UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-KSB/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM __________ TO __________
CALIFORNIA SOFTWARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 88-0408446
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NO.)
2485 MCCABE WAY, IRVINE, CALIFORNIA 92614
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(949) 553-8900
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE PER SHARE, 20,000,000 SHARES
AUTHORIZED, 6,541,800 ISSUED AND OUTSTANDING AS OF DECEMBER 31,
1999.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 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 [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The approximate aggregate market value of the Common Stock held
by non-affiliates of the registrant, based upon the closing price
of the Common Stock reported on OTCBB, was $18,866,657 as of
September 30, 2000.
The number of shares of Common Stock outstanding as of September
30, 2000 was 12,577,771.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT:
Yes [ ] No [X]
THE FOLLOWING DISCUSSION CONTAINS, IN ADDITION TO HISTORICAL
INFORMATION, FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
BELOW AND IN ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION".
TABLE OF CONTENTS
PART I
Item 1. DESCRIPTION OF BUSINESS 1
Item 2. DESCRIPTION OF PROPERTY 9
Item 3. LEGAL PROCEEDINGS 9
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER 11
MATTERS
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF 12
OPERATION
Item 7. FINANCIAL STATEMENTS 16
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 30
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT 31
Item 10. EXECUTIVE COMPENSATION 32
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 33
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 34
PART IV
Item 13. EXHIBITS AND REPORTS ON FORM 8-K 34
SIGNATURES 35
<PAGE>
PART I
ITEM 1. BUSINESS.
OVERVIEW AND HISTORY
California Software Corporation, hereinafter referred to as the
"Company" or "CSC", was incorporated in the State of Nevada on
October 28, 1998 and 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 Company's predecessor, California Software Products, Inc.
("CSPI"), was founded in 1975 for the purpose of writing software
programs for mainframe manufacturers. In 1980, CSPI was
approached by the PC Division of IBM to write a program that
would compile System/32 software to run on a personal computer.
The development continued throughout the eighties adding new
features and updating current programs as IBM introduced newer
computer systems. When IBM disbanded the PC Division and the
AS/400 Division chose not to continue the relationship, CSPI
continued to improve its products on its own.
In the early eighties, CSPI's founders pioneered the first
personal computer ("PC")-based Report Generation Language ("RPG")
compilers, which are a core functionality of the BABY product
line. As the development environment expanded, the products
evolved to allow a user to execute Midrange applications on a PC
network in "native" mode without the need for complete
redevelopment of the application's source code. Over the past
decade, the BABY brand has gained a significant franchise in the
worldwide marketplace with more than 100,000 users in fifty-six
countries.
In late 1996, CSPI was purchased by Bruce Acacio and Carol
Conway. In January 1997, CSPI filed for Chapter 11 protection
under federal bankruptcy law due to an unresolved conflict with a
major creditor. The reorganization plan put forth by management
was approved by the courts in October 1997.
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.
INDUSTRY BACKGROUND
The IBM AS/400 and its predecessors, System/32, System/34,
System/36, and System/38 - collectively called IBM Midrange
systems - are a class of machines substantially different from
widely familiar PCs. The System/36, superceded by the AS/400,
served as a popular computing solution for business applications
for many years after IBM's introduction of these two systems in
1983 and 1988, respectively. Midrange systems were popular
because, at the time of their introduction, they were far more
powerful than individual PCs and were capable of supporting
environments with hundreds of users. While the AS/400 made the
System/36 obsolete, industry sources estimate that approximately
250,000 System/36 systems remained in use worldwide at the end of
1995. Industry publications estimate that there are over 700,000
AS/400 systems deployed worldwide at the end of 1999.
The wide acceptance of IBM Midrange systems fed off a large
number of available software applications, both custom and pre-
packaged, that ran on them. Over 28,000 business programs were
written for those systems - more than for any other platform.
Thus, in adopting IBM's Midrange computing platforms, businesses
and the independent software vendors ("ISVs") that supported them
invested substantial resources developing application software
that could perform a wide variety of manufacturing, accounting,
and other information-management functions. According to
industry sources, by 1995, an estimated 25,000 software
applications had been developed for use on AS/400 systems.
Indeed, the development of applications software intended for use
on IBM's Midrange computing platforms continues assisted by
approximately 8,000 ISVs. In 1995, those ISVs generated an
estimated $2.5 billion in revenues from AS/400 applications
software sales.
Despite the platform's multiple advantages, IBM Midrange users
and developers have historically been constrained by the non-
graphical and proprietary nature of IBM's operating systems.
Software applications written for the System/36 and AS/400
platforms would not run on other computing platforms, including
those using open operating systems such as UNIX or Windows NT(TM).
This factor became increasingly important in recent years as PC
networks became far more powerful and the number of PC users grew
to the point where virtually all business people use them daily.
Today, Midrange systems appear old-fashioned to many information
management professionals. Since the late 1980s, decreasing
prices and increasing functionality in information technology
products led to increased market acceptance of open systems and
customer demand for information technology products based on such
systems. According to some estimates, sales of server/host
systems based on the UNIX and Windows NT(TM) operating systems will
increase to $40 billion annually in the year 2000, up from an
estimated $22 billion in 1996. Industry sources estimate that
the UNIX applications software market is currently smaller, but
growing faster, than the AS/400 applications software market.
-1-
The shift in position of the AS/400 from the operating platform
to a passive server on a network raises the issue of integrating
a huge bank of reliable, but proprietary, text screen
applications into a network environment. The four major
approaches to integrating System/36 and AS/400 systems into LAN
environments may be summarized as follows:
* Re-engineering - Re-engineering requires rewriting existing
applications software to enable it to operate on a new computing
platform. Since this entails completely rewriting applications
software to meet customer requirements, it often results in
increased cost, risk of failure, disruption and delay.
* Packaged Solutions - Migrating to a new computing platform
can sometimes be accomplished by installing an applications
software package that has been independently developed to run on
open or portable platforms. While a substantial number of
packaged software applications are available, businesses
implementing this approach will often have to abandon their
investment in existing databases and software and may incur
substantial retraining costs.
* Rehosting - Rehosting involves migration of applications
software to a new computing platform with minimal change to the
source code. Rehosting is achieved by rebuilding applications
software to run efficiently on the new computing platform. This
solution often enables businesses to enjoy the continued use of
their existing programs and databases, reduces retraining costs
and takes full advantage of a new computing platform.
* Refacing - Refacing involves replacing the "green-screen"
interface with a graphical user interface ("GUI"). The source
code must still be run on the original computing platform or in a
replicated environment. This is frequently the next step after
rehosting an application to provide appearance and operation
virtually identical to other Windows(TM) applications running in
the environment.
Re-engineering custom applications or moving to a new packaged
solution poses a significant financial risk to a business.
Rewriting an application is not a line-for-line process because
programming languages have different characteristics. As a
result, businesses that elect to reengineer their software may
expect new applications to have errors that must be corrected. A
packaged solution usually requires extensive modifications in
order to meet particular business requirements. During the
implementation period, users may need retraining and the
incidence of user errors may increase. Businesses may have to
deal with the risk of loss of customer, sales, financial, and/or
operations data during the conversion.
