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, 1999.
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. [ X ]
Issuer's revenues for its most recent fiscal year ended August 31,
1999 were $8,901,044.
As of November 16, 1999, the aggregate market value of the voting
stock held by non-affiliates of the Company was approximately
$5,400,000.
As of November 16, 1999, the Company had 3,130,925 shares of its
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11 and 12 of Part III of this report are hereby
incorporated by reference from the Company's Fiscal 2000 Definitive
Proxy Statement which will be filed within 120 days of the end of
the Company's fiscal year.
Transitional Small Business Disclosure (check one):
Yes __ No X
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), a Pharmacy Information System under the name of
CyberMED(Trademark), a Radiology Information System under the name
CyberRAD(Registered) 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, 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.
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, 1999, the Company supported approximately 500 active
application installations that are used in over 400 client sites.
The percentage of the Company's net sales attributable to
the sale, licensure, and implementation of Clinical Information
Systems, including data acquisition product sales, accounted for
approximately 69% of total revenues in fiscal 1999, 64% in fiscal
1998, and 70% in fiscal 1997. 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 2000 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 plan 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.
In accordance with its diversification plan the Company
announced in September 1999 that it formed a new wholly owned
subsidiary, Xymed.com, that will be developed as an Application
Service Provider (ASP) and a provider of data center outsourcing
services.
Xymed.com will offer the Company's clinical information
systems products to clients via private dedicated wide area networks
and over the Internet. As an ASP, Xymed.com will provide software-
based services to clients on a fee for service basis, which will
eliminate a good portion of the hardware costs for servers and
related equipment. Clients will make no capital outlays for servers
or software but will instead pay a monthly fee for the services. In
addition, Xymed.com's staff at the Company's data center will
perform the operational information technology functions normally
associated with an installation.
The formation of Xymed.com as an ASP is a logical evolution
of the Company's web strategy and is in response to inquiries by
existing and potential clients that want to reduce their information
technology expenses while extending their clinical information to a
broader constituency. The Company intends to begin offering
services as early as the first calendar quarter of 2000 after the
completion of a beta test. Xymed.com was formed to solely focus on
providing application services and outsourcing and may be
independently capitalized in order to pursue it's business strategy.
The Company's fiscal 1999 revenues and earnings showed a
marked increase over its 1998 fiscal year which had 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 are recognized when delivered and operational, and
revenues associated with the installation and implementation of
systems are 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. The Company's results of
operations for fiscal 1998 resulted in a reduction of revenues and
in operating losses. The Company's results of operations for its
1999 fiscal year were not significantly impacted by the adoption of
SOP 97-2 since most of the impact was experienced in fiscal 1998.
The Company was profitable in each of its quarters in fiscal 1999.
Clinical Information Systems
For clinical 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). The Company offers systems on
Compaq(Registered) and IBM(Registered) computers and licenses its
application software to end users that may have their own 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) as well as CyberMED(Trademark) and
CyberRAD(Registered) 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 1999, the
Company developed many new features, and enhancements to CyberLAB
II(Registered). The Company also continued to make enhancements to
a new anatomical pathology system that can be used as a stand-alone
or integrated with CYBERLAB II(Registered) and a Web-server that
provides access to its applications via Internet or Intranet.
CyberLAB II(Registered) 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 Year 2000 compliant.
CyberRAD(Registered), 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). MQA can also be sold as a stand-alone
system, and meets FDA guidelines for Mammography Quality Assurance.
CyberRAD(Registered) 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 many
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 communications 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),
CyberMED(Trademark), and CyberRAD(Registered), 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), LAN Manager(Registered), and Microsoft
NT(Registered)). 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
years 1999 and 1998 the Company continued the development of
enhancements to CyberLINK(Registered) 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 are Year 2000
compliant. 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 have delayed or postponed
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)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 began 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 thin 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, 1999, the Company
had sold more than 12,000 of its data acquisition products in the
United States and abroad. All of the Company's data acquisition
products are Year 2000 compliant.
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
patient's bedside known as CyberMATE(Registered), a hand-held
computer which permits phlebotomists to download specimen collection
orders from CyberLAB II(Registered) into a battery operated hand-
held computer, make their rounds based upon information displayed on
CyberMATE's(Registered) screen, and update collection status
information as they collect specimens. The updated status
information is uploaded into CyberLAB II(Registered) 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 services
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). 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 because it must retain a loaner pool of components used
to service its client base.
The Company's post implementation service revenues for
fiscal 1999 increased by approximately 19% from the previous fiscal
year and they are expected to continue to grow as the installed base
of system clients grows. More than 95% 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 help desk/service support system to automate the
Company's service activities. During the last three fiscal years 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 $500,000 has 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. All of the Company's service and support
systems are Year 2000 compliant.
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 placed on continuing to
upgrade the service organization and expanding the services that the
company offers. As part of this effort the Company routinely
surveys its clients in an effort to obtain a "report card" on how
the service organization performs. With this mechanism the Company
tunes its service organization to better address its clients
requirements. During fiscal 1999 the Company recruited several new
personnel to augment its technical services, software support, and
implementation staff. The Company also anticipates adding additional
support and implementation personnel during fiscal 2000. The
Company has also 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, 1999 the Company had
approximately 150 departmental results processing systems and over
500 of its data acquisition products in twenty-five LCA
laboratories. Development of further software applications
continues and management anticipates that LCA will acquire several
more data acquisition products in fiscal 2000. In addition, the
Company assisted 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) laboratory information systems. PhyCor
based in Nashville, TN. is a physician practice management company
that operates approximately 60 large multi-specialty clinics and
manages independent practice associations. The Company currently
has eight CyberLAB II(Registered) 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.
