UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number: 001-15769
CALIFORNIA SOFTWARE CORPORATION
(Exact name of small business issuer as specified in its charter)
Nevada 88-0408446
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2485 McCabe Way, 2nd Floor, 92614
Irvine, California (Zip Code)
(Address of principal executive
offices)
(949) 553-8900
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Check whether the registrant filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange
Act after the distribution of securities under a plan confirmed
by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares of registrants' common stock as of 10/31/00:
12,577,771
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT:
Yes [ ] No [X]
California Software Corporation
Quarterly Report
Period Ending September 30, 2000
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet 1
Statements of Operations 2
Statements of Cash Flows 3
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis 5
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security 13
Holders
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
-i-
PART I - FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
California Software Corporation
BALANCE SHEET
(unaudited)
September 30, 2000
ASSETS
Current assets:
Cash and cash equivalents $5,787,093
Accounts receivable, net of allowance for 327,448
doubtful accounts of $295,330
Prepaids and other current assets 798,750
Total current assets 6,913,291
Property and equipment, net 143,482
Other assets 67,847
TOTAL ASSETS $7,124,620
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $639,388
Accrued payroll and related expenses 156,947
Deferred revenue 96,344
Total current liabilities 892,679
Long-term liabilities 24,643
Total liabilities 917,322
Contingencies (Note 4)
Stockholders' Equity
Preferred stock, $0.001 par value; 5,000,000 -
shares authorized; no shares issued and
outstanding
Common stock, $0.001 par value; 20,000,000 12,578
shares authorized; 12,577,771 shares issued
and outstanding at September 30, 2000
Additional paid-in capital 10,397,520
Accumulated deficit (4,202,800)
Total stockholders' equity 6,207,298
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $7,124,620
The accompanying notes are an integral part of the financial
statements.
<PAGE>1
California Software Corporation
STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
Revenues:
Software sales $207,322 $347,691 $972,459 $2,412,047
Maintenance and other 44,925 37,261 126,725 102,494
revenue
Total revenues 252,247 384,952 1,099,184 2,514,541
Costs and expenses:
Research and development 121,779 103,748 361,004 311,244
Selling, general, and 2,145,746 827,215 4,636,424 1,959,983
administrative
Depreciation and 8,838 3,192 24,059 8,249
amortization
Total costs and expenses 2,276,363 934,155 5,021,487 2,279,476
Income (loss) from (2,024,116) (549,203) (3,922,303) 235,065
operations
Other income (expense), 94,618 (3,728) 156,565 (11,025)
net
Income (loss) from (1,929,498) (552,931) (3,765,738) 224,040
operations before
provision for income taxes
Benefit for income taxes - 168,306 - -
Net income (loss) $(1,929,498) $(384,625) $(3,765,738) $224,040
Basic and diluted income $(.18) $(.06) $(.35) $.03
(loss) per share
Weighted-average shares 10,814,252 6,541,800 10,716,254 6,541,800
outstanding
The accompanying notes are an integral part of the financial
statements.
<PAGE>2
California Software Corporation
STATEMENTS OF CASH FLOWS
(unaudited)
Nine months ended September 30,
2000 1999
Net income (loss) (3,765,738) 224,040
Adjustments to reconcile net income
(loss) with net cash
flows provided by (used in) operations:
Depreciation and amortization 24,059 8,249
Allowance for bad debt 194,217 488,937
Loss on disposal of assets 5,542 -
Issuance of stock for services 685,867 -
Changes in operating assets /
liabilities:
Accounts receivable (80,446) (451,472)
Prepaids and other current assets (241,454) 86,037
Accounts payable and accrued expenses 144,978 (147,684)
Accrued payroll and related expenses 39,700 (26,112)
Deferred revenue 44,511 (14,000)
Net cash provided by (used in) (2,948,764) 167,995
operations
Cash flows from investing activities
Acquisition of CSPI, net of cash - 349,950
acquired
Increase in other assets (3,829) -
PP&E additions (90,582) (45,279)
Net cash provided by (used in) (94,411) 304,671
investing activities
Cash flows from financing activities
Issuance of common stock 8,427,486 -
Net cash provided by financing 8,427,486 -
activities
Net change in cash and cash 5,384,311 472,666
equivalents
Cash at beginning of period 402,782 15,395
Cash at end of period $5,787,093 $488,061
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Purchase of CSPI in exchange for common $- $700,840
stock
subscription
Conversion of common stock subscription $700,840 $-
into common
stock
Issuance of stock in exchange for note $64,018 $-
receivable
The accompanying notes are an integral part of the financial
statements.
