Citadel Security Software Announces Record 2006 First Quarter Results; Company Reports Revenue of $5.4 Million, $3.9 Million in Cash Flow From Operations and Third Consecutive Quarter of Improved Financial Operating Performance.DALLAS Dallas, city (1990 pop. 1,006,877), seat of Dallas co., N Tex., on the Trinity River near the junction of its three forks; inc. 1871. The second largest Texas city, after Houston, and the eighth largest U.S. -- Citadel Security Software Inc. (NASDAQ NASDAQ in full National Association of Securities Dealers Automated Quotations U.S. market for over-the-counter securities. Established in 1971 by the National Association of Securities Dealers (NASD), NASDAQ is an automated quotation system that reports on :CDSS CDSS California Department of Social Services CDSS Clinical Decision Support Systems CDSS Country Dance and Song Society CDSS Canadian Down Syndrome Society CDSS Community Day Secondary Schools (Malawi) ), a leader in enterprise vulnerability management and policy compliance solutions, today announced financial results for its first quarter ended March 31, 2006. The Company reported 2006 first quarter revenue of $5,426,049 versus $1,739,926 for the first quarter of 2005. For the first quarter ended March 31, 2006, the Company reported a net loss to common shareholders of $891,931 or $(0.03) loss per share, versus a loss to common shareholders of $5,253,220, or $(0.18) loss per share, for the year earlier period. The net loss to common shareholders for the quarter ended March 31, 2005 included charges for preferred dividends preferred dividend n. a payment of a corporation's profits to holders of preferred shares of stock. (See: preferred stock) of $187,500 and net non-cash charges Non-Cash Charge A charge off, made by a company against earnings, that does not require an initial outlay of cash. Notes: Non-cash charges are typically against the depreciation, amortization, and depletion accounts on a company's balance sheet. of $61,542 related to the fair value adjustments of the preferred stock Stock shares that have preferential rights to dividends or to amounts distributable on liquidation, or to both, ahead of common shareholders. Preferred stock is given preference over common stock. Holders of preferred stock receive dividends at a fixed annual rate. . Similar charges were not incurred during the first quarter of 2006. The Company received $6.4 million in total orders for software, Hercules Hercules, in astronomy Hercules (hûr`kyəlēz'), in astronomy, northern constellation located between Lyra and Corona Borealis. It is traditionally depicted as the hero Hercules in a kneeling position. content, subscriptions, customer support contracts and professional services (job) professional services - A department of a supplier providing consultancy and programming manpower for the supplier's products. engagements in the first quarter of 2006 contributing to the growth in revenue to $5.4 million. Typically, the first quarter has been a seasonally slow period. Unfilled order backlog Backlog The total value of sales orders waiting to be fulfilled. Notes: This figure is used mainly in the manufacturing industry. Increases or decreases in a company's backlog indicate the future direction of sales and earnings. at the end of the first quarter 2006 was $1.7 million and deferred revenue for ratable That which can be appraised, assessed, or adjusted through the application of a formula or percentage. Ratable property is that which is taxable or capable of being appraised or assessed. ratable adj. revenue Hercules content, customer support contracts and professional services was $5.7 million. The Company expects approximately ap·prox·i·mate adj. 1. Almost exact or correct: the approximate time of the accident. 2. $5.1 million of the $7.4 million of the unfilled order backlog and deferred revenue will be earned and recognized ratably as revenue during the remainder of 2006. Cash flow generated from operating activities was $3.9 million during the first quarter of 2006, compared to a negative cash flow from operating activities of $3.2 million in the first quarter of 2005. The cash flow from operations Cash flow from operations A firm's net cash inflow resulting directly from its regular operations (disregarding extraordinary items such as the sale of fixed assets or transaction costs associated with issuing securities), calculated as the sum of net income plus noncash expenses was the highest level since the third quarter of 2004. The Company also realized cost savings from actions initiated during 2005 which resulted in reduced operating expenses Operating expenses The amount paid for asset maintenance or the cost of doing business, excluding depreciation. Earnings are distributed after operating expenses are deducted. in the first quarter of 2006. Cash operating expenses(1), a non-GAAP measure, declined $1.6 million from $6.8 million in the first quarter of 2005 to $5.2 million in the first quarter of 2006. Non-cash operating expenses(1), a non-GAAP measure, consisting of software amortization, depreciation and stock based compensation expense, increased approximately $530,000 of which approximately $406,000 relates to a charge associated with stock based compensation, primarily from stock options in the first quarter of 2006 resulting from the implementation of a new stock option accounting policy that was adopted on January January: see month. 