<PAGE> 1
FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-20284
CITATION COMPUTER SYSTEMS, INC.
(Exact name of company as specified in its charter)
<TABLE>
<S> <C>
MISSOURI 43-1174397
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
424 SOUTH WOODS MILL ROAD, SUITE 200 63017
CHESTERFIELD, MISSOURI (Zip Code)
(Address of principal executive offices)
</TABLE>
Company's telephone number, including area code: (314) 579-7900
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section (12(g) of the Act:
COMMON STOCK, PAR VALUE $0.10 PER SHARE
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the company was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained herein, and will not be contained, to the best of Company's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-K.
---
Company's revenue for the fiscal year ended March 31, 1999, were $16,128,000.
On June 15, 1999, the aggregate market value of the Company's voting stock held
by non-affiliates was $4,774,436.
On June 15, 1999, there were 3,844,211 share of Common Stock outstanding,
exclusive of treasury shares or shares held by subsidiaries of the Company.
Part II incorporates information by reference from the Annual Report to
Shareholders for the fiscal year ended March 31, 1999. Part III incorporates
information by reference from the Proxy Statement for the Company's 1999 Annual
Meeting of Shareholders.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
CITATION Computer Systems, Inc.(R) ("CITATION" or the "Company") designs,
develops, markets and supports patient-centered clinical information systems for
hospitals, clinics, physicians' groups and emerging Integrated Delivery Networks
("IDNs"). The Company offers a comprehensive suite of clinical products using
open client/server architecture that meets a broad range of the information
systems needs of the healthcare industry. These products integrate patient care
processes within the enterprise. The Company's systems are modular, scaleable
and allow clients to leverage their investments in existing systems. Individual
components of the Company's systems can function independently, giving clients
the ability to build their system over time and to integrate existing software
which is meeting their current needs. CITATION's systems are installed in
approximately 300 institutions ranging in size from under 100 beds to over 1,000
beds. CITATION markets its products directly in the United States and Canada, as
well as through distribution partners in Europe, India, Latin America and the
Far East.
THE COMPANY
CITATION was organized in 1979 as a Missouri corporation. The Company's
principal executive office is located at 424 South Woods Mill Road, Suite 200,
Chesterfield, Missouri 63017 (a suburb of St. Louis) and its telephone number is
(314) 579-7900.
In June 1998, the Company sold its suite of financial software products to
allow it to focus on its clinical applications. The Description of Business
section excludes these products.
INDUSTRY BACKGROUND
The United States healthcare industry is undergoing rapid change.
Historically, reimbursement for healthcare services has been based on a
fee-for-service model of payment. With increasing pressure to reduce costs,
managed care organizations and other payors are shifting the economic risk for
the delivery of care to providers through alternative reimbursement models,
including capitation and fixed fees. As a result, healthcare providers such as
hospitals, multi-specialty physician groups, laboratories, pharmacies, home
health services and nursing homes are integrating horizontally and vertically to
create IDNs. IDNs are
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designed to serve all of the healthcare needs of regional populations while
achieving economies of scale.
In order to lower healthcare delivery costs while maintaining or improving
the quality of patient care, providers need access to detailed clinical
information to: (i) manage the patient care process throughout the IDN; (ii)
automate patient care documentation; (iii) compare care provider performance and
clinical and cost outcomes both within the organization and to established
norms; (iv) monitor performance under managed care contracts; (v) monitor
practice patterns of care providers; (vi) measure the effectiveness of new
technologies and therapeutics; and (vii) support intra- and inter-facility
communication. A comprehensive clinical healthcare information system must be
able to assist both clinicians and administrators in managing patient
information throughout the continuum of care.
Certain information-intensive departments of healthcare organizations, such
as laboratories, were early adopters of information systems in order to manage
workflow and clinical data. However, as multiple legacy systems have become
increasingly prominent on an enterprise-wide basis, the integration of these
systems across the enterprise has become more difficult given the different
architectures, platforms and operating systems of these information systems.
Integration and accessibility to patient information are increasingly
necessary for healthcare providers to operate efficiently and improve the
quality of patient care. As the need for readily accessible information
throughout the healthcare enterprise continues to grow, hospitals, providers and
payors of all sizes are faced with the challenge of implementing healthcare
information systems that are scalable, capable of working with existing
information systems and flexible to adapt to changes in the healthcare
marketplace. Also, such systems must be patient-centered, integrating all
aspects of managing the healthcare process.
THE CITATION SOLUTION
CITATION designs, develops, markets and supports products that address the
healthcare industry's need for patient-centered, fully integrated clinical
information systems. CITATION's products are designed using a modular,
client/server approach, offering clients the ability to build their systems over
time and to allow existing legacy applications to interoperate with the
Company's products.
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BUSINESS STRATEGY
CITATION's goal is to leverage its experience of 20 years with
client/server application solutions to become a leading provider of clinical
healthcare information systems. The Company's strategy for achieving this goal
includes the following elements:
TARGET COMPREHENSIVE CLINICAL SYSTEM SALES. CITATION intends to focus its
sales efforts on selling larger, more comprehensive clinical systems to
hospitals with 400 beds or less and IDNs to address a broad range of needs. The
Company will aggressively promote its clinical suite of products.
LEVERAGE EXISTING CLIENT BASE. With an installed base of approximately 300
facilities (excluding the financial product suite clients), the Company believes
it has the potential to cross-sell additional products to its existing clients
because many of those clients have not purchased all of the Company's products.
CITATION's products are modular in design and can be added over time as each
client's needs expand and evolve.
EXPAND PRODUCT PORTFOLIO. The Company plans to expand its product line to
meet the evolving needs of its clients. The Company continually evaluates its
offerings to determine what additional products or enhancements are required by
the healthcare information systems marketplace and the Company develops and
enhances products internally to meet clients' needs. If the Company can purchase
or license proven products at reasonable cost on its chosen technology base it
will do so in order to avoid the time and expense involved in developing
products.
CAPITALIZE ON INTERNATIONAL MARKETS. CITATION believes that a significant
opportunity exists to expand the sales of its products in international markets.
Healthcare providers in a number of countries have not yet invested in
sophisticated information systems, and increasingly they are seeking to purchase
state-of-the art products, particularly clinical information systems. The
Company believes that its open, client/server architecture and modular, scalable
systems provide a cost-effective solution to these markets. CITATION has entered
several international markets through a combination of direct sales and
distribution arrangements.
EXPANDED SERVICES. The Company has expanded the range of strategic client
support and data interpretation services it provides in order to strengthen
relationships with clients. The Company has also expanded its services to design
and configure the architecture of a client's systems, including networking,
systems integration and data conversion. Further, the Company provides advice on
data analysis to assist care providers in evaluating their operations.
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PRODUCTS
CITATION has developed a comprehensive suite of clinical products to manage
information in the healthcare enterprise. A client can purchase a comprehensive
system or can buy modules separately to match a user's individual needs.
CITATION's systems address the information needs of care providers and hospital
administrators by enabling joint access to clinical and cost information,
thereby facilitating cost containment, effective decision making and delivery of
high quality care.
CITATION's clinical suite of products currently consists of five primary
components, each of which can operate independently or as part of a fully
integrated system.
C-COM(R) captures and tracks comprehensive patient clinical
information and routes that information among departments or systems in the
healthcare organization, enabling providers to evaluate quality of care,
productivity and cost-effectiveness of services. C-COM(R) accepts orders
from and displays the resulting information at any networked PC location
where patient care is being delivered, such as a nursing station or even
the bedside. C-COM(R) also is Internet-enabled and supports hand-held,
wireless technology. C-COM(R) is available for DOS, Windows(R) and Windows
NT(TM).1
C-LAB(R) provides comprehensive laboratory automation solutions for
clinics, single and multiple site hospitals and clinical and research
laboratories. C-LAB(R) automates order entry and dissemination of results
and interfaces with care providers' financial systems. C-LAB(R) sub-modules
consist of General Lab, Microbiology, Anatomical Pathology and Blood Bank.
The Blood Bank submodule is licensed by CITATION for use and implementation
in C-LAB(R). C-LAB(R) is available in DOS, Windows(R) and Windows NT(TM).
C-CARE is a patient care management system which is designed to
increase the productivity of nurses and other clinicians and to assist in
the creation and management of care plans and clinical pathways. C-CARE
documents variances against established care plans and clinical pathways,
enabling care providers to focus on both improving the quality of care and
controlling costs. This system enables the healthcare enterprise to
allocate resources and schedule procedures and tests automatically. C-CARE
must
[FN]
1 This report contains trademarks and trade names of third parties. These
trademarks remain the property of such third parties.
</FN>
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be used in conjunction with C-COM(R). C-CARE is currently available for DOS
under the NuCaMS product name. C-CARE is expected to be available for
Windows NT(TM) in late 2000.
C-RIS(R) is a radiology management system providing patient tracking,
transcription, radiology reporting, auto-fax capabilities, statistical
reporting, film management and mammography management. C-RIS(R) is
available in Windows NT(TM).
C-MAX(R) provides the information necessary to manage managed care
contracts and transactions with indemnity payors. It also allows users to
model future expectations of performance. C-MAX is Windows(R) based.
SERVICES
Client service is an important component of the Company's operations. At
March 31, 1999, the Company employed 35 persons in client services. The client
services team generally provides implementation, application and support,
education and consulting services to the Company's clients and primarily employs
medical technologists and other healthcare professionals in supporting and
implementing healthcare information systems. Instrument interface, network
consulting, operating system and hardware support are provided by experts in
each area. Additional client services are provided through computer-based
training or formal instructor-led, Company-sponsored ongoing educational courses
and seminars.
In addition, the Company provides comprehensive training for clients at its
headquarters near St. Louis. Before the Company's product becomes operational,
training is also provided at the client's location. The Company provides
additional training at the client's request for a fee. The Company offers a
maintenance program covering hardware replacement, software upgrades, and
telephone consulting service. Depending on the type of system, the Company
offers service contracts for periods of one to five years. Customer support is
available 24 hours a day.
The Company also offers its services to design and configure the
architecture of a provider's systems, including networking, systems integration
and data conversion. Further, the Company provides advice on data analysis to
assist care providers in evaluating their operations.
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PRODUCT DEVELOPMENT
CITATION is dedicated to providing state-of-the-art integrated clinical
systems for healthcare. The cornerstone of CITATION's system is its
long-standing commitment to client/server technology. CITATION's multi-tiered
products are modular in nature, using an open architecture that is integratable
with third party systems as well as other CITATION systems.
