<PAGE> 1
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 registrant 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
--------------
(Registrant's telephone number, including area code)
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filled by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the registrant's Common Stock, par value
$0.10 per share, at November 6, 1998 was 3,832,799 shares.
Exhibit Index on Page 16 Page 1 of 16
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
See pages F-1 to F-6 hereof.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, uncertainties related to the
proposed business combination with MEDASYS Digital Systems, S.A., significant
changes in healthcare regulation, economic downturns in any of the Company's
markets, competitors, new entrants into the Company's markets, increased price
pressure, the availability of suitable acquisition candidates, customer
reduction caused by industry consolidation or other factors or marketplace
acceptance of Windows NT as an operating platform.
Readers are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly release the results of any revisions to these
forward-looking statements which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998, TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
GENERAL. The Company reported net income of $0.05 per share, or $0.2
million, for the second quarter of fiscal 1999, compared with a net gain of
$0.01 per share, or $37 thousand in the comparable period of fiscal 1998. The
increase in profitability from the prior year was principally the result of
lower selling and administrative 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.
On September 15, 1998, the Company, MEDASYS Digital Systems, S.A.,
certain shareholders of the Company and certain shareholders of MEDASYS entered
into an Agreement and Plan of Reorganization (the "Reorganization Agreement").
Pursuant to the Reorganization Agreement, the Company will (1) undertake an
initial public offering in France of its Common Stock, and (2) offer to
exchange shares of the Company's common stock and warrants and options to
purchase shares of the Company's common stock with MEDASYS shareholders,
warrant holders and option holders for corresponding shares of MEDASYS common
stock and warrants and options to purchase shares of MEDASYS' common stock,
with the result that MEDASYS will be a subsidiary of the Company. The
consummation of the transactions set forth in the Reorganization Agreement is
subject to various regulatory approvals and express closing conditions,
including completion of due diligence, the approval of the Reorganization
Agreement by the Company's shareholders and the tender of at least 67% of the
outstanding shares of MEDASYS in the exchange offer. The exchange offer is
expected to be accounted for under the purchase accounting method. The Company
anticipates that the transactions will be completed in the first quarter of
1999.
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REVENUES. Total revenue decreased 3.9% from $4.3 million for the second
quarter of fiscal 1998 to $4.1 million for the second quarter of fiscal 1999. A
5.4% increase in system sales revenue was offset by a 14.1% decrease in service
revenue.
System sales revenue for the second quarter increased $0.2 million,
from $2.2 million in fiscal 1998 to $2.4 million in fiscal 1999. The 5.4%
increase in system sales was primarily attributable to the release of the
Company's new NT(R) products during late June, 1998. System sales represented
57.3% and 52.2% of total revenues for the second quarter of fiscal 1999 and
1998, respectively.
Service revenue for the second quarter decreased $0.3 million to $1.8
million in fiscal 1999. Included in the second quarter of fiscal year 1998 was
$0.2 million service revenue from the financial products which were sold in June
1998. Service revenue represented 42.7% and 47.8% of total revenues for the
second quarter of fiscal 1999 and 1998 respectively.
COST OF PRODUCTS AND SERVICES SOLD AND GROSS PROFIT. Cost of products
and services sold include cost of system sales and cost of service revenues.
Cost of system sales includes hardware sold, installation and training expenses,
and software amortization costs. Cost of service revenue includes all client
service expenses plus an allocation of certain other overhead expenses. As a
percentage of total revenue, the total cost of products and services sold
decreased from 45.1% in the second quarter of fiscal 1998 to 44.2% in the second
quarter of fiscal 1999. For the second quarter of fiscal 1999 and 1998, total
cost of products and services sold were $1.8 million and $1.9 million,
respectively.
The decrease in cost as a percentage of revenues was primarily due to
the decrease in client service expense and software amortization expense.
Software amortization costs of $0.4 million and $0.5 million in the second
quarter of fiscal years 1999 and 1998 represented 21.2% and 26.3%, respectively,
of total costs of products and services sold.
Gross profit as a percentage of total revenues increased from 54.9% in
the second quarter of fiscal 1998 to 55.8% in the second quarter of fiscal 1999.