The Company's expertise is in rehosting and refacing - the two
approaches that require minimal retraining costs and offer
continued use of existing programs and databases. The Company's
products replicate the IBM Midrange operating environments under
Windows(TM) whereby an applications developer can take older IBM
Midrange programs that meet current business requirements and run
them on an Windows NT(TM) network. Moreover, the developer can
utilize another of the Company's products to add a GUI that does
for Midrange applications what Windows 3.x and Windows 95/98 did
for DOS applications. The Company also provided a Year-2000
compliant platform for System/3x programs, which in turn extended
the life of the Midrange applications at a relatively low cost to
the developer.
ISVs must also adapt to customer demands associated with
increased popularity of new computing platforms. ISVs that have
developed successful AS/400 applications software are faced with
the challenge of migrating their products to new platforms to
meet customer demands while maintaining their existing customer
base for applications software running on the AS/400 platform.
The Company's products are an excellent choice for such ISVs
because BABY development tools do not modify the RPG source code.
Moreover, screens developed with BABY/GUI can be used for both
the AS/400 and Windows NT(TM) offerings. As a result, one set of
code and screens can be maintained for both the Midrange and PC
platforms.
-2-
COMPETITION
Competition in the rehosting end of the Company's business,
including its BABY/AS2000 and BABY/36 products, is minimal and
the Company enjoys market leadership in this space, as there are
no other significant rehosting products available to the
Company's knowledge. The Company's graphical products, including
its BABY/GUI and BABY.COM products, which enable AS/400 text
screens and deploy them to the Internet, compete directly with
established market leader Seagull Software. While the Company
considers itself a relative newcomer to this market, it
anticipates that this technology will become the dominant
business for the Company in the future.
PRINCIPAL PRODUCTS
The Company markets a family of software products under the brand
name BABY. The products provide (a) software solutions that
allow business customers to migrate IBM Midrange RPG applications
to the PC environment and to execute such applications in native
mode on a PC network without a complete rewrite of the
application's source code; (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 Windows NT(TM); and (c) GUI software that
allows a developer of an AS/400 text-based application to present
screens with Windows(TM) point-and-click functionality. Once the
application runs on a BABY system, the developer deploys his
application by purchasing a BABY runtime license for every user
of the software. As a result, businesses and companies worldwide
use the Company's family of BABY products for off-loading their
program development by moving their source code to the PC, where
it can be modified, recompiled, and debugged using BABY products.
These programs can then be run on the PC or the Midrange system.
The Company currently offers the following applications:
* BABY/AS2000 - BABY/AS2000 is a powerful PC-based RPG/400
development, execution, and operating environment that combines
all the benefits of PC and PC network technology with the power
and versatility of an IBM AS/400 Midrange computer. Existing
source code is downloaded to the PC, recompiled and executed
without the need for redevelopment. New programs can be
developed, compiled and debugged on the PC platform. New
applications can be executed on the PC or uploaded to the AS/400.
BABY/AS2000 allows users to preserve their existing application
software investment, improve system performance and end-user
response time, avoid the high cost of Midrange system upgrades,
lower maintenance and system operations cost, integrate RPG/400
application data with existing PC applications, increase end user
productivity and performance and shorten new user training time.
* BABY/AS2000 Client Server - The BABY/AS2000 Client-Server
rapidly converts AS/400 legacy applications into client-server
solutions without the need for any redevelopment of PC
functionality. With BABY/AS2000 Client Server, portions of the
legacy application targeted to become PC Clients can be
downloaded to the PC and recompiled creating PC-based object
code. The PC-based RPG application is able to execute for the
Client and continue to use the data files residing on the AS/400
(true client-server). This makes it possible to rapidly turn a
legacy application into a client-server application, eliminating
the need for reprogramming or learning new PC-based languages.
Benefits of the BABY/AS2000 Client-Server include eliminating
redevelopment of application functionality, rapid implementation
cycle with low project completion risk, minimal project and staff
investment, no learning curve for new PC based programming
languages, no requirement to move the original source code from
the AS/400, increased end user productivity and performance and
shortened application training time for new users.
* BABY/36 - BABY/36 is a powerful PC-based RPG II development,
execution and operating environment for the migration of
System/36 applications to a PC stand-alone or network environment
without the need for any redevelopment. Many users have replaced
their System/36 with PC networks and were able to easily migrate
their System/36 applications in a matter of days. Benefits of
BABY/36 include the ability to preserve existing application
software investments, improved system performance and end user
response time, avoiding the high cost of upgrading to an AS/400,
lower maintenance and system operations cost, integration of RPG
II application data with existing PC applications, increased end
user productivity and performance, avoiding the cost of adding
third party GUI products, shortened new user training time and
the ability to execute System/36 applications on portable PCs and
across remote locations.
* BABY/GUI - BABY/GUI is a powerful PC-based program that
allows a software developer to transform System/36 and AS/400
text-based applications into icon-driven Windows(TM) screens with
point-and-click functionality. On-the-fly conversion gives an
application an appearance somewhat better than most 5250
emulation products. The visual editor provides the tools to
customize the application by moving or deleting objects from the
screen, adding logos and graphics, turning function keys into
menus or buttons, changing the color and font of labels and
fields, displaying subfiles as list boxes, creating multi-level
task bars, adding sophisticated metaphors like tabs and
notebooks, and other standard and custom Windows(TM) features.
BABY/GUI facilitates the conversion through a powerful
recognition engine that identifies application features for
automatic transformation. Prepared and user-defined scripts
provide additional auto-conversion functionality. Screens
modified with BABY/GUI can be displayed using either the AS/400
or BABY/AS2000 platforms. Thus, a developer offering his
application on both platforms has only one set of screens to
maintain.
-3-
Services and Support
The Company currently supports its products with a team of
technical experts that can assist clients in a smooth migration
to the PC environment. The Company believes its technical
support team and implementation consultants are well equipped to
support IBM Midrange, PC, connectivity hardware, and operating
system environments. The Company also offers services such as:
* Pre-Migration Analysis - Analysis and preparation of a
customer's software and hardware environment for migration to the
Company's products.
* Client-Server Consulting - Assistance in planning for and
converting legacy application environments to client/server
environments.
* Application Migration Services - Migration of RPG
applications to the Company's PC-based operating environment.
* Implementation Service - On-site installation of migrated
applications, technical training and configuration of the PC
environment for program execution.
DISTRIBUTION, MARKETING AND CUSTOMER RELATIONS
The Company sells its products and services in North America
directly to end-users and through a network of value added
resellers ("VARs"), who bundle their own Midrange applications
with the BABY products into a single PC offering. The Company
also markets its products overseas through an international
distributor network of IBM Business Partners and software houses.
The Company is an IBM AS/400 Partner in Development and a
Microsoft Solution Provider. No single customer accounts for a
material portion of the Company's revenues.
The Company is currently marketing and distributing its services
and products through a direct sales force. The Company believes
that its multi-channel distribution strategy will enable it to
effectively market its software and services to a wide range of
potential customers. The Company has also established and will
continue to establish marketing and distribution relationships
through a broad range of channels including VARs, distributors
and manufacturers representatives, as well as direct sales
representatives. In addition, the Company employs direct mail,
advertising, seminars, trade shows, telemarketing, and on-going
customer and third-party communications programs.
The Company has organized its information technology services
business such that each service technician maintains a direct
relationship with certain of the Company's service customers.
Specific marketing programs will vary by target customer. The
Company believes that its direct sales approach, including having
Company service technicians serve as client-relationship
managers, has led to better account penetration and management,
better communication and long-term relationships with its clients
and greater opportunities for follow-on sales of products and
services to its client base.
