<PAGE>
As filed with the Securities and Exchange Commission on May 20, 1998
Registration No. 333-________
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM S-8
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------------------
CITADEL TECHNOLOGY, INC.
(Exact name of registrant 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, TEXAS 75219
(Address of principal executive offices) (Zip Code)
STOCK OPTIONS
(Full title of the plans)
----------------------------------
STEVEN B. SOLOMON
CHIEF EXECUTIVE OFFICER
CITADEL TECHNOLOGY, INC.
3811 TURTLE CREEK BLVD, SUITE 600
DALLAS, TEXAS 75219
(214) 520-9292
(Name, address and telephone number
including area code of agent for service)
----------------------------------
Copy to:
DAVID A. WOOD, ESQ.
WOOD, EXALL & BONNET, L.L.P.
12222 MERIT DRIVE, SUITE 880
DALLAS, TEXAS 75251
<PAGE>
<TABLE>
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
TITLE OF CLASS MAXIMUM MAXIMUM
OF SECURITIES AMOUNT OFFERING AGGREGATE AMOUNT OF
TO BE TO BE PRICE OFFERING REGISTRATION
REGISTERED REGISTERED PER SHARE(1)(2) PRICE (1)(2) FEE (2)
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<S> <C> <C> <C> <C>
Common Stock, $0.01
par value per share 265,625 Shares $0.25 $66,406.25 $19.90
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Calculated pursuant to Rule 457(c) and (h) under the Securities Act of
1933, as amended. Accordingly, the offering price per share and the aggregate
offering price for the options are based upon the exercise price of such
options.
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PART I
INFORMATION REQUIRED IN THE SECTION 10(a) PROSPECTUS
The information specified by Item 1 and Item 2 of Part I of Form S-8 is omitted
from this filing in accordance with provisions of Rule 428 under the Securities
Act of 1933, as amended, and the introductory Note to Part I of Form S-8.
PART II
INFORMATION REQUIRED IN REGISTRATION STATEMENT
ITEM 3. INCORPORATION OF DOCUMENTS BY REFERENCE.
The registrant hereby incorporates by reference in this registration
statement the following documents previously filed by the registrant with the
Securities and Exchange Commission (the "Commission"):
(1) the registrant's Annual Report on Form 10-KSB filed with the
Commission for the fiscal year ended February 28, 1997;
(2) the registrant's Quarterly Reports on Form 10-QSB for the quarters
ended May 31, 1997, August 31, 1997 and November 30, 1997, filed
with the Commission and all other reports filed pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 since the end
of the fiscal year covered by the annual report referred to in (1)
above; and
(3) the description of the common stock, par value $0.01 per share, of the
registrant (the "Common Stock") set forth in the Registration
Statement on Form S-1 for Apollo Resources, Inc., filed with the
Commission on November 1, 1988, and declared effective January 4,
1989, including any amendment or report filed for the purpose of
updating such description.
In addition, all documents subsequently filed by the registrant with the
Commission pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), prior to the filing of a
post-effective amendment hereto that indicates that all securities offered
<PAGE>
hereby have been sold or which deregisters all such securities then remaining
unsold, shall be deemed to be incorporated herein by reference and to be a part
hereof from the date of filing of such documents. Any statement contained
herein or in any document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
registration statement to the extent that a statement contained herein or in any
other subsequently filed document which also is or is deemed to be incorporated
by reference herein modifies or supersedes such statement. Any such statement
so modified or superseded shall not be deemed to constitute a part of this
registration statement, except as so modified or superseded.
ITEM 4. DESCRIPTION OF SECURITIES.
Not applicable.
ITEM 5. INTERESTS OF NAMED EXPERTS AND COUNSEL.
Legal matters in connection with the Common Stock being offered
hereunder have been passed upon for the registrant by Wood, Exall & Bonnet,
L.L.P. David A. Wood, an officer of David Allen Wood, P.C., a partner in
such law firm, holds exercisable options to acquire 200,000 shares of the
Common Stock of the registrant.
ITEM 6. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The registrant's Certificate of Incorporation, as amended, and Bylaws
provide that no director of the Registrant will be personally liable to the
Registrant or any of its stockholders for monetary damages arising from the
director's breach of fiduciary duty as a director, with certain limited
exceptions.
Pursuant to the provisions of Section 145 of the Delaware General
Corporation Law, every Delaware corporation has the power to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (other than an
action by or in the right of the corporation) by reason of the fact that he or
she is or was a director, officer, employee or agent of any corporation,
partnership, joint venture, trust or other enterprise, against any and all
expenses, judgments, fines and amounts paid in settlement and reasonably
incurred in connection with such action, suit or proceeding. The power to
indemnify applies only if such person acted in good faith and in a manner he or
she reasonably believed to be in the best interest, or not opposed to the best
interest, of the corporation and with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
The power to indemnify applies to actions brought by or in the right of
the corporation, but only to the extent of defense and settlement expenses
and not to any satisfaction of a judgment or settlement of the claim itself,
and with the further limitation that in such actions no indemnification shall
be made in the event of any adjudication unless the court, in its discretion,
believes that in the light of all the circumstances indemnification should
apply.
To the extent any of the persons referred to in the two immediately
preceding paragraphs is successful in the defense of the actions referred to
therein, such person is entitled, pursuant to Section 145, to indemnification as
described above.
In addition, the Registrant's Certificate of Incorporation and Bylaws
provide for indemnification of officers and directors to the fullest extent
permitted by the Delaware General Corporation Law.
ITEM 7. EXEMPTIONS FROM REGISTRATION CLAIMED.
Not applicable.
<PAGE>
ITEM 8. EXHIBITS.
Unless otherwise indicated below as being incorporated by reference
to another filing of the Company, each of the following documents is filed as a
part of this registration statement.
<TABLE>
Exhibit Description of Exhibit
- ------- ----------------------
<S> <C>
4.1 Certificate of Incorporation, as amended (incorporated by reference to
Annual Report on Form 10-KSB for the fiscal year ended February 28,
1997).
4.2* Certificate of Amendment to Certificate of Incorporation filed with
the Delaware Secretary of State on February 27, 1998.
4.3 Bylaws (incorporated by reference to Registration Statement
on Form S-1, File No. 33-25462, filed with the Commission
on November 10, 1988).
4.4 Certificate of Designations of Series A Convertible Preferred
Stock filed with the Delaware Secretary of State on July 16, 1996
(incorporated by reference to Form 10-QSB for the quarter ended
May 31, 1996).
4.5 Certificate of Designations of Series B Convertible Preferred
Stock filed with the Delaware Secretary of State on September 27, 1996
(incorporated by reference to Form S-8, File No. 33-15665, filed
with the Commission on November 6, 1996).
4.6* Certificate of Designations of Series C Convertible Preferred
Stock filed with the Delaware Secretary of State on November 7, 1997.
4.7* Certificate of Designations of Series E Convertible Redeemable
Preferred Stock filed with the Delaware Secretary of State on
April 28, 1998.
4.8* Certificate of Amendment to Certificate of Designations of
Series E Convertible Redeemable Preferred Stock filed with
the Delaware Secretary of State on April 30, 1998.
5* Opinion of Wood, Exall & Bonnet, L.L.P., counsel to registrant.
23.1* Consent of Grant Thornton LLP, independent certified public
accountants.
23.2* Consent of Wood, Exall & Bonnet, L.L.P. (included as part of
Exhibit 5).
24* Power of Attorney is included on the signature pages of this
registration statement.
____________________
* Filed herewith.
</TABLE>
ITEM 9. UNDERTAKINGS.
