<PAGE> 1
FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-20284
CITATION COMPUTER SYSTEMS, INC.
(Exact name of company as specified in its charter)
MISSOURI 43-1174397
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
424 SOUTH WOODS MILL ROAD, SUITE 200 63017
CHESTERFIELD, MISSOURI (Zip Code)
(Address of principal executive offices)
Company's telephone number, including area code: (314) 579-7900
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.10 PER SHARE
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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
--- ---
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained herein, and will not be contained, to the best of Company's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-K. X
---
Company's revenue for the fiscal year ended March 31, 1998, were $16,640,000.
On July 7, 1998, the aggregate market value of the Company's voting stock held
by non-affiliates was $10,949,429.
On July 7, 1998, there were 3,811,490 shares of Common Stock outstanding,
exclusive of treasury shares or shares held by subsidiaries of the Company.
Part II incorporates information by reference from the Annual Report to
Shareholders for the fiscal year ended March 31, 1998. Part III incorporates
information by reference from the definitive Proxy Statements to be used in
connection with the Company's Annual Meeting of Shareholders and to be filed no
later than 120 days after Company's fiscal year end.
<PAGE> 2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
CITATION Computer Systems, Inc. ("CITATION" or the "Company") was
organized in 1979 as a Missouri corporation. The Company's principal executive
office is located at 424 South Woods Mill Road, Suite 200, Chesterfield,
Missouri 63017 (a suburb of St. Louis) and its telephone number is (314)
579-7900.
In June 1998, the Company announced the sale of its suite of
administrative products to allow it to focus on its clinical applications. The
Description of Business section excludes these products.
INTRODUCTION
CITATION designs, develops, markets and supports patient-centered
clinical information systems for hospitals, clinics, physicians' groups and
emerging Integrated Delivery Networks ("IDNs"). The Company offers a
comprehensive suite of clinical products using open client/server architecture
that meets a broad range of the information systems needs of the healthcare
industry. These products integrate patient care processes within the enterprise.
The Company's systems are modular, scalable and allow clients to leverage their
investments in existing systems. Individual components of the Company's systems
can function independently, giving clients the ability to build their system
over time and to integrate existing software which is meeting their current
needs. CITATION's systems are installed in approximately 370 institutions
ranging in size from under 100 beds to over 1,000 beds. CITATION markets its
products directly in the United States and Canada, as well as through
distribution partners in Europe, India and the Far East.
INDUSTRY BACKGROUND
The United States healthcare industry is undergoing rapid change.
Historically, reimbursement for healthcare services has been based on a
fee-for-service model of payment. With increasing pressure to reduce costs,
managed care organizations and other payors are shifting the economic risk for
the delivery of care to providers through alternative reimbursement models,
including capitation and fixed fees. As a result, healthcare providers such as
hospitals, multi-specialty physician groups, laboratories, pharmacies, home
health services and nursing homes are integrating horizontally and vertically to
create IDNs. IDNs are
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designed to serve all of the healthcare needs of regional populations while
achieving economies of scale.
In order to lower healthcare delivery costs while maintaining or
improving the quality of patient care, providers need access to detailed
clinical information to (i) manage the patient care process throughout the IDN;
(ii) automate patient care documentation; (iii) compare care provider
performance and clinical and cost outcomes both within the organization and to
established norms; (iv) monitor performance under managed care contracts; (v)
monitor practice patterns of care providers; (vi) measure the effectiveness of
new technologies and therapeutics; and (vii) support intra and inter facility
communication. A comprehensive clinical healthcare information system must be
able to assist both clinicians and administrators in managing patient
information throughout the continuum of care.
Certain information-intensive departments of healthcare organizations,
such as laboratories, were early adopters of information systems in order to
manage workflow and clinical data. However, as multiple legacy systems have
become increasingly prominent on an enterprise-wide basis, the integration of
these systems across the enterprise has become more difficult given the
different architectures, platforms and operating systems of these information
systems.
Integration and accessibility to patient information are increasingly
necessary for healthcare providers to operate efficiently and improve the
quality of patient care. As the need for readily accessible information
throughout the healthcare enterprise continues to grow, hospitals, providers and
payors of all sizes are faced with the challenge of implementing healthcare
information systems that are scalable, capable of working with existing
information systems and flexible to adapt to changes in the healthcare
marketplace. Also, such systems must be patient-centered, integrating all
aspects of managing the healthcare process.
THE CITATION SOLUTION
CITATION designs, develops, markets and supports products that address
the healthcare industry's need for patient-centered, fully integrated clinical
information systems. CITATION's products are designed using a modular,
client/server approach, offering clients the ability to build their systems over
time and to allow existing legacy applications to interoperate with the
Company's products.
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BUSINESS STRATEGY
CITATION's goal is to leverage its experience of over fifteen years
with client/server application solutions to become a leading provider of
clinical healthcare information systems. The Company's strategy for achieving
this goal includes the following elements:
TARGET COMPREHENSIVE CLINICAL SYSTEM SALES. CITATION intends to focus
its sales efforts on selling larger, more comprehensive clinical systems to
hospitals with 400 beds or less and IDNs to address a broad range of needs. The
Company will aggressively promote its clinical suite of products.
LEVERAGE EXISTING CLIENT BASE. With an installed base of nearly 350
facilities excluding the financial product suite clients, the Company believes
it has the potential to cross-sell additional products to its existing clients
because many of those clients have not purchased all of the Company's products.
CITATION's products are modular in design and can be added over time as each
client's needs expand and evolve.
EXPAND PRODUCT PORTFOLIO. The Company plans to expand its product line
to meet the evolving needs of its clients. The Company continually evaluates its
offerings to determine what additional products or enhancements are required by
the healthcare information systems marketplace and the Company develops and
enhances products internally to meet clients' needs. If the Company can purchase
or license proven products at reasonable cost on its chosen technology base it
will do so in order to avoid the time and expense involved in developing
products.
CAPITALIZE ON INTERNATIONAL MARKETS. CITATION believes that a
significant opportunity exists to expand the sales of its products in
international markets. Healthcare providers in a number of countries have not
yet invested in sophisticated information systems, and increasingly they are
seeking to purchase state-of-the art products, particularly clinical information
systems. The Company believes that its open, client/server architecture and
modular, scalable systems provide a cost effective solution to these markets.
CITATION has successfully entered several international markets through a
combination of direct sales and distribution arrangements.
EXPANDED SERVICES. The Company has expanded the range of strategic
client support and data interpretation services it provides in order to
strengthen relationships with clients. The Company has also expanded its
services to design and configure the architecture of a client's systems,
including networking, systems integration and data conversion. Further, the
Company provides advice on data analysis to assist care providers in evaluating
their operations.
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PRODUCTS
CITATION has developed a comprehensive suite of clinical products to
manage information in the healthcare enterprise. A client can purchase a
comprehensive system or can buy modules separately to match a user's individual
needs. CITATION's systems address the information needs of care providers and
hospital administrators by enabling joint access to clinical and cost
information, thereby facilitating cost containment, effective decision making
and delivery of high-quality care.
CITATION's clinical suite of products currently consists of six main
components, each of which can operate independently or as part of a fully
integrated system.
C-COM captures and tracks comprehensive patient clinical
information and routes that information among departments or systems in
the healthcare organization, enabling providers to evaluate quality of
care, productivity and cost-effectiveness of services. C-COM accepts
orders from and displays the resulting information at any networked PC
location where patient care is being delivered, such as a nursing
station or even the bedside. C-COM also supports hand-held, wireless
technology. C-COM is available for DOS, Windows(TM) and Windows
NT(TM).(1)
C-LAB provides comprehensive laboratory automation solutions
for clinics, single and multiple site hospitals and clinical and
research laboratories. C-LAB automates order entry and dissemination of
results and interfaces with care providers' financial systems. C-LAB
sub-modules consist of General Lab, Microbiology, Anatomical Pathology
and Blood Bank. The Blood Bank submodule is licensed by CITATION for
use and implementation in C-LAB. C-LAB is available in DOS and Windows
NT(TM).
C-CARE is a patient care management system which is designed
to increase the productivity of nurses and other clinicians and to
assist in the creation and management of care plans and clinical
pathways. C-CARE documents variances against established care plans and
clinical pathways, enabling care providers to focus on both improving
the quality of care and controlling costs. This system enables the
healthcare enterprise to allocate resources and schedule procedures and
tests automatically. C-CARE must
(1) This document contains trademarks and trade names of other persons. These
trademarks remain the property of such persons.
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be used in conjunction with C-COM. C-CARE is currently available for
DOS under the NuCaMS product name. C-CARE is expected to be available
for Windows NT(TM) in late 1999 or early 2000.
C-RIS is a radiology management system providing patient
tracking, transcription, radiology reporting, auto-fax capabilities,
statistical reporting, film management and mammography management.
C-RIS is currently available for DOS and will be available in August,
1997 for Windows NT(TM). C-RIS is a third-party product for which
CITATION has exclusive distribution rights.
C-MED is a medication dispensing and inventory control system
which can increase productivity through the use of tools such as
bar-coding to control narcotics or floor stock items. C-MED can
integrate with a hospital's other information systems to verify patient
status and to provide patient billing and laboratory information. C-MED
also enables a single data entry to produce patient charges, labels,
profiles, inventory control and drug utilization management. The
Company licenses C-MED from a third party, and it is currently
available for Windows NT(TM).
C-MAX provides the information necessary to manage managed
care contracts and transactions with indemnity payors. It also allows
users to model future expectations of performance. C-MAX is Windows(TM)
based.
SERVICES
Client service is an important component of the Company's operations.
As of March 31, 1998, the Company employed 40 persons (approximately 30 persons
after sale of financial products) in client services. The client services team
generally provides implementation, application and support, education and
consulting services to the Company's clients and primarily employs medical
technologists and other healthcare professionals in supporting and implementing
healthcare information systems. Instrument interface, network consulting,
operating system and hardware support are provided by experts in each area.
Additional client services are provided through computer-based training or
formal instructor-led, Company-sponsored ongoing educational courses and
seminars.
In addition, the Company provides comprehensive training for clients at
its headquarters near St. Louis. Before the Company's product becomes
operational, training is also provided at the client's location. The Company
provides additional training at the client's request for a fee. The Company
offers a maintenance program covering hardware replacement, software upgrades,
and telephone consulting service. Depending on the type of system, the Company
offers service contracts for periods of one to five years. Customer support is
available 24 hours a day.
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The Company has expanded the range of strategic client support and data
interpretation services it provides in order to strengthen relationships with
clients. The Company has expanded its services to design and configure the
architecture of a provider's systems, including networking, systems integration
and data conversion. Further, the Company provides advice on data analysis to
assist care providers in evaluating their operations.
