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UNITED STATES 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 FEBRUARY 28, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-08718
CITADEL TECHNOLOGY, INC.
(formerly Citadel Computer Systems Incorporated)
(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 600, DALLAS, TX 75219-4421
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(214) 520-9292
ISSUER'S TELEPHONE NUMBER
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 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 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 ..................................................... $1,613,326
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As of June 16, 1998, the average bid and ask price of the Company's stock was
$1.70 per share. The aggregate market value of the voting and non-voting
common stock held by non-affiliates of the Company was $31,039,566.
As of June 16, 1998, there were 24,948,348 shares of common stock, $.01 par
value per share, outstanding.
Transitional Small Business Disclosure Format. Yes No X
--- ---
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CITADEL TECHNOLOGY, INC.
(formerly Citadel Computer Systems Incorporated)
FORM 10-KSB ANNUAL REPORT
FOR THE FISCAL YEAR ENDED
FEBRUARY 28, 1998
Table of Contents
<TABLE>
<S> <C> <C>
PART I
Item 1. Description of Business.................................... 3
Item 2. Description of Property.................................... 23
Item 3. Legal Proceedings.......................................... 23
Item 4. Submission of Matters to a Vote of Security Holders........ 24
PART II
Item 5. Market for Common Equity and Related Stockholder Matters... 25
Item 6. Management's Discussion and Analysis....................... 27
Item 7. Consolidated Financial Statements.......................... 32
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................ 32
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of Exchange Act.... 32
Item 10. Executive Compensation..................................... 32
Item 11. Security Ownership of Certain Beneficial Owners and
Management................................................ 32
Item 12. Certain Relationships and Related Transactions............. 32
PART IV
Item 13. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................. 32
Signatures
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the registrant's
1998 Annual Meeting of Stockholders to be held on August 26, 1998 are
incorporated into Part III of this Annual Report on Form 10-KSB.
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UNLESS OTHERWISE INDICATED, SHARE AND PER SHARE INFORMATION CONTAINED IN THIS
REPORT REFLECT THE COMPANY'S ONE-FOR-TWO REVERSE STOCK SPLIT EFFECTIVE AS OF MAY
1, 1996.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
The discussion in this Report on Form 10-KSB contains forward-looking
statements that involve risks and uncertainties. The statements contained in
this Report that are not purely historical are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended, including
statements regarding the Company's expectations, beliefs, intentions or
strategies regarding the future. In this Report, the words "anticipates",
"believes", "expects", "estimates", "intends", "future", and similar
expressions identify forward-looking statements. All forward-looking
statements included in this document are based on information available to
the Company on the date hereof, and the Company assumes no obligation to
update any such forward-looking statements. The Company's actual results
could differ materially from those discussed herein. Factors that could
cause or contribute to such differences include, but are not limited to,
those discussed elsewhere in this item under the heading "CERTAIN FACTORS
THAT MAY AFFECT FUTURE OPERATING RESULTS" as well as those discussed
elsewhere in this Report, and the risks discussed in the Company's Securities
and Exchange Commission filings.
THE COMPANY
Citadel Technology, Inc. ("Citadel" or the "Company"), formerly Citadel
Computer Systems Incorporated, develops and markets security and
administration software products for both computer networks and desktop
personal computers ("PCs"). The Company's integrated, easy-to-use network
products enable network administrators to control access to network
resources, automate routine network maintenance tasks, and automatically
shutdown and restart servers and desktop PCs in the event of a network crash.
The Company's products also enable individual PC users to control access to
their desktops, secure files, and index and retrieve files stored in a variety
of storage media. The Company's products are designed to reduce the direct
and indirect costs of computer network operations, protect proprietary
networks and information, and otherwise improve overall office productivity.
The Company is the successor to a Delaware corporation (also known as Citadel
Computer Systems Incorporated (the "Old Company")) that was formed and began
operations in June 1992. References in this Report to "Citadel" or the
"Company" shall include Citadel and the Old Company unless the context
requires otherwise.
The Company maintains its principal executive offices at 3811 Turtle Creek
Blvd., Suite 600, Dallas, Texas 75219-4421; the telephone number of this
office is (214) 520-9292. The Company maintains a site on the World Wide Web
at http://www.citadel.com.
RECENT DEVELOPMENTS FOR THE COMPANY
MANAGEMENT
Fiscal 1998 was a period of restructuring and transition for the Company.
The Company consolidated all its operations into its Dallas location,
significantly reduced its workforce, completely revamped its sales and
marketing strategies, and restructured many of the operational aspects of the
Company. In April 1997, the Company's former president and chief executive
officer resigned and agreed to the termination of his employment contract in
connection with the Company's restructuring. Additionally, several other key
members of the Company's management team resigned, including its former Vice
President of Sales, Vice President of Channel Sales, Chief Technology
Officer, and several other of its officers. The Company appointed its former
Chief Operating Officer, Steven B. Solomon, as its new President and Chief
Executive Officer, and appointed Richard L. Travis, Jr., its Chief Financial
Officer, to the additional
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post of Chief Operating Officer. In July 1997, Mr. Carl Banzhof, the
Company's Vice President of Engineering, assumed the role of Chief Technology
Officer of the Company. In January 1998, Bennett Klien, formerly of Iomega,
joined the Company as Vice President of Business Development. In addition to
the restructuring efforts, the new management team began developing strategic
and OEM relationships with industry market leaders. As a result of the
foregoing, while the Company's sales for the current year were adversely
affected, management feels the Company is better positioned today than ever
to move forward.
PRODUCTS
In November 1997, the Company introduced C:\More!, a product that enables
users to index, locate, and retrieve their files from a wide range of
different storage media. C:\More! has received a favorable initial response
in the market. Iomega, the developer of the highly successful ZIP and JAZ
drives, has included C:\More! in its Iomega-ready software program and has
assisted the Company in promoting the product. Among other things, Iomega
has featured C:\More! on its web site, invited the Company to present
C:\More! at the Iomega booth at the fall 1997 Comdex show, and authorized the
Company to use images of the ZIP and JAZ drives in the packaging for C:\More!.
In January 1998, the Company introduced WinShield 95/ NT, the Company's
solution for desktop users who want to protect their PC system from
unauthorized modification or access. WinShield was the Spotlight product for
February 1998 on Microsoft's educational software web site -
www.microsoft.com/education/wsc/features. Sales of WinShield are currently
gaining momentum in the VAR, distributor and corporate channels.
The Company has secured retail distribution for its C:\More! and WinShield
products in key retail outlets such as Office Depot, Office Max, Best Buy,
Computer City, Micro Center, and CompUSA., and is currently working with
other retail outlets.
METAMOR TRANSACTION
On October 6, 1997, the Company entered into a strategic alliance with
Metamor Wordwide, Inc. (formerly CORESTAFF, Inc.) (NASDAQ:MMWW), a leading
provider of information technology and staffing services with annual revenues
in excess of $1.0 billion. The alliance includes the following elements:
- In October 1997, Metamor purchased 2.5 million shares of the Company's
common stock for $750,000 in cash and other valuable consideration,
and was also granted warrants to purchase an additional 1 million
shares at $4.00 per share and another 1 million shares at $5.00 per
share.
- An executive vice president of Metamor, who also serves as the
president of Metamor's information technology services division,
joined the Company's board of directors in October 1997.
- Metamor agreed to provide software development support to the Company,
including support through its subsidiary, Metamor Software Solutions
("MSS"), which employs more than 200 software programmers. As a
result of this support, the Company believes that it will be able
to introduce new products and upgrades to existing products and
otherwise react to changes in customer needs and the market more
quickly than in the past.
- The Company and Metamor will cross-sell each other's products. The
Company will be the exclusive distributor of Metamor's "First Step"
software program, a peer-to-peer system that enables users to easily
access multiple systems requiring different user codes.
- In May 1998, Metamor invested an additional $2 million in the Company,
by purchasing 2,000 shares of the Company's convertible preferred
stock.
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OTHER RECENT DEVELOPMENTS
On February 26, 1998, the stockholders of the Company approved the amendment
of the Company's Certificate of Incorporation to change the Company's name to
Citadel Technology, Inc.
In March 1998, the Company in association with Guildsoft Limited opened an
office in Devon, England to distribute the Company's products in UK and
Europe.
In May 1998, the Company appointed System Plan as its exclusive reseller and
distributor for the Japanese market.
In June 1998, a Dallas based private investment fund acquired 2 million
shares of Citadel common stock for $2.5 million.
OVERVIEW
The Company's network products are designed to: reduce clients' costs,
improve the accuracy of clients' information, maintain the operation of
networks, secure networks 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. The Company's network software
products operate on operating systems designed by Novell, Microsoft, IBM and
Apple. The Company's focus is on the two largest, Novell and Microsoft, whose
NetWare and Windows NT software control in excess of 70% of the market for
network operating systems. The Company's desktop products are designed to
enable individual PC users to control access to their desktops, secure
files, and index and retrieve files stored in a variety of storage media.
The Company's primary products include Crash Protection and Recovery (CPR),
C:\MORE!, NetOFF, Server Sentry, Phantom of the Console, Server Cam,
WinShield, and FolderBolt. See "Citadel Products". The Company's clients
include many Fortune 2000 companies, government and educational agencies and
individual PC users.
THE COMPANY STRATEGY
The Company's strategy is to develop long-term client relationships and to
maintain a high level of lifetime client satisfaction, which the Company
believes will result in additional recurring revenues from new products and
upgrades on existing software products. The Company has focused its
development efforts on the client-server LAN and PC market due to the rapid
growth of this market as companies, government agencies and educational users
shift from mainframes to client server networks and intranets. The Company
believes its products are positioned to capitalize on this trend.
The Company's fundamental objective is to become a leading supplier of
security and administration software products for computer networks and PCs.
The Company seeks to achieve this objective through the following strategies:
- EXPAND SOFTWARE PRODUCT PORTFOLIO. The Company's existing product
line addresses a wide range of the security and administration needs
of computer network administrators and PC users. The Company believes
a central element of its future success will be the development of new
products and enhancements for its existing products that provide
additional capabilities and features and differentiate the Company's
product line from the product lines of competitors and potential
competitors.
- CONTINUE TO EXPAND SALES AND MARKETING. The Company is continuing to
implement the restructuring of its marketing and sales effort, moving
from telemarketing to distribution through the retail, distributor,
VAR, and OEM channels.
- ENTER INTO ADDITIONAL STRATEGIC RELATIONSHIPS. The Company has
successfully developed strategic alliances or partnerships with other
technology companies in the past. In addition to the strategic
alliance with Metamor, the Company has developed a close working
relationship with Iomega, which has included the Company's C:\More!
product in its Iomega-ready software program and assisted the Company
in promoting the product. The Company also works closely with
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representatives of Novell and Microsoft in the development of its
products. The Company intends to further leverage its technology and
products by entering into strategic relationships with other
technology companies, including other complementary software and
hardware providers (such as PC OEMs, server manufacturers, and
removable media storage vendors).
- MAINTAIN TECHNOLOGICAL LEADERSHIP. The Company believes that its
computer security and administration products are more advanced than
those of its competitors. It intends to maintain its technological
lead by continuing to dedicate significant resources to its research
and development efforts.
- PURSUE ACQUISITION OPPORTUNITIES. In addition to the Company's
internal product development efforts, the Company has had success in
acquiring products and technology. Such acquisitions can be less
expensive and more time efficient than internal development. The
Company believes that additional opportunities may arise in the future
to expand its product lines or technology base by acquiring
businesses, products and technologies that complement those of the
Company.
INDUSTRY BACKGROUND
NETWORK SECURITY AND ADMINISTRATION. Largely as a result of the increasing
power, ease of use, and low cost of PCs, many businesses and other
organizations have shifted from a centralized mainframe computer platform,
usually procured from a single vendor, to a distributed multiple-PC networked
platform, the elements of which are procured from a variety of vendors.
These organizations have invested heavily in client-server networks,
"intranets," and other distributed computing networks to realize the cost and
productivity benefits of sharing applications, files, data, and printers and
other peripherals among PC users across a work group, department or entire
enterprise. As a result of the migration of mainframe applications to
network servers, mission critical functions are increasingly performed over
such distributed networks. These functions include e-mail; electronic funds
transfer; reservation entry for airlines, hotels and rental car companies;
and telemarketing and order entry.
The use of complex, heterogeneous distributed networks linking multiple host
servers and client PCs creates substantial risk. Unauthorized interception,
alteration, and theft of proprietary information, as well as electronic
vandalism or terrorism aimed at disrupting network operations, can have major
adverse effects on the organizations that own, operate, and/or use those
distributed networks. This risk grows every day because of the deployment of
more capable PCs, growth in the number of network access points, enhancements
in the ability of different types of computers to communicate with one
another, and expansion in the number of public and private communications
networks used to support distributed computing environments. As a result of
these developments, protecting distributed networks and the information
transmitted over those networks is an increasingly important and difficult
task.
Another challenge facing organizations that depend on distributed computing
networks is network administration. In many cases because of budgetary or
other constraints, organizations are hard pressed to address the network
administration needs that arise as their networks grow in size and
complexity. Some organizations outsource some or all network administration
tasks to a service bureau or VAR. Some smaller organizations have no
formally trained network administrator available on a daily basis.
Organizations without a substantial (and usually expensive) in-house network
administration effort are vulnerable to network disruptions. Such
disruptions can reduce top-line revenue by preventing the entry of order
information and delaying transaction processing, reducing internal
productivity by idling network users, alienating customers by interfering
with customer service functions, and increasing overall workplace tension.
The Company believes that corporate and institutional use of distributed
computing networks will continue to expand and that, as reliance on these
networks deepens, organizations will become increasingly more concerned about
(i) protecting the integrity and security of these networks, (ii) reducing
the incidence of network disruptions, and (iii) reducing the expense of
network administration. The Company, therefore, believes that demand for
more powerful and more cost effective network security and administration
tools
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will grow substantially over the next several years.
PC SECURITY AND ADMINISTRATION. Even in a distributed computing environment,
many users prefer to maintain all or a substantial portion of their important
"stuff" (E.G., business and personal files) on their desktop hard drive or
other desktop storage media (i.e., diskettes, Zip drives, etc.). Desktop
computer storage continues to grow and new systems provide on average more
than 5 GB of storage for each user's data, e-mail, and Internet downloads.
Storage of large amounts of information at the desktop level increases the
risk of security breaches by inviting unauthorized access, viewing and
copying of confidential information, and access to network information during
the many times a user is away from his or her desk, including lunch breaks or
meetings. Moreover, organizations are moving to expand sharing of desktop PCs
by employees, particularly in functions that require 24-hour service. Shared
PCs are found often in service bureaus, call center operations, government
and education agencies, libraries, and the home. Protecting an individual
user's data and PC settings and configuration is critical, especially in a
shared PC environment.
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THE CITADEL SOLUTION
The Company's current line of software products addresses computer security
and administration problems at both the network and desktop levels. Key
features of the Company's products include:
- INTEGRATED PRODUCT CAPABILITIES. The Company's integrated security
and administration solution enables a network administrator from a
single console to automatically shutdown and restart in an orderly
manner servers and desktop units in the event of a network crash,
control access to network resources, log off inactive desktop users
and save all desktop work in progress, and automate routine network
maintenance tasks.
- PC CONFIGURATION PROTECTION. The Company's solutions also enable
individual PC users, particularly those who share a desktop unit with
a co-worker or other students, to protect their PC configurations and
data.
- ENHANCED CUSTOMER PRODUCTIVITY. The Company's products are designed
to improve overall office productivity, particularly by reducing the
direct and indirect costs of network operations by reducing (i) the
personnel resources required to administer the network, (ii) the
disruption (including data loss) caused by network crashes, (iii)
software license fees charged to inactive users, and (iv) unauthorized
use of network and desktop resources.
- EASE OF USE, OPTIMIZE PRODUCTS FOR LEADING TECHNOLOGIES. The
Company's products are easy for a customer to install and are fully
compatible with the major network and desktop operating systems,
including Windows NT, NetWare, and Windows 3.1 and 95. The intuitive
look and feel of the products' graphical user interface ("GUI")
enhances their usability.
- MODULAR PRODUCT DESIGN. The Company's network programs can be added
on a plug-and-play basis to the Citadel Network Administrator - a
centralized program manager included with all Citadel network
products. This modularity provides a migration path for network
administrators. As their network security and administration needs
become more complex, they can utilize more of the Company's products
and operate them all through an existing, familiar program manager.
- COST EFFECTIVENESS. The Company believes its products can reduce the
cost of overall system support and maintenance be ensuring an orderly
backup, reducing license fees by logging off inactive users, and
reducing the personnel resources required to administer networks.
CITADEL PRODUCTS
NETOFF 5.0 NetOFF is designed to protect a network by shutting down
unattended client PCs automatically after a specified period of inactivity.
Network administrators may also use NetOFF to shut down such PCs to complete
a clean backup. The product ensures an orderly shutdown by automatically
closing all open files and applications on the PC and saving the information.
NetOFF is available for the Windows NT and NetWare platforms and supports
Windows 3.1, 95, and NT desktop PCs. The benefits of NetOFF include:
- Enhancing Overall Computer Security - Unattended desktop PCs subject
the network and PC to a heightened risk of data theft. NetOFF
protects confidential files and information by loading a password
protected screensaver and logging off the unattended PCs, thus
shutting off access to PC hard drives and the network.
- Facilitating Clean Back-Ups - To protect important information, almost
every company employs a back-up system. The back-up system is a
magnetic tape drive or other storage medium that 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 restored in a relatively short
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time, saving the company the time and effort necessary to attempt
to reconstruct lost data and files. The back-up system, however,
backs up only closed files. If a PC is logged on during the process,
data in open files can be corrupted or omitted from the back-up tape.
NetOFF eliminates these problems by automatically logging off network
client stations at a time pre-selected by the network administrator.
- Conserving Resources - Software license fees are often based on the
number of actual users of the licensed product. Many companies pay
excess license fees for programs that are left open on unattended
computers. NetOFF helps customers reduce costs by logging off
unattended PCs.
SERVER SENTRY. The Company believes Server Sentry is the first network
protection product that automatically restarts the network server in the
event of a crash. Server Sentry automatically notifies network personnel,
produces downtime reports, and captures information to enable the network
administrator to avoid recurrences. Server Sentry is available for NetWare
3.x and higher. A Windows 95 and NT version is being developed with an
expected release date in the second quarter of fiscal year 1999.
PHANTOM OF THE CONSOLE. Phantom operates as a "virtual administrator,"
automating specified daily server tasks for network file servers, thus
permitting network administrators to increase LAN productivity. The product
automatically executes commands and runs programs at any set time, day or
night, without the need for an administrator at the console. Phantom
preserves server cache memory and improves overall server performance by
scheduling the unloading, loading, and execution of network loadable modules.
Phantom is available for Windows 3.x and 95 and NetWare 3.x and higher. A
Windows NT version is being developed with an expected release in the second
quarter of fiscal year 1999.
SERVER CAM. Server Cam emulates a time-lapse video recorder connected to the
network server console. Server Cam captures events as they occur, which
helps network personnel to recreate and investigate the events leading to a
crash. Server Cam is available for NetWare 3.x and higher. A Windows 95 and
NT version is in development with an expected release in the second quarter
of fiscal year 1999.
FOLDERBOLT. FolderBolt provides desktop users, particularly users in a
shared desktop PC environment, such as education, with several tools to
protect proprietary information. Users can protect groups of directories,
individual directories, or files by designating them as locked or read-only
protected or as a secure drop box. Optional data encryption adds another
layer of security against more sophisticated intruders. Users are able to
send self-extracting encrypted e-mails within the company or across the
Internet. FolderBolt is available for Windows 3.1 and MacIntosh. Windows 95
and NT versions are expected to be released in the second quarter of fiscal
year 1999.
WINSHIELD. WinShield is designed to address the problems that arise when
users share desktop PCs in work environments such as schools, libraries,
government offices, and resource centers such as Kinkos and AlphaGraphics.
The product enables a network administrator (or in a smaller office,
individual users) to establish different profiles for different users that
can only be modified by the administrator. These profiles include desktop
appearance, configuration, and initialization, as well as restrictions on
user access to various PC and network resources (including hard drives,
diskettes, CD-ROMs, printers, Internet access, etc.). The same desktop PC
can then toggle between several user profiles.
WinShield prevents deliberate or accidental configuration changes that can
disrupt use of a desktop PC, abuse of PC or network resources (such as
unauthorized Internet surfing or installation of unauthorized software), and
interception or alteration of proprietary information. The user can govern
access to CD-ROM or disk drives and control the specific CDs that can be
used. WinShield is currently available for Windows 95 and 3.x. A Windows NT
version and a server-controlled version was released in June 1998. The
product has been included in Compaq's and Microsoft's software bundles for
the educational market and has been a feature product of the month on
Microsoft's website and is sold through Best Buy, Office Max and other retail
outlets.
C:\MORE! C:\More!, which began shipping in January 1998, enables both
individual and networked
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computer users to quickly and easily locate all of their computer files. The
proliferation of storage alternatives, such as higher capacity hard drives
that can store gigabytes of information and high capacity removable media
such as ZIP, JAZ, Syquest and others, combined with dramatic growth in the
complexity and size of files to be stored as the use of graphics and other
storage-intensive capabilities grows, has led to users finding it more and
more difficult to find and access stored information.
Using advanced summarization technology licensed from the PARC
Laboratory-based Inxight Software division of Xerox, C:\More! automatically
scans and catalogs files from virtually all forms of computer storage media,
including hard drives; floppy, Iomega-TM-, SyQuest-TM-, and Imation-TM-
disks; and even CD-ROMs. It automatically creates and updates keywords,
summaries, and thumbnail images (for graphics files) and generates an index
that the user can later search when trying to locate and retrieve a
particular file, even a file stored on removable media not currently inserted
in the drive. Text searches can be conducted without opening files, and
graphics files can be identified quickly via thumbnail viewer. C:\More! also
enables users to easily move many files from different physical sources at
one time onto a ZIP or other high capacity removable medium to take home,
take on the road, or share with others.
C:\More! provides cataloging assistance that has been available in the past
only to high-end users in the digital photography and desktop publishing
industries in products like Cantos and Extensis. The product provides much
greater file/information capability than file-management utilities from
Symantec, Corel, and Claris, which only minimally enhance functions built
into Windows and other operating systems and applications. C:\More! has been
endorsed and approved as an Iomega-ready software product. C:\More! is
currently available for Windows NT, 95, and 3.x and is sold through Best Buy,
Office Max and other retail outlets.
CRASH PROTECTION AND RECOVERY SYSTEM ("CPR"). CPR for Netware 3.X and
higher operating systems was released in April 1998. The Company expects to
release its Windows NT version of CPR, currently in Beta, during the third
quarter of fiscal year 1999. CPR enables the fully unattended shutdown and
restart of servers and desktop PCs in the event of a computer network crash
or other catastrophic event, such as a power outage. CPR is an integrated
package combining four of the Company's products - NetOFF, Server Sentry,
Phantom of the Console, and Server Cam. These modules operate under a
centralized program manager - Citadel Network Administrator. Together, the
modules (i) detect fatal server problems, (ii) shut down the servers and
logoff individual desktop PCs in an orderly manner, (iii) keep a record of
the network disruption for later analysis, and (iv) automatically restart the
server. CPR initiates and manages the network recovery process in a
comprehensive manner - from the first sign of a problem through crash
analysis - and thus enables the administrator user to reduce downtime and
determine what caused the network to crash. CPR minimizes network downtime
and the attendant problems of a network crash such as data loss. CPR
initially will be available for the NetWare platform with a Windows NT
version expected to be released during the third quarter of the current
fiscal year.
CITADEL SECURE DESKTOP ("CSD"). To be released in beta during the second
quarter of fiscal year 1999, CSD is being jointly developed by the Company
and Millennium. Combining technologies from both companies, CSD will create
the most secure Windows desktop PC operating environment available. CSD will
be positioned and marketed to large corporations running large heterogeneous
networks combining mainframes, minicomputers, LAN/WAN servers, and desktop
client PCs. Key features will include single sign-on, idle logoff (utilizing
NetOFF technology), desktop configuration (utilizing WinShield technology),
file and folder encryption (using FolderBolt technology), Internet monitoring
and blocking features, and a customizable GUI shell.
Additional Company products include: (1) Tabworks, a personal document
management tool for computers using Windows 95 and 3.1 operating systems;
(2) NetConsole, which is designed to automate input tasks at the server
console so that commands can be scheduled at an unattended server; (2)
NetPurge, which automatically searches for old or unused files and moves them
to archival storage; (3) NetQ, which enables network users to manage
facility queues, such as those for printing, archiving, or custom
applications; and (4) NetWatch, which detects and corrects unowned network
files.
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SALES AND MARKETING
With the introduction of new products, recruitment of software sales
executives, and a revised sales model, the Company intends to leverage a
broad range of sales and marketing opportunities that will target direct and
indirect customers.
SALES
To address a broad range of sales and marketing opportunities, the Company,
in fiscal 1998, changed the focus of its selling efforts from a telemarketing
direct sales force to a multi-channel distribution strategy. The Company's
multi-channel sales strategy includes an enterprise sales group, OEM
distribution arrangements, VAR and dealer channels, direct sales channels,
strategic alliances with industry leaders, and trade shows.
- ENTERPRISE SALES GROUP AND VARS. This direct sales group is
responsible for end users owning or operating large, sophisticated
enterprise networks, including corporations and educational
institutions. These end users place orders primarily for the
Company's products and have a sales cycle from two to six months
depending on the size of the network and the resources they have
available for testing.
In addition to managing the Company's relationship with these end
users, the Enterprise Sales Group is responsible for recruiting and
managing VARs nationwide. Each sales person is responsible for
developing relationships with VARs and end users in their
geographic territory. VARs and other resellers broaden the
Company's exposure to corporate and educational accounts. VARs can
purchase the Company's products through wholesale distributors or
direct from the Company, depending on their business model. In
January 1998, the Company's VAR authorization program was launched.
As of the end of May 1998, the Company had 68 VARs recruited.
The Company continues to work with a limited number of
international resellers for WinShield, C:\More!, NetOFF, Server
Sentry, and Phantom of the Console. In 1998, the Company entered
into relationships with distributors in the UK and Japan that will
enable the Company to penetrate the UK, France, Germany, Spain,
Italy and Japan markets.
- DIRECT SALES GROUP. This group, which is primarily composed of
in-house telemarketers, focuses on qualifying leads for the Enterprise
Sales Group. This function includes cold calls and follow-up calls
from marketing events and trade shows. The group does the majority of
the prospecting and qualifying of large deals, thus allowing the
Enterprise Sales Group to focus on closing the sale. The Direct Sales
Group also closes sales on small deals and inbound calls.
- CHANNEL GROUP. This group focuses on retail accounts and on the
wholesale distributors, such as Ingram Micro and Tech Data, through
which both VARs and retail accounts source products. The group is
also responsible for sales and marketing events that are implemented
in national retail chains such as CompUSA. By leveraging the retail
channel, the Company believes it can effectively build brand
recognition for the Citadel name and enhance the market profile of its
entire software product portfolio.
The Company currently has C:\More! and WinShield stocked in Office
Depot, CompUSA, Computer City, Micro Center, and Best Buy and is
negotiating with office super stores, mall chains, and other
retail accounts. The Company is also implementing indirect
training programs with the sales representatives in retail
storefronts. These programs are managed via direct mail to each
store location from the Company's corporate office.
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MARKETING
The marketing department provides each of the sales groups with the tools
necessary to develop leads, inform prospective customers, and close sales.
The Company's marketing activities include direct mail to VARs and other
resellers as well as educational and corporate buyers, public relations via
product reviews, industry trade shows with trade show partners such as Iomega
and Novell, joint marketing with retailers, and Internet advertising. The
Company's product awareness advertising is combined with an aggressive public
relations campaign and advertisements targeted at resellers and vertical
markets.
Since the Company has undergone significant changes through both acquisitions
and product updates, it was necessary during fiscal 1998 to develop new user
interfaces, packaging, literature, and collateral materials for each product.
The new materials now give the Company's products a common look and feel
that serves to easily identify the Company's products at all levels, retail,
reseller and end user. This common look and feel also helps to raise the
Company's profile in the software industry and expand product cross-selling
opportunities.
The marketing group also gathers specific information from customers and
sales representatives that is used to assess future market opportunities and
plan future products.
BUSINESS DEVELOPMENT
The business development team's mission is to (i) increase market awareness
of the Company and (ii) identify additional channels and vehicles through
which to market the Company's products.
Business development has the lead in implementing the Company's plan to
systematically approach all PC OEMs, disk drive manufacturers, server
manufacturers, and removable storage media vendors regarding potential
business partnerships. The Company's existing strategic relationships with
Novell, Microsoft, and Iomega provide the Company with (i) valuable insight
into future developments in network and desktop operating systems and other
technologies, (ii) a higher market profile as the Company is invited to
promote and demonstrate its products at key industry trade shows and
conferences, (iii) access to top resellers in the Company's target market,
and (iv) expanded cross-selling opportunities. The Company's business
development team expects to derive similar benefits from new business
partnerships.
PRODUCT DEVELOPMENT
The Company believes that its success will depend largely upon its ability to
enhance existing products and develop new products that meet the needs of a
rapidly evolving marketplace and increasingly sophisticated and demanding
customers. The Company intends to expand its product offerings and to
introduce new products for customers seeking additional network and PC
security and administration features. While the Company intends to primarily
develop the products internally or through its affiliation with Metamor, it
may, based on timing and cost considerations, acquire technologies or
products from third parties.
The Company's product development efforts are built around its analysis of
market opportunities. That analysis includes a review of existing or
potential competition by the developers of the key operating systems or other
third-party vendors. After an opportunity is identified, business
development with sales and marketing input prepares a Product Requirements
Document ("PRD") outlining the market opportunity and the product features
needed to address it.
In developing new products, the Company strives to meet the following
standards in product development:
- STANDARDS COMPLIANCE AND NETWORK COMPATIBILITY. The Company's
products comply with industry standards and are designed to be
compatible with the leading network and desktop PC
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operating systems, including Novell's NetWare and Microsoft's
Windows NT. To that end, the Company's products are currently
developed using Microsoft Visual C++ and Novell toolkits.
