<PAGE> 1
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 0-20284
CITATION COMPUTER SYSTEMS, INC.
(Exact name of company as specified in its charter)
MISSOURI 43-1174397
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
424 SOUTH WOODS MILL ROAD, CHESTERFIELD, MISSOURI 63017
(Address of principal executive offices) (Zip Code)
(314) 579-7900
-----------------------------------------------
(Company's telephone number, including area code)
[ ] Indicate by check mark whether the company (1) has filed all reports
required to be filled by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the company's Common Stock, par value $0.10
per share, at August 8, 1998, was 3,813,773 shares.
Exhibit Index on Page 14 Page 1 of 14
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
See pages F-1 to F-7 hereof.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998, TO THREE MONTHS ENDED JUNE 30,
1997
GENERAL. The Company reported a net loss of $0.03 per share, or $129.8
thousand, for the first quarter of fiscal 1999, compared with net loss of $0.04
per share, or $152.8 thousand in the comparable period of fiscal 1998. Net loss
from ongoing operations for the first quarter of fiscal 1999, excluding the loss
on the sale of the financial systems business was $86.1 thousand or $0.02 per
share. The increase in profitability from the prior year's loss was principally
the result of lower operating expenses.
In June 1998, the Company sold its financial systems business, including
its accounts receivable, patient billing, general ledger, accounts payable,
fixed assets, inventory control, medical records abstracting and registration
software modules, to Sterling Systems based in Downey, Idaho. See Note 6 to the
accompanying financial statements.
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 year 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 by the end of the year.
Any forward looking statements set forth herein are necessarily subject to
significant uncertainties and risks. The words "believes," "anticipates,"
"expects" and similar expressions are intended to identify forward-looking
statements. Actual results could be materially different as a result of various
possibilities, including difficulties or delays in the introduction of new
products or the revision of existing products, significant changes in healthcare
regulation, economic downturns in any of the Company's markets, competitors, new
entrants into the Company's markets, increased price pressure, customer
reduction caused by industry consolidation or other factors or marketplace
acceptance of Windows NT as an operating platform.
Readers are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly release the results of any revisions to these
forward-looking statements which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
Page 2
<PAGE> 3
REVENUE. Total revenue decreased 20.3% from $4.3 million for the first
quarter of fiscal 1998 to $3.4 million for the first quarter of fiscal 1999,
which reflects a 38.7% decrease in system sales revenue and a 1.2% decrease in
service revenue.
System sales revenue for the first quarter decreased by $0.8 million, from
$2.2 million in fiscal 1998 to $1.3 million in fiscal 1999. The 20.3% decrease
in system sales was primarily attributable to the delay in new system orders due
to the anticipated release of the Company's new NT products. System sales
represented 50.9% and 39.1% of total revenues for the first quarter of fiscal
1998 and 1999, respectively.
Service revenue for the first quarters of fiscal 1997 and 1998 was $2.1
million. Service revenue represented 49.1% and 60.9% of total revenues for the
first quarter of fiscal 1998 and 1999, respectively.
COST OF PRODUCTS AND SERVICES SOLD AND GROSS PROFIT. Cost of products and
services sold include cost of system sales and cost of service revenue. Cost of
system sales includes cost of hardware sold, installation and training expenses,
and software amortization costs. Cost of service revenue includes all client
service expenses plus an allocation of certain other overhead expenses. As a
percentage of total revenue, the total cost of products and services sold
decreased from 50.6% in the first quarter of fiscal 1998 to 50.2% in the first
quarter of fiscal 1999. For the first quarter of fiscal 1998 and 1999, total
cost of products and services sold were $2.2 million and $1.7 million,
respectively.
The decrease in cost as a percentage of revenues was primarily due to the
decrease in the total revenues which was offset by a decrease in costs because
of a change in product mix resulting in slightly higher margins. Software
amortization costs of $0.5 million in the first quarter of both fiscal 1998 and
1999 represented 23.0% and 30.6%, respectively, of total costs of products and
services sold.
Gross profit as a percentage of total revenues increased from 49.4% in the
first quarter of fiscal 1998 to 49.8% in the first quarter of fiscal 1999. The
increase in gross profit as a percentage of total revenues was primarily
attributable to the factors discussed above.
RESEARCH AND DEVELOPMENT COSTS. Total outlays for software development for
the first quarter of fiscal 1998 and 1999 are as follows (000's):
<TABLE>
<CAPTION>
FY99 FY98
R&D EXPENSE 1ST QTR. 1ST QTR.