-4-
NEW PRODUCT OFFERINGS
BABY.COM - An add-on module planned for late 2000, BABY.COM will
be sold separately to users of BABY/GUI and will allow a
developer to Internet-enable his product. This product will
create a synergistic marketing environment for BABY/AS2000,
BABY/GUI and BABY/36.
PROPRIETARY RIGHTS
The Company has a registered United States trademark for its
family of BABY software technology. Management is currently
planning to register additional copyrights and/or trademarks to
fully protect its software. In addition, the Company is
protecting new proprietary technological advancements as trade
secrets until appropriate measures can be taken for protection.
RESEARCH AND DEVELOPMENT ACTIVITIES
The market for business computing products has been historically
characterized by frequent technological advances, evolving
industry standards and escalating customer expectations. As a
result, management believes that the Company's future growth and
success will be largely dependent on its ability to develop or
acquire products to meet the evolving needs of its prospective
clients. The Company anticipates that the long-term success of
its product offering will require further product development.
The Company expects to continually evaluate its products to
determine what additional products or enhancements are required
by the marketplace. The Company plans to develop and enhance its
products internally to meet clients' needs, but if the Company
can purchase or license proven products at reasonable costs it
will do so in order to avoid the time and expense involved in
developing products.
The Company did not incur any research and development costs from
October 28, 1998 (date of inception) through December 31, 1998.
However, during the year ended December 31, 1999, the Company
incurred research and development expenses of $414,992 with
respect to its current and future products. The cost of such
activities were not borne by the Company's customers.
The Company has added new features to both BABY/36 and
BABYAS/2000 to allow Internet access. A product called BABY/GUI
was released in the third quarter of 1999. Much of the
technology for the GUI product has been released as a component
of BABY/36; as a result, most of the research and development has
already been completed. BABY/GUI creates a GUI for software
companies and users of the IBM AS/400 computer itself, whether
they purchase the Company's original BABY series of products or
not. In short, AS/400 users not wishing to deploy their software
on PCs can maintain their IBM Midrange computer and make their
software appear more modern.
Users of more current software running under Windows(TM) have come
to expect graphical point and click software. BABY/GUI allows
software companies and end users the ability to create graphical
screens without having to rewrite their non-graphical text-based
software. Having created these new graphical screens, BABY.COM
allows customers to save these screens in DHTML format and deploy
them on the Internet.
EMPLOYEES
At September 30, 2000, the Company had thirty-seven (37) full-
time employees. The Company's employees are currently not
represented by a collective bargaining agreement, and the Company
believes that its relations with its employees are good.
-5-
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-KSB/A that are not historical facts (including,
but not limited to statements contained in "Item 6 - Management's
Discussion and Analysis or Plan of Operations" of this Report on
Form 10-KSB/A 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 Annual Report on Form
10-KSB/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.
In addition, 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. Finally, 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 year ended December
31, 1999, 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 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.
-6-
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, in the future,
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 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.
-7-
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 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 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.
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.
-8-
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.
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.
ITEM 2. PROPERTIES.
As of December 31, 1999, the Company's corporate headquarters
were located in approximately 6,000 square feet of office space
located at 2901 South Pullman, Santa Ana, California 92705
through a sublease arrangement with CSPI, the original lessee
under the lease, and Rayson Associates, the master lessor. The
sublease is for approximately $0.98 per square foot ($5,851.40
per month) from October 1, 1997 to May 15, 1998, increasing to
$1.20 per square foot ($7,228.20 per month) from January 12, 1999
through September 30, 1999, and increasing to $1.26 per square
foot ($7,572.40 per month) from October 1, 1999 to September 30,
2000.
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 3. 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 in the United States District Court for the Central
District of California against the Company, Mr. Acacio and Ms.
Conway. The complaint is based on the same allegations and
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, 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.
Finally, 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.
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.
-9-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
-10-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
MARKET FOR COMMON STOCK
The common stock of the Company, par value $0.001 per share (the
"Common Stock"), is traded on the Over the Counter Bulletin Board
("OTCBB") under the symbol "CAWC". There was no active trading
market for the Common Stock prior to November 29, 1999, the
commencement of the Company's trading on the OTCBB.
The table below reflects the high and low closing prices of the
Common Stock, as reported by the OTCBB, from November 29, 1999
through December 31, 1999.
HIGH LOW
1999
Fourth Quarter (beginning $1.00 $0.19
November 29, 1999)
HOLDERS
As of September 30, 2000, there were 176 stockholders of record
of the Company's Common Stock.
DIVIDEND POLICY
The Company has not paid cash dividends on its Common Stock and
does not intend to pay any cash dividends in the foreseeable
future.
SALES OF UNREGISTERED SECURITIES
On or about October 28, 1998, the Company completed an offering
that was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended. The Company issued 5,400,000
shares of its Common Stock to its founders for an aggregate
amount of $7,175, consisting of $2,800 cash and the forgiveness
of a loan owed to the stockholders for corporate consulting and
incorporation costs that were paid for by the stockholders in the
amount of $4,375.
On or about December 7, 1998, the Company completed an offering
that was exempt from registration pursuant to Regulation D, Rule
504, of the Securities Act of 1933, as amended. Through the
Company's principal underwriter, Campbell, Mello and Associates,
the Company sold 1,141,800 shares of Common Stock at a price of
$0.025 per share. The Company received cash in the amount of
$25,545, net of offering costs of $3,000.
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.
-11-
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.
FORWARD LOOKING STATEMENTS
THE STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT HISTORICAL
FACTS ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT. FORWARD-LOOKING
STATEMENTS ARE MADE BASED UPON MANAGEMENT'S CURRENT EXPECTATIONS
AND BELIEFS CONCERNING FUTURE DEVELOPMENTS AND THEIR POTENTIAL
EFFECTS UPON THE COMPANY. THERE CAN BE NO ASSURANCE THAT FUTURE
DEVELOPMENTS AFFECTING THE COMPANY WILL BE THOSE ANTICIPATED BY
MANAGEMENT. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
INCLUDED IN THE FORWARD-LOOKING STATEMENTS.
PLAN OF OPERATION
Over the next twelve months, the Company plans on continuing its
research and development activities to develop enhancements to
existing products as well as working to develop new products. In
connection with these activities, the Company plans on launching
the following new product during 2000:
BABY.COM - An add-on module planned for late 2000, BABY.COM
will be sold separately to users of BABY/GUI and will allow
a developer to Internet-enable his product. This product
will create a synergistic marketing environment for
BABY/AS2000, BABY/GUI, and BABY.COM.
The Company anticipates that the development of new products,
coupled with a planned expansion of its sales force, may require
the Company to seek alternative means of financing. Accordingly,
the Company is exploring different avenues of financing. In
addition, depending on the outcome of the aforementioned class
action lawsuits, the Company may be required to seek additional
financing to sustain its operations. There can be no assurance
that the Company will be able to secure financing on terms
acceptable to the Company, or at all. As a result of these
factors, the Company is presently unable to estimate how long it
can satisfy its cash requirements.
RESULTS OF OPERATIONS
At December 31, 1998, the Company was considered a development
stage company as defined by SFAS No. 7, "Accounting and Reporting
by Development Stage Enterprises". Effective January 12, 1999,
the Company commenced operations, began recording revenue, and
was no longer considered to be in the development stage.
