** **

**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

 

**Washington, DC 20549**

 

**FORM 10-QSB**

 
| **(Mark  One)**                                                                                                                                                                                                                                                                                                                                                   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                              |   |   |
| **ý**                                                                                                                                                                                                                                                                                                                                                        |   | **QUARTERLY REPORT UNDER  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                                                                              |
| **For the quarterly period ended February 29, 2004**                                                                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                                                                              |   |   |
| **o**                                                                                                                                                                                                                                                                                                                                                             |   | **TRANSITION REPORT UNDER  SECTION 13 OR 15(d) OF THE EXCHANGE ACT** |
|                                                                                                                                                                                                                                                                                                                                                              |
| **For the transition period from                              to                           ** |
|                                                                                                                                                                                                                                                                                                                                                              |
| **Commission file number 0-12551**                                                                                                                                                                                                                                                                                                                                |

 
| **CREATIVE  COMPUTER APPLICATIONS, INC.**                          |
|--------------------------------------------------------------------|
| (Exact  name of small business issuer as specified in its charter) |
|                                                               |   |   |
| **California**                                                     |   | **95-3353465** |
| (State  or other jurisdiction of  incorporation or organization)   |   | (I.R.S.  Employer  Identification No.) |
|                                                               |   |   |
| **26115-A Mureau Road, Calabasas, California 91302**               |
| (Address  of principal executive offices)                          |
|                                                               |   |   |
| **(818) 880-6700**                                                 |
| Issuer’s  telephone number:                                   |

 

State the number of shares outstanding ofeach of the issuer’s classes of common equity, as of the latest practicabledate:  3,318,900 common shares as ofMarch 31, 2004.

 

Transitional Small Business Disclosure Format(check one):

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

 

 

----

 

**CREATIVE COMPUTER APPLICATIONS, INC.**

 

**FORM 10-QSB**

 

**I N D E X**

 
| **PART I - Financial Information:**                                                                        |                                                                                                                           |
|------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                       |                                                                                                                           |
| Item 1.  Financial Statements                                                                         |                                                                                                                           |
|                                                                                                       |                                                                                                                           |   |
|                                                                                                       | Condensed Consolidated Balance Sheets at  February 29, 2004 and August 31, 2003                                      |   |
|                                                                                                       |                                                                                                                           |   |
|                                                                                                       | Condensed Consolidated Statements of  Operations for the three months ended February 29, 2004  and February 28, 2003 |   |
|                                                                                                       |                                                                                                                           |   |
|                                                                                                       | Condensed Consolidated Statements of  Operations for the six months ended February 29, 2004  and February 28, 2003   |   |
|                                                                                                       |                                                                                                                           |   |
|                                                                                                       | Condensed Consolidated Statements of Cash  Flows for the six months ended February 29, 2004  and February 28, 2003   |   |
|                                                                                                       |                                                                                                                           |   |
|                                                                                                       | Notes to Condensed Consolidated Financial  Statements                                                                          |   |
|                                                                                                       |                                                                                                                           |   |
| Item 2.   Management’s Discussion and Analysis of Results of Operations and  Financial Condition |                                                                                                                           |
|                                                                                                       |                                                                                                                           |
| Item 3.  Controls and  Procedures                                                                     |                                                                                                                           |
|                                                                                                       |                                                                                                                           |
| **PART II - Other Information:**                                                                           |                                                                                                                           |
|                                                                                                       |                                                                                                                           |
| Items 1 through 6                                                                                          |                                                                                                                           |
|                                                                                                       |                                                                                                                           |
| **Signatures**                                                                                             |                                                                                                                           |
|                                                                                                       |                                                                                                                           |
| **Exhibits and  Certifications**                                                                           |                                                                                                                           |

 

2

----

 

**CREATIVE COMPUTER APPLICATIONS, INC.**

 

**PART 1 - FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 
|                                                                                                   |   | **February 29,  2004** |      | **August 31,  *  2003** |   |
|--------------------------------------------------------------------------------------------------------|--------|-----------------------------|-----------|------------------------------|--------|
|                                                                                                   |   | **(Unaudited)**             |      |                         |   |
| **ASSETS**                                                                                             |   |                        |      |                         |   |
|                                                                                                   |   |                        |      |                         |   |
| CURRENT ASSETS:                                                                                        |   |                        |      |                         |   |
| Cash                                                                                                   |   | $                           | 1,228,121 |                         | $      | 1,075,323 |   |
| Receivables, net                                                                                       |   | 1,784,434                   |      | 2,063,311                    |   |
| Inventories                                                                                            |   | 154,843                     |      | 164,581                      |   |
| Prepaid expenses and other assets                                                                      |   | 180,285                     |      | 231,117                      |   |
| Deferred tax asset                                                                                     |   | 362,850                     |      | 362,850                      |   |
|                                                                                                   |   |                        |      |                         |   |
| TOTAL CURRENT ASSETS                                                                                   |   | 3,710,533                   |      | 3,897,182                    |   |
|                                                                                                   |   |                        |      |                         |   |
| PROPERTY AND EQUIPMENT, net                                                                            |   | 193,723                     |      | 219,627                      |   |
| INVENTORY OF COMPONENT PARTS                                                                           |   | 237,275                     |      | 267,275                      |   |
| CAPITALIZED SOFTWARE COSTS, net of  accumulated amortization of $1,324,111 and $1,114,645              |   | 1,435,032                   |      | 1,360,374                    |   |
| DEFERRED TAX ASSET                                                                                     |   | 536,885                     |      | 536,885                      |   |
|                                                                                                   |   |                        |      |                         |   |
|                                                                                                   |   | $                           | 6,113,448 |                         | $      | 6,281,343 |   |
|                                                                                                   |   |                        |      |                         |   |
| **LIABILITIES AND  SHAREHOLDERS’ EQUITY**                                                         |   |                        |      |                         |   |
|                                                                                                   |   |                        |      |                         |   |
| CURRENT LIABILITIES:                                                                                   |   |                        |      |                         |   |
| Notes payable to bank (Note 3)                                                                         |   | $                           | —    |                         | $      | — |   |
| Accounts payable                                                                                       |   | 219,923                     |      | 207,624                      |   |
| Accrued liabilities:                                                                                   |   |                        |      |                         |   |
| Vacation Pay                                                                                           |   | 221,801                     |      | 185,508                      |   |
| Accrued Payroll                                                                                        |   | 111,500                     |      | 105,768                      |   |
| Other                                                                                                  |   | 153,464                     |      | 159,241                      |   |
| Deferred service contract income                                                                       |   | 1,216,972                   |      | 1,115,366                    |   |
| Deferred revenue on system sales                                                                       |   | 365,438                     |      | 501,507                      |   |
| Capital lease obligation, current portion                                                              |   | —                      |      | 361                          |   |
|                                                                                                   |   |                        |      |                         |   |
| TOTAL CURRENT LIABILITIES                                                                              |   | 2,289,098                   |      | 2,275,375                    |   |
|                                                                                                   |   |                        |      |                         |   |
| SHAREHOLDERS’ EQUITY:                                                                             |   |                        |      |                         |   |
| Common shares, no par value; 20,000,000  shares authorized; 3,318,900 and 3,318,900 shares outstanding |   | 6,192,692                   |      | 6,192,692                    |   |
| Accumulated deficit                                                                                    |   | (2,368,342                  | )         | (2,186,724                   | )      |
|                                                                                                   |   |                        |      |                         |   |
| TOTAL SHAREHOLDERS’ EQUITY                                                                        |   | 3,824,350                   |      | 4,005,968                    |   |
|                                                                                                   |   |                        |      |                         |   |
|                                                                                                   |   | $                           | 6,113,448 |                         | $      | 6,281,343 |   |

