** **

**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

 

**Washington, DC 20549**

 

**FORM10-QSB**

 

**(Mark One)**

 

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

** **

**For the quarterly period ended September 30,2005.**

 

**o****                                ****TRANSITION REPORT UNDER SECTION13 OR 15(d) OF THE EXCHANGE ACT**

** **

**For the transition period from                        to                        **

 

**Commission file number 0-12551**

 

**CREATIVECOMPUTER APPLICATIONS, INC.**

(Exact name of small business issuer asspecified 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**

(Address of principal executive offices)

 

**(818) 880-6700**

(Issuer’s telephone number, including areacode):

 

**Check whether the Issuer (1) filed allreports required to be filed by Section 13 or 15(d) of the Exchange Act duringthe past 12 months (or for such shorter period that the Issuer was required tofile such reports), and (2) has been subject to such filing requirements forthe past 90 days.**

**Yes  ****ý****                                                                                                         No  ****o**

 

**Indicate by a check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).**

**Yes  ****o****                                                                                                         No  ****ý**

 

**State the number of shares outstanding ofeach of the issuer’s classes of common equity, as of the latest practicabledate:  3,491,400 common shares as ofOctober 31, 2005.**

 

**Transitional Small Business Disclosure Format(check one):**

**Yes  ****o****                                                                                                         No  ****ý**

 

 

----

 

**CREATIVE COMPUTER APPLICATIONS, INC.**

 

**FORM 10-QSB**

 

**I N D E X**

 
| **PART I - Financial Information:**                                                                                    | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                                   |       |
| **Item 1.   Financial Statements (unaudited)**                                                                    |       |
|                                                                                                                   |       |
| Condensed Consolidated Balance Sheets, as  at September 30, 2005 and December 31, 2004                                 |       |
|                                                                                                                   |       |
| Condensed Consolidated Statements of  Operations for the three months ended September 30, 2005 and September 30,  2004 |       |
|                                                                                                                   |       |
| Condensed Consolidated Statements of  Operations for the nine months ended September 30, 2005 and September 30,  2004  |       |
|                                                                                                                   |       |
| Condensed Consolidated Statements of Cash  Flows for the nine months ended September 30, 2005 and September 30, 2004   |       |
|                                                                                                                   |       |
| Notes to Condensed Consolidated Financial  Statements                                                                  |       |
|                                                                                                                   |       |
| **Item 2. Management’s Discussion and  Analysis or Plan of Operation**                                            |       |
|                                                                                                                   |       |
| **Item 3. Controls and Procedures**                                                                                    |       |
|                                                                                                                   |       |
| **PART II - Other Information:**                                                                                       |       |
|                                                                                                                   |       |
| **Item 6. Exhibits**                                                                                                   |       |
|                                                                                                                   |       |
| **Signatures**                                                                                                         |       |
|                                                                                                                   |       |
| **Exhibit Index**                                                                                                      |       |

 

2

----

 

**CREATIVE COMPUTER APPLICATIONS, INC.**

 

**PART 1 - FINANCIAL INFORMATION**

 

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

#### ** **

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

 
| ** **                                                                                                        | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                                                                        | ** ** | **(Unaudited)**         | ** ** | **(Unaudited)**        | ** ** |
| **ASSETS**                                                                                                        |       |                    |       |                   |       |
|                                                                                                              |       |                    |       |                   |       |
| CURRENT ASSETS:                                                                                                   |       |                    |       |                   |       |
| Cash                                                                                                              |       | $                       | 861,027    |                   | $          | 1,655,063 |   |
| Receivables, net                                                                                                  |       | 852,477                 |       | 1,736,768              |       |
| Inventory                                                                                                         |       | 138,110                 |       | 86,298                 |       |
| Prepaid expenses and other assets                                                                                 |       | 333,047                 |       | 256,289                |       |
| Deferred tax asset                                                                                                |       | —                  |       | 539,420                |       |
|                                                                                                              |       |                    |       |                   |       |
| TOTAL CURRENT ASSETS                                                                                              |       | 2,184,661               |       | 4,273,838              |       |
|                                                                                                              |       |                    |       |                   |       |
| PROPERTY AND EQUIPMENT, net                                                                                       |       | 479,065                 |       | 345,004                |       |
| INVENTORY OF COMPONENT PARTS                                                                                      |       | 194,135                 |       | 186,599                |       |
| CAPITALIZED SOFTWARE COSTS, net of  accumulated amortization of $1,137,971 and $878,021                      |       | 1,783,044               |       | 1,531,573              |       |
| DEFERRED MERGER COSTS                                                                                             |       | 340,077                 |       | —                 |       |
| DEFERRED TAX ASSET                                                                                                |       | —                  |       | 254,457                |       |
|                                                                                                              |       |                    |       |                   |       |
|                                                                                                              |       | $                       | 4,980,982  |                   | $          | 6,591,471 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                     |       |                    |       |                   |       |
|                                                                                                              |       |                    |       |                   |       |
| CURRENT LIABILITIES:                                                                                              |       |                    |       |                   |       |
| Notes payable to bank (Note 4)                                                                                    |       | 200,000                 |       | 300,000                |       |
| Accounts payable                                                                                                  |       | 431,425                 |       | 377,768                |       |
| Accrued liabilities:                                                                                              |       |                    |       |                   |       |
| Vacation pay                                                                                                      |       | 227,503                 |       | 243,060                |       |
| Accrued payroll                                                                                                   |       | 39,733                  |       | 128,227                |       |
| Other                                                                                                             |       | 125,841                 |       | 173,808                |       |
| Deferred service contract income                                                                                  |       | 1,085,341               |       | 1,235,032              |       |
| Deferred revenue on system sales                                                                                  |       | 290,928                 |       | 226,111                |       |
|                                                                                                              |       |                    |       |                   |       |
| TOTAL CURRENT LIABILITIES                                                                                         |       | 2,400,771               |       | 2,684,006              |       |
|                                                                                                              |       |                    |       |                   |       |
| SHAREHOLDERS’ EQUITY:                                                                                        |       |                    |       |                   |       |
| Common shares, no par value; 20,000,000  shares authorized; 3,409,900 and 3,321,900 shares issued and outstanding |       | 6,367,092               |       | 6,195,692              |       |
| Accumulated deficit                                                                                               |       | (3,786,881              | )          | (2,288,227             | )          |
|                                                                                                              |       |                    |       |                   |       |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                   |       | 2,580,211               |       | 3,907,465              |       |
|                                                                                                              |       |                    |       |                   |       |
|                                                                                                              |       | $                       | 4,980,982  |                   | $          | 6,591,471 |   |

 

**See Notes to Condensed Consolidated FinancialStatements.**

 

3

----

 

**CREATIVE COMPUTER APPLICATIONS, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

 
| ** **                                       | ** ** | **Three Months Ended September 30,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                       | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| ** **                                       | ** ** | **(Unaudited)**                      | ** ** |
|                                             |       |                                 |       |   |   |
| NET SYSTEM SALES AND SERVICE REVENUE:            |       |                                 |       |   |   |
| System sales                                     |       | $                                    | 545,886    |   | $ | 1,177,629 |   |
| Service revenue                                  |       | 1,181,786                            |       | 1,107,579 |   |
|                                             |       | 1,727,672                            |       | 2,285,208 |   |
|                                             |       |                                 |       |   |   |
| COSTS OF PRODUCTS AND SERVICES SOLD:             |       |                                 |       |   |   |
| System sales                                     |       | 393,686                              |       | 448,285 |   |
| Service revenue                                  |       | 414,985                              |       | 380,797 |   |
|                                             |       | 808,671                              |       | 829,082 |   |
|                                             |       |                                 |       |   |   |
| Gross profit                                     |       | 919,001                              |       | 1,456,126 |   |
|                                             |       |                                 |       |   |   |
| OPERATING EXPENSES                               |       |                                 |       |   |   |
| Selling, general and administrative              |       | 883,704                              |       | 769,854 |   |
|                                             |       |                                 |       |   |   |
| Research and development                         |       | 314,456                              |       | 258,825 |   |
|                                             |       |                                 |       |   |   |
| Total operating expenses                         |       | 1,198,160                            |       | 1,028,679 |   |
|                                             |       |                                 |       |   |   |
| Operating income (loss)                          |       | (279,159                             | )          | 427,447 |   |
|                                             |       |                                 |       |   |   |
| INTEREST AND OTHER INCOME                        |       | 3,873                                |       | 2,555 |   |
|                                             |       |                                 |       |   |   |
| INTEREST EXPENSE                                 |       | (3,989                               | )          | (173 | ) |
|                                             |       |                                 |       |   |   |
| Income (Loss) before provision for income  taxes |       | (279,275                             | )          | 429,829 |   |
|                                             |       |                                 |       |   |   |
| PROVISION FOR INCOME TAXES                       |       | 793,877                              |       | 117,763 |   |
|                                             |       |                                 |       |   |   |
| NET INCOME (LOSS)                                |       | $                                    | (1,073,152 | ) | $ | 312,066 |   |
|                                             |       |                                 |       |   |   |
| EARNINGS (LOSS) PER SHARE (Note 3):              |       |                                 |       |   |   |
|                                             |       |                                 |       |   |   |
| Basic                                            |       | $                                    | (.31       | ) | $ | .09 |   |
| Diluted                                          |       | (.31                                 | )          | .09 |   |
|                                             |       |                                 |       |   |   |
| WEIGHTED AVERAGE NUMBER OF SHARES  OUTSTANDING:  |       |                                 |       |   |   |
| Basic                                            |       | 3,465,900                            |       | 3,318,900 |   |
| Diluted                                          |       | 3,465,900                            |       | 3,369,832 |   |

 

**See Notes to Condensed Consolidated FinancialStatements.**

 

4

----

 

