<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 29, 1996
REGISTRATION NO. 333-08195
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
CITATION COMPUTER SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
MISSOURI 43-1174397
(State or Other Jurisdiction (I.R.S. Employer
of Identification
Incorporation or Number)
Organization)
</TABLE>
424 SOUTH WOODS MILL ROAD
CHESTERFIELD, MISSOURI 63017
(314) 579-7900
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
KENNETH H. SUELTHAUS, ESQ.
SUELTHAUS & WALSH, P.C.
7733 FORSYTH BOULEVARD
ST. LOUIS, MISSOURI 63105
(314) 727-7676
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
COPIES TO:
<TABLE>
<S> <C>
JAMES J. JUNEWICZ, ESQ. JEFFREY A. SCHUMACHER, ESQ.
Mayer, Brown & Platt Sachnoff & Weaver
190 South LaSalle Street 30 South Wacker Drive, 29th Floor
Chicago, Illinois 60603 Chicago, Illinois 60606
(312) 701-7032 (312) 207-6414
</TABLE>
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
-------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. / /
If the registrant elects to deliver its latest annual report to
security-holders, or a complete and legible facsimile thereof, pursuant to Item
11(a)(1) of this form, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. / / _______
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same
offering. / / _______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
-------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 28, 1996
2,732,311 SHARES
[LOGO]
COMMON STOCK
--------------
Of the 2,732,311 shares of Common Stock offered hereby, 2,000,000 are being
sold by CITATION Computer Systems, Inc. ("CITATION" or the "Company") and
732,311 shares are being sold by certain shareholders of the Company (the
"Selling Shareholders"). In addition to the 2,732,311 shares offered to the
public, the Company is offering 25,000 shares pursuant to this Prospectus
directly to Directors and eligible employees of the Company on a
non-underwritten basis. See "Company Director and Employee Offering." The
Company will not receive any proceeds from the sale of Common Stock by the
Selling Shareholders. The Company's Common Stock is traded on the Nasdaq
National Market under the symbol "CITA." On August 27, 1996, the last reported
sale price of the Common Stock as reported on the Nasdaq National Market was
$15.25 per share. See "Price Range of Common Stock."
-------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGES 6 - 9.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND PROCEEDS TO TO THE SELLING
PUBLIC COMMISSIONS(1) THE COMPANY(2) SHAREHOLDERS
<S> <C> <C> <C> <C>
Per Share(3)............ $ $ $ $
Total(3)(4)............. $ $ $ $
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
several Underwriters against certain liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses, payable by the Company, estimated at $550,000.
(3) Excludes 25,000 shares being offered by the Company directly to Directors
and eligible employees of the Company at the Price to Public less
Underwriting Discounts and Commissions. See "Company Director and Employee
Offering" and "Underwriting."
(4) The Company and the Selling Shareholders have granted the Underwriters a
30-day option to purchase up to 409,847 additional shares of Common Stock,
on the same terms and conditions as set forth above, solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the total Price to Public, Underwriting Discounts and Commissions, Proceeds
to Company and Proceeds to the Selling Shareholders will be $ , $ ,
$ and $ , respectively. See "Underwriting."
-------------------
The shares of Common Stock (other than the shares offered pursuant to the
Company Director and employee offering) are offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that the certificates for the shares of Common Stock will be available
for delivery at the offices of Volpe, Welty & Company, One Maritime Plaza, San
Francisco, California on or about , 1996.
VOLPE, WELTY & COMPANY
JEFFERIES & COMPANY, INC.
PUNK, ZIEGEL & KNOELL
The date of this Prospectus is , 1996.
<PAGE>
[A GRAPHIC DEPICTION OF THE PRODUCTS AND DEMOGRAPHIC AND CLINICAL DATA
REPOSITORIES OF THE COMPANY AND THE TYPE OF CUSTOMERS USING THEM]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS OR THEIR AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN
THE COMPANY'S COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE
10b-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE
"UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, AND NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION
CONTAINED IN THIS PROSPECTUS ASSUMES THAT (I) THE UNDERWRITERS' OVER-ALLOTMENT
OPTION IS NOT EXERCISED AND (II) ALL OF THE 25,000 SHARES OF COMMON STOCK
OFFERED BY THE COMPANY TO DIRECTORS AND ELIGIBLE EMPLOYEES OF THE COMPANY ARE
PURCHASED BY SUCH PERSONS. SEE "COMPANY DIRECTOR AND EMPLOYEE OFFERING" AND
"UNDERWRITING."
THE COMPANY
CITATION Computer Systems, Inc. ("CITATION" or the "Company") designs,
develops, markets and supports patient-centered clinical and financial
information systems for hospitals, clinics, physician groups and emerging
Integrated Delivery Networks ("IDNs"). The Company offers a comprehensive suite
of products using open client/server architecture to meet a broad range of the
information systems needs of the healthcare industry. The Company's products
integrate clinical, financial and decision support information within the
enterprise and provide community-wide patient registration and identification
throughout the IDN. The Company's systems are modular, scalable and
interoperable, enabling hospitals and IDNs to purchase systems that fit their
specific needs and leverage their existing information technology.
Since the Company's inception, CITATION has developed client/server-based
solutions for clients in the healthcare industry. CITATION's comprehensive suite
of products addresses four functional areas: clinical, financial, community
registration and decision support. As part of its continuing efforts to deliver
advanced solutions to its clients, the Company is presently migrating
substantially all of its products to a Windows NT operating system, which is an
emerging client/server industry standard. In addition to its own development
efforts, the Company acquires or licenses technologies or products developed by
third parties that complement and enhance CITATION's internally developed
product offerings.
As the need for readily accessible information throughout the healthcare
enterprise continues to grow, hospitals, providers and payors of all sizes are
faced with the challenge of implementing healthcare information systems that are
scalable, capable of working with existing information systems and adaptable to
changes in the healthcare marketplace. In the future, as healthcare delivery
systems become more complex and IDNs emerge, the Company believes that access to
information and the ability to integrate patient data from disparate sources
will grow in importance. For example, a master patient index ties together
information about individuals no matter where or how the data is stored,
providing a universal electronic record of a patient's demographic, clinical and
payor history. In a 1996 survey conducted by Modern Healthcare/ Coopers &
Lybrand that appears in the March 4, 1996 issue of MODERN HEALTHCARE, 59% of
hospital chief information officers surveyed identified master patient indices
as one of their top four information priorities. In late calendar year 1996, the
Company intends to ship its master patient index product, the Common User
Registration Entry System, CURES. CURES distributes demographic and health
assessment information across multiple sites located throughout healthcare
enterprises, IDNs or the community. CURES is designed to function as a master
patient index and as a central data repository for all patient demographic and
health status information, streamlining the intake process by eliminating
repetitive registration questions about medical history and eligibility
information.
CITATION's goal is to leverage its 15 years of experience developing
client/server application solutions to become a leading provider of healthcare
information systems. In order to achieve this goal, the Company's strategy
includes increasing the number of comprehensive systems sales, expanding its
existing client base to include larger enterprises, broadening its product
portfolio to address the changing needs of healthcare enterprises and building
upon its international presence. CITATION's systems are installed in nearly 600
healthcare institutions worldwide, ranging in size from under 100 beds to over
1,000. CITATION markets its products directly in the United States, Canada, the
United Kingdom and Europe as well as through distribution partners in the Middle
East, the Far East and Latin America.
As part of its strategy to sell more comprehensive systems to larger
entities, the Company intends to expand its sales and marketing effort. In
addition, the Company sees an opportunity to expand its value-added client
support services by assisting clients in the design and configuration of their
systems, including networking, systems integration and data conversion.
Furthermore, the Company intends to provide advice on data analysis to assist
care providers in evaluating their operations.
In January 1995, J. Robert Copper became Chairman and Chief Executive
Officer of CITATION. From that time until September 1995, the Company recruited
and reorganized its senior management to improve its operating performance and
position the Company for future growth. Under the guidance of the new management
team, in January 1995 the Company initiated a plan to restructure its operations
in order to reduce its cost structure. In addition, in June 1995 the Company
decided to consolidate the operations of its Madison, Wisconsin facility into
its St. Louis, Missouri headquarters.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
The Company................................... 2,000,000 shares(1)
The Selling Shareholders...................... 732,311 shares
Common Stock to be outstanding after the 5,791,904 shares(2)
offering........................................
Use of Proceeds................................. Working capital and general corporate
purposes, including sales force
expansion, product development and
acquisitions of complementary
businesses and technologies.
Nasdaq National Market Symbol................... CITA
</TABLE>
- ---------
(1) Excludes 25,000 shares of Common Stock offered hereby directly by the
Company to Directors and eligible employees of the Company on a
non-underwritten basis. See "Company Director and Employee Offering."
(2) Based on the number of shares of Common Stock outstanding as of August 26,
1996. Excludes options to purchase 444,497 shares which were outstanding as
of August 26, 1996.
-------------------
This Prospectus contains trademarks and trade names of companies other than
CITATION. These trademarks and trade names are the property of their respective
owners. The following trademarks are owned by the Company: C-CIS, C-COM, C-LAB,
C-CARE, C-RIS, C-MED, C-FIS, C-GEN, C-REC, CURES and C-MIS, and
CITATION-REGISTERED TRADEMARK- is a federally registered trademark of the
Company.
-------------------
ANY FORWARD LOOKING STATEMENTS SET FORTH IN THIS PROSPECTUS ARE NECESSARILY
SUBJECT TO SIGNIFICANT UNCERTAINTIES AND RISKS, INCLUDING, BUT NOT LIMITED TO,
THOSE SET FORTH IN "RISK FACTORS." WHEN USED IN THIS PROSPECTUS, THE WORDS
"BELIEVES," "ANTICIPATES," "INTENDS," "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 KEY MARKETS, INCREASED COMPETITION CAUSED BY
FACTORS SUCH AS INDUSTRY CONSOLIDATION, NEW PRODUCT OFFERINGS BY EXISTING
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.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
----------------------------------------------------- --------------------
1992(1) 1993(1) 1994 1995 1996 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net system sales and service revenue:
System sales.................................... $ 11,186 $ 14,102 $ 14,767 $ 15,338 $ 16,216 $ 3,447 $ 4,183
Service revenue................................. 3,756 5,067 6,763 8,027 8,835 2,188 2,479
--------- --------- --------- --------- --------- --------- ---------
Total revenue................................. 14,942 19,169 21,530 23,365 25,051 5,635 6,662
--------- --------- --------- --------- --------- --------- ---------
Cost of products and services sold:
System sales.................................... 5,478 5,995 8,161 9,128 8,532 1,931 2,163
Service revenue................................. 1,293 1,555 2,362 2,742 2,538 685 557
--------- --------- --------- --------- --------- --------- ---------
Total cost of products and services sold...... 6,771 7,550 10,523 11,870 11,070 2,616 2,720
--------- --------- --------- --------- --------- --------- ---------
Gross profit...................................... 8,171 11,619 11,007 11,495 13,981 3,019 3,942
--------- --------- --------- --------- --------- --------- ---------
Research and development expense.................. 538 503 1,296 1,661 1,672 447 602
Selling and administrative expenses............... 5,308 7,450 7,718 9,212 8,711 1,926 2,289
Restructuring of operations....................... -- -- -- 3,426(2) -- -- --
Office consolidation and relocation expense....... -- -- -- -- 1,380(3) 1,000 --
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses...................... 5,846 7,953 9,014 14,299 11,763 3,373 2,891
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)........................... 2,325 3,666 1,993 (2,804) 2,218 (354) 1,051
Other income, net................................. 95 134 154 102 95 29 15
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes................. 2,420 3,800 2,147 (2,702) 2,313 (325) 1,066
Provision (benefit) for income taxes.............. 863 1,502 808 (877) 901 (127) 416
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)................................. $ 1,557 $ 2,298 $ 1,339 $ (1,825) $ 1,412 $ (198) $ 650
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Primary and fully diluted net income (loss) per
share............................................ $ .57 $ .73 $ .36 $ (.49) $ .37 $ (0.05) $ 0.16
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted average number of shares of Common Stock
outstanding -- fully diluted..................... 2,711 3,166 3,704 3,688 3,780 3,712 3,957
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------
ACTUAL AS ADJUSTED(4)
--------- --------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................................... $ 1,708 $ 30,379
Working capital............................................................................. 8,413 37,084
Total assets................................................................................ 21,106 49,777
Long-term debt, less current portion........................................................ 414 414
Shareholders' equity........................................................................ 13,386 42,057
</TABLE>
- ----------
(1) On December 11, 1992, the Company issued 596,559 shares of its Common Stock
in exchange for all of the outstanding shares of Health Micro Data Systems,
Inc. ("HMDS"). The merger was accounted for as a pooling of interests, and
accordingly, the consolidated financial statements of the Company for
periods up to the date of consummation of the merger have been restated to
include the accounts of HMDS.
(2) In January 1995, the Company initiated a plan to restructure its operations
in order to reduce its cost structure. As a result, the Company incurred a
restructuring charge of $3.4 million in the fourth quarter of fiscal 1995.
See Note 4 of Notes to Consolidated Financial Statements.
(3) In June 1995, the Company decided to consolidate the operations of its
Madison, Wisconsin facility into its St. Louis, Missouri headquarters and
recorded a charge of $1.4 million for the related costs in the first, third
and fourth quarters of fiscal 1996. The consolidation and relocation have
been substantially completed. See Note 3 of Notes to Consolidated Financial
Statements.
(4) Adjusted to reflect the sale of 2,025,000 shares of Common Stock offered by
the Company hereby, assuming a public offering price of $15.25 per share,
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds."
5
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY.
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS. The Company's quarterly
results of operations have varied greatly in the past and are expected to vary
in the future because of the relatively high average sales price of the
Company's information systems and long length of the sales process. In addition,
the Company is increasingly committed to international sales. Historically, the
Company's international sales have been more volatile than the Company's
domestic sales on a quarterly basis. Any shortfall in revenues recognized in any
given period could have a material adverse effect on the Company's business,
results of operations and financial condition for such period. Because a
significant percentage of the Company's total expenses is relatively fixed,
variations in the timing of systems sales and installations can cause
significant variations in operating results from quarter to quarter and may
magnify the adverse effect of any shortfalls in revenue on the Company's results
of operations. The Company believes that period-to-period comparisons of
revenues and results of operations are not necessarily meaningful and should not
be relied upon as indicators of future performance. At some point in the future
the Company's quarterly results will likely be below those projected by market
analysts. Quarterly results fluctuations and variations from projections could
have a significant impact on the market price of the Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Results of Operations."
TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCT DEVELOPMENT. The healthcare
information systems industry is characterized by rapid technological change. The
Company's future success will depend upon its ability to continually develop
software applications that incorporate new technologies and to enhance and
expand its current products. There can be no assurance that the Company's
financial and technological resources will permit it to develop or market new
products successfully or respond effectively to technological changes. The
Company anticipates that significant amounts of future revenue will be derived
from products and product enhancements which either do not exist today or have
not been sold in large enough quantities to ensure market acceptance. The
development of new systems is a complex, expensive and uncertain process
requiring technical innovation and the accurate anticipation of technological
and market trends. The Company will need to continue to attract and retain
appropriately skilled employees to successfully develop new systems. There can
be no assurance that the Company will not experience difficulties that could
delay or prevent the successful development and introduction of product
enhancements or new products, or that such enhancements or new products will
adequately meet the requirements of the marketplace or achieve market
acceptance. If the Company is unable to develop and introduce product
enhancements and new products in a timely and cost-effective manner in response
to changing market conditions or client requirements, the Company's business,
results of operations and financial condition could be materially and adversely
affected.
The software products offered by the Company may contain undetected errors
or failures when first introduced or as new versions are released. Errors or
failures that are not detected until after the commencement of commercial
shipments of a product could result in loss of or delay in market acceptance of
the product and in claims against the Company, which could have a material
adverse impact on the Company's business, results of operations and financial
condition.
PRODUCT CONVERSIONS TO WINDOWS NT. The Company intends to migrate
substantially all of its products to Windows NT. The Company expects that
Windows NT will become the operating system foundation for a large number of
healthcare enterprises, although there can be no assurance that this will be the
case. As a result of the complexities involved in the conversion of the
Company's products to Windows NT, the new versions will require significant
development and testing periods before they achieve marketability. There can be
no assurance that the Windows NT versions will be completed before demand for
the Company's software written for other operating systems slows. Some of the
Company's competitors have already been able to convert their products to
operate on Windows NT. Further, certain potential clients may delay purchasing
decisions until Windows NT versions of the Company's products are available.
There can be no assurance that the Company will not experience difficulties that
could delay or prevent the successful and timely development, introduction and
marketing of the new Windows NT versions of its products, or that
6
<PAGE>
such versions will adequately meet the requirements of the marketplace and
achieve market acceptance. In addition, the conversions could divert resources
away from developing or enhancing other products. The occurrence of any of these
potential product conversion problems could have a material adverse impact on
the Company's business, results of operations and financial condition. See
"Business -- Products" and "Business -- Product Development."
CHANGE IN MARKETING FOCUS. While the Company has traditionally sold its
products to small and medium-sized hospitals, the Company believes it will be
necessary to extend its marketing efforts to larger healthcare providers with
which the Company has less sales experience. Many healthcare providers are
consolidating to create larger healthcare delivery organizations. This
consolidation reduces the number of potential customers for the Company's
products, and the increased purchasing power of these organizations could lead
to reductions in the amounts paid for the Company's products. The Company
anticipates that the laboratory information systems market and the integrated
healthcare information systems market will continue to expand despite a decrease
in the number of small and medium-sized hospitals, but there can be no assurance
that such expansion will occur in these markets. The Company intends to focus
its sales efforts on selling more comprehensive products to large hospitals and
IDNs. Because the Company has expanded its product offerings into an extensive
package of integrated products, purchases of the Company's products increasingly
require approval by a customer's executive officers as opposed to departmental
managers, lengthening the sales process and rendering the sale more competitive
and uncertain. There can be no assurance that the Company will be successful in
these sales efforts. Failure to compete successfully in these market segments
could have a material adverse impact on the Company's business, results of
operations and financial condition. See "Business -- Business Strategy" and
"Business -- Sales and Marketing."
RISKS ASSOCIATED WITH FOREIGN SALES. In 1996, the Company's international
sales increased to 12.2% of total revenues from 6.0% in 1995. The Company
expects international sales to continue to constitute a significant portion of
its revenues. The Company's sales outside the United States are subject to the
risks that: agreements may be more difficult to enforce; receivables may be more
difficult to collect through a foreign country's legal system; foreign customers
often have longer payment cycles; foreign countries could make unexpected
changes in regulatory requirements or be the subject of significant political
and economic instability; foreign subsidiaries, distributors and sales
representatives may be difficult to manage; foreign countries could impose
additional withholding taxes or otherwise tax the Company's foreign income,
impose tariffs or adopt other restrictions on foreign trade; and intellectual
property rights may be more difficult to enforce in foreign countries. In
addition, exchange rate fluctuations may render the Company's products less
competitive relative to local product offerings, or could result in foreign
exchange losses, depending upon the currency in which the Company sells its
products. To date, the Company has not engaged in exchange rate hedging
activities to minimize the risks of such fluctuations. The Company may seek to
implement hedging techniques in the future with respect to its foreign currency
transactions. There can be no assurance, however, that the Company will be
successful in such hedging activities. Problems arising from the Company's
international sales could have a material adverse impact on the Company's
business, results of operations and financial condition. See "Business -- Sales
and Marketing."
RISKS ASSOCIATED WITH IDENTIFYING AND INTEGRATING ACQUISITIONS. A portion
of the net proceeds of this offering and other funds available to the Company
may be used to acquire complementary products, technologies or businesses in the
healthcare information systems industry. The evaluation, negotiation and
integration of any such acquisition may divert the time, attention and resources
of the Company, particularly its management. In addition, there is significant
competition for acquisition opportunities in the healthcare information systems
industry. Consolidation in the industry may intensify such competition and
thereby increase the costs of such opportunities. There can be no assurance that
the Company will be able to identify suitable acquisition candidates, consummate
acquisitions on terms favorable to the Company, or integrate successfully any
acquired products, technologies or businesses into its current operations. The
failure to do so could have a material adverse impact on the Company's business,
results of operations and financial condition. See "Use of Proceeds," "Business
- -- Business Strategy" and "Business -- Product Development."
COMPETITION. The market for healthcare information systems, including the
market for the Company's information systems, is highly competitive. Most of the
Company's revenues are derived from lengthy, competitive procurement processes
managed by sophisticated purchasers that extensively investigate and
7
<PAGE>
compare the healthcare information systems offered by the Company and its
competitors. The Company believes that the principal competitive factors
influencing the market for its healthcare information systems include vendor and
product reputation, product architecture, functionality and features, ease of
use, rapidity of implementation, quality of client support, product performance
and price. There can be no assurance that the Company will be able to compete
successfully with respect to any of such factors. In the healthcare information
systems market, the Company competes with a large number of other healthcare
information systems vendors. Many of the Company's current and potential
competitors have significantly greater financial, managerial, development,
technical, marketing and sales resources than the Company and may be able to
devote those resources to develop and introduce products more rapidly than the
Company or systems with significantly greater functionality than, and superior
overall performance to, those offered by the Company. These competitors may also
be able to initiate and withstand significant price decreases more effectively
than the Company. Moreover, the continuing consolidation of hospitals and other
healthcare providers has resulted in fewer individual purchasing decisions, a
trend that may favor larger vendors. To be competitive, the Company must be able
to respond effectively to the introduction of new and improved healthcare
information systems by its competitors. There can be no assurance that the
Company will be able to develop new or improved healthcare industry information
services in a timely and cost effective manner or that the Company's current and
future healthcare information systems and services will achieve and maintain
market acceptance. Failure of the Company to effectively compete could have a
material adverse impact on the Company's business, results of operations and
financial condition. See "Business -- Competition."
GOVERNMENT REGULATION. The Company is subject to the general requirements
of the Food and Drug Administration's regulations for Class I Medical Devices
because it produces C-CIS, the Company's clinical information system. The
Company has decided not to internally develop products (E.G., blood bank
software), at this time, that would subject the Company to the pre-market
approval requirements of Section 510(k) of the Food, Drug and Cosmetic Act.
Additional legislation governing the dissemination of medical record information
has been proposed. Currently pending in Congress is the Medical Records
Confidentiality Act (the "Medical Records Act"), which would protect and
regulate the confidentiality of medical record information. The Medical Records
Act would preempt most state laws regarding access to, and the use and
disclosure of, medical record information. If the Medical Records Act is
enacted, compliance with it could be costly and could preclude or delay the
introduction of certain new products. The Company is unable to determine at this
time the effect, if any, that these requirements may have on its business. There
can be no assurance that future regulation of the healthcare industry would not
have a material adverse impact on the Company's business, results of operations
and financial condition. See "Business -- Regulation."
HEALTHCARE INDUSTRY REFORM. The healthcare industry is subject to changing
political, economic and regulatory influences that may affect the procurement
practices and operations of healthcare providers. Many lawmakers have announced
that they intend to propose programs to reform the United States healthcare
system. The Company cannot predict with any certainty what impact, if any, such
legislative or market-driven, regulatory reforms might have on its business and
results of operations. There can be no assurance that such proposed changes, if
adopted, would not have a material adverse impact on the Company's business,
results of operations and financial condition. See "Business -- Regulation."
PRODUCT LIABILITY. The Company's systems include applications that may
relate to confidential patient medical histories, clinical information and
treatment plans. Improper disclosure of this information or any failure by the
Company's systems to provide accurate and timely information could result in
claims against the Company by its clients or their patients. A successful claim
brought against the Company in excess of its insurance coverage could have a
material adverse effect on the Company's business, results of operations and
financial condition, and even unsuccessful claims could result in the
expenditure of substantial funds in litigation and the diversion of management
time and resources. There can be no assurance that the Company will not be
subject to such claims in the future, that such claims will not result in
liability in excess of any insurance coverage maintained by the Company with
respect to such claims, that insurance will cover such claims or that
appropriate insurance will continue to be available to the Company at
commercially reasonable rates.
INTELLECTUAL PROPERTY. The Company's success depends upon its ability to
prevent the unauthorized use of its software products, none of which is
patented. The Company relies largely on copyright protection,
8
<PAGE>
license agreements, confidentiality procedures and employee nondisclosure
agreements to protect its proprietary rights. It may nonetheless be possible for
third parties to misappropriate the Company's technology and proprietary
information or to develop independently similar or superior technology. There
can be no assurance that the legal protections afforded to the Company and the
measures taken by the Company will be adequate to protect its intellectual
property. In addition, the laws of some foreign countries in which the Company
sells, or may in the future sell, its products do not protect proprietary rights
to as great an extent as do the laws of the United States. Moreover, the Company
is subject to the risk that others will assert adverse claims and commence
litigation alleging infringement or misappropriation of their intellectual
property rights. Any such claims regardless of their merit could be time
consuming, result in costly litigation, delay or prevent product shipments or
require the Company to enter into costly royalty or licensing agreements. There
can be no assurance that the Company would be able to develop alternative
technology or that any necessary licenses would be available or that, if
available, such licenses could be obtained on commercially reasonable terms. The
occurrence of any of the foregoing could have a material adverse impact on the
Company's business, results of operations and financial condition. See "Business
- -- Intellectual Property."
DEPENDENCE ON KEY PERSONNEL. The success of the Company is dependent on the
efforts and abilities of its senior executive officers. In January 1995, J.
Robert Copper became Chairman and Chief Executive Officer of CITATION. From that
time until September 1995, the Company recruited and reorganized its senior
management. There can be no assurance that this new management team will
continue to be successful. Loss of one or more members of the management team
could have a material adverse impact on the Company's business, results of
operations and financial condition. See "Management."
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Common Stock
could be subject to significant fluctuations in response to quarter-to-quarter
variations in the Company's operating results, announcements of technological
innovations or new products by the Company or its competitors, governmental
regulatory actions, general trends in the industry and other events. In
addition, the stock market in recent years has experienced price and volume
fluctuations that have particularly affected the market prices of many
technology companies and that have often been unrelated or disproportionate to
the operational performance of these companies. These fluctuations, as well as
general economic and market conditions, could materially and adversely affect
the market price of the Common Stock. See "Price Range of Common Stock."
SHARES ELIGIBLE FOR FUTURE SALE; POTENTIAL FOR ADVERSE EFFECT ON STOCK
PRICE. Sales of substantial amounts of Common Stock in the public market could
have a material adverse impact on the market price of the Common Stock. Upon
completion of this offering, substantially all shares of the Company's Common
Stock will be freely tradeable without restriction, or may be sold pursuant to
Rule 144 under the Securities Act of 1933, as amended (the "Securities Act").
The Company, and Directors, executive officers and the Selling Shareholders
beneficially holding an aggregate of 732,340 shares of Common Stock as of August
26, 1996 (excluding shares offered hereby other than the shares subject to the
Underwriters' over-allotment option), have agreed that they will not sell any
Common Stock without the prior consent of Volpe, Welty & Company for a period of
120 days from the date of this Prospectus (the "Lockup Period"). Upon expiration
of the Lockup Period, these shares will become eligible for immediate sale,
subject in certain cases to volume and other limitations under Rule 144.
Additionally, at August 26, 1996, options to purchase 444,497 shares of Common
Stock were outstanding, of which options to purchase 274,497 shares were
exercisable. The Company has filed registration statements to permit the shares
acquired on exercise of options to be freely tradeable. See "Shares Eligible for
Future Sale" and "Underwriting."
ANTI-TAKEOVER PROVISIONS. Certain provisions of the Company's Articles of
Incorporation and By-laws may be regarded as "anti-takeover" provisions because
they could have the effect of limiting the ability of other entities or persons
to acquire control of the Company. The existence of these provisions could
materially and adversely affect the market price of the Common Stock. See
"Description of Capital Stock -- Anti-Takeover Effects of Missouri Law and
Articles of Incorporation and By-laws."
9
<PAGE>
THE COMPANY
The Company was organized in 1979 as a Missouri corporation. The Company's
principal executive office is located at 424 South Woods Mill Road, Suite 200,
Chesterfield, Missouri 63017 and its telephone number is (314) 579-7900. The
Company also has a branch office in London.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,025,000 shares
offered by the Company hereby (after deducting estimated underwriting discounts
and commissions and estimated offering expenses), at an assumed offering price
of $15.25 per share, are estimated to be approximately $28.7 million ($31.7
million if the Underwriters' over-allotment option is exercised in full). The
Company will not receive any of the proceeds from the sale of shares by the
Selling Shareholders. See "Principal and Selling Shareholders."
The Company intends to use the net proceeds from the offering for working
capital and general corporate purposes, including sales force expansion, product
development and acquisitions of complementary businesses and technologies. No
material acquisitions are currently pending. The net proceeds will be invested
by the Company in short-term, interest-bearing, investment grade securities
until used for such purposes.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
Pursuant to the Company's line of credit agreement, the Company may not declare
or pay any dividends without the prior written consent of the lender thereunder.
The Company anticipates that it will retain all of its net earnings or available
funds, if any, for use in the operation and expansion of its business and does
not anticipate paying any cash dividends on its Common Stock in the foreseeable
future.
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company is traded on the Nasdaq National Market
under the symbol "CITA." The following table sets forth the high and low sales
prices of the Common Stock for the periods indicated, as reported on the Nasdaq
National Market:
<TABLE>
<CAPTION>
HIGH LOW
---------- ----------
<S> <C> <C>
FISCAL 1995
Quarter ended June 30, 1994.................................................................... $ 53/4 $ 41/2
Quarter ended September 30, 1994............................................................... 7 47/8
Quarter ended December 31, 1994................................................................ 8 65/8
Quarter ended March 31, 1995................................................................... 75/8 43/8
FISCAL 1996
Quarter ended June 30, 1995.................................................................... $ 57/8 $ 43/8
Quarter ended September 30, 1995............................................................... 63/8 5
Quarter ended December 31, 1995................................................................ 53/4 35/8
Quarter ended March 31, 1996................................................................... 143/4 51/2
FISCAL 1997
Quarter ended June 30, 1996.................................................................... $ 201/2 $ 133/8
Quarter ended September 30, 1996 (through August 27, 1996)..................................... 201/4 9
</TABLE>
On August 27, 1996, the closing sales price of the Common Stock on the
Nasdaq National Market was $15.25 per share.
As of June 24, 1996, there were 181 holders of record of Common Stock.
10
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996 on an actual basis and as adjusted to reflect the estimated net
proceeds to the Company from the sale of the 2,025,000 shares of Common Stock
offered by the Company hereby at an assumed offering price of $15.25 per share.
The table should be read in conjunction with the Consolidated Financial
Statements and Notes thereto and other consolidated financial data of the
Company appearing elsewhere in this Prospectus. See "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C>
Long-term debt, less current portion...................................................... $ 414 $ 414
--------- -----------
Shareholders' equity:
Common Stock, $0.10 par value; 10,000,000 shares authorized; 3,756,936 shares issued and
outstanding; 5,781,936 shares issued and outstanding, as adjusted (1).................. 376 578
Additional paid-in capital................................................................ 6,190 34,659
Retained earnings......................................................................... 6,830 6,830
Equity adjustment from foreign currency translation....................................... (10) (10)
--------- -----------
Total shareholders' equity.............................................................. 13,386 42,057
--------- -----------
Total capitalization.................................................................. $ 13,800 $ 42,471
--------- -----------
--------- -----------
</TABLE>
- ---------
(1) Excludes 202,017 shares of Common Stock available for grant under the
Company's stock option plans and 291,497 shares which were subject to
outstanding options as of June 30, 1996. See "Principal and Selling
Shareholders" and "Shares Eligible for Future Sale."
