**U.S. SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C.20549**

 

**FORM 10-QSB**

 

| **(Mark One)**                                                                                                                                                                                         |   |                                                                                   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------|
| **ý**                                                                                                                                                                                             |   | **Quarterly  Report under Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|                                                                                                                                                                                                   |   |                                                                                   |
| **For the quarterly period ended September  30, 2003**                                                                                                                                                 |
|                                                                                                                                                                                                   |   |                                                                                   |
| **o**                                                                                                                                                                                                  |   | **Transition  Report Pursuant to Section 13 or 15(d) of the Exchange Act**             |
|                                                                                                                                                                                                   |   |                                                                                   |
| **For the transition period from                 to               ** |

 

**Commission File number 0-16449**

 

**RAINING DATA CORPORATION**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**             |   | **94-3046892**                    |
|--------------------------|--------|-----------------------------------|
| (State of Incorporation) |   | (IRS Employer Identification No.) |

 

**17500 Cartwright RoadIrvine, CA 92614**

(Address of principal executive offices)

 

**(949) 442-4400**

(Registrant’s telephone number)

 

Check whether the issuer: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act during thepast 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ý  No o

 

As ofSeptember 30, 2003, there were 18,158,454 shares of registrant’s Common Stock,$.10 par value, outstanding.

 

TransitionalSmall Business Disclosure Format (Check one): Yes o  No ý

 

 

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**RAINING DATA CORPORATION**

**INDEX**

 
| PART I.    | FINANCIAL INFORMATION                                                                                                    |
|------------|--------------------------------------------------------------------------------------------------------------------------|
| ITEM 1.    | FINANCIAL STATEMENTS                                                                                                     |
|       | UNAUDITED CONDENSED CONSOLIDATED BALANCE  SHEETS — SEPTEMBER 30, 2003 AND MARCH 31, 2003                            |
|       | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS  OF OPERATIONS — THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 |
|       | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS  OF CASH FLOWS — SIX MONTHS ENDED SEPTEMBER 30, 2003 AND 2002           |
|       | CONDENSED NOTES TO THE UNAUDITED CONDENSED  CONSOLIDATED FINANCIAL STATEMENTS                                            |
| ITEM 2.    | MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS                              |
| ITEM 3.    | CONTROLS AND PROCEDURES                                                                                                  |
| PART II.   | OTHER INFORMATION                                                                                                        |
| ITEM 1.    | LEGAL PROCEEDINGS                                                                                                        |
| ITEM 6.    | EXHIBITS AND REPORTS ON FORM 8-K                                                                                         |
| SIGNATURES |

 

2

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**PART I. FINANCIAL INFORMATION**

 

ITEM 1.  FINANCIAL STATEMENTS

 

**RAINING DATA CORPORATION AND SUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATED BALANCESHEETS**

 
|                                                          |   | **September  30,  2003** |   | **March 31,  2003** |   |
|---------------------------------------------------------------|--------|--------------------------|--------|---------------------|--------|
|                                                          |   | **(In  thousands)**      |   |
|                                                          |   |                     |   |
| ASSETS                                                        |   |                     |   |                |   |
| Current assets                                                |   |                     |   |                |   |
| Cash and equivalents                                          |   | $                        | 5,582  |                | $      | 5,279 |   |
| Trade accounts receivable-net                                 |   | 2,012                    |   | 2,142               |   |
| Other current assets                                          |   | 314                      |   | 318                 |   |
| Total current assets                                          |   | 7,908                    |   | 7,739               |   |
|                                                          |   |                     |   |                |   |
| Property, furniture and equipment-net                         |   | 780                      |   | 880                 |   |
|                                                          |   |                     |   |                |   |
| Intangible assets-net                                         |   | 3,033                    |   | 4,333               |   |
| Goodwill                                                      |   | 27,684                   |   | 27,684              |   |
| Other assets                                                  |   | 217                      |   | 258                 |   |
| Total assets                                                  |   | $                        | 39,622 |                | $      | 40,894 |   |
|                                                          |   |                     |   |                |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                    |   |                     |   |                |   |
|                                                          |   |                     |   |                |   |
| Current liabilities                                           |   |                     |   |                |   |
| Accounts payable                                              |   | $                        | 158    |                | $      | 600 |   |
| Accrued liabilities                                           |   | 2,419                    |   | 2,992               |   |
| Deferred revenue                                              |   | 5,220                    |   | 5,242               |   |
| Current portion of long-term liabilities                      |   | 64                       |   | 321                 |   |
| Total current liabilities                                     |   | 7,861                    |   | 9,155               |   |
|                                                          |   |                     |   |                |   |
| Long-term debt, net of discount and excluding current portion |   | 22,505                   |   | 21,932              |   |
| Total liabilities                                             |   | 30,366                   |   | 31,087              |   |
|                                                          |   |                     |   |                |   |
| Commitments and contingencies                                 |   |                     |   |                |   |
|                                                          |   |                     |   |                |   |
| Stockholders’ equity                                     |   |                     |   |                |   |
| Series A convertible preferred stock                          |   | 300                      |   | 300                 |   |
| Common stock                                                  |   | 1,816                    |   | 1,795               |   |
| Additional paid-in capital                                    |   | 95,169                   |   | 94,919              |   |
| Deferred stock-based compensation                             |   | (85                      | )      | (145                | )      |
| Accumulated other comprehensive income                        |   | 1,203                    |   | 1,050               |   |
| Accumulated deficit                                           |   | (89,147                  | )      | (88,112             | )      |
|                                                          |   |                     |   |                |   |
| Total stockholders’ equity                               |   | 9,256                    |   | 9,807               |   |
|                                                          |   |                     |   |                |   |
| Total liabilities and stockholders’ equity               |   | $                        | 39,622 |                | $      | 40,894 |   |

 

See accompanying condensed notes to the unaudited condensedconsolidated financial statements.

 

3

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**RAINING DATA CORPORATION AND SUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**THREE AND SIX MONTHS ENDED SEPTEMBER 30,**

 
|                                                          |   | **Three  Months Ended  September 30,** |   | **Six Months  Ended  September 30,** |   |
|---------------------------------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
|                                                          |   | **2003**                               |   | **2002**                             |   | **2003** |   | **2002** |   |
|                                                          |   | **(In  thousands)**                    |   |
| Net revenue                                                   |   |                                   |   |                                 |   |   |   |   |   |
| Licenses                                                      |   | $                                      | 2,247  |                                 | $      | 2,260 |   | $ | 4,533 |   | $ | 4,372 |   |
| Services                                                      |   | 3,115                                  |   | 2,688                                |   | 6,238 |   | 5,289 |   |
| Total net revenues                                            |   | 5,362                                  |   | 4,948                                |   | 10,771 |   | 9,661 |   |
|                                                          |   |                                   |   |                                 |   |   |   |   |   |
| Costs of revenue                                              |   |                                   |   |                                 |   |   |   |   |   |
| Cost of license revenue                                       |   | 133                                    |   | 70                                   |   | 222 |   | 115 |   |
| Cost of service revenue                                       |   | 583                                    |   | 504                                  |   | 1,072 |   | 1,035 |   |
| Total cost of revenue                                         |   | 716                                    |   | 574                                  |   | 1,294 |   | 1,150 |   |
|                                                          |   |                                   |   |                                 |   |   |   |   |   |
| Gross profit                                                  |   | 4,646                                  |   | 4,374                                |   | 9,477 |   | 8,511 |   |
|                                                          |   |                                   |   |                                 |   |   |   |   |   |
| Cost of operations                                            |   |                                   |   |                                 |   |   |   |   |   |
| Selling and marketing                                         |   | 1,309                                  |   | 1,055                                |   | 2,766 |   | 2,179 |   |
| Research and development                                      |   | 1,843                                  |   | 1,475                                |   | 3,817 |   | 2,949 |   |
| General and administrative                                    |   | 996                                    |   | 1,098                                |   | 1,916 |   | 2,445 |   |
| Stock-based compensation                                      |   | 73                                     |   | 82                                   |   | 123 |   | 265 |   |
| Amortization of intangible assets                             |   | 650                                    |   | 650                                  |   | 1,300 |   | 1,300 |   |
| Total operating expenses                                      |   | 4,871                                  |   | 4,360                                |   | 9,922 |   | 9,138 |   |
|                                                          |   |                                   |   |                                 |   |   |   |   |   |
| Operating income (loss)                                       |   | (225                                   | )      | 14                                   |   | (445 | ) | (627 | ) |
|                                                          |   |                                   |   |                                 |   |   |   |   |   |
| Other expense                                                 |   |                                   |   |                                 |   |   |   |   |   |
| Interest expense-net                                          |   | (305                                   | )      | (956                                 | )      | (601 | ) | (2,067 | ) |
| Other income (expense)-net                                    |   | (5                                     | )      | (34                                  | )      | 11 |   | 39 |   |
|                                                          |   | (310                                   | )      | (990                                 | )      | (590 | ) | (2,028 | ) |
| Net loss                                                      |   | $                                      | (535   | )                                    | $      | (976 | ) | $ | (1,035 | ) | $ | (2,655 | ) |
|                                                          |   |                                   |   |                                 |   |   |   |   |   |
| Basic and diluted net loss per share                          |   | $                                      | (0.03  | )                                    | $      | (0.05 | ) | $ | (0.06 | ) | $ | (0.15 | ) |
|                                                          |   |                                   |   |                                 |   |   |   |   |   |
| Shares used in computing basic and diluted net loss per share |   | 18,101                                 |   | 17,774                               |   | 18,029 |   | 17,710 |   |
|                                                          |   |                                   |   |                                 |   |   |   |   |   |
| Departmental allocation of stock-based compensation           |   |                                   |   |                                 |   |   |   |   |   |
| Cost of service revenues                                      |   | $                                      | 16     |                                 | $      | 16 |   | $ | 33 |   | $ | 33 |   |
| Selling and marketing                                         |   | 3                                      |   | 3                                    |   | 5 |   | 5 |   |
| Research and development                                      |   | 52                                     |   | 29                                   |   | 80 |   | 188 |   |
| General and administrative                                    |   | 2                                      |   | 34                                   |   | 5 |   | 39 |   |
| Total stock-based compensation                                |   | $                                      | 73     |                                 | $      | 82 |   | $ | 123 |   | $ | 265 |   |

 

See accompanying condensed notes to the unaudited condensedconsolidated financial statements.

