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 for the fiscal year
ended August 31, 1998.
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
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,
1998 were $6,448,370
As of November 16, 1998, the aggregate market value of the voting
stock held by non-affiliates of the Company was approximately
$2,000,000.
As of November 16, 1998, the Company had 2,920,740 shares of its
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Transitional Small Business Disclosure (check one):
Yes __ No X
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(Registered 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, Mammography Reporting and Tracking 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 that automate the
collection and management of patient clinical 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 clinical instrumentation.
Subsequently, the Company transformed this technology into turnkey
information processing and Clinical Information Systems (CIS). As
of August 31, 1998, the Company supported approximately 650 active
application installations, that are used in over 500 client 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 64% of
the total revenues in fiscal 1998, 70% in fiscal 1997,and 67% in
fiscal 1996. 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 1999 as in the current fiscal year.
By automating the collection and organization of patient
clinical data, the Company's Clinical Information Systems reduce
operating costs, improve patient care, 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. 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.
The Company has pursued a diversification program since 1992
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 Company has successfully pursued this program and during fiscal
1998 acquired MQA, a mammography reporting and tracking system, and
completed enhancements and new modules to its Clinical Information
System products. In addition, the Company has developed a Web-
server based clinical system that provides access to its existing
products so that physicians and nurses can easily utilize them from
virtually anywhere in the world. 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 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. The Company is working to provide integration of
its various departmental clinical applications to aid in patient
treatment and management.
Although the Company has been profitable in each of its last six
previous fiscal years, its 1998 fiscal year resulted in a loss
primarily attributable to the adoption of a new accounting method,
SOP 97-2. In October 1997 the American Institute of Certified
Public Accountants issued Statement of Position (SOP 97-2), Software
Revenue Recognition, which became effective for fiscal years
beginning after December 15, 1997 although earlier adoption was
recommended. The provisions of the new SOP necessitated significant
modifications in the way companies structure software transactions
and report revenues from those activities. Under the SOP 97-2
guidelines revenues from the sale of the Company's CIS products are
recognized as hardware and standard software are delivered to a
client, custom software such as interfaces to other vendors systems
will be recognized when delivered and operational, and revenues
associated with the installation and implementation of systems will
be recognized as the services are performed. Because of the
substantial nature of the accounting changes, the Company decided to
adopt SOP 97-2 in mid year rather than wait until the beginning of
its 1999 fiscal year. Accordingly, the Company's Results of
Operations, resulted in a reduction of revenues and operating losses
in its second and third fiscal quarters. Its fourth quarter
resulted in an operating profit.
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,
compliance, 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 highly 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(Registered 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 1998, the Company developed a number of new
features, and enhancements to CyberLAB II(Registered Trademark)
including medical necessity validation decision support capabilities
and an expanded microbiology module. The Company also completed the
development of a new anatomical pathology system that can be used as
a stand-alone or integrated with CyberLAB II(Registered Trademark),
and a Web-server that provides access to its applications via
Internet or Intranet. CyberLAB II(Registered Trademark) is Year
2000 compliant.
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
regulation. CyberMED(Trademark) is currently undergoing
modifications to be Year 2000 compliant.
CyberRAD(Registered 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. MQA, a mammography
reporting and tracking system acquired by the Company during fiscal
1998 has been integrated into CyberRAD(Registered Trademark). MQA
can also be sold as a stand-alone system, and meets FDA
requirements. CyberRAD(Registered Trademark) and MQA are Year 2000
compliant.
The Company's Clinical Information Systems support extensive
communication capabilities to both Hospital Information Systems and
Clinical Information Systems for which the Company has developed
over one-hundred system to system communication 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
communication 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 Company's 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(Registered Trademark), and
administrative information systems are very important functional
requirements in the marketability of its products. The Company has
focused considerable attention on the communication, networking, 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(Registered
Trademark), LAN Manager(Registered Trademark), Microsoft NT(Registered
Trademark). 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 1998 the Company completed the development of enhancements to
CyberLINK(Registered 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 vendor's
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 except
CyberMED(Trademark), are either Year 2000 compliant or are in the
final stages of conversion to Year 2000 compliance. In addition,
the Company designed the Year 2000 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 Year 2000 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.
The Company's Clinical Information Systems operate under
various versions of UNIX, which has been a defacto standard in
healthcare where most competitive companies also have standardized
on UNIX. As a result of popular trends throughout the information
technology marketplace Microsoft NT(Registered Trademark) is becoming
more popular. The Company has the ability to operate its Clinical
Information Systems under NT and is in the process of porting its
applications to that environment. In addition, the Company is also
migrating its systems to a client-server format that it has termed
Incremental Client Server Architecture(Trademark)(ICSA). ICSA allows a
mixture of both character and graphical user workstations on the same
platform. Because many clinical departments do not lend themselves to
a true graphical user applications, a mix and match approach under ICSA
provides this capability. In addition, healthcare users are under
tight budgetary controls and consequently by employing ICSA they can
"incrementally" apply client-server technology where applicable
without replacing all their existing equipment.
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 currently
markets the widest line of data acquisition products designed for
use by biomedical laboratories. As of August 31, 1998, the Company
had sold more than 11,500 of its data acquisition products in the
United States and abroad. All of the Company's data acquisition
products are Year 2000 compliant.
Most laboratory tests, such as blood cell counts and blood
serum chemistry analyses, are performed by freestanding automated
testing instruments. These instruments produce hard data, such as
computer printouts. The Company has developed intelligent links, or
"data interfaces", which enable these freestanding 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, upon request, for products
introduced into the market.
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 II(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
II(Registered Trademark) via a system communication/battery charging
device.
Service
The Company provides comprehensive services to its installed
base of system clients through its own service organization, and
provides extensive training and implementation of its systems. 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 1998 increased by
approximately 9% from the previous fiscal year and they are expected
to continue to grow as the installed base of system clients grows.
More than 90% of the Company's clients are under service contracts.
The Company believes that the ability to offer comprehensive
services to its clients is a competitive advantage and solidifies a
long-term relationship with its client accounts. The recurring
revenue stream associated with this activity is a significant part
of the Company's business. The ability to offer long term service
often leads to add-on sales opportunities for peripheral components,
data acquisition products and upgrades to newer computers and
software applications. In addition, the quality of service is an
important aspect of the end users buying decision when making a
system selection, therefore the Company is constantly fine tuning
the services it provides and its service organization as part of its
marketing plan.
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. During fiscal 1997 and fiscal 1998 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 $450,000 have been expended for
the project. The Company has begun to employ a "virtual company"
concept by linking outside personnel via the Internet directly into
its own internal network. A number of Company employees who are
engaged in technical and service related activities tele-commute
through this venue.