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data as of and for each of the five
years in the period ended March 31, 1996 has been derived from the audited
consolidated financial statements of the Company, which have been audited by
Price Waterhouse LLP. The consolidated financial data as of June 30, 1996 and
for the three months ended June 30, 1995 and 1996, are derived from the
unaudited consolidated financial statements of the Company which have been
prepared on a basis consistent with the audited consolidated financial
statements of the Company, and, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial position and results of operations for the periods
presented. The results of operations for the three months ended June 30, 1996
are not necessarily indicative of the results of operations that may be expected
for the fiscal year ending March 31, 1997 or any other period subsequent to June
30, 1996. The selected consolidated financial data is qualified in its entirety
by and should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated Financial
Statements and related Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
--------------------------------------------------------- --------------------
1992(1) 1993(1) 1994 1995 1996 1995 1996
----------- ----------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net system sales and service revenue:
System sales.................................. $ 11,186 $ 14,102 $ 14,767 $ 15,338 $ 16,216 $ 3,447 $ 4,183
Service revenue............................... 3,756 5,067 6,763 8,027 8,835 2,188 2,479
----------- ----------- --------- --------- --------- --------- ---------
Total revenue............................... 14,942 19,169 21,530 23,365 25,051 5,635 6,662
----------- ----------- --------- --------- --------- --------- ---------
Cost of products and services sold:
System sales.................................. 5,478 5,995 8,161 9,128 8,532 1,931 2,163
Service revenue............................... 1,293 1,555 2,362 2,742 2,538 685 557
----------- ----------- --------- --------- --------- --------- ---------
Total cost of products and services sold.... 6,771 7,550 10,523 11,870 11,070 2,616 2,720
----------- ----------- --------- --------- --------- --------- ---------
Gross profit.................................... 8,171 11,619 11,007 11,495 13,981 3,019 3,942
----------- ----------- --------- --------- --------- --------- ---------
Research and development expense................ 538 503 1,296 1,661 1,672 447 602
Selling and administrative expenses............. 5,308 7,450 7,718 9,212 8,711 1,926 2,289
Restructuring of operations..................... -- -- -- 3,426(2) -- -- --
Office consolidation and relocation expense..... -- -- -- -- 1,380(3) 1,000 --
----------- ----------- --------- --------- --------- --------- ---------
Total operating expenses.................... 5,846 7,953 9,014 14,299 11,763 3,373 2,891
----------- ----------- --------- --------- --------- --------- ---------
Operating income (loss)......................... 2,325 3,666 1,993 (2,804) 2,218 (354) 1,051
Other income, net............................... 95 134 154 102 95 29 15
----------- ----------- --------- --------- --------- --------- ---------
Income (loss) before income taxes............... 2,420 3,800 2,147 (2,702) 2,313 (325) 1,066
Provision (benefit) for income taxes............ 863 1,502 808 (877) 901 (127) 416
----------- ----------- --------- --------- --------- --------- ---------
Net income (loss)............................... $ 1,557 $ 2,298 $ 1,339 $ (1,825) $ 1,412 $ (198) $ 650
----------- ----------- --------- --------- --------- --------- ---------
----------- ----------- --------- --------- --------- --------- ---------
Primary and fully diluted net income (loss) per
share.......................................... $ .57 $ .73 $ .36 $ (.49) $ .37 $ (0.05) $ 0.16
----------- ----------- --------- --------- --------- --------- ---------
----------- ----------- --------- --------- --------- --------- ---------
Weighted average number of shares of Common
Stock outstanding -- fully diluted............. 2,711 3,166 3,704 3,688 3,780 3,712 3,957
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
--------------------------------------------------------- -------------
1992 1993 1994 1995 1996 1996
----------- ----------- --------- --------- --------- -------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 2,068 $ 7,807 $ 4,817 $ 2,634 $ 2,146 $ 1,708
Working capital................................... 2,003 9,113 7,567 6,275 7,908 8,413
Total assets...................................... 9,151 17,337 19,119 18,890 21,257 21,106
Long-term debt, less current portion.............. 13 88 278 540 450 414
Shareholders' equity.............................. 3,579 11,372(4) 12,726 11,240 12,614 13,386
</TABLE>
- ------------
(1) On December 11, 1992, the Company issued 596,559 shares of its Common Stock
in exchange for all of the outstanding shares of HMDS. The merger was
accounted for as a pooling of interests, and accordingly, the consolidated
financial statements of the Company for periods up to the date of
consummation of the merger have been restated to include the accounts of
HMDS.
(2) In January 1995, the Company initiated a plan to restructure its operations
in order to reduce its cost structure. As a result, the Company incurred a
restructuring charge of $3.4 million in the fourth quarter of fiscal 1995.
See Note 4 of Notes to Consolidated Financial Statements.
(3) In June 1995, the Company decided to consolidate the operations of its
Madison, Wisconsin facility into its St. Louis, Missouri headquarters and
recorded a charge of $1.4 million for the related costs in the first, third
and fourth quarters of fiscal 1996. The consolidation and relocation have
been substantially completed. See Note 3 of Notes to Consolidated Financial
Statements.
(4) Amount reflects the net proceeds of approximately $5.0 million from the
Company's October 1992 initial public offering of Common Stock.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. WHEN USED
IN THE FOLLOWING DISCUSSION, THE WORDS "BELIEVES," "ANTICIPATES," "INTENDS,"
"EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES WHICH
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED, INCLUDING,
BUT NOT LIMITED TO, THOSE SET FORTH IN "RISK FACTORS." 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.
OVERVIEW
CITATION designs, develops, markets and supports patient-centered clinical
and financial information systems for hospitals, clinics, physician groups and
emerging IDNs. The Company offers a comprehensive suite of products using open
client/server architecture to meet a broad range of the information systems
needs of the healthcare industry. These products integrate patient care
processes within the enterprise and provide community-wide patient registration
and identification throughout the IDN. The Company's systems are modular,
scalable, and allow clients to leverage their investments in existing systems.
Individual components of the Company's systems can function independently,
giving clients the ability to build their system over time and to integrate
existing software which is meeting their current needs. CITATION's systems are
installed in nearly 600 institutions ranging in size from fewer than 100 beds to
more than 1,000 beds. CITATION markets its products directly in the United
States, Canada, the United Kingdom, and Europe as well as through distribution
partners in the Middle East, the Far East, and Latin America.
The Company generates revenues from the sale of information systems and
services. System sales consist of software licenses, related hardware,
installation and training, and the sale of third-party software. Hardware
revenues are generated from sales of third-party manufactured hardware typically
sold in conjunction with the Company's software. Service revenue includes
maintenance and support services.
The sales cycle for the Company's systems is typically six to nine months
from initial contact to contract execution. Depending upon the combination of
products purchased and the installation schedule, installation typically
requires six to 12 months. Revenue from systems sales is recognized upon
shipment to the client provided that no significant vendor obligations remain
and collection of the related receivable is deemed probable. Revenue related to
the installation is recognized as the work is performed. Service revenue is
recognized ratably over the term of the contract period. Revenue recognized from
the sale of hardware as a percentage of total revenue has declined from 18.7% in
fiscal 1995 to 14.6% in fiscal 1996 because of increased software sales and also
because the Company's clients are buying hardware directly from third parties.
Cost of products and services sold includes 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 expenses. Cost of
service revenue includes all client service expenses plus an allocation of
certain other overhead expenses.
Research and development expenses include salaries and expenses related to
development and documentation of software systems, reduced by capitalized
software development costs. Software development costs are expensed until such
time as technological feasibility is established and then are capitalized in
compliance with Statement of Financial Accounting Standards No. 86 "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed."
Sales and marketing expenses include salaries, commissions, advertising,
trade show costs, and user group costs related to the sale and marketing of the
Company's systems. General and administrative expenses include salaries and
expenses for the corporate administration, finance, legal, and human resources,
as well as profit sharing, bonuses and insurance.
13
<PAGE>
In January 1995, J. Robert Copper became Chairman and Chief Executive
Officer of the Company. From that time until September 1995, the Company
recruited and reorganized its senior management to improve its operating
performance and position the Company for future growth.
In January 1995, the Company initiated a plan to restructure its operations
in order to reduce its cost structure. As a result, the Company incurred a
restructuring charge of $3.4 million in the fourth quarter of fiscal 1995. See
Note 4 of Notes to Consolidated Financial Statements for details of the
restructuring charge.
In June 1995, the new management team decided to consolidate the operations
of its Madison, Wisconsin facility into its St. Louis, Missouri headquarters.
During the fiscal year ended March 31, 1996, the Company recorded a charge of
$1.4 million for the related costs. The consolidation and relocation has been
substantially completed. See Note 3 of the Notes to Consolidated Financial
Statements for details of the office consolidation and relocation charge.
RECENT DEVELOPMENTS
On August 26, 1996, the Company acquired a reimbursement management system
from Computer Systems Excellence, Inc. The Company will market the product under
the name C-MAX Contract Management System. C-MAX is a Windows-based software
product that provides information needed to manage managed care contracts and
transactions with indemnity payors. The system consists of two integrated
modules: a reimbursement management module that documents and tracks the
management and profitability of contracts, prospective payments and claims; and
a systems management module that controls the link to the healthcare provider's
patient accounting system.
The Company has announced it will take a $1.2 million pre-tax charge against
earnings in the second quarter of fiscal year 1997 for restructuring its
operations in the United Kingdom. As part of its ongoing efforts to reduce costs
and improve operating efficiency, the Company will consolidate development and
other functions previously performed in the U.K. into its St. Louis headquarters
and write off capitalized software related to discontinued development projects.
The restructuring will have an estimated impact of $0.19 a share on second
quarter earnings and require a cash outlay of approximately $300,000,
principally for severance and closure costs.
14
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's Consolidated Statement of Operations expressed as a
percentage of total revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
-------------------------------------- ----------------------------
1994 1995 1996 1995 1996
----------- ------------ ----------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net system sales and service revenue:
System sales....................................... 68.6% 65.6% 64.7% 61.2% 62.8%
Service revenue.................................... 31.4 34.4 35.3 38.8 37.2
----- ----- ----- ----- -----
Total revenue.................................... 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
Cost of products and services sold:
System sales....................................... 37.9 39.1 34.1 34.3 32.5
Service revenue.................................... 11.0 11.7 10.1 12.2 8.4
----- ----- ----- ----- -----
Total cost of products and services sold......... 48.9 50.8 44.2 46.5 40.9
----- ----- ----- ----- -----
Gross profit......................................... 51.1 49.2 55.8 53.5 59.1
----- ----- ----- ----- -----
Research and development expense..................... 6.0 7.1 6.7 7.9 9.0
Selling and administrative expenses.................. 35.8 39.4 34.8 34.2 34.4
Restructuring of operations.......................... -- 14.7 -- -- --
Office consolidation and relocation expense.......... -- -- 5.5 17.7 --
----- ----- ----- ----- -----
Total operating expenses......................... 41.8 61.2 47.0 59.8 43.4
----- ----- ----- ----- -----
Operating income (loss).............................. 9.3 (12.0) 8.8 (6.3) 15.8
Other income (expense):
Interest income.................................... 0.8 0.8 0.6 0.7 0.5
Interest expense................................... (0.2) (0.3) (0.3) (0.2) (0.3)
Other, net......................................... 0.1 -- 0.1 0.1 --
----- ----- ----- ----- -----
Income (loss) before income taxes.................... 10.0 (11.6) 9.2 (5.7) 16.0
Provision (benefit) for income taxes................. 3.8 (3.8) 3.6 (2.3) 6.2
----- ----- ----- ----- -----
Net income (loss).................................... 6.2% (7.8)% 5.6% (3.4)% 9.8%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
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
3 of the Notes to Consolidated Financial Statements for further information.
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. Consistent 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
15
<PAGE>
1996, it did exceed the approximate average for fiscal 1996. This higher average
system 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 revenue 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 revenue 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 release
the Windows and Windows NT versions of the majority of its current product line
during the next twelve months. 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 expenses increased $0.4 million to $2.3 million in
the first quarter of fiscal 1997, 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 3 to the Notes to the Consolidated Financial
Statements for details of the office consolidation and relocation changes.
OPERATING INCOME. Operating income increased from $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%
to 15.8% in the first quarter of fiscal 1996 and 1997, respectively, reflecting
a shift of the product mix to more profitable products.
16
<PAGE>
COMPARISON OF FISCAL YEAR ENDED MARCH 31, 1995 TO FISCAL YEAR ENDED MARCH 31,
1996
REVENUE. Total revenues increased 7.2% from $23.4 million in fiscal 1995 to
$25.1 million in fiscal 1996 due to a 5.7% increase in system sales, and a 10.1%
increase in service revenue. Revenues from domestic operations were flat in
fiscal 1996. However, revenues increased at accelerated rates during the third
and fourth quarters of fiscal 1996. The Company believes that the results for
the first six months of the year were negatively impacted by (i) a management
reorganization within the Company, (ii) the refocusing of its sales efforts
toward larger, fully integrated hospital information systems sales and (iii) the
consolidation of its domestic operations. The increased revenues in the third
and fourth quarters are due to this refocusing of sales efforts in the United
States and increased efforts to sell the products internationally. International
revenues increased 119% to $3.1 million in fiscal 1996. This increase is due to
several key system sales to hospitals in England, Ireland and the Netherlands.
Domestic and international sales represented 87.8% and 12.2% of total revenues,
respectively, in fiscal 1996.
System sales increased from $15.3 million in fiscal 1995 to $16.2 million in
fiscal 1996. The 5.7% increase in system sales was primarily attributable to
additional revenue generated from international operations. While the Company
sold fewer systems in fiscal 1996 as compared to fiscal 1995, the average system
contract value was higher in fiscal 1996. The higher average system contract
value reflects the growth in the sale of more comprehensive systems. The average
system contract value increased from approximately $180,000 in fiscal 1995 to
approximately $280,000 in 1996. This trend was especially evident in the fourth
quarter of fiscal year 1996 during which the average systems contract increased
166% from $154,000 during the fourth quarter of fiscal year 1995 to $410,000.
System sales represented 65.6% and 64.7% of total revenues in fiscal years 1995
and 1996, respectively.
Service revenue increased from $8.0 million in fiscal 1995 to $8.8 million
in fiscal 1996. The 10.1% increase was primarily due to additional service
revenue from the growth in the client base and renewals of maintenance contracts
from existing clients. Service revenue represented 34.4% and 35.3% of total
revenues in fiscal years 1995 and 1996, respectively.
COST OF PRODUCTS AND SERVICES SOLD AND GROSS PROFIT. Total cost of products
and services sold decreased from $11.9 million in 1995 to $11.1 million in 1996.
The total cost of products and services sold decreased from 50.8% of total
revenues in fiscal 1995 to 44.2% in fiscal 1996. The decrease was primarily due
to the decrease in hardware costs as a percentage of total revenues and a
decrease in client service expense reflecting the closing of the Madison office.
The decreases in hardware costs and client service expenses were offset by a
slight increase in amortization of capitalized software costs for the year.
Software amortization costs of $1.7 million in fiscal 1995 and $1.8 million in
fiscal 1996 represented 14.4% and 16.2%, respectively, of total costs of
products and services sold for fiscal years 1995 and 1996.
Gross profit increased $2.5 million from $11.5 million in fiscal 1995 to
$14.0 million in fiscal 1996. Gross profit as a percentage of total revenues
increased from 49.2% in fiscal 1995 to 55.8% in fiscal 1996. The increase was
primarily attributable to higher average per system contract value and a lower
hardware component as a percentage of the system contract value. Several system
sales in fiscal 1996 were software-only sales, which have a higher gross profit
percentage than similarly priced systems which include both software and
hardware.
RESEARCH AND DEVELOPMENT EXPENSES. Total outlays for software development
for fiscal years 1995 and 1996 were $5.3 million and $4.4 million, respectively,
representing 22.8% and 17.6% of total revenues for those periods. The Company
capitalized $3.6 million in fiscal 1995 and $2.6 million in fiscal 1996,
resulting in research and development expense of $1.7 million for both fiscal
years 1996 and 1995. The decrease of $1.0 million in total outlays for software
development was primarily due to the consolidation of domestic development into
one location. Software development costs for domestic operations were $3.5
million in fiscal year 1996 of which $2.0 million was capitalized.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses as
a percentage of total revenues decreased from 39.4%, or $9.2 million in fiscal
1995, to 34.8%, or $8.7 million in fiscal 1996. The
17
<PAGE>
decrease in selling and administrative expenses as a percentage of total
revenues resulted from consolidating domestic operations in St. Louis. The $0.5
million decrease is also due to lower costs associated with the support of both
domestic and international operations.
OFFICE CONSOLIDATION AND RELOCATION. A charge of $1.4 million was recorded
in fiscal 1996 to provide for costs of the consolidation of facilities,
settlement of related employee claims and the relocation of certain employees
and equipment due to the consolidation of domestic operations in St. Louis.
OPERATING INCOME. Operating income increased from $0.6 million, excluding
restructuring charges of $3.4 million in fiscal 1995, to $3.6 million, excluding
$1.4 million in office consolidation and relocation charges in fiscal 1996. The
increase in operating income is due to the growth in revenues and the reduction
in the cost of sales and selling and administrative expenses. Including the
above non-recurring charges, the Company incurred a loss of $2.2 million in
fiscal 1995 compared with operating income of $2.8 million in fiscal 1996.
INCOME TAXES. The Company's effective income tax (benefit) rate was (32.5)%
in fiscal 1995 versus 39.0% in fiscal 1996. The fiscal 1995 rate reflects the
non-deductibility for tax purposes of a relatively minor portion of the asset
write-offs included in the restructuring costs recorded during the year.
COMPARISON OF FISCAL YEAR ENDED MARCH 31, 1994 TO FISCAL YEAR ENDED MARCH 31,
1995
REVENUE. Total revenues increased 8.5% from $21.5 million in fiscal 1994 to
$23.4 million in fiscal 1995 due to a 3.9% increase in system sales and an 18.7%
increase in service revenue.
System sales increased from $14.8 million in fiscal 1994 to $15.3 million in
fiscal 1995. The 3.9% increase in system sales was primarily attributable to
additional revenue generated from international operations. While the Company
sold fewer systems in fiscal 1995 as compared to fiscal 1994, the average system
contract value was higher in fiscal 1995. The higher average system contract
value reflects the growth in the sale of systems consisting of clinical
information systems. In fiscal 1994 less than 10% of system sales (as measured
by the number of contracts sold) consisted of clinical information systems,
versus 20% in fiscal 1995. System sales represented 68.6% and 65.6% of total
revenues in fiscal years 1994 and 1995, respectively. Revenue from international
sales represented 3.2% and 6.0% of total revenues in fiscal years 1994 and 1995,
respectively.
Service revenue increased from $6.8 million in fiscal 1994 to $8.0 million
in fiscal 1995. The 18.7% increase was primarily due to additional service
revenue from the growth in the client base and renewals of service contracts
from existing clients. Service revenue represented 31.4% and 34.4% of total
revenues in fiscal years 1994 and 1995, respectively.
COST OF PRODUCTS AND SERVICES SOLD AND GROSS PROFIT. For fiscal 1994 and
1995, total cost of products and services sold were $10.5 million and $11.9
million, respectively, for a 12.8% increase in fiscal 1995. The total cost of
products and services sold increased from 48.9% of total revenues in fiscal 1994
to 50.8% in fiscal 1995. The increase was primarily due to the increase in
amortization of capitalized software costs for the year, related to the increase
in product development expenditures over the past two years, and to an increase
in client service expenses related to additional employees hired to support the
growth in the client base. The increases in amortization costs and client
service expenses were offset by a slight decrease in hardware costs as a
percentage of total revenues. Software amortization costs of $1.3 million in
fiscal 1994 and $1.7 million in fiscal 1995 represented 12.1% and 14.4%,
respectively, of total costs of products and services sold for fiscal years 1994
and 1995.
Gross profit increased $0.5 million from $11.0 million in fiscal 1994 to
$11.5 million in fiscal 1995. While gross profit increased, gross profit as a
percentage of total revenues decreased from 51.1% in fiscal 1994 to 49.2% in
fiscal 1995. The decrease in gross profit as a percentage of total revenues
primarily reflects the fact that the increases in software amortization costs
(34.3%), and client service expenses (15.2%) outpaced the increase in total
revenues (8.5%) in fiscal 1995.
18
<PAGE>
RESEARCH AND DEVELOPMENT COSTS. Total outlays for software development for
fiscal years 1994 and 1995 were $3.7 million and $5.3 million, respectively,
representing 17.0% and 22.6% of total revenues for those periods. The Company
capitalized $2.4 million in fiscal 1994 and $3.6 million in fiscal 1995,
resulting in research and development expense of $1.3 million and $1.7 million
for fiscal years 1994 and 1995, respectively. The increase of $1.7 million in
total outlays for software development was primarily due to costs associated
with allocating more resources to the development of new products, such as
Windows-based products and enhancements to existing products. See also the
discussion of restructuring of operations following.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses as
a percentage of total revenues increased from 35.8%, or $7.7 million in fiscal
1994 to 39.4% or $9.2 million in fiscal 1995. The increase in selling and
administrative expenses as a percentage of total revenues resulted from selling
and administrative expenses increasing at a greater rate (19.4%) than the
increases in total revenues (8.5%). Total selling and administrative expenses
increased $1.5 million primarily due to costs associated with higher selling and
administrative costs to support international and domestic operations. In
addition, the increase is attributable to increases in facilities and equipment
expenses resulting from moving to new offices, as well as increases to ongoing
expenses related to insurance, taxes, professional services, travel, salaries
and benefits.
RESTRUCTURING OF OPERATIONS. During the fourth quarter of fiscal 1995, the
Company incurred a restructuring charge of $3.4 million. In January 1995, the
Company initiated a plan to restructure its operations in order to reduce its
cost structure and remain competitive. The restructuring charge includes $2.8
million related primarily to the write-off of capitalized software costs,
inventory and intangible assets associated with discontinued product lines, and
$0.6 million for severance and related benefit costs associated with changes in
the Company's executive management. The restructuring required a cash outlay of
approximately $0.3 million in fiscal 1995 and required a cash outlay of
approximately $0.3 million in fiscal 1996.
OPERATING INCOME. Operating income for fiscal 1994 was $2.0 million
compared to $0.6 million in fiscal 1995 (excluding restructuring charges of $3.4
million in 1995). The decrease in operating income before restructuring costs of
$1.4 million reflected growth in revenue at a slower rate than growth in various
expenses, including increased product development expenditures and higher
selling and administrative costs to support the international and domestic
operations.
INCOME TAXES. The Company's effective income tax (benefit) rate was 37.6%
in fiscal 1994 versus (32.5)% in fiscal 1995. The fiscal 1995 rate reflects the
non-deductibility for tax purposes of a relatively minor portion of the asset
write-offs described in restructuring of operations above.
19
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly financial data
for each of the quarters for fiscal 1995 and 1996 and the first fiscal quarter
of 1997. This quarterly unaudited information, in the opinion of the Company's
management, is a fair presentation of the information for the periods presented.
The results of operations for any quarter are not necessarily indicative of
results for any future quarter.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1994 1994 1994 1995 1995 1995 1995
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net system sales and service
revenue:
System sales...................... $ 3,806 $ 4,810 $ 3,361 $ 3,361 $ 3,447 $ 2,404 $ 4,293
Service revenue................... 1,911 2,025 1,991 2,100 2,188 2,240 2,164
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues.................. 5,717 6,835 5,352 5,461 5,635 4,644 6,457
----------- ----------- ----------- ----------- ----------- ----------- -----------
Cost of products and services sold:
System sales...................... 2,128 2,405 2,078 2,517 1,931 1,731 2,003
Service revenue................... 621 594 639 888 685 657 602
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total cost of products and
services sold.................. 2,749 2,999 2,717 3,405 2,616 2,388 2,605
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit........................ 2,968 3,836 2,635 2,056 3,019 2,256 3,852
----------- ----------- ----------- ----------- ----------- ----------- -----------
Research and development............ 329 421 403 508 447 479 389
Selling and administrative.......... 2,318 2,479 2,546 1,869 1,926 1,767 2,062
Restructuring of operations......... -- -- -- 3,426 -- -- --
Office consolidation and
relocation......................... -- -- -- -- 1,000 -- 58
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses........ 2,647 2,900 2,949 5,803 3,373 2,246 2,509
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss)............. 321 936 (314) (3,747) (354) 10 1,343
Other income, net................... 31 25 14 32 30 23 3
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes... 352 961 (300) (3,715) (324) 33 1,346
Provision (benefit) for income
taxes.............................. 137 375 (118) (1,271) (127) 13 525
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)................... $ 215 $ 586 $ (182) $ (2,444) $ (197) $ 20 $ 821
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Primary and fully diluted net income
(loss) per share................... $ .06 $ .16 $ (.05) $ (.66) $ (.05) $ .01 $ .22
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
MAR. 31, JUNE 30,
1996 1996
----------- -----------
<S> <C> <C>
Net system sales and service
revenue:
System sales...................... $ 6,072 $ 4,183
Service revenue................... 2,243 2,479
----------- -----------
Total revenues.................. 8,315 6,662
----------- -----------
Cost of products and services sold:
System sales...................... 2,867 2,163
Service revenue................... 594 557
----------- -----------
Total cost of products and
services sold.................. 3,461 2,720
----------- -----------
Gross profit........................ 4,854 3,942
----------- -----------
Research and development............ 357 602
Selling and administrative.......... 2,956 2,289
Restructuring of operations......... -- --
Office consolidation and
relocation......................... 322 --
----------- -----------
Total operating expenses........ 3,635 2,891
----------- -----------
Operating income (loss)............. 1,219 1,051
Other income, net................... 39 15
----------- -----------
Income (loss) before income taxes... 1,258 1,066
Provision (benefit) for income
taxes.............................. 490 416
----------- -----------
Net income (loss)................... $ 768 $ 650
----------- -----------
----------- -----------
Primary and fully diluted net income
(loss) per share................... $ .20 $ 0.16
----------- -----------
----------- -----------
</TABLE>
The Company's quarterly revenues and results of operations have varied
significantly in the past, and are likely to vary in the future as a result of a
number of factors, including: the volume and timing of systems sales and
installations; the Company's internal management changes and facilities
consolidation efforts; the timing of client acceptances; the length and
complexity of the systems sales and installation cycles; seasonal buying trends
as a result of clients' annual purchasing and budgeting practices; and the
increased size of the average contract. While the Company expects that these
variations will continue for the foreseeable future, it believes that the impact
of the Company's internal changes will be less dramatic. However, the timing of
revenue recognition is difficult to forecast because the Company's systems sales
and installation cycles are relatively long and frequently depend on factors
such as the size and scope of installations and general economic conditions.
Also, because a significant percentage of the Company's total expenses,
particularly employee compensation, is relatively fixed, variations in timing of
systems sales and installations can cause significant variations in operating
results from quarter to quarter. If total revenues are below expectations in any
period, the Company's inability to adjust spending to compensate fully for the
lower revenues may magnify the adverse effect of such a shortfall on the
Company's results of operations. Accordingly, period-to-period comparisons of
revenues and results of operations may not necessarily be meaningful and are not
necessarily indicative of future results.
20
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is cash flow from operations. At
March 31, 1995, the Company had cash and cash equivalents of $2.6 million as
compared to $2.1 million at March 31, 1996 and $1.7 million at June 30, 1996.
The Company generated cash from operations of $2.4 million, $2.4 million and
$2.7 million in fiscal years of 1994, 1995 and 1996, respectively. Total cash
decreased $2.2 million in fiscal 1995. The decrease in fiscal 1995 was primarily
due to $4.8 million used in investing activities, including $3.6 million for
capitalized software offset by cash provided by operations. Fiscal 1995 cash
flow from operating activities includes a non-cash restructuring charge of $2.6
million.
For the year ended March 31, 1996, the Company generated $2.7 million in
cash from operating activities, and used $3.0 million in investing activities
(including $2.6 million for capitalized software development and $0.4 million
for capital expenditures). Cash from investing activities was immaterial.
For the fiscal quarter ended June 30, 1996, the cash balance decreased by
$0.4 million, primarily due to $0.7 million used for software development costs
and $0.2 million used for capital expenditures, offset by $0.4 million generated
from operating activities.
As of June 30, 1996, the Company had a line of credit agreement with a bank.
The line of credit allows the Company to borrow up to $1.0 million with interest
at the bank'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 St. Louis, Missouri,
which expires in May 2004.
The Company believes that its cash and cash equivalents, together with its
current borrowing facilities, cash generated from operations and cash proceeds
from this offering 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.
INFLATION AND CHANGING PRICES
The Company believes inflation has not had a material effect on the
Company's operations or its financial condition.
NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("FAS 123"), which addresses accounting for stock options,
purchase and award plans. FAS 123 specifies that companies utilize either the
"fair value based method," or the "intrinsic value based method" for valuing
stock options granted. The Company will adopt FAS 123 during the year ending
March 31, 1997, and expects to utilize the "intrinsic value based method" for
valuing stock options granted. The Company anticipates that when adopted, FAS
123 will have no material effect on its consolidated financial position or
consolidated results of operations.
21
<PAGE>
BUSINESS
INTRODUCTION
CITATION designs, develops, markets and supports patient-centered clinical
and financial information systems for hospitals, clinics, physician groups and
emerging IDNs. The Company offers a comprehensive suite of products using open
client/server architecture to meet a broad range of the information systems
needs of the healthcare industry. The Company's products integrate patient care
processes within the enterprise and provide community-wide patient registration
and identification throughout the IDN. The Company's systems are modular,
scalable and allow clients to leverage their investments in existing systems.
Individual components of the Company's systems can function independently,
giving clients the ability to build their system over time and to integrate
existing software which is meeting their current needs. CITATION's systems are
installed in nearly 600 institutions ranging in size from under 100 beds to over
1,000 beds. CITATION markets its products directly in the United States, Canada,
the United Kingdom and Europe as well as through distribution partners in the
Middle East, the Far East and Latin America.
INDUSTRY BACKGROUND
The United States healthcare industry is undergoing rapid change. In 1995,
healthcare expenses in the United States approximated $1.0 trillion.
Historically, reimbursement for healthcare services has been based on a
fee-for-service model of payment. With increasing pressure to reduce costs,
managed care organizations and other payors are shifting the economic risk for
the delivery of care to providers through alternative reimbursement models,
including capitation and fixed fees. As a result, healthcare providers such as
hospitals, multi-specialty physician groups, laboratories, pharmacies, home
health services and nursing homes are integrating horizontally and vertically to
create IDNs. IDNs are designed to serve all of the healthcare needs of regional
populations while achieving economies of scale.
In order to lower healthcare delivery costs while maintaining or improving
the quality of patient care, providers need access to detailed clinical and
management information to: (i) manage the patient care process throughout the
IDN; (ii) automate patient care documentation; (iii) compare care provider
performance and clinical and cost outcomes both within the organization and to
established norms; (iv) monitor performance under managed care contracts; (v)
monitor practice patterns of care providers; (vi) measure the effectiveness of
new technologies and therapeutics; and (vii) support intra and inter facility
communication. A comprehensive healthcare information system must be able to
assist both clinicians and administrators in managing patient information
throughout the continuum of care.