 

4

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**RAINING DATA CORPORATION AND SUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**SIX MONTHS ENDED SEPTEMBER 30,**

 
|                                                                          |   | **2003**            |   | **2002** |   |
|-------------------------------------------------------------------------------|--------|---------------------|--------|----------|--------|
|                                                                          |   | **(In  thousands)** |   |
| Cash flows from operating activities:                                         |   |                |   |     |   |
| Net loss                                                                      |   | $                   | (1,035 | )        | $      | (2,655 | ) |
| Adjustments to reconcile net loss to net cash used for operating  activities: |   |                |   |     |   |
| Depreciation and amortization of long-lived assets                            |   | 1,479               |   | 1,505    |   |
| Note discount amortization                                                    |   | 41                  |   | 1,154    |   |
| Amortization of deferred stock-based compensation                             |   | 123                 |   | 265      |   |
| Change in assets and liabilities:                                             |   |                |   |     |   |
| Trade accounts receivable                                                     |   | 227                 |   | (107     | )      |
| Other current and non-current assets                                          |   | (2                  | )      | (28      | )      |
| Accounts payable and accrued liabilities                                      |   | (434                | )      | (2,085   | )      |
| Deferred revenue                                                              |   | (64                 | )      | 55       |   |
| Net cash provided by (used for) operating activities                          |   | 335                 |   | (1,896   | )      |
|                                                                          |   |                |   |     |   |
| Cash flows from investing activities:                                         |   |                |   |     |   |
| Purchase of property, furniture and equipment                                 |   | (3                  | )      | (317     | )      |
| Net cash used for investing activities                                        |   | (3                  | )      | (317     | )      |
|                                                                          |   |                |   |     |   |
| Cash flows from financing activities:                                         |   |                |   |     |   |
| Proceeds from exercise of stock options and warrants                          |   | 126                 |   | —   |   |
| Repayment of debt                                                             |   | (288                | )      | (57      | )      |
| Proceeds from issuance of common stock                                        |   | 83                  |   | 43       |   |
| Net cash used for financing activities                                        |   | (79                 | )      | (14      | )      |
|                                                                          |   |                |   |     |   |
| Effect of exchange rate changes on cash                                       |   | 50                  |   | 127      |   |
|                                                                          |   |                |   |     |   |
| Net increase (decrease) in cash and equivalents                               |   | 303                 |   | (2,100   | )      |
|                                                                          |   |                |   |     |   |
| Cash and equivalents at beginning of period                                   |   | 5,279               |   | 4,500    |   |
| Cash and equivalents at end of period                                         |   | $                   | 5,582  |     | $      | 2,400 |   |
|                                                                          |   |                |   |     |   |
| Other non-cash activities:                                                    |   |                |   |     |   |
| Issuance of payment-in-kind notes for accrued interest                        |   | $                   | 563    |     |   |   |

 

See accompanying condensed notes to the unaudited condensedconsolidated financial statements.

 

5

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**RAINING DATA CORPORATION AND SUBSIDIARIES**

**CONDENSED NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**September 30, 2003 (Unaudited)**

 

**1. INTERIM FINANCIAL STATEMENTS**

 

The unaudited interim condensed consolidated financial informationfurnished herein reflects all adjustments, consisting only of normal recurringitems, which in the opinion of management are necessary to fairly state RainingData Corporation’s (the “Company”) financial position, the results of itsoperations and its cash flows for the dates and periods presented and to makesuch information presented not misleading. Certain information and footnote disclosures,normally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America, havebeen omitted pursuant to SEC rules and regulations; nevertheless, management ofthe Company believes that the disclosures herein are adequate to make theinformation presented not misleading. These consolidated financial statementsshould be read in conjunction with the Company’s audited financial statementsfor the year ended March 31, 2003 contained in the Company’s Annual Reporton Form 10-KSB. The results of operations for the period ended September30, 2003 are not necessarily indicative of results to be expected for any otherinterim period or the fiscal year ending March 31, 2004.

 

**Reclassifications**

 

Certain reclassifications have been made to prior period amounts toconform to the current period presentation.

 

**2. RECENTLY ISSUED ACCOUNTING STANDARDS**

 

In June 2001, the Financial****Accounting****StandardsBoard****(“FASB”) issuedSFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFASNo. 143”). SFAS No. 143 requires the Company to record the fair valueof an asset retirement obligation as a liability in the period in which itincurs a legal obligation associated with the retirement of tangible long-livedassets that result from the acquisition, construction, development or normaluse of the assets. The Company also records a corresponding asset, which isdepreciated over the life of the asset. Subsequent to the initial measurementof the asset retirement obligation, the obligation will be adjusted at the endof each period to reflect the passage of time and changes in the estimatedfuture cash flows underlying the obligation. The Company adopted SFASNo. 143 on April 1, 2003.  Theadoption has not had and is not expected to have a material effect on theCompany’s consolidated financial position or results of operations.

 

On January 17, 2003, the FASBissued FASB Financial Interpretation No. 46, “Consolidation of VariableInterest Entities,” (“FIN No. 46”) which requires extensive disclosures about,and requires companies to evaluate, variable interest entities.  Such evaluation is required to determinewhether to apply the FIN No. 46 consolidation approach to such entities.Companies must apply FIN No. 46 to entities with which they are involved if theentity’s equity has specified characteristics. If it is reasonably possiblethat a company will have a significant variable interest in a variable interestentity at the date the FIN No. 46 consolidation requirements become effective,the company must disclose the nature, purpose, size and activities of thevariable interest entity and the consolidated enterprise’s maximum exposure toloss resulting from its involvement with the variable interest entity in allfinancial statements issued after January 31, 2003, regardless of when thevariable interest entity was created. Since the Company has no interest in anyvariable interest entity, the adoption of FIN No. 46 has not had and is notexpected to have a material effect on the Company’s consolidated financialposition or results of operations.

 

In April 2002, the FASBissued SFAS No. 145, “Rescission of the FASB Statements No. 4, 44 and64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFASNo. 145”). SFAS No. 145 eliminates the requirement to classify gains andlosses from the extinguishment of indebtedness as extraordinary, requirescertain lease modifications to be treated the same as a sale-leasebacktransaction, and makes other non-substantive technical corrections to existingpronouncements. SFAS No. 145 is effective for fiscal years beginning afterMay 15, 2002. SFAS No. 145 was adopted on April 1, 2003.  The adoption has not had and is not expectedto have a material effect on the Company’s consolidated financial position orresults of operations.

 

6

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The Emerging Issues Task Force reached a consensus on its tentativeconclusions for EITF 00-21, “Revenue Arrangements with Multiple Deliverables”(“EITF 00-21”). EITF 00-21 provides accounting guidance for allocation ofrevenue where delivery or performance of products or services or performancemay occur at different points in time or over different periods of time.Companies are required to adopt this consensus for fiscal periods beginningafter June 15, 2003.  The Companyadopted EITF 00-21 on July 1, 2003.  Theadoption of EITF 00-21 did not have a material effect on the Company’sconsolidated financial position or, results of operations, or liquidity.

 

In May 2003, the FASB issued SFAS No. 150,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity” (“SFAS No. 150”). SFAS No. 150 establishes standards for how an issuer classifies and measurescertain financial instruments with characteristics of both liabilities andequity.  It requires that an issuerclassify a financial instrument that is within its scope as a liability (or anasset in some circumstances).  Many ofthose instruments were previously classified as equity.  This statement is effective for financialinstruments entered into or modified after May 31, 2003, and otherwise iseffective for the Company’s quarter beginning July 1, 2003.  For financial instruments created before theissuance date of SFAS No. 150 and still existing at the beginning of theinterim period of adoption, transition shall be achieved by reporting thecumulative effect of a change in accounting principle by initially measuringthe financial instruments at fair value or other measurement attribute requiredby SFAS No. 150.  The Company hasfully adopted SFAS No. 150 as of July 1, 2003 and the adoption of SFAS 150 hasnot had and is not expected to have a material effect on its consolidatedfinancial position or results of operations.

 

**3. LONG-TERM DEBT**

 

Long-term debt of the Company, including the Subordinated ConvertibleNote payable to Astoria Capital Partners, L.P. (“Astoria”), the Company’scontrolling stockholder, as of September 30, 2003 and March 31, 2003, is asfollows (in thousands):

 
|                                           |   | **September 30,  2003** |   | **March 31,  2003** |   |
|------------------------------------------------|--------|-------------------------|--------|---------------------|--------|
|                                           |   |                    |   |                |   |
| Note payable to Astoria                        |   | $                       | 22,600 |                | $      | 22,140 |   |
| Plus accrued interest                          |   | 285                     |   | 182                 |   |
| Less unamortized discount                      |   | (386                    | )      | (427                | )      |
|                                           |   | 22,499                  |   | 21,895              |   |
|                                           |   |                    |   |                |   |
| Note payable and accrued interest - individual |   | —                  |   | 256                 |   |
| Other long-term liabilities                    |   | 70                      |   | 102                 |   |
|                                           |   |                    |   |                |   |
| Total debt                                     |   | 22,569                  |   | 22,253              |   |
|                                           |   |                    |   |                |   |
| Less current portion of long-term debt         |   | (64                     | )      | (321                | )      |
| Total long-term debt                           |   | $                       | 22,505 |                | $      | 21,932 |   |

 

As further explained in Note 5 below, in January 2003, the Companyentered into a Note Exchange Agreement with Astoria replacing the SecuredPromissory Note with a Convertible Subordinated Note that extended the maturitydate of the debt to May 30, 2008.

 

**4. STOCKHOLDERS’ EQUITY**

 

The Company’s earnings per share data and dilutive shares outstandingexclude 1,742,117 shares and 1,195,292 shares for the three and six-monthperiods ended September 30, 2003, respectively, and exclude 447,532 shares and207,818 shares for the three and six-month periods ended September 30, 2002,respectively, as the effect of these shares, related to options and warrants,if exercised, would have been anti-dilutive.

