** **

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-QSB**

 
| **(Mark  One)**                                                                                                                                                                                                                                                                                                                                                                        |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                   |
| **ý**                                                                                                                                                                                                                                                                                                                                                                             | ** ** | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                                                                                                                                                                             | ** ** | ** ** |
| **For the  quarterly period ended November 30, 2004.**                                                                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                                                                   |
| **o**                                                                                                                                                                                                                                                                                                                                                                                  | ** ** | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT** |
| ** **                                                                                                                                                                                                                                                                                                                                                                             | ** ** | ** ** |
| **For the  transition period  from                            to                            ** |

 

**Commission file number 0-12551**

 

**CREATIVE COMPUTER APPLICATIONS, INC.**

(Exact name of small business issuer as specified in its charter)

 

| **California**                                                  | **95-3353465**                        |
|-----------------------------------------------------------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) | (I.R.S. Employer  Identification No.) |
|                                                            |                                  |
| **26115-A Mureau Road, Calabasas, California 91302**            |
| (Address of principal executive offices)                        |
|                                                            |                                  |
| **(818) 880-6700**                                              |
| Issuer’s telephone number:                                 |

 

**State thenumber of shares outstanding of each of the issuer’s classes of common equity,as of the latest practicable date: 3,321,900 common shares as of December 31, 2004.**

 

**TransitionalSmall Business Disclosure Format (check one):**

**Yes  ****o             No  ****ý**

 

 

----

 

**CREATIVE COMPUTER APPLICATIONS, INC.**

 

**FORM 10-QSB**

 

### **I N D E X**

 
| **PART I - Financial  Information:**                                                                                 |   |
|----------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                 |   |
| Condensed  Consolidated Balance Sheets, as at November 30, 2004 and August 31, 2004                                  |   |
|                                                                                                                 |   |
| Condensed  Consolidated Statements of Operations for the three months ended November 30,  2004 and November 30, 2003 |   |
|                                                                                                                 |   |
| Condensed  Consolidated Statements of Cash Flows for the three months ended November 30,  2004 and November 30, 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

----

 

**CREATIVE COMPUTER APPLICATIONS, INC.**

 

**PART I -FINANCIAL INFORMATION**

 

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

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                        | ** ** | **November 30,  2004** | ** ** | **August 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                                        | ** ** | **(Unaudited)**        | ** ** | ** **           | ** ** |
| **ASSETS**                                                                                                        |       |                   |       |                 |       |
|                                                                                                              |       |                   |       |                 |       |
| CURRENT ASSETS:                                                                                                   |       |                   |       |                 |       |
| Cash                                                                                                              |       | $                      | 1,623,598  |                 | $          | 1,574,377 |   |
| Receivables, net                                                                                                  |       | 1,913,115              |       | 1,722,340            |       |
| Inventory                                                                                                         |       | 136,634                |       | 118,517              |       |
| Prepaid expenses and other assets                                                                                 |       | 273,130                |       | 266,848              |       |
| Deferred tax asset                                                                                                |       | 539,420                |       | 539,420              |       |
|                                                                                                              |       |                   |       |                 |       |
| TOTAL CURRENT ASSETS                                                                                              |       | 4,485,897              |       | 4,221,502            |       |
|                                                                                                              |       |                   |       |                 |       |
| PROPERTY AND EQUIPMENT, net                                                                                       |       | 328,222                |       | 183,814              |       |
| INVENTORY OF COMPONENT PARTS                                                                                      |       | 191,599                |       | 199,031              |       |
| CAPITALIZED SOFTWARE COSTS, net of accumulated amortization of  $1,203,218 and $1,103,009                    |       | 1,519,952              |       | 1,492,661            |       |
| DEFERRED TAX ASSET                                                                                                |       | 254,457                |       | 254,457              |       |
|                                                                                                              |       |                   |       |                 |       |
|                                                                                                              |       | $                      | 6,780,127  |                 | $          | 6,351,465 |   |
|                                                                                                              |       |                   |       |                 |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                     |       |                   |       |                 |       |
|                                                                                                              |       |                   |       |                 |       |
| CURRENT LIABILITIES:                                                                                              |       |                   |       |                 |       |
| Notes payable to bank (Note 3)                                                                                    |       | 300,000                |       | —               |       |
| Accounts payable                                                                                                  |       | 393,718                |       | 185,869              |       |
| Accrued liabilities:                                                                                              |       |                   |       |                 |       |
| Vacation pay                                                                                                      |       | 249,563                |       | 230,183              |       |
| Accrued payroll                                                                                                   |       | 66,669                 |       | 158,092              |       |
| Other                                                                                                             |       | 202,071                |       | 188,338              |       |
| Deferred service contract income                                                                                  |       | 1,206,685              |       | 1,175,509            |       |
| Deferred revenue on system sales                                                                                  |       | 261,796                |       | 244,882              |       |
|                                                                                                              |       |                   |       |                 |       |
| TOTAL CURRENT LIABILITIES                                                                                         |       | 2,680,502              |       | 2,182,873            |       |
|                                                                                                              |       |                   |       |                 |       |
| SHAREHOLDERS’ EQUITY:                                                                                        |       |                   |       |                 |       |
| Common shares, no par value; 20,000,000 shares  authorized; 3,318,900 and 3,318,900 shares issued and outstanding |       | 6,192,692              |       | 6,192,692            |       |
| Accumulated deficit                                                                                               |       | (2,093,067             | )          | (2,024,100           | )          |
|                                                                                                              |       |                   |       |                 |       |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                   |       | 4,099,625              |       | 4,168,592            |       |
|                                                                                                              |       |                   |       |                 |       |
|                                                                                                              |       | $                      | 6,780,127  |                 | $          | 6,351,465 |   |