Software Sales. Software sales consist of sales of the Company's
BABY software products. Software sales for the twelve months
ended December 31, 1999 were $2,571,164. Most of the revenues
during 1999 were the result of 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. This is
expected to allow the Company to expand its potential customer
base to a much broader target of installed IBM AS/400 users. 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 year ended December 31, 1999 was $135,834. It is anticipated
that revenue from these sources will increase over the next
twelve months as the Company expands its user base.
Research and Development Costs. 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" ("SFAS No. 86"), which requires
capitalization of certain software development costs subsequent
to the establishment of technological feasibility. Based on the
Company's product development process, technological feasibility
is established upon completion of a working model. Since the
Company does not incur any costs between the completion of the
working model and the point at which the product is ready for
general release, all research and development costs are charged
to expense as incurred. For the year ended December 31, 1999,
the Company incurred research and development costs of $414,992.
As a percentage of revenue, research and development costs for
the year ended December 31, 1999 were 15.3%. The Company did not
incur any research and development costs for the year ended
December 31, 1998. 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.
-12-
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 year ended June 30,
1999, selling, general and administrative expenses were
$2,686,999. As a percentage of revenue, selling general and
administrative expenses for the year ended December 31, 1999 were
99.3%. For the year ended December 31, 1998, selling, general
and administrative costs were $17,325. The Company expects that
selling, general and administrative costs, especially those
related to sales and marketing efforts, will continue to increase
in the future.
Depreciation and Amortization. Depreciation and amortization
consists of recurring depreciation charges recorded against the
Company's property and equipment. Depreciation and amortization
for the year ended December 31, 1999 was $13,100. As a
percentage of revenue, depreciation and amortization for the year
ended December 31, 1999 was 0.5%. There was no depreciation or
amortization for the year ended December 31, 1998. 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 an increase in property and equipment acquired
as a part of any possible future acquisitions made by the
Company.
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 year ended December 31, 1999 was $11,644 or 0.4% of revenue.
There was no net other expense or income for the year ended
December 31, 1998.
Income Taxes. The Company did not record any tax benefits
arising from losses from operations for the years ended December
31, 1999 and 1998.
Net Income / Loss. For the year ended December 31, 1999, the
Company recorded a net loss of $419,737 or $0.06 per common share
as a result of the factors described above. For the year ended
December 31, 1998, the Company recorded a net loss of $17,325 or
$0.00 per common share as the result of the factors described
above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have resulted in net losses of $419,737
and $17,325 for the years ended December 31, 1999 and 1998,
respectively. Since the Company's inception in October 1998, the
Company has financed its operations primarily through the sale of
its Common Stock. On or about October 28, 1998, the Company
completed an offering that was exempt from registration pursuant
to Section 4(2) of the Securities Act of 1933, as amended. The
Company issued 5,400,000 shares of its Common Stock to its
founders for an aggregate amount of $7,175, consisting of $2,800
cash and the forgiveness of a loan owed to the stockholders for
corporate consulting and incorporation costs that were paid for
by the stockholders in the amount of $4,375. On or about
December 7, 1998, the Company completed an offering that was
exempt from registration pursuant to Regulation D, Rule 504, of
the Securities Act of 1933, as amended. The Company sold
1,141,800 shares of Common Stock at a price of $0.025 per share,
for proceeds of $25,545, net of offering costs of $3,000.
Net cash provided by operations for the year ended December 31,
1999 was $87,292, while net cash used by operations for the year
ended December 31, 1998 was $12,950. The positive cash flows
generated from operations for the year ended December 31, 1999
were primarily due to the effects of non-cash charges; however,
in the short term future, the Company believes that it may
experience negative cash flows from operations as it restructures
its sales efforts to prepare for supporting its new graphical and
Internet-related products.
-13-
Net cash provided by investing activities for the year ended
December 31, 1999 was $300,095. There was no cash provided by or
used in investing activities for the year ended December 31,
1998. On January 12, 1999, the Company acquired the net assets
of CSPI in the amount of $700,840, including cash of $349,950 in
exchange for a subscription of the Company's Common Stock. On
January 27, 2000, the Company issued 2,000,000 shares of its
Common Stock to CSPI. The Company expects to continue to invest
in capital and other assets to support its growth.
Net cash provided by financing activities for the year ended
December 31, 1998 was $28,345, which was derived entirely from
the two stock offerings described above. 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 December 31, 1999, cash and cash equivalents totaled $402,782,
up $387,387 from $15,395 at December 31, 1998. In addition, at
December 31, 1999, the Company had working capital of $244,327
and an accumulated deficit of $437,062.
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 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 $547,259 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 Exchange Act of 1934, 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.
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 August 24, 2000, a shareholder filed a complaint against the
Company, Mr. Acacio and Ms. Conway with the United States
District Court for the Central District of California, based on
the same allegations and 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, 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, a fourth shareholder class action
was commenced in the same court and against the same defendants
as in the prior class action suits. This class action suit is
based on 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 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 other legal matters will have a
material adverse effect on the Company's results of operations or
financial position.
-14-
The Company had no significant commitments for capital
expenditures at September 30, 2000. Depending on the outcome of
the above-mentioned securities litigation currently filed against
the Company, the Company may be required to raise additional
funds to meet its working capital and capital expenditure needs
through the next twelve months.
-15-
Item 7. Financial Statements.
TABLE OF CONTENTS
PAGE
INDEPENDENT AUDITORS' REPORT 17
BALANCE SHEET 18
STATEMENTS OF OPERATIONS 19
STATEMENT OF STOCKHOLDERS' EQUITY 20
STATEMENTS OF CASH FLOWS 21
NOTES TO FINANCIAL STATEMENTS 22
-16-
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
California Software Corporation
We have audited the accompanying balance sheet of California
Software Corporation (the "Company") as of December 31, 1999, and
the related statements of operations, stockholders' equity and
cash flows for the year ended December 31, 1999 and the period
from inception (October 28, 1998) to December 31, 1998. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of California Software Corporation as of December 31, 1999, and
the results of its operations and its cash flows for the year
ended December 31, 1999 and the period from inception (October
28, 1998) to December 31, 1998, in conformity with generally
accepted accounting principles.
/s/Stark, Tinter and Associates, LLC
Denver, Colorado
September 29, 2000
-17-
California Software Corporation
BALANCE SHEET
December 31, 1999
(Restated)
ASSETS
Current assets:
Cash and cash equivalents $ 402,782
Accounts receivable, net of allowance for 441,219
doubtful accounts of $427,864
Prepaids and other current assets 58,129
Total current assets 902,130
Property and equipment, net 52,171
TOTAL ASSETS $ 954,301
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 488,722
Accrued payroll and related expenses 117,248
Deferred revenue 51,833
Total current liabilities 657,803
Commitments and contingencies (Note 5)
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 6,542
shares authorized; 6,541,800 shares issued
and outstanding
Additional paid-in capital 26,178
Common stock subscribed 700,840
Accumulated deficit (437,062)
Total stockholders' equity 296,498
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 954,301
See the accompanying notes to the financial statements.
