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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from December 31, 1995 to February 29, 1996
Commission file number: 0-08718
CITADEL COMPUTER SYSTEMS INCORPORATED
(Exact name of small business issuer in its charter)
DELAWARE 75-2432011
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3811 TURTLE CREEK BLVD., SUITE 1080, DALLAS, TX 75219
1300 POST OAK BLVD., NINTH FLOOR, HOUSTON, TX 77056
(Addresses of principal executive offices)
(214) 520-9292 AND (713) 686-6400
(Issuer's telephone numbers)
Securities to be registered under Section 12(b) of the Act: None
Securities to be registered under Section 12(g) of the Act:
Common Stock, par value $.01
(Title of class)
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference to such filing requirements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ].
State issuer's revenues for its most recent fiscal year: $2,562,530
As of June 13, 1996, the average bid and asked price of the Company's stock
was $13-1/8 per share. The aggregate market value of the voting stock held by
non-affiliates of the Company was $63,295,641. As of June 13, 1996, there were
11,987,062 shares of common stock, $.01 par value, outstanding.
Transitional Small Business Disclosure Format Yes [ ] No [X]
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Unless otherwise indicated, share and per share information contained in
this Report reflect the Company's one-for-five reverse stock split, effective as
of December 11, 1995, the one-for-two stock dividend paid on February 2, 1996,
and the one-for-two reverse stock split effective as of May 1, 1996.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Citadel Computer Systems Incorporated (the "Company" or "Citadel") is a
developer and marketer of computer software products including network security
and management utilities. The Company's products are designed to secure and
manage local area networks ("LANs") and enable network administrators to more
efficiently manage the networks. The Company's products are designed to reduce
client costs, improve the accuracy of clients' information, secure the network
from fraud or unauthorized use, and generally enable the administrator to devote
more time to improving the service to the network rather than focusing on
operational details. Citadel's products operate on operating systems designed
by Novell, Microsoft, IBM, and Apple. Citadel's focus is on the two largest,
Novell and Microsoft, who control in excess of 70% of the market for network
operating systems. Citadel's strategy is to develop long term client
relationships and to maintain a high level of lifetime client satisfaction which
Citadel believes will result in additional recurring revenues from new products
and upgrades on existing software products. Citadel has focused its development
efforts on the client server LAN market due to the rapid growth of this market
as companies, government agencies and educational users shift from mainframes to
client server networks. Citadel believes its products are positioned to
capitalize on this trend.
Citadel's clients include many Fortune 2000 companies and government
agencies. The Company has installed more than 20,000 copies of NetOFF, the
Company's flagship product.
The Company is the successor to a Delaware corporation (also known as
Citadel Computer Systems Incorporated ("Old Citadel")) that was formed and began
operations in June 1992. References herein to "Citadel," or the "Company" shall
include the Company and Old Citadel, unless otherwise indicated or unless the
context requires otherwise.
On February 29, 1996, a wholly-owned subsidiary of LoneStar Hospitality
Corporation, the Company's predecessor, merged with Old Citadel (the "Merger").
This Merger has been accounted for as a reverse acquisition. Accordingly, in
discussions in this Report of previous operations and pre-merger transactions,
the Company shall be referred to as "LoneStar".
The Company maintains its principal executive offices at 3811 Turtle Creek
Boulevard, Suite 1080, Dallas, Texas 75219; the telephone number at this office
is (214) 520-9292. The Company's principal operational offices are located at
1300 Post Oak Blvd., Ninth Floor, Houston, Texas 77056, and its telephone number
is (713) 686-6400. The Company maintains a site on the World Wide Web at
http://www.citadel.com.
PRODUCTS
The Company's products may broadly be categorized as software management
tools and network security and management utilities. According to industry
sources, Novell and Microsoft hold approximately 70% of the market of network
operating systems. The Company's products are designed
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to better manage and provide additional security to LANs using Novell and
Microsoft network operating software. As a result, the Company's lead product,
NetOFF, has been installed on more than 20,000 computer networks worldwide.
NETOFF. NetOFF is a network management utility program designed to
protect a network by shutting down unattended computers automatically when a
user leaves a computer logged on while the user is away from the terminal.
Network administrators can set a time for NetOFF to shut down computers in order
to complete a clean backup. NetOFF provides three major benefits:
Security. While unattended, computers are subject to computer theft of
confidential files and information. NetOFF helps to secure networks by
preventing unauthorized use of unattended terminals.
Resources. Software licenses often require payment for software running on the
network. Many companies pay excess license fees for programs that are left open
on unattended computers. NetOFF may help customers reduce costs by logging off
unattended computers.
Back-up. To further secure the network, a back-up system is employed. The
back-up system is a tape drive which periodically copies all of the data stored
in the network. Should a data loss occur from a power failure, mechanical
failure or other error, the lost information can be fed back into the computer
in a matter of minutes, thereby saving the company hundreds of hours required to
reenter lost data. However, the back-up system only backs up computers that are
logged-off. If a computer is logged-on during the process, the data from that
computer can be corrupted or omitted from the back-up tape. NetOFF eliminates
these problems by automatically logging off network client stations after a
specified period of inactivity. The latest release of NetOFF, NetOFF System IV,
is available for Windows and DOS operating environments.
PHANTOM OF THE CONSOLE (PHANTOM). Phantom operates as a "virtual user"
that automates certain daily server tasks for network file servers, permitting
network administrators to increase LAN productivity. The software automatically
executes commands and runs programs at any set-time, day or night, without the
need for an operator at the console. Phantom preserves server cache memory and
improves overall server performance by scheduling the unloading, loading and
execution of Network Loadable Modules ("NLMs") that must be unloaded for backup
to proceed.
SERVER SENTRY. The Company believes Server Sentry is the first network
protection system that automatically restarts the file server in the event of a
system crash. Server Sentry automatically notifies network personnel, produces
downtime reports, and captures all information available to enable the network
administrator to avoid recurrences.
SERVER CAM. Server Cam is a software program that emulates a time-lapse
video recorder connected to the network. Server Cam captures events as they
occur, which allows network personnel to track down network intruders and
vandals. Server Sentry may also be used to re-create critical events for
training sessions.
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 administrator will want all 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.
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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 unowned network files. An unowned
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 "unowned" by the
network. Consequently, if an unowned 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 unowned files to a supervisor ID or other user
specified ID.
MARKET FOR COMPANY PRODUCTS
The Company's current products are installed on computer networks,
primarily those using Novell and Microsoft network operating systems. As of
November 1995, Novell and Microsoft had approximately 2.5 million installations,
representing a market share of approximately 70%. Industry experts predict the
total number of networks to surpass 10 million by the year 2000, with Novell and
Microsoft systems comprising approximately 80% of the market.
The Company is developing new products to meet the needs of the expanding
network market, as well as developing new security products for the Internet and
PC environments. In addition, the Company considers possible acquisition
opportunities to complement the Company's current product lines.
The Company's management believes that the Company and its products are
well positioned to address the management and security needs of network and
desktop PC environments. The Company's management believes that the Company
will continue to play an important role in defining standards for network
security.
SALES AND MARKETING
SALES. Citadel sells its products through telemarketing representatives,
dealer channels, direct sales channels and trade shows. Citadel's telemarketing
operations provide a direct link to the end user, allowing Citadel to develop
products and services that specifically meet the needs of the network market.
The Company is currently implementing a value added reseller program, and is
also exploring joint marketing and licensing arrangements with other companies.
MARKETING. The marketing department is responsible for assessing market
opportunities, product planning and specific sales support. In addition, the
marketing organization is actively involved in obtaining input from potential
and existing clients, product development, sales and client services and
support. As a result of this involvement, the marketing department helps to
define the scope, features, and functionality of new products and product
upgrades. Citadel's marketing efforts include display advertising in industry
publications, direct mail, card deck ads, and lead generation at industry trade
shows.
ACQUISITION OF ASSETS OF CIRCUIT MASTERS SOFTWARE, INC.
Effective 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 approximately $250,000 in
cash and liabilities assumed and issuing Common Stock of the Company valued at
$2,000,000, which is resulting in the issuance of approximately 370,000 shares
of Common Stock, based on the average
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of the closing prices of the Company's Common Stock for the 30 trading days
following the effective date of the transaction.
COMPETITION
The Company operates in a highly competitive environment and faces
competition from companies with substantially greater financial, research and
development, and marketing resources. There can be no assurance that the
Company will be able to compete successfully against current and future
competitors or that competitive pressures will not result in price reductions,
reduced operating margins and loss of market share, any of which could
materially adversely affect the Company. The Company's management believes that
there are currently no products available that directly compete with NetOFF.
There are, however, programs that offer PC security by locking the keyboard,
blanking the screen or performing other functions similar to those performed by
NetOFF. Because these programs do not log the PC off the network (a feature
network managers desire), Company's management believes that they do not offer
direct competition to NetOFF.
FORWARD LOOKING INFORMATION
The statements contained in this Report that are not historical facts,
including, but not limited to, statements found in this Item 1 - "Description of
Business" and in Item 6 - "Management's Discussion and Analysis or Plan of
Operation," 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 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 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.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company's success is dependent in part on its ability to protect its
proprietary technology. The Company relies on a combination of copyright and
trademark laws, trade secrets, software security measures, confidentiality
agreements and license agreements to establish and protect its proprietary
rights and its software. Despite these efforts, it may be possible for
unauthorized third parties to copy certain portions of the Company's products or
to reverse engineer or otherwise obtain and use proprietary information of the
Company. The Company does not have any patents, and existing copyright laws
afford only limited protection. In addition, the Company cannot be certain that
others will not develop substantially equivalent or superseding proprietary
technology, or that equivalent products will not be marketed in competition with
the Company's products, thereby substantially reducing the value of the
Company's proprietary rights. Furthermore, there can be no assurance that any
confidentiality agreements between the Company and its employees or any license
agreements with its customers or OEMs will provide meaningful protection of the
Company's proprietary information. In addition, the laws of certain countries
do not protect the Company's proprietary rights to the same extent as do the
laws of the United States. Accordingly, there can be no assurance that the
Company will be able to protect its proprietary software against unauthorized
third party copying or use, which could adversely affect the Company's business,
operating results and financial condition.
The Company is not currently engaged in any intellectual property
litigation or proceedings. Nonetheless, from time to time the Company may
receive notices claiming that it is infringing the
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proprietary rights of third parties, and there can be no assurance that the
Company will not become the subject of infringement claims or legal proceedings
by third parties with respect to current or future products. In addition, the
Company may initiate claims or litigation against third parties for infringement
of the Company's proprietary rights or to establish the validity of the
Company's proprietary rights. Any such claims could be time consuming, result
in costly litigation, cause product shipment delays or lead the Company to enter
into royalty or licensing agreements rather than disputing the merits of such
claims.
GOVERNMENT REGULATION
Government regulation has not had a material effect on the Company's
conduct of its business to date.
RESEARCH AND DEVELOPMENT
The Company spent approximately $136,000 on research and development in
1995 and the Company was primarily engaged in development activities in the
preceding years.
Citadel believes that a principal factor in the success of its products is
its system of performing extensive market research (including sending product
for evaluation and testing in the market) and testing of products at important
phases of development to ensure that each new product or product upgrade is of
the highest quality and addresses an identified market opportunity.
EMPLOYEES
As of February 29, 1996, the Company had 31 full-time employees, including
five in executive or managerial positions, four in software development, and the
balance in software sales, quality control, distribution, administrative,
clerical and other positions.
SALE OF RESTAURANT ASSETS
As of March 1, 1996, LoneStar 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. Miami Subs also assumed
LoneStar's indebtedness of $1,500,000 to Stephens Diversified Leasing, Inc.
("Stephens"). LoneStar 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, LoneStar cannot sell any of the
Miami Subs Stock, except with Miami Subs' consent, and Miami Subs has the right
to acquire the Miami Subs Stock for $2.50 per share. LoneStar will thereafter
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 LoneStar, except for
LoneStar's loan from Stephens and certain restaurant and equipment leases.
LoneStar has also issued to Miami Subs a promissory note in the principal amount
of $1,500,000. The note is secured by the Miami Subs Stock and does not bear
interest. The maturity date of the note was extended to July 1, 1996 as a
result of LoneStar's principal payment of $50,000.
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HISTORICAL BACKGROUND
Effective February 29, 1996, Old Citadel merged into LSHC Acquisition,
Inc., a wholly owned Delaware subsidiary of LoneStar, 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, and as
adjusted for the one-for-two reverse stock split effected on May 1, 1996, each
stockholder and warrant holder of Citadel received 2.25 shares or share
equivalents 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.
Former stockholders of Old Citadel now own approximately 60% of the issued and
outstanding shares of Common Stock of the Company on a fully diluted basis. 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.
In July 1994, pursuant to another acquisition consummated in March 1994,
the Company changed its name to LoneStar Hospitality Corporation. From March
1994 until February 1996, the Company owned and operated franchised restaurants
in the Dallas, Texas area.
RECENT DEVELOPMENTS
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, of
which the Company paid $200,000 in June 1996 pursuant to promissory notes. These
notes must be repaid over 12 months if the acquisition is not consummated.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases the premises housing its principal operations located at
1300 Post Oak Blvd., Houston, Texas pursuant to a lease agreement that expires
December 31, 2001. That lease covers approximately 14,000 square feet and the
Company has an option, until December 31, 1996, to expand into adjacent space.