<PAGE>3
California Software Corporation
NOTES TO FINANCIAL STATEMENTS
September 30, 2000
1. BASIS OF PRESENTATION
The financial statements included herein have been prepared by
California Software Corporation (the "Company"), without audit,
pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). These financial statements should
be read in conjunction with the financial statements and the
notes thereto included in the Company's Annual Report on Form 10-
KSB, as amended, for the fiscal year ended December 31, 1999.
In the opinion of management, the unaudited financial statements
contain all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the Company's
financial position and results of operations. The results for
the three month period ended September 30, 2000 are not
necessarily indicative of the results expected for the full
fiscal year.
2. CHANGE IN ACCOUNTANTS / CHANGE IN ACCOUNTING PRINCIPLES
In October 1997, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position ("SOP") No. 97-
2, "Software Revenue Recognition" which superseded SOP No. 91-1.
SOP No. 97-2 was effective for fiscal years after December 15,
1997, as amended by SOP No. 98-4 and SOP No. 98-9, and provides
guidance on applying generally accepted accounting principles
("GAAP") for software revenue recognition transactions. The
Company had been improperly recognizing revenue on shipments of
new products that failed to meet the criteria specified in SOP
No. 97-2. The Company's independent accountant issued an
unqualified opinion on the Company's financial statements for the
year ended December 31, 1999, a copy of which was included in the
Company's Annual Report on Form 10-KSB filed for the year then
ended. In addition, the Company filed a Form 10-QSB for the
three month period ended March 31, 2000 which contained financial
statements that were also not prepared in accordance with the
provisions of SOP No. 97-2. During the first quarter of 2000,
the Company was seeking to list its Common Stock on the American
Stock Exchange ("AMEX") and, during the listing process, was
notified that the Company would need to submit reaudited
financial statements for the year ended December 31, 1999 from
another independent accountant because the Company was unable to
provide evidence that its independent accountant met the peer
review standards mandated by the American Institute of Certified
Public Accountants ("AICPA"). On May 2, 2000, the Company's
Board of Directors approved a resolution engaging a new
certifying independent accountant, Squar, Milner, Reehl &
Williamson, LLP ("Squar"), who was initially engaged to perform a
SAS 71 review of the Company's financial statements for the three
months ended March 31, 2000. After appointing Squar, AMEX
notified the Company that it would accept audited financial
statements for the three month period ended March 31, 2000 in
lieu of having the year ended December 31, 1999 reaudited by
Squar. Squar subsequently notified the Company that it would not
be able to perform this audit within the timeframe requested by
the Company. On July 24, 2000, the Company engaged a new
certifying independent accountant, Stark, Tinter and Associates,
LLP ("Stark") in order to complete the audit within the Company's
timeframe. Upon examination of the Company's financial
statements, Stark notified the Company that the method in which
the Company used to record revenue was not in compliance with the
provisions of SOP No. 97-2. The restated results for the three
and nine month periods ended September 30, 2000 and 1999 included
in this report on Form 10-QSB are prepared in accordance with
GAAP, including the provisions of SOP No. 97-2.
3. STOCK TRANSACTIONS
During the three months ended September 30, 2000, the Company
issued to unrelated non-employees 2,000 shares of common stock at
$3.86 per share for investor services.
<PAGE>4
4. CONTINGENCIES
Litigation
Refer to Part II, Item 1 for a description of legal proceedings.
Leases
During the three months ended September 30, 2000, the Company
entered into several leases for computer equipment. In
accordance with the provisions of Statement of Financial
Accounting Standards No. 13, "Accounting for Leases," these
leases have been capitalized and the Company has recorded long
term liabilities of $24,643 at September 30, 2000, which
represents the long-term unpaid principal on those leases.
5. SUBSEQUENT EVENTS
On October 20, 2000, the Company acquired the net assets of
Software Connections, Inc. d/b/a ALE Systems ("ALE"), a Virginia
corporation in exchange for $750,000 in cash and an earn-out
agreement valued between $625,000 and $2.5 million which is
dependent on the operating results of ALE in future periods.
