UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal
year ended August 31, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________ to _______________
Commission file number 0-12551
CREATIVE COMPUTER APPLICATIONS, INC.
(Name of Small Business Issuer in its charter)
California 95-3353465
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
26115-A Mureau Road
Calabasas, California 91302
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (818) 880-6700
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
(Title of class)
Check whether the Issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the Issuer 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 there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no
disclosure will be contained, to the best of Issuer'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-KSB.
[ ]
Issuer's revenues for its most recent fiscal year ended August 31,
1997 were $7,119,381.
As of November 10, 1997, the aggregate market value of the voting
stock held by non-affiliates of the Company was approximately
$3,600,000.
As of November 10, 1997, the Company had 2,864,865 shares of its
common stock outstanding.
Transitional Small Business Disclosure (check one):
Yes __ No X
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11 and 12 of Part III of this report are hereby
incorporated by reference from the Company's Definitive Proxy
Statement which will be filed within 120 days of the Company's
fiscal year.
PART I
Item 1. Business.
The following report contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve risks and
uncertainties so that the actual results may vary materially.
Business Description
Creative Computer Applications, Inc. (CCA or the Company)
develops, assembles, markets, installs, and services computer based
Clinical Information Systems for use in hospitals, clinics,
reference laboratories, and other healthcare institutions. Clinical
information is data that is gathered concerning each individual
patient's health condition, diagnosis, and treatment that is used by
doctors, nurses and other healthcare providers. CCA's products are
used to provide automation of information that facilitates the
operation of clinical departments and allows the rapid recording and
processing of information that can be communicated, documented, and
delivered to healthcare providers. Currently, CCA markets a
Laboratory Information System under the name CyberLAB II(registered
trademark), a Pharmacy Information System under the name of
CyberMED(trademark), a Radiology Information System under the name
CyberRAD(trademark), a Financial Management System for outpatient
billing and accounts receivable and other related application modules.
Additional application software products are in development or are
planned to be developed in the future. The Company is also actively
seeking to license or acquire other synergistic software products
and operating businesses to add to its expanding product and service
activities. The Company operates in a single industry segment.
The general offices and operational headquarters are located at
26115-A Mureau Road, Calabasas, CA 91302. The telephone number is
818/880-6700.
The Company's business consists of three operational areas:
(1) Clinical Information Systems products, (2) service of its
client's installations, and (3) data acquisition products. Product
lines consist of Laboratory Information Systems, Pharmacy
Information Systems, Radiology Information Systems, Financial
Management Systems, and Data Acquisition products. The Company
sells its products and systems directly through its own sales force
and through joint marketing relations with other companies. In
addition, the Company sells its data acquisition products to
original equipment manufacturers (OEM) and provides out source
services.
History and Business Development
Since its inception as a California corporation in 1978, the
Company has been primarily engaged in the development, manufacture,
and service of Clinical Information Systems and data acquisition
products that automate the collection and management of data for the
healthcare industry.
Upon its formation, the Company initially designed and
assembled custom data interfaces for various customers to use with
specific automated and semi-automated testing devices. By January
1982, the Company had expanded its initial prototype data interface
and data entry console products into a line of off-the-shelf
interfaces for a wide variety of instrumentation technology.
Subsequently, the Company transformed this technology into turnkey
information processing and Laboratory Information Systems (LIS). As
of August 31, 1997, the Company had sold over 550 Clinical
Information Systems and currently supports approximately 370 active
installations, that are used in over 500 sites.
The percentage of the Company's net sales attributable to
the sale and licensure of Clinical Information Systems, including
data acquisition product sales, accounted for approximately 70% of
the total revenues in fiscal year 1997, 67% in fiscal year 1996, and
67% in fiscal year 1995. Management believes that the percentage of
the Company's net sales attributable to its sales of Clinical
Information Systems activities will continue at a similar rate in
fiscal 1998 as in the current fiscal year.
By automating the collection and organization of patient
clinical data, the Company's systems and data acquisition products
reduce operating costs and increase the efficiency of healthcare
providers. In recent years, the healthcare industry has come under
increasing pressure to control costs from government regulatory
agencies and third party payers of medical expenses, as well as from
increased competition in the healthcare industry in general. The
need to contain healthcare costs has led to pressure to decrease or
control the costs of the various components of healthcare.
Management believes the pressure to contain healthcare costs can be
expected to increase in the foreseeable future. The Company is
continuing its research and development activities to develop
products which will reduce operating costs, improve patient care,
and provide efficiencies in the healthcare industry.
During fiscal 1992, the Company's board of directors
determined that the Company should pursue a diversification program
through acquisition and new product development to expand the
Company's business to encompass other products that could service
other clinical departments in hospitals and multi-specialty clinics.
The objective of the diversification was to transform the Company
into a multi-product vendor of Clinical Information Systems that
would eventually include laboratory, radiology, pharmacy, therapies,
and other related clinical applications. The Company has
successfully pursued this program and by the end of its 1996 fiscal
year had accomplished the completion of its pharmacy and radiology
products and had begun to successfully sell all its products as an
integrated package.
Management believes that there are significant opportunities
to market a multiple range of clinical applications to existing as
well as new customers. Furthermore, the Company's existing software
and hardware support organization and its sales and marketing
personnel have been employed to service and market additional
products. Management also believes there is synergy between the
various clinical departments in hospitals and multi-specialty
clinics. It is therefore intended to provide integration of the
various departmental clinical applications to aid in patient
treatment and management.
In September 1992, the Company commenced the development of
a computerized Radiology Information System CyberRAD(trademark).
CyberRAD(trademark)is a UNIX based product with open systems architecture
and has linkage to the Company's existing financial management product.
The Company began marketing CyberRAD(trademark) in August 1995, although
additional enhancements are still under development.
In October 1992, the Company consummated the acquisition of
the assets of PRX Pharmacy Systems (PRX) from Western States
Pharmacy Consultants, Ltd., a privately owned company, of Boulder,
Colorado. PRX developed computerized Pharmacy Information Systems
that are sold to hospitals and outpatient facilities to manage
pharmacy departments. PRX also supported a base of over 130
installations. Since the acquisition, the Company has made
significant enhancements to the pharmacy product, and the inpatient
and outpatient products were merged together. The PRX name was
dropped and the new product renamed CyberMED(trademark).
Clinical Information Systems
For laboratories, the Company has integrated its software
applications and data acquisition technology into Laboratory
Information Systems which are sold under its tradename CyberLAB II(registered
trademark). The Company offers systems on Compaq(registered trademark),
IBM(registered trademark) and Hewlett Packard(registered trademark)
computers. Extensive applications for a wide variety of laboratory
testing and quality control procedures, including hematology,
immunology, chemistry, microbiology, drug testing, toxicology,
urinalysis, blood bank, and cytology testing, are available with the
Company's systems. File management, data base management, bedside
specimen collections, remote communications, and financial
management, including billing and accounts receivable options, are
also available.
The Company's systems are scaleable enabling a wide range of
users to employ them. The Company's systems are designed around
flexible parameterized software which enables the customer to tailor
the software for its individual needs. The Company's Laboratory
Information Systems are used by laboratories testing up to 15,000
patient samples a day, which includes approximately 95% of the
clinical laboratory market.
CyberLAB II(registered trademark) as well as CyberMED(trademark) and
CyberRAD(trademark) operate under UNIX and are sold independently or
as an integrated turnkey system and may be networked together or become
part of an enterprise-wide network. In fiscal 1997, the Company developed a
number of new features, and enhancements to CyberLAB II(registered trademark)
including medical necessity decision support capabilities and an expanded
microbiology module. Additional enhancements and new modules are
currently under development.
The Company's Pharmacy Information Systems, which are sold
under the trademark CyberMED(trademark), integrate inpatient, outpatient and
long term care applications into a highly integrated software
product. CyberMED(trademark) integrates unit dose, IVPB/TPN, controlled
substances, floor stock, inventory control, and kinetics functions.
It performs labor intensive operations such as patient profiling,
medication administration reporting, drug inventory control, drug
interactions, and patient billing. An optional purchasing module
can electronically place orders with suppliers and determine the
fastest moving drugs, as well as track drug usage and costs.
CyberMED(trademark) supports several third party data base services for
integrated drug interactions, pricing, and patient informational
disclosures that are required by regulations.
CyberRAD(trademark), the Company's Radiology Information System, is
also hybrid in its design that allows its employment in inpatient
and outpatient settings. Applications include extensive scheduling,
reporting, film tracking, transcription and clinical functionality.
A mammography module that meets FDA requirements has been
integrated into the CyberRAD(trademark) system.
The Company's Clinical Information Systems support extensive
communication capabilities to both Hospital Information Systems and
Clinic Information Systems for which the Company has developed
system interfaces for a variety of settings. The Company's Clinical
Information Systems support networking capabilities and are employed
in certain settings that consist of multiple sites. In addition,
different types of enterprises such as hospital and affiliated
outpatient clinics can use the Company's systems to integrate their
activities together. The communication interfaces often support bi-
directional data capabilities whereby demographic and test order
requests are transmitted to the Clinical Information Systems and, in
turn, billing information and test results are re-transmitted to the
host system. The Clinical Information Systems support their own
order communications and test results subsystems that have been
employed in other accounts that have relied on the Clinical
Information System's communications capabilities. Management
believes that communications to other systems allowing connectivity
between clinical systems such as CyberLAB II(registered trademark),
CyberMED(trademark), and CyberRAD(trademark), and administrative
information systems are becoming increasingly important functional
requirements in the marketability of its products. The Company has
focused considerable attention on the communication and connectivity
capabilities of its products and plans to further develop these
capabilities as opportunities present themselves.
The Company has developed standard seamless integration and
network connectivity for all its products through user selected
network topologies (Ethernet, Token Ring) network protocols (TCP/IP,
IPX/SPX), and network operating systems (Novell, LAN Manager,
Microsoft NT.) Although each application has been carefully
configured to operate as a stand alone product, all can be operated
as an integrated package, residing on a shared platform or network,
thereby eliminating the need for multiple interfaces, duplicate
information handling, and their associated costs. During fiscal
1997 the Company completed the development of CyberLINK(trademark) a
software integration and communications module that integrates all of
its own clinical applications and provides a single communications gateway
to or from other vendors' software products.