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 1998 the Company recruited an implementation
manager, and other personnel to augment its service and
implementation staff. Additional personnel may be added in fiscal
1999 to further augment the Company's service and implementation
operations. The Company has expanded its professional service
activities, which include networking, communications, and systems
integration.
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, 1998 the Company had
approximately 150 departmental results processing systems and over
500 of its data acquisition products in twenty-seven LCA
laboratories. Development of further software applications
continues and management anticipates that LCA will acquire several
more data acquisition products in fiscal 1999. In addition, the
Company is currently assisting LCA in upgrading their departmental
results processing systems for Year 2000 compliance.
In June 1998 the Company entered into a 3 year preferred
vendor agreement with PhyCor, Inc. to provide that company with
CyberLAB II(Registered Trademark) laboratory information systems.
PhyCor based in Nashville, TN. is a physician practice management
company that operates 61 large multi-specialty clinics and manages
independent practice associations. The Company currently has seven
CyberLAB II(Registered Trademark) installations within PhyCor
clinics and is in the process of working with several PhyCor
affiliates who have selected the Company's products. The Company's
knowledge of multi-specialty clinics' specialized needs has enabled
it to develop state of the art applications that address PhyCor's
unique requirements. In addition, the Company offers an array of
operational, reporting and Internet connectivity solutions that
facilitate the clinics clinical and compliance related activities.
As part of its overall marketing strategy the Company is
pursuing a number of other strategic relationships with
organizations that operate multiple entity enterprises where the
Company may have the opportunity to offer its array of products and
services to the group.
During the 1998 fiscal year, there were no contracts or
programs that 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 1998,
1997 and 1996 fiscal years, amounts (inclusive of capitalized
software) equal to approximately 16%, 14% 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 enhancements to the 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 $671,000 in fiscal 1998, $570,000 in fiscal 1997, and
$461,000 in fiscal 1996. 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 that 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 has been 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(Registered Trademark)
Systems, 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. The
Company at present is porting its applications to Microsoft NT(Registered
Trademark) and intends to offer its products on both UNIX and NT platforms in
the near future. All of the Company's products are open data base
compliant (ODBC) and the data structures support the use of standard
query language (SQL) report generators for a wide range of reporting
capabilities.
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 Caribbean. 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 1999.
During fiscal 1999 the Company commenced new promotional
activities targeting larger potential clients with some success.
The Company promotes its products by attending industry trade
meetings at national and regional levels. Because of the
opportunity the Company has in meeting larger audiences at such
meetings it intends to increase the number of meetings it will
attend in fiscal 1999. 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 to better serve its clients. 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 and has scheduled a
symposium for March 1999.
The Company also publishes newsletters and articles, which
are intended to expand communication with existing and potential
clients. During fiscal 1998, the Company invested 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.
During the fiscal year ended August 31, 1998, prices
received by the Company for its Clinical Information Systems with
application and operating system software ranged from approximately
$90,000 to over $450,000. 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 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 hybrid multi-site capabilities, 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. The Company has also received very good references about its
service organization and the ability to respond to clients needs on
a timely and cost effective basis. 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 1998
the Company sold 44 system applications to 32 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, 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
providefor volume purchase discounts, cooperative marketing programs, 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 that 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 $4,000,000 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, service, and know-how than patent
or copyright protection. The Company has trademarks for
CyberLAB(Registered Trademark), CyberMED(Trademark),
CyberRAD(Registered Trademark), CyberTERM(Registered Trademark),
CyberLINK(Registered Trademark) and CyberMATE(Registered Trademark),
and has applied to register its 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 manufacturers 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 because of timing issues withdrew
its submission. The Company is currently planning a resubmission of
its 510K pending the completion of certain data relative to
outstanding issues highlighted by the FDA in their review.
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). 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. 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.
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 and are a major focus of
its development efforts in order to maintain the regulatory
compliance of its products.
Backlog
The Companies order backlog at August 31, 1998 was
approximately $900,000 for systems and interface products and
$750,000 for deferred services, compared to approximately $200,000
for system and interface products and $570,000 for deferred services
at August 31, 1997.
Employees
At November 10, 1998, the Company employed 61 full-time and
3 part-time employees of whom 12 are involved in product
development, 12 in sales and marketing, 4 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 16,850 square feet with an effective base
rental of approximately $17,700 per month plus common area
maintenance costs and property taxes. The lease comprises a five-
year term with no cost of living adjustments. 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 $1,990 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 that cover warehousing, support,
training, development, and assembly. The Boulder, Colorado facility
is a branch 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, 1998.
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, 1998.
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, 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
Fiscal Year Ended August 31, 1998
1st Quarter, Ended November 30, 1997 1 15/16 1 9/16
2nd Quarter, Ended February 28, 1998 2 1 3/8
3rd Quarter, Ended May 31, 1998 1 3/4 1 7/16
4th Quarter, Ended August 31, 1998 1 1/2 1
</TABLE>
The number of shareholders of record of Common Shares of the
Company as of November 1, 1998 was approximately 431.
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
In October 1997 the American Institute of Certified Public
Accountants issued Statement of Position (SOP) 97-2, Software
Revenue Recognition, which became effective for fiscal years
beginning after December 15, 1997 although earlier adoption was
recommended. The new SOP affects all companies that sell software
and provide related services. Its provisions necessitated
significant modifications in the way the Company structured software
transactions and reported revenues from those activities. Because
SOP 97-2 significantly changes the way in which the Company accounts
for the sale of its Clinical Information Systems, management decided
to adopt the change in accounting method immediately on January
1,1998 instead of waiting until the beginning of its next fiscal
year. The Company expected that the change in accounting method
would significantly impact the recording of revenues and its results
of operations for one to two quarters beyond the second quarter
ended February 28, 1998.
SOP 97-2 requires that the Company modify its revenue
recognition policies on a going forward basis and no restatement of
prior periods is required. Accordingly the following discussion
takes into consideration the effect of SOP 97-2 for the current
fiscal year only and therefore the comparisons are not fully
representative The change in accounting method brought about by SOP
97-2 primarily affects reporting of revenues from the sale of the
Company's CIS products and related data acquisition products bundled
into CIS transactions. All other components of the Company's
business from which it derives revenues were already compliant with
the provisions of SOP 97-2. Under the SOP 97-2 guidelines revenues
from the sale of the Company's CIS products are recognized as
hardware and standard software are delivered to a client, custom
software such as interfaces to other vendors systems will be
recognized when delivered and operational, and revenues associated
with the installation and implementation of systems will be
recognized as the services are performed. Other provisions of the
SOP that require, among other things, a defined contract and
definitive sales price by component have been met by the Company's
internal sales policies that were already in place for many years.
