<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 DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------- -------
COMMISSION FILE NUMBER 0-20284
CITATION COMPUTER SYSTEMS, INC.
(Exact name of the 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
-----------------------------------------------------
(The 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 February 7, 1997, was 3,791,025 shares.
Exhibit Index on Page 19 Page 1 of 19
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
See pages F-1 to F-8 hereof.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 1996, TO THREE MONTHS ENDED
DECEMBER 31, 1995.
GENERAL. The Company reported a net loss of $0.43 per share, or $1.6
million, for the third quarter of fiscal 1997, compared with net income of
$0.22 per share, or $0.8 million, in the comparable period of fiscal 1996. As
described below, net earnings from ongoing operations on a pro forma basis,
excluding UK results of operations, restructuring and consolidation charges
and secondary offering expenses decreased from $0.7 million or $0.19 per share
in the third quarter of fiscal 1996 to a net loss of $0.9 million or $0.24 per
share in the third quarter of fiscal 1997. The decline in profitability from
the prior year was principally the result of three factors: lower sales volume;
lower gross margins due to unfavorable product mix; and higher research and
development spending on new products, coupled with lower capitalization amounts
of research and development.
During the second quarter of fiscal 1997, the Company filed a Registration
Statement for the issuance of additional common shares. The secondary offering
was terminated on October 8, 1996, and $0.5 million of non-operating charges
related to the offering were expensed in the third quarter of fiscal 1997.
During the third quarter of fiscal 1997, the Company recorded an
additional $0.2 million pretax charge to cover the restructuring of its
operations in the United Kingdom, bringing total UK restructuring charges in
fiscal 1997 to $1.5 million. As part of its ongoing efforts to reduce costs
and improve operating efficiency, the Company consolidated development and
other functions previously performed in the United Kingdom into its St. Louis
headquarters and wrote off capitalized software related to discontinued
development projects in the United Kingdom. See Notes 2 and 11 of the
consolidated financial statements for further information.
On January 22, 1997, the Company announced a preliminary agreement to sell
its United Kingdom operations to Health Systems Limited, which will also become
CITATION's exclusive distributor for its clinical software products in the UK.
Under the terms of the Memorandum of Understanding, Health Systems Limited will
acquire CITATION's operating assets, retain the majority of the Company's
employees in the UK, and assume responsibility for CITATION's existing
customers and contracted commitments in the UK. The transaction will result in
a loss of between $0.35 and $0.40 per share to be recognized in the fourth
quarter of fiscal 1997.
Page 2
<PAGE> 3
During the nine months of fiscal 1996, the Company recorded $1.1 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. See Note 3 of the consolidated financial
statements for further information.
The following pro forma information presents the Company's operations with
the UK operating results and UK restructuring charges shown on a separate line
item. Further, pro forma earnings per share from ongoing operations is
presented excluding UK results of operations, restructuring and consolidation
charges and secondary offering expenses:
<TABLE>
<CAPTION>
(000's, except per share amount) Three Months Ended Nine Months Ended
---------------------------- ------------------------------
12/31/96 12/31/95 12/31/96 12/31/95
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Sales $ 3,861 $5,375 $ 16,212 $15,027
Cost of sales 2,207 2,104 6,853 6,352
------- ------ -------- -------
Gross profit 1,654 3,271 9,359 8,675
Operating expenses 3,149 2,141 7,146 6,021
Restructuring/operations - UK 597 (272) 3,903 596
Office consolidation & relocation - 58 - 1,058
------- ------ -------- -------
Operating income (loss) (2,092) 1,344 (1,690) 1,000
Other income (expense), net (36) 3 (26) 55
Secondary offering expense (543) - (543) -
------- ------ -------- -------
Income (loss) before taxes (2,671) 1,347 (2,259) 1,055
Provision (benefit) for income
taxes (1,042) 525 (881) 411
------- ------ -------- -------
Net income (loss) ($1,629) $822 ($1,378) $644
======= ====== ======== =======
Earnings (loss) per share:
Ongoing operations ($0.24) $0.19 $0.35 $0.44
Consolidation charge - Madison - (0.01) - (0.17)
Restructuring/operations - UK (0.10) 0.04 (0.63) (0.10)
Secondary offering expense (0.09) - (0.09) -
------- ------ -------- -------
Reported EPS - income (loss) ($0.43) $0.22 ($0.37) $0.17
======= ====== ======== =======
</TABLE>
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.
