UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-KSB

(Mark one)

x                              ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2007

or

o                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    .

Commission file number 0-16449

RAINING DATA CORPORATION

(Name of Small Business Issuer in Its Charter)

Delaware

 

94-3046892

(State of Incorporation)

 

(I.R.S. Employer ID. No.)

25A Technology Drive, Irvine, California

 

92618

(Address of Principal Executive Offices)

 

(Zip Code)

 

(949) 442-4400

(Issuer’s Telephone Number, Including Area Code)

Securities registered under Section 12(b) of the Exchange Act:

Title of Each Class

 

Name of Each Exchange on Which Registered

None

 

N/A

 

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, $0.10 par value

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the 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  o

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No  x

The Registrant’s revenues for the fiscal year ended March 31, 2007 were $18.7 million.

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was $19,267,643 on March 22, 2007 based on the closing sale price of such stock on that date.

As of May 31, 2007, the Registrant had 21,186,747 shares of its common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.

Transitional Small Business Disclosure Format (check one): Yes  o  No  x

 




RAINING DATA CORPORATION

FISCAL YEAR 2007 FORM 10-KSB ANNUAL REPORT

INDEX

 

PART I

 

 

 

Item 1.

 

Description of Business

 

1

 

Item 2.

 

Description of Property

 

6

 

Item 3.

 

Legal Proceedings

 

7

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

8

 

 

 

PART II

 

 

 

Item 5.

 

Market for Common Equity and Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities

 

9

 

Item 6.

 

Management’s Discussion and Analysis or Plan of Operations

 

10

 

Item 7.

 

Financial Statements

 

22

 

Item 8.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

22

 

Item 8A.

 

Controls and Procedures

 

22

 

Item 8B.

 

Other Information

 

23

 

 

 

PART III

 

 

 

Item 9.

 

Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act

 

23

 

Item 10.

 

Executive Compensation

 

25

 

Item 11.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

29

 

Item 12.

 

Certain Relationships and Related Transactions

 

31

 

Item 13.

 

Exhibits

 

32

 

Item 14.

 

Principal Accountant Fees and Services

 

33

 

Signatures

 

35

 

Consolidated Financial Statements

 

36

 

 

i




PART I

IMPORTANT NOTE ABOUT FORWARD-LOOKING STATEMENTS   This Form 10-KSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may generally be identified by the use of such words as “expect,” “anticipate,” “believe,” “intend,” “plan,” “will,” or “shall,” or the negative of those terms. We have based these forward-looking statements on our current expectations and projections about future events. Forward-looking statements involve certain risks and uncertainties and actual results may differ materially from those discussed in any such statement. Factors that could cause actual results to differ materially from such forward-looking statements include the risks described under the heading “Risk Factors” in Part II, Item 6 of this Form 10-KSB and elsewhere in this Form 10-KSB. The forward-looking statements contained in this Form 10-KSB include, but are not limited to statements about the following: (1) our future success, (2) our research and development efforts, (3) our future operating results and cash flow, (4) our competitive ability and position, (5) the markets in which we operate, (6) our revenue, (7) cost of license revenue and cost of service revenue, (8) our selling and marketing costs, (9) our general and administrative costs, (10) stock-based compensation expense and the impact of adopting SFAS 123(R), (11) the possibility that we may seek to take advantage of opportunities in the equity and capital markets (12) our belief that our existing cash balances combined with our cash flow from operating activities will be sufficient to meet our operating and capital expenditure requirements for the remainder of the fiscal year ending March 31, 2008 and through the foreseeable future, (13) our belief that our credit facility is not required for liquidity purposes or to meet our cash flow needs for the foreseeable future and (14) our focus on the continued development and enhancement of the TigerLogic XDMS product line, identification of new and emerging application areas and discussions with channel partners for the sale and distribution of the TigerLogic product line. All forward-looking statements in this document are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement.

ITEM 1.                Description of Business

Overview

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

Products

Our principal business is the design, development, sale and support of software infrastructure. Our products allow customers to create and enhance flexible software applications for their own needs and our software may be categorized into three product lines: XML data management systems (“XDMS”), Multi-dimensional database management systems (“MDMS”), and Rapid Application Development (“RAD”) software tools.

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

Beginning in 2001, we began an extensive effort to leverage our time-proven Pick UDM and core intellectual property to create an enterprise class XML database management system for the emerging XML market, the growing need for native XML data stores and the ability to handle structured and unstructured data. This significant investment of time and resources resulted in the TigerLogic

1




XDMS product line. We are focused on the continued development and enhancement of this product line, identification of new and emerging application areas and discussions with channel partners for the sale and distribution of the TigerLogic product line.

TigerLogic XDMS

TigerLogic XML Data Management Server provides high-performance management and query of XML data by leveraging the time-proven Pick UDM. TigerLogic also enables the ability to query external data sources as if they were one logical database and maintains referential integrity across data sources. TigerLogic’s patent-pending XML Indexing and Profiling technology enables it to access XML data via XQuery between 10x to 150x faster in internal tests than relational databases, XML repositories or XML Index and Search engines. TigerLogic provides XML, Java, .NET, WSDL and SOAP compatibility for simplified plug-in and integration with development environments of choice.

TigerLogic provides an extensible and flexible development and deployment environment. Unlike other XML data management alternatives, TigerLogic XDMS does not need to know the schema or structure of data before processing and storing it. We believe the ability to make XML schemas optional is a vital innovation because the structures of operational systems frequently change, and mapping schemas for the purpose of linking to a new data source is both difficult and time-consuming. The system also enables support for schema versioning, which is critical when addressing evolving standards and XML schemas. The General Availability Release of TigerLogic XDMS version 2.6, which included support for enhanced XQuery features, including XQuery stored procedures and full-text search and support for High Availability clustering, was released in July 2006, and Version 3.0, which is the third generation release of the product and includes compliance with the XML Query 1.0 specification released in January 2007, cache management of data sources, in-memory cache support for Geospatial data, enhanced APIs and data repolication was released for beta testing in June 2007.

Multi-dimensional Databases (MDMS)

The MDMS product line consists principally of the D3 Data Base Management System (“D3”), which runs on many operating systems such as IBM AIX, Linux and Windows NT. D3 allows application programmers to create new business solution software in less time than it normally takes in many other environments. This can translate into lower costs for the developer, lower software prices for the customer and reduced costs of ownership for both the developer and end user. Our MDMS products also include mvEnterprise, a scalable multi-dimensional database solution that allows the user to leverage the capabilities of the UNIX operating system, and mvBase, a multi-dimensional database solution that runs on all Windows platforms.

MDMS components include the Pick Data Provider for .Net (“PDP”) and our Pick Reporting Services Connector. The PDP component for the Microsoft .NET Framework is tightly integrated with Microsoft Visual Studio .NET. It allows software developers using IBM’s Universe and Unidata databases and our D3 database platform to build client/server applications, Web applications or Web services using any of the languages and technologies that run on the Microsoft .NET Framework, such as Microsoft ASP.NET, Visual Basic .NET, Visual C# .NET and Visual J# .NET. Our Pick Reporting Services Connector enables a data connection that allows Pick database users to unlock the benefits of Microsoft Reporting Services to take advantage of a comprehensive, server-based reporting solution that can author, manage, and deliver both paper-oriented and interactive, Web-based reports. This solution also allows access to IBM UniVerse, IBM UniData and Pick D3 data.

2




Rapid Application Development (RAD) Tools

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

Technical Support

Our products are used by our customers to build and deploy applications that may become a critical component of their business operations. As a result, continuing to provide customer technical support services is an important element of our business strategy. Customers who participate in our support programs receive periodic maintenance releases on a when-and-if available basis and direct technical support when required.

Sales and Distribution

In the United States, we sell our products through established distribution channels consisting of OEMs, system integrators, specialized vertical application software developers and consulting organizations. We also sell our products directly through our sales personnel to end user organizations. Outside the United States, we maintain direct sales offices in the United Kingdom, France and Germany. Approximately 31% of our revenue came from sales through our offices located outside the United States for the year ended March 31, 2007.

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

We license our software on a per-CPU, per-server, per-port or per-user basis. Therefore, the addition of CPU’s, servers, ports or users to existing systems increases our revenue from our installed base of licenses. In addition to software products, we provide continuing maintenance and other services to our customers, including professional services, technical support and training to help plan, analyze, implement and maintain application software based on our products.

Customers

Our customers may be classified into two general categories:

·       Independent Software Vendors and Software Developers. The majority of our revenue is derived from independent software vendors, which typically write their own vertical application software that they sell as a complete package to end user customers. This category includes value added resellers (“VARs”) and software-consulting companies that provide contract programming services to their customers.

·       Corporate Information Technology (“IT”) Departments.

For each of the three years ended March 31, 2007, 2006 and 2005, no single customer accounted for more than 10% of our revenue.

3




Research and Development

We have devoted significant resources to the research and development of our products and technology. We believe that our future success will depend largely on a strong development effort with respect to both our existing and new products. These development efforts have resulted in updates and upgrades to existing MDMS and RAD products and the launch of new products including the XDMS product line. New product releases in all of our product lines are currently in progress. We expect to continue our research and development efforts in all product lines for the foreseeable future. We intend for these efforts to improve our future operating results and increase cash flow. However, such efforts may not result in additional new products or revenue, and we can make no assurances that the recently announced products or future products will be successful. We spent $9.3 million, $9.6 million and $7.6 million on research and development in fiscal years 2007, 2006 and 2005, respectively.

Competition

The application development tools software market is rapidly changing and intensely competitive. Our MDMS products compete with products developed by companies such as Oracle, Microsoft and IBM. Our RAD products currently encounter competition from several direct competitors, including Microsoft, and competing development environments, including JAVA. Competition is developing and evolving in the XML market for which our XDMS products are intended. Companies that do or are expected to compete in this market include Oracle, IBM, Microsoft and Sybase, as well as a number of smaller companies with products that directly and indirectly compete with our XDMS products. Most of our competitors have significantly more financial, technical, marketing and other resources than we do. As a result, these competitors may be able to respond more quickly to new or emerging technologies, evolving markets and changes in customer requirements, and may devote greater resources to the development, promotion and sale of their products.

We believe that our ability to compete in the various MDMS, RAD, and XDMS markets depends on factors both within and outside our control, including the timing of release, performance and price of new products developed by both us and our competitors. Although we believe that we currently compete favorably with respect to most of these factors, we may not be able to maintain our competitive position against current and potential competitors, especially those with greater resources.

Intellectual Property and Other Proprietary Rights

We rely primarily on a combination of trade secret, copyright and trademark laws and contractual provisions to protect our intellectual property and proprietary rights. Our trademarks include Raining Data, Pick, TigerLogic, D3, Omnis, Omnis Studio, mvEnterprise, mvBase, and mvDesigner, among others. We also have one pending U.S. patent application as of March 31, 2007.

We license our products to end users on a “right to use” basis pursuant to a perpetual license agreement that restricts use of products to a specified number of users. We generally rely on “click-wrap” licenses that become effective when a customer downloads and installs the software on its system. In order to retain exclusive ownership rights to our software and technology, we generally provide our software in object code only, with contractual restrictions on copying, disclosure, and transferability. There can be no assurance that these protections will be adequate, or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology.

Backlog

We generally ship software products as orders are received and have historically operated with little backlog. As a result, our license revenue in any given quarter is dependent upon orders received and

4




product shipped during the quarter. Historically, there has been a short cycle between receipt of an order and shipment. Consequently, we do not believe that our backlog as of any particular date is meaningful.

Employees

At March 31, 2007, we had 111 employees worldwide of which 81 were in the United States and 30 were in our international offices. Of the 111 employees, 104 are full-time and approximately 50% are in research and development, 15% in technical support, 22% in sales and marketing and 13% in general and administrative functions.