- EASE OF USE. The Company's products are designed to function without
extensive and continual user involvement. The aim is to simplify, not
complicate, the user's work environment.
- EASE OF ADMINISTRATION. The Company has extended its ease-of-use
concept to network administration with the Citadel Network
Administrator, which is designed to provide central management and
security features with the ability to "plug and play" additional
functions at a low cost.
- COST EFFECTIVENESS. The Company provides products at a price and
performance level that the Company believes offer superior network and
PC security and administration options at affordable prices.
Schedules for the development of high technology products are inherently
difficult to predict, and there can be no assurance that the Company will
achieve targeted initial customer shipment dates for any of its products, or
at all.
The Company accounts for software development costs in accordance with SFAS
No. 86 issued by FASB. Under this pronouncement the Company is required to
capitalize software development costs after technological feasibility of a
project is established and must cease capitalizing such costs when the
products derived from the project are available for sale, lease or otherwise
marketed. After which, capitalized costs are amortized on a
product-by-product basis, based on the greater of (a) the amount computed by
the straight-line method over the estimated useful life of the product or (b)
the amount computed by using the ratio that current gross revenues bear to
the total of current and anticipated future revenues. 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 product
for which the net book value is in excess of its net realizable value. It is
reasonably possible that future events may cause a reduction in the
amortization period of software costs.
The Company maintains a core software development staff at its corporate
office to maintain existing code bases and define the Company's approach in
developing new technologies and products to meet market opportunities. Once
a product design has been finalized, the actual final development work is
either performed in-house or outsourced to Millennium, Metamor's software
development operation, depending on project scope and resource schedules.
The Company anticipates that it will continue to commit substantial resources
to research and development in the future.
The Company recently introduced C:\More!, WinShield NT and WinShield Network
and is in the beta testing on CPR-NT and FolderBolt for Windows 95 and NT.
The Company is currently in development on its Citadel Secure Desktop
product. Planned releases on all three products are scheduled for the second
and third quarters of the Company's 1999 fiscal year. The Company also
intends, with its resources and the resources available to the Company from
Metamor, to introduce additional products and upgrades to existing products
that continue to address current and future end user needs.
CLIENT SUPPORT AND WARRANTIES
The Company believes that retention of customers is a key element of its
future success. Therefore, the Company is dedicated to the highest level of
customer support and satisfaction. The Company encourages its sales
employees in their interaction with a customer to be flexible and innovative
to ensure that the customer's needs are met. The Company's specialized
information systems also further the Company's customer service goals. They
enable the Company's employees to enter comments regarding a customer's
order, as well as comments regarding feedback, both positive and negative,
from the customer. These comments can then be accessed by other employees,
allowing them to quickly
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reference a particular customer's preferences, needs, and past ordering
practices, among other information.
The Company's products are generally warranted to be free of defects in
materials and workmanship for 90 days. The Company offers yearly maintenance
contracts on most of its software and basic technical support and replacement
of defective media.
MANUFACTURING AND SUPPLIERS
The Company prepares master software disks, user manuals and packaging for
certain products and out-sources production of other products. Certain of
the Company's disk duplication, as well as its product packaging, is
performed by the Company at its offices, while the other disk duplication and
product packaging and printing of user manuals and related materials is
performed to the Company's specifications by outside sources. During peak
demand, the Company may use outside sources to perform disk duplication and
product packaging services. To date, the Company has not experienced any
material difficulties or delays in manufacture through an interruption in its
own production or the production of any suppliers. Because of the generally
short cycle between order and shipment, The Company does not believe that its
backlog as of a particular date is indicative of future sales.
CUSTOMERS
The Company's customers include many Fortune 2000 companies, governmental and
educational agencies and individual PC users, and there appears to be a
strong need for the Company's products within these market segments. There
are no assurances that these customers will continue to utilize the
Company's products in the future.
COMPETITION
The security and administration software industry is intensely competitive
and rapidly changing. The Company competes against large companies (such as
Microsoft, Novell, Computer Associates, McAfee, Symantec and others) that
offer network and desktop PC security and administration software as a
segment of their businesses. The Company also competes with a large number
of small companies that offer security and administration software for
networks and desktop PCs as a portion of their product line. Some of these
competitors offer products that address multiple aspects of network and
desktop security and administration and management, while other competitors
market products that provide narrow solutions. Many of the Company's
competitors have longer operating histories and significantly greater
financial, technical, sales, marketing and other resources, as well as
greater name recognition and a larger installed customer base, than the
Company. Further, many competitors have established relationships with
customers of the Company and end users of the Company's products. The
Company's competitors could, in the future, introduce products with more
features and lower prices than the Company's product offerings. These
companies could also bundle existing or new products with other, more
established products in order to compete with the Company.
The Company and its competitors generally compete on the basis of product
features and functions, product architecture, product quality, the ability of
products to run on a variety of different network and desktop operating
systems, technical support and other related services, and price/performance
features. Based on these factors, the Company believes that its products are
well positioned in the market and that it has targeted promising niche
opportunities.
An example of such strategic niche targeting is the Company's CPR product.
Most software developers have focused on high-level network management and
disaster recovery (i.e., backup and restore) products. On the high-end of
network management, IBM, Computer Associates, and Hewlett-Packard
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fight for market share. Their products focus on managing the installation,
setup, and day-to-day operations of large heterogeneous networks. On the
lower end, companies like Intel, Seagate, Symantec, and McAfee have products
that focus on data backup and recovery, software distribution and metering,
auditing, anti-virus and PC system repair. CPR targets a need that to date
has not been addressed - unattended detection, evaluation, and resolution of
network server problems and failures. Although some of CPR's features can be
found in other network products, those products require manual intervention
by network administrators, rather than 24 hour a day automatic supervision of
the network.
Many of the Company's current and potential competitors have significantly
greater financial, technical, marketing and other resources than the Company.
As a result, they may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion, sale and support of their products
than the Company. The Company also expects that competition will increase as
a result of future software industry consolidations, which have occurred in
the past. In addition, current and potential competitors have established or
may establish cooperative relationships among themselves or with third
parties. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. In
addition, network and desktop PC operating system vendors could introduce new
or upgrade existing operating systems or environments that include security
and administration functionality offered by the Company's products, which
could render the Company's products obsolete and unmarketable. There can be
no assurance that the Company will be able to compete successfully against
current or future competitors or that competitive pressures faced by the
Company will not materially adversely affect its business, operating results
and financial conditions.
INTELLECTUAL PROPERTY
PURCHASED AND INTERNALLY DEVELOPED PROPRIETARY TECHNOLOGY.
During the course of calendar year 1996, the Company acquired several
products (generally through the purchase of other companies) with the aim of
using the base proprietary technology within each product to create a new
class of utility software. These product acquisitions included:
- Server Sentry
- Phantom of the Console
- Server CAM
- WinShield
- FolderBolt
In addition to these acquisitions, the Company also acquired licenses for
other important technologies which are included in C:\More!, the Company's
solution for cataloging and file retrieval in a multiple storage media.
C:\More! also incorporates a Company-developed robust search and retrieval
engine that ultimately will be available for use by other application
developers. The engine will allow developers to access cataloged information
directly from the Microsoft Office products as well as prevalent programming
languages such as C/C++, Visual Basic, and Java.
The Company's networking products are based upon proprietary technologies
that provide a core set of common user interface objects and libraries. This
core set is known as the Citadel Administrator Framework ("CAF"). CAF
enables the Company to produce new products or conform new acquisitions for
the Windows 32-bit environment in a fraction of the time normally spent
developing user interfaces. For
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example, a product that needs to include network features can be compiled in
such a way that the simple inclusion of a single Windows dynamic link library
will allow it to communicate within heterogeneous network environments such
as Novell NetWare and Microsoft Windows NT.
The Company has developed proprietary technology and expertise to manage
crashes on Novell or NT servers. To automate the response to these events,
the Company has developed the Citadel Server Crash Applications Programming
Interface ("API"). This API enables Server Sentry to intercept and document
many of the common causes behind server crashes and delay or even prevent the
crashes from occurring in the first place.
The core of NetOFF is the Company's proprietary Citadel Workstation Shutdown
Technology ("CWST"). CWST automatically shuts down and saves all work in
progress on a PC. CWST can be modified by the user to shut down new
applications, or the user can rely on CWST's built-in advanced application
identification capability.
To assist in its automation efforts, the Company has developed a portable
scripting language and execution tool that can run on Microsoft NT servers,
NT Workstation, Windows 95, and Novell NetWare servers. This technology is
currently the basis for Phantom of the Console. The scripting language can
also be launched by other applications and programming languages installed on
the same computer.
The Company is well prepared to develop new products as encryption becomes an
increasingly used tool in providing security in the distributed computing
environment. The Company's dynamic modular approach to encryption
applications supports its own proprietary encryption algorithms as well as
other encryption methods available in the marketplace. Where secure access
is a concern, WinShield contains proprietary components such as the WinShield
Extensible Platform, which allows users to specify additional features not
found in WinShield as initially installed, such as blocking a specific menu
from within a specific application.
INTELLECTUAL PROPERTY RIGHTS.
The Company regards certain features of its internal operations, software and
documentation as its intellectual property. The Company's success has been
and will be dependent in part on its ability to protect its proprietary
technology. The Company relies primarily upon a combination of copyright,
trademarks, trade secret laws, confidentiality agreements and other measures
to establish and protect its rights in its proprietary technology. The
Company does not have any patents or statutory copyrights on any of its
proprietary technology which the Company believes to be material to its
future success, and the Company cannot be certain that others will not
develop substantially equivalent or superseding proprietary technology.
Furthermore, there can be no assurance that any confidentiality agreements
between the Company and its employees will provide meaningful protection of
the Company's proprietary information in the event of any unauthorized use or
disclosure of such proprietary information.
There can be no assurance that the Company will not become the subject of
claims of infringement with respect to intellectual property rights
associated with the Company's 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 and could result
in costly litigation or lead the Company to enter into royalty or licensing
agreements rather than disputing the merits of such claims.
EMPLOYEES
As of May 26, 1998, the Company had 33 employees: 16 in sales and marketing,
4 in product research and development, 4 in production and operations, 4 in
customer service and technical support and 5 in administration, finance and
MIS. The Company anticipates adding additional employees in sales, marketing,
and research and development as needs and resources dictate. The Company's
future
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success depends in significant part upon the continued service of its key
technical and senior management personnel and its continuing ability to
attract and retain highly qualified technical and managerial personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company can retain its key technical and managerial employees or that it
can attract, assimilate or retain other highly qualified technical and
managerial personnel in the future. None of the Company's employees are
represented by a labor union. The Company has not experienced any work
stoppages and considers its relations with its employees to be good.
GOVERNMENT REGULATION
Government regulation has not had a material effect on the Company's conduct
of its business to date.
CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
In addition to the other information in this Report, the following risk
factors should be considered carefully in evaluating the Company and its
business. This disclosure is for the purpose of qualifying for the "safe
harbor" provisions of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. It
contains factors which could cause results to differ materially from such
forward-looking statements. These factors are in addition to any other
cautionary statements, written or oral, which may be made or referred to in
connection with any such forward-looking statement.
The following matters, among other things, may have a material adverse effect
on the business, financial condition, liquidity, results of operations or
prospects, financial or otherwise, of the Company. Reference to these
factors in the context of a forward-looking statement or statements shall be
deemed to be a statement that any or more of the following factors may cause
actual results to differ materially from those in such forward-looking
statement or statements.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; FUTURE OPERATING RESULTS
UNCERTAIN
The Company's quarterly operating results have in the past varied and may in
the future vary significantly depending on a number of factors, including the
size and timing of significant orders; increased competition; market
acceptance of new products, applications and product enhancements; changes in
pricing policies by the Company and its competitors; the ability of the
Company to timely develop, introduce and market new products, applications
and product enhancements and to control costs; the Company's success in
expanding its sales and marketing programs; technological changes in the LAN
security and administration market; the mix of sales among the Company's
channels; deferrals of
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customer orders in anticipation of new products, applications or product
enhancements; changes in Company strategy; personnel changes; and general
economic factors.
The Company's future revenues are difficult to predict. The Company operates
with virtually no order backlog because its software products typically are
shipped shortly after orders are received. As a result, product revenues in
any quarter are substantially dependent on orders booked and shipped.
Revenues for any future quarter are not predictable with any significant
degree of certainty. Product and software maintenance revenues are also
difficult to forecast because the LAN security and administration market is
rapidly evolving and the Company's sales cycle varies substantially from
customer to customer. Royalty and license revenues are substantially
dependent upon sales by OEMs of their products that incorporate the Company's
software. Accordingly, royalty and license revenues are subject to OEMs'
product cycles, which are also difficult to predict. Royalty and license
revenues are further impacted by fluctuations in licensing activity from
quarter-to-quarter, because initial license fees generally are non-recurring
and recognized upon the signing of the license agreement. The Company's
expense levels are based, in part, on its expectations as to future revenues.
If revenue levels are below expectations, operating results are likely to be
adversely affected. Net income may be disproportionately affected by a
reduction in revenues because a proportionately smaller amount of the
Company's expenses varies with its revenues. As a result, the Company
believes that period-to-period comparisons of its results of operations are
not necessarily meaningful and should not be relied upon as indications of
future performance. Due to all of the foregoing factors, it is possible that
in future quarters the Company's operating results may be below the
expectations of public market analysts and investors. In such event, the
price of the Company's common stock would likely be materially adversely
affected.
COMPETITION
The network security and administration market is intensely competitive,
highly fragmented and characterized by rapidly changing technology and
evolving standards. Competitors vary in size and in the scope and breadth of
the products and services offered. The Company's major competitors on the
Novell NetWare and Windows NT platforms include Computer Associates, McAfee,
Symantec and others, all of which have greater financial resources than the
Company. The Company also expects increased competition from systems and
network management companies, especially those that have historically focused
on the mainframe market and are broadening their focus to include the
client/server market. In addition, because there are relatively low barriers
to entry in the software market, the Company expects additional competition
from other established and emerging companies. Increased competition is
likely to result in price reductions, reduced gross margins and loss of
market share, any of which could adversely affect the Company's business,
operating results and financial condition.
Many of the Company's current and potential competitors have significantly
greater financial, technical, marketing and other resources than the Company.
As a result, they may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion, sale and support of their products
than the Company. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or
with third parties. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. In addition, network operating system vendors could introduce new or
upgrade existing operating systems or environments that include storage
management functionality offered by the Company's products, which could
render the Company's products obsolete and unmarketable. There can be no
assurance that the Company will be able to compete successfully against
current or future competitors or that competitive pressures faced by the
Company will not adversely affect its business, operating results and
financial condition.
DEPENDENCE ON NEW SOFTWARE PRODUCTS; RAPID TECHNOLOGICAL CHANGE
The security and administration software market is characterized by rapid
technological change, changing customer needs, frequent new software product
introductions and evolving industry standards. The introduction of products
embodying new technologies and the emergence of new industry standards
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could render the Company's existing products obsolete and unmarketable. The
Company's future success will depend upon its ability to develop and
introduce new software products (including new releases, applications and
enhancements) on a timely basis that keep pace with technological
developments and emerging industry standards and address the increasingly
sophisticated needs of its customers. There can be no assurance that the
Company will be successful in developing and marketing new products that
respond to technological changes or evolving industry standards, that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these new products, or
that its new products will adequately meet the requirements of the
marketplace and achieve market acceptance. If the Company is unable, for
technological or other reasons, to develop and introduce new products in a
timely manner in response to changing market conditions or customer
requirements, the Company's business, operating results and financial
condition will be adversely affected. The Company currently has plans to
introduce and market several potential new products and upgrades in the next
twelve months. Due to the complexity of software products and the difficulty
in gauging the engineering effort required to produce these potential new
products and upgrades, such potential new products and upgrades are subject
to significant technical risks. There can be no assurance that such
potential new products and upgrades will be introduced on a timely basis or
at all. In the past, the Company has experienced delays in the commencement
of commercial shipments of its new products and upgrades, resulting in the
loss of customers and delay or loss of product revenues. If potential new
products and upgrades are delayed or do not achieve market acceptance, the
Company's business, operating results and financial condition will be
adversely affected.
Software products as complex as those offered by the Company may contain
undetected errors or failures when first introduced or as new versions are
released. The Company has in the past discovered software errors in certain
of its new products after their introduction and has experienced delays or
lost revenues during the period required to correct these errors. Although
the Company has not experienced material adverse effects resulting from any
such errors to date, there can be no assurance that, despite testing by the
Company and by current and potential customers, errors will not be found in
new products after commencement of commercial shipments, resulting in loss of
or delay in market acceptance, which could have a material adverse effect
upon the Company's business, operating results and financial condition.
RELIANCE ON MICROSOFT AND NOVELL TECHNOLOGY
The Company's software products are designed for Microsoft technologies,
including Windows NT and Windows 95, and Novell Netware. Although the
Company believes that Microsoft and Novell technologies are and will be
widely utilized by businesses in the corporate market, no assurances can be
given that these businesses will actually adopt such technologies as
anticipated or will not in the future migrate to other computing technologies
that the Company does not support. Moreover, the Company's strategy will
require that the Company's products and technology be compatible with new
developments in Microsoft and Novell technologies, and there can be no
assurances that the Company will be able to develop compatible products.
RISK ASSOCIATED WITH STRATEGY OF EXPANDING RESELLER AND OEM CHANNELS
Historically, the Company used primarily a direct sales model, complemented
with a telesales force, for the sale of its software products. In fiscal
1998, the Company began to expand its distribution efforts to include third
party resellers in both the United States and internationally. To increase
the Company's growth will require the Company to expand its direct sales
force and add distributors, system integrators and value added resellers
(collectively, "resellers") to market, sell, and support the Company's
software products. The Company will be increasingly dependent upon resellers
for domestic and international sales. The Company has only limited experience
in marketing its products through resellers. The expansion of the Company's
distribution network and its direct sales force will require the expenditure
of substantial resources. There can be no assurance that the Company will be
able to expand its distribution channels successfully.
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Even if the Company is successful in its expansion into the distribution
channel, the Company's agreements with resellers will generally not be
exclusive and in many cases may be terminated by either party without cause.
Many of the Company's resellers will carry product lines that are competitive
with those of the Company. Therefore, there can be no assurance that these
resellers will give a high priority to the marketing of the Company's
products and they may, in fact, give a higher priority to other products,
including the products of competitors. Events or occurrences of this nature
could have a material adverse affect on the Company's business, operating
results and financial condition. The Company's results of operations could
also be adversely affected by changes in reseller inventory strategies, which
could occur rapidly, and in many cases, may not be related to end user
demand. There can be no assurance that the Company will be successful in
retaining resellers or if retained such resellers will be successful in
selling and marketing the Company's products.
In addition to the above, an integral part of the Company's sales strategy is
to increase the proportion of the Company's customers licensed through OEMs.
As with resellers, the Company has limited experience in dealing with OEMs.
The Company is investing and plans to continue to invest significant
resources to develop this channel, which could materially affect the
Company's operating performance. There can be no assurances that the Company
will be successful in its efforts to increase the revenues or profits generated
by this channel.
INTERNATIONAL OPERATIONS; RISKS ASSOCIATED WITH INTERNATIONAL SALES
The Company believes that its growth and profitability will depend in part on
its expansion into international markets and the Company has recently entered
into affiliations in the UK and Japan. While the Company has taken steps to
minimize the financial exposure of such ventures, there can be no assurances
that its products will be successful overseas and that these ventures will
not have an adverse impact on the financial condition of the Company. In
addition, in order for the Company to successfully expand international sales
significant management attention and financial resources could be required
and could have an adverse effect on the Company's operating margins. In
addition, the Company relies significantly on its distributors and other
resellers in international sales efforts, that are not employees of the
Company and do not offer the Company's products exclusively, and there can be
no assurance that they will continue to market the Company's products.
Additional risks inherent in the Company's international business activities
generally include unexpected changes in regulatory requirements, fluctuations
in the values of currencies, tariffs and other trade barriers, costs to
localize products, lack of acceptance of localized products, if any, in
foreign countries, longer accounts receivable payment cycles, difficulties in
managing international operations, potentially adverse tax consequences
including restrictions on the repatriation of earnings, and the burdens of
complying with a wide variety of foreign laws. There can be no assurance
that such factors will not have a material adverse effect on the Company's
future international sales and the Company's business, operating results and
financial condition.
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MANAGEMENT OF EXPANDING OPERATIONS
In the event the Company experiences a period of significant expansion of its
operations such expansion could put a significant strain upon the Company's
management systems and resources. In addition, such expansion will require the
Company to hire a significant number of employees. The Company may also need to
expand the geographic scope of its customer base and operations. This expansion
could result in substantial demands on the Company's management resources. The
Company's ability to compete effectively and to manage future expansion of its
operations, if any, will require the Company to continue to improve its
financial and management controls, reporting systems and procedures on a timely
basis and expand, train and manage its employee work force. There can be no
assurance that the Company will be able to do any of these successfully. The
Company's failure to do so could have a material adverse effect upon the
Company's business, operating results and financial condition.
DEPENDENCE UPON KEY PERSONNEL
The Company's future performance also depends in significant part upon the
continued service of its key technical and senior executive and sales
management personnel, only some of whom are covered by employment contracts.
The loss of the services of one or more of the Company's officers or other
key employees could have a material adverse effect on the Company's business,
operating results and financial condition. The Company's future success also
depends on its continuing ability to attract and retain highly qualified
technical and managerial personnel. Competition for such personnel is
intense, and there can be no assurance that the Company can retain its key
technical and managerial employees or that it can attract, or retain other
highly qualified technical and managerial personnel in the future.
DEPENDENCE ON GROWTH IN THE NETWORK STORAGE MANAGEMENT MARKET; GENERAL
ECONOMIC AND MARKET CONDITIONS
Substantially all of the Company's operating business is in the network and
desktop security and administration software market, which is still an
emerging market. The Company's future financial performance will depend in
large part on continued growth in the number of organizations adopting
security and administration solutions for their client/server and desktop
environments. There can be no assurance that the market for network and
desktop security and administration will continue to grow. If the security
and administration software market fails to grow or grows more slowly than
the Company currently anticipates, the Company's business, operating results
and financial condition would be adversely affected. During recent years,
segments of the computer industry have experienced significant economic
downturns characterized by decreased product demand, production overcapacity,
price erosion, work slowdowns and layoffs. The Company's operations may in
the future experience substantial fluctuations from period to period as a
consequence of such industry patterns, general economic conditions affecting
the timing of orders from major customers, and other factors affecting
capital spending. There can be no assurance that such factors will not have
a material adverse effect on the Company's business, operating results or
financial condition.
DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT
The Company depends significantly upon proprietary technology. The Company
relies on trade secrecy laws, confidentiality agreements and contractual
provisions to protect its proprietary technology. The Company seeks to
protect its software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection. The Company
does not have any patents or statutory copyrights on any of its proprietary
technology which the Company believes to be material to its future success.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of the Company's products or to obtain
and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult, and although the
Company is unable to determine the extent to which piracy of its software
products exists, software piracy can be
21
<PAGE>
expected to be a persistent problem. In selling its products, the Company
relies primarily on "shrink wrap" licenses that are not signed by licensees,
and, therefore, such licenses may be unenforceable under the laws of certain
jurisdictions. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to as great an extent as do the laws
of the United States. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology substantially
equivalent or superceding proprietary technology. Furthermore, there can be
no assurance that any confidentiality agreements between the Company and its
employees will provide meaningful protection of the Company's proprietary
information, in the event of any unauthorized use or disclosure thereof.
There has also been a substantial amount of litigation in the software
industry regarding intellectual property rights. There can be no assurance
that the Company will not become the subject of claims of infringement with
respect to intellectual property rights associated with the Company's current
or future products, trademarks or other proprietary rights. The Company
expects that software product developers will increasingly be subject to
infringement claims as the number of products and competitors in the
Company's industry segment grows and the functionality of products in
different industry segments overlaps. Any such claims, whether initiated by
the Company or others and whether they are with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company or at all, which could have a material adverse
effect upon the Company's business, operating results and financial condition.
PRODUCT LIABILITY
The Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims. In selling its products, the Company relies primarily on
"shrink wrap" licenses that are not signed by licensees, and, therefore, such
licenses may be unenforceable under the laws of certain jurisdictions. As a
result of these and other factors, the limitation of liability provisions
contained in the Company's license agreements may not always be effective.
The Company's products can be used to secure and administer critical
operating systems within an organization, and, as a result, the sale and
support of products by the Company may entail the risk of product liability
claims. A successful product liability claim brought against the Company
could have a material adverse effect upon the Company's business, operating
results and financial condition.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years, computer systems
and/or software used by many companies will need to be upgraded to comply
with such "Year 2000" requirements. Systems that do not properly recognize
such information could generate erroneous data or cause a system to fail.
Significant uncertainty exists in the software industry concerning the
potential effects associated with such compliance. Management does not
anticipate that the Company will incur significant operating expenses or be
required to invest heavily in computer systems improvements to be Year 2000
compliant. Although the Company believes its software products are Year 2000
compliant, there can be no assurance that the Company's software products
contain all the necessary software routines and programs for the accurate
calculation, display, storage and manipulation of data involving dates. The
Company believes that the purchasing patterns of customers and potential
customers may be affected by Year 2000 issues as companies expend significant
resources to correct or patch their current software systems for Year 2000
compliance. These expenditures may result in reduced funds available to
purchase products such as those offered by the Company. The occurrence of
any of the foregoing could have a material adverse effect on the Company's
business, operating results or financial condition.
Although the Company believes the software and hardware it uses internally
comply with Year 2000 requirements and is not aware of any material
operational issues or costs associated with preparing its
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internally used software and hardware for the Year 2000, there can be no
assurances that the Company will not experience serious, unanticipated
negative consequences and/or material costs caused by undetected errors or
defects in the technology used in its internal systems. The occurrence of
any of the foregoing could have a material adverse effect on the Company's
business, operating results or financial condition.
POSSIBLE VOLATILITY OF STOCK PRICE
The trading price of the Company's common stock has been subject to wide
fluctuations throughout its history. The trading price of the Company's
common stock could be subject to wide fluctuations in the future in response
to quarterly variations in operating results, announcements of technological
innovations or new products, applications or product enhancements by the
Company or its competitors, changes in financial estimates by securities
analysts and other events or factors. In addition, the stock market has
experienced volatility that has particularly affected the market prices of
equity securities of many high technology companies and that often has been
unrelated to the operating performance of such companies. These broad market
fluctuations may adversely affect the market price of the Company's common
stock.
NEED FOR ADDITIONAL FINANCING
The Company currently funds product development and the expansion of sales
and marketing activities through existing cash reserves and cash from
operations and issuances of securities. In the event that cash from
operations and other available funds prove to be insufficient to fund the
Company's presently anticipated operations, the Company will be required to
seek additional financing. In May 1998, the Company sold shares of
convertible preferred stock to Metamor Worldwide, a holder of approximately
13% of the Company's outstanding common stock, for $2,000,000, and 2,000,000
shares of the Company's Common Stock to Icarus Investments I, Ltd., for
$2,500,000. There can be no assurance that, if additional financing is
required, it will be available on acceptable terms, or at all. Nor can any
assurances be given that Metamor or Icarus would be willing to fund any
additional operational requirements of the Company in the future.
Additional financing may involve substantial dilution to the interests of the
Company's then-current shareholders.
LEGAL PROCEEDINGS
The Company is involved in certain legal proceedings as described in "Item 3.
Legal Proceedings." While the Company intends to defend such lawsuits,
adverse decisions or settlements, and the costs of defending such suits,
could have a material adverse effect on the Company.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases its office premises located at 3811 Turtle Creek Blvd.,
Suite 600, Dallas, Texas, 75219-4421, pursuant to a lease that expires in
2001 with two five-year renewal options. 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.
The telephone number of its principal office is (214) 520-9292. The Company
maintains a site on the World Wide Web at http://www.citadel.com.
ITEM 3. LEGAL PROCEEDINGS
A former employee of LoneStar (the Company's predecessor) 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,
were obligated to pay the exercise price for certain stock options, and
breached a purported agreement to register certain stock held by the
plaintiff. The plaintiff is seeking damages of approximately $2,300,000,
plus attorneys' fees, pre- and post-judgement interest and costs of the
lawsuit. The Company and the individual believe
23
<PAGE>
such claims are without merit and intend to vigorously defend against the
claims and are considering filing counter-claims. The Company has filed an
answer in the case, styled Heredia v. Citadel, et. al., in the 298th Court of
Dallas County, Texas.
Two former employees of the Company have lawsuits pending against the Company
demanding payment of a promissory note issued in connection with the
acquisition of Kent-Marsh and Astonishing Developments, Inc. and are seeking
damages in excess of $400,000. The Company reached a settlement with one of
the employees under the terms of a promissory note and agreed judgment. The
court severed the claims of the remaining party, who amended his claims to
include amounts allegedly owing under an employment agreement (in the amount
of approximately $168,000). The Company believes it has defenses to payment
under the note and employment agreement and intends to vigorously defend
against the lawsuit and pursue counterclaims. The Company has filed an
answer in the cases, styled Nesbitt & Wesolek v. Citadel, and Nesbitt v.
Citadel in the 193rd District Court of Dallas County, Texas.
On January 7, 1998, the Company's former Houston landlord filed a lawsuit
against the Company, styled Lenhndorff Four Oaks Place Joint Venture v.
Citadel, in the 11th Judicial District Court of Harris County, Texas,
alleging that the Company breached a certain lease covering the Company's
former Houston office space. The suit seeks damages to date of approximately
$180,000, plus attorney's fees, pre and post judgment interest and court
costs. The Company believes that it has viable defenses against such a claim
and is in the process of filing a counter-suit against the plaintiff.
