**U.S.SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM10-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, 2004**                                                                                                                                                  |
|                                                                                                                                                                                                    |       |                                                                                   |
| **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 its charter) |
| ** **                                              | ** ** | ** ** |
| **Delaware**                                            | ** ** | **94-3046892** |
| (State  of Incorporation)                               |   | (IRS  Employer Identification No.) |
|                                                    |
| **17500 Cartwright Road  Irvine, CA 92614**             |
| (Address  of principal executive offices)               |
|                                                    |
| **(949) 442-4400**                                      |
| (Registrant’s  telephone number)                   |

 

Check whether the issuer: (1) has filedall reports required to be filed by Section 13 or 15(d) of the ExchangeAct during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes ý  No o

 

As of September 30, 2004,there were 18,473,794 shares of registrant’s Common Stock, $.10 par value,outstanding.

 

Transitional Small BusinessDisclosure 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, 2004 AND MARCH 31, 2004                             |   |
|     | UNAUDITED  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS — THREE AND SIX MONTHS ENDED SEPTEMBER  30, 2004 AND 2003 |   |
|     | UNAUDITED  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — SIX MONTHS ENDED SEPTEMBER 30,  2004 AND 2003           |   |
|     | 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                                                                                                                  |   |

 

2

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**PARTI.  FINANCIAL INFORMATION**

 

ITEM 1.  FINANCIAL STATEMENTS

 

**RAINING DATA CORPORATION ANDSUBSIDIARIES****UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS**
| ** **                                      | ** ** | **September 30,****2004** | ** ** | **March 31,****2004** | ** ** |
|-------------------------------------------------|------------|---------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **(In thousands)**        | ** ** |
|                                            |       |                      |       |                  |       |
| ASSETS                                          |       |                      |       |                  |       |
|                                            |       |                      |       |                  |       |
| Current assets                                  |       |                      |       |                  |       |
| Cash                                            |       | $                         | 8,640      |                  | $          | 7,783 |   |
| Trade accounts receivable-net                   |       | 1,610                     |       | 1,865                 |       |
| Other current assets                            |       | 405                       |       | 390                   |       |
| Total current assets                            |       | 10,655                    |       | 10,038                |       |
|                                            |       |                      |       |                  |       |
| Property, furniture and equipment-net           |       | 688                       |       | 795                   |       |
|                                            |       |                      |       |                  |       |
| Intangible assets-net                           |       | 433                       |       | 1,733                 |       |
| Goodwill                                        |       | 27,684                    |       | 27,684                |       |
| Other assets                                    |       | 160                       |       | 201                   |       |
| Total assets                                    |       | $                         | 39,620     |                  | $          | 40,451 |   |
|                                            |       |                      |       |                  |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY      |       |                      |       |                  |       |
|                                            |       |                      |       |                  |       |
| Current liabilities                             |       |                      |       |                  |       |
| Accounts payable                                |       | $                         | 135        |                  | $          | 242 |   |
| Accrued liabilities                             |       | 1,971                     |       | 2,257                 |       |
| Deferred revenue                                |       | 4,875                     |       | 5,006                 |       |
| Note payable                                    |       | 5                         |       | 38                    |       |
| Total current liabilities                       |       | 6,986                     |       | 7,543                 |       |
|                                            |       |                      |       |                  |       |
| Long term debt-net of discount                  |       | 23,751                    |       | 23,117                |       |
| Total liabilities                               |       | 30,737                    |       | 30,660                |       |
|                                            |       |                      |       |                  |       |
| Commitments and contingencies                   |       | —                    |       | —                |       |
|                                            |       |                      |       |                  |       |
| Stockholders’ equity                       |       |                      |       |                  |       |
| Preferred stock                                 |       | 300                       |       | 300                   |       |
| Common stock                                    |       | 1,847                     |       | 1,840                 |       |
| Additional paid-in capital                      |       | 95,582                    |       | 95,418                |       |
| Deferred stock-based compensation               |       | (25                       | )          | (41                   | )          |
| Accumulated other comprehensive income          |       | 1,384                     |       | 1,509                 |       |
| Accumulated deficit                             |       | (90,205                   | )          | (89,235               | )          |
| Total stockholders’ equity                 |       | 8,883                     |       | 9,791                 |       |
|                                            |       |                      |       |                  |       |
| Total liabilities and stockholders’ equity |       | $                         | 39,620     |                  | $          | 40,451 |   |

 

Seeaccompanying condensed notes to the unaudited condensed consolidated financialstatements.

 

3

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**RAINING DATA CORPORATION ANDSUBSIDIARIES****UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS****THREE AND SIX MONTHS ENDEDSEPTEMBER 30,**

 
| ** **                                                     | ** ** | **Three Months Ended  September 30,**     | ** ** | **Six Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                     | ** ** | **2004**                                  | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                     | ** ** | **(In thousands, except per share data)** | ** ** |
|                                                           |       |                                      |       |                                |       |   |   |   |   |
| Net revenues                                                   |       |                                      |       |                                |       |   |   |   |   |
| Licenses                                                       |       | $                                         | 2,018      |                                | $          | 2,247 |   | $ | 4,240 |   | $ | 4,533 |   |
| Services                                                       |       | 3,054                                     |       | 3,115                               |       | 6,029 |   | 6,238 |   |
| Total net revenues                                             |       | 5,072                                     |       | 5,362                               |       | 10,269 |   | 10,771 |   |
|                                                           |       |                                      |       |                                |       |   |   |   |   |
| Costs of revenues                                              |       |                                      |       |                                |       |   |   |   |   |
| Cost of license revenues                                       |       | 83                                        |       | 102                                 |       | 155 |   | 190 |   |
| Cost of service revenues                                       |       | 646                                       |       | 614                                 |       | 1,114 |   | 1,104 |   |
| Total cost of revenues                                         |       | 729                                       |       | 716                                 |       | 1,269 |   | 1,294 |   |
|                                                           |       |                                      |       |                                |       |   |   |   |   |
| Gross profit                                                   |       | 4,343                                     |       | 4,646                               |       | 9,000 |   | 9,477 |   |
|                                                           |       |                                      |       |                                |       |   |   |   |   |
| Cost of operations                                             |       |                                      |       |                                |       |   |   |   |   |
| Selling and marketing                                          |       | 1,322                                     |       | 1,309                               |       | 2,736 |   | 2,766 |   |
| Research and development                                       |       | 1,736                                     |       | 1,843                               |       | 3,474 |   | 3,817 |   |
| General and administrative                                     |       | 907                                       |       | 996                                 |       | 1,796 |   | 1,916 |   |
| Stock-based compensation                                       |       | 18                                        |       | 73                                  |       | 50 |   | 123 |   |
| Amortization of intangible assets                              |       | 650                                       |       | 650                                 |       | 1,300 |   | 1,300 |   |
| Total operating expenses                                       |       | 4,633                                     |       | 4,871                               |       | 9,356 |   | 9,922 |   |
|                                                           |       |                                      |       |                                |       |   |   |   |   |
| Operating loss                                                 |       | (290                                      | )          | (225                                | )          | (356 | ) | (445 | ) |
|                                                           |       |                                      |       |                                |       |   |   |   |   |
| Other expense                                                  |       |                                      |       |                                |       |   |   |   |   |
| Interest expense-net                                           |       | (305                                      | )          | (305                                | )          | (608 | ) | (601 | ) |
| Other income (expense)-net                                     |       | 4                                         |       | (5                                  | )          | (6 | ) | 11 |   |
|                                                           |       | (301                                      | )          | (310                                | )          | (614 | ) | (590 | ) |
| Net loss                                                       |       | $                                         | (591       | )                                   | $          | (535 | ) | $ | (970 | ) | $ | (1,035 | ) |
|                                                           |       |                                      |       |                                |       |   |   |   |   |
| Basic and diluted net loss per share                           |       | $                                         | (0.03      | )                                   | $          | (0.03 | ) | $ | (0.05 | ) | $ | (0.06 | ) |
|                                                           |       |                                      |       |                                |       |   |   |   |   |
| Shares used in computing basic and diluted  net loss per share |       | 18,452                                    |       | 18,101                              |       | 18,433 |   | 18,029 |   |
|                                                           |       |                                      |       |                                |       |   |   |   |   |
| Departmental allocation of stock-based  compensation           |       |                                      |       |                                |       |   |   |   |   |
| Cost of service revenues                                       |       | $                                         | —     |                                | $          | 16 |   | $ | — |   | $ | 33 |   |
| Selling and marketing                                          |       | —                                    |       | 3                                   |       | — |   | 5 |   |
| Research and development                                       |       | 16                                        |       | 51                                  |       | 46 |   | 80 |   |
| General and administrative                                     |       | 2                                         |       | 3                                   |       | 4 |   | 5 |   |
| Total stock-based compensation                                 |       | $                                         | 18         |                                | $          | 73 |   | $ | 50 |   | $ | 123 |   |

 

Seeaccompanying condensed notes to the unaudited condensed consolidated financialstatements.

