SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB/A
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(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, 2001
[ ] 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
Identification No.)
17500 CARTWRIGHT ROAD 92614
IRVINE, CALIFORNIA (Zip Code)
(Address of Principal Executive Offices)
(949) 442-4400
(Issuer's Telephone Number, Including Area Code)
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Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class On Which Registered
None N/A
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $0.10 par value
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Check whether the issuer (1) has 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 [ ]
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not 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. [ ]
The issuer's revenues for the fiscal year ending March 31, 2001 were $9,319,000.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $14,472,708 on March 14, 2002 based on the closing sale price
of such stock on that date.
As of March 14, 2002, the registrant had 17,870,266 shares of its common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format (check one): [ ] YES [X] NO
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EXPLANATORY NOTE
On February 14, 2002, the Company announced that it would restate its financial
statements for the fiscal year ended March 31, 2001, and each of the quarters in
the six quarterly periods ended September 30, 2001, due to the misapplication of
certain accounting standards. This amended filing contains restated financial
information and related disclosures for the year ended March 31, 2001, and
reflects, where appropriate, changes as a result of the restatements.
This amendment does not otherwise attempt to update the information in the
originally filed Form 10-KSB to reflect events occurring after the original
filing date.
PART I
ITEM 1. DESCRIPTION OF BUSINESS:
OVERVIEW
Effective December 1, 2000 the Company completed the acquisition of PickAX, Inc,
("PickAX") a Delaware corporation, pursuant to an Agreement and Plan of Merger
dated August 23, 2000. Concurrent with the acquisition, the Company changed its
name to Raining Data Corporation. The principal asset of PickAX is Pick Systems,
now a wholly owned subsidiary of PickAX, which PickAX acquired from the estate
of Richard Pick, the founder of Pick Systems in March 2000. Pick Systems was
incorporated in California in November 1982.
The Company's principal business is the design, development, sale, and support
of two major software products: 1) a suite of Rapid Application Development
(RAD) software tools, and 2) multi-dimensional database management systems. The
Company's products allow customers to quickly develop flexible software
solutions that can be continuously enhanced to respond to changing business and
technical needs. The Company's products support the full lifecycle of
application development and are designed for rapid development and deployment of
Web, client/server and mobile computing applications. The Company's RAD products
are object-oriented, component-based tools, providing the ability to deploy
applications on the Windows, Unix, and Linux operating system platforms as well
as Oracle, DB2, Sybase, Microsoft SQL Server database environments and other
Open Data Base Connectivity ("ODBC") compatible database management systems.
Similarly, the Company's multi-dimensional database products are designed to
operate in the Windows, Unix, and Linux operating environments.
The Company's products are used by in-house corporate development teams,
commercial application developers, system integrators, independent software
vendors, and independent consultants to deliver pre-packaged and custom software
solutions for a wide range of users.
The Company licenses its software on both a server basis and a user basis.
In addition to computer software products, the Company provides continuing
maintenance and customer service contracts as well as professional services,
technical support and training to help plan, analyze, implement, and maintain
application software based on the Company's products.
The Company has direct offices in the United States, United Kingdom, France,
Germany, and South Africa and maintains distributor relationships in many other
parts of the world. The office in South Africa will be closed at the end of June
2001.
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PRODUCTS
The Company's products are now marketed under the Raining Data brand name.
The Company's products are Rapid Application Development ("RAD") tools for
computer application development and multi-dimensional database management
systems.
The RAD product line is designed to allow customers to develop software
solutions that can be continuously enhanced to respond to changing business and
technical needs. The RAD products support the full life cycle of applications
and are designed for rapid development and deployment of Web and client/server
applications, providing true reuse of software objects and the ability to
integrate objects from disparate programming languages on a number of different
operating system platforms. The RAD products are used by corporations, system
integrators, independent software vendors, small businesses, and independent
consultants to deliver custom software solutions for a wide range of users. In
addition to these products, the Company provides technical support and training
to help plan, analyze, implement, and maintain application software based on the
Company's technology.
Omnis Studio, the Company's premium RAD product, is an object-oriented, rapid
application development tool, offering efficient visual assembly of components
and objects. Omnis Studio includes cross-platform support for Windows 95,
Windows 98, Windows NT, Windows 2000, Mac OS X and Linux.
The Company's multi-dimensional database management system includes a
comprehensive set of traditional third generation development tools.
Historically, the principal advantages of the multi-dimensional database system
have been: simple program development, maximum flexibility, ease of use, and low
total cost of ownership. Over the years, a community of vertical market
application developers has evolved on the multi-dimensional database platform.
This group has created numerous high quality, vertically focused business
applications, which are commercially sold and supported worldwide.
The Company's multi-dimensional database product line consists principally of
the D3 Data Base Management System ("D3") which operates on operating systems
including: IBM AIX, DG/UX, HP-UX, Linux, Microsoft NT 2000, SCO UnixWare, SCO
System V and Sun Solaris. D3 allows application programmers to create new
business solution software in less time than it normally takes in other
environments. This translates to lower costs for the developer, lower software
prices for the customer and reduced costs of ownership for both the developer
and end user.
Although D3 has many features, the software has not traditionally offered an
integrated graphical user interface ("GUI"). Many multi-dimensional database
applications still run in the non-GUI character mode commonly referred to as
"dumb terminals" or "green screens." Even when deployed on traditional PCs, this
green screen functionality is merely emulated and still appears as a dumb
terminal.
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TRAINING SERVICES
As part of its sales efforts, the Company offers training programs to its
customers and prospective customers. These classes, held at various locations
emphasize foundation skills (for the newer developer), advanced classes (for the
more experienced developer) and classes designed to assist customers in the
migration and use of the Company's products.
TECHNICAL SUPPORT
Because the Company's products are used by customers to build and deploy
applications that may become a critical component of their business operations,
continuing customer technical support services are an important element of the
Company's business strategy. Customers who participate in the Company's support
programs receive periodic maintenance releases, direct technical support when
required.
DISTRIBUTION
Domestic US Distribution
In the United States, the Company sells its products through a established
distribution channel consisting of system integrators, specialized vertical
application software developers, and consulting organizations. The Company also
sells its products directly to large end user organizations through technical
sales representatives.
International Distribution
Outside the United States, the Company maintains direct offices in the United
Kingdom, France, Germany, and South Africa. (The Company plans to close the
office in South Africa at the end of June, 2001.) In addition, the Company has
distributor relationships in over 25 countries. Distributors in Latin America
and in the Pacific Rim are managed from the corporate offices in Irvine,
California, while distributors in Europe, the Middle East and Africa are managed
from the European offices of the Company. For the fiscal year ending March 31,
2001, approximately 37% of the Company's revenue came from sales of the
Company's products and services to customers located outside the United States,
primarily in Europe and South America.
CUSTOMERS
The Company's customers can be segmented into two general categories:
o Independent Software Vendors and Software Developers--the majority of
the Company's revenue has been to independent software vendors who
typically write their own vertical application software that they sell
as a
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complete package to end-user customers. This category would include
value added resellers and software-consulting companies that provide
contract programming services to their customers.
o Corporate Information Technology ("IT") Departments--sales to IT
departments of large corporations.
For the fiscal year ended March 31, 2001, no one customer accounted for more
than 10% of the Company's revenues.
COMPETITION
The applications development tools software market is rapidly changing and
intensely competitive. The Omnis Studio line of RAD developer products currently
encounters competition from several direct competitors, including Microsoft
Corporation (Visual Basic), Inprise Corporation (Delphi), Allaire Corporation
(Cold Fusion) and Magic Software Enterprises. With regard to database products,
the Company competes with several companies including Oracle, Microsoft
SQL/Server, IBM DB2, Sybase and Informix (particularly the Informix
multi-dimensional database products, UniVerse and UniData). In mid April 2000,
Informix announced the sale of its database assets to IBM.
The Company believes that its ability to compete in the various D3 and Omnis
Studio markets depends on factors both within and outside its control. The most
important of these factors include the timing, performance, and the price of new
products developed by both the Company and the Company's competitors.
INTELLECTUAL PROPERTIES AND OTHER PROPRIETARY RIGHTS
The Company relies primarily on a combination of trade secret, copyright and
trademark laws and contractual provisions to protect its proprietary rights. In
addition to trademark and copyright protections, the Company licenses its
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. The
Company generally relies on "shrink-wrap" or "click-wrap" licenses that become
effective when a customer opens the package or downloads and installs software
on its system. In order to retain exclusive ownership rights to its software and
technology, the Company generally provides its 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 the
Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technology.
PRODUCTION
The Company duplicates the software for the D3 products for worldwide
distribution at its office in Irvine, California. The Omnis Studio software is
duplicated for worldwide distribution in the United Kingdom.
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The Company utilizes certain of its distributors in some international markets
to localize the products, including conversion of the product and product
documentation to native languages, where necessary. The distributor for that
market then handles the production of the resulting localized product.
BACKLOG
The Company generally ships software products as orders are received. As a
result, the Company has historically operated with little backlog. As a result,
the Company's license revenue in any given quarter is dependent on orders
received and product shipped during the quarter. Traditionally there has been a
short cycle between receipt of an order and shipment. Consequently, the Company
does not believe that its backlog as of any particular date is meaningful.
EMPLOYEES
At May 31, 2001, the Company had 177 employees worldwide of which 121 were in
the United States and 56 were in the international offices of the Company.
ITEM 2. DESCRIPTION OF PROPERTY:
The Company relocated its headquarters from San Carlos, California, to Irvine,
California, following the acquisition of PickAX, where the Company currently
leases approximately 44,750 square feet of office space in two buildings
pursuant to a lease that expires in 2005 and has base monthly rent of $67,135.
The facility includes facilities for engineering, technical support, sales,
marketing, and general administration. The Company believes that the existing
facilities are in excess of its needs for at least the next twelve months and
intends to sublease one of the two buildings representing approximately 13,000
square feet.
The Company owns a three-story building 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.
The Company also leases approximately 6 sales and support offices in the United
States, Europe, and South Africa.
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ITEM 3. LEGAL PROCEEDINGS:
COMPASS LITIGATION. Since 1994, the Company and Compass Software ("Compass")
have been in litigation over software copyright infringement and related claims
in the courts of the State of Washington. The Company has generally prevailed in
these matters. In the most recent action, the US District Court for the Western
District of the State of Washington awarded statutory damages to the Company in
the amount of approximately $150,000 in addition to injunctive relief and
attorney fees from Compass. The Company obtained a motion for judgment to
collect the $150,000 judgment awarded and for an additional $245,000 in legal
fees. In February, 2001, Earl Asmus, the principal in Compass, sued the Company
in the Central District of California on a number of issues related to the State
of Washington court proceedings. In early April, 2000, the suit was dismissed;
however, Mr. Asmus subsequently appealed the decision. In October 2001, the case
was settled through the Company's insurance policy.
PACE-NORTHERN IRELAND LITIGATION: In July 2000, Park Applications Computer
Engineering, Ltd. ("PACE") sued the Company in the Queen's Bench Division
Company of the High Court of Justice in Northern Ireland. PACE sought damages of
$800,000 plus penalties and interest for alleged breach of contract relating to
the purchase by Pick Systems of software from PACE. In January 2002, the Company
and PACE entered into a settlement agreement of the matter under which the
Company agreed to pay $500,000 to PACE. Of this settlement, $250,000 was paid to
PACE in January 2002 and the remaining $250,000 will be paid over a two year
period.
OLENIK LITIGATION - In November 2000, George Olenik, former President and Chief
Executive Officer of Pick Systems filed a lawsuit in Orange County Superior
Court. Mr. Olenik asserted claims relating to his resignation from Pick Systems
in March 2000, and sought unspecified damages including a success fee for the
sale of Pick Systems to PickAX. In November 2001, the Company and Mr. Olenik
entered into a settlement agreement whereby the Company agreed to pay $200,000
to Mr. Olenik. Such amount was paid in November 2001.
GENERAL AUTOMATION LITIGATION: In May 2001, General Automation initiated
litigation in Superior Court of the State of California for the County of Orange
against the Company for breach of contract relating to the Pick Systems purchase
of selected assets of General Automation in August, 2000. General Automation
seeks in excess of $1,000,000 in damages, penalties and interest, in addition to
attorneys' fees and costs. The Company has asserted counterclaims for fraud,
breach of contract and indemnity. The Company believes that the suit is without
merit and intends to defend the suit vigorously. A jury trial is scheduled to
begin July 28, 2002.
DOUCE BIS LITIGATION - In June 2001, Douce Bis Company sued the Company in the
Commercial Court of Paris, France for approximately US$990,000 plus costs. The
claim is for compensation and loss of profits due Douce Bis under the terms of
the Douce Bis/Omnis distributorship agreement entered into in 1983 and extended
from time to time thereafter. The Company terminated Douce Bis as the Omnis
distributor in France effective in December 2000. The Company believes the suit
is without merit and intends to defend the suit vigorously. The litigation is in
the discovery phase and a hearing is scheduled in March 2002.
