**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

 

**Washington, DC 20549**

 

**FORM 10-QSB**

 

**(MarkOne)**

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

 

**For the quarterly period ended November 30, 2002.**

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

 

**For thetransition period from                         to                         **

 

**Commission file number 0-12551**

 

**CREATIVE COMPUTER APPLICATIONS,INC.**

(Exactname 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 the number of sharesoutstanding of each of the issuer’s classes of common equity, as of the latestpracticable date:  3,268,900 commonshares as of December 31, 2002.

 

Transitional Small BusinessDisclosure Format (check one):

Yeso                                No ý

 

 

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**FORM 10-QSB**

 

**I N D EX**

 
| **PART I - Financial Information:**                                                                                  |
|----------------------------------------------------------------------------------------------------------------------|
|                                                                                                                 |
| Condensed  Consolidated Balance Sheets, as at November 30, 2002 and August 31, 2002                                  |
|                                                                                                                 |
| Condensed  Consolidated Statements of Operation for the three months ended November 30,  2002 and November 30, 2001  |
|                                                                                                                 |
| Condensed  Consolidated Statements of Cash Flows for the three months ended November 30,  2002 and November 30, 2001 |
|                                                                                                                 |
| 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                                                                                                           |
|                                                                                                                 |
| Certifications                                                                                                       |

 

2

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**PART1 - FINANCIAL INFORMATION**

 

**Item 1**

 

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
|                                                                                                    |   | **November  30,  2002** |      | **August 31,*********2002** |   |
|---------------------------------------------------------------------------------------------------------|--------|-------------------------|-----------|-----------------------------|--------|
|                                                                                                    |   | **(Unaudited)**         |      |                        |   |
| **ASSETS**                                                                                              |   |                    |      |                        |   |
|                                                                                                    |   |                    |      |                        |   |
| CURRENT ASSETS:                                                                                         |   |                    |      |                        |   |
| Cash                                                                                                    |   | $                       | 1,115,753 |                        | $      | 1,027,810 |   |
| Receivables, net                                                                                        |   | 1,834,672               |      | 2,089,274                   |   |
| Inventories                                                                                             |   | 185,419                 |      | 183,640                     |   |
| Prepaid expenses  and other assets                                                                      |   | 182,500                 |      | 183,251                     |   |
| Deferred tax asset                                                                                      |   | 470,532                 |      | 488,600                     |   |
|                                                                                                    |   |                    |      |                        |   |
| TOTAL CURRENT  ASSETS                                                                                   |   | 3,788,876               |      | 3,972,575                   |   |
|                                                                                                    |   |                    |      |                        |   |
| PROPERTY AND  EQUIPMENT, net                                                                            |   | 230,537                 |      | 251,458                     |   |
| INVENTORY OF  COMPONENT PARTS                                                                           |   | 230,889                 |      | 245,889                     |   |
| CAPITALIZED  SOFTWARE COSTS, net of accumulated amortization of $1,306,002 and $1,200,993               |   | 1,374,754               |      | 1,365,763                   |   |
| DEFERRED TAX  ASSET                                                                                     |   | 440,013                 |      | 456,691                     |   |
|                                                                                                    |   |                    |      |                        |   |
|                                                                                                    |   | $                       | 6,065,069 |                        | $      | 6,292,376 |   |
|                                                                                                    |   |                    |      |                        |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                          |   |                    |      |                        |   |
|                                                                                                    |   |                    |      |                        |   |
| CURRENT  LIABILITIES:                                                                                   |   |                    |      |                        |   |
| Notes payable to  bank (Note 4)                                                                         |   | $                       | —    |                        | $      | — |   |
| Accounts payable                                                                                        |   | 297,155                 |      | 224,418                     |   |
| Accrued  liabilities:                                                                                   |   |                    |      |                        |   |
| Vacation Pay                                                                                            |   | 166,168                 |      | 151,930                     |   |
| Accrued Payroll                                                                                         |   | 27,482                  |      | 97,672                      |   |
| Other                                                                                                   |   | 252,707                 |      | 396,712                     |   |
| Deferred service  contract income                                                                       |   | 957,238                 |      | 973,931                     |   |
| Deferred revenue                                                                                        |   | 433,446                 |      | 561,385                     |   |
| Capital lease  obligation, current portion (Note 5)                                                     |   | 17,423                  |      | 23,111                      |   |
|                                                                                                    |   |                    |      |                        |   |
| TOTAL CURRENT  LIABILITIES                                                                              |   | 2,151,619               |      | 2,429,159                   |   |
|                                                                                                    |   |                    |      |                        |   |
| SHAREHOLDERS’  EQUITY:                                                                             |   |                    |      |                        |   |
| Common shares,  no par value; 20,000,000 shares authorized; 3,268,900 and 3,266,400 shares  outstanding |   | 6,146,292               |      | 6,144,042                   |   |
| Accumulated  deficit                                                                                    |   | (2,232,842              | )         | (2,280,825                  | )      |
|                                                                                                    |   |                    |      |                        |   |
| TOTAL  SHAREHOLDERS’ EQUITY                                                                        |   | 3,913,450               |      | 3,863,217                   |   |
|                                                                                                    |   |                    |      |                        |   |
|                                                                                                    |   | $                       | 6,065,069 |                        | $      | 6,292,376 |   |

