** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-QSB**

 

 

 

**(Mark One)**

 
| **o** | ** ** | **QUARTERLY REPORT UNDER SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|----------------------------------------------------------------------------------------|

** **

**For thequarterly period ended               **

 
| **ý** | ** ** | **TRANSITION REPORT UNDER SECTION  13 OR 15(d) OF THE EXCHANGE ACT** |
|------------|------------|----------------------------------------------------------------------|

** **

**For the transition period fromSeptember 1, 2004 to December 31, 2004.**

 

**Commissionfile number 0-12551**

 

| **CREATIVE  COMPUTER APPLICATIONS, INC.**                          |
|--------------------------------------------------------------------|
| (Exact name of small  business issuer as specified in its charter) |

 

 

| **California**                   | ** ** | **95-3353465**      |
|----------------------------------|------------|---------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer    |
| incorporation or  organization)  |       | Identification No.) |

 

| **26115-A  Mureau Road, Calabasas, California 91302** |
|-------------------------------------------------------|
| (Address of principal  executive offices)             |

 

| **(818)  880-6700**              |
|----------------------------------|
| Issuer’s telephone  number: |

 

 

 

 

State the number of shares outstanding of each of theissuer’s classes of common equity, as of the latest practicable date:  3,369,900 common shares as of February 15,2005.

 

 

                Transitional SmallBusiness Disclosure Format (check one):

                                                                                                Yes ý            No   o

 

----

 

**FORM 10-QSB**

 

 

 
| **I N D E X**                                                                                                       |
|---------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                          |   |   |
| **PART I - Financial  Information:**                                                                                |   |   |
|                                                                                                                |   |   |
| Condensed  Consolidated Balance Sheets at December 31, 2004                                                         |   |   |
|                                                                                                                |   |   |
| Condensed  Consolidated Statements of Operations for the four months ended December 31,  2004 and December 31, 2003 |   |   |
|                                                                                                                |   |   |
|                                                                                                                |   |   |
| Condensed  Consolidated Statements of Cash Flows for the four months ended December 31,  2004 and December 31, 2003 |   |   |
|                                                                                                                |   |   |
|                                                                                                                |   |   |
| Notes  to Condensed Consolidated Financial Statements                                                               |   |   |
|                                                                                                                |   |   |
| Management’s  Discussion and Analysis of Results of Operations and Financial Condition                         |   |   |
|                                                                                                                |   |   |
| Controls and Procedures                                                                                             |   |   |
| ** **                                                                                                          |   |   |
| **PART II - Other  Information:**                                                                                   |   |   |
|                                                                                                                |   |   |
| Items 1 through 6                                                                                                   |   |   |
|                                                                                                                |   |   |
| Signatures                                                                                                          |   |   |
|                                                                                                                |   |   |
| Exhibits  and Certifications                                                                                        |   |   |

 

 

2

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**PART 1 - FINANCIAL INFORMATION**

 

#### **Item 1. Financial Statements**

#### ** **

#### **CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                           | ** ** | **December 31, 2004** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                           | ** ** | **(Unaudited)**       | ** ** |
| **ASSETS**                                                                                           |       |                  |       |
|                                                                                                 |       |                  |       |
| CURRENT ASSETS:                                                                                      |       |                  |       |
| Cash                                                                                                 |       | $                     | 1,655,063  |   |
| Receivables, net                                                                                     |       | 1,736,768             |       |
| Inventory                                                                                            |       | 86,298                |       |
| Prepaid expenses  and other assets                                                                   |       | 256,289               |       |
| Deferred tax  asset                                                                                  |       | 539,420               |       |
|                                                                                                 |       |                  |       |
| TOTAL CURRENT  ASSETS                                                                                |       | 4,273,838             |       |
|                                                                                                 |       |                  |       |
| PROPERTY AND  EQUIPMENT, net                                                                         |       | 345,004               |       |
| INVENTORY OF  COMPONENT PARTS                                                                        |       | 186,599               |       |
| CAPITALIZED  SOFTWARE COSTS, net of accumulated amortization of $878,021                        |       | 1,531,573             |       |
| DEFERRED TAX  ASSET                                                                                  |       | 254,457               |       |
|                                                                                                 |       |                  |       |
|                                                                                                 |       | $                     | 6,591,471  |   |
|                                                                                                 |       |                  |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                       |       |                  |       |
|                                                                                                 |       |                  |       |
| CURRENT  LIABILITIES:                                                                                |       |                  |       |
| Notes payable to  bank (Note 3)                                                                      |       | $                     | 300,000    |   |
| Accounts payable                                                                                     |       | 377,768               |       |
| Accrued  liabilities:                                                                                |       |                  |       |
| Vacation pay                                                                                         |       | 243,060               |       |
| Accrued payroll                                                                                      |       | 128,227               |       |
| Other                                                                                                |       | 173,808               |       |
| Deferred service  contract income                                                                    |       | 1,235,032             |       |
| Deferred revenue  on system sales                                                                    |       | 226,111               |       |
|                                                                                                 |       |                  |       |
| TOTAL CURRENT  LIABILITIES                                                                           |       | 2,684,006             |       |
|                                                                                                 |       |                  |       |
| SHAREHOLDERS’  EQUITY:                                                                          |       |                  |       |
| Common shares,  no par value; 20,000,000 shares authorized; 3,321,900 shares issued and  outstanding |       | 6,195,692             |       |
| Accumulated  deficit                                                                                 |       | (2,288,227            | )          |
|                                                                                                 |       |                  |       |
| TOTAL  SHAREHOLDERS’ EQUITY                                                                     |       | 3,907,465             |       |
|                                                                                                 |       |                  |       |
|                                                                                                 |       | $                     | 6,591,471  |   |

 

 

 

**See Notes to CondensedConsolidated Financial Statements.**

 

*** As presented in the audited consolidatedfinancial statements**

 

3

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**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

 