PRODUCT DEVELOPMENT
CITATION is dedicated to providing state-of-the-art integrated clinical
systems for healthcare. The cornerstone of CITATION's system is its
long-standing commitment to client/server technology. CITATION's multi-tiered
products are modular in nature, using an open architecture that is easily
integratable with third party systems as well as other CITATION systems.
CITATION's current product development efforts use object-oriented
programming methodologies. This allows the Company to develop applications based
on reusable libraries of code that the Company believes results in more
cost-effective and rapid product development cycles. The Company is a
Microsoft(R) Solutions Provider and extensively employs Microsoft(R) toolsets
and standards in its product development efforts. The Company believes use of
these standards and tools facilitates interfacing with other systems and
products. The Company also supports other industry standards such as HL/7 and
the Novell Netware Network Operating System.
The Company plans to expand its clinical product line to meet the
evolving needs of its clients. The Company continually evaluates its offerings
to determine what additional products or enhancements are required by the
healthcare information systems marketplace. The Company develops and enhances
products internally to meet clients' needs, but if the Company can purchase or
license proven products at reasonable costs it will do so in order to avoid the
time and expense involved in developing products. The Company actively seeks out
for acquisition and licensing other companies and products that fit into
CITATION's overall product and technology plan. There is much competition for
suitable acquisition candidates and there can be no assurance that the Company
will be able to successfully acquire or license additional products.
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For the years ended March 31, 1997 and 1998, CITATION invested $4.8
million and $4.3 million, respectively, on research and development. At March
31, 1998 the Company employed 39 persons (approximately 35 persons after the
sale of financial products) in research and development. The Company expects to
continue to make significant investments in research and development, however,
there can be no assurance that the Company's financial and technological
resources will permit it to develop or market new products successfully or
respond effectively to technological changes.
SALES AND MARKETING
The Company markets its products in the United States and Canada
through a direct sales force under the direction of the Company's Vice President
of Sales. As of March 31, 1998, the Company's sales force consisted of 8
employees. In addition to the Company's sales force employees, the Company has a
6-person marketing team that promotes the Company's products, participates in
trade shows and demonstrates the Company's products. In addition, members of the
Company's development and client services departments provide pre-sales support
for the Company's direct sales force in making presentations to and preparing
comprehensive proposals for potential customers.
The Company intends to focus its sales efforts on selling larger, more
comprehensive clinical systems to hospitals with 400 beds or less, and IDNs to
address a broad range of needs. As part of this strategy, the Company is cross
training its sales force so that each salesperson will have the background
necessary to sell all of the Company's products.
The Company markets its products internationally through distribution
alliances in Europe, India, the Far East and Latin America. For example, Summit
Health Systems Limited, who purchased the UK operations, is marketing certain
CITATION products in the UK, while Siemens Information Systems, Ltd of India is
marketing these products in India. In addition, the Company has a strategic
relationship with Microstate Separations Pte. Ltd. ("Microstate"), a healthcare
information systems integrator based in Singapore. Microstate has agreed to
purchase the Company's systems for the Indonesian, Malaysian, Hong Kong and
Singapore markets. In Latin America, CITATION has a strategic arrangement with
Laboratories Para Laboratorios.
REGULATION
The Company is subject to the general requirements of the Food and Drug
Administration's regulations for Class I Medical Devices because it produces a
suite of clinical software products. The Company complies with these regulations
and follows Medical Device Reporting (MDR) guidelines as well.
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Additional legislation governing the dissemination of medical record
information has been proposed. The Company is unable to determine at this time
the effect, if any, that these requirements may have on its business.
In addition, the healthcare industry is subject to changing political,
economic and regulatory influences that may affect the procurement practices and
operations of healthcare providers. Many lawmakers have announced that they
intend to propose programs to reform the United States healthcare system. These
programs may contain proposals to increase governmental involvement in
healthcare, lower reimbursement rates and otherwise change the regulatory
environment in which the Company's clients operate. Healthcare providers may
react to these proposals and the uncertainty surrounding such proposals by
curtailing or deferring investments, including those for the Company's
healthcare information systems. Even if healthcare providers do not curtail or
defer investments, they may institute cost containment measures in anticipation
of regulatory reform or for other reasons. These measures may result in greater
selectivity in the allocation of capital funds, which could have a material
adverse effect on the Company's ability to sell its healthcare information
systems and services. The Company cannot predict with any certainty what impact,
if any, such legislative or market-driven reforms might have on its business and
results of operations. There can be no assurance that such proposed changes, if
adopted, would not have a material adverse effect on the Company's business and
results of operations.
FORWARD LOOKING STATEMENTS
Certain of the statements made herein are "FORWARD LOOKING STATEMENTS,"
as such term is used in Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. 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. The
Company cautions readers that actual results could be materially different as a
result of various possibilities and differences between anticipated and actual
developments.
The uncertainties and risks include, but are not limited to: (i)
fluctuations in quarterly operating results, as the Company has historically
experienced greatly varied results from quarter to quarter, and such results can
be expected to continue to vary; (ii) technological changes and the Company's
dependence on new product developments -- the healthcare industry is subject to
rapid technological change, and the Company's future success may be adversely
impacted if the Company is not able to adapt to such changes in a timely and
efficient manner; (iii) the
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Company has expended and will continue to expend significant resources to
migrate its products to the Windows NT operating system, and will be subject to
substantial risk of adverse effect if the market does not show the anticipated
acceptance of this move; (iv) changes in the marketing focus of the Company,
shifting to becoming a clinical solutions supplier only and selling larger more
comprehensive clinical products than in the past, may adversely affect the
Company if such changes are not successful in attracting additional sales; (v)
risks associated with foreign sales, including difficulties in enforcing
agreements and collecting receivables, as well as potential adverse effects due
to fluctuating monetary exchange rates; (vi) the Company has sought to fill
certain needs within the range of products it offers through the acquisition of
licenses from third parties or the acquisition of such third parties, but there
is no assurance that such acquisition candidates will be found or that the
Company will have the resources to make such acquisitions in the future; (vii)
there are a number of larger and better financed entities in competition with
the Company, many of which offer a fuller range of products than the Company;
(viii) the Company is currently subject to regulation as a medical device
manufacturer and there is no assurance that such regulation will not become more
complex and onerous to the Company, subjecting it to adverse effects; (ix)
healthcare industry reform is an ongoing process, and is likely to continue to
pressure healthcare providers to become more efficient and engage in less
capital spending, including spending on information systems such as those
offered by the Company; (x) product liability arising out of such issues as
confidentiality of patient records or the failure of the Company's products to
provide accurate and timely disclosure of information could lead to adverse
effects upon the Company; (xi) the Company is heavily dependent upon its
intellectual property, none of which is patented; (xii) the Company has sold its
suite of financial products to another company which has agreed to assume the
Company's obligations under various warranties and service agreements, and if
the acquiror fails to adequately satisfy these obligations such failure could
have a material adverse effect on the Company; (xiii) the Company, either with
respect to its own software or with respect to other software upon which the
Company's software is dependent, may not be able to address adequately Year 2000
programming requirements; and (xiv) if the Company enters into a business
combination with another party, there is no assurance the two entities will be
able to successfully integrate operations and management.
EMPLOYEES
As of March 31, 1998, the Company employed 123 persons. Of these
employees, 39 were involved in product development, 40 in client services, 16 in
sales and marketing and 28 in general administration, clerical and finance. The
Company's employees are not represented by a labor union and the Company's
management believes that its relationship with its employees is good.
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BACKLOG
The Company sells its products on a purchase order basis, with
shipments of "turnkey" systems made shortly after receipt of executed purchase
orders. As a result, the level of backlog at any particular time is not
necessarily an indication of future results.
SUBSEQUENT EVENTS
In June 1998, the Company announced that it sold the financial software
line of business, including its accounts receivable, patient billing, general
ledger, accounts payable, fixed assets, inventory control, medical records
abstracting and registration software modules to a privately held corporation
doing business as Sterling Systems based in Downey, Idaho. This business
accounted for approximately $1.0 million of revenue and contributed a pretax
loss of $0.2 million in fiscal 1998. Net assets associated with this line of
business, which are primarily comprised of capitalized software, approximated
$1.1 million at March 31, 1998. The cash transaction will result in a slight
after-tax loss on disposal in the first quarter of fiscal 1999.
Also in June 1998, the Company announced it is in discussions about a
possible business combination with MEDASYS Digital Systems, a French Company
with U.S. offices in Miami and Chicago. MEDASYS is a leading provider of medical
imaging systems in Europe, is listed on the Second Market of the Paris Bourse
and reported revenues of $23.3 million in calendar 1997. Any transaction is
subject to the performance of due diligence and negotiation of a definitive
agreement. The Company anticipates that these negotiations and the resulting
transaction, if any, will be completed in the fall of 1998.
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EXECUTIVE OFFICERS OF COMPANY
The following persons constitute the executive officers and other key
employees of Company. All executive officers are appointed annually at the
organizational meeting of the Company's Board of Directors.
<TABLE>
<CAPTION>
PERSON AGE OFFICE/POSITION HELD
- ------ --- --------------------
<S> <C> <C>
J. Robert Copper 58 Chairman and Chief Executive Officer
(since January 1995)
Richard D. Neece 52 President (since August 1997; prior to that
Executive Vice President and Chief Financial
Officer since July 1995)
W. Steven Carter 43 Executive Vice President, Services
(since August 1996)
Russell L. Fortune 50 Executive Vice President, International Sales
(since April 1997; prior to that various sales
positions since June 1991)
John Selestak 41 Vice President Marketing (since January 1996)
Patricia Q. Moore 51 Vice President Human Resources (since October 1995)
John P. Gilmore 56 Vice President, Controller and Treasurer
(since August 1996; prior to that Controller
since June 1995)
Anton F. Flieg 44 Vice President Product Management, Admin-
istrative Suite (since May 1997; prior to that
Director of Sales Operations since March 1992)
Candice J. Barker 42 Vice President Clinical Products
(since September 1997, prior to that
Director of Systems Development
since December 1996)
</TABLE>
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ITEM 2. DESCRIPTION OF PROPERTIES
The Company's principal facilities consist of approximately 32,000
square feet are located in Chesterfield, Missouri, a suburb of St. Louis. The
lease expires in May, 2004.
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any reportable litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No such matters were submitted during the fourth quarter of Company's
fiscal year ended March 31, 1998.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is quoted and traded on the NASDAQ
National market under the symbol CITA. The following table sets forth the high
and low sale prices of the Common Stock for the periods indicated, as quoted on
NASDAQ.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
Fiscal 1998
Quarter ended June 30, 1997 $8 1/2 $5 1/2
Quarter ended September 30, 1997 9 1/2 7 1/8
Quarter ended December 31, 1997 8 5/8 5 1/2
Quarter ended March 31, 1998 9 1/2 5 3/4
</TABLE>
No dividends have been declared or paid on the Company's Common Stock.
