**UNITED STATES SECURITIESAND 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  May 31, 2003**                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                               |
| **o**                                                                                                                                                                                                                                                              | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**                   |
|                                                                                                                                                                                                                                                               |
| **For the transition period from                      to                    ** |

 

**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  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:                                    |

 

Statethe number of shares outstanding of each of the issuer’s classes of commonequity, as of the latest practicable date: 3,318,900 common shares as of June 30, 2003.

 

TransitionalSmall Business Disclosure Format (check one):

Yes    o          No    ý

 

 

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**CREATIVECOMPUTER APPLICATIONS, INC.**

 

**FORM10-QSB**

 

**I N D E X**

 
| **PART I - Financial  Information:**                                                                      |
|-----------------------------------------------------------------------------------------------------------|
|                                                                                                      |
| Item 1.  Financial Statements                                                                        |
|                                                                                                      |
|                                                                                                      | Condensed  Consolidated Balance Sheets at May 31, 2003 and August 31, 2002 |
|                                                                                                      |   |
|                                                                                                      | Condensed  Consolidated Statements of Operations for the three months ended May 31, 2003  and May 31, 2002 |
|                                                                                                      |   |
|                                                                                                      | Condensed  Consolidated Statements of Operations for the nine months ended May 31, 2003  and May 31, 2002 |
|                                                                                                      |   |
|                                                                                                      | Condensed  Consolidated Statements of Cash Flows for the nine months ended May 31, 2003  and May 31, 2002 |
|                                                                                                      |   |
|                                                                                                      | Notes  to Condensed Consolidated Financial Statements |
|                                                                                                      |
| Item 2.  Management’s Discussion and Analysis of  Results of Operations and Financial Condition |
|                                                                                                      |
| Item 3.  Controls and Procedures                                                                     |
|                                                                                                      |
| **PART II - Other  Information:**                                                                         |
|                                                                                                      |
| Items 1  through 6                                                                                        |
|                                                                                                      |
| **Signatures**                                                                                            |
|                                                                                                      |
| **Certifications**                                                                                        |

 

2

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**CREATIVECOMPUTER APPLICATIONS, INC.**

 

**PART 1 - FINANCIAL INFORMATION**

 

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

 

#### **CONDENSED CONSOLIDATED BALANCE SHEETS**

 
|                                                                                                   |   | **May 31,  2003** |      | **August 31,  2002 *** |   |
|--------------------------------------------------------------------------------------------------------|--------|-------------------|-----------|------------------------|--------|
|                                                                                                   |   | **(Unaudited)**   |      |                   |   |
| **ASSETS**                                                                                             |   |              |      |                   |   |
|                                                                                                   |   |              |      |                   |   |
| CURRENT ASSETS:                                                                                        |   |              |      |                   |   |
| Cash                                                                                                   |   | $                 | 1,068,916 |                   | $      | 1,027,810 |   |
| Receivables, net                                                                                       |   | 2,367,473         |      | 2,089,274              |   |
| Inventories                                                                                            |   | 180,969           |      | 183,640                |   |
| Prepaid expenses and other assets                                                                      |   | 275,641           |      | 183,251                |   |
| Deferred tax asset                                                                                     |   | 438,911           |      | 488,600                |   |
|                                                                                                   |   |              |      |                   |   |
| TOTAL CURRENT ASSETS                                                                                   |   | 4,331,910         |      | 3,972,575              |   |
|                                                                                                   |   |              |      |                   |   |
| PROPERTY AND EQUIPMENT, net                                                                            |   | 227,696           |      | 251,458                |   |
| INVENTORY OF COMPONENT PARTS                                                                           |   | 200,889           |      | 245,889                |   |
| CAPITALIZED SOFTWARE COSTS, net of accumulated  amortization of $1,520,592 and $1,200,993              |   | 1,388,164         |      | 1,365,763              |   |
| DEFERRED TAX ASSET                                                                                     |   | 410,824           |      | 456,691                |   |
|                                                                                                   |   |              |      |                   |   |
|                                                                                                   |   | $                 | 6,559,483 |                   | $      | 6,292,376 |   |
|                                                                                                   |   |              |      |                   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                         |   |              |      |                   |   |
|                                                                                                   |   |              |      |                   |   |
| CURRENT LIABILITIES:                                                                                   |   |              |      |                   |   |
| Accounts payable                                                                                       |   | $                 | 336,882   |                   | $      | 224,418 |   |
| Accrued liabilities:                                                                                   |   |              |      |                   |   |
| Vacation pay                                                                                           |   | 181,701           |      | 151,930                |   |
| Accrued payroll                                                                                        |   | 28,425            |      | 97,672                 |   |
| Other                                                                                                  |   | 126,335           |      | 396,712                |   |
| Deferred service contract income                                                                       |   | 1,146,821         |      | 973,931                |   |
| Deferred revenue                                                                                       |   | 689,812           |      | 561,385                |   |
| Capital lease obligation, current portion                                                              |   | 6,048             |      | 23,111                 |   |
|                                                                                                   |   |              |      |                   |   |
| TOTAL CURRENT LIABILITIES                                                                              |   | 2,516,024         |      | 2,429,159              |   |
|                                                                                                   |   |              |      |                   |   |
| SHAREHOLDERS’ EQUITY:                                                                             |   |              |      |                   |   |
| Common shares, no par value; 20,000,000 shares  authorized; 3,318,900 and 3,266,400 shares outstanding |   | 6,192,691         |      | 6,144,042              |   |
| Accumulated deficit                                                                                    |   | (2,149,232        | )         | (2,280,825             | )      |
|                                                                                                   |   |              |      |                   |   |
| TOTAL SHAREHOLDERS’ EQUITY                                                                        |   | 4,043,459         |      | 3,863,217              |   |
|                                                                                                   |   |              |      |                   |   |
|                                                                                                   |   | $                 | 6,559,483 |                   | $      | 6,292,376 |   |

 

**See Notesto Condensed Consolidated Financial Statements.**

 

----

*** As presented in the auditedconsolidated financial statements**

 