Page 3
<PAGE> 4
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 37.5% from $6.5 million for the third
quarter of fiscal 1996 to $4.0 million for the third quarter of fiscal 1997,
due to a 55.3% decrease in system sales revenue and a decrease of 2.2% in
service revenue.
System sales revenue for the third quarter decreased $2.4 million from
$4.3 million in fiscal 1996 to $1.9 million in fiscal 1997. The decrease in
system sales was primarily attributable to a decrease in the number of systems
shipped in the third quarter of fiscal 1997 compared to the third quarter of
fiscal 1996. System sales represented 47.6% and 66.5% of total revenues for
the third quarter of fiscal 1997 and 1996, respectively.
Service revenue for the third quarter decreased from $2.2 million in
fiscal 1996 to $2.1 million in fiscal 1997. This is primarily due to a
decrease in contract renewals during the quarter from an earlier consolidation
in the healthcare industry which has not yet been offset by sales to new
customers. Service revenue represented 52.4% and 33.5% of total revenues for
the third quarter of fiscal 1997 and 1996, 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 include 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 40.3% in the third quarter of fiscal 1996 to 63.5% in the third
quarter of fiscal 1997. For the third quarter of fiscal 1996 and 1997, total
cost of products and services sold were $2.6 million for both periods.
The increase in the percentage of cost of products and services sold as a
percent of total revenues was primarily due to the costs of products and
services declining less than the decrease in total revenue due to changes in
product mix and the fixed component of the cost of services. Software
amortization costs of $0.5 million in the third quarter of fiscal 1996 and $0.6
million in the third quarter of fiscal 1997 represented 18.2% and 24.2%,
respectively, of total costs of products and services sold.
Gross profit as a percentage of total revenues decreased from 59.7% in the
third quarter of fiscal 1996 to 36.5% in the third quarter of fiscal 1997. The
decrease in gross profit as a percentage of total revenues was primarily
attributable to the decrease in system sales revenue and the cost factors
mentioned in the previous paragraph.
Page 4
<PAGE> 5
RESEARCH AND DEVELOPMENT COSTS. Total outlays for software development for the
third quarter of fiscal 1996 and 1997 are as follows (000's):
<TABLE>
<CAPTION>
FY97 FY96
R&D EXPENSE 3RD QTR. 3RD QTR.
-------- --------
<S> <C> <C>
R&D spending $1,422.2 $911.8
Less - R&D capitalized 385.0 524.4
-------- --------
Total R&D expense 1,037.2 387.4
Software amortization (cost of prod. sold) 620.4 475.2
-------- --------
Total R&D expense $1,657.6 $862.6
======== ========
SOFTWARE DEVELOPMENT COST, NET
Beginning of period $4,843.0 $4,638.8
R&D capitalized per above 385.0 524.4
-------- --------
5,228.0 5,163.2
Less software amortization (620.4) (475.2)
Other adjustments 46.9 (16.4)
-------- --------
End of period $4,654.5 $4,671.6
======== ========
</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 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 third quarter
of fiscal years 1996 and 1997, the Company capitalized 57.5% and 27.1%,
respectively, of software development spending.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
as a percentage of total revenues increased from 31.9% in the third quarter of
fiscal 1996, to 58.6%, in the third quarter of fiscal 1997. The percentage
increase is due mainly to the reduction in sales, which was not offset by a
decrease in expenses. Total selling and administrative expenses increased $0.3
million to $2.4 million in this year's third quarter, primarily due to higher
marketing expenses in anticipation of the introduction of new products.
OPERATING INCOME. Operating income decreased $3.4 million in the third
quarter of fiscal 1997, compared with the third quarter of fiscal 1996. The
operating margin decreased from 20.8% to a negative 51.8% in the third quarter
of fiscal 1996 and 1997, respectively, reflecting the effect of the reduced
sales and lower margins, increased research and development expenses and
increased selling, general and administrative expense.
Page 5
<PAGE> 6
COMPARISON OF NINE MONTHS ENDED DECEMBER 31, 1996, TO NINE MONTHS ENDED
DECEMBER 31, 1995.