 

4

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**RAINING DATA CORPORATION AND SUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**SIX****MONTHS ENDED SEPTEMBER 30,**

 
| ** **                                                                       | ** ** | **2004**            | ** ** | **2003** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------|------------|----------|------------|
| ** **                                                                       | ** ** | **(In  thousands)** | ** ** |
| Cash flows from operating  activities:                                           |       |                |       |     |       |
| Net loss                                                                         |       | $                   | (970       | )        | $          | (1,035 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |       | 1,450               |       | 1,479    |       |
| Depreciation and amortization of long-lived  assets                              |       |                |       |     |       |
| Note payable discount amortization                                               |       | 41                  |       | 41       |       |
| Amortization of deferred stock-based  compensation                               |       | 50                  |       | 123      |       |
| Change in assets and liabilities:                                                |       |                |       |     |       |
| Trade accounts receivable                                                        |       | 299                 |       | 337      |       |
| Other current and non-current assets                                             |       | (15                 | )          | (2       | )          |
| Accounts payable and accrued liabilities                                         |       | (101                | )          | (434     | )          |
| Deferred revenue                                                                 |       | 9                   |       | (174     | )          |
| Net cash provided by operating activities                                        |       | 763                 |       | 335      |       |
|                                                                             |       |                |       |     |       |
| Cash flows from investing activities:                                            |       |                |       |     |       |
| Purchase of property, furniture and  equipment                                   |       | (9                  | )          | (3       | )          |
| Net cash used in investing activities                                            |       | (9                  | )          | (3       | )          |
|                                                                             |       |                |       |     |       |
| Cash flows from financing activities:                                            |       |                |       |     |       |
| Proceeds from exercise of stock options and  warrants                            |       | 37                  |       | 126      |       |
| Proceeds from issuance of common stock                                           |       | 99                  |       | 83       |       |
| Repayment of debt                                                                |       | (33                 | )          | (288     | )          |
| Net cash provided by (used in) financing  activities                             |       | 103                 |       | (79      | )          |
|                                                                             |       |                |       |     |       |
| Effect of exchange rate changes on cash                                          |       | —              |       | 50       |       |
|                                                                             |       |                |       |     |       |
| Net increase in cash and equivalents                                             |       | 857                 |       | 303      |       |
|                                                                             |       |                |       |     |       |
| Cash and equivalents at beginning of period                                      |       | 7,783               |       | 5,279    |       |
| Cash and equivalents at end of period                                            |       | $                   | 8,640      |     | $          | 5,582 |   |
|                                                                             |       |                |       |     |       |
| Non-cash financing activities:                                                   |       |                |       |     |       |
| Issuance of payment-in-kind notes for  accrued interest                          |       | $                   | 581        |     | $          | 563 |   |

 

Seeaccompanying condensed notes to the unaudited condensed consolidated financialstatements.

 

5

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**RAINING DATA CORPORATION AND SUBSIDIARIES**

**CONDENSED NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**September 30, 2004 (Unaudited)**

 

**1.  INTERIM FINANCIAL STATEMENTS**

 

The unaudited interim condensed consolidatedfinancial information furnished herein reflects all adjustments, consistingonly of normal recurring items, which in the opinion of management arenecessary to fairly state Raining Data Corporation’s (the “Company”) financialposition, the results of its operations and its cash flows for the dates andperiods presented and to make such information presented not misleading.Certain information and footnote disclosures, normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America, have been omitted pursuant to SEC rules andregulations; nevertheless, management of the Company believes that thedisclosures herein are adequate to make the information presented notmisleading. These condensed consolidated financial statements should be read inconjunction with the Company’s audited financial statements for the year endedMarch 31, 2004, contained in the Company’s Annual Report on Form 10-KSB.The results of operations for the period ended September 30, 2004 are notnecessarily indicative of results to be expected for any other interim periodor the fiscal year ending March 31, 2005.

 

**StockOptions**

 

Pro forma information,which assumes the Company had accounted for stock options granted under thefair value method prescribed by Statement of Financial Accounting Standards (“SFAS”)No. 123, “Accounting for Stock-based Compensation” as amended, is presentedbelow. The per share weighted-average fair values of stock options granted forthe three and six month periods ended September 30, 2004, as estimated usingthe Black-Scholes option-pricing model, were $2.32 and $2.71,respectively.  The per shareweighted-average fair values of stock options granted for the three and sixmonth periods ended September 30, 2003, as estimated using the Black-Scholesoption-pricing model, were $3.34 and $2.64, respectively.  The following assumptions were used for thethree-month period ended September 30, 2004: dividend yield of 0%; expectedvolatility of 123%; risk-free interest rate of 3.92%; and expected life of 7years.  The following assumptions wereused for the six-month period ended September 30, 2004: dividend yield of 0%;expected volatility of 123%; risk-free interest rate of 4.05%; and expectedlife of 7 years.  The followingassumptions were used for the three-month period ended September 30, 2003:dividend yield of 0%; expected volatility of 138%; risk-free interest rate of3.72%; and expected life of 7 years.  Thefollowing assumptions were used for the six-month period ended September 30,2003: dividend yield of 0%; expected volatility of 138%; risk-free interestrate of 3.42%; and expected life of 7 years.

 

For purposes of proforma disclosures, the estimated fair value of the options is amortized toexpense over the options’ vesting periods. The Company’s historical and proforma net loss per share for the three and six month periods ended September30, 2004 and 2003 are as follows (in thousands, except per share data):

 
| ** **                                                                                             | ** ** | **Three Months ended  September 30,** | ** ** | **Six Months ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                             | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                   |       |                                  |       |                                |       |   |   |   |   |
| Net loss:                                                                                              |       |                                  |       |                                |       |   |   |   |   |
| As reported                                                                                            |       | $                                     | (591       | )                                   | $          | (535 | ) | $ | (970 | ) | $ | (1,035 | ) |
|                                                                                                   |       |                                  |       |                                |       |   |   |   |   |
| Add:                                                                                                   |       |                                  |       |                                |       |   |   |   |   |
| Stock-based employee compensation expense  included in net loss                                        |       | 18                                    |       | 73                                  |       | 50 |   | 123 |   |
|                                                                                                   |       |                                  |       |                                |       |   |   |   |   |
| Less:                                                                                                  |       |                                  |       |                                |       |   |   |   |   |
| Total stock-based employee compensation  expense determined under the fair value method for all awards |       | (287                                  | )          | (504                                | )          | (576 | ) | (996 | ) |
|                                                                                                   |       |                                  |       |                                |       |   |   |   |   |
| Pro forma net loss:                                                                                    |       | $                                     | (860       | )                                   | $          | (966 | ) | $ | (1,496 | ) | $ | (1,908 | ) |
|                                                                                                   |       |                                  |       |                                |       |   |   |   |   |
| Basic and diluted loss per share                                                                       |       |                                  |       |                                |       |   |   |   |   |
| As reported                                                                                            |       | $                                     | (0.03      | )                                   | $          | (0.03 | ) | $ | (0.05 | ) | $ | (0.06 | ) |
| Pro forma                                                                                              |       | $                                     | (0.05      | )                                   | $          | (0.05 | ) | $ | (0.08 | ) | $ | (0.11 | ) |

 

6

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**Reclassifications**

 

Certain reclassifications have been made toprior period amounts to conform to the current period presentation.

 

**2.  LONG-TERM DEBT**

 

Long-term debt of the Company, including theConvertible Subordinated Note payable to Astoria Capital Partners, L.P. (“Astoria”),the Company’s controlling stockholder, as of September 30, 2004 and March 31,2004, is as follows (in thousands):

 
| ** **                                        | ** ** | **September 30,****2004** | ** ** | **March 31,****2004** | ** ** |
|---------------------------------------------------|------------|---------------------------|------------|-----------------------|------------|
|                                              |       |                      |       |                  |       |
| Subordinated Convertible Note payable to  Astoria |       | $                         | 23,755     |                  | $          | 23,172 |   |
| Plus accrued interest                             |       | 299                       |       | 289                   |       |
| Less unamortized discount                         |       | (303                      | )          | (344                  | )          |
|                                              |       | 23,751                    |       | 23,117                |       |
|                                              |       |                      |       |                  |       |
| Other long-term liabilities                       |       | 5                         |       | 38                    |       |
| Total debt                                        |       | 23,756                    |       | 23,155                |       |
| Less current portion of long-term debt            |       | (5                        | )          | (38                   | )          |
| Total long-term debt                              |       | $                         | 23,751     |                  | $          | 23,117 |   |

 

**3.  STOCKHOLDERS’ EQUITY**

 

Basic loss per share is computed using thenet loss and the weighted average number of common shares outstanding duringthe period. Diluted loss per share is computed using the net loss and theweighted average number of common shares and dilutive potential common sharesoutstanding during the period when the potential common shares are notanti-dilutive. Potential dilutive common shares include outstanding stockoptions and warrants, convertible debt, and convertible preferred stock. Therewere 4,038,013 and 4,050,591 outstanding options to purchase shares of theCompany’s common stock with exercise prices ranging from $0.75 to $52.50 pershare at September 30, 2004 and 2003, respectively.  There were 2,169,647and 2,572,502 outstanding warrants to purchase shares of the Company’s commonstock with exercise prices ranging from $2.35 to $6.29 and $2.35 to $6.51 pershare at September 30, 2004 and 2003, respectively.  There were 300,000shares of preferred stock, which are convertible into 500,100 shares of commonstock, outstanding at September 30, 2004 and 2003.  There was convertibledebt outstanding at September 30, 2004 and 2003, which was convertible into 4,750,992and 4,519,986 shares of common stock, respectively.  The total of theseitems were not included in the computation of diluted earnings per sharebecause their effect would have been anti-dilutive.