Executive Officers

The following sets forth certain information regarding our executive officers as of March 31, 2007:

Name

 

 

 

Age

 

Position(s)

 

Carlton H. Baab

 

 

49

 

 

President, Chief Executive Officer and Director

 

Thomas Lim

 

 

38

 

 

Chief Financial Officer, VP of Finance, and Secretary

 

John H. Bramley

 

 

50

 

 

Vice President, Product Development

 

Robert W. Albo

 

 

48

 

 

Vice President, Business Solutions

 

Ajay Ramachandran

 

 

33

 

 

CTO & Vice President, XML-Centric Applications & Platforms

 

 

Mr. Baab joined us as President and Chief Executive Officer in August 2001 and was appointed as a member of our Board of Directors in December 2001. From May 2001 to August 2001, Mr. Baab served as a Managing Principal of Astoria Capital Management (“ACM”), a Securities and Exchange Commission (the “SEC”) registered investment advisor and a General Partner of Astoria Capital Partners, L.P. (“ACP”), a significant stockholder of ours. In August 2001, Mr. Baab took a formal leave of absence from ACM to join us. From March 2000 to April 2001, Mr. Baab was the Vice President of Finance and Chief Financial Officer of Certive, Inc., a web-based small-business services firm. From January 1999 to March 2000, Mr. Baab was the Chief Operating Officer and Chief Financial Officer of RemarQ Communities, Inc., a web-based provider of discussion group services. Mr. Baab served as Chief Financial Officer of the CKS Group (“CKS”), a marketing communications company, from February 1994 through December 1998. In addition, Mr. Baab served as an Executive Vice President and the Secretary of CKS from August 1995 through December 1998 and as CKS’ Chief Operating Officer from August 1995 through May 1996. Mr. Baab also served on the Board of Directors of Momentum Business Applications, Inc. (Nasdaq: MMTM), which provided research and development expertise on a contract basis, until it was acquired by PeopleSoft (Nasdaq: PSFT) in April 2002. Mr. Baab also serves on the University of Southern California, School of Engineering Board of Councilors. Mr. Baab holds a B.S. in Electrical Engineering, with honors, from the University of Southern California and an M.B.A. from the Harvard Graduate School of Business Administration.

Mr. Lim has served as our Chief Financial Officer, Vice President of Finance and Secretary since May 2006. Prior to joining Raining Data, from March 2004 to May 2006, Mr. Lim served as the Director of Finance and Controller of WageWorks, Inc., an employee benefits administration firm. Mr. Lim served as the Director of Finance of DNA Sciences, Inc., a bio-research company, from October 2002 to January 2004, and as the Corporate Controller of Certive Corporation, a software company, from June 2000 to September 2002. Mr. Lim graduated from the University of California at Berkeley, Haas School of Business with a B.S. in accounting and finance and received his M.B.A. from the University of California at Berkeley, Haas School of Business. Mr. Lim is a Certified Public Accountant.

Mr. Bramley has served as our Vice President of Product Development since February 2007. Mr. Bramley has over 20 years of experience in product management and development. From April 2001 to February 2007, Mr. Bramley held various corporate technical positions involved with the development,

5




marketing and support of Raining Data’s TigerLogic XDMS technology. From November 1996 to April 2001, Mr. Bramley served as Vice President, Engineering responsible for the product development and technical support for Raining Data’s multi-dimensional database management systems. From January 1987 to November 1996, Mr. Bramley was involved in the management and development of the Pick database management system at Sequoia Systems, a vendor of fault tolerant hardware products. Mr. Bramley holds a B.S. degree in Computer Science from the State University of New York, Plattsburgh, NY.

Mr. Albo joined us in July 2005 as our Vice President of Business Solutions. Prior to this, Mr. Albo was Vice President of Value Engineering at SAP from October 2004 to July 2005. Mr. Albo also has over ten years of management experience in technology and business consulting companies, including eLoyalty/TSC from June 1997 to July 2002 and Cambridge Technology Partners from March 1993 to June 1997. Mr. Albo holds a B.S. in Industrial Engineering and Operations Research from the University of California at Berkeley and an M.B.A. from the Harvard Graduate School of Business Administration.

Mr. Ramachandran is disclosed pursuant to Item 401(b) of Regulation S-B. Mr. Ramachandran was not considered an executive officer as of March 31, 2007. Mr. Ramachandran joined us as Vice President and General Manager of the Enterprise Applications Group in April 2004. He was promoted to CTO and Vice President of XML-Centric Applications and Platforms in May 2006. From October 2001 to April 2004, Mr. Ramachandran served as a Founding General Partner of Ark Venture Partners LLC, a management advisory and private equity firm. From April 1999 to September 2001, Mr. Ramachandran was a Co-Founder at Electron Economy, a venture capital funded supply chain workflow and XML integration software company, where he was the Vice President of Business Development and Strategic Alliances, and from July 2000 to September 2001, he was its Vice President of Business Development and Product Management. From December 1997 to July 1999, Mr. Ramachandran was a Partner and Practice Leader of the E-Commerce Business Unit at USWeb/CKS Corporation, a leading Internet Professional Services Firm. From June 1996 to December 1997, Mr. Ramachandran was a Partner and Director of Technology and Internet Applications at Utopia Inc.. Mr. Ramachandran serves on the boards of several early stage ventures and is the technical chair of the World Wide Consortium of the GRID. Mr. Ramachandran holds a B.S. in Molecular Cellular Biology and B.A. in Communications, from the University of California at Davis. Mr. Ramachandran’s employment with us terminated effective June 1, 2007.

ITEM 2.                Description of Property

We currently lease approximately 29,000 square feet of office space in Irvine, California. The lease commenced in November 2005 and has a five year term and provides for a base monthly rent of approximately $43,000. The facility accommodates our engineering, technical support, sales, marketing, and general and administrative personnel.

We own a building consisting of approximately 5,900 total square feet located on approximately six acres of land in Suffolk, England. The facility houses engineers, marketing, and technical support.

We currently lease approximately 5,000 square feet of office space in San Jose, California which houses engineering, business development, marketing, and general and administrative personnel.

We also lease a sales and support office in each of the UK, France and Germany.

We believe that our facilities are suitable and adequate for our current needs.

6




ITEM 3.                Legal Proceedings

We are subject from time to time to litigation, claims and suits arising in the ordinary course of business. As of March 31, 2007, we have the following outstanding litigations:

1.     Raining Data v. Intrametrics.  On or about January 19, 2007, the Company filed a complaint in Orange County Superior Court that sets forth allegations that Intrametrics threatens to and has misappropriated the Company’s trade secrets.  The Company’s allegations in the complaint include that Intrametrics has obtained the Company’s source code in violation of the Parties’ OEM (Original Equipment Manufacturer) Distribution Agreement and in violation of California’s laws prohibiting the misappropriation of trade secrets.  The Company seeks injunctive relief from Intrametrics, including, but not limited to, compelling Intrametrics to fully comply with all of the termination provisions set forth in the OEM Agreement; enjoining Intrametrics and its employees and agents from using or disclosing the Company’s trade secrets; prohibiting Intrametrics from soliciting the Company's current or potential customers for 3 years, and from soliciting or employing certain of the Company's former employees for 3 years.  Intrametrics filed a motion to quash the Complaint, which the Company opposed, but on the morning of the hearing, Intrametrics first notified the Company that it filed Chapter 11 bankruptcy, effectively staying the litigation in Orange County Superior Court.  The Company will pursue further discovery and litigation in the Bankruptcy court in Houston, TX. 

2.     Raining Data v. Soheil Raissi (formerly the Company’s Vice President, Product Development and Professional Services), Mario Barrenechea (formerly the Company’s Senior Vice President, Worldwide Sales and Marketing, Pick and Omnis Products), and Adevnet.  On or about December 8, 2006, the Company filed a complaint in Orange County Superior Court that sets forth allegations that the defendants threaten to and have missappropriated the Company’s trade secrets.  The Company’s allegations in the complaint include that the individual defendants have used and/or disclosed the Company’s trade secrets (in the form of source code and licenses and other trade secret information) in violation of their agreements with the Company to maintain the confidentiality of such trade secret information, and in violation of California laws prohibiting the misappropriation of trade secrets. The Company seeks injunctive relief from the defendants, including, but not limited to, compelling the defendants to immediately return all of the Company's trade secrets and property; enjoining the defendants and their employees and agents from using or disclosing the Company's trade secrets, including the Company's source code; ordering the defendants to disclose all gains and profits they have derived from the misappropriation of the Company's trade secrets; enjoining the defendants from directly or indirectly supplying, selling or promoting any product that incorporates the Company's trade secrets.

3.     Cross-Complaint by Soheil Raissi, Mario Barrenechea and Adevnet v. Raining Data.  On or about January 10, 2007, the defendants in the case above filed a cross-complaint, alleging several claims against the Company and Carlton Baab, the Company’s President and Chief Executive Officer, unfair business practices, violation of civil rights, intentional interference with prospective economic advantage, negligent interference with prospective economic advantage, malicious prosecution, abuse of process, negligence, civil conspiracy, and injunctive relief.  Cross-complainants allege general, compensatory, special, and punitive and exemplary damages in amounts “according to proof”, and seek to enjoin the Company from engaging in improper and unlawful conduct.  The Company and Carlton Baab assert that all of the claims are baseless, and filed a special motion to strike all the allegations in the cross-complaint.  The Company's special motion to strike is scheduled to be heard on August 3, 2007.  The Company and Carlton Baab will continue to vigorously defend their rights in this litigation.

An unfavorable resolution of these legal proceedings could have a material adverse effect on the Company's business, results of operations, financial condition and cash flows.

7




ITEM 4.                Submission of Matters to a Vote of Security Holders

At the 2006 Annual Meeting of the Company’s Stockholders held on February 16, 2007 (the “Meeting”), two proposals were submitted. No other proposals were put before the Meeting. The proposals and voting results were as follows:

1.                 To elect Richard W. Koe as a Class II director to serve until the 2009 Annual Meeting of the Stockholders or until his successor is duly elected and qualified:

FOR: 20,559,381                    WITHHELD: 218,368

2.                 To ratify the appointment of KPMG LLP as the independent auditors of the Company for the fiscal year ending March 31, 2007:

FOR: 20,660,810          AGAINST: 104,403          WITHHELD: 12,536

All proposals were approved by the requisite number of votes.

8




PART II

ITEM 5.                Market for Common Equity and Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities

Market Information

Our common stock is traded on the Nasdaq Capital Market under the symbol “RDTA.”

The following table sets forth the high and low closing prices for our common stock for the periods indicated, as reported by Nasdaq:

 

 

High

 

Low

 

Fiscal Year 2006

 

 

 

 

 

First Quarter

 

$

2.79

 

$

2.09

 

Second Quarter

 

$

4.20

 

$

2.06

 

Third Quarter

 

$

4.33

 

$

3.42

 

Fourth Quarter

 

$

3.50

 

$

2.53

 

 

 

 

High

 

Low

 

Fiscal Year 2007

 

 

 

 

 

First Quarter

 

$

4.01

 

$

2.55

 

Second Quarter

 

$

4.50

 

$

3.19

 

Third Quarter

 

$

3.89

 

$

2.50

 

Fourth Quarter

 

$

3.00

 

$

2.05

 

 

On March 31, 2007, the closing price for our common stock on the Nasdaq Capital Market was $2.84 and there were approximately 141 holders of record of our common stock.

Dividends

We have never declared or paid dividends on our common stock. We intend to retain earnings, if any, for the operation and expansion of our business, and therefore do not anticipate paying any cash dividends in the foreseeable future. The terms of the Loan and Security Agreement with Silicon Valley Bank, dated February 11, 2004, prohibit the payment of dividends (except in specified circumstances) without Silicon Valley Bank’s prior written consent, which will not be unreasonably withheld.

9




ITEM 6.                Management’s Discussion and Analysis or Plan of Operations

The section entitled “Management’s Discussion and Analysis” set forth below contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. When used herein, the words “anticipates,” “believes,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “seeks,” “should,” “will” or the negative of these terms or similar expressions are generally intended to identify forward-looking statements. Forward-looking statements involve certain risks and uncertainties, and actual results may differ materially from those discussed in any such statement. Factors that could cause actual results to differ materially from such forward-looking statements include the risks described in the “Risk Factor” section and elsewhere in this Form 10-KSB. All forward-looking statements in this document are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement. See “Important Note About Forward-Looking Statements” in Part I of this 10-KSB.

This discussion and analysis of the financial statements and results of operations should be read in conjunction with our audited consolidated financial statements, including the related notes thereto, contained elsewhere in this Form 10-KSB.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and disclosure of contingent liabilities.

On an on-going basis, we evaluate our estimates, including those related to revenue recognition and accounting for goodwill. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

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

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

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

10




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

For contracts that require significant modification or customization to the software in accordance with customers’ specifications, we recognize revenue using the completed-contract method pursuant to the requirements of Statement of Position No. 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” Under this method, revenue and expenses are deferred until customer acceptance of the finished product occurs.

GOODWILL.   We assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We also assess the value of goodwill at least annually. Factors we consider to be important which could trigger an impairment review include the following:

·       Significant underperformance relative to expected historical or projected future operating results;

·       Timing of our revenue, significant changes in the manner of use of the acquired assets or the strategy for the overall business;

·       Significant negative industry or economic trends;

·       Significant decline in our stock price for a sustained period; and

·       Our market capitalization relative to net book value.

In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), we do not amortize goodwill, but test for goodwill impairment following a two-step process. The first step is used to identify potential impairment by comparing the fair value of a reporting unit with its net book value (or carrying amount), including goodwill. If the fair value exceeds the carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. Currently, we have one reporting unit for goodwill impairment testing.

