**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 June 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 filed all reports required to befiled by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes ý  No o

 

As of June 30,2004, there were 18,428,141 shares of registrant’s Common Stock, $.10 parvalue, outstanding.

 

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

 

 

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**RAINING DATA CORPORATION**

**INDEX**

 
| PART I.    | FINANCIAL INFORMATION                                                                                       |
|------------|-------------------------------------------------------------------------------------------------------------|
| ITEM 1.    | FINANCIAL STATEMENTS                                                                                        |
|       | UNAUDITED CONDENSED CONSOLIDATED BALANCE  SHEETS — JUNE 30, 2004 AND MARCH 31, 2004                    |
|       | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS  OF OPERATIONS — THREE MONTHS ENDED JUNE 30, 2004 AND 2003 |
|       | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS  OF CASH FLOWS — THREE MONTHS ENDED JUNE 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 AND REPORTS ON FORM 8-K                                                                            |
| SIGNATURES |

 

2

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**PART I. FINANCIAL INFORMATION**

 

ITEM 1.  FINANCIAL STATEMENTS

 

**RAINING DATA CORPORATION AND SUBSIDIARIES****UNAUDITED CONDENSED CONSOLIDATED BALANCE****SHEETS**
| ** **                                      | ** ** | **June 30,****2004** | ** ** | **March 31,****2004** | ** ** |
|-------------------------------------------------|------------|----------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **(In thousands)**   | ** ** |
|                                            |       |                 |       |                  |       |
| ASSETS                                          |       |                 |       |                  |       |
|                                            |       |                 |       |                  |       |
| Current assets                                  |       |                 |       |                  |       |
| Cash                                            |       | $                    | 8,344      |                  | $          | 7,783 |   |
| Trade accounts receivable-net                   |       | 1,499                |       | 1,865                 |       |
| Other current assets                            |       | 303                  |       | 390                   |       |
| Total current assets                            |       | 10,146               |       | 10,038                |       |
|                                            |       |                 |       |                  |       |
| Property, furniture and equipment-net           |       | 742                  |       | 795                   |       |
|                                            |       |                 |       |                  |       |
| Intangible assets-net                           |       | 1,083                |       | 1,733                 |       |
| Goodwill                                        |       | 27,684               |       | 27,684                |       |
| Other assets                                    |       | 180                  |       | 201                   |       |
| Total assets                                    |       | $                    | 39,835     |                  | $          | 40,451 |   |
|                                            |       |                 |       |                  |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY       |       |                 |       |                  |       |
|                                            |       |                 |       |                  |       |
| Current liabilities                             |       |                 |       |                  |       |
| Accounts payable                                |       | $                    | 270        |                  | $          | 242 |   |
| Accrued liabilities                             |       | 1,622                |       | 2,257                 |       |
| Deferred revenue                                |       | 5,220                |       | 5,006                 |       |
| Note payable                                    |       | 22                   |       | 38                    |       |
| Total current liabilities                       |       | 7,134                |       | 7,543                 |       |
|                                            |       |                 |       |                  |       |
| Long term debt-net of discount                  |       | 23,431               |       | 23,117                |       |
| Total liabilities                               |       | 30,565               |       | 30,660                |       |
|                                            |       |                 |       |                  |       |
| Commitments and contingencies                   |       | —               |       | —                |       |
|                                            |       |                 |       |                  |       |
| Stockholders’ equity                       |       |                 |       |                  |       |
| Preferred stock                                 |       | 300                  |       | 300                   |       |
| Common stock                                    |       | 1,843                |       | 1,840                 |       |
| Additional paid-in capital                      |       | 95,472               |       | 95,418                |       |
| Deferred stock-based compensation               |       | (33                  | )          | (41                   | )          |
| Accumulated other comprehensive income          |       | 1,302                |       | 1,509                 |       |
| Accumulated deficit                             |       | (89,614              | )          | (89,235               | )          |
| Total stockholders’ equity                 |       | 9,270                |       | 9,791                 |       |
|                                            |       |                 |       |                  |       |
| Total liabilities and stockholders’ equity |       | $                    | 39,835     |                  | $          | 40,451 |   |

 

See accompanying condensed notes to the unaudited condensedconsolidated financial statements.

 

3

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**RAINING DATA CORPORATION AND SUBSIDIARIES****UNAUDITED CONDENSED CONSOLIDATED STATEME****NTS OF OPERATIONS****THREE MONTHS ENDED JUNE30,**
| ** **                                                | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                      |       |     |       |     |       |
| Net revenues                                              |       |     |       |     |       |
| Licenses                                                  |       | $        | 2,222      |     | $          | 2,286 |   |
| Services                                                  |       | 2,975    |       | 3,123    |       |
| Total net revenues                                        |       | 5,197    |       | 5,409    |       |
|                                                      |       |     |       |     |       |
| Costs of revenues                                         |       |     |       |     |       |
| Cost of license revenues                                  |       | 72       |       | 89       |       |
| Cost of service revenues                                  |       | 468      |       | 489      |       |
| Total cost of revenues                                    |       | 540      |       | 578      |       |
|                                                      |       |     |       |     |       |
| Gross profit                                              |       | 4,657    |       | 4,831    |       |
|                                                      |       |     |       |     |       |
| Cost of operations                                        |       |     |       |     |       |
| Selling and marketing                                     |       | 1,414    |       | 1,457    |       |
| Research and development                                  |       | 1,738    |       | 1,974    |       |
| General and administrative                                |       | 889      |       | 920      |       |
| Stock-based compensation                                  |       | 32       |       | 50       |       |
| Amortization of intangible assets                         |       | 650      |       | 650      |       |
| Total operating expenses                                  |       | 4,723    |       | 5,051    |       |
|                                                      |       |     |       |     |       |
| Operating loss                                            |       | (66      | )          | (220     | )          |
|                                                      |       |     |       |     |       |
| Other expense                                             |       |     |       |     |       |
| Interest expense-net                                      |       | (303     | )          | (296     | )          |
| Other income (expense)-net                                |       | (10      | )          | 16       |       |
|                                                      |       | (313     | )          | (280     | )          |
| Net loss                                                  |       | $        | (379       | )        | $          | (500 | ) |
|                                                      |       |     |       |     |       |
| Basic and diluted loss per share                          |       | $        | (0.02      | )        | $          | (0.03 | ) |
|                                                      |       |     |       |     |       |
| Shares used in computing basic and diluted loss per share |       | 18,415   |       | 17,956   |       |
|                                                      |       |     |       |     |       |
| Departmental allocation of stock-based  compensation      |       |     |       |     |       |
| Cost of service revenues                                  |       | $        | —     |     | $          | 3 |   |
| Selling and marketing expense                             |       | —   |       | 16       |       |
| Research and development expense                          |       | 30       |       | 28       |       |
| General and administrative expense                        |       | 2        |       | 3        |       |
| Total stock-based compensation                            |       | $        | 32         |     | $          | 50 |   |