Certain information-intensive departments of healthcare organizations, such
as laboratories, were early adopters of information systems in order to manage
workflow and clinical data. However, as multiple legacy systems have become
increasingly prominent on an enterprise-wide basis, the integration of these
systems across the enterprise has become more difficult given the different
architectures, platforms and operating systems of these information systems.
Integration and accessibility to patient information are increasingly
necessary for healthcare providers to operate efficiently and improve the
quality of patient care. For example, creation of a master patient index
represents a current information goal of many hospitals, providers and,
increasingly, IDNs. A master patient index ties together information about
individuals no matter where or how the data is stored, integrating data from
disparate systems and providing a universal electronic record of a patient's
demographic, clinical and payor history. In a 1996 survey conducted by Modern
Healthcare/Coopers & Lybrand that appears in the March 4, 1996 issue of MODERN
HEALTHCARE, 59% of hospital chief information officers surveyed identified
master patient indices as one of their top four information priorities, and 54%
identified remote access to data as another pressing information systems need.
Further, a majority of executives surveyed indicated that they either have or
are planning for operations that extend beyond the hospital to integrate other
elements of the healthcare system such as physicians, outpatient facilities and
payors.
As the need for readily accessible information throughout the healthcare
enterprise continues to grow, hospitals, providers and payors of all sizes are
faced with the challenge of implementing healthcare information
22
<PAGE>
systems that are scalable, capable of working with existing information systems
and flexible to adapt to changes in the healthcare marketplace. Also, such
systems must be patient-centered, integrating all aspects of managing the
healthcare process, such as clinical care, financial management and
administrative decision support.
THE CITATION SOLUTION
CITATION designs, develops, markets and supports products that address the
healthcare industry's need for patient-centered, fully integrated clinical and
financial information systems. CITATION's products are designed using a modular,
client/server approach, offering clients the ability to build their systems over
time and to allow existing legacy applications to interoperate with the
Company's products.
CURES, the Common User Registration Entry System, which the Company expects
to ship to clients in late calendar 1996, distributes demographic and health
assessment information across multiple disparate entities within healthcare
enterprises or IDNs. CURES serves as a central data repository, or master
patient index, for all patient demographic and health status information,
streamlining the intake process by eliminating repetitive registration questions
about medical history and eligibility information.
BUSINESS STRATEGY
CITATION's goal is to leverage its experience of over fifteen years with
client/server application solutions to become a leading provider of healthcare
information systems. The Company's strategy for achieving this goal includes the
following elements:
TARGET COMPREHENSIVE SYSTEM SALES. CITATION intends to focus its sales
efforts on selling larger, more comprehensive systems to larger hospitals and
IDNs to address a broad range of needs. The Company's new management team began
to implement this strategy in April 1995. In the fourth quarter of fiscal 1996
the average systems contract value was $410,000, an increase of 166% from the
fourth quarter of the previous year. The average system contract value for the
first quarter of fiscal 1997 was $291,000.
LEVERAGE EXISTING CLIENT BASE. With an installed base of over 600
facilities, the Company believes it has the potential to cross-sell additional
products to its existing clients because many of those clients have not
purchased all of the Company's products. CITATION's products are modular in
design and can be added over time as each client's needs expand and evolve.
EXPAND PRODUCT PORTFOLIO. The Company plans to expand its product line to
meet the evolving needs of its clients. The Company continually evaluates its
offerings to determine what additional products or enhancements are required by
the healthcare information systems marketplace and the Company develops and
enhances products internally to meet clients' needs. If the Company can purchase
or license proven products at reasonable cost on its chosen technology base it
will do so in order to avoid the time and expense involved in developing
products.
CAPITALIZE ON INTERNATIONAL MARKETS. CITATION believes that a significant
opportunity exists to expand the sales of its products in international markets.
Healthcare providers in a number of countries have not yet invested in
sophisticated information systems, and increasingly they are seeking to purchase
state-of-the art products, particularly clinical information systems. The
Company believes that its open, client/server architecture and modular, scalable
systems provide a cost effective solution to these markets. CITATION has
successfully entered several international markets through a combination of
direct sales and distribution arrangements.
EXPAND SERVICES. The Company intends to expand the range of strategic
client support and data interpretation services it provides in order to
strengthen relationships with clients. The Company intends to expand its
services to design and configure the architecture of a client's systems,
including networking, systems integration and data conversion. Further, the
Company intends to provide advice on data analysis to assist care providers in
evaluating their operations.
EXTEND BEYOND HOSPITALS TO THE IDN MARKET. Leveraging the opportunity
presented by CURES and the Company's other existing products as well as its
position in the hospital market, CITATION believes that it is well positioned to
broaden its product array to offer products which meet the complete needs of the
IDN. These opportunities include physician practice management, home health,
long-term care and specialty facilities, including psychiatric care, ambulatory
care and rehabilitation.
23
<PAGE>
PRODUCTS
CITATION has developed a comprehensive suite of products to manage
information in the healthcare enterprise. A client can purchase a comprehensive
system or can buy modules separately to match its individual needs. CITATION's
systems address the information needs of care providers and hospital
administrators by enabling joint access to clinical and cost information,
thereby facilitating cost containment, effective decision making and delivery of
high-quality care. CITATION offers products addressing four functional areas:
clinical, financial, community registration and decision support.
<TABLE>
<CAPTION>
NUMBER OF
SYSTEMS
PRODUCTS SALES(1) DESCRIPTION
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------------------------------
CLINICAL
C-COM 30 Communications and Clinical Database
Support System
C-LAB (2) 333 Laboratory Information Systems,
including the following submodules:
General Lab, Microbiology, Anatomical
Pathology and Blood Bank
C-CARE 30 Care Management System, including
nursing notes, care plans and clinical
pathways
C-RIS 26 Radiology Information System, including
the following submodules: Transcription
System, Film Tracking and Mammography
Submodule
C-MED (2) 15 Pharmacy Information System, including
medication dispensing and inventory
control
---------------------------------------------------------------------------------------------
FINANCIAL
C-FIS 120 Financial System for registration,
billing, accounts receivable and
collection management
C-GEN 90 General Accounting System, including
general ledger, payroll, accounts
payable, materials management and fixed
assets management
C-REC 100 Medical Records Systems, including
abstracting and case mix analysis
---------------------------------------------------------------------------------------------
COMMUNITY REGISTRATION
CURES 5 (3 ) Master Patient Index linking demographic
and health assessment information
throughout the integrated delivery
network
---------------------------------------------------------------------------------------------
DECISION SUPPORT
C-MIS (4) 1 Management Information System providing
analytical and decision support
information for an enterprise's
operations
<CAPTION>
<S> <C>
</TABLE>
- ------------------------
(1) This table is as of July 19, 1996 and does not include the recently acquired
C-MAX product.
(2) The blood bank submodule and C-MED are licensed by the Company from third
parties.
(3) Expected to be shipped in late calendar 1996.
(4) Until May 1996 C-MIS was included with certain of the Company's other
systems.
24
<PAGE>
CLINICAL
C-CIS is CITATION's clinical information system. It currently consists of
five main components, each of which can operate independently or as part of a
fully integrated system.
C-COM captures and tracks comprehensive patient clinical information and
routes that information among departments or systems in the healthcare
organization, enabling providers to evaluate quality of care, productivity
and cost-effectiveness of services. C-COM accepts orders from and displays
the resulting information at any networked PC location where patient care is
being delivered, such as a nursing station or even the bedside. C-COM also
supports hand-held, wireless technology. C-COM is currently available for
DOS, Windows and Windows NT. Depending on the modules purchased, its price
range is $30,000 to $80,000.
C-LAB (marketed as LAB 2000 in the United Kingdom) provides
comprehensive laboratory automation solutions for clinics, single and
multiple site hospitals and clinical and research laboratories. C-LAB
automates order entry and dissemination of results and interfaces with care
providers' financial systems. C-LAB consists of General Lab, Microbiology,
Anatomical Pathology and Blood Bank submodules. The Blood Bank submodule is
licensed by CITATION for use and implementation in C-LAB. C-LAB is currently
available for DOS and is in the process of being migrated to Windows NT.
Depending on the modules purchased, its price range is $85,000 to $800,000.
C-CARE is a patient care management system which is designed to increase
the productivity of nurses and other clinicians and to assist in the
creation and management of care plans and clinical pathways. C-CARE
documents variances against established care plans and clinical pathways,
enabling care providers to focus on both improving the quality of care and
controlling costs. This system enables the healthcare enterprise to allocate
resources and schedule procedures and tests automatically. C-CARE must be
used in conjunction with C-COM. C-CARE is currently available for DOS.
Depending on the modules purchased, its price range is $25,000 to $75,000.
C-RIS (marketed as XR2000 in the United Kingdom) is a radiology
management system providing patient tracking, transcription, radiology
reporting, auto-fax capabilities, statistical reporting, film management and
mammography management. C-RIS is currently available for DOS in the United
States and for Windows in the United Kingdom and it is in the process of
being migrated to Windows NT. Depending on the modules purchased, its price
range is $25,000 to $250,000.
C-MED is a medication dispensing and inventory control system which can
increase productivity through the use of tools such as bar-coding to control
narcotics or floor stock items. C-MED can integrate with a hospital's other
information systems to verify patient status and to provide patient billing
and laboratory information. C-MED also enables a single data entry to
produce patient charges, labels, profiles, inventory control and drug
utilization management. The Company licenses C-MED from a third party, and
it is currently available for DOS. Depending on the modules purchased, its
price range is $20,000 to $85,000.
FINANCIAL
CITATION's financial systems consist of C-FIS (CITATION's registration and
billing system), C-GEN (CITATION's general accounting system), and C-REC
(CITATION's medical and financial records mixed tracking system). These modules
provide a flexible system for evaluating contracts, controlling costs and
managing financial information for multiple entity healthcare organizations.
C-FIS handles patient admissions, discharges and transfers as well as
accounts receivable, patient billing and collection arrangement. C-FIS is
currently available for DOS and is in the process of being migrated to
Windows NT. Depending on the modules purchased, its price range is $40,000
to $80,000.
C-GEN has a general ledger module providing budgetary comparisons as
well profit and loss statements for each department or division, or for the
entire enterprise. It has an accounts payable module to maintain cash
management through disbursement controls. C-GEN also has the capability to
handle
25
<PAGE>
human resources functions, tracking authorized staff positions against
actual labor resources consumed. C-GEN has a payroll module which assists in
managing labor costs. C-GEN is currently available for DOS. Depending on the
modules purchased, its price range is $40,000 to $80,000.
C-REC is designed to help a medical records department meet quality
assurance, concurrent review, and special study requirements. C-REC is
currently available for DOS and is in the process of being migrated to
Windows NT. Depending on the modules purchased, its price range will be
$15,000 to $25,000.
C-MAX, acquired by the Company on August 26, 1996, is a Windows-based
software product that provides information needed to manage managed care
contracts and transactions with indemnity payors. The system consists of two
integrated modules: a reimbursement management module that documents and
tracks the management and profitability of contracts, prospective payments
and claims; and a systems management module that controls the link to the
healthcare providers' patient accounting system. Depending on the modules
purchased, its price range is $75,000 to $100,000.
REGISTRATION
CURES, the Company's community-wide user registration system, distributes
demographic and health assessment information across multiple disparate entities
within healthcare enterprises or IDNs. CURES serves as a central data
repository, or master patient index, for all patient demographic and health
status information, streamlining the intake process by eliminating repetitive
registration questions about medical history and eligibility information. CURES
is capable of linking multiple healthcare facilities in a community (E.G.
doctors' offices, hospitals, clinics, nursing homes, and home health agencies)
as well as multiple departments within a single facility, providing each user
with access to common demographic information. CURES can also serve as a link
between existing information systems in home health, physician's offices, and
other health facilities, thereby offering a significant step towards the goals
of a computerized patient record and the establishment of community-based
healthcare services. CURES is in final testing and the Company expects to ship
the product in late 1996. The Company has received orders for five CURES
systems. CURES will be available for Windows NT. Depending on the modules
purchased, its price range will be $25,000 to $250,000.
DECISION SUPPORT
C-MIS, CITATION's decision support module, provides healthcare executives
access to financial and census information, as well as medical, physician,
payor, rate, case mix and labor trends. The module offers report writing and
word processing applications, enabling the user to produce reports tying
together financial and clinical information. C-MIS includes multiple security
levels to limit access to sensitive information. C-MIS is currently available
for DOS. Depending on the modules purchased, its price range is $10,000 to
$35,000.
SERVICES
Client service is an important component of the Company's operations. As of
June 30, 1996, the Company employed 58 persons in client services. The client
services team generally provides implementation, application and support,
education and consulting services to the Company's clients and primarily employs
medical technologists and other healthcare professionals in supporting and
implementing healthcare information systems. Instrument interface, network
consulting, operating system and hardware support are provided by experts in
each area. Additional client services are provided through computer-based
training or formal instructor-led, Company-sponsored ongoing educational courses
and seminars.
In addition, the Company provides comprehensive training for clients at its
headquarters near St. Louis. Before the Company's product becomes operational,
training is also provided at the client's location. The Company provides
additional training at the client's request for a fee. The Company offers a
maintenance program covering hardware replacement, software upgrades, and
telephone consulting service. Depending on the type of system, the Company
offers service contracts for periods of one to five years. Customer support is
available 24 hours a day.
The Company intends to expand the range of strategic client support and data
interpretation services it provides in order to strengthen relationships with
clients. The Company intends to expand its services to design
26
<PAGE>
and configure the architecture of a client's systems, including networking,
systems integration and data conversion. Further, the Company intends to provide
advice on data analysis to assist care providers in evaluating their operations.
PRODUCT DEVELOPMENT
CITATION is dedicated to providing state-of-the-art integrated systems for
healthcare enterprises. The cornerstone of CITATION's system is its
long-standing commitment to client/server technology. CITATION's multi-tiered
products are modular in nature, using an open architecture that is easily
integratable with third party systems as well as other CITATION systems.
CITATION's current product development efforts use object-oriented
programming methodologies. This allows the Company to develop applications based
on reusable libraries of code that the Company believes results in more
cost-effective and rapid product development cycles. The Company is a Microsoft
Solutions Provider and extensively employs Microsoft toolsets and standards in
its product development efforts. The Company believes use of these standards and
tools facilitates interfacing with other systems and products. The Company also
supports other industry standards such as HL/7 and the Novell Netware Network
Operating System.
Currently, a majority of CITATION's products are available solely on DOS.
C-COM is also available for Windows and Windows NT. CURES, which is expected to
be shipped in late 1996, will run on Windows NT. The Company intends to migrate
substantially all of its products to Windows NT, which the Company expects will
become the operating system foundation for a large number of healthcare
enterprises, although there can be no assurance that this will be the case.
While the Company believes it will accomplish its migration to Windows NT in a
timely fashion, there can be no assurance that the Company will not experience
difficulties that could delay or prevent the successful and timely development,
introduction and marketing of the new Windows NT products, that such versions
will adequately meet the requirements of the marketplace or that the migration
will be accomplished before demand for existing versions of the Company's
products slows. Negative developments in these areas could have a material
adverse effect on the Company's business, results of operations and financial
condition.
The Company plans to expand its product line to meet the evolving needs of
its clients. The Company continually evaluates its offerings to determine what
additional products or enhancements are required by the healthcare information
systems marketplace. The Company develops and enhances products internally to
meet clients' needs, but if the Company can purchase or license proven products
at reasonable costs it will do so in order to avoid the time and expense
involved in developing products. The Company actively seeks out for acquisition
and licensing other companies and products that fit into CITATION's overall
product and technology plan. There is much competition for suitable acquisition
candidates and there can be no assurance that the Company will be able to
successfully acquire or license additional products.
For the years ended March 31, 1995 and 1996, CITATION invested $5.3 million
and $4.4 million, respectively, on research and development. For the quarter
ended June 30, 1996, CITATION invested $1.3 million on research and development.
At June 30, 1996 the Company employed 57 persons in research and development.
The Company expects to continue to make significant investments in research and
development, however, there can be no assurance that the Company's financial and
technological resources will permit it to develop or market new products
successfully or respond effectively to technological changes. 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.
SALES AND MARKETING
The Company markets its products in the United States, Canada and the United
Kingdom through a direct sales force under the direction of the Company's
Executive Vice President Sales and Marketing. As of June 30, 1996, the Company's
sales force consisted of 25 employees. In addition to the Company's sales force
employees,
27
<PAGE>
the Company has a 7-person marketing team that promotes the Company's products,
participates in trade shows and demonstrates the Company's products. In
addition, members of the Company's development and client services departments
provide pre-sales support for the Company's direct sales force in making
presentations to and preparing comprehensive proposals for potential customers.
The Company intends to focus its sales efforts on selling larger, more
comprehensive systems to larger hospitals and IDNs to address a broad range of
needs. As part of this strategy, the Company is cross training its sales force
so that each salesperson will have the background necessary to sell all of the
Company's products. The Company is also planning to increase its sales force in
fiscal 1997.
The Company has a branch office in the United Kingdom to enhance
international marketing. The Company markets its products through distribution
alliances in the Middle East, the Far East and Latin America. For example, the
Company's UK office is providing support to El Sief Development Corporation
(Saudi Arabia) in its efforts to market CITATION products in the Middle East. In
addition, the Company has a strategic relationship with Microstate Separations
Plc. Ltd. ("Microstate"), a healthcare information systems integrator based in
Singapore. Microstate has agreed to purchase the Company's systems and to
install and support them in other bases, enhancing the Company's access to the
Asian/Pacific Rim market. In Latin America, CITATION has a strategic arrangement
with Laboratories Para Laboratorios.
REGULATION
The Company is subject to the general requirements of the Food and Drug
Administration's regulations for Class I Medical Devices because it produces
C-CIS. The Company complies with these regulations and follows Medical Device
Reporting guidelines as well. The Company has decided not to internally develop
products (E.G., blood bank software), at this time, that would subject the
Company to the pre-market approval requirements of Section 510(k) of the Food,
Drug and Cosmetic Act.
Additional legislation governing the dissemination of medical record
information has been proposed. The Medical Records Act, currently pending in
Congress, would protect and regulate the confidentiality of medical record
information. The Medical Records Act would prohibit the disclosure of
individually identifiable health information, except with the patient's consent.
Without the patient's consent, medical information could be disclosed only for
other limited purposes, including disclosures to permit the creation of
nonidentifiable health information and to facilitate medical research. The
Medical Records Act would preempt most state laws regarding access to, and the
use and disclosure of, medical record information. If the Medical Records Act is
enacted, compliance with it could be costly and could preclude or delay the
introduction of certain new products. The Company is unable to determine at this
time the effect, if any, that these requirements may have on its business.
In addition, the healthcare industry is subject to changing political,
economic and regulatory influences that may affect the procurement practices and
operations of healthcare providers. Many lawmakers have announced that they
intend to propose programs to reform the United States healthcare system. These
programs may contain proposals to increase governmental involvement in
healthcare, lower reimbursement rates and otherwise change the regulatory
environment in which the Company's clients operate. Healthcare providers may
react to these proposals and the uncertainty surrounding such proposals by
curtailing or deferring investments, including those for the Company's
healthcare information systems. Even if healthcare providers do not curtail or
defer investments, they may institute cost containment measures in anticipation
of regulatory reform or for other reasons. These measures may result in greater
selectivity in the allocation of capital funds, which could have a material
adverse effect on the Company's ability to sell its healthcare information
systems and services. The Company cannot predict with any certainty what impact,
if any, such legislative or market-driven reforms might have on its business and
results of operations. There can be no assurance that such proposed changes, if
adopted, would not have a material adverse effect on the Company's business and
results of operations.
COMPETITION
The market for healthcare information systems is highly competitive. Most of
the Company's revenues are derived from lengthy, competitive procurement
processes managed by sophisticated purchasers that extensively investigate and
compare the products offered by the Company and its competitors. The Company
believes that
28
<PAGE>
the principal competitive factors in this market are the features, functions,
and capabilities of the information systems, the user's evaluation of the
ongoing support for the information systems, the potential for enhancements and
future compatible products, and price. There can be no assurance that the
Company will be able to compete successfully with respect to any of such
factors. Many of the Company's current and potential competitors have
significantly greater financial, managerial, development, technical, marketing
and sales resources than the Company and may be able to devote those resources
to develop and introduce systems more rapidly than the Company or healthcare
information systems with significantly greater functionality than, and superior
overall performance to, those offered by the Company. These competitors may also
be able to initiate and withstand significant price decreases more effectively
than the Company. The continuing consolidation of hospitals and other healthcare
providers has resulted in fewer individual purchasing decisions, a trend that
may favor larger vendors with greater numbers of hospitals currently under
contract. Moreover, the healthcare information industry is entering a period of
consolidation which could have a material adverse effect on the Company by
increasing the size and strength of its competitors.
The Company competes with a large number of other healthcare information
systems vendors, some of which sell comprehensive systems and some of which sell
products which compete with only one or more modules of the Company's products.
The Company believes that it is competitive in the marketplace due to the
functional capability, sophistication, client/server architecture and price of
its software systems; the ability of each user to customize the systems to meet
its unique needs; and the high level of service the Company provides to all
clients.
PRODUCT LIABILITY
The Company's products may from time to time be involved in the conveyance,
retrieval or storage of confidential data. Improper disclosure of confidential
information as a result of an error in the Company's healthcare information
systems or any failure by the Company's systems to provide accurate and timely
information could result in claims against the Company by its clients or their
patients. There can be no assurance the Company will not be subject to such
claims in the future, that such claims will not result in liability in excess of
any insurance coverage maintained by the Company with respect to such claims,
that insurance will cover such claims or that appropriate insurance will
continue to be available to the Company at commercially reasonable rates.
INTELLECTUAL PROPERTY
The Company regards its products as proprietary and relies on a combination
of trade secrecy, contractual provisions, and technical measures to protect its
proprietary rights. Under the Company's license agreements, the Company's
clients agree not to disclose sensitive information about the system. The
Company also requires each employee to sign a nondisclosure agreement at the
commencement of employment. Notwithstanding these safeguards, it is possible for
competitors of the Company to obtain its trade secrets and to imitate its
products. Furthermore, there can be no assurance that others will not
independently develop software products similar to those developed or planned by
the Company. The Company has decided not to apply for patent or copyright
protection for its software. The Company believes that trade secret and
copyright protection are less important to the Company's success than the
Company's ability to further develop, enhance, and modify its software. However,
the Company has decided to seek trademark protection for the names of certain of
its products in order to avoid confusion in the marketplace.
EMPLOYEES
As of June 30, 1996, the Company employed 170 persons. Of these employees,
57 were involved in product development, 58 in client services, 32 in sales and
marketing and 23 in general administration, clerical and finance. The Company's
employees are not represented by a labor union and the Company's management
believes that its relationship with its employees is good.
BACKLOG
The Company sells its products on a purchase order basis, with shipments of
"turnkey" systems made shortly after receipt of executed purchase orders. As a
result, the level of backlog at any particular time is not necessarily an
indication of future results.
29
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The Company's Directors and executive officers and their ages as of July 15,
1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- -------------------------------------------- --- --------------------------------------------------------
<S> <C> <C>
J. Robert Copper............................ 56 Chairman, President and Chief Executive Officer;
Director
Richard D. Neece............................ 50 Executive Vice President and Chief Financial Officer
William H. J. Seabrook...................... 62 Executive Vice President -- Sales and Marketing;
Director
Patricia Q. Moore........................... 49 Vice President -- Human Resources
John M. Selestak............................ 39 Vice President -- Marketing
John P. Gilmore............................. 54 Controller
Fred L. Brown (1)........................... 55 Director
James F. O'Donnell (1)(2)................... 49 Director
David T. Pieroni (1)(2)..................... 51 Director
Frank L. Poggio............................. 49 Director
</TABLE>
- ---------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
J. Robert Copper has been a Director of the Company since May 1992. Mr.
Copper was appointed Chairman and Chief Executive Officer of the Company in
January 1995 and President of the Company in July 1996. Prior to that time Mr.
Copper was a partner in Hales, Copper & Company, a management consulting firm,
which he joined in 1992. From 1990 to 1992, Mr. Copper was President and Chief
Executive Officer of the PLC Group, a management consulting firm specializing in
mergers and acquisitions. From 1988 to 1990, Mr. Copper was President and Chief
Executive Officer of Pet, Incorporated, a packaged foods company. Mr. Copper was
Senior Vice President -- Planning and Development for Whitman Corporation
(formerly IC Industries), a conglomerate ("Whitman Corporation"), from 1980 to
1988.
Richard D. Neece has been the Executive Vice President -- Finance and
Administration of the Company since July 1995. From 1991 to 1995, Mr. Neece
served as Executive Vice President -- Finance and Administration for Hussmann
Corporation, a manufacturer of commercial refrigeration and supermarket display
equipment, which is a subsidiary of Whitman Corporation.
William H. J. Seabrook has been a Director of the Company since February
1993, and has served as Executive Vice President -- Sales and Marketing of the
Company since October 1995. Since September 1991, Mr. Seabrook has provided
consulting services to the Company in connection with its international
operations. In 1985 he became Chairman of Datasystems Consultants Limited and
I.T. Health Consulting Limited, each of which is a consulting company
headquartered in London, England specializing in advising health authorities and
small companies in the healthcare business.
Patricia Q. Moore has been Vice President -- Human Resources of the Company
since October 1995. From 1992 to 1995, Ms. Moore was Director of Human Resources
for Spencer & Spencer Systems, Inc., a contract programming consulting company
("Spencer & Spencer"). From 1988 to 1992, Ms. Moore was Assistant Vice President
- -- Staff Relations/Generalist Treasury Group for Citicorp.
John M. Selestak has served as Vice President -- Marketing since January
1996, and has also previously served as the Company's Director of National
Accounts from 1992 to March 1994. During 1995 he served as a Director for First
Consulting Group, Chicago, Illinois, a consulting firm that specializes in
information technology in the healthcare industry. From April 1994 to the
beginning of 1995, Mr. Selestak served as a Senior Sales Representative of
Shared Medical Systems Corporation, which sells healthcare information
30
<PAGE>
systems. From 1988 to 1992, he served in sales and marketing roles for ALLTEL
Healthcare Information Services, Inc. (formerly TDS Healthcare Systems
Corporation), a provider of clinical-based information systems.
John P. Gilmore has been Controller of the Company since June 1995. From
1991 to 1995, Mr. Gilmore was Director, Corporate Planning and Real Estate
Accounting of Whitman Corporation.
Fred L. Brown has been a Director of the Company since February 1993. He has
been President and Chief Executive Officer of BJC Health System, a hospital and
healthcare provider headquartered in St. Louis, Missouri, since its creation in
June 1993 (resulting from the merger of Christian Health Services with
Barnes-Jewish, Inc.). Mr. Brown was President and Chief Executive Officer of
Christian Health Services from January 1986 to February 1993. Mr. Brown is a
director of Commerce Bancshares, Inc., a Missouri bank holding company
("Commerce Bancshares").
James F. O'Donnell was elected as a Director of the Company in 1994. Mr.
O'Donnell has served since 1990 as Chairman of Capital For Business, Inc., an
investment manager of two federally licensed SBIC venture funds and served as
President of that company since 1987 to 1990. Capital For Business, Inc. manages
CFB Venture Fund I, Inc., which owns 632,311 shares of the Company's Common
Stock. Mr. O'Donnell is also Chairman of CFB Venture Fund I, Inc. Capital For
Business, Inc. and CFB Venture Fund I, Inc. are wholly owned subsidiaries of
Commerce Bancshares. See "Principal and Selling Shareholders."
David T. Pieroni has been a Director of the Company since August 1991. Mr.
Pieroni formed Pieroni Management Counselors, Inc., a management consulting
company, in 1990 and served as President from 1990 to 1991, and again became
active in its affairs in 1995. From 1991 to 1995 Mr. Pieroni was President of
Spencer & Spencer. In 1995, Mr. Pieroni joined The Farris Group, a medical
consulting firm, and became President of The Farris Group in 1996. From 1977 to
1990, Mr. Pieroni was a partner at a predecessor of Ernst & Young LLP, working
in its healthcare and management consulting practice.
Frank L. Poggio has been a Director of the Company since it acquired HMDS in
December 1992 and was President of the Company from January 1995 to July 1996
and now serves as a consultant to the Company. Prior to January 1995, Mr. Poggio
served as Executive Vice President -- Operations of the Company. Mr. Poggio was
the founder of HMDS and served as its President from 1980 to July 1996.
The Company's Articles of Incorporation provide that the Board of Directors
is divided into three classes of Directors serving staggered three-year terms.
The members of Class 1, whose terms of office expire at the 1999 annual
shareholders meeting, are Mr. Brown and Mr. Seabrook. The members of Class 2,
whose terms of office expire at the 1997 annual shareholders meeting, are Mr.
Poggio and Mr. O'Donnell. The members of Class 3, whose terms of office expire
at the 1998 annual shareholders meeting, are Mr. Copper and Mr. Pieroni.
Executive officers are appointed annually by the Board of Directors and continue
in office until the following annual meeting of the Board of Directors or until
their earlier removal or resignation.
31
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of August 26, 1996, before and after
giving effect to the sale of Common Stock offered hereby by (i) each Director
and certain executive officers of the Company, (ii) all Directors and executive
officers of the Company as a group, (iii) each person known by the Company to
own beneficially more than 5% of the outstanding shares of Common Stock and (iv)
the Selling Shareholders. The Company believes that each individual or entity
named has sole investment and voting power with respect to shares of Common
Stock indicated as beneficially owned by them, except as otherwise noted.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
SHARES BENEFICIALLY OWNED OWNED AFTER THE
PRIOR TO THE OFFERING(1) NUMBER OF OFFERING(1)(2)
---------------------------- SHARES ------------------------
NAME(3) NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
- ---------------------------------------------------- ------------- ------------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
CFB Venture Fund I, Inc. (4)........................ 632,311 16.8% 532,311 100,000 1.7%
James F. O'Donnell (4).............................. 632,311 16.8% 532,311 100,000 1.7%
Frank L. Poggio..................................... 351,623 9.3% 200,000 151,623 2.6%
Kennedy Capital Management, Inc..................... 341,800 9.1% -- 341,800 5.9%
J. Robert Copper.................................... 296,411(5) 7.7% -- 296,411 5.0%
Richard D. Neece.................................... 135,000(5) 3.5% -- 135,000 2.3%
William T. Wynn..................................... 40,265 1.1% -- 40,265 *
William H. J. Seabrook.............................. 18,703(5) * -- 18,703 *
Fred L. Brown....................................... 7,853 * -- 7,853 *
David T. Pieroni.................................... 2,050 * -- 2,050 *
All Directors and Executive Officers as a Group (11
Persons) (6)....................................... 1,504,916 37.8 % 732,311 772,605 12.9 %
</TABLE>
- ------------
* Less than 1%.
(1) Calculated pursuant to Rule 13d-3(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Under Rule 13d-3(d), shares not
outstanding which are subject to options, warrants, rights or conversion
privileges exercisable within 60 days are deemed outstanding for the
purpose of calculating the number and percentage owned by such person, but
not deemed outstanding for the purpose of calculating the percentage owned
by each other person listed. None of the shares shown are known to be
shares with respect to which the listed beneficial owner has the right to
acquire beneficial ownership, as specified in Rule 13d-3(d)(1), except that
the number of shares includes shares subject to options presently
exercisable or exercisable within 60 days as follows: Mr. Copper -- 100,000
shares; Mr. Neece -- 50,000 shares; Mr. Seabrook -- 10,000 shares; and all
Directors and executive officers as a group -- 209,332 shares.