 

**See Notes to Condensed Consolidated FinancialStatements.**

 

----

*** Aspresented in the audited consolidated financial statements**

 

3

----

 

**CREATIVE COMPUTER APPLICATIONS, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                     | ** ** | **Three Months Ended November 30,** | ** ** |
|------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                     | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| ** **                                     | ** ** | **(Unaudited)**                     | ** ** |
|                                           |       |                                |       |   |   |
| NET SYSTEM SALES AND SERVICE REVENUE:          |       |                                |       |   |   |
| System sales                                   |       | $                                   | 632,479    |   | $ | 471,355 |   |
| Service revenue                                |       | 1,158,229                           |       | 1,124,206 |   |
|                                           |       | 1,790,708                           |       | 1,595,561 |   |
|                                           |       |                                |       |   |   |
| COSTS OF PRODUCTS AND SERVICES SOLD:           |       |                                |       |   |   |
| System sales                                   |       | 418,021                             |       | 447,375 |   |
| Service revenue                                |       | 390,998                             |       | 405,054 |   |
|                                           |       | 809,019                             |       | 852,429 |   |
|                                           |       |                                |       |   |   |
| Gross profit                                   |       | 981,689                             |       | 743,132 |   |
|                                           |       |                                |       |   |   |
| OPERATING EXPENSES                             |       |                                |       |   |   |
| Selling, general and administrative            |       | 753,741                             |       | 740,484 |   |
|                                           |       |                                |       |   |   |
| Research and development                       |       | 299,583                             |       | 256,236 |   |
|                                           |       |                                |       |   |   |
| Total operating expenses                       |       | 1,053,324                           |       | 996,720 |   |
|                                           |       |                                |       |   |   |
| Operating loss                                 |       | (71,635                             | )          | (253,588 | ) |
|                                           |       |                                |       |   |   |
| INTEREST AND OTHER INCOME                      |       | 2,966                               |       | 1,357 |   |
|                                           |       |                                |       |   |   |
| INTEREST EXPENSE                               |       | (298                                | )          | (1,427 | ) |
|                                           |       |                                |       |   |   |
| Loss before provision for income taxes         |       | (68,967                             | )          | (253,658 | ) |
|                                           |       |                                |       |   |   |
| PROVISION FOR INCOME TAXES                     |       | —                              |       | — |   |
|                                           |       |                                |       |   |   |
| NET LOSS                                       |       | $                                   | (68,967    | ) | $ | (253,658 | ) |
|                                           |       |                                |       |   |   |
| LOSS PER SHARE (Note 2):                       |       |                                |       |   |   |
|                                           |       |                                |       |   |   |
| Basic                                          |       | $                                   | (.02       | ) | $ | (.08 | ) |
| Diluted                                        |       | (.02                                | )          | (.08 | ) |
|                                           |       |                                |       |   |   |
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: |       |                                |       |   |   |
| Basic and Diluted                              |       | 3,318,900                           |       | 3,318,900 |   |

 

**See Notes to Condensed Consolidated FinancialStatements.**

 

4

----

 

**CREATIVE COMPUTER APPLICATIONS, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

**Increase (Decrease) in Cash**

 
| ** **                                                                                 | ** ** | **Three Months Ended November 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                 | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| ** **                                                                                 | ** ** | **(Unaudited)**                     | ** ** |
|                                                                                       |       |                                |       |   |   |
| OPERATING ACTIVITIES                                                                       |       |                                |       |   |   |
| Net loss                                                                                   |       | $                                   | (68,967    | ) | $ | (253,658 | ) |
| Adjustments to reconcile net loss to net cash  provided by (used in) operating activities: |       |                                |       |   |   |
| Depreciation and amortization                                                              |       | 34,200                              |       | 33,639 |   |
| Provision for doubtful accounts                                                            |       | —                              |       | 10,000 |   |
| Amortization of capitalized software costs                                                 |       | 100,209                             |       | 101,692 |   |
| Increase (decrease) from changes in:                                                       |       |                                |       |   |   |
| Receivables                                                                                |       | (190,775                            | )          | 149,858 |   |
| Inventories                                                                                |       | (10,685                             | )          | 29,807 |   |
| Prepaid expenses and other assets                                                          |       | (6,282                              | )          | 32,380 |   |
| Accounts payable                                                                           |       | 207,849                             |       | 50,614 |   |
| Accrued liabilities                                                                        |       | (58,310                             | )          | (50,346 | ) |
| Deferred service contract income                                                           |       | 31,176                              |       | 28,584 |   |
| Deferred revenue on system sales                                                           |       | 16,914                              |       | (187,004 | ) |
|                                                                                       |       |                                |       |   |   |
| Net cash provided by (used in) operating activities                                        |       | 55,329                              |       | (54,434 | ) |
|                                                                                       |       |                                |       |   |   |
| INVESTING ACTIVITIES                                                                       |       |                                |       |   |   |
| Additions to property and equipment                                                        |       | (178,608                            | )          | (20,312 | ) |
| Additions to capitalized software costs                                                    |       | (127,500                            | )          | (129,000 | ) |
|                                                                                       |       |                                |       |   |   |
| Net cash used in investing activities                                                      |       | (306,108                            | )          | (149,312 | ) |
|                                                                                       |       |                                |       |   |   |
| 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                                                            |       | 49,221                              |       | (204,107 | ) |
|                                                                                       |       |                                |       |   |   |
| CASH, beginning of period                                                                  |       | 1,574,377                           |       | 1,075,323 |   |
|                                                                                       |       |                                |       |   |   |
| CASH, end of period                                                                        |       | $                                   | 1,623,598  |   | $ | 871,216 |   |
|                                                                                            |            |                                     |            |  |  |  |  |  |  |

