<PAGE> 1
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------- -------
COMMISSION FILE NUMBER 0-20284
CITATION COMPUTER SYSTEMS, INC.
---------------------------------------------------
(Exact name of company as specified in its charter)
MISSOURI 43-1174397
---------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
424 SOUTH WOODS MILL ROAD, CHESTERFIELD, MISSOURI 63017
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(314) 579-7900
----------------------------------
(Company's telephone number, including area code)
--------------------
[ ]Indicate by check mark whether the company (1) has filed all reports required
to be filled by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the company's Common Stock, par value $0.10
per share, at August 8, 1997, was 3,805,755 shares.
Exhibit Index on Page 14
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
See pages F-1 to F-7 hereof.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1997, TO THREE MONTHS ENDED JUNE 30,
1996
GENERAL. The Company reported a net loss of $0.04 per share, or $0.2
million, for the first quarter of fiscal 1998, compared with net income of
$0.16 per share, or $0.7 million in the comparable period of fiscal 1997. As
described below, net earnings from ongoing operations on a pro forma basis for
the first quarter of fiscal 1997, excluding United Kingdom ("UK") results of
operations for the first quarter of fiscal 1997, reflected net income of $1.0
million or $0.24 per share. The decline in profitability from the prior year
on both an actual historical and pro forma basis was principally the result of
lower sales volume and lower gross margins due to unfavorable product mix.
In March 1997, the Company sold its UK operations to Health Systems
Limited, a new UK company, which also became CITATION's exclusive distributor
for its clinical software products in the UK.
The following pro forma information presents the Company's operations
with the UK operating results shown on a separate line. Further, pro forma
earnings per share from ongoing operations is presented excluding UK results of
operations:
Three months ended
--------------------
6/30/97 6/30/96
--------- ---------
(000's, except per share amount)
Sales $4,281.7 $6,288.0
Cost of sales 2,166.8 2,247.5
-------- --------
Gross profit 2,114.9 4,040.5
Operating expenses 2,320.7 2,461.9
Operations - UK - (527.2)
-------- --------
Operating income (loss) (205.8) 1,051.4
Other income (expense), net (40.7) 14.9
-------- --------
Income (loss) before taxes (246.5) 1,066.3
Provision (benefit) for income taxes (93.7) 415.9
-------- --------
Net income (loss) $ (152.8) $ 650.4
======== ========
Earnings (loss) per share:
Ongoing operations $ (0.04) $ 0.24
Operations - UK - (0.08)
-------- --------
Reported EPS - Income (loss) $ (0.04) $ (0.16)
======== ========
Page 2
<PAGE> 3
Any forward looking statements set forth herein are necessarily subject to
significant uncertainties and risks. The words "believes," "anticipates,"
"expects" and similar expressions are intended to identify forward-looking
statements. Actual results could be materially different as a result of
various possibilities, including difficulties or delays in the introduction of
new products or the revision of existing products, significant changes in
healthcare regulation, economic downturns in any of the Company's markets,
competitors, new entrants into the Company's markets, increased price pressure,
customer reduction caused by industry consolidation or other factors or
marketplace acceptance of Windows NT as an operating platform.
Readers are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly release the results of any revisions to these
forward-looking statements which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
REVENUE. Total revenue decreased 35.7% from $6.7 million for the first
quarter of fiscal 1997 to $4.3 million for the first quarter of fiscal 1998,
which reflects a 47.9% decrease in system sales revenue and a 15.1% decrease in
service revenue.
System sales revenue for the first quarter decreased by $2.0 million,
from $4.2 million in fiscal 1997 to $2.2 million in fiscal 1998. Included in
last year's revenues were $0.4 million from the UK operations and $0.6 million
from the Asia Pacific market, of which no comparable transactions were recorded
in the current year's first quarter. System sales represented 62.8% and 50.9%
of total revenues for the first quarter of fiscal 1997 and 1998, respectively.