 

7

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The change in accumulated other comprehensive income during thethree-month and six-month periods ended September 30, 2003 and 2002 is theresult of the effect of foreign exchange rate changes. The following tablereconciles net loss as reported with total comprehensive loss (in thousands):

 
|                         |   | **Three  Months ended  September 30,** |   | **Six  Months ended  September 30,** |   |
|------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
|                         |   | **2003**                               |   | **2002**                             |   | **2003** |   | **2002** |   |
|                         |   |                                   |   |                                 |   |   |   |   |   |
| Net loss reported            |   | $                                      | (535   | )                                    | $      | (976 | ) | $ | (1,035 | ) | $ | (2,655 | ) |
| Translation adjustments, net |   | 31                                     |   | 44                                   |   | 153 |   | 127 |   |
| Total comprehensive loss     |   | $                                      | (504   | )                                    | $      | (932 | ) | $ | (882 | ) | $ | (2,528 | ) |

 

**Stock Options**

 

Pro formainformation, which assumes the Company had accounted for stock options grantedunder the fair value method prescribed by SFAS No. 123, “Accounting forStock-based Compensation,” is presented below. The per share weighted-averagefair value of stock options granted was $3.01 and $1.92 for the three andsix-month periods ended September 30, 2003, respectively, and $0.87 and $2.38for the three and six-month periods ended September 30, 2002, respectively, asestimated using the Black-Scholes option-pricing model.  The following assumptions were used for eachof the three and six-month periods ended September 30, 2003: dividend yield of0%; expected volatility of 138%; risk-free interest rate of 4.23% and 3.93%,respectively; and expected life of 4 years. The following assumptions were used for each of the three and six-monthperiods ended September 30, 2002: dividend yield of 0%; expected volatility of147%; risk-free interest rate of 4.26% and 4.68%, respectively; and expectedlife of 4 years.

 

Forpurposes of pro forma disclosures, the estimated fair value of the options isamortized to expense over the options’ vesting periods. The Company’shistorical and pro forma net loss per share for the three-month and six-monthperiods ended September 30, 2003 and 2002 are as follows (in thousands, exceptper share data):

 
|                                                                                                   |   | **Three  Months ended  September 30,** |   | **Six  Months ended  September 30,** |   |
|--------------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
|                                                                                                   |   | **2003**                               |   | **2002**                             |   | **2003** |   | **2002** |   |
| Net loss:                                                                                              |   |                                   |   |                                 |   |   |   |   |   |
| As reported                                                                                            |   | $                                      | (535   | )                                    | $      | (976 | ) | $ | (1,035 | ) | $ | (2,655 | ) |
|                                                                                                   |   |                                   |   |                                 |   |   |   |   |   |
| Add:                                                                                                   |   |                                   |   |                                 |   |   |   |   |   |
| Stock-based employee compensation expense included in net loss                                         |   | 73                                     |   | 82                                   |   | 123 |   | 265 |   |
|                                                                                                   |   |                                   |   |                                 |   |   |   |   |   |
| Less:                                                                                                  |   |                                   |   |                                 |   |   |   |   |   |
| Total stock-based employee compensation expense determined under the  fair value method for all awards |   | (494                                   | )      | (599                                 | )      | (978 | ) | (1,220 | ) |
|                                                                                                   |   |                                   |   |                                 |   |   |   |   |   |
| Pro forma net loss:                                                                                    |   | $                                      | (956   | )                                    | $      | (1,493 | ) | $ | (1,890 | ) | $ | (3,610 | ) |
|                                                                                                   |   |                                   |   |                                 |   |   |   |   |   |
| Basic and diluted loss per share                                                                       |   |                                   |   |                                 |   |   |   |   |   |
| As reported                                                                                            |   | $                                      | (0.03  | )                                    | $      | (0.05 | ) | $ | (0.06 | ) | $ | (0.15 | ) |
| Pro forma                                                                                              |   | $                                      | (0.05  | )                                    | $      | (0.08 | ) | $ | (0.10 | ) | $ | (0.20 | ) |

 

**5. SUBSEQUENT EVENTS, COMMITMENTS AND CONTINGENCIES**

 

At September 30, 2003, the Company had $5.6 million in cash andcash equivalents.  The Company believesthat its cash flow from operating activities will be sufficient to meet theCompany’s operating and capital expenditure requirements for the remainder ofthe fiscal year ending March 31, 2004 and through the

 

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foreseeable future.  The Companyis committed to research and development efforts that are intended to allow itto penetrate new markets and generate new sources of revenue and improveoperating results.  However, theCompany’s research and development efforts have required, and will continue torequire, cash outlays without the immediate or short-term receipt of relatedrevenue. The Company’s ability to service its long-term debt and meet itsexpenditure requirements is dependent upon the Company’s future financialperformance, which will be affected by, among other things, prevailing economicconditions, the Company’s ability to penetrate new markets and attract newcustomers, market acceptance of the Company’s new and existing products andservices, the success of research and development efforts and other factorsbeyond the Company’s control.

 

If the Company’s future financial performance improves, the Company mayseek to take advantage of opportunities in the equity and capital markets toraise additional funds for operating needs or to pay down its debt toAstoria.  The Company is not permitted to redeem theConvertible Subordinated Note issued to Astoria until January 2005.  The Convertible Subordinated Note isconvertible into common stock at any time, at the option of Astoria, at a priceof $5.00 per share.  If the ConvertibleSubordinated Note is converted into common stock, the Company’s stockholdersmay experience substantial dilution.

 

Given the subordinated nature of the Convertible Subordinated Note, theCompany may seek to obtain a bank line of credit for operating purposes. Noassurance can be given that additional financing will be available or that, ifavailable, such financing will be on terms favorable to the Company.

 

The Company had no material commitments for capital expenditures atSeptember 30, 2003.

 

Indemnification and warrantyprovisions contained within the Company’s customer license and serviceagreements are generally consistent with those prevalent in the Company’sindustry.  The duration of the Company’sservice warranties generally does not exceed 30 days following completion ofits services. The Company has not incurred significant obligations undercustomer indemnification or warranty provisions and does not expect to incursignificant obligations in the future. Accordingly, the Company does notmaintain accruals for potential customer indemnification or warranty-relatedobligations. The indemnification agreements that the Company has executed withits executive officers and directors and the statutory indemnificationprovisions under the laws of the State of Delaware relating to the Company’sdirectors require the Company to indemnify such officers and directors incertain instances. The Company has not incurred obligations under theseindemnification agreements and does not expect to incur significant obligationsin the future. Accordingly, the Company does not maintain accruals forpotential officer or director indemnification obligations. The maximumpotential amount of future payments that the Company could be required to makeis generally limited under the indemnification provisions in its customerlicense and service agreements, and is unlimited under the indemnificationprovisions contained in the indemnification agreements entered into with theCompany’s officers and directors and the statutory indemnification provisionsunder the laws of the State of Delaware relating to the Company’s directors.

 

**6. BUSINESS SEGMENTS**

 

The Company operates in one business segment engaged in the design,development, sale and support of software infrastructure. The Company segmentsits products into two main categories: (1) Pick-based database technology(“Databases”), which includes Multi-dimensional Database Management Systems(“MDMS”), XML Data Management Servers (“XDMS”) and the Pick Data Provider forthe Microsoft .NET development environment (“PDP”); and (2) Rapid ApplicationDevelopment Tools software tools (“RAD Tools”). The following table representsthe net revenue from the Company’s business segments by product line and byoffice location:

 

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|              |   | **Three months ended  September 30,** |   | **Six months ended  September 30,** |   |
|-------------------|--------|---------------------------------------|--------|-------------------------------------|--------|
|              |   | **2003**                              |   | **2002**                            |   | **2003** |   | **2002** |   |
|              |   | **(in  thousands)**                   |   | **(in  thousands)**                 |   |
| **Databases:**    |   |                                  |   |                                |   |   |   |   |   |
|              |   |                                  |   |                                |   |   |   |   |   |
| United States     |   | $                                     | 3,566  |                                | $      | 3,174 |   | $ | 7,026 |   | $ | 5,919 |   |
| United Kingdom    |   | 386                                   |   | 426                                 |   | 734 |   | 782 |   |
| France            |   | 269                                   |   | 339                                 |   | 698 |   | 775 |   |
|              |   | 4,221                                 |   | 3,939                               |   | 8,458 |   | 7,476 |   |
|              |   |                                  |   |                                |   |   |   |   |   |
| **RAD Tools:**    |   |                                  |   |                                |   |   |   |   |   |
|              |   |                                  |   |                                |   |   |   |   |   |
| United States     |   | 516                                   |   | 471                                 |   | 966 |   | 966 |   |
| United Kingdom    |   | 165                                   |   | 139                                 |   | 387 |   | 423 |   |
| France            |   | 133                                   |   | 156                                 |   | 285 |   | 276 |   |
| Germany           |   | 327                                   |   | 243                                 |   | 675 |   | 520 |   |
|              |   | 1,141                                 |   | 1,009                               |   | 2,313 |   | 2,185 |   |
|              |   |                                  |   |                                |   |   |   |   |   |
| Total Net Revenue |   | $                                     | 5,362  |                                | $      | 4,948 |   | $ | 10,771 |   | $ | 9,661 |   |

 

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**ITEM 2.  MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

This Form 10-QSB contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended. Suchstatements include our expectations, hopes and intentions regarding the future,including but not limited to statements regarding (i) our strategy, (ii) ourresearch and development plans, (iii) the anticipated cost, timing and eventualacceptance of our new products and services by the market, (iv) the sufficiencyof our capital resources, (v) our capital expenditures, (vi) our financingplan, (vii) our revenue, (viii) our operations and operating results, (ix) ourcompetitive position, (x) our expectation about certain markets, and (xi) ourexpectation about future expenses. Forward-looking statements involve certainrisks and uncertainties, and actual results may differ materially from thosediscussed in any such statement. Factors that could cause actual results todiffer materially from such forward-looking statements include the risksdescribed in the “Risk Factors” section and elsewhere in this Form 10-QSB.All forward-looking statements in this document are made as of the date hereof,based on information available to us as of the date hereof, and we assume noobligation to update any forward-looking statement.

 

This discussion and analysis of the financial statements and results ofoperations should be read in conjunction with our unaudited condensedconsolidated financial statements, including the related notes thereto,contained elsewhere in this Form 10-QSB.

