**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

 

**Washington,DC 20549**

 

**FORM 10-QSB**

 

**(Mark One)**

 

**ý****        QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

**For thequarterly period ended March 31, 2005.**

 

**o****        TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THEEXCHANGE ACT**

**For the transition period from                         to                         **

 

**Commission file****number 0-12551**

 

**CREATIVECOMPUTER APPLICATIONS, INC.**

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

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

 

**26115-A Mureau Road, Calabasas, California91302**

(Address of principal executive offices)

 

**(818)880-6700**

(Issuer’s telephone number,including area code):

 

**Check whether theIssuer (1) filed all reports required to be filed by Section 13 or15(d) of the Exchange Act during the past 12 months (or for such shorterperiod that the Issuer was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.**

| **Yes  ****ý** | ** ** | **No  ****o** |
|-------------------------------|------------|-------------------------|

** **

**State the number ofshares outstanding of each of the issuer’s classes of common equity, as of thelatest practicable date:  3,369,900common shares as of April 30, 2005.**

** **

**Transitional SmallBusiness Disclosure Format (check one):**

| **Yes  ****o** | ** ** | **No  ****ý** |
|--------------------------|------------|------------------------------|

 

 

----

 

**CREATIVECOMPUTER APPLICATIONS, INC.**

 

**FORM 10-QSB**

 

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

 
| **PART I - Financial Information:**                                                                                 | ** **                                                          |
|--------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------|
|                                                                                                                     |                                                                |
| **Item 1.**                                                                                                              | **Financial Statements (unaudited)**                                | ** ** |
|                                                                                                                     |                                                                |
| Condensed Consolidated Balance Sheets, as  at March 31, 2005 and December 31, 2004                             |                                                                |
|                                                                                                                     |                                                                |
| Condensed Consolidated Statements of  Operations for the three months ended March 31, 2005 and March 31,  2004 |                                                                |
|                                                                                                                     |                                                                |
| Condensed Consolidated Statements of Cash  Flows for the three months ended March 31, 2005 and March 31, 2004  |                                                                |
|                                                                                                                     |                                                                |
| Notes to Condensed Consolidated Financial  Statements                                                                    |                                                                |
|                                                                                                                     |                                                                |
| **Item 2.**                                                                                                              | **Management’s Discussion and Analysis or  Plan of Operation** |   |
|                                                                                                                     |                                                                |
| **Item 3.**                                                                                                              | **Controls and Procedures**                                         |   |
|                                                                                                                     |                                                                |
| **PART II - Other Information:**                                                                                    | ** **                                                          |
|                                                                                                                     |                                                                |
| **Item 5.**                                                                                                              | **Other Information**                                               |   |
|                                                                                                                     |                                                                |
| **Item 6.**                                                                                                              | **Exhibits**                                                        |   |
|                                                                                                                     |                                                                |
| **Signatures**                                                                                                           |                                                                |
|                                                                                                                     |                                                                |
| **Exhibit Index**                                                                                                   |                                                                |

 

2

----

 

**CREATIVECOMPUTER APPLICATIONS, INC.**

 

**PART 1- FINANCIAL INFORMATION**

 

#### **Item1.** Financial Statements

#### ** **

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

 
| ** **                                                                                                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                         | ** ** | **2005**           | ** ** | **2004**              | ** ** |
| ** **                                                                                                         | ** ** | **(Unaudited)**    | ** ** | **(Unaudited)**       | ** ** |
| **ASSETS**                                                                                                         |       |               |       |                  |       |
|                                                                                                               |       |               |       |                  |       |
| CURRENT  ASSETS:                                                                                                   |       |               |       |                  |       |
| Cash                                                                                                               |       | $                  | 1,766,505  |                  | $          | 1,655,063 |   |
| Receivables,  net                                                                                                  |       | 1,406,595          |       | 1,736,768             |       |
| Inventory                                                                                                          |       | 106,110            |       | 86,298                |       |
| Prepaid  expenses and other assets                                                                                 |       | 323,948            |       | 256,289               |       |
| Deferred tax  asset                                                                                                |       | 539,420            |       | 539,420               |       |
|                                                                                                               |       |               |       |                  |       |
| TOTAL  CURRENT ASSETS                                                                                              |       | 4,142,578          |       | 4,273,838             |       |
|                                                                                                               |       |               |       |                  |       |
| PROPERTY AND  EQUIPMENT, net                                                                                       |       | 391,695            |       | 345,004               |       |
| INVENTORY OF  COMPONENT PARTS                                                                                      |       | 224,135            |       | 186,599               |       |
| CAPITALIZED  SOFTWARE COSTS, net of accumulated amortization of $968,160 and $878,021                         |       | 1,567,434          |       | 1,531,573             |       |
| DEFERRED TAX  ASSET                                                                                                |       | 254,457            |       | 254,457               |       |
|                                                                                                               |       |               |       |                  |       |
|                                                                                                               |       | $                  | 6,580,299  |                  | $          | 6,591,471 |   |
|                                                                                                               |       |               |       |                  |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                     |       |               |       |                  |       |
|                                                                                                               |       |               |       |                  |       |
| CURRENT  LIABILITIES:                                                                                              |       |               |       |                  |       |
| Notes  payable to bank (Note 3)                                                                                    |       | 200,000            |       | 300,000               |       |
| Accounts  payable                                                                                                  |       | 467,589            |       | 377,768               |       |
| Accrued  liabilities:                                                                                              |       |               |       |                  |       |
| Vacation pay                                                                                                       |       | 252,025            |       | 243,060               |       |
| Accrued  payroll                                                                                                   |       | 193,265            |       | 128,227               |       |
| Other                                                                                                              |       | 133,676            |       | 173,808               |       |
| Deferred  service contract income                                                                                  |       | 1,426,696          |       | 1,235,032             |       |
| Deferred  revenue on system sales                                                                                  |       | 134,547            |       | 226,111               |       |
|                                                                                                               |       |               |       |                  |       |
| TOTAL  CURRENT LIABILITIES                                                                                         |       | 2,807,798          |       | 2,684,006             |       |
|                                                                                                               |       |               |       |                  |       |
| SHAREHOLDERS’  EQUITY:                                                                                        |       |               |       |                  |       |
| Common  shares, no par value; 20,000,000 shares authorized; 3,369,900 and 3,321,900  shares issued and outstanding |       | 6,247,692          |       | 6,195,692             |       |
| Accumulated  deficit                                                                                               |       | (2,475,191         | )          | (2,288,227            | )          |
|                                                                                                               |       |               |       |                  |       |
| TOTAL  SHAREHOLDERS’ EQUITY                                                                                   |       | 3,772,501          |       | 3,907,465             |       |
|                                                                                                               |       |               |       |                  |       |
|                                                                                                               |       | $                  | 6,580,299  |                  | $          | 6,591,471 |   |