On November 7, 2000, the Company signed a letter of intent to
merge with UniComp Inc., a provider of retail e-business
solutions and business software solutions for small and medium-
sized companies, retailers and system integrators. The merger is
subject to the customary closing conditions, including
shareholder and regulatory approval. At the closing of the
merger, California Software shareholders will receive a number of
shares equivalent to one for one.
Item 2. Management's Discussion and Analysis
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on
Form 10-QSB contains forward-looking statements. The forward-
looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from those
reflected in such forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking
statements, which reflect management's opinions only as of the
date hereof. The Company undertakes no obligation to revise or
publicly release the results of any revision to these forward-
looking statements. Readers should carefully review the risk
factors described herein and in other documents the Company files
from time to time with the SEC, including its Annual Report on
Form 10-KSB, as amended, for the fiscal year ended December 31,
1999 and the Quarterly Reports on Form 10-QSB, as amended, filed
by the Company in fiscal 2000.
GENERAL
The Company markets a family of software products under the brand
name BABY that support the migration of International Business
Machines ("IBM") Midrange applications to the PC-LAN business
environment. The products provide (a) software solutions that
allow business customers to migrate IBM Midrange Report
Generation Language ("RPG") applications to the personal computer
("PC") environment and execute such applications in native mode
on a PC network without a complete rewrite; (b) software designed
to create a distributed processing environment including a true
AS/400 client-server environment, remote site operations,
deployment of specific applications to PC workstations separate
from an AS/400, various high availability applications, or
delegation of AS/400 batch processing to NT; (c) graphical user
interface ("GUI") software that allows a developer of an AS/400
text-based application to present screens with Windows point-and-
click functionality; and (d) web-enablement software which
provides internet access to AS/400-based applications. 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 and web-
enablement products markets.
<PAGE>5
RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 Compared to Three Months
Ended September 30, 1999
Software Sales. Software sales consist of sales of the Company's
BABY software products. Software sales for the three months
ended September 30, 2000 and 1999 were $207,322 and $347,691,
respectively, a 59.6% decrease. The decrease in software sales
during the three months ended September 30, 2000 is due to a
restructuring of the Company's sales activities resulting from
the Company's change in revenue recognition under SOP No. 97-2.
In addition, the decrease was due to distractions of management
relating to the class action lawsuits filed against the Company
during the quarter (see Part II, Item 1 of this Form 10-QSB) that
reduced management's involvement in sales activities. The
Company anticipates that the results of the restructuring will
allow the Company to increase its revenues from software sales in
future periods.
Maintenance and Other Revenue. Maintenance and other revenue
consists of annual maintenance contracts sold to the Company's
customers for technical support on its products, business partner
agreements which entitle the Company's customers to unlimited
annual technical support as well as increased discounts on
software purchases, and shipping revenue billed to customers.
Revenue from annual maintenance contracts and business partner
agreements are deferred and recognized over the term of the
related contract or agreement. Maintenance and other revenue for
the three months ended September 30, 2000 and 1999 was $44,925
and $37,261, respectively, a 20.6% increase. The Company expects
that revenue from this source will continue to increase in future
periods as the Company expands its customer base.
Research and Development Costs. Research and development costs
consist primarily of salaries paid to employees engaged in
research and development activities. The Company has adopted the
provisions of Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed". Since the Company did not meet
the standards for capitalization under this Statement, all
research and development costs for the three months ended
September 30, 2000 and 1999 were charged to expense as incurred.
For the three months ended September 30, 2000 and 1999, research
and development costs were $121,779 and $103,748, respectively, a
17.4% increase as the Company continues its planned increases in
research and development activities relating to potential new
product releases. As a percentage of total revenue, research and
development costs for the three months ended September 30, 2000
were 48.3% as compared to 27.0% for the three months ended
September 30, 1999. The Company believes that research and
development expenditures are essential to maintaining a
competitive position and expects that these costs will continue
to increase in the future.
