<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____ to ____
Commission file number: 0-08718
CITADEL COMPUTER SYSTEMS INCORPORATED
(Exact name of small business issuer
as specified 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 330, Dallas, TX 75219
(Address of principal executive offices)
(214) 520-9292
(Issuer's telephone number)
------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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
--- ---
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Common Stock, par value $.01 16,156,370
-------------------------------
Outstanding at January 19, 1997
Transitional Small Business Disclosure Format Yes [ ] No [X]
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Citadel Computer Systems Incorporated
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
November 30, 1996 February 29, 1996
----------------- ------------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets
Cash $ 247,153 $ 125,565
Accounts receivable - net 2,366,147 484,336
Other receivables 1,169,295 --
Marketable securities available for sale 1,285,250 --
Assets under contract of sale -- 2,605,772
Prepaid expenses and other current assets 246,976 82,405
----------------- ------------------
Total current assets 5,314,821 3,298,078
Property and equipment - net 709,131 110,327
Software - net 4,430,965 2,757,412
Other assets 430,232 249,046
----------------- ------------------
$ 10,885,149 $ 6,414,863
================= ==================
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities
Notes payable $ 1,274,032 $ 4,034,214
Current portion of long-term notes payable 538,982 --
Accounts payable and accrued expenses 1,581,863 2,030,800
Other current liabilities 1,104,372 --
----------------- ------------------
Total current liabilities 4,499,249 6,065,014
Notes payable 1,141,251 --
Other long-term liabilities -- 34,360
Stockholders' equity
Common stock 156,926 115,091
Preferred stock 1,190,000 --
Mandatorily convertible debt 650,000 --
Unrealized loss on securities available for sale (281,937) --
Additional paid-in capital 11,768,953 2,405,144
Accumulated deficit (8,068,979) (2,204,746)
Less treasury stock at cost (170,314) --
----------------- ------------------
5,244,649 315,489
----------------- ------------------
$ 10,885,149 $ 6,414,863
================= ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Citadel Computer Systems Incorporated
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
November 30, November 30,
1996 1995 1996 1995
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales $ 1,501,270 $ 494,633 $ 4,390,208 $1,079,530
Cost of sales 91,224 38,525 246,413 113,124
----------- ---------- ----------- ----------
Gross profit $ 1,410,046 $ 456,108 $ 4,143,795 $ 966,406
Operating expenses
Selling, general and administrative expenses 1,924,554 480,821 5,126,253 1,151,600
Depreciation and amortization 257,915 38,088 598,420 111,444
Research and development costs -- 81,813 4,007,792 109,084
----------- ---------- ----------- ----------
2,182,469 600,722 9,732,465 1,372,128
----------- ---------- ----------- ----------
Operating loss (772,423) (144,614) (5,588,670) (405,722)
Other income (expense)
Interest expense (113,420) (96,606) (292,329) (232,831)
Other -- (53,512) -- (70,987)
Gain (loss) on marketable securities 786,895 -- (451,280) --
----------- ---------- ----------- ----------
673,475 (150,118) (743,609) (303,818)
----------- ---------- ----------- ----------
Net loss before extraordinary items (98,948) (294,732) (6,332,279) (709,540)
Extraordinary item - gain on debt settlement 210,843 -- 468,146 --
----------- ---------- ----------- ----------
Net income (loss) $ 111,895 $ (294,732) $(5,864,133) $ (709,540)
=========== ========== =========== ==========
Per share data
Net loss before extraordinary item $ -- $ (.05) $ (.50) $ (.11)
Extraordinary item .01 -- .04 --
----------- ---------- ----------- ----------
Net income (loss) $ .01 $ (.05) $ (.46) $ (.11)
=========== ========== =========== ==========
Weighted average shares outstanding 19,906,008 6,514,000 12,654,537 6,514,000
=========== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Citadel Computer Systems Incorporated
CONSOLIDATED STATEMENT OF CASH FLOWS
For the nine months ended November 30,
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
-------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (5,864,133) $ (709,540)
Adjustments to reconcile net loss to net cash
(used in) operating activities
Depreciation and amortization 598,420 111,444
Net loss on marketable securities 451,519 --
Research and development expenses acquired with stock 3,959,069 --
Change in operating assets and liabilities
Accounts receivable (1,649,385) (474,252)
Other receivables (1,169,295) --
Prepaid expenses and other current assets (105,852) (22,088)
Other assets 41,402 (25,899)
Other liabilities (337,858) --
Accounts payable and accrued expenses (914,119) 431,785
-------------- -------------
Net cash (used in) operations (4,990,232) (688,550)
Cash flows from investing activities
Purchase of equipment and software (1,432,738) (188,641)
Purchase of trading securities (4,818,841) --
Sales of trading securities 5,367,322 --
Purchase of businesses (658,543) --
Purchase of treasury stock (170,314) --
-------------- -------------
Net cash used in investing activities (1,713,114) (188,641)
Cash flows from financing activities
Proceeds from sale of stock and convertible debt 8,592,443 --
Net change in notes payable (1,767,509) 694,909
Other -- 158,245
-------------- -------------
Net cash provided by financing activities 6,824,934 853,154
Net increase (decrease) in cash 121,588 (24,037)
Cash at the beginning of period 125,565 24,037
-------------- -------------
Cash at the end of period $ 247,153 $ -0-
============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Citadel Computer Systems Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Basis of Presentation
The financial information presented herein should be read in conjunction with
the financial statements and footnotes included in the Company's Annual Report
on Form 10-KSB for the period ended February 29, 1996. The balance sheet as of
February 29, 1996, has been derived from the audited financial statement at that
date.
