<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, 1999
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 2, 1999 was 3,867,061 shares.
Transitional small business disclosure format: Yes [ ] No [X]
Exhibit Index on Page 15 Page 1 of 15
<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, significant changes in healthcare
regulation, economic downturns in any of CITATION Computer Systems, Inc.'s (the
"Company") 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.
For further discussion of risk factors, please refer to page 9 of the
Company's Form 10KSB Annual Report for the fiscal year ended March 31, 1999 as
filed with the Securities and Exchange Commission.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1999, TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
GENERAL. The Company reported net income of $0.03 per share, or $0.1
million, for the second quarter of fiscal 2000, compared to net income of $0.05
per share, or $0.2 million in the comparable period of fiscal 1999. The decrease
in profitability from the prior year was principally the result of a higher
percentage of lower margin hardware sales which more than offset higher total
revenues and lower operating expenses.
REVENUES. Total revenue increased 5.3% from $4.1 million for the second
quarter of fiscal 1999 to $4.3 million for the second quarter of fiscal 2000. A
12.8% increase in system sales revenue was partially offset by a 4.9% decrease
in service revenue.
System sales revenue for the second quarter increased $0.3 million,
from $2.4 million in fiscal 1999 to $2.7 million in fiscal 2000. The 12.8%
increase in system sales was primarily attributable to revenues resulting from
the Company's new NT(R) products, C-LMB(R) AND C-COM(R), as well as increased
hardware sales from Y2K-related systems upgrades. System sales represented 57.3%
and 61.4% of total revenues for the second quarter of fiscal 1999 and 2000,
respectively.
Service revenue for the second quarter decreased $0.1 million to $1.7
million in fiscal 2000. The 4.9% decrease was primarily due to the reduction in
sales and renewals of service contracts from existing customers. Service revenue
represented 42.7% and 38.6% of total revenues for the second quarter of fiscal
1999 and 2000 respectively.
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<PAGE> 3
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
increased from 44.2% in the second quarter of fiscal 1999 to 53.8% in the second
quarter of fiscal 2000. For the second quarter of fiscal 1999 and 2000, total
cost of products and services sold were $1.8 million and $2.3 million,
respectively.
The cost of system sales as a percent of system sales revenue increased
from 59.6% in the second quarter of fiscal 1999 to 72.4% in the second quarter
of fiscal 2000 due to the increased percentage of lower margin hardware sales in
the second quarter of fiscal 2000. The cost of service revenue as a percent of
service revenue increased from 23.7% in the second quarter of fiscal 1999 to
24.3% in the second quarter of fiscal 2000 due primarily to increased client
services costs. Software amortization costs of $0.4 million in the second
quarter of fiscal 1999 and $0.3 million in fiscal 2000 represented 21.2% and
13.3%, respectively, of total costs of products and services sold.
Gross profit as a percentage of total revenues decreased from 55.8% in
the second quarter of fiscal 1999 to 46.2% in the second quarter of fiscal 2000.
The decrease in gross profit as a percentage of total revenues was primarily
attributable to the factors discussed above.
RESEARCH AND DEVELOPMENT COSTS. Total outlays for software development
for the second quarter of fiscal 1999 and 2000 were as follows (000's):
<TABLE>
<CAPTION>
FY00 FY99
R&D EXPENSE 2ND QTR. 2ND QTR.
- ----------- -------- --------
<S> <C> <C>
R&D spending $ 780.6 $ 892.7
Less-R&D capitalized 198.3 224.2
--------- ---------
Total R&D expense 582.3 668.5
Software amortization (cost of prod. sold) 310.1 384.8
--------- ---------
Total R&D expensed $ 892.4 $ 1,053.3
========= =========
</TABLE>
For the second quarter of fiscal years 1999 and 2000, the Company
capitalized 25.1% and 25.4%, respectively, of software development spending.
The decrease in research and development spending in the second quarter
of fiscal 2000 compared to the second quarter of fiscal 1999 relates to the lack
of significant product enhancement programs during the current year. The Company
anticipates that research and development spending will increase in future
quarters as product enhancement programs are initiated.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative
expenses as a percentage of total revenues decreased from 32.6% in the second
quarter of fiscal 1999, to 28.2%, in the second quarter of fiscal 2000. This
decrease was principally a result of the relatively fixed nature of selling and
administrative expenses in relation to the increase in revenues. Total selling
and administrative expenses decreased $0.1 million to $1.2 million in this
year's second quarter.
