**U.S. SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-QSB**

 

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

 

**Commission File number 0-16449**

 

**RAINING DATA CORPORATION**

(Exact name of registrant as specified in 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)

 

Checkwhether the issuer: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities 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 July 31, 2003 there were 18,070,231 shares of registrant’s CommonStock, $.10 par value, outstanding.

 

Transitional Small Business Disclosure Format (Checkone): Yes o  No ý

 

 

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**RAINING DATA CORPORATION**

**INDEX**

 
| PART I.    | FINANCIAL INFORMATION                                                                                        | 3  |
|------------|--------------------------------------------------------------------------------------------------------------|----|
| ITEM 1.    | FINANCIAL STATEMENTS                                                                                         | 3  |
|       | UNAUDITED  CONDENSED CONSOLIDATED BALANCE SHEETS — JUNE 30, 2003 AND MARCH 31, 2003                     | 3  |
|       | UNAUDITED  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS — THREE MONTHS ENDED JUNE 30,  2003 AND 2002 | 4  |
|       | UNAUDITED  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — THREE MONTHS ENDED JUNE 30,  2003 AND 2002 | 5  |
|       | CONDENSED  NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                | 6  |
| ITEM  2.   | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                  | 10 |
| ITEM 3.    | CONTROLS AND  PROCEDURES                                                                                     | 23 |
| PART II.   | OTHER INFORMATION                                                                                            | 23 |
| ITEM 1.    | LEGAL PROCEEDINGS                                                                                            | 23 |
| ITEM 5.    | OTHER INFORMATION                                                                                            | 24 |
| ITEM 6.    | EXHIBITS AND  REPORTS ON FORM 8-K                                                                            | 24 |
| SIGNATURES | 24                                                                                                           |

 

2

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**PART I.  FINANCIALINFORMATION**

 

ITEM 1.  FINANCIAL STATEMENTS

 

**RAININGDATA CORPORATION AND SUBSIDIARIES**

**UNAUDITEDCONDENSED CONSOLIDATED BALANCE SHEETS**

 
|                                                           |   | **June 30, 2003**   |       | **March 31, 2003** |       |
|----------------------------------------------------------------|--------|---------------------|------------|--------------------|------------|
|                                                           |   | **(In  thousands)** |       |
| **ASSETS**                                                     |   |                | ** ** |               | ** ** |
| Current assets                                                 |   |                |       |               |       |
| Cash and  equivalents                                          |   | $                   | 4,949      |               | $          | 5,279 |   |
| Trade accounts  receivable-net                                 |   | 2,287               |       | 2,142              |       |
| Other current  assets                                          |   | 274                 |       | 318                |       |
| Total current  assets                                          |   | 7,510               |       | 7,739              |       |
|                                                           |   |                |       |               |       |
| Property,  furniture and equipment-net                         |   | 839                 |       | 880                |       |
|                                                           |   |                |       |               |       |
| Intangible  assets-net                                         |   | 3,683               |       | 4,333              |       |
| Goodwill                                                       |   | 27,684              |       | 27,684             |       |
| Other assets                                                   |   | 237                 |       | 258                |       |
| Total assets                                                   |   | $                   | 39,953     |               | $          | 40,894 |   |
|                                                           |   |                |       |               |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                 |   |                | ** ** |               | ** ** |
| Current  liabilities                                           |   |                |       |               |       |
| Accounts payable                                               |   | $                   | 338        |               | $          | 600 |   |
| Accrued  liabilities                                           |   | 2,329               |       | 2,992              |       |
| Deferred revenue                                               |   | 5,485               |       | 5,242              |       |
| Current portion  of long-term liabilities                      |   | 64                  |       | 321                |       |
| Total current  liabilities                                     |   | 8,216               |       | 9,155              |       |
|                                                           |   |                |       |               |       |
| Long-term debt,  net of discount and excluding current portion |   | 22,215              |       | 21,932             |       |
| Total  liabilities                                             |   | 30,431              |       | 31,087             |       |
|                                                           |   |                |       |               |       |
| Commitments and  contingencies                                 |   |                |       |               |       |
|                                                           |   |                |       |               |       |
| Stockholders’  equity                                     |   |                |       |               |       |
| Series A  convertible preferred stock                          |   | 300                 |       | 300                |       |
| Common stock                                                   |   | 1,800               |       | 1,795              |       |
| Additional  paid-in capital                                    |   | 94,979              |       | 94,919             |       |
| Deferred  stock-based compensation                             |   | (117                | )          | (145               | )          |
| Accumulated  other comprehensive income                        |   | 1,172               |       | 1,050              |       |
| Accumulated  deficit                                           |   | (88,612             | )          | (88,112            | )          |
| Total  stockholders’ equity                               |   | 9,522               |       | 9,807              |       |
| Total  liabilities and stockholders’ equity               |   | $                   | 39,953     |               | $          | 40,894 |   |

 

See accompanyingcondensed notes to the unaudited condensed consolidated financial statements.

 

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**RAININGDATA CORPORATION AND SUBSIDIARIES**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**For theThree Months Ended June 30,**

 
|                                                           |   | **2003**            |   | **2002** |   |
|----------------------------------------------------------------|--------|---------------------|--------|----------|--------|
|                                                           |   | **(In  thousands)** |   |
| Net revenue                                                    |   |                |   |     |   |
| Licenses                                                       |   | $                   | 2,286  |     | $      | 2,112 |   |
| Services                                                       |   | 3,123               |   | 2,601    |   |
| Total net  revenues                                            |   | 5,409               |   | 4,713    |   |
|                                                           |   |                |   |     |   |
| Costs of  revenues                                             |   |                |   |     |   |
| Cost of license  revenues                                      |   | 89                  |   | 45       |   |
| Cost of service  revenues                                      |   | 489                 |   | 531      |   |
| Total cost  of revenues                                   |   | 578                 |   | 576      |   |
|                                                           |   |                |   |     |   |
| Gross profit                                                   |   | 4,831               |   | 4,137    |   |
|                                                           |   |                |   |     |   |
| Cost of  operations                                            |   |                |   |     |   |
| Selling and  marketing                                         |   | 1,457               |   | 1,124    |   |
| Research and  development                                      |   | 1,974               |   | 1,474    |   |
| General and  administrative                                    |   | 920                 |   | 1,347    |   |
| Stock-based  compensation                                      |   | 50                  |   | 183      |   |
| Amortization of  intangible assets                             |   | 650                 |   | 650      |   |
| Total operating  expenses                                      |   | 5,051               |   | 4,778    |   |
|                                                           |   |                |   |     |   |
| Operating loss                                                 |   | (220                | )      | (641     | )      |
|                                                           |   |                |   |     |   |
| Other income  (expense)                                        |   |                |   |     |   |
| Interest  expense-net                                          |   | (296                | )      | (1,111   | )      |
| Other income-net                                               |   | 16                  |   | 73       |   |
|                                                           |   | (280                | )      | (1,038   | )      |
| Net loss                                                       |   | $                   | (500   | )        | $      | (1,679 | ) |
|                                                           |   |                |   |     |   |
| Basic and  diluted net loss per share                          |   | $                   | (0.03  | )        | $      | (0.10 | ) |
|                                                           |   |                |   |     |   |
| Shares used in  computing basic and diluted net loss per share |   | 17,956              |   | 17,646   |   |
|                                                           |   |                |   |     |   |
| Supplemental  information on stock-based compensation:         |   |                |   |     |   |
|                                                           |   |                |   |     |   |
| Departmental  allocation of stock-based compensation           |   |                |   |     |   |
| Cost of service  revenues                                      |   | $                   | 3      |     | $      | 3 |   |
| Selling and  marketing                                         |   | 16                  |   | 16       |   |
| Research and  development                                      |   | 28                  |   | 159      |   |
| General and  administrative                                    |   | 3                   |   | 5        |   |
| Total  stock-based compensation                                |   | $                   | 50     |     | $      | 183 |   |

 

See accompanyingcondensed notes to the unaudited condensed consolidated financial statements.

