UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1998.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to _______________
Commission file number 0-12551
CREATIVE COMPUTER APPLICATIONS, INC.
(Exact name of small business issuer as specified 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)
(818) 880-6700
Issuer's telephone number:
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 Registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
State the number of shares outstanding of each of the
issuer's classes of common equity, as of the latest practicable
date: 2,920,740 common shares as of December 31, 1998.
Transitional Small Business Disclosure Format (check one):
Yes No X
FORM 10-QSB
I N D E X
PART I - Financial Information: PAGE
Condensed Balance Sheets, as at November 30,
1998 and August 31, 1998 3
Condensed Statements of Income for the three
months ended November 30, 1998 and November
30, 1997 4
Condensed Statements of Cash Flows for the
three months ended November 30, 1998 and
November 30, 1997 5
Notes to Condensed Financial Statements 6
Management's Discussion and Analysis or Plan
of Operation 6
PART II - Other Information:
Items 1 through 6 9
Signatures 9
PART 1 - FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
November 30, August 31,
1998 1998 *
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ 433,969 $ 375,876
Receivables 2,010,714 1,973,601
Inventories 607,925 670,243
Prepaid expenses and other assets 128,662 79,907
Deferred tax asset 466,300 466,300
TOTAL CURRENT ASSETS 3,647,570 3,565,927
PROPERTY AND EQUIPMENT, net 544,234 575,804
INVENTORY OF COMPONENT PARTS 146,027 156,527
CAPITALIZED SOFTWARE COSTS, net of
accumulated amortization of
$450,912 and $384,509 1,200,595 1,128,498
INTANGIBLES, net 251,986 302,120
OTHER ASSETS 23,100 32,371
DEFERRED TAX ASSET 844,200 844,200
TOTAL ASSETS $ 6,657,712 $ 6,605,447
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to bank $ 581,609 $ 611,609
Accounts payable 462,786 507,005
Accrued liabilities:
Vacation Pay 203,889 184,305
Other 372,035 339,402
Deferred service contract income 718,677 754,343
Deferred revenue 706,314 638,018
Capital lease obligations,
current portion 3,173 4,679
TOTAL CURRENT LIABILITIES 3,048,483 3,039,361
TOTAL LIABILITIES 3,048,483 3,039,361
SHAREHOLDERS' EQUITY:
Preferred shares, no par value;
500,000 shares authorized; no
shares outstanding - -
Common shares, no par value;
20,000,000 shares authorized;
2,920,740 and 2,920,740 shares
outstanding 5,831,027 5,831,027
Accumulated deficit (2,221,798) (2,264,941)
TOTAL SHAREHOLDERS' EQUITY 3,609,229 3,566,086
$ 6,657,712 $ 6,605,447
</TABLE>
See Notes to Financial Statements.
* As presented in the audited financial statements
CONDENSED STATEMENTS OF OPERATION
<TABLE>
<CAPTION>
Three Months Ended
November 30,
1998 1997
(unaudited)
<S> <C> <C>
NET SYSTEM SALES AND SERVICE REVENUE
System sales $ 1,207,606 $ 1,244,737
Service revenue 670,683 562,704
1,878,289 1,807,441
COST OF PRODUCTS AND SERVICES SOLD
System sales 746,204 624,861
Service revenue 357,444 393,406
1,103,648 1,018,267
Gross profit 774,641 789,174
OPERATING EXPENSES:
Selling, general and administrative 570,936 589,371
Research and development 145,753 155,543
716,689 744,914
Operating income 57,952 44,260
INTEREST AND OTHER INCOME 578 574
INTEREST EXPENSE (15,188) (3,998)
Income before taxes on income 43,342 40,836
TAXES ON INCOME (200) (350)
NET INCOME $ 43,142 $ 40,486
EARNINGS PER COMMON SHARE (Note 2):
Basic $ .01 $ .01
Diluted $ .01 $ .01
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES AND COMMON STOCK
EQUIVALENTS OUTSTANDING
Basic 2,920,740 2,859,865
Diluted 2,920,740 3,010,231
</TABLE>
See Notes to Financial Statements.