 

**See Notes to Condensed Consolidated Financial Statements.**

 

----

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

 

3

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**CONDENSED CONSOLIDATED STATEMENTS OF OPERATION**

 
|                                           |   | **Three  Months Ended November 30,** |    |
|------------------------------------------------|--------|--------------------------------------|---------|
|                                           |   | **2002**                             |    | **2001** |   |
|                                           |   | **(unaudited)**                      |    |
|                                           |   |                                 |    |
| NET SYSTEM SALES  AND SERVICE REVENUE (Note 3) |   |                                 |    |   |   |
| System sales                                   |   | $                                    | 802,469 |   | $ | 772,546 |   |
| Service revenue                                |   | 1,079,692                            |    | 954,769 |   |
|                                           |   | 1,882,161                            |    | 1,727,315 |   |
|                                           |   |                                 |    |   |   |
| COST OF PRODUCTS  AND SERVICES SOLD            |   |                                 |    |   |   |
| System sales                                   |   | 579,177                              |    | 470,005 |   |
| Service revenue                                |   | 356,683                              |    | 366,557 |   |
|                                           |   | 935,860                              |    | 836,562 |   |
|                                           |   |                                 |    |   |   |
| Gross profit                                   |   | 946,301                              |    | 890,753 |   |
|                                           |   |                                 |    |   |   |
| OPERATING  EXPENSES:                           |   |                                 |    |   |   |
| Selling, general  and administrative           |   | 651,440                              |    | 653,852 |   |
|                                           |   |                                 |    |   |   |
| Research and  development                      |   | 213,510                              |    | 184,847 |   |
|                                           |   |                                 |    |   |   |
|                                           |   | 864,950                              |    | 838,699 |   |
|                                           |   |                                 |    |   |   |
| Operating income                               |   | 81,351                               |    | 52,054 |   |
|                                           |   |                                 |    |   |   |
| INTEREST AND  OTHER INCOME                     |   | 3,725                                |    | 4,140 |   |
|                                           |   |                                 |    |   |   |
| INTEREST EXPENSE                               |   | (2,347                               | )       | (4,510 | ) |
|                                           |   |                                 |    |   |   |
| Income before  taxes on income                 |   | 82,729                               |    | 51,684 |   |
|                                           |   |                                 |    |   |   |
| INCOME TAX  PROVISION                          |   | 34,746                               |    | 21,707 |   |
|                                           |   |                                 |    |   |   |
| NET INCOME                                     |   | $                                    | 47,983  |   | $ | 29,977 |   |
|                                           |   |                                 |    |   |   |
| EARNINGS PER  SHARE (Note 2):                  |   |                                 |    |   |   |
| Basic                                          |   | $                                    | .02     |   | $ | .01 |   |
| Diluted                                        |   | $                                    | .01     |   | $ | .01 |   |
|                                           |   |                                 |    |   |   |
| WEIGHTED AVERAGE  NUMBER OF SHARES OUTSTANDING |   |                                 |    |   |   |
| Basic                                          |   | 3,266,400                            |    | 3,224,358 |   |
| Diluted                                        |   | 3,382,486                            |    | 3,224,358 |   |

 

**See Notes to Condensed Consolidated Financial Statements.**

 

4

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**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