Determining the fair value of a reporting unit under the first step of the goodwill impairment test and determining the fair value of individual assets and liabilities of a reporting unit (including unrecognized intangible assets) under the second step of the goodwill impairment test is judgmental in nature and often involves the use of significant estimates and assumptions. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and the magnitude of any such charge. Estimates of fair value are currently based on our stock price as reported by Nasdaq.

11




EMPLOYEE STOCK-BASED COMPENSATION.   We account for stock-based compensation in accordance with SFAS No. 123(R), Share-Based Payment. Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the requisite service period. We estimate the fair value of stock-based awards using a Black-Scholes valuation model. Determining the fair value of share-based awards at the grant date requires judgment, including estimating volatility, expected terms, and forfeitures. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.  See note 7, “Stockholders’ Equity,” for additional information.

Results of Operations

The following table sets forth certain consolidated statement of operations data in total dollars, as a percentage of total net revenue and as a percentage change from the prior year. Cost of license revenue and the cost of service revenue are expressed as a percentage of the related revenue. This information should be read in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this Form 10-KSB.

 

 

Year Ended

 

Year Ended

 

 

 

Year Ended

 

 

 

March 31, 2007

 

March 31, 2006

 

 

 

March 31, 2005

 

 

 

Results

 

% of Net
Revenues

 

Percent
Change

 

Results

 

% of Net
Revenues

 

Percent
Change

 

Results

 

% of Net
Revenues

 

Net revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licenses

 

$

6,859

 

 

37

%

 

 

(18

)%

 

$

8,404

 

 

41

%

 

 

(10

)%

 

$

9,362

 

 

44

%

 

Services

 

11,885

 

 

63

%

 

 

0

%

 

11,890

 

 

59

%

 

 

(2

)%

 

12,121

 

 

56

%

 

Total net revenues

 

18,744

 

 

100

%

 

 

(8

)%

 

20,294

 

 

100

%

 

 

(6

)%

 

21,483

 

 

100

%

 

Operating expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of license revenues (as a % of license revenues)

 

99

 

 

1

%

 

 

(52

)%

 

207

 

 

2

%

 

 

(35

)%

 

318

 

 

3

%

 

Cost of service revenues (as a % of service revenues)

 

2,117

 

 

18

%

 

 

(7

)%

 

2,274

 

 

19

%

 

 

(3

)%

 

2,333

 

 

19

%

 

Selling and marketing

 

5,466

 

 

29

%

 

 

5

%

 

5,219

 

 

26

%

 

 

(7

)%

 

5,582

 

 

26

%

 

Research and
development

 

9,295

 

 

50

%

 

 

(4

)%

 

9,638

 

 

47

%

 

 

27

%

 

7,563

 

 

35

%

 

General and
administrative

 

3,866

 

 

21

%

 

 

11

%

 

3,477

 

 

17

%

 

 

(7

)%

 

3,748

 

 

17

%

 

Amortization Expense

 

 

 

0

%

 

 

0

%

 

 

 

0

%

 

 

(100

)%

 

1,733

 

 

8

%

 

Total operating
expenses

 

20,843

 

 

111

%

 

 

0

%

 

20,815

 

 

103

%

 

 

(2

)%

 

21,277

 

 

99

%

 

Operating loss

 

(2,099

)

 

(11

)%

 

 

303

%

 

(521

)

 

(3

)%

 

 

(353

)%

 

206

 

 

1

%

 

Other expense-net

 

(765

)

 

(4

)%

 

 

(26

)%

 

(1,027

)

 

(5

)%

 

 

(9

)%

 

(1,127

)

 

(5

)%

 

Loss before income taxes

 

(2,864

)

 

(15

)%

 

 

85

%

 

(1,548

)

 

(8

)%

 

 

68

%

 

(921

)

 

(4

)%

 

Provision for income
taxes

 

94

 

 

1

%

 

 

24

%

 

76

 

 

0

%

 

 

4

%

 

73

 

 

0

%

 

Net loss

 

$

(2,958

)

 

(16

)%

 

 

82

%

 

$

(1,624

)

 

(8

)%

 

 

63

%

 

$

(994

)

 

(5

)%

 

 

12




REVENUE

NET REVENUE.   Our revenue is derived principally from two sources: fees from software licensing and fees for post contract technical support. We license our software on a per-CPU, per-server, per-port or per-user basis. Therefore, the addition of CPU’s, servers, ports or users to existing systems increases our revenue from our installed base of licenses. While the timing of orders and customer ordering patterns have resulted in some fluctuations in license revenue between quarters and year-to-year, the 18% decrease in license revenue from fiscal 2006 to fiscal 2007 was primarily the result of an acceleration of our customers adoption of other technologies. Services revenue has remained relatively stable and consistent from period to period and we anticipate that services revenue will remain stable for the foreseeable future. In the longer term, we expect that the MDMS and RAD markets will eventually contract as customers continue to adopt newer technologies and, therefore, the revenue generated from sales of our MDMS and RAD products is expected to decrease.

We have been actively developing and marketing our XDMS product line. Should our development efforts and the adoption of these product lines be successful, we anticipate additional revenues in future periods related to the sale of these products. However, we can give no assurances as to customer acceptance of any new products or services, or the ability of the current or any new products and services to generate revenue. While we are committed to research and development efforts that are intended to allow us to penetrate new markets and generate new sources of revenue, such efforts may not result in additional products, services or revenue.

OPERATING EXPENSES

COST OF LICENSE REVENUE.   Cost of license revenue is comprised of direct costs associated with software license sales including software packaging, documentation, physical media costs and royalties. The decrease in cost of license revenue fiscal 2007 as compared to fiscal 2006, and in fiscal year 2006 as compared to fiscal year 2005 is due to decrease in license revenue. If license revenue continues to decline in future periods, we anticipate that the cost of license revenue, in absolute dollars, will decline accordingly in future periods.

COST OF SERVICE REVENUE.   Cost of service revenue includes primarily personnel costs relating to providing consulting, technical support and training services. Cost of service revenue decreased in fiscal 2007 as compared to fiscal 2006 due to reduced headcount and remained relatively consistent in fiscal 2006 as compared to fiscal 2005. We anticipate that the cost of service revenue, as a percentage of service revenue and in absolute dollars, will be relatively stable in future periods.

SELLING AND MARKETING.   Selling and marketing expense consists primarily of salaries, benefits, advertising, tradeshows, travel and overhead costs for our sales and marketing personnel. Selling and marketing expense remained relatively consistent in fiscal 2007 as compared to fiscal 2006, and also in fiscal year 2006 as compared to fiscal year 2005. We adopted  SFAS No. 123(R) at the beginning of fiscal year 2007 pursuant to which stock option compensation expense of $0.4 million was recorded in fiscal year 2007 in selling and marketing expenses. In addition, advertising and marketing expenses increased approximately $0.2 million. However, these expenses were partially offset by a reduction in headcount that decreased expenses by approximately $0.3 million. We anticipate that selling and marketing costs related to XDMS products may increase as we further develop the sales channel for these products and if customer acceptance of these products increases. In addition, if our continued research and development efforts are successful, including with respect to our XDMS products, and new products or services are created, we may incur increased sales and marketing expense to promote those new products in future periods.

RESEARCH AND DEVELOPMENT.   Research and development expense consists primarily of salaries and other personnel-related expenses and overhead costs for engineering personnel, including

13




employees in the US and the UK and contractors in the US and India. Research and development expense decreased slightly in fiscal 2007 as compared to fiscal 2006 due to reduced headcount and consulting expenses of approximately $0.5 million and $0.1 million, respectively, partially offset by the adoption of SFAS No. 123(R) for stock option compensation expense of $0.3 million. In fiscal 2006, spending related to our development efforts increased because of continued efforts to refine and add certain features and functionality to these products. The majority of these costs have been personnel related, including salary and recruiting costs, as we have hired employees and contractors in association with the ongoing development and enhancement of our product lines. We are committed to our research and development efforts and expect research and development expense will remain at the current level in future periods or increase if we believe that additional spending is warranted. Such efforts may not result in additional new products and any new products, including the XDMS products, may not generate sufficient revenue, if any, to offset the research and development expense.

GENERAL AND ADMINISTRATIVE.   General and administrative expense consists primarily of costs associated with our finance, human resources, legal and other administrative functions. These costs consist principally of salaries and other personnel-related expenses, professional fees, depreciation and overhead costs. General and administrative spending increased in fiscal 2007 as compared to fiscal 2006 due to cost incurred relating to the restatement of our 10-KSB for the year ended March 31, 2006, the adoption of SFAS No. 123(R) of approximately $0.3 million, and fees of approximately $0.4 million in connection with the current legal proceedings, partially offset by reduced headcount. General and administrative spending was lower in fiscal 2006 as compared to fiscal 2005 due to reduced headcount. We anticipate that general and administrative costs as a percentage of revenue and in absolute dollars will remain relatively stable in future periods.

AMORTIZATION OF INTANGIBLE ASSETS.   We amortize our identifiable intangible assets in accordance with their determined useful life. The life of our existing intangible assets was estimated to be four years. As of March 31, 2005, our existing intangible assets were fully amortized.

OTHER EXPENSE.   Other expense consists primarily of net interest expense and, to a much lesser extent, gains and losses on foreign currency transactions. Other expense decreased during fiscal 2007 as compared to fiscal 2006 due to higher interest income as a result of higher investment balances and remained relatively consistent in fiscal 2006 as compared to fiscal 2005. Due to the uncertainty in exchange rates, we may experience transaction gains or losses in future periods, the effect of which cannot be determined at this time.

PROVISION FOR INCOME TAXES.   Our effective tax rate was 3.3%, 4.9%, and 7.9% for fiscal 2007, 2006, and 2005, respectively. The provision for income taxes reflects the tax on earnings from foreign subsidiaries. The Company is able to reduce the current tax liability of foreign subsidiaries with net operating loss carryforwards. However, certain carryforwards were acquired in our 2000 acquisition. Therefore, the benefit realized from utilizing those net operating loss carryforwards reduced goodwill instead of income tax expense. Due to uncertainties surrounding the timing of realizing the benefits of the net operating loss carryforwards in the future, the Company has established a full valuation allowance against its net deferred tax assets.

Liquidity and Capital Resources

In connection with the acquisition of PickAx, we assumed a Secured Promissory Note issued to Astoria Capital Partners, L.P. (“Astoria”) dated November 30, 2000, in the amount of $18.5 million. In January 2003, we entered into a Note Exchange Agreement (the “Exchange Agreement”) with Astoria to replace the existing Secured Promissory Note, as amended, with a Convertible Subordinated Note. Under the terms of the Exchange Agreement, the Secured Promissory Note was exchanged and replaced with a Convertible Subordinated Note having a principal amount of $22.1 million, which principal amount was

14




equal to the outstanding principal and accrued interest payable on the Secured Promissory Note as of the date of the Exchange Agreement. In October 2005, Astoria assigned a portion of its common stock holdings totaling 870,536 shares and a portion of the Subordinated Convertible Note, totaling $1,751,832, to two of its limited partners. As such, we issued an Amended and Restated Note to Astoria for $20,749,581 and corresponding notes directly to the limited partners for $862,979 and $888,853, respectively. The Convertible Subordinated Notes are convertible into common stock at any time, at the option of the holder, at a price of $5.00 per share. The Convertible Subordinated Notes mature on May 30, 2008, extending the May 30, 2003 maturity date of the Secured Promissory Note. The interest rate of the Convertible Subordinated Notes is 5% per annum as compared to an interest rate of 10% per annum under the Secured Promissory Note. The interest is payable quarterly at our option in cash or through increases to the outstanding principal of the Convertible Subordinated Notes.

On December 14, 2004, we entered into an Agreement Regarding Amended and Restated Common Stock Purchase Warrant and 5% Convertible Subordinated Note Due 2008 with Astoria whereby we could redeem, in part, the Convertible Subordinated Note in advance of January 30, 2005. On December 14, 2004, Astoria exercised its warrant in the amount of $2,670,904. In lieu of a cash payment, we used the proceeds of the exercise to pay down a portion of the indebtedness to Astoria. The pay down consisted of $247,129 for accrued and unpaid interest, and $2,423,775 as a reduction of principal of the Convertible Subordinated Note. For the foreseeable future, we expect to increase the principal of the Convertible Subordinated Notes in lieu of cash payments for the interest. If the Convertible Subordinated Notes are converted into common stock, our stockholders may experience substantial dilution. Unlike the Secured Promissory Note, the Convertible Subordinated Notes are not secured by our assets.

If our future financial performance improves, we may seek to take advantage of opportunities in the equity and capital markets to raise additional funds for operating needs or to pay down our debt to Astoria and others. There can be no assurances that such opportunities will arise. In addition to holding the majority of the Convertible Subordinated Notes, Astoria is a major stockholder of ours, holding a majority of our outstanding common stock. Richard W. Koe, Chairman of the Board of Directors, serves as the Managing General Partner for Astoria. Carlton H. Baab, our President and Chief Executive Officer and a member of the Board of Directors, served as a Managing Principal of ACM, which is a general partner of Astoria, until taking a formal leave of absence to join us in August 2001. Gerald F. Chew, a member of our Board of Directors, is the cousin of Mr. Koe.