 

The change in accumulated other comprehensiveincome during the three and six month periods ended September 30, 2004 and 2003is the result of the effect of foreign exchange rate changes. The followingtable reconciles net loss as reported with total comprehensive loss (inthousands):
| ** **                       | ** ** | **Three Months ended  September 30,** | ** ** | **Six Months ended  September 30,** | ** ** |
|----------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
|                             |       | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|                             |       |                                  |       |                                |       |   |   |   |   |
| Net loss reported                |       | $                                     | (591       | )                                   | $          | (535 | ) | $ | (970 | ) | $ | (1,035 | ) |
| Translation adjustments–net |       | 82                                    |       | 31                                  |       | (125 | ) | 153 |   |
| Total comprehensive loss         |       | $                                     | (509       | )                                   | $          | (504 | ) | $ | (1,095 | ) | $ | (882 | ) |

 

7

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**4.SUBSEQUENT EVENT**

 

On November 9, 2004, the Company entered intoa lease agreement with The Irvine Company whereby it leased one buildingin Irvine, California, comprising approximately 29,000square feet, to replace its current headquartersfacility.  The lease is expected to commence in November 2005and has a five year term.  If certain conditions are met, theCompany has the option to extend the term of the lease for anadditional thirty-six months.  The total basic rent over the fiveyear term is approximately $2.6 million, which represents a lower per squarefoot cost than the current property lease.  The annual basic rentduring the five year term ranges from approximately $475,000 duringthe first year to approximately $545,000 during the fifth year.

 

**5.  BUSINESS SEGMENT**

 

The Company operates in one reportablesegment. International operations consist primarily of foreign sales officesselling software developed by or for the Company’s entities in the UnitedStates of America, combined with local service revenue. The following tablesummarizes consolidated financial information of the Company’s operations bygeographic location (in thousands):

 
| ** **                              | ** ** | **North  America** | ** ** | **Europe** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|--------------------|------------|------------|------------|-----------|------------|
|                                    |       |               |       |       |       |      |       |
| *Three Months Ended September 30, 2004* |       |               |       |       |       |      |       |
| Net revenues                            |       | $                  | 3,625      |       | $          | 1,447     |       | $ | 5,072 |   |
| Long lived assets                       |       | 28,340             |       | 625        |       | 28,965    |       |
| *Three Months Ended September 30, 2003* |       |               |       |       |       |      |       |
| Net revenues                            |       | $                  | 4,082      |       | $          | 1,280     |       | $ | 5,362 |   |
| Long lived assets                       |       | 31,075             |       | 639        |       | 31,714    |       |
| *Six Months Ended September 30, 2004*   |       |               |       |       |       |      |       |
| Net revenues                            |       | $                  | 7,349      |       | $          | 2,920     |       | $ | 10,269 |   |
| Long lived assets                       |       | 28,340             |       | 625        |       | 28,965    |       |
| *Six Months Ended September 30, 2003*   |       |               |       |       |       |      |       |
| Net revenues                            |       | $                  | 7,992      |       | $          | 2,779     |       | $ | 10,771 |   |
| Long lived assets                       |       | 31,075             |       | 639        |       | 31,714    |       |

 

The Company is engaged in the design,development, sale and support of software infrastructure. The Company dividesits products into two main categories: (1) Pick-based database technology (“Databases”),which includes multi-dimensional database management systems, XML data managementsystems and the Pick Data Provider for the Microsoft .NET developmentenvironment; and (2) Rapid Application Development software tools (“RAD Tools”).The following table represents the net revenue from the Company’s segment byproduct line (in thousands):

 
| ** **         | ** ** | **Three Months Ended  September 30,** | ** ** | **Six Months Ended  September 30,** | ** ** |
|--------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **         | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Databases:**     |       |                                  |       |                                |       |   |   |   |   |
| Databases          |       | $                                     | 3,961      |                                | $          | 4,221 |   | $ | 7,935 |   | $ | 8,458 |   |
| RAD Tools          |       | 1,111                                 |       | 1,141                               |       | 2,334 |   | 2,313 |   |
| Total net revenues |       | $                                     | 5,072      |                                | $          | 5,362 |   | $ | 10,269 |   | $ | 10,771 |   |

 

**ITEM 2.****  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

This Form 10-QSB containsforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”). Such statements includeour expectations, hopes and intentions regarding the future, including but notlimited to statements regarding (i) our strategy, (ii) our research anddevelopment plans and costs, (iii) our expectation about selling and marketingcosts and general and administrative costs, (iv) the sufficiency of our capitalresources, (v) our capital expenditures, (vi) our financing plan, (vii) ourrevenue and cost of license and service revenue, (viii) our operations andoperating results, (ix) our competitive position, (x) our expectation aboutcertain markets, and (xi) our expectation about future expenses.Forward-looking statements involve certain risks and uncertainties, and actualresults may differ materially from those discussed in any such statement.Factors that could cause actual results to differ materially from suchforward-looking statements include the risks described in the “Risk Factors”section and elsewhere in this Form 10-QSB. All forward-looking statementsin this document are made as of the date hereof, based on information availableto us as of the date hereof, and we assume no obligation to update anyforward-looking statement.

 

This discussion and analysis of the financialstatements and results of operations should be read in conjunction with ourunaudited condensed consolidated financial statements, including the relatednotes thereto, contained elsewhere in this Form 10-QSB.

 

 

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**OVERVIEW**

 

We were incorporated in the State of Delawarein August 1987. We were originally incorporated as BlythHoldings, Inc., and our name was changed to Omnis Technology Corporationin September 1997. Effective December 1, 2000, we completed theacquisition of PickAx, Inc., a Delaware corporation (“PickAx”). Concurrentwith the acquisition, we changed our name to Raining Data Corporation.

 

Our principal business is the design,development, sale and support of software infrastructure. Our products allowcustomers to create and enhance flexible software applications for their ownneeds and our software may be categorized into four product lines: Multi-dimensionaldatabase management systems (“MDMS”), XML data management systems (“XDMS”), thePick Data Provider (“PDP”) for the Microsoft .NET development environment andRapid Application Development (“RAD”) software tools.

 

Many of our products are based on the PickUniversal Data Model (“Pick UDM”), which we created, and are capable ofhandling data from many sources. The Pick UDM is a core component across theMDMS, XDMS and PDP product lines.

 

The MDMS product line consists principally ofthe D3 Data Base Management System (“D3”), which operates on many systemsincluding but not limited to IBM AIX, Linux and Windows NT.  D3 allows application programmers to createnew business solution software in less time than it normally takes in many otherenvironments. This can translate into lower costs for the developer, lowersoftware prices for the customer and reduced costs of ownership for both thedeveloper and end user. Our MDMS products also include mvEnterprise, a scalablemulti-dimensional database solution that allows the user to leverage thecapabilities of the UNIX operating system, and mvBase, a multi-dimensionaldatabase solution that runs on all Windows platforms.

 

Our first XDMS product, TigerLogic version1.1, was released in May 2003. TigerLogic XDMS is a high-performanceinformation infrastructure software that provides both scalability,XA-compliant transactional integrity and fine-grain search capabilitiestypically associated with enterprise databases, as well as the dynamicextensibility, n-tier hierarchies and ease of use and deployment, mostly foundin data repositories and file systems. We have filed a patent applicationrelated to the technology utilized in the TigerLogic product and this patentwas pending as of September 30, 2004.

 

In September 2003, we announced theproduction release of the Pick Data Provider for .NET.  The PDP component for the Microsoft .NETFramework is tightly integrated with Microsoft Visual Studio .NET. It allowssoftware developers using IBM’s Universe and Unidata databases and our D3database platform to build client/server applications, Web applications or Webservices using any of the languages and technologies that run on the Microsoft..NET Framework, such as Microsoft ASP.NET, Visual Basic .NET, Visual C# .NETand Visual J# .NET.

 

Our RAD products support the full life cycleof software application development and are designed for rapid prototyping,development and deployment of graphical user interface (“GUI”) client/serverand Web applications. The RAD products include Omnis Studio, Omnis Studio forSAP and Omnis Classic and are object-oriented and component-based, providingthe ability to deploy applications on operating system platforms such asWindows, Unix and Linux, as well as database environments such as MySQL,Oracle, DB2, Sybase, Microsoft SQL Server and other Open Data Base Connectivity(“ODBC”) compatible database management systems.