**Increase (Decrease) in Cash**

 

 
|                                                                           |   | **Three  Months Ended November 30,** |      |
|--------------------------------------------------------------------------------|--------|--------------------------------------|-----------|
|                                                                           |   | **2002**                             |      | **2001** |   |
|                                                                           |   | **(unaudited)**                      |      |
|                                                                           |   |                                 |      |
| OPERATING  ACTIVITIES:                                                         |   |                                 |      |   |   |
| Net income                                                                     |   | $                                    | 47,983    |   | $ | 29,977 |   |
| Adjustments to  reconcile net income to net cash used in operating activities: |   |                                 |      |   |   |
| Depreciation and  amortization                                                 |   | 146,910                              |      | 181,211 |   |
| Deferred taxes                                                                 |   | 34,746                               |      | 21,707 |   |
|                                                                           |   |                                 |      |   |   |
| Changes in  operating assets and liabilities:                                  |   |                                 |      |   |   |
| Receivables                                                                    |   | 254,602                              |      | (314,987 | ) |
| Inventories                                                                    |   | 13,221                               |      | 687 |   |
| Prepaid expenses  and other assets                                             |   | 751                                  |      | 36,565 |   |
| Accounts payable                                                               |   | 72,737                               |      | 57,507 |   |
| Accrued  liabilities and deferred revenues                                     |   | (344,589                             | )         | (72,030 | ) |
|                                                                           |   |                                 |      |   |   |
| Net cash  provided by (used in) operating activities                           |   | 226,361                              |      | (59,363 | ) |
|                                                                           |   |                                 |      |   |   |
| INVESTING  ACTIVITIES                                                          |   |                                 |      |   |   |
| Purchases of  property and equipment                                           |   | (20,980                              | )         | (21,650 | ) |
| Capitalized  software costs                                                    |   | (114,000                             | )         | (113,280 | ) |
|                                                                           |   |                                 |      |   |   |
| Net cash used in  investing activities                                         |   | (134,980                             | )         | (134,930 | ) |
|                                                                           |   |                                 |      |   |   |
| FINANCING  ACTIVITIES:                                                         |   |                                 |      |   |   |
| Borrowings on  notes payable                                                   |   | —                               |      | 100,000 |   |
| Payments on  notes payable                                                     |   | —                               |      | (80,000 | ) |
| Payments on  capital lease obligations                                         |   | (5,688                               | )         | (5,687 | ) |
| Proceeds from  issuance of stock and exercises of stock options                |   | 2,250                                |      | 3,500 |   |
|                                                                           |   |                                 |      |   |   |
| Net cash  provided by (used in) financing activities                           |   | (3,438                               | )         | 17,813 |   |
|                                                                           |   |                                 |      |   |   |
| NET INCREASE  (DECREASE) IN CASH                                               |   | 87,943                               |      | (176,480 | ) |
|                                                                           |   |                                 |      |   |   |
| Cash, beginning  of period                                                     |   | 1,027,810                            |      | 661,008 |   |
|                                                                           |   |                                 |      |   |   |
| Cash, end of  period                                                           |   | $                                    | 1,115,753 |   | $ | 484,528 |   |

 

**See notes to Condensed Consolidated Financial Statements.**

 

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**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL 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 November 30, 2002 the results ofits operations for the three months ended November 30, 2002 and 2001, and cashflows for the three months ended November 30, 2002 and 2001.  These results have been determined on thebasis of generally accepted accounting principles and practices appliedconsistently with those used in preparation of the Company’s Annual Report onForm 10-KSB for the fiscal year ended August 31, 2002.

 

The results of operationsfor the three months ended November 30, 2002 are not necessarily indicative ofthe results expected for any other period or for the entire year.

 

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

 

Earningsper share has been computed as follows:

 
|                                                          |   | **Three  Months Ended  November 30,  2002** |   |
|---------------------------------------------------------------|--------|--------------------------------------------------|--------|
|                                                          |   |                                             |   |
| NET INCOME                                                    |   | 47,983                                           |   |
| Basic weighted  average number of common shares outstanding   |   | 3,266,400                                        |   |
| Diluted effect  of stock options                              |   | 116,086                                          |   |
| Diluted weighted  average number of common shares outstanding |   | 3,382,486                                        |   |
| Basic earnings  per share                                     |   | $                                                | .02    |   |
| Diluted earnings  per share                                   |   | $                                                | .01    |   |

 

Warrantsto purchase 125,000 shares of common stock at $1.50 per share were not includedin the computation of diluted earning per share because the exercise priceexceeded average market price and would have been anti-dilutive.

 

**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 bankon provides for $500,000 on a revolving basis through February 1, 2003, andcontains certain loan covenants and financial ratio requirements.  On November 30, 2002, 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 November 30,2002.

 

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**Note 5.**                             New AccountingPronouncements- SFAS 144, Accounting for the Impairment or Disposal ofLong-Lived Assets, was issued in August 2001 and is effective for fiscal yearsbeginning after December 15, 2001.  SFAS144 provides a single, comprehensive accounting model for impairment anddisposal of long-lived assets and discontinued operations.  TheCompany does not expect the adoption of this pronouncement to have a materialeffect on the Company’s financialstatements.

