U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Mark One)
[X] Quarterly Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2001
------------------
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Exchange Act
For the transition period from _________ to _________
Commission File number 0-16449
RAINING DATA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-3046892
(State of Incorporation) (IRS Employer Identification No.)
17500 Cartwright Road
Irvine, CA 92614
(Address of principal executive offices)
(949) 442-4400
(Registrant's telephone number)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of March 14, 2002 there were 17,870,266 shares of registrant's Common Stock,
$.10 par value, outstanding.
EXPLANATORY NOTE
On February 14, 2002, the Company announced that it would restate its financial
statements for the fiscal year ended March 31, 2001, and each of the quarters in
the six quarterly periods ended September 30, 2001, due to the misapplication of
certain accounting standards. This amended filing contains restated financial
information and related disclosures for the year ended March 31, 2001 and the
three and six months ended September 30, 2001 and 2000, and reflects, where
appropriate, changes as a result of the restatements.
This amendment does not otherwise attempt to update the information in the
originally filed Form 10-QSB to reflect events occurring after the original
filing date.
RAINING DATA CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
PAGE NO.
--------
Item 1. Financial Statements:
Unaudited Consolidated Balance Sheets - 3
September 30, 2001 and March 31, 2001
Unaudited Consolidated Statements of Operations - 4
Three and six months ended September 30, 2001 and 2000
Unaudited Consolidated Statements of Cash Flows - 5
Six months ended September 30, 2001 and 2000
Condensed Notes to Unaudited Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RAINING DATA CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
Restated Restated
September 30, March 31,
2001 2001
------------- -------------
(unaudited)
ASSETS
Current Assets
Cash $ 3,409,000 $ 2,424,000
Trade Accounts Receivable-less allowance for doubtful accounts
of $328,000 at September 30, 2001 and $156,000
at March 31, 2001 2,557,000 2,502,000
Other Current Assets 165,000 263,000
------------- -------------
Total Current Assets 6,131,000 5,189,000
Property, Furniture and Equipment-net 1,178,000 1,403,000
Intangible Assets-net 9,740,000 11,384,000
Goodwill-net 30,130,000 34,610,000
Other Assets 75,000 269,000
------------- -------------
Total Assets $ 47,254,000 $ 52,855,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 1,379,000 $ 1,733,000
Accrued Liabilities 3,748,000 3,094,000
Deferred Revenue 4,383,000 3,274,000
Current Portion of Long-Term Debt 160,000 328,000
------------- -------------
Total Current Liabilities 9,670,000 8,429,000
Long-Term Debt, net of Current Portion 17,581,000 15,758,000
------------- -------------
Total Liabilities 27,251,000 24,187,000
Commitments and Contingencies -- --
Stockholders' Equity
Preferred Stock: $1.00 par value; 300,000 shares
authorized, issued, and outstanding 300,000 300,000
Common Stock: $0.10 par value; 30,000,000 shares
authorized, 17,558,538 issued, and outstanding
at September 30, 2001; 15,716,090 issued and
outstanding at March 31, 2001 1,756,000 1,572,000
Additional Paid-in Capital 94,393,000 91,921,000
Deferred Stock-Based Compensation (1,752,000) (2,073,000)
Accumulated Other Comprehensive Income 713,000 1,216,000
Accumulated Deficit (75,407,000) (64,268,000)
------------- -------------
Total Stockholders' Equity 20,003,000 28,668,000
------------- -------------
Total Liabilities and Stockholders' Equity $ 47,254,000 $ 52,855,000
============= =============
See accompanying notes to the unaudited consolidated financial statements.
RAINING DATA CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Restated Restated
Three Months Ended Six Months Ended
September 30, September 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net Revenue
License $ 2,222,000 $ 834,000 $ 5,074,000 $ 1,626,000
Service 2,371,000 235,000 4,755,000 407,000
------------ ------------ ------------ ------------
Total Net Revenue 4,593,000 1,069,000 9,829,000 2,033,000
Costs of Revenue
Cost of License Revenue 87,000 11,000 193,000 45,000
Cost of Service Revenue 970,000 146,000 2,019,000 377,000
------------ ------------ ------------ ------------
Total Cost of Revenues 1,057,000 157,000 2,212,000 422,000
------------ ------------ ------------ ------------
Gross Profit 3,536,000 912,000 7,617,000 1,611,000
Cost of Operations
Selling and Marketing 1,599,000 1,164,000 3,711,000 2,529,000
Research and Development 1,525,000 586,000 2,741,000 2,138,000
General and Administrative 1,637,000 327,000 3,413,000 764,000
Stock-Based Compensation 257,000 357,000 613,000 626,000
Amortization of Goodwill and
Intangible Assets 3,196,000 -- 6,382,000 --
------------ ------------ ------------ ------------
Total Operating Expense 8,214,000 2,434,000 16,860,000 6,057,000
------------ ------------ ------------ ------------
Operating Loss (4,678,000) (1,522,000) (9,243,000) (4,446,000)
------------ ------------ ------------ ------------
Other Expense
Interest Expense-net (950,000) (58,000) (1,847,000) (103,000)
Other Expense 1,000 (5,000) (49,000) (4,000)
------------ ------------ ------------ ------------
(949,000) (63,000) (1,896,000) (107,000)
------------ ------------ ------------ ------------
Net Loss $ (5,627,000) $ (1,585,000) $(11,139,000) $ (4,553,000)
============ ============ ============ ============
Basic and Diluted
Net Loss Per Share $ (0.36) $ (0.16) $ (0.71) $ (0.46)
Weighted Average Number of
Common Shares Outstanding 15,757,319 10,133,995 15,770,777 9,901,076
See accompanying notes to the unaudited consolidated financial statements.