Selling, General and Administrative Expense. Selling, general
and administrative expenses include sales and marketing expenses,
employee compensation, corporate overhead, legal and accounting
expenses, and bad debt expenses. For the three months ended
September 30, 2000 and 1999, selling, general and administrative
expenses were $2,145,746 and $827,215, respectively, a 159.4%
increase due to the amortization of investor relations expenses
and financial services expenses of approximately $503,000 that
were paid in shares of the Company's Common Stock. The increase
was also due to increases in headcount from approximately 25
employees during the quarter ended September 30, 1999 to
approximately 37 employees at September 30, 2000. The headcount
increase, coupled with an increase in salaries paid to the
Company's employees during the quarter, resulted in an increase
in wages and related benefits of approximately $273,000.
Finally, the increase was due to legal expenses of approximately
$166,000 and accounting expenses of approximately $87,000
relating to the Company's restatement of its December 31, 1999
and March 31, 2000 financial statements and tax returns, and the
related class action lawsuits (see Part II, Item 1 of this Form
10-QSB). As a percentage of revenue, selling general and
administrative expenses for the three month period ended
September 30, 2000 were 850.7% as compared to 214.9% for the
three month period ended September 30, 1999. The Company expects
that selling, general and administrative costs, exclusive of the
investor relations expenses and lawsuit-related expenses, will
continue to increase in the future as the Company continues to
ramp up its sales and marketing efforts.
Depreciation and Amortization. Depreciation and amortization
consists of recurring depreciation charges recorded against the
Company's property and equipment. Depreciation and amortization
for the three months ended September 30, 2000 and 1999 was $8,838
and $3,192, respectively, a 176.9% increase primarily due to an
increase in property and equipment acquired by the Company. As a
percentage of revenue, depreciation and amortization for the
three month period ended September 30, 2000 was 3.5% compared to
0.8% for the three month period ended September 30, 1999. The
Company expects that depreciation and amortization will continue
to increase in the future as the Company increases its property
and equipment base in connection with its continued expansion
efforts or as a result of any possible future acquisitions made
by the Company.
<PAGE>6
Other Income/Expense, Net. Other income/expense primarily
consists of imputed interest expense calculated on the
liabilities assumed by the Company in connection with its
acquisition of CSPI in January 1999, offset by interest income
received from investments of the Company's excess cash balances.
Net other income for the three months ended September 30, 2000
was $94,618 as compared to net other expense of $3,728 for the
three months ended September 30, 1999, a 2,638% increase as the
result of higher cash balances maintained by the Company during
the third quarter of 2000.
Income Taxes. For the three months ended September 30, 2000, the
Company did not record any income tax benefit as compared to a
benefit of $168,306 for the three months ended September 30,
1999.
Net Income / Loss. For the three months ended September 30,
2000, the Company recorded a net loss of $1,929,498 or $.18 per
common share as compared to a net loss of $384,625 or $.06 per
common share for the three months ended September 30, 1999, a
401.7% decrease as a result of the factors described above.
Nine Months Ended September 30, 2000 Compared to Nine Months
Ended September 30, 1999
Software Sales. Software sales consist of sales of the Company's
BABY software products. Software sales for the nine months ended
September 30, 2000 and 1999 were $972,459 and $2,412,047,
respectively, a 59.7% decrease. The decrease in software sales
during the first two quarters of 2000 represents a planned change
in emphasis in the Company's business plan. In the first two
quarters of 1999, emphasis was placed on upgrading current
customers on the Company's rehosting products to prepare them for
the launch of the Company's new BABY/GUI and BABY.COM products,
which also allowed the Company to expand its potential customer
base to a much broader target of installed IBM AS/400 users. The
Company introduced BABY/GUI in the third quarter of 1999, and
launched BABY.COM in September 2000. The Company anticipates
that these products will account for a majority of the Company's
sales in the future. In addition, sales for the three months
ended September 30, 2000 were adversely affected by the class
action lawsuits filed against the Company during that timeframe
which resulted in significant reductions of managements'
involvement in sales activities.
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 nine months ended September 30, 2000 and 1999 was $126,725
and $102,494, respectively, a 23.6% increase. The Company
expects that revenue from this source will increase in future
periods as the Company expands its customer base.
Research and Development Costs. Research and development costs
consist primarily of salaries paid to employees engaged in
research and development activities. The Company has adopted the
provisions of Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed". Since the Company did not meet
the standards for capitalization under this Statement, all
research and development costs for the nine months ended
September 30, 2000 and 1999 were charged to expense as incurred.