In May 1999 the Company announced that it had been awarded
a contract with The University of California, San Diego Medical
Center to provide its CyberLAB ll(Registered) laboratory information
system. The contract calls for the Company to provide an enterprise
wide LIS that will link the clinical laboratories that serve UCSD
Medical Center and its other affiliated entities. This is the
largest single teaching hospital LIS installation that the Company
has undertaken. UCSD Medical Center began live operation of
CyberLAB II(Registered) on November 11, 1999.
In July 1999 the Company was awarded a contract with West
Florida Medical Center Clinic for the provision of its
CyberRAD(Registered) radiology information system as the core
information system element in the clinic's multi-million dollar
expansion program for its diagnostic imaging activities. West
Florida is comprised of 8 separate imaging centers; all of which
will access a central database, fully utilizing
CyberRAD(Registered)'s multi-site client/server architecture.
CyberRAD(Registered) will be central to directing the information
flow to and from digital radiography, the PACs system, mammography
imaging, and the electronic medical record. The system is currently
undergoing implementation and training.
In November 1998 the Company entered into an agreement with
Net Care Health Systems Inc., of Nashville TN to provide Net Care
hospitals with the Company's CIS products. Net Care operates for
profit hospitals primarily in the southeastern region of the US. As
of this date five Net Care facilities have been implemented with
various CIS products and three others are awaiting implementation.
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 1999 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 1999,
1998 and 1997 fiscal years, amounts (inclusive of capitalized
software) equal to approximately 13%, 16%, and 14%, respectively, of
the Company's net sales were expended for research and development.
The percentage decrease in fiscal 1999 was attributable to the
increase in sales and the related comparison. Net research and
development expenditures actually increased for fiscal 1999. 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 additional 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 continues
to develop enhancements to its Web-server that provides for 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.
Research and development expenditures net of capitalized
software amounted to approximately $722,000 in fiscal 1999, $671,000
in fiscal 1998, and $570,000 in fiscal 1997. 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) to IBM(Registered) RISC 6000 Systems, and to
Hewlett Packard(Registered) 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) and intends to
offer its products on both UNIX and NT platforms in the 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 eight
technical specialists assist in sales activities. Management
anticipates that a marketing communications manager will be added to
the Company's sales and marketing department in fiscal 2000.
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 to meet larger audiences at such meetings the Company
intends to increase the number of meetings it will attend in fiscal
2000. 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 has
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 proves to be
a good forum to discuss general topics, such as the Company's
strategy and product direction, and provides an opportunity to focus
on specific application issues in breakout sessions. The Company
also schedules free advanced training courses prior to the symposium
that have had considerable attendance by its clients.
The Company also publishes newsletters and articles, which
are intended to expand communication with existing and potential
clients. During fiscal 1999, 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, 1999, prices
received by the Company for its Clinical Information Systems with
application and operating system software ranged from approximately
$90,000 to over $800,000. 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 is competitive
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 1999
the Company sold 68 system applications to 55 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), and
IBM(Registered). 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) as a sub-dealer and with IBM(Registered) as an
industry re-seller. These arrangements provide for volume purchase
discounts, cooperative marketing programs, the sub-licensure 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. To further mitigate
its risks, the Company's standard hardware sales/software license
agreement as well as its service agreement expressly limits its
liabilities and the warranties of its products and services in
accordance with accepted provisions of the uniform commercial code
as adopted in most states.
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), CyberMED(Trademark), CyberRAD(Registered),
CyberTERM(Registered), CyberLINK(Registered) and
CyberMATE(Registered), and has applied to register its trademarks 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) 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.
To the Company's knowledge, 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.
In general, the Company and its products are subject to
direct governmental regulations applicable to manufacturers,
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 Company's order backlog at August 31, 1999 was
approximately $1,600,000 for systems and interface products and
$673,000 for deferred services, compared to approximately $900,000
for system and interface products and $750,000 for deferred services
at August 31, 1998. The Company also has annually renewable
extended service agreements aggregating over $3,000,000.
Employees
At November 10, 1999, the Company employed 68 full-time and
4 part-time employees of whom 13 are involved in product
development, 13 in sales and marketing, 3 in production, 36 in
technical services, training, 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 1,100 square foot office in
Westminster, Colorado that costs approximately $1,500 per month
including common area maintenance expenses and property taxes and is
subject to cost of living increases annually.
The Calabasas, California facility is used as general
offices and operations headquarters that covers warehousing, service
and support, training, development, and assembly. The Westminster
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 active, pending or threatened legal
proceedings to which the Company is a party at August 31, 1999.
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, 1999.
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, 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
Fiscal Year Ended August 31, 1999
1st Quarter, Ended November 30, 1998 1 1/8 1/2
2nd Quarter, Ended February 28, 1999 1 3/4 3/8
3rd Quarter, Ended May 31, 1999 3 11/16 1 3/16
4th Quarter, Ended August 31, 1999 3 3/16 2 1/16
</TABLE>
The number of shareholders of record of Common Shares of
the Company as of November 1, 1999 was approximately 359.
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 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
accounted 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.
SOP 97-2 required that the Company modify its revenue
recognition policies on a going forward basis and no restatement of
prior periods was 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.
Due to the adoption of SOP 97-2 the Company's results of
operations for its 1998 fiscal year were substantially impacted and
a fair comparison with both prior and subsequent fiscal periods is
not representative.
Sales for the year ended August 31, 1999 were $8,901,044 as
compared to $6,448,370 for the fiscal year ended August 31, 1998, an
overall increase of approximately $2,452,674 or 38%. When analyzed
by product category, sales of Clinical Information Systems (CIS)
increased by $1,692,473 or 51% and sales of data acquisition
products increased $228,398 or 32%. Service revenues increased
$453,048 or 19% and other revenues increased $78,755 or 120% over
the previous fiscal year. The increase in the sale of CIS products
was primarily attributable to a greater number of CIS products sold
during the period and an increase in the average transaction amount.