The Company has designed its products to incorporate open systems
architecture and to conform to computer industry standards which
enable them to be more easily integrated with other vendors
products. Healthcare industry standards including health level
seven (HL7) and ASTM are employed throughout the Company's software
products. All of the Company's application products are either
millennium compliant or are in the final stages of conversion to
millennium compliance. In addition, the Company designed the
millennium changes so they are backward compatible, thereby
providing a simple upgrade path for its installed base of clients.
The work associated with the conversion to millennium compliance has
not posed a significant investment for the company other than the
allocation of staff resources. Although the conversion may delay or
postpone other projects, it has not had, nor is it expected to have,
a material adverse effect on the Company's business.
Data Acquisition Products
The Company's data acquisition products, which consist of
data interfaces, data entry consoles and intelligent disk systems,
are designed to increase the efficiency and accuracy of on-line data
acquisition in biomedical laboratories by automating the collection
and organization of test data. Each of the Company's data
acquisition products uses a microcomputer performing a specific
discrete task. All of the Company's data acquisition products are
"plug-in" compatible with each other, enabling an end user to easily
expand its system. The Company's data acquisition products conserve
central computer resources, lower hardware costs and significantly
reduce costs of installation and system expansion, meeting the cost-
containment needs of healthcare organizations.
The Company's data acquisition products are designed to be
compatible with virtually all currently available computer systems
and are designed for installation by persons without technical
skills or training. Management believes that the Company markets the
widest line of data acquisition products designed for use by
biomedical laboratories currently available. As of August 31,
1997, the Company had sold more than 11,000 of its data acquisition
products in the United States and abroad.
Most laboratory tests, such as blood cell counts and blood
serum chemistry analyses, are performed by free-standing automated
testing instruments. These instruments produce hard data, such as
computer printouts. The Company has developed intelligent links, or
"data interfaces", which enable these free-standing automated
testing devices to "talk to" and automatically enter data into the
laboratory's central computer. By eliminating the production of
hard data and the resulting need to transcribe the data, interfaces
save time and labor and reduce human error. The Company currently
sells over 500 different interface configurations for use with a
wide variety of automated biomedical testing devices. The Company
also develops new data interfaces for products introduced into the
market upon request.
The Company also sells a product to collect data at the patients
bedside known as CyberMate(registered trademark), a hand-held computer
which permits phlebotomists to download specimen collection orders from
CyberLAB(registered trademark)into a battery operated hand-held computer,
make their rounds based upon information displayed on CyberMate's(registered
trademark) screen, and update collection status information as they collect
specimens. The updated status information is uploaded into
CyberLAB (registered trademark) via a system communication/battery
charging device.
Service
The Company provides comprehensive service to its installed
base of system clients through its own service organization. The
Company offers both software support service through a twenty-four
(24) hour "hotline" and field service for hardware repair. In some
instances the Company relies on third parties to service hardware
components that it sells, especially in the case of computers
supplied by IBM(registered trademark) and Hewlett Packard(registered
trademark). The Company services its own data acquisition products
and related software, including peripherals used as part of its CIS
products, under service contracts offered to end users. The Company's
long term inventory requirements for its service and repair business
are significant.
The Company's service revenues for fiscal 1997 increased by
approximately 5% from the previous fiscal year and they are expected
to grow as the installed base of system clients grows. The Company
believes that the ability to offer comprehensive service to its
clients is a competitive advantage and solidifies a long term
relationship with its customer accounts. The recurring revenue
stream associated with this activity is a significant part of the
Company's business. In addition, the ability to offer long term
service often leads to add-on sales opportunities for sales of
peripheral components, data acquisition products and upgrades to
newer computers and software applications.
During fiscal 1996 the Company began an extensive project to
install a new help desk/service support system to automate the
Company's service activities in order to provide better service to
its customers. During fiscal 1997 the system was integrated
throughout the Company on a wide area network and linked its
California and Colorado facilities and its field personnel. To
date, approximately $400,000 has been expended for the project.
The Company believes that the service of its clients is of
utmost importance to its long term success and business strategy.
Accordingly a great deal of emphasis is being placed on upgrading
its service organization and expanding the services that the company
offers. During fiscal 1997 the Company recruited a director of
client services, a manager of technical services, promoted a person
to manage field training, and recruited other personnel to augment
its service and implementation staff. Additional personnel will be
added in fiscal 1998 to further augment the Company's service and
implementation operations.
Significant Contracts and Programs
The Company entered into a contract in November 1989 with
Laboratory Corporation of America (LCA) formerly, Roche Biomedical
Laboratories, Inc., a subsidiary of Hoffman La Roche, Inc., to
provide LCA with custom software applications and the Company's data
acquisition products for use in LCA's laboratory facilities
throughout the United States. As of August 31, 1997 the Company had
approximately 130 departmental results processing systems and over
500 of its data acquisition products in twenty-four LCA
laboratories. Development of further software applications
continues and management anticipates that LCA will acquire several
more data acquisition products for fiscal 1998
During the 1997 fiscal year, there were no contracts or
programs which generated over 10% of the Company's net sales.
Product Development
The market for the Company's products is characterized by
rapid and significant technological change. The Company's ability
to compete in the market and to operate successfully depends in part
on its ability to react to such change. During the Company's 1997,
1996 and 1995 fiscal years, amounts (inclusive of capitalized
software) equal to approximately 14%, 13% and 13%, respectively, of
the Company's net sales were expended for research and development.
The Company continues to expend a significant amount of resources
for the development of new products, and for the development of
additional enhancements to existing products.
The Company has planned product development projects over
the next three years that include a new anatomical pathology system,
a data warehouse for all its systems, and a clinical work station
that will include system-wide order communications, inquiry and
decision support. The Company has also developed a Web server that
allows orders and inquiry via standard Internet browsers into the
Company's clinical applications. In addition, the Company has
designed an incremental client server architecture that allows for
the migration of the Company's existing application products to a
client server environment. At the same time, graphical user
interfaces are being incorporated into the Company's clinical
applications The Company has developed relationships with several
major vendors of analytical testing instruments which provide the
Company with specifications of new products when developed in order
for the Company to develop data acquisition products for use with
these products. The Company also develops, in certain instances at
the customer's expense, application software to meet the customer's
special needs.
Research and development expenditures amounted to
approximately $570,000 in fiscal 1997, $461,000 in fiscal 1996 and
$465,000 in fiscal 1995. Such expenditures were attributable to
systems development, including the development of new Laboratory,
Radiology, and Pharmacy Information Systems applications, and
enhancements to those products. The Company's applications are
compiled under Microfocus COBOL which provides a standard code
structure for the system applications while other imbedded process
code is written in C. By employing Microfocus' run-time modules for
UNIX, the Company is able to port to a variety of hardware platforms
with ease. The Company has successfully ported its software
applications from Compaq(registered trademark) to IBM(registered trademark)
RISC 6000 Systems, Data General Aviion systems(registered trademark),
and to Hewlett Packard (registered trademark) HP 9000 RISC Systems.
This portability capability has allowed the Company to become "platform
independent" in vending its software products where some customers may
be predisposed to certain hardware brands.
Distribution and Marketing
From its inception, the Company has sold its products and
systems directly to the healthcare industry through its own sales
and marketing personnel, as well as indirectly through original
equipment manufacturers ("OEM's") and through joint marketing
relations with other companies. The Company markets all its
products throughout the United States, Canada and the Carribean. At
present, the Company's direct field sales force consists of five
salespersons. In addition, the Company's management and seven
technical specialists assist in sales activities. Management
anticipates that at least one marketing support person will be added
to the Company's sales and marketing department in fiscal 1998.
During fiscal 1997 the Company increased its direct
telemarketing activities and commenced new promotional activities.
The Company promotes its products by attending industry trade
meetings at national and regional levels. The Company also markets
an upgrade program in order to help customers upgrade their existing
systems. In addition, the Company has formed informal joint
marketing arrangements with other companies that have compatible
products and services which have increased sales penetration in the
marketplace.
Historically, the Company established user groups in order to
encourage users of its Clinical Information Systems to participate
in helping the Company continue to better serve its customers. The
focus of the user groups is to encourage open group communications
with the Company about a range of subjects, including service and
support and new product enhancements. During fiscal 1997 the user
groups were reorganized and consolidated into a single national
symposium. Since the Company has experienced success in vending
multiple products to its clients the national symposium proved to be
a good forum to discuss general topics, such as the Company's
strategy and product direction, and provided an opportunity to
focus on specific application issues in breakout sessions. The
Company also scheduled free advanced training courses prior to the
symposium that had considerable attendance by its clients. The
Company intends to continue the symposium format during fiscal 1998.
The Company also publishes newsletters and articles which
are intended to expand communication with existing and potential
customers. During fiscal 1998 the Company intends to invest in new
collateral materials, including new product marketing literature,
and enhancements to its Web page.
The Company has OEM contracts to sell its products to a
number of vendors of hospital Laboratory Information Systems and
analytical instrumentation, including HBOC and Columbia Health Care.
Prices for the Company's data acquisition products range
from $1,595 for a special data entry console to $9,995 for a host
query bi-directional interface. During the fiscal year ended August
31, 1997, prices received by the Company for its Clinical
Information Systems with application and operating system software
ranged from approximately $80,000 to over $350,000. The sales price
varies depending on the type of system purchased and the
configuration of hardware and related software ordered by the
customer.
Competition
The Company markets its data acquisition products to
hospital, clinic, reference, research, veterinary and other
healthcare providers directly and through OEM customers. Management
believes that it has competition for its data acquisition products
from at least one other competitor. However, there are alternative
technological means to accomplish the tasks that its data
acquisition products provide. There can be no assurance that
additional companies will not enter this field or that significant
competition for the Company's data acquisition products will not
develop.