**CREATIVE COMPUTER APPLICATIONS, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

 
| ** **                                       | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                       | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| ** **                                       | ** ** | **(Unaudited)**                     | ** ** |
|                                             |       |                                |       |   |   |
| NET SYSTEM SALES AND SERVICE REVENUE:            |       |                                |       |   |   |
| System sales                                     |       | $                                   | 1,429,593  |   | $ | 2,795,480 |   |
| Service revenue                                  |       | 3,679,374                           |       | 3,243,422 |   |
|                                             |       | 5,108,967                           |       | 6,038,902 |   |
|                                             |       |                                |       |   |   |
| COSTS OF PRODUCTS AND SERVICES SOLD:             |       |                                |       |   |   |
| System sales                                     |       | 1,218,254                           |       | 1,424,824 |   |
| Service revenue                                  |       | 1,239,678                           |       | 1,187,360 |   |
|                                             |       | 2,457,932                           |       | 2,612,184 |   |
|                                             |       |                                |       |   |   |
| Gross profit                                     |       | 2,651,035                           |       | 3,426,718 |   |
|                                             |       |                                |       |   |   |
| OPERATING EXPENSES                               |       |                                |       |   |   |
| Selling, general and administrative              |       | 2,483,681                           |       | 2,088,928 |   |
|                                             |       |                                |       |   |   |
| Research and development                         |       | 873,396                             |       | 773,705 |   |
|                                             |       |                                |       |   |   |
| Total operating expenses                         |       | 3,357,077                           |       | 2,862,633 |   |
|                                             |       |                                |       |   |   |
| Operating income (loss)                          |       | (706,042                            | )          | 564,085 |   |
|                                             |       |                                |       |   |   |
| INTEREST AND OTHER INCOME                        |       | 13,015                              |       | 4,413 |   |
|                                             |       |                                |       |   |   |
| INTEREST EXPENSE                                 |       | (11,750                             | )          | (1,858 | ) |
|                                             |       |                                |       |   |   |
| Income (Loss) before provision for income  taxes |       | (704,777                            | )          | 566,640 |   |
|                                             |       |                                |       |   |   |
| PROVISION FOR INCOME TAXES                       |       | 793,877                             |       | 117,763 |   |
|                                             |       |                                |       |   |   |
| NET INCOME (LOSS)                                |       | $                                   | (1,498,654 | ) | $ | 448,877 |   |
|                                             |       |                                |       |   |   |
| EARNINGS (LOSS) PER SHARE (Note 3):              |       |                                |       |   |   |
|                                             |       |                                |       |   |   |
| Basic                                            |       | $                                   | (.44       | ) | $ | .14 |   |
| Diluted                                          |       | (.44                                | )          | .13 |   |
|                                             |       |                                |       |   |   |
| WEIGHTED AVERAGE NUMBER OF SHARES  OUTSTANDING:  |       |                                |       |   |   |
| Basic                                            |       | 3,401,011                           |       | 3,318,900 |   |
| Diluted                                          |       | 3,401,011                           |       | 3,405,437 |   |

 

**See Notes to Condensed Consolidated FinancialStatements.**

 

5

----

 

**CREATIVE COMPUTER APPLICATIONS, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

 

**Increase (Decrease) in Cash**

 
| ** **                                                                                | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| ** **                                                                                | ** ** | **(Unaudited)**                     | ** ** |
|                                                                                      |       |                                |       |   |   |
| OPERATING ACTIVITIES                                                                      |       |                                |       |   |   |
| Net Income (loss)                                                                         |       | $                                   | (1,498,654 | ) | $ | 448,877 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |       |                                |       |   |   |
| Depreciation and amortization                                                             |       | 122,864                             |       | 82,241 |   |
| Provision for doubtful accounts                                                           |       | 30,880                              |       | 60,000 |   |
| Amortization of capitalized software costs                                                |       | 259,950                             |       | 324,952 |   |
| Deferred tax provision                                                                    |       | 793,877                             |       | 105,858 |   |
| Increase (decrease) from changes in:                                                      |       |                                |       |   |   |
| Receivables                                                                               |       | 853,411                             |       | (272,786 | ) |
| Inventories                                                                               |       | (59,348                             | )          | 79,949 |   |
| Prepaid expenses and other assets                                                         |       | (76,758                             | )          | 1,950 |   |
| Accounts payable                                                                          |       | 53,657                              |       | (20,220 | ) |
| Accrued liabilities                                                                       |       | (152,018                            | )          | 19,910 |   |
| Deferred service contract income                                                          |       | (149,691                            | )          | 35,265 |   |
| Deferred revenue on system sales                                                          |       | 64,817                              |       | 174,814 |   |
|                                                                                      |       |                                |       |   |   |
| Net cash provided by operating activities                                                 |       | 242,987                             |       | 1,040,810 |   |
|                                                                                      |       |                                |       |   |   |
| INVESTING ACTIVITIES                                                                      |       |                                |       |   |   |
| Additions to property and equipment                                                       |       | (256,925                            | )          | (122,365 | ) |
| Additions to deferred merger costs                                                        |       | (340,077                            | )          | — |   |
| Additions to capitalized software costs                                                   |       | (511,421                            | )          | (427,803 | ) |
|                                                                                      |       |                                |       |   |   |
| Net cash used in investing activities                                                     |       | (1,108,423                          | )          | (550,168 | ) |
|                                                                                      |       |                                |       |   |   |
| FINANCING ACTIVITIES                                                                      |       |                                |       |   |   |
| Payments on notes payable                                                                 |       | (100,000                            | )          | — |   |
| Exercise of stock options                                                                 |       | 171,400                             |       | — |   |
|                                                                                      |       |                                |       |   |   |
| Net cash provided by financing activities                                                 |       | 71,400                              |       | — |   |
|                                                                                      |       |                                |       |   |   |
| NET INCREASE (DECREASE) IN CASH                                                           |       | (794,036                            | )          | 490,642 |   |
|                                                                                      |       |                                |       |   |   |
| CASH, beginning of period                                                                 |       | 1,655,063                           |       | 889,521 |   |
|                                                                                      |       |                                |       |   |   |
| CASH, end of period                                                                       |       | $                                   | 861,027    |   | $ | 1,380,163 |   |

 

**See notes to Condensed Consolidated FinancialStatements.**

 

6

----

 

**CREATIVE COMPUTER APPLICATIONS, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(unaudited)**

 

**Note 1-Presentation of Financial Statements**

 

In the opinion of management of CreativeComputer Applications, Inc. (the “Company” or “CCA”), the accompanyingunaudited condensed consolidated financial statements reflect all adjustments(which include only normal recurring accruals) necessary to present fairly theCompany’s financial position as of September 30, 2005, the results of itsoperations for the three and nine month periods ended September 30, 2005 and2004, and cash flows for the nine months ended September 30, 2005 and2004.  These results have been determinedon the basis of accounting principles generally accepted in the United Statesof America and practices applied consistently with those used in preparation ofthe Company’s Annual Report on Form 10-KSB for the fiscal year ended August 31,2004 and the Transitional Report on Form 10-QSBT for the period ended December31, 2004.

 

The results of operations for the three andnine months ended September 30, 2005 are not necessarily indicative of theresults expected for any other period or for the entire year.

 

**Note 2- Inventories**

 

Inventories consist primarily of computer hardware held for resale andare stated at the lower of cost or market (net realizable value).  Cost is determined using the first-in,first-out method. Supplies are charged to expense as incurred.

 

The Company also maintains an inventory pool of component parts toservice systems previously sold, which is classified as non-current in theaccompanying balance sheets.  Suchinventory is carried at the lower of cost or market and is charged to cost ofsales based on usage.  Allowances aremade for quantities on hand in excess of estimated future usage.  At September 30, 2005 and 2004 theinventory allowance was $195,073 and $141,273.

 

**Note3-Earnings per Share**

 

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

 

Earnings per share has been computed asfollows:

 
| ** **                                                    | ** ** | **Three Months  Ended  September 30, 2005** | ** ** | **Nine Months  Ended  September 30, 2005** | ** ** | **Three Months  Ended  September 30, 2004** | ** ** | **Nine Months  Ended  September 30, 2004** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
|                                                          |       |                                        |       |                                       |       |                                        |       |                                       |       |
| NET INCOME (LOSS)                                             |       | $                                           | (1,073,152 | )                                          | $          | (1,498,654                                  | )          | $                                          | 312,066    |   | $ | 448,877 |   |
| Basic weighted average number of common  shares outstanding   |       | 3,465,900                                   |       | 3,401,011                                  |       | 3,318,900                                   |       | 3,318,900                                  |       |
| Dilutive effect of stock options                              |       | —                                      |       | —                                     |       | 50,932                                      |       | 86,537                                     |       |
| Diluted weighted average number of common  shares outstanding |       | 3,465,900                                   |       | 3,401,011                                  |       | 3,369,832                                   |       | 3,405,437                                  |       |
| Basic earnings (loss) per share                               |       | $                                           | (.31       | )                                          | $          | (.44                                        | )          | $                                          | .09        |   | $ | .14 |   |
| Diluted earnings (loss) per share                             |       | $                                           | (.31       | )                                          | $          | (.44                                        | )          | $                                          | .09        |   | $ | .13 |   |

 

7

----

 

For the three and nine months ended September30, 2005 and 2004, options to purchase 210,000 and 150,000 shares of commonstock at per share prices ranging from $.72 to $1.76 were not included in thecomputation of diluted earnings (loss) per share because inclusion would havebeen anti-dilutive.

 

**Note 4-DebtObligations**

 

The Company’s line of credit with its bankprovides for $1,000,000 on a revolving basis through February 1, 2006.  On September 30, 2005, the total amount dueto the bank was $200,000.

 

**Note5-Stock-Based Compensation**

 

As allowed by Statement ofFinancial Accounting Standards No. 123 (“SFAS 123”), the Companyhas adopted the intrinsic value method of accounting for employee stock optionsunder the principles of APB Opinion No. 25, Accounting for Stock Issued toEmployees (“APB 25”) and discloses the pro forma effect on net income (loss)and income (loss) per share as if the fair value based method had beenapplied.  For equity instruments,including stock options, issued to non-employees, the fair value of the equityinstruments or the fair value of the consideration received, whichever is morereadily determinable, is used to determine the value of services or goodsreceived 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  Ended  September 30, 2005** | ** ** | **Nine Months  Ended  September 30, 2005** | ** ** | **Three Months  Ended  September 30, 2004** | ** ** | **Nine Months  Ended  September 30, 2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                     | ** ** | ** **                                  | ** ** | ** **                                 | ** ** | ** **                                  | ** ** | ** **                                 | ** ** |
| Net income (loss), as reported                                                                                 |       | $                                           | (1,073,152 | )                                          | $          | (1,498,654                                  | )          | $                                          | 312,066    |   | $ | 448,877 |   |
|                                                                                                           |       |                                        |       |                                       |       |                                        |       |                                       |       |
| Add: Stock-based compensation expense  included in reported net income, net of related tax effects             |       | —                                      |       | —                                     |       | —                                      |       | —                                     |       |
|                                                                                                           |       |                                        |       |                                       |       |                                        |       |                                       |       |
| Less: total stock based employee  compensation expense determined under fair value based method for all awards |       | (11,011                                     | )          | (33,032                                    | )          | (19,513                                     | )          | (58,539                                    | )          |
|                                                                                                           |       |                                        |       |                                       |       |                                        |       |                                       |       |
| Net loss, pro forma                                                                                            |       | $                                           | (1,084,163 | )                                          | $          | (1,531,686                                  | )          | $                                          | 292,553    |   | $ | 390,338 |   |
|                                                                                                           |       |                                        |       |                                       |       |                                        |       |                                       |       |
| Basic net earnings (loss) per share, as  reported                                                              |       | $                                           | (.31       | )                                          | $          | (.44                                        | )          | $                                          | .09        |   | $ | .14 |   |
| Basic net earnings (loss) per share, pro  forma                                                                |       | $                                           | (.31       | )                                          | $          | (.45                                        | )          | $                                          | .09        |   | $ | .12 |   |
| Diluted net earnings (loss) per share, as  reported                                                            |       | $                                           | (.31       | )                                          | $          | (.44                                        | )          | $                                          | 09         |   | $ | 13 |   |
| Diluted net earnings (loss) per share, pro  forma                                                              |       | $                                           | (.31       | )                                          | $          | (.45                                        | )          | $                                          | .09        |   | $ | .12 |   |

 

The Company issues all of 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 September30, 2005 and 2004.  As required by SFAS123, the Company provides the following disclosure of estimated values forthese awards:  The fair value of eachoption was estimated on the date of grant using a Black-Scholes option-pricingmodel with

 

8

----

 

the following weighted average assumptionsfor 2004: risk free interest rates ranging from 3.4% to 6.1%, expected lives of5 years; volatility ranging from 67% to 126% and no assumed dividends.  The weighted-average grant-date fair value ofoptions granted during 2004 was estimated to be $.93.  There were no options granted in the ninemonths ended September 30, 2005.