 

**See Notes to Condensed Consolidated FinancialStatements.**

 

----

*** As presented in the audited consolidated financial statements**

 

3

----

 

**CREATIVE COMPUTER APPLICATIONS, INC.**

 

##### **CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS**

 
|                                           |   | **Three  Months Ended February 29 & 28** |    |
|------------------------------------------------|--------|---------------------------------------------------|---------|
|                                           |   | **2004**                                          |    | **2003** |   |
|                                           |   | **(unaudited)**                                   |    |
| NET SYSTEM SALES AND SERVICE REVENUE           |   |                                              |    |   |   |
| System sales                                   |   | $                                                 | 828,666 |   | $ | 817,856 |   |
| Service revenue                                |   | 1,022,521                                         |    | 1,036,929 |   |
|                                           |   | 1,851,187                                         |    | 1,854,785 |   |
|                                           |   |                                              |    |   |   |
| COST OF PRODUCTS AND SERVICES SOLD             |   |                                              |    |   |   |
| System sales                                   |   | 434,591                                           |    | 526,044 |   |
| Service revenue                                |   | 402,231                                           |    | 360,823 |   |
|                                           |   | 836,822                                           |    | 886,867 |   |
|                                           |   |                                              |    |   |   |
| Gross profit                                   |   | 1,014,365                                         |    | 967,918 |   |
|                                           |   |                                              |    |   |   |
| OPERATING EXPENSES:                            |   |                                              |    |   |   |
| Selling, general and administrative            |   | 696,022                                           |    | 715,457 |   |
|                                           |   |                                              |    |   |   |
| Research and development                       |   | 245,826                                           |    | 225,768 |   |
|                                           |   |                                              |    |   |   |
| Total Operating Expenses                       |   | 941,848                                           |    | 941,225 |   |
|                                           |   |                                              |    |   |   |
| Operating income                               |   | 72,517                                            |    | 26,693 |   |
|                                           |   |                                              |    |   |   |
| INTEREST AND OTHER INCOME                      |   | 1,010                                             |    | 4,785 |   |
|                                           |   |                                              |    |   |   |
| INTEREST EXPENSE                               |   | (1,487                                            | )       | (2,204 | ) |
|                                           |   |                                              |    |   |   |
| Income before provision for income taxes       |   | 72,040                                            |    | 29,274 |   |
|                                           |   |                                              |    |   |   |
| PROVISION FOR INCOME TAXES                     |   | —                                            |    | 12,411 |   |
|                                           |   |                                              |    |   |   |
| NET INCOME                                     |   | $                                                 | 72,040  |   | $ | 16,863 |   |
|                                           |   |                                              |    |   |   |
| EARNINGS PER SHARE (Note 2):                   |   |                                              |    |   |   |
|                                           |   |                                              |    |   |   |
| Basic                                          |   | $                                                 | .02     |   | $ | .01 |   |
| Diluted                                        |   | .02                                               |    | .01 |   |
|                                           |   |                                              |    |   |   |
| WEIGHTED AVERAGE NUMBER OF SHARES  OUTSTANDING |   |                                              |    |   |   |
|                                           |   |                                              |    |   |   |
| Basic                                          |   | 3,318,900                                         |    | 3,272,233 |   |
| Diluted                                        |   | 3,440,646                                         |    | 3,540,303 |   |

 

**See Notes to Condensed Consolidated FinancialStatements.**

 

4

----

 

**CREATIVE COMPUTER APPLICATIONS, INC.**

 

**CONDENSED****CONSOLIDATED STATEMENTS OF OPERATIONS**

 
|                                             |   | **Six Months  Ended February 29 & 28** |      |
|--------------------------------------------------|--------|-------------------------------------------------|-----------|
|                                             |   | **2004**                                        |      | **2003** |   |
|                                             |   | **(unaudited)**                                 |      |
| NET SYSTEM SALES AND SERVICE REVENUE             |   |                                            |      |   |   |
| System sales                                     |   | $                                               | 1,300,021 |   | $ | 1,620,325 |   |
| Service revenue                                  |   | 2,146,727                                       |      | 2,116,621 |   |
|                                             |   | 3,446,748                                       |      | 3,736,946 |   |
|                                             |   |                                            |      |   |   |
| COST OF PRODUCTS AND SERVICES SOLD               |   |                                            |      |   |   |
| System sales                                     |   | 881,966                                         |      | 1,105,221 |   |
| Service revenue                                  |   | 807,285                                         |      | 717,506 |   |
|                                             |   | 1,689,251                                       |      | 1,822,727 |   |
|                                             |   |                                            |      |   |   |
| Gross profit                                     |   | 1,757,497                                       |      | 1,914,219 |   |
|                                             |   |                                            |      |   |   |
| OPERATING EXPENSES:                              |   |                                            |      |   |   |
| Selling, general and administrative              |   | 1,436,506                                       |      | 1,366,897 |   |
|                                             |   |                                            |      |   |   |
| Research and development                         |   | 502,062                                         |      | 439,278 |   |
|                                             |   |                                            |      |   |   |
| Total Operating Expenses                         |   | 1,938,568                                       |      | 1,806,175 |   |
|                                             |   |                                            |      |   |   |
| Operating income (loss)                          |   | (181,071                                        | )         | 108,044 |   |
|                                             |   |                                            |      |   |   |
| INTEREST AND OTHER INCOME                        |   | 2,367                                           |      | 8,510 |   |
|                                             |   |                                            |      |   |   |
| INTEREST EXPENSE                                 |   | (2,914                                          | )         | (4,551 | ) |
|                                             |   |                                            |      |   |   |
| Income (loss) before provision for income  taxes |   | (181,618                                        | )         | 112,003 |   |
|                                             |   |                                            |      |   |   |
| PROVISION FOR INCOME TAXES                       |   | —                                          |      | 47,157 |   |
|                                             |   |                                            |      |   |   |
| NET INCOME (LOSS)                                |   | $                                               | (181,618  | ) | $ | 64,846 |   |
|                                             |   |                                            |      |   |   |
| EARNINGS (LOSS) PER SHARE (Note 2):              |   |                                            |      |   |   |
| Basic                                            |   | $                                               | (.05      | ) | $ | .02 |   |
| Diluted                                          |   | (.05                                            | )         | .02 |   |
|                                             |   |                                            |      |   |   |
| WEIGHTED AVERAGE NUMBER OF SHARES  OUTSTANDING   |   |                                            |      |   |   |
|                                             |   |                                            |      |   |   |
| Basic                                            |   | 3,318,900                                       |      | 3,269,317 |   |
| Diluted                                          |   | 3,318,900                                       |      | 3,461,395 |   |