The increase in gross profit as a percentage of total revenues was primarily
attributable to the factors discussed above.
OTHER INCOME. Interest expense, net decreased from expense of $23.4
thousand in the second quarter of fiscal 1998 to expense of $11.6 thousand in
the second quarter of fiscal 1999 due to the net reduction in borrowings under
the Company's line of credit.
INCOME TAXES. The Company's effective income tax provision rate was 38%
in the second quarter of fiscal years 1998 and 1999.
RESEARCH AND DEVELOPMENT COSTS. Total outlays for software development
for the second quarter of fiscal 1998 and 1999 were as follows (000's):
<TABLE>
<CAPTION>
FY99 FY98
R&D EXPENSE 2ND QTR. 2ND QTR.
- - - ----------- --------- --------
<S> <C> <C>
R&D spending $ 892.7 $ 806.0
Less - R&D capitalized 224.2 204.2
-------- --------
Total R&D expense 668.5 601.8
Software amortization (cost of prod. sold) 384.8 506.4
-------- --------
Total R&D expensed $1,053.3 $1,108.2
======== ========
</TABLE>
For the second quarter of fiscal years 1999 and 1998, the Company
capitalized 25.1% and 25.3%, respectively, of software development spending.
Page 3
<PAGE> 4
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative
expenses as a percentage of total revenues decreased from 38.7% in the second
quarter of fiscal 1998, to 32.6%, in the second quarter of fiscal 1999. Total
selling and administrative expenses decreased $0.3 million to $1.3 million in
this year's second quarter. The decrease was primarily due to lower
personnel costs and with lower administrative costs to support operations.
OPERATING INCOME. Operating income increased from $0.1 million, in the
second quarter of fiscal 1998, to $0.3 million in the second quarter of fiscal
1999. The operating margin increased from 2.2% to 6.9% in the second quarter of
fiscal 1998 and 1999 respectively, primarily reflecting the factors discussed
above.
COMPARISON OF SIX MONTHS ENDED SEPTEMBER 30, 1998, TO SIX MONTHS ENDED SEPTEMBER
30, 1997
GENERAL. The Company reported net income of $0.01 per share, or $42.6
thousand, for the first six months of fiscal 1999, compared to a net loss of
$0.03 per share, or $115.7 thousand in the comparable period of fiscal 1998. Net
income from ongoing operations for the six months of fiscal 1999, excluding the
loss on the sale of the financial systems business, was $85.6 thousand or $0.02
per share. The increase in profitability from the prior year's loss was
principally the result of lower selling and administrative 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.
REVENUES. Total revenues decreased 12.1% to $7.5 million for the first
six months of fiscal 1999 from $8.6 million for the first six months of fiscal
1998, which reflects a 16.4% decrease in system sales revenue and an 7.6%
decrease in service revenue.
System sales revenue for the first six months decreased by $0.7
million, from $4.4 million in fiscal 1998 to $3.7 million in fiscal 1999. The
16.4% decrease in system sales was primarily attributable to the timing of new
system orders due to the anticipated release in the second quarter of the
Company's new NT(R) products. The Company's new NT(R) products were released in
late June, 1998. System sales represented 51.5% of total revenues for the first
six months of fiscal 1998 and 49.0% of total revenues for the corresponding
period in fiscal 1999.
Service revenue for the first six months decreased by $0.3 million,
from $4.1 million in fiscal 1998 to $3.8 million in fiscal 1999. Included in
the first six months of fiscal 1998 was $0.4 million service revenue from the
financial products. The 7.6% decrease was primarily due to the reduction in
sales and renewals of service contracts from existing customers. Service
revenue represented 51.0% and 48.5% for the first six months of fiscal 1999 and
1998, respectively.
COST OF PRODUCTS AND SERVICES SOLD AND GROSS PROFIT. As a percentage of
total revenue, the total cost of products and services sold decreased from 47.8%
in the first six months of fiscal 1998 to 46.9% in the first six months of
fiscal 1999. The decrease in cost as a percentage of revenue was primarily due
to the decrease in total revenues, which was more than offset by a decrease in
software amortization costs and client service expense. Software amortization
costs of $0.9 million and $1.0 million in the six months of fiscal years 1999
and 1998 represented 25.8% and 24.5%, respectively, of total costs of products
and services sold.