 

**OVERVIEW**

 

We were incorporated in the State of Delaware in August 1987. Wewere originally incorporated as Blyth Holdings, Inc., and our name waschanged to Omnis Technology Corporation in September 1997. EffectiveDecember 1, 2000, we completed the acquisition of PickAx, Inc., aDelaware corporation (“PickAx”). Concurrent with the acquisition, we changed our name to Raining DataCorporation.

 

Our principal business is the design, development, sale and support ofsoftware infrastructure.  Our softwaremay be categorized into two main categories: (1) Pick-based databasetechnology, which includes Multi-dimensional Database Management Systems(“MDMS”), XML Data Management Servers (“XDMS”) and the Pick Data Provider forthe Microsoft .NET development environment (“PDP”); and (2) Rapid ApplicationDevelopment software tools (“RAD”).

 

Many of our products are based on the Pick Universal Data Model (“PickUDM”), which we created, and are capable of handling data from manysources.  The Pick UDM is a corecomponent across the MDMS, XDMS and PDP product lines.

 

Our MDMS products include a comprehensive set of Pick UDM basedsoftware development tools that allow the user to write, compile and runapplication programs.  Our MDMS productsare based on the multi-dimensional data model and are designed to operate inenvironments such as Windows, Unix and Linux.

 

Our first XDMS product, TigerLogic XDMS (“TigerLogic”) version 1.1, wasreleased in May 2003.  TigerLogic XDMSis a high-performance information infrastructure software that provides bothscalability, XA-compliant transactional integrity and fine-grain searchcapabilities typically associated with enterprise databases, as well as thedynamic extensibility, n-tier hierarchies and ease of use and deploymentusually found in data repositories and file systems.  We have filed patent applications related to the technologyutilized in the TigerLogic product and those patents were pending as ofSeptember 30, 2003.

 

In February 2003, we announced the development of our PDP product linedesigned to support the Microsoft .NET Framework.  We began selling an early adopter release of the Pick DataProvider for .NET in May 2003 to a limited and selected customer base and weannounced our full production release in September 2003.

 

Our RAD products support the full life cycle of software applicationdevelopment and are designed for rapid prototyping, development and deploymentof graphical user interface (“GUI”) client/server and web applications. The RADproducts are object-oriented and component-based, providing the ability todeploy applications on operating system platforms such as Windows, Unix andLinux, as well as database environments such as Oracle, DB2, Sybase, MicrosoftSQL Server and other Open Data Base Connectivity (“ODBC”) compatible databasemanagement systems.  In July 2003, weannounced the release of our Omnis

 

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Studio for SAP product.  OmnisStudio for SAP provides a rapid application development environment allowingfast provision of applications accessing SAP data.

 

We have devoted significant resources to theresearch and development of products and technology.  We believe that our future success will depend largely on astrong development effort with respect to both our existing and new products.  These development efforts have resulted inupdates and upgrades to existing MDMS and RAD products and the launch of newproducts including the XDMS and PDP product lines.  New product releases in all of our product linesare currently in progress.  We expect to continue our research anddevelopment efforts in all product lines for the foreseeable future.  We intend for these efforts to improve ouroperating results and increase cash flow. However, such efforts may not resultin additional new products or revenue, and we can make no assurances that therecently announced products or future products will be successful.

 

In the United States, we sell our products through establisheddistribution channels consisting of system integrators, specialized verticalapplication software developers and consulting organizations. We also sell ourproducts directly through our sales personnel to large end user organizations.

 

Outside the United States, wemaintain direct sales offices in the United Kingdom, France and Germany. Inaddition, we have distributor relationships in over 25 countries. Approximately24% and 26% of our revenue came from sales through our offices located outsidethe United States for the three-month periods ended September 30, 2003 and2002, respectively, and approximately 26% and 29% of our revenue came fromsales through our offices located outside the United States for the six-monthperiods ended September 30, 2003 and 2002, respectively.

 

We sell our products in U.S. Dollars in North America, British PoundsSterling in the United Kingdom and Euros in Germany and France. Because werecognize revenue and expense in these various currencies but report ourfinancial results in U.S. Dollars, changes in exchange rates may causevariances in our period-to-period revenue and results of operations in future periods.Foreign exchange gains and losses have not been material to our performance todate.

 

We license our software on a per-server or per-user basis. Therefore,the addition of servers or users to existing systems increases our revenue fromour installed base of licenses. In addition to computer software products, weprovide continuing maintenance and other services to our customers, includingprofessional services, technical support and training to help plan, analyze,implement and maintain application software based on our products.

 

Our customers may be classified into two general categories:

 

•                                          IndependentSoftware Vendors and Software Developers. The majority of our revenue isderived from independent software vendors, which typically write their own verticalapplication software that they sell as a complete package to end usercustomers. This category includes value added resellers (“VARs”) andsoftware-consulting companies that provide contract programming services totheir customers.

 

•                                          Corporate Information Technology (“IT”) Departments.We also derive a significant portion of our revenue from sales to ITdepartments of large companies.

 

For the three and six-month periods ended September 30, 2003 and 2002,no single customer accounted for more than 10% of our revenue.

 

We rely primarily on acombination of trade secrets, copyright and trademark laws and contractualprovisions to protect our intellectual property and proprietary rights. Ourregistered trademarks include Raining Data, Pick, D3, Omnis, Omnis Studio,mvEnterprise, mvBase, mvDesigner, and our trademarks or service marks includeTigerLogic and PickDBi, among others. We also have two pending U.S. patent applications as ofSeptember 30, 2003.

 

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**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

The preparation of our consolidated financial statements requiresmanagement to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenue and expenses, and the disclosure of contingentliabilities.  On an on-going basis, weevaluate our estimates, including those related to revenue recognition andaccounting for intangible assets and goodwill. We base our estimates onhistorical experience and on various other assumptions that we believe to bereasonable under the circumstances. Actual results may differ from theseestimates under different assumptions or conditions.

 

We have identified the accounting policies below as the policiescritical to our business operations and the understanding of our results ofoperations. We believe the following critical accounting policies and therelated judgments and estimates affect the preparation of our consolidatedfinancial statements:

 

REVENUE RECOGNITION. We recognize and defer revenue using the residualmethod pursuant to the requirements of Statement of Position No. 97-2,“Software Revenue Recognition” (“SOP 97-2”), as amended by Statement ofPosition No. 98-9, “Modification of SOP 97-2, Software Revenue Recognitionwith Respect to Certain Arrangements.” Under the residual method, revenue isrecognized in a multiple element arrangement when company-specific objectiveevidence of fair value exists for all of the undelivered elements in thearrangement, but does not exist for one or more of the delivered elements inthe arrangement. At the outset of the arrangement with the customer, we deferrevenue for the fair value of our undelivered elements (e.g., maintenance) andrecognize revenue for the remainder of the arrangement fee attributable to theelements initially delivered in the arrangement (e.g., software license) whenthe basic criteria in SOP 97-2 have been met.

 

Under SOP 97-2, revenue attributable to an element in a customerarrangement is recognized when persuasive evidence of an arrangement exists anddelivery has occurred, provided the fee is fixed or determinable,collectibility is probable and the arrangement does not require significantcustomization of the software. If, at the outset of the customer arrangement,we determine that the arrangement fee is not fixed or determinable, we deferrevenue recognition until the arrangement fee becomes due and payable.

 

Professional services, maintenance and other revenue relate primarilyto consulting services, maintenance and training.  Maintenance revenue is recognized ratably over the term of themaintenance contract, typically 12 months. Consulting and training revenueis recognized as the services are performed and is usually calculated on a timeand materials basis. Such services primarily consist of implementation servicesrelated to the installation of our products and do not include significantcustomization to or development of the underlying software code. We do not haveprice protection programs, conditional acceptance agreements or warrantyprograms, and sales of our products are made without right of return.

 

When applicable, we record revenue on certain products, such as the PDPproduct, on a net amount retained basis in accordance with Emerging Issues TaskForce No. 99-19, “Reporting Revenue Gross as a Principal verses Net as anAgent.”

 

INTANGIBLE ASSETS AND GOODWILL.  We assess the impairment of identifiable intangibles, long-lived assetsand goodwill whenever events or changes in circumstances indicate that thecarrying value may not be recoverable. Factors we consider to be importantwhich could trigger an impairment review include the following:

 

•                                          Significant underperformance relative to expectedhistorical or projected future operating results;

 

•                                          Timing of our revenue, significant changes in themanner of use of the acquired assets or the strategy for the overall business;

 

•                                          Significant negative industry or economic trends;

 

•                                          Significant decline in our stock price for asustained period; and

 

•                                          Our market capitalization relative to net bookvalue.

 

When we determine that the carrying value ofintangibles and other long-lived assets may not be recoverable based upon theexistence of one or more of the above indicators of impairment, and thecarrying value of the asset cannot be recovered from projected undiscountedcash flows, we measure any impairment based on a projected discounted cash flowmethod using a discount rate determined by our

 

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management to be commensurate with the riskinherent in the current business model. Significant management judgment isrequired in determining whether an indicator of impairment exists and inprojecting cash flows.

 

Prior to the adoption of SFASNo. 142, we assessed impairment of goodwill in the same manner as otherintangibles and long-lived assets as described above.  Following the adoption of SFAS No. 142, we updated our policy forassessing and determining impairment of goodwill.  The SFAS No. 142 goodwill impairment model is a two-step process.The first step requires identification of potential impairment by comparing thefair value of a reporting unit with its net book value (or carrying amount),including goodwill. If the fair value exceeds the carrying amount, goodwill ofthe reporting unit is considered not impaired and the second step of theimpairment test is unnecessary. If the carrying amount of a reporting unitexceeds its fair value, the second step of the goodwill impairment test isperformed to measure the amount of impairment loss, if any. The second step ofthe goodwill impairment test compares the implied fair value of the reportingunit’s goodwill with the carrying amount of that goodwill. If the carryingamount of the reporting unit’s goodwill exceeds the implied fair value of thatgoodwill, an impairment loss is recognized in an amount equal to that excess.The implied fair value of goodwill is determined in the same manner as theamount of goodwill recognized in a business combination. That is, the fairvalue of the reporting unit is allocated to all of the assets and liabilitiesof that unit (including any unrecognized intangible assets) as if the reportingunit had been acquired in a business combination and the fair value of thereporting unit was the purchase price paid to acquire the reporting unit.