 

In April 2002, the FASB issuedSFAS No. 145, “Rescission of FASBStatements No. 4, 44, and 64, Amendment of FASB Statement No. 13, andTechnical Corrections”. This statement eliminates the current requirement that gains and losses on debt extinguishments must be classified as extraordinary items in the income statement. Instead, such gains andlosses will be classified as extraordinary items only if they are deemedto be unusual and infrequent, in accordance with the current GAAP criteria forextraordinary classification. In addition, SFAS No. 145 eliminates aninconsistency in lease accounting by requiring that modifications of capitalleases that result in reclassification as operating leases be accounted forconsistent with sale-leaseback accounting rules. The statement also containsother nonsubstantive corrections to authoritative accounting literature. Thechanges related to debt extinguishment will be effective for fiscal years beginning after May 15, 2002, and thechanges related to lease accounting wouldbe effective for transactions occurring after May 15, 2002. The Companyhas adopted this standard and it did not have an effect on the Company’sconsolidated financial statements.

 

In September 2002, the FASB issued SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities”, which addresses accountingfor restructuring and similar costs. SFAS No. 146 supersedes previousaccounting guidance, principally Emerging Issues Task Force (“EITF”) Issue No.94-3. The Company will adopt the provisions of SFAS No. 146 forrestructuring activities initiated after December 31, 2001. SFAS No. 146 requires that the liability for costs associated with anexit or disposal activity be recognized when the liability is incurred.Under EITF No. 94-3, a liability for an exit cost was recognized at the date ofa company’s commitment to an exit plan. SFAS No.146 also establishes that the liability be measured and recordedat fair value.  Accordingly, SFAS No.146 may affect the timing of recognizing future restructuring costs as well asthe amount recognized.  The Company hasadopted this standard and it did not have an effect on the Company’sconsolidated financial statements.

 

In December 2002, theFASB issued SFAS No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure—an amendment of FASB StatementNo. 123.” This statement provides alternative methods of transition for avoluntary change to the fair value method of accounting for stock-basedcompensation. The statement amends the disclosure requirements of FASBStatement 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. The Company will implement the disclosureprovisions in the quarter ending May 31, 2003.

 

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

 

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

 

7

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**Introduction**

 

CCA generates revenues primarily from the sale of its ClinicalInformation Systems, which includes the licensure of proprietary applicationsoftware, and the sale of servers upon which the application softwareoperates.  In connection with its salesof CIS products, the Company provides implementation services for theinstallation, integration, and training of end users’ personnel.  The Company generates sales of ancillarysoftware and hardware, including its data acquisition products, to its CISclients and to third parties.  TheCompany also generates recurring revenues from the provision of comprehensivepost implementation services to its CIS clients, pursuant to extended serviceagreements.

 

Because of the nature of its business, CCA makessignificant investments in research and development for new products andenhancements to existing products.  Inthe past, CCA has funded its research and development programs through cashflow primarily generated from operations. Management anticipates that future expenditures in research anddevelopment will either continue at current levels or may increase for theforeseeable future, and will be funded primarily out of the Company’s cashflow.

 

CCA’s results of operation for the current fiscalquarter ended November 30, 2002 were slightly improved over the comparablequarter in 2001 continuing a trend of increased sales and earnings since theCompany began a turnaround in the third fiscal quarter of its 2001 fiscalyear.  The Company had experienceddecreases in sales and operating losses in its 2000 and 2001 fiscal years dueto a number of factors.  Such decreasesin revenues and earnings were primarily attributable to an industry-wide postYear 2000 slowdown, the Balanced Budget Act, and uncertainties related to theHealth Insurance Portability and Accountability Act (HIPAA).  As a result of increased sales and marketingactivities, the Company’s pipeline of new CIS transactions has risen back tohistorical levels.  Management believesthe industry and the market for healthcare information technology productscontinues to recover despite current economic conditions.  The market is now experiencing a newinterest in clinical applications that is being fueled by the demand for newtechnology that addresses compliance issues as well as patient care and safetyissues.