CITATION's current product development efforts use object-oriented
programming methodologies. This allows the Company to develop applications based
on reusable libraries of code that the Company believes results in more
cost-effective and rapid product development cycles. The Company is a
Microsoft(R) Solutions Provider and extensively employs Microsoft(R) toolsets
and standards in its product development efforts. The Company believes use of
these standards and tools facilitates interfacing with other systems and
products. The Company also supports other industry standards such as HL/7 and
the Novell Netware Network Operating System.
The Company plans to expand its clinical product line to meet the evolving
needs of its clients. The Company continually evaluates its offerings to
determine what additional products or enhancements are required by the
healthcare information systems marketplace. The Company develops and enhances
products internally to meet clients' needs, but if the Company can purchase or
license proven products at reasonable costs it will do so in order to avoid the
time and expense involved in developing products. The Company actively seeks out
for acquisition and licensing other companies and products that fit into
CITATION's overall product and technology plan. There is significant competition
for suitable acquisition candidates and there can be no assurance that the
Company will be able to successfully acquire or license additional products.
During the fiscal years ended March 31, 1999 and 1998, CITATION invested
$3.2 million and $4.3 million, respectively, on research and development. At
March 31, 1999, the Company employed 28 persons in research and development. The
Company expects to continue to make significant investments in research and
development, however, there can be no assurance that the Company's financial and
technological resources will permit it to develop or market new products
successfully or respond effectively to technological changes.
SALES AND MARKETING
The Company markets its products in the United States and Canada through a
direct sales force under the direction of the Company's Executive Vice
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President of Sales and Marketing. At March 31, 1999, the Company's sales force
consisted of 8 employees. In addition to the Company's sales force employees,
the Company has a 6-person marketing team that promotes the Company's products,
participates in trade shows and demonstrates the Company's products. In
addition, members of the Company's development and client services departments
provide pre-sales support for the Company's direct sales force in making
presentations to and preparing comprehensive proposals for potential customers.
The Company intends to focus its sales efforts on selling larger, more
comprehensive clinical systems to hospitals with 400 beds or less, and IDNs to
address a broad range of needs. As part of this strategy, the Company
cross-trains its sales force so that each salesperson will have the background
necessary to sell all of the Company's products.
The Company markets its products internationally through distribution
alliances in India, the Far East and Latin America. For example, Siemens
Information Systems, Ltd of India is marketing certain CITATION products in
India. In addition, the Company has a strategic relationship with Microstate
Separations Pte. Ltd. ("Microstate"), a healthcare information systems
integrator based in Singapore. Microstate has purchased the Company's systems
for the Indonesian, Malaysian, Hong Kong and Singapore markets. In Latin
America, CITATION has a strategic arrangement with Laboratories Para
Laboratorios.
REGULATION
The Company is subject to the general requirements of the Food and Drug
Administration's regulations for Class I Medical Devices because it produces a
suite of clinical software products. The Company complies with these regulations
and follows Medical Device Reporting (MDR) guidelines as well.
Additional legislation governing the dissemination of medical record
information has been proposed. The Company is unable to determine at this time
the effect, if any, that these requirements may have on its business.
In addition, the healthcare industry is subject to changing political,
economic and regulatory influences that may affect the procurement practices and
operations of healthcare providers. Many lawmakers have announced that they
intend to propose programs to reform the United States healthcare system. These
programs may contain proposals to increase governmental involvement in
healthcare, lower reimbursement rates and otherwise change the regulatory
environment in which the Company's clients operate. Healthcare providers may
react to these proposals and the uncertainty surrounding such proposals by
curtailing or deferring investments, including those for the Company's
healthcare
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information systems. Even if healthcare providers do not curtail or defer
investments, they may institute cost containment measures in anticipation of
regulatory reform or for other reasons. These measures may result in greater
selectivity in the allocation of capital funds, which could have a material
adverse effect on the Company's ability to sell its healthcare information
systems and services. The Company cannot predict with any certainty what impact,
if any, such legislative or market-driven reforms might have on its business and
results of operations. There can be no assurance that such proposed changes, if
adopted, would not have a material adverse effect on the Company's business and
results of operations.
FORWARD LOOKING STATEMENTS
Certain of the statements made herein are "FORWARD LOOKING STATEMENTS," as
such term is used in Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Any forward
looking statements set forth herein are necessarily subject to significant
uncertainties and risks. The words "believes," "anticipates," "expects," and
similar expressions are intended to identify forward looking statements. The
Company cautions readers that actual results could be materially different as a
result of various possibilities and differences between anticipated and actual
developments.
The uncertainties and risks include, but are not limited to: (i)
fluctuations in quarterly operating results, as the Company has historically
experienced greatly varied results from quarter-to-quarter, and such quarterly
variations can be expected to continue; (ii) technological changes and the
Company's dependence on new product developments -- the healthcare industry is
subject to rapid technological change, and the Company's future success may be
adversely impacted if the Company is not able to adapt to such changes in a
timely and efficient manner; (iii) the historical and planned continued
expenditures of significant resources to migrate its products to the Windows NT
operating system, and a substantial risk of adverse effect if the market does
not show the anticipated acceptance of this strategy; (iv) changes in the
marketing focus of the Company, shifting to becoming a clinical solutions
supplier only and selling larger more comprehensive clinical products than in
the past, which may adversely affect the Company if such changes are not
successful in attracting additional sales; (v) risks associated with foreign
sales, including difficulties in enforcing agreements and collecting
receivables, as well as potential adverse effects due to fluctuating monetary
exchange rates; (vi) the Company's strategy of addressing certain needs within
the range of products it offers through the acquisition of licenses from third
parties or the acquisition of such third parties, however there is no assurance
that such acquisition candidates will be found or that the Company will have the
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resources to make such acquisitions in the future; (vii) competition from a
number of larger and better financed software providers, many of which offer a
fuller range of products than the Company; (viii) regulation of the Company as a
medical device manufacturer and the risk that such regulation will become more
complex and onerous to the Company, subjecting it to adverse effects; (ix)
ongoing healthcare industry reform which is likely to continue to pressure
healthcare providers to become more efficient and engage in less capital
spending, including spending on information systems such as those offered by the
Company; (x) product liability arising out of such issues as confidentiality of
patient records or the failure of the Company's products to provide accurate and
timely disclosure of information; (xi) substantial dependence upon intellectual
property, none of which is patented; (xii) the disposition of the Company's
suite of financial products to another company which has agreed to assume the
Company's obligations under various warranties and service agreements, which
could have a material adverse effect on the Company if the acquirer fails to
adequately satisfy these obligations; (xiii) the Company's and its customers'
ability to address adequately Year 2000 programming requirements with respect to
their own or third party software on which the Company, its customers or their
software is dependent; and (xiv) risks and uncertainties of possible business
combinations with other parties, including the ability to successfully integrate
operations and management.
EMPLOYEES
At March 31, 1999, the Company employed 102 persons. Of these employees, 28
were involved in product development, 35 in client services, 14 in sales and
marketing and 25 in general administration, clerical and finance. The Company's
employees are not represented by a labor union and the Company's management
believes that its relationships with its employees are good.
BACKLOG
The Company sells its products on a purchase order basis, with shipments of
"turnkey" systems made shortly after receipt of executed purchase orders. As a
result, the level of backlog at any particular time is not necessarily an
indication of future results.
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ITEM 2. DESCRIPTION OF PROPERTIES
The Company's principal facilities consisting of approximately 32,000
square feet are located in Chesterfield, Missouri, a suburb of St. Louis. The
lease expires in May, 2004.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is subject to litigation and claims in the
ordinary course of business. The Company currently is not a party to any pending
legal proceedings, other than ordinary routine litigation incidental to its
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No such matters were submitted during the fourth quarter of Company's
fiscal year ended March 31, 1999.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY.
The following persons constitute the executive officers and other key
employees of Company. All executive officers are appointed annually by of the
Company's Board of Directors.
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PERSON AGE OFFICE/POSITION HELD
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<S> <C> <C>
J. Robert Copper 59 Chairman and Chief Executive Officer (since
January 1995, prior to that time Mr. Copper was a
partner in Hales, Copper & Company which he joined
in 1992.)
Richard D. Neece 53 President (since August 1997; prior to that
Executive Vice President and Chief Financial
Officer since July 1995, from 1991 to 1995, Mr.
Neece served as Executive Vice President - Finance
and Administration for the Hussmann Corporation.)
Russell L. Fortune 51 Executive Vice President, Sales and Marketing
(since April 1999; prior to that Executive Vice
President, International Sales since April 1997;
prior to that various sales positions since June
1991)
Patricia Q. Moore 52 Vice President Human Resources (since October
1995, from 1992 to 1995, Ms. Moore was Director
of Human Resources for Spencer & Spencer Systems.)
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PERSON AGE OFFICE/POSITION HELD
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<S> <C> <C>
John P. Gilmore 57 Vice President, Controller and Treasurer (since August
1996; prior to that Controller since June 1995, from
1991 to 1995, Mr. Gilmore was Director, Corporate Planning
and Real Estate Accounting of the Whitman Corporation.)
Anton F. Flieg 45 Vice President, Sales Administration and C-MAX(R) Product
Manager (since July 1998; prior to that Vice President
Administrative Products since May 1997; prior to that Director
of Sales Operations since March 1992)
Candice J. Barker 43 Vice President Clinical Products (since September 1997,
prior to that Director of Systems Development since December
1996; prior to that Director of Client Services since October
1995, prior to that Senior Development Manager since October 1994.)
John C. Blaile 32 Senior Development Manager (since September 1997; prior
to that Senior Analyst at BJC Health Systems from May 1997
to August 1997; prior to that Project Manager at Group Health
Plan from May 1995 to April 1997, prior to that Supervisor,
Computer Operations at California Interactive Computing from
June 1991.)
Richard M. Mayer 44 Client Services Manager (since October 1997; prior to that
various positions in Client Services since April 1994)
</TABLE>
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company hereby incorporates by reference page 8 of the Company's 1999
Annual Report to Shareholders.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company hereby incorporates by reference pages 1 through 9, inclusive,
of the Company's Financial Information for the Year Ended March 31, 1999 insert
to the 1999 Annual Report to Shareholders.
ITEM 7. FINANCIAL STATEMENTS
The Company hereby incorporates by reference pages 10 through 26 inclusive,
of the Company's Financial Information for the Year Ended March 31, 1999 insert
to the 1999 Annual Report to Shareholders.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The Company hereby incorporates by reference the section captioned "Section
16(a) Beneficial Reporting Compliance" in the Company's definitive Proxy
Statement for its 1999 Annual Meeting of Shareholders to be filed within 120
days of the Company's fiscal year end. Information respecting executive officers
is set forth as Item 4a of this Report.