 

Determining the fair value of areporting unit under the first step of the goodwill impairment test anddetermining the fair value of individual assets and liabilities of a reportingunit (including unrecognized intangible assets) under the second step of thegoodwill impairment test is judgmental in nature and often involves the use ofsignificant estimates and assumptions. These estimates and assumptions couldhave a significant impact on whether or not an impairment charge is recognizedand the magnitude of any such charge. Estimates of fair value are primarilydetermined using discounted cash flows and are based on our best estimate offuture revenue and operating costs and general market conditions. These estimatesare subject to review and approval by management. This approach usessignificant assumptions, including projected future cash flows (includingtiming), the discount rate reflecting the risk inherent in future cash flows,and a terminal growth rate.

 

**RESULTSOF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2003 AND 2002**

 

**REVENUE**

 

NET REVENUE. Our revenue isderived principally from two sources: fees from software licensing and fees forservices, including consulting, training, maintenance and technical support.Total net revenue increased 8% to $5.4 million for the three months endedSeptember 30, 2003 from $4.9 million for the same three-month period inthe prior fiscal year, and increased 11% to $10.8 million from $9.7 million forthe six-month periods ended September 30, 2003 and 2002, respectively.  For the three months ended September 30,2003, license revenue decreased 1% to $2.2 million from $2.3 millionfor the same three-month period in the prior fiscal year, while servicesrevenue increased 16% to $3.1 million from $2.7 million for the samethree-month period in the prior fiscal year. For the six months ended September 30, 2003, license revenue increased ­­­4%to $4.5 million from $4.4 million for the same six-month period inthe prior fiscal year, while services revenue increased 18% to$6.2 million from $5.3 million for the same six-month period in theprior fiscal year.

 

We view the MDMS and RADmarkets in which we operate to be relatively stable and consistent from periodto period and anticipate that our revenue on an annual basis from thoseproducts will remain stable for the foreseeable future. Fluctuations in revenuebetween quarters or year to year are primarily the result of changes in the mixof software licensing and service fees as well as the timing of orders andcustomer order patterns. We do not view the changes in year-to-year revenue forthe three-month and six month periods ended September 30, 2003 and 2002 to berepresentative of market trends; however, we have continued to experience anincreased mix of service revenue in recent quarters. In the longer term, weexpect that the MDMS and RAD markets will eventually contract as customersadopt newer technologies and, therefore, the revenue generated from sales of ourMDMS and RAD products is expected to decrease.

 

In addition, we can make noassurances as to the market acceptance or the ability for the current or anynew product lines to generate additional revenue. While we are committed toresearch and development efforts that

 

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are designed to allow us to penetrate new markets and generate newsources of revenue, such efforts may not result in additional products orrevenue, and any new products may not achieve market acceptance

 

**COST OF REVENUE**

 

COST OF LICENSE REVENUE. Cost of license revenue is comprised of directcosts associated with software license sales including software packaging,documentation and physical media costs. Total cost of license revenue for thethree months ended September 30, 2003 remained relatively consistent with theprior three months ended September 30, 2002. As a percentage of license revenue, cost of license revenue increased toapproximately 6% for the three months ended September 30, 2003 from 3% oflicense revenue for the same three-month period in the prior fiscal year.  For the six months ended September 30, 2003,cost of license revenue increased 93% to $0.2 million from $0.1 million for thesix months ended September 30, 2002.  Asa percentage of license revenue, cost of license revenue increased toapproximately 5% for the six months ended September 30, 2003 from 3% of licenserevenue for the same six-month period in the prior fiscal year.  This increase, although relatively small inabsolute dollars, was largely due to the composition of products sold duringthe three and six-month periods ended September 30, 2003.  We anticipate that the cost of licenserevenue, as a percentage of license revenue and in absolute dollars, will remainrelatively stable in future periods.

 

COST OF SERVICE REVENUE. Cost of service revenue includes consulting,technical support and training, all of which consist primarily of personnelrelated costs.  Total cost of servicerevenue increased 16% to $0.6 million for the three months ended September 30,2003 from $0.5 million for the same three-month period in the prior fiscalyear.  As a percentage of servicerevenue, cost of service revenue remained relatively consistent atapproximately 19% for the three months ended September 30, 2003 and 2002,respectively.  For the six months endedSeptember 30, 2003, cost of service revenue increased 4% to $1.1 million from$1.0 million for the six months ended September 30, 2002.  As a percentage of service revenue, cost ofservice revenue decreased to approximately 17% for the six months endedSeptember 30, 2003 from 20% of service revenue for the same six-month period inthe prior fiscal year.  We anticipatethat the cost of service revenue as a percentage of service revenue and inabsolute dollars will remain relatively stable in future periods.

 

**OPERATING EXPENSES**

 

SELLING AND MARKETING. Selling and marketing expense consists primarilyof salaries, benefits, advertising, tradeshows, travel and overhead costs forour sales and marketing personnel. Selling and marketing expense increased 24%to $1.3 million for the three months ended September 30, 2003 from$1.1 million for the three months ended September 30, 2002.  Sales and marketing expense increased to 24%of total revenue for the three months ended September 30, 2003 from 21% oftotal revenue for the same three-month period in the prior fiscal year.  Selling and marketing expense increased 27%to $2.8 million for the six months ended September 30, 2003 from$2.2 million for the six months ended September 30, 2002. Selling andmarketing expense increased to 26% of total revenue for the six months endedSeptember 30, 2003 from 23% of total revenue for the same six-month period inthe prior fiscal year.  The increase inselling and marketing expense was primarily due to increased marketing effortsand an increase in staffing in connection with the release of the XDMS and PDPproducts. We anticipate that selling and marketing costs related to the XDMSand PDP products will continue to increase as we develop the sales channel forthese new products and if customer acceptance of these products increases.  We believe the sales and marketing costsassociated with the MDMS and RAD product sales will remain relatively stable infuture periods.  In addition, if ourcontinued research and development efforts are successful, including our XDMSand PDP products, and new products or services are created, we may incurincreased sales and marketing expense to promote those new products in futureperiods.

 

RESEARCH AND DEVELOPMENT. Research and development expense consistsprimarily of salaries and other personnel-related expense for engineeringpersonnel, expensible hardware and software costs, overhead costs and costs ofcontractors. Research and development expense increased 25% to$1.8 million for the three months ended September 30, 2003 from$1.5 million for the three months ended September 30, 2002. Research anddevelopment expense increased to 34% of total revenue for the three monthsended September 30, 2003 from 30% of total revenue for the same three-monthperiod in the prior fiscal year. Research and development expense increased 29% to $3.8 million forthe six months ended September 30, 2003 from $2.9 million for the six monthsended September 30, 2002. Research and development expense increased to 35% oftotal revenue for the six months ended September 30, 2003 from 31% of totalrevenue for the same

 

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six-month period in the prior fiscal year.  We have seen an increase in our spending related to ourdevelopment efforts as our new products reached production release and as werefine and add certain features and functionality to these products.  In addition, we continue to incur costsrelated to the ongoing development and enhancement of all of our productlines.  We are committed to our researchand development efforts and expect research and development expense in absolutedollars to remain stable at the current quarter levels in future periods orincrease if liquidity improves and we believe that additional spending iswarranted. Such efforts may not result in additional new products and any newproducts, including the announced XDMS and PDP products, may not generate sufficientrevenue, if any, to offset the research and development expense.

 

GENERAL AND ADMINISTRATIVE. General and administrative expense consistsprimarily of costs associated with our finance, human resources, legal andother administrative functions. These costs consist principally of salaries andother personnel-related expenses, professional fees, depreciation, audit fees,legal fees, legal settlement costs and overhead costs. General andadministrative expense decreased 9% to $1.0 million for the three monthsended September 30, 2003 from $1.1 million for the same three-month periodin the prior fiscal year. General and administrative expense decreased to 19%of total revenue for the three months ended September 30, 2003 from 22% oftotal revenue for the three months ended September 30, 2002.  General and administrative expense decreased22% to $1.9 million for the six months ended September 30, 2003 from$2.4 million for the same six-month period in the prior fiscal year.General and administrative expense decreased to 18% of total revenue for thesix months ended September 30, 2003 from 25% of total revenue for the sixmonths ended September 30, 2002.  Thisdecrease in general and administrative spending is a result of continued costcontrols. We are focused on the continued reduction in general overhead costsand intend to use any savings from such reduction for our ongoing research anddevelopment and sales and marketing efforts. During the latter portion of fiscal year 2002 and into fiscal year 2003,we underwent significant changes in our management, including the hiring of anew chief executive officer and chief financial officer. Since that time, wehave been focused on streamlining the operations, including implementingstandardized policies and procedures throughout the organization with increasedoversight from management and necessary head count reductions. Additionally, wesettled various outstanding legal matters. This resulted in increased general and administrative costs in theperiods incurred. We anticipate that general and administrative costs, inabsolute dollars, will remain relatively stable or slightly decrease in futureperiods now that cost reduction efforts have been implemented and all materiallitigation has been settled.

 

STOCK-BASED COMPENSATION. Stock-based compensation expense for thethree months ended September 30, 2003 remained relatively consistent with thethree months ended September 30, 2002. Stock-based compensation expense decreased to 1% of total revenue forthe three months ended September 30, 2003 from 2% of total revenue for the samethree-month period in the prior fiscal year. Stock-based compensation expense decreased 54% to $0.1 million in thesix months ended September 30, 2003 from $0.3 million for the six months endedSeptember 30, 2002. Stock-based compensation expense decreased to 1% of totalrevenue for the six months ended September 30, 2003 from 3% of total revenuefor the same six-month period in the prior fiscal year.  The decrease in stock-based compensation isattributable primarily to cancellations of options for terminated employees,options nearing the end of their vesting periods, no new options being grantedwith an exercise price below fair value at the date of grant, and fewer optionsgranted to non-employees. We do not anticipate any significant increases instock-based compensation expense in future periods and further reductions arelikely as existing options continue to vest.