A. The undersigned registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made, a post-
effective amendment to this registration statement:(i) to include any prospectus
required by Section 10(a)(3) of the Securities Act; (ii) to reflect in the
prospectus any facts or events arising after the effective date of the
registration statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement; or (iii) to include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the registrant pursuant to Section 13
or Section 15(d) of the Exchange Act that are incorporated by reference in
the registration statement.
<PAGE>
(2) that, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof; and
(3) to remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
B. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
C. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-8 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Dallas, State of Texas, on May 20, 1998:
CITADEL TECHNOLOGY, INC.
By: /s/ Steven Solomon
-----------------------------------------
Steven Solomon
Chief Executive Officer and President
(Principal Executive Officer)
By: /s/ Richard L. Travis, Jr.
-----------------------------------------
Richard L. Travis, Jr.
Chief Financial and Operating Officer
(Principal Financial and Accounting Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Steven B. Solomon and Richard L. Travis, Jr., or
either of them, his true and lawful attorney-in-
<PAGE>
fact and agent with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this registration
statement, and to file the same with all exhibits thereto, and all documents
in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents or either of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ Victor K. Kiam, II
- ------------------------ Chairman of the Board of May 11, 1998
Victor K. Kiam, II Directors
/s/ Steven B. Solomon
- ------------------------ Chief Executive Officer, May 20, 1998
Steven B. Solomon President & Director
(Principal Executive
Officer)
/s/ Richard L. Travis, Jr.
- ------------------------ Chief Financial and Operating May 20, 1998
Richard L. Travis, Jr. Officer, Secretary & Director
(Principal Financial and
Accounting Officer)
/s/ Kenneth Johnsen
- -------------------------
Kenneth Johnsen Director May 20, 1998
- -------------------------
Mark Rogers Director
/s/ Chris Economou
- -------------------------
Chris Economou Director May 20, 1998
/s/ Axel Sawallich
- -------------------------
Axel Sawallich Director May 20, 1998
- -------------------------
Gilbert Gertner Director
<PAGE>
EXHIBIT INDEX
<TABLE>
Sequential
Exhibit Page
Number Document Description Number
------ -------------------- ------
<S> <C>
4.1 Certificate of Incorporation, as amended (incorporated by reference
to Annual Report on Form 10-KSB for the fiscal year ended
February 28, 1997).
4.2* Certificate of Amendment to Certificate of Incorporation filed with
the Delaware Secretary of State on February 27, 1998.
4.3 Bylaws (incorporated by reference to Registration Statement
on Form S-1, File No. 33-25462, filed with the Commission
on November 10, 1988).
4.4 Certificate of Designations of Series A Convertible Preferred
Stock filed with the Delaware Secretary of State on July 16, 1996
(incorporated by reference to Form 10-QSB for the quarter ended
May 31, 1996).
4.5 Certificate of Designations of Series B Convertible Preferred
Stock filed with the Delaware Secretary of State on September 27,
1996 (incorporated by reference to Form S-8, File No. 33-15665,
filed with the Commission on November 6, 1996).
4.6* Certificate of Designations of Series C Convertible Preferred
Stock filed with the Delaware Secretary of State on November 7,
1997.
4.7* Certificate of Designations of Series E Convertible Redeemable
Preferred Stock filed with the Delaware Secretary of State on
April 28, 1998.
4.8* Certificate of Amendment to Certificate of Designations of
Series E Convertible Redeemable Preferred Stock filed with
the Delaware Secretary of State on April 30, 1998.
5* Opinion of Wood, Exall & Bonnet, L.L.P., counsel to registrant.
23.1* Consent of Grant Thornton LLP, independent certified public
accountants.
23.2* Consent of Wood, Exall & Bonnet, L.L.P. (included as part of
Exhibit 5).
24* Power of Attorney is included on the signature pages of this
registration statement.
</TABLE>
____________________
* Filed herewith.
<PAGE>
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
CITADEL COMPUTER SYSTEMS INCORPORATED
CITADEL COMPUTER SYSTEMS INCORPORATED, a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware (the "Corporation"), DOES HEREBY CERTIFY as follows:
FIRST: The Certificate of Incorporation of the Corporation is hereby
amended by deleting the first paragraph of Article IV of the Certificate of
Incorporation in its entirety and substituting therefor the following:
"ARTICLE IV: The corporation shall be authorized to issue two classes of
stock to be designated respectively "Common" and "Preferred." The total
number of shares of Common Stock that the corporation shall have authority
to issue shall be Sixty Million (60,000,000), and the par value of each
share of Common Stock shall be one cent ($.01). The total number of shares
of Preferred Stock that the corporation shall have authority to issue shall
be One Million (1,000,000), and the par value of each share of Preferred
Stock shall be one cent ($.01)."
SECOND: The capital of the Corporation will not be reduced under or by
reason of this Amendment to the Certificate of Incorporation of the
Corporation.
THIRD: The Certificate of Incorporation of the Corporation is hereby
amended by deleting the first paragraph of Article I of the Certificate of
Incorporation in its entirety and substituting therefor the following:
"ARTICLE I: The name of the corporation shall be "Citadel Technology,
Inc.""
FOURTH: The amendment to the Certificate of Incorporation of the
Corporation set forth in this Certificate of Amendment has been duly adopted
by the vote of the stockholders of the Corporation in accordance with Section
242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment
to be signed and attested by its duly authorized officer as of this 27th of
February, 1998.
CITADEL COMPUTER SYSTEMS INCORPORATED
By: /s/ Steven B. Solomon
- -------------------------------------
Steven B. Solomon
Chief Executive Officer and President
<PAGE>
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF
SERIES C CUMULATIVE CONVERTIBLE PREFERRED STOCK OF
CITADEL COMPUTER SYSTEMS INCORPORATED
(Pursuant to Section 151(g) of the Delaware General Corporation Law)
The undersigned does hereby certify:
(a) that he is, and at all times mentioned herein was, the duly elected
and acting Chief Executive Officer and Secretary of Citadel Computer Systems
Incorporated, a Delaware corporation (the "Company");
(b) that the Company's Certificate of Incorporation, as amended (the
"Certificate of Incorporation"), authorizes the Company's board of directors
(the "Board of Directors") to adopt resolutions fixing the voting powers,
designations, preferences, rights and qualifications, limitations or
restrictions of any series of Preferred Stock, and the Board of Directors has
delegated such authority to its executive committee (the "Executive
Committee"); and
(c) the Executive Committee adopted the following resolutions at a
meeting held on November 7, 1997:
WHEREAS, the Certificate of Incorporation authorizes a class of stock
designated Preferred Stock (the "Preferred Stock"), comprising 1,000,000
shares, par value $0.01 per share, provides that such Preferred Stock may be
issued from time to time in one or more series, and vests authority in the
Board of Directors of the Company to fix or alter the voting powers,
designations, preferences and relative, participating, optional or other
special rights, rights and terms of redemption, the redemption price or
prices and the liquidation preferences of any wholly unissued series of
Preferred Stock within the limitations set forth in the Delaware General
Corporation Law, and the Board of Directors has delegated such authority to
the Executive Committee;
WHEREAS, the Company has outstanding 50 shares of the Company's
authorized Preferred Stock, consisting of shares of Series B Preferred Stock;
WHEREAS, there remains 999,950 shares of the Company's authorized but
unissued Preferred Stock eligible for designation by the Company with respect
to new series thereof;
WHEREAS, the Company proposes to make an offering of up to 15,000 shares
of a new series of Preferred Stock (the "Offering"); and
WHEREAS, it is the desire of the Company to designate a series of
Preferred Stock and to fix the powers, preferences and rights, and the
qualifications, limitations or restrictions thereof in connection with the
Offering;
1
<PAGE>
NOW, THEREFORE, BE IT RESOLVED, that the Company, does hereby designate
15,000 shares of authorized but unissued Preferred Stock as Series C Cumulative
Convertible Preferred Stock (the "Series C Preferred Stock"), and does hereby
fix the voting powers, preferences, and relative, participating, optional, or
other special rights and qualifications, limitations, or restrictions thereof as
follows:
Part 1. GENERAL.