4
RAINING DATA CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Restated
Six Months Ended
September 30,
-----------------------------
2001 2000
------------ ------------
Cash flows from operating activities:
Net loss $(11,139,000) $ (4,549,000)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 6,750,000 151,000
Note discount amortization 1,809,000 --
Stock-based compensation 613,000 626,000
Software exchanged for common stock -- 900,000
Change in assets and liabilities:
Trade accounts receivable (55,000) (224,000)
Other current and non-current assets 292,000 215,000
Accounts payable and accrued liabilities (522,000) 497,000
Deferred revenue 1,109,000 133,000
------------ ------------
Net cash used for operating activities (1,143,000) (2,251,000)
------------ ------------
Cash flows from investing activities:
Purchase of furniture and equipment (96,000) (206,000)
Acquisition of software assets -- (407,000)
------------ ------------
Net cash used for investing activities (96,000) (613,000)
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of incentive stock options 45,000 110,000
Net proceeds from issuance of common stock 2,319,000 --
Additions of debt -- 2,107,000
Repayment of debt (168,000) (54,000)
------------ ------------
Net cash provided by financing activities 2,196,000 2,163,000
------------ ------------
Effect of exchange rate changes on cash 28,000 84,000
------------ ------------
Net increase in cash 985,000 (617,000)
Cash at the beginning of period 2,424,000 1,238,000
------------ ------------
Cash at end of period $ 3,409,000 $ 621,000
============ ============
See accompanying condensed notes to the unaudited consolidated financial
statements.
5
RAINING DATA CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
Note 1 - Restatement of Financial Statements
Subsequent to the filing of its Quarterly Report on Form 10-QSB for the quarter
ended September 30, 2001 with the Securities and Exchange Commission, the
Company became aware of certain misapplications of accounting standards related
to the accounting for its business combination with PickAX, Inc. (PickAX) under
the purchase method in December 2000, the purchase of technology from a third
party in May 2000 and the grant of options at below market exercise prices.
These misapplications can be summarized as follows:
- In computing the purchase price, the Company used the fair value of its
common stock around the date the merger agreement was signed to value common
stock, warrants and options to purchase common stock exchanged for similar
securities of PickAX. Portions of the merger consideration were, however, to
be determined based upon subsequent negotiations between the Company and
PickAX's controlling stockholder. These negotiations were completed on the
closing date. As a result the Company should have used the fair value of its
common stock around the closing date to value stock-based merger
consideration. In addition, the Company included certain shares and warrants
that were contingently issuable based upon the amount of revenue reported by
the combined company for the succeeding twelve months. Contingent
consideration of this nature should not be included in the purchase price
until the resolution of the contingency is determinable beyond a reasonable
doubt.
- In connection with the merger with PickAX, a promissory note previously
issued by PickAX to Astoria Capital Partners, L.P. (Astoria) in the amount
of $18,525,000 in principal and accrued interest was exchanged for a new
promissory note from the Company in the same amount, and Astoria also
received warrants to purchase an additional 500,000 shares of the Company's
common stock at an exercise price of $7.00 per share. The additional
warrants were valued using the Black-Scholes model and recorded as a
discount against the note. One of the assumptions used in the Company's
Black-Scholes computation was that the term of the warrant was two years.
The contractual term of the option is, in fact, 5 years and the full
contractual term should be used in the Black-Scholes calculation.
- The Company assigned the entire excess of the purchase price over the book
value of the acquired net tangible assets to goodwill. The Company retained
a valuation expert to determine the value of other identifiable intangible
assets acquired in the PickAX acquisition. As a result, a portion of the
purchase price should have been assigned to identifiable intangible assets,
consisting principally of core technology and assembled workforce. These
identifiable intangible assets will be amortized over periods ranging from 3
to 4 years. The Company has also reconsidered its determination of the
amortization period for goodwill and retroactively reduced the period from
10 to 4 years. In addition, options to purchase PickAX common stock were
assumed and converted in the merger into Company options to purchase common
stock. A portion of the purchase price should have been allocated to
unvested options whose exercise price is below the fair value of the
underlying common stock on the closing date. The purchase price allocation
should have also included an adjustment to reduce the carrying value of
deferred revenue on the closing date balance sheet of PickAX for the
theoretical seller's profit previously earned by the acquired company. The
Company also recorded excess amounts for a number of facility closure,
severance and litigation accruals as part of the purchase price allocation
and these were subsequently released, in part, to income.
- In May 2000, the Company acquired the rights to certain incomplete software
with no alternative future use with the intention to further develop it into
a software product. The Company recorded the payments related to the
incomplete software as an asset. The Company's policy for software
development costs is to expense software development costs until
technological feasibility has been achieved. In general, technological
feasibility occurs near general release. Since this purchased software was
incomplete and significant development efforts were required before it could
be released, the amounts capitalized should have been expensed as incurred.
- At various dates during fiscal 2001 and 2002, the Company granted options to
purchase common stock to employees with an exercise price at a discount from
the fair market value of the common stock on the date of grant. In addition,
the Company accelerated vesting or extended the term of options held by
terminated employees. In neither instance did the Company record deferred
stock-based compensation or stock-based compensation.