Gross profit as a percentage of total revenues increased from 52.2% in
the first six months of fiscal 1998 to 53.1% in the first six months of fiscal
1999. The increase in gross profit as a percentage of total revenues was
primarily attributable to the factors discussed above.
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<PAGE> 5
RESEARCH AND DEVELOPMENT COSTS. Total outlays for software development
for the first six months of fiscal 1998 and 1999 were as follows ($000's):
<TABLE>
<CAPTION>
FY99 FY98
R&D EXPENSE SIX MONTHS SIX MONTHS
- - - ----------- ---------- ----------
<S> <C> <C>
R&D spending $ 1,698.9 $ 1,519.2
Less - R&D capitalized 428.2 385.4
---------- ----------
Total R&D expense 1,270.7 1,133.8
Software amortization (cost of prod. sold) 909.4 1,003.7
---------- ----------
Total R&D expensed $ 2,180.1 $ 2,137.5
========== ==========
</TABLE>
For the first six months of fiscal years 1998 and 1999, the Company
capitalized 25.4% and 25.2%, respectively, of software development spending.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative
expenses decreased from $3.4 million in the first six months of fiscal 1998 to
$2.6 million in the first six months of fiscal 1999, a decrease of 24.5%. Total
selling and administrative expenses decreased primarily due to lower personnel
costs and expenditures associated with lower selling and administrative costs to
support operations. Selling and administrative expenses as a percentage of total
revenues decreased from 40.2% in fiscal 1998 to 34.6% in fiscal 1999.
OPERATING INCOME. Operating income increased from an operating loss of
$0.1 million in the first six months of fiscal 1998 to operating income of $0.1
million, excluding the $70 thousand loss on the sale of the financial systems
business, in the first six months of fiscal 1999, primarily reflecting the
decrease in total revenues more than offset by the decreased selling and
administrative expenses as well as other factors described above.
OTHER INCOME. Interest expense, net decreased from $66.1 thousand in
the first six months of fiscal 1998 to $23.9 thousand in the first six months of
fiscal 1999 due to the lower borrowings under the Company's line of credit.
INCOME TAXES. The Company reported an effective income tax benefit rate
of 38% in the first six months of fiscal 1998 compared to an effective income
tax provision rate of 39% in the first six months of fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is cash flow from operations.
At March 31, 1998, the Company had cash and cash equivalents in the amount of
$0.4 million as compared to $0.2 million at September 30, 1998. Cash flows in
the six months ended September 30, 1998 reflects amounts paid for capital
investments ($0.1 million), software development costs ($0.4 million), and
repayment of long-term debt, ($0.1 million), offset by cash generated from
operating activities of $0.1 million and borrowings under the line of credit
($0.4 million). The decrease in cash generated from operating activities from
the prior year is primarily due to the decrease in deferred service revenue
($0.6 million) and the increase in prepaid expenses ($0.3 million).
At September 30, 1997 and March 31, 1997, the Company reported cash and
cash equivalents in the amount of $0.5 million. Cash flows in the six months
ended September 30, 1997 reflects amounts paid for capital investments ($0.2
million), and software development costs ($1.5 million), offset by cash
generated from operating activities of $1.3 million.
As of October 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 (8.0% at September 30, 1998). The line of credit is secured by the
Company's accounts receivable, inventory and general intangible assets. There
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<PAGE> 6
were borrowings of $1.6 million outstanding under the line of credit agreement
as of September 30, 1998 ($0.4 million of additional borrowings are available),
which have been classified as long-term debt in the September 30, 1998
Consolidated Balance Sheet.
The Company believes that its cash and cash equivalents, together with
its current borrowing facilities, cash generated from operations and other
liquidity sources will be sufficient to fund its anticipated cash requirements
for at least the next 12 months. The Company's ability to meet its cash
requirements on a long-term basis will depend on profitable operations and
consistent and timely collections of its accounts receivable.