All shares of Series C Preferred Stock will be identical with each other
in all respects. All of the shares of Series C Preferred Stock will be
junior to any security specifically ranking by its terms senior to the Series
C Preferred Stock, prior to the Company's Common Stock as set forth herein,
and senior to any class or series of capital stock hereafter created not
specifically ranking by its terms senior to or on a parity with the Series C
Preferred Stock, and of such rank as to any other outstanding series of
Preferred Stock of the Company as to dividends and distributions upon
liquidation, dissolution or winding up, as shall be provided in the
resolutions of the Board of Directors or the Executive Committee of the
Company creating such other series, subject in each case to the conditions
contained herein.
Part 2. DIVIDENDS.
The holder of each issued and outstanding share of Series C Preferred
Stock shall be entitled to receive dividends at a rate of $8.00 per share per
annum, when and as declared by the Board of Directors of the Company. No
dividends (other than those payable solely in shares of Common Stock of the
Company) shall be paid on or declared and set apart for any Common Stock or
series of Preferred Stock that is subordinate to the Series C Preferred Stock
so long as any shares of Series C Preferred Stock are outstanding, unless,
at the same time, an equivalent or greater dividend or distribution is
declared or paid or set apart, as the case may be, on the Series C Preferred
Stock, payable on the same day as if fully converted into Common Stock
pursuant to Part 4. At the sole option of the Company, dividends on each
share of Series C Preferred Stock may be paid in either (a) cash out of the
assets at the time legally available for such purposes, or (b) shares of
Common Stock in an amount determined by dividing (x) the amount of the
dividend payable thereon, by (y) the Conversion Price (as defined in Part 4
hereof) in effect on the dividend declaration date. No dividends shall be
paid on the Series C Preferred Stock at such time as such payment would
violate the laws of the State of Delaware.
Part 3. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution or winding up of the
Company, either voluntary or involuntary, the holders of the Series C
Preferred Stock then issued and outstanding shall be entitled to receive out
of the assets of the Company available for distribution to its stockholders,
whether from capital, surplus or earnings, prior and in
2
<PAGE>
preference to any payment or distribution and setting apart for payment or
distribution of any of the net assets or surplus funds of the Company to the
holders of the Common Stock or any series of Preferred Stock with a
liquidation preference subordinate to the Series C Preferred Stock, an amount
(the "Liquidation Preference") for each share of Series C Preferred Stock
then held by them equal to $100 per share (the "Stated Value") plus accrued
dividends. If upon the occurrence of such event, the assets and funds thus
distributed among the holders of the Series C Preferred Stock shall be
insufficient to permit the payment to such holders of the full Liquidation
Preference, then the entire assets and funds of the Company legally available
for distribution shall be distributed among the holders of the Series C
Preferred Stock and the holders of any other series of Preferred Stock with a
liquidation preference equal to that of the Series C Preferred Stock, in
proportion to the shares of Series C Preferred Stock or other such series of
Preferred Stock then held by them.
(b) If the assets and funds of the Company available for distribution
to the Company's stockholders exceed the aggregate Liquidation Preferences
payable to the holders of Series C Preferred Stock pursuant to paragraph 3(a)
above, then after the payments required by paragraph 3(a) shall have been
made or irrevocably set apart for payment, such assets or funds shall be
distributed among the holders of Common Stock and subordinate Preferred Stock.
(c) (i) A consolidation or merger (within the meaning of Section 368(a)
of the Internal Revenue Code of 1986, as amended) of the Company with or into
one or more other corporations or other business organizations, (ii) the
sale, lease or transfer of all or substantially all of the assets of the
Company, or (iii) any other form of corporate reorganization in which
outstanding shares of the Company are exchanged for or converted into cash,
securities of another corporation or business organization or other property,
which in any such case shall not in fact result in a liquidation (in whole or
in part) of the Company and the distribution of its assets to its
stockholders shall not be deemed or treated as a liquidation, dissolution or
winding up of the Company within the meaning of Part 3.
Part 4. CONVERSION AND REDEMPTION.
The holders of Series C Preferred Stock will have the following
conversion and redemption rights:
(a) RIGHT TO CONVERT. Each share of Series C Preferred Stock shall be
convertible, on and after the Conversion Dates and at the Conversion Ratio
set forth below, into fully paid and non-assessable shares of Common Stock.
(b) METHOD OF CONVERSION. Subject to paragraph (c) below, each holder
of Series C Preferred Stock who desires to convert the same into shares of
Common Stock shall provide notice to the Company by the execution and
delivery to it of a Notice of Conversion in substantially the form attached
as Annex A hereto. Notice may be given by
3
<PAGE>
telecopy to the Company at 512.520.9293, attention Steven B. Solomon, CEO.
The date on which a Notice of Conversion is received by the Company shall be
a "Notice Date". The Company shall use its reasonable best efforts to issue
and deliver within five business days after receipt of the Notice of
Conversion and the certificate or certificates for the shares of Series C
Preferred Stock, with proper endorsement if necessary, from the holder
electing conversion, a certificate or certificates representing the number of
shares of Common Stock to which the holder shall be entitled to upon the
conversion.
(c) CONVERSION DATE. The Series C Preferred Stock shall become
convertible into shares of Common Stock at any time commencing one hundred
twenty (120) days after the closing date for the original issuance of the
Series C Preferred Stock (the "Conversion Date"); provided, that the Company,
in its sole discretion, may permit conversions prior to the Conversion Date.
(d) CONVERSION RATIO. In addition to such shares of Common Stock as
may be issued upon the election of the Company pursuant to Part 2 above as
dividends, each share of Series C Preferred Stock shall be convertible into
the number of shares of Common Stock according to the following formula:
N X 100
----------------
Conversion Price
where:
N = the number of shares of Series C Preferred Stock for which conversion is
elected.
Conversion Price = the lesser of (i) $0.75 per share or (ii) product of (x)
the average closing bid price as reported on the Nasdaq system (or on such
other national securities exchange or automated quotation system on which the
Common Stock is then primarily traded) of the Common Stock for the five
consecutive trading days immediately preceding the Notice Date and (y) (1)
.80 if the Notice Date is within the first six months following the date of
issuance, (2) .75 if the Notice Date is between six and twelve months
following the date of issuance, or (3) .70 if the Notice Date is after twelve
months following the date of issuance.
(e) REDEMPTION. The Company may redeem all or any portion of the
Series C Preferred Stock at any time if the price of the stock is less than
$1.50 per share upon conversion or otherwise at a redemption price (the
"Redemption Price") for each share of Series C Preferred Stock to be redeemed
equal to the Stated Value, plus a premium equal to (i) 20% if notice of
redemption is given during the first six months following the date of
issuance, (ii) 25% if notice of redemption is given between six and twelve
months following the date of issuance, or (iii) 30% if notice of the
redemption is given after twelve months following the date of issuance,
together with all accrued dividends; provided, that the provisions of section
(f) below shall govern in the event of a redemption as of the maturity date.