(2) Adjusted to reflect the sale of shares of Common Stock offered hereby. The
Company, CFB Venture Fund I, Inc. and Mr. Poggio each granted to the
Underwriters a 30-day option to purchase up to an aggregate of 209,847,
100,000 and 100,000 additional shares, respectively, solely to cover
over-allotments, if any. If all of such shares are purchased, CFB Venture
Fund I, Inc. will no longer own any and Mr. Poggio will own less than 1% of
the shares of Common Stock outstanding. See "Underwriting" and "Company
Director and Employee Offering."
(3) The address for CFB Venture Fund I, Inc. and Mr. O'Donnell is Eleven South
Meramec, Suite 1430, St. Louis, Missouri 63105; the address for Kennedy
Capital Management, Inc. is 425 North New Ballas, St. Louis, Missouri
63141. The address for all other shareholders in the table is care of the
Company at 424 South Woods Mill Road, Chesterfield, Missouri 63017.
(4) Mr. O'Donnell, a director of the Company, is Chairman of CFB Venture Fund
I, Inc. and is deemed to beneficially own the shares held by CFB Venture
Fund I, Inc.
(5) Mr. Copper purchased 189,600 of the shares beneficially owned by him in the
open market and 5,000 shares in connection with the Company's 1992 initial
public offering. Mr. Copper received 1,811 shares of Common Stock as a
director's fee. The balance of shares of Common Stock beneficially owned by
him have been issued, or are issuable, upon the exercise of options. Mr.
Neece purchased 85,000 of the shares beneficially owned by him in the open
market and the balance of such shares have been issued, or are issuable,
upon the exercise of options. Mr. Seabrook purchased 8,703 of the shares
beneficially owned by him in the open market and the balance of such shares
have been issued, or are issuable, upon the exercise of options. In
addition to the above, on July 17, 1996, Mr. Copper was granted options to
purchase 100,000 shares of Common Stock, 50,000 of which are contingent on
the consummation of the underwritten sale of Common Stock offered hereby
and Mr. Neece was granted options to purchase 60,000 shares of Common
Stock, 30,000 of which are contingent on the consummation of the
underwritten sale of Common Stock offered hereby.
(6) Because Mr. O'Donnell is a director of the Company and is deemed to
beneficially own the shares held by CFB Venture Fund I, Inc., the number of
shares and percentages for all Directors and Officers as a group includes
the shares owned and sold by CFB Venture Fund I, Inc.
32
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
As of the date of this Prospectus, the Company's authorized capital consists
of 10,000,000 shares of Common Stock, par value $.10 per share (the "Common
Stock"), and 5,000,000 shares of Preferred Stock, par value $.01 per share (the
"Preferred Stock"). On August 26, 1996, 3,766,904 shares of Common Stock were
issued and outstanding and 200,017 shares were reserved for issuance upon the
exercise of options issued pursuant to the following plans (collectively, the
"Stock Option Plans"): (i) the First Amended Incentive Stock Option Plan of
CITATION Computer Systems, Inc. effective January 25, 1986, as amended January
1, 1987 and April 30, 1992 and (ii) the CITATION Computer Systems, Inc. 1992
Employee Incentive Stock Option Plan effective April 1, 1992, as amended in
April 1993. On June 24, 1996, the shares of Common Stock were held of record by
181 persons. All issued and outstanding shares of Common Stock are, and the
shares of Common Stock offered hereby will be, fully paid and non-assessable.
Upon completion of this offering, 5,791,904 shares of Common Stock will be
issued and outstanding (including the 25,000 shares offered by the Company in
the Company Director and Employee Offering). No shares of Preferred Stock are
outstanding.
Holders of shares of Common Stock are entitled to receive such dividends as
may be declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, holders of shares of
Common Stock are entitled to share ratably in all assets remaining after payment
in full of liabilities, including the liquidation rights of outstanding
Preferred Stock, if any. Holders of Common Stock are entitled to one vote for
each share held on all matters submitted to a vote of the shareholders. Holders
are not entitled to cumulate votes for the election of directors. There are no
redemption, conversion or sinking fund provisions or preemptive rights with
respect to the Common Stock. The rights and privileges of the holders of the
Common Stock are subject to the preferential rights and privileges of the
holders of any Preferred Stock of the Company. The Common Stock of the Company
is quoted and traded on the Nasdaq National Market under the trading symbol
"CITA." The Transfer Agent and Registrar for the Common Stock is Boatmen's Trust
Company, St. Louis, Missouri.
PREFERRED STOCK
The Articles of Incorporation authorize the Board of Directors to create and
issue one or more series of Preferred Stock and to determine the rights and
preferences of each series, to the extent permitted by the Articles of
Incorporation and applicable law. Among other rights, the Board of Directors may
fix: (i) the number of shares constituting the series and the distinctive
designation of the series; (ii) the annual dividend rate on the shares of the
series, whether dividends will be cumulative, and if so, from which date or
dates; (iii) whether the series shall be redeemable, and if so, the terms and
conditions of such redemption, including the date or dates upon and after which
the shares shall be redeemable, and the amount per share payable in case of
redemption, which amount may vary under different conditions and at different
redemption dates; (iv) the obligation, if any of the Company to retire shares of
the series pursuant to a sinking fund; (v) whether the shares of that series
shall be convertible into, or exchangeable for, shares of stock of any other
class or classes or debt securities and if so, the terms and conditions of such
conversion or exchange, including the price or prices or the rate or rates of
conversion or exchange and the terms of adjustment, if any; (vi) whether the
shares of that series shall have voting rights, in addition to any voting rights
provided by law, and if so, the terms of such voting rights; (vii) the rights of
the shares of the series in the event of voluntary or involuntary liquidation,
dissolution or winding up of the Company; and (viii) any other relative rights,
powers, preferences, privileges, qualifications, limitations, or restrictions
relating to that series. The shares of Preferred Stock within any one series
shall be identical with each other in all respects except as to the dates from
and after which dividends shall cumulate, if cumulative.
ANTI-TAKEOVER EFFECTS OF MISSOURI LAW AND ARTICLES OF INCORPORATION AND BY-LAWS
Set forth below are descriptions of the relevant provisions of Section
351.459 of the Missouri General and Business Corporations Law, the Articles of
Incorporation and the By-laws. The descriptions are
33
<PAGE>
intended as a summary only and are qualified in their entirety by reference to
the Articles of Incorporation and By-laws, which are incorporated by reference
as exhibits to the Registration Statement of which this Prospectus is a part,
and to Section 351.459 of the Missouri General and Business Corporations Law.
MISSOURI GENERAL AND BUSINESS CORPORATIONS LAW BUSINESS COMBINATION
PROVISION. Section 351.459 of the Missouri General and Business Corporation Law
(the "Business Combination Statute"), a statutory provision restricting business
combinations with shareholders who acquire 20% or more of a corporation's voting
stock, is applicable to the Company because it applies to Missouri corporations
that have a class of voting stock registered with the Securities and Exchange
Commission (the "Commission") pursuant to Section 12 of the Exchange Act and
that have not elected to opt out of the Business Combination Statute; the
Company has not opted out of the Business Combination Statute.
The Business Combination Statute prohibits mergers and certain other
business combination transactions between a publicly held Missouri corporation,
such as the Company, and any beneficial owner of 20% or more of the outstanding
voting stock of the Company (an "Interested Shareholder") for a period of five
years after the date on which the latter becomes an Interested Shareholder,
unless the proposed business combination or the proposed purchase of stock made
by such Interested Shareholder on such Interested Shareholder's stock
acquisition date is approved by the board of directors on or prior to such stock
acquisition date. After such five year restriction, a business combination with
an Interested Shareholder can only be effected if: (i) such business combination
is approved by the board of directors prior to the acquisition of stock by the
Interested Shareholder; or (ii) a majority of the holders of the outstanding
voting stock of the company (not including shares beneficially owned by the
Interested Shareholder) approve such business combination; or (iii) certain fair
price provisions are met by the proposed business combination.
The Business Combination Statute would not prevent the holder of a
controlling interest from exercising control over the Company or preclude a
hostile takeover or acquisition of control of the Company. It may, however,
discourage or make more difficult a hostile takeover or acquisition of control.
Thus, the Business Combination Statute could deprive shareholders of possible
opportunities to realize premiums for their shares and reduce the risk to
management that it might be displaced by a takeover.
AVAILABILITY OF SHARES OF CAPITAL STOCK FOR FUTURE ISSUANCE. The
availability for issue of shares of Preferred Stock and Common Stock by the
Company without further action by shareholders (except as may be required by
applicable Nasdaq National Market regulations) could be viewed as enabling the
Board of Directors to make more difficult a change in control of the Company,
including by issuing warrants or rights to acquire shares of Preferred Stock or
Common Stock to discourage or defeat unsolicited stock accumulation programs and
acquisition proposals and by issuing shares in a private placement or public
offering to dilute or deter stock ownership of persons seeking to obtain control
of the Company. The Company has no present plans to issue any shares of
Preferred Stock or Common Stock other than as offered hereby or as contemplated
under the Stock Option Plans.
REMOVAL OF DIRECTORS ONLY FOR CAUSE AND RELATED PROVISIONS. The Articles of
Incorporation provide that Directors may be removed only for cause and by the
affirmative vote of the holders of two-thirds of all outstanding stock entitled
to vote. This provision, in conjunction with the provisions of the Articles of
Incorporation authorizing the Board of Directors to fill vacant directorships,
may prevent shareholders from removing incumbent Directors without cause and
filling the resulting vacancies with their own nominees.
CLASSIFIED BOARD OF DIRECTORS AND RELATED PROVISIONS. The Articles of
Incorporation provide that the Board of Directors is divided into three classes
of Directors serving staggered three-year terms. This classified board provision
will prevent a party who acquires control of a majority of the outstanding
voting stock from obtaining control of the Board of Directors until the second
annual shareholders' meeting following the date the acquirer obtains the
controlling interest. The classified board provision could have the effect of
discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control of the Company and could thus increase the
likelihood that incumbent Directors will retain their positions.
34
<PAGE>
The Articles of Incorporation provide that the number of Directors will be
set at seven, or such other number as may be determined in accordance with the
By-laws. The Directors will have the power to change the number of Directors on
the Board by resolution adopted by vote of a majority of the Board of Directors.
The number of directors is currently set at six.
The foregoing provisions of the Articles of Incorporation and the provisions
described under "Description of Capital Stock -- Anti-Takeover Effects of
Missouri Law and Articles of Incorporation and By-laws -- Removal of Directors
Only for Cause and Related Provisions" may be changed only by the affirmative
vote of the holders of two-thirds of the shares of capital stock of the Company
entitled to vote for directors on such matters at a meeting duly called for such
purpose.
BOARD CONSIDERATION OF ACQUISITION PROPOSALS; OTHER CONSTITUENCIES. Section
351.347 of the Missouri General and Business Corporations Law authorizes, but
does not require, the Company's Board of Directors to consider a variety of
factors and constituencies in addition to the economic interests of the
Company's shareholders when exercising its business judgment in connection with
acquisition proposals (such as tender offers, merger offers and the like) by
other entities. The Articles of Incorporation provide that, in determining
whether to take or refrain from taking any corporate action, the Board of
Directors may take into account long-term as well as short-term interests of the
Company and its shareholders, clients, employees, suppliers and other
constituencies, including the effect on communities in which the Company does
business. As a consequence, the economic interests of the shareholders may not
be the exclusive factor considered by the Board of Directors in response to any
such proposals.
SHAREHOLDER PROPOSALS. The By-laws provide that, if a shareholder desires
to submit a proposal at an annual or special shareholders' meeting, the
shareholder must submit written notice to the Company in accordance with the
provisions of Rule 14a-8 promulgated under the Exchange Act.
The By-laws also provide that, in order for shareholders to approve
precatory proposals requesting the Board of Directors to take certain actions, a
majority of the outstanding stock of the Company entitled to vote thereon (and
not of the stock present at the meeting) must be voted for the proposal. The
requirement that precatory proposals receive approval of a majority of the
outstanding shares entitled to vote rather than a majority of the shares present
at a meeting will make it more difficult for shareholders to obtain the vote
required to approve such proposals. As a result, the By-law provision may
discourage or deter a third party from conducting a solicitation of proxies to
request the Board of Directors to take certain actions.
The By-laws provide that, if a shareholder desires to nominate persons for
election as Directors, the shareholder must submit written notice to the Company
at least 120 days and no more than 180 days prior to the anniversary date of the
prior annual meeting. Director nomination notices must set forth the name,
address and occupation of the nominee, certain other information about the
nominee and the shareholder proposing him or her, and other information as would
be required under Regulation 14A of the Exchange Act.
35
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding an
aggregate of 5,791,904 shares of Common Stock based on the number of shares
outstanding at August 26, 1996, including 25,000 shares of Common Stock offered
hereby directly by the Company to Directors and eligible employees of the
Company on a non-underwritten basis and excluding options to purchase 444,497
shares which were outstanding as of August 26, 1996. If the Underwriters'
over-allotment option is exercised in full the number of shares of Common Stock
outstanding after the offering will be 6,001,751. All of these shares will be
freely tradeable without restriction under the Securities Act of 1933, as
amended (the "Securities Act") or may currently be sold pursuant to Rule 144
under the Securities Act ("Rule 144"). If CFB Venture Fund I, Inc. holds shares
remaining after this offering with a market value of at least $1,500,000, it
will have the right to require the Company to register the shares under the
Securities Act. If the over-allotment is exercised in full, CFB Venture Fund I,
Inc. will not own any shares of the Company.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned "restricted securities"
(as such term is defined in Rule 144) for at least two years, including a person
who may be deemed an affiliate of the Company, is entitled to sell within any
three month period a number of shares of Common Stock that does not exceed the
greater of 1% of the then outstanding shares of Common Stock of the Company and
the average weekly trading volume of the Common Stock on the Nasdaq National
Market during the four calendar weeks preceding such sale. Sales under Rule 144
are further subject to certain restrictions relating to the manner of sale,
notice and the availability of current public information about the Company. A
person who is not an affiliate of the Company as of or at any time during the 90
days preceding a sale and who has beneficially owned shares of Common Stock for
at least three years, is entitled to sell such shares without regard to the
volume limitations, manner of sale provisions, notice or other requirements of
Rule 144.
In addition, under the Company's Stock Option Plans, the Company has issued
options to purchase Common Stock at prices which are below current market and
may issue options to purchase additional shares of Common Stock in the future.
At August 26, 1996, options to purchase 444,497 shares of Common Stock were
outstanding of which options to purchase 274,497 shares were immediately
exercisable and options to purchase 4,000 shares will become exercisable on
September 26, 1996. An additional 200,017 shares of Common Stock are available
for future grants under the Stock Option Plans. The Company has filed
registration statements on Form S-8 to permit the shares acquired upon exercise
of options to be freely tradable or sold pursuant to Rule 144.
The Company, and Directors, executive officers and the Selling Shareholders
beneficially holding an aggregate of 732,340 shares of Common Stock as of August
26, 1996 (excluding shares offered hereby other than the shares subject to the
Underwriters' over-allotment option), have entered into lockup agreements with
the Underwriters pursuant to which such stockholders have agreed not to sell or
otherwise dispose of any shares of Common Stock for a period of 120 days after
the date of this Prospectus without the prior written consent to Volpe, Welty &
Company. Upon expiration of the lockup period, these shares will be eligible for
immediate sale, subject in certain cases to volume and other limitations under
Rule 144. See "Underwriting."
No prediction can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Sales of substantial number of shares of Common
Stock could adversely affect prevailing market prices.
COMPANY DIRECTOR AND EMPLOYEE OFFERING
Of the shares of Common Stock offered hereby, the Company is offering 25,000
shares of Common Stock (the "Director and Employee Shares") to its Directors and
full-time Company employees who are presently and for at least six months have
been employed by the Company (the "Director and Employee Offerees"). The
Director and Employee Shares will be offered and sold to eligible Director and
Employee Offerees on a non-discriminatory basis at the Price to Public less the
amount of Underwriting Discounts and Commissions. The minimum number of Director
and Employee Shares that may be purchased by a Director
36
<PAGE>
and Employee Offeree is 25 shares. Director and Employee Offerees must advise
the Company whether they desire to purchase any of the Director and Employee
Shares not later than the close of business on the business day following the
date of this Prospectus. Any Director and Employee Shares not purchased by
Director and Employee Offerees will not be offered or sold to the public. In the
event that the offering by the Company of Director and Employee Shares is
over-subscribed, each subscribing Director and Employee Offeree will be sold a
number of Director and Employee Shares equal to his or her pro rata portion of
the 25,000 Director and Employee Shares available for sale based on the
relationship which the number of Director and Employee Shares subscribed for by
such Director and Employee Offeree bears to the total number of Director and
Employee Shares subscribed for by all Director and Employee Offerees. The
offering to the public pursuant to this Prospectus is not contingent upon any
minimum number of Director and Employee Shares being sold. The Underwriters are
not responsible for and are not involved in any manner with the offering and
sale of the Director and Employee Shares and the Underwriters will not receive
any compensation or reimbursement in respect of the sale of the Director and
Employee Shares.
Each Director and Employee Offeree who purchases Director and Employee
Shares is required to include in his or her gross income in the year of
purchase, with respect to each Director and Employee Share purchased by such
Director and Employee Offeree, the excess, if any, of the fair market value of a
Director and Employee Share (determined at the time of transfer) over the amount
paid by such Director and Employee Offeree. This amount will be subject to
applicable income, employment and other withholding taxes. Any subsequent
appreciation or depreciation in the value of such Director and Employee Share
generally will be taxable as capital gain or loss on an exchange or other
taxable disposition. This summary of Federal income tax consequences to Director
and Employee Offerees is not intended to be a complete summary of such tax
consequences. Further, this summary does not cover other tax consequences,
including state income tax consequences. Accordingly, Director and Employee
Offerees are urged to consult with their own tax advisors concerning the
purchase of Director and Employee Shares.
37
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") the Company and the Selling Shareholders have agreed
to sell to each of the underwriters named below (the "Underwriters"), and each
of such Underwriters, for whom Volpe, Welty & Company, Jefferies & Company, Inc.
and Punk, Ziegel & Knoell, L.P. are acting as representatives (together, the
"Representatives"), has severally agreed to purchase from the Company and the
Selling Shareholders the respective number of shares of Common Stock set forth
opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------------------------------------------------------- ----------
<S> <C>
Volpe, Welty & Company.....................................................................
Jefferies & Company, Inc...................................................................
Punk, Ziegel & Knoell, L.P.................................................................
----------
Total.................................................................................. 2,732,311
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the offering price set
forth on the cover page of this Prospectus and to certain dealers at such price
less a concession of not in excess of $ per share, of which $ may
be reallocated to other dealers. After the offering, the public offering price,
concession and reallowance to dealers may be reduced by the Representatives. No
such reduction shall change the amount of proceeds to be received by the Company
as set forth on the cover page of this Prospectus.
The Company and the Selling Shareholders have granted to the Underwriters an
option, exercisable within 30 days after the date of this Prospectus, to
purchase up to an additional 209,847 and 200,000 shares of Common Stock,
respectively, at the same price per share as the Company and the Selling
Shareholders receive for the 2,732,311 shares of Common Stock offered hereby,
solely to cover over-allotments, if any. If the Underwriters exercise their
over-allotment option, the Underwriters have severally agreed, subject to
certain conditions, to purchase approximately the same percentage thereof that
the number of shares of Common Stock to be purchased by each of them, as shown
in the foregoing table, bears to the 2,732,311 shares of Common Stock offered
hereby. The Underwriters may exercise such option only to cover the over-
allotments in connection with the sale of the 2,732,311 shares of Common Stock
offered hereby.
Each of the Company's directors, certain officers of the Company and the
Selling Shareholders have agreed not to offer, sell, contract to sell or
otherwise dispose of Common Stock or securities convertible into or exchangeable
for, or any rights to purchase or acquire, Common Stock for a period of 120 days
following the date of this Prospectus, without the prior written consent of
Volpe, Welty & Company. The Company also has agreed not to offer, sell, contract
to sell or otherwise dispose of any shares of Common Stock or any securities
convertible into or exchangeable for, or any rights to purchase or acquire,
Common Stock for a period of 120 days following the date of this Prospectus
without the prior written consent of Volpe, Welty & Company, except for the
offering of 25,000 shares of Common Stock to Directors and certain employees of
the Company as described on the cover page of this Prospectus and under "Company
Director and Employee Offering," the granting of options pursuant to the
Company's existing Stock Option Plans and,
38
<PAGE>
subject to consultation with Volpe, Welty & Company, the issuance of shares by
the Company in connection with acquisitions. Volpe, Welty & Company, in its
discretion, may waive the foregoing restrictions in whole or in part, with or
without a public announcement of such action.
The Company is offering 25,000 shares of Common Stock hereby to Directors
and certain employees of the Company as described on the cover page of this
Prospectus and under "Company Director and Employee Offering." The offering of
Director and Employee Shares by the Company is not being underwritten by the
Underwriters and will not be subject to the terms and conditions of the
Underwriting Agreement. The Underwriters will not receive any compensation or
reimbursement in connection with the offer or sale of such shares. Any of such
shares of Common Stock not purchased by such Directors and employees will not be
offered or sold to the public.
The offering of the underwritten shares is made for delivery when, as and if
accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offering without notice. The Underwriters
reserve the right to reject an order for the purchase of shares in whole or in
part.
In general, the rules of the Commission will prohibit the Underwriters from
making a market in the Common Stock during the "cooling off" period immediately
preceding the commencement of sales in the offering. The Commission has,
however, adopted exemptions from these rules that permit passive market making
under certain conditions. These rules permit an underwriter to continue to make
a market subject to the conditions, among others, that its bid not exceed the
highest bid by a market maker not connected with the offering and that its net
purchases on any one trading day not exceed prescribed limits. Pursuant to these
exemptions, certain Underwriters, selling group members (if any) or their
respective affiliates may have engaged in passive market making in the Company's
Common Stock during the cooling off period.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters and their controlling persons against certain liabilities,
including liabilities under the Securities Act of 1933, as amended, or to
contribute to payments the Underwriters may be required to make in respect
thereof.
LEGAL MATTERS
The validity of the shares of Common Stock being offered hereby will be
passed upon for the Company by Mayer, Brown & Platt, Chicago, Illinois, special
counsel to the Company, which may rely, as to matters of Missouri law, on the
opinion of Suelthaus & Walsh, P.C., St. Louis, Missouri. Certain legal matters
will be passed upon for the Underwriters by Sachnoff & Weaver, Ltd., Chicago,
Illinois.
EXPERTS
The consolidated financial statements of the Company included in this
Propectus as of March 31, 1995 and 1996 and for each of the three years in the
period ended March 31, 1996 have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the following
Regional Offices of the Commission: Chicago Regional Office, Northwestern Atrium
Center, 500 West Madison Street, Chicago, Illinois 60601-2511; and New York
Regional Office, Seven World Trade Center, 13th Floor, New York, New York 10048.
Copies of such material may also be obtained from the Public Reference Section
of the Commission at its principal office at 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates.
The Company has filed with the Commission a registration statement on Form
S-2 (the "Registration Statement") under the Securities Act with respect to the
shares of Common Stock offered hereby. For the
39
<PAGE>
purposes hereof, the term "Registration Statement" means the original
Registration Statement and any and all amendments thereto. This Prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits and schedules thereto. For further information with respect to the
Company and such Common Stock, reference is hereby made to such Registration
Statement, exhibits and schedules, which may be inspected and copied at the
public reference facilities maintained by the Commission at its principal office
at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549
and at certain regional offices of the Commission located at Northwestern Atrium
Center, 500 West Madison Street, Chicago, Illinois 60661 and at 75 Park Place,
14th Floor, New York, New York 10007. Copies of the Registration Statement can
be obtained at prescribed rates from the Public Reference Section of the
Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549 or at the Commission's Web site at
http:/www.sec.gov.
Statements contained in this Prospectus as to the contents of any contract
or other document are not necessarily complete, and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission pursuant to
the Exchange Act are incorporated in this Prospectus by reference and made a
part hereof: (i) Annual Report on Form 10-KSB for the fiscal year ended March
31, 1996 (the "1996 Annual Report"), filed on July 1, 1996; (ii) Quarterly
Report on Form 10-QSB for the fiscal quarter ended June 30, 1996 filed on August
2, 1996; and (iii) the registration statement on Form 8-A, filed on June 3,
1992, which discusses the terms of the Common Stock.
The Company will provide without charge to each person to whom this
Prospectus is delivered, on the written or oral request of such person, a copy
of any or all of the documents referred to above that have been or may be
incorporated by reference in this Prospectus, other than exhibits to such
documents. Such written or oral request should be directed to the attention of
Debbie Edgar, Executive Assistant, CITATION Computer Systems, Inc., 424 South
Woods Mill Road, Chesterfield, Missouri 63017 (telephone (314) 579-7900).
40
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Consolidated Balance Sheet................................................................................. F-3
Consolidated Statement of Operations....................................................................... F-4
Consolidated Statement of Cash Flows....................................................................... F-5
Consolidated Statement of Shareholders' Equity............................................................. F-7
Notes to Consolidated Financial Statements................................................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of CITATION Computer Systems, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of shareholders' equity
present fairly, in all material respects, the consolidated financial position of
CITATION Computer Systems, Inc. and its subsidiaries at March 31, 1996 and 1995,
and the results of their operations and their cash flows for each of the three
years in the period ended March 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
St. Louis, Missouri
April 30, 1996
F-2
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
-------------------- JUNE 30,
1995 1996 1996
--------- --------- -----------
(IN THOUSANDS, (UNAUDITED)
EXCEPT SHARE AND PER
SHARE AMOUNTS)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................... $ 2,634 $ 2,146 $ 1,708
Accounts receivable:
Trade, net of allowance for doubtful accounts of $137, $170, and
$170 respectively.................................................. 6,885 10,919 11,125
Other............................................................... 52 36 25
Inventories (Note 6).................................................... 534 537 559
Prepaid expenses and other current assets............................... 689 704 543
Income taxes receivable (Note 8)........................................ 1,178 -- --
Deferred tax asset (Note 8)............................................. 159 83 83
--------- --------- -----------
Total current assets.............................................. 12,131 14,425 14,043
--------- --------- -----------
SOFTWARE DEVELOPMENT COSTS, NET OF ACCUMULATED AMORTIZATION OF $6,203,
$7,992 AND $8,513, RESPECTIVELY (NOTE 2)................................ 3,942 4,762 4,902
--------- --------- -----------
PROPERTY AND EQUIPMENT, NET (NOTE 2)...................................... 2,255 1,756 1,749
--------- --------- -----------
OTHER ASSETS.............................................................. 562 314 412
--------- --------- -----------
Total assets...................................................... $ 18,890 $ 21,257 $ 21,106
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 7).............................. $ 120 $ 143 $ 143
Accounts payable........................................................ 1,880 1,421 1,411
Customer deposit........................................................ 520 542 755
Accrued bonuses payable................................................. -- 475 150
Accrued commissions..................................................... 47 334 286
Other accrued liabilities............................................... 688 1,254 848
Deferred service revenue................................................ 2,601 2,317 1,827
Income taxes payable (Note 8)........................................... -- 31 210
--------- --------- -----------
Total current liabilities......................................... 5,856 6,517 5,630
LONG-TERM DEBT (NOTE 7)................................................... 540 450 414
DEFERRED TAX LIABILITY (NOTE 8)........................................... 1,254 1,676 1,676
--------- --------- -----------
7,650 8,643 7,720
--------- --------- -----------
COMMITMENTS (NOTES 5, 11 AND 12)
SHAREHOLDERS' EQUITY (NOTES 2 AND 9):
Preferred stock; par value $.01 per share; 5,000,000 shares authorized;
no shares issued and outstanding....................................... -- -- --
Common stock; par value $.10 per share; 10,000,000 shares authorized;
3,711,791, 3,747,882 and 3,756,936 shares issued and outstanding,
respectively........................................................... 371 375 376
Paid-in capital......................................................... 5,965 6,128 6,190
Retained earnings....................................................... 4,768 6,180 6,830
Equity adjustment from foreign currency translation..................... 136 (69) (10)
--------- --------- -----------
11,240 12,614 13,386
--------- --------- -----------
Total liabilities and shareholders' equity........................ $ 18,890 $ 21,257 $ 21,106
--------- --------- -----------
--------- --------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE (UNAUDITED)
AMOUNTS)
<S> <C> <C> <C> <C> <C>
NET SYSTEM SALES AND SERVICE REVENUE:
System sales................................. $ 14,767 $ 15,338 $ 16,216 $ 3,447 $ 4,183
Service revenue.............................. 6,763 8,027 8,835 2,188 2,479
--------- --------- --------- --------- ---------
21,530 23,365 25,051 5,635 6,662
--------- --------- --------- --------- ---------
COST OF PRODUCTS AND SERVICES SOLD:
System sales................................. 8,161 9,128 8,532 1,931 2,163
Service revenue.............................. 2,362 2,742 2,538 685 557
--------- --------- --------- --------- ---------
10,523 11,870 11,070 2,616 2,720
--------- --------- --------- --------- ---------
Gross profit............................. 11,007 11,495 13,981 3,019 3,942
RESEARCH AND DEVELOPMENT EXPENSE............... 1,296 1,661 1,672 447 602
SELLING AND ADMINISTRATIVE EXPENSES............ 7,718 9,212 8,711 1,926 2,289
RESTRUCTURING OF OPERATIONS (NOTE 4)........... -- 3,426 -- -- --
OFFICE CONSOLIDATION AND RELOCATION EXPENSE
(NOTE 3)..................................... -- -- 1,380 1,000 --
--------- --------- --------- --------- ---------
OPERATING INCOME (LOSS)........................ 1,993 (2,804) 2,218 (354) 1,051
--------- --------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income.............................. 178 186 144 38 34
Interest expense............................. (35) (74) (68) (12) (22)
Other, net................................... 11 (10) 19 3 3
--------- --------- --------- --------- ---------
154 102 95 29 15
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES.............. 2,147 (2,702) 2,313 (325) 1,066
PROVISION (BENEFIT) FOR INCOME TAXES (NOTE
8)........................................... 808 (877) 901 (127) 416
--------- --------- --------- --------- ---------
NET INCOME (LOSS).............................. $ 1,339 $ (1,825) $ 1,412 $ (198) $ 650
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
(NOTE 2):
Primary and fully diluted:
Net income (loss) per share.............. $ .36 $ (.49) $ .37 $ (0.05) $ 0.16
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers......... $ 20,721 $ 22,972 $ 20,771 $ 5,368 $ 6,237
Cash paid to suppliers and
employees........................... (18,225) (20,145) (18,896) (4,535) (5,644)
Income taxes paid.................... (242) (592) 806 196 (237)
Interest paid........................ (25) (71) (87) (12) (22)
Interest received and other.......... 178 186 144 38 37
--------- --------- --------- --------- ---------
Net cash provided by operating
activities.................... 2,407 2,350 2,738 1,055 371
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................. (883) (1,167) (430) (89) (233)
Software development costs........... (2,369) (3,622) (2,609) (734) (661)
Proceeds from sale of property and
equipment........................... -- 8 55 -- --
Purchase of CPS, net of cash acquired
(Note 1)............................ (2,124) -- -- -- --
--------- --------- --------- --------- ---------
Net cash used in investing
activities.................... (5,376) (4,781) (2,984) (823) (894)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term
debt................................ (36) (91) (362) (21) (36)
Proceeds from long-term debt......... -- -- 202 -- --
Proceeds from sale of common stock
pursuant to exercise of stock
options and warrants................ 40 119 136 -- 63
Issuance of common stock to
directors........................... -- 37 31 -- --
--------- --------- --------- --------- ---------
Net cash provided by financing
activities.................... 4 65 7 (21) 27
--------- --------- --------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH................................... (25) 183 (249) (68) 58
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................ (2,990) (2,183) (488) 143 (438)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD
(NOTE 2)............................... 7,807 4,817 2,634 2,634 2,146
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF
PERIOD................................. $ 4,817 $ 2,634 $ 2,146 $ 2,777 $ 1,708
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income (loss)........................... $ 1,339 $ (1,825) $ 1,412 $ (198) $ 650
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of
property and equipment................. 511 852 921 231 241
Amortization of software development
costs.................................. 1,274 1,711 1,789 382 522
Amortization of maintenance contracts... 104 104 -- -- --
Amortization of other assets............ 191 264 83 21 20
Non-cash restructuring charges.......... -- 2,593 90 1,000 --
Loss on disposal of property and
equipment.............................. -- 35 -- -- --
Increase in accounts receivable, net.... (1,034) (715) (4,018) (69) (195)
Decrease (increase) in inventories...... 202 201 (3) 25 (23)
Decrease (increase) in prepaid expenses
and other assets....................... (345) (492) 150 10 42
Decrease (increase) in deferred tax
asset.................................. 148 (130) 76 -- --
Increase (decrease) in accounts
payable................................ (201) 757 (459) (198) (10)
Increase (decrease) in customer
deposits............................... (238) (12) 22 (5) 213
Increase (decrease) in other accrued
liabilities............................ (341) 12 1,328 (20) (779)
Increase (decrease) in deferred service
revenues............................... 379 334 (284) (193) (490)
Increase (decrease) in current income
taxes receivable/payable............... (25) (1,371) 1,209 69 179
Increase in deferred income tax
liability.............................. 443 32 422 -- --
--------- --------- --------- --------- ---------
Net cash provided by operating
activities....................... $ 2,407 $ 2,350 $ 2,738 $ 1,055 $ 4,371
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES (IN
THOUSANDS)
During the years ended March 31, 1994, 1995 and 1996, the Company issued $249,
$418 and $93, respectively, in notes payable in conjunction with the purchase of
property and equipment.