ITEM 10. EXECUTIVE COMPENSATION
The Company hereby incorporates by reference the sections captioned
"Compensation of Executive Officers, "Option/SAR Grants in Last Fiscal Year" and
"Aggregated Option/SAR Exercises in Last Fiscal Year" in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Shareholders to be
filed within 120 days of the Company's fiscal year end.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company hereby incorporates by reference the section captioned
"Ownership of Certain Beneficial Owners and Management" in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Shareholders to be
filed within 120 days of Company's fiscal year end.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company hereby incorporates by reference the section captioned "Change
in Control Agreements" in the Company's definitive Proxy Statement for its 1999
Annual Meeting of Shareholders to be filed within 120 days of the Company's
fiscal year end.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) Those Exhibits required by Item 601 of Regulation S-B and by
paragraph (a) of Item 13:
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-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
</TABLE>
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<TABLE>
<S> <C>
-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
-4(c) Form of Amendment to Registration Rights Agreement, dated
October 23, 1992, between the Company and Capital For Business,
Inc.; incorporated by reference to Exhibit 4(n) to the Quarterly
Report on Form 10-Q for the quarter ended September 30, 1992,
dated November 13, 1992, as filed by the Company with the
Commission.
-10(a) First Amended Incentive Stock Option Plan; incorporated by
reference to the corresponding Exhibit to the Company's
Registration Statement on Form S-1 of the Company, Registration
No. 33-48332
-10(b) Resolution Amending the First Amended Incentive Stock Option
Plan; incorporated by reference to the corresponding Exhibit to
the Company's Registration Statement on Form S-1 of the Company,
Registration No. 33-48332
-10(c) Amendment to First Amended Incentive Stock Option Plan;
incorporated by reference to the corresponding Exhibit to the
Company's Registration Statement on Form S-1 of the Company,
Registration No. 33-48332
-10(d) 1992 Employee Incentive Stock Option Plan; incorporated by
reference to the corresponding Exhibit to the
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<TABLE>
<S> <C>
Company's Registration Statement on Form S-1 of the Company,
Registration No. 33-48332
-13(a) 1999 Annual Report to Shareholders
-21 List of Subsidiaries of the Registrant
-23(a) Consent of PricewaterhouseCoopers LLP
-23(b) Report of PricewaterhouseCoopers LLP on Financial Statement
Schedule
-27 Financial Data Schedule
</TABLE>
(B) REPORTS ON FORM 8-K.
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CITATION Computer Systems, Inc.
By /s/ J. Robert Copper
---------------------------------
J. Robert Copper, Chairman
and Chief Executive Officer
June 25, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
/s/ J. Robert Copper /s/ Fred L. Brown
- ------------------------------------ -------------------------------------
J. Robert Copper, June 25, 1999 Fred L. Brown, June 25, 1999
Director, Chairman and Chief Director
Executive Officer
/s/ Larry D. Marcus /s/ James F. O'Donnell
- ------------------------------------ -------------------------------------
Larry D. Marcus, June 25, 1999 James F. O'Donnell, June 25, 1999
Director Director
/s/ David T. Pieroni /s/ Richard D. Neece
- ------------------------------------ -------------------------------------
David T. Pieroni, June 25, 1999 Richard D. Neece, June 25, 1999
Director President and Principal Financial
Officer
/s/ John P. Gilmore
-------------------------------------
John P. Gilmore, June 25, 1999
Vice President, Controller, Treasurer
and Principal Accounting Officer
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INDEX TO FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
<TABLE>
<CAPTION>
SCHEDULE
NUMBER SCHEDULE
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<S> <C>
VIII Valuation and Qualifying Accounts
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ -------
<S> <C>
3(a) Restated Articles of Incorporation of the Company;
incorporated by reference to the corresponding Exhibit to
the Company's Registration Statement on Form S-1 of the
Company, Registration No. 33-48332
3(b) Restated By-laws of the Company; incorporated by reference
to the corresponding Exhibit to the Company's Registration
Statement of Form S-1 of the Company, Registration No.
33-48332
4(a) Specimen Common Stock Certificate; incorporated by reference
to the corresponding Exhibit to the Company's Registration
Statement on Form S-1 of the Company, Registration No.
33-48332
4(b) Registration Rights Agreement, dated May 29, 1992, between
the Company and Capital For Business, Inc.; incorporated by
reference to the corresponding Exhibit to the Company's
Registration Statement on Form S-1 of the Company,
Registration No. 33-48332
4(c) Form of Amendment to Registration Rights Agreement, dated
October 23, 1992, between Company and Capital For Business,
Inc.; incorporated by reference to Exhibit 4(n) to the
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1992, dated November 13, 1992, as filed by the
Company with the Commission.
</TABLE>
Page 18
<PAGE> 19
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ -------
<S> <C>
10(a) First Amended Incentive Stock Option Plan; incorporated by
reference to the corresponding Exhibit to the Company's
Registration Statement on Form S-1 of the Company,
Registration No. 33-48332
10(b) Resolution Amending the First Amended Incentive Stock Option
Plan; incorporated by reference to the corresponding Exhibit
to the Company's Registration Statement on Form S-1 of the
Company, Registration No. 33-48332
10(c) Amendment to First Amended Incentive Stock Option Plan;
incorporated by reference to the corresponding Exhibit to
the Company's Registration Statement on Form S-1 of the
Company, Registration No. 33-48332
10(d) 1992 Employee Incentive Stock Option Plan; incorporated by
reference to the corresponding Exhibit to the Company's
Registration Statement on Form S-1 of the Company,
Registration No. 33-48332
</TABLE>
Page 19
<PAGE> 20
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ -------
<S> <C>
13(a) 1999 Annual Report to Shareholders
21 List of Subsidiaries of the Registrant
23(a) Consent of PricewaterhouseCoopers LLP
23(b) Report of PricewaterhouseCoopers LLP on Financial Statement
Schedule
27 Financial Data Schedule
</TABLE>
Page 20
<PAGE> 1
Exhibit 13(a)
________________________________________________________________________________
CITATION COMPUTER SYSTEMS, INC.
FINANCIAL INFORMATION FOR THE YEAR ENDED
MARCH 31, 1999
________________________________________________________________________________
<PAGE> 2
INDEX TO FINANCIAL INFORMATION
<TABLE>
<S> <C>
Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................1
Consolidated Balance Sheet..............................................10
Consolidated Statement of Operations....................................12
Consolidated Statement of Shareholders' Equity..........................13
Consolidated Statement of Cash Flows....................................14
Notes to Consolidated Financial Statements..............................16
Statement of Management's Responsibility for
Financial Reporting..................................................26
Report of Independent Accountants.......................................26
</TABLE>
<PAGE> 3
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following should be read in conjunction with the consolidated financial
statements and notes thereto.
OVERVIEW
CITATION Computer Systems, Inc. designs, develops, markets and supports clinical
information systems for hospitals, clinics, physicians' groups and emerging
Integrated Delivery Networks ("IDN's"). The Company offers a comprehensive suite
of products designed using open client/server architecture that meets a broad
range of the information systems needs of the healthcare industry. These
products integrate patient care processes within the enterprise and throughout
the IDN. The Company's systems are modular, scaleable and allow clients to
leverage their investments in existing systems. Individual components of the
Company's systems can function independently, giving clients the ability to
build their system over time and to integrate existing software. CITATION's
clinical systems are installed in approximately 300 institutions ranging in size
from under 100 beds to over 1,000 beds. CITATION markets its products directly
in the United States and Canada, as well as through distribution partners in
Europe, India, the Asia Pacific area and Latin America.
The Company generates revenues from the sale of information systems and
services. System sales consist of software licenses, related hardware,
installation and training, and the sale of third-party software. Hardware
revenues are generated from sales of third-party manufactured hardware typically
sold in conjunction with the Company's software. Service revenue includes
maintenance and support services.
Revenue from systems sales is recognized upon shipment to the client. Revenue
related to the installation is recognized as the work is performed. Service
revenue is recognized ratably over the term of the contract period.
Cost of products and services sold includes cost of system sales and cost of
service revenue. Cost of system sales includes cost of hardware sold,
installation and training expenses and software amortization costs. Cost of
service revenue includes all client service expenses plus an allocation of
certain other overhead expenses.
Research and development expenses include salaries and expenses related to
development and documentation of software systems and are reduced by capitalized
software development costs. Software development costs are expensed until such
time as technological feasibility is established and are capitalized in
compliance with Statement of Financial Accounting Standards No. 86.
Sales and marketing expenses include salaries, commissions, advertising, trade
show costs, and user group costs related to the sale and marketing of the
Company's systems. General and administrative expenses include salaries and
expenses for corporate administration, finance, legal, and human resources, as
well as profit sharing, bonuses and insurance.
1
<PAGE> 4
RESTRUCTURING COSTS AND OTHER NON-RECURRING CHARGES, INCLUDING SALE OF THE
FINANCIAL SOFTWARE LINE OF BUSINESS AND THE COMPANY'S UK OPERATIONS
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
line of business accounted for approximately $1.8 million of revenue and
contributed a pretax loss of $0.2 million in fiscal 1998. Revenues from this
line of business in fiscal 1999 were $0.3 million through the date of its sale.
The transaction resulted in an aggregate after tax loss of approximately $0.4
million, or $0.11 per share, which reflects an after tax loss on disposal of $44
thousand, or $0.01 per share, recorded in the first quarter of fiscal 1999 and
an after tax loss of $0.4 million, or $0.10 per share, recorded in the fourth
quarter of fiscal 1999. The loss included the write-off of approximately $0.5
million of capitalized software development costs associated with this software.
The additional charge in the fourth quarter of fiscal 1999 reflects a change in
management's estimates of the collectibility of certain accounts receivable
related to its former financial software line of business. Approximately $0.4
million of the sales price for this line of business is reflected in other
accounts receivable on the March 31, 1999 Consolidated Balance Sheet; payment
thereof is expected in fiscal year 2000.
Also in June 1998, the Company announced it was in discussions about a possible
business combination with MEDASYS Digital Systems, S.A., a French Company with
U.S. offices in Miami and Chicago. On December 9, 1998, the Company and MEDASYS
Digital Systems, S.A. agreed to terminate a previously announced Agreement and
Plan of Reorganization to combine the two companies. The companies have entered
into a joint marketing agreement with respect to clinical information systems.
During the fourth quarter of fiscal 1999, the Company recorded a non-operating
charge of $0.5 million relative to costs associated with the MEDASYS business
combination discussions.
In the fourth quarter of fiscal 1998 the Company recorded non-recurring pretax
charges of approximately $1.0 million related to the restructuring of operations
(primarily customer service matters) and for non-operating costs related to the
strategic review of alternatives following an unsolicited expression of interest
in the Company. See Note 5 of the Notes to Consolidated Financial Statements.