 

We have devotedsignificant resources to the research and development of our products andtechnology.  We believe that our futuresuccess will depend largely on a strong development effort with respect to bothour existing and new products.  These developmentefforts have resulted in updates and upgrades to existing MDMS and RAD productsand the launch of new products including the XDMS and PDP product lines.  New product releases in all of ourproduct lines are currently in progress. We expect to continue our researchand development efforts in all product lines for the foreseeable future.  We intend for these efforts to improve ourfuture operating results and increase cash flow. However, such efforts may notresult in additional new products or revenue, and we can make no assurancesthat the recently announced products or future products will be successful.

 

In the United States, we sell our productsthrough established distribution channels consisting of system integrators,specialized vertical application software developers and consultingorganizations. We also sell our products directly through our sales personnelto end user organizations. Outside the United States, we maintain direct salesoffices in the United Kingdom, France and Germany.  Approximately 29% and 28% of our revenue camefrom sales through our offices located outside the United States for the threeand six month periods ended September 30, 2004, respectively, and approximately24% and 26% of our revenue came from sales through our offices located outsidethe United States for the three and six month periods ended September 30, 2003,respectively.

 

We sell our products in U.S. Dollars in NorthAmerica, British Pounds Sterling in the United Kingdom and Euros in Germany andFrance. Because we recognize revenue and expense in these various currenciesbut report our financial results in U.S. Dollars, changes in exchange rates maycause variances in our period-to-period revenue and results of operations infuture periods. Recorded foreign exchange gains and losses have not beenmaterial to our performance to date.

 

We license our software on a per-server basisor per-user basis. Therefore, the addition of servers or users to existingsystems

 

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increases our revenue from our installed baseof licenses.  In addition to softwareproducts, we provide continuing maintenance and other services to ourcustomers, including professional services, technical support and training tohelp plan, analyze, implement and maintain application software based on ourproducts.

 

Our customers may be classified into twogeneral categories:

 

•                                          Independent Software Vendors and SoftwareDevelopers. The majority of our revenue is derived from independent softwarevendors, which typically write their own vertical application software thatthey sell as a complete package to end user customers. This category includesvalue added resellers (“VARs”) and software-consulting companies that providecontract programming services to their customers.

 

•                                          Corporate Information Technology (“IT”)Departments.

 

For the three and six month periods ended September30, 2004 and 2003, no single customer accounted for more than 10% of ourrevenue.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

The discussion and analysis of our financialcondition and results of operations is based on our condensed consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America. The preparationof these financial statements requires management to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenue andexpenses and disclosure of contingent liabilities.

 

On an on-going basis, we evaluate ourestimates, including those related to revenue recognition and accounting forintangible assets and goodwill. We base our estimates on historical experienceand on various other assumptions that we believe to be reasonable under thecircumstances. Actual results may differ from these estimates under differentassumptions or conditions.

 

We have identified the accounting policiesbelow as the policies critical to our business operations and the understandingof our results of operations. We believe the following critical accountingpolicies and the related judgments and estimates affect the preparation of ourcondensed consolidated financial statements:

 

REVENUE RECOGNITION.  We recognize revenue using the residualmethod pursuant to the requirements of Statement of Position No. 97-2, “SoftwareRevenue Recognition” (“SOP 97-2”), as amended. Under the residual method, revenue is recognized in a multiple elementarrangement when company-specific objective evidence of fair value exists forall of the undelivered elements in the arrangement, but does not exist for oneor more of the delivered elements in the arrangement. At the outset of thearrangement with the customer, we defer revenue for the fair value of ourundelivered elements (e.g., maintenance) based on company-specific objectiveevidence of the amount such items are sold individually to our customers 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 anelement in a customer arrangement is recognized when persuasive evidence of anarrangement exists and delivery has occurred, provided the fee is fixed ordeterminable, collectibility is probable and the arrangement does not requiresignificant customization of the software. If at the outset of the customerarrangement, we determine that the arrangement fee is not fixed ordeterminable, we defer the revenue and recognize the revenue when thearrangement fee becomes due and payable.

 

Service revenue relates primarily to consultingservices, maintenance and training. Maintenance revenue is initially deferredand then recognized ratably over the term of the maintenance contract,typically 12 months. Consulting and training revenue is recognized as theservices are performed and is usually calculated on a time and materials basis.Such services primarily consist of implementation services related to theinstallation of our products and do not include significant customization to ordevelopment of the underlying software code. We do not have price protectionprograms, conditional acceptance agreements or warranty programs, and sales ofour products are made without right of return.

 

INTANGIBLE ASSETS AND GOODWILL.  We assess the impairment of identifiableintangibles, long-lived assets and goodwill whenever events or changes incircumstances indicate that the carrying value may not be recoverable. We alsoassess the value of goodwill at least annually. Factors we consider to be important which could trigger an impairmentreview include the following:

 

•                                          Significant underperformance relative toexpected historical or projected future operating results;

•                                          Timing of our revenue, significant changes inthe manner of use of the acquired assets or the strategy for the overallbusiness;

•                                          Significant negative industry or economictrends;

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

•                                          Our market capitalization relative to netbook value.

 

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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 the carryingvalue of the asset cannot be recovered from projected undiscounted cash flows,we measure any impairment based on a projected discounted cash flow methodusing a discount rate determined by our management to be commensurate with therisk inherent in the current business model. Significant management judgment isrequired in determining whether an indicator of impairment exists and inprojecting cash flows.

 

Following the adoption of SFAS No. 142, “Goodwilland Other Intangible Assets,” we revised our policy for assessing anddetermining impairment of goodwill. The SFAS No. 142 goodwill impairmentmodel is a two-step process. The first step is used to identify potentialimpairment by comparing the fair value of a reporting unit with its net bookvalue (or carrying amount), including goodwill. If the fair value exceeds thecarrying amount, goodwill of the reporting unit is considered not impaired andthe second step of the impairment test is unnecessary. If the carrying amountof a reporting unit exceeds its fair value, the second step of the goodwillimpairment test is performed to measure the amount of impairment loss, if any.The second step of the goodwill impairment test compares the implied fair valueof the reporting unit’s goodwill with the carrying amount of that goodwill. Ifthe carrying amount of the reporting unit’s goodwill exceeds the implied fairvalue of that goodwill, an impairment loss is recognized in an amount equal tothat excess. The implied fair value of goodwill is determined in the samemanner as the amount of goodwill recognized in a business combination. That is,the fair value of the reporting unit is allocated to all of the assets andliabilities of that unit (including any unrecognized intangible assets) as ifthe reporting unit had been acquired in a business combination and the fairvalue of the reporting unit was the purchase price paid to acquire thereporting unit.

 

Determining the fair value of a reportingunit under the first step of the goodwill impairment test and determining thefair value of individual assets and liabilities of a reporting unit (includingunrecognized intangible assets) under the second step of the goodwillimpairment 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.  This approach uses significant assumptions,including projected future cash flows (including timing), the discount ratereflecting the risk inherent in future cash flows, and a terminal growth rate.  These estimates are subject to review andapproval by management.  Changes to theseestimates in future periods may have a material impact on our financialposition and results of operations.

 

**Results ofOperations**

 

The following table sets forth certainCondensed Consolidated Statement of Operations data in total dollars, as apercentage of total net revenues and as a percentage change from the prioryear.  Cost of license revenues, cost ofservice revenues, gross profit and margin on license revenues and gross profitand margin on service revenues are expressed as a percentage of the relatedrevenues. This information should be read in conjunction with the CondensedConsolidated Financial Statements included elsewhere in this Form 10-QSB.

 

