##### **UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

#### **Washington, DC20549**

** **

##### **FORM 10-KSB**

 

| **ý** |   | **ANNUAL REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 for the  fiscal year ended August 31, 2001.** |
|------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                      |
|       |   | **OR**                                                                                                                                    |
|       |   |                                                                                                                                      |
| **o**      |   | **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 underSection 12(b) of the Exchange Act:  None

Securities registered underSection 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 ExchangeAct during the past 12 months (or for such shorter period that the Issuer wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes   ý   No   o

 

Check if there is no disclosureof delinquent filers in response to Item 405 of Regulation S-B is not containedin this form, and no disclosure will be contained, to the best of Issuer'sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.ý

 

Issuer's revenues for its mostrecent fiscal year ended August 31, 2001 were $5,953,014

 

As of November 16, 2001,the aggregate market value of the voting stock held by non-affiliates of theCompany was approximately $1,200,000.

 

As of November 16, 2001the Company had 3,221,025 shares of its common stock outstanding.

 

DOCUMENTS INCORPORATED BYREFERENCE

 

Items 10, 11 and 12 of Part IIIof this report are hereby incorporated by reference from the Company’s Fiscal2000 Definitive Proxy Statement, which will be filed within 120 days of the endof the Company’s fiscal year.

 

Transitional Small BusinessDisclosure (check one):

Yes   o   No  ý

 

 

#### **PART I**

 

 

**Item 1. Business.**

 

                The following report contains forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995.  Such forward-lookingstatements involve risks and uncertainties so that the actual results may varymaterially.

 

 

**Business Description**

 

                Creative Computer Applications, Inc. (CCA orthe Company) develops, assembles, markets, installs, and services computerbased Clinical Information Systems (CIS) for use in hospitals, clinics,reference laboratories, and other healthcare institutions.  Clinical information is data that isgathered concerning each individual patient's health condition, diagnosis, andtreatment that are used by doctors, nurses and other healthcare providers.  CCA's products are deployed to provide automationof patient centered clinical information that facilitates the operation ofclinical departments and allows the rapid recording and processing ofinformation that can be communicated, documented, and delivered to healthcareproviders.

 

                Currently, CCA markets a LaboratoryInformation System under the name CyberLAB II®, a PharmacyInformation System under the name CyberMED®, a Radiology InformationSystem under the name CyberRAD®, and other related clinical applicationmodules.  Enhancements to such productsas well as additional application software products are in development or areplanned to be developed in the future. In addition, CCA is seeking to license or acquire other synergisticsoftware products and operating businesses to add to its expanding product andservice activities.  The general officesand operational headquarters are located at 26115-A Mureau Road, Calabasas, CA91302.  The Company’s telephone number is818/880-6700.  The Company's businessconsists of four operational areas:  (1)Clinical Information Systems products, (2) service of its client'sinstallations, (3) implementation services, and (4) data acquisitionproducts.  Product lines consist ofLaboratory Information Systems, Pharmacy Information Systems, RadiologyInformation Systems, Mammography Reporting and Tracking Systems, and DataAcquisition products.  The Company sellsits products and systems directly through its own sales force and through jointmarketing programs with other companies.

 

 

**History and Business Development**

 

                Since its inception as a Californiacorporation in 1978, CCA has been primarily engaged in the development,marketing, installation, and service of Clinical Information Systems thatautomate the collection and management of patient centered clinical data forthe healthcare industry.  As of August31, 2001, the Company supported approximately 580 active applicationinstallations that are used in over 500 client sites.

 

                The percentage of the Company's net salesattributable to the sale, licensure, and implementation of Clinical InformationSystems, including data acquisition product sales, accounted for approximately38% of total revenues in fiscal 2001, 56% in fiscal 2000, and 69% in fiscal1999.  Management believes that thepercentage of the Company's net sales attributable to its sales of ClinicalInformation Systems activities will increase in fiscal 2002. It also expectsthat its service revenues, which accounted for 62% of total revenues in thecurrent fiscal year, will not grow significantly in the 2002 fiscal year due toa limited number of new system sales in fiscal 2001.

                By automating thecollection and organization of patient centered clinical data, the Company'sClinical Information Systems reduce operating costs, improve patient care, and increasethe efficiency of healthcare providers. In recent years, the healthcare industry has come under increasingpressure to control costs from government regulatory agencies and third partypayers of medical expenses, as well as from increased competition in thehealthcare industry.  The need tocontain healthcare costs has led to pressure to either decrease or control thecosts of the various components of healthcare. Management believes the pressure to contain healthcare costs can beexpected to increase in the foreseeable future.

 

                As part of its business strategy, the Companyhas pursued the development of new products and services to expand theCompany's business to encompass other products that service other clinicaldepartments in hospitals and multi-specialty clinics.  The Company has developed a Web GatewayTM, which provides accessto its existing products so that physicians and nurses can easily utilize themfrom virtually anywhere in the world, and is continuing to build upon thistechnology platform in order to deploy other functionality.  Initially the Web GatewayTM was developed toenable access to CyberLAB II® for orders, inquiry and results,additional functionality is now available for CyberRAD® for orders,inquiry and electronic signature.  CCAis also developing similar functionality for CyberMED®.

 

                In September 1999 CCA formed a wholly ownedsubsidiary, Xymed.com, which it initially planned to develop as an ApplicationService Provider (ASP) and a provider of data center outsourcing services.  Initially, Xymed.com was intended to offerthe Company’s clinical information systems products to clients via privatededicated wide area networks and over the Internet.  The Company expended considerable resources in developing the ASPinfrastructure, which it completed successfully.  However as a result of current market conditions, a lack ofmarket acceptance for ASP services, and the difficulty in obtaining financingfor such enterprises, the Company has decided not to pursue the ASP program at thistime.  The Company gained substantialtechnological capabilities from its ASP development program and accordingly hasdeployed some of the technology in its standard products. In addition, theCompany is utilizing the ASP infrastructure to perform on-line demonstrationsof its application products and to provide enhanced training.

 

                The Company experienced a decrease inrevenues and has incurred operating losses in its last two fiscal years due toa number of factors.  Such decreases inrevenues and earnings were primarily attributable to an industry-wide post Year2000 slowdown, the Balanced Budget Act, and uncertainties related to the HealthInsurance Accountability and Portability Act (HIPAA).

 

                The Company began to experience an increasein new sales activities during the second half of its 2001 fiscal year andbelieves that the industry is recovering from its slowdown but management iscautious about current domestic economic conditions.  As a result of increased sales and marketing activities the Company’spipeline of new CIS transactions has risen back to historical levels.  Management believes the industry and themarket for CIS products will recover but is guarded about its core businessactivities until it has a clearer vision ahead.  Accordingly, management continues to respond to the currentmarket conditions by keeping a tight reign on staffing and other expenses.  In addition to the post Y2K slowdown, theentire industry has been concerned with the potential effects of HIPAA on allhealthcare systems.

 

                In order to address issues brought about bythe HIPAA regulations, the Company is currently developing enhancements to its products in order to addressthe compliance issues necessitated by the HIPAA regulations.  Provisions of HIPAA are intended to ensurepatient confidentiality and security for all health care relatedinformation.  The requirements of HIPAAapply to any entity storing and/or transmitting patient identifiableinformation on electronic media.  Thisaffects virtually all health care organizations, from physicians and insurancecompanies to health care support organizations.  Certain safeguards will be required to accurately insure thesecurity of patient data.  This willinclude more robust audit trails and tiered/structured password security whenaccessing patient data.  CCA plans onproviding its client base with application enhancements that will assist itsclients in adhering to HIPAA regulations as well as the necessary hardwareupgrades and implementation services required to implement the new HIPAArelated enhancements.

**Clinical Information Systems**

 

                The Company’s Clinical Information Systemsare designed to provide cost effective, robust application features to manage avariety of clinical activities throughout most sectors of the health caremarket.  The Company's systems arehighly scaleable, enabling a wide range of users to employ them.

 

                CCA's Clinical Information Systemapplications are designed around a common open systems architecture that isbased on the UNIX operating system platform and employs thin-client technologywhere applicable. CCA's use of this technology allows easy integration intoexisting networks, as well as seamless integration with other systems. CCA’ssuite of Clinical Information Systems applications allows for unprecedentedscalability and flexibility ensuring that as the needs of a healthcare providerchange the systems can easily be adapted. The Company's clinical applications are designed around flexibleparameterized software, which enables the customer to tailor the software forits individual needs.

 

                For clinical laboratories, the Company hasintegrated its software applications and data acquisition technology intoLaboratory Information Systems, which are sold under its trade name CyberLAB II®.  Extensive applications for a wide variety oflaboratory testing, compliance, and quality control procedures, includinghematology, immunology, chemistry, microbiology, drug testing, toxicology,urinalysis, and cytology testing, are available with the Company'ssystems.  Validation and reimbursement,multi-site reporting and management, database management, bedside specimencollections, point of care testing, remote communications and flexible userdefined reporting capabilities are also included.  Additional modules are also available for complete microbiologytesting and CyberPATHTM, CCA’s anatomic pathology system can be fully integratedwith CyberLAB II®.  TheCompany's Laboratory Information Systems are used by laboratories testing up to15,000 patient samples a day.

 

                The Company's Pharmacy Information Systems,which are sold under the trademark CyberMED®, integrate inpatient,outpatient, and long term care applications into a highly integrated softwareproduct.  CyberMED®integrates unit dose, IVPB/TPN, controlled substances, floor stock, inventorycontrol, and kinetics functions.  Itperforms labor-intensive operations such as patient profiling, drug inventorycontrol, drug interactions, and patient billing.  An optional purchasing module can electronically place orderswith suppliers and determine the fastest moving drugs, as well as track drugusage and costs.  CyberMEDTM supportsseveral third party database services for integrated drug interactions, pricing,and patient informational disclosures that are required by regulation.  Extensive reporting capabilities aresupported including a user defined parameterized medication administrationreporting module.

 

                CyberRAD®, the Company’s RadiologyInformation System, is hybrid in its design, which allows its employment ininpatient and outpatient settings. Applications include extensive scheduling, reporting, film tracking,transcription, and clinical functionality. MQA, a mammography reporting and tracking system acquired by the Companyduring fiscal 1998, has been integrated into CyberRAD®.  MQA can also be sold as a stand-alonesystem, and meets FDA guidelines for Mammography Quality Assurance.

                The Company'sClinical Information Systems support extensive communication capabilities tovarious healthcare information systems including Hospital InformationSystems, nursing and practice management systems, for which the Company hasdeveloped over one hundred system-to-system communication interfaces.  The Company's Clinical Information Systemssupport networking capabilities and are employed in many settings that consistof multiple sites.  In addition,different types of enterprises, such as hospital and affiliated outpatientclinics, can use the Company’s systems to integrate their activities.  The communication interfaces often supportbi-directional data communications, whereby demographic and test order requestsare transmitted to the Clinical Information Systems and, in turn, billinginformation and test results are re-transmitted to the host system.  The Company’s Clinical Information Systemssupport their own order communications and test result subsystems that havebeen employed in other accounts that have relied on the Clinical InformationSystem's communications capabilities. Management believes that communications to other systems allowingconnectivity between clinical systems, such as CyberLAB II®,CyberMED®, and CyberRAD®, and administrative informationsystems, are very important functional requirements in the marketability of itsproducts.  The Company has focusedconsiderable attention on the communication, networking, and connectivitycapabilities of its products, and plans to further develop these capabilitiesas opportunities present themselves.

 

                The Company has developed standard seamlessintegration and network connectivity for all its products through user selectednetwork topologies, network protocols, and network operating systems.  Although each application has beenconfigured to operate as a stand-alone product, all can be operated as anintegrated package, residing on a shared platform or network, therebyeliminating the need for multiple interfaces, duplicate information handling,and their associated costs.  CCAcontinues the development of enhancements to CyberLINK®, a softwareintegration and communications module that integrates all of its own clinicalapplications and provides a single communications gateway to or from othervendors’ systems.