Sales for the year ended August 31, 1998 were $6,448,370 as
compared to $7,119,381 for the fiscal year ended August 31, 1997, an
overall decrease of approximately $671,010 or 9%. When analyzed by
product category, sales of Clinical Information Systems (CIS)
decreased by $666,892 or 16% and sales of data acquisition products
decreased $196,078 or 21%. Service revenues increased $191,961 or
9% over the previous fiscal year. The decrease in the sale of CIS
products was primarily attributable to the effects of SOP 97-2 as
described above, whereby a portion of the revenues from the sale of
CIS products was deferred to subsequent periods when the deferred
revenues will be recognized. Had the Company not implemented SOP
97-2 the sales of CIS products would have been at similar levels to
fiscal 1997. During the 1998 fiscal year the Company experienced a
slow down in the close rate of new CIS orders as a result of
potential clients delaying purchasing decisions. These delays are
attributable to clients deliberating over Year 2000 issues that have
effected the entire industry. However, the Company has the largest
"pipeline" of working CIS transactions in its history, and believes
that the decision delays are only temporary. The decrease in sales
of data acquisition products was primarily attributable to a lower
volume of units sold to CyberLAB II(Registered Trademark) customers,
and reduced sales of such products to OEM customers. The increase
in service revenues is attributable to a greater number of client
accounts under contract. Service revenues are expected to continue
to increase as the Company's installed base of CIS installations
increases.
The Company continues to expand its sales and marketing
activities and has also initiated strategic joint marketing
partnerships with other companies, which have improved the Company's
market penetration. With these changes the Company successfully
increased its market presence which resulted in the 19% increase in
sales of CIS products during the 1997 fiscal year, and has increased
its "pipeline" of working CIS transactions to date. Management
views the near term outlook for the continued sale of CIS products
favorably during the first half of the 1999 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, and the temporary delays in the closing
of new CIS sales described above.
Cost of sales increased by $382,425 or 10% for the 1998
fiscal year. There was a decrease in materials of $115,750 or 10%,
an increase in other costs of sales of $121,859 or 9%, and an
increase in labor of $376,316 or 27%. The decrease in material
costs was attributable to the decrease in the sale of CIS products
discussed above. 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 implementing
CIS transactions during the current fiscal year. The Company has
implemented cost savings measures directed at reducing travel
expenses by centralizing its travel through one agency, and has
begun billing its clients for out of pocket travel related expenses
associated with its CIS implementations. Cost of sales as a
percentage of sales increased to 65% for the 1998 fiscal year as
compared to 54% for the 1997 fiscal year. The overall percentage
increase in cost of sales was attributable to both a decrease in
sales and the increase in expenses previously discussed. The
effects of SOP 97-2 also temporarily skewed cost of sales during the
period, due to the deferral of revenues related to the
implementation of systems which has a higher gross margin.
Selling, general and administrative expenses increased by
$195,980 or 8.6% for the current 1998 fiscal year as compared to the
1997 fiscal year. The increases in S G & A expenses were
attributable to an increase in the write off of approximately
$85,000 in bad debts expense, as well as increased costs in travel,
trade show, consultant and personnel recruitment expenses.
Research and development expenses increased by $101,367 or
17.8% for fiscal 1998. The increase is attributable to the addition
of new personnel and their related salaries. For its 1998 and 1997
fiscal years, the Company capitalized software costs of $385,164 and
$395,856 respectively which are generally amortized over a five year
period. Such costs were attributable to enhancements and new
modules for the Company's CIS products, new applications under
development, and modifications associated with Year 2000 compliance.
Management anticipates its overall research and development
activities will increase in fiscal 1999.
Interest and other income was $3,630 for fiscal 1998 as
compared to $6,589 for fiscal 1997.
Interest and other expense increased by $46,687 or 204% for
fiscal 1998 as compared to fiscal 1997 due to increased borrowings
on the Company's line of credit with its bank.
The Company incurred a loss before Income Tax Expense
(Benefit) of $(971,703)for fiscal 1998 as compared to income of
$428,725 for fiscal 1997. 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 $322,800 in fiscal 1998 and $462,275 in its 1997
fiscal year. As a result of these factors the Company's net loss
was $(648,903) or $.22 per share in fiscal 1998 as compared to net
income of $891,000 or $.30 per share in fiscal 1997.
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, 1998 was approximately $3,416,000 compared to $2,365,000 in the
prior year. The net operating loss carryforward is available to
offset future taxable income through 2013. The Company also has
investment and research and experimentation tax credit carryforwards
to offset future income tax payable of approximately $285,000 that
expire at various dates through 2013.
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 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 zero, as
the Company believes it is more likely than not that the net
deferred tax asset will be realized. During the year ended August
31, 1998, the Company re-evaluated the realization of the deferred
tax asset taking into consideration projected operating results and
prior earnings history, in light of the current year loss. As a
result, the Company continues to believe that it is more likely than
not that the net deferred tax asset will be realized.
Capital Resources and Liquidity
The Company's primary need for capital has been to invest in
software development, and in the new company wide network and
facility expansion. The Company invested $385,164 and $395,856
during fiscal 1998 and 1997 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(Registered Trademark)), and other product enhancements.
The Company anticipates expending additional sums during fiscal 1999
on the further development of the Company's Radiology Information
System, and other new products and product enhancements. During
fiscal 1998, the Company expended an additional $200,526 to
implement the Company's wide area network, help desk systems, and
the expansion of its California facilities.
As of August 31, 1998, the Company's working capital
amounted to $526,566 compared to $1,703,057 as of August 31, 1997.
The decrease in working capital was primarily attributable to the
loss incurred as a result of the change in accounting method
necessitated by the adoption of SOP 97-2. In addition, the
Company's Balance Sheet has been affected by the inclusion of
deferred revenues as a current liability which further reduced
working capital. The Company's bank line as of August 31, 1998
amounted to $800,000 of which $611,609 was being utilized. The bank
credit agreement contains certain financial ratio requirements. The
Company was not in compliance with some of the covenants as of
August 31, 1998, but had obtained a waiver from the bank.
Cash flows from operating activities were $96,357 for the
1998 fiscal year compared to $784,317 for the 1997 fiscal year. The
decrease resulted primarily from lower sales recognized because of
the adoption of SOP 97-2.
Net cash used in investing activities changed during the
1998 fiscal year to $617,944 used in investing activities as
compared to $609,085 used in investing activities during the 1997
fiscal year. The change resulted from decreased expenditures for
the company wide network and help desk system, and the acquisition
of assets of $33,780. As discussed under Item 1 Business, the
Company is undertaking the conversion of its products to make them
Year 2000 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 1999 to complete the projects.
