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 quarter period ended JUNE 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 months ended June 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 -
June 30, 2001 and March 31, 2001 3
Unaudited Consolidated Statements of Operations -
Three months ended June 30, 2001 and 2000 4
Unaudited Consolidated Statements of Cash Flows -
Three months ended June 30, 2001 and 2000 5
Condensed Notes to the Unaudited Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 13
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RAINING DATA CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
Restated Restated
JUNE 30, MARCH 31,
2001 2001
------------- -------------
ASSETS
Current Assets
Cash $ 1,644,000 $ 2,424,000
Trade Accounts Receivable less allowance for doubtful
accounts of $313,000 at June 30, 2001 and $156,000
at March 31, 2001 3,004,000 2,502,000
Other Current Assets 193,000 263,000
------------- -------------
Total Current Assets 4,841,000 5,189,000
Property, Furniture and Equipment-net 1,224,000 1,403,000
Intangible Assets-net 10,562,000 11,384,000
Goodwill-net 32,341,000 34,610,000
Other Assets 280,000 269,000
------------- -------------
Total Assets $ 49,248,000 $ 52,855,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 2,245,000 $ 1,733,000
Accrued Liabilities 3,493,000 3,094,000
Deferred Revenue 3,967,000 3,274,000
Current Portion of Long-Term Debt 237,000 328,000
------------- -------------
Total Current Liabilities 9,942,000 8,429,000
Long-Term Debt, net of Current Portion 16,647,000 15,758,000
------------- -------------
Total Liabilities 26,589,000 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, 15,734,749 issued, and outstanding
at June 30, 2001; 15,716,091 issued and
outstanding at March 31, 2001 1,574,000 1,572,000
Additional Paid-in Capital 92,080,000 91,921,000
Additional Deferred Stock-Based Compensation (1,859,000) (2,073,000)
Accumulated Other Comprehensive Income 344,000 1,216,000
Accumulated Deficit (69,780,000) (64,268,000)
------------- -------------
Total Stockholders' Equity 22,659,000 28,668,000
------------- -------------
Total Liabilities and Stockholders' Equity $ 49,248,000 $ 52,855,000
============= =============
See accompanying condensed notes to the unaudited consolidated financial
statements.
3
RAINING DATA CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Restated
Three Months Ended June 30,
--------------------------------
2001 2000
------------ ------------
Net Revenue
License $ 2,852,000 $ 792,000
Service 2,384,000 172,000
------------ ------------
Total Net Revenue 5,236,000 964,000
------------ ------------
Cost of Revenue
Cost of License Revenue 106,000 34,000
Cost of Service Revenue 1,049,000 231,000
------------ ------------
Total Cost of Revenue 1,155,000 265,000
------------ ------------
Gross Profit 4,081,000 699,000
Cost of Operations
Selling and Marketing 2,112,000 1,365,000
Research and Development 1,216,000 1,552,000
General and Administrative 1,776,000 437,000
Stock-Based Compensation 356,000 269,000
Amortization of Goodwill and
Intangible Assets 3,186,000 --
------------ ------------
Total Operating Expenses 8,646,000 3,623,000
------------ ------------
Operating Loss (4,565,000) (2,924,000)
Other Expense
Interest Expense-net (897,000) (44,000)
Other Expense (50,000) --
------------ ------------
(947,000) (44,000)
------------ ------------
Net Loss $ (5,512,000) $ (2,968,000)
============ ============
Basic and Diluted
Net Loss Per Share $ (0.35) $ (0.30)
============ ============
Weighted Average Number of
Common Shares Outstanding 15,724,291 9,839,230
See accompanying condensed notes to the unaudited consolidated financial
statements.