The Company was successful in closing a number of larger
transactions that included multiple CIS applications as well as a
very large sale of its CyberLAB II(Registered) LIS during the
period. In addition, the Company also experienced an increase in
CIS upgrade orders relating to Y2K remediation. Such Y2K
activities are expected to continue into the first and second
quarters of the 2000 fiscal year. During the later half of the 1999
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 due to deliberations over Year 2000 issues. Such issues
have affected the entire Healthcare Information Systems industry.
However, the Company has a large "pipeline" of working CIS
transactions and believes that the decision delays are only
temporary.
The Company also experienced an overall increase in sales
of data acquisition products which was primarily attributable to an
increased volume of units sold to CyberLAB II(Registered) customers,
and increased sales of such products to OEM customers. The increase
in service revenues is attributable to a greater number of client
accounts under contract and an increase in the average fees charged
for such contracts. As a result of the Company closing larger CIS
transactions the annual service costs associated with such
transactions are proportionately greater. 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, directing its focus towards larger clients and has also
initiated strategic joint marketing partnerships with other
companies, which has improved the Company's market penetration.
With these changes and the impact of Y2K upgrades, the Company
experienced a 51% increase in sales of CIS products during the 1999
fiscal year, and has increased its "pipeline" of working CIS
transactions to date. However, management views the near term
outlook for the continued sale of CIS products cautiously during the
first half of the 2000 fiscal year. In addition, 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 $353,803 or 8% for the 1999
fiscal year. There was an increase in materials of $341,823 or 34%,
an increase in other costs of sales of $62,648 or 4%, and a decrease
in labor of $50,668 or 3%. The increase in material costs was
attributable to the increase 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 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 decrease in
labor costs was attributable to the employment of temporary
personnel. During late fiscal 1999 the Company implemented cost
saving measures directed at reducing travel expenses by centralizing
its travel through one agency, and began billing its clients for out
of pocket travel related expenses associated with its CIS
implementations. Cost of sales as a percentage of sales decreased
to 51% for the 1999 fiscal year as compared to 65% for the 1998
fiscal year. The overall percentage decrease in cost of sales was
attributable to both an increase in sales, and an improvement in the
gross margins of new CIS transactions.
Selling, general and administrative expenses increased by
$347,802 or 14% for the current 1999 fiscal year as compared to the
1998 fiscal year. The increases in S G & A expenses were primarily
attributable to an increase in salaries of approximately $166,000,
sales commissions of approximately $37,000, contract labor and
consultants of approximately $93,000, as well as increased costs in
travel, trade show, user symposium, and personnel recruitment
expenses. Most of the increased expenses were attributable to sales
and marketing activities and are expected to remain at similar
levels in fiscal 2000.
Research and development expenses increased by $50,783 or
8% for fiscal 1999. The increase is attributable to the addition of
new personnel and their related salaries. For its 1999 and 1998
fiscal years, the Company capitalized software costs of $429,791 and
$385,164 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 2000.
Interest and other income was $10,697 for fiscal 1999 as
compared to $3,630 for fiscal 1998.
Interest and other expense was $41,080 for fiscal 1999 as
compared to $69,516 for fiscal 1998 due to decreased borrowings on
the Company's line of credit with its bank.
The Company earned net income before Income Tax Expense
(Benefit) of $764,086 for fiscal 1999 as compared to a net loss of
$971,703 for fiscal 1998. 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 provision including
applicable income taxes of $80,000 in fiscal 1999 compared to an
income tax benefit net of applicable income taxes of $322,800 in its
1998 fiscal year. As a result of these factors the Company's net
income was $684,086 or $.23 basic earnings per share in fiscal 1999
as compared to a net loss of $648,903 or $.22 basic loss per share
in fiscal 1998.
The Company is currently in a loss carry-forward position
primarily due to the operating losses incurred prior to August 31,
1993. The net operating loss carry-forwards balance as of the
August 31, 1999 was approximately $2,902,000 compared to $3,416,000
in the prior year. The net operating loss carry-forward is
available to offset future taxable income through 2018. The Company
also has investment and research and experimentation tax credit
carry-forwards to offset future income tax payable of approximately
$285,000 that expire at various dates through 2014.
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.
The Company annually evaluates the realization of the net
deferred tax asset, taking into consideration prior earnings
history, projected operating results and the reversal of temporary
tax differences. At August 31, 1999, the Company did not have a
valuation allowance on the net deferred tax asset as the Company
believes 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 $429,791 and $385,164
during fiscal 1999 and 1998 in software development. These
expenditures related to the new version of the Company's LIS product
(CyberLAB II(Registered)), and the release of its revised PIS
product (CyberMED(Trademark)), its new RIS product
(CyberRAD(Registered)), and other product enhancements. The Company
anticipates expending additional sums during fiscal 2000 on the
further development of the Company's Radiology Information System,
and other new products and product enhancements. During fiscal
1999, the Company expended an additional $211,028 in capital
expenditures for the Company's wide area network, help desk systems,
and for the replacement of internal systems that were not Y2K
compliant.
As of August 31, 1999, the Company's working capital
amounted to $1,491,021 compared to $526,566 as of August 31, 1998.
The Company's current ratio was 1.46 at August 31, 1999 compared to
1.17 in the prior year. The Company's bank line as of August 31,
1999 amounted to $650,000 of which $187,488 was being utilized. The
bank credit agreement contains certain financial ratio requirements.
The Company was in compliance with all of the covenants as of August
31, 1999.
Cash flows from operating activities were $1,140,529 for
the 1999 fiscal year compared to $96,357 for the 1998 fiscal year.
The increase resulted primarily from the increase in sales and the
improvement in operating income.
