<PAGE> 1
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------- -------
COMMISSION FILE NUMBER 0-20284
CITATION COMPUTER SYSTEMS, INC.
-------------------------------
(Exact name of company as specified in its charter)
MISSOURI 43-1174397
-------------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
424 SOUTH WOODS MILL ROAD, CHESTERFIELD, MISSOURI 63017
---------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(314) 579-7900
-----------------
(Company's telephone number, including area code)
--------------------
[ ] Indicate by check mark whether the company (1) has filed all reports
required to be filled by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the company's Common Stock, par value $0.10
per share, at August 14, 2000 was 3,892,081 shares.
Transitional small business disclosure format: Yes [ ] No [X]
EXHIBIT INDEX ON PAGE 14 PAGE 1 OF 14
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SUBSEQUENT EVENT
On May 15, 2000, the Company, Cerner Corporation, a Delaware
corporation ("Cerner"), and Cerner Performance Logistics, Inc., a Delaware
corporation and wholly owned subsidiary of Cerner ("Logistics"), entered into an
Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which
CITATION will be merged with and into Logistics (the "Merger"). The Board of
Directors of CITATION unanimously approved the Merger at its meeting held on May
12, 2000.
In accordance with the Merger Agreement, with respect to each
holder of CITATION common stock, $.10 par value (the "CITATION Common Stock"):
(1) 90% of the shares of CITATION Common Stock held by such holder immediately
prior to the effective time of the Merger (the "Effective Time") shall be
converted into that number of shares of Cerner common stock, $.01 par value
("Cerner Common Stock"), determined by multiplying the number of such shares of
CITATION Common Stock times the Exchange Ratio (defined below); and (2) 10% of
the shares of CITATION Common Stock held by such holder at the Effective Time
shall be converted into the right to receive $5.10 in cash per share of CITATION
Common Stock (the "Merger Consideration"). The Exchange Ratio is 0.1695, subject
to adjustment in the event of any reclassification, recapitalization, stock
split, or stock dividend with respect to CITATION or Cerner Common Stock prior
to the Effective Time. In addition, each option to purchase CITATION Common
Stock outstanding at the Effective Time, whether or not then exercisable, will
be converted into the right to receive that number of shares of Cerner Common
Stock determined by multiplying the number of shares of CITATION Common Stock
subject to such option or right by the Exchange Ratio at a price per share
determined by dividing the per-share exercise price specified in such stock
option or stock appreciation right by the Exchange Ratio.
The Company's shareholders approved the Merger Agreement and
the Merger at a special meeting of the shareholders held on August 17, 2000.
Consummation of the Merger is expected to occur on or about August 22, 2000.
The preceding descriptions of the Merger Agreement and the
Merger are qualified in their entirety by reference to the Proxy
Statement/Prospectus of the Company and Cerner, dated as of July 6, 2000, and
copy of the Merger Agreement included therein.
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
See pages F-1 to F-6 hereof.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Any forward looking statements set forth herein are necessarily subject
to significant uncertainties and risks. The words "believes," "anticipates,"
"expects" and
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similar expressions are intended to identify forward-looking statements. Actual
results could be materially different as a result of various possibilities,
including difficulties or delays in the introduction of new products or the
revision of existing products, significant changes in healthcare regulation,
economic downturns of CITATION Computer Systems, Inc.'s (the "Company") markets,
new entrants into the Company's markets, competitors, increased price pressure,
customer reduction caused by industry consolidation, marketplace acceptance of
Windows NT as an operating platform or other factors.
Readers are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly release the results of any revisions to these
forward-looking statements which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
For further discussion of risk factors, please refer to page 8 of the
Company's Form 10-KSB Annual Report for the fiscal year ended March 31, 2000 as
filed with the Securities and Exchange Commission and page 13 of that Proxy
Statement/Prospectus, dated July 6, 2000 as filed with the Securities and
Exchange Commission.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2000 TO THREE MONTHS ENDED JUNE 30,
1999
On May 15, 2000, the Company announced the signing of a definitive
agreement for a business combination with Cerner Corporation ("Cerner").
