<PAGE> 1
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 0-20284
CITATION COMPUTER SYSTEMS, INC.
(Exact name of company as specified in its charter)
MISSOURI 43-1174397
- ------------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
424 SOUTH WOODS MILL ROAD, CHESTERFIELD, MISSOURI 63017
----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(314) 579-7900
-----------------------------------
(Company's telephone number, including area code)
____________________
Indicate by check mark whether the company (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the company's Common Stock, par value $0.10
per share, at July 26, 1996, was 3,764,936 shares.
Exhibit Index on Page 15 Page 1 of 15
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
See pages F-1 to F-7 hereof.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1995, TO THREE MONTHS ENDED JUNE 30,
1996
GENERAL. The Company reported substantially improved earnings from
operations for the first quarter of fiscal 1997. Net earnings, before a charge
for office consolidation and relocation expenses in the first quarter of fiscal
1996, increased from $0.4 million, or $0.11 per share, to $0.6 million, or
$0.16 per share, in the first quarter of fiscal 1997.
During the first quarter of fiscal 1996, the Company recorded a $1.0
million pretax charge to cover office consolidation and relocation expenses
associated with the consolidation of the Company's facilities in Madison,
Wisconsin, into its St. Louis headquarters. Including that charge, the Company
reported a loss for the first quarter of fiscal 1996 of $0.2 million, or $0.05
a share. See Note 2 on page F6 for further information.
Any forward looking statements set forth herein are necessarily subject
to significant uncertainties and risks. The words "believes," "anticipates,"
"expects" and similar expressions are intended to identify forward-looking
statements. Actual results could be materially different as a result of
various possibilities, including difficulties or delays in the introduction of
new products or the revision of existing products, significant changes in
healthcare regulation, economic downturns in any of the Company's markets,
competitors, new entrants into the Company's markets, increased price pressure,
the availability of suitable acquisition candidates, customer reduction caused
by industry consolidation or other factors or marketplace acceptance of Windows
NT as an operating platform. Readers are cautioned not to place undue reliance
on forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
REVENUE. Total revenue increased 18.2% from $5.6 million for the first
quarter of fiscal 1996 to $6.7 million for the first quarter of fiscal 1997,
which reflects a 21.3% increase in system sales revenue and a 13.3% increase in
service revenue.
System sales revenue for the first quarter increased by $0.7 million,
from $3.4 million in fiscal 1996 to $4.2 million in fiscal 1997. Consistant
with the Company's business plan, the average system contract value increased
from approximately $155,000 in the first quarter of fiscal 1996 to
approximately $291,000 in fiscal 1997. Although this average contract value
did not equal the $410,000 average in the fourth quarter of fiscal 1996, it did
exceed the approximate average for fiscal 1996. This higher average system
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contract value reflects the growth in the sale of more comprehensive systems.
System sales represented 61.2% and 62.8% of total revenues for the first
quarter of fiscal 1996 and 1997, respectively.
Service revenue for the first quarter increased by $0.3 million, from
$2.2 million in fiscal 1996 to $2.5 million in fiscal 1997. The increase was
primarily due to additional service revenue from the sale of new systems, as
well as additional sales and renewals of service contracts from existing
clients. Service revenue represented 38.8% and 37.2% of total revenues for the
first quarter of fiscal 1996 and 1997, respectively.
COST OF PRODUCTS AND SERVICES SOLD AND GROSS PROFIT. Cost of products
and services sold include cost of system sales and cost of service revenue.
Cost of system sales includes cost of hardware sold, installation and training
expenses, and software amortization costs. Cost of service revenue includes
all client service expenses plus an allocation of certain other overhead
expenses. As a percentage of total revenue, the total cost of products and
services sold decreased from 46.4% in the first quarter of fiscal 1996 to 40.8%
in the first quarter of fiscal 1997. For the first quarter of fiscal 1996 and
1997, total cost of products and services sold were $2.6 million and $2.7
million, respectively.