GENERAL. The Company's reported net loss was $0.37, or $1.4 million, in
the first nine months of fiscal 1997, compared with net income of $0.17 per
share, or $0.6 million, in the comparable period of fiscal 1996. As described
previously, net earnings from ongoing operations on a pro forma basis,
excluding UK results of operations, restructuring and consolidation charges and
secondary offering expenses, decreased from $0.44 per share, or $1.7 million,
in the first nine months of fiscal 1996, to $0.35 per share, or $1.3 million,
in the first nine months of fiscal 1997.
REVENUES. Total revenue increased 1.9% to $17.0 million for the first
nine months of fiscal 1997 from $16.7 million for the first nine months of
fiscal 1996, which reflects flat system sales revenue and a slight increase in
service revenue.
System sales revenue for the first nine months increased by $0.1 million,
from $10.1 million in fiscal 1996 to $10.2 million in fiscal 1997. The 0.8%
increase in system sales was primarily attributable to the lower number of
systems shipped in the third quarter of fiscal 1997 compared to fiscal 1996.
System sales for the first six months of fiscal 1997 increased $2.5 million.
System sales represented 60.6% of total revenues for the first nine months of
fiscal 1996 and 60.0% of total revenues for the same period in fiscal 1997.
Service revenue for the first nine months increased by $0.2 million, from
$6.6 million in fiscal 1996 to $6.8 million in fiscal 1997. The 3.4% increase
was primarily due to additional sales and renewals of service contracts from
existing customers. Service revenue represented 40.0% of total revenues for
the first nine months of fiscal 1997 and 39.4% for the first nine months of
fiscal 1996.
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
45.5% in the first nine months of fiscal 1996 to 47.2% in the first nine months
of fiscal 1997. The increase in the percentage of revenue is primarily due to
a decrease in higher margin sales and an increase in software amortization
expense partially offset by a decrease in client service expense. Systems cost
of sales as a percentage of systems sales was 60.1% in the first nine months of
fiscal 1997 as compared with 55.8% in the first nine months of fiscal 1996.
For the first nine months of fiscal 1997 and 1996, total cost of products and
services sold were $8.0 million and $7.6 million, respectively.
Gross profit as a percentage of total revenues decreased from 54.5% in the
first nine months of fiscal 1996 to 52.8% in the first nine months of fiscal
1997. In dollar amounts, gross profit decreased 1.3% from $9.1 million in
fiscal 1996 to $9.0 million in fiscal 1997. The decrease in gross profit as a
percentage of total revenues was primarily attributable to a larger
proportionate increase in cost when compared with the increase in revenue for
the reasons indicated in the cost of products and services sold in section
above.
Page 6
<PAGE> 7
RESEARCH AND DEVELOPMENT COSTS. Total outlays for software development
for the first nine months of fiscal 1996 and 1997 are as follows ($000's):
<TABLE>
<CAPTION>
FY97 FY96
R&D EXPENSE NINE MONTHS NINE MONTHS
----------- -----------
<S> <C> <C>
R&D spending $ 4,032.7 $ 3,258.1
Less - R&D capitalized 1,373.8 1,968.3
---------- ----------
Total R&D expense 2,658.9 1,289.8
Software amortization (cost of prod. sold) 1,641.9 1,279.5
---------- ----------
Total R&D expense $ 4,300.8 $ 2,569.3
========== ==========
<CAPTION>
FY97 FY96
SOFTWARE DEVELOPMENT COST, NET NINE MONTHS NINE MONTHS
----------- -----------
<S> <C> <C>
Beginning of period $ 4,762.5 $ 3,942.3
R&D capitalized per above 1,373.8 1,968.3
Software acquired (C-MAX)* 651.7 --
---------- ----------
6,788.0 5,910.6
Less - write-off - UK (587.3) --
Software amortization (1,641.9) (1,279.5)
Other adjustments 95.7 40.5
---------- ----------
End of period $ 4,654.5 $ 4,671.6
========== ==========
</TABLE>
*Software acquired relates to the purchase of the contract management
system. See Note 8 of the consolidated financial statements for further
information.
