<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 SEPTEMBER 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 registrant as specified in its charter)
<TABLE>
<S> <C>
MISSOURI 43-1174397
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
424 SOUTH WOODS MILL ROAD, CHESTERFIELD, MISSOURI 63017
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(314) 579-7900
------------------------------------------------------
(Registrant's telephone number, including area code)
____________________
Indicate by check mark whether the registrant (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
registrant 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 registrant's Common Stock, par value
$0.10 per share, at November 7, 1997 was 3.808,929 shares.
Exhibit Index on Page 16 Page 1 of 16
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
See pages F-1 to F-6 hereof.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1997, TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
GENERAL. The Company reported net income of $0.01 per share, or $37,000,
for the second quarter of fiscal 1998, compared with a net loss of $0.11 per
share, or $0.4 million in the comparable period of fiscal 1997. As described
below, net earnings from ongoing operations on a pro forma basis for the second
quarter of fiscal 1997, excluding United Kingdom ("UK") results of operations
and the restructuring charge for the second quarter of fiscal 1997, reflected
net income of $0.7 million or $0.17 per share. The decline in profitability of
ongoing operations from the prior year was principally the result of lower
sales volume and lower gross margins due to unfavorable product mix.
During the second quarter of fiscal 1997, the Company recorded a $1.3
million pretax charge to cover the restructuring of its operations in the UK.
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. 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.
The following pro forma information presents the Company's operations with
the UK operating results and the restructuring charge shown on separate lines.
Further, pro forma earnings per share from ongoing operations is presented
excluding UK results of operations and the restructuring charge:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
9/30/97 9/30/96
-------- --------
<S> <C> <C>
(000's, except per share amount)
Sales $4,272.6 $6,063.4
Cost of sales 1,926.2 2,398.4
-------- --------
Gross profit 2,346.4 3,665.0
Operating expenses 2,253.4 2,560.8
Operating loss - UK - 449.5
Restructuring charge - 1,303.5
-------- --------
Operating income (loss) 93.0 (648.8)
Other expense, net (33.1) (4.6)
-------- --------
Income (loss) before taxes 59.9 (653.4)
Provision (benefit) for income taxes 22.8 (254.8)
-------- --------
Net income (loss) $ 37.1 $ (398.6)
======== ========
Earnings (loss) per share:
Ongoing operations $ 0.01 $ 0.17
Operations - UK - (0.07)
Restructuring charge - (0.21)
-------- --------
Reported EPS - income (loss) $ 0.01 $ (0.11)
======== ========
</TABLE>
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,
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.
REVENUES. Total revenue decreased 32.7% from $6.3 million for the second
quarter of fiscal 1997 to $4.3 million for the second quarter of fiscal 1998,
due to a 45.9% decrease in system sales revenue and a 8.1% decrease in service
revenue.
System sales revenue for the second quarter decreased $1.9 million, from
$4.1 million in fiscal 1997 to $2.2 million in fiscal 1998. Included in last
year's revenue were $0.3 million from the UK operations and $1.1 million from
the Asia Pacific market, of which no comparable transactions were recorded in
the current year's second quarter. System sales represented 52.2% and 65.0% of
total revenues for the second quarter of fiscal 1998 and 1997, respectively.
Service revenue for the second quarter decreased $0.2 million to $2.0
million in fiscal 1998. The decrease was primarily due to the loss of service
revenue from several customers due to consolidation in the industry, which was
not entirely offset by additional sales and renewals of service contracts from
existing clients. Service revenue represented 47.8% and 35.0% of total revenues
for the second quarter of fiscal 1998 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 revenues. Cost
of system sales includes 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 43.4% in the second quarter of fiscal 1997 to 45.1% in the
second quarter of fiscal 1998. For the second quarter of fiscal 1998 and 1997,
total cost of products and services sold were $1.9 million and $2.8 million,
respectively.
The increase in the percentage of cost of products and services sold to
total revenues was primarily due to the decrease in total revenues which was
not entirely offset by a decrease in client service expense. Software
amortization costs of $0.5 million in the second quarter of fiscal years 1998
and 1997 represented 26.3% and 18.1%, respectively, of total costs of products
and services sold.
Gross profit as a percentage of total revenues decreased from 56.6% in the
second quarter of fiscal 1997 to 54.9% in the second quarter of fiscal 1998.
