UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number: 001-15769
CALIFORNIA SOFTWARE CORPORATION
(Exact name of small business issuer as specified in its charter)
Nevada 88-0408446
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2485 McCabe Way, 2nd Floor, 92614
Irvine, California (Zip Code)
(Address of principal executive
offices)
(949) 553-8900
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Check whether the registrant filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange
Act after the distribution of securities under a plan confirmed
by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
12,577,771
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT:
Yes [ ] No [X]
<PAGE>
California Software Corporation
Quarterly Report
Period Ending March 31, 2000
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet 1
Statements of Operations 2
Statements of Cash Flows 3
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis 5
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security 12
Holders
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
-i-
PART I - FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
California Software Corporation
BALANCE SHEET
(unaudited)
March 31, 2000
ASSETS
Current assets:
Cash and cash equivalents $2,162,365
Accounts receivable, net of allowance 415,747
for doubtful accounts of $427,864
Prepaids and other current assets 283,241
Total current assets 2,861,353
Property and equipment, net 63,993
Other assets 64,552
TOTAL ASSETS $2,989,898
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $415,775
Accrued payroll and related expenses 137,312
Deferred revenue 73,125
Total current liabilities 626,212
Contingencies (Note 4)
Stockholders' Equity
Preferred stock, $0.001 par value; -
5,000,000 shares authorized; no
shares issued and outstanding
Common stock, $0.001 par value; 9,766
20,000,000 shares authorized;
9,765,800 shares issued and
outstanding at March 31, 2000
Common stock subscribed 2,000,000
Additional paid-in capital 1,377,062
Accumulated deficit (1,023,142)
Total stockholders' equity 2,363,686
TOTAL LIABILITIES AND STOCKHOLDERS' $2,989,898
EQUITY
The accompanying notes are an integral part of the financial
statements.
-1-
California Software Corporation
STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended March 31,
2000 1999
Revenues:
Software sales $404,411 $763,240
Maintenance and other revenue 40,429 34,132
Total revenues 444,840 797,372
Costs and expenses:
Research and development 117,035 103,748
Selling, general, and 905,872 464,797
administrative
Depreciation and amortization 6,707 2,511
Total costs and expenses 1,029,614 571,056
Income (loss) from operations (584,774) 226,316
Other income (expense), net (1,306) (3,515)
Income (loss) from operations (586,080) 222,801
before provision for income tax
es
Provision for income taxes - (77,980)
Net income (loss) $(586,080) $144,821
Basic and diluted income (loss) $(0.07) $0.02
per share
Weighted-average shares 8,736,284 6,541,800
outstanding
The accompanying notes are an integral part of the financial
statements.
-2-
California Software Corporation
STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended March 31,
2000 1999
Net income (loss) $(586,080) $144,821
Adjustments to reconcile net
income (loss) with net cash
flows provided by (used in)
operations:
Depreciation and amortization 6,707 2,511
Allowance for bad debt - 71,073
Loss on disposal of assets 5,542 -
Issuance of stock for services 185,083 -
Changes in operating assets /
liabilities:
Accounts receivable 25,472 (254,430)
Prepaids and other current (20,944) 100
assets
Accounts payable and accrued (72,949) (88,847)
expenses
Accrued payroll and related 20,065 (45,068)
expenses
Income taxes payable - 77,980
Deferred revenue 21,292 (2,000)
Net cash used in operations (415,812) (93,860)
Cash flows from investing
activities
Acquisition of CSPI, net of cash - 349,950
acquired
Increase in other assets (534) -
PP&E additions (24,071) (3,531)
Net cash provided by (used in) (24,605) 346,419
investing activities
Cash flows from financing
activities
Issuance of common stock 200,000 -
Issuance of common stock 2,000,000 -
subscription
Net cash provided by financing 2,200,000 -
activities
Net change in cash and cash 1,759,583 252,559
equivalents
Cash at beginning of period 402,782 15,395
Cash at end of period $2,162,365 $267,954
SUPPLEMENTAL DISCLOSURE OF
NONCASH INVESTING AND FINANCING
ACTIVITIES
Purchase of CSPI in exchange for $- $700,840
common stock subscription
Conversion of common stock $700,840 $-
subscription into common stock
Issuance of stock in exchange for $64,018 $-
note receivable
The accompanying notes are an integral part of the financial
statements.