 

**See Notes to Condensed Consolidated FinancialStatements.**

 

5

----

 

**CREATIVE COMPUTER APPLICATIONS, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

 

**Increase (Decrease) in Cash**

 
|                                                                                      |   | **Six Months  Ended February 29 & 28** |      |
|-------------------------------------------------------------------------------------------|--------|-------------------------------------------------|-----------|
|                                                                                      |   | **2004**                                        |      | **2003** |   |
|                                                                                      |   | **(unaudited)**                                 |      |
| OPERATING ACTIVITIES:                                                                     |   |                                            |      |   |   |
| Net income (loss)                                                                         |   | $                                               | (181,618  | ) | $ | 64,846 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |   |                                            |      |   |   |
| Depreciation and amortization                                                             |   | 61,416                                          |      | 83,313 |   |
| Provision for doubtful accounts                                                           |   | 10,000                                          |      | — |   |
| Amortization of capitalized software costs                                                |   | 209,466                                         |      | 210,391 |   |
| Deferred tax provision                                                                    |   | —                                          |      | 47,157 |   |
| Increase (decrease) from changes in:                                                      |   |                                            |      |   |   |
| Receivables                                                                               |   | 268,877                                         |      | (278,103 | ) |
| Inventories                                                                               |   | 39,738                                          |      | 8,026 |   |
| Prepaid expenses and other assets                                                         |   | 50,832                                          |      | 7,676 |   |
| Accounts payable                                                                          |   | 12,299                                          |      | 99,973 |   |
| Accrued liabilities                                                                       |   | 36,248                                          |      | (224,684 | ) |
| Deferred revenues                                                                         |   | (34,463                                         | )         | 413,265 |   |
|                                                                                      |   |                                            |      |   |   |
| Net cash provided by operating activities                                                 |   | 472,795                                         |      | 431,860 |   |
|                                                                                      |   |                                            |      |   |   |
| INVESTING ACTIVITIES                                                                      |   |                                            |      |   |   |
| Additions to property and equipment                                                       |   | (35,512                                         | )         | (38,118 | ) |
| Additions to capitalized software costs                                                   |   | (284,124                                        | )         | (228,000 | ) |
|                                                                                      |   |                                            |      |   |   |
| Net cash used in investing activities                                                     |   | (319,636                                        | )         | (266,118 | ) |
|                                                                                      |   |                                            |      |   |   |
| FINANCING ACTIVITIES:                                                                     |   |                                            |      |   |   |
| Payments on capital lease obligations                                                     |   | (361                                            | )         | (11,375 | ) |
| Proceeds from issuance of stock and  exercises of stock options                           |   | —                                          |      | 48,650 |   |
|                                                                                      |   |                                            |      |   |   |
| Net cash provided by (used in) financing  activities                                      |   | (361                                            | )         | 37,275 |   |
|                                                                                      |   |                                            |      |   |   |
| NET INCREASE IN CASH                                                                      |   | 152,798                                         |      | 203,017 |   |
|                                                                                      |   |                                            |      |   |   |
| Cash, beginning of period                                                                 |   | 1,075,323                                       |      | 1,027,810 |   |
|                                                                                      |   |                                            |      |   |   |
| Cash, end of period                                                                       |   | $                                               | 1,228,121 |   | $ | 1,230,827 |   |

 

**See Notes to Condensed Consolidated FinancialStatements.**

 

6

----

 

**CREATIVE COMPUTER APPLICATIONS, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**Note 1.**                                                          In theopinion of management, the accompanying unaudited condensed consolidatedfinancial statements reflect all adjustments (which include only normalrecurring accruals) necessary to present fairly the Company’s financialposition as of February 29, 2004, the results of its operations for thethree and six month periods ended February 29, 2004 and February 28,2003, and cash flows for the six months ended February 29, 2004 andFebruary 28, 2003.  These resultshave been determined on the basis of accounting principles generally accepted inthe United States of America and practices applied consistently with those usedin preparation of the Company’s Annual Report on Form 10-KSB for the fiscalyear ended August 31, 2003.

 

The results of operations for the three and six months endedFebruary 29, 2004 are not necessarily indicative of the results expectedfor any other period or for the entire year.

 

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

 

Earnings per share has been computed asfollows:

 
|                                                          |   | **Three  Months  Ended  February 29, 2004** |   | **Six Months  Ended  February 29, 2004** |   | **Three  Months  Ended  February 28, 2003** |   | **Six Months  Ended  February 28, 2003** |   |
|---------------------------------------------------------------|--------|--------------------------------------------------|--------|-----------------------------------------------|--------|--------------------------------------------------|--------|-----------------------------------------------|--------|
|                                                          |   |                                             |   |                                          |   |                                             |   |                                          |   |
| NET INCOME (LOSS)                                             |   | $                                                | 72,040 |                                          | $      | (181,618                                         | )      | $                                             | 16,863 |   | $ | 64,846 |   |
| Basic weighted average number of common  shares outstanding   |   | 3,318,900                                        |   | 3,318,900                                     |   | 3,272,233                                        |   | 3,269,317                                     |   |
| Dilutive effect of stock options                              |   | 121,746                                          |   | —                                        |   | 268,070                                          |   | 192,078                                       |   |
| Diluted weighted average number of common  shares outstanding |   | 3,440,646                                        |   | 3,318,900                                     |   | 3,540,303                                        |   | 3,461,395                                     |   |
| Basic earnings (loss) per share                               |   | $                                                | .02    |                                          | $      | (.05                                             | )      | $                                             | .01    |   | $ | .02 |   |
| Diluted earnings (loss) per share                             |   | $                                                | .02    |                                          | $      | (.05                                             | )      | $                                             | .01    |   | $ | .02 |   |

 

For the three and six months endedFebruary 29, 2004, options to purchase 20,000 and 405,000 shares,respectively, of common stock at a per share price ranging from $.72 to $1.76were not included in the computation of diluted loss per share becauseinclusion would have been anti-dilutive.

 

**Note 3.**                                                          The Company’s line of credit with its bankprovides for $500,000 on a revolving basis through February 1, 2005.  On February 29, 2004, there were noamounts outstanding under the line of credit.

 

**Note 4.**                                                          As allowed by SFAS123, the Company has adoptedthe intrinsic value method of accounting for employee stock options under theprinciples of APB Opinion No. 25, Accounting for Stock Issued to Employees (APB25) and discloses the pro forma effect on net income (loss) and income (loss)per share as if the fair value based method had been applied.  For equity instruments, including stockoptions, issued to non-employees, the fair value of the equity instruments orthe fair value of the consideration

 

7

----

 

received, whichever is more readilydeterminable, is used to determine the value of services or goods received andthe corresponding charge to operations.