1, 2006. See the reconciliation of these NON-GAAP measures to reported GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). amounts following the unaudited financial tables at the end of this press release. Cash and cash equivalents at the end of the first quarter of fiscal 2006 were $3.8 million, compared to $1.3 million at year-end year-end also year·end n. The end of a year. adj. Occurring or done at the end of the year: a year-end audit. Noun 1. . "The combination of increased orders and higher revenue, along with lower operating expenses in the first quarter, resulted in the third consecutive quarter of improved financial performance for Citadel," said Steven Ste´ven n. 1. Voice; speech; language. Ye have as merry a steven As any angel hath that is in heaven. - Chaucer. 2. An outcry; a loud call; a clamor. To set steven to make an appointment. B. Solomon Solomon, d. c.930 B.C., king of the ancient Hebrews (c.970–c.930 B.C.), son and successor of David. His mother was Bath-sheba. His accession has been dated to c.970 B.C. According to the Bible. , CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board. of Citadel Security Software Inc. "While the first quarter is typically a slow period for the Company, customers have increasingly begun to validate To prove something to be sound or logical. Also to certify conformance to a standard. Contrast with "verify," which means to prove something to be correct. For example, data entry validity checking determines whether the data make sense (numbers fall within a range, numeric data the effectiveness of Hercules, our vulnerability management and compliance solution, as demonstrated by the recent $5.2 million order from a leading government systems integrator An individual or organization that builds systems from a variety of diverse components. With increasing complexity of technology, more customers want complete solutions to information problems, requiring hardware, software and networking expertise in a multivendor environment. for a major civilian CIVILIAN. A doctor, professor, or student of the civil law. government agency We now have over 4.5 million seats of Hercules under license and over 25,000 remedies rem·e·dy n. pl. rem·e·dies 1. Something, such as medicine or therapy, that relieves pain, cures disease, or corrects a disorder. 2. Something that corrects an evil, fault, or error. 3. in our library that protect information technology assets of our expanding customer base. New customers and the growth in orders continue to validate the strength of our patented security solution and enhances the prospect for continued improvement in financial performance in 2006. We are pleased with positive trends in cash flow, orders, revenue and expenses and remain confident in a strong and record 2006." Business Outlook: The Company continues to see positive results from sales and operational changes implemented in 2005, as reflected in the strength of its sales pipeline opportunities, a steady flow of requests-for-proposals and technical proofs of concepts, as well as lower operating costs operating costs npl → gastos mpl operacionales and expenses. The Company expects revenue for the second quarter ending June June: see month. 30, 2006 in a range of $4 million to $5 million. The Company had revenue of $2.7 million for the second quarter of 2005. During the second half of 2006, Citadel plans to add additional new products, based upon the recently awarded patent for its Hercules technology. These products will be a natural extension of the Hercules family and will provide additional sources of revenue. Based upon current business outlook The Company expects a record 2006. Mr. Solomon and Richard Ri·chard , Joseph Henri Maurice Known as "Rocket." 1921-2000. Canadian hockey player. A right wing for the Montreal Canadiens (1942-1960), he led his team to eight Stanley Cup championships and was the first player to score 50 goals in a Connelly Con·nel·ly , Marcus Cook Known as "Marc." 1890-1980. American playwright, producer, and director who won a Pulitzer Prize for The Green Pastures (1930), a play based on Southern African-American interpretations of biblical stories. , CFO See Chief Financial Officer. will host a conference call and live Webcast at 4:30 p.m. Eastern Time today. Interested participants may call (800) 901-5259 when calling within the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. or 617-786-4514 when calling internationally. Please reference Conference I.D. Number 