-3-
California Software Corporation
NOTES TO FINANCIAL STATEMENTS
March 31, 2000
1. BASIS OF PRESENTATION
The financial statements included herein have been prepared by
California Software Corporation (the "Company"), without audit,
pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). These financial statements should
be read in conjunction with the financial statements and the
notes thereto included in the Company's Annual Report on Form 10-
KSB, as amended, for the fiscal year ended December 31, 1999.
In the opinion of management, the unaudited financial statements
contain all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the Company's
financial position and results of operations. The results for
the three month period ended March 31, 2000 are not necessarily
indicative of the results expected for the full fiscal year.
2. CHANGE IN ACCOUNTANTS / CHANGE IN ACCOUNTING PRINCIPLES
In October 1997, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position ("SOP") No. 97-
2, "Software Revenue Recognition" which superseded SOP No. 91-1.
SOP No. 97-2 was effective for fiscal years after December 15,
1997, as amended by SOP No. 98-4 and SOP No. 98-9, and provides
guidance on applying generally accepted accounting principles
("GAAP") for software revenue recognition transactions. The
Company had been improperly recognizing revenue on shipments of
new products that failed to meet the criteria specified in SOP
No. 97-2. The Company's independent accountant issued an
unqualified opinion on the Company's financial statements for the
year ended December 31, 1999, a copy of which was included in the
Company's Annual Report on Form 10-KSB filed for the year then
ended. In addition, the Company filed a Form 10-QSB for the
three month period ended March 31, 2000 which contained financial
statements that were also not prepared in accordance with the
provisions of SOP No. 97-2. During the first quarter of 2000,
the Company was seeking to list its Common Stock on the American
Stock Exchange ("AMEX") and, during the listing process, was
notified that the Company would need to submit reaudited
financial statements for the year ended December 31, 1999 from
another independent accountant because the Company was unable to
provide evidence that its independent accountant met the peer
review standards mandated by the American Institute of Certified
Public Accountants ("AICPA"). On May 2, 2000, the Company's
Board of Directors approved a resolution engaging a new
certifying independent accountant, Squar, Milner, Reehl &
Williamson, LLP ("Squar"), who was initially engaged to perform a
SAS 71 review of the Company's financial statements for the three
months ended March 31, 2000. After appointing Squar, AMEX
notified the Company that it would accept audited financial
statements for the three month period ended March 31, 2000 in
lieu of having the year ended December 31, 1999 reaudited by
Squar. Squar subsequently notified the Company that it would not
be able to perform this audit within the timeframe requested by
the Company. On July 24, 2000, the Company engaged a new
certifying independent accountant, Stark, Tinter and Associates,
LLP ("Stark") in order to complete the audit within the Company's
timeframe. Upon examination of the Company's financial
statements, Stark notified the Company that the method in which
the Company used to record revenue was not in compliance with the
provisions of SOP No. 97-2. The restated results for the three
months ended March 31, 2000 and 1999 included in this report on
Form 10-QSB/A are prepared in accordance with GAAP, including the
provisions of SOP No. 97-2.
3. STOCK TRANSACTIONS
On January 12, 1999, the Company acquired the net assets of
California Software Products, Inc. ("CSPI") with a historical
cost of $700,840 in exchange for a Common Stock subscription.
Since CSPI's line of business was substantially the same as the
Company's, and the shareholders, officers, and directors of CSPI
and CSC were substantially the same, the Company valued the net
assets acquired from CSPI at their historical cost. On January
27, 2000, the subscription was converted into 2,000,000 shares of
the Company's Common Stock.
-4-
Effective March 15, 2000, the Company effected a two-for-one
stock split. Since the Company is incorporated in the State of
Nevada, where state securities laws mandate a minimum par value
of $0.001 (the par value of the Company's Common Stock prior to
the split), the Company increased its Common Stock and decreased
its additional paid-in capital accounts to account for effects of
the stock split. All share amounts and dollar amounts in this
Form 10-QSB have been adjusted to account for the effects of this
split.
During the three months ended March 31, 2000, the Company
commenced a private offering of its Common Stock under the
provisions of Rule 506 of Regulation D under the Securities Act
of 1933, as amended. On March 31, 2000, the Company received
partial proceeds of $2,000,000 from the offering but did not
issue the shares until May 23, 2000. As a result, the Company
recorded a stock subscription in the amount of $2,000,000 as of
March 31, 2000.