In March 1997, the Company sold its United Kingdom ("UK") operations to Health
Systems Limited, a new UK-based company. Under the terms of the transaction,
Health Systems Limited acquired CITATION's UK operating assets, retained the
majority of the Company's employees in the UK and assumed responsibility for
CITATION's existing customers and contracted commitments in the UK. See Note 6
of the Notes to Consolidated Financial Statements for additional information
regarding the 1997 restructuring charge of $4.3 million related to the sale of
UK operations.
2
<PAGE> 5
RESULTS OF OPERATIONS
The following table sets forth, for the period indicated, certain items from the
Company's Consolidated Statement of Operations expressed as a percentage of
total revenues.
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Revenues:
System sales 53.8 % 49.4 % 59.0 %
Service revenue 46.2 50.6 41.0
------ ------ ------
Total revenues 100.0 100.0 100.0
Cost of products and services sold:
Cost of system sales 37.9 37.6 37.9
Cost of service revenue 12.0 12.3 10.5
------ ------ ------
Total cost of products & services sold 49.9 49.9 48.4
Gross profit 50.1 50.1 51.6
Research and development 14.7 19.2 14.9
Selling and administrative 32.3 40.2 38.7
Restructuring costs and other non-recurring charges - 5.0 19.5
Loss on sale of financial systems business 4.1 - -
------ ------ ------
Total operating expense 51.1 64.4 73.1
------ ------ ------
Operating loss (1.0) (14.3) (21.5)
Other income (expense):
Interest income 0.4 0.5 0.7
Interest expense (0.8) (1.0) (0.7)
Other, net (2.8) (1.2) (2.5)
------ ------ ------
Loss before taxes (4.2) (16.0) (24.0)
Benefit for income taxes (1.6) (6.1) (9.1)
------ ------ ------
Net loss (2.6)% (9.9)% (14.9)%
======= ====== ======
</TABLE>
COMPARISON OF FISCAL YEAR ENDED MARCH 31, 1999 TO FISCAL YEAR ENDED MARCH 31,
1998.
REVENUE
Total revenues decreased 3.1% to $16.1 million in fiscal 1999 from $16.6 million
in fiscal 1998 which reflects a 5.5% increase in system sales and an 11.5%
decrease in service revenue. Fiscal 1999 and 1998 included $0.3 million and $1.8
million, respectively, of revenues from the financial software line of business
which was sold in June 1998.
Clinical system sales increased to $8.4 million in fiscal 1999 from $6.4 million
in fiscal 1998. The 31.3% increase in clinical system sales was primarily
attributable to the increase in systems orders of the Company's new NT products
and the increase in hardware sales in anticipation of Y2K upgrades. Clinical
system sales represented 51.9% and 38.5% of total revenues in fiscal years 1999
and 1998, respectively.
3
<PAGE> 6
Service revenue decreased to $7.5 million in fiscal 1999 from $8.4 million in
fiscal 1998. The 11.5% decrease was primarily due to the sale of the financial
software line of business in June 1998. Service revenue represented 46.2% and
50.6% of total revenues in fiscal years 1999 and 1998, respectively.
COST OF PRODUCTS AND SERVICES SOLD AND GROSS PROFIT
For fiscal 1999 and 1998, total cost of products and services sold were $8.0
million and $8.3 million, respectively, representing a 3.1% decrease in fiscal
1999. The total cost of products and services sold as a percentage of total
revenues was 49.9% in both fiscal 1999 and 1998, reflecting minimal variation
from year to year in cost of system sales and cost of service revenue as a
percentage of total revenues. Software amortization costs of $1.7 million in
fiscal 1999 and $2.1 million in fiscal 1998 represented 20.5% and 25.1%,
respectively, of total costs of products and services sold for fiscal years 1999
and 1998.
Gross profit as a percentage of total revenues was 50.1% in fiscal years 1999
and 1998.
RESEARCH AND DEVELOPMENT EXPENSES
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
---------------------------
Software Development Expense 1999 1998
- ---------------------------- ------- -------
(In thousands)
<S> <C> <C>
Research and development spending $ 3,177 $ 4,288
Less - software development capitalized 808 1,089
------- -------
Total research and development expense 2,369 3,199
Amortization of software development costs 1,650 2,085
------- -------
Total research and development expenses $ 4,019 $ 5,284
======= =======
</TABLE>
<TABLE>
<CAPTION>
Capitalized Software Development Cost, Net 1999 1998
- ------------------------------------------ ------- -------
<S> <C> <C>
Beginning of period $ 2,880 $ 3,876
Research and development capitalized per above 808 1,089
Software acquired (C-RIS(R))* 250 -
------- -------
3,938 4,965
Write-off - Financial products capitalized software development costs (539) -
Amortization of software development costs (1,650) (2,085)
Other adjustments 26 -
------- -------
End of period $ 1,775 $ 2,880
======= =======
</TABLE>
[FN]
* Software acquired related to the purchase of the radiology system. See Note
4 of the Consolidated Financial Statements for further information.
</FN>
The decrease in research and development spending in fiscal 1999 as compared to
fiscal 1998 was the result of the Company completing the development of several
Windows NT-based products during fiscal 1998. In conjunction with the decreased
research and development spending in fiscal 1999, the decreased number of
development projects qualifying for capitalization in recent years and the
write-off of capitalized software costs in conjunction with the sale of the
financial software line of business, the Company expects software amortization
expense in fiscal 2000 and beyond to decrease slightly from fiscal 1999 levels.
For the fiscal years 1999 and 1998, the Company capitalized 25.4% of research
and development spending.
4
<PAGE> 7
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses as a percentage of total revenues decreased
to 32.3% in fiscal 1999 from 40.2% in fiscal 1998. Total selling and
administrative expenses decreased $1.5 million to $5.2 million. This decrease
was primarily due to lower personnel costs and lower administrative costs to
support operations.
OTHER OPERATING EXPENSES
See previous discussion of restructuring costs and other non-recurring charges,
including sale of the financial software line of business and the Company's UK
operations.
OPERATING LOSS
CITATION recorded operating income of $0.5 million in fiscal 1999, excluding the
$0.7 million loss on the sale of financial systems line of business. The
operating loss for fiscal 1998 was $1.6 million, excluding the $0.8
restructuring costs. The change primarily reflects the factors described above.
Including the above non-recurring charges, the operating loss was $0.2 million
in fiscal 1999 compared to an operating loss of $2.4 million in fiscal 1998.
INCOME TAXES
The Company's effective income tax benefit rate was 38.0% in both fiscal 1999
and fiscal 1998.
NET LOSS AND LOSS PER SHARE
Net loss decreased $1.3 million to $0.4 million in fiscal 1999 from $1.7 million
in fiscal 1998 as a result of the factors noted above. Basic and diluted loss
per share decreased to $0.11 in fiscal 1999 from $0.43 in fiscal 1998.
COMPARISON OF FISCAL YEAR ENDED MARCH 31, 1998 TO FISCAL YEAR ENDED MARCH 31,
1997.
REVENUE
Total revenues decreased 24.4% to $16.6 million in fiscal 1998 from $22.0
million in fiscal 1997 due to a 36.7% decrease in system sales and a 6.7%
decrease in service revenue. Fiscal 1997 included $0.9 million in United Kingdom
sales (operations within the United Kingdom were sold in 1997).
System sales decreased to $8.2 million in fiscal 1998 from $13.0 million in
fiscal 1997. The 36.7% decrease in system sales was primarily attributable to
the loss of revenue generated from UK operations and the delay in new systems
orders due to the anticipated release of the Company's new NT products. The
Company also believes that system sales results were negatively impacted by
uncertainty over the Company's future because of the announced hiring of an
investment banker to review its strategic options. System sales represented
49.4% and 59.0% of total revenues in fiscal years 1998 and 1997, respectively.
Service revenue decreased to $8.4 million in fiscal 1998 from $9.0 million in
fiscal 1997. The 6.7% decrease was primarily due to the reduction in sales and
renewals of service contracts from existing customers. Service revenue
represented 50.6% and 41.0% of total revenues in fiscal years 1998 and 1997,
respectively.
5
<PAGE> 8
COST OF PRODUCTS AND SERVICES SOLD AND GROSS PROFIT
For fiscal 1998 and 1997, total cost of products and services sold were $8.3
million and $10.7 million, respectively, representing a 22.1% decrease in fiscal
1998. The total cost of products and services sold increased to 49.9% of total
revenues in fiscal 1998 from 48.4% in fiscal 1997. The increase in cost as a
percentage of revenues was primarily due to decreases in total revenues which
were not entirely offset by decreases in software amortization costs and client
service expenses. Software amortization costs of $2.1 million in fiscal 1998 and
$2.2 million in fiscal 1997 represented 25.1% and 20.7%, respectively, of total
costs of products and services sold for fiscal years 1998 and 1997.
Gross profit as a percentage of total revenues decreased to 50.1% in fiscal 1998
from 51.6% in fiscal 1997. The decrease in gross profit as a percentage of total
revenues was primarily attributable to the factors discussed above.
RESEARCH AND DEVELOPMENT EXPENSES
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
---------------------------
Software Development Expense 1998 1997
- ---------------------------- ------- -------
(In thousands)
<S> <C> <C>
Research and development spending $ 4,288 $ 4,793
Less - software development capitalized 1,089 1,525
------- -------
Total research and development expense 3,199 3,268
Amortization of software development costs 2,085 2,201
------- -------
Total research and development expenses $ 5,284 $ 5,469
======= =======
</TABLE>
<TABLE>
<CAPTION>
Capitalized Software Development Cost, Net 1998 1997
- ------------------------------------------ ------- -------
<S> <C> <C>
Beginning of period $ 3,876 $ 4,762
Research and development capitalized per above 1,089 1,525
Software acquired (C-MAX)* - 652
Other software acquired - 176
------- -------
4,965 7,115
Write-off - UK capitalized software development costs - (1,114)
Amortization of software development costs (2,085) (2,201)
Other adjustments - 76
------- -------
End of period $ 2,880 $ 3,876
======= =======
</TABLE>
[FN]
* Software acquired related to the purchase of the contract management
system. See Note 8 of the Consolidated Financial Statements for further
information.
</FN>
For the fiscal years 1998 and 1997, the Company capitalized 25.4% and 31.8%,
respectively, of research and development spending.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses as a percentage of total revenues increased
to 40.2% in fiscal 1998 from 38.7% in fiscal 1997. Total selling and
administrative expenses decreased $1.8 million to $6.7 million primarily due to
lower selling and marketing expenses, principally sales commissions, to support
operations.