OPERATING INCOME. Operating income decreased from $0.3 million in the
second quarter of fiscal 1999 to $0.2 million in the second quarter of fiscal
2000. The operating margin decreased from 6.9% to 4.5% in the second quarter of
fiscal 1999 and 2000 respectively, primarily reflecting the factors discussed
above.
OTHER INCOME. Interest expense, net increased from expense of $11.6
thousand in the second quarter of fiscal 1999 to expense of $26.9 thousand in
the second quarter of fiscal 2000 due to a net increase in borrowings.
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<PAGE> 4
INCOME TAXES. The Company's effective income tax provision rate was 38%
and 40% in the second quarter of fiscal years 1999 and 2000, respectively.
COMPARISON OF SIX MONTHS ENDED SEPTEMBER 30, 1999, TO SIX MONTHS ENDED
SEPTEMBER 30, 1998
GENERAL. The Company reported net income of $0.06 per share, or $244.6
thousand, for the first six months of fiscal 2000, compared to net income of
$0.01 per share, or $42.6 thousand in the comparable period of fiscal 1999. 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 was principally the
result of higher sales.
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 Pocatello, Idaho. See Note 6 to
the accompanying financial statements.
REVENUES. Total revenues increased 15.0% from $7.5 million for the
first six months of fiscal 1999 to $8.6 million for the first six months of
fiscal 2000, which reflects a 42.5% increase in system sales revenue and an
11.4% decrease in service revenue.
System sales revenue for the first six months increased by $1.6
million, from $3.7 million in fiscal 1999 to $5.3 million in fiscal 2000. The
42.5% increase in system sales was primarily attributable to new system orders
for the Company's new NT(R) products. System sales represented 49.0% of total
revenues for the first six months of fiscal 1999 and 60.7% of total revenues for
the corresponding period in fiscal 2000.
Service revenue for the first six months decreased by $0.4 million,
from $3.8 million in fiscal 1999 to $3.4 million in fiscal 2000. Included in the
first six months of fiscal 1999 was $0.3 million service revenue from the
financial products. Service revenue represented 51.0% and 39.3% of total
revenues for the first six months of fiscal 1999 and 2000, respectively.
COST OF PRODUCTS AND SERVICES SOLD AND GROSS PROFIT. As a percentage of
total revenue, the total cost of products and services sold increased from 46.9%
in the first six months of fiscal 1999 to 52.3% in the first six months of
fiscal 2000. The increase in cost as a percentage of revenue was primarily due
to the change in product mix and increased client services expense relating to
the Year 2000 issue. Software amortization costs of $0.9 million and $0.7
million in the six months of fiscal years 1999 and 2000 represented 25.8% and
14.6%, respectively, of total costs of products and services sold.
Gross profit as a percentage of total revenues decreased from 53.1% in
the first six months of fiscal 1999 to 47.7% in the first six months of fiscal
2000. The decrease in gross profit as a percentage of total revenues was
primarily attributable to the factors discussed above.
RESEARCH AND DEVELOPMENT COSTS. Total outlays for software development
for the first six months of fiscal 1999 and 2000 were as follows ($000's):
<TABLE>
<CAPTION>
FY00 FY99
R&D EXPENSE SIX MONTHS SIX MONTHS
- ----------- ---------- ----------
<S> <C> <C>
R&D spending $1,553.8 $1,698.9
Less - R&D capitalized 404.2 428.2
-------- --------
Total R&D expense 1,149.6 1,270.7
Software amortization (cost of prod. sold) 659.4 909.4
-------- --------
Total R&D expensed $1,809.0 $2,180.1
======== ========
</TABLE>
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<PAGE> 5
For the first six months of fiscal years 1999 and 2000, the Company
capitalized 25.2% and 26.0%, respectively, of software development spending.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative
expenses decreased from $2.6 million in the first six months of fiscal 1999 to
$2.5 million in the first six months of fiscal 2000, a decrease of 3.3%. Total
selling and administrative expenses decreased primarily due to management's
ability to maintain strict cost controls during the first half of the fiscal
year. Selling and administrative expenses as a percentage of total revenues
decreased from 34.6% in fiscal 1999 to 29.0% in fiscal 2000.
OPERATING INCOME. Operating income increased from $0.1 million in the
first six months of fiscal 1999, excluding the $70 thousand loss on the sale of
the financial systems business, to $0.5 million in the first six months of
fiscal 2000, primarily reflecting the increase in total revenues as well as
other factors described above.
OTHER INCOME. Interest expense, net increased from $23.9 thousand in
the first six months of fiscal 1999 to $54.1 thousand in the first six months of
fiscal 2000 due to the higher borrowings under the Company's line of credit.