The Company has entered into a short term lease for office space housing its
Dallas executive offices at 3811 Turtle Creek Blvd., pending final negotiations
of a long term lease and build out of office space in the same building. The
Company believes that these facilities are adequate for its current needs and
that suitable additional or alternative space will be available in the future on
commercially reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in routine litigation from time to time. Such
litigation is not material to the Company's consolidated financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of the year ended December 31, 1995, the
stockholders of Old Citadel executed a written consent to approve a restated and
amended certificate of incorporation of Old Citadel. During the Transition
Period, the stockholders of Old Citadel executed a written consent to approve
the Merger with the Company. No other matter was submitted to a vote of
security holders, through the solicitation of proxies or otherwise, during the
fourth quarter of the fiscal year or during the Transition Period.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
- ------------------
The Company's Common Stock is currently traded on the OTC Bulletin Board
under the symbol NOFF. The following table sets forth, for the periods
indicated, the high and low bid and ask prices for the Common Stock as reported
on the OTC Bulletin Board; such prices have been adjusted to reflect the one-
for-five reverse stock split effected in December 1995, the one-for-two stock
dividend distributed in February 1996, and the one-for-two reverse stock split
effected on May 1, 1996. The quotations reflect inter-dealer prices, without
retail mark-up, mark-down, or commission and may not represent actual
transactions. The Common Stock was traded under the symbol LSHO from December
15, 1995 to May 3, 1996 and under the symbol LSHC prior to December 15, 1995.
<TABLE>
<CAPTION>
Fiscal Year Bid Ask
- ----------- ------------- -------------
High Low High Low
<S> <C> <C> <C> <C>
1995
Second Quarter (from July 22, 1994)........ $23.34 $6.67 $33.34 $8.34
Third Quarter.............................. 17.50 5.00 23.34 8.34
Fourth Quarter............................. 5.84 2.50 13.34 6.67
1996
First Quarter.............................. 2.50 .84 9.26 4.16
Second Quarter............................. 5.00 .84 8.34 4.16
Third Quarter.............................. 4.58 .75 8.33 2.80
Fourth Quarter............................. 3.88 .50 4.38 2.41
1997
First Quarter.............................. 18.38 3.50 19.00 4.00
Second Quarter (through June 21, 1996)..... 13.75 12.25 14.00 12.63
</TABLE>
The Company's Common Stock commenced trading on July 22, 1994.
Holders of Common Stock are entitled to dividends when, as and if declared
by the Board of Directors out of funds legally available therefor. The Company
has never paid cash dividends on its Common Stock and management intends, for
the immediate future, to retain any earnings for the operation and expansion of
the Company's business. Any future determination regarding the payment of
dividends will depend upon results of operations, capital requirements, the
financial condition of the Company and such other factors that the Board of
Directors of the Company may consider. If the Company issues preferred stock,
the Board of Directors will have the right to establish the rights, designations
and preferences thereof, including preferences as to payment of dividends and
liquidation proceeds.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
On February 29, 1996, a wholly-owned subsidiary of the Company, merged with
Citadel Computer Systems Incorporated (the "Merger"). See "Historical
Background" in Item 1 of this Report. The Merger has been accounted for as a
reverse acquisition. Accordingly, except where noted otherwise, the discussion
herein relates to the results of operations and liquidity of Citadel, rather
than of the pre-Merger operations of the Company. In discussions of pre-Merger
operations and transactions, the Company shall be referred to as "LoneStar."
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RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995 AS COMPARED WITH YEAR ENDED DECEMBER 31, 1994.
During the year ended December 31, 1995, the Company concentrated on the
development and growth of its business and its markets. The Company's business
strategy was to increase the recognition of its products in the marketplace. A
key means of executing this strategy was to distribute Company products on a
trial basis and the solicitation of comments from the persons to whom these
products were distributed.
During the year ended December 31, 1995, the Company had gross sales of
$2,562,530, an increase of $1,541,785, or 151% over gross sales of $1,020,745
during the prior fiscal year. The increase occurred primarily as a result of an
increase in the Company's marketing and sales efforts, and consisted primarily
of increased sales of the Company's NetOFF product, which accounted for a large
majority of the Company's gross sales during the year.
The Company's gross sales were offset by returns and allowances of
$1,214,148, or approximately 47.4% of gross sales during the year ended December
31, 1995. During the year ended December 31, 1994, returns and allowances were
$294,284, or approximately 28.8% of gross sales. The increased level of
allowances and returns resulted from Company's strategy of distributing products
on a trial basis, and the Company's priority during the early stage of its
development to devote its primary efforts to increase the awareness of its
products in the marketplace, to refine existing products through feedback from
customers, and to establish a market for upgrades of its existing products and
for new products. While the Company intends to aggressively market its products,
new management believes that the current market awareness of the Company's
products and the implementation of new sales and marketing strategies will
result in a decrease in the percentage of allowances over the next fiscal year.
The costs and expenses incurred in connection with producing the Company's
products were $127,583 during the year ended December 31, 1995, a decrease of
$40,492, or approximately 24%, from costs of sales of $168,075 incurred in the
previous fiscal year.
In addition to the research and development costs of $136,355 reflected in
the Company's statement of operations for the year ended December 31, 1995, the
Company has also capitalized development costs, which are being amortized over
the expected lives of the products.
Selling, general and administrative expenses for the year ended December
31, 1995 were $1,718,465, an increase of $1,002,356, or 140% over selling,
general and administrative expenses during the prior fiscal year. Such expenses
increased in connection with the Company's increases in its operations, its
marketing efforts and its efforts to raise additional capital.
Interest expense increased from $20,797 in the year ended December 31, 1994
to $250,525 in 1995, primarily due to increased debt, including in connection
with factoring of accounts receivable.
INFLATION
Inflation did not have a material effect on the Company's results during
the periods discussed.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents at February 29, 1996 were $125,565.
Beginning in October 1995, the Company undertook a private placement to
secure a bridge loan in the amount of $750,000.
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Cash flows from operations were a negative $1,165,990 for the year ended
December 31, 1995 compared to negative $27,255 for 1994. The increase was due
principally to the increased net loss, and increases in receivables.
Cash used in investing activities was $156,255 in 1995 compared to $25,237
in 1994. This increase was due to an increase of capital expenditures.
Cash flows provided by financing activities were $1,376,067 in 1995
compared to $50,000 in 1994. This increase was due primarily to the (i)
proceeds from notes payable, offset by payments on notes payable and (ii) net
proceeds from factoring accounts receivable.
As a result of the aforementioned factors, cash and cash equivalents
increased by $53,822 in the year ended December 31, 1995.
Beginning in December 1995, the Company began a series of financing
transactions which raised approximately $2,700,000 from the sale of debentures
and warrants through June 21, 1996. Conversions and exercises resulted in an
increase in equity subsequent to February 29, 1996 of $1,700,000. Approximately
$1,000,000 remains outstanding as debt as of June 21, 1996.
Subsequent to the end of the fiscal year, the Company has realized an
aggregate total of $387,500 from the exercise of outstanding options.
In June 1996, the Company is conducting a private placement of convertible
notes that are mandatorily convertible into common stock. As of June 21, the
Company has raised net proceeds of $2,550,000 in this offering and has received
commitments for an additional $2,250,000.
The Company has signed a nonbinding letter of intent with respect to a line
of credit with a bank under which the Company will be able to refinance
approximately $1,250,000 of outstanding indebtedness and will be able to draw up
to an additional $500,000 for working capital.
The Company received 1,325,000 shares of common stock of Miami Subs
Corporation in connection with its sale of the its Miami Subs Grill restaurants.
See Item 1. "Description of Business - Sale of Restaurant Assets" for a
description of certain restrictions on the resale of such stock and of certain
related indebtedness.
Subsequent to the end of the fiscal year, officers of the Company have
advanced funds to the Company to meet various short term obligations.
The Company has granted to holders of its warrants and to the holders of
certain of its shares certain piggyback registration rights that generally are
at the Company's expense.
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The Company believes the funds available from the sources described above
will be sufficient to fund its current operations through the end of 1996, but
that it will need substantial additional funds to expand its operations and to
pursue acquisitions that will permit it to expand its line of products and to
complement its internal software development efforts. The Company expects that
it will need to seek additional funds, either through borrowing, through sales
of its securities, or a combination of both, in order to secure such funds.
ACCOUNTING STANDARDS NOT ADOPTED
Two recently issued accounting standards, Accounting for Long-Lived Assets
(SFAS No. 121) and Accounting for Stock Based Compensation (SFAS No. 123) are
effective for the fiscal year ending February 28, 1997. The Company does not
expect that the adoption of SFAS No. 121 will have a material effect on the
financial statements. SFAS No. 123, as an alternative to adoption, permits use
of current accounting methods with disclosure of the pro forma effect of
adoption. The Company expects to elect the alternative disclosure provisions.
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements for the year ended December 31, 1995 and the
Transition Period are found following the signature page of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL MATTERS
There has been no change in the principal accountant of the Company during
the Company's two most recent fiscal years.
Grant Thornton LLP is the Company's principal accountant. Old Citadel's
former principal accountant was BDO Seidman, LLP. BDO Seidman, LLP had audited
the financial statements of Old Citadel for the fiscal year ended December 31,
1994.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
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 72 Chairman of the Board
George T. Sharp 53 President, Chief Executive Officer, and Director
Steven B. Solomon 31 Chief Operating Officer, Secretary, and Director
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 chairman 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, Chief Executive Officer, and a director
of the Company since February 29, 1996, and was president of Old Citadel from
its inception in June 1992. Prior to founding Citadel, Mr. Sharp was President
of Matrix Systems Incorporated. Matrix developed software programs which
provided accounting systems, contact management systems, and reporting systems
to independent insurance companies nationwide.
STEVEN B. SOLOMON has been the Chief Operating Officer, Secretary, and a
director of the Company since February 29, 1996. He was the President and a
Director of LoneStar from its inception in February 1992 until February 1996,
and Chairman of the Board of Directors from December 1994 until February 1996.
Mr. Solomon also served as Developer and Executive Producer of SportsWaves!, a
division of LoneStar that produced syndicated television programs covering the
National Football League and collegiate and professional sports. 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 development and corporate finance consultant. 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 on
February 29, 1996 and was a director of LoneStar since June 1993. He has been
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., a privately-held electronic parts manufacturer.
11
<PAGE>
JESSE R. MARION has been a Director of the Company since March 1996. He
has been President and CEO of Millennium Seismic, Inc. since June 1, 1996.
Until May 31, 1996, he was a Director of Seitel, Inc., a New York Stock Exchange
listed energy and seismic data company. He also served as president of Seitel
Data Corp. and Seitel Data, Ltd., both 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 February 1996 and a
director of LoneStar 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 or executive
officers of the Company.
BOARD COMMITTEES AND MEETINGS
During the fiscal year and transition period ended February 29, 1996 the
Board of Directors held five (5) meetings and took action by unanimous consent
on one occasion. Each director, other than Mr. James E. Bradshaw, a former
director of LoneStar, attended at least 75% of the aggregate number of
meetings of the Company's Board of Directors and committees on which he served.
Prior to the Merger, the Board of Directors had an executive committee
consisting of Messrs. Solomon, Economou, Lawrence E. Steinberg and Steven R.
Leipsner. During the fiscal year ended February 29, 1996, the executive
committee held no meetings.
COMPLIANCE WITH SECTION 16
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
that the Company's officers, directors and persons who own more than 10 percent
of a registered class of the Company's equity securities file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Officers, directors and greater than 10 percent shareholders are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file. Based solely on its review of the copies of such forms
received by it, or written representations from certain reporting persons that
no Forms 5 were required for those persons, the Company believes that during the
fiscal year ended February 29, 1996, Messrs. Solomon, Economou and Sawallich and
James E. Bradshaw, Steven R. Leipsner, Lawrence E. Steinberg and David S.
Lundeen each filed Form 4s late. Such Form 4s related to grants to or
extensions of exercise periods or reductions in exercise prices of options held
by such persons. In addition, Mr. Solomon filed a Form 5 late relating to his
acquisition, receipt and exercise of certain options and a debenture during the
fiscal year.
12
<PAGE>
KEY EMPLOYEES
The following sets forth certain information regarding other significant
employees of and consultants to the Company:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Stuart Marks 34 Director of Research and Development
Paul H. Harder 45 Chief Technical Officer
Edmund J. Pankau 50 Senior Security Technical Advisor
</TABLE>
STUART MARKS, the Director of Research and Development, joined Citadel in
November 1994. Mr. Marks has more than sixteen years of experience designing
and developing application software for commercial and entertainment markets,
including political, real estate, construction, education and financial markets.
He has extensive experience in systems integration, and is the author of
Citadel's most recent upgrade of "NetOFF." Mr. Marks was president of Marcor,
Inc. a software development and consulting group he founded in 1985, until it
was acquired by Citadel in November 1994.
PAUL H. HARDER, PH.D., the Chief Technical Officer of the Company, oversees
technical merits and feasibility of Citadel's products. Dr. Harder has more
than twenty years' experience developing application software for the petroleum
industry, NASA, military and intelligence programs, medical imaging and
scientific research. Dr. Harder holds a B.S. in Physics for Kansas State
University, an MS in Systems Management from the University of Southern
California, and a Ph.D. in Meteorology from Texas A&M University.
