<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NUMBER: 0-08718
CITADEL TECHNOLOGY, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2432011
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3811 TURTLE CREEK BLVD., SUITE 600, DALLAS, TX 75219
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(214) 520-9292
(ISSUER'S TELEPHONE NUMBER)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at October 19, 1998
- -------------------------------------- -------------------------------
Common Stock, Par value $.01 per share 27,875,813
Transitional Small Business Disclosure Format Yes [ ] No [X]
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CITADEL TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 28,
ASSETS 1998 1998
---------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash $1,930,876 $ 8,555
Accounts receivable, less allowance for returns and
doubtful accounts of $43,000 and $681,000 1,651,622 435,615
Notes receivable from related parties 603,600 376,487
Inventory 116,706 57,512
Other 382,897 71,981
---------- ----------
Total current assets 4,685,701 950,150
PROPERTY AND EQUIPMENT, net 343,709 387,923
PURCHASED SOFTWARE, net of accumulated amortization
of $2,252,530 and $1,788,000 2,997,869 3,462,879
CAPITALIZED SOFTWARE DEVELOPMENT COSTS,
net of accumulated amortization of $312,200 and $150,000 1,593,658 1,011,432
OTHER ASSETS 238,149 350,650
---------- ----------
$9,859,086 $6,163,034
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 3
CITADEL TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS - CONTINUED
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 28,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1998
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Cash overdraft $ -- $ 10,249
Current maturities of long-term debt 347,781 1,270,565
Notes payable 323,955 842,174
Accounts payable and accrued expenses 1,278,359 2,274,141
------------ ------------
Total current liabilities 1,950,095 4,397,129
LONG-TERM LIABILITIES
Debt, less current liabilities 74,910 478,044
------------ ------------
Total liabilities 2,025,005 4,875,173
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Common stock, $.01 par value per share; authorized
60,000,000 shares; issued, 32,040,426 shares
at 8/31/98 and 25,881,328 shares at 2/28/98 320,404 258,813
Preferred stock, $.01 par value per share;
authorized 1,000,000 shares; issued and outstanding
Series B convertible, 50 shares (liquidation value $50,000) 1 1
Series C convertible, 4,250 shares at 8/31/98 and 5,000 shares
at 2/28/98 (liquidation value $425,000 and $500,000) 43 50
Series D convertible, 2,253 shares (liquidation value $2,253,000) 23 --
Equity notes 944,000 944,000
Additional paid-in capital 23,196,241 16,158,442
Accumulated deficit (14,126,392) (13,573,206)
Treasury stock, at cost (4,164,613 shares) (2,500,239) (2,500,239)
------------ ------------
Total stockholders' equity 7,834,081 1,287,861
------------ ------------
$ 9,859,086 $ 6,163,034
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
CITADEL TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Gross sales $ 1,129,078 $ 350,070 $ 2,205,504 $ 848,138
Less returns and allowances 51,760 3,976 93,991 9,770
------------ ------------ ------------ ------------
Net sales 1,077,318 346,094 2,111,513 838,368
Cost of sales 60,912 14,375 131,243 23,786
------------ ------------ ------------ ------------
Gross profit 1,016,406 331,719 1,980,270 814,582
Operating expenses
Research and development expenses 146,609 67,215 251,333 217,737
Selling and marketing expenses 958,904 303,760 1,430,298 611,387
General and administrative expenses 426,152 426,570 781,491 1,010,408
------------ ------------ ------------ ------------
1,531,665 797,545 2,463,122 1,839,532
------------ ------------ ------------ ------------
Operating income (loss) before depreciation
and amortization (515,259) (465,826) (482,852) (1,024,950)
Depreciation and amortization expense 371,491 348,152 723,917 622,328
------------ ------------ ------------ ------------
Operating income (loss) (886,750) (813,978) (1,206,769) (1,647,278)
Other income (expense)
Interest expense (30,847) (29,502) (82,051) (50,728)
Other 7,566 107,916 7,566 101,323
Loss on marketable securities -- (199,672) -- (199,672)
------------ ------------ ------------ ------------
(23,281) (121,258) (74,485) (149,077)
------------ ------------ ------------ ------------
Net loss before extraordinary item (910,031) (935,236) (1,281,254) (1,796,355)
Extraordinary item - gain on settlement of debt 205,847 -- 733,068 --
------------ ------------ ------------ ------------
Net income (loss) $ (704,184) $ (935,236) $ (548,186) $ (1,796,355)
============ ============ ============ ============
Basic and diluted earnings (loss) per share data
Net loss before extraordinary item (0.03) (0.06) (0.05) (0.12)
Extraordinary item 0.01 -- 0.03 --
------------ ------------ ------------ ------------
Net income (loss) per share (0.03) (0.06) (0.02) (0.12)
============ ============ ============ ============
Shares used in computing earnings (loss) per share
Basic and diluted 26,256,753 14,427,452 24,123,254 14,424,452
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
CITADEL TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
August 31,
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (548,186) $(1,796,355)
Adjustments to reconcile net loss to net cash
used by operating activities
Depreciation and amortization 723,917 622,328
