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 several families of software products that are targeted to users of the International Business Machines ("IBM*") iSeries, formerly known as the AS/400* and mainframe computers. These products include software marketed under the brand names BABY, Unibol, MLPS, DLCS, ALPS and CLPS.
The Company's predecessor, California Software Products, Inc. ("CSPI"), was founded in 1975 for the purpose of writing software programs. 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. Development of these programs continued throughout the 1980s 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 1980s, 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 without the need for complete redevelopment of the application's source code.
On January 12, 1999, the Company acquired the net assets of CSPI with a historical cost of $700,840 in exchange for shares of the Company's Common Stock that were to be issued at a later date. On January 27, 2000, the Company issued 2,000,000 shares of its Common Stock in exchange for such assets.
On October 20, 2000, the Company acquired the stock of Software Connections, Inc, dba ALE Systems ("ALE"), a software developer of loan processing software, in exchange for cash of $750,000, an earn-out payable over 60 months, bearing no interest, valued between $625,000 and $2,500,000 depending on ALE's operating results during that period, and a note payable, bearing no interest, in the amount of $292,500 payable in monthly installments over 36 months. In conjunction with this acquisition, the Company was amortizing goodwill in the amount of $3,933,101 over a five year period. As of December 31, 2001, the Company has recorded an impairment loss for all of the remaining and unamortized goodwill associated with this acquisition.
On November 8, 2000, the Company signed a letter of intent to merge with Unicomp, Inc. ("Unicomp"), a Georgia corporation. On that same date, and two days thereafter, the Company entered into various agreements with Unicomp through which the Company acquired Unibol, Ltd., a United Kingdom corporation, and through which the Company contends it also acquired Unibol, Inc., a Georgia corporation ("Unibol U.S."). In the Stock Purchase Agreement, the Amendment to the Stock Purchase Agreement and related documents, the Company agreed to pay cash of $1,000,000, an additional $500,000 due in four monthly installments commencing on the first of the month beginning with the second month after the Closing Date, and $1,500,000 of the Company's Common Stock due and valued on the six month anniversary of the Closing Date. On November 13, 2000, the Company paid the $1,000,000 in cash due under the agreements. Subsequent to the cash payment, a dispute arose between the Company and Unicomp about Unicomp's providing of financial information, the identity of the companies included under the acquisition documents, as well as the intent of certain provisions contained in the Amendment to the Stock Purchase Agreement purporting to grant sole operational and voting control over the Unibol entities to the Chief Executive Officer of Unicomp for a six month period. As a result, the Company did not make any of the installment payments due under the Stock Purchase Agreement and merger discussions were terminated. The Company thereafter filed a lawsuit in California against Unicomp, several of its officers and directors, and a third party, alleging fraudulent misrepresentation and various other charges in connection with the acquisition of Unibol, Ltd. and Unibol, Inc. Unicomp also filed a lawsuit in Georgia against the Company seeking to preserve Unicomp's interest in one of the Unibol companies, Unibol, Inc., as well as to uphold the original terms and conditions of the Stock Purchase Agreement and Amendment to the Stock Purchase Agreement, although that lawsuit subsequently was dismissed by the Georgia court.
* A trademark of International Business Machines Corporation
The Company asserted its physical and operational control over Unibol UK on or about January 29, 2001. As a result, the Company has reversed the valuation reserve it established as of December 31, 2000 against its $1,000,000 cash investment in Unibol. This reversal of the valuation reserve is presented as an extraordinary item in the Company's Consolidated Statement of Operations for the year ended December 31, 2001. Further, the Company has included the operations of Unibol UK for the period of January 29, 2001 through December 31, 2001 in its Consolidated Statement of Operations for the year ended December 31, 2001. Subsequent to year end, all pending claims and court issues regarding Unibol were settled and then dismissed.