ARATA LITIGATION - In June 2001, Thomas Arata, a former employee of the Company,
sued the Company in the Civil District Court for the Parish of Orleans in
Louisiana. The suit is for unspecified amounts charging breach of contract,
fraud, breach of fiduciary duty, unfair trade practices, and unjust enrichment
concerning Arata's activities for and on behalf of PickAX prior to and during
PickAX's acquisition of Pick Systems in March 2000, and
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the termination of Arata's employment in December 2000. The Company believes the
suit is without merit and intends to defend the suit vigorously. The litigation
is in the discovery phase.
The Company is from time to time subject to claims and suits arising in the
ordinary course of business. In the Company's opinion, the ultimate resolution
of these matters will not have a material adverse effect on its financial
position, results of operations, or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
No matters were submitted for a vote of the stockholders of the Company during
the fourth quarter of the fiscal year ending March 31, 2001.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information regarding the executive officers of
the Company as of June 14, 2001:
Name Age Position(s)
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Bryce J. Burns 43 Chairman of the Board and Interim Chief Executive Officer
Gwyneth M. Gibbs 58 Vice President, European and African Operations
Richard K. Lauer 56 President and Chief Operating Officer
Timothy J. Holland 54 Senior Vice President and Chief Technology Officer
Mario I. Barrenechea 40 Senior Vice President, Sales and Marketing
Scott K. Anderson, Jr. 56 Vice President, Finance, Treasurer, and Corporate Secretary
Mr. Burns was elected Interim Chief Executive Officer on December 29, 2000.
Mr. Burns also serves as Chairman of the Board of the Company. Mr. Burns served
as Director of Product Management at Novell, Inc., a computer software company,
from 1998 to 2000 and served as Executive Vice President and Chief Operating
Officer at Caldera Systems, a computer software company, from June 1997 through
July 1998. Mr. Burns was also the President of Applied Medical Informatics,
Inc., a medical software company from October 1995 to June 1997. Mr. Burns holds
a BS degree in medical biology from the University of Utah and an MBA from
Brigham Young University.
Mrs. Gibbs serves as Vice President European and Africa Operations for the
Company from her offices in the United Kingdom. Mrs. Gibbs served as President
and Interim Chief Executive Officer of the Company from October 1998 until the
Company's merger with PickAX in December 2000. Mrs. Gibbs joined the Company in
October 1994, and was initially responsible for Research and Development in
Europe before accepting worldwide responsibility for the Company in October
1998. Mrs. Gibbs holds a BS in Astronomy from the University of London. Mrs.
Gibbs resigned as an officer of the Company effective June 30, 2001. Mrs. Gibbs
remains as a Director of the Company.
Mr. Lauer was elected President on December 29, 2000. Prior to that time
Mr. Lauer was serving as Senior Vice President and Chief Operating Officer of
the Company. Mr. Lauer came to the Company from PickAX where he served in a
similar capacity as part of the management team that acquired and operated Pick
Systems, in March 2000. From 1998 through 1999 Mr. Lauer served as Executive
Director of Compuware Corporation, a computer software company. Prior to that
time from 1996 through 1998, Mr. Lauer served as President and Chief Operating
Officer of Cambridge Parallel Processing, Inc., a computer software company. Mr.
Lauer holds a BA in Business Administration from California State University at
Fullerton, and an MBA from Pepperdine University.
Mr. Holland serves as Senior Vice President and Chief Technology Officer of
the Company. Mr. Holland came to the Company from PickAX where he served in a
similar capacity as part of the management team that acquired and operated Pick
Systems in March 2000. From 1993 through 2000 Mr. Holland was an independent
consultant
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working primarily with high-end multi-value database suppliers and large end
users. Mr. Holland holds a BS degree in Electrical Engineering from Illinois
Institute of Technology.
Mr. Barrenechea serves as Senior Vice President, Sales and Marketing of the
Company. Mr. Barrenechea came to the Company from PickAX where he served in a
similar capacity as part of the management team that acquired and operated Pick
Systems in March, 2000. From 1994 through 2000, Mr. Barrenechea served in
various executive sales and marketing capacities at Informix, Inc., a leading
supplier of computer software multi-dimension databases. Mr. Barrenechea holds a
BS in Electrical Engineering from Temple University.
Mr. Anderson serves as Vice President, Finance, Treasurer, and Corporate
Secretary of the Company. Mr. Anderson came to the Company from PickAX where he
served in a similar capacity as part of the management team that acquired and
operated Pick Systems in March 2000. From 1985 through 2000, Mr. Anderson served
as Chief Financial Officer and Corporate Secretary of BBE Sound, Inc., a company
that licenses special audio technology to consumer electronic equipment
manufacturers. Mr. Anderson also serves on the adjunct accounting faculty at
Pepperdine University and holds a BS degree in chemical engineering from the
University of Pennsylvania and an MBA from Stanford University.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The common stock of the Company has been traded on the NASDAQ since October
1987. The Company is listed on the NASDAQ Small Cap Market under the symbol
"RDTA".
The following table sets forth the high and low closing prices for the Company's
common stock for fiscal years 2000 and 2001:
FISCAL YEAR 2000 HIGH LOW
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First Quarter $3.000 $0.750
Second Quarter $7.187 $2.250
Third Quarter $22.000 $5.000
Fourth Quarter $21.000 $12.000
FISCAL YEAR 2001 HIGH LOW
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First Quarter $16.500 $5.630
Second Quarter $ 9.500 $5.810
Third Quarter $14.000 $2.940
Fourth Quarter $11.130 $4.810
On June 28, 2001 the closing price for the Company's common stock on the NASDAQ
Small Cap Market was $5.40 and there were approximately 139 holders of record of
the Company's common stock.
DIVIDENDS
The Company has never declared or paid dividends on its common stock. The
Company intends to retain earnings, if any, for the operation and expansion of
the Company's business, and therefore does not anticipate paying any cash
dividends in the foreseeable future.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
This discussion and analysis of the financial statements and results of
operations should be read in conjunction with the Company's audited consolidated
financial statements, including the relates notes thereto, contained elsewhere
in this From 10-KSB.
RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the filing of its Annual Report on Form 10-KSB for the year ended
March 31, 2001 with the Securities and Exchange Commission, the Company became
aware of certain misapplications of accounting standards related to the
accounting for its business combination with PickAX under the purchase method in
December 2000, the purchase of technology from a third party in May 2000 and the
grant of options at below market exercise prices. These misapplications can be
summarized as follows:
- In computing the purchase price, the Company used the fair value of its
common stock around the date the merger agreement was signed to value common
stock, warrants and options to purchase common stock exchanged for similar
securities of PickAX. Portions of the merger consideration were, however, to
be determined based upon subsequent negotiations between the Company and
PickAX's controlling stockholder. These negotiations were completed on the
closing date. As a result, the Company should have used the fair value of
its common stock at the closing date to value stock-based merger
consideration. In addition, the Company included certain shares and warrants
that were contingently issuable based upon the amount of revenue reported by
the combined company for the succeeding twelve months. Contingent
consideration of this nature should not be included in the purchase price
until the resolution of the contingency is determinable beyond a reasonable
doubt.
- In connection with the merger with PickAX, a promissory note previously
issued by PickAX to its controlling stockholder, Astoria Capital Partners,
L.P. (Astoria), in the amount of $18,525,000 in principal and accrued
interest was exchanged for a new promissory note from the Company in the
same amount, and Astoria also received warrants to purchase an additional
500,000 shares of the Company's common stock at an exercise price of $7.00
per share. The additional warrants were valued using the Black-Scholes
model. One of the assumptions used in the Company's Black-Scholes
computation was that the term of the warrant was two years. The contractual
term of the option is, in fact, 5 years and the full contractual term should
be used in Black-Scholes calculations.
- The Company assigned the entire excess of the purchase price over the book
value of the acquired net tangible assets to goodwill. The Company retained
a valuation expert to determine the value of other identifiable intangible
assets acquired in the PickAX acquisition. As a result, a portion of the
purchase price should have been assigned to identifiable intangible assets,
consisting principally of core technology and assembled workforce. These
identifiable intangible assets will be amortized over periods ranging from 3
to 4 years. The Company has also reconsidered its determination of the
amortization period for goodwill and retroactively reduced the period from
10 to 4 years. In addition, options to purchase PickAX common stock were
assumed and converted in the merger into Company options to purchase common
stock. A portion of the purchase price should have been allocated to
unvested options whose exercise price was below the fair value of the
underlying common stock on the closing date. The purchase price allocation
should have also included an adjustment to reduce the carrying value of
deferred revenue on the closing date balance sheet of PickAX for the
theoretical seller's profit previously earned by the acquired company. The
Company also recorded excess amounts for a number of facility closure,
severance and litigation accruals as part of the purchase price allocation
and these were subsequently released, in part, to income.
- In May 2000, the Company acquired the rights to certain incomplete software
with no alternative future use with the intention to further develop it into
a software product. The Company recorded the payments related to the
incomplete software as an asset. The Company's policy for software
development costs is to expense software development costs until
technological feasibility has been achieved. In general, technological
feasibility occurs near general release. Since this purchased software was
incomplete and significant development efforts were required before it could
be released, the amounts capitalized should have been expensed as incurred.
- At various dates during fiscal 2001, the Company granted options to purchase
common stock to employees with an exercise price at a discount from the
fair market value of the common stock on the date of grant. In addition, the
Company accelerated vesting or extended the term of options held by
terminated employees. In neither instance did the Company record deferred
stock-based compensation or stock-based compensation.
Accordingly, the consolidated financial statements for fiscal 2001 have been
restated as follows:
As Reported Restated
------------ ------------
Net Revenue
License $ 6,285,000 $ 6,194,000
Service 4,562,000 3,125,000
------------ ------------
Total Net Revenue 10,847,000 9,319,000
Total Costs and Expenses 18,281,000 21,718,000
------------ ------------
Operating Loss (7,434,000) (12,499,000)
Total Other Expense (1,440,000) (1,787,000)
------------ ------------
Net Loss $ (8,874,000) $(14,186,000)
============ ============
Basic and Diluted Net Loss Per Share $ (0.75) $ (1.21)
Shares Used in Computing Basic and
Diluted Net Loss Per Share 11,832,099 11,764,955
RESULTS OF OPERATIONS
The acquisition of PickAX was effective on December 1, 2000. As a result, the
results of operations for the fiscal year ending March 31, 2001 differ
materially from the same periods in the prior year. Consequently, the results of
prior periods are not directly comparable to this period or future periods.
The Company sells its products in U.S. Dollars in North America, British Pounds
Sterling in the United Kingdom, Euros in Germany and France, and Rand in South
Africa. Foreign exchange gains and losses have not been material to the
Company's performance to date.
The following table sets forth, as a percentage of revenue, certain Consolidated
Statement of Operations data as a percentage of total revenue for the periods
indicated, except for the cost of license revenue and the cost of service
revenue, which are expressed as a percentage of the related revenue. This
information should be read in conjunction with the Selected Financial Data and
Consolidated Financial Statements included elsewhere in this Form 10-KSB.
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Twelve Months Ended
--------------------------------
March 31, 2001 March 31, 2000
-------------- --------------
Net Revenue
License 66% 80%
Service 34% 20%
---- ---
Total Net Revenue 100% 100%
---- ---
Costs and Expenses
Cost of License Revenue 3% 3%
Cost of Service Revenue 18% 4%
Selling and Marketing 60% 52%
Research and Development 42% 37%
General and Administrative 45% 60%
Stock-based Compensation 19% 18%
Amortization of Goodwill and Intangible
Assets 45% --
---- ---
Total Costs and Expenses 233% 174%
---- ---
Operating Loss (133)% (74)%
Other Expense, net (19)% (2)%
---- ---
Net Loss (152)% (76)%
==== ===
Gross margin on license revenue 95% 96%
Gross margin on service revenue 47% 77%
NET REVENUE. Total net revenue increased 50% to $9.3 million in fiscal year
ending March 31, 2001 from $6.2 million in the fiscal year ending March 31,
2000.
The Company's revenue is derived principally principal two sources: fees from
software licensing and fees for services, including consulting, training,
maintenance and technical support. License revenue increased 24% to $6.2 million
in the fiscal year ending March 31, 2001, from $5.0 million in fiscal year
ending March 31, 2000.
Service revenue increased 158% to $3.1 million in the fiscal year ending March
31, 2001, from $1.2 million in the fiscal year ending March 31, 2000.
No single customer accounted for more than 10% of revenues during the fiscal
year ended March 31, 2001. In fiscal year ended March 31, 2000, one customer in
the United States of America accounted for approximately 19% of revenue.