The Company anticipates that due to the nature of the planned development
activities (e.g. product enhancements versus the significant development effort
involved in developing software for 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 nine
months of fiscal years 1996 and 1997, the Company capitalized 60.4% and 34.0%,
respectively, of software development costs.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
increased from $5.8 million in the first nine months of fiscal 1996 to $6.6
million in the first nine months of fiscal 1997, an increase of 13.7%. Total
selling and administrative expenses increased primarily due to expenditures
associated with higher selling, marketing and administrative costs to support
operations. Selling and administrative expenses as a percentage of total
revenues increased from 34.5% in fiscal 1996 to 38.6% in fiscal 1997.
OPERATING INCOME. Operating income decreased from $2.1 million, excluding
the $1.1 million relocation charge, in the first nine months of fiscal 1996 to
an operating loss of $0.2 million, excluding the $1.5 million restructuring
charge, in the first nine months of fiscal 1997. Including the respective
charges, operating income decreased from $1.0 million to a loss of $1.7 million
in the first nine months of fiscal 1996 and 1997, respectively.
Page 7
<PAGE> 8
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is cash flows from operations.
At December 31, 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 used for operating
activities ($0.7 million), investing activities ($2.6 million), and repayment
of debt ($0.1), offset by the proceeds from the sale of common stock ($0.2
million) and borrowings under a line of credit ($1.5 million).
As of December 31, 1996, the Company had a line of credit agreement that
allows the Company to borrow up to $2.0 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 $1.5 million in
borrowings outstanding under the line of credit agreement at December 31, 1996.
The Company is currently negotiating an increase in the line of credit
facility to $3.0 million.
During the first six months of fiscal 1997, the Company paid $0.7 million
at closing and recorded a liability of $0.5 million relating to the purchase of
the contract management system to be paid in eight quarterly payments. The
first quarterly payment was made during the third quarter of fiscal 1997.
The Company anticipates using cash and debt for general corporate
purposes, including: financing international growth and development efforts;
financing enhancements and expansion of the Company's product line; and
financing capital improvements.
The Company believes that its cash and cash equivalents, together with its
borrowing facilities, cash generated from operations, and other liquidity
sources, will be sufficient to fund its anticipated cash requirements. The
Company's ability to meet its cash requirements on a long-term basis will
depend on profitable operations and consistent and timely collection of its
accounts receivable.
Page 8
<PAGE> 9
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 9
<PAGE> 10
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: February 13, 1997 By: /s/ Richard D. Neece
------------------- -----------------------------------
Richard D. Neece
Executive Vice President
& Chief Financial Officer
(Principal Financial &
Accounting Officer)
Page 10
<PAGE> 11
CITATION Computer Systems, Inc.
CONSOLIDATED BALANCE SHEET
(000's)
<TABLE>
<CAPTION>
Dec. 31 March 31,
1996 1996
----------- ----------
(unaudited) (audited)
<S> <C> <C>
Assets
Current assets:
Cash $651.2 $2,146.3
Accounts receivable:
Trade, net 8,878.3 10,919.4
Other 28.2 35.6
Inventories (Note 4) 749.9 537.1
Prepaid expenses and other current assets 490.3 704.3
Income taxes receivable 600.0 -
Deferred tax asset 957.6 82.7
--------- ---------
Total current assets 12,355.5 14,425.4
Software development costs, net 4,654.5 4,762.5
Property and equipment, net 1,496.1 1,756.1
Long-term accounts receivable (Note 7) 1,657.3 -
Other assets 710.4 313.2
--------- ---------
Total assets $20,873.8 $21,257.2
========= =========
Liabilities and shareholders' equity:
Current liabilities:
Current portion of long-term debt $143.0 $143.0
Accounts payable 1,979.2 1,420.6
Accrued bonuses - 475.0
Other accrued liabilities 1,524.7 2,161.0
Deferred service revenue 1,761.2 2,316.9
--------- ---------
Total current liabilities 5,408.1 6,516.5
Long-term debt 1,867.7 450.0
Deferred tax liability 1,465.0 1,676.4
Other long term liabilities 393.7 -
--------- ---------
9,134.5 8,642.9
--------- ---------
Commitments (Note 6) - -
Shareholders' equity:
Common stock 379.0 374.8
Paid-in capital 6,378.2 6,127.7
Retained earnings 4,802.5 6,180.1
Equity adjustment from foreign currency translation 179.6 (68.3)
--------- ---------
11,739.3 12,614.3
--------- ---------
Total liabilities and shareholders' equity $20,873.8 $21,257.2
========= =========
</TABLE>
F-1
Page 11
See accompanying notes to consolidated financial statements
<PAGE> 12
CITATION Computer Systems, Inc.