4
<PAGE>
(f) AUTOMATIC CONVERSION OR REDEMPTION AT MATURITY. Each share of
Series C Preferred Stock outstanding on the date three years after the date
of issuance at the option of the Company shall be (i) converted into Common
Stock on such date at a Conversion Ratio equal to 110% of the Stated Value
per share where the Common Stock is valued at 100% of the closing bid price
as of such date; or (ii) redeemed by the Company for cash in an amount equal
to 110% of the Stated Value per share of the Series C Preferred Stock to be
redeemed. The date three years after the date of issuance shall be deemed to
be the Notice Date with respect to such conversion or redemption; provided
however, if such date is not a day on which the Nasdaq system is open for
trading or quotation, the deemed Notice Date shall be the next succeeding day
on which the Nasdaq system is open for trading or quotation.
(g) FRACTIONAL SHARES. No fractional share will be issued upon the
conversion of any shares of Series C Preferred Stock. All shares of Common
Stock (including fractions thereof) issuable on conversion of Series C
Preferred Stock by a holder thereof shall be aggregated for purposes of
determining whether the conversion would result in the issuance of any
fractional share. If, after the aggregation, the conversion would result in
the issuance of a fractional share, the Company shall, in lieu of issuing any
fractional share, round up or down any fractional share to the nearest whole
share of Common Stock.
(h) ADJUSTMENT TO CONVERSION PRICE.
(i) If, prior to the conversion of all shares of Series C Preferred
Stock, the number of shares of Common Stock or Series C Preferred Stock is
increased by a stock split, stock dividend, or similar event, or if the
number of shares of Common Stock or Series C Preferred Stock is decreased
by a combination, reclassification, reverse stock split, or similar event,
the Board of Directors of the Company shall make an equitable adjustment in
the Conversion Ratio, if necessary, to reflect such event in order to
preserve substantially the initial Conversion Ratio. The Company will send
to each holder of Series C Preferred Stock written notice of each change in
the Conversion Ratio.
(ii) If, prior to conversion of all shares of Series C Preferred
Stock, there shall be any merger, consolidation, exchange of shares,
recapitalization, reorganization or similar event, as a result of which
shares of Common Stock will be changed into the same or a different number
of shares of the same or different class or classes of stock or other
securities of the Company or another entity, then holders of Series C
Preferred Stock will thereafter have the right to purchase and receive upon
conversion of shares of Series C Preferred Stock, on the basis and on the
terms and conditions specified herein, and in lieu of shares of Common
Stock immediately theretofore issuable upon conversion, such shares of
stock or securities as may be issued or payable with respect to or in
exchange for the number of shares of Common Stock immediately theretofore
purchasable and
5
<PAGE>
receivable upon conversion of shares of Series C Preferred Stock had
such event not taken place. In any case subject hereto, appropriate
provision shall be made with respect to the rights and interests of the
holders of Series C Preferred Stock to the end that the provisions
hereof (including without limitation provisions for adjustment of the
Conversion Price and the number or type of shares issuable upon
conversion of the Series C Preferred Stock) shall thereafter be
applicable, as nearly as may be practicable in relation to any shares of
stock or securities thereafter deliverable upon the exercise hereof.
The Company shall not effect any transaction described in this
subsection (ii) unless the successor or acquiring entity (if not the
Company) assumes by written instrument the obligation to deliver to the
holders of Series C Preferred Stock shares of stock or securities, as in
accordance with the foregoing, the holders of the Series C Preferred
Stock may be entitled to purchase upon conversion.
(i) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Company shall
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of Series C Preferred Stock, such number of shares of Common Stock
as shall from time to time be sufficient to effect the conversion of all then
outstanding shares of Series C Preferred Stock. If at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to
effect the conversion of all then outstanding shares of Series C Preferred
Stock, the Company will take such corporate action as may be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purposes.
(j) STATUS OF CONVERTED STOCK. Upon the Company receiving a Notice of
Conversion for any shares of Series C Preferred Stock pursuant to this
section, the shares covered by such Notice of Conversion shall no longer be
deemed outstanding and all rights with respect to such shares shall cease and
be canceled and such shares shall be returned to the status of authorized
but unissued Preferred Stock of no designated class or series and shall not
be issuable by the Company as Series C Preferred Stock.
Part 5. VOTING RIGHTS.
Except as otherwise expressly required by the Delaware General
Corporation Law or as to any repeal, modification, or amendment to this
Certificate of Designation, which repeal, modification, or amendment shall
require the affirmative vote of the holders of at least a majority of the
shares of Series C Preferred Stock outstanding, voting separately as a class,
the holders of Series C Preferred Stock shall have no voting power
whatsoever, and no holder of Series C Preferred Stock shall vote or otherwise
participate in any proceeding in which actions shall be taken by the Company
or the stockholders thereof, or be entitled to notification of any meeting of
the Board of Directors or the stockholders.
6
<PAGE>
Part 6. REPLACEMENT.
Upon receipt of evidence reasonably satisfactory to the Company (an
affidavit of the registered holder with indemnification provisions will be
satisfactory) of the ownership and the loss, theft, destruction or mutilation
of any certificate evidencing shares of Series C Preferred Stock, and in the
case of any such loss, theft or destruction, upon receipt of indemnity
reasonably satisfactory to the Company or, in the case of any mutilation,
upon surrender of such certificate, the Company will (at the holder's
expense) execute and deliver in lieu of such certificate a new certificate of
like kind representing the number of shares of Series C Preferred Stock
represented by such lost, stolen, destroyed or mutilated certificate, and
dividends will accrue on the shares of Series C Preferred Stock represented
by such new certificate from the date to which dividends have been fully paid
on such lost, stolen, destroyed or mutilated certificate.
FURTHER RESOLVED, that the statements contained in the foregoing
resolutions creating and designating the Series C Preferred Stock and fixing
the number, powers, preferences and relative, optional, participating and
other special rights and the qualifications, limitations, restrictions, and
other distinguishing characteristics thereof shall, upon the effective date
of such series, be deemed to be included in the Certificate of Incorporation
of the Company pursuant to Sections 104 and 151 of the Delaware General
Corporation Law.
The undersigned further certifies that the authorized number of shares
of Preferred Stock is 1,000,000 and that the number of shares of this series
of Preferred Stock, the Series C Convertible Preferred Stock, none of which
has been issued, is 15,000.
IN WITNESS WHEREOF, Citadel Computer Systems Incorporated has caused
this Certificate to be executed by its duly authorized representative as of
November 7, 1997.
CITADEL COMPUTER SYSTEMS INCORPORATED
By: /s/ Steven B. Solomon
--------------------------------
Steven B. Solomon,
Chief Operating Officer
7
<PAGE>
ANNEX A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder to Convert Series C Preferred Stock)
The undersigned hereby irrevocably elects to convert $____________ or
____________ shares of Series C Preferred Stock into shares of Common Stock
of Citadel Computer Systems Incorporated (the "Company") according to the
conditions hereof, as of the date written below. The undersigned represents
and warrants that (i) all of the requirements of Regulation S promulgated
under the Securities Act of 1933, as amended (the "Securities Act"),
applicable to the undersigned have been complied with by the undersigned and
(ii) the undersigned has not engaged in any transaction or series of
transactions that is a part of or a plan or scheme to evade the registration
requirements of the Securities Act.
Date of Conversion* ______________________
Applicable Conversion Price ________________
Dollar amount or Shares ___________________
Signature ______________________________
Name and Address:
__________________________
__________________________
__________________________
__________________________
*The original certificate representing shares of Series C Preferred Stock and
this Notice of Conversion must be received by the Company by the fifth
business day following the Date of Conversion.