During the three months ended March 31, 2000, the Company issued
to unrelated non-employees 624,000 shares of its Common Stock at
prices from $0.525 to $7.20 per share for various services.
Certain of these services are to be performed in future periods.
As such, the Company has recorded deferred expense at March 31,
2000 in the amount of $204,168 related to these services.
4. CONTINGENCIES
Litigation
Refer to Part II, Item 1 for a description of legal proceedings.
Leases
In February 2000, the Company entered into a new lease agreement
for its corporate headquarters with McCabe Way Irvine, LLC for
approximately 10,668 square feet located at 2485 McCabe Way,
Irvine, CA 92614. The lease is for a five year term, with one
five-year option, with monthly lease payments ranging from
$22,403 to $24,003.
Item 2. Management's Discussion and Analysis
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on
Form 10-QSB contains forward-looking statements. The forward-
looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from those
reflected in such forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking
statements, which reflect management's opinions only as of the
date hereof. The Company undertakes no obligation to revise or
publicly release the results of any revision to these forward-
looking statements. Readers should carefully review the risk
factors described herein and in other documents the Company files
from time to time with the SEC, including its Annual Report on
Form 10-KSB, as amended, for the fiscal year ended December 31,
1999 and the Quarterly Reports on Form 10-QSB, as amended, filed
by the Company in fiscal 2000.
GENERAL
The Company markets a family of software products under the brand
name BABY that support the migration of International Business
Machines ("IBM") Midrange applications to the PC-LAN business
environment. The products provide (a) software solutions that
allow business customers to migrate IBM Midrange Report
Generation Language ("RPG") applications to the personal computer
("PC") environment and execute such applications in native mode
on a PC network without a complete rewrite; (b) software designed
to create a distributed processing environment including a true
AS/400 client-server environment, remote site operations,
deployment of specific applications to PC workstations separate
from an AS/400, various high availability applications, or
delegation of AS/400 batch processing to NT; and (c) graphical
user interface ("GUI") software that allows a developer of an
AS/400 text-based application to present screens with Windows
point-and-click functionality. The Company's goal is to sustain
market leadership in the management of midrange migration within
the IBM AS/400 and PC-LAN business environment, and to build
market share in the graphical products market.
-5-
RESULTS OF OPERATIONS
Software Sales. Software sales consist of sales of the Company's
BABY software products. Software sales for the three months
ended March 31, 2000 and 1999 were $404,411 and $763,240,
respectively, a 47.0% decrease. The decrease in software sales
during 2000 represents a planned change in emphasis in the
Company's business plan. In the first and second quarters of
1999, emphasis was placed on upgrading current customers on the
Company's rehosting products to prepare them for the launch of
the Company's new BABY/GUI and BABY.COM products, which also
allowed the Company to expand its potential customer base to a
much broader target of installed IBM AS/400 users. The Company
introduced BABY/GUI in the third quarter of 1999, and anticipates
launching BABY.COM in the fourth quarter of 2000. The Company
anticipates that these products will account for a majority of
the Company's sales in the future.
Maintenance and Other Revenue. Maintenance and other revenue
consists of annual maintenance contracts sold to the Company's
customers for technical support on its products, business partner
agreements which entitle the Company's customers to unlimited
annual technical support as well as increased discounts on
software purchases, and shipping revenue billed to customers.
Revenue from annual maintenance contracts and business partner
agreements are deferred and recognized over the term of the
related contract or agreement. Maintenance and other revenue for
the three months ended March 31, 2000 and 1999 was $40,429 and
$34,132, respectively, a 18.4% increase. The Company expects
that revenue from this source will increase in future periods as
the Company expands its customer base.
Research and Development Costs. Research and development costs
consist primarily of salaries paid to employees engaged in
research and development activities. The Company has adopted the
provisions of Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed". Since the Company did not meet
the standards for capitalization under this Statement, all
research and development costs for the three months ended March
31, 2000 and March 31, 1999 were charged to expense as incurred.
For the three months ended March 31, 2000 and 1999, research and
development costs were $117,035 and $103,748, respectively, a
12.8% increase as the Company continues its planned increases in
research and development activities relating to potential new
product releases. As a percentage of total revenue, research and
development costs for the three months ended March 31, 2000 were
26.3% as compared to 13.0% for the three months ended March 31,
1999. The Company believes that research and development
expenditures are essential to maintaining a competitive position
and expects that these costs will continue to increase in the
future.
