**UNITED STATES SECURITIESAND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

#### **FORM 10-QSB**

#### ** **

**(Mark One)**

 
| **ý**                                                                                                                                                                                                                     |   | **QUARTERLY REPORT UNDER  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                           |   |                                                                                        |
| **For the quarterly period ended May 31, 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 businessissuer 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, California91302**

(Addressof principal executive offices)

 

**(818) 880-6700**

Issuer’stelephone 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 ofJune 30, 2004.

 

Transitional Small Business Disclosure Format(check one):

 

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

 

 

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**FORM 10-QSB**

 

**I N D E X**

 
| **PART I - Financial Information:**                                                                        |   |
|------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                       |   |
| Item 1.  Financial Statements                                                                         |   |
|                                                                                                       |   |
| Condensed Consolidated Balance Sheets at  May 31, 2004 and August 31, 2003                            |   |
|                                                                                                       |   |
| Condensed Consolidated Statements of  Operations for the three months ended May 31, 2004 and May 31, 2003  |   |
|                                                                                                       |   |
| Condensed Consolidated Statements of  Operations for the nine months ended May 31, 2004 and May 31, 2003   |   |
|                                                                                                       |   |
| Condensed Consolidated Statements of Cash  Flows for the nine months ended May 31, 2004 and May 31, 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**                                                                           |   |

 

1

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**CREATIVE COMPUTER APPLICATIONS, INC.**

 

**PART 1 - FINANCIAL INFORMATION**

 

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

#### ** **

#### **CONDENSED CONSOLIDATEDBALANCE SHEETS**

#### ** **

|                                                                                                   |   | **May 31,  2004** |      | **August 31,  *  2003** |   |
|--------------------------------------------------------------------------------------------------------|--------|-------------------|-----------|------------------------------|--------|
|                                                                                                   |   | **(Unaudited)**   |      |                         |   |
| **ASSETS**                                                                                             |   |              |      |                         |   |
|                                                                                                   |   |              |      |                         |   |
| CURRENT ASSETS:                                                                                        |   |              |      |                         |   |
| Cash                                                                                                   |   | $                 | 1,408,460 |                         | $      | 1,075,323 |   |
| Receivables, net                                                                                       |   | 2,001,015         |      | 2,063,311                    |   |
| Inventory                                                                                              |   | 175,082           |      | 164,581                      |   |
| Prepaid expenses and other assets                                                                      |   | 246,230           |      | 231,117                      |   |
| Deferred tax asset                                                                                     |   | 362,850           |      | 362,850                      |   |
|                                                                                                   |   |              |      |                         |   |
| TOTAL CURRENT ASSETS                                                                                   |   | 4,193,637         |      | 3,897,182                    |   |
|                                                                                                   |   |              |      |                         |   |
| PROPERTY AND EQUIPMENT, net                                                                            |   | 185,997           |      | 219,627                      |   |
| INVENTORY OF COMPONENT PARTS                                                                           |   | 222,275           |      | 267,275                      |   |
| CAPITALIZED SOFTWARE COSTS, net of  accumulated amortization of $1,436,417 and $1,114,645              |   | 1,457,726         |      | 1,360,374                    |   |
| DEFERRED TAX ASSET                                                                                     |   | 536,885           |      | 536,885                      |   |
|                                                                                                   |   |              |      |                         |   |
|                                                                                                   |   | $                 | 6,596,520 |                         | $      | 6,281,343 |   |
|                                                                                                   |   |              |      |                         |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                          |   |              |      |                         |   |
|                                                                                                   |   |              |      |                         |   |
| CURRENT LIABILITIES:                                                                                   |   |              |      |                         |   |
| Accounts payable                                                                                       |   | $                 | 309,168   |                         | $      | 207,624 |   |
| Accrued liabilities:                                                                                   |   |              |      |                         |   |
| Vacation pay                                                                                           |   | 233,130           |      | 185,508                      |   |
| Accrued payroll                                                                                        |   | 46,876            |      | 105,768                      |   |
| Other                                                                                                  |   | 139,671           |      | 159,241                      |   |
| Deferred service contract income                                                                       |   | 1,244,031         |      | 1,115,366                    |   |
| Deferred revenue on system sales                                                                       |   | 790,162           |      | 501,507                      |   |
| Capital lease obligation, current portion                                                              |   | —            |      | 361                          |   |
|                                                                                                   |   |              |      |                         |   |
| TOTAL CURRENT LIABILITIES                                                                              |   | 2,763,038         |      | 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                                                                                    |   | (2,359,210        | )         | (2,186,724                   | )      |
|                                                                                                   |   |              |      |                         |   |
| TOTAL SHAREHOLDERS’ EQUITY                                                                        |   | 3,833,482         |      | 4,005,968                    |   |
|                                                                                                   |   |              |      |                         |   |
|                                                                                                   |   | $                 | 6,596,520 |                         | $      | 6,281,343 |   |

 

**See Notes to Condensed Consolidated FinancialStatements.**

 

----

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

 

2

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**CREATIVE COMPUTER APPLICATIONS, INC.**

 