8
<PAGE>
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF
SERIES E CONVERTIBLE REDEEMABLE PREFERRED STOCK OF
CITADEL TECHNOLOGY, INC.
(Pursuant to Section 151 of the General Corporation
Law of the State of Delaware)
CITADEL TECHNOLOGY, INC., a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), hereby
certifies that, pursuant to the authority contained in its Certificate of
Incorporation, as amended, and in accordance with the provisions of Section
151 of the General Corporation Law of the State of Delaware, its Board of
Directors or a committee thereof has adopted the following resolution
creating a series of its Preferred Stock designated as Series E Convertible
Redeemable Preferred Stock:
RESOLVED, that a series of the class of authorized Preferred Stock of
the Corporation be, and hereby is, created, and that the designation and
amount thereof and the voting powers, preferences and relative,
participating, optional and other special rights of the shares of such
series, and the qualifications, limitations or restrictions thereof, are as
follows:
(1) Designation and Amount. The shares of such series shall be designated
as "Series E Convertible Redeemable Preferred Stock" (the "Series E Preferred
Stock") and the number of shares constituting such series shall be Five Thousand
(5,000). The number of shares of Series E Preferred Stock may be decreased (but
not below the number of shares then outstanding) or increased by a certificate
executed, acknowledged, filed, and recorded in accordance with the General
Corporation Law of the State of Delaware setting forth a statement that a
specified decrease or increase, as the case may be, thereof had been authorized
and directed by a resolution or resolutions adopted by the Board of Directors or
a committee thereof pursuant to authority expressly vested in it by the
provisions of the Certificate of Incorporation of the Corporation.
(2) Dividends. The holders of shares of Series E Preferred Stock shall be
entitled to receive quarterly, out of any assets legally available therefor,
cumulative dividends, at the rate of six percent (6%) per annum of the Original
Issue Price of the Series E Preferred Stock (as defined below), payable, at the
holder's option, in cash or in Common Stock at the Series E Conversion Price (as
defined below).
(3) Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of the Series E
Preferred Stock shall be entitled to receive, prior and in preference to
any distribution of any of the assets or surplus funds of the Corporation
to the holders of the Common Stock by reason of their ownership thereof, an
amount per share
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<PAGE>
equal to the sum of (A) $100.00 for each outstanding share of Series E
Preferred Stock (the "Original Issue Price" for the Series E Preferred
Stock) and (B) an amount equal to declared but unpaid dividends on such
share. If upon the occurrence of such event, the assets and funds thus
distributed among the holders of the Series E Preferred Stock shall be
insufficient to permit the payment to such holders of the full aforesaid
preferential amount, then the entire assets and funds of the Corporation
legally available for distribution shall be distributed ratably among the
holders of the Series E Preferred Stock and other outstanding series of
preferred stock ranking pari passu with the Series E Preferred Stock in
proportion to the preferential amount each such holder is otherwise
entitled to receive.
(b) After payment to the holders of the Series E Preferred Stock and
other outstanding series of preferred stock ranking pari passu with the
Series E Preferred Stock of the amounts set forth in Section 3(a) above,
the entire remaining assets and funds of the Corporation legally available
for distribution, if any, shall be distributed among the holders of the
Common Stock in proportion to the shares of Common Stock then held by them.
(c) For purposes of this Section (3), (i) any acquisition of the
Corporation by means of merger or other form of corporate reorganization in
which outstanding shares of the Corporation are exchanged for securities or
other consideration issued, or caused to be issued, by the acquiring
corporation or its subsidiary (other than a mere reincorporation
transaction) and following which the stockholders of the Corporation
immediately prior to such transaction own less than a majority of the
voting shares of the surviving corporation or (ii) a sale of all or
substantially all of the assets of the Corporation, shall be treated as a
liquidation, dissolution or winding up of the Corporation and shall entitle
the holders of Series E Preferred Stock to receive at the closing in cash,
securities or other property (valued as provided in Section (3)(d) below)
amounts as specified in Section (3)(a) above.
(d) Whenever the distribution provided for in this Section (3) shall
be payable in securities or property other than cash, the value of such
distribution shall be the fair market value of such securities or other
property as determined in good faith by the Board of Directors.
(4) Redemption.
(a) At any time after the date of issuance of the Series E Preferred
Stock and prior to 90th day following the date of original issuance, this
Corporation may redeem, from any source of funds legally available
therefor, some or all of the outstanding Series E Preferred Stock (the date
of each such redemption being referred to herein as the "Series E
Redemption Date"). The Corporation shall effect such redemptions on the
Series E Redemption Date by paying in exchange for each share of Series E
Preferred Stock to be redeemed an
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<PAGE>
amount in cash (except as provided below) equal to the "Series E
Redemption Price" (expressed as percentages of the Original Issue Price
for the Series E Preferred Stock) set forth below, plus accrued and
unpaid dividends to the redemption date, if payment for redemption is
received during the indicated period following the date of original
issuance:
<TABLE>
<CAPTION>
Time Period (date on
which Redemption Price Series E
is received by Holder) Redemption Price
<S> <C>
within 30 days 107.5%
within 60 days 112.5%
within 90 days 117.5%.
</TABLE>
Any redemption effected pursuant to this Section (4)(a) shall be made
on a pro-rata basis among the holders of the Series E Preferred Stock in
proportion to the shares of Series E Preferred Stock then held by them.
(b) The Company shall mail written notice of redemption, first class
postage prepaid, to each holder of record (at the close of business on the
business day next preceding the day on which notice is given) of the Series
E Preferred Stock to be redeemed, at the address last shown on the records
of the Corporation for such holder, notifying such holder of the redemption
to be effected, specifying the number of shares to be redeemed from such
holder, the Redemption Date, the Series E Redemption Price, the place at
which payment may be obtained and calling upon such holder to surrender to
the Corporation, in the manner and at the place designated, his certificate
or certificates representing the shares to be redeemed (the "Redemption
Notice"). Except as provided in Section (4)(c), on or after the Redemption
Date, each holder of Series E Preferred Stock to be redeemed shall
surrender to this Corporation the certificate or certificates representing
such shares, in the manner and at the place designated in the Redemption
Notice, and thereupon the Series E Redemption Price of such shares shall be
payable to the order of the person whose name appears on such certificate
or certificates as the owner thereof and each surrendered certificate shall
be canceled. Payment of the Series E Redemption Price shall be made by wire
transfer or company check in immediately available funds. In the event
less than all the shares represented by any such certificate are redeemed,
a new certificate shall be issued representing the unredeemed shares.
(c) From and after the Redemption Date, unless there shall have been
a default in payment of the Series E Redemption Price, all rights of the
holders of shares of Series E Preferred Stock designated for redemption in
the Redemption Notice as holders of Series E Preferred Stock (except the
right to receive the Series E Redemption Price without interest upon
surrender of their certificate or certificates) shall cease with respect to
such shares, and such shares shall not thereafter be transferred on the
books of the Corporation or be deemed to be
3
<PAGE>
outstanding for any purpose whatsoever. The shares of Series E Preferred
Stock not redeemed shall remain outstanding and entitled to all the
rights and preferences provided herein.
(d) If on the Redemption Date, the Corporation does not pay the
Series E Redemption Price, the holder of Series E Preferred Stock may
thereafter convert any or all or part of its Series E Preferred Stock at
the lesser of (i) the Series E Conversion Price (as defined in Section 6(a)
hereof), or (ii) 78% of the five-day average closing bid price for the
Corporation's Common Stock for the five (5) trading days prior to the
delivery of the Notice of Redemption.
(5) Voting Rights.