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| ** **                                             | ** ** | **Three  Months Ended  September 30, 2004** | ** ** | **Three  Months Ended  September 30, 2003** | ** ** | **Six  Months Ended  September 30, 2004** | ** ** | **Six  Months Ended  September 30, 2003** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
|                                                   |       | **Results**                                 | ** ** | **% of Net  Revenues**                      | ** ** | **Percent  Change**                       |       | **Results**                               | ** ** | **% of Net  Revenues** |   | **Results** | ** ** | **% of Net  Revenues** | ** ** | **Percent  Change** |   | **Results** | ** ** | **% of Net  Revenues** |   |
| Net revenues                                           |       |                                        |       |                                        |       |                                      |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Licenses                                               |       | $                                           | 2,018      |                                        | 40         | %                                         | (10        | )%                                        | $          | 2,247 |   | 42 | % | $ | 4,240 |   | 41 | % | (6 | )% | $ | 4,533 |   | 42 | % |
| Services                                               |       | 3,054                                       |       | 60                                          | %          | (2                                        | )%         | 3,115                                     |       | 58 | % | 6,029 |   | 59 | % | (3 | )% | 6,238 |   | 58 | % |
| Total net  revenues                                    |       | 5,072                                       |       | 100                                         | %          | (5                                        | )%         | 5,362                                     |       | 100 | % | 10,269 |   | 100 | % | (5 | )% | 10,771 |   | 100 | % |
| Cost of sales                                          |       |                                        |       |                                        |       |                                      |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of license  revenues (as a % of license revenues) |       | 83                                          |       | 4                                           | %          | (19                                       | )%         | 102                                       |       | 5 | % | 155 |   | 4 | % | (18 | )% | 190 |   | 4 | % |
| Cost of service  revenues (as a % of service revenues) |       | 646                                         |       | 21                                          | %          | 5                                         | %          | 614                                       |       | 20 | % | 1,114 |   | 18 | % | 1 | % | 1,104 |   | 18 | % |
| Gross margin on  license revenues                      |       | 1,935                                       |       | 96                                          | %          | (10                                       | )%         | 2,145                                     |       | 95 | % | 4,085 |   | 96 | % | (6 | )% | 4,343 |   | 96 | % |
| Gross margin on  service revenues                      |       | 2,408                                       |       | 79                                          | %          | (4                                        | )%         | 2,501                                     |       | 80 | % | 4,915 |   | 82 | % | (4 | )% | 5,134 |   | 82 | % |
| Operating  expenses                                    |       |                                        |       |                                        |       |                                      |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling and  marketing                                 |       | 1,322                                       |       | 26                                          | %          | 1                                         | %          | 1,309                                     |       | 24 | % | 2,736 |   | 27 | % | (1 | )% | 2,766 |   | 26 | % |
| Research and  development                              |       | 1,736                                       |       | 34                                          | %          | (6                                        | )%         | 1,843                                     |       | 34 | % | 3,474 |   | 34 | % | (9 | )% | 3,817 |   | 35 | % |
| General and  administrative                            |       | 907                                         |       | 18                                          | %          | (9                                        | )%         | 996                                       |       | 19 | % | 1,796 |   | 17 | % | (6 | )% | 1,916 |   | 18 | % |
| Stock-based  compensation                              |       | 18                                          |       | 0                                           | %          | (75                                       | )%         | 73                                        |       | 1 | % | 50 |   | 0 | % | (59 | )% | 123 |   | 1 | % |
| Amortization of  intangible assets                     |       | 650                                         |       | 13                                          | %          | 0                                         | %          | 650                                       |       | 12 | % | 1,300 |   | 13 | % | 0 | % | 1,300 |   | 12 | % |
| Total costs and  expenses                              |       | 4,633                                       |       | 91                                          | %          | (5                                        | )%         | 4,871                                     |       | 91 | % | 9,356 |   | 91 | % | (6 | )% | 9,922 |   | 92 | % |
| Operating loss                                         |       | (290                                        | )          | (6                                          | )%         | 29                                        | %          | (225                                      | )          | (4 | )% | (356 | ) | (3 | )% | (20 | )% | (445 | ) | (4 | )% |
| Other expense,  net                                    |       | (301                                        | )          | (6                                          | )%         | (3                                        | )%         | (310                                      | )          | (6 | )% | (614 | ) | (6 | )% | 4 | % | (590 | ) | (5 | )% |
| Net loss                                               |       | $                                           | (591       | )                                           | (12        | )%                                        | 10         | %                                         | $          | (535 | ) | (10 | )% | $ | (970 | ) | (9 | )% | (6 | )% | $ | (1,035 | ) | (10 | )% |
|                                                        |            |                                             |            |                                             |            |                                           |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**REVENUE**

 

NET REVENUES. Our revenues are derivedprincipally from two sources: fees from software licensing and fees forservices, including maintenance, consulting, training and technicalsupport.  We license our software on aper-server basis or per-user basis. Therefore, the addition of servers or usersto existing systems increases our revenue from our installed base of licenses.  We view the MDMS and RAD markets in which weoperate to be relatively stable and consistent from period to period andanticipate that our revenues on an annual basis from those products will remainrelatively stable for the foreseeable future. The decrease in year over yearrevenue was due to similar reductions in both license and service revenues.  Fluctuations in revenues between quarters oryear-to-year are primarily the result of the timing of orders and customerorder patterns. We do not view the changes in year-to-year revenues for thethree and six month periods ended September 30, 2004 and 2003 to berepresentative of immediate market trends. However, in the longer term, we expect that the MDMS and RAD marketswill eventually contract as customers adopt newer technologies and, therefore,the revenues generated from sales of our MDMS and RAD products is expected todecrease.

 

We have been selling software developmentkits (“SDKs”) for the PDP product, primarily directly to IT departments thatare developing new applications and re-engineering existing applications forin-house use.  SDKs are pricedcompetitively to promote the adoption and entry into the product line and,therefore, the sale of SDKs yielded minimal initial revenue.  Deployment of applications created using thePDP SDKs requires the purchase of deployment licenses, which would result inadditional revenue for us.  Thedevelopment cycle takes time for our customers to complete prior todeployment.  Should the adoption of thePDP product and our customer’s development efforts be successful, we wouldanticipate additional revenues in future periods related to the sale of thedeployment licenses.

 

However, we can give no assurances as tocustomer acceptance of any new products or services, or the ability of thecurrent or any new products and services to generate revenue. While we arecommitted to research and development efforts that are designed to allow us topenetrate new markets and generate new sources of revenue, such efforts may notresult in additional products, services or revenue.

 

**COST OFREVENUES**

 

COST OF LICENSE REVENUES. Cost of licenserevenues is comprised of direct costs associated with software license salesincluding software packaging, documentation, physical media costs androyalties.  Total cost of license revenuesin absolute dollars remained relatively stable for the three and six monthperiods ended September 30, 2004 as compared to the three and six month periodsended September 30, 2003, respectively. We anticipate that the cost of license revenues, as a percentage oflicense revenues and in absolute dollars, will be relatively stable in futureperiods.

 

COST OF SERVICE REVENUES. Cost of servicerevenues includes primarily personnel costs related to providing consulting,

 

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technical support and training services.  Cost of service revenues remained stable duringthe three and six month periods ended September 30, 2004 as compared to thethree and six month periods ended September 30, 2003, respectively.  We anticipate that the cost of servicerevenues as a percentage of service revenues and in absolute dollars will berelatively stable in future periods.

 

**OPERATINGEXPENSES**

 

SELLING AND MARKETING. Selling and marketingexpense consists primarily of salaries, benefits, advertising, tradeshows,travel and overhead costs for our sales and marketing personnel.  Selling and marketing expense remained stableduring the three and six month periods ended September 30, 2004 as compared tothe same periods in the prior year. We anticipate that selling and marketingcosts related to the XDMS and PDP products may increase as we further developthe sales channel for these products and if customer acceptance of theseproducts increases.  In addition, if ourcontinued research and development efforts are successful, including withrespect to our XDMS and PDP products, and new products or services are created,we may incur increased sales and marketing expense to promote such products andservices in future periods.

 

RESEARCH AND DEVELOPMENT. Research anddevelopment expense consists primarily of salaries and other personnel-relatedexpenses for engineering personnel, expensible hardware and software costs,overhead costs and costs of contractors. In the three and six month periods ended September 30, 2004, as comparedto the same periods in the prior year, our research and development expense, inabsolute dollars, decreased slightly due to the nature and timing of certainexpenses as well as temporary headcount reductions.  We continue to incur costs related to theongoing development and enhancement of all of our product lines.  We are committed to our research anddevelopment efforts and expect research and development expense will remain relativelystable in future periods or increase if we believe that additional spending iswarranted. Such efforts may not result in additional new products, and any newproducts, including the XDMS and PDP products, may not generate sufficientrevenue, if any, to offset the research and development expense.

 

GENERAL AND ADMINISTRATIVE. General andadministrative expense consists primarily of costs associated with our finance,human resources, legal and other administrative functions. These costs consistprincipally of salaries and other personnel-related expenses, professionalfees, depreciation and overhead costs. The slight decrease in general and administrative spending during thethree and six month periods ended September 30, 2004, as compared to sameperiods in the prior year, was the result of the timing of expenditures as wellas continued cost controls resulting in reduced legal and relatedexpenses.  We are focused on the controlof general overhead costs and intend to use any savings from such reduction forour ongoing research and development and sales and marketing efforts.  We anticipate that general and administrativecosts as a percentage of revenue and in absolute dollars will remain relativelystable for the remainder of the fiscal year. However, we anticipate an increase in general and administrative expensebeginning in fiscal 2006 as we increase our efforts related to Sarbanes-Oxleysection 404 internal control compliance and the associated costs for implementation,testing and auditing related to that compliance.  The extent of these costs cannot bedetermined at this time.

 

STOCK-BASED COMPENSATION.  The decreases in stock-based compensation inthe three and six month periods ended September 30, 2004, as compared to thethree and six month periods ended September 30, 2003, is attributable primarilyto cancellations of previously issued options with an exercise price below fairvalue on the date of grant for terminated employees, options reaching the endof their vesting periods, no new options being granted with an exercise pricebelow fair value at the date of grant, and fewer options granted tonon-employees. We do not anticipate significant changes in stock-basedcompensation expense in future periods.