4
RAINING DATA CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Restated
Three Months Ended
June 30,
2001 2000
------------ ------------
Cash flows from operating activities:
Net loss $ (5,512,000) $ (2,968,000)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 3,409,000 79,000
Note discount amortization 878,000 --
Amortization of deferred compensation 356,000 269,000
Software exchanged for common stock 900,000
Change in assets and liabilities:
Trade accounts receivable (502,000) (148,000)
Inventory (4,000) 6,000
Other current and non-current assets 63,000 (565,000)
Accounts payable and accrued liabilities 210,000 1,083,000
Deferred revenue 693,000 66,000
------------ ------------
Net cash used for operating activities (409,000) (1,278,000)
------------ ------------
Cash flows from investing activities:
Purchase of property, furniture and equipment (21,000) (158,000)
Acquisition of software assets -- (68,000)
------------ ------------
Net cash used for investing activities (21,000) (226,000)
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of Incentive Stock Options 19,000 61,000
Proceeds from stockholder note -- 1,055,000
Repayment of debt (28,000) (47,000)
------------ ------------
Net cash provided by (used for) financing activities (9,000) 1,069,000
------------ ------------
Effect of exchange rate changes on cash (341,000) (41,000)
------------ ------------
Net increase in cash (780,000) (476,000)
Cash at the beginning of period 2,424,000 1,238,000
------------ ------------
Cash and equivalents at end of period $ 1,644,000 $ 762,000
============ ============
See accompanying condensed notes to the unaudited
consolidated financial statements.
5
RAINING DATA CORPORATION
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
(Unaudited)
1. RESTATED FINANCIAL STATEMENTS
Subsequent to the filing of its Quarterly Report on Form 10-QSB for the quarter
ended June 30, 2001 with the Securities and Exchange Commission, the Company
became aware of certain misapplications of accounting standards principally
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 June
30, 2001 and 2000 have been restated as follows:
2001 2000
As As
Reported Restated Reported Restated
------------ ------------ ------------ ------------
Net Revenue
License $ 2,903,000 $ 2,852,000 $ 814,000 $ 792,000
Service 3,105,000 2,384,000 172,000 172,000
------------ ------------ ------------ ------------
Total Net Revenue 6,008,000 5,236,000 986,000 964,000
Total Costs and Expenses 8,403,000 9,801,000 2,916,000 3,888,000
------------ ------------ ------------ ------------
Operating Loss (2,395,000) (4,565,000) (1,930,000) (2,924,000)
Total Other Expense (873,000) (947,000) (44,000) (44,000)
------------ ------------ ------------ ------------
Net Loss $ (3,268,000) $ (5,512,000) $ (1,974,000) $ (2,968,000)
============ ============ ============ ============
Basic and Diluted Net Loss
Per Share $ (.20) $ (.35) $ (.19) $ (.30)
Weighted Average Number
of Common Shares
Outstanding 16,009,088 15,724,291 10,124,026 9,839,230
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/A. The results of operations for
the period ended June 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.
4. 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 months ending June 30, 2000, would have been approximately as
follows:
Revenue $ 5,248,000
Net Loss Before Tax (7,296,000)
Loss per share $ (0.51)
7
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, contain forward-looking
statements about the Company's business, revenue, expenditures, research and
development efforts, operating and capital requirements, changes in operations,
integration of the acquisition of PickAX, 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.
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; that the
Company may not introduce new or improved products in a timely fashion or at
all; 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; or that
the Company may not be able to retire the debt due upon maturity.
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 products: Rapid Application Development ("RAD") software
tools; and multi-dimensional database management systems. The Company's products
allow customers to create and enhance flexible software applications tailor-made
to their own needs. The Company's products support the full lifecycle of
application development and are designed for rapid development and deployment of
Web, client/server and mobile computing applications. The Company's RAD products
are object-oriented, component-based tools, providing the ability to deploy
applications on the Windows, Unix and Linux operating system platforms as well
as the Oracle, DB2, Sybase, Microsoft and SQL Server database environments and
other Open Data Base Connectivity ("ODBC") compatible database management
systems. Similarly, the Company's
8
multi-dimensional database products are designed to operate in the Windows,
Unix, Linux operating environments.
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 both a per-server basis and a per-user
basis. Additional servers and users, as applicable, on existing systems increase
the Company's revenues 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 month period ended June 30, 2001 differ materially from
the same period in the prior year. Consequently, the results of prior periods
are not comparable to this period or future periods.