For the nine months ended September 30, 2000 and 1999, research
and development costs were $361,004 and $311,244, respectively, a
16.0% increase as the Company continues its planned increases in
research and development activities relating to potential new
product releases. As a percentage of total revenue, research and
development costs for the nine months ended September 30, 2000
were 32.8% as compared to 12.4% for the nine months ended
September 30, 1999. The Company believes that research and
development expenditures are essential to maintaining a
competitive position and expects that these costs will continue
to increase in the future.
<PAGE>7
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 nine months ended
September 30, 2000 and 1999, selling, general and administrative
expenses were $4,636,424 and $1,959,983, respectively, a 136.6%
increase due to investor relations expenses and financial
services expenses of approximately $1,162,000 that were paid in
shares of the Company's Common Stock. In addition, increases in
headcount totaling approximately $635,000 coupled with the
increased legal and accounting fees of approximately $205,000,
both of which are discussed above, accounted for the majority of
the remainder of the increase during 2000. As a percentage of
revenue, selling general and administrative expenses for the nine
month period ended September 30, 2000 were 421.8% as compared to
77.9% for the nine month period ended September 30, 1999. The
Company expects that selling, general and administrative costs,
exclusive of the investor relations expenses and lawsuit-related
expenses, will continue to increase in the future as the Company
continues to ramp up its sales and marketing efforts.
Depreciation and Amortization. Depreciation and amortization
consists of recurring depreciation charges recorded against the
Company's property and equipment. Depreciation and amortization
for the nine months ended September 30, 2000 and 1999 was $24,059
and $8,249, respectively, a 191.7% increase primarily due to an
increase in property and equipment acquired by the Company. As a
percentage of revenue, depreciation and amortization for the nine
month period ended September 30, 2000 was 2.2% compared to 0.3%
for the nine month period ended September 30, 1999. The Company
expects that depreciation and amortization will continue to
increase in the future as the Company increases its property and
equipment base in connection with its continued expansion efforts
or as a result of any possible future acquisitions made by the
Company.
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 income for the nine months ended September 30, 2000 was
$156,565 as compared to net other expense of $11,025 for the nine
months ended September 30, 1999, a 1,520% increase as the result
of higher cash balances maintained by the Company during 2000.
Income Taxes. For the nine months ended September 30, 2000 and
1999, the Company did not record any income tax provision or
benefit.
Net Income / Loss. For the nine months ended September 30, 2000,
the Company recorded a net loss of $3,765,738 or $.35 per common
share as compared to a net profit of $224,040 or $.03 per common
share for the nine months ended September 30, 1999, a 1,780%
decrease as a result of the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have resulted in a net loss of
$3,765,738 for the nine months ended September 30, 2000 versus
net income of $224,040 for the nine months ended September 30,
1999. Since the Company's inception in October 1998, the Company
has financed its operations primarily through the sale of its
Common Stock.
Net cash used in operations for the nine months ended September
30, 2000 was $2,948,764, while net cash provided by operations
for the nine months ended September 30, 1999 was $167,995. The
negative cash flows generated from operations for the nine months
ended September 30, 2000 were primarily due to the losses
incurred from operations, while the positive cash flows generated
from operations for the nine months ended September 30, 1999 were
primarily due to decreases in cash collections resulting from a
lack of internal resources within the Company. The Company
believes that it may continue to experience negative cash flows
from operations in the short-term future as it restructures its
sales efforts to prepare for supporting its new graphical and
Internet-related products.
Net cash used in investing activities for the nine months ended
September 30, 2000 was $94,411, due almost entirely to purchases
of property and equipment. Net cash provided by investing
activities for the nine months ended September 30, 1999 was
$304,671, due primarily to cash received from the Company's
acquisition of CSPI in January 1999. The Company expects to
continue to invest in capital and other assets as well as utilize
mergers and acquisitions to expand and support its growth.
<PAGE>8
Net cash provided by financing activities for the nine months
ended September 30, 2000 was $8,427,486, due primarily to
proceeds received from the Company's private placement completed
during the second quarter of 2000. There was no cash provided by
or used in financing activities for the nine months ended
September 30, 1999. The Company anticipates that it may seek
additional capital in the future to support its business plan.
At September 30, 2000, cash and cash equivalents totaled
$5,787,093. In addition, at September 30, 2000, the Company had
working capital of $6,020,612 and an accumulated deficit of
$4,202,800.