6
<PAGE> 9
OPERATING LOSS
CITATION incurred an operating loss of $1.6 million in fiscal 1998, excluding
the $0.8 million in restructuring costs. The operating loss for fiscal 1997 was
$0.4 million, excluding $4.3 million in restructuring costs and loss on the sale
of the UK operations. The operating loss increased primarily reflecting the
factors described above. Including the above non-recurring charges, the
operating loss was $2.4 million in fiscal 1998 compared with an operating loss
of $4.7 million in fiscal 1997.
INCOME TAXES
The Company's effective income tax benefit rate was 38.0% in both fiscal 1998
and fiscal 1997.
NET LOSS AND LOSS PER SHARE
Net loss decreased $1.6 million to $1.7 million in fiscal 1998 from $3.3 million
in fiscal 1997 as a result of the factors noted above. Basic and diluted loss
per share decreased to $.43 in fiscal 1998 from $.87 in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash flows from operations and
borrowing under its line of credit with a bank. At March 31, 1999, the Company
had cash and cash equivalents of $0.2 million compared to $0.4 million at March
31, 1998.
Cash generated (used) by operations was $1.1 million, $2.6 million and $(0.5)
million in the fiscal years of 1999, 1998, and 1997, respectively. For the year
ended March 31, 1999, the Company generated $1.1 million in cash from operating
activities, and used $1.5 in investing activities (including $0.8 million for
capitalized software development, $0.3 million for the purchase of the C-RIS(R)
system, and $0.4 million for capital expenditures). Cash provided by financing
activities was $0.1 million, which included $0.5 million in borrowings to
upgrade internal computer equipment and for the purchase of the C-RIS(R) system,
offset by $0.4 million of principal payments.
Cash decreased $0.1 million in fiscal 1998. The decrease was primarily due to
$1.5 million used in investing activities (for capital expenditures and software
development costs) and $1.1 million of principal payments on long-term debt
offset by $2.6 million of cash provided by operations.
Cash decreased $1.6 million in fiscal 1997. The decrease was primarily due to
$3.2 million used in investing activities, including $1.8 million for
capitalized software and $0.8 million for the purchase of a contract management
system offset by cash provided by financing activities, primarily line of credit
borrowings.
At March 31, 1999, the Company had a line of credit agreement with a bank. The
line of credit allows the Company to borrow up to $4.0 million through June 1,
2000 with interest at the bank's prime rate (7.75% at March 31, 1999). During
fiscal 1999 the Company borrowed approximately $0.4 million under term notes
related to the purchase of C-RIS(R) and certain computer equipment. Such term
notes are payable in monthly payments of principal and interest through March
2002. The line of credit and term notes are secured by the Company's accounts
receivable, inventory, and general intangible assets. There were borrowings of
$1.2 million outstanding under the line of credit agreement as of March 31, 1999
($2.8 million of additional borrowings are available), which have been
classified as long-term in the March 31, 1999 Consolidated Balance Sheet.
7
<PAGE> 10
The Company has provided extended payment terms to an overseas customer in
Singapore for a maximum period of three years ending in calendar year 2000. The
Company believes that this receivable is fully collectible pursuant to such
payment terms.
The Company's current commitments consist primarily of operating lease
obligations aggregating $2.5 million over the next five years. The operating
leases consist primarily of the Company's office lease in St. Louis, Missouri,
which expires in May 2004.
The Company believes that its cash and cash equivalents, together with its
current borrowing facilities and cash generated from operations, will be
sufficient to fund its anticipated cash requirements for at least the next 12
months. The Company's ability to meet its cash requirements on a long term basis
will depend on profitable operations and consistent and timely collections of
its accounts receivable.
INFLATION AND CHANGING PRICES
The Company believes inflation has not had a material effect on the Company's
operations or its financial condition.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"), effective for periods beginning
after December 15, 1997. FAS 131 supersedes FAS 14, "Financial Reporting of
Segments of a Business Enterprise." FAS 131 establishes standards for the way
public business enterprises report financial and descriptive information about
the reportable operating segments in their financial statements. Generally,
financial information is required to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. The adoption of FAS 131 during fiscal 1999 had no effect
on the Company's financial statement presentation.
During fiscal 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97-2"). SOP 97-2 is effective for transactions entered into in fiscal
years beginning after December 15, 1998. SOP 97-2 provides guidance on applying
generally accepted accounting principles in recognizing revenue on software
transactions and supersedes SOP 91-1, "Software Revenue Recognition." SOP 97-2
did not materially impact the financial position or results of operations of the
Company.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133").
FAS 133 established accounting and reporting standards for derivative
instruments and for hedging activities and requires recognition of all
derivatives on the balance sheet measured at fair value. FAS 133 is effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000. The
Company is continuing to evaluate the provisions of FAS 133 to determine its
impact on the Company's financial position and results of operations.
YEAR 2000
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 completed a Year 2000 compliance program to make its
systems Year 2000 compliant. This program
8
<PAGE> 11
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 March
31, 1999, the Company had: (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. It is
anticipated that all reprogramming efforts will be completed by September 30,
1999. 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 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. 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 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, cash flows or results of
operations.
FORWARD LOOKING STATEMENTS
Certain of the statements made herein are "FORWARD LOOKING STATEMENTS," as such
term is used in Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Any forward
looking statements set forth herein are necessarily subject to significant
uncertainties and risks. The words "believes," "anticipates," "expects," and
similar expressions are intended to identify forward looking statements. The
Company cautions readers that actual results could be materially different as a
result of various possibilities and differences between anticipated and actual
developments.
For further discussion of risk factors, please refer to page 9 of the Company's
Form 10-KSB Annual Report for the fiscal year ended March 31, 1999 as filed with
the Securities and Exchange Commission.
9
<PAGE> 12
Consolidated Balance Sheet
(Thousands, except share amounts)
<TABLE>
<CAPTION>
March 31,
-------------------
1999 1998
------ ------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 204 $ 420
Accounts receivable:
Trade, net of allowance for doubtful accounts of $212 and
$205, respectively 6,857 6,351
Other 445 113
Inventories (Note 11) 348 436
Prepaid expenses and other current assets 369 270
Deferred tax assets (Note 13) 142 136
-------- --------
Total current assets 8,365 7,726
-------- --------
Software development costs, net of accumulated amortization of
$12,367 and $10,717 respectively (Note 1) 1,775 2,880
-------- --------
Property and equipment:
Furniture and fixtures 843 843
Hardware and shop equipment 3,091 2,750
Leasehold improvements 120 109
Vehicles 37 37
-------- --------
4,091 3,739
Less - accumulated depreciation and amortization (3,392) (2,821)
-------- --------
Net property and equipment 699 918
-------- --------
Long-term deferred tax assets (Note 13) 1,104 876
Long-term accounts receivable (Note 9) 1,569 1,657
Other assets 366 255
-------- --------
3,039 2,788
-------- --------
Total assets $ 13,878 $ 14,312
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
10
<PAGE> 13
Consolidated Balance Sheet - continued
(Thousands, except share amounts)
<TABLE>
<CAPTION>
March 31,
--------------------
1999 1998
------- -------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt (Note 12) $ 239 $ 238
Accounts payable 1,223 1,423
Customer deposits 236 413
Accrued commissions 139 116
Other accrued liabilities 211 218
Deferred service revenue 2,521 2,378
-------- --------
Total current liabilities 4,569 4,786
Long-term debt (Note 12) 1,491 1,379
-------- --------
6,060 6,165
-------- --------
Commitments and contingencies (Notes 9, 10, 16 and 17)
Shareholders' Equity (Notes 1 and 14):
Preferred stock; par value $.01 per share; 5,000,000 shares
authorized; no shares issued and outstanding
Common stock; par value $.10 per share; 10,000,000 shares
authorized; 3,838,344 and 3,810,548 shares issued and outstanding,
respectively 384 381
Paid-in capital 6,596 6,513
Retained earnings 838 1,253
-------- --------
7,818 8,147
-------- --------
Total liabilities and shareholders' equity $ 13,878 $ 14,312
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
11
<PAGE> 14
Consolidated Statement of Operations
(Thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net system sales and service revenue:
System sales $ 8,669 $ 8,214 $ 12,972
Service revenue 7,459 8,426 9,033
-------- -------- --------
16,128 16,640 22,005
-------- -------- --------
Cost of products and services sold:
System sales 6,110 6,252 8,337
Service revenue 1,934 2,048 2,313
-------- -------- --------
8,044 8,300 10,650
-------- -------- --------
Gross profit 8,084 8,340 11,355
Research and development expense 2,369 3,199 3,268
Selling and administrative expenses 5,207 6,686 8,515
Restructuring costs and other non-recurring charges (Notes 5
and 6) - 832 4,299
Loss on sale of financial systems business (Note 2) 663 - -
-------- -------- --------
Operating loss (155) (2,377) (4,727)
-------- -------- --------
Other income (expense):
Interest income 65 78 143
Interest expense (126) (168) (150)
MEDASYS merger-related expenses (Note 3) (495) - -
Other non-operating expenses (Note 5) - (158) -
Secondary offering expense (Note 7) - - (542)
Other, net 42 (42) (4)
-------- -------- --------
(514) (290) (553)
-------- -------- --------
Loss before income taxes (669) (2,667) (5,280)
Benefit for income taxes (Note 13) (254) (1,014) (2,006)
-------- -------- --------
Net loss $ (415) $ (1,653) $ (3,274)
======== ======== ========
Earnings per common and common equivalent share (Note 1):
Basic and diluted:
Loss per share $ (0.11) $ (0.43) $ (0.87)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
12
<PAGE> 15
Consolidated Statement of Shareholders' Equity
(Thousands)
<TABLE>
<CAPTION>
Equity
Adjustment
Common Stock From Foreign
Par Paid-In Retained Currency
Value Capital Earnings Translation Total
----- ------- -------- ----------- -----
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1996 $375 $6,128 $ 6,180 $(69) $12,614
Sale of common stock pursuant
to exercise of stock options
and warrants 3 240 - - 243
Issuance of common stock
to Directors (Note 1) 1 23 - - 24
Issuance of common stock for
401K company matching
contributions 1 58 - - 59
Foreign currency translation
adjustment - - - 143 143
Net loss - - (3,274) - (3,274)
---- ------ ------- ---- -------
Balance, March 31, 1997 380 6,449 2,906 74 9,809
Sale of common stock
pursuant to exercise of
stock options and warrants - 2 - - 2
Issuance of common stock
to Directors (Note 1) - 12 - - 12
Insurance of common stock
for 401K company-matching
contributions 1 50 - - 51
Foreign currency translation
adjustment - - - (74) (74)
Net loss - - (1,653) - (1,653)
---- ------ ------- ---- -------
Balance, March 31, 1998 $381 $6,513 $ 1,253 $ - $ 8,147
Issuance of common stock
to Directors (Note 1) 2 46 - - 48
Issuance of common stock
for 401K company-matching
contributions 1 37 - - 38
Net loss $ - $ - $ (415) $ - $ (415)
---- ------ ------- ---- -------
Balance, March 31, 1999 $384 $6,596 $ 838 $ - $ 7,818
==== ====== ======= ==== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
13
<PAGE> 16
Consolidated Statement of Cash Flows
(Thousands)
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (415) $(1,653) $(3,274)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities, excluding the effects
of the sale of UK operations:
Depreciation and amortization of property and equipment 590 657 932
Amortization of software development costs 1,650 2,085 2,201
Amortization of other assets 180 181 107
Non-cash write off of financial products software 539 - -
Non-cash restructuring costs and other non-recurring
charges - 943 4,299
Non-cash 401K matching contribution 38 51 59
Non-cash issuance of common stock to Directors 48 12 24
Decrease in deferred income taxes (254) (1,014) (1,333)
Decrease (increase) in accounts receivable, net (838) 64 1,295
Decrease (increase) in inventories 88 (19) 120
Decrease (increase) in prepaid expenses and other assets (370) 1,331 (1,076)
Decrease (increase) in long-term accounts receivable 88 - (1,657)
Decrease in accounts payable (200) (238) (53)
Increase (decrease) in customer deposits (177) 78 (207)
Increase (decrease) in other accrued liabilities 16 (6) (1,928)
Increase (decrease) in deferred service revenues 143 92 (31)
------ ------- -------
Net cash provided (used) by operating activities $1,126 $ 2,564 $ (522)
====== ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
14
<PAGE> 17
Consolidated Statement of Cash Flows - continued
(Thousands)
<TABLE>
Year ended March 31,
--------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from investing activities:
Capital expenditures $ (371) $ (345) $ (653)
Software development costs (834) (1,089) (1,777)
Purchase of C-RISO system (250) - -
Purchase of contract management system - - (792)
------ ------- -------
Net cash used in investing activities (1,455) (1,434) (3,222)
------ ------ -------
Cash flows from financing activities:
Principal payments on long-term debt (421) (1,149) (244)
Proceeds from long-term debt 534 - 1,967
Proceeds from sale of common stock pursuant
to exercise of stock options and warrants - 2 243
------ ------ -------
Net cash provided (used) by financing activities 113 (1,147) 1,966
------ ------ -------
Effect of exchange rate changes on cash - (74) 143
------ ------ -------
Net decrease in cash and cash equivalents (216) (91) (1,635)
Cash and cash equivalents, beginning of year 420 511 2,146
------ ------ -------
Cash and cash equivalents, end of year $ 204 $ 420 $ 511
====== ====== =======
</TABLE>
Supplemental schedule of non-cash investing and financing activities.