 

**See notes to Condensed Consolidated FinancialStatements.**

 

5

----

 

**CREATIVE COMPUTER APPLICATIONS, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**Note 1.**                                                          In the opinion of management, theaccompanying unaudited condensed consolidated financial statements reflect alladjustments (which include only normal recurring accruals) necessary to presentfairly the Company’s financial position as of November 30, 2004, the results ofits operations for the three months ended November 30, 2004 and 2003, and cashflows for the three months ended November 30, 2004 and 2003.  These results have been determined on thebasis of accounting principles generally accepted in the United States ofAmerica and practices applied consistently with those used in preparation ofthe Company’s Annual Report on Form 10-KSB for the fiscal year ended August 31,2004.

 

                                                                                                The results of operations for thethree months ended November 30, 2004 are not necessarily indicative of theresults expected for any other period or for the entire year.

 

**Note 2.**                                                          TheCompany accounts for its earnings per share in accordance with SFAS No.128,which requires presentation of basic and diluted earnings per share.  Basic earnings per share is computed bydividing income or loss available to common shareholders by the weightedaverage number of common shares outstanding for the reporting period.  Diluted earnings per share reflect thepotential dilution that could occur if securities or other contracts, such asstock options, to issue common stock were exercised or converted into commonstock.

 

                                                                                                Earningsper share has been computed as follows:

 
| ** **                                                    | ** ** | **Three Months Ended  November 30, 2004** | ** **    | **Three Months Ended  November 30, 2003** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------|---------------|-------------------------------------------|------------|
|                                                          |       |                                      |          |                                      |       |
| NET LOSS                                                      |       | $                                         |  (68,967 | )                                         | $          |  (253,658 | ) |
| Basic weighted average number of common shares  outstanding   |       | 3,318,900                                 |          | 3,318,900                                 |       |
|                                                          |       |                                      |          |                                      |       |
| Dilutive effect of stock options                              |       | —                                    |          | —                                    |       |
| Diluted weighted average number of common shares  outstanding |       | 3,318,900                                 |          | 3,318,900                                 |       |
|                                                          |       |                                      |          |                                      |       |
| Basic loss per share                                          |       | $                                         | (.02          | )                                         | $          | (.08 | ) |
| Diluted loss per share                                        |       | $                                         | (.02          | )                                         | $          | (.08 | ) |

 

                                                                                                Forthe three months ended November 30, 2004 and 2003, options to purchase 405,000and 405,000 shares of common stock at a per share price ranging from $.72 to$1.76 were not included in the computation of diluted loss per share becauseinclusion would have been anti-dilutive.

 

**Note 3.**                                                          TheCompany’s line of credit with its bank provides for $500,000 on a revolvingbasis through February 1, 2005.  OnNovember 30, 2004, the total amount due to the bank was $300,000.

 

**Note 4.**                                                          As allowed by SFAS 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.

 

                                                                                                Thefollowing table illustrates the effect on net income (loss) and income (loss)per share as if the Company had applied the fair value recognition provision ofSFAS No. 123 to stock-based employee compensation:

 

6

----

 
| ** **                                                                                                     | ** ** | **Three Months  Ended****November 30, 2004** | ** ** | **Three Months  Ended****November 30, 2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                                     | ** ** | ** **                                   | ** ** | ** **                                   | ** ** |
| Net loss, as reported                                                                                          | ** ** | $                                            | (68,967    | )                                            | $          | (253,658 | ) |
| 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 | ** ** | (13,704                                      | )          | (16,835                                      | )          |
|                                                                                                           | ** ** | ** **                                   |       |                                         |       |
| Net loss, pro forma                                                                                            |       | $                                            | (82,671    | )                                            | $          | (270,493 | ) |
|                                                                                                           |       |                                         |       |                                         |       |
| Basic net loss per share, as reported                                                                          |       | $                                            | (.02       | )                                            | $          | (.08 | ) |
|                                                                                                           |       |                                         |       |                                         |       |
| Basic net loss per share, pro forma                                                                            |       | $                                            | (.02       | )                                            | $          | (.08 | ) |
|                                                                                                           |       |                                         |       |                                         |       |
| Diluted net loss per share, as reported                                                                        |       | $                                            | (.02       | )                                            | $          | (.08 | ) |
|                                                                                                           |       |                                         |       |                                         |       |
| Diluted net loss per share, pro forma                                                                          |       | $                                            | (.02       | )                                            | $          | (.08 | ) |

 

TheCompany issues all of its options at fair market value at the time of grant;therefore, no expense has been recorded under the intrinsic value method forthe three months ended November 30, 2004 and 2003.  As required by SFAS 123, the Company providesthe 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 the followingweighted average assumptions for 2004 and 2003: risk free interest ratesranging from 3.4% to 6.1%, expected lives of 5 years; volatility ranging from67% 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 threemonths ended November 30, 2004.

 

**Note 5.****                                                         **Inaccordance with the bylaws of the Company, officers and directors areindemnified for certain events or occurrences arising as a result of theofficer or director’s serving in such capacity. The term of the indemnification period is for the lifetime of theofficer or director.  The maximumpotential amount of future payments the Company could be required to make underthe indemnification provisions of its bylaws is unlimited.  However, the Company has a director andofficer liability insurance policy that reduces its exposure and enables it torecover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes theestimated exposure for the indemnification provisions of its bylaws is minimaland, therefore, the Company has not recorded any related liabilities.

