** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

 

**FORM 10-QSB**

 

 

**(MarkOne)**

 
| **ý** | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 31,  2002**                                                                                                                                                                                                                             |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                                                                                                                                            |
| **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 issueras 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:

 

 

Check whether the Issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes   ý  No   o

 

State the number of shares outstanding of each of theissuer’s classes of common equity, as of the latest practicable date:  3,266,400 common shares as of July 12, 2002.

 

Transitional Small Business Disclosure Format (checkone):

Yes   o  No   ý

 

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**CREATIVECOMPUTER APPLICATIONS, INC.**

 

**FORM 10-QSB**

 

 

 

**I N D E X**

 

 
| **PART I - Financial  Information:**                                                                       |   |   |
|------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                       |   |   |
| Condensed  Consolidated Balance Sheets at May 31, 2002 and August 31, 2001                                 |   |   |
|                                                                                                       |   |   |
| Condensed  Consolidated Statements of Operations for the three months ended May 31, 2002  and May 31, 2001 |   |   |
|                                                                                                       |   |   |
| Condensed  Consolidated Statements of Operations for the nine months ended May 31, 2002  and May 31, 2001  |   |   |
|                                                                                                       |   |   |
| Condensed  Consolidated Statements of Cash Flows for the nine months ended May 31, 2002  and May 31, 2001  |   |   |
|                                                                                                       |   |   |
| Notes  to Condensed Consolidated Financial Statements                                                      |   |   |
|                                                                                                       |   |   |
| Management’s  Discussion and Analysis of Results of Operations and Financial Condition                |   |   |
|                                                                                                       |   |   |
| **PART II - Other Information:**                                                                           |   |   |
|                                                                                                       |   |   |
| Items 1 through 6                                                                                          |   |   |
|                                                                                                       |   |   |
| Signatures                                                                                                 |   |   |

 

 

2

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**CREATIVECOMPUTER APPLICATIONS, INC.**

 

**PART1 - FINANCIAL INFORMATION**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 

 
| ** **                                                                                              | ** ** | **May 31,  2002** | ** ** | **August 31,  2001** | *****  |
|---------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------|--------|
|                                                                                                    |       | **(Unaudited)**   |       |                 |   |
| **ASSETS**                                                                                              |       |              |       |                 |   |
|                                                                                                    |       |              |       |                 |   |
| CURRENT ASSETS:                                                                                         |       |              |       |                 |   |
| Cash                                                                                                    |       | $                 | 640,723    |                 | $      | 661,008 |   |
| Receivables,  net                                                                                       |       | 2,025,898         |       | 1,209,872            |   |
| Inventories                                                                                             |       | 194,868           |       | 233,737              |   |
| Prepaid expenses  and other assets                                                                      |       | 153,293           |       | 142,219              |   |
| Deferred tax  asset                                                                                     |       | 639,500           |       | 639,500              |   |
|                                                                                                    |       |              |       |                 |   |
| TOTAL CURRENT  ASSETS                                                                                   |       | 3,654,282         |       | 2,886,336            |   |
|                                                                                                    |       |              |       |                 |   |
| PROPERTY AND  EQUIPMENT, net                                                                            |       | 274,105           |       | 398,179              |   |
| INVENTORY OF  COMPONENT PARTS                                                                           |       | 261,496           |       | 306,496              |   |
| CAPITALIZED  SOFTWARE COSTS, net of accumulated amortization of $1,311,292 and $999,331                 |       | 1,360,792         |       | 1,337,472            |   |
| INTANGIBLES, net                                                                                        |       | 55,400            |       | 104,744              |   |
| DEFERRED TAX  ASSET                                                                                     |       | 438,324           |       | 591,000              |   |
| OTHER ASSETS                                                                                            |       | 2,427             |       | 13,796               |   |
|                                                                                                    |       |              |       |                 |   |
| TOTAL ASSETS                                                                                            |       | $                 | 6,046,826  |                 | $      | 5,638,023 |   |
|                                                                                                    |       |              |       |                 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                          |       |              |       |                 |   |
|                                                                                                    |       |              |       |                 |   |
| CURRENT  LIABILITIES:                                                                                   |       |              |       |                 |   |
| Notes payable to  bank (Note 4)                                                                         |       | $                 | —     |                 | $      | 239,351 |   |
| Accounts payable                                                                                        |       | 219,423           |       | 216,087              |   |
| Accrued  liabilities:                                                                                   |       |              |       |                 |   |
| Vacation  pay                                                                                           |       | 169,485           |       | 159,290              |   |
| Other                                                                                                   |       | 276,111           |       | 275,790              |   |
| Deferred service  contract income                                                                       |       | 939,718           |       | 831,873              |   |
| Deferred revenue                                                                                        |       | 774,714           |       | 474,091              |   |
| Capital  lease obligation, current portion                                                              |       | 22,750            |       | 22,750               |   |
|                                                                                                    |       |              |       |                 |   |
| TOTAL CURRENT  LIABILITIES                                                                              |       | 2,402,201         |       | 2,219,232            |   |
|                                                                                                    |       |              |       |                 |   |
| CAPITAL LEASE                                                                                           |       | 6,048             |       | 23,111               |   |
|                                                                                                    |       |              |       |                 |   |
| TOTAL LIABILITIES                                                                                       |       | 2,408,249         |       | 2,242,343            |   |
|                                                                                                    |       |              |       |                 |   |
| SHAREHOLDERS’  EQUITY:                                                                             |       |              |       |                 |   |
| Common shares, no  par value; 20,000,000 shares authorized; 3,266,400 and 3,221,025 shares  outstanding |       | 6,144,041         |       | 6,108,164            |   |
| Accumulated  deficit                                                                                    |       | (2,505,464        | )          | (2,712,484           | )      |
|                                                                                                    |       |              |       |                 |   |
| TOTAL  SHAREHOLDERS’ EQUITY                                                                        |       | 3,638,577         |       | 3,395,680            |   |
|                                                                                                    |       |              |       |                 |   |
| TOTAL  LIABILITIES & SHAREHOLDERS’ EQUITY                                                      |       | $                 | 6,046,826  |                 | $      | 5,638,023 |   |