 

                The Company has designed its products toincorporate open systems architecture and to conform to computer industrystandards, which enable them to be more easily integrated with other vendor’sproducts.  Healthcare industrystandards, including Health Level Seven (HL7) and ASTM, are employed throughoutthe Company’s software products.

 

                The Company’s Clinical Information Systemsoperate under various versions of UNIX. As a result of trends throughout the information technology marketplace,Microsoft NT® is becoming more popular.  The Company has the ability to operate its Clinical InformationSystems under NT, and has deployed some of its applications in thatenvironment.  The Company beganmigrating some of its systems to a client-server architecture and CyberRAD®,and CyberPATHTM operate in that environment. However, as a result of technological changes and the desire to operateapplications over the Internet, the Company is evolving all of its clinicalapplications to Web based architecture.

 

 

**Data Acquisition Products**

 

                The Company's data acquisition products,which consist of clinical instrument data interfaces, increase the efficiencyand accuracy of on-line data acquisition in biomedical laboratories byautomating the collection and organization of test data.  Each of the Company's data acquisitionproducts uses a microcomputer performing a specific discrete task.  All of the Company's data acquisitionproducts are "plug-in" compatible with each other, enabling an enduser to easily expand its system.  TheCompany's data acquisition products conserve central computer resources, lowerhardware costs, and significantly reduce costs of installation and systemexpansion, meeting the cost-containment needs of healthcare organizations.

 

                As of August 31, 2001, the Company had soldmore than 12,500 of its data acquisition products in the United States andabroad, and supports over 500 different interface configurations for use with awide variety of automated biomedical testing devices.

 

**Service**

 

                The Company provides comprehensive servicesto 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 supportservices, through a twenty-four (24) hour "hotline", and field servicefor hardware repair.  In many instancesthe Company relies on third parties to service hardware components that itsells.  The Company services its owndata acquisition products and related software, including peripherals used aspart of its CIS products, under service contracts offered to end users.  The Company's long-term inventoryrequirements for its service and repair business are significant because itmust retain a loaner pool of components used to service its client base.

 

                The Company's post implementation servicerevenues for fiscal 2001 increased by approximately 14% from the previousfiscal year, and they are expected to continue to grow when and as theinstalled base of system clients grows. All of the Company’s clients are under service contracts.  The Company believes that the ability to offercomprehensive services to its clients is a competitive advantage and solidifiesa long-term relationship with its client accounts.  The recurring revenue stream associated with this activity is asignificant part of the Company's business. The ability to offer long-term service often leads to add-on salesopportunities for peripheral components, data acquisition products, andupgrades to newer computers and software applications.  In addition, the quality of service is animportant aspect of the end users buying decision when making a systemselection; therefore the Company is constantly fine-tuning the services itprovides and its service organization as part of its marketing strategy.

 

                The Company has invested in a company widehelpdesk system in order to more effectively service its clients and employs a“virtual company” concept by linking outside personnel via the Internetdirectly into its own internal network. A number of Company employees who are engaged in technical and servicerelated activities tele-commute through this venue.  The Company has a significant investment in its internalhelpdesk, network and related applications, and intends to make furtherinvestment in the future.

 

                The Company believes that the service of itsclients is of utmost importance to its long-term success and businessstrategy.  Accordingly, a great deal ofemphasis is placed on continuing to upgrade the service organization and onexpanding the services that the Company offers.  As part of this effort, the Company routinely surveys its clientsin an effort to obtain a “report card” on how the service organizationperforms.  With this mechanism theCompany tunes its service organization to better address its client’s requirements.  The Company anticipates adding additionalsupport and implementation personnel during fiscal 2002.  The Company has also expanded itsprofessional service activities, which include networking, communications, andsystems integration.

 

 

**Significant Contracts and Programs**

 

                The Company entered into a contract inNovember 1989, with Laboratory Corporation of America (LCA), to provide LCAwith 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, 2001 the Company hadapproximately 150 departmental results processing systems and over 500 of itsdata acquisition products in twenty-five LCA laboratories.  Development of further software applicationscontinues, and management anticipates that LCA will acquire several more dataacquisition products in fiscal 2002.

 

                As part of its overall marketing strategy,the Company is pursuing a number of other strategic relationships withorganizations that operate multiple entity enterprises where the Company mayhave the opportunity to offer its array of products and services to the group.

                During the 2001fiscal year, there were no contracts or programs that generated over 10% of theCompany's net sales.

 

 

**Product Development**

 

                The market for the Company's products ischaracterized by rapid and significant technological change.  The Company's ability to compete in themarket, and to operate successfully, depends in part on its ability to react tosuch change.  During the Company's 2001,2000, and 1999, fiscal years, amounts (inclusive of capitalized software) equalto approximately 20%, 16%, and 13%, respectively, of the Company's net sales,were expended for research and development. The Company continues to expend a significant amount of resources for thedevelopment of new products, and for the development of additional enhancementsto existing products.

 

                The Company development plans are focused onevolving its clinical application products to Web based architecture in orderto deploy them in a traditional enterprise fashion, and also via theInternet.  At the same time, graphicaluser interfaces are being incorporated into the Company’s clinical applicationswhere applicable.  The Company hasplanned product development projects over the next three years that includeadditional enhancements to the anatomical pathology system, a data warehousefor all its systems, and a clinical work station that will include system-wideorder communications, inquiry and decision support.  The Company continues to develop enhancements to its Web-serverthat provides for orders and inquiry via standard Internet browsers into theCompany’s clinical applications.

 

                Research and development expenditures, net ofcapitalized software, amounted to approximately $781,000 in fiscal 2001,$763,000 in fiscal 2000, and $722,000 in fiscal 1999.  Such expenditures were attributable to systems development,including the development of new Laboratory, Radiology, and PharmacyInformation Systems applications, and enhancements to those products. TheCompany's business logic applications are compiled under Microfocus COBOL thatprovides a standard code structure for the system applications while otherembedded process code is written in C. By employing Microfocus' run-time modules for UNIX, the Company has beenable to port to a variety of hardware platforms with ease.  The Company has successfully ported itssoftware applications from Compaq® to IBM® RISC 6000 Systems, and toHewlett Packard® HP9000 Systems.  This portabilitycapability has allowed the Company to become "platform independent"in vending its software products where some customers may be predisposed tocertain hardware brands.  The Company atpresent is porting some of its applications to Microsoft NT®, and in the future intends tooffer its products on both UNIX and NT platforms in the future.  All of the Company’s products are opendatabase compliant (ODBC), and the data structures support the use of standardquery language (SQL) report generators that allows a wide range of reportingcapabilities.

 

 

**Distribution and Marketing**

 

                From its inception, the Company has sold itsproducts and systems directly to the healthcare industry through its own salesand marketing personnel, as well as indirectly through original equipment manufacturers("OEM's"), and through joint marketing relations with othercompanies.  The Company hastraditionally marketed its products throughout the United States, Canada andthe Caribbean.  Early in fiscal 2000,the Company contracted to provide CyberLAB II® to a large referencelaboratory in Malaysia, and plans to market its products in the region.  The Company also installed CyberLABII® in a large referencelaboratory in Jamaica during fiscal 2001. At present, the Company's directfield sales force consists of three salespersons.  In addition, the Company's management and technical specialistsassist in sales activities.

                During fiscal2001, the Company commenced new promotional activities including atelemarketing campaign, targeting larger potential clients, with somesuccess.  As part of the telemarketingactivity the Company is building a significant database of accounts throughoutthe healthcare market place that is helping to position the Company’s sales activities.  In addition to direct marketing, the Companypromotes its products by attending industry trade meetings at national andregional levels.  Because of theopportunity to meet larger audiences at such meetings, the Company hasincreased the number of meetings it will attend in fiscal 2002.  The Company has also formed joint marketingarrangements with other companies that have compatible products and services,which has increased sales penetration in the marketplace.

 

                The Company has established and supports anannual user symposium in order to encourage users of its Clinical InformationSystems to participate in helping the Company to better serve its clients.  The focus of the symposium is to encourageopen group communications with the Company about a range of subjects, includingservice and support and new product enhancements.  Since the Company has experienced success in vending multipleproducts to its clients, the national symposium proves to be a good forum todiscuss general topics, such as the Company’s strategy and product direction,and provides an opportunity to focus on specific application issues in breakoutsessions.  The Company also schedulesadvanced training courses as part of the symposium agenda that have hadconsiderable attendance by its clients.

 

                The Company also publishes newsletters andarticles, which are intended to expand communication with existing andpotential clients.  During fiscal 2001,the Company invested in new Web site, collateral materials, including new productmarketing literature, and a new exhibits campaign and intends to further investin other marketing programs in fiscal 2002.

 

 

**Competition**

 

                The Company has significant competition inthe Clinical Information Systems business from several competitors, many ofwhom are larger concerns that may offer a wider array of products in additionto competitive clinical applications. Management believes, however, that few competing Laboratory InformationSystems offer the Company's hybrid multi-site capabilities, variety of datainterfaces, add-on capability, and flexibility that allows the systems to beuser definable, so that they can be employed in different types ofsettings.  The multi-site andmulti-disciplinary or hybrid nature of the Company’s products are a strongselling point.  The Company has alsoreceived very good references about its service organization and the ability torespond to clients needs on a timely and cost effective basis.  Most of the Company's competitors havedesigned their products for the hospital environment; therefore, they are notas flexible and are less suitable for other types of operations.

 

                The principal competitive factors in theCompany's business are technological competence, diversity of product line,price and performance characteristics, product quality, capability andreliability, marketing and distribution networks, service and support, abilityto attract and retain trained technical employees and business reputation.  The Company believes that it has competitiveadvantages in many of these areas.

 

**Manufacturing and Suppliers**

 

                The Company has utilized computersmanufactured by several suppliers for its Clinical Information Systems in thepast, and primarily uses computers manufactured by Compaq®, and to a lesser extent IBM®.  Management believes that other computers, which can be used inthe Company’s systems, are readily available from several suppliers.    As part of a strategy to limit the amountof hardware that the company vends, it has migrated to a “just in time” inventoryprogram whereby it has relied on purchasing inventory when it has received anorder from a customer rather than stocking inventory on a routine basis.  The Company still maintains an inventorysupply of certain items including spare parts and components for both its CISproduct line and for its data acquisition product line.  In addition, the Company maintains along-term inventory pool of components and parts to service customer’s hardwarepursuant to its long term extended service agreements.  The Company's data acquisition products areassembled by its employees and subcontractors from prefabricated subassemblies,which are built by independent electronics assembly companies.  Management believes there are many competentsubassembly companies within the immediate vicinity of the Company's businesslocation.  The Company obtains thecomponents of its data acquisition products from a variety of suppliers and isnot dependent on any one supplier for such components.

 

 

**Warranties and Product Liability**

 

                The Company warrants that its productsconform to their respective functional specifications.  The Company's data acquisition products andcomponents are warranted against faulty materials and workmanship for 90days.  The Company also warrants itsapplication software incorporated in its Laboratory, Radiology, and PharmacyInformation Systems for 90 days. However, such warranties are extended throughout the term of theextended service agreements that clients may elect to enter into with theCompany.  Direct costs associated withthe initial warranties have been insignificant.  The computers that the Company currently sells as part of itsClinical Information Systems are subject to the warranties of theirmanufacturers.  The manufacturersgenerally warrant their products against faulty material and workmanship forone to three years.  The Company passesthrough the manufacturers warranties to the end users and in some casescontracts with the manufactures to provide onsite warranty services through themanufactures service network.

 

                The Company currently carries an aggregate of$4,000,000 in product liability insurance. Management believes that this amount of insurance is adequate to coverits risks.  To further mitigate itsrisks, the Company’s standard hardware sales/software license agreement as wellas its service agreement expressly limits its liabilities and the warranties ofits products and services in accordance with accepted provisions of the UniformCommercial code as adopted in most states.

