<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, 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 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 10, 1998, was 3,809,052 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 DECEMBER 31, 1997, TO THREE MONTHS ENDED
DECEMBER 31, 1996.
GENERAL. The Company reported a net loss of $0.03 per share, or $0.1
million, for the third quarter of fiscal 1998, compared with a net loss of
$0.43 per share, or $1.6 million, in the comparable period of fiscal 1997. As
described below, net earnings from ongoing operations on a pro forma basis for
the third quarter of fiscal 1997, excluding United Kingdom ("UK") results of
operations and restructuring charge and secondary offering expenses for the
third quarter of fiscal 1997, reflected a net loss of $0.9 million or $0.24 per
share. The reduction in losses of ongoing operations from the prior year was
principally the result of three factors: higher sales volume; higher gross
margins due to more favorable product mix; and reduced research and development
spending on new products, coupled with a decrease in amortization of
capitalized research and development. In March 1997, the Company sold its UK
operations to Health Systems Limited, a new UK company. See Note 2 to the
Company's March 31, 1997 Financial Statements included in the Company's Annual
Report of Form 10-KSB dated June 25, 1997. Also see Note 2 to the Quarterly
Consolidated Financial Statements.
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 loss per share from ongoing operations is presented
excluding UK results of operations, restructuring and consolidation charges and
secondary offering expenses:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------
12/31/97 12/31/96
-------- --------
<S> <C> <C>
(000's, except per share amount)
Sales $ 4,304.6 $ 3,861.1
Cost of sales 2,094.6 2,207.4
--------- ---------
Gross profit 2,210.0 1,653.7
Operating expenses 2,399.9 3,148.9
Operating loss - UK - 433.8
Restructuring charge - 163.5
--------- ---------
Operating loss (189.9) (2,092.5)
Other expense, net 15.4 36.4
Secondary offering expense - 542.5
--------- ---------
Loss before taxes (205.3) (2,671.4)
Benefit for income taxes (78.0) (1,041.9)
--------- ---------
Net loss $ (127.3) $(1,629.5)
========= =========
Loss per share:
Ongoing operations $ (0.03) $ (0.24)
Operations - UK - (0.07)
Restructuring charge - (0.03)
Secondary offering expenses - (0.09)
--------- ---------
Reported EPS - loss $ (0.03) $ (0.43)
========= ==========
</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,
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 increased 6.6% from $4.0 million for the third
quarter of fiscal 1997 to $4.3 million for the third quarter of fiscal 1998,
due to a 18.6% increase in system sales revenue and a decrease of 4.3% in
service revenue.
System sales revenue for the third quarter increased $0.4 million from
$1.9 million in fiscal 1997 to $2.3 million in fiscal 1998. The increase in
system sales was primarily attributable to an increase in the number of systems
shipped in the third quarter of fiscal 1998 compared to the third quarter of
fiscal 1997. System sales represented 52.9% and 47.6% of total revenues for
the third quarter of fiscal 1998 and 1997, respectively.
Service revenue for the third quarter decreased $0.1 million to $2.0
million in fiscal 1998. The decrease was primarily due to the loss of service
revenue due to the earlier consolidation in the health care industry. Service
revenue represented 47.1% and 52.4% of total revenues for the third 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 revenue. 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
decreased from 63.5% in the third quarter of fiscal 1997 to 48.7% in the third
quarter of fiscal 1998. For the third quarter of fiscal 1997 and 1998, total
cost of products and services sold were $2.6 million and $2.1 million,
respectively.
The decrease in the percentage of cost of products and services sold to
total revenues was primarily due to the increase in total revenues and the
decrease in client service expense and other costs due to the change in product
mix (i.e., higher system sales which normally have higher gross margins).
Software amortization costs of $0.5 million and $0.6 million in the third
quarter of fiscal year 1998 and 1997 represented 25.0% and 24.2% respectively,
of total costs of products and services sold.
Gross profit as a percentage of total revenues increased from 36.5% in the
third quarter of fiscal 1997 to 51.3% in the third quarter of fiscal 1998. The
increase in the system sales gross profit margin to 30.8% in the third quarter
of fiscal 1998 from a negative 1.3% in the third quarter of fiscal 1997 is
primarily due to negotiating higher profit margins on systems and the $0.1
million decrease in software amortization. The increase in the service
revenues gross profit margin in the third quarter of fiscal 1998
Page 3
<PAGE> 4
from 70.8% to 74.4% is primarily due to a reduction in costs at a greater
percentage than the reduction in service revenue.