The Company anticipates that it will retain all available funds for use in the
operation and expansion of its business and does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future. There were
approximately 153 shareholders of record on July 7, 1998.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company hereby incorporates by reference pages 1 through 9,
inclusive, of the Company's Financial Information for the Year Ended March 31,
1998 insert to the Annual Report to Shareholders, comprising Exhibit 13(a) of
this Form 10-KSB.
ITEM 7. FINANCIAL STATEMENTS
The Company hereby incorporates by reference pages 10 through 27
inclusive, of the Company's Financial Information for the Year Ended March 31,
1998 insert to the Annual Report to Shareholders comprising Exhibit 13(b) of
this Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The Company hereby incorporates by reference portions of the Company's
definitive Proxy Statement to be filed within 120 days of the Company's fiscal
year end. Information respecting executive officers is set forth as a part of
Item 1 of this Report.
ITEM 10. EXECUTIVE COMPENSATION
The Company hereby incorporates by reference portions of the Company's
definitive Proxy Statement to be filed within 120 days of the Company's fiscal
year end.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The Company hereby incorporates by reference portions of Company's
definitive Proxy Statement to be filed within 120 days of Company's fiscal year
end.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company hereby incorporates by reference portions of Company's
definitive Proxy Statement to be filed within 120 days of the Company's fiscal
year end.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Those Exhibits required by Item 601 of Regulation S-B and by
paragraph (a) of Item 13:
-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
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-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
-4(c) Form of Amendment to Registration Rights Agreement, dated
October 23, 1992, between the Company and Capital For
Business, Inc.; incorporated by reference to Exhibit 4(n) to
the Quarterly Report on Form 10-Q for the quarter ended
September 30, 1992, dated November 13, 1992, as filed by the
Company with the Commission.
-10(a) First Amended Incentive Stock Option Plan; incorporated by
reference to the corresponding Exhibit to the Company's
Registration Statement on Form S-1 of the Company,
Registration No. 33-48332
-10(b) Resolution Amending the First Amended Incentive Stock Option
Plan; incorporated by reference to the corresponding Exhibit
to the Company's Registration Statement on Form S-1 of the
Company, Registration No. 33-48332
-10(c) Amendment to First Amended Incentive Stock Option Plan;
incorporated by reference to the corresponding Exhibit to the
Company's Registration Statement on Form S-1 of the Company,
Registration No. 33-48332
-10(d) 1992 Employee Incentive Stock Option Plan; incorporated by
reference to the corresponding Exhibit to the Company's
Registration Statement on Form S-1 of the Company,
Registration No. 33-48332
-10(y) Software Systems Program Product License, dated October 14,
1992, between Health Micro Data Systems, Inc., and
Presbyterian Healthcare Services; incorporated by reference to
the Company's Form 10-K for the fiscal year ended March 31,
1993
CITATION Computer Systems, Inc. Page 16
Form 10-KSB for FYE 3/31/98
<PAGE> 17
-13(a) Financial Information Insert to the 1998 Annual Report to
Shareholders, pages 1-9.
-13(b) Financial Information Insert to the 1998 Annual Report to
Shareholders, pages 10 to 27.
-21(a) List of Subsidiaries of the Registrant
-23(a) Consent of PricewaterhouseCoopers LLP
-23(b) Report of PricewaterhouseCoopers LLP on Financial Statement
Schedule
-27 Financial Data Schedule
(b) REPORTS ON FORM 8-K.
None.
CITATION Computer Systems, Inc. Page 17
Form 10-KSB for FYE 3/31/98
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CITATION Computer Systems, Inc.
By /s/ J. Robert Copper
---------------------
J. Robert Copper, Chairman
and Chief Executive Officer
July 7, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
/s/ J. Robert Copper /s/ Fred L. Brown
- ------------------------------------ -----------------------------------
J. Robert Copper, July 7, 1998 Fred L. Brown, July 7, 1998
Director and Chief Executive Officer Director
/s/ Larry D. Marcus /s/ James F. O'Donnell
- ------------------------------------ -----------------------------------
Larry D. Marcus, July 7, 1998 James F. O'Donnell, July 7, 1998
Director Director
/s/ David T. Pieroni /s/ Richard D. Neece
- ------------------------------------ -----------------------------------
David T. Pieroni, July 7, 1998 Richard D. Neece, July 7, 1998
Director Principal Financial Officer
/s/ John P. Gilmore
-----------------------------------
John P. Gilmore, July 7, 1998
Principal Accounting Officer
Page 18
<PAGE> 19
INDEX TO FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
<TABLE>
<CAPTION>
SCHEDULE
NUMBER SCHEDULE
- -------- --------
<S> <C>
VIII Valuation and Qualifying Accounts
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <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
</TABLE>
Page 19
<PAGE> 20
<TABLE>
<S> <C>
4(c) Form of Amendment to Registration Rights Agreement, dated October 23,
1992, between Company and Capital For Business, Inc.; incorporated by
reference to Exhibit 4(n) to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1992, dated November 13, 1992, as filed by
the Company with the Commission.
10(a) First Amended Incentive Stock Option Plan; incorporated by reference to
the corresponding Exhibit to the Company's Registration Statement on
Form S-1 of the Company, Registration No. 33-48332
10(b) Resolution Amending the First Amended Incentive Stock Option Plan;
incorporated by reference to the corresponding Exhibit to the Company's
Registration Statement on Form S-1 of the Company, Registration No.
33-48332
10(c) Amendment to First Amended Incentive Stock Option Plan; incorporated by
reference to the corresponding Exhibit to the Company's Registration
Statement on Form S-1 of the Company, Registration No. 33-48332
10(d) 1992 Employee Incentive Stock Option Plan; incorporated by reference to
the corresponding Exhibit to the Company's Registration Statement on
Form S-1 of the Company, Registration No. 33-48332
10(y) Software Systems Program Product License, dated October 14, 1992,
between Health Micro Data Systems, Inc., and Presbyterian Healthcare
Services; incorporated by reference to Company's Form 10-K for the
fiscal year ended March 31, 1993
</TABLE>
Page 20
<PAGE> 21
<TABLE>
<S> <C>
13(a) Financial Information Insert to the 1998 Annual Report to Shareholders,
pages 1 to 9
13(b) Financial Information Insert to the 1998 Annual Report to Shareholders,
pages 10 to 27
21(a) List of Subsidiaries of the Registrant
23(a) Consent of PricewaterhouseCoopers LLP
23(b) Report of PricewaterhouseCoopers LLP on Financial Statement Schedule
27 Financial Data Schedule
</TABLE>
Page 21
<PAGE> 22
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS CHARGED OFF PERIOD
----------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1996:
Allowance for Doubtful accounts $137 $74 - $41 $170
Year ended March 31, 1997:
Allowance for Doubtful accounts $170 $40 - $48 $162
Year ended March 31, 1998:
Allowance for Doubtful accounts $162 $74 - $31 $205
</TABLE>
Page 22
<PAGE> 1
EXHIBIT 13(a)
Management Discussion and Analysis of Financial Condition and
Results of Operations
The following should be read in conjunction with the consolidated financial
statements and notes thereto.
OVERVIEW
CITATION Computer Systems, Inc. designs, develops, markets and supports clinical
information systems for hospitals, clinics, physicians' groups and emerging
Integrated Delivery Networks ("IDN's"). The Company offers a comprehensive suite
of products designed using open client/server architecture that meets a broad
range of the information systems needs of the healthcare industry. These
products integrate patient care processes within the enterprise and throughout
the IDN. The Company's systems are modular, scaleable and allow clients to
leverage their investments in existing systems. Individual components of the
Company's systems can function independently, giving clients the ability to
build their system over time and to integrate existing software. CITATION's
systems are installed in over 400 institutions ranging in size from under 100
beds to over 1,000 beds. CITATION markets its products directly in the United
States and Canada, as well as through distribution partners in Europe, India,
the Asia Pacific area and Latin America.
The Company generates revenues from the sale of information systems and
services. System sales consist of software licenses, related hardware,
installation and training, and the sale of third-party software. Hardware
revenues are generated from sales of third-party manufactured hardware typically
sold in conjunction with the Company's software. Service revenue includes
maintenance and support services.
The sales cycle for the Company's systems is typically six to twelve months from
initial contact to contract execution. Depending upon the combination of
products purchased and the installation schedule, installation typically
requires six to twelve months. Revenue from systems sales is recognized upon
shipment to the client providing that no significant vendor obligations remain
and collection of the related receivable is deemed probable. Revenue related to
the installation is recognized as the work is performed. Service revenue is
recognized ratably over the term of the contract period.
Cost of products and services sold includes cost of system sales and cost of
service revenue. Cost of system sales includes cost of hardware sold,
installation and training expenses and software amortization costs. Cost of
service revenue includes all client service expenses plus an allocation of
certain other overhead expenses.
Research and development expenses include salaries and expenses related to
development and documentation of software systems reduced by capitalized
software development costs. Software development costs are expensed until such
time as technological feasibility is established and then are capitalized in
compliance with Statement of Financial Accounting Standards No. 86.
Sales and marketing expenses include salaries, commissions, advertising, trade
show costs, and user group costs related to the sale and marketing of the
Company's systems. General and administrative expenses include salaries and
expenses for corporate administration, finance, legal, and human resources, as
well as profit sharing, bonuses and insurance.
1
<PAGE> 2
In June 1998, the Company announced that it sold the financial software line of
business, including its accounts receivable, patient billing, general ledger,
accounts payable, fixed assets, inventory control, medical records abstracting
and registration software modules to a private entity doing business as Sterling
Systems based in Downey, Idaho. This business accounted for approximately $1.0
million of revenue and contributed a pretax loss of $0.2 million in fiscal 1998.
Net assets associated with this line of business, which are primarily comprised
of capitalized software, approximated $1.1 million at March 31, 1998. The cash
transaction will result in a slight after-tax loss on disposal in the first
quarter of fiscal 1999.
Also in June 1998, the Company announced it is in discussions about a possible
business combination with MEDASYS Digital Systems, a French Company with U.S.
offices in Miami and Chicago. MEDASYS is a leading provider of medical imaging
systems in Europe, is listed on the Second Market of the Paris Bourse and
reported revenues of $23.3 million in calendar 1997. Any transaction is subject
to performance of due diligence and negotiations of a definitive agreement. The
Company anticipates that these negotiations and the resultant transaction, if
any, would be completed by the end of the year.