 

In order to address compliance issues necessitated bythe HIPAA regulations, the Company is completing the development ofenhancements to its products. Provisions of HIPAA are intended to ensurepatient confidentiality and security for all health care relatedinformation.  The requirements of HIPAAapply to any entity storing and/or transmitting patient identifiableinformation on electronic media.  Thisaffects virtually all health care organizations, from physicians and insurancecompanies to health care support organizations.  Certain safeguards will be required to accurately insure thesecurity of patient data including more robust audit trails andtiered/structured password security when accessing patient data.  CCA is on schedule with its plans to provideits client base with application enhancements that will assist them in adheringto HIPAA regulations before the regulations go into effect.  Management also believes that theapplication enhancements will require that many of its clients will need toupgrade their systems in order to effectively manage greater amounts of data,which will afford the Company opportunities to sell upgrades and provideprofessional services.

 

**Results of Operations**

 

Sales for the first fiscal quarter ending November 30,2002 increased to $1,882,161, as compared to $1,727,315 for the comparablequarter ended November 30, 2001, an overall increase of approximately $154,846or 9%.  When analyzed by productcategory, sales of Clinical Information Systems (CIS) increased by $87,865 or13.5% and service revenues increased $124,923 or 13.1% over the same quarter offiscal 2002.  Such increases werepartially offset by a decrease in sales of data acquisition products of $55,944or 49.4% and a slight decrease of $1,998 or 24.1% in other revenues.  The increase in sales of CIS products wasprimarily attributable to a greater number of CIS related transactions due inpart to upgrades to insure client’s readiness for HIPAA compliance.  The Company had fewer new CIS sales in thecurrent quarter as a result of delays in closing contracts.  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.  The Company experienced anoverall decrease in sales of data acquisition products, which was primarilyattributable to a decrease in the volume of units sold to OEM customers and atechnological shift to software based clinical instrument interfaces.  The decrease in OEM business is expected tocontinue, as fewer OEM customers remain active in the marketplace or are nolonger reliant on CCA’s data acquisition products.  Management does not believe the OEM

 

8

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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 viewsthe near term outlook for the continued sale of CIS products cautiously duringthe first 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, and the temporary delaysin the closing of new CIS sales.  Inaddition, the Company’s revenues associated with CIS transactions may bedelayed due to client related issues such as staff availability, ITinfrastructure readiness, and the performance of third party contractors, allof which are issues outside of the control of CCA.

 

Cost of sales for the first quarter of fiscal 2003increased by $99,298 or 11.9% as compared to the same quarter of fiscal2002.  The overall increase in cost ofsales was primarily attributable to increases in labor costs of $27,392 or7.3%, and in material costs of $85,461 or 81.3%.  Such increases were partially offset by a decrease in other costsof $13,555 or 3.8%.  The increase inmaterial costs was attributable to sales that were more weighted to upgradeshaving a higher proportion of hardware components and lower gross margins.  The increase in labor costs was attributableto additions in personnel expenses due to new hires for the Company’s supportoperations.  The decrease in other costsof sales was attributable to decreased expenses in travel and training.  Cost of sales as a percentage of sales was50% as compared to 48% for the comparable 2002 fiscal quarter.

 

Selling, general, and administrative expensesdecreased slightly by $2,412 or 0.37% for the current 2003 fiscal quarter ascompared to the same quarter of fiscal 2002. The decrease in selling, general, and administrative expenses wasinsignificant as there were no material changes in the overall expense levelsfor the comparable periods.  However,the Company plans to increase its expenditures attributable to sales andmarketing in fiscal 2003.  A CyberRAD®product manager was hired in October 2002 and additional expenditures inadvertising, tradeshow expense, and other related marketing expenses areanticipated.  Management alsoanticipates increases in insurance costs and in occupancy expenses as a resultof a renegotiation of its facility lease, which began in November 2002.

 

Research and development expenses increased by $28,663or 15.5% during the current fiscal quarter of 2003 as compared to the samequarter of fiscal 2002.  The increase isattributable to increases in salaries and other personnel relatedexpenses.  For the comparable firstquarters of 2003 and 2002, the Company capitalized software costs of $114,000and $113,280, respectively, which are generally amortized over the estimateduseful life not to exceed five years. Such costs were attributable to enhancements and new modules for theCompany’s CIS products, new applications under development, and modificationsassociated with HIPAA compliance to all of CCA’s products.  Management anticipates its overall researchand development activities will increase in fiscal 2003 due to plannedpersonnel additions in product engineering, quality assurance and systemcommunications support.

 

Interest and other income was $3,725 for the currentfiscal quarter of 2003 as compared to $4,140 for comparable quarter of fiscal2002.

 

Interest and other expense was $2,347 for the currentfiscal quarter of 2003 as compared to $4,510 for the comparable quarter offiscal 2002 due to the level of borrowings.