Each holder of shares of the Series E Preferred Stock shall be entitled
to the number of votes equal to the number of shares of Common Stock into
which such shares of Series E Preferred Stock could be converted and shall
have voting rights and powers equal to the voting rights and powers of the
Common Stock (except as otherwise expressly provided herein or as required by
law, voting together with the Common Stock as a single class) and shall be
entitled to notice of any stockholders' meeting in accordance with the Bylaws
of the Corporation. Fractional votes shall not, however, be permitted and any
fractional voting rights resulting from the above formula (after aggregating
all shares into which shares of Series E Preferred Stock held by each holder
could be converted) shall be rounded to the nearest whole number (with
one-half being rounded upward).
(6) Conversion. The holders of the Series E Preferred Stock shall
have conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series E Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the
date 90 days after the date of issuance of such share, at the office of the
Corporation or any transfer agent for such stock, into such number of fully
paid and nonassessable shares of Common Stock as is determined by dividing
the Original Issue Price for the Series E Preferred Stock by the Conversion
Price applicable to such share, determined as hereinafter provided, in
effect on the date conversion shall be deemed to have been made (the
"Conversion Date"), as specified by the holder of Series E Preferred Stock
in his Notice of Conversion (as defined below). The price at which shares
of Common Stock shall be deliverable upon conversion of shares of the
Series E Preferred Stock (the "Series E Conversion Price") shall be the
lesser of (i) seventy-five percent (75%) of the consecutive five-day
average closing bid price for the Corporation's Common Stock listed and
traded on the Nasdaq over-the-counter market, or such other national
securities exchange or trading system on which the Corporation's Common
Stock is then listed, 5-day period 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.
4
<PAGE>
(b) Automatic Conversion. Each share of Series E Preferred Stock
shall automatically be converted into shares of Common Stock at the
then-effective Series E Conversion Price three (3) years after the
issuance of such share.
(c) Mechanics of Conversion.
(i) Before any holder of Series E Preferred Stock shall be
entitled to convert the same into shares of Common Stock, he shall
telecopy an executed and completed notice (each a "Notice of
Conversion") to the Corporation at 214/520-0034, attention: Steven B.
Solomon, specifying the number of shares of Series E Preferred Stock
to be converted, the Conversion Date, the name or names in which he
wishes the certificate or certificates for shares of Common Stock to
be issued, and such other information as the Corporation may
reasonably request. The original certificate representing the
Preferred Stock shall be delivered by the Buyer to the Company
simultaneously with the final Notice of Conversion.
(ii) The Corporation shall, at its expense, take all actions and
use all means necessary and diligent to cause its transfer agent to
issue and deliver a certificate or certificates representing the
shares of Common Stock issuable upon conversion of the Series E
Preferred Stock to such holder of Series E Preferred Stock via
express courier, by electronic transfer or otherwise, within three (3)
business days of the later (the "Delivery Date") of (i) receipt by the
Company of the Notice of Conversion, and (ii) the Conversion Date.
(iii) Conversion shall be deemed to have been made
immediately prior to the close of business on the Conversion Date, and
the person or persons entitled to receive the shares of Common Stock
issuable upon such conversion shall be treated for all purposes as the
record holders or holders of such shares of Common Stock on such date.
(iv) The Corporation agrees to pay late payments in the amounts
and as set forth herein to the holder of Series E Preferred Stock
satisfying the prerequisites for conversion of the Series E Preferred
Stock set forth in Section 6(c)(i) hereof in the event that the
transfer agent does not issue and deliver to such holder of Series E
Preferred Stock certificates representing the shares of Common Stock
issuable upon conversion of the Series E Preferred Stock, in the
manner and as set forth in Section 6(c)(ii) hereof, by the Delivery
Date. The late payments shall be paid in accordance with the following
schedule (where "No. Business Days Late"
5
<PAGE>
is defined as the number of business days beyond five (5) business
days from Delivery Date:
<TABLE>
<CAPTION>
Late Payment for Each $10,000
Of Preferred Stock Liquidation
No. Business Days Late Amount Being Converted
---------------------- ----------------------
<S> <C>
1 $100
2 $200
3 $300
4 $400
5 $500
> 5 $500 + $200 for each
Business Day Late beyond
five (5) days from Delivery Date
</TABLE>
The Corporation shall pay any payments incurred under this
subsection in immediately available funds upon demand. Nothing herein
shall limit the holder of Series E Preferred Stock from pursuing
actual damages resulting in the transfer agent's failing to issue and
deliver the Common Stock to such holder of Series E Preferred Stock.
Furthermore, in addition to any other remedies that may be available
to the holder of Series E Preferred Stock, in the event that delivery
of such shares of Common Stock is not made within five (5) business
days after the Delivery Date, the holder of Series E Preferred Stock
will be entitled to revoke the relevant Notice of Conversion by
delivering a notice to such effect to the Corporation whereupon the
Corporation and such holder of Series E Preferred Stock shall each be
restored to their respective positions immediately prior to delivery
of such Notice of Conversion, and the holder of Series E Preferred
Stock may then require the Corporation to immediately redeem all
outstanding Series E Preferred Stock in accordance with Section 4
hereof.
(v) If, by the relevant Delivery Date, delivery of the shares of
Common Stock to be issued upon conversion of the Series E Preferred
Stock is not made, and after such Delivery Date the holder of the
Series E Preferred Stock purchases, in an open market transaction or
otherwise at the market price for such shares, shares of Common Stock
(the "Covering Shares") in order to make delivery in satisfaction of a
sale of Common Stock by such holder of Series E Preferred Stock (the
"Sold Shares"), which delivery such holder of Series E Preferred Stock
anticipated to make using the shares of Common Stock to be issued upon
such conversion of Series E Preferred Stock (a "Buy-In"), the
Corporation shall pay to such holder of Series E Preferred Stock the
Buy-In Adjustment Amount (as defined below). The "Buy-In Adjustment
Amount" is the amount equal to the excess, if any, of (x) the holder
of Series E Preferred
6
<PAGE>
Stock's total purchase price (including brokerage commissions, if
any) for the Covering Shares over (y) the net proceeds (after
brokerage commissions, if any) received by such holder of Series E
Preferred Stock from the sale of the Sold Shares. The Corporation
shall pay the Buy-In Adjustment Amount to the holder of Series E
Preferred Stock in immediately available funds immediately upon
demand by such holder of Series E Preferred Stock. By way of
illustration and not in limitation of the foregoing, if the holder of
Series E Preferred Stock purchases shares of Common Stock having a
total purchase price (including brokerage commissions) of $11,000 to
cover a Buy-In with respect to shares of Common Stock it sold for net
proceeds of $10,000, the Buy-In Adjustment Amount which the
Corporation will be required to pay to such holder of Series E
Preferred Stock will be $1,000.
(vi) Subject to the completeness and accuracy of the holder of
Series E Preferred Stock's representations and warranties herein, upon
the conversion of any Series E 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
Corporation shall, at its expense, take all necessary action
(including the issuance of an opinion of counsel) to assure that the
Corporation's transfer agent shall issue stock certificates without
restrictive legends or stop orders in the name of such holder of
Series E Preferred Stock (or its nominee (being a non-U.S. Person) or
such non-U.S. Persons as may be designated by such holder of Series E
Preferred Stock) 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 6,
however, shall affect in any way any holder of Series E Preferred
Stock's or such nominee's obligations and agreement to comply with all
applicable securities laws upon resale of the shares of Common Stock.
The remedies set forth in subsections 4(c)(iv), (v) and (vi) shall be
cumulative.