 

4

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**RAININGDATA CORPORATION AND SUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**THREEMONTHS ENDED JUNE 30,**

 
|                                                                          |   | **2003**            |   | **2002** |   |
|-------------------------------------------------------------------------------|--------|---------------------|--------|----------|--------|
|                                                                          |   | **(In  thousands)** |   |
| Cash flows from operating activities:                                         |   |                |   |     |   |
| Net loss                                                                      |   | $                   | (500   | )        | $      | (1,679 | ) |
| Adjustments to reconcile net loss to net  cash used for operating activities: |   |                |   |     |   |
| Depreciation and amortization of long-lived  assets                           |   | 741                 |   | 742      |   |
| Note discount amortization                                                    |   | 21                  |   | 710      |   |
| Amortization of deferred stock-based compensation                             |   | 50                  |   | 183      |   |
| Change in assets and liabilities:                                             |   |                |   |     |   |
| Trade accounts receivable                                                     |   | (58                 | )      | (448     | )      |
| Other current  and non-current assets                                         |   | 36                  |   | (40      | )      |
| Accounts payable  and accrued liabilities                                     |   | (912                | )      | (1,104   | )      |
| Deferred revenue                                                              |   | 209                 |   | 257      |   |
| Net cash used  for operating activities                                       |   | (413                | )      | (1,379   | )      |
|                                                                          |   |                |   |     |   |
| Cash flows from  investing activities:                                        |   |                |   |     |   |
| Purchases of  property, furniture and equipment                               |   | (1                  | )      | (53      | )      |
| Net cash used  for investing activities                                       |   | (1                  | )      | (53      | )      |
|                                                                          |   |                |   |     |   |
| Cash flows from  financing activities:                                        |   |                |   |     |   |
| Proceeds from  exercise of stock options and warrants                         |   | 44                  |   | 2        |   |
| Additions to  debt                                                            |   | 278                 |   | —   |   |
| Repayment of  debt                                                            |   | (272                | )      | (19      | )      |
| Net cash  provided (used) by financing activities                             |   | 50                  |   | (17      | )      |
|                                                                          |   |                |   |     |   |
| Effect of  exchange rate changes on cash                                      |   | 34                  |   | 83       |   |
|                                                                          |   |                |   |     |   |
| Net increase  (decrease) in cash and equivalents                              |   | (330                | )      | (1,366   | )      |
|                                                                          |   |                |   |     |   |
| Cash and  equivalents at beginning of period                                  |   | 5,279               |   | 4,500    |   |
| Cash and  equivalents at end of period                                        |   | $                   | 4,949  |     | $      | 3,134 |   |

 

See accompanyingcondensed notes to the unaudited condensed consolidated financial statements.

 

5

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**RAINING DATA CORPORATION AND SUBSIDIARIES**

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

**June 30, 2003 (Unaudited)**

 

**1.  INTERIM FINANCIALSTATEMENTS**

 

Theunaudited interim condensed consolidated financial information furnished hereinreflects all adjustments, consisting only of normal recurring items, which inthe opinion of management are necessary to fairly state Raining DataCorporation’s (the “Company”) financial position, the results of its operationsand its cash flows for the dates and periods presented and to make suchinformation 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 consolidated financialstatements should be read in conjunction with the Company’s audited financialstatements for the year ended March 31, 2003 contained in the Company’s AnnualReport on Form 10-KSB. The results of operations for the period ended June30, 2003 are not necessarily indicative of results to be expected for any otherinterim period or the fiscal year ending March 31, 2004.

 

**Reclassifications**

 

Certainreclassifications have been made to prior period amounts to conform to thecurrent period presentation.

 

**2.  RECENTLY ISSUEDACCOUNTING STANDARDS**

 

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

** **

**On January 17, 2003, the FASB issued FASB FinancialInterpretation No. 46, “Consolidation of Variable Interest Entities,” (“FIN No.46”) which requires extensive disclosures about, and requires companies toevaluate, variable interest entities. Such evaluation is required to determine whether to apply the FIN No. 46consolidation approach to such entities. Companies must apply FIN No. 46 toentities with which they are involved if the entity’s equity has specifiedcharacteristics. If it is reasonably possible that a company will have asignificant variable interest in a variable interest entity at the date the FINNo. 46 consolidation requirements become effective, the company must disclosethe nature, purpose, size and activities of the variable interest entity andthe consolidated enterprise’s maximum exposure to loss resulting from itsinvolvement with the variable interest entity in all financial statements issuedafter January 31, 2003 regardless of when the variable interest entity wascreated. Since the Company has no interest in any variable interest entity, theCompany believes that the adoption of this interpretation will not have amaterial impact on its consolidated financial position or results ofoperations.**

** **

**In April 2002, the FASB issued SFAS No. 145,“Rescission of the FASB Statements No. 4, 44 and 64, Amendment of FASBStatement No. 13, and Technical Corrections” (“SFAS No. 145”). SFASNo. 145 eliminates the requirement to classify gains and losses from theextinguishment of indebtedness as extraordinary, requires certain leasemodifications to be treated the same as a sale-leaseback transaction, and makesother non-substantive technical corrections to existing pronouncements. SFASNo. 145 is effective for fiscal years beginning after May 15, 2002.SFAS No. 145 was adopted on April 1, 2003 and did not have a material effect onthe Company’s financial position or results of operations.**

** **

**Recently IssuedAccounting Standards Not Yet Adopted**

 

The Emerging Issues TaskForce recently reached a consensus on its tentative conclusions for EITF 00-21,“Revenue Arrangements with Multiple Deliverables”(“EITF 00-21”). EITF 00-21provides accounting guidance for allocation of revenue where delivery orperformance of products, services or performance may occur at different pointsin time or over different periods of time. Companies are required to adopt thisconsensus for fiscal periods beginning after June 15, 2003. The Companybelieves the adoption of EITF 00-21 will not have a material impact on theCompany’s financial position, results of operations, or liquidity.

 

**In May 2003, the FASB issued SFAS No. 150, “Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity” (“SFAS No. 150”).  SFAS No. 150establishes standards for how an issuer classifies and measures certainfinancial instruments**

 

6

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**with characteristics of both liabilities and equity.  It requires that an issuer classify afinancial instrument that is within its scope as a liability (or an asset insome circumstances).  Many of thoseinstruments were previously classified as equity.  This statement is effective for financial instruments enteredinto or modified after May 31, 2003, and otherwise is effective for theCompany’s quarter beginning July 1, 2003. For financial instruments created before the issuance date of SFAS No.150 and still existing at the beginning of the interim period of adoption,transition shall be achieved by reporting the cumulative effect of a change inaccounting principle by initially measuring the financial instruments at fairvalue or other measurement attribute required by SFAS No. 150.  The Company believes the adoption of SFASNo. 150 will not have a material impact on its consolidated financial positionor results of operations.**

 

**3.  LONG-TERM DEBT**

 

Long-termdebt of the Company, including the promissory note payable to Astoria CapitalPartners, L.P. (“Astoria”), the Company’s controlling stockholder, as of June30, 2003 and March 31, 2003, is as follows (in thousands):

 
|                                            |   | **June 30,  2003** |   | **March 31,  2003** |   |
|-------------------------------------------------|--------|--------------------|--------|---------------------|--------|
|                                            |   |               |   |                |   |
| Note payable to  Astoria                        |   | $                  | 22,322 |                | $      | 22,140 |   |
| Plus accrued  interest                          |   | 278                |   | 182                 |   |
| Less unamortized  discount                      |   | (407               | )      | (427                | )      |
|                                            |   | 22,193             |   | 21,895              |   |
|                                            |   |               |   |                |   |
| Note payable and  accrued interest - individual |   | —             |   | 256                 |   |
| Other long-term  liabilities                    |   | 86                 |   | 102                 |   |
|                                            |   |               |   |                |   |
| Total debt                                      |   | 22,279             |   | 22,253              |   |
|                                            |   |               |   |                |   |
| Less current  portion of long-term debt         |   | (64                | )      | (321                | )      |
| Total long-term  debt                           |   | 22,215             |   | 21,932              |   |
|                                                 |        |                    |        |                     |        |  |  |

 

Asfurther explained in Note 5 below, in January 2003, the Company entered into aNote Exchange Agreement with Astoria replacing the Secured Promissory Note witha Convertible Subordinated Note that extended the maturity date of the debt toMay 30, 2008.  As such, the amount ofprincipal, accrued interest and unamortized discount have been classified inthe accompanying Unaudited Condensed Consolidated Balance Sheets as Long-TermDebt.

 

**4.  STOCKHOLDERS’EQUITY**

 

TheCompany’s Earnings Per Share data and Dilutive Shares Outstanding exclude614,182 shares and 535,539 shares for the three-month periods ended June 30,2003 and 2002, respectively, as the effect of these shares, related to optionsand warrants, if exercised, would have been anti-dilutive.

 

Thechange in Accumulated Other Comprehensive Income during the three-month periodsended June 30, 2003 and 2002 is the result of the effect of foreign exchangerate changes. The following table reconciles Net Loss as reported with TotalComprehensive Loss (in thousands):

 
|                          |   | **Three  Months ended  June 30,** |   |
|-------------------------------|--------|-----------------------------------|--------|
|                          |   | **2003**                          |   | **2002** |   |
|                          |   |                              |   |   |   |
| Net Loss  Reported            |   | $                                 | (500   | ) | $ | (1,679 | ) |
| Translation  Adjustments, Net |   | 122                               |   | 83 |   |
| Total  Comprehensive Loss     |   | $                                 | (378   | ) | $ | (1,596 | ) |

 

7

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**Stock Options**

 

Pro forma information assuming the Company hadaccounted for stock options granted under the fair value method prescribed bySFAS No. 123, “Accounting for Stock-based Compensation,” is presented below.The per share weighted-average fair value of stock options granted for thethree-month periods ended June 30, 2003 and 2002 was $1.36 and $2.12,respectively, as estimated using the Black-Scholes option-pricing model withthe following assumptions for each of the three-month periods: dividend yieldof 0% in 2003 and 2002; expected volatility of 142% in 2003 and 157% in 2002;risk-free interest rate of 3.62% and 4.32% in 2003 and 2002, respectively; andexpected life of 4 years for 2003 and 2002.