 

As a result of the factors discussed above, theCompany earned net income of $47,983 for the current fiscal quarter of 2003,compared to a net income of $29,977 for the same quarter in fiscal 2002.  The Company’s basic and diluted earnings pershare was $.02 and $.01 respectively for the current fiscal quarter of 2003 ascompared to basic and diluted net income per share of $.01 for the comparablequarter in 2001.

 

**CapitalResources and Liquidity**

 

The Company’s primary need for capital has been to invest in softwaredevelopment, and in computers and related equipment for its internal use.  The Company invested $ 114,000 and $113,280during the first fiscal quarters of

 

9

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2003 and 2002 in software development. These expenditures related to HIPAA related enhancements to all itsproducts, and the new browser version of the Company’s LIS product, CyberLAB®,the release of its revised PIS, CyberMED®, its new RIS, CyberRAD®,and other product enhancements.  TheCompany anticipates expending additional sums during fiscal 2003 on theremainder of the HIPAA related enhancements to all its products and the furtherdevelopment of the browser user interfaces. During the current fiscal quarter of 2003, the Company invested anaggregate of $ 20,980 in additions to fixed assets primarily consisting ofcomputers and software, as compared to an investment of $21,650 in thecomparable quarter of 2002.

 

As of November 30, 2002, the Company’s working capitalamounted to $1,637,257 compared to $1,543,416 as of August 31, 2002.  The Company’s current ratio was 1.8 atNovember 30, 2002 compared to 1.6 at August 31, 2002.  At November 30, 2002 the Company’s credit facilities with itsbank consisted of a revolving line of credit of $500,000, of which there wereno amounts outstanding.  The bank creditagreement is through February 1, 2003 and contains certain loan covenants andfinancial ratio requirements.  As ofNovember 30, 2002, the Company was in compliance with all of the covenants andfinancial ratio requirements required by its bank.

 

Cash flows from operating activities were $226,361 forthe first fiscal quarter of 2003 compared to cash used of $59,363 for thecomparable quarter of fiscal 2002.  Theincrease in cash flow from operating activities was primarily attributable tothe increase in net income from operations and a net change in receivablesduring the current fiscal quarter of 2003.

 

Net cash used in investing activities totaled $134,980for the current quarter of fiscal 2003, compared to $134,930 used in investingactivities during the comparable quarter of 2002.

 

Cash flows used in financing activities amounted to$3,438 during the first fiscal quarter of 2003 compared to $17,813 provided byfinancing activities in the same quarter of fiscal 2002.  The change from fiscal 2002 to fiscal 2003resulted primarily from the Company having paid off its line of credit.

 

The Company’s primary source of working capital hasbeen generated from earnings, and borrowings on its line of credit.  The Company’s results of operations for thecurrent fiscal quarter ended November 30, 2002 produced operating cash flow ofapproximately $226,361, which was sufficient to fund its product developmentactivities, and to invest in new marketing programs.  Management believes that its sales pipeline is adequate toproduce sufficient operating cash flow in the 2003 fiscal year, and that it’sprojected cash flow from operations, together with its bank credit facilities,should be sufficient to fund its working capital requirements for its 2003fiscal year.  However, an unanticipateddecline in sales, delays in implementations where payments are tied to deliveryand/or performance of services, or cancellations of contracts could have anegative effect on cash flow from operations and could in turn createshort-term liquidity problems.  If suchevents were to occur the Company may have to seek alternative financing.

 

**Seasonality,Inflation and Industry Trends**

 

The Company’s sales are generally lower in the summerand higher in the fall, winter and spring. Inflation has not had a material effect on the Company’s business sincethe Company has been able to adjust the prices of its products and services in responseto inflationary pressures.  Managementbelieves that most phases of the healthcare segment of the computer industrywill continue to be highly competitive, and that potential healthcare reformsincluding those promulgated by HIPAA may have a long-term positive impact onits business.  With respect to thecompliance issues brought about by HIPAA, the Company has invested heavily innew application modules 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.

 

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**CriticalAccounting Policies and Estimates**

 

Managements discussion and analysis of CCA’s financialcondition and results of operations are based upon the condensed consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States.  The preparation of these financial statements requires managementto make estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosures of contingentassets and liabilities.  On an on-goingbasis, management evaluates estimates, including those related to the valuationof inventory and the allowance for uncollectible accounts receivable. We baseour estimates on historical experience and on various other assumptions thatare believed to be reasonable under the circumstances, the results of whichform the basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources.  Actual results may differ from theseestimates under different assumptions or conditions. We believe the followingcritical accounting policies affect our more significant judgments andestimates used in the preparation of our consolidated financial statements:

 

Inventory

 

Inventory is evaluated on a continual basis andreserve adjustments are made based on management’s estimate of future salesvalue, if any, of specific inventory items. Reserve adjustments are made forthe difference between the cost of the inventory and the estimated market valueand charged to operations in the period in which the facts that give rise tothe adjustments become known.  At November30, 2002 and 2001, the inventory reserve was $85,568 and $71,174 respectively.