INCOME TAXES. The Company reported an effective income tax provision
rate of 39% in the first six months of fiscal 1999 compared to an effective
income tax provision rate of 40% in the first six months of fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is cash flow from operations.
At March 31, 1999 and September 30, 1999, the Company had cash and cash
equivalents in the amount of $0.2 million. Cash flows in the six months ended
September 30, 1999 reflects amounts paid for capital investments ($0.1 million),
software development costs ($0.4 million), and net repayment of long-term debt
($0.2 million), offset by cash generated from operating activities of $0.7
million.
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), capitalized software development costs ($0.4
million), and repayment of long-term debt, ($0.2 million), offset by cash
generated from operating activities of $0.1 million and proceeds under the line
of credit of $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).
As of September 30, 1999, the Company had a line of credit agreement
that allows the Company to borrow up to $4.0 million through 2001 with interest
at the lender's prime rate (8.25% at September 30, 1999). The line of credit is
secured by the Company's accounts receivable, inventory 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 waivers at September 30,
1999. There were borrowings of $1.1 million outstanding under the line of credit
agreement as of September 30, 1999 which have been classified as long-term debt
on the September 30, 1999 Consolidated Balance Sheet.
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.
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<PAGE> 6
YEAR 2000 ISSUE
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 developed a Year 2000 compliance
program to make its systems Year 2000 compliant. This program encompasses the
Company's operating information and facilities systems, its 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 the
Company has: (i) identified all critical software sold and used by the Company
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. All reprogramming efforts
and related testing have been completed. Notification has been sent to all
customers of the Company's systems regarding the Year 2000 issue and its
potential effect on those customers systems, hardware and instruments.
The total cost of the Year 2000 project to date has been less than $150
thousand, principally related to upgraded hardware. 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, results of
operations or cash flow and that currently anticipated additional costs to be
incurred by the Company with respect to Year 2000 issues will be funded from
operating cash flows and/or the Company's line of credit. 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, financial position, cash flows or
results of operations.
Because the Company believes that its internal systems are Year 2000
compliant 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, cash flows or results of operations.
Page 6
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1999 Annual Meeting of Shareholders was held on August
19, 1999. Two matters were submitted to a vote of the shareholders of the
Company: the election of two Class 1 Directors and consideration of the
appointment of PricewaterhouseCoopers LLP to serve as independent auditors of
the Company.
Two people were nominated to fill the two director positions voted upon
at the meeting. The nominees and the votes cast are, with respect to each,
listed below:
Nominee Votes For Votes Withheld Broker Non-Votes
- ------- --------- -------------- ----------------
Fred L. Brown 2,995,890 29,787 -
Larry D. Marcus 2,987,430 38,247 -
The nominees were elected and will serve until the 2002 Annual Meeting
of Shareholders or until their successors are duly qualified and elected. The
directors continuing in office are J. Robert Copper, James F. O'Donnell and
David T. Pieroni.
The second measure submitted was the ratification of the appointment of
PricewaterhouseCoopers LLP as independent auditors for the Corporation. To
approve the proposal, the affirmative vote of holders of a majority of the
shares represented in person and by proxy at the Annual Meeting was required.
The affirmative votes were 3,012,539; votes against were 5,338; abstentions were
7,800; and there were no broker non-votes. The affirmative votes equaled 99.6
percent of the shares present in person or by proxy at the Annual Meeting, and
thus the proposal was approved.
No other matters were submitted to the shareholders of the Company.
ITEM 5. OTHER INFORMATION
On August 19, 1999, the Board of Directors of the Company approved the
CITATION Computer Systems, Inc. 1999 Director Stock Option Plan (the "Plan").
The Plan provides for the granting of nonqualified stock options to the
directors of the Company who are not otherwise officers or employees of the
Company. Pursuant to the terms of the Plan, eligible directors may, on an annual
basis, elect to be granted options to purchase either: (a) 10,000 shares of
Company common stock, or (b) twice the number of shares of Company common stock
purchased by the director during a Plan year, not to exceed 20,000 shares. The
purchase price for the shares subject to the options will be 100% of the market
value of the Company common stock on the date of the option grant. A total of
400,000 shares of Company common stock has been reserved for issuance under the
Plan. The purpose of the Plan is (1) to compensate directors of the Company for
their services during the preceding fiscal year, (2) to induce directors of the
Company to remain directors of the Company over the long term, (3) to align the
directors' interests in the Company's financial performance more directly with
those of the shareholders and (4) to aid the Company in competing with other
enterprises for the services of new directors. The Plan will be submitted for
approval by the shareholders of the Company at the 2000 Annual Meeting of
Shareholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index for list of Exhibits.