 

The following table illustrates the effect onnet income (loss) and income (loss) per share as if the Company had applied thefair value recognition provision of SFAS No. 123 to stock-based employeecompensation.

 

 
|                                                                                                     |   | **Three  Months  EndedFebruary 29, 2004** |   | **Six Months  EndedFebruary 29, 2004** |   | **Three  Months  Ended**

**February 28, 2003** |   | **Six Months  EndedFebruary 28, 2003** |   |
|----------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|--------|---------------------------------------------|--------|------------------------------------------------------|--------|---------------------------------------------|--------|
|                                                                                                     |   |                                           |   |                                        |   |                                                 |   |                                        |   |
| Net Income (Loss), as reported                                                                           |   | $                                              | 72,040 |                                        | $      | (181,618                                             | )      | $                                           | 16,863 |   | $ | 64,846 |   |
| Less: total stock based employee compensation  expense determined under fair value method for all awards |   | (16,835                                        | )      | (33,670                                     | )      | (10,464                                              | )      | (20,927                                     | )      |
|                                                                                                     |   |                                           |   |                                        |   |                                                 |   |                                        |   |
| Pro forma net income (loss)                                                                              |   | $                                              | 55,205 |                                        | $      | (215,288                                             | )      | $                                           | 6,399  |   | $ | 43,919 |   |
|                                                                                                     |   |                                           |   |                                        |   |                                                 |   |                                        |   |
| Basic net earnings (loss) per share, as  reported                                                        |   | $                                              | .02    |                                        | $      | (.05                                                 | )      | $                                           | .01    |   | $ | .02 |   |
| Basic net earnings (loss) per share, pro  forma                                                          |   | $                                              | .02    |                                        | $      | (.06                                                 | )      | $                                           | .00    |   | $ | .01 |   |
| Diluted net earnings (loss) per share, as  reported                                                      |   | $                                              | .02    |                                        | $      | (.05                                                 | )      | $                                           | .01    |   | $ | .02 |   |
| Diluted net earnings (loss) per share, pro  forma                                                        |   | $                                              | .02    |                                        | $      | (.06                                                 | )      | $                                           | .00    |   | $ | .01 |   |

 

As required by SFAS 123, the Company providesthe following disclosure of estimated values for these awards:  The fair value of each option was estimatedon the date of grant using a Black-Scholes option-pricing model with thefollowing weighted average assumptions for 2004 and 2003: risk free interestrates ranging from 3.8% 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 during2003 was estimated to be $1.25.  Therewere 60,000 options granted in the three months ended February 29, 2004.

 

**Note 5.****                                                         **In accordance with the bylaws of theCompany, officers and directors are indemnified for certain events oroccurrences arising as a result of the officer or director’s serving in suchcapacity.  The term of theindemnification period is for the lifetime of the officer or director.  The maximum potential amount of futurepayments the Company could be required to make under the indemnificationprovisions of its bylaws is unlimited. However, the Company has a director and officer liability insurancepolicy that reduces its exposure and enables it to recover a portion of anyfuture amounts paid.  As a result of itsinsurance policy coverage, the Company believes the estimated exposure for theindemnification provisions of its bylaws is minimal and, therefore, the Companyhas not recorded any related liabilities.

 

TheCompany enters into indemnification provisions under agreements with variousparties in the normal course of business, typically with customers andlandlords.  Under these provisions, theCompany generally indemnifies and holds harmless the indemnified party forlosses suffered or incurred by the indemnified party as a result of theCompany’s activities or, in some cases, as a result of the indemnified party’sactivities under the agreement.  Theseindemnification provisions often include indemnifications relating to representationsmade by the Company with regard to intellectual property rights.  These indemnification provisions generallysurvive termination of the underlying agreement.  The maximum

 

8

----

 

potentialamount of future payments the Company could be required to make under theseindemnification provisions cannot be estimated.  The Company maintains general liability, errors and omissions,and professional liability 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 recordedany related liabilities.

 

**Note 6.**                                                          New Accounting Pronouncements - OnDecember 17, 2003, the SEC’s Office of the Chief Accountant and Divisionof Corporation Finance issued Staff Accounting Bulletin (SAB) 104, RevenueRecognition. The SAB updates portions of the interpretive guidance included in Topic13 of the codification of staff accounting bulletins (SAB 103 codification) inorder to make the guidance consistent with current authoritative accountingliterature.  The principal revisionsrelate to the incorporation of certain sections of the staff’s FAQ document onrevenue recognition into Topic 13.  TheCompany does not expect the adoption of SAB 104 to have a material effect onthe Company’s financial statements.

 

In November 2002, the EITF reached a consensus on EITF 00-21,“Revenue Arrangements with Multiple Deliverables,” related to the separationand allocation of consideration for arrangements that include multipledeliverables.  The EITF requires thatwhen the deliverables included in this type of arrangement meet certaincriteria they should be accounted for separately as separate units ofaccounting.  This may result in adifference in the timing of revenue recognition but will not result in a changein the total amount of revenue recognized in a bundled sales arrangement.  The allocation of revenues to the separatedeliverables is based on the relative fair value of each item.  If the fair value is not available for thedelivered items then the residual method must be used.  This method requires that the amountallocated to the undelivered items in the arrangement is their full fairvalue.  This would result in thediscount, if any, being allocated to the delivered items.  This consensus is effective prospectivelyfor arrangements entered into in fiscal periods beginning after June 15,2003.  The adoption of EITF 00-32 doesnot have a material impact on the Company’s financial statements at this time.

 

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

 

ThisQuarterly Report on Form 10-QSB includes forward-looking statements within themeaning of Section 21E of the Securities Exchange Act of 1934 that involverisk and uncertainty, such as forward-looking statements relating to sales andearnings per share expectations, expectations regarding the Company’s liquidityand the impact of seasonality on the Company’s operations and is subject to theRisk Factors set forth below.  Wedisclaim any obligation to update our forward-looking statements

 

###### **Overview**

 

CCA generates revenues primarily from thesale of its Clinical Information Systems (CIS), which includes the licensing ofproprietary application software, the licensing of third party software, andthe sale of servers upon which the application software operates.  In connection with its sales of CISproducts, the Company provides implementation services for the installation,integration, and training of end users’ personnel.  The Company generates sales of ancillary software and hardware,including its data acquisition products, to its CIS clients and to thirdparties.  The Company also generatesrecurring revenues from the provision of comprehensive post implementationservices to its CIS clients, pursuant to extended service agreements.