 

 

**Copyrights, Patents and Trade Secrets**

 

                The Company does not hold any patentsprotecting its proprietary technology. The Company has relied on design copyrights for its hardware, and hascopyrighted the designs of its proprietary components and software.  Patent or copyright protection may not beavailable for many of the Company's products. A portion of the Company's proprietary technology is in the form ofsoftware.  The Company has reliedprimarily on copyright and trade secret protection of its software.  Management believes that its business ismore dependent upon marketing, service, and know-how than on patent orcopyright protection.  The Company hasregistered trademarks for CyberLAB®, CyberMED®, CyberRAD®, CyberTERM®, CyberLINK® and CyberMATE®, and has applied to registerits trademarks on several of its other trade names.  The Company has retained special intellectual property counsel toadvise management on the appropriate course to pursue with respect to theseissues.

 

**Governmental Regulation**

 

                The Federal Food, Drug and Cosmetic Act, morecommonly known for its regulation of interstate commerce in drugs, was amendedby the "Medical Device Amendments of 1976" (the"Amendments") to cover devices used in medical practice.  These include instruments and reagents usedin biomedical laboratory testing.  In1987, the FDA first classified a number of clinical software products asmedical devices, but exempted most of them from routine regulations.  Subsequently, the FDA amended the policy andmade the exemptions inapplicable to manufacturers of devices intended for usein blood banks.  As a result of morerecent pronouncements by the FDA, and an earlier decision by the Company todevelop a blood bank module to its CyberLAB II® LIS, the Company undertookthe filing of a pre-market notification (510K), which was submitted in March1996.  The Company received a reviewletter from the FDA regarding its 510K submission, and because of timing issueswithdrew its submission.

 

                During the third fiscal quarter ended May 31,2000, the Company conducted a routine review of its business and productofferings, and as a result made certain decisions with respect to some of itsproducts.  The Company decided todiscontinue the blood bank system that it had previously developed.  Although the Company believed its bloodbanking system would meet FDA regulations, the potential return on itsinvestment due to limited market opportunity was negative.  Accordingly, management determined it wasnot financially viable to continue to develop and maintain the blood bankproduct, and ceased offering the product for sale and providing support.  Instead, the Company entered into astrategic marketing agreement with the leading best of breed blood bank vendorto provide its products when such are required.  In view of this decision, the Company recorded a charge ofapproximately $150,000 in the third fiscal quarter of 2000, including thewrite-off of capitalized software relating to the blood bank product, torecognize its discontinuance.

 

                The Company is informed that the FDA alsointends to require all Class I devices, which includes the Company’s otherClinical Information System products, to comply with its Quality SystemRequirements (QSRs).  The Company is inthe process of modifying its internal policies to comply with thisdirective.  Management anticipates thatthe QSRs procedure will have an impact on its business to the extent that therewill be lengthened development cycles of new software and additional costsincurred.  However, all of itscompetitors are faced with the same requirements.

 

                To the Company’s knowledge, the FDA iscurrently in the process of reevaluating its rules relevant to computerproducts used in connection with medical devices and software used in clinicalapplications.  No assurance can be giventhat the Company's current or new products developed by the Company will not besubject to the provisions of the Amendments and implementing rules.  The Company has retained special counsel toadvise it in such matters.  Thelikelihood of such changes and their effect on the business of the Companycannot be ascertained.  If the FDA wereto determine that additional provisions should apply to all or some of theCompany's products, it is uncertain whether compliance with such interpretationwould have a material adverse effect on the Company.

 

                In general, the Company and its products aresubject to direct governmental regulations applicable to manufacturers,including those regulations promulgated under the Occupational Safety andHealth Act, and by the Environmental Protection Agency.  The Company's customers, however, aresubject to significant regulation by the Food and Drug Administration, theHealthcare Financing Administration, the Health and Human Services Administration,and by state and local governmental authorities.  Such regulations require the Company to comply with certainrequirements in order to sell its systems, and are a major focus of itsdevelopment efforts in order to maintain the regulatory compliance of itsproducts.

 

**Backlog**

 

                The Company’s backlog at August 31, 2001 wasapproximately $535,000 for systems and interface products, and $832,000 fordeferred services, compared to approximately $591,000 for systems and interfaceproducts, and $845,000 for deferred services, at August 31, 2000.  The Company also has annually renewableextended service agreements under contracts aggregating over $3,700,000.

 

 

**Employees**

 

                At November 16, 2001, the Company employed 57full-time and 2 part-time employees of whom 13 are involved in product development,10 in sales and marketing, 2 in production, 28 in technical services, training,and support, and 6 in administration. The Company is not subject to any collective bargaining agreements.  The Company considers its employee relationsto be good.

 

 

**Item 2. Properties.**

 

                The Company’s headquarters are located in aleased facility in Calabasas, California. The facility was constructed in 1991 and comprises approximately 16,850square feet with an effective base rental of approximately $17,700 per month,plus common area maintenance costs and property taxes. The lease comprises afive-year term with no cost of living adjustments, and expires in October2002.  There is a five-year renewaloption at the end of the initial term.

 

                The Company also leases a 1,100 square footoffice in Westminster, Colorado that costs approximately $1,600 per month,including common area maintenance expenses and property taxes, and is subjectto cost of living increases annually. The lease expires in December 2001.

 

                The Calabasas, California facility is used asgeneral offices and operations headquarters that covers warehousing, serviceand support, training, development, and assembly.  The Westminster Colorado facility is a branch developmentoffice.  The Company considers the twofacilities to be adequate for their intended purpose.  The Company carries adequate general liability insurance, asrequired by the respective leases, to cover any risks concerning the twofacilities.

 

 

**Item 3. Legal Proceedings.**

 

                There are no material active, pending, orthreatened legal proceedings to which the Company is a party.

 

**Item 4. Submission of Matters to a Vote of Security Holders.**

 

                The Company did not submit any matter to avote of its security holders during the fourth quarter of its fiscal year endedAugust 31, 2001.

 

**PART II**

 

 

**Item 5. Market for Company's Common Equity and Related Stockholder Matters.**

 

The Company’s common sharestrade on the American Stock Exchange under the symbol CAP.

 

The following table sets forththe high and low bid quotations for the Common Shares for the periodsindicated.

 
|                                 |   | **High** |   | **Low** |
|--------------------------------------|--------|----------|--------|---------|
|                                 |   |     |   |    |
| Fiscal Year Ended August 31, 2000    |   |     |   |    |
| 1st Quarter, Ended November 30, 1999 |   | 2 7/8    |   | 1 15/16 |
| 2nd Quarter, Ended February 28, 2000 |   | 3        |   | 1 3/4   |
| 3rd Quarter, Ended May 31, 2000      |   | 4 1/8    |   | 1 1/4   |
| 4th Quarter, Ended August 31, 2000   |   | 1 3/4    |   | 13/16   |
|                                 |   |     |   |    |
| Fiscal Year Ended August 31, 2001    |   |     |   |    |
| 1st Quarter, Ended November 30, 2000 |   | 1.25     |   | .625    |
| 2nd Quarter, Ended February 28, 2001 |   | .875     |   | .25     |
| 3rd Quarter, Ended May 31, 2001      |   | .62      |   | .26     |
| 4th Quarter, Ended August 31, 2001   |   | 1.10     |   | .30     |

 

 

                The number of shareholders of record ofCommon Shares of the Company as of November 16, 2001 was approximately 294.

 

                Holders of Common Shares are entitled toreceive such dividends as may be declared by the Company's Board ofDirectors.  The Company has never paid acash dividend on its Common Shares and the Board of Directors currently intendsto retain any earnings for use in the Company's business.

 

                In June 1998, the Company issued 125,000common stock purchase warrants at an exercise price of $1.50 per share inconnection with a financial advisory services agreement.  The warrants expire on May 31, 2003.  The issuance of the warrant was exempt fromregistration under Section 4 (2) of the Securities Act of 1933 as amended, as atransaction not involving any public offering.

 

                In the third quarter of fiscal 1999, anaggregate of 3,400 restricted common shares were issued to employees of theCompany at an average price of $1.68. In the third quarter of fiscal 2001, an aggregate of 47,450 restrictedcommon shares were issued to officers and employees of the Company at anaverage price of $.34 per share.  Theshares were issued at the closing price of the Company’s common shares astraded on the American Stock Exchange on the date of purchase.  The issuances of the common shares wereexempt from registration under Section 4(2) of the Securities Act of 1933 asamended, as a transaction not involving any public offering.

 

 

**Item 6. Management's Discussion and Analysis of Results of Operations andFinancial Condition.**

 

                The following section of this report containsforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  Suchforward-looking statements involve risks and uncertainties so that the actualresults may vary materially.

 

 

**Introduction**

 

                CCAgenerates revenues primarily from the sale of its Clinical Information Systems,which includes the licensure of proprietary application software, and the saleof servers upon which the application software operates.  In connection with its sales of CISproducts, the Company provides implementation services for the installation,integration, and training of end user’s personnel.  The Company generates sales of ancillary software and hardware, including its dataacquisition products, to its CIS clients and to third parties.  The Company also generates recurringrevenues from the provision of comprehensive post implementation services toits CIS clients, pursuant to extended service agreements.

 

                Since its inception, the Company has providedenterprise systems consisting of its application software, servers, and othercomputer hardware components that it sells to end users.  Beginning in the first fiscal quarter endedNovember 30, 1999, the Company began to develop an application service provider(ASP) activity in its wholly owned subsidiary Xymed.com.  The Company intended to offer itsproprietary application software to clients on a monthly subscription basis, aswell as data center services and application software support.   However as a result of current marketconditions, a lack of market acceptance for ASP services, and the difficulty inobtaining financing for such enterprises, the Company has decided not to pursuethe ASP program at this time.  TheCompany invested considerable resources in developing its ASP program.  Xymed.comhad no revenues for the year, however development expenses aggregatingapproximately $348,000 were incurred.

 

                Because of the nature of its business, CCAmakes significant investments in research and development for new products andenhancements to existing products.  Inthe past, CCA has funded its research and development programs through cashflow primarily generated from operations. Management anticipates that future expenditures on research anddevelopment will continue at their current levels for the foreseeable future,and will be funded primarily out of the Company's earnings.

 

                The Company’s fiscal 2001 revenues andearnings showed a decrease compared to its 2000 fiscal year, which wasprimarily attributable to an industry wide post Y2K slowdown the BalancedBudget Act, and uncertainties related to the Health Insurance Accountabilityand Portability Act (HIPAA).  Duringfiscal 1999, and into the first fiscal quarter of 2000, the Company experienceda strong period of sales growth, partially fueled by Y2K compliance issues andseveral large CIS transactions.  As aresult, a large backlog of installations was built up that carried forward intothe Company’s second fiscal quarter of 2000. However, the Company began to experience a decrease in orders of CISproducts in the fourth calendar quarter of 1999, which continued into calendaryear 2000.  Management believes that thegeneral decrease is attributable to post Y2K capital spending suspensions,whereby most healthcare facilities focused on addressing critical Y2Kcompliance issues and suspended the acquisition of new systems andtechnology.  This has affected thehealthcare information systems industry in general, and much has been publishedon point regarding the slowdown.

 

                However, the Company began to experience animprovement in new sales activities during the second half of its 2001 fiscalyear and posted an operating profit on increased sales in its third fiscalquarter ended May 31,2001. Additionally, the Company’s pipeline of new CIS transactions has begunto build back to historical levels.  TheCompany’s operating results were greatly improved in the fourth fiscal quarteras sales increased to $1,817,859 and the Company earned net income of $206,000or $.06 per share.

 

                Management believes the industry and themarket for CIS products is recovering, but is cautious about its core businessactivities until it has a clearer vision ahead.  Accordingly management has continued to respond to the uncertainmarket conditions by keeping a tight reign on staffing and other expenses.  In addition to the post Y2K slowdown, theentire industry has been concerned with the potential effects of HIPAA on allhealthcare systems.