 

For purposes of pro forma disclosures, theestimated fair value of the options is amortized to expense over the options’vesting periods. The Company’s historical and pro forma net loss per share forthe three-month periods ended June 30, 2003 and 2002 are as follows (inthousands, except per share data):

 
|                                                                                                                   |   | **2003** |   | **2002** |   |
|------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Net loss:                                                                                                              |   |     |   |     |   |
| As reported                                                                                                            |   | $        | (500   | )        | $      | (1,679 | ) |
|                                                                                                                   |   |     |   |     |   |
| Add:                                                                                                                   |   |     |   |     |   |
| Stock-based  employee compensation expense included in net loss, net of tax                                            |   | 50       |   | 183      |   |
|                                                                                                                   |   |     |   |     |   |
| Less:                                                                                                                  |   |     |   |     |   |
| Total  stock-based employee compensation expense determined under fair value based  methods for all awards, net of tax |   | (484     | )      | (622     | )      |
|                                                                                                                   |   |     |   |     |   |
| Pro forma net  loss:                                                                                                   |   | $        | (934   | )        | $      | (2,118 | ) |
|                                                                                                                   |   |     |   |     |   |
| Basic and  diluted loss per share                                                                                      |   |     |   |     |   |
| As reported                                                                                                            |   | $        | (0.03  | )        | $      | (0.10 | ) |
| Pro forma                                                                                                              |   | $        | (0.05  | )        | $      | (0.12 | ) |

 

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

 

AtJune 30, 2003, the Company had $4.9 million in cash.  The Company believes that its cash flow fromoperating activities will be sufficient to meet the Company’s operating andcapital expenditure requirements for the remainder of the fiscal year endingMarch 31, 2004 and through the foreseeable future.  The Company is committed to research anddevelopment efforts that are intended to allow it to penetrate new markets andgenerate new sources of revenue and improve operating results.  However, the Company’s research anddevelopment efforts have required, and will continue to require, cash outlayswithout the immediate or short-term receipt of related revenue. The Company’sability to service its long-term debt and meet its expenditure requirements isdependent upon the Company’s future financial performance, which will beaffected by, among other things, prevailing economic conditions, the Company’sability to penetrate new markets and attract new customers, market acceptanceof the Company’s new and existing products and services, the success ofresearch and development efforts and other factors beyond the Company’scontrol.

 

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

 

Giventhe subordinated nature of the Convertible Subordinated Note,the Company may seek to obtain a bank line of credit for operating expensepurposes. No assurance can be given that additional financing will be availableor that, if available, such financing will be on terms favorable to theCompany.

 

InJuly 2002, the Company settled all claims with General Automation, Inc.,dba GA eXpress (“General Automation”), for the sum of $2,000,000, which theCompany has paid in full. The Company paid $1,000,000 of this amountconcurrently with the signing of the Settlement Agreement and Mutual Release inJuly 2002; $400,000 was paid in December 2002; and the remaining$600,000 was paid in June 2003.

 

8

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TheCompany had no material commitments for capital expenditures at June 30, 2003.

 

**Indemnification and warranty provisions contained withinthe Company’s customer license and service agreements are generally consistentwith those prevalent in the Company’s industry.  The duration of the Company’s service warranties generally doesnot exceed 30 days following completion of its services. The Company has not incurredsignificant obligations under customer indemnification or warranty provisionsand does not expect to incur significant obligations in the future.Accordingly, the Company does not maintain accruals for potential customerindemnification or warranty-related obligations. The indemnification agreementsthat the Company has executed with its executive officers and directors and thestatutory indemnification provisions under the laws of the State of Delawarerelating to the Company’s directors require the Company to indemnify suchofficers and directors in certain instances. The Company has not incurredobligations under these indemnification agreements and does not expect to incursignificant obligations in the future. Accordingly, the Company does notmaintain accruals for potential officer or director indemnificationobligations. The maximum potential amount of future payments that the Companycould be required to make is generally limited under the indemnificationprovisions in its customer license and service agreements, and is unlimited underthe indemnification provisions contained in the indemnification agreementsentered into with the Company’s officers and directors and the statutoryindemnification provisions under the laws of the State of Delaware relating tothe Company’s directors.**

 

**6.  BUSINESS SEGMENTS**

 

TheCompany operates in one business segment engaged in the design, development,sale and support of software infrastructure. The Company segments its productsinto two main categories; Pick-based database technology (“Databases”), whichincludes   Multi-dimensional DatabaseManagement Systems (“MDMS”), XML Data Management Servers (“XDMS”) and the PickData Provider for .NET (“PDP”); and Rapid Application Development Tools (“RADTools”). The following table represents the Net Revenue from the Company’sbusiness segment by its product lines and by office location:

 
|               |   | **Year three months ended  June 30,** |   |
|--------------------|--------|---------------------------------------|--------|
|               |   | **2003**                              |   | **2002** |   |
|               |   | **(in  thousands)**                   |   |
| **Databases:**     |   |                                  |   |   |   |
|               |   |                                  |   |   |   |
| United States      |   | $                                     | 3,460  |   | $ | 2,879 |   |
| United Kingdom     |   | 348                                   |   | 373 |   |
| France             |   | 432                                   |   | 479 |   |
|               |   | $                                     | 4,240  |   | $ | 3,731 |   |
|               |   |                                  |   |   |   |
| **RAD  Tools:**    |   |                                  |   |   |   |
|               |   |                                  |   |   |   |
| United States      |   | $                                     | 450    |   | $ | 274 |   |
| United Kingdom     |   | 222                                   |   | 298 |   |
| France             |   | 150                                   |   | 115 |   |
| Germany            |   | 347                                   |   | 295 |   |
|               |   | $                                     | 1,169  |   | $ | 982 |   |
|               |   |                                  |   |   |   |
| Total Net  Revenue |   | $                                     | 5,409  |   | $ | 4,713 |   |

 

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

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

 

Thisdiscussion and analysis of the financial statements and results of operationsshould be read in conjunction with our unaudited condensed consolidatedfinancial statements, including the related notes thereto, contained elsewherein this Form 10-QSB.

 

**OVERVIEW**

 

Wewere incorporated in the State of Delaware in August 1987. We were originallyincorporated as Blyth Holdings, Inc., and our name was changed to OmnisTechnology Corporation in September 1997. Effective December 1, 2000,we completed the acquisition of PickAx, Inc., a Delaware corporation(“PickAx”).  Concurrent with the acquisition,we changed our name to Raining Data Corporation.

 

Ourprincipal business is the design, development, sale and support of softwareinfrastructure. Our software may be categorized into four product lines:Multi-dimensional database management systems (“MDMS”), Rapid ApplicationDevelopment software tools (“RAD”), XML data management servers (“XDMS”) andPick Data Provider (“PDP”) for the Microsoft .NET development environment. Ourproducts allow customers to create and enhance flexible software applicationsfor their own needs. The MDMS products are based on the multi-dimensional datamodel and are designed to operate in environments such as Windows, Unix andLinux. Our RAD products support the full life cycle of software applicationdevelopment and are designed for rapid prototyping, development and deploymentof graphical user interface (“GUI”) client/server and web applications. The RADproducts are object-oriented and component-based, providing the ability todeploy applications on operating system platforms such as Windows, Unix andLinux, as well as database environments such as Oracle, DB2, Sybase, MicrosoftSQL Server and other Open Data Base Connectivity (“ODBC”) compatible databasemanagement systems. We intend to continue to develop and enhance our MDMS andRAD products. New product releases in all of our product lines are currently inprogress.

 

SinceApril 2001, we have changed the mix of our research and development efforts toinclude the development of technologies and products outside of our historicalmarket, specifically XML-based Internet infrastructure products. The productionrelease of our TigerLogic XDMS (“TigerLogic”) version 1.1, the first productthat resulted from these development efforts, occurred in May 2003. TigerLogicXDMS is a high-performance information infrastructure software that providesboth scalability, XA-compliant transactional integrity and fine-grain searchcapabilities typically associated with enterprise databases, as well as thedynamic extensibility, n-tier hierarchies and ease of use and deploymentusually found in data repositories and file systems.  We have filed patentapplications related to the technology utilized in the TigerLogic product andthose patents were pending as of June 30, 2003.

 

InFebruary 2003, we announced the development of our PDP product line designed tosupport the Microsoft .NET framework, and began selling an early adopterrelease of the Pick Data Provider for .NET in May 2003 to a limited andselected customer base.

 

**Products**

 

We market our products under the Raining Databrand name. Many of our products are based on the Pick Universal Data Model(“Pick UDM”), which we created, and are capable of handling data from manysources.  The Pick UDM is a corecomponent across the MDMS, XDMS and PDP product lines.  Our products also include RAD software toolsfor computer application development.