Accordingly, the consolidated financial statements for the quarters ended
September 30, 2001 and 2000 have been restated as follows:
2001 2000
----------------------------- ------------------------------
As Reported Restated As Reported Restated
------------ ------------ ------------ ------------
Net Revenues
Licenses $ 2,200,000 2,222,000 851,000 834,000
Services 2,825,000 2,371,000 235,000 235,000
Total Net Revenues 5,025,000 4,593,000 1,086,000 1,069,000
Total Costs and Expenses 7,962,000 9,271,000 2,448,000 2,591,000
Operating Loss (2,937,000) (4,678,000) (1,362,000) (1,522,000)
Total Other Expense (822,000) (949,000) (59,000) (63,000)
Net Loss $ (3,759,000) $ (5,627,000) $ (1,421,000) $ (1,585,000)
Basic and Diluted Net Loss Per Share $ (.23) $ (.36) $ (.14) $ (.16)
Weighted Average Number of Common Shares
Outstanding 16,101,555 15,757,319 10,247,047 10,133,995
The consolidated financial statements for the six months ended September 30,
2001 and 2000 have been restated as follows:
2001 2000
----------------------------- -----------------------------
As Reported Restated As Reported Restated
------------ ------------ ------------ ------------
Net Revenues
Licenses $ 5,103,000 $ 5,074,000 $ 1,665,000 $ 1,626,000
Services 5,930,000 4,755,000 407,000 407,000
Total Net Revenues 11,033,000 9,829,000 2,072,000 2,033,000
Total Costs and Expenses 16,365,000 19,072,000 5,364,000 6,479,000
Operating Loss (5,332,000) (9,243,000) (3,292,000) (4,446,000)
Total Other Expense (1,695,000) (1,896,000) (103,000) (107,000)
Net Loss $ (7,027,000) $(11,139,000) $ (3,395,000) $ (4,553,000)
Basic and Diluted Net Loss Per Share $ (.44) $ (.71) $ (.35) $ (.46)
Weighted Average Number of Common Shares
Outstanding 16,055,574 15,770,777 9,768,440 9,901,076
2. INTERIM FINANCIAL STATEMENTS
The unaudited interim consolidated financial information furnished
herein reflects all adjustments, consisting only of normal recurring
items, which in the opinion of management are necessary to fairly state
the Company's financial position, the results of its operations and the
changes in its financial position for the periods presented. Certain
information and footnote disclosures, normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America, have been omitted pursuant to
such SEC rules and regulations; nevertheless management of the Company
believes that the disclosures herein are adequate to make the
information presented not misleading. These consolidated financial
statements should be read in conjunction with the Company's audited
financial statements for the year ended March 31, 2001 contained in the
Company's Annual Report on Form 10-KSB. The results of operations for
the period ended September 30, 2001 are not necessarily indicative of
results to be expected for any other interim period or the fiscal year
ending March 31, 2002.
6
3. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 141, Business Combinations,
(SFAS No. 141) and SFAS No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142). SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations. SFAS No. 141
specifies criteria that intangible assets acquired in a business
combination must meet to be recognized and reported separately from
goodwill. SFAS No. 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested
for impairment at least annually in accordance with the provisions of
SFAS No. 142. SFAS No. 142 also requires that intangible assets with
estimable useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 121 and subsequently, SFAS No.
144 after its adoption.
The Company adopted the provisions of SFAS No. 141 as of July 1, 2001,
and SFAS No. 142 is effective for the Company on April 1, 2002.
Goodwill and intangible assets determined to have an indefinite useful
life acquired in a purchase business combination completed after June
30, 2001, but before SFAS No. 142 is adopted in full, are not
amortized. Goodwill and intangible assets acquired in business
combinations completed before July 1, 2001 continued to be amortized
and tested for impairment prior to the full adoption of SFAS No. 142.
Upon adoption of SFAS No. 142, the Company is required to evaluate its
existing intangible assets and goodwill that were acquired in purchase
business combinations, and to make any necessary reclassifications in
order to conform with the new classification criteria in SFAS No. 141
for recognition separate from goodwill. The Company will be required to
reassess the useful lives and residual values of all intangible assets
acquired, and make any necessary amortization period adjustments by the
end of the first interim period after adoption. If an intangible asset
is identified as having an indefinite useful life, the Company will be
required to test the intangible asset for impairment in accordance with
the provisions of SFAS No. 142 within the first interim period.
Impairment is measured as the excess of carrying value over the fair
value of an intangible asset with an indefinite life. Any impairment
loss will be measured as of the date of adoption and recognized as the
cumulative effect of a change in accounting principle in the first
interim period.
In connection with SFAS No. 142's transitional goodwill impairment
evaluation, the Statement requires the Company to perform an assessment
of whether there is an indication that goodwill is impaired as of the
date of adoption. To accomplish this, the Company must identify its
reporting units and determine the carrying value of each reporting unit
by assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units as of April 1,
2002. The Company will then have up to six months from April 1, 2002 to
determine the fair value of each reporting unit and compare it to the
carrying amount of the reporting unit. To the extent the carrying
amount of a reporting unit exceeds the fair value of the reporting
unit, an indication exists that the reporting unit goodwill may be
impaired and the Company must perform the second step of the
transitional impairment test. The second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. In the second step, the Company must compare the implied fair
value of the reporting unit goodwill with the carrying amount of the
reporting unit goodwill, both of which would be measured as of the date
of adoption. The implied fair value of goodwill is determined by
allocating the fair value of the reporting unit to all of the assets
(recognized and unrecognized) and liabilities of the reporting unit in
a manner similar to a purchase price allocation, in accordance with
SFAS No. 141. The residual fair value after this allocation is the
implied fair value of the reporting unit goodwill. Any transitional
impairment loss will be recognized as the cumulative effect of a change
in accounting principle in the Company's statement of operations.