During the quarter ended June 30, 2000, the Company completed a
private placement of 2,654,971 shares of its common stock. The
offering price per share was $4.00 per share 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
Securities Act of 1933, as amended, 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.
During the nine months ended September 30, 2000, the Company
issued to unrelated non-employees 781,000 shares of common stock
at prices from $0.05 to $7.35 per share for various services.
Depending on the outcome of the securities litigation currently
filed against the Company (see Part II, Item 1 hereof), the
Company may be required to raise additional funds to meet the
Company's working capital and capital expenditure needs at least
through the next twelve months.
RISK FACTORS
The Company does not provide forecasts of its future financial
performance. However, from time to time, information provided by
the Company or statements made by its employees may contain
"forward-looking" information that involves risks and
uncertainties. In particular, statements contained in this
Report on Form 10-QSB that are not historical facts (including,
but not limited to statements contained in "Item 2 - Management's
Discussion and Analysis" of Part I of this Report on Form 10-QSB
relating to liquidity and capital resources) may constitute
forward-looking statements and are made under the safe harbor
provisions of The Private Securities Litigation Reform Act of
1995. The Company's actual results of operations and financial
condition have varied and may in the future vary significantly
from those stated in any forward looking statements. Factors
that may cause such differences include, without limitation, the
risks, uncertainties and other information discussed below and
within this Quarterly Report on Form 10-QSB, as well as the
accuracy of the Company's internal estimates of revenue and
operating expense levels. The following discussion of the
Company's risk factors should be read in conjunction with the
financial statements contained herein and related notes thereto.
Such factors, among others, may have a material adverse effect
upon the Company's business, results of operations and financial
condition.
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.
<PAGE>9
On or about September 11, 2000, a third shareholder class action
was commenced in the United States District Court for the Central
District of California, against the same defendants. This
complaint is based upon the same allegations and seeks the same
relief as in the class action suits described above.
On or about September 21, 2000, a fourth shareholder class action
was commenced in the same court against the same defendants.
This class action suit is based upon the same allegations and
seeks the same relief as described above.
The Company expects that the above suits will be consolidated
into a single class action.
The Company believes that it has meritorious defenses to these
actions and intends to vigorously defend them. The pending
securities actions are in the early states of procedure.
Consequently, at this time it is not reasonably possible to
estimate the damage, or the range of damages, if any, that the
Company might incur in connection with such actions. However,
the uncertainty associated with substantial unresolved litigation
may be expected to have an adverse impact on the Company's
business. In particular, such litigation could impair the
Company's relationships with existing customers and its ability
to obtain new customers. Defending such litigation will likely
result in a diversion of management's time and attention away
from business operations, which could have a material adverse
effect on the Company's business, results of operations and
financial condition. Such litigation may also have the effect of
discouraging potential acquirors from bidding for the Company or
reducing the consideration such acquirors would otherwise be
willing to pay in connection with an acquisition.
Dependence on Principal Products. For the nine months ended
September 30, 2000, the Company's core of BABY products accounted
for substantially all of the Company's net sales. The Company is
wholly dependent on these products. As a result, any factor
adversely affecting sales of any of these products could have a
material adverse effect on the Company. The Company's future
financial performance will depend in part on the successful
introduction of enhanced versions of these products and
development of new versions of these and other products and
subsequent acceptance of such new and enhanced products. There
can be no assurance that the Company's new and enhanced products
will achieve significant market acceptance or will generate
significant revenue. In addition, competitive pressures or other
factors may result in significant price erosion that could have a
material adverse effect on the Company's business, financial
condition or results of operations.
Product Concentration. As previously noted, the Company derives
most of its revenues from products that replicate the AS/400
environment on a personal computer platform and provides a
graphical user interface ("GUI") for those text-screen
applications. As a result, the Company's future operating
results are dependent upon the continued widespread use of the
AS/400. Because there can be no assurance that the AS/400
platform will continue to be used in the foreseeable future, a
decline in demand for AS/400 products and hence the Company's
software products could have a material adverse effect on the
Company's business, operating results, and financial condition.