##### **CONDENSED CONSOLIDATEDSTATEMENTS OF OPE**RATIONS

##### ** **

|                                           |   | **Three  Months Ended May 31,** |    |
|------------------------------------------------|--------|---------------------------------|---------|
|                                           |   | **2004**                        |    | **2003** |   |
|                                           |   | **(unaudited)**                 |    |
|                                           |   |                            |    |   |   |
| NET SYSTEM SALES AND SERVICE REVENUE           |   |                            |    |   |   |
| System sales                                   |   | $                               | 799,826 |   | $ | 928,132 |   |
| Service revenue                                |   | 1,089,683                       |    | 1,060,959 |   |
|                                           |   | 1,889,509                       |    | 1,989,091 |   |
|                                           |   |                            |    |   |   |
| COST OF PRODUCTS AND SERVICES SOLD             |   |                            |    |   |   |
| System sales                                   |   | 519,480                         |    | 586,722 |   |
| Service revenue                                |   | 414,698                         |    | 374,173 |   |
|                                           |   | 934,178                         |    | 960,895 |   |
|                                           |   |                            |    |   |   |
| Gross profit                                   |   | 955,331                         |    | 1,028,196 |   |
|                                           |   |                            |    |   |   |
| OPERATING EXPENSES:                            |   |                            |    |   |   |
| Selling, general and administrative            |   | 680,458                         |    | 691,613 |   |
|                                           |   |                            |    |   |   |
| Research and development                       |   | 266,513                         |    | 223,531 |   |
|                                           |   |                            |    |   |   |
| Total operating expenses                       |   | 946,971                         |    | 915,144 |   |
|                                           |   |                            |    |   |   |
| Operating income                               |   | 8,360                           |    | 113,052 |   |
|                                           |   |                            |    |   |   |
| INTEREST AND OTHER INCOME                      |   | 980                             |    | 3,815 |   |
|                                           |   |                            |    |   |   |
| INTEREST EXPENSE                               |   | (208                            | )       | (1,721 | ) |
|                                           |   |                            |    |   |   |
| Income before provision for income taxes       |   | 9,132                           |    | 115,146 |   |
|                                           |   |                            |    |   |   |
| PROVISION FOR INCOME TAXES                     |   | —                          |    | 48,399 |   |
|                                           |   |                            |    |   |   |
| NET INCOME                                     |   | $                               | 9,132   |   | $ | 66,747 |   |
|                                           |   |                            |    |   |   |
| EARNINGS PER COMMON SHARE (Note 2):            |   |                            |    |   |   |
|                                           |   |                            |    |   |   |
| Basic                                          |   | $                               | .00     |   | $ | .02 |   |
| Diluted                                        |   | .00                             |    | .02 |   |
|                                           |   |                            |    |   |   |
| WEIGHTED AVERAGE NUMBER OF SHARES  OUTSTANDING |   |                            |    |   |   |
|                                           |   |                            |    |   |   |
| Basic                                          |   | 3,318,900                       |    | 3,318,900 |   |
| Diluted                                        |   | 3,427,875                       |    | 3,559,335 |   |

 

**See Notes to Condensed Consolidated FinancialStatements.**

 

3

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**CREATIVE COMPUTER APPLICATIONS, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

 
|                                             |   | **Nine  Months Ended May 31** |      |
|--------------------------------------------------|--------|-------------------------------|-----------|
|                                             |   | **2004**                      |      | **2003** |   |
|                                             |   | **(unaudited)**               |      |
|                                             |   |                          |      |   |   |
| NET SYSTEM SALES AND SERVICE REVENUE             |   |                          |      |   |   |
| System sales                                     |   | $                             | 2,099,847 |   | $ | 2,548,457 |   |
| Service revenue                                  |   | 3,236,410                     |      | 3,177,580 |   |
|                                             |   | 5,336,257                     |      | 5,726,037 |   |
|                                             |   |                          |      |   |   |
| COST OF PRODUCTS AND SERVICES SOLD               |   |                          |      |   |   |
| System sales                                     |   | 1,401,446                     |      | 1,691,943 |   |
| Service revenue                                  |   | 1,221,983                     |      | 1,091,679 |   |
|                                             |   | 2,623,429                     |      | 2,783,622 |   |
|                                             |   |                          |      |   |   |
| Gross profit                                     |   | 2,712,828                     |      | 2,942,415 |   |
|                                             |   |                          |      |   |   |
| OPERATING EXPENSES:                              |   |                          |      |   |   |
| Selling, general and administrative              |   | 2,116,964                     |      | 2,058,510 |   |
|                                             |   |                          |      |   |   |
| Research and development                         |   | 768,575                       |      | 662,809 |   |
|                                             |   |                          |      |   |   |
| Total operating expenses                         |   | 2,885,539                     |      | 2,721,319 |   |
|                                             |   |                          |      |   |   |
| Operating income (loss)                          |   | (172,711                      | )         | 221,096 |   |
|                                             |   |                          |      |   |   |
| INTEREST AND OTHER INCOME                        |   | 3,347                         |      | 12,325 |   |
|                                             |   |                          |      |   |   |
| INTEREST EXPENSE                                 |   | (3,122                        | )         | (6,272 | ) |
|                                             |   |                          |      |   |   |
| Income (loss) before provision for income  taxes |   | (172,486                      | )         | 227,149 |   |
|                                             |   |                          |      |   |   |
| PROVISION FOR INCOME TAXES                       |   | —                        |      | 95,556 |   |
|                                             |   |                          |      |   |   |
| NET INCOME (LOSS)                                |   | $                             | (172,486  | ) | $ | 131,593 |   |
|                                             |   |                          |      |   |   |
| EARNINGS (LOSS) PER COMMON SHARE (Note 2):       |   |                          |      |   |   |
| Basic                                            |   | $                             | (.05      | ) | $ | .04 |   |
| Diluted                                          |   | (.05                          | )         | .04 |   |
|                                             |   |                          |      |   |   |
| WEIGHTED AVERAGE NUMBER OF SHARES  OUTSTANDING   |   |                          |      |   |   |
|                                             |   |                          |      |   |   |
| Basic                                            |   | 3,318,900                     |      | 3,285,844 |   |
| Diluted                                          |   | 3,318,900                     |      | 3,494,041 |   |