 

See accompanying condensed notes to theunaudited condensed consolidated financial statements.

 

4

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**RAINING DATA CORPORATION AND SUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**THREE MONTHS ENDED JUNE 30,**

 
| ** **                                                                                  | ** ** | **2004**            | ** ** | **2003**   | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------|------------|------------|------------|
| ** **                                                                                  | ** ** | **(In  thousands)** | ** ** |
| Cash flows from operating activities:                                                       | ** ** | ** **          | ** ** | ** ** | ** ** |
| Net loss                                                                                    |       | $                   | (379       | )          | $          | (500 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used for) operating activities: |       |                |       |       |       |
| Depreciation and amortization of long-lived  assets                                         |       | 725                 |       | 741        |       |
| Note discount amortization                                                                  |       | 21                  |       | 21         |       |
| Amortization of deferred stock-based compensation                                           |       | 32                  |       | 50         |       |
| Change in assets and liabilities:                                                           |       |                |       |       |       |
| Trade accounts receivable                                                                   |       | 398                 |       | 119        |       |
| Other current and non-current assets                                                        |       | 86                  |       | 36         |       |
| Accounts payable and accrued liabilities                                                    |       | (602                | )          | (912       | )          |
| Deferred revenue                                                                            |       | 284                 |       | 32         |       |
| Net cash provided by (used for) operating  activities                                       |       | 565                 |       | (413       | )          |
|                                                                                        |       |                |       |       |       |
| Cash flows from investing activities:                                                       |       |                |       |       |       |
| Purchase of property, furniture and  equipment - net                                        |       | (7                  | )          | (1         | )          |
| Net cash used for investing activities                                                      |       | (7                  | )          | (1         | )          |
|                                                                                        |       |                |       |       |       |
| Cash flows from financing activities:                                                       |       |                |       |       |       |
| Proceeds from exercise of stock options and  warrants                                       |       | 32                  |       | 44         |       |
| Proceeds from issuance of common stock                                                      |       | —              |       | 278        |       |
| Repayment of debt                                                                           |       | (16                 | )          | (272       | )          |
| Net cash provided by financing activities                                                   |       | 16                  |       | 50         |       |
|                                                                                        |       |                |       |       |       |
| Effect of exchange rate changes on cash                                                     |       | (13                 | )     | 34         |       |
|                                                                                        |       |                |       |       |       |
| Net increase (decrease) in cash and  equivalents                                            |       | 561                 |       | (330       | )          |
|                                                                                        |       |                |       |       |       |
| Cash and equivalents at beginning of period                                                 |       | 7,783               |       | 5,279      |       |
| Cash and equivalents at end of period                                                       |       | $                   | 8,344      |       | $          | 4,949 |   |
|                                                                                        |       |                |       |       |       |
| Other non-cash activities:                                                                  |       |                |       |       |       |
| Issuance of payment-in-kind notes for  accrued interest                                     |       | $                   | 289        |       | $          | 182 |   |

 

See accompanying condensed notes to the unaudited condensedconsolidated financial statements.

 

5

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**RAINING DATA CORPORATION AND SUBSIDIARIES**

**CONDENSED NOTES TO THE UNAUDITED CONDENS****ED CONSOLIDATED FINANCIAL STATEMENTS**

**June 30, 2004 (Unaudited)**

 

**1. INTERIM FINANCIAL STATEMENTS**

 

The unaudited interim condensed consolidated financial informationfurnished herein reflects all adjustments, consisting only of normal recurringitems, which in the opinion of management are necessary to fairly state RainingData Corporation’s (the “Company”) financial position, the results of itsoperations and its cash flows for the dates and periods presented and to makesuch information presented not misleading. Certain information and footnotedisclosures, normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of America,have been omitted pursuant to SEC rules and regulations; nevertheless,management of the Company believes that the disclosures herein are adequate tomake the information presented not misleading. These condensed consolidatedfinancial statements should be read in conjunction with the Company’s auditedfinancial statements for the year ended March 31, 2004, contained in theCompany’s Annual Report on Form 10-KSB. The results of operations for theperiod ended June 30, 2004, are not necessarily indicative of results to beexpected for any other interim period or the fiscal year ending March 31,2005.

 

**Stock Options**

 

Pro formainformation, which assumes the Company had accounted for stock options grantedunder the fair value method prescribed by Statement of Financial AccountingStandards (“SFAS”) No. 123, “Accounting for Stock-based Compensation,” ispresented below. The per share weighted-average fair values of stock optionsgranted for the three month periods ended June 30, 2004 and 2003, as estimated usingthe Black-Scholes option-pricing model were $2.83 and $1.50, respectively.  The following assumptions were used for thethree-month period ended June 30, 2004: dividend yield of 0%; expectedvolatility of 126%; risk-free interest rate of 4.18%; and expected life of 7years.  The following assumptions wereused for the three-month period ended June 30, 2003: dividend yield of 0%;expected volatility of 142%; risk-free interest rate of 3.13%; and expectedlife of 7 years.