 

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

 

9

----

 

CCA’s results of operations for the six-monthperiod ended February 29, 2004 were marked by a decrease in sales over thecomparable period in 2003 and a decrease in earnings.  For the second fiscal quarter ended February 29, 2004, revenueswere only slightly below the comparable quarter of fiscal 2003.  The Company’s decrease in revenues for thesix-month period was due to a number of factors.  The primary factor was a transition to a new version of our coreproduct, CyberLABâ 7.0 that impacted sales of the previousversion of this product.  Other factorscontributing to the decline in sales were associated with the sluggish economyand the healthcare industry’s preoccupation with the Health InsurancePortability and Accountability Act (HIPAA) compliance issues.  In addition, the Company experienced delaysin closing new transactions that further impacted the first and second fiscalquarters of 2004.  Typically, salescycles for CIS products are lengthy and on average exceed one year frominception to closure.  Because of thecomplexity of the sales process, a number of factors can delay the closing oftransactions that are beyond the control of the Company.

 

The Company experienced a delay in therelease of its new CyberLAB 7.0 laboratory information system due to timingissues and the need to complete HIPAA related upgrades to its existing productsand deliver them to its clients.  Duringthe fourth fiscal quarter of 2003, CCA had substantially completed CyberLAB 7.0and began to install the new software in its initial beta site for testing andevaluation.  The Company began releasingCyberLAB 7.0 to its client base beginning January 1, 2004.  As of March 30, 2004, CyberLAB 7.0 waslive in three sites and two additional new sites were being implemented.  In addition, new sales and marketingactivities were initiated resulting in CCA’s pipeline of potential new CyberLAB7.0 related transactions returning to historical levels.  CyberLAB 7.0 has generated significantinterest among new buyers as well as CCA’s installed client base.  Management believes the industry and themarket for healthcare information technology products continues to improvedespite economic conditions.  The marketis experiencing a renewed interest in clinical applications that is beingfueled by the demand for new technology that addresses compliance issues aswell as patient care and safety issues.

 

In order to address compliance issues broughtabout by the HIPAA regulations, the Company completed the development ofenhancements to its products and upgraded hundreds of client sites with theHIPAA related enhancements during the 2003 fiscal year.  This posed considerable challenges to CCA’sorganization.  Provisions of HIPAA areintended to ensure patient confidentiality and security for all health carerelated information.  The requirementsof HIPAA apply to any entity storing and/or transmitting patient identifiableinformation on electronic media.  Thisaffects virtually all health care organizations, from physicians and insurancecompanies to health care support organizations.  Certain safeguards are required to accurately ensure the securityof patient data including more robust audit trails and tiered/structuredpassword security when accessing patient data. Management believes that the HIPAA enhancements will require that manyCCA clients will need to upgrade their systems in order to effectively managegreater amounts of data, which will afford the Company opportunities to sellupgrades and provide professional services. It is also anticipated that the migration to CyberLAB 7.0 will requireclients to acquire additional hardware and professional services from theCompany in order to deploy the new software.

 

**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  EndedFebruary 29, 2004** |   | **Six Months  EndedFebruary 29, 2004** |   | **Three  Months  EndedFebruary 28, 2003** |   | **Six Months  EndedFebruary 28, 2003** |   |
|--------------------------------------------------|--------|------------------------------------------------|--------|---------------------------------------------|--------|------------------------------------------------|--------|---------------------------------------------|--------|
| Revenues:                                        |   |                                           |   |                                        |   |                                           |   |                                        |   |
| System sales                                     |   | 44.8                                           | %      | 37.7                                        | %      | 44.1                                           | %      | 43.4                                        | %      |
| Service revenues                                 |   | 55.2                                           |   | 62.3                                        |   | 55.9                                           |   | 56.6                                        |   |
|                                             |   |                                           |   |                                        |   |                                           |   |                                        |   |
| Total revenues                                   |   | 100.0                                          |   | 100.0                                       |   | 100.0                                          |   | 100.0                                       |   |
|                                             |   |                                           |   |                                        |   |                                           |   |                                        |   |
| Cost of products and services sold:              |   |                                           |   |                                        |   |                                           |   |                                        |   |
| System sales                                     |   | 23.5                                           |   | 25.6                                        |   | 28.4                                           |   | 29.6                                        |   |
| Service revenues                                 |   | 21.7                                           |   | 23.4                                        |   | 19.4                                           |   | 19.2                                        |   |
|                                             |   |                                           |   |                                        |   |                                           |   |                                        |   |
| Total cost of products and services              |   | 45.2                                           |   | 49.0                                        |   | 47.8                                           |   | 48.8                                        |   |
| Gross profit                                     |   | 54.8                                           |   | 51.0                                        |   | 52.2                                           |   | 51.2                                        |   |
| Operating expenses:                              |   |                                           |   |                                        |   |                                           |   |                                        |   |
| Selling, general and administrative              |   | 37.6                                           |   | 41.7                                        |   | 38.6                                           |   | 36.6                                        |   |
| Research and development                         |   | 13.3                                           |   | 14.6                                        |   | 12.2                                           |   | 11.7                                        |   |
| Total operating expenses                         |   | 50.9                                           |   | 56.3                                        |   | 50.8                                           |   | 48.3                                        |   |
| Operating income (loss)                          |   | 3.9                                            |   | (5.3                                        | )      | 1.4                                            |   | 2.9                                         |   |
|                                             |   |                                           |   |                                        |   |                                           |   |                                        |   |
| Income (loss) before provision for income  taxes |   | 3.9                                            |   | (5.3                                        | )      | 1.6                                            |   | 3.0                                         |   |
| Provision for income taxes                       |   | —                                         |   | —                                      |   | .7                                             |   | 1.3                                         |   |
|                                             |   |                                           |   |                                        |   |                                           |   |                                        |   |
| Net income (loss)                                |   | 3.9                                            |   | (5.3                                        | )      | .9                                             |   | 1.7                                         |   |

 

10

----

 

Sales for the second fiscal quarter endingFebruary 29, 2004 decreased by $3,598 or .02%, as compared to the samequarter of fiscal 2003.  For thesix-month period ended February 29, 2004, sales decreased $290,198 or 7.8%compared to the same period in fiscal 2003. When analyzed by product category for the quarter, sales of CIS productsincreased by $42,105 or 5.8% when compared to the same quarter of fiscal2003.  The increase was offset bydecreases in sales of data acquisition products of $26,539 or 31.6%, servicerevenues of $14,408 or 1.4%, and other revenues of $4,756 or 66.5%.  When analyzed by product category for thesix-month period, sales of CIS products decreased $279,233 or 19.1%, sales ofdata acquisition products decreased by $35,606 or 25.2%, and other revenuesdecreased $5,465 or 40.7%.  These decreaseswere partially offset by an increase in service revenues of $30,106 or 1.4% ascompared to the same period of fiscal 2003. The decrease in sales of CIS products for the six-month period wasprimarily attributable to a transition to a new version of CyberLAB 7.0 thatimpacted sales of the previous product version, delays associated with closingnew transactions, market conditions, and the industry’s preoccupation withissues related to HIPAA as discussed more fully above.  The Company began to experience a turnaroundin the sales of the new version of CyberLAB 7.0 in the second fiscal quarter of2004.  Management believes thattransition period is in its final stages. The Company’s decrease in service revenues for the quarter isattributable to reduced billable services. However, the Company had an increase in service revenues for thesix-month period due to a greater number of client accounts under contract andan increase in the average fees charged for such contracts.  Service revenues are expected to continue toincrease as and when the Company’s installed base of CIS installationsincreases.