 

**See Notes to Condensed Consolidated FinancialStatements.**

 

4

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**CREATIVE COMPUTER APPLICATIONS, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

 

**Increase (Decrease) in Cash**

 
|                                                                                      |   | **Nine  Months Ended May 31** |      |
|-------------------------------------------------------------------------------------------|--------|-------------------------------|-----------|
|                                                                                      |   | **2004**                      |      | **2003** |   |
|                                                                                      |   | **(unaudited)**               |      |
|                                                                                      |   |                          |      |   |   |
| OPERATING ACTIVITIES:                                                                     |   |                          |      |   |   |
| Net income (loss)                                                                         |   | $                             | (172,486  | ) | $ | 131,593 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |   |                          |      |   |   |
| Depreciation and amortization                                                             |   | 88,599                        |      | 121,431 |   |
| Amortization of capitalized software costs                                                |   | 321,772                       |      | 319,599 |   |
| Provision for doubtful accounts                                                           |   | 10,000                        |      | 4,987 |   |
| Deferred tax provision                                                                    |   | —                        |      | 95,556 |   |
| Increase (decrease) from changes in:                                                      |   |                          |      |   |   |
| Receivables                                                                               |   | 52,296                        |      | (283,186 | ) |
| Inventories                                                                               |   | 34,499                        |      | 47,671 |   |
| Prepaid expenses and other assets                                                         |   | (15,113                       | )         | (92,390 | ) |
| Accounts payable                                                                          |   | 101,544                       |      | 112,464 |   |
| Accrued liabilities                                                                       |   | (30,840                       | )         | (309,853 | ) |
| Deferred revenues                                                                         |   | 417,320                       |      | 301,317 |   |
|                                                                                      |   |                          |      |   |   |
| Net cash provided by operating activities                                                 |   | 807,591                       |      | 449,189 |   |
|                                                                                      |   |                          |      |   |   |
| INVESTING ACTIVITIES                                                                      |   |                          |      |   |   |
| Additions to property and equipment                                                       |   | (54,969                       | )         | (97,669 | ) |
| Additions to capitalized software costs                                                   |   | (419,124                      | )         | (342,000 | ) |
|                                                                                      |   |                          |      |   |   |
| Net cash used in investing activities                                                     |   | (474,093                      | )         | (439,669 | ) |
|                                                                                      |   |                          |      |   |   |
| FINANCING ACTIVITIES:                                                                     |   |                          |      |   |   |
| Payments on capital lease obligations                                                     |   | (361                          | )         | (17,063 | ) |
| Proceeds from issuance of stock and  exercises of stock options                           |   | —                        |      | 48,649 |   |
|                                                                                      |   |                          |      |   |   |
| Net cash provided by (used in) financing  activities                                      |   | (361                          | )         | 31,586 |   |
|                                                                                      |   |                          |      |   |   |
| NET INCREASE IN CASH                                                                      |   | 333,137                       |      | 41,106 |   |
|                                                                                      |   |                          |      |   |   |
| Cash, beginning of period                                                                 |   | 1,075,323                     |      | 1,027,810 |   |
|                                                                                      |   |                          |      |   |   |
| Cash, end of period                                                                       |   | $                             | 1,408,460 |   | $ | 1,068,916 |   |

 

**See Notes to Condensed Consolidated FinancialStatements.**

 

5

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**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 May 31, 2004, the results of its operations for the three andnine month periods ended May 31, 2004 and May 31, 2003, and cash flows for thenine months ended May 31, 2004 and May 31, 2003.  These results have been determined on the basis of accountingprinciples generally accepted in the United States of America and practicesapplied consistently with those used in preparation of the Company’s AnnualReport on Form 10-KSB for the fiscal year ended August 31, 2003.

 

The results of operations for the three and nine months endedMay 31, 2004 are not necessarily indicative of the results expected for anyother 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 are computed by dividing income or loss available to commonshareholders by the weighted average number of common shares outstanding forthe reporting period.  Diluted earningsper share reflect the potential dilution that could occur if securities orother contracts, such as stock options, to issue common stock were exercised orconverted into common stock.