 

**SeeNotes to Condensed Consolidated Financial Statements.**

 

3

----

 

**CREATIVECOMPUTER APPLICATIONS, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

 
| ** **                                       | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                       | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| ** **                                       | ** ** | **(Unaudited)**                       | ** ** |
|                                             |       |                                  |       |   |   |
| NET SYSTEM  SALES AND SERVICE REVENUE:           |       |                                  |       |   |   |
| System sales                                     |       | $                                     | 587,107    |   | $ | 894,764 |   |
| Service  revenue                                 |       | 1,238,181                             |       | 1,063,936 |   |
|                                             |       | 1,825,288                             |       | 1,958,700 |   |
|                                             |       |                                  |       |   |   |
| COSTS OF  PRODUCTS AND SERVICES SOLD:            |       |                                  |       |   |   |
| System sales                                     |       | 453,350                               |       | 445,634 |   |
| Service  revenue                                 |       | 414,862                               |       | 407,786 |   |
|                                             |       | 868,212                               |       | 853,420 |   |
|                                             |       |                                  |       |   |   |
| Gross profit                                     |       | 957,076                               |       | 1,105,280 |   |
|                                             |       |                                  |       |   |   |
| OPERATING  EXPENSES                              |       |                                  |       |   |   |
| Selling,  general and administrative             |       | 828,732                               |       | 722,396 |   |
|                                             |       |                                  |       |   |   |
| Research and  development                        |       | 314,843                               |       | 256,346 |   |
|                                             |       |                                  |       |   |   |
| Total  operating expenses                        |       | 1,143,575                             |       | 978,742 |   |
|                                             |       |                                  |       |   |   |
| Operating  income (loss)                         |       | (186,499                              | )          | 126,538 |   |
|                                             |       |                                  |       |   |   |
| INTEREST AND  OTHER INCOME                       |       | 4,727                                 |       | 1,274 |   |
|                                             |       |                                  |       |   |   |
| INTEREST  EXPENSE                                |       | (5,192                                | )          | (1,115 | ) |
|                                             |       |                                  |       |   |   |
| Income  (Loss) before provision for income taxes |       | (186,964                              | )          | 126,697 |   |
|                                             |       |                                  |       |   |   |
| PROVISION  FOR INCOME TAXES                      |       | —                                |       | — |   |
|                                             |       |                                  |       |   |   |
| NET INCOME  (LOSS)                               |       | $                                     | (186,964   | ) | $ | 126,697 |   |
|                                             |       |                                  |       |   |   |
| EARNINGS  (LOSS) PER SHARE (Note 2):             |       |                                  |       |   |   |
|                                             |       |                                  |       |   |   |
| Basic                                            |       | $                                     | (.06       | ) | $ | .04 |   |
| Diluted                                          |       | (.06                                  | )          | .04 |   |
|                                             |       |                                  |       |   |   |
| WEIGHTED  AVERAGE NUMBER OF SHARES OUTSTANDING:  |       |                                  |       |   |   |
| Basic                                            |       | 3,353,900                             |       | 3,318,900 |   |
| Diluted                                          |       | 3,353,900                             |       | 3,428,370 |   |

 

**SeeNotes to Condensed Consolidated Financial Statements.**

 

4

----

 

**CREATIVECOMPUTER APPLICATIONS, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

 

**Increase(Decrease) in Cash**

 
| ** **                                                                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| ** **                                                                                | ** ** | **(Unaudited)**                       | ** ** |
|                                                                                      |       |                                  |       |   |   |
| OPERATING  ACTIVITIES                                                                     |       |                                  |       |   |   |
| Net Income  (loss)                                                                        |       | $                                     | (186,964   | ) | $ | 126,697 |   |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |       |                                  |       |   |   |
| Depreciation  and amortization                                                            |       | 34,397                                |       | 27,776 |   |
| Amortization  of capitalized software costs                                               |       | 90,139                                |       | 107,775 |   |
| Increase  (decrease) from changes in:                                                     |       |                                  |       |   |   |
| Receivables                                                                               |       | 330,173                               |       | (343,872 | ) |
| Inventories                                                                               |       | (57,348                               | )          | 9,931 |   |
| Prepaid  expenses and other assets                                                        |       | 1,967                                 |       | 19,465 |   |
| Accounts  payable                                                                         |       | 89,821                                |       | 92,056 |   |
| Accrued  liabilities                                                                      |       | 33,871                                |       | 101,958 |   |
| Deferred  service contract income                                                         |       | 191,664                               |       | 157,999 |   |
| Deferred  revenue on system sales                                                         |       | (91,564                               | )          | 61,085 |   |
|                                                                                      |       |                                  |       |   |   |
| Net cash  provided by operating activities                                                |       | 436,156                               |       | 360,870 |   |
|                                                                                      |       |                                  |       |   |   |
| INVESTING  ACTIVITIES                                                                     |       |                                  |       |   |   |
| Additions to  property and equipment                                                      |       | (81,088                               | )          | (17,925 | ) |
| Additions to  capitalized acquisition costs                                               |       | (69,626                               | )          | — |   |
| Additions to  capitalized software costs                                                  |       | (126,000                              | )          | (148,625 | ) |
|                                                                                      |       |                                  |       |   |   |
| Net cash  used in investing activities                                                    |       | (276,714                              | )          | (166,549 | ) |
|                                                                                      |       |                                  |       |   |   |
| FINANCING  ACTIVITIES                                                                     |       |                                  |       |   |   |
| Payments on  notes payable                                                                |       | (100,000                              | )          | — |   |
| Exercise of  stock options                                                                |       | 52,000                                |       | — |   |
|                                                                                      |       |                                  |       |   |   |
| Net cash  used in financing activities                                                    |       | (48,000                               | )          | — |   |
|                                                                                      |       |                                  |       |   |   |
| NET INCREASE  IN CASH                                                                     |       | 111,442                               |       | 194,321 |   |
|                                                                                      |       |                                  |       |   |   |
| CASH, beginning of period                                                            |       | 1,655,063                             |       | 889,521 |   |
|                                                                                      |       |                                  |       |   |   |
| CASH, end of  period                                                                      |       | $                                     | 1,766,505  |   | $ | 1,083,842 |   |

 

**Seenotes to Condensed Consolidated Financial Statements.**

 

5

----

 

**CREATIVECOMPUTER APPLICATIONS, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(unaudited)**

 

**Note 1-Presentation of Financial Statements**

 

In the opinionof management of Creative Computer Applications, Inc. (the “Company” or“CCA”), the accompanying unaudited condensed consolidated financial statementsreflect all adjustments (which include only normal recurring accruals)necessary to present fairly the Company’s financial position as of March 31,2005, the results of its operations for the three months ended March 31,2005 and 2004, and cash flows for the three months ended March 31, 2005and 2004.  These results have beendetermined on the basis of accounting principles generally accepted in theUnited States of America and practices applied consistently with those used inpreparation of the Company’s Annual Report on Form 10-KSB for the fiscalyear ended August 31, 2004 and the Transitional Report on Form 10-QSBTfor the period ended December 31, 2004. This is the Company’s first quarterly report for the period ended March 31,2005 since it changed its fiscal year-end to December 31.    