Service revenue for the first quarter decreased by $0.4 million, from $2.5
million in fiscal 1997 to $2.1 million in fiscal 1998. The decrease was
primarily due to the loss of service revenue from several customers due to
consolidation of the industry which was not offset by additional sales and
renewals of service contracts from existing clients. Service revenue
represented 37.2% and 49.1% of total revenues for the first quarter of fiscal
1997 and 1998, 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 increased from 40.8% in the first quarter of fiscal 1997 to 50.6%
in the first quarter of fiscal 1998. For the first quarter of fiscal 1997 and
1998, total cost of products and services sold were $2.7 million and $2.2
million, respectively.
The increase in the percentage of total revenues was primarily due to the
decrease in the total revenues which was not entirely offset by a decrease in
software amortization costs and client service expense. Software amortization
costs of $0.5 million in the first quarter of both fiscal 1997 and 1998
represented 19.2% and 23.0%, respectively, of total costs of products and
services sold.
Page 3
<PAGE> 4
Gross profit as a percentage of total revenues decreased from 59.2% in the
first quarter of fiscal 1997 to 49.4% in the first quarter of fiscal 1998. The
decrease in gross profit as a percentage of total revenues was primarily
attributable to the factors discussed above.
RESEARCH AND DEVELOPMENT COSTS. Total outlays for software development
for the first quarter of fiscal 1997 and 1998 are as follows (000's):
<TABLE>
<CAPTION>
FY98 FY97
R&D EXPENSE 1ST QTR. 1ST QTR.
- ----------- --------- ---------
<S> <C> <C>
R&D spending $ 713.2 $1,221.6
Less - R&D capitalized 181.2 660.8
-------- --------
Total R&D expense 532.0 560.8
Software amortization (cost of prod. sold) 497.2 521.4
-------- --------
Total R&D expensed $1,029.2 $1,082.2
======== ========
<CAPTION>
FY98 FY97
SOFTWARE DEVELOPMENT COST, NET 1ST QTR. 1ST QTR.
- ------------------------------ --------- ---------
<S> <C> <C>
Beginning of period $3,876.0 $4,762.5
R&D capitalized per above 181.2 660.8
-------- --------
4057.2 5,423.3
Less software amortization (497.2) (521.4)
Other adjustments - (0.1)
-------- --------
End of period $3,560.0 $4,901.8
======== ========
</TABLE>
The Company anticipates that due to the nature of the planned development
activities (e.g. product enhancements versus the significant development effort
involved in prior periods 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. For the
first quarter of fiscal years 1997 and 1998, the Company capitalized 50.7% and
25.4%, respectively, of software development spending.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
as a percentage of total revenues increased from 34.4% in the first quarter of
fiscal 1997, to 41.8% in the first quarter of fiscal 1998. Total selling and
administrative expenses decreased $0.5 million to $1.8 million in this year's
first quarter, primarily due to expenditures associated with lower selling and
administrative costs to support international and domestic operations.
OPERATING INCOME. Operating income decreased from $1.1 million in the
first quarter of fiscal 1997, to a net loss of $0.2 million in the first
quarter of fiscal 1998. The operating margin decreased from 15.8% to a
negative 4.8% in the first quarter of fiscal 1997 and 1998, respectively,
primarily reflecting the decrease in total revenues and other factors as
described above.
Page 4
<PAGE> 5
OTHER INCOME. Interest expense, net increased from income of $12.2
thousand in the first quarter of fiscal 1997 to expense of $42.7 thousand in
the first quarter of fiscal 1998 due to the borrowing from the line of credit
in the last three quarters of fiscal 1997.
INCOME TAXES. The Company's effective income tax provision (benefit)
rate was 39.0% in the first quarter of fiscal 1997 versus (38.0)% in the first
quarter of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is cash flows from operations.
At March 31, 1997, the Company had cash and cash equivalents in the amount of
$0.5 million as compared to $0.4 million at June 30, 1997. The cash balance
decreased by $0.1 million primarily due to cash used for repayment of debt
($0.7 million), software development costs ($0.2 million) and capital
expenditures ($0.1 million), offset by cash generated from operating activities
of $0.8 million.