Net loss on marketable securities -- 199,672
Gain on settlement of debt (733,068) --
Provision for uncollectiable accounts 15,000 --
Changes in operating assets and liabilities
Accounts receivable (1,231,007) (99,851)
Notes receivable from related parties (227,113) (82,548)
Other current assets (310,916) (254,874)
Inventory (59,194) --
Bank overdraft (10,249) (22,797)
Accounts payable and accrued expenses (666,132) 771,164
Other assets 112,501 (3,786)
----------- -----------
NET CASH USED BY OPERATING ACTIVITIES (2,934,447) (667,047)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (52,413) (128,112)
Securities transactions - net -- 156,100
Development of software (744,506) (280,834)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (796,919) (252,846)
CASH FLOW FROM FINANCING ACTIVITIES
Net change in notes payable (118,219) (197,432)
Proceeds from sale of equity & convertible notes -- 1,075,000
Proceeds from sale of preferred stock 2,567,391 --
Proceeds from sale of common stock 3,772,015 63,426
Redemption of preferred stock (567,500) --
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,653,687 940,994
----------- -----------
Net increase (decrease) in cash 1,922,321 21,101
Cash at the beginning of the period 8,555 15,100
----------- -----------
Cash at the end of the period $ 1,930,876 $ 36,201
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
CITADEL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The financial information presented herein should be read in
conjunction with the financial statements and footnotes included in the
Company's Annual Report on Form 10-KSB for the period ended February 28, 1998.
The balance sheet as of February 28, 1998 has been derived from the audited
financial statement at that date.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and have been presented on the basis that the Company is a going
concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation, consisting of those of
a normal recurring nature, are reflected in the accompanying financial
statements.
NOTE B - STOCKHOLDERS' EQUITY
During the period from March 1, 1998 through August 31, 1998, the
Company's stockholders' equity reflected the following changes:
<TABLE>
<S> <C>
Balance at February 28, 1998 $ 1,287,861
Issuance of preferred stock, net 2,645,808
Conversion of debt to equity 442,500
Issuance of common stock, net 2,424,980
Exercise of options 25,000
Net income 155,998
-----------
Balance at May 31, 1998 6,982,147
Issuance of common stock, net 1,410,000
Redemption of preferred stock (567,500)
Conversion of debt to equity 346,003
Exercise of options 99,281
Value of options given related to assumption
of certain indebtedness 407,500
Expenses related to fund raising (139,166)
Net loss for the period (704,184)
-----------
Balance at August 31, 1998 $ 7,834,081
===========
</TABLE>
6
<PAGE> 7
CITADEL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - COMMITMENTS AND CONTINGENCIES
In August 1998, the Company settled a lawsuit styled Marks, Marks, Ranshaw,
Colquitt & Lauratis v. Citadel Computer Systems Incorporated, et al., in the
189th Judicial District Court of Harris County, Texas for $25,000 in cash plus
the extension of the plaintiffs options to purchase 207,088 shares of Common
Stock and the Company agreed to register the shares underlying these options.
The lawsuit was filed by former employees who alleged that the Company and/or
the individual defendants owed the plaintiffs damages, attorney's fees, pre- and
post-judgment interest and costs allegedly in excess of $4,000,000.
7
<PAGE> 8
CITADEL TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - COMMITMENTS AND CONTINGENCIES - CONTINUED
In August 1998, Janssen Meyers Associates L.P. ("JM") filed a lawsuit against
the Company. The suit alleges that the Company owes the plaintiffs a fee in the
amount of $16,500,000 plus interest and attorney's fees in connection with
services allegedly performed by JM in respect of the merger between LoneStar and
Old Citadel and related matters. The Company believes such claims are without
merit and intends to vigorously defend against the claims. The lawsuit, styled
Janssen Meyers Associates, L.P. v. Citadel Technology, Inc., was filed in the
Supreme Court of the State of New York, County of New York. The Company has
removed the case to federal court in the Southern District of New York.
NOTE D - CAPITAL TRANSACTIONS
On June 30, 1998, the Company and Icarus Investments I, Ltd. ("Icarus") entered
into a Stock Purchase Agreement pursuant to which Icarus purchased 1,000,000
shares of Citadel's Common Stock for proceeds of $1,500,000. 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. In connection with the
transaction, the Company issued warrants to purchase 500,000 shares of the
Company's Common Stock at $3.00 per shares and 250,000 shares at $2.00. The
Company paid a commission of $90,000 to an individual in connection with the
transaction. No other fees were paid in connection with the sale of the shares
to Icarus.
NOTE E - RELATED PARTY TRANSACTIONS
The Company contracted with Metamor Software Solutions, a division of Metamor
Worldwide, Inc. ("Metamor") to provide various development services for the
Company. During the quarter the Company incurred approximately $246,000 in
expenses related to these services, and approximately $745,000 for the period to
date. Mr. Johnsen, one of the Company's directors, is executive vice president
of Metamor.