COST OF LICENSE REVENUE. Cost of license revenue is comprised of direct costs
associated with software license sales including software packaging,
documentation, and physical media costs. Cost of license revenue as percentage
of license revenue increased to 5% in the fiscal year ending March 31, 2001 from
4% for the same period in the prior year. The Company has redesigned the
packaging and documentation of the former PickAX products in an effort to reduce
these costs in the future.
COST OF SERVICE REVENUE. Cost of service revenue includes consulting, technical
support, and training, which consist primarily of personnel related costs. Cost
of service revenue as a percentage of net service revenue increased to 53% in
the fiscal year ending March 31, 2001 from 23% in the fiscal year ending March
31, 2000. The increase in cost of service revenue as a percentage of service
revenue in the fiscal year ending March 31, 2001, as
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compared to fiscal year ended March 31, 2000, was primarily due to the PickAX
acquisition and the significant upfront personnel costs involved with expanding
the activities in this part of the business.
SELLING AND MARKETING EXPENSE. Selling and marketing expense increased 74% to
$5.6 million in the fiscal year ended March 31, 2001, from $3.2 million in the
fiscal year ending March 31, 2000, representing 60% and 52% of total net
revenue during the periods, respectively. The increase in selling and marketing
expenses was due primarily to the higher level of activity including higher
levels of personnel staffing in PickAX in order for the Company to begin
marketing all of the Company's products to all of the Company's customers as
envisioned in the PickAX acquisition. In addition, the Company has begun
marketing the Company's products to customers in other multi-dimensional market
spaces not heretofore included in the Company's sales and marketing efforts.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses increased
71% to $3.9 million in the fiscal year ending March 31, 2001, from $2.3 million
in the fiscal year ended March 31, 2000, representing 42% and 37% of total net
revenue during the periods, respectively. The increase in research and
development expense was due primarily to the higher levels of activity
including personnel staffing in PickAX and to the efforts of the Company to
develop products reflecting the combination of technologies resulting from the
acquisition.
GENERAL AND ADMINISTRATIVE EXPENSE: General and administrative expense increased
14% to $4.2 million in the fiscal year ended March 31, 2001 from $3.7 million in
the fiscal year ended March 31, 2000. Total general and administrative expense
represented approximately 45% of total net revenue in the fiscal year ended
March 31, 2001, and 60% of total net revenue in the fiscal year ended March 31,
2000. General and administrative expense increased as a result of the addition
of personnel and facilities resulting from the PickAx acquisition in December
2000. In addition, severance and related costs were incurred following the
acquisition, as a result of cost reduction efforts and initiatives to eliminate
redundant operations and activities.
STOCK-BASED COMPENSATION. Stock-based compensation increased to $1.8 million in
the fiscal year ended March 31, 2001, from $1.1 million in the fiscal year ended
March 31, 2000. The increase in stock-based compensation is attributable
primarily to the assumption of "in-the-money" options in connection with the
PickAX acquisition for which the Company recorded deferred stock-based
compensation on the closing date.
AMORTIZATION OF GOODWILL AND INTANGIBLE ASSETS. The Company recorded $4.2
million related to the amortization of goodwill and intangible assets in the
fiscal year ended March 31, 2001 related to the acquisition of PickAX. The
Company incurred no goodwill amortization expense in the fiscal year ending
March 31, 2000.
OTHER INCOME (EXPENSE). Other income (expense) is primarily comprised of net
interest expense and gains and losses on foreign currency transactions. Interest
expense increased to $1.3 million in the fiscal year ended March 31, 2001, from
$0.1 million in the fiscal year ended March 31, 2000 and relates primarily to
the note payable to Astoria for $18.5 million, which was assumed in the
acquisition of PickAX, and the long term notes payable totaling $1.0 million
borrowed by the Company from other stockholders in August and September 2000.
The Company sells its products in U.S. Dollars in North America, in British
Pounds Sterling in the United Kingdom, in Euros in Germany and France, and in
Rand in South Africa. As the Company recognizes revenues and expenses in these
various currencies but reports its financial results in U.S. Dollars, changes in
exchange rates may cause variances in the Company's period-to-period revenue
and results of operations in future periods. Foreign exchange gains and losses
have not been material to the Company's performance to date.
NET LOSS. The net loss for fiscal year 2001, was $14.2 million or $1.21 per
share compared to a loss of $4.7 million or $.48 per share for the fiscal year
ended March 31, 2000. The increased loss relates to the PickAX acquisition for
which the Company recognized approximately $4.2 million in amortization of
goodwill and intangible assets and approximately $1.2 million in interest
expense for the fiscal year ending March 31, 2001.
INFLATION
The Company believes that inflation has not had a material impact on the
Company's operating results to date and does not expect inflation to have a
material impact on the Company's operating results in the fiscal year ending
Mach 31, 2002.
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LIQUIDITY AND CAPITAL RESOURCES
The Company had $2.4 million in cash at March 31, 2001.
The Company does not have a line of credit with a bank. The recent financial
performance of the Company makes such a line of credit unlikely at the present
time. Astoria Capital Partners, L.P. (Astoria) is the primary secured party in
all the assets in support of the note assumed in the acquisition of PickAX. The
note had a balance (including accrued interest) of $19.0 million at March 31,
2001, and will continue to accrue interest until maturity on November 30, 2002,
or retirement prior to that time. The note does not provide for any further
borrowings. The note requires certain payments in the event of a public or
private offering of equity and gives Astoria certain rights to approve any
future acquisitions. There can be no assurances that the Company will have
sufficient cash to pay the note at maturity or in the event of an offering. The
Company's ability to service its debt is dependent upon future performance which
will be affected by, among other things, prevailing economic conditions, the
public market for the Company's stock, and other factors beyond the Company's
control.
The Company had a working capital deficit of $3.2 million at March 31, 2001. Of
this total deficit, $3.3 million represents deferred revenue that the Company
earns over the remaining life of the underlying service contracts (usually 12
months) as more fully discussed in the Notes to the Consolidated Financial
Statements.
Management believes that the Company's working capital and future cash flow from
operating activities will be sufficient to meet the Company's operating and
capital expenditure requirements for at least the next twelve months. However,
the Company may need additional funds if the Company experiences a decline in
revenue or in the event of unforeseen circumstances. In addition, the Company
may require additional funds to support its working capital requirements or for
other purposes and may seek to raise such funds through public or private equity
financing or bank lines of credit or from other sources. No assurance can be
given that additional financing will be available or that, if available, such
financing will be on terms favorable to the Company.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 141, Business Combinations, (SFAS No.
141) and SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). SFAS
No. 141 requires that the purchase method of accounting be used for all business
combinations. SFAS No. 141 specifies criteria that intangible assets acquired in
a business combination must meet to be recognized and reported separately from
goodwill. SFAS No. 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121 and
subsequently, SFAS No. 144 after its adoption.
The Company adopted the provisions of SFAS No. 141 as of July 1, 2001, and SFAS
No. 142 is effective for the Company on April 1, 2002. Goodwill and intangible
assets determined to have an indefinite useful life acquired in a purchase
business combination completed after June 30, 2001, but before SFAS No. 142 is
adopted in full, are not amortized. Goodwill and intangible assets acquired in
business combinations completed before July 1, 2001 continued to be amortized
and tested for impairment prior to the full adoption of SFAS No. 142.
Upon adoption of SFAS No. 142, the Company is required to evaluate its existing
intangible assets and goodwill that were acquired in purchase business
combinations, and to make any necessary reclassifications in order to conform
with the new classification criteria in SFAS No. 141 for recognition separate
from goodwill. The Company will be required to reassess the useful lives and
residual values of all intangible assets acquired, and make any necessary
amortization period adjustments by the end of the first interim period after
adoption. If an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of SFAS No. 142 within the first interim
period. Impairment is measured as the excess of carrying value over the fair
value of an intangible asset with an indefinite life. Any impairment loss will
be measured as of the date of adoption and recognized as the cumulative effect
of a change in accounting principle in the first interim period.
In connection with SFAS No. 142's transitional goodwill impairment evaluation,
the Statement requires the Company to perform an assessment of whether there is
an indication that goodwill is impaired as of the date of adoption. To
accomplish this, the Company must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of April 1, 2002. The Company will then have up to six months from April 1,
2002 to determine the fair value of each reporting unit and compare it to the
carrying amount of the reporting unit. To the extent the carrying amount of a
reporting unit exceeds the fair value of the reporting unit, an indication
exists that the reporting unit goodwill may be impaired and the Company must
perform the second step of the transitional impairment test. The second step is
required to be completed as soon as possible, but no later than the end of the
year of adoption. In the second step, the Company must compare the implied fair
value of the reporting unit goodwill with the carrying amount of the reporting
unit goodwill, both of which would be measured as of the date of adoption. The
implied fair value of goodwill is determined by allocating the fair value of the
reporting unit to all of the assets (recognized and unrecognized) and
liabilities of the reporting unit in a manner similar to a purchase price
allocation, in accordance with SFAS No. 141. The residual fair value after this
allocation is the implied fair value of the reporting unit goodwill. Any
transitional impairment loss will be recognized as the cumulative effect of a
change in accounting principle in the Company's statement of operations.
As of the date of adoption of SFAS No. 142, the Company expects to have
unamortized goodwill in the amount of $25.4 million and unamortized identifiable
intangible assets in the amount of $8.1 million, all of which will be subject
to the transition provisions of SFAS No. 142. Amortization expense related to
goodwill was $3.1 million for the year ended March 31, 2001. Because of the
extensive effort needed to comply with adopting SFAS No. 141 and No. 142, it is
not practicable to reasonably estimate the impact of adopting the Statements on
the Company's consolidated financial statements at the date of this report,
including whether it will be required to recognize any transitional impairment
losses as the cumulative effect of a change in accounting principle.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations (SFAS No. 143). SFAS No. 143 requires the Company to record the fair
value of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development and/or normal
use of the assets. The Company also records a corresponding asset which is
depreciated over the life of the asset. Subsequent to the initial measurement of
the asset retirement obligation, the obligation will be adjusted at the end of
each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. The Company is required to adopt SFAS No.
143 on April 1, 2003, but does not expect adoption to have a material effect on
its financial condition or results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This Statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized by
the amount by which the carrying amount of the asset exceeds the fair value of
the asset. SFAS No. 144 requires companies to separately report discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell. The Company is
required to adopt SFAS No. 144 on April 1, 2002. The Company has not yet
determined the effect, if any, from the adoption of SFAS No. 144 on its
financial condition and results of operations.
- 13 -
RISK FACTORS
This Annual Report on Form 10-KSB contains forward-looking statements with the
meaning of Section 27A of the Securities At of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended. Such statements include
statements regarding the Company's expectations, hopes, and intentions regarding
the future, including but not limited to statements regarding the Company's
strategy, competition, development plans (including anticipated cost, timing and
eventual acceptance of new products and services by the market), financing,
revenue, and operations. 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 greater
detail in the following paragraphs. All forward-looking statements in this
document are made as of the date hereof, based on information available to the
Company as of the date hereof, and the Company assumes no obligation to update
any forward-looking statement.
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS. The Company has experienced
significant quarterly fluctuations in operating results in the past and
anticipates such fluctuations in the future. The Company expects to continue to
expend significant sums in the area of sales and marketing operations and
research and development in order to promote new product development and rapid
product introduction. Because the expenses associated with these activities are
relatively fixed in the short-term, the Company may be unable to adjust spending
quickly enough to offset any unexpected shortfall in revenue growth or any
decrease in revenue levels. Operating results may also fluctuate due to factors
such as:
o the size and timing of customer orders;
o changes in pricing policies by the Company or its competitors;
o the ability of the Company to develop, introduce, and market new and
enhanced versions of the Company's products;
o the number, timing, and significance of product enhancements and new
product announcements by the Company's competitors;
o the demand for the Company's products;
o changes in the proportion of revenues attributable to licenses and
service fees;
o nonrenewal of customer support agreements;
o commencement or conclusion of significant consulting projects;
o customer order deferrals in anticipation of enhancements or new
products offered by the Company or its competitors;
o software defects and other product quality problems;
o personnel changes; and
o the level of international expansion.
As a result, the Company expects its quarterly operating results to continue to
fluctuate.
The Company operates 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, the Company 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 the Company's products and
services, in relation to the forecast for any given quarter, could materially
and negatively impact the results of the Company's operations. In addition, the
Company believes that period-to-period comparisons of its operating results
should not be relied upon as indications of future performance.
- 14 -
INTEGRATION. The acquisition of PickAX in December 2000 has increased revenue
from $6.2 million for the fiscal year ending March 31, 2000 to $9.3 million for
the fiscal year ending March 31, 2001, which includes the results of the PickAX
acquisition for the four month period from December 2000 through March 2001. The
number of employees increased from approximately 35 at the Company just prior to
closing the acquisition to approximately 183 employees just after the
acquisition. Since the acquisition, the Company's focus has been on new products
and services. The first such product, called mvDesigner, was introduced at the
Company's worldwide user conference in May 2001. The Company believes that the
initial market for these products will be the multi-dimensional database market
where value added resellers, application developers, system integrators, and
large end users are seeking to upgrade their existing, highly functional
multi-dimensional database applications for deployment in a Web or client/server
environment.