 

Forpurposes of pro forma disclosures, the estimated fair value of the options isamortized to expense over the options’ vesting periods. The Company’shistorical and pro forma net loss per share for the three month periods endedJune 30, 2004 and 2003 are as follows (in thousands, except per share data):

 
| ** **                                                                                             | ** ** | **Three Months ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                             | ** ** | **2004**                         | ** ** | **2003** | ** ** |
| Net loss:                                                                                              |       |                             |       |   |   |
| As reported                                                                                            |       | $                                | (379       | ) | $ | (500 | ) |
|                                                                                                   |       |                             |       |   |   |
| Add:                                                                                                   |       |                             |       |   |   |
| Stock-based employee compensation expense included in net loss                                         |       | 32                               |       | 50 |   |
|                                                                                                   |       |                             |       |   |   |
| Less:                                                                                                  |       |                             |       |   |   |
| Total stock-based employee compensation expense determined under the  fair value method for all awards |       | (290                             | )          | (492 | ) |
|                                                                                                   |       |                             |       |   |   |
| Pro forma net loss:                                                                                    |       | $                                | (637       | ) | $ | (942 | ) |
|                                                                                                   |       |                             |       |   |   |
| Basic and diluted loss per share                                                                       |       |                             |       |   |   |
| As reported                                                                                            |       | $                                | (0.02      | ) | $ | (0.03 | ) |
| Pro forma                                                                                              |       | $                                | (0.03      | ) | $ | (0.05 | ) |

 

6

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**Reclassifications**

 

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

 

**2. LONG-TERM DEBT**

 

Long-term debt of the Company, including the Convertible SubordinatedNote payable to Astoria Capital Partners, L.P. (“Astoria”), the Company’scontrolling stockholder, as of June 30, 2004 and March 31, 2004, is as follows(in thousands):

 

**RAINING DATA CORPORATION AND SUBSIDIARIESLONG-TERM DEBT SCHEDULE**

 
| ** **                                        | ** ** | **June 30,****2004** | ** ** | **March 31,****2004** | ** ** |
|---------------------------------------------------|------------|----------------------|------------|-----------------------|------------|
|                                              |       |                 |       |                  |       |
| Subordinated Convertible Note payable to  Astoria |       | $                    | 23,462     |                  | $          | 23,172 |   |
| Plus accrued interest                             |       | 292                  |       | 289                   |       |
| Less unamortized discount                         |       | (323                 | )          | (344                  | )          |
|                                              |       | 23,431               |       | 23,117                |       |
|                                              |       |                 |       |                  |       |
| Other long-term liabilities                       |       | 22                   |       | 38                    |       |
| Total debt                                        |       | 23,453               |       | 23,155                |       |
| Less current portion of long-term debt            |       | (22                  | )     | (38                   | )          |
| Total long-term debt                              |       | $                    | 23,431     |                  | $          | 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 not anti-dilutive.Potential dilutive common shares include outstanding stock options andwarrants, convertible debt, and convertible preferred stock. There were4,053,346 and 4,027,935 outstanding options to purchase shares of the Company’scommon stock with exercise prices ranging from $0.75 to $52.50 per share as ofJune 30, 2004 and 2003, respectively.  There were 2,169,647 and 2,637,086outstanding warrants to purchase shares of the Company’s common stock withexercise prices ranging from $2.35 to $6.29 and $2.35 to $6.51 per share atJune 30, 2004 and 2003, respectively.  There were 300,000 shares ofpreferred stock, which are convertible into 500,100 shares of common stock,outstanding at June 30, 2004 and 2003.  There was convertible debtoutstanding at June 30, 2004 and 2003, which was convertible into 4,692,407 and4,464,335 shares of common stock, respectively.  The total of these itemswere not included in the computation of diluted earnings per share becausetheir effect would have been anti-dilutive.

 

The change in accumulated othercomprehensive income during the three-month periods ended June 30, 2004 and2003, is the result of the effect of foreign exchange rate changes. Thefollowing table reconciles net loss as reported with total comprehensive loss(in thousands):

 
| ** **                         | ** ** | **Three Months ended  June 30,** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **2004**                         | ** ** | **2003** | ** ** |
|                               |       |                             |       |   |   |
| Net loss reported                  |       | $                                | (379       | ) | $ | (500 | ) |
| Translation adjustments – net |       | (207                             | )     | 122 |   |
| Total comprehensive loss           |       | $                                | (586       | ) | $ | (378 | ) |

 

**4. BUSINESS SEGMENT**

 

The Company operates in onereportable segment. International operations consist primarily of foreign salesoffices selling software developed by or for the Company’s entities in theUnited States of America, combined with local service revenue. The followingtable summarizes consolidated financial information of the Company’s operationsby geographic location (in thousands):

 
| ** **                         | ** ** | **North  America** | ** ** | **Europe** | ** ** | **Total** | ** ** |
|------------------------------------|------------|--------------------|------------|------------|------------|-----------|------------|
|                               |       |               |       |       |       |      |       |
| *Three Months Ended June 30, 2004* |       |               |       |       |       |      |       |
| Net revenues                       |       | $                  | 3,724      |       | $          | 1,473     |       | $ | 5,197 |   |
| Long lived assets                  |       | 29,050             |       | 639        |       | 29,689    |       |
|                               |       |               |       |       |       |      |       |
| *Three Months Ended June 30, 2003* |       |               |       |       |       |      |       |
| Net revenues                       |       | $                  | 3,911      |       | $          | 1,498     |       | $ | 5,409 |   |
| Long lived assets                  |       | 31,788             |       | 655        |       | 32,443    |       |

 

7

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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 Management Servers and the Pick Data Provider for the Microsoft .NETdevelopment environment; and (2) Rapid Application Development software tools(“RAD Tools”). The following table represents the net revenue from theCompany’s segment by product line (in thousands):

 
| ** **                         | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| *Three Months Ended June 30, 2004* |       |     |       |     |       |
| Databases                          |       | $        | 3,974      |     | $          | 4,240 |   |
| RAD Tools                          |       | 1,223    |       | 1,169    |       |
| Total Net Revenues                 |       | $        | 5,197      |     | $          | 5,409 |   |