 

 

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

 

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

** **

 

3

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**CREATIVECOMPUTER APPLICATIONS, INC.**

 

##### **CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

 

 
|                                           |   | **Three  Months Ended May 31** |      |
|------------------------------------------------|--------|--------------------------------|-----------|
|                                           |   | **2002**                       |      | **2001** |   |
|                                           |   | **(unaudited)**                |      |
| NET SYSTEM SALES  AND SERVICE REVENUE (Note 3) |   |                           |      |   |   |
| System sales                                   |   | $                              | 1,063,801 |   | $ | 729,101 |   |
| Service revenues                               |   | 1,038,421                      |      | 897,720 |   |
|                                           |   | 2,102,222                      |      | 1,626,821 |   |
|                                           |   |                           |      |   |   |
| COST OF PRODUCTS  AND SERVICES SOLD            |   |                           |      |   |   |
| System sales                                   |   | 587,369                        |      | 446,938 |   |
| Service revenue                                |   | 383,746                        |      | 394,750 |   |
|                                           |   | 971,115                        |      | 841,688 |   |
|                                           |   |                           |      |   |   |
| Gross profit                                   |   | 1,131,107                      |      | 785,133 |   |
|                                           |   |                           |      |   |   |
| OPERATING  EXPENSES:                           |   |                           |      |   |   |
| Selling, general  and administrative           |   | 693,531                        |      | 557,873 |   |
|                                           |   |                           |      |   |   |
| Research and  development                      |   | 229,208                        |      | 194,438 |   |
|                                           |   |                           |      |   |   |
|                                           |   | 922,739                        |      | 752,311 |   |
|                                           |   |                           |      |   |   |
| Operating income                               |   | 208,368                        |      | 32,822 |   |
|                                           |   |                           |      |   |   |
| INTEREST AND  OTHER INCOME                     |   | 1,604                          |      | 7,838 |   |
|                                           |   |                           |      |   |   |
| INTEREST EXPENSE                               |   | (3,432                         | )         | (7,435 | ) |
|                                           |   |                           |      |   |   |
| Income before  taxes on income                 |   | 206,540                        |      | 33,225 |   |
|                                           |   |                           |      |   |   |
| INCOME TAX  PROVISION                          |   | 88,171                         |      | — |   |
|                                           |   |                           |      |   |   |
| NET INCOME                                     |   | $                              | 118,369   |   | $ | 33,225 |   |
|                                           |   |                           |      |   |   |
| EARNINGS  PER COMMON SHARE (Note 2):      |   |                           |      |   |   |
|                                           |   |                           |      |   |   |
| Basic                                          |   | $                              | .04       |   | $ | .01 |   |
| Diluted                                        |   | $                              | .04       |   | $ | .01 |   |
|                                           |   |                           |      |   |   |
| WEIGHTED AVERAGE  NUMBER OF SHARES OUTSTANDING |   |                           |      |   |   |
|                                           |   |                           |      |   |   |
| Basic                                          |   | 3,251,483                      |      | 3,185,325 |   |
| Diluted                                        |   | 3,368,066                      |      | 3,185,325 |   |