 
| ** **                                      | ** ** | **Four Months Ended December 31,** | ** ** |
|-------------------------------------------------|------------|------------------------------------|------------|
| ** **                                      | ** ** | **2004**                           | ** ** | **2003** | ** ** |
| ** **                                      | ** ** | **(Unaudited)**                    | ** ** |
|                                            |       |                               |       |   |   |
| NET SYSTEM SALES  AND SERVICE REVENUE:          |       |                               |       |   |   |
| System sales                                    |       | $                                  | 844,069    |   | $ | 541,019 |   |
| Service revenue                                 |       | 1,547,173                          |       | 1,457,182 |   |
|                                            |       | 2,391,242                          |       | 1,998,201 |   |
|                                            |       |                               |       |   |   |
| COSTS OF  PRODUCTS AND SERVICES SOLD:           |       |                               |       |   |   |
| System sales                                    |       | 610,294                            |       | 607,784 |   |
| Service revenue                                 |       | 542,151                            |       | 540,751 |   |
|                                            |       | 1,152,445                          |       | 1,148,535 |   |
|                                            |       |                               |       |   |   |
| Gross profit                                    |       | 1,238,797                          |       | 849,666 |   |
|                                            |       |                               |       |   |   |
| OPERATING  EXPENSES                             |       |                               |       |   |   |
| Selling, general  and administrative            |       | 1,099,279                          |       | 992,595 |   |
|                                            |       |                               |       |   |   |
| Research and  development                       |       | 406,214                            |       | 342,824 |   |
|                                            |       |                               |       |   |   |
| Total operating  expenses                       |       | 1,505,493                          |       | 1,335,419 |   |
|                                            |       |                               |       |   |   |
| Operating loss                                  |       | (266,696                           | )          | (485,753 | ) |
|                                            |       |                               |       |   |   |
| INTEREST AND  OTHER INCOME                      |       | 4,589                              |       | 1,761 |   |
|                                            |       |                               |       |   |   |
| INTEREST EXPENSE                                |       | (2,020                             | )          | (1,888 | ) |
|                                            |       |                               |       |   |   |
| Loss before  provision for income taxes         |       | (264,127                           | )          | (485,880 | ) |
|                                            |       |                               |       |   |   |
| PROVISION FOR  INCOME TAXES                     |       | —                             |       | — |   |
|                                            |       |                               |       |   |   |
| NET LOSS                                        |       | $                                  | (264,127   | ) | $ | (485,880 | ) |
|                                            |       |                               |       |   |   |
| LOSS PER SHARE  (Note 2):                       |       |                               |       |   |   |
|                                            |       |                               |       |   |   |
| Basic                                           |       | $                                  | (.08       | ) | $ | (.15 | ) |
| Diluted                                         |       | (.08                               | )          | (.15 | ) |
|                                            |       |                               |       |   |   |
| WEIGHTED AVERAGE  NUMBER OF SHARES OUTSTANDING: |       |                               |       |   |   |
| Basic and  Diluted                              |       | 3,319,650                          |       | 3,318,900 |   |

 

**See Notes to CondensedConsolidated Financial Statements.**

 

4

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**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

 

**Increase (Decrease) in Cash**

 
| ** **                                                                                 | ** ** | **Four Months Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                 | ** ** | **2004**                           | ** ** | **2003** | ** ** |
| ** **                                                                                 | ** ** | **(Unaudited)**                    | ** ** |
|                                                                                       |       |                               |       |   |   |
| OPERATING  ACTIVITIES                                                                      |       |                               |       |   |   |
| Net loss                                                                                   |       | $                                  | (264,127   | ) | $ | (485,880 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                               |       |   |   |
| Depreciation and  amortization                                                             |       | 42,416                             |       | 44,489 |   |
| Provision for  doubtful accounts                                                           |       | 34,432                             |       | 10,000 |   |
| Amortization of  capitalized software costs                                                |       | 136,330                            |       | 141,456 |   |
| Increase  (decrease) from changes in:                                                      |       |                               |       |   |   |
| Receivables                                                                                |       | (48,860                            | )          | 456,525 |   |
| Inventories                                                                                |       | 44,651                             |       | 34,807 |   |
| Prepaid expenses  and other assets                                                         |       | 10,559                             |       | 22,652 |   |
| Accounts payable                                                                           |       | 191,899                            |       | (23,146 | ) |
| Accrued  liabilities                                                                       |       | (31,518                            | )          | (43,895 | ) |
| Deferred service  contract income                                                          |       | 59,523                             |       | 72,506 |   |
| Deferred revenue  on system sales                                                          |       | (18,771                            | )          | (209,154 | ) |
|                                                                                       |       |                               |       |   |   |
| Net cash  provided by operating activities                                                 |       | 156,534                            |       | 20,360 |   |
|                                                                                       |       |                               |       |   |   |
| INVESTING  ACTIVITIES                                                                      |       |                               |       |   |   |
| Additions to  property and equipment                                                       |       | (203,606                           | )          | (25,301 | ) |
| Additions to  capitalized software costs                                                   |       | (175,242                           | )          | (180,500 | ) |
|                                                                                       |       |                               |       |   |   |
| Net cash used in  investing activities                                                     |       | (378,848                           | )          | (205,801 | ) |
|                                                                                       |       |                               |       |   |   |
| FINANCING  ACTIVITIES                                                                      |       |                               |       |   |   |
| Borrowings on  notes payable                                                               |       | 300,000                            |       | — |   |
| Payments on  capital lease obligations                                                     |       | —                             |       | (361 | ) |
|                                                                                       |       |                               |       |   |   |
| Net cash  provided by (used in) financing activities                                       |       | 300,000                            |       | (361 | ) |
|                                                                                       |       |                               |       |   |   |
| NET INCREASE  (DECREASE) IN CASH                                                           |       | 80,686                             |       | (185,802 | ) |
|                                                                                       |       |                               |       |   |   |
| CASH, beginning  of period                                                                 |       | 1,574,377                          |       | 1,075,323 |   |
|                                                                                       |       |                               |       |   |   |
| CASH, end of  period                                                                       |       | $                                  | 1,655,063  |   | $ | 889,521 |   |

 

**See notes to CondensedConsolidated Financial Statements.**

 

5

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**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**Note 1.**                                                          In theopinion of management, the accompanying unaudited condensed consolidatedfinancial statements reflect all adjustments (which include only normalrecurring accruals) necessary to present fairly the Company’s financialposition as of December 31, 2004, the results of its operations for the fourmonths ended December 31, 2004 and 2003, and cash flows for the four monthsended December 31, 2004 and 2003.  Theseresults have been determined on the basis of accounting principles generallyaccepted in the United States of America and practices applied consistentlywith those used in preparation of the Company’s Annual Report on Form 10-KSBfor the fiscal year ended August 31, 2004.

 

                                                                                                This is atransitional report that is being filed since the Company has changed itsfiscal year from August 31 to December 31, and therefore the results ofoperations for the four months ended December 31, 2004 are not necessarilyindicative of the results expected for any other period or for the entire year.

 

**Note 2.**                                                          The Company accounts for its earnings pershare in accordance with SFAS No.128, which requires presentation of basic anddiluted earnings per share.  Basicearnings per share is computed by dividing income or loss available to commonshareholders by the weighted average number of common shares outstanding forthe reporting period.  Diluted earningsper share reflect the potential dilution that could occur if securities orother contracts, such as stock options, to issue common stock were exercised orconverted into common stock.

 

                                                                                                Earnings per share has been computed asfollows:

 

                                                                                                
| ** **                                                    | ** ** | **Four Months Ended   December 31, 2004** | ** ** | **Four Months Ended   December 31, 2003** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
|                                                          |       |                                      |       |                                      |       |
| NET LOSS                                                      |       | $                                         | (264,127   | )                                         | $          | (485,880 | ) |
| Basic weighted  average number of common shares outstanding   |       | 3,319,650                                 |       | 3,318,900                                 |       |
|                                                          |       |                                      |       |                                      |       |
| Dilutive effect  of stock options                             |       | —                                    |       | —                                    |       |
| Diluted weighted  average number of common shares outstanding |       | 3,319,650                                 |       | 3,318,900                                 |       |
|                                                          |       |                                      |       |                                      |       |
| Basic loss per  share                                         |       | $                                         | (.08       | )                                         | $          | (.15 | ) |
| Diluted loss per  share                                       |       | $                                         | (.08       | )                                         | $          | (.15 | ) |
|                                                          |       |                                      |       |                                      |       |

 

                                                                                                For the four months ended December 31,2004 and 2003, options to purchase 402,000 and 345,000 shares of common stockat a per share price ranging from $.72 to $1.76 were not included in thecomputation of diluted loss per share because inclusion would have beenanti-dilutive.