Cash flows from financing activities changed to $363,033
provided by financing activities during the 1998 fiscal year from
$105,997 provided by financing activities in fiscal 1997. 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 projected cash flow from
operations together with its bank credit facilities should be
sufficient to fund its working capital requirements for its 1999
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 and services. 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, improving and
expanding its services, and by constantly enhancing its software
applications.
New Accounting Pronouncements
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 adopted SFAS No. 129 on
December 15, 1997 and it had no effect 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. This standard deals with
financial statement disclosure and will not effect the Company's
financial position or its results of operations.
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. This
standard deals with financial statement disclosure and will not effect
the Company's financial position or its results of operations.
Statement of Position 97-2, "Software Revenue Recognition",
("SOP 97-2") issued by the AICPA is effective for transactions
entered into in fiscal years beginning after December 15, 1997. SOP
97-2 supersedes SOP 91-1 regarding software revenue recognition.
SOP 97-2 establishes standards which require a company to recognize
revenue when (i) persuasive evidence of an arrangement exists, (ii)
delivery has occurred, (iii) the vendor's fee is fixed or
determinable, and (iv) collectability is probable. The SOP also
discusses the revenue recognition criteria for multiple element
contracts and allocation of the fee to various elements based on
vendor-specific objective evidence of fair value. Statement of
Position 98-4 "Deferral of the Effective Date of a Provision of SOP
97-2" defers for one year the application which limits what is
considered vendor-specific objective evidence of the fair value of
the various elements in a multiple-element arrangement. The Company
adopted this SOP during 1998.
Year 2000 Compliance
Many currently installed computer systems and software
products are coded to accept only two digit entries in the date code
field. As the year 2000 approaches, these code fields will need to
accept four digit entries to distinguish years beginning with "19"
from those beginning with "20". As a result some computer systems
and software used by the Company and its clients may have to be
upgraded to comply with such Year 2000 requirements. The Company is
currently expending resources to review its products, systems and
services and the computer systems and software products it sells in
order to identify and modify those products, systems and services.
The Company believes that the cost of the modifications associated
with this effort will not have a material adverse effect on the
Company's operating results. However, achieving Year 2000
compliance is dependent on many factors, some of which are not
completely within the Company's control, including without
limitation, the availability and cost of trained personnel and
effectiveness of software upgrades used by the Company and its
vendors and suppliers. Should either the Company's internal systems
or the internal systems of one or more significant vendors or
suppliers fail to achieve Year 2000 compliance, the Company's
business and its results of operations could be adversely affected.
Clinical Information Systems
The Company has been engaged in evaluating and modifying its
CIS products for sometime and has completed core modifications and
testing for Year 2000 changes to CyberLAB II(Registered Trademark).
The Company is currently distributing the Year 2000 compliant
software upgrades to its clients. CyberRAD(Registered Trademark)
and MQA were designed to be Year 2000 compliant.
CyberMED(Trademark) is currently being modified and it is expected
that the modifications and testing will be completed by mid 1999.
Subsequently the modified CyberMED(Trademark) upgrade will be
distributed to clients. Modifications are also currently being made
to the financial management system that will be completed by March
1999 and released thereafter. The Company will also evaluate
communication interfaces it has installed in order to determine in
each individual case, whether the software is Year 2000 compliant,
and will undertake such modifications as are deemed to be necessary
to be compliant. The Company believes it is timely and on schedule
in its efforts to effectuate the modifications, testing and upgrade
of its developed software applications to its clients. Management
is cognizant of the fact that the timeliness of the completion and
distribution of Year 2000 modifications are critical to the success
of the Company.
Some of the Company's clients may require upgrades to their
computers and/or operating systems, in order to operate the upgraded
application software and otherwise be Year 2000 compliant. The
Company has been conducting a review of its client installations in
order to determine their status and to advise clients as to what
modifications should be undertaken. The Company's extended service
agreements require that the client be responsible for the cost of
any upgrades to their computers that may be required to operate
upgraded or modified application software. Therefore the Company
does not expect to bear the costs associated with this effort and
instead will derive revenues from the upgrades. The Company had
identified the modifications and/or upgrades required by the vendors
and is assisting its clients in securing the necessary modifications
and/or upgrades.
In House Systems and Computers
The Company has been conducting a review of the computers,
systems and software that it utilizes internally to operate its
business. It has determined that some systems such as its
accounting and voice mail systems will have to be replaced since
they are not modifiable. However, such systems were already due to
be replaced because they are no longer adequate and are not being
supported by their manufacturers. Other systems supported by their
manufacturers will be upgraded in the normal course with Year 2000
modifications on a timely basis. Although the Company will have to
bear the cost of replacing non-compliant systems, it is not
anticipated that the aggregate expenditures will be of a material
nature. At present, the cost of such replacements has not been
fully determined.
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, 52 Chairman of the Board and 1978
Chief Technology Officer
since its inception in 1978.
Steven M. Besbeck, 50 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, 54 Vice President/Operations since 1987
1982 and Secretary.
Lawrence S. Schmid, 57 President and Chief Executive 1991
Officer, Strategic Directions
International, Inc., a management
consulting firm specializing
in technology companies.
Robert S. Fogerson, Jr., 45 Chief Operating Officer, of 1992
ViroMED Laboratories, Inc.,
a leading independent laboratory
providing clinical testing services
since 1998. Mr. Fogerson
had previously served in various
capacities at PharmChem Laboratories
since 1975.
John R. Murray, 56 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 American Stock Exchange (AMEX) 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.
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 1999 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 1999 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 1999 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, 1998.
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 20, 1998 By: /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 Chief Nov. 20, 1998
Bruce M. Miller Technology Officer
/S/ Steven M. Besbeck President, Chief Executive Nov. 20, 1998
Steven M. Besbeck Officer, Chief Financial Officer
and Director
/S/ James R. Helms Vice President, Operations, Nov. 20, 1998
James R. Helms Secretary and Director
/S/ Lawrence S. Schmid Director Nov. 20, 1998
Lawrence S. Schmid
/S/ Robert S. Fogerson, Jr. Director Nov. 20, 1998
Robert S. Fogerson, Jr.
/S/ Carol Bessel Controller Nov. 20, 1998
Carol Bessel Chief Accounting Officer
/S/ John R. Murray Vice President, Sales Nov. 20, 1998
John R. Murray and Business Development
</TABLE>
CREATIVE COMPUTER APPLICATIONS, INC.
_______________________
Financial Statements
For the Years Ended August 31, 1998 and 1997
_______________________
CREATIVE COMPUTER APPLICATIONS, INC.