78898123. This call is being webcast by CCBN CCBN Central Coast Bancorp CCBN Charles County Business Network and will be available from the Investor Relations Investor relations The process by which the corporation communicates with its investors. section of the company's corporate website or by going directly to http://www.Citadel.com/4qwebcast.asp and via replay beginning two hours after the completion of the call. The webcast is also being distributed over CCBN's Investor Distribution Network to both institutional and individual investors. Individual investors can listen to the call through CCBN's individual investor center at www.fulldisclosure.com or by visiting any of the investor sites in CCBN's Individual Investor Network. Institutional investors Institutional Investor A non-bank person or organization that trades securities in large enough share quantities or dollar amounts that they qualify for preferential treatment and lower commissions. can access the call via CCBN's password-protected event management site, StreetEvents (www.streetevents.com). All of the comments above are based on information available to management as of the date of this press release. Should these expectations not be realized, actual results may differ materially from the expectations expressed above. Please refer to the Unaudited Financial Tables following this release for the details and comparisons to prior periods for the numbers reported above. About Citadel Citadel Security Software Inc. delivers security solutions that enable organizations to manage risk, reduce threats and enforce compliance with security policies and regulations. Citadel's proven architecture provides a business process to manage the increasing volume, frequency and complexity of cyber (1) From "cybernetics," it is a prefix attached to everyday words to add a computer, electronic or online connotation. The term is similar to "virtual," but the latter is used more frequently. See virtual. security attacks. Citadel combines the world's largest active library of remediations spanning all classes of vulnerabilities with a proven delivery methodology to dramatically streamline streamline, path of a fluid flowing steadily and without appreciable turbulence. A body is said to be streamlined if its shape offers the least possible resistance to a current of air, water, or other fluid. vulnerability management and security compliance and provide ROI (Return On Investment) The monetary benefits derived from having spent money on developing or revising a system. In the IT world, there are more ways to compute ROI than Carter has liver pills (and for those of you who never heard of that expression, it means a lot). from the first use. Citadel solutions are used across the US Department of Defense, at the US Department of Veterans Affairs Veterans Affairs is a term of the business that deals with the relation between a government and its veteran communities, usually administered by the designated government agency. , the US Department of Energy, MCI (1) (Media Control Interface) A high-level programming interface from Microsoft and IBM for controlling multimedia devices. It provides commands and functions to open, play and close the device. (2) (Microwave Communications Inc. , Raytheon Raytheon Company (NYSE: RTN) is a major American defense contractor and industrial corporation with core manufacturing concentrations in defense systems and defense and commercial electronics. and within other government and commercial organizations. For more information on Citadel, visit http://www.citadel.com, or call 888-8CITADEL. Notes: 1. Non-cash operating expenses are a non-GAAP measure and represent GAAP cost of revenue plus GAAP operating expenses less non-cash charges for software amortization, depreciation and stock option expense and the addition of capitalization capitalization n. 1) the act of counting anticipated earnings and expenses as capital assets (property, equipment, fixtures) for accounting purposes. 2) the amount of anticipated net earnings which hypothetically can be used for conversion into capital assets. of software development costs. See the reconciliation of non-GAAP measures following the Unaudited Financial Tables attached to this press release. Safe Harbor/Forward-looking Statements: This press release may contain forward-looking statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. that are intended to be subject to the safe harbor Safe Harbor 1. A legal provision to reduce or eliminate liability as long as good faith is demonstrated. 