 

Accounts Receivable

 

Accounts receivable balances are evaluated on acontinual basis and allowances are provided for potentially uncollectibleaccounts based on management’s estimate of the collectability of customeraccounts. If the financial condition of a customer were to deteriorate,resulting in an impairment of their ability to make payments, an additionalallowance may be required. Allowance adjustments are charged to operations inthe period in which the facts that give rise to the adjustments becomeknown.  The accounts receivable balanceat November 30, 2002 was $1,834,672 net of an allowance for doubtful accountsof $32,248.

 

RevenueRecognition

 

Revenues are derived primarily from the sale ofclinical information systems and the provision of services.  The components of the system sales revenuesare the licensing of computer software, installation, and the sale of computerhardware and sublicensed software. The components of service revenues aresoftware support and hardware maintenance, training, and implementationservices.  The Company recognizesrevenue in accordance with the provisions of Statement of Position (SOP) No.97-2, “Software Revenue Recognition,” as amended by SOP No. 98-4, SOP 98-9 andclarified by Staff Accounting Bulletin (SAB) 101 “Revenue Recognition inFinancial 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 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.

 

Post Implementation software and hardware maintenanceservices are marketed under monthly and annual arrangements and are recognizedas revenue ratably over the contracted maintenance term as services areprovided.  Deferred revenue related toCIS sales, comprises deferrals for license fees, hardware, and other servicesfor which the implementation has not yet been completed and revenues have notbeen recognized.

 

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Software Development Costs

 

Costs incurred internally in creating computersoftware products are expensed until technological feasibility has beenestablished upon completion of a program design. Thereafter, applicablesoftware development costs are capitalized and subsequently reported at the lowerof amortized cost or net realizable value. Capitalized costs are amortized based on current and expected futurerevenue for each product with minimum annual amortization equal to thestraight-line amortization over the estimated economic life of the product notto exceed five years.

 

**New Accounting Pronouncements**

 

SFAS 144, Accounting for the Impairment or Disposal ofLong-Lived Assets, was issued in August 2001 and is effective for fiscal yearsbeginning after December 15, 2001.  SFAS144 provides a single, comprehensive accounting model for impairment anddisposal of long-lived assets and discontinued operations.  TheCompany does not expect the adoption of this pronouncement to have a materialeffect on the Company’s financialstatements.

 

In April 2002, the FASB issuedSFAS No. 145, “Rescission of FASBStatements No. 4, 44, and 64, Amendment of FASB Statement No. 13, andTechnical Corrections”. This statement eliminates the current requirement that gains and losses on debt extinguishments must be classified as extraordinary items in the income statement. Instead, such gains andlosses will be classified as extraordinary items only if they are deemedto be unusual and infrequent, in accordance with the current GAAP criteria forextraordinary classification. In addition, SFAS No. 145 eliminates aninconsistency in lease accounting by requiring that modifications of capitalleases that result in reclassification as operating leases be accounted forconsistent with sale-leaseback accounting rules. The statement also containsother nonsubstantive corrections to authoritative accounting literature. Thechanges related to debt extinguishment will be effective for fiscal years beginning after May 15, 2002, and thechanges related to lease accounting wouldbe effective for transactions occurring after May 15, 2002. The Companyhas adopted this standard and it did not have an effect on the Company’sconsolidated financial statements.

 

In September 2002, the FASB issued SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities”, which addresses accountingfor restructuring and similar costs. SFAS No. 146 supersedes previousaccounting guidance, principally Emerging Issues Task Force (“EITF”) Issue No.94-3. The Company will adopt the provisions of SFAS No. 146 forrestructuring activities initiated after December 31, 2001. SFAS No. 146 requires that the liability for costs associated with anexit or disposal activity be recognized when the liability is incurred.Under EITF No. 94-3, a liability for an exit cost was recognized at the date ofa company’s commitment to an exit plan. SFAS No.146 also establishes that the liability be measured and recordedat fair value.  Accordingly, SFAS No.146 may affect the timing of recognizing future restructuring costs as well asthe amount recognized.  The Company hasadopted this standard and it did not have an effect on the Company’sconsolidated financial statements.