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation, consisting of those of a normal recurring nature, are reflected in
the accompanying financial statements.
Note B - Marketable Securities
The Company received 1,325,000 shares of Miami Subs U.S.A., Inc. (Miami Subs)
common stock as consideration for the sale of its restaurants on March 1, 1996.
The carrying value of the stock at the date of sale of $2,567,186 has been
reduced by $1,000,000 and has been charged to income for the quarter ended May
31, 1996. Based on events occurring after the sale of the restaurants, the
Company concluded that it could no longer recover its investment in the Miami
Subs stock and wrote down the investment to its market value as of July 19,
1996.
Note C - Acquisitions
In August 1996, the Company completed the acquisition of Kent-Marsh Ltd., Inc.
and Astonishing Developments Inc. (the ADI Group), which develops security
software for stand alone personal computers, for a total consideration of
approximately $2,200,000, consisting of $1,200,000 in common stock (subject to
sales limitations for two years) and $1,000,000 in cash over six months
($600,000 of which has already been paid).
In August 1996, the Company completed the acquisition of DanaSoft, Inc., which
develops and markets software for Internet and intranet applications, for
$264,000 in Citadel common stock and $30,000 in cash. In August 1996, the
Company also completed the acquisition of MicroVault Corporation, a data
security software provider, for $475,200 in Citadel common stock and $75,000 in
cash.
All of such acquisitions have been accounted for by the purchase method. In
connection with the acquisition of the ADI Group and MicroVault Corporation, the
Company wrote off $2,402,000 of purchased research and development technology
that had not reached the working model stage and for which there is not
alternate use. The following pro forma operating data has been prepared as
though the acquisitions had been made as of the beginning of the previous fiscal
year (March 1, 1995):
<TABLE>
<CAPTION>
Three months ended Nine months ended
November 30, November 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ 1,501,270 $ 970,187 $ 5,050,589 $ 2,286,192
Net income (loss) before
extraordinary item (98,948) N/A (4,433,636) N/A
Net income (loss) $ 111,895 $ (313,313) $(3,965,490) $(3,188,019)
Net loss per share before
extraordinary item $ -- N/A $ (.34) N/A
Net income (loss) per share $ .01 $ (.05) $ (.31) $ (.45)
</TABLE>
The write-off of purchased research and development costs of $2,402,000 is
reflected in the pro forma net loss only for the 1995 periods.
<PAGE>
The pro forma operating results are not necessarily indicative of the actual
results that would have occurred had the acquisitions been made on March 1, 1995
or of the future operations of the combined companies.
Note D - Purchase and License of Technology
In August 1996, the Company purchased the TabWorks and Cougar technology
and product lines from the XSoft Division of Xerox Corporation, headquartered at
the Xerox Palo Alto Research Center (PARC). Total consideration consists of
$750,000 in cash, a non-interest bearing $1,350,000 senior note ($1,206,560
after discount for imputed interest) payable over two years, and royalty
payments of up to $1,250,000 over four years. The Company has the right to pay
an aggregate of $2,500,000 during the first year following the acquisition in
exchange for the release of its obligations under the note and royalty terms. In
August 1996, the Company and XSoft announced their strategic partnership
pursuant to which XSoft's Summarizer Technology was licensed to the Company.
In connection with this purchase of technology, the Company wrote off
approximately $1,557,000 of purchased research and development technology that
had not reached the working model stage and for which there is not alternate
use.
