UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2000
Or
[ ] TRANSITION REPORT PURSUANT TO 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, Irvine, California 92614
(Address of principal executive offices) (Zip Code)
(949) 553-8900
(Issuer's telephone number, including area code)
Check whether the issuer (1) has 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:
Number of shares of registrant's common stock as of September 21,
2000:
12,597,771
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT:
Yes [ ] No [X]
California Software Corporation
Quarterly Report
Period Ending June 30, 2000
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet 1
Statements of Operations 2
Notes to Financial Statements 3
Item 2. Management's Discussion and Analysis 4
PART II - OTHER INFORMATION 9
SIGNATURES 10
-i-
PART I - FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
California Software Corporation
BALANCE SHEET
June 30, 2000
(Unaudited)
-------------
ASSETS
Current assets:
Cash and cash equivalents $7,340,914
Accounts receivable, net of allowance for doubtful 538,047
accounts of $512,826
Prepaids and other current assets 846,403
Total current assets 8,725,364
Property and equipment, net 118,491
Acquired technology, net 1,084,412
TOTAL ASSETS 9,928,267
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $411,088
Accrued payroll and related expenses 123,546
Deferred revenue 98,958
Total current liabilities 633,592
Total liabilities 633,592
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; 20,000,000 shares 12,576
authorized; 12,575,771 shares issued and
outstanding
Additional paid-in capital 11,952,275
Accumulated deficit (2,670,176)
Total stockholders' equity 9,294,675
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,928,267
The accompanying notes are an integral part of the financial
statements.
-1-
California Software Corporation
STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended June 30,
2000 1999
---------- ----------
Revenues:
Software sales $433,759 $1,301,116
Maintenance and other revenue 41,371 31,101
Total revenues 475,130 1,332,217
Costs and expenses:
Research and development 122,190 103,748
Selling, general, and 1,584,806 704,619
administrative
Depreciation and amortization 85,971 80,004
Total costs and expenses 1,792,967 888,371
Income (loss) from operations (1,317,837) 443,846
Other income (expense), net 61,626 (3,782)
Income (loss) from operations (1,256,211) 440,064
before provision for income taxes
Provision for income taxes - (96,026)
Net income (loss) $(1,256,211) $344,038
Basic and diluted income
(loss) per share $(0.12) $0.05
Weighted-average shares 10,814,252 6,541,800
outstanding
The accompanying notes are an integral part of the financial
statements.
-2-
California Software Corporation
NOTES TO FINANCIAL STATEMENTS
June 30, 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"), except that our independent
accountants have informed us that their review of our financial
statements is incomplete. Accordingly, in conformity with
Regulation S-X, these financial statements do not include all of
the information and notes required by generally accepted
accounting principles for complete financial statements.
However, the Company believes that the disclosures are adequate
to make the information presented not misleading. 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 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 June 30, 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 for
software revenue recognition transactions. Based in part on
guidance provided by the Company's original certifying
accountant, Mr. James Slayton, CPA, the Company was recognizing
revenue on shipments of new product that failed to meet the
criteria specified in SOP 97-2. Mr. Slayton 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 Mr. Slayton did not meet
the peer review standards mandated by the American Institute of
Certified Public Accountants ("AICPA"). On May 2, 2000, the
Company filed a Form 8-K with the SEC dismissing Mr. Slayton and
engaged 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 filed a Form 8-K with
the SEC dismissing Squar and named Stark, Tinter and Associates,
LLP ("Stark"), as the certifying independent accountants. Upon
examination of the Company's financial statements, Stark notified
the Company that the method in which it used to record revenue
was not in compliance with the provisions of SOP No. 97-2. The
Company is currently in the process of restating its operating
results to conform to SOP No. 97-2 for the year ended December
31, 1999 and the three month period ended March 31, 2000, and
will amend its SEC filings upon completion of these restatements.
The results for the three month periods ended June 30, 2000 and
1999 are prepared in accordance with the provisions of SOP No. 97-
2.
3. STOCK TRANSACTIONS
Effective March 15, 2000, the Company effected a two-for-one
stock split. Accordingly, the number of shares outstanding at
June 30, 1999 used in the calculation of earnings per share have
been adjusted to account for the effects of this split.
During the three months ended June 30, 2000, the Company
completed 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"). The Company issued a total of
2,654,971 shares of its common stock in exchange for proceeds of
$8,258,239, net of offering costs of $521,659.
During the three months ended June 30, 2000, the Company issued
to unrelated non-employees 155,000 shares of common stock for
various services. Certain of these services are to be performed
in future periods. As such, the Company has recorded deferred
expense in the amount of $382,500 related to these services.
4. CONTINGENCIES
Litigation
Refer to Part II, Item 1 for a description of legal proceedings.
-3-
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 for the fiscal year ended December 31, 1999 and the
Quarterly Reports on Form 10-QSB 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 RPG applications
to the 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.
RESULTS OF OPERATIONS
Software Sales. Software sales consist of sales of the Company's
BABY software products. Software sales for the three months
ended June 30, 2000 and 1999 were $433,759 and $1,301,116,
respectively, a 66.7% decrease. The decrease in software sales
during 2000 represents a planned change in emphasis in the
Company's business plan. In 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 rollout of these new products is planned for
the fourth quarter of 2000. The Company anticipates that these
new 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 June 30, 2000 and 1999 was $41,371 and
$31,101, respectively, a 33.0% increase consistent with the
continued expansion of the Company's customer base.
-4-
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 June
30, 2000 and June 30, 1999 were charged to expense as incurred.