On September 15, 1998, the Company, MEDASYS Digital Systems, S.A.,
certain shareholders of the Company and certain shareholders of MEDASYS entered
into an Agreement and Plan of Reorganization (the "Reorganization Agreement").
Pursuant to the Reorganization Agreement, the Company will (1) undertake an
initial public offering in France of its Common Stock, and (2) offer to
exchange shares of the Company's common stock and warrants and options to
purchase shares of the Company's common stock with MEDASYS shareholders,
warrant holders and option holders for corresponding shares of MEDASYS common
stock and warrants and options to purchase shares of MEDASYS' common stock,
with the result that MEDASYS will be a subsidiary of the Company. The
consummation of the transactions set forth in the Reorganization Agreement is
subject to various regulatory approvals and express closing conditions,
including completion of due diligence, the approval of the Reorganization
Agreement by the Company's shareholders and the tender of at least 67% of the
outstanding shares of MEDASYS in the exchange offer. The exchange offer is
expected to be accounted for under the purchase accounting method. The Company
anticipates that the transactions will be completed in the first quarter of
1999.
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Computer
equipment, software and devices with imbedded technology that are time sensitive
may treat years as occurring between 1900 and the end of 1999 may not
self-convert to reflect the upcoming change in the century. If not corrected,
this problem could result in system failures or miscalculations and erroneous
results by or at the Year 2000.
The Company has undertaken, but not yet completed a program to
understand the nature and extent of the work required to make its systems Year
2000 compliant. This program encompasses the Company's operating information and
facilities systems, the vendors and other third parties with which the Company
does business. The program includes the following phases: awareness and
inventory, detailed assessment and resolution, testing, deployment and
contingency plan development for all areas.
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. As part of the Company's Year 2000 compliance program, as of
September 30, 1998, the Company had: (i) identified all critical software that
requires modification for the Year 2000 and completed an estimate of the
personnel time required to complete such software modifications; (ii) received
written or oral confirmation from its telecommunications vendors that the
equipment supplied by such vendors is or will be Year 2000 compliant; (iii)
instituted a formal communication process to keep senior management
apprised of significant Year 2000 issues; and (iv) developed a schedule for
completing necessary Year 2000 modifications in a timely manner. It is
anticipated that all reprogramming efforts will be completed during fiscal
1999. Notification has been sent to all customers of the Company's systems
regarding the Year 2000 issue and its potential effect on those customer's
systems, hardware and instruments.
The total cost of the Year 2000 project to date has not been material.
Based on the program to date, the Company does not expect that future costs of
modifications will have a material adverse effect on the Company's financial
position or results of operations and that currently anticipated costs to be
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incurred by the Company with respect to Year 2000 issues will be funded from
operating cash flows. However, if all Year 2000 issues are not properly
identified, or assessment, remediation and testing are not effected timely with
respect to Year 2000 problems that are identified, there can be no assurance
that the Year 2000 issue will not materially adversely impact the Company's
results of operations or adversely affect the Company's relationships with
customer, vendors, or others. Additionally, there can be no assurance that the
Year 2000 issues of other entities will not have a material adverse impact on
the Company's systems or results of operations.
Because the Company expects that its internal systems will become Year
2000 compliant in a timely manner and believes that it has or will have taken
all necessary steps with regard to customers and Company products sold to
customers in a timely manner, the Company believes that the most likely worst
case scenario would result from vendors or other third parties failing to
achieve Year 2000 compliance. Depending upon the number of third parties, their
identity and the nature of the non-compliance, the Year 2000 issue could have a
material adverse effect on the Company's financial position or results of
operations.
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PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
SHAREHOLDER PROPOSALS
At this time, the Company anticipates that its 1999 Annual Meeting of
Shareholders will be held more than 30 days from the date of the 1998 Annual
Meeting of Shareholders. Therefore, proposals of Shareholders intended to be
presented at the 1999 Annual Meeting of Shareholders must be received by the
Company by a reasonable time before the Company begins to print and mail its
proxy materials for enclosure in the Company's Proxy Statement and proxy
relating to that meeting. Upon receipt of any such proposal, the Company will
determine whether or not to include such proposal in the Proxy Statement and
proxy in accordance with regulations governing the solicitation of proxies.