As of the date of adoption of SFAS No. 142, the Company expects to have
unamortized goodwill in the amount of $25.4 million and unamortized
identifiable intangible assets in the amount of $8.1 million, all of
which will be subject to the transition provisions of SFAS No. 142.
Amortization expense related to goodwill was $3.1 million for the year
ended March 31, 2001. Because of the extensive effort needed to comply
with adopting SFAS No. 141 and No. 142, it is not practicable to
reasonably estimate the impact of adopting the Statements on the
Company's consolidated financial statements at the date of this report,
including whether it will be required to recognize any transitional
impairment losses as the cumulative effect of a change in accounting
principle.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations (SFAS No. 143). SFAS No. 143 requires the
Company to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation
associated with the retirement of tangible long-lived assets that
result from the acquisition, construction, development and/or normal
use of the assets. The Company also records a corresponding asset which
is depreciated over the life of the asset. Subsequent to the initial
measurement of the asset retirement obligation, the obligation will be
adjusted at the end of each period to reflect the passage of time and
changes in the estimated future cash flows underlying the obligation.
The Company is required to adopt SFAS No. 143 on April 1, 2003, but
does not expect adoption to have a material effect on its financial
condition or results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No.
144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This Statement requires that long-lived
assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If the carrying amount of
an asset exceeds its estimated future cash flows, an impairment charge
is recognized by the amount by which the carrying amount of the asset
exceeds the fair value of the asset. SFAS No. 144 requires companies to
separately report discontinued operations and extends that reporting to
a component of an entity that either has been disposed of (by sale,
abandonment, or in a distribution to owners) or is classified as held
for sale. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. The Company is
required to adopt SFAS No. 144 on April 1, 2002. The Company has not
yet determined the effect, if any, from the adoption of SFAS No. 144 on
its financial condition and results of operations.
7
4. STOCKHOLDERS' EQUITY:
On September 27, 2001, the Company entered into a Common Stock Purchase
Agreement with Astoria whereby the Company issued 1,760,000 shares of
its common stock for consideration of $2,200,000. The common stock is
not registered and Astoria is entitled to one vote for each share of
common stock held.
9. PRO FORMA FINANCIAL INFORMATION:
Had the Company acquired PickAX at the beginning of the Company's
fiscal year on April 1, 2000, the unaudited pro forma results for the
three and six months ended September 30, 2000, would have been
approximately as shown in the following table.
Three Months Six Months
Ended Ended
September 30, 2000 September 30, 2000
------------------ ------------------
Revenue $ 5,370,000 $ 9,861,000
Net Loss $ (7,253,000) $(18,848,000)
Loss Per Share $ (0.52) $ (1.32)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Item 2, as well as other portions of this document, contains
forward-looking statements about the Company's business, revenues, expenditures,
research and development efforts, operating and capital requirements, changes in
operations, integration of the acquisition of PickAX, products, initial markets
for its products, cost savings and reductions, and ability to raise capital in
the future. In addition, forward-looking statements may be included in various
other Company documents to be issued concurrently or in the future and in oral
or other statements made by representatives of the Company to investors and
others from time to time.
8
Forward-looking statements are subject to risks and uncertainties which could
cause actual results to differ materially from predicted results.
Such risks include, among others, that the Company may not be able to integrate
the technologies, products, and operations of the two companies in a timely and
effective way; that the Company may not be able to achieve the cost reductions
or eliminate the duplicate and redundant facilities and contracts in a timely
manner or at all; that the Company may not introduce new or improved products in
a timely fashion or at all; that the Company's shift in research and development
efforts may not result in new or improved products; that the marketplace may not
accept any new or improved products; that the presence of competitors with
greater technical, marketing and financial resources may significantly limit the
growth and impact of the Company; that the Company may not be able to raise
additional funds when needed on favorable terms, or at all; or that the Company
may not be able to retire the debt due in November 2002.
The outline of risks mentioned above and this discussion should be read in
conjunction with the discussion of "Risk Factors" in the Company's 10-KSB for
the fiscal year ended March 31, 2001.
OVERVIEW
Effective December 1, 2000 the Company completed the acquisition of PickAX, Inc,
a Delaware corporation ("PickAX"), pursuant to an Agreement and Plan of Merger
dated August 23, 2000. Concurrent with the acquisition, the Company changed its
name to Raining Data Corporation. The principal asset of PickAX is Pick Systems,
now a wholly owned subsidiary, which PickAX acquired from the estate of Richard
Pick, the founder of Pick Systems, in March 2000. Pick Systems was incorporated
in California in November 1982.
The Company's principal business is the design, development, sale, and support
of two major software product lines: Multi-Dimensional Databases and Rapid
Application Development ("RAD") software tools. The Company's products allow
customers to create and enhance flexible software applications tailor-made to
their own needs. The Company's database products are based on a
multi-dimensional data model and designed to operate in such operating
environments as Windows, Unix and Linux. Similarly, the Company's RAD products
support the full lifecycle of application development and are designed for the
rapid prototyping, development and deployment of GUI Client/Server and Web
applications. The Company's RAD products are object-oriented and
component-based, providing the ability to deploy applications on such operating
system platforms as Windows, Unix and Linux, as well as such database
environments as Oracle, DB2, Sybase, Microsoft SQL Server and other Open Data
Base Connectivity ("ODBC") compatible database management systems. Since the
start of the 2002 fiscal year, the Company has been changing the mix of its
research and development efforts to include a focus on technologies, markets and
products outside its historical market, specifically XML-based products for
Internet infrastructure. There can be no assurance that such shifts will result
in new products or that any new products will be successful.
9
The Company's products are used by in-house corporate development teams,
commercial application developers, system integrators, independent software
vendors and independent consultants.