 

**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

This Form 10-QSB contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended. Suchstatements include our expectations, hopes and intentions regarding the future,including but not limited to statements regarding (i) our strategy, (ii) ourresearch and development plans, (iii) our expectation about selling andmarketing costs and general and administrative costs, (iv) the sufficiency ofour capital resources, (v) our capital expenditures, (vi) our financing plan,(vii) our revenue and cost of license and service revenue, (viii) ouroperations and operating results, (ix) our competitive position, (x) ourexpectation about certain markets, and (xi) our expectation about futureexpenses. Forward-looking statements involve certain risks and uncertainties,and actual results may differ materially from those discussed in any suchstatement. Factors that could cause actual results to differ materially fromsuch forward-looking statements include the risks described in the “RiskFactors” section and elsewhere in this Form 10-QSB. All forward-lookingstatements in this document are made as of the date hereof, based oninformation available to us as of the date hereof, and we assume no obligationto update any forward-looking statement.

 

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

 

**OVERVIEW**

 

We were incorporated in theState of Delaware in 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 thedesign, development, sale and support of software infrastructure. Our productsallow customers to create and enhance flexible software applications for theirown needs and our software may be categorized into four product lines:Multi-dimensional database management systems (“MDMS”), XML data managementservers (“XDMS”), the Pick Data Provider (“PDP”) for the Microsoft .NETdevelopment environment and Rapid Application Development (“RAD”) softwaretools.

 

Many of our products are basedon the Pick Universal Data Model (“Pick UDM”), which we created, and arecapable of handling data from many sources. The Pick UDM is a core componentacross the MDMS, XDMS and PDP product lines.

 

The MDMS product line consistsprincipally of the D3 Data Base Management System (“D3”), which operates onmany systems including 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 manyother environments. This can translate into lower costs for the developer,lower software prices for the customer and reduced costs of ownership for boththe developer and end user. Our MDMS products also include mvEnterprise, ascalable multidimensional database solution that allows the user to leveragethe capabilities of the UNIX operating system, and mvBase, a multidimensionaldatabase solution that runs on all Windows platforms.

 

Our first XDMS product,TigerLogic version 1.1, was released in May 2003. TigerLogic XDMS is ahigh-performance information infrastructure software that provides bothscalability, XA-compliant transactional integrity and fine-grain searchcapabilities typically associated with enterprise databases, as well as thedynamic extensibility, n-tier hierarchies and ease of use and deployment,mostly 

 

8

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found in data repositories andfile systems. We have filed a patent application related to the technologyutilized in the TigerLogic product and this patent was pending as ofJune 30, 2004.

 

In September 2003, we announcedthe production 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 thefull life cycle of software application development and are designed for rapidprototyping, development and deployment of graphical user interface (“GUI”)client/server and web applications. The RAD products include Omnis Studio,Omnis Studio for SAP and Omnis Classic and are object-oriented andcomponent-based, providing the ability to deploy applications on operatingsystem platforms such as Windows, Unix and Linux, as well as databaseenvironments such as MySQL, Oracle, DB2, Sybase, Microsoft SQL Server and otherOpen Data Base Connectivity (“ODBC”) compatible database management systems.

 

We have devoted significant resources to theresearch and development of our products and technology.  We believe that our future success willdepend largely on a strong development effort with respect to both our existingand new products.  These  development efforts have resulted in updates andupgrades to existing MDMS and RAD products and the launch of new productsincluding the XDMS and PDP product lines. New product releases in all of our product lines are currently inprogress.  We expect to continue our research and development efforts in all productlines for the foreseeable future.  We intendfor these efforts to improve our operating results and increase cash flow.However, such efforts may not result in additional new products or revenue, andwe can make no assurances that the recently announced products or futureproducts will be successful.

 

In the United States, we sellour products through established distribution channels consisting of systemintegrators, specialized vertical application software developers andconsulting organizations. We also sell our products directly through our salespersonnel to end user organizations. Outside the United States, we maintaindirect sales offices in the United Kingdom, France and Germany.  Approximately 28% of our revenue came fromsales through our offices located outside the United States for each of thethree-month periods ended June 30, 2004 and 2003.

 

We sell our products in U.S.Dollars in North America, British Pounds Sterling in the United Kingdom andEuros in Germany and France. Because we recognize revenue and expense in thesevarious currencies but report our financial results in U.S. Dollars, changes inexchange rates may cause variances in our period-to-period revenue and resultsof operations in future periods. Recorded foreign exchange gains and losseshave not been material to our performance to date.

 

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.

 

Our customers may be classifiedinto two general categories:

 

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

 

•                                          CorporateInformation Technology (“IT”) Departments.

 

For the three month periodsended June 30, 2004 and 2003, no single customer accounted for more than 10% ofour revenue.

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

The discussion and analysis ofour financial condition and results of operations is based on our condensedconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States of America. Thepreparation of these financial statements requires management to make estimatesand judgments that affect the reported amounts of assets, liabilities, revenueand expenses and disclosure of contingent liabilities.

 

On an on-going basis, weevaluate our estimates, including those related to revenue recognition andaccounting for intangible assets and goodwill. We base our estimates onhistorical experience and on various other assumptions that we believe to bereasonable under the circumstances. Actual results may differ from theseestimates under different assumptions or conditions.