The Company has significant competition in the Clinical
Information Systems business from several competitors, many of whom
are larger concerns that may offer a wider array of products in
addition to competitive clinical applications. Management believes,
however, that few competing Laboratory Information Systems offer
the Company's variety of data interfaces, add-on capability and
flexibility that allows the systems to be user definable so that
they can be employed in different types of settings. The multi-site
and multi-disciplinary or hybrid nature of the Company's products
are a strong selling point. Most of the Company's competitors have
designed their products for the hospital environment; therefore,
they are not as flexible and are less suitable for other types of
operations. With respect to its Pharmacy Information Systems, the
Company believes it has a competitive advantage because of
CyberMED's(trademark) robust features, flexibility, and integrated
outpatient, inpatient, and long term care functionality.
The Company has made a concerted effort to emphasize the
sale of software and de-emphasize the sale of hardware, which is
less profitable. Accordingly the Company often times installs its
software applications in customers sites on existing hardware or in
conjunction with other vendor's applications. This has led to
better margins and more market opportunities.
The principal competitive factors in the Company's business are
technological competence, diversity of product line, price and
performance characteristics, product quality, capability and
reliability, marketing and distribution networks, service and
support, ability to attract and retain trained technical employees
and business reputation. The Company believes that it has
competitive advantages in many of these areas. During fiscal 1997
the Company sold 49 new system applications to 39 clients.
Manufacturing and Suppliers
The Company has utilized computers manufactured by several
suppliers for its Clinical Information Systems in the past and
currently uses computers manufactured by Compaq(registered trademark),
IBM(registered trademark), and Hewlett Packard(registered trademark).
Management believes that other computers which can be
used in the Company's systems, with appropriate software
modifications, are readily available from several suppliers. The
Company has entered into an agreement with Compaq(registered trademark)
as a sub-dealer and with IBM(registered trademark) and Hewlett Packard
(registered trademark) as industry re-sellers. These
arrangements provide for volume purchase discounts, cooperative
marketing programs, and the sublicensure of certain software and
technical assistance.
The Company's data acquisition products are assembled by its
employees and subcontractors from prefabricated subassemblies which
are built by independent electronics assembly companies. Management
believes there are many competent subassembly companies within the
immediate vicinity of the Company's business location. The Company
obtains the components of its data acquisition products from a
variety of suppliers and is not dependent on any one supplier for
products.
Warranties and Product Liability
The Company warrants that its products conform to their
respective functional specifications. The Company's products and
components are warranted against faulty materials and workmanship
for 90 days, in the case of its data acquisition products, and six
months, in the case of software and hardware incorporated in its
Laboratory, Radiology, and Pharmacy Information Systems. Direct
costs associated with the initial warranties have been
insignificant. The computers which the Company currently sells as
part of its Clinical Information Systems are subject to the
warranties of their manufacturers. The manufacturers generally
warrant their products against faulty material and workmanship for
one to three years.
The Company currently carries an aggregate of $3,000,000 in
product liability insurance. Management believes that this amount
of insurance is adequate to cover its risks.
Copyrights, Patents and Trade Secrets
The Company does not hold any patents protecting its
proprietary technology. The Company has relied on design copyrights
for its hardware and has copyrighted the designs of its proprietary
components and software. Patent or copyright protection may not be
available for many of the Company's products. A portion of the
Company's proprietary technology is in the form of software. The
Company has relied primarily on copyright and trade secret
protection of its software. Management believes that its business
is more dependent upon marketing and know-how than patent or
copyright protection. The Company has trademarks for CyberLAB(registered
trademark),CyberMED(trademark), CyberRAD(trademark), CyberTERM(registered
trademark)and CyberMATE(registered trademark), and has applied for
trademark's on several of its other trade names. The Company has
retained special intellectual property counsel to advise management
on the appropriate course to pursue with respect to these issues.
Governmental Regulation
The Federal Food, Drug and Cosmetic Act, more commonly known
for its regulation of interstate commerce in drugs, was amended by
the "Medical Device Amendments of 1976" (the "Amendments") to cover
devices used in medical practice. These include instruments and
reagents used in biomedical laboratory testing. In 1987 the FDA
first classified a number of clinical software products as medical
devices, but exempted most of them from routine regulations.
Subsequently the FDA amended the policy and made the exemptions
inapplicable to manufactures of devices intended for use in blood
banks. As a result of more recent pronouncements by the FDA and the
decision by the Company to develop a blood bank module to its
CyberLAB II(registered trademark) LIS, the Company undertook the filing
of a pre-market notification (510K) which was submitted in March 1996.
The Company received a review letter from the FDA regarding its 510K
submission and is in communication with the FDA regarding outstanding
issues. In addition the Company is informed that the FDA also intends to
require all Class I devices, which includes the Company's other
Clinical Information System products, to comply with its Quality
System Requirements (QSRs). Accordingly the Company is in the
process of modifying its internal policies to comply with this
directive. Management anticipates that the QSRs procedure will have
an impact on its business to the extent that there will be
lengthened development cycles of new software and additional costs
incurred. However, all of its competitors are faced with the same
requirements.
The FDA is currently in the process of reevaluating its
rules relevant to computer products used in connection with medical
devices and software used in clinical applications and no assurance
can be given that the Company's current or new products developed by
the Company will not be subject to the provisions of the Amendments
and implementing rules. The Company has retained special counsel to
advise it in such matters. The likelihood of such changes and their
effect on the business of the Company cannot be ascertained. If the
FDA were to determine that additional provisions should apply to all
or some of the Company's products, it is uncertain whether
compliance with such interpretation would have a material adverse
effect on the Company.
In addition, the Company and its products are subject to
direct governmental regulations applicable to manufacturers in
general, including those regulations promulgated under the
Occupational Safety and Health Act and by the Environmental
Protection Agency. The Company's customers, however, are subject to
significant regulation by the Food and Drug Administration, the
Healthcare Financing Administration, the Health and Human Services
Administration and by state and local governmental authorities.
Such regulations require the Company to comply with certain
requirements in order to sell its systems.
Backlog
The Companies order backlog at August 31, 1997 was
approximately $200,000 for systems and interface products and
$570,000 for deferred services, compared to approximately $200,000
for system and interface products and $464,000 for deferred services
at August 31, 1996.
Employees
At November 10, 1997, the Company employed 65 full-time and
2 part-time employees of whom 12 are involved in product
development, 12 in sales and marketing, 5 in production, 29 in
technical services and support and 7 in administration. The Company
is not subject to any collective bargaining agreements. The Company
considers its employee relations to be good.
Item 2. Properties.
The Company's headquarters are located in a leased facility
in Calabasas, California. The facility was constructed in 1991 and
comprises approximately 13,200 square feet with an effective base
rental of approximately $13,400 per month subject to cost of living
adjustments, plus common area maintenance costs and property taxes.
The initial term of the lease expired in October 1997. The Company
negotiated a new lease which began concurrently with the expiration
of the previous lease. The new lease included a build-out of an
additional 3,650 square feet of office space and refurbishment of
the existing facilities. The new lease comprises a five year term
at approximately $17,700 per month base rental plus common area
maintenance costs and property taxes. There is a five year renewal
option at the end of the initial term.
The Company also leases a 2,100 square foot office in
Boulder, Colorado that costs approximately $1,895 per month
including common area maintenance costs, property taxes and is
subject to cost of living increases annually.
The Calabasas, California facility is used as general
offices and operations headquarters which covers warehousing,
support, training, development, and assembly. The Boulder, Colorado
facility is a branch sales and development office. The Company
considers the two facilities to be adequate for their intended
purpose. The Company carries adequate general liability insurance
as required by the respective leases to cover any risks concerning
the two facilities.
Item 3. Legal Proceedings.
There are no material pending or threatened legal
proceedings to which the Company is a party at August 31, 1997.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company did not submit any matter to a vote of its
security holders during the fourth quarter of its fiscal year ended
August 31, 1997.
PART II
Item 5. Market for Company's Common Equity and Related Stockholder
Matters.
The Company's common shares trade on the American Stock Exchange
under the symbol CAP.
The following table sets forth the high and low bid quotations for
the Common Shares for the periods indicated.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
Fiscal Year Ended August 31, 1996
1st Quarter, Ended November 30, 1995 2 1 9/16
2nd Quarter, Ended February 29, 1996 2 3/8 1 5/8
3rd Quarter, Ended May 31, 1996 2 1/4 1 11/16
4th Quarter, Ended August 31, 1996 2 1/16 1 3/8
Fiscal Year Ended August 31, 1997
1st Quarter, Ended November 30, 1996 2 13/16 1 7/16
2nd Quarter, Ended February 28, 1997 2 3/16 1 3/8
3rd Quarter, Ended May 31, 1997 2 7/16 1 3/8
4th Quarter, Ended August 31, 1997 2 1/8 1 1/2
</TABLE>
The number of beneficial shareholders of Common Shares of the
Company as of November 1, 1997 was approximately 649.
Holders of Common Shares are entitled to receive such
dividends as may be declared by the Company's Board of Directors.
The Company has never paid a cash dividend on its Common Shares and
the Board of Directors currently intends to retain any earnings for
use in the Company's business.
Item 6. Management's Discussion and Analysis of Results of
Operations and Financial Condition.
Results of Operations
Sales for the year ended August 31, 1997 were $7,119,381 as
compared to $6,236,962 for the fiscal year ended August 31, 1996, an
overall increase of approximately $882,419 or 14%. When analyzed by
product category, sales of Clinical Information Systems (CIS)
increased by $743,469 or 23% and sales of data acquisition products
increased $42,525 or 5%. Service revenues increased $96,424 or 5%
over the previous fiscal year. The overall increase in sales and
service revenues is primarily attributable to the introduction of
new products such as CyberMED(trademark) and CyberRAD(trademark) and the
Company's ability to sell multiple applications to the same customer. The
increase in sales of data acquisition products was primarily
attributable to a higher volume of units sold to CyberLAB II(registered
trademark)customers. The increase in service revenues is attributable to a
greater number of accounts under contract. Service revenues are
expected to increase as the Company's installed base of CIS
installations increases.
In late fiscal 1995 management restructured its sales and
marketing activities, including the recruitment of a Vice President
of Sales and Business Development. The Company also began strategic
joint marketing partnerships with other companies which improved the
Company's market penetration. With these changes the Company
successfully increased its market presence which resulted in the 23%
increase in sales of CIS products during the 1997 fiscal year.