 

***MultidimensionalDatabase Management Systems Products***

 

Our MDMS products include a comprehensive set ofPick UDM based software development tools that allow the user to write, compileand run application programs. Historically, the principal advantages of themulti-dimensional database system have been

 

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simple program development, maximum flexibility,ease of use, and low total cost of ownership. Over the years, a community ofvertical market application developers using the multi-dimensional databaseplatform has emerged.

 

The MDMS product line consists principally of theD3 Data Base Management System (“D3”), which operates on systems such as IBMAIX, DG/UX, HP-UX, Linux, Windows NT, SCO UnixWare, SCO System V and SunSolaris. D3 allows application programmers to create new business solutionsoftware in less time than it normally takes in many other environments. Thiscan translate into lower costs for the developer, lower software prices for thecustomer and reduced costs of ownership for both the developer and end user.Our MDMS products also include mvEnterprise, a scalable multi-dimensional databasesolution that allows the user to leverage the capabilities of the UNIXoperating system and mvBase, a multi-dimensional database solution that runs onall Windows platforms.

 

***RAD Products***

 

The RAD product line is an object-orienteddevelopment environment that is designed to allow customers to develop anddeploy web and client/server applications. The products include Omnis Studio and Omnis Classic, both of which offercross-platform support for Windows, Mac and Linux.

 

***XDMSProducts***

 

Our XDMS product line includes TigerLogic.  TigerLogic is a mid-tier operational data server softwareproduct that simplifies and streamlines information access for XML-enabled Javaand .NET applications. TigerLogic decouples structured and unstructured datafrom back-end sources, transforms it into XML, stores aggregated views in themid-tier, and profiles and indexes them for fast retrieval. TigerLogic providesinnovative XML processing technology that boosts the performance and efficiencyof data architectures by aggregating and moving commonly requested data to themid-tier, between front-end Web Services composite applications and back-endoperational systems and legacy applications. TigerLogic uses the Pick UDM to power its underlying storage engine andallows new data to be processed in the TigerLogic data model with littleprogramming.  This creates an extensible and flexible environment enablingcompanies to leverage the full power of XML. TigerLogic supports industrystandards, including J2EE Connector Architecture, World Wide Web Consortium’sXML Schema, XSLT, SOAP and XPath specifications.

 

***PDP Products***

 

The PDP products include the Pick Data Providerfor .NET.  This product extends theintrinsic capabilities of Pick and Pick-like databases to the Microsoft .NETframework technology, allowing forease of development and deployment of applications using the Visual Studio.NETdevelopment environment while allowing access to our D3 database as well asIBM’s Universe and Unidata databases.

 

**Training Services**

 

As part of our sales efforts, we offer trainingprograms to our customers and prospective customers. These programs includeclasses designed to develop basic and advanced skills with respect to ourproducts, as well as classes designed to assist customers in the implementationand use of our products.

 

**Technical Support**

 

Customers use our products to build and deployapplications that may become a critical component of their business operations.As a result, continuing to provide customer technical support services is animportant element of our business strategy. Customers who participate in oursupport programs receive periodic maintenance releases and direct technicalsupport when required.

 

**Sales and Distribution**

 

Inthe United States, we sell our products through established distributionchannels consisting of system integrators, specialized vertical applicationsoftware developers and consulting organizations. We also sell our productsdirectly through our sales personnel to large end user organizations.

 

Outsidethe United States, we maintain direct sales offices in the United Kingdom,France and Germany. In addition, we have distributor relationships in over 25countries. Approximately 28% and 33% of our revenue came from sales through ouroffices located outside the United States for the three-month periods endedJune 30, 2003 and 2002, respectively.

 

Wesell our products in U.S. Dollars in North America, British Pounds Sterling inthe United Kingdom and Euros in Germany and France. Because we recognize revenueand expense in these various currencies but report our financial results inU.S. Dollars, changes in exchange

 

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ratesmay cause variances in our period-to-period revenue and results of operationsin future periods. Foreign exchange gains and losses have not been material toour performance to date.

 

Welicense our software on a per-server or per-user basis. Therefore, the additionof servers or users to existing systems increases our revenue from our installedbase of licenses. In addition to computer software products, we providecontinuing maintenance and services to our customers, including professionalservices, technical support and training to help plan, analyze, implement andmaintain application software based on our products.

 

### **Customers**

 

Ourcustomers may be classified into two general categories:

 

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

 

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

 

Forthe three-month periods ended June 30, 2003 and 2002, no single customeraccounted for more than 10% of our revenue.

 

**Research and Development**

 

We have devoted significant resources to theresearch and development of products and technology. We believe that our futuresuccess will depend largely on a strong development effort with respect to bothour existing and new products.  Thesedevelopment efforts have resulted in updates and upgrades to existing MDMS andRAD products and the launch of new products including the XDMS and PDP productlines.  We expect to continue ourresearch and development efforts in all product lines for the foreseeablefuture.  We intend for these efforts toimprove our operating results and increase cash flow. However, such efforts maynot result in additional new products or revenue, and we can make no assurancesthat the recently announced products or future products will be successful.

 

**Competition**

 

The data management and application developmenttools software markets in which our products compete are rapidly changing andintensely competitive. Our MDMS products compete with products developed bycompanies such as Oracle, Microsoft, IBM, and Sybase. Our Omnis line of RADdeveloper products currently encounters competition from several directcompetitors and competing development environments including Microsoft  (Visual Studio and Visual Studio .NET) andJAVA. Competition is developing inthe XML market for which our XDMS products are intended.  Companies who do or are expected to competein this market include Oracle, IBM, Microsoft, Sybase and BEA, as well as anumber of smaller companies.Our new PDP products, which are intended tosupport the Microsoft .NET framework, are subject to significant competition,primarily from Microsoft and Oracle.  Most of our competitors have significantly morefinancial, technical, marketing and other resources than we do. As a result,these competitors may be able to respond more quickly to new or emergingtechnologies, evolving markets, changes in customer requirements, and maydevote greater resources to the development, promotion and sale of theirproducts.

 

We believe that our ability to compete in thevarious markets in which our MDMS, RAD, XDMS and PDP product lines operatedepends on factors both within and outside our control, including the timing,performance and price of new products developed by both us and our competitors.Although we believe that we currently compete favorably with respect to most ofthese factors, we may not be able to maintain our competitive position,especially with respect to current or potential competitors with greaterresources than us.

 

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**Intellectual Property and Other Proprietary Rights**

 

We rely primarily on a combination of tradesecrets, 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 and PickDBi, among others.  We also have two pending U.S. patentapplications as of June 30, 2003.

 

We license our products to end users on a “rightto use” basis pursuant to a perpetual license agreement that restricts use ofproducts to a specified number of users. We generally rely on “shrink-wrap” or “click-wrap”licenses that become effective when a customer opens the package or downloadsand installs the software on its system. In order to retain exclusive ownershiprights to our software and technology, we generally provide our software inobject code 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.

 

**Backlog**

 

We generally ship software products as orders arereceived and have historically operated with little backlog. As a result, ourlicense revenue in any given quarter is dependent upon orders received andproduct shipped during the quarter. Traditionally there has been a short cyclebetween receipt of an order and shipment. Consequently, we do not believe thatour backlog as of any particular date is meaningful.

 

**Employees**

 

At June 30, 2003, we had 150 employees worldwideof which 110 were in the United States and 40 were in our internationaloffices. Of the 150 employees, approximately 45% are in research anddevelopment, 20% are in technical support, 20% are in sales and marketing and15% are in general and administrative functions.

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

Thediscussion and analysis of our financial condition and results of operations isbased on our consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America. The preparation of these financial statements requires managementto make estimates and judgments that affect the reported amounts of assets,liabilities, revenue and expenses, and the disclosure of contingentliabilities.

 

Onan on-going basis, we evaluate our estimates, including those related torevenue recognition and accounting for intangible assets and goodwill. We baseour estimates on historical experience and on various other assumptions that webelieve to be reasonable under the circumstances. Actual results may differfrom these estimates under different assumptions or conditions.

 

Wehave identified the accounting policies below as the policies critical to ourbusiness operations and the understanding of our results of operations. Webelieve the following critical accounting policies and the related judgmentsand estimates affect the preparation of our consolidated financial statements:

 

REVENUERECOGNITION. We recognize and defer revenue using the residual method pursuantto the requirements of Statement of Position No. 97-2, “Software RevenueRecognition” (“SOP 97-2”), as amended by Statement of Position No. 98-9,“Modification of SOP 97-2, Software Revenue Recognition with Respect to CertainArrangements.” Under the residual method, revenue is recognized in a multipleelement arrangement when company-specific objective evidence of fair valueexists for all of the undelivered elements in the arrangement, but does notexist for one or more of the delivered elements in the arrangement. At theoutset of the arrangement with the customer, we defer revenue for the fairvalue of our undelivered elements (e.g., maintenance) and recognize revenue forthe remainder 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.

 

UnderSOP 97-2, revenue attributable to an element in a customer arrangement isrecognized when persuasive evidence of an arrangement exists and delivery hasoccurred, provided the fee is fixed or determinable, collectibility is probableand the arrangement does not require significant customization of the software.If, at the outset of the customer arrangement, we determine that thearrangement fee is not fixed or determinable, we defer revenue recognitionuntil the arrangement fee becomes due and payable.