Net cash used in investing activities changed during the
1999 fiscal year to $634,901 used in investing activities as
compared to $617,944 used in investing activities during the 1998
fiscal year. The change resulted from increased expenditures for
the company wide network and help desk system and additional
capitalized software costs.
Cash flows from financing activities changed to $231,233
used in financing activities during the 1999 fiscal year from
$363,033 provided by financing activities in fiscal 1998. The
change resulted primarily from the repayment of notes payable and
were partially offset by the exercise of stock options and warrants.
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 2000
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 had no effect on the Company's
financial position or results of operations and cash flows.
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.
The Company adopted SFAS No. 131 during the year ended August 31,
1999, and it had no impact on the Company's financial position or
results of operations and cash flows.
Statement of Financial Accounting Standards No. 132 (SFAS No.
132), "Employers' Disclosures about Pensions and Other Postretirement
Benefits," issued by the Financial Accounting Standards Board is
effective for financial statements with fiscal years beginning after
December 15, 1997. This Statement revises employers' disclosures
about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. Adoption of
SFAS No. 132 did not have an impact on its financial position or
results of operations and cash flows.
Statement of Financial Accounting Standards No. 133 (SFAS No.
133), "Accounting for Derivative Instruments and Hedging
Activities," issued by the Financial Accounting Standards Board is
effective for fiscal years beginning after June 15, 2000. SFAS No.
133 requires companies to recognize all derivative contracts as
either assets or liabilities in the balance sheet and to measure them
at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge, the objective of which is to
match the timing of gain or loss recognition on the hedging
derivative with the recognition of (i) the changes in the fair value
of the hedged asset or liability that are attributable to the hedged
risk or (ii) the earnings effect of the hedged forcasted transaction.
For a derivative not designated as a hedging instrument, the gain or
loss is recognized in income in the period of change. The Company
does not expect adoption of SFAS No. 133 to have an effect on its
financial position, or results of operations and cash flows.
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 needed to be
upgraded to comply with such Year 2000 requirements. The Company
expended considerable 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 thus far and those yet to be incurred, 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) and all
software modifications have been distributed to its clients
beginning November 1998. CyberRAD(Registered) and MQA were designed
to be Year 2000 compliant. CyberMED(Trademark) modifications and
testing were completed in October 1999 and the modified Y2K
compliant software is currently being distributed to clients.
Modifications were also made to the financial management system that
were completed in March 1999 and released thereafter. The Company
has also evaluated communication interfaces it has installed in
order to determine in each individual case, whether the software is
Year 2000 compliant, and undertook such modifications that were
deemed to be necessary to be compliant. The Company believes it is
timely and on schedule in its efforts to effectuate the remaining
modifications, testing and upgrade of its developed software
applications to its clients.
Some of the Company's clients required upgrades to their
computers and/or operating systems, in order to operate the upgraded
application software and otherwise be Year 2000 compliant. The
Company had conducted 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
has not been required to bear the costs associated with this effort
and instead has derived revenues from the upgrades. The Company had
identified the modifications and/or upgrades required by the vendors
and assisted its clients in securing the necessary modifications
and/or upgrades. As of this date the Company believes it will
complete all necessary modifications in time for Y2K. As a follow
up, the Company sent a Y2K technical document to all its clients,
and posted the information on its web site to assist its clients in
their evaluations, at www.ccainc.com.
In House Systems and Computers
The Company conducted a review of the computers, systems
and software that it utilizes internally to operate its business.
It determined that some systems such as its accounting and voice
mail systems required replacement since they are not modifiable.
However, such systems were already due to be replaced because they
were no longer adequate and were not being supported by their
manufacturers. As of this date the new accounting and voice mail
systems are fully implemented and online. Other systems supported
by their manufacturers have either already been upgraded or will be
upgraded in the normal course with Year 2000 modifications on a
timely basis. Although the Company had to bear the cost of
replacing non-compliant systems as anticipated, the aggregate
expenditures were not material. The total cost of such replacements
so far was approximately $70,000.
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, 53 Chairman of the Board and
Chief Technology Officer 1978
since its inception in 1978.
Steven M. Besbeck, 51 President, Chief Executive
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. 1980
James R. Helms, 55 Vice President/Operations
since 1982 and Secretary. 1987
Lawrence S. Schmid, 58 President and Chief Executive
Officer, Strategic Directions
International, Inc., a
management consulting firm
specializing in technology
companies. 1991
Robert S. Fogerson, Jr., 46 Chief Operating Officer, of
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. 1992
John R. Murray, 57 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.
Based upon review, Steven M. Besbeck and John R. Murray
were late in filing one Form 4 each, which reported their exercise
of Incentive Stock Options pursuant to the Company's 1992 Stock
Option Plan.
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 2000 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 2000 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 2000 Annual
Meeting of the Company's Shareholders.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
2.1(4) 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(4) Warrant Agreement and Warrant Certificate
between CCA and Western States Pharmacy
Consultants, Ltd.
4.9(4) Warrant Agreement and Warrant Certificate
between CCA and James L.D. Roser.
4.10(4) Warrant Agreement and Warrant Certificate
between CCA and The Roser Partnership.
4.11(4) Warrant Agreement and Warrant Certificate
between CCA and Epigen,Inc.
4.12(6) 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(6) Lease for Premises at 26115-A Mureau Road,
Calabasas, California
10.15(6) Mission Park Agreement
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(4) 1992 Incentive Stock Option Plan.
4.7(5) 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 October 21, 1992.
(5) Previously filed as an addendum to the Company's Proxy
Statement and Notice of Annual Meeting of Shareholders
dated April 10, 1992.
(6) 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 year ended August 31, 1999.