 

The results ofoperations for the three months ended March 31, 2005 are not necessarilyindicative of the results expected for any other period or for the entire year.

 

**Note2-Earnings per Share**

 

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

 

Earnings pershare has been computed as follows:

 
| ** **                                                    | ** ** | **Three Months  Ended  March 31, 2005** | ** ** | **Three Months  Ended  March 31,  2004** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------|------------|-----------------------------------------------|------------|
|                                                          |       |                                         |       |                                          |       |
| NET INCOME  (LOSS)                                            |       | $                                            | (186,964   | )                                             | $          | 126,697 |   |
|                                                          |       |                                         |       |                                          |       |
| Basic weighted  average number of common shares outstanding   |       | 3,353,900                                    |       | 3,318,900                                     |       |
|                                                          |       |                                         |       |                                          |       |
| Dilutive  effect of stock options                             |       | —                                       |       | 109,470                                       |       |
| Diluted  weighted average number of common shares outstanding |       | 3,353,900                                    |       | 3,428,370                                     |       |
|                                                          |       |                                         |       |                                          |       |
| Basic  earnings (loss) per share                              |       | $                                            | (.06       | )                                             | $          | .04 |   |
| Diluted  earnings (loss) per share                            |       | $                                            | (.06       | )                                             | $          | .04 |   |

 

For the threemonths ended March 31, 2005 and 2004, options to purchase 354,000 and30,000 shares of common stock at per share prices ranging from $.72 to $1.76were not included in the computation of diluted earnings (loss) per sharebecause inclusion would have been anti-dilutive.  

 

**Note3-Debt Obligations**             

 

The Company’sline of credit with its bank provides for $1,000,000 on a revolving basisthrough February 1, 2006.  On March 31,2005, the total amount due to the bank was $200,000.  

 

6

----

 

**Note4-Stock-Based Compensation**

 

As allowed by Statement ofFinancial Accounting Standards No. 123 (“SFAS 123”), 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 (loss)and income (loss) per share as if the fair value based method had beenapplied.  For equity instruments,including stock options, issued to non-employees, the fair value of the equityinstruments or the fair value of the consideration received, whichever is morereadily determinable, is used to determine the valueof services or goods received and the corresponding charge to operations.

 

The followingtable illustrates the effect on net income (loss) and income (loss) per shareas if the Company had applied the fair value recognition provision of SFAS No. 123to stock-based employee compensation:

 
| ** **                                                                                                      | ** ** | **Three Months  Ended  March 31, 2005** | ** ** | **Three Months  Ended  March 31, 2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| Net Income (loss), as reported                                                                                  |       |                                         | (186,964   | )                                            |       | 126,697 |   |
| Add:  Stock-based compensation expense included in reported net income, net of related  tax effects             |       | —                                       |       | —                                       |       |
|                                                                                                            |       |                                         |       |                                         |       |
| Less: total  stock based employee compensation expense determined under fair value based  method for all awards |       | (11,011                                      | )          | (5,567                                       | )          |
|                                                                                                            |       |                                         |       |                                         |       |
| Net loss, pro forma                                                                                             |       |                                         | (197,975   | )                                            |       | 121,130 |   |
|                                                                                                            |       |                                         |       |                                         |       |
| Basic net earnings (loss) per share, as  reported                                                               |       |                                         | (.06       | )                                            |       | .04 |   |
| Basic net earnings (loss) per share, pro  forma                                                                 |       |                                         | (.06       | )                                            |       | .04 |   |
| Diluted net earnings (loss) per share, as  reported                                                             |       |                                         | (.06       | )                                            |       | .04 |   |
| Diluted net earnings (loss) per share, pro  forma                                                               |       |                                         | (.06       | )                                            |       | .04 |   |

 

The Company issues all of itsoptions at fair market value at the time of grant; therefore, no expense hasbeen recorded under the intrinsic value method for the three months ended March 31,2005 and 2004.  As required by SFAS 123,the Company provides the following disclosure of estimated values for theseawards:  The fair value of each optionwas estimated on the date of grant using a Black-Scholes option-pricing modelwith the following weighted average assumptions for 2004: risk free interestrates ranging from 3.4% to 6.1%, expected lives of 5 years; volatility rangingfrom 67% to 126% and no assumed dividends. The weighted-average grant-date fair value of options granted during2004 was estimated to be $.93.  Therewere no options granted in the three months ended March 31, 2005.  

 

**Note5-Commitments and Contingencies****                    **

 

In accordancewith the bylaws of the Company, officers and directors are indemnified forcertain events or occurrences arising as a result of the officer or director’sserving in such capacity.  The term ofthe indemnification period is for the lifetime of the officer or director.  The maximum potential amount of futurepayments the Company could be required to make under the indemnificationprovisions of its bylaws is unlimited. However, the Company has a director and officer liability insurancepolicy that reduces its exposure and enables it to recover a portion of anyfuture amounts paid.  As a result of itsinsurance policy coverage, the Company believes the estimated exposure for theindemnification provisions of its bylaws is minimal and, therefore, the Companyhas not recorded any related liabilities. 

 

7

----

 

The Companyenters into indemnification provisions under agreements with various parties inthe normal course of business, typically with customers and landlords.  Under these provisions, the Company generallyindemnifies and holds harmless the indemnified party for losses suffered orincurred by the indemnified party as a result of the Company’s activities or,in some cases, as a result of the indemnified party’s activities under theagreement.  These indemnificationprovisions often include indemnifications relating to representations made bythe Company with regard to intellectual property rights.  These indemnification provisions generallysurvive termination of the underlying agreement.  The maximum potential amount of futurepayments the Company could be required to make under these indemnificationprovisions cannot be estimated.  TheCompany maintains general liability, errors and omissions, and professionalliability insurance in order to mitigate such risks.  The Company has not incurred material coststo defend lawsuits or settle claims related to these indemnificationagreements.  As a result, the Companybelieves the estimated exposure under these agreements is minimal.  Accordingly, the Company has not recorded anyrelated liabilities. 