3

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**CREATIVECOMPUTER APPLICATIONS, INC.**

 

##### **CONDENSED CONSOLIDATED STATEMENTS OF OPE**RATIONS

 
|                                          |   | **Three Months Ended May 31,** |    |
|-----------------------------------------------|--------|--------------------------------|---------|
|                                          |   | **2003**                       |    | **2002** |   |
|                                          |   | **(unaudited)**                |    |
|                                          |   |                           |    |   |   |
| NET SYSTEM SALES AND SERVICE REVENUE (Note 3) |   |                           |    |   |   |
| System sales                                  |   | $                              | 928,132 |   | $ | 1,063,801 |   |
| Service revenue                               |   | 1,060,959                      |    | 1,038,421 |   |
|                                          |   | 1,989,091                      |    | 2,102,222 |   |
|                                          |   |                           |    |   |   |
| COST OF PRODUCTS AND SERVICES SOLD            |   |                           |    |   |   |
| System sales                                  |   | 586,722                        |    | 587,369 |   |
| Service revenue                               |   | 374,173                        |    | 383,746 |   |
|                                          |   | 960,895                        |    | 971,115 |   |
|                                          |   |                           |    |   |   |
| Gross profit                                  |   | 1,028,196                      |    | 1,131,107 |   |
|                                          |   |                           |    |   |   |
| OPERATING EXPENSES:                           |   |                           |    |   |   |
| Selling, general and administrative           |   | 691,613                        |    | 693,531 |   |
|                                          |   |                           |    |   |   |
| Research and development                      |   | 223,531                        |    | 229,208 |   |
|                                          |   |                           |    |   |   |
| Total Operating Expenses                      |   | 915,144                        |    | 922,739 |   |
|                                          |   |                           |    |   |   |
| Operating income                              |   | 113,052                        |    | 208,368 |   |
|                                          |   |                           |    |   |   |
| INTEREST AND OTHER INCOME                     |   | 3,815                          |    | 1,604 |   |
|                                          |   |                           |    |   |   |
| INTEREST EXPENSE                              |   | (1,721                         | )       | (3,432 | ) |
|                                          |   |                           |    |   |   |
| Income before taxes on income                 |   | 115,146                        |    | 206,540 |   |
|                                          |   |                           |    |   |   |
| INCOME TAX PROVISION                          |   | 48,399                         |    | 88,171 |   |
|                                          |   |                           |    |   |   |
| NET INCOME                                    |   | $                              | 66,747  |   | $ | 118,369 |   |
|                                          |   |                           |    |   |   |
| EARNINGS PER COMMON SHARE (Note 2):           |   |                           |    |   |   |
|                                          |   |                           |    |   |   |
| Basic                                         |   | $                              | .02     |   | $ | .04 |   |
| Diluted                                       |   | .02                            |    | .04 |   |
|                                          |   |                           |    |   |   |
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING |   |                           |    |   |   |
|                                          |   |                           |    |   |   |
| Basic                                         |   | 3,318,900                      |    | 3,251,483 |   |
| Diluted                                       |   | 3,559,335                      |    | 3,368,066 |   |

 

**See Notesto Condensed Consolidated Financial Statements.**

 

4

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**CREATIVECOMPUTER APPLICATIONS, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTSOF OPE****RATIONS**

 
|                                          |   | **Nine Months Ended May 31** |      |
|-----------------------------------------------|--------|------------------------------|-----------|
|                                          |   | **2003**                     |      | **2002** |   |
|                                          |   | **(unaudited)**              |      |
|                                          |   |                         |      |   |   |
| NET SYSTEM SALES AND SERVICE REVENUE (Note 3) |   |                         |      |   |   |
| System sales                                  |   | $                            | 2,548,457 |   | $ | 2,660,419 |   |
| Service revenue                               |   | 3,177,580                    |      | 2,983,541 |   |
|                                          |   | 5,726,037                    |      | 5,643,960 |   |
|                                          |   |                         |      |   |   |
| COST OF PRODUCTS AND SERVICES SOLD            |   |                         |      |   |   |
| System sales                                  |   | 1,691,943                    |      | 1,585,535 |   |
| Service revenue                               |   | 1,091,679                    |      | 1,107,356 |   |
|                                          |   | 2,783,622                    |      | 2,692,891 |   |
|                                          |   |                         |      |   |   |
| Gross profit                                  |   | 2,942,415                    |      | 2,951,069 |   |
|                                          |   |                         |      |   |   |
| OPERATING EXPENSES:                           |   |                         |      |   |   |
| Selling, general and administrative           |   | 2,058,510                    |      | 1,962,561 |   |
|                                          |   |                         |      |   |   |
| Research and development                      |   | 662,809                      |      | 625,569 |   |
|                                          |   |                         |      |   |   |
| Total Operating Expenses                      |   | 2,721,319                    |      | 2,588,130 |   |
|                                          |   |                         |      |   |   |
| Operating income                              |   | 221,096                      |      | 362,939 |   |
|                                          |   |                         |      |   |   |
| INTEREST AND OTHER INCOME                     |   | 12,325                       |      | 10,132 |   |
|                                          |   |                         |      |   |   |
| INTEREST EXPENSE                              |   | (6,272                       | )         | (13,375 | ) |
|                                          |   |                         |      |   |   |
| Income before taxes on income                 |   | 227,149                      |      | 359,696 |   |
|                                          |   |                         |      |   |   |
| INCOME TAX PROVISION                          |   | 95,556                       |      | 152,676 |   |
|                                          |   |                         |      |   |   |
| NET INCOME                                    |   | $                            | 131,593   |   | $ | 207,020 |   |
|                                          |   |                         |      |   |   |
| EARNINGS PER COMMON SHARE (Note 2):           |   |                         |      |   |   |
| Basic                                         |   | $                            | .04       |   | $ | .06 |   |
| Diluted                                       |   | .04                          |      | .06 |   |
|                                          |   |                         |      |   |   |
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING |   |                         |      |   |   |
|                                          |   |                         |      |   |   |
| Basic                                         |   | 3,285,844                    |      | 3,235,622 |   |
| Diluted                                       |   | 3,494,041                    |      | 3,245,108 |   |