INDUSTRY BACKGROUND
Rehosting / Graphical --------------------- The IBM iSeries* and its predecessors, System/32*, System/34*, System/36*, System/38*, and AS/400* - collectively called IBM Midrange systems - are a class of machines substantially different from widely familiar PCs. The System/36, superceded by the AS/400 (later renamed the iSeries), 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. According to IBM, it has shipped over 750,000 AS/400 systems worldwide since the AS/400's introduction.
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. 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. Industry sources estimate that over 28,000 business programs were written for those systems - more than for any other platform. Today, industry sources estimate that approximately 8,000 ISVs assist in the development of applications software intended for use on IBM's Midrange computing platforms.
Despite the platform's multiple advantages, IBM Midrange and Mainframe 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 Windows NT/2000TM or Unix. This factor has become increasingly important in recent years as the cost of PCs decreased and PC networks became far more powerful and widespread. Today, the limitations of Midrange systems can make them appear old-fashioned to many information management professionals, and many companies are looking for ways to migrate their Midrange systems to alternative systems such as Windows NT/2000TM and Unix. However, many of these companies have made significant investments in their software applications, and are looking for ways to extend the life of their software without having to convert or rewrite their software to a new operating system. As a result, companies wanting to migrate their System/36 and AS/400-based applications to a PC or Unix network environment must choose one of the following approaches:
o 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.
o 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.
o 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. * A trademark of International Business Machines Corporation
o 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 WindowsTM applications running in the environment.
Re-engineering custom applications or moving to a new packaged solution poses significant financial and operational risks 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 WindowsTM whereby an applications developer can take older IBM Midrange programs that meet current business requirements and run them on a Windows NT/2000TM network. Moreover, the developer can utilize another of the Company's products to add a GUI that does for Midrange applications what Windows 3.xTM and Windows 95/98TM 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 that have developed successful AS/400 applications software are faced with the challenge of migrating their products to new platforms while maintaining their existing customer base for applications software running on the AS/400 platform. The Company's products may be used by these 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/2000TM offerings. As a result, one set of code and screens can be maintained for a developer's Midrange and PC platforms.
Mortgage Loan Processing ------------------------
The Company's MLPS product was originally developed in the early 1980's to serve the mortgage lending industry. Since then, the product has evolved to include all aspects of loan processing including first and second mortgages, credit cards, lines of credit, consumer, home equity, mortgage, and student loans. The Company targets MLPS primarily towards lenders and mortgage brokers in the finance industry. The software's scalability and flexibility allows the Company to offer MLPS to customers with loan processing volumes of less than 100 to over 5,000 per month.
COMPETITION
Competition in the rehosting end of the Company's business, including its BABY/iSeries and BABY/36 products, is not extensive, as the Company believes that, with the exception of Unibol, there are no other significant rehosting products available in the marketplace. The Company's graphical and internet products, including its BABY/GUI and baby.com products, compete primarily with established market leaders Seagull Software and Jacada Ltd. Competition in the mortgage loan industry is intense, with a mix of both large and small companies competing for customers.
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 applications to the PC environment and to execute such applications on a PC network without a complete rewrite of the application's source code; (b) GUI software that allows a developer of an AS/400 or Mainframe text-based application to present screens with WindowsTM point-and-click functionality; and (c) software that internet-enables AS/400 and Mainframe applications. 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. In addition, the Company markets a software product under the brand name MLPS that supports the processing of mortgage loans in the banking and financial industries.
The Company currently offers the following applications:
o BABY/iSeries - BABY/iSeries is a PC-based application that allows developers to migrate IBM AS/400 and iSeries 400 applications and data files to the Windows NT/2000TM environment. The existing source code residing on an AS/400 or iSeries 400 is downloaded to a PC, recompiled, and executed without the need for redevelopment. BABY/iSeries also allows new programs to be developed, compiled, and debugged on a PC platform and allows subsequent program execution on either a PC or AS/400 and iSeries 400 computers.
o BABY/36 - BABY/36 is a PC-based RPG II development, execution and operating environment that allows the migration of IBM System/36 applications to the Windows NT/2000TM environment. Similar in operation to BABY/iSeries, existing source code residing on a System/36 is downloaded to a PC, recompiled, and executed without the need for redevelopment.