 

TheCompany enters into indemnification provisions under agreements with variousparties in the normal course of business, typically with customers andlandlords.  Under these provisions, theCompany generally indemnifies and holds harmless the indemnified party forlosses suffered or incurred by the indemnified party as a result of the Company’sactivities or, in some cases, as a result of the indemnified party’s activitiesunder the agreement.  Theseindemnification provisions often include indemnifications relating torepresentations made by the Company with regard to intellectual propertyrights.  These indemnification provisionsgenerally survive termination of the underlying agreement.  The maximum potential amount of futurepayments the Company could be required to make under these indemnificationprovisions cannot be estimated.  TheCompany maintains general liability, errors and omissions, and professionalliability insurance in order to mitigate such risks.  The Company has not incurred material coststo defend lawsuits or settle claims related to these indemnificationagreements.  As a result, the Companybelieves the estimated exposure under these agreements is minimal.  Accordingly, the Company has not recorded anyrelated liabilities.

 

7

----

 

**Note 6.**                                                          NewAccounting 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 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.

 

In December 2004, theFASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — An Amendment ofAPB Opinion No. 29,” which eliminates the exception for nonmonetary exchangesof similar productive assets and replaces it with a general exception forexchanges of nonmonetary assets that do not have commercial substance. The Company is required to adopt SFAS No. 153 for nonmonetary asset exchangesoccurring in the first quarter of 2006 and its adoption is not expected to havea significant impact on the Company’s results of operations or financialcondition.

 

InNovember 2004, the FASB issued SFAS No. 151, “Inventory Costs — An Amendment ofARB No. 43, Chapter 4,” which clarifies the accounting for abnormal amounts ofidle facility expense, freight, handling costs and wasted material(spoilage).  The Company is required to adopt SFAS No. 151 in 2006 and itsadoption is not expected to have a significant impact on the Company’s resultsof operations or financial condition.

 

**Note 7.****                                                         **Subsequent Events — OnJanuary 10, 2005, the Company entered into a letter of intent to merge withStorCOMM, Inc. of Jacksonville, Florida, a private company providing PictureArchive Communication Systems (PACS) and Clinical Image Management Systems forthe medical imaging market (the “StorCOMM Merger”). CCA will be the survivingentity and StorCOMM shareholders 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.

 

On January 11, 2005, the Companyannounced a change in its fiscal year end from August 31 to December 31.  The Company will be filing a Form 10-QSBTtransition report covering the transition period of September 1, 2004 —December 31, 2004.

 

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

 

ThisQuarterly Report on Form 10-QSB contains forward-looking statements, whichreflect management’s current views about future events and financialresults.  Management makes thesestatements in reliance on the safe harbor created by the Private SecuritiesLitigation Reform Act of 1995.  Forward-lookingstatements include views on future financial results, financing sources,product development, capital requirements, market growth and the like, and aregenerally identified by phrases such as “anticipates,” “believes,” “estimates,”“expects,” “intends,” “plans” and similar words.  Forward-looking statements are merely predictionsand therefore inherently subject to uncertainties and other factors which couldcause the actual results to differ materially from the forward-lookingstatement.  These uncertainties and otherfactors include, among other things:

 

**•**                  Unexpectedtechnical and marketing difficulties inherent in major product developmentefforts such as those described about CyberLAB 7.0.

 

8

----

 

**•**                  The potentialneed for changes in our long-term strategy in response to future developments.

**•**                  Future advancesin clinical information technology and procedures, as well as potential changesin government regulations and healthcare policies, both of which couldadversely affect the economics of the products offered by CCA.

**•**                  Rapid technologicalchange in the microelectronics and software industries

**•**                  Increasingcompetition from current as well as future competitors, and

**•**                  The ability tocomplete the StorCOMM Merger.

 

Set forth below are other significant uncertaintiesand factors 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**

 

CCAgenerates revenues primarily from the sale of its Clinical Information Systems(CIS), which includes the licensure of proprietary application software, thelicensure of third party software, and the sale of servers upon which theapplication software operates.  Inconnection with its sales of CIS products, the Company provides implementationservices for the installation, integration, and training of end users’personnel.  The Company generates salesof ancillary software and hardware, including its data acquisition products, toits CIS clients and to third parties.  The Company also generates recurring revenuesfrom the provision of comprehensive post implementation services to its CISclients, pursuant to extended service agreements.

 

Becauseof the nature of its business, CCA makes significant investments in researchand development for new products and enhancements to existing products.  Historically, CCA has funded its research anddevelopment programs through 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’sresults of operations for the first fiscal quarter ended November 30, 2004 weremarked by an increase in sales and a smaller loss over the comparable quarterone year ago.  The Company’s increase inrevenues for the first fiscal quarter 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 the second fiscal quarter of 2004 and is nowlive in ten sites and five new sites are in the process of beingimplemented.  The response to the newversion has been very positive.  Otherfactors contributing to the increase in sales were associated with new salesand marketing activities, which generated significant interest among new buyersas well as the existing client base.   It is anticipated that the migration to CyberLAB 7.0 will requireclients to acquire additional hardware and professional services from theCompany in order to deploy the new software. Generally, sales cycles for CIS products are lengthy and on averageexceed one year from inception to closure. Because of the complexity of the sales process, a number of factors candelay the closing of transactions that are beyond the control of the Company.

 

Inorder to address compliance issues brought about by the HIPAA regulations, theCompany completed the development of enhancements to its products and upgradedhundreds of client sites with the HIPAA related enhancements during the 2003fiscal year.  This posed considerablechallenges to CCA’s organization and caused delays in the development andeventual release of CyberLAB 7.0.