 

**See Notesto Condensed Consolidated Financial Statements.**

 

5

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**CREATIVECOMPUTER APPLICATIONS, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTSOF CAS****H FLOWS**

 

**Increase(Decrease) in Cash**

 
|                                                                               |   | **Nine Months Ended May 31** |      |
|------------------------------------------------------------------------------------|--------|------------------------------|-----------|
|                                                                               |   | **2003**                     |      | **2002** |   |
|                                                                               |   | **(unaudited)**              |      |
| OPERATING ACTIVITIES:                                                              |   |                         |      |   |   |
| Net income                                                                         |   | $                            | 131,593   |   | $ | 207,020 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |   |                         |      |   |   |
| Depreciation and amortization                                                      |   | 441,030                      |      | 542,026 |   |
| Provision for doubtful accounts                                                    |   | 4,987                        |      | — |   |
| Deferred taxes                                                                     |   | 95,556                       |      | 152,676 |   |
| Changes in operating assets and liabilities:                                       |   |                         |      |   |   |
| Receivables                                                                        |   | (283,186                     | )         | (816,026 | ) |
| Inventories                                                                        |   | 47,671                       |      | 83,869 |   |
| Prepaid expenses and other assets                                                  |   | (92,390                      | )         | 295 |   |
| Accounts payable                                                                   |   | 112,464                      |      | 3,336 |   |
| Accrued liabilities and deferred revenues                                          |   | (8,536                       | )         | 418,984 |   |
|                                                                               |   |                         |      |   |   |
| Net cash provided by operating activities                                          |   | 449,189                      |      | 592,180 |   |
|                                                                               |   |                         |      |   |   |
| INVESTING ACTIVITIES                                                               |   |                         |      |   |   |
| Purchases of property and equipment                                                |   | (97,669                      | )         | (56,648 | ) |
| Capitalized software costs                                                         |   | (342,000                     | )         | (335,280 | ) |
|                                                                               |   |                         |      |   |   |
| Net cash used in investing activities                                              |   | (439,669                     | )         | (391,928 | ) |
|                                                                               |   |                         |      |   |   |
| FINANCING ACTIVITIES:                                                              |   |                         |      |   |   |
| Borrowings on notes payable                                                        |   | —                       |      | 300,000 |   |
| Payments on notes payable                                                          |   | —                       |      | (539,351 | ) |
| Payments on capital lease obligations                                              |   | (17,063                      | )         | (17,063 | ) |
| Proceeds from issuance of stock and exercises of  stock options                    |   | 48,649                       |      | 35,877 |   |
|                                                                               |   |                         |      |   |   |
| Net cash provided by (used in) financing activities                                |   | 31,586                       |      | (220,537 | ) |
|                                                                               |   |                         |      |   |   |
| NET INCREASE (DECREASE) IN CASH                                                    |   | 41,106                       |      | (20,285 | ) |
|                                                                               |   |                         |      |   |   |
| Cash, beginning of period                                                          |   | 1,027,810                    |      | 661,008 |   |
|                                                                               |   |                         |      |   |   |
| Cash, end of period                                                                |   | $                            | 1,068,916 |   | $ | 640,723 |   |

 

**See Notesto Condensed Consolidated Financial Statements.**

 

6

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**CREATIVECOMPUTER APPLICATIONS, INC.**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIA****L STATEMENTS**

 

**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 May 31, 2003, the results of itsoperations for the three and nine–month period ended May 31, 2003 and 2002, andcash flows for the nine months ended May 31, 2003 and 2002.  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 of theCompany’s Annual Report on Form 10-KSB for the fiscal year ended August 31,2002.

 

Theresults of operations for the three and nine months ended May 31, 2003 are notnecessarily indicative of the results expected for any other period or for theentire 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 are 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.

 

Earningsper share has been computed as follows:

 
|                                                        |   | **Three Months  Ended********May 31, 2003** |   | **Nine Months  Ended  May 31, 2003** |   | **Three Months  Ended  May 31, 2002** |   | **Nine Months  Ended  May 31, 2002** |    |
|-------------------------------------------------------------|--------|---------------------------------------------|--------|--------------------------------------|--------|---------------------------------------|--------|--------------------------------------|---------|
|                                                        |   |                                        |   |                                 |   |                                  |   |                                 |    |
| NET INCOME                                                  |   | $                                           | 66,747 |                                 | $      | 131,593                               |   | $                                    | 118,369 |   | $ | 207,020 |   |
| Basic weighted average number of commonshares outstanding   |   | 3,318,900                                   |   | 3,285,844                            |   | 3,251,483                             |   | 3,235,622                            |    |
|                                                        |   |                                        |   |                                 |   |                                  |   |                                 |    |
| Diluted effect of stock options                             |   | 240,435                                     |   | 208,197                              |   | 116,583                               |   | 9,486                                |    |
| Diluted weighted average number of commonshares outstanding |   | 3,559,335                                   |   | 3,494,041                            |   | 3,368,066                             |   | 3,245,108                            |    |
|                                                        |   |                                        |   |                                 |   |                                  |   |                                 |    |
| Basic earnings per share                                    |   | $                                           | .02    |                                 | $      | .04                                   |   | $                                    | .04     |   | $ | .06 |   |
| Diluted earnings per share                                  |   | $                                           | .02    |                                 | $      | .04                                   |   | $                                    | .04     |   | $ | .06 |   |

 

**Note 3.**                                                          The Company accounts for its softwarerevenue recognition in accordance with Statement of Position 97-2, “SoftwareRevenue Recognition”, (“SOP 97-2”).  SOP 97-2 requires companies to recognize revenue when (i) persuasiveevidence of an arrangement exists, (ii) delivery has occurred, (iii) thevendor’s fee is fixed and determinable, and (iv) collectability isprobable.  The SOP also requirescompanies to allocate the fee on a multiple element contract between thevarious elements based on vendor-specific objective evidence of fair value.  The Company’s policies are in accordancewith Staff Accounting Bulletin 101, “Revenue Recognition”, (“SAB 101”). SAB 101provides interpretive guidance on the recognition, presentation and disclosureof revenue in financial statements.  SAB101 expands on the issues not explicitly covered in the SOP.