Note E - Earnings Per Share
Earnings (loss) per share is based upon the weighted average number of
common shares and common share equivalents outstanding. Common share equivalents
include stock options and warrants when dilutive. Fully diluted earnings per
share is not presented because the assumed conversion of convertible preferred
stock and debt is antidilutive.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
During the three months ended November 30, 1996, the Company had net sales
of $1,501,000, an increase of $1,006,000, or 204% over net sales of $495,000
during the three months ended November 30, 1995. During the nine months ended
November 30, 1996, the Company had net sales of $4,390,000, an increase of
$3,331,000, or 306% over net sales of $1,080,000 during the nine months ended
November 30, 1995. The Company realized additional sales as a result of
increased market awareness of its NetOFF, Server Sentry and Phantom of the
Console products, as well as the addition of new vertical marketing channels and
an increase in its sales and marketing efforts through the expansion of the
Company's sales and marketing department and approximately $190,000 of net sales
resulting from companies and technologies acquired in the quarter ended August
31, 1996.
During the third quarter of fiscal 1997, the Company was integrating recent
acquisitions and implementing upgrades to certain products. This resulted in
delays in shipments of such products into the fourth quarter. Management
believes that this ramp up will result in increased net sales in the fourth
quarter. In addition, the Company has expanded its sales programs by
implementing an enterprise sales group to focus on large corporate accounts. The
Company has opened regional sales offices to service domestic and international
markets, and the Company anticipates that it will continue to expand its
enterprise sales group in future periods. Management believes that, in future
periods, this enterprise sales group will result in increased sales, and
anticipates increased selling expenses.
During the third and fourth quarters of fiscal 1997, the Company has also
increased its efforts to enter into OEM and joint venture relationships with
strategic partners to increase its sales channels. In December 1996, the
Company's WinShield product was selected by Microsoft Corporation for inclusion
in a bundled software product targeted for the education market. Management is
continuing its efforts and currently expects to finalize additional alliances in
the fourth quarter of fiscal 1997 or in future quarters of fiscal 1998.
The Company introduced NetOFF 5, a 32-bit NetWare and Windows NT product,
early in the fourth quarter of fiscal 1997 and has recently started marketing
and selling its new Network Recovery System. The Company is beta testing a
Windows 95 32-bit upgrade to its WinShield product line. The Company expects to
launch additional new products and upgrades late in the fourth quarter of fiscal
1997 and in future quarters of fiscal 1998 that will provide ease of use
security solutions for Internet and intranet applications on Microsoft and
Novell platforms.
The costs and expenses incurred in connection with producing the Company's
products were $91,000 during the three months ended November 30, 1996, an
increase of $52,000, or approximately 133%, from costs of sales of $39,000
incurred in the previous period. As a percentage of net sales, costs of sales
decreased in the three months ended November 30, 1996, to 6.1% from 7.9% in the
prior period. The costs and expenses incurred in connection with producing the
Company's products were $246,000 during the nine months ended November 30, 1996,
an increase of $133,000, or approximately 118%, from costs of sales of $113,000
incurred in the previous period. As a percentage of net sales, costs of sales
decreased in the nine
<PAGE>
months ended November 30, 1996, to 5.6% from 10.5% in the prior period. The
decreases in cost of sales on a percentage basis were primarily the result of
greater efficiencies from the higher level of sales.
Selling, general and administrative expenses for the three months ended
November 30, 1996, were $1,925,000, an increase of $1,444,000, or 300%, over
selling, general and administrative expenses during the three months ended
November 30, 1995. Such expenses increased primarily due to the Company's growth
which included the addition of key management and implementation of corporate
infrastructure; the hiring of sales and marketing, development, and
administrative personnel; increased attendance at trade shows and increased
marketing expenses; the introduction of new products and the establishment of
the enterprise sales group; expenses related to its status as a publicly traded
company; its continued efforts to expand its product offerings; and the opening
of its Dallas office and expansion of its Houston office. Selling, general and
administrative expenses for the nine months ended November 30, 1996, were
$5,126,000, an increase of $3,974,000, or 345%, over selling, general and
administrative expenses of $1,152,000 during the nine months ended November 30,
1995. Such expenses increased as a result of the factors discussed above
relating to the Company's growth, including the development of new products and
implementation of the enterprise sales group. The Company expects increases in
selling, general and administrative expenses in future periods as a result of
expansion of its business and acquired technologies.
No research and development costs were charged to expense as a result of
the level of development activity which resulted in the capitalization of
substantially all research and development costs for the quarter ended November
30, 1996. The Company introduced NetOFF 5, a Windows NT 32-bit product, early
in the fourth quarter of fiscal 1997 and expects to launch additional new
products and upgrades late in the fourth quarter of fiscal 1997 and in future
quarters. Depreciation and amortization expense increased to $258,000 in the
three months ended November 30, 1996, from $38,000, or an increase of 579% over
the prior period, due to the acquisition of certain companies and products.