The decrease in the system sales gross profit margin from 50.6% in the second
quarter of fiscal 1997 to 33.8% in the second quarter of fiscal 1998 is
primarily due to lower profit margins on systems and third party software. The
increase in the service revenues gross profit margin in the second quarter of
fiscal 1998 from 67.7% to 77.9% is primarily due to a reduction in costs at a
greater percentage than the reduction in service revenue.
Page 3
<PAGE> 4
OTHER INCOME. Interest expense, net increased from expense of $2.2
thousand in the second quarter of fiscal 1997 to expense of $14.1 thousand in
the second quarter of fiscal 1998 due to the borrowings under the Company's
line of credit in the last three quarters of fiscal 1997.
INCOME TAXES. The Company's effective income tax provision (benefit) rate
was 39% in the second quarter of fiscal 1997 versus (38)% in the second quarter
of fiscal 1998.
RESEARCH AND DEVELOPMENT COSTS. Total outlays for software development
for the second quarter of fiscal 1997 and 1998 are as follows (000's):
<TABLE>
<CAPTION>
FY98 FY97
R&D EXPENSE 2ND QTR. 2ND QTR.
-------- --------
<S> <C> <C>
R&D spending $ 806.0 $1,388.9
Less - R&D capitalized 204.2 369.6
-------- --------
Total R&D expense 601.8 1,019.3
Software amortization (cost of prod. sold) 506.4 500.2
-------- --------
Total R&D expensed $1,108.2 $1,519.5
======== ========
<CAPTION>
FY98 FY97
-------- --------
2ND QTR. 2ND QTR.
-------- --------
<S> <C> <C>
SOFTWARE DEVELOPMENT COST, NET
Beginning of period $3,560.0 $4,901.8
R&D capitalized per above 204.2 369.6
Software acquired (C-MAX)* - 651.7
-------- --------
3,764.2 5,923.1
Less - Write-off - UK - (587.3)
Software amortization (506.4) (500.2)
Other adjustment (0.1) 7.4
-------- --------
End of period $3,257.7 $4,843.0
======== ========
</TABLE>
*Software acquired relates to the purchase of the contract management
system.
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. For the second quarter
of fiscal years 1997 and 1998, the Company capitalized 26.6% and 25.3%,
respectively, of software development spending.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
as a percentage of total revenues increased from 30.2% in the second quarter of
fiscal 1997, to 38.7%, in the second quarter of fiscal 1998. Total selling and
administrative expenses decreased $0.3 million to $1.7 million in this year's
second quarter, primarily due to lower selling and administrative costs to
support international and domestic operations.
OPERATING INCOME. Operating income decreased from $0.7 million, excluding
the restructuring charge, in the second quarter of fiscal 1997, to $93,000 in
the second quarter of fiscal 1998. The operating margin on the same basis
decreased from 10.3% to 2.2% in the second quarter of fiscal 1997 and 1998
respectively, primarily reflecting the decrease in total revenues and other
factors as described above.
Page 4
<PAGE> 5
COMPARISON OF SIX MONTHS ENDED SEPTEMBER 30, 1997, TO SIX MONTHS ENDED
SEPTEMBER 30, 1996.
GENERAL. The Company reported a net loss of $0.03 per share, or $0.1
million, for the first six months of fiscal 1998, compared with net income of
$0.06 per share, or $0.3 million in the comparable period of fiscal 1997. As
described below, net earnings from ongoing operations on a pro forma basis for
the first six months of fiscal 1997, excluding United Kingdom ("UK") results of
operations and the restructuring charge, reflected net income of $1.6 million
or $0.41 per share.
During the second quarter of fiscal 1997, the Company recorded a $1.3
million pretax charge to cover the restructuring of its operations in the UK.
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. 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.
The following pro forma information presents the Company's operations with
the UK operating results and the restructuring charge shown on separate lines.