 

**Note 4.**                                                          The Company’s line of credit with its bankprovides for $500,000 on a revolving basis through February 1, 2004, andcontains certain loan covenants and financial ratio requirements.  On May 31, 2003, there were no amountsoutstanding under the line of credit. The Company was in compliance with all ofthe covenants and financial ratios required by its bank as of May 31, 2003.

 

7

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**Note 5.**                                                          The Company hasadopted 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 and incomeper share as if the fair value base method had been applied.  For equity instruments, including stockoptions, issued to non-employees, the fair value of the equity instruments orthe fair value of the consideration received, whichever is more readilydeterminable, is used to determine the value of services or goods received andthe corresponding charge to operations.

 

The following table illustrates the effect on netincome and income per share as if the Company had applied the fair valuerecognition provision of SFAS No. 123 to stock-based employee compensation.

 
|                                                                                                      |   | **Three  Months Ended  May 31, 2003** |   | **Nine  Months Ended  May 31, 2003** |   | **Three  Months Ended  May 31, 2002** |   | **Nine  Months Ended  May 31, 2002** |    |
|-----------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|---------------------------------------|--------|--------------------------------------|---------|
| Net Income, as  reported                                                                                  |   | $                                     | 66,747 |                                 | $      | 131,593                               |   | $                                    | 118,369 |   | $ | 207,020 |   |
|                                                                                                      |   |                                  |   |                                 |   |                                  |   |                                 |    |
| Less: total  stock based employee compensation expense determined under fair value method  for all awards |   | (5,931                                | )      | (22,262                              | )      | (7,865                                | )      | (23,596                              | )       |
|                                                                                                      |   |                                  |   |                                 |   |                                  |   |                                 |    |
| Pro forma net  income                                                                                     |   | $                                     | 60,816 |                                 | $      | 109,331                               |   | $                                    | 110,504 |   | $ | 183,424 |   |
|                                                                                                      |   |                                  |   |                                 |   |                                  |   |                                 |    |
| Basic net  earnings per share, as reported                                                                |   | $                                     | .02    |                                 | $      | .04                                   |   | $                                    | .04     |   | $ | .06 |   |
| Basic net  earnings per share, pro forma                                                                  |   | $                                     | .02    |                                 | $      | .03                                   |   | $                                    | .03     |   | $ | .06 |   |
| Diluted net  earnings per share, as reported                                                              |   | $                                     | .02    |                                 | $      | .04                                   |   | $                                    | .04     |   | $ | .06 |   |
| Diluted net  earnings per share, pro forma                                                                |   | $                                     | .02    |                                 | $      | .03                                   |   | $                                    | .03     |   | $ | .06 |   |

 

As required by SFAS 123,the Company provides the following disclosure of estimated values for theseawards.  During the three and ninemonths ended May 31, 2003, there were no options generated.  The weighted-average grant-date fair valueof options granted during 2002 was estimated to be $0.64.

 

The fair value of eachoption was estimated on the date of grant using a Black-Scholes option-pricingmodel with the following weighted average assumptions for 2002 risk freeinterest rates of 3.8%, expected lives of 5 years; volatility of 126% and noassumed dividends.  There were nooptions granted in the three and nine months ended May 31, 2003.

 

**Note 6.**                                                          New AccountingPronouncements—In December 2002, the FASB issued SFAS No. 148,“Accounting for Stock-Based Compensation-Transition and Disclosure—an amendment ofFASB Statement No. 123.” This statement provides alternative methods oftransition for a voluntary change to the fair value method of accounting forstock-based compensation. The statement amends the disclosure requirements ofFASB Statement No. 123 to require prominent disclosure in both annual andinterim financial statements about the method of accounting for stock-basedcompensation and the effect of the method used on reported results. The Companyaccounts for stock-based compensation arrangements in accordance with theprovisions of Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees,” and complies with the disclosure provisions of FASBStatement No. 123. The transition provisions are effective for fiscalyears ending after December 15, 2002. The disclosure provisions areeffective for interim periods beginning after December 15, 2002, withearly application encouraged. The adoption of this statement is not expected tohave a material impact on the Company’s consolidated financial position,results of operations or cash flows.

 

InMay 2003, the FASB issued Statement of Financial Accounting Standards No. 150,Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity (SFAS 150).  Thisstatement affects the classification, measurement, and disclosure requirementsof the following three types of freestanding financial instruments:  1) mandatory redeemable shares, which theissuing company is obligated to buy back with cash or other assets; 2)instruments that do or may require the issuer to buy

 

8

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backsome of its shares in exchange for cash or other assets, which includes putoptions and forward purchase contracts; and 3) obligations that can be settledwith shares, the monetary value of which is fixed, tied solely or predominantlyto a variable such as a market index, or varies inversely with the value of theissuers shares.  In general, SFAS 150 iseffective for all financial instruments entered into or modified after May 31,2003, and otherwise is effective at the beginning of the first interim periodbeginning after June 15, 2003.  Theadoption of SFAS 150 is not expected to have an impact on the Company’sconsolidated financial position or disclosures.

 

InNovember 2002, the FASB issued Financial Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others” (FIN 45).  The provisions of FIN 45 are effective for year-end 2003.  Recognition and measurement provisions ofFIN 45 become effective for guarantees issued or modified on or after January1, 2003.  The adoption of FIN 45 doesnot have a material impact on our results of operations, financial position, orliquidity.