2. A form of shark repellent implemented by a target company acquiring a business that is so poorly regulated that the target itself is less attractive. protection provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or future financial performance and involve known and unknown risks and uncertainties that may cause actual results or performance to be materially different from those indicated by any forward-looking statements. In some cases, you can identify forward-looking statements by terminology The terminology used in the computer and telecommunications field adds tremendous confusion not only for the lay person, but for the technicians themselves. What many do not realize is that terms are made up by anybody and everybody in a nonchalant, casual manner without any regard or such as "forecast," "may," "will," "could," "should," "anticipate," "expect," "plan," "believe," "potential" or other similar words indicating future events or contingencies Contingencies (ISSN 1048-9851) is the bimonthly magazine of the American Academy of Actuaries, providing a large and diverse readership with general interest and technical articles on a wide range of issues related to the actuarial profession. . Some of the things that could cause actual results to differ from expectations are: adjustments to reported revenues based on audit adjustments and revenue recognition accounting requirements; uncertainties related to the issuance of a patent by the United States Patent and Trademark Office The United States Patent and Trademark Office (PTO or USPTO) is an agency in the United States Department of Commerce that provides patent protection to inventors and businesses for their inventions, and trademark registration for product and intellectual property ; the possibility of other intellectual property rights held by third parties related to the technology; uncertainty related to projected cost savings from restructuring restructuring - The transformation from one representation form to another at the same relative abstraction level, while preserving the subject system's external behaviour (functionality and semantics). activities; the economic and geopolitical ge·o·pol·i·tics n. (used with a sing. verb) 1. The study of the relationship among politics and geography, demography, and economics, especially with respect to the foreign policy of a nation. 2. a. environment; changes in the information technology spending trends; the uncertainty of funding of government and corporate information technology security projects; the variability of the product sales cycle, including longer sales cycles for government and large commercial contracts; the uncertainty that the company's prospective deals will result in final contracts; the potential changes in the buying decision makers during a customer purchasing cycle; the complexities in scope and timing for finalization Writing the table of contents (TOC) on a recordable CD or DVD disc. The finalization process ensures that the disc can be played back on most CD and DVD players. See disc-at-once. of contracts; the fluctuations in product delivery schedules; a lack of Citadel operating history; uncertainty of product development and acceptance; uncertainty of ability to compete effectively in a new market; the uncertainty of profitability and cash flow of Citadel; intellectual property rights and dependence on key personnel; economic conditions; the continued impact of terrorist attacks, global instability instability /in·sta·bil·i·ty/ (-stah-bil´i-te) lack of steadiness or stability. detrusor instability and potential U.S. military involvement; the competitive environment and other trends in the company's industry; the effects of inflation; changes in laws and regulations; changes in the company's business plans, including shifts to new pricing models that may cause delays in licenses; interest rates and the availability of financing; liability, legal and other claims asserted against the company; labor disputes; and the company's ability to attract and retain qualified personnel. For a discussion of these and other risk factors, see the company's Annual Report on Form 10-K Form 10-K A report required by the SEC from exchange-listed companies that provides for annual disclosure of certain financial information. Form 10-K See 10-K. for the year ended December December: see month. 31, 2005. All of the forward-looking statements are qualified in their entirety The whole, in contradistinction to a moiety or part only. When land is conveyed to Husband and Wife, they do not take by moieties, but both are seised of the entirety. by reference to the risk factors discussed therein. These risk factors may not be exhaustive. The company operates in a continually con·tin·u·al adj. 1. Recurring regularly or frequently: the continual need to pay the mortgage. 2. changing business environment, and new risk factors emerge from time to time. Management cannot predict such new risk factors, nor can it assess the impact, if any, of such new risk factors on the company's business or events described in any forward-looking statements. The company disclaims any obligation to publicly update or revise any forward-looking statements after the date of this report to conform them to actual results. Editors Note: Citadel is a trademark and Hercules(R) is a registered trademark of Citadel Security Software.