 

**Resultsof Operations**

 

Thefollowing table sets forth certain line items in our condensed consolidatedstatement of operations as a percentage of total revenues for the periodsindicated:

 

9

----

 
| ** **                             | ** ** | **Three Months Ended****November 30, 2004** | ** ** | **Three Months Ended****November 30, 2003** | ** ** |
|----------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                             | ** ** | ** **                                  | ** ** | ** **                                  | ** ** |
| Revenues:                              |       |                                        |       |                                        |       |
| System sales                           |       | 35.3                                        | %          | 29.5                                        | %          |
| Service revenues                       |       | 64.7                                        |       | 70.5                                        |       |
|                                   |       |                                        |       |                                        |       |
| Total revenues                         |       | 100.0                                       |       | 100.0                                       |       |
| Costs of  products and services sold:  |       |                                        |       |                                        |       |
| System sales                           |       | 23.4                                        |       | 28.0                                        |       |
| Service revenues                       |       | 21.8                                        |       | 25.4                                        |       |
|                                   |       |                                        |       |                                        |       |
| Total costs of products and services   |       | 45.2                                        |       | 53.4                                        |       |
| Gross profit                           |       | 54.8                                        |       | 46.6                                        |       |
| Operating expenses:                    |       |                                        |       |                                        |       |
| Selling, general and administrative    |       | 42.1                                        |       | 46.4                                        |       |
| Research and development               |       | 16.7                                        |       | 16.1                                        |       |
| Total operating expenses               |       | 58.8                                        |       | 62.5                                        |       |
| Operating loss                         |       | (4.0                                        | )          | (15.9                                       | )          |
| Loss before provision for income taxes |       | (3.9                                        | )          | (15.9                                       | )          |
| Provision for income taxes             |       | —                                      |       | —                                      |       |
|                                   |       |                                        |       |                                        |       |
| Net loss                               |       | (3.9                                        | )          | (15.9                                       | )          |

 

Salesfor the first fiscal quarter ended November 30, 2004 increased to $1,790,708,as compared to $1,595,561 for the comparable quarter ended November 30, 2003,an overall increase of approximately $195,147 or 12%.  When analyzed by product category, sales ofCIS products increased by $135,748 or 32.5%, sales of data acquisition productsincreased by $27,044 or 56.1%, and service revenues increased by $34,023 or3.0% when compared to the same quarter of fiscal 2004.  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 thecurrent 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 anincrease in the average fees charged for such contracts.  Service revenues are expected to continue toincrease as and when the Company’s installed base of CIS installationsincreases.

 

Theincrease in the sales of data acquisition products is primarily attributable toa greater number of units shipped to OEM customers, however, managementbelieves going forward, there will be reduced sales of data acquisitionproducts as there has been a technological shift to software based clinicalinstrument interfaces.  Furthermore,fewer OEM customers remain active in the marketplace or no longer use CCA’sdata acquisition products.  Managementdoes not believe the data acquisition product business is a material part ofCCA’s business today and will not be in the future as the Company’s emphasis isbeing placed on its CIS products and related services.

 

TheCompany continues to expand its direct sales and marketing activities,directing its focus towards larger clients and multi-product sales as well asselling new products into its installed client base.  Although its “pipeline” of working CIStransactions continues to improve, management views the near term outlook forthe continued sale of CIS products cautiously during the first half of the 2005fiscal year.  The Company’s futureoperating results will continue to be subject to quarterly variations basedupon a wide variety of factors, including the volume mix and timing of ordersreceived during any quarter, and the temporary delays in the closing of new CISsales.  In addition, the Company’srevenues associated with CIS sales may be delayed due to client related issuessuch as client staff availability for training, IT infrastructure readiness,and the performance of third party contractors, all of which are issues outsideof the control of CCA.

 

Costof sales for the first quarter of fiscal 2005 decreased by $43,410 or 5.1% ascompared to the same quarter of fiscal 2004. The overall decrease in cost of sales was primarily attributable to adecrease in material costs of $16,341 or 18.4%, a decrease in other costs of$24,676 or 7.6%, and a slight decrease in labor costs of $2,393 or 0.5%.  The decrease in material costs wasattributable to fewer sales of CIS products requiring hardware.  Many new clients prefer providing their ownhardware and, as a result, a higher percentage of CCA’s CIS sales do notinclude hardware.  The decrease in othercosts of sales was attributable to decreased expenses related to telephonecosts as a result of better rates negotiated under a new contract for telephoneand data services.  Cost of sales as apercentage of sales was 45% as compared to 53% for the comparable 2004 fiscal quarter.  The overall percentage decrease in cost ofsales, as a percentage of sales, was attributable to the overall increase insales 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.

 

10

----

 

Selling,general, and administrative expenses increased by $13,257 or 1.8% for the firstfiscal quarter 2005 as compared to the same quarter of fiscal 2004.  The increases in selling, general, andadministrative expenses were primarily attributable to approximately $7,400 inexpenses related to implementation fees for upgrading certain modules of theaccounting system and approximately $7,100 for consultant expenses related toSarbanes-Oxley Act Section 404 compliance requirements.  Management anticipates that it will incurincreases in auditing and consultant expenses in fiscal 2005 that are relatedto Sarbanes-Oxley Act Section 404 compliance requirements.  It is likely to incur additional expenses in2005 related to the StorCOMM Merger. During fiscal 2005, the Company will also acquire and implement a newcustomer relationship management system to replace its aged help deskapplication, a portion of the costs of which will be expensed.  The Company plans to monitor and keep a tightreign on its expenditures in fiscal 2005. Management also anticipates increases in insurance costs in the currentfiscal year.