-18-
California Software Corporation
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1999 and
The Period from Inception (October 28, 1998) to December 31, 1998
(Restated)
1999 1998
Revenues:
Software sales $2,571,164 $ -
Maintenance and other revenue 135,834 -
Total revenues 2,706,998 -
Costs and expenses:
Research and development 414,992 -
Selling, general, and administrative 2,686,999 17,325
Depreciation and amortization 13,100 -
Total costs and expenses 3,115,091 17,325
Income (loss) from operations (408,093) (17,325)
Other income (expense), net (11,644) -
Income (loss) before provision for (419,737) (17,325)
income taxes
Provision for income taxes - -
Net income (loss) $(419,737) $(17,325)
(Loss) per share - basic and fully diluted $ (0.06) $ 0.00
Weighted-average shares outstanding - 6,541,800 6,208,043
basic and fully diluted
See the accompanying notes to the financial statements.
-19-
California Software Corporation
STATEMENT OF STOCKHOLDERS' EQUITY
For the Period From Inception (October 28, 1998) to December 31,
1999
(Restated)
<TABLE>
<S> <C> <C> <C> <C> <C>
Common Stock Additional Common Accumulated Total
Paid-In Stock Deficit Stockholders
Shares Amount Capital Subscribed Equity
October 28, 1998 - $ - $ - $ - $ - $ -
Issuance of 5,400,000 5,400 1,775 - - 7,175
common stock to
founding
shareholders
Issuance of 1,141,800 1,142 24,403 - - 25,545
common stock
Net loss - - - - (17,325) (17,325)
Balance at 6,541,800 $6,542 $26,178 $ - $(17,325) $15,395
December 31,
1998
Subscription of - - - 700,840 - 700,840
common stock for
acquisition of
CSPI assets
Net loss - - - - (419,737) (419,737)
Balance at 6,541,800 $6,542 $26,178 $700,840 $(437,062) $296,498
December 31,
1999
</TABLE>
See the accompanying notes to the financial statements.
-20-
California Software Corporation
STATEMENTS OF CASH FLOWS
For the Period Ended December 31, 1999 and
The Period From Inception (October 28, 1998) to December 31, 1999
(Restated)
December 31,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (419,737) (17,325)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization 13,100 -
Allowance for doubtful accounts 497,214 -
Writedown of obsolete inventory 84,828 -
Issuance of common stock for services - 4,375
Changes in operating assets and
liabilities:
Accounts receivable 63,762 -
Prepaids and other current assets (25,291) -
Accounts payable and accrued expenses (108,847) -
Accrued payroll and related expenses (5,070) -
Deferred revenue (12,667) -
Net cash provided by (used in) 87,292 (12,950)
operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of CSPI assets, net of cash 349,950 -
acquired
Acquisition of property and equipment (49,855) -
Net cash provided by investing 300,095 -
activities
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock - 28,345
Net cash provided by financing - 28,345
activities
Net increase in cash and cash 387,387 15,395
equivalents
Cash and cash equivalents, beginning 15,395 -
of year
Cash and cash equivalents, end of $ 402,782 $ 15,395
year
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 24,024 $ -
Income taxes $ - $ -
NON-CASH FINANCING AND INVESTING
ACTIVITIES:
Purchase of CSPI assets in exchange $ 700,840 $ -
for common stock subscription
See the accompanying notes to the financial statements.
-21-
California Software Corporation
Notes to Financial Statements
December 31, 1999
(Restated)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
California Software Corporation (the "Company") was incorporated
in the State of Nevada on October 28, 1998. 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 of the application's source
code; (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 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.
Through December 31, 1998, the Company had been in the
development stage. Effective January 12, 1999, the Company
commenced operations and was no longer considered to be in the
development stage.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates. On an ongoing basis,
management reviews those estimates, including those related to
allowances for doubtful accounts, loss contingencies for
litigation, income taxes, and projection of future cash flows
used to assess the recoverability of long-lived assets.
Cash and Cash Equivalents
For purposes of balance sheet classification and the statements
of cash flows, the Company considers all highly liquid
investments purchased with an original maturity of three months
or less to be cash equivalents.
Financial Instruments
Fair value estimates discussed herein are based upon certain
market assumptions and pertinent information available to
management as of December 31, 1999. The respective carrying
value of certain on-balance-sheet financial instruments
approximated their fair values. These financial instruments
include cash, accounts receivable, accounts payable and accrued
expenses. Fair values were assumed to approximate carrying
values for these financial instruments because they are short-
term in nature and their carrying amounts approximate fair value
or they are receivable or payable on demand.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash
investments and trade receivables. The Company has cash
investment policies that limit investments to investment grade
securities. The Company performs ongoing credit evaluations of
its customers' financial position and the risk with respect to
trade receivables is further mitigated by the fact that the
Company's customer base is highly diversified.
Inventory
Inventories are stated at the lower of cost (based on the first-
in, first-out method) or market.
Property and Equipment
Property and equipment is stated at cost. Depreciation is
computed using the straight-line method based on estimated useful
lives ranging from three to five years. Leasehold improvements
are amortized over the estimated useful lives or lease terms, as
appropriate.
-22-
Long-Lived Assets
The carrying amount of long-lived assets is reviewed if facts and
circumstances suggest that it may not be recoverable. For
purposes of evaluating the recoverability of long-lived assets,
the Company estimates the future undiscounted cash flows of the
businesses to which long-lived assets relate. When such
estimates of the future undiscounted cash flows are less than the
carrying amount of long-lived assets, the difference is charged
to operations. The Company estimates the future undiscounted
cash flows using historical results and current projections. If
current projections of future cash flows are not achieved, the
Company may be required to record reductions in the carrying
values of long-lived assets in future periods.
Deferred Revenue
Deferred revenue primarily relates to support and maintenance
agreements which have been paid for by customers prior to the
performance of those services. Revenue from these services is
recognized ratably over the term of the support or maintenance
agreement.
Revenue Recognition
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. The Company has
adopted the provisions of SOP No. 97-2 for the fiscal year ended
December 31, 1998. The Company recognizes revenue from sales of
its products upon shipment, provided fees are fixed and
determinable and collection is probable.
Research and Development Costs
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"
("SFAS No. 86"), which requires capitalization of certain
software development costs subsequent to the establishment of
technological feasibility. Based on the Company's product
development process, technological feasibility is established
upon completion of a working model. Since the Company does not
incur any costs between the completion of the working model and
the point at which the product is ready for general release, all
research and development costs are charged to expense as
incurred.
Accounting for Stock-Based Compensation
Effective January 1, 1999, the Company adopted the disclosure
provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
In accordance with the provisions of SFAS No. 123, the Company
applies Accounting Principles Board Opinion 25, "Accounting for
Stock Issued to Employees" ("APB No. 25") and related
interpretations in accounting for its employee stock option
plans. In March 2000, the FASB issued FASB Interpretation No. 44
("FIN 44"), "Accounting for Certain Transactions Involving Stock
Compensation". The Company will be required to adopt FIN 44
effective July 1, 2000 with respect to certain provisions
applicable to new awards, exchanges of awards in a business
combination, modifications to outstanding awards and changes in
grantee status that occur on or after that date. FIN 44
addresses practice issues related to the application of APB No.
25. The Company does not expect the application of FIN 44 to
have a material impact on its financial position or results of
operations. There were no compensatory employee stock options
issued or outstanding at December 31, 1999 or 1998.
Income Taxes
The Company uses the liability method of accounting for income
taxes. Accordingly, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
assets and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period of the enactment date. A
valuation allowance is established against deferred tax assets
when management concludes that the "more likely than not"
realization criteria has not been met.
-23-
Advertising Costs
The Company expenses all costs of advertising as incurred.