Unaudited Financial Tables
CITADEL SECURITY SOFTWARE INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2006 2005
------------ --------------
ASSETS
------------
CURRENT ASSETS
Cash and cash equivalents $ 3,755,818 $ 1,320,376
Accounts receivable-trade, less
allowance of $209,000 at March 31,
2006 and December 31, 2005 369,711 2,570,090
Prepaid expenses and other
current assets 1,276,990 932,591
-------------- -------------
Total current assets 5,402,519 4,823,057
PROPERTY AND EQUIPMENT, net of
accumulated depreciation of
$2,895,549 and $2,483,398 4,714,077 5,126,228
CAPITALIZED SOFTWARE DEVELOPMENT COSTS,
net of accumulated amortization of
$7,239,833 and $6,625,180 4,336,238 4,431,322
OTHER ASSETS 80,125 84,812
-------------- -------------
TOTAL ASSETS $14,532,959 $14,465,419
============== =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-----------------------------------------
CURRENT LIABILITIES
Factoring line of credit $ - $ 924,777
Accounts payable and accrued expenses 3,771,068 3,721,551
Accrued compensation and payroll
tax obligations 2,087,319 1,245,401
Current portion of deferred revenue 4,736,783 4,680,328
-------------- -------------
Total current liabilities 10,595,170 10,572,057
LONG-TERM DEBT, LESS CURRENT PORTION 3,750,000 3,750,000
DEFERRED REVENUE, LESS CURRENT PORTION 954,890 398,342
OTHER NON-CURRENT LIABILITIES 583,773 609,912
COMMITMENTS AND CONTINGENCIES
CONVERTIBLE PREFERRED STOCK, $1,000
stated value per share; 1,000,000 shares
authorized;
Series A Preferred Stock, 15,000 shares
issued and outstanding at March 31, 2006
and December 31, 2005, liquidation
preference of $15,000,000 10,422,299 10,422,299
Series B Preferred Stock, 7,000 shares
issued and outstanding at March 31, 2006
and December 31, 2005, liquidation
preference of $7,000,000 5,247,688 5,247,688
COMMON STOCK, $.01 par value per share;
100,000,000 shares authorized; 30,518,230
shares issued and outstanding at
March 31, 2006 and December 31, 2005 305,182 305,182
ADDITIONAL PAID-IN CAPITAL 46,585,160 46,179,211
ACCUMULATED DEFICIT (63,911,203) (63,019,272)
-------------- -------------
Total Stockholders' Deficit (1,350,874) (864,892)
-------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $14,532,959 $14,465,419
============== =============
CITADEL SECURITY SOFTWARE INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
MARCH 31,
2006 2005
----------- -----------
Revenue
License fees $ 3,678,648 $ 193,858
Content, subscription, and customer support
services 1,460,233 1,160,511
Professional services 287,168 385,557
----------- -----------
Total revenue 5,426,049 1,739,926
Costs of revenue
Software amortization 614,653 484,559
Content, subscription, and customer support
services costs 370,000 461,181
Professional services costs 93,558 124,258
Shipping and other costs 58,246 7,351
----------- -----------
Total costs of revenue 1,136,457 1,077,349
Operating expenses
Selling, general and administrative expense 4,075,049 4,870,596
Product development expense 519,325 342,844
Depreciation and amortization of property
and equipment 412,151 418,315
----------- -----------
Total operating expenses 5,006,525 5,631,755
----------- -----------
Operating loss (716,933) (4,969,178)
Interest income 3,525 25,425
Interest expense (178,523) (60,425)
----------- -----------
Loss before income taxes (891,931) (5,004,178)
Provision for income taxes - -
----------- -----------
Net loss (891,931) (5,004,178)
Preferred stock dividends - (187,500)
Non-cash accretion of preferred stock
beneficial conversion feature - (61,542)
----------- -----------
Net loss to common shareholders $ (891,931)$(5,253,220)
========== ============
Net loss per share to common shareholders -
basic and diluted $ (0.03)$ (0.18)
========== ============
Weighted average common shares outstanding -
basic and diluted 30,518,230 29,845,730
=========== ===========
CITADEL SECURITY SOFTWARE INC
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
2006 2005
------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (891,931)$(5,004,178)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,026,804 902,874
Provision for returns, allowances, and
bad debts 825 -