At March 31, 1996, the Company had cash and cash equivalents in the amount
of $2.1 million as compared to $1.7 million at June 30, 1996. The cash balance
decreased by $0.4 million primarily due to cash used for software development
costs ($0.7 million), and cash used for capital expenditures ($0.2 million),
offset by cash generated from operating activities of $0.4 million.
During the first quarter of fiscal 1998, the Company made payments
totaling approximately $0.2 million for items related to the sale of the UK
operations. Additional payments totaling approximately $0.2 are expected to be
paid during the remainder of fiscal 1998.
As of June 30, 1997, the Company had a line of credit agreement that
allows the Company to borrow up to $3.0 million with interest at the lender's
prime rate (8.5% at June 30, 1997). The line of credit is secured by the
Company's accounts receivable, inventory, and general intangible assets. The
Company repaid $0.6 million during the first quarter of fiscal 1998 and had an
outstanding balance of $1.4 million at June 30, 1997. Also included in
long-term debt is $0.3 million notes payable for equipment.
On July 15, 1997, the Company renewed its line of credit in the amount of
$1.6 million with interest at the lender's prime rate (8.5% at July 15, 1997)
plus three-quarters percent.
The Company believes that its cash and cash equivalents, together with its
current borrowing facilities and cash generated from operations 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.
Page 5
<PAGE> 6
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no reportable proceedings.
ITEM 2. CHANGE IN SECURITIES
(a) Not applicable.
(b) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) Not applicable.
(b) Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index for list of Exhibits.
(b) None.
Page 6
<PAGE> 7
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITATION COMPUTER SYSTEMS, INC.
Date: August 14, 1997 By: /s/Richard D. Neece
--------------- ---------------------------
Richard D. Neece
Executive Vice President
& Chief Financial Officer
(Principal Financial & Accounting Officer)
Page 7
<PAGE> 8
CITATION COMPUTER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
(000's)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
June 30, March 31,
1997 1997
---------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 399.3 $ 510.7
Accounts receivable:
Trade, net 6,961.7 7,334.1
Other 30.4 40.6
Inventories 408.6 416.6
Prepaid expenses and other current assets 520.2 521.1
Income taxes receivable 944.3 179.4
Deferred tax asset 179.4 1,435.2
--------- ---------
Total current assets 9,443.9 10,437.7
Software development costs, net 3,560.0 3,876.0
Property and equipment, net 1,156.2 1,229.6
Other assets 2,047.4 2,092.4
--------- ---------
Total assets $16,207.5 $17,635.7
========= =========
Liabilities and shareholders' equity:
Current liabilities:
Current portion of long-term debt $ 351.4 $364.9
Accounts payable 777.0 1,350.8
Customer deposits 400.9 334.9
Accrued bonuses and commissions 143.3 121.2
Other accrued liabilities 421.0 529.5
Deferred service revenue 2,259.1 2,286.1
--------- ---------
Total current liabilities 4,352.7 4,987.4
Long-term debt 1,746.3 2,400.4
Deferred tax liability 438.9 438.9
--------- ---------
6,537.9 7,826.7
Shareholders' equity: --------- ---------
Common stock 380.4 380.2
Paid-in capital 6,462.1 6,448.9
Retained earnings 2,753.6 2,906.4
Equity adjustment from foreign currency translation 73.5 73.5
--------- ---------
9,669.6 9,809.0
--------- ---------
Total liabilities and shareholders' equity $16,207.5 $17,635.8
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
F-1
Page 8
<PAGE> 9
CITATION COMPUTER SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three months ended
June 30,
------------------------------
1997 1996
----------- ----------
(Unaudited) (Unaudited)
<S> <C> <C>
Net system sales and service revenues:
System sales $2,177.4 $4,182.7
Service revenue 2,104.3 2,479.1
-------- --------
4,281.7 6,661.8
Cost of products and service sold:
System sales 1,747.8 2,162.8
Service revenue 419.0 556.6
------- -------