 

The California GeneralCorporations Law provides that California corporations may include provisionsin their articles of incorporation relieving directors of monetary liabilityfor breach of their fiduciary duties as directors, except for the liability ofa director resulting from (i) acts or omissions involving intentionalmisconduct or a knowing and culpable violation of law, (ii) acts or omissionsthat a director believes to be contrary to the best interests of thecorporation or its shareholders or that involve the absence of good faith onthe part of the director, (iii) any transaction from which the director derivesan improper personal benefit, (iv) acts or omissions showing reckless disregardfor the director’s duty to the corporation or its shareholders in circumstancesin which the director was aware, or should have been aware, in the ordinarycourse of performing a director’s duties, of a risk of serious injury to thecorporation or its shareholders, (v) acts or omissions constituting anunexcused pattern of inattention that amounts to an abdication of thedirector’s duty to the corporation or its shareholders, (vi) transactionsbetween corporations and directors which have not been approved or ratified ingood faith by disinterested directors or shareholders or which are not provedto be just and reasonable as to the corporation, and (vii) approvingdistributions to shareholders or loans to directors or officers contrary toCalifornia law. The Company’s Articles of Incorporation provide that theCompany’s directors are not liable to the Company or its shareholders formonetary damages for breach of their fiduciary duties to the fullest extentpermitted by California law.  However,the Company has a directors and officers’ liability insurance policy thatlimits its exposure and enables it to recover a portion of any future amountspaid.  As a result of its insurancepolicy coverage, the Company believes the estimated fair value of theseindemnification agreements is minimal and has no liabilities recorded for theseagreements as of May 31, 2003.

 

TheCompany enters into limited indemnification provisions under its agreementswith other companies in its ordinary course of business, typically withbusiness partners, contractors, customers and landlords.  Under these provisions the Company may agreeto indemnify and hold harmless the indemnified party for losses suffered orincurred by the indemnified party as a result of the Company’s grossnegligence, or infringement of United States Patent and Trademark laws.  These indemnification provisions generallysurvive termination of the underlying agreement.  In addition, in some cases, the Company has agreed to reimburseemployees for certain legitimate business expenses.  The Company has not incurred material costs to defend lawsuits orsettle claims related to these indemnification agreements.  As a result, the Company believes the fairvalue of the agreements is minimal. Accordingly, the Company has no liabilities recorded for theseagreements as of May 31, 2003.

 

InJanuary 2003, FASB issued FASB Interpretation No. 46 (FIN No. 46),Consolidation of Variable Interest Entities, an interpretation of AccountingResearch Bulletin No. 51, Consolidated Financial Statements.  FIN No. 46 explains how to identify variableinterest entities and how an enterprise assesses its interest in a variableentity to decide whether to consolidate that entity.  FIN No. 46 requires existing unconsolidated variable interestentities to be consolidated by their primary beneficiaries if the entities donot effectively disperse risks among parties involved.  FIN No. 46 is effective immediately forvariable interest entities after January 31, 2003, and to variable interestentities in which an enterprise obtained an interest after that date.  Fin No. 46 applies in the first fiscal yearor interim period beginning after June 15, 2003, to variable interest entitiesin which an enterprise holds a variable interest that is acquired beforeFebruary 1, 2003.  The adoption of FINNo. 46 is not expected to have a material effect on the Company’s financialposition and results of operations.

 

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

 

Thefollowing section of this report contains forward-looking statements within themeaning of the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements involverisks and uncertainties so that the actual results may vary materially.

 

###### **Introduction**

 

CCA generates revenuesprimarily from the sale of its Clinical Information Systems (CIS), whichincludes the licensure of proprietary application software, and the sale ofservers upon which the application software operates, and from the performanceof services.  In connection with itssales of 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.

 

Becauseof the nature of its business, CCA makes significant ongoing investments inresearch and development for new products and enhancements to existingproducts.  In the past, CCA has fundedits research and development programs through cash flow primarily generatedfrom operations.  Management anticipatesthat future expenditures in research and development will increase for theforeseeable future, and will be funded primarily out of the Company’s cashflow.

 

Inorder to address compliance issues necessitated by the Health InsurancePortability and Accountability Act (HIPAA) regulations, the Company undertookthe development of enhancements to its products. Provisions of HIPAA areintended to ensure patient confidentiality and security for all health carerelated information.  The requirementsof HIPAA apply to any entity storing and/or transmitting patient identifiableinformation on electronic media.  Thisaffects virtually all health care organizations, from physicians and insurancecompanies to health care support organizations.  Certain safeguards are required to accurately insure the securityof patient data including more robust audit trails and tiered/structuredpassword security when accessing patient data. CCA has completed its plans to provide its client base with applicationenhancements that assist them in adhering to HIPAA regulations.  Management also believes that the HIPAArelated application enhancements will require that many of its clients willneed to upgrade their systems over the next two years in order to effectivelymanage greater amounts of data.

 

As a result of increased sales and marketingactivities, the Company’s pipeline of potential CIS transactions hasincreased.  However, the market has beenfocused on addressing HIPAA compliance issues, which has temporarily delayedsales of new systems.  Managementbelieves the industry and the market for healthcare information technologyproducts will improve in the second half of 2003, despite current economicconditions.  The market is nowexperiencing a renewed interest in clinical applications that is being fueledby the demand for new technology that addresses compliance issues as well aspatient care and safety issues.  Anotherfactor that has temporarily impacted sales of new CIS systems is that theCompany is in the midst of a product transition of its laboratory informationsystem, CyberLAB® 7.0.  Thenew browser-based laboratory information system will be deliverable in Summer2003 and has generated considerable interest among new and existingclients.  However, typically when thereis a new product announcement, CCA has experienced a time lag of sales due tobuyer anticipation of the new version.