 

The Company has continued to experience adecrease in sales of data acquisition products over the past few years, whichhas been primarily attributable to a decrease in the volume of units sold toOEM customers and a technological shift to software based clinical instrumentinterfaces.  The decrease in OEMbusiness is expected to continue, as fewer OEM customers remain active in themarketplace or no longer use CCA’s data acquisition products.  Management does not believe the OEM businessis a material part of CCA’s business today and will not be in the future as theCompany’s emphasis is being placed 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.  In addition, the Company hasstrategic 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 second half of the 2004 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 sales may be delayed dueto client related issues such as client staff availability for training, ITinfrastructure readiness, and the performance of third party contractors, allof which are issues outside of the control of CCA.

 

Cost of sales for the second quarter andsix-month period ended February 29, 2004 decreased by $50,045 or 5.6% and$133,476 or 7.3%, respectively, as compared to the same periods of fiscal2003.  For the quarter and six-monthperiod, the decrease in cost of sales was primarily attributable to a decreasein material costs of $78,717 or 47.7% and $180,214 or 50.7%, respectively, anda decrease in other costs of $14,025 or 4.4% and $31,608 or 4.8%,respectively.  Such decreases werepartially offset by an increase in labor costs, for the quarter and six-monthperiod, of $42,697 or 10.5% and $78,346 or 9.7%, respectively.  The decrease in material costs wasattributable to the decrease in sales of CIS products discussed above.  The increase in labor costs was attributableto additions of personnel to the Company’s support and implementationdepartments.  The decrease in othercosts of sales was attributable to decreased expenses in travel andtraining.  For the current quarter andsix-month period, cost of sales as a percentage of sales was 45% and

 

11

----

 

49%, respectively, as compared to 48% and 49%, respectively, for the comparable2003 fiscal quarter.  The overallpercentage decrease in cost of sales, as a percentage of sales, in the currentquarter was attributable to a reduced number of sales of CIS products requiringhardware.  The Company could potentiallyexperience quarterly variations in gross margin as a result of the factorsdiscussed above.

 

Selling, general, and administrative expensesdecreased $19,435 or 2.7% as compared to the same quarter of fiscal 2003.  For the six-month period endedFebruary 29, 2004, selling, general, and administrative expenses increased$69,609 or 5.1% as compared to the same period of fiscal 2003.  The decrease in the current quarter ofselling, general, and administrative expenses was primarily due to lower costsrelated to trade shows incurred in the quarter.  The increases in selling, general, and administrative expensesfor the six-month period were due to increased expenses for sales and marketingactivities mainly attributable to the addition of a new CyberLAB productmanager and increases in overall marketing expenditures.  The Company plans to continue its investmentin sales and marketing activities; however, the Company plans to monitor andkeep a tight reign on its expenditures in fiscal 2004.  Management also anticipates increases ininsurance costs in the current fiscal year.

 

Research and development expenses increased$20,058 or 8.9% and $62,784 or 14.3%, respectively, for the current quarter andsix-month period compared to the same periods of fiscal 2003.  The increase is attributable to increases insalaries, other personnel related expenses, and the addition of new personnelin product engineering.  For thecomparable second quarters of 2004 and 2003, the Company capitalized softwarecosts of $155,124 and $114,000, respectively, which are generally amortizedover the estimated useful life not to exceed five years.  Such costs were attributable to enhancementsand new modules for the Company’s CIS products and new applications under development.  Management anticipates its overall researchand development activities will increase in fiscal 2004 due to plannedpersonnel additions in product engineering.

 

For the quarter and six-month period endedFebruary 29, 2004, the Company did not record a tax provision compared totax provisions of $12,411 and $47,157, respectively, recorded for the sameperiods of fiscal 2003 due to the level of taxable income.  The Company believes that it is more likelythan not that the net deferred tax asset of $899,735 will be realized in futureperiods.

 

As a result of the factors discussed above,the Company earned income of $72,040 or basic and diluted earnings per share of$.02 for the current quarter compared to net income of $16,863 or basic anddiluted earnings per share of $.01 for the same quarter of fiscal 2003.  For the six-month period endedFebruary 29, 2004, the Company incurred a net loss of $181,618 or basicand diluted loss per share of $.05 compared to net income of $64,846 or basicand diluted earnings per share of $.02 for the same period in fiscal 2003.

 

**Capital Resources and Liquidity**

 

The Company’s primary need for capital hasbeen to invest in software development, and in computers and related equipmentfor its internal use.  The Companyinvested $284,124 and $228,000 in software development during the six-monthperiods ended February 29, 2004 and February 28, 2003,respectively.  These expendituresrelated to HIPAA related enhancements to all its products, and the new browserversion of the Company’s LIS product, CyberLAB 7.0, and other productenhancements.  The Company anticipatesexpending additional sums during fiscal 2004 on product enhancements to all itsproducts and the further development of the new browser version of the Company’sCyberLAB 7.0 product.  During the six-monthperiod ended February 29, 2004, the Company invested an aggregate of$35,512 in additions to fixed assets, primarily consisting of computers andsoftware, as compared to an investment of $38,118 in the comparable period offiscal 2003.

 

As of February 29, 2004, the Company’sworking capital amounted to $1,421,435 compared to $1,621,807 as ofAugust 31, 2003.  The Company’scurrent ratio was 1.6 at February 29, 2004, compared to 1.7 atAugust 31, 2003.  AtFebruary 29, 2004, the Company’s credit facilities with its bank consistedof a revolving line of credit of $500,000, of which there were no amountsoutstanding.  The bank credit agreementexpires on February 1, 2005.

 

Cash flows from operating activities were$472,795 for the six months ended February 29, 2004, compared to $431,860for the comparable period of fiscal 2003. The increase in cash flow from operating activities was primarilyattributable to the net change in accrued liabilities and receivables duringthe six months ended February 29, 2004.

 

12

----

 

Net cash used in investing activities totaled$319,636 for the six months ended February 29, 2004, compared to $266,118used in investing activities during the comparable period of 2003.  The increase in cash used in investingactivities was due to increased investment in software development and theportion that was associated with software capitalization.

 

Cash used in financing activities amounted to$361 during the six months ended February 29, 2004, compared to $37,275provided in the same period of fiscal 2003. The change from fiscal 2003 to fiscal 2004 resulted primarily from theCompany having paid off its capital lease obligations in fiscal 2004 and exercisesof stock options in fiscal 2003.