 

**Note 3.**                                                          The Company’s line of credit with itsbank provides for $1,000,000 on a revolving basis through February 1,2006.  On December 31, 2004, the totalamount due to the bank was $300,000.

 

**Note 4.**                                                          As allowed bySFAS 123, the Companyhas adopted the intrinsic value method of accounting for employee stock optionsunder the principles of APB Opinion No. 25, Accounting for Stock Issued toEmployees (APB 25) and discloses the pro forma effect on net income (loss) andincome (loss) per share as if the fair value based method had beenapplied.  For equity instruments,including stock options, issued to non-employees, the fair value of the equityinstruments or the fair value of the consideration received, whichever is morereadily determinable, is used to determine the value of services or goodsreceived and the corresponding charge to operations.

 

                                                                                                The following table illustrates theeffect on net income (loss) and income (loss) per share as if the Company hadapplied the fair value recognition provision of SFAS No. 123 to stock-basedemployee compensation:

 

6

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| ** **                                                                                                      | ** ** | **Four Months Ended   December 31, 2004** | ** ** | **Four Months Ended   December 31, 2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
|                                                                                                            | ** ** |                                      |       |                                      |       |
| Net loss, as  reported                                                                                          | ** ** | $                                         | (264,127   | )                                         | $          | (485,880 | ) |
|                                                                                                            | ** ** |                                      |       |                                      |       |
| Add: Stock-based  compensation expense included in reported net income, net of related tax  effects             | ** ** | —                                    |       | —                                    |       |
|                                                                                                            | ** ** |                                      |       |                                      |       |
| Less: total  stock based employee compensation expense determined under fair value based  method for all awards | ** ** | (22,267                                   | )          | (22,447                                   | )          |
|                                                                                                            |       |                                      |       |                                      |       |
| Net loss, pro  forma                                                                                            |       | $                                         | (286,394   | )                                         | $          | (508,327 | ) |
|                                                                                                            |       |                                      |       |                                      |       |
| Basic net loss  per share, as reported                                                                          |       | $                                         | (.08       | )                                         | $          | (.15 | ) |
|                                                                                                            |       |                                      |       |                                      |       |
| Basic net loss  per share, pro forma                                                                            |       | $                                         | (.09       | )                                         | $          | (.15 | ) |
|                                                                                                            |       |                                      |       |                                      |       |
| Diluted net loss  per share, as reported                                                                        |       | $                                         | (.08       | )                                         | $          | (.15 | ) |
|                                                                                                            |       |                                      |       |                                      |       |
| Diluted net loss  per share, pro forma                                                                          |       | $                                         | (.09       | )                                         | $          | (.15 | ) |
|                                                                                                            |       |                                      |       |                                      |       |
|                                                                                                                 |            |                                           |            |                                           |            |  |  |  |  |

 

                                                                                                The Company issues all of its options atfair market value at the time of grant; therefore, no expense has been recordedunder the intrinsic value method for the four months ended December 31, 2004and 2003.  As required by SFAS 123, theCompany provides the following disclosure of estimated values for these awards:  The fair value of each option was estimatedon the date of grant using a Black-Scholes option-pricing model with thefollowing weighted average assumptions for 2004 and 2003: risk free interestrates ranging from 3.4% to 6.1%, expected lives of 5 years; volatility rangingfrom 67% to 126% and no assumed dividends. The weighted-average grant-date fair value of options granted during2004 and 2003 was estimated to be $.91 and $1.25, respectively.  There were no options granted in the fourmonths ended December 31, 2004.

 

**Note5.****                                                         **In accordance with the bylaws of theCompany, officers and directors are indemnified for certain events oroccurrences arising as a result of the officer or director’s serving in suchcapacity.  The term of theindemnification period is for the lifetime of the officer or director.  The maximum potential amount of futurepayments the Company could be required to make under the indemnificationprovisions of its bylaws is unlimited. However, the Company has a director and officer liability insurancepolicy that reduces its exposure and enables it to recover a portion of anyfuture amounts paid.  As a result of itsinsurance policy coverage, the Company believes the estimated exposure for theindemnification provisions of its bylaws is minimal and, therefore, the Companyhas not recorded any related liabilities.

 

The Company enters into indemnification provisionsunder agreements with various parties in the normal course of business,typically with customers and landlords. Under these provisions, the Company generally indemnifies and holdsharmless the indemnified party for losses suffered or incurred by theindemnified party as a result of the Company’s activities or, in some cases, asa result of the indemnified party’s activities under the agreement.  These indemnification provisions ofteninclude indemnifications relating to representations made by the Company withregard to intellectual property rights. These indemnification provisions generally survive termination of theunderlying agreement.  The maximumpotential amount of future payments the Company could be required to make underthese indemnification provisions cannot be estimated.  The Company maintains general liability,errors and omissions, and professional liability insurance in order to mitigatesuch risks.  The Company has not incurredmaterial costs to defend lawsuits or settle claims related to theseindemnification agreements.  As a result,the Company believes the estimated exposure under these agreements is minimal.  Accordingly, the Company has not recorded anyrelated liabilities.

 

7

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**Note6.**                                                          New Accounting Pronouncements - InDecember 2004 the Financial Accounting Standards Board (FASB) issued Statementof Financial Accounting Standard No. 123 (revised 2004), *Share-Based Payment (SFAS No. 123(R))*.SFAS No. 123(R) requires compensation cost relating to unvested share-basedpayment transactions that are outstanding as of the effective date and newlyissued transactions to be recognized in the financial statements. That costwill be measured based on the fair value of the equity or liability instrumentsissued. SFAS No. 123(R) covers a wide range of share-based compensationarrangements including share options, restricted share plans, performance-basedawards, share appreciation rights and employee share purchase plans. SFAS No.123(R) replaces SFAS No. 123, *Accounting forStock-Based Compensation*(SFAS No. 123), and supersedes AccountingPrinciples Board Opinion No. 25, *Accountingfor Stock Issued to Employees*(Opinion 25)*.*SFAS No. 123, as originally issued in 1995, establishedfair-value-based method of accounting for share-based payment transactions withemployees. However, that Statement permitted entities the option of continuingto apply the guidance in Opinion 25, as long as the footnotes to financialstatements disclosed what net income would have been had the fair-value-basedmethod been used. As disclosed in footnote 2, the Company elected the option ofdisclosure only under SFAS No. 123. Public entities will be required to applySFAS No. 123(R) as of the first interim or annual reporting period that beginsafter June 15, 2005.  TheCompany is currently evaluating the impact of this statement.