Selling, General and Administrative Expense. Selling, general
and administrative expenses include sales and marketing expenses,
employee compensation, corporate overhead, legal and accounting
expenses, and bad debt expenses. For the three months ended
March 31, 2000 and 1999, selling, general and administrative
expenses were $905,872 and $464,797, respectively, a 94.9%
increase due to investor relations expenses and financial
services expenses of approximately $185,000, paid in shares of
the Company's Common Stock, that related to the Company's
private offering of its Common Stock completed during the second
quarter of 2000. In addition, increases in headcount from
approximately 23 employees during the quarter ended March 31,1999
to approximately 39 employees during the quarter ended March 31,
2000 resulted in an increase in wages and related benefits of
approximately $210,000. The remainder of the increase was due to
increases in corporate overhead necessary to support the Company's
expanding customer base. As a percentage of revenue, selling
general and administrative expenses for the three month period
ended March 31, 2000 were 203.6% as compared to 58.3% for the
three month period ended March 31, 1999. The Company expects
that selling, general and administrative costs, exclusive of
the investor relations expenses, will continue to increase in the
future as the Company continues to ramp up its sales and
marketing efforts.
Depreciation and Amortization. Depreciation and amortization
consists of recurring depreciation charges recorded against the
Company's property and equipment. Depreciation and amortization
for the three months ended March 31, 2000 and 1999 was $6,707 and
$2,511, respectively, a 167.1% increase primarily due to an
increase in property and equipment acquired by the Company. As a
percentage of revenue, depreciation and amortization for the
three month period ended March 31, 2000 was 1.5% compared to 0.3%
for the three month period ended March 31, 1999. The Company
expects that depreciation and amortization will continue to
increase in the future as the Company increases its property and
equipment base in connection with its continued expansion efforts
or as a result of any possible future acquisitions made by the
Company.
-6-
Other Income/Expense,Net. Other income/expense primarily consists
of imputed interest expense calculated on the liabilities assumed
by the Company in connection with its acquisition of CSPI in
January 1999, offset by interest income received from investments
of the Company's excess cash balances. Net other expense for the
three months ended March 31, 2000 was $1,306 as compared to net
other expense of $3,515 for the three months ended March 31,
1999, a 62.8% decrease as the result of higher cash balances
maintained by the Company during the first quarter of 2000.
Income Taxes. For the three months ended March 31, 2000, the
Company did not record any income tax benefit as compared to an
income tax provision of $77,980 for the three months ended March
31, 1999.
Net Income / Loss. For the three months ended March 31, 2000,
the Company recorded a net loss of $586,080 or $0.07 per common
share as compared to net income of $144,821 or $0.02 per common
share for the three months ended March 31, 1999, a 504.7%
decrease as a result of the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have resulted in a net loss of $586,080
for the three months ended March 31, 2000 versus net income of
$144,821 for the three months ended March 31, 1999. Since the
Company's inception in October 1998, the Company has financed its
operations primarily through the sale of its Common Stock.
Net cash used in operations for the three months ended March 31,
2000 and 1999 was $415,812 and $93,860, respectively. The
negative cash flows generated from operations for the three
months ended March 31, 2000 were primarily due to the losses
incurred from operations, while the negative cash flows generated
from operations for the three months ended March 31, 1999 were
primarily due to a decrease in cash collections resulting from a
lack of internal resources. The Company believes that it may
experience negative cash flows from operations in the short-term
future as it restructures its sales efforts to prepare for
supporting its new graphical and Internet-related products.
Net cash used in investing activities for the three months ended
March 31, 2000 was $24,605, due almost entirely to purchases of
property and equipment. Net cash provided by investing
activities for the three months ended March 31, 1999 was
$346,419, due primarily to cash received from the Company's
acquisition of CSPI in January 1999. The Company expects to
continue to invest in capital and other assets as well as utilize
mergers and acquisitions to expand and support its growth.
Net cash provided by financing activities for the three months
ended March 31, 2000 was $2,200,000, due primarily to proceeds
received from the Company's private placement during the first
quarter of 2000. There was no cash provided by or used in
financing activities for the year ended December 31, 1999. The
Company anticipates that it may seek additional capital in the
future to support its business plan.
At March 31, 2000, cash and cash equivalents totaled $2,162,365.
In addition, at March 31, 2000, the Company had working capital
of $2,235,141 and an accumulated deficit of $1,023,142.
