined total sales.
F - SUBSEQUENT EVENTS
On February 29, 1996, Circuit Masters Software, Inc. sold certain assets to
Citadel Computer Systems, Inc. in exchange for consideration consisting of
stock, cash and the assumption of certain outstanding liabilities of the
Company.
B-9
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
CITADEL COMPUTER SYSTEMS INCORPORATED
DECEMBER 31, 1995
C-1
<PAGE>
CITADEL COMPUTER SYSTEMS INCORPORATED
PRO FORMA CONDENSED BALANCE SHEET
December 31, 1995
ASSETS
<TABLE>
<CAPTION>
Citadel (Note B) Pro forma (Note B)
Computer Circuit Pro forma adjustments Citadel LoneStar Pro forma adjustments
Systems Masters --------------------- and Circuit Hospitality --------------------------
Incorporated Combined Debit Credit Masters Corporation Debit Credit
------------ --------- ---------- ------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash $ 53,822 $ 4,403 $ - $ 4,403 $ 53,822 $ 100,398 $ - $ 12,200
Accounts receivable 452,016 27,480 - 27,480 452,016 103,063 - -
Other current assets 87,335 8,386 - 8,386 87,335 156,427 - 87,108
Assets held for sale - - - - - - 4,200,532 1,594,760
---------- ------- ---------- ------- ---------- ---------- ---------- ----------
Total current
assets 593,173 40,269 - 40,269 593,173 359,888 4,200,532 1,694,068
Property and equipment -
net 52,118 - - - 52,118 3,575,311 - 3,490,317
Intangible and other
assets 688,436 51,223 2,250,000 51,223 2,938,436 820,773 - 651,444
---------- ------- ---------- ------- ---------- ---------- ---------- ----------
$1,333,727 $91,492 $2,250,000 $91,492 $3,583,727 $4,755,972 $4,200,532 $5,835,829
========== ======= ========== ======= ========== ========== ========== ==========
<CAPTION>
LoneStar
Hospitality Pro forma
Corporation Total
------------ ----------
<S> <C> <C>
Cash $ 88,198 $ 142,020
Accounts receivable 103,063 555,079
Other current assets 69,319 156,654
Assets held for sale 2,605,772 2,605,772
---------- ----------
Total current
assets 2,866,352 3,459,525
Property and equipment -
net 84,994 137,112
Intangible and other
assets 169,329 3,107,765
---------- ----------
$3,120,675 $6,704,402
========== ==========
</TABLE>
C-2
<PAGE>
CITADEL COMPUTER SYSTEMS INCORPORATED
PRO FORMA CONDENSED BALANCE SHEET
December 31, 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Citadel (Note B) Pro forma (Note B)
Computer Circuit Pro forma adjustments Citadel LoneStar Pro forma adjustments
Systems Masters --------------------- and Circuit Hospitality --------------------------
Incorporated Combined Debit Credit Masters Corporation Debit Credit
------------ --------- --------- ---------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Notes payable $1,576,067 $ 6,800 $ 6,800 $ - $1,576,067 $ 238,062 $ - $1,336,338
Accounts payable and
accrued
liabilities 664,405 46,288 46,288 250,000 914,405 970,560 40,537 -
Accrued loss on sale of
assets - - - - - - 1,594,760 1,594,760
---------- ------- ------- ---------- ---------- ---------- ---------- ----------
Total current
liabilities 2,240,472 53,088 53,088 250,000 2,490,472 1,208,622 1,635,297 2,931,098
Long-term debt - - - - - 1,336,338 1,336,338 -
Other long-term liabilities 27,430 - - - 27,430 - - -
Stockholders' equity (934,175) 38,404 - 1,961,596 1,065,825 2,211,012 1,594,760 -
---------- ------- ------- ---------- ---------- ---------- ---------- ----------
$1,333,727 $91,492 $53,088 $2,211,596 $3,583,727 $4,755,972 $4,566,395 $2,931,098
========== ======= ======= ========== ========== ========== ========== ==========
<CAPTION>
LoneStar
Hospitality Pro forma
Corporation Total
------------ ----------
<S> <C> <C>
Notes payable $1,574,400 $3,150,467
Accounts payable and
accrued
liabilities 930,023 1,844,428
Accrued loss on sale of
assets - -
---------- ----------
Total current
liabilities 2,504,423 4,994,895
Long-term debt - -
Other long-term liabilities - 27,430
Stockholders' equity 616,252 1,682,077
---------- ----------
$3,120,675 $6,704,402
========== ==========
</TABLE>
C-3
<PAGE>
CITADEL COMPUTER SYSTEMS INCORPORATED
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
For the year ending December 31, 1995
<TABLE>
<CAPTION>
Citadel
Computer Circuit Pro forma adjustments