 

Earnings per share has been computed asfollows:

 
|                                                          |   | **Three  Months  Ended  May 31, 2004** |   | **Nine  Months  Ended  May 31, 2004** |   | **Three  Months  Ended  May 31, 2003** |   | **Nine  Months  Ended  May 31, 2003** |   |
|---------------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                          |   |                                   |   |                                  |   |                                   |   |                                  |   |
| NET INCOME (LOSS)                                             |   | $                                      | 9,132  |                                  | $      | (172,486                               | )      | $                                     | 66,747 |   | $ | 131,593 |   |
| Basic weighted average number of common  shares outstanding   |   | 3,318,900                              |   | 3,318,900                             |   | 3,318,900                              |   | 3,285,844                             |   |
| Dilutive effect of stock options                              |   | 108,975                                |   | —                                |   | 240,435                                |   | 208,197                               |   |
| Diluted weighted average number of common  shares outstanding |   | 3,427,875                              |   | 3,318,900                             |   | 3,559,335                              |   | 3,494,041                             |   |
| Basic earnings (loss) per share                               |   | $                                      | .00    |                                  | $      | (.05                                   | )      | $                                     | .02    |   | $ | .04 |   |
| Diluted earnings (loss) per share                             |   | $                                      | .00    |                                  | $      | (.05                                   | )      | $                                     | .02    |   | $ | .04 |   |

 

For the three and nine months ended May 31,2004, options to purchase 30,000 and 405,000 shares, respectively, of commonstock at a per share price ranging from $.72 to $1.76 were not included in thecomputation of diluted loss per share because inclusion would have beenanti-dilutive.  For the three and ninemonths ended May 31, 2003, all options were included in dilutive calculation.

 

**Note 3.**                   The Company’s line of credit with its bankprovides for $500,000 on a revolving basis through February 1, 2005.  On May 31, 2004, there were no amountsoutstanding 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,

 

6

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issued to non-employees, the fair value ofthe equity instruments or the fair value of the consideration received,whichever is more readily determinable, is used to determine the value ofservices or goods received and the 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  EndedMay 31, 2004** |   | **Nine  Months  EndedMay 31, 2004** |   | **Three  Months  EndedMay 31, 2003** |   | **Nine  Months  EndedMay 31, 2003** |   |
|----------------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                                                                                                     |   |                                 |   |                                |   |                                 |   |                                |   |
| Net income (loss), as reported                                                                           |   | $                                    | 9,132  |                                | $      | (172,486                             | )      | $                                   | 66,747 |   | $ | 131,593 |   |
|                                                                                                     |   |                                 |   |                                |   |                                 |   |                                |   |
| Less: total stock based employee compensation  expense determined under fair value method for all awards |   | (16,835                              | )      | (50,505                             | )      | (5,931                               | )      | (22,262                             | )      |
|                                                                                                     |   |                                 |   |                                |   |                                 |   |                                |   |
| Pro forma net income (loss)                                                                              |   | $                                    | (7,703 | )                                   | $      | (222,991                             | )      | $                                   | 60,816 |   | $ | 109,331 |   |
|                                                                                                     |   |                                 |   |                                |   |                                 |   |                                |   |
| Basic net earnings (loss) per share, as  reported                                                        |   | $                                    | .00    |                                | $      | (.05                                 | )      | $                                   | .02    |   | $ | .04 |   |
| Basic net earnings (loss) per share, pro  forma                                                          |   | $                                    | .00    |                                | $      | (.07                                 | )      | $                                   | .02    |   | $ | .03 |   |
| Diluted net earnings (loss) per share, as  reported                                                      |   | $                                    | .00    |                                | $      | (.05                                 | )      | $                                   | .02    |   | $ | .04 |   |
| Diluted net earnings (loss) per share, pro  forma                                                        |   | $                                    | .00    |                                | $      | (.07                                 | )      | $                                   | .02    |   | $ | .03 |   |

 

The Company issues all its options at fairmarket value at the time of grant, therefore, no expense has been recordedunder the intrinsic value method for the three and nine months ended May 31,2004 and 2003.  As required by SFAS 123,the Company provides the following disclosure of estimated values for theseawards:  The fair value of each optionwas estimated on the date of grant using a Black-Scholes option-pricing modelwith the following weighted average assumptions for 2004 and 2003: risk freeinterest rates ranging from 3.8% to 6.1%, expected lives of 5 years; volatilityranging from 67% to 126% and no assumed dividends.  The weighted-average grant-date fair value of options grantedduring 2003 was estimated to be $1.25. There were no options granted in the three months ended May 31, 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

 

7

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party’sactivities under the agreement.  Theseindemnification provisions often include indemnifications relating torepresentations made by the Company with regard to intellectual propertyrights.  These indemnificationprovisions generally survive termination of the underlying agreement.  The maximum potential amount of futurepayments the Company could be required to make under these indemnificationprovisions cannot be estimated.  TheCompany maintains general liability, errors and omissions, and professionalliability insurance in order to mitigate such risks.  The Company has not incurred material costs to defend lawsuits orsettle claims related to these indemnification agreements.  As a result, the Company believes theestimated exposure under these agreements is minimal.  Accordingly, the Company has not recorded any relatedliabilities.