Management views the near term outlook for the continued sale of CIS
products favorably during the first half of the 1998 fiscal year.
However, the Company's future operating results could continue to be
subject to quarterly variations based upon a wide variety of
factors, including the volume mix and timing of orders received
during any quarter or annual periods.
Cost of sales increased by $632,426 or 20% for the 1997
fiscal year. There was an increase in materials of $295,493 or 36%,
an increase in other costs of sales of $222,276 or 20%, and an
increase in labor of $114,657 or 9%. The increase in material costs
was attributable to the Company selling more new systems and more
hardware upgrades to existing accounts. However, management expects
the trend which began in fiscal 1996, of increasing application
software sales and decreasing hardware sales to continue due to the
Company's emphasis on selling multiple products to the same
accounts. The increase in labor costs was attributable to more
personnel hired to staff the Company's system support departments.
The increase in other costs of sales was attributable to increased
expenses in travel, personnel recruitment, training, and
depreciation all related to the increased volume of transactions
during the current fiscal year. Cost of sales as a percentage of
sales increased to 54% for the 1997 fiscal year as compared to 51%
for the 1996 fiscal year. The overall percentage increase in cost
of sales was attributable to both an increase in sales and the
increases previously discussed.
Selling, general and administrative expenses increased by
$195,243 or 9.4% for the current 1997 fiscal year as compared to the
1996 fiscal year. The increases in S G & A expenses were
attributable to planned increased expenditures for salaries and
commissions of new salespeople and related support staff, as well as
increased costs in travel, trade show expenses, consultant and
personnel recruitment expenses.
Research and development expenses increased by $108,338 or
23.5% for fiscal 1997. The increase is attributable to the addition
of new personnel and their related salaries. In addition, a greater
amount of software production costs were capitalized in fiscal 1997
as a result of new CIS products being completed. For its 1997 and
1996 fiscal years, the Company capitalized software costs of
$395,856 and $365,420 respectively which are generally amortized
over a three to five year period. Such costs were attributable to
enhancements and new modules for the Company's CIS products and new
applications under development. Management anticipates its overall
research and development activities to increase in fiscal 1998.
Interest and other income were $6,589 for fiscal 1997 as
compared to $3,243 for fiscal 1996.
Interest expense decreased by $13,580 or 37% for fiscal 1997
as compared to fiscal 1996 due to reduced borrowings on the
Company's line of credit with its bank.
Income before Income Tax Expense (Benefit) was $428,725 for
fiscal 1997 as compared to $465,387 for fiscal 1996. As a result of
the application of the Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income taxes (see notes to the
financial statements) the Company recognized an income tax benefit
net of applicable income taxes of $462,275 in fiscal 1997 and
$502,410 in its 1996 fiscal year. As a result of these factors the
Company's net income was $891,000 or $.30 per share in fiscal 1997
as compared to net income of $967,797 or $.32 per share in fiscal
1996.
The Company is currently in a loss carryforward position
primarily due to the operating losses incurred prior to August 31,
1993. The net operating loss carryforwards balance as of the August
31, 1997 was approximately $2,365,000 compared to $2,465,000 in the
prior year. The net operating loss carryforward is available to
offset future taxable income through 2003. The Company also has
investment and research and experimentation tax credit carryforwards
to offset future income tax payable of approximately $275,000 that
expire at various dates through 2010.
The major temporary tax differences that are expected to
reverse next year are deferred revenue, allowance for doubtful
accounts, accrued vacation, Section 263A Unicap inventory, and
component inventory reserve. However, the Company expects new
temporary differences to be established in these years which will
either reduce or exceed the reversing temporary differences.
For the year ended August 31, 1995, the Company established
a valuation allowance equal to the net deferred tax asset as the
Company could not conclude that is was more likely than not that the
deferred tax asset could be realized. During the years ended August
31, 1997 and 1996, the Company re-evaluated the valuation allowance
taking into consideration prior earnings history, projected
operating results and the reversal of temporary tax differences. As
a result, the Company reduced the valuation allowance to $514,600 or
50% of the net deferred tax asset in fiscal 1996. For the year
ended August 31, 1997, the Company believes it is more likely than
not to realize the net deferred tax asset and accordingly the
remaining valuation allowance was reduced.
Capital Resources and Liquidity
The Company's primary need for capital has been to invest in
software development, and to invest in the new company wide network
and help desk system. The Company invested $395,856 and $365,420
during fiscal 1997 and 1996 in software development. These
expenditures related to the new version of the Company's LIS product
(CyberLAB II)(registered trademark), and the release of its revised PIS
product (CyberMED)(trademark), its new RIS product (CyberRAD)(trademark),
and other product enhancements. The Company anticipates expending
additional sums during fiscal 1998 on the further development of the
Company's Radiology Information System, and other new products and product
enhancements. During fiscal 1997, the Company expended an
additional $213,229 to implement the Company's wide area network and
help desk systems.
As of August 31, 1997, the Company's working capital
amounted to $1,703,057 compared to $1,525,225 as of August 31, 1996.
The Company's bank line as of August 31, 1997 amounted to $700,000
of which $287,296 was being utilized. The bank credit agreement
contains certain financial ratio requirements. The Company was in
compliance with all covenants, including financial ratios, as of
August 31, 1997.
On February 8, 1995 the Company notified the holders of
warrants to purchase 391,581 shares which were issued in connection
with the acquisition of certain assets of PRX Pharmacy Systems in
October 1992, that it was redeeming the warrants on April 10, 1995.
The Company also filed a registration statement under Form S-3 with
the Securities and Exchange Commission to register the common shares
underlying the warrants; the registration was declared effective on
February 22, 1995. The warrants were exercisable at $1.03 per
share. As of April 10, 1995, all the warrants had been exercised
and the proceeds of approximately $394,000 were used by the Company
for general working capital purposes.
Cash flows from operating activities increased to $784,317
for the 1997 fiscal year compared to $519,187 for the 1996 fiscal
year. The increase resulted primarily from higher sales during the
1997 fiscal year as compared to the 1996 fiscal year.
Cash used in investing activities changed during the 1997
fiscal year to $609,085 used in investing activities as compared to
$722,930 used in investing activities during the 1996 fiscal year.
The change resulted from decreased expenditures for the company wide
network and help desk system. As discussed under Item 1 Business,
the Company is undertaking the conversion of its products to make
them millennium compliant. Although it is not expected that such
activities will have a material adverse impact on the Company's
business a reallocation of personnel resources will be required
during fiscal 1998 to complete the project.
Cash flows from financing activities changed to $105,997
provided by financing activities during the 1997 fiscal year from
$79,131 provided by financing activities in fiscal 1996. The change
resulted from proceeds from the exercise of stock options and
warrants and increased bank borrowings, but was partially offset by
repayments of notes payable and capital lease obligations as
compared to the prior year.
The Company believes that its cash flow from operations
together with its bank credit facilities should be sufficient to
fund its working capital requirements for its 1998 fiscal year.
Seasonality, Inflation and Industry Trends
The Company's sales are generally lower in the summer and
higher in the fall and winter. Inflation has had no material effect
on the Company's business since the Company has been able to adjust
the prices of its products. Management believes that most phases of
the healthcare segment of the computer industry will continue to be
competitive and that potential healthcare reforms may have a long
term positive impact on its business. In addition, management
believes that the industry will be marked with more significant
technological advances which will improve the quality of service and
reduce costs. The Company is poised to meet these challenges by
continuing to employ new technologies when they become available,
diversifying its product offerings, and by constantly enhancing its
software applications.
New Accounting Pronouncements
Statement of Financial Accounting Standard No. 128, (SFAS No.
128), "Earnings Per Share," issued by the Financial Accounting
Standards Board is effective for financial statements issued for the
periods ending after December 15, 1997, including interim periods.
The SFAS 128 requires restatement of all periods EPS data presented.
The new standard also requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. The Company has not
determined the effect on its EPS calculation from the adoption of this
statement.
Statement of Financial Accounting Standard No. 129 (SFAS No.
129), "Disclosure of Information about Capital Structure," issued by
the Financial Accounting Standards Board is effective for financial
statements issued ending after December 15, 1997. The new standard
reinstates various securities disclosure requirements previously in
effect under Accounting Principles Board Opinion No. 15, which has
been superseded by SFAS No. 129. The Company does not expect adoption
of SFAS No. 129 to have a material effect, if any, on its financial
position or results of operations.
Statement of Financial Accounting Standard No. 130 (SFAS No.
130), "Reporting Comprehensive Income," issued by the Financial
Accounting Standards Board is effective for financial statements with
fiscal years beginning after December 15, 1997. Earlier application
is permitted. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. The Company has not determined
the effect on its financial position or results of operations, if any,
from the adoption of this statement.
Statement of Financial Accounting Standard No. 131 (SFAS No.
131), "Disclosure about Segments of an Enterprise and Related
Information," issued by the Financial Accounting Standards Board is
effective for financial statements with fiscal years beginning after
December 15, 1997. The new standard requires that public business
enterprises report certain information about operating segments in
complete sets of financial statements of the enterprises and in
condensed financial statements of interim periods issued to
shareholders. It also requires that public business enterprises
report certain information about their products and services, the
geographic areas in which they operate and their major customers.
Item 7. Financial Statements.
For a list of financial statements filed as part of this
report, see index to Financial Statements and Financial Statement
Schedules on page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures.
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act.
Background information concerning each present Director,
executive officer and each nominee for the office of Director of
Company is as follows:
<TABLE>
<CAPTION>
<S> <S> <C>
Office with Company; Year First
Name, Age Background Information Elected Director
Bruce M. Miller, 51 Chairman of the Board of 1978
the Company since its
inception in 1978.
Steven M. Besbeck, 49 President, Chief Executive 1980
Officer of the Company since
August 1983 and a Director of
the Company since November
1980 and Chief Financial Officer.
Director of International Remote
Imaging Systems.
James R. Helms, 53 Vice President/Operations 1987
since 1982 and Secretary.
Lawrence S. Schmid, 56 President and Chief Executive 1991
Officer, Strategic Directions
International, Inc., a management
consulting firm specializing
in technology companies.