 

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We have identified theaccounting policies below as the policies critical to our business operationsand the understanding of our results of operations. We believe the followingcritical accounting policies and the related judgments and estimates affect thepreparation of our condensed consolidated financial statements:

 

REVENUE RECOGNITION.  We recognize revenue using the residualmethod pursuant to the requirements of Statement of Position No. 97-2,“Software Revenue Recognition” (“SOP 97-2”), as amended.  Under the residual method, revenue isrecognized in a multiple element arrangement when company-specific objectiveevidence of fair value exists for all of the undelivered elements in thearrangement, but does not exist for one or more of the delivered elements inthe arrangement. At the outset of the arrangement with the customer, we deferrevenue for the fair value of our undelivered elements (e.g., contract revenueamount for maintenance) based on company-specific objective evidence of the amountsuch items are sold individually to our customers and recognize revenue for theremainder of the arrangement fee attributable to the elements initiallydelivered in the arrangement (e.g., software license) when the basic criteriain SOP 97-2 have been met.

 

Under SOP 97-2, revenueattributable to an element in a customer arrangement is recognized whenpersuasive evidence of an arrangement exists and delivery has occurred,provided the fee is fixed or determinable, collectibility is probable and thearrangement does not require significant customization of the software. If atthe outset of the customer arrangement, we determine that the arrangement feeis not fixed or determinable, we defer the revenue and recognize the revenuewhen the arrangement fee becomes due and payable.

 

Professional services,maintenance and other revenue relate primarily to consulting services,maintenance and training. Maintenance revenue is initially deferred and thenrecognized ratably over the term of the maintenance contract, typically12 months. Consulting and training revenue is recognized as the servicesare performed and is usually calculated on a time and materials basis. Suchservices 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 ANDGOODWILL.  We assess the impairment ofidentifiable intangibles, long-lived assets and goodwill whenever events orchanges in circumstances indicate that the carrying value may not be recoverable.We also assess the value of goodwill at least annually.  Factors we consider to be important whichcould trigger an impairment review include the following:

 

•                                          Significantunderperformance relative to expected historical or projected future operatingresults;

•                                          Timingof our revenue, significant changes in the manner of use of the acquired assetsor the strategy for the overall business;

•                                          Significantnegative industry or economic trends;

•                                          Significantdecline in our stock price for a sustained period; and

•                                          Ourmarket capitalization relative to net book value.

 

When we determine that thecarrying value of intangibles and other long-lived assets may not berecoverable based upon the existence of one or more of the above indicators ofimpairment and the carrying value of the asset cannot be recovered fromprojected undiscounted cash flows, we measure any impairment based on aprojected discounted cash flow method using a discount rate determined by ourmanagement to be commensurate with the risk inherent in the current businessmodel. Significant management judgment is required in determining whether anindicator of impairment exists and in projecting cash flows.

 

Following the adoption of SFASNo. 142, “Goodwill and Other Intangible Assets,” we revised our policy forassessing and determining impairment of goodwill. The SFAS No. 142goodwill impairment model is a two-step process. The first step is used toidentify potential impairment by comparing the fair value of a reporting unitwith its net book value (or carrying amount), including goodwill. If the fairvalue exceeds the carrying amount, goodwill of the reporting unit is considerednot impaired and the second step of the impairment test is unnecessary. If thecarrying amount of a reporting unit exceeds its fair value, the second step of thegoodwill impairment test is performed to measure the amount of impairment loss,if any. The second step of the goodwill impairment test compares the impliedfair value of the reporting unit’s goodwill with the carrying amount of thatgoodwill. If the carrying amount of the reporting unit’s goodwill exceeds theimplied fair value of that goodwill, an impairment loss is recognized in anamount equal to that excess. The implied fair value of goodwill is determinedin the same manner as the amount of goodwill recognized in a businesscombination. That is, the fair value of the reporting unit is allocated to allof the assets and liabilities of that unit (including any unrecognizedintangible assets) as if the reporting unit had been acquired in a business combinationand the fair value of the reporting unit was the purchase price paid to acquirethe reporting unit.

 

Determining the fair value of a reporting unit under the first step ofthe goodwill impairment test and determining the fair value of individual assetsand liabilities of a reporting unit (including unrecognized intangible assets)under the second step of the goodwill impairment test is judgmental in natureand often involves the use of significant estimates and assumptions. Theseestimates and assumptions could have a significant impact on whether or not animpairment charge is recognized and the magnitude of any such 

 

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charge. Estimates of fair value are primarily determined usingdiscounted cash flows and are based on our best estimate of future revenue andoperating costs and general market conditions. This approach uses significant assumptions, including projected futurecash flows (including timing), the discount rate reflecting the risk inherentin 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 the Company’sfinancial position and results of operations.

 

**Resultsof Operations**

 

The following table sets forthcertain Condensed Consolidated Statement of Operations data in total dollars,as a percentage 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.

 
| ** **                                             | ** ** | **Three Months Ended  June 30, 2004** | ** ** | ** **             | ** ** | **Three Months Ended  June 30, 2003** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|------------------------|------------|---------------------------------------|------------|
| ** **                                             | ** ** | **Results**                           | ** ** | **% of Net  Revenues** | ** ** | **Percent  Change**                   | ** ** | **Results** | ** ** | **% of Net  Revenues** | ** ** |
| Net revenues                                           |       |                                  |       |                   |       |                                  |       |   |   |   |   |
| Licenses                                               |       | $                                     | 2,222      |                   | 43         | %                                     | (3         | )% | $ | 2,286 |   | 42 | % |
| Services                                               |       | 2,975                                 |       | 57                     | %          | (5                                    | )%         | 3,123 |   | 58 | % |
| Total net revenues                                     |       | 5,197                                 |       | 100                    | %          | (4                                    | )%         | 5,409 |   | 100 | % |
| Cost of revenues                                       |       |                                  |       |                   |       |                                  |       |   |   |   |   |
| Cost of license revenues (as a % of license  revenues) |       | 72                                    |       | 3                      | %          | (19                                   | )%         | 89 |   | 4 | % |
| Cost of service revenues (as a % of service  revenues) |       | 468                                   |       | 16                     | %          | (4                                    | )%         | 489 |   | 16 | % |
| Gross profit and margin on license revenues            |       | 2,150                                 |       | 97                     | %          | (2                                    | )%         | 2,197 |   | 96 | % |
| Gross profit and margin on service revenues            |       | 2,507                                 |       | 84                     | %          | (5                                    | )%         | 2,634 |   | 84 | % |
| Operating expenses                                     |       |                                  |       |                   |       |                                  |       |   |   |   |   |
| Selling and marketing                                  |       | 1,414                                 |       | 27                     | %          | (3                                    | )%         | 1,457 |   | 27 | % |
| Research and development                               |       | 1,738                                 |       | 33                     | %          | (12                                   | )%         | 1,974 |   | 36 | % |
| General and administrative                             |       | 889                                   |       | 17                     | %          | (3                                    | )%         | 920 |   | 17 | % |
| Stock-based compensation                               |       | 32                                    |       | 1                      | %          | (36                                   | )%         | 50 |   | 1 | % |
| Amortization of goodwill and intangible  assets        |       | 650                                   |       | 13                     | %          | 0                                     | %          | 650 |   | 12 | % |
| Total operating expenses                               |       | 4,723                                 |       | 91                     | %          | (6                                    | )%         | 5,051 |   | 93 | % |
| Operating loss                                         |       | (66                                   | )          | (1                     | )%         | (70                                   | )%         | (220 | ) | (4 | )% |
| Other income (expense), net                            |       | (313                                  | )          | (6                     | )%         | 12                                    | %          | (280 | ) | (5 | )% |
| Net loss                                               |       | $                                     | (379       | )                      | (7         | )%                                    | (24        | )% | $ | (500 | ) | (9 | )% |