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
EQUITY
COMMON STOCK ADJUSTMENT
-------------------- FROM FOREIGN
PAID-IN RETAINED CURRENCY
PAR VALUE CAPITAL EARNINGS TRANSLATION TOTAL
--------- --------- ----------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1993..................................... $ 360 $ 5,780 $ 5,254 $ (22) $ 11,372
Sale of common stock pursuant to exercise of stock options
and warrants.............................................. 4 36 -- -- 40
Foreign currency translation adjustment..................... -- -- -- (25) (25)
Net income.................................................. -- -- 1,339 -- 1,339
--------- --------- ----------- ----- ---------
BALANCE, MARCH 31, 1994..................................... 364 5,816 6,593 (47) 12,726
Sale of common stock pursuant to exercise of stock options
and warrants.............................................. 6 113 -- -- 119
Issuance of common stock to directors....................... 1 36 -- -- 37
Foreign currency translation adjustment..................... -- -- -- 183 183
Net loss.................................................... -- -- (1,825) -- (1,825)
--------- --------- ----------- ----- ---------
BALANCE, MARCH 31, 1995..................................... 371 5,965 4,768 136 11,240
Sale of common stock pursuant to exercise of stock options
and warrants.............................................. 3 133 -- -- 136
Issuance of common stock to directors....................... 1 30 -- -- 31
Foreign currency translation adjustment..................... -- -- -- (205) (205)
Net income.................................................. -- -- 1,412 -- 1,412
--------- --------- ----------- ----- ---------
BALANCE, MARCH 31, 1996..................................... 375 6,128 6,180 (69) 12,614
Sale of common stock pursuant to exercise of stock options
and warrants.............................................. 1 47 -- -- 48
Issuance of common stock for 401(k) company matching
contribution.............................................. -- 15 -- -- 15
Foreign currency translation adjustment (unaudited)......... 59 59
Net income (unaudited)...................................... -- -- 650 -- 650
--------- --------- ----------- ----- ---------
BALANCE, JUNE 30, 1996...................................... $ 376 $ 6,190 $ 6,830 $ (10) $ 13,386
--------- --------- ----------- ----- ---------
--------- --------- ----------- ----- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
In July 1993, CITATION Computer Systems, Inc. ("CITATION" or the "Company")
acquired all of the issued and outstanding shares of capital stock of Rubicon
Corporation, subsequently renamed CITATION Professional Services, Inc. ("CPS")
for approximately $2,245 in cash, effective July 1, 1993. The business
combination has been accounted for as a purchase transaction; accordingly, the
accompanying financial statements include the results of operations of CPS since
the date of acquisition.
Net assets acquired consist of the following:
<TABLE>
<S> <C>
Cash................................................................ $ 121
Accounts receivable................................................. 419
Property and equipment.............................................. 247
Maintenance contracts............................................... 970
Other assets........................................................ 686
Current liabilities assumed......................................... (198)
---------
$ 2,245
---------
---------
</TABLE>
The following unaudited pro forma summary presents the combined historical
results of operations as adjusted to reflect purchase transactions assuming that
the acquisition had occurred at April 1, 1993. These pro forma results are not
necessarily indicative of the combined results that would have occurred had the
acquisition actually taken place on April 1, 1993, nor are they necessarily
indicative of the results that may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31, 1994
--------------
<S> <C>
Net sales and service revenue................................................. $ 22,228
Net income.................................................................... $ 1,364
Net income per share.......................................................... $ .36
</TABLE>
See Note 4 for discussion of the fiscal 1995 restructuring charge related to
CPS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The policies utilized by the Company in the preparation of the financial
statements conform to generally accepted accounting principles, and require
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual amounts
could differ from these estimates.
The significant accounting policies followed by the Company are described
below:
OPERATIONS
CITATION designs, develops, markets and services client/server information
systems for the healthcare industry. The Company's products focus on three main
areas: clinical, administrative/ financial, and community registration.
INVENTORIES
Inventories are valued at the lower of cost, determined on the first in,
first out basis, or market.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Major renewals and betterments
are capitalized while maintenance and repairs are expensed currently. When
property is sold or otherwise disposed of, the related cost and accumulated
depreciation are removed from the respective accounts, and any gain or loss on
disposition is credited or charged to income.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and equipment consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Furniture and fixtures.............................................. $ 1,448 $ 1,315
Hardware and shop equipment......................................... 3,229 3,687
Leasehold improvements.............................................. 158 170
Vehicles............................................................ 104 91
--------- ---------
4,939 5,263
Less -- accumulated depreciation and amortization................... (2,684) (3,507)
--------- ---------
Net property and equipment...................................... $ 2,255 $ 1,756
--------- ---------
--------- ---------
</TABLE>
The Company provides for depreciation of property and equipment by charging
against earnings amounts sufficient to amortize the cost of the properties over
the estimated useful lives generally using straight-line methods. The estimated
useful life of the assets is as follows:
<TABLE>
<S> <C>
Vehicles, furniture, fixtures and equipment....... 3 to 10 years
Remaining life of the
Leasehold improvements............................ lease
</TABLE>
REVENUE RECOGNITION
Revenue from the sale of computer systems is recognized upon shipment to the
customer providing that no significant vendor obligations remain and collection
of the related receivable is deemed probable. Costs and expenses related to
installation of the computer equipment and software system, training customer
personnel, and provision for warranties offered are estimated and recorded as
cost of sales when the related revenue is recognized.
Revenue from the sale of additional hardware and additional software is
recognized upon shipment. Costs and expenses associated with the sale of
additional hardware and software are recorded when the related revenue is
recognized. Revenue related to product warranties and maintenance service
contracts is recognized ratably over the term of the contract period. Sales
returns are treated as reductions to net system sales and service revenues.
COST OF SALES
For purposes of estimating the cost of sales related to service revenue, the
Company includes all of its customer service expenses plus an allocation of
certain other expenses based upon estimates made by management.
SOFTWARE DEVELOPMENT COSTS
Certain costs incurred in developing software products are capitalized and
amortized on a product-by-product basis using the greater of the ratio that
current gross revenues for a product bear to the current and anticipated future
gross revenues for that product or the straight-line method over the estimated
three to five year economic life of the products. The costs consist of salaries,
computer expenses and other overhead costs directly related to the development
and/or major enhancement of software products. Such costs are capitalized, to
the extent they are recoverable through future sales, from the time the
products' technological feasibility is established up to its general release to
customers. Costs incurred before or after this period are expensed as incurred.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred income taxes are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Such temporary differences result primarily
from using different methods to accrue certain expenses and to calculate
capitalization of software development costs for financial and tax reporting
purposes. Deferred tax expense represents the change in the deferred tax asset
or liability.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Earnings per common and common equivalent share is determined by dividing
net income by the aggregate weighted average number of common shares and common
share equivalents outstanding during each period presented. Common share
equivalents consist of common stock which may be issuable upon exercise of
outstanding stock options (using the treasury stock method), except when
antidilutive.
The weighted average number of shares used in computing earnings per common
and common equivalent share are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Primary....................................... 3,703,876 3,687,669 3,767,533
---------- ---------- ----------
Fully diluted................................. 3,703,876 3,688,152 3,779,759
---------- ---------- ----------
</TABLE>
FOREIGN CURRENCY TRANSLATION
The asset and liability accounts of the Company's foreign division are
translated at the year-end exchange rate. Revenue and expense amounts are
translated at monthly average exchange rates. The resulting translation
adjustment is recorded as a separate component of shareholders' equity. Foreign
currency transaction gains and losses are included in earnings when incurred.
Such foreign currency transaction gains and losses were not material for each of
the three years in the period ended March 31, 1996.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes all highly liquid investments, such as
money-market accounts and short-term discount notes, with an original maturity
of three months or less.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
DIRECTORS' FEES
During the year ended March 31, 1995, the Company adopted the Directors
Common Share Plan ("Directors' Plan") whereby certain non-employee members of
the Board of Directors ("Directors") may receive all or a portion of the
Directors' fees in the form of Company common stock in lieu of cash. During the
years ended March 31, 1995 and 1996, 5,433 and 4,959 shares of common stock
valued at $37 and $31, respectively, were issued to such Directors under the
Directors' Plan.
3. OFFICE CONSOLIDATION AND RELOCATION
In June 1995, the Company decided to consolidate the operations of its
Madison, Wisconsin, facility into its St. Louis, Missouri, headquarters. Charges
of $1,000, $58 and $322 were recorded in the first, third
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) -- (CONTINUED)
3. OFFICE CONSOLIDATION AND RELOCATION (CONTINUED)
and fourth quarters, respectively, of the fiscal year ended March 31, 1996 to
provide for the costs of the consolidation of facilities, settlement of related
employee claims and the relocation of certain employees and equipment. The major
components of the combined charges are as follows:
<TABLE>
<S> <C>
Lease buyout and asset write-off, net............................... $ 680
Employee severance and related costs................................ 171
Employee arbitration settlement and related costs................... 208
Employee relocation................................................. 112
Office move and other related expenses.............................. 209
---------
$ 1,380
---------
---------
</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. With the exception of the asset write-offs totaling
approximately $90, all costs resulted in cash payments.
4. RESTRUCTURING OF OPERATIONS
During the fourth quarter of the fiscal year ended March 31, 1995, the
Company initiated various activities to restructure its operations in order to
reduce its cost structure and remain competitive.
Restructuring activities resulted in net charges of $3,426 which included
$2,801 related to the write-off of capitalized software costs, inventory and
intangible assets associated with discontinued product lines, certain
maintenance contracts and intangible assets associated with the CPS acquisition
and $625 for severance and related benefit costs associated with changes in the
Company's executive management. With the exception of the asset write-offs,
these restructuring charges resulted in cash outlays.
Accrued restructuring costs totaling $292 were paid during the fiscal year
ended March 31, 1996, and no additional costs were incurred or are expected.
5. CONCENTRATION OF CREDIT RISK
The Company generates revenue primarily through sales to the healthcare
industry located throughout the United States. Due to this concentration,
substantially all receivables at March 31, 1995 and 1996 are from healthcare
institutions which may be similarly affected by changes in economic, regulatory
or other conditions.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company maintains reserves for
potential credit losses and such losses have been within management's
expectations.
The Company invests its excess cash in deposits with major financial
institutions, in U.S. government agency securities and in commercial paper of
companies with strong credit ratings. Generally, the investments mature within
90 days and, therefore, are subject to little risk. The Company has not
experienced losses related to these investments.
6. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
-------------------- -----------
1995 1996 1996
--------- --------- -----------
<S> <C> <C> <C>
Hardware and third party software................................... $ 286 $ 322 $ 344
Field service equipment............................................. 248 215 215
--------- --------- -----
$ 534 $ 537 $ 559
--------- --------- -----
--------- --------- -----
</TABLE>
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) -- (CONTINUED)
7. DEBT
Long-term debt consists of bank notes payable with interest rates ranging
from 8.09% to 8.75% due through March 2000. Long-term debt at March 31, 1995 and
1996, was $660 and $593, respectively.
As of March 31, 1996, the Company had a line of credit agreement with a
bank. The line of credit allows the Company to borrow up to $1,000 through July
31, 1996, with interest at the bank's prime rate (8.25% at March 31, 1996).
There were no borrowings outstanding under the line of credit agreement in
effect at March 31, 1996.
The line of credit and the notes payable are secured by the Company's
accounts receivable, inventory, equipment and general intangible assets. The
respective agreements require that certain minimum net worth and leverage ratio
requirements be maintained by the Company. The Company was in compliance with
these requirements at March 31, 1996.
The aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
-------------
<S> <C>
1997................................................................... $ 143
1998................................................................... 359
1999................................................................... 54
2000................................................................... 37
-----
$ 593
-----
-----
</TABLE>
8. INCOME TAXES
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal...................................................... $ 164 $ (620) $ 341
State........................................................ 53 (159) 62
--------- --------- ---------
217 (779) 403
--------- --------- ---------
Deferred:
Federal...................................................... 497 (106) 418
State........................................................ 94 8 80
--------- --------- ---------
591 (98) 498
--------- --------- ---------
$ 808 $ (877) $ 901
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision (benefit) for income taxes differs from the amount computed
using the statutory federal income tax rate (34%) as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Income tax provision (benefit) at the statutory rate......... $ 730 $ (919) $ 787
Increases (decreases):
State income taxes, net...................................... 97 (108) 94
Write-off of CPS acquisition costs........................... -- 70 --
Other, net................................................... (19) 80 20
--------- --------- ---------
$ 808 $ (877) $ 901
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) -- (CONTINUED)
8. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities at March 31, 1995 and 1996, are as
follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Current deferred tax asset:
Accrued liabilities....................................................... $ 58 $ 29
Allowance for doubtful accounts........................................... 56 68
Other, net................................................................ 45 (14)
--------- ---
Total current deferred tax asset.......................................... $ 159 $ 83
--------- ---
--------- ---
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Long-term deferred tax liability:
Capitalized software development costs.............................. $ 1,523 $ 1,952
Depreciation........................................................ (33) (29)
State taxes......................................................... (69) (97)
Tax credit carry forward............................................ (90) (90)
Other, net.......................................................... (77) (60)
--------- ---------
Total deferred tax liability.......................................... $ 1,254 $ 1,676
--------- ---------
--------- ---------
</TABLE>
9. STOCK OPTIONS AND WARRANTS
On April 20, 1992, the board of directors and shareholders approved the
adoption of the 1992 Employee Incentive Stock Option Plan which provides for the
issuance of up to 148,347 stock options to executive officers or other key
employees of the Company.
On October 13, 1993, the board of directors adopted an amendment to the 1992
Employee Incentive Stock Option Plan which increased the number of stock options
available for issuance to executive officers or other key employees of the
Company by 200,000.
The Company's incentive stock option plan allows participation, with certain
restrictions, by all full-time employees with one year of service. Options
granted allow employees to purchase shares of the Company's common stock at
prices not less than the fair market value of the stock at the date of the
grant. Options which have been granted under the plan are exercisable during the
employment of the grantee or at specified time intervals. Outstanding options
expire between 1995 and 2005.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) -- (CONTINUED)
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
Stock option transactions (number of shares) are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------
1994 1995 1996
--------- --------- ----------
<S> <C> <C> <C>
Shares under option, beginning of period............................... 225,023 291,626 255,292
Stock options granted at an option price of $4.50...................... -- -- 56,500
Stock options granted at an option price of $6.00...................... 113,600 -- --
Stock options granted at an option price of $6.88...................... -- 48,000 --
Stock options forfeited................................................ (24,333) (47,335) (131,164)
Non-qualified stock options granted at an option price of $5.00........ -- -- 150,000
Non-qualified stock options granted at an option price of $6.00........ 16,400 -- --
Non-qualified stock options granted at an option price of $7.19........ -- 30,333 --
Stock options exercised at $1.04....................................... (39,064) (57,332) (13,965)
Stock options exercised at $6.00....................................... -- (10,000) (10,000)
Stock options exercised at $8.51....................................... -- -- (7,166)
--------- --------- ----------
Shares under option, end of period..................................... 291,626 255,292 299,497
--------- --------- ----------
--------- --------- ----------
</TABLE>
Paid-in capital is credited with proceeds received in excess of the par
value of shares issued under the stock option plan. No charges are made to
income in accounting for this plan due to the options being granted with an
exercise price at or above the fair value of the common stock on the date of
grant.
At March 31, 1996, 234,997 options outstanding were exercisable. During the
years ended March 31, 1997 and 1998, an additional 60,500 and 4,000,
respectively, options outstanding will become exercisable. Options on 202,017
shares were available for grant under the 1992 Employee Incentive Stock Option
Plan at March 31, 1996.
NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("FAS 123") which addresses accounting for stock option, purchase
and award plans. FAS 123 specifies that companies utilize either the "fair value
based method" or the "intrinsic value based method" for valuing stock options
granted. The Company will adopt FAS 123 during the year ending March 31, 1997,
and expects to utilize the "intrinsic value based method" for valuing stock
options granted. The Company anticipates that when adopted, FAS 123 will have no
material effect on its consolidated financial position or consolidated results
of operation.
10. PROFIT AND SAVINGS INCENTIVE PLANS
CITATION maintains a Retirement Savings Plan for the benefit of
substantially all CITATION employees. Employee contributions may range from 1%
to 15% of compensation, and CITATION matches a discretionary percentage of an
employee's contribution. The match will be based on the employee's contribution
up to 6% of the employee's compensation.
For the plan year ended December 31, 1995, the matching contribution was 25%
of such contributions, and was paid in the form of cash the first three quarters
of the year and in the form of Company stock for the fourth quarter. It is the
Company's current intention to continue to make the matching contribution in the
form of Company stock. Employees are 100% vested as to employee contributions
and are vested as to employer contributions at the rate of 20% per year,
beginning in the second year of service.
For the years ended March 31, 1994, 1995 and 1996, the Company recorded
expense of approximately $66, $82 and $66, respectively, relating to this plan.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) -- (CONTINUED)
11. LEASES
The Company leases its office and warehouse facilities and certain office
equipment. The lease terms are generally for five to ten years. Rental expense
under operating leases for the years ended March 31, 1994, 1995 and 1996, was
approximately $578, $916 and $685, respectively.
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
-----------
<S> <C>
1997................................................................... $ 495
1998................................................................... 471
1999................................................................... 447
2000................................................................... 468
2001................................................................... 476
Thereafter............................................................. 1,546
-----------
$ 3,903
-----------
-----------
</TABLE>
12. COMMITMENTS
The Company has entered into employment agreements with two of its executive
officers. The agreements provide for terms of employment through December 1997
and March 1998, respectively, and include annual compensation, bonuses, and
various other benefits. The agreements may be terminated by the Company for
cause, as defined in the employment agreements. The agreements require severance
benefits for termination without cause.
The Company from time to time is a party to certain lawsuits. Management and
legal counsel do not expect the outcome of any litigation to have a material
adverse effect on the Company's financial position or results of operations. As
of the date hereof, the Company does not know of any pending lawsuits.
13. RELATED PARTY TRANSACTIONS
During the years ended March 31, 1994, 1995 and 1996, the Company paid
approximately $90, $180 and $113, respectively, in fees to consulting firms,
certain executives of which are directors of the Company.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) -- (CONTINUED)
14. SEGMENT INFORMATION
Worldwide operations data, as required by Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business Enterprise,"
are listed below. Profitability of the Company's operations by location was
determined based on ultimate sales to unaffiliated customers. Total Company
profit was included in the location of the entity transacting the final sale.
<TABLE>
<CAPTION>
NET
REVENUES, EARNINGS
UNAFFILIATED (LOSS) FROM IDENTIFIABLE
CUSTOMERS OPERATIONS ASSETS
------------ ----------- ------------
<S> <C> <C> <C>
For years ended March 31,
1994
United States....................................... $ 20,831 $ 2,324 $ 17,777
United Kingdom...................................... 699 (331) 1,342
------------ ----------- ------------
$ 21,530 $ 1,993 $ 19,119
------------ ----------- ------------
------------ ----------- ------------
1995
United States....................................... $ 21,963 $ (1,383) $ 15,790
United Kingdom...................................... 1,402 (1,421) 3,100
------------ ----------- ------------
$ 23,365 $ (2,804) $ 18,890
------------ ----------- ------------
------------ ----------- ------------
1996
United States....................................... $ 21,983 $ 2,849 $ 16,749
United Kingdom...................................... 3,068 (631) 4,508
------------ ----------- ------------
$ 25,051 $ 2,218 $ 21,257
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
EARNINGS (LOSS)
NET SALES GROSS PROFIT NET INCOME (LOSS) PER SHARE
-------------------- -------------------- -------------------------- --------------------------
1995 1996 1995 1996 1995 1996 1995 1996
--------- --------- --------- --------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1st quarter.......... $ 5,717 $ 5,635 $ 2,968 $ 3,019 $ 215 $ (197)(2) $ .06 $ (.05)(2)
2nd quarter.......... 6,835 4,644 3,836 2,256 586 20 .16 .01
3rd quarter.......... 5,352 6,457 2,635 3,852 (182) 821(2) (.05) .22(2)
4th quarter.......... 5,461 8,315 2,056 4,854 (2,444)(1) 768(2) (.66)(1) .20(2)
--------- --------- --------- --------- ------------ ------ ----- -----
Total.............. $ 23,365 $ 25,051 $ 11,495 $ 13,981 $ (1,825) $ 1,412 $ (.49) $ .38(3)
--------- --------- --------- --------- ------------ ------ ----- -----
--------- --------- --------- --------- ------------ ------ ----- -----
</TABLE>
- ------------
(1) See Note 4 regarding restructuring of operations in the fourth quarter of
the fiscal year ended March 31, 1995.
(2) See Note 3 regarding office consolidation and relocation during the fiscal
year ended March 31, 1996.
(3) The annual earnings per share amount does not agree to the sum of the
quarters as a result of changes in the market prices of the Company's common
stock and the application of the treasury stock method.
16. SUBSEQUENT EVENT
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. Mr. Poggio remains a director of the Company.
F-16
<PAGE>
[A GRAPHIC DEPICTION OF AN ANNOTATED SAMPLE SCREEN, DESCRIBING CERTAIN FEATURES
OF THE COMPANY'S COMMON USER REGISTRATION ENTRY SYSTEM SOFTWARE PRODUCT]
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, ANY UNDERWRITER OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES, OR AN
OFFER TO, OR A SOLICITATION OF ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER
OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DAY
SUBSEQUENT TO THE DATE HEREOF.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
The Company.................................... 10
Use of Proceeds................................ 10
Dividend Policy................................ 10
Price Range of Common Stock.................... 10
Capitalization................................. 11
Selected Consolidated Financial Data........... 12
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 13
Business....................................... 22
Management..................................... 30
Principal and Selling Shareholders............. 32
Description of Capital Stock................... 33
Shares Eligible for Future Sale................ 36
Company Director and Employee Offering......... 36
Underwriting................................... 38
Legal Matters.................................. 39
Experts........................................ 39
Additional Information......................... 39
Incorporation of Certain Documents by
Reference..................................... 40
Index to Consolidated Financial Statements..... F-1
</TABLE>
2,732,311 SHARES
[LOGO]
COMMON STOCK
---------------
PROSPECTUS
, 1996
---------------
VOLPE, WELTY & COMPANY
JEFFERIES & COMPANY, INC.
PUNK, ZIEGEL & KNOELL
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemized list of the estimated expenses to be incurred
in connection with the offering of the securities being offered hereunder other
than underwriting discounts and commissions.
<TABLE>
<CAPTION>
Registration Fee.......................................................... $ 18,000
<S> <C>
"Blue Sky" Registration Fees.............................................. 10,000
NASD Supplemental Application Filing Fee.................................. 18,000
Printing and Engraving Expenses........................................... 150,000
Legal Fees and Expenses................................................... 200,000
Accountants' Fees and Expenses............................................ 35,000
Miscellaneous............................................................. 119,000
---------
Total................................................................... $ 550,000
---------
---------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) The Missouri General and Business Corporations Law (Section 351.355)
gives Missouri corporations broad powers to indemnify their present and former
directors and officers and those of affiliated corporations against expenses
incurred in the defense of any lawsuit to which they are made parties by reason
of being or having been such directors or officers, subject to specified
conditions and exclusions, gives a director or officer who successfully defends
an action the right to be so indemnified, and authorizes the registrant to buy
directors' and officers' liability insurance. Such indemnification is not
exclusive of any other rights to which those indemnified may be entitled under
any articles of incorporation, by-laws, agreement, vote of shareholders or
disinterested directors or otherwise.
(b) Article XI of the Articles of Incorporation of the registrant permits,
and Article VII of the By-laws of the registrant provides for indemnification of
directors and officers, and permits the Board of Directors to grant employees
and agents indemnification, to the fullest extent permitted by law.
(c) Reference is made to Section 11 of the Underwriting Agreement (the form
of which is included as Exhibit 1 to this Registration Statement) for provisions
regarding the indemnification under certain circumstances of the registrant, its
directors and certain of its officers by the Underwriters.
II-1
<PAGE>
ITEM 16. EXHIBITS
(a) All financial statements, schedules and historical financial information
have been omitted as they are not applicable.
<TABLE>
<C> <C> <S>
(b) *1.1 Form of Underwriting Agreement
4.1 Specimen Common Stock Certificate; incorporated by reference to the
corresponding Exhibit to the registrant's Registration Statement on
Form S-1, Registration No. 33-48332
4.2 Restated Articles of Incorporation of the registrant; incorporated by
reference to the corresponding Exhibit to the registrant's
Registration Statement on Form S-1, Registration No. 33-48332
4.3 Restated By-laws of the registrant; incorporated by reference to the
corresponding Exhibit to the registrant's Registration Statement on
Form S-1 Registration No. 33-48332
*5.1 Opinion of Mayer, Brown & Platt with respect to legality
10.1 Registration Rights Agreement, dated May 29, 1992, between the
registrant and Capital for Business, Inc.; incorporated by reference
to the corresponding Exhibit to the registrant's Registration
Statement on Form S-1, Registration No. 33-48332
10.2 Form of Amendment to Registration Rights Agreement, dated October 23
1992, between the registrant and Capital for Business, Inc.;
incorporated by reference to the corresponding Exhibit to the
registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1992
10.3 First Amended Incentive Stock Option Plan; incorporated by reference
to the corresponding Exhibit to the registrant's Registration
Statement on Form S-1, registration No. 33-48332
10.4 Resolution Amending the First Amended Incentive Stock Option Plan;
incorporated by reference to the corresponding Exhibit to the
registrant's Registration Statement on Form S-1, Registration No.
33-48332
10.5 Amendment to First Amended Incentive Stock Option Plan; incorporated
by reference to the corresponding Exhibit to the registrant's
Registration Statement on Form S-1, Registration No. 33-48332
10.6 1992 Employee Incentive Stock Option Plan; incorporated by reference
to the corresponding Exhibit to the registrant's Registration
Statement on Form S-1, Registration No. 33-48332
10.7 Non-competition/Non-solicitation Agreement, dated as of December 11,
1992, among the registrant, Health Micro Data Systems, Inc., and Frank
L. Poggio; incorporated by reference to the corresponding Exhibit to
the registrant's Form 10-K for the fiscal year ended March 31, 1993
10.8 Employment Agreement, dated December 11, 1992, among Health Micro Data
Systems, Inc., the registrant, and Frank L. Poggio; incorporated by
reference to the corresponding Exhibit to the registrant's Form 10-K
for the fiscal year ended March 31, 1993
10.9 Agreement, dated March 16, 1992, between the registrant and William H.
J. Seabrook; incorporated by reference to the corresponding Exhibit to
the registrant's Form 10-K for the fiscal year ended March 31, 1993
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <C> <S>
10.10 Agreement, dated to be effective April 1, 1993, between the registrant
and William H. J. Seabrook; incorporated by reference to the
corresponding Exhibit to the registrant's Form 10-K for the fiscal
year ended March 31, 1993
10.11 Software Systems Program Product License, dated October 14, 1992,
between Health Micro Data Systems, Inc., and Presbyterian Healthcare
Services; incorporated by reference to the corresponding Exhibit to
the registrant's Form 10-K for the fiscal year ended March 31, 1993
10.12 Line of Credit Note and General Loan and Security Agreement, dated
January 9, 1995, between the registrant and Commerce Bank of St.
Louis; incorporated by reference to the corresponding Exhibit to the
registrant's 10-KSB for the fiscal year ended March 31, 1996
10.13 Amendment to Line of Credit and General Loan and Security Agreement,
dated October 2, 1995, between the registrant and Commerce Bank of St.
Louis; incorporated by reference to the registrant's 10-KSB for the
fiscal year ended March 31, 1996
10.14 Employment Agreement, dated July 25, 1995, among the registrant and J.
Robert Copper; incorporated by reference to the corresponding Exhibit
to the registrant's Form 10-KSB for the fiscal year ended March 31,
1996
10.15 Agreement, dated January 15, 1996, between the registrant and William
H.J. Seabrook; incorporated by reference to the corresponding Exhibit
to the registrant's Form 10-KSB for the fiscal year ended March 31,
1996
*10.16 Agreement dated July 15, 1996 between the Company and Frank L. Poggio
*23.1 Consent of Mayer, Brown & Platt (included in its opinion filed as
Exhibit 5.1)
*23.2 Consent of Price Waterhouse LLP
**24.1 Powers of Attorney
</TABLE>
- ---------
* Filed herewith.
** Previously filed.
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers and controlling persons of the registrant pursuant to the provisions
described under Item 15 above, 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 Securities 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 whether such indemnification by it is against public
policy as expressed in such Securities Act, and will be governed by the final
adjudication of such issue.
(b) For determining any liability under the Securities Act, the registrant
shall treat the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A under the Securities Act
and contained in a form of prospectus filed by the registrant under Rule
424(b)(1), or (4), or 497(h) under the Securities Act as part of this
Registration Statement as of the time the Commission declared it effective.
(c) For determining any liability under the Securities Act, the registrant
shall treat each post-effective amendment that contains a form of prospectus as
a new registration statement for the Common Stock offered in this Registration
Statement, and that offering of the Common Stock at that time as the initial
BONA FIDE offering.