 

InDecember 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets —An Amendment of APB Opinion No. 29,” which eliminates the exception fornonmonetary exchanges of similar productive assets and replaces it with ageneral exception for exchanges of nonmonetary assets that do not havecommercial substance.  The Company is required to adopt SFAS No. 153 fornonmonetary asset exchanges occurring in the first quarter of 2006 and itsadoption is not expected to have a significant impact on the Company’s resultsof operations or financial condition.

 

In November 2004, the FASB issued SFAS No. 151, “InventoryCosts — An Amendment of ARB No. 43, Chapter 4,” which clarifies the accountingfor abnormal amounts of idle facility expense, freight, handling costs andwasted material (spoilage).  The Company is required to adopt SFAS No. 151in 2006 and its adoption is not expected to have a significant impact on theCompany’s results of operations or financial condition.

 

 

**Note 7.****                                                         **SubsequentEvents — On January 10, 2005, the Company entered into a letter of intent tomerge with StorCOMM, Inc. of Jacksonville, Florida, a private company providingPicture Archive Communication Systems (PACS) and Clinical Image ManagementSystems for the medical imaging market (the “StorCOMM Merger”).  CCA will be the surviving entity and StorCOMMshareholders will own one-half of the merged entity.  The transaction is subject to the completionand execution of a definitive merger agreement and shareholder approval.  It is expected that the post merger companywill offer integrated applications and services to a broad sector of thehealthcare provider market.  The mergeris expected to be completed by the spring of 2005.

 

 

 

 

 

**Item 2.            Management’s Discussion andAnalysis of Financial Condition and Results of Operations******

 

This Quarterly Report on Form 10-QSB containsforward-looking statements, which reflect management’s current views aboutfuture events and financial results. Management makes these statements in reliance on the safe harbor createdby the Private Securities Litigation Reform Act of 1995.  Forward-looking statements include views onfuture financial results, financing sources, product development, capitalrequirements, market growth and the like, and are generally identified byphrases such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans”and similar words.  Forward-lookingstatements are merely predictions and therefore inherently subject touncertainties and other factors which could cause the actual results to differmaterially from the forward-looking statement.  These uncertainties and other factors include,among other things:

 

•                  Unexpected technical and marketing difficulties inherent in majorproduct development efforts such as those described about CyberLAB 7.0.

•                  The potential need for changes in our long-term strategy in response tofuture developments.

 

8

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•                  Future advances in clinical information technology and procedures, aswell as potential changes in government regulations and healthcare policies,both of which could adversely affect the economics of the products offered byCCA.

•                  Rapid technological change in the microelectronics and softwareindustries

•                  Increasing competition from current as well as future competitors, and

•                  The ability to complete the StorCOMM Merger.

 

        Set forth below are other significant uncertainties andfactors affecting forward-looking statements. The readers should understandthat uncertainties and other factors identified in this Quarterly Report onForm 10-QSB are not a comprehensive list of all the uncertainties and otherfactors that may affect forward-looking statements.  We do not undertake any obligation to updateor revise any forward-looking statements or the list of uncertainties and otherfactors that could affect those statements.

 

 

 

**Overview**

 

                This is atransitional report that is being filed since the Company has changed itsfiscal year from August 31 to December 31, and therefore the results ofoperations for the four months ended December 31, 2004 are not necessarilyindicative of the results expected for any other period or for the entireyear.  CCA generates revenues primarilyfrom the sale of its Clinical Information Systems (CIS), which includes thelicensure of proprietary application software, the licensure of third partysoftware, and the sale of servers upon which the application softwareoperates.  In connection with its salesof CIS products, the Company provides implementation services for theinstallation, integration, and training of end users’ personnel.  The Company generates sales of ancillarysoftware and hardware, including its data acquisition products, to its CISclients and to third parties.  TheCompany also generates recurring revenues from the provision of comprehensivepost implementation services to its CIS clients, pursuant to extended serviceagreements.

 

Because of the nature of its business, CCA makessignificant investments in research and development for new products andenhancements to existing products. Historically, CCA has funded its research and development programsthrough cash flow primarily generated from operations.  Management anticipates that futureexpenditures in research and development will either continue at current levelsor may increase for the foreseeable future, and will be funded primarily out ofthe Company’s cash flow.

 

CCA’s results of operations for the four months endedDecember 31, 2004 were marked by an increase in sales and a smaller loss overthe comparable period one year ago.  TheCompany’s increase in revenues was due to a number of factors.  The primary factor was a transition to a newversion of our core product, CyberLABâ7.0 that impacted new sales and upgrades of clients on the previous version ofthis product.  CyberLAB 7.0 wasintroduced to the marketplace in January of 2004 and is now live in ten sitesand eight new sites are in the process of being implemented.  The response to the new version has been verypositive.  Other factors contributing tothe increase in sales were associated with new sales and marketing activities,which generated significant interest among new buyers as well as the existingclient base.    It is anticipated thatthe migration to CyberLAB 7.0 will require clients to acquire additionalhardware and professional services from the Company in order to deploy the newsoftware.  Generally, sales cycles forCIS products are lengthy and on average exceed one year from inception toclosure.  Because of the complexity ofthe sales process, a number of factors can delay the closing of transactionsthat are beyond the control of the Company.

 

In order to address compliance issues brought about bythe HIPAA regulations, the Company completed the development of enhancements toits products and upgraded hundreds of client sites with the HIPAA relatedenhancements during the 2003 fiscal year. This posed considerable challenges to CCA’s organization and causeddelays in the development and eventual release of CyberLAB 7.0.

 

 

**Results of Operations**

 

        The following table setsforth certain line items in our condensed consolidated statement of operationsas a percentage of total revenues for the periods indicated:

 

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| ** **                                  | ** ** | **Four Months Ended   December 31, 2004** | ** ** | **Four Months Ended   December 31, 2003** | ** ** |
|---------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| Revenues:                              |       |                                      |       |                                      |       |
| System sales                                |       | 35.3                                      | %          | 27.1                                      | %          |
| Service revenues                            |       | 64.7                                      | %          | 72.9                                      | %          |
|                                        |       |                                      |       |                                      |       |
| Total revenues                              |       | 100.0                                     |       | 100.0                                     |       |
| Costs of  products and services sold:  |       |                                      |       |                                      |       |
| System sales                                |       | 25.5                                      |       | 30.4                                      |       |
| Service revenues                            |       | 22.7                                      |       | 27.1                                      |       |
|                                        |       |                                      |       |                                      |       |
| Total costs of  products and services       |       | 48.2                                      |       | 57.5                                      |       |
| Gross profit                                |       | 51.8                                      |       | 42.5                                      |       |
| Operating  expenses:                   |       |                                      |       |                                      |       |
| Selling, general  and administrative        |       | 46.0                                      |       | 49.7                                      |       |
| Research and  development                   |       | 17.0                                      |       | 17.1                                      |       |
|                                        |       |                                      |       |                                      |       |
| Total operating  expenses                   |       | 63.0                                      |       | 66.8                                      |       |
| Operating loss                              |       | (11.2                                     | )          | (24.3                                     | )          |
| Loss before  provision for income taxes     |       | (11.1                                     | )          | (24.3                                     | )          |
| Provision for  income taxes                 |       | —                                    |       | —                                    |       |
|                                        |       |                                      |       |                                      |       |
| Net loss                                    |       | (11.1                                     | )          | (24.3                                     | )          |