 

**Note6-New Accounting Pronouncements**                 

 

In December 2004 the FinancialAccounting Standards Board (“FASB”) issued Statement of Financial AccountingStandards No. 123 (revised 2004), *Share-BasedPayment (SFAS No. 123(R))*. SFAS No. 123(R) requirescompensation cost relating to unvested share-based payment transactions thatare outstanding as of the effective date and newly issued transactions to berecognized in the financial statements. That cost will be measured based on thefair value of the equity or liability instruments issued. SFAS No. 123(R)covers a wide range of share-based compensation arrangements including shareoptions, restricted share plans, performance-based awards, share appreciationrights and employee share purchase plans. SFAS No. 123(R) replaces SFAS No. 123and supersedes APB 25*.*SFAS No. 123,as originally issued in 1995, established fair-value-based method of accountingfor share-based payment transactions with employees. However, SFAS No. 123permitted entities the option of continuing to apply the guidance in APB 25, aslong as the footnotes to financial statements disclosed what net income wouldhave been had the fair-value-based method been used. As disclosed in footnote2, the Company elected the option of disclosure only under SFAS No. 123.Public companies will be required to apply SFAS No. 123(R) as of the firstannual reporting period that begins after June 15, 2005, or December 15,2005 for small business issuers.  In April 2005,the SEC issued a Final Rule Release, “Amendment to Rule 4-01(a) ofRegulation S-X regarding the compliance date for Statement of FinancialAccounting Standards No. 123 (revised 2004), Share-Based Payment.”  This rule extends the date forcompliance with SFAS No. 123R until the beginning of the public companies’next fiscal year, instead of the next reporting period, that begins after June 15,2005, or December 15, 2005 for small business issuers.  The Company is currently evaluating theimpact of this statement.

 

In March 2005, the SEC staff issued a Staff Accounting Bulletin (“SAB 107”) whichexpressed views of the staff regarding the interaction between SFAS No. 123Rand certain SEC rules and regulations and provide the staff’s viewsregarding the valuation of share-based payment arrangements for publiccompanies. In particular, SAB 107 provides guidance related to share-basedpayment transactions with non-employees, the transition from nonpublic topublic entity status, valuation methods (including assumptions such as expectedvolatility and expected term), the accounting for certain redeemable financialinstruments issued under share-based payment arrangements, the classificationof compensation expense, non-GAAP financial measures, first-time adoption ofSFAS No. 123R in an interim period, capitalization of compensation costrelated to share-based payment arrangements, the accounting for income taxeffects of share-based payment arrangements upon adoption of SFAS No. 123R,the modification of employee share options prior to adoption of SFAS No. 123Rand disclosures in Management’s Discussion and Analysis subsequent to adoptionof SFAS No. 123R. 

 

**Note7-Merger****              **

 

On January 10, 2005, the Company enteredinto a letter of intent to merge with StorCOMM, Inc. of Jacksonville,Florida, a private company providing Picture Archive Communication Systems(PACS) and Clinical Image Management Systems for the medical imaging market(the “StorCOMM Merger”). ** **CCA will be the surviving entityand StorCOMM shareholders will own one-half of the merged entity.  The transaction is subject to the completionand execution of a definitive merger agreement and shareholder approval.  It is expected that the post-merger companywill offer integrated applications and services to a broad sector of thehealthcare provider market.  The mergeris expected to be completed by the summer of 2005.

 

8

----

 

**Item 2.****                                   Management’sDiscussion and Analysis or Plan of Operation**

 

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

 

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

•                  Thepotential need for changes in our long-term strategy in response to futuredevelopments. 

•                  Futureadvances in clinical information technology and procedures, as well aspotential changes in government regulations and healthcare policies, both ofwhich could adversely affect the economics of the products offered by CCA.

•                  Rapidtechnological change in the microelectronics and software industries

•                  Increasingcompetition from current as well as future competitors, and

•                  Theability to complete the StorCOMM Merger.

 

Set forthbelow are other significant uncertainties and factors affecting forward-lookingstatements. The readers should understand that uncertainties and other factorsidentified in this Quarterly Report on Form 10-QSB are not a comprehensivelist of all the uncertainties and other factors that may affect forward-lookingstatements.  We do not undertake anyobligation to update or revise any forward-looking statements or the list of uncertaintiesand other factors that could affect those statements.

 

**Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**Overview**

 

CCA generatesrevenues primarily from the sale of its Clinical Information Systems (CIS), whichincludes the licensure of proprietary application software, the licensure ofthird party software, and the sale of servers upon which the applicationsoftware operates.  In connection withits sales 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.

 

Because of thenature of its business, CCA makes significant investments in research anddevelopment for new products and enhancements to existing products.  Historically, CCA has funded its research anddevelopment programs through cash flow primarily generated fromoperations.  Management anticipates thatfuture expenditures in research and development will either continue at currentlevels or may increase for the foreseeable future, and will be funded primarilyout of the Company’s cash flow.  

 

CCA’s resultsof operations for the first fiscal quarter ended March 31, 2005 were marked bya decrease in sales and income over the comparable quarter one year ago.  The Company’s decrease in revenues for thefirst fiscal quarter was due to a number of factors.  Many of our existing clients and potentialclients experienced delays in their decision-making process thereby resultingin a delay in the closure of sales during the period. Many of our existingclients have upgraded to the new version of our core product, CyberLAB® 7.0,and the response to the new version has been very positive.  Furthermore, we have invested additionalfunds into marketing activities and we are experiencing an increase in oursales pipeline as a result of these efforts. Notwithstanding the delays we have experienced in closing new deals, webelieve the underlying demand for our products exists.  Despite the shortfall in our new systemsales, there were positive areas in our business during the first quarter of2005.  For instance, services revenuesincreased by $174,245 or 16.4% from $1,063,936 in the first quarter of 2004 to$1,238,181 in the first quarter of 2005, and we also booked six new upgrades ofCyberLAB 7.0 during the period reflected in our system sales for the firstquarter of 2005.  It is anticipated thatas more clients migrate to CyberLAB 7.0, it will require them to acquire additionalhardware and professional services from the Company in order to deploy the newsoftware.  Generally, sales cycles forCIS products are lengthy and on average

 

9

----

 

exceed one yearfrom inception to closure.  Because ofthe complexity of the sales process, a number of factors can delay the closingof transactions that are beyond the control of the Company.