II-3
<PAGE>
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-2 and has duly caused this Amendment No. 2 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Chesterfield, Missouri, on the 28th day of
August, 1996.
CITATION COMPUTER SYSTEMS, INC.
By: /S/ RICHARD D. NEECE
-----------------------------------
Name: Richard D. Neece
Title:Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
NAME TITLE DATE
- ------------------------------------------------------ ------------------------------------- ------------------
*
------------------------------------------- Chief Executive Officer; August 28, 1996
J. Robert Copper Director
* Executive Vice President and Chief
------------------------------------------- Financial Officer (Principal August 28, 1996
Richard D. Neece Financial and Accounting Officer)
*
------------------------------------------- Director August 28, 1996
Fred L. Brown
*
------------------------------------------- Director August 28, 1996
James F. O'Donnell
*
------------------------------------------- Director August 28, 1996
David T. Pieroni
*
------------------------------------------- Director August 28, 1996
Frank L. Poggio
*
------------------------------------------- Director August 28, 1996
William H.J. Seabrook
*Signature by Richard D. Neece as Attorney-in-Fact
under Power of Attorney.
By: /S/ RICHARD D. NEECE
------------------------------------
Name: Richard D. Neece
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION OF EXHIBIT PAGE NUMBER
- --------- ----------------------------------------------------------------------------------------- ---------------
<C> <S> <C>
1.1 Form of Underwriting Agreement...........................................................
5.1 Opinion of Mayer, Brown & Platt with respect to legality.................................
10.16 Agreement dated July 15, 1996 between the Company and Frank L. Poggio
23.1 Consent of Mayer, Brown & Platt (included in its opinion filed as Exhibit 5.1)...........
23.2 Consent of Price Waterhouse LLP..........................................................
</TABLE>
<PAGE>
EXHIBIT 1.1
8/29 DRAFT; SUBJECT TO NEGOTIATION
2,732,311 Shares(1)
CITATION COMPUTER SYSTEMS, INC.
Common Stock
UNDERWRITING AGREEMENT
September __, 1996
Volpe, Welty & Company
Jefferies & Company, Inc.
Punk, Ziegel & Knoell
As Representatives of the several Underwriters
c/o Volpe, Welty & Company
One Maritime Plaza, 11th Floor
San Francisco, California 94111
Gentlemen and Ladies:
Citation Computer Systems, Inc., a Missouri corporation (the "COMPANY"),
proposes to issue and sell 2,000,000 shares of its authorized but unissued
Common Stock, $0.10 par value (the "COMMON STOCK"), and the shareholders of the
Company named in Schedule II hereto (collectively, the "SELLING
SECURITYHOLDERS") propose to sell an aggregate of 732,311 shares of Common Stock
of the Company (the "FIRM SHARES"). The Company and the Selling Securityholders
propose to grant to the Underwriters (as defined below) an option to purchase up
to 409,847 additional shares of Common Stock (the "OPTIONAL SHARES" and, with
the Firm Shares, collectively, the "SHARES"). The Common Stock is more fully
described in the Registration Statement and the Prospectus hereinafter
mentioned.
The Company and the Selling Securityholders severally hereby confirm the
agreements made with respect to the purchase of the shares by the several
underwriters, for whom you are acting, named in Schedule I hereto (collectively,
the "UNDERWRITERS," which term shall also include any underwriter purchasing
Stock pursuant to Section 3(b) hereof). You represent and warrant that you have
been authorized by each of the other Underwriters to enter into this Agreement
on its behalf and to act for it in the manner herein provided.
- --------------------
(1) Plus an option to purchase from the Company and the Selling Securityholders
up to 409,847 additional shares to cover over-allotments.
<PAGE>
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to the several Underwriters as of the date hereof
and as of each Closing Date (as defined below) that:
a. The Company has filed with the Securities and Exchange Commission (the
"COMMISSION") a registration statement on Form S-2 (No. 333-08195), including
the related preliminary prospectus, for the registration under the Securities
Act of 1933, as amended (the "SECURITIES ACT") of the Shares. Copies of such
registration statement and of each amendment thereto, if any, including the
related preliminary prospectus (meeting the requirements of Rule 430A of the
rules and regulations of the Commission promulgated under the Securities Act
(the "RULES AND REGULATIONS")) heretofore filed by the Company with the
Commission have been delivered to you.
The term Registration Statement as used in this agreement shall mean such
registration statement, including all documents incorporated by reference
therein, all exhibits and financial statements, all information omitted
therefrom in reliance upon Rule 430A and contained in the Prospectus referred to
below, in the form in which it became effective, and any registration statement
filed pursuant to Rule 462(b) of the Rules and Regulations with respect to the
shares (a "RULE 462(b) REGISTRATION STATEMENT"), and, in the event of any
amendment thereto after the effective date of such registration statement (the
"EFFECTIVE DATE"), shall also mean (from and after the effectiveness of such
amendment) such registration statement as so amended (including any Rule 462(b)
Registration Statement). The term Prospectus as used in this Agreement shall
mean the prospectus, including the documents incorporated by reference therein,
relating to the Shares first filed with the Commission pursuant to Rule 424(b)
and Rule 430A (or if no such filing is required, as included in the Registration
Statement) and, in the event of any supplement or amendment to such prospectus
after the Effective Date, shall also mean (from and after the filing with the
Commission of such supplement or the effectiveness of such amendment) such
prospectus as so supplemented or amended. The term Preliminary Prospectus as
used in this Agreement shall mean each preliminary prospectus included in such
registration statement prior to the time it becomes effective.
The Registration Statement has been declared effective under the Securities
Act, and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. The Company has caused to be delivered
to you copies of each Preliminary Prospectus and has consented to the use of
such copies for the purposes permitted by the Securities Act.
b. Each of the Company and its subsidiaries have been duly incorporated
and is validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has full corporate power and authority to own
or lease its properties and conduct its business as described in the
Registration Statement and the Prospectus and as being conducted, and is duly
qualified as a foreign corporation and in good standing in all jurisdictions in
which the character of the property owned or leased or the nature of the
business transacted by it makes qualification necessary (except where the
failure to be so qualified would not have a material adverse effect on the
business, properties, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole (any such effect being referred
to as a "MATERIAL ADVERSE EFFECT")).
-2-
<PAGE>
c. The Company does not own or control, directly or indirectly, any
corporation, association or other entity, other than the subsidiaries listed in
the Annual Report on Form 10-K for the Company's most recent fiscal year. The
Company owns all of the outstanding capital stock of its subsidiaries free and
clear of all claims, liens, charges and encumbrances. The Company and each of
its subsidiaries are in possession of and operating in substantial compliance
with all material authorizations, licenses, permits, consents, certificates and
orders material to the conduct of their respective businesses as described in
the Prospectus, all of which are valid and in full force and effect.
d. Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there has not been any materially
adverse change in the business, properties, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole, whether or not
arising from transactions in the ordinary course of business, other than as set
forth in the Registration Statement and the Prospectus, and since such dates,
except in the ordinary course of business, neither the Company nor any of its
subsidiaries has entered into any material transaction not referred to in the
Registration Statement and the Prospectus.
e. The Registration Statement and the Prospectus comply, and on the
Closing Date (as hereinafter defined) and any later date on which Optional
Shares are to be purchased, the Prospectus will comply, in all material
respects, with the provisions of the Securities Act and the Securities Exchange
Act of 1934, as amended (the "EXCHANGE ACT") and the rules and regulations of
the Commission thereunder; on the Effective Date, the Registration Statement did
not contain any untrue statement of a material fact and did not omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein not misleading; and, on the Effective Date the Prospectus
did not and, on the Closing Date and any later date on which Optional Shares are
to be purchased, will not contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; PROVIDED, HOWEVER, that none of the representations and warranties
in this subparagraph 1.e shall apply to statements in, or omissions from, the
Registration Statement or the Prospectus made in reliance upon and in conformity
with information herein or otherwise furnished in writing to the Company by or
on behalf of the Underwriters for use in the Registration Statement or the
Prospectus. Notwithstanding the foregoing, the Company makes no representation
with respect to information concerning the Selling Securityholders.
f. The Company has authorized and outstanding capital stock as set forth
under the heading "Capitalization" in the Prospectus. The issued and
outstanding shares of Common Stock have been duly authorized and validly issued,
are fully paid and nonassessable, have been issued in compliance with all
federal and state securities laws, and were not issued in violation of or
subject to any preemptive rights or other rights to subscribe for or purchase
securities. All issued and outstanding shares of capital stock of each
subsidiary of the Company have been duly authorized and validly issued and are,
fully paid and nonassessable. Except as disclosed in or contemplated by the
Prospectus and the financial statements of the Company and the related notes
thereto included in the Prospectus, neither the Company nor any subsidiary has
any outstanding options to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations
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convertible into, or any contracts or commitments to issue or sell, shares of
its capital stock or any such options, rights, convertible securities or
obligations.
g. The Shares are duly authorized, are (or, in the case of Shares to be
sold by the Company, will be, when issued and sold to the Underwriters as
provided herein) validly issued, fully paid and nonassessable and conform to the
description thereof in the Prospectus. No further approval or authority of the
shareholders or the Board of Directors of the Company will be required for the
transfer and sale of the Shares to be sold by the Selling Securityholders or the
issuance and sale of the Shares to be sold by the Company as contemplated
herein.
h. The Shares to be sold by the Selling Securityholders are duly admitted
to trading on the Nasdaq National Market, and prior to the Closing Date, the
Shares to be issued and sold by the Company will be authorized for listing on
the Nasdaq National Market upon official notice of issuance.
i. The Shares to be sold by the Company will be sold free and clear of
any pledge, lien, security interest, encumbrance, claim or equitable interest,
and will conform to the description thereof contained in the Prospectus. No
shareholder of the Company has any right which has not been waived, or complied
with, to require the Company to register the sale of any shares owned by such
stockholder under the Securities Act in the public offering contemplated by this
Agreement, and no other preemptive right, co-sale right, registration right,
right of first refusal or other similar right to subscribe for or purchase
securities of the Company exists with respect to the issuance and sale of the
Shares by the Company pursuant to this Agreement.
j. The Company has full corporate power and authority to enter into this
Agreement and perform the transactions contemplated hereby in all material
respects. This Agreement has been duly authorized, executed and delivered by
the Company and constitutes a valid and binding obligation of the Company
enforceable in accordance with its terms, except as enforceability may be
limited by general equitable principles, bankruptcy, insolvency, reorganization,
moratorium laws affecting creditors' rights generally and except as to those
provisions relating to indemnity or contribution for liabilities arising under
federal and state securities laws. The making and performance of this Agreement
by the Company and the consummation of the transactions contemplated hereby (1)
will not violate any provisions of the Articles of Incorporation, Bylaws or
other organizational documents of the Company or any of its subsidiaries, and
(2) will not conflict with, result in a material breach or violation of, or
constitute, either by itself or upon notice or the passage of time or both, a
material default under (A) any agreement, mortgage, deed of trust, lease,
franchise, license, indenture, permit or other instrument to which the Company
or any of its subsidiaries is a party or by which the Company or any of its
subsidiaries or any of their respective properties may be bound or affected, or
(B) any statute or any authorization, judgment, decree, order, rule or
regulation of any court or any regulatory body, administrative agency or other
governmental body applicable to the Company or any of its subsidiaries or any of
their respective properties. No consent, approval, authorization or other order
of any court, regulatory body, administrative agency or other governmental body
that has not already been obtained is required for the execution and delivery of
this Agreement or the consummation of the transactions contemplated by this
Agreement, except for compliance with the
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Securities Act, the Blue Sky laws applicable to the public offering of the
Common Shares by the several Underwriters and the clearance of such offering
with the National Association of Securities Dealers, Inc. ("NASD").
k. The consolidated financial statements and schedules of the Company and
the related notes thereto included in the Registration Statement and the
Prospectus present fairly on a consolidated basis the financial position of the
Company and its subsidiaries as of the respective dates of such financial
statements and schedules, and the results of operations and cash flows of the
Company and its subsidiaries for the respective periods covered thereby. Such
statements, schedules and related notes have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods specified, as certified by the independent accountants
named in subsection 10.f. No other financial statements or schedules are
required to be included in the Registration Statement. The selected financial
data set forth in the Prospectus under the captions "Capitalization" and
"Selected Consolidated Financial Information" fairly present the information set
forth therein on the basis stated in the Registration Statement.
l. The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (1) transactions are executed
in accordance with management's general or specific authorizations, (2)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets, (3) access to assets is permitted only in
accordance with management's general or specific authorization, and (4) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences. The representations and warranties given by the Company and its
officers to its independent public accountants for the purpose of supporting the
letters referred to in Section 10.f are true and correct.
m. Neither the Company nor any of its subsidiaries is (1) in violation or
default of any provision of its Articles of Incorporation, Bylaws or other
organizational documents, or (2) in a material breach of or default with respect
to any provision of any agreement, judgment, decree, order, mortgage, deed of
trust, lease, franchise, license, indenture, permit or other instrument to which
it is a party or by which it or any of its properties are bound; and to the
Company's knowledge (as used in this Agreement, the knowledge of the Company
shall mean the actual knowledge of the current executive officers of the
Company, as such officers are identified in the section titled "Management" in
the Prospectus), there does not exist any state of facts which, with notice or
lapse of time or both, would constitute such a breach or default on the part of
the Company and its subsidiaries, taken as a whole.
n. There are no contracts or other documents required to be described in
the Registration Statement or to be filed as exhibits to the Registration
Statement by the Securities Act or by the Rules and Regulations which have not
been described or filed as required. The contracts so described in the
Prospectus are in full force and effect on the date hereof.
o. Except as disclosed in the Prospectus, there are no legal or
governmental actions, suits or proceedings pending or, to the Company's
knowledge, threatened to which the Company or any
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of its subsidiaries is or is threatened to be made a party or of which property
owned or leased by the Company or any of its subsidiaries is or is threatened to
be made the subject, which actions, suits or proceedings could, individually or
in the aggregate, prevent or adversely affect the transactions contemplated by
this Agreement or result in a Material Adverse Effect; and no labor disturbance
by the employees of the Company or any of its subsidiaries exists or is imminent
which could give rise to a Material Adverse Effect. Neither the Company nor any
of its subsidiaries is a party or subject to the provisions of any material
injunction, judgment, decree or order of any court, regulatory body,
administrative agency or other governmental body. Except as disclosed in the
Prospectus, there are no material legal or governmental actions, suits or
proceedings pending or, to the Company's and the Selling Securityholders'
knowledge, threatened against any executive officers or directors of the
Company.
p. The Company or the applicable subsidiary has good and marketable title
to all the properties and assets reflected as owned in the financial statements
hereinabove described (or elsewhere in the Prospectus), subject to no lien,
mortgage, pledge, charge or encumbrance of any kind except (1) those, if any,
reflected in such financial statements (or elsewhere in the Prospectus), or (2)
those which are not material in amount to the Company or its subsidiaries, and
do not adversely affect the use made and proposed to be made of such property by
the Company or its subsidiaries. The Company or the applicable subsidiary holds
its leased properties under valid and binding leases. Except as disclosed in
the Prospectus, the Company owns or leases all such properties as are necessary
to its operations as now conducted or as proposed to be conducted.
q. Since the respective dates as of which information is given in the
Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus: (1) the Company and its
subsidiaries have not (A) incurred any material liabilities or obligations,
indirect, direct or contingent, or (B) entered into any oral or written
agreement or other transaction, which in the case of (A) or (B) is not in the
ordinary course of business; (2) the Company and its subsidiaries have not
sustained any material loss or interference with their respective businesses or
properties from fire, flood, windstorm, accident or other calamity, whether or
not covered by insurance; (3) the Company and its subsidiaries have not paid or
declared any dividends or other distributions with respect to their respective
capital stock and the Company and its subsidiaries are not in default in the
payment of principal or interest on any outstanding debt obligations; (4) there
has not been any change in the capital stock of the Company or its subsidiaries
(other than upon the sale of the Shares hereunder or upon the exercise of any
options or warrants disclosed in the Prospectus); (5) there has not been any
material increase in the short- or long-term debt of the Company and its
subsidiaries; and (6) there has not been any Material Adverse Effect or any
development involving or which may reasonably be expected to involve a
prospective Material Adverse Effect.
r. The Company and its subsidiaries are conducting business in compliance
with all applicable laws, rules and regulations of the jurisdictions in which
they are conducting business, except where the failure to be so in compliance
would not have a Material Adverse Effect.
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s. The Company and its subsidiaries have filed all necessary federal,
state and foreign income and franchise tax returns, and all such tax returns are
complete and correct in all material respects, and the Company and its
subsidiaries have not failed to pay any taxes which were payable pursuant to
said returns or any assessments with respect thereto. The Company has no
knowledge of any tax deficiency which has been or is likely to be threatened or
asserted against the Company or its subsidiaries.
t. The Company has not distributed, and will not distribute prior to the
later to occur of (1) completion of the distribution of the Shares, or (2) the
expiration of any time period within which a dealer is required under the
Securities Act to deliver a prospectus relating to the Shares, any offering
material in connection with the offering and sale of the Shares other than the
Prospectus, the Registration Statement and any other materials permitted by the
Securities Act and consented to by the Underwriters.
u. Each of the Company and its subsidiaries maintains insurance of the
types and in the amounts generally deemed adequate for their business,
including, but not limited to, directors' and officers' insurance, insurance
covering real and personal property owned or leased by the Company and its
subsidiaries against theft, damage, destruction, acts of vandalism and all other
risks customarily insured against, all of which insurance is in full force and
effect. The Company has not been refused any insurance coverage sought or
applied for, and the Company has no reason to believe that it will not be able
to renew its existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to continue
its business at a cost that would not give rise to a Material Adverse Effect.
v. Neither the Company nor any of its subsidiaries nor, to the knowledge
of the Company any of their employees or agents has at any time during the last
five years (1) made any unlawful contribution to any candidate for foreign
office, or failed to disclose fully any contribution in violation of law, or (2)
made any payment to any foreign, federal or state governmental officer or
official or other person charged with similar public or quasi-public duties,
other than payments required or permitted by the laws of the United States or
any jurisdiction thereof.
w. The Company has not taken and will not take, directly or indirectly,
any action designed to or that might be reasonably expected to cause or result
in stabilization or manipulation of the price of the Common Stock to facilitate
the sale or resale of the Shares.
x. Neither the Company nor any of its affiliates does business with the
government of Cuba or with any person or affiliate located in Cuba.
y. Except as specifically disclosed in the Prospectus, the Company and
its subsidiaries have sufficient trademarks, trade names, patent rights,
copyrights, licenses, approvals and governmental authorizations to conduct their
businesses as now conducted (except where their absence would not have a
Material Adverse Effect); the expiration of any trademarks, trade names, patent
rights, copyrights, licenses, approvals or governmental authorizations would not
have a Material Adverse Effect; neither the Company nor any Selling
Securityholder has any knowledge
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of any infringement by the Company or its subsidiaries of trademark, trade name
rights, patent rights, copyrights, licenses, trade secret or other similar
rights of others; and no claims have been made or are threatened against the
Company or its subsidiaries regarding trademark, trade name, patent, copyright,
license, trade secret or other infringement which could have a Material Adverse
Effect.
z. Except as disclosed in the Prospectus, (1) the Company and its
subsidiaries are in compliance in all material respects with all rules, laws and
regulation relating to the use, treatment, storage and disposal of toxic
substances and protection of health or the environment ("ENVIRONMENTAL LAWS")
which are applicable to their business, (2) neither the Company nor any of its
subsidiaries has received any notice from any governmental authority or third
party of an asserted claim under Environmental Laws, (3) no facts currently
exist that will require the Company or any of its subsidiaries to make future
material capital expenditures to comply with Environmental Laws, and (4) to the
knowledge of the Company and the Selling Securityholders, no property which is
or has been owned, leased or occupied by the Company or any of its subsidiaries
has been designated as a Superfund site pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended (42
U.S.C. Section 9601, et seq.), or otherwise designated as a contaminated site
under applicable state or local law.
aa. The Company is not an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
SECTION 2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SELLING
SECURITYHOLDERS. Each of the Selling Securityholders, severally and not
jointly, represents, warrants and covenants to the several Underwriters as of
the date hereof and as of each Closing Date hereinafter mentioned that:
a. Such Selling Securityholder has good and marketable title to the
Shares to be sold by such Selling Securityholder hereunder, free and clear of
all liens, encumbrances, equities, security interests and claims whatsoever,
with full right and authority to deliver the same hereunder, subject, in the
case of each Selling Securityholder, to the rights of _______, as Custodian (the
"CUSTODIAN"), and that upon the delivery of and payment for such Shares
hereunder, the several Underwriters will receive good and marketable title
thereto, free and clear of all liens, encumbrances, equities, security interests
and claims whatsoever.
b. Certificates in negotiable form for the Shares to be sold by such
Selling Securityholder have been placed in custody under a Custody Agreement for
delivery under this Agreement with the Custodian; such Selling Securityholder
specifically agrees that the Shares represented by the certificates so held in
custody for such Selling Securityholder are subject to the interests of the
several Underwriters and the Company, that the arrangements made by such Selling
Securityholder for such custody, including the Power of Attorney provided for in
such Custody Agreement, are to that extent irrevocable, and that the obligations
of such Selling Securityholder shall not be terminated by any act of such
Selling Securityholder or by operation of law, whether by the death or
incapacity of such Selling Securityholder (or, in the case of a Selling
Securityholder that is not an individual, the dissolution or liquidation of such
Selling Securityholder) or the occurrence of any other event; if any
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such death, incapacity, dissolution, liquidation or other such event should
occur before the delivery of such shares of the shares hereunder, certificates
for the Shares shall be delivered by the Custodian in accordance with the terms
and conditions of this Agreement as if such death, incapacity, dissolution,
liquidation or other event had not occurred, regardless of whether the Custodian
shall have received notice of such death, incapacity, dissolution, liquidation
or other event.
c. Such Selling Securityholder has reviewed the Registration Statement
and Prospectus and, although such Selling Securityholder has not independently
verified the accuracy or completeness of all the information contained therein,
nothing has come to the attention of such Selling Securityholder that would lead
such Selling Securityholder to believe that (1) on the Effective Date, the
Registration Statement contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading; and, (2) on the Effective
Date the Prospectus contained and, on the Closing Date and any later date on
which Optional Shares are to be purchased contains, any untrue statement of a
material fact or omitted or omits to state any material fact necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading. In addition, Frank L. Poggio further represents
and warrants that, to his actual knowledge but without undertaking any
independent investigation, the representations and warranties of the Company
contained in Section 1 of this Agreement are true, complete and correct in all
material respects.
d. All information in the Registration Statement or the Prospectus, or
any amendment or supplement thereto, relating to such Selling Securityholder
(including, without limitation, the information relating to the Selling
Securityholder which is set forth in the Prospectus under the caption "Principal
and Selling Shareholders"), and all representations and warranties of such
Selling Securityholder in the Custody Agreement are true and correct in all
material respects and do not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the information in the light of the circumstances under which they were
made not misleading. The sale of the Shares by such Selling Securityholder
pursuant hereto is not prompted by such Selling Securityholder's knowledge of
any material information concerning the Company or any subsidiary which is not
set forth in the Prospectus or the documents incorporated by reference therein.
e. Such Selling Securityholder has full power and authority to enter into
this Agreement and the Custody Agreement and perform the transactions
contemplated hereby and thereby. This Agreement and the Custody Agreement have
been duly authorized, executed and delivered by or on behalf of such Selling
Securityholder and the form of such Securityholder Agreement has been delivered
to you.
f. The making and performance of this Agreement and the Custody Agreement
and the consummation of the transactions contemplated hereby and thereby will
not result in a breach or violation by such Selling Securityholder of any of the
terms or provisions of, or constitute a default by such Selling Securityholder
under, any indenture, mortgage, deed of trust, trust (constructive or other),
loan agreement, lease, franchise, license or other agreement or instrument to
which such Selling Securityholder is a party or by which such Selling
Securityholder or any of its properties is
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bound, any statute, or any judgment, decree, order, rule or regulation of any
court or governmental agency or body applicable to such Selling Securityholder
or any of its properties.
g. Such Selling Securityholder has not taken and will not take, directly
or indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Shares.
h. Each of the Selling Securityholders hereby agrees that, without the
prior written consent of Volpe, Welty & Company, such Selling Securityholder
will not, for a period of one hundred twenty (120) days following the date of
the Prospectus (the "LOCK-UP PERIOD"), (1) offer, sell, contract to sell, make
any short sale (including without limitation short against the box), pledge, or
otherwise dispose of, directly or indirectly, any shares of Common Stock or any
options to acquire shares of Common Stock or securities convertible into or
exchangeable or exercisable for or any other rights to purchase or acquire
Common Stock (including without limitation, Common Stock of the Company which
may be deemed to be beneficially owned in accordance with the rules and
regulations of the Commission) other than the exercise or conversion of
outstanding options, warrants or convertible securities or (2) enter into any
swap or other agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise; PROVIDED, HOWEVER, that
(A) a Selling Stockholder shall be permitted to make bona fide gift transactions
and transfers which will not result in any change in beneficial ownership, but
only on the condition that the transferee agrees in writing to be bound by the
provisions of this Section 2.i for the remainder of the Lock-Up Period, and (B)
the foregoing sentence shall not apply to the shares to be sold to the
Underwriters pursuant to this Agreement.
i. The Selling Securityholders will pay any transfer taxes incident to
the transfer to the Underwriters of the Shares being sold by the Selling
Securityholders, their respective underwriting discounts and commissions and
sales expenses and the fees and disbursements of their legal counsel.
SECTION 3. PURCHASE OF THE SHARES BY THE UNDERWRITERS.
a. On the basis of the representations and warranties and subject to the
terms and conditions herein set forth, the Company agrees to issue and sell
2,000,000 of the Firm Shares to the several Underwriters, each Selling
Securityholder agrees to sell to the several Underwriters the number of the Firm
Shares set forth in Schedule II opposite the name of such Selling
Securityholder, and each of the Underwriters agrees to purchase from the Company
and the Selling Securityholders the respective aggregate number of Firm Shares
set forth opposite its name in Schedule I. The price at which such Firm Shares
shall be sold by the Company and the Selling Securityholders and purchased by
the several Underwriters shall be $______ per share. The obligation of each
Underwriter to the Company and each of the Selling Securityholders shall be to
purchase from the Company and the Selling Securityholders that number of Firm
Shares which represents the same proportion of the total number of Firm Shares
to be sold by each of the Company and the Selling
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Securityholders pursuant to this Agreement as the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule I hereto represents of
the total number of shares of the Firm Shares to be purchased by all
Underwriters pursuant to this Agreement, as adjusted by you in such manner as
you deem advisable to avoid fractional shares. In making this Agreement, each
Underwriter is contracting severally and not jointly; except as provided in
paragraphs b. and c. of this Section 3, the agreement of each Underwriter is to
purchase only the respective number of shares of the Firm Shares specified in
Schedule I.
b. If for any reason one or more of the Underwriters shall fail or refuse
(otherwise than for a reason sufficient to justify the termination of this
Agreement under the provisions of Section 9 or 10 hereof) to purchase and pay
for the number of Shares agreed to be purchased by such Underwriter or
Underwriters, the Company or the Selling Securityholders shall immediately give
notice thereof to you, and the non-defaulting Underwriters shall have the right
within 24 hours after the receipt by you of such notice to purchase, or procure
one or more other Underwriters to purchase, in such proportions as may be agreed
upon between you and such purchasing Underwriter or Underwriters and upon the
terms herein set forth, all or any part of Shares which such defaulting
Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail so to make such arrangements with respect to all such shares
and portion, the number of Shares which each non-defaulting Underwriter is
otherwise obligated to purchase under this Agreement shall be automatically
increased on a pro rata basis to absorb the remaining shares and portion which
the defaulting Underwriter or Underwriters agreed to purchase; PROVIDED,
HOWEVER, that the non-defaulting Underwriters shall not be obligated to purchase
the portion which the defaulting Underwriter or Underwriters agreed to purchase
if the aggregate number of such Shares exceeds 10% of the total number of Shares
which all Underwriters agreed to purchase hereunder. If the total number of
Shares which the defaulting Underwriter or Underwriters agreed to purchase shall
not be purchased or absorbed in accordance with the two preceding sentences, the
Company and the Selling Securityholders shall have the right, within 24 hours
next succeeding the 24-hour period above referred to, to make arrangements with
other underwriters or purchasers satisfactory to you for purchase of such Shares
and portion on the terms herein set forth. In any such case, either you or the
Company shall have the right to postpone the Closing Date determined as provided
in Section 5 hereof for not more than seven business days after the date
originally fixed as the Closing Date pursuant to Section 5 in order that any
necessary changes in the Registration Statement, the Prospectus or any other
documents or arrangements may be made. If neither the non-defaulting
Underwriters nor the Company and the Selling Securityholders shall make
arrangements within the 24-hour periods stated above for the purchase of all of
the Shares which the defaulting Underwriter or Underwriters agreed to purchase
hereunder, this Agreement shall be terminated without further act or deed and
without any liability on the part of the Company or the Selling Securityholders
to any non-defaulting Underwriter and without any liability on the part of any
non-defaulting Underwriter to the Company or the Selling Securityholders.
Nothing in this paragraph b., and no action taken hereunder, shall relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
c. On the basis of the representations, warranties and covenants herein
contained, and subject to the terms and conditions herein set forth, the Company
and the Selling Securityholders
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grant an option to the several Underwriters to purchase, severally and not
jointly, up to 209,847 Optional Shares from the Company and up to 200,000
Optional Shares from the Selling Securityholders, in the respective amounts set
forth in the third column on Schedule II, at the same price per share as the
Underwriters shall pay for the Firm Shares. Said option may be exercised only
to cover over-allotments in the sale of the Firm Shares by the Underwriters and
may be exercised in whole or in part at any time, on no more than two occasions
except with the consent of the Company, or before the thirtieth day after the
date of this Agreement upon written or telegraphic notice by you to the Company
setting forth the aggregate number of Optional Shares as to which the several
Underwriters are exercising the option. If the option is exercised for less
than all of the Option Shares, then (1) Option Shares purchased from the Selling
Securityholders shall be purchased in proportion to their respective maximum
total numbers of Option Shares and (2) all Option Shares shall first be
purchased from the Selling Securityholders before any Option Shares are
purchased from the Company. Delivery of certificates for the Optional Shares,
and payment therefor, shall be made as provided in Section 5 hereof. The number
of Optional Shares to be purchased by each Underwriter shall be the same
percentage of the total number of Optional Shares to be purchased by the several
Underwriters as such Underwriter is purchasing of the Firm Shares, as adjusted
by you in such manner as you deem advisable to avoid fractional shares.
SECTION 4. OFFERING BY UNDERWRITERS.
a. The terms of the initial public offering by the Underwriters of the
Shares to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.
b. The information (insofar as such information relates to the
Underwriters) set forth in the last paragraph on the front cover page and under
"Underwriting" in the Registration Statement, any Preliminary Prospectus and the
Prospectus relating to the Shares constitutes the only information furnished by
the Underwriters to the Company for inclusion in the Registration Statement, any
Preliminary Prospectus, and the Prospectus, and you on behalf of the respective
Underwriters represent and warrant to the Company that the statements made
therein are correct.
c. The Underwriters have not distributed, and will not distribute prior
to the later to occur of (1) completion of the distribution of the Shares, or
(2) the expiration of any time period within which a dealer is required under
the Securities Act to deliver a prospectus relating to the Shares, any offering
material in connection with the offering and sale of the Shares other than the
Prospectus, the Registration Statement and any other materials permitted by the
Securities Act and consented to by the Company.