 

Professionalservices, maintenance and other revenue relate primarily to consultingservices, maintenance and training. Maintenance

 

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revenueis recognized 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.

 

Whenapplicable, we record revenue on certain products, such as the PDP product, ona net amount retained basis in accordance with Emerging Issues Task Force No.99-19, "Reporting Revenue Gross as a Principal verses Net as anAgent."

 

INTANGIBLE ASSETS ANDGOODWILL.  We assess the impairment of identifiableintangibles, long-lived assets and goodwill whenever events or changes incircumstances indicate that the carrying value may not be recoverable. Factorswe consider to be important which could trigger an impairment review includethe following:

 

•              Significantunderperformance relative to expected historical or projected future operatingresults;

 

•                                          Timing of our revenue, significant changes in themanner of use of the acquired assets or 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.

 

Whenwe determine that the carrying value of intangibles and other long-lived assetsmay not be recoverable based upon the existence of one or more of the aboveindicators of impairment and the carrying value of the asset cannot berecovered from projected undiscounted cash flows, we measure any impairmentbased on a projected discounted cash flow method using a discount ratedetermined by our management to be commensurate with the risk inherent in thecurrent business model. Significant management judgment is required indetermining whether an indicator of impairment exists and in projecting cashflows.

 

**Prior to the adoption of SFAS No. 142, we assessedimpairment of goodwill in the same manner as other intangibles and long-livedassets as described above.  Followingthe adoption of SFAS No. 142, we updated our policy for assessing anddetermining impairment of goodwill.  TheSFAS No. 142 goodwill impairment model is a two-step process. The first steprequires identification of potential impairment by comparing the fair value ofa reporting unit with its net book value (or carrying amount), includinggoodwill. If the fair value exceeds the carrying amount, goodwill of thereporting unit is considered not impaired and the second step of the impairmenttest is unnecessary. If the carrying amount of a reporting unit exceeds itsfair value, the second step of the goodwill impairment test is performed tomeasure the amount of impairment loss, if any. The second step of the goodwillimpairment test compares the implied fair value of the reporting unit’sgoodwill with the carrying amount of that goodwill. If the carrying amount ofthe reporting unit’s goodwill exceeds the implied fair value of that goodwill,an impairment loss is recognized in an amount equal to that excess. The impliedfair value of goodwill is determined in the same manner as the amount ofgoodwill recognized in a business combination. That is, the fair value of thereporting unit is allocated to all of the assets and liabilities of that unit(including any unrecognized intangible assets) as if the reporting unit hadbeen acquired in a business combination and the fair value of the reportingunit was the purchase price paid to acquire the reporting unit.**

** **

**Determining the fair value of a reporting unit under thefirst step of the goodwill impairment test and determining the fair value ofindividual assets and liabilities of a reporting unit (including unrecognizedintangible assets) under the second step of the goodwill impairment test isjudgmental in nature and often involves the use of significant estimates andassumptions. These estimates and assumptions could have a significant impact onwhether or not an impairment charge is recognized and the magnitude of any suchcharge. Estimates of fair value are primarily determined using discounted cashflows and are based on our best estimate of future revenue and operating costsand general market conditions. These estimates are subject to review andapproval by management. This approach uses significant assumptions, includingprojected future cash flows (including timing), the discount rate reflectingthe risk inherent in future cash flows, and a terminal growth rate.**

 

**RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30,2003 AND 2002**

 

**REVENUE**

 

NET REVENUE. Our revenue is derived principally from two sources: feesfrom software licensing and fees for services, including consulting, training,maintenance and technical support. Total net revenue increased 15% to$5.4 million for the three months ended June 30, 2003 from$4.7 million for the same three-month period in the prior fiscal year. Forthe three-month period ended June 30, 2003,

 

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license revenue increased 8% to $2.3 million from$2.1 million for the same period in the prior fiscal year, while servicesrevenue increased 20% to $3.1 million from $2.6 million for the sameperiod in the prior fiscal year.

 

Weview the MDMS and RAD markets in which we operate to be relatively stable andconsistent from period to period and anticipate that our revenue on an annualbasis from those products will remain stable for the foreseeable future.Fluctuations in revenue between quarters or year to year are primarily theresult of changes in the mix of software licensing and service fees as well asorder timing and customer order patterns. We do not view the changes inyear-to-year revenue for the three-month periods ended June 30, 2003 and 2002to be representative of market trends; however, we have continued to experiencean increased mix of service revenue in recent quarters. In the longer term, weexpect that the MDMS and RAD markets will eventually contract as customersadopt newer technologies and, therefore, the revenue generated from sales ofour products, which compete in such markets, will decrease.

 

InFebruary 2003, we announced the development of our PDP product line designed tosupport the Microsoft .NET framework. We began selling an early adopter release of the Pick Data Provider for..NET in May 2003 to a limited and selected customer base.

 

InMay 2003, we announced the production release of our first XDMS product.  We can make no assurances as to the marketacceptance or the ability for this or any new product line to generateadditional revenue. While we are committed to research and development effortsthat are designed to allow us to penetrate new markets and generate new sourcesof revenue, such efforts may not result in additional products or revenue, andany new products may not achieve market acceptance. In addition, our ability tocontinue our research and development efforts at anticipated levels is subjectto the availability of adequate liquidity and other risks described below.

 

**COST OF REVENUE**

 

COSTOF LICENSE REVENUE. Cost of license revenue is comprised of direct costsassociated with software license sales including software packaging,documentation and physical media costs. Total cost of license revenue remainedstable at less than $0.1 million for the three months ended June 30, 2003 and2002. As a percentage of license revenue, cost of license revenue increased toapproximately 4% for the three months ended June 30, 2003 from 2% of licenserevenue for the same three-month period in the prior fiscal year.  This increase, although small in absolutedollars, resulted from the timing of certain overhead costs and costallocations. We anticipate that the cost of license revenue, as a percentage oflicense revenue and in absolute dollars, will remain relatively stable infuture periods.

 

COSTOF SERVICE REVENUE. Cost of service revenue includes consulting, technicalsupport and training, all of which consist primarily of personnel relatedcosts. Total cost of service revenue remained relatively stable at $0.5 millionfor the three months ended June 30, 2003 and 2002. At the same time, cost ofservice revenue decreased to 16% of service revenue for the three months endedJune 30, 2003 from 20% of service revenue for the same three-month period inthe prior fiscal year.  The decrease incost of service revenue as a percentage of service revenue is the result of arelatively stable cost structure and increasing revenues. We anticipate thatthe cost of service revenue as a percentage of service revenue and in absolutedollars will remain relatively stable in future periods.

 

**OPERATING EXPENSES**

 

SELLINGAND MARKETING. Selling and marketing expense consists primarily of salaries,benefits, sales commissions, travel, information technology and overhead costsfor our sales and marketing personnel. Selling and marketing expense increased30% to $1.5 million for the three months ended June 30, 2003 from$1.1 million for the same three-month period in the prior fiscal year.Sales and marketing expense increased to 27% of total revenue for the threemonths ended June 30, 2003 from 24% of total revenue for the same three-monthperiod in the prior fiscal year. The increase in selling and marketing expensewas primarily due to increased marketing efforts and an increase in staffing inconnection with, and in advance of, the release of the XDMS and PDP products.We anticipate that selling and marketing costs related to the XDMS and PDPproducts will continue to increase as we develop the sales channel for thesenew products and if customer acceptance of these products increases.  We believe the sales and marketing costsassociated with the MDMS and RAD product sales will remain relatively stable infuture periods.  In addition, if ourcontinued research and development efforts are successful, including our XDMSproducts, and new products or services are created, we may incur increasedsales and marketing expense to promote those new products in future periods.

 

RESEARCHAND DEVELOPMENT. Research and development expense consists primarily ofsalaries and other personnel-related expense for engineering personnel,overhead costs and costs of contractors. Research and development expenseincreased 34% to $2.0 million for the three months ended June 30, 2003from $1.5 million for the three-month period ended June 30, 2002. Researchand development expense increased to 36% of total revenue for the three monthsended June 30, 2003 from 31% of total revenue for the same three-month periodin the prior fiscal year. Since the beginning of fiscal year 2002, we changedthe mix of our research and development efforts to include technologies,markets and products outside of our historical market, specifically XML-basedInternet infrastructure products.  In May2003 we announced the production release of our first XDMS product thatresulted from these efforts.  Inaddition, we announced the development of our PDP product line with the releaseof the Pick Data Provider for .NET.  Wehave seen an increase in our

 

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spendingrelated to our development efforts as the products reach production release andwe refine and add certain features and functionality to these products.  In addition, we continue to incur costsrelated to the ongoing development and enhancement of all of our productlines.  These efforts include updatesto, and major releases with respect to, all of our product lines, as well asother new features such as the release of Omnis for SAP, which was announced inJuly 2003.  We are committed to ourresearch and development efforts and expect research and development expense inabsolute dollars to remain stable at the current quarter levels in futureperiods or increase if liquidity improves and we believe that additionalspending is warranted. Such efforts may not result in additional new productsand any new products, including the announced XDMS products, may not generatesufficient revenue, if any, to offset the research and development expense.