Systems Masters --------------------- Pro forma
Incorporated combined Debit Credit Total
------------ -------- -------- ------- -----------
<S> <C> <C> <C> <C> <C>
Net sales $ 1,348,382 $232,945 $ - $ - $ 1,581,327
Cost of sales 127,583 45,970 - - 173,553
----------- -------- -------- ------- -----------
Gross profit 1,220,799 186,975 - - 1,407,774
Selling, general
and administrative
expenses 1,871,689 134,853 450,000 45,970 2,498,805
Research and
development costs 136,355 16,430 - - 112,452
----------- -------- -------- ------- -----------
Operating profit
(loss) (787,245) 35,692 450,000 45,970 (1,203,483)
Other expense - net 322,403 3,059 - - 277,562
----------- -------- -------- ------- -----------
Net income (loss) $(1,109,648) $ 32,633 $450,000 $45,970 $(1,481,045)
=========== ======== ======== ======= ===========
Per share data
Net (loss) $(.14)
=====
Weighted average shares outstanding 10,568,445
==========
</TABLE>
C-4
<PAGE>
CITADEL COMPUTER SYSTEMS INCORPORATED
NOTES TO PRO FORMA FINANCIAL STATEMENTS
December 31, 1995
NOTE A - DESCRIPTION OF TRANSACTIONS AND PRESENTATION
Effective February 29, 1996, LoneStar Hospitality Corporation (LSHC) acquired
all of the outstanding stock of Citadel Computer Systems Incorporated (Citadel)
by issuing LSHC common stock to Citadel shareholders in exchange for shares of
Citadel. The acquisition resulted in the stockholders of Citadel owning
approximately 75% of the outstanding common stock of LSHC on a fully diluted
basis and, accordingly, Citadel is deemed to be the acquiring company for
accounting purposes.
LSHC operates four restaurants under the name Miami Subs Grill as a franchisee
of Miami Subs U.S.A., Inc. (MSUSA). On March 1, 1996, LSHC sold all of its
restaurant assets to MSUSA for 1,325,000 shares of MSUSA stock valued at
approximately $2,600,000.
Effective February 29, 1996, Citadel acquired certain assets of Circuit
Masters Software, Inc. (Circuit Masters) in exchange for issuance of stock
valued at approximately $2,000,000 and cash of approximately $250,000.
The accompanying pro forma condensed balance sheet is intended to present
Citadel as if the foregoing transactions were consummated at December 31, 1995.
The accompanying pro forma condensed statement of operations is intended to
present the acquisition of Circuit Master as if it occurred on January 1, 1995.
The operations of LSHC for the year ended December 31, 1995 have been excluded
from this presentation due to the fact that the restaurant operations have been
discontinued and have no continuing effect on operations.
NOTE B - PRO FORMA ADJUSTMENTS
The pro forma adjustments related to the acquisition of Circuit Masters
reflect acquiring software copyrights with an estimated value of $2,250,000.
These rights are being amortized over five years with annual amortization of
$450,000.
The pro forma adjustments related to LSHC reflect the discontinued operation
of the restaurant business including an estimated loss on disposal of
approximately $1,600,000.
C-5
<PAGE>
EXHIBIT 2.6
AGREEMENT
This Agreement made this 16th day of May, 1996, but effective as of
February 29, 1996, by and between CITADEL COMPUTER SYSTEMS, INC. (hereinafter
referred to as "Citadel"), CIRCUIT MASTER SOFTWARE, INC. (herein after referred
to as "CMSI"), PATRICK WILLIAM MULVANY (hereinafter referred to as "Mulvany"),
and KIM MARIE NEWMAN (hereinafter referred to as "Newman").
This Agreement supplements, and supersedes to the extent of any conflict,
that certain letter agreement dated December 12, 1995, from George Sharp,
President of Citadel to Mulvany, as President of CMSI (the "Letter Agreement"),
a copy of which is attached hereto as Exhibit "A", that certain unsigned
Employment Agreement dated December 12, 1995 by and between Citadel and Kim
Marie Newman (the "Newman Agreement"), a copy of which is attached hereto as
Exhibit "C", and that certain Technology Transfer Agreement effective February
29, 1996 by and between LoneStar Hospitality Corporation (to be renamed Citadel
Computer Systems, Inc.) and CMSI (the "Reorg Agreement"), together with all
Exhibits thereto, a copy of which, together with such Exhibits is attached
hereto as Exhibit "D".