The decrease in the percentage of total revenues was primarily due to
the decrease in hardware costs as a percentage of total revenues, a decrease in
client service expenses due to the office consolidation in fiscal 1996 and
offset by an increase in software amortization costs. Software amortization
costs of $0.4 million in the first quarter of fiscal 1996 and $0.5 million in
the first quarter of fiscal 1997 represented 14.6% and 19.2%, respectively, of
total costs of products and services sold.
Gross profit as a percentage of total revenues increased from 53.6% in
the first quarter of fiscal 1996 to 59.2% in the first quarter of fiscal 1997.
The increase in gross profit as a percentage of total revenues was primarily
attributable to a change in the sales mix among various products.
RESEARCH AND DEVELOPMENT COSTS. Total outlays for software development
were $1.2 million and $1.3 million for the first quarter of fiscal 1996 and
fiscal 1997, respectively, which represented 21.0% of total revenue in the
first quarter of fiscal 1996 compared with 19.0% in fiscal 1997. The Company
capitalized $0.7 million in the first quarter of fiscal 1996 and fiscal 1997,
resulting in current expense of $0.4 million and $0.6 million in the first
quarter of fiscal 1996 and 1997, respectively. The Company expects to complete
the development of the majority of its Windows and Windows NT-based products
during fiscal 1997. The Company anticipates that due to the nature of the
planned development activities (e.g., product enhancements versus the
significant development effort involved in porting software to a new operating
system), the ratio of software development costs capitalized to total software
development outlays will decline in future periods as compared to recent years.
Software amortization costs of $0.4 million in the first quarter of fiscal 1996
and $0.5 million in fiscal 1997 are reflected as part of the cost of products
and services sold in determining gross profit.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative
expenses as a percentage of total revenues increased slightly from 34.2% in the
first quarter of fiscal 1996, to 34.4% in the first quarter of fiscal 1997.
Total selling and administrative
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expenses increased $0.4 million to $2.3 million in this year's first quarter,
primarily due to expenditures associated with higher selling and administrative
costs to support international and domestic operations.
OFFICE CONSOLIDATION AND RELOCATION. During the first quarter of fiscal
1996, the Company recorded a $1.0 million pretax charge for the consolidation
of its Madison, Wisconsin office. There were no comparable charges in the
first quarter of fiscal 1997. See Note 2 on page F6 for further information.
OPERATING INCOME. Operating income increased from of $0.6 million,
excluding the consolidation charge, in the first quarter of fiscal 1996, to
$1.1 million in the first quarter of fiscal 1997. The operating margin
increased from 11.5 percent to 15.8 percent in the first quarter of fiscal 1996
and 1997, respectively, reflecting a shift of the product mix to more
profitable products.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is cash flows from operations.
At March 31, 1996, the Company had cash and cash equivalents in the amount of
$2.1 million as compared to $1.7 million at June 30, 1996. The cash balance
decreased by $0.4 million primarily due to cash used for software development
costs ($0.7 million), and cash used for capital expenditures ($0.2 million),
offset by cash generated from operating activities of $0.4 million.
During the first quarter of fiscal 1997, the Company did not incur any
additional long-term debt.
As of June 30, 1996, the Company had a line of credit agreement that
allows the Company to borrow up to $1.0 million with interest at the lender's
prime rate (8.25% at June 30, 1996). The line of credit is secured by the
Company's accounts receivable, inventory, and general intangible assets. There
were no borrowings outstanding under the line of credit agreement as of June
30, 1996.
The Company's current commitments consist primarily of operating lease
obligations aggregating $3.9 million over the next ten years. The operating
leases consist primarily of the Company's office lease in Chesterfield,
Missouri, which expires in May 2004.
On July 16, 1996, the Company filed a registration statement with the
Securities and Exchange Commission covering the proposed offering of 2,732,311
shares of its common stock, of which 732,311 shares are being offered and sold
for the account of certain current shareholders of the Company. In addition,
the Company is offering up to 25,000 shares to eligible employees. The
underwriters will also be granted a 30-day option from the Company and selling
shareholders to purchase up to 409,847 additional shares to cover any
over-allotments. Proceeds of the offering will be used to fund CITATION's
working capital and general corporate purposes, including the funding of the
Company's growth plans.