 

GENERALAND ADMINISTRATIVE. General and administrative expense consists primarily ofcosts associated with our finance, human resources, legal and otheradministrative functions. These costs consist principally of salaries and otherpersonnel-related expenses, professional fees, provision for doubtful accounts,equipment depreciation, audit fees, legal fees, legal settlement costs andoverhead costs. General and administrative expense decreased 32% to$0.9 million for the three months ended June 30, 2003 from $1.3 millionfor the same three-month period in the prior fiscal year. General andadministrative expense decreased to 17% of total revenue for the three monthsended June 30, 2003 from 29% of total revenue for the three months ended June30, 2002. This decrease in general and administrative spending is a result ofcontinued cost controls. We are focused on the continued reduction in generaloverhead costs and intend to use any savings from such reduction for ourongoing research and development and sales and marketing efforts.  During the latter portion of fiscal year2002 and into fiscal year 2003, we underwent significant changes in ourmanagement, including the hiring of a new chief executive officer, chief financialofficer and vice president of product development. Since that time, we havebeen focused on streamlining the operations, including implementingstandardized policies and procedures throughout the organization with increasedoversight from management and necessary head count reductions. Additionally, wesettled various outstanding legal matters. This resulted in increased general and administrative costs in theperiods incurred. We anticipate that general and administrative costs, inabsolute dollars, will remain relatively stable or slightly decrease in futureperiods now that cost reduction efforts have been implemented and all materiallitigation has been settled.

 

STOCK-BASEDCOMPENSATION. Stock-based compensation expense decreased 73% to $50,000 in thethree-month period ended June 30, 2003 from $0.2 million for the three-monthperiod ended June 30, 2002. Stock-based compensation expense decreased to 1% oftotal revenue for the three months ended June 30, 2003 from 4% of total revenuefor the same three-month period in the prior fiscal year. The decrease instock-based compensation is attributable primarily to cancellations of optionsfor terminated employees, options nearing the end of their vesting periods, nonew options being granted with an exercise price below fair value at the date ofgrant, and fewer options granted to non-employees. We do not anticipate anysignificant increases in stock-based compensation expense in future periods andfurther reductions are likely as existing options continue to vest.

 

AMORTIZATIONOF GOODWILL AND INTANGIBLE ASSETS. Amortization of identifiable intangibleassets of $0.7 million was recorded for each of the three-month periods endedJune 30, 2003 and 2002. Under SFAS 142, goodwill is not amortized;however, the underlying assets are tested annually for impairment. We continueto amortize identifiable intangible assets in accordance with their determineduseful life, estimated at four years.

 

**OPERATING INCOME (LOSS)**

 

OPERATINGINCOME (LOSS). We recorded operating losses of $0.2 million and $0.6 million forthe three-month periods ended June 30, 2003 and 2002, respectively.

 

OTHERINCOME (EXPENSE). Other expense consists primarily of net interest expense and,to a much lesser extent, gains and losses on foreign currency transactions.Other expense decreased to $0.3 million in the three-month period ended June30, 2003 from $1.0 million in the same three-month period in the priorfiscal year.  This decrease wasprimarily the result of the reduction of the interest rate as a result of therestructuring of our debt in January 2003. We expect other income (expense) to remain stable in future periods.

 

**NET LOSS**

 

Thenet loss for the three-month period ended June 30, 2003 was $0.5 million, or$0.03 per share, as compared to a net loss of $1.7 million, or $0.10 pershare, for the three-month period ended June 30, 2002.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Inconnection with the acquisition of PickAx, we assumed a Secured Promissory Noteissued to Astoria Capital Partners, L.P. (“Astoria”) dated November 30, 2000 inthe amount of $18,525,417. In January 2003, we entered into a Note Exchange Agreement (the “ExchangeAgreement”) with Astoria to replace the existing Secured Promissory Note, asamended, with a Convertible Subordinated Note. Under

 

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theterms of the Exchange Agreement, the Secured Promissory Note was exchanged andreplaced with a Convertible Subordinated Note having a principal amount of$22.1 million, which principal amount was equal to the outstanding principaland accrued interest payable on the Secured Promissory Note as of the date ofthe Exchange Agreement.  The ConvertibleSubordinated Note is convertible into common stock at any time, at the optionof Astoria, at a price of $5.00 per share. The Convertible Subordinated Notematures May 30, 2008, extending the May 30, 2003 maturity date of the SecuredPromissory Note. The Company may not redeem the Convertible Subordinated Noteuntil January 2005.   The interest rateof the Convertible Subordinated Note is 5% per annum as compared to an interestrate of 10% per annum under the Secured Promissory Note.  The interest is payable quarterly at ouroption in cash or through increases to the outstanding principal of theConvertible Subordinated Note. Forthe periods ended March 31, 2003 and June 30, 2003, we issued payment in kind(“PIK”) notes to Astoria for the accrued interest due in the aggregate amountof $460,225.  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.  Unlike the Secured Promissory Note, theConvertible Subordinated Note is not secured by our assets.

 

Inaddition to holding the Convertible Subordinated Note, Astoria is a major stockholderof ours, holding all of our preferred stock and a majority of our outstandingcommon stock. Richard W. Koe, a member of our Board of Directors, serves as theManaging General Partner for Astoria. Carlton H. Baab, our President and Chief Executive Officer, servedas a Managing Principal of Astoria until taking a formal leave of absence tojoin us in August 2001.  Mr. Baabis an employee of Astoria Capital Management, which is a general partner of Astoria.  Gerald F. Chew, a member of our Board ofDirectors, is the cousin of Mr. Koe.

 

AtJune 30, 2003, we had $4.9 million in cash. We believe that our cash flow from operating activities will besufficient to meet our operating and capital expenditure requirements for theremainder of the fiscal year ending March 31, 2004 and through theforeseeable future. We are committed to research and development efforts thatare intended to allow us to penetrate new markets and generate new sources ofrevenue and improve operating results. However, our research and development efforts have required, and willcontinue to require, cash outlays without the immediate or short-term receiptof related revenue. Our ability to service our long-term debt and meet ourexpenditure requirements is dependent upon our future financial performance,which will be affected by, among other things, prevailing economic conditions,our ability to penetrate new markets and attract new customers, marketacceptance of our new and existing products and services, the success of researchand development efforts and other factors beyond our control.

 

Ifour future financial performance improves, we may seek to take advantage ofopportunities in the equity and capital markets to raise additional funds foroperating needs or to pay down our debt to Astoria.  We are notpermitted to redeem the Convertible Subordinated Note until January 2005.  The Convertible Subordinated Note isconvertible into common stock at any time, at the option of Astoria, at a priceof $5.00 per share.  If the Convertible Subordinated Note is convertedinto common stock, our stockholders may experience substantial dilution.

 

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

 

InJuly 2002, we settled all claims with General Automation, Inc., dba GAeXpress (“General Automation”), for the sum of $2,000,000, which has been paidin full. We paid $1,000,000 of this amount concurrently with the signing of theSettlement Agreement and Mutual Release in July 2002; $400,000 was paid inDecember 2002; and the remaining $600,000 was paid in June 2003.

 

Wehad no material commitments for capital expenditures at June 30, 2003.

 

Wehad net cash used in operating activities of $0.4 million and $1.4 for thethree-month periods ended June 30, 2003 and 2002, respectively. During thethree-month period ending June 30, 2003, we had a net reduction in accountspayable and accrued liabilities of $0.9 million, which included the $0.6million paid to General Automation.

 

Ourearnings before interest, taxes, depreciation and amortization (EBITDA) was$0.6 million, or 11% of total net revenue, and $0.3 million, or 6% oftotal net revenue, for the three-month periods ended June 30, 2003 and 2002,respectively. The improvement in EBITDA was primarily due to the increase inrevenue and cost reductions.  EBITDA isdefined as operating income (loss) with an add-back for depreciation, goodwilland non-goodwill amortization, and non-cash stock-based compensationexpense.  The following table reconcilesEBITDA to the reported operating loss:

 

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**RAINING DATA CORPORATION AND SUBSIDIARIES**

**RECONCILIATION OF EBITDA TO OPERATING LOSS**

**(Unaudited)**

 
|                                        |   | **For the  three months  ended June,** |   |
|---------------------------------------------|--------|----------------------------------------|--------|
| **In  $000’s**                         |   | **2003**                               |   | **2002** |   |
|                                        |   |                                   |   |   |   |
| Reported  operating loss                    |   | $                                      | (220   | ) | $ | (641 | ) |
| Depreciation and  non-goodwill amortization |   | 91                                     |   | 92 |   |
| Stock-based  compensation                   |   | 50                                     |   | 183 |   |
| Goodwill and  intangible amortization       |   | 650                                    |   | 650 |   |
|                                        |   |                                   |   |   |   |
| EBITDA                                      |   | $                                      | 571    |   | $ | 284 |   |

 

EBITDAdoes not represent funds available for management’s discretionary use and isnot intended to represent cash flow from operations. EBITDA should not beconstrued as a substitute for operating income or as a better measure ofliquidity than cash flow from operating activities, which is determined inaccordance with generally accepted accounting principles (“GAAP”). EBITDAexcludes components that are significant in understanding and assessing ourresults of operations and cash flows. In addition, EBITDA is not a term definedby GAAP and as a result our measure of EBITDA might not be comparable to similarlytitled measures used by other companies.