                In addition to the factors discussed above,the Company’s fiscal 2001 sales and earnings were also affected by newaccounting changes that were adopted at the beginning of the 2001 fiscalyear.  In December 1999, the Securitiesand Exchange Commission (SEC) released Staff Accounting Bulletin No. 101,“RevenueRecognition in Financial Statements” (SAB 101).  SAB 101 provides interpretive guidance on the recognition,presentation, and disclosure of revenue in the financial statements.  SAB 101 had to be applied to financialstatements no later than the fourth quarter of fiscal years beginning afterDecember 15, 1999.  The Company electedearly adoption of SAB 101 for the first fiscal quarter beginning September 1,2000.  The impact of SAB 101 were timingissues related to the recognition of revenue from the sale of hardware andlicense of application software that moved the time of revenue recognition outapproximately ninety to one hundred and eighty days.

 

                In order to address issues brought about bythe HIPAA regulations, the Company is currently developing enhancements to itsapplication products so that they will meet the requirements for the complianceissues.  Provisions of HIPAA areintended to ensure patient confidentiality for all health care relatedinformation.  The requirements of HIPAAapply to any entity storing and/or transmitting patient identifiableinformation on electronic media.  Thisaffects virtually all health care organizations, from physicians and insurancecompanies to health care support organizations.  Certain safeguards will be required to accurately insure thesecurity of patient data.  This willinclude more robust audit trails and tiered/structured password security whenaccessing patient data.  The increase inpatient centered data that must be retained under the HIPAA guidelines willrequire that systems electronically store much larger amounts of data.  CCA plans on providing its client base withapplication enhancements that will assist its clients in adhering to HIPAAregulations well before the final date that the new regulations go intoeffect.  Management also believes thatthe application enhancements will require that many of its clients will need toupgrade their systems in order to effectively manage greater amounts of data,which will afford the Company opportunities to sell upgrades and provideprofessional services.

 

 

**Results of Operations**

 

                Sales for the year ending August 31, 2001decreased to $5,953,014, as compared to $7,224,398 for the fiscal year endingAugust 31, 2000, an overall decrease of approximately $1,271,384 or 17.6%.  When analyzed by product category, sales ofClinical Information Systems (CIS) decreased by $1,774,922 or 53.6%, and salesof data acquisition products increased $155,183 or 27.1%, service revenuesincreased $506,076 or 16%, and other revenues decreased $157,721 or 88.5% overthe previous fiscal year.  The decreasein sales of CIS products was primarily attributable to the post Y2K industrywide slow down, and the HIPAA related factors discussed above.  The Company experienced an overall increasein sales of data acquisition products, which was primarily attributable to anincrease in the volume of units sold to CyberLAB II® customers.  The increase in service revenues isattributable to a greater number of client accounts under contract and anincrease in the average fees charged for such contracts.  As a result of the Company closing largerCIS transactions, the annual service costs associated with such transactionsare proportionately greater.  Servicerevenues are expected to continue to increase as and when the Company’sinstalled base of CIS installations increases.

 

                The Company continues to expand its sales andmarketing activities, directing its focus towards larger clients andmulti-product sales.  The Company hasalso initiated strategic joint marketing partnerships with other companies,which has improved the Company’s market penetration.  Although its “pipeline” of working CIS transactions has begun toimprove, management views the near term outlook for the continued sale of CISproducts cautiously during the first half of the 2002 fiscal year.  In addition, the Company’s future operatingresults could continue to be subject to quarterly variations based upon a widevariety of factors, including the volume mix and timing of orders receivedduring any quarter or annual periods, and the temporary delays in the closingof new CIS sales.

 

                Cost of sales decreased by $955,800 or 22.4%for the 2001 fiscal year as compared to the previous fiscal year.  The overall decrease in cost of sales wasprimarily attributable to a decrease in material costs of $271,037 or 44.8%, adecrease in labor costs of $405,872 or 20.2%, and a decrease in other costs ofsales of $278,891 or 16.8%.  Thedecrease in material costs was attributable to the decrease in sales of CISproducts discussed above and planned reductions in operating expenses.  Approximately $100,000 of the decrease inlabor costs was attributable to personnel hired to develop and manage theXymed.com ASP delivery infrastructure. The balance of the decrease in labor costs was attributable to thereduction of additional temporary personnel hired for Y2K remediation work inthe previous fiscal year.  The decreasein other costs of sales was attributable to decreased expenses in travel,personnel recruitment, and training, all related to a lesser number of CISimplementations during the first half of the current fiscal year.  Cost of sales as a percentage of sales decreasedto 56% for the 2001 fiscal year, as compared to 59% for the 2000 fiscalyear.  The overall percentage decreasein cost of sales, as a percentage of sales, was attributable to costcontainment measures, and the reduction of startup expenses attributable toXymed.com.

 

                Selling, general, and administrative expensesdecreased by $443,823 or 15.7% for the current 2001 fiscal year as compared tothe 2000 fiscal year overall.  Thedecreases in S G & A expenses were primarily attributable to decreases insalaries of approximately $144,000, consultants and temporary personnel ofapproximately $84,000, sales commissions of approximately $89,000, user groupand trade show expenses of approximately $50,000, bad debt expense ofapproximately $26,000, as well as decreased costs in travel, and other sellingrelated expenses.  As discussedpreviously, as a result of the industry slowdown, management reduced overheadand curtailed personnel recruitment in the later half of the 2000 fiscalyear.  However, the Company anticipatesincreasing its expenditures attributable to sales and marketing in fiscal 2002if market conditions continue to improve enough in order to justify suchexpenditures.

 

                Research and development expenses increasedby $17,887 or 2.3% for fiscal year 2001, as compared to fiscal 2000.  The increase is attributable to increases insalaries and other personnel related expenses. For its 2001 and 2000 fiscal years, the Company capitalized softwarecosts of $424,022 and $426,850, respectively, which are generally amortizedover a three to five-year period.  Suchcosts were attributable to enhancements and new modules for the Company’s CISproducts, new applications under development, and modifications associated withYear 2000 compliance.  Management anticipatesits overall research and development activities will increase in fiscal 2002.

 

                Interest and other income was $21,630 forfiscal 2001 as compared to $22,905 for fiscal 2000.

 

                Interest and other expense was $9,894 forfiscal 2001 as compared to $7,146 for fiscal 2000 due to the level ofborrowings on the Company’s line of credit with its bank.

 

                The Company incurred a net loss of $512,650in fiscal 2001, compared to a net loss of $618,979 for fiscal 2000.  The net loss in fiscal 2001 included approximately$348,000 in development expenses for Xymed.Com.  The Company’s basic and diluted loss per share was $.16 forfiscal 2001 as compared to basic and diluted loss per share of $ .20 in fiscal2000.

 

                The Company is currently in a losscarry-forward position, primarily due to the operating losses incurred prior toAugust 31, 1993.  The net operating losscarry-forwards balance as of the August 31, 2001 was approximately $3,600,000,compared to $3,200,000 in the prior year. The net operating loss carry-forward is available to offset futuretaxable income through 2021.  TheCompany also has investment and research and experimentation tax creditcarry-forwards to offset future income tax payable of approximately $357,000that expire at various dates through 2021.

 

                The major temporary tax differences that areexpected to reverse next year are deferred revenue, allowance for doubtfulaccounts, accrued vacation, Section 263A Unicap inventory, and componentinventory reserve.  However, the Companyexpects new temporary differences to be established in these years, which willeither reduce or exceed the reversing temporary differences.

 

                The Company annually evaluates therealization of the net deferred tax asset, taking into consideration priorearnings history, projected operating results, and the reversal of temporarytax differences.  At August 31, 2001,the Company evaluated the net deferred tax asset, taking into considerationoperating results, and determined that a valuation allowance of approximately $256,700should be established.  The Companybelieves it is more likely than not that the net deferred tax asset of$1,230,500 will be realized.

 

 

**Capital Resources and Liquidity**

 

                The Company’s primary need for capital hasbeen to invest in software development, and in computers and related equipmentfor its internal use.  The Companyinvested $424,022 and $426,850 during fiscal 2001 and 2000 in softwaredevelopment.  These expenditures relatedto the new version of the Company’s LIS product, CyberLAB II®, and the release of itsrevised PIS, CyberMED®,its new RIS, CyberRAD®,and other product enhancements.  TheCompany anticipates expending additional sums during fiscal 2002 on HIPAArelated enhancements to all its products and the further development of the Webuser interfaces.  During fiscal 2001,the Company invested an aggregate of $114,261 in additions to fixed assets,which included approximately $77,000 associated with the purchase of anemergency backup generator necessitated by California’s perceived energycrisis.

 

                As of August 31, 2001, the Company’s workingcapital amounted to $667,104 compared to $858,623 as of August 31, 2000.  The Company’s current ratio was 1.3 atAugust 31, 2001 compared to 1.4 in the prior year.  At August 31, 2001 the Company’s credit facilities with its bankconsisted of a revolving line of credit of $500,000, of which $239,351 wasoutstanding.  The bank credit agreementis through February 1, 2002 and contains certain financial ratiorequirements.  As of August 31, 2001, theCompany was in compliance with all of the covenants except for a covenantrelated to tangible net worth for which the Company had obtained a waiver fromthe bank.

 

                Cash flows from operating activities were$419,996 for the 2001 fiscal year, compared to $610,495 for the 2000 fiscalyear.  The decrease in cash flow fromoperating activities was primarily attributable to the decrease in the net lossincurred in the 2001 fiscal year.

 

                Net cash used in investing activities was$538,283 for the 2001 fiscal year, compared to $658,765 used in investingactivities during the 2000 fiscal year. The change was the result of a decrease in capital expenditures comparedto the prior fiscal year.

 

                Cash flows from financing activities provided$161,232 during the 2001 fiscal year compared to $16,062 provided by financingactivities in fiscal 2000.  The changeresulted primarily from borrowings under the revolving line of credit andcapital lease obligations net of the repayment of notes payable and capitalleases.

 

                The Company believes that its projected cashflow from operations, together with its bank credit facilities, should besufficient to fund its working capital requirements for its 2002 fiscal year.

 

 

**Seasonality, Inflation and Industry Trends**

 

                The Company's sales are generally lower inthe summer and higher in the fall, winter and spring.  Inflation has had no material effect on the Company's businesssince the Company has been able to adjust the prices of its products andservices.  Management believes that mostphases of the healthcare segment of the computer industry will continue to behighly competitive, and that potential healthcare reforms including thosepromulgated by HIPAA may have a long-term positive impact on its business.  In addition, management believes that theindustry will be marked with more significant technological advances, whichwill improve the quality of service and reduce costs.  The Company is poised to meet these challenges by continuing toemploy new technologies when they become available, diversifying its productofferings, improving and expanding its services, and by constantly enhancingits software applications.

 

 

**New AccountingPronouncements**

 

                In June 2001, the Financial AccountingStandards Board finalized FASB Statements No. 141, Business Combinations (SFAS141) and No. 142, Goodwill and Other Intangible Assets (SFAS 142).  SFAS 141 requires the use of the purchasemethod of accounting and prohibits the use of pooling-of-interest method ofaccounting for business combinations initiated after June 30, 2001.  SFAS 141 also requires that the Companyrecognize acquired intangible assets apart from goodwill if the acquiredintangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30,2001 and for purchase business combinations completed on or after July 1,2001.  It also requires, upon adoptionof SFAS 142, that the Company reclassify the carrying amounts of intangibleassets and goodwill based on the criteria in SFAS 141.

 

                SFAS 142 requires, among other things, thatcompanies no longer amortize goodwill, but instead test goodwill for impairmentat least annually.  In addition, SFAS142 requires that the Company identify reporting units for the purposes ofassessing potential future impairments of goodwill, reassess the useful livesof other existing recognized intangible assets, and cease amortization ofintangible assets with an indefinite useful life.  An intangible asset with an indefinite useful life should betested for impairment in accordance with the guidance in SFAS 142.  SFAS 142 is required to be applied in fiscalyears beginning after December 5, 2001 to all goodwill and other intangibleassets recognized at that date, regardless of when those assets were initiallyrecognized.  SFAS 142 requires theCompany to complete a transitional goodwill impairment test six months from thedate of adoption.  The Company is alsorequired to reassess the useful lives of other intangible assets within thefirst interim quarter after adoption of SFAS 142.  The Company is assessing the implications of SFAS 141 and SFAS142 but has not yet determined how the adoption of these pronouncements willimpact its financial position and results of operation.