On August 11, 1998, the Company entered into a transaction with a shareholder
of the Company whereby the Company granted the shareholder certain options to
purchase shares of Common Stock of the Company and reduced the exercise price on
certain other options in consideration for the shareholder assuming certain
indebtedness of the Company. The transaction resulted in no gain or loss. As of
August 31, 1998, the Company has a receivable from this individual shareholder
in the amount of $325,000, which is secured by 750,000 shares of the Company's
Common Stock.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The statements contained in this Report that are not historical facts,
including, but not limited to, statements found in this Item 2 - "Management's
Discussion and Analysis," are forward looking statements and as such involve a
number of risks and uncertainties. The actual results of the future events
described in such forward-looking statements in this Report could differ
materially from those stated in such forward looking statements. Among the
factors that could cause actual results to differ materially are: general
economic conditions; competition; the market for network software products;
seasonality of product sales; the Company's capital requirements and the
uncertainty of additional funding; the Company's inconsistent revenues and the
uncertainty of future profitability; costs and risks related to integration of
acquisitions; uncertainties related to new product development and market
acceptance of new products; costs, expenses and delays in sales related to the
implementation of new sales methods; software development costs; litigation; as
well as the risks and uncertainties discussed in this Report, including, without
limitation, the portions referenced above, and the uncertainties set forth from
time to time in the Company's other public reports and filings and public
statements.
RESULTS OF OPERATIONS
During the three months ended August 31, 1998, the Company had net sales of
$1,077,318, an increase of $731,224 or 211.3% over net sales of $346,094 for the
three months ended August 31, 1997. During the six months ended August 31, 1998,
the Company had net sales of $2,111,513, an increase of $1,273,145, or 151.9%
over net sales of $838,368 for the six months ended August 31, 1997. The Company
attributes the sales increase to increased industry recognition of its products
and the recent partnering relationship with System Plan in Japan and its
bundling arrangements with Microsoft and Compaq.
The costs and expenses incurred in connection with producing the Company's
products increased from $14,375, or 4.2% of net sales for the three months
ended August 31, 1997, to $60,912, or 5.7% for the three months ended August
31, 1998. The costs and expenses incurred in connection with producing the
Company's products increased from $23,786, or 2.8% of net sales for the six
months ended August 31, 1997, to $131,243, or 6.2% for the six months ended
August 31, 1998. The percentage increase in cost of sales for the quarter and
for the year to date over the same periods last year can be attributed to a
change in the product sales mix to lower priced products sold on an individual
unit basis and the establishment of a reserve for product returns. Both factors
can be attributed to the Company's entry into the retail sales channel, which
the Company was not engaged in during the same periods last year. In addition,
and partly due to its entry into the retail channel, the Company completely
updated its packaging and collateral pieces to give all its products a common
look. This also tended to increase the Company's cost of sales on a per unit
basis. The impact of the aforementioned was offset, to some degree, by the
increase in the Company's bundling revenues over the same periods last year,
which tended to reduce the cost of sales on a percentage basis. The reduction
in costs and expenses as a percentage of revenues in the current quarter over
the previous quarter can be attributed to the increase in bundling revenues as
a percentage of total revenues in this quarter over the previous quarter.
Research and development costs charged to expense for the three months ended
August 31, 1998 were $146,609 versus $67,215 for the same period last year, or
an increase of $79,394 or 118.1%. Research and development costs charged to
expense for the six months ended August 31, 1998 were $251,333 versus $217,737
for the same period last year, or an increase of $33,596 or 15.4%. The Company
capitalized research and development costs of approximately $247,000 and
$745,000 for the three and six months ended August 31, 1998, respectively,
versus approximately $135,000 and $281,000 for the three and six months ended
August 31, 1997, respectively. The increase in costs capitalized relates
primarily to development work being performed by Metamor Software Solutions
during the periods. The Company launched its WinShield NT and Network products
during the first quarter of fiscal 1999 and its FolderBolt 95 and CPR for
Netware products during the second quarter. The Company expects to launch its
Citadel Secure Desktop product and other new products and upgrades during the
third and fourth quarters of fiscal 1999 that will provide ease-of-use security
solutions for Internet and intranet applications on Microsoft and Novell
platforms.
9
<PAGE> 10
Selling and marketing expense increased $655,144, or 215.7% from $303,760 for
the three months ended August 31, 1997 to $958,904 for the three months ended
August 31, 1998. For the six months ended August 31, 1998 selling and marketing
expenses were $1,430,298, compared to $611,387 for the comparable period last
year, or an increase of $818,911, or 133.9%. As a percentage of sales, selling
and marketing expenses increased from 87.8% to 89.0% for, for the quarter and
decreased from 80.0% to 67.7%, for the six months ended August 31, 1997 and
1998, respectively. During the quarter ended August 31, 1988, the Company
allocated considerable resources to marketing and the expansion of its inside
and outside sales departments. The Company expects that it will continue to
allocate additional resources to selling and marketing expenses in the future.
Therefore, the Company would expect that in the future these expenses will
continue to increase on a dollar basis, but to the extent sales increase these
expenses can be expected to decrease as a percentage of sales.