During the three months ended March 31, 2000, the Company
commenced a private offering of its common stock under the
provisions of Rule 506 of Regulation D under the Securities Act
of 1933, as amended (the "Act"). On March 31, 2000, the Company
received partial proceeds of $2,000,000 from the offering but did
not issue the shares until May 23, 2000. As a result, the
Company recorded a stock subscription in the amount of $2,000,000
as of March 31, 2000.
During the three months ended March 31, 2000, the Company issued
to unrelated non-employees 624,000 shares of common stock at
prices from $0.525 to $7.20 per share for various services.
Certain of these services are to be performed in future periods.
As such, the Company has recorded deferred expense at March 31,
2000 in the amount of $204,168 related to these services.
Depending on the outcome of the securities litigation currently
filed against the Company (see Part II, Item 1 hereof), the
Company may be required to raise additional funds to meet the
Company's working capital and capital expenditure needs at least
through the next twelve months.
-7-
RISK FACTORS
The Company does not provide forecasts of its future financial
performance. However, from time to time, information provided by
the Company or statements made by its employees may contain
"forward-looking" information that involves risks and
uncertainties. In particular, statements contained in this
Report on Form 10-QSB/A that are not historical facts (including,
but not limited to statements contained in "Item 2 - Management's
Discussion and Analysis" of Part I of this Report on Form 10-QSB
relating to liquidity and capital resources) may constitute
forward-looking statements and are made under the safe harbor
provisions of The Private Securities Litigation Reform Act of
1995. The Company's actual results of operations and financial
condition have varied and may in the future vary significantly
from those stated in any forward looking statements. Factors
that may cause such differences include, without limitation, the
risks, uncertainties and other information discussed below and
within this Quarterly Report on Form 10-QSB/A, as well as the
accuracy of the Company's internal estimates of revenue and
operating expense levels. The following discussion of the
Company's risk factors should be read in conjunction with the
financial statements contained herein and related notes thereto.
Such factors, among others, may have a material adverse effect
upon the Company's business, results of operations and financial
condition.
Exposure to Damages as a Result of Litigation. On August 17,
2000, a shareholder class action was commenced in the United
States District Court for the Central District of California
against the Company as well as two of its officers and directors,
Bruce Acacio and Carol Conway. The class action was brought on
behalf of purchasers of the stock of the Company during the
period February 9, 2000 through August 6, 2000. The plaintiffs
allege that the defendants made false and misleading statements
about the Company's actual and expected financial performance to
inflate the value of the Company's stock to defraud investors, in
violation of federal securities laws. The plaintiffs seek
damages, interest, costs and such other equitable or injunctive
relief as the Court may deem just and proper.
Additionally, on August 24, 2000, a shareholder filed a complaint
against the same defendants in the United States District Court
for the Central District of California, based on the same
allegations and seeking the same damages as in the class action
suit described above.
On or about September 11, 2000, a third shareholder class action
was commenced in the United States District Court for the Central
District of California, against the same defendants. This
complaint is based upon the same allegations and seeks the same
relief as in the class action suits described above.
On or about September 21, 2000, a fourth shareholder class action
was commenced in the same court against the same defendants.
This class action suit is based upon the same allegations and
seeks the same relief as described above.
The Company expects that the above suits will be consolidated
into a single class action.
The Company believes that it has meritorious defenses to these
actions and intends to vigorously defend them. The pending
securities actions are in the early states of procedure.
Consequently, at this time it is not reasonably possible to
estimate the damage, or the range of damages, if any, that the
Company might incur in connection with such actions. However,
the uncertainty associated with substantial unresolved litigation
may be expected to have an adverse impact on the Company's
business. In particular, such litigation could impair the
Company's relationships with existing customers and its ability
to obtain new customers. Defending such litigation will likely
result in a diversion of management's time and attention away
from business operations, which could have a material adverse
effect on the Company's business, results of operations and
financial condition. Such litigation may also have the effect of
discouraging potential acquirors from bidding for the Company or
reducing the consideration such acquirors would otherwise be
willing to pay in connection with an acquisition.