 

**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 inTopic 13 of the codification of staff accounting bulletins (SAB 103codification) in order to make the guidance consistent with currentauthoritative accounting literature. The principal revisions relate to the incorporation of certain sectionsof the staff’s FAQ document on revenue recognition into Topic 13.  SAB 104 did not have a material effect onthe Company’s financial statements.

 

In November 2002, the EITF reached aconsensus on EITF 00-21, “Revenue Arrangements with Multiple Deliverables,”related to the separation and allocation of consideration for arrangements thatinclude multiple deliverables.  The EITFrequires that when the deliverables included in this type of arrangement meetcertain criteria 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 00-21 does not have a material impact on theCompany’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 tothe Risk Factors set forth below.  Wedisclaim any obligation to update our forward-looking statements

 

###### **Overview**

 

CCA generates revenues from the sale of itsClinical Information Systems (CIS), which includes the licensing of proprietaryapplication software, the licensing of third party software, and the sale ofservers upon which the application software operates.  In connection with its sales of CIS products, the Companyprovides implementation services for the installation, integration, andtraining of end users’ personnel.  TheCompany generates sales of ancillary software and hardware, including its dataacquisition products, to its CIS clients and to third parties.  The Company also generates recurringrevenues from the provision of comprehensive post implementation services toits 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.

 

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CCA’s results of operations for thenine-month period ended May 31, 2004 were marked by a decrease in sales overthe comparable period in 2003 and a decrease in earnings.  For the third fiscal quarter ended May 31,2004, revenues were below the comparable quarter of fiscal 2003.  The Company’s decrease in revenues for thethree and nine-month period was due to a number of factors.  The primary factor was a transition to a newversion of our core product, 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, second, and thirdfiscal quarters of 2004.  Typically,sales cycles 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 (LIS) due totiming issues and the need to complete HIPAA related upgrades to its existingproducts and deliver them to its clients. During the fourth fiscal quarter of 2003, CCA had substantiallycompleted CyberLAB 7.0 and began to install the new software in its initialbeta site for testing and evaluation. The Company began releasing CyberLAB 7.0 to its client base beginningJanuary 1, 2004.  As ofJune 30, 2004, CyberLAB 7.0 was live in four sites and six additional newsites were being implemented.  Inaddition, new sales and marketing activities were increasing CCA’s pipeline ofpotential new CyberLAB 7.0 related transactions.  CyberLAB 7.0 has generated significant interest among new buyersas well as CCA’s installed client base. Management believes the industry and the market for healthcareinformation technology products continues to improve.  The market is experiencing a renewed interest in clinicalapplications that is being fueled by the demand for new technology thataddresses compliance issues as well as patient care and safety issues.  According to available information there aremany older LIS systems that are projected to be replaced over the next fewyears due to industry consolidation and the phase out of older systems nolonger being marketed.  Many of the newtransactions that the Company is working on are related to replacing such systems.

 

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  EndedMay 31, 2004** |   | **Nine  Months  EndedMay 31, 2004** |   | **Three  Months  EndedMay 31, 2003** |   | **Nine  Months  EndedMay 31, 2003** |   |
|--------------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
| Revenues:                                        |   |                                 |   |                                |   |                                 |   |                                |   |
| System sales                                     |   | 42.3                                 | %      | 39.4                                | %      | 46.7                                 | %      | 44.5                                | %      |
| Service revenues                                 |   | 57.7                                 |   | 60.6                                |   | 53.3                                 |   | 55.5                                |   |
|                                             |   |                                 |   |                                |   |                                 |   |                                |   |
| Total revenues                                   |   | 100.0                                |   | 100.0                               |   | 100.0                                |   | 100.0                               |   |
|                                             |   |                                 |   |                                |   |                                 |   |                                |   |
| Cost of products and services sold:              |   |                                 |   |                                |   |                                 |   |                                |   |
| System sales                                     |   | 27.5                                 |   | 26.3                                |   | 29.5                                 |   | 29.5                                |   |
| Service revenues                                 |   | 21.9                                 |   | 22.9                                |   | 18.8                                 |   | 19.1                                |   |
|                                             |   |                                 |   |                                |   |                                 |   |                                |   |
| Total cost of products and services              |   | 49.4                                 |   | 49.2                                |   | 48.3                                 |   | 48.6                                |   |
| Gross profit                                     |   | 50.6                                 |   | 50.8                                |   | 51.7                                 |   | 51.4                                |   |
| Operating expenses:                              |   |                                 |   |                                |   |                                 |   |                                |   |
| Selling, general and administrative              |   | 36.0                                 |   | 39.7                                |   | 34.8                                 |   | 35.9                                |   |
| Research and development                         |   | 14.1                                 |   | 14.4                                |   | 11.2                                 |   | 11.6                                |   |
| Total operating expenses                         |   | 50.1                                 |   | 54.1                                |   | 46.0                                 |   | 47.5                                |   |
| Operating income (loss)                          |   | 0.5                                  |   | (3.3                                | )      | 5.7                                  |   | 3.9                                 |   |
|                                             |   |                                 |   |                                |   |                                 |   |                                |   |
| Income (loss) before provision for income  taxes |   | 0.5                                  |   | (3.2                                | )      | 5.8                                  |   | 4.0                                 |   |
| Provision for income taxes                       |   | —                               |   | —                              |   | 2.4                                  |   | 1.7                                 |   |
|                                             |   |                                 |   |                                |   |                                 |   |                                |   |
| Net income (loss)                                |   | 0.5                                  |   | (3.2                                | )      | 3.4                                  |   | 2.3                                 |   |