RESEARCH AND DEVELOPMENT COSTS. Total outlays for software development
for the third quarter of fiscal 1997 and 1998 are as follows (000's):
<TABLE>
<CAPTION>
FY98 FY97
R&D EXPENSE 3RD QTR. 3RD QTR.
- ----------- -------- --------
<S> <C> <C>
R&D spending $ 914.2 $1,422.2
Less - R&D capitalized 232.4 385.0
-------- --------
Total R&D expense 681.8 1,037.2
Software amortization (cost of prod. sold) 525.7 620.4
-------- --------
Total R&D expensed $1,207.5 $1,657.6
======== ========
<CAPTION>
FY98 FY97
SOFTWARE DEVELOPMENT COST, NET 3RD QTR. 3RD QTR.
- ------------------------------ --------- ----------
<S> <C> <C>
Beginning of period $3,257.7 $4,843.0
R&D capitalized per above 232.4 385.0
-------- --------
3,490.1 5,228.0
Less software amortization (525.7) (620.4)
Other adjustments .1 46.9
-------- --------
End of period $2,964.5 $4,654.5
======== ========
</TABLE>
For the third quarter of fiscal years 1997 and 1998, the Company
capitalized 27.1% and 25.4%, respectively, of software development spending.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
as a percentage of total revenues decreased from 58.6% in the third quarter of
fiscal 1997 to 39.9% in the third quarter of fiscal 1998. Total selling and
administrative expenses decreased $0.6 million to $1.7 million in this year's
third quarter, primarily due to lower selling and marketing expenses to support
international and domestic operations. Selling and administrative expenses as
a percentage of total revenues decreased from 58.6% in fiscal 1997 to 39.9% in
fiscal 1998.
OPERATING LOSS. The operating loss decreased from $1.9 million, excluding
the restructuring charge, in the third quarter of 1997, to a loss of $0.2
million in the third quarter of fiscal 1998. The operating margin on the same
basis increased from a negative 54.2% to a negative 4.4% in the third quarter
of fiscal 1997 and 1998, respectively, primarily reflecting the factors as
described above.
INCOME TAXES. The Company's effective income tax benefit rate was 39% in
the third quarter of fiscal 1997 versus 38% in the third quarter of fiscal
1998.
COMPARISON OF NINE MONTHS ENDED DECEMBER 31, 1997, TO NINE MONTHS ENDED
DECEMBER 31, 1996.
GENERAL. The Company reported a net loss of $0.06 per share, or $0.2
million, for the first nine months of fiscal 1998, compared with a net loss of
$0.37 per share, or $1.4 million in the comparable period of fiscal 1997. As
described below, net earnings from ongoing operations on a pro forma basis for
the first nine months of fiscal 1997, excluding United Kingdom ("UK") results
of operations,
Page 4
<PAGE> 5
restructuring charge and secondary offering expenses, reflected net income of
$0.7 million or $0.19 per share.
During the first nine months of fiscal 1997, the Company recorded a $1.5
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. 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.
Also see Note 2 to the Quarterly Consolidated Financial Statements.
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>
NINE MONTHS ENDED
--------------------------
12/31/97 12/31/96
------------ ------------
<S> <C> <C>
(000's, except per share amount)
Sales $12,858.9 $16,212.5
Cost of sales 6,187.6 6,853.3
--------- ---------
Gross profit 6,671.3 9,359.2
Operating expenses 6,974.0 8,171.7
Operating loss - UK - 1,410.4
Restructuring charge - 1,467.0
--------- ---------
Operating loss (302.7) (1,689.9)
Other income (expense), net (89.2) (26.1)
Secondary offering expense - (542.5)
--------- ---------
Loss before taxes (391.9) (2,258.5)
Benefit for income taxes (148.9) (880.9)
--------- ---------
Net loss $ (243.0) $(1,377.6)
========= =========
Earnings (loss) per share:
Ongoing operations $ (0.06) $0.19
Operations - UK - (0.23)
Restructuring charge - (0.24)
Secondary offering expenses - (0.09)
--------- ---------
Reported EPS - income (loss) $ (0.06) $ (0.37)
========= =========
</TABLE>
REVENUES. Total revenues decreased 24.6% to $12.9 million for the first
nine months of fiscal 1998 from $17.0 million for the first nine months of
fiscal 1997, which reflects a 34.6% decrease in system sales revenue and a 9.5%
decrease in service revenue.
System sales revenue for the first nine months decreased by $3.5 million,
from $10.2 million in fiscal 1997 to $6.7 million in fiscal 1998. Included in
last year's revenues were $0.8 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 60.0% of total revenues for the first
nine months of fiscal 1997 and 52.0% of total revenues for the same period in
fiscal 1998.