For the years ended March 31, 1999, 1998, and 1997, the Company paid interest
of $126, $168, and $150, respectively, and received refunds of income taxes of
$59, $646, and $793, respectively.
The accompanying notes are an integral part of the consolidated financial
statements.
15
<PAGE> 18
Notes to Consolidated Financial Statements
(Thousands except shares and per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The policies utilized by CITATION Computer Systems, Inc. ("Company") in the
preparation of the consolidated financial statements conform to generally
accepted accounting principles, and require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual amounts could differ from these
estimates.
The significant accounting policies followed by the Company are described
below:
OPERATIONS
CITATION designs, develops, markets and supports clinical information systems
for hospitals, clinics, physicians' groups and emerging Integrated Delivery
Networks ("IDN's"). The Company offers a comprehensive suite of products
designed using open client/server architecture that meets a broad range of the
information systems needs of the healthcare industry.
INVENTORIES
Inventories are valued at the lower of cost, determined on the first in, first
out basis, or market.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Major renewals and betterments are
capitalized while maintenance and repairs are expensed currently. When
property is sold or otherwise disposed of, the related cost and accumulated
depreciation are removed from the respective accounts, and any gain or loss on
disposition is credited or charged to income.
The Company provides for depreciation of property and equipment by charging
against earnings amounts sufficient to amortize the cost of the properties over
the estimated useful lives generally using straight line methods. The
estimated useful life of the assets are as follows:
Vehicles, furniture, fixtures and equipment 3 to 10 years
Leasehold improvements . Remaining life of the lease
REVENUE RECOGNITION
Revenue from the sale of computer systems is recognized upon shipment to the
customer. Revenue related to the installation of computer systems is
recognized as the work is performed. Costs and expenses related to
installation of the computer equipment and software system, training customer
personnel, and provision for warranties offered are estimated and recorded as
cost of sales when the related revenue is recognized.
Revenue from the sale of additional hardware and additional software is
recognized upon shipment. Costs and expenses associated with the sale of
additional hardware and software are recorded when the related revenue is
recognized. Revenue related to sales of product warranties and maintenance
service contracts is recognized ratably over the term of the contract period.
Sales returns are treated as reductions to net system sales and service
revenues.
16
<PAGE> 19
COST OF SALES
For purposes of estimating the cost of sales related to service revenue, the
Company includes all of its customer service expenses plus an allocation of
certain other overhead expenses based upon estimates made by management.
SOFTWARE DEVELOPMENT COSTS
Certain costs incurred in developing software products are capitalized and
amortized on a product-by-product basis using the greater of the ratio that
current gross revenues for a product bear to the current and anticipated future
gross revenues for that product or the straight-line method over the estimated
three- to five-year economic life of the products. The costs consist of
salaries, computer expenses and other overhead costs directly related to the
development and/or major enhancement of software products. Such costs are
capitalized, to the extent they are recoverable through future sales, from the
time the product's technological feasibility is established up to its general
release to customers. Costs incurred before or after this period are expensed
as incurred.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred income taxes are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Such temporary differences result
primarily from using different methods to accrue certain expenses and to
calculate capitalization of software development costs for financial and tax
reporting purposes. Deferred tax (benefit) expense represents the change in
the deferred tax asset or liability.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"), which
requires public entities to present both basic and diluted earnings per share
amounts on the face of their financial statements, replacing the former
calculations of primary and fully diluted earnings per share. The Company
adopted FAS 128 effective with the beginning of its fiscal 1998 third quarter,
and retroactively restated all prior years earnings per share information.
Reconciliation of the number of shares used in computing basic and dilutive
earnings (loss) per common and common equivalent share is as follows:
<TABLE>
YEAR ENDED MARCH 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Basic 3,823,361 3,806,536 3,773,020
Effect of dilutive securities - stock options - - -
--------- --------- ---------
Diluted 3,823,361 3,806,536 3,773,020
========= ========= =========
</TABLE>
17
<PAGE> 20
FOREIGN CURRENCY TRANSLATION
The asset and liability accounts of the Company's former foreign division were
translated at the year-end exchange rate. Revenue and expense amounts were
translated at monthly average exchange rates. The resulting translation
adjustment was recorded as a separate component of shareholders' equity.
Foreign currency transaction gains and losses were included in earnings when
incurred. Such foreign currency transaction gains and losses were not material
for each of the three years in the period ended March 31, 1999. As discussed
in Note 6 below, since March 1997 the Company has had no significant foreign
operations.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid investments, such as
money-market accounts with an original maturity of three months or less.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
DIRECTORS' FEES
During the year ended March 31, 1995, the Company adopted the Directors Common
Share Plan (Directors' Plan) whereby certain non-employee members of the Board
of Directors (Directors) may receive all or a portion of the Directors' fees in
the form of Company common stock in lieu of cash. During the years ended March
31, 1999, 1998, and 1997, 15,672, 1,600, and 1,793 shares of common stock
valued at $48, $12, and $24, respectively, were issued to such Directors under
the Directors Plan.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("FAS 130"), establishes standards for the reporting and presentation
of comprehensive income and its components in a complete set of general-purpose
financial statements. Comprehensive income represents net income plus certain
items that are charged directly to stockholders' equity. The Company has
adopted FAS 130 for the year ended March 31, 1999. Given the sale of the UK
operations in fiscal 1997, other comprehensive income items are immaterial and
the adoption of FAS 130 had no effect on the accompanying financial statement
presentation.
2. SALE OF FINANCIAL SOFTWARE LINE OF 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
line of business accounted for approximately $1.8 million of revenue and
contributed a pretax loss of $0.2 million in fiscal 1998. Revenues from this
line of business in fiscal 1999 were $0.3 million through the date of its sale.
The transaction resulted in an aggregate after tax loss of approximately $0.4
million, or $0.11 per share, which reflects an after tax loss on disposal of
$44 thousand, or $0.01 per share, recorded in the first quarter of fiscal 1999
and an after tax loss of $0.4 million, or $0.10 per share, recorded in the
fourth quarter of fiscal 1999. The loss included the write-off of approximately
$0.5 million of capitalized software development costs associated with this
software. The additional charge in the fourth quarter of fiscal 1999 reflects
a change in management's estimates of the collectibility of certain accounts
receivable related to its former financial software line of business.
Approximately $0.4 million of the sales price for this line of business is
reflected in other accounts receivable on the March 31, 1999 Consolidated
Balance Sheet; payment thereof is expected in fiscal year 2000.
18
<PAGE> 21
3. TERMINATION OF 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"). On
December 9, 1998, the Reorganization Agreement was terminated by the parties.
However, the companies continued to explore other strategic opportunities and
have entered a joint marketing agreement related to clinical information
systems. During the fourth quarter of fiscal 1999, a non-operating charge of
$495 was recorded related to costs (primarily legal, accounting and investment
advisory in nature) associated with the MEDASYS business combination
discussions.
4. ACQUIRED C-RIS(R) RADIOLOGY INFORMATION SYSTEM SOFTWARE
During the fourth quarter of fiscal 1999 the Company agreed to purchase its
C-RIS(R) radiology information system software from Irish Medical Systems (IMS)
for $250. The Company previously held the exclusive North American
distribution rights for C-RIS(R), which was developed by IMS under CITATION's
specifications and first introduced to the market in 1997. The Company
financed this purchase with proceeds from a term note.
5. RESTRUCTURING COSTS AND OTHER NON-RECURRING CHARGES
During the fourth quarter of fiscal 1998, the Company recorded non-recurring,
pretax charges of $832 for restructuring costs primarily related to customer
service matters and $158 for non-operating costs related to the strategic
review of alternatives following an unsolicited expression of interest in the
Company. Cash payments during fiscal 1998 with respect to such charges were
approximately $60. Remaining additional payments totaling approximately $62
were paid in fiscal 1999.