(b) None.
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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 4, 1999 By: /s/Richard D. Neece
---------------- --------------------------
Richard D. Neece
President and Chief Financial Officer
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CITATION COMPUTER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999
------------ --------
(unaudited) (audited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 245.2 $ 203.6
Accounts receivable:
Trade, net 6,733.3 6,857.0
Other 446.0 445.1
Inventories 457.7 348.7
Prepaid expenses and other current assets 309.5 369.2
Deferred tax asset 142.0 142.0
--------- ---------
Total current assets 8,333.7 8,365.6
Software development costs, net 1,519.9 1,775.1
Property and equipment, net 556.6 699.1
Long-term accounts receivable 1,568.7 1,568.7
Long-term deferred tax assets 945.5 1,103.8
Other assets 281.1 365.9
--------- ---------
Total assets $13,205.5 $13,878.2
========= =========
Liabilities and shareholders' equity:
Current liabilities:
Current portion of long-term debt $ 215.8 $ 238.6
Accounts payable 621.7 1,223.3
Customer deposits 303.9 236.3
Accrued bonuses and commissions 156.5 138.8
Other accrued liabilities 197.1 210.3
Deferred service revenue 2,304.8 2,521.2
--------- ---------
Total current liabilities 3,799.8 4,568.5
--------- ---------
Long-term debt 1,322.1 1,491.3
--------- ---------
Common stock 384.9 383.8
Paid-in capital 6,615.7 6,596.2
Retained earnings 1,083.0 838.4
--------- ---------
8,083.6 7,818.4
--------- ---------
Total liabilities and shareholders' equity $13,205.5 $13,878.2
========= =========
</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,
------------------ ----------------
1999 1998 1999 1998
--------- --------- --------- ---------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net system sales and service revenues:
System sales $ 2,652.9 $ 2,351.6 $ 5,254.0 $ 3,687.3
Service revenue 1,669.1 1,754.2 3,395.7 3,832.9
--------- --------- --------- ---------
4,322.0 4,105.8 8,649.7 7,520.2
--------- --------- --------- ---------
Cost of products and service sold:
System costs 1,921.1 1,401.3 3,726.7 2,617.7
Service costs 405.7 415.0 799.5 912.0
--------- --------- --------- ---------
2,326.8 1,816.3 4,526.2 3,529.7
--------- --------- --------- ---------
Gross profit 1,995.2 2,289.5 4,123.5 3,990.5
Research and development expense 582.3 668.5 1,149.6 1,270.7
Selling and administrative expenses 1,217.6 1,336.7 2,512.2 2,598.8
Loss on sale of financial systems business (Note 6) - - - 70.5
--------- --------- --------- ---------
Operating income 195.3 284.3 461.7 50.5
Other income:
Interest expense, net (26.9) (11.6) (54.1) (23.9)
Other - 6.4 0.1 43.2
--------- --------- --------- ---------
Income before income taxes 168.4 279.1 407.7 69.8
Provision for income taxes 67.4 106.7 163.1 27.2
--------- --------- --------- ---------
Net income $ 101.0 $ 172.4 $ 244.6 $ 42.6
========= ========= ========= =========
Net earnings per common share:
Basic and diluted $ 0.03 $ 0.05 $ 0.06 $ 0.01
========= ========= ========= =========
Weighted average number of shares used in computing
net earnings per common share:
Basic 3,848 3,815 3,845 3,813
========= ========= ========= =========
Diluted 3,857 3,815 3,851 3,841
========= ========= ========= =========
</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,
-------------------------------
1999 1998
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 244.6 $ 42.6
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of property and equipment 235.1 300.3
Amortization of software development costs 659.4 909.4
Non-cash charge related to sale of financial systems business - 538.7
Non-cash 401K matching contribution and issuance of Directors' stock 20.6 67.6
Decrease in deferred income taxes 158.3 79.5
(Increase) decrease in accounts receivable 122.8 (434.5)
Increase in inventories (109.0) (75.5)
(Increase) decrease in prepaid expenses and other assets 144.5 (325.6)
Decrease in accounts payable (601.6) (191.7)
Increase (decrease) in customer deposits 67.6 (161.9)
Increase (decrease) in accrued bonuses and commissions 17.7 (4.0)
Decrease in other accrued liabilities (13.2) (4.9)
Decrease in deferred service revenue (216.4) (602.0)
--------- ---------
Net cash provided by operating activities 730.4 138.0
--------- ---------
Cash flows from investing activities