- ----------- -------- --------
<S> <C> <C>
R&D spending $ 806.2 $ 713.2
Less -- R&D capitalized 204.0 181.2
Total R&D expense 602.2 532.0
Software amortization (cost of prod. sold) 524.6 497.2
-------- --------
Total R&D expensed $1,126.8 $1,029.2
======== ========
</TABLE>
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<PAGE> 4
For the first quarter of fiscal years 1998 and 1999, the Company
capitalized 25.4% and 25.3%, respectively, of software development spending.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses as
a percentage of total revenues decreased from 41.8% in the first quarter of
fiscal 1998, to 37.0% in the first quarter of fiscal 1999. Total selling and
administrative expenses decreased $0.5 million to $1.3 million in this year's
first quarter. The increase is primarily due to lower sales costs consistent
with the decrease in sales and with lower administrative costs to support
operations.
OPERATING LOSS. The Company incurred an operating loss of $0.2 million in
the first quarter of fiscal 1998 and 1999. The operating margin decreased from a
negative 4.8% to a negative 6.8% in the first quarter of fiscal 1998 and 1999,
respectively, primarily reflecting the decrease in total revenues and other
factors as described above. Excluding the loss on sale of financial products,
operating margin was a negative 4.8% for the first quarter of fiscal 1998 and
1999.
OTHER INCOME. Interest expense, net decreased from $42.7 thousand in the
first quarter of fiscal 1998 to $12.3 thousand in the first quarter of fiscal
1999 due to the repayment of a portion of the line of credit in fiscal 1998
offset by an increase in interest income.
INCOME TAXES. The Company's effective income tax benefit rate was 38.0% in
the first quarter of fiscal 1998 and 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is cash flows from operations. At
March 31, 1998, the Company had cash and cash equivalents in the amount of $0.4
million as compared to $0.1 million at June 30, 1998. The cash balance decreased
by $0.3 million primarily due to cash used for repayment of debt ($0.1 million),
software development costs ($0.3 million) and capital expenditures ($0.1
million), offset by cash generated from operating activities of $0.2 million.
At March 31, 1997, the Company had cash and cash equivalents in the amount
of $0.5 million as compared to $0.4 million at June 30, 1997. The cash balance
decreased by $0.1 million primarily due to cash used for repayment of debt ($0.7
million), software development costs ($0.2 million), and capital expenditures
($0.1 million), offset by cash generated from operating activities of $0.8
million.
As of June 30, 1998, the Company had a line of credit agreement that allows
the Company to borrow up to $2.0 million with interest at the lender's prime
rate (8.5% at June 30, 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
June 30, 1998 ($0.8 million of additional borrowings are available), which have
been classified as long-term debt in the June 30, 1998 Consolidated Balance
Sheet.
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<PAGE> 5
The Company believes that its cash and cash equivalents, together with its
current borrowing facilities and cash generated from operations, including the
proceeds from the sale of the financial systems business, 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.
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.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no reportable proceedings.
ITEM 2. CHANGE IN SECURITIES
(a) Not applicable.
(b) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) Not applicable.
(b) Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index for list of Exhibits.
(b) Form 8-K filed reporting following announcements:
(1) On June 18, 1998, Registrant issued a Press Release announcing
the sale of its financial systems business and customer base to Sterling Systems
of Downey, Idaho.
(2) On June 24, 1998, Registrant issued a Press Release announcing
that Registrant is in discussions with MEDASYS Digital Systems regarding a
possible business combination.
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<PAGE> 7
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITATION COMPUTER SYSTEMS, INC.
Date: August 14, 1998 By:
------------------------------------
Richard D. Neece
President
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<PAGE> 8
CITATION Computer Systems, Inc.