(vii) In lieu of delivering physical certificates
representing the unlegended securities issuance upon conversion,
provided the Corporation's transfer agent is participating in the
Depository Trust Company ("DTC") Fast Automated Securities Transfer
program, upon request of the holder of Series E Preferred Stock and
its compliance with the provisions contained in this subsection, so
long as the certificates therefor do not bear a legend and such holder
of Series E Preferred Stock thereof is not obligated to return such
certificate for the placement of a legend thereon, the Corporation
shall use its best efforts to cause its transfer agent to
electronically transmit the Common Stock issuable upon conversion to
the holder of Series E Preferred Stock by crediting the account of the
Prime Broker of such holder of Series E Preferred Stock with DTC
through its Deposit Withdrawal Agent Commission System.
7
<PAGE>
(viii) The original certificate or certificates representing
the Series E Preferred Stock shall be delivered by the holder thereof
to the Corporation concurrently with delivery of the final Notice of
Conversion.
(d) No Impairment. The Corporation will not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed hereunder by
the Corporation, but will at all times in good faith assist in the carrying
out of all the provisions of this Section (6) and in the taking of all such
action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Series E Preferred Stock against
impairment.
(e) Notices of Record Date. In the event that the Corporation shall
propose at any time: (i) to declare any dividend or distribution upon its
Common Stock, whether in cash, property, stock or other securities, whether
or not a regular cash dividend and whether or not out of earnings or earned
surplus; (ii) to offer for subscription pro rata to the holders of any
class or series of its stock any additional shares of stock of any class or
series or other rights; (iii) to effect any reclassification or
recapitalization of its Common Stock outstanding involving a change in the
Common Stock; or (iv) to merge or consolidate with or into any corporation
other than the Corporation's subsidiaries, or sell, lease or convey all or
substantially all of its assets, or to liquidate, dissolve or wind up;
Then, in connection with each such event, the Corporation shall send
to the holders of Series E Preferred Stock: (1) at least twenty (20) days
prior written notice of the date on which a record shall be taken for such
dividend, distribution or subscription rights (and specifying the date on
which the holders of Common Stock shall be entitled thereto) or for
determining rights to vote, if any, in respect of the matters referred to
in (iii) and (iv) above; and (2) in the case of the matters referred to in
(iii) and (iv) above, at least twenty (20) days prior written notice of the
date when the same shall take place (and specifying the date on which the
holders of Common Stock shall be entitled to exchange their Common Stock
for securities or other property deliverable upon the occurrence of such
event).
(f) Issue Taxes. The Corporation shall pay any and all issue and
other taxes that may be payable in respect of any issue or delivery of
shares of Common Stock on conversion of shares of Series E Preferred Stock
pursuant hereto; provided, however, that the Corporation shall not be
obligated to pay any transfer taxes resulting from any transfer requested
by any holder in connection with any such conversion.
8
<PAGE>
(g) Reservation of Stock Issuable Upon Conversion. The Corporation
shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series E Preferred Stock, such number of
its shares of Common Stock as shall from time to time be sufficient to
effect the conversion of all outstanding shares of the Series E Preferred
Stock; and if at any time the number of authorized but unissued shares of
Common Stock shall not be sufficient to effect the conversion of all then
outstanding shares of the Series E Preferred Stock, the Corporation will
take such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Common Stock to
such number of shares as shall be sufficient for such purpose, including,
without limitation, engaging in best efforts to obtain the requisite
stockholder approval of any necessary amendment to this Certificate.
(h) Fractional Shares. No fractional share shall be issued upon the
conversion of any share or shares of Series E Preferred Stock. All shares
of Common Stock (including fractions thereof) issuable upon conversion of
more than one share of Series E Preferred Stock by a holder thereof shall
be aggregated for purposes of determining whether the conversion would
result in the issuance of any fractional share. If, after the
aforementioned aggregation, the conversion would result in the issuance of
a fraction of a share of Common Stock, the Corporation shall, in lieu of
issuing any fractional share, at its option, issue the next greater number
of whole shares or pay the holder otherwise entitled to such fraction a sum
in cash equal to the fair market value of such fraction on the date of
conversion (as determined in good faith by the Board of Directors).
(i) Notices. Any notice required by the provisions of this Section
(6) to be given to the holders of shares of Series E Preferred Stock shall
be deemed given if deposited in the United States mail, postage prepaid,
and addressed to each holder of record at his address appearing on the
books of the Corporation.
(j) LIMITATIONS ON TRANSFER. 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"). In such case, (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:
9
<PAGE>
(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:
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.
(7) Restrictions and Limitations. (a) So long as any shares of Preferred
Stock remain outstanding, the Corporation shall not, without the vote or written
consent by the holders of at least 66-2/3% of the then outstanding shares of the
Series E Preferred Stock, voting together as a single class:
(i) Redeem, purchase, or otherwise acquire for value (or pay
into or set aside for a sinking fund for such purposes) any share or
shares of Series E Preferred Stock otherwise than by redemption in
accordance with Section (6) hereof or by conversion in accordance with
Section (4) hereof;
(ii) Redeem, purchase or otherwise acquire (or pay into or set
aside for a sinking fund for such purpose), any of the Common Stock,
provided, however, that this restriction shall not apply to the
repurchase of
10
<PAGE>
shares of Common Stock from employees, officers, directors,
consultants or other persons performing services for the Corporation
or any subsidiary pursuant to agreements under which the Corporation
has the option to repurchase such shares upon the occurrence of
certain events, such as the termination of employment;
(iii) Authorize or issue, or obligate itself to issue, any
other equity security (including any security convertible into or
exercisable for any equity security) senior to or on a parity with the
Series E Preferred Stock (other than with respect to securities to be
issued in connection with the redemption of the Series E Preferred
Stock) as to voting rights, dividend rights, conversion rights,
redemption rights or liquidation preferences;
(iv) Declare or pay any dividend or make any distribution with
regard to any share of Common Stock;
(v) Sell, convey, lease or otherwise dispose of all or
substantially all of its property or business; liquidate, dissolve or
wind up the Corporation's business; or merge into or consolidate with
any other corporation (other than a wholly-owned subsidiary
corporation); or effect any transaction or series of related
transactions in which more than 50% of the voting power of the
corporation is disposed of (a "Corporate Transaction"), unless the
corporation's stockholders of record as constituted immediately prior
to such Corporate Transaction will, immediately after such Corporate
Transaction, hold at least a majority of the voting power of the
surviving or acquiring entity;
(vi) Permit any subsidiary to issue or sell, or obligate itself
to issue or sell, except to the Corporation or any wholly owned
subsidiary, any stock of such subsidiary;
(vii) Increase or decrease (other than by redemption or
conversion) the total number of authorized shares of Series E
Preferred Stock; or
(viii) alter or change the rights, preferences or privileges
of the shares of Series E Preferred Stock so as to affect adversely
the shares.
(8) No Reissuance of Series E Preferred Stock. No share or shares of Series
E Preferred Stock acquired by the Corporation by reason of redemption, purchase,
conversion or otherwise shall be reissued, and all such shares shall be
canceled, retired and eliminated from the shares which the Corporation shall be
authorized to issue.
11
<PAGE>
IN WITNESS WHEREOF, CITADEL TECHNOLOGY, INC. has caused this Certificate of
Designations, Preferences and Rights of Series E Convertible Preferred Stock to
be duly executed by its President and attested to by its Secretary this 28th day
of April, 1998.
CITADEL TECHNOLOGY, INC.
By:
---------------------------------------
Steven B. Solomon
President and Chief Executive Officer
ATTEST:
- ------------------------------------
Richard L. Travis, Jr., Secretary
12
<PAGE>
AMENDMENT TO CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS
OF
SERIES E CONVERTIBLE REDEEMABLE PREFERRED STOCK
OF
CITADEL TECHNOLOGY, INC.