The Company, and its president, are involved in an arbitration proceeding,
styled Vestcom Ltd. v. Citadel Computer Systems, Incorporated before the
American Arbitration Association in Los Angeles, California. Vestcom claims
it is entitled to compensation and a finder's fee for introducing the Company
to a third party and is seeking damages of $100,000 in shares of the
Company's common stock plus 50% of additional consideration paid by the
Company to such third party. The Company and its president believe they have
defenses to such claim. Vestcom agreed to stay the arbitration proceeding
pending a decision on one of the Company's defenses in Texas state court.
The case is styled Citadel Computer Systems Inc. and Steven B. Solomon V.
Vestcom, Ltd., in the 193rd Judicial District Court in Dallas County, Texas.
In June 1998, the Texas state court made an oral ruling in favor of the
Company and its president that the purported agreement was a forgery. In the
event the Court issues a written opinion in accordance with its oral ruling,
the arbitration proceeding should be permanently enjoined. The Company
intends to vigorously defend against the claim.
On October 12, 1997, five former employees of the Company filed a lawsuit
against the Company and one current and one former officer and director. The
suit alleges that the Company and/or the individuals owe the plaintiffs free
trading stock options in lieu of certain amounts claimed to be due to them
for salary, bonus or override compensation, and seeks damages, attorney's
fees, pre- and post- judgment interest, and costs allegedly in excess of
$4,000,000. The Company and the individuals believe such claims are without
merit and intend to vigorously defend against the claims. The lawsuit is
styled Marks, Marks, Ranshaw, Colquitt & Lauratis v. Citadel Computer
Systems, Inc., et al., in the 189th Judicial District Court of Harris County,
Texas.
At this time, the Company is unable to predict the ultimate outcome of these
suits, the costs associated with defending the claims and pursuing
counterclaims, and monetary compensation awarded, if any.
The Company is also 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
On February 26, 1998, the Company held its Annual Stockholders Meeting, at
which time the stockholders of the Company approved the following matters:
PROPOSAL #1. The election of following individuals as directors of the
Company: Chris Economou (for - 20,003,285, withheld - 118,866); Gilbert
Gertner (for - 20,003,275, withheld - 118,876); Kenneth Johnsen (for -
20,006,835, withheld - 115,316); Victor Kiam II (for - 19,961,135, withheld -
161,016); Mark Rogers (for - 20,004,335, withheld - 117,816); Dr. Axel
Sawallich (for -20,006,835, withheld - 115,316); and Steven Solomon (for -
20,001,025, withheld - 121,126).
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PROPOSAL #2. Amendment to the Company's certificate of incorporation to
change the name of the Company to Citadel Technology, Inc. (for - 20,013,184,
against - 5,710, abstain - 103,257).
PROPOSAL #3. Amendment of the Company's certificate of incorporation to
increase the Company's authorized shares of common stock to 60,000,000 shares
(for- 19,701,481, against - 308,406, abstain - 112,264).
PROPOSAL #4. The ratification of the selection of Grant Thornton, LLP,
as the Company's independent certified public accountants for the fiscal year
ending February 28, 1998 (for - 19,972,581, against - 18,104, abstain
- -131,466).
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 CITN. 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-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 NOFF from May 4, 1996 to March 26, 1998.
<TABLE>
- -------------------------------------------------------------------------
FISCAL YEAR BID ASK
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Quarter High Low High Low
- -------------------------------------------------------------------------
1997
1st Quarter 18.38 3.50 19.00 4.00
- -------------------------------------------------------------------------
2nd Quarter 13.75 3.00 14.00 3.50
- -------------------------------------------------------------------------
3rd Quarter 4.63 1.13 4.75 1.19
- -------------------------------------------------------------------------
4th Quarter 1.88 .84 1.94 .91
- -------------------------------------------------------------------------
1998
1st Quarter .88 .25 .97 .28
- -------------------------------------------------------------------------
2nd Quarter .69 .15 .75 .17
- -------------------------------------------------------------------------
3rd Quarter .90 .39 .93 .41
- -------------------------------------------------------------------------
4th Quarter .55 .18 .59 .22
- -------------------------------------------------------------------------
1999
1st Quarter 1.94 .35 1.97 .35
- -------------------------------------------------------------------------
2nd Quarter
(through 6/16/98) 1.81 1.16 1.88 1.22
- -------------------------------------------------------------------------
</TABLE>
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. The Company has
issued preferred stock, which entitles the holders thereof to preferences as
to payment of dividends and liquidation proceeds.
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<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES
In January 1998, the Company received a loan in the amount of $400,000 from
Thomas E. Oxley. The loan bore interest at a rate of 5% per annum and was
payable in full on or before January 1999. In connection with the loan, Mr.
Oxley received warrants to purchase 200,000 shares of common stock at $.32
per share (the then fair market value of the Company's common stock at the
date of the transaction). The warrants vest immediately and expire on January
5,1999. Subsequent to the end of the Company's 1998 fiscal year, Mr. Oxley
converted this debt into shares of the Company's Common Stock. Such
securities were not registered under the Securities Act of 1933, as amended
(the "Securities Act"), in reliance upon Section 4(2) of the Securities Act
and Rule 506 of Regulation D thereunder. No underwriters were involved in
connection with the sale of the securities.
In April 1998, the Company received a loan in the amount of $250,000 from
Edward Coppola. The loan bears interest at 10% per annum and is payable in
full on or before July 13, 1998. In connection with the loan, the Company
issued warrants to purchase 100,000 shares of the Company's common stock at
$.50 per share (the fair market value of the Company's common stock at the
date of the transaction). The warrants vest immediately and expire on April
1, 2001. Mr. Coppola has the right to convert this debt into shares of the
Company's Series D Convertible Redeemable Preferred Stock (the terms of which
are described below). Such securities were not registered under the
Securities Act, in reliance upon Section 4(2) of the Securities Act and Rule
506 of Regulation D thereunder. No underwriters were involved in connection
with the sale of the securities.
On April 30, 1998, the Company and Precision Capital Investors Limited
Partnership I ("Precision") entered into a Securities Purchase Agreement (the
"Purchase Agreement") pursuant to which Precision purchased shares of 6%
Series E Convertible Redeemable Preferred Stock for $500,000. The preferred
shares are convertible into common stock of the Company at the election of
the holder at any time after 90 days following the date of issuance, at a
conversion price equal to the lesser of (i) seventy-five percent (75%) of the
consecutive five-day average closing bid price for the Company's common stock
prior to the conversion date, or (ii) 115% of the closing market price as of
the closing date of the issuance of the Series E Preferred Stock ($.79 per
share). At any time after the date of issuance of the Series E Preferred
Stock, and prior to the 90th day following the date of original issuance,
this Company may redeem some or all of the outstanding Series E Preferred
Stock at a redemption price in cash equal to 107.5% of the original issue
price if redeemed within 30 days of issuance, 112.5% of the original issue
price if redeemed between 31 and 60 days of issuance, and 117.5% of the
original issue price if redeemed between 61 and 90 days of issuance, plus
accrued and unpaid dividends to the redemption date. In connection with the
transaction, the Company also issued warrants to purchase up to 150,000
shares of the Company's common stock at $0.75 per share (above the fair
market value of the Company's common stock at the date of the transaction).
Warrants to purchase 100,000 shares vest immediately, with the remaining
warrants to purchase 50,000 shares vesting 90 days from the date of closing.
All warrants expire on April 30, 2001. In the event the Company elects to
redeem the preferred stock within 90 days of its issuance, the warrants to
acquire the 50,000 shares will be nullified. The Company currently intends to
redeem the Series E Preferred Stock prior to June 30, 1998. Such securities
were not registered under the Securities Act, in reliance upon Section 4(2)
of the Securities Act and Rule 506 of Regulation D thereunder. Astor Capital
acted as placement agent for the purchase and received a fee in the amount of
8% of the proceeds of the offering.
Subsequent to the end of the Company's 1998 fiscal year, on May 15, 1998, the
Company and Metamor Worldwide, Inc. (formerly Corestaff, Inc.) ("Metamor")
entered into a Stock Purchase Agreement (the "Stock Purchase Agreement")
pursuant to which Metamor purchased 2,000 shares of Citadel's 11% Series D
Convertible Redeemable Preferred Stock for proceeds of $2,000,000. The
preferred shares are convertible into common stock of the Company at the
election of the holder at a conversion price equal to 150% of the twenty day
average of the closing bid price of the Company's common stock prior to the
closing of the purchase ($1.07 per share). The preferred shares will
automatically convert into shares of
26
<PAGE>
common stock upon (i) the closing of an underwritten public offering that
values the Company at a minimum equity value of $20,000,000 with proceeds to
the Company of a minimum of $10,000,000 before expenses, or (ii) the date at
which the Company's common stock maintains a closing bid price that is 100%
greater than the conversion price for at least 20 consecutive days. Such
shares were not registered under the Securities Act, in reliance upon Section
4(2) of the Securities Act and Rule 506 of Regulation D thereunder. No
underwriters were involved in connection with the sale of the shares under
the Stock Purchase Agreement. Beginning one year from the date of closing,
the Company may redeem all or part of the unconverted preferred shares based
on a redemption price equal to 120% of the issuance price if redeemed prior
to two years after the closing, 115% of the issuance price if redeemed prior
to three years after the closing, or 100% of the issuance price if redeemed
prior to four years after the closing.
Subsequent to the end of the Company's 1998 fiscal year, on May 26, 1998, the
Company and Icarus Investments I, Ltd. ("Icarus"). entered into a Stock
Purchase Agreement pursuant to which Icarus purchased 2,000,000 shares of
Citadel's Common Stock for proceeds of $2,500,000. Such shares were not
registered under the Securities Act, in reliance upon Section 4(2) of the
Securities Act and Rule 506 of Regulation D thereunder. No underwriters were
involved in connection with the sale of the shares to Icarus.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the financial
statements and notes thereto found elsewhere herein, as well as the disclosure
relating to forward-looking statements set forth in Item 1. Description of
Business--Certain Factors That May Affect Future Operating Results.
RESULTS OF OPERATIONS
YEAR ENDED FEBRUARY 28, 1998, AS COMPARED WITH YEAR ENDED FEBRUARY 28, 1997
During the fiscal year ended February 28, 1998, the Company had net sales of
$1,613,326, a decrease of $3,712,866, or 69.7%, over net sales of $5,326,192
during the fiscal year ended February 28, 1997. The Company realized this
reduction in sales as a result of the restructuring of its operations, and
the reduction in its workforce. The Company during the year changed from
its mainly telemarketing and tradeshow sales model to a more traditional VAR,
reseller, OEM and joint venture sales model. While the Company believes the
newly adopted sales strategies have better positioned the Company for the
future and expects increased sales in fiscal 1999, the revenues for fiscal
1998 were adversely affected by the restructuring and new sales strategy.
During fiscal 1998, the Company increased its efforts to enter into OEM and
joint venture relationships with strategic partners to increase its sales
channels. During the second quarter of fiscal 1998, the Company signed a
bundling agreement with Compaq relating to its WinShield product. In October
1997, the Company entered into a strategic alliance with Metamor in which
Metamor purchased 2,500,000 shares of the Company's common stock and the
parties agreed to certain joint research and development, technology
licensing, and marketing activities. In February 1998, the Company's
WinShield product was the "spotlight of the month" product on Microsoft's
educational software web site. In addition, the Company has recently started
to market its products internationally through the establishment of
distribution relationships in the UK and Japan. The Company is continuing to
explore similar arrangements with other market leaders in the technology
industry and the Company expects these channels will represent a significant
percentage of the Company's revenues in the future.
The Company introduced its C:\MORE! and WinShield 95 products into the retail
channel early in the fourth quarter of fiscal 1998 and has launched its
WinShield NT and Network products during the first quarter of fiscal 1999.
The Company is beta testing its CPR and FolderBolt 95 and NT products and
expects to launch these products during the second and third quarters of
fiscal 1999. The Company also expects to launch its Citadel Secure Desktop
product and other new products and upgrades in the future quarters of fiscal
1999 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 $78,429 during the fiscal year ended February 28, 1998, a
decrease of $226,007, or approximately 74.2%, from costs of sales of $304,436
incurred in the previous fiscal year. This resulted primarily from the
reduction in sales. As a percentage of net sales, costs of sales decreased
in the fiscal year ended February 28, 1998, to 4.9% from 5.7% in the prior
period. The decrease in cost of sales, on a percentage basis, was primarily
27
<PAGE>
the result of greater operational and order procurement efficiencies relating
to the fulfillment of customer orders during the year.
Selling, general and administrative expenses for the fiscal year ended
February 28, 1998, were $3,056,408, a decrease of $2,882,691, or 48.5%, over
selling, general and administrative expenses of $5,939,099 during the prior
fiscal year. Such expenses decreased primarily due to the Company's
restructuring, which included significantly reducing its workforce, the
consolidation of all operational, production and sales offices into its
Dallas location, the identification of areas for operational efficiencies and
the corresponding reduction in the associated operational expenses. While
selling, general and administrative expenses decreased during fiscal year
1998, the Company expects as revenues increase, it will allocate additional
resources to selling and
28
<PAGE>
marketing activities, thus these expenses may be expected to increase in
future periods.
Provision for uncollectible accounts decreased from $1,984,113 for the fiscal
year ending February 28, 1997 to $368,897 for fiscal year 1998, or a decrease
of $1,615,216, or 81.4%. Under the Company's previous telemarketing sales
model, the Company generally delivered its products to customers on a 30-day
trial basis following receipt of a signed trial agreement. The Company only
recognized revenue if the product had not been returned within the 30 days in
accordance with the terms and conditions of the trial agreement. Numerous
disagreements arose between the Company and its customers regarding the
customer's obligation to pay for products delivered. The Company believes
these agreements are legally binding contracts and intends to continue to
pursue the collection thereof. However, the Company provided an allowance
for returns and doubtful accounts of $2,500,000 and $681,000 as of February
28, 1997 and 1998, respectively, to cover the potential for uncollectible
accounts. Due to trouble encountered by the Company with this sales model,
the Company, during fiscal 1998, changed its sales model to a more
traditional VAR, reseller, OEM and joint venture model. As a result of this
change, the Company conflicts with its customer have been substantially
reduced and collections have been significantly improved.
Depreciation and amortization expense increased to $1,270,708 in the fiscal
year ended February 28, 1998, from $942,166, or an increase of 34.9% over
the fiscal year ended February 28, 1997. This increase is due to the
commencement of amortization on certain capitalized software development
costs relating to products that became available for sale. Management
expects that these expenses will continue to increase in the quarters to come
as additional products reach a salable state.
Research and development expenses charged to operations for the year ended
February 28, 1998 were $161,010 compared to $3,336,253 for the year ended
February 28, 1997, or a decrease of $3,175,243 or 95.2%. During fiscal year
1997, and in connection with certain acquisitions, the Company wrote-off
approximately $3,268,040 of purchased in-process research and development
costs that had not reached the working model stage and for which there was no
alternative use. The Company did not incur a similar expense in fiscal 1998.
The Company capitalized $568,963 and $457,321 in software development costs
for fiscal years 1998 and 1997, respectively. These costs will be amortized
over the estimated useful lives of the underlying products.
During the fiscal year ended February 28, 1998, the Company had a net loss
on sales of marketable securities of $199,672 versus $451,280 for the fiscal
year ended February 28, 1997. The loss for the fiscal year 1998 resulted
from the ultimate disposal of the Miami Subs stock. The loss for fiscal year
1997 resulted from a $1,000,000 charge related to the write-down of the Miami
Subs Stock pursuant to the sale of the restaurants, offset by a $548,720 gain
on the sale of certain marketable securities during the year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents at February 28, 1998 were $8,555, and
approximately $3,350,000 as of June 15, 1998.
Cash flows from operations was a negative $2,661,326 for the fiscal year
ended February 28, 1998, compared to negative $6,706,035 for the fiscal year
ended February 28, 1997. The decrease was due principally to the decreased
net loss of the Company for the year as a result of the Company's
restructuring efforts.
Cash used in investing activities was $4,780 in the fiscal year ended
February 28, 1998, compared to $1,562,464 in the prior year. This decrease
was primarily due to a decrease in
29
<PAGE>
capital expenditures and a decrease in the acquisitions of businesses and
software.
Cash flows provided by financing activities were $2,659,561 in the fiscal
year ended February 28, 1998, compared to $8,158,034 in the fiscal year ended
February 28, 1997. This decrease was due primarily to fewer funds being
raised this year as compared to last year through equity note and preferred
stock issuances. However, the Company does expect that it may require
additional funding in the future (see additional disclosure following
regarding subsequent debt and equity issuances).
In March 1996, in connection with the sale of restaurants owned by the
Company's predecessor to Miami Subs USA, Inc. ("Miami Subs"), the Company
received 1,325,000 shares of Miami Subs common stock and Miami Subs assumed
certain restaurant indebtedness. 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 the aforementioned
1,325,000 shares of Miami Subs common stock owned by the Company. The
Company determined that it could not recover its investment in the Miami Subs
stock and through a charge to earnings of $1,000,000 wrote down the
investment during the quarter ended May 31, 1996, to its market value as of
July 19, 1996. Subsequent to May 31, 1996, the Company through a charge to
equity further wrote down the investment in the Miami Subs stock to the
carrying value of the debt. In June 1997, the Company tendered the stock to
Miami Subs as payment in full of the $1,250,000 debt owed by the Company to
Miami Subs. In addition, to settle certain disputes between the Company and
Miami Subs, Miami Subs issued to the Company 200,000 shares of Miami Subs
common stock and agreed to assume additional indebtedness related the
Company's former restaurant operations. The Company sold the shares for
approximately $156,000 and used the proceeds for working capital.
In January 1998, the Company received a loan in the amount of $350,000 from
an individual. The loan bore interest at a rate of 5% per annum and was
payable in full on or before January 1999. In connection with the loan, the
Company issued warrants to purchase 200,000 shares of common stock.
Subsequent to the end of the Company's 1998 fiscal year, this debt was
converted into shares of the Company's Common Stock. See "Recent Sales of
Unregistered Securities."
As a result of the aforementioned factors, cash and cash equivalents
decreased by $6,545 in the fiscal year ended February 28, 1998.
On April 13, 1998, the Company received a loan in the amount of $250,000 from
an individual. The loan bears interest at 10% per annum and is payable in
full on or before July 13, 1998. In connection with the loan, the Company
issued warrants to purchase 100,000 shares of the Company's common stock. See
"Recent Sales of Unregistered Securities."
On April 30, 1998, the Company and Precision Capital Investors Limited
Partnership I ("Precision") entered into a Securities Purchase Agreement (the
"Purchase Agreement") pursuant to which Precision purchased shares of 6% Series
E Convertible Redeemable Preferred Stock for $500,000. See "Recent Sales of
Unregistered Securities."
On May 15, 1998, the Company and Metamor Worldwide, Inc. (formerly Corestaff,
Inc.) ("Metamor") entered into a Stock Purchase Agreement (the "Stock
Purchase Agreement") pursuant to which Metamor purchased 2,000 shares of
Citadel's 11% Series D Convertible Redeemable Preferred Stock for proceeds of
$2,000,000. See "Recent Sales of Unregistered Securities."
30
<PAGE>
Subsequent to the end of the Company's 1998 fiscal year, on May 26, 1998, the
Company and Icarus Investments I, Ltd. ("Icarus"). entered into a Stock
Purchase Agreement pursuant to which Icarus purchased 2,000,000 shares of
Citadel's Common Stock for proceeds of $2,500,000. See "Recent Sales of
Unregistered Securities."
INFLATION
Inflation did not have a material effect on the Company's results during the
periods discussed.
ACCOUNTING STANDARDS NOT ADOPTED
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and display of comprehensive income
and its components, as defined. SFAS No. 130 requires that all items that
must be recognized under accounting standards as components of comprehensive
income be reported in a financial statement displayed with the same
prominence as other financial statements. Adoption of SFAS No. 130 is not
expected to have a material effect on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," and supercedes FASB issued SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise. SFAS No. 131
requires public enterprises to report certain financial and descriptive
information about operating segments, as defined, in annual financial
statements and selected information in condensed financial statements for
interim periods issued to shareholders, if practical. SFAS No. 131 is not
expected to have a material impact on the Company's financial statements.
Both the aforementioned accounting standards are effective for years
beginning after December 15, 1997.
In October 1997, the Accounting Standards Executive Committee ("AcSec")
issued Statement of Position 97-2, Software Revenue Recognition ("SOP 97-2"),
which delineates the accounting for software product and maintenance
revenues. SOP 97-2 supercedes the Accounting Standards Executive Committee
Statement of Position 91-1, Software Revenue Recognition. In March 1998,
AcSec issued SOP 98-4 "Deferral of Effective Date of a Provision of SOP 97-2,
Software Revenue Recognition," in which certain provisions of SOP 97-2
have been deferred for one year. SOP 97-2 and 98-4 are effective for
transactions entered into after March 31, 1998. The Company is evaluating
the requirements of SOP 97-2 and 98-4, and the effects, if any, on the
Company's current revenue recognition policies.
31
<PAGE>
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
The Financial Statements for the fiscal year ended February 28, 1998, 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.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from the
sections entitled "Election of Directors" and "Executive Officers Of The
Company" contained in the Company's definitive 1998 Proxy Statement to be
filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as
amended.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
section entitled "Compensation of Executive Officers" contained in the
Company's definitive 1998 Proxy Statement to be filed pursuant to Regulation
14A of the Securities Exchange Act of 1934, as amended
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
section entitled "Security Ownership of Certain Individuals" contained in the
Company's definitive 1998 Proxy Statement to be filed pursuant to Regulation
14A of the Securities Exchange Act of 1934, as amended.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
section entitled "Certain Relationships and Related Transactions" contained
in the Company's definitive 1998 Proxy Statement to be filed pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
2.1 Second Amended and Restated Plan of Merger, dated February 29, 1996, by
and between 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).
32
<PAGE>
2.2 Purchase and Sale Agreement, dated March 1, 1996, by and between
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 Masters 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, 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 Securities and
Exchange Commission on June 10, 1996).
3.1 Certificate of Incorporation (incorporated by reference to the
Registration Statement on Form S-1, File No. 33-25462, for Apollo Resources,
Inc., on November 10, 1988, and declared effective January 4, 1989).
3.2 Certificate of Amendment to Certificate of Incorporation filed with the
Delaware Secretary of State on June 4, 1990 (incorporated by reference to
Exhibit 3.2 of the Company's Annual Report on Form 10-KSB for the fiscal year
ended February 29, 1996).
3.3 Bylaws (incorporated by reference to the Registration Statement on Form
S-1, File No. 33-25462, filed with the Securities and Exchange Commission on
November 10, 1988).
3.4 Certificate of Amendment to Certificate of Incorporation filed with the
Delaware Secretary of State on October 15, 1991 (incorporated by reference to
the Company's Annual Report on Form 10-KSB for the year ended December 31,
1991).
3.5 Certificate of Amendment to Certificate of Incorporation filed with the
Delaware Secretary of State on July 20, 1994 (incorporated by reference to
the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30,
1994).
3.6 Certificate of Amendment to Certificate of Incorporation filed with the
Delaware Secretary of State on December 11, 1995 (incorporated by reference
to the Company's Quarterly Report on Form 10-QSB for the quarter ended
December 31, 1995).
3.7 Certificate of Amendment to Certificate of Incorporation filed with the
Delaware Secretary of State on May 1, 1996 (incorporated by reference to
Exhibit 3.7 of the Company's Annual Report on Form 10-KSB for the fiscal year
ended February 29, 1996).
3.8 Certificate of Designations of Series A Preferred Stock. (incorporated
by reference to Exhibit 4 of the Company's Quarterly Report on Form 10-QSB
for the fiscal quarter ended May 31, 1996)
3.9 Certificate of Designations of Series B Preferred Stock (incorporated by
reference to Exhibit 4.2 of the Company's Quarterly Report on Form 10-QSB for
the fiscal quarter ended August 31, 1996).
33
<PAGE>
3.10 Certificate of Amendment to Certificate of Incorporation filed with the
Delaware Secretary of State on February 27, 1998 (incorporated by reference
to Exhibit 4.2 of the Company's Registration Statement on Form S-8 filed May
20, 1998, File No. 333-53131).
3.11 Certificate of Designations of Series C Preferred Stock (incorporated by
reference to Exhibit 4.6 of the Company's Registration Statement on Form S-8
filed May 20, 1998, File No. 333-53131).
3.12 Certificate of Designations of Series D Preferred Stock (incorporated by
reference to Exhibit 4.8 of the Company's Registration Statement on Form S-8
filed May 20, 1998, File No. 333-53131).
3.11 Certificate of Designations of Series E Preferred Stock (incorporated by
reference to Exhibit 4.7 of the Company's Registration Statement on Form S-8
filed May 20, 1998, File No. 333-53131).
*10.1 Employment Agreement dated July 15, 1997, by and between Citadel
Computer Systems Incorporated and Steven Solomon.
*10.2 Employment Agreement dated January 5, 1998, by and between Citadel
Computer Systems Incorporated and Bennett Klein.
*10.3 Employment Agreement dated June 1, 1997, by and between Citadel Computer
Systems Incorporated and Richard L. Travis, Jr.
10.4 Stock Purchase Agreement, dated August 16, 1996, among Citadel Computer
Systems Incorporated, Kent-Marsh Ltd., Inc., Bob Wesolek and Vance Nesbitt.
(incorporated by reference to Exhibit 2.1 of the Company's Current Report on
Form 8-K filed September 3, 1996)
10.5 Stock Purchase Agreement, dated August 16, 1996, among Citadel Computer
Systems Incorporated, Astonishing Developments, Inc., Bob Wesolek and Vance
Nesbitt (incorporated by reference to Exhibit 2.2 of the Company's Current
Report on Form 8-K filed September 3, 1996).
10.6 Agreement, dated April 11, 1997, among Citadel, George Sharp and Gil
Gertner (incorporated by reference to Exhibit 99.1 of the Company's Current
Report on Form 8-K filed April 11, 1997).
10.7 Form of Offshore Securities Subscription Agreement, Convertible Notes,
Warrants and Registration Rights Agreement between Citadel Computer Systems
Incorporated and First Bermuda Securities Limited (incorporated by reference
to Exhibits 99.1 through 99.4 of the Company's Current Report on Form 8-K
filed March 26, 1997).
10.8 Form of Offshore Securities Subscription Agreement, Convertible Notes,
Warrants and Registration Rights Agreement between Citadel Computer Systems
Incorporated and Willora Company Ltd. (incorporated by reference to Exhibits
99.1 through 99.4 of the Company's Current Report on Form 8-K filed April 28,
1997).
10.9 Form of Offshore Securities Subscription Agreement, Convertible Notes,
Warrants and Registration Rights Agreement between Citadel Computer Systems
Incorporated and Silenus Ltd. (incorporated by reference to Exhibits 99.1
through 99.4 of the Company's Current Report on Form 8-K filed June 24,
1997).
10.10 Purchase Agreement between Citadel and CORESTAFF, Inc., dated October
6, 1997 (incorporated by reference to Exhibit 10.10 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended February 28, 1997).
10.11 Warrant to Purchase Common Stock of Citadel issued to Worldwide
PetroMoly Inc. (incorporated by reference to Exhibit 10.11 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended February 28, 1997).
34
<PAGE>
*10.12 Series D Preferred Stock Purchase Agreement between Citadel and
METAMOR WORLDWIDE, Inc., dated May 15, 1998.
*10.13 Stock Purchase Agreement between Citadel and Precision Capital Limited
Partnership I, dated April 30, 1998.
*10.14 Stock Purchase Agreement between Citadel and Icarus Investments I,
Ltd., dated May 27, 1998.
*21 Subsidiaries of the Company.
*23.1 Consent of Grant Thornton LLP.
*27 Financial Data Schedule.
- --------------
* Filed herewith.
REPORTS ON FORM 8-K
The Company filed no Current Reports on Form 8-K for the fourth quarter of
the fiscal year ended February 28, 1998.
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 TECHNOLOGY, INC.
/s/ Steven B. Solomon
- --------------------------------------
Steven B. Solomon
President and Chief Executive Officer
Dated: 6/18/98
--------
35
<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:
Name and Title Date
- --------------
/s/ Victor K. Kiam, II 6/18/98
- ------------------------------------
Victor K. Kiam, II
Chairman of the Board of Directors
/s/ Steven B. Solomon 6/18/98
- ------------------------------------
Steven B. Solomon
President, Chief Executive Officer, Secretary and
Director (Principal Executive Officer)
/s/ Richard L. Travis, Jr. 6/18/98
- ------------------------------------
Richard L. Travis, Jr.
Chief Financial Officer and Chief Operating Officer
(Principal Accounting Officer)
- ------------------------------------
Gilbert Gertner
Director
/s/ Mark Rogers 6/18/98
- ------------------------------------
Mark Rogers
Director
/s/ Chris A. Economou 6/18/98
- ------------------------------------
Chris A. Economou
Director
/s/ Dr. Axel Sawallich 6/18/98
- ------------------------------------
Dr. Axel Sawallich
Director
/s/ Ken Johnsen 6/18/98
- ------------------------------------
Ken Johnsen
Director
36
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report to Independent Certified Public Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-5
Consolidated Statement of Stockholders' Equity (Deficit) F-6
Consolidated Statements of Cash Flows F-8
Notes to Consolidated Financial Statements F-10
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Citadel Technology, Inc.