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 16, 1999
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 Nov. 16, 1999
Bruce M. Miller and Chief Technology Officer
/S/ Steven M. Besbeck President, Chief Executive Nov. 16, 1999
Steven M. Besbeck Officer, Chief Financial
Officer and Director
/S/ James R. Helms Vice President, Operations, Nov. 16, 1999
James R. Helms Secretary and Director
/S/ Lawrence S. Schmid Director Nov. 16, 1999
Lawrence S. Schmid
/S/ Robert S. Fogerson, Jr. Director Nov. 16, 1999
Robert S. Fogerson, Jr.
/S/ Carol Bessel Controller Nov. 16, 1999
Carol Bessel Chief Accounting Officer
/S/ John R. Murray Vice President, Sales Nov. 16, 1999
John R. Murray and Business Development
</TABLE>
CREATIVE COMPUTER APPLICATIONS, INC.
_______________________
Financial Statements
For the Years Ended August 31, 1999 and 1998
_______________________
CREATIVE COMPUTER APPLICATIONS, INC.
INDEX
Page
FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants F-2
Balance Sheets
August 31, 1999 and 1998 F-3
Statements of Operations
Years ended August 31, 1999, 1998 and 1997 F-4
Statements of Shareholders' Equity
Years ended August 31, 1999, 1998 and 1997 F-5
Statements of Cash Flows
Years ended August 31, 1999, 1998 and 1997 F-6
Notes to Financial Statements F-7 - F-20
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, 1999 and 1998 and the
related statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended August 31,
1999. 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, 1999 and 1998
and the results of its operations and its cash flows for the three
years ended August 31, 1999, 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 1997
and as discussed in Note 1 to the financial statements, the Company
changed its method of accounting for software revenue recognition in
fiscal 1998.
/S/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
Los Angel, California
October 21, 1999
CREATIVE COMPUTER APPLICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
August 31, 1999 1998
ASSETS (Note 4)
CURRENT ASSETS:
Cash $ 650,271 $ 375,876
Receivables, net (Notes 1 and 2) 2,895,947 1,973,601
Inventory (Note 1) 419,557 670,243
Prepaid expenses 152,676 79,907
Deferred tax asset (Note 8) 639,500 466,300
TOTAL CURRENT ASSETS 4,757,951 3,565,927
PROPERTY AND EQUIPMENT, net
(Notes 1 and 3) 579,949 575,804
INVENTORY OF COMPONENT PARTS
(Note 1) 254,515 156,527
CAPITALIZED SOFTWARE COSTS,
net of accumulated
amortization of $526,074
and $384,509 (Note 1) 1,272,690 1,128,498
INTANGIBLES, net (Note 1) 236,328 302,120
DEFERRED TAX ASSET (Note 8) 591,000 844,200
OTHER ASSETS (Note 7) 22,236 32,371
$ 7,714,669 $ 6,605,447
LIABILITIES AND SHAREHOLDERS' EQUIT
CURRENT LIABILITIES:
Notes payable to bank (Note 4) $ 187,488 $ 611,609
Accounts payable 497,768 507,005
Accrued liabilities:
Vacation pay 170,296 184,305
Other 435,803 339,402
Deferred service contract income 672,398 754,343
Deferred revenue on system sales
(Note 1) 1,303,177 638,018
Capital lease obligations - 4,679
TOTAL CURRENT LIABILITIES 3,266,930 3,039,361
COMMITMENTS (Note 5)
SHAREHOLDERS' EQUITY (Notes 6 and 9):
Common shares, no par value;
20,000,000 shares authorized;
3,106,925 and 2,920,740 shares
issued and outstanding 6,028,594 5,831,027
Accumulated deficit (1,580,855) (2,264,941)
TOTAL SHAREHOLDERS' EQUITY 4,447,739 3,566,086
$ 7,714,669 $ 6,605,447
See notes to financial statements.
</TABLE>
CREATIVE COMPUTER APPLICATIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year ended August 31, 1999 1998 1997
NET SYSTEM SALES AND
SERVICE REVENUE (Note 1):
System sales $ 6,113,474 $ 4,113,848 $ 4,976,820
Service revenue 2,787,570 2,334,522 2,142,561
TOTAL SYSTEM SALES AND
SERVICE REVENUE 8,901,044 6,448,370 7,119,381
COST OF PRODUCTS AND
SERVICES SOLD:
System sales 3,064,737 2,645,949 2,467,743
Service revenue 1,485,502 1,550,487 1,346,269
TOTAL COST OF PRODUCTS
AND SERVICES SOLD 4,550,239 4,196,436 3,814,012
GROSS PROFIT 4,350,805 2,251,934 3,305,369
RESEARCH AND
DEVELOPMENT EXPENSE 721,818 671,035 569,668
SELLING AND
ADMINISTRATIVE EXPENSES 2,834,518 2,486,716 2,290,736
OPERATING INCOME (LOSS) 794,469 (905,817) 444,965
OTHER INCOME (EXPENSE):
Interest income 10,697 3,630 6,589
Interest and other expense (41,080) (69,516) (22,829)
TOTAL OTHER EXPENSE (30,383) (65,886) (16,240)
INCOME (LOSS) BEFORE
INCOME TAX PROVISION
(BENEFIT) 764,086 (971,703) 428,725
INCOME TAX PROVISION
(BENEFIT) (Note 8) 80,000 (322,800) (462,275)
NET INCOME (LOSS) $ 684,086 $ (648,903) $ 891,000
EARNINGS (LOSS) PER
SHARE (Notes 1, 6 and 9):
Basic $ .23 $ (.22) $ .31
Diluted $ .21 $ (.22) $ .30
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING
(Note 9):
Basic 2,979,060 2,901,003 2,836,532
Diluted 3,281,634 2,901,003 3,011,101
See notes to financial statements.