Capital expenditures ( 92.6) (137.7)
Software development costs (404.2) (428.2)
--------- ---------
Net cash used in investing activities (496.8) (565.9)
--------- ---------
Cash flows from financing activities:
(Repayments) proceeds from line of credit (66.9) 432.3
Principal payments on long-term debt (125.1) (185.0)
--------- --------
Net cash provided by (used in) financing activities (192.0) 247.3
--------- --------
Net increase (decrease) in cash and cash equivalents 41.6 (180.6)
Cash and cash equivalents, beginning of year 203.6 419.7
--------- ---------
Cash and cash equivalents, end of period $ 245.2 $ 239.1
========= =========
</TABLE>
See accompanying notes to consolidated financial statements F-3
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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, 1999 (audited) 3,838,344 $ 383.8 $ 6,596.2 $ 838.4 $ 7,818.4
Issuance of common stock for 401K
company matching contribution
(unaudited) 10,717 1.1 19.5 - 20.6
Net income (unaudited) - - 244.6 244.6
--------- --------- --------- --------- ---------
Balance, September 30, 1999 (unaudited) 3,849,061 $ 384.9 $ 6,615.7 $ 1,083.0 $ 8,083.6
========= ========= ========= ========= =========
</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 as of September 30, 1999 and for the
three and six months periods ended September 30, 1999 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 for the fiscal year ended March 31,
1999.
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, 1999, the Statement of Operations for the three and six
months ended September 30, 1999 and 1998, the Statement of Cash Flows for
the six months ended September 30, 1999 and 1998, and the Statement of
Shareholders' Equity for the six months ended September 30, 1999. The
interim results, however, are not necessarily indicative of results for any
future period.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPT. 30, MARCH 31,
1999 1999
--------- ---------
<S> <C> <C>
Hardware and third party software $ 247.1 $ 143.7
Field service equipment 210.6 205.0
--------- ---------
$ 457.7 $ 348.7
========= =========
</TABLE>
3. 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.
4. LONG-TERM ACCOUNTS RECEIVABLE
The Company has provided extended payment terms to a customer in
Singapore. At September 30, 1999, $1.6 million was outstanding.
F-5
Page 13
<PAGE> 14
5. LONG-TERM DEBT
As of September 30, 1999, the Company had a line of credit agreement
that allowed the Company to borrow up to $4.0 million with interest at the
lender's prime rate. The line of credit expires on June 1, 2001. The line
of credit and the notes payable to banks are secured by the Company's
accounts receivable, inventory and equipment. 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 waivers at September 30, 1999. The Company had
$1.1 million in borrowings outstanding under the line of credit agreement
at September 30, 1999.
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
Pocatello, Idaho. The 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. EARNINGS PER COMMON SHARE AND COMMON EQUIVALENT SHARE
Reconciliation of the number of shares used in computing basic and
dilutive earnings per common and common equivalent shares is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30 September 30
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic 3,847,569 3,815,306 3,844,762 3,813,289
Effective of dilutive securities - stock options 9,035 - 6,663 27,836
--------- --------- --------- ---------
Diluted 3,856,604 3,815,306 3,851,425 3,841,125
========= ========= ========= =========
</TABLE>
F-6
Page 14
<PAGE> 15
EXHIBIT INDEX
Exhibit
Number Exhibit
- ------ -------
10 1999 Director Stock Option Plan
27 (a) Financial Data Schedule
Page 15
<PAGE> 1
EXHIBIT 10
CITATION COMPUTER SYSTEMS, INC.
1999 DIRECTOR STOCK OPTION PLAN
1. PURPOSE. The purpose of the CITATION Computer Systems, Inc. 1999
Director Stock Option Plan (the "Plan") is (1) to compensate directors of
CITATION Computer Systems, Inc. (the "Company") for their services during the
preceding fiscal year, (2) to induce directors of the Company to remain
directors of the Company over the long term, (3) to align the directors'
interests in the Company's financial performance more directly with those of the
shareholders and (4) to aid the Company in competing with other enterprises for
the services of new directors, when necessary.