 

**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 oflicenses.  We view the MDMS and RADmarkets in which we operate to be relatively stable and consistent from periodto period and anticipate that our revenues on an annual basis from thoseproducts will remain stable for the foreseeable future. The decrease in netrevenues is primarily due to a reduction in year over year servicerevenue.  Fluctuations in revenuesbetween quarters or year-to-year are primarily the result of the timing oforders and customer order patterns. We do not view the changes in year-to-yearrevenues for the three month periods ended June 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 sellingsoftware development kits (“SDKs”) for the PDP product, primarily directly toIT departments that are developing new applications and re-engineering existingapplications for in-house use.  SDKs arepriced competitively to promote the adoption and entry into the product lineand, therefore, the sale of SDKs yielded minimal initial revenue in the lastfiscal year. Deployment of applications created using the PDP SDKs requires thepurchase of deployment licenses, which would result in additional revenue forus.  The development cycle takes time forour customers to complete prior to deployment. Should the adoption 

 

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of the PDP product and ourcustomer’s development efforts be successful, we would anticipate additionalrevenues in future periods related to the sale of the deployment 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 stable at less than $0.1 million for the threemonths ended June 30, 2004 and 2003.  Weanticipate that the cost of license revenues, as a percentage of licenserevenues and in absolute dollars, will be relatively stable in future periods.

 

COST OF SERVICE REVENUES. Cost of servicerevenues includes consulting, technical support and training, all of whichconsist primarily of personnel related costs.  Cost of service revenues decreased slightly during the three-month periodended June 30, 2004, as compared to the three-month period ended June 30, 2003.The decrease in cost of service revenues is attributed to overhead costreductions as well as a result of product mix changes.  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.  The slight decrease in selling and marketingexpense in the three-month period ended June 30, 2004, as compared to thethree-month period ended June 30, 2003, was primarily due to savings as a resultof temporary headcount reductions. We anticipate that selling and marketingcosts related to the XDMS and PDP products may increase as we further develop the sales channel for these new productsand if customer acceptance of these products increases.  In addition, if our continued research anddevelopment efforts are successful, including with respect to our XDMS and PDPproducts, and new products or services are created, we may incur increasedsales and marketing expense to promote those new products 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-month period ended June 30, 2004, our research anddevelopment expense has decreased 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 atthe current level in future periods or increase if we believe that additionalspending is warranted. Such efforts may not result in additional new products,and any new products, including the XDMS and PDP products, may not generatesufficient revenue, 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 in the threemonths ended June 30, 2004, as compared to the three months ended June 30,2003, was the result of the timing of expenditures as well as continued costcontrols resulting in reduced legal and related expenses.  We are focused on the control of generaloverhead costs and intend to use any savings from such reduction for ourongoing 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 in future periods.

 

STOCK-BASED COMPENSATION.  The decreases in stock-based compensation inthe three-month period ended June 30, 2004, as compared to the three-monthperiod ended June 30, 2003, is attributable primarily to cancellations ofpreviously issued options with an exercise price below fair value on the dateof grant for terminated employees, options reaching the end of their vestingperiods, no new options being granted with an exercise price below fair valueat the date of grant, and fewer options granted to non-employees. We do notanticipate significant changes in stock-based compensation expense in futureperiods.

 

GOODWILL AND AMORTIZATION OF INTANGIBLEASSETS.  We continue to amortize identifiableintangible assets in accordance with their determined useful life, estimated tobe four years.  We stopped amortizinggoodwill effective April 1, 2002.

 

OTHERINCOME (EXPENSE). Other expense consists primarily of net interest expense and,to a much lesser extent, gains and losses on foreign currencytransactions.  Due to the uncertainty inexchange rates, we may experience transaction gains or losses in futureperiods, the effect of which cannot be determined at this time.

 

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**LIQUIDITY AND 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 ConvertibleSubordinated Note is 5% per annum as compared to an interest rate of 10% perannum under the Secured Promissory Note. The interest is payable quarterly at our option in cash or throughincreases to the outstanding principal of the Convertible Subordinated Note.For the periods ended March 31, 2003, June 30, 2003, September 30, 2003,December 31, 2003, March 31, 2004 and June 30, 2004, we issued payment in kind(“PIK”) notes to Astoria for the accrued interest due in the aggregate amountof $1,614,795.  For the foreseeablefuture, we expect to issue additional PIK notes to Astoria, in lieu of cashpayments for the interest due under the Convertible Subordinated Note.  If the Convertible Subordinated Note or thePIK notes are converted into common stock, our stockholders may experiencesubstantial dilution.  Unlike the SecuredPromissory Note, the Convertible Subordinated Note is not secured by ourassets.