 

AMORTIZATION OF INTANGIBLE ASSETS.  We continue to amortize identifiable intangibleassets in accordance with their determined useful life, estimated to be fouryears.  The amortization of intangibleassets is nearly complete and beginning in December 2004, the Company expectsto experience an improvement in operating margin and net loss.

 

OTHER INCOME (EXPENSE). Other expenseconsists primarily of net interest expense and, to a much lesser extent, gainsand losses on foreign currency transactions. Due to the uncertainty in exchange rates, we may experience transactiongains or losses in future periods, the effect of which cannot be determined atthis time.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

In connection with the acquisition of PickAx,we assumed a Secured Promissory Note issued to Astoria Capital Partners, L.P. (“Astoria”)dated November 30, 2000, in the amount of $18.5 million.  In January 2003, we entered into 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 on May30, 2008, extending the May 30, 2003 maturity date of the Secured PromissoryNote.  The Company may not redeem theConvertible Subordinated Note until January 2005.  The interest rate of the Convertible

 

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Subordinated Note is 5% per annum as comparedto an interest rate of 10% per annum under the Secured Promissory Note.  The interest is payable quarterly at ouroption in cash or through increases to the outstanding principal of theConvertible Subordinated Note. For the periods ended March 31, 2003, June 30,2003, September 30, 2003, December 31, 2003, March 31, 2004, June 30, 2004 andSeptember 30, 2004, we issued payment in kind (“PIK”) notes to Astoria for theaccrued interest due in the aggregate amount of $1,914,165.  For the foreseeable future, we expect toissue additional PIK notes to Astoria in lieu of cash payments for the interestdue under the Convertible Subordinated Note. If the Convertible Subordinated Note or the PIK notes are converted intocommon stock, our stockholders may experience substantial dilution.  Unlike the Secured Promissory Note, theConvertible Subordinated Note is not secured by our assets.

 

If our future financial performance improves,we may seek to take advantage of opportunities in the equity and capitalmarkets to raise additional funds for operating needs or to pay down our debtto Astoria.  There can be no assurancesthat such opportunities will arise. In addition to holding the ConvertibleSubordinated Note, Astoria is a major stockholder of ours, holding all of ourpreferred stock and a majority of our outstanding common stock. Richard W. Koe,a member of our Board of Directors, serves as the Managing General Partner forAstoria.  Carlton H. Baab, our Presidentand Chief Executive Officer, served as a Managing Principal of Astoria CapitalManagement, which is a general partner of Astoria, until taking a formal leaveof absence to join us in August 2001. Gerald F. Chew, a member of our Board of Directors, is the cousin of Mr.Koe.

 

At September 30, 2004, we had $8.6 millionin cash. We believe that our cash flow from operating activities will besufficient to meet our operating and capital expenditure requirements for theremainder of the fiscal year ending March 31, 2005 and through theforeseeable future. We are committed to research and development efforts thatare intended to allow us to penetrate new markets and generate new sources ofrevenue 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.

 

In February 2004, we entered into a creditfacility with Silicon Valley Bank which provides us with the ability to borrowup to $1.5 million at an annual interest rate of Prime plus 1.0%, provided,that the annual interest rate shall never be less than 5%.  The credit facility is collateralized by ourassets and expires in February 2006.  Thecredit facility contains financial and reporting covenants that require us tomaintain certain financial ratios only when we have outstanding creditextensions.  There were no outstandingcredit extensions at September 30, 2004.

 

On November 9, 2004, we entered into a leaseagreement with The Irvine Company whereby we leased one building inIrvine, California, comprising approximately 29,000 square feet, toreplace our current headquarters facility.  The leaseis expected to commence in November 2005 and has a five yearterm.  If certain conditions are met, we have the option to extendthe term of the lease for an additional thirty-six months. The total basic rent over the five year term is approximately $2.6million, which represents a lower per square foot cost than our currentproperty lease.  The annual basic rent during the five year term rangesfrom approximately $475,000 during the first year to approximately$545,000 during the fifth year.  We expect to incur move in costs infuture periods, however these costs are not expected to be material in theperiods in which they are incurred.

 

We had no material commitments for capitalexpenditures at September 30, 2004.

 

Net cash provided by operating activities was$0.8 million and $0.3 million for the six months ended September 30, 2004 and 2003,respectively.

 

Our earnings before interest, taxes,depreciation and amortization (EBITDA) was $0.5 million, or 9% of totalnet revenue, and $1.1 million, or 11% of total net revenue, for the three andsix month periods ended September 30, 2004, and $0.6 million, or 11% oftotal net revenue, and $1.2 million, or 11% of total net revenue, for the threeand six month periods ended September 30, 2003. EBITDA is defined as net loss with an add-back for depreciation,amortization of intangibleassets, non-cash stock-based compensation expense, interest expense and otherincome.  The following table reconcilesEBITDA to the reported net loss:

 

**RAINING DATA CORPORATION AND SUBSIDIARIES**

**RECONCILIATION OF EBITDA TO NET LOSS**

**(Unaudited)**

 
| ** **                    | ** ** | **For the three months  ended September 30,** | ** ** | **For the six months  ended September 30,** | ** ** |
|-------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| **In $000’s**            | ** ** | **2004**                                      | ** ** | **2003**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
|                          |       |                                          |       |                                        |       |   |   |   |   |
| Reported net loss             |       | $                                             | (591       | )                                           | $          | (535 | ) | $ | (970 | ) | $ | (1,035 | ) |
| Depreciation and amortization |       | 75                                            |       | 88                                          |       | 150 |   | 179 |   |
| Stock-based compensation      |       | 18                                            |       | 73                                          |       | 50 |   | 123 |   |
| Intangible asset amortization |       | 650                                           |       | 650                                         |       | 1,300 |   | 1,300 |   |
| Interest expense-net          |       | 305                                           |       | 305                                         |       | 608 |   | 601 |   |
| Other income (expense)-net    |       | (4                                            | )          | 5                                           |       | 6 |   | (11 | ) |
|                          |       |                                          |       |                                        |       |   |   |   |   |
| EBITDA                        |       | $                                             | 453        |                                        | $          | 586 |   | $ | 1,144 |   | $ | 1,157 |   |

 

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EBITDA does not represent funds available formanagement’s discretionary use and is not intended to represent cash flow fromoperations. EBITDA should not be construed as a substitute for net loss or as abetter measure of liquidity than cash flow from operating activities, which aredetermined in accordance with generally accepted accounting principles (“GAAP”).EBITDA excludes components that are significant in understanding and assessingour results of operations and cash flows. In addition, EBITDA is not a termdefined by GAAP and as a result our measure of EBITDA might not be comparableto similarly titled measures used by other companies.

 

However, EBITDA is used by management toevaluate, assess and benchmark our operational results and we believe thatEBITDA is relevant and useful information, which is often reported and widelyused by analysts, investors and other interested parties in our industry.Accordingly, we are disclosing this information to permit a more comprehensiveanalysis of our operating performance, to provide an additional measure ofperformance and liquidity and to provide additional information with respect toour ability to meet future debt service, capital expenditure and workingcapital requirements.

 

Our EBITDA financial information is alsocomparable to net cash provided by operating activities.  The table below reconciles EBITDA to the GAAPdisclosure of net cash provided by operating activities:

 

**RAININGDATA CORPORATION AND SUBSIDIARIESRECONCILIATION OF EBITDA TO NET CASH PROVIDED BY OPERATING ACTIVITIES**

**(Unaudited)**

 
| ** **                                          | ** ** | **For the six months  ended September 30,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------|------------|
| **In $000’s**                                  | ** ** | **2004**                                    | ** ** | **2003** | ** ** |
|                                                |       |                                        |       |   |   |
| Net cash provided by operating activities           |       | $                                           | 763        |   | $ | 335 |   |
|                                                |       |                                        |       |   |   |
| Interest expense-net                                |       | 608                                         |       | 601 |   |
| Other (income) expense-net                          |       | 6                                           |       | (11 | ) |
| Change in accounts receivable                       |       | (299                                        | )          | (337 | ) |
| Change in other assets                              |       | 15                                          |       | 2 |   |
| Change in accounts payable and accrued  liabilities |       | 101                                         |       | 434 |   |
| Change in deferred revenue                          |       | (9                                          | )          | 174 |   |
| Note payable discount amortization                  |       | (41                                         | )          | (41 | ) |
|                                                |       |                                        |       |   |   |
| EBITDA                                              |       | $                                           | 1,144      |   | $ | 1,157 |   |

 

**RISKFACTORS**

 

We operate in a rapidly changing environmentthat involves numerous risks and uncertainties. The following section listssome, but not all, of these risks and uncertainties that may have a materialadverse effect on our business, financial condition and results of operation.