EDMUND J. PANKAU, the Senior Security Technical advisor to the Company,
joined the Company in March 1996. Mr. Pankau is the founder and has been
chairman of INTERTECT, Inc., of Houston, Texas, an international private
investigative agency since a date prior to 1991. Mr. Pankau is the author of
numerous articles and books on security matters, financial fraud examination and
international business investigation. He is a Certified Legal Investigator and
a Certified Protection Professional.
13
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The total compensation (i) during the Transition Period and for the three
fiscal years ended December 31,1995, December 31, 1994 and December 31, 1993,
respectively, to the Chief Executive Officer, George T. Sharp, and (ii) Steven
B. Solomon, who served as the Chief Executive Officer of LoneStar prior to
the Merger, for the fiscal year ended February 29, 1996 (the persons listed in
(i) and (ii) collectively referred to herein as the "Named Executive Officers"),
is set forth below in the following Summary Compensation Table. No other person
received cash compensation in excess of $100,000 during the fiscal year ended
December 31, 1995 (in the case of Old Citadel), or the fiscal year ended
February 29, 1996 (in the case of LoneStar).
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation All Other
Name and Principal Position Year Salary Bonus Compensation
- --------------------------- ---- -------- ----- ------------
<S> <C> <C> <C> <C>
George Sharp, 1996* $20,833 -0- -0-
President and Chief Executive 1995 81,947 $45,433 -0-
Officer 1994 44,000 -0- -0-
1993 40,950 -0- -0-
Steven B. Solomon, Chief 1996+ $110,000 -0- $13,150/2/
Operating Officer 1995 91,923 -0- 23,900/3/
1994 95,000 $105,000/1/ 7,800/4/
</TABLE>
* Transition period
+ April 1, 1995 - February 29, 1996
/1/ Mr. Solomon accrued this bonus amount during the fiscal year
ended March 31, 1994. This bonus was paid during the fiscal year ended
March 31, 1995.
/2/ Mr. Solomon received a car allowance of $650 per month through June
1995, and $950 per month after July 1, 1995, life insurance and disability
insurance during the fiscal year ended February 29, 1996.
/3/ Mr. Solomon received a car allowance of $650 per month during
the fiscal year ended March 31, 1995. He also received approximately $15,000
in connection with his efforts to raise capital during that fiscal year, and
disability insurance.
/4/ Mr. Solomon received a car allowance of $650 per month during the
fiscal year ended March 31, 1994.
14
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
The following table discloses, for each of the Named Executive Officers,
options granted during the fiscal year ended December 31, 1995 and during the
Transition Period by Old Citadel (in the case of Mr. Sharp) and during the
fiscal year ended February 29, 1996 by LoneStar (in the case of Mr. Solomon) and
the potential realizable values for such options:
<TABLE>
<CAPTION>
Number of Securities % of Total Options/SARs Exercise or
Underlying Granted to Employees in Base Price Expiration
Name Options/SARs Granted Fiscal Year /1/ ($/Sh) Date
---- -------------------- ------------------------ ----------- ----------
<S> <C> <C> <C> <C>
George Sharp 1,462,500 32% /2/ 12/11/00
Steven B. Solomon 1,747,500 100% /3/ /3/
</TABLE>
/1/ Percentage for Mr. Sharp refers to options granted by Old Citadel.
Percentage for Mr. Solomon refers to option granted by LoneStar.
/2/ Includes options to purchase shares of Old Citadel that, at the time
of the Merger, converted into options to purchase 1,125,000 shares at $.50 per
share and 337,500 shares at $.89 per share.
/3/ Includes options to purchase (a) shares of Old Citadel that were
converted into an option to purchase 1,575,000 shares at the time of the Merger,
exercisable at $.89 per share until December 11, 2000, (b) 22,500 shares granted
to Mr. Solomon in his capacity as a director of the Company at an exercise price
of $.33-1/3 per share, until October 15, 1995, which have been exercised, and
(c) 150,000 shares granted pursuant to Mr. Solomon's employment agreement with
LoneStar at $.46-2/3 per share until June 30, 1997, which have been exercised.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
The following table describes for each of the Named Executive Officers
options exercised and the potential values for their unexercised in-the-money
options at February 29, 1996:
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-The-Money
Options/SARs at Options/SARs at
Shares Acquired FY-End FY-End ($)
on Exercisable/ Exercisable/
Name Exercise Value Realized Unexercisable Unexercisable
- ------------------- --------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C>
George Sharp -0- -0- 1,462,500/0 9,678,727/0
Steven B. Solomon 172,500 $543,375 1,584,461/0 10,072,884/0
</TABLE>
COMPENSATION OF DIRECTORS
Directors are not compensated for any services provided as directors but
are reimbursed reasonable expenses incurred in connection with attendance at
meetings of the Board or committees.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
In March 1996 the Board of Directors approved employment agreements between
the Company and Messrs. Sharp and Solomon and a consulting agreement between the
Company and Mr. Gertner.
Mr. Sharp's employment agreement is dated as of December 1, 1995, and its
initial term expires on November 30, 2000. It will be automatically renewed
annually unless otherwise extended or terminated in writing. Mr. Sharp's
employment agreement provides for an annual base salary and permits the award of
bonuses at the discretion of the Board. The base salary is $150,000 during the
first year of the agreement and will be $165,000 during the second year,
$181,500 during the third year, $199,644 during
15
<PAGE>
the fourth year and $219,600 during the fifth year. If Mr. Sharp cannot perform
his duties during the term of the employment agreement because of personal
injury, disability or illness, the Company will continue to pay his salary
during the full term of the agreement. In consideration of certain intellectual
property that Mr. Sharp has contributed to the Company in the past, the Company
cannot terminate his employment for any reason during the initial five year term
of the agreement. If, however, the Company elects to terminate the employment
agreement for any reason during the initial five year term, the balance of the
base salary during the balance of that initial term will be accelerated and
payable immediately.
Mr. Gertner's consulting agreement, pursuant to which he is serving as
Chief Financial Consultant of the Company, is dated as of December 1, 1995 and
its initial term expires on November 30, 2000. It will be automatically renewed
annually unless terminated in writing or otherwise extended. Mr. Gertner's
consulting agreement provides for an annual base salary and permits the award of
bonuses at the discretion of the Board. The base salary is $120,000 during the
first year of the consulting agreement, $132,000 during the second year and
$144,000 during remaining three years of the consulting agreement. If Mr.
Gertner is terminated, other than for death or disability, he shall be entitled
to any unpaid salary and bonus pay, and any options to purchase Company
securities exercisable during the term of the employment agreement would become
immediately exercisable.
Mr. Solomon's employment agreement, pursuant to which he is serving as
Chief Operating Officer and Director of Corporate Relations of the Company, is
dated as of March 1, 1996 and its initial term expires on February 28, 2001. It
will be automatically renewed annually unless terminated in writing or otherwise
extended. Mr. Solomon's employment agreement provides for an annual base salary
and permits the award of bonuses at the discretion of the Board. The base
salary is $120,000 during the first year of the employment agreement, and will
be $132,000 during the second year and $144,000 during remaining three years of
the employment agreement. If Mr. Solomon is terminated other than for cause, he
will be entitled to a severance payment equal to the greater of the remaining
payments due under the employment agreement or any extension thereof, discounted
at 6%, or twenty-four months' base salary in effect at the time of such
termination.
The Company shall provide life insurance in the amount of $1,000,000 on the
lives of each of Messrs. Sharp and Solomon, in addition to any key man life
insurance policy on Mr. Solomon maintained by the Company for its benefit. The
Company also provides disability insurance for Messrs. Sharp, Gertner, and
Solomon. The Company shall provide each of Messrs. Sharp, Gertner, and Solomon
with an automobile allowance of $950 per month and automobile liability
insurance.
REPRICING OF OPTIONS
In June 1995 the Board of Directors of LoneStar approved the reduction in
the exercise price of several outstanding options and warrants from their
existing exercise prices to $.33-1/3 per share. Among the options with respect
to which exercise prices were lowered were certain options held by directors or
former directors of LoneStar, and included an option to purchase 9,461 shares of
common stock held by each of Steven B. Solomon and three other persons. See
Item 12. "Certain Relationships and Related Transactions." In its action, the
LoneStar Board reduced the exercise price from $3.98 per share to $.33-1/3 per
share for the period from June 27, 1995 until October 15, 1995, at which time
the exercise price reverted to $3.98.
The LoneStar Board approved the reduction for two principal reasons.
First, the Board wished to provide its investors, including members of the
LoneStar Board, with an opportunity to bring their basis in their investment in
LoneStar to a level that was closer to the then-current market price of
LoneStar's common stock. Second, the LoneStar Board wanted to encourage these
persons to increase their investment in LoneStar at a time when additional funds
were needed in connection with the operation and growth of LoneStar's business.
Mr. Solomon elected not to exercise the aforementioned option at the
reduced exercise price.
16
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information is submitted as of June 12, 1996 with respect to
the Company's voting securities owned beneficially by each person known by the
Company owning more than 5% of the Common Stock of the Company (this being the
only class of voting securities now outstanding) and by all directors and
officers of the Company, individually and as a group. Unless otherwise
indicated, the number of Shares and percentage of ownership of Common Stock for
each of the named stockholders assumes that Shares of Common Stock that the
stockholder may acquire within sixty days of the Record Date are outstanding.
As of June 12, 1996, 11,987,062 shares of the Company are outstanding, including
shares issuable in connection with the Circuit Masters acquisition . See
"Acquisition of Assets of Circuit Masters, Inc." in Item 1 of this Report.
<TABLE>
<CAPTION>
Outstanding as of June 12, 1996
----------------------------------
Number Approximate
Name and address of beneficial owner: of shares percent of class
- --------------------------------------- -------------- ----------------
<S> <C> <C>
Gilbert Gertner 5,094,000 /1/ 37.9%
1300 Post Oak Blvd., 9th Floor
Houston, Texas 77056
George Sharp 3,163,500 /1/ 23.5
1300 Post Oak Blvd., 9th Floor
Houston, Texas 77056
Steven B. Solomon 3,021,585 /2/ 22.3
3811 Turtle Creek Blvd., Suite 1080
Dallas, Texas 75219
Chris A. Economou 185,000 1.5
150 North Federal Highway, Suite 210
Fort Lauderdale, Florida 33301
Axel Sawallich 219,461 /3/ 1.8
Rudolfplatz 10
A-1080 Vienna, Austria
Jesse R. Marion 25,000 /4/ *
50 Briar Hollow, Suite 700 West
Houston, Texas 77027
All officers and directors as a group 11,708,546 /5/ 70.8 %
(6 persons):
</TABLE>
*Less than one percent.
/1/ Includes 1,462,500 shares presently issuable pursuant to an option to
purchase Common Stock.
/2/ Includes 1,584,461 shares presently issuable pursuant to options to
purchase Common Stock.
/3/ Includes 112,500 shares held by Mr. Sawallich as trustee, over which
he has voting and dispositive power.
/4/ Includes 25,000 shares presently issuable pursuant to an option to
purchase Common Stock.
/5/ Includes all shares presently issuable pursuant to presently
exercisable options held by Messrs. Gertner, Sharp, Solomon and Marion.
17
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of November 13, 1995, LoneStar issued to Steven B. Solomon, then the
President of LoneStar, 450,000 shares of Common Stock in exchange for the
cancellation of indebtedness totaling, in the aggregate, $150,000, or $.33-1/3
per share. LoneStar had agreed in June 1995 to issue this stock in exchange
for the cancellation of indebtedness to Mr. Solomon in connection with the loan
from Stephens. LoneStar had also issued 37,500 shares of Common Stock to the
prior holder of this indebtedness; such shares are held by Axel Sawallich, a
director of LoneStar, in his capacity as a trustee for such prior holder.
In October 1995, Messrs. Sawallich and Solomon exercised options to acquire
an aggregate of 31,961 shares and 22,500 shares of Common Stock, respectively,
at an exercise price of $.33-1/3 per share.
In June 1995, LoneStar issued to each member of the Board of Directors,
as then constituted, options to purchase 22,500 shares of Common Stock at
$.33-1/3 per share until August 26, 1995 and to lower the exercise price of
outstanding options previously issued to directors to $.33-1/3 per share until
the same date, after which the exercise price reverted to the original exercise
price. The exercise period for both the new options and for the reduced exercise
price of the existing options was subsequently extended until October 15, 1995.
In February 1996, LoneStar issued to Chris A. Economou, Steven R.
Leipsner, David S. Lundeen and James E. Bradshaw, each being a member of the
Board of Directors, as then constituted, options to acquire 25,000 shares of
Common Stock at $3.50 per share until May 31, 1996.
During the fiscal year ended February 29, 1996, Axel Sawallich, a director
of the Company, received options to purchase 75,000 shares of common stock as
compensation for his assistance in the placement of securities to investors in
Europe.
Chris A. Economou, a director of the Company, provided legal services to
LoneStar. During the fiscal year ended February 29, 1996, Mr. Economou
agreed to receive 105,500 shares of Common Stock in lieu of $35,000 as legal
fees for legal services performed for the Company.
Lawrence E. Steinberg, a director of LoneStar until February 29, 1996,
is of counsel to Jenkens & Gilchrist, a Professional Corporation, a Dallas law
firm that performs legal services for LoneStar. During the year ended
February 29, 1996, LoneStar had incurred legal fees totaling $418,784 to
Jenkens & Gilchrist.