Further, pro forma earnings per share from ongoing operations is presented
excluding UK results of operations and the restructuring charge:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------
9/30/97 9/30/96
-------- ---------
<S> <C> <C>
(000's, except per share amount)
Sales $8,554.3 $12,351.4
Cost of sales 4,093.0 4,645.9
-------- ---------
Gross profit 4,461.3 7,705.5
Operating expenses 4,574.1 5,022.7
Operating loss - UK - 976.7
Restructuring charge - 1,303.5
-------- ---------
Operating income (loss) (112.8) 402.6
Other income (expense), net (73.8) 10.3
-------- ---------
Income (loss) before taxes (186.6) 412.9
Provision (benefit) for income taxes (70.9) 161.0
-------- ---------
Net income (loss) $ (115.7) $ 251.9
======== =========
Earnings (loss) per share:
Ongoing operations $ (0.03) $ 0.41
Operations - UK - (0.15)
Restructuring charge - (0.20)
-------- ---------
Reported EPS - income (loss) $ (0.03) $ 0.06
======== =========
</TABLE>
REVENUES. Total revenues decreased 34.2% to $8.6 million for the first
six months of fiscal 1998 from $13.0 million for the first six months of fiscal
1997, which reflects a 47.0% decrease in system sales revenue and an 11.8%
decrease in service revenue.
System sales revenue for the first six months decreased by $3.9 million,
from $8.3 million in fiscal 1997 to $4.4 million in fiscal 1998. Included in
last year's revenues were $0.7 million from the UK operations and $1.7 million
from the Asia Pacific market of which no comparable transactions were
recorded in fiscal 1998. System sales represented 63.9% of total revenues for
the first six months of fiscal 1997 and 51.5% of total revenues for the same
period in fiscal 1998.
Page 5
<PAGE> 6
Service revenue for the first six months decreased by $0.6 million, from
$4.7 million in fiscal 1997 to $4.1 million in fiscal 1998. The 11.8% decrease
was primarily due to the reduction in sales and renewals of service contracts
from existing customers. Service revenue represented 36.1% and 48.5% for the
first six months of fiscal 1997 and 1998, respectively.
COST OF PRODUCTS AND SERVICES SOLD AND GROSS PROFIT. As a percentage of
total revenue, the total cost of products and services sold increased from
42.1% in the first six months of fiscal 1997 to 47.8% in the first six months
of fiscal 1998. The increase in the percentage of revenue is primarily due to
a decrease in total revenues which was not entirely offset by a decrease in
software amortization costs and client service expense.
Gross profit as a percentage of total revenues decreased from 57.9% in the
first six months of fiscal 1997 to 52.2% in the first six months 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 six months of fiscal 1997 and 1998 are as follows ($000's):
<TABLE>
<CAPTION>
FY98 FY97
R&D EXPENSE SIX MONTHS SIX MONTHS
---------- ----------
<S> <C> <C>
R&D spending $ 1,519.2 $2,610.5
Less - R&D capitalized 385.4 988.8
--------- ----------
Total R&D expense 1,133.8 1,621.7
Software amortization (cost of prod. sold) 1,003.7 1,021.5
--------- ----------
Total R&D expensed $ 2,137.5 $2,643.2
========= ==========
<CAPTION>
FY98 FY97
SOFTWARE DEVELOPMENT COST, NET SIX MONTHS SIX MONTHS
---------- ----------
<S> <C> <C>
Beginning of period $ 3,876.0 $4,762.5
R&D capitalized per above 385.4 988.8
Software acquired (C-MAX)* - 651.7
--------- ----------
4,261.4 6,403.0
--------- ----------
Less - Write-off - UK - (587.3)
Software amortization (1,003.7) (1,021.5)
Other adjustment - 48.8
--------- ----------
End of period $ 3,257.7 $4,843.0
========= ==========
</TABLE>
*Software acquired relates to the purchase of the contract management
system.
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. For the six months of
fiscal years 1997 and 1998, the Company capitalized 37.9% and 25.4%,
respectively, of software development costs.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
decreased from $4.2 million in the first six months of fiscal 1997 to $3.4
million in the first six months of fiscal 1998, a decrease of 18.2%. Total
selling and administrative expenses decreased primarily due to expenditures
associated with lower selling and administrative costs to support operations.
Selling and administrative expenses as a percentage of total revenues increased
from 32.3% in fiscal 1997 to 40.2% in fiscal 1998 due to lower sales in fiscal
1998.
Page 6
<PAGE> 7
OPERATING INCOME. Operating income decreased from $1.7 million, excluding
the $1.3 million restructuring charge in the first six months of fiscal 1997,
to an operating loss of $0.1 million in the first six months of fiscal 1998,
primarily reflecting the decrease in total revenues and other factors described
above.