 

 

Sales for the four months ended December 31, 2004 increased to$2,391,242, as compared to $1,998,201 for the comparable period ended December31, 2003, an overall increase of approximately $393,041 or 19.7%.  When analyzed by product category, sales ofCIS products increased by $256,793 or 53.4%, sales of data acquisition productsincreased by $47,925 or 87.9%, and service revenues increased by $89,991 or6.2% when compared to the same period one year ago.  Such increases were partially offset by aslight decrease in other revenues of $1,668 or 29.9%.  The increase in sales of CIS products wasprimarily attributable to the favorable acceptance in the marketplace and bythe current client base of the new version of CyberLAB 7.0.  The increase in service revenues isattributable to a greater number of client accounts under contract and an increasein the average fees charged for such contracts. Service revenues are expected to continue to increase as and when theCompany’s installed base of CIS installations increases.  The increase in the sales of data acquisitionproducts is primarily attributable to a greater number of units shipped to CCAcustomers, however, management believes going forward, there will be reducedsales of data acquisition products as there has been a technological shift tosoftware based clinical instrument interfaces.    Management does not believe the data acquisitionproduct business is a material part of CCA’s business today and will not be inthe future as the Company’s emphasis is being placed on its CIS products andrelated services.

 

The Company continues to expand its direct sales andmarketing activities, directing its focus towards larger clients andmulti-product sales as well as selling new products into its installed clientbase.  Although its “pipeline” of workingCIS transactions continues to improve, management views the near term outlookfor the continued sale of CIS products cautiously.  The Company’s future operating results willcontinue to be subject to quarterly variations based upon a wide variety offactors, including the volume mix and timing of orders received during anyquarter, and the temporary delays in the closing of new CIS sales.  In addition, the Company’s revenuesassociated with CIS sales may be delayed due to client related issues such asclient staff availability for training, IT infrastructure readiness, and theperformance of third party contractors, all of which are issues outside of thecontrol of CCA.

 

Cost of sales for the four months ended December 31,2004 increased slightly by $3,910 or 0.3% as compared to the period one yearago.  The overall increase in cost ofsales was primarily attributable to an increase in material costs of $14,077 or11.0% and an increase in labor costs of $9,282 or 1.6%.  These costs were partially offset by adecrease in other costs of $19,449 or 4.5%. The increase in material costs was attributable to an increase inupgrades of hardware by the installed client base by those clients that havemigrated to CyberLAB 7.0.  The increasein labor costs was a result of additions to the support and implementationstaff.  The decrease in other costs ofsales was attributable to decreased expenses related to telephone costs as aresult of better rates negotiated under a new contract for telephone and dataservices.  Cost of sales as a percentageof sales was 48% as compared to 57% for the comparable period one yearago.  The overall percentage decrease incost of sales, as a percentage of sales, was attributable to the overallincrease in sales of CIS products and the cost reductions as discussed above.  The Company could potentially experiencequarterly variations in gross margin as a result of the factors discussedabove.

 

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Selling, general, and administrative expensesincreased by $106,684 or 10.8% for the four months ended December 31, 2004 ascompared to the same period of 2003.  Theincreases in selling, general, and administrative expenses were primarilyattributable to approximately $8,400 in expenses related to implementation feesfor upgrading certain modules of the accounting system, approximately $15,000in expenses for legal and accounting expense, approximately $11,900 forconsultant expenses related to Sarbanes-Oxley Act Section 404 compliancerequirements, approximately $35,000 related to the write off of a clientaccount deemed uncollectible, and additional expenses related to marketingactivities.  Management anticipates thatit will incur increases in auditing and consultant expenses in fiscal 2005 thatare related to Sarbanes-Oxley Act Section 404 compliance requirements.  It is also likely to incur additionalexpenses in 2005 related to the StorCOMM Merger.  During fiscal 2005, the Company will alsoacquire and implement a new customer relationship management system to replaceits aged help desk application, a portion of the costs of which will beexpensed.  Management also anticipatesincreases in insurance costs in the current fiscal year.

 

Research and development expenses increased by $63,390or 18.5% during the four months ended December 31. 2004 as compared to the sameperiod of 2003.  The increase isattributable to increases in salaries, other personnel related expenses, andthe addition of new personnel in product engineering.  For the comparable periods, the Companycapitalized software costs of $175,242 and $180,500, respectively, which aregenerally amortized over the estimated useful life, not to exceed fiveyears.  Such costs were attributable toenhancements and new modules for the Company’s CIS products, and newapplications under development.

 

For the four months ended December 31, 2004 and 2003,the Company did not record a tax provision due to the pretax net loss.  At December 31, 2004, the Company evaluatedthe net deferred tax asset, taking into consideration operating results, and determinedthat a valuation allowance should be maintained.  The Company believes that it is more likelythan not that the net deferred tax asset of $793,877 will be realized in futureperiods.

 

As a result of the factors discussed above, theCompany incurred a net loss of $264,127 and $485,880, respectively, for thefour months ended December 31, 2004 and 2003. The Company’s basic and diluted loss per share was $.08 and $.15,respectively, for the four months ended December 31, 2004 and 2003.

 

 

### **Capital Resources andLiquidity**

 

The Company’s primary need for capital has been toinvest in software development, and in computers and related equipment for itsinternal use.  The Company invested$175,242 and $180,500 during the four months ended December 31, 2004 and 2003in software development.  Theseexpenditures related to the new browser version of the Company’s LIS product,CyberLAB 7.0, and other product enhancements. The Company anticipates expending additional sums during fiscal 2005 onproduct enhancements to all its products and the further development of the newbrowser version of the Company’s CyberLAB 7.0 product.  During the four months ended December 31,2004, the Company invested an aggregate of $203,606 in additions to fixedassets, primarily consisting of computers and software related to the newcustomer relationship management system, which is replacing its aged help deskapplication, as compared to an investment of $25,301 in the four months endedDecember 31, 2003.

 

As of December 31, 2004, the Company’s working capitalamounted to $1,589,832.  The Company’scurrent ratio was 1.6 at December 31, 2004. At December 31, 2004, the Company’s credit facilities with its bankconsisted of a revolving line of credit of $1,000,000, of which there was$300,000 outstanding.  The bank credit agreementexpires on February 1, 2006.  The Companymay seek additional debt or equity financing in connection with the StorCOMMMerger.

 

Cash flows from operating activities were $156,534 forthe four months ended December 31, 2004 compared to $20,360 for the comparableperiod ended December 31, 2003.  Theincrease in cash flow from operating activities was primarily attributable tothe reduction in net loss from operations in four months ended December 31,2004 compared to the same period of 2003 offset by the net change inreceivables, accrued payables, and deferred revenues.