 

                SFAS 143,Accounting for Asset Retirement Obligations, was issued in June 2001 andis effective for fiscal years beginning after June 15, 2002.  SFAS 143 requires that any legal obligationrelated to the retirement of long-lived assets be quantified and recorded as aliability with the associated asset retirement cost capitalized on the balancesheet in the period it is incurred when a reasonable estimate of the fair valueof the liability can be made.

 

                SFAS 144, Accounting for the Impairment orDisposal of Long-Lived Assets, was issued in August 2001 and is effective forfiscal years beginning after December 15, 2001.  SFAS 144 provides a single, comprehensive accounting model forimpairment and disposal of long-lived assets and discontinued operations.

 

                SFAS 143 and SFAS 144 will be adopted ontheir effective dates, and adoption is not expected to result in any materialeffects on the Company’s financial statements.

 

 

**Item 7. Financial Statements.**

 

                For a list of financial statements filed aspart of this report, see index to Financial Statements and Financial StatementSchedules on page F-1.

 

 

**Item 8. Changes in and Disagreements with Accountants on Accounting andFinancial Disclosures.**

 

                Not applicable.

 

 

**PART III**

 

**Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliancewith Section 16(a) of the Exchange Act.**

 

                Background information concerning eachpresent Director, executive officer and each nominee for the office of Directorof Company is as follows:

 
|                         |   | Office with  Company;                                                                                                                                                                                                         |   | Year First        |
|------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|
| Name, Age                    |   | Background Information                                                                                                                                                                                                        |   | Elected  Director |
|                         |   |                                                                                                                                                                                                                          |   |              |
|                         |   |                                                                                                                                                                                                                          |   |              |
| Bruce M.  Miller, 55         |   | Chairman of  the Board and Chief Technology Officer since its inception in 1978.                                                                                                                                              |   | 1978              |
|                         |   |                                                                                                                                                                                                                          |   |              |
|                         |   |                                                                                                                                                                                                                          |   |              |
|                         |   |                                                                                                                                                                                                                          |   |              |
|                         |   |                                                                                                                                                                                                                          |   |              |
| Steven M.  Besbeck, 53       |   | 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, 57          |   | Vice  President/Operations since 1982 and Secretary.                                                                                                                                                                          |   | 1987              |
|                         |   |                                                                                                                                                                                                                          |   |              |
|                         |   |                                                                                                                                                                                                                          |   |              |
| Lawrence S.  Schmid, 60      |   | President  and Chief Executive Officer, Strategic Directions International, Inc., a  management consulting firm specializing in technology companies.                                                                         |   | 1991              |
|                         |   |                                                                                                                                                                                                                          |   |              |
| Robert S.  Fogerson, Jr., 48 |   | General  Manager, of ViroMED Laboratories, Inc., a leading laboratory providing  clinical testing services since 1998.   Mr. Fogerson had previously served in various capacities at PharmChem  Laboratories since 1975. |   | 1992              |

 

 

 

**Section 16(a) Beneficial Ownership ReportingCompliance**

 

                Section 16(a) of the Securities Exchange Actof 1934 (1934 Act) requires the Company’s directors and executive officers, andpersons who own more than 10% of a registered class of the Company’s equitysecurity, to file with the Securities and Exchange Commission and the AmericanStock Exchange (AMEX) reports of ownership and changes in ownership of commonstock and other equity securities of the Company.  Officers, directors and greater than 10% shareholders arerequired by SEC regulation to furnish the Company with copies of all Section16(a) forms they file.

 

                To the Company’s knowledge, based solely on areview of the copies of such reports furnished to the Company and writtenrepresentations that no other reports were required, during the fiscal yearended August 31, 2001, all Section 16(a) filing requirements applicable to itsofficers, directors and greater than ten percent beneficial owners werecomplied with.

 

 

**Item 10. Executive Compensation.**

 

                Incorporated by reference from “ExecutiveCompensation” in the Definitive Proxy Statement to be filed with the Securitiesand Exchange Commission for the 2002 Annual Meeting of the Company’sShareholders.

 

**Item 11. Security Ownership of CertainBeneficial Owners and Management.**

 

                Incorporated by reference from “SecurityOwnership of Certain Beneficial Owners and Management” in the Definitive ProxyStatement to be filed with the Securities and Exchange Commission for the 2002Annual Meeting of the Company’s Shareholders.

 

**Item 12. Certain Relationships and RelatedTransactions.**

 

                Incorporated by reference from “CertainRelationships and Related Transactions” in the Definitive Proxy Statement to befiled with the Securities and Exchange Commission for the 2002 Annual Meetingof 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 andWestern States Pharmacy Consultants, Ltd.

 

                4.9(4)        Warrant Agreement and Warrant Certificate between CCA andJames L.D. Roser.

 

                4.10(4)      Warrant Agreement and Warrant Certificate between CCA and TheRoser Partnership.

 

                4.11(4)      Warrant Agreement and Warrant Certificate between CCA andEpigen, 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 plansand 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.

 

                4.8(7)            1997Stock 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, 2001.                                  |
|   |                                                                                                                                   |   |
| (7)    | Previously  filed as an exhibit to the Company's Proxy Statement and Notice of Annual  Meeting of Shareholders dated March 24, 1997.   |
|        |                                                                                                                                        |  |  |

 

**SIGNATURES**

 

                In accordance with Section 13 or 15(d) of theExchange Act, the Company has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 

CREATIVE COMPUTER APPLICATIONS, INC.

 

 
| Dated:  November 20, 2001 |   | 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 theExchange Act, this report has been signed below by the following persons onbehalf of the Company and in the capacities and on the dates indicated.

 
| Signatures |   | Title |   | Date |  
 

 

 

 

 

 

 

 

 

 

/S/ Bruce M.  Miller

 

Chairman of  the Board and Chief

 

November 20,  2001

Bruce M.  Miller

 

Technology  Officer

 

 

 

 

 

 

 

 

 

 

 

 

/S/ Steven  M. Besbeck

 

President,  Chief Executive Officer,

 

November 20,  2001

Steven M.  Besbeck

 

Chief  Financial Officer and Director

 

 

 

 

 

 

 

 

 

 

 

 

/S/ James R.  Helms

 

Vice  President, Operations, Secretary

 

November 20,  2001

James R.  Helms

 

and Director

 

 

 

 

 

 

 

 

 

 

 

 

/S/ Lawrence  S. Schmid

 

Director

 

November 20,  2001

Lawrence S.  Schmid

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/S/ Robert  S. Fogerson, Jr.

 

Director

 

November 20,  2001

Robert S.  Fogerson, Jr.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/S/ Anahita  Villafane

 

Controller

 

November 20,  2001

Anahita  Villafane

 

Chief  Accounting Officer

 

 

 

** **

** **

** **

**CREATIVE COMPUTERAPPLICATIONS, INC.**

 

 

 

 

 

 

 

**ConsolidatedFinancial Statements**

 

 

**For the Years EndedAugust 31, 2001 and 2000**

 

 

 

 

 

 

CREATIVE COMPUTER APPLICATIONS, INC.

 

INDEX

 

 

 

 

**Report of Independent Certified Public  Accountants**

 

 

 

 

 

 

 

 

**Consolidated Financial Statements**

 

 

 

 

 

 

Balance Sheets - August 31, 2001 and 2000

 

 

 

 

 

Statements of Operations - Years ended  August 31, 2001, 2000 and 1999

 

 

 

 

 

Statements of Shareholders' Equity - Years  ended August 31, 2001, 2000 and 1999

 

 

 

 

 

Statements of Cash Flows - Years ended  August 31, 2001, 2000 and 1999

 

 

 

 

 

 

 

**Notes to Consolidated Financial Statements**

 

 

 

 

 

 

 

 

 

 

 

 

Report of Independent Certified Public Accountants

 

 

 

Board ofDirectors and Shareholders

CreativeComputer Applications, Inc.

 

 

                We have audited the accompanying consolidatedbalance sheets of Creative Computer Applications, Inc. as of August 31, 2001and 2000 and the related consolidated statements of operations, shareholders'equity and cash flows for each of the three years in the period ended August31, 2001.  These consolidated financialstatements are the responsibility of the Company's management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audits.

 

                We conducted our audits in accordance withauditing standards generally accepted in the United States of America.  Those standards require that we plan andperform the audits to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

                In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of Creative Computer Applications, Inc. at August 31, 2001and 2000 and the results of its operations and its cash flows for each of thethree years in the period ended August 31, 2001, in conformity with accountingprinciples generally accepted in the United States of America.

 

 

 

 

 

                                                                                                                BDO SEIDMAN, LLP

 

 

 

 

 

Los Angeles, California

October 29, 2001, except forNote 4,

  as to which the date is November 16, 2001

 

**CREATIVE COMPUTER APPLICATIONS, INC.**

** **

**CONSOLIDATEDBALANCE SHEETS**

 

 

 

 

**August 31,**

 

 

 

**2001**

 

**2000**

 

 

 

 

 

 

 

**ASSETS** (Note 4)

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash

 

$

661,008

 

$

618,063

 

Receivables, net (Notes 1 and 2)

 

1,209,872

 

1,230,184

 

Inventory (Note 1)

 

233,737

 

267,796

 

Prepaid expenses

 

142,219

 

126,633

 

Deferred tax asset (Note 7)

 

639,500

 

639,500

 

 

 

 

 

 

 

TOTAL CURRENT ASSETS

 

2,886,336

 

2,882,176

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT, net (Notes 1 and 3)

 

398,179

 

558,451

 

INVENTORY OF COMPONENT PARTS (Note 1)

 

306,496

 

395,631

 

CAPITALIZED SOFTWARE COSTS, net of  accumulated amortization of $999,331 and $744,351 (Note 1)

 

1,337,472

 

1,310,468

 

INTANGIBLES, net (Note 1)

 

104,744

 

170,536

 

DEFERRED TAX ASSET (Note 7)

 

591,000

 

591,000

 

OTHER ASSETS

 

13,796

 

7,601

 

 

 

$

5,638,023

 

$

5,915,863

 

 

 

 

 

 

 

**LIABILITIES AND SHAREHOLDERS’ EQUITY**

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Notes payable to bank (Note 4)

 

$

239,351

 

$

140,000

 

Accounts payable

 

216,087

 

211,136

 

Accrued liabilities:

 

 

 

 

 

Vacation pay

 

159,290

 

184,821

 

Other

 

275,790

 

251,697

 

Deferred service contract income

 

831,873

 

844,926

 

Deferred revenue on system sales (Note 1)

 

474,091

 

390,973

 

Capital lease obligation, current portion  (Note 5)

 

22,750

 

-

 

 

 

 

 

 

 

TOTAL CURRENT LIABILITIES

 

2,219,232

 

2,023,553

 

 

 

 

 

 

 

CAPITAL LEASE OBLIGATION, net of current  portion (Note 5)

 

23,111

 

-

 

 

 

 

 

 

 

COMMITMENTS (Note 5)

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY (Notes 6 and 8):

 

 

 

 

 

Common shares, no par value; 20,000,000  shares authorized; 3,221,025 and 3,173,575 shares issued and outstanding

 

6,108,164

 

6,092,144

 

Accumulated deficit

 

(2,712,484

)

(2,199,834

)

TOTAL SHAREHOLDERS' EQUITY

 

3,395,680

 

3,892,310

 

 

 

$

5,638,023

 

$

5,915,863

 

 

*See notes toconsolidated financial statements.*
****
**CREATIVE COMPUTER APPLICATIONS, INC.**