OTHER INCOME. Interest expense, net increased from income of $7.2
thousand in the first six months of fiscal 1997 to expense of $66.1 thousand in
the first six months of fiscal 1998 due to the borrowings under the Company's
line of credit in the last three quarters of fiscal 1997.
INCOME TAXES. The Company's effective income tax provision (benefit) rate
was 39% in the first six months of fiscal 1997 versus (38)% in the first six
months of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is cash flow from operations.
At March 31, 1997 and September 30, 1997, the Company had cash and cash
equivalents in the amount of $0.5 million. Cash flows in the six months ended
September 30, 1997 reflects amounts paid for capital investments ($0.2
million), software development costs ($1.5 million), and repayment of long-term
debt, ($0.8 million), offset by cash generated from operating activities of
$2.5 million, excluding $1.1 million of research and development expense.
At September 30, 1996, the Company had cash and cash equivalents in the
amount of $0.6 million as compared to $2.1 million at March 31, 1996. The cash
balance decreased by $1.5 million primarily due to amounts paid for income
taxes ($0.8 million), contract management system ($0.7 million), capital
investments ($0.4 million), and software development costs ($2.6 million),
offset in part by the use of the line of credit, ($1.0 million) and cash flows
from operations of $1.1 million, excluding $1.6 million of research and
development expense.
During the first six months of fiscal 1998, the Company made payments
totaling approximately $0.4 million for items related to the sale of the UK
operations. No additional payments of a material nature are expected to be
paid during the remainder of fiscal 1998.
As of September 30, 1997, the Company had a line of credit agreement that
allows the Company to borrow up to $1.6 million through April 15, 1998 with
interest at the lender's prime rate (8.5% at September 30, 1997), plus
three-quarters percent. 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 September 30, 1997. The Company intends
to renew the line of credit for another year.
The Company believes that its cash and cash equivalents, together with its
current borrowing facilities, cash generated from operations and other
liquidity sources 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 7
<PAGE> 8
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no reportable proceedings.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
(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
The Company's Annual Meeting of Shareholders was held on August 15, 1997.
Two matters were submitted to a vote of the shareholders of the Company: the
election of the Director to Class 2 and consideration of the appointment of
Price Waterhouse to serve as independent auditors of the Company.
One person was nominated to fill the open director position. The nominee,
and the vote cast is listed below:
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld Broker Non-votes
-------------------------------------------------------------------
<S> <C> <C> <C>
James F. O'Donnell 3,346,183 257,520 -0-
</TABLE>
The nominee was elected and will serve until the 2000 Annual Meeting of
Shareholders or until his successor is duly qualified and elected. Directors
continuing in office include: J. Robert Copper; Fred L. Brown; Larry D. Marcus;
and David T. Pieroni.
The second measure to be put to a vote of the shareholders was the
ratification of Price Waterhouse to serve as independent auditors of the
Company for the fiscal year ending March 31, 1998. To approve the proposal,
the affirmative vote of a majority of the shares represented in person and by
proxy at the Annual Meeting was required. The affirmative votes equaled
3,353,096; votes against were 51,410; abstentions were 199,197; and no broker
non-votes. The affirmative votes equaled 93.0 percent of the shares present in
person or by proxy at the Annual Meeting, and thus the proposal was approved.
No other matters were submitted to the shareholders of the Company.
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> 9
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
CITATION COMPUTER SYSTEMS, INC.
Date: November 13, 1997 By: /s/Richard D. Neece
----------------- ----------------------------
Richard D. Neece
President
(Principal Financial & Accounting Officer)
<PAGE> 10
CITATION Computer Systems, Inc.