Restatement of Financial Statements
Subsequent to the filing of its Annual Report on Form 10-QSB for the quarter
ended June 30, 2001 with the Securities and Exchange Commission, the Company
became aware of certain misapplications of accounting standards principally
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 June
30, 2001 and 2000 have been restated as follows:
2001 2000
------------------------------ ------------------------------
As Reported Restated As Reported Restated
------------- ------------- ------------- -------------
Net Revenue
License $2,903,000 $2,852,000 $814,000 $792,000
Service 3,105,000 2,384,000 172,000 172,000
Total Net Revenue 6,008,000 5,236,000 986,000 964,000
Total Costs and Expenses 8,403,000 9,801,000 2,916,000 3,888,000
Operating Loss (2,395,000) (4,565,000) (1,930,000) (2,924,000)
Total Other Expense (873,000) (947,000) (44,000) (44,000)
Net Loss $(3,268,000) $(5,512,000) $(1,974,000) $(2,968,000)
Basic and Diluted Net
Loss Per Share $(.20) $(.35) $(.19) $(.30)
Weighted Average
Number of Common
Shares Outstanding 16,009,008 15,724,291 10,124,026 9,839,230
Net Revenue: Total net revenue for the three month period ended June 30, 2001
increased 443% to $5,236,000 from $964,000 for the same three month period in
the prior year. License revenue increased 260% to $2,852,000 from $792,000 while
services revenue increased 1,286% to $2,384,000 from $172,000 for the same three
month period in the prior year. The increase in net revenue in total and by
category is due to the acquisition of PickAX in December 2000. Prior to the
acquisition of PickAX, the Company's revenue had been declining. In the early
part of the fiscal year ended March 31, 2001, the Company reduced the price of
its products
9
in an effort to increase demand for the Company's products. That strategy was
not successful in increasing the Company's revenue.
As a result of the PickAX acquisition, the mix of revenue also changed. Services
revenue increased to 46% of total year revenue for the three months ended June
30, 2001 from 18% of total revenue for the same three month period in the prior
year. PickAX was more active in providing consulting and training services than
the Company up to the time of acquisition.
Cost of License Revenue: Total cost of license revenue increased 212% to
$106,000 for the three months ended June 30, 2001 from $34,000 for the three
month period in the prior fiscal year reflecting the results of the PickAX
acquisition. At the same time, cost of license revenue remained approximately 4%
of license revenue for the same three month period in the prior fiscal year
compared to the three months ended June 30, 2001. The Company is moving the
product documentation process to CD-ROM and to Web-based downloading. In this
manner, the Company was able to reduce the cost of manufacturing and shipping of
the Company products.
Cost of Service Revenue: Total cost of service revenue increased 354% to
$1,049,000 for the three months ended June 30, 2001 from $231,000 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 44% of
service revenue for the three months ended June 30, 2001 from 134% of service
revenue for the same three month period in the prior fiscal year. This reflects
the continuing efforts of the Company to improve the financial contribution of
the service businesses to the Company including customer support, professional
consulting services, and training and education.
Selling and Marketing Expenses: Selling and marketing expenses increased 55% to
$2,112,000 from $1,365,000 for the same three month period in the prior fiscal
year for the three months ended June 30, 2001 reflecting the results of the
PickAX acquisition. At the same time, sales and marketing expenses decreased to
40% of total revenue for the three months ended June 30, 2001 from 142% of total
revenue for the same three month period in the prior fiscal year.
Research and Development Expenses: Research and development expenses decreased
22% to $1,216,000 from $1,552,000 for the same three month period in the prior
fiscal year for the three months ended June 30, 2001 reflecting the results of
the PickAX acquisition. During the three month period ended June 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. During the three month period ended June
30, 2000, the Company purchased software still in development for $900,000 which
was expensed during that period.
General and Administrative Expenses: General and administrative expenses
increased 306% to $1,776,000 for the three months ended June 30, 2001 from
$437,000 for the same three month period in the prior fiscal year reflecting the
results of the PickAX acquisition. At the same time, general and administrative
expenses decreased from 45% of total revenue for the same three month period in
the prior fiscal year to 34% of total net revenue for the three months ended
June 30, 2001.
Stock-Based Compensation: Stock-based compensation expense increased 32% to
$356,000 from $269,000 for the same three month period in the prior fiscal year.