(Pursuant to Section 151 of the General Corporation
Law of the State of Delaware)
CITADEL TECHNOLOGY, INC. (the "Corporation"), a corporation organized
and existing under the General Corporation Law of the State of Delaware (the
"DGCL"), hereby certifies that, pursuant to the authority contained in its
Certificate of Incorporation, as amended, and in accordance with the
provisions of Section 151 of the General Corporation Law of the State of
Delaware, its Board of Directors or a committee thereof has adopted the
following resolutions amending the series of its Preferred Stock designated
as Series E Convertible Redeemable Preferred Stock ("Series E Preferred
Stock"):
FIRST: The Corporation has not issued any shares of Series E Preferred
Stock.
SECOND: The Amendment to the Corporation's Certificate of Designations
of Series E Preferred Stock, as filed on April 28,1998, sets forth the
following resolution approved by a majority of the Corporation's Board of
Directors or a committee thereof, and was duly adopted in accordance with
Section 151 of the DGCL:
"RESOLVED, that the Certificate of Designations, Preferences and
Rights of Series E Convertible Redeemable Preferred Stock of Citadel
Technology, Inc. be amended by deleting Section 6(c)(iv) in its entirety
and replaced with a new Section 6(c)(iv), to read in its entirety as
follows:
"(iv) The Corporation agrees to pay late payments in the
amounts and as set forth herein to the holder of Series E Preferred
Stock satisfying the prerequisites for conversion of the Series E
Preferred Stock set forth in Section 6(c)(i) hereof in the event that
the transfer agent does not issue and deliver to such holder of Series
E Preferred Stock certificates representing the shares of Common Stock
issuable upon conversion of the Series E Preferred Stock, in the
manner and as set forth in Section 6(c)(ii) hereof, by the Delivery
Date. The late payments shall be paid in accordance with the following
schedule (where "No. Business Days Late"
1
<PAGE>
is defined as the number of business days beyond five (5) business
days from Delivery Date:
<TABLE>
<CAPTION>
Late Payment for Each $10,000
of Preferred Stock Liquidation
No. Business Days Late Amount Being Converted
---------------------- ----------------------
<S> <C>
1 $100
2 $200
3 $300
4 $400
5 $500
> 5 $500 + $200 for each
Business Day Late beyond
five (5) days from Delivery Date
</TABLE>
The Corporation shall pay any payments incurred under this
subsection in immediately available funds upon demand. Nothing herein
shall limit the holder of Series E Preferred Stock from pursuing
actual damages resulting in the transfer agent's failing to issue and
deliver the Common Stock to such holder of Series E Preferred Stock.
Furthermore, in addition to any other remedies that may be available
to the holder of Series E Preferred Stock, in the event that delivery
of such shares of Common Stock is not made within five (5) business
days after the Delivery Date, the holder of Series E Preferred Stock
will be entitled to revoke the relevant Notice of Conversion by
delivering a notice to such effect to the Corporation whereupon the
Corporation and such holder of Series E Preferred Stock shall each be
restored to their respective positions immediately prior to delivery
of such Notice of Conversion, and the holder of Series E Preferred
Stock may then require the Corporation to immediately redeem all
outstanding Series E Preferred Stock in accordance with Section
6(j)(y).""
2
<PAGE>
IN WITNESS WHEREOF, CITADEL TECHNOLOGY, INC. has caused this Amendment
to Certificate of Designations, Preferences and Rights of Series E
Convertible Preferred Stock to be duly executed by its President and attested
to by its Secretary this 30th day of April, 1998.
CITADEL TECHNOLOGY, INC.
By:
---------------------------------------
Steven B. Solomon
President and Chief Executive Officer
ATTEST:
- ---------------------------------------
Richard L. Travis, Jr., Secretary
3
<PAGE>
EXHIBIT 5
May 20, 1998
Citadel Technology, Inc.
3811 Turtle Creek Boulevard
Suite 600
Dallas, Texas 75219
Re: Registration Statement on Form S-8
Gentlemen:
The undersigned has acted as counsel to Citadel Technology, Inc., a
Delaware corporation (the "Company"), in connection with the preparation of
the Registration Statement on Form S-8 (the "Registration Statement") to be
filed with the Securities and Exchange Commission on May 20, 1998, under the
Securities Act of 1933, as amended (the "Securities Act"), relating to 265,625
shares of the $.01 par value common stock (the "Common Stock") of the Company
that may be issued upon exercise of stock options granted to a former employee
of the Company.
You have requested the opinion of the undersigned with respect to
certain legal aspects of the proposed offering. In connection therewith, the
undersigned has examined and relied upon the original, or copies identified
to our satisfaction, of (1) the Certificate of Incorporation and the Bylaws
of the Company, each as amended; (2) the Registration Statement and exhibits
thereto; and (3) such other documents, records, certificates, memoranda and
instruments as we have deemed necessary for the expression of the opinions
herein contained. In making the foregoing examinations, we have assumed the
genuineness of all signatures and the authenticity of all documents submitted
as originals, and the conformity to original documents of all documents
submitted as certified or photostatic copies, as well as the due execution
and delivery of all documents where the due execution and delivery are a
prerequisite to the effectiveness thereof. As to various questions of fact
material to this opinion, and as to the content and form of the Certificate
of Incorporation, the Bylaws, minutes, records, resolutions and other
documents or writings of the Company, the undersigned has relied, to the
extent deemed reasonably appropriate, upon representations or certificates of
officers or directors of the Company and upon documents, records and
instruments furnished to the undersigned by the Company, without independent
confirmation or verification of their accuracy.
Based upon our examination and consideration of, and reliance on, the
documents and other matters described above, and subject to the comments and
exceptions noted below, the undersigned is of the opinion that the Company
presently has available sufficient shares of authorized but unissued shares
of Common Stock from which the shares of Common Stock subject to the exercise
of options may be issued. Furthermore, assuming that (i) the outstanding
options were duly granted, (ii) the shares of Common Stock to be issued pursuant
to the exercise of options are duly issued in accordance with the terms of
the applicable agreement, (iii) the Company maintains an adequate number of
authorized but unissued shares and/or treasury shares of Common Stock
available for issuance to those persons who exercise options, and (iv) the
consideration for shares of Common Stock issued pursuant to the exercise of
options is actually received by the Company in accordance with the terms of
the applicable Agreement and exceeds the par value of such shares, then the
undersigned is of the opinion that the shares of Common Stock issued pursuant
to the exercise of options and in accordance with the terms of the applicable
agreement, will be duly and validly issued, fully paid and nonassessable.
The undersigned hereby consents to the filing of this opinion as an exhibit
to the Registration Statement and to references to the undersigned included
in or made a part of the Registration Statement. In giving this consent, the
undersigned does not admit that the undersigned comes within the category of
person whose consent is required
<PAGE>
under Section 7 of the Securities Act or the Rules and Regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
WOOD, EXALL & BONNET, L.L.P.
By: David Allen Wood, P.C.
By: /s/ David A. Wood
-----------------------------------
David A. Wood, President
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated August 29, 1997 accompanying the consolidated
financial statements of Citadel Technology, Inc. (formerly Citadel Computer
Systems Incorporated) and Subsidiary appearing in the annual report on Form
10-KSB for the year ended February 28, 1997, which is incorporated by
reference in this Registration Statement. We consent to the incorporation by
reference in the Registration Statement of the aforementioned report.
GRANT THORNTON LLP
Dallas, Texas
May 20, 1998