RESTRUCTURING COSTS AND OTHER NON-RECURRING CHARGES, INCLUDING SALE OF UK
OPERATIONS
In the fourth quarter of fiscal 1998 the Company recorded non-recurring pretax
charges of nearly $1 million related to the restructuring of operations
(primarily customer service matters) and for non-operating costs related to the
strategic review of alternatives following an unsolicited expression of interest
in the Company. See Note 2 of the Notes to Consolidated Financial Statements for
details.
In March 1997, the Company sold its United Kingdom ("UK") operations to Health
Systems Limited, a new UK-based company. Under the terms of the transaction,
Health Systems Limited acquired CITATION's UK operating assets, retained the
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 3
of the Notes to Consolidated Financial Statements for details of the 1997
restructuring charge of $4.3 million related to the sale of UK operations.
2
<PAGE> 3
RESULTS OF OPERATIONS
The following table sets forth, for the period indicated, certain items from the
Company's Consolidated Statement of Operations expressed as a percentage of
total revenues.
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------
1998 1997 1996
<S> <C> <C> <C>
Revenues:
System sales 49.4% 59.0% 64.7%
Service revenue 50.6 41.0 35.3
----- ----- -----
Total revenues 100.0% 100.0% 100.0%
Cost of products and services sold:
Cost of system sales 37.6 37.9 34.1
Cost of service revenue 12.3 10.5 10.1
----- ----- -----
Total cost of products & services sold 49.9 48.4 44.2
Gross Profit 50.1 51.6 55.8
Research and development 19.2 14.9 6.7
Selling and administrative 40.2 38.7 34.8
Restructuring costs and other non-recurring charges 5.0 19.5 --
Office consolidation and relocation expense -- -- 5.5
----- ----- -----
Total operating expense 64.4 73.1 47.0
----- ----- -----
Operating income (loss) (14.3) (21.5) 8.8
Other income (expense):
Interest income 0.5 0.7 0.6
Interest expense (1.0) (0.7) (0.3)
Other, net (1.2) (2.5) 0.1
----- ----- -----
Income (loss) before taxes (16.0) (24.0) 9.2
Provision (benefit) for income taxes (6.1) (9.1) 3.6
----- ----- -----
Net income (loss) (9.9)% (14.9)% 5.6%
</TABLE>
COMPARISON OF FISCAL YEAR ENDED MARCH 31, 1998 TO FISCAL YEAR ENDED MARCH 31,
1997.
REVENUE
Total revenues decreased 24.4% from $22.0 million in fiscal 1997 to $16.6
million in fiscal 1998 due to a 36.7% decrease in system sales and a 6.7%
decrease in service revenue. Fiscal 1997 included $0.9 million in United Kingdom
sales (operations within the United Kingdom were sold in 1997).
System sales decreased from $13.0 million in fiscal 1997 to $8.2 million in
fiscal 1998. The 36.7% decrease in system sales was primarily attributable to
the loss of revenue generated from UK operations and the delay in new systems
orders due to the anticipated release of the Company's new NT products. The
Company also believes that system sales results were negatively impacted by
uncertainty over the Company's future because of the announced hiring of an
investment banker to review its strategic
3
<PAGE> 4
options. System sales represented 49.4% and 59.0% of total revenues in fiscal
years 1998 and 1997, respectively.
Service revenue decreased from $9.0 million in fiscal 1997 to $8.4 million in
fiscal 1998. The 6.7% decrease was primarily due to the reduction in sales and
renewals of service contracts from existing customers. Service revenue
represented 50.6% and 41.0% of total revenues in fiscal years 1998 and 1997,
respectively.
COST OF PRODUCTS AND SERVICES SOLD AND GROSS PROFIT
For fiscal 1998 and 1997, total cost of products and services sold were $8.3
million and $10.7 million, respectively, representing a 22.1% decrease in fiscal
1998. The total cost of products and services sold increased from 48.4% of total
revenues in fiscal 1997 to 49.9% in fiscal 1998. The increase in cost as a
percentage of revenues was primarily due to decreases in total revenues which
were not entirely offset by decreases in software amortization costs and client
service expenses. Software amortization costs of $2.1 million in fiscal 1998 and
$2.2 million in fiscal 1997 represented 25.1% and 20.7%, respectively, of total
costs of products and services sold for fiscal years 1998 and 1997.
Gross profit as a percentage of total revenues decreased from 51.6% in fiscal
1997 to 50.1% in fiscal 1998. The decrease in gross profit as a percentage of
total revenues was primarily attributable to the factors discussed above.
RESEARCH AND DEVELOPMENT EXPENSES
Total outlays for software development for fiscal 1998 and 1997 are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
Software Development Expense 1998 1997
- ---------------------------- ------- -------
<S> <C> <C>
Research and development spending $ 4,288 $ 4,793
Less - software development capitalized 1,089 1,525
------- -------
Total research and development expense 3,199 3,268
Amortization of software development costs 2,085 2,201
------- -------
Total research and development expenses $ 5,284 $ 5,469
======= =======
</TABLE>
<TABLE>
<CAPTION>
Capitalized Software Development Cost, Net 1998 1997
- ------------------------------------------ ------- -------
<S> <C> <C>
Beginning of period $ 3,876 $ 4,762
Research and development capitalized per above 1,089 1,525
Software acquired (C-MAX)* -- 652
Other software acquired -- 176
------- -------
4,965 7,115
Write-off - UK capitalized software development costs -- (1,114)
Amortization of software development costs (2,085) (2,201)
Other adjustments -- 76
End of period ------- -------
$ 2,880 $ 3,876
======= =======
</TABLE>
*Software acquired related to the purchase of the contract management system.
See Note 6 of the Consolidated Financial Statements for further information.
4
<PAGE> 5
For the fiscal years 1997 and 1998, the Company capitalized 31.8% and 25.4%,
respectively, of research and development spending.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses as a percentage of total revenues increased
from 38.7% in fiscal 1997 to 40.2% in fiscal 1998. Total selling and
administrative expenses decreased $1.8 million to $6.7 million primarily due to
lower selling and marketing expenses, principally sales commissions, to support
operations.
OPERATING LOSS
CITATION incurred an operating loss of $1.6 million in fiscal 1998, excluding
the $0.8 million in restructuring costs. The operating loss for fiscal 1997 was
$0.4 million, excluding $4.3 million in restructuring costs and loss on the sale
of the UK operations. The operating loss increased primarily reflecting the
factors described above. Including the above non-recurring charges, the
operating loss was $2.4 million in fiscal 1998 compared with an operating loss
of $4.7 million in fiscal 1997.
INCOME TAXES
The Company's effective income tax benefit rate was 38.0% in both fiscal 1997
and fiscal 1998.
NET LOSS AND LOSS PER SHARE
Net loss decreased $1.6 million from $3.3 million in fiscal 1997 to $1.7 million
in fiscal 1998 as a result of the factors noted above. Basic and diluted loss
per share decreased from $.87 in fiscal 1997 to $.43 in fiscal 1998.
COMPARISON OF FISCAL YEAR ENDED MARCH 31, 1997, TO FISCAL YEAR ENDED MARCH 31,
1996.
REVENUE
Total revenues decreased 12.2% from $25.1 million in fiscal 1996 to $22.0
million in fiscal 1997 due to a 20.0% decrease in system sales, and a 2.2%
increase in service revenue. Revenues from domestic operations decreased 4.0% in
fiscal 1997 from $22.0 million to $21.1 million. Results were negatively
impacted by reorganization of the sales force within the Company, as well as a
general slowness in domestic markets in the last half of fiscal 1997.
International revenues decreased 70.4% to $0.9 million in fiscal 1997,
principally due to decreased sales in the UK.
System sales decreased from $16.2 million in fiscal 1996 to $13.0 million in
fiscal 1997. The 20.0% decrease in system sales was primarily attributable to
the loss of revenue generated from UK operations. System sales represented 59.0%
and 64.7% of total revenues in fiscal years 1997 and 1996, respectively.
Service revenue increased from $8.8 million in fiscal 1996 to $9.0 million in
fiscal 1997. The 2.2% increase was primarily due to additional service revenue
from new clients and renewals of service contracts from existing clients.
Service revenue represented 41.0% and 35.3% of total revenues in fiscal years
1997 and 1996, respectively.
5
<PAGE> 6
COST OF PRODUCTS AND SERVICES SOLD AND GROSS PROFIT
For fiscal 1997 and 1996, total cost of products and services sold were $10.7
million and $11.1 million, respectively, representing a 3.8% decrease in fiscal
1997. The total cost of products and services sold increased from 44.2% of total
revenues in fiscal 1996 to 48.4% in fiscal 1997. The increase was primarily due
to the increase in third party software and hardware costs as a percentage of
total revenues and an increase in amortization of capitalized software costs for
the year. Software amortization costs of $2.2 million in fiscal 1997 and $1.8
million in fiscal 1996 represented 20.7% and 16.2%, respectively, of total costs
of products and services sold for fiscal years 1997 and 1996.
Gross profit decreased $2.6 million from $14.0 million in fiscal 1996 to $11.4
million in fiscal 1997. Gross profit as a percentage of total revenues decreased
from 55.8% in fiscal 1996 to 51.6% in fiscal 1997. The decrease in gross profit
as a percentage of total revenues reflects the fact that the decrease in cost of
sales (3.8%) did not match the decrease in sales (12.2%) due primarily to the
fixed cost components of cost of sales.
RESEARCH AND DEVELOPMENT EXPENSES
Total outlays for software development for fiscal 1996 and 1997 are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDING MARCH 31,
Software Development Expense 1997 1996
- ---------------------------- ------- -------
<S> <C> <C>
Research and development spending $ 4,793 $ 4,256
Less - software development capitalized 1,525 2,584
------- -------
Total research and development expense 3,268 1,672
Amortization of software development costs 2,201 1,789
------- -------
Total research and development expenses $ 5,469 $ 3,461
======= =======
</TABLE>
<TABLE>
<CAPTION>
Capitalized Software Development Cost, Net 1997 1996
- ------------------------------------------ ------- -------
<S> <C> <C>
Beginning of period $ 4,762 $ 3,942
Research and development capitalized per above 1,525 2,584
Software acquired (C-MAX)* 652 --
Other software acquired 176 --
------- -------
7,115 6,526
Write-off - UK capitalized software development costs (1,114) --
Amortization of software development costs (2,201) (1,789)
Other adjustments 76 25
------- -------
End of period $ 3,876 $ 4,762
======= =======
</TABLE>
*Software acquired relates to the purchase of the contract management system.
See Note 6 of the Consolidated Financial Statements for further information.
For fiscal years 1996 and 1997, the Company capitalized 60.7% and 31.8%,
respectively, of software development costs.