2. ADMINISTRATION. The Plan shall be administered by the Board of
Directors of the Company. The determinations of the Board of Directors shall be
made in accordance with its judgment as to the best interests of the Company and
its shareholders and in accordance with the purpose of the Plan. A majority of
members of the Board of Directors shall constitute a quorum, and all
determinations of the Board of Directors shall be made by a majority of its
members. Any determination of the Board of Directors under the Plan may be made
without notice or meeting of the Board of Directors, by a writing signed by a
majority of the members of the Board of Directors. Determinations,
interpretations or other actions made or taken by the Board of Directors
pursuant to the provisions of the Plan shall be final and binding and conclusive
for all purposes and upon all persons whomsoever. Subject to the express
provisions of the Plan, the Board of Directors shall have plenary authority to
construe and interpret the Plan, to make, amend and rescind rules and
regulations regarding the Plan and its administration, to determine the terms
and provisions of the respective stock option agreements (which need not be
identical), and to take whatever action is necessary to carry out the purposes
of the Plan; provided, however, that the Board of Directors shall take no action
which will impair any option previously granted under the Plan or cause the Plan
or any individual grant thereunder not to meet the requirements of Rule 16b-3 of
the Securities Exchange Act of 1934, as amended from time to time.
3. SHARES RESERVED UNDER THE PLAN. There is hereby reserved for
issuance under the Plan an aggregate of Four Hundred Thousand (400,000) shares
of common stock, $0.10 par value per share (the "Common Stock"), of the Company,
which may be authorized but unissued or treasury shares. Shares underlying
outstanding stock options shall be counted against the Plan maximum while such
stock options are outstanding and after the shares underlying the award are
issued. Shares underlying expired, cancelled or forfeited stock options may be
added back to the Plan. When the exercise price of stock options is paid by
delivery of shares of Common Stock of the Company, the number of shares
available for issuance under the Plan shall be reduced by the gross (rather than
the net) number of shares which would have been issued pursuant to such
exercise, regardless of the number of shares surrendered in payment.
4. PARTICIPANTS AND PERMISSIBLE TRANSFEREES.
(a) Participants shall consist of directors of the Company who
are not otherwise officers or employees of the Company or of any subsidiary
thereof.
(b) A Permissible Transferee is a person or entity, other than
a participant, to whom stock options may be transferred pursuant to this Section
4(b) as provided in Section 8. Permissible Transferees are limited to the
following persons or entities: (i) one or more members of the participant's
family; (ii) one or more trusts for the benefit of the participant and/or one or
more members of the participant's family; or (iii) one or more partnerships
(general or limited), corporations, limited liability companies or other
entities in which the aggregate interests of the participant and members of the
participant's family exceed 80% of all interests in such entity. For this
purpose, the participant's family includes only the participant's spouse,
children and grandchildren.
5. DATE OF GRANT. All options granted under the Plan shall be granted
as of an award date which shall be designated in the particular award agreement.
If no award date is so specified, the award date shall be the date that the
Board action granting the award is effective. Promptly after each award date,
the Company shall notify the participant of the grant of the option, and shall
hand deliver or mail to the participant an agreement awarding the benefit, duly
executed by and on behalf of the Company.
6. TYPES OF BENEFITS. The Board of Directors may grant nonqualified
stock options to the participants under the Plan.
1
<PAGE> 2
EXHIBIT 10
7. NONQUALIFIED STOCK OPTIONS. Nonqualified stock options shall consist
of stock options to purchase shares of Common Stock of the Company that are not
"incentive stock options" under Section 422 of the Internal Revenue Code of
1986, as amended. On an annual basis, participant may elect to be granted
options to purchase either: (i) 10,000 shares of Common Stock; or (ii) twice the
number of shares of Common Stock purchased by the participant during each Plan
Year (as defined herein), provided, however, that options granted under this
clause (ii) shall not exceed 20,000 shares. If a participant fails to make such
an election for any Plan Year, the participant shall be deemed to have elected
to be granted stock options to purchase 10,000 shares. As used in this Plan, the
term "Plan Year" shall mean, as applicable, the period beginning on the
Effective Date and ending September 20, 1999, each period of twelve consecutive
months thereafter beginning on September 20 in each year. Notwithstanding the
foregoing, in no event shall options to purchase 200,000 or more shares of
Common Stock, in the aggregate, be granted to any one individual pursuant to the
Plan.
Stock options shall be granted at prices equal to 100% of the fair
market value of the shares on the date the options are granted. Said purchase
price may be paid (i) in cash or by check or, in the discretion of the Board of
Directors, either (ii) by the delivery of shares of Common Stock of the Company
then owned by the participant or Permissible Transferee, as the case may be,
which shares have been owned for at least six months and have an aggregate fair
market value equal to the purchase price or (iii) by a combination of the
foregoing, in the manner provided in the award agreement.