 

**Results of Operations**

 

The following table sets forth certain lineitems in our condensed consolidated statement of operations as a percentage oftotal revenues for the periods indicated:

 
| ** **                                       | ** ** | **Three Months Ended  March 31, 2005** | ** ** | **Three Months Ended  March 31, 2004** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| Revenues:                                        |       |                                        |       |                                        |       |
| System sales                                     |       | 32.2                                        | %          | 45.7                                        | %          |
| Service  revenues                                |       | 67.8                                        |       | 54.3                                        |       |
|                                             |       |                                        |       |                                        |       |
| Total revenues                                   |       | 100.0                                       |       | 100.0                                       |       |
| Costs of  products and services sold:            |       |                                        |       |                                        |       |
| System sales                                     |       | 24.8                                        |       | 22.8                                        |       |
| Service  revenues                                |       | 22.7                                        |       | 20.8                                        |       |
|                                             |       |                                        |       |                                        |       |
| Total costs  of products and services            |       | 47.5                                        |       | 43.6                                        |       |
| Gross profit                                     |       | 52.5                                        |       | 56.4                                        |       |
| Operating  expenses:                             |       |                                        |       |                                        |       |
| Selling,  general and administrative             |       | 45.4                                        |       | 36.9                                        |       |
| Research and  development                        |       | 17.2                                        |       | 13.1                                        |       |
| Total  operating expenses                        |       | 62.6                                        |       | 50.0                                        |       |
| Operating  income (loss)                         |       | (10.2                                       | )          | 6.4                                         |       |
| Income  (loss) before provision for income taxes |       | (10.2                                       | )          | 6.4                                         |       |
| Provision  for income taxes                      |       | —                                      |       | —                                      |       |
|                                             |       |                                        |       |                                        |       |
| Net income  (loss)                               |       | (10.2                                       | )          | 6.4                                         |       |

 

*Revenues*

 

Sales for the first fiscal quarter ended March 31,2005 decreased to $1,825,288, as compared to $1,958,700 for the comparablequarter ended March 31, 2004, an overall decrease of approximately$133,412 or 6.8%.  When analyzed byproduct category, sales of CIS products decreased by $348,767, or 44.3%,partially offset by an increase in sales of data acquisition products of$40,692, or 38.9%, an increase in service revenues of $174,245, or 16.4%, andan increase in other revenues of $418 or 16.2% when compared to the samequarter of fiscal 2004.  The decrease insales of CIS products was primarily attributable to the delays in the salesprocess as described above under “Overview”. This is not indicative of a trend because such delays are typical in theCompany’s line of business.  The increasein service revenues is attributable to a greater number of client accountsunder contract 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 increase in the sales of data acquisitionproducts is primarily attributable to a greater number of units shipped to OEMcustomers, however, management believes that going forward, therewill be reduced sales of data acquisition products as there has been atechnological shift to software-based clinical instrument interfaces.  Furthermore, fewer OEM customers remainactive in the marketplace or no longer use CCA’s data acquisitionproducts.  Management does not believethe data acquisition product business is a material part of CCA’s businesstoday and it will not be in the future, as the Company’s emphasis is beingplaced on its CIS products and related services.  

 

The Company continues to expand its directsales and marketing activities, directing its focus towards larger clients andmulti-product sales as well as selling new products into its installed clientbase.  Although the Company’s marketingefforts has generated favorable interest in the marketplace, management iscautious about the near-term outlook for the continued sale of CIS productsduring the second quarter and half of the 2005 fiscal year.  The Company’s future operating results willcontinue to be subject to quarterly variations based upon a wide variety offactors, including the volume mix and timing of orders received during anyquarter, and the temporary delays in the closing of new CIS sales.  In addition, the Company’s revenuesassociated with CIS sales may be delayed due to client related issues such asclient staff availability for training, IT infrastructure readiness, and theperformance of third party contractors, all of which are issues outside of thecontrol of CCA.  

 

10

----

 

*Costs of products and services sold*

 

Cost of sales for the first quarter of fiscal2005 slightly increased by $14,792 or 1.7% as compared to the same quarter offiscal 2004.  The overall increase incost of sales was primarily attributable to an increase in costs of materialsof $12,756, or 14.4%, and an increase in labor costs of $5,031, or 1.1%,partially offset by a decrease in other costs of $2,995 or 1%.  The increase in costs of materials wasattributable to additional upgrades in the quarter by current clients of theirexisting hardware to accommodate their migration to CyberLAB 7.0.  The decrease in other costs of sales wasattributable to decreased expenses related to telephone costs as a result ofbetter rates negotiated under a new contract for telephone and dataservices.  Cost of sales as a percentageof sales was 48% as compared to 44% for the comparable 2004 fiscal quarter.  The overall percentage increase in cost ofsales, as a percentage of sales, was attributable to the increase in costs ofmaterials as discussed above, and the lower level of revenues during thequarter.  The Company could potentiallyexperience quarterly variations in gross margin as a result of the factorsdiscussed above.

 

*Selling, general and administrative expenses* 

 

Selling, general and administrative expensesincreased by $106,336, or 14.7%, for the first fiscal quarter of 2005 ascompared to the same quarter of fiscal 2004. The increase in selling, general and administrative expenses wereprimarily attributable to consultant expenses related to Sarbanes-Oxley Act of2002 Section 404 compliance requirements, additional expenses for legaland accounting fees as a result of the Company changing its fiscal year-end,expenses related to the StorCOMM merger, and additions to the sales staff.  Management anticipates that it will incurincreases in auditing and consultant expenses in fiscal 2005 that are relatedto Sarbanes-Oxley Act of 2002 Section 404 compliance requirements.  It is also likely that the Company will incursignificant additional expenses in 2005 related to the StorCOMM Merger thatwill be expensed when incurred.  Inaddition, the Company is in the process of implementing a new customerrelationship management system to replace its aged help desk application, aportion of the costs of which will be expensed as incurred.  Management also anticipates an increase ininsurance costs in the current fiscal year.

 

*Research and development expenses*

 

Research and development expenses increasedby $58,497, or 22.8%, during the first fiscal quarter of 2005 as compared tothe same quarter of fiscal 2004.  Theincrease is attributable to increases in salaries, other personnel relatedexpenses, and the addition of new personnel in product engineering.  For the comparable first quarters of 2005 and2004, the Company capitalized software costs of $126,000 and $148,625,respectively, which are generally amortized over the estimated useful life, notto exceed five years.  Such costs wereattributable to enhancements and new modules for the Company’s CIS products,and new applications under development.   

 

*Income taxes*

 

For the fiscal quarter ended March 31,2005, the Company did not record a tax provision due to the pretax netloss.  In 2004, the Company was operatingunder a different fiscal year-end and at the time, the Company was in a pretaxnet loss position and therefore the Company did not record a tax provision.  The Company believes that it is more likelythan not that the net deferred tax asset of $793,877 will be realized in futureperiods.