We have audited the accompanying consolidated balance sheets of Citadel
Technology, Inc. as of February 28, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the years 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 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
Technology, Inc. as of February 28, 1998 and 1997, and the consolidated results
of its operations and its consolidated cash flows for each of the years
then ended, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
/s/ Grant Thornton LLP
Dallas, Texas
June 17, 1998
F-2
<PAGE>
CITADEL TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
February 28,
--------------------------
ASSETS 1998 1997
----------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 8,555 $ 15,100
Accounts receivable, less allowance for returns
and doubtful accounts of $681,000
and $625,000 435,615 727,422
Notes receivable from related parties 376,487 870,000
Marketable securities available for sale - 1,250,000
Other 129,493 57,106
---------- -----------
Total current assets 950,150 2,919,628
ACCOUNTS RECEIVABLE - NONCURRENT, less
allowance for returns and doubtful accounts of
$1,875,000 in 1997 - 1,875,000
PROPERTY AND EQUIPMENT, net 387,923 696,459
PURCHASED SOFTWARE, net of accumulated
amortization of $1,788,000 and $854,000 3,462,879 4,396,398
CAPITALIZED SOFTWARE DEVELOPMENT COSTS,
net of accumulated amortization of $150,000
and $19,000 1,011,432 573,388
OTHER ASSETS 350,650 263,220
---------- -----------
$6,163,034 $10,724,093
---------- -----------
---------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
CITADEL TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS - CONTINUED
<TABLE>
<CAPTION>
February 28,
--------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
----------- ------------
<S> <C> <C>
CURRENT LIABILITIES
Cash overdraft $ 10,249 $ 167,256
Current maturities of long-term debt 1,270,565 804,141
Notes payable 842,174 2,456,087
Accounts payable and accrued expenses 2,274,141 2,253,481
----------- -----------
Total current liabilities 4,397,129 5,680,965
LONG-TERM LIABILITIES
Debt, less current maturities 478,044 1,770,905
----------- -----------
Total liabilities 4,875,173 7,451,870
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common stock, $.01 par value per share;
authorized, 60,000,000 shares; issued
and outstanding, 25,881,328 shares in
1998 and 16,501,980 shares in 1997 258,813 165,020
Preferred stock, $.01 par value per share;
authorized, 1,000,000 shares;
issued and outstanding
Series B convertible, 50 shares in 1998 and
545 shares in 1997
(liquidation value $50,000 and $545,000) 1 5
Series C convertible, 5,000 shares in 1998
(liquidation value $500,000) 50 -
Equity notes 944,000 300,000
Additional paid-in capital 16,058,442 13,370,627
Accumulated deficit (13,473,206) (9,854,067)
Unrealized loss on securities available for sale - (355,772)
Treasury stock, at cost (4,164,613 shares in 1998
and 264,613 shares in 1997) (2,500,239) (353,590)
----------- -----------
Total stockholders' equity 1,287,861 3,272,223
----------- -----------
$ 6,163,034 $10,724,093
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CITADEL TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended February 28,
--------------------------
1998 1997
----------- ------------
<S> <C> <C>
REVENUES
Sales $1,638,853 $ 5,824,553
Less allowance for returns 25,527 498,361
----------- -----------
Net sales 1,613,326 5,326,192
COST OF SALES 78,429 304,436
----------- -----------
Gross profit 1,534,897 5,021,756
OPERATING EXPENSES
Selling, general and administrative expenses 3,056,408 5,939,099
Provision for uncollectible receivables 368,897 1,984,113
Depreciation and amortization 1,270,708 942,166
Research and development expense 161,010 3,336,253
----------- -----------
4,857,023 12,201,631
----------- -----------
Operating loss (3,322,126) (7,179,875)
OTHER INCOME (EXPENSE)
Interest expense (128,929) (253,557)
Write-down of marketable securities - (1,000,000)
Gain (loss) on sales of marketable securities (199,672) 548,720
Other 128,017 369,105
----------- -----------
(200,584) (335,732)
----------- -----------
NET LOSS $(3,522,710) $(7,515,607)
----------- -----------
Loss per share $(0.21) $(0.56)
----------- -----------
Weighted average shares outstanding 16,801,818 13,721,032
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CITADEL TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED
<TABLE>
<CAPTION>
Unrealized
loss on
Common stock securities Additional
--------------------- Preferred Equity available paid-in Accumulated Treasury
Shares Amount stock notes for sale capital deficit stock Total
---------- -------- --------- ------ ---------- ---------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 1, 1996 11,509,126 $115,091 $ - $ - $ - $2,405,144 $(2,204,746) $ - $ 315,489
Exercise of stock options
and warrants 240,282 2,403 - - - 639,259 - - 641,662
Sale of preferred stock -
3,490 shares, net of
issuance costs of $565,118 - - 35 - - 2,924,847 - - 2,924,882
Sale of equity notes, net of
issuance costs of $527,434 - - - 4,550,000 - (527,434) - - 4,022,566
Conversions to common
stock 3,633,623 36,337 (30) (4,250,000) - 4,213,693 - - -
Payment of dividends
Preferred stock 75,296 753 - - - 54,225 (54,978) - -
Equity notes 45,947 459 - - - 78,277 (78,736) - -
Notes payable converted
to warrants - - - - - 734,000 - - 734,000
Stock options issued for
services - - - - - 70,040 - - 70,040
Sale of common stock, net
of issuance costs of $87,059 357,706 3,577 - - - 845,775 - - 849,352
Unrealized loss on securities
available for sale - - - - (355,772) - - - (355,772)
Purchase of treasury
stock - 84,613 shares - - - - - - - (209,787) (209,787)
Sale of subsidiary for
common stock -
180,000 shares - - - - - - - (143,803) (143,803)
Acquisition of businesses 640,000 6,400 - - - 1,932,801 - - 1,939,201
Net loss - - - - - - (7,515,607) - (7,515,607)
---------- -------- --- ------- -------- ---------- ---------- -------- ----------
Balance at February 28,
1997 16,501,980 165,020 5 300,000 (355,772) 13,370,627 (9,854,067) (353,590) 3,272,223
---------- -------- --- ------- -------- ---------- ---------- -------- ----------
---------- -------- --- ------- -------- ---------- ---------- -------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CITADEL TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED
<TABLE>
<CAPTION>
Unrealized
loss on
Common stock securities Additional
-------------------- Preferred Equity available paid-in Accumulated Treasury
Shares Amount stock notes for sale capital deficit stock Total
---------- -------- --------- ------ ---------- ---------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise of stock options
and warrants 1,258,100 $ 12,581 $ - $ - $ - $ 376,197 $ - $ - $ 388,778
Sale of equity notes, net of
issuance costs of $182,244 - - - 1,625,000 - (182,244) - - 1,442,756
Sale of preferred stock -
5,000 shares, net of
issuance costs of $78,835 - - 50 - - 421,115 - - 421,165
Conversions to common stock
Debt, net of unamortized
debt issuance costs of
$38,667 2,964,093 29,641 - - - 871,685 - - 901,326
Preferred stock and equity
notes 2,285,257 22,852 (4) (481,000) - 458,152 - - -
Redemption of equity notes - - - (500,000) - (100,000) - - (600,000)
Payment of dividends on
equity notes 275,897 2,759 - - - 93,670 (96,429) - -
Common stock issued for
services 96,000 960 - - - 24,240 - - 25,200
Sale of common stock 2,500,000 25,000 - - - 725,000 - - 750,000
Purchase of treasury stock-
3,900,000 shares - - - - - - - (2,146,649) (2,146,649)
Change in unrealized
depreciation on
securities available
for sale - - - - 355,772 - - - 355,772
Net loss - - - - - - (3,522,710) - (3,522,710)
---------- -------- --- -------- -------- ----------- ------------ ----------- -----------
Balance at February 28,
1998 25,881,327 $258,813 $51 $944,000 $ - $16,058,442 $(13,473,206) $(2,500,239) $ 1,287,861
---------- -------- --- -------- -------- ----------- ------------ ----------- -----------
---------- -------- --- -------- -------- ----------- ------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
CITADEL TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended February 28,
--------------------------
1998 1997
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,522,701) $(7,515,607)
Adjustments to reconcile net loss to net cash used
by operating activities
Acquisition of in-process research and development - 3,268,040
Write-down of available for sale securities - 1,000,000
Depreciation and amortization 1,270,708 942,166
Stock and options issued for services 25,200 70,040
Loss (gain) on sale of securities 199,672 (548,720)
Provision for losses on accounts receivable
and sales returns 368,897 2,482,474
Changes in operating assets and liabilities
Accounts receivable (280,803) (4,489,829)
Other receivables (131,487) (870,000)
Other current assets (72,387) 48,400
Software development costs (568,963) (457,321)
Cash overdraft (157,007) 167,256
Accounts payable and accrued expenses 294,984 (442,733)
Other assets (87,430) (360,201)
---------- -----------
NET CASH USED BY OPERATING ACTIVITIES (2,661,326) (6,706,035)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of available for sale securities - (7,032,397)
Sales of available for sale securities - 7,581,117
Capital expenditures (160,880) (763,824)
Proceeds from sale of securities 156,100 -
Acquisition of businesses and software - (1,347,360)
---------- -----------
NET CASH USED BY INVESTING ACTIVITIES (4,780) (1,562,464)
---------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<PAGE>
CITADEL TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
Years ended February 28,
--------------------------
1998 1997
----------- ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable $ (628,441) $(1,439,127)
Proceeds from notes payable 514,528 -
Proceeds from long-term debt 489,865 1,583,522
Repayments on long-term debt (119,090) (215,036)
Proceeds from sale of preferred stock 421,165 2,924,882
Proceeds from sale of equity notes 1,442,756 4,022,566
Proceeds from sale of common stock 1,138,778 1,491,014
Purchase of treasury stock - (209,787)
Redemption of equity notes (600,000) -
---------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,659,861 8,158,034
---------- -----------
Net increase (decrease) in cash (6,545) (110,465)
Cash at beginning of the period 15,100 125,565
---------- -----------
Cash at end of the period $ 8,555 $ 15,100
---------- -----------
---------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-9
<PAGE>
CITADEL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 1998 and 1997
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The Company develops, markets and supports security and administration
products for both computer network and desktop personal computers. The
Company licenses the products through resellers, and directly to end-users,
in North America, Europe and Asia Pacific. The Company also licenses its
products for initial licensing fees to original equipment manufacturers
("OEM's") and receives ongoing royalties from OEMs' product sales.
During fiscal 1997, the Company primarily marketed and sold its products
directly to end-users through telemarketing and trade shows.
CHANGE OF NAME
On February 26, 1998, the Company changed its name to Citadel Technology,
Inc.
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.
REVENUE RECOGNITION
During fiscal 1998, the Company recognized revenues when a customer's
purchase order had been received, the software had been shipped (or
electronically delivered), the remaining obligations were insignificant and
the collection of the resulting receivables was probable.
Revenues generated from products sold through traditional channels where
the right of return exist are reduced by reserves for estimated product
returns. Such reserves are based on estimates developed by management. As
unused products in these channels are exposed to rapid changes in consumer
preferences or technological obsolescence due to new operating systems or
computing products, it is reasonably possible that these estimates may
change in the future.
Revenues related to significant post-contract support agreements (generally
product maintenance agreements) are deferred and recognized over the period
of the agreements.
F-10
<PAGE>
CITADEL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1998 and 1997
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
Royalty revenues are recognized as earned unless collection of such
revenues is not probable. When collection is not probable, revenues are
recognized as payments are received.
During fiscal 1997, the Company generally delivered its products to
customers on a thirty (30) day trial basis following receipt of a signed
trial agreement from the customer. The Company only recognized revenue if
the product had not been returned within 30 days in accordance with the
terms and conditions of the trial agreement. Numerous disagreements arose
between the Company and its customers regarding the customer's obligation
to pay for the products delivered. As a result, the Company provided an
allowance for returns and doubtful accounts of $681,000 and $2,500,000
during fiscal years 1998 and 1997, respectively, to cover potential
uncollectible accounts.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over estimated useful lives of the assets.
SOFTWARE COSTS
Purchased software is recorded at cost and is amortized by the straight-
line method over four to seven years.
The Company capitalizes software development costs when technological
feasibility has been established. Software development costs not
qualifying for capitalization are expensed as research and development
costs. Research and development expense totaled $161,010 and $3,336,253
in 1998 and 1997, respectively. Included in fiscal 1997 expense is
$3,268,040 representing amounts written off in connection with the
acquisitions referred to in Notes D. Capitalized costs are amortized using
the straight-line amortization using useful lives ranging from three to
five 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. Amortization expense was $1,083,479
and $643,233 in fiscal 1998 and 1997, respectively.
It is reasonably possible that future events could cause a reduction in the
amortization period of software costs.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation as prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock issued to
Employees" (Opinion No. 25) and the related interpretations. The pro forma
information required by Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (Statement No. 123) is
disclosed in Note H.
F-11
<PAGE>
CITADEL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1998 and 1997
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
INVESTMENT SECURITIES
The Company classifies investments as available for sale. Securities
classified as available for sale are reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a
separate component of stockholders' equity. Permanent declines in value
are reported in the statements of operations.
Realized gains and losses for securities classified as available for sale
are reported in earnings in year of sale.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income", which establishes standards for reporting
and displaying comprehensive income and its components in a full set of
general-purpose financial statements and is required to be adopted by the
Company. The adoption of SFAS No. 130 is not expected to have a material
impact on the Company's financial statements.
Additionally, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information",
which establishes standards for the way that public business enterprises
report information in annual statements and interim financial reports
regarding operating segments, products and services, geographic areas and
major customers. SFAS 131 is not expected to have a material impact on
the Company's financial statements. Both the aforementioned accounting
standards are effective for years and interim periods beginning after
December 15, 1997.
In October 1997 and March 1998, the Accounting Standards Executive
Committee ("AcSEC") issued Statement of Position ("SOP") 97-2, "Software
Revenue Recognition" and SOP 98-4, "Deferral of the Effective Date of a
Provision of SOP 97-2, Software Revenue Recognition," respectively, which
provide guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions and is effective for the
Company's transactions entered into subsequent to March 31, 1998. AcSEC
is currently deliberating the potential permanent deferral of certain
provisions of SOP 97-2. The Company does not believe that the
implementation of SOP 97-2 and SOP 98-4 will have a material adverse
affect on expected revenues or earnings. However, in the event subsequent
interpretations are contrary to the Company's revenue accounting practices,
the Company believes it can change its current business practices to
comply with this guidance and avoid any material adverse affect on reported
revenues and earnings. There can be no assurance this will be the case.
F-12
<PAGE>
CITADEL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1998 and 1997
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, marketable securities,
notes receivable, accounts receivable, and accounts and notes payable.
Marketable securities are carried at fair value. The other instruments'
carrying values approximate fair value because of their short-term
maturities.
NET INCOME (LOSS) PER COMMON SHARE
In the fourth quarter of 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS No. 128). In accordance with SFAS No. 128, the Company computes
income (loss) per common share based on the weighted average number of
common shares outstanding. Income (loss) per common share - assuming
dilution is computed based on the weighted average number of common shares
outstanding plus the number of additional common shares that would have
been outstanding if dilutive potential common shares, consisting of stock
options, warrants and shares issuable upon conversion of debt, had been
issued; income is adjusted for interest on the convertible debt.
Retroactive application, which is required by SFAS No. 128, did not result
in restatement of 1997 per share data. Per share data - assuming dilution
has not been presented because the effect of potential common shares is
antidilutive.
NOTE B - MARKETABLE SECURITIES
The Company received 1,325,000 shares of Miami Subs U.S.A., Inc. (Miami
Subs) common stock valued at $2,567,187 as consideration for the sale of
its restaurants on March 1, 1996. Based on events occurring after the sale
of the restaurants, the Company concluded that it could no longer recover
the carrying value of the Miami Subs stock and wrote the investment down by
a charge to earnings in 1997 of $1,000,000. At February 28, 1997, a
valuation allowance of $355,772 had been made by a charge to stockholders'
equity. In June 1997, the Company tendered the stock to Miami Subs as
payment in full of the $1,250,000 note payable to Miami Subs (Note E). In
addition, to settle certain disputes between the Company and Miami Subs,
Miami Subs issued to the Company 200,000 shares of Miami Subs common stock
and the Company sold the shares for approximately $156,000 and used the
proceeds for working capital.
NOTE C - PROPERTY AND EQUIPMENT
Major classes of property and equipment and their estimated useful lives
are as follows:
<TABLE>
<CAPTION>
February 28,
---------------------
Lives 1998 1997
----------- --------- ----------
<S> <C> <C> <C>
Furniture 5-10 years $ 82,978 $ 228,433
Office equipment 3-7 years 74,339 132,205
Leasehold improvements Lease term 62,184 15,000
Computer equipment 3-7 years 480,671 547,900
--------- ----------
700,172 923,538
Less accumulated depreciation (312,249) (227,079)
--------- ----------
Net property and equipment $ 387,923 $ 696,459
--------- ----------
--------- ----------
</TABLE>
F-13
<PAGE>
CITADEL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1998 and 1997
NOTE D - ACQUISITIONS
In August 1996, the Company acquired 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 360,000 shares of common stock valued at
$1,200,000 (subject to sales restrictions for two years), $600,000 in cash
and $400,000 in short-term notes.
In August 1996, the Company acquired Danasoft, Inc. which develops and
markets software for Internet and Intranet applications, for a total
consideration of $294,000, consisting of 100,000 shares of common stock
valued at $264,000 and $30,000 in cash.
In August 1996, the Company acquired MicroVault Corporation, a data
security software provider, for a total consideration of $550,000,
consisting of 180,000 shares of common stock valued at $475,000 and $75,000
in cash. There was a disagreement between the parties and, in February
1997, the Company sold MicroVault Corporation back to its former owner for
the 180,000 shares of stock.
Each acquisition has been accounted for by the purchase method. In
connection with the acquisition of the ADI Group and MicroVault
Corporation, the Company wrote off approximately $1,711,000 of purchased
research and development technology that had not reached the working model
stage and for which there is not an alternate use.
The following unaudited pro forma summary results of operations gives
effect to the acquisition of the ADI Group (the effect of the acquisition
of Danasoft, Inc. was not material) as though the acquisitions had been
made as of the beginning of the previous fiscal year (March 1, 1996):
<TABLE>
Year ended
February 28,
1997
------------
<S> <C>
Revenues $ 5,732,406
Net loss (6,479,902)
Net loss per share (.47)
</TABLE>
The fiscal 1997 pro forma data excludes the write-off of $1,236,000 ($.09
per share) of purchased research and development related to the ADI Group
acquisition as such write-off has been included in the fiscal 1995 data.
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 of March 1, 1996 or of the future results of
operations of the combined businesses.
F-14
<PAGE>
CITADEL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1998 and 1997
NOTE E - NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
February 28,
-------------------------
1998 1997
----------- ------------
<S> <C> <C>
Unsecured notes payable to individuals, including $80,000 in 1998 and
$430,000 in 1997 to related parties, due at various dates in 1998
and 1999, bearing interest at rates ranging from 0% to 10%; weighted
average interest rate is approximately 6.1% (1) $ 652,500 $ 722,500
Note payable to officer, non-interest bearing - 36,809
Note payable to Miami Subs USA, Inc. (2) - 1,250,000
Note payable to a corporation, bearing interest at 10% (3) - 250,000
Note payable to bank, bearing interest at 11.50% 102,340 150,000
Note payable to a commercial finance company, bearing interest
at 11.5% - 20,555
Other notes payable 87,334 26,223
-------- ----------
$842,174 $2,456,087
-------- ----------
-------- ----------
</TABLE>
(1) Certain of these notes have warrants to purchase common stock. The
total number of warrants issued was 509,375 with an exercise price
ranging from $0.32 to $0.89 per share. A note for $350,000
outstanding at February 28, 1998, is convertible into common stock
at $1.075 per share.
(2) Note is noninterest bearing and was liquidated in June 1997 by
transferring collateral to Miami Subs USA, Inc. (Note B).
(3) Payee is controlled by the Company's former Chairman of the Board.
Note is collateralized by pledge of Company shares owned by an officer
of the Company. See Note I regarding assumption of the note by the
former Chairman of the Board in April 1997.
F-15
<PAGE>
CITADEL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1998 and 1997
NOTE F - LONG-TERM DEBT
<TABLE>
<CAPTION>
February 28,
-------------------------
1998 1997
----------- ----------
<S> <C> <C>
Redeemable convertible notes, interest at 5% payable in common
stock, due in March 2000 (1) $ 330,000 $1,000,000
Note payable to Xerox Corporation, non-interest bearing, due September
1998, interest imputed at 10% (net of discount) 995,918 1,075,918
Note payable to a bank, payable $4,063 per month plus interest at 10.5%,
through August 2000 162,781 178,693
Note payable to an individual, noninterest bearing, payable by an initial
payment of $25,000 and monthly payments of $10,000 through 1999 259,910 -
Capital lease obligations, payable in varying monthly installments
through 2001, collateralized by the related equipment and
guaranteed by certain officers of the Company - 374,434
---------- ----------
1,748,609 2,629,045
Less amounts representing interest on capital lease obligations, imputed
at rates ranging from 7.02% to 23.78% - (53,999)
---------- ----------
1,748,609 2,575,046
Less current maturities 1,270,565 804,141
---------- ----------
$ 478,044 $1,770,905
---------- ----------
---------- ----------
</TABLE>
(1) These notes are convertible into common stock at the lesser of $1.50
per share or a percentage, which ranges from 75 to 80% of the average
market price for the five days preceding conversion. The notes are
payable, at the option of the Company, in cash or common stock. However,
in the event of a transfer of 50% of the voting rights of the common stock,
the note holder can demand payment in cash for unconverted notes at 125% of
the principal amount.
Aggregate maturities of long-term debt for the five years following
February 28, 1998, are as follows:
<TABLE>
<CAPTION>
Year ending
February 28,
------------
<S> <C>
1999 $1,270,565
2000 123,666
2001 354,378
----------
$1,748,609
----------
----------
</TABLE>
F-16
<PAGE>
CITADEL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1998 and 1997
NOTE G - INCOME TAXES
Following is a reconciliation of the Company's income tax provision with
the amount of tax computed at the statutory rate:
<TABLE>
<CAPTION>
Years ended February 28,
-------------------------
1998 1997
----------- ----------
<S> <C> <C>
Tax benefit at statutory rate $ 1,159,000 $ 2,555,000
Write-off of purchased research and development costs - (582,000)
Change in valuation allowance, net of amounts that relate
to acquired business ($219,000 in 1997) and unrealized
losses on securities available for sale
($121,000 in 1997) (1,136,000) (2,005,000)
Other (23,000) 32,000
----------- ------------
$ - $ -
----------- ------------
----------- ------------
</TABLE>
Significant components of deferred income tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
February 28,
----------------------------
1998 1997
----------- ----------
<S> <C> <C>
Deferred tax assets
Net operating loss carryovers $3,933,000 $ 1,560,000
Accounts receivable 232,000 923,000
Marketable securities - 461,000
Property and equipment 32,000 32,000
Accounts payable and accrued expenses 26,000 103,000
Other 3,000 11,000
----------- ------------
4,226,000 3,090,000
Valuation allowance (4,226,000) (3,090,000)
----------- ------------
Net deferred tax asset $ - -
----------- ------------
</TABLE>
The Company has net operating loss carryovers of approximately $11,400,000
and $4,500,000 at February 28, 1998 and 1997, respectively. 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 2013.
F-17
<PAGE>
CITADEL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1998 and 1997
NOTE H - STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company's outstanding Series B and Series C preferred stock are
convertible at the option of the holder into shares of common stock at 83%
and 70% to 80%, respectively, of the average market price of the common
stock for the five days preceding conversion, subject, however, to a
maximum conversion price on the Series C preferred of $0.75 per share.
Each share of Series B and Series C preferred stock has a conversion
value of $1,000 and $100, respectively. Any shares outstanding at
September 24, 1998 and November 11, 2000, respectively, will be
automatically converted. Dividends accrue at 5% and 8%, respectively,
and are payable in common stock or cash.
EQUITY NOTES
During fiscal 1998 and 1997, the Company issued $1,125,000 and $4,550,000
respectively of equity notes. These notes are unsecured and are
convertible into common stock at 80% of the average market price of the
common stock for the five days preceding conversion. Notes outstanding at
maturity (July 2000 and July 1997, respectively) are automatically
converted into common stock. Interest at 8% is payable only in common
stock. At February 28, 1998, $4,731,000 of the notes had been converted.
The outstanding balance of unconverted notes is classified on the balance
sheet as a component of stockholders' equity.
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. Generally, the options vest over no
more than one year. Following is a summary of option transactions for the
periods beginning March 1, 1996:
<TABLE>
Weighted
average
exercise
Shares price
--------- ---------
<S> <C> <C>
Outstanding at March 1, 1996 5,136,878 $0.96
Granted 1,602,000 5.24
Exercised (153,499) 2.74
Expired or canceled (662,694) 2.84
---------- ----
Outstanding at February 28, 1997 5,922,685 1.86
Granted 8,611,000 .33
Exercised (800,000) .28
Expired or canceled (3,936,935) 2.53
---------- ----
Outstanding at February 28, 1998 9,796,750 $ .41
---------- ----
</TABLE>
In July 1997, following a significant decline in the market price of
the Company's common stock, the terms of options covering 3,375,000
shares with exercise prices ranging from $.89 to $7.00 per share
(weighted average of $2.34 per share) were revised in order to
encourage the option holders to increase their investments in the
Company at a time when additional funds were needed in connection
with the operations and growth of the Company's business and to enhance
the Company's ability to retain the services of such individuals by
reducing the exercise price of the options closer to the then-current
market levels. The exercise price was reduced to $.40 per share. These
options have been reflected as cancelled and granted in the above
summary of option transactions.
F-18
<PAGE>
CITADEL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1998 and 1997
NOTE H - STOCKHOLDERS' EQUITY - CONTINUED
<TABLE>
<CAPTION>
Weighted
average
exercise
Shares price
--------- ---------
<S> <C> <C>
Exercisable at February 29, 1997 5,054,685 $1.16
Exercisable at February 28, 1998 7,786,750 $0.44
Weighted-average fair value of options granted
during the year ended February 28, 1997
- $1.77
Weighted-average fair value of options granted
during the year ended February 28, 1998
- $0.18
</TABLE>
The following table summarizes information about stock options at February
28, 1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
---------------------------------- ---------------------
Weighted
average
remaining Weighted Weighted
contractual average average
Range of life exercise exercise
exercise prices Shares (in years) price Shares price
--------------- --------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$.20 - .50 8,775,250 6.10 0.33 6,855,250 0.26
.51 - 1.00 935,000 3.27 0.88 845,000 0.80
1.01 - 6.00 86,500 2.40 4.21 86,500 4.21
--------- ------ --------- -----
9,796,750 $ 0.41 7,786,750 $0.44
--------- ------ --------- -----
--------- ------ --------- -----
</TABLE>
F-19
<PAGE>
CITADEL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1998 and 1997
NOTE H - STOCKHOLDERS' EQUITY - CONTINUED
The Company has adopted the disclosure provisions of Statement No. 123, as
discussed in Note A, and continues to apply Opinion 25 for stock options
granted to employees. If the Company had recognized compensation expense
based upon the fair value at the grant date for options granted to
employees during the years ended February 28, 1998 and 1997, the effect on
net loss and loss per share would have been as follows:
<TABLE>
<CAPTION>
Years ended February 28,
1998 1997
---------- ----------
<S> <C> <C>
Net loss
As reported (3,522,710) (7,515,607)
Pro forma (4,197,423) (9,539,474)
Loss per common share
As reported (.21) (.56)
Pro forma (.25) (.70)
</TABLE>
The fair value of these options was estimated at the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
Years ended February 28,
1998 1997
---------- ----------
<S> <C> <C>
Expected volatility 137-147% 145-185%
Risk-free interest rates 5.7-6.2% 6.0-6.5%
Dividend yield 0% 0%
Expected option lives 1-4 years 1-4 years
</TABLE>
The pro forma amounts presented are not representative of the amounts that
will be disclosed in the future because they do not take into effect pro
forma expense related to grants before the year ended February 28, 1995.
F-20
<PAGE>
CITADEL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1998 and 1997
NOTE H - STOCKHOLDERS' EQUITY - CONTINUED
During fiscal 1997, the Company issued warrants to purchase 540,822
shares of common stock, principally in connection with issuance of
convertible debt. During fiscal 1998, the Company issued warrants to
purchase 3,050,000 shares of common stock in connection with the sale
of common stock and 312,500 shares of common stock in connection with
the issuance of convertible debt. The following summarizes the warrant
transactions for 1998 and 1997:
<TABLE>
<CAPTION>
Weighted
average
Shares exercise price
--------- --------------
<S> <C> <C>
Outstanding at March 1, 1996 3,500,250 0.90
Issued 540,822 1.52
Exercised (167,721) 1.99
Expired or cancelled (38,362) 3.50
--------- -----
Outstanding at February 28, 1997 3,834,989 $0.95
Issued 3,362,500 2.89
Exercised (451,437) 0.36
Expired or cancelled (640,914) 1.55
--------- -----
Outstanding at February 28, 1998 6,105,138 $2.00
--------- -----
--------- -----
</TABLE>
NOTE I - RELATED PARTY TRANSACTIONS
JOINT VENTURE
In November 1996, the Company made a one-year, $625,000, 8% loan to GGS
Investment Company (GGS), a joint venture owned by Gilbert Gertner, former
Chairman of the Board of the Company, George Sharp, former Chief Executive
Officer of the Company and Steven B. Solomon, President and Chief Executive
Officer of the Company, who were also directors and owned approximately 46%
of the Company's outstanding common stock at that time. The purpose of the
joint venture was to invest in securities for short-term profits. The loan
agreement provided that (1) interest would be waived for the first six
months, (2) 100% of the net profits, while the loan was outstanding, would
be paid to the Company, and (3) net losses would be borne by GGS.
The loan was guaranteed by each of the officers, and the guaranty was
secured by the pledge of a total of 754,000 shares of the Company's common
stock, valued at approximately $1,282,000 as of the date of the
transaction.
F-21
<PAGE>
CITADEL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1998 and 1997
NOTE I - RELATED PARTY TRANSACTIONS - CONTINUED
The joint venture was not profitable, and the loan was discharged by GGS
during fiscal 1998 in the following manner:
- Mr. Solomon forgave $78,000 due from the Company to him.
- Mr. Gertner assumed debt of the Company to a corporation controlled by
Mr. Gertner in the principal amount of $250,000 plus accrued interest of
approximately $25,000.
- Mr. Sharp received a credit against the loan of $200,000 as consideration
for agreeing to terminate his noncancellable employee contract
aggregating approximately $700,000 through November 2000.
- $72,000 of the loan was forgiven in connection with the asset sale
agreement discussed below.