 

 

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

 

 

4

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**CREATIVECOMPUTER APPLICATIONS, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

 

 
|                                           |   | **Nine Months Ended May 31** |      |
|------------------------------------------------|--------|------------------------------|-----------|
|                                           |   | **2002**                     |      | **2001** |   |
|                                           |   | **(unaudited)**              |      |
| NET SYSTEM SALES  AND SERVICE REVENUE (Note 3) |   |                         |      |   |   |
| System sales                                   |   | $                            | 2,660,419 |   | $ | 1,408,643 |   |
| Service revenues                               |   | 2,983,541                    |      | 2,726,512 |   |
|                                           |   | 5,643,960                    |      | 4,135,155 |   |
|                                           |   |                         |      |   |   |
| COST OF PRODUCTS  AND SERVICES SOLD            |   |                         |      |   |   |
| System sales                                   |   | 1,585,535                    |      | 1,244,782 |   |
| Service revenue                                |   | 1,107,356                    |      | 1,226,765 |   |
|                                           |   | 2,692,891                    |      | 2,471,547 |   |
|                                           |   |                         |      |   |   |
| Gross profit                                   |   | 2,951,069                    |      | 1,663,608 |   |
|                                           |   |                         |      |   |   |
| OPERATING  EXPENSES:                           |   |                         |      |   |   |
| Selling, general  and administrative           |   | 1,962,561                    |      | 1,771,119 |   |
|                                           |   |                         |      |   |   |
| Research and  development                      |   | 625,569                      |      | 616,252 |   |
|                                           |   |                         |      |   |   |
|                                           |   | 2,588,130                    |      | 2,387,371 |   |
|                                           |   |                         |      |   |   |
| Operating income  (loss)                       |   | 362,939                      |      | (723,763 | ) |
|                                           |   |                         |      |   |   |
| INTEREST AND  OTHER INCOME                     |   | 10,132                       |      | 24,799 |   |
|                                           |   |                         |      |   |   |
| INTEREST EXPENSE                               |   | (13,375                      | )         | (19,763 | ) |
|                                           |   |                         |      |   |   |
| Income (Loss)  before taxes on income          |   | 359,696                      |      | (718,727 | ) |
|                                           |   |                         |      |   |   |
| INCOME TAX  PROVISION                          |   | 152,676                      |      | — |   |
|                                           |   |                         |      |   |   |
| NET INCOME  (LOSS)                             |   | $                            | 207,020   |   | $ | (718,727 | ) |
|                                           |   |                         |      |   |   |
| EARNINGS (LOSS)  PER COMMON SHARE (Note 2)     |   |                         |      |   |   |
|                                           |   |                         |      |   |   |
| Basic                                          |   | $                            | .06       |   | $ | (.23 | ) |
| Diluted                                        |   | $                            | .06       |   | $ | (.23 | ) |
|                                           |   |                         |      |   |   |
| WEIGHTED AVERAGE  NUMBER OF SHARES OUTSTANDING |   |                         |      |   |   |
|                                           |   |                         |      |   |   |
| Basic                                          |   | 3,235,622                    |      | 3,177,492 |   |
| Diluted                                        |   | 3,245,108                    |      | 3,177,492 |   |

 

 

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

 

 