2,166.8 2,719.4
Gross profit 2,114.9 3,942.4
Research and development expense 532.0 602.4
Selling and administrative expenses 1,788.7 2,288.6
------- -------
Operating income (loss) (205.8) 1,051.4
Other income:
Interest income (expense), net (42.7) 12.2
Other 2.0 2.7
------- -------
Income (loss) before income taxes (246.5) 1,066.3
Provision (benefit) for income taxes (93.7) 415.9
------- -------
Net income (loss) $(152.8) $650.4
======= ======
Net earnings (loss) per common share: $(0.04) $0.16
Fully diluted ====== =====
Weighted average number of shares used in
computing net earnings per common share:
Fully diluted 3,803 3,957
===== =====
</TABLE>
See accompanying notes to consolidated financial statements
F-2
Page 9
<PAGE> 10
CITATION COMPUTER SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(000'S)
<TABLE>
<CAPTION>
Three months ended
June 30,
------------------------------
1997 1996
----------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(152.8) $ 650.4
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment 179.1 240.7
Amortization of software development costs 497.2 521.4
Amortization of other assets -- 20.2
Non-cash 401K matching contribution 13.4 14.6
Decrease (increase) in accounts receivable 382.5 (195.2)
Decrease (increase) in inventories 8.0 (21.7)
Decrease in prepaid expenses and other assets 45.9 41.9
(Decrease) in accounts payable (573.8) (9.5)
Increase in customer deposits 66.0 213.2
Increase (decrease) in accrued bonuses and commissions 22.1 (325.0)
(Decrease) in other accrued liabilities (108.4) (454.2)
Increase in current income taxes receivable/payable 490.9 179.3
(Decrease) in deferred service revenue (27.1) (490.2)
------- --------
Net cash provided by operating activities 843.0 385.9
Cash flows from investing activities:
Capital expenditures (105.7) (233.6)
Software development costs (181.2) (660.8)
------- --------
Net cash used in investing activities: (286.9) (894.4)
------- --------
Cash flows from financing activities:
Proceeds from long-term debt -- --
Principal payments on long-term debt (667.5) (35.7)
Proceeds from the issuance of common stock -- 48.1
------- --------
Net cash provided by (used in) financing activities (667.5) 12.4
------- --------
Effect of exchange rate changes on cash -- 58.2
------- --------
Net decrease in cash and cash equivalents (111.4) (437.9)
Cash and cash equivalents, beginning of year 510.7 2,146.3
------- --------
Cash and cash equivalents, end of period $ 399.3 $1,708.4
======= ========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
Page 10
<PAGE> 11
CITATION COMPUTER SYSTEMS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(000'S, EXCEPT FOR NUMBER OF SHARES)
<TABLE>
<CAPTION>
Common Stock
--------------------------------
Additional Foreign
Number Par Paid-in Retained Currency
of Shares Value Capital Earnings Translation Total
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1997 (audited) 3,802,041 $380.2 $6,448.9 $2,906.4 $73.5 $9,809.0
Net loss (unaudited) (152.8) (152.8)
Issuance of common stock for 401K Company
matching contribution 1,676 0.2 13.2 13.4
----------------------------------------------------------------
Balance, June 30, 1997 (unaudited) 3,803,717 $380.4 $6,462.1 $2,753.6 $73.5 $9,669.6
----------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
F-4
Page 11
<PAGE> 12
CITATION COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim financial information for the three-month periods ended June
30, 1996, and 1997 is unaudited. Financial Statement note disclosures,
normally included in financial statements prepared in conformity with
generally accepted accounting principles, have been omitted in this Form
10-QSB pursuant to the Rules and Regulations of the Securities and
Exchange Commission. However, in the opinion of the Company, the
disclosures contained in this Form 10-QSB are adequate to make the
information presented not misleading. See Notes to Financial Statements
as incorporated by reference in the Company's Annual Report on Form
10-KSB, dated June 25, 1997, which includes financial statements and notes
thereto for the year ended March 31, 1997.