CONSOLIDATED STATEMENT OF OPERATIONS
(000's, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
------------------------- -------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net system sales and service revenues:
System sales $1,920.9 $4,293.1 $10,230.8 $10,145.1
Service revenue 2,116.6 2,164.0 6,816.9 6,591.8
--------- -------- --------- --------
4,037.5 6,457.1 17,047.7 16,736.9
--------- -------- --------- --------
Cost of products and service sold:
System costs 1,945.9 2,002.7 6,148.2 5,665.1
Service costs 617.1 602.1 1,891.8 1,944.2
--------- -------- --------- --------
2,563.0 2,604.8 8,040.0 7,609.3
--------- -------- --------- --------
Gross profit 1,474.5 3,852.3 9,007.7 9,127.6
Research and development expense 1,037.2 387.4 2,658.9 1,289.8
Selling and administrative expenses 2,366.3 2,062.4 6,571.7 5,779.4
Restructuring charge (Note 2) 163.5 - 1,467.0 -
Office consolidation and relocation expenses (Note 3) - 58.2 - 1,058.2
--------- -------- --------- --------
Operating income (loss) (2,092.5) 1,344.3 (1,689.9) 1,000.2
Other income:
Other income (expense), net (36.4) 3.0 (26.1) 55.0
Secondary offering expenses (Note 9) (542.5) - (542.5) -
--------- -------- --------- --------
Income (loss) before income taxes (2,671.4) 1,347.3 (2,258.5) 1,055.2
Provision (benefit) for income taxes (1,041.9) 524.8 (880.9) 410.9
--------- -------- --------- --------
Net income (loss) ($1,629.5) $822.5 ($1,377.6) $644.3
========= ======== ========= ========
Net earnings (loss) per common share:
Primary and fully diluted ($0.43) $0.22 ($0.37) $0.17
--------- -------- --------- --------
Weighted average number of shares used in
computing net earnings per common share:
Primary and fully diluted 3,779 3,730 3,765 3,732
========= ======== ========= ========
</TABLE>
F-2
Page 12
See accompanying notes to consolidated financial statements
<PAGE> 13
CITATION Computer Systems, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
(000's)
<TABLE>
<CAPTION>
Nine months ended
December 31,
---------------------------
1996 1995
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $16,891.8 $15,705.1
Cash paid to suppliers and employees (17,705.4) (13,544.3)
Cash paid for restructuring charge (191.1) -
Cash paid for office consolidation and relocation - (758.3)
Income taxes paid 250.3 56.9
Interest paid (94.9) (41.7)
Interest received and other 114.9 96.7
--------- ---------
Net cash (used in) provided by operating activities: (734.4) 1,514.4
--------- ---------
Cash flows from investing activities:
Capital expenditures (513.6) (210.5)
Software development costs (2,121.3) (2,008.8)
--------- ---------
Net cash used in investing activities: (2,634.9) (2,219.3)
--------- ---------
Cash flows from financing activities:
Principal payments on long-term debt (99.2) (330.4)
Proceeds from long-term debt 1,517.0 201.0
Proceeds from sale of common stock pursuant to
exercise of stock options 208.5 38.6
--------- ---------
Net cash provided by (used in) financing activities 1,626.3 (90.8)
--------- ---------
Effect of exchange rate changes on cash 247.9 (159.4)
--------- ---------
Net decrease in cash and cash equivalents (1,495.1) (955.1)
Cash and cash equivalents, beginning of year 2,146.3 2,634.2
--------- ---------
Cash and cash equivalents, end of period $651.2 $1,679.1
========= =========
</TABLE>
F-3
Page 13
See accompanying notes to consolidated financial statements
<PAGE> 14
CITATION Computer Systems, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
(000's)
<TABLE>
<CAPTION>
Nine months ended
December 31,
-----------------------------
1996 1995
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Reconcilation of net income (loss) to net cash (used in)
provided by operating income activities:
Net income (loss) ($1,377.6) $644.3
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization of property and
equipment 763.7 681.9
Amoritization of software development costs 1,641.9 1,279.5
Amoritization of other assets 71.0 62.7
Non-cash restructuring charge 988.2 -
Non-cash office consolidation and relocation charge - 300.0
Non-cash 401k matching contribution 46.1 -
(Increase) decrease in accounts receivable 1,641.0 (1,287.6)
(Increase) decrease in current income taxes receivable (630.6) 467.8
(Increase) decrease in inventories (212.8) 54.5
(Increase) decrease in prepaid expenses and other assets (339.1) 66.9