6. UK RESTRUCTURING AND SALE OF OPERATIONS
During the second, third and fourth quarters of fiscal 1997 the Company
recorded pretax charges of $1,303, $164 and $118, respectively, to cover the
restructuring of its operations in the United Kingdom ("UK"). In March 1997,
the Company completed a transaction in which it sold its UK operations to
Health Systems Limited ("HSL"), which also became CITATION's exclusive
distributor for its clinical software products in the UK. Under the terms of
the transaction, HSL acquired CITATION's UK operating assets, retained a
majority of the Company's employees in the UK, and assumed responsibility for
CITATION's existing customers and contracted commitments in the UK. The major
components of the UK restructuring and sale, and its effect on the pre-tax and
after-tax results of the Company, are as follows:
<TABLE>
<CAPTION>
Year Ended March 31, 1997
-----------------------------
Pre-tax After Tax Per Share
------- --------- ---------
<S> <C> <C> <C>
Net loss on sale of UK assets (including write-off of
capitalized software of $527) $2,714 $1,655 $0.44
Write-off of capitalized software prior to sale 587 358 0.09
Severance and closure costs 300 183 0.05
Other restructuring costs 698 426 0.11
------ ------ ------
$4,299 $2,622 $0.69
======= ====== ======
</TABLE>
All expenses associated with the UK restructuring and sale of operations were
recorded during fiscal 1997. Cash payments during fiscal 1997 related to the
UK restructuring and sale of operations were approximately $550. Remaining
additional payments totaling approximately $400 were paid in fiscal 1998.
19
<PAGE> 22
7. SECONDARY OFFERING EXPENSE
On July 16, 1996 the Company filed a registration statement with the Securities
and Exchange Commission covering a proposed offering of 2,732,311 shares of its
Common Stock, of which 732,311 shares were to be offered for the account of
certain current shareholders and 2,000,000 shares were to be offered by the
Company. The proposed offering was terminated on October 8, 1996 and no sales
of common stock were made pursuant thereto. During the year ended March 31,
1997, $542 of non-operating charges related to the proposed secondary offering
were recorded.
8. ACQUIRED CONTRACT MANAGEMENT SYSTEM
On August 26, 1996, the Company acquired a contract management system from
Computer Systems Excellence, Inc. ("CSE") for $1,242, including $92 of
transaction costs. The Company paid $700 at closing and recorded a liability
of $450 which was paid in eight quarterly installments through August 1998.
9. LONG-TERM ACCOUNTS RECEIVABLE
The Company has provided extended payment terms to a customer in Singapore for
a maximum period of three years ending in calendar year 2000. The Company
believes that this receivable is fully collectible pursuant to such payment
terms.
10. CONCENTRATION OF CREDIT RISK
The Company generates revenue primarily through sales to the healthcare
industry located throughout the United States. Due to this concentration,
substantially all receivables at March 31, 1999 and 1998 are from healthcare
institutions in the United States, and a healthcare information systems
integrator based in Singapore, which may be similarly affected by changes in
economic, regulatory or other conditions.
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral. The Company maintains reserves for potential
credit losses and historically such losses have been within management's
expectations.
11. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31,
--------------------
1999 1998
--------- ----------
<S> <C> <C>
Hardware and third party software $143 $195
Field service equipment 205 241
--------- ---------
$348 $436
========= =========
</TABLE>
20
<PAGE> 23
12. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31,
--------------
1999 1998
---- ----
<S> <C> <C>
Bank notes payable due in monthly payments of principal and
interest
through March, 2002; interest payable at 8% to 8.5% $ 563 $ 338
Note payable to CSE due through August, 1998 - 112
Borrowings under bank line of credit, interest payable at prime
(7.75% at March 31, 1999) 1,167 1,167
------ ------
Total debt 1,730 1,617
Less - current portion 239 238
------ ------
Total long-term debt $1,491 $1,379
====== ======
</TABLE>
The line of credit with a bank allows the Company to borrow up to $4,000
through June 1, 2000. At March 31, 1999, $2,833 was available under the line
of credit.
The line of credit and the notes payable to banks are secured by the Company's
accounts receivable, inventory, equipment, and general intangible assets. The
respective agreements require that certain minimum net worth and leverage ratio
requirements be maintained by the Company. The Company was in compliance with
these requirements or has obtained waivers at March 31, 1999.
The aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year Ended
March 31,
<S> <C>
2000 $ 239
2001 1,374
2002 117
-------
$1,730
=======
</TABLE>
13. INCOME TAXES
The components of the benefit for income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ - $ - $ (577)
State - - (96)
----- ------- -------
- - (673)
----- ------- -------
Deferred:
Federal (217) (857) (1,118)
State (37) (157) (215)
----- ------- -------
(254) (1,014) (1,333)
----- ------- -------
$(254) $(1,014) $(2,006)
===== ======= =======
</TABLE>
21
<PAGE> 24
The benefit for income taxes differs from the amount computed using the
statutory federal income tax rate (34%) as follows:
<TABLE>
Year ended March 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income tax benefit at the statutory rate $(227) $ (907) $(1,795)
Increases:
State income taxes, net (24) (103) (204)
Other, net (3) (4) (7)
----- ------- -------
$(254) $(1,014) $(2,006)
===== ======= =======
</TABLE>
Deferred tax assets and liabilities at March 31, 1999 and 1998, are comprised
of the following temporary differences:
<TABLE>
<CAPTION>
March 31,
--------------------
1999 1998
---- ----
<S> <C> <C>
Current deferred tax assets (liabilities):
Accrued liabilities $ 71 $68
Allowance for doubtful accounts 85 82
Other, net (14) (14)
---- ----
Net current deferred tax asset $142 $136
==== ====
</TABLE>
<TABLE>
<CAPTION>
March 31,
--------------------
1999 1998
---- ----
<S> <C> <C>
Long-term deferred tax assets (liabilities):
Capitalized software development
Costs $(387) $ (829)
Depreciation 85 (9)
State taxes (53) (40)
Tax credit carry forward 90 90
Net operating loss carry forward 1,369 1,664
------ ------
Net long-term deferred tax asset $1,104 $876
====== ======
</TABLE>
At March 31, 1999, the Company had Federal net operating loss carryforwards of
approximately $3,500 which expire between 2012 and 2013. Company management
has determined that based on expected future operating plans and tax planning
strategies available to the Company, the net operating loss carryforwards at
March 31, 1999 will be utilized to offset future taxes. Therefore, no
valuation allowance related to the net operating loss carryforwards has been
recorded at March 31, 1999.
14. STOCK OPTIONS AND WARRANTS
The Company has an Employee Incentive Stock Option Plan which provides for the
issuance of up to 348,347 stock options to executive officers or other key
employees of the Company.
The Company's incentive stock option plan allows participation, with certain
restrictions, by all full-time employees with, at least, one year of service.
Options granted allow employees to purchase shares of the Company's common
stock at prices not less than the fair market value of the stock at the date of
the grant. Options which have been granted under the plan are exercisable
during the employment of the grantee at specified time intervals. Outstanding
options expire between 2004 and 2008.
<PAGE> 25
Stock option transactions (number of shares) are summarized below:
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Shares under option,
beginning of period 346,333 300,333 299,497
Stock options granted at an exercise price
of $1.00 9,000 - -
Stock options granted at an exercise price
of $3.0625 1,000 - -
Stock options granted at an exercise price
of $11.00 - - 8,000
Stock options granted at an exercise price
of $15.75 - - 2,000
Stock options granted at an exercise price
of $7.00 - 7,000 -
Stock options forfeited (15,000) (1,500) (41,664)
Non-qualified stock options granted at
an exercise price of $14.25 - - 80,000
Non-qualified stock options granted at
an exercise price of $7.24 to $9.125 - 41,000 -
Non-qualified stock options forfeited (11,000) - -
Stock options exercised at $4.50 to $8.51 - - (47,500)
Stock options exercised at $4.50 - (500) -
------- ------- -------
Shares under option, end of period 330,333 346,333 300,333
======= ======= =======
</TABLE>
The following table summarizes information for options currently outstanding at
March 31, 1999:
<TABLE>
<CAPTION>
Weighted Average
Exercise Number Remaining
Price Outstanding Contractual Life
- ---------------- --------------- ------------------
<S> <C> <C>
$1.00-$3.0625 10,000 10 years
4.50 - 5.00 172,000 6
6.13 - 6.88 24,000 9
7.00 - 7.19 32,333 7
8.88 - 9.13 12,000 9
14.25 80,000 7
-------
330,333
=======
</TABLE>
The Company accounts for employee stock options in accordance with Accounting
Principles Board No. 25 "Accounting for Stock Issued to Employees" (APB 25).
Under APB 25, the "intrinsic value based method" specifies that no compensation
expense is recognized if employee stock options are granted with an exercise
price equal to or higher than the market value of the stock price on the date
of the grant.
At March 31, 1999, options to purchase 299,361 shares were exercisable. During
the years ended March 31, 2000 and 2001, options to purchase an additional
17,036 and 13,936 shares, respectively, will become exercisable. Options to
purchase 242,181 shares were available for grant under the 1992 Employee
Incentive Stock Option Plan at March 31, 1999.
23
<PAGE> 26
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("FAS 123"). FAS 123 prescribes the recognition of compensation
expense based on the fair value of options or stock awards determined on the
date of the grant. However, FAS 123 allows companies to continue to apply the
"intrinsic value based method" set forth in APB 25 for employee stock option
grants. Had compensation costs for the Company's employee stock option plan
been determined based on the fair value of the options on the grant dates
consistent with the methodology prescribed by FAS 123, the Company's net loss
and net loss per share would have increased as shown below. In accordance with
the adoption methodology prescribed by FAS 123, the pro forma results shown
below reflect only the impact of employee stock options granted during the
years ended March 31, 1999 and 1998. Because future employee stock options may
be granted, the pro forma impact for fiscal 1999 and fiscal 1998 is not
necessarily indicative of the impact in future years.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net loss
As reported $ (669) $(1,653)
Pro forma (688) (1,771)
Loss per share
As reported $(0.11) $ (0.43)
Pro forma (0.11) (0.47)
</TABLE>
The fair value of the options granted is estimated on the date of grant using
the Black-Scholes multiple option-pricing model with the following weighted
average assumptions:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Risk-free interest rate 4.4% - 5.3% 5.8% - 6.6%
Expected volatility 77% 63%
Estimated lives of options (in years) 5.0 5.0
Expected dividend yield 0% 0%
</TABLE>
The weighted average fair value of options granted during the fiscal years
ended March 31, 1999 and 1998 was $1.89 and $3.95, respectively.