 

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Sales for the third fiscal quarter ending May31, 2004 decreased by $99,582 or 5.01%, as compared to the same quarter offiscal 2003.  For the nine-month periodended May 31, 2004, sales decreased $389,780 or 6.8% compared to the sameperiod in fiscal 2003.  When analyzed byproduct category for the quarter, sales of CIS products decreased  $103,649 or 13.1% and sales of dataacquisition products decreased $25,603 or 19.4%, when compared to the samequarter of fiscal 2003.  The decreaseswere partially offset by increases in sales of service revenues of $28,724 or2.7%, and other revenues of $946 or 38.7%. When analyzed by product category for the nine-month period, sales ofCIS products decreased $382,882 or 16.9%, sales of data acquisition productsdecreased by $61,209 or 22.4%, and other revenues decreased $4,519 or28.4%.  These decreases were partiallyoffset by an increase in service revenues of $58,830 or 1.9% as compared to thesame period of fiscal 2003.  Thedecrease in sales of CIS products for the nine-month period was primarilyattributable to a transition to a new version of CyberLAB 7.0 that impactedsales of the previous product version, delays associated with closing newtransactions, market conditions, and the industry’s preoccupation with issuesrelated to HIPAA as discussed more fully above.  The Company began to experience increased sales activity of thenew version of CyberLAB 7.0 in the second fiscal quarter of 2004.

 

Due to timing issues, the Company closed somesales of CIS products toward the end of its third quarter, which createdimplementation delays and therefore increased the backlog of installations anddelayed the recognition of revenue to subsequent periods.  Such delays as discussed above and elsewherein this report are common to the Company’s business.  The increase in service revenues for the quarter and nine-monthperiod was due to a greater number of client accounts under contract and anincrease in the average fees charged for such contracts.  Service revenues are expected to continue toincrease as and when the Company’s installed base of CIS installationsincreases.

 

The Company 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.  The Company’s future operating results willcontinue to be subject to quarterly variations based upon a wide variety offactors, including the volume mix and timing of orders received during anyquarter, and the temporary delays in the closing of new CIS sales.  In addition, the Company’s revenuesassociated with CIS sales may be delayed due to client related issues such asclient staff availability for training, IT infrastructure readiness, and theperformance of third party contractors, all of which are issues outside of thecontrol of CCA.

 

Cost of sales for the third quarter andnine-month period ended May 31, 2004 decreased by $26,717 or 2.8% and $160,193or 5.8%, respectively, as compared to the same periods of fiscal 2003.  For the quarter and nine-month period, thedecrease in cost of sales was primarily attributable to a decrease in materialcosts of $22,772 or 12.3% and $202,985

 

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or 37.6%, respectively, and a decrease inother costs of $58,963 or 15.4% and $90,572 or 8.7%, respectively.  Such decreases were partially offset by anincrease in labor costs, for the quarter and nine-month period, of $55,018 or14.0% and $133,364 or 11.1%, respectively. The decrease in material costs was attributable to the decrease in salesof CIS products discussed above.  Theincrease in labor costs was attributable to hiring additional personnel for theCompany’s support and implementation departments.  The decrease in other costs of sales was attributable todecreased expenses in travel and training. For the current quarter and nine-month period, cost of sales as a percentageof sales was 49% respectively, as compared to 48% and 49%, respectively, forthe comparable 2003 fiscal quarter and nine month period The overall percentagedecrease in cost of sales, as a percentage of sales, in the current quarter wasattributable to a reduced number of sales of CIS products.  The Company could potentially experiencequarterly variations in gross margin as a result of the factors discussedabove.

 

Selling, general, and administrative expensesdecreased $11,155 or 1.6% as compared to the same quarter of fiscal 2003.  For the nine-month period ended May 31, 2004,selling, general, and administrative expenses increased $58,454 or 2.8% ascompared to the same period of fiscal 2003. The decrease in the current quarter of selling, general, andadministrative expenses was primarily due to decreased expenses in travelincurred in the quarter.  The increasesin selling, general, and administrative expenses for the nine-month period weredue to increased expenses related to trade shows and increases in overall salesand marketing expenditures.  The Companyplans to continue its investment in sales and marketing activities; however,the Company plans to monitor and keep a tight reign on its expenditures infiscal 2004.

 

Research and development expenses increased$42,982 or 19.2% and $105,766 or 16.0%, respectively, for the current quarterand nine-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 third quarters of 2004 and 2003, the Company capitalized softwarecosts of $135,000 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 underdevelopment.  Management anticipates itsoverall research and development activities will increase in fiscal 2004 due toplanned personnel additions in product engineering.