** **

**CONSOLIDATED STATEMENTS OF OPERATIONS**

** **

 

 

 

**Years ended August 31,**

 

 

 

**2001**

 

**2000**

 

**1999**

 

 

 

 

 

 

 

 

 

NET SYSTEM SALES AND SERVICE REVENUE :

 

 

 

 

 

 

 

(Note 1)

 

 

 

 

 

 

 

System sales

 

$

2,282,254

 

$

4,059,714

 

$

6,113,474

 

Service revenue

 

3,670,760

 

3,164,684

 

2,787,570

 

 

 

 

 

 

 

 

 

TOTAL SYSTEM SALES AND SERVICE REVENUE

 

5,953,014

 

7,224,398

 

8,901,044

 

 

 

 

 

 

 

 

 

COST OF PRODUCTS AND SERVICES SOLD:

 

 

 

 

 

 

 

System sales

 

1,748,843

 

2,571,006

 

3,064,737

 

Service revenue

 

1,565,829

 

1,699,466

 

1,485,502

 

 

 

 

 

 

 

 

 

TOTAL COST OF PRODUCTS AND SERVICES SOLD

 

3,314,672

 

4,270,472

 

4,550,239

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

2,638,342

 

2,953,926

 

4,350,805

 

 

 

 

 

 

 

 

 

RESEARCH AND DEVELOPMENT EXPENSE

 

781,357

 

763,470

 

721,818

 

 

 

 

 

 

 

 

 

SELLING AND ADMINISTRATIVE EXPENSES

 

2,381,371

 

2,825,194

 

2,834,518

 

 

 

 

 

 

 

 

 

OPERATING INCOME (LOSS)

 

(524,386

)

(634,738

)

794,469

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

Interest income

 

21,630

 

22,905

 

10,697

 

Interest and other expense

 

(9,894

)

(7,146

)

(41,080

)

 

 

 

 

 

 

 

 

TOTAL OTHER INCOME (EXPENSE)

 

11,736

 

15,759

 

(30,383

)

 

 

 

 

 

 

 

 

INCOME (LOSS) BEFORE INCOME TAX PROVISION

 

(512,650

)

(618,979

)

764,086

 

 

 

 

 

 

 

 

 

INCOME TAX PROVISION (Note 7)

 

-

 

-

 

80,000

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

 

$

(512,650

)

$

(618,979

) 

$

684,086

 

 

 

 

 

 

 

 

 

EARNINGS (LOSS) PER SHARE (Notes 1, 6 and  8):

 

 

 

 

 

 

 

Basic

 

$

(.16

)

$

(.20

) 

$

.23

 

Diluted

 

$

(.16

)

$

(.20

)

$

.21

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF SHARES  OUTSTANDING (Note 8):

 

 

 

 

 

 

 

Basic

 

3,188,375

 

3,149,358

 

2,979,060

 

Diluted

 

3,188,375

 

3,149,358

 

3,281,634

 

 

*See notes toconsolidated financial statements.*

 
**
**CREATIVE COMPUTER APPLICATIONS, INC.**

** **

**CONSOLIDATED STATEMENTS OF SHAREHOLDER'SEQUITY**

** **

 

 

 

**Common   Shares**

 

**Common   Shares   Amount**

 

**Accumulated   Deficit**

 

**Total   Shareholders’ Equity**

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options (Note 6)

 

63,250

 

57,825

 

-

 

57,825

 

 

 

 

 

 

 

 

 

 

 

Issuance of common shares

 

3,400

 

5,725

 

-

 

5,725

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

-

 

-

 

(618,979

)

(618,979

)

 

 

 

 

 

 

 

 

 

 

BALANCE, August 31, 2000

 

3,173,575

 

6,092,144

 

(2,199,834

)

3,892,310

 

 

 

 

 

 

 

 

 

 

 

Issuance of common shares

 

47,450

 

16,020

 

-

 

16,020

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

-

 

-

 

(512,650

)

(512,650

)

 

 

 

 

 

 

 

 

 

 

BALANCE, August 31, 2001

 

3,221,025

 

$

6,108,164

 

$

(2,712,484

)

$

3,395,680

 

 

*See notes toconsolidated financial statements.*
**
**CREATIVE COMPUTER APPLICATIONS, INC.**

** **

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

** **

 

**Increase (Decrease) in Cash**(Note 10)

 

 

 

**Years ended August 31,**

 

 

 

**2001**

 

**2000**

 

**1999**

 

 

 

 

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net income (loss)

 

$

(512,650

)

$

(618,979

) 

$

684,086

 

Adjustments to reconcile net income (loss)  to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

340,325

 

319,205

 

271,396

 

Amortization of capitalized software costs

 

397,018

 

389,072

 

285,599

 

Provision for doubtful accounts

 

14,004

 

40,023

 

102,399

 

Gain on disposal of property and equipment

 

-

 

-

 

(2,814

)

Deferred taxes

 

-

 

-

 

80,000

 

Increase (decrease) from changes in:

 

 

 

 

 

 

 

Receivables

 

6,308

 

1,625,740

 

(1,024,745

)

Inventories

 

123,194

 

10,645

 

152,698

 

Prepaid expenses

 

(15,586

)

26,043

 

(72,769

)

Other assets

 

(6,195

)

14,635

 

8,310

 

Accounts payable

 

4,951

 

(286,632

)

(9,237

)

Accrued liabilities

 

(1,438

)

(169,581

)

82,392

 

Deferred service income

 

(13,053

)

172,528

 

(81,945

)

Deferred revenue on system sales

 

83,118

 

(912,204

)

665,159

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

419,996

 

610,495

 

1,140,529

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

Additions to property and equipment

 

(114,261

)

(231,915

)

(211,028

)

Additions to capitalized software costs

 

(424,022

)

(426,850

)

(429,791

)

Proceeds from insurance settlement of  property and equipment

 

-

 

-

 

5,918

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

(538,283

)

(658,765

)

(634,901

)

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

Borrowings on notes payable

 

200,000

 

-

 

87,488

 

Payments on notes payable

 

(100,649

)

(47,488

)

(511,609

)

Additions to capital lease

 

68,251

 

-

 

-

 

Payments on capital lease obligations

 

(22,390

)

-

 

(4,679

)

Proceeds from issuance of stock

 

16,020

 

5,725

 

-

 

Exercise of stock options and warrants

 

-

 

57,825

 

197,567

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) financing  activities

 

161,232

 

16,062

 

(231,233

)

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH

 

42,945

 

(32,208

)

274,395

 

 

 

 

 

 

 

 

 

CASH,beginning of year

 

618,063

 

650,271

 

375,876

 

 

 

 

 

 

 

 

 

CASH, end of year

 

$

661,008

 

$

618,063

 

$

650,271

 

 

*See notes toconsolidated financial statements.*

 

**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

**                Business Activities**

 

                Creative Computer Applications, Inc. (the"Company"), a California corporation, was formed in 1978.  The Company develops, assembles, markets,installs and services computer-based Clinical Information Systems and productswhich automate the acquisition and management of clinical data for thehealthcare industry.  The Company sells itsproducts and systems, including the implementation of such products andsystems, primarily to hospitals, clinics, reference laboratories and otherhealthcare institutions.  The Companyalso generates revenue through service contracts with customers to providetechnical support and repair services for specified periods of time.

 

                The accompanying consolidated financialstatements include the accounts of Creative Computer Applications, Inc. and itswholly-owned subsidiary, Xymed.com, which was formed in September 1999.  All material intercompany transactions havebeen eliminated.

 

**                Cash and Cash Equivalents**

 

                The Company considers all liquid assets withan initial maturity of three months or less to be cash equivalents.

 

**                Accounts Receivable and Concentration of Credit Risk**

 

                Accounts receivable potentially exposes theCompany to concentrations of credit risk. The Company provides credit to alarge number of hospitals, clinics, reference laboratories and other healthcareinstitutions in various geographical areas. The Company performs ongoing credit evaluations and maintains a generalsecurity interest in the item sold until full payment is received.

 

                The Company maintains the majority of itscash and cash equivalents in a number of commercial bank accounts.  Accounts at these banks are guaranteed bythe Federal Deposit Insurance Corporation (“FDIC”) up to $100,000 each.  At August 31, 2001, the Company hadapproximately $145,498 at a bank, which was in excess of the FDIC insurancelimit.

 

**                Inventories**

 

                Inventories consist primarily of computer hardwareheld for resale and are stated at the lower of cost or market (net realizablevalue).  Cost is determined using thefirst-in, first-out method. Supplies are charged to expense as incurred.

 

                The Company also maintains an inventory poolof component parts to service systems previously sold, which is classified asnon-current in the accompanying balance sheets.  Such inventory is carried at the lower of cost or market and ischarged to cost of sales based on usage. Allowances are made for quantities on hand in excess of estimated futureusage.

 
****
                **Property and Equipment**

 

                Property, equipment, and leaseholdimprovements are stated at cost less accumulated depreciation.  Depreciation of machinery and equipment,furniture and fixtures, and data processing equipment is computed for financialreporting purposes using the straight-line method over the estimated usefullife of the related asset, ranging from three to five years.  Amortization of leasehold improvements iscomputed using the straight-line method over the lease term.  Accelerated depreciation methods are usedfor income tax reporting purposes.

 

**                Capitalized Software Costs**

 

                Softwarecosts incurred internally in creating computer software products are expenseduntil technological feasibility has been established upon completion of adetailed program design.  Thereafter,all software development costs are capitalized until the point that the productis ready for sale and subsequently reported at the lower of unamortized cost ornet realizable value.  The Companyconsiders annual amortization of capitalized software costs based on the ratioof current year revenues by product to the product's total estimated revenuesmethod, subject to an annual minimum based on straight-line amortization overthe product's estimated economic useful life, not to exceed five years.  The Company periodically reviews capitalizedsoftware costs for impairment where the fair value is less than the carryingvalue.

 

                During the years ended August 31, 2001, 2000and 1999, the Company capitalized $424,022, $426,850 and $429,791 of softwaredevelopment costs.  Amortization expenseof capitalized software development costs, included in cost of sales, for theyears ended August 31, 2001, 2000, 1999 amounted to $397,018, $389,072 and$285,599.

 

**                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-linemethod over the estimated useful life, not to exceed ten years.  Accumulated amortization was $503,180 and$437,388 at August 31, 2001 and 2000. The Company periodically reviews intangible assets for impairment wherethe fair value is less than the carrying value.

 
****
**                Revenue Recognition**

 

                                *System Sales*

 

                In accordance with Statement of Position97-2, “Software Revenue Recognition”, (“SOP 97–2”), the Companyrecognizes revenue on sales of Clinical Information Systems and dataacquisition products when the following criteria are met: (i) persuasiveevidence of an arrangement exists, (ii) delivery has occurred and thesystem is functional, (iii) the vendor’s fee is fixed or determinable and(iv) collectability is probable.  Alsoin accordance with SOP 97-2, the Company allocates the fee of a multipleelement contract to the various elements based on vendor-specific objectiveevidence of fair value.  Revenueallocated to a specific element is recognized when the basic revenuerecognition criteria above is met for that element.  If sufficient vendor-specific objective evidence for all elementsdoes not exist to allocate revenue to the elements, all revenue from thearrangement generally would be deferred until such evidence does exist or untilall elements have been delivered. Revenues related to installation of systems requiring substantial futureperformance by the Company are recognized using the percentage-of-completionmethod based on meeting key milestone events over the terms of thecontract.  Implementation revenue,consisting primarily of installation and training, is recognized as revenue asthe services are performed.

 

                Staff Accounting Bulletin 101, “RevenueRecognition”, (“SAB 101”).  SAB 101provides interpretive guidance on the recognition, presentation and disclosureof revenue in financial statements.  SAB101 expands on the issues not explicitly covered in SOP 97-2.  The Company elected early adoption of SAB101 for the current fiscal year beginning September 1, 2000.