At March 31, 2007, we had $11.7 million in cash. We believe that our existing cash balances combined with our cash flow from operating activities will be sufficient to meet our operating and capital expenditure requirements for the remainder of the fiscal year ending March 31, 2008 and through the foreseeable future. We are committed to research and development efforts that are intended to allow us to penetrate new markets and generate new sources of revenue and improve operating results. However, our research and development efforts have required, and will continue to require, cash outlays without the immediate or short-term receipt of related revenue. Our ability to service our long-term debt and meet our expenditure requirements is dependent upon our future financial performance, which will be affected by, among other things, prevailing economic conditions, our ability to penetrate new markets and attract new customers, market acceptance of our new and existing products and services, the success of research and development efforts and other factors beyond our control.

On February 11, 2004, we entered into a two year credit facility with Silicon Valley Bank which provided us with the ability to borrow up to $1.5 million at an annual interest rate of Prime plus 1.0%, provided that the annual interest rate shall never be less than 5%. We renewed this credit facility on February 11, 2006. The credit facility is collateralized by our assets and expires in February 2008. The credit facility contains financial and reporting covenants that require us to maintain certain financial ratios only when we have outstanding borrowings on the line. There were no outstanding borrowings at March 31, 2007. Upon expiration of the term of this facility we will assess our credit and liquidity needs in

15




relation to market factors. However, we believe that the facility is not required for liquidity purposes or to meet our cash flow needs for the foreseeable future.

On November 9, 2004, we entered into a lease agreement with The Irvine Company whereby we leased one building in Irvine, California, comprising approximately 29,000 square feet, to replace our then headquarters facility. The lease commenced in November 2005 and has a five-year term. If certain conditions are met, we have the option to extend the term of the lease for an additional thirty-six months. The total basic rent over the five-year term is approximately $2.6 million, which represents a lower per square foot cost than our prior property lease. The annual basic rent during the five-year term ranges from approximately $475,000 during the first year to approximately $545,000 during the fifth year. The rent expense is being recognized on a straight line basis over the lease term.

We had no material commitments for capital expenditures at March 31, 2007.

Net cash used in operating activities was $0.3 million and  $0.2 million and net cash provided by operating activities was $2.8 million for the years ended March 31, 2007, 2006 and 2005, respectively.

Our earnings before interest, taxes, depreciation and amortization (EBITDA) were negative $0.9 million, or negative 5% of total net revenue, negative $0.2 million, or negative 1% of total net revenue, $2.3 million, or 11% of total net revenue, for the years ended March 31, 2007, 2006 and 2005, respectively. The reduction in fiscal 2007 EBITDA as compared to fiscal 2006 and fiscal year 2005 was a result decreased revenues and increased spending for research and development. EBITDA is defined as net loss with an add-back for depreciation and amortization, non-cash stock-based compensation expense, interest expense, other income and income taxes. The following table reconciles EBITDA to the reported net loss:

RAINING DATA CORPORATION AND SUBSIDIARIES
RECONCILIATION OF EBITDA TO NET LOSS
(In thousands)

 

 

For the year ended March 31,

 

 

 

2007

 

2006

 

2005

 

Reported net loss

 

$

(2,958

)

$

(1,624

)

$

(994

)

Depreciation and amortization

 

318

 

276

 

2,021

 

Stock-based compensation

 

911

 

10

 

66

 

Interest expense-net

 

837

 

952

 

1,155

 

Other income (expense)-net

 

(72

)

75

 

(28

)

Provision for income taxes

 

94

 

76

 

73

 

EBITDA

 

$

(870

)

$

(235

)

$

2,293

 

 

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

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

16




Our EBITDA financial information is also comparable to net cash provided by (used in) operating activities. The table below reconciles EBITDA to the GAAP disclosure of net cash provided by (used in) operating activities:

RAINING DATA CORPORATION AND SUBSIDIARIES
RECONCILIATION OF EBITDA TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
(In thousands)

 

 

For the year ended March 31,

 

 

 

2007

 

2006

 

2005

 

Net cash provided by (used in) operating activities

 

$

(280

)

$

(163

)

$

2,812

 

Interest expense-net

 

837

 

952

 

1,155

 

Other (income) expense -net

 

(72

)

75

 

(28

)

Change in trade accounts receivable

 

(375

)

110

 

38

 

Change in other current and non-current assets

 

68

 

(133

)

101

 

Change in accounts payable

 

279

 

134

 

(188

)

Change in accrued liabilities

 

(1,145

)

(1,482

)

(1,156

)

Change in deferred revenue

 

(98

)

355

 

(352

)

Note payable discount amortization

 

(83

)

(83

)

(89

)

Provision for bad debt

 

(1

)

 

 

EBITDA

 

$

(870

)

$

(235

)

$

2,293

 

 

RISK FACTORS

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

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

We have devoted significant resources to the research and development of products and technologies. We believe that our future success will depend in large part on a strong research and development effort with respect to both our existing and new products. Beginning in 2001, we began an extensive effort to leverage our time-proven Pick UDM and core intellectual property to create an enterprise class XML database management server for the emerging XML market. This significant investment of time and resources resulted in the TigerLogic XDMS product line. While we intend for these efforts to improve our future operating results and increase cash flow, such efforts may not result in new products or revenue, and any new products that do result may not be successful. The development of new or enhanced software products is a complex and uncertain process requiring high levels of innovation, as well as accurate anticipation of customer and technical trends. In developing new products and services, we may fail to develop and market products that respond to technological changes or evolving industry standards in a timely or cost-effective manner, or experience difficulties that could delay or prevent the successful development, introduction and marketing of these new products. The development and introduction of new or enhanced products also requires us to manage the transition from older products in order to minimize disruptions in customer ordering patterns and to ensure that adequate supplies of new products can be delivered to meet customer demand. Failure to develop and introduce new products, or enhancements to existing products, in a timely manner in response to changing market conditions or customer requirements, or lack of customer acceptance of our products, will materially and adversely affect our business, results of operations and financial condition.

17




OUR FAILURE TO COMPETE EFFECTIVELY MAY HAVE AN ADVERSE IMPACT ON OUR OPERATING RESULTS.

The market for our products is highly competitive, diverse and subject to rapid change. Our products and services compete on the basis of the following key characteristics: performance; inter-operability; scalability; functionality; reliability; pricing; post sale customer support; quality; compliance with industry standards; and overall total cost of ownership.

The application development tools software market is rapidly changing and intensely competitive. Our MDMS products compete with products developed by companies such as Oracle, Microsoft and IBM. Our RAD products currently encounter competition from several direct competitors, including Microsoft, and competing development environments, including JAVA. Competition is developing and evolving in the XML market for which our XDMS products are intended. Companies that do or are expected to compete in this market include Oracle, IBM, Microsoft and Sybase, as well as a number of smaller companies with products that directly and indirectly compete with our XDMS products. Additionally, as we expand our business, we expect to compete with a different group of companies, including smaller, highly focused companies offering single products.

Most of our competitors have significantly more financial, technical, marketing and other resources than we do. As a result, these competitors may be able to respond more quickly to new or emerging technologies, evolving markets and changes in customer requirements and may devote greater resources to the development, promotion and sale of their products. While we currently believe that our products and services compete favorably in the marketplace, our products and services could fall behind marketplace demands at any time. If we fail to address the competitive challenges, our business would suffer materially.

BECAUSE THE MARKET FOR OUR MDMS AND RAD PRODUCTS MAY BE DECLINING, OUR REVENUE MAY DECLINE IF WE CANNOT MAINTAIN OUR SALES TO EXISTING CUSTOMERS OR GENERATE SALES TO NEW CUSTOMERS.

We believe that the markets for our MDMS and RAD products may be declining as customers adopt other technologies. As a result, to maintain or grow our revenue in these markets, we will need to maintain our sales to existing customers and to generate sales to new customers, including corporate development teams, commercial application developers, system integrators, independent software vendors and independent consultants. If we fail to attract new customers, if we lose our customers to competitors, or if the MDMS or RAD markets decline, our revenue may be adversely affected. In the longer term, it is expected that the MDMS and RAD markets will eventually decline as customers adopt newer technologies.

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

The sales cycle for our MDMS and RAD products typically ranges from three to nine months or longer and the sales cycle for our XDMS products is anticipated to be significantly longer since these markets are emerging and the products are still in the process of being adopted by the marketplace. Our products are typically used by application developers, system integrators and value added resellers to develop applications that are critical to their corporate end user’s business. Because our products are often part of an end user’s larger business process, re-engineering initiative, or implementation of client/server or web-based computing, the end users frequently view the purchase of our products as part of a long-term strategic decision regarding the management of their workforce-related operations and expenditures. Thus, this sometimes results in end users taking a significant period of time to assess alternative solutions by competitors or to defer a purchase decision as a result of an unrelated strategic issue beyond our control. As a result, a significant period of time may elapse between our research and development efforts and recognition of revenue, if any.

18




IF WE FAIL TO INCREASE REVENUE OR IMPROVE OUR OPERATING RESULTS, WE MAY NOT BE ABLE TO REPAY OUR DEBT TO ASTORIA AND OTHERS.

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

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

As of March 31, 2007, Astoria beneficially owned approximately 57% of our outstanding common stock. In addition, as of March 31, 2007, the Convertible Subordinated Note issued to Astoria and its limited partners had a balance of approximately $24.2 million in principal and accrued interest maturing on May 30, 2008. Richard W. Koe, Chairman of the Board of Directors, serves as the Managing General Partner for ACM, which is a general partner of Astoria. Carlton H. Baab, our President, Chief Executive Officer, and Director, served as a Managing Principal of ACM until taking a formal leave of absence to join us in August 2001. This concentration of stock ownership, together with the outstanding debt, would allow Astoria, acting alone, to block any actions that require approval of our stockholders, including the election of members to the Board of Directors and the approval of significant corporate transactions. Moreover, this concentration of ownership may delay or prevent a change in control.

WE MAY EXPERIENCE QUARTERLY FLUCTUATIONS IN OPERATING RESULTS, WHICH MAY RESULT IN VOLATILITY OF OUR STOCK PRICE.

We expect to continue to spend substantial amounts of money in the area of research and development, sales and marketing and operations in order to promote new product development and introduction. Because the expenses associated with these activities are relatively fixed in the short-term, we may be unable to timely adjust spending to offset any unexpected shortfall in revenue growth or any decrease in revenue levels. Operating results may also fluctuate due to factors such as:

·       the size and timing of customer orders;

·       changes in pricing policies by us or our competitors;

·       our ability to develop, introduce, and market new and enhanced versions of our products;

·       the number, timing, and significance of product enhancements and new product announcements by our competitors;

·       the demand for our products;

·       non-renewal of customer support agreements;

·       software defects and other product quality problems; and

·       personnel changes.

19




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

THE SUCCESS OF OUR BUSINESS DEPENDS IN PART UPON OUR ABILITY TO RECRUIT AND RETAIN KEY PERSONNEL AND MANAGEMENT.

The majority of our executive officers joined us subsequent to the acquisition of PickAx, including our President, Chief Executive Officer, and Director, Carlton H. Baab, who joined us in August 2001. The loss of one or more of these or other executives could adversely affect our business. In addition, we believe that our future success will depend to a significant extent on our ability to recruit, hire and retain highly skilled management and employees with experience in engineering, product management, business development, sales, marketing and customer service. Competition for such personnel in the software industry can be intense, and there can be no assurance that we will be successful in attracting and retaining such personnel. If we are unable to do so, we may experience inadequate levels of staffing to develop and license our products and perform services for our customers, which could adversely affect our business.

THE INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY COULD HARM OUR ABILITY TO COMPETE.

Our ability to compete successfully will depend, in part, on our ability to protect our proprietary technology and operations without infringing upon the rights of others. We may fail to do so. In addition, the laws of certain countries in which our products are, or may be, licensed may not protect our proprietary rights to the same extent as the laws of the United States. We rely primarily on a combination of trade secret, copyright and trademark laws and contractual provisions to protect our intellectual property and proprietary rights. Our trademarks include Raining Data, Pick, D3, Omnis, Omnis Studio, mvEnterprise, mvBase, mvDesigner and TigerLogic, among others. We also have one pending U.S. patent application as of March 31, 2007. In addition to trademark and copyright protections, we license our products to end users on a “right to use” basis pursuant to a perpetual license agreement that restricts use of products to a specified number of users.