Potential for Software Defects. Software products as complex as
the BABY products offered by the Company may contain undetected
errors or failures when first introduced or as new versions are
released. Despite testing by the Company and by current and
potential customers, any of the Company's products may contain
errors after their commercial shipment. Such errors may cause
loss of or delay in market acceptance of the Company's products,
damage to the Company's reputation, and increased service and
warranty costs. The possibility of the Company being unable to
correct such errors in a timely manner could have a material
adverse effect on the Company's results of operations and its
cash flows. In addition, technical problems with the current
release of the platforms on which the Company's products operate
could impact sales of these products, which could have a material
adverse effect on the Company's results of operations.
Uneven Patterns of Quarterly Operating Results. The Company's
revenues in general are relatively difficult to forecast and vary
from quarter to quarter due to various factors, including the (i)
relatively long sales cycles for the Company's products, (ii)
size and timing of individual transactions, the closing of which
tend to be delayed by customers until the end of a fiscal quarter
as a negotiating tactic, (iii) introduction of new products or
product enhancements by the Company or its competitors, (iv)
potential for delay or deferral of customer implementations of
the Company's software, (v) changes in customer budgets, (vi)
seasonality of technology purchases and other general economic
conditions, and (vii) changes in the pricing policies of the
Company or its competitors. Accordingly, the Company's quarterly
results are difficult to predict until the end of the quarter,
and delays in product delivery or closing of sales near the end
of a quarter have historically caused and could cause quarterly
revenues and net income to fall significantly short of
anticipated levels.
<PAGE>10
The Company's revenues in any quarter are substantially dependent
on orders booked and shipped in that quarter. Because the
Company's operating expenses are based on anticipated revenue
levels and because a high percentage of the Company's expenses
are relatively fixed, a delay in the recognition of revenue from
even a limited number of sales transactions could cause
significant variations in operating results from quarter to
quarter and could cause net income to fall significantly short of
anticipated levels.
Effects of Electronic Commerce. There can be no assurance that
the Company will be able to provide a product offering that will
satisfy new customer demands in the Internet, online services, e-
business applications, and electronic commerce areas. In
addition, standards for web-enabled and e-business applications,
as well as other industry adopted and de facto standards for the
Internet are evolving rapidly. There can be no assurance that
standards chosen by the Company will position its products to
compete effectively for business opportunities as they arise on
the Internet and other emerging areas. The success of the
Company's product offerings depends, in part, on the Company's
ability to continue developing products which are compatible with
the Internet. The increased commercial use of the Internet may
require substantial modification and customization of the
Company's products and the introduction of new products. The
Company may not be able to effectively compete in the Internet-
related products and services market.
Competition. The Company encounters intense competition in some
aspects of its platform migration business and competes directly
with other software firms, many of which have greater financial
resources than the Company. There can be no assurance that the
Company will be able to compete successfully in the future or
that competition will not have a material adverse affect on the
Company's results of operations.
Acquisition Strategy. Although the Company has no current
acquisition plans, it has addressed and may continue to address
the need to develop new products, in part, through the
acquisition of other companies. Acquisitions involve numerous
risks including difficulties in the assimilation of the
operations, technologies and products of the acquired companies,
the diversion of management's attention from other business
concerns, risks of entering markets in which the Company has no
or limited direct prior experience and where competitors in such
markets have stronger market positions, and the potential loss of
key employees of the acquired company. Achieving and maintaining
the anticipated benefits of an acquisition will depend in part
upon whether the integration of a target company's business is
accomplished in an efficient and effective manner, and there can
be no assurance that this will occur. The successful combination
of companies in the high technology industry may be more
difficult to accomplish than in other industries.
Hiring and Retention of Employees. The Company's continued
growth and success depend to a significant extent on the
continued service of its senior management and other key
employees and the hiring of new qualified employees. Competition
for highly-skilled business, product development, technical and
other personnel is becoming more intense due to lower overall
unemployment rates as well as the boom in information technology
spending. Accordingly, the Company expects to experience
increased compensation costs that may not be offset through
either improved productivity or higher prices. There can be no
assurances that the Company will be successful in continuously
recruiting new personnel and in retaining existing personnel. In
general, the Company does not have long-term employment or non-
competition agreements with its employees. The loss of one or
more key employees or the Company's inability to attract
additional qualified employees or retain other employees could
have a material adverse effect on the continued growth of the
Company.
Sales Force Restructuring. The Company historically has relied
heavily on its direct sales force. In the past, the Company has
restructured or made other periodic adjustments to its sales
force. These changes have generally resulted in a temporary lack
of focus and reduced productivity by the Company's sales force
that may have affected revenues in a quarter. There can be no
assurances that the Company will not continue to restructure its
sales force or that the related transition issues associated with
restructuring the sales force will not recur.