In connection with the loan from Stephens Diversified Leasing, Inc., dba
Stephens Franchise Finance to LoneStar in June 1995, Steven B. Solomon, then
the President and Chairman of the Board of LoneStar, purchased 450,000 shares
of Common Stock for an aggregate of $150,000, or $.33-1/3 per share. Lawrence E.
Steinberg, then LoneStar's secretary and a director, and Jeffrey L. Beck, a
former director and then the beneficial owner of approximately 19.2% of
LoneStar's common stock, each purchased 225,000 shares of Common Stock for an
aggregate of $75,000 each, or $.33-1/3 per share, and Chris A. Economou, a
director of the Company purchased 30,000 shares for $10,000, or $.33-1/3 per
share.
In December 1995, Old Citadel issued to George Sharp options to purchase
500,000 shares of Old Citadel common stock at $.05 per share (which Mr. Sharp
subsequently agreed to increase to $1.125 per share) and 150,000 shares at $2.00
per share. As a result of the Merger, Mr. Sharp's options have become options to
purchase 1,125,000 shares of Common Stock at $.50 per share and 337,500 shares
at $.89 per share. In December 1995, Old Citadel issued to Gilbert Gertner
options to purchase 650,000 shares of Old Citadel common stock at $2.00 per
share. As a result of the Merger, Mr. Gertner's options have become options to
purchase 1,462,500 shares of Common Stock at $.89 per share. Also in December
1995, Old Citadel issued to Steven B. Solomon an option to purchase 700,000
shares of Old
18
<PAGE>
Citadel common stock at $2.00 per share. As a result of the Merger, such
options have become options to purchase 1,595,000 shares of Common Stock at $.89
per share.
At various times during the year ended February 29, 1996, Steven B. Solomon
personally guaranteed various obligations of LoneStar.
At various times during the year ended February 29, 1996, Steven B. Solomon
advanced funds to LoneStar to fund various short term obligations of LoneStar.
See Item 6. "Management's Discussion and Analysis or Plan of Operation."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
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 Exhibit 2.1 of
the Company's Current Report on Form 8-K dated February 29, 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
Exhibit 2.2 of the Company's Current Report on Form 8-K dated
February 29, 1996)
2.3 Technology Transfer Agreement, by and between LoneStar
Hospitality Corporation and Circuit Master Software, Inc., dated
February 29, 1996 (without exhibits). (incorporated by reference
to Exhibit 2.3 of the Company's Current Report on Form 8-K dated
February 29, 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 Exhibit 2.4 of
the Company's Current Report on Form 8-K dated February 29, 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 Exhibit
2.5 of the Company's Current Report on Form 8-K dated February
29, 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. (incorporated by reference to Exhibit 2.6 of the Current
Report on Form 8-K/A filed with the Commission on June 10, 1996)
3.1 Certificate of Incorporation. (incorporated by reference to
Registration Statement on Form S-1, File No. 33-25462, for Apollo
Resources, Inc., on November 10, 1988 and declared effective
January 4, 1989)
19
<PAGE>
*3.2 Certificate of Amendment to Certificate of Incorporation filed
with Delaware Secretary of State on June 4, 1990.
3.3 Bylaws. (incorporated by reference to Registration Statement on
Form S-1, File No. 33-25462, filed with the Commission on
November 10, 1988)
3.4 Certificate of Amendment to Certificate of Incorporation filed
with Delaware Secretary of State on October 15, 1991.
(incorporated by reference to the Company's Annual Report on Form
10-K for year ended December 31, 1991)
3.5 Certificate of Amendment to Certificate of Incorporation filed
with Delaware Secretary of State on July 20, 1994. (incorporated
by reference to the Company's Quarterly Report on Form 10-QSB for
quarter ended June 30, 1994)
3.6 Certificate of Amendment to Certificate of Incorporation filed
with Delaware Secretary of State on December 11, 1995.
(incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for quarter ended December 31, 1995 )
*3.7 Certificate of Amendment to Certificate of Incorporation filed
with Delaware Secretary of State on May 1, 1996.
10.1 Loan Agreement dated June 30, 1995 by and among LoneStar
Hospitality Corporation, LS Holding Corp. and Stephens
Diversified Leasing, Inc. d/b/a Stephens Franchise Finance.
(incorporated by reference to Exhibit 10.5 of the Company's
Annual Report on Form 10-KSB for the year ended March 31, 1995)
10.2 Forbearance and Restructuring Agreement dated June 30, 1995 by
and among LoneStar Hospitality Corporation, LS Holding Corp. and
Miami Subs U.S.A., Inc. (incorporated by reference to Exhibit
10.6 of the Company's Annual Report on Form 10-KSB for the year
ended March 31, 1995)
*10.3 Employment Agreement dated December 1, 1995 between Citadel
Computer Systems, Inc. and George Sharp.
*10.4 Consulting Agreement dated December 1, 1995 between Citadel
Computer Systems and Gilbert Gertner.
*10.5 Employment Agreement dated March 1, 1996 between the Company
and Steven B. Solomon.
*11 Statement re: Computation of per share earnings.
*21 Subsidiaries of the Company.
*23.1 Consent of Grant Thornton LLP.
*27 Financial Data Schedule.
20
<PAGE>
(b) REPORTS ON FORM 8-K.
On December 14, 1995, the Company filed a Form 8-K pursuant to which
it reported the proposed acquisition of Citadel and reported the terms
of an employment agreement between the Company and Steven B. Solomon.
Subsequent to the end of the fiscal year and transition period, on
March 13, 1996, the Company filed a Form 8-K pursuant to which it
reported the acquisition of Citadel, the sale of its restaurant assets
and the change of its fiscal year. This Form 8-K was amended in a Form
8-K/A filed with the Commission on June 11, 1996 to include financial
statements of Old Citadel and Circuit Masters.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CITADEL COMPUTER SYSTEMS INCORPORATED
(REGISTRANT)
Date: June 24, 1996 By: /s/ George Sharp
----------------------------------------------
George Sharp, President,
Chief Executive Officer
Date: June 24, 1996 By: /s/ Steven B. Solomon
----------------------------------------------
Steven B. Solomon,
Chief Operating Officer, Chief Financial
Officer, Chief Accounting Officer
22
<PAGE>
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated:
Date: June 24, 1996 By: /s/ Gilbert Gertner
--------------------------------------------------
Gilbert Gertner, Chairman of the Board of
Directors
Date: June 24, 1996 By: /s/ George Sharp
--------------------------------------------------
George Sharp, President, Director, Chief
Executive Officer
Date: June 24, 1996 By: /s/ Steven B. Solomon
--------------------------------------------------
Steven B. Solomon, Chief Operating Officer,
Secretary, Director, Principal Accounting
and Financial Officer
Date: June 24, 1996 By: /s/ Chris A. Economou
--------------------------------------------------
Chris A. Economou, Director
Date: June 24, 1996 By: /s/ Jesse R. Marion
--------------------------------------------------
Jesse R. Marion, Director
Date: June 24, 1996 By: /s/ Axel Sawallich
--------------------------------------------------
Axel Sawallich, Director
23
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
Citadel Computer Systems, Incorporated
We have audited the accompanying consolidated balance sheets of Citadel Computer
Systems, Incorporated as of February 29, 1996 and December 31, 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the two months ended February 29, 1996 and the year ended December 31,
1995. 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 audits.
We conducted our audits 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 our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the consolidated financial position of Citadel Computer
Systems, Incorporated as of February 29, 1996 and December 31, 1995, and the
consolidated results of their operations and their consolidated cash flows for
the two months ended February 29, 1996 and the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Houston, Texas
June 12, 1996, (except for Note N, as to
which the date is June 21, 1996)
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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.
BDO Seidman, LLP
May 26, 1995
Houston, Texas
F-2
<PAGE>
CITADEL COMPUTER SYSTEMS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
February 29, December 31,
------------------------
ASSETS 1996 1995 1994
--------------- ------------ ----------
<S> <C> <C> <C>
CURRENT ASSETS
Cash $ 125,565 $ 53,822 $ -
Accounts receivable less allowance for
doubtful accounts of $325,000, $490,000
and $80,000 484,336 452,016 155,605
Assets under contract of sale 2,605,772 - -
Other 82,405 87,335 4,333
----------- ----------- ---------
Total current assets 3,298,078 593,173 159,938
PROPERTY AND EQUIPMENT, NET 110,327 52,118 27,274
PURCHASED SOFTWARE, NET OF ACCUMULATED
AMORTIZATION OF $188,000, $168,000 AND $56,000 2,622,000 392,000 504,000
CAPITALIZED SOFTWARE DEVELOPMENT COSTS 135,412 100,804 -
OTHER ASSETS 249,046 195,632 64,850
----------- ----------- ---------
$ 6,414,863 $ 1,333,727 $ 756,062
=========== =========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Bank overdraft $ - $ - $ 6,272
Notes payable 4,034,214 1,576,067 200,000
Accounts payable and accrued expenses 2,030,800 664,405 356,007
----------- ----------- ---------
Total current liabilities 6,065,014 2,240,472 562,279
ACCOUNTS PAYABLE - LONG-TERM 34,360 27,430 73,830
----------- ----------- ---------
Total liabilities 6,099,374 2,267,902 636,109
COMMITMENTS AND CONTINGENCIES - - -
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value per share; authorized
30,000,000 shares in 1996, 10,000,000 shares in
1995 and 3,000 shares in 1994; issued and
outstanding, 11,509,126 shares in 1996,
3,000,000 shares in 1995 and 2,895 shares in 1994 115,091 30,000 29
Additional paid-in capital 2,405,144 851,034 825,485
Accumulated deficit (2,204,746) (1,815,209) (705,561)
----------- ----------- ---------
Total stockholders' equity (deficit) 315,489 (934,175) 119,953
----------- ----------- ---------
$ 6,414,863 $ 1,333,727 $ 756,062
=========== =========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
CITADEL COMPUTER SYSTEMS, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Two months
ended
February 29, Years ended December 31,
--------------------------
1996 1995 1994
------------- ------------- -----------
<S> <C> <C> <C>
REVENUES
Sales $ 301,781 $ 2,562,530 $1,020,745
Less returns and allowances (111,101) (1,214,148) (294,284)
---------- ----------- ----------
Net sales 190,680 1,348,382 726,461
COST OF SALES (24,308) (127,583) (168,075)
---------- ----------- ----------
Gross profit 166,372 1,220,799 558,386
OPERATING EXPENSES
Selling, general and administrative expenses 507,325 1,718,465 716,109
Depreciation and amortization 29,199 153,224 69,353
Research and development costs 32,842 136,355 -
---------- ----------- ----------
569,366 2,008,044 785,462
---------- ----------- ----------
Operating loss (402,994) (787,245) (227,076)
OTHER INCOME (EXPENSE)
Interest expense (31,579) (250,525) (20,797)
Loss on disposal of asset - (47,900) -
Other 45,036 (23,978) (39,925)
---------- ----------- ----------
13,457 (322,403) (60,722)
---------- ----------- ----------
Loss before extraordinary item (389,537) (1,109,648) (287,798)
EXTRAORDINARY ITEM - GAIN ON FORGIVENESS OF DEBT - - 110,062
---------- ----------- ----------
NET LOSS $ (389,537) $(1,109,648) $ (177,736)
========== =========== ==========
Loss per share
Loss before extraordinary item $ (.06) $ (.17) $ (.07)
Extraordinary item - - .03
---------- ----------- ----------
Net loss $ (.06) $ (.17) $ (.04)
========== ========== ==========
Weighted average shares outstanding 6,750,000 6,570,284 3,999,060
========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CITADEL COMPUTER SYSTEMS, INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<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, effective in
the form of a stock dividend 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)
Recapitalization of Citadel
Computer Systems,
Incorporated and merger
with LoneStar Hospitality
Corporation 8,138,756 81,388 (442,187) - (360,799)
Acquisition of Circuit Masters
Software, Inc. 370,370 3,703 1,996,297 - 2,000,000
Net loss - - - (389,537) (389,537)
---------- -------- ---------- ----------- -----------
Balance at February 29, 1996 11,509,126 $115,091 $2,405,144 $(2,204,746) $ 315,489
========== ======== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CITADEL COMPUTER SYSTEMS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Two months
ended
February 29, Years ended December 31,
--------------------------
1996 1995 1994
------------- ------------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(389,537) $(1,109,648) $(177,736)
Adjustments to reconcile net loss to net cash used
by operating activities
Depreciation and amortization 29,199 153,224 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 132,802 410,314 88,633
Changes in operating assets and liabilities
Accounts receivable (165,122) (706,725) (129,479)
Other receivables 5,998 (83,002) 9,640
Other current assets (53,850) (139,299) (540)
Bank overdraft - (6,272) 6,272
Accounts payable and accrued expenses 97,353 261,998 176,726
Due to affiliates - - 39,938
--------- ----------- ---------
NET CASH USED BY OPERATING ACTIVITIES (343,157) (1,165,990) (27,255)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (300,998) (158,355) (25,237)
Proceeds from sale of asset - 2,100 -
--------- ----------- ---------
NET CASH USED BY INVESTING ACTIVITIES (300,998) (156,255) (25,237)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable (227,107) (742,000) (120,000)
Proceeds from notes payable 943,005 1,850,595 170,000
Net proceeds from factor - 267,472 -
--------- ----------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 715,898 1,376,067 50,000
--------- ----------- ---------
Net increase (decrease) in cash 71,743 53,822 (2,492)
Cash at beginning of the period 53,822 - 2,492
--------- ----------- ---------
Cash at end of the period $ 125,565 $ 53,822 $ -
========= =========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CITADEL COMPUTER SYSTEMS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
Two months
ended
February 29, Years ended December 31,
------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ - $234,212 $ 20,797
Non-cash investing and financing transactions:
Issuance of common stock in exchange for
certain assets - 50,000 -
Acquisition of software for a note payable - - 560,000
Conversion of notes payable to 1,495,000 shares of the
Company's common stock - - 825,500
Acquisition of Circuit Masters Software, Inc.:
Common stock issued 2,000,000 - -
Liabilities assumed 50,000 - -
Merger with LoneStar Hospitality
Corporation, accounted for as
a reverse acquisition:
Assets acquired:
Assets under contract of sale 2,605,772 - -
Other assets 401,650 - -
Liabilities assumed
Notes payable (2,142,249) - -
Accounts payable (1,225,972) - -
------------
Excess of liabilities assumed over
assets acquired (360,799) - -
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
CITADEL COMPUTER SYSTEMS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 29, 1996 and December 31, 1995 and 1994
NOTE A - BASIS OF PRESENTATION
Effective February 29, 1996, Citadel Computer Systems, Incorporated (the
Company), successor to Citadel Computer Systems, Incorporated, a Delaware
corporation (Old Citadel), merged with LSHC Acquisition Inc., a wholly-owned
subsidiary of LoneStar Hospitality Corporation (LoneStar). Pursuant to the
terms of the merger agreement, each stockholder of Old Citadel received 2.25
shares of LoneStar common stock for each share of Old Citadel's common stock.