Service revenue for the first nine months decreased by $0.6 million, from
$6.8 million in fiscal 1997 to $6.2 million in fiscal 1998. The 9.5% decrease
was primarily due to the reduction in sales and renewals of service contracts
from existing customers. Service revenue represented 40.0% and 48.0% for the
first nine months of fiscal 1997 and 1998, respectively.
Page 5
<PAGE> 6
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
47.2% in the first nine months of fiscal 1997 to 48.1% in the first nine 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 52.8% in the
first nine months of fiscal 1997 to 51.9% in the first nine 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 nine months of fiscal 1997 and 1998 are as follows (000's):
<TABLE>
<CAPTION>
FY98 FY97
R&D EXPENSE NINE MONTHS NINE MONTHS
- ----------- ----------- -----------
<S> <C> <C>
R&D spending $2,433.4 $4,032.7
Less - R&D capitalized 617.8 1,373.8
-------- --------
Total R&D expense 1,815.6 2,658.9
Software amortization (cost of prod. sold) 1,529.3 1,641.9
-------- --------
Total R&D expensed $3,344.9 $4,300.8
======== ========
<CAPTION>
FY98 FY97
SOFTWARE DEVELOPMENT COST, NET NINE MONTHS NINE MONTHS
- ------------------------------ ----------- -----------
<S> <C> <C>
Beginning of period $3,876.0 $4,762.5
R&D capitalized per above 617.8 1,373.8
Software acquired (C-MAX)* - 651.7
-------- --------
4,493.8 6,788.0
Less - write-off - UK - (587.3)
Software amortization (1,529.3) (1,641.9)
Other adjustments - 95.7
-------- --------
End of period $2,964.5 $4,654.5
======== ========
</TABLE>
*Software acquired relates to the purchase of the contract management
system.
For the nine months of fiscal years 1997 and 1998, the Company capitalized
34.1% and 25.4%, respectively, of software development costs.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
decreased from $6.6 million in the first nine months of fiscal 1997 to $5.2
million in the first nine months of fiscal 1998, a decrease of 21.5%. Total
selling and administrative expenses decreased primarily due to lower selling
and marketing expenses. Selling and administrative expenses as a percentage of
total revenues increased from 38.5% in fiscal 1997 to 40.2% in fiscal 1998.
OPERATING LOSS. The operating loss increased from $0.2 million, excluding
the $1.5 million restructuring charge in the first nine months of fiscal 1997,
to an operating loss of $0.3 million in the first nine months of fiscal 1998,
primarily reflecting factors described above. The operating margin on the same
basis increased from a negative 10.4% in fiscal 1997 to a negative 2.4% in
fiscal 1998.
Page 6
<PAGE> 7
INCOME TAXES. The Company's effective income tax benefit rate was 39% in
the first nine months of fiscal 1997 versus 38% in the first nine months of
fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is cash flow from operations.
At December 31, 1997, the Company had cash and cash equivalents in the amount
of $0.3 million as compared to $0.5 million at March 31, 1997. The cash
balance decreased $0.2 million primarily due to amounts used for capital and
software development spending ($0.9 million) and repayment of debt ($0.8
million), offset by cash provided by operating activities ($1.4 million).
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) million, 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, 1997, the Company had a line of credit agreement that
allows the Company to borrow up to $1.6 million with interest at the lender's
prime rate (8.5% at December 31, 1997), 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 December 31, 1997. Subsequent to December 31,
1997, the Company refinanced all its bank debt, including its line of credit.
See Note 9 to the Consolidated Financial Statements.
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.
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 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 collection 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.
(c) Not applicable
(d) 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 8
<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 on its behalf by the
undersigned thereunto duly authorized.
CITATION COMPUTER SYSTEMS, INC.
Date: February 13, 1998 By: /s/ Richard D. Neece
----------------------------
Richard D. Neece
President
(Principal Financial &
Accounting Officer)
Page 9
<PAGE> 10
CITATION Computer Systems, Inc.