 

However,we believe that EBITDA is relevant and useful information, which is oftenreported and widely used by analysts, investors and other interested parties inour industry. Accordingly, we are disclosing this information to permit a morecomprehensive analysis of our operating performance, to provide an additionalmeasure of performance and liquidity and to provide additional information withrespect to our ability to meet future debt service, capital expenditure andworking capital requirements. See the Unaudited Condensed ConsolidatedFinancial Statements and notes thereto contained elsewhere in this report formore information.

 

OurEBITDA financial information is also comparable to cash provided by (used for)operating activities.  The table belowreconciles EBITDA to the GAAP disclosure of net cash used in operatingactivities:

 

**RAINING DATA CORPORATION AND SUBSIDIARIES**

**RECONCILIATION OF EBITDA TO NET CASH PROVIDED BY (USEDFOR) OPERATING ACTIVITIES**

**(Unaudited)**

 
|                                               |   | **For the three months  ended June 30,** |   |
|----------------------------------------------------|--------|------------------------------------------|--------|
| **In $000’s**                                 |   | **2003**                                 |   | **2002** |   |
|                                               |   |                                     |   |   |   |
| Net cash used for operating activities             |   | $                                        | (413   | ) | $ | (1,379 | ) |
|                                               |   |                                     |   |   |   |
| Interest expense, net                              |   | 296                                      |   | 1,111 |   |
| Other income, net                                  |   | (16                                      | )      | (73 | ) |
| Change in accounts receivable                      |   | 58                                       |   | 448 |   |
| Change in other assets                             |   | (36                                      | )      | 40 |   |
| Change in accounts payable and accrued liabilities |   | 912                                      |   | 1,104 |   |
| Change in deferred revenue                         |   | (209                                     | )      | (257 | ) |
| Note discount amortization                         |   | (21                                      | )      | (710 | ) |
|                                               |   |                                     |   |   |   |
| EBITDA                                             |   | $                                        | 571    |   | $ | 284 |   |

 

 

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**RISK FACTORS**

 

Weoperate in a rapidly changing environment that involves numerous risks anduncertainties. The following section lists some, but not all, of these risksand uncertainties that may have a material adverse effect on our business,financial condition and results of operation.

 

**IF WE DO NOT DEVELOP NEW PRODUCTS AND ENHANCE EXISTINGPRODUCTS TO KEEP PACE WITH RAPIDLY CHANGING TECHNOLOGY AND INDUSTRY STANDARDS,OUR REVENUE MAY DECLINE.**

 

Wehave devoted significant resources to the research and development of productsand technology. We believe that our future success will depend in large part ona strong research and development effort with respect to both our existing andnew products. Since the start of fiscal year 2002, we have changed the mix ofour research and development efforts to include technologies, markets andproducts outside of our historical market, specifically XML-based Internetinfrastructure products.  In May 2003,we announced the production release of our first XDMS product which resultedfrom these development efforts. Additionally, in February 2003, we announced the development of our PDPproduct line designed to support the Microsoft .NET framework and began sellingour Pick Data Provider for .NET in limited release in May 2003. While we intendfor these efforts to improve our operating results and increase cash flow, suchefforts may not result in new products or revenue, and any new products that doresult may not be successful. The development of new or enhanced softwareproducts is a complex and uncertain process requiring high levels of innovationfrom the designers as well as accurate anticipation of customer and technicaltrends by the marketing staff. In developing new products and services, we mayfail to develop and market products that respond to technological changes orevolving industry standards in a timely or cost-effective manner, or experiencedifficulties that could delay or prevent the successful development,introduction and marketing of these new products. The development andintroduction of new or enhanced products also requires us to manage thetransition from older products in order to minimize disruptions in customerordering patterns and to ensure that adequate supplies of new products can bedelivered to meet customer demand. Failure to develop and introduce newproducts, or enhancements to existing products, in a timely manner in responseto changing market conditions or customer requirements, or lack of customeracceptance of our products, will materially and adversely affect our business,results of operations and financial condition.

 

**THE CONCENTRATION OF OUR STOCK OWNERSHIP AND THE DEBT OWED TOASTORIA GIVE CERTAIN STOCKHOLDERS SIGNIFICANT CONTROL OVER OUR BUSINESS.**

 

As ofJune 30, 2003, Astoria and Rockport Group, LP (“Rockport”) togetherbeneficially owned approximately 74% of our outstanding common stock. As ofsuch date, Astoria also owned all of our outstanding preferred stock. Inaddition, as of June 30, 2003, the Convertible Subordinated Note issued toAstoria had a balance of approximately $22.6 million in principal andaccrued interest maturing May 30, 2008. Richard W. Koe, a member of our Board of Directors, serves as theManaging General Partner for Astoria.  Carlton H.Baab, our President and Chief Executive Officer, served as a Managing Principalof Astoria until taking a formal leave of absence to join us inAugust 2001.  Mr. Baab is anemployee of Astoria Capital Management, which is a general partner of Astoria.  Mr. Wagner, a member of our Board ofDirectors, is the Managing Director of Rockport.  This concentration of stock ownership, together with theoutstanding debt, would allow Astoria, acting alone, or Rockport and Astoria,acting together, to block any actions that require approval of ourstockholders, including the election of members to the Board of Directors andthe approval of significant corporate transactions. Also, Astoria, actingalone, or Rockport and Astoria, acting together, could approve certaincorporate actions without the consent of the other stockholders. Moreover, thisconcentration of ownership may delay or prevent a change in control.

 

**BECAUSE THE MARKET FOR OUR MDMS AND RAD PRODUCTS ISRELATIVELY STABLE, OUR REVENUE MAY DECLINE IF WE CANNOT MAINTAIN OUR SALES TOEXISTING CUSTOMERS OR GENERATE SALES TO NEW CUSTOMERS.**

 

Webelieve that the markets for our MDMS and RAD products in which we currentlyoperate 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

 

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orRAD markets decline, our revenue may be adversely affected. In the longer term,it is expected that the MDMS and RAD markets will eventually contract ascustomers adopt newer technologies.

 

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

 

Webelieve that our cash flow from operating activities will be sufficient to meetour operating and capital expenditure requirements through the fiscal yearending March 31, 2004 and the foreseeable future. Our ability to meetour expenditures and service our debt obligations is dependent uponour future financial performance, which will be affected by, among otherthings, prevailing economic conditions, our ability to penetrate new marketsand attract new customers, market acceptance of our new and existing productsand services, the success of research and development efforts and other factorsbeyond our control.  As described above, in January 2003, we entered intothe ExchangeAgreement with Astoria to replace the existing Secured Promissory Note, whichwas due May 2003, with a Convertible Subordinated Note, which is due andpayable in May 2008.  The ConvertibleSubordinated Note bears interest at 5% per annum and is convertible into commonstock by Astoria at any time at a price of $5.00 per share. If we are unable topenetrate new markets, generate new sources of revenue or otherwise improve ouroperating results, we may be unableto pay down our debt to Astoria or to access opportunities in the equity and capitalmarkets to raise additional funds for operating needs.  Given the subordinated nature of the Convertible Subordinated Note, we may seek to obtain a bank line of credit foroperating purposes.  However, no assurance can be given that additionalfinancing will be available or that, if available, such financing will be onterms favorable to us.

 

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

 

Asof June 30, 2003, we had 17,997,720 outstanding shares of common stock, ofwhich approximately 10,500,000 shares were restricted securities held byAstoria and other holders. Restricted securities may be sold in the publicmarket only if they are registered or if they qualify for an exemption fromregistration promulgated under the Securities Act of 1933, as amended. Atpresent, all of our outstanding restricted securities are either entitled to registrationrights or eligible for public sale under Rule 144, subject to volumelimitations and other requirements of Rule 144.   If Astoria or other holders decide to exercise their demandregistration rights, we would incur costs and expenses associated with theregistration of securities. Furthermore, sales of a substantial number ofshares by Astoria or other securities holders in the public market, or theperception that those sales may occur, could cause the market price of ourcommon stock to decline. In addition, if we register shares of our common stockin connection with a public offering of securities, we may be required toinclude shares of restricted securities in the registration, which may have anadverse effect on our ability to raise capital.