SECTION 5. DELIVERY OF AND PAYMENT FOR THE SHARES.
a. Delivery of certificates for the Firm Shares and the Optional Shares
(if the option granted by Section 3(c) hereof shall have been exercised not
later than 7:00 A.M., San Francisco time, on the date two business days
preceding the Closing Date), and payment therefor, shall be made
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at the office of Mayer Brown & Platt, Chicago, Illinois at 8:00 a.m., Chicago
time, on the [fourth] business day after the date of this Agreement, or at such
time on such other day, not later than seven full business days after such
fourth business day, as shall be agreed upon in writing by the Company and you.
The date and hour of such delivery and payment (which may be postponed as
provided in Section 3(b) hereof) are herein called the "Closing Date."
b. If the option granted by Section 3(c) hereof shall be exercised after
9:00 a.m., Chicago time, on the date two business days preceding the Closing
Date, delivery of certificates for the shares of Optional Shares, and payment
therefor, shall be made at the office of Mayer, Brown & Platt at 7:00 a.m., San
Francisco time, on the third business day after the exercise of such option.
c. Payment for the shares purchased from the Company shall be made to
the Company or its order, and payment for the shares purchased from the
Selling Securityholders shall be made, in the discretion of the Underwriters,
to such Selling Securityholders or to the Custodian, for the account of the
Selling Securityholders, in each case by (1) one or more certified or
official bank check or checks in next day funds (and the Company and the
Selling Securityholders agree not to deposit any such check in the bank on
which drawn until the day following the date of its delivery to the Company
or the Custodian, as the case may be) or (2) federal funds wire transfer.
Such payment shall be made upon delivery of certificates for the shares to
you for the respective accounts of the several Underwriters (including
without limitation by "full-fast" electronic transfer by Depository Trust
Company) against receipt therefor signed by you. Certificates for the shares
to be delivered to you shall be registered in such name or names and shall be
in such denominations as you may request at least one business day before the
Closing Date, in the case of Firm Shares, and at least one business day prior
to the purchase thereof, in the case of the Optional Shares. Such
certificates will be made available to the Underwriters for inspection,
checking and packaging at the offices of agent of Volpe, Welty & Company's
clearing agent, Bear Stearns Securities Corp., on the business day prior to
the Closing Date or, in the case of the Optional Shares, by 3:00 p.m., New
York time, on the business day preceding the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
and the Selling Securityholders for shares to be purchased by any Underwriter
whose check shall not have been received by you on the Closing Date or any later
date on which Optional Shares are purchased for the account of such Underwriter.
Any such payment by you shall not relieve such Underwriter from any of its
obligations hereunder.
SECTION 6. COVENANTS OF THE COMPANY. The Company covenants and agrees as
follows:
a. The Company will (1) prepare and timely file with the Commission under
Rule 424(b) a Prospectus containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A
and (2) not file any amendment to the Registration Statement or supplement to
the Prospectus of which you shall not previously have been advised and
furnished with a copy or to which you shall have reasonably objected in
writing or which is not in compliance with the Securities Act or the rules
and regulations of the Commission.
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b. The Company will promptly notify each Underwriter in the event of
(1) the request by the Commission for amendment of the Registration Statement
or for supplement to the Prospectus or for any additional information, (2)
the issuance by the Commission of any stop order suspending the effectiveness
of the Registration Statement, (3) the institution or notice of intended
institution of any action or proceeding for that purpose, (4) the receipt by
the Company of any notification with respect to the suspension of the
qualification of the shares for sale in any jurisdiction, or (5) the receipt
by it of notice of the initiation or threatening of any proceeding for such
purpose. The Company will make every reasonable effort to prevent the
issuance of such a stop order and, if such an order shall at any time be
issued, to obtain the withdrawal thereof at the earliest possible moment.
c. The Company will (1) on or before the Closing Date, deliver to you a
signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each
post-effective amendment, if any, to the Registration Statement (together
with, in each case, all exhibits thereto unless previously furnished to you)
and will also deliver to you, for distribution to the Underwriters, a
sufficient number of additional conformed copies of each of the foregoing
(but without exhibits) so that one copy of each may be distributed to each
Underwriter, (2) as promptly as possible deliver to you and send to the
several Underwriters, at such office or offices as you may designate, as many
copies of the Prospectus as you may reasonably request, and (3) thereafter
from time to time during the period in which a prospectus is required by law
to be delivered by an Underwriter or dealer, likewise send to the
Underwriters as many additional copies of the Prospectus and as many copies
of any supplement to the Prospectus and of any amended prospectus, filed by
the Company with the Commission, as you may reasonably request for the
purposes contemplated by the Securities Act.
d. If at any time during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised in writing by
you, shall occur as a result of which it is necessary, in the opinion of counsel
for the Company or of counsel for the Underwriters, to supplement or amend the
Prospectus in order to make the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser of the shares,
the Company will forthwith prepare and file with the Commission a supplement to
the Prospectus or an amended prospectus so that the Prospectus as so
supplemented or amended will not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances existing at the time such Prospectus
is delivered to such purchaser, not misleading. If, after the initial public
offering of the shares by the Underwriters and during such period, the
Underwriters shall propose to vary the terms of offering thereof by reason of
changes in general market conditions or otherwise, you will advise the Company
in writing of the proposed variation, and, if in the opinion either of counsel
for the Company or of counsel for the Underwriters such proposed variation
requires that the Prospectus be supplemented or amended, the Company will
forthwith prepare and file with the Commission a supplement to the Prospectus or
an amended prospectus setting forth such variation. The Company authorizes the
Underwriters and all dealers to whom any of the shares may be sold by the
several Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the shares in accordance with
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the applicable provisions of the Securities Act and the applicable rules and
regulations thereunder for such period.
e. Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment to
the Registration Statement and any supplement to the Prospectus or any amended
prospectus proposed to be filed.
f. The Company will cooperate, when and as requested by you, in the
qualification of the shares for offer and sale under the securities or blue sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or dealer, in
keeping such qualifications in good standing under said securities or blue sky
laws; PROVIDED, HOWEVER, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign corporation in
any jurisdiction in which it is not so qualified. The Company will, from time
to time, prepare and file such statements, reports, and other documents as are
or may be required to continue such qualifications in effect for so long a
period as you may reasonably request for distribution of the shares.
g. During a period of five years commencing with the date hereof, the
Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to shareholders of
the Company and of all information, documents and reports filed with the
Commission.
h. Not later than the 45th day following the end of the fiscal quarter
first occurring after the first anniversary of the Effective Date, the Company
will make generally available to its security holders an earnings statement
(which need not be audited) in accordance with Section 11(a) of the Securities
Act and Rule 158 thereunder.
i. The Company agrees to pay all costs and expenses incident to the
performance of the obligations of the Company and the Selling Securityholders
under this Agreement, including all costs and expenses incident to (1) the
preparation, printing and filing with the Commission and the NASD of the
Registration Statement, any Preliminary Prospectus and the Prospectus, (2)
the furnishing to the Underwriters and the persons designated by them of
copies of any Preliminary Prospectus and of the several documents required by
paragraph c. of this Section 6 to be so furnished, (3) the printing of this
Agreement and related documents delivered to prospective Underwriters, (4)
the preparation, printing and filing of all supplements and amendments to the
Prospectus referred to in paragraph d. of this Section 6, (5) the furnishing
to you and the Underwriters of the reports and information referred to in
paragraph g. of this Section 6 and (6) the printing and issuance of stock
certificates, including the transfer agent's fees.
j. The Company agrees to reimburse you, for the account of the several
Underwriters, for blue sky fees and related disbursements (including counsel
fees and disbursements and cost of printing memoranda for the Underwriters) paid
by or for the account of the Underwriters or their counsel in qualifying the
shares under state securities or blue sky laws and in the review of the offering
by the Corporate Financing Department of the NASD.
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k. The provisions of paragraphs i. and j. of this Section are intended to
relieve the Underwriters from the payment of the expenses and costs which the
Company and the Selling Securityholders hereby agree to pay and shall not affect
any agreement which the Company and the Selling Securityholders may make, or may
have made, for the sharing of any such expenses and costs.
l. The Company hereby agrees that, without the prior written consent of
Volpe, Welty & Company, the Company will not, during the Lock-Up Period, (1)
issue, offer, sell, contract to sell, make any short sale (including without
limitation short against the box), pledge, or otherwise dispose of, directly
or indirectly, any shares of Common Stock or any options to acquire shares of
Common Stock or securities convertible into or exchangeable or exercisable
for or any other rights to purchase or acquire Common Stock (including
without limitation, Common Stock of the Company which may be deemed to be
beneficially owned in accordance with the rules and regulations of the
Commission) other than the exercise or conversion of outstanding options,
warrants or convertible securities or (2) enter into any swap or other
agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise; PROVIDED, HOWEVER, that
(A) the foregoing sentence shall not apply to the shares to be sold to the
Underwriters pursuant to this Agreement, (B) the Company shall be permitted
to issue shares of Common Stock upon the exercise of options previously
granted under the option plans of the Company (the "OPTION PLANS") and
outstanding as of the date of this Agreement, all as described in footnote
(1) to the table under the caption "Capitalization" in the Preliminary
Prospectus, (C) the Company may after the date of this Agreement grant
options to purchase Common Stock under the Option Plans, subject to the
condition that any such options shall not, by their terms, be exercisable
during the Lock-Up Period, (D) the Company shall be permitted to issue up to
25,000 shares to eligible Directors and employees as described in the
Prospectus and (E) the Company shall be permitted, conditioned upon prior
consultation with Volpe, Welty & Company (it being understood that the
consent of Volpe, Welty & Company shall not be required), to issue shares as
consideration for acquisitions or other business combinations.
m. The Company is familiar with the Investment Company Act of 1940, as
amended, and has in the past conducted its affairs, and will in the future
conduct its affairs, in such a manner to ensure that the Company was not and
will not be an "investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as amended,
and the rules and regulations thereunder.
n. The Company agrees to maintain directors' and officers' insurance in
amounts customary for the size and nature of the Company's business for a period
of two years from the date of this Agreement.
SECTION 7. INDEMNIFICATION AND CONTRIBUTION.
a. Subject to the provisions of paragraphs b. and h. of this Section 7,
the Company and the Selling Securityholders jointly and severally agree to
indemnify and hold harmless each Underwriter and each person (including each
partner or officer thereof) who controls any Underwriter
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within the meaning of Section 15 of the Securities Act from and against any and
all losses, claims, damages or liabilities, joint or several, to which such
indemnified parties or any of them may become subject under the Securities Act,
the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), or the
common law or otherwise, and the Company and the Selling Securityholders jointly
and severally agree to promptly reimburse each such Underwriter and controlling
person for any legal or other expenses (including, except as otherwise
hereinafter provided, reasonable fees and disbursements of counsel) incurred by
the respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (1) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) Registration Statement) or any post-effective amendment thereto
(including any Rule 462(b) Registration Statement), or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus or the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment thereof or supplement
thereto) or the omission or alleged omission to state therein a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; PROVIDED, HOWEVER,
that (1) the indemnity agreements of the Company and the Selling Securityholders
contained in this paragraph a. shall not apply to any such losses, claims,
damages, liabilities or expenses if such statement or omission was made in
reliance upon and in conformity with information furnished as herein stated or
otherwise furnished in writing to the Company by or on behalf of any Underwriter
for use in any Preliminary Prospectus or the Registration Statement or the
Prospectus or any such amendment thereof or supplement thereto, (2) the
indemnity agreement contained in this paragraph a. with respect to any
Preliminary Prospectus (or the Prospectus) shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages,
liabilities or expenses purchased the shares which is the subject thereof (or to
the benefit of any person controlling such Underwriter) if at or prior to the
written confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
(excluding the documents incorporated therein by reference) and the untrue
statement or omission of a material fact contained in such Preliminary
Prospectus (or the Prospectus) was corrected in the Prospectus (or the
Prospectus as amended or supplemented) unless the failure is the result of
noncompliance by the Company with paragraph c. of Section 6 hereof. The
indemnity agreements of the Company and the Selling Securityholders contained in
this paragraph a. and the representations and warranties of the Company and the
Selling Securityholders contained in Section 2 hereof shall remain operative and
in full force and effect regardless of any investigation made by or on behalf of
any indemnified patty and shall survive the delivery of and payment for the
Shares.
b. Notwithstanding anything else herein, the Selling Securityholders
shall only be liable under this Section 7 with respect to (1) information
pertaining to such Selling Securityholder furnished by or on behalf of such
Selling Securityholder in writing expressly for use in the Registration
Statement, any Preliminary Prospectus, the Prospectus or any amendment or
supplement thereto, or (2) facts
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that would constitute a breach of any representation or warranty of such Selling
Securityholder set forth in Section 2 of this Agreement.
c. Each Underwriter severally agrees to indemnify and hold harmless the
Company, each of its officers who signs the Registration Statement on his own
behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Securities Act, and the Selling Securityholders from and against any
and all losses, claims, damages or liabilities, joint or several, to which such
indemnified parties or any of them may become subject under the Securities Act,
the Exchange Act, or the common law or otherwise and to reimburse each of them
for any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) Registration Statement) or any post-effective amendment thereto
(including any Rule 462(b) Registration Statement) or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading or (ii) any untrue
statement or alleged untrue statement of a material fact contained in the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment thereof or supplement thereto) or the omission or
alleged omission to state therein a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, if such statement or omission was made in reliance upon
and in conformity with information furnished as herein stated or otherwise
furnished in writing to the Company by or on behalf of such indemnifying
Underwriter for use in the Registration Statement or the Prospectus or any such
amendment thereof or supplement thereto. The indemnity agreement of each
Underwriter contained in this paragraph b. shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the shares.
d. Each party indemnified under the provision of paragraphs a. and b. of
this Section 7 agrees that, upon the service of a summons or other initial legal
process upon it in any action or suit instituted against it or upon its receipt
of written notification of the commencement of any investigation or inquiry of,
or proceeding against, it in respect of which indemnity may be sought on account
of any indemnity agreement contained in such paragraphs, it will promptly give
written notice (the "NOTICE") of such service or notification to the party or
parties from whom indemnification may be sought hereunder. No indemnification
provided for in such paragraphs shall be available to any party who shall fail
so to give the Notice if the party to whom such Notice was not given was unaware
of the action, suit, investigation, inquiry or proceeding to which the Notice
would have related and was prejudiced by the failure to give the Notice, but the
omission so to notify such indemnifying party or parties of any such service or
notification shall not relieve such indemnifying party or parties from any
liability which it or they may have to the indemnified party for contribution or
otherwise than on account of such indemnity agreement. Any indemnifying party
shall be entitled
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at its own expense to participate in the defense of any action, suit or
proceeding against, or investigation or inquiry of, an indemnified party. Any
indemnifying party shall be entitled, if it so elects within a reasonable time
after receipt of the Notice by giving written notice (the "NOTICE OF DEFENSE")
to the indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties, which may be counsel to the Company; PROVIDED,
HOWEVER, that (i) if the defendants in any such action include both the
indemnified party and the indemnifying party, and the indemnified party or
parties reasonably determine that there may be a conflict between the positions
of the indemnifying party or parties and of the indemnified party or parties in
conducting the defense of such action, suit, investigation, inquiry or
proceeding, or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or partiesthen counsel for the indemnified party or parties
shall be entitled to conduct the defense to the extent reasonably determined by
such counsel to be necessary to protect the interests of the indemnified party
or parties and (ii) in any event, the indemnified party or parties shall be
entitled to have counsel chosen by such indemnified party or parties and
reasonably satisfactory to the indemnifying party participate in, but not
conduct, the defense. If, within a reasonable time after receipt of the Notice,
an indemnifying party gives a Notice of Defense and the counsel chosen by the
indemnifying party or parties is reasonably satisfactory to the indemnified
party or parties, the indemnifying party or parties will not be liable under
paragraphs a. through c. of this Section 7 for any legal or other expenses
subsequently incurred by the indemnified party or parties in connection with the
defense of the action, suit, investigation, inquiry or proceeding, except that
(A) the indemnifying party or parties shall bear the legal and other expenses
incurred in connection with the conduct of the defense as referred to in
clause (i) of the proviso to the preceding sentence and (B) the indemnifying
party or parties shall bear such other expenses as it or they have authorized to
be incurred by the indemnified party or parties. If, within a reasonable time
after receipt of the Notice, no Notice of Defense has been given, the
indemnifying party or parties shall be responsible for any legal or other
expenses incurred by the indemnified party or parties in connection with the
defense of the action, suit, investigation, inquiry or proceeding. In no event
will the Indemnifying Party be responsible for the fees and expenses of more
than one counsel for all Indemnified Parties.
e. If the indemnification provided for in this Section 7 is unavailable
or insufficient to hold harmless an indemnified party under paragraph a. or b.
of this Section 7, then each indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of the losses, claims, damages or liabilities
referred to in paragraph a. or b. of this Section 7 (i) in such proportion as is
appropriate to reflect the relative benefits received by each indemnifying party
from the offering of the shares or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of each indemnifying party in connection with the
statements or omissions that resulted in such losses, claims, damages or
liabilities, or actions in respect thereof, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Selling Securityholders on
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the one hand and the Underwriters on the other shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the shares
received by the Company and the Selling Securityholders and the total
underwriting discount received by the Underwriters, as set forth in the table on
the cover page of the Prospectus, bear to the aggregate public offering price of
the shares. Relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by each indemnifying party and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission.
The parties agree that it would not be just and equitable if contributions
pursuant to this paragraph d. were to be determined by pro rata allocation (even
if the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take into account the equitable
considerations referred to in the first sentence of this paragraph d. The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities, or actions in respect thereof, referred to in the first sentence
of this paragraph d. shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigation,
preparing to defend or defending against any action or claim which is the
subject of this paragraph d. Notwithstanding the provisions of this paragraph
d., no Underwriter shall be required to contribute any amount in excess of the
underwriting discount applicable to the shares purchased by such Underwriter.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this paragraph d. to contribute are several in proportion to
their respective underwriting obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph c. of this Section 7).
f. Neither the Company nor the Selling Securityholders will, without the
prior written consent of each Underwriter, settle or compromise or consent to
the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not such Underwriter or any person who controls such Underwriter within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act is
a party to such claim, action, suit or proceeding) unless such settlement,
compromise or consent includes an unconditional release of such Underwriter and
each such controlling person from all liability arising out of such claim,
action, suit or proceeding.
g. No Underwriter or person who controls an Underwriter will, without the
prior written consent of the Company, settle or compromise or consent to the
entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought
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hereunder (whether or not the Company or any person who controls the Company
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act is a party to such claim, action, suit or proceeding) without the
prior written consent of the Company, which consent shall not be unreasonably
delayed, denied or conditioned.
h. The liability of each Selling Securityholder under such Selling
Securityholder's representations and warranties contained in Section 2 hereof
and under the indemnity and reimbursement agreements contained in the provisions
of this Section 7 and Section 8 hereof shall be limited to an amount equal to
the initial public offering price, less underwriting discounts and commissions,
of the shares sold by such Selling Securityholder to the Underwriters. The
Company and the Selling Securityholders may agree, as among themselves and
without limiting the rights of the Underwriters under this Agreement, as to the
respective amounts of such liability for which they each shall be responsible.
SECTION 8. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to their other
obligations under Section 7 of this Agreement (and subject, in the case of a
Selling Securityholder, to the provisions of paragraphs b. and h. of Section 7),
the Company and the Selling Securityholders hereby jointly and severally agree
to reimburse on a monthly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph a. of Section 7 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 8 and the possibility that such payments might later be held
to be improper, unenforceable or otherwise not required under the terms of this
Agreement; PROVIDED, HOWEVER, that to the extent any such payment is ultimately
held to be improper, unenforceable or otherwise not required under the terms of
this Agreement, the Underwriters receiving such payments shall promptly refund
them and such Underwriters shall provide to the Company, upon request,
reasonable assurances of their ability to effect any refund, when and if due.
SECTION 9. TERMINATION. This Agreement may be terminated by you at any
time prior to the Closing Date by giving written notice to the Company and the
Selling Securityholders in accordance with Section 10, or if after the date of
this Agreement trading in the Common Stock shall have been suspended, or if
there shall have occurred the engagement in hostilities or an escalation of
major hostilities by the United States or the declaration of war or a national
emergency by the United States on or after the date hereof, any outbreak of
hostilities or other national or international calamity or crisis or change in
economic or political conditions if the effect of such outbreak, calamity,
crisis or change in economic or political conditions in the financial markets of
the United States or the Company's industry sector generally would, in the
Underwriters' reasonable judgment, make the offering or delivery of the shares
impracticable, suspension of trading in securities generally or a material
adverse decline in value of securities generally on the New York Stock Exchange,
the American Stock Exchange, or The Nasdaq Stock Market, or limitations on
prices other than limitations on hours or numbers of days of trading) for
securities on either such exchange or system, the enactment, publication,
decree or other promulgation of any federal statute, regulation, rule or order
of, or commencement of any proceeding or investigation by, any court,
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legislative body, agency or other federal governmental authority which in the
Underwriters' reasonable opinion materially and adversely affects or will
materially or adversely affect the business or operations of the Company, except
as is specifically disclosed in or contemplated by the Prospectus, the
declaration of a banking moratorium by either federal or New York State
authorities or the taking of any official action by the federal government or
any federal agency in respect of its monetary or fiscal affairs which in the
Underwriters' reasonable opinion has a material adverse effect on the securities
markets in the United States. If this Agreement shall be terminated pursuant to
this Section 9, there shall be no liability of the Company or the Selling
Securityholders to the Underwriters and no liability of the Underwriters to the
Company or the Selling Securityholders; PROVIDED, HOWEVER, that in the event of
any such termination the Company and the Selling Securityholders agree to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including all costs and expenses referred
to in paragraphs i. and j. of Section 6 hereof.
SECTION 10. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of
the several Underwriters to purchase and pay for the shares shall be subject to
the performance by the Company and by the Selling Securityholders of all their
respective obligations to be performed hereunder at or prior to the Closing Date
or any later date on which Optional Shares are to be purchased, as the case may
be, and to the following further conditions:
a. The Registration Statement shall have become effective; and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
b. The legality and sufficiency of the sale of the shares hereunder and
the validity and form of the certificates representing the shares, all corporate
proceedings and other legal matters incident to the foregoing, and the form of
the Registration Statement and of the Prospectus (except as to the financial
statements contained therein), shall have been approved at or prior to the
Closing Date by Sachnoff & Weaver, Ltd., counsel for the Underwriters.
c. You shall have received from Mayer, Brown & Platt, counsel for the
Company, an opinion, addressed to the Underwriters and dated the Closing Date,
covering the matters set forth in Annex A hereto, from Suelthaus & Walsh, P.C.,
Missouri counsel for the Company, an opinion, addressed to the Underwriters and
dated the Closing Date covering the matters set forth in Annex B hereto, and
from Husch & Eppenberger, counsel for the Selling Securityholders, an opinion,
addressed to the Underwriters dated the Closing Date covering the matters set
forth in Annex C hereto, and if Optional Shares are purchased at any date after
the Closing Date, additional opinions from each such counsel, addressed to the
Underwriters and dated such later date, confirming that the statements expressed
as of the Closing Date in such opinions remain valid as of such later date.
In rendering such opinions, such counsel may rely on: (1) an opinion or
opinions of other counsel retained by them or the Company as to laws of any
jurisdiction other than the United States; PROVIDED that (a) such reliance is
expressly authorized by each opinion so relied upon, and (b) each
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such opinion is in form and substance satisfactory to you and your counsel; and,
(2) as to matters of fact, certificates of officers of the Company or of the
Selling Securityholders and of governmental officials. In each such case such
counsel shall provide copies of the opinions or certificates relied upon and
shall state that they are so doing and that they believe they and the
Underwriters are justified in relying on such opinions or certificates. As an
alternative to (1) above, such counsel may explicitly assume, for the purpose of
any opinion regarding the enforceability of any agreement, that the laws of the
jurisdiction pursuant to which such agreement is by its terms to be construed
and enforced are not materially different from those of the jurisdiction where
such counsel is located.
d. Each of the following shall be true: (i) as of the Effective Date,
the statements made in the Registration Statement and the Prospectus were true
and correct, and neither the Registration Statement nor the Prospectus omitted
to state any material fact required to be stated therein or necessary in order
to make the statements therein, respectively, not misleading; (ii) since the
Effective Date, no event has occurred which should have been set forth in a
supplement or amendment to the Prospectus which has not been set forth in such a
supplement or amendment; (iii) since the respective dates as of which
information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole, whether or not arising from transactions in the ordinary course of
business, and, since such dates, except in the ordinary course of business,
neither the Company nor any of its subsidiaries has entered into any material
transaction not referred to in the Registration Statement in the form in which
it originally became effective and the Prospectus contained therein; (iv) the
Commission has not issued any order preventing or suspending the use of the
Prospectus or any Preliminary Prospectus filed as a part of the Registration
Statement or any amendment thereto; no stop order suspending the effectiveness
of the Registration Statement has been issued; and to the knowledge of the
respective signers, no proceedings for that purpose have been instituted or are
pending or contemplated under the Securities Act; (v) neither the Company nor
any of its subsidiaries has any material contingent obligations which are not
disclosed in the Registration Statement and the Prospectus; (vi) there are not
any pending or known threatened legal proceedings to which the Company or any of
its subsidiaries is a party or of which property of the Company or any of its
subsidiaries is the subject which are material and which are not disclosed in
the Registration Statement and the Prospectus; (vii) there are not any
franchises, contracts, leases or other documents which are required to be filed
as exhibits to the Registration Statement which have not been filed as required;
and (vii) the representations and warranties of the Company herein are true and
correct in all material respects as of the Closing Date or any later date on
which Optional Shares are to be purchased, as the case may be.
e. You shall have received on the Closing Date and on any later date on
which Optional Shares are purchased a certificate, dated the Closing Date or
such later date, as the case may be, and signed by the President and the Chief
Financial Officer of the Company, stating that the respective signers of said
certificate have carefully examined the Registration Statement in the form in
which it originally became effective and the Prospectus contained therein and
any supplements or
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<PAGE>
amendments thereto, and that the statements included in clauses (i) through
(viii) of paragraph d. of this Section 10 are true and correct.
f. You shall have received from Price Waterhouse LLP a letter or letters,
addressed to the Underwriters and dated as of the Closing Date and any later
date on which Optional Shares are purchased, confirming that they are
independent public accountants with respect to the Company within the meaning of
the Securities Act and the applicable published rules and regulations thereunder
and based upon the procedures described in their letter delivered to you
concurrently with the execution of this Agreement (the "ORIGINAL LETTER"), but
carried out to a date not more than three business days prior to the Closing
Date or such later date on which Optional Shares are purchased (i) confirming,
to the extent true, that the statements and conclusions set forth in the
Original Letter are accurate as of the Closing Date or such later date, as the
case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of the Original Letter or to reflect the availability of more recent
financial statements, data or information. The letters shall not disclose any
change, or any development involving a prospective change, in or affecting the
business or properties of the Company or any of its subsidiaries which, in your
sole judgment, makes it impractical or inadvisable to proceed with the public
offering of the shares or the purchase of the Optional Shares as contemplated by
the Prospectus.
g. Prior to the Closing Date, the shares to be issued and sold by the
Company shall have been duly authorized for listing by the Nasdaq National
Market upon official notice of issuance.
h. On or prior to the Closing Date, you shall have received from all
directors and all current executive officers of the Company (as identified on
page [30] of the Prospectus) agreements, in form reasonably satisfactory to
Volpe, Welty & Company, stating that without the prior written consent of Volpe,
Welty & Company, such person or entity will not, during the Lock-Up Period
(i) offer, sell, contract to sell, make any short sale (including without
limitation short against the box), pledge, or otherwise dispose of, directly or
indirectly, any shares of Common Stock or any options to acquire shares of
Common Stock or securities convertible into or exchangeable or exercisable for
or any other rights to purchase or acquire Common Stock (including without
limitation, Common Stock of the Company which may be deemed to be beneficially
owned in accordance with the rules and regulations of the Commission) or
(ii) enter into any swap or other agreement that transfers, in whole or in part,
any of the economic consequences or ownership of Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise; PROVIDED,
HOWEVER, that parties to such agreements shall be permitted to exercise or
convert outstanding options, warrants or convertible securities, although any
securities issued upon such exercise or conversion shall remain subject to the
terms of such agreements and parties to such agreements shall be permitted to
make bona fide gift transactions and transfers which will not result in any
change in beneficial ownership, but only on the condition that the transferee
agrees in writing to be bound by the provisions of such agreement for the
remainder of the Lock-Up Period.
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<PAGE>
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Sachnoff & Weaver, Ltd., counsel for the Underwriters,
shall be reasonably satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 10 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company. Any such termination shall be without liability of the Company or the
Selling Securityholders to the Underwriters and without liability of the
Underwriters to the Company or the Selling Securityholders; PROVIDED, HOWEVER,
that (i) in the event of such termination, the Company and the Selling
Securityholders agree to indemnify and hold harmless the Underwriters from all
costs or expenses incident to the performance of the obligations of the Company
and the Selling Securityholder under this Agreement, including all costs and
expenses referred to in paragraphs i. and j. of Section 6 hereof, and (ii) if
this Agreement is terminated by you because of any refusal, inability or failure
on the part of the Company or the Selling Securityholders to perform any
agreement herein, to fulfill any of the conditions herein, or to comply with any
provision hereof other than by reason of a default by any of the Underwriters or
the termination of this Agreement by the Underwriters pursuant to Section 9, the
Company and the Selling Stockholders will jointly and severally reimburse the
Underwriters severally upon demand for all out-of-pocket expenses (including
reasonable fees and disbursements of counsel) that shall have been incurred by
them in connection with the transactions contemplated hereby.
SECTION 11. CONDITIONS OF THE OBLIGATION OF THE COMPANY AND THE SELLING
SECURITYHOLDERS. The obligation of the Company and the Selling Securityholders
to deliver the shares shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 11 shall not be
fulfilled, this Agreement may be terminated by the Company and the Selling
Securityholders by giving notice to you. Any such termination shall be without
liability of the Company and the Selling Securityholders to the Underwriters and
without liability of the Underwriters to the Company or the Selling
Securityholders; PROVIDED, HOWEVER, that in the event of any such termination
the Company and the Selling Securityholders jointly and severally agree to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including all costs and expenses referred
to in paragraphs (i) and (j) of Section 6 hereof.
SECTION 12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall
inure to the benefit of the Company, the Selling Securityholders and the several
Underwriters and, with respect to the provisions of Section 7 hereof, the
several parties (in addition to the Company, the Selling Securityholders and the
several Underwriters) indemnified under the provisions of said Section 7, and
their respective personal representatives, successors and assigns. Nothing in
this Agreement is intended or shall be construed to give to any other person,
firm or corporation any legal or equitable remedy or claim under or in respect
of this Agreement or any provision herein contained. The term
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<PAGE>
"successors and assigns" as herein used shall not include any purchaser, as such
purchaser, of any of the shares from any of the several Underwriters.