 

Researchand development expenses increased by $43,347 or 16.9% during the first fiscalquarter of 2005 as compared to the same quarter of fiscal 2004.  The increase is attributable to increases insalaries, other personnel related expenses, and the addition of new personnelin product engineering.  For thecomparable first quarters of 2005 and 2004, the Company capitalized softwarecosts of $127,500 and $129,000, respectively, which are generally amortizedover the estimated useful life, not to exceed five years.  Such costs were attributable to enhancementsand new modules for the Company’s CIS products, and new applications underdevelopment.

 

Forthe fiscal quarters ended November 30, 2004 and 2003, the Company did notrecord a tax provision due to the pretax net loss.  The Company believes that it is more likelythan not that the net deferred tax asset of $793,877 will be realized in futureperiods.

 

As aresult of the factors discussed above, the Company incurred a net loss of$68,967 and $253,658, respectively, for the first fiscal quarters of 2005 and2004.  The Company’s basic and dilutedloss per share was $.02 and $.08, respectively, for the first fiscal quartersof 2005 and 2004.

 

### **Capital Resources andLiquidity**

 

TheCompany’s primary need for capital has been to invest in software development,and in computers and related equipment for its internal use.  The Company invested $127,500 and $129,000during the first fiscal quarters of 2005 and 2004 in software development.  These expenditures related to the new browserversion of the Company’s LIS product, CyberLAB 7.0, and other productenhancements.  The Company anticipatesexpending additional sums during fiscal 2005 on product enhancements to all itsproducts and the further development of the new browser version of the Company’sCyberLAB 7.0 product.  During the firstfiscal quarter of 2005, the Company invested an aggregate of $178,608 inadditions to fixed assets, primarily consisting of computers and softwarerelated to the new customer relationship management system, which is replacingits aged help desk application, as compared to an investment of $20,312 in thecomparable quarter of 2004.

 

As ofNovember 30, 2004, the Company’s working capital amounted to $1,805,395,compared to $2,038,629 as of August 31, 2004. The Company’s current ratio was 1.7 at November 30, 2004 compared to 1.9at August 31, 2004.  At November 30,2004, the Company’s credit facilities with its bank consisted of a revolvingline of credit of $500,000, of which there was $300,000 outstanding.  The bank credit agreement expires on February1, 2005.  Management believes the bankwill renew the line of credit; however, if such renewal is not forthcoming, theCompany may have to seek alternative financing. In addition, the Company mayseek additional debt or equity financing in connection with the StorCOMMMerger.

 

Cashflows from operating activities were $55,329 for the first fiscal quarter of2005 compared to cash used of $54,434 for the comparable quarter of fiscal2004.  The increase in cash flow fromoperating activities was primarily attributable to the reduction in net lossfrom operations in the first fiscal quarter ended November 30, 2004 compared tothe first quarter of fiscal 2004 offset by the net change in accruedreceivables, payables, and deferred revenues.

 

Netcash used in investing activities totaled $306,108 for the first quarter offiscal 2005, compared to $149,312 used in investing activities during thecomparable quarter of 2004.  The increasein cash used in investing activities was due to increased investment inproperty and equipment.

 

11

----

 

Cashflows from financing activities amounted to $300,000 during the first fiscalquarter of 2005 compared to cash used of $361 in the same quarter of fiscal2004.  The change from fiscal 2004 tofiscal 2005 resulted primarily from borrowings from its revolving line ofcredit with the bank.

 

                        TheCompany’s primary source of working capital has been generated from earnings,and from borrowings on its line of credit. The Company produced cash flows amounting to $55,329 along with cashprovided from financing activities of $300,000 to fund its operations in thefirst fiscal quarter ended November 30, 2004. Management believes that its sales pipeline is adequate to producesufficient operating cash flow in the 2005 fiscal year, and that its projectedcash flow from operations, together with its bank credit facilities, should besufficient to fund 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**

 

TheCompany’s sales are generally higher in the winter and spring.  Inflation has not had a material effect onthe Company’s business since the Company has been able to adjust the prices ofits products and services in response to inflationary pressures.  Management believes that most phases of thehealthcare segment of the computer industry will continue to be highlycompetitive, and that potential healthcare reforms including those promulgatedby 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 meet thesechallenges by continuing to employ new technologies when they become available,diversifying its product offerings, improving and expanding its services, andby constantly enhancing its software applications.

 

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

 

Managementsdiscussion and analysis of CCA’s financial condition and results of operationsare based upon the condensed consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States.  The preparation of thesefinancial statements requires management to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosures of contingent assets and liabilities.  On an on-going basis, management evaluatesestimates, including those related to the valuation of inventory and theallowance for uncollectible accounts receivable. We base our estimates onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from these estimates under differentassumptions or conditions. We believe the following critical accountingpolicies affect our more significant judgments and estimates used in thepreparation of our consolidated financial statements:

 

Inventory

 

TheCompany’s inventory is comprised of a current inventory account that consistsof items that are held for resale and a long-term inventory account thatconsists of items that are held for repairs and replacement of hardwarecomponents that are serviced by the Company under long-term Extended ServiceAgreements with its clients.  Currentinventory is valued at the lower of cost to purchase or the current estimatedmarket value of the inventory items. Inventory is evaluated on a continual basis and adjustments to recordedcosts are made based on management’s estimate of future sales value, or in thecase of the long-term component inventory, on managements estimation of theusage of specific inventory items and net realizable value.  Management reviews inventory quantities onhand and makes determination of the excess or obsolete items in the inventory,which, are specifically reserved.  Inaddition, adjustments are made for the difference between the cost of theinventory and the estimated market value and charged to operations in theperiod in which the facts that give rise to the adjustments become known.  At November 30, 2004, the inventory reservewas $143,705.