 

**IF WE DONOT DEVELOP NEW PRODUCTS AND ENHANCE EXISTING PRODUCTS TO KEEP PACE WITHRAPIDLY CHANGING TECHNOLOGY AND INDUSTRY STANDARDS, OUR REVENUE MAY DECLINE.**

 

We have devoted significant resources to theresearch and development of products and technology. We believe that our futuresuccess will depend in large part on a strong research and development effortwith respect to both our existing and new products. Since the start of fiscalyear 2002, we have changed the mix of our research and development efforts toinclude technologies, markets and products outside of our historical market,specifically XML-based infrastructure products. In May 2003, we announced the initial production release of our first XDMSproduct which resulted from these development efforts.  In September 2003, we released the productionversion of the PDP for .NET.  This wasour first release in the PDP product line which is designed to support theMicrosoft.NET Framework.  While we intendfor these efforts to improve our future operating results and increase cashflow, such efforts may not result in new products or revenue, and any newproducts that do result may not be successful. The development of new orenhanced software products is a complex and uncertain process requiring highlevels of innovation, as well as accurate anticipation of customer andtechnical trends. In developing new products and services, we may fail todevelop and market products that respond to technological changes or evolvingindustry standards in a timely or cost-effective manner, or experiencedifficulties that could delay or prevent the successful development,introduction and marketing of these new products. The development andintroduction of new or enhanced products also requires us to manage thetransition from older products in order to minimize disruptions in customer

 

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ordering patterns and to ensure that adequatesupplies of new products can be delivered to meet customer demand. Failure to developand introduce new products, or enhancements to existing products, in a timelymanner in response to changing market conditions or customer requirements, orlack of customer acceptance of our products, will materially and adverselyaffect our business, results of operations and financial condition.

 

**OUR FAILURETO COMPETE EFFECTIVELY MAY HAVE AN ADVERSE IMPACT ON OUR OPERATING RESULTS.**

 

The market for our products is highlycompetitive, diverse and subject to rapid change. Our products and services competeon the basis of the following key characteristics: performance;inter-operability; scalability; functionality; reliability; pricing; post salecustomer support; quality; compliance with industry standards; and overalltotal cost of ownership.

 

We currently face competition from a numberof sources, including several large vendors that develop and market databases,development tools, and decision support products and consulting services. OurMDMS products compete with products developed by companies such as Oracle,Microsoft and IBM. Our Omnis line of RAD developer products currentlyencounters competition from several direct competitors, including MicrosoftCorporation and competing development environments such as JAVA.  Competition is developing and evolving in theXML market for which our XDMS products are intended.  Companies who do or are expected to competein this market include Oracle, IBM, Microsoft and BEA, as well as a number ofsmaller companies with products that directly and indirectly compete with ourXDMS products. Our new initiatives in the .NET area are subject to significantcompetition, primarily from Microsoft and Oracle. Additionally, as we expandour business, we expect to compete with a different group of companies,including smaller, highly focused companies offering single products.

 

Most of our competitors have significantlymore financial, technical, marketing and other resources than we do. As aresult, these competitors may be able to respond more quickly to new oremerging technologies, evolving markets, changes in customer requirements, andmay devote greater resources to the development, promotion and sale of theirproducts.  While we currently believethat our products and services compete favorably in the marketplace, ourproducts and services could fall behind marketplace demands at any time. If wefail to address the competitive challenges, our business would suffermaterially.

 

**BECAUSE THEMARKET FOR OUR MDMS AND RAD PRODUCTS IS RELATIVELY STABLE, OUR REVENUE MAYDECLINE IF WE CANNOT MAINTAIN OUR SALES TO EXISTING CUSTOMERS OR GENERATE SALESTO NEW CUSTOMERS.**

 

We believe that the markets for our MDMS andRAD products are relatively stable and consistent from period to period. As aresult, to grow our revenue in these markets, we will need to maintain oursales to existing customers and to generate sales to new customers, includingcorporate development teams, commercial application developers, systemintegrators, independent software vendors and independent consultants. If wefail to attract new customers, if we lose our customers to competitors, or ifthe MDMS or RAD markets decline, our revenue may be adversely affected. In thelonger term, it is expected that the MDMS and RAD markets will eventuallycontract as customers adopt newer technologies.

 

**IF WE FAILTO INCREASE REVENUE OR IMPROVE OUR OPERATING RESULTS, WE MAY NOT BE ABLE TOREPAY OUR DEBT TO ASTORIA.**

 

We believe that our cash and cash flow fromoperating activities will be sufficient to meet our operating and capitalexpenditure requirements at least through the foreseeable future. Our abilityto meet our expenditures and service our debt obligations isdependent upon our future financial performance, which will be affected by,among other things, prevailing economic conditions, our ability to penetratenew markets and attract new customers, market acceptance of our new andexisting products and services, the success of research and development effortsand other factors beyond our control.  As previously noted, in January2003, we entered into the Exchange Agreement with Astoria to replace theexisting Secured Promissory Note, which was due May 2003, with a ConvertibleSubordinated Note, which is due and payable in May 2008.  The Convertible Subordinated Note bearsinterest at 5% per annum and is convertible into common stock by Astoria at anytime at a price of $5.00 per share. If we are unable to penetrate new markets,generate new sources of revenue or otherwise improve our operating results, wemay be unable to repay our debt to Astoria or to access opportunities in theequity and capital markets to raise additional funds for operating needs.

 

**THECONCENTRATION OF OUR STOCK OWNERSHIP AND THE DEBT OWED TO ASTORIA GIVE CERTAIN STOCKHOLDERSSIGNIFICANT CONTROL OVER OUR BUSINESS.**

 

As of September 30, 2004, Astoria andRockport Group, LP (“Rockport”) together beneficially owned approximately 71%of our outstanding common stock. As of such date, Astoria also owned all of ouroutstanding preferred stock. In addition, as of September 30, 2004, theConvertible Subordinated Note issued to Astoria had a balance of approximately$24.1 million in principal and accrued interest maturing on May 30,2008.  Richard W. Koe, a member of ourBoard of Directors, serves as the Managing General Partner for Astoria CapitalManagement, which is a general partner of Astoria.  Carlton H. Baab, our President and ChiefExecutive Officer, served as a Managing Principal of Astoria Capital Managementuntil taking a formal leave of absence to join us in August 2001.

 

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Mr. Wagner, a member of our Board ofDirectors, 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.

 

**WE MAYEXPERIENCE QUARTERLY FLUCTUATIONS IN OPERATING RESULTS, WHICH MAY RESULT INVOLATILITY OF OUR STOCK PRICE.**

 

In the past, we have experienced significantquarterly fluctuations in our operating results. We expect to continue to spendsubstantial amounts of money in the area of research and development, sales andmarketing and operations in order to promote new product development andintroduction. Because the expenses associated with these activities arerelatively fixed in the short-term, we may be unable to timely adjust spending tooffset any unexpected shortfall in revenue growth or any decrease in revenuelevels. Operating results may also fluctuate due to factors such as:

 

•                                          the size and timing of customer orders;

•                                          changes in pricing policies by us or ourcompetitors;

**•****                                         **our ability to develop, introduce, and marketnew and enhanced versions of our products;

**•****                                         **the number, timing, and significance ofproduct enhancements and new product announcements by our competitors;

**•****                                         **the demand for our products;

**•****                                         **non-renewal of customer support agreements;

•                                          software defects and other product qualityproblems; and

•                                          personnel changes.

 

We operate without a significant backlog oforders. As a result, the quarterly sales and operating results in any givenquarter are dependent, in large part, upon the volume and timing of ordersbooked and products shipped during that quarter. Accordingly, we may be unableto adjust spending in a timely manner to compensate for any unanticipateddecrease in orders, sales or shipments. Therefore, any decline in demand forour products and services, in relation to the forecast for any given quarter,could materially and negatively impact the results of our operations. As aresult, we expect our quarterly operating results to continue to fluctuate,which may cause our stock price to be volatile. In addition, we believe thatperiod-to-period comparisons of our operating results should not be relied uponas indications of future performance.

 

**THE SUCCESSOF OUR BUSINESS DEPENDS IN PART UPON OUR ABILITY TO RECRUIT AND RETAIN KEYPERSONNEL AND MANAGEMENT.**

 

Many of the our executive officers joined ussubsequent to the acquisition of PickAx, including our President and ChiefExecutive Officer, Carlton Baab, who joined us in August 2001. Additionalchanges in management have occurred following Mr. Baab’s appointment,including the hiring of Brian Bezdek, Chief Financial Officer and SoheilRaissi, Vice President, Product Development and Professional Services.  The loss of one or more of these or otherexecutives could adversely affect our business. In addition, we believe thatour future success will depend to a significant extent on our ability torecruit, hire and retain highly skilled management and employees withexperience in engineering, product management, sales, marketing and customerservice. Competition for such personnel in the software industry can beintense, and there can be no assurance that we will be successful in attractingand retaining such personnel. If we are unable to do so, we may experienceinadequate levels of staffing to develop and license our products and performservices for our customers, which could adversely affect our business.