INDEX
Page
FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants F-2
Balance Sheets
August 31, 1998 and 1997 F-3
Statements of Operations
Years ended August 31, 1998, 1997 and 1996 F-4
Statements of Shareholders' Equity
Years ended August 31, 1998, 1997 and 1996 F-5
Statements of Cash Flows
Years ended August 31, 1998, 1997 and 1996 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, 1998 and 1997 and the
related statements of operations, shareholders' equity and cash flows
for each of the three years in the period ended August 31, 1998.
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, 1998 and 1997 and
the results of its operations and its cash flows for the three years
ended August 31, 1998 in conformity with generally accepted accounting
principles.
In accordance with Statement of Position 97-2, "Software
Revenue Recognition", which the Company adopted as of December 1998
and as discussed Note 8 to the financial statements, the Company
changed its method of accounting for software revenue recognition in
fiscal 1998.
BDO SEIDMAN, LLP
/S/ BDO Seidman, LLP
Los Angeles, California
October 23, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
August 31, 1998 1997
ASSETS (Note 4)
CURRENT ASSETS:
Cash $ 375,876 $ 534,430
Receivables, net (Note 2) 1,973,601 1,933,685
Inventory 670,243 675,795
Prepaid expenses 79,907 78,951
Deferred tax asset (Note 9) 466,300 427,000
TOTAL CURRENT ASSETS 3,565,927 3,649,861
PROPERTY AND EQUIPMENT, net (Note 3) 575,804 551,413
INVENTORY OF COMPONENT PARTS 156,527 136,357
CAPITALIZED SOFTWARE COSTS,
net of accumulated amortization of
$384,509 and $286,907 (Note 1) 1,128,498 917,937
INTANGIBLES, net (Note 1) 302,120 264,381
DEFERRED TAX ASSET (Note 9) 844,200 551,200
OTHER ASSETS (Note 7) 32,371 21,965
$6,605,447 $6,093,114
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to bank (Note 4) $ 611,609 $ 287,296
Accounts payable 507,005 522,808
Accrued liabilities:
Vacation pay 184,305 187,367
Other 339,402 363,027
Deferred service contract income 754,343 569,734
Deferred revenue on system sales(Note 8) 638,018 -
Capital lease obligations - current
portion (Note 5) 4,679 16,572
TOTAL CURRENT LIABILITIES 3,039,361 1,946,804
DEFERRED RENT (Note 5) - 5,034
CAPITAL LEASE OBLIGATIONS, net of
current portion (Note 5) - 4,679
TOTAL LIABILITIES 3,039,361 1,956,517
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;
2,920,740, and 2,849,865
shares outstanding 5,831,027 5,752,635
Accumulated deficit (2,264,941) (1,616,038)
TOTAL SHAREHOLDERS' EQUITY 3,566,086 4,136,597
$6,605,447 $6,093,114
</TABLE>
See notes to financial statements.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year ended August 31, 1998 1997 1996
NET SYSTEM SALES AND SERVICE
REVENUE (Notes 7 and 8):
System sales $4,113,848 $4,976,820 $4,190,825
Service revenue 2,334,522 2,142,561 2,046,137
6,448,370 7,119,381 6,236,962
COST OF PRODUCTS AND
SERVICES SOLD:
System sales 2,645,949 2,467,743 1,922,100
Service revenue 1,550,487 1,346,269 1,259,486
4,196,436 3,814,012 3,181,586
GROSS PROFIT 2,251,934 3,305,369 3,055,376
RESEARCH AND DEVELOPMENT
EXPENSE 671,035 569,668 461,330
SELLING AND ADMINISTRATIVE
EXPENSES 2,486,716 2,290,736 2,095,493
OPERATING INCOME (LOSS) (905,817) 444,965 498,553
OTHER INCOME (EXPENSE):
Interest income 3,630 6,589 3,243
Interest and other expense (69,516) (22,829) (36,409)
(65,886) (16,240) (33,166)
INCOME (LOSS) BEFORE INCOME
TAX BENEFIT (971,703) 428,725 465,387
INCOME TAX BENEFIT (Note 9) (322,800) (462,275) (502,410)
NET INCOME (LOSS) $ (648,903) $ 891,000 $ 967,797
EARNINGS (LOSS) PER SHARE
(Notes 1 and 10):
Basic $ (.22) $ .31 $ .35
Diluted $ (.22) $ .30 $ .32
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING(Note 10):
Basic 2,901,003 2,836,532 2,772,615
Diluted 2,901,003 3,011,101 3,006,926
</TABLE>
See notes to financial statements.
<TABLE>
<CAPTION>
Common Accumu-
Common Shares lated
Shares Amount Deficit Totals
BALANCE, September 1, 1995 2,735,715 $5,676,230 $(3,474,835) $2,201,395
<S> <C> <C> <C> <C>
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 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
Exercise of stock options
(Note 6) 61,000 66,550 - 66,550
Issuance of common shares 9,875 11,842 - 11,842
Net loss - - (648,903) (648,903)
BALANCE, August 31, 1998 $2,920,740 $5,831,027 $(2,264,941) $3,566,086
</TABLE>
See notes to financial statements.
<TABLE>
<CAPTION>
Increase (Decrease) in Cash (Note 11)
Year ended August 31, 1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (648,903) $ 891,000 $ 967,797
Adjustments to reconcile
net income (loss) to net
cash provided by operating
activities:
Depreciation and amortization 235,005 194,606 180,093
Amortization of capitalized
software costs 174,602 171,616 175,491
Provision for possible losses 106,118 16,793 55,422
Gain on disposal of property
and equipment (246) - -
Deferred rent expense (5,034) (30,201) (30,200)
Deferred taxes (332,300) (463,600) (514,602)
Increase (decrease) from
changes in:
Receivables (146,034) (271,911) (173,900)
Inventories (14,618) (21,008) (57,032)
Prepaid expenses (956) 7,930 (5,749)
Accounts payable (15,803) 216,487 (186,952)
Accrued liabilities (89,127) (33,053) 138,002
Deferred service income 184,609 105,658 (29,183)
Deferred revenue on
system sales 638,018 - -
Other assets 11,026 - -
Net cash provided by
operating activities 96,357 784,317 519,187
INVESTING ACTIVITIES
Additions to property
and equipment (200,526) (213,229) (357,510)
Capitalized software costs (385,164) (395,856) (365,420)
Payments for acquisition
of assets (33,780) - -
Proceeds from insurance
settlement of property
and equipment 1,526 - -
Net cash used in
investing activities (617,944) (609,085) (722,930)
FINANCING ACTIVITIES
Borrowings on notes payable 644,313 315,421 351,875
Payments on notes payable (320,000) (220,000) (306,084)
Payments on capital
lease obligations (16,572) (27,489) (5,000)
Proceeds from issuance
of stock 11,842 - -
Exercise of stock options
and warrants 43,450 38,065 38,340
Net cash provided by
financing activities 363,033 105,997 79,131
NET INCREASE (DECREASE)
IN CASH (158,554) 281,229 (124,612)
CASH, beginning of year 534,430 253,201 377,813
CASH, end of year $ 375,876 $ 534,430 $ 253,201
</TABLE>
See notesto financial statements.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activities
Creative Computer Applications, Inc. (the "Company")
develops, assembles, markets, installs and services 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, including the
implementation of such products and systems, primarily to hospitals,
clinics, reference laboratories 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.