5

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**CREATIVECOMPUTER APPLICATIONS, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

**Increase (Decrease) in Cash**

 

 
|                                                                                                 |   | **Nine  Months Ended May 31** |    |
|------------------------------------------------------------------------------------------------------|--------|-------------------------------|---------|
|                                                                                                 |   | **2002**                      |    | **2001** |   |
|                                                                                                 |   | **(unaudited)**               |    |
| OPERATING  ACTIVITIES:                                                                               |   |                          |    |   |   |
| Net income  (loss)                                                                                   |   | $                             | 207,020 |   | $ | (718,727 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |   |                          |    |   |   |
| Depreciation and  amortization                                                                       |   | 542,026                       |    | 546,601 |   |
| Provision for  doubtful accounts                                                                     |   | —                        |    | 14,004 |   |
| Deferred taxes                                                                                       |   | 152,676                       |    | — |   |
| Changes in  operating assets and liabilities:                                                        |   |                          |    |   |   |
| Receivables                                                                                          |   | (816,026                      | )       | (282,762 | ) |
| Inventories                                                                                          |   | 83,869                        |    | 74,173 |   |
| Prepaid expenses  and other assets                                                                   |   | 295                           |    | (46,856 | ) |
| Accounts payable                                                                                     |   | 3,336                         |    | (22,673 | ) |
| Accrued  liabilities and deferred revenues                                                           |   | 418,984                       |    | 592,009 |   |
|                                                                                                 |   |                          |    |   |   |
| Net cash  provided by operating activities                                                           |   | 592,180                       |    | 155,769 |   |
|                                                                                                 |   |                          |    |   |   |
| INVESTING  ACTIVITIES                                                                                |   |                          |    |   |   |
| Purchases of  property and equipment                                                                 |   | (56,648                       | )       | (35,660 | ) |
| Capitalized  software costs                                                                          |   | (335,280                      | )       | (303,000 | ) |
|                                                                                                 |   |                          |    |   |   |
| Net cash used in  investing activities                                                               |   | (391,928                      | )       | (338,660 | ) |
|                                                                                                 |   |                          |    |   |   |
| FINANCING  ACTIVITIES:                                                                               |   |                          |    |   |   |
| Borrowings on notes payable                                                                          |   | 300,000                       |    | 150,000 |   |
| Payments on notes payable                                                                            |   | (539,351                      | )       | (90,000 | ) |
| Increase in capital lease obligations                                                                |   | —                        |    | 68,251 |   |
| Payments on capital lease obligations                                                                |   | (17,063                       | )       | (16,702 | ) |
| Proceeds from issuance of stock                                                                      |   | 35,877                        |    | 16,020 |   |
|                                                                                                 |   |                          |    |   |   |
| Net cash provided by (used in) financing activities                                                  |   | (220,537                      | )       | 127,569 |   |
|                                                                                                 |   |                          |    |   |   |
| NET DECREASE IN  CASH                                                                                |   | (20,285                       | )       | (55,322 | ) |
|                                                                                                 |   |                          |    |   |   |
| Cash, beginning  of period                                                                           |   | 661,008                       |    | 618,063 |   |
|                                                                                                 |   |                          |    |   |   |
| Cash, end of  period                                                                                 |   | $                             | 640,723 |   | $ | 562,741 |   |

 

 

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

 

 

6

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**CREATIVECOMPUTER APPLICATIONS, INC.**

 

##### **NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 1.**                                                          In the opinion of management, theaccompanying unaudited condensed consolidated financial statements reflect alladjustments (which include only normal recurring accruals) necessary to presentfairly the Company’s financial position as of May 31, 2002, the results of itsoperations for the three months and nine months ended May 31, 2002 and 2001,and cash flows for the nine months ended May 31, 2002 and May 31, 2001.  These results have been determined on thebasis of generally accepted accounting principals and practices appliedconsistently with those used in the preparation of the Company’s Annual Reporton Form 10-KSB for the fiscal year end August 31, 2001.

 

The results of operationsfor the three months and nine months ended May 31, 2002 are not necessarilyindicative of the results to be expected for any other period or for the entireyear.