 

*Net income (loss)*

 

As a result of the factors discussed above,the Company incurred a net loss of $186,964 in the first fiscal quarter of 2005as compared to net income of $126,697 for the first fiscal quarter of2004.  The Company’s basic and dilutedloss per share was $.06 for the first fiscal quarter of 2005 as compared tobasic and diluted earnings per share of $.04 for the first fiscal quarter of2004.  

 

### **Capital Resources andLiquidity**

 

The Company’s primary need for capital hasbeen to invest in software development, and in computers and related equipmentfor its internal use.  The Companyinvested $126,000 and $148,625 during the first fiscal quarters of 2005 and2004 in software development.  Theseexpenditures related to the new browser version of the Company’s LIS product,CyberLAB 7.0, and other product enhancements. The Company anticipates expending additional sums during the

 

11

----

 

remainder offiscal 2005 on product enhancements to all its products and the furtherdevelopment of the new browser version of the Company’s CyberLAB 7.0product.  During the first fiscal quarterof 2005, the Company invested an aggregate of $81,088 in additions to fixedassets, primarily consisting of computers and software related to the newcustomer relationship management system, which is replacing its aged help deskapplication, as compared to an investment of $17,925 in the comparable quarterof 2004.  

 

As of March 31, 2005, the Company’sworking capital amounted to $1,334,780, compared to $1,589,832 as of December 31,2004.  The Company’s current ratio was1.5 at March 31, 2005 compared to 1.6 at December 31, 2004.  At March 31, 2005, the Company’s creditfacilities with its bank consisted of a revolving line of credit of $1,000,000,of which there was $200,000 outstanding. The bank credit agreement expires on February 1, 2006.  In addition, the Company is seekingadditional equity financing in connection with the StorCOMM Merger.

 

Cash flows from operating activities were$436,156 for the first fiscal quarter of 2005 compared to cash flows of$360,870 for the comparable quarter of fiscal 2004.  The increase in cash flow from operating activitieswas primarily attributable to the net change in accrued receivables,inventories, payables, and deferred revenues offset by the reduction inincome from operations in the first fiscal quarter ended March 31, 2005compared to the first quarter of fiscal 2004.

 

Net cash used in investing activities totaled$276,714 for the first quarter of fiscal 2005, compared to $166,549 used ininvesting activities during the comparable quarter of 2004.  The increase in cash used in investingactivities was due to increased investment in property and equipment andadditions to capitalized acquisition costs. 

 

Net cash used in financing activitiesamounted to $48,000 during the first fiscal quarter of 2005.  There were no financing activities during thecomparable first quarter of fiscal 2004. The change from fiscal 2004 to fiscal 2005 resulted primarily frompayments on its revolving line of credit with the bank offset by cash flowsfrom exercises of stock options.

 

The Company’s primary source of workingcapital has been generated from earnings, and from borrowings on its line ofcredit.  The Company produced cash flowsamounting to $436,156 to fund its operations in the first fiscal quarter ended March 31,2005.  Management believes that its salespipeline is adequate to produce sufficient operating cash flow in the 2005fiscal year, and that its projected cash flow from operations, together withits bank credit facilities, should be sufficient to fund its working capitalrequirements for its 2005 fiscal year. However, an unanticipated decline in sales or continued delays inclosing new transactions, delays in implementations where payments are tied todelivery and/or performance of services, orcancellations of contracts could have a negative effect on cash flow fromoperations and could in turn create short-term liquidity problems.  If such events were to occur, the Company mayhave to seek alternative financing.

 

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

 

The Company’s sales are generally higher inthe winter and spring due to budgetary cycles of its clients.  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 Health Insurance Portability and Accountability Act (“HIPAA”) may have a long-termpositive impact on its business.  Withrespect to the compliance issues brought about by HIPAA, the Company hasinvested heavily in new application modules to assist its clients in meetingtheir regulatory goals.  Managementbelieves that the new modules will be key selling points and will provide acompetitive advantage.  In addition,management believes that the healthcare information technology industry will bemarked with more significant technological advances, which will improve thequality of service and reduce costs.  TheCompany is poised to meet these challenges by continuing to employ newtechnologies when they become available, diversifying its product offerings,improving and expanding its services, and by constantly enhancing its softwareapplications.  

 

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

 

Management’s discussion and analysis of CCA’sfinancial condition and results of operations are based upon the condensedconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States.  The preparation of these financial statementsrequires management to make

 

12

----

 

estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related 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*

 

The Company’s inventory is comprised of acurrent inventory account that consists of items that are held for resale and along-term inventory account that consists of items that are held for repairsand replacement of hardware components that are serviced by the Company underlong-term Extended Service Agreements with its clients.  Current inventory is valued at the lower ofcost to purchase or the current estimated market value of the inventoryitems.  Inventory is evaluated on acontinual basis and adjustments to recorded costs are made based on management’sestimate of future sales value, or in the case of the long-term componentinventory, on managements estimation of the usage ofspecific inventory items and net realizable value.  Management reviews inventory quantities onhand and makes determination of the excess or obsolete items in the inventory,which, are specifically reserved.  Inaddition, adjustments are made for the difference between the cost of theinventory and the estimated market value and charged to operations in theperiod in which the facts that give rise to the adjustments become known.  At March 31, 2005, the inventory reservewas $165,000. 

 

*Accounts Receivable*

 

Accounts receivable balances are evaluated ona continual 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 become known.  The accounts receivable balance at March 31,2005 was $1,406,595, net of an allowance for doubtful accounts of $26,000.  

 

*Revenue Recognition*

 

Revenues are derived primarily from the saleof CIS products and the provision of services. The components of the system sales revenues are the licensing ofcomputer software, installation, and the sale of computer hardware andsublicensed software. The components of service revenues are software supportand hardware maintenance, training, and implementation services.  The Company recognizes revenue in accordancewith the provisions of Statement of Position (SOP) No. 97-2, “SoftwareRevenue Recognition,” as amended by SOP No. 98-4, SOP 98-9 and clarifiedby Staff Accounting Bulletin (SAB) 104 “Revenue Recognition in FinancialStatements.” SOP No 97-2, as amended, generally requires revenue earned onsoftware arrangements involving multiple-elements to be allocated to eachelement based on the relative fair values of those elements.  The Company allocates revenue to each elementin a multiple-element arrangement based on the element’s respective fair value,with the fair value determined by the price charged when that element is soldand specifically defined in a quotation or contract.  The Company determines the fair value of themaintenance portion of the arrangement based on the renewal price of themaintenance charged to clients, professional services portion of thearrangement, other than installation services, based on hourly rates which theCompany charges for these services when sold apart from a software license, andthe hardware and sublicense of software based on the prices for these elementswhen they are sold separately from the software.  At March 31, 2005, deferred revenue onsystem sales was $134,547.