Cash and Cash Equivalents
The Company considers all liquid assets with an initial
maturity of three months or less to be cash and cash equivalents.
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 is 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.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 unamortized cost or net realizable value. The
Company considers annual amortization of capitalized software costs
based on the ratio of current year revenues by product to the
product's total estimated revenues method, subject to an annual
minimum based on straight-line amortization over the product's
estimated economic useful life, not to exceed five years.
During the years ended August 31, 1998, 1997 and 1996, the
Company capitalized $385,164, $395,856 and $365,420 of software
development costs. Amortization expense of capitalized software
development costs, included in cost of sales, for the years ended
August 31, 1998, 1997 and 1996 amounted to $174,602, $171,616 and
$175,491.
Intangible Assets
Intangible assets amounting to $607,924 consist of
proprietary rights to application software, trademarks, customer
lists and copyrights and are being amortized using the straight-line
method over the estimated useful life, not to exceed ten years.
Accumulated amortization was $305,804 and $247,323 at August 31,
1998 and 1997.
Revenue Recognition
System Sales
The Company adopted Statement of Position 97-2, "Software
Revenue Recognition", ("SOP 97-2") during 1998. In accordance with
SOP 97-2, the Company recognizes revenue on sales of Clinical
Information Systems and data acquisition products when the following
criteria are met; (I) persuasive evidence of an arrangement exists,
(ii) delivery has occurred and the system is functionable, (iii) the
vendor's fee is fixed or determinable and (iv) collectability is
probable. Also in accordance with SOP 97-2, the Company also
allocates the fee of a multiple element contract to the various
elements based on vendor-specific objective evidence of fair value.
Revenue allocated to a specific element is recognized when the basic
revenue recognition criteria above is met for that element. If
sufficient vendor-specific objective evidence for all elements does
not exist to allocate revenue to the elements, all revenue from the
arrangement generally would be deferred until such evidence does
exist or until all elements have been delivered. 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. Implementation revenue, consisting primarily of
installation and training, is recognized as revenue as the services
are performed.
Service Revenue
Service revenues (which are included in net sales) are
recognized ratably over the contractual period (usually one year) or
as the services are provided. These services are not essential to
the functionality of any other elements and are separately stated.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition (Continued)
Deferred Revenue and Income
Deferred revenue on system sales and deferred service contract
income represent cash received in advance or accounts receivable
from system and service sales of which the above criteria have not
been met for the current reporting of income.
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.
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. The Company has adopted this method
of reporting.
Earnings Per Share
The Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS No. 128) during 1998.
SFAS No. 128 provides for the calculation of Basic and Diluted
earnings per share. Basic earnings per share includes no dilution
and is computed by dividing income (loss) available to common
shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of
an entity, such as stock options, warrants or convertible
debentures. All prior period weighted average and per share
information has been adjusted in accordance with SFAS No. 128.
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.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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, accounts payable, deferred service
contract income and deferred revenue on system sales 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
Disclosure about Capital Structure
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 adopted SFAS No. 129
on December 15, 1997 and it had no effect on its financial position
or results of operations.
Comprehensive Income
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. This standard
deals with financial statement disclosure and will not effect the
Company's financial position or its results of operations.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
New Accounting Pronouncements (Continued)
Segment Information
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.
This standard deals with financial statement disclosure and will not
effect the Company's financial position or its results of
operations.
Software Revenue Recognition
Statement of Position 97-2, "Software Revenue Recognition",
("SOP 97-2") issued by the AICPA is effective for transactions
entered into in fiscal years beginning after December 15, 1997. SOP
97-2 supersedes SOP 91-1 regarding software revenue recognition.
SOP 97-2 establishes standards which require a company to recognize
revenue when (i) persuasive evidence of an arrangement exists, (ii)
delivery has occurred, (iii) the vendor's fee is fixed or
determinable, and (iv) collectability is probable. The SOP also
discusses the revenue recognition criteria for multiple element
contracts and allocation of the fee to various elements based on
vendor-specific objective evidence of fair value. Statement of
Position 98-4 "Deferral of the Effective Date of a Provision of SOP
97-2" defers for one year the application which limits what is
considered vendor-specific objective evidence of the fair value of
the various elements in a multiple-element arrangement. The Company
adopted this SOP during 1998 and the effect on the Company resulted
in deferred revenue of $638,018 at August 31, 1998.
NOTE 2 - RECEIVABLES
<TABLE>
<CAPTION>
Receivables are summarized as follows:
August 31, 1998 1997
<S> <C> <C>
Trade accounts $2,037,101 $1,966,985
Allowance for uncollectible accounts (63,500) (33,300)
$1,973,601 $1,933,685
</TABLE>
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
August 31, 1998 1997
<S> <C> <C>
Machinery and equipment $ 244,447 $ 231,438
Furniture and fixtures 327,865 214,593
Leasehold improvements 84,705 65,078
Data processing equipment 1,179,764 1,148,310
1,836,781 1,659,419
Accumulated depreciation (1,260,977) (1,108,006)
$ 575,804 $ 551,413
</TABLE>
Included in property and equipment at August 31, 1998 and
1997 are machinery and equipment and furniture and fixtures under
capital lease agreements in the amount of $23,275 and $96,261 with
related accumulated amortization thereon of $19,784 and $66,807.
Depreciation and amortization expense for the years ended
August 31, 1998, 1997 and 1996 was $174,855, $158,901 and $127,400.
NOTE 4 - NOTES PAYABLE TO BANK
The notes payable to bank are classified as current and are summarized
as follows:
<TABLE>
<CAPTION>
August 31, 1998 1997
<S> <C> <C>
Line of credit of $500,000 with a
bank with interest at the bank's prime
rate plus 1.75% (10.25% at August 31,
1998) and maturing on February 1, 1999,
and collateralized by substantially all
of the Company's assets $500,000 $200,000
Note payable to a bank with interest at
the bank's prime rate plus 2.5%
(11% at August 31, 1998) maturing on
January 1, 2000, and collateralized by
substantially all of the Company's assets.