 

AMORTIZATION OF GOODWILL AND INTANGIBLE ASSETS. Amortization of identifiableintangible assets of $0.7 million was recorded for each of the three-monthperiods ended September 30, 2003 and 2002. Amortization of identifiable intangible assets of $1.3 million wasrecorded for each of the six-month periods ended September 30, 2003 and2002.  Under SFAS 142, goodwill isnot amortized; however, the underlying assets are tested annually forimpairment. We continue to amortize identifiable intangible assets inaccordance with their determined useful life, estimated at four years.

 

**OPERATING INCOME (LOSS)**

 

OPERATING INCOME (LOSS). We recorded an operating loss of $0.2 millionfor the three months ended September 30, 2003 and we had a breakeven operatingincome for the three months ended September 30, 2002.  We recorded operating losses of $0.4 million and $0.6 million forthe six-month periods ended September 30, 2003 and 2002, respectively.

 

OTHER INCOME (EXPENSE). Other expense consists primarily of netinterest expense and, to a much lesser extent, gains and losses on foreign currencytransactions. Other expense decreased to $0.3 million in the

 

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three months ended September 30, 2003 from $1.0 million in thesame three-month period in the prior fiscal year.  Other expense decreased to $0.6 million in the six months endedSeptember 30, 2003 from $2.0 million in the same six-month period in theprior fiscal year.  This decrease wasprimarily the result of the reduction of the interest rate as a result of therestructuring of our debt in January 2003. We expect other income (expense) to remain stable in future periods.

 

**NET LOSS**

 

The net losses for the three and six-month periods ended September 30,2003 were $0.5 million, or $0.03 per share, and $1.0 million, or $0.06 pershare, respectively, as compared to net losses of $1.0 million, or $0.05 pershare, and $2.7 million, or $0.15 per share, for the three and six-monthperiods ended September 30, 2002, respectively.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

In connection with the acquisition of PickAx, we assumed a SecuredPromissory Note issued to Astoria Capital Partners, L.P. (“Astoria”) datedNovember 30, 2000 in the amount of $18,525,417. In January 2003, we enteredinto a NoteExchange Agreement (the “Exchange Agreement”) with Astoria to replace theexisting Secured Promissory Note, as amended, with a Convertible SubordinatedNote.  Under the terms of the ExchangeAgreement, the Secured Promissory Note was exchanged and replaced with aConvertible Subordinated Note having a principal amount of $22.1 million, whichprincipal amount was equal to the outstanding principal and accrued interestpayable on the Secured Promissory Note as of the date of the ExchangeAgreement.  The Convertible SubordinatedNote is convertible into common stock at any time, at the option of Astoria, ata price of $5.00 per share. The Convertible Subordinated Note matures May 30,2008, extending the May 30, 2003 maturity date of the Secured Promissory Note.The Company may not redeem the Convertible Subordinated Note until January2005.   The interest rate of theConvertible Subordinated Note is 5% per annum as compared to an interest rateof 10% per annum under the Secured Promissory Note.  The interest is payable quarterly at our option in cash orthrough increases to the outstanding principal of the Convertible SubordinatedNote. For the periods ended March 31, 2003, June 30, 2003 and September30, 2003, we issued payment in kind (“PIK”) notes to Astoria for the accruedinterest due in the aggregate amount of $745,050.  For the foreseeable future, we expect to issue additional PIKnotes to Astoria, in lieu of cash payments for the interest due under theConvertible Subordinated Note.  Unlikethe Secured Promissory Note, the Convertible Subordinated Note is not securedby our assets.

 

In addition to holding the Convertible Subordinated Note, Astoria is amajor stockholder of ours, holding all of our preferred stock and a majority ofour outstanding common stock. Richard W. Koe, a member of our Board ofDirectors, serves as the Managing General Partner for Astoria.  Carlton H. Baab, our President andChief Executive Officer, served as a Managing Principal of Astoria until takinga formal leave of absence to join us in August 2001.  Mr. Baab is an employee of Astoria CapitalManagement, which is a general partner of Astoria.  Gerald F. Chew, a member of our Board of Directors, is the cousinof Mr. Koe.

 

At September 30, 2003, we had $5.6 million in cash and cashequivalents.  We believe that our cashflow from operating activities will be sufficient to meet our operating andcapital expenditure requirements for the remainder of the fiscal year endingMarch 31, 2004 and through the foreseeable future. We are committed toresearch and development efforts that are intended to allow us to penetrate newmarkets and generate new sources of revenue and improve operating results.  However, our research and developmentefforts have required, and will continue to require, cash outlays without theimmediate or short-term receipt of related revenue. Our ability to service ourlong-term debt and meet our expenditure requirements is dependent upon ourfuture financial performance, which will be affected by, among other things,prevailing economic conditions, our ability to penetrate new markets andattract new customers, market acceptance of our new and existing products andservices, the success of research and development efforts and other factorsbeyond our control.

 

If our future financial performance improves, we may seek to take advantageof opportunities in the equity and capital markets to raise additional fundsfor operating needs or to pay down our debt to Astoria.  We are not permitted to redeem the Convertible Subordinated Note untilJanuary 2005.  The Convertible Subordinated Note isconvertible into common stock at any time, at the option of Astoria, at a priceof $5.00 per share.  If theConvertible Subordinated Note is converted into common stock, our stockholdersmay experience substantial dilution.

 

17

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Given the subordinated nature of the Convertible Subordinated Note, we mayseek to obtain a bank line of credit for operating expense purposes. Noassurance can be given that additional financing will be available or that, if available,such financing will be on terms favorable to us.

 

We had no material commitments for capital expenditures at September30, 2003.

 

Net cash provided by operating activities was $0.3 million for the sixmonths ended September 30, 2003 and net cash used for operating activities was$1.9 million for the six months ended September 30, 2002.  During the six-month period endingSeptember 30, 2003, we had a net reduction in accounts payable and accruedliabilities of $0.4 million.

 

Our earnings before interest, taxes, depreciation and amortization(EBITDA) was $0.6 million, or 11% of total net revenue, and $0.9 million,or 17% of total net revenue, for the three-month periods ended September 30,2003 and 2002, respectively.  For thesix months ended September 30, 2003, EBITDA was $1.2 million, or 11% of netrevenue, as compared to $1.1 million, or 12% of net revenue, for the samesix-month period in the prior fiscal year. The reduction in EBITDA for the three months ended September 30, 2003was a result of increased development and marketing costs related to our newproduct initiatives.  EBITDA is definedas net loss with an add-back for depreciation, goodwill and non-goodwillamortization, non-cash stock-based compensation expense, interest expense andother income (expense).  The followingtable reconciles EBITDA to the reported net loss:

 

**RAINING DATA CORPORATION AND SUBSIDIARIESRECONCILIATION OF EBITDA TO NET LOSS**

**(Unaudited)**

** **
|                                       |   | **For the  three months  ended September 30,** |   | **For the  six months  ended September 30,** |   |
|--------------------------------------------|--------|------------------------------------------------|--------|----------------------------------------------|--------|
| **In $000’s**                         |   | **2003**                                       |   | **2002**                                     |   | **2003** |   | **2002** |   |
|                                       |   |                                           |   |                                         |   |   |   |   |   |
| Reported net loss                          |   | $                                              | (535   | )                                            | $      | (976 | ) | $ | (1,035 | ) | $ | (2,655 | ) |
| Depreciation and non-goodwill amortization |   | 88                                             |   | 113                                          |   | 179 |   | 205 |   |
| Stock-based compensation                   |   | 73                                             |   | 82                                           |   | 123 |   | 265 |   |
| Goodwill and intangible amortization       |   | 650                                            |   | 650                                          |   | 1,300 |   | 1,300 |   |
| Interest expense - net                     |   | 305                                            |   | 956                                          |   | 601 |   | 2,067 |   |
| Other income (expense) - net               |   | 5                                              |   | 34                                           |   | (11 | ) | (39 | ) |
|                                       |   |                                           |   |                                         |   |   |   |   |   |
| EBITDA                                     |   | $                                              | 586    |                                         | $      | 859 |   | $ | 1,157 |   | $ | 1,143 |   |

 

EBITDA does not represent funds available for management’sdiscretionary use and is not intended to represent cash flow from operations.EBITDA should not be construed as a substitute for net loss or as a bettermeasure of liquidity than cash flow from operating activities, which isdetermined in accordance with generally accepted accounting principles(“GAAP”). EBITDA excludes components that are significant in understanding andassessing our results of operations and cash flows. In addition, EBITDA is nota term defined by GAAP and as a result our measure of EBITDA might not becomparable to similarly titled measures used by other companies.

 

However, we believe that EBITDA is relevant and useful information,which is often reported and widely used by analysts, investors and otherinterested parties in our industry. Accordingly, we are disclosing thisinformation to permit a more comprehensive analysis of our operatingperformance, to provide an additional measure of performance and liquidity andto provide additional information with respect to our ability to meet futuredebt service, capital expenditure and working capital requirements. See theUnaudited Condensed Consolidated Financial Statements and notes theretocontained elsewhere in this report for more information.

 

Our EBITDA financial information is also comparable to net cashprovided by (used for) operating activities. The table below reconciles EBITDA to the GAAP disclosure of net cashprovided by (used for) operating activities:

 

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**RAINING DATA CORPORATION AND SUBSIDIARIES**

**RECONCILIATION OF EBITDA TO NET CASH PROVIDEDBY (USED FOR) OPERATING ACTIVITIES**

**(Unaudited)**

 
|                                                 |   | **For the six months  ended September 30,** |   |
|------------------------------------------------------|--------|---------------------------------------------|--------|
| **In $000’s**                                   |   | **2003**                                    |   | **2002** |   |
|                                                 |   |                                        |   |   |   |
| Net cash provided by (used for) operating activities |   | $                                           | 335    |   | $ | (1,896 | ) |
|                                                 |   |                                        |   |   |   |
| Interest expense, net                                |   | 601                                         |   | 2,067 |   |
| Other income, net                                    |   | (11                                         | )      | (39 | ) |
| Change in accounts receivable                        |   | (227                                        | )      | 107 |   |
| Change in other assets                               |   | 2                                           |   | 28 |   |
|                                                 |   |                                        |   |   |   |
| Change in accounts payable and accrued liabilities   |   | 434                                         |   | 2,085 |   |
| Change in deferred revenue                           |   | 64                                          |   | (55 | ) |
| Note discount amortization                           |   | (41                                         | )      | (1,154 | ) |
|                                                 |   |                                        |   |   |   |
| EBITDA                                               |   | $                                           | 1,157  |   | $ | 1,143 |   |

 

 

**RISK FACTORS**

We operate in a rapidly changing environment that involves numerousrisks and uncertainties. The following section lists some, but not all, ofthese risks and uncertainties that may have a material adverse effect on ourbusiness, financial condition and results of operation.