Investors and security holders are urged to read the Proxy
Statement/Registration Statement on Form S-4, filed by Cerner and CITATION,
which contains or incorporates by reference such documents relating to and other
important information regarding the merger. This document and amendments to this
document were filed with the U. S. Securities and Exchange Commission. They may
be obtained free at the SEC's website at www.sec.gov. You may also obtain this
document for free from CITATION by directing your request to Investor Relations
at (314) 579-7900 or by fax at (314) 579-7990.
GENERAL. The Company reported a net loss of $0.02 per share, or $94,100,
for the first quarter of fiscal 2001, compared to net income of $0.04 per share,
or $143,600, in the comparable period of fiscal 2000. The decrease in
profitability from the prior year's profit was principally the result of lower
sales.
REVENUE. Total revenue decreased 36.0% from $4.3 million for the first
quarter of fiscal 2000 to $2.8 million for the first quarter of fiscal 2001,
which reflected a 54.6% decrease in system sales revenue and an 8.1% decrease in
service revenue.
System sales revenue for the first quarter decreased by $1.4 million,
from $2.6 million in fiscal 2000 to $1.2 million in fiscal 2001. The 54.6%
decrease in system sales revenue was primarily attributable to uncertainty in
the marketplace related to the announcement of the pending business combination
of CITATION with Cerner Corporation. System sales revenue represented 60.1% and
42.7% of total revenues for the first quarter of fiscal 2000 and 2001,
respectively.
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Service revenue for the first quarter decreased $0.1 million from $1.7
million in fiscal 2000 to $1.6 million in fiscal 2001. Service revenue
represented 39.9% and 57.3% of total revenues for the first quarter of fiscal
2000 and 2001, respectively.
COST OF PRODUCTS AND SERVICES SOLD AND GROSS PROFIT. Cost of products
and services sold include cost of system sales and cost of service revenue. Cost
of system sales includes cost of hardware sold, installation and training
expenses, and software amortization costs. Cost of service revenue includes all
client service expenses plus an allocation of certain other overhead expenses.
As a percentage of total revenue, the total cost of products and services sold
decreased from 50.8% in the first quarter of fiscal 2000 to 39.0% in the first
quarter of fiscal 2001. For the first quarter of fiscal 2000 and 2001, total
cost of products and services sold were $2.2 million and $1.1 million,
respectively.
The cost of system sales as a percent of system sales revenue decreased
from 69.4% in the first quarter of 2000 to 63.7% in the first quarter of fiscal
2001 due to the decreased percentage of lower margin hardware sales in the first
quarter of fiscal 2001. The cost of service revenue as a percent of service
revenue decreased from 22.8% in the first quarter of fiscal 2000 to 20.6% in the
first quarter of fiscal 2001 due primarily to a decrease in related costs.
Software amortization costs of $0.3 million in the first quarter of fiscal 2000
and $0.2 million in fiscal 2001 represented 15.9% and 23.1%, respectively, of
total costs of products and services sold.
Gross profit as a percentage of total revenues increased from 49.2% in
the first quarter of fiscal 2000 to 61.0% in the first quarter of fiscal 2001.
The increase in gross profit as a percentage of total revenues was primarily
attributable to the factors discussed above.
RESEARCH AND DEVELOPMENT COSTS. Total outlays for software development
for the first quarter of fiscal 2000 and 2001 were as follows (000's):
<TABLE>
<CAPTION>
FY01 FY00
R&D EXPENSE 1ST QTR. 1ST QTR.