Immediately after the merger, the stockholders of Old Citadel owned
approximately 60% of the outstanding common stock of the Company. Therefore,
the merger has been accounted for as a reverse merger, whereby Old Citadel is
deemed to have acquired LoneStar.
As discussed in Note L, LoneStar entered into an agreement in February 1996
to sell substantially all of its assets and operations in exchange for common
stock of Miami Subs USA, Inc. The sale was consummated on March 1, 1996, and
LoneStar is no longer an operating Company.
As a result of the merger, (i) stockholders' equity of the Company was
decreased by $360,799, which represents the stockholders' deficit of LoneStar
at the date of the merger, and (ii) the Company has been "recapitalized" to
reflect the outstanding shares of LoneStar, the legal acquiror.
NOTE B - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
------------------
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.
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.
F-8
<PAGE>
CITADEL COMPUTER SYSTEMS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 29, 1996, December 31, 1995 and 1994
NOTE B - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - CONTINUED
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.
Software Costs
--------------
Purchased software is recorded at cost and is amortized by the straight-line
method over a five year period.
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
$32,842 and $136,355 for the two months ended February 29, 1996 and the year
ended December 31, 1995, respectively. 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.
It is reasonably possible that future events could cause a reduction in the
amortization period of software costs.
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.
Income Taxes
------------
Deferred incomes taxes result from temporary differences between the financial
statement and income tax bases of assets and liabilities.
Loss per Share
--------------
The computation of loss per share is based upon the weighted average number of
outstanding common shares during the periods. The weighted average number of
shares outstanding was calculated by giving retroactive effect to the 1,000-
for-1 stock split of Old Citadel shares in 1995, the shares issued in the
merger of Old Citadel and LoneStar, and the 1-for-2 reverse stock split in May
1996. No effect has been given to stock options, warrants and conversion
rights of noteholders, because the effect of assumed exercises or conversions
is anti-dilutive.
Reclassifications
-----------------
Certain of the 1994 amounts have been reclassified to conform to the 1996
presentation.
F-9
<PAGE>
CITADEL COMPUTER SYSTEMS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 29, 1996, December 31, 1995 and 1994
NOTE C - PROPERTY AND EQUIPMENT
Major classes of property and equipment and their estimated useful lives are
as follows:
<TABLE>
<CAPTION>
December 31,
February 29, ------------------
Lives 1996 1995 1994
------------- ----------- --------- -------
<S> <C> <C> <C> <C>
Furniture 5 years $ 24,158 $18,309 $15,136
Office equipment 3 years 48,661 13,866 9,031
Computer equipment 3 years 76,377 37,598 7,185
-------- ------- -------
149,196 69,773 31,352
Less accumulated depreciation (38,869) (17,655) (4,078)
-------- -------- -------
Net property and equipment $110,327 $ 52,118 $27,274
======== ======== =======
</TABLE>
NOTE D - PURCHASE OF SOFTWARE
Effective June 24, 1994, the Company acquired 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 Old Citadel's common stock to
Danasoft to satisfy the unpaid obligation of $465,000. Under the terms of the
agreement, Danasoft had the right to redeem its shares of common stock for
$250,000 at any time from October 1996 through October 1999. The Company had
the right to redeem these shares of common stock for $450,000 during the same
period. In July 1995, the president of the Company purchased all of the
shares owned by Danasoft, and the redemption rights were terminated.
NOTE E - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, accounts receivable, and
accounts and notes payable. Their carrying values approximate fair value
because of their short-term maturities.
F-10
<PAGE>
CITADEL COMPUTER SYSTEMS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 29, 1996, December 31, 1995 and 1994
NOTE F - NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31,
February 29, -----------------------
1996 1995 1994
------------ ------------ --------
<S> <C> <C> <C>
Unsecured notes payable to individuals, including
$141,488 from related parties, due at various
dates in 1996, bearing interest at rates ranging
from 10% to 20%; weighted average interest rate
is approximately 11.9% (1) $1,624,493 $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
Note payable to factor, collateralized by receivables (2) 267,472 267,472 -
Note payable to officer, non-interest bearing and
due upon demand 117,722 - -
Note payable to commercial finance company; note
was replaced in March 1996 by a note to Miami
Subs USA, Inc., due July 1996. See Note L. 1,467,039 - -
Notes payable to individuals, bearing interest at 12%,
due July 1996 (3) 557,488 - -
---------- ------------ ---------
$4,034,214 $1,576,067 $ 200,000
========== ========== =========
</TABLE>
(1) Certain of these notes have warrants to purchase common stock. The
aggregate number of such warrants is 3,395,250 at prices ranging from $.44
to $1.78 per share.
(2) During 1995, the Company entered into agreements to factor accounts
receivable with recourse. 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.
(3) These notes have warrants to purchase 260,000 shares of common stock at
$2.00 to $3.50 per share.
F-11
<PAGE>
CITADEL COMPUTER SYSTEMS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 29, 1996, December 31, 1995 and 1994
NOTE G - 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 H - 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.
NOTE I - INCOME TAXES
The Company has deferred income tax assets which consist of the following:
<TABLE>
<CAPTION>
December 31,
February 29, ----------------------
1996 1995 1994
------------- ---------- ----------
<S> <C> <C> <C>
Deferred tax asset
Net operating loss carryovers $ 587,000 $ 368,000 $ 213,000
Allowance for doubtful accounts 111,000 168,000 27,000
Common stock 47,000 - -
Other 47,000 77,000 -
--------- --------- ---------
Deferred income tax asset 792,000 613,000 240,000
Valuation allowance (792,000) (613,000) (240,000)
--------- --------- ---------
Net deferred income tax asset $ - $ - $ -
========= ========= =========
</TABLE>
The Company has estimated its net operating loss carryovers for tax
reporting purposes to be approximately $1,725,000 at February 29,1996. The
net operating loss carryover, which is subject to annual limitations as
prescribed by the Internal Revenue Code, is available to offset future
taxable income through 2011.
NOTE J - STOCK OPTIONS AND WARRANTS
The Company has issued stock options to directors, employees, and others.
Options are granted at no less than fair value at date of grant, as determined
by the board of directors. Following is a summary of option transactions for
1995 and 1996:
<TABLE>
<CAPTION>
Exercise
Shares Price
---------- ------------
<S> <C> <C>
Outstanding at January 1, 1995 - -
Granted 4,887,500 $.50 to 2.00
--------- ------------
Outstanding at December 31, 1995 4,887,500 .50 to 2.00
Options of LoneStar outstanding at
date of merger 249,378 .32 to 6.67
--------- ------------
Outstanding at February 29, 1996 5,136,878 $.32 to 6.67
========= ============
</TABLE>
In connection with the issuance of debt, the Company has issued warrants to
purchase common stock. The following summarizes the warrant transactions for
1995 and 1996:
<TABLE>
<CAPTION>
Exercise
Shares Price
---------- -------------
<S> <C> <C>
Outstanding at January 1, 1995 - -
Granted 3,395,250 $ .44 to 1.78
--------- -------------
Outstanding at December 31, 1995 3,395,250 .44 to 1.78
Warrants of LoneStar outstanding at
date of merger 260,000 2.00 to 3.50
--------- -------------
Outstanding at February 29, 1996 3,655,250 $ .44 to 3.50
========= =============
</TABLE>
In connection with the Merger, all outstanding options and warrants to
purchase shares of Old Citadel became options and warrants to purchase shares
of the Company's common stock. All shares and per share amounts have been
adjusted to give effect to the Merger. Substantially all outstanding options
and warrants are exercisable at February 29, 1996.
F-12
<PAGE>
CITADEL COMPUTER SYSTEMS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 29, 1996, December 31, 1995 and 1994
NOTE K - COMMITMENTS AND CONTINGENCIES
The Company leases its office space under operating lease agreements.
Future minimum lease payments under these leases at February 29,1996, were as
follows:
<TABLE>
<CAPTION>
Year ending
February 28,
- ------------------------
<S> <C>
1997 $ 227,000
1998 264,000
1999 230,000
2000 218,000
2001 218,000
Future years 182,000
----------
Total $1,339,000
==========
</TABLE>
Rental expense totaled approximately $7,600 for the period ended February 29,
1996 and $54,000 and $44,000 for the years ended December 31, 1995 and 1994,
respectively.
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 July 1995, the Company entered into a three year consulting
agreement with an individual. Under the terms of the agreement, the individual
will receive approximately $70,000 per year for consulting on product
development.
The Company has employment agreements with two of its officers and a
consulting agreement with its Chairman. These agreements expire in 2000 to
2001 and, with respect to one officer, become accelerated in the event of
death or termination.
NOTE L - SALE OF ASSETS BY LONESTAR
As of March 1, 1996, LoneStar consummated the sale of its restaurants and
related development rights to Miami Subs USA, Inc. (Miami Subs), the
franchiser of the restaurants, pursuant to an agreement entered into in
February 1996. These assets are carried on the balance sheet as assets under
contract of sale and are stated at the contract price. LoneStar 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
covering the Miami Subs Stock. During the six months following the closing,
LoneStar 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, LoneStar 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 are subject to a right of first refusal by Miami Subs. Miami Subs has
assumed certain indebtedness of LoneStar (Note F), and LoneStar issued to
Miami Subs a promissory note in the principal amount of $1,467,039 which is
secured by the Miami Subs Stock. The note does not bear interest and is due in
July 1996.
F-13
<PAGE>
CITADEL COMPUTER SYSTEMS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 29, 1996, December 31, 1995 and 1994
NOTE M - ACQUISITION OF ASSETS OF CIRCUIT MASTERS SOFTWARE, INC.
Effective February 29, 1996, the Company acquired substantially all of the
assets of Circuit Masters Software, Inc. (Circuit Masters) in a transaction
accounted for as a purchase. Consideration consisted of 370,370 shares of
common stock valued at $2,000,000, cash of approximately $200,000 and
assumption of certain liabilities of approximately $50,000.
The following unaudited pro forma summary results of operations for 1994 and
1995 assume that the acquisition occurred on January 1 of each year:
1995 1994
------------- ------------
Net sales $1,581,327 $877,878
Net loss (1,481,045) (578,694)
Loss per share (.21) (.13)
The unaudited pro forma summary results of operations are not necessarily
indicative of results of operations that would have occurred had the
transactions taken place as at January 1 of the periods presented as of future
results of operations of the combined businesses. Pro forma results of
operations for the two months ended February 29, 1996 are not presented,
because they are not materially different than actual results.
NOTE N - SUBSEQUENT EVENTS
On May 6, 1996, LoneStar changed its name to Citadel Computer Systems,
Incorporated and effected a 1-for-2 reverse split of its common stock. All
share data has been restated to reflect the split.
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
LoneStar, 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.
Subsequent to February 29, 1996, the Company entered into a number of
financing transactions, the more significant of which are as follows:
1. $2,550,000 was received from the sale of notes which are mandatorily
convertible into common stock.
2. $730,000 of notes payable outstanding at February 29, 1996 were
converted to warrants to purchase common stock.
3. $387,500 was received from the exercise of stock options.
4. Warrant exercises and conversions of debt incurred after February 29,
1996 increased equity by $957,500.
5. Debt was increased by approximately $1,000,000 as a result of the sale
of debentures and warrants.
The pro forma effect of these financing transactions on stockholders' equity,
assuming they had taken place at February 29, 1996, is as follows:
<TABLE>
<CAPTION>
<S> <C>
Stockholders' equity at February 29, 1996 $ 315,489
Cash received from sale of equity instruments 2,550,000
Conversions of debt and exercises of options
and warrants 2,075,000
----------
Pro forma stockholders' equity $4,940,489
==========
</TABLE>
F-14
<PAGE>
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT
TO CERTIFICATE OF INCORPORATION
OF APOLLO RESOURCES, INC.