6
<PAGE> 7
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses as a percentage of total revenues increased
from 34.8%, or $8.7 million in fiscal 1996, to 38.7%, or $8.5 million in fiscal
1997. The increase in selling and administrative expenses as a percentage of
total revenues resulted from sales decreasing at a faster rate than the decrease
in selling and administrative expenses, which includes a substantial fixed cost
component. The $0.2 million decrease is due to lower costs associated with the
support of both domestic and international operations offset in part by
increased sales and marketing expense.
OPERATING INCOME
CITATION incurred an operating loss of $0.4 million in fiscal 1997, excluding
the $4.3 million in restructuring costs and loss on the sale of the UK
operations. Operating income for fiscal 1996 was $3.6 million, excluding $1.4
million in office consolidation and relocation charges. The decline in operating
income is due to lower revenues only partially offset by lower cost of sales and
selling and administrative expenses. Including the above non-recurring charges,
the operating loss was $4.7 million in fiscal 1997 compared with operating
income of $2.2 million in fiscal 1996.
INCOME TAXES
The Company's effective income tax (benefit) rate was 39.0% in fiscal 1996
versus (38.0)% in fiscal 1997.
NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE
Net income (loss) decreased $4.7 million from $1.4 million net income in fiscal
1996 to $(3.3) million net loss in fiscal 1997 as a result of the factors noted
above. Basic and diluted earnings (loss) per share decreased from $.38 in fiscal
1996 to $(.87) in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash flows from operations and
borrowing under its line of credit with a bank. At March 31, 1998, the Company
had cash and cash equivalents of $0.4 million as compared to $0.5 million at
March 31, 1997.
The Company generated (used) cash from operations of $2.6 million, $(0.5)
million and $2.8 million in the fiscal years of 1998, 1997, and 1996,
respectively. For the year ended March 31, 1998, the Company generated $2.6
million in cash from operating activities, and used $1.4 in investing activities
(including $1.1 million for capitalized software development, and $0.3 million
for capital expenditures). Cash used by financing activities was $1.1 million,
which was primarily due to payments to reduce borrowings under the line of
credit and notes payable.
Cash decreased $1.6 million in fiscal 1997. The decrease was primarily due to
$3.2 million used in investing activities, including $1.8 million for
capitalized software and $0.8 million for the purchase of a contract management
system offset by cash provided by financing activities, primarily line of credit
borrowing.
7
<PAGE> 8
Cash decreased $0.5 million in fiscal 1996. The decrease was primarily due to
$3.0 million used in investing activities, including $2.6 million for
capitalized software offset by cash provided by operations.
As of March 31, 1998, the Company had a line of credit agreement with a bank.
The line of credit allows the Company to borrow up to $2.0 million through
February 1, 2000 with interest at the bank's prime rate (8.5% at March 31,
1998). The line of credit is secured by the Company's accounts receivable,
inventory, and general intangible assets. There were borrowings of $1.2 million
outstanding under the line of credit agreement as of March 31, 1998 ($0.8
million of additional borrowings are available), which have been classified as
long-term in the March 31, 1998 Consolidated Balance Sheet.
The Company has provided extended payment terms to an overseas customer in
Singapore for a maximum period of three years ending in fiscal 2000. The Company
believes that this receivable is fully collectible pursuant to such payment
terms. A foreign bank guarantee in the amount of $0.2 million has been received
by the Company and is expected to be applied against the long-term receivable
balance.
The Company's current commitments consist primarily of operating lease
obligations aggregating $3.1 million over the next six years. The operating
leases consist primarily of the Company's office lease in St. Louis, Missouri,
which expires in May 2004.
Cash proceeds from the sale of the financial software line of business, to be
received over a nine-month period from the date of sale, will be used for
funding the general operations of the Company.
The Company believes that its cash and cash equivalents, together with its
current borrowing facilities and cash generated from operations, will be
sufficient to fund its anticipated cash requirements for at least the next 12
months. The Company's ability to meet its cash requirements on a long term basis
will depend on profitable operations and consistent and timely collections of
its accounts receivable.
INFLATION AND CHANGING PRICES
The Company believes inflation has not had a material effect on the Company's
operations or its financial condition.
NEW ACCOUNTING STANDARDS
In March 1997, the Financial Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (FAS 128), which requires
public entities to present both basic and diluted earnings per share amounts on
the face of their financial statements, replacing the former calculations of
primary and fully diluted earnings per share. The Company adopted FAS 128
effective with the beginning of its fiscal 1998 third quarter.
In June 1997, the FASB issued FAS 130, "Reporting Comprehensive Income",
effective for fiscal years beginning after December 15, 1997. FAS 130
establishes standards for reporting and display of comprehensive income and
components in a financial statement that is displayed with the same prominence
as other financial statements. The Company continues to analyze FAS 130 and does
not currently expect it to have a significant impact on its financial statement
presentation.
8
<PAGE> 9
In June 1997, the FASB issued FAS 131, "Disclosures about Segments of an
Enterprise and Related Information", effective for periods beginning after
December 15, 1997. FAS 131 supersedes FAS 14, "Financial Reporting of Segments
of a Business Enterprise." FAS 131 establishes standards for the way public
business enterprises report financial and descriptive information about the
reportable operating segments in their financial statements. Generally,
financial information is required to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. The Company continues to evaluate the provisions of FAS
131 to determine the impact of the revised disclosure requirements on its 1999
financial statements.
During fiscal 1998, the AICPA issued Statement of Position 97-2, "Software
Revenue Recognition" (SOP 97-2). SOP 97-2 is effective for transactions entered
into in fiscal years beginning after December 15, 1998. SOP 97-2 provides
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions. This SOP supersedes SOP 91-1, "Software
Revenue Recognition." SOP 97-2 is not expected to materially impact the
financial statements or results of operations of the Company.
YEAR 2000
The Company is addressing the issues associated with the Year 2000. The Company
is utilizing resources to identify, correct, reprogram and test both its systems
used internally as well as the products it sells for Year 2000 compliance. It is
anticipated that all reprogramming efforts will be completed during fiscal 1999.
The Company estimates the remaining costs of the reprogramming will not be
material. However, there are numerous uncertainties relating to addressing Year
2000 issues, some of which may be beyond the Company's control, and all of which
may cause results to be different than currently anticipated by the Company.
STRATEGIC ALTERNATIVES
In January 1998 the Company received an unsolicited expression of interest in
the Company and engaged an investment banker to evaluate this expression of
interest and explore other strategic alternatives. The Company continues to
evaluate strategic opportunities including a proposed merger with a French
company as described in a preceding section and in the Notes to the Consolidated
Financial Statements.
FORWARD LOOKING STATEMENTS
Certain of the statements made herein are "FORWARD LOOKING STATEMENTS," as such
term is used in Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. 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. The
Company cautions readers that actual results could be materially different as a
result of various possibilities and differences between anticipated and actual
developments.
For further discussion of risk factors, please refer to page 9 of the Company's
Form 10-KSB Annual Report for the fiscal year end 1998 as filed with the
Securities and Exchange Commission.
9
<PAGE> 1
EXHIBIT 13(b)
Consolidated Balance Sheet
(Thousands except for share and per share data)
<TABLE>
<CAPTION>
March 31,
1998 1997
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 420 $ 511
Accounts receivable:
Trade, net of allowance for doubtful accounts of $205 and
$162, respectively 6,351 7,334
Other 87 40
Inventories (Note 9) 436 417
Prepaid expenses and other current assets 216 521
Income taxes receivable (Note 11) 80 1,177
Deferred tax assets (Note 11) 136 139
-------- --------
Total current assets 7,726 10,139
-------- --------
Software development costs, net of accumulated amortization of
$10,717 and $8,632 respectively (Note 1) 2,880 3,876
-------- --------
Property and equipment:
Furniture and fixtures 843 975
Hardware and shop equipment 2,750 2,990
Leasehold improvements 109 217
Vehicles 37 37
-------- --------
3,739 4,219
Less - accumulated depreciation and amortization (2,821) (2,989)
-------- --------
Net property and equipment 918 1,230
-------- --------
Long-term deferred tax assets (Note 11) 876 --
Long-term accounts receivable (Note 7) 1,657 1,657
Other assets 255 436
-------- --------
Total assets $ 14,312 $ 17,338
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
10
<PAGE> 2
Consolidated Balance Sheet - continued
(Thousands except for share and per share data)
<TABLE>
<CAPTION>
March 31,
1998 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Current portion of long-term debt (note 10) $ 238 $ 365
Accounts payable 1,113 1,351
Customer deposits 413 335
Accrued commissions 116 121
Other accrued liabilities 528 529
Deferred service revenue 2,378 2,286
------- -------
Total current liabilities 4,786 4,987
Long-term debt (Note 10) 1,379 2,401
Deferred tax liability (Note 11) -- 141
------- -------
6,165 7,529
------- -------
Commitments and contingencies (Notes 6, 7, 8, 14 and 15)
Shareholders' Equity (Notes 1 and 12):
Preferred stock; par value $.01 per share; 5,000,000 shares
authorized; no shares issued and outstanding
Common stock; par value $.10 per share; 10,000,000 shares
authorized; 3,810,548 and 3,802,041 shares issued and
outstanding, respectively 381 380
Paid-in capital 6,513 6,449
Retained earnings 1,253 2,906
Equity adjustment from foreign currency translation -- 74
------- -------
8,147 9,809
------- -------
Total liabilities and shareholders' equity $14,312 $17,338
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
11
<PAGE> 3
Consolidated Statement of Operations
(Thousands except per share amounts)
<TABLE>
<CAPTION>
Year Ended March 31,
1998 1997 1996
<S> <C> <C> <C>
Net system sales and service revenue:
System sales $ 8,214 $ 12,972 $ 16,216
Service revenue 8,426 9,033 8,835
-------- -------- --------
16,640 22,005 25,051
-------- -------- --------
Cost of products and services sold:
System sales 6,252 8,337 8,532
Service revenue 2,048 2,313 2,538
-------- -------- --------
8,300 10,650 11,070
-------- -------- --------
Gross profit 8,340 11,355 13,981
Research and development expense 3,199 3,268 1,672
Selling and administrative expenses 6,686 8,515 8,711
Restructuring costs and other non-recurring charges (Notes 2
and 3) 832 4,299 --
Office consolidation and relocation expense (Note 4) -- -- 1,380
-------- -------- --------
Operating income (loss) (2,377) (4,727) 2,218
-------- -------- --------
Other income (expense):
Interest income 78 143 144
Interest expense (168) (150) (68)
Other non-operating expenses (Note 2) (158) -- --
Secondary offering expense (Note 5) -- (542) --