</TABLE>
CREATIVE COMPUTER APPLICATIONS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Common Total
Common Shares Accumulated Shareholders'
Shares Amount Deficit Equity
BALANCE, September
1, 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
Exercise of stock
options (Note 6) 186,185 197,567 - 197,567
Net income - - 684,086 684,086
BALANCE, August 31,
1999 3,106,925 $ 6,028,594 $(1,580,855) $ 4,447,739
See notes to financial statements.
</TABLE>
CREATIVE COMPUTER APPLICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Increase (Decrease) in
Cash (Note 10)
Year ended August 31, 1999 1998 1997
OPERATING ACTIVITIES
Net income (loss) $ 684,086 $ (648,903) $ 891,000
Adjustments to reconcile
net income (loss) to net
cash provided by operating
activities:
Depreciation and amortization 271,396 235,005 194,606
Amortization of capitalized
software costs 285,599 174,602 171,616
Provision for possible losses 102,399 106,118 16,793
Gain on disposal of property
and equipment (2,814) (246) -
Deferred rent expense - (5,034) (30,201)
Deferred taxes 80,000 (332,300) (463,600)
Increase (decrease) from
changes in:
Receivables (1,024,745) (146,034) (271,911)
Inventories 152,698 (14,618) (21,008)
Prepaid expenses (72,769) (956) 7,930
Accounts payable (9,237) (15,803) 216,487
Accrued liabilities 82,392 (89,127) (33,053)
Deferred service income (81,945) 184,609 105,658
Deferred revenue on
system sales 665,159 638,018 -
Other assets 8,310 11,026 -
Net cash provided by
operating activities 1,140,529 96,357 784,317
INVESTING ACTIVITIES
Additions to property
and equipment (211,028) (200,526) (213,229)
Additions to capitalized
software costs (429,791) (385,164) (395,856)
Payments for acquisition
of assets - (33,780) -
Proceeds from insurance
settlement of property
and equipment 5,918 1,526 -
Net cash used in
investing activities (634,901) (617,944) (609,085)
FINANCING ACTIVITIES
Borrowings on notes payable 87,488 644,313 315,421
Payments on notes payable (511,609) (320,000) (220,000)
Payments on capital lease
obligations (4,679) (16,572) (27,489)
Proceeds from issuance
of stock - 11,842 -
Exercise of stock options
and warrants 197,567 43,450 38,065
Net cash provided by
(used in) financing
activities (231,233) 363,033 105,997
NET INCREASE (DECREASE)
IN CASH 274,395 (158,554) 281,229
CASH, beginning of year 375,876 534,430 253,201
CASH, end of year $ 650,271 $ 375,876 $ 534,430
See notes to financial
statements.
</TABLE>
CREATIVE COMPUTER APPLICATIONS, INC.
NOTES TO 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. 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, ranging
from three to 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.
CREATIVE COMPUTER APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
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. The
Company periodically reviews capitalized software costs for
impairment where the fair value is less than the carrying value.
During the years ended August 31, 1999, 1998 and 1997, the
Company capitalized $429,791, $385,164 and $395,856 of software
development costs. Amortization expense of capitalized software
development costs, included in cost of sales, for the years ended
August 31, 1999, 1998 and 1997 amounted to $285,599, $174,602 and
$171,616.
Intangible Assets
Intangible assets with a cost 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 $371,596 and $305,804 at August 31,
1999 and 1998. The Company periodically reviews intangible assets
for impairment where the fair value is less than the carrying value.
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 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.
As a result of the Company adopting SOP 97-2, the Company
recorded deferred revenue of $638,018 at August 31, 1998 and
$1,303,177 at August 31, 1999.
CREATIVE COMPUTER APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition (Continued)
Service Revenue
Service revenues 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.
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 No. 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. SFAS No. 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 No. 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 No. 123 is not adopted related to stock-based
employee compensation, SFAS No. 123 for disclosure 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.
CREATIVE COMPUTER APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company accounts for income taxes in accordance with
the Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes. SFAS No. 109 requires a Company to
use the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of "temporary differences" by
applying enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities. Under SFAS No. 109,
the effect on deferred income taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
Accounting Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Fair Value of Financial Instruments
Quoted market prices generally are not available for all of
the Company's financial instruments. Accordingly, fair values are
based on judgments regarding current economic conditions, risk
characteristics of various financial instruments and other factors.
These estimates involve uncertainties and matters of judgment, and
therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
A description of the methods and assumptions used to
estimate the fair value of each class of the Company's financial
instruments is as follows:
Cash, receivables, inventory, accounts payable, accrued
liabilities, 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.
CREATIVE COMPUTER APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
New Accounting Pronouncements
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. 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 had no effect on the Company's financial position or results of
operations and cash flows.
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.
The Company adopted SFAS No. 131 during the year ended August 31,
1999, and it had no impact on the Company's financial position or
result of operations and cash flows.
Pensions and Postretirement Benefits
Statement of Financial Accounting Standards No. 132
(SFAS No. 132), "Employers' Disclosures about Pensions and Other
Postretirement Benefits," issued by the Financial Accounting
Standards Board is effective for financial statements with fiscal
years beginning after December 15, 1997. This Statement revises
employers' disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those
plans. Adoption of SFAS No. 132 did not have an impact on its
financial position or results of operations and cash flows.
Derivative Instruments and Hedging Activities
Statement of Financial Accounting Standards No. 133 (SFAS
No. 133), "Accounting for Derivative Instruments and Hedging
Activities," issued by the Financial Accounting Standards Board is
effective for fiscal years beginning after June 15, 2000.