CONSOLIDATED BALANCE SHEET
(000's)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
Sept. 30, March 31,
Assets 1997 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $523.3 $510.7
Accounts receivable:
Trade, net 7,182.5 7,334.1
Other 13.3 40.6
Inventories 477.5 416.6
Prepaid expenses and other current assets 385.8 521.1
Income taxes receivable 929.6 1,435.2
Deferred tax asset 179.4 179.4
---------- ----------
Total current assets 9,691.4 10,437.7
Software development costs, net 3,257.7 3,876.0
Property and equipment, net 1,065.8 1,229.6
Other assets 2,002.4 2,092.4
---------- ----------
Total assets $16,017.3 $17,635.7
========== ==========
Liabilities and shareholders' equity:
Current liabilities:
Current portion of long-term debt and line of credit $1,731.8 $364.9
Accounts payable 475.4 1,350.8
Customer deposits 375.9 334.9
Accrued bonuses and commissions 153.9 121.2
Other accrued liabilities 447.1 529.5
Deferred service revenue 2,395.7 2,286.1
---------- ----------
Total current liabilities 5,579.8 4,987.4
Long-term debt 275.2 2,400.4
Deferred tax liability 438.9 438.9
---------- ----------
6,293.9 7,826.7
---------- ----------
Shareholders' equity:
Common stock 380.6 380.2
Paid-in capital 6,477.2 6,448.9
Retained earnings 2,790.7 2,906.4
Equity adjustment from foreign currency
translation 74.9 73.5
---------- ----------
9,723.4 9,809.0
---------- ----------
Total liabilities and shareholders' equity $16,017.3 $17,635.7
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-1
Page 10
<PAGE> 11
CITATION Computer Systems, Inc.
CONSOLIDATED STATEMENT OF OPERATIONS
(000's, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
------------------------ -----------------------
1997 1996 1997 1996
(unaudited) (unaudited) (unaudited)(unaudited)
<S> <C> <C> <C> <C>
Net system sales and service revenues:
System sales $ 2,230.9 $ 4,127.2 $ 4,408.3 $ 8,309.9
Service revenue 2,041.7 2,221.2 4,146.0 4,700.3
------------ ---------- --------- ---------
4,272.6 6,348.4 8,554.3 13,010.2
------------ ---------- --------- ---------
Cost of products and service sold:
System costs 1,475.9 2,039.5 3,223.7 4,202.3
Service costs 450.3 718.1 869.3 1,274.7
------------ ---------- --------- --------
1,926.2 2,757.6 4,093.0 5,477.0
------------ ---------- --------- ---------
Gross profit 2,346.4 3,590.8 4,461.3 7,533.2
Research and development expense 601.8 1,019.3 1,133.8 1,621.7
Selling and administrative expenses 1,651.6 1,916.8 3,440.3 4,205.4
Restructuring charge (Note 2) - 1,303.5 - 1,303.5
------------ ---------- --------- ---------
Operating income (loss) 93.0 (648.8) (112.8) 402.6
Other income:
Interest income (expense), net (23.4) (5.0) (66.1) 7.2
Other (9.7) 0.4 (7.7) 3.1
------------ ---------- --------- ---------
Income (loss) before income taxes 59.9 (653.4) (186.6) 412.9
Provision (benefit) for income taxes 22.8 (254.8) (70.9) 161.0
------------ ---------- --------- ---------
Net income (loss) $ 37.1 $ (398.6) $ (115.7) $ 251.9
============ ========== ========= =========
Net earnings (loss) per common share:
Primary and fully diluted $ 0.01 $ (0.11) $ (0.03) $ 0.06
============ ========== ========= =========
Weighted average number of shares used in
computing net earnings per common share:
Primary and fully diluted 3,889 3,765 3,844 3,948
=========== ========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
F-2
Page 11
<PAGE> 12
CITATION Computer Systems, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
(000's)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
-------------------------
1997 1996
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (115.7) $ 251.9
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization of property and
equipment 344.1 500.9
Amortization of software development costs 1,003.7 1,021.5
Amortization of other assets - 40.8
Non-cash restructuring charge - 871.5
Non-cash 401K matching contribution 26.4 32.5
Decrease in accounts receivable 178.9 868.9
Increase in inventories (60.8) (133.7)
Decrease (increase) in prepaid expenses and other assets 225.3 (491.0)
Increase in long-term accounts receivable - (1,905.5)
Increase (decrease) in accounts payable (875.5) 167.4
Increase (decrease) in customer deposits 41.0 (5.5)
Increase (decrease) in accrued bonuses and commissions 32.8 (475.0)
Decrease in other accrued liabilities (82.4) (101.5)
Increase (decrease) in current income taxes
receivable/payable 505.6 (661.0)
Increase (decrease) in deferred service revenue 109.5 (526.7)
----------- -----------