General and administrative expenses were $426,570 for the three months ended
August 31, 1997, compared to $427,152 for the three months ended August 31,
1998. General and administrative expenses for the six months decreased $228,917,
or 22.7%, from $1,010,408 to $781,491 for the six months ended May 31, 1997 and
1998, respectively. This resulted primarily from the Company's restructuring and
cost control programs implemented during the previous fiscal year. As a
percentage of sales these expenses decreased for the quarter from 123.3% in 1997
to 39.6% in 1998, and from 120.5% to 37.0%, for the six months ended August 31,
1997 and 1998, respectively. The Company would expect that as revenues increase
these expenses will continue to decrease as a percentage of sales.
Depreciation and amortization expense increased $23,339 or 6.7%, to $371,491
from $348,152 for the three months ended August 31, 1998 and 1997, respectively.
For the six months, depreciation and amortization expense increased $101,589, or
16.3%, from $622,328 to $723,917 for the periods ended August 31, 1997 and 1998,
respectively. This increase resulted from the commencement of amortization on
certain capitalized research and development costs relating to products that
became available for sale during the periods.
Interest expense for the three months ended August 31, 1998 was $30,847
compared to $29,502 for the three months ended August 31, 1997. For the six
months ended August 31, 1998, interest expense increased $31,323, from $50,728
for the six months ended August 31, 1997, to $82,051, or 61.7%. This resulted
primarily from the Company having more interest bearing debt outstanding during
the period when compared to the same period last year.
As a result of the foregoing the Company reported a net loss before
extraordinary items of $910,031 for the three months ended August 31, 1998,
compared to a net loss of $935,236 for the same period last year. For the six
months ended August 31, 1998, the Company reported a net loss before
extraordinary items of $1,281,254, compared to a net loss of $1,796,355, for the
same period last year.
During the three months and six months ended August 31, 1998, the Company
recognized gains on the settlement of debts of $205,847 and $733,068,
respectively. These gains related primarily to the restructuring of a certain
note payable to Inxight, a division of Xerox and the settlement of certain
accrued obligations. In connection with the Inxight transaction, Inxight agreed
to reduce a certain note and accrued interest due from the Company by $520,816.
In exchange the Company agreed to a shorter maturity on the note and the
issuance of 250,000 shares of the Company's common stock to Inxight (valued at
$92,500 as of the date of the transaction). The value of the stock has been
treated as a reduction in the gain associated with the transaction.
As a result of the aforementioned, for the three months ended August 31, 1998,
the Company reported a net loss of $704,184, and a net loss of $548,186 for the
six months then ended, compared to a net loss of approximately $935,236 and
$1,796,355 for the respective comparable periods last year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents at August 31, 1998 were $1,930,876.
Cash flows from operations were a negative $2,934,447 for the six months ended
August 31, 1998, compared to negative $667,047 for the six months ended August
31, 1997. The increase in the negative cash flow from operations resulted
primarily from an increase in Company's receivables due to an increase in the
Company's sales
10
<PAGE> 11
sold with extended payment terms, an increase in other assets which related
primarily to expenditures for various marketing and advertising programs, and a
decrease in accounts payable and accrued expenses. The aforementioned negative
impacts were offset in part by a decrease in the Company's net loss for the
period.
Cash used in investing activities was approximately $769,919 for the six months
ended August 31, 1998, compared to approximately $252,846 for the same period
last year. This increase resulted primarily from the increase in development
expenses relating to development activities on new products and product
upgrades.
Cash flows provided by financing activities were $5,653,687 for the six months
ended August 31, 1998, compared to $940,944 for the six months ended August 31,
1997. This increase was due primarily to more capital being raised during this
period compared to the same period last year.
As a result of the aforementioned factors, cash and cash equivalents increased
by $1,922,321 for the six months ended August 31, 1998 versus an increase of
approximately $21,101 for the same period last year.
PART II. OTHER INFORMATION
Except as listed below, all information required by Part II is omitted because
the items are inapplicable or the answer is negative.
ITEM 1. LEGAL PROCEEDINGS
In August 1998, the Company settled a lawsuit styled Marks, Marks, Ranshaw,
Colquitt & Lauratis v. Citadel Computer Systems Incorporated, et al., in the
189th Judicial District Court of Harris County, Texas for $25,000 in cash plus
the extension of the plaintiffs options to purchase 207,088 shares of Common
Stock and the Company agreed to register the shares underlying these options.
The lawsuit was filed by former employees who alleged that the Company and/or
the individual defendants owed the plaintiffs damages, attorney's fees, pre- and
post-judgment interest and costs allegedly in excess of $4,000,000.
In August 1998, Janssen Meyers Associates L.P. ("JM") filed a lawsuit against
the Company. The suit alleges that the Company owes the plaintiffs a fee in the
amount of $16,500,000 plus interest and attorney's fees in connection with
services allegedly performed by JM in respect of the merger between LoneStar and
Old Citadel and related matters. The Company believes such claims are without
merit and intends to vigorously defend against the claims. The lawsuit, styled
Janssen Meyers Associates, L.P. v. Citadel Technology, Inc., was filed in the
Supreme Court of the State of New York, County of New York. The Company has
removed the case to federal court in the Southern District of New York.