At the 1999 Annual Meeting of Shareholders, the individuals named in
the Proxy relating to such meeting will exercise discretionary authority to vote
on any matter brought before the meeting, with respect to which the Company
received notice on or after a reasonable time before the Company mails its proxy
materials. With respect to matters brought before the meeting which the Company
was provided with timely notice prior, the individuals named in the Proxy
relating to such meeting will exercise discretionary authority to vote on any
such matter and the Company will include in the Proxy Statement advice on the
nature of the matter and how the individuals named in the Proxy relating to such
meeting intend to exercise their discretion to vote on each matter.
Notwithstanding the above, the individuals named in the Proxy relating to such
meeting shall not exercise discretionary authority over a matter if: (i) The
Company receives timely notice of such matter; (ii) by such time, the proponent
of such matter (the "proponent") provides the Company with a written statement
that the Proponent intends to deliver a proxy statement and form of proxy to
holders of at least the percentage of the Company's voting shares required under
Missouri law to carry the proposal; (iii) the Proponent includes the same
statement in its proxy materials filed under Rule 14a-6 of the Securities
Exchange Act of 1934, as amended; and (iv) immediately after soliciting the
percentage of shareholder required to carry the proposal, the Proponent provides
the Company with a statement from any solicitor or other person with knowledge
that the necessary steps have been taken to deliver a proxy statement and form
of proxy to holders of at least the percentage of the Company's voting shares
required under Missouri law to carry the proposal.
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 29, 1998, the Company filed a current report on Form
8-K dated June 18, 1998, to report pursuant to Item 5 thereof,
announcing the sale of the Company's financial systems business
and customer base to Sterling Systems of Downey, Idaho and that
the Company had entered into discussions with MEDASYS Digital
Systems regarding a possible business combination.
(2) On July 31, 1998, the Company filed a current report on Form
8-K dated July 20, 1998, to report pursuant to Item 5 thereof,
announcing the results of the Company's fiscal quarter ended June
30, 1998.
(3) On September 18, 1998, the Company field a current report on
Form 8-K dated September 15, 1998, to report pursuant to item 5
thereof, announcing that the company had entered into an Agreement
and Plan of Reorganization MEDASYS Digital Systems, certain
shareholders of the Company and certain shareholders of MEDASYS.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
CITATION COMPUTER SYSTEMS, INC.
Date: November 13, 1998 By: /s/Richard D. Neece
----------------- -----------------------------------
Richard D. Neece
President
(Principal Financial & Accounting Officer)
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CITATION Computer Systems, Inc.
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
---- ----
(unaudited) (audited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 239.1 $ 419.7
Accounts receivable:
Trade, net 6,430.8 6,351.0
Other 468.5 113.8
Inventories 511.6 436.1
Prepaid expenses and other current assets 190.4 190.2
Income taxes receivable 0.2 79.7
Deferred tax asset 135.8 135.8
--------- ---------
Total current assets 7,976.4 7,726.3
Software development costs, net 1.859.9 2,879.8
Property and equipment, net 755.0 917.6
Long-term accounts receivable 1,657.3 1,657.3
Long-term deferred tax assets 875.9 875.9
Other assets 580.4 255.0
--------- ---------
Total assets $13,704.9 $14,311.9
========= =========
Liabilities and shareholders' equity:
Current liabilities:
Current portion of long-term debt $ 125.9 $ 238.4
Accounts payable 1,231.8 1,423.5
Customer Deposits 250.6 412.5
Accrued bonuses and commissions 112.5 116.5
Other accrued liabilities 212.4 217.3
Deferred service revenue 1,775.8 2,377.8
--------- ---------
Total current liabilities 3,709.0 4,786.0
Long-term debt 1,739.1 1,379.3
--------- ---------
Common stock 382.9 381.1
Paid-in capital 6,578.3 6,512.5
Retained earnings 1,295.6 1,253.0
--------- ---------
8,256.8 8,146.6
Total liabilities and shareholders' equity $13,704.9 $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 Six months ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net system sales and service revenues:
System sales $ 2,351.6 $ 2,230.9 $ 3,687.3 $ 4,408.3
Service revenue 1,754.2 2,041.7 3,832.9 4,146.0
--------- --------- --------- ---------
4,105.8 4,272.6 7,520.2 8,554.3
--------- --------- --------- ---------
Cost of products and service sold:
System costs 1,401.3 1,475.9 2,617.7 3,223.7
Service costs 415.0 450.3 912.0 869.3
--------- --------- --------- ---------
1,816.3 1,926.2 3,529.7 4,093.0
--------- --------- --------- ---------
Gross profit 2,289.5 2,346.4 3,990.5 4,461.3
Research and development expense 668.5 601.8 1,270.7 1,133.8
Selling and administrative expenses 1,336.7 1,651.6 2,598.8 3,440.3
Loss on sale of financial systems business (Note 6) - - 70.5 -
--------- --------- --------- ---------
Operating income (loss) 284.3 93.0 50.5 (112.8)
Other income:
Interest expense, net (11.6) (23.4) (23.9) (66.1)
Other 6.4 (9.7) 43.2 (7.7)
--------- --------- --------- ---------
Income (loss) before income taxes 279.1 59.9 69.8 (186.6)
Provision (benefit) for income taxes 106.7 22.8 27.2 (70.9)
--------- --------- --------- ---------
Net income (loss) $ 172.3 $ 37.1 $ 42.6 $ (115.7)
========= ========= ========= =========
Net earnings (loss) per common share:
Basic and diluted $ 0.05 $ 0.01 $ 0.01 $ (0.03)
========= ========= ========= =========
Weighted average number of shares used in
computing net earnings per common share:
Basic 3,815 3,805 3,813 3,804
========= ========= ========= =========
Diluted 3,815 3,888 3,841 3,804
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements F-2
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CITATION Computer Systems, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six months ended
September 30,
-------------
1998 1997
---- ----
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 42.6 $ (115.7)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of property and equipment 300.3 344.1
Amortization of software development costs 909.4 1,003.7
Non-cash charge related to sale of financial systems business 538.7 -
Non-cash 401K matching contribution and issuance of Director's stock 67.6 26.4
(Increase) decrease in accounts receivable (434.5) 178.9
Increase in inventories (75.5) (60.8)
(Increase) decrease in prepaid expenses and other assets (325.6) 225.3
Decrease in accounts payable (191.7) (875.5)
Increase (decrease) in customer deposits (161.9) 41.0
Increase (decrease) in accrued bonuses and commissions (4.0) 32.8
Decrease in other accrued liabilities (4.9) (82.4)
Increase in current income taxes receivable/payable 79.5 505.6
Increase (decrease) in deferred service revenue (602.0) 109.5
------- --------
Net cash provided by operating activities 138.0 1,332.9
------- --------
Cash flows from investing activities
Capital expenditures (137.7) (180.3)
Software development costs (428.2) (385.4)
------- --------
Net cash used in investing activities (565.9) (565.7)
------- --------
Cash flows from financing activities:
Proceeds from long-term debt 432.3 -
Principal payments on long-term debt (185.0) (758.3)
Proceeds from the issuance of common stock - 2.3
------- --------
Net cash provided by (used in) financing activities 247.3 (756.0)
------- --------
Effect of exchange rate changes on cash - 1.4
------- --------
Net increase (decrease) in cash and cash equivalents (180.6) 12.6
Cash and cash equivalents, beginning of year 419.7 510.7
------- --------
Cash and cash equivalents, end of period $ 239.1 $ 523.3
======= ========
</TABLE>
See accompanying notes to consolidated financial statements F-3
Page 12
<PAGE> 13
CITATION Computer Systems, Inc.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands except for share information)
<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) 3,225 0.2 19.4 - 19.6
Issuance of common stock to directors
(unaudited) 15,672 1.6 46.4 - 48.0
Net income (unaudited) - - 42.6 42.6
--------- ------- --------- --------- ---------
Balance, September 30, 1998 (unaudited) 3,829,445 $ 382.9 $ 6,578.3 $ 1,295.6 $ 8,256.8
========= ======= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements F-4
Page 13
<PAGE> 14
CITATION COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim financial information as of September 30, 1998 and for the
three and six months periods ended September 30, 1998 and 1997 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. Reference is made
to Notes to Financial Statements as incorporated by reference in the
Company's Annual Report on From 10-KSB for the year ended March 31, 1998.