The integration of the two companies will require the dedication of management,
engineering, and sales resources in order to achieve the anticipated benefits
and efficiencies of the acquisition. The difficulties of combining the
operations are exacerbated by the necessity of coordinating geographically
separated engineering organizations in the United States of America and in the
United Kingdom as well as integrating the accounting and other administrative
systems of the two companies. The process of integrating the operations of the
two companies could cause an interruption of, or loss of momentum in, the
activities of the combined our businesses. The failure to successfully integrate
PickAX operations could have a materially adverse effect upon our business,
operating results, and financial condition.
SALES CYCLE. The sales cycle for the Company's products typically ranges from
three to six months or longer. The Company's 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. Thus, the
purchases of the Company's products are often part of an end user's larger
business process, reengineering initiative, or implementation of client/server
or web-based computing. Therefore, the end users frequently view the purchase of
the Company's products as part of a long-term strategic decision regarding the
management of their workforce-related operations and expenditures which
sometimes results in end users taking a long period of time to assess
alternative solutions by competitors or to defer a purchase decision as a result
of an unrelated strategic issue beyond the Company's ability to influence or
control. The Company will continue to educate potential customers on the use and
benefits of the Company's products and services, as well as the integration of
the Company's products and services with additional software applications
utilized by individual customers. There can be no assurance, however, that the
Company will not experience these and additional delays in the future.
MARKET GROWTH. The multi-dimensional database market is small and stable. As a
result, the primary growth of the Company's market will depend upon the
Company's ability to displace its competitors in the products of system
integrators and value added resellers that sell to corporate end users. Unless a
critical mass of organizations and their suppliers adopt the Company's products
and recommend them to corporate end users, the Company's products may not
achieve widespread market acceptance, which would cause the Company's business
to suffer.
PRODUCT DEVELOPMENT. Because the market for the Company's products is continuing
to emerge and is subject to rapid technology change and evolving industry
standards, the life cycles of the Company's products are difficult to predict.
Competitors may introduce new products or enhancements to existing products
employing new technologies, which could render the Company's existing products
and services obsolete and unmarketable. To be successful, the Company's products
and services must keep pace with technological developments and emerging
industry standards, address the ever-changing and increasingly sophisticated
needs of the Company's customers and achieve market acceptance. However, the
development of new, enhanced software products is a complex and uncertain
process requiring high levels of innovation from the Company's designers as well
as accurate anticipation of customer and technical trends by the marketing
staff. In developing new products and services, the Company may also 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 and services. The development
and introduction of new or enhanced products also requires the Company to manage
the transition from older, displaced 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. The Company's results of
operations would be seriously harmed if the Company was unable to develop,
release and market new software product enhancements on a timely and
cost-
- 15 -
effective basis, or if new products or enhancements do not achieve market
acceptance or fail to respond to evolving industry or technology standards.
COMPETITION. The market for the Company's products is highly competitive,
diverse, and subject to rapid change. The Company's products and services
compete on the basis of the following key characteristics:
o performance;
o interoperability;
o scalability;
o functionality;
o reliability;
o pricing;
o post sale customer support;
o quality;
o compliance with industry standards; and
o overall total cost of ownership.
While management currently believes that the Company's products and services
compete favorably with respect to their characteristics in the marketplace, the
Company's products and services could fall behind marketplace demands at any
time. If the Company fails to address the competitive challenges, the Company's
business would suffer materially.
The Company currently faces competition from a number of sources, including
several large vendors that develop and market databases, development tools,
decision support products, and consulting services. The Company's principal
competitors include IBM, Microsoft, Informix/Ardent, Oracle, Sybase and Jbase.
There are also a number of open source database alternatives to the Company's
database products, which include My SQL and Postgre SQL. Additionally, as the
Company expands its business, the Company expects to compete with a different
group of companies, including small, highly focused companies offering single
products or services that the Company includes as part of an overall solution. A
number of the Company's competitors have significantly greater financial,
technical, marketing and other resources than the Company. As a result, these
competitors may be able to respond more quickly to new or emerging technologies,
evolving markets, changes in customer requirements, and may devote greater
resources to the development, promotion and sale of their products than the
Company.
CONCENTRATION OF STOCK OWNERSHIP AND DEBT TO PRINCIPAL STOCKHOLDER. Astoria
Capital Partners, L.P. and Rockport Group together beneficially own
approximately 63% of the Company's outstanding common stock. In addition, the
Company has a promissory note for approximately $19.0 million in principal and
accrued interest due to Astoria Capital Partners, L.P. in November 2002.
Mr. Wagner, a member of the Company's Board of Directors, is the managing
director of Rockport Group. This concentration of stock ownership can affect
those actions of the Company that require stockholder approval, including the
election of the Board of Directors and the approval of significant corporate
transactions. Moreover, this concentration of ownership may delay or prevent a
change in control of the Company.
LIMITED OPERATING HISTORY. In December 2000, the Company completed the
acquisition of PickAX. There is a limited operating history as a combined
entity. Risks and difficulties include the Company's ability to:
o expand its base of customers with fully installed and deployed systems
that can serve as reference accounts for the Company's ongoing sales
efforts;
o expand the Company's pipeline of sales prospects domestically and
internationally in order to promote greater predictability in the
Company's period-to-period sales levels;
o continue to offer new products that complement the Company's existing
product line, in order to make the Company's products more attractive
to customers;
o continue to develop, integrate and upgrade the Company's technology to
add additional features and functionality;
o maintain the current, and develop new, third-party relationships;
o continue to attract and retain qualified personnel; and
- 16 -
o increase awareness of the Company's brand name.
There are no assurances that the Company's business strategy will be successful
or that the Company will successfully address these risks or difficulties. If
the Company fails to address these risks or difficulties adequately, the
business of the Company will likely suffer.
LIQUIDITY. The Company expects that its cash in the bank will be sufficient to
meet the Company's working capital and capital expenditures for the next twelve
months. However, the Company may need additional funds if the Company
experiences a decline in revenues or in the event of other unforeseen
circumstances. If additional financing becomes necessary, there is no assurance
that the Company could raise additional funds on acceptable terms. Therefore,
the Company may not be able to develop or enhance the Company's products, take
advantage of future opportunities, or respond to competitive pressures or
unanticipated requirements.
INTERNATIONAL OPERATIONS. The Company operates on a global basis with offices or
distributors in Europe, Africa, Asia, and North America. Approximately 43% of
the Company's revenue in the fiscal year ending March 31, 2001 were derived from
international sources. The Company intends to continue to expand its
international operations to achieve the Company's anticipated growth, but the
Company may face significant challenges to the Company's international
expansion. The expansion of the Company's existing international operations and
entry into additional international markets will require significant management
attention and financial resources. To achieve acceptance in international
markets, the Company's products must be internationalized to handle a variety of
factors specific to each international market, including language and generic
formatting such as date and time. The incorporation of these and other factors
into the Company's products is a complex process and often requires assistance
from third parties. At the same time, to achieve broad usage by employees across
international organizations, the Company's products must be localized to handle
native languages and cultures in each international market. Localizing the
Company's products is also a complex process and the Company intends to continue
to work with third parties to develop localized products.
The Company also faces other risks inherent in conducting business
internationally, including but not limited to the following:
o fluctuations in interest rates or currency exchange rates;
o language and cultural differences;
o local and governmental requirements;
o difficulties and costs of staffing and managing international
operations;
o differences in intellectual property protections;
o difficulties in collecting accounts receivable and longer collection
periods;
o seasonal business activities in certain parts of the world; and
o trade policies.
Any of these factors could seriously harm the Company's current international
operations and, consequently, affect the international growth of the Company's
business. There can be no assurance that these factors or any combination of
these factors will not adversely affect the international revenues or overall
financial performance of the Company.
RAPID TECHNOLOGICAL CHANGE. The market in which the Company competes is
characterized by rapidly changing technology, evolving industry standards and
protocol, and frequent improvements in products and services. In order to
succeed, the Company must improve current products and services and develop new
products and services that are competitive in terms of price, performance, and
quality. The Company must provide products and related services that meet the
demands of its customers and prospective customers as the market and customer
requirements evolve. Not only will the Company have to expend significant funds
and other resources to continue to improve the Company's existing products and
services, but the Company must also properly anticipate, address, and respond to
consumer preferences and demands. As customers' needs change with respect to
their enterprise applications, the Company's existing products may become
obsolete or inefficient relative to those of the competition and may require
modifications or improvements. The addition of new products and services will
also require that the Company continue to improve the technology underlying the
Company's products. If the Company
- 17 -
fails to quickly respond to customer needs, or if its offerings fail to achieve
market acceptance, the market for its products and services will not grow or may
decline, and the Company's business may suffer significantly. Consequently, the
Company's future financial performance will depend, in significant part, upon
the successful development, introduction, and market acceptance of new and
enhanced products or services.
INDUSTRY STANDARDS. A key factor in the Company's future success will continue
to be the ability of the Company's products to operate and perform well with
existing and future leading, industry-standard enterprise software applications
intended to be used in connection with multidimensional database management
system products. Interoperability may require third party licenses, which may
not be available to the Company on favorable terms or at all. Failure to meet
existing or future interoperability and performance requirements of industry
standard applications in a timely manner could adversely affect the Company's
business. Uncertainties relating to the timing and nature of new product
announcements, introductions or modifications by the these third parties could
delay the Company's product development, increase the Company's product
development expense or cause customers to delay evaluation, purchase, and
deployment of the Company's products.
PROFESSIONAL SERVICES. The growth of the Company's license revenue also depends
on the Company's ability to provide the Company's customers with professional
services to assist in support, training, consulting, initial implementation and
deployment of the Company's products and to educate third-party systems
integrators in the use of the Company's products. As a result, the Company plans
to increase the number of professional services personnel to meet these needs.
New professional services personnel will require training and take time to reach
full productivity. Competition for qualified professional services personnel is
intense due to the limited number of people who have the requisite knowledge and
skills. The Company may not be able to attract or retain a sufficient number of
qualified professional services personnel. To meet the Company's customers'
needs for professional services, the Company may also need to use more costly
third-party consultants to supplement the Company's own professional services
group. In addition, the Company could experience delays in recognizing revenue
if the Company's professional services group fails to complete implementations
in a timely manner. If the Company fails to maintain or enhance its professional
services group as a result of any of these factors, the Company's business could
be materially harmed.
SOFTWARE DEFECTS. The Company's enterprise applications software may contain
undetected errors or failures when first introduced or as new versions are
released. This may result in loss of, or delay in, market acceptance of the
Company's products and could harm the Company's reputation. Undetected errors or
failures in computer software programs are not uncommon and are endemic to the
nature of the business. While the Company makes every effort to thoroughly test
its software, in the event that the Company experiences significant software
errors in future releases, the Company could experience delays in release,
customer dissatisfaction and lost revenues. Any of these errors or defects could
cause the Company's business to be materially harmed.
PROPRIETARY RIGHTS. The Company relies primarily on a combination of trade
secret, copyright and trademark laws and contractual provisions to protect its
proprietary rights. In addition to trademark and copyright protections, the
Company licenses its 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. The Company generally relies on "shrink-wrap" or "click-wrap"
licenses that become effective when a customer opens the package or downloads
and installs software on its system. In order to retain exclusive ownership
rights to its software and technology, the Company generally provides its
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 the Company's competitors will not
independently develop technologies that are substantially equivalent or superior
to the Company's technology.
The Company's ability to compete successfully will depend, in part, on the
Company's ability to protect the Company's proprietary technology and operations
without infringing upon the rights of others. The Company may fail to do so. In
addition, the laws of certain countries in which are products are or may be
licensed may not protect the Company's proprietary rights to the same extent as
the laws of the United States.
There has been a substantial amount of litigation in the software industry
regarding intellectual property rights. Third parties may claim that the
Company's current or potential future products and services infringe upon their
intellectual property. The Company expects that software product developers and
providers of software applications
- 18 -
will increasingly be subject to infringement claims as the number of products
and competitors in the Company's industry segment grows and the functionality of
products in different industry segments overlaps. 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 the
Company's business.
KEY PERSONNEL AND MANAGEMENT. Many of the Company's executive officers joined
the Company recently in connection with the acquisition of PickAX. The new
executive officers must be able to work efficiently together to manage the
Company's operations. The loss of one or more of these executives could
adversely affect the Company. In addition, the Company believes that its future
success will depend to a significant extent on its ability to recruit, hire and
retain highly skilled management and employees for engineering new products,
product management, sales, marketing, and customer service. Competition for such
personnel in the software industry is intense, and there can be no assurance
that the Company will be successful in attracting and retaining such personnel.