 

The Company’s primary source of workingcapital has been generated from earnings, and borrowings on its line ofcredit.  The Company’s cash flowsamounted to $472,795 to fund its operations during the six months endedFebruary 29, 2004.  Managementbelieves that its sales pipeline is adequate to produce sufficient operatingcash flow in the 2004 fiscal year, and that its projected cash flow fromoperations, together with its bank credit facilities, should be sufficient tofund its working capital requirements for its 2004 fiscal year.  However, an unanticipated decline in salesor continued delays in closing new transactions, delays in implementationswhere payments are tied to delivery 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 and Industry Trends**

 

The Company’s sales are generally higher inthe winter and spring.  Inflation hasnot had a material effect on the Company’s business since the Company has beenable to adjust the prices of its products and services in response to inflationarypressures.  Management believes that mostphases of the healthcare segment of the computer industry will continue to behighly competitive, and that potential healthcare reforms including thosepromulgated by HIPAA may have a long-term positive impact on its business.  With respect to the compliance issuesbrought about by HIPAA, the Company has invested heavily in new applicationmodules to assist its clients in meeting their regulatory goals.  Management believes that the new moduleswill be key selling points and will provide a competitive advantage.  In addition, management believes that thehealthcare information technology industry will be marked with more significanttechnological advances, which will improve the quality of service and reducecosts.  The Company is poised to meetthese challenges by continuing to employ new technologies when they becomeavailable, diversifying its product offerings, improving and expanding itsservices, and by constantly enhancing its software applications.

 

**Critical 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 financialstatements requires management to make estimates and judgments that affect thereported amounts of assets, liabilities, revenues and expenses, and relateddisclosures of contingent assets and liabilities.  On an on-going basis, management evaluates estimates, includingthose related to the valuation of inventory and the allowance for uncollectibleaccounts receivable. We base our estimates on historical experience and onvarious other assumptions that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources.  Actual results maydiffer from these estimates under different assumptions or conditions. Webelieve the following critical accounting policies affect our more significantjudgments and estimates used in the preparation of our consolidated financialstatements:

 

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 onmanagement’s estimate of future sales value, or in the case of the long-termcomponent inventory, on management’s estimation of the usage of specificinventory items and net realizable value. Management reviews inventory quantities on hand and makes determinationof the excess or obsolete items in the inventory, which, are specificallyreserved.  In addition, adjustments aremade for the difference between the cost of the inventory and the estimatedmarket value and charged to operations in the period in

 

13

----

 

which the facts that give rise to the adjustments become known.  At February 29, 2004 andFebruary 28, 2003, the inventory reserve was $106,273 and $100,568,respectively.

 

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 atFebruary 29, 2004 was $1,784,434, net of an allowance for doubtfulaccounts of $27,362.

 

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, “Software RevenueRecognition,” as amended by SOP No. 98-4, SOP 98-9 and clarified by StaffAccounting Bulletin (SAB) 101 “Revenue Recognition in Financial Statements.”SOP No 97-2, as amended, generally requires revenue earned on softwarearrangements involving multiple-elements to be allocated to each element basedon the relative fair values of those elements. The Company allocates revenue to each element in a multiple-elementarrangement based on the element’s respective fair value, with the fair valuedetermined by the price charged when that element is sold and specificallydefined in a quotation or contract.  TheCompany determines the fair value of the maintenance portion of the arrangementbased on the renewal price of the maintenance charged to clients, professionalservices portion of the arrangement, other than installation services, based onhourly rates which the Company charges for these services when sold apart froma software license, and the hardware and sublicense of software based on theprices for these elements when they are sold separately from the software.  At February 29, 2004 and February 28,2003, deferred revenue was $365,438 and $830,410, respectively.

 

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, comprises deferrals for license fees, hardware, and otherservices for which the implementation has not yet been completed and revenueshave not been recognized.  AtFebruary 29, 2004 and February 28, 2003, deferred service contractincome was $1,216,972 and $1,118,171, respectively.

 

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 on current and expectedfuture revenue for each product with minimum annual amortization equal to thestraight-line amortization over the estimated economic life of the product, notto exceed five years.  For the sixmonths ended February 29, 2004 and February 28, 2003, the Companycapitalized $284,124 and $228,000, respectively.  At February 29, 2004, the balance of capitalized softwarecosts were $1,435,032, net of accumulated amortization of $1,324,111.

 

Income Taxes

 

The Company is subject to income and otherrelated taxes in areas in which it operates. When recording income tax expense, certain estimates are required bymanagement due to timing and the impact of future events on when income taxexpenses and benefits are recognized by the Company.  The Company periodically evaluates its tax operating loss andother carryforwards to determine whether a gross deferred tax asset as well asa related valuation allowance should be recognized in its financialstatements.  The Company has reported anet deferred tax asset on its Consolidated Balance Sheet, after deduction ofthe related valuation allowance, which has been determined on the basis ofmanagement’s estimation of the likelihood of realization of the gross deferredtax asset.  The deferred tax asset, netof valuation allowance, is $899,735 at February 29, 2004.

 

14

----

 

### **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.

 

***CCAfaces intense competition from both established entities and new entries in themarket that may 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 determineif other firms are conducting potentially competitive research, which couldresult in the development and introduction of products that are eithercomparable or superior to the products we sell.  Further, new product introductions, product enhancements and theuse of other technologies by our competitors could lead to a loss of marketacceptance and cause a decline in sales or gross margins.

 

***CCA’s success depends on its ability toattract, retain and motivate management and other skilled employees***

 

CCA’s success depends upon the continuedservices of key management and skilled personnel.  Competition for qualified personnel is intense and there are alimited number of people with knowledge of, and experience in, ourindustry.  We do not have employmentagreements with most of our key employees. However, we generally enter into agreements with our employees regardingpatents, confidentiality and related matters. We do not maintain life insurance polices on our employees.  Our loss of key personnel, especiallywithout advance notice, or our inability to hire or retain qualified personnel,could have a material adverse effect on sales and our ability to maintain ourtechnological edge.  We cannot guaranteethat we will continue to retain our key management and skilled personnel, orthat we will be able to attract, assimilate and retain other highly qualifiedpersonnel in the future.

 

***Anyfailure to successfully introduce future products into the market couldadversely affect our 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 laborcosts, improve patient care and offer other distinctive benefits to the medicalcommunity.  However, there is oftenmarket resistance to products that require significant capital expenditures or whicheliminate jobs through automation.  Wecan make no assurance that the market will accept our future products andsystems, or that sales of our future products and systems will grow at therates expected by our management.

 

***IfCCA fails to meet changing demands of technology, we may not continue to beable to compete successfully 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 evolving client requirements.  Our failure to meet these demands couldresult in a loss of our market share and competitiveness and could harm ourrevenues and results of operations.

 

***Any failure or inability to protect ourtechnology and confidential information could adversely affect our business***

 

*Trade Secrets****.***  Wehave trade secrets, unpatented technology and proprietary knowledge related tothe sale, promotion, design, operation, and development of our products.  We generally enter into confidentialityagreements with our employees and consultants. However, we cannot guarantee that our trade secrets, unpatentedtechnology or proprietary knowledge will not become known or be independentlydeveloped by competitors.  If any ofthis proprietary information becomes know to third parties, we may have nopractical recourse against these parties.