In the opinion of the Company, the accompanying unaudited consolidated
financial statements include all adjustments, consisting solely of normal
recurring adjustments, necessary to present fairly the Balance Sheet at
September 30, 1998, the Statement of Operations for the three and six months
ended September 30, 1998 and 1997, the Statement of Cash Flows for the six
months ended September 30, 1998 and 1997, and the Statement of Shareholders'
Equity for the six months ended September 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>
SEPT. 30, MARCH 31,
1998 1998
-------- ---------
<S> <C> <C>
Hardware and third party software $ 289.5 $ 241.2
Field service equipment 222.1 194.9
-------- ---------
$ 511.6 $ 436.1
======== =========
</TABLE>
3. COMMITMENTS
The Company from time to time is a party to certain lawsuits.
Management does not expect the outcome of any litigation to have a material
effect on the Company's financial position or results of operations. As of
the date hereof, the Company does not know of any pending lawsuits.
4. LONG-TERM ACCOUNTS RECEIVABLE
The Company has provided extended payment terms to an overseas customer
for a maximum period of three years. At September 30, 1998, $1.7 million was
outstanding.
F-5
Page 14
<PAGE> 15
5. LONG-TERM DEBT
As of September 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 had $1.6 million in
borrowings outstanding under the line of credit agreement at September 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 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
On September 15, 1998, the Company, MEDASYS Digital Systems, S.A., certain
shareholders of the Company and certain shareholders of MEDASYS entered into an
agreement and Plan of Reorganization (the "Reorganization Agreement"). Pursuant
to the Reorganization Agreement, the Company will (1) undertake an initial
public offering in France of its Common Stock, and (2) offer to exchange shares
of the Company's common stock and warrants and options to purchase shares of
the Company's common stock with MEDASYS shareholders, warrant holders and
option holders for corresponding shares of MEDASYS common stock and warrants
and options to purchase shares of MEDASYS' common stock, with the result that
MEDASYS will be a subsidiary of the Company. The consummation of the
transactions set forth in the reorganization agreement is subject to various
regulatory approvals and express closing conditions, including the completion
of due diligence, the approval of the Reorganization Agreement by the Company's
shareholders and the tender of at least 67% of the outstanding shares of
MEDASYS in the exchange offer. The exchange offer is expected to be accounted
for under the purchase accounting method. The Company anticipates that the
transactions will be completed in the first quarter of 1999.
F-6
Page 15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- - - ------- -------
<S> <C>
2.1 Agreement and Plan of Reorganization among CITATION
Computer Systems, Inc., MEDASYS Digital Systems, S.A.,
certain CITATION shareholders and certain MEDASYS
shareholders, incorporated by reference to Exhibit 2.1 to
the Company's report on Form 8-K filed September 15, 1998
27 Financial Data Schedule
</TABLE>
Page 16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-1-1998
<PERIOD-END> SEP-30-1998
<CASH> 239
<SECURITIES> 0
<RECEIVABLES> 7,074
<ALLOWANCES> 176
<INVENTORY> 512
<CURRENT-ASSETS> 7,976
<PP&E> 3,867
<DEPRECIATION> 3,112
<TOTAL-ASSETS> 13,705
<CURRENT-LIABILITIES> 3,709
<BONDS> 0
383
0
<COMMON> 0
<OTHER-SE> 7,874
<TOTAL-LIABILITY-AND-EQUITY> 13,705
<SALES> 1,004
<TOTAL-REVENUES> 6,516
<CGS> 735
<TOTAL-COSTS> 2,795
<OTHER-EXPENSES> 3,940
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67
<INCOME-PRETAX> 70
<INCOME-TAX> 27
<INCOME-CONTINUING> 43
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