Advertising costs included in selling, general and administrative
expenses aggregated $217,189 and $0 in 1999 and 1998,
respectively.
Net Income (Loss) per Common Share
The Company calculates net income (loss) per share as required by
Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" ("SFAS No. 128"). Basic earnings (loss) per share is
calculated by dividing net income (loss) by the weighted average
number of common shares outstanding for the period. Diluted
earnings (loss) per share is calculated by dividing net income
(loss) by the weighted average number of common shares and
dilutive common stock equivalents outstanding. During the
periods presented, common stock equivalents were not considered
as their effect would be antidilutive.
Segment Information
The Company follows the provisions of Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). In
accordance with SFAS No. 131, certain information is disclosed
based on the way management organizes financial information for
making operating decisions and assessing performance. The
Company currently operates in a single segment and will evaluate
additional segment disclosure requirements as it expands its
operations.
Recent Pronouncements
The FASB recently issued Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and
Hedging Activities-Deferral of Effective Date of FASB Statement
No. 133" ("SFAS No. 137"). SFAS No. 137 defers for one year the
effective date of FASB Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133").
The rule now will apply to all fiscal quarters of all fiscal
years beginning after June 15, 2000. In June 1998, the FASB
issued SFAS No. 133, which is required to be adopted in years
beginning after June 15, 1999. The Statement permits early
adoption as of the beginning of any fiscal quarter after its
issuance. The Statement will require the Company to recognize
all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of derivatives will either
be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized
in other comprehensive income until the hedged item is recognized
in earnings. The ineffective portion of a derivative's change in
fair value will be immediately recognized in earnings. The
Company has not yet determined if it will early adopt and what
the effect of SFAS No. 133 will be on the earnings and financial
position of the Company.
NOTE 2. RESTATEMENT OF FINANCIAL STATEMENTS
During August 2000 the Company filed a Form 8-K with the
Securities and Exchange Commission ("the Commission") informing
the Commission that it will restate its financial statements for
1999 and the first quarter of 2000. The restatement results from
the Company's change in its revenue recognition policy from a
method that did not comply with Generally Accepted Accounting
Principles ("GAAP") to a method which does comply with GAAP.
The Company had previously recognized revenue upon shipment of
its product to a customer for a trial period in order to allow
the customer to determine whether to keep or return the product,
with a reserve established to cover returns. Under the new
policy, revenue is not recognized until the customer agrees to
accept the product and collection of the fee is probable.
-24-
Following is a summary of revenue and income (loss) before income
taxes:
Previously Restated
Reported
Total revenue $10,246,193 $2,706,998
Net income (loss) before income $3,350,493 $ (419,737)
taxes
The Company is currently involved in litigation as a result of
this restatement (see Note 11).
NOTE 3. ACQUISITION
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.
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999:
Computer equipment $47,081
Office equipment 5,100
Leasehold improvements 13,090
65,271
Less accumulated depreciation and (13,100)
amortization
$52,171
NOTE 5. COMMITMENTS AND CONTINGENCIES
Leases
The Company had leased its corporate facilities under a non-
cancelable operating lease agreement that expires in September
2000. The facility lease requires the Company to pay operating
costs, such as property taxes, insurance and maintenance as well
as provides for renewal options and provisions adjusting the
lease payments based upon changes in the consumer price index.
Rent expense for the years ended December 31, 1999 and 1998
totaled $93,081 and $0, respectively.
In February 2000, the Company entered into a new non-cancelable
operating lease agreement for its corporate facilities. The
lease is for a term of five years with an option to extend the
lease for an additional five years at the conclusion of the
original lease term.
Future minimum payments under non-cancelable operating leases
with initial terms of one year or more are as follows:
2000 $ 157,764
2001 268,836
2002 273,633
2003 280,038
2004 286,437
2005 72,009
$1,338,717
-25-
Litigation
See Note 11, Subsequent Events.
NOTE 6. STOCKHOLDERS' EQUITY
Preferred Stock
The Company's Board of Directors has the authority to issue
shares of preferred stock, in one or more series, and containing
certain rights and limitations, including dividend rights, voting
rights, conversion privileges, redemption rights, and liquidation
or sinking fund rights. No preferred stock has been issued or is
outstanding at December 31, 1999 and the Company has no present
plans to issue any shares of preferred stock.
Common Stock
On or about October 28, 1998, the Company completed an offering
that was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended. The Company issued 5,400,000
shares of its $0.001 par value common stock for $7,175 to its
founders. Consideration for the common stock consisted of $2,800
cash and the forgiveness of a loan owed to the stockholders for
corporate consulting and incorporation costs that were paid for
by the stockholders in the amount of $4,375.
On or about December 7, 1998, the Company completed an offering
that was exempt from registration pursuant to Regulation D, Rule
504, of the Securities Act of 1933, as amended. The Company sold
1,141,800 shares of its $0.001 par value common stock at a price
of $0.025 per share. The Company received cash in the amount of
$25,545, net of expenses of $3,000.
Common Stock Subscription
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.
NOTE 7. NONRECURRING IMPAIRMENT CHARGE
In 1999, the Company discontinued selling a DOS-based version of
its computer software. Because of this, an item that accounted
for $84,828 of inventory became obsolete and was charged to
operations.
NOTE 8. INCOME TAXES
The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS No. 109"), which requires use of the liability
method. SFAS No. 109 provides that deferred tax assets and
liabilities are recorded based on the differences between the tax
bases of assets and liabilities and their carrying amounts for
financial reporting purposes, referred to as temporary
differences. Deferred tax assets and liabilities at the end of
each period are determined using the currently enacted tax rates
applied to taxable income in the periods in which the deferred
tax assets and liabilities are expected to be settled or
realized.
The provision for income taxes differs from the amount computed
by applying the statutory federal income tax rate to income
before provision for income taxes. The sources and tax effects
of the differences are as follows:
U.S federal statutory rate (34.0%)
R&D credit 9.5%
Valuation reserve 24.5%
Total -%
-26-
As of December 31, 1999, the Company has a net operating loss
carryforward of approximately $435,000 for tax purposes, which
will be available to offset future taxable income. If not used,
this carryforward will expire in 2018 and 2019. To the extent
that net operating loss carryforwards, when realized, relate to
stock option deductions, the resulting benefits will be credited
to stockholders' equity. The deferred tax asset relating to the
operating loss carryforward of approximately $106,500 has been
fully reserved at December 31, 1999.
NOTE 9. RELATED PARTY TRANSACTIONS
The Company will from time-to-time make loans to or receive loans
from its officers. These loans typically bear no interest and
are due on demand.
On December 13, 1999, the Company entered into an employment
agreement with Bruce Acacio, its President and Chief Executive
Officer. The agreement is for a three year term with the total
consideration to be paid summarized as follows:
Year 1 Year 2 Year 3
Annual Base Salary $225,000 $300,000 $350,000
Annual Bonus (1) $100,000 $100,000 $100,000
Stock Options (shares) (2) 300,000 300,000 300,000
In addition, on December 13, 1999, the Company also entered into
an employment agreement with Carol Conway, its Vice President
and Chief Financial Officer. The agreement is also for a three
year term with the total consideration to be paid summarized as
follows:
Year 1 Year 2 Year 3
Annual Base Salary $180,000 $230,000 $280,000
Annual Bonus (1) $100,000 $100,000 $100,000
Stock Options (shares) (2) 250,000 250,000 250,000
(1) Bonuses are to be paid quarterly based upon a percentage of
achievement of revenue goals set forth by the Company's Board of
Directors.