CONDENSED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
Three Months Ended
November 30,
1998 1997
(unaudited)
<C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 43,142 $ 40,486
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 139,264 111,176
Provision for possible losses (881) 1,650
Changes in operating assets and
liabilities:
Receivables (36,232) (191,761)
Inventories 62,318 (48,502)
Prepaid expenses and other assets (48,755) (43,388)
Accounts payable (44,219) 52,488
Accrued liabilities 84,847 100,975
Net cash provided by
operating activities 199,484 23,124
INVESTING ACTIVITIES
Additions to property and equipment (13,885) (38,788)
Capitalized software costs (96,000) (106,000)
Net cash used in investing
activities (109,885) (144,788)
FINANCING ACTIVITIES:
Additions to (payments on) notes payable, net (30,000) (130,000)
Decrease in capital lease obligations,
net of payments (1,506) (5,948)
Exercise of Stock Option 0 15,950
Net cash used in financing activities (31,506) (119,998)
NET INCREASE (DECREASE) IN CASH 58,093 (241,662)
Cash, beginning of period 375,876 534,430
Cash, end of period $ 433,969 $ 292,768
</TABLE>
See notes to financial statements.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 1. In the opinion of management, the accompanying
unaudited condensed financial statements reflect
all adjustments (which include only normal
recurring accruals) necessary to present fairly the
Company's financial position as of November 30,
1998 and August 31, 1998, the results of its
operations for the three months ended November 30,
1998 and 1997, and cash flows for the three months
ended November 30, 1998 and November 30, 1997.
Note 2. The Company adopted SFAS No. 128, "Earnings Per
Share,". SFAS No. 128 requires presentation of
basic and diluted earnings per share. Basic
earnings per share is computed by dividing income
or loss available to common shareholders by the
weighted average number of common shares
outstanding for the reporting period. Diluted
earnings per share reflects the potential dilution
that could occur if securities or other contracts,
such as stock options, to issue common stock were
exercised or converted into common stock. All
prior period weighted average and per share
information have been restated in accordance with
SFAS No. 128.
Note 3. The Company elected early adoption of Statement of
Position 97-2, "Software Revenue Recognition",
("SOP 97-2"). SOP 97-2 supersedes SOP 91-1
regarding software revenue recognition. SOP 97-2
required the Company to change the method of
recognizing revenues on software sales and related
services, in accordance with SOP 97-2. The SOP
requires companies to recognize revenue when (i)
persuasive evidence of an arrangement exists, (ii)
delivery has occurred, (iii) the vendor's fee is
fixed and determinable, and (iv) collectability is
probable. The SOP also requires companies to
allocate the fee on a multiple element contract
between the various elements based on vendor-
specific objective evidence of fair value.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
This following section of the 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.
Results of Operations
In October 1997 the American Institute of Certified Public
Accountants issued Statement of Position (SOP) 97-2, Software
Revenue Recognition, which became effective for fiscal years
beginning after December 15, 1997 although earlier adoption was
recommended. The new SOP affects all companies that sell software
and provide related services. Its provisions necessitate
significant modifications in the way the Company structures software
transactions and reports revenues from those activities. Because
SOP 97-2 significantly changes the way in which the Company accounts
for the sale of its Clinical Information Systems, management decided
to adopt the change in accounting method during the second quarter
of 1998 instead of waiting until the beginning of its next fiscal
year.
SOP 97-2 requires that the Company modify its revenue
recognition policies on a going forward basis and no restatement of
prior periods is required. Accordingly the following discussion
takes into consideration the effect of SOP 97-2 for the current
periods 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 will be recognized as
hardware and standard software is delivered to a customer, 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 have been met by the Company's internal sales
policies that were already in place for many years.
Sales for the first quarter of fiscal 1999 ended November
30, 1998 increased by $70,848 or 4% compared to the same quarter of
fiscal 1998. When analyzed by product category, sales of Clinical
Information Systems (CIS) decreased $92,322 or 9%, sales of data
acquisition products increased $52,021 or 23% and service and other
revenues increased $111,149 or 19%. The overall increase in sales
is primarily attributable to an increase in sales of data
acquisition products and an increase in service revenues due to a
greater number of customer sites on contract. The increases were
offset by a decrease in sales of Clinical Information Systems. This
decrease was attributable to the change in accounting for revenue
recognition in accordance with SOP 97-2.