CONSOLIDATED BALANCE SHEET
(000'S)
<TABLE>
<CAPTION>
Dec. 31, March 31,
1997 1997
----------- ---------
(unaudited) (audited)
<S> <C> <C>
Assets
Current assets:
Cash $ 251.0 $ 510.7
Accounts receivable:
Trade, net 7,492.7 7,334.1
Other 23.8 40.6
Inventories (Note 3) 489.5 416.6
Prepaid expenses and other current assets 318.1 521.1
Income taxes receivable 1,018.2 1,435.2
Deferred tax asset 179.4 179.4
--------- ---------
Total current assets 9,772.7 10,437.7
Software development costs, net 2,964.5 3,876.0
Property and equipment, net 963.6 1,229.6
Other assets (Note 5) 1,957.4 2,092.4
--------- ---------
Total assets $15,658.2 $17,635.7
========= =========
Liabilities and shareholders' equity:
Current liabilities:
Current portion of long-term debt (Note 6) $ 1,665.6 $ 364.9
Accounts payable 400.0 1,350.8
Accrued bonuses and commissions 147.4 121.2
Other accrued liabilities 996.3 864.4
Deferred service revenue 2,136.7 2,286.1
--------- ---------
Total current liabilities 5,346.0 4,987.4
Long-term debt (Note 6) 251.7 2,400.4
Deferred tax liability 438.9 438.9
--------- ---------
6,036.6 7,826.7
--------- ---------
Commitments (Note 4) - -
Shareholders' equity:
Common stock 380.9 380.2
Paid-in capital 6,502.5 6,448.9
Retained earnings 2,663.4 2,906.4
Equity adjustment from foreign currency
translatiion 74.8 73.5
--------- ---------
9,621.6 9,809.0
--------- ---------
Total liabilities and shareholders' equity $15,658.2 $17,635.7
========= =========
</TABLE>
F-1
See accompanying notes to consolidated financial statements Page 10
<PAGE> 11
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,
------------------------- -----------------------
1997 1996 1997 1996
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net system sales and service revenues:
System sales $2,278.3 $ 1,920.9 $ 6,686.6 $10,230.8
Service revenue 2,026.3 2,116.6 6,172.3 6,816.9
-------- --------- --------- ---------
4,304.6 4,037.5 12,858.9 17,047.7
-------- --------- --------- ---------
Cost of products and service sold:
System costs 1,574.9 1,945.9 4,799.6 6,148.2
Service costs 519.7 617.1 1,388.0 1,891.8
-------- --------- --------- ---------
2,094.6 2,563.0 6,187.6 8,040.0
-------- --------- --------- ---------
Gross profit 2,210.0 1,474.5 6,671.3 9,007.7
Research and development expense 681.8 1,037.2 1,815.6 2,658.9
Selling and administrative expenses 1,718.1 2,366.3 5,158.4 6,571.7
Restructuring charge (Note 2) -- 163.5 -- 1,467.0
-------- --------- --------- ---------
Operating loss (189.9) (2,092.5) (302.7) (1,689.9)
Other income:
Other expense, net (15.4) (36.4) (89.2) (26.1)
Secondary offering expenses (Note 8) -- (542.5) -- (542.5)
-------- --------- --------- ---------
Loss before income taxes (205.3) (2,671.4) (391.9) (2,258.5)
Benefit for income taxes (78.0) (1,041.9) (148.9) (880.9)
-------- --------- --------- ---------
Net loss $ (127.3) $(1,629.5) (243.0) (1,377.6)
======== ========= ========= =========
Net loss per common share $ (0.03) $ (0.43) (0.06) (0.37)
======== ========= ========= =========
Basic and diluted
Weighted average number of shares used in
computing net loss per common share 3,808 3,779 3,805 3,765
======== ========= ========= =========
Basic and diluted
</TABLE>
F-2
See accompanying notes to consolidated financial statements Page 11
<PAGE> 12
CITATION Computer Systems, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
(000's)
<TABLE>
<CAPTION>
Nine months ended
December 31,
----------------------------
1997 1996
----------- ------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (243.0) $ (1,377.6)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization of property and
equipment 500.9 763.7
Amortization of software development costs 1,529.3 1,641.9
Amortization of other assets -- 71.0
Non-cash restructuring charge -- 988.2
Non-cash 401k matching contribution 40.0 46.1
Decrease (increase) in accounts receivable (142.0) 1,641.0
Increase in inventories (72.8) (212.8)
Decrease (increase) in prepaid expenses and other assets 338.0 (339.1)
Increase in deferred tax asset -- (874.9)
Increase in long-term accounts receivable -- (1,657.3)
Increase (decrease) in accounts payable (950.8) 558.6
Increase (decrease) in accrued bonuses and commissions 26.3 (475.0)
Increase (decrease) in other accrued liabilities 131.8 (321.9)
Increase (decrease) in current income taxes receivable/payable 417.0 (630.6)
Increase (decrease) in deferred service revenue (149.4) (555.7)
--------- -----------
Net cash provided by (used in) operating activities 1,425.3 (734.4)
--------- -----------
Cash flows from investing activities:
Capital expenditures (234.8) (513.6)
Software development costs (617.8) (2,121.3)
--------- -----------
Net cash used in investing activities: (852.6) (2,634.9)