<PAGE>11
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.
Limited Market for Common Stock; Absence of Dividends. The
Company's Common Stock is currently quoted on the Over-the-
Counter Bulletin Board ("OTCBB") under the symbol "CAWC".
However, as is the case for many other stocks on the OTCBB, the
trading volume in the Company's stock is insignificant. In
addition, most of the Company's stock is privately held. As a
result, the market for the Company's stock is limited.
Management of the Company anticipates that the expansion of the
shareholder base and continuing improvements in operating results
would enhance the liquidity of the Company's shares in the
future. However, there can be no assurance that a meaningful
trading market will develop.
Since the Company's inception, the Company has not paid dividends
on its Common Stock, and does not anticipate paying any dividends
in the foreseeable future.
Year 2000. As of the date of this filing, the Company currently
knows of no significant Year 2000-related failures that have
occurred in either its products or its internal systems as a
result of the date change from December 31, 1999 to January 1,
2000.
<PAGE>12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On August 17, 2000, a shareholder class action was commenced in
the United States District Court for the Central District of
California against the Company as well as two of its officers and
directors, Bruce Acacio and Carol Conway. The class action was
brought on behalf of purchasers of the stock of the Company
during the period February 9, 2000 through August 6, 2000. The
plaintiffs allege that the defendants made false and misleading
statements about the Company's actual and expected financial
performance to inflate the value of the Company's stock to
defraud investors, in violation of federal securities laws. The
plaintiffs seek damages, interest, costs and such other equitable
or injunctive relief as the Court may deem just and proper.
On or about August 21, 2000, another shareholder class action was
commenced against the Company, Mr. Acacio and Ms. Conway. The
complaint is based on the same allegations and is seeking the
same relief as in the class action suit described above.
On or about September 11, 2000, a third shareholder class action
was commenced in the United States District Court for the Central
District of California against the Company and Mr. Acacio and Ms.
Conway. This complaint is based on the same allegations and
seeks the same relief as in the class action suits described
above.
On or about September 21, 2000, another shareholder class action
was commenced in the United States District Court for the Central
District of California against the Company, Mr. Acacio and Ms.
Conway. This complaint is based on the same allegations and
seeks the same relief as in the class action suits described
above.
The Company expects that the above suits will be consolidated
into a single class action.
The Company believes that it has meritorious defenses to these
actions and intends to vigorously defend them.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
On October 20, 2000, the Company acquired the net assets of
Software Connections, Inc. d/b/a ALE Systems ("ALE"), a Virginia
corporation in exchange for $750,000 in cash and an earn-out
agreement valued between $625,000 and $2.5 million which is
dependent on the operating results of ALE in future periods.
On November 7, 2000, the Company signed a letter of intent to
merge with UniComp Inc., a provider of retail e-business
solutions and business software solutions for small and medium-
sized companies, retailers and system integrators. The merger is
subject to the customary closing conditions, including
shareholder and regulatory approval. At the closing of the
merger, California Software shareholders will receive a number of
shares equivalent to one for one.
<PAGE>13
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
27. Financial Data Schedule
(b) Reports on Form 8-K -
Filed on July 3, 2000 amending the filing on May 16, 2000 for Item
5, Other Events and Item 7, Financial Statements and Exhibits
relating to the Company's private placement of its Common Stock.
Filed on August 3, 2000 amending the filing on May 2, 2000 for
Item 4, Change in Registrant's Certifying Accountant.
Filed on August 8, 2000 for Item 4, Change in Registrant's
Certifying Accountant.
Filed on August 14, 2000 for Item 5, Other Events and Item 7,
Financial Statements and Exhibits announcing the Company's
restatement of its financials for the year ended December 31, 1999 and
the quarter ended March 31, 2000.
Filed on September 27, 2000 amending the filing on August 8,
2000 for Item 4, Change in Registrant's
Certifying Accountant.
<PAGE>14
Signatures
In accordance with the requirements of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 13, 2000
CALIFORNIA SOFTWARE CORPORATION
By:/s/Lawrence J. Jagiello
Lawrence J. Jagiello
Chief Financial Officer and Principal Accounting Officer
<PAGE>15
END