1. The parties acknowledge that the transactions contemplated in the Reorg
Agreement are intended to qualify and shall be consummated and reported for
federal income tax purposes as a "C" Reorganization, i.e., a tax free
transaction (as to all parties, including CMSI and its shareholders) described
in Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended from
time to time. The parties further agree that they shall not at any time take or
adopt a position with respect to any aspect of the transactions described in the
agreements attached hereto as Exhibits "A" through "D", for federal income tax
or other purposes, that would be inconsistent with tax free treatment of such
transactions to all parties, including CMSI and its shareholders (except as to
any compensation payable for services provided under the Mulvany and Newman
Agreements described above, which all parties acknowledge shall be deductible by
the Employer therein and includible as income by the respective Employees
therein, and except as to any portion of the consideration for the exchange of
assets by CMSI under the Reorg Agreement which shall be classified as
"additional consideration" under Internal Revenue Code 356 and which the parties
acknowledge shall be taxable to CMSI or its shareholders).
2. The parties acknowledge and agree that the consideration to be received
by CMSI from Citadel for the exchange transaction described in the Reorg
Agreement is and shall be as follows:
a) that the number of shares of the common stock of Citadel derived by
dividing $2,000,000.00 by the average closing price of such stock
as quoted on the NASDAQ for the 30 trading days immediately
following February 29, 1996, adjusting for any stock split (forward
or reverse) that becomes effective during such 30-day period.
b) the sum of $171,202.00 in cash; and
1
<PAGE>
c) the assumption of those liabilities described in Schedule 3.4
attached to the Reorg Agreement remaining unpaid after the
application of CMSI's cash and bank balances and the proceeds of
all of CMSI's accounts receivable in existence as of the closing
date under the Reorg Agreement.
3. The parties acknowledge and agree that on December 20., 1995, Citadel
deposited with Mulvany the sum of $50,000.00 as a good faith deposit to be
credited toward the cash component of the purchase price described in the Reorg
Agreement, and that such sum shall be credited at the closing under the Reorg
agreement against the cash portion of the consideration described in paragraph
2.B) above, and that at such closing, certificates evidencing the stock
described in paragraph 2.A) above shall be delivered to CMSI, $50,000.00 of the
cash portion of the consideration described in paragraph 2.B) above shall be
paid to Mulvany, and all net liabilities of CMSI described in paragraph 3.C)
above shall have been paid or provided for to the satisfaction of Mulvany. The
balance of the cash portion of the consideration described in paragraph 2.B)
above shall be evidenced by a promissory note of Citadel bearing interest at the
rate of eight percent (8%) per annum and providing for equal monthly payments to
Mulvany per month commencing on the first day of each calendar month following
the closing under the Reorg Agreement and continuing until said note shall be
paid in full on March 1, 1997. Said note shall be evidenced by a unsecured
promissory note in the standard form thereof promulgated by the State Bar of
Texas.
4. The parties acknowledge and agree that the stock to be received by CMSI
and distributed to its shareholders shall be restricted stock as described in
Rule 144 promulgated under the Securities Exchange Act of 1934 (the "Act".). As
a material inducement to CMSI and its shareholders to enter into and consummate
the Reorg Agreement and accept such restricted stock, Citadel, has represented
and warranted to CMSI and its shareholders, and do hereby represent and warrant
that all stock and securities of Citadel owned, held, or controlled by all
directors, officers, and beneficial owners of stock or securities of Citadel, as
defined in Regulations 16a-1 and 16a-2 of the Act, except that stock or
securities that are purchased in the open market or pursuant to an ESOP plan,
are and shall be restricted stock and securities, of equal rights, privileges,
and restrictions as the stock and securities to be issued to CMSI, and that none
of such persons has received freely tradable stock, any piggyback rights, or
rights to compel registration of their restricted stock, and that in the event
any of such persons are granted piggyback rights with respect to such stock or
rights to participate in any sale of such stock pursuant to any offering,
secondary offering, or otherwise, that Citadel shall extend the same rights,
privileges, and opportunities of piggyback, participation in offerings, or
sales, to the owners and holders of the Citadel stock received by CMSI pursuant
to the Reorg Agreement.
5. For acting as a consultant during the transition, period, Citadel
hereby agrees to assign to Mulvany 7,500 warrants convertible to 7,500 shares at
$10.00 per warrant, five (5) year term, and Citadel agrees to use its best
efforts to include these warrants in some registration within one (1) year from
today's date.