We generally rely on “click-wrap” licenses that become effective when a customer downloads and installs software on its system. In order to retain exclusive ownership rights to our software and technology, we generally provide our software in object code only, with contractual restrictions on copying, disclosure and transferability. There can be no assurance that these protections will be adequate, or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology.

As further described in Item 3, the Company has filed complaints in Orange County Superior Court that sets forth allegations that certain parties threaten to and have misappropriated the Company’s trade secrets, including the possible release of certain source code.

20




OUR PRODUCTS MAY CONTAIN SOFTWARE DEFECTS WHICH COULD HARM OUR BUSINESS.

Our enterprise applications software may contain undetected errors or failures. This includes our XDMS products, which are at higher risk given these products are in the earliest stages of the product life cycle. This may result in loss of, or delay in, customer acceptance of our products and could harm our reputation and our business. Undetected errors or failures in computer software programs are not uncommon. While we make every effort to thoroughly test our software, in the event that we experience significant software errors, we could experience delays in release, customer dissatisfaction and lost revenue. Any of these errors or defects could harm our business.

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

As of March 31, 2007, we had 21,184,402 outstanding shares of common stock, of which approximately 9,700,000 shares were restricted securities held by Astoria and other holders. Restricted securities may be sold in the public market only if they are registered or if they qualify for an exemption from registration promulgated under the Securities Act of 1933, as amended. At present, all of our outstanding restricted securities are either entitled to registration rights or eligible for public sale under Rule 144, subject to volume limitations and other requirements of Rule 144. If Astoria or other holders decide to exercise their demand registration rights, we would incur costs and expenses associated with the registration of securities.

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

OUR GLOBAL OPERATIONS EXPOSE US TO ADDITIONAL RISKS AND CHALLENGES ASSOCIATED WITH CONDUCTING BUSINESS INTERNATIONALLY.

We operate on a global basis with offices or distributors in Europe, Africa, Asia, Latin America, South America, Australia and North America and development efforts in North America, India and Europe. Approximately 31% of our revenue for the year ended March 31, 2007 was generated from our international offices. We face several risks inherent in conducting business internationally, including but not limited to the following:

·       fluctuations in interest rates or currency exchange rates;

·       language and cultural differences;

·       local and governmental requirements;

·       difficulties and costs of staffing and managing international operations;

·       differences in intellectual property protections;

·       difficulties in collecting accounts receivable and longer collection periods;

·       seasonal business activities in certain parts of the world; and

·       trade policies.

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

21




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

A key factor in our future success will continue to be the ability of our products to operate and perform well with existing and future leading, industry-standard enterprise software applications intended to be used in connection with our MDMS, RAD, and XDMS products. Inter-operability may require third party licenses, which may not be available to us on favorable terms or at all. Failure to meet existing or future inter-operability and performance requirements of industry standard applications in a timely manner could adversely affect our business. Uncertainties relating to the timing and nature of new product announcements or introductions or modifications of third party software applications could delay our product development, increase our product development expense or cause customers to delay evaluation, purchase, and deployment of our products.

THIRD PARTIES COULD ASSERT THAT OUR SOFTWARE PRODUCTS AND SERVICES INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH COULD RESULT IN COSTLY LITIGATION, CAUSE PRODUCT SHIPMENT DELAYS, PROHIBIT PRODUCT LICENSING OR REQUIRE US TO ENTER INTO ROYALTY OR LICENSING AGREEMENTS.

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

ITEM 7.                Financial Statements

Our consolidated financial statements, including the notes thereto, together with the report of KPMG LLP, independent registered public accounting firm, thereon are presented as a separate section of this Form 10-KSB, and the following are attached hereto beginning on Page 36:

Consolidated Financial Statements:

 

 

Report of Independent Registered Public Accounting Firm

 

36

Consolidated Balance Sheets as of March 31, 2007 and March 31, 2006

 

37

Consolidated Statements of Operations for the years ended March 31, 2007, 2006 and 2005

 

38

Consolidated Statements of Cash Flows for the years ended March 31, 2007, 2006 and 2005

 

39

Consolidated Statements of Stockholders’ Equity and Comprehensive Loss for the years ended March 31, 2007, 2006 and 2005

 

40

Notes to Consolidated Financial Statements

 

41

 

ITEM 8.                Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There were no changes in or disagreements with our accountants on accounting or financial disclosures for the year ended March 31, 2007.

ITEM 8A.        Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on such

22




evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure; however, it was concluded that such controls were ineffective, as of the end of the period covered by this report, because it has recently come to the Company's attention that Richard Smith, a director, has failed to file Forms 4 with respect to a substantial number of transactions in the Company's common stock from September 2005 to the present. The Company is reviewing the circumstances surrounding the failed filings and intends to provide additional disclosure upon the completion of its review.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Management necessarily applied its judgment in assessing the benefits of controls relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within Raining Data Corporation have been detected.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the fourth quarter of the 2007 fiscal year that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 8B.       Other Information

None.

PART III

ITEM 9.                Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act

Our Bylaws provide that the Board of Directors is to be composed of no less than five (5) and no more than nine (9) directors divided into Classes I, II and III, each with as nearly equal a number of directors as possible. The exact number of directors is currently set at five (5) by resolution of the Board of Directors. The directors are elected to serve staggered three-year terms, with the term of one class of directors expiring each year at the annual meeting of stockholders.

The following table sets forth as of March 31, 2007, the name, age, and position of the directors, the date they joined the Board of Directors and the year in which their term expires:

Name of Director

 

 

 

Age

 

Position

 

Director
Since

 

Term
Expires

 

Richard W. Koe(1)(3)(4)

 

 

50

 

 

Chairman

 

 

2003

 

 

 

2009

 

 

Carlton H. Baab

 

 

49

 

 

President, Chief Executive
Officer and Director

 

 

2001

 

 

 

2007

 

 

Gerald F. Chew(2)

 

 

47

 

 

Director

 

 

1998

 

 

 

2007

 

 

Douglas G. Marshall(1)(2)(3)

 

 

50

 

 

Director

 

 

1998

 

 

 

2008

 

 

Richard W. Smith(2)

 

 

46

 

 

Director

 

 

2005

 

 

 

2008

 

 


(1)          Member of the Compensation Committee

(2)          Member of the Audit Committee

23




(3)          Member of the Nominating and Corporate Governance Committee

(4)          Member of the Stock Committee, a subcommittee of the Compensation Committee

The following is a description of the background of each director as of March 31, 2007:

Mr. Koe joined the Board of Directors in January 2003. Mr. Koe has served as Managing General Partner for ACP, a significant stockholder of ours, and Montavilla Partners, L.P., both of which are investment partnerships, and as President of ACM since July 1991. Mr. Koe has served as Chairman of the Board since December 2004. Mr. Koe serves as Chairman of the Compensation Committee and the Nominating and Corporate Governance Committee and is the sole member of the Stock Committee, a subcommittee of the Compensation Committee.

Mr. Baab joined us as President and Chief Executive Officer in August 2001 and was appointed as a member of the Board of Directors in December 2001. From May 2001 to August 2001, Mr. Baab served as a Managing Principal of ACM and a General Partner of ACP, a significant stockholder of ours. In August 2001, Mr. Baab took a formal leave of absence from ACM to join us. From March 2000 to April 2001, Mr. Baab was the Vice President of Finance and Chief Financial Officer of Certive, Inc., a web-based small-business services firm. From January 1999 to March 2000, Mr. Baab was the Chief Operating Officer and Chief Financial Officer of RemarQ Communities, Inc., a web-based provider of discussion group services. Mr. Baab served as Chief Financial Officer of the CKS, a marketing communications company, from February 1994 through December 1998. In addition, Mr. Baab served as an Executive Vice President and the Secretary of CKS from August 1995 through December 1998 and as CKS’ Chief Operating Officer from August 1995 through May 1996. Mr. Baab also served on the Board of Directors of Momentum Business Applications, Inc. (Nasdaq: MMTM), which provided research and development expertise on a contract basis, until it was acquired by PeopleSoft (Nasdaq: PSFT) in April 2002. Mr. Baab also serves on the University of Southern California, School of Engineering Board of Councilors. Mr. Baab holds a B.S. in Electrical Engineering, with honors, from the University of Southern California and an M.B.A. from the Harvard Graduate School of Business Administration.

Mr. Chew joined the Board of Directors  in 1998. Since 2003, Mr. Chew has served as Managing Director of Bridgetown Associates, LLC, an investment advisory firm. Mr. Chew served as the President and Chief Operating Officer of MDSI Mobile Data Solutions Inc. (Nasdaq: MDSI) from 2001 to 2002 and served as a director of MDSI from 1995 until 2001. Mr. Chew served as Executive Vice President of Ancora Capital & Management Group, LLC, an investment firm, from 1998 to 2001. In addition, since 1997, Mr. Chew has served as Managing Director of The Cairn Group. Mr. Chew holds a B.S. in Electrical Engineering from the University of California, Davis and an M.B.A. from the Amos Tuck School of Business Administration at Dartmouth College. Mr. Chew is also an advisor to several private companies. Mr. Chew serves as Chairman of the Audit Committee.

Mr. Marshall joined the Board of Directors in July 1998. Mr. Marshall is Senior Vice President of Deposit Strategy and Product Management at Washington Mutual (NYSE: WM), a financial services company. Mr. Marshall joined Washington Mutual in November 2001. From August 1994 to November 2001, Mr. Marshall held a number of marketing positions at Bank of America (NYSE: BAC), most recently as Vice President of Advertising and Marketing Communications. Mr. Marshall holds a B.A. in English from Seattle Pacific University and an M.B.A. from the University of Washington. Mr. Marshall serves on the Audit Committee, Compensation Committee and the Nominating and Corporate Governance Committee.

Mr. Smith joined the Board of Directors in August 2005. Mr. Smith currently serves as a sales and business development consultant for global technology and semiconductor organizations. From 1997 through 2004, Mr. Smith held various management positions with Intel Corporation, most recently as Business Development Manager for Intel Capital. Prior to Intel, Mr. Smith held positions with Cummins Engine Company and General Electric and served as an officer with the United States Army. Mr. Smith

24




received his B.S. in Civil Engineering from the United States Military Academy at West Point and his M.B.A. from the Darden Graduate School of Business Administration at the University of Virginia. Mr. Smith serves on the Audit Committee.

Information regarding our current executive officers, which may be found under the caption “Executive Officers” in Part I hereof, is incorporated by reference into this Item 9.

Family Relationships

To our knowledge, with the exception of Mr. Chew and Mr. Koe who are cousins, there are no family relationships between any of our directors and executive officers.

Audit Committee Financial Expert

The Audit Committee of the Board of Directors is comprised solely of independent directors as defined in the Marketplace Rules of the Nasdaq Stock Market, and is governed by a written charter adopted by the Board of Directors. The Board of Directors has determined that Gerald F. Chew qualifies as an “audit committee financial expert” as that term is defined in Item 401(e) of Regulation S-B under the Exchange Act and is “independent” as defined in Rule 4200(a)(15) of the National Association of Securities Dealers’ listing standards.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file certain reports of ownership with the SEC and with the National Association of Securities Dealers, Inc. To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required during the fiscal year ended March 31, 2007, all reports required to be filed during fiscal year ended March 31, 2007 pursuant to Section 16(a) of the Exchange Act by directors, executive officers and 10% beneficial owners were timely filed, with the exception of the following late filings: one Form 3 and one Form 4 by Mr. Lim on June 5, 2006, one Form 3 by Mr. Bramley on April 4, 2007 and one Form 3 by Mr. Albo on June 21, 2007. In addition, it has recently come to the Company’s attention that Richard Smith, a director, has failed to file Forms 4 with respect to a substantial number of transactions in the Company’s common stock from September 2005 to the present.  The Company is reviewing the circumstances surrounding the failed filings and intends to provide additional disclosure upon the completion of its review.

Code of Ethics

We have adopted a Code of Ethics for Principal Executive and Senior Financial Officers, which is posted on our Internet website at www.rainingdata.com. We will post any amendments or waivers, if and when approved or granted, of our Code of Ethics on our website at www.rainingdata.com.

ITEM 10.         Executive Compensation

Summary Compensation

The following table sets forth the compensation of our Named Executive Officers, which consist of (i) all persons serving as the chief executive officer during the fiscal year ended March 31, 2007, (ii) the two most highly compensated executive officers serving as such at the end of the fiscal year ended March 31, 2007, in addition to the chief executive officer and (iii) up to two additional individuals for whom disclosure would have been provided pursuant to subsection (ii) above but for the fact that the individual was not serving as an executive officer at the end of the fiscal year ended March 31, 2007.