 

# **Results of Operations**

 

Salesfor the third fiscal quarter ending May 31, 2003 decreased by $113,131 or 5%,as compared to the same quarter of fiscal 2002.  For the nine-month period ended May 31, 2003, sales increased$82,077 or 1.5% compared to the same period in fiscal 2002.  When analyzed by product category for thequarter, sales of Clinical Information Systems (CIS) decreased $165,644 or17.3% and other revenues decreased by $2,592 or 51.5% partially offset by anincrease in service revenues of $22,538 or 2.2% and an increase in sales ofdata acquisition products of $32,567 or 32.8%. We believe the decrease in sales of CIS products was primarilyattributable to delays associated with the product transition of the laboratoryinformation system.  The increase inservice revenues is attributable to a greater number of client accounts undercontract and an increase 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.  The Company experienced 

 

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an increase in sales of data acquisitionproducts, which was primarily attributable to an increase in the volume ofunits sold to OEM customers.  Whenanalyzed by product category for the nine-month period, sales of ClinicalInformation Systems (CIS) decreased $54,615 or 2.4%, other revenues decreasedby $1,559 or 8.9%, sales of data acquisition products decreased $55,788 or 17.0%offset by an increase in service revenues of $194,039 or 6.5%.  As indicated above, the decrease in sales ofCIS products is primarily due to the company being in the midst of a producttransition phase of its laboratory information system.  Service revenues have increased as a resultof a larger client base and increases in the average fees charged.  Although the Company had increased sales ofdata acquisition products for the quarter, sales of such products for thenine-month period decreased as compared to the same period of fiscal 2002.  This is a result of the decreased overalldemand from OEM customers and a technological shift to software based clinicalinstrument interfaces.  The decrease inOEM business is expected to continue, as fewer OEM customers remain active inthe marketplace or are no longer reliant on CCA’s data acquisitionproducts.  Management does not believethe OEM 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 sales andmarketing activities, directing its focus towards larger clients andmulti-product sales as well as selling new products into its installed clientbase.  The Company has also initiatedstrategic joint marketing partnerships with other companies, which has improvedthe Company’s market penetration and has initiated more marketing activitiesinternationally.  Although its “pipeline”of working CIS transactions continues to improve, management views the nearterm outlook for the continued sale of CIS products cautiously during thesecond half of the 2003 fiscal year. The Company’s future operating results could continue to be subject toquarterly variations based upon a wide variety of factors, including the volumemix and timing of orders received during any quarter, the temporary delays inthe closing of new CIS sales, and the product transition of CyberLAB®discussed above. In addition, the Company’s revenues associated with CIStransactions may be delayed due to client related issues such as staffavailability, IT infrastructure readiness, and the performance of third partycontractors, all of which are issues outside of the control of CCA.  Such issues were relevant to the currentquarter, which delayed implementations and required the deferral of revenuerecognition to later periods.

 

Costof sales for the third quarter decreased $10,220 or 1.1% as compared to thesame quarter of fiscal 2002.  For thenine-month period ended May 31, 2003 cost of sales increased by $90,731 or 3.4%as compared to the same period of fiscal 2002. For the quarter, the decrease in cost of sales was attributable todecreases in labor costs of $21,767 or 5.2% and in material costs of $17,838 or8.8%.  Such decreases were partiallyoffset by an increase in other costs of $29,386 or 8.3%.  For the nine-month period, the increase incost of sales was attributable to increases in labor costs of $23,343 or 2.0%and in material costs of $71,076 or 15.2%. Such increases were partially offset by a decrease in other costs of$3,688 or 0.4%.  The changes in materialcosts were attributable to the type of sales generated within the periods.  Sales in the first two quarters of fiscal2003 were more weighted to upgrades having a higher proportion of hardwarecomponents and lower gross margins and in the third quarter sales were moreweighted to software upgrades.  Thechanges in labor costs were attributable to staffing changes in the Company’ssupport operations.  Cost of sales as apercentage of sales for the current quarter and nine-month period ended May 31,2003 were 48% and 49% respectively, as compared to 46% and 48% respectively forthe comparable 2002 periods.

 

Selling,general, and administrative expenses decreased by $1,918 or .3% as compared tothe same quarter of 2002.  For thenine-month period ended May 31, 2003 selling, general and administrativeexpenses increased $95,949 or 4.9% as compared to the same period of fiscal2002.  The decrease in the currentquarter of selling, general, and administrative expenses was insignificant ascompared to the same quarter of fiscal 2002. The increase in selling, general, and administrative expenses for thenine-month period was primarily due to additional expenditures in legal,accounting, advertising, tradeshows, and other related marketing expenses,primarily in the first half of the fiscal year.

 

Researchand development expenses had an insignificant decrease of $5,677 or 2.5% forthe current quarter ended May 31, 2003, as compared to the same period offiscal 2002.  For the nine-month periodended May 31, 2003, research and development expense increased $37,240 or 6% ascompared to the same period of fiscal 2002. The increase is attributable to increases in salaries and otherpersonnel related expenses.  For thecomparable third quarters of 2003 and 2002, the Company capitalized softwarecosts of $114,000 and $111,000, 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, new applications underdevelopment, and modifications associated with HIPAA compliance to all of CCA’sproducts.  Management anticipates its overallresearch and development activities will increase in fiscal 2003 due to plannedpersonnel additions in product engineering, quality assurance and systemcommunications support.

 

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Interestand other income was $3,815 and $12,325 respectively, for the current quarterand nine-month period ended May 31, 2003, which is consistent with $1,604 and$10,132 respectively for comparable periods of fiscal 2002.

 

Interestand other expense was $1,721 and $6,272 respectively for the current quarterand nine-month period ended May 31, 2003 as compared to $3,432 and $13,375 forthe comparable periods of fiscal 2002 due to the level of borrowings on theCompany’s line of credit.

 

Forthe current quarter and nine-month period ended May 31, 2003, the Companyrecorded a tax provision of $48,399 and $95,556 respectively, as compared to$88,171 and $152,676 for the same periods of fiscal 2002 due to the level oftaxable income.  The Company believes itis more likely than not that the net deferred tax asset of $849,735 will berealized in future periods.

 

Asa result of the aggregate factors discussed above, the Company earned netincome of $66,747 or basic and diluted earnings per share of $0.02 and $131,593or basic and diluted earnings per share of $0.04 for the current quarter andnine-month period ended May 31, 2003 compared to a net income of $118,369 orbasic and diluted earnings per share of $0.04 and $207,020 or basic and dilutedearnings per share of $0.06 for the same quarter and nine-month period infiscal 2002.