The note is subject to minimum principal
repayment terms of $10,000 a month
plus interest 111,609 87,296
$611,609 $287,296
</TABLE>
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, 1998, the Company was not
in compliance with certain financial covenants of which the Company
received a waiver from the bank.
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. 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>
1999 $219,712
2000 211,752
2001 211,752
2002 211,752
2003 17,646
Total minimum lease payments $872,614
</TABLE>
Rent expense for the years ended August 31, 1998, 1997 and
1996 was approximately $229,000, $172,000 and $205,000.
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, 1998:
<TABLE>
<CAPTION>
<S> <C>
Capital
Fiscal year ending Leases
1999 $4,679
Total minimum lease payments 4,679
Amount representing interest -
Present value of minimum lease payments 4,679
Current portion (4,679)
Capital lease obligations, net of current portion $ -
</TABLE>
NOTE 6 - STOCK OPTION PLANS AND WARRANTS
During 1997, the Company adopted the 1997 Non-Qualified and
Incentive Stock Option Plans upon termination of the 1992 Plans. At
August 31, 1998, the 1992 plans have 284,000 options outstanding and
203,911 options exercisable. Under the 1997 Non-Qualified Stock
Option Plan, the Company may grant a maximum of 300,000 common
shares (officers and directors may acquire no more than 150,000
common shares) and no options may be granted at a price less than 85
percent of the fair market value of the common shares on the date of
grant. Under the 1997 Incentive Stock Option Plan, the Company may
grant a maximum of 500,000 common shares (officers and directors may
acquire no more than 250,000 common shares). In addition, under the
1997 Incentive Stock Option Plan, options can 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. Under the 1997 Plans, options granted to
optionees owning less than 10 percent 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 percent
or more of the Company's outstanding voting securities have an
exercise term of no more than five years from the date of grant. No
options under either plan 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. At August 31, 1998, the 1997 plans have 172,000
options outstanding and 19,250 options exercisable. These plans
expire in 2007.
Activity under the 1982, 1992 and 1997 plans through August
31, 1998 is summarized below:
<TABLE>
<CAPTION>
Non-Qualified Plans Incentive Plans
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
September 1, 1995 724,755 $1.27 212,409 $1.33
Options granted range from
$1.75 to $2.25 per share 25,000 $1.79 115,000 $2.19
Options expired range from
$.45 to $2.25 per share - - (48,209) $1.36
Options exercised at $0.45 (34,000) $0.45 (51,200) $0.45
August 31, 1996 715,755 $1.33 228,000 $1.96
Options granted range from
$1.63 to $2.13 75,000 $1.87 42,000 $1.85
Options expired range from
$1.00 to $1.25 (108,000) $1.02 (15,000) $2.25
Options exercised range from
$1.25 to $1.58 (20,000) $1.33 (5,000) $1.10
August 31, 1997 662,755 $1.44 250,000 $1.94
Options granted range from
$1.63 to $1.78 35,000 $1.69 60,000 $1.72
Options expired range from
$1.10 to $1.50 (30,000) $1.30 (11,000) $2.25
Options exercised range from
$1.03 to $1.13 (36,000) $1.10 (25,000) $1.08
August 31, 1998 631,755 $1.48 274,000 $1.95
Options exercisable at
August 31, 1998 515,566 $1.40 144,911 $2.04
Options available for
grant at August 31,1998 215,000 413,000
</TABLE>
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 from two to five years after which they expire.
449,755 shares of the special grants are included in the non-
qualified plan shares outstanding at August 31, 1998.
NOTE 6 - STOCK OPTION PLANS AND WARRANTS (Continued)
Information relating to stock options, at August 31,1998
summarized by exercise price are as follows:
<TABLE>
<CAPTION>
Outstanding Exerciseable
Weighted Average Weighted Average
Exercise Price Life Exercise Exercise
Per Share Shares (Month) Price Shares Price
Incentive Stock Option Plan:
<C> <C> <C> <C> <C> <C>
$1.25 10,000 13.0 $ 1.25 7,500 $ 1.25
$1.38 5,000 13.0 1.38 3,750 1.38
$1.44 10,000 1.0 1.44 10,000 1.44
$1.58 5,000 1.0 1.58 5,000 1.58
$1.63 20,000 114.0 1.63 - 1.63
$1.63 10,000 37.0 1.63 2,500 1.63
$1.66 5,000 114.0 1.66 - 1.66
$1.75 10,000 25.0 1.75 5,000 1.75
$1.78 25,000 111.0 1.78 - 1.78
$1.79 10,000 56.0 1.79 - 1.79
$1.79 5,000 37.0 1.79 1,250 1.79
$1.93 5,000 25.0 1.93 2,500 1.93
$1.94 27,000 44.0 1.94 6,750 1.94
$2.25 127,000 26.0 2.25 100,661 2.25
274,000 44.1 $ 1.95 144,911 $ 2.04
</TABLE>
<TABLE>
<CAPTION>
Non-Qualified Stock Option Plan:
<C> <C> <C> <C> <C> <C>
$1.00 100,000 8.0 $ 1.00 100,000 $ 1.00
$1.25 20,000 13.0 1.25 20,000 1.25
$1.38 5,000 13.0 1.38 5,000 1.38
$1.38 300,000 27.0 1.38 300,000 1.38
$1.44 20,000 1.0 1.44 20,000 1.44
$1.58 2,000 1.0 1.58 2,000 1.58
$1.63 20,000 37.0 1.63 5,000 1.63
$1.63 20,000 37.0 1.63 - 1.63
$1.75 20,000 25.0 1.75 10,000 1.75
$1.78 15,000 111.0 1.78 - 1.78
$1.79 5,000 37.0 1.79 1,250 1.79
$1.93 5,000 25.0 1.93 2,500 1.93
$1.94 40,000 44.0 1.94 10,000 1.94
$2.13 10,000 44.0 2.13 2,500 2.13
$2.25 49,755 17.5 2.25 37,316 2.25
631,755 25.8 $ 1.48 515,566 $ 1.40
</TABLE>
NOTE 6 - STOCK OPTION PLANS AND WARRANTS (Continued)
All stock options issued to employees have an exercise price
not less than 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 (loss) and earnings (loss) per share for the years ended
August 31, 1998, 1997, and 1996 would have been decreased to the pro
forma amounts presented below.