----------- -------- --------
<S> <C> <C>
R&D spending $ 784.3 $ 763.5
Less - R&D capitalized 199.2 196.2
--------- ---------
Total R&D expense 585.1 567.3
Software amortization (cost of prod. sold) 249.2 349.3
--------- ---------
Total R&D expensed $ 834.3 $ 916.6
========= =========
</TABLE>
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
as a percentage of total revenues increased from 29.9% in the first quarter of
fiscal 2000, to 41.2% in the first quarter of fiscal 2001. This increase was
principally a result of the relatively fixed nature of selling and
administrative expenses in relation to the decrease in revenues. Total selling
and administrative expenses were $1.3 million and $1.1 million in the first
quarter of fiscal years 2000 and 2001, respectively.
OPERATING INCOME. Operating income decreased from $0.3 million in the
first quarter of fiscal 2000 to a loss of $35 thousand in the first quarter of
fiscal 2001. The
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operating margin decreased from 6.2% to a negative 1.2% in the
first quarter of fiscal 2000 and 2001, respectively, primarily reflecting the
factors as described above.
OTHER INCOME (EXPENSE). Interest expense, net decreased from $27.2
thousand in the first quarter of fiscal 2000 to $3.5 thousand in the first
quarter of fiscal 2001 due to the decrease in borrowing under the line of credit
in fiscal 2001. Merger related expense of $0.1 million was recorded during the
first quarter of fiscal 2001.
INCOME TAXES. The Company's effective income tax provision rate was
40.0% in the first quarter of fiscal 2000 compared to an effective income tax
benefit rate of 37.0% in fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is cash flows from operations.
At March 31, 2000 and June 30, 2000, the Company had cash and cash equivalents
in the amount of $0.3 million as compared to $0.1 million. Cash flow in the
three months ended June 30, 2000 reflects amounts paid for repayment of debt
($0.1 million) and software development costs ($0.3 million), offset by cash
generated from operating activities of $0.3 million.
At March 31, 1999 and June 30, 1999, the Company had cash and cash
equivalents in the amount of $0.2 million. Cash flow in the three months ended
June 30, 1999 reflects amounts paid for capital investments ($0.1 million),
software development costs ($0.2 million), and repayment of long-term debt ($0.1
million), and cash used in operating activities, ($0.1 million), offset by
borrowings under the line of credit ($0.4 million).
As of June 30, 2000, the Company had a line of credit agreement that
allows the Company to borrow up to $4.0 million through 2001 with interest at
the lender's prime rate (9.5% at June 30, 2000). The line of credit is secured
by the Company's accounts receivable, inventory, and general intangible assets.
The respective agreements require that certain minimum net worth and leverage
ratio requirements be maintained by the Company. The Company was in compliance
with these requirements or has obtained waivers at June 30, 2000. There were
borrowings of $0.5 million outstanding under the line of credit agreement as of
June 30, 2000, which have been classified as long-term debt in the June 30, 2000
Consolidated Balance Sheet.
The Company believes that its cash and cash equivalents, together with its
current borrowing facilities and cash generated from operations, will be
sufficient to fund its anticipated cash requirements for at least the next 12
months. The Company's ability to meet its cash requirements on a long-term basis
will depend on profitable operations and consistent and timely collections of
its accounts receivable.
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PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index for list of Exhibits.
(b) On May 19, 2000 filed a report on Form 8-K reporting under Item 5
thereto that the Company had entered into an Agreement and Plan of
Merger with Cerner Corporation and Cerner Performance Logistics.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITATION COMPUTER SYSTEMS, INC.
Date: August 21,2000 By: /s/ Richard D. Neece
-------------- -----------------------------------------
Richard D. Neece
President and Chief Financial Officer
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CITATION Computer Systems, Inc.