 

**Note 6-Commitmentsand Contingencies**

 

In accordance with the bylaws of the Company,officers and directors are indemnified for certain events or occurrencesarising as a result of the officer or director’s serving in such capacity.  The term of the indemnification period is forthe lifetime of the officer or director. The maximum potential amount of future payments the Company could berequired to make under the indemnification provisions of its bylaws isunlimited.  However, the Company has adirector and officer liability insurance policy that reduces its exposure andenables it to recover a portion of any future amounts paid.  As a result of its insurance policy coverage,the Company believes the estimated exposure for the indemnification provisionsof its bylaws is minimal and, therefore, the Company has not recorded anyrelated liabilities.

 

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

 

**Note 7-New AccountingPronouncements**

 

In December 2004, the FASB issued SFAS No. 123 (revised 2004), (“Share-BasedPayment” (“SFAS 123R”), which replaces SFAS No. 123, “Accounting forStock-Based Compensation,” (“SFAS 123”) and supersedes APB Opinion No. 25,“Accounting for Stock Issued to Employees.” SFAS 123R requires all share-basedpayments to employees, including grants of employee stock options, to berecognized in the financial statements based on their fair value. The pro formadisclosures previously permitted under SFAS 123 will no longer be analternative to financial statement recognition. We are required to adopt SFAS123R in the first quarter of fiscal 2006. Under SFAS 123R, we must determinethe appropriate fair value model to be used for valuing share-payments, theamortization method for compensation cost and the transition method to be usedat the date of adoption. The transition methods include prospective andretroactive adoption methods. The prospective method requires that compensationexpense be recorded for all unvested stock options at the beginning of thefirst quarter of adoption of SFAS 123R, while the retroactive method wouldrestate prior periods to record compensation expense for all unvested stock optionsbeginning with the first period restated. We are evaluating the requirements ofSFAS 123R and expect that the adoption of SFAS 123R will have a material impacton our consolidated results of operations and earnings per share. We have notyet determined the method of adoption or the effect of adopting SFAS 123R, andwe have not yet determined whether the adoption will result in amounts that aresimilar to the current pro forma disclosures under SFAS 123.

 

In March 2005, the SEC staff issued a Staff Accounting Bulletin (“SAB107”) which expressed views of the staff regarding the interaction between SFASNo. 123R and certain SEC rules and regulations and provide the staff’s viewsregarding the valuation of share-based payment arrangements for public companies.In particular, SAB 107 provides guidance related to share-based paymenttransactions with non-employees, the transition from nonpublic to public entitystatus, valuation methods (including assumptions such as expected volatilityand expected term), the accounting for certain redeemable financial instrumentsissued under share-based payment arrangements, the classification ofcompensation expense, non-GAAP financial measures, first-time adoption of SFASNo. 123R in an interim period, capitalization of compensation cost related toshare-based payment arrangements, the accounting for income tax effects ofshare-based payment arrangements upon adoption of

 

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SFAS No. 123R, the modification of employee share options prior toadoption of SFAS No. 123R and disclosures in Management’s Discussion andAnalysis subsequent to adoption of SFAS No. 123R.

 

In December 2004, the FASB issued SFAS No. 151, “Inventory Costs, anamendment of ARB No. 43, Chapter 4,” which requires that abnormal amounts ofidle facility expense, freight, handling costs and wasted material (spoilage)be recognized as current-period charges. In addition, the statement requiresthat allocation of fixed production overheads to the costs of conversion bebased on the normal capacity of the production facilities. SFAS No. 151 iseffective for fiscal years beginning after June 15, 2005. The Company willadopt this statement as required, and the Company does not believe the adoptionwill have a material effect on the Company’s results of operations or financialcondition.

 

In December 2004, the FASB issued SFAS No. 153, “Exchanges ofNonmonetary Assets, an amendment of APB Opinion No. 29,” which eliminates theexception for nonmonetary exchanges of similar productive assets and replacesit with a general exception for exchanges of nonmonetary assets that do nothave commercial substance. The statement defines a nonmonetary exchange withcommercial substance as one in which the future cash flows of an entity areexpected to change significantly as a result of the exchange. SFAS No. 153 iseffective for fiscal years beginning after June 15, 2005. The Company willadopt this statement as required, and it does not believe the adoption willhave a material effect on the Company’s results of operation or financialcondition.

 

In May 2005, the Financial Accounting Standards Board issuedStatement No. 154, “Accounting Changes and Error Corrections, areplacement of APB Opinion No. 20, Accounting Changes, and StatementNo. 3, Reporting Accounting Changes in Interim Financial Statements,” orSFAS No.154. SFAS No. 154 changes the requirements for the accounting for,and reporting of, a change in accounting principle. Previously, most voluntarychanges in accounting principles were required to be recognized by way of acumulative effect adjustment within net income during the period of the change.SFAS No. 154 generally requires retrospective application to prior periods’financial statements of voluntary changes in accounting principles. SFASNo. 154 is effective for accounting changes made in fiscal years beginningafter December 15, 2005; however, SFAS No. 154 does not change thetransition provisions of any existing accounting pronouncements. We do notbelieve adoption of SFAS No. 154 will have a material effect on ourconsolidated results of operations or financial position.

 

**Note 8-Income Taxes**

 

The Company accounts for income taxes in accordance with SFAS No. 109 “Accountingfor Income Taxes,” which requires recognition of deferred tax liabilities andassets for the expected future tax consequences of events that have beenincluded in the financial statements or tax returns.  Under this method, deferred tax liabilitiesand assets are determined based on the differences between the financialstatements and the tax bases of assets and liabilities using enacted tax ratesin effect for the year in which the differences are expected to reverse.  Valuation allowances are established whennecessary to reduce deferred tax assets to the amount expected to berealized.  Income tax expense representsthe tax payable for the period and the change during the period in deferred taxassets and liabilities

 

For the third quarter and nine-month period ended September 30, 2005,the Company recorded an additional valuation allowance of $793,877.  The Company invested heavily in integrationactivities in anticipation of the impending merger.  As a result, additional loss was generated inthe quarter and nine-month period necessitating an additional valuationallowance against the deferred tax asset. The Company evaluates the realization of the net deferred tax asset,taking into consideration prior earnings history, projected operating results,and the reversal of temporary tax differences. Although the net deferred tax asset may have been eliminated as a resultof the purchase transaction upon the completion of the merger with StorCOMM,the Company evaluated the net deferred tax asset at September 30, 2005, takinginto consideration operating results, and determined that an additionalvaluation allowance of $793,877 should be maintained.

 

**Note 9-Merger**

 

On August 16, 2005,the Company entered into a definitive merger agreement with StorCOMM, Inc. ofJacksonville, Florida, a private company providing Picture ArchiveCommunication Systems (PACS) and Clinical Image Management Systems for themedical imaging market (the “StorCOMM Merger”). ** **CCA will be the

 

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survivingentity and StorCOMM shareholders will own one-half of the merged entity.  The transaction is subjectto shareholder approval and other conditions to closing contained in the mergeragreement.  It is expected that the postmerger company will offer integrated applications and services to a broadsector of the healthcare provider market. The merger is expected to be completed on or about November 21,2005.   For the nine-month period endedSeptember 30, 2005, the Company deferred approximately $340,000 in merger costsprimarily related to legal and third party due diligence expenses.

 

On August 18, 2005, the Company entered into a private placementtransaction with a small group of investors for the issuance of $3,000,000 incommon stock and warrants contingent upon the completion of the StorCOMMmerger.

 

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

 

The SEC encourages companies to disclose forward-looking information sothat investors can better understand a company’s future prospects and makeinformed investment decisions. This Quarterly Report on Form 10-Q contains such“forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995, Section 27A of the Securities Act of 1933and Section 21E of the Securities Exchange Act of 1934.

 

Words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,”“plan,” “project,” “seek,” “will” and words and terms of similar substance usedin connection with any discussion of future events, operating or financialperformance, financing sources, product development, capital requirements,market growth and the like, identify forward-looking statements.Forward-looking statements are merely predictions and therefore inherentlysubject to uncertainties and other factors which could cause the actual resultsto differ materially from the forward-looking statement.  These forward-looking statements include:

 

•             projections ofrevenues and other financial items;

 

•             statements ofstrategies and objectives for future operations;

 

•             expectationsregarding the completion of the merger with StorCOMM;

 

•             statements regardingintegration plans following the merger with StorCOMM;

 

•             statements concerningproposed applications or services;

 

•             statements regardingfuture economic conditions, performance or business prospects;

 

•             statements regardingcompetitors or competitive actions; and

 

•             statements ofassumptions underlying any of the foregoing.

 

All forward-looking statements are present expectations of futureevents and are subject to a number of factors and uncertainties that couldcause actual results to differ materially from those described in theforward-looking statements. The risks related to CCA’s business discussed under“Risk Factors” of this Quarterly Report on Form 10-QSB, among others, couldcause actual results to differ materially from those described in theforward-looking statements.  Such risksinclude, among others: whether the merger with StorCOMM will be completed; ifthe merger is completed, whether the combined company will realize thepotential benefits of the merger; the competitive environment; unexpectedtechnical and marketing difficulties inherent in major product developmentefforts such as those described about CyberLAB 7.0; the potential need forchanges in our long-term strategy in response to future developments; futureadvances in clinical information technology and procedures, as well aspotential changes in government regulations and healthcare policies, both ofwhich could adversely affect the economics of the products offered by CCA; andrapid technological change in the microelectronics and software industries.

 

The Company makes no representation as to whether any projected orestimated information or results contained in any forward-looking statementswill be obtained or achieved. Shareholders are cautioned not to place unduereliance on the forward-looking statements, which speak only as of the date ofthis Quarterly Report on Form 10-QSB. The Company is under no obligation, andit expressly disclaims any obligation, to update or alter any forward-lookingstatements after the date of this Quarterly Report on Form 10-QSB, whether as aresult of new information, future events or otherwise.