 

                As a result of the Company applying theprovisions of SOP 97-2 and SAB 101, the Company recorded deferred revenueon system sales of $474,091 and $390,973 at August 31, 2001 and 2000.

 

                                *ServiceRevenue*

 

                Service revenues are recognized ratably overthe contractual period (usually one year) or as the services are provided.  These services are not essential to thefunctionality of any other elements and are separately stated.

 

                                *DeferredRevenue and Income*

 

                Deferred revenue on system sales and deferredservice contract income represent cash received in advance or accountsreceivable from system and service sales of which the above criteria have notbeen met for the current reporting of income.

 
****
                **Stock Based Compensation**

 

                Statement of Financial Accounting StandardsNo. 123, "Accounting for Stock-based Compensation" (SFASNo. 123), establishes a fair value method of accounting for stock-basedcompensation plans and for transactions in which a company acquires goods orservices from non-employees in exchange for equity instruments.  SFAS No. 123 also gives the option toaccount for stock-based employee compensation in accordance with AccountingPrinciples Board Opinion No. 25 (APB 25), "Accounting for Stockissued to Employees," or SFAS No. 123.  The Company elected to follow APB 25 which measurescompensation cost for employee stock options as the excess, if any, of the fairmarket price of the Company's stock at the measurement date over the amount anemployee must pay to acquire stock.

 

                SFAS No. 123 has not been adoptedrelated to the accounting for stock-based employee compensation, however, fordisclosure purposes, SFAS 123 requires that companies measure the cost ofstock-based employee compensation at the grant date based on the value of theaward and recognize this cost over the service period.  The value of the stock-based award isdetermined using a pricing model whereby compensation cost is the excess of thefair value of the stock as determined by the model at grant date or othermeasurement date over the amount an employee must pay to acquire the stock.  The Company has adopted this method ofreporting.

 

**                Earnings Per Share**

 

                The Company computes earnings (loss) percommon share under Statement of Financial Accounting Standards No. 128,“Earnings per Share” (SFAS No. 128), which requires presentation of Basic andDiluted earnings (loss) per share. Basic earnings (loss) per share includes no dilution and is computed bydividing income (loss) available to common shareholders by the weighted averagenumber of common shares outstanding for the period.  Diluted earnings (loss) per share reflects the potential dilutionof securities that could share in the earnings of an entity, such as stockoptions, warrants or convertible debentures, unless antidilutive (see Note 9).

 

**                Income Taxes**

 

                The Company accounts for income taxes inaccordance with the Statement of Financial Accounting Standards (SFAS) No. 109,"Accounting for Income Taxes.  SFASNo. 109 requires a Company to use the asset and liability method of accountingfor income taxes.  Under the asset andliability method, deferred income taxes are recognized for the tax consequencesof "temporary differences" by applying enacted statutory tax ratesapplicable to future years to differences between the financial statementcarrying amounts and the tax bases of existing assets and liabilities.  Under SFAS No. 109, the effect on deferredincome taxes of a change in tax rates is recognized in income in the periodthat includes the enactment date.

 

**                Accounting Estimates**

 

                Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.
****
                **Fair Value of Financial Instruments**

 

                Quoted market prices generally are notavailable for all of the Company's financial instruments.  Accordingly, fair values are based onjudgments regarding current economic conditions, risk characteristics ofvarious 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 assumptionsused to estimate the fair value of each class of the Company's financialinstruments is as follows:

 

                Cash, receivables, accounts payable, accruedliabilities, deferred service contract income and deferred revenue on systemsales are recorded at carrying amounts which approximate fair value due to theshort maturity of these instruments.

 

**                New Accounting Pronouncements**

 

                In June 2001, the Financial AccountingStandards Board finalized FASB Statements No. 141, Business Combinations (SFAS141) and No. 142, Goodwill and Other Intangible Assets (SFAS 142).  SFAS 141 requires the use of the purchasemethod of accounting and prohibits the use of the pooling-of-interest method ofaccounting for business combinations initiated after June 30, 2001.  SFAS 141 also requires that the Companyrecognize acquired intangible assets apart from goodwill if the acquiredintangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30,2001 and for purchase business combinations completed on or after July 1,2001.  It also requires, upon adoptionof SFAS 142, that the Company reclassify the carrying amounts of intangibleassets and goodwill based on the criteria in SFAS 141.

 

                SFAS 142 requires, among other things, thatcompanies no longer amortize goodwill, but instead test goodwill for impairmentat least annually.  In addition, SFAS142 requires that the Company identify reporting units for the purposes ofassessing potential future impairments of goodwill, reassess the useful livesof other existing recognized intangible assets, and cease amortization ofintangible assets with an indefinite useful life.  An intangible asset with an indefinite useful life should betested for impairment in accordance with the guidance in SFAS 142.  SFAS 142 is required to be applied in fiscalyears beginning after December 15, 2001 to all goodwill and other intangibleassets recognized at that date, regardless of when those assets were initiallyrecognized.  SFAS 142 requires theCompany to complete a transitional goodwill impairment test six months from thedate of adoption.  The Company is alsorequired to reassess the useful lives of other intangible assets within thefirst interim quarter after adoption of SFAS 142.  The Company is assessing the implications of SFAS 141 and SFAS142 but has not yet determined how the adoption of these pronouncements willimpact its financial position and results of operations.

 

                SFAS 143, Accounting for Asset RetirementObligations, was issued in June 2001 and is effective for fiscal yearsbeginning after June 15, 2002. SFAS 143 requires that any legal obligationrelated to the retirement of long-lived assets be quantified and recorded as aliability with the associated asset retirement cost capitalized on the balancesheet in the period it is incurred when a reasonable estimate of the fair valueof the liability can be made.  TheCompany does not expect adoption to have a material effect on the Company’sfinancial statements.

                SFAS 144,Accounting for the Impairment or Disposal of Long-Lived Assets, was issued inAugust 2001 and is effective for fiscal years beginning after December15, 2001. SFAS 144 provides a single, comprehensive accounting model forimpairment and disposal of long-lived assets and discontinued operations.  The Company is assessing the implications ofSFAS 144 but has not yet determined how the adoption of this pronouncement willimpact its financial position and results of operations.

 

**NOTE 2 -RECEIVABLES**

 

                Receivables are summarized as follows:

 

 

 

**August 31,**

 

 

 

**2001**

 

**2000**

 

 

 

 

 

 

 

Trade accounts

 

$

1,287,372

 

$

1,371,684

 

Allowance for doubtful accounts

 

(77,500

)

(141,500

)

 

 

 

 

 

 

 

 

$

1,209,872

 

$

1,230,184

 

 

**NOTE3 - PROPERTY AND EQUIPMENT**

 

                Property and equipment are summarized asfollows:

 

 

 

**August 31,**

 

 

 

**2001**

 

**2000**

 

 

 

 

 

 

 

Machinery and equipment

 

$

353,037

 

$

276,907

 

Furniture and fixtures

 

338,338

 

337,394

 

Data processing equipment

 

1,390,066

 

1,382,959

 

Leasehold improvements

 

66,938

 

66,938

 

 

 

 

 

 

 

 

 

2,148,379

 

2,064,198

 

Accumulated depreciation and amortization

 

(1,750,200

)

(1,505,747

)

 

 

 

 

 

 

 

 

$

398,179

 

$

558,451

 

 

                At August 31, 2001, the Company had variouscomputer equipment under capital lease agreements in the amount of $68,251 withrelated accumulated amortization thereon of $24,770.

 

                Depreciation and amortization expense forproperty and equipment for the years ended August 31, 2001, 2000 and 1999was $274,533, $254,576 and $203,779.

 

**NOTE4 - NOTES PAYABLE TO BANK**

 

Notes payable to bank are classified as current and are summarized asfollows:

 

 

 

**August 31,**

 

 

 

**2001**

 

**2000**

 

 

 

 

 

 

 

Line of credit of $500,000 with a bank with  interest at the bank's prime rate plus 1% (7.75% at August 31, 2001) and  maturing on February 1, 2002, and collateralized by substantially all of  the Company's assets

 

$239,351

 

$100,000

 

 

 

 

 

 

 

Revolving credit to term loan facility of  $150,000 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.  The term loan  was paid in full in December 2000.

 

-

 

40,000

 

 

 

 

 

 

 

 

 

$239,351

 

$140,000

 

 

                The outstanding note payable to bank iscovered by a note agreement that requires the Company to meet certaincovenants, including various financial ratios. At August 31, 2001, the Company was in compliance with all the covenantsexcept for a covenant related to tangible net worth, for which the Company hadobtained a waiver from the bank.

 

**NOTE 5 - COMMITMENTS**

 

                **Operating Leases**

 

                TheCompany leases office and warehouse space in Calabasas, California under anon-cancelable operating lease expiring in fiscal 2003.  The Company also leases office space inWestminster, Colorado expiring in fiscal 2002.

 

                **Capital Lease**

 

                During the year ended August 31, 2001, theCompany entered into a lease agreement which is classified as a capitallease.  Computer equipment leases havepurchase options at the end of the original lease term.

 

                Future minimumlease payments, by year and in the aggregate, under capital and the facilityleases with initial or remaining terms of one year or more are asfollows:

 

**Fiscal year ending August 31,**

 

**Capital   Leases**

 

**Operating   Leases**

 

 

 

 

 

 

 

2002

 

$

27,817

 

$

218,131

 

2003

 

27,817

 

35,293

 

2004

 

428

 

-

 

 

 

 

 

 

 

Total minimum lease payments

 

56,062

 

$

253,424

 

 

 

 

 

 

 

Less amount representing interest

 

(10,201

)

 

 

 

 

 

 

 

 

Present value of net minimum lease payment

 

45,861

 

 

 

Less current portion

 

(22,750

)

 

 

 

 

 

 

 

 

Total minimum lease payments

 

$

23,111

 

 

 

 

                Rent expense for the years ended August 31,2001, 2000 and 1999 was approximately $231,000, $230,000 and $232,000.

 

**NOTE 6 - STOCK OPTION PLANS AND WARRANTS**

 

                During 1997, the Company adopted the 1997Non-Qualified and Incentive Stock Option Plans upon termination of the 1992Plans.  At August 31, 2001, the 1992plans have 340,000 options outstanding and exercisable.  Under the 1997 Non-Qualified Stock OptionPlan, the Company may grant a maximum of 300,000 common shares (officers anddirectors may acquire no more than 150,000 common shares) and no options may begranted at a price less than 85 percent of the fair market value of the commonshares on the date of grant.  Under the1997 Incentive Stock Option Plan, the Company may grant a maximum of 500,000 commonshares (officers and directors may acquire no more than 250,000 commonshares).  In addition, under the 1997Incentive Stock Option Plan, options can not be granted at a price less than100 percent of the fair market value of the common shares on the date of grantfor officers, directors and employees who own less than 10 percent of theCompany’s common shares and not less than 110 percent of fair market value forthose officers, directors, and employees who own 10 percent or more of theCompany’s common shares.  Under the 1997Plans, options granted to optionees owning less than 10 percent of theCompany’s outstanding voting securities may exercise their options within tenyears from the date of grant.  Optionsgranted to optionees owning 10 percent or more of the Company’s outstandingvoting securities have an exercise term of no more than five years from thedate of grant.  No options under eitherplan can be exercised if the optionee had been previously granted an optionthat had not been exercised or had not expired.  No options can be exercised during the first year of the optionterm.  At August 31, 2001, the 1997plans have 332,000 options outstanding and 165,125 options exercisable.  These plans expire in 2007.

The Company has also granted special options approved by the Board ofDirectors to officers and directors and financial consultants.  The options were granted at the fair marketvalue at the date of grant and are exercisable over periods ranging from two tofive years after which they expire. 300,000 shares of the special grants are included in the non-qualifiedplan shares outstanding at August 31, 2001.

 

                In December 1998, the Company's board ofdirectors amended the exercise price of all outstanding options with anexercise price above $1.25 per share, or in the case of owners of 10% or moreof the Company, with outstanding shares above $1.38.  The exercise price became $.90 and $.99 per share, respectively.