o BABY/GUI - BABY/GUI is a PC-based program that allows a software developer to transform System/36, AS/400 and iSeries 400 text-based applications into icon-driven WindowsTM screens with point-and-click functionality. Residing on a Windows NT/2000TM server, BABY/GUI intercepts the instructions that the application sends to the screen and reinterprets it into a graphical presentation. This requires no redevelopment of the application's source code.
o baby.com - baby.com allows developers to Internet-enable AS/400-based and rehosted software applications. Baby.com renders screens that have been reinterpreted by BABY/GUI into a web deployable DHTML format for presentation to a remote Internet client. The developer can elect to use a sophisticated scripting capability to integrate legacy applications with PC-based programs.
o MLPS - MLPS is an IBM AS/400-based software product for companies that do loan processing. The program can be adapted to various lending markets including retail and wholesale mortgages, automobile and consumer loans.
Services and Support
The Company currently supports its products with a team of technical experts and implementation consultants that can assist clients in migrating their applications to the PC environment. The Company also offers services such as:
o Pre-Migration Analysis - Analysis and preparation of a customer's software and hardware environment for migration to the Company's products.
o Client-Server Consulting - Assistance in planning for and converting legacy application environments to client/server environments.
o Migration Services - Migration of RPG applications to the Company's PC-based operating environment.
o Implementation Service - On-site installation of migrated applications, technical training and configuration of the PC environment for program execution.
o Installation and Setup Services - Assistance in planning the installation of hardware and MLPS software at a customer site.
o Business Consulting Services - Consulting services designed to maximize loan processing efficiencies in utilizing MLPS to automate processing and collections.
DISTRIBUTION, MARKETING AND CUSTOMER RELATIONS
The Company sells its BABY and Unibol products and services throughout the world directly to end-users and through a network of business partners, who bundle their own applications with the BABY and Unibol products into a single multi-host offering for Windows and Unix. The Company also markets its products overseas through an international distributor network of IBM Business Partners and software houses. MLPS is sold directly to end-user banks and financial
institutions throughout the United States. 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 has also established and will continue to establish marketing and distribution relationships through a broad range of channels including business partners, 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.
PROPRIETARY RIGHTS
The Company has registered United States trademarks for its product families. In addition to its existing rights under law, 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 further 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 introduced two new BABY products in 2001. A new version of BABY/iSeries incorporating new functionality such as the usage of WindowsTM , Oracle support for added scalability, Active X support for faster multidatabase connectivity, complete web-to-host support via DHTML and the ability to deploy under Unix and Linux. BABY/GUI and baby.com are now bundled with BABY/iSeries. In the third quarter of 2001, a Mainframe version of BABY/GUI and baby.com was released making web-to-host products and a complete GUI available for the 3270 mainframe environment.
During the years ended December 31, 2001 and 2000, the Company incurred research and development expenses of $1,400,306 and 577,729, respectively, with respect to its current and future products. The cost of such activities were not borne by the Company's customers.
EMPLOYEES
As of December 31, 2001, the Company had thirty-eight (38) 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.
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 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 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, 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.
Financial Condition and Going Concern Qualification. In early 2001, the Company implemented a new operating plan designed to accelerate the Company's ability to achieve positive operating cash flow. As part of the new operating plan, the Company reduced the size of its workforce and made further expense reductions in the areas of technical support, product development and general and administrative expenses. To successfully execute this plan, the Company must adhere to its expense reductions and work to achieve the revenue targets incorporated as underlying assumptions to its operating plan. If the Company is unable to manage its operating expenses and increase revenues, the Company may be unable to achieve and maintain positive operating cash flow. The Company's ability to achieve its annual and quarterly revenue goals could also be negatively impacted by the softening consumer demand for technology products, as well as the weakening general economic conditions and decreasing consumer confidence.