The Company licenses its software on a per-server basis or per-user basis.
Additional servers and users, as applicable, on existing systems increase the
Company's revenue from its installed base of licenses.
In addition to computer software products, the Company provides continuing
maintenance and customer service contracts, as well as professional services,
technical support and training to help plan, analyze, implement and maintain
application software based on the Company's products.
The Company has direct sales offices in the United States, United Kingdom,
France and Germany, and maintains distributor relationships in many other parts
of the world. The office in South Africa was closed at the end of June 2001.
RESULTS OF OPERATIONS
As a result of the acquisition of PickAX on December 1, 2000, the results of
operations for the three and six month periods ended September 30, 2001 differ
materially from the same periods in the prior fiscal year. Consequently, the
results of prior periods are not comparable to these periods or future periods.
RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the filing of its Annual Report on Form 10-QSB for the quarter
ended September 30, 2001 with the Securities and Exchange Commission, the
Company became aware of certain misapplications of accounting standards related
to the accounting for its business combination with PickAX, Inc. (PickAX) under
the purchase method in December 2000, the purchase of technology from a third
party in May 2000 and the grant of options at below market exercise prices.
These misapplications can be summarized as follows:
- In computing the purchase price, the Company used the fair value of its
common stock around the date the merger agreement was signed to value common
stock, warrants and options to purchase common stock exchanged for similar
securities of PickAX. Portions of the merger consideration were, however, to
be determined based upon subsequent negotiations between the Company and
PickAX's controlling stockholder. These negotiations were completed on the
closing date. As a result the Company should have used the fair value of its
common stock around the closing date to value stock-based merger
consideration. In addition, the Company included certain shares and warrants
that were contingently issuable based upon the amount of revenue reported by
the combined company for the succeeding twelve months. Contingent
consideration of this nature should not be included in the purchase price
until the resolution of the contingency is determinable beyond a reasonable
doubt.
- In connection with the merger with PickAX, a promissory note previously
issued by PickAX to Astoria Capital Partners, L.P. (Astoria) in the amount
of $18,525,000 in principal and accrued interest was exchanged for a new
promissory note from the Company in the same amount, and Astoria also
received warrants to purchase an additional 500,000 shares of the Company's
common stock at an exercise price of $7.00 per share. The additional
warrants were valued using the Black-Scholes model and recorded as a
discount against the note. One of the assumptions used in the Company's
Black-Scholes computation was that the term of the warrant was two years.
The contractual term of the option is, in fact, 5 years and the full
contractual term should be used in the Black-Scholes calculation.
- The Company assigned the entire excess of the purchase price over the book
value of the acquired net tangible assets to goodwill. The Company retained
a valuation expert to determine the value of other identifiable intangible
assets acquired in the PickAX acquisition. As a result, a portion of the
purchase price should have been assigned to identifiable intangible assets,
consisting principally of core technology and assembled workforce. These
identifiable intangible assets will be amortized over periods ranging from 3
to 4 years. The Company has also reconsidered its determination of the
amortization period for goodwill and retroactively reduced the period from
10 to 4 years. In addition, options to purchase PickAX common stock were
assumed and converted in the merger into Company options to purchase common
stock. A portion of the purchase price should have been allocated to
unvested options whose exercise price is below the fair value of the
underlying common stock on the closing date. The purchase price allocation
should have also included an adjustment to reduce the carrying value of
deferred revenue on the closing date balance sheet of PickAX for the
theoretical seller's profit previously earned by the acquired company. The
Company also recorded excess amounts for a number of facility closure,
severance and litigation accruals as part of the purchase price allocation
and these were subsequently released, in part, to income.
- In May 2000, the Company acquired the rights to certain incomplete software
with no alternative future use with the intention to further develop it into
a software product. The Company recorded the payments related to the
incomplete software as an asset. The Company's policy for software
development costs is to expense software development costs until
technological feasibility has been achieved. In general, technological
feasibility occurs near general release. Since this purchased software was
incomplete and significant development efforts were required before it could
be released, the amounts capitalized should have been expensed as incurred.
- At various dates during fiscal 2001 and 2002, the Company granted options to
purchase common stock to employees with an exercise price at a discount from
the fair market value of the common stock on the date of grant. In addition,
the Company accelerated vesting or extended the term of options held by
terminated employees. In neither instance did the Company record deferred
stock-based compensation or stock-based compensation.
Accordingly, the consolidated financial statements for the quarters ended
September 30, 2001 and 2000 have been restated as follows:
2001 2000
----------------------------- ------------------------------
As Reported Restated As Reported Restated
------------ ------------ ------------ ------------
Net Revenues
Licenses $ 2,200,000 2,222,000 851,000 834,000
Services 2,825,000 2,371,000 235,000 235,000
Total Net Revenues 5,025,000 4,593,000 1,086,000 1,069,000
Total Costs and Expenses 7,962,000 9,271,000 2,448,000 2,591,000
Operating Loss (2,937,000) (4,678,000) (1,362,000) (1,522,000)
Total Other Expense (822,000) (949,000) (59,000) (63,000)
Net Loss $ (3,759,000) $ (5,627,000) $ (1,421,000) $ (1,585,000)
Basic and Diluted Net Loss Per Share $ (.23) $ (.36) $ (.14) $ (.16)
Weighted Average Number of Common Shares
Outstanding 16,101,555 15,757,319 10,247,047 10,133,995
The consolidated financial statements for the six months ended September 30,
2001 and 2000 have been restated as follows:
2001 2000
----------------------------- -----------------------------
As Reported Restated As Reported Restated
------------ ------------ ------------ ------------
Net Revenues
Licenses $ 5,103,000 $ 5,074,000 $ 1,665,000 $ 1,626,000
Services 5,930,000 4,755,000 407,000 407,000
Total Net Revenues 11,033,000 9,829,000 2,072,000 2,033,000
Total Costs and Expenses 16,365,000 19,072,000 5,364,000 6,479,000
Operating Loss (5,332,000) (9,243,000) (3,292,000) (4,446,000)
Total Other Expense (1,695,000) (1,896,000) (103,000) (107,000)
Net Loss $ (7,027,000) $(11,139,000) $ (3,395,000) $ (4,553,000)
Basic and Diluted Net Loss Per Share $ (.44) $ (.71) $ (.35) $ (.46)
Weighted Average Number of Common Shares
Outstanding 16,055,574 15,770,777 9,768,440 9,768,440
Net Revenue: Total net revenue for the three month period ended September 30,
2001 increased 330% from $1,069,000 to $4,593,000 over the same three month
period in the prior fiscal year. License revenue increased 166% from $834,000
to $2,222,000 while service revenue increased 909% from $235,000 to $2,371,000
over the same three month period in the prior fiscal year.