Cost of sales for the first quarter of 1999 increased by
$85,381 or 8% as compared to the same quarter of 1998. The increase
in cost of sales was primarily attributable to an increase in
material costs of $104,463 or 48% which was attributable to a
greater volume of hardware components sold during the quarter and to
a lesser amount of software revenues that were recognized in the
quarter. There was an increase in other costs of $4,176 or 1%.
These increases were partially offset by a decrease in labor costs
of $23,258 or 5%. Cost of sales as a percentage of sales was 59%
for the current quarter as compared to 56% to the comparable fiscal
1998 quarter. This was due in part to the recognition of hardware
revenue and the deferral of software revenue in accordance with the
adoption of SOP-97-2.
Selling and administration expenses decreased $18,435 or
about 3% for the current quarter compared to the same quarter of
1998. The decrease was primarily attributable to a reduction in
sales taxes and other expenses during the quarter. Management
anticipates increasing the level of sales and marketing expenditures
in future quarters as the Company expands its sales and marketing
activities related to the sale of its CIS products across a broader
market spectrum.
The Company has been engaged in strategic joint marketing
partnerships with other companies which has improved the Company's
market penetration. Management views the near term outlook for the
continued sale of CIS products favorably during the first half of
the 1999 fiscal year. However, the Company's future operating
results will 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.
Research and Development expense decreased $9,790 or about
6% for the current quarter as compared to the same quarter of 1998.
The decrease is attributable to a change in personnel. The Company
continues to expend considerable resources on new product
development and product enhancements which should continue for the
foreseeable future. In addition, the Company has also initiated the
design phase of new CIS products that will require increased
development expenditures in future periods.
As a result of the aggregate factors discussed above the
Company earned net income of $43,142 or basic and diluted net income
per share of $.01 for the first fiscal quarter ended November 30,
1998 compared to $40,486 or basic and diluted net income per share
of $.01 per share for the same quarter a year ago.
Capital Resources and Liquidity
As of November 30, 1998, the Company's working capital
amounted to $599,087 compared to $526,566 at August 31, 1998. The
ratio of the Company's current assets to current liabilities was
approximately 1.2 to 1 at November 30, 1998 compared to 1.2 to 1 at
August 31, 1998.
The Company's Balance Sheet has been affected by the
inclusion of deferred revenues as a current liability which affects
working capital ratios.
The Company's bank line of credit as of November 30, 1998
amounted to approximately $800,000, of that amount $581,600 was
outstanding as of that date. The Company's bank line contains
certain financial ratio requirements. The Company was not in
compliance with some of the covenants and financial ratios required
by its bank as of November 30, 1998, but had obtained a waiver from
its bank.
The Company believes that its cash flow from operations
together with its bank credit facilities should be sufficient to
fund its working capital requirements for its 1999 fiscal year.
Seasonality, Inflation and Industry Trends
The Company sales are generally lower in the summer and
higher in the fall and winter. Inflation has had no material effect
on the Company 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 systems
industry will continue to be competitive and that the changes making
place in healthcare will have a long term positive impact on its
business. In addition, management believes that the industry will
experience more significant technological advances which will
improve the quality of service and reduce costs. The Company is
poised to meet these challenges by continuing to employ new
technologies when they become available, diversifying its product
offerings, and by constantly enhancing its software applications.
Year 2000 Compliance
Many currently installed computer systems and software products
are coded to accept only two digit entries in the date code field. As
the year 2000 approaches, these code fields will need to accept four
digit entries to distinguish years beginning with "19" from those
beginning with "20". As a result some computer systems and software
used by the Company and its clients may have to be upgraded to
comply with such Year 2000 requirements. The Company is currently
expending resources to review its products, systems and services and
the computer systems and software products it sells in order to
identify and modify those products, systems and services. The
Company believes that the cost of the modifications associated with
this effort will not have a material adverse effect on the Company's
operating results. However, achieving Year 2000 compliance is
dependent on many factors, some of which are not completely within
the Company's control, including without limitation, the
availability and cost of trained personnel and effectiveness of
software upgrades used by the Company and its vendors and suppliers.
Should either the Company's internal systems or the internal systems
of one or more significant vendors or suppliers fail to achieve Year
2000 compliance, the Company's business and its results of
operations could be adversely affected.
Clinical Information Systems
The Company has been engaged in evaluating and modifying its CIS
products for sometime and has completed core modifications and
testing for Year 2000 changes to CyberLAB II(Registered Trademark).