 

Post Implementation software and hardwaremaintenance services are marketed under monthly and annual arrangements and arerecognized as revenue ratably over the contracted maintenance term as servicesare provided.  Deferred revenue relatedto CIS sales is comprised of deferrals for license fees, hardware, and otherservices for which the implementation has not yet been completed and revenueshave not been recognized.  At March 31,2005, deferred service contract income was $1,426,696.

 

13

----

 

*Software Development Costs*

 

Costs incurred internally in creatingcomputer software products are expensed until technological feasibility hasbeen established upon completion of a program design. Thereafter, applicablesoftware development costs are capitalized and subsequently reported at thelower of amortized cost or net realizable value.  Capitalized costs are amortized based oncurrent and expected future revenue for each product with minimum annualamortization equal to the straight-line amortization over the estimatedeconomic life of the product, not to exceed five years.  For the first fiscal quarters of 2005 and2004, the Company capitalized $126,000 and $148,625, respectively.  At March 31, 2005, the balance of capitalized software costs were $1,567,434, netof accumulated amortization of $968,160.

 

### **RiskFactors**

 

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

 

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

 

There are many companies with active researchand development programs both in and outside of the healthcare informationtechnology industry.  Many of thesecompanies have considerable experience in areas of competing interest tous.  Additionally, we cannot determine ifother firms are conducting potentially competitive research, which could resultin the development and introduction of products that are either comparable orsuperior to the products we sell. Further, new product introductions, product enhancements and the use ofother technologies by our competitors could lead to a loss of market acceptanceand cause a decline in sales or gross margins.

 

***CCA’s success dependson its ability to attract, retain and motivate management and other skilledemployees***

 

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

 

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

 

The commercial success of future productsdepends upon their acceptance by the medical community.  Our future product plans includecapital-intensive clinical information systems. We believe that these products can significantly reduce labor costs,improve patient care and offer other distinctive benefits to the medicalcommunity.  However, there is oftenmarket resistance to products that require significant capital expenditures orwhich eliminate jobs through automation. We can make no assurance that the market will accept our future productsand systems, or that sales of our future products andsystems will grow at the rates expected by our management.

 

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

 

The market for CCA’s products and systems ischaracterized by rapid technological advances, changes in customer requirementsand frequent new product introductions and enhancements.  Our future success depends upon our abilityto introduce new products that keep pace with technological developments,enhance current product lines and respond to

 

14

----

 

evolving clientrequirements.  Our failure to meet thesedemands could result in a loss of our market share and competitiveness andcould harm our revenues and results of operations.

 

***Any failure orinability to protect our technology and confidential information couldadversely affect our business***

 

*Trade Secrets**.***  We have trade secrets, unpatented technologyand proprietary knowledge related to the sale, promotion, design, operation,and development of our products.  Wegenerally enter into confidentiality agreements with our employees andconsultants.  However, we cannotguarantee that our trade secrets, unpatented technology or proprietaryknowledge will not become known or be independently developed by competitors.  If any of this proprietary informationbecomes know to third parties, we may have no practical recourse against theseparties.

 

*Copyrights**.***  We claim copyrights in our software and alsoclaim trademark rights in the United States and other foreign countries wherewe sell our products.  However, we canmake no assurance that we will be able to obtainenforceable copyright and trademark protection, nor that this protection willprovide us a significant commercial advantage.

 

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

 

The healthcare information technologyindustry in recent years has been characterized by consolidation by bothhealthcare providers who are our clients and by those companies that we competeagainst.  Large hospital chains andgroups of affiliated hospitals prefer to negotiate comprehensive contracts forall of their system needs with larger vendors who offer broader product linesand services.  The convenienceoffered by these large vendors are administrative and financialincentives that we cannot offer our clients.

 

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

 

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

 

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

 

Federal and state legislative proposals areperiodically introduced or proposed that would affect major changes in thehealthcare system, nationally, at the state level or both.  Future legislation, regulation or payment policiesof Medicare, Medicaid, private health insurance plans, health maintenanceorganizations and other third-party payors could adversely affect the demandfor our current or future products and our ability to sell our products on aprofitable basis.  Moreover, healthcarelegislation is an area of extensive and dynamic change, and we cannot predictfuture legislative changes in the healthcare field or their impact on ourindustry or our business.

 

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

 

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

 

***Health InsurancePortability and Accountability Act (HIPAA)***

 

Our business is substantially impacted by therequirements of HIPAA and our products must maintain the confidentiality of a patients medical records and information.  Theserequirements also apply to most of our clients.  We believe our productsmeet the standards of HIPAA and may require our clients to upgrade theirsystems, but our clients’ preoccupation with HIPAA may adversely impact salesof our products, and the costs of compliance with HIPAA could

 

15

----

 

have an impact onour product margins and selling, general and administrative expenses incurredby us and could negatively impact our net income.

 

***We depend on ourcomputer and communications system***

 

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

 

***Our evaluation ofinternal controls and remediation of potential problems will be costly and timeconsuming and could expose weakness in our financial reporting***

 

While we believe that we currently haveadequate internal control procedures in place, we are still exposed topotential risks from recent legislation requiring companies to evaluatecontrols under Section 404 of the Sarbanes-Oxley Act of 2002.  We are evaluating our internal controlssystem in order to allow management to report on, and our independent registeredpublic accounting firm to attest to, our internal controls over financialreporting, beginning with our Annual Report on Form 10-KSB for fiscal year2006 as required in Section 404 of the Sarbanes-Oxley Act of 2002.

 

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

 

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

 

***Future sales of ourcommon stock could adversely affect our stock price***

 

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

 

### **NewAccounting Pronouncements**

 

In December 2004 the FinancialAccounting Standards Board (“FASB”) issued Statement of Financial AccountingStandards No. 123 (revised 2004), *Share-BasedPayment (SFAS No. 123(R))*. SFAS No. 123(R) requirescompensation cost relating to unvested share-based payment transactions thatare outstanding as of the effective date and newly issued transactions to berecognized in the financial statements. That cost will be measured based on thefair value of the equity or liability instruments issued. SFAS No. 123(R)covers a wide range of share-based compensation arrangements including shareoptions, restricted share plans, performance-based awards, share appreciationrights and employee share purchase plans. SFAS No. 123(R) replaces SFAS No. 123and supersedes APB 25, *Accounting for StockIssued to Employees*(Opinion 25)*.*SFAS No. 123, as originally issued in 1995, establishedfair-value-based method of accounting for share-based payment transactions withemployees. However, SFAS No. 123 permitted entities the option ofcontinuing to apply the guidance in APB 25, as long as the footnotes tofinancial statements disclosed what net income would have been had thefair-value-based method been used. As disclosed in footnote 2, the Companyelected the option of disclosure only under SFAS No. 123. Public companieswill be required to apply SFAS No. 123(R) as of the first annual reportingperiod that begins after June 15, 2005, or December 15, 2005 forsmall business issuers.  In April 2005,the SEC issued a Final Rule Release, “Amendment to Rule 4-01(a) ofRegulation S-X regarding the compliance date for Statement of FinancialAccounting Standards No. 123 (Revised 2004), Share-Based Payment.”  This rule extends the

 

16

----

 

date forcompliance with SFAS No. 123R until the beginning of the public companies’next fiscal year, instead of the next reporting period, that begins after June 15,2005, or December 15, 2005 for small business issuers.  The Company is currently evaluating theimpact of this statement. 