Other, net (42) (4) 19
-------- -------- --------
(290) (553) 95
-------- -------- --------
Income (loss) before income taxes (2,667) (5,280) 2,313
Provision (benefit) for income taxes (Note 11) (1,014) (2,006) 901
-------- -------- --------
Net income (loss) $ (1,653) $ (3,274) $ 1,412
======== ======== ========
Earnings per common and common equivalent share (Note 1):
Basic and diluted:
Earnings (loss) per share $ (0.43) $ (0.87) $ 0.38
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
12
<PAGE> 4
Consolidated Statement of Shareholders' Equity
(Thousands)
<TABLE>
<CAPTION>
EQUITY
ADJUSTMENT
COMMON STOCK FROM FOREIGN
PAR PAID-IN RETAINED CURRENCY
VALUE CAPITAL EARNINGS TRANSLATION TOTAL
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1995 $ 371 $ 5,965 $ 4,768 $ 136 $ 11,240
Sale of common stock
pursuant to exercise of
stock options and warrants 3 133 -- -- 136
Issuance of common stock
to Directors 1 30 -- -- 31
Foreign currency translation
adjustment -- -- -- (205) (205)
Net income -- -- 1,412 -- 1,412
-------- -------- -------- -------- --------
Balance, March 31, 1996 375 6,128 6,180 (69) 12,614
Sale of common stock pursuant
To exercise of stock options
and warrants 3 240 -- -- 243
Issuance of common stock
to Directors 1 23 -- -- 24
Issuance of common stock for
401K company matching
contributions 1 58 -- -- 59
Foreign currency translation
adjustment -- -- -- 143 143
Net loss -- -- (3,274) -- (3,274)
-------- -------- -------- -------- --------
Balance, March 31, 1997 380 6,449 2,906 74 9,809
Sale of common stock
pursuant to exercise of
stock options and warrants -- 2 -- -- 2
Issuance of common stock
to Directors -- 12 -- -- 12
Insurance of common stock
for 401K company-matching
contributions 1 50 -- -- 51
Foreign current translation
adjustment -- -- -- (74) (74)
Net loss -- -- (1,653) -- (1,653)
-------- -------- -------- -------- --------
Balance, March 31, 1998 $ 381 $ 6,513 $ 1,253 $ -- $ 8,147
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
13
<PAGE> 5
Consolidated Statement of Cash Flows
(Thousands)
<TABLE>
<CAPTION>
Year Ended March 31,
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,653) $(3,274) $ 1,412
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities, excluding the effects
of the sale of UK operations:
Depreciation and amortization of property and equipment 657 932 921
Amortization of software development costs 2,085 2,201 1,789
Amortization of other assets 181 107 83
Non-cash restructuring costs and other non-recurring
charges 943 4,299 90
Non-cash 401K matching contribution 51 59 --
Non-cash issuance of common stock to Directors 12 24 31
Decrease (increase) in accounts receivable, net 64 1,295 (4,018)
Decrease (increase) in inventories (19) 120 (3)
Decrease in prepaid expenses and other assets 234 390 150
Increase in long-term accounts receivable -- (1,657) --
Decrease in accounts payable (238) (53) (459)
Increase (decrease) in customer deposits 78 (207) 22
Increase (decrease) in other accrued liabilities (6) (1,928) 1,328
Increase (decrease) in deferred service revenues 92 (31) (284)
Increase (decrease) in current income taxes
receivable/payable 1,097 (1,466) 1,209
Increase (decrease) in deferred income taxes (1,014) (1,333) 498
------- ------- -------
Net cash provided (used) by operating activities $ 2,564 $ (522) $ 2,769
------- ------- -------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
14
<PAGE> 6
Consolidated Statement of Cash Flows - continued
(Thousands)
<TABLE>
<CAPTION>
Year ended March 31,
1998 1997 1996
<S> <C> <C> <C>
Cash flows from investing activities:
Capital expenditures $ (345) $ (653) $ (430)
Software development costs (1,089) (1,777) (2,609)
Proceeds from sale of property and equipment -- -- 55
Purchase of contract management system (Note 6) -- (792) --
------- ------- -------
Net cash used in investing activities (1,434) (3,222) (2,984)
------- ------- -------
Cash flows from financing activities:
Principal payments on long-term debt (1,149) (244) (362)
Proceeds from long-term debt -- 1,967 202
Proceeds from sale of common stock pursuant
to exercise of stock options and warrants 2 243 136
------- ------- -------
Net cash provided (used) by financing activities (1,147) 1,966 (24)
------- ------- -------
Effect of exchange rate changes on cash (74) 143 (249)
------- ------- -------
Net decrease in cash and cash equivalents (91) (1,635) (488)
Cash and cash equivalents, beginning of year 511 2,146 2,634
------- ------- -------
Cash and cash equivalents, end of year $ 420 $ 511 $ 2,146
======= ======= =======
</TABLE>
Supplemental schedule of non-cash investing and financing activities
During the year ended March 31, 1996, the Company issued $93 in long-term
debt in conjunction with the purchase of property and equipment. For the
years ended March 31, 1998, 1997 and 1996, the Company paid interest of $168,
$150 and $87, respectively, and paid (received refunds of) income taxes of
$(646), $(793) and $806, respectively.
The accompanying notes are an integral part of the consolidated financial
statements.
15
<PAGE> 7
Notes to Consolidated Financial Statements
(Thousands except shares and per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The policies utilized by CITATION Computer Systems, Inc. ("the Company") in the
preparation of the consolidated financial statements conform to generally
accepted accounting principles, and require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual amounts could differ from these
estimates.
The significant accounting policies followed by the Company are described below:
OPERATIONS
CITATION designs, develops, markets and supports clinical information systems
for hospitals, clinics, physicians' groups and emerging Integrated Delivery
Networks ("IDN's"). The Company offers a comprehensive suite of products
designed using open client/server architecture that meets a broad range of the
information systems needs of the healthcare industry.
INVENTORIES
Inventories are valued at the lower of cost, determined on the first in, first
out basis, or market.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Major renewals and betterments are
capitalized while maintenance and repairs are expensed currently. When property
is sold or otherwise disposed of, the related cost and accumulated depreciation
are removed from the respective accounts, and any gain or loss on disposition is
credited or charged to income.
The Company provides for depreciation of property and equipment by charging
against earnings amounts sufficient to amortize the cost of the properties over
the estimated useful lives generally using straight line methods.
The estimated useful life of the assets are as follows:
Vehicles, furniture, fixtures and equipment ...... 3 to 10 years
Leasehold improvements ....... Remaining life of the lease
REVENUE RECOGNITION
Revenue from the sale of computer systems is recognized upon shipment to the
customer providing that no significant vendor obligations remain and collection
of the related receivable is deemed probable. Revenue related to the
installation of computer systems is recognized as the work is performed. Costs
and expenses related to installation of the computer equipment and software
system, training customer personnel, and provision for warranties offered are
estimated and recorded as cost of sales when the related revenue is recognized.
Revenue from the sale of additional hardware and additional software is
recognized upon shipment. Costs and expenses associated with the sale of
additional hardware and software are recorded when the related revenue is
recognized. Revenue related to sales of product warranties and maintenance
service
16
<PAGE> 8
contracts is recognized ratably over the term of the contract period. Sales
returns are treated as reductions to net system sales and service revenues.
COST OF SALES
For purposes of estimating the cost of sales related to service revenue, the
Company includes all of its customer service expenses plus an allocation of
certain other overhead expenses based upon estimates made by management.
SOFTWARE DEVELOPMENT COSTS
Certain costs incurred in developing software products are capitalized and
amortized on a product-by-product basis using the greater of the ratio that
current gross revenues for a product bear to the current and anticipated future
gross revenues for that product or the straight-line method over the estimated
three to five year economic life of the products. The costs consist of salaries,
computer expenses and other overhead costs directly related to the development
and/or major enhancement of software products. Such costs are capitalized, to
the extent they are recoverable through future sales, from the time the
product's technological feasibility is established up to its general release to
customers. Costs incurred before or after this period are expensed as incurred.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes. Under
the liability method, deferred income taxes are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Such temporary differences result primarily
from using different methods to accrue certain expenses and to calculate
capitalization of software development costs for financial and tax reporting
purposes. Deferred tax expense represents the change in the deferred tax asset
or liability.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
In March 1997, the Financial Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (FAS 128), which requires
public entities to present both basic and diluted earnings per share amounts on
the face of their financial statements, replacing the former calculations of
primary and fully diluted earnings per share. The Company adopted FAS 128
effective with the beginning of its fiscal 1998 third quarter, and retroactively
restated all prior year's earnings per share information.
Reconciliation of the number of shares used in computing basic and dilutive
earnings (loss) per common and common equivalent share is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1998 1997 1996
<S> <C> <C> <C>
Basic 3,806,536 3,773,020 3,726,893
Effect of dilutive securities - stock options -- -- 23,755
--------- --------- ---------
Diluted 3,806,536 3,773,020 3,750,648
========= ========= =========
</TABLE>
17
<PAGE> 9
FOREIGN CURRENCY TRANSLATION
The asset and liability accounts of the Company's former foreign division were
translated at the year-end exchange rate. Revenue and expense amounts were
translated at monthly average exchange rates. The resulting translation
adjustment was recorded as a separate component of shareholders' equity. Foreign
currency transaction gains and losses were included in earnings when incurred.
Such foreign currency transaction gains and losses were not material for each of
the three years in the period ended March 31, 1998. As discussed in Note 3
below, the Company no longer has any significant foreign operations.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly-liquid investments, such as
money-market accounts and short-term discount notes, with an original maturity
of three months or less.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
DIRECTORS' FEES
During the year ended March 31, 1995, the Company adopted the Directors Common
Share Plan (Directors' Plan) whereby certain non-employee members of the Board
of Directors (Directors) may receive all or a portion of the Directors' fees in
the form of Company common stock in lieu of cash. During the years ended March
31, 1998, 1997 and 1996, 1,600, 1,793 and 4,959 shares of common stock valued at
$12, $24 and $31, respectively, were issued to such Directors under the
Directors Plan.
2. RESTRUCTURING COSTS AND OTHER NON-RECURRING CHARGES
During the fourth quarter of fiscal 1998, the Company recorded non-recurring,
pretax charges of $832 for restructuring costs primarily related to customer
service matters and $158 for non-operating costs related to the strategic review
of alternatives following an unsolicited expression of interest in the Company
(see Notes 17 and 20). Cash payments during fiscal 1998 with respect to such
charges were approximately $60. Remaining additional payments totaling
approximately $62 will be paid in Fiscal 1999.