Apollo Resources, Inc., a corporation organized and existing under virtue
of the General Corporation Laws of the State of Delaware (the "Corporation"),
does hereby certify:
FIRST: That the Board of Directors of the Corporation has adopted
resolutions by unanimous consent setting forth a proposed amendment to the
Corporation's Certificate of Incorporation by deleting the Article First the
first paragraph of and Article Fourth thereto, and substituting a new Article
First and first paragraph of Article Fourth in lieu thereof, declaring said
amendment to be advisable and directing that the amendment be submitted to the
holders of at least a majority of the outstanding stock of the corporation for
their consent as permitted by Section 228 of the General Corporation Laws of the
State of Delaware.
SECOND: a) Article First of the original Certificate of Incorporation is
deleted and the following new Article First is substituted in lieu thereof:
FIRST: The name of the corporation is FirstSouth Commercial
Corporation (the "Corporation").
b) The first paragraph of Article Fourth of the original
Certificate of Incorporation is deleted and the following new first paragraph of
Article Fourth is substituted in hew thereof:
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue shall be 11,000,000
shares, of which 1,000,000 will be preferred stock of the par
value of one cent each ($.0l) (hereinafter called the
"Preferred Stock"), and of which 10,000,000 be common stock of
the par value of two cents each ($.02) (hereinafter called the
"Common Stock").
THIRD: That thereafter, pursuant to a resolution of its Board of
Directors, a consent in writing, including the proposed amendment, was signed by
the holders of in excess of a majority of the outstanding Common Stock of the
Corporation, which was not less than the minimum number of votes necessary to
authorize such an amendment at a meeting at which all members having the right
<PAGE>
to vote thereon were present and voted, and written notices of such action has
been sent to all other stockholders who have not consented in writing to such
action.
FOURTH: Said amendment was duly appointed in accordance with the
provisions of Section 228 and Section 242 of the general Corporation Laws of the
State of Delaware.
FIFTH: That the capital of the Company will not be reduced under or by
reason of said amendment.
SIXTH: That upon filing of said Amendment with the Secretary of State
of Delaware, there shall be effected a one-for-two reverse stock split, with
each share of the Corporation's Common Stock, par value one cent ($.0l)
previously outstanding becoming one-half share of Common Stock, par value two
cents ($.02).
IN WITNESS WHEREOF, the undersigned have hereunder subscribed our names
this 31st day of May, 1990.
----
/s/ Uwe Matthaeus
----------------------------------
President
/s/ Donita Huff
----------------------------------
Secretary
<PAGE>
EXHIBIT 3.7
CERTIFICATE OF AMENDMENT
TO CERTIFICATE OF INCORPORATION
OF LONESTAR HOSPITALITY CORPORATION
LONESTAR HOSPITALITY CORPORATION, a corporation organized and existing
under and by virtue of the General Corporation Laws of the State of Delaware
(the "Corporation"), does hereby certify:
FIRST: Article IV of the Certificate of Incorporation is amended as
follows:
(a) By changing the name of the Corporation to Citadel Computer Systems
Incorporated. Accordingly, Article I of the Certificate of Incorporation, as
amended, is deleted and the following new Article I is substituted in lieu
thereof:
"ARTICLE I
The name of the Corporation is Citadel Computer Systems Incorporated."
SECOND: That thereafter, pursuant to a resolution of its Board of
Directors, a consent in writing, including the proposed amendment, was signed by
the holders of in excess of a majority of the outstanding Common Stock of the
Corporation, which was not less than the minimum number of votes necessary to
authorize such an amendment at a meeting at which all members having the right
to vote thereon were present and voted, and written notices of such action has
been sent to all other stockholders who have not consented in writing to such
action.
THIRD: Said amendment was duly appointed in accordance with the provisions
of Section 228 and Section 242 of the General Corporation Laws of the State of
Delaware.
FOURTH: That upon the filing of this Certificate of Amendment with the
Secretary of State of Delaware, (i) each two (2) shares of Common Stock, par
value $.01 previously outstanding on such date of filing shall be deemed to have
been exchanged for one (1) new share of outstanding common stock, par value
$.01, (ii) certificates representing shares of Common Stock previously
outstanding on such date of filing shall be exchanged on such date for new
certificates reflecting the one-for-two (1:2) reverse stock split; and (iii)
fractional shares shall be rounded up to the nearest whole share.
CERTIFICATE OF AMENDMENT TO
CERTIFICATE OF INCORPORATION OF
LONESTAR HOSPITALITY CORPORATION - PAGE 1
-----------------------------------------
<PAGE>
IN WITNESS WHEREOF, the undersigned have hereunder subscribed our names
this 1ST day of MAY, 1996.
George Sharp
--------------------------------
George Sharp
President
Steven B. Solomon
--------------------------------
Steven B. Solomon
Secretary
CERTIFICATE OF AMENDMENT TO
CERTIFICATE OF INCORPORATION OF
LONESTAR HOSPITALITY CORPORATION - PAGE 2
-----------------------------------------
<PAGE>
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into this
1st day of December 1995, effective as of the 1st day of December 1995, by and
between Citadel Computer Systems, Inc. (hereinafter referred to as "Employer" or
"Citadel") a Delaware Corporation, having its principal place of business at
2950 North Loop West, Suite 1080, Houston, Texas 77092 and George Sharp (
hereinafter referred to as "Employee")
RECITALS:
1. Employer desires to employ Employee as its President and Chief
Executive Officer.
2. Employee desires to be employed by Employer in such capacity.
3. The parties to this Agreement wish to reduce to writing their prior
oral understanding and agreement as to employment and compensation of
Employee.
NOW, THEREFORE, in consideration of the representations, warranties and
mutual promises hereinafter set forth, it is agreed as follows:
1. Employment. Employer hereby employs Employee and Employee hereby
----------
accepts employment as President and Chief Executive Officer of the Employer in
the Houston, Texas, office of Employer (or in such other position and/or
locations as may be mutually agreed upon) upon the terms and conditions
hereinafter set forth.
2. Term of Employment. Subject to the provisions for termination as
------------------
hereinafter provided, the term of this Agreement (the "Term") shall commence on
the 1st day of December, 1995 and shall terminate on November 30, 2000. After
November 30, 2000, the parties may extend this Agreement for additional periods
of time and at such compensation as is mutually agreed upon by the parties from
time to time upon the execution of a mutually agreed written Extension Agreement
prior to the end of the Term or any extension thereof. Such additional
extensions shall be valid until written notice of termination is delivered by
either party thirty (30) days in advance of the termination date of this
Agreement. If the parties to this Agreement fail to execute an Extension
Agreement, unless otherwise terminated, this Agreement shall be automatically
renewed for an additional twelve (12) month period from the expiration of the
Term, or from the end of any period covered by any subsequently executed
extension, under the same terms and conditions applicable at the end of the
Term, or as may be amended in writing, and shall automatically renew in such
manner each year thereafter.
3. Duties. During the Employment Period the Employee agrees to serve as
------
President
1
<PAGE>
and Chief Executive Officer of Citadel, except as may be modified by the written
agreement of the parties hereto. In his capacity as President/CEO, Employee will
have full control of, and be responsible for, the day to day operations of
Citadel and will perform such duties and responsibilities for Citadel as may
from time to time be assigned to him by the Board of Directors of Citadel.
Employee shall have supervision and responsibility for all areas of Citadel, and
shall report directly to the Chairman of the Board of Citadel. Employee shall
have no responsibility for payroll nor for the filing of any payroll tax return,
nor for payment of any tax of any kind that may be due or payable by Citadel or
any of its divisions.
4. Covenant Not to Compete. Employee agrees that he will not, either
-----------------------
directly or indirectly, carry on or engage in any business competing with the
business conducted by Citadel during the initial term of this contract, and for
a total of two (2) years following the later of the expiration of the initial
term, or any extension of this contract. If Citadel terminates this contract
prior to the expiration of the initial term, this covenant not to compete is of
no effect, and Employee is no longer bound by this covenant.
5. Compensation. As compensation for all services rendered by Employee
------------
under this Agreement, Employer shall pay Employee as follows:
(a) Base Salary. Employee shall receive a base salary of the following
monthly amounts which shall be payable on the last business day of
each month, beginning December 1, 1995:
<TABLE>
<CAPTION>
Period Monthly Salary
<S> <C>
December 1, 1995- November 30, 1996 $12,500
December 1, 1996- November 30, 1997 $13,750
December 1, 1997- November 30, 1998 $15,125
December 1, 1998- November 30, 1999 $16,637
December 1, 1999- November 30, 2000 $18,300
</TABLE>
(b) Bonus. Employee may receive other bonuses or other extraordinary
-----
compensation as determined in the discretion of the Board of Directors
of Employer. Such bonuses shall be paid at such times and in such
amounts as the Board of Directors may determine.
(c.) Withholding for Taxes. All payments under this Agreement shall be
---------------------
subject to federal withholding and other applicable taxes.
6. Automobile Allowance. Citadel shall pay Employee an automobile
--------------------
allowance of $950.00 per month, payable on the last business day of each month.
Employee shall, at his own cost and expense, procure an automobile for use in
Citadel's business. Employee shall further procure and maintain in force an
automobile liability policy covering such automobile with Citadel as the named
insured in the minimum amount of $1,000,000 for bodily injury or death in one
2
<PAGE>
accident, $1,000,000 for bodily injury or death to one person in one accident
and $100,000 for property damage in one accident. Employee shall deliver to
Citadel a true copy of such automobile liability insurance policy. Employee
shall further, at his own cost and expenses, maintain such automobile in proper
operating condition. In lieu of such allowance, Citadel may provide an
automobile satisfactory to Employee and pay insurance and maintenance costs
thereof; provided however, that if Employee has acquired an automobile for use
in Citadel's business, Citadel may not substitute the provision of an automobile
except upon twelve months' notice.
7. Employee Benefits.
------------------
(a) In addition to any key man insurance maintained by Employer for
its benefit, Employer shall use its best efforts to purchase and pay
what the Board of Directors considers to be, in its sole discretion, a
reasonable premium on a life insurance policy covering Employee in the
amount of at least $1,000,000. Employee shall have the sole right to
designate one or more beneficiaries under such policy. The current
one-year term cost of such policy shall be included in Employee's
income to the extent required by law
(b) Employer shall continue the salary of Employee for the full term
of this Agreement if Employee is not able to perform his duties as a
result of personal injury, disability or illness. Employer shall use
its best efforts to purchase and pay what the Board of Directors
considers to be, in its sole discretion, a reasonable premium to
maintain a disability income policy which shall commence payment of
benefits to Employee beginning not later than the day that the term of
this Agreement ends, at a rate equal to at least 60% of his
compensation for the twelve month period immediately preceding the
illness, injury or other event causing disability (including deferred
or postponed payments). The cost of such insurance shall be included
in the income of Employee.
(c) Employer shall include Employee and his dependents under
Employer's current major medical benefit plan at no cost to Employee.
(d) Employee shall be entitled to participate in any employee benefit
plans or agreements maintained or adopted in the future by Employer
relating to retirement, health, disability, dental, group term life
insurance, paid holidays, and other related benefits offered to
employees generally by Employer.
8. Vacation. Employee shall be entitled each year to annual vacation,
--------
personal and sick leave at the Employee's discretion.
9. Working Facilities. Employee shall be furnished with a private office
------------------
at Employer's principal executive office (at which he shall be stationed).
Employee shall also be provided
3
<PAGE>
stenographic help and such other facilities and services, suitable to his
position and adequate for the performance of his duties.
10. Business Expenses. Employer shall pay all costs and expenses incurred
-----------------
by Employee for all reasonable travel and other expenses incurred by Employee in
performing his obligations under this Agreement. Such reimbursement will be made
on or before the end of the first Pay Period following the date the expenses are
submitted by Employee to Employer.
11. Termination of Employment. In consideration of certain intellectual
-------------------------
property that Employee has provided to Employer in the past, all parties
understand and specifically agree that THIS AGREEMENT CANNOT BE TERMINATED BY
--------------------------------------
CITADEL DURING THE INITIAL FIVE (5) YEAR TERM, regardless of the reason for
- ---------------------------------------------
termination. However, if Citadel elects to terminate this contract for any
reason during the initial five (5) year term, then the balance of the
executive's base salary for the balance of the initial term, as provided for in
this contract, is automatically accelerated and becomes immediately due and
owing by Citadel to the executive within seven (7) days of notice of
termination.
12. Severance Payments.
------------------
(a) If Employee dies during the initial five (5) year term of this
contract, then the balance of the executive's base salary for the balance
of the initial term, as provided for in this contract, and the Override for
the balance of the initial term will be payable to Employee's estate on a
monthly basis in the same manner as if the Employee were employed by
Citadel for the entire initial term.
(b) In addition to the foregoing amounts, Employee shall be entitled upon
termination of employment for whatever cause to any unpaid salary and bonus
pay. Such amounts shall be paid in a lump sum within 30 days after the
effective date of his termination of employment. Any options to purchase
shares which would be exercisable during the Term of this Agreement or any
extension thereof shall become fully exercisable upon the termination of
this Agreement.
13. Waiver of Breach. The waiver by Employer of a breach of any provision
----------------
of this Agreement by Employee shall not operate or be construed as a wavier of
any subsequent breach by Employee.