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
(UNAUDITED) (AUDITED)
JUNE 30, MARCH 31,
1998 1998
--------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 144.3 $ 419.7
Accounts receivable:
Trade, net 5,754.2 6,351.0
Other 607.1 113.8
Inventories 648.3 436.1
Prepaid expenses and other current assets 182.7 190.2
Income taxes receivable 107.0 79.7
Deferred tax asset 135.8 135.8
--------- ---------
Total current assets 7,579.4 7,726.3
Software development costs, net 2,020.5 2,879.8
Property and equipment, net 873.5 917.6
Long-term accounts receivable 1,657.0 1,657.0
Long-term deferred tax assets 875.9 875.9
Other assets 290.6 255.3
--------- ---------
Total assets $13,296.9 $14,311.9
========= =========
Liabilities and shareholders' equity:
Current liabilities:
Current portion of long-term debt $ 182.2 $ 238.4
Accounts payable 1,190.3 1,423.5
Customer deposits 580.9 412.5
Accrued bonuses and commissions 93.1 116.5
Other accrued liabilities 230.7 217.3
Deferred service revenue 1,655.8 2,377.8
--------- ---------
Total current liabilities 3,933.0 4,786.0
--------- ---------
Long-term debt 1,338.3 1,379.3
--------- ---------
Common stock 381.2 381.1
Paid-in capital 6,521.2 6,512.5
Retained earnings 1,123.2 1,253.0
--------- ---------
8,025.6 8,146.6
--------- ---------
Total liabilities and shareholders' equity $13,296.9 $14,311.9
========= =========
</TABLE>
See accompanying notes to consolidated financial statements F-1
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CITATION Computer Systems, Inc.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months ended
June 30,
1998 1997
(Unaudited) (Unaudited)
<S> <C> <C>
Net system sales and service revenues:
System sales $1,335.7 $2,177.4
Service revenue 2,078.7 2,104.3
-------- --------
3,414.4 4,281.7
-------- --------
Cost of products and service sold:
System sales 1,216.3 1,747.8
Service revenue 497.0 419.0
-------- --------
1,713.3 2,166.8
-------- --------
Gross profit 1,701.1 2,114.9
Research and development expenses 602.2 532.0
Selling and administrative expenses 1,262.2 1,788.7
Loss on sale of financial systems business 70.5 --
-------- --------
Operating loss (233.8) (205.8)
Other income:
Interest expense, net (12.3) (42.7)
Other 36.8 2.0
-------- --------
Loss before income taxes (209.3) (246.5)
Benefit for income taxes (79.5) (93.7)
-------- --------
Net loss $ (129.8) $ (152.8)
======== ========
Net loss per common share: $ (0.03) $ (0.04)
======== ========
Basic and diluted
Weighted average number of shares used in
computing net earnings per common share:
Basic and diluted 3,811 3,803
======== ========
</TABLE>
See accompanying notes to consolidated financial statements F-2
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<PAGE> 10
CITATION Computer Systems, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three months ended
June 30,
1998 1997
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net loss $(129.8) $(152.8)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment 148.2 179.1
Amortization of software development costs 524.6 497.2
Non-cash 401K matching contribution 8.8 13.4
Non-cash charge related to sale of financial systems business 538.7 -
Decrease in accounts receivable 103.6 382.5
Decrease (increase) in inventories (212.2) 8.0
Decrease (increase) in prepaid expenses and other assets (27.8) 45.9
Decrease in accounts payable (233.2) (573.8)
Increase in customer deposits 168.4 66.0
Increase (decrease) in accrued bonuses and commissions (23.4) 22.1
Increase (decrease) in other accrued liabilities 13.4 (108.4)
Increase in current income taxes receivable/payable (27.3) 490.9
Decrease in deferred service revenue (722.0) (27.1)
------- -------
Net cash provided by operating activities 130.0 843.0
Cash flows from investing activities:
Capital expenditures (104.2) (105.7)
Software development costs (204.0) (181.2)
------- -------
Net cash used in investing activities (308.2) (286.9)
------- -------
Cash flows from financing activities:
Principal payments on long-term debt (97.2) (667.5)
------- -------
Net cash used in financing activities (97.2) (667.5)
------- -------
Net decrease in cash and cash equivalents (275.4) (111.4)
Cash and cash equivalents, beginning of year 419.7 510.7
------- -------
Cash and cash equivalents, end of period $ 144.3 $ 399.3
======= =======
</TABLE>
See accompanying notes to consolidated financial statements F-3
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<PAGE> 11
CITATION Computer Systems, Inc.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands except for number of shares)
<TABLE>
<CAPTION>
Common Stock
------------
Additional
Number Par Paid-in Retained
of Shares Value Capital Earnings Total
--------- ----- ---------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1998 (audited) 3,810,548 $381.1 $6,512.5 $1,253.0 $8,146.6
Issuance of common stock for 401K
company matching contribution
(unaudited) 942 0.1 8.7 -- 8.8
Net loss (unaudited) -- -- -- (129.8) (129.8)
--------- ------ -------- -------- --------
Balance, June 30, 1998 (unaudited) 3,811,490 $381.2 $6,521.2 $1,123.2 $8,025.6
========= ====== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements F-4
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CITATION COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim financial information for the three-month periods ended June
30, 1997, and 1998 is unaudited. Financial statement note disclosures,
normally included in financial statements prepared in conformity with
generally accepted accounting principles, have been omitted in this Form
10-QSB pursuant to the Rules and Regulations of the Securities and Exchange
Commission. However, in the opinion of the Company, the disclosures
contained in this Form 10-QSB are adequate to make the information
presented not misleading. See Notes to Financial Statements as incorporated
by reference in the Company's Annual Report on Form 10-KSB, dated July 7,
1998, which includes financial statements and notes thereto for the year
ended March 31, 1998.