SECTION 13. NOTICES. Except as otherwise provided herein, all
communications hereunder shall be in writing or by telegraph and, if to the
Underwriters, shall be mailed, telegraphed or delivered to Volpe, Welty &
Company, One Maritime Plaza, 11th Floor, San Francisco, California 94111,
Attention: Director of Compliance; with a copy to Douglas R. Newkirk, Sachnoff
& Weaver, Ltd., 30 S. Wacker, Chicago, IL 60606 and if to the Company, shall be
mailed, telegraphed or delivered to it at its office, ____________, Attention:
Richard Neece, with a copy to James Junewicz at Mayer, Brown & Platt, 190 South
LaSalle Street, Chicago, Illinois 60603; and if to the Selling Securityholders,
shall be mailed, telegraphed or delivered to the Selling Securityholders in care
of____________ at ____________, with a copy to James Stepleton at Husch &
Eppenberger, 100 N. Broadway, Suite 1300, St. Louis, Missouri 63109. All
notices given by telegraph shall be promptly confirmed by letter.
SECTION 14. MISCELLANEOUS. The reimbursement, indemnification and
contribution agreements contained in this Agreement and the representations,
warranties and covenants in this Agreement shall remain in full force and effect
regardless of (a) any termination of this Agreement, (b) any investigation made
by or on behalf of any Underwriter or controlling person thereof, or by or on
behalf of the Company or the Selling Securityholders or their respective
directors or officers, and (c) delivery and payment for the shares under this
Agreement; PROVIDED, HOWEVER, that if this Agreement is terminated prior to the
Closing Date, the provisions of paragraphs (1) and (m) of Section 6 hereof shall
be of no further force or effect.
SECTION 15. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability
of any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this Agreement is for any reason
determined to be invalid or unenforceable, there shall be deemed to be made such
minor changes (and only such minor changes) as are necessary to make it valid
and enforceable.
SECTION 16. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the internal laws (and not the laws pertaining to
conflicts of laws) of the State of California.
SECTION 17. GENERAL. This Agreement constitutes the entire agreement of
the parties to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof. This Agreement may be executed in several
counterparts, each one of which shall be an original, and all of which shall
constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may
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<PAGE>
be amended or modified, and the observance of any term of this Agreement may be
waived, only by a writing signed by the Company, the Selling Securityholders and
you.
Any person executing and delivering this Agreement as Attorney-in-fact for
the Selling Securityholders represents by so doing that he has been duly
appointed as Attorney-in-fact by such Selling Securityholder pursuant to a
validly existing and binding Power of Attorney which
[remainder of page intentionally left blank]
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<PAGE>
authorizes such Attorney-in-fact to take such action. Any action taken under
this Agreement by any of the Attorneys-in-fact will be binding on all of the
Selling Securityholders.
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us the enclosed copies hereof, whereupon it will
become a binding agreement among the Company and the several Underwriters,
including you, all in accordance with its terms.
Very truly yours,
CITATION COMPUTER SYSTEMS, INC.
By:
-------------------------------------
Title:
-----------------------------
THE SELLING SECURITYHOLDERS
By:
-------------------------------------
Attorney-in-fact
The foregoing Underwriting
Agreement is hereby confirmed
and accepted by us in
San Francisco, California as of
the date first above written.
VOLPE, WELTY & COMPANY
JEFFERIES & COMPANY, INC.
PUNK, ZIEGEL & KNOELL
Acting for ourselves and as
Representatives of the several
Underwriters named in the
attached Schedule A
By: VOLPE, WELTY & COMPANY
By:
-----------------------
Principal
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<PAGE>
SCHEDULE I
UNDERWRITERS
Number of
Firm Shares to
Underwriters be Purchased
- ------------ ------------
Volpe, Welty & Company . . . . . . . . . . . . . .
Jefferies & Company, Inc.. . . . . . . . . . . . .
Punk, Ziegel & Knoell. . . . . . . . . . . . . . .
---------
Total . . . . . . . . . . . . . . . . . . . . 2,732,311
---------
---------
I-1
<PAGE>
SCHEDULE II
SELLING SECURITYHOLDERS
Number of Number of
Firm Shares Option Shares
Name of Selling Securityholders to be Sold to be Sold
- ------------------------------- ---------- ----------
CFB Venture Fund I, Inc. . . . . . . . . . . . . . 532,311 100,000
Frank L. Poggio. . . . . . . . . . . . . . . . . . 200,000 100,000
------- -------
Total . . . . . . . . . . . . . . . . . . . . 732,311 200,000
------- -------
------- -------
II-1
<PAGE>
ANNEX A
MATTERS TO BE COVERED IN THE OPINION OF
SECURITIES COUNSEL FOR THE COMPANY
(i) Each of the Company and its subsidiaries is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, is in good standing as a foreign corporation in certain specified
states and has full corporate power and authority to own or lease its properties
and conduct its business as described in the Registration Statement; all the
issued and outstanding capital stock of each of the subsidiaries of the Company
has been duly authorized and validly issued and is fully paid and nonassessable,
and is owned by the Company free and clear of all liens, encumbrances and
security interests, and to the best of such counsel's knowledge, no options,
warrants or other rights to purchase, agreements or other obligations to issue
or other rights to convert any obligations into shares of capital stock or
ownership interests in such subsidiaries are outstanding; In addition to the
foregoing opinions, such counsel shall state that they have no knowledge that
the Company conducts operations or owns or leases property in other states such
that the Company would be required to qualify as a foreign corporation, except
where the failure to be so qualified would not have a Material Adverse Effect;
(ii) the authorized capital stock of the Company consists of ____________
shares of ____________ Stock, $____________ par value, of which there are
outstanding ____________ shares, and ________ shares of Common Stock,
$____________ par value, of which there are outstanding _______ shares; all of
the outstanding shares of such capital stock (including the Firm Shares and the
Optional Shares issued, if any) have been duly authorized and validly issued and
are, assuming receipt in full of the consideration specified in the resolutions
authorizing such issuance, fully paid and nonassessable; any Optional Shares
purchased after the Closing Date have been duly authorized and, when issued and
delivered to, and paid for by, the Underwriters as provided in the Underwriting
Agreement, will be validly issued and fully paid and nonassessable; and no
preemptive rights of, or rights of refusal in favor of, shareholders exist with
respect to the Shares, or the issue and sale thereof, pursuant to the Articles
of Incorporation or Bylaws of the Company or any other instrument and, to the
knowledge of such counsel, there are no contractual preemptive rights that have
not been waived, rights of first refusal or rights of co-sale which exist with
respect to the Shares being sold by the Selling Securityholders or the issue and
sale of the Shares by the Company;
(iii) the Registration Statement has become effective under the Securities
Act and, to the best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement or suspending or preventing the use
of the Prospectus is in effect and no proceedings for that purpose have been
instituted or are pending or contemplated by the Commission;
(iv) the Registration Statement and the Prospectus (except as to the
financial statements and schedules and other financial data contained therein,
as to which such counsel need express no opinion) comply as to form in all
material respects with the requirements of the Securities Act, the Exchange Act
and with the rules and regulations of the Commission thereunder;
A-1
<PAGE>
(v) such counsel do not know of any franchises, contracts, leases,
documents or legal proceedings, pending or threatened, which in the opinion of
such counsel are of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement, which are not described and filed as required;
(vi) the Underwriting Agreement has been duly authorized, executed and
delivered by the Company;
(vii) the Company has full corporate power and authority to enter into the
Underwriting Agreement and to sell and deliver the Shares to be sold by it to
the several Underwriters; the Underwriting Agreement is a valid and binding
agreement of the Company enforceable in accordance with its terms, except as
enforceability may be limited by general equitable principles, bankruptcy,
insolvency, reorganization, moratorium or other laws affecting creditor's rights
generally and except as to those provisions relating to indemnity or
contribution for liabilities arising under federal and state securities laws (as
to which no opinion need be expressed).
(viii) the issue and sale by the Company of the Shares sold by the Company
as contemplated by the Underwriting Agreement will not result in a breach of, or
constitute a default under the Articles of Incorporation or Bylaws of the
Company or any of its subsidiaries or any material agreement or instrument known
to such counsel (as listed on a schedule to the opinion), to which the Company
or any of its subsidiaries is a party or by which any of its properties may be
bound or any applicable law or regulation, or any order, writ, injunction or
decree, of any jurisdiction, court or governmental instrumentality known to such
counsel (as listed on a schedule to the opinion);
(ix) all holders of securities of the Company having rights to the
registration of shares of Common Stock, or other securities, known to such
counsel, because of the filing of the Registration Statement by the Company have
executed the Underwriting Agreement as Selling Securityholders, have waived such
rights or have suffered the expiration of such rights by reason of lapse of time
following notification of the Company's intent to file the Registration
Statement;
(x) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the transactions
contemplated in the Underwriting Agreement, except such as have been obtained
under the Securities Act and such as may be required under state securities or
blue sky laws in connection with the purchase and distribution of the Shares by
the Underwriters and the clearance of the offering with the NASD; and
(xi) the Shares sold by the Selling Securityholders are listed and duly
admitted to trading on the Nasdaq National Market, and the shares issued and
sold by the Company will been duly authorized for listing by the Nasdaq National
Market upon official notice of issuance.
Counsel rendering the foregoing opinion may rely as to questions of law not
involving the laws of the United States or of the States of Illinois or
Delaware, upon opinions of local counsel reasonably satisfactory in form and
scope to counsel for the Underwriters. Copies of any opinions so relied upon
shall be delivered to the Representatives and to counsel for the Underwriters
and the
A-2
<PAGE>
foregoing opinion shall also state that counsel believes it is reasonable for
the Underwriters to rely upon the opinions of such local counsel.
In addition to the matters set forth above, counsel rendering the foregoing
opinion shall also include a statement to the effect that no facts have has come
to the attention of such counsel that would cause them to believe that the
Registration Statement (except as to the financial statements and schedules and
other financial or statistical data contained or incorporated by reference
therein, as to which such counsel need not express any opinion or belief) at the
Effective Date contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, that the Prospectus, as amended or
supplemented, if applicable (except as to the financial statements and schedules
and other financial or statistical data contained or incorporated by reference
therein, as to which such counsel need not express any opinion or belief) as of
its date or at the Closing Date (or any later date on which Optional Shares is
purchased), contained or contains any untrue statement of a material fact or
omitted or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. Such statements may disclaim any independent check or
verification.
A-3
<PAGE>
ANNEX B
MATTERS TO BE COVERED IN THE OPINION OF
MISSOURI COUNSEL FOR THE COMPANY
The information required to be set forth in the Registration Statement in
answer to Items 9 and 10 (insofar as it relates to such counsel) of Form S-2 is
to the best of such counsel's knowledge accurately and adequately set forth
therein in all material respects or no response is required with respect to such
Items.
B-1
<PAGE>
ANNEX C
MATTERS TO BE COVERED IN THE OPINION OF
COUNSEL FOR THE SELLING SECURITYHOLDERS
(i) The Underwriting Agreement has been duly executed and delivered by
or on behalf of the Selling Securityholders and the Custody Agreement between
the Selling Securityholders and ____________, as Custodian, and the Power of
Attorney referred to in such Custody Agreement have been duly executed and
delivered by the several Selling Securityholders;
(ii) the Underwriting Agreement, the Custody Agreement and the Power of
Attorney are valid and binding agreements of each of the Selling Securityholders
enforceable in accordance with their terms except as enforceability may be
limited by general equitable principles, bankruptcy, insolvency, reorganization,
moratorium or other laws affecting creditors' rights generally and except with
respect to those provisions relating to indemnity or contribution for
liabilities under the Securities Act, as to which no opinion need be expressed,
and each Selling Securityholder has full legal right and authority to enter into
the Underwriting Agreement, the Custody Agreement and the Power of Attorney and
to sell, transfer and deliver in the manner provided in the Underwriting
Agreement the Shares sold by such Selling Securityholder hereunder;
(iii) to the best of such counsel's knowledge, the transfer and sale by
the Selling Stockholders of the Shares to be sold by the Selling Stockholders as
contemplated by the Underwriting Agreement, the Power of Attorney and the
Custody Agreement will not conflict with, result in a breach of, or constitute a
default under any agreement or instrument known to such counsel to which any of
the Selling Stockholders is a party or by which any of the Selling Stockholders
or any of their properties may be bound, or any applicable law or regulation, or
so far is known to such counsel, order, writ, injunction or decree of any
jurisdiction, court or governmental instrumentality body;
(iv) good and marketable title to the Shares under the Underwriting
Agreement, free and clear of all liens, encumbrances, equities, security
interests and claims, has been transferred to the Underwriters who have
severally purchased such Shares under the Underwriting Agreement, assuming for
the purpose of this opinion that the Underwriters purchased the same in good
faith without notice of any adverse claims.
C-1
<PAGE>
[MAYER, BROWN & PLATT LETTERHEAD]
August 28, 1996
The Board of Directors
CITATION Computer Systems, Inc.
424 South Woods Mill Road
Chesterfield, Missouri 63017
Re: COMMON STOCK, $.10 PAR VALUE PER SHARE
Gentlemen:
We have acted as special counsel to CITATION Computer Systems, Inc., a
Missouri corporation (the "Company"), in connection with the corporate
proceedings (the "Corporate Proceedings") taken and to be taken relating to
the proposed public offering by the Company and certain shareholders of the
Company of up to an aggregate of 3,167,159 shares (the "Shares") of the
Company's common stock, $.10 par value per share (the "Common Stock"). We
have also participated in the preparation and filing with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, of a
registration statement on Form S-2 (the "Registration Statement") relating to
such shares of Common Stock. In this connection, we have examined such
corporate and other records, instruments, certificates, opinions and
documents as we considered necessary to enable us to express this opinion.
We have assumed without any independent verification or examination that that
Company has received, or in the case of newly issued Shares, will receive,
payment in full of the higher of contract price or par value with respect to
such Shares. As to any other facts material to the opinions expressed herein
which were not independently established or verified, we have relied upon and
assumed the present and continuing truth and accuracy of those factual
representations made to us by directors and officers of the Company.
Based on the foregoing, it is our opinion that upon completion of the
Corporate Proceedings, the Shares will have been duly authorized for
issuance, and, when the Shares are delivered in accordance with the
Underwriting Agreement in substantially the form filed as Exhibit 1.1 to the
Registration Statement and the Corporate Proceedings, the Shares will be
validly issued, fully paid and non-assessable.
We are attorneys admitted to practice law in the State of Illinois. To
the extent our opinions in the preceding paragraph relate to the laws of the
State of Missouri, we have consulted and are relying on Suelthaus & Walsh,
P.C., Missouri counsel to the Company.
<PAGE>
August 28, 1996
Page 2
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the caption "Legal
Matters."
Very truly yours,
MAYER, BROWN AND PLATT
<PAGE>
EXHIBIT 10.16
AGREEMENT
This Agreement is made and entered into on the date last below written
by and between CITATION COMPUTER SYSTEMS, INC., a Missouri corporation (the
"COMPANY"), the principal business address of which is 424 South Woods Mill
Road, Suite 200, Chesterfield, Missouri 63017, and FRANK L. POGGIO
("POGGIO"), whose principal residence address is 14598 Big Timber Lane,
Chesterfield, Missouri 63017.
WHEREAS, Poggio is and has been for a number of years an employee of the
Company; and
WHEREAS, the terms and conditions of Poggio's current employment by the
Company are defined in an Employment Agreement dated December 11, 1992
between the Company and Poggio, as amended (the "EMPLOYMENT AGREEMENT") and
in a Non-Competition/Non-Solicitation Agreement also dated December 11, 1992
(the "NON-COMPETITION/NON-SOLICITATION AGREEMENT"); and
WHEREAS, Poggio is also a shareholder of the Company, an officer of the
Company, and a member of its Board of Directors; and
WHEREAS, the Company and Poggio have reached an understanding concerning
the voluntary termination of Poggio's employment with the Company, and desire
to memorialize their understanding in this writing;
NOW, THEREFORE, for and in consideration of the premises and of the
mutual covenants and promises set forth herein, the adequacy of which is
acknowledged by each of the parties, it is hereby agreed as follows.
1. RESIGNATION
Poggio hereby voluntarily resigns as an employee of the Company,
effective as of July 15, 1996 (the "RESIGNATION DATE"). This Agreement
shall be effective as of the eighth day following the date on which it is
executed by Poggio (the "EFFECTIVE DATE").
2. SUPERSEDES PRIOR AGREEMENTS
This Agreement shall supersede in all respects the Employment Agreement
and Non-Competition/Non-Solicitation Agreement, both of which shall be deemed
to have terminated and shall be of no further force and effect from and after
the Effective Date. From and after
Agreement Page 1
<PAGE>the Effective Date, all of the rights and obligations of the Company
and Poggio arising out of their employment relationship and the subject
matter hereof shall be governed solely by this Agreement.
3. REGULAR COMPENSATION; FRINGE BENEFITS
It is understood that Poggio's compensation and fringe benfits ceased as
of the Resignation Date and that no further compensation or fringe benefits
are due to Poggio.
4. BUSINESS EXPENSES
Poggio shall be reimbursed for all business expenses incurred through
the Resignation Date. All expense reports must be turned in within 30 days
after the Effective Date in order to be eligible for reimbursement.
5. RECONCILIATION OF AMOUNTS DUE; COMPANY PROPERTY
The Company and Poggio shall reconcile all other amounts due from one to
the other as of the Effective Date. To the extent that the net of the
reconciliation favors Poggio, the net amount due to Poggio shall be paid to
Poggio within 10 days after the Effective Date. To the extent that the net
of the reconciliation favors the Company, the net amount due to the Company
shall be subtracted from the consulting payments otherwise due to Poggio.
Poggio shall, on or promptly after the Effective Date, return any and
all property of the Company of any kind or nature that is in his possession
or control.
6. CONSULTING SERVICES
Poggio shall provide consulting services to the Company for a period of
12 months following the Effective Date. During that time, Poggio shall make
himself available at mutually agreed upon times to provide advice and
consultation to the Company with respect to any and all operations of the
Company, relationships with vendors and customers, software and business
acquisitions, and general strategic planning.
The Company shall pay to Poggio $6,250.00 per month as compensation for
providing consulting services. If Poggio should die or become unable to
render the consulting services contemplated hereunder, no further monthly
payments will be due. Monthly amounts due for consulting shall be payable in
advance on the Effective Date and on the same date of each month thereafter
during the term of this Agreement until 12 such payments have been made.
Agreement Page 2
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7. BOARD OF DIRECTORS
Poggio's membership on the Board of Directors of the Company shall be
unaffected by this Agreement.
8. CONFIDENTIAL INFORMATION
Poggio shall not, except as authorized by the Company, during or at any
time after the Effective Date, directly or indirectly, use for himself or
others, or disclose, communicate, divulge, furnish to, or convey to any other
person, firm, or corporation, any secret or confidential information,
knowledge, or data of the Company (whether or not written and whether or not
labeled as confidential, secret, or otherwise) or that of third parties
obtained by Poggio during the period of his employment with the Company.
As used herein, secret or confidential information, knowledge, or data
shall NOT include information: (i) that is generally available in the
industry at the time of its disclosure to Poggio or that subsequently becomes
generally available in the industry, unless it becomes so available as a
result of a breach of this Agreement; (ii) that becomes available from a
person other than Poggio, which person is not otherwise bound by a
confidentiality agreement with the Company; or (iii) that it can be clearly
proven was already known by the receiving party PRIOR TO its disclosure to
the receiving party.
9. NON-SOLICITATION; NON-DISPARAGEMENT
For a period of 12 months after the Effective Date, Poggio shall not
participate, directly or indirectly, in or be materially involved in any
manner in the hiring or any attempt to hire as an employee, officer,
director, consultant, or advisor any person who is at the time of such hiring
or attempted hiring an employee of Company.
Poggio agrees that he will not, at any time after the date hereof, make
any statement or take or omit to take any action, the effect of which is to
criticize or otherwise disparage in any way the Company or its management.
10. MUTUAL RELEASES
Poggio, in consideration of the payments and other benefits provided by
this Agreement and other consideration herein, and with the intent of binding
both himself, his heirs, personal representatives, administrators,
successors, and assigns, hereby releases and forever discharges the Company
and all their present, former, and future officers, directors, employees,
agents, attorneys, divisions, subsidiaries, successors, related companies,
the
Agreement Page 3
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shareholders, partners, and members of all of them, personal
representatives, and assigns, from any and all claims, charges, rights of
action, judgments, jury verdicts, or lawsuits arising on or before the
Effective Date, including but not limited to: (l) any and all claims relating
to alleged discrimination, including but not limited to, any and all actions
arising under Title VII of the Civil Rights Act of 1964, 42 U.S.C. Section
2000e et seq., the Age Discrimination in Employment Act, 29 U.S.C. Section
621 et seq., the Missouri Civil Rights Act, Mo. Rev. Stat. Section 213.010 et
seq., and the Americans with Disabilities Act, 42 U.S.C. Section 12101 et
seq.; (2) any and all actions for breach of contract, violation of public
policy, promissory estoppel, fraud, negligence, wrongful or retaliatory
discharge, defamation, intentional infliction of emotional distress, and/or
other personal or business injury; (3) any and all rights to or claims for
compensation (including, but not limited to, salary, severance or vacation
pay, bonuses, incentives, pension, insurance, or any other employment or
fringe benefits or compensation of any kind whatsoever) except as provided
for in this Agreement, rights to or claims for liquidated damages, rights to
or claims for reinstatement, rights to or claims for contract, compensatory,
exemplary or punitive damages, rights to or claims for injunctive relief,
rights to or claims for front pay, rights to or claims for expenses, costs,
or attorneys' fees; and (4) any and all claims for losses or damages of
whatsoever kind or nature which he now has or has ever had, both known or
unknown, or which his heirs, personal representatives, administrators,
successors, and assigns hereinafter can, shall, or may have, both known or
unknown, against the Company and/or all its present, former and future
officers, directors, employees, agents, attorneys, divisions, subsidiaries,
successors, related companies, administrators, personal representatives, and
assigns. Poggio hereby expressly waives the benefit of any statute or rule
of law, which, if applied to this Agreement, would otherwise exclude from its
binding effect any claims not now known by Poggio to exist.
Notwithstanding the provisions of the immediately preceding paragraph,
Poggio does not release such rights as he may have to indemnification as a
former officer and/or director of the Company, whether such rights arise under
the Company's By-laws, contract, an insurance policy, or otherwise.
Additionally, the Company shall, IF Poggio is not covered by director AND
officer insurance written on an occurrence basis for the time period ending on
the Effective Date, continue to provide director and officer insurance coverage
to Poggio, but only to the extent (if any) that current officers and directors
are covered, for a period of five years following the Effective Date, so long
as such coverage is available.
The Company, on behalf of itself, its subsidiaries and affiliates and
anyone claiming by, through, or under any of them, in consideration of the
agreements and promises by Poggio in this Agreement and other consideration
herein, and with the intent of binding itself, its successors and assigns,
hereby releases and forever discharges Poggio and all of his heirs, personal
representatives, administrators, successors, and assigns from any and all
claims, charges, rights of action, judgments, jury verdicts, or lawsuits arising
on or before
Agreement Page 4
<PAGE>
the Effective Date, including without limitation: (1) any and all
actions for breach of contract, violation of public policy, promissory estoppel,
fraud, negligence, defamation, and other business injury, including rights to or
claims for liquidated damages, claims for contract, compensatory, exemplary, or
punitive damages, rights to or claims for injunctive relief, rights to or claims
for expenses, costs, or attorneys' fees; and (2) any and all claims for losses
or damages of whatsoever kind or nature which the Company now has or has ever
had, both known or unknown, for which its successors or assigns hereafter can,
shall, or may have, both known or unknown, against Poggio and/or any of his
administrators, personal representatives, successors, or assigns.
It is expressly understood and agreed that the acceptance by the parties of
the terms and conditions of this Agreement shall not be deemed to be an
admission of liability on the part of any party hereto.
11. AGE CLAIM WAIVER Poggio
understands that there is included within the release given by him in the
immediately preceding section a release and waiver of all rights and claims
Poggio may have under the Age Discrimination in Employment Act, 29 U.S.C.
Section 621 et seq. (the "ADEA"). In order to comply with the Act, the
Company hereby advises Poggio as follows:
(a) Poggio has the right to consult with an attorney prior to
executing this Agreement.
(b) The waiver and release of rights and claims under the ADEA
pertains only to rights and claims arising on or before the Effective Date
of this Agreement, but not to rights and claims under the ADEA that arise
after the Effective Date of this Agreement.
(c) It is understood that the consulting arrangements between Poggio
and the Company that are made pursuant to this Agreement are not required
under the Employment Agreement in the event of Poggio's voluntary
resignation, that the non-solicitation provisions of this Agreement are
similar to what would be applicable under the Non-Competition/
Non-Solicitation Agreement in the event of Poggio's voluntary resignation,
and that CITATION has not exercised what would otherwise be its right to
include provisions limiting Poggio's ability to compete in the healthcare
information systems business after the Effective Date. All of the
foregoing represents a compromise between the Company and Poggio with
respect to the relative positions of the Company and Poggio following his
voluntary resignation. Also, the Company has agreed, without objection,
to increase the number of its common shares owned
Agreement Page 5
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by Poggio that will be included in its intended upcoming offering to
the public, it being understood that the Company does NOT obligate itself
to complete such public offering if market or other conditions do not
justify same in the sole discretion of the Company.
(d) Notwithstanding any other provisions hereof, this Agreement shall
not become effective until 7 days have passed following the date on which
it is executed by Poggio. During said 7-day period, Poggio may revoke this
Agreement by notice in writing to the Company, in which case this Agreement
shall be null and void and unenforceable by either party.
(e) Poggio shall have a period of 21 days after the date on which
this Agreement is delivered to him to consider whether or not to execute
it. Assuming the factual circumstances on which this Agreement is based
are materially correct and absent substantially changed circumstances, the
Company intends to execute the Agreement in the form delivered, or with
modifications acceptable to it and Poggio, upon request from Poggio at any
time within the said 21-day period.
12. GENERAL PROVISIONS
TERMS OF THIS AGREEMENT. No party shall, without written authorization
from the other, disclose to any third party the terms and conditions of this
Agreement except as may be necessary to establish or assert rights hereunder
or as may be required by law or applicable regulation; provided, however,
that any party may, on a confidential basis, disclose this Agreement to that
party's accountants, attorneys, and financial advisors.
CERTAIN DEFINED TERMS. All initially capitalized terms used herein
without definition shall have the meanings assigned to them in the Employment
Agreement.
ENTIRE AGREEMENT, AMENDMENTS. The provisions hereof (including any
Schedules or Exhibits hereto) constitute the entire and only Agreement
between the parties with respect to the subject matter hereof and supersede
all prior agreements, commitments, representations, understandings, or
negotiations, oral or written, and all other communications relating to the
subject matter hereof. No amendment or modification of any provision of this
Agreement will be effective unless set forth in a document that purports to
amend this Agreement and is executed by all parties hereto.
BINDING EFFECT; THIRD PARTY BENEFICIARIES. This Agreement shall inure
to the benefit of and shall be binding upon the parties hereto and their
respective heirs, legal
Agreement Page 6
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representatives, successors, and permitted assigns. Except as expressly set
forth herein, this Agreement is not intended to confer any rights or remedies
upon any other person or entity.
ASSIGNMENT. Neither party shall sell, transfer, assign, or subcontract
any right or obligation hereunder except as expressly provided herein without
the prior written consent of each other party. Any act in derogation of the
foregoing shall be null and void.
GOVERNING LAW. The validity, construction, and performance of this
Agreement shall be governed by and in accordance with the internal laws of
the State of Missouri.
CERTAIN EXPENSES. Each of the parties shall bear its or his own
expenses, including attorneys' fees, in connection with the negotiation and
preparation of this Agreement and the taking of the other actions
contemplated herein; provided, however, that costs incurred in connection
with the commencement of a proceeding pursuant to the paragraph below
entitled "Binding Arbitration, Enforcement, Costs and Expenses" will be
governed in accordance with the provisions of that paragraph.
WAIVERS. No waiver by any party hereto of any condition or provision of
this Agreement to be performed by another party shall be valid unless in
writing, and no such valid waiver shall be deemed a waiver of any similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time.
NOTICE. All notices provided for in this Agreement shall be in writing
and shall be given either (i) by actual delivery of the notice to the party
entitled thereto or (ii) by depositing the same with the United States Postal
Service, certified mail, return receipt requested, postage prepaid, to the
address of the party entitled thereto. The notice shall be deemed to have
been received in case (i) on the date of its actual receipt by the party
entitled thereto and in case (ii) two days after the date of its deposit with
the United States Postal Service.
SEVERABILITY. The terms and conditions of this Agreement are severable,
and if any provision hereof is found to be in violation or contravention of
law, such provision shall, to the extent so found, be deemed not to be a part
of this Agreement, and the remainder of this Agreement shall remain in full
force and effect.
BINDING ARBITRATION, ENFORCEMENT, COSTS, AND EXPENSES. Except as
otherwise provided for herein, any controversy or claim arising out of or
relating to this Agreement, or the breach thereof, shall be settled by
arbitration in accordance with the Rules of the
Agreement Page 7
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American Arbitration Association in the metropolitan St. Louis area, and the
parties hereby agree to be bound by the results thereof. Each party shall
promptly choose one arbitrator and a third arbitrator shall be chosen by the
two arbitrators so chosen by the parties. A judgment upon any award rendered
by a majority opinion of the arbitrators so chosen may be entered in any
court having jurisdiction thereof.
Notwithstanding the foregoing, Poggio specifically agrees that the
Company shall be entitled to obtain specific performance and may sue in any
court of competent jurisdiction to enjoin any breach, threatened or actual,
of the covenants and promises contained in those Sections of this Agreement
entitled "Confidential Information," and "Non-Solicitation;
Non-Disparagement;" and that, in connection with any such litigation, the
Company may also sue to obtain damages for default under or breach of the
provisions of any of said Sections without first initiating arbitration
pursuant to this Section.
If either party shall commence a proceeding (whether in arbitration or
in court) against the other to enforce and/or recover damages for breach of
this Agreement, the prevailing party in such proceeding shall be entitled to
recover from the other party all reasonable costs and expenses of enforcement
and collection of any and all remedies and damages, or all reasonable costs
and expenses of defense, as the case may be. The foregoing costs and
expenses shall include reasonable attorneys' fees.
HEADINGS. The section and other headings contained in this Agreement
are for reference purposes only and shall not affect the meaning or
interpretation of this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized representatives as of this 15th day of
July, 1996.
THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
COMPANY: CITATION COMPUTER SYSTEMS, INC.
By /s/
Title: CEO
POGGIO: /s/ Frank L. Poggio
-------------------------------
Frank L. Poggio
Agreement Page 8
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CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion and incorporation by reference in the
Prospectus constituting part of this Registration Statement on Form S-2 of
our report dated April 30, 1996, which appears on page 34 of the 1996 Annual
Report to Shareholders of CITATION Computer Systems, Inc., which is
incorporated by reference in CITATION Computer Systems, Inc.'s Annual Report
on Form 10-KSB for the year ended March 31, 1996. We also consent to the
incorporation by reference of our report on the Financial Statement Schedule,
which appears on page 107 of such Annual Report on Form 10-KSB. We also
consent to the references to us under the headings "Experts" and "Selected
Consolidated Financial Data" in such Prospectus. However, it should be noted
that Price Waterhouse LLP has not prepared or certified such "Selected
Consolidated Financial Data".
Price Waterhouse LLP
St. Louis, Missouri
August 28, 1996