SFAS No. 133 requires companies to recognize all derivative contracts
as either assets or liabilities in the balance sheet and to measure
them at fair value. If certain conditions are met, a derivative may
be specifically designated as a hedge, the objective of which is to
match the timing of gain or loss recognition on the hedging
derivative with the recognition of (i) the changes in the fair value
of the hedged asset or liability that are attributable to the hedged
risk or (ii) the earnings effect of the hedged forecasted
transaction. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of
change. The Company does not expect adoption of SFAS No. 133 to have
an effect on its financial position, or results of operations and
cash flows.
CREATIVE COMPUTER APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C> <C>
NOTE 2 - RECEIVABLES
Receivables are summarized
as follows:
August 31, 1999 1998
Trade accounts $ 2,927,747 $ 2,037,101
Allowance for uncollectible accounts (31,800) (63,500)
$ 2,895,947 $ 1,973,601
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment are
summarized as follows:
August 31, 1999 1998
Machinery and equipment $ 272,091 $ 244,447
Furniture and fixtures 331,839 327,865
Data processing equipment 1,190,615 1,179,764
Leasehold improvements 65,788 84,705
1,860,333 1,836,781
Accumulated depreciation
and amortization (1,280,384) (1,260,977)
$ 579,949 $ 575,804
</TABLE>
At August 31, 1999, the Company's capital lease obligations
were paid in full. Included in property and equipment at August 31,
1998 were machinery and equipment and furniture and fixtures under
capital lease agreements in the amount of $23,275 with related
accumulated amortization thereon of $19,784.
Depreciation and amortization expense for property and
equipment for the years ended August 31, 1999, 1998 and 1997 was
$203,779, $174,855 and $158,901.
CREATIVE COMPUTER APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - NOTES PAYABLE TO BANK
The notes payable to bank are classified as current
and are summarized as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
August 31, 1999 1998
Line of credit of $500,000 with a bank
with interest at the bank's prime rate
plus 1.75% (10% at August 31, 1999)
and maturing on February 1, 2000,
and collateralized by substantially
all of the Company's assets $ 100,000 $ 500,000
Note payable to a bank with interest at
the bank's prime rate plus 1.75%
(10% at August 31, 1999) 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. The note was paid
in full in August 1999 - 111,609
Revolving credit to term loan facility
of $150,000 with a bank at the bank's
prime rate plus 1.75% (10% at August 31,
1999) maturing on December 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
beginning October 1, 1999, at which
time the line of credit converts to
a term note 87,488 -
$ 187,488 $ 611,609
</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, 1999, the Company
was in compliance with all financial and non-financial covenants.
NOTE 5 - COMMITMENTS
Operating Leases
The Company leases office and warehouse space in Calabasas,
California under a non-cancelable operating lease expiring in fiscal
2003. The Company also leases office space in Westminster, Colorado
expiring in fiscal 2002.
Future minimum lease payments under the facility leases are
as follows:
<TABLE>
<CAPTION>
<S> <C>
Fiscal year ending August 31, Amount
2000 $ 230,127
2001 230,689
2002 218,127
2003 17,646
Total minimum lease payments $ 696,589
</TABLE>
CREATIVE COMPUTER APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - COMMITMENTS (Continued)
Operating Leases (Continued)
Rent expense for the years ended August 31, 1999, 1998 and
1997 was approximately $232,000, $229,000 and $172,000.
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, 1999, the 1992 plans have 162,065 options outstanding and
121,174 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, 1999, the 1997 plans have 155,750
options outstanding and 133,315 options exercisable. These plans
expire in 2007.
The Company has also granted special options approved by
the Board of Directors to officers and directors and financial
consultants. The options were 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. 349,755 shares of the
special grants are included in the non-qualified plan shares
outstanding at August 31, 1999.
In December 1998, the Company's board of directors amended
the exercise price of all outstanding options with an exercise price
above $1.25 per share, or above $1.38 per share in the case of
owners of 10% or more of the Company, to $.90 and $.99 per share,
respectively.
During fiscal 1999, the Company issued to a financial
consultant a warrant to purchase a total of 125,000 common shares of
the Company exercisable at $1.50 per share through June 2003.
CREATIVE COMPUTER APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - STOCK OPTION PLANS AND WARRANTS (Continued)
Option and warranty activity through August 31, 1999 is
summarized below:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Non-Qualified Plans Incentive Plans Warrants
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
September 1, 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
Warrants granted
at $1.50 - - - - 125,000 $ 1.50
Options granted
range from
$.90 to $.99 509,755 $0.90 244,000 $0.91 - -
Options canceled
range from
$1.25 to $2.25 (509,755) $1.41 (244,000) $1.98 - -
Options expired
range from
$1.44 to $2.25 (22,000) 1.67 (30,000) $1.74 - -
Options exercised
range from
$.90 to $.99 (112,500) $0.90 (73,685) $0.90 - -
August 31, 1999 497,255 $0.97 170,315 $0.91 125,000 $ 1.50
Options and
warrants
exercisable at
August 31, 1999 427,255 $0.90 99,987 $0.91 125,000 $ 1.50
Options available
for grant a
August 31, 1999 215,000 429,250
</TABLE>
CREATIVE COMPUTER APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - STOCK OPTION PLANS AND WARRANTS (Continued)
Information relating to stock options and warrants, at
August 31, 1999 summarized by exercise price are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Outstanding Exercisable
Weighted Average Weighted Average
Exercise Price Life Exercise Exercise
Per Share Shares (Months) Price Shares Price
Incentive Stock
Option Plan:
$ 0.90 145,315 31.6 $ 0.90 88,737 $ 0.90
$ 0.99 25,000 40.4 $ 0.99 11,250 $ 0.99
170,315 32.9 $ 0.91 99,987 $ 0.91
Non-Qualified
Stock Option
Plan:
$ 0.90 472,255 19.3 $ 0.90 411,005 $ 0.90
$ 0.99 25,000 14.4 $ 0.99 16,250 $ 0.99
497,255 19.1 $ 0.95 427,255 $ 0.90
Warrants:
$ 1.50 125,000 45.0 $ 1.50 125,000 $ 1.50
</TABLE>
CREATIVE COMPUTER APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
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 No. 123, the Company's net
income (loss) and earnings (loss) per share for the years ended
August 31, 1999, 1998, and 1997 would have been decreased to the pro
forma amounts presented below.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
August 31, 1999 1998 1997
Net income (loss),
as reported $ 684,086 $ (648, 903) $ 891,000
Net income (loss),
pro forma 656,434 (709,144) 859,205
Basic net earnings (loss)
per share, as reported 0.23 (0.22) 0.31
Basic net earnings (loss)
per share, pro forma 0.22 (0.25) 0.30
Diluted net earnings (loss)
per share, as reported 0.21 (0.22) 0.30
Diluted net earnings (loss)
per share, as reported 0.20 (0.25) 0.29
</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 and 1997; expected
life of options, 5 years, expected volatility of 14% and 16%,
respectively, and risk-free interest rate of 6.0% and 5.5%,
respectively. The weighted average fair value on the date of grants
for options granted during 1998 and 1997 was $.46 and $.49 per
option. No options were granted under the Non-Qualified Stock
Option Plan or the Incentive Stock Option Plan during the year ended
August 31, 1999.