25




Summary Compensation Table

Name and
Principal Position

 

 

 

Year

 

Salary 
($)
(1)

 

Bonus 
($)

 

Stock 
Awards 
($)

 

Option
Grants
 ($)
(2)

 

Non-Equity
Incentive Plan 
Compensation
($)

 

Change in 
Pension Value
and
Nonqualified
Deferred
Compensation 
Earnings 
($)

 

All Other
Compensation 
($)

 

Total 
($)

 

Carlton H. Baab,
President
and Chief Executive Officer

 

 

2007

 

 

$

248,000

 

$

150,000

(3)

 

$

 

 

 

$

191,474

 

 

 

$

 

 

 

$

 

 

 

21,360

(4)

 

$

610,834

 

Robert W. Albo,
Vice President, Business Solutions

 

 

2007

 

 

$

175,000

 

$

87,500

(5)

 

$

 

 

 

$

130,165

 

 

 

$

 

 

 

$

 

 

 

$

168

(6)

 

$

392,833

 

Thomas Lim,
CFO and Vice President of Finance

 

 

2007

 

 

$

147,404

 

$

86,250

(7)

 

$

 

 

 

$

62,571

 

 

 

$

 

 

 

$

 

 

 

$

142

(6)

 

$

296,367

 


(1)                Includes base salary amounts earned in 2007. Includes amounts (if any) deferred at the named executive officer’s option under the Raining Data 401(k) plan.

(2)                Amounts shown do not reflect compensation actually received by the named executive officers. Instead, the amounts shown reflect the expense recognized by us in 2007 for option awards as determined pursuant to SFAS 123(R). These compensation costs include option awards granted in and prior to 2007. The assumptions used to calculate the value of the option awards are set forth in the notes to the consolidated financial statements in Item 7 of this Form 10-KSB (Note 2, “Determining Fair Value”), with the exception that the “Estimated Forfeiture Rates” assumption used was zero in accordance with SEC instructions to Item 402(b)(2)(v) and (vi). There were no forfeitures in 2007 of option awards received by the Named Executive Officers. The material terms of each option grant is further described in the footnotes to the “Outstanding Equity Awards at Fiscal Year-End Table” below.

(3)                Represents a discretionary bonus earned by Mr. Baab in fiscal year 2007 but paid in April 2007.

(4)                All Other Compensation for Mr. Baab reflects payments to a continuing medical plan Mr. Baab had in place at the time he joined us.

(5)                Represents a discretionary bonus earned by Mr. Albo in fiscal year 2007 but paid in June 2007.

(6)                Represents taxable amount of premiums paid by us on group term life insurance policies for the benefit of the Named Executive Officers.

(7)                Represents a sign-on bonus of $25,000 plus a discretionary bonus of $61,250 earned by Mr. Lim in fiscal year 2007 but paid in June 2007.

Outstanding Equity Awards at Fiscal Year-End Table

The following table summarizes the outstanding equity awards held by each Named Executive Officer as of March 31, 2007. The Named Executive Officers did not exercise any options during the fiscal year ended March 31, 2007.

 

Option Awards

 

Stock Awards

 

Name

 

 

 

Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable(1)

 

Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable(1)

 

Equity
Incentive
Plan Awards;
Number of
Underlying
Unexercised
Unearned
Options (#)

 

Option
Exercise
Price ($)

 

Option
Expiration
Date(1)

 

Number
of Shares
or Units
of Stock
That
Have Not
Vested
(#)

 

Market
Value of
Shares
or Units
of Stock
That
Have
Not
Vested
($)

 

Equity
Incentive
Plan
Awards;
Number of
Unearned
Shares,
Units or
Other
Rights
That Have
Not Vested
(#)

 

Equity
Incentive
Plan
Awards;
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That Have
Not Vested
($)

 

Carlton H. Baab

 

 

 

 

 

400,000

(2)

 

 

 

 

 

$

3.50

 

 

 

5/10/2016

 

 

 

 

 

 

$

 

 

 

 

 

 

$

 

 

 

 

1,000,000

 

 

 

 

 

 

 

 

 

$

1.55

 

 

 

9/24/2011

 

 

 

 

 

 

$

 

 

 

 

 

 

$

 

 

 

 

50,000

 

 

 

 

 

 

 

 

 

$

1.02

 

 

 

7/31/2009

 

 

 

 

 

 

$

 

 

 

 

 

 

$

 

 

Robert W. Albo

 

 

104,166

 

 

 

145,834

(3)

 

 

 

 

 

$

2.49

 

 

 

7/15/2015

 

 

 

 

 

 

$

 

 

 

 

 

 

$

 

 

Thomas Lim

 

 

0

 

 

 

150,000

(4)

 

 

 

 

 

$

3.25

 

 

 

5/30/2016

 

 

 

 

 

 

$

 

 

 

 

 

 

$

 

 


(1)                Unless otherwise noted, the options vest at a rate of 25% one year from the date of grant and 1/48th each month thereafter and expire ten years from the date of grant. The vesting of options granted to Named Executive Officers may accelerate under specified conditions, as described in the “Employment Contracts and Termination of Employment and Change-in-Control Arrangements” section below.

26




(2)                This option was granted on May 10, 2006 and vests over four years, subject to Mr. Baab’s continued employment, with 25% of the shares vesting on May 10, 2007 and 1/48th of the shares vesting each month thereafter, subject to acceleration of vesting as described in the “Employment Contracts and Termination of Employment and Change-in-Control Arrangements” section below.

(3)                This option was granted on July 15, 2005 and vests over four years, subject to Mr. Albo’s continued employment, with 25% of the shares vesting on July 15, 2006 and 1/48th of the shares vesting each month thereafter, subject to acceleration of vesting as described in the “Employment Contracts and Termination of Employment and Change-in-Control Arrangements” section below.

(4)                This option was granted on May 30, 2006 and vests over four years, subject to Mr. Lim’s continued employment, with 25% of the shares vesting on May 30, 2007 and 1/48th of the shares vesting each month thereafter, subject to acceleration of vesting as described in the “Employment Contracts and Termination of Employment and Change-in-Control Arrangements” section below.

Employment Contracts and Termination of Employment and Change-in-Control Arrangements

Regardless of the reason for termination, a Named Executive Officer is entitled to receive upon termination of employment amounts earned through the termination date, including, base salary and unused vacation pay, and the right to exercise any shares of options vested up to the executive’s termination date. The Named Executive Officer are not otherwise entitled to any severance benefits upon voluntary resignation. Our Compensation Committee and Board of Directors determines whether any severance benefits are provided upon any voluntary termination on a case by case basis.

Effective April 5, 2003, we entered into a Severance and Change of Control Agreement with Mr. Baab. The agreement provides for twelve (12) months severance pay at Mr. Baab’s base salary rate then in effect in the event of his involuntary termination other than for cause, death or disability, either prior to a change of control or at least twelve months after a change of control. In the event of Mr. Baab’s involuntary termination other than for cause, death or disability within twelve (12) months following a change of control, the agreement provides for: (i) 100% acceleration of vesting of his stock options as of his termination date; (ii) severance payments equal to 200% of the aggregate salary and bonus paid to Mr. Baab during the twelve (12) months preceding his termination; and (iii) health (i.e., medical, vision and dental) coverage and benefits commensurate with those in effect for Mr. Baab on the day immediately preceding his termination for a period until the earlier of (1) the date Mr. Baab is no longer eligible to receive continuation coverage pursuant to COBRA, or (2) twelve (12) months from the termination date.

Effective April 24, 2006, we entered into an offer letter agreement with Mr. Lim. In the event that Mr. Lim is terminated as a result of an involuntary termination, other than for cause or disability, within twelve (12) months after a change of control, one hundred percent (100%) of the shares subject to this option shall be vested on the date of Mr. Lim’s termination. In the event that Mr. Lim is terminated for any reason other than for cause within six (6) months after his start date, Mr. Lim shall receive three months of his annual base salary from the date of his termination, and except for the acceleration of vesting provided in the event of a change of control, the vesting of his stock option shall be accelerated such that he shall be entitled to purchase a number of shares as if the Registrant had employed Mr. Lim for one (1) year. In the event that Mr. Lim is terminated for any reason other than for cause after his first six (6) months of employment, Mr. Lim shall receive six months of his annual base salary following the date of his termination, and except for the acceleration of vesting provided in the event of a change of control, the vesting of his stock option shall be accelerated such that he shall be entitled to purchase a number of shares as if the Company had employed Mr. Lim for the six (6) months after the date of his termination.

Effective July 12, 2005, we entered into an offer letter agreement with Mr. Albo. The offer letter provides for full vesting of Mr. Albo’s options upon an involuntary termination of his employment other than for cause or disability within twelve (12) months following a change of control, subject to his signing a general release in a commercially customary form prescribed by us.

27




DIRECTOR COMPENSATION

We reimburse directors for travel and other out-of-pocket expenses incurred in attending Board meetings. We do not pay cash compensation to our directors.

Director Compensation Table

Name

 

 

 

Fees Earned
or Paid in
Cash ($)

 

Stock
Awards ($)

 

Option
Awards
($)(1)

 

Non-Equity
Incentive Plan
Compensation
($)

 

Nonqualified
Deferred
Compensation
Earnings ($)

 

All Other
Compensation
($)

 

Total ($)

 

Richard W. Koe(2)

 

 

$

 

 

 

$

 

 

$

 

 

$

 

 

 

$

 

 

 

$

 

 

$

 

Gerald F. Chew(3)

 

 

$

 

 

 

$

 

 

$

19,147

(4)

 

$

 

 

 

$

 

 

 

$

 

 

$

19,147

 

Douglass G. Marshall(5)

 

 

$

 

 

 

$

 

 

$

19,147

(6)

 

$

 

 

 

$

 

 

 

$

 

 

$

19,147

 

Richard W. Smith(7)

 

 

$

 

 

 

$

 

 

$

31,270

(8)

 

$

 

 

 

$

 

 

 

$

 

 

$

31,270

 


(1)          Amounts shown do not reflect compensation actually received by the directors. Instead, the amounts shown reflect the expense recognized by us in 2007 for option awards as determined pursuant to SFAS 123(R). These compensation costs include option awards granted in and prior to 2007. The assumptions used to calculate the value of the option awards are set forth in the notes to the consolidated financial statements in Item 7 of this Form 10-KSB (Note 2, “Determining Fair Value”), with the exception that the “Estimated Forfeiture Rates” assumption used was zero in accordance with SEC instructions to Item 402(b)(2)(v) and (vi). There were no forfeitures in 2007 of option awards received by the named directors. Unless otherwise noted, the options vest at a rate of 25% one year from the date of grant and 1/48th each month thereafter and expire ten years from the date of grant. For all options awarded to directors, 100% of the shares subject to the options granted may immediately vest in the event of a Corporate Transaction, defined as any of the following transactions: (a) a merger or consolidation in which Raining Data (“the Company”) is not the surviving entity, except for a transaction the principal purpose of which is to change the state in which the Company is incorporated; (b) the sale, transfer or other disposition of all or substantially all of the assets of the Company (including the capital stock of subsidiary corporations); (c) approval by the Company’s stockholders of any plan or proposal for complete liquidation or dissolution of the Company; (d) any reverse merger in which the Company is the surviving entity but in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger; or (e) acquisition by any person or related group of persons (other than the Company or by a Company-sponsored employee benefit plan) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities.

(2)          Mr. Koe’s security ownership is described in Item 11 hereof.

(3)          Mr. Chew held a total of 136,825 outstanding option awards as of March 31, 2007.

(4)          Corresponds to an option grant on May 10, 2006 for 40,000 shares that vests over four years, subject to Mr. Chew’s continued service, with 25% of the shares vesting on May 10, 2007 and 1/48th of the shares vesting each month thereafter. This option grant is subject to acceleration of vesting as described above in footnote (1) above.

(5)          Mr. Marshall held a total of 136,825 outstanding option awards as of March 31, 2007.

(6)          Corresponds to an option grant on May 10, 2006 for 40,000 shares that vests over four years, subject to Mr. Marshall’s continued service, with 25% of the shares vesting on May 10, 2007 and 1/48th of the

28




shares vesting each month thereafter. This option grant is subject to acceleration of vesting as described above in footnote (1) above.

(7)          Mr. Smith held a total of 50,000 outstanding option awards as of March 31, 2007.

(8)          Corresponds to an option grant on August 29, 2005 for 50,000 shares that vests over three years, subject to Mr. Smith’s continued service, with one-third (1/3) of the shares vesting on August 29, 2006 and 1/36th of the shares vesting each month thereafter. This option grant is subject to acceleration of vesting as described above in footnote (1) above.

ITEM 11.         Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth, as of March 31, 2007, certain information with respect to the beneficial ownership of our voting securities by (i) any person (including any “group” as that term is used in Section 13(d)(3) of the Exchange Act) known by us to be the beneficial owner of more than five percent (5%) of any class of our voting securities, (ii) each director, (iii) each of the Named Executive Officers, and (iv) all of our current directors and executive officers as a group. As of March 31, 2007, there were 21,184,402 shares of issued and outstanding common stock. In computing the number and percentage of shares beneficially owned by a person, shares of common stock subject to options currently exercisable, or exercisable within sixty (60) days of March 31, 2007, are counted as outstanding, but these shares are not counted as outstanding for computing the percentage ownership of any other person.