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The Company believes that its cash and cash equivalents, together with its
current borrowing facilities, cash generated from operations and additional
sources of liquidity, including possible equity financing, will be sufficient
to fund its anticipated cash requirements for at least the next 12 months. The
Company's ability to meet its cash requirements on a long-term basis will
depend on profitable operations and consistent and timely collections of its
accounts receivable.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no reportable proceedings.
ITEM 2. CHANGE IN SECURITIES
(a) Not applicable.
(b) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) Not applicable.
(b) Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index for list of Exhibits.
(b) None.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITATION COMPUTER SYSTEMS, INC.
Date: August 1, 1996 By: /s/Richard D. Neece
---------------- --------------------
Richard D. Neece
Executive Vice President
& Chief Financial Officer
(Principal Financial & Accounting Officer)
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CITATION COMPUTER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET (000's)
<TABLE>
<CAPTION>
(Audited) (Unaudited)
March 31, June 30,
1996 1996
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,146.3 $ 1,708.4
Accounts receivable:
Trade, net 10,919.4 11,124.8
Other 35.6 25.3
Inventories 537.1 558.9
Prepaid expenses and other current assets 704.3 543.3
Deferred tax asset 82.7 82.7
--------- ---------
Total current assets 14,425.4 14,043.4
Software development costs, net 4,762.5 4,901.8
Property and equipment, net 1,756.1 1,749.1
Other assets 313.2 412.1
--------- ---------
Total assets $21,257.2 $21,106.4
========= =========
Liabilities and shareholders' equity:
Current liabilities:
Current portion of long-term debt $ 143.0 $ 142.8
Accounts payable 1,420.6 1,411.1
Customer deposits 542.3 755.5
Accrued bonuses 475.0 150.0
Other accrued liabilities 1,588.1 1,133.9
Deferred service revenue 2,316.9 1,826.7
Income taxes payable 30.6 209.9
--------- ---------
Total current liabilities 6,516.5 5,629.9
Long-term debt 450.0 414.4
Deferred tax liability 1,676.4 1,676.4
--------- ---------
8,642.9 7,720.7
--------- ---------
Shareholders' equity:
Common stock 374.8 375.7
Paid-in capital 6,127.7 6,189.5
Retained earnings 6,180.1 6,830.5
Equity adjustment from foreign currency translation 68.3) (10.0)
-------- --------
12,614.3 13,385.7
--------- ---------
Total liabilities and shareholders' equity $21,257.2 $21,106.4
========= =========
</TABLE>
F-1
See accompanying notes to consolidated financial statements Page 8
<PAGE> 9
CITATION COMPUTER SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Three months ended
June 30, June 30,
------------------------- ------------------------
1995 1996
------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net system sales and service revenues:
System sales $3,447.4 $4,182.7
Service revenue 2,187.9 2,479.1
-------- --------
5,635.3 6,661.8
Cost of products and service sold:
System sales 1,931.7 2,162.8
Service revenue 684.9 556.6
-------- --------
2,616.6 2,719.4
Gross profit 3,018.7 3,942.4
Research and development expense 446.8 602.4
Selling and administrative expenses 1,926.1 2,288.6
Office consolidation and relocation expense 1,000.0 -
-------- --------
Operating income (loss) (354.2) 1,051.4
Other income:
Interest - net 28.8 14.9
-------- --------
Income (loss) before income taxes (325.4) 1,066.3
Provision (benefit) for income taxes (126.9) 415.9
------- --------
Net income (loss) $ (198.5) $ 650.4
======== ========
Net earnings (loss) per common share:
Fully diluted $ (0.05) $ 0.16
======== ========
Weighted average number of shares used in
computing net earnings per common share:
Fully diluted 3,712 3,957
</TABLE>
F-2
See accompanying notes to consolidated financial statements Page 9
<PAGE> 10
CITATION COMPUTER SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (000's)
<TABLE>
<CAPTION>
Three months ended
June 30,
--------------------------------
1995 1996