 

 

**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 reflects the potential dilution that could occur if securities orother contracts, such as stock options and warrants, to issue common stock wereexercised or converted into common stock.

 

 

**Note 3.**                                                          The Companyadopted Staff Accounting Bulletin 101, “Revenue Recognition”, (“SAB 101”).  SAB 101 provides interpretive guidance onthe recognition, presentation and disclosure of revenue in financialstatements.  The Company accounts forits software revenue recognition in accordance with Statement of Position 97-2,“Software Revenue Recognition”, (“SOP 97-2”).  SOP 97-2 requires companies to recognize revenue when (i) persuasiveevidence of an arrangement exists, (ii) delivery has occurred, (iii) thevendor’s fee is fixed and determinable, and (iv) collectability isprobable.  The SOP also requires companiesto allocate the fee on a multiple element contract between the various elementsbased on vendor-specific objective evidence of fair value.  SAB 101 expands on the issues not explicitlycovered in the SOP. The Company elected early adoption of SAB 101 for thecurrent fiscal year beginning September 1, 2000.  Pursuant to the adoption of SAB 101 the Company estimates thatthe recognition of revenue from the sale of hardware and software associatedwith the Company’s Clinical Information Systems will be extended byapproximately ninety to one hundred and eighty days.

 

 

**Note 4.**                                                          The Companyrenewed its line of credit with its bank on January 30, 2002.  The new line provides for $500,000 on arevolving basis through February 1, 2003, and contains certain loan covenantsand financial ratio requirements.  OnMay 31, 2002, there were no amounts outstanding under the line of credit.  The Company was in compliance with all ofthe covenants and financial ratios required by its bank as of May 31, 2002.

 

 

**Note 5.**                                                          The Companyentered into an amendment to its facility-operating lease on January 11,2002.  The amendment extended the leaseterm, which was to expire on October 31, 2002, to October 31, 2007.  Future minimum lease payments under thefacility lease are $218,131 for fiscal 2002, $253,771 for fiscal 2003, $268,896for fiscal 2004, $276,963 for fiscal 2005, and $285,030 for fiscal 2006.

 

 

**Item 2****.    Management’sDiscussion and Analysis of Results of Operations and Financial Condition**

 

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

 

 

7

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The Company or CCA as it’s known, generatesrevenues primarily from the sale of Clinical Information Systems (CIS), whichincludes the licensure of proprietary application software, and often the saleof 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 user’s 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.

 

The company has continued to experience aturnaround in its results of operations that began in the fiscal quarter endedMay 31, 2001 that has been reflected in it’s reporting of increased sales andnet income in each of its last five fiscal quarters.  Although business continues to improve, market conditions remainuncertain and accordingly management remains cautious and continues to keep atight reign on staffing and other expenses in response to current industry andgeneral economic conditions.

 

The Company invests considerable resources inproduct development programs to expand the depth of functionality of itsproducts, and to address pending compliance issues associated with the HealthInsurance Portability and Accountability Act (HIPAA).  In order to address issues brought about by the HIPAAregulations, the Company is currently developing enhancements to itsapplication products so that they will assist clients with the complianceissues.  Provisions of HIPAA areintended to ensure patient confidentiality for all health care related information.  The requirements of HIPAA apply to anyentity storing and/or transmitting patient identifiable information onelectronic media.  This affectsvirtually all health care organizations, from physicians and insurancecompanies to health care support organizations.  Certain safeguards will be required to accurately insure thesecurity of patient data.  This willinclude more robust audit trails and tiered/structured password security whenaccessing patient data.  The increase inpatient centered data that must be retained under the HIPAA guidelines willrequire that systems electronically store much larger amounts of data.  CCA plans on providing its client base withapplication enhancements that will assist its clients in adhering to HIPAAregulations well before the final date of April 13, 2003, when the newregulations go into effect.

 

 

## **Results of Operations**

 

Salesfor the third quarter of fiscal 2002 endedMay 31, 2002 were $2,102,222, and increased $475,401 or 29% compared to thesame quarter of fiscal 2001.  For thenine-month period ended May 31, 2002 sales were $5,643,960, and increased$1,508,805 or 37% compared to the same period in fiscal 2001.  Such overall increases were attributable tothe turnaround the Company has experienced since the quarter ended in May 2001.