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. Such matters could
have a material adverse effect on the results of operations or financial
condition of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 30, 1998, the Company and Icarus Investments I, Ltd. ("Icarus") entered
into a Stock Purchase Agreement pursuant to which Icarus purchased 1,000,000
shares of Citadel's Common Stock for proceeds of $1,500,000. 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. In connection with the
transaction, the Company issued warrants to purchase 500,000 shares of the
Company's Common Stock at $3.00 per shares and 250,000 shares at $2.00. The
Company paid a commission of $90,000 to an individual in connection with the
transaction. No other fees were paid in connection with the sale of the shares
to Icarus.
11
<PAGE> 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Stock Purchase Agreement between Citadel and Icarus Investments I,
Ltd., dated June 30, 1998.
10.2 Warrant to purchase shares of Common Stock issued to Icarus
Investment I, Ltd. dated June 30, 1998.
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K.
The Company filed no Current Reports on Form 8-K during the quarter ended August
31, 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.
(REGISTRANT)
Date: October 20, 1998 By: /s/ Steven B. Solomon
---------------------------------------------------
Steven B. Solomon, President and Chief Executive
Officer (Duly Authorized Signatory and Principal
Executive Officer)
By: /s/ Richard L. Travis, Jr.
---------------------------------------------------
Richard L. Travis, Jr., Chief Operating and Financial
Officer (Duly Authorized Signatory and Principal
Financial Officer)
12
<PAGE> 13
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.1 Stock Purchase Agreement between Citadel and Icarus Investments I, Ltd., dated June 30, 1998.
10.2 Warrant to purchase shares of Common Stock issued to Icarus Investments I, Ltd. dated June 30, 1998.
27 Financial Data Schedule.
</TABLE>
<PAGE> 1
Exhibit 10.1
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT is dated as of June 29, 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 one million (1,000,000) 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 $1.50 per share for an aggregate purchase
price of one million five hundred thousand dollars ($1,500,000.00) (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 June 29, 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:
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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.
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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) 24,948,348 shares are issued and outstanding as of June 29,
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 June 29, 1998. 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
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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
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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.
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"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 29, 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 June 29, 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
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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.
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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
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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.
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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
ICARUS INVESTMENTS I, LTD.
By: ICARUS INVESTMENTS, INC., General Partner
By: /s/ MICHAEL RUFF
----------------------------
Michael Ruff, President
<PAGE> 1
Exhibit 10.2
THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE SHARES ISSUABLE UPON
EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER SUCH SECURITIES
NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE
TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS
EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE
COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF SUCH SECURITIES, WHICH
COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH
SECURITIES MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR TRANSFERRED IN THE MANNER
CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR
APPLICABLE STATE SECURITIES LAWS.
THE TRANSFER OF THIS WARRANT IS RESTRICTED AS DESCRIBED HEREIN.
CITADEL TECHNOLOGY, INC.
Warrant for the Purchase of Shares of Common Stock, par value $.01 per share
No. 1 750,000 Shares
THIS CERTIFIES that, for value received, Icarus Investments I, Ltd., a
Texas limited partnership (the "Holder"), is entitled to subscribe for and
purchase from Citadel Technology, Inc., a Delaware corporation (the "Company"),
upon the terms and conditions set forth herein, at any time or from time to time
after June 29, 1998 until 5:00 P.M. on July 1, 1999, Central time (the "Exercise
Period"), up to 750,000 shares of the Common Stock of the Company at an exercise
price of (i) for up to 250,000 shares, $2.00 per share and (ii) for up to an
additional 500,000 shares, $3.00 per share (the "Exercise Price"). The number of
shares of Common Stock issuable upon exercise of the Warrants (collectively, the
"Warrant Shares") and the Exercise Price may be adjusted from time to time as
hereinafter set forth.
1. EXERCISE. This Warrant may be exercised at any time during the
Exercise Period as to the whole or any lesser number of whole Warrant Shares, by
the surrender of this Warrant (with the election form at the end hereof duly
executed) to the Company at its office at 3811 Turtle Creek Boulevard, Suite
600, Dallas, Texas 75219, attention: President, or at such other place as the
Company may designate in writing, together with a cashier's check payable to the
order of the Company in an amount equal to the Exercise Price multiplied by the
number of Warrant Shares for which this Warrant is being exercised.
2. TITLE. Upon each exercise of the Holder's rights to purchase Warrant
Shares, the Holder shall be deemed to be the holder of record of the Warrant
Shares
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issuable upon such exercise, notwithstanding that the transfer books of the
Company shall then be closed or certificates representing such Warrant Shares
shall not then have been actually delivered to the Holder. As soon as
practicable after each such exercise of this Warrant, the Company shall issue
and deliver to the Holder a certificate or certificates for the Warrant Shares
issuable upon such exercise, registered in the name of the Holder or its
designee. If this Warrant should be exercised in part only, the Company shall,
upon surrender of this Warrant for cancellation, execute and deliver a new
Warrant evidencing the right of the Holder to purchase the balance of the
Warrant Shares (or portions thereof) subject to purchase hereunder.