If the Company is unable to do so, it may experience inadequate levels of
staffing to develop and license its products and perform services for its
customers.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company, including the notes
thereto, together with the report of independent auditors thereon are presented
beginning on Page F-1 and are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Grant Thornton LLP was previously the principal accountants for Raining Data
Corporation. On January 2, 2002, that firm's appointment as principal
accountants was terminated and KPMG LLP was engaged as principal accountants.
The decision to change accountants was approved by the board of directors.
In connection with the audits of the two fiscal years ended March 31, 2000, and
2001, and reviews of the subsequent interim period through September 30, 2001,
there were no disagreements with Grant Thornton LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures, which disagreements if not resolved to their satisfaction would have
caused them to make reference in connection with their opinion to the subject
matter of the disagreement.
The audit reports of Grant Thornton LLP on the consolidated financial statements
of Raining Data Corporation and subsidiaries as of and for the years ended March
31, 2000 and 2001 did not contain any adverse opinion or disclaimer of opinion,
nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles. Subsequent to the filing of its Annual Report on Form
10-KSB for the year ended March 31, 2001, and the change in auditors from Grant
Thornton LLP to KPMG LLP:
In January 2002,the Company became aware of certain misapplications of
accounting standards principally related to the accounting for its business
combination with PickAX under the purchase method in December 2000, the purchase
of technology from a third party in 2000 and the grant of options at below
market exercise prices. Management discussed these matters with Grant Thornton
LLP and on February 27, 2002 Grant Thornton LLP sent a letter to the Company
withdrawing its audit report on the consolidated financial statements of Raining
Data Corporation as of and for the year ended March 31, 2001.
- 19 -
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The Bylaws of the Company provide that the Board of Directors is composed of
seven directors divided into three classes composed of two members in each of
Classes I and II and three members in Class III. The directors are elected to
serve staggered three-year terms, with the term of one class of directors
expiring each year.
The following table sets forth as of June 14, 2001, 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 Principal Occupation Director Since Term Expires
---------------- --- -------------------- -------------- ------------
Bryce J. Burns 43 Chairman and Interim Chief Executive 2000 2003
Officer of the Company
Gerald F. Chew(2) 41 President and Chief Operating Officer, 1998 2001
MDSI Mobile Data Solutions, Inc.
Gil Figueroa 57 President and Chief Executive Officer, 2000 2001
Internet Tools, Inc.
Gwyneth M. Gibbs 58 Vice President, European and Africa 1999 2003
Operations of the Company
Douglas G. Marshall(1) 45 Vice President of Marketing, Bank of 1998 2002
America
Bryan Sparks(2) 39 Chairman and Chief Executive Officer of 2000 2003
Lineo, Inc.
Geoffrey P. Wagner(1,2) 44 General Partner, Rockport Group, L.P. 1998 2002
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
There are no arrangements or understandings between any director and executive
officers or other person pursuant to which he or she is or was to be selected as
a director or officer of the Company.
Gerald F. Chew, a director of the Company, is a cousin of the General Partner of
Astoria Capital Partners, LP.
Except as follows, each director has been engaged in his principal occupation
set forth above during the past five years; there is no family relationship
between any director and executive officer of the Company.
Mr. Burns was elected Interim Chief Executive Officer on December 29, 2000. Mr.
Burns also serves as Chairman of the Board of the Company. Mr. Burns served as
Director of Product Management at Novell, Inc., a computer software company,
from 1998 to 2000 and served as Executive Vice President and Chief Operating
Officer at Caldera Systems, a computer software company, from June 1997 through
July 1998. Mr. Burns was also the President of Applied Medical Informatics,
Inc., a medical software company from October 1995 to June 1997. Mr. Burns holds
a BS degree in medical biology from the University of Utah and an MBA from
Brigham Young University.
Mr. Chew currently serves as the President and Chief Operating Officer of MDSI
Mobile Data Solutions, Inc. ("MDSI"), a company of which he has been a Director
since 1995. Prior to joining MDSI, Mr. Chew had been serving as Executive Vice
President of Ancora Capital & Management Group, LLC since June 1998 and Managing
Director of The Cairn Group since February 1997. From August 1996 to February
1997, he was Chief Operating Officer of Spot Magic, Inc. Mr. Chew serves on the
Audit Committee.
- 20 -
Mr. Figueroa joined the Board in November 2000. At the time, Mr. Figueroa was
serving as the Chairman and Chief Executive Officer of PickAX, which Mr.
Figueroa formed in August 1999 to acquire Pick Systems. Mr. Figueroa served
briefly as the President and Chief Executive Officer of the Company in December
2000 following the acquisition. Mr. Figueroa resigned as an executive officer of
the Company at the end of December 2000, and formed Internet Tools, Inc., where
he serves as President and Chief Executive Officer. From 1995 until he formed
PickAX, Mr. Figueroa was President of Advanced Litigation Techniques, Inc.
Mrs. Gibbs serves as Vice President European and Africa Operations for the
Company from her offices in the United Kingdom. Mrs. Gibbs served as President
and Interim Chief Executive Officer of the Company from October 1998 until the
Company's merger with PickAX in December 2000. Mrs. Gibbs joined the Company in
October 1994, and was initially responsible for Research and Development in
Europe before accepting worldwide responsibility for the Company in October
1998. Mrs. Gibbs holds a BS in Astronomy from the University of London. Mrs.
Gibbs resigned as an officer of the Company effective June 30, 2001. Mrs. Gibbs
remains as a Director of the Company.
Mr. Marshall is currently Vice President with Bank of America where he has held
a number of marketing positions including Vice President of Advertising and
Marketing Communications as well as product development and management roles
since joining the bank in August 1994. Mr. Marshall holds BA in English from
Seattle Pacific University and an MBA from the University of Washington. Mr.
Marshall serves on the Compensation Committee.
Mr. Sparks joined the Board of Directors in August 2000. Mr. Sparks serves as
the Chairman and Chief Executive Officer of Lineo, Inc., a computer software
company, which he joined in September 1998. From October 1994 through September
1998 Mr. Sparks served as the Chief Executive Officer of Caldera, Inc., a
computer software company. Mr. Sparks holds Bachelor's Degree in Computer
Science from Brigham Young University. Mr. Sparks is a member of the Audit
Committee.
Mr. Wagner served as Secretary of the Company from February 1999, through
November 2000. Mr. Wagner is the sole General Partner of Rockport Group LP since
it's founding in September 1990. The Rockport Group LP invests in a variety of
industries, including technology, healthcare and apparel. Prior to 1990 Mr.
Wagner held sales executive positions at several leading Wall Street firms
including five years at Bear, Stearns & Co., Inc. and five years at Kidder,
Peabody & Co., Inc. Mr. Wagner holds a BS in Business Administration from
Portland State University. Mr. Wagner serves on the Audit Committee and the
Compensation Committee.
Information regarding the current Executive Officers of the Company found under
the caption "Executive Officers of the Registrant" in Part I hereof is
incorporated by reference into this Item 9.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership on
- 21 -
Form 3 and changes in ownership on Form 4 or 5 with the Securities and Exchange
Commission ("SEC"). Such officers, directors and ten-percent stockholders are
also required by SEC rules to furnish the Company with copies of all forms that
they file pursuant to Section 16(a). Based solely on its review of the copies of
such forms received by it and representations that no other forms were required
to be filed, the Company believes that all Section 16(a) filing requirements
applicable to its officers, directors and ten-percent stockholders were complied
with in a timely fashion, except as follows: Gwyneth Gibbs filed a late Form 3
and reported four transactions late on a Form 5; Bryan Sparks filed a late Form
3; Astoria Capital Partners filed a late Form 3 and filed late Form 4 reports
for the months of January, February, March, April, June, July, November and
December 2000 with respect to an indeterminable number of transactions; and
Richard Koe filed a late Form 3 and filed late Form 4 reports for the months of
July, November and December 2000 with respect to an indeterminable number of
transactions.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth the compensation of the Company's Named Executive
Officers, which consist of a) the all persons serving as the chief executive
officer during the fiscal year, b) the four most highly compensated executive
officers serving as such at the end of the fiscal year, and c) the two most
highly compensated former executives for whom disclosure would have otherwise
been required but for the fact they were not serving as such at the end of the
fiscal year ending March 31, 2001:
Summary Compensation Table
Long Term
Compensation Awards
Annual Compensation ---------------------
------------------------------------ Securities Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($) Options (#) Compensation(9)
--------------------------- ---- ---------- --------- --------------------- ---------------
Bryce J. Burns(1) 2001 $ 75,000 -- 64,825 $ 9,124
Interim Chief Executive Officer and
Chairman
Gwyneth M. Gibbs(2) 2001 $144,423 30,000 $21,934
Vice President European and African 2000 $107,884 $40,000 -- $22,283
Operations; Former President and 1999 $ 79,874 $33,209 -- $22,855
Interim Chief Executive Officer until
PickAX acquisition
Gil Figueroa(3) 2001 $254,738 -- -- $97,119
Former President and Chief Executive Officer
Richard K. Lauer(4) 2001 $268,750 $20,000 30,000 --
President and Chief Operating Officer
Timothy J. Holland(5) 2001 $187,500 -- 30,000 $ 2,820
Senior Vice President and
Chief Technology Officer
Mario I. Barrenechea(6) 2001 $306,300 -- 30,000 $ 2,478
Senior Vice President,
Sales and Marketing
Scott K. Anderson, Jr.(7) 2001 $185,000 $10,000 30,000 $ 1,500
Vice President of Finance,
Treasurer, and Corporate Secretary
James Dorst(8) 2001 $121,875 -- -- $46,875
Former Chief Operating Officer and 2000 $ 94,507 -- -- --
Chief Financial Officer
- 22 -
(1) Mr. Burns joined the Company as Interim Chief Executive Officer on December
29, 2000. Mr. Burns was elected Chairman of the Company on September 22, 2000.
(2) Mrs. Gibbs resigned as President and Interim Chief Executive Officer at the
time of the PickAX acquisition and was subsequently elected Vice President,
European and African Operations of the Company. Mrs. Gibbs resigned as an
officer of the Company effective June 30, 2001.
(3) Mr. Figueroa was serving as President and Chief Executive Officer of PickAX
at the time of the PickAX acquisition and joined the Company as President and
Chief Executive Officer through December 29, 2000. Mr. Figueroa remains a
Director of the Company. Compensation includes amounts earned at PickAX from
April 1, 2000 through the date of acquisition.
(4) Mr. Lauer was serving as Executive Vice President and Chief Operating
Officer of PickAX at the time of the acquisition and was elected Senior Vice
President and Chief Operating Officer of the Company at the time of the
acquisition. Mr. Lauer was elected President and Chief Operating Officer of the
Company on December 29, 2000. Compensation includes amounts earned at PickAX
from April 1, 2000 through the date of acquisition.
(5) Mr. Holland was serving as Senior Vice President and Chief Technology
Officer of PickAX at the time of the acquisition and was elected to the same
position in the Company at time of the acquisition. Compensation includes
amounts earned at PickAX from April 1, 2000 through the date of acquisition.
(6) Mr. Barrenechea was serving as Senior Vice President, Sales and Marketing of
PickAX at the time of the acquisition and was elected to the same position in
the Company at time of the acquisition. Compensation includes amounts earned at
PickAX from April 1, 2000 through the date of acquisition.
(7) Mr. Anderson was serving as Vice President and Administration and Corporate
Secretary of PickAX at the time of the acquisition and was elected Vice
President, Treasurer, and Corporate Secretary of the Company at time of the
acquisition. Compensation includes amounts earned at PickAX from April 1, 2000
through the date of acquisition.
(8) Mr. Dorst resigned as an officer of the Company on October 16, 2000 and
resigned as a Director of the Company on August 14, 2000.
(9) Amounts presented include the dollar value of:
(i) premiums paid by the Company during the fiscal year with respect to
term life insurance for the benefit of the Mr. Barrenechea in the amount of
$2,478.
(ii) contributions to the Company's 401(k) program on behalf of the Named
Executive Officer's 401(k) Plan in the amount of $1,200 for Mr. Figueroa,
$2,820 for Mr. Holland, and for $1,500 Mr. Anderson. Contributions to the
United Kingdom company pension plan for Mrs. Gibbs totaled $21,934.
(iii) balance of rental cost of housing not covered by Mr. Figueroa's
housing allowance of $2,000 per month and severance payments made through
March 31, 2001, of $89,565.
(iv) Mr. Dorst received $46,875 in severance payments.