Robert S. Fogerson,Jr.,44 Vice President, Technical Director, 1992
of PharmChem Laboratories, Inc.,
a leading independent laboratory
providing integrated drug testing
services. Mr. Fogerson has
served in various capacities at
PharmChem Laboratories since 1975.
John R. Murray, 55 Vice President, Sales and Business
Development since February 1996.
Mr. Murray served as an Independent
Marketing Consultant since 1993 and
a Manager of International Business
Development, Healthvision Corporation
since 1991.
</TABLE>
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934
requires the Company's directors and executive officers, and persons
who own more than 10% of a registered class of the Company's equity
security, to file with the Securities and Exchange Commission and
the (name of securities exchange) reports of ownership and changes
in ownership of common stock and other equity securities of the
Company. Officers, directors and greater than 10% shareholders are
required by SEC regulation to furnish the Company with copies of all
Section 16(a) forms they file.
During the fiscal year ended August 31, 1997, Mr. Bruce M.
Miller failed to file one Form 4 report in December 1996 pertaining
to two exercises of employee stock options on a timely basis. The
report was filed on January 15, 1997.
Item 10. Executive Compensation.
Incorporated by reference from Executive Compensation" in
the Definitive Proxy Statement to be filed with the Securities and
Exchange Commission for the 1998 Annual Meeting of the Company's
Shareholders.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
Incorporated by reference from "Security Ownership of
Certain Beneficial Owners and Management" in the Definitive Proxy
Statement to be filed with the Securities and Exchange Commission
for the 1998 Annual Meeting of the Company's Shareholders.
Item 12. Certain Relationships and Related Transactions.
Incorporated by reference from "Certain Relationships and
Related Transactions" in the Definitive Proxy Statement to be filed
with the Securities and Exchange Commission for the 1998 Annual
Meeting of the Company's Shareholders.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
2.1(6) Asset Purchase Agreement.
3.1(1) Restated Articles of Incorporation, as Amended.
3.2(1) By-Laws, as amended.
4.1(1) Specimen Share Certificate.
4.2(2) Specimen Warrant Certificate.
4.3(2) Form of Underwriter's Warrant.
4.8(6) Warrant Agreement and Warrant Certificate
between CCA and Western
States Pharmacy Consultants, Ltd.
4.9(6) Warrant Agreement and Warrant Certificate
between CCA and James L.D. Roser.
4.10(6) Warrant Agreement and Warrant Certificate
between CCA and The Roser Partnership.
4.11(6) Warrant Agreement and Warrant Certificate
between CCA and Epigen, Inc.
4.12(8) Registration Rights Agreement.
10.1(2) Warrant Agreement.
10.2(2) The Company's product
warranties.
10.5(1) 14% Subordinated
Convertible Debenture due
December 21, 1987.
10.6(1) Form of 1983 Warrants.
10.7(1) Form of 1982 Warrant.
10.8(2) Original Equipment
Manufacturer Contracts.
10.9(2) Michael Miller Consulting
Agreement.
10.10(2) Boehringer Mannheim
(Canada) Joint Marketing
Agreement.
10.12(3) Lease for Premises at
26664 Agoura Road,
Calabasas, California.
10.13(3) SAC Shareholders'
Agreement.
10.14(8) Lease for Premises at
26115-A Mureau Road,
Calabasas, California
10.15(8) Mission Park Agreement
11. Statement re: computation of per share
earnings
16.(4) Letter re: change in
certifying accountants
16.1(5) Letter re: change in
certifying accountants
Executive compensation plans and arrangements.
4.4(1) 1982 Non-Qualified Stock Option Plan.
4.5(2) 1982 Incentive Stock Option Plan, as amended.
4.6(6) 1992 Incentive Stock Option Plan.
4.7(7) 1992 Non-Qualified Stock Option Plan.
10.3(2) Bruce Miller Employment Agreement.
10.4(2) Steven Besbeck Employment Agreement.
(1) Previously filed as an exhibit to the Company's Registration
Statement on Form S-18 dated September 22, 1983, SEC File
No. 2- 85265.
(2) Previously filed as an exhibit to the Company's Registration
Statement on Form S-1 dated October 1, 1985 SEC File No. 2-
99878.
(3) Previously filed as an exhibit to the Company's Form 10-K
for the year ended August 31, 1986.
(4) Previously filed as an exhibit to the Company's Form 8-K
dated August 18, 1989.
(5) Previously filed as an exhibit to the Company's Form 8
Amendment No. 1 to Form 8-K, dated July 20, 1990,
incorporated by reference herein.
(6) Previously filed as an exhibit to the Company's Form 8-K
dated October 21, 1992.
(7) Previously filed as an addendum to the Company's Proxy
Statement and Notice of Annual Meeting of Shareholders dated
April 10, 1992.
(8) Previously filed as an exhibit to the Company's Form 10-K
for the year ended August 31, 1992.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during its
last fiscal quarter ended August 31, 1997.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CREATIVE COMPUTER APPLICATIONS, INC.
Dated: November 18, 1997 /S/ Steven M. Besbeck
Steven M. Besbeck, President, Chief
Executive Officer, and Chief
Financial Officer.
In accordance with Section 13 or 15(d) of the Exchange Act,
this report has been signed below by the following persons on behalf
of the Company and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <S> <C>
Signatures Title Date
/S/ Bruce M. Miller Chairman of the Board and Nov. 18, 1997
Bruce M. Miller Chief Technology Officer
/S/ Steven M. Besbeck President, Chief Executive Nov. 18, 1997
Steven M. Besbeck Officer, Chief Financial
Officer and Director
/S/ James R. Helms Vice President, Operations, Nov. 18, 1997
James R. Helms Secretary and Director
/S/ Lawrence S. Schmid Director Nov. 18, 1997
Lawrence S. Schmid
/S/ Robert S. Fogerson, Jr. Director Nov. 18, 1997
Robert S. Fogerson, Jr.
/S/ Carol Bessel Controller Nov. 18, 1997
Carol Bessel Chief Accounting Officer
/S/ John R. Murray Vice President, Sales Nov. 18, 1997
John R. Murray and Business Development
</TABLE>
INDEX
Page
FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants F-2
Balance Sheets
August 31, 1997 and 1996 F-3
Statements of Operations
Years ended August 31, 1997, 1996 and 1995 F-4
Statements of Shareholders' Equity
Years ended August 31, 1997, 1996 and 1995 F-5
Statements of Cash Flows
Years ended August 31, 1997, 1996 and 1995 F-6
Notes to Financial Statements F-7 - F-19
Report of Independent Certified Public Accountants
Board of Directors and Shareholders
Creative Computer Applications, Inc.
We have audited the accompanying balance sheets of
Creative Computer Applications, Inc. as of August 31, 1997 and 1996
and the related statements of income, shareholders' equity and cash
flows for each of the three years in the period ended August 31, 1997.
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 in accordance with generally
accepted auditing standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
Creative Computer Applications, Inc. at August 31, 1997 and 1996 and
the results of its operations and its cash flows for each of the three
years in the period ended August 31, 1997 in conformity with generally
accepted accounting principles.
/S/ BDO Seidman, LLP
BDO SEIDMAN, LLP
Los Angeles, California
October 24, 1997
CREATIVE COMPUTER APPLICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
August 31,
ASSETS (Note 4) 1997 1996
CURRENT ASSETS:
Cash $ 534,430 $ 253,201
Receivables, net (Note 2) 1,933,685 1,678,564
Inventory 675,795 642,787
Prepaid expenses 78,951 86,881
Deferred tax asset (Note 9) 427,000 437,000
TOTAL CURRENT ASSETS 3,649,861 3,098,433
PROPERTY AND EQUIPMENT, net (Note 3) 551,413 480,108
INVENTORY OF COMPONENT PARTS 136,357 148,357
CAPITALIZED SOFTWARE COSTS,
net of accumulated
amortization of
$286,907 and $201,822 (Note 1) 917,937 693,696
INTANGIBLES, net (Note 1) 264,381 315,551
DEFERRED TAX ASSET (Note 9) 551,200 77,600
OTHER ASSETS 21,965 23,480
$ 6,093,114 $ 4,837,225
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to bank (Note 4) $ 287,296 $ 191,875
Accounts payable 522,808 306,321
Accrued liabilities:
Vacation pay 187,367 157,106
Other 363,027 426,341
Deferred service contract income 569,734 464,076
Capital lease obligations
- current portion (Note 5) 16,572 27,489
TOTAL CURRENT LIABILITIES 1,946,804 1,573,208
DEFERRED RENT (Note 5) 5,034 35,235
CAPITAL LEASE OBLIGATIONS, net
of current portion
(Note 5) 4,679 21,250
TOTAL LIABILITIES 1,956,517 1,629,693
COMMITMENTS (Note 5)
SHAREHOLDERS' EQUITY (Notes 6 and 10):
Preferred shares, no par value;
500,000 shares authorized; no
shares outstanding - -
Common shares, no par value;
20,000,000 shares
authorized; 2,849,865 and
2,820,915 shares outstanding 5,752,635 5,714,570
Accumulated deficit (1,616,038) (2,507,038)
TOTAL SHAREHOLDERS' EQUITY 4,136,597 3,207,532
$ 6,093,114 $ 4,837,225
</TABLE>
See notes to financial statements.
CREATIVE COMPUTER APPLICATIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended August 31,
1997 1996 1995
<S> <C> <C> <C>
NET SYSTEM SALES AND SERVICE
REVENUE (Note 7):
System sales $ 4,976,820 $ 4,190,825 $ 3,974,338
Service revenue 2,142,561 2,046,137 1,952,181
7,119,381 6,236,962 5,926,519
COST OF PRODUCTS AND
SERVICES SOLD:
System sales 2,467,743 1,922,100 2,262,756
Service revenue 1,346,269 1,259,486 1,237,161
3,814,012 3,181,586 3,499,917
GROSS PROFIT 3,305,369 3,055,376 2,426,602
RESEARCH AND DEVELOPMENT
EXPENSE 569,668 461,330 465,407
SELLING AND ADMINISTRATIVE
EXPENSES 2,290,736 2,095,493 1,779,679
OPERATING INCOME 444,965 498,553 181,516
OTHER INCOME (EXPENSE):
Interest and other income 6,589 3,243 2,490
Interest expense (22,829) (36,409) (42,561)
Settlement of litigation
(Note 8) - - (132,475)
(16,240) (33,166) (172,546)
INCOME BEFORE INCOME TAX EXPENSE
(BENEFIT) 428,725 465,387 8,970
INCOME TAX EXPENSE
(BENEFIT) (Note 9) (462,275) (502,410) 2,000
NET INCOME $ 891,000 $ 967,797 $ 6,970
EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE
(Note 1):
Primary and fully diluted:
Net income per share $ .30 $ .32 $ .00
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND COMMON
STOCK EQUIVALENTS OUTSTANDING 3,011,101 3,006,926 2,863,346
</TABLE>
See notes to financial statements.