Stock options shall not be exercisable earlier than six months after
the date they are granted and shall terminate upon the tenth anniversary of the
date the option is granted. Subject to the foregoing, options granted under the
Plan shall vest and become exercisable ratably over a three-year period
beginning on the date of grant, with options for one-third of the shares subject
to each option vesting and becoming exercisable, on a cumulative basis, on each
of the first, second and third anniversaries, respectively, of the date of grant
of such option, so long as the optionee shall have continuously served as a
director of the Company from the date of grant to the date such vesting occurs.
Until an option becomes vested, it shall not be exercisable and any unvested
options shall lapse and be of no further force or effect on the date that an
optionee's service as a director of the Company terminates. Such termination
shall not affect any options which previously have become vested.
Notwithstanding the foregoing, all outstanding options shall become
automatically vested upon the occurrence of a Change of Control. A "Change of
Control" shall be deemed to have occurred if, after the date hereof: (i) any
person (other than the Company, or any company owned directly or indirectly by
the shareholders of the Company in substantially the same proportion as their
ownership of voting securities of the Company) becomes the beneficial owner,
directly or indirectly, of securities of the Company representing 50% or more of
the combined voting power of the Company's then outstanding voting securities;
or (ii) the shareholders of the Company approve a merger or consolidation of the
Company with any other company, other than (a) a merger or consolidation which
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or being
converted into voting securities of the surviving entity) more than 50% of the
combined voting power of the voting securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation; or (b) a
merger or consolidation effected to implement a recapitalization of the Company
or similar transaction in which no person acquires more than 50% of the combined
voting power of the Company's then outstanding securities; or (iii) the
shareholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets. As used herein, "person" means a
natural person, company, partnership, limited liability company, limited
partnership, trust, syndicate, other entity, government, political subdivision,
agency or instrumentality of a government. As used herein, "beneficial owner"
means any person who, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise has or shares (i) voting power, which
includes the power to vote or direct the voting of voting securities of the
Company; and/or (ii) investment power, which includes the power to dispose or
direct the disposition of voting securities of the Company. All voting
securities of the Company, regardless of the form which such beneficial
ownership takes, shall be aggregated in calculating a person's beneficial
ownership. Moreover, a person shall be deemed to be the beneficial owner of
voting securities of the Company if that person has the right to acquire
beneficial ownership (via the exercise of an option, through conversion rights,
or otherwise) of such voting securities within 60 days after the date on which
such person's beneficial ownership of voting securities is being determined. Any
voting securities of the Company which are subject to such a right to acquire
beneficial ownership shall be deemed to be outstanding for the purpose of
computing the percentage of outstanding voting securities of the Company of
which such person is the beneficial owner. As used herein, "voting securities"
means shares of stock or other securities which entitle the holder to vote in
the election of directors of the Company. It is specifically agreed that a
Change of Control shall not include any of the following: (i) a public
2
<PAGE> 3
EXHIBIT 10
offering of voting securities of the Company; or (ii) a sale of voting
securities of the Company to a group of investors which includes material direct
or indirect ownership by members of management of the Company at the time of
such purchase; or (iii) any acquisition of voting securities of the Company by
an employee benefit plan sponsored or maintained by the Company.
Subject to the provisions of this Section 7, a participant may, at any
time before his or her death, direct that all or any portion of the option
granted or to be granted pursuant to this Section 7 be granted or regranted in
the name of one or more Permissible Transferees. Such direction shall be
effective only to the extent that the Company receives written notice from the
participant, before his or her death, advising of such a direction, the name or
other identifying information concerning the Permissible Transferee or
Transferees and the number of shares to which such direction relates. If an
option is issued in the name of a Permissible Transferee, such Permissible
Transferee shall have, with respect to such option, all of the rights,
privileges and obligations which would attach thereunder to the participant if
the option were issued to such participant.
3
<PAGE> 4
EXHIBIT 10
8. ADJUSTMENT PROVISIONS.
(a) If the Company shall at any time change the number of
issued shares of Common Stock without new consideration to the Company (such as
by stock dividends, stock splits or recapitalization), the total number of
shares reserved for issuance under this Plan, the maximum number of shares
available to a particular participant or Permissible Transferee and the number
of shares covered by each outstanding option shall be adjusted so that the
aggregate consideration payable to the Company, if any, and the value of each
such option shall not be changed. Upon the occurrence of such event, the
purchase price per share shall also be adjusted to assure that the aggregate
consideration payable to the Company and the value of each such option shall not
change.