 

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 Capital Management, 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.  Gerald F. Chew, a member of our Board ofDirectors, is the cousin of Mr. Koe.

 

At June 30, 2004, we had$8.3 million in cash. We believe that our cash flow from operatingactivities will be sufficient to meet our operating and capital expenditurerequirements for the remainder of the fiscal year ending March 31, 2005and through the foreseeable future. We are committed to research anddevelopment efforts that are intended to allow us to penetrate new markets andgenerate new sources of revenue and improve operating results. However, ourresearch and development efforts have required, and will continue to require,cash outlays without the immediate or short-term receipt of related revenue.Our ability to service our long-term debt and meet our expenditure requirementsis dependent 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.

 

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 June 30, 2004.

 

We had no material commitmentsfor capital expenditures at June 30, 2004.

 

Netcash provided by operating activities was $0.6 million for the three monthsended June 30, 2004 and net cash used by operating activities was $0.4 millionfor the three months ended June 30, 2003.

 

Our earnings before interest, taxes, depreciation and amortization(EBITDA) was $0.7 million, or 13% of total net revenue, and $0.6 million,or 11% of total net revenue, for the three month periods ended June 30, 2004and 2003, respectively.  The increase inEBITDA for the three month period ended June 30, 2004 was primarily a result ofcost savings during the quarter.  EBITDAis defined as net loss with an add-back for depreciation, goodwill andnon-goodwill amortization, non-cash stock-based compensation expense, interestexpense and other income.  The followingtable reconciles EBITDA to the reported net loss:

 

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**RAINING DATA CORPORATION AND SUBSIDIARIES**

**RECONCILIATION OF EBITDA TO NET LOSS**

**(Unaudited)**

 
| ** **                    | ** ** | **For the three months  ended June 30,** | ** ** |
|-------------------------------|------------|------------------------------------------|------------|
| **In $000’s**            | ** ** | **2004**                                 | ** ** | **2003** | ** ** |
|                          |       |                                     |       |   |   |
| Reported net loss             |       | $                                        | (379       | ) | $ | (500 | ) |
| Depreciation and amortization |       | 75                                       |       | 91 |   |
| Stock-based compensation      |       | 32                                       |       | 50 |   |
| Intangible asset amortization |       | 650                                      |       | 650 |   |
| Interest expense - net        |       | 303                                      |       | 296 |   |
| Other (income) expense - net  |       | 10                                       |       | (16 | ) |
|                          |       |                                     |       |   |   |
| EBITDA                        |       | $                                        | 691        |   | $ | 571 |   |

 

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 andassessing our results of operations and cash flows. In addition, EBITDA is nota term defined by GAAP and as a result our measure of EBITDA might not becomparable to similarly titled measures used by other companies.

 

However, 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 (used for) operating activities:

 

**RAINING DATA CORPORATION AND SUBSIDIARIESRECONCILIATION OF EBITDA TO NET CASH PROVIDED BY (USED FOR) OPERATINGACTIVITIES**

**(Unaudited)**

 
| ** **                                           | ** ** | **For the three months  ended June 30,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------|------------|
| **In $000’s**                                   | ** ** | **2004**                                 | ** ** | **2003** | ** ** |
|                                                 |       |                                     |       |   |   |
| Net cash provided by (used for) operating activities |       | $                                        | 565        |   | $ | (413 | ) |
|                                                 |       |                                     |       |   |   |
| Interest expense - net                               |       | 303                                      |       | 296 |   |
| Other (income) expense - net                         |       | 10                                       |       | (16 | ) |
| Change in accounts receivable                        |       | (398                                     | )     | (119 | )  |
| Change in other assets                               |       | (86                                      | )     | (36 | )  |
| Change in accounts payable and accrued liabilities   |       | 602                                      |       | 912 |   |
| Change in deferred revenue                           |       | (284                                     | )     | (32 | )  |
| Note discount amortization                           |       | (21                                      | )          | (21 | ) |
|                                                 |       |                                     |       |   |   |
| EBITDA                                               |       | $                                        | 691        |   | $ | 571 |   |

 

**RISK FACTORS**

 

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 firstXDMS product which resulted from these development efforts.  In September 2003, we released the 

 

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production version of the PDP for .NET.  This was our first release in the PDP productline which is designed to support the Microsoft.NET Framework.  While we intend for these efforts to improveour operating results and increase cash flow, such efforts may not result innew products or revenue, and any new products that do result may not besuccessful. The development of new or enhanced software products is a complexand uncertain process requiring high levels of innovation, as well as accurateanticipation of customer and technical trends. In developing new products andservices, we may fail to develop and market products that respond totechnological changes or evolving industry standards in a timely orcost-effective manner, or experience difficulties that could delay or preventthe successful development, introduction and marketing of these new products.The development and introduction of new or enhanced products also requires usto manage the transition from older products in order to minimize disruptionsin customer ordering patterns and to ensure that adequate supplies of newproducts can be delivered to meet customer demand. Failure to develop andintroduce 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 servicescompete on 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 penetrate newmarkets and attract new customers, market acceptance of our new and existingproducts and services, the success of research and development efforts andother factors beyond our control.  As previously noted, in January 2003,we entered into the Exchange Agreement with Astoria to replace the existingSecured 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 the equityand capital markets to raise additional funds for operating needs.

 

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**THECONCENTRATION OF OUR STOCK OWNERSHIP AND THE DEBT OWED TO ASTORIA GIVE CERTAIN**

**STOCKHOLDERSSIGNIFICANT CONTROL OVER OUR BUSINESS.**

 

As of June 30, 2004, Astoria and RockportGroup, LP (“Rockport”) together beneficially owned approximately 71% of ouroutstanding common stock. As of such date, Astoria also owned all of ouroutstanding preferred stock. In addition, as of June 30, 2004, the ConvertibleSubordinated Note issued to Astoria had a balance of approximately$23.8 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.  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.