Dependence on Principal Products. For the three months ended
March 31, 2000, the Company's core of BABY products accounted for
substantially all of the Company's net sales. The Company is
wholly dependent on these products. As a result, any factor
adversely affecting sales of any of these products could have a
material adverse effect on the Company. The Company's future
financial performance will depend in part on the successful
introduction of enhanced versions of these products and
development of new versions of these and other products and
subsequent acceptance of such new and enhanced products. There
can be no assurance that the Company's new and enhanced products
will achieve significant market acceptance or will generate
significant revenue. In addition, competitive pressures or other
factors may result in significant price erosion that could have a
material adverse effect on the Company's business, financial
condition or results of operations.
-8-
Product Concentration. As previously noted, the Company derives
most of its revenues from products that replicate the AS/400
environment on a personal computer platform and provides a
graphical user interface ("GUI") for those text-screen
applications. As a result, the Company's future operating
results are dependent upon the continued widespread use of the
AS/400. Because there can be no assurance that the AS/400
platform will continue to be used in the foreseeable future, a
decline in demand for AS/400 products and hence the Company's
software products could have a material adverse effect on the
Company's business, operating results, and financial condition.
Potential for Software Defects. Software products as complex as
the BABY products offered by the Company may contain undetected
errors or failures when first introduced or as new versions are
released. Despite testing by the Company and by current and
potential customers, any of the Company's products may contain
errors after their commercial shipment. Such errors may cause
loss of or delay in market acceptance of the Company's products,
damage to the Company's reputation, and increased service and
warranty costs. The possibility of the Company being unable to
correct such errors in a timely manner could have a material
adverse effect on the Company's results of operations and its
cash flows. In addition, technical problems with the current
release of the platforms on which the Company's products operate
could impact sales of these products, which could have a material
adverse effect on the Company's results of operations.
Uneven Patterns of Quarterly Operating Results. The Company's
revenues in general are relatively difficult to forecast and vary
from quarter to quarter due to various factors, including the (i)
relatively long sales cycles for the Company's products, (ii)
size and timing of individual transactions, the closing of which
tend to be delayed by customers until the end of a fiscal quarter
as a negotiating tactic, (iii) introduction of new products or
product enhancements by the Company or its competitors, (iv)
potential for delay or deferral of customer implementations of
the Company's software, (v) changes in customer budgets, (vi)
seasonality of technology purchases and other general economic
conditions, and (vii) changes in the pricing policies of the
Company or its competitors. Accordingly, the Company's quarterly
results are difficult to predict until the end of the quarter,
and delays in product delivery or closing of sales near the end
of a quarter have historically caused and could cause quarterly
revenues and net income to fall significantly short of
anticipated levels.
The Company's revenues in any quarter are substantially dependent
on orders booked and shipped in that quarter. Because the
Company's operating expenses are based on anticipated revenue
levels and because a high percentage of the Company's expenses
are relatively fixed, a delay in the recognition of revenue from
even a limited number of sales transactions could cause
significant variations in operating results from quarter to
quarter and could cause net income to fall significantly short of
anticipated levels.
Effects of Electronic Commerce. There can be no assurance that
the Company will be able to provide a product offering that will
satisfy new customer demands in the Internet, online services, e-
business applications, and electronic commerce areas. In
addition, standards for web-enabled and e-business applications,
as well as other industry adopted and de facto standards for the
Internet are evolving rapidly. There can be no assurance that
standards chosen by the Company will position its products to
compete effectively for business opportunities as they arise on
the Internet and other emerging areas. The success of the
Company's product offerings depends, in part, on the Company's
ability to continue developing products which are compatible with
the Internet. The increased commercial use of the Internet may
require substantial modification and customization of the
Company's products and the introduction of new products. The
Company may not be able to effectively compete in the Internet-
related products and services market.
Competition. The Company encounters intense competition in some
aspects of its platform migration business and competes directly
with other software firms, many of which have greater financial
resources than the Company. There can be no assurance that the
Company will be able to compete successfully in the future or
that competition will not have a material adverse affect on the
Company's results of operations.
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Acquisition Strategy. Although the Company has no current
acquisition plans, it has addressed and may continue to address
the need to develop new products, in part, through the
acquisition of other companies. Acquisitions involve numerous
risks including difficulties in the assimilation of the
operations, technologies and products of the acquired companies,
the diversion of management's attention from other business
concerns, risks of entering markets in which the Company has no
or limited direct prior experience and where competitors in such
markets have stronger market positions, and the potential loss of
key employees of the acquired company. Achieving and maintaining
the anticipated benefits of an acquisition will depend in part
upon whether the integration of a target company's business is
accomplished in an efficient and effective manner, and there can
be no assurance that this will occur. The successful combination
of companies in the high technology industry may be more
difficult to accomplish than in other industries.