ASSET SALE AGREEMENT
In April 1997, the Company entered into an asset sale agreement with its
former Chief Executive Officer and its former Chairman of the Board (the
Purchasers) jointly. At the date of the agreement, the Purchasers owned
approximately 31% of the Company's outstanding common stock at that date.
The Company sold to the Purchasers, $3,750,000 of trade accounts receivable
and forgave indebtedness owed by the Purchasers to the Company in the
amount of $155,000 ($72,000 of which relates to discharge of joint
venture indebtedness noted earlier). The carrying value of the receivables
at February 28, 1997, net of allowance, was $1,992,000. Consideration
received consisted of 3,900,000 shares of the Company's common stock with a
market value of approximately $2,750,000 as of the date of the transaction.
For accounting purposes, the Company has valued the shares at approximately
$2,147,000. The agreement provides that the Company will also receive 50%
of the proceeds in excess of $2,250,000 from collection of the receivables.
The transaction resulted in no gain or loss.
OTHER
During the year ended February 28, 1998, the Company lent approximately
$122,000 to its Chief Executive Officer.
NOTE J - COMMITMENTS AND CONTINGENCIES
The Company leases office space under noncancellable operating lease
agreements expiring at various dates through 2002. Future minimum lease
payments under these leases at February 28, 1998, were as follows:
<TABLE>
<CAPTION>
Year ending
February 28,
------------
<S> <C>
1999 $ 274,000
2000 289,000
2001 301,000
2002 303,000
-----------
Total $1,167,000
-----------
-----------
</TABLE>
F-22
<PAGE>
CITADEL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1998 and 1997
NOTE J - COMMITMENTS AND CONTINGENCIES - CONTINUED
Rental expense totaled approximately $303,000 and $352,000 for the years
ended February 28, 1998 and 1997, respectively.
A former employee 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 is seeking damages in excess of
$2,300,000. The Company believes such claims are without merit and intends
to vigorously defend against the claims and is considering filing counter-
claims.
Two former employees of the Company had a lawsuit pending against the
Company demanding payment of a promissory note issued in connection with
the acquisition of the ADI Group and are seeking damages in excess of
$400,000. The Company recently reached a settlement with one of the
employees under the terms of a promissory note and agreed judgment. The
court severed the claims of the remaining employee, who amended his claim
to include amounts allegedly owing under an employment agreement (in the
amount of approximately $168,000). The Company believes it has defenses
to payment under the note and employment agreement and intends to
vigorously defend against the lawsuit and pursue counterclaims.
On January 7, 1998, the Company's former Houston landlord filed a lawsuit
against the Company alleging that the Company breached a certain lease
covering the Company's former Houston office space. The suit seeks damages
to date of approximately $180,000, plus attorney's fees, pre and post
judgment interest and court costs. The Company believes that it has viable
defenses against such a claim and is in the process of filing a counter-
suit against the plaintiff.
The Company, and its President are involved in an arbitration proceeding
with Vestcom, a group that claims it is entitled to compensation and a
finder's fee for introducing the Company to a third party, and is seeking
damages of $100,000 in shares of the Company's common stock plus 50% of
additional compensation paid by the Company to such third party. The
Company believes it has defenses to such claims. Vestcom has agreed to
stay the arbitration proceeding pending a decision on one of the Company's
defenses in Texas State Court. An oral ruling has been made by the court
in favor of the Company.
On October 12, 1997, five former employees of the Company filed a lawsuit
against the Company and one current and one former officer and director.
The suit alleges that the Company and/or the individuals owe the plaintiffs
stock options in lieu of certain amounts claimed to be due to them for
salary, bonus or override compensation, and seeks damages, attorney's fees,
pre and post judgment interest, and costs allegedly in excess of
$4,000,000. The Company and the individuals believe such claims are
without merit and intend to vigorously defend against the claims.
F-23
<PAGE>
CITADEL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1998 and 1997
NOTE J - COMMITMENTS AND CONTINGENCIES - CONTINUED
At this time, the Company is unable to predict the ultimate outcome of
these suits, the costs associated with defending the claims and pursuing
counterclaims, and monetary compensation awarded, if any.
The Company is also involved in other litigation. Such litigation is not
material to the Company's consolidated financial condition or results of
operations.
At February 28, 1998, the Company has employment agreements with
three of its officers. The agreements expire in 2000 to 2002.
NOTE K - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Years ended February 28,
---------------------------
1998 1997
---------- ----------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 128,929 $ 239,508
Non-cash investing and financing transactions:
Notes payable converted to warrants - 734,000
Payment of dividends in common stock 96,429 133,714
Conversions to common stock
Debt 901,326 -
Preferred stock and equity notes 481,004 4,213,693
Acquisition of software and in-process research
and development for notes payable - 1,206,560
Liquidation of note payable by transfer of
collateral 1,250,000 -
Sale of receivables for treasury stock 2,146,649 -
Notes receivable satisfied through debt
assumptions 425,000 -
</TABLE>
F-24
<PAGE>
CITADEL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1998 and 1997
NOTE K - SUPPLEMENTAL CASH FLOW INFORMATION - CONTINUED
<TABLE>
<CAPTION>
Years ended February 28,
---------------------------
1998 1997
---------- ----------
<S> <C> <C>
Acquisition of businesses:
In-process research and development acquired $ - $ 1,711,480
Assets acquired - 2,051,135
Liabilities assumed - (1,226,054)
Common stock issued - (1,939,201)
------------ ------------
Cash paid, net $ - $ 597,360
------------ ------------
------------ ------------
</TABLE>
NOTE L - SUBSEQUENT EVENTS
Subsequent to February 28, 1998, the Company issued common and
convertible preferred stock for total consideration of approximately
$5,000,000.
F-25
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into this
15th day of July 1997, by and between Citadel Computer Systems, Inc.
(hereinafter referred to as "Employer" or "Citadel"), a Delaware Corporation
having its principal place of business at 3811 Turtle Creek Boulevard, Suite
600, Dallas, Texas 75219, and Steven B. Solomon (hereinafter referred to as
"Employee").
RECITALS:
1. Employer desires to employ Employee as its Chief Executive Officer and
President.
2. Employee desires to be employed by Employer in such capacity.
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 Executive Officer and President 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 15th day of July, 1997, and shall terminate on February 28, 2002. After
February 28, 2002, 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 Executive Officer and President of Citadel, except as may be modified by
the written agreement of the parties hereto. In his capacity as Chief Executive
Officer and President, the Employee will be responsible for all matters
typically delegated to such officers, and will perform such duties and
responsibilities for Citadel as may from time to time be assigned to him by the
Board of Directors and the Executive shall report directly to the Board of
Directors of Citadel.
1
<PAGE>
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 July 16th 1997:
<TABLE>
Period Monthly Salary
------ --------------
<S> <C>
July 16, 1997 - November 31, 1997 $11,000
December 1, 1997-November 31, 1998 $12,000
December 1, 1998-November 31, 1999 $14,000
December 1, 1999-November 31, 2000 $14,000
December 1, 2000-November 31, 2001 $14,000
December 1, 2001-March 1, 2002 $14,000
</TABLE>
(b) BONUS. Employee shall receive other bonuses or other extraordinary
compensation as determined in the discretion of the Board of Directors
of Employer but at least equal to the prior year's bonus. Such
bonuses shall be paid quarterly but the Employee may defer such
bonuses.
(c) WITHHOLDING FOR TAXES. All payments under this Agreement shall be
subject to federal withholding and other applicable taxes.
(d) OPTIONS. Employee shall receive options to purchase 250,000 shares
of the Company's common stock on each of the first four anniversaries
of the date of this Agreement at an exercise price of $0.25 per share,
which options shall vest in the event of the termination of the
Employee for any reason or in the event of any change in control.
6. AUTOMOBILE ALLOWANCE. Citadel shall pay Employee an automobile
allowance of $950.00 per month, payable on the last business day of each month.
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.
2
<PAGE>
(a) In addition to key man any 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 four 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.
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
3
<PAGE>
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) Employee's conviction of a crime involving moral turpitude, or
(ii) 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
(iii) any other action by Employee involving willful and deliberate
malfeasance or gross negligence in the performance of Employee's
duties if such action shall continue beyond a period of five (5)
business days immediately after notice thereof by Citadel to
Employee.
For the purposes of the agreement, disability shall mean such physical,
mental or emotional disability of Employee as 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 Employee's employment with Citadel is terminated by Citadel or the
Employee for other than good cause, Employee shall be entitled to a
severance payment equal to the greater of (i) the 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.
(b) In addition to the foregoing amounts, Employee shall be entitled upon
termination of employment for whatever cause to any unpaid salary, bonus
(based on a pro rata portion of the prior year's bonus) and vacation pay
(based on a pro rata portion of the portion of the year expired). 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 (and remain exercisable for at least
two year following the date of termination) 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
4
<PAGE>
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 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
3811 Turtle Creek Boulevard, Suite 600
Dallas, Texas 75219
IF TO EMPLOYER:
Citadel Computer Systems Incorporated
3811 Turtle Creek Boulevard, Suite 600
Dallas, Texas 75219
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.
6
<PAGE>
Citadel has caused this Agreement to be executed by its authorized
officer and the Employee has signed this Agreement.
CITADEL:
CITADEL COMPUTER SYSTEMS INCORPORATED
By: /s/ George Sharp
--------------------------------
Name: George Sharp
------------------------------
Title: Vice Chairman
-----------------------------
EMPLOYEE:
/s/ Steven B. Solomon
- -----------------------------------
Steven B. Solomon
7
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is dated made and entered into
effective as of January 5, 1998, by and between Citadel Computer Systems
Incorporated, a Delaware corporation (the "Company") and Bennett Klein (the
"Employee").
WHEREAS, the Company desires to employ Employee, and Employee desires to be
employed by the Company, pursuant to the terms and conditions contained in this
Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement, the parties agree as follows:
1. Employment. Subject to the terms and conditions set forth in this
Agreement, the Company hereby employs Employee, and Employee hereby accepts such
employment by the Company.
2. Duties of Employee.
(a) Employee shall serve as an employee of the Company and Vice President,
Product Marketing and Business Development, subject to the supervision and
control of the Chief Executive Officer of the Company or such other duties and
responsibilities as the Company may designate.
(b) During the term of this Agreement, Employee shall devote substantially all
of his business time and effort to the performance of his duties and
responsibilities.
(c) Unless otherwise agreed by Employee, the duties shall be performed in
Dallas, Texas.
3. Term. The term of this Agreement and of Employee's employment by the
Company shall commence on the date hereof (the "Effective Date") and continue
until the third anniversary of the Effective Date; provided, however, that at
the end of such initial term, and on each subsequent anniversary of the
Effective Date, the term shall automatically extend for an additional year
unless either party provides, at least 60 days prior to the end of such initial
term or such subsequent anniversary, written notice that it does not wish to
extend the term. Notwithstanding the foregoing, this Agreement may be earlier
terminated in accordance with Section 7 of this Agreement.
Salary.
(a) Base Salary. The initial base salary payable by the Company to Employee
during the term of this Agreement for his services as an employee of the Company
shall be $11,250 per month, which shall be payable in accordance with the
Company's standard
1
<PAGE>
payment schedule for salaried employees, but not less than monthly. Such base
salary shall not include any benefits made available to Employee or any
contributions or payments made on his behalf pursuant to any employee benefit
plan or program of the Company, including any health or life insurance plan
or program, 401(k) plan, cash bonus plan, stock incentive plan, retirement
plan or similar plan or program, if any.
(b) Bonuses. The Company shall issue to the Employee 50,000 shares of its
common stock as a signing bonus. In the event such shares do not have a market
value of at least $50,000 as of March 31, 1998, the Company shall, at its
option, either repurchase such shares for the purchase price of $50,000 or issue
additional shares of its common stock having a market value equal to the
difference between $50,000 and the market value of the shares issued as of March
31, 1998. The Company shall pay to the Employee a corporate bonus in the amount
of up to forty percent (40%) of the Employee's base salary per year, paid
quarterly, based on agreed upon targets for personal goals and achievements
determined for the Employee.
(c) Options. The Company shall issue to the Employee options to purchase up to
300,000 shares of the Company's common stock, with options to purchase 8,333
shares vesting on the first day of each month following the date of this
Agreement during the term of this Agreement. The exercise price for such
options shall be $.32 per share [the lower of $0.40 per share or the market
price as of the effective date of this Agreement]. The options shall be
evidenced by an option agreement in substantially the form attached hereto as
Exhibit A.
5. Employee Benefits. During the term of this Agreement, the Company
shall provide the Employee with benefits at least equal to those made available
from time to time by the Company to its Vice Presidents, such benefits to be in
accordance with the Company's policies. Such benefits shall include
participation in benefit plans or programs, paid vacation and fringe benefits,
if any. Such benefits will include Medical Plan and Hospitalization, Dental
Plan and Life Insurance in the amount of up to $50,000 under the Company's
current plan. In addition, if the Employee's health status permits the Company
to obtain life insurance on commercially reasonable terms based, the Company
will obtain life insurance on the Employee in an amount equal to two times the
Employee's annual base salary.
6. Reimbursement of Expenses. The Company shall reimburse the Employee
for expenses actually and reasonably incurred by him in the business interests
of the Company, subject to the Company's policies. Such reimbursement shall be
made to the Employee upon appropriate documentation of such expenditures in
accordance with the Company's policies. In addition, the Company will pay to
the Employee relocation expenses as set forth in Exhibit 2 attached hereto and
made a part hereof.
7. Early Termination.
2
<PAGE>
(a) Notwithstanding the provisions of Section 3 of this Agreement
but subject to the provisions of Section 7(b), the Employee's employment shall
terminate:
(i) In the event of the Employee's death;
(ii) If the Employee is disabled so that he has been unable to
perform his duties and responsibilities hereunder for a period of 90
consecutive days (in the opinion of a person designated by the parties);
(iii) If the Board of Directors terminates this Agreement and the
Employee's employment hereunder "with cause"; or
(iv) If the Employee materially breaches the terms of this Agreement
and such breach remains uncured after actual notice and a reasonable opportunity
to cure such breach.
(b) If the Employee's employment hereunder is terminated pursuant to
Section 7(a), the Employee, or his representative in the event of his death,
shall be entitled to receive payment of all compensation under Section 4 of this
Agreement that has accrued to the date of such termination and all additional
compensation and employee benefits under Sections 4 or 5 that have accrued or
vested in the Employee on the date of such termination. The Employee shall also
be entitled to reimbursement of expenses under Section 6 hereof. As used in
this Section 7, termination "with cause" shall mean any termination of the
Employee for (i) the commission of an act of fraud or embezzlement against the
Company, (ii) conviction of a felony or a crime involving moral turpitude, (iii)
gross negligence or willful misconduct in performing the Employee's duties under
Section 2, (iv) the commission of a material act of personal dishonesty or a
breach of fiduciary duty in connection with the Employee's employment by the
Company, or (v) material breach of this Agreement which the Employee fails to
cure after notice and a reasonable opportunity to cure.
(c) If the Employee is terminated by the Company for any reason
other than for "cause" as set forth in Section 7(b), the Company shall pay to
the Employee a severance payment equal to six month's salary.
(d) If the Company at any time during the term of the Agreement
causes a significant reduction in the Employee's base compensation, position or
responsibilities ("good cause"), the Employee may terminate this Agreement at
that time.
(e) The Employee reserves the right to terminate this Agreement and
sever the employment relationship with the Company at any time for any reason or
no reason after one year of the effective date of this Agreement. In the event
the Employee terminates his employment hereunder (other than for "good cause"
as defined in section (d) above) within one year of the effective date of this
Agreement, he shall reimburse the Company for all relocation expenses and
signing bonuses.
3
<PAGE>
8. Non-Competition Agreement. The Employee understands that during the
course of his employment by the Company, the Employee will represent the Company
and will develop contacts and relationships with other persons and entities on
behalf of the Company, including but not limited to customers, potential
customers and other employees of the Company. To protect the Company's interest
in these contacts and relationships, the Employee agrees and covenants that the
Employee will comply with the terms and conditions of the Noncompetition
Agreement attached hereto as Annex I, which is made a part of this Agreement for
all purposes. It is understood and agreed that the scope of the foregoing
covenant is reasonable as to time, area and persons and is necessary to protect
the legitimate business interests of the Company. It is further agreed that
such covenant will be regarded as divisible and will be operative as to time,
area and persons to the extent that it may be so operative, and if any part of
such covenant is declared invalid, unenforceable, or void as to time, area or
persons, the validity and enforceability of the remainder will not be affected.
The Company shall, in addition to all other rights or remedies it may have at
law or in equity, be entitled to injunctive and other equitable relief to
prevent or enjoin any violation of the provisions of this Section 8 and Annex I.
9. Confidentiality. The Employee acknowledges that he has learned and
will learn Confidential Information (as defined herein) relating to the business
conducted and to be conducted by the Company. The Employee agrees that he will
not, except in the normal and proper course of his duties hereunder, disclose or
use or enable any third party to disclose or use any such Confidential
Information, without prior written approval of the Company. As used in this
Section 9, "Confidential Information" shall mean the following types of
information, both existing and contemplated, regarding the Company, as well as
all other proprietary information regarding the Company: corporate data and
information, including plans, strategies, tactics and policies; marketing
information, including sales or product plans, strategies, tactics and methods
and data regarding customers, prospects and markets; financial information,
including financial statements, projections, business plans and cost and
performance data; operational data, including trade secrets and data regarding
patents and patent applications, control and inspection practices, manufacturing
processes and methods, suppliers and contracts; technical information, including
process and machinery designs, drawings and specifications; and personnel
information, including organization structure, personnel lists, resumes,
personal data and performance evaluations. Confidential Information shall not
include information that (i) is publicly known or becomes publicly known through
no fault of the Employee, or (ii) is generally or readily obtainable by the
public, or (iii) general skills, knowledge and experience required by the
Employee before and/or during his employment with the Company.
The Employee agrees that all documents of any nature pertaining to
activities of the Company or that include any Confidential Information, in his
possession now or at any time during the term of his employment with the
Company, including without limitation, memoranda, notebooks, notes, data sheets,
records and computer programs,
4
<PAGE>
are and shall be the property of the Company and that all copies thereof
shall be surrendered to such entity upon termination of his employment.
10. Miscellaneous.
(a) Any notice, demand or request required or permitted to be given
or made under this Agreement shall be in writing and shall be deemed given or
made when delivered in person or when sent by United States registered or
certified mail, or postage prepaid, to a party at its address specified below:
If to the Company:
Citadel Computer Systems Incorporated
3811 Turtle Creek Boulevard, Suite 600
Dallas, Texas 75219
Attention: Chief Executive Officer
Telecopy No.: (214) 520-9293
If to Employee:
Bennett Klein
3530 North 2300 East
Layton, Utah 84040
Telecopy No.: ( ) -
The parties to this Agreement may change their addresses for notice in the
manner provided above.
(b) All section titles and captions in this Agreement are for
convenience only, shall not be deemed part of this Agreement, and in no way
shall define, limit, extend or describe the scope or intent of any provisions
hereof.
(c) Whenever the context may require, any pronoun used in this
Agreement shall include the corresponding masculine, feminine or neuter forms,
and the singular form of nouns, pronouns and verbs shall include the plural and
vice versa.
(d) The parties shall execute all documents, provide all information
and take or refrain from taking all actions as may be necessary or appropriate
to achieve the purposes of this Agreement.
(e) This Agreement shall be binding upon and inure to the benefit of
the parties hereto, their representatives and permitted successors and assigns.
Except as otherwise expressly provided in this Agreement, nothing in this
Agreement, express or implied, is intended to confer upon any person other than
the parties to this Agreement,
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their respective representatives and permitted successors and assigns, any
rights, remedies or obligations under or by reason of this Agreement.
(f) This Agreement constitutes the entire agreement among the parties
hereto pertaining to the specific subject matter hereof and supersedes all prior
agreements and understandings pertaining thereto.
(g) None of the provisions of this Agreement shall be for the benefit
of or enforceable by any creditors of the parties, except as otherwise expressly
provided herein.
(h) No failure by any party to insist upon the strict performance of
any covenant, duty, agreement or condition of this Agreement or to exercise any
right or remedy consequent upon a breach thereof shall constitute waiver of any
such breach or any other covenant, duty, agreement or condition.
(i) This Agreement may be executed in counterparts, all of which
together shall constitute one agreement binding on all the parties hereto,
notwithstanding that all such parties are not signatories to the original or the
same counterpart.
(j) THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED
BY THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS
OF LAW. THE PARTIES HERETO IRREVOCABLY AGREE THAT ANY LEGAL ACTION OR
PROCEEDING ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT SHALL BE BROUGHT
IN FEDERAL COURT (OR STATE COURT IF FEDERAL COURTS ARE WITHOUT JURISDICTION)
LOCATED IN THE CITY OF DALLAS IN THE STATE OF TEXAS AND SHALL BE BROUGHT IN NO
OTHER COURT. BY THE EXECUTION AND DELIVERY OF THIS AGREEMENT, THE PARTIES TO
THIS AGREEMENT HEREBY IRREVOCABLY ACCEPT AND SUBMIT TO THE JURISDICTION OF SUCH
COURTS IN PERSON, GENERALLY AND UNCONDITIONALLY, IN CONNECTION WITH ANY LEGAL
ACTION OR PROCEEDING ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT.
(k) If any provision of this Agreement is declared or found to be
illegal, unenforceable, or void, in whole or in part, then the parties shall be
relieved of all obligations arising under such provision, but only to the extent
that it is illegal, unenforceable or void, it being the intent and agreement of
the parties that this Agreement shall be deemed amended by modifying such
provision to the extent necessary to make it legal and enforceable while
preserving its intent or, if that is not possible, by substituting therefor
another provision that is legal and enforceable and achieves the same
objectives.
(l) No supplement, modification or amendment of this agreement or
waiver of any provision of this Agreement shall be binding unless executed in
writing by
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all parties to this Agreement. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provision
of this Agreement (regardless of whether similar), nor shall any such waiver
constitute a continuing wavier unless otherwise expressly provided.
(m) Each party acknowledges and agrees that the other party may be
irreparably harmed by any material violation of the party's obligations under
Sections 8 and 9 hereof and that, in addition to all other rights or remedies
available at law or in equity, the non-breaching party will be entitled to
injunctive and other equitable relief to prevent or enjoin any such violation.
The provisions of Sections 8 and 9 hereof will survive any termination of this
Agreement, in accordance with their terms for a period of one year after such
termination.
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<PAGE>
EXECUTED as of the date first above written.
CITADEL COMPUTER SYSTEMS INCORPORATED
By: /s/ Steven B. Solomon
--------------------------------
Steven B. Solomon
Chief Executive Officer
EMPLOYEE:
/s/ Bennett Klein
--------------------------------
Bennett Klein
8
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of
June 1, 1997, by and between Citadel Technology Incorporated, formerly Citadel
Computer Systems, Inc., a Delaware Corporation ("Citadel") and Richard L.
Travis, Jr. (hereinafter referred to as "Employee").
RECITALS
1. Citadel desires to employ Employee as its Chief Financial Officer.
2. Employee desires to be employed by Citadel in such capacity.
3. The parties to this Agreement wish to reduce to writing their understanding
and agreement as to the 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. Citadel hereby employs Employee and Employee hereby accepts
employment as Chief Financial Officer of Citadel in the Dallas, Texas,
office of Citadel (or in such other position and/or locations as may be
mutually agreed upon) upon the terms and conditions set forth in this
Agreement. Employee represents and warrants to Citadel that Employee has
terminated any and all employment agreements that he may have with any
other entity or individual.
2. TERM OF EMPLOYMENT. Subject to the provisions for termination as provided
in this Agreement, the term of this Agreement (the "Term") shall commence
on June 1, 1997 and terminate on May 31, 2002. After May 31, 2002,
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.
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3. DUTIES. During the Term the Employee agrees to serve as Chief Financial
Officer of Citadel, except as may be modified by the written agreement of
the parties hereto. In his capacity as Chief Financial Officer, Employee
will be responsible for the day to day financial and accounting operations
of Citadel and will perform such duties and responsibilities for Citadel as
may from time to time be assigned to him by the Chief Executive Officer of
Citadel.
4. OTHER EMPLOYMENT. Employee shall devote his entire productive time,
knowledge, skill, merits, energies and attention solely to the business of
Citadel during the terms of this Agreement and any extension thereof.
Employee shall not engage in any other employment activities 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, Citadel shall pay Employee as follows:
(a) BASE SALARY. Employee shall receive a base salary of $10,833.33 per
month which shall be payable on the 1st and 16th of each month,
beginning December 16, 1996. The base salary shall be increased, as
of July 1, 1997, December 1, 1997 and July 1, 1998, as follows, or as
may be mutually agreed upon by the parties. After which, it shall be
reviewed by the Company on an annual basis, commencing July 1, 1999,
or on such other dates as may be mutually agreed to by the parties.
July 1, 1997 $10,000 per annum
December 1, 1997 $10,000 per annum
July 1, 1998 $10,000 per annum and annually
thereafter
At the option of the Employee, the Employee may elect to take the
entire increase or a portion thereof, as of dates indicated above, in
common stock of the Company. If so elected, the conversion price
shall be the closing bid price of the Company's stock on the date
written notice of such election is received by Company. The Company
will issue such shares within thirty (30) days of such notice and such
share shall be free-trading shares and free of any restrictions.
(b) BONUS. Employee 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
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Board of Directors may determine. It is agreed by both parties that
a bonus of $10,000 will be paid on August 1, 1997.
(c) WITHHOLDING FOR TAXES. All payments under this Agreement shall be
subject to federal withholding and other applicable taxes.
(d) OPTIONS. Employee shall receive options to purchase 125,000 shares of
the Company's common stock on each four anniversaries of the date of
this Agreement at an exercise price of $.35 per share, which options
shall vest immediately in the event of termination of employee for any
reason, change in employee's position for which employee does not
agree to, or in the event of any change in control.
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 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,
if requested, 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) Citadel 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) Citadel 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. Citadel 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.
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(c) Citadel shall include Employee and his dependents under Citadel's
current or amended major medical and dental 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 Citadel
relating to retirement, health, disability, dental, group term life
insurance, paid holidays, and other related benefits offered to
employees generally by Citadel.
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. Such vacation shall be earned on a pro-rata basis at 1.25 days per
month. 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 either paid to Employee upon his request or 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. After 3 years of
employment, employee shall be entitled to four (4) weeks vacation.
If employee elects to be paid for his earned vacation hereunder, he may
elect to have such amounts paid to him in cash, or if mutually agreed upon
by both parties, in unrestricted free-trading common stock of the Company.
The conversion price to be based on the closing bid price of the Company's
common stock, as of the date of request.
9. WORKING FACILITIES. Employee shall be furnished with a private office at
Citadel's principal executive office in Dallas, Texas (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. Citadel 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 Citadel.
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 good cause, upon the good faith
determination by the Board of Directors or Executive Committee of Citadel
that good cause exists for the termination of the employment relationship.
As used herein, the term "good cause" shall include, but
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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 intentional act of dishonesty injurious to Citadel
committed by Employee; or
(ii) Employee's conviction of a crime involving moral turpitude, or
Employee's breach, nonperformance or nonobservance in any
material respect of a material term of this Agreement, including
his duties and obligations as an Employee, if such breach,
nonperformance or nonobservance shall continue beyond a period
of ten (10) business days immediately after notice thereof by
Citadel to Employee; or
(iii) any other intentional 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 as 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. For the purposes of this Agreement,
no act or failure to act on the part of the Employee shall deemed to be
"intentional" unless the act or omission by the Employee is not in good
faith or without the reasonable belief that the act or omission was in the
best interest of the Company. 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.
In the event the Agreement is terminated by the Company without good cause
or there exist a change in the Employees position as Chief Financial
Officer or compensation, which has not been mutually agreed upon by the
parties, and the Employee elects to terminate his employment due to such
change, the Employee shall be entitled to receive a severance payment in
the amount of the greater of (i) the remaining payments during the term of
this Agreement or any extension thereof, discounted to present value using
an interest rate of six percent (6%) or (ii) an amount determined by
multiplying his base salary plus benefits 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 termination or, at the Company's
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option, in three quarterly installments following the date of termination.
The Employee shall also be entitled to receive any unpaid salary, bonus and
vacation pay accrued through the date of such termination and such amounts
shall be paid in a lump sum within 30 days after the effective date of his
termination. In addition, the Company agrees to pay the cost of an
out-placement service, which shall be selected by the Employee, for a
period of twelve (12) months.
12. WAIVER OF BREACH. The waiver by Citadel 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.
13. 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.
14. ASSIGNMENT. This Agreement is a personal services contract and is not
assignable by Employee. This Agreement is not assignable by Citadel 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 Citadel under this
Agreement shall inure to the benefit of and shall be binding upon the
successors and assigns of Citadel.
15. 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.
16. 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.
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17. 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:
Richard L. Travis, Jr.
Citadel Computer Systems Incorporated
3811 Turtle Creek Blvd., Suite 600
Dallas, Texas 75219-4421
IF TO CITADEL:
Steven B. Solomon
Chief Executive Officer
Citadel Computer Systems Incorporated
3811 Turtle Creek Blvd., Suite 600
Dallas, Texas 75219-4421
18. 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.
Citadel has caused this Agreement to be executed by its authorized officer and
the Employee has signed this Agreement.
CITADEL TECHNOLOGY, INCORPORATED, formerly Citadel
Computer Systems, Inc.
/s/ Steven B. Solomon
-------------------------------------------------
Steven B. Solomon, President and Chief Executive
Officer
EMPLOYEE
/s/ Richard L. Travis, Jr.
-------------------------------------------------
Richard L. Travis, Jr.
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<PAGE>
SERIES D PREFERRED STOCK PURCHASE AGREEMENT
between
METAMOR WORLDWIDE, INC.
and
CITADEL TECHNOLOGY, INC.