Name and Address(1)

 

 

 

Number of
Shares of
Common Stock

 

Percent of
Total
Common Stock

 

5% Stockholders

 

 

 

 

 

 

 

 

 

 

Carlton H. Baab(2)

 

 

15,814,983

 

 

 

59

%

 

 

Richard W. Koe(3)

 

 

14,729,583

 

 

 

57

%

 

 

Astoria Capital Partners L.P.(4)

 

 

14,664,983

 

 

 

57

%

 

 

Rockport Group LP(5)

 

 

1,444,174

 

 

 

7

%

 

 

Philip and Debra Barrett Charitable Remainder Trust(6)

 

 

1,348,168

 

 

 

6

%

 

 

Directors and Named Executive Officers

 

 

 

 

 

 

 

 

 

 

Thomas Lim(7)

 

 

37,500

 

 

 

*

 

 

 

Robert W. Albo(8)

 

 

118,521

 

 

 

*

 

 

 

Gerald F. Chew(9)

 

 

136,825

 

 

 

*

 

 

 

Douglas G. Marshall(10)

 

 

130,655

 

 

 

*

 

 

 

Richard W. Smith(11)

 

 

49,166

 

 

 

*

 

 

 

All directors and executive officers as a group (12 persons)(12)

 

 

16,685,766

 

 

 

60

%

 

 


                 * Represents less than 1%

       (1) Except as otherwise indicated below, we believe the persons whose names appear in the table above have sole voting and investment power with respect to all shares of stock shown as beneficially owned by them, subject to applicable community property laws.

       (2) Represents options to purchase 1,150,000 shares of common stock exercisable within 60 days of March 31, 2007, held by Mr. Baab. Also includes the following shares beneficially owned by ACP: 14,664,983 shares of common stock, which includes 4,470,751 shares of common stock which may be acquired upon the conversion of a subordinated convertible note payable to ACP for $22,353,737 convertible at $5.00 per share. Mr. Baab is an employee of ACM, which is a general partner of ACP. As a general partner of ACP, ACM has a special profit interest in ACP’s realized and unrealized gains and income in excess of a specified hurdle rate, subject to certain additional conditions. As an employee of ACM, Mr. Baab is entitled to an annual bonus equal to a fixed percentage of any special

29




profit allocation ACP receives for the year in question. Mr. Baab, who is on formal leave of absence from ACM, disclaims beneficial ownership of these securities held by ACP as he does not hold voting or investment power over the holdings of ACP.

       (3) Includes the following shares beneficially owned by ACP: 14,664,983 shares of common stock, which includes 4,470,751 shares of common stock which may be acquired upon the conversion of a subordinated convertible note payable to ACP for $22,353,737 convertible at $5.00 per share. Also includes 64,600 shares beneficially owned by Mr. Koe and ACM through an investment fund managed by ACM. Mr. Koe is the President and sole shareholder of ACM and Mr. Koe and ACM are the General Partners of ACP.

       (4) The principal address of ACP is 1675 S.W. Marlow Suite 315, Portland, Oregon 97225. Includes 4,470,751 shares of common stock which may be acquired upon the conversion of a subordinated convertible note payable to ACP for $22,353,737 convertible at $5.00 per share.

       (5) The principal address of Rockport Group LP is 1675 SW Marlow Suite 315 Portland, Oregon 97225.

       (6) The principal address of the Philip and Debra Barrett Charitable Remainder Trust (“Trust”) is P.O. Box 1033, Vancouver, Washington 98666.

       (7) Includes options to purchase 37,500 shares of common stock exercisable within 60 days of March 31, 2007, held by Mr. Lim.

       (8) Includes options to purchase 114,582 shares of common stock exercisable within 60 days of March 31, 2007, held by Mr. Albo.

       (9) Includes options to purchase 106,825 shares of common stock exercisable within 60 days of March 31, 2007, held by Mr. Chew.

(10) Includes options to purchase 106,825 shares of common stock exercisable within 60 days of March 31, 2007, held by Mr. Marshall.

(11) Includes options to purchase 29,166 shares of common stock exercisable within 60 days of March 31, 2007, held by Mr. Smith.

(12) Includes an aggregate of 1,708,437 of common stock issuable upon exercise of options or warrants exercisable within 60 days of March 31, 2007, 4,470,751 shares of common stock which may be acquired upon the conversion of a subordinated convertible note payable to ACP for $22,353,737 convertible at $5.00 per share, and 64,600 shares beneficially owned by Mr. Koe and ACM through an investment fund managed by ACM.

Information Regarding Equity Compensation Plans

All of our equity compensation plans have been approved by our stockholders. Our equity compensation plans and activities are more fully discussed in the notes to the consolidated financial statements in Item 7 of this Form 10-KSB.

The following table sets forth information regarding the number of shares of our common stock that may be issued pursuant to our equity compensation plans or arrangements as of March 31, 2007.

30




Equity Compensation Plan Information

Plan Category

 

 

 

Number of securities
to be issued
upon exercise of
outstanding options,
warrants and rights

 

Weighted-average
exercise price of
outstanding options,
 warrants and rights

 

Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding securities
reflected in column (a))

 

 

 

 

(a)

 

 

 

(b)

 

 

 

(c)

 

 

Equity compensation plans approved by security holders

 

 

4,228,637

(1)

 

 

$

2.80

 

 

 

3,041,130

(2)

 

Equity compensation plans not approved by security holders

 

 

N/A

 

 

 

N/A

 

 

 

N/A

 

 

Total

 

 

4,228,637

 

 

 

 

 

 

 

3,041,130

 

 


(1)          Represents shares of common stock that may be issued pursuant to outstanding options granted under the following plans: 4,223,826 shares under the 1999 Stock Option Plan, 3,161 shares under the 1996 Stock Option Plan, and 1,650 shares under the 1987 Stock Option Plan. The 1996 Stock Option Plan and the 1987 Stock Option Plan were terminated, except as to options then issued and outstanding under such plans.

(2)          Represents shares of common stock that may be issued pursuant to options available for future grant under the following plans: 2,494,627 shares under the 1999 Stock Option Plan and 546,503 shares of common stock available for purchase by employees under the 2001 Employee Stock Purchase Plan.

ITEM 12.         Certain Relationships and Related Transactions

A description of the terms of the Note Exchange Agreement and the Agreement Regarding Amended and Restated Common Stock Purchase Warrant and 5% Convertible Subordinated Note Due 2008 between us and ACP, a significant stockholder of ours, may be found under the caption “Liquidity and Capital Resources” in Part II, Item 6 hereof and is incorporated by reference into this Item 12. Mr. Koe, a director, is the President and sole shareholder of ACM, and Mr. Koe and ACM are the General Partners of ACP. Mr. Baab, our President, Chief Executive Officer, and Director, is an employee of ACM. As an employee of ACM, Mr. Baab is entitled to an annual bonus equal to a fixed percentage of any special profit allocation ACP receives for the year in question. Mr. Baab is currently on a formal leave of absence from ACM.

A description of the terms of the Severance and Change of Control Agreement between us and Mr. Baab, and the offer letter agreements between us and Mr. Ramachandran, and between us and Mr. Albo, may be found under the caption “Employment Contracts and Termination of Employment and Change-in-Control Arrangements” in Item 10 hereof.

We have entered into our standard form of indemnification agreement with each of our directors and certain executives.

It is our current policy that all transactions between us and our officers, directors, five percent (5%) stockholders and their affiliates will be entered into only if these transactions are approved by our Audit Committee, are on terms no less favorable to us than could be obtained from unaffiliated parties and are reasonably expected to benefit us.

Related Party Transactions

We entered into a Staff Resources Agreement in September 2004 with SourceN Inc. to obtain technical resources, certain infrastructure, workstations, and telecommunication services in India. The Executive Vice President of SourceN Inc. is the brother of our CTO and Vice President of XML-Centric Applications and Platforms, Mr. Ramachandran. Total payments made by us to SourceN were $731,000 in fiscal year 2007, $580,000 in fiscal year 2006, and $246,000 in fiscal year 2005. This agreement was subsequently terminated by us in April 2007.

31




ITEM 13.         Exhibits

Exhibit

 

 

 

Description

3.1

 

Amended and Restated Certificate of Incorporation of the Registrant dated November 29, 2005 (included as Exhibit 3.1 to the Registrant’s Form 8-K filed with the Commission on November 30, 2005 and incorporated herein by reference).

3.2

 

Amended and Restated Bylaws of the Registrant, dated November 28, 2005 (included as Exhibit 3.2 to the Registrant’s Form 8-K filed with the Commission on November 30, 2005 and incorporated herein by reference).

3.3

 

Certificate of Designations dated March 31, 1999, as corrected (included as Exhibit 3.1 to the Registrant’s Form 8-K filed with the Commission on April 5, 1999 and incorporated herein by reference).

4.1

 

Registration Rights Agreement by and among the Registrant, Astoria Capital Partners, L.P., Harrison H. Augur, Keogh MP and Robert D. van Roijen dated as of December 4, 2000, as amended on April 3, 2003 (included as Exhibit 4.3 to the Registrant’s Form 10-QSB filed with the Commission on August 13, 2002 and incorporated herein by reference).

4.2

 

Sixth Amendment to the Registration Rights Agreement by and among the Registrant, Astoria Capital Partners, L.P., Harrison H. Augur, Keogh MP and Robert D. van Roijen dated as of April 1, 2003 (included as Exhibit 4.3 to the Registrant’s Form 10-KSB filed with the Commission on June 6, 2003 and incorporated herein by reference).

4.3

 

Registration Rights Agreement by and between the Registrant and Astoria Capital Partners, L.P., dated as of September 27, 2001, as amended on April 3, 2002 (included as Exhibit 4.2 to the Registrant’s Form 10-QSB filed with the Commission on August 13, 2002 and incorporated herein by reference).

4.4

 

Third Amendment to Registration Rights Agreement by and between the Registrant and Astoria Capital Partners, L.P., dated as of September 27, 2001, as amended on January 30, 2003 (included as Exhibit 4.3 to the Registrant’s Form 8-K filed with the Commission on January 30, 2003 and incorporated herein by reference).

4.5

 

Note Exchange Agreement between the Registrant and Astoria Capital Partners, L.P. dated January 30, 2003 (included as Exhibit 4.1 to the Registrant’s Form 8-K filed with the Commission on January 30, 2003 and incorporated herein by reference).

4.6

 

5% Convertible Subordinated Note Due 2008 between the Registrant and Astoria Capital Partners, L.P. dated January 30, 2003 (included as Exhibit 4.2 to the Registrant’s Form 8-K filed with the Commission on January 30, 2003 and incorporated herein by reference).

4.7

 

Form of payment in kind note, as referenced in the 5% Convertible Subordinated Note, between the Registrant and Astoria Capital Partners, L.P. (included as Exhibit 4.8 to the Registrant’s Form 10-KSB filed with the Commission on June 6, 2003 and incorporated herein by reference).

4.8

 

Form of Common Stock Purchase Warrant issued by the Registrant to Astoria Capital Partners, L.P. dated April 1, 2004. Originally issued on November 30, 2000 and adjusted on April 1, 2003 (included as Exhibit 4.9 to the Registrant’s Form 10-KSB filed with the Commission on June 29, 2004 and incorporated herein by reference).

4.9

 

Agreement Regarding Amended and Restated Common Stock Purchase Warrant and 5% Convertible Subordinated Note Due 2008, dated December 14, 2004 (included as exhibit 4.12 to the Registrant’s Form 8-K filed with the Commission on December 17, 2004 and incorporated herein by reference).

10.1*

 

1999 Stock Option Plan, as amended on November 28, 2005, Form of Notice of Stock Option Agreement and Form of Stock Option Agreement (included as Exhibit 10.1 to the Registrant’s Form 8-K filed with the Commission on November 30, 2005 and incorporated herein by reference).

32




 

10.2*

 

2001 Employee Stock Purchase Plan as amended on December 28, 2001 (included as Exhibit 10.1 to the Registrant’s Form 10-QSB filed with the Commission on March 21, 2002 and incorporated herein by reference).

10.3*

 

Option Agreement dated September 24, 2001, between the Registrant and Carlton H. Baab (included as Exhibit 10.22 of Registrant’s Form 10-QSB filed with the Commission on November 14, 2001 and incorporated herein by reference).

10.5*

 

Form of Indemnification Agreement entered into with officers and directors of Registrant (included as Exhibit 10.2 to the Registrant’s Form 10-QSB filed with the Commission on March 21, 2002 and incorporated herein by reference).