------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 5,367.9 $ 6,237.2
Cash paid to suppliers and employees (4,534.9) (5,644.4)
Income taxes paid 196.0 (236.5)
Interest paid (12.6) (22.2)
Interest received and other 38.3 37.3
--------- ---------
Net cash provided by operating activities: 1,054.7 371.3
--------- ---------
Cash flows from investing activities:
Capital expenditures (88.6) (233.6)
Software development costs (734.4) (660.8)
--------- ---------
Net cash used in investing activities: (823.0) (894.4)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt - -
Principal payments on long-term debt (21.3) (35.7)
Proceeds from the issuance of common stock - 62.6
--------- ---------
Net cash provided by (used in) financing activities (21.3) 26.9
--------- ---------
Effect of exchange rate changes on cash (67.7) 58.2
--------- ---------
Net increase in cash and cash equivalents 142.7 (437.9)
Cash and cash equivalents, beginning of year 2,634.2 2,146.3
--------- ---------
Cash and cash equivalents, end of period $ 2,776.9 $ 1,708.4
========= =========
</TABLE>
F-3
See accompanying notes to consolidated financial statements Page 10
<PAGE> 11
CITATION COMPUTER SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (000's)
<TABLE>
<CAPTION>
Three months ended
June 30,
--------------------------------
1995 1996
-------------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Reconciliation of net income (loss) to net cash
provided by operating income activities:
Net income (loss) $ (198.5) $ 650.4
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment 230.7 240.7
Amortization of software development costs 382.5 521.4
Amortization of other assets 21.2 20.2
Non-cash office consolidation and relocation charge 1,000.0 -
Increase in accounts receivable (69.2) (195.2)
(Increase) decrease in inventories 24.8 (21.7)
Decrease in prepaid expenses and other assets 9.8 41.9
Decrease in accounts payable (198.2) (9.5)
Increase (decrease) in customer deposits (4.9) 213.2
Decrease in accrued bonuses - (325.0)
Decrease in other accrued liabilities (19.3) (454.2)
Increase in current income taxes 69.1 179.3
Decrease in deferred service revenue (193.3) (490.2)
-------- -------
Net cash provided by operating activities $1,054.7 $ 371.3
======== =======
</TABLE>
F-4
See accompanying notes to consolidated financial statements Page 11
<PAGE> 12
CITATION Computer Systems, Inc.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except for number of shares)
<TABLE>
<CAPTION>
Common Stock
-----------------------------------
Additional Foreign
Number Par Paid-in Retained Currency
of Shares Value Capital Earnings Translation Total
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1996 (audited) 3,747,882 $374.8 $6,127.7 $6,180.1 $(68.3) $12,614.3
Net income (unaudited) 650.4 650.4
Sale of common stock pursuant to exercise
of stock options 8,000 0.8 47.3 48.1
Issuance of common stock for 401K Company
matching contribution 1,054 0.1 14.5 14.6
Foreign currency translation adjustment (unaudited) 58.3 58.3
-----------------------------------------------------------------------
Balance, June 30, 1996 (unaudited) 3,756,936 $375.7 $6,189.5 $6,830.5 $(10.0) $13,385.7
-----------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
F-5
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CITATION COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim financial information for the three-month periods
ended June 30, 1995, and 1996 is unaudited. Financial Statement
note disclosures, normally included in financial statements
prepared in conformity with generally accepted accounting
principles, have been omitted in this Form 10-QSB pursuant to the
Rules and Regulations of the Securities and Exchange Commission.
However, in the opinion of the Company, the disclosures contained
in this Form 10-QSB are adequate to make the information
presented not misleading. See Notes to Financial Statements as
incorporated by reference in the Company's Annual Report on Form
10-KSB, dated June 26, 1996, which includes financial statements
and notes thereto for the year ended March 31, 1996.