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
2000 2000
----------- -----------
(UNAUDITED) (AUDITED)
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 280.4 $ 295.0
Accounts receivable:
Trade, net 5,748.7 5,900.2
Other 473.8 456.1
Inventories 340.3 327.4
Prepaid expenses and other current assets 470.5 422.4
Deferred tax assets 79.9 79.9
----------- -----------
Total current assets 7,393.6 7,481.0
Software development costs, net 1,405.3 1,455.3
Property and equipment, net 449.4 521.1
Long-term accounts receivable 1,391.3 1,441.3
Long-term deferred tax assets 910.1 910.1
Other assets 239.2 262.5
----------- -----------
Total assets $11,788.9 $12,071.3
=========== ===========
Liabilities and shareholders' equity:
Current liabilities:
Current portion of long-term debt $ 169.3 $ 196.9
Accounts payable 325.8 271.1
Customer deposits 135.6 148.7
Accrued bonuses and commissions 69.5 66.2
Other accrued liabilities 200.2 180.9
Deferred service revenue 2,305.0 2,502.4
----------- -----------
Total current liabilities 3,205.4 3,366.2
----------- -----------
Long-term debt 582.3 621.5
----------- -----------
Common stock 388.1 387.7
Paid-in capital 6,679.7 6,668.4
Retained earnings 933.4 1,027.5
----------- -----------
8,001.2 8,083.6
----------- -----------
Total liabilities and shareholders' equity $ 11,788.9 $12,071.3
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements F-1
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CITATION Computer Systems, Inc.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months ended
June 30,
2000 1999
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Net system sales and service revenues:
System sales $ 1,182.2 $ 2,601.1
Service revenue 1,586.9 1,726.6
--------- ---------
2,769.1 4,327.7
Cost of products and services sold:
System sales 752.8 1,805.6
Service revenue 326.4 393.8
--------- ---------
1,079.2 2,199.4
Gross profit 1,689.9 2,128.3
Research and development expenses 585.1 567.3
Selling and administrative expenses 1,139.4 1,294.6
--------- ---------
Operating income (loss) (34.6) 266.4
Other income:
Interest expense, net (3.5) (27.2)
Merger related expenses (111.0) -
Other - 0.1
--------- ---------
Income (loss) before income taxes (149.4) 239.3
Provision (benefit) for income taxes (55.3) 95.7
--------- ---------
Net income (loss) $ (94.1) $ 143.6
========= =========
Net income (loss) per common share:
Basic $ (0.02) $ 0.04
========= =========
Diluted $ (0.02) $ 0.04
========= =========
Weighted average number of shares used in
computing net earnings per common share:
Basic 3,879 3,842
========= =========
Diluted 3,879 3,846
========= =========
</TABLE>
See accompanying notes to consolidated financial statements F-2
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CITATION Computer Systems, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three months ended
June 30,
2000 1999
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $(94.1) $143.6
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization of property and
equipment 83.9 132.5
Amortization of software development costs 249.2 349.3
Non-cash 401K matching contribution 11.7 10.3
Decrease (increase) in deferred income taxes - 90.9
Decrease (increase) in accounts receivable 133.8 (429.6)
Increase in inventories (12.9) (123.3)
Decrease in prepaid expenses and other assets 25.2 5.9
Increase (decrease) in accounts payable 54.7 (126.3)
Increase (decrease) in customer deposits (13.1) 83.4
Increase in other accrued liabilities 22.6 6.8
Decrease in deferred service revenue (197.4) (287.3)
--------- ---------
Net cash provided by (used in) operating activities 263.6 (143.8)
--------- ---------
Cash flows from investing activities:
Capital expenditures (12.2) (50.2)
Software development costs (199.2) (196.2)
--------- ---------
Net cash used in investing activities (211.4) (246.4)
--------- ---------
Cash flows from financing activities:
Principal payments on long-term debt (66.8) (81.4)
Proceeds from line of credit - 433.0
--------- ---------
Net cash provided by (used in) financing activities (66.8) 351.6
--------- ---------
Net decrease in cash and cash equivalents (14.6) (38.6)
Cash and cash equivalents, beginning of year 295.0 203.6
--------- ---------
Cash and cash equivalents, end of period $ 280.4 $ 165.0
========= =========
</TABLE>
See accompanying notes to consolidated financial statements F-3