 

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**Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

**Overview**

 

CCA generates revenues primarily from the sale of its ClinicalInformation Systems (CIS), which includes the licensure of proprietaryapplication software, the licensure of third party software, and the sale ofservers upon which the application software operates.  In connection with its sales of CIS products,the Company provides implementation services for the installation, integration,and training 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 recurring revenuesfrom the provision of comprehensive post-implementation services to its CISclients, pursuant to extended service agreements.

 

Because of the nature of its business, CCA makes significantinvestments in research and development for new products and enhancements toexisting products.  Historically, CCA hasfunded its research and development programs through cash flow primarilygenerated from operations.  Managementanticipates that future expenditures in research and development will eithercontinue at current levels or may increase for the foreseeable future, and willbe funded primarily out of the Company’s cash flow.

 

CCA’s results of operations for the third fiscal quarter and nine-monthperiod ended September 30, 2005 were marked by a decrease in sales andoperating income over the comparable period of 2004.  The Company’s decrease in revenues for thethird fiscal quarter and nine-month period was due to a number of factors, theprimary being the loss of members of our sales force.  During the second and third quarters of 2005,the Company experienced an unexpected significant turnover in its sales force,including the loss of its Vice President of Sales, which affected its abilityto close near term sales opportunities.  The Company has since hired a new Vice President of Sales and three newregional sales managers and is actively recruiting additional salespersonnel.  In addition, the Company hasinvested additional funds into marketing activities to rebuild its salespipeline.  Despite the shortfall in ournew system sales, there were positive areas in our business.  For instance, service revenues increased forthe quarter and nine-month period by $74,207 or 6.7% and $435,952 or 13.4%,respectively.  Generally, sales cyclesfor CIS products are lengthy and on average exceed one year from inception toclosure.  Because of the complexity ofthe sales process, a number of factors that are beyond the control of theCompany can delay the closing of transactions.

 

Since the beginning of fiscal year 2005, management has been involvedin activities related to the proposed merger with StorCOMM.  The Company originally anticipated that themerger would be completed in the summer of 2005.  However, due to a number of factors themerger completion date was extended and the Company now expects it to close onor about November 21, 2005, subject to shareholder approval.  In order to mitigate the delays in completingthe merger and put the combined company in the best position to immediatelyexecute its integration plan and launch new products following the merger,management determined it was in the best interests of the company to proceedwith the development of its integration plan with StorCOMM prior to thecompletion of the merger.  This requiredsignificant investment in infrastructure and product development.  This investment has been financed through theutilization of working capital and short-term borrowings, which managementanticipates repaying once the merger and related private placement areconsummated.   The costs associated withthis investment have been expensed as incurred, which increased the operatingexpenses of CCA during the current quarter and nine-month period endedSeptember 30, 2005, and is more fully discussed below in “Results ofOperations.”  While some of theseexpenses are non-recurring, others including the addition of key personnel inproduct management, regulatory affairs, and product development, were importantadditions to management in order to assure the success of the company’sintegration strategy.

 

The operating losses incurred by the Company during the nine-monthperiod ended September 30, 2005 were primarily a result of expenses incurred inconnection with the proposed merger with StorCOMM and the related integrationplan.  Due to the accumulated net lossesincurred by the Company, we have established an additional valuation allowanceagainst our net deferred tax asset. Management anticipated the net deferred tax asset would have beeneliminated in any case as a result of the accounting for the purchasetransaction upon the completion of the merger as described in the Company’sregistration statement on Form S-4 filed on October 3, 2005.

 

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**Results of Operations**

 

The following table sets forth certain line items in our condensedconsolidated statement of operations as a percentage of total revenues for theperiods indicated:

 
| ** **                                       | ** ** | **Three Months  Ended  September 30, 2005** | ** ** | **Nine Months  Ended  September 30, 2005** | ** ** | **Three Months  Ended  September 30, 2004** | ** ** | **Nine Months  Ended  September 30, 2004** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| Revenues:                                        |       |                                        |       |                                       |       |                                        |       |                                       |       |
| System sales                                     |       | 31.6                                        | %          | 28.0                                       | %          | 51.5                                        | %          | 46.3                                       | %          |
| Service revenues                                 |       | 68.4                                        |       | 72.0                                       |       | 48.5                                        |       | 53.7                                       |       |
|                                             |       |                                        |       |                                       |       |                                        |       |                                       |       |
| Total revenues                                   |       | 100.0                                       |       | 100.0                                      |       | 100.0                                       |       | 100.0                                      |       |
|                                             |       |                                        |       |                                       |       |                                        |       |                                       |       |
| Cost of products and services sold:              |       |                                        |       |                                       |       |                                        |       |                                       |       |
| System sales                                     |       | 22.8                                        |       | 23.8                                       |       | 19.6                                        |       | 23.6                                       |       |
| Service revenues                                 |       | 24.0                                        |       | 24.3                                       |       | 16.7                                        |       | 19.7                                       |       |
|                                             |       |                                        |       |                                       |       |                                        |       |                                       |       |
| Total cost of products and services              |       | 46.8                                        |       | 48.1                                       |       | 36.3                                        |       | 43.3                                       |       |
| Gross profit                                     |       | 53.2                                        |       | 51.9                                       |       | 63.7                                        |       | 56.7                                       |       |
| Operating expenses:                              |       |                                        |       |                                       |       |                                        |       |                                       |       |
| Selling, general and administrative              |       | 51.2                                        |       | 48.6                                       |       | 33.7                                        |       | 34.6                                       |       |
| Research and development                         |       | 18.2                                        |       | 17.1                                       |       | 11.3                                        |       | 12.8                                       |       |
| Total operating expenses                         |       | 69.4                                        |       | 65.7                                       |       | 45.0                                        |       | 47.4                                       |       |
| Operating income (loss)                          |       | (16.2                                       | )          | (13.8                                      | )          | 18.7                                        |       | 9.3                                        |       |
|                                             |       |                                        |       |                                       |       |                                        |       |                                       |       |
| Income (loss) before provision for income  taxes |       | (16.2                                       | )          | (13.8                                      | )          | 18.8                                        |       | 9.4                                        |       |
| Provision for income taxes                       |       | 45.9                                        |       | 15.5                                       |       | 5.1                                         |       | 2.0                                        |       |
|                                             |       |                                        |       |                                       |       |                                        |       |                                       |       |
| Net income (loss)                                |       | (62.1                                       | )          | (29.3                                      | )          | 13.7                                        |       | 7.4                                        |       |

 

*Revenues*

 

Sales for the third fiscal quarter ended September 30, 2005 decreasedto $1,727,672, as compared to $2,285,208 for the comparable quarter endedSeptember 30, 2004, an overall decrease of approximately $557,536 or24.4%.  For the nine-month period endedSeptember 30, 2005, sales decreased $929,935 or 15.4% compared to the sameperiod of 2004.  When analyzed by productcategory for the quarter, sales of CIS products decreased by $668,948, or 61.7%and a decrease in other revenues of $7,560 or 76.3%, partially offset by anincrease in sales of data acquisition products of $44,765, or 53.6%, and anincrease in service revenues of $74,207, or 6.7% when compared to the samequarter of fiscal 2004.  When analyzed byproduct category for the nine-month period ended September 30, 2005, sales ofCIS products decreased by $1,474,865, or 58.4% and a decrease in other revenuesof $9,060 or 55.6%, partially offset by an increase in sales of dataacquisition products of $118,038, or 46.5%, and an increase in service revenuesof $435,952, or 13.4% when compared to the same period of fiscal 2004.  The decrease in sales of CIS products wasprimarily attributable to the turnover in the sales force as described aboveunder “Overview”.  The Company has beenin the process of rebuilding its direct sales force and has recently hiredthree new regional sales managers.  Theincrease in service revenues is attributable to a greater number of clientaccounts under contract and an increase in the average fees charged for suchcontracts.  Service revenues are expectedto continue to increase as and when the Company’s installed base of CISinstallations increases.

 

The increase in the sales of data acquisition products is primarilyattributable to a greater number of units shipped to LIS customers. However,management believes that in the future, there will be reduced sales of dataacquisition products as there has been a technological shift to software-basedclinical instrument interfaces. Furthermore, fewer OEM customers remain active in the marketplace or nolonger use CCA’s data acquisition products. Management does not believe the data acquisition product business is a materialpart of CCA’s business today and it will not be in the future, as the Company’semphasis is being placed on its CIS products and related services.

 

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Although the Company continues to invest in sales and marketingactivities, management is cautious about the near-term outlook for its sales ofCIS products as it focuses on rebuilding its sales force and transactionpipeline.  The Company’s future operatingresults will continue to be subject to quarterly variations based upon a widevariety of factors, including the volume mix and timing of orders receivedduring any quarter, and the temporary delays in the closing of new CISsales.  In addition, the Company’srevenues associated with CIS sales may be delayed due to client related issuessuch as client staff availability for training, information technologyinfrastructure readiness, and the performance of third party contractors, allof which are issues outside of the control of CCA.

 

*Costs of products and services sold*

 

Cost of sales for the third quarter and nine-month period endedSeptember 30, 2005 decreased by $20,411 or 2.5% and $154,252 or 5.9%,respectively, as compared to the same periods of fiscal 2004.  For the quarter and nine-month period, thedecrease in cost of sales was primarily attributable to a decrease in materialcosts of $62,717 or 54.6% and $168,163 or 44.6%, respectively.  For the nine-month period there was also adecrease in other costs of $20,226 or 2.2%. Such decreases were partially offset by an increase in labor costs, forthe quarter and nine-month period, of $13,768 or 3.2% and $34,137 or 2.6%,respectively and for the quarter there was an increase in other costs of$28,537 or 10.2%.  The decrease inmaterial costs was attributable to the decrease in sales of CIS productsdiscussed above.  The increase in laborcosts was attributable to additions of personnel to the Company’s supportdepartment.  For the nine-month period,the decrease in other costs of sales was attributable to decreased expensesrelated to telephone costs as a result of better rates negotiated under a newcontract for telephone and data services. For the current quarter and nine-month period, cost of sales as a percentageof sales was 47% and 48%, respectively, as compared to 36% and 43%,respectively, for the comparable periods of 2004.  The overall percentage increase in cost ofsales, as a percentage of sales, in the quarter and nine-month period wasattributable to a reduced number of sales of CIS products sold.  The Company could potentially experiencequarterly variations in gross margin as a result of the factors discussedabove.