 

**IF WE DO NOT DEVELOP NEW PRODUCTS AND ENHANCEEXISTING PRODUCTS TO KEEP PACE WITH RAPIDLY CHANGING TECHNOLOGY AND INDUSTRYSTANDARDS, OUR REVENUE MAY DECLINE.**

We have devoted significant resources to the research and developmentof products and technology. We believe that our future success will depend inlarge part on a strong research and development effort with respect to both ourexisting and new products. Since the start of fiscal year 2002, we have changedthe mix of our research and development efforts to include technologies,markets and products outside of our historical market, specifically XML-basedinfrastructure products.  In May 2003,we announced the initial production release of our first XDMS product whichresulted from these development efforts. Additionally, in February 2003, we announced the development of our PDPproduct line designed to support the Microsoft .NET Framework.  We began selling our Pick Data Provider for..NET in limited release in May 2003 and we announced our production release inSeptember 2003.  While we intend forthese efforts to improve our operating results and increase cash flow, suchefforts may not result in new products or revenue, and any new products that doresult may not be successful. The development of new or enhanced softwareproducts is a complex and uncertain process requiring high levels of innovation,as well as accurate anticipation of customer and technical trends. Indeveloping new products and services, we may fail to develop and marketproducts that respond to technological changes or evolving industry standardsin a timely or cost-effective manner, or experience difficulties that coulddelay or prevent the successful development, introduction and marketing ofthese new products. The development and introduction of new or enhancedproducts

 

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also requires us to manage the transition from older products in orderto minimize disruptions in customer ordering patterns and to ensure thatadequate supplies of new products can be delivered to meet customer demand.Failure to develop and introduce new products, or enhancements to existingproducts, in a timely manner in response to changing market conditions orcustomer requirements, or lack of customer acceptance of our products, willmaterially and adversely affect our business, results of operations andfinancial condition.

 

**THE CONCENTRATION OF OUR STOCK OWNERSHIP ANDTHE DEBT OWED TO ASTORIA GIVE CERTAIN STOCKHOLDERS SIGNIFICANT CONTROL OVER OURBUSINESS.**

As of September 30, 2003, Astoria and Rockport Group, LP (“Rockport”)together beneficially owned approximately 72% of our outstanding common stock.As of such date, Astoria also owned all of our outstanding preferred stock. Inaddition, as of September 30, 2003, the Convertible Subordinated Note issued toAstoria had a balance of approximately $22.9 million in principal andaccrued interest maturing May 30, 2008. Richard W. Koe, a member of our Board of Directors, serves as theManaging General Partner for Astoria. Carlton H. Baab, our President and Chief Executive Officer, servedas a Managing Principal of Astoria until taking a formal leave of absence tojoin us in August 2001.  Mr. Baabis an employee of Astoria Capital Management, which is a general partner ofAstoria.  Mr. Wagner, a member ofour Board of Directors, is the Managing Director of Rockport.  This concentration of stock ownership,together with the outstanding debt, would allow Astoria, acting alone, orRockport and Astoria, acting together, to block any actions that requireapproval of our stockholders, including the election of members to the Board ofDirectors and the approval of significant corporate transactions. Also,Astoria, acting alone, or Rockport and Astoria, acting together, could approvecertain corporate actions without the consent of the other stockholders.Moreover, this concentration of ownership may delay or prevent a change incontrol.

 

**BECAUSE THE MARKET FOR OUR MDMS AND RADPRODUCTS IS RELATIVELY STABLE, OUR REVENUE MAY DECLINE IF WE CANNOT MAINTAINOUR SALES TO EXISTING CUSTOMERS OR GENERATE SALES TO NEW CUSTOMERS.**

We believe that the markets for our MDMS and RAD products arerelatively stable and consistent from period to period. As a result, to growour revenue in these markets, we will need to maintain our sales to existingcustomers and to generate sales to new customers, including corporatedevelopment teams, commercial application developers, system integrators,independent software vendors and independent consultants. If we fail to attractnew customers, if we lose our customers to competitors, or if the MDMS or RADmarkets decline, our revenue may be adversely affected. In the longer term, itis expected that the MDMS and RAD markets will eventually contract as customersadopt newer technologies.

 

**IF WE FAIL TO INCREASE REVENUE OR IMPROVE OUROPERATING RESULTS, WE MAY NOT BE ABLE TO REPAY OUR DEBT TO ASTORIA OR TOACQUIRE ADDITIONAL FUNDS THROUGH THE CAPITAL MARKETS FOR OPERATING NEEDS.**

We believe that our cash flow from operating activities will besufficient to meet our operating and capital expenditure requirements throughthe fiscal year ending March 31, 2004 and the foreseeable future. Ourability to meet our expenditures and service our debtobligations is dependent upon our future financial performance, which will beaffected by, among other things, prevailing economic conditions, our ability topenetrate new markets and attract new customers, market acceptance of our newand existing products and services, the success of research and developmentefforts and other factors beyond our control.  As described above, inJanuary 2003, we entered into the Exchange Agreement with Astoria to replace the existing SecuredPromissory Note, which was due May 2003, with a Convertible Subordinated Note,which is due and payable in May 2008. The Convertible Subordinated Note bears interest at 5% per annum and isconvertible into common stock by Astoria at any time at a price of $5.00 pershare. If we are unable to penetrate new markets, generate new sources ofrevenue or otherwise improve our operating results, we may be unable topay down our debt to Astoria or to access opportunities in the equity andcapital markets to raise additional funds for operating needs.  Given the subordinated nature of the Convertible Subordinated Note, we mayseek to obtain a bank line of credit for operating purposes.  However, noassurance can be given that additional financing will be available or that, ifavailable, such financing will be on terms favorable to us.

 

**IF THE REGISTRATION RIGHTS HELD BY ASTORIAAND OTHER SECURITIES HOLDERS ARE EXERCISED, OR THESE SECURITIES HOLDERS SELL ASUBSTANTIAL AMOUNT OF RESTRICTED SECURITIES IN THE OPEN MARKET, OUR STOCK PRICEMAY DECLINE.**

As of September 30, 2003, we had 18,158,454 outstanding shares ofcommon stock, of which approximately 9,700,000 shares were restrictedsecurities held by Astoria and other holders. Restricted securities may be soldin the public market only if they are registered or if they qualify for anexemption from registration promulgated under the Securities Act of 1933, as amended.At present, all of our outstanding restricted securities are either entitled toregistration rights or eligible for public sale under Rule 144, subject tovolume limitations and other requirements of Rule 144.   If Astoria or other holders decide toexercise their demand registration rights, we would incur costs and expensesassociated with the registration of securities.

 

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Furthermore, sales of a substantial number of shares by Astoria orother securities holders in the public market, or the perception that thosesales may occur, could cause the market price of our common stock to decline.In addition, if we register shares of our common stock in connection with apublic offering of securities, we may be required to include shares ofrestricted securities in the registration, which may have an adverse effect onour ability to raise capital.

 

**OUR FAILURE TO COMPETE EFFECTIVELY MAY HAVEAN ADVERSE IMPACT ON OUR OPERATING RESULTS.**

The market for our products is highly competitive, diverse and subjectto rapid change. Our products and services compete on the basis of thefollowing key characteristics: performance; inter-operability; scalability;functionality; reliability; pricing; post sale customer support; quality;compliance with industry standards; and overall total cost of ownership.  While we currently believe that our productsand services compete favorably in the marketplace, our products and servicescould fall behind marketplace demands at any time. If we fail to address thecompetitive challenges, our business would suffer materially.

 

We currently face competition from a number of sources, includingseveral large vendors that develop and market databases, development tools,decision support products and consulting services. Our MDMS products competewith products developed by companies such as Oracle, Microsoft, IBM and Sybase.Our Omnis line of RAD developer products currently encounters competition fromseveral direct competitors and competing development environments includingMicrosoft (Visual Studio and Visual Studio .NET) and JAVA.  Competition is developing in the XML marketfor which our XDMS products are intended. Companies who do or are expected to compete in this market includeOracle, IBM, Microsoft, Sybase and BEA, as well as a number of smallercompanies. Our new PDP products, which are intended to support the Microsoft..NET Framework, are subject to significant competition, primarily fromMicrosoft and Oracle. Additionally, as we expand our business, we expect tocompete with a different group of companies, including smaller, highly focusedcompanies offering single products.

 

Most of our competitors have significantly more financial, technical,marketing and other resources than we do. As a result, these competitors may beable to respond more quickly to new or emerging technologies, evolving markets,changes in customer requirements, and may devote greater resources to thedevelopment, promotion and sale of their products.

 

**WE MAY EXPERIENCE QUARTERLY FLUCTUATIONS INOPERATING RESULTS, WHICH MAY RESULT IN VOLATILITY OF OUR STOCK PRICE.**

In the past, we have experienced significant quarterly fluctuations inour operating results. We expect to continue to spend substantial amounts of moneyin the area of research and development, sales and marketing and operations inorder to promote new product development and introduction. Because the expensesassociated with these activities are relatively fixed in the short-term, we maybe unable to timely adjust spending to offset any unexpected shortfall inrevenue growth or any decrease in revenue levels. Operating results may alsofluctuate due to factors such as:

 

•                                          thesize and timing of customer orders;

 

•                                          changesin pricing policies by us or our competitors;

 

•                                          ourability to develop, introduce, and market new and enhanced versions of ourproducts;

 

•                                          thenumber, timing, and significance of product enhancements and new productannouncements by our competitors;

 

•                                          thedemand for our products;

 

•                                          non-renewalof customer support agreements;

 

•                                          softwaredefects and other product quality problems; and

 

•                                          personnelchanges.