Net cash provided by (used in) operating activities 1,332.9 (544.5)
----------- -----------
Cash flows from investing activities:
Capital expenditures (180.3) (369.6)
Software development costs (385.4) (1,689.4)
----------- -----------
Net cash used in investing activities: (565.7) (2,059.0)
----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt - 960.0
Principal payments on long-term debt (758.3) (71.3)
Proceeds from the issuance of common stock 2.3 111.4
----------- -----------
Net cash provided by (used in) financing activities (756.0) 1,000.1
----------- -----------
Effect of exchange rate changes on cash 1.4 88.1
----------- -----------
Net increase (decrease) in cash and cash equivalents 12.6 (1,515.3)
Cash and cash equivalents, beginning of year 510.7 2,146.3
----------- -----------
Cash and cash equivalents, end of period $ 523.3 $ 631.0
=========== ===========
</TABLE>
See accomanying notes to consolidated financial statements
F-3
Page 12
<PAGE> 13
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) (115.7) (115.7)
Sale of common stock pursuant to exercise
of stock options (unaudited) 500 0.1 2.2 2.3
Issuance of common stock for 401K Company
matching contribution (unaudited) 3,214 0.3 26.1 26.4
Foreign currency translation adjustment (unaudited) 1.4 1.4
-------------------------------------------------------------
Balance, September 30, 1997 (unaudited) 3,805,755 $380.6 $6,477.2 $2,790.7 $74.9 $9,723.4
-------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
F-4
Page 13
<PAGE> 14
CITATION COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim financial information for the three and six months periods
ended September 30, 1997 and 1996 is unaudited. Financial Statement note
disclosures, normally included in financial statements prepared in
conformity with generally accepted accounting principles, have been omitted
in this Form 10-QSB pursuant to the Rules and Regulations of the Securities
and Exchange Commission. However, in the opinion of the Company, the
disclosures contained in this Form 10-QSB are adequate to make the
information presented not misleading. See Notes to Financial Statements as
incorporated by reference in the Company's Annual Report on From 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 September 30,
1997, the Statement of Operations for the three and six months ended
September 30, 1997 and 1996, the Statement of Cash Flows for the six months
ended September 30, 1997 and 1996, and the Statement of Shareholders' Equity
for the six months ended September 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 the 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>
SEPT. 30, MARCH 31,
1997 1997
---------- -----------
<S> <C> <C>
Hardware and third party software $ 247.7 $ 192.5
Field service equipment 229.8 224.1
---------- -----------
$ 477.5 $ 416.6
========== ===========
</TABLE>
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 September 30, 1997, $1.7 million
was outstanding.
F-5
Page 14
<PAGE> 15
6. LONG-TERM DEBT
As of September 30, 1997, the Company had a line of credit agreement
that allowed the Company to borrow up to $1.6 million with interest at the
lender's prime rate plus three quarters percent. 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 September 30, 1997.
7. ACQUIRED REIMBURSEMENT MANAGEMENT SYSTEM
On August 26, 1996, the Company acquired a reimbursement management
system from Computer Systems Excellence, Inc. for $1.2 million. The Company
paid $0.7 million at closing and recorded $0.5 million debt to be paid in
eight quarterly payments. Software development in the amount of $0.7
million has been capitalized.
F-6
Page 15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<S> <C> <C>
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
</TABLE>
*Incorporated by reference as set forth in Exhibit description.
Page 16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 523
<SECURITIES> 0
<RECEIVABLES> 7,334
<ALLOWANCES> 151
<INVENTORY> 478
<CURRENT-ASSETS> 9,691
<PP&E> 4,260
<DEPRECIATION> 3,194
<TOTAL-ASSETS> 16,017
<CURRENT-LIABILITIES> 4,193
<BONDS> 0
<COMMON> 381
0
0
<OTHER-SE> 9,342
<TOTAL-LIABILITY-AND-EQUITY> 16,017
<SALES> 4,408
<TOTAL-REVENUES> 8,554
<CGS> 1,360
<TOTAL-COSTS> 4,093
<OTHER-EXPENSES> 4,574
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83
<INCOME-PRETAX> (187)
<INCOME-TAX> (71)
<INCOME-CONTINUING> (116)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (116)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