3. UK RESTRUCTURING AND SALE OF OPERATIONS
During the second, third and fourth quarters of fiscal 1997 the Company recorded
pretax charges of $1,303, $164 and $118, respectively, to cover the
restructuring of its operations in the United Kingdom ("UK"). In March 1997, the
Company completed a transaction in which it sold its UK operations to Health
Systems Limited ("HSL"), which also became CITATION's exclusive distributor for
its clinical software products in the UK. Under the terms of the transaction,
HSL acquired CITATION's UK operating assets, retained a majority of the
Company's employees in the UK, and assumed responsibility for CITATION's
existing customers and contracted commitments in the UK. The major components of
the UK restructuring and sale, and its effect on the pretax and after tax
results of the Company, are as follows:
<TABLE>
<CAPTION>
Pretax After Tax Per Share
------ --------- ---------
<S> <C> <C> <C>
Net loss on sale of UK assets (including
write-off of capitalized software of $527) $2,714 $1,655 $0.44
Write-off of capitalized software 587 358 0.09
Severance and closure costs 300 183 0.05
Other restructuring costs 698 426 0.11
------ ------ -----
$4,299 $2,622 $0.69
====== ====== =====
</TABLE>
18
<PAGE> 10
All expenses associated with the UK restructuring and sale of operations were
recorded during the fiscal year ended March 31, 1997, and no material costs were
incurred in fiscal 1998 or are expected in the future. Cash payments during
fiscal 1997 related to the UK restructuring and sale of operations were
approximately $550. Remaining additional payments totaling approximately $400
were paid in fiscal 1998.
4. OFFICE CONSOLIDATION AND RELOCATION
In June 1995, the Company decided to consolidate the operations of its Madison,
Wisconsin facility into its St. Louis, Missouri headquarters. Charges of $1,000,
$58 and $322 were recorded in the first, third and fourth quarters,
respectively, of the fiscal year ended March 31, 1996 to provide for the costs
of the consolidation of facilities, settlement of related employee claims and
the relocation of certain employees and equipment.
The major components of the combined charges are as follows:
<TABLE>
<S> <C>
Lease buyout and asset write-off, net $ 680
Employee severance and related costs 171
Employee arbitration settlement and related costs 208
Employee relocation 112
Office move and other related expenses 209
------
$1,380
======
</TABLE>
All expenses associated with the office consolidation and relocation have been
paid as of March 31, 1997, and no additional material costs were incurred. With
the exception of the asset write-offs totaling approximately $90, all costs
resulted in cash payments.
5. SECONDARY OFFERING EXPENSE
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 to be offered for the account of
certain current shareholders and 2,000,000 shares were to be offered by the
Company. The proposed offering was terminated on October 8, 1996 and no sales of
common stock were made pursuant thereto. During the year ended March 31, 1997,
$542 of non-operating charges related to the secondary offering were recorded.
6. ACQUIRED CONTRACT MANAGEMENT SYSTEM
On August 26, 1996, the Company acquired a contract management system from
Computer Systems Excellence, Inc. ("CSE") for $1,242, including $92 of
transaction costs. The Company paid $700 at closing and recorded a liability of
$450 to be paid in eight quarterly installments. Acquired software development
in the amount of $652 was capitalized at the date of acquisition.
7. LONG-TERM ACCOUNTS RECEIVABLE
The Company has provided extended payment terms to an overseas customer in
Singapore for a maximum period of three years ending in fiscal 2000. The Company
believes that this receivable is fully collectible pursuant to such payment
terms. A foreign bank guarantee in the amount of $0.2 million has been received
by the Company and is expected to be applied against a portion of this long-term
accounts receivable balance.
8. CONCENTRATION OF CREDIT RISK
The Company generates revenue primarily through sales to the healthcare industry
located throughout the United States. Due to this concentration, substantially
all receivables at March 31, 1998 and 1997 are from healthcare institutions in
the United States, and a healthcare information systems integrator
19
<PAGE> 11
based in Singapore, which may be similarly affected by changes in economic,
regulatory or other conditions.
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral. The Company maintains reserves for potential credit
losses and historically such losses have been within management's expectations.
9. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31,
1998 1997
<S> <C> <C>
Software systems $ 195 $ 193
Field service equipment 241 224
------ ------
$ 436 $ 417
====== ======
</TABLE>
10. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31,
1998 1997
<S> <C> <C>
Bank notes payable due through March, 2000;
Interest payable at prime (8.5% at March 31, 1998) $ 338 $ 461
Note payable to CSE due through August, 1998 112 338
Borrowings under bank line of credit, interest
payable at prime (8.5% at March 31, 1998) 1,167 1,967
------ ------
Total debt 1,617 2,766
Less - current portion 238 365
------ ------
Total long-term debt $1,379 $2,401
====== ======
</TABLE>
The line of credit with a bank allows the Company to borrow up to $2,000 through
February 1, 2000. At March 31, 1998, $833 was available under the line of
credit.
The line of credit and the notes payable to banks are secured by the Company's
accounts receivable, inventory, equipment, and general intangible assets. The
respective agreements require that certain minimum net worth and leverage ratio
requirements be maintained by the Company. The Company was in compliance with
these requirements or has obtained appropriate waivers at March 31, 1998.
The aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year ended
March 31,
<S> <C>
1999 $ 238
2000 1,300
2001 79
-------
$ 1,617
=======
</TABLE>
20
<PAGE> 12
11. INCOME TAXES
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
Year ended March 31,
1998 1997 1996
<S> <C> <C> <C>
Current:
Federal $ -- $ (577) $ 341
State -- (96) 62
------- ------- -------
-- (673) 403
======= ======= =======
Deferred:
Federal (857) (1,118) 418
State (157) (215) 80
------- ------- -------
(1,014) (1,333) 498
------- ------- -------
$(1,014) $(2,006) $ 901
======= ======= =======
</TABLE>
The provision (benefit) for income taxes differs from the amount computed using
the statutory federal income tax rate (34%) as follows:
<TABLE>
<CAPTION>
Year ended March 31,
1998 1997 1996
<S> <C> <C> <C>
Income tax provision (benefit) at the statutory rate $ (907) $(1,795) $ 787
Increases (decreases):
State income taxes, net (103) (204) 94
Other, net (4) (7) 20
------- ------- -------
$(1,014) $(2,006) $ 901
======= ======= =======
</TABLE>
Deferred tax assets and liabilities at March 31, 1998 and 1997, are comprised of
the following temporary differences:
<TABLE>
<CAPTION>
March 31,
1998 1997
<S> <C> <C>
Current deferred tax asset:
Accrued liabilities $ 68 $ 69
Allowance for doubtful accounts 82 65
Other, net (14) 5
------- -------
Total current deferred tax asset $ 136 $ 139
======= =======
</TABLE>
<TABLE>
<CAPTION>
March 31,
1998 1997
<S> <C> <C>
Long-term deferred tax asset (liability):
Capitalized software development
Costs $ (829) $(1,232)
Depreciation (9) (3)
State taxes (40) 23
Tax credit carry forward 90 90
Net operating loss carry forward 1,664 981
------- -------
Total deferred tax asset (liability) $ 876 $ (141)
======= =======
</TABLE>
21
<PAGE> 13
At March 31, 1998, the Company had a domestic net operating loss carryforwards
of approximately $4,001 which expires between 2012 and 2013. Company management
has determined that based on expected future operating plans and tax planning
strategies available to the Company, the net operating loss carryforwards at
March 31, 1998 will be utilized to offset future taxes. Therefore, no valuation
allowance related to the net operating loss carryforwards has been recorded at
March 31, 1998.
12. STOCK OPTIONS AND WARRANTS
On April 20, 1992, the Board of Directors and shareholders approved the adoption
of the 1992 Employee Incentive Stock Option Plan which provides for the issuance
of up to 148,347 stock options to executive officers or other key employees of
the Company.
On October 13, 1993, the Board of Directors adopted an amendment to the 1992
Employee Incentive Stock Option Plan which increased the number of stock options
available for issuance to executive officers or other key employees of the
Company by 200,000.
The Company's incentive stock option plan allows participation, with certain
restrictions, by all full-time employees with one year of service. Options
granted allow employees to purchase shares of the Company's common stock at
prices not less than the fair market value of the stock at the date of the
grant. Options which have been granted under the plan are exercisable during the
employment of the grantee at specified time intervals.
Outstanding options expire between 2004 and 2008.
Stock option transactions (number of shares) are summarized below:
<TABLE>
<CAPTION>
Year ended March 31,
1998 1997 1996
<S> <C> <C> <C>
Shares under option,
beginning of period 300,333 299,497 255,292
Stock options granted at an exercise price
of $4.50 -- -- 56,500
Stock options granted at an exercise price
of $11.00 -- 8,000 --
Stock options granted at an exercise price
of $15.75 -- 2,000 --
Stock options granted at an exercise price
of $7.00 7,000 -- --
Stock options forfeited (1,500) (41,664) (131,164)
Non-qualified stock options granted at
an exercise price of $5.00 -- -- 150,000
Non-qualified stock options granted at
an exercise price of $14.25 -- 80,000 --
Non-qualified stock options granted at
an exercise price of $7.24 to $9.125 41,000 -- --
Stock options exercised at $1.04 to $8.51 -- -- (31,131)
Stock options exercised at $4.50 to $8.51 -- (47,500) --
Stock options exercised at $4.50 (500) -- --
-------- -------- --------
Shares under option, end of period 346,333 300,333 299,497
======== ======== ========
</TABLE>
22
<PAGE> 14
The following table summarizes information for options currently outstanding at
March 31, 1998:
<TABLE>
<CAPTION>
Weighted Average
Exercise Number Remaining
Price Outstanding Contractual Life
--------------- ----------- ----------------
<S> <C> <C>
$4.50 - $5.00 172,000 7 years
6.13 - 6.88 24,000 10
7.00 - 7.24 48,333 8
8.88 - 9.13 12,000 10
11.00 8,000 9
14.25 80,000 8
15.75 2,000 8
-------
346,333
=======
</TABLE>
The Company accounts for employee stock options in accordance with Accounting
Principles Board No. 25 "Accounting for Stock Issued to Employees" (APB 25).
Under APB 25, the "intrinsic value based method" specifies that no compensation
expense is recognized if employee stock options are granted with an exercise
price equal to or higher than the market value of the stock price on the date of
the grant.
At March 31, 1998, 293,333 options outstanding were exercisable. During the
years ended March 31, 1999, 2000 and 2001, an additional 18,560, 18,570 and
15,870, respectively, options outstanding will become exercisable. Options of
228,181 shares were available for grant under the 1992 Employee Incentive Stock
Option Plan at March 31, 1998.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
(FAS 123), that was effective for the Company during fiscal 1998. FAS 123
prescribes the recognition of compensation expense based on the fair value of
options or stock awards determined on the date of the grant. However, FAS 123
allows companies to continue to apply the "intrinsic value based method" set
forth in APB 25 for employee stock option grants. Had compensation costs for the
Company's employee stock option plan been determined based on the fair value of
the options on the grant dates consistent with the methodology prescribed by FAS
123, the Company's net loss and net loss per share would have increased as shown
below. In accordance with the adoption methodology prescribed by FAS 123, the
pro forma results shown below reflect only the impact of employee stock options
granted during the years ended March 31, 1998, 1997 and 1996. Because future
employee stock options may be granted, the pro forma impact for fiscal 1998 and
fiscal 1997 is not necessarily indicative of the impact in future years.