3. TRANSFER AND RESTRICTIONS ON TRANSFER. (a) This Warrant and any
Warrants issued upon the transfer or exercise in part of this Warrant shall be
numbered and shall be registered in a Warrant Register as they are issued. The
Company shall be entitled to treat the registered holder of any Warrant on the
Warrant Register as the owner in fact thereof for all purposes. The Company
shall not be bound to recognize any equitable or other claim to or interest in
such Warrant on the part of any other person. The Company shall not be liable
for any registration or transfer of Warrants that are registered or to be
registered in the name of a fiduciary or the nominee of a fiduciary, unless such
registration or transfer is made with the Company's actual knowledge that a
fiduciary or nominee is committing a breach of trust in requesting such
registration or transfer, or with the knowledge of such facts that its
participation therein amounts to bad faith. This Warrant shall be transferable
only on the books of the Company upon delivery thereof duly endorsed by the
Holder or by his duly authorized attorney or representative, or accompanied by
proper evidence of succession, assignment, or authority to transfer. In all
cases of transfer by an attorney, executor, administrator, guardian, or other
legal representative, duly authenticated evidence of his or its authority shall
be produced. Upon any registration of transfer, the Company shall deliver a new
Warrant or Warrants to the person entitled thereto. This Warrant may be
exchanged, at the option of the Holder thereof, for another Warrant, or other
Warrants of different denominations, of like tenor and representing in the
aggregate the right to purchase a like number of Warrant Shares (or portions
thereof), upon surrender to the Company or its duly authorized agent. The
Company shall have no obligation to cause Warrants to be transferred on its
books to any person unless such transfer is registered under the Securities Act
of 1933, as amended (the "Act"), and applicable state securities laws or unless
the Company receives an opinion of counsel to the Holder, which counsel and
opinion are reasonably satisfactory to the Company, that the Warrant may be
transferred in the manner contemplated without an effective registration
statement under the Act or applicable state securities laws.
(b) The Holder acknowledges that the Holder has been advised by the
Company that neither this Warrant nor the Warrant Shares have been registered
under the Act, that this Warrant is being or has been issued and the Warrant
Shares may be issued on the basis of the statutory exemption provided by Section
4(2) of the Act or Regulation D promulgated thereunder, or both, relating to
transactions by an issuer not involving any public offering, and that the
Company's reliance thereon is based in part upon the representations made by the
original Holder. The Holder acknowledges that he has been
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informed by the Company of, or is otherwise familiar with, the nature of the
limitations imposed by the Act and the rules and regulations thereunder on the
transfer of securities. In particular, the Holder agrees that no sale,
assignment or transfer of this Warrant or the Warrant Shares shall be valid or
effective, and the Company shall not be required to give any effect to any such
sale, assignment or transfer, unless (i) the sale, assignment or transfer of
this Warrant or such Warrant Shares is registered under the Act, it being
understood that the Company has no obligation or intention to so register this
Warrant or the Warrant Shares except as specifically provided herein, or (ii)
this Warrant or such Warrant Shares are sold, assigned or transferred in
accordance with all the requirements and limitations of Rule 144 under the Act,
it being understood that Rule 144 may not be available at the time of the
original issuance of this Warrant for the sale of this Warrant or the Warrant
Shares and that there can be no assurance that Rule 144 sales will be available
at any subsequent time, or (iii) such sale, assignment, or transfer is otherwise
exempt from registration under the Act.
4. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES. If the
Company shall at any time after the date the Warrants were first issued (i)
declare a dividend on the outstanding Common Stock payable in shares of its
capital stock, (ii) subdivide the outstanding Common Stock, (iii) combine the
outstanding Common Stock into a smaller number of shares, (iv) issue any shares
of its capital stock by reclassification of the Common Stock (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing corporation), or (v) make any distribution of its
assets to holders of its Common Stock as a liquidation or partial liquidation
dividend or by way of return of capital; then, in each case, the Exercise Price
and the number of Warrant Shares in effect at the time of the record date for
such dividend or of the effective date of such subdivision, combination, or
reclassification, shall be proportionately adjusted so that the Holder after
such time shall be entitled to receive the aggregate number and kind of shares
which, if such Warrant had been exercised immediately prior to such time, the
Holder would have owned upon such exercise and been entitled to receive by
virtue of such dividend, subdivision, combination, or reclassification. Such
adjustment shall be made successively whenever any event listed above shall
occur.