CREATIVE COMPUTER APPLICATIONS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common
Shares Accumulated
Shares Amount Deficit Totals
<S> <C> <C> <C> <C>
BALANCE, September 1, 1994 2,334,704 $5,272,087 $(3,481,805) $1,790,282
Exercise of warrants
and stock options(Note 6) 394,911 393,851 - 393,851
Issuance of common
shares (Note 10) 6,100 10,292 - 10,292
Net income - - 6,970 6,970
BALANCE, August 31, 1995 2,735,715 5,676,230 (3,474,835) 2,201,395
Exercise of warrants
and stock options(Note 6) 85,200 38,340 - 38,340
Net income - - 967,797 967,797
BALANCE, August 31, 1996 2,820,915 5,714,570 (2,507,038) 3,207,532
Exercise of warrants
and stock options(Note 6) 25,000 32,140 - 32,140
Issuance of common
shares (Note 10) 3,950 5,925 - 5,925
Net income - - 891,000 891,000
BALANCE, August 31, 1997 2,849,865 $5,752,635 $(1,616,038) $4,136,597
</TABLE>
See notes to financial statements.
CREATIVE COMPUTER APPLICATIONS, INC.
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash (Note 10)
<TABLE>
<CAPTION>
Year ended August 31,
1997 1996 1995
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 891,000 $ 967,797 $ 6,970
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 194,606 180,093 161,223
Amortization of capitalized
software costs 171,616 175,491 159,694
Provision for possible losses 16,793 55,422 78,218
Issuance of common shares
for services - - 10,292
Deferred rent expense (30,201) (30,200) (30,203)
Increase (decrease) from
changes in:
Receivables (271,911) (173,900) (218,888)
Inventories (21,008) (57,032) 2,641
Prepaid expenses 7,930 (5,749) (20,336)
Deferred tax asset (463,600) (514,602) -
Accounts payable 216,487 (186,952) (39,879)
Accrued liabilities (33,053) 138,002 26,802
Deferred service income 105,658 (29,183) 46,985
Net cash provided by
operating activities 784,317 519,187 183,519
INVESTING ACTIVITIES:
Additions to property and
equipment (213,229) (357,510) (105,755)
Capitalized software costs (395,856) (365,420) (299,534)
Net cash used in investing
activities (609,085) (722,930) (405,289)
FINANCING ACTIVITIES:
Borrowings on notes payable 315,421 351,875 100,000
Payments on notes payable (220,000) (306,084) (301,999)
Payments on capital lease
obligations (27,489) (5,000) (23,801)
Exercise of stock options
and warrants 38,065 38,340 393,851
Net cash provided by
financing activities 105,997 79,131 168,051
NET INCREASE (DECREASE)IN CASH 281,229 (124,612) (53,719)
CASH, beginning of year 253,201 377,813 431,532
CASH, end of year $ 534,430 $ 253,201 $ 377,813
</TABLE>
See notes to financial statements.
CREATIVE COMPUTER APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activities
Creative Computer Applications, Inc. (the "Company") designs
and manufactures computer based Clinical Information Systems and
products which automate the acquisition and management of clinical
data for the healthcare industry. The Company sells its products and
systems primarily to hospitals, clinics, reference laboratories,
veterinary and other healthcare institutions, as well as original
equipment manufacturers. The Company also generates revenue through
service contracts with customers to provide technical support and
repair services for specified periods of time.
Accounts Receivable and Concentration of Credit Risk
Accounts receivable potentially exposes the Company to
concentrations of credit risk, as defined by Statement of Financial
Accounting Standards No. 105 "Disclosure of Information about
Financial Instruments with Off-Balance-Sheet Risk and Financial
Instruments with Concentrations of Credit Risk." The Company provides
credit to a large number of hospitals, clinics, reference laboratories
and other healthcare institutions in various geographical areas. The
Company performs ongoing credit evaluations and maintains a general
security interest in the item sold until full payment is received.
Inventories
Inventories consist primarily of computer hardware held for
resale and are stated at the lower of cost or market (net realizable
value). Cost is determined using the first-in, first-out method.
Supplies are charged to expense as incurred.
The Company also maintains an inventory pool of
component parts to service systems previously sold, which is
classified as non-current in the accompanying balance sheets. Such
inventory is carried at the lower of cost or market and will be
charged to cost of sales based on usage. Allowances are made for
quantities on hand in excess of estimated future usage.
Property and Equipment
Property, equipment, and leasehold improvements are stated at
cost less accumulated depreciation. Depreciation of machinery and
equipment, furniture and fixtures, and data processing equipment is
computed for financial reporting purposes using the straight-line
method over the estimated useful life of the related asset (generally
five years). Amortization of leasehold improvements is computed using
the straight-line method over the lease term. Accelerated
depreciation methods are used for income tax reporting purposes.
Capitalized Software Costs
Software costs incurred internally in creating computer
software products are expensed until technological feasibility has
been established upon completion of a detailed program design.
Thereafter, all software development costs are capitalized until the
point that the product is ready for sale and subsequently reported at
the lower of amortized
CREATIVE COMPUTER APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Capitalized Software Costs (Continued)
cost or net realizable value. During the years ended August 31, 1997,
1996 and 1995, the Company capitalized $395,856, $365,420 and $299,534
of software development costs. Amortization expense of capitalized
software development costs, included in cost of sales, for the years
ended August 31, 1997, 1996 and 1995 amounted to $171,616, $175,491
and $159,694.
In accordance with Statement of Financial Accounting Standard
No. 86 the Company considers annual amortization of capitalized
software costs under 1) the ratio of current year revenues by product
to the product's total estimated revenues method and 2) over the
product's estimated economic useful life by the straight line method
and recognizes the greater amount.
Intangible Assets
Intangible assets amounting to $511,704 consist of proprietary
rights to application software, trademarks, customer lists and
copyrights and are being amortized using the straight-line method over
a ten year period. Accumulated amortization was $247,323 and $196,153
at August 31, 1997 and 1996.
Revenue Recognition
Sales of Clinical Information Systems and data acquisition
products are recognized when shipped, provided that no significant
obligations remain and collection is probable. Revenues related to
installation of systems requiring substantial future performance by
the Company are recognized using the percentage-of-completion method
based on meeting key milestone events over the terms of the contract.
Costs and earnings recognized in excess of billings are shown as an
asset on the balance sheet. Service contract revenues (which are
included in net sales) are recognized ratably over the contractual
period or as the services are provided.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" SFAS 123, establishes a fair
value method of accounting for stock-based compensation plans and for
transactions in which a company acquires goods or services from non-
employees in exchange for equity instruments. The Company adopted
this accounting standard on September 1, 1996. SFAS 123 also gives
the option to account for stock-based employee compensation in
accordance with Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock issued to Employees," or SFAS 123. The Company
elected to follow APB 25 which measures compensation cost for employee
stock options as the excess, if any, of the fair market price of the
Company's stock at the measurement date over the amount an employee
must pay to acquire stock.
CREATIVE COMPUTER APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Based Compensation (Continued)
If SFAS 123 is not adopted related to stock-based employee
compensation, SFAS 123 for footnote purposes requires that companies
measure the cost of stock-based employee compensation at the grant
date based on the value of the award and recognize this cost over the
service period. The value of the stock-based award is determined
using a pricing model whereby compensation cost is the excess of the
fair value of the stock as determined by the model at grant date or
other measurement date over the amount an employee must pay to acquire
the stock.
Earnings Per Share
Earnings per common share are computed by dividing the net
income for each period by the weighted average number of common shares
plus the weighted average of dilutive common share equivalents
outstanding during the period using the treasury stock method. Common
share equivalents consist of stock options and warrants. Common stock
equivalents are considered dilutive for earnings per share if the
average stock price exceeds the exercise price during the period. The
common stock equivalents are weighted from the beginning of the
earliest quarter in which they become dilutive.
Income Taxes
The Company accounts for income taxes in accordance with the
Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes. SFAS No. 109 requires a Company to use
the asset and liability method of accounting for income taxes. Under
the asset and liability method, deferred income taxes are recognized
for the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax bases of
existing assets and liabilities. Under SFAS No. 109, the effect on
deferred income taxes of a change in tax rates is recognized in income
in the period that includes the enactment date.
Accounting Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Fair Value of Financial Instruments
Quoted market prices generally are not available for all of
the Company's financial instruments. Accordingly, fair values are
based on judgments regarding current economic conditions, risk
characteristics of various financial instruments and other factors.
These estimates involve uncertainties and matters of judgment, and
therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
CREATIVE COMPUTER APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
A description of the methods and assumptions used to estimate
the fair value of each class of the Company's financial instruments is
as follows:
Cash, receivables, inventory, prepaid expenses, accounts
payable, accrued expenses, and deferred service contract income are
recorded at carrying amounts which approximate fair value due to the
short maturity of these instruments.
The fair value of the Company's notes payable and capital
lease obligations are based on quoted market prices for similar issues
of debt and capital leases with similar remaining maturities and
terms, and therefore the carrying amounts approximate fair value.
New Accounting Pronouncements
Statement of Financial Accounting Standard No. 128, (SFAS No.
128), "Earnings Per Share," issued by the Financial Accounting
Standards Board is effective for financial statements issued for the
periods ending after December 15, 1997, including interim periods.
The SFAS 128 requires restatement of all periods EPS data presented.
The new standard also requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. The Company has not
determined the effect on its EPS calculation from the adoption of this
statement.