15. PROFIT AND SAVINGS INCENTIVE PLANS
CITATION maintains a Retirement Savings Plan for the benefit of substantially
all CITATION employees. Employee contributions may range from 1% to 15% of
compensation, subject to limits prescribed by the Internal Revenue Code.
CITATION matches a discretionary percentage of an employee's contribution, up
to 6% of the employee's compensation.
For the plan year ended December 31, 1998 and 1997, the matching contribution
was 25% of employee contributions, and was paid in the form of Company stock.
It is the Company's current intention to continue to make the matching
contribution in the form of Company stock. Employees are immediately 100%
vested as to employee contributions and are vested as to employer contributions
at the rate of 20% per year, beginning in the second year of service.
For the years ended March 31, 1999, 1998, and 1997, the Company recorded
expense of approximately $38, $51, and $59, respectively, relating to this
plan.
16. LEASES
The Company leases its office and warehouse facilities and certain office
equipment. The lease terms are generally for two to ten years. Rental expense
under operating leases for the years ended March 31, 1999, 1998, and 1997, was
approximately $549, $551, and $524, respectively.
24
<PAGE> 27
Future minimum lease payments under non-cancelable operating leases are as
follows:
<TABLE>
<CAPTION>
Year Ended March 31,
<S> <C>
2000 $ 523
2001 476
2002 476
2003 476
2004 476
Thereafter 119
--------
$2,546
========
</TABLE>
17. 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.
18. RELATED PARTY TRANSACTIONS
During the year ended March 31, 1997, the Company paid approximately $181 in
fees to consulting firms, certain executives of which were Directors of the
Company. No such payments were made in the years ended March 31, 1999 and
1998.
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Basic and Diluted
Earnings (loss)
Net sales Gross Profit Net income (loss) per share 3
------------- ------------ ----------------- -----------------
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1st quarter $ 3,414 $ 4,282 $1,701 $2,115 $(130)1 $ (152) $(.03)1 $(.04)
2nd quarter 4,106 4,273 2,290 2,346 172 37 .05 .01
3rd quarter 3,976 4,305 2,145 2,210 194 (127) .05 (.03)
4th quarter 4,632 3,780 1,948 1,669 (651)1 (1,411)2 (.17)1 (.37)2
------- ------- ------ ------ ----- -------
Total $16,128 $16,640 $8,084 $8,340 $(415). $(1,653) $(.11)3 $(.43)
======= ======= ====== ====== ===== ======= ===== ======
</TABLE>
(1) See Notes 2 and 3 regarding the sale of the financial products and
termination of proposed business combination in the first and fourth
quarters of fiscal 1999.
(2) See Note 5 regarding restructuring costs and other non-recurring charges
and other non-operating expenses in the fourth quarter of fiscal 1998.
(3) The annual earnings per share amount does not agree to the sum of the
quarters as a result of changes in the market prices of the Company's
common stock and the application of the treasury stock method
25
<PAGE> 28
Statement of Management's Responsibility For Financial Reporting
The accompanying consolidated financial statements of CITATION Computer
Systems, Inc. have been prepared by management, who are responsible for their
integrity and objectivity. The statements have been prepared in conformity
with generally accepted accounting principles and include amounts based on
management's best estimates and judgments. Financial information elsewhere in
this Annual Report is consistent with that in the consolidated financial
statements.
Management has established and maintains a system of internal controls designed
to provide reasonable assurance that assets are safeguarded and that the
financial records reflect the authorized transactions of the Company. The
system of internal control includes widely communicated statements of policies
and business practices that are designed to require all employees to maintain
high ethical standards in the conduct of Company affairs. The internal
controls are augmented by organizational arrangements that provide for
appropriate delegation of authority and division of responsibility.
The consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, independent accountants. As part of their audit of
the Company's fiscal 1999 consolidated financial statements,
PricewaterhouseCoopers LLP considered the Company's system of internal control
to the extent they deemed necessary to determine the nature, timing and extent
of their audit tests.
The Board of Directors pursues its responsibility for the Company's financial
reporting through its Audit Committee, which is composed of outside Directors.
The Audit Committee meets periodically with the independent accountants, with
or without the presence of management representatives, to discuss the results
of their work and their comments on the adequacy of internal accounting
controls and the quality of financial reporting.
<TABLE>
<S> <C> <C>
J. Robert Copper Richard D. Neece John P. Gilmore
Chairman and Chief Executive Officer President Vice President and Controller
</TABLE>
Report of Independent Accountants
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF CITATION COMPUTER SYSTEMS, INC.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity and of cash
flows present fairly, in all material respects, the consolidated financial
position of CITATION Computer Systems, Inc. and its subsidiaries at March 31,
1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended March 31, 1999, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
St. Louis, Missouri
May 6, 1999
26
<PAGE> 29
OFFICES
424 South Woods Mill Road, Suite 200
Chesterfield, MO 63017
STOCKHOLDER SERVICES
Inquiries should be directed to:
Maureen Gallagher
CITATION Computer Systems, Inc.(R)
424 South Woods Mill Road, Suite 200
Chesterfield, MO 63017. 314-579-7900
http://ww.cita.com
TRANSFER AGENT AND REGISTRAR
United Missouri Bank, N.A.
928 Grand Avenue, 13th Floor
Kansas City, MO 64106
INDEPENDENT AUDITOR
PricewaterhouseCoopers LLP
St. Louis, MO
LEGAL COUNSEL
Thompson Coburn, LLP
St. Louis, MO
FORM 10-KSB
A copy of CITATION's Form 10-KSB Annual Report as filed with the Securities and
Exchange Commission will be made available to all shareholders, at no charge,
upon request to John P. Gilmore at: CITATION Computer Systems, Inc. 424 South
Woods Mill Road, Suite 200, Chesterfield, MO 63017
COMMON STOCK INFORMATION
The Common Stock of the Company is quoted and traded on the NASDAQ National
market under the symbol CITA. The following table sets for the high and low
sale prices of the Common Stock for the periods indicated, as quoted on NASDAQ:
<TABLE>
<CAPTION>
FISCAL 1999 QUARTER ENDED HIGH LOW
<S> <C> <C>
June 30, 1998 $ 9 $4
September 30, 1998 5 2 1/2
December 31, 1998 3 1
March 31, 1999 4 1 1/2
FISCAL 1998 QUARTER ENDED
June 30, 1997 $8 1/2 $5 1/2
September 30, 1997 9 1/2 7 1/8
December 31, 1997 8 5/8 5 1/2
March 31, 1998 9 1/2 5 3/4
</TABLE>
No dividends have been declared or paid on the Company's Common Stock. The
Company anticipates that it will retain all available funds for use in the
operation and expansion of its business and does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future. There were
approximately 168 shareholders of record on June 9, 1999.
<PAGE> 30
BOARD OF DIRECTORS
FRED L. BROWN
Vice Chairman,
BJC Health System and
1999 Chairman of the American Hospital Association
J. ROBERT COPPER
Chairman and CEO,
CITATION Computer Systems, Inc.
LARRY D. MARCUS
President and CEO,
Peak Media, LLC
JAMES F. O'DONNELL
Chairman and CEO,
Capital for Business, Inc.,
CFB Venture Fund I, Inc.,
and CFB Partners, Inc.
DAVID T. PIERONI
President,
Pieroni Management
Counselors, Inc.
OFFICERS
J. ROBERT COPPER
Chairman and Chief Executive Officer
RICHARD D. NEECE
President and CFO
RUSSELL L. FORTUNE
Executive Vice President,
Sales and Marketing
CANDICE J. BARKER
Vice President,
Clinical Product Suite
ANTON F. FLIEG, JR.
Vice President,
Sales Administration and
C-MAX Product Manager
JOHN P. GILMORE
Vice President,
Controller and Treasurer
PATRICIA Q. MOORE
Vice President,
Human Resources
<PAGE> 1
EXHIBIT 21
Subsidiaries of Registrant
Health Micro Data Systems, Inc.
CITATION Professional Services, Inc.
Both subsidiaries are wholly-owned by Registrant.
Page 21
<PAGE> 2
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS CHARGED OFF PERIOD
----------- --------- -------- -------- ----------- ------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1997:
Allowance for Doubtful accounts $170 $40 -- $48 $162
Year ended March 31, 1998:
Allowance for Doubtful accounts $162 $74 -- $31 $205
Year ended March 31, 1999:
Allowance for Doubtful accounts $205 $95 -- $88 $212
</TABLE>
Page 22
<PAGE> 1
Exhibit 23(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No.33-85558; No. 333-57379) of CITATION Computer
Systems, Inc. of our report dated May 6, 1999, which appears on page 26 of the
Financial Information for the year ended March 31, 1999 insert to the 1999
Annual Report to Shareholders of CITATION Computer Systems, Inc., which is
incorporated by reference in this Annual Report on Form 10-KSB for the year
ended March 31, 1999. We also consent to the incorporation by reference of our
report on the Financial Statement Schedule, which appears in Exhibit 23(b) to
this Form 10-KSB.
PricewaterhouseCoopers LLP
St. Louis, Missouri
June 25, 1999
<PAGE> 1
Exhibit 23(b)
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
CITATION Computer Systems, Inc.
Our audits of the consolidated financial statements referred to in our report
dated May 6, 1999, appearing on page 26 of the Financial Information for the
year ended March 31, 1999 insert to the 1999 Annual Report to Shareholders of
CITATION Computer Systems, Inc. (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-KSB)
also included an audit of the Financial Statement Schedule included in this Form
10-KSB. In our opinion, this Financial Statement Schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
St. Louis, Missouri
May 6, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-1-1998
<PERIOD-END> MAR-31-1999
<CASH> 204
<SECURITIES> 0
<RECEIVABLES> 7,069
<ALLOWANCES> 212
<INVENTORY> 348
<CURRENT-ASSETS> 8,365
<PP&E> 4,091
<DEPRECIATION> 3,392
<TOTAL-ASSETS> 13,878
<CURRENT-LIABILITIES> 4,569
<BONDS> 0
0
0
<COMMON> 384
<OTHER-SE> 7,434
<TOTAL-LIABILITY-AND-EQUITY> 13,878
<SALES> 2,773
<TOTAL-REVENUES> 16,128
<CGS> 2,340
<TOTAL-COSTS> 8,044
<OTHER-EXPENSES> 8,239
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 126
<INCOME-PRETAX> (669)
<INCOME-TAX> (254)
<INCOME-CONTINUING> (415)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (415)
<EPS-BASIC> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