5. MERGER. (a) In case of any consolidation with or merger of the
Company with or into another corporation (other than a merger or consolidation
in which the Company is the surviving or continuing corporation), or in case of
any sale, lease, or conveyance to another corporation of the property and assets
of any nature of the Company as an entirety or substantially as an entirety,
such successor, or such leasing or purchasing corporation, as the case may be,
shall (i) execute with the Holder an agreement providing that the Holder shall
have the right thereafter to receive upon exercise of this Warrant solely the
kind and amount of shares of stock and other securities, property, cash, or any
combination thereof receivable upon such consolidation, merger, sale, lease, or
conveyance by a holder of the number of shares of Common Stock for which this
Warrant might have been exercised immediately prior to such consolidation,
merger, sale, lease, or conveyance and (ii) make effective provision in its
3
<PAGE> 4
certificate of incorporation or otherwise, if necessary, to effect such
agreement. Such agreement shall provide for adjustments which shall be as nearly
equivalent as practicable to the adjustments in Section 4.
(b) In case of any reclassification or change of the shares of Common
Stock issuable upon exercise of this Warrant (other than a change in par value
or as a result of a subdivision or combination, but including any change in the
shares into two or more classes or series of shares), or in case of any
consolidation or merger of another corporation into the Company in which the
Company is the continuing corporation and in which there is a reclassification
or change (including a change to the right to receive cash or other property,
including, without limitation, a reverse subsidiary merger) of the shares of
Common Stock (other than a change in par value, or as a result of a subdivision
or combination, but including any change in the shares into two or more classes
or series of shares), the Holder shall have the right thereafter to receive upon
exercise of this Warrant solely the kind and amount of shares of stock and other
securities, property, cash, or any combination thereof receivable upon such
reclassification, change, consolidation, or merger by a holder of the number of
shares of Common Stock for which this Warrant might have been exercised
immediately prior to such reclassification, change, consolidation, or merger.
Thereafter, appropriate provision shall be made for adjustments which shall be
as nearly equivalent as practicable to the adjustments in Section 4.
(c) The above provisions of this Section 5 shall similarly apply to
successive reclassifications and changes of shares of Common Stock and to
successive consolidations, mergers, sales, leases, or conveyances.
6. COVENANTS OF COMPANY.
(a) The Company shall at all times reserve and keep available out of
its authorized and unissued Common Stock, solely for the purpose of providing
for the exercise of the rights to purchase all Warrant Shares granted pursuant
to the Warrants, such number of shares of Common Stock as shall, from time to
time, be sufficient therefor. The Company covenants that all shares of Common
Stock issuable upon exercise of this Warrant, upon receipt by the Company of the
full Exercise Price therefor, shall be validly issued, fully paid,
nonassessable, and free of preemptive rights.
(b) If at any time the Company shall propose to:
(i) pay any dividend or make any distribution on shares of Common Stock
in shares of Common Stock or make any other distribution (other than regularly
scheduled cash dividends which are not in a greater amount per share than the
most recent such cash dividend) to all holders of Common Stock; or
(ii) issue any rights, warrants, or other securities to all holders of
Common Stock entitling them to purchase any additional shares of Common Stock or
any other rights, warrants, or other securities; or
4
<PAGE> 5
(iii) effect any reclassification or change of outstanding shares of
Common Stock, or any consolidation, merger, sale, lease, or conveyance of
property, described in Section 5; or
(iv) effect any liquidation, dissolution, or winding-up of the Company;
or
(v) take any other action which would cause an adjustment to the
Exercise Price;
then, and in any one or more of such cases, the Company shall give written
notice thereof, by registered mail, postage prepaid, to the Holder at the
Holder's address as it shall appear in the Warrant Register, mailed at least 15
days prior to (i) the date as of which the holders of record of shares of Common
Stock to be entitled to receive any such dividend, distribution, rights,
warrants, or other securities are to be determined, (ii) the date on which any
such reclassification, change of outstanding shares of Common Stock,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up is expected to become effective, and the date as of
which it is expected that holders of record of shares of Common Stock shall be
entitled to exchange their shares for securities or other property, if any,
deliverable upon such reclassification, change of outstanding shares,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up, or (iii) the date of such action which would require
an adjustment to the Exercise Price.
7. EXPENSES OF EXERCISE. The issuance of any shares or other securities
upon the exercise of this Warrant, and the delivery of certificates or other
instruments representing such shares or other securities, shall be made without
charge to the Holder for any tax or other charge in respect of such issuance.
The Company shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of any certificate
in a name other than that of the Holder and the Company shall not be required to
issue or deliver any such certificate unless and until the person or persons
requesting the issue thereof shall have paid to the Company the amount of such
tax or shall have established to the satisfaction of the Company that such tax
has been paid.
8. REGISTRATION OF WARRANT SHARES.
(a) If any Warrant Shares are outstanding, the Company shall provide
written notice to the Holder 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 Holder desires to elect to sell its Warrant Shares in connection
with the registration statement, the Holder shall provide written notice to the
Company within five days of its intention to sell all or any multiple of 20% of
its original Warrant Shares. The Company shall use its best efforts to include
such Warrant Shares requested by the Holder in such registration statement, to
the extent requisite to permit the public offering and sale of the Warrant
5
<PAGE> 6
Shares, 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 "Warrant Shares" shall not include Shares 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 Holder purchased such Warrant Shares.