In the opinion of the Company, the accompanying unaudited financial
statements include all adjustments, consisting solely of normal recurring
adjustments, necessary to present fairly the Balance Sheet at June 30,
1998, the Statement of Operations for the three months ended June 30, 1997
and 1998, the Statement of Cash Flows for the three months ended June 30,
1997 and 1998, and the Statement of Changes in Shareholders' Equity for the
three months ended June 30, 1998. The interim results, however, are not
necessarily indicative of results for any future period.
Certain prior year amounts have been reclassified to reflect current year
classifications.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
-------- --------
<S> <C> <C>
Hardware and third party software $414.6 $241.2
Field service equipment 233.7 194.9
------ ------
$648.3 $436.1
====== ======
</TABLE>
3. COMMITMENTS COMMITMENTS
The Company from time to time is a party to certain lawsuits.
Management does not expect the outcome of any litigation to have a material
effect on the Company's financial position or results of operations. As of
the date hereof, the Company knows of one pending lawsuit.
F-6
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4. LONG-TERM ACCOUNTS RECEIVABLE
The Company has provided extended payment terms to an overseas
customer for a maximum period of three years. At June 30, 1998, $1.7
million was outstanding.
5. LONG-TERM DEBT
As of June 30, 1998, the Company had a line of credit agreement that
allowed the Company to borrow up to $2.0 million with interest at the
lender's prime rate. The line of credit is secured by the Company's
accounts receivable, inventory and equipment. The Company has $1.2 million
in borrowings outstanding under the line of credit agreement at June 30,
1998.
6. SALE OF FINANCIAL SYSTEMS BUSINESS
In June 1998, the Company 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. The cash transaction resulted
in an after-tax loss on disposal of $43.7 thousand, or $0.01 per share, in
the first quarter of fiscal 1999.
7. POSSIBLE BUSINESS COMBINATION
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.
F-6
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequential Page
Number Exhibit Number
- ------- -------- ---------------
<S> <C> <C>
3(a) Restated Articles of Incorporation of the Company; incorporated by *
reference to the corresponding Exhibit to the Company's Registration
Statement on Form S-1 of the Company, Registration No. 33-48332
3(b) Restated By-laws of the Company; incorporated by reference to the *
corresponding Exhibit to the Company's Registration Statement of
Form S-1 of the Company, Registration No. 33-48332
4(a) Specimen Common Stock Certificate; incorporated by reference to the *
corresponding Exhibit to the Company's Registration Statement on
Form S-1 of the Company, Registration No. 33-48332
4(b) Registration Rights Agreement, dated May 29, 1992, between the *
Company and Capital For Business, Inc; incorporated by reference to the
corresponding Exhibit to the Company's Registration Statement on
Form S-1 of the Company, Registration No. 33-48332
27(a) Financial Data Schedule
</TABLE>
- ----------
* Incorporated by reference as set forth in Exhibit description.
Page 14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 144
<SECURITIES> 0
<RECEIVABLES> 6,144
<ALLOWANCES> 204
<INVENTORY> 648
<CURRENT-ASSETS> 7,579
<PP&E> 3,837
<DEPRECIATION> 2,964
<TOTAL-ASSETS> 13,297
<CURRENT-LIABILITIES> 3,933
<BONDS> 0
0
0
<COMMON> 381
<OTHER-SE> 7,644
<TOTAL-LIABILITY-AND-EQUITY> 13,297
<SALES> 461
<TOTAL-REVENUES> 3,414
<CGS> 238
<TOTAL-COSTS> 1,713
<OTHER-EXPENSES> 1,935
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33
<INCOME-PRETAX> (209)
<INCOME-TAX> (79)
<INCOME-CONTINUING> (130)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (130)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