Total net revenue for the six month period ended September 30, 2001 increased
383% from $2,033,000 to $9,829,000 over the same six month period in the prior
fiscal year. License
10
License revenue increased 212% to $5,074,000 from $1,626,000 while services
revenue increased 1,068% to $4,755,000 from $407,000 for the same six month
period in the prior fiscal year.
The increase in net revenue in total and by category is primarily due to the
acquisition of PickAX in December 2000.
As a result of the PickAX acquisition, the mix of revenue also changed. Service
revenue, which includes primarily revenue from technical support services as
well as revenue from consulting services and training services, increased to 52%
of total year revenue for the three month period ended September 30, 2001 from
22% of total revenue for the same three month period in the prior fiscal year.
Service revenue increased to 48% of total year revenue for the six month period
ended September 30, 2001 from 20% of total revenue for the same six month period
in the prior fiscal year.
Cost of License Revenue: Total cost of license revenue increased 691% to $87,000
for the three month period ended September 30, 2001 from $11,000 for the three
month period in the prior fiscal year. At the same time, cost of license revenue
increased to 4% of license revenue for the three month period ended September
30, 2001, from 1% of license revenue for the same three month period in the
prior fiscal year due to the shift in product mix sold as a result of the PickAX
acquisition.
Total cost of license revenue increased 329% to $193,000 for the six month
period ended September 30, 2001 from $45,000 for the six month period in the
prior fiscal year . At the same time, cost of license revenue increased slightly
from 3% of license revenue for the same six month period in the prior fiscal
year to 4% of license revenue for the six month period ended September 30, 2001.
The slight increase in the cost of license revenue as a percentage of license
revenue reflects the changing mix of product shipments towards the PickAX
products.
Cost of Service Revenue: Total cost of service revenue increased 564% to
$970,000 for the three month period ended September 30, 2001, from $146,000 for
the same three month period in the prior fiscal year reflecting the results of
the PickAX acquisition. At the same time, cost of service revenue decreased to
41% of service revenue for the three months ended September 30, 2001 from 62% of
service revenue for the same three month period in the prior fiscal year.
Total cost of service revenue increased 436% to $2,019,000 for the six month
period ended September 30, 2001 from $377,000 for the same six month period in
the prior fiscal year reflecting the results of the PickAX acquisition. At the
same time, cost of service revenue decreased to 42% of service revenue for the
six months ended September 30, 2001 from 93% of service revenue for the same six
month period in the prior fiscal year .
The reduction in the cost of service revenue as a percentage of service revenue
reflects the continuing efforts of the Company to improve the financial
contribution of service businesses, including customer support, professional
consulting services, training and education.
11
Selling and Marketing Expenses: Selling and marketing expenses increased 37% to
$1,599,000 from $1,164,000 for the same three month period in the prior fiscal
year for the three month period ended September 30, 2001. At the same time,
sales and marketing expenses decreased from 109% of total revenues for the same
three month period in the prior fiscal year to 35% of total revenues for the
three month period ended September 30, 2001.
Selling and marketing expenses increased 47% to $3,711,000 for the six month
period ended September 30, 2001 from $2,529,000 for the same six month period in
the prior fiscal year. At the same time, sales and marketing expenses decreased
to 38% of total revenues for the six month period ended September 30, 2001 from
124% of total revenues for the same six month period in the prior fiscal year.
The increase in selling and marketing expenses reflects the efforts of the
company to sell and market the broader range of products offered by the
acquisition of PickAX. During the three months ended September 30, 2001, the
Company made a number of changes in its selling and marketing cost structure to
further combine and to streamline the Company's sales and marketing efforts.
Research and Development Expenses: Research and development expenses increased
160% to $1,525,000 from $586,000 for the same three month period in the prior
fiscal year for the three month period ended September 30, 2001. At the same
time, research and development expenses decreased to 33% of total revenues for
the three month period ended September 30, 2001 from 55% of total revenues for
the same three month period in the prior fiscal year.
Research and development expenses increased 28% to $2,741,000 for the six month
period ended September 30, 2001 from $2,138,000 for the same six month period in
the prior fiscal year reflecting the results of the PickAX acquisition. At the
same time, research and development expenses decreased to 28% of total revenues
for the six month period ended September 30, 2001 from 105% of total revenues
for the same six month period in the prior fiscal year.
During the six month period ended September 30, 2001, the Company began
changing the mix of its research and development efforts to include a
significant focus on technologies, markets and products outside its historical
market, specifically XML-based products for Internet infrastructure. There can
be no assurance that such shifts will result in new products or that any new
products will be successful.