 

**THEINABILITY TO PROTECT OUR INTELLECTUAL PROPERTY COULD HARM OUR ABILITY TOCOMPETE.**

 

Our ability to compete successfully willdepend, in part, on our ability to protect our proprietary technology andoperations without infringing upon the rights of others. We may fail to do so.In addition, the laws of certain countries in which our products are, or maybe, licensed may not protect our proprietary rights to the same extent as thelaws of the United States. We rely primarily on a combination of trade secret,copyright and trademark laws and contractual provisions to protect ourintellectual property and proprietary rights. Our trademarks include RainingData, Pick, D3, Omnis, Omnis Studio, mvEnterprise, mvBase, mvDesigner andTigerLogic, among others.  We also have apending U.S. patent application as of September 30, 2004.  In addition to trademark and copyrightprotections, we license our products to end users on a “right to use” basispursuant to a perpetual license agreement that restricts use of products to aspecified number of users. We generally rely on “click-wrap” licenses thatbecome effective when a customer downloads and installs software on its system.In order to retain exclusive ownership rights to our software and technology,we generally provide our software in object code only, with contractualrestrictions on copying, disclosure and transferability. There can be noassurance that these protections will be adequate, or that our competitors willnot independently develop technologies that are substantially equivalent orsuperior to our technology.

 

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

 

Our enterprise applications software maycontain undetected errors or failures. This includes our XDMS and PDP products,which are

 

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at higher risk given these products are inthe earliest stages of the product life cycle. This may result in loss of, ordelay in, customer 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, we could experiencedelays in release, customer dissatisfaction and lost revenue. Any of theseerrors or defects could harm our business.

 

**IF THEREGISTRATION RIGHTS HELD BY ASTORIA AND OTHER SECURITIES HOLDERS ARE EXERCISED,OR THESE SECURITIES HOLDERS SELL A SUBSTANTIAL AMOUNT OF RESTRICTED SECURITIESIN THE OPEN MARKET, OUR STOCK PRICE MAY DECLINE.**

 

As of September 30, 2004, we had 18,473,794outstanding shares of common stock, of which approximately 9,600,000 shareswere restricted securities held by Astoria and other holders. Restrictedsecurities may be sold in the public market only if they are registered or ifthey qualify for an exemption from registration promulgated under theSecurities Act of 1933, as amended. At present, all of our outstandingrestricted securities are either entitled to registration rights or eligiblefor public sale under Rule 144, subject to volume limitations and other requirementsof Rule 144.  If Astoria or otherholders decide to exercise their demand registration rights, we would incurcosts and expenses associated with the registration of securities.

 

Furthermore, sales of a substantial number ofshares by Astoria or other securities holders in the public market, or theperception that those sales may occur, could cause the market price of ourcommon stock to decline. In addition, if we register shares of our common stockin connection with a public offering of securities, we may be required toinclude shares of restricted securities in the registration, which may have anadverse effect on our ability to raise capital.

 

**OURPRODUCTS HAVE A LONG SALES CYCLE, WHICH COULD RESULT IN DELAYS IN THE RECEIPTOF REVENUE.**

 

The sales cycle for our MDMS and RAD productstypically ranges from three to nine months or longer and the sales cycle forour XDMS and PDP products is anticipated to be significantly longer since theseproducts are still in the process of being adopted by the marketplace.  Our products are typically used byapplication developers, system integrators and value added resellers to developapplications that are critical to their corporate end user’s business. Becausethe purchases of our products are often part of an end user’s larger businessprocess, re-engineering initiative, or implementation of client/server orweb-based computing, the end users frequently view the purchase of our productsas part of a long-term strategic 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 beyond ourcontrol.  As a result, a significantperiod of time may elapse between our research and development efforts andrecognition of revenue, if any.

 

**OUR GLOBALOPERATIONS EXPOSE US TO ADDITIONAL RISKS AND CHALLENGES ASSOCIATED WITHCONDUCTING BUSINESS INTERNATIONALLY.**

 

We operate on a global basis with offices ordistributors in Europe, Africa, Asia, Latin America, South America, Australiaand North America. Approximately 29% and 28% of our revenue for the three andsix month periods ended September 30, 2004 was generated from our internationaloffices. We face several risks inherent in conducting business internationally,including but not limited to the following:

 

•                                          fluctuations in interest rates or currencyexchange rates;

•                                          language and cultural differences;

•                                          local and governmental requirements;

•                                          difficulties and costs of staffing andmanaging international operations;

•                                          differences in intellectual propertyprotections;

•                                          difficulties in collecting accountsreceivable and longer collection periods;

•                                          seasonal business activities in certain partsof the world; and

•                                          trade policies.

 

Any of these factors could harm ourinternational operations and, consequently, affect the international growth ormaintenance of our business. These factors or any combination of these factorsmay adversely affect our international revenue or our overall financialperformance.

 

**THE FAILUREOF OUR PRODUCTS TO CONTINUE TO CONFORM TO INDUSTRY STANDARDS MAY HARM OUROPERATING RESULTS.**

 

A key factor in our future success willcontinue to be the ability of our products to operate and perform well withexisting and future leading, industry-standard enterprise software applicationsintended to be used in connection with our MDMS, RAD, XDMS and PDP products.Inter-operability may require third party licenses, which may not be availableto us on favorable terms or at all. Failure to meet existing or futureinter-operability and performance requirements of industry standardapplications in a timely manner could adversely affect our business. Uncertaintiesrelating to the timing and nature of new product announcements or introductionsor

 

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modifications of third party softwareapplications could delay our product development, increase our productdevelopment expense or cause customers to delay evaluation, purchase, anddeployment of our products.

 

**THIRDPARTIES COULD ASSERT THAT OUR SOFTWARE PRODUCTS AND SERVICES INFRINGE ON THEIRINTELLECTUAL PROPERTY RIGHTS, WHICH COULD RESULT IN COSTLY LITIGATION, CAUSEPRODUCT SHIPMENT DELAYS, PROHIBIT PRODUCT LICENSING OR REQUIRE US TO ENTER INTOROYALTY OR LICENSING AGREEMENTS.**

 

There has been a substantial amount oflitigation in the software industry regarding intellectual property rights.Third parties may claim that our current or potential future products andservices infringe upon their intellectual property. We expect that softwareproduct developers and providers of software applications will increasingly besubject to infringement claims as the number of products and competitors in ourindustry segment grow and the functionality of products in different industrysegments overlap. Any claims, with or without merit, could be time consuming,result in costly litigation, cause product shipment delays, prohibit productlicensing or require us to enter into royalty or licensing agreements. Royaltyor licensing agreements, if required, may not be available on terms acceptableto us or at all, which could seriously harm our business.

 

**ITEM 3.****  CONTROLS AND PROCEDURES**

 

**EVALUATIONOF DISCLOSURE CONTROLS AND PROCEDURES**

 

The evaluation of our disclosure controls andprocedures and internal control over financial reporting included a review oftheir objectives and processes, implementation and effect on the informationgenerated for use in this report. In the course of this evaluation, we soughtto identify any significant deficiencies or material weaknesses in our controlsand any acts of fraud involving personnel who have a significant role in ourinternal control over financial reporting, and to confirm that any necessarycorrective action, including process improvements, were being undertaken. Theoverall goals of these evaluation activities are to monitor our disclosurecontrols and procedures and internal control over financial reporting and tomake modifications as necessary.

 

Our principal executive officer and principalfinancial officer have concluded that our disclosure controls and procedures(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) areeffective, as of the end of the period covered by this report, to ensure thatinformation required to be disclosed by us in reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in Securities and Exchange Commission rules andaccumulated and communicated to the Company’s management, including itsprincipal executive officer and principal financial officer, to allow timelydecisions regarding required disclosure.

 

However, a control system, no matter how wellconceived and operated, can provide only reasonable, not absolute, assurancethat the objectives of the control system are met. Management necessarilyapplied its judgment in assessing the benefits of controls relative to theircosts. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issues,if any, within Raining Data Corporation have been detected.

 

**Changes inInternal Controls**

 

There was no change in our internal controlover financial reporting that occurred during our last fiscal quarter that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

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**PART II.OTHER INFORMATION**

 

ITEM 1.  LEGAL PROCEEDINGS

 

We are subject from time to time to claimsand suits arising in the ordinary course of business.  As of September 30, 2004, we were not a partyto any material litigation, claim or suit.

 

ITEM 6.  EXHIBITS

 
| (a)    |   | Exhibits:                                                                                                                                                                |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                     |
| 10.1   |   | Lease agreement dated November 9, 2004 between registrant and The  Irvine Company.                                                                                       |
| 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 theExchange Act, the registrant caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
| Date:  November  9, 2004 | **RAINING  DATA CORPORATION**                          |
|------------------------------------|--------------------------------------------------------|
| ** **                         | ** **                                             |
| * *                           | */s/ Brian C. Bezdek*                                  | * * |
|                               | Brian C. Bezdek                                        |
| * *                           | *Chief  Financial Officer and Duly Authorized Officer* |

 

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**EXHIBIT INDEX**

 
| 10.1 |   | Lease agreement dated  November 9, 2004 between registrant and The Irvine Company.                                                                                       |   |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 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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