 

In March 2005, the SEC staff issued aStaff Accounting Bulletin (“SAB 107”) which expressviews of the staff regarding the interaction between SFAS No. 123R andcertain SEC rules and regulations and provide the staff’s views regardingthe valuation of share-based payment arrangements for public companies. Inparticular, SAB 107 provides guidance related to share-based paymenttransactions with non-employees, the transition from nonpublic to public entitystatus, valuation methods (including assumptions such as expected volatilityand expected term), the accounting for certain redeemable financial instrumentsissued under share-based payment arrangements, the classification ofcompensation expense, non-GAAP financial measures, first-time adoption of SFAS No. 123Rin an interim period, capitalization of compensation cost related toshare-based payment arrangements, the accounting for income tax effects ofshare-based payment arrangements upon adoption of SFAS No. 123R, themodification of employee share options prior to adoption of SFAS No. 123Rand disclosures in Management’s Discussion and Analysis subsequent to adoptionof SFAS No. 123R. 

 

**Item 3.****                                   Controlsand Procedures**

 

(a)  Evaluation of DisclosureControls and Procedures.  The Company’smanagement, with the participation of the Company’s Chief Executive Officer(principal executive officer) and its Chief Accounting Officer (principalaccounting officer), carried out an evaluation of the effectiveness of theCompany’s disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e),as of the end of the period covered by this Form 10-QSB.  Based upon that evaluation, the ChiefExecutive Officer and the Chief Accounting Officer concluded that as of the endof the period covered by this Form 10-QSB, the Company’s disclosurecontrols and procedures are effective in accumulating and communicating to them in a timelymanner material information relating to the Company (including its consolidatedsubsidiary) required to be included in the periodic reports filed with theSecurities and Exchange Commission.

(b)  Changes in Internal Control overFinancial Reporting. There was no change in the Company’s internal controlover financial reporting during the fiscal quarter ended March 31, 2005that has materially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.** **

The Company maintains a system of internalcontrols designed to provide reasonable assurance that transactions areexecuted in accordance with management’s general or specific authorization;transactions are recorded as necessary (1) to permit preparation offinancial statements in conformity with generally accepted accountingprinciples, (2) to maintain accountability for assets, and (3) toensure that access to assets is permitted only in accordance with management’sgeneral or specific authorization; and the recorded accountability for accessis compared with the existing assets at reasonable intervals and appropriateaction is taken with respect to any differences.

 

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

 

**Item 6.****           Exhibits**

 

Exhibit 3.1                  RestatedArticles of Incorporation, as Amended (previously filed as an exhibit to theCompany’s Registration Statement on Form S-18 dated September 22,1983, SEC File No. 2-85265).

 

Exhibit 3.2                  By-Laws, asamended (previously filed as an exhibit to the Company’s Registration Statementon Form S-18 dated September 22, 1983, SEC File No. 2-85265).

 

Exhibit 10.1            Form of Change inControl Agreement, dated February 7, 2005 (incorporated by reference to Exhibit 10.1filed with the Company’s Current Report on Form 8-K, dated February 7,2005).

 

Exhibit 11                     Statement re:computation of per share earnings.

 

Exhibit 31.1            Certification of ChiefExecutive Officer pursuant to Rule 13a-14(a) of the SecuritiesExchange Act of 1934.

 

17

----

 

Exhibit 31.2            Certification of ChiefAccounting Officer pursuant to Rule 13a-14(a) of the SecuritiesExchange Act of 1934.

 

Exhibit 32.1            Certification of ChiefExecutive Officer pursuant to Rule 13a-14(b) of the Securities ExchangeAct of 1934.

 

Exhibit 32.2            Certification of ChiefAccounting Officer pursuant to Rule 13a-14(b) of the SecuritiesExchange Act of 1934.

 

### **SIGNATURES**

 

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

 

CREATIVE COMPUTER APPLICATIONS, INC.

(Registrant)

 

 
| Date:  | May 13, 2005               |   | /S/ Steven M. Besbeck |   |   |
|--------|---------------------------------|--------|-----------------------|--------|--------|
|   | Steven. M. Besbeck, President   |   |
|   | Chief Executive Officer, Chief  |   |
|   | Financial Officer               |   |
|   |                            |   |
|   |                            |   |
| Date:  | May 13, 2005               |   | /S/ Anahita Villafane |   |
|   | Anahita Villafane,              |   |
|   | Controller and Chief Accounting |   |
|   | Officer                         |   |

 

18

----

 

#### **EXHIBIT INDEX**

 
| 3.1    |   | Restated Articles of Incorporation, as  Amended (previously filed as an exhibit to the Company’s Registration  Statement on Form S-18 dated September 22, 1983, SEC File  No. 2-85265).           |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                  |
| 3.2    |   | By-Laws, as amended (previously filed as an  exhibit to the Company’s Registration Statement on Form S-18 dated  September 22, 1983, SEC File No. 2-85265).                                       |
|   |   |                                                                                                                                                                                                                  |
| 10.1   |   | Form of Change in Control Agreement,  dated February 7, 2005 (incorporated by reference to Exhibit 10.1  filed with the Company’s Current Report on Form 8-K, dated  February 7, 2005). |
|   |   |                                                                                                                                                                                                                  |
| 11     |   | Statement re: computation of per share  earnings.                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                  |
| 31.1   |   | Certification of Chief Executive Officer  pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.                                                                                                |
|   |   |                                                                                                                                                                                                                  |
| 31.2   |   | Certification of Chief Accounting Officer  pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.                                                                                               |
|   |   |                                                                                                                                                                                                                  |
| 32.1   |   | Certification of Chief Executive Officer  pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934.                                                                                                |
|   |   |                                                                                                                                                                                                                  |
| 32.2   |   | Certification of Chief Accounting Officer  pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934.                                                                                               |

 

19

----