 

When analyzed by productcategory, for the quarter and nine-month periods, sales of CIS productsincreased $463,552 or 93% and $1,480,958 or 178% respectively, and servicerevenues increased $140,701 or 16% and $257,029 or 9% respectively.  These increases were partially offset by adecrease in sales of data acquisition products for the quarter and nine-monthperiods of $128,852 or 56% and $228,146 or 41% respectively.  The increase in revenues associated with theCompany’s CIS products was primarily attributable to the improved marketconditions discussed above.  Thedecrease in sales of data acquisition products is primarily attributable to alesser number of units shipped to OEM customers.  The decrease in OEM business is expected to continue, as fewerOEM customers remain active in the marketplace or are no longer reliant onCCA’s data acquisition products.  Theincrease in service revenues was attributable to a greater number of customersites on contract and higher average revenues per account.  As a result of the Company closing largerCIS transactions, the annual service costs associated with such transactionsare proportionally greater.  Managementexpects that service revenues will continue to increase as the Company’s installedbase of CIS accounts increases.

 

The Company continues toexpand its sales and marketing activities, directing its focus towards largerclients and multi-product sales.  TheCompany has also initiated strategic joint marketing partnerships with othercompanies, which has improved the Company’s market penetration.  As a result of these efforts, its “pipeline”of working CIS transactions has improved. 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 or annual periods, and thetemporary delays in the closing of new CIS sales.  In addition, revenues associated with its CIS transactions may bedelayed due to customer related issues such as staff availability and theperformance of third party contractors.

 

 

8

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Cost of sales for the third quarter and nine-monthperiod ended May 31, 2002 increased by $129,427 or 15% and $221,344 or 9%respectively as compared to the same quarter and nine-month period of2001.  For the quarter the increase incosts of sales was primarily attributable to an increase in labor costs of $12,211or 3%, an increase in material costs of $107,289 or 113%, and an increase inother costs of $9,927 or 3%.  For thenine-month period ended May 31, 2002 the increase in cost of sales wasprimarily attributable to an increase in material costs of $289,001or 161%, andan increase in other costs of $1,800 or .2% which were partially offset by adecrease in labor costs of $69,457 or 6%. The overall fluctuations in material, labor, and other costs wereattributable to the increase in CIS sales during the nine-month period and the concurrent deferral of some costsassociated with SAB 101.  For thecurrent quarter and nine- month period ended May 31, 2002, cost of sales as apercentage of sales decreased to 46% from 52% and decreased to 48% from 60%respectively.  The overall improvementin gross margins was primarily attributable to the increases in revenuesrecognized in the quarter and nine-month periods and the Company maintaining atight reign on expenses.  Since a substantial portion of the Company’scost of sales are fixed, fluctuations in revenues recognized in any period mayaffect the gross margins derived from such sales.

 

Selling and administration expenses increased $135,658or 24% and $191,442 or 11% in comparing the current quarter and nine-monthperiod ended May 31, 2002 with the same periods of fiscal 2001.  The increase was primarily attributable toincreased expenditures in sales and marketing activities and their relatedexpenses; commission expense, new marketing materials, trade show expenses andthe Company also added one additional sales representative.

 

Research and Development expense increased $34,770 or18% and $9,317 or 2% for the current quarter and nine-month period ended May31, 2002, compared to the same periods of fiscal 2001.  The increase in product development expense for the current periods isattributable to increased staffing and overall increases in salaries andbenefits.  The Company continuesto expend considerable resources on new product development and productenhancements, much of which is associated with HIPAA compliance.

 

As a result of the aggregate factors discussed abovethe Company earned net income of $118,369 or basic and diluted earnings pershare of $.04 for thecurrent fiscal quarter comparedto net income of $33,225 or basic and diluted earnings per share of $.01 forthe comparable third quarter of fiscal 2001. For the nine-month period ending May 31, 2002, the Company earnednet income of $207,020 or basic and diluted earnings per share of $ .06,compared to a net loss of $718,727 or basic and diluted loss per share of $.23for the comparable nine-month period one year ago.