 

### **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 $342,000 and $335,280 in software development during the nine-month periodsended May 31, 2003 and 2002, respectively. These expenditures related to HIPAA related enhancements to all itsproducts, and the new browser version of the Company’s LIS product, CyberLAB®7.0, the release of its revised PIS, CyberMED®, its new RIS,CyberRAD®, and other product enhancements.  The Company anticipates expending additional sums during fiscal2003 related to enhancements to all its products and the further development ofthe new browser based versions of its CIS products.  During the nine-month period ended May 31, 2003, the Companyinvested an aggregate of $97,669 in additions to fixed assets, primarilyconsisting of computers and software, as compared to an investment of $56,648in the comparable period of fiscal 2002.

 

Asof May 31,2003, the Company’s working capital amounted to $1,815,886 comparedto $1,543,416 as of August 31, 2002. The Company’s current ratio was 1.7 at May 31, 2003 compared to 1.6 atAugust 31, 2002.  At May 31, 2003 theCompany’s credit facilities with its bank consisted of a revolving line ofcredit of $500,000, of which there were no amounts outstanding.  The bank credit agreement is throughFebruary 1, 2004 and contains certain loan covenants and financial ratiorequirements.  As of May 31, 2003, theCompany was in compliance with all of the covenants and financial ratiorequirements required by its bank.

 

Cashflows from operating activities were $449,189 for the nine months ended May 31,2003, compared to $592,180 for the comparable period of fiscal 2002.  The decrease in cash flow from operatingactivities was primarily attributable to the net change in accrued liabilitiesand the decrease in income during the nine months ended May 31, 2003.

 

Netcash used in investing activities totaled $439,669 for the nine months endedMay 31, 2003, compared to $391,928 used in investing activities during thecomparable period of 2002.  The increasein cash used in investing activities was primarily attributable to increasedinvestments in fixed assets.

 

Cashflows from financing activities amounted to $31,586 for the nine months endedMay 31, 2003 compared to cash used of $220,537 in the same period of fiscal2002.  The change from fiscal 2002 tofiscal 2003 resulted primarily from the Company having paid off its line ofcredit and exercises of stock options.

 

The Company’s primarysource of working capital has been generated from earnings, and borrowings onits line of credit.  The Company’sresults of operations for the nine months ended May 31, 2003 produced operatingcash flow of $449,189, which was sufficient to fund its product developmentactivities, and to invest in new marketing programs.  Management believes that its sales pipeline is adequate to producesufficient operating cash flow in the 2003 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 2003 fiscal year.  However, an unanticipated decline in sales,delays in implementations where payments are tied to delivery and/orperformance of services, or cancellations of contracts could

 

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have a negative effect on cash flow fromoperations and could in turn create short-term liquidity problems.  If such events were to occur, the Companymay have to seek alternative financing.

 

**Seasonality, Inflation and Industry 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 issuesbrought about by HIPAA, the Company has invested heavily in new applicationmodules to assist its clients in meeting their regulatory goals.  Management believes that the new moduleswill be 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 AccountingPolicies 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

 

Inventoryis evaluated on a continual basis and reserve adjustments are made based onmanagement’s estimate of future sales value, if any, of specific inventoryitems. Reserve 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 May 31, 2003 and 2002, the inventoryreserve was $115,569 and $101,174 respectively.

 

AccountsReceivable

 

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 its ability to makepayments, an additional allowance may be required. Allowance adjustments arecharged to operations in the period in which the facts that give rise to theadjustments become known.  The accountsreceivable balance at May 31, 2003 was $2,367,473, net of an allowance fordoubtful accounts of $33,217.

 

RevenueRecognition

 

Revenuesare derived primarily from the sale of clinical information systems and theprovision of services.  The componentsof the system sales revenues are the licensing of computer software,installation, and the sale of computer hardware and sublicensed software. Thecomponents of service revenues are software support and hardware maintenance,training, and implementation services. The Company recognizes revenue in accordance with the provisions ofStatement of Position (SOP) No. 97-2, “Software Revenue Recognition,” asamended by SOP No. 98-4, SOP 98-9 and clarified by Staff Accounting Bulletin(SAB) 101 “Revenue Recognition in Financial Statements.” SOP No 97-2, as

 

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amended, generally requires revenue earnedon software arrangements involving multiple-elements to be allocated to eachelement based on the relative fair values of those elements.  The Company allocates revenue to eachelement in a multiple-element arrangement based on the element’s respectivefair value, with the fair value determined by the price charged when thatelement is sold and 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 May 31, 2003 and 2002, the deferred revenue was $689,812 and$774,714, respectively.

 

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, comprises deferrals forlicense fees, hardware, and other services for which the implementation has notyet been completed and revenues have not been recognized.  At May 31, 2003 and 2002, deferred servicecontract income was $1,146,821 and $939,718, respectively.

 

SoftwareDevelopment Costs

 

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 and subsequentlyreported at the lower 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 nine months ended May 31, 2003 and2002, the Company capitalized $342,000 and $335,280, respectively.  At May 31, 2003 and 2002, the balance ofcapitalized software costs were $1,388,164 and $1,360,792 net of accumulatedamortization of $1,520,592 and $1,311,292, respectively.

 

IncomeTaxes

 

Ourincome tax policy records the estimated future tax effects of temporarydifferences between the tax bases of assets and liabilities and amountsreported in the accompanying consolidated balance sheets, as well as operatingloss and tax credit carryforwards.  Wefollow very specific and detailed guidelines regarding the recoverability ofany tax assets recorded on the balance sheet and provide any necessaryallowances required.

 

### **New Accounting Pronouncements**

 

InDecember 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation—Transition and Disclosure—an amendment of FASBStatement No. 123.” This statement provides alternative methods oftransition for a voluntary change to the fair value method of accounting forstock-based compensation. The statement amends the disclosure requirements ofFASB Statement No. 123 to require prominent disclosure in both annual andinterim financial statements about the method of accounting for stock-basedcompensation and the effect of the method used on reported results. The Companyaccounts for stock-based compensation arrangements in accordance with theprovisions of Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees,” and complies with the disclosure provisions of FASBStatement No. 123. The transition provisions are effective for fiscalyears ending after December 15, 2002. The disclosure provisions are effectivefor interim periods beginning after December 15, 2002, with earlyapplication encouraged. The adoption of this statement is not expected to havea material impact on the Company’s consolidated financial position, results ofoperations or cash flows.