 

12

----

 

Accounts Receivable

 

Accountsreceivable balances are evaluated on a continual basis and allowances areprovided for potentially uncollectible accounts based on management’s estimateof the collectability of customer accounts. If the financial condition of acustomer were to deteriorate, resulting in an impairment of their ability tomake payments, an additional allowance may be required. Allowance adjustmentsare charged to operations in the period in which the facts that give rise tothe adjustments become known.  Theaccounts receivable balance at November 30, 2004 was $1,913,115, net of anallowance for doubtful accounts of $87,362.

 

RevenueRecognition

 

Revenuesare derived primarily from the sale of CIS products and the provision ofservices.  The components of the systemsales revenues are the licensing of computer software, installation, and thesale of computer hardware and sublicensed software. The components of servicerevenues are software support and hardware maintenance, training, andimplementation services.  The Companyrecognizes revenue in accordance with the provisions of Statement of Position(SOP) No. 97-2, “Software Revenue Recognition,” as amended by SOP No. 98-4, SOP98-9 and clarified by Staff Accounting Bulletin (SAB) 104 “Revenue Recognitionin Financial Statements.” SOP No 97-2, as amended, generally requires revenueearned on software arrangements involving multiple-elements to be allocated toeach element based on the relative fair values of those elements.  The Company allocates revenue to each elementin a multiple-element arrangement based on the element’s respective fair value,with the fair value determined by the price charged when that element is soldand specifically defined in a quotation or contract.  The Company determines the fair value of themaintenance portion of the arrangement based on the renewal price of themaintenance charged to clients, professional services portion of thearrangement, other than installation services, based on hourly rates which theCompany charges for these services when sold apart from a software license, andthe hardware and sublicense of software based on the prices for these elementswhen they are sold separately from the software.  At November 30, 2004, deferred venue was$261,796.

 

PostImplementation software and hardware maintenance services are marketed undermonthly and annual arrangements and are recognized as revenue ratably over thecontracted maintenance term as services are provided.  Deferred revenue related to CIS sales iscomprised of deferrals for license fees, hardware, and other services for whichthe implementation has not yet been completed and revenues have not beenrecognized.  At November 30, 2004,deferred service contract income was $1,206,685.

 

Software DevelopmentCosts

 

Costsincurred internally in creating computer software products are expensed untiltechnological feasibility has been established upon completion of a programdesign. Thereafter, applicable software development costs are capitalized andsubsequently reported at the lower of amortized cost or net realizablevalue.  Capitalized costs are amortizedbased on current and expected future revenue for each product with minimumannual amortization equal to the straight-line amortization over the estimatedeconomic life of the product, not to exceed five years.  For the first fiscal quarters of 2005 and2004, the Company capitalized $127,500 and $129,000, respectively.  At November 30, 2004, the balance ofcapitalized software costs were $1,519,952, net of accumulated amortization of$1,203,218.

 

**Risk Factors**

 

Inevaluating the Company, various risk factors and other information should becarefully considered. The risks and uncertainties described below are not theonly ones that impact the Company. Additional risks and uncertainties notpresently known to us or that we currently deem immaterial may also have anadverse impact on us. Among other things, this discussion containsforward-looking statements that are based on certain assumptions about futurerisks and uncertainties. We believe that our assumptions are reasonable.Nonetheless, it is likely that at least some of these assumptions will not cometrue.

 

13

----

 

***CCA faces intense competition from both established entitiesand new entries in the market that may adversely affect our revenues andprofitability***

 

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 its ability to attract, retain andmotivate 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 to successfully introduce future products intothe market could adversely affect our 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 to meet changing demands of technology, we maynot continue to be able to compete successfully with competitors***

 

The marketfor 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 to protect our technology andconfidential information could adversely affect our business***

 

*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 not become known or be independentlydeveloped by competitors.  If any of thisproprietary information becomes know to third parties, we may have no practicalrecourse against 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 a consolidating industry which createsbarriers 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 largervendors

 

14

----

 

who offer broader productlines and services.  The convenienceoffered by these large vendors are administrative and financial incentives thatwe cannot offer our clients.

 

***CCA’s products may be subject to government regulation inthe future that could impair our operations***

 

CCA’sproducts could be subject to stringent government regulation in the UnitedStates and other countries in the future. These regulatory processes can be lengthy, expensive and uncertain.  Additionally, securing necessary clearancesor approvals may require the submission of extensive data and other supportinginformation.  Failure to comply withapplicable requirements could result in fines, recall, total or partialsuspension of distribution, or withdrawal of existing product.  If any of these things occur, it could have amaterial adverse impact on our business.

 

***Changes in government regulation of the healthcare industrycould adversely affect CCA’s business.***

 

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 dynamic change,and we cannot predict future legislative changes in the healthcare field ortheir impact on our industry or our business.

 

***Defective products may subject CCA to liability***

 

CCA’sproducts are used to gather information for professionals to make medicaldecisions, diagnosis, and treatment.  Accordingly,the manufacture and sale of our products entails an inherent risk of productliability arising from an inaccurate, or allegedly inaccurate, test orprocedure result.  We currently maintainproduct liability insurance coverage for up to $2.0 million per incidentand up to an aggregate of $4.0 million per year.  Although management believes this liabilitycoverage is sufficient protection against future claims, there can be noassurance of the sufficiency of these policies. We have not received any indication that our insurance carrier will notrenew our product liability insurance at or near current premiums; however, wecannot guarantee that this will continue to be the case.