Dated May 15, 1998
<PAGE>
TABLE OF CONTENTS
ARTICLE I
AUTHORIZATION AND CLOSING
1.1 Authorization of the Preferred Stock . . . . . . . . . . . . . . . . . 1
1.2 Purchase and Sale of the Preferred Stock . . . . . . . . . . . . . . . 1
1.3 The Closing . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . 1
ARTICLE II
CONDITIONS OF METAMOR WORLDWIDE'S OBLIGATION
AT THE CLOSING
2.1 Representations and Warranties . . . . . . . . . . . . . . . . . . . . 2
2.2 Certificate of Designations. . . . . . . . . . . . . . . . . . . . . . 2
2.3 Closing Documents. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.4 Compliance with Applicable Laws. . . . . . . . . . . . . . . . . . . . 2
2.5 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE III
TRANSFER OF RESTRICTED SECURITIES
3.1 Transfer of Restricted Securities. . . . . . . . . . . . . . . . . . . 3
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
4.1 Organization and Corporate Power . . . . . . . . . . . . . . . . . . . 4
4.2 Capital Stock and Related Matters. . . . . . . . . . . . . . . . . . . 4
4.3 Authorization; No Breach . . . . . . . . . . . . . . . . . . . . . . . 5
4.4 Governmental Consent, etc. . . . . . . . . . . . . . . . . . . . . . . 5
4.5 Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE V
DEFINITIONS
5.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
<PAGE>
ARTICLE VI
MISCELLANEOUS
6.1 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
6.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
6.3 METAMOR WORLDWIDE's Investment Representations . . . . . . . . . . . . 7
6.4 Consent to Amendments. . . . . . . . . . . . . . . . . . . . . . . . . 8
6.5 Survival of Representation and Warranties. . . . . . . . . . . . . . . 8
6.6 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . 8
6.7 Generally Accepted Accounting Principles . . . . . . . . . . . . . . . 8
6.8 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.9 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
6.10 Descriptive Headings; Interpretation . . . . . . . . . . . . . . . . . 9
6.11 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
6.12 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
6.13 Arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
LIST OF EXHIBITS
Exhibit A Certificate of Designations, Preferences and Rights of Series D
Convertible Redeemable Preferred Stock
<PAGE>
SERIES D PREFERRED STOCK PURCHASE AGREEMENT
CITADEL TECHNOLOGY, INC.
THIS AGREEMENT is made as of May 15, 1998, between CITADEL TECHNOLOGY,
INC., a Delaware corporation (the "Company"), and METAMOR WORLDWIDE, INC., a
Delaware corporation ("METAMOR WORLDWIDE"). Except as otherwise indicated
herein, capitalized terms used herein are defined in SECTION 6 hereof.
The parties hereto agree as follows:
ARTICLE I
AUTHORIZATION AND CLOSING
1.1 AUTHORIZATION OF THE PREFERRED STOCK. The Company shall authorize
the issuance and sale to METAMOR WORLDWIDE of two thousand (2,000) shares
(the "Shares") of its Series D Convertible Redeemable Preferred Stock, par
value $.01 per share (the "Preferred Stock").
1.2 PURCHASE AND SALE OF THE PREFERRED STOCK. At the Closing (as
defined in SECTION 1.3 below), the Company shall sell to METAMOR WORLDWIDE
and, subject to the terms and conditions set forth in the Certificate of
Designations, Preferences and Rights of Series D Convertible Redeemable
Preferred Stock (the "Certificate of Designations") attached hereto as
Exhibit A and the terms and conditions set forth herein, METAMOR WORLDWIDE
shall purchase from the Company, 2,000 shares of Preferred Stock at a price
of $1,000.00 per share; provided, however, that the terms and conditions on
which the shares of Preferred Stock sold to METAMOR WORLDWIDE pursuant to
this Agreement shall be at least as favorable as the most favorable terms and
conditions made available with respect to the shares of Preferred Stock sold
to investors in the private placement conducted by Hoak Breedlove Wesneski &
Co., and the Company shall reissue the Preferred Stock to METAMOR WORLDWIDE
on such more favorable terms in the event more favorable terms are made
available to such other investors.
1.3 THE CLOSING. The closing of the purchase and sale of the
Preferred Stock to be purchased pursuant to SECTION 1.2 (the "Closing") shall
take place at the offices of METAMOR WORLDWIDE, Inc., 4400 Post Oak
Boulevard, Suite 1100, Houston, Texas 77027 at 10:00 a.m. on May 15, 1998 or
at such other place or on such other date as may be mutually agreeable to the
Company and METAMOR WORLDWIDE. At the Closing, the Company shall deliver to
METAMOR WORLDWIDE stock certificates evidencing the Preferred Stock to be
purchased by METAMOR WORLDWIDE, registered in METAMOR WORLDWIDE's name, upon
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payment of the purchase price thereof by a cashier's or certified check, or
by wire transfer of immediately available funds to such account as designated
by the Company in the amount of two million dollars ($2,000,000.00).
ARTICLE II
CONDITIONS OF METAMOR WORLDWIDE'S
OBLIGATION AT THE CLOSING
The obligation of METAMOR WORLDWIDE to purchase and pay for the
Preferred Stock at the Closing is subject to the satisfaction as of the
Closing of the following conditions:
2.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties contained in SECTION 4 hereof shall be true and correct at and as
of the Closing as though then made, except to the extent of changes caused by
the transactions expressly contemplated herein.
2.2 CERTIFICATE OF DESIGNATIONS. The Certificate of Designations
shall be in the form set forth as EXHIBIT A hereto, shall be in full force
and effect under the laws of Delaware as of the Closing and shall not have
been amended or modified.
2.3 CLOSING DOCUMENTS. The Company shall have delivered to METAMOR
WORLDWIDE all of the following documents;
(i) an Officer's Certificate, dated the date of the Closing,
stating that the conditions specified in SECTION 1 and SECTIONS 2.1 and 2.2
have been fully satisfied;
(ii) certified copies of the resolutions duly adopted by the
Board of Directors of the Company or a committee thereof authorizing the
execution, delivery and performance of this Agreement and each of the other
agreements contemplated hereby (collectively, the "DOCUMENTS"), the filing
of the Certificate of Designations referred to in SECTION 2.2, the issuance
and sale of the Preferred Stock and the consummation of all other
transactions contemplated by this Agreement;
(iii) such other documents relating to the transactions
contemplated by this Agreement as METAMOR WORLDWIDE or its counsel may
reasonably request.
2.4 COMPLIANCE WITH APPLICABLE LAWS. The purchase of Preferred Stock
by METAMOR WORLDWIDE hereunder shall not be prohibited by any applicable law
or governmental regulation, shall not subject METAMOR WORLDWIDE
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<PAGE>
to any penalty, liability or, in METAMOR WORLDWIDE's sole judgment, other
onerous conditions under or pursuant to any applicable law or governmental
regulation, and shall be permitted by laws and regulations of the
jurisdictions to which METAMOR WORLDWIDE is subject.
2.5 WAIVER. Any condition specified in this SECTION 2 may be waived
only if such waiver is set forth in a writing executed by METAMOR WORLDWIDE.
ARTICLE III
TRANSFER OF RESTRICTED SECURITIES
3.1 TRANSFER OF RESTRICTED SECURITIES.
(a) Restricted Securities are transferable only pursuant to (i)
public offerings registered under the Securities Act, (ii) Rule 144 or Rule
144A of the Securities and Exchange Commission (or any similar rule or rules
then in force) if such rule or rules are available and (iii) subject to the
conditions specified in PARAGRAPH (b) below, any other legally available
means of transfer.
(b) In connection with the transfer of any Restricted Securities
(other than a transfer described in subparagraph 3(i)(a) or (b) above), the
holder thereof shall deliver written notice to the Company describing in
reasonable detail the transfer or proposed transfer, together with an opinion
of Hogan & Hartson, LLP or other counsel which (to the Company's reasonable
satisfaction) is knowledgeable in securities law matters to the effect that
such transfer of Restricted Securities may be effected without registration
of such Restricted Securities under the Securities Act. In addition, if the
holder of the Restricted Securities delivers to the Company an opinion of
Hogan & Hartson, LLP or such other counsel that no subsequent transfer of
such Restricted Securities shall require registration under the Securities
Act, the Company shall promptly upon such contemplated transfer deliver new
certificates for such Restricted Securities which do not bear the Securities
Act legend set forth in SECTION 6.3. If the Company is not required to
deliver new certificates for such Restricted Securities not bearing such
legend, the holder thereof shall not transfer the same until the prospective
transferee has confirmed to the Company in writing its agreement to be bound
by the conditions contained in this paragraph and SECTION 6.3.
(c) Upon the request of METAMOR WORLDWIDE, the Company shall promptly
supply to METAMOR WORLDWIDE or its prospective transferees all information
regarding the Company required to be delivered in connection with a transfer
pursuant to Rule 144A of the Securities and Exchange Commission.
3
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
As a material inducement to METAMOR WORLDWIDE to enter into this
Agreement and purchase the Preferred Stock, the Company hereby represents and
warrants to METAMOR WORLDWIDE that:
4.1 ORGANIZATION AND CORPORATE POWER. The Company is a corporation
duly organized, validly existing and in good standing under the laws of
Delaware and is qualified to do business in every jurisdiction in which the
failure to so qualify might reasonably be expected to have a material adverse
effect on the financial condition, operating results, assets, operations or
business prospects of the Company and its Subsidiaries taken as a whole. The
Company has all requisite corporate power and authority and all material
licenses, permits and authorizations necessary to own and operate its
properties, to carry on its businesses as now conducted and presently
proposed to be conducted and to carry out the transactions contemplated by
this Agreement. The copies of the Company's Certificate of Incorporation and
bylaws which have been furnished to METAMOR WORLDWIDE's counsel reflect all
amendments made thereto at any time prior to the date of this Agreement and
are correct and complete.
4.2 CAPITAL STOCK AND RELATED MATTERS.
(a) As of the Closing and immediately thereafter, the authorized
capital stock of the Company shall consist of (1) 60,000,000 shares of Common
Stock, of which (i) 21,774,388 shares are issued and outstanding as of May 6,
1998, (ii) 2,000,000 of which are reserved for issuance to METAMOR WORLDWIDE
pursuant to the Option Agreement previously issued to METAMOR WORLDWIDE, and
(iii) 15,800,000 shares of which are reserved for issuance pursuant to
outstanding warrants, options or convertible securities (the "Outstanding
Options"); and (2) 1,000,000 shares of Preferred Stock, of which 50 shares of
Series A Preferred Stock, 425 shares of Series C Preferred Stock and 5,000
shares of Series E Preferred Stock are outstanding. As of the Closing, the
Company shall not have outstanding any stock or securities convertible or
exchangeable for any shares of its capital stock or containing any profit
participation features, nor shall it have outstanding any rights or options
to subscribe for or to purchase its capital stock or any stock or securities
convertible into or exchangeable for its capital stock or any stock
appreciation rights or phantom stock plans other as disclosed in the
Company's filings with the Securities and Exchange Commission and pursuant to
and as contemplated by this Agreement, the Option Agreement and the
Outstanding Options. As of the Closing, the Company shall not be subject to
any obligation (contingent or otherwise) to repurchase or otherwise acquire
or retire any shares of its capital stock or any warrants, options or other
rights to acquire its capital stock, except pursuant to this Agreement, the
Option Agreement, the Outstanding Options, and the Series E Preferred Stock
to be redeemed from the proceeds of this offering. As of the Closing, all of
the
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outstanding shares of the Company's capital stock shall be validly issued,
fully paid and nonassessable.
(b) There are no statutory or, to the best of the Company's
knowledge, contractual stockholders preemptive rights or rights of refusal
with respect to the issuance of the Preferred Stock hereunder, except as
expressly provided herein. Based in part on the investment representations
of METAMOR WORLDWIDE in SECTION 6.3 hereof, the Company has not violated any
applicable federal or state securities laws in connection with the offer,
sale or issuance of any of its capital stock, and the offer, sale and
issuance of the Preferred Stock hereunder do not and will not require
registration under the Securities Act or any applicable state securities
laws. To the best of the Company's knowledge, there are no agreements between
the Company's stockholders with respect to the voting or transfer of the
Company's capital stock or with respect to any other aspect of the Company's
affairs, except for this Agreement and the prior Purchase Agreement with
METAMOR WORLDWIDE.
4.3 AUTHORIZATION; NO BREACH. The execution, delivery and performance
of this Agreement, the Documents and all other agreements contemplated hereby
to which the Company is a party and the filing of the Certificate of
Designations have been duly authorized by the Company. This Agreement, the
Documents, the Certificate of Designations and all other agreements
contemplated hereby each constitutes a valid and binding obligation of the
Company, enforceable in accordance with its terms. The execution and delivery
by the Company of this Agreement, the Documents and all other agreements
contemplated hereby to which the Company is a party, the offering, sale and
issuance of the Preferred Stock hereunder, the Certificate of Designations
and the fulfillment of and compliance with the respective terms hereof and
thereof by the Company do not and will not (i) conflict with or result in a
breach of the terms, conditions or provisions of, (ii) constitute a default
under, (iii) result in the creation of any lien, security interest, charge or
encumbrance upon the Company's capital stock or assets pursuant to. (iv) give
any third party the right to modify, terminate or accelerate any obligation
under, (v) result in a violation of, or (vi) require any authorization,
consent, approval, exemption or other action by or notice to any court or
administrative or governmental body pursuant to, the Certificate of
Incorporation or bylaws of the Company, or any law, statute, rule or
regulation to which the Company is subject, or any agreement, instrument,
order, judgment or decree to which the Company is a party or by which it is
bound.
4.4 GOVERNMENTAL CONSENT, ETC. No permit, consent, approval or
authorization of, or declaration to or filing with, any governmental
authority is required in connection with the execution, delivery and
performance by the Company of this Agreement or the other agreements
contemplated hereby, or the consummation by the Company of any other
transactions contemplated hereby or thereby.
4.5 CLOSING DATE. The representations and warranties of the Company
contained in this SECTION 4 and elsewhere in this Agreement and all
information
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contained in any exhibit, schedule or attachment hereto or in any writing
delivered by, or on behalf of, the Company to METAMOR WORLDWIDE shall be true
and correct in all material respects on the date of the Closing as though
then made, except as affected by the transactions expressly contemplated by
this Agreement.
ARTICLE V
DEFINITIONS
5.1 For the purposes of this Agreement, the following terms have the
meanings set forth below:
"COMMON STOCK" means the Company's common stock, par value $.01 per
share.
"OFFICER'S CERTIFICATE" means a certificate signed by the Company's
president or its chief financial officer, stating that (i) the officer
signing such certificate has made or has caused to be made such
investigations as are necessary in order to permit him to verify the accuracy
of the information set forth in such certificate and (ii) to the best of such
officer's knowledge, such certificate does not misstate any material fact and
does not omit to state any fact necessary to make the certificate not
misleading.
"PERSON" means an individual, a partnership, a limited liability
company, a corporation, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization and a governmental entity or
any department, agency or political subdivision thereof.
"RESTRICTED SECURITIES" means (i) the Preferred Stock issued hereunder
and (ii) any securities issued with respect to the securities referred to in
clause (i) above by way of a stock dividend or stock split or in connection
with a combination of shares, recapitalization, merger, consolidation or
other reorganization. As to any particular Restricted Securities, such
securities shall cease to be Restricted Securities when they have (A) been
effectively registered under the Securities Act and disposed of in accordance
with the registration statement covering them, (B) become eligible for sale
pursuant to Rule 144(k) (or any similar provision then in force) under the
Securities Act or (C) been otherwise transferred and new certificates for
them not bearing the Securities Act legend set forth in SECTION 6.3 have been
delivered by the Company in accordance with SECTION 3.1(b). Whenever any
particular securities cease to be Restricted Securities, the holder thereof
shall be entitled to receive from the Company, without expense, new
securities of like tenor not bearing a Securities Act legend of the character
set forth in SECTION 6.3.
"SECURITIES ACT" means the Securities Act of 1933, as amended, or any
similar federal law then in force.
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"SECURITIES EXCHANGE ACT" means the Securities Exchange Act of 1934. as
amended, or any similar federal law then in force.
"SECURITIES AND EXCHANGE COMMISSION" includes any governmental body or
agency succeeding to the functions thereof.
"SUBSIDIARY" means any corporation of which the securities having a
majority of the ordinary voting power in electing the board of directors are,
at the time as of which any determination is being made, owned by the Company
either directly or through one or more Subsidiaries.
ARTICLE VI
MISCELLANEOUS
6.1 EXPENSES. Each party agrees to bear its own expenses associated
with the transactions contemplated hereby.
6.2 REMEDIES. Each holder of Investor Stock shall have all rights
and remedies set forth in this Agreement and the Certificate of Designations
and all rights and remedies which such holders have been granted at any time
under any other agreement or contract and all of the rights which such
holders have under any law. Any Person having any rights under any provision
of this Agreement shall be entitled to enforce such rights specifically
(without posting a bond or other security), to recover damages by reason of
any breach of any provision of this Agreement and to exercise all other
rights granted by law.
6.3 METAMOR WORLDWIDE'S INVESTMENT REPRESENTATIONS. METAMOR
WORLDWIDE hereby represents that it is acquiring the Restricted Securities
purchased hereunder or acquired pursuant hereto for its own account with the
present intention of holding such securities for purposes of investment, and
that it has no intention of selling such securities in a public distribution
in violation of the federal securities laws or any applicable state
securities laws; provided that nothing contained herein shall prevent METAMOR
WORLDWIDE and subsequent holders of Restricted Securities from transferring
such securities in compliance with the provisions of ARTICLE III hereof.
Each certificate for Restricted Securities shall be imprinted with a legend
in substantially the following form:
"The securities represented by this certificate were originally
issued on May 15, 1998 and have not been registered under the Securities
Act of 1933, as amended. The transfer of the securities represented by this
certificate is subject to the conditions specified in the Purchase
Agreement, dated as of May 15, 1998, between the issuer (the "Company") and
a certain investor, and the Company reserves the right to refuse the
transfer of such securities until such conditions have been fulfilled with
respect to such transfer. A copy of such conditions shall
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be furnished by the Company to the holder hereof upon written request and
without charge."
6.4 CONSENT TO AMENDMENTS. Except as otherwise expressly provided
herein, the provisions of this Agreement may be amended and the Company may
take any action herein prohibited, or omit to perform any act herein required
to be performed by it, only if the Company has obtained the written consent
of the holders of a majority of the Investor Stock. No other course of
dealing between the Company and the holder of any Preferred Stock or any
delay in exercising any fights hereunder or under the Certificate of
Incorporation shall operate as a waiver of any rights of any such holders.
For purposes of this Agreement, shares of Preferred Stock held by the Company
or any Subsidiaries shall not be deemed to be outstanding.
6.5 SURVIVAL OF REPRESENTATION AND WARRANTIES. All representations
and warranties contained herein or made in writing by any party in connection
herewith shall survive the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, regardless of any
investigation made by METAMOR WORLDWIDE or on its behalf.
6.6 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, all covenants and agreements contained in this Agreement by or on
behalf of any of the parties hereto shall bind and inure to the benefit of
the respective successors and assigns of the parties hereto whether so
expressed or not. In addition, and whether or not any express assignment has
been made, the provisions of this Agreement which are for METAMOR WORLDWIDE's
benefit as a purchaser or holder of Preferred Stock are also for the benefit
of, and enforceable by, any subsequent holder of such Preferred Stock. The
rights and obligations of METAMOR WORLDWIDE under this Agreement and the
agreements contemplated hereby may be assigned by METAMOR WORLDWIDE at any
time, in whole or in part, to any Subsidiary of METAMOR WORLDWIDE, or any
successor thereto.
6.7 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. Where any accounting
determination or calculation is required to be made under this Agreement or
the exhibits hereto, such determination or calculation (unless otherwise
provided) shall be made in accordance with generally accepted accounting
principles, consistently applied, except that if because of a change in
generally accepted accounting principles the Company would have to alter a
previously utilized accounting method or policy in order to remain in
compliance with generally accepted accounting principles, such determination
or calculation shall continue to be made in accordance with the Company's
previous accounting methods and policies.
6.8 SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable
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law, such provision shall be ineffective only to the extent of such
prohibition or invalidity, without invalidating the remainder of this
Agreement.
6.9 COUNTERPARTS. This Agreement may be executed simultaneously in
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together shall
constitute one and the same Agreement.
6.10 DESCRIPTIVE HEADINGS; INTERPRETATION. The descriptive headings of
this Agreement are inserted for convenience only and do not constitute a
Section of this Agreement. The use of the word "including" in this Agreement
shall be by way of example rather than by limitation.
6.11 GOVERNING LAW. The corporate law of Delaware shall govern all
issues concerning the relative rights of the Company and its stockholders.
All other questions concerning the construction, validity and interpretation
of this Agreement and the exhibits and schedules hereto shall he governed by
and construed in accordance with the internal laws of the State of Texas,
without giving effect to any choice of law or conflict of law provision or
rule (whether of the State of Texas or any other jurisdiction) that would
cause the application of the laws of any jurisdiction other than the State of
Texas.
6.12 NOTICES. All notices, demands or other communications to be
given or delivered under or by reason of the provisions of this Agreement
shall be in writing and shall be deemed to have been given when delivered
personally to the recipient, sent to the recipient by reputable express
courier service (charges prepaid), 48 hours after being deposited to the
recipient by United States mail, first class, postage prepaid, or sent by
facsimile. Such notices, demands and other communications shall be sent to
METAMOR WORLDWIDE and to the Company at the address indicated below:
IF TO THE COMPANY:
Citadel Technology, Inc.
3811 Turtle Creek Boulevard, Suite 600
Dallas, TX 75219
Attention: Steven B. Solomon
Tel No.: (214) 520-9292
Fax No.: (214) 520-0034
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with a copy to:
David A. Wood
Wood, Exall & Bonnet, L.L.P.
12222 Merit Drive, Suite 880
Dallas, TX 75251
Tel No.: (972) 991-8510
Fax No.: (972) 991-9261
IF TO METAMOR WORLDWIDE:
METAMOR WORLDWIDE, Inc.
4400 Post Oak Parkway, Suite 2000
Houston, TX 77027
Attention: Kenneth R. Johnsen
Tel No.: (713) 548-3485
Fax No.: (713) 548-3430
with a copy to:
Peter T. Dameris, Esq.
METAMOR WORLDWIDE, Inc.
4400 Post Oak Parkway, Suite 1100
Houston, TX 77027
Tel No.: (713) 548-3400
Fax No.: (713) 627-1059
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
6.13. ARBITRATION. THE PARTIES AGREE TO SUBMIT TO ARBITRATION, IN
ACCORDANCE WITH THESE PROVISIONS, ANY DISPUTED CLAIM OR CONTROVERSY ARISING
FROM OR RELATED TO THE ALLEGED BREACH OF THIS AGREEMENT. THE PARTIES FURTHER
AGREE THAT THE ARBITRATION PROCESS AGREED UPON HEREIN SHALL BE THE EXCLUSIVE
MEANS FOR RESOLVING ALL DISPUTES MADE SUBJECT TO ARBITRATION HEREIN, BUT THAT
NO ARBITRATOR SHALL HAVE AUTHORITY TO EXPAND THE SCOPE OF THESE ARBITRATION
PROVISIONS. ANY ARBITRATION HEREUNDER SHALL BE CONDUCTED UNDER THE
PROCEDURES OF THE AMERICAN ARBITRATION ASSOCIATION (AAA). EITHER PARTY MAY
INVOKE ARBITRATION PROCEDURES HEREIN BY WRITTEN NOTICE FOR ARBITRATION
CONTAINING A STATEMENT OF THE MATTER TO BE ARBITRATED. THE PARTIES SHALL THEN
HAVE FOURTEEN (14) DAYS IN WHICH THEY MAY IDENTIFY A MUTUALLY AGREEABLE,
NEUTRAL ARBITRATOR. AFTER THE FOURTEEN (14) DAY PERIOD HAS EXPIRED, THE
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PARTIES SHALL PREPARE AND SUBMIT TO THE AAA A JOINT SUBMISSION, WITH EACH
PARTY TO CONTRIBUTE HALF OF THE APPROPRIATE ADMINISTRATIVE FEE. IN THE EVENT
THE PARTIES CANNOT AGREE UPON A NEUTRAL ARBITRATOR WITHIN FOURTEEN (14) DAYS
AFTER WRITTEN NOTICE FOR ARBITRATION IS RECEIVED, THEIR JOINT SUBMISSION TO
THE AAA SHALL REQUEST A PANEL OF THREE ARBITRATORS WHO ARE PRACTICING
ATTORNEYS WITH PROFESSIONAL EXPERIENCE IN THE FIELD OF CORPORATE LAW, AND THE
PARTIES SHALL ATTEMPT TO SELECT AN ARBITRATOR FROM THE PANEL ACCORDING TO AAA
PROCEDURES. UNLESS OTHERWISE AGREED BY THE PARTIES, THE ARBITRATION HEARING
SHALL TAKE PLACE IN HOUSTON, TEXAS, AT A PLACE DESIGNATED BY THE AAA. ALL
ARBITRATION PROCEDURES HEREUNDER SHALL BE CONFIDENTIAL. EACH PARTY SHALL BE
RESPONSIBLE FOR ITS COSTS INCURRED IN ANY ARBITRATION, AND THE ARBITRATOR
SHALL NOT HAVE AUTHORITY TO INCLUDE ALL OR ANY PORTION OF SAID COSTS IN AN
AWARD, REGARDLESS OF WHICH PARTY PREVAILS. THE ARBITRATOR MAY INCLUDE
EQUITABLE RELIEF. ANY ARBITRATION AWARDED SHALL BE ACCOMPANIED BY A WRITTEN
STATEMENT CONTAINING A SUMMARY OF THE ISSUES IN CONTROVERSY, A DESCRIPTION OF
THE AWARD, AND AN EXPLANATION OF THE REASONS FOR THE AWARD.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first written above.
CITADEL TECHNOLOGY, INC.
By: /s/ Steven B. Solomon
-------------------------
Steven B. Solomon
President
METAMOR WORLDWIDE, INC.
By: /s/ Peter T. Dameris
----------------------------
Name: Peter T. Dameris
----------------------------
Title: Senior Vice President
----------------------------
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SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT, dated as of April 30, 1998, is
entered into by and between CITADEL TECHNOLOGY, INC., a Delaware
corporation, with headquarters located at 3811Turtle Creek Blvd., Suite 600,
Dallas, TX 75219 (the "Company"), and the undersigned (the "Buyer").
W I T N E S S E T H:
WHEREAS, the Company and the Buyer are executing and delivering
this Agreement in accordance with and in reliance upon the exemption from
securities registration afforded, INTER ALIA, by Rule 506 under Regulation D
("Regulation D") as promulgated by the United States Securities and Exchange
Commission (the "SEC") under the Securities Act of 1933, as amended (the
"1933 Act"), and/or Section 4(2) of the 1933 Act; and
WHEREAS, the Buyer wishes to purchase, upon the terms and subject
to the conditions of this Agreement, Convertible Redeemable Preferred Stock,
$.01 par value per share (the "Convertible Preferred Stock"), of the Company
which will be convertible into shares of Common Stock, $.01 par value per
share of the Company (the "Common Stock"), upon the terms and subject to the
conditions of such Convertible Preferred Stock, together with the Warrants
(as defined below) exercisable for the purchase of shares of Common Stock
(the "Warrant Shares"), and subject to acceptance of this Agreement by the
Company;
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
1. AGREEMENT TO PURCHASE; PURCHASE PRICE.
a. PURCHASE; CERTAIN DEFINITIONS. (i) The undersigned hereby
agrees to purchase from the Company shares of the Convertible Preferred Stock
in the amount set forth on the signature page of this Agreement (the "Initial
Preferred Stock"), out of a total offering of $500,000 of such Convertible
Preferred Stock, and having the terms and conditions set forth in the
Certificate of Designations, Voting Powers, Preferences and Rights to the
Certificate of Incorporation of the Company attached hereto as ANNEX I (the
"Certificate of Designations"). The purchase price for the Initial Preferred
Stock shall be as set forth on the signature page hereto (the "Purchase
Price") and shall be payable in United States Dollars.
(ii) As used herein, the term "Preferred Stock" means the
Initial Preferred Stock, together with all shares, if any, of the Convertible
Preferred Stock issued as dividends
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thereon, unless the context otherwise requires.
(iii) As used herein, the term "Securities" means the Preferred
Stock, the Warrants and the Common Stock issuable upon conversion of the
Preferred Stock or the exercise of the Warrants.
(iv) As used herein, the term "Closing Date" means the date of
the closing of the purchase and sale of the Initial Preferred Stock, as
provided herein.
(v) As used herein, the term "Market Price" means the average
closing bid price of the Common Stock as reported by Bloomberg, LP for the
five (5) trading days ending on the trading day immediately before the date
indicated in the relevant provision hereof.
(vi) As used herein, the term "Effective Date" means the
effective date of the Registration Statement covering the Registrable
Securities (as defined in the Registration Rights Agreement defined below).
b. FORM OF PAYMENT. The Buyer shall pay the Purchase Price for
the Initial Preferred Stock by delivering immediately available good funds in
United States Dollars to the escrow agent (the "Escrow Agent") identified in
the Joint Escrow Instructions attached hereto as ANNEX II (the "Joint Escrow
Instructions"). No later than the Closing Date (as defined below), the
Company shall deliver one or more certificates representing the Initial
Preferred Stock duly executed on behalf of the Company (collectively, the
"Certificate") to the Escrow Agent. By signing this Agreement, the Buyer and
the Company, and subject to acceptance by the Escrow Agent, each agrees to
all of the terms and conditions of, and becomes a party to, the Joint Escrow
Instructions, all of the provisions of which are incorporated herein by this
reference as if set forth in full.
c. METHOD OF PAYMENT. Payment into escrow of the Purchase Price
for the Initial Preferred Stock shall be made by wire transfer of funds to:
Bank of New York
350 Fifth Avenue
New York, New York 10001
ABA# 021000018
For credit to the account of Krieger & Prager, Esqs.