 

In December 2002, theFASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transitionand Disclosure—an amendment of FASB Statement No. 123.” This statementprovides alternative methods of transition for a voluntary change to the fairvalue method of accounting for stock-based compensation. The statement amendsthe disclosure requirements of FASB Statement No. 123 to require prominentdisclosure in both annual and interim financial statements about the method ofaccounting for stock-based compensation and the effect of the method used onreported results. The Company accounts for stock-based compensationarrangements in accordance with the provisions of Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees,” and complieswith the disclosure provisions of FASB Statement No. 123. The transitionprovisions are effective for fiscal years ending after December 15, 2002.The disclosure provisions are effective for interim periods beginning afterDecember 15, 2002, with early application encouraged. The adoption of thisstatement is not expected to have a material impact on the Company’sconsolidated financial position, results of operations or cash flows. TheCompany will implement the disclosure provisions in the quarter ending May 31,2003.

 

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

 

(a)  Evaluationof Disclosure Controls and Procedures. The Company’s Chief Executive Officer and its Chief Accounting Officer,after evaluating the effectiveness of the Company’s disclosure controls andprocedures (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c)and 15d-14(c) as of a date within 90 days of the filing date of this

 

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quarterly report on Form 10-QSB (the “Evaluation Date”), have concludedthat as of the Evaluation Date, the Company’s disclosure controls andprocedures were adequate and effective to ensure that material informationrelating to the Company would be made known to them by others within theCompany.

 

(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.

 

**PART II - OTHER INFORMATION**

 

Items 1 through5.  NOT APPLICABLE

 
| **Item 6.** |   | **Exhibits and Reports on Forms 8-K**                                                |
|-------------|--------|--------------------------------------------------------------------------------------|
|        |   |                                                                                 |
| (a)         |   | Exhibit 11 - Statement re: computation of per share earnings.                        |
|        |   |                                                                                 |
| (b)         |   | Exhibit 99.1  Statement Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   |
|        |   | Exhibit 99.2 Statement Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.   |
|        |   |                                                                                 |
| (c)         |   | There were no reports  filed on Form 8-K during the quarter ended November 30, 2002. |

 

 

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**SIGNATURES**

 

In accordance with the requirements of theExchange Act, the Company caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

CREATIVECOMPUTER APPLICATIONS, INC.

(Company)

 

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

 

 
| Date  January 14, 2003 |   | /s/ Anahita Villafane            |   |
|-----------------------------|--------|----------------------------------|--------|
|                        |   | Anahita Villafane,               |
|                        |   | Controller and Chief  Accounting |
|                        |   | Officer                          |

 

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**Statement Pursuantto Section 302 of the Sarbanes-Oxley Act of 2002**

**By**

**PrincipalExecutive Officer**

**RegardingFacts and Circumstances Relating to Exchange Act Filings**

 

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, thisannual report does not contain any untrue statement of a material fact or omitto state a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3.  Based on my knowledge, thefinancial statements, and other financial information included in this annualreport, fairly present in all material respects the financial condition,results of operations and cash flows of the registrant as of, and for, theperiods presented in this annual 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)  designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

b)  evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)  presentedin this annual 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)  allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)  any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6. The registrant’s other certifying officers and I have indicated inthis annual report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 

Date:  January 14, 2003

 

 
|   | /s/ Steven M. Besbeck                                             |   |
|--------|-------------------------------------------------------------------|--------|
|   | Steven M. Besbeck                                                 |
|   | President, Chief Executive  Officer, and Chief  Financial Officer |

 

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**Statement Pursuant to Section 302 of the Sarbanes-Oxley Actof 2002**

**By**

**Principal Financial Officer**

**Regarding Facts and Circumstances Relating to Exchange ActFilings**

 

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, thisannual report does not contain any untrue statement of a material fact or omitto state a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3.  Based on my knowledge, thefinancial statements, and other financial information included in this annualreport, fairly present in all material respects the financial condition,results of operations and cash flows of the registrant as of, and for, theperiods presented in this annual 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 and procedures toensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this annual report is being prepared;

 

b) evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this annual report (the “Evaluation Date”); and

 

c) presented in this annual report our conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation 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 significant deficiencies in the design oroperation 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, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

 

6. The registrant’s other certifying officers and I have indicated inthis annual report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 

Date:  January 14, 2003

 

 
|   | /s/ Anahita Villafane    |   |
|--------|--------------------------|--------|
|   | Anahita Villafane        |
|   | Controller               |
|   | Chief Accounting Officer |

 

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