 

*****Health Insurance Portability and Accountability Act(HIPAA)*****

 

****Our business is substantially impacted by therequirements of HIPAA and our products must maintain the confidentiality of apatents medical records and information.  These requirements also apply tomost of our clients.  We believe our products meet the standards of HIPAAand may require our clients to upgrade their systems, but our clients’preoccupation with HIPAA may adversely impact sales of our products, and thecosts of compliance with HIPAA could have an impact on our product margins andselling, general and administrative expenses incurred by us and couldnegatively impact our net income.****

 

*****Loss of the services of our key personnelcould adversely affect our business*****

 

Ourfuture success and growth depend on the continued services of our keymanagement and employees, including Steve Besbeck, Bruce Miller, and JamesHelms.  The loss of the services of anyof these individuals or any other key employee could materially affect ourbusiness.  Our future success alsodepends on our ability to identify, attract and retain additional qualifiedpersonnel.  Competition for employees inour industry is intense and we may not be successful in attracting or retainingthem.

 

*****We depend on our computer andcommunications system*****

 

****We rely on our management information systems tooperate our business and to track our operating results.  Our management information systems willrequire modification and refinement as we grow and our business needschange.  If we experience a significantsystem failure or if we are unable to modify our management information systemsto respond to changes in our business needs, then our ability to properly runour business could be adversely affected.****

 

*****Our evaluation of internal controls andremediation of potential problems will be costly and time consuming and couldexpose weakness in our financial reporting*****

 

15

----

 

****While we believe that we currently have adequateinternal control procedures in place, we are still exposed to potential risksfrom recent legislation requiring companies to evaluate controls under Section404 of the Sarbanes-Oxley Act of 2002. We are evaluating our internal controls system in order to allowmanagement to report on, and our independent auditors to attest to, ourinternal controls over financial reporting, as required in Section 404 of theSarbanes-Oxley Act of 2002.****

 

***We may be unable to complete the StorCOMMMerger***

 

Wehave entered into a Letter of Intent to merge with StorCOMM.  The transaction is subject to the completionand execution of a definitive merger agreement and shareholder approval.  The merger is risky and may be subject to alengthy process to close and it could divert management’s time and focus fromoperating our business.  We may seekadditional debt or equity financing in connection with the merger.  Additional financing may not be available tous on acceptable terms or at all.  We maynot be able to close the transaction on the timetable we anticipate, if atall.  If we are unable to complete themerger, we may incur significant non-recoverable expenses that may have amaterial adverse effect on our financial position.  If we do complete the transaction, it couldresult in unanticipated operating difficulties and expense and the anticipatedbenefits of the transaction may not materialize.

 

*****Future sales of our common stock couldadversely affect our stock price*****

 

****Futuresales of substantial amounts of shares of our common stock in the publicmarket, or the perception that these sales could occur, may cause the marketprice of our common stock to decline.  Inaddition, we may be required to issue additional shares upon exercise ofpreviously granted options that are currently outstanding.  Increased sales of our common stock in themarket after exercise of our currently outstanding stock options could exertsignificant downward pressure on our stock price.  These sales also might make it more difficultfor us to sell equity or equity-related securities in the future at a time and price********we deem appropriate.****

 

### **New AccountingPronouncements**

 

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 for nonmonetaryexchanges of similar productive assets and replaces it with a general exceptionfor exchanges of nonmonetary assets that do not have commercialsubstance.  The Company is required to adopt SFAS No. 153 for nonmonetaryasset exchanges occurring in the first quarter of 2006 and its adoption is notexpected to have a significant impact on the Company’s results of operations orfinancial condition.

 

InNovember 2004, the FASB issued SFAS No. 151, “Inventory Costs — An Amendment ofARB No. 43, Chapter 4,” which clarifies the accounting for abnormal amounts ofidle facility expense, freight, handling costs and wasted material(spoilage).  The Company is required to adopt SFAS No. 151 in 2006 and itsadoption is not expected to have a significant impact on the Company’s resultsof operations or financial condition.

 

16

----

 

**Item 3****                                      Controlsand 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 procedurespursuant to Exchange Act Rules 13a-15(e). Based upon that evaluation, the Chief Executive Officer and the ChiefAccounting Officer believes that as of the end of the period covered by thisreport, the Company’s disclosure controls and procedures are adequate andeffective in making known to them material information relating to the Company(including its 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.

TheCompany maintains a system of internal controls designed to provide reasonableassurance that transactions are executed in accordance with management’sgeneral or specific authorization; transactions are recorded as necessary (1)to permit preparation of financial statements in conformity with generallyaccepted accounting principles, (2) to maintain accountability for assets, and(3) to ensure that access to assets is permitted only in accordance withmanagement’s general or specific authorization; and the recorded accountabilityfor access is compared with the existing assets at reasonable intervals andappropriate action is taken with respect to any differences.

 

**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 Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002. |
|   | Exhibit 31.2  Certification of Chief Accounting Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.      |
|   | Exhibit 32.1  Certification of Chief Executive Officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.       |
|   | Exhibit 32.2  Certification of Chief Accounting Officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.      |

 

### **SIGNATURES**

 

In accordance with therequirements of the Exchange Act, the Company caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 

CREATIVECOMPUTER APPLICATIONS, INC.

(Company)

 

 
| Date   | January 14, 2005                                   |   | /S/ Steven M.  Besbeck |   |
|--------|----------------------------------------------------|--------|------------------------|--------|
|   | Steven. M.  Besbeck, President                     |
|   | Chief Executive  Officer, Chief  Financial Officer |
|   |                                               |
|   |                                               |
| Date   | January 14, 2005                                   |   | /S/ Anahita  Villafane |   |
|   | Anahita  Villafane,                                |
|   | Controller and  Chief Accounting  Officer          |

 

17

----