 

                During fiscal 1999, the Company issued to afinancial consultant a warrant to purchase a total of 125,000 common shares ofthe Company exercisable at $1.50 per share through June 2003.

 

                Option and warranty activity through August31, 2001 is summarized below:

 

** **

** **

**Non-Qualified  Plans**

** **

**Incentive  Plans**

** **

**Warrants**

** **

** **

** **

**Number   of Shares**

** **

**Weighted   Average   Exercise   Price**

** **

**Number   of Shares**

** **

**Weighted   Average   Exercise   Price**

** **

**Number   of Shares**

** **

**Weighted   Average   Exercise   Price**

** **

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 1, 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 granted at $1.00

 

40,000

 

$

1.00

 

195,000

 

$

1.00

 

-

 

-

 

Options canceled at $.90

 

-

 

-

 

(23,750

)

$

0.90

 

-

 

-

 

Options expired at $.90

 

(49,755

)

$

0.90

 

(3,000

)

$

0.90

 

-

 

-

 

Options exercised range from $.90 to $.99

 

(17,500

)

$

0.93

 

(45,750

)

$

0.91

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options and warrants outstanding at August 31, 2000

 

470,000

 

$

0.91

 

292,815

 

$

0.97

 

125,000

 

$

1.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options canceled range from $.90 to $1.00

 

-

 

-

 

(36,000

)

$

0.98

 

-

 

-

 

Options expired range from $.90 to $0.99

 

(20,000

)

$

0.92

 

(34,815

)

$

0.90

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options and warrants outstanding at August 31, 2001

 

450,000

 

$

0.91

 

222,000

 

$

1.00

 

125,000

 

$

1.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options and warrants exercisable at August 31, 2001

 

411,250

 

$

0.91

 

93,875

 

$

0.97

 

125,000

 

$

1.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options available for grant at August 31, 2001

 

175,000

 

 

 

293,000

 

 

 

 

 

 

 

                Informationrelating to stock options and warrants, at August 31, 2001 summarized byexercise price are as follows:

 

 

 

**Outstanding**

 

**Exercisable**

 

 

 

 

 

**Weighted Average**

 

**Weighted Average**

 

Exercise Price

 

 

 

**Life**

 

**Exercise**

 

 

 

**Exercise**

 

Per Share

 

**Shares**

 

**(Months)**

 

**Price**

 

**Shares**

 

**Price**

 

 

 

 

 

 

 

 

 

 

 

 

 

Incentive Stock Option Plan:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$    0.90

 

47,000

 

11.2

 

$

0.90

 

41,375

 

$

0.90

 

$    0.99

 

15,000

 

12.3

 

$

0.99

 

12,500

 

$

0.99

 

$    1.00

 

120,000

 

47.0

 

$

1.00

 

30,000

 

$

1.00

 

$    1.10

 

40,000

 

47.0

 

$

1.10

 

10,000

 

$

1.10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

222,000

 

37.1

 

$

1.00

 

93,875

 

$

0.97

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Qualified Stock Option Plan:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$    0.90

 

395,000

 

23.6

 

$

0.90

 

386,250

 

$

0.90

 

$    0.99

 

15,000

 

5.7

 

$

0.99

 

15,000

 

$

0.99

 

$    1.00

 

40,000

 

47.0

 

$

1.00

 

10,000

 

$

1.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

450,000

 

25.1

 

$

0.91

 

411,250

 

$

0.91

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$1.50

 

125,000

 

21.0

 

$

1.50

 

125,000

 

$

1.50

 

 

 

                All stock options issued to employees have anexercise price not less than the fair market value of the Company's commonstock on the date of grant.  Inaccordance with accounting for such options utilizing the intrinsic valuemethod whereby stock-based compensation is determined based on the fair valueof the grant dates consistent with the method of SFAS No. 123, theCompany's net income (loss) and earnings (loss) per share for the years endedAugust 31, 2001, 2000 and 1999 would have been decreased to the pro formaamounts presented below.

 

 

 

**August 31,**

 

 

 

**2001**

 

**2000**

 

**1999**

 

 

 

 

 

 

 

 

 

Net income (loss), as reported

 

$

(512,650

)

$

(618,979

)

$

684,086

 

Net income (loss), pro forma

 

(544,572

)

(625,327

)

630,044

 

 

 

 

 

 

 

 

 

Basic net earnings (loss) per share, as  reported

 

(0.16

)

(0.20

)

0.23

 

Basic net earnings (loss) per share, pro  forma

 

(0.16

)

(0.20

)

0.21

 

 

 

 

 

 

 

 

 

Diluted net earnings (loss) per share, as  reported

 

(0.16

)

(0.20

)

0.21

 

Diluted net earnings (loss) per share, pro  forma

 

(0.17

)

(0.20

)

0.19

 

 

                The fair value of option grants is estimatedon the date of grants utilizing the Black-Scholes option pricing with thefollowing weighted average assumptions for grants in 2000 and 1999; expectedlife of options, 5 years and 2 years, respectively, expected volatility of 19%and 18%, respectively, and risk-free interest rate of 6.1% and 4.5%,respectively.  The weighted average fairvalue on the date of grants for options granted during 2000 and 1999 was $0.31and $0.08 per option.  The Company didnot grant any options during the year ended August 31, 2001.

 

**NOTE 7 - INCOME TAX PROVISION (BENEFIT)**

 

                The provision (benefit) for income taxesconsist of the following:

 

 

 

**August 31,**

 

 

 

**2001**

 

**2000**

 

**1999**

 

 

 

 

 

 

 

 

 

Current taxes:

 

 

 

 

 

 

 

Federal

 

$

-

 

$

-

 

$

-

 

State

 

-

 

2,300

 

4,600

 

 

 

 

 

 

 

 

 

Deferred

 

 

 

 

 

 

 

State

 

-

 

(2,300

)

-

 

Federal

 

(21,400

)

(235,300

)

175,400

 

 

 

 

 

 

 

 

 

 

 

(21,400

)

(235,300

)

180,000

 

 

 

 

 

 

 

 

 

Change in valuation allowance

 

21,400

 

235,300

 

(100,000

)

 

 

 

 

 

 

 

 

Income tax provision (benefit)

 

$

-

 

$

-

 

$

80,000

 

 

                Income tax provision (benefit) differs fromthe amount obtained by applying the statutory federal income tax rate to incomebefore income tax expense as follows:

 

 

 

**August 31,**

 

 

 

**2001**

 

**2000**

 

**1999**

 

 

 

 

 

 

 

 

 

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

 

0.5

 

0.4

 

0.6

 

 

 

 

 

 

 

 

 

Change in valuation allowance

 

4.2

 

38.0

 

(14.0

)

 

 

 

 

 

 

 

 

Permanent differences and other

 

29.3

 

(4.4

)

(10.1

)

 

 

 

 

 

 

 

 

 

 

-

%

-

%

10.5

%

 

                Deferred income taxes reflect the net taxeffects of temporary differences between the carrying amounts of assets andliabilities for financial reporting purposes and the amounts used for incometax purposes.  Significant components ofthe Company's deferred tax assets and liabilities as of August 31, 2001 and2000 are as follows:

 

 

 

**August 31,**

 

 

 

**2001**

 

**2000**

 

 

 

 

 

 

 

Deferred tax assets:

 

 

 

 

 

Allowance for doubtful accounts

 

$

31,000

 

$

56,600

 

Inventory uniform capitalization and  reserve

 

35,500

 

22,800

 

Accrued vacation

 

63,700

 

73,900

 

Deferred revenue

 

241,400

 

247,100

 

Depreciation and amortization

 

38,800

 

30,700

 

Net operating loss carryforwards

 

1,258,000

 

1,255,900

 

Tax credits

 

357,300

 

308,900

 

 

 

 

 

 

 

Gross deferred tax assets

 

2,025,700

 

1,995,900

 

 

 

 

 

 

 

Deferred tax liability:

 

 

 

 

 

Capitalized software costs

 

(535,000

)

(524,200

)

Other

 

(3,500

)

(5,900

)

 

 

 

 

 

 

Gross deferred tax liability

 

(538,500

)

(530,100

)

 

 

 

 

 

 

Valuation allowance

 

(256,700

)

(235,300

)

 

 

 

 

 

 

Net deferred tax assets

 

$

1,230,500

 

$

1,230,500

 

 

                At August 31,2001, the Company had state and federal net operating loss carryforwardsavailable to offset future taxable income of approximately $293,000 and$3,624,000, respectively, that expire at various dates through 2021 andgeneral business tax credit carryforwards available to offset future income taxpayable of approximately $357,000 that expire at various dates through2021.  The Tax Reform Act of 1986contains provisions which limit the amount of tax credits that can be utilizedin any one year in subsequent years.

 

                The Company annually evaluates therealization of the net deferred tax asset, taking into consideration priorearnings history, projected operating results and the reversal of temporary taxdifferences.  At August 31, 2001, theCompany evaluated the net deferred tax asset taking into considerationoperating results, and determined that a valuation allowance of $256,700 shouldbe established.  The Company believes itis more likely than not that the net deferred tax asset of $1,230,500 will berealized.

 

**NOTE8 – EARNINGS (LOSS) PER SHARE**

 

 

 

**August 31,**

 

 

 

**2001**

 

**2000**

 

**1999**

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

3,188,375

 

3,149,358

 

2,979,060

 

 

 

 

 

 

 

 

 

Diluted effect of stock options and  warrants

 

-

 

-

 

302,574

 

 

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

3,188,375

 

3,149,358

 

3,281,634

 

 

                At August 31, 2001 and 2000, options andwarrants to purchase 797,000 and 887,815 shares, respectively, were outstandingand could affect future periods, but were not included in the computation ofdiluted loss per common share because the effect would be antidilutive.  At August 31, 1999, all 792,570 outstandingoptions and warrants are dilutive and considered in the above computation.

 

**NOTE9 – SEGMENT INFORMATION AND MAJOR CUSTOMERS**

 

                The Company’s operations are classified intotwo principal reportable industry segments: (a) development, manufacture,sales and service of Clinical Information Systems (CIS) for use in hospitals,clinics, reference laboratories and other healthcare institutions, and (b)application service provider (ASP) and data outsourcing services provided byXymed.com, the Company’s wholly-owned subsidiary formed in September 1999.

 

August 31, 2001

 

**CIS**

 

**ASP**

 

**Combined**

 

 

 

 

 

 

 

 

 

Net sales to unaffiliated  customers

 

$

5,953,014

 

$

-

 

$

5,953,014

 

Operating loss

 

(176,073

)

(348,313

)

(524,386

)

Identifiable assets

 

5,464,883

 

68,396

 

5,533,279

 

Depreciation and amortization

 

302,987

 

37,338

 

340,325

 

Interest expense

 

19,910

 

-

 

19,910

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

August 31, 2000

 

**CIS**

 

**ASP**

 

**Combined**

** **

 

 

 

 

 

 

 

 

Net sales to unaffiliated  customers

 

$

7,224,398

 

$

-

 

$

7,224,398

 

Operating loss

 

(227,326

)

(407,412

)

(634,738

)

Identifiable assets

 

5,649,766

 

95,561

 

5,745,327

 

Depreciation and amortization

 

305,248

 

13,957

 

319,205

 

Interest expense

 

12,753

 

-

 

12,753

 

 

                For the year ended August 31, 1999, theCompany operated as one segment.

 

                The Company had no customers that accountedfor more than 10% of the Company’s sales during the years ended August 31,2001, 2000 and 1999.

 

**NOTE 10 -SUPPLEMENTAL CASH FLOW INFORMATION**

 

                Supplemental cash flow information is asfollows:

 

                (a)           Cashpaid:

 

 

 

**2001**

 

**2000**

 

**1999**

 

 

 

 

 

 

 

 

 

Interest

 

$

19,478

 

$

13,757

 

$

37,644

 

Income taxes

 

$

4,578

 

$

5,278

 

$

1,006

 

 

 

 

 

 

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--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------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