Depreciation and amortization expense increased to $598,000 in the nine months
ended November 30, 1996, or 439%, from $111,000 during the prior period, due to
the acquisition of certain companies and products.
Interest expense for the three months ended November 30, 1996 increased to
$113,000, an increase of $17,000, or 17%, over interest expense of $97,000
during the same period in the prior year. Interest expense for the nine months
ended November 30, 1996 increased to $292,000, an increase of $59,000, or 25%,
over interest expense of $233,000 during the same period in the prior year. Such
increases were primarily due to increased indebtedness associated with the
recent financing activities described under "Liquidity and Capital Resources"
below.
During the three months ended November 30, 1996, the Company had a gain on
sales of marketable securities of $787,000. During the nine months ended
November 30, 1996, the Company had a loss on sales of marketable securities of
$451,000.
The Company reported earnings of $112,000 after extraordinary items
(consisting of a gain on a debt settlement in the amount of $211,000) for the
quarter ended November 30, 1996, compared to a net loss of $295,000 for the same
period of the prior year. The Company reported a net loss $5,864,000 after
extraordinary items (consisting of a gain on a debt settlement in the
<PAGE>
amount of $468,000) for the nine months ended November 30, 1996, compared to a
net loss of $710,000 for the same period of the prior year. The results for the
nine month period ended November 30, 1996 included research and development
costs of $3,959,000 written-off by the Company in connection with the
acquisitions of Kent-Marsh Ltd., Inc. and Astonishing Developments Inc. (the
"ADI Group") and MicroVault Corporation and the purchase of technology from
Xerox.
The statements contained in this Report that are not historical facts,
including, but not limited to, statements found in this Item 2 - "Management's
Discussion and Analysis," are forward looking statements and as such 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 network software products;
seasonality of product sales; costs and risks related to integration of
acquisitions; uncertainties related to new product development and market
acceptance of new products; costs, expenses and delays in sales related to the
implementation of new sales methods; software development costs; 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.
Liquidity and Capital Resources
The Company's cash and cash equivalents at November 30, 1996 were $247,000.
Cash flows from operations were a negative $4,990,000 for the nine months
ended November 30, 1996, compared to negative $689,000 for the nine months ended
November 30, 1995. The increase was due principally to the increased expenses
relating to the Company's expansion and development, selling and marketing
efforts, decreases in accounts payable and accrued expenses, and increases in
receivables related to increased sales.
Cash used in investing activities was $1,713,000 in the nine months ended
November 30, 1996, compared to $189,000 in the same period of the prior year.
This increase was due to purchases of businesses and an increase in capital
expenditures.
In the prior fiscal quarter, the Company announced a share repurchase
program whereby the Company is authorized to repurchase up to 500,000 shares of
its outstanding common stock in the open market through February 1998. During
the quarter ended November 30, 1996, the Company repurchased approximately
59,000 shares for an aggregate purchase price of $170,000.
Cash flows provided by financing activities were $6,825,000 in the nine
months ended November 30, 1996, compared to $853,000 in the nine months ended
November 30, 1995. This increase was due primarily to the proceeds of issuances
of shares of the Company's common stock, preferred stock and notes payable, net
of payments against debt.
<PAGE>
As a result of the aforementioned factors, cash and cash equivalents
increased by $122,000 in the nine months ended November 30, 1996.
In September 1996, the Company conducted a private placement of preferred
stock that is mandatorily convertible into common stock at an exercise price
equal to 80% of the average closing bid price for the five trading days prior to
conversion. The Company raised net proceeds of $1,435,000 in this offering.
In March 1996, the Company issued a nonrecourse non-interest bearing
promissory note to Miami Subs with a remaining principal amount of $1,250,000,
secured by a pledge of 1,325,000 shares of Miami Subs common stock owned by the
Company. The maturity date has been extended to January 31, 1997 and the Company
is in negotiations with Miami Subs with respect to the Note and the stock. The
Company currently believes that Miami Subs and the Company will extend the
maturity date of the note for a period of up to one year, although there can be
no assurances with respect to any such extension. The Company determined that it
could not recover its investment in the Miami Subs stock and wrote down the
investment during the quarter ended May 31, 1996, to its market value as of July
19, 1996.