Hiring and Retention of Employees. The Company's continued
growth and success depend to a significant extent on the
continued service of its senior management and other key
employees and the hiring of new qualified employees. Competition
for highly-skilled business, product development, technical and
other personnel is becoming more intense due to lower overall
unemployment rates as well as the boom in information technology
spending. Accordingly, the Company expects to experience
increased compensation costs that may not be offset through
either improved productivity or higher prices. There can be no
assurances that the Company will be successful in continuously
recruiting new personnel and in retaining existing personnel. In
general, the Company does not have long-term employment or non-
competition agreements with its employees. The loss of one or
more key employees or the Company's inability to attract
additional qualified employees or retain other employees could
have a material adverse effect on the continued growth of the
Company.
Sales Force Restructuring. The Company historically has relied
heavily on its direct sales force. In the past, the Company has
restructured or made other periodic adjustments to its sales
force. These changes have generally resulted in a temporary lack
of focus and reduced productivity by the Company's sales force
that may have affected revenues in a quarter. There can be no
assurances that the Company will not continue to restructure its
sales force or that the related transition issues associated with
restructuring the sales force will not recur.
Possible Necessity for Additional Capital. Depending on the
outcome of the currently filed class action lawsuits, the Company
may require additional capital to fund its capital expenditures,
product development and working capital requirements through
2000. In addition, any significant change in the Company's
product development plans or marketing and distribution methods
might require additional capital. If the Company is required in
the future to seek additional capital through a new line of
credit, asset-based lending or the sale of equity, no assurance
can be given that such capital will be available on terms
favorable to the Company, or at all. The sale of equity
interests would dilute the ownership of current shareholders.
Enforcement of the Company's Intellectual Property Rights. The
Company relies on a combination of copyright, patent, trademark,
trade secrets, confidentiality procedures and contractual
procedures to protect its intellectual property rights. Despite
the Company's efforts to protect its intellectual property
rights, it may be possible for unauthorized third parties to copy
certain portions of the Company's products or to reverse engineer
or obtain and use technology or other information that the
Company regards as proprietary. There can also be no assurances
that the Company's intellectual property rights would survive a
legal challenge to their validity or provide significant
protection for the Company. In addition, the laws of certain
countries do not protect the Company's proprietary rights to the
same extent as do the laws of the United States. Accordingly,
there can be no assurance that the Company will be able to
protect its proprietary technology against unauthorized third
party copying or use, which could adversely affect the Company's
competitive position.
Possibility of Infringement Claims. The Company may, in the
future, receive notices from third parties claiming infringement
by the Company's products of third party patent and other
intellectual property rights. The Company expects that software
products will increasingly be subject to such claims as the
number of products and competitors in the Company's industry
segment grow and the functionality of products overlaps.
Regardless of its merit, responding to any such claim could be
time-consuming, result in costly litigation and require the
Company to enter into royalty and licensing agreements which may
not be offered or available on terms acceptable to the Company.
If a successful claim is made against the Company and the Company
fails to develop or license a substitute technology, the
Company's business, results of operations or financial position
could be materially adversely affected.
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Possible Volatility of Stock Price. The market price of the
Company's Common Stock has experienced significant fluctuations
and may continue to fluctuate significantly. The market price of
the Common Stock may be significantly affected by factors such as
the announcement of new products or product enhancements by the
Company or its competitors, technological innovation by the
Company or its competitors, quarterly variations in the Company's
or its competitors' results of operations, changes in prices of
the Company's or its competitors' products and services, changes
in revenue and revenue growth rates for the Company as a whole or
for specific geographic areas, business units, products or
product categories, changes in earnings estimates by market
analysts, speculation in the press or analyst community and
general market conditions or market conditions specific to
particular industries. The stock prices for many companies in
the technology sector have experienced wide fluctuations which
often have been unrelated to their operating performance. Such
fluctuations may adversely affect the market price of the
Company's Common Stock.
Limited Market for Common Stock; Absence of Dividends. The
Company's Common Stock is currently quoted on the Over-the-
Counter Bulletin Board ("OTCBB") under the symbol "CAWC".
However, as is the case for many other stocks on the OTCBB, the
trading volume in the Company's stock is insignificant. In
addition, most of the Company's stock is privately held. As a
result, the market for the Company's stock is limited.