 

*Selling, general and administrative expenses*

 

Selling, general and administrative expenses increased by $113,850 or14.8% and $394,753 or 18.9%, respectively, for the current fiscal quarter andnine-month period ended September 30, 2005 as compared to the same periods offiscal 2004.  The increase in selling,general and administrative expenses were primarily attributable to additionalexpenses as follows:  legal andaccounting fees of approximately $31,000 in the current quarter and $72,000 forthe nine-month period were the result of the Company changing its fiscalyear-end.  There were increased expensesrelated to the implementation of a new customer relationship management systemof approximately $25,000 for the current quarter and nine month period.Additional expenses attributable to marketing consulting and telemarketingexpenses were approximately $18,000 in the current quarter and $50,000 for thenine-month period.  There were expensesassociated with the addition of a new product consultant, a controller, aradiology product manager, and a director of regulatory affairs and recruitmentfees paid in conjunction with some of the new hires of approximately $35,000 inthe current quarter and $100,000 for the nine-month period.  In addition, the Company had an increase inits insurance costs of approximately $20,000 for the nine-month period.  The balance of increased expenses during thecurrent quarter and nine month period were attributable to the StorCOMM merger.Management anticipates that it will incur increases in legal and accountingexpenses, trade show expenses, and other general and administrative expenses inthe last quarter of fiscal 2005 that are related to marketing efforts and theannual shareholders meeting.  It is alsolikely that the Company will incur significant additional expenses in the lastquarter of fiscal 2005 related to the StorCOMM Merger that will be expensedwhen incurred.

 

*Research and development expenses*

 

Research and development expenses increased by $55,631, or 21.5% and$99,691 or 12.9%, respectively, for the third fiscal quarter and nine-monthperiod ended September 30, 2005 as compared to the same periods of fiscal2004.  The increase is attributable toincreases in salaries, other personnel related expenses, and the addition ofnew personnel in product engineering. For the comparable third quarters of 2005 and 2004, the Companycapitalized software costs of $171,000 and $147,179, respectively, which aregenerally amortized over the estimated useful life, not to exceed fiveyears.  Such costs were attributable toenhancements and new modules for the Company’s CIS products, and new applicationsunder development, as well as the completion of new software that integratesthe Company’s radiology product CyberRAD with the StorCOMM PACS system.

 

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*Income taxes*

 

For the third quarter and nine-month period ended September 30, 2005,the Company recorded an additional valuation allowance of $793,877.  The Company invested heavily in integrationactivities in anticipation of the proposed merger with StorCOMM.  As a result, additional loss was generated inthe quarter and nine-month period necessitating an additional valuationallowance against the deferred tax asset. The Company evaluates the realization of the net deferred tax asset,taking into consideration prior earnings history, projected operating results,and the reversal of temporary tax differences. Although the net deferred tax asset may have been eliminated as a resultof the purchase transaction upon the completion of the merger with StorCOMM,the Company evaluated the net deferred tax asset at September 30, 2005, takinginto consideration operating results, and determined that an additionalvaluation allowance of $793,877 should be maintained.  In 2004, the Company was operating under adifferent fiscal year-end and at the time, the Company recorded a tax provisionof $117,763.

 

*Net income (loss)*

 

As a result of the factors discussed above, the Company incurred a netloss of $1,073,152 or basic and diluted loss per share of $.31 in the thirdfiscal quarter of 2005 as compared to net income of $312,066 or basic anddiluted earning per share of $.09 for the third fiscal quarter of 2004.  For the nine-month period ended September 30,2005, the Company incurred a net loss of $1,498,654 or basic and diluted lossper share of $.44 as compared to net income of $448,877 or basic and dilutedearning per share of $.14 and $.13, respectively, for the same period of 2004.

 

### **Liquidity and Capital Resources**

 

The Company’s primary need for capital has been to invest in softwaredevelopment, in computers and related equipment for its internal use, and itsintegration plan for the impending merger with StorCOMM.  The Company invested $511,421 and $427,803 insoftware development during the nine-month periods ended September 30, 2005 and2004, respectively.  These expendituresrelated to the new browser version of the Company’s LIS product, CyberLAB 7.0,and new software that integrates the Company’s radiology product CyberRAD withthe StorCOMM PACS system.

 

The Company anticipates expending additional sums during the remainderof fiscal 2005 on product enhancements to all its products, the furtherenhancements of the new browser version of the Company’s CyberLAB 7.0 product,and the integration of the Company’s radiology product CyberRAD with theStorCOMM PACS system.  During thenine-month period ended September 30, 2005, the Company invested an aggregateof $256,925 in additions to fixed assets, primarily consisting of computers andsoftware related to the new customer relationship management system, whichreplaced its former aged help desk application, as compared to an investment of$122,365 in the comparable period of 2004. Furthermore, the Company deferred approximately $340,000 in merger costsprimarily related to legal and third party due diligence expenses which will beadjusted to the aggregate merger transaction costs at closing

 

As of September 30, 2005, the Company had negative working capital of$216,110, compared to working capital of $1,589,832 as of December 31,2004.  The negative working capital is primarilydue to the valuation allowance taken against the net deferred tax asset and thereduction in cash and receivables since December 31, 2004.  The Company’s current ratio was 0.91 atSeptember 30, 2005 compared to 1.6 at December 31, 2004.  At September 30, 2005, the Company’s creditfacilities with its bank consisted of a revolving line of credit of $1,000,000,of which there was $200,000 outstanding. The bank credit agreement expires on February 1, 2006.  In addition, the Company hasentered into a private placement transaction with a small group of investorsfor the issuance of $3,000,000 in common stock and warrants contingent upon thecompletion of the StorCOMM merger.

 

Cash flows from operating activities were $242,987 for the nine-monthperiod ended September 30, 2005 compared to cash flows of $1,040,810 for thecomparable period of fiscal 2004.  Thedecrease in cash flow from operating activities was primarily attributable tothe net change in accrued receivables, inventories, payables, deferred taxasset, and deferred revenues offset by the reduction in income fromoperations in the nine-month period ended September 30, 2005 compared to thesame period of fiscal 2004.

 

Net cash used in investing activities totaled $1,108,423 for thenine-month period ended September 30, 2005, compared to $550,168 used ininvesting activities during the comparable period of 2004.  The increase in cash used in

 

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investing activities was due toincreased investment in property and equipment related to the new customerrelationship management system, additional investment in capitalized software,and additions to capitalized acquisition costs.

 

Cash flows from financing activities amounted to $71,400 during the nine-monthperiod ended September 30, 2005.  Therewere no financing activities during the comparable period of fiscal 2004.  The change from fiscal 2004 to fiscal 2005resulted primarily from payments on its revolving line of credit with the bankoffset by cash flows from exercises of stock options.

 

The Company’s primary source of working capital has been generated fromearnings, and from borrowings on its line of credit.  The Company produced cash flows amounting to$242,987 to fund its operations in the nine-month period ended September 30,2005.  Management believes that itsprojected cash flow from operations, together with its bank credit facilities,should be sufficient to fund its working capital requirements for the next twelvemonths.  Furthermore, we will haveadditional funds available to us from the private placement transaction.  However, an unanticipated decline in sales orcontinued delays in closing new transactions, delays in implementations wherepayments are tied to delivery and/or performance of services, or cancellationsof contracts could have a negative effect on cash flow from operations andcould in turn create short-term liquidity problems.  If such events were to occur, the Company mayhave to seek alternative financing. Additionally, we may seek additional funds to finance our future growthand operations. There can be no assurance that such funds will be availablewhen required or available on terms acceptable to us.

 

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

 

The Company’s sales are generally higher in the winter and spring dueto budgetary cycles of its clients. Inflation has not had a material effect on the Company’s business sincethe Company has been able to adjust the prices of its products and services inresponse to inflationary pressures. Management believes that most phases of the healthcare segment of thecomputer industry will continue to be highly competitive, and that potentialhealthcare reforms including those promulgated by Health Insurance Portabilityand Accountability Act (“HIPAA”) may have a long-term positive impact on itsbusiness.  With respect to the complianceissues brought about by HIPAA, the Company has invested heavily in newapplication modules to assist its clients in meeting their regulatory goals.  Management believes that the new modules willbe key selling points and will provide a competitive advantage.  In addition, management believes that thehealthcare information technology industry will be marked with more significanttechnological advances, which will improve the quality of service and reducecosts.  The Company is poised to meetthese challenges by continuing to employ new technologies when they becomeavailable, diversifying its product offerings, improving and expanding itsservices, and by constantly enhancing its software applications.

 

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

 

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

 

*Inventory*

 

The Company’s inventory is comprised of a current inventory accountthat consists of items that are held for resale and a long-term inventoryaccount that consists of items that are held for repairs and replacement ofhardware components that are serviced by the Company under long-term ExtendedService Agreements with its clients. Current inventory is valued at the lower of cost to purchase or thecurrent 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

 

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usage of specific inventoryitems and net realizable value. Management reviews inventory quantities on hand and makes determinationof the excess or obsolete items in the inventory, which, are specificallyreserved.  In addition, adjustments aremade for the difference between the cost of the inventory and the estimatedmarket value and charged to operations in the period in which the facts thatgive rise to the adjustments become known. At September 30, 2005, the inventory reserve was approximately $195,000.

 

*Accounts Receivable*

 

Accounts receivable balances are evaluated on a continual basis andallowances are provided for potentially uncollectible accounts based onmanagement’s estimate of the collectability of customer accounts. If thefinancial condition of a customer were to deteriorate, resulting in animpairment of their ability to make payments, an additional allowance may berequired. Allowance adjustments are charged to operations in the period inwhich the facts that give rise to the adjustments become known.  The accounts receivable balance at September30, 2005 was $852,477, net of an allowance for doubtful accounts ofapproximately $57,700.

 

*Revenue Recognition*

 

Revenues are derived primarily from the sale of CIS products and theprovision of services.  The components ofthe system sales revenues are the licensing of computer software, installation,and the sale of computer hardware and sublicensed software. The components ofservice revenues are software support and hardware maintenance, training, andimplementation services.  The Companyrecognizes revenue in accordance with the provisions of Statement of Position(SOP) No. 97-2, “Software Revenue Recognition,” as amended by SOP No. 98-4, SOP98-9 and clarified by Staff Accounting Bulletin (SAB) 104 “Revenue Recognitionin Financial Statements.” SOP No 97-2, as amended, generally requires revenueearned on software arrangements involving multiple-elements to be allocated toeach element based on the relative fair values of those elements.  The Company allocates revenue to each elementin a multiple-element arrangement based on the element’s respective fair value,with the fair value determined by the price charged when that element is soldand specifically defined in a quotation or contract.  The Company determines the fair value of themaintenance portion of the arrangement based on the renewal price of themaintenance charged to clients, professional services portion of thearrangement, other than installation services, based on hourly rates which theCompany charges for these services when sold apart from a software license, andthe hardware and sublicense of software based on the prices for these elementswhen they are sold separately from the software.  At September 30, 2005, deferred revenue onsystem sales was $290,928.