- 23 -
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth the individual grants of stock options made by
the Company during the fiscal year ending March 31, 2001, to each of the Named
Executive Officers:
Percent
Number of of Total
Securities Options
Underlying Granted to
Options Employees
Granted in Fiscal Exercise Price Expiration
Name (#) Year(1) ($/Sh) Date
---- ---------- ---------- -------------- ----------
Bryce J. Burns 64,825 7% $4.09 3/1/11
Gwyneth M. Gibbs 30,000 3% $5.00 3/29/11
Richard K. Lauer 30,000 3% $4.25 3/29/11
Timothy J. Holland 30,000 3% $4.25 3/29/11
Mario I. Barrenechea 30,000 3% $4.25 3/29/11
Scott K. Anderson, Jr. 30,000 3% $4.25 3/29/11
(1) Based on an aggregate of 924,400 options granted to directors and employees
of the Company in the fiscal year ending March 31, 2001, including the Named
Executive Officers. Each of the options listed in the table vests at 25% one
year after the commencement date of the grant, and one thirty-sixth of the
remaining unvested shares subject to the option grant vest each month
thereafter.
- 24 -
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
The Named Executive Officers exercised no options during the last fiscal year.
The following table shows, as to the Named Executive Officers, the value of
unexercised options at March 31, 2001:
Aggregated Option Exercises in Fiscal Year 2001
and Fiscal Year 2001 Ending Option Values
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-The-Money Options at
Fiscal Year End (#) Fiscal Year End(2)
---------------------------- ---------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Bryce J. Burns 35,892 157,758 $ 0 $ 68,105
Gwyneth M. Gibbs 42,326 60,674 $ 60,859 $ 47,251
Gil Figueroa 30,550 0 $ 58,063 $ 0
Richard K. Lauer 91,648 167,473 $200,764 $327,866
Timothy J. Holland 81,465 152,198 $178,457 $294,405
Mario I. Barrenechea 91,648 167,473 $200,764 $327,866
Scott K. Anderson, Jr. 61,099 121,649 $133,843 $227,484
James Dorst(1) 0 0 $ 0 $ 0
(1) Mr. Dorst resigned on October 16, 2000, and did not exercise his options
within the authorized time limit following his departure from the Company.
(2) In accordance with SEC rules, values are calculated by subtracting the
exercise price from the fair market value of the underlying common stock. For
purposes of this table, fair market value is deemed to be closing price of the
common stock on March 31, 2001, which was $5.1406 per share.
EMPLOYMENT CONTRACTS
The Service Agreement effective April 1, 2000, between the Company and Gwyneth
M. Gibbs retains Mrs. Gibbs as an Officer of the Company for an initial term of
two (2) years, which is automatically renewed for subsequent two year terms
unless the agreement is terminated by either party by delivery of six months
prior notice. The Service Agreement provides for an annual base salary of Pound
Sterling83,000 sterling, with annual increases based the Index of Retail Prices
published by the Office for National Statistics. In addition, Mrs. Gibbs is
entitled to an annual incentive bonus of 50% of her base salary if certain
prearranged annual goals and objectives are met (no bonuses have been paid to
date), and to Company contributions to a Company retirement plan open to all
United Kingdom employees.
The Company has Employment Agreements effective December 1, 2000, with Messrs.
Figueroa, Lauer, Holland, Barrenechea and Anderson, the form of which was
included as Exhibit 10-1 in the Form 10-QSB filed with the SEC on February 14,
2001. Except for Mr. Barrenechea's agreements, the Employment Agreements signed
by the Company are for one year, identify the initial position title and
compensation amounts, provide the officers may receive bonuses from time to time
at the discretion of the Board of Directors, and provide for six months
severance in the event of involuntary separation from the Company. Mr.
Barrenechea's agreement is for three years and
- 25 -
provides that he will receive commissions on the Company's revenues. Mr.
Barrenechea's Agreement does not contain a non-competition provision.
On March 7, 2001, the Company entered into a Transition and Release Agreement
(the "Transition Agreement") with Gil Figueroa in connection with his
resignation as President and Chief Executive Officer of the Company on December
29, 2000. Pursuant to the terms of the Transition Agreement, Mr. Figueroa will
receive severance pay of $24,083 per month through December 31, 2001. In
addition, the Company agreed to pay Mr. Figueroa's COBRA insurance payments
through that period, to allow Mr. Figueroa remain in the house the Company
provided for him through the end of the lease on April 30, 2001, to provide Mr.
Figueroa a moving allowance of $7,500 to relocate upon termination of the house
lease, to allow Mr. Figueroa to retain the Company car previously provided to
Mr. Figueroa through December 31, 2001, and to reimburse Mr. Figueroa for legal
expenses in connection with the negotiation of the Transition Agreement, of up
to $8,500.
DIRECTOR COMPENSATION
The Company reimburses directors for travel and other out-of-pocket expenses
incurred in attending Board meetings but no cash compensation is otherwise paid
to directors.
In April 1999, the Board of Directors determined that it was in the best
interests of the Company to adopt the Raining Data Corporation 1999 Stock Option
Plan (the "1999 Plan") to consolidate options to be issued to directors,
officers, key employees, consultants and advisors under a single option plan and
to terminate the Director Plan, the 1993 Advisors Plan and the 1996 Stock Option
Plan, except as to warrants and options then issued and outstanding under such
plans. The Board of Directors adopted the 1999 Plan and 1,500,000 shares of the
common stock of the Company were reserved for issuance under the 1999 Plan. The
stockholders of the Company approved the 1999 Plan during the 1999 Annual
Stockholders' Meeting. At the 2000 Annual Stockholders' Meeting the number of
shares under the 1999 Plan was increased to 5,000,000.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of June 28, 2001, certain information with
respect to the beneficial ownership of the Company's 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 the Company to be the beneficial owner of more than
5% of any class of the Company's voting securities, (ii) each director, (iii)
each of the Named Executive Officers, and (iv) all directors and executive
officers of the Company as a group. As of June 28, 2001, there were 300,000 and
16,019,546 shares of issued and outstanding preferred stock and common stock
respectively.
Number of Percent of Number of Percent of
Shares of Total of Shares of Total of
Preferred Preferred Common Common
Name and Address(1) Stock(2) Stock(2) Stock Stock
-------------------- --------- --------- ---------- ----------
Astoria Capital Partners L.P.(3) 300,000 100.0% 10,057,396 55.2%
6600 92nd Avenue, S.W.
Portland, OR 97223
Philip and Debra Barrett Trust(4) 1,680,000 10.5%
P.O. Box 3730
Salem, OR 97302
Gil Figueroa(5) 794,290 4.9%
Gerald F. Chew(6) 127,658 *
Gwyneth M. Gibbs(7) 152,079 *
Douglas G. Marshall(8) 127,658 *
Geoffrey P. Wagner(9) 2,310,000 14.4%
Bryan Sparks(10) 32,275 *
Bryce J. Burns(11) 49,198 *
Richard K. Lauer(12) 91,648 *
Timothy J. Holland(13) 208,755 1.3%
Mario I. Barrenechea(14) 91,648 *
Scott K. Anderson, Jr.(15) 61,099 *
James Dorst(16) -- 0.0%
All Directors and Executive Officers
as a group (11 persons)(17) 4,046,308 24.1%
* Represents less than 1%
(1) Except as otherwise indicated below, the Company believes 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
community property laws, where applicable.
- 26 -
(2) "Preferred Stock" refers to the Series A Convertible Preferred Stock, which
is convertible into 1.667 shares of common stock.
(3) Includes warrants to purchase 2,207,318 shares of common stock exercisable
within 60 days of June 28, 2001.
(4) Includes warrants to purchase 30,000 shares of common stock exercisable
within 60 days of June 28, 2001.
(5) Includes options to purchase 30,550 shares of common stock exercisable
within 60 days of June 28, 2001, held by Mr. Figueroa.
(6) Represents warrants and options to purchase 127,658 shares of common stock
exercisable within 60 days of June 28, 2001, held by Mr. Chew.
(7) Includes options to purchase 51,947 shares of common stock exercisable
within 60 days of June 28, 2001, held by Mrs. Gibbs.
(8) Represents warrants and options to purchase 127,658 shares of common stock
exercisable within 60 days of June 30, 2001, held by Mr. Marshall.
(9) Includes warrants to purchase 4,167 shares of common stock exercisable
within 60 days of June 30, 2001, held by Mr. Wagner, 25,833 shares of common
stock owned by Mr. Wagner directly, 1,420,000 shares of common stock owned by
Rockport Group LP, of which Mr. Wagner is the sole general partner, 850,000
shares of common stock owned by RCJ Capital Partners LP, of which Rockport Group
LP is the sole general partner; Director Geoffrey P. Wagner is the sole general
partner of Rockport Group LP, and 10,000 shares of common stock purchased on
April 5, 1999 by a trust of which the reporting person's wife is the sole
beneficiary; the reporting person disclaims beneficial ownership of such 10,000
shares except to the extent of his pecuniary interest in such shares.
(10) Represents options to purchase 32,275 shares of common stock exercisable
within 60 days of June 28, 2001, held by Mr. Sparks.
(11) Represents options to purchase 49,198 shares of common stock exercisable
within 60 days of June 28, 2001, held by Mr. Burns.
(12) Represents options to purchase 91,648 shares of common stock exercisable
within 60 days of June 28, 2001, held by Mr. Lauer.
(13) Includes options to purchase 81,465 shares of common stock exercisable
within 60 days of June 28, 2001, held by Holland.
(14) Represents options to purchase 91,648 shares of common stock exercisable
within 60 days of June 28, 2001, held by Mr. Barrenechea.
(15) Represents options to purchase 61,099 shares of common stock exercisable
within 60 days of June 28, 2001, held by Mr. Anderson.
(16) Mr. Dorst resigned from the Company in October 2000.
(17) Includes an aggregate of 749,313 shares of common stock issuable upon
exercise of options or warrants exercisable within 60 days of June 30, 2001.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
On November 30, 2000, the Company acquired PickAX in which Astoria was a
significant shareholder. As a condition of that acquisition, the Company assumed
a note for approximately $18.5 million due to Astoria from PickAX, Inc. on that
date.
On March 7, 2001, the Company entered into a Transition and Release Agreement
(the "Transition Agreement") with Gil Figueroa in connection with his
resignation as President and Chief Executive Officer of the Company on December
29, 2000. See "Employment Contracts".
Two limited partners in RCJ Capital Partners LP loaned the Company $550,000 in
August 2000. The loans are for two years and bear annual interest at 4% payable
semiannually. The notes provide for the automatic conversion of the principal
and unpaid interest into shares of the Company's stock at a conversion price
$6.17 at maturity in August 2002. Geoffrey P. Wagner, a director of the Company,
is the sole general partner of Rockport Group LP, which is the sole general
partner of RCJ Capital Partners LP.
A trust of which a stockholder of the Company is the trustee and beneficiary,
loaned the Company $250,000 in September 2000. The loan is for two years and
bears an annual interest at 10% payable quarterly.
- 27 -
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The following Consolidated Financial Statements of Raining Data Corporation and
Subsidiaries and the Report of Independent Auditors are attached hereto
beginning on pages F-1.