Increase in deferred tax asset (874.9) -
Increase in long term accounts receivable (1,657.3) -
(Decrease) increase in accounts payable 558.6 (989.9)
(Decrease) increase in customer deposits (82.8) 289.0
Decrease in accrued bonuses (475.0) -
(Decrease) increase in other accrued liabilities (239.1) 62.6
Decrease in deferred service revenue (555.7) (117.3)
--------- --------
Net cash (used in) provided by operating activities ($734.4) $1,514.4
========= ========
</TABLE>
F-4
Page 14
See accompanying notes to consolidated financial statements
<PAGE> 15
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, 1996 (audited) 3,747,882 $374.8 $6,127.7 $6,180.1 ($68.3) $12,614.3
Net income (unaudited) (1,377.6) (1,377.6)
Sale of common stock pursuant to exercise
of stock options 39,293 3.9 204.7 208.6
Issuance of common stock for 401K Company
matching contribution 3,038 0.3 45.8 46.1
Foreign currency translation adjustment (unaudited) 247.9 247.9
------------------------------------------------------------------
Balance, September 30, 1996 (unaudited) 3,790,213 $379.0 $6,378.2 $4,802.5 $179.6 $11,739.3
------------------------------------------------------------------
</TABLE>
F-5
Page 15
See accompanying notes to consolidated financial statements
<PAGE> 16
CITATION COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim financial information for the three and nine month periods
ended December 31, 1996 and 1995 is unaudited. Financial statement
note disclosures, normally included in financial statements prepared in
conformity with generally accepted accounting principles, have been
omitted in this Form 10-QSB pursuant to the Rules and Regulations of
the Securities and Exchange Commission. However, in the opinion of the
Company, the disclosures contained in this Form 10-QSB are adequate to
make the information presented not misleading. See Notes to Financial
Statements as incorporated by reference in the Company's Annual Report
on Form 10-KSB, dated June 26, 1996, which includes financial
statements and notes thereto for the year ended March 31, 1996.
In the opinion of the Company, the accompanying unaudited consolidated
financial statements include all adjustments, consisting solely of
normal recurring adjustments, necessary to present fairly the Balance
Sheet at December 31, 1996, the Statement of Operations for the three
and nine months ended December 31, 1996 and 1995, the Statement of Cash
Flows for the nine months ended December 31, 1996 and 1995, and the
Statement of Shareholders' Equity for the nine months ended December
31, 1996. The interim results, however, are not necessarily indicative
of results for any future period.
2. RESTRUCTURING OF OPERATIONS
During the second and third quarters of fiscal 1997, the Company
recorded a $1.5 million pretax charge against earnings for
restructuring its operations in the United Kingdom. Included in the
charge is $0.6 million related to the write-off of capitalized software
costs, and $0.3 million for severance and closure costs, and $0.6
million for other assets. See also Note 11 to the consolidated
financial statements.
3. OFFICE CONSOLIDATION AND RELOCATION
In June, 1995 the Company decided to consolidate the majority of the
operations of its Madison facility into its St. Louis headquarters. A
pretax charge of $1.1 million was recorded in the first and third
quarters of 1995 statement of operations to provide for the costs of
the consolidation of facilities and relocation of certain employees
and equipment.
F-6
Page 16
<PAGE> 17
4. INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of the following:
Dec. 31, March 31,
1996 1996
-------- --------
<S> <C> <C>
Hardware and third party software $521.4 $322.0
Field service equipment 228.5 215.1
------ ------
$749.9 $537.1
====== ======
</TABLE>
5. GRANTING OF STOCK OPTIONS
During the nine months ended December 31, 1996 nonqualified options to
purchase 80,000 shares of Common Stock were granted at an exercise
price of $14.25 per share. The options become exercisable six months
after the date of grant. In addition, qualified options to purchase
2,000 shares and 8,000 shares of Common Stock were issued at exercise
prices of $15.75 and $11.00 per share, respectively. These options
become exercisable beginning six months after the date of grant with
various vesting periods.