14. Legal Construction and Severability. If any one or more of the
-----------------------------------
provisions contained in this Agreement shall for any reason be held invalid,
illegal, unenforceable in any respect, under present or future law, such
provision shall be fully severable and such invalid, illegal, or unenforceable
provision shall not affect any other provision of this Agreement. In such event
this Agreement shall be construed and enforced as if such illegal, invalid, or
unenforceable provision had never comprised a part of this Agreement and the
remaining provisions of this
4
<PAGE>
Agreement shall continue in full force and effect and shall not be affected by
the illegal, invalid, or unenforceable provision or its severance from this
Agreement. Furthermore, in lieu of such illegal, invalid, or unenforceable
provision, there shall be added automatically as a part of this Agreement, a
provision as similar in terms to such illegal, invalid, or unenforceable
provision as may be possible and be legal, valid, and enforceable.
15. Assignment This Agreement is a personal services contract and is not
----------
assignable by Employee. This Agreement is not assignable by Employer except with
the consent of Employee and then only to a partnership, corporation, or other
entity which shall purchase substantially all of its assets or shall be its
legal successor pursuant to any merger, consolidation, or other action permitted
by law. Subject to the qualification in the preceding sentence, the rights and
obligations of Employer under this Agreement shall inure to the benefit of and
shall be binding upon the successors and assigns of Employer.
16. Governing Law: Venue. This Agreement shall be construed under and in
--------- ----------
accordance with the laws of the State of Texas. In the event that any legal
proceedings are instituted concerning the interpretation or enforcement of this
Agreement, exclusive venue over such proceedings shall be vested in courts
sitting in the State of Texas.
17. Attorneys' Fees and Costs. If any action at law or in equity is
-------------------------
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorneys' fees, costs and necessary
disbursements in addition to any other relief to which he may be entitled.
18. Notices. All notices shall be in writing and shall have been duly
-------
given if delivered by hand or mailed, certified or registered mail, return
receipt requested to the following address or to such other address as either
party may designate by like notice:
If to Employee:
George Sharp
Citadel Computer Systems, Inc.
2950 N. Loop West #l080
Houston, Texas 77092
If to Employer:
Gilbert Gertner
Citadel Computer Systems, Inc.
2950 N. Loop West #1080
Houston, Texas 77092
19. Entire Agreement. This Agreement constitutes the sole and only
----------------
agreement of the
5
<PAGE>
parties hereto and supersedes any prior understanding or written or oral
agreement between the parties respecting the within subject matter. This
Agreement may not be changed orally, but only by an agreement in writing signed
by both parties hereto.
Citadel has caused this Agreement to be executed by its authorized officer and
the Employee has signed this Agreement.
CITADEL:
/s/ Gilbert Gertner
-----------------------------------
Gilbert Gertner
Citadel Computer Systems, Inc.
EMPLOYEE:
/s/ George Sharp
-----------------------------------
George Sharp
6
<PAGE>
EXHIBIT 10.4
CONSULTING AGREEMENT
--------------------
THIS CONSULTING AGREEMENT (the "Agreement") is made and entered into this
1st day of December 1995, effective as of the 1st day of December, 1995, by and
between Citadel Computer Systems, Inc. (hereinafter referred to as "Citadel") a
Delaware Corporation, having its principal place of business at 2950 North Loop
West, Suite 1080, Houston, Texas 77092 and Gilbert Gertner ( hereinafter
referred to as "Consultant")
RECITALS:
1 Citadel desires to retain Consultant as its Chief Financial Consultant.
2. Consultant desires to be retained by Citadel in such capacity.
3. The parties to this Agreement wish to reduce to writing their prior
oral understanding and agreement as to employment and compensation of
Consultant.
NOW, THEREFORE, in consideration of the representations, warranties and
mutual promises hereinafter set forth, it is agreed as follows:
1. Employment. Citadel hereby retains Consultant and Consultant hereby
----------
accepts the position of Chief Financial Consultant of the Citadel in the
Houston, Texas, office of Citadel (or in such other position and/or locations as
may be mutually agreed upon) upon the terms and conditions hereinafter set
forth.
2. Term. Subject to the provisions for termination as hereinafter
----
provided, the term of this Agreement (the "Term") shall commence on the 1st day
of December, 1995, and shall terminate on November 30, 2000. After November 30,
2000, the parties may extend this Agreement for additional periods of time and
at such compensation as is mutually agreed upon by the parties from time to time
upon the execution of a mutually agreed written Extension Agreement prior to the
end of the Term or any extension thereof. Such additional extensions shall be
valid until written notice of termination is delivered by either party thirty
(30) days in advance of the termination date of this Agreement. If the parties
to this Agreement fail to execute an Extension Agreement, unless otherwise
terminated, this Agreement shall be automatically renewed for an additional
twelve (12) month period from the expiration of the Term, or from the end of any
period covered by any subsequently executed extension, under the same terms and
conditions applicable at the end of the Term, or as may be amended in writing,
and shall automatically renew in such manner each year thereafter.
1
<PAGE>
3. Duties. During the Term of this agreement the Consultant agrees to
------
serve as Chief Financial Consultant of Citadel, except as may be modified by the
written agreement of the parties hereto. In his capacity Chief Financial
Consultant, Consultant will be directly involved in advising Management and the
Board of Directors on general business matters and financial transactions
involving Citadel and will perform such duties and responsibilities for Citadel
as may from time to time be assigned to him by the Board of Directors of
Citadel. Consultant shall have direct involvement in all areas of Citadel, and
shall report directly to the Board of Directors of Citadel. Consultant shall
have no responsibility for payroll nor for the filing of any payroll tax return,
nor for payment of any tax of any kind that may be due or payable by Citadel or
any of its divisions.
4. Covenant Not to Compete. Consultant agrees that he will not, either
-----------------------
directly or indirectly, carry on or engage in any business directly competing
with the business conducted by Citadel during the initial term of this contract,
and for a total of two (2) years following the later of the expiration of the
initial term, or any extension of this contract.
5 Compensation. As compensation for all services rendered by Consultant
------------
under this Agreement, Citadel shall pay Consultant as follows:
(a) Base Salary. Consultant shall receive a base salary of the
-----------
following monthly amounts which shall be payable on the 1st business
day of each month, beginning December 1, 1995:
<TABLE>
<CAPTION>
Period Monthly Salary
<S> <C>
December 1, 1995- November 30, 1996 $10,000
December 1, 1996- November 30, 1997 $11,000
December 1, 1997- November 30, 1998 $12,000
December 1, 1998- November 30, 1999 $12,000
December 1, 1999- November 30, 2000 $12,000
</TABLE>
(b) Bonus. Consultant may receive other bonuses or other extraordinary
-----
compensation as determined in the discretion of the Board of Directors
of Citadel. Such bonuses shall be paid at such times and in such
amounts as the Board of Directors may determine.
(c.) Withholding for Taxes. All payments under this Agreement shall
---------------------
NOT be subject to federal withholding and other applicable taxes, as
Consultant is an Independent Contractor.
6. Automobile Allowance. Citadel shall pay Consultant an automobile
--------------------
allowance of $950.00 per month, payable on the last business day of each month.
Consultant shall, at his own cost and expense, procure an automobile for use in
Citadels business. Consultant shall further procure and maintain in force an
automobile liability policy covering such automobile with Citadel as the named
insured in the minimum amount of $1,000,000 for bodily injury or death in one
2
<PAGE>
accident, $1,000,000 for bodily injury or death to one person in one accident
and $100,000 for property damage in one accident. Consultant shall deliver to
Citadel a true copy of such automobile liability insurance policy. Consultant
shall further, at his own cost and expenses, maintain such automobile in proper
operating condition. In lieu of such allowance, Citadel may provide an
automobile satisfactory to Consultant and pay insurance and maintenance costs
thereof; provided however, that if Consultant has acquired an automobile for use
in Citadel's business, Citadel may not substitute the provision of an automobile
except upon twelve months' notice.
7. Consultant Benefits.
-------------------
(a) Citadel shall include Consultant and his dependents under
Citadel's current major medical benefit plan at no cost to Consultant.
(b) Consultant shall be entitled to participate in any Consultant
benefit plans or agreements maintained or adopted in the future by
Citadel relating to retirement, health, disability, dental, group term
life insurance, paid holidays, and other related benefits offered to
Consultants generally by Citadel.
8. Vacation. Consultant shall be entitled each year to annual vacation,
--------
personal and sick leave at the Consultant's discretion.
9. Working Facilities. Consultant shall be furnished with a private office
------------------
at Citadel's principal executive office (at which he shall be stationed).
Consultant shall also be provided with a secretary and such other facilities and
services, suitable to his position and adequate for the performance of his
duties.
10. Business Expenses. Citadel shall pay all costs and expenses incurred
-----------------
by Consultant for all reasonable travel and other expenses incurred by
Consultant in performing his obligations under this Agreement. Such
reimbursement will be made on or before the end of the first Pay Period
following the date the expenses are submitted by Consultant to Citadel.
Consultant shall be reimbursed for the monthly service costs of a cellular phone
for Consultant's use.
11. Termination of Agreement. This agreement shall not be terminated prior
------------------------
to the expiration of its term or any extension thereof, except upon the mutual
consent of the parties hereto, or in the event of the death or permanent total
disability of Consultant, or for due cause, upon the good faith determination by
the Board of Directors of Citadel that "due cause" exists for the termination of
the relationship created in this Agreement. As used herein, the term "due cause"
shall include, but is not limited to, the following events which are only used
herein for illustrative purposes:
(i) any intentional misapplication by Consultant of Citadel's funds,
or any other act of dishonesty injurious to Citadel committed
by Consultant; or
3
<PAGE>
(ii) Consultant's conviction of a crime involving moral turpitude,
or
(iii) Consultant's breach, nonperformance or non-observance in any
material respect of a material term of this agreement,
including his duties and obligations as an Consultant, if such
breach, non performance or non observance shall continue beyond
a period of five (5) business days immediately after notice
thereof by Citadel to Consultant; or
(iv) any other action by Consultant involving willful and deliberate
malfeasance or gross negligence in the performance of
Consultant's duties.
12. Severance Payments.
------------------
(a) If this agreement is terminated due to the death or disability of
Consultant, no severance payments shall be due to Consultant.
(b) In addition to the foregoing amounts, Consultant shall be entitled upon
termination for whatever cause to any unpaid salary and bonus pay. Such
amounts shall be paid in a lump sum within 30 days after the effective date
of his termination of this Agreement. Any options to purchase shares which
would be exercisable during the Term of this Agreement or any extension
thereof shall become fully exercisable upon the termination of this
Agreement.
13. Waiver of Breach. The waiver by Citadel of a breach of any provision
----------------
of this Agreement by Consultant shall not operate or be construed as a wavier of
any subsequent breach by Consultant.
14. Legal Construction and Severability. If any one or more of the
-----------------------------------
provisions contained in this Agreement shall for any reason be held invalid,
illegal, unenforceable in any respect, under present or future law, such
provision shall be fully severable and such invalid, illegal, or unenforceable
provision shall not affect any other provision of this Agreement. In such event
this Agreement shall be construed and enforced as if such illegal, invalid, or
unenforceable provision had never comprised a part of this Agreement and the
remaining provisions of this Agreement shall continue in full force and effect
and shall not be affected by the illegal, invalid, or unenforceable provision or
its severance from this Agreement. Furthermore, in lieu of such illegal,
invalid, or unenforceable provision, there shall be added automatically as a
part of this Agreement, a provision as similar in terms to such illegal,
invalid, or unenforceable provision as may be possible and be legal, valid, and
enforceable.
15. Assignment. This Agreement is a personal services contract and is not
----------
assignable by Consultant. This Agreement is not assignable by Citadel except
with the consent of Consultant and then only to a partnership, corporation, or
other entity which shall purchase substantially all of its assets or shall be
its legal successor pursuant to any merger, consolidation, or other action
4
<PAGE>
permitted by law. Subject to the qualification in the preceding sentence, the
rights and obligations of Citadel under this Agreement shall inure to the
benefit of and shall be binding upon the successors and assigns of Citadel.
16. Governing Law: Venue. This Agreement shall be construed under and in
--------- ----------
accordance with the laws of the State of Texas. In the event that any legal
proceedings are instituted concerning the interpretation or enforcement of this
Agreement, exclusive venue over such proceedings shall be vested in courts
sitting in the State of Texas.
17. Attorneys' Fees and Costs. If any action at law or in equity is
---------- --------------
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorneys fees, costs, and necessary
disbursements in addition to any other relief to which he may be entitled.
18. Notices. All notices shall be in writing and shall have been duly
-------
given if delivered by hand or mailed, certified or registered mail, return
receipt requested to the following address or to such other address as either
party may designate by like notice:
If to Consultant:
Gilbert Gertner
Citadel Computer Systems, Inc.
2950 N. Loop West #1080
Houston, Texas 77092
If to Citadel:
George Sharp
Citadel Computer Systems, Inc.
2950 N. Loop West #1080
Houston, Texas 77092
19. Entire Agreement. This Agreement constitutes the sole and only
----------------
agreement of the parties hereto and supersedes any prior understanding or
written or oral agreement between the parties respecting the within subject
matter. This Agreement may not be changed orally, but only by an agreement in
writing signed by both parties hereto.
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<PAGE>
Citadel has caused this Agreement to be executed by its authorized officer and
the Consultant has signed this Agreement.