 

**OUR FAILURE TO COMPETE EFFECTIVELY MAY HAVE AN ADVERSE IMPACTON OUR OPERATING RESULTS.**

 

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

 

Wecurrently face competition from a number of sources, including several largevendors that develop and market databases, development tools, decision supportproducts and consulting services. Our MDMS products compete with productsdeveloped by companies such as Oracle, Microsoft, IBM and Sybase. Our Omnisline of RAD developer products currently encounters competition from severaldirect competitors and competing development environments including Microsoft(Visual Studio and Visual Studio .NET) and JAVA.  Competition is developing in the XML market for which our XDMSproducts are intended.  Companies who door are expected to compete in this market include Oracle, IBM, Microsoft,Sybase and BEA, as well as a number of smaller companies. Our new PDP products,which are intended to support the Microsoft .NET framework, are subject tosignificant competition, primarily from Microsoft and Oracle. Additionally, aswe expand our business, we expect to compete with a different group ofcompanies, including smaller, highly focused companies offering single products.

 

Mostof our competitors have significantly more financial, technical, marketing andother resources than we do. As a result, these competitors may be able torespond more quickly to new or emerging technologies, evolving markets, changesin customer requirements, and may devote greater resources to the development,promotion and sale of their products.

 

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

 

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

 

•                                          the size and timing of customer orders;

 

•                                          changes in pricing policies by us or ourcompetitors;

 

•                                          our ability to develop, introduce, and market newand enhanced versions of our products;

 

•                                          the number, timing, and significance of productenhancements 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.

 

Weoperate without a significant backlog of orders. As a result, the quarterlysales and operating results in any given quarter are dependent, in large part,upon the volume and timing of orders booked and products shipped during thatquarter. Accordingly, we may be unable to adjust spending in a timely manner tocompensate for any unanticipated decrease in orders, sales or shipments.Therefore, any decline in demand for our products and services, in relation tothe forecast for any given quarter, could materially and negatively impact theresults of our operations. As a result, we expect our quarterly operatingresults to continue to fluctuate, which may cause our stock price to bevolatile. In addition, we believe that period-to-period comparisons of ouroperating results should not be relied upon as indications of futureperformance.

 

**THE SUCCESS OF OUR BUSINESS DEPENDS IN PART UPON OUR ABILITYTO RECRUIT, INTEGRATE AND RETAIN KEY PERSONNEL AND MANAGEMENT.**

 

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

 

**OUR PRODUCTS HAVE A LONG SALES CYCLE, WHICH COULD RESULT INDELAYS IN THE RECEIPT OF REVENUE.**

 

Thesales cycle for our MDMS, RAD and PDP products typically ranges from three tosix months or longer and the sales cycle for our XDMS products is anticipatedto be significantly longer since these new products are just beginning to beadopted by the marketplace.  Ourproducts are typically used by application developers, system integrators andvalue added resellers to develop applications that are critical to theircorporate end user’s business. Because the purchases of our products are oftenpart of an end user’s larger business process, re-engineering initiative, orimplementation of client/server or web-based computing, the end usersfrequently view the purchase of our products as part of a long-term strategicdecision regarding the management of their workforce related operations andexpenditures. Thus, this sometimes results in end users taking a significantperiod of time to assess alternative solutions by competitors or to defer apurchase decision as a result of an unrelated strategic issue beyond ourcontrol. We will continue to educate potential customers about the uses andbenefits of our products and services, as well as the integration of ourproducts and services with additional software applications. We may experiencethese and additional delays in the future.

 

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

 

Our enterpriseapplications software may contain undetected errors or failures when firstintroduced or as new versions are released. This includes our XDMS and PDPproducts, which are at higher risk given these products are in the earlieststages of the product life cycle. This may result in loss of, or delay in,market acceptance of our products and could harm our reputation and ourbusiness. Undetected errors or failures in computer software programs are notuncommon. While we make every effort to thoroughly test our software, in theevent that we experience significant software errors in future releases, wecould experience delays in release, customer dissatisfaction and lost revenue.Any of these errors or defects could harm our business.

 

**OUR GLOBAL OPERATIONS EXPOSE US TO ADDITIONAL RISKS ANDCHALLENGES ASSOCIATED WITH CONDUCTING BUSINESS INTERNATIONALLY.**

 

Weoperate on a global basis with offices or distributors in Europe, Africa, Asia,Latin America, South America, Australia and North America. Approximately 28% ofour revenue for the three-month period ended June 30, 2003 was generated fromour international offices. We face several risks inherent in conductingbusiness internationally, including but not limited to the following:

 

•                                          fluctuations in interest rates or currencyexchange rates;

 

•                                          language and cultural differences;

 

•                                          local and governmental requirements;

 

•                                          difficulties and costs of staffing and managinginternational operations;

 

•                                          differences in intellectual property protections;

 

•                                          difficulties in collecting accounts receivable andlonger collection periods;

 

•                                          seasonal business activities in certain parts ofthe world;

 

•                                          trade policies; and

 

•                                          the impact of SARS in Asia and in other areas ofthe world.

 

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

 

**THE FAILURE OF OUR PRODUCTS TO CONTINUE TO CONFORM TOINDUSTRY STANDARDS MAY HARM OUR OPERATING RESULTS.**

 

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

 

**THE INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY COULD HARMOUR ABILITY TO COMPETE.**

 

Ourability to compete successfully will depend, in part, on our ability to protectour proprietary technology and operations without infringing upon the rights ofothers. We may fail to do so. In addition, the laws of certain countries inwhich our products are, or may be, licensed may not protect our proprietaryrights to the same extent as the laws of the United States. We rely primarilyon a combination of trade secret, copyright and trademark laws and contractualprovisions to protect our proprietary rights. In addition to trademark andcopyright protections, we license our products to end users on a “right to use”basis pursuant to a perpetual license agreement that restricts use of productsto a specified number of users. We generally rely on “shrink-wrap” or“click-wrap” licenses that become effective when a

 

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customeropens the package or downloads and installs software on its system. In order toretain exclusive ownership rights to our software and technology, we generallyprovide our software in object code only, with contractual restrictions oncopying, disclosure and transferability. There can be no assurance that theseprotections will be adequate, or that our competitors will not independentlydevelop technologies that are substantially equivalent or superior to ourtechnology.

 

**THIRD PARTIES COULD ASSERT THAT OUR SOFTWARE PRODUCTS ANDSERVICES INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH COULD RESULT INCOSTLY LITIGATION, CAUSE PRODUCT SHIPMENT DELAYS, PROHIBIT PRODUCT LICENSING ORREQUIRE US TO ENTER INTO ROYALTY OR LICENSING AGREEMENTS.**

 

Therehas been a substantial amount of litigation in the software industry regardingintellectual property rights. Third parties may claim that our current orpotential future products and services infringe upon their intellectualproperty. We expect that software product developers and providers of softwareapplications will increasingly be subject to infringement claims as the numberof products and competitors in our industry segment grow and the functionalityof products in different industry segments overlap. Any claims, with or withoutmerit, could be time consuming, result in costly litigation, cause productshipment delays, prohibit product licensing or require us to enter into royaltyor licensing agreements. Royalty or licensing agreements, if required, may notbe available on terms acceptable to us or at all, which could seriously harmour business.

 

ITEM 3.  CONTROLS AND PROCEDURES

 

**EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES**

 

The evaluation of ourdisclosure controls and procedures and internal control over financialreporting included a review of their objectives and processes, implementationand effect on the information generated for use in this report. In the courseof this evaluation, we sought to identify any significant deficiencies ormaterial weaknesses in our controls, and whether we had identified any acts offraud involving personnel who have a significant role in our internal controls,and to confirm that any necessary corrective action, including processimprovements, were being undertaken. The overall goals of these evaluationactivities are to monitor our disclosure and internal control over financialreporting and to make modifications as necessary. We intend to maintain thesecontrols as processes that may be appropriately modified as circumstanceswarrant.

 

Ourprincipal executive officer and principal financial officer have concluded thatour disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (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 andreported within the time periods specified in Securities and ExchangeCommission rules and forms.

 

**CHANGES IN INTERNAL CONTROLS**

 

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

 

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.

 

**PART II. OTHER INFORMATION**

 

ITEM 1.  LEGAL PROCEEDINGS

 

Weare subject from time to time to claims and suits arising in the ordinarycourse of business.  As of June 30,2003, we were not a party to any material litigation, claim or suit.

 

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ITEM 5.  OTHER INFORMATION

 

Inaccordance with Section 10A(i)(2) of the Securities Exchange Act of 1934, asadded by Section 202 of theSarbanes-Oxley Act of 2002, we areresponsible for listing the non-audit servicesapproved in the three months ended June 30, 2003 by the company’sAudit Committee to be performed by our external auditor. Non-audit services are defined as services other than thoseprovided in connection with an audit or a review of our financialstatements. During the three-month period ended June 30, 2003, no such serviceswere approved or contemplated by the Audit Committee.

 

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:                                                                                                                                               |

 

OnMay 20, 2003, we filed a Current Report on Form 8-K, reporting under Item9 Regulation FD Disclosure (Information Furnished Pursuant to Item12.  Results of Operations and Financial Condition) that we had issued apress release on May 20, 2003 announcing our financial results for the fourthquarter and fiscal year ended March 31, 2003 and certain other information.

 

**SIGNATURES**

 

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|  Date:   August 13, 2003 | **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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