(a)(1) Consolidated Financial Statements:
Report of Independent Auditors
Consolidated Balance Sheets as of March 31, 2001 and March 31, 2000
Consolidated Statements of Operations for fiscal years ended March 31, 2001 and
2000
Consolidated Statements of Cash Flows for fiscal years ended March 31, 2001 and
2000
Consolidated Statements of Stockholders' Equity (Deficit) for fiscal years ended
March 31, 2001 and 2000
Notes to Consolidated Financial Statements
(a)(2) Exhibits
EXHIBIT DESCRIPTION
------- -----------
2.1 Agreement and Plan of Merger, dated as of August 23, 2000, by and
among the Registrant, Raining Merger Sub, Inc., PickAX, Inc. and
Gilbert Figueroa (included as Appendix A to the Registrant's
Definitive Proxy Statement filed with the Commission on November 16,
2000 and incorporated herein by reference)
2.2 Merger Agreement dated as of August 23, 2000 by and among the
Registrant, PickAX, Inc., Gilbert Figueroa, and Raining Merger Sub,
Inc. (included as Exhibit 10.1 to the Registrant's Form 10-QSB filed
with the Commission on November 6, 2000 and incorporated herein by
reference)
2.3 Asset Purchase Agreement by and among the Registrant, the Wainer
Group, Dirk Wainer, Shirley-Anne Wainer, Dennis Janossich and Joseph
Bernard as to all matters, and Paradigm Designs Software Pty Ltd.,
as to certain matters dated as of May 19, 2000 (included as Exhibit
10.1 to the Registrant's Form 10-QSB filed with the Commission on
August 10, 2000 and incorporated herein by reference)
3.1 Restated Certificate of Incorporation dated September 17, 1997, as
amended and corrected of the Registrant (included as Exhibit 3.1 to
the Registrant's Form 8-K filed with the Commission on June 16, 1998
and incorporated herein by reference)
3.2 Certificate of Amendment of Certificate of Incorporation of the
Registrant dated February 9, 1999 (included as Exhibit 3.2 to the
Registrant's Form 10-KSB filed with the Commission on July 7, 1999
and incorporated herein by reference)
3.3 Certificate of Designation 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)
3.4 Certificate of Amendment of Restated Certificate of Incorporation of
the Registrant dated November 29, 2000 (included as Exhibit 3.1 to
the Registrant's Form 10-QSB filed with the Commission on February
14, 2001 and incorporated herein by reference)
3.5 Bylaws dated August 7, 1987, as amended (included as Exhibit 3.3 to
the Registrant's Form 10-KSB filed with the Commission on June 29,
1998 and incorporated herein by reference)
- 28 -
EXHIBIT DESCRIPTION
------- -----------
4.1 Registration Rights Agreement by and among the Registrant, Pamela
Conrad, Donald D. Durr, Lee Summers, Robert J. Rosenberg, Gil
Figueroa, Michael E. McGoey, Gerald L. Cohn and Timothy Holland
dated as of November 30, 2000 (included as Exhibit 4.1 to the
Registrant's Form 10-QSB filed with the Commission on February 14,
2001 and incorporated herein by reference)
4.2 Note and Warrant Purchase Agreement by and between the Registrant
and Astoria Capital Partners, L.P. dated as of November 30, 2000
(included as Exhibit 4.2 to the Registrant's Form 10-QSB filed with
the Commission on February 14, 2001 and incorporated herein by
reference)
4.3 Secured Promissory Note issued by the Registrant to Astoria Capital
Partners, L.P. dated November 30, 2000 (included as Exhibit 4.3 to
the Registrant's Form 10-QSB filed with the Commission on February
14, 2001 and incorporated herein by reference)
4.4 Common Stock Purchase Warrant issued by the Registrant to Astoria
Capital Partners, L.P. dated November 30, 2000 (included as Exhibit
4.4 to the Registrant's Form 10-QSB filed with the Commission on
February 14, 2001 and incorporated herein by reference)
4.5 Second Amendment to Credit Facility Agreement, Promissory Note and
Non-Transferable Warrant by and between the Registrant and Astoria
Capital Partners, L.P. dated as of December 21, 1999, as amended
April 30, 2000 (included as Exhibit 4.5 to the Registrant's Form
10-QSB filed with the Commission on February 14, 2001 and
incorporated herein by reference)
4.6 Common Stock Purchase Agreement - Cash Purchase, by and between the
Registrant and Astoria Capital Partners, L.P. dated as of December
4, 2000 (included as Exhibit 4.1 to the Registrant's Form 8-K/A
filed with the Commission on June 21, 2001 and incorporated herein
by reference)
4.7 Common Stock Purchase Agreement - PickAX Note, by and between the
Registrant and Astoria Capital Partners, L.P. dated as of December
4, 2000 (included as Exhibit 4.2 to the Registrant's Form 8-K/A
filed with the Commission on June 21, 2001 and incorporated herein
by reference)
4.8 Common Stock Purchase Agreement - Individual, by and between the
Registrant and Harry Augur dated as of December 4, 2000 (included as
Exhibit 4.3 to the Registrant's Form 8-K/A filed with the Commission
on June 21, 2001 and incorporated herein by reference)
4.9 Common Stock Purchase Agreement - Individual, by and between the
Registrant and Robert van Roijen dated as of December 4, 2000
(included as Exhibit 4.4 to the Registrant's Form 8-K/A filed with
the Commission on June 21, 2001 and incorporated herein by
reference)
- 29 -
EXHIBIT DESCRIPTION
------- -----------
4.10 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 (included as Exhibit 4.5 to
the Registrant's Form 8-K/A filed with the Commission on June 21,
2001 and incorporated herein by reference)
10.1 At-Will Employment Agreement between the Registrant and James Dorst
dated as of November 23, 1999 (included as Exhibit 10.1 to the
Registrant's Form 10-QSB filed with the Commission on February 14,
2000 and incorporated herein by reference)
10.2 Stock Purchase Agreement by and between the Registrant and Astoria
Capital Partners, L.P. dated as of March 31, 1999 (included as
Exhibit 10.1 to the Registrant's Form 8-K filed with the Commission
on April 5, 1999 and incorporated herein by reference)
10.3 Common Stock Purchase Agreement by and between the Registrant and
Astoria Capital Partners, L.P. dated as March 31, 1999 (included as
Exhibit 10.2 to the Registrant's Form 8-K filed with the Commission
on April 5, 1999 and incorporated herein by reference)
10.4 Common Stock Purchase Agreement by and between the Registrant and
Gwyneth Gibbs dated as of March 31, 1999 (included as Exhibit 10.3
to the Registrant's Form 8-K filed with the Commission on April 5,
1999 and incorporated herein by reference)
10.5 Common Stock Purchase Agreement by and between the Registrant and
Philip and Debra Barrett Charitable Remainder Trust dated as of
March 31, 1999 (included as Exhibit 10.4 to the Registrant's Form
8-K filed with the Commission on April 5, 1999 and incorporated
herein by reference)
10.6 Common Stock Purchase Agreement by and between the Registrant and
RCJ Capital Partners, L.P. dated as of March 31, 1999 (included as
Exhibit 10.5 to the Registrant's Form 8-K filed with the Commission
on April 5, 1999 and incorporated herein by reference)
10.7 Common Stock Purchase Agreement by and between the Registrant and
Rockport Group, L.P. dated as of March 31, 1999 (included as Exhibit
10.6 to the Registrant's Form 8-K filed with the Commission on April
5, 1999 and incorporated herein by reference)
10.8 Incentive Stock Option Agreement by and between the Registrant and
Bryce Burns dated as of February 14, 2000 (included as Exhibit 10.15
to the Registrant's Form 10-KSB/A filed with the Commission on July
31, 2000 and incorporated herein by reference)
- 30 -
EXHIBIT DESCRIPTION
------- -----------
10.9 Form of Employment Agreement by and between the Registrant and each
of Mssrs. Figueroa, Lauer, Holland, Barrenechea and Anderson
(included as Exhibit 10.1 to the Registrant's Form 10-QSB filed with
the Commission on February 14, 2001 and incorporated herein by
reference)
10.10 Nonincentive Stock Option Agreement by and between the Registrant
and Bryan Sparks dated as of August 14, 2000 (included as Exhibit
10.1 to the Registrant's Form 8-K filed with the Commission on
October 24, 2000 and incorporated herein by reference)
10.11 Amended and Restated Nonincentive Stock Option Agreement by and
between the Registrant and Bryce J. Burns dated as of February 14,
2000 (included as Exhibit 10.2 to the Registrant's Form 8-K filed
with the Commission on October 24, 2000 and incorporated herein by
reference)
10.12 Nonincentive Stock Option Agreement by and between the Registrant
and Bryce J. Burns dated as of September 22, 2000 (included as
Exhibit 10.3 to the Registrant's Form 8-K filed with the Commission
on October 24, 2000 and incorporated herein by reference)
10.13 Form of Promissory Note dated September 28, 2000, issued by the
Registrant to The Philip and Debra Barrett Charitable Remainder
Trust (included as Exhibit 10.4 to the Registrant's Form 8-K filed
with the Commission on October 24, 2000 and incorporated herein by
reference)
10.14 Form of Note Purchase Agreement and Form of Nonsecured Convertible
Promissory Note dated as of August 23, 2000, respectively, issued by
the Registrant to three lenders (included as Exhibit 10.5 to the
Registrant's Form 8-K filed with the Commission on October 24, 2000
and incorporated herein by reference)
10.15* Transition Agreement and Releases by and between the Registrant and
Gilbert Figueroa dated as of March 7, 2001.
10.16* Service Agreement by and between the Registrant and Gwyneth Gibbs
dated April 1, 2000.
10.17 Omnis Technology Corporation 1999 Stock Option Plan and Form of
Option Agreement (included as Exhibit 10.24 to the Registrant's
Annual Report on Form 10-KSB/A filed with the Commission on July 29,
1999 and incorporated herein by reference)
10.18 Omnis Technology Corporation Amended 1999 Stock Option Plan
(included as Appendix A to the Registrant's Definitive Proxy
Statement filed with the Commission on October 10, 2000 in
connection with the October 23, 2000 Annual Meeting of Stockholders
of the Registrant and incorporated herein by reference)
21.1* Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
24.1* Power of Attorney
* Previously filed with Commission.
(b) Reports on Form 8-K
None
- 31 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 20th day of
March 2002.
RAINING DATA CORPORATION
By: /s/ SCOTT K. ANDERSON, JR.
--------------------------------------
Scott K. Anderson, Jr.
Vice President, Finance
Treasurer, and Corporate Secretary
Pursuant to the requirements of 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:
---------- ------
/s/ CARLTON H. BAAB President, Chief Executive March 20, 2002
---------------------------- Officer and Director -------------------
Carlton H. Baab (Principal Executive Officer) (Date)
/s/ SCOTT K. ANDERSON JR. Vice President of Finance, March 20, 2002
---------------------------- Treasurer and Corporate ------------------
Scott K. Anderson Jr. Secretary (Principal Financial (Date)
and Accounting Officer)
/s/ GEOFFREY P. WAGNER* Director March 20, 2002
---------------------------- ------------------
Geoffrey P. Wagner (Date)
/s/ GERALD F. CHEW* Director March 20, 2002
---------------------------- ------------------
Gerald F. Chew (Date)
/s/ DOUGLAS G. MARSHALL* Director March 20, 2002
---------------------------- ------------------
Douglas G. Marshall (Date)
/s/ BRYCE J. BURNS* Director March 20, 2002
---------------------------- ------------------
Bryce J. Burns (Date)
/s/ BRYAN SPARKS* Director March 20, 2002
---------------------------- ------------------
Bryan Sparks (Date)
*By: /s/ SCOTT K. ANDERSON, JR.
-------------------------------
Scott K. Anderson, Jr.
Attorney-in-fact
- 32 -
REPORT OF INDEPENDENT AUDITORS
To 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, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the years in the two-year period ended March 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, 2001 and 2000, and the results of
their operation and their cash flows for each of the years in the two-year
period ended March 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
KPMG LLP
Costa Mesa, California
March 20, 2002
F-1
RAINING DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 and 2000
Restated
2001 2000
------------- -------------
ASSETS
Current Assets
Cash $ 2,424,000 $ 1,238,000
Trade Accounts Receivable, less allowance for
doubtful accounts of $156,000 in 2001 and $179,000
in 2000 2,502,000 594,000
Other Current Assets 263,000 423,000
------------- -------------
Total Current Assets 5,189,000 2,255,000
Property, Furniture and Equipment-net 1,403,000 923,000
Intangible Assets, less accumulated amortization of $1,096,000 11,384,000
Goodwill, less accumulated amortization of $3,141,000 34,610,000 --
Other Assets 269,000 --
------------- -------------
Total Assets $ 52,855,000 $ 3,178,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts Payable $ 1,733,000 $ 460,000
Accrued Liabilities 3,094,000 591,000
Deferred Revenue 3,274,000 206,000
Current Portion of Long-Term Debt 328,000 56,000
Note Payable to Stockholder -- 2,028,000
------------- -------------
Total Current Liabilities 8,429,000 3,341,000
Long-Term Debt, net of current portion 15,758,000 --
------------- -------------
Total Liabilities 24,187,000 3,341,000
Commitments and contingencies
Stockholders' Equity (Deficit)
Series A Convertible Preferred Stock: $1.00 par value;
300,000 shares authorized, issued, and
outstanding; liquidation preference of $500,100 300,000 300,000
Common Stock: $0.10 par value; 30,000,000 shares
authorized, 15,716,090 issued, and outstanding
at March 31, 2001; 10,035,238 issued and
outstanding at March 31, 2000 1,572,000 1,004,000
Additional Paid-in Capital 91,921,000 50,374,000
Deferred Stock-Based Compensation (2,073,000) (2,045,000)
Accumulated Other Comprehensive Income 1,216,000 286,000
Accumulated Deficit (64,268,000) (50,082,000)
------------- -------------
Total Stockholders' Equity (Deficit) 28,668,000 (163,000)
------------- -------------
Total Liabilities and Stockholders' Equity (Deficit) $ 52,855,000 $ 3,178,000
============= =============
See accompanying notes to the consolidated financial statements.