10.9*

 

Severance and Change of Control Agreement, dated April 5, 2003, between the Registrant and Carlton H. Baab (included as Exhibit 10.12 to the Registrants Form 10-KSB filed with the Commission on June 6, 2003 and incorporated herein by reference).

10.10

 

Loan and Security Agreement dated February 11, 2004, between the Registrant, Raining Data U.S., Inc. and Silicon Valley Bank (included as Exhibit 10.13 to the Registrant’s Form 10-KSB filed with the Commission on June 29, 2004 and incorporated herein by reference).

10.11

 

Lease Agreement dated November 9, 2004 between Registrant and The Irvine Company (included as Exhibit 10.1 to the Registrant’s Form 10-QSB filed with the Commission on November 9, 2004 and incorporated herein by reference).

10.12*

 

Offer Letter Agreement, effective March 17, 2004, between the Registrant and Ajay Ramachandran (included as Exhibit 10.12 to the Registrant’s Form 10-KSB filed with the Commission on July 24, 2006 and incorporated herein by reference).

10.13*

 

Offer Letter, dated April 22, 2006, between the Registrant and Thomas G. Lim (included as Exhibit 10.1 to the Registrant’s Form 8-K filed with the Commission on April 27, 2006 and incorporated herein by reference).

10.14*

 

Offer Letter Agreement, effective July 15, 2005 between the Registrant and Robert W. Albo.

21.1

 

Subsidiaries of the Registrant (included as Exhibit 21.1 to the Registrant’s Form 10-KSB filed with the Commission on June 28, 2002 and incorporated herein by reference).

23.1

 

Consent of Independent Registered Public Accounting Firm.

24.1

 

Power of Attorney (included in the signature page and incorporated herein by reference).

31.1

 

Certification of Chief Executive Officer.

31.2

 

Certification of Chief Financial Officer.

32.1

 

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


*                    Indicates management contracts or compensatory plans and arrangements filed pursuant to Item 601 of Regulation S-B under the Exchange Act.

ITEM 14.         Principal Accountant Fees and Services

The following table presents the aggregate fees billed for the indicated services performed by KPMG LLP during the 2007 and 2006 fiscal years.

 

 

2007

 

2006

 

Audit Fees

 

$

495,431

 

$

554,685

 

Tax Fees

 

70,700

 

97,605

 

Total

 

$

566,131

 

$

652,290

 

 

Audit Fees.   Audit Fees relate to professional services rendered in connection with the audit of our annual financial statements, quarterly review of financial statements included in our 10-QSB, and audit services provided in connection with other statutory and regulatory filings.

33




Tax Fees.   Tax Fees include professional services related to tax compliance, tax advice and tax planning and transfer pricing consultation, including the preparation of federal and state tax returns.

The Audit Committee pre-approved all of the services provided by KPMG LLP in fiscal years 2007 and 2006. Pursuant to the Audit Committee Charter, the Audit Committee must pre-approve audit and non-audit services to be provided to us by the independent auditor, or subsequently approve non-audit services in those circumstances where a subsequent approval is necessary and permissible.

34




SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

RAINING DATA CORPORATION

 

By:

/s/ THOMAS LIM

 

 

Thomas Lim

 

 

Chief Financial Officer

 

Date:

June 29, 2007

 

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Carlton H. Baab and Thomas Lim, and each or any one of them, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-KSB, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his substitute or substituted, may lawfully do or cause to be done by virtue hereof.

In accordance with the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signatures

 

 

 

Title

 

 

 

Date

 

/s/ CARLTON H. BAAB

 

President, Chief Executive Officer and Director

 

June 29, 2007

Carlton H. Baab

 

(Principal Executive Officer)

 

 

/s/ THOMAS LIM

 

Chief Financial Officer

 

June 29, 2007

Thomas Lim

 

(Principal Financial and Accounting Officer)

 

 

/s/ RICHARD W. KOE

 

Director

 

June 29, 2007

Richard W. Koe

 

 

 

 

/s/ GERALD F. CHEW

 

Director

 

June 29, 2007

Gerald F. Chew

 

 

 

 

/s/ DOUGLAS G. MARSHALL

 

Director

 

June 29, 2007

Douglas G. Marshall

 

 

 

 

/s/ RICHARD W. SMITH

 

Director

 

June 29, 2007

Richard W. Smith

 

 

 

 

 

35




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Raining Data Corporation:

We have audited the accompanying consolidated balance sheets of Raining Data Corporation and subsidiaries as of March 31, 2007 and 2006, and the related consolidated statements of operations, cash flows, and stockholders’ equity and comprehensive loss for each of the years in the three-year period ended March 31, 2007. These consolidated financial statements are the responsibility of Raining Data Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Raining Data Corporation and subsidiaries as of March 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2007, in conformity with U.S. generally accepted accounting principles.

As discussed in notes 2 and 7 to the consolidated financial statements, effective April 1, 2006, the Company adopted the fair value method of accounting for stock-based compensation as required by Statement of Financial Accounting Standards No. 123(R), Share-Based Payment.

As discussed in notes 2 and 3 to the consolidated financial statements, effective April 1, 2006, the Company changed its method of quantifying errors.

/s/ KPMG LLP

 

Costa Mesa, California

June 29, 2007

 

36




RAINING DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

 

 

March 31,
2007

 

March 31,
2006

 

 

 

(In thousands, except
per share data)

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

11,654

 

$

10,789

 

Trade accounts receivable, less allowance for doubtful accounts of $200 in 2007 and $182 in 2006

 

1,609

 

2,019

 

Other current assets

 

461

 

355

 

Total current assets

 

13,724

 

13,163

 

Property, furniture and equipment-net

 

949

 

1,055

 

Goodwill

 

26,751

 

26,845

 

Other assets

 

112

 

96

 

Total assets

 

$

41,536

 

$

41,159

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

130

 

$

399

 

Accrued liabilities

 

2,536

 

2,885

 

Deferred revenue

 

4,801

 

4,886

 

Total current liabilities

 

7,467

 

8,170

 

Long-term debt-net of discount

 

24,150

 

22,893

 

Total liabilities

 

31,617

 

31,063

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Series A convertible preferred stock: $1.00 par value; 5,000,000 shares authorized; none issued or outstanding at March 31, 2007 and 2006

 

 

 

Common stock: $0.10 par value; 100,000,000 shares authorized; 21,184,402 and 20,644,576 issued and oustanding as of March 31, 2007 and 2006, respectively

 

2,118

 

2,064

 

Additional paid-in-capital

 

101,385

 

99,341

 

Accumulated other comprehensive income

 

1,612

 

1,234

 

Accumulated deficit

 

(95,196

)

(92,543

)

Total stockholders’ equity

 

9,919

 

10,096

 

Total liabilities and stockholders’ equity

 

$

41,536

 

$

41,159

 

 

See accompanying notes to the consolidated financial statements.

37




RAINING DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended March 31, 2007, 2006 and 2005

 

 

     2007    

 

     2006   

 

   2005     

 

 

 

(In thousands, except per share data)

 

Net revenues

 

 

 

 

 

 

 

 

 

Licenses

 

 

$

6,859

 

 

$

8,404

 

$

9,362

 

Services

 

 

11,885

 

 

11,890

 

12,121

 

Total net revenues

 

 

18,744

 

 

20,294

 

21,483

 

Operating expenses

 

 

 

 

 

 

 

 

 

Cost of license revenues

 

 

99

 

 

207

 

318

 

Cost of service revenues

 

 

2,117

 

 

2,274

 

2,333

 

Selling and marketing

 

 

5,466

 

 

5,219

 

5,582

 

Research and development

 

 

9,295

 

 

9,638

 

7,563

 

General and administrative

 

 

3,866

 

 

3,477

 

3,748

 

Amortization expense

 

 

 

 

 

1,733

 

Total operating expenses

 

 

20,843

 

 

20,815

 

21,277

 

Operating income (loss)

 

 

(2,099

)

 

(521

)

206

 

Other expense

 

 

 

 

 

 

 

 

 

Interest expense-net

 

 

(837

)

 

(952

)

(1,155

)

Other income (expense)-net

 

 

72

 

 

(75

)

28

 

Total other expense

 

 

(765

)

 

(1,027

)

(1,127

)

Loss before income taxes

 

 

(2,864

)

 

(1,548

)

(921

)

Provision for income taxes

 

 

94

 

 

76

 

73

 

Net loss

 

 

$

(2,958

)

 

$

(1,624

)

$

(994

)

Basic and diluted net loss per share

 

 

$

(0.14

)

 

$

(0.08

)

$

(0.05

)

Shares used in computing basic and diluted loss per share

 

 

20,986

 

 

20,203

 

18,803

 

 

See accompanying notes to the consolidated financial statements.

38




RAINING DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended March 31, 2007, 2006 and 2005

 

 

2007

 

2006

 

2005

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(2,958

)

$

(1,624

)

$

(994

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Depreciation and amortization of long-lived assets

 

318

 

276

 

2,021

 

Provision for bad debt

 

1

 

 

 

Note payable discount amortization

 

83

 

83

 

89

 

Stock-based compensation expense

 

911

 

10

 

66

 

Deferred income tax expense

 

94

 

76

 

73

 

Change in assets and liabilities:

 

 

 

 

 

 

 

Trade accounts receivable

 

375

 

(110

)

(38

)

Other current and non-current assets

 

(68

)

133

 

(101

)

Accounts payable

 

(279

)

(134

)

188

 

Accrued liabilities

 

1,145

 

1,482

 

1,156

 

Deferred revenue

 

98

 

(355

)

352

 

Net cash provided by (used in) operating activities

 

(280

)

(163

)

2,812

 

Cash flows used in investing activities-purchase of property, furniture and equipment

 

(87

)

(483

)

(262

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from exercise of stock options and warrants

 

1,007

 

730

 

91

 

Proceeds from issuance of common stock

 

179

 

133

 

187

 

Repayment of debt

 

 

 

(38

)

Net cash provided by financing activities

 

1,186

 

863

 

240

 

Effect of exchange rate changes on cash

 

46

 

(53

)

52

 

Net increase in cash and equivalents

 

865

 

164

 

2,842

 

Cash and equivalents at beginning of period

 

10,789

 

10,625

 

7,783

 

Cash and equivalents at end of period

 

$

11,654

 

$

10,789

 

$

10,625

 

Non-cash financing activities:

 

 

 

 

 

 

 

Accrued interest added to long-term debt

 

$

1,161

 

$

1,105

 

$

931

 

Reduction of long-term debt through exercise of warrants

 

$

 

$

 

$

2,671

 

Conversion of preferred stock to common stock

 

$

 

$

300

 

$

 

 

See accompanying notes to the consolidated financial statements.

39




RAINING DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
For the Years Ended March 31, 2007, 2006 and 2005
(in thousands, except share amounts)

 

 

Series A

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Convertible Preferred

 

 

 

 

 

Additional

 

Deferred

 

Other

 

 

 

Stockholders'

 

 

 

 

 

Stock

 

Common Stock

 

Paid-In

 

Stock-Based

 

Comprehensive

 

Accumulated

 

Equity

 

Comprehensive

 

 

 

  Shares  

 

  Amount  

 

Shares

 

Amount

 

  Capital  

 

Compensation

 

     Income     

 

     Deficit     

 

    (Deficit)    

 

    Loss    

 

Balances March 31, 2004

 

 

300,000

 

 

 

$ 300

 

 

18,403,132

 

 

$ 1,840

 

 

 

$ 95,418

 

 

 

$ (41

)

 

 

$ 1,509

 

 

 

$ (89,925

)

 

 

$ 9,101

 

 

 

 

 

 

Stock option and purchase plan issuances

 

 

 

 

 

 

 

151,705

 

 

15

 

 

 

263

 

 

 

 

 

 

 

 

 

 

 

 

278

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

35

 

 

 

31

 

 

 

 

 

 

 

 

 

66

 

 

 

 

 

 

Warrants exercised

 

 

 

 

 

 

 

1,192,961

 

 

120

 

 

 

2,551

 

 

 

 

 

 

 

 

 

 

 

 

2,671

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(994

)

 

 

(994

)

 

 

$  (994

)

 

Foreign currency
translation
adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(115

)

 

 

 

 

 

(115

)

 

 

(115

)

 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$ (1,109

)

 

Balances March 31, 2005

 

 

300,000

 

 

 

300

 

 

19,747,798

 

 

1,975

 

 

 

98,267

 

 

 

(10

)

 

 

1,394

 

 

 

(90,919

)

 

 

$ 11,007

 

 

 

 

 

 

Stock option and purchase plan issuances

 

 

 

 

 

 

 

396,678

 

 

39

 

 

 

824

 

 

 

 

 

 

 

 

 

 

 

 

863

 

 

 

 

 

 

Stock-based compensation