 

**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 June 30, 2004, we had 18,428,141outstanding 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 otherrequirements of Rule 144.   IfAstoria or other holders decide to exercise their demand registration rights,we would incur costs and expenses associated with the registration ofsecurities.

 

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.

 

**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 anddevelopment, sales and marketing and operations in order to promote new productdevelopment and introduction. Because the expenses associated with these activitiesare relatively fixed in the short-term, we may be unable to timely adjustspending to offset any unexpected shortfall in revenue growth or any decreasein revenue levels. Operating results may also fluctuate due to factors such as:

 

•                                          thesize 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 a result,we expect our quarterly operating results to continue to fluctuate, which maycause 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.

 

 

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**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, Boris Geller,Vice President, Market Development and Soheil Raissi, Vice President, ProductDevelopment and Professional Services. The loss of one or more of these or other executives could adverselyaffect our business. In addition, we believe that our future success willdepend to a significant extent on our ability to recruit, hire and retainhighly skilled management and employees with experience in engineering, productmanagement, sales, marketing and customer service. Competition for suchpersonnel in the software industry can be intense, and there can be noassurance that we will be successful in attracting and retaining suchpersonnel. If we are unable to do so, we may experience inadequate levels ofstaffing to develop and license our products and perform services for ourcustomers, 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 registered trademarks includeRaining Data, Pick, D3, Omnis, Omnis Studio, mvEnterprise, mvBase, mvDesigner,and our service marks include TigerLogic, among others.  We also have a pending U.S. patentapplication as of June 30, 2004.  Inaddition to trademark and copyright protections, we license our products to endusers on a “right to use” basis pursuant to a perpetual license agreement thatrestricts use of products to a specified number of users. We generally rely on“click-wrap” licenses that become effective when a customer downloads andinstalls software on its system. In order to retain exclusive ownership rightsto our software and technology, we generally provide our software in objectcode only, with contractual restrictions on copying, disclosure andtransferability. There can be no assurance that these protections will beadequate, or that our competitors will not independently develop technologiesthat are substantially equivalent or superior 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 at higher risk given these products are in the earliest stages of theproduct life cycle. This may result in loss of, or delay in, customeracceptance of our products and could harm our reputation and our business.Undetected errors or failures in computer software programs are not uncommon.While we make every effort to thoroughly test our software, in the event thatwe experience significant software errors, we could experience delays inrelease, customer dissatisfaction and lost revenue. Any of these errors ordefects could harm our business.

 

**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 thesenew products are just beginning to be 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 theirworkforce-related operations and expenditures. Thus, this sometimes results inend users taking a significant period of time to assess alternative solutionsby competitors or to defer a purchase decision as a result of an unrelatedstrategic issue beyond our control.   Asa result, a significant period of time may elapse between our research anddevelopment efforts and recognition 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 28% of our revenue for the three months endedJune 30, 2004 was generated from our international offices. We face severalrisks inherent in conducting business internationally, including but notlimited 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;

 

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•                                          seasonal business activities in certain partsof the world;

•                                          trade policies; and

•                                          the impact of SARS or other healthadvisories.

 

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.Uncertainties relating to the timing and nature of new product announcements orintroductions or modifications of third party software applications could delayour product development, increase our product development expense or causecustomers to delay evaluation, purchase, and deployment 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 of litigation in the softwareindustry regarding intellectual property rights. Third parties may claim thatour current or potential future products and services infringe upon theirintellectual property. We expect that software product developers and providersof software applications will increasingly be subject to infringement claims asthe number of products and competitors in our industry segment grow and thefunctionality of products in different industry segments overlap. Any claims,with or without merit, could be time consuming, result in costly litigation,cause product shipment delays, prohibit product licensing or require us toenter into royalty or licensing agreements. Royalty or licensing agreements, ifrequired, may not be available on terms acceptable to us or at all, which couldseriously harm our business.

 

**ITEM 3.  CONTROLS AND PROCEDURES**

 

**EVALUATION OF DISCLOSURE CONTROLS ANDPROCEDURES**

 

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 officerand principal financial officer have concluded that our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) under the ExchangeAct) are effective, as of the end of the period covered by this report, toensure that information required to be disclosed by us in reports that we fileor submit under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in Securities and Exchange Commission (“SEC”)rules and accumulated and communicated to the Company’s management, includingits principal executive officer and principal financial officer, to allowtimely decisions 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.

 

**Changesin Internal Controls**

 

Therewas no change in our internal control over financial reporting that occurredduring our last fiscal quarter that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

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**PART II. OTHERINFORMATION**

 

ITEM 1.  LEGAL PROCEEDINGS

 

We are subject from time to time to claims and suits arising in theordinary course of business.  As of June30, 2004, we were not a party to any material litigation, claim or suit.

 

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

 
| (a)    | Exhibits:                                                                                                                                                                                                   |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                        |   |
| 31.1   |                                                                                                                                                                                                        | Certification of Chief Executive Officer. |
| 31.2   |                                                                                                                                                                                                        | Certification of Chief Financial Officer. |
| 32.1   |                                                                                                                                                                                                        | Certification of Chief Executive Officer and Chief Financial Officer  Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
|   |                                                                                                                                                                                                        |   |
| (b)    | Reports on Form 8-K::                                                                                                                                                                                       |
|   |                                                                                                                                                                                                        |
|   | On June 22, 2004, the registrant filed a Form 8-K under Item 12 for a  press release that announced the Company’s financial results for the  fourth quarter and fiscal year ended March 31, 2004. |

 

**SIGNATURES**

 

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

 
| Date:  August 3, 2004 | **RAINING DATA CORPORATION**                           |
|---------------------------------|--------------------------------------------------------|
| ** **                      | ** **                                             |
| * *                        | */s/ Brian C. Bezdek*                                  | * * |
|                            | Brian C. Bezdek                                        |
| * *                        | *Chief Financial Officer and Duly Authorized  Officer* |

 

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**EXHIBIT INDEX**

 
| 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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