For the three months ended June 30, 2000 and 1999, research and
development costs were $122,190 and $103,748, respectively, a
17.8% 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 June 30, 2000 were
25.7% as compared to 7.8% for the three months ended June 30,
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 June
30, 2000 and 1999, selling, general and administrative expenses
were $1,584,806 and $704,619, respectively, a 124.9% increase
primarily due to one-time investor relations expenses of
approximately $550,000, of which $470,000 was paid in shares of
the Company's common stock, relating to the Company's private
offering of its common stock completed during the second quarter
of 2000. To a lesser extent, the increase was due to increases
in headcount and 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 June 30, 2000 were 333.6% as compared to 52.9% for
the three month period ended June 30, 1999. The Company expects
that selling, general and administrative costs, exclusive of the
one-time 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, as well as amortization of
technology acquired by the Company in connection with its
acquisition of CSPI in January 1999. Depreciation and
amortization for the three months ended June 30, 2000 and 1999
was $85,971 and $80,004, respectively, a 7.5% 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 June 30, 2000 was
18.1% compared to 6.0% for the three month period ended June 30,
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.
Interest, Net. Net interest 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 interest income for the
three months ended June 30, 2000 was $61,626 as compared to net
interest expense of $3,782 for the three months ended June 30,
1999, a 1,729.5% increase as the result of higher cash balances
arising from the proceeds of the Company's private offering of
its common stock completed during the second quarter of 2000.
Income Taxes. For the three months ended June 30, 2000, the
Company did not record an income tax benefit as compared to an
income tax provision of $96,026 for the three months ended June
30, 1999.
Net Income / Loss. For the three months ended June 30, 2000, the
Company recorded a net loss of $1,256,211 or $0.12 per common
share as compared to net income of $344,038 or $0.05 per common
share for the three months ended June 30, 1999, a 465.1% decrease
as a result of the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have resulted in a net loss of
$1,256,211 for the three months ended June 30, 2000 versus net
income of $344,038 for the three months ended June 30, 1999.
Since the Company's inception in October 1998, the Company has
financed its operations primarily through the sale of its common
stock.
-5-
At June 30, 2000, cash and cash equivalents totaled $7,340,914.
In addition, at June 30, 2000, the Company had working capital of
$8,091,772 and an accumulated deficit of $2,670,176.
In June 2000, the Company completed a private placement of
2,654,971 shares of its common stock. The offering price per
share was $4.00 per share (on a post-split basis) and the Company
received an aggregate of $8,779,898 in proceeds from the
offering. The Company paid commissions and expenses in the
aggregate amount of $521,659 in connection with the offering.
The offering was made by the Company in reliance on the
provisions of Rule 506 of Regulation D promulgated under the Act
and the shares were offered solely to accredited investors as
that term is defined in Rule 501 of such regulation. The Company
intends to use the proceeds of this offering for working capital,
acquisitions, and other corporate purposes.
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.
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 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, 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.
580/099999-0071
118488.01 a09/22/00 -1-
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 its Chief Executive Officer and
President. 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 state 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 Company, its
Chief Executive Officer and President with the Orange County
Superior Court based on the same allegations and seeking the same
damages as in the class action suit described above. The Company
expects that this suit will be consolidated with the class
action. The Company believes that it has meritorious defenses to
these actions and intends to vigorously defend them. The pending
securities action is 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
June 30, 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.
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.
-6-
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 its 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.
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 the companies' 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.
-7-
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 temporarily
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 lawsuit, 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.
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
common stock of the Company 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.
-8-
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 its Chief Executive
Officer and President. 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 state securities laws. The plaintiffs seek damages,
interest, costs and such other equitable or injunctive relief as
the Court may deem just and proper.
On August 24, 2000, a shareholder filed a complaint against the
Company, its Chief Executive Officer and President with the
Orange County Superior Court based on the same allegations and
seeking the same damages as in the class action suit described
above. The Company expects that this suit will be consolidated
with the class action. The Company believes that it has
meritorious defenses to these actions and intends to vigorously
defend them.
The Company is subject to various other legal proceedings and
claims, either asserted or unasserted, which arise in the
ordinary course of business. While the outcome of these claims
cannot be predicted with certainty, management does not believe
that the outcome of any of these legal matters will have a
material adverse effect on the Company's results of operations or
financial position.
Item 2. Changes in Securities
During the three month period ended June 30, 2000, the Company
completed a private placement of 2,654,971 shares of its common
stock. The offering price per share was $4.00 per share (on a
post-split basis) and the Company received an aggregate of
$8,779,898 in proceeds from the offering. The Company paid
commissions and expenses in the aggregate amount of $521,659 in
connection with the offering. The offering was made by the
Company in reliance on the provisions of Rule 506 of Regulation D
promulgated under the Act and the shares were offered solely to
accredited investors as that term is defined in Rule 501 of such
regulation.
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 -
27 - Financial Data Schedule
(b) Reports on Form 8-K -
Filed on May 2, 2000 for Item 4.
Change in Registrant's Certifying Accountant.
Filed on May 16, 2000 for Item 5, Other Events
and Item 7, Financial Statements and Exhibits
relating to the Company's private placement of
its common stock.
Filed on May 31, 2000 amending the filing on
May 16, 2000 for Item 5, Other Events and Item
7, Financial Statements and Exhibits relating
to the Company's private placement of its
common stock.
-9-
SIGNATURES
Pursuant to the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CALIFORNIA SOFTWARE CORPORATION
(Registrant)
Date: September 22, 2000
By:/s/Lawrence J. Jagiello
Lawrence J. Jagiello,
Chief Financial Officer and Principal Accounting Officer
-10-
END