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 No. 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 1997,
1998 and 1999.
NOTE 7 - RELATED PARTIES
At August 31, 1999 and 1998, the Company had a note
receivable outstanding from an executive officer for $14,790 and
$23,100, respectively, which accrues interest at 10% per annum and
is payable annually beginning January 2, 1998. The note receivable
is payable in full on December 18, 2000 and was partially paid down
during the year.
CREATIVE COMPUTER APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - INCOME TAX PROVISION (BENEFIT)
The provision (benefit) for income taxes consist of the
following:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
August 31, 1999 1998 1997
Current taxes:
Federal $ - $ - $ -
State 4,600 9,500 1,325
Deferred
State - 7,800 -
Federal 175,400 (340,100) 51,000
180,000 (322,800) 52,325
Change in valuation allowance (100,000) - (514,600)
Income tax provision (benefit) $ 80,000 $(322,800) $(462,275)
</TABLE>
Income tax provision (benefit) differs from the amount
obtained by applying the statutory federal income tax rate to income
before income tax expense as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
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 0.6 1.0 0.3
Tax benefit of federal net
operating loss carryforward - - (34.0)
Permanent differences and other (10.1) (0.2) 11.9
Reduction in valuation allowance (14.0) - (120.0)
10.5% (33.2)% (107.8)%
</TABLE>
CREATIVE COMPUTER APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - 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, 1999 and 1998
are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
August 31, 1999 1998
Deferred tax assets:
Allowance for doubtful accounts $ 12,700 $ 25,400
Inventory uniform capitalization 39,300 24,000
Accrued vacation 56,700 64,600
Deferred revenue 274,400 214,900
Depreciation and amortization - 4,600
Net operating loss carryforwards 1,119,600 1,261,600
Tax credits 285,200 285,200
Gross deferred tax assets 1,787,900 1,880,300
Valuation allowance - (100,000)
1,787,900 1,780,300
Deferred tax liability:
Capitalized software costs (509,100) (468,600)
Depreciation and amortization (27,000) -
Other (21,300) (1,200)
Gross deferred tax liability (557,400) (469,800)
Net deferred tax assets $ 1,230,500 $ 1,310,500
</TABLE>
At August 31, 1999, the Company had state and federal net
operating loss carryforwards available to offset future taxable
income of approximately $2,902,000 that expire at various dates
through 2018 and general business tax credit carryforwards available
to offset future income tax payable of approximately $285,000 that
expire at various dates through 2014. 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.
The Company annually evaluates the realization of the net
deferred tax asset, taking into consideration prior earnings
history, projected operating results and the reversal of temporary
tax differences. At August 31, 1999, the Company did not have a
valuation allowance on the net deferred tax asset as the Company
believes it is more likely than not that the net deferred tax asset
will be realized.
CREATIVE COMPUTER APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
<S> <C> <C> <C>
August 31
1999 1998 1997
Basic weighted average
shares outstanding 2,979,060 2,901,003 2,836,532
Diluted effect of stock
options and warrants 302,574 - 174,569
Diluted weighted average
shares outstanding 3,281,634 2,901,003 3,011,101
</TABLE>
At August 31, 1998, options to purchase 905,755 shares were
outstanding and could affect future periods, but were not included
in the computation of diluted loss per common share because the
effect would be antidilutive. At August 31, 1999, all outstanding
options and warrants are dilutive and considered in the above
computation.
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is as follows:
(a) Cash paid:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
Interest $ 37,644 $ 55,365 $ 34,969
Income taxes $ 1,006 $ 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).
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-END> AUG-31-1999
<CASH> 650271
<SECURITIES> 0
<RECEIVABLES> 2895947
<ALLOWANCES> 0
<INVENTORY> 419557
<CURRENT-ASSETS> 4757951
<PP&E> 1860333
<DEPRECIATION> 1280384
<TOTAL-ASSETS> 7714669
<CURRENT-LIABILITIES> 3266930
<BONDS> 0
0
0
<COMMON> 6028594
<OTHER-SE> (1580855)
<TOTAL-LIABILITY-AND-EQUITY> 7714669
<SALES> 8901044
<TOTAL-REVENUES> 8911741
<CGS> 4550239
<TOTAL-COSTS> 8106575
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41080
<INCOME-PRETAX> 764086
<INCOME-TAX> 80000
<INCOME-CONTINUING> 684086
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 684086
<EPS-BASIC> .23
<EPS-DILUTED> .21
</TABLE>