12
General and Administrative Expenses: General and administrative expenses
increased 401% to $1,637,000 for the three month period ended September 30, 2001
from $327,000 for the same three month period in the prior fiscal year.
General and administrative expenses increased 347% to $3,413,000 for the six
month period ended September 30, 2001 from $764,000 for the same six month
period in the prior fiscal year reflecting the results of the PickAX
acquisition.
Stock Based Compensation: Stock based compensation decreased to $257,000 for the
three months ended September 30, 2001, from $357,000 in the comparable prior
year period. Stock-based compensation also decreased to $616,000 for the six
months ended September 30, 2001, from $626,000 in the comparable prior year
period. The decrease is primarily attributable to the cancellation of options
for terminated employees partially offset by additional stock-based compensation
arising from the "in-the-money" options assumed in connection with the PickAX
acquisition.
Amortization of Goodwill and Intangible Assets: Amortization of goodwill and
intangible assets was $3,196,000 and $6,382,000 for the three and six month
periods ended September 30, 2001, respectively. Amortization of goodwill and
intangible assets arises from the acquisition of PickAX effective December 1,
2000.
Operating Loss: The Company's operating loss increased 207% to a net
operations loss of $4,678,000 for the three month period ended September 30,
2001 from a net operating loss of $1,522,000 for the same three month period in
the prior fiscal year.
The Company's operating loss increased 108% to a net operating loss of
$9,243,000 for the six month period ended September 30, 2001 from a net
operating loss of $4,446,000 for the same six month period in the prior fiscal
year.
The operating loss for the six months period ended September 30, 2001 and
September 30, 2000 include non cash charges for depreciation and various
amortizations. The following table summarizes these charges for the period
indicated.
Restated Three Months Restated Six Months
(Unaudited) Ended September 30, Ended September 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Operating loss $ (4,678,000) $ (1,522,000) $(9,243,000) $ (4,446,000)
Add non-cash charges
Depreciation of property, furniture and equipment 167,000 4,000 368,000 83,000
Amortization of Intangible Assets 822,000 -- 1,644,000 --
Amortization of Stock-Based Compensation 257,000 357,000 613,000 626,000
Amortization of Goodwill 2,374,000 -- 4,738,000 --
------------ ------------ ------------ ------------
Operating Loss Before Depreciation and Amortization $ (1,058,000) $ (1,161,000) $(1,880,000) $ (3,737,000)
============ ============ ============ ============
Interest and Other Expense: Net interest expense increased to $949,000 for the
three months ended September 30, 2001 from $63,000 for the same three month
period in the prior fiscal year.
Net interest expense increased to $1,896,000 for the six months ended
September 30, 2001 from $107,000 for the same six month period in the prior
fiscal year. The increase reflects the increase in debt of the Company.
Net Loss: The net loss increased 255% to a net loss of $5,627,000 or ($.36) per
share for the three month period ended September 30, 2001 from $1,585,000 for
the same three month period in the prior fiscal year.
13
The net loss increased 145% to a net loss of $11,139,000 or $(.71) per share for
the six months ended September 30, 2001 from $4,553,000 for the same six month
period in the prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $3,409,000 in cash and equivalents at September 30, 2001.
The Company does not have a line of credit with a bank. The recent financial
performance of the Company makes such a line of credit unlikely at the present
time. Astoria is the primary secured party of substantially all of the Company's
assets in relation to the replacement note issued in connection with the
December 1, 2000 acquisition of PickAX. The note does not provide for any
further borrowings. The note requires certain payments in the event of a public
or private common or preferred stock offering and gives Astoria certain rights
to approve any future acquisitions. There can be no assurances that the Company
will have sufficient cash to pay the note at maturity.
The Company had a working capital deficit of $3,539,000 at September 30, 2001
compared to a working capital deficit of $3,240,000 at March 31, 2001. In
calculating the deficit, current liabilities at September 30, 2001, included
approximately $4,383,000 in deferred revenue that the Company earns over the
remaining life of the underlying service contracts as more fully discussed in
the notes to the consolidated financial statements.
On September 27, 2001, the Company entered into a Common Stock Purchase
Agreement with Astoria pursuant to which the Company received an aggregate of
$2.2 million in consideration for 1,760,000 shares of the Company's common stock
at a price of $1.25 per share. In connection with this offering, Astoria waived
the payment provisions of the Astoria note triggered by the offering.
Management believes that the Company's working capital and future cash flow from
operating activities will be sufficient to meet the Company's operating and
capital expenditure requirements for at least the next twelve months. However,
in the event the Company experiences a decrease in revenue or increase in
expenses or other unforeseen event, the Company may require additional funds to
support its working capital requirements and may seek to raise such funds
through public or private equity financing or bank lines of credit or from other
sources. No assurances can be given that additional financing will be available
or that, if available, such financing will be on terms favorable to the Company.
14
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
GENERAL AUTOMATION LITIGATION - In May 2001, General Automation initiated
litigation in Superior Court of the State of California for the County of Orange
against the Company for breach of contract relating to the Pick Systems purchase
of selected assets of General Automation in August 2000. General Automation
seeks in excess of $1,000,000 in damages, penalties and interest, in addition to
attorneys' fees and costs. The Company has asserted counterclaims for fraud,
breach of contract and indemnity. The Company believes that the suit is without
merit and intends to defend the suit vigorously. A jury trial is scheduled to
begin July 28, 2002.