Management of the Company anticipates that the expansion of the
shareholder base and continuing improvements in operating results
would enhance the liquidity of the Company's shares in the
future. However, there can be no assurance that a meaningful
trading market will develop.
Since the Company's inception, the Company has not paid dividends
on its Common Stock, and does not anticipate paying any dividends
in the foreseeable future.
Year 2000. As of the date of this filing, the Company currently
knows of no significant Year 2000-related failures that have
occurred in either its products or its internal systems as a
result of the date change from December 31, 1999 to January 1,
2000.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On August 17, 2000, a shareholder class action was commenced in
the United States District Court for the Central District of
California against the Company as well as two of its officers and
directors, Bruce Acacio and Carol Conway. The class action was
brought on behalf of purchasers of the stock of the Company
during the period February 9, 2000 through August 6, 2000. The
plaintiffs allege that the defendants made false and misleading
statements about the Company's actual and expected financial
performance to inflate the value of the Company's stock to
defraud investors, in violation of federal securities laws. The
plaintiffs seek damages, interest, costs and such other equitable
or injunctive relief as the Court may deem just and proper.
On or about August 21, 2000, another shareholder class action was
commenced against the Company, Mr. Acacio and Ms. Conway. The
complaint is based on the same allegations and is seeking the
same relief as in the class action suit described above.
On or about September 11, 2000, a third shareholder class action
was commenced in the United States District Court for the Central
District of California against the Company and Mr. Acacio and Ms.
Conway. This complaint is based on the same allegations and
seeks the same relief as in the class action suits described
above.
On or about September 21, 2000, another shareholder class action
was commenced in the United States District Court for the Central
District of California against the Company, Mr. Acacio and Ms.
Conway. This complaint is based on the same allegations and
seeks the same relief as in the class action suits described
above.
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The Company expects that the above suits will be consolidated
into a single class action.
The Company believes that it has meritorious defenses to these
actions and intends to vigorously defend them.
Item 2. Changes in Securities
On January 12, 1999, the Company acquired the net assets of CSPI
with a historical cost of $700,840 in exchange for a Common Stock
subscription. Since CSPI's line of business was substantially
the same as the Company's, and the shareholders, officers, and
directors of CSPI and CSC were substantially the same, the
Company valued the net assets acquired from CSPI at their
historical cost. On January 27, 2000, the subscription was
converted into 2,000,000 shares of the Company's Common Stock.
Effective March 15, 2000, the Company effected a two-for-one
stock split. Since the Company is incorporated in the State of
Nevada, where state securities laws mandate a minimum par value
of $0.001 (the par value of the Company's stock prior to the
split), the Company increased its Common Stock and decreased its
additional paid-in capital accounts to account for effects of the
stock split. All share amounts and dollar amounts in this Form
10-QSB have been adjusted to account for the effects of this
split.
During the three months ended March 31, 2000, the Company
commenced a private offering of its Common Stock under the
provisions of Rule 506 of Regulation D under the Securities Act
of 1933, as amended. On March 31, 2000, the Company received
partial proceeds of $2,000,000 from the offering but did not
issue the shares until May 23, 2000. As a result, the Company
recorded a stock subscription in the amount of $2,000,000 as of
March 31, 2000.
During the three months ended March 31, 2000, the Company issued
to unrelated non-employees 624,000 shares of Common Stock at
prices from $0.525 to $7.20 per share for various services.
Certain of these services are to be performed in future periods.
As such, the Company has recorded deferred expense at March 31,
2000 in the amount of $204,168 related to these services.
During the three months ended March 31, 2000, the Company issued
to its employees options to purchase 64,000 shares of the
Company's Common Stock at exercise prices ranging from $0.75 to
$13.625 per share. The options vest over a period of 24 months
and expire five years after the grant date. No compensation
expense was recognized upon the issuance of these options as the
market value per share was equal to the exercise price at the
grant date.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
10 Standard Multi-Tenant Office Lease between the Company
and McCabe Way Irvine, LLC dated February 14, 2000
27 Financial Data Schedule
(b) Reports on Form 8-K -
There were no reports filed on Form 8-K during the quarter
ended March 31, 2000.
-13-
Signatures
In accordance with the requirements of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: October 17, 2000
CALIFORNIA SOFTWARE CORPORATION
By:/s/Lawrence J. Jagiello
Lawrence J. Jagiello
Chief Financial Officer and Principal Accounting Officer
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