 

Post Implementation software and hardware maintenance services aremarketed under monthly and annual arrangements and are recognized as revenueratably over the contracted maintenance term as services are provided.  Deferred revenue related to CIS sales iscomprised of deferrals for license fees, hardware, and other services for whichthe implementation has not yet been completed and revenues have not beenrecognized.  During the second fiscal quarter,the Company implemented a new customer relationship management system.  The new system replaced the Company’s agedhelp desk system and was integrated with the Company’s accounting system.  The integration of these systems necessitateda change in the Company’s billing procedures, which resulted in a partialreduction of accounts receivable and a concurrent decrease in deferredrevenues.  At September 30, 2005,deferred service contract income was $1,085,341.

 

*Software Development Costs*

 

Costs incurred internally in creating computer software products areexpensed until technological feasibility has been established upon completionof a program design. Thereafter, applicable software development costs arecapitalized and subsequently reported at the lower of amortized cost or netrealizable value.  Capitalized costs areamortized based on current and expected future revenue for each product withminimum annual amortization equal to the straight-line amortization over theestimated economic life of the product, not to exceed five years.  For the nine-month periods ended September30, 2005 and 2004, the Company capitalized $511,421 and $427,803,respectively.  At September 30, 2005, thebalance of capitalized software costs was $1,783,044, net of accumulatedamortization of $1,137,971.

 

*Income Taxes*

 

The Company accounts for income taxes in accordance with SFAS No. 109 “Accountingfor Income Taxes,” which requires recognition of deferred tax liabilities andassets for the expected future tax consequences of events that have beenincluded in the financial statements or tax returns.  Under this method, deferred tax liabilitiesand assets are

 

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determined based on thedifferences between the financial statements and the tax bases of assets andliabilities using enacted tax rates in effect for the year in which thedifferences are expected to reverse. Valuation allowances are established when necessary to reduce deferredtax assets to the amount expected to be realized.  Income tax expense represents the tax payablefor the period and the change during the period in deferred tax assets andliabilities.

 

### **Risk Factors**

 

In evaluating the Company, various risk factors and other informationshould be carefully considered.  Therisks and uncertainties described below are not the only ones that impact theCompany.  Additional risks anduncertainties not presently known to us or that we currently deem immaterialmay also have an adverse impact on us. Among other things, this discussion contains forward-looking statementsthat are based on certain assumptions about future risks anduncertainties.  We believe that ourassumptions are reasonable.  Nonetheless,it is likely that at least some of these assumptions will not come true.

 

***We face intensecompetition from both established entities and new entries in the market thatmay adversely affect our revenues and profitability.***

 

Our markets are competitive. There are many companies with active research and development programsboth in and outside of the healthcare information technology industry.  Many of these companies have considerableexperience 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.

 

If we are unable to anticipate or react to competition or if existingor new competitors gain market share, our sales may decline or be impaired andwe may experience a decline in the prices we can charge for our products, whichcould adversely affect our operating results. Our competitive position depends on several factors, including:

 

•                  ourability to adapt effectively to the continued development, acquisition or licensingof technology or product rights by our competitors;

 

•                  ourability to enhance our products or develop new products;

 

•                  ourability to adapt to changing technological demands; and

 

•                  ourstrategic decisions regarding the best allocation of our limited resources.

 

Several of our current and potential competitors have greaterfinancial, technical, sales, marketing and other resources than we do andconsequentially may have an ability to influence customers to purchase theirproducts that compete with ours.  Ourfuture and existing competitors could introduce products with superiorfeatures, scalability and functionality at lower prices than our products, andcould also bundle existing or new products with other more established productsin order to compete with us.  Ourcompetitors could also gain market share by acquiring or forming strategicalliances with our other competitors.  Ifwe do not adapt our business in the face of this competition, our business andoperating results may be harmed.

 

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

 

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

 

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

 

The market for our products is characterizedby rapid technological advances, changes in customer requirements and frequentnew product introductions and enhancements. Our future success depends upon our ability to introduce new productsthat keep pace with technological developments, enhance current product linesand respond to evolving client requirements. CCA has incurred, and we will need to continue to incur, significantresearch and development expenditures in future periods as we strive to remaincompetitive.  Our failure to meet thesedemands could result in a loss of our market share and competitiveness andcould harm our revenues and results of operations.

 

***Our success depends on our ability toattract, retain and motivate management and other skilled employees.***

 

Our future success and growth depend on the continued services of ourkey management and employees, including Steven M. Besbeck, Bruce M. Miller, andJames R. Helms.  The loss of the servicesof any of these individuals or any other key employee could materially affectour business.  Our future success alsodepends on our ability to identify, attract and retain additional qualifiedpersonnel.  Competition for employees inour industry is intense and we may not be successful in attracting or retainingthem.  There are a limited number ofpeople 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, especially withoutadvance notice, or our inability to hire or retain qualified personnel, couldhave 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.

 

***If we do not protect our proprietaryinformation and prevent third parties from making unauthorized use of ourproducts and technology, our financial results could be harmed.***

 

We rely on a combination of confidentiality agreements and proceduresand copyright, patent, trademark and trade secret laws to protect ourproprietary information.  However, all ofthese measures afford only limited protection and may be challenged,invalidated, or circumvented by third parties. Third parties may copy aspects of our products or otherwise obtain anduse our proprietary information without authorization.  Third parties may also develop similar orsuperior technology independently, including by designing around ourpatents.  Furthermore, the laws of someforeign countries do not offer the same level of protection of our proprietaryrights as the laws of the United States, and we may be subject to unauthorizeduse of our products in those countries. Any legal action that we may bring to protect proprietary informationcould be expensive and may distract management from day-to-day operations.  Unauthorized copying or use of our productsor proprietary information could result in reduced sales of our products.

 

***Third parties claiming that we infringe theirproprietary rights could cause us to incur significant legal expenses andprevent us from selling our products.***

 

We could receive claims that we have infringed the intellectualproperty rights of others.  Any suchclaim, with or without merit, could:

 

•                  betime consuming to defend;

 

•                  resultin costly litigation;

 

•                  divertmanagement’s time and attention from our business;

 

•                  requireus to stop selling, to delay shipping or to redesign our products; or

 

•                  requireus to pay monetary amounts as damages to our customers.

 

In addition, we license and use software from third parties in ourbusiness.  These third party softwarelicenses may not continue to be available to us on acceptable terms.  Also, these third parties may from time totime receive claims that they have infringed the intellectual property rightsof others, including patent and copyright infringement claims, which may

 

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affect our ability to continuelicensing their software.  Our inabilityto use any of this third party software could result in disruptions in ourbusiness, which could materially and adversely affect our operating results.

 

***We operate in aconsolidating industry which creates barriers to market penetration.***

 

The healthcare information technologyindustry in recent years has been characterized by consolidation by both healthcareproviders who are our clients and by those companies that we competeagainst.  Large hospital chains andgroups of affiliated hospitals prefer to negotiate comprehensive contracts forall of their system needs with larger vendors who offer broader product linesand services.  The convenience offered bythese large vendors are administrative and financial incentives that we cannotoffer our clients.

 

***Our products may besubject to government regulation in the future that could impair our operations.***

 

CCA’s products could be subject to stringent government regulation inthe United States and other countries in the future.  Furthermore, assuming we complete the mergerwith StorCOMM, we expect that the integration of our product and serviceoffering with those of StorCOMM will require us to comply with regulatoryrequirements and that we will devote significant time and resources to thiseffort.  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, withdrawal of existing product, or our inability to integrate ourservice and product offerings with those of StorCOMM.  If any of these things occur, it could have amaterial adverse impact on our business.

 

***Changes ingovernment regulation of the healthcare industry could adversely affect ourbusiness.***

 

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 or 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.

 

***We are subject to the Health Insurance Portability andAccountability Act (HIPAA) and the cost of complying with HIPAA may negativelyimpact our net income.***

 

Our business is substantially impacted by the requirements of HIPAA andour products must maintain the confidentiality of a patient’s medical recordsand information.  These requirements also apply to most of ourclients.  We believe our products meet the standards of HIPAA and mayrequire our clients to upgrade their systems, but our clients’ preoccupationwith HIPAA may adversely impact sales of our products, and the costs ofcompliance with HIPAA could have an impact on our product margins and sales,the general and administrative expenses incurred by us and could negativelyimpact our net income.

 

***Defective productsor product failure may subject us to liability and could substantially increaseour costs.***

 

CCA’s products are used to gather information for professionals to makemedical decisions, diagnosis, and treatment. Accordingly, the manufacture and sale of our products entails aninherent risk of product liability arising from an inaccurate, or allegedlyinaccurate, test or procedure result. CCA may discover errors and failures in certain of its productofferings, which could result in delays or lost revenue during the period requiredto correct these errors.  Errors andfailures in products released by us could result in negative publicity, productreturns, loss of or delay in market acceptance of our products, loss ofcompetitive position or claims by customers or others.  Alleviating any of these problems could requiresignificant expenditures of our capital and resources and could causeinterruptions, delays or cessation of our sales, which could cause us to loseexisting or potential customers and would adversely affect our operatingresults.  We may be subject to productliability claims as a result of any failure or errors in our products. If acustomer is successful in proving its damages, it could prove expensive andtime-consuming to defend against these claims, and we could be liable for thedamages suffered by our customers and other related expenses, which couldadversely affect our operating results. We currently maintain product liability insurance coverage for up to$2.0 million per incident and up to an aggregate of $4.0 million peryear.  Although management believes thisliability coverage is sufficient protection against future claims, there can beno assurance of the sufficiency of these policies.  We have not received any indication that our

 

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insurance carrier will notrenew our product liability insurance at or near current premiums; however, wecannot guarantee that this will continue to be the case.

 

***System or network failures could reduce our sales, increasecosts or result in a loss of customers.***

 

We rely on our management information systems to operate our businessand to track our operating results.  Ourmanagement information systems will require modification and refinement as wegrow and our business needs change.  Ifwe experience a significant system failure or if we are unable to modify ourmanagement information systems to respond to changes in our business needs,then our ability to properly run our business could be adversely affected andcould lead to a reduction in our sales, increased costs and a loss ofcustomers.

 

***Our evaluation of internal controls and remediation ofpotential problems will be costly and time consuming and could expose weaknessin our financial reporting.***

 

While we believe that we currently have adequate internal controlprocedures in place, we are still exposed to potential risks from recentlegislation requiring companies to evaluate controls under Section 404 of theSarbanes-Oxley Act of 2002.  We areevaluating our internal controls system in order to allow management to reporton, and our independent registered public accounting firm to attest to, ourinternal controls over financial reporting, beginning with our Annual Report onForm 10-KSB for fiscal year 2006 as required in Section 404 of theSarbanes-Oxley Act of 2002.