 

Net cash used in investing activities totaled $378,848for the four months ended December 31, 2004, compared to $205,801 used ininvesting activities during the comparable period of 2003.  The increase in cash used in investingactivities was due to increased investment in property and equipment.

 

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Cash flows from financing activities amounted to$300,000 during four months ended December 31, 2004, compared to cash used of$361 in the same period of 2003.  Thechange resulted primarily from borrowings from the Company’s revolving line ofcredit with the bank.

 

        The Company’s primarysource of working capital has been generated from earnings, and from borrowingson its line of credit.  The Companyproduced cash flows amounting to $156,534 from operations along with cashprovided from financing activities of $300,000 to fund its operations in the fourmonths ended December 31, 2004.  Managementbelieves that its sales pipeline is adequate to produce sufficient operatingcash flow in the 2005 fiscal year, and that its projected cash flow fromoperations, together with its bank credit facilities, should be sufficient tofund its working capital requirements for its 2005 fiscal year.  However, an unanticipated decline in sales orcontinued delays in closing new transactions, delays in implementations wherepayments are tied to delivery and/or performance of services, or cancellationsof contracts could have a negative effect on cash flow from operations andcould in turn create short-term liquidity problems.  If such events were to occur, the Company mayhave to seek alternative financing.

 

### **Seasonality, Inflation andIndustry Trends**

 

The Company’s sales are generally higher in the winterand spring.  Inflation has not had amaterial effect on the Company’s business since the Company has been able toadjust the prices of its products and services in response to inflationarypressures.  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.  With respect to the compliance issues broughtabout by HIPAA, the Company has invested heavily in new application modules toassist its clients in meeting their regulatory goals.  Management believes that the new modules willbe key selling points and will provide a competitive advantage.  In addition, management believes that thehealthcare information technology industry will be marked with more significanttechnological advances, which will improve the quality of service and reducecosts.  The Company is poised to meetthese challenges by continuing to employ new technologies when they becomeavailable, diversifying its product offerings, improving and expanding itsservices, and by constantly enhancing its software applications.

 

 

### **Critical Accounting Policies and Estimates**

 

Management’s discussion and analysis of CCA’sfinancial condition and results of operations are based upon the condensedconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States.  The preparation of these financial statementsrequires management to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosuresof contingent assets and liabilities.  Onan on-going basis, management evaluates estimates, including those related tothe valuation of inventory and the allowance for uncollectible accountsreceivable. We base our estimates on historical experience and on various otherassumptions that are believed to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from othersources.  Actual results may differ fromthese estimates under different assumptions or conditions. We believe thefollowing critical accounting policies affect our more significant judgmentsand estimates used in the preparation of our consolidated financial statements:

 

Inventory

 

The Company’s inventory is comprised of a currentinventory account that consists of items that are held for resale and along-term inventory account that consists of items that are held for repairsand replacement of hardware components that are serviced by the Company under long-termExtended Service Agreements with its clients. Current inventory is valued at the lower of cost to purchase or thecurrent estimated market value of the inventory items.  Inventory is evaluated on a continual basisand adjustments to recorded costs are made based on management’s estimate offuture sales value, or in the case of the long-term component inventory, onmanagements estimation of the usage of specific inventory items and netrealizable value.  Management reviewsinventory quantities on hand and makes determination of the excess or obsoleteitems in the inventory, which, are specifically reserved.  In addition, adjustments are made for thedifference between the cost of the inventory and the estimated market value andcharged to operations in the period in which the facts that give rise to theadjustments become known.  At December31, 2004, the inventory reserve was approximately $150,000.

 

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Accounts Receivable

 

Accounts receivable balances are evaluated on acontinual basis and allowances are provided for potentially uncollectibleaccounts based on management’s estimate of the collectability of customeraccounts. If the financial condition of a customer were to deteriorate,resulting in an impairment of their ability to make payments, an additionalallowance may be required. Allowance adjustments are charged to operations inthe period in which the facts that give rise to the adjustments becomeknown.  The accounts receivable balanceat December 31, 2004 was $1,736,768, net of an allowance for doubtful accountsof approximately $47,500.

 

RevenueRecognition

 

Revenues are derived primarily from the sale of CISproducts and the provision of services. The components of the system sales revenues are the licensing ofcomputer software, installation, and the sale of computer hardware andsublicensed software. The components of service revenues are software supportand hardware maintenance, training, and implementation services.  The Company recognizes revenue in accordancewith the provisions of Statement of Position (SOP) No. 97-2, “Software RevenueRecognition,” as amended by SOP No. 98-4, SOP 98-9 and clarified by StaffAccounting Bulletin (SAB) 104 “Revenue Recognition in Financial Statements.” SOPNo 97-2, as amended, generally requires revenue earned on software arrangementsinvolving multiple-elements to be allocated to each element based on therelative fair values of those elements. The Company allocates revenue to each element in a multiple-elementarrangement based on the element’s respective fair value, with the fair valuedetermined by the price charged when that element is sold and specificallydefined in a quotation or contract.  TheCompany determines the fair value of the maintenance portion of the arrangementbased on the renewal price of the maintenance charged to clients, professionalservices portion of the arrangement, other than installation services, based onhourly rates which the Company charges for these services when sold apart froma software license, and the hardware and sublicense of software based on theprices for these elements when they are sold separately from the software.  At December 31, 2004, deferred revenue was$226,111.

 

Post Implementation software and hardware maintenanceservices are marketed under monthly and annual arrangements and are recognizedas revenue ratably over the contracted maintenance term as services areprovided.  Deferred revenue related toCIS sales is comprised of deferrals for license fees, hardware, and otherservices for which the implementation has not yet been completed and revenueshave not been recognized.  At December31, 2004, deferred service contract income was $1,235,032.

 

Software Development Costs

 

Costs incurred internally in creating computersoftware products are expensed until technological feasibility has beenestablished upon completion of a program design. Thereafter, applicablesoftware development costs are capitalized and subsequently reported at thelower of amortized cost or net realizable value.  Capitalized costs are amortized based oncurrent and expected future revenue for each product with minimum annualamortization equal to the straight-line amortization over the estimatedeconomic life of the product, not to exceed five years.  For the four months ended December 31, 2004and 2003, the Company capitalized $175,242 and $180,500, respectively.  At December 31, 2004, the balance of capitalizedsoftware costs were $1,531,573, net of accumulated amortization of $878,021.

 

Income Taxes

 

The Company uses the asset and liability method toaccount for income taxes, including recognition of deferred tax assets for theanticipated future tax consequences attributable to differences betweenfinancial statement amounts and their respective tax bases. Income tax expenseis recognized currently for taxes payable. The Company reviews its deferred taxassets for recovery. A valuation allowance is established when the Companybelieves that it is more likely than not that some portion of its deferred taxassets will not be realized. Changes in valuation allowances from period toperiod are included in the Company’s tax provision in the period of change.