<TABLE>
<CAPTION>
August 31, 1998 1997 1996
<S> <C> <C> <C>
Net income (loss), as reported $(648, 903) $ 891,000 $ 967,797
Net income (loss), pro forma (709,144) 859,205 952,869
Basic net earnings (loss)
per share, as reported (0.22) 0.31 0.35
Basic net earnings (loss)
per share, pro forma (0.25) 0.30 0.32
Diluted net earnings (loss)
per share, as reported (0.22) 0.30 0.32
Diluted net earnings (loss)
per share, as reported (0.25) 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 grants in 1998, 1997 and 1996;
expected life of options for all three years was 5 years, expected
volatility of 14%, 16% and 19%, respectively, and risk-free interest
rate of 6.0%, 5.5% and 6.0%, respectively. The weighted average
fair value on the date of grants for options granted during 1998,
1997 and 1996 was $.46, $.49 and $.57 per option.
Due to the fact that 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 granted prior to 1995 that vested in 1996,
1997 and 1998.
NOTE 7 - RELATED PARTIES
The Company has a note receivable from a major shareholder
for $23,100, which accrues interest at 10% per annum and is payable
monthly beginning January 2, 1998. The note receivable of $23,100
is payable in full on December 18, 2000.
NOTE 8 - REVENUE
In accordance with SOP 97-2, a Company is required to change
its method of accounting for software revenue for fiscal years
beginning after December 15, 1997. During 1998, the Company elected
early adoption of this SOP.
NOTE 8 - REVENUE (Continued)
The Company recognizes revenue when the criteria discussed in the
Revenue Recognition accounting policy in Note 1 are met. Whereas
under SOP 91-1 revenue was recognized once delivery occurred,
collectability was probable and remaining vendor obligations were
insignificant and accrued for. As a result of implementing SOP 97-
2, the Company has deferred revenue on system sales of $638,018
(primarily related to implementation revenue), as the revenue
recognition criteria under SOP 97-2 were not met. Deferred revenue
will be recognized as the Company meets the specific criteria. In
accordance with SOP 97-2, all prior periods have not been
retroactively adjusted.
NOTE 9 - INCOME TAX BENEFIT
The provision for income taxes consist of the following:
<TABLE>
<CAPTION>
August 31, 1998 1997 1996
<S> <C> <C> <C>
Current taxes:
Federal $ - $ - $ -
State 9,500 1,325 12,190
Deferred
State 7,800 - -
Federal (340,100) 51,000 -
(322,800) 52,325 12,190
Change in valuation
allowance - (514,600) (514,600)
Income tax benefit $(322,800) $(462,275) $(502,410)
</TABLE>
Income tax benefit differs from the amount obtained by
applying the statutory federal income tax rate to income before
income tax expense as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Computed provision (benefit)
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 1.0 0.3 6.0
Tax benefit of federal net
operating loss carryforward - (34.0) (34.0)
Permanent differences and other (0.2) 11.9 -
Reduction in valuation allowance - (120.0) (114.0)
(33.2)% (107.8)% (108.0)%
</TABLE>
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, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
August 31, 1998 1997
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 25,400 $ 13,700
Inventory uniform capitalization 24,000 23,900
Accrued vacation 64,600 66,900
Deferred revenue 214,900 163,500
Depreciation and amortization 4,600 7,600
Net operating loss carryforwards 1,161,600 804,000
Tax credits 285,200 275,000
Gross deferred tax assets 1,780,300 1,354,600
Deferred tax liability:
Capitalized software costs (468,600) (376,400)
Other (1,200) -
(469,800) (376,400)
Net deferred tax assets $1,310,500 $ 0 978,200
</TABLE>
At August 31, 1998, the Company had federal net operating
loss carryforwards available to offset future taxable income of
approximately $3,416,000 that expire at various dates through 2013
and general business tax credit carryforwards available to offset
future income tax payable of approximately $285,200 that expire at
various dates through 2013. The Tax Reform Act of 1986 contains
provisions which limit the amount of tax credits that can be
utilized in any one year 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 zero, as
the Company believes it is more likely than not that the net
deferred tax asset will be realized. During the year ended August
31, 1998, the Company re-evaluated the realization of the deferred
tax asset taking into consideration projected operating results and
prior earnings history, in light of the current year loss. As a
result, the Company continues to believe that it is more likely than
not that the net deferred tax asset will be realized.
NOTE 10 - EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
August 31
1998 1997 1996
<S> <C> <C> <C>
Basic weighted average
shares outstanding 2,901,003 2,836,532 2,772,615
Diluted effect of stock
options and warrants - 174,569 234,311
Diluted weighted average
shares outstanding 2,901,003 3,011,101 3,006,926
</TABLE>
At August 31, 1998, options to purchase 905,755 shares were
outstanding and could effect future periods, but were not included
in the computation of diluted loss per common share because the
effect would be antidilutive.
NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is as follows:
(a) Cash paid:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
Interest $ 55,365 $ 34,969 $ 35,800
Income taxes $ 1,570 $ - $ -
</TABLE>
(b) Non-cash investing and financing activities:
During fiscal 1998, the Company generated a note receivable for
$23,100 from a related party (See Note 7).
During fiscal 1996, the Company acquired a computer with a cost
of $23,286 under a capital lease agreement.
EXHIBIT 11
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year ended August 31, 1998 1997 1996
AVERAGE MARKET PRICE
PER SHARE $ 1.50 $ 1.82 $ 1.85
NET INCOME (LOSS) $ (648,903) $ 891,000 $ 967,797
Basic weighted average
number of common
shares outstanding 2,901,003 2,836,532 2,772,615
Diluted effect of
stock options - 174,569 234,311
Diluted weighted average
number of common
shares outstanding 2,901,003 3,011,101 3,006,926
Basic earnings (loss)
per share $ (.22) $ .31 $ .35
Diluted earnings (loss)
per share $ (.22) $ .30 $ .32
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
[ARTICLE] 5
[RESTATED]
</TABLE>
<TABLE>
<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
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 5752635
[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] .31
[EPS-DILUTED] .30
</TABLE>
CREATIVE COMPUTER APPLICATIONS, INC.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<CASH> 375876
<SECURITIES> 0
<RECEIVABLES> 1973601
<ALLOWANCES> 0
<INVENTORY> 670243
<CURRENT-ASSETS> 3565927
<PP&E> 1836781
<DEPRECIATION> 1260977
<TOTAL-ASSETS> 6605447
<CURRENT-LIABILITIES> 3039361
<BONDS> 0
0
0
<COMMON> 5831027
<OTHER-SE> (2264941)
<TOTAL-LIABILITY-AND-EQUITY> 6605447
<SALES> 6448370
<TOTAL-REVENUES> 6452000
<CGS> 4196436
<TOTAL-COSTS> 7354187
<OTHER-EXPENSES> 14151
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55365
<INCOME-PRETAX> (971703)
<INCOME-TAX> (322800)
<INCOME-CONTINUING> (648903)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (648903)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> (.22)
</TABLE>