In the opinion of the Company, the accompanying unaudited financial
statements include all adjustments, consisting solely of normal recurring
adjustments, necessary to present fairly the Balance Sheet at June 30,
1997, the Statement of Operations for the three months ended June 30, 1996
and 1997, the Statement of Cash Flows for the three months ended June 30,
1996 and 1997, and the Statement of Changes in Shareholders' Equity for
the three months ended June 30, 1997. The interim results, however, are
not necessarily indicative of results for any future period.
2. UK RESTRUCTURING AND SALE OF OPERATIONS
In March 1997, the Company completed a transaction in which it sold its UK
operations to Health Systems Limited ("HSL"), which also became CITATION's
exclusive distributor for its clinical software products in the UK. Under
the terms of the transaction, HSL acquired CITATION's UK operating
assets, retained a majority of the Company's employees in the UK, and
assumed responsibility for CITATION's existing customers and contracted
commitments in the UK. See Note 2 to the Company's March 31, 1997
Financial Statements included in the Company's Annual Report on Form
10-KSB dated June 25, 1997.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, March 31,
1997 1997
---------- -----------
<S> <C> <C>
Hardware and third party software $178.9 $192.5
Field service equipment 229.7 224.1
---------- -----------
$408.6 $416.6
========== ===========
</TABLE>
F-5
Page 12
<PAGE> 13
4. COMMITMENTS
The Company from time to time is a party to certain lawsuits. Management
does not expect the outcome of any litigation to have a material 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.
5. LONG-TERM ACCOUNTS RECEIVABLE
The Company has provided extended payment terms to an overseas customer
for a maximum period of three years. At June 30, 1997, $1.7 million was
outstanding.
6. LONG-TERM DEBT
As of June 30, 1997, the Company had a line of credit agreement that
allowed the Company to borrow up to $3.0 million with interest at the
lender's prime rate. The line of credit is secured by the Company's
accounts receivable, inventory and equipment. The Company has $1.4
million in borrowings outstanding under the line of credit agreement at
June 30, 1997.
7. SUBSEQUENT EVENTS
On July 15, 1997, the Company renewed its line of credit in the amount of
$1.6 million with interest at the lender's prime rate (8.5% at July 15,
1997) plus three quarters percent.
F-6
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<PAGE> 14
EXHIBIT INDEX
Exhibit Sequential Page
Number Exhibit Number
- ------ ------- ---------------
3(a) Restated Articles of Incorporation of the Company; *
incorporated by reference to the corresponding
Exhibit to the Company's Registration Statement on
Form S-1 of the Company, Registration No. 33-48332
3(b) Restated By-laws of the Company; incorporated by *
reference to the corresponding Exhibit to the
Company's Registration Statement of Form S-1 of the
Company, Registration No. 33-48332
4(a) Specimen Common Stock Certificate; incorporated by *
reference to the corresponding Exhibit to the
Company's Registration Statement on Form S-1 of the
Company, Registration No. 33-48332
4(b) Registration Rights Agreement, dated May 29, 1992, *
between the Company and Capital For Business, Inc;
incorporated by reference to the corresponding
Exhibit to the Company's Registration Statement on
Form S-1 of the Company, Registration No. 33-48332
27(a) Financial Data Schedule
* Incorporated by reference as set forth in Exhibit description.
Page 14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 399
<SECURITIES> 0
<RECEIVABLES> 7,151
<ALLOWANCES> 159
<INVENTORY> 409
<CURRENT-ASSETS> 9,444
<PP&E> 4,320
<DEPRECIATION> 3,164
<TOTAL-ASSETS> 16,208
<CURRENT-LIABILITIES> 4,353
<BONDS> 0
0
0
<COMMON> 380
<OTHER-SE> 9,289
<TOTAL-LIABILITY-AND-EQUITY> 16,208
<SALES> 2,177
<TOTAL-REVENUES> 4,282
<CGS> 824
<TOTAL-COSTS> 2,167
<OTHER-EXPENSES> 2,321
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50
<INCOME-PRETAX> (247)
<INCOME-TAX> (94)
<INCOME-CONTINUING> (153)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (153)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