 

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### **Risk Factors**

 

        In evaluating the Company,various risk factors and other information should be carefully considered. Therisks and uncertainties described below are not the only ones that impact theCompany. Additional risks and uncertainties not presently known to us or thatwe currently deem immaterial may also have an adverse impact on us. Among otherthings, this discussion contains forward-looking statements that are based oncertain assumptions about future risks and uncertainties. We believe that ourassumptions are reasonable. Nonetheless, it is likely that at least some ofthese assumptions will not come true.

 

 

***CCA faces intensecompetition from both established entities and new entries in the market thatmay adversely affect our revenues and profitability***

 

        Thereare many companies with active research and development programs both in andoutside of the healthcare information technology industry.  Many of these companies have considerableexperience in areas of competing interest to us.  Additionally, we cannot determine if otherfirms are conducting potentially competitive research, which could result inthe development and introduction of products that are either comparable orsuperior to the products we sell. Further, new product introductions, product enhancements and the use ofother technologies by our competitors could lead to a loss of market acceptanceand cause a decline in sales or gross margins.

 

***CCA’s success depends on itsability to attract, retain and motivate management and other skilled employees***

 

        CCA’ssuccess depends upon the continued services of key management and skilledpersonnel.  Competition for qualifiedpersonnel is intense and there are a limited number of people with knowledgeof, and experience in, our industry.  Wedo not have employment agreements with most of our key employees.  However, we generally enter into agreementswith our employees regarding patents, confidentiality and related matters.  We do not maintain life insurance polices onour employees.  Our loss of keypersonnel, especially without advance notice, or our inability to hire orretain qualified personnel, could have a material adverse effect on sales andour ability to maintain our technological edge. We cannot guarantee that we will continue to retain our key managementand skilled personnel, or that we will be able to attract, assimilate andretain other highly qualified personnel in the future.

 

***Any failure tosuccessfully introduce future products into the market could adversely affectour business***

 

        Thecommercial success of future products depends upon their acceptance by themedical community.  Our future productplans include capital-intensive clinical information systems.  We believe that these products cansignificantly reduce labor costs, improve patient care and offer otherdistinctive benefits to the medical community. However, there is often market resistance to products that requiresignificant capital expenditures or which eliminate jobs through automation.  We can make no assurance that the market willaccept our future products and systems, or that sales of our future productsand systems will grow at the rates expected by our management.

 

***If CCA fails tomeet changing demands of technology, we may not continue to be able to competesuccessfully with competitors***

 

        Themarket for CCA’s products and systems is characterized by rapid technologicaladvances, changes in customer requirements and frequent new productintroductions and enhancements.  Ourfuture success depends upon our ability to introduce new products that keeppace with technological developments, enhance current product lines and respondto evolving client requirements.  Ourfailure to meet these demands could result in a loss of our market share andcompetitiveness and could harm our revenues and results of operations.

 

***Any failure or inability toprotect our technology and confidential information could adversely affect ourbusiness***

 

        *Trade Secrets**.***  We have tradesecrets, unpatented technology and proprietary knowledge related to the sale,promotion, design, operation, and development of our products.  We generally enter into confidentialityagreements with our employees and consultants. However, we cannot guarantee that our trade secrets, unpatentedtechnology or proprietary knowledge will 

 

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not become known or be independently developed bycompetitors.  If any of this proprietaryinformation becomes know to third parties, we may have no practical recourseagainst these parties.

 

        *Copyrights**.***  We claimcopyrights in our software and also claim trademark rights in the United Statesand other foreign countries where we sell our products.  However, we can make no assurance that wewill be able to obtain enforceable copyright and trademark protection, nor thatthis protection will provide us a significant commercial advantage.

 

***CCA operates in aconsolidating industry which creates barriers to market penetration***

 

        Thehealthcare information technology industry in recent years has beencharacterized by consolidation by both healthcare providers who are our clientsand by those companies that we compete against. Large hospital chains and groups of affiliated hospitals prefer tonegotiate comprehensive contracts for all of their system needs with larger vendorswho offer broader product lines and services. The convenience offered by these large vendors are administrative andfinancial incentives that we cannot offer our clients.

 

***CCA’s products maybe subject to government regulation in the future that could impair ouroperations***

 

        CCA’s products could be subject tostringent government regulation in the United States and other countries in thefuture.  These regulatory processes canbe lengthy, expensive and uncertain. Additionally, securing necessary clearances or approvals may require thesubmission of extensive data and other supporting information.  Failure to comply with applicablerequirements could result in fines, recall, total or partial suspension ofdistribution, or withdrawal of existing product.  If any of these things occur, it could have amaterial adverse impact on our business.

 

***Changes ingovernment regulation of the healthcare industry could adversely affect CCA’sbusiness.***

 

        Federaland state legislative proposals are periodically introduced or proposed thatwould affect major changes in the healthcare system, nationally, at the statelevel or both.  Future legislation,regulation or payment policies of Medicare, Medicaid, private health insuranceplans, health maintenance organizations and other third-party payors couldadversely affect the demand for our current or future products and our abilityto sell our products on a profitable basis. Moreover, healthcare legislation is an area of extensive and dynamicchange, and we cannot predict future legislative changes in the healthcarefield or their impact on our industry or our business.

 

***Defective productsmay subject CCA to liability***

 

        CCA’s products are used togather information for professionals to make medical decisions, diagnosis, andtreatment.  Accordingly, the manufactureand sale of our products entails an inherent risk of product liability arisingfrom an inaccurate, or allegedly inaccurate, test or procedure result.  We currently maintain product liabilityinsurance coverage for up to $2.0 million per incident and up to anaggregate of $4.0 million per year. Although management believes this liability coverage is sufficientprotection against future claims, there can be no assurance of the sufficiencyof these policies.  We have not receivedany indication that our insurance carrier will not renew our product liabilityinsurance at or near current premiums; however, we cannot guarantee that thiswill continue to be the case.

 

*****HealthInsurance Portability and Accountability Act (HIPAA)*****

 

****Ourbusiness is substantially impacted by the requirements of HIPAA and ourproducts must maintain the confidentiality of a patents medical records andinformation.  These requirements also apply to most of our clients. We believe our products meet the standards of HIPAA and may require our clientsto upgrade their systems, but our clients’ preoccupation with HIPAA mayadversely impact sales of our products, and the costs of compliance with HIPAAcould have an impact on our product margins and selling, general andadministrative expenses incurred by us and could negatively impact our netincome.****

 

*****Loss of the services of our key personnel couldadversely affect our business*****

 

Our future success and growth depend on the continuedservices of our key management and employees, including Steve Besbeck, BruceMiller, and James Helms.  The loss of theservices of any of these individuals or any other key employee could materiallyaffect our business.  Our future successalso depends on our ability to identify, attract and 

 

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retain additional qualified personnel. Competition for employees in our industry is intense and we may not besuccessful in attracting or retaining them.