DOUCE BIS LITIGATION - In June 2001, Douce Bis Company sued the Company in the
Commercial Court of Paris, France for approximately $990,000 plus costs. The
claim is for compensation and loss of profits due Douce Bis under the terms of
the Douce Bis/Omnis distributorship agreement entered into in 1983 and extended
from time to time thereafter. The Company terminated Douce Bis as the Omnis
distributor in France effective in December 2000. The Company believes the suit
is without merit and intends to defend the suit vigorously. The litigation is in
the discovery phase and a hearing is scheduled in March 2002.
PACE-NORTHERN IRELAND LITIGATION - In July 2000, Park Applications Computer
Engineering, Ltd. (PACE) sued the Company in the Queen's Bench Division Company
of the High Court of Justice in Northern Ireland. PACE sought damages of
$800,000 plus penalties and interest for alleged breach of contract relating to
the purchase by Pick Systems of software from PACE. In January 2002, the Company
and PACE entered into a settlement agreement of the matter under which the
Company agreed to pay $500,000 to PACE. Of this settlement, $250,000 was paid to
PACE in January 2002 and the remaining $250,000 will be paid over a two year
period.
15
The Company is from time to time subject to claims and suits arising in the
ordinary course of business. In the Company's opinion, the ultimate resolution
of these matters will not have a material adverse effect on its financial
position, results of operations, or liquidity.
ITEM 2. CHANGES IN SECURITIES
During the quarter ended September 30, 2001, the Company issued the following
unregistered shares of its common stock:
(1) On September 5, 2001, the Company issued 37,500 shares to the partners of
the Wainer Group, an Australian partnership, as final payment for
additional services performed by the Wainer Group under an Asset Purchase
Agreement dated as of May 19, 2000 in which the Company purchased
incomplete computer software. The issuance of the shares to these
individuals was exempt from the provisions of Section 5 of the Securities
Act of 1933, as amended (the "Securities Act") under Section 4(2) thereof
and/or Regulation S promulgated under the Securities Act. The Company did
not offer the shares through any general solicitation, and each purchaser
represented that it (i) has such knowledge and experience in financial
and business matters so as to be capable of evaluating the merits and
risks of the investment, and (ii) is acquiring the shares for its own
account, for investment purposes and without a view to distribution.
(2) On September 27, 2001, the Company issued 1,760,000 shares to Astoria for
a price of $1.25 per share, which the Board of Directors found to be fair
considering the difficulty and cost of raising additional capital for the
Company in the investment climate prevailing at the time. The issuance of
the shares to Astoria was exempt from the provisions of Section 5 of the
Securities Act under Section 4(2) thereof and/or Regulation D promulgated
thereunder. The Company did not offer the shares through any general
solicitation, and the purchaser represented that it (i) is an "accredited
investor" within the meaning of Regulation D, (ii) has such knowledge and
experience in financial and business matters so as to be capable of
evaluating the merits and risks of the investment, and (iii) is acquiring
the shares for its own account, for investment purposes and without a
view to distribution.
ITEM 5. OTHER EVENTS
In connection with certain option grants and the September 27, 2001 sale of
1,760,000 shares of common stock to Astoria, automatic adjustments were made to
certain outstanding warrants to purchase the Company's common stock pursuant to
anti-dilution provision in such instruments. As a result of such anti-dilution
adjustments, the number of shares of the Company's common stock underlying such
warrants increased by an aggregate of 156,748 shares.
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Number Description
------ -----------
10.20 Common Stock Purchase Agreement-2001, dated as of September
27, 2001, among Raining Data Corporation and Astoria Capital
Partners, L.P. (incorporated by reference to Exhibit 10.1 to
Form 8-K filed by the Company on October 1, 2001)
10.21 Registration Rights Agreement, dated as of September 27, 2001,
by and among Raining Data Corporation and Astoria Capital
Partners, L.P. (incorporated by reference to Exhibit 10.2 to
Form 8-K filed by the Company on October 1, 2001)
10.22* Option Agreement dated September 24, 2001, between the Company
and Carlton H. Baab
10.23* Waiver Letter dated as of September 27, 2001 from Astoria
Capital Partners, L.P. regarding the Secured Promissory Note
dated November 30, 2000
* Previously filed with the Commission.
(b) Reports on Form 8-K.
(1) The Company filed a Form 8-K/A on June 21, 2001 to amend the Form 8-K
filed December 15, 2000 to include certain financial statements and
pro forma financial information relating to the merger of PickAX, Inc.
into a subsidiary of the Company and the Private Placement of the
Company's common stock shortly thereafter.
(2) The Company filed a Form 8-K/A on August 27, 2001 to amend the Form
8-K filed December 15, 2000 to include an exhibit to the Form 8-K
indicating the agreement of the Company's former independent auditors
with the statements made in Item 4 therein.
(3) The Company filed a Form 8-K/A on August 30, 2001 reporting the
following: resignation of Richard K. Lauer as President and Chief
Operating Officer; resignation of Timothy J. Holland as Senior Vice
President and Chief Technology Officer; resignation of Bryce J. Burns
as Chairman of the Board and Interim Chief Executive Officer of the
Company (Burns remains a Director of the Company); election of
Geoffery P. Wagner, the sole general partner of the Rockport Group,
L.P., a large stockholder of the Company, as Chairman of the Board;
and election of Carlton H. Baab, a managing principal of Astoria as
President and Chief Executive Officer of the Company.
17
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Date: March 20, 2002
RAINING DATA CORPORATION
By: /s/ Scott K. Anderson, Jr.
----------------------------------------------
Scott K. Anderson, Jr.
Vice President Finance, Treasurer and Secretary
(Principal Financial and Accounting Officer)
18