The Company's operating plan reflects management's expectations as of the date of this annual report, and is based on currently available information as well as significant assumptions made by management regarding various revenue and operating expense items. The Company cannot guarantee that the assumptions that it relied upon in developing its operating plan will be accurate, or that future events or results will conform to the Company's expectations or assumptions. The Company's independent accountants have issued a "going concern" qualification to their audit opinion for the year ended December 31, 2001 that calls into question the Company's ability to continue operations through December 31, 2002. Furthermore, due to potential concerns regarding the Company's going concern qualification, financial condition and its perceived ability to fulfill its financial and other obligations, the Company's customers, vendors, and other corporate partners may decide not to conduct business with it, or may conduct business with the Company on terms that are less favorable than those customarily extended by them. As a result, if the Company's assumptions are inaccurate, or its expectations prove to be erroneous in light of future events, or if it is unable to maintain the support of its customers, vendors, and other key corporate relationships regardless of the success of its operating plan, it may need to raise additional working capital before it achieves positive operating cash flow. In order to obtain this capital, the Company may seek to sell additional equity securities, obtain a line of credit or seek other ways to fund its operations in the event it requires additional working capital to operate its business. If the Company decides to raise additional funds by issuing equity or convertible debt securities, the percentage ownership of its stockholders will be significantly diluted. Also, any new securities could have rights, preferences and privileges senior to that of the Company's Common Stock.
The Company has not achieved profitability since its inception, and it incurred net operating losses of $5,490,733 and $6,482,649 for the years ended December 31, 2001 and 2000, respectively, and may continue to incur losses for the foreseeable future. Although the Company recently initiated a restructuring of its business designed, in part, to significantly reduce costs in a number of areas, the Company has not yet obtained profitability. The Company's ability to become profitable and continue its operations depends on its ability to generate and sustain higher revenue levels, and maintain reasonable operating expense levels consistent with the assumptions underlying the Company's new operating plan. If the Company is unable to increase its revenues or manage and reduce its operating expenses and costs compared to the year ended December 31, 2001, it
may be unable to achieve positive operating cash flow. If the Company does not achieve positive operating cash flow in a timely manner that is consistent with its operating plan, the Company could fail.
Exposure to Damages as a Result of Litigation. Over the past few years, the Company has been subject to various legal proceedings, many of which have been resolved and dismissed. See a more detailed discussion of legal proceedings in Item 3.
The Company is subject to various 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.
Dependence on Principal Products. For the year ended December 31, 2001, the Company's core of BABY and MLPS 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 and results of operations.
Potential for Software Defects. Software products as complex as the BABY and MLPS 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 business, financial condition and 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 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 business, financial condition and results of operations.
Acquisition Strategy. The Company 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 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. The Company may require additional capital to fund its capital expenditures, product development and working capital requirements through 2002. In addition, any significant change in the Company's product development plans or marketing and distribution methods might require additional capital. The sale of equity interests would significantly 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 overlap. 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 and financial condition could be materially adversely affected.
Possible Volatility of Stock Price. The market price of the Company's Common Stock has experienced significant fluctuations and may continue to fluctuate significantly. The market price of the Common Stock may be significantly
affected by factors such as the announcement of new products or product enhancements by the Company or its competitors, technological innovation by the Company or its competitors, quarterly variations in the Company's or its competitors' results of operations, changes in prices of the Company's or its competitors' products and services, changes in revenue and revenue growth rates for the Company as a whole or for specific geographic areas, business units, products or product categories, changes in earnings estimates by market analysts, speculation in the press or analyst community and general market conditions or market conditions specific to particular industries. The stock prices for many companies in the technology sector have experienced wide fluctuations which often have been unrelated to their operating performance. Such fluctuations may adversely affect the market price of the Company's Common Stock.
Limited Market for Common Stock; Absence of Dividends. The Common Stock of the Company is currently quoted on the Over-the-Counter Bulletin Board ("OTCBB") under the symbol "CAWC". As a result, the market for the Company's stock is limited. There can be no assurance that a meaningful trading market will develop.