Statement of Financial Accounting Standard No. 129 (SFAS No.
129), "Disclosure of Information about Capital Structure," issued by
the Financial Accounting Standards Board is effective for financial
statements issued ending after December 15, 1997. The new standard
reinstates various securities disclosure requirements previously in
effect under Accounting Principles Board Opinion No. 15, which has
been superseded by SFAS No. 129. The Company does not expect adoption
of SFAS No. 129 to have a material effect, if any, on its financial
position or results of operations.
Statement of Financial Accounting Standard No. 130 (SFAS No.
130), "Reporting Comprehensive Income," issued by the Financial
Accounting Standards Board is effective for financial statements with
fiscal years beginning after December 15, 1997. Earlier application
is permitted. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. The Company has not determined
the effect on its financial position or results of operations, if any,
from the adoption of this statement.
Statement of Financial Accounting Standard No. 131 (SFAS No.
131), "Disclosure about Segments of an Enterprise and Related
Information," issued by the Financial Accounting Standards Board is
effective for financial statements with fiscal years beginning after
December 15, 1997. The new standard requires that public business
enterprises report certain information about operating segments in
complete sets of financial statements of the enterprises and in
condensed financial statements of interim periods issued to
shareholders. It also requires that public business enterprises
report certain information about their products and services, the
geographic areas in which they operate and their major customers.
CREATIVE COMPUTER APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2 - RECEIVABLES
Receivables are summarized as follows:
<TABLE>
<CAPTION>
August 31,
<S> <C> <C>
1997 1996
Trade accounts 1,966,985 1,716,784
Allowance for uncollectible accounts (33,300) (38,220)
$ 1,933,685 $ 1,678,564
</TABLE>
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
August 31,
<S> <C> <C>
1997 1996
Machinery and equipment $ 231,438 $ 217,926
Furniture and fixtures 214,593 214,203
Leasehold improvements 65,078 63,201
Data processing equipment 1,148,310 950,860
1,659,419 1,446,190
Accumulated depreciation (1,108,006) (966,082)
$ 551,413 $ 480,108
</TABLE>
Included in property and equipment at August 31, 1997 and 1996
are machinery and equipment and furniture and fixtures under capital
lease agreements in the amount of $96,261 and $149,212 with related
accumulated amortization thereon of $66,807 and $100,238.
NOTE 4 - NOTES PAYABLE TO BANK
<TABLE>
<CAPTION>
August 31,
<S> <C> <C>
1997 1996
A line of credit of $400,000 with a bank with
interest at the bank's prime rate plus 1.75%
(10.25% at August 31, 1997) and maturing on
February 1, 1998, and collateralized by
substantially all of the Company's assets. $ 200,000 $ 100,000
Note payable to a bank with interest at the
bank's prime rate plus 2.5% (11% at August
31, 1997)maturing on June 30, 1998, and
collateralized by substantially all of the
Company's assets. The note is subject to
minimum principal repayment terms of
$10,000 a month. 87,296 91,875
$ 287,296 $ 191,875
</TABLE>
CREATIVE COMPUTER APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 4 - NOTES PAYABLE TO BANK (Continued)
The notes payable to bank are covered by two note agreements
that require the Company to meet certain covenants, including various
financial ratios. At August 31, 1997, the Company was in compliance
with all financial and non-financial covenants.
NOTE 5 - COMMITMENTS
Operating Leases
The Company leases office and warehouse space in Calabasas,
California under a non-cancelable operating lease expiring in fiscal
2003. Under the original terms of the lease, the Company received
nine months of free rent. In accordance with Statement of Financial
Accounting Standards No. 13 the Company is recognizing rental expense
with respect to the facility lease on a straight line basis which has
resulted in the recognition of a liability for deferred rent as of
August 31, 1997 and 1996. The Company also leases office space in
Boulder, Colorado expiring in fiscal 1999.
Future minimum lease payments under the facility leases are as
follows:
<TABLE>
<CAPTION>
Fiscal year ending Facilities
<C> <C>
1998 $ 206,345
1999 219,712
2000 211,752
2001 211,752
2002 211,752
Thereafter 17,646
Total minimum lease payments $ 1,078,959
</TABLE>
Rent expense for the years ended August 31, 1997, 1996, and
1995 was approximately $172,000, $205,000 and $219,000.
CREATIVE COMPUTER APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 5 - COMMITMENTS (Continued)
Capital Leases
The Company leases certain machinery and equipment and
furniture and fixtures under leases classified as capital leases due
to the existence of bargain purchase options. The following is a
schedule by years of future minimum lease payments under capital
leases together with the present value of the net minimum lease
payments as of August 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Capital
Fiscal year ending Leases
1998 $ 18,319
1999 4,987
Total minimum lease payments 23,306
Amount representing interest (2,055)
Present value of minimum lease payments 21,251
Current portion (16,572)
Capital lease obligations, net of
current portion $ 4,679
</TABLE>
NOTE 6 - STOCK OPTION PLANS AND WARRANTS
Under the 1982 Non-Qualified Stock Option Plan (the "Non-
Qualified Plan"), as amended, options may be granted by the Company to
purchase up to 80,000 common shares (officers and directors could
acquire no more than 48,000 common shares). Options could not be
granted at a price less than 80 percent of the fair market value of
the common shares on the date of grant. No options can be exercised
during the first year of the option term and each option granted
terminated no later than five years from the date of grant.
Under the 1982 Incentive Stock Option Plan (the "Incentive
Plan"), as amended, options may be granted by the Company to purchase
up to 120,000 common shares (officers and directors could acquire no
more than 60,000 common shares). Options could not be granted at a
price less than 100 percent of the fair market value of the common
shares on the date of grant for officers, directors and employees who
owned less than 10 percent of the Company's common shares and not less
than 110 percent of fair market value for those officers, directors
and employees who owned 10 percent or more of the Company's common
shares. No options can be exercised if the optionee had been
previously granted an option that had not been exercised or had not
expired. No options can be exercised during the first year of the
option term and each option granted terminated no later than five
years from the date of grant.
CREATIVE COMPUTER APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 6 - STOCK OPTION PLANS AND WARRANTS (Continued)
The 1982 Non-Qualified and Incentive Plans expired in 1992.
Subsequently, the Company adopted the 1992 Non-Qualified Stock Option
Plan and the 1992 Incentive Stock Option Plan. The 1992 plans are
essentially the same as the 1982 plans with certain exceptions. Under
the 1992 Non-Qualified Plan, options may be granted by the Company to
purchase up to 200,000 common shares (officers and directors may
acquire no more than 100,000 common shares) and no options may be
granted at a price less than 85% of the fair market value of the
common shares on the date of grant. Under the 1992 Incentive Plan,
options may be granted by the Company to purchase up to 400,000 common
shares (officers and directors may acquire no more than 200,000 common
shares).
The Company adopted the 1997 Non-Qualified and Incentive Plan
upon the termination of the 1992 Plans in 1997. The 1997 Plans are
the same as the 1992 Plans with few exceptions. Under the 1997 Plans,
the Company may grant a maximum of 300,000 common shares of Non-
Qualified Stock Options and a maximum of 500,000 shares of Incentive
Stock Options. Under the 1997 Plans, options granted to optionees
owning less than 10% of the Company's outstanding voting securities
may exercise their options within ten years from the date of grant.
Options granted to optionees owning 10% or more of the Company's
outstanding voting securities have an exercise term of no more than
five years from the date of grant. These plans expire in 2007.
Activity under the 1982, 1992 and 1997 plans through August 31,
1997 is summarized below:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Non-Qualified Plans Incentive Plans
Number Per Share Number Per Share
of Exercise of Exercise
Shares Price Shares Price
September 1, 1994 635,000 $0.45-$1.58 130,409 $1.00-$1.38
Granted 40,000 $1.25-$1.50 102,000 $1.25-$2.25
Expired - (16,670) $1.10-$2.25
Exercised - (3,330) $ 1.10
August 31, 1995 675,000 $0.45-$1.58 212,409 $ 2.25
Granted 74,755 $1.75-$2.25 115,000 $1.75-$2.25
Expired - - (48,209) $ .45-$2.25
Exercised (34,000) $ 0.45 (51,200) $ 0.45
August 31, 1996 715,755 $1.00-$2.25 228,000 $1.03-$2.25
Granted 75,000 $1.63-$2.13 42,000 $1.63-$1.94
Expired (108,000) $1.00-$1.25 (15,000) $ 2.25
Exercised (20,000) $1.25-$1.58 (5,000) $ 1.10
August 31, 1997 662,755 $1.00-$2.25 250,000 $1.03-$2.25
Exercisable at
August 31, 1997 458,928 $1.00-$2.25 111,161 $1.03-$2.25
Available for grant
at August 31, 1997 250,000 473,000
</TABLE>
CREATIVE COMPUTER APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 6 - STOCK OPTION PLANS AND WARRANTS (Continued)
During fiscal 1996 and 1995, the Company also granted special
options approved by the Board of Directors to officers and directors
and financial consultants. The options have been granted at the fair
market value at the date of grant and are exercisable over periods
ranging two to five years after which they expire. 515,755 shares of
the special grants are included in the non-qualified plan shares
outstanding at August 31, 1997.