(b) In connection with registration of securities pursuant to this
Section, the Holder shall pay all fees and expenses with respect to its shares,
including the proportionate part, based upon the number of the Holder'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 Holder and any stock transfer taxes incurred
with respect of the Warrant Shares of the Holder. The Company shall bear all
other expenses incurred in connection with such registration statement,
including Commission filing fees.
9. STOP TRANSFER LEGEND. Unless registered pursuant to Act, the Warrant
Shares issued upon exercise of the Warrants shall be subject to a stop transfer
order and the certificate or certificates evidencing such Warrant Shares shall
bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE
SECURITIES LAWS AND NEITHER SUCH SECURITIES NOR ANY INTEREST THEREIN
MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE TRANSFERRED UNLESS
(1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER
THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE COMPANY
RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF SUCH SECURITIES, WHICH
COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT
SUCH SECURITIES MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR TRANSFERRED
IN THE MANNER CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE ACT OR APPLICABLE STATE SECURITIES LAWS."
6
<PAGE> 7
10. REPLACEMENT OF WARRANT. Upon receipt of evidence satisfactory to
the Company of the loss, theft, destruction, or mutilation of any Warrant and
(i) in the case of any such loss, theft or destruction upon delivery of
indemnity satisfactory to the Company in form and amount or, (ii) in the case of
any such mutilation upon surrender of such warrant for cancellation of the
principal office of the Company, upon reimbursement of the Company's reasonable
incidental expenses, the Company shall execute and deliver to the Holder thereof
a new Warrant of like date, tenor, and denomination.
11. NO RIGHTS AS STOCKHOLDER. The Holder of any Warrant shall not have
solely on account of such status, any rights of a stockholder of the Company,
either at law or in equity, or to any notice of meetings of stockholders or of
any other proceedings of the Company, except as provided in this Warrant.
12. CHOICE OF LAW. This Warrant has been negotiated and consummated in
the State of Texas and shall be construed in accordance with the laws of the
State of Texas applicable to contracts made and performed within such State,
without regard to principles governing conflicts of law.
13. JURISDICTION. The Company irrevocably consents to the jurisdiction
of the courts of the State of Texas and of any federal court located in such
State in connection with any action or proceeding arising out of or relating to
this Warrant, any document or instrument delivered pursuant to, in connection
with or simultaneously with this Warrant, or a breach of this Warrant or any
such document or instrument. Within 30 days after such service, or such other
time as may be mutually agreed upon in writing by the attorneys for the parties
to such action or proceeding, the Company shall appear to answer such summons,
complaint or other process. Should the Company so served fail to appear or
answer within such 30-day period or such extended period, as the case may be,
the Company shall be deemed in default and judgment may be entered against the
Company for the amount as demanded in any summons, complaint or other process so
served.
14. SEVERABILITY. Any provision contained in this Warrant which is
prohibited or unenforceable by law shall be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
contained in this Warrant.
15. HEADINGS. The descriptive headings of the several Sections of this
Warrant are inserted for convenience only and do not constitute part of the
Warrant.
Dated: June 29, 1998.
CITADEL TECHNOLOGY, INC.
By: /s/ STEVEN B. SOLOMON
---------------------------------
Steven B. Solomon, President
7
<PAGE> 8
To: Citadel Technology, Inc.
3811 Turtle Creek Boulevard
Suite 600
Dallas, Texas 75219
ELECTION TO EXERCISE
The undersigned hereby exercises his or its rights to purchase ___________
Warrant Shares covered by the within Warrant and tenders payment herewith in the
amount of $___________ in accordance with the terms thereof, and requests that
certificates for such securities be issued in the name of, and delivered to:
- -----------------------------
- -----------------------------
- -----------------------------
- -----------------------------
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of Warrant Shares shall not be all the Warrant Shares
covered by the within Warrant, that a new Warrant for the balance of the Warrant
Shares covered by the within Warrant be registered in the name of, and delivered
to, the undersigned at the address stated below.
Dated:
-------------------------
Name:
- -----------------------------
(Print)
Address:
- -----------------------------
- -----------------------------
- -----------------------------
- ----------------------------
(Signature)
8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENT OF CITADEL TECHNOLOGY, INC. FOR THE PERIOD ENDED AUGUST 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> AUG-31-1998
<CASH> 1,930,876
<SECURITIES> 0
<RECEIVABLES> 1,651,622
<ALLOWANCES> 0
<INVENTORY> 116,706
<CURRENT-ASSETS> 4,685,701
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,859,086
<CURRENT-LIABILITIES> 1,950,095
<BONDS> 74,910
0
67
<COMMON> 320,404
<OTHER-SE> 7,513,610
<TOTAL-LIABILITY-AND-EQUITY> 9,859,086
<SALES> 1,077,318
<TOTAL-REVENUES> 1,077,318
<CGS> 60,912
<TOTAL-COSTS> 60,912
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,847
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (910,031)
<DISCONTINUED> 0
<EXTRAORDINARY> 205,847
<CHANGES> 0
<NET-INCOME> (704,184)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