 

 

### **CapitalResources and Liquidity**

 

As of May 31, 2002, the Company’s working capitalamounted to $1,252,081 compared to $667,104 at August 31, 2001.  The ratio of the Company’s current assets tocurrent liabilities was approximately 1.5 to 1 at May 31, 2002 compared to 1.3to 1 at August 31, 2001.

 

The Company’s renewed itsline of credit with its bank on January 30, 2002.  The new line provides for $500,000 on a revolving basis throughFebruary 1, 2003, and contains certain loan covenants and financial ratiorequirements.  There were no amountsoutstanding under the line of credit as of May 31, 2002.  The Company was in compliance with all ofthe covenants and financial ratios required by its bank as of May 31, 2002.

 

The Company’s primarysource of working capital has been generated from earnings, and borrowings onits line of credit.  The Company’sprimary need for capital has been for its continued investment in softwaredevelopment.  The Company’s results ofoperations for the nine-month period ended May 31, 2002 produced EBITDA ofapproximately $1,055,000, which was sufficient to fund its product developmentactivities and to invest in new marketing programs.  As a result of increased cash flow during its current quarter,the Company was also able to repay the entire outstanding balance on its lineof credit.  Management believes that itsbacklog and sales pipeline is sufficient to produce positive EBITDA in the nextfew quarters, and that it’s projected cash flow from operations, together withits bank credit facilities, should be sufficient to fund its working capitalrequirements for the remainder of the calendar year.  However, an unanticipated decline in sales or cancellations ofcontracts could have a negative effect on cash flow from operations and couldin turn create short-term liquidity problems.

 

 

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

 

The Company sales are generallylower in the summer and higher in the fall and winter.  Inflation has had no material effect on theCompany business since the Company has been able to adjust the prices of itsproducts and services.  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.  In addition, managementbelieves that the 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.

 

 

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

 

 

Items 1 through 3. NOT APPLICABLE

 

**Item 4.    Submission of Matters to a Vote ofSecurity Holders**

 

(a)                                  The Company held an Annual Meeting ofShareholders on March 1, 2002.

 

(b)                                 The following Directors, all of whom wereincumbents, were reelected to the five member Board at the March 1, 2002meeting:

 
|                     |   | **FOR**   |   | **WITHHELD** |   |
|--------------------------|--------|-----------|--------|--------------|--------|
| Bruce M. Miller          |   | 3,114,059 |   | 33,510       |   |
| Steven M.  Besbeck       |   | 3,114,059 |   | 33,510       |   |
| James R. Helms           |   | 3,114,059 |   | 33,510       |   |
| Lawrence S.  Schmid      |   | 3,114,059 |   | 33,510       |   |
| Robert S.  Fogerson, Jr. |   | 3,114,059 |   | 33,510       |   |

 

(c)                                  The only matter voted upon at the March1, 2002 Annual Meeting was the ratification of BDO Seidman, LLP as theCompany’s auditors for the fiscal year ending August 31, 2002 by a vote of3,129,534 for, 5,365 against, 12,670 abstaining, and 0 non-votes.

 

(d)                                 Not applicable.

 

 

Item 5.   NOT APPLICABLE

 

 

**Item 6.    Exhibits and Reports on Forms 8-K**

 

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

 

(b)                                 There were two reports filed on Form 8-K,dated March 6, 2002 and April 17, 2002, during the quarter ended May 31, 2002.

 

 

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### **SIGNATURES**

 

 

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

 

 
| **CREATIVE  COMPUTER APPLICATIONS, INC.** |          |   |                                    |
|-------------------------------------------|---------------|--------|-----------------------------------------|
| (Company)                                 |          |   |                                    |
|                                      |          |   |                                    |
| **Date:**                                 | July 12, 2002 |   | /S/  Steven  M. Besbeck            |
|                                      |          |   | Steven. M. Besbeck, President           |
|                                      |          |   | Chief Executive Officer, Chief          |
|                                      |          |   | Financial Officer                       |
|                                      |          |   |                                    |
| **Date:**                                 | July 12, 2002 |   | /S/  Anahita  Villafane            |
|                                      |          |   | Anahita Villafane                       |
|                                      |          |   | Controller and Chief Accounting Officer |
|                                           |               |        |                                         |  |  |  |  |

 

 

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