Stock-based compensation expense 405,949 -
Amortization of deferred credit for
tenant incentive recorded as leasehold
improvements (26,139) -
Amortization of debt issuance costs
recorded as interest expense 4,688 6,019
Changes in operating assets and liabilities:
Accounts receivable - trade 2,199,555 186,362
Prepaid expenses and other current assets (344,399) 169,539
Accounts payable and accrued expenses 49,517 (283,211)
Accrued compensation and payroll tax
obligations 841,917 (11,496)
Deferred revenue 613,003 858,816
------------- -----------
NET CASH PROVIDED (USED) IN
OPERATING ACTIVITIES 3,879,789 (3,175,275)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment - (644,290)
Capitalized software development costs (519,570) (1,002,944)
------------- -----------
NET CASH USED IN INVESTING ACTIVITIES (519,570) (1,647,234)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of long-term debt - (297,727)
Payment of preferred stock dividends - (187,500)
Net payments made on factoring accounts
receivable (924,777) -
------------- -----------
NET CASH USED IN FINANCING ACTIVITIES (924,777) (485,227)
------------- -----------
Net increase (decrease) in cash and
cash equivalents 2,435,442 (5,307,736)
Cash and cash equivalents at the
beginning of the period 1,320,376 9,838,154
------------- -----------
Cash and cash equivalents at the
end of the period $3,755,818 $ 4,530,418
============ ============
Supplemental cash flow information:
Interest paid $ 165,086 $ 54,407
============ ============
Income taxes paid $ - $ -
============ ============
Non-cash financing items:
Accretion of convertible preferred
stock beneficial conversion feature $ - $ 61,542
============ ============
Fair value of warrants issued in
conjunction with bank lines of credit
recorded as deferred financing costs $ - $ 31,317
============ ============
Preferred stock dividend accrued $ - $ 187,500
============ ============
Non-GAAP Measures
Citadel has elected to provide guidance on a pro forma non-GAAP basis,
including terms used in this press release such as cash operating
expenses and non-cash expenses, believing that it provides meaningful
information for the Company in evaluating operations and managing and
benchmarking performance. Citadel has chosen to provide this
supplemental information to investors, analysts and other interested
parties to enable them to perform additional analyses of the Company's
business outlook and to illustrate the effect that future performance
could have. The pro forma non-GAAP financial information presented
herein should be considered supplemental to, and not as a substitute
for, or superior to, financial measures calculated in accordance with
GAAP. A reconciliation of cash operating expenses and non-cash
expenses for the quarters ended March 31, 2006 and 2005, respectively
is shown below. Citadel is unable to provide a non-GAAP to GAAP
reconciliation of projected amounts for the second quarter of 2006.
Among other reasons, such amounts are not known or cannot be
reasonably estimated at this time.
THREE MONTHS ENDED
MARCH 31,
2006 2005
------------- -----------
Revenue $5,426,049 $1,739,926
Content, subscription, and customer
support services costs 370,000 461,181
Professional services costs 93,558 124,258
Shipping and other costs 58,246 7,351
Selling, general and administrative expense 4,075,049 4,870,596
Product development expense, net of
capitalized software development costs 519,325 342,844
Plus: Capitalized software development costs 519,570 1,002,944
Less: Stock based employee
compensation expense (405,949) -
------------- -----------
Total of cash operating expenses 5,229,799 6,809,174
Software amortization 614,653 484,559
Depreciation and amortization of
property and equipment 412,151 418,315
Plus: Stock based employee compensation
expense 405,949 -
------------- -----------
Total of non-cash expenses 1,432,753 902,874
------------- -----------
Less: Capitalized software
development costs (519,570) (1,002,944)
------------- -----------
Total Operating Costs 6,142,982 6,709,104
------------- -----------
GAAP Operating loss $ (716,933)$(4,969,178)
============ ============
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