The Company believes the funds available from the sources described above
will be sufficient to fund its current operations through the end of its 1997
fiscal year, but that it may need 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 has entered
into a letter of intent with First Bermuda Securities Ltd., on a best efforts
basis, with respect to a private placement of up to $3,325,000 of convertible
redeemable notes and warrants. The Company anticipates that the net proceeds of
such an offering would be used to retire indebtedness and as working capital and
for general corporate purposes. There can be no assurance that the Company will
be successful in raising capital in any such offering.
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. The
Company changed its fiscal year end to the last day in February from March 31,
commencing February 29, 1996.
<PAGE>
PART II. OTHER INFORMATION
Except as listed below, all information required by Part II is omitted
because the items are inapplicable or the answer is negative.
ITEM 1. LEGAL PROCEEDINGS
A former employee of Old LoneStar filed a lawsuit against the Company and
one of its officers and directors alleging that the Company and/or the
individual owe the plaintiff additional stock options and seeking damages in
excess of $2,600,000. The Company and the individual believe such claims are
without merit and intends to vigorously defend against the claim and is
considering filing counterclaims. The Company has filed an answer in the case,
styled Heredia v. Citadel, et al., in the 298th Court of Dallas County, Texas.
The Company is also involved in routine litigation from time to time. Such
litigation, including other litigation in which the Company is currently
involved, is not material to the Company's consolidated financial condition or
results of operations.
ITEM 5. OTHER INFORMATION
Subsequent to the quarter ended November 30, 1996, the Company withdrew its
application to qualify its shares for trading on the Nasdaq Small Cap Market as
a result of the market price of the Company's common stock. The Company plans
to re-file an application in the event the market price of its common stock
meets the criteria of the Nasdaq Small Cap Market or the American Stock
Exchange.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Calculation of earnings per share
27 Financial Data Schedule
(b) Reports on Form 8-K.
On September 5, 1996, the Company filed a Form 8-K relating to the
acquisition of Kent-Marsh Ltd., Inc. ("KML") and Astonishing
Developments Inc. ("ADI").
On November 5, 1996, the Company filed a Form 8-K/A amending the
September 5, 1996 Form 8-K to include audited financial statements of
KML and ADI.
<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: January 20, 1997 By: /s/ Steven B. Solomon
-------------------------------------------------
Steven B. Solomon, Chief Operating Officer and
Secretary (Duly Authorized Signatory and Principal
Financial and Accounting Officer)
<PAGE>
EXHIBIT 11
CITADEL COMPUTER SYSTEMS INCORPORATED
COMPUTATION OF PRIMARY EARNINGS PER SHARE
(UNAUDITED)
Three Months Ended Nine Months Ended
November 30, November 30,
------------------------ ------------------------
1996 1995 1996 1995
----------- ---------- ----------- ----------
Net income (loss) $ 111,895 $ (294,732) $(5,864,133) $ (709,540)
=========== ========== =========== ==========
Shares as adjusted:
Average number of shares
outstanding 14,186,842 6,514,000 12,654,437 6,514,000
Incremental shares from
outstanding stock options
as determined under the
treasury stock method,
using the average market
price 5,719,166 - - -
----------- ---------- ----------- ----------
Shares as adjusted 19,906,008 6,514,000 12,654,437 6,514,000
=========== ========== =========== ==========
Primary earnings (loss)
per share $ .01 $ (.05) $ (.46) $ (.11)
=========== ========== =========== ==========
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CITADEL COMPUTER SYSTEMS INCORPORATED AS OF THE QUARTER
ENDED NOVEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> FEB-28-1997 FEB-28-1996
<PERIOD-START> MAR-01-1996 MAR-01-1995
<PERIOD-END> NOV-30-1996 NOV-30-1995
<CASH> 247,153 125,565
<SECURITIES> 1,285,250 0
<RECEIVABLES> 3,535,442 484,336
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 5,314,821 3,298,078
<PP&E> 709,131 110,327
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 10,885,149 6,414,863
<CURRENT-LIABILITIES> 4,499,249 6,065,014
<BONDS> 1,141,251 0
0 0
1,190,000 0
<COMMON> 156,926 115,091
<OTHER-SE> 3,897,723 200,398
<TOTAL-LIABILITY-AND-EQUITY> 10,885,149 6,414,863
<SALES> 4,390,208 1,079,530
<TOTAL-REVENUES> 4,390,208 1,079,530
<CGS> 246,413 113,124
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 292,329 232,831
<INCOME-PRETAX> (6,332,279) (709,540)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (6,332,279) (709,540)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 468,146 0
<CHANGES> 0 0
<NET-INCOME> (5,864,133) (709,540)
<EPS-PRIMARY> (.46) (.11)
<EPS-DILUTED> 0 0
</TABLE>