 

InMay 2003, the FASB issued Statement of Financial Accounting Standards No. 150,Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity (SFAS 150).  Thisstatement affects the classification, measurement, and disclosure requirementsof the following three types of freestanding financial instruments:  1) mandatory redeemable shares, which theissuing company is obligated to buy back with cash or other assets; 2)instruments that do or may require the issuer to buy back some of its shares inexchange for cash or other assets, which includes put options and forwardpurchase contracts; and 3) obligations that can be settled with shares, themonetary value of which is fixed, tied solely or predominantly to a variable suchas a market index, or varies inversely with the value of the issuersshares.  In general, SFAS 150 iseffective for all financial instruments entered into or modified after

 

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May 31, 2003, and otherwise is effective atthe beginning of the first interim period beginning after June 15, 2003.  The adoption of SFAS 150 is not expected tohave an impact on the Company’s consolidated financial position or disclosures.

 

InNovember 2002, the FASB issued Financial Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others” (FIN 45).  The provisions of FIN 45 are effective for year-end 2003.  Recognition and measurement provisions ofFIN 45 become effective for guarantees issued or modified on or after January1, 2003.  The adoption of FIN 45 doesnot have a material impact on our results of operations, financial position, orliquidity.

 

InJanuary 2003, FASB issued FASB Interpretation No. 46 (FIN No. 46),Consolidation of Variable Interest Entities, an interpretation of AccountingResearch Bulletin No. 51, Consolidated Financial Statements.  FIN No. 46 explains how to identify variableinterest entities and how an enterprise assesses its interest in a variableentity to decide whether to consolidate that entity.  FIN No. 46 requires existing unconsolidated variable interestentities to be consolidated by their primary beneficiaries if the entities donot effectively disperse risks among parties involved.  FIN No. 46 is effective immediately forvariable interest entities after January 31, 2003, and to variable interestentities in which an enterprise obtained an interest after that date.  Fin No. 46 applies in the first fiscal yearor interim period beginning after June 15, 2003, to variable interest entitiesin which an enterprise holds a variable interest that is acquired beforeFebruary 1, 2003.  The adoption of FINNo. 46 is not expected to have a material effect on the Company’s financialposition and results of operations.

 

**Item 3.****                                                          ****Controls and Procedures**

 

(a)  Evaluation of Disclosure Controls andProcedures.  The Company’s ChiefExecutive Officer and its Chief Accounting Officer, after evaluating theeffectiveness of the Company’s disclosure controls and procedures (as definedin the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c) as of adate within 90 days of the filing date of this quarterly report on Form 10-QSB(the “Evaluation Date”), have concluded that as of the Evaluation Date, theCompany’s disclosure controls and procedures were adequate and effective toensure that material information relating to the Company would be made known tothem by others within the Company.

 

(b)  Changes in Internal Controls. Therewere no significant changes in the Company’s internal controls or in otherfactors that could significantly affect the Company’s disclosure controls andprocedures subsequent to the Evaluation Date, nor any significant deficienciesor material weaknesses in such disclosure controls and procedures requiringcorrective actions.

 

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**PART II -OTHER INFORMATION**

 

Items 1 through5.  NOT APPLICABLE

 

Item 6.             Exhibits and Reports on Forms 8-K

 

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

 

(b)                                 Exhibit 99.1 Statement Pursuant to Section906 of the Sarbanes-Oxley Act of 2002.

Exhibit 99.2 StatementPursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(c)                                  There was one report dated April 11, 2003filed on Form 8-K during the quarter ended May 31, 2003, disclosing otherinformation; the Company’s second quarter earning release.

 

**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.

 
| **CREATIVE COMPUTER APPLICATIONS, INC.** |
|------------------------------------------|
| (Company)                                |
|                                     |   |   |
|                                     |   |   |
| **Date:**                                | July 14, 2003 |   |     /s/  Steven M. Besbeck |   |
|                                     |   | Steven. M. Besbeck,  President |
|                                     |   | Chief Executive Officer,  Chief  Financial Officer |
|                                     |   |   |
|                                     |   |   |
| **Date:**                                | July 14, 2003 |   |     /s/  Anahita Villafane |   |
|                                     |   | Anahita Villafane |
|                                     |   | Controller and Chief  Accounting Officer |

 

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**Statement Pursuant to 18 U.S.C. Section 1350, as AdoptedPursuant to****Section 302 of theSarbanes-Oxley Act of 2002**

 

I, Steven M. Besbeck, certify that:

 

1.  I have reviewed thisquarterly report on Form 10-QSB of Creative Computer Applications, Inc.;

 

2.  Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.  Based on my knowledge, thefinancial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.  The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and have:

 

a)  designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)  evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)  presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.  The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation, tothe registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a)  all significant deficiencies in the designor operation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)  any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.  The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:  July  14, 2003 |                                                              |
|----------------------------|-------------------------------------------------------------------|
|                       |                                                              |
|                       |                                                              |
|                       | /s/ Steven M. Besbeck                                             |   |
|                       | Steven M. Besbeck                                                 |
|                       | President,  Chief Executive Officer,  and Chief Financial Officer |

 

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**Stat****ement Pursuant to 18 U.S.C.Sections 1350, as Adopted Pursuant to****Section 302 of theSarbanes-Oxley Act of 2002**

 

I, Anahita Villafane, certify that:

 

1.  I have reviewed thisquarterly report on Form 10-QSB of Creative Computer Applications, Inc.;

 

2.  Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.  Based on my knowledge, thefinancial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.  The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and have:

 

a) designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c) presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.  The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.  The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| Date:  July  14, 2003 |                     |
|----------------------------|--------------------------|
|                       |                     |
|                       |                     |
|                       | /s/ Anahita Villafane    |   |
|                       | Anahita  Villafane       |
|                       | Controller               |
|                       | Chief Accounting Officer |

 

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