In the opinion of the Company, the accompanying unaudited
financial statements include all adjustments, consisting solely
of normal recurring adjustments, necessary to present fairly the
Balance Sheet at June 30, 1996, the Statement of Operations for
the three months ended June 30, 1995 and 1996, the Statement of
Cash Flows for the three months ended June 30, 1995 and 1996, and
the Statement of Changes in Shareholders' Equity for the three
months ended June 30, 1996. The interim results, however, are not
necessarily indicative of results for any future period.
2. OFFICE CONSOLIDATION AND RELOCATION
In June, 1995 the Company decided to consolidate the majority of
the operations of its Madison facility into its St. Louis
headquarters. A pretax charge of $1.4 million was recorded in
fiscal 1996 results of operations to provide for the costs of the
consolidation of facilities and relocation of certain employees
and equipment, $1.0 million of which was recorded in the first
quarter of fiscal 1996. The major components of that charge are
as follows:
<TABLE>
<S> <C>
Lease buyout and asset write offs $ 315,000
Employee relocation 285,000
Employee severance and related costs 207,000
Office move and other related expenses 193,000
-----------
$ 1,000,000
===========
</TABLE>
All expenses associated with the office consolidation and
relocation were recorded during the fiscal year ended March 31,
1996 and no material future costs are expected.
F-6
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3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, June 30,
1996 1996
--------- --------
<S> <C> <C>
Hardware and third party software $ 322.0 $ 343.8
Field service equipment 215.1 215.1
-------- --------
$ 537.1 $ 558.9
======== ========
</TABLE>
4. SUBSEQUENT EVENTS
On July 16, 1996 the Company filed a registration statement with
the Securities and Exchange Commission covering the proposed offering of
2,732,311 shares of its common stock, of which 732,311 shares are being
offered and sold for the account of certain current shareholders of the
Company. Proceeds of the offering will be used to fund the Company's
working capital and general corporate purposes, including the funding of
the Company's growth plans.
5. OTHER INFORMATION
On July 15, 1996, Frank L. Poggio resigned from the position of
President of the Company, thereby terminating his employment from the
Company. On that date he entered into a consulting agreement with the
Company to provide specified services for one year.
F-7
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequential Page
Number Exhibit Number
- ------ ------- ------
<S> <C> <C>
3(a) Restated Articles of Incorporation of the Company; *
incorporated by reference to the corresponding Exhibit to the
Company's Registration Statement on Form S-1 of the Company,
Registration No. 33-48332
3(b) Restated By-laws of the Company; incorporated by reference to *
the corresponding Exhibit to the Company's Registration
Statement of Form S-1 of the Company, Registration No. 33-
48332
4(a) Specimen Common Stock Certificate; incorporated by reference *
to the corresponding Exhibit to the Company's Registration
Statement on Form S-1 of the Company, Registration No. 33-
48332
4(b) Registration Rights Agreement, dated May 29, 1992, between *
the Company and Capital For Business, Inc; incorporated by
reference to the corresponding Exhibit to the Company's
Registration Statement on Form S-1 of the Company,
Registration No. 33-48332
27(a) Financial Data Schedule
</TABLE>
* Incorporated by reference as set forth in Exhibit description.
Page 15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> JUN-30-1996
<CASH> 1,708
<SECURITIES> 0
<RECEIVABLES> 11,284
<ALLOWANCES> 134
<INVENTORY> 559
<CURRENT-ASSETS> 14,043
<PP&E> 5,512
<DEPRECIATION> 3,756
<TOTAL-ASSETS> 21,106
<CURRENT-LIABILITIES> 5,630
<BONDS> 414
0
0
<COMMON> 376
<OTHER-SE> 13,010
<TOTAL-LIABILITY-AND-EQUITY> 21,106
<SALES> 4,183
<TOTAL-REVENUES> 6,662
<CGS> 2,163
<TOTAL-COSTS> 2,719
<OTHER-EXPENSES> 2,891
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (15)
<INCOME-PRETAX> 1,066
<INCOME-TAX> 416
<INCOME-CONTINUING> 650
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 650
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