As a percentage of total net revenue stock based compensation expense decreased
to 7% for the three month period ended June 30, 2001 from 28% for the same three
month period in the prior fiscal year.
Amortization of Goodwill and Intangible Assets: Amortization of goodwill and
intangible assets was $3,186,000 for the three month period ended June 30, 2001.
There was no similar charge in the three month period in the prior year.
Amortization of goodwill and intangible assets arises from the acquisition of
PickAX effective December 1, 2000.
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Operating Loss: The Company's operating loss increased 56% to $4,565,000 for the
three months ended June 30, 2001 from $2,924,000 for the same three month period
in the prior fiscal year.
The operating loss for the period ended June 30, 2001 includes non cash charges
for depreciation and amortization. The following table summarizes these charges
for the periods indicated.
Restated Restated
Three Months Three Months
Ended Ended
(Unaudited) June 30, 2001 June 30, 2000
------------- -------------
Operating Loss $ (4,565,000) $ (2,924,000)
Depreciation of Property, Furniture and Equipment 200,000 79,000
Amortization of Stock-Based Compensation 356,000 269,000
Amortization of Goodwill and Intangible
Assets 3,186,000 --
------------ ------------
Operating Loss before depreciation
and amortization $ (823,000) $ (2,576,000)
============ ============
Interest and Other Expense: Net interest expense increased to $947,000 for the
three months ended June 30, 2001 from $44,000 for the same period in the prior
year. The increase reflects the increase in debt of the Company (see notes to
the consolidated financial statements). Other expense of $50,000 for the three
months ended June 30, 2001 resulted primarily from foreign exchange transaction
losses.
Net Loss: The net loss increased to a net loss of $5,512,000 or $(.35) per share
for the three months ended June 30, 2001 from $2,968,000 for the same three
month period in the prior fiscal year or $(.30) per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $1,644,000 in cash and equivalents at June 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 assumed in 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 or in the event of an offering.
The Company had a working capital deficit of $5,101,000 at June 30, 2001. Of
this total deficit, approximately $3,967,000 represents deferred revenue which
the Company earns over the remaining life of the underlying service contracts.
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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 longer term, or 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 assurance can be given that additional
financing will be available or that, if available, such financing will be on
terms favorable to the Company.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
COMPASS LITIGATION - Since 1994, the Company and Compass Software (Compass) have
been in litigation over software copyright infringement and related claims in
the courts of the State of Washington. The Company has generally prevailed in
these matters. In the most recent action, the US District Court for the Western
District of the State of Washington awarded statutory damages to the Company in
the amount of approximately $150,000 in addition to injunctive relief and
attorney fees from Compass. The Company obtained a motion for judgment to
collect the $150,000 judgment awarded and for an additional $245,000 in legal
fees. In February 2001, Earl Asmus, the principal in Compass, sued the Company
in the Central District of California on a number of issues related to the State
of Washington court proceedings. In early April 2000, the suit was dismissed,
with leave to amend. Mr. Asmus amended his complaint and the Company's motion to
strike the amended complaint is before the Court. In October 2001, the case was
settled through the Company's insurance policy.
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 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 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.
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 approximately $690,000 plus penalties and interest. The Company has
prevailed in two preliminary hearings sought by General Automation. 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.
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 5. OTHER INFORMATION
Ms. Gwyneth M. Gibbs resigned as an officer of the Company effective June 30,
2001. However, the effective date for the resignation of Ms. Gibbs as an
employee of the Company was amended from June 30, 2001 to March 31, 2002
pursuant to a Settlement Agreement attached to this Form 10-QSB as Exhibit
10.19. In addition, effective as of August 14, 2001, Ms. Gibbs resigned as a
director of the Company.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.19* Settlement Agreement between the Company and Gwyneth M. Gibbs.
*Previously filed with the Commission.
(b) Reports on Form 8-K.
None
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
/s/ SCOTT K. ANDERSON, JR.
--------------------------------------------------
Scott K. Anderson, Jr.
Vice President Finance, Treasurer and Secretary
(Principal Financial and Accounting Officer)
13