6. 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.
7. LONG-TERM ACCOUNTS RECEIVABLE
The Company has provided extended payment terms to an overseas customer
for a maximum period of three years.
8. ACQUIRED CONTRACT MANAGEMENT SYSTEM
On August 26, 1996, the Company acquired a contract management system
from Computer Systems Excellence, Inc. for $1.2 million. The Company
paid $0.7 million at closing and recorded a liability of $0.5 million
to be paid in eight quarterly payments. Acquired software development
in the amount of $0.7 million has been capitalized.
9. REGISTRATION STATEMENT
On July 16, 1996 the Company filed a registration statement with
the Securities and Exchange Commission covering a proposed offering of
2,732,311 shares of its Common Stock, of which 732,311 shares were
offered for the account of certain
F-7
Page 17
<PAGE> 18
current shareholders. The proposed offering was terminated on October
8, 1996 and no sales of common stock were made pursuant thereto.
During the third quarter of fiscal 1997, $0.5 million of
non-operating charges related to the offering were recorded.
10. LONG TERM DEBT
As of December 31, 1996, the Company had a line of credit agreement
that allows the Company to borrow up to $2.0 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 $1.5 million in borrowings outstanding under the line of credit
agreement at December 31, 1996.
11. SUBSEQUENT EVENTS
On January 22, 1997, the Company announced a preliminary agreement to
sell its United Kingdom operations to Health Systems Limited, which
will also become CITATION's exclusive distributor for its clinical
software products in the UK. Under the terms of the Memorandum of
Understanding, Health Systems Limited will acquire CITATION's operating
assets, retain the majority of the Company's employees in the UK, and
assume responsibility for CITATION's existing customers and contracted
commitments in the UK. The transaction will result in a loss of between
$0.35 and $0.40 per share to be recognized in the fourth quarter of
fiscal 1997.
F-8
Page 18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequential Page
Number Exhibit Number
- ------ ------- ---------------
<S> <C> <C>
3(a) Restated Articles of Incorporation of the Company; *
incorporated by reference to the corresponding
Exhibit to the Company's Registration Statement on
Form S-1 of the Company, Registration No. 33-48332
3(b) Restated By-laws of the Company; incorporated by *
reference to the corresponding Exhibit to the
Company's Registration Statement of Form S-1 of the
Company, Registration No. 33-48332
4(a) Specimen Common Stock Certificate; incorporated by *
reference to the corresponding Exhibit to the
Company's Registration Statement on Form S-1 of the
Company, Registration No. 33-48332
4(b) Registration Rights Agreement, dated May 29, 1992, *
between the Company and Capital For Business, Inc;
incorporated by reference to the corresponding
Exhibit to the Company's Registration Statement on
Form S-1 of the Company, Registration No. 33-48332
27(a) Financial Data Schedule
</TABLE>
*Incorporated by reference as set forth in Exhibit description.
CITATION Computer Systems, Inc.
Form 10-QSB
Page 19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 651
<SECURITIES> 0
<RECEIVABLES> 9,995
<ALLOWANCES> 124
<INVENTORY> 750
<CURRENT-ASSETS> 12,356
<PP&E> 5,086
<DEPRECIATION> 3,590
<TOTAL-ASSETS> 20,874
<CURRENT-LIABILITIES> 5,408
<BONDS> 0
0
0
<COMMON> 379
<OTHER-SE> 11,360
<TOTAL-LIABILITY-AND-EQUITY> 20,874
<SALES> 10,231
<TOTAL-REVENUES> 17,048
<CGS> 6,148
<TOTAL-COSTS> 8,040
<OTHER-EXPENSES> 11,240
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27
<INCOME-PRETAX> (2,259)
<INCOME-TAX> (881)
<INCOME-CONTINUING> (1,378)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,378)
<EPS-PRIMARY> (0.37)
<EPS-DILUTED> (0.37)
</TABLE>