 

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

 

Future sales of substantial amounts of shares of our common stock inthe public market, or the perception that these sales could occur, may causethe market price of our common stock to decline.  In addition, we may be required to issueadditional shares upon exercise of previously granted options or warrants, suchas the warrants to purchase up to 300,000 shares of CCA common stock that CCAis issuing in a private placement and the CCA options and warrants to be issuedin exchange for StorCOMM’s options and warrants in the merger. Increased salesof our common stock in the market after exercise of stock options or warrantscould exert significant downward pressure on our stock price.  These sales also might make it more difficultfor us to sell equity or equity-related securities in the future at a time andprice we deem appropriate.

*** ***

***Our stock price maybe volatile in the future, and you could lose the value of your investment.***

 

The market prices of the common stock for CCA has experiencedsignificant fluctuations and our stock price may continue to fluctuatesignificantly, and you could lose the value of your investment.  The market price of our common stock may beaffected by a number of factors, including:

 

•                  announcementsof quarterly operating results and revenue and earnings forecasts by us, ourcompetitors or our customers;

•                  failureto achieve financial forecasts, either because expected sales do not occur orbecause they occur at lower prices or on terms that are less favorable to us;

•                  rumors,announcements or press articles regarding changes in our management,organization, operations or prior financial statements;

•                  changesin revenue and earnings estimates by securities analysts;

•                  announcementsof planned acquisitions by us or by our competitors;

•                  announcementsof new or planned products by us, our competitors or our customers;

•                  gainor loss of a significant customer;

•                  inquiriesby the SEC, AMEX, law enforcement or other regulatory bodies; and

•                  actsof terrorism, the threat of war and economic slowdowns in general.

 

The stock market has experienced extreme price volatility, which hasadversely affected and may continue to adversely affect the market price of ourcommon stock for reasons unrelated to our business or operating results.

 

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***Fluctuations in ourquarterly financial results have affected the stock prices of CCA in the pastand could affect our stock price in the future.***

 

The quarterly financial results of CCA have fluctuated in the past andthe quarterly financial results of the Company are likely to vary significantlyin the future.  A number of factorsassociated with the operation of our business may cause our quarterly financialresults to fluctuate, including our ability to:

 

•                  effectivelyalign sales resources to meet customer needs and address market opportunities;

•                  effectivelyrespond to competitive pressures;

•                  effectivelymanage our operating expense levels; and

•                  effectivelymanage and incentivize our selling organization.

 

A number of factors associated with our industry and the markets forour products, many of which are outside our control, may cause our quarterlyfinancial results to fluctuate, including:

 

•                  reduceddemand for any of our products;

•                  timingand amount of orders by customers and seasonality in the buying patterns ofcustomers;

•                  cancellation,deferral or limitation of orders by customers;

•                  fluctuationsin foreign currency exchange rates; and

•                  weaknessor uncertainty in general economic or industry conditions.

 

Quarterly changes in our financial results could cause the tradingprice of our common stock to fluctuate significantly.  If our quarterly financial results or our predictionsof future financial results fail to meet the expectations of securitiesanalysts and investors, our stock price could be negatively affected.  Any volatility in our quarterly financialresults may make it more difficult for us to raise capital in the future orpursue acquisitions that involve issuances of our stock or securitiesconvertible into or exercisable for our stock. You should not rely on the results of prior periods as predictors of ourfuture performance.

 

***Factors outside ofour control may adversely affect our operations and operating results.***

 

Our operations and operating results may be adversely affected by manydifferent factors which are outside of our control, including:

 

•           deterioration ineconomic conditions in any of the healthcare information technology industry,which could reduce customer demand and ability to pay for our products andservices;

 

•           political and militaryinstability, which could slow spending within our target markets, delay salescycles and otherwise adversely affect our ability to generate revenues andoperate effectively;

 

•           budgetary constraintsof customers, which are influenced by corporate earnings and spendingobjectives;

 

•           earthquakes, floods,hurricanes or other natural disasters affecting our headquarters located inCalabasas, California, an area known for seismic activity, or our otherlocations worldwide;

 

•           acts of war orterrorism; and

 

•           inadvertent errors.

 

Any of these factors could result in a loss of revenues and/or higherexpenses, which could adversely affect our financial results.

*** ***

***Our internationaloperations involve special risks that could increase our expenses, adverselyaffect our operating results and require increased time and attention of ourmanagement.***

 

We expect to generate less than 5% of our revenues from customerslocated outside of the United States in the fiscal year endingDecember 31, 2005.  Assuming themerger with StorCOMM is completed, our international operations will expand sinceStorCOMM has significant operations outside of the United States.  We expect to expand our internationaloperations and such expansion is contingent upon the successful growth of ourinternational revenues.  Our internationaloperations are subject to risks in addition to those faced by our domesticoperations, including:

 

•           potential loss ofproprietary information due to piracy, misappropriation or laws that may beless protective of our intellectual property rights;

 

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•           imposition of foreign lawsand other governmental controls, including trade and employment restrictions;

 

•           enactment of additionalregulations or restrictions on imports and exports;

 

•           fluctuations incurrency exchange rates and economic instability such as higher interest ratesand inflation, which could make our products more expensive in those countries;

 

•           limitations on futuregrowth or inability to maintain current levels of revenues from internationalsales if we do not invest sufficiently in our international operations;

 

•           longer payment cyclesfor sales in foreign countries and difficulties in collecting accountsreceivable;

 

•           difficulties instaffing, managing and operating our international operations;

 

•           difficulties incoordinating the activities of our geographically dispersed and culturallydiverse operations; and

 

•           political unrest, waror terrorism, particularly in areas in which we have facilities.

 

A portion of StorCOMM’s transactions outside of the United States aredenominated in foreign currencies.  Our functionalcurrency is the U.S. dollar. Accordingly, our future operating results willcontinue to be subject to fluctuations in foreign currency rates.  Hedging foreign currency transactionexposures is complex and subject to uncertainty. We may be negatively affectedby fluctuations in foreign currency rates in the future, especially ifinternational sales continue to grow as a percentage of our total sales.

*** ***

***Changes to financialaccounting standards and new exchange rules could make it more expensiveto issue stock options to employees, which would increase compensation costsand may cause us to change our business practices.***

 

We prepare our financial statements to conform with generally acceptedaccounting principles, or GAAP, in the United States.  These accounting principles are subject tointerpretation by the Public Company Accounting Oversight Board, the Securitiesand Exchange Commission and various other regulatory bodies.  A change in those policies could have asignificant effect on our reported results and may affect our reporting oftransactions completed before a change is announced.

 

For example, we have used stock options and other long-term equityincentives as a fundamental component of our employee compensationpackages.  We believe that stock optionsand other long-term equity incentives directly motivate our employees tomaximize long-term shareholder value and, through the use of vesting, encourageemployees to remain with our company. Several regulatory agencies and entities are considering regulatorychanges that could make it more difficult or expensive for us to grant stockoptions to employees.  For example, theFinancial Accounting Standards Board has issued SFAS 123R that will require usto record a charge to earnings for employee stock option grants.  In addition, regulations implemented by theAmerican Stock Exchange generally require shareholder approval for all stockoption plans, which could make it more difficult or expensive for us to grantstock options to employees.  We may, as aresult of these changes, incur increased compensation costs, change our equitycompensation strategy or find it difficult to attract, retain and motivateemployees, each of which could materially and adversely affect our business,operating results and financial condition.

*** ***

***We may be unable to complete the StorCOMM Merger.***

 

On October 3, 2004, CCA filed a registration statement on Form S-4 inconnection with the proposed merger of StorCOMM with Xymed.com, Inc., a whollyowned subsidiary of CCA.  Theregistration statement was declared effective by the SEC on October 28,2005.  Assuming the merger is approved bythe shareholders of CCA and StorCOMM, CCA expects the merger to close on orabout November 21, 2005.  The merger is riskyand may be subject to a lengthy process to close and it could divert management’stime and focus from operating our business. We may seek additional debt or equity financing in connection with themerger.  Additional financing may not beavailable to us on acceptable terms or at all. We may not be able to close the transaction on the timetable weanticipate, if at all.  If we are unableto complete the merger, we may incur significant non-recoverable expenses thatmay have a material adverse effect on our financial position.  As of September 30, 2005, we have incurredexpenses related to the integration of StorCOMM and CCA and additional expensesrelated to the merger.  We will not beable to recover these expenses if the merger is not completed.

 

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***Failure to completethe merger could adversely affect CCA’s and StorCOMM’s future business andoperation as well as the market price of CCA common stock.***

 

The merger is subject to the satisfaction of closing conditions,including the approval by both CCA and StorCOMM shareholders, and neither CCAnor StorCOMM can assure you that the merger will be successfullycompleted.  In the event that the mergeris not completed, CCA and StorCOMM may be subject to many risks, including thecosts related to the merger, such as legal, accounting and advisory fees, whichmust be paid even if the merger is not completed, or the payment of atermination fee under specified circumstances. If the merger is not completed, the market price of CCA common stockcould decline.

*** ***

***If the merger iscompleted but CCA and StorCOMM fail to effectively integrate their operations,the combined company may not realize the potential benefits of the merger.***

 

Assuming the merger is completed, the integration of CCA and StorCOMMwill be a time consuming and expensive process and may disrupt the combinedcompany’s operations if it is not completed in a timely and efficientmanner.  If this integration effort isnot successful, the combined company’s results of operations could be harmed,employee morale could decline, key employees could leave, customers couldcancel existing orders or choose not to place new ones and the combined companycould have difficulty complying with regulatory requirements.  In addition, the combined company may notachieve anticipated synergies or other benefits of the merger.  Following the merger, CCA and StorCOMM mustoperate as a combined organization utilizing common information andcommunication systems, operating procedures, financial controls and humanresources practices.  The combinedcompany may encounter the following difficulties, costs and delays involved inintegrating their operations:

 

•           failure to successfullymanage relationships with customers and other important relationships;

 

•           failure of customers toaccept new services or to continue using the products and services of thecombined company;

 

•           difficulties insuccessfully integrating the management teams and employees of CCA andStorCOMM;

 

•           challenges encounteredin managing larger, more geographically dispersed operations;

 

•           the loss of keyemployees;

 

•           diversion of theattention of management from other ongoing business concerns;

 

•           potentialincompatibilities of technologies and systems;

 

•           potential difficultiesintegrating and harmonizing financial reporting systems; and

 

•           potentialincompatibility of business cultures.

 

If the combined company’s operations after the merger do not meet theexpectations of existing customers of CCA or StorCOMM, then these customers maycease doing business with the combined company altogether, which would harm theresults of operations and financial condition of the combined company.

 

If the anticipated benefits of the merger are not realized or do notmeet the expectations of financial or industry analysts, the market price ofCCA common stock may decline after the merger. The market price of CCA common stock may decline as a result of themerger if:

 

•           the integration of CCAand StorCOMM is unsuccessful;

 

•           the combined companydoes not achieve the expected benefits of the merger as quickly as anticipatedor the costs of or operational difficulties arising from the merger are greaterthan anticipated;

 

•           the combined company’sfinancial results after the merger are not consistent with the expectations offinancial or industry analysts;

 

•           the anticipatedoperating and product synergies of the merger are not realized; or

 

•           the combined companyexperiences the loss of significant customers or employees as a result of themerger.