6. The compensation to be paid to Mulvany and credited to the sales price
by Citadel pursuant to the Mulvany Agreement shall be $12,514.00, of which,
$12,514.00 has been paid as salary through March 15, 1996. In addition, Mulvany
shall receive $1,397.40 cash on closing as
2
<PAGE>
compensation for group health insurance which Newman shall be responsible for
securing.
7. The compensation to be paid to Newman by Citadel pursuant to the Newman
Agreement shall be $12,514.00, of which $12,514.00 has been paid as salary
through March 15, 1996. For acting as a consultant during the transition
period, Citadel hereby agrees to pay Newman $26,986.00 in equal monthly
installments on the first of every month beginning June 1, 1996, the last
payment being due on March 1, 1997. In addition, Newman shall receive $1,397.40
cash on closing as compensation for group health insurance which Newman shall be
responsible for securing.
8. In the event it becomes necessary for any party to employ an attorney
to enforce any provision of any written agreement between the parties, then the
losing party shall be obligated to pay the prevailing party, all fees and costs
incurred.
9. 50% of all Citadel stock delivered to CMSI is agreed by CMSI and
Mulvany to be assigned to Carl Banzhoff pursuant to Exhibit "E" attached hereto.
10. The parties acknowledge and agree that the provisions of the Letter
Agreement, unless expressly modified, are and shall remain material, integral
terms of the transactions by operation of Section 6.5 of the Reorg Agreement.
Executed in multiple original counterparts this 16th day of May, 1996.
CITADEL COMPUTER SYSTEMS, INC.
By: George Sharp
-------------------------------
GEORGE SHARP, President
ATTEST:
Manfred Sternberg, Jr.
-------------------------------------
-------------------------------------
(Printed/Typed Name & Title)
3
<PAGE>
Executed in multiple original counterparts this 16 day of May, 1996.
CIRCUIT MASTERS SOFTWARE, INC.
By: Patrick Mulvany
--------------------------------
PATRICK WILLIAM MULVANY, President
ATTEST:
Kim Newman
-------------------------------------
Kim Newman
-------------------------------------
(Printed/Typed Name & Title)
Executed in multiple original counterparts this 16 day of May, 1996.
By: Patrick W. Mulvany
--------------------------------
PATRICK WILLIAM MULVANY, Individually
Executed in multiple original counterparts this 16 day of May, 1996.
By: Kim Marie Newman
--------------------------------
KIM MARIE NEWMAN, Individually
4
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS OF CITADEL COMPUTER SYSTEMS INCORPORATED AS OF AND FOR YEARS ENDED
DECEMBER 31, 1995 & 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 53,822
<SECURITIES> 0
<RECEIVABLES> 452,016
<ALLOWANCES> 490,000
<INVENTORY> 0
<CURRENT-ASSETS> 593,173
<PP&E> 69,773
<DEPRECIATION> 17,655
<TOTAL-ASSETS> 1,333,727
<CURRENT-LIABILITIES> 2,267,902
<BONDS> 0
0
0
<COMMON> 30,000
<OTHER-SE> (964,175)
<TOTAL-LIABILITY-AND-EQUITY> 1,333,727
<SALES> 2,562,530
<TOTAL-REVENUES> 2,562,530
<CGS> 127,583
<TOTAL-COSTS> 2,000,044
<OTHER-EXPENSES> 71,878
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 250,525
<INCOME-PRETAX> (1,109,648)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,109,648)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,109,648)
<EPS-PRIMARY> (.38)
<EPS-DILUTED> (.38)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM COMBINED
FINANCIAL STATEMENTS OF CIRCUIT MASTERS AND CIRCUIT MASTERS SOFTWARE, INC.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 4,403
<SECURITIES> 0
<RECEIVABLES> 32,480
<ALLOWANCES> (5,000)
<INVENTORY> 8,386
<CURRENT-ASSETS> 40,269
<PP&E> 6,145
<DEPRECIATION> (6,145)
<TOTAL-ASSETS> 91,492
<CURRENT-LIABILITIES> 53,088
<BONDS> 0
0
0
<COMMON> 1,000
<OTHER-SE> 37,404
<TOTAL-LIABILITY-AND-EQUITY> 91,492
<SALES> 232,945
<TOTAL-REVENUES> 232,945
<CGS> 45,970
<TOTAL-COSTS> 197,253
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 35,692
<INCOME-TAX> 3,059
<INCOME-CONTINUING> 32,633
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,633
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