 

For the quarter and nine-month period endedMay 31, 2004, the Company did not record a tax provision compared to taxprovisions of $48,399 and $95,556, respectively, recorded for the same periodsof fiscal 2003 due to the level of taxable income.  The Company believes that it is more likely than not that the netdeferred tax asset of $899,735 will be realized in future periods.

 

As a result of the factors discussed above,the Company earned income of $9,132 or basic and diluted earnings per share of$.00 for the current quarter compared to net income of $66,747 or basic anddiluted earnings per share of $.02 for the same quarter of fiscal 2003.  For the nine-month period ended May 31,2004, the Company incurred a net loss of $172,486 or basic and diluted loss pershare of $.05 compared to net income of $131,593 or basic and diluted earningsper share of $.04 for the same period in fiscal 2003.

 

### **CapitalResources 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 $419,124 and $342,000 in software development during the nine-monthperiods ended May 31, 2004 and May 31, 2003, respectively.  These expenditures related to HIPAA relatedenhancements to all its products, and the new browser version of the Company’sLIS product, CyberLAB 7.0, and other product enhancements.  The Company anticipates expending additionalsums during fiscal 2004 on product enhancements to all its products and thefurther development of the new browser version of the Company’s CyberLAB 7.0product.  During the nine-month periodended May 31, 2004, the Company invested an aggregate of $54,969 in additionsto fixed assets, primarily consisting of computers and software, as compared toan investment of $97,669 in the comparable period of fiscal 2003.

 

As of May 31, 2004, the Company’s workingcapital amounted to $1,430,599 compared to $1,621,807 as of August 31,2003.  The Company’s current ratio was1.5 at May 31, 2004, compared to 1.7 at August 31, 2003.  At May 31, 2004, the Company’s creditfacilities with its bank consisted of a revolving line of credit of $500,000,of which there were no amounts outstanding. The bank credit agreement expires on February 1, 2005.

 

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Cash flows from operating activities were$807,591 for the nine months ended May 31, 2004, compared to $449,189 for thecomparable period of fiscal 2003.  Theincrease in cash flow from operating activities was primarily attributable tothe net change in accrued liabilities, receivables, and the increase indeferred revenues during the nine months ended May 31, 2004.

 

Net cash used in investing activities totaled$474,093 for the nine months ended May 31, 2004, compared to $439,669 used ininvesting 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 nine months ended May 31, 2004, compared to $31,586 provided inthe same period of fiscal 2003.  Thechange from fiscal 2003 to fiscal 2004 resulted primarily from the Companyhaving paid off its capital lease obligations in fiscal 2004 and exercises ofstock 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 operating cashflow amounted to $807,591 to fund its operations during the nine months endedMay 31, 2004.  Management believes thatits sales pipeline is adequate to produce sufficient operating cash flow in the2004 fiscal year, and that its projected cash flow from operations, togetherwith its bank credit facilities, should be sufficient to fund its workingcapital requirements for its 2004 fiscal year. However, an unanticipated decline in sales or continued delays inclosing new transactions, delays in implementations where payments are tied todelivery and/or performance of services, or cancellations of contracts couldhave a negative effect on cash flow from operations and could in turn createshort-term liquidity problems.  If suchevents were to occur the Company may have to seek alternative financing.

 

### **Seasonality,Inflation and Industry Trends**

 

The Company’s sales are generally 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 toinflationary pressures.  Managementbelieves that most phases of the healthcare segment of the computer industrywill continue to be highly competitive, and that potential healthcare reformsincluding those promulgated by HIPAA may have a long-term positive impact onits business.  With respect to thecompliance issues brought about by HIPAA, the Company has invested heavily innew application modules to assist its clients in meeting their regulatorygoals.  Management also believes thatthe technology investments made and resident in CyberLAB 7.0 are key sellingpoints and will provide a competitive advantage.  In addition, management believes that the healthcare informationtechnology industry will be marked with more significant technologicaladvances, which will improve the quality of service and reduce costs.  The Company is poised to meet thesechallenges by continuing to employ new technologies when they become available,diversifying its product offerings, improving and expanding its services, andby constantly enhancing its software applications.

 

### **CriticalAccounting 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

 

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inventory is valued at the lower of cost topurchase or the current estimated market value of the inventory items.  Inventory is evaluated on a continual basisand adjustments to recorded costs are made based on management’s estimate offuture sales value, or in the case of the long-term component inventory, onmanagement’s estimation of the usage of specific inventory items and netrealizable value.  Management reviewsinventory quantities on hand and makes determination of the excess or obsoleteitems in the inventory, which, are specifically reserved.  In addition, adjustments are made for thedifference between the cost of the inventory and the estimated market value andcharged to operations in the period in which the facts that give rise to theadjustments become known.  At May 31,2004 and August 31, 2003, the inventory reserve was $121,273 and $76,273,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 becomeknown.  The accounts receivable balanceat May 31, 2004 was $2,001,015, net of an allowance for doubtful accounts 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” andSAB 104 “Revenue Recognition”.  SOP No97-2, as amended, generally requires revenue earned on software arrangementsinvolving multiple-elements to be allocated to each element based on therelative 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 the pricesfor these elements when they are sold separately from the software.  At May 31, 2004 and August 31, 2003,deferred revenue was $790,162 and $501,507, 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.  At May 31,2004 and August 31, 2003, deferred service contract income was $1,244,031and $1,115,366, 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 ninemonths ended May 31, 2004 and May 31, 2003, the Company capitalized $419,124and $342,000, respectively.  At May 31,2004, the balance of capitalized software costs were $1,457,726, net ofaccumulated amortization of $1,436,417.