The Company is currently distributing the Year 2000 compliant
software upgrades to its clients. CyberRAD(Registered Trademark)
and MQA were designed to be Year 2000 compliant.
CyberMED(Trademark) is currently being modified and it is expected
that the modifications and testing will be completed by mid 1999.
Subsequently the modified CyberMED(Trademark) upgrade will be
distributed to clients. Modifications are also currently being made
to the financial management system that will be completed by March
1999 and released thereafter. The Company is also evaluating
communication interfaces it has installed in order to determine in
each individual case, whether the software is Year 2000 compliant,
and will undertake such modifications as are deemed to be necessary
to be compliant. The Company believes it is timely and on schedule
in its efforts to effectuate the modifications, testing and upgrade
of its developed software applications to its clients. Management
is cognizant of the fact that the timeliness of the completion and
distribution of Year 2000 modifications are critical to the success
of the Company.
Some of the Company's clients may require upgrades to their
computers and/or operating systems, in order to operate the upgraded
application software and otherwise be Year 2000 compliant. The
Company has been conducting a review of its client installations in
order to determine their status and to advise clients as to what
modifications should be undertaken. The Company's extended service
agreements require that the client be responsible for the cost of
any upgrades to their computers that may be required to operate
upgraded or modified application software. Therefore the Company
does not expect to bear the costs associated with this effort and
instead will derive revenues from the upgrades. The Company had
identified the modifications and/or upgrades required by the vendors
and is assisting its clients in securing the necessary modifications
and/or upgrades. The Company has sent a Year 2000 technical
document to all it's clients, and posted the information on its web
site to assist its clients in their evaluations.
In House Systems and Computers
The Company continues to conduct a review of the computers,
systems and software that it utilizes internally to operate its
business. It has determined that some systems such as its
accounting and voice mail systems will have to be replaced since
they are not modifiable. However, such systems were already due to
be replaced because they are no longer adequate and are not being
supported by their manufacturers. Other systems supported by their
manufacturers will be upgraded in the normal course with Year 2000
modifications on a timely basis. Although the Company will have to
bear the cost of replacing non-compliant systems, it is not
anticipated that the aggregate expenditures will be of a material
nature. At present, the cost of such replacements has not been
fully determined.
PART II - OTHER INFORMATION
Items 1 through 5. NOT APPLICABLE
Item 6. Exhibits and Reports on Forms 8-K
(a) Exhibit 11 - Statement re: computation of per share
earnings.
Exhibit 27 - Financial Data Schedule.
(b) There were no reports filed on Form 8-K during the quarter
ended November 30, 1998.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CREATIVE COMPUTER APPLICATIONS, INC.
(Company)
Date January 11, 1999 /S/ Steven M. Besbeck
Steven. M. Besbeck, President
Chief Executive Officer, Chief
Financial Officer
Date January 11, 1999 /S/ Carol Bessel
Carol Bessel, Controller and Chief
Accounting Officer
Exhibit 11
CREATIVE COMPUTER APPLICATIONS, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Three Months Ended
November 30,
1998 1997
<S> <C> <C>
AVERAGE MARKET PRICE PER SHARE $ .82 $ 1.74
NET INCOME $ 43,142 $ 40,486
Basic weighted average
number of common
shares outstanding 2,920,740 2,859,865
Diluted effect of stock options - 150,366
Diluted weighted average number of common
shares outstanding 2,920,740 3,010,231
Basic earnings per share $ .01 $ .01
Diluted earnings per share $ .01 $ .01
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> NOV-30-1997
<CASH> 292768
<SECURITIES> 0
<RECEIVABLES> 2123796
<ALLOWANCES> 0
<INVENTORY> 724297
<CURRENT-ASSETS> 3685167
<PP&E> 1698207
<DEPRECIATION> 1148148
<TOTAL-ASSETS> 6162033
<CURRENT-LIABILITIES> 1965827
<BONDS> 0
0
0
<COMMON> 5768585
<OTHER-SE> (1575552)
<TOTAL-LIABILITY-AND-EQUITY> 6162033
<SALES> 1807441
<TOTAL-REVENUES> 1808015
<CGS> 1018267
<TOTAL-COSTS> 1763181
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3998
<INCOME-PRETAX> 40836
<INCOME-TAX> 350
<INCOME-CONTINUING> 40486
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40486
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