(2) Option grants are to be issued at the end of each year
during the term of the agreement, and are exercisable at the end
of the initial term of the agreement.
Both agreements provide that, upon termination of the employee as
a result of unlawful or dishonest acts by the employee,conviction
of the employee of a felony offense, or a breach of any term of
the employment agreement by the employee, the Company shall pay
the employee the full amount of compensation accrued as of the
date of termination. In addition, both agreements provide for
immediate payment of all compensation due under the agreement for
the remainder of the term of the agreement upon termination
of employment due to a default or breach of any term of the
agreement by the Company. Finally, both agreements contain
non-competition provisions as well as provisions under which
both officers will continue to serve the Company in the same
capacity in the event of a change of control.
NOTE 10. EMPLOYEE BENEFIT PLAN
Effective January 12, 1999, the Company assumed the CSPI Savings
and Investment Plan (the "Plan") in conjunction with the
Company's acquisition of CSPI covering substantially all of the
Company's employees. Employees may contribute up to 15% of their
total compensation to the Plan. The Company is required to match
25% of the first $4,000 contributed to the Plan. 401(k) expenses
for the Plan, including administrative costs, were $12,161 and
$0, respectively, for the years ended December 31, 1999 and 1998.
-27-
NOTE 11. SUBSEQUENT EVENTS
Stockholders' Equity
On March 15, 2000 the Company effected a 2 for 1 forward stock
split. All share and per share amounts have been restated to give
effect to this split.
On March 15, 2000, pursuant to a private placement agreement
dated November 23, 1999, the Company issued 600,000 shares of its
common stock in exchange for cash of $200,000 and a note
receivable in the amount of $74,332. The note bears no interest
and matures on September 6, 2001.
On January 27, 2000, the Company converted a common stock
subscription payable to CSPI resulting from the Company's January
12, 1999 acquisition of CSPI into 2,000,000 shares of the
Company's common stock.
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 Company issued a total of 2,654,971
shares of its common stock in exchange for proceeds of
$8,232,639, net of offering costs of $547,259.
Commitments
On February 1, 2000, the Company entered into an agreement for
investor relations services. Under the terms of the agreement,
the Company is to receive investor relations services for a nine
month period from February 1, 2000 to October 31, 2000 in
exchange for 420,000 shares of the Company's common stock valued
at $0.625 per share. These shares were issued on March 6, 2000.
On February 1, 2000, the Company entered into an agreement for
various corporate financial services. Under the terms of the
agreement, the Company is to receive specified financial
consulting services in exchange for 200,000 shares of the
Company's common stock valued at $0.525 per share. These shares
were issued on March 15, 2000.
On April 6, 2000, the Company entered into an agreement for
investor relations services. Under the terms of the agreement,
the Company is to receive investor relations services for a six
month period from April 1, 2000 to September 30, 2000 in exchange
for 150,000 shares of the Company's common stock valued at $5.10
per share. These shares were issued on April 14, 2000.
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.
On August 24, 2000, a shareholder filed a complaint against the
Company, Mr. Acacio and Ms. Conway with the United States
District Court for the Central District of California, based on
the same allegations and 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, 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, a fourth shareholder class action
was commenced in the same court and against the same defendants
as in the prior class action suits. This class action suit is
based on the same allegations and seeks the same relief as
described above.
-28-
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. At this time it
is not reasonably possible to estimate the range of damages, if
any, that the Company might incur in connection with the above
actions. However, the uncertainty associated with substantial
unresolved litigation might be expected to have an adverse impact
on the Company's business.
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 other legal matters will have a
material adverse effect on the Company's results of operations or
financial position.
-29-
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
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 years
ended December 31, 1999 and 1998 included in this report on Form
10-KSB/A are prepared in accordance with GAAP, including the
provisions of SOP No. 97-2.
-30-
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The names and positions of the Company's directors, executive
officers, and significant employees are as follows:
Name Age Position
R. Bruce Acacio 40 President, Chief Executive
Officer and Chairman of the
Board
Carol Conway 57 Vice President, Chief
Financial Officer,
Secretary, Treasurer, and
Director
R. Dean Moore 61 Director of Development
Thomas Hoyt 37 Director of Worldwide Sales
Mr. Acacio is Chairman of the Board, President and Chief
Executive Officer of the Company and has held those positions
since the Company's inception. He was elected as the Company's
Chairman on October 12, 1999 for a one year term. Mr. Acacio is
the former President and Chief Executive Officer of CSPI. In
January 1997, during Mr. Acacio's tenure as President and Chief
Executive Officer, CSPI filed for Chapter 11 protection under
federal bankruptcy law due to an unresolved conflict with a major
creditor. At CSPI, Mr. Acacio was responsible for the release of
new versions of CSPI's trademarked BABY/36 and BABY/AS2000
products. Prior to his involvement with CSPI, Mr. Acacio has
held sales and middle management positions with UK-based
conglomerate Lex Service, PLC and for IBM. In these positions,
he has been responsible for turning around troubled operations
and expanding business units.
Ms. Conway is the Vice President, Chief Financial Officer,
Secretary, and Treasurer of the Company and has held those
positions since the company's inception. She was elected as a
director on October 12, 1999 for a one year term. Ms. Conway is
the former CFO of CSPI. In January 1997, during Ms. Conway's
tenure as Vice President and Chief Financial Officer, CSPI filed
for Chapter 11 protection under federal bankruptcy law due to an
unresolved conflict with a major creditor. At CSPI, Ms. Conway
was directly involved in the planning and execution of new
product releases, support and documentation of new versions of
BABY/36 and BABY/AS2000. Prior to her involvement with CSPI, Ms.
Conway held account and management positions with Ketchum Public
Relations in San Francisco, California, servicing both the
technology and consumer products sectors.
Mr. Moore is the Company's Director of Development and was one of
the founding members of CSPI. At CSPI, Mr. Moore led the
programming team that developed the compilers for the initial
BABY offerings and expanded these products into the suites of
programs that currently comprise BABY/36 and BABY/AS2000.
Currently, Mr. Moore oversees all new product development at the
Company.
Mr. Hoyt is the Company's Director of Worldwide Sales, and also
held a similar position at CSPI. Prior to his involvement with
CSPI, Mr. Hoyt held various software and hardware marketing
positions at several technology companies including a Kodak
subsidiary based in Hamburg, Germany. Mr. Hoyt is currently
responsible for overseeing all sales activities of the Company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own
more than ten percent of a registered class of the Company's
equity securities, to file with the SEC initial reports of
ownership and reports of changes in ownership of Common Stock and
other equity securities of the Company. Officers, directors and
greater than ten-percent stockholders are required by SEC
regulations to furnish the Company with copies of all Section
16(a) forms they file. To the Company's knowledge, based solely
on review of the copies of such reports furnished to the Company
and written representations that no other reports were required
during the fiscal year ended December 31, 1999, its officers,
directors and greater than ten percent beneficial owners complied
with all Section 16(a) filing requirements.
-31-
ITEM 10. EXECUTIVE COMPENSATION.