F-2
RAINING DATA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2001 and 2000
Restated
2001 2000
------------ ------------
Net Revenue
License $ 6,194,000 $ 4,998,000
Service 3,125,000 1,212,000
------------ ------------
Total Net Revenue 9,319,000 6,210,000
Cost of Revenue
Cost of License Revenue 302,000 195,000
Cost of Service Revenue 1,664,000 277,000
------------ ------------
Total Cost of Revenue 1,966,000 472,000
------------ ------------
Gross Profit 7,353,000 5,738,000
Cost of Operations
Selling and Marketing 5,599,000 3,221,000
Research and Development 3,922,000 2,287,000
General and Administrative 4,237,000 3,712,000
Stock-based Compensation 1,755,000 1,092,000
Amortization of Goodwill and
Intangible Assets 4,239,000 --
------------ ------------
Total Operating Expense 19,752,000 10,312,000
------------ ------------
Operating Loss (12,399,000) (4,574,000)
------------ ------------
Other Income (Expense)
Interest Expense-net (1,317,000) (124,000)
Other Income (Expense) (470,000) 2,000
------------ ------------
(1,787,000) (122,000)
------------ ------------
Net Loss $(14,186,000) $ (4,696,000)
============ ============
Basic and Diluted
Net Loss Per Share $ (1.21) $ (0.48)
============ ============
Shares used in computing basic and
diluted net loss per share 11,764,955 9,768,440
See accompanying notes to the consolidated financial statements.
F-3
RAINING DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDING MARCH 31, 2001 and 2000
RESTATED RESTATED
2001 2000
------------ ------------
Cash Flows From Operating Activities
Net Loss $(14,186,000) $ (4,696,000)
Adjustments to Reconcile Net Loss to Net Cash
Used In Operating Activities:
Depreciation and Amortization 4,705,000 341,000
Accretion of Debt Discount 908,000 --
Stock-Based Compensation 1,755,000 1,092,000
Common Stock Exchange for Incomplete Software 900,000 --
Change in Assets and Liabilities:
Trade Accounts Receivable 1,624,000 171,000
Other Assets 352,000 208,000
Accounts Payable and Accrued Liabilities (2,901,000) 278,000
Deferred Revenue 1,268,000 (206,000)
------------ ------------
Net Cash Used In Operating Activities (5,575,000) (2,812,000)
------------ ------------
Cash Flows from Investing Activities
Purchase of Property, Furniture, Equipment (362,000) (378,000)
Acquisition of Pick Ax, Inc. net of cash acquired (279,000) --
------------ ------------
Net Cash Used in Investing Activities (641,000) (378,000)
------------ ------------
Cash Flows from Financing Activities
Proceeds from Exercise of Stock Options 418,000 9,000
Net Proceeds from Issuance of Stock 4,043,000 2,084,000
Proceeds from Issuance of Debt 2,000,000 2,028,000
Repayment of Debt (120,000) (54,000)
------------ ------------
Net Cash Provided By Financing Activities 6,341,000 4,067,000
------------ ------------
Effect of exchange rates changes on cash 1,061,000 90,000
------------ ------------
Net Increase in Cash 1,186,000 967,000
Cash at the Beginning of Period 1,238,000 271,000
------------ ------------
Cash at End of Period $ 2,424,000 $ 1,238,000
============ ============
Schedule of Non Cash Investing and Financing Activities
Issuance of Debt, Common Stock, Warrants and Stock
Options and Assumption of Net Tangible Liabilities
in Connection with the Acquisition of Pick Ax, Inc. 36,246,000 --
Conversion of Debt to Common Stock in Private Placement 4,148,000 --
See accompanying notes to the consolidated financial statements.
F-4
RAINING DATA CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MARCH 31, 2001 (RESTATED) and 2000
(in thousands, except share amounts)
Series A
Convertible
Preferred Stock Common Stock Additional
-------------------------- ------------------------ Paid-In
Shares Amount Shares Amount Capital
------- -------- ------------ ------- ----------
Balances March 31, 1999 300,000 $ 300 9,679,829 $ 967 $ 45,181
Common Stock Options Exercised 10,090 1 8
Common Stock Issued 345,319 36 2,048
Stock Options Granted 3,137
Net Loss
Foreign Currency Translation Adjustments
Comprehensive Loss
------- -------- ------------ ------- --------
Balances March 31, 2000 300,000 $ 300 10,035,238 1,004 50,374
Common Stock Options and Warrants Exercised 362,347 36 382
Acquisition of PickAX:
Issuance of common stock 2,563,172 257 10,317
Conversion of debt to common stock 645,467 64 2,598
Issuance of stock warrants 7,820
Issuance of stock warrants in connection
with the issuance of debt 5,066
Issuance of stock options 6,082
Private placement to Astoria on December 4, 2000:
Issuance of common stock, net of issuance costs 991,818 99 3,944
Conversion of debt to common stock 1,005,548 101 4,047
Issuance of common stock in connection with the
purchase of incomplete software 112,500 11 889
Common Stock Options Granted 672
Stock Options Cancelled (270)
Net Loss
Foreign Currency Translation Adjustments
Comprehensive Loss
------- -------- ------------ ------- --------
Balances March 31, 2001 300,000 $ 300 15,716,090 $ 1,572 $ 91,929
======= ======== ============ ======= ========
Deferred Stockholders'
Stock-Based Accumulated Other Accumulated Equity Comprehensive
Compensation Comprehensive Income Deficit (Deficit) Loss
------------ ---------------- ----------- ------------ -------------
Balances March 31, 1999 $ -- $201 $(45,386) $ 1,263
Common Stock Options Exercised 9
Common Stock Issued 2,084
Common Stock Options Granted (3,137) --
Stock-Based Compensation 1,092 1,092
Net Loss (4,696) (4,696) $ (4,696)
Foreign Currency Translation Adjustments 85 85 85
--------
Comprehensive Loss -- $ (4,611)
------- ---- -------- -------- ========
Balances March 31, 2000 (2,045) 286 (50,082) (163)
Common Stock Options and Warrants Exercised 418
Acquisition of PickAX:
Issuance of common stock 10,574
Conversion of debt to common stock 2,662
Issuance of stock warrants 7,820
Issuance of stock warrants in connection --
with the issuance of debt 5,066
Issuance of stock options (1,381) 4,701
Private placement to Astoria on December 4, 2000:
Issuance of common stock, net of issuance costs 4,043
Conversion of debt to common stock 4,148
Issuance of common stock in connection with the
purchase of incomplete software 900
Common Stock Options Granted (672) --
Stock-Based Compensation 1,755 1,755
Stock Options Cancelled 270 --
Net Loss (14,186) (14,186) $(14,186)
Foreign Currency Translation Adjustments 930 930 930
--------
Comprehensive Loss -- $(13,256)
------- ---- -------- -------- ========
Balances March 31, 2001 $(2,073) $1,216 $(64,268) $ 28,668
======= ====== ======== ========
See accompanying notes to the consolidated financial statements.
F-5
RAINING DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
1. RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the filing of its Annual Report on Form 10-KSB for the year ended
March 31, 2001 with the Securities and Exchange Commission, Raining Data
Corporation (the Company) became aware of certain misapplications of accounting
standards principally related to the accounting for its business combination
with PickAX, Inc. (PickAX) under the purchase method in December 2000, the
purchase of technology from a third party in May 2000 and the grant of options
at below market exercise prices. The misapplications can be summarized as
follows:
- In computing the purchase price, the Company used the fair value of its
common stock around the date the merger agreement was signed to value common
stock, warrants and options to purchase common stock exchanged for
similar securities of PickAX. Portions of the merger consideration were,
however, to be determined based upon subsequent negotiations between the
Company and PickAX's controlling stockholder. These negotiations were
completed on the closing date. As a result, the Company should have used the
fair value of its common stock at the closing date to value stock-based
merger consideration. In addition, the Company included certain shares and
warrants that were contingently issuable based upon the amount of revenue
reported by the combined company for the succeeding twelve months.
Contingent consideration of this nature should not be included in the
purchase price until the resolution of the contingency is determinable
beyond a reasonable doubt.
- In connection with the merger with PickAX, a promissory note previously
issued by PickAX to its controlling stockholder, Astoria Capital Partners,
L.P. (Astoria), in the amount of $18,525,000 in principal and accrued
interest was exchanged for a new promissory note from the Company in the
same amount, and Astoria also received warrants to purchase an additional
500,000 shares of the Company's common stock at an exercise price of $7.00
per share. The additional warrants were valued using the Black-Scholes
model. One of the assumptions used in the Company's Black-Scholes
computation was that the term of the warrant was 2 years. The contractual
term of the option is, in fact, 5 years and the full contractual term should
be used in the Black-Scholes calculation.
- The Company assigned the entire excess of the purchase price over the book
value of the acquired net tangible assets to goodwill. The Company retained
a valuation expert to determine the value of other identifiable intangible
assets acquired in the PickAX acquisition. As a result, a portion of the
purchase price should have been assigned to identifiable intangible assets,
consisting principally of core technology and assembled workforce. These
identifiable intangible assets will be amortized over periods ranging from 3
to 4 years. The Company has also reconsidered its determination of the
amortization period for goodwill and retroactively reduced the period from
10 to 4 years. In addition, options to purchase PickAX common stock were
assumed and converted in the merger into Company options to purchase common
stock. A portion of the purchase price should have been allocated to
unvested options whose exercise price was below the fair value of the
underlying common stock on the closing date. The purchase price allocation
should have also included an adjustment to reduce the carrying value of
deferred revenue on the closing date balance sheet of PickAX for the
theoretical seller's profit previously earned by the acquired company. The
Company also recorded excess amounts for a number of facility closure,
severance and litigation accruals as part of the purchase price allocation
and these were subsequently released, in part, to income.
- In May 2000, the Company acquired the rights to certain incomplete software
with no alternative future use with the intention to further develop it into
a software product. The Company recorded the payments related to the
incomplete software as an asset. The Company's policy for software
development costs is to expense software development costs until
technological feasibility has been achieved. In general, technological
feasibility occurs near general release. Since this purchased software was
incomplete and significant development efforts were required before it could
be released, the amounts capitalized should have been expensed as incurred.
- At various dates during fiscal 2001, the Company granted options to purchase
common stock to employees with an exercise price at a discount from the fair
market value of the common stock on the date of grant. In addition, the
Company accelerated vesting or extended the term of options held by
terminated employees. In neither instance did the Company record deferred
stock-based compensation or stock-based compensation.
Accordingly, the consolidated financial statements for fiscal 2001 have been
restated as follows:
As Reported Restated
------------ ------------
Net Revenue
License $ 6,285,000 $ 6,194,000
Service 4,562,000 3,125,000
------------ ------------
Total Net Revenue 10,847,000 9,319,000
Total Costs and Expenses 18,281,000 21,718,000
------------ ------------
Operating Loss (7,434,000) (12,399,000)
Total Other Expense (1,440,000) (1,787,000)
------------ ------------
Net Loss (8,874,000) (14,186,000)
============ ============
Basic and Diluted Net Loss Per Share $ (0.75) $ (1.21)
============ ============
Shares Used in Computing Basic and
Diluted Net Loss Per Share 11,832,099 11,764,955
2. ORGANIZATION
The Company was incorporated as Blyth Holding, Inc. under the laws of the State
of Delaware in August 1987 pursuant to a reorganization of predecessor companies
originally incorporated under the laws of England in 1983. The Initial Public
Offering for the Company's stock took place in October 1987. In September 1997,
the Company changed its name to Omnis Technology Corporation. In December 2000,
the Company acquired PickAX. At the same time, the Company changed its name to
Raining Data Corporation. The principal asset of PickAX is Pick Systems. PickAX
acquired Pick Systems from the estate of Richard Pick, the founder, in March
2000. Pick Systems was incorporated in California in November 1982.
The Company's principal business is the design, development, sale, and support
of two major software products: 1) Rapid Application Development (RAD) software
tools and; 2) a multi-dimensional database management system. The Company's
products are sold to in-house corporate development teams, commercial
application developers, system integrators, independent software vendors, value
added resellers and independent consultants. In addition to computer software
products, the Company provides continuing maintenance and customer service
contracts as well as professional services, technical support and training.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies applied in the preparation of the accompanying
consolidated financial statements of the Company follow:
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated.
LICENSE AND SERVICE REVENUE - The Company recognizes revenue using the residual
method pursuant to the requirements of Statement of Position No. 97-2, "Software
Revenue Recognition" (SOP 97-2), as amended by Statement of Position No. 98-9,
"Software Revenue Recognition with Respect to Certain Arrangements." 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, the Company defers revenue for the fair value of its undelivered
elements (e.g., maintenance) and recognizes revenue for the remainder of the
arrangement fee attributable to the elements initially delivered in the
arrangement (i.e., 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, the Company determines that the
arrangement fee is not fixed or determinable, the Company defers the revenue and
recognizes the revenue when the arrangement fee becomes due and payable. The
Company recognizes revenue from resellers upon sell-through to the end customer
by the reseller.
Professional services, maintenance and other revenues relate primarily to
consulting services, maintenance and training. Maintenance revenues are
recognized ratably over the term of the maintenance contract, typically 12
months. Consulting and training revenues are recognized as the services are
performed and are usually on a time and materials basis. Such