 

 

*****We depend on our computer and communications system*****

 

****        We rely on ourmanagement information systems to operate our business and to track ouroperating results.  Our managementinformation systems will require modification and refinement as we grow and ourbusiness needs change.  If we experiencea significant system failure or if we are unable to modify our managementinformation systems to respond to changes in our business needs, then ourability to properly run our business could be adversely affected.****

 

 

 

*****Our evaluation of internal controls and remediationof potential problems will be costly and time consuming and could exposeweakness in our financial reporting*****

 

****        While webelieve that we currently have adequate internal control procedures in place,we are still exposed to potential risks from recent legislation requiringcompanies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of2002.  We are evaluating our internalcontrols system in order to allow management to report on, and our independentauditors to attest to, our internal controls over financial reporting, asrequired in Section 404 of the Sarbanes-Oxley Act of 2002.  Stock price may be affected if a materialweakness is found.****

 

*****We may be unable tocomplete the StorCOMM Merger*****

 

****        We have entered into a Letter of Intentto merge with StorCOMM.  The transactionis subject to the completion and execution of a definitive merger agreement andshareholder approval.  The merger isrisky and may be subject to a lengthy process to close and it could divertmanagement’s time and focus from operating our business.  We may seek additional debt or equityfinancing in connection with the merger. Additional financing may not be available to us on acceptable terms orat all.  We may not be able to close thetransaction on the timetable we anticipate, if at all.  If we are unable to complete the merger, wemay incur significant non-recoverable expenses that may have a material adverseeffect on our financial position.  If wedo complete the transaction, it could result in unanticipated operatingdifficulties and expense and the anticipated benefits of the transaction maynot materialize.****

 

*****Future sales of our common stock could adverselyaffect our stock price*****

 

****       ********Future sales of substantial amounts of shares of our commonstock in the public market, or the perception that these sales could occur, maycause the market price of our common stock to decline.  In addition, we may be required to issueadditional shares upon exercise of previously granted options that arecurrently outstanding.  Increased salesof our common stock in the market after exercise of our currently outstandingstock options could exert significant downward pressure on our stockprice.  These sales also might make itmore difficult for us to sell equity or equity-related securities in the futureat a time and price********we deemappropriate.****

 

### **New Accounting Pronouncements**

 

In December 2004 the Financial Accounting StandardsBoard (FASB) issued Statement of Financial Accounting Standard No. 123 (revised2004), *Share-Based Payment (SFAS No. 123(R))*.SFAS No. 123(R) requires compensation cost relating to unvested share-basedpayment transactions that are outstanding as of the effective date and newlyissued transactions to be recognized in the financial statements. That cost willbe measured based on the fair value of the equity or liability instrumentsissued. SFAS No. 123(R) covers a wide range of share-based compensationarrangements including share options, restricted share plans, performance-basedawards, share appreciation rights and employee share purchase plans. SFAS No.123(R) replaces SFAS No. 123, *Accounting forStock-Based Compensation*(SFAS No. 123), and supersedes AccountingPrinciples Board Opinion No. 25, *Accountingfor Stock Issued to Employees*(Opinion 25)*.*SFAS No. 123, as originally issued in 1995, establishedfair-value-based method of accounting for share-based payment transactions withemployees. However, that Statement permitted entities the option of continuingto apply the guidance in Opinion 25, as long as the footnotes to financialstatements disclosed what net income would have been had the fair-value-basedmethod been used. As disclosed in footnote 2, the Company elected the option ofdisclosure only under 

 

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SFAS No. 123. Public entities will be required to apply SFAS No. 123(R)as of the first interim or annual reporting period that begins afterJune 15, 2005.  The Company iscurrently evaluating the impact of this statement.

 

In December 2004, the FASB issued SFAS No. 153, “Exchangesof Nonmonetary Assets — An Amendment of APB Opinion No. 29,” which eliminatesthe exception for nonmonetary exchanges of similar productive assets andreplaces it with a general exception for exchanges of nonmonetary assets thatdo not have commercial substance.  The Company is required to adopt SFASNo. 153 for nonmonetary asset exchanges occurring in the first quarter of 2006and its adoption is not expected to have a significant impact on the Company’sresults of operations or financial condition.

 

In November 2004, the FASB issued SFAS No. 151, “InventoryCosts — An Amendment of ARB No. 43, Chapter 4,” which clarifies the accountingfor abnormal amounts of idle facility expense, freight, handling costs andwasted material (spoilage).  The Company is required to adopt SFAS No. 151in 2006 and its adoption is not expected to have a significant impact on theCompany’s results of operations or financial condition.

 

**Item 3             Controls and Procedures**

 

 

(a)  Evaluationof Disclosure Controls and Procedures. The Company’s Chief Executive Officer and its Chief Accounting Officer,with the participation of the Company’s management, carried out an evaluationof the effectiveness of the Company’s disclosure controls and procedures pursuantto Exchange Act Rules 13a-15(e).  Basedupon that evaluation, the Chief Executive Officer and the Chief AccountingOfficer believes that as of the end of the period covered by this report, theCompany’s disclosure controls and procedures are adequate and effective inmaking known to them material information relating to the Company (includingits consolidated subsidiary) required to be included in the report.

(b)  Changesin Internal Controls. There were no significant changes in the Company’sinternal controls or in other factors that could significantly affect theCompany’s disclosure controls and procedures subsequent to the Evaluation Date,nor any significant deficiencies or material weaknesses in such disclosurecontrols and procedures requiring corrective actions.

The Company maintains a system of internal controlsdesigned to provide reasonable assurance that transactions are executed inaccordance with management’s general or specific authorization; transactionsare recorded as necessary (1) to permit preparation of financial statements inconformity with generally accepted accounting principles, (2) to maintainaccountability for assets, and (3) to ensure that access to assets is permittedonly in accordance with management’s general or specific authorization; and therecorded accountability for access is compared with the existing assets atreasonable intervals and appropriate action is taken with respect to anydifferences.

#### ** **

 

 

#### ** **

#### **PART II - OTHER INFORMATION**

 

 

Items 1 through 5. NOT APPLICABLE

 

**Item 6.    Exhibits**

 

(a)           Exhibit 11 -Statement re: computation of per share earnings.

 

(b)           Exhibit 31.1    Certification of Chief Executive Officerpursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

                                                Exhibit 31.2    Certification of Chief Accounting Officer pursuant to Section 302of the Sarbanes-Oxley Act of 2002.

                                                Exhibit 32.1 Certification of ChiefExecutive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

                                                Exhibit 32.2 Certification of ChiefAccounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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### **SIGNATURES**

 

In accordance with the requirements of the Exchange Act, the Companycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

CREATIVE COMPUTERAPPLICATIONS, INC.

(Company)

 

 
| Date February 24, 2005 |   |   |   |   | /S/ Steven M. Besbeck          |
|------------------------|--------|--------|--------|--------|--------------------------------|
|                   |   |   |   |   | Steven. M. Besbeck, President  |
|                   |   |   |   |   | Chief Executive Officer, Chief |
|                   |   |   |   |   | Financial Officer              |

 

 
| Date February 24, 2005 |   |   |   | /S/ Anahita Villafane           |
|------------------------|--------|--------|--------|---------------------------------|
|                   |   |   |   | Anahita Villafane,              |
|                   |   |   |   | Controller and Chief Accounting |
|                   |   |   |   | Officer                         |

 

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