Account No.: < To be identified by Krieger & Prager >
Not later than 1:00 p.m., New York time, on the date which is one (1) New
York Stock Exchange trading day after the Company shall have accepted this
Agreement and returned a signed counterpart of this Agreement to the Escrow
Agent by facsimile, the Buyer shall deposit with the Escrow Agent the
aggregate purchase price for the Initial Preferred Stock, in immediately
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available funds. Time is of the essence with respect to such payment, and
failure by the Buyer to make such payment shall allow the Company to cancel
this Agreement.
d. ESCROW PROPERTY. The Purchase Price and the Certificate
delivered to the Escrow Agent as contemplated by Sections 1(b) and (c) hereof
are referred to as the "Escrow Property."
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.; ACCESS TO INFORMATION;
INDEPENDENT INVESTIGATION.
The Buyer represents and warrants to, and covenants and agrees
with, the Company as follows:
a. Without limiting Buyer's right to sell the Common Stock
pursuant to the Registration Statement (as that term is defined in the
Registration Rights Agreement), the Buyer is purchasing the Preferred Stock
and the Warrants and will be acquiring the shares of Common Stock issuable
upon conversion of the Preferred Stock (the "Converted Shares") and the
Warrant Shares for its own account for investment or as Agent for other
"accredited investors", and not with a view towards the public sale or
distribution thereof and not with a view to or for sale in connection with
any distribution thereof.
b. The Buyer is (i) an "accredited investor" as that term is
defined in Rule 501 of the General Rules and Regulations under the 1933 Act
by reason of Rule 501(a)(3), (ii) experienced in making investments of the
kind described in this Agreement and the related documents, (iii) able, by
reason of the business and financial experience of its officers (if an
entity) and professional advisors (who are not affiliated with or compensated
in any way by the Company or any of its affiliates or selling agents), to
protect its own interests in connection with the transactions described in
this Agreement, and the related documents, and (iv) able to afford the entire
loss of its investment in the Securities.
c. All subsequent offers and sales of the Preferred Stock and the
shares of Common Stock representing the Converted Shares and the Warrant
Shares (such Common Stock sometimes referred to as the "Shares") by the Buyer
shall be made pursuant to registration of the Shares under the 1933 Act or
pursuant to an exemption from registration.
d. The Buyer understands that the Initial Preferred Stock are
being offered and sold to it in reliance on specific exemptions from the
registration requirements of United States federal and state securities laws
and that the Company is relying upon the truth and accuracy of, and the
Buyer's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of the Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of the
Buyer to acquire the Initial Preferred Stock.
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e. The Buyer and its advisors, if any, have been furnished with
all materials relating to the business, finances and operations of the
Company and materials relating to the offer and sale of the Initial Preferred
Stock and the offer of the Shares which have been requested by the Buyer,
including ANNEX V hereto. The Buyer and its advisors, if any, have been
afforded the opportunity to ask questions of the Company and have received
complete and satisfactory answers to any such inquiries. Without limiting
the generality of the foregoing, the Buyer has also had the opportunity to
obtain and to review the Company's (i) the Company's annual report on Form
10-K for the year ending February 28, 1997, (ii) the Company's quarterly
reports on Form 10-Q for the quarterly periods ending May 31, 1997. August
31, 1997 and November 30. 1997, (iii) Current Reports on Form 8-K, filed on
March 26, 1997, April 28, 1997, May 12, 1997, June 24, 1997, and October 21,
1997, and (iv) Definitive Proxy Statement filed on January 30, 1998 (the
"SEC Reports");
f. The Buyer understands that its investment in the Securities
involves a high degree of risk.
g. The Buyer understands that no United States federal or state
agency or any other government or governmental agency has passed on or made
any recommendation or endorsement of the Securities.
h. This Agreement has been duly and validly authorized, executed
and delivered on behalf of the Buyer and is a valid and binding agreement of
the Buyer enforceable in accordance with its terms, subject as to
enforceability to general principles of equity and to bankruptcy, insolvency,
moratorium and other similar laws affecting the enforcement of creditors'
rights generally.
i. Notwithstanding the provisions hereof or of the Preferred
Stock, in no event (except (i) with respect to an automatic conversion of the
Preferred Stock as provided in the Certificate of Designations, (ii) with
respect to a conversion pursuant to a Redemption Notice Conversion as
provided in the Certificate of Designations or (iii) if the Company is in
default of any of its obligations under the Preferred Stock or any of the
Transaction Agreements, as defined below, and the Buyer has asserted such
default) shall the holder be entitled to convert any Preferred Stock to the
extent that, after such conversion, the sum of (1) the number of shares of
Common Stock beneficially owned by the Buyer and its affiliates (other than
shares of Common Stock which may be deemed beneficially owned through the
ownership of the unconverted portion of the Preferred Stock), and (2) the
number of shares of Common Stock issuable upon the conversion of the
Preferred Stock with respect to which the determination of this proviso is
being made, would result in beneficial ownership by the Buyer and its
affiliates of more than 9.99% of the outstanding shares of Common Stock
(after taking into account the shares to be issued to the Buyer upon such
conversion). For purposes of the proviso to the immediately preceding
sentence, beneficial ownership shall be determined in accordance with Section
13(d) of the
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Securities Exchange Act of 1934, as amended (the "1934 Act"), except as
otherwise provided in clause (1) of such proviso. The Buyer further agrees
that if the Buyer transfers or assigns any of the Debentures to a party who
or which would not be considered such an affiliate, such assignment shall be
made subject to the transferee's or assignee's specific agreement to be bound
by the provisions of this Section 2(i) as if such transferee or assignee were
a signatory to this Agreement.
3. COMPANY REPRESENTATIONS, ETC.
The Company represents and warrants to the Buyer that, except as
provided in ANNEX V hereto:
a. CONCERNING THE PREFERRED STOCK AND THE SHARES. The
Convertible Preferred Stock has been duly authorized and, when issued and
released from escrow as provided herein, will be duly and validly issued,
fully paid and non-assessable and will not subject the holder thereof to
personal liability by reason of being such holder. There are no preemptive
rights of any stockholder of the Company, as such, to acquire the Preferred
Stock, the Warrants or the Shares.
b. REPORTING COMPANY STATUS. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Delaware and has the requisite corporate power to own its properties and
to carry on its business as now being conducted. The Company is duly
qualified as a foreign corporation to do business and is in good standing in
each jurisdiction where the nature of the business conducted or property
owned by it makes such qualification necessary, other than those
jurisdictions in which the failure to so qualify would not have a material
adverse effect on the business, operations or prospects or condition
(financial or otherwise) of the Company and its subsidiaries, taken as a
whole. The Company has registered its Common Stock pursuant to Section 12 of
the 1934 Act, and the Common Stock is listed and traded on the
NASDAQ/Bulletin Board market. The Company has received no notice, either
oral or written, with respect to the continued eligibility of the Common
Stock for such listing, and the Company has maintained all requirements for
the continuation of such listing.
c. AUTHORIZED SHARES. The Company has at April 23, 1998,
21,774,388 shares of Common Stock outstanding, and has sufficient authorized
and unissued Shares as may be reasonably necessary to effect the conversion
of all of the Preferred Stock (assuming for such purposes that the Market
Price for each Conversion Date were fifty percent of the Market Price on the
Closing Date) and to issue all of the Warrant Shares. The Converted Shares
and the Warrant Shares have been duly authorized and, when issued upon
conversion of, or as interest on, the Preferred Stock in accordance with its
terms or upon exercise of the Warrants, will be duly and validly issued,
fully paid and non-assessable and will not subject the holder thereof to
personal liability by reason of being such holder.
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d. SECURITIES PURCHASE AGREEMENT; REGISTRATION RIGHTS AGREEMENT
AND STOCK. This Agreement and the Registration Rights Agreement, the form of
which is attached hereto as ANNEX IV (the "Registration Rights Agreement"),
and the transactions contemplated hereby and thereby, have been duly and
validly authorized by the Company, this Agreement has been duly executed and
delivered by the Company and this Agreement is, and the Preferred Stock, the
Warrants and the Registration Rights Agreement, when executed and delivered
by or on behalf of the Company, will be, valid and binding agreements of the
Company enforceable in accordance with their respective terms, subject, as to
enforceability, to general principles of equity and to bankruptcy,
insolvency, moratorium, and other similar laws affecting the enforcement of
creditors' rights generally.
e. NON-CONTRAVENTION. The execution and delivery of this
Agreement and the Registration Rights Agreement by the Company, the issuance
of the Securities, and the consummation by the Company of the other
transactions contemplated by this Agreement, the Registration Rights
Agreement, and the Preferred Stock do not and will not conflict with or
result in a breach by the Company of any of the terms or provisions of, or
constitute a default under (i) the articles of incorporation or by-laws of
the Company, each as currently in effect, (ii) any indenture, mortgage, deed
of trust, or other material agreement or instrument to which the Company is a
party or by which it or any of its properties or assets are bound, (iii) to
its knowledge, any existing applicable law, rule, or regulation or any
applicable decree, judgment, or order of any court, United States federal or
state regulatory body, administrative agency, or other governmental body
having jurisdiction over the Company or any of its properties or assets, or
(iv) any listing agreement for its Common Stock, except such conflict,
breach or default which would not have a material adverse effect on the
transactions contemplated herein.
f. APPROVALS. No authorization, approval or consent of any
court, governmental body, regulatory agency, self-regulatory organization, or
stock exchange or market or the stockholders of the Company is required to be
obtained by the Company for the issuance and sale of the Securities to the
Buyer as contemplated by this Agreement, except such authorizations,
approvals and consents that have been obtained.
g. SEC FILINGS. None of the Company's SEC Reports contained, at
the time they were filed, any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements made therein in light of the circumstances under which they
were made, not misleading. The Company has since February 28, 1997 timely
filed all requisite forms, reports and exhibits thereto with the SEC.
h. ABSENCE OF CERTAIN CHANGES. Since February 28, 1997, there
has been no material adverse change and no material adverse development in
the business, properties, operations, condition (financial or otherwise), or
results of operations of the Company and its subsidiaries, taken as a whole,
except as disclosed in the Company's SEC Reports. Since
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February 28, 1997, the Company has not (i) incurred or become subject to any
material liabilities (absolute or contingent) except liabilities incurred in
the ordinary course of business consistent with past practices; (ii)
discharged or satisfied any material lien or encumbrance or paid any material
obligation or liability (absolute or contingent), other than current
liabilities paid in the ordinary course of business consistent with past
practices; (iii) declared or made any payment or distribution of cash or
other property to stockholders with respect to its capital stock, or
purchased or redeemed, or made any agreements to purchase or redeem, any
shares of its capital stock; (iv) sold, assigned or transferred any other
tangible assets, or canceled any debts or claims, except in the ordinary
course of business consistent with past practices; (v) suffered any
substantial losses or waived any rights of material value, whether or not in
the ordinary course of business, or suffered the loss of any material amount
of existing business; (vi) made any changes in employee compensation, except
in the ordinary course of business consistent with past practices; or (vii)
experienced any material problems with labor or management in connection with
the terms and conditions of their employment.
i. FULL DISCLOSURE. There is no fact known to the Company (other
than general economic conditions known to the public generally or as
disclosed in the Company's SEC Reports), that has not been disclosed in
writing to the Buyer that (i) would reasonably be expected to have a material
adverse effect on the business or financial condition of the Company or (ii)
would reasonably be expected to materially and adversely affect the ability
of the Company to perform its obligations pursuant to this Agreement or any
of the agreements contemplated hereby (collectively, including this
Agreement, the "Transaction Agreements"), or (iii) would reasonably be
expected to materially and adversely affect the value of the rights granted
to the Buyer in the Transaction Agreements.
j. ABSENCE OF LITIGATION. Except as set forth in the Company's
SEC Reports, there is no action, suit, proceeding, inquiry or investigation
before or by any court, public board or body pending or, to the knowledge of
the Company, threatened against or affecting the Company, wherein an
unfavorable decision, ruling or finding would have a material adverse effect
on the properties, business or financial condition. results of operation or
prospects of the Company and its subsidiaries taken as a whole or the
transactions contemplated by any of the Transaction Agreements or which would
adversely affect the validity or enforceability of, or the authority or
ability of the Company to perform its obligations under, any of the
Transaction Agreements.
k. ABSENCE OF EVENTS OF DEFAULT. Except as set forth in Section
3(e) hereof, no Event of Default (or its equivalent term), as defined in the
respective agreement to which the Company is a party, and no event which,
with the giving of notice or the passage of time or both, would become an
Event of Default (or its equivalent term) (as so defined in such agreement),
has occurred and is continuing, which would have a material adverse effect on
the Company's financial condition or results of operations.
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l. PRIOR ISSUES. During the twelve (12) months preceding the
date hereof, the Company has not issued any Common Stock or convertible
securities in capital transactions which have not been fully disclosed in the
Company's filings with the SEC. All such issuances have been fully converted
into shares of common stock and there are no outstanding unconverted debt or
convertible securities from those transactions.
m. NO UNDISCLOSED LIABILITIES OR EVENTS. The Company has no
liabilities or obligations other than those disclosed in the Company's SEC
Reports or those incurred in the ordinary course of the Company's business
since February 28, 1997, and which, individually or in the aggregate, do not
or would not have a material adverse effect on the properties, business,
condition (financial or otherwise), results of operations or prospects of the
Company and its subsidiaries, taken as a whole. No event or circumstances
has occurred or exists with respect to the Company or its properties,
business, condition (financial or otherwise), results of operations or
prospects, which, under applicable law, rule or regulation, requires public
disclosure or announcement prior to the date hereof by the Company but which
has not been so publicly announced or disclosed. There are no proposals
currently under consideration or currently anticipated to be under
consideration by the Board of Directors or the executive officers of the
Company which proposal would (x) change the charter or by-laws of the
Company, each as currently in effect, with or without shareholder approval,
which change would reduce or otherwise adversely affect the rights and powers
of the shareholders of the Common Stock or (y) materially or substantially
change the business, assets or capital of the Company, including its
interests in subsidiaries other than the Redemption Fund Raising (as defined
in Annex VII hereto).
n. NO DEFAULT. The Company is not in default in the performance
or observance of any material obligation, agreement, covenant or condition
contained in any indenture, mortgage, deed of trust or other material
instrument or agreement to which it is a party or by which it or its property
is bound.
o. NO INTEGRATED OFFERING. Neither the Company nor any of its
affiliates nor any person acting on its or their behalf has, directly or
indirectly, at any time since June 1997, made any offer or sales of any
security or solicited any offers to buy any security under circumstances that
would eliminate the availability of the exemption from registration under
Regulation D in connection with the offer and sale of the Securities as
contemplated hereby.
p. DILUTION. The number of Shares issuable upon conversion of
the Preferred Stock may increase substantially in certain circumstances,
including, but not necessarily limited to, the circumstance wherein the
trading price of the Common Stock declines prior to the conversion of the
Preferred Stock. The Company's executive officers and directors have studied
and fully understand the nature of the Securities being sold hereby and
recognize that they have a potential dilutive effect. The board of directors
of the Company has concluded, in its good faith business judgment, that such
issuance is in the best interests of the Company. The Company
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<PAGE>
specifically acknowledges that its obligation to issue the Shares upon
conversion of the Preferred Stock and upon exercise of the Warrants is
binding upon the Company and enforceable regardless of the dilution such
issuance may have on the ownership interests of other shareholders of the
Company.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
a. TRANSFER RESTRICTIONS. The Buyer acknowledges that (1) the
Preferred Stock has not been and is not being registered under the provisions
of the 1933 Act and, except as provided in the Registration Rights Agreement,
the Shares have not been and are not being registered under the 1933 Act, and
may not be transferred unless (A) subsequently registered thereunder or (B)
the Buyer shall have delivered to the Company an opinion of counsel,
reasonably satisfactory in form, scope and substance to the Company, to the
effect that the Securities to be sold or transferred may be sold or
transferred pursuant to an exemption from such registration; (2) any sale of
the Securities made in reliance on Rule 144 promulgated under the 1933 Act
may be made only in accordance with the terms of said Rule and further, if
said Rule is not applicable, any resale of such Securities under
circumstances in which the seller, or the person through whom the sale is
made, may be deemed to be an underwriter, as that term is used in the 1933
Act, may require compliance with some other exemption under the 1933 Act or
the rules and regulations of the SEC thereunder; and (3) neither the Company
nor any other person is under any obligation to register the Securities
(other than pursuant to the Registration Rights Agreement) under the 1933 Act
or to comply with the terms and conditions of any exemption thereunder.
b. RESTRICTIVE LEGEND. The Buyer acknowledges and agrees that
the Preferred Stock and the Warrants and, until such time as the Common Stock
has been registered under the 1933 Act as contemplated by the Registration
Rights Agreement and sold pursuant to an effective Registration Statement,
certificates and other instruments representing any of the Securities shall
bear a restrictive legend in substantially the following form (and a
stop-transfer order may be placed against transfer of any such Securities):
THESE SECURITIES (THE "SECURITIES") HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR
OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES OR AN OPINION OF COUNSEL OR OTHER
EVIDENCE ACCEPTABLE TO THE CORPORATION THAT SUCH REGISTRATION IS
NOT REQUIRED.
c. REGISTRATION RIGHTS AGREEMENT. The parties hereto agree to
enter into the Registration Rights Agreement on or before the Closing Date.
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<PAGE>
d. FILINGS. The Company undertakes and agrees to make all
necessary filings in connection with the sale of the Preferred Stock to the
Buyer under any United States laws and regulations, or by any domestic
securities exchange or trading market, and to provide a copy thereof to the
Buyer promptly after such filing.
e. REPORTING STATUS. So long as the Buyer beneficially owns any
of the Preferred Stock, the Company shall file all reports required to be
filed with the SEC pursuant to Section 13 or 15(d) of the 1934 Act, and the
Company shall not terminate its status as an issuer required to file reports
under the 1934 Act even if the 1934 Act or the rules and regulations
thereunder would permit such termination.
f. USE OF PROCEEDS. The Company will use the proceeds from the
sale of the Preferred Stock (excluding amounts paid by the Company for legal
fees, finder's fees and escrow agent fees in connection with the sale of the
Preferred Stock) for general capital purposes and acquisitions, but shall
not, directly or indirectly, use such proceeds for investment in any other
affiliate or to repay debt to affiliates.
g. CERTAIN AGREEMENTS. (i) The Company covenants and agrees
that it will not, without the prior written consent of the Buyer, enter into
any subsequent or further offer or sale of Common Stock or securities
convertible into Common Stock with any third party until the earlier of the
date which is one hundred eighty (180) days after the Effective Date.
(ii) The provisions of subparagraph (g)(i) will not apply to (w)
Common Stock issued pursuant to Rule 144, provided the holder thereof holds
such Common Stock for at least one year from the date of issuance; (x) a
secondary public offering of shares of Common Stock at market; (y) an
offering of convertible debentures at market or above; or (z) the issuance of
securities (other than for cash) in connection with a merger, consolidation,
sale of assets, disposition or the exchange of the capital stock for assets,
stock or other joint venture interests; provided, such securities would not
be included in the Registration Statement relating to the Shares and a
registration statement in respect of such stock shall not be filed prior to
sixty (60) days after the Effective Date.
(iii) The provisions of subparagraph (g)(i) will also not apply
to a Redemption Fund Raising (as defined in ANNEX VII annexed hereto),
provided all of the terms and conditions set forth in ANNEX VII annexed
hereto are satisfied.
(iv) In the event the Company breaches the provisions of this
Section 4(g), the Conversion Price shall be amended to be the lesser of 68%
of the lowest five (5) day average closing bid for the twenty-five (25) days
prior to the Conversion Notice or 100% of the five (5) day average bid price
prior to the Closing Date, and the Buyer may require the Company to
immediately redeem all outstanding Preferred Stock in accordance with Section
4(j)(y).
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<PAGE>
h. AVAILABLE SHARES. The Company shall have at all times
authorized and reserved for issuance, free from preemptive rights, shares of
Common Stock sufficient to yield two hundred percent (200%) of the number of
shares of Common Stock issuable at conversion rights of the Buyer pursuant to
the terms and conditions of the Preferred Stock for all outstanding shares of
Preferred Stock and upon exercise of the Warrants.
i. WARRANTS. The Company agrees to issue to Buyer on the Closing
Date transferable divisible warrants with cashless exercise provisions (the
"Warrants") for 150,000 shares of Common Stock. Such Warrants shall bear an
exercise price of seventy-five cents ($0.75) per share of Common Stock and,
except as provided below, shall be exercisable immediately upon issuance, and
will expire on the third anniversary of the Closing Date. The Warrants shall
be in the form annexed hereto as ANNEX VI, together with piggy-back
registration rights, and demand registration rights under the Registration
Rights Agreement. Notwithstanding the foregoing provisions regarding the
exercisability of the Warrants, Warrants for 50,000 shares shall not be
exercisable for ninety (90) days after the Closing Date and shall be canceled
in their entirety if the Preferred Stock has been fully redeemed in
accordance with all of the provisions of the Certificate of Designations by
the ninetieth day after the Closing Date.
j. LIMITATION ON ISSUANCE OF SHARES. The Company may be limited
in the number of shares of Common Stock it may issue by virtue of (i) the
number of authorized shares or (ii) the applicable rules and regulations of
the principal securities market on which the Common Stock is listed or traded
(collectively, the "Cap Regulations"). Without limiting the other
provisions thereof, the Certificate of Designations shall provide that (i)
the Company will take all steps reasonably necessary to be in a position to
issue shares of Common Stock on conversion of the Preferred Stock and/or
exercise of the Warrants without violating the Cap Regulations and (ii) if,
despite taking such steps, the Company still can not issue such shares of
Common Stock without violating the Cap Regulations, the holder of Preferred
Stock which can not be converted as result of the Cap Regulations (each such
share, an "Unconverted Preferred Stock") shall have the option, exercisable
in such holder's sole and absolute discretion, to elect either of the
following remedies:
(x) require the Company to issue shares of Common Stock in
accordance with such holder's notice of conversion at a conversion
purchase price equal to the average of the closing bid price per share
of Common Stock for the five (5) consecutive trading days (subject to
certain equitable adjustments for certain events occurring during such
period) preceding the date of notice of conversion; or
(y) require the Company to redeem each Unconverted Preferred
Stock for an amount payable in cash (the "Redemption Amount") equal
to:
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V x M
------------
CP
where:
"V" means the liquidation preference of an Unconverted Preferred
Stock plus any accrued but unpaid dividends thereon;
"CP" means the conversion price in effect on the date of
redemption (the "Redemption Date") specified in the notice from the
holder of the Unconverted Preferred Stock electing this remedy; and
"M" means the highest closing bid price per share of the Common
Stock during the period beginning on the Redemption Date and ending
on the date of payment of the Redemption Amount.
If a holder owns more than one share of Unconverted Preferred Stock, such
holder may elect one of the above remedies with respect to some of such
shares of Unconverted Preferred Stock and the other remedy with respect to
other shares of Unconverted Preferred Stock. The Certificate of Designations
shall contain provisions substantially consistent with the above terms, with
such additional provisions as may be consented to by the Buyer. The
provisions of this paragraph are not intended to limit the scope of the
provisions otherwise included in the Certificate of Designations.
5. TRANSFER AGENT INSTRUCTIONS.
a. Promptly following the delivery by the Buyer of the aggregate
Purchase Price for the Initial Preferred Stock in accordance with Section
1(c) hereof, the Company will irrevocably instruct its transfer agent to
issue Common Stock from time to time upon conversion of the Preferred Stock
in such amounts as specified from time to time by the Company to the transfer
agent, bearing the restrictive legend specified in Section 4(b) of this
Agreement prior to registration of the Shares under the 1933 Act, registered
in the name of the Buyer or its nominee and in such denominations to be
specified by the Buyer in connection with each conversion of the Preferred
Stock. The Company warrants that no instruction other than such instructions
referred to in this Section 5 and stop transfer instructions to give effect
to Section 4(a) hereof prior to registration and sale of the Shares under the
1933 Act will be given by the Company to the transfer agent and that the
Shares shall otherwise be freely transferable on the books and records of the
Company as and to the extent provided in this Agreement, the Registration
Rights Agreement, and applicable law. Nothing in this Section shall affect
in any way the Buyer's obligations and agreement to comply with all
applicable securities laws upon resale of the Securities. If the Buyer
provides the Company with an opinion of counsel reasonably
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<PAGE>
satisfactory to the Company that registration of a resale by the Buyer of any
of the Securities in accordance with clause (1)(B) of Section 4(a) of this
Agreement is not required under the 1933 Act, the Company shall (except as
provided in clause (2) of Section 4(a) of this Agreement) permit the transfer
of the Securities and, in the case of the Converted Shares or the Warrant
Shares, as the case may be, promptly instruct the Company's transfer agent
to issue one or more certificates for Common Stock without legend in such
name and in such denominations as specified by the Buyer.
b. (i) The Company shall, at its expense, take all actions
and use all means, necessary and diligent to cause its transfer agent to
transmit the certificates representing the Converted Shares issuable upon
conversion of any Preferred Stock (together with, if certificates
representing more shares than have been converted with respect to any given
certificate, one or more certificates for the shares of Preferred Stock not
being so converted) to the Buyer via express courier, by electronic transfer
or otherwise.
(ii) Other provisions relating to the manner of conversion of
the Preferred Stock, including the date by which certificates representing
the Common Stock into which the Preferred Stock has been converted, shall be
provided in the Certificate of Designations. As used in this Agreement, the
term "Conversion Date" shall have the meaning ascribed to it in the
Certificate of Designations.
c. In addition to any other remedies which may be available
to the Buyer under the Certificate of Designations, if the transfer agent
fails to deliver the shares of Common Stock issuable on conversion by the
Buyer within five (5) business days after the Delivery Date (as defined in
the Certificate of Designations), the Buyer will be entitled to revoke the
relevant Notice of Conversion by delivering a notice to such effect to the
Company, whereupon the Company and the Buyer shall each be restored to their
respective positions immediately prior to delivery of such Notice of
Conversion, and Buyer may require the Company to immediately redeem all
outstanding Preferred Stock in accordance with Section 4(j)(y) of the
Certificate of Designations.
d. Subject to the completeness and accuracy of the Buyer's
representations and warranties herein, upon the conversion of any Preferred
Stock by a person who is a non-U.S. Person, and following the expiration of
any applicable Restricted Period (as those terms are defined in Regulation
S), the Company, shall, at its expense, take all necessary action (including
the issuance of an opinion of counsel) to assure that the Company's transfer
agent shall issue stock certificates without restrictive legend or stop
orders in the name of Buyer (or its nominee (being a non-U.S. Person) or such
non-U.S. Persons as may be designated by Buyer) and in such denominations to
be specified at conversion representing the number of shares of Common Stock
issuable upon such conversion, as applicable. Nothing in this Section 5,
however, shall affect in any way Buyer's or such nominee's obligations and
agreement to comply with all applicable securities laws upon resale of the
Securities. The remedies set forth in paragraphs 5(c), (d) and
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<PAGE>
(e) shall be cumulative.
e. In lieu of delivering physical certificates representing the
unlegended securities issuable upon conversion, provided the Company's
transfer agent is participating in the Depository Trust Company ("DTC") Fast
Automated Securities Transfer program, upon request of the Buyer and its
compliance with the provisions contained in this paragraph, so long as the
certificates therefor do not bear a legend and the Buyer thereof is not
obligated to return such certificate for the placement of a legend thereon,
the Company shall use its best efforts to cause its transfer agent to
electronically transmit the Common Stock issuable upon conversion to the
Buyer by crediting the account of Buyer's Prime Broker with DTC through its
Deposit Withdrawal Agent Commission system.
g. The Company will authorize its transfer agent to give
information relating to the Company directly to the Buyer or the Buyer's
representatives upon the request of the Buyer or any such representative.
The Company will provide the Buyer with a copy of the authorization so given
to the transfer agent.
6. DELIVERY INSTRUCTIONS.
The Initial Preferred Stock shall be delivered by the Company to
the Escrow Agent pursuant to Section 1(b) hereof, on a delivery against
payment basis, no later than on the Closing Date.
7. CLOSING DATE.
(i) The Closing Date shall occur on the date which is the
first NYSE trading day after the fulfillment or waiver of all closing
conditions pursuant to Sections 8 and 9 hereof or such other date and time as
is mutually agreed upon by the Company and the Buyer.
(ii) The closing of the purchase and issuance of the Preferred
Stock shall take place at the offices of the Escrow Agent and shall take
place no later than 12:00 Noon, New York time, on such day or such other time
as is mutually agreed upon by the Company and the Buyer.
(iii) Notwithstanding anything to the contrary contained
herein, the Escrow Agent will be authorized to release the Escrow Property
only upon satisfaction of the conditions set forth in Sections 8 and 9
hereof.
8. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The Buyer understands that the Company's obligation to sell the
Preferred Stock to the Buyer on the Closing Date pursuant to this Agreement
is conditioned upon:
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<PAGE>
a. The execution and delivery of this Agreement by the Buyer;
b. Delivery by the Buyer to the Escrow Agent of good funds as
payment in full of an amount equal to the purchase price for the Initial
Preferred Stock in accordance with this Agreement;
c. The accuracy on such Closing Date of the representations and
warranties of the Buyer contained in this Agreement, each as if made on such
date, and the performance by the Buyer on or before such date of all
covenants and agreements of the Buyer required to be performed on or before
such date; and
d. There shall not be in effect any law, rule or regulation
prohibiting or restricting the transactions contemplated hereby, or requiring
any consent or approval which shall not have been obtained.
9. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to purchase the
Initial Preferred Stock on the Closing Date is conditioned upon:
a. The execution and delivery of this Agreement, the Registration
Rights Agreement and the Warrant by the Company;
b. Delivery by the Company to the Escrow Agent of the Certificate
representing the relevant Preferred Stock in accordance with this Agreement;
c. The accuracy in all material respects on such Closing Date of
the representations and warranties of the Company contained in this
Agreement. each as if made on such date, and the performance by the Company
on or before such date of all covenants and agreements of the Company
required to be performed on or before such date;
d. On such Closing Date, the Registration Rights Agreement shall
be in full force and effect and the Company shall not be in default
thereunder;
e. On such Closing Date, the Buyer shall have received an opinion
of counsel for the Company, dated such Closing Date, in form, scope and
substance reasonably satisfactory to the Buyer, substantially to the effect
set forth in ANNEX III attached hereto;
f. No statute, rule, regulation, executive order, decree, ruling
or injunction shall be enacted, entered, promulgated or endorsed by any court
or governmental authority of competent jurisdiction which prohibits or
adversely effects any of the transactions contemplated by this Agreement or
the Transaction Documents, and no proceeding or investigation shall have
15
<PAGE>
been commenced or threatened which may have the effect of prohibiting or
adversely effecting any of the transactions contemplated by this Agreement or
the Transaction Documents; and
g. From and after the date hereof to and including the Closing
Date, the trading of the Common Stock shall not have been suspended by the
SEC, or the NASD and trading in securities generally on the New York Stock
Exchange or NASDAQ/Bulletin Board shall not have been suspended or limited,
nor shall minimum prices been established for securities traded on
NASDAQ/Bulletin Board, nor shall there be any outbreak or escalation of
hostilities involving the United States or any material adverse change in any
financial market that in either case in the reasonable judgment of the Buyer
makes it impracticable or inadvisable to purchase the Initial Preferred
Stock.
10. GOVERNING LAW: MISCELLANEOUS.
a. This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Delaware for contracts to be wholly
performed in such state and without giving effect to the principles thereof
regarding the conflict of laws. Each of the parties consents to the
jurisdiction of the federal courts whose districts encompass any part of the
City of New York or the state courts of the State of New York sitting in the
City of New York in connection with any dispute arising under this Agreement
and hereby waives, to the maximum extent permitted by law, any objection,
including any objection based on FORUM NON CONVENIENS, to the bringing of any
such proceeding in such jurisdictions. To the extent determined by such
court, the Company shall reimburse the Buyer for any reasonable legal fees
and disbursements incurred by the Buyer in enforcement of or protection of
any of its rights under any of the Transaction Agreements.
b. Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right or
remedy, shall not operate as a waiver thereof.
c. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
not affect the validity or enforceability of the remainder of this Agreement
or the validity or enforceability of this Agreement in any other jurisdiction.
d. This Agreement shall inure to the benefit of and be binding
upon the successors and assigns of each of the parties hereto.
e. All pronouns and any variations thereof refer to the
masculine, feminine or neuter, singular or plural, as the context may require.
f. A facsimile transmission of this signed Agreement shall be
legal and
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<PAGE>
binding on all parties hereto.
g. This Agreement may be signed in one or more counterparts, each
of which shall be deemed an original.
h. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
i. This Agreement may be amended only by an instrument in writing
signed by the party to be charged with enforcement thereof.
j. This Agreement supersedes all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof.
k. In the event for any reason, any payment by or act of the
Company or the Buyer with respect to any of the Transaction Agreements shall
result in payment of interest which would exceed the limit authorized by or
be in violation of the law of the jurisdiction applicable to the Transaction
Agreements, then IPSO FACTO the obligation of the Company to pay interest or
perform such act or requirement shall be reduced to the limit authorized
under such law, so that in no event shall the Company be obligated to pay any
such interest, perform any such act or be bound by any requirement which
would result in the payment of interest in excess of the limit so authorized.
In the event any payment by or act of the Company shall result in the
extraction of a rate of interest in excess of a sum which is lawfully
collectible as interest, then such amount (to the extent of such excess not
returned to the Company) shall, without further agreement or notice between
or by the Company or the Buyer, be deemed applied to the payment of the
liquidation preference of the Preferred Stock, if any, immediately upon
receipt of such excess funds by the Buyer, with the same force and effect as
though the Company had specifically designated such sums to be so applied and
the Buyer had agreed to accept such sums as an interest-free prepayment
thereof. If any part of such excess remains after the liquidation
preference has been paid in full, whether by the provisions of the preceding
sentences of this paragraph (k) or otherwise, such excess shall be deemed to
be an interest-free loan from the Company to the Buyer, which loan shall be
payable immediately upon demand by the Company. The provisions of this
paragraph (k) shall control every other provision of the Transaction
Agreements.
11. NOTICES. Any notice required or permitted hereunder shall be
given in writing (unless otherwise specified herein) and shall be deemed
effectively given on the earliest of
(i) the date delivered, if delivered by personal delivery as against
written receipt therefor or by confirmed facsimile transmission,
(ii) the seventh business day after deposit, postage prepaid, in the
United States
17
<PAGE>
Postal Service by registered or certified mail, or
(iii) the third business day after mailing by international express
courier, with delivery costs and fees prepaid,
in each case, addressed to each of the other parties thereunto entitled at
the following addresses (or at such other addresses as such party may
designate by ten (10) days' advance written notice similarly given to each of
the other parties hereto):
COMPANY: CITADEL TECHNOLOGY, INC.
3811 Turtle Creek Blvd., Suite 600
Dallas, TX 75219
ATTN: Steven B. Solomon
Telephone No.: (214) 520-9292
Telecopier No.: (214) 520-0034
with a copy to:
Wood, Exall & Bonnet, L.L.P.
12222 Merit Drive, Suite 880
Dallas, TX 75251
ATTN: David Wood, Esq.
Telephone No.: (972) 991-8510
Telecopier No.: (972) 991-9261
BUYER: At the address set forth on the signature page of this Agreement.
with a copy to:
Krieger & Prager, Esqs.
319 Fifth Avenue
New York, New York 10016
ATTN: Samuel Krieger, Esq.
Telephone No.: (212) 689-3322
Telecopier No.: (212) 213-2077
ESCROW AGENT: Krieger & Prager, Esqs.
319 Fifth Avenue
New York, New York 10016
ATTN: Samuel Krieger, Esq.
Telephone No.: (212) 689-3322
Telecopier No.: (212) 213-2077
18
<PAGE>
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The Company's
representations and warranties herein shall survive the execution and
delivery of this Agreement and the delivery of the Preferred Stock and the
Purchase Price, and shall inure to the benefit of the Buyer and its
successors and assigns.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
19
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the
Buyer or one of its officers thereunto duly authorized as of the date set
forth below.
NUMBER OF SHARES OF PREFERRED STOCK TO BE PURCHASED: 500
AGGREGATE PURCHASE PRICE OF SUCH PREFERRED STOCK: $ 500,000.00
SIGNATURES FOR ENTITIES
IN WITNESS WHEREOF, the undersigned represents that the foregoing
statements are true and correct and that it has caused this Securities
Purchase Agreement to be duly executed on its behalf this 30th day of April,
1998.
3845 Bathurst St. Ste.202
Downsview Ontario PRECISION CAPITAL LIMITED PARTNERSHIP I
By its General Partner, Precision Capital
Partners Ltd.
Address
Printed Name of Subscriber
By: /s/ Paul Jacobs
--------------------------------
Telecopier No. 416-630-4626 (Signature of Authorized Person)
Paul Jacobs, President
Precision Capital Partners Ltd.
Ontario Printed Name and Title
- -------------------------------
Jurisdiction of Incorporation
or Organization
As of the date set forth below, the undersigned hereby accepts this Agreement
and represents that the foregoing statements are true and correct and that it
has caused this Securities Purchase Agreement to be duly executed on its
behalf.
CITADEL TECHNOLOGY, INC.
By: /s/ Steven B. Solomon
----------------------------
Steven B. Solomon
President
<PAGE>
ANNEX I AMENDMENT TO/EXCERPT FROM CERTIFICATE OF INCORPORATION or
CERTIFICATE OF DESIGNATIONS
ANNEX II JOINT ESCROW INSTRUCTIONS
ANNEX III OPINION OF COUNSEL
ANNEX IV REGISTRATION RIGHTS AGREEMENT
ANNEX V COMPANY DISCLOSURE MATERIALS
ANNEX VI FORM OF WARRANT
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT is dated as of May 27, 1998, between CITADEL
TECHNOLOGY, INC., a Delaware corporation (the "Company"), and ICARUS
INVESTMENTS I, LTD., a Texas limited partnership (the "Purchaser"). Except as
otherwise indicated herein, capitalized terms used herein are defined in
SECTION 6 of this Agreement.
WHEREAS, the Company desires to issue and sell the Shares (as defined in
SECTION 1.1 below) to the Purchaser, and the Purchaser desires to purchase the
Shares from the Company, on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing premises and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
AUTHORIZATION AND CLOSING
1.1 AUTHORIZATION. The Company shall authorize the issuance and sale to
Purchaser of two million (2,000,000) shares (the "Shares") of its Common Stock,
par value $.01 per share (the "Stock").
1.2 PURCHASE AND SALE OF THE SHARES. At the Closing (as defined in SECTION
1.3 below), the Company shall sell to Purchaser and, subject to the terms and
conditions set forth herein, Purchaser shall purchase from the Company, the
Shares at a price of $1.25 per share for an aggregate purchase price of two
million five hundred thousand dollars ($2,500,000.00) (the "Purchase Price").
1.3 THE CLOSING. The closing of the purchase and sale of the Shares to be
purchased pursuant to SECTION 1.2 (the "Closing") shall take place at the
offices of the Company, at 3811 Turtle Creek Boulevard, Suite 600, Dallas, Texas
75219 at 12:00 p.m. on May 27, 1998 or at such other place or on such other date
as may be mutually agreeable to the Company and Purchaser. At the Closing, the
Company shall deliver to Purchaser stock certificates evidencing the Shares to
be purchased by Purchaser, registered in Purchaser's name, upon payment of the
purchase price thereof by a cashier's or certified check, or by wire transfer of
immediately available funds to such account as designated by the Company in the
amount of the Purchase Price.
ARTICLE II
CONDITIONS OF PURCHASER'S OBLIGATION AT THE CLOSING
The obligation of Purchaser to purchase and pay for the Shares at the
Closing is subject to the satisfaction as of the Closing of the following
conditions:
1
<PAGE>
2.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
contained in SECTION 4 hereof shall be true and correct at and as of the Closing
as though then made, except to the extent of changes caused by the transactions
expressly contemplated herein.
2.2 COMPLIANCE WITH APPLICABLE LAWS. The purchase of the Shares by
Purchaser hereunder shall not be prohibited by any applicable law or
governmental regulation, shall not subject Purchaser to any penalty, liability
or, in Purchaser's sole judgment, other onerous conditions under or pursuant to
any applicable law or governmental regulation, and shall be permitted by laws
and regulations of the jurisdictions to which Purchaser is subject.
2.3 WAIVER. Any condition specified in this SECTION 2 may be waived only
if such waiver is set forth in a writing executed by Purchaser.
ARTICLE III
TRANSFER OF RESTRICTED SECURITIES
3.1 TRANSFER OF RESTRICTED SECURITIES.
(a) Restricted Securities are transferable only pursuant to (i) public
offerings registered under the Securities Act, (ii) Rule 144 or Rule 144A of the
Securities and Exchange Commission (or any similar rule or rules then in force)
if such rule or rules are available and (iii) subject to the conditions
specified in PARAGRAPH (b) below, any other legally available means of transfer.
(b) In connection with the transfer of any Restricted Securities (other
than a transfer described in subparagraph 3(i)(a) above), the holder thereof
shall deliver written notice to the Company describing in reasonable detail the
transfer or proposed transfer, together with an opinion of counsel which (to the
Company's reasonable satisfaction) is knowledgeable in securities law matters to
the effect that such transfer of Restricted Securities may be effected without
registration of such Restricted Securities under the Securities Act. In
addition, if the holder of the Restricted Securities delivers to the Company an
opinion of such counsel that no subsequent transfer of such Restricted
Securities shall require registration under the Securities Act, the Company
shall promptly upon such contemplated transfer deliver new certificates for such
Restricted Securities which do not bear the Securities Act legend set forth in
SECTION 7.3. If the Company is not required to deliver new certificates for
such Restricted Securities not bearing such legend, the holder thereof shall not
transfer the same until the prospective transferee has confirmed to the Company
in writing its agreement to be bound by the conditions contained in this
paragraph and SECTION 7.3.
(c) Upon the request of Purchaser, the Company shall promptly supply to
Purchaser or its prospective transferees all information regarding the Company
required to be delivered in connection with a transfer pursuant to Rule 144A of
the Commission.
2
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
As a material inducement to Purchaser to enter into this Agreement and
purchase the Shares, the Company hereby represents and warrants to Purchaser
that:
4.1 ORGANIZATION AND CORPORATE POWER. The Company is a corporation duly
organized, validly existing and in good standing under the laws of Delaware and
is qualified to do business in every jurisdiction in which the failure to so
qualify might reasonably be expected to have a material adverse effect on the
financial condition, operating results, assets, operations or business prospects
of the Company and its Subsidiaries taken as a whole. The Company has all
requisite corporate power and authority and all material licenses, permits and
authorizations necessary to own and operate its properties, to carry on its
businesses as now conducted and presently proposed to be conducted and to carry
out the transactions contemplated by this Agreement.
4.2 CAPITAL STOCK AND RELATED MATTERS.
(a) As of the Closing and immediately thereafter, the authorized capital
stock of the Company shall consist of (1) 60,000,000 shares of Common Stock, of
which (i) 21,774,388 shares are issued and outstanding as of May 6, 1998, and
(2) 1,000,000 shares of Preferred Stock, of which 50 shares of Series A
Preferred Stock, 425 shares of Series C Preferred Stock, 2,000 shares of Series
D Preferred Stock, and 5,000 shares of Series E Preferred Stock are outstanding.
As of the Closing, the Shares shall be validly issued, fully paid and
nonassessable.
(b) There are no statutory or, to the best of the Company's knowledge,
contractual stockholders preemptive rights or rights of refusal with respect to
the issuance of the Shares hereunder. Based in part on the investment
representations of Purchaser in SECTION 7.3 hereof, the Company has not violated
any applicable federal or state securities laws in connection with the offer,
sale or issuance of any of its capital stock, and the offer, sale and issuance
of the Shares hereunder do not and will not require registration under the
Securities Act or any applicable state securities laws.
4.3 AUTHORIZATION; NO BREACH. The execution, delivery and performance of
this Agreement and all other agreements contemplated hereby to which the Company
is a party have been duly authorized by the Company. This Agreement and all
other agreements contemplated hereby each constitutes a valid and binding
obligation of the Company, enforceable in accordance with its terms. The
execution and delivery by the Company of this Agreement and all other agreements
contemplated hereby to which the Company is a party, the offering, sale and
issuance of the Shares hereunder and the fulfillment of and compliance with the
respective terms hereof and thereof by the Company do not and will not (i)
conflict with or result in a breach of the terms, conditions or provisions of,
(ii) constitute a default under, (iii) result in the creation of
3
<PAGE>
any lien, security interest, charge or encumbrance upon the Company's capital
stock or assets pursuant to, (iv) give any third party the right to modify,
terminate or accelerate any obligation under, (v) result in a violation of, or
(vi) require any authorization, consent, approval, exemption or other action
by or notice to any court or administrative or governmental body pursuant to,
the Certificate of Incorporation or bylaws of the Company, or any law,
statute, rule or regulation to which the Company is subject, or any agreement,
instrument, order, judgment or decree to which the Company is a party or by
which it is bound.
4.4 GOVERNMENTAL CONSENT, ETC. No permit, consent, approval or
authorization of, or declaration to or filing with, any governmental authority
is required in connection with the execution, delivery and performance by the
Company of this Agreement or the other agreements contemplated hereby, or the
consummation by the Company of any other transactions contemplated hereby or
thereby.
4.5 CLOSING DATE. The representations and warranties of the Company
contained in this SECTION 4 and all information contained in any exhibit,
schedule or attachment hereto or in any writing delivered by, or on behalf of,
the Company to Purchaser shall be true and correct in all material respects on
the date of the Closing as though then made, except as affected by the
transactions expressly contemplated by this Agreement.
ARTICLE IV
REGISTRATION RIGHTS
(a) If any Restricted Securities are outstanding, the Company shall
provide written notice to the Purchaser of its intention to file any
registration statement with the Commission (other than a registration statement
on Form S-8 or Form S-4) in connection with any public offering involving the
Company's Common Stock. If the Purchaser desires to elect to sell its
Restricted Securities in connection with the registration statement, the
Purchaser shall provide written notice to the Company within five days of its
intention to sell all or any multiple of 20% of its original Restricted
Securities. The Company shall use its best efforts to include such Restricted
Securities requested by the Purchaser in such registration statement, to the
extent requisite to permit the public offering and sale of the Restricted
Securities, and will use its best efforts to cause such registration statement
to become effective as promptly as practicable. In the event the registration
statement is filed on behalf of the Company (as opposed to other selling
stockholders), if the managing underwriter or underwriters of the proposed
offering advise the Company that the success of the offering would be materially
and adversely affected by the inclusion of all of the shares requested to be
included, then the number of shares to be included for any persons other than
the Company shall be reduced or limited (i) as between the selling shareholders
and the Company, in the sole and absolute discretion of the Board of Directors
of the Company, and (ii) as between the selling shareholders, pro rata based
upon the total number of shares held by such shareholders on a fully diluted
basis. As used herein, the "Restricted Securities" shall not include Shares
4
<PAGE>
that have been previously sold or that may be resold pursuant to Rule 144
promulgated under the Act or other available exemption. Notwithstanding the
foregoing, the Company shall in no event be required to keep any such
registration or qualification in effect for a period in excess of 90 days or
after two years from the date on which the Purchaser purchased such Restricted
Securities.
(b) In connection with registration of securities pursuant to this
Section, the Purchaser shall pay all fees and expenses with respect to its
shares, including the proportionate part, based upon the number of the
Purchaser's shares sold in relation to all shares to be sold, of broker/dealer
commissions, underwriting discounts, the expenses of such underwriter, and fees
and disbursements of counsel of the Purchaser and any stock transfer taxes
incurred with respect of the Restricted Securities of the Purchaser. The
Company shall bear all other expenses incurred in connection with such
registration statement, including Commission filing fees.
ARTICLE VI
DEFINITIONS
6.1 For the purposes of this Agreement, the following terms have the
meanings set forth below:
"COMMON STOCK" means the Company's common stock, par value $.01 per share.
"PERSON" means an individual, a partnership, a limited liability company, a
corporation, an association, a joint stock company, a trust, a joint venture, an
unincorporated organization and a governmental entity or any department, agency
or political subdivision thereof.
"RESTRICTED SECURITIES" means (i) the Shares issued hereunder and (ii) any
securities issued with respect to the securities referred to in clause (i) above
by way of a stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization. As to
any particular Restricted Securities, such securities shall cease to be
Restricted Securities when they have (A) been effectively registered under the
Securities Act and disposed of in accordance with the registration statement
covering them, (B) become eligible for sale pursuant to Rule 144(k) (or any
similar provision then in force) under the Securities Act or (C) been otherwise
transferred and new certificates for them not bearing the Securities Act legend
set forth in SECTION 7.3 have been delivered by the Company in accordance with
SECTION 3.1(b). Whenever any particular securities cease to be Restricted
Securities, the holder thereof shall be entitled to receive from the Company,
without expense, new securities of like tenor not bearing a Securities Act
legend of the character set forth in SECTION 7.3.
5
<PAGE>
"SECURITIES ACT" means the Securities Act of 1933, as amended, or any
similar federal law then in force.
"SECURITIES EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, or any similar federal law then in force.
"COMMISSION" means the Securities and Exchange Commission and includes any
governmental body or agency succeeding to the functions thereof.
"SUBSIDIARY" means any corporation of which the securities having a
majority of the ordinary voting power in electing the board of directors are, at
the time as of which any determination is being made, owned by the Company
either directly or through one or more Subsidiaries.
ARTICLE VII
MISCELLANEOUS
7.1 EXPENSES. Each party agrees to bear its own expenses associated with
the transactions contemplated hereby.
7.2 REMEDIES. The Purchaser shall have all rights and remedies set forth
in this Agreement and all of the rights which such holders have under any law.
Any Person having any rights under any provision of this Agreement shall be
entitled to enforce such rights specifically (without posting a bond or other
security), to recover damages by reason of any breach of any provision of this
Agreement and to exercise all other rights granted by law.
7.3 PURCHASER'S INVESTMENT REPRESENTATIONS. Purchaser hereby represents
that it is an Accredited Investor as defined in Regulation D under the
Securities Act, that it is acquiring the Restricted Securities purchased
hereunder or acquired pursuant hereto for its own account with the present
intention of holding such securities for purposes of investment, and that it has
no intention of selling such securities in a public distribution in violation of
the federal securities laws or any applicable state securities laws; provided
that nothing contained herein shall prevent Purchaser and subsequent holders of
Restricted Securities from transferring such securities in compliance with the
provisions of ARTICLE III hereof. Each certificate for Restricted Securities
shall be imprinted with a legend in substantially the following form:
"The securities represented by this certificate were originally issued
on June 1, 1998 and have not been registered under the Securities Act of
1933, as amended. The transfer of the securities represented by this
certificate is subject to the conditions specified in the Stock Purchase
Agreement, dated as of May 26, 1998, between the issuer (the "Company") and
a certain investor, and the Company reserves the right to refuse the
transfer of such securities until such conditions have been fulfilled with
respect to such transfer. A copy of such
6
<PAGE>
conditions shall be furnished by the Company to the holder hereof upon
written request and without charge."
7.4 CONSENT TO AMENDMENTS. Except as otherwise expressly provided herein,
the provisions of this Agreement may be amended and the Company may take any
action herein prohibited, or omit to perform any act herein required to be
performed by it, only if the Company has obtained the written consent of the
Purchaser or holders of a majority of the Shares. No other course of dealing
between the Company and the holder of any Shares or any delay in exercising any
fights hereunder or under the Certificate of Incorporation shall operate as a
waiver of any rights of any such holders. For purposes of this Agreement, shares
held by the Company or any Subsidiaries shall not be deemed to be outstanding.
7.5 SURVIVAL OF REPRESENTATION AND WARRANTIES. All representations and
warranties contained herein or made in writing by any party in connection
herewith shall survive the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, regardless of any
investigation made by Purchaser or on its behalf.
7.6 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein,
all covenants and agreements contained in this Agreement by or on behalf of any
of the parties hereto shall bind and inure to the benefit of the respective
successors and assigns of the parties hereto whether so expressed or not. In
addition, and whether or not any express assignment has been made, the
provisions of this Agreement which are for Purchaser's benefit as a purchaser or
holder of Shares are also for the benefit of, and enforceable by, any subsequent
holder of such Shares. The rights and obligations of Purchaser under this
Agreement and the agreements contemplated hereby may be assigned by Purchaser at
any time, in whole or in part, to any Subsidiary of Purchaser, or any successor
thereto.
7.7 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. Where any accounting
determination or calculation is required to be made under this Agreement or the
exhibits hereto, such determination or calculation (unless otherwise provided)
shall be made in accordance with generally accepted accounting principles,
consistently applied, except that if because of a change in generally accepted
accounting principles the Company would have to alter a previously utilized
accounting method or policy in order to remain in compliance with generally
accepted accounting principles, such determination or calculation shall continue
to be made in accordance with the Company's previous accounting methods and
policies.
7.8 SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
7
<PAGE>
7.9 COUNTERPARTS. This Agreement may be executed simultaneously in two or
more counterparts, any one of which need not contain the signatures of more than
one party, but all such counterparts taken together shall constitute one and the
same Agreement.
7.10 DESCRIPTIVE HEADINGS; INTERPRETATION. The descriptive headings of this
Agreement are inserted for convenience only and do not constitute a Section of
this Agreement. The use of the word "including" in this Agreement shall be by
way of example rather than by limitation.
7.11 GOVERNING LAW. The corporate law of Delaware shall govern all issues
concerning the relative rights of the Company and its stockholders. All other
questions concerning the construction, validity and interpretation of this
Agreement and the exhibits and schedules hereto shall he governed by and
construed in accordance with the internal laws of the State of Texas, without
giving effect to any choice of law or conflict of law provision or rule (whether
of the State of Texas or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the State of Texas.
7.12 NOTICES. All notices, demands or other communications to be given or
delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally to the
recipient, sent to the recipient by reputable express courier service (charges
prepaid), 48 hours after being deposited to the recipient by United States mail,
first class, postage prepaid, or sent by facsimile. Such notices, demands and
other communications shall be sent to Purchaser and to the Company at the
address indicated below:
IF TO THE COMPANY:
Citadel Technology, Inc.
3811 Turtle Creek Boulevard, Suite 600
Dallas, TX 75219
Attention: Steven B. Solomon
Tel. No.: (214) 520-9292
Fax No.: (214) 520-0034
IF TO PURCHASER:
Icarus Investments I, Ltd.
8144 Walnut Hill, Suite 172
Dallas, TX 75231
Attention: Michael Ruff, President
Tel. No.: (214) 696-3250
Fax No.: (214) 696-0532
8
<PAGE>
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
7.13. ARBITRATION. THE PARTIES AGREE TO SUBMIT TO ARBITRATION, IN
ACCORDANCE WITH THESE PROVISIONS, ANY DISPUTED CLAIM OR CONTROVERSY ARISING FROM
OR RELATED TO THE ALLEGED BREACH OF THIS AGREEMENT. THE PARTIES FURTHER AGREE
THAT THE ARBITRATION PROCESS AGREED UPON HEREIN SHALL BE THE EXCLUSIVE MEANS FOR
RESOLVING ALL DISPUTES MADE SUBJECT TO ARBITRATION HEREIN, BUT THAT NO
ARBITRATOR SHALL HAVE AUTHORITY TO EXPAND THE SCOPE OF THESE ARBITRATION
PROVISIONS. ANY ARBITRATION HEREUNDER SHALL BE CONDUCTED UNDER THE PROCEDURES
OF THE AMERICAN ARBITRATION ASSOCIATION (AAA). EITHER PARTY MAY INVOKE
ARBITRATION PROCEDURES HEREIN BY WRITTEN NOTICE FOR ARBITRATION CONTAINING A
STATEMENT OF THE MATTER TO BE ARBITRATED. THE PARTIES SHALL THEN HAVE FOURTEEN
(14) DAYS IN WHICH THEY MAY IDENTIFY A MUTUALLY AGREEABLE, NEUTRAL ARBITRATOR.
AFTER THE FOURTEEN (14) DAY PERIOD HAS EXPIRED, THE PARTIES SHALL PREPARE AND
SUBMIT TO THE AAA A JOINT SUBMISSION, WITH EACH PARTY TO CONTRIBUTE HALF OF THE
APPROPRIATE ADMINISTRATIVE FEE. IN THE EVENT THE PARTIES CANNOT AGREE UPON A
NEUTRAL ARBITRATOR WITHIN FOURTEEN (14) DAYS AFTER WRITTEN NOTICE FOR
ARBITRATION IS RECEIVED, THEIR JOINT SUBMISSION TO THE AAA SHALL REQUEST A PANEL
OF THREE ARBITRATORS WHO ARE PRACTICING ATTORNEYS WITH PROFESSIONAL EXPERIENCE
IN THE FIELD OF CORPORATE LAW, AND THE PARTIES SHALL ATTEMPT TO SELECT AN
ARBITRATOR FROM THE PANEL ACCORDING TO AAA PROCEDURES. UNLESS OTHERWISE AGREED
BY THE PARTIES, THE ARBITRATION HEARING SHALL TAKE PLACE IN DALLAS, TEXAS, AT A
PLACE DESIGNATED BY THE AAA. ALL ARBITRATION PROCEDURES HEREUNDER SHALL BE
CONFIDENTIAL. EACH PARTY SHALL BE RESPONSIBLE FOR ITS COSTS INCURRED IN ANY
ARBITRATION, AND THE ARBITRATOR SHALL NOT HAVE AUTHORITY TO INCLUDE ALL OR ANY
PORTION OF SAID COSTS IN AN AWARD, REGARDLESS OF WHICH PARTY PREVAILS. THE
ARBITRATOR MAY INCLUDE EQUITABLE RELIEF. ANY ARBITRATION AWARDED SHALL BE
ACCOMPANIED BY A WRITTEN STATEMENT CONTAINING A SUMMARY OF THE ISSUES IN
CONTROVERSY, A DESCRIPTION OF THE AWARD, AND AN EXPLANATION OF THE REASONS FOR
THE AWARD.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date
first written above.
CITADEL TECHNOLOGY, INC.
By: /s/ Steven B. Solomon
--------------------------------
Steven B. Solomon, President
ICARUS INVESTMENTS I, LTD.
By: ICARUS INVESTMENTS, INC., General Partner
By: /s/ Michael Ruff
------------------------------
Michael Ruff, President
10
<PAGE>
EXHIBIT 21
The Company has the following wholly-owned Subsidiaries:
1. Kent-Marsh Ltd., Inc.
2. Astonishing Developments, Inc.
3. DanaSoft, Inc.
4. LSHC Acquisition Corp.
5. Liberty Recovery Corp.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated June 17, 1998, accompanying the consolidated
financial statements included in the Annual Report of Citadel Technology,
Inc. on Form 10-KSB as of February 28, 1998. We hereby consent to the
incorporation by reference of said report in the Registration Statements of
Citadel Technology, Inc. on Form S-8 (File No. 33-65189, No. 333-03291,
No. 333-15665 and 333-53151, effective December 20, 1995, May 8, 1996,
November 6, 1996, and May 20, 1998, respectively).
GRANT THORNTON LLP
/s/ Grant Thornton LLP
Dallas, Texas
June 19, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CITADEL TECHNOLOGY, INC. (FORMERLY CITADEL COMPUTERS
SYSTEMS INCORPORATED) FOR THE YEAR ENDED FEBRUARY 28, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 8,555
<SECURITIES> 0
<RECEIVABLES> 435,615
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 950,150
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,163,034
<CURRENT-LIABILITIES> 4,397,129
<BONDS> 478,044
0
51
<COMMON> 257,813
<OTHER-SE> 1,028,997
<TOTAL-LIABILITY-AND-EQUITY> 6,163,034
<SALES> 1,613,326
<TOTAL-REVENUES> 1,613,326
<CGS> 78,429
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<INCOME-CONTINUING> (3,522,710)
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<NET-INCOME> (3,522,710)
<EPS-PRIMARY> (.21)
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</TABLE>