*** ***

***Completion of themerger may result in dilution of future earnings per share to the shareholdersof CCA.***

 

The completion of the merger may not result in improved earnings pershare of CCA or a financial condition superior to that which would have beenachieved by either CCA or StorCOMM on a stand-alone basis.  The merger could fail to

 

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produce the benefits that thecompanies anticipate, or could have other adverse effects that the companiescurrently do not foresee.  In addition,some of the assumptions that either company has made, such as the achievementof operating synergies, may not be realized. In this event, the merger could result in a reduction of earnings pershare of CCA as compared to the earnings per share that would have beenachieved by CCA or StorCOMM if the merger had not occurred.

*** ***

***The costs associatedwith the merger are difficult to estimate, may be higher than expected and mayharm the financial results of the combined company.***

 

CCA estimates that it will incur aggregate direct transaction costs ofapproximately $700,000 associated with the merger, and additional costsassociated with consolidation and integration of operations, which cannot beestimated accurately at this time. Assuming the merger is completed, if the total costs of the mergerexceed estimates or the benefits of the merger do not exceed the total costs ofthe merger, the financial results of the combined company could be adverselyaffected.

*** ***

***The businesses ofCCA could suffer due to the closing of the merger.***

 

The closing of the merger may have a negative impact on CCA’s orStorCOMM’s ability to sell their respective products and services, attract andretain key management, technical, sales or other personnel, maintain and attractnew customers and maintain strategic relationships with third parties.  For example, CCA and StorCOMM may experiencedeferral, cancellations or a decline in the size or rate of orders for theirrespective products or services or a deterioration in their respective customeror business partner relationships.  Anysuch events could harm the operating results and financial condition of thecombined company following the merger.

 

### **New Accounting Pronouncements**

 

In December 2004, the FASB issued SFAS No. 123 (revised 2004), (“Share-BasedPayment” (“SFAS 123R”), which replaces SFAS No. 123, “Accounting forStock-Based Compensation,” (“SFAS 123”) and supersedes APB Opinion No. 25,“Accounting for Stock Issued to Employees.” SFAS 123R requires all share-basedpayments to employees, including grants of employee stock options, to berecognized in the financial statements based on their fair value. The pro formadisclosures previously permitted under SFAS 123 will no longer be analternative to financial statement recognition. We are required to adopt SFAS123R in the first quarter of fiscal 2006. Under SFAS 123R, we must determinethe appropriate fair value model to be used for valuing share-payments, theamortization method for compensation cost and the transition method to be usedat the date of adoption. The transition methods include prospective andretroactive adoption methods. The prospective method requires that compensationexpense be recorded for all unvested stock options at the beginning of thefirst quarter of adoption of SFAS 123R, while the retroactive method wouldrestate prior periods to record compensation expense for all unvested stockoptions beginning with the first period restated. We are evaluating therequirements of SFAS 123R and expect that the adoption of SFAS 123R will have amaterial impact on our consolidated results of operations and earnings pershare. We have not yet determined the method of adoption or the effect ofadopting SFAS 123R, and we have not yet determined whether the adoption willresult in amounts that are similar to the current pro forma disclosures underSFAS 123.

 

In March 2005, the SEC staff issued aStaff Accounting Bulletin (“SAB 107”) which express views of the staffregarding the interaction between SFAS No. 123R and certain SEC rules andregulations and provide the staff’s views regarding the valuation ofshare-based payment arrangements for public companies. In particular, SAB 107provides guidance related to share-based payment transactions withnon-employees, the transition from nonpublic to public entity status, valuationmethods (including assumptions such as expected volatility and expected term),the accounting for certain redeemable financial instruments issued undershare-based payment arrangements, the classification of compensation expense,non-GAAP financial measures, first-time adoption of SFAS No. 123R in an interimperiod, capitalization of compensation cost related to share-based paymentarrangements, the accounting for income tax effects of share-based paymentarrangements upon adoption of SFAS No. 123R, the modification of employee shareoptions prior to adoption of SFAS No. 123R and disclosures in Management’sDiscussion and Analysis subsequent to adoption of SFAS No. 123R.

 

In December 2004, the FASB issued SFAS No. 151, “Inventory Costs, anamendment of ARB No. 43, Chapter 4,” which requires that abnormal amounts ofidle facility expense, freight, handling costs and wasted material (spoilage)be recognized as current-period charges. In addition, the statement requiresthat allocation of fixed production overheads to the costs of conversion bebased on the normal capacity of the production facilities. SFAS No. 151 iseffective for fiscal

 

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years beginning after June 15,2005. The Company will adopt this statement as required, and the Company doesnot believe the adoption will have a material effect on the Company’s resultsof operations or financial condition.

 

In December 2004, the FASB issued SFAS No. 153, “Exchanges ofNonmonetary Assets, an amendment of APB Opinion No. 29,” which eliminates theexception for nonmonetary exchanges of similar productive assets and replacesit with a general exception for exchanges of nonmonetary assets that do nothave commercial substance. The statement defines a nonmonetary exchange withcommercial substance as one in which the future cash flows of an entity areexpected to change significantly as a result of the exchange. SFAS No. 153 iseffective for fiscal years beginning after June 15, 2005. The Company willadopt this statement as required, and it does not believe the adoption willhave a material effect on the Company’s results of operation or financialcondition.

 

In May 2005, the Financial Accounting Standards Board issuedStatement No. 154, “Accounting Changes and Error Corrections, areplacement of APB Opinion No. 20, Accounting Changes, and StatementNo. 3, Reporting Accounting Changes in Interim Financial Statements,” orSFAS No.154. SFAS No. 154 changes the requirements for the accounting for,and reporting of, a change in accounting principle. Previously, most voluntarychanges in accounting principles were required to be recognized by way of acumulative effect adjustment within net income during the period of the change.SFAS No. 154 generally requires retrospective application to prior periods’financial statements of voluntary changes in accounting principles. SFASNo. 154 is effective for accounting changes made in fiscal years beginningafter December 15, 2005; however, SFAS No. 154 does not change thetransition provisions of any existing accounting pronouncements. We do notbelieve adoption of SFAS No. 154 will have a material effect on ourconsolidated results of operations or financial position.

 

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

 

*Quarterly Controls Evaluation and RelatedChief Executive Officer and Chief Financial Officer Certifications*

 

Our Chief Executive Officer, Steven M. Besbeck, and Chief FinancialOfficer, Anahita Villafane, with the participation of our management, evaluatedthe effectiveness of the design and operation of our disclosure controls andprocedures as of the end of the period covered by this quarterly report. Basedupon that evaluation, the Chief Executive Officer and the Chief FinancialOfficer believe that, as of the end of the period covered by this report, theCompany’s disclosure controls and procedures are effective in timely makingknown to them material information relating to the Company (including itsconsolidated subsidiaries) required to be included in this report.

 

Attached as exhibits to this quarterly report are certifications of theChief Executive Officer and the Chief Financial Officer, which are required inaccordance with Rule 13a-14 of the Exchange Act. This “Controls andProcedures” section includes the information concerning the controls evaluationreferred to in the certifications, and it should be read in conjunction withthe certifications for a more complete understanding of the topics presented.

 

*Definition of Disclosure Controls andProcedures*

 

Disclosure controls and procedures are methods designed to reasonablyassure that information required to be disclosed in our reports filed under theExchange Act, such as this quarterly report, is recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules and forms.Disclosure controls and procedures are also designed to reasonably assure thatsuch information is accumulated and communicated to our management, includingthe Chief Executive Officer and Chief Financial Officer, as appropriate, toallow timely decisions regarding required disclosure.

 

*Limitations on the Effectiveness ofDisclosure Controls and Procedures*

 

Disclosure controls and procedures, no matter how well designed andimplemented, can provide only reasonable assurance of achieving a company’sdisclosure objectives. The likelihood of achieving such objectives is affectedby limitations inherent in disclosure controls and procedures. These includethe fact that human judgment in decision-making can be faulty and thatbreakdowns in internal control can occur because of human failures such assimple errors, mistakes or intentional circumvention of the establishedprocesses.

 

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*Changes in Internal Control over FinancialReporting*

 

There was no change in the Company’s internal control over financialreporting, known to the Chief Executive Officer or the Chief Financial Officer,which occurred during the period covered by this quarterly report that hasmaterially affected, or is reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

#### **PARTII - OTHER INFORMATION**

 

**Item6.****           Exhibits**

 

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

 

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

 

Exhibit 11                                             Statementre: computation of per share earnings.

 

Exhibit 31.1                                    Certificationof Chief Executive Officer pursuant to Rule 13a-14(a) of the SecuritiesExchange Act of 1934.

 

Exhibit 31.2                                    Certificationof Chief Financial Officer pursuant to Rule 13a-14(a) of the SecuritiesExchange Act of 1934.

 

Exhibit 32.1                                    Certificationof Chief Executive Officer pursuant to Rule 13a-14(b) of the SecuritiesExchange Act of 1934.

 

Exhibit 32.2                                    Certificationof Chief Financial Officer pursuant to Rule 13a-14(b) of the SecuritiesExchange Act of 1934.

 

 

### **SIGNATURES**

 

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

 
| CREATIVE COMPUTER APPLICATIONS, INC. |                              |   |
|--------------------------------------|-----------------------------------|--------|
| (Registrant)                         |                              |
|                                 |                              |
| Date:                                | November 14, 2005                 |   | /S/ Steven M. Besbeck |   |
|                                 | Steven. M. Besbeck, President and |
|                                 | Chief Executive Officer           |
|                                 |                              |
|                                 |                              |
| Date:                                | November 14, 2005                 |   | /S/ Anahita Villafane |   |
|                                 | Anahita Villafane,                |
|                                 | Chief Financial Officer           |
|                                      |                                   |        |  |  |  |

#### ** **

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#### **EXHIBIT INDEX**

 

3.1                                 Restated Articles ofIncorporation, as Amended (previously filed as an exhibit to the Company’sRegistration Statement on Form S-18 dated September 22, 1983, SEC File No.2-85265).

 

3.2                                 By-Laws, as amended(previously filed as an exhibit to the Company’s Registration Statement on FormS-18 dated September 22, 1983, SEC File No. 2-85265).

 

11                                    Statement re:computation of per share earnings.

 

31.1                           Certification of ChiefExecutive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of1934.

 

31.2                           Certificationof Chief Financial Officer pursuant to Rule 13a-14(a) of the SecuritiesExchange Act of 1934.

 

32.1                           Certificationof Chief Executive Officer pursuant to Rule 13a-14(b) of the SecuritiesExchange Act of 1934.

 

32.2                           Certificationof Chief Financial Officer pursuant to Rule 13a-14(b) of the SecuritiesExchange Act of 1934.

 

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