 

We operate without a significant backlog of orders. As a result, thequarterly sales and operating results in any given quarter are dependent, inlarge part, upon the volume and timing of orders booked and products shipped

 

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during that quarter. Accordingly, we may be unable to adjust spendingin a timely manner to compensate for any unanticipated decrease in orders,sales or shipments. Therefore, any decline in demand for our products andservices, in relation to the forecast for any given quarter, could materiallyand negatively impact the results of our operations. As a result, we expect ourquarterly operating results to continue to fluctuate, which may cause our stockprice to be volatile. In addition, we believe that period-to-period comparisonsof our operating results should not be relied upon as indications of future performance.

 

**THE SUCCESS OF OUR BUSINESS DEPENDS IN PARTUPON OUR ABILITY TO RECRUIT, INTEGRATE AND RETAIN KEY PERSONNEL AND MANAGEMENT.**

Many of the our executive officers joined us subsequent to theacquisition of PickAx, including our President and Chief Executive Officer,Carlton Baab, who joined us in August 2001. Additional changes inmanagement have occurred following Mr. Baab’s appointment, including thehiring of Brian Bezdek, Chief Financial Officer, Boris Geller, Vice President,Market Development and Soheil Raissi, Vice President, Product Development andProfessional Services. The executive officers must be able to work efficientlytogether to manage our operations. Furthermore, the loss of one or more ofthese or other executives could adversely affect our business. In addition, webelieve that our future success will depend to a significant extent on ourability to recruit, hire and retain highly skilled management and employeeswith experience in engineering, product management, sales, marketing andcustomer service. Competition for such personnel in the software industry canbe intense, and there can be no assurance that we will be successful inattracting and retaining such personnel. If we are unable to do so, we mayexperience inadequate levels of staffing to develop and license our productsand perform services for our customers, which could adversely affect ourbusiness.

 

**OUR PRODUCTS HAVE A LONG SALES CYCLE, WHICHCOULD RESULT IN DELAYS IN THE RECEIPT OF REVENUE.**

The sales cycle for our MDMS, RAD and PDP products typically rangesfrom three to six months or longer and the sales cycle for our XDMS products isanticipated to be significantly longer since these new products are justbeginning to be adopted by the marketplace. Our products are typically used by application developers, systemintegrators and value added resellers to develop applications that are criticalto their corporate end user’s business. Because the purchases of our productsare often part of an end user’s larger business process, re-engineeringinitiative, or implementation of client/server or web-based computing, the endusers frequently view the purchase of our products as part of a long-termstrategic decision regarding the management of their workforce-relatedoperations and expenditures. Thus, this sometimes results in end users taking asignificant period of time to assess alternative solutions by competitors or todefer a purchase decision as a result of an unrelated strategic issue beyondour control. We will continue to educate potential customers about the uses andbenefits of our products and services, as well as the integration of ourproducts and services with additional software applications. We may experiencethese and additional delays in the future.

 

**OUR PRODUCTS MAY CONTAIN SOFTWARE DEFECTS,WHICH COULD HARM OUR BUSINESS.**

Our enterprise applications software may contain undetected errors orfailures when first introduced or as new versions are released. This includesour XDMS and PDP products, which are at higher risk given these products are inthe earliest stages of the product life cycle. This may result in loss of, ordelay in, market acceptance of our products and could harm our reputation andour business. Undetected errors or failures in computer software programs arenot uncommon. While we make every effort to thoroughly test our software, inthe event that we experience significant software errors in future releases, wecould experience delays in release, customer dissatisfaction and lost revenue.Any of these errors or defects could harm our business.

 

**OUR GLOBAL OPERATIONS EXPOSE US TO ADDITIONALRISKS AND CHALLENGES ASSOCIATED WITH CONDUCTING BUSINESS INTERNATIONALLY.**

We operate on a global basis with offices or distributors in Europe,Africa, Asia, Latin America, South America, Australia and North America.Approximately 24% and 26% of our revenue for the three and six-month periodsended September 30, 2003, respectively was generated from our internationaloffices. We face several risks inherent in conducting business internationally,including but not limited to the following:

 

•                                          fluctuationsin interest rates or currency exchange rates;

 

•                                          languageand cultural differences;

 

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•                                          localand governmental requirements;

 

•                                          difficultiesand costs of staffing and managing international operations;

 

•                                          differencesin intellectual property protections;

 

•                                          difficultiesin collecting accounts receivable and longer collection periods;

 

•                                          seasonalbusiness activities in certain parts of the world;

 

•                                          tradepolicies; and

 

•                                          theimpact of SARS in Asia and in other areas of the world.

 

Any of these factors could harm our international operations and,consequently, affect the international growth or maintenance of our business.These factors or any combination of these factors may adversely affect ourinternational revenue or our overall financial performance.

 

**THE FAILURE OF OUR PRODUCTS TO CONTINUE TOCONFORM TO INDUSTRY STANDARDS MAY HARM OUR OPERATING RESULTS.**

A key factor in our future success will continue to be the ability ofour products to operate and perform well with existing and future leading,industry-standard enterprise software applications intended to be used inconnection with our MDMS, RAD, XDMS and PDP products. Inter-operability mayrequire third party licenses, which may not be available to us on favorableterms or at all. Failure to meet existing or future inter-operability andperformance requirements of industry standard applications in a timely mannercould adversely affect our business. Uncertainties relating to the timing andnature of new product announcements or introductions or modifications of thirdparty software applications could delay our product development, increase ourproduct development expense or cause customers to delay evaluation, purchase,and deployment of our products.

 

**THE INABILITY TO PROTECT OUR INTELLECTUALPROPERTY COULD HARM OUR ABILITY TO COMPETE.**

Our ability to compete successfully will depend, in part, on ourability to protect our proprietary technology and operations without infringingupon the rights of others. We may fail to do so. In addition, the laws ofcertain countries in which our products are, or may be, licensed may notprotect our proprietary rights to the same extent as the laws of the UnitedStates. We rely primarily on a combination of trade secret, copyright andtrademark laws and contractual provisions to protect our proprietary rights. Inaddition to trademark and copyright protections, we license our products to endusers on a “right to use” basis pursuant to a perpetual license agreement thatrestricts use of products to a specified number of users. We generally rely on“shrink-wrap” or “click-wrap” licenses that become effective when a customeropens the package or downloads and installs software on its system. In order toretain exclusive ownership rights to our software and technology, we generallyprovide our software in object code only, with contractual restrictions oncopying, disclosure and transferability. There can be no assurance that theseprotections will be adequate, or that our competitors will not independentlydevelop technologies that are substantially equivalent or superior to ourtechnology.

 

**THIRD PARTIES COULD ASSERT THAT OUR SOFTWARE PRODUCTSAND SERVICES INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH COULD RESULTIN COSTLY LITIGATION, CAUSE PRODUCT SHIPMENT DELAYS, PROHIBIT PRODUCT LICENSINGOR REQUIRE US TO ENTER INTO ROYALTY OR LICENSING AGREEMENTS.**

There has been a substantial amount of litigation in the softwareindustry regarding intellectual property rights. Third parties may claim thatour current or potential future products and services infringe upon theirintellectual property. We expect that software product developers and providersof software applications will increasingly be subject to infringement claims asthe number of products and competitors in our industry segment grow and thefunctionality of products in different industry segments overlap. Any claims,with or without merit, could be time consuming, result in costly litigation,cause product shipment delays, prohibit product licensing or require us toenter into royalty or licensing agreements. Royalty or licensing agreements, ifrequired, may not be available on terms acceptable to us or at all, which couldseriously harm our business.

 

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**ITEM 3. CONTROLS AND PROCEDURES**

 

**EVALUATION OF DISCLOSURE CONTROLS ANDPROCEDURES**

The evaluation of our disclosure controls and procedures and internalcontrol over financial reporting included a review of their objectives andprocesses, implementation and effect on the information generated for use inthis report. In the course of this evaluation, we sought to identify any significantdeficiencies or material weaknesses in our controls and any acts of fraudinvolving personnel who have a significant role in our internal control overfinancial reporting, and to confirm that any necessary corrective action,including process improvements, were being undertaken. The overall goals ofthese evaluation activities are to monitor our disclosure controls andprocedures and internal control over financial reporting and to makemodifications as necessary.

 

Our principal executive officer and principal financial officer haveconcluded that our disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,as amended (the “Exchange Act”)) are effective, as of the end of the period coveredby this report, to ensure that information required to be disclosed by us inreports that we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms.

 

**CHANGES IN INTERNAL CONTROLS**

There was no change in our internal control over financial reportingthat occurred during our last fiscal quarter that has materially affected, oris reasonably likely to materially affect, our internal control over financialreporting.

 

However, a control system, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met.Management necessarily applied its judgment in assessing the benefits ofcontrols relative to their costs. Because of the inherent limitations in allcontrol systems, no evaluation of controls can provide absolute assurance thatall control issues, if any, within Raining Data Corporation have been detected.

 

**PART II. OTHER INFORMATION**

 

ITEM 1.  LEGAL PROCEEDINGS

 

We are subject from time to time to claims and suits arising in theordinary course of business.  As ofSeptember 30, 2003, we were not a party to any material litigation, claim orsuit.

 

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

 
| (a)    | Exhibits: |
|--------|-----------|
|   |      |   |
| 31.1   |      | Certification of Chief Executive Officer. |
| 31.2   |      | Certification of Chief Financial Officer. |
| 32.1   |      | Certification of Chief Executive Officer and Chief Financial Officer  Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

 

**SIGNATURES**

 

In accordance with the requirements of the Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
| Date:  November 11, 2003 | **RAINING DATA CORPORATION**                           |
|-------------------------------|--------------------------------------------------------|
|                          |                                                   |
|                          | */s/ Brian C. Bezdek*                                  |   |
|                          | Brian C. Bezdek                                        |
|                          | *Chief Financial Officer and Duly Authorized  Officer* |

 

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**EXHIBITINDEX**

 
| 31.1 |   | Certification of Chief Executive Officer                                                                                                                                 |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification of Chief Financial Officer                                                                                                                                 |
| 32.1 |   | Certification  of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C.  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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