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CITATION Computer Systems, Inc.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands except for number of shares)
<TABLE>
<CAPTION>
Common Stock
Additional
Number Par Paid-in Retained
of Shares Value Capital Earnings Total
<S> <C> <C> <C> <C> <C>
Balance, March 31, 2000 (audited) 3,876,655 $ 387.7 $ 6,668.4 $ 1,027.5 $ 8,083.6
Issuance of common stock for 401K
company matching contribution
(unaudited) 4,575 0.4 11.3 - 11.7
Net income (unaudited) - - (94.1) (94.1)
--------- --------- --------- --------- ---------
Balance, June 30, 2000 (unaudited) 3,881,230 $ 388.1 $ 6,679.7 $ 933.4 $ 8,001.2
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements F-4
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CITATION COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARES)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim financial information for the three-month periods ended June 30,
1999 and 2000 is unaudited. Financial statement note disclosures,
normally included in financial statements prepared in conformity with
generally accepted accounting principles, have been omitted in this Form
10-QSB pursuant to the Rules and Regulations of the Securities and
Exchange Commission. However, in the opinion of the Company, the
disclosures contained in this Form 10-QSB are adequate to make the
information presented not misleading. See Notes to Financial Statements
in the Company's Annual Report on Form 10-KSB, dated June 2, 2000, which
includes financial statements and notes thereto for the fiscal year ended
March 31, 2000.
In the opinion of the Company, the accompanying unaudited financial
statements include all adjustments, consisting solely of normal recurring
adjustments, necessary to present fairly the Balance Sheet at June 30,
2000, the Statement of Operations for the three months ended June 30,
1999 and 2000, the Statement of Cash Flows for the three months ended
June 30, 1999 and 2000, and the Statement of Shareholders' Equity for the
three months ended June 30, 2000. The interim results, however, are not
necessarily indicative of results for any future period.
2. SHAREHOLDER APPROVAL OF AGREEMENT AND PLAN OF MERGER WITH CERNER
CORPORATION - SUBSEQUENT EVENT
See page 2 of this document for details.
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
---------- ---------
<S> <C> <C>
Hardware and third party software $ 138.2 $ 129.5
Field service equipment 202.1 197.9
-------- --------
$ 340.3 $ 327.4
======== ========
</TABLE>
4. COMMITMENTS
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 effect on the Company's financial
position, results of operations or cash flows.
F-5
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5. LONG-TERM ACCOUNTS RECEIVABLE
The Company has provided extended payment terms for software sold to its
distributor in Singapore. Collection of the receivable is ultimately
dependent on the distributor's cash flows. The Company believes that this
receivable, which approximated $1.4 million and $1.6 million at June 30,
2000 and March 31, 2000 respectively, and is classified as long-term, is
fully collectible.
6. LONG-TERM DEBT
As of June 30, 2000, the Company had a line of credit agreement that
allowed the Company to borrow up to $4.0 million with interest at the
lender's prime rate. The line of credit and the notes payable to banks
are secured by the Company's accounts receivable, inventory and
equipment. The respective agreements require that certain minimum net
worth and leverage ratio requirements be maintained by the Company. The
Company was in compliance with these requirements or has obtained waivers
at June 30, 2000. The Company had $0.5 million in borrowings outstanding
under the line of credit agreement at June 30, 2000.
7. EARNINGS PER COMMON SHARE AND COMMON EQUIVALENT SHARE
Reconciliation of the number of shares used in computing basic and
dilutive earnings (loss) per common and common equivalent shares is as
follows:
<TABLE>
<CAPTION>
Three Months Ended June 30
--------------------------
2000 1999
---- ----
<S> <C> <C>
Basic 3,878,767 3,841,954
Effective of dilutive securities - stock options - 4,291
--------- ---------
Diluted 3,878,767 3,846,245
========= =========
</TABLE>
F-6
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<S> <C>
27(a) Financial Data Schedule
</TABLE>
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