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Net loss
As reported $ (1,653) $ (3,274)
Pro forma (1,771) (3,741)
Loss per share
As reported $ (0.43) $ (0.87)
Pro forma (0.47) (0.99)
</TABLE>
23
<PAGE> 15
The fair value of the options granted is estimated on the date of grant using
the Black-Scholes multiple option-pricing model with the following weighted
average assumptions:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Risk-free interest rate 5.8% - 6.6% 6.3%- 6.5%
Expected volatility 63% 64%
Estimated lives of options (in years) 5.0 5.0
Expected dividend yield 0% 0%
</TABLE>
The weighted average fair value of options granted during the fiscal years ended
March 31, 1998 and 1997 was $3.95 and $8.45, respectively.
13. PROFIT AND SAVINGS INCENTIVE PLANS
CITATION maintains a Retirement Savings Plan for the benefit of substantially
all CITATION employees. Employee contributions may range from 1% to 15% of
compensation, subject to limits prescribed by the Internal Revenue Code, and
CITATION matches a discretionary percentage of an employee's contribution. The
match will be based on the employee's contribution up to 6% of the employee's
compensation.
For the plan year ended December 31, 1997 and 1996, the matching contribution
was 25% of such contributions, and was paid in the form of Company stock. It is
the Company's current intention to continue to make the matching contribution in
the form of Company stock. Employees are immediately 100% vested as to employee
contributions and are vested as to employer contributions at the rate of 20% per
year, beginning in the second year of service.
For the years ended March 31, 1998, 1997 and 1996, the Company recorded expense
of approximately $51, $59, and $66, respectively, relating to this plan.
14. LEASES
The Company leases its office and warehouse facilities and certain office
equipment. The lease terms are generally for two to ten years. Rental expense
under operating leases for the years ended March 31, 1998, 1997 and 1996, was
approximately $551, $524, and $685, respectively.
Future minimum lease payments under non-cancelable operating leases are as
follows:
<TABLE>
<CAPTION>
Year ended March 31,
<S> <C>
1999 $ 546
2000 523
2001 476
2002 476
2003 476
Thereafter 595
--------
$ 3,092
========
</TABLE>
15. COMMITMENTS AND CONTINGENCIES
The Company from time to time is a party to certain lawsuits in the ordinary
course of business. Management does not expect the outcome of any litigation to
have a material adverse effect on the Company's financial position, results of
operations, or cash flows. As of the date hereof, the Company is aware of one
pending lawsuit.
24
<PAGE> 16
16. RELATED PARTY TRANSACTIONS
During the years ended March 31, 1997 and 1996, the Company paid approximately
$181 and $113, respectively, in fees to consulting firms, certain executives of
which were Directors of the Company. No such payments were made in the year
ended March 31, 1998.
17. STRATEGIC ALTERNATIVES
In January 1998 the Company received an unsolicited expression of interest in
the Company and engaged an investment banker to evaluate this expression of
interest and explore other strategic alternatives. The Company continues to
evaluate strategic opportunities. See Note 20.
18. SEGMENT INFORMATION
Worldwide operations data, as required by Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business Enterprise,"
are listed below. Profitability of the Company's operations by location was
determined based on ultimate sales to unaffiliated customers. Total Company
profit was included in the location of the entity transacting the final sale.
<TABLE>
<CAPTION>
Net revenues, Earnings
unaffiliated (loss) from Identifiable
customers Operations assets
<S> <C> <C> <C>
For years ended March 31,
1998
United States $ 16,640 $ (1,653) $ 14,312
======== ======== ========
1997
United States $ 21,097 $ (21) $ 17,636
United Kingdom 908 (4,706) --
-------- -------- --------
$ 22,005 $ (4,727) $ 17,636
======== ======== ========
1996
United States $ 21,983 $ 2,849 $ 16,749
United Kingdom 3,068 (631) 4,508
-------- -------- --------
$ 25,051 $ 2,218 $ 21,257
======== ======== ========
</TABLE>
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Earnings (loss)
Net sales Gross Profit Net income (loss) per share(3)
1998 1997 1998 1997 1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1st quarter $ 4,282 $ 6,662 $ 2,115 $ 3,942 $ (152) $ 650 $(.04) $ .16
2nd quarter 4,273 6,348 2,346 3,591 37 (399)(1) .01 (.11)(1)
3rd quarter 4,305 4,038 2,210 1,475 (127) (1,629)(1) (.03) (.43)(1)
4th quarter 3,780 4,957 1,669 2,347 (1,411)(2) (1,896)(1) (.37)(2) (.50)(1)
------- ------- ------- ------- ------- ------- ----- -----
Total $16,640 $22,005 $ 8,340 $11,355 $(1,653)(2) $(3,274) $(.43)(2) $(.87)(3)
======= ======= ======= ======= ======= ======= ===== =====
</TABLE>
(1) See Notes 3 and 5 regarding restructuring and sale of UK operations and
proposed secondary offering costs in the second, third and fourth quarters
of the fiscal year ended March 31, 1997.
(2) See Note 2 regarding restructuring costs and other non-recurring charges
and other non-operating expenses in the fourth quarter of fiscal 1998.
(3) The annual earnings per share amount does not agree to the sum of the
quarters as a result of changes in the market prices of the Company's
common stock and the application of the treasury stock method.
25
<PAGE> 17
20. SUBSEQUENT EVENTS
In June 1998, the Company announced that it sold the financial software line of
business, including its accounts receivable, patient billing, general ledger,
accounts payable, fixed assets, inventory control, medical records abstracting
and registration software modules to a private entity doing business as Sterling
Systems based in Downey, Idaho. This business accounted for approximately $1.0
million of revenue and contributed a pretax loss of $0.2 million in fiscal 1998.
Net assets associated with this line of business, which are primarily comprised
of capitalized software, approximated $1.1 million at March 31, 1998. The cash
transaction will result in a slight after-tax loss on disposal in the first
quarter of fiscal 1999.
Also in June 1998, the Company announced it is in discussions about a possible
business combination with MEDASYS Digital Systems, a French Company with U.S.
offices in Miami and Chicago. MEDASYS is a leading provider of medical imaging
systems in Europe, is listed on the Second Market of the Paris Bourse and
reported revenues of $23.3 million in calendar 1997. Any transaction is subject
to performance of due diligence and negotiations of a definitive agreement. The
Company anticipates that these negotiations and the resultant transaction, if
any, would be completed by the end of the year.
26
<PAGE> 18
Statement of Management's Responsibility For Financial Reporting
The accompanying consolidated financial statements of CITATION Computer Systems,
Inc. have been prepared by management, which is responsible for their integrity
and objectivity. The statements have been prepared in conformity with generally
accepted accounting principles and include amounts based on management's best
estimates and judgments. Financial information elsewhere in this Annual Report
is consistent with that in the consolidated financial statements.
Management has established and maintains a system of internal controls designed
to provide reasonable assurance that assets are safeguarded and that the
financial records reflect the authorized transactions of the Company. The system
of internal control includes widely communicated statements of policies and
business practices that are designed to require all employees to maintain high
ethical standards in the conduct of Company affairs. The internal controls are
augmented by organizational arrangements that provide for appropriate delegation
of authority and division of responsibility.
The consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, independent accountants. As part of their audit of
the Company's fiscal 1998 consolidated financial statements,
PricewaterhouseCoopers LLP considered the Company's system of internal control
to the extent they deemed necessary to determine the nature, timing and extent
of their audit tests.
The Board of Directors pursues its responsibility for the Company's financial
reporting through its Audit Committee, which is composed of outside Directors.
The Audit Committee meets periodically with the independent accountants, with or
without the presence of management representatives, to discuss the results of
their work and their comments on the adequacy of internal accounting controls
and the quality of financial reporting.
J. Robert Copper Richard D. Neece John P. Gilmore
Chairman and President Vice President and
Chief Executive Officer Controller
Report of Independent Accountants
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF CITATION COMPUTER SYSTEMS, INC.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the consolidated financial position of
CITATION Computer Systems, Inc. and its subsidiaries at March 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended March 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
St. Louis, Missouri
May 11, 1998, except for Note 20 which is as of June 24, 1998
27
<PAGE> 1
EXHIBIT 21(a)
Subsidiaries of Registrant
Health Micro Data Systems, Inc.
CITATION Professional Services, Inc.
Both subsidiaries are wholly-owned by Registrant.
<PAGE> 1
Exhibit 23(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (no.33-85558; No. 333-57379) of CITATION Computer
Systems, Inc. of our report dated May 11, 1998, except for Note 20 which is as
of June 24, 1998, which appears on page 27 of the Financial Information Insert
to the 1998 Annual Report to Shareholders of CITATION Computer Systems, Inc.,
which is incorporated by reference in this Annual Report on Form 10-KSB for the
year ended March 31, 1998. We also consent to the incorporation by reference of
our report on the Financial Statement Schedule, which appears in Exhibit 23(b)
to this Form 10-KSB.
PricewaterhouseCoopers LLP
St. Louis, Missouri
July 10, 1998
<PAGE> 1
Exhibit 23(b)
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
CITATION Computer Systems, Inc.
Our audits of the consolidated financial statements referred to in our report
dated May 11, 1998, except for Note 20 which is as of June 24, 1998, appearing
on page 27 of the Financial Information Insert to the 1998 Annual Report to
Shareholders of CITATION Computer Systems, Inc. (which report and consolidated
financial statements are incorporated by reference in this Annual Report on Form
10-KSB) also included an audit of the Financial Statement Schedule included in
this Form 10-KSB. In our opinion, this Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
St. Louis, Missouri
May 11, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 420
<SECURITIES> 0
<RECEIVABLES> 6,643
<ALLOWANCES> 205
<INVENTORY> 436
<CURRENT-ASSETS> 7,726
<PP&E> 3,739
<DEPRECIATION> 2,821
<TOTAL-ASSETS> 14,312
<CURRENT-LIABILITIES> 4,786
<BONDS> 0
0
0
<COMMON> 381
<OTHER-SE> 7,766
<TOTAL-LIABILITY-AND-EQUITY> 14,312
<SALES> 8,214
<TOTAL-REVENUES> 16,640
<CGS> 1,721
<TOTAL-COSTS> 8,300
<OTHER-EXPENSES> 10,717
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 168
<INCOME-PRETAX> (2,667)
<INCOME-TAX> (1,014)
<INCOME-CONTINUING> (1,653)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,653)
<EPS-PRIMARY> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