--------- -----------
Cash flows from financing activities:
Proceeds from long-term debt -- 1,517.0
Principal payments on long-term debt (848.0) (99.2)
Proceeds from the issuance of common stock 14.3 208.5
--------- -----------
Net cash provided by (used in) financing activities (833.7) 1,626.3
--------- -----------
Effect of exchange rate changes on cash 1.3 247.9
--------- -----------
Net decrease in cash and cash equivalents (259.7) (1,495.1)
Cash and cash equivalents, beginning of year 510.7 2,146.3
--------- -----------
Cash and cash equivalents, end of period $ 251.0 $ 651.2
========= ===========
</TABLE>
F-3
See accompanying notes to consolidated financial statements 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, 1996 (audited) 3,802,041 $380.2 $6,448.9 $2,906.4 $73.5 $9,809.0
Net loss (unaudited) (243.0) (243.0)
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) 4,911 0.4 39.6 40.0
Issuance of common stock to directors (unaudited) 1,600 0.2 11.8 12.0
Foreign currency translation adjustment (unaudited) 1.3 1.3
---------------------------------------------------------------------
Balance, December 31, 1997 (unaudited) 3,809,052 $380.9 $6,502.5 $2,663.4 $74.8 $9,621.6
---------------------------------------------------------------------
</TABLE>
F-4
See accompanying notes to consolidated financial statements Page 13
<PAGE> 14
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 months periods
ended December 31, 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 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 December 31,
1997, the Statement of Operations for the three and nine months ended
December 31, 1997 and 1996, the Statement of Cash Flows for the nine months
ended December 31, 1997 and 1996, and the Statement of Shareholders' Equity
for the nine months ended December 31, 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. The Company recorded restructuring charges of $0.2
million and $1.5 million related thereto for the three and nine months ended
December 31, 1996, respectively. 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: (DOLLARS IN 000'S)
<TABLE>
<CAPTION>
DEC. 31, MARCH 31,
1997 1997
---- ----
<S> <C> <C>
Hardware and third party software $265.6 $192.5
Field service equipment 223.9 224.1
------ ------
$489.5 $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.
F-5
Page 14
<PAGE> 15
5. OTHER ASSETS - LONG-TERM ACCOUNTS RECEIVABLE
The Company has provided extended payment terms to an overseas customer
for a maximum period of three years. At December 31, 1997, $1.7 million was
outstanding and included in other assets on the balance sheet.
6. LONG-TERM DEBT
As of December 31, 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 which is included in current portion of long-term debt at December
31, 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.
8. REGISTRATION STATEMENT
During 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 current shareholders. The proposed offering was
terminated in October 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.
9. SUBSEQUENT EVENTS
In January 1998 the Company refinanced its long-term debt, including a
two-year, $2.0 million line of credit agreement, lowering the interest rate
to the lender's prime rate (8.5% at December 31, 1997).
The Company announced in January 1998 that it had responded to an
unsolicited expression of interest by engaging an investment banker to
evaluate the Company's strategic alternatives.
10. ADOPTION OF NEW EPS ACCOUNTING STANDARD
Effective for the quarter ended December 31, 1997, the Company adopted
the provisions of SFAS No. 128, "Earnings Per Share." SFAS 128 requires
presentation in the statement of operations of basic and diluted earnings
per share, calculated as defined by SFAS 128, rather than primary and fully
diluted earnings per share or defined in APB 15, "Earnings Per Share." The
adoption of FAS 128 did not have a material impact on reported loss per
share amounts for interm periods in fiscal 1998 or for interim periods in
fiscal 1997.
F-6
Page 15
<PAGE> 16
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 16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 251
<SECURITIES> 0
<RECEIVABLES> 7,662
<ALLOWANCES> 145
<INVENTORY> 490
<CURRENT-ASSETS> 9,773
<PP&E> 3,631
<DEPRECIATION> (2,667)
<TOTAL-ASSETS> 15,658
<CURRENT-LIABILITIES> 5,346
<BONDS> 0
0
0
<COMMON> 381
<OTHER-SE> 9,241
<TOTAL-LIABILITY-AND-EQUITY> 15,658
<SALES> 6,687
<TOTAL-REVENUES> 12,859
<CGS> 1,381
<TOTAL-COSTS> 6,188
<OTHER-EXPENSES> 6,974
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 125
<INCOME-PRETAX> (392)
<INCOME-TAX> (149)
<INCOME-CONTINUING> (243)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (243)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