Information relating to stock options, at August 31,1997
summarized by exercise price are as follows:
<TABLE>
<CAPTION>
<C> <C> <C> <C> <C> <C>
Outstanding Exerciseable
Weighted Average Weighted Average
Exercise Price Life Exercise Exercise
Per Share Shares (Month) Price Shares Price
Incentive Stock
Option Plan
$1.03 10,000 1.0 $ 1.03 10,000 $ 1.03
$1.10 10,000 3.5 $ 1.10 10,000 $ 1.10
$1.13 5,000 1.0 $ 1.13 5,000 $ 1.13
$1.25 10,000 25.0 $ 1.25 5,000 $ 1.25
$1.38 5,000 25.0 $ 1.38 2,500 $ 1.38
$1.44 10,000 13.0 $ 1.44 7,500 $ 1.44
$1.58 5,000 13.0 $ 1.58 3,750 $ 1.58
$1.63 10,000 49.0 $ 1.63 - $ 1.63
$1.75 10,000 37.0 $ 1.75 2,500 $ 1.75
$1.79 5,000 49.0 $ 1.79 - $ 1.79
$1.93 5,000 37.0 $ 1.93 1,250 $ 1.93
$1.94 27,000 56.0 $ 1.94 - $ 1.94
$2.25 138,000 29.5 $ 2.25 63,661 $ 2.25
250,000 30.0 $ 1.94 111,161 $ 1.83
</TABLE>
<TABLE>
<CAPTION>
<C> <C> <C> <C> <C> <C>
Non-Qualified
Stock Option Plan:
$1.00 100,000 20.0 $ 1.00 100,000 $ 1.00
$1.10 51,000 17.8 $ 1.10 43,800 $ 1.10
$1.25 20,000 25.0 $ 1.25 10,000 $ 1.25
$1.38 305,000 39.8 $ 1.38 242,500 $ 1.38
$1.44 20,000 13.0 $ 1.44 15,000 $ 1.44
$1.50 15,000 24.5 $ 1.50 15,000 $ 1.50
$1.58 2,000 13.0 $ 1.58 1,500 $ 1.58
$1.63 20,000 49.0 $ 1.63 - $ 1.63
$1.75 20,000 37.0 $ 1.75 5,000 $ 1.75
$1.79 5,000 49.0 $ 1.79 - $ 1.79
$1.93 5,000 37.0 $ 1.93 1,250 $ 1.93
$1.94 40,000 56.0 $ 1.94 - $ 1.94
$2.13 10,000 56.0 $ 2.13 - $ 2.13
$2.25 49,755 29.5 $ 2.25 24,878 $ 2.25
662,755 34.1 $ 1.44 458,928 $ 1.33
</TABLE>
CREATIVE COMPUTER APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 6 - STOCK OPTION PLANS AND WARRANTS (Continued)
All stock options issued to employees have an exercise price not
less than 85% of the fair market value of the Company's common stock
on the date of grant, and in accordance with accounting for such
options utilizing the intrinsic value method stock-based compensation
been determined based on the fair value of the grant dates consistent
with the method of SFAS 123, the Company's net income and earnings per
share for the year ended August 31, 1997 and 1996 would have been
decreased to the pro forma amounts presented below.
<TABLE>
<CAPTION>
August 31,
<S> <C> <C>
1997 1996
Net Income
As reported $ 891,000 $ 967,797
Pro forma 859,205 952,869
Earnings per share
As reported 0.30 0.32
Pro forma 0.29 0.32
</TABLE>
The fair value of option grants is estimated on the date of
grants utilizing the Black-Scholes option pricing with the following
weighted average assumptions for the year ended August 31, 1997;
expected life of 5 years, expected volatility of 16.16%, risk-free
interest rates of 5.5%, and a 0% dividend yield. The weighted average
fair value at the date of grant for options granted during 1997
approximated $1.83.
As the Company's stock option programs vest over many years
and additional awards are made each year, the above pro forma numbers
are not indicative of the financial impact had the disclosure
provisions of SFAS 123 been applicable to all years of previous option
grants. The above numbers do not include the effect of options prior
to 1995 that vested in 1996 and 1997.
In connection with the acquisition of PRX Pharmacy Systems
on October 21, 1992, the Company issued warrants to purchase 391,581
common shares. The warrants were exercisable at $1.03 per share and
were all exercised during fiscal year ended August 31, 1995 and the
Company received net proceeds of $390,188.
NOTE 7 - RELATED PARTIES
Net sales for the year ended August 31, 1997, 1996 and 1995
includes sales of $20,756, $159,101 and $382,157 to an entity of which
a director of the Company is an officer.
CREATIVE COMPUTER APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 8 - SETTLEMENT OF LITIGATION
The Company was a defendant in a lawsuit brought by a customer
alleging breach of warranties and fraudulent misrepresentation with
respect to a computer system sold to the customer. During the third
fiscal quarter ended May 31, 1995, the Company reached an agreement to
settle the litigation. Although the Company did not believe there was
merit in the plaintiff's claims or that the plaintiff would eventually
prevail in the litigation, the Company agreed to the settlement
because it did not believe that any eventual recovery it might receive
would justify the legal expenses it was incurring to continue the
litigation. The settlement included a cash payment of $25,000. All
payments under the settlement were made during fiscal year ended
August 31, 1995.
NOTE 9 - INCOME TAX EXPENSE (BENEFIT)
The provision for income taxes consist of the following:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1996 1995
Current taxes:
Federal $ - $ - $ -
State 1,325 12,190 2,000
Deferred:
Federal 51,000 - -
52,325 12,190 2,000
Change in valuation allowance (514,600) (514,600) -
Income tax expense (benefit) $(462,275) $(502,410) $ 2,000
</TABLE>
Income tax expense (benefit) differs from the amount obtained
by applying the statutory federal income tax rate to income before
income tax expense as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1996 1995
Computed provision for taxes
based on income at statutory rate 34.0% 34.0% 34.0%
State taxes, net of benefit of state
net operating loss carryforward 0.3 6.0 22.3
Tax benefit of federal net
operating loss carryforward (34.0) (34.0) (34.0)
Permanent differences 11.9 - -
Reduction in valuation allowance (120.0) (114.0) -
(107.8)% (108.0)% 22.3%
</TABLE>
CREATIVE COMPUTER APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 9 - INCOME TAXES (Continued)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets
and liabilities as of August 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
August 31,
<S> <C> <C>
1997 1996
Deferred tax assets:
Allowance for doubtful accounts $ 13,700 $ 15,700
Inventory reserves and uniform
capitalization 23,900 110,400
Accrued vacation 66,900 58,100
Deferred revenue 163,500 147,000
Depreciation and amortization 7,600 15,800
Net operating loss carryforwards 804,000 837,300
Tax credits 275,000 129,300
Gross deferred tax assets 1,354,600 1,313,600
Deferred tax liability:
Capitalized software costs (376,400) (284,400)
978,200 1,029,200
Valuation allowance - (514,600)
Net deferred tax assets $ 978,200 $ 514,600
</TABLE>
At August 31, 1997, the Company had federal net operating loss
carryforwards available to offset future taxable income of
approximately $2,365,000 that expire at various dates through 2003 and
general business tax credit carryforwards available to offset future
income tax payable of approximately $275,000 that expire at various
dates through 2010. The Tax Reform Act of 1986 contains provisions
which limit the amount of tax credits that can be utilized in
subsequent years.
For the year ended August 31, 1995, the Company established a
valuation allowance equal to the net deferred tax asset as the Company
could not conclude that it was more likely than not that the deferred
tax asset could be realized. During the years ended August 31, 1997
and 1996, the Company re-evaluated the valuation allowance taking into
consideration prior earnings history, projected operating results and
the reversal of temporary tax differences. As a result, the Company
reduced the valuation allowance to $514,600 or 50% of the net deferred
tax asset in fiscal 1996. For the year ended August 31, 1997, the
Company believes it is more likely than not to realize the net
deferred tax asset and accordingly the remaining valuation allowance
was relieved.
CREATIVE COMPUTER APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(Concluded)
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1996 1995
Interest paid $ 34,969 $ 35,800 $ 44,126
</TABLE>
Supplemental non-cash investing and financing activity included:
During fiscal 1996, the Company acquired a computer with a cost
of $23,286 under a capital lease agreement.
During fiscal 1995, the Company issued 6,100 common shares with
a market value of $10,292 in payment of accrued vacation obligations.
Exhibit 11
CREATIVE COMPUTER APPLICATIONS, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Year ended August 31,
<S> <C> <C> <C>
1997 1996 1995
ENDING MARKET PRICE
PER SHARE $ 1.75 $ 1.75 $ 1.69
AVERAGE MARKET PRICE
PER SHARE $ 1.82 $ 1.85 $ 2.10
NET INCOME $ 891,000 $ 967,797 $ 6,970
PRIMARY EARNINGS PER
SHARE:
Shares:
Weighted average
number of common
shares outstanding 2,836,532 2,772,615 2,500,772
Shares issuable upon
exercise of options
and warrants 638,000 731,000 800,200
Shares assumed to be
repurchased under the
treasury stock
method (1)(2) (463,431) (496,689) (437,626)
Adjusted weighted average
number of common
shares outstanding 3,011,101 3,006,926 2,863,346
Primary earnings per share $ .30 $ .32 $ .00
FULLY DILUTED EARNINGS
PER SHARE:
Shares:
Weighted average number
of common shares
outstanding 2,836,532 2,772,615 2,500,772
Shares issuable upon
exercise of options
and warrants 638,000 731,000 800,200
Shares assumed to be
repurchased under the
treasury stock
method (1)(2) (463,431) (496,689) (437,626)
Adjusted weighted average
number of common
shares outstanding 3,011,101 3,006,926 2,863,346
Fully diluted earnings
per share $ .30 $ .32 $ .00
</TABLE>
(1) Shares assumed to be repurchased under the treasury stock method:
Primary common stock equivalents are assumed to be repurchased
at average market price.
Fully diluted common stock equivalents are assumed to be
repurchased at the greater of average or ending market price.
(2) Shares assumed to be repurchased under the treasury stock method
were based on proceeds of assumed options and warrants of
$843,445, $918,875 and $919,015 for the years ended August
31, 1997, 1996 and 1995.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<CASH> 534430
<SECURITIES> 0
<RECEIVABLES> 1933685
<ALLOWANCES> 0
<INVENTORY> 675795
<CURRENT-ASSETS> 3649861
<PP&E> 1659419
<DEPRECIATION> 1108006
<TOTAL-ASSETS> 6093114
<CURRENT-LIABILITIES> 1946804
<BONDS> 0
<COMMON> 5752635
0
0
<OTHER-SE> (1616038)
<TOTAL-LIABILITY-AND-EQUITY> 6093114
<SALES> 7119381
<TOTAL-REVENUES> 7125970
<CGS> 3814012
<TOTAL-COSTS> 6674416
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22829
<INCOME-PRETAX> 428725
<INCOME-TAX> (462275)
<INCOME-CONTINUING> 891000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 891000
<EPS-PRIMARY> .30
<EPS-DILUTED> .30
</TABLE>