Citadel:
/s/ George Sharp
--------------------------------------
George Sharp
Citadel Computer Systems, Inc.
Consultant:
/s/ Gilbert Gertner
--------------------------------------
Gilbert Gertner
6
<PAGE>
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into this
28th day of February 1996, effective as of the 1st day of March, 1996, by and
between Citadel Computer Systems, Inc. (hereinafter referred to as "Employer" or
"Citadel") a Delaware Corporation, having its principal place of business at
2950 North Loop West, Suite 1080, Houston, Texas 77092 and Steven B. Solomon
(hereinafter referred to as "Employee")
RECITALS:
1. Employer desires to employ Employee as its Chief Operating Officer and
Director of Corporate Relations.
2. Employee desires to be employed by Employer in such capacity.
3. The parties to this Agreement wish to reduce to writing their prior
oral understanding and agreement as to employment and compensation of
Employee.
NOW, THEREFORE, in consideration of the representations, warranties and
mutual promises hereinafter set forth, it is agreed as follows:
1. Employment. Employer hereby employs Employee and Employee hereby
----------
accepts employment as Chief Operating Officer and Director of Corporate
Relations of the Employer in the Dallas, Texas, office of Employer (or in such
other position and/or locations as may be mutually agreed upon) upon the terms
and conditions hereinafter set forth. Employee represents and warrants to
Employer that Employee has terminated any and all other Employment agreements
that he may have with any other entity or individual.
2. Term of Employment. Subject to the provisions for termination as
------------------
hereinafter provided, the term of this Agreement (the "Term") shall commence on
the 1st day of March, 1996, and shall terminate on February 28, 2001. After
February 28, 2001, the parties may extend this Agreement for additional periods
of time and at such compensation as is mutually agreed upon by the parties from
time to time upon the execution of a mutually agreed written Extension Agreement
prior to the end of the Term or any extension thereof. Such additional
extensions shall be valid until written notice of termination is delivered by
either party thirty (30) days in advance of the termination date of this
Agreement. If the parties to this Agreement fail to execute an Extension
Agreement, unless otherwise terminated, this Agreement shall be automatically
renewed for an additional twelve (12) month period from the expiration of the
Term, or from the end of any period covered by any subsequently executed
extension, under the same terms and conditions applicable at the end of the
Term, or as may be amended in writing, and shall automatically renew in such
manner each year thereafter.
3. Duties. During the Employment Period the Employee agrees to serve as
------
Chief
1
<PAGE>
Operating Officer and Director of Corporate Relations of Citadel, except as may
be modified by the written agreement of the parties hereto. In his capacity as
Chief Operating Officer and Director of Corporate Relations, the Employee will
be responsible for all matters involving the raising of capital for Citadel's
expansion programs and other projects, all aspects of Citadel's corporate
finance, Citadel's respective relationships with its shareholders, the general
public, securities brokers and dealers, the Securities and Exchange Commission,
NASDAQ, and any other public securities market, and will perform such duties and
responsibilities for Citadel as may from time to time be assigned to him by the
President of Citadel. In his position, the Executive shall have full
responsibility for corporate relations for Citadel and shall report directly to
the President and Chief Executive Officer of Citadel.
4. Other Employment. Employee shall devote his entire productive time,
----------------
knowledge, skill, ability, energies, and attention solely and exclusively to the
business of Employer during the Term of this Agreement and any extension
thereof. Employee shall not engage in any other employment activity during such
time. This restriction shall not prevent Employee from engaging in other
business or investment activities so long as such activities do not require the
personal services of Employee.
5. Compensation. As compensation for all services rendered by Employee
------------
under this Agreement, Employer shall pay Employee as follows:
(a) Base Salary. Employee shall receive a base salary of the following
-----------
monthly amounts which shall be payable on the 1st and 16th of each
month, beginning March 1, 1996:
<TABLE>
<CAPTION>
Period Monthly Salary
<S> <C>
March 1, 1996- November 31, 1997 $10,000
December 1, 1997-November 31, 1998 $11,000
December 1, 1998-November 31, 1999 $12,000
December 1, 1999-November 31, 2000 $12,000
December 1, 2000-March 1, 2001 $12,000
</TABLE>
(b) Bonus. Employee may receive other bonuses or other extraordinary
-----
compensation as determined in the discretion of the Board of Directors
of Employer. Such bonuses shall be paid at such times and in such
amounts as the Board of Directors may determine.
(c.) Withholding for Taxes. All payments under this Agreement shall be
---------------------
subject to federal withholding and other applicable taxes.
6. Automobile Allowance. Citadel shall pay Employee an automobile
--------------------
allowance of $950.00 per month, payable on the last business day of each month.
Employee shall, at his own cost and expense, procure an automobile for use in
Citadel's business. Employee shall further
2
<PAGE>
procure and maintain in force an automobile liability policy covering such
automobile with Citadel as the named insured in the minimum amount of $1,000,000
for bodily injury or death in one accident, $1,000,000 for bodily injury or
death to one person in one accident and $100,000 for property damage in one
accident. Employee shall deliver to Citadel a true copy of such automobile
liability insurance policy. Employee shall further, at his own cost and
expenses, maintain such automobile in proper operating condition. In lieu of
such allowance, Citadel may provide an automobile satisfactory to Employee and
pay insurance and maintenance costs thereof; provided however, that if Employee
has acquired an automobile for use in Citadel's business, Citadel may not
substitute the provision of an automobile except upon twelve months' notice.
7. Employee Benefits.
-----------------
(a) In addition to any key man insurance maintained by Employer for
its benefit, Employer shall purchase and pay the premiums on a life
insurance policy covering Employee in the amount of at least
$1,000,000. Employee shall have the sole right to designate one or
more beneficiaries under such policy. The current one-year term cost
of such policy shall be included in Employee's income to the extent
required by law.
(b) Employer shall continue the salary of Employee for a period of 180
days if Employee is not able to perform his duties as a result of
personal injury, disability or illness. Employer shall maintain a
disability income policy which shall commence payment of benefits to
Employee beginning not later than the 181st day of his disability at a
rate equal to at least 60% of his compensation for the twelve month
period immediately preceding the illness, injury or other event
causing disability (including deferred or postponed payments). The
cost of such insurance shall be included in the income of Employee.
(c) Employer shall include Employee and his dependents under
Employer's current major medical benefit plan at no cost to Employee.
(d) Employee shall be entitled to participate in any employee benefit
plans or agreements maintained or adopted in the future by Employer
relating to retirement, health, disability, dental, group term life
insurance, paid holidays, and other related benefits offered to
employees generally by Employer.
8. Vacation. Employee shall be entitled each year to three weeks
--------
vacation for each calendar year, during which time his compensation shall be
paid in full. If Employee is for any reason unable to take such vacation, the
compensation which would have been paid to him during such vacation shall be
carried forward from year to year and paid to Employee upon termination of his
employment in addition to any other severance pay to which he shall be entitled.
3
<PAGE>
9 Working Facilities. Employee shall be furnished with a private office
------------------
at Employer's principal executive office (at which he shall be stationed).
Employee shall also be provided stenographic help and such other facilities and
services, suitable to his position and adequate for the performance of his
duties.
10. Business Expenses. Employer shall pay all costs and expenses incurred
-----------------
by Employee for all reasonable travel and other expenses incurred by Employee in
performing his obligations under this Agreement. Such reimbursement will be made
on or before the end of the first Pay Period following the date the expenses are
submitted by Employee to Employer.
11. Termination of Employment. This agreement shall not be terminated
-------------------------
prior to the expiration of its term or any extension thereof, except upon the
mutual consent of the parties hereto, or in the event of the death or permanent
total disability of Employee, or for due cause, upon the good faith
determination by the Board of Directors of Citadel that "due cause" exists for
the termination of the employment relationship. As used herein, the term "due
cause" shall include, but is not limited to, the following events which are only
used herein for illustrative purposes:
(i) any intentional misapplication by Employee of Citadel's funds,
or any other act of dishonesty injurious to Citadel committed
by Employee; or
(ii) Employee's conviction of a crime involving moral turpitude, or
(iii) Employees breach, nonperformance or non-observance in any
material respect of a material term of this agreement,
including his duties and obligations as an employee, if such
breach, non performance or non observance shall continue beyond
a period of five (5) business days immediately after notice
thereof by Citadel to Employee; or
(iv) any other action by Employee involving willful and deliberate
malfeasance or gross negligence in the performance of
Employee's duties.
For the purposes of the agreement, disability shall mean such physical,
mental or emotional disability of Employee a defined in the disability insurance
policy purchased by Citadel in accordance with Section 7(b) of this agreement,
which renders Employee unable to perform his duties for a period of six (6)
consecutive months. Any other termination of the agreement shall be in breach
hereof and shall not prejudice any other remedy to which the non-terminating
party may be entitled to either in law, in equity or under this agreement.
12. Severance Payments
------------------
(a) If this agreement is terminated due to the death or disability of
Employee, no severance payments shall be due to Employee.
(b) If Employee's employment with Citadel is terminated for other than
good cause, Employee shall be entitled to a severance payment equal to the
greater of (I) the
4
<PAGE>
remaining payments which would have been made during the Term of this
agreement or any extension thereof, discounted to present value using an
interest rate of six percent (6.0%) or (ii) an amount determined by
multiplying his base salary for the most recently completed full month of
employment by 24. Such amount shall be paid in a lump sum within 30 days
after the effective date of his termination of employment.
(c) In addition to the foregoing amounts, Employee shall be entitled upon
termination of employment for whatever cause to any unpaid salary, bonus
and vacation pay. Such amounts shall be paid in a lump sum within 30 days
alter the effective date of his termination of employment. Any options to
purchase shares which would be exercisable during the Term of this
Agreement or any extension thereof shall become fully exercisable upon the
termination of this Agreement.
13. Waiver of Breach. The waiver by Employer of a breach of any provision
----------------
of this Agreement by Employee shall not operate or be construed as a wavier of
any subsequent breach by Employee.
14. Legal Construction and Severability. If any one or more of the
-----------------------------------
provisions contained in this Agreement shall for any reason be held invalid,
illegal, unenforceable in any respect, under present or future law, such
provision shall be fully severable and such invalid, illegal, or unenforceable
provision shall not affect any other provision of this Agreement. In such event
this Agreement shall be construed and enforced as if such illegal, invalid, or
unenforceable provision had never comprised a part of this Agreement and the
remaining provisions of this Agreement shall continue in full force and effect
and shall not be affected by the illegal, invalid, or unenforceable provision or
its severance from this Agreement. Furthermore, in lieu of such illegal,
invalid, or unenforceable provision, there shall be added automatically as a
part of this Agreement, a provision as similar in terms to such illegal,
invalid, or unenforceable provision as may be possible and be legal, valid, and
enforceable.
15. Assignment. This Agreement is a personal services contract and is not
----------
assignable by Employee. This Agreement is not assignable by Employer except with
the consent of Employee and then only to a partnership, corporation, or other
entity which shall purchase substantially all of its assets or shall be its
legal successor pursuant to any merger, consolidation, or other action permitted
by law. Subject to the qualification in the preceding sentence, the rights and
obligations of Employer under this Agreement shall inure to the benefit of and
shall be binding upon the successors and assigns of Employer.
16. Governing Law: Venue. This Agreement shall be construed under and in
--------- ----------
accordance with the laws of the State of Texas. In the event that any legal
proceedings are instituted concerning the interpretation or enforcement of this
Agreement, exclusive venue over
5
<PAGE>
such proceedings shall be vested in courts sitting in the State of Texas.
17. Attorneys' Fees and Costs. If any action at law or in equity is
-------------------------
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorneys' fees, costs, and necessary
disbursements in addition to any other relief to which he may be entitled.
18. Notices. All notices shall be in writing and shall have been duly
-------
given if delivered by hand or mailed, certified or registered mail, return
receipt requested to the following address or to such other address as either
party may designate by like notice:
If to Employee:
Steven B. Solomon
3131 Turtle Creek Boulevard, Suite 1301
Dallas, Texas 75219
If to Employer:
George Sharp
Citadel Computer Systems Inc.
2950 N. Loop West #1080
Houston, Texas 77092
19. Entire Agreement. This Agreement constitutes the sole and only
----------------
agreement of the parties hereto and supersedes any prior understanding or
written or oral agreement between the parties respecting the within subject
matter. This Agreement may not be changed orally, but only by an agreement
writing signed by both parties hereto.
Citadel has caused this Agreement to be executed by its authorized officer and
the Employee has signed this Agreement.
CITADEL:
/s/ George Sharp, President
----------------------------------
George Sharp, President
Citadel Computer Systems, Inc.
EMPLOYEE:
/s/ Steven B. Solomon
----------------------------------
Steven B. Solomon
6
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
LS Holding Corp., a Delaware corporation
Citadel Computer Systems Acquisitions, Inc., a Delaware corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated June 12, 1996, accompanying the consolidated
financial statements included in the Annual Report of Citadel Computer Systems,
Incorporated on Form 10-KSB as of February 29, 1996. We hereby consent to the
incorporation by reference of said report in the Registration Statements of
Citadel Computer Systems, Incorporated (formerly LoneStar Hospitality
Corporation) on Form S-8 (File No. 33-65189 and No. 333-03291, effective
December 20, 1995 and May 8, 1996, respectively).
GRANT THORNTON LLP
Houston, Texas
June 21, 1996