The following table discloses compensation paid by the Company
during the fiscal year ended December 31, 1999 to (i) the
Company's Chief Executive Officer, and (ii) one individual who
was the only executive officer, other than the Chief Executive
Officer, who was serving as an executive officer at the end of
1999 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
ANNUAL
COMPENSATION ALL OTHER
NAME AND PRINICPAL YEAR SALARY BONUS COMPENSATION
POSITION (1) ($) ($) ($)
R. Bruce Acacio 1999 $180,000 - 1,000(2)
Chairman of the Board,
President, and
Chief Executive Officer
Carol Conway 1999 $150,000 - $1,000(2)
Vice President, Chief
Financial Officer,
Secretary, and Treasurer
(1) No executive officer of the Company drew a salary from the
Company prior to January 12, 1999.
(2) These payments consist of amounts funded by the Company's
401(k) plan for the year ended December 31, 1999.
STOCK OPTIONS GRANTED IN LAST FISCAL YEAR
There were no grants of stock options to any of the Named
Executive Officers for the year ended December 31, 1999.
COMPENSATION OF DIRECTORS
The Company's only directors are its current executive officers
who are already drawing a salary for the management of the
Company. They do not receive any additional compensation for
their services as directors. Accordingly, it may be necessary
for the Company to compensate newly appointed directors in order
to attract a quality governance team. At this time the Company
has not identified any specific individuals or candidates nor has
it entered into any negotiations or activities in this regard.
EMPLOYMENT AGREEMENTS
On December 13, 1999, the Company entered into an employment
agreement with Bruce Acacio, its President and Chief Executive
Officer. The agreement is for a three year term with the total
consideration to be paid summarized as follows:
Year 1 Year 2 Year 3
Annual Base Salary $225,000 $300,000 $350,000
Annual Bonus (1) $100,000 $100,000 $100,000
Stock Options (shares) (2) 300,000 300,000 300,000
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In addition, on December 13, 1999, the Company also entered into
an employment agreement with Carol Conway, its Vice President and
Chief Financial Officer. The agreement is also for a three year
term with the total consideration to be paid summarized as
follows:
Year 1 Year 2 Year 3
Annual Base Salary $180,000 $230,000 $280,000
Annual Bonus (1) $100,000 $100,000 $100,000
Stock Options (shares) (2) 250,000 250,000 250,000
(1) Bonuses are to be paid quarterly based upon a percentage of
achievement of revenue goals set forth by the Company's Board of
Directors.
(2) Option grants are to be issued at the end of each year
during the term of the agreement, and are exercisable at the end
of the initial term of the agreement.
Both agreements provide that, upon termination of the employee as
a result of unlawful or dishonest acts by the employee,
conviction of the employee of a felony offense, or a breach of
any term of the employment agreement by the employee, the Company
shall pay the employee the full amount of compensation accrued as
of the date of termination. In addition, both agreements provide
for the immediate payment of all compensation due under the
agreement for the remainder of the term of the agreement upon the
termination of employment due to a default or breach of any term
of the agreement by the Company. Finally, both agreements
contain non-competition provisions as well as provisions under
which both officers will continue to serve the Company in the
same capacity in the event of a change of control.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth certain information as of
September 30, 2000, with respect to the beneficial ownership of
the Company's Common Stock by: (i) all persons known by the
Company to be beneficial owners of more than 5% of the Company's
Common Stock, (ii) each director and Named Executive Officer, and
(iii) by all executive officers and directors as a group.
COMMON STOCK
Name and Address of Amount and Percent of
Beneficial Owner (1) Nature of Common Stock
Beneficial
Ownership
R. Bruce Acacio 3,274,214 (2) 25.99%
David LaMarr 3,274,214 (2) 25.99%
Carol Conway 3,145,814 24.97%
All executive officers and 6,420,028 50.96%
directors as a group (2 members)
Footnotes to Beneficial Owners:
(1) The address of each beneficial owner is c/o California
Software Corporation, 2485 McCabe Way, Irvine, CA 92614.
(2) These shares are held by Mr. Acacio and Mr. LaMarr in joint
tenancy.
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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company engaged the services of NevWest Securities
Corporation ("NevWest") on November 23, 1999 as its investment
banking firm in conjunction with corporate finance and investment
banking services. The Company agreed to compensate NevWest for
its services as a promoter with a warrant that permitted NevWest
to purchase 600,000 shares of Common Stock in the Company. The
principal terms of the warrant include an exercise price equal to
110% of the average daily closing price of the Company on the
OTCBB (trading symbol: "CAWC"), calculated as of each day's
closing bid over the course of the Company's first 30 days of
available and/or active trading on the OTCBB. The warrant was
exercisable within a period commencing 30 days after the first
day of available and/or active trading of the Company on the
OTCBB and expiring two (2) years from such commencement date. On
February 7, 2000, NevWest exercised the warrant and paid the
Company $200,000 cash and $74,032 in the form of a non-interest
bearing promissory note with a maturity date of September 6,
2001.
The Company engaged the services of OTC Financial Network
("OTCFN"), a division of National Financial Communications Corp.,
a full service financial communications and investor relations
firm assisting the Company in shareholder communications. For its
services as a promoter, OTCFN received a fee payable in
restricted Common Stock of the Company in the amount of 420,000
shares valued at $0.625 per share. These shares were issued to
OTCFN on March 6, 2000.
The Company engaged the services of A to Z Consultants ("A to Z")
to assist the Company in its shareholder communications. For its
services as a promoter, A to Z received a fee payable in
restricted Common Stock of the Company in the amount of 150,000
shares valued at $5.10 per share. These shares were issued to A
to Z on April 14, 2000.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
A list of exhibits required to be filed as part of this Annual
Report is set forth in the Index to Exhibits, which immediately
precedes such exhibits and is incorporated herein by reference.
(b) Reports on Form 8-K:
The Company has not filed any reports on Form 8-K during the last
quarter of the fiscal year ended December 31, 1999.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CALIFORNIA SOFTWARE CORPORATION
Date: October 17, 2000
By:/s/R. Bruce Acacio
R. Bruce Acacio
Chairman of the Board and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By:/s/R. Bruce Acacio
R. Bruce Acacio
Chairman of the Board and Chief Executive Officer (Principal
Executive Officer)
October 17, 2000
By:/s/Carol Conway
Carol Conway
President, Secretary, Treasurer and Director
October 17, 2000
By:/s/Lawrence J. Jagiello
Lawrence J. Jagiello
Chief Financial Officer and Director (Principal Financial Officer
and Principal Accounting Officer)
October 17, 2000
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INDEX TO EXHIBITS
Exhibit Name and/or Identification of Exhibit
Number
2.1 Asset Purchase Agreement with California Software
Products, Inc. (filed on September 14, 1999 as Exhibit 2 to
the Registrant's Form 10-SB as amended and incorporated herein by
reference)
3.1 Articles of Incorporation of the Company filed with the
Nevada Secretary of State on October 28, 1998 (filed on
September 14, 1999 as Exhibit 2 to the Registrant's Form
10-SB as amended and incorporated herein by reference)
3.2 Bylaws of the Company adopted October 31, 1998 (filed on
September 14, 1999 as Exhibit 2 to the Registrant's Form
10-SB as amended and incorporated herein by reference)
10.1 Assumption of Premise Lease dated September 25, 1997
(filed on September 14, 1999 as Exhibit 2 to the Registrant's Form
10-SB as amended and incorporated herein by reference)
10.2 Employment Agreement dated December 13, 1999 between the
Company and R. Bruce Acacio
10.3 Employment Agreement dated December 13, 1999 between the
Company and Carol Conway
27 Financial Data Schedule
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