 

15

----

 

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

 

***CCAoperates in a consolidating industry which creates barriers to marketpenetration***

 

The healthcare information technology industryin recent years has been characterized by consolidation by both healthcareproviders 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 convenience offeredby these large vendors are administrative and financial incentives that wecannot offer our clients.

 

***CCA’sproducts may be subject to government regulation in the future that couldimpair our operations***

 

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 a material adverseimpact on our business.

 

***Changesin government regulation of the healthcare industry could adversely affectCCA’s business.***

 

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 paymentpolicies of Medicare, Medicaid, private health insurance plans, healthmaintenance organizations and other third-party payors could adversely affectthe demand for our current or future products and our ability to sell ourproducts on a profitable basis. Moreover, healthcare legislation is an area of extensive and dynamicchange, and we cannot predict future legislative changes in the healthcarefield or their impact on our industry or our business.

 

***Defectiveproducts may 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 Insurance Portability andAccountability Act (HIPAA)***

 

Our business is substantially impacted by the requirements of HIPAA andour products must maintain the confidentiality of a patents medical records andinformation.  These requirements alsoapply to most of our clients.  Webelieve our products meet the standards of HIPAA and may require our clients toupgrade their systems, but our clients’ preoccupation with HIPAA may adverselyimpact sales of our products, and the costs of compliance with HIPAA could havean impact on our product margins and selling, general and administrativeexpenses incurred by us and could negatively impact our net income.

 

**New AccountingPronouncements**

 

On December 17, 2003, the SEC’s Officeof the Chief Accountant and Division of Corporation Finance issued StaffAccounting Bulletin (SAB) 104, Revenue Recognition. The SAB updates portions ofthe interpretive guidance included in Topic 13 of the codification of staffaccounting bulletins (SAB 103 codification) in order to make the guidanceconsistent with current authoritative accounting literature.  The principal revisions relate to theincorporation of certain sections of the staff’s FAQ document on revenuerecognition into Topic 13.  The Companydoes not expect the adoption of SAB 104 to have a material effect on theCompany’s financial statements.

 

16

----

 

In November 2002, the EITF reached a consensus on EITF 00-21,“Revenue Arrangements with Multiple Deliverables,” related to the separationand allocation of consideration for arrangements that include multipledeliverables.  The EITF requires thatwhen the deliverables included in this type of arrangement meet certaincriteria they should be accounted for separately as separate units ofaccounting.  This may result in adifference in the timing of revenue recognition but will not result in a changein the total amount of revenue recognized in a bundled sales arrangement.  The allocation of revenues to the separatedeliverables is based on the relative fair value of each item.  If the fair value is not available for thedelivered items then the residual method must be used.  This method requires that the amountallocated to the undelivered items in the arrangement is their full fair value.  This would result in the discount, if any,being allocated to the delivered items. This consensus is effective prospectively for arrangements entered intoin fiscal periods beginning after June 15, 2003.  The adoption of EITF 00-32 does not have a material impact on theCompany’s financial statements at this time.

 

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

 

(a)  Evaluationof Disclosure Controls and Procedures. The Company’s Chief Executive Officer and its Chief Accounting Officer,with the participation of the Company’s management, carried out an evaluationof the effectiveness of the Company’s disclosure controls and procedurespursuant to Exchange Act Rules 13a-15(e). Based upon that evaluation, the Chief Executive Officer and the ChiefAccounting Officer believes that as of the end of the period covered by thisreport, the Company’s disclosure controls and procedures are adequate andeffective in making known to them material information relating to the Company(including its consolidated subsidiary) required to be included in the report.

 

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

 

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 of financialstatements in conformity with generally accepted accounting principles, (2) tomaintain accountability for assets, and (3) to ensure that access to assets ispermitted only in accordance with management’s general or specificauthorization; and the recorded accountability for access is compared with theexisting assets at reasonable intervals and appropriate action is taken withrespect to any differences.

 

**PART II - OTHERINFORMATION**

 

Items 1through 3.  NOT APPLICABLE

 

Item 4.             Submission of Matters to a Vote of SecurityHolders

 

(a)                                  The Company held anAnnual Meeting of Shareholders on February 27, 2004.

 

(b)                                 The followingDirectors, all of whom were incumbents, were reelected to the six member Boardat the February 27, 2004 meeting:

 
|                    |   | **FOR**   |   | **WITHHELD** |   |
|-------------------------|--------|-----------|--------|--------------|--------|
|                    |   |      |   |         |   |
| Bruce M. Miller         |   | 3,034,215 |   | 20,680       |   |
| Steven M. Besbeck       |   | 3,034,215 |   | 20,680       |   |
| James R. Helms          |   | 3,034,215 |   | 20,680       |   |
| Lawrence S. Schmid      |   | 3,034,215 |   | 20,680       |   |
| Robert S. Fogerson, Jr. |   | 3,034,215 |   | 20,680       |   |
| Norman R. Cohen         |   | 3,034,215 |   | 20,680       |   |

 

17

----

 

(c)                                  The only other mattervoted upon at the February 27, 2004 Annual Meeting was the ratification ofBDO Seidman, LLP as the Company’s auditors for the fiscal year endingAugust 31, 2004 by a vote of 3,046,715 for, 3,660 against, 4,520abstaining, and 0 non-votes.

 

(d)                                 Notapplicable.

 

Item 5.            NOT APPLICABLE

 
| **Item 6.** | **Exhibits and  Reports on Forms 8-K** |
|-------------|----------------------------------------|
|        |                                   |
| (a)         |                                   | Exhibit 11 - Statement re:  computation of per share earnings. |
|        |                                   |   |
| (b)         |                                   | Exhibit 31.1 Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|        |                                   | Exhibit 31.2 Certification of  Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. |
|        |                                   | Exhibit 32.1 Certification of  Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002. |
|        |                                   | Exhibit 32.2 Certification of  Chief Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002. |
|        |                                   |   |
| (c)         |                                   | There was one report dated  January 14, 2004 filed on Form 8-K during the quarter ended  February 29, 2004 disclosing other information; the Company’s quarterly  earnings release. |

 

 

**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.

 

 
| **CREATIVE COMPUTER APPLICATIONS, INC.** |                |
|------------------------------------------|---------------------|
| (Company)                                |                |
|                                     |                |   |
|                                     |                |   |
| **Date:**                                | April 14, 2004 |   | /S/  Steven M. Besbeck |
|                                     |                |   | Steven. M. Besbeck, President |
|                                     |                |   | Chief Executive Officer, Chief  Financial Officer |
|                                     |                |   |   |
|                                     |                |   |   |
| **Date:**                                | April 14, 2004 |   | /S/  Anahita Villafane |
|                                     |                | Anahita Villafane |
|                                     |                | Controller and Chief  Accounting Officer |

 

18

----