 

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 financial statements.  The Company has reported a net deferred taxasset on its Consolidated Balance

 

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Sheet, after deduction of the relatedvaluation allowance, which has been determined on the basis of management’sestimation of the likelihood of realization of the gross deferred taxasset.  The deferred tax asset, net ofvaluation allowance, is $899,735 at May 31, 2004, which management believes isrealizable.

 

### **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 to us.  Additionally, we cannot determine if otherfirms are conducting potentially competitive research, which could result inthe development and introduction of products that are either comparable orsuperior to the products we sell. Further, new product introductions, product enhancements and the use ofother technologies by our competitors could lead to a loss of market acceptanceand cause a decline in sales or gross margins.

 

***CCA’s success depends on its ability 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, our industry.  We do not have employment agreements withmost of our key employees.  However, wegenerally enter into agreements with our employees regarding patents,confidentiality and related matters.  Wedo 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 orwhich eliminate jobs through automation. We can make no assurance that the market will accept our future productsand systems, or that sales of our future products 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, unpatented technologyor proprietary knowledge will

 

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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.

 

*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 technologyindustry in recent years has been characterized by consolidation by bothhealthcare providers who are our clients and by those companies that we competeagainst.  Large hospital chains andgroups of affiliated hospitals prefer to negotiate comprehensive contracts forall of their system needs with larger vendors who offer broader product linesand services.  The 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 InsurancePortability and Accountability Act (HIPAA)***

 

Our business issubstantially impacted by the requirements of HIPAA and our products mustmaintain the confidentiality of a patents medical records and information.  These requirements also apply to most of ourclients.  We believe our products meetthe standards of HIPAA and may require our clients to upgrade their systems,but our clients’ preoccupation with HIPAA may adversely impact sales of ourproducts, and the costs of compliance with HIPAA could have an impact on ourproduct margins and selling, general and administrative expenses incurred by usand could negatively impact our net income.

 

### **New Accounting Pronouncements**

 

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

 

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staff’s FAQ document on revenue recognitioninto Topic 13.  SAB 104 did not have amaterial effect on the 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 00-21 doesnot have a material impact on the Company’s financial statements at this time.

 

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

 

(a)  Evaluation of DisclosureControls and Procedures.  TheCompany’s Chief Executive Officer and its Chief Accounting Officer, with theparticipation of the Company’s management, carried out an evaluation of theeffectiveness of the Company’s disclosure controls and procedures pursuant toExchange Act Rules 13a-15(e).  Basedupon that evaluation, the Chief Executive Officer and the Chief AccountingOfficer believe that as of the end of the period covered by this report, theCompany’s disclosure controls and procedures are adequate and effective inmaking known to them material information relating to the Company (includingits consolidated subsidiary) required to be included in the report.

 

(b)  Changes in InternalControls. There were no significant changes in the Company’s internalcontrols or in other factors that could significantly affect the Company’sdisclosure controls and procedures subsequent to the Evaluation Date, nor anysignificant deficiencies or material weaknesses in such disclosure controls andprocedures 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**

 

Items1 through 5.  NOT APPLICABLE

 

**Item 6.****  ****Exhibits and Reports onForms 8-K**

 

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

 

(b)           Exhibit 31.1 Certification of ChiefExecutive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

Exhibit 31.2 Certification of ChiefAccounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

Exhibit 32.1 Certification of Chief ExecutiveOfficer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.2 Certification of ChiefAccounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of2002.

 

(c)           There was one report dated April 14,2004 filed on Form 8-K during the quarter ended May 31, 2004 disclosing otherinformation, the Company’s quarterly earnings release.

 

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**SIGNATURES**

 

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

 
| **CREATIVE COMPUTER APPLICATIONS, INC.** |               |                                              |   |
|------------------------------------------|--------------------|---------------------------------------------------|--------|
| (Company)                                |               |                                              |
|                                     |               |                                              |
|                                     |               |                                              |
| **Date:**                                | July 15, 2004 |                                              |   | /S/  Steven M. Besbeck |   |
|                                     |               | Steven. M. Besbeck, President                     |
|                                     |               | Chief Executive Officer, Chief  Financial Officer |
|                                     |               |                                              |
|                                     |               |                                              |
| **Date:**                                | July 15, 2004 |                                              |   | /S/  Anahita Villafane |
|                                     |               | Anahita Villafane                                 |
|                                     |               | Controller and Chief  Accounting Officer          |
|                                          |                    |                                                   |        |  |  |  |

 

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