(b) Notwithstanding any other provision of this Plan, and
without affecting the number of shares reserved or available hereunder, the
Board of Directors may authorize the issuance or assumption of options in
connection with any merger, consolidation, acquisition of property or stock, or
reorganization upon such terms and conditions as it may deem appropriate.
9. NONTRANSFERABILITY. Each option granted under the Plan to a
participant shall not be transferable, to other than a Permissible Transferee as
allowable hereunder, otherwise than by will or the laws of descent and
distribution or pursuant to a domestic relations order (as defined under the
Internal Revenue Code), and shall be exercisable, during the participant's
lifetime, only by the participant or a Permissible Transferee, as the case may
be. In the event of the death of a participant, exercise or payment shall be
made only:
(a) By or to a transferee under a domestic relations order,
Permissible Transferee, the executor or administrator of the estate of the
deceased participant or the person or persons to whom the deceased participant's
rights under the benefit shall pass by will or the laws of descent and
distribution; and
(b) To the extent that the deceased participant was entitled
thereto at the date of his death.
10. TAXES. The Company shall be entitled to withhold the amount of any
tax attributable to any amounts payable or shares deliverable under the Plan
after giving the person entitled to receive such payment or delivery notice as
far in advance as practicable, and the Company may defer making payment or
delivery as to any benefit if any such tax is payable until indemnified to its
satisfaction. The person entitled to any such delivery may, by notice to the
Company at the time the requirement for such delivery is first established,
elect to have such withholding satisfied by a reduction of the number of shares
otherwise so deliverable, such reduction to be calculated based on a closing
market price on the date of such notice.
11. NO RIGHT TO REMAIN A DIRECTOR. The grant of any award under this
Plan shall not create any right in any person to remain a director of the
Company.
12. DURATION, INTERPRETATION, AMENDMENT AND TERMINATION. No benefit
shall be granted more than ten years after the date of adoption of the Plan;
provided, however, that the terms and conditions applicable to any benefit
granted within such period may thereafter be amended or modified by mutual
agreement between the Company and the participant or such other person as may
then have an interest therein. Also, by mutual agreement between the Company and
a participant or Permissible Transferee hereunder, options may be granted to
such participant or Permissible Transferee in substitution and exchange for, and
in cancellation of, any option previously granted such participant or
Permissible Transferee under the Plan. The Board of Directors may amend the Plan
from time to time or terminate the Plan at any time. However, no action
authorized by this paragraph shall reduce the amount of any existing benefit or
change the terms and conditions thereof without the participant's or Permissible
Transferee's consent. No amendment of the Plan shall, without approval of the
shareholders of the Company, (a) increase the total number of shares which may
be issued under the Plan or increase the amount or type of benefits that may be
granted under the Plan, (b) change the minimum purchase price, if any, of shares
of Common Stock which may be made subject to benefits under the Plan, or (c)
modify the requirements as to eligibility for benefits under the Plan.
13. SHAREHOLDER APPROVAL. The Plan shall be effective on August 19,
1999 (the "Effective Date"). The Plan shall be submitted for approval by the
shareholders of the Company at the 2000 Annual Meeting of Shareholders. If the
shareholders do not approve the Plan, it, and any action taken hereunder, shall
be void and of no effect.
4
<PAGE> 5
EXHIBIT 10
14. GOVERNING LAW. Subject to the provisions of applicable federal law,
the Plan shall be administered, construed and enforced according to the internal
laws of the State of Missouri, excluding its conflict of law rules and the
conflict of law rules of any other state.
15. SEVERABILITY. The invalidity of any particular clause, provision or
covenant herein shall not invalidate all or any part of the remainder of the
Plan, but such remainder shall be and remain valid in all respects as fully as
the law shall permit.
5
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 245
<SECURITIES> 0
<RECEIVABLES> 6,898
<ALLOWANCES> 165
<INVENTORY> 458
<CURRENT-ASSETS> 8,334
<PP&E> 4,183
<DEPRECIATION> 3,627
<TOTAL-ASSETS> 13,206
<CURRENT-LIABILITIES> 3,800
<BONDS> 0
0
0
<COMMON> 385
<OTHER-SE> 7,699
<TOTAL-LIABILITY-AND-EQUITY> 13,206
<SALES> 1,721
<TOTAL-REVENUES> 8,650
<CGS> 1,603
<TOTAL-COSTS> 4,526
<OTHER-EXPENSES> 3,662
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70
<INCOME-PRETAX> 408
<INCOME-TAX> 163
<INCOME-CONTINUING> 245
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 245
<EPS-BASIC> 0.06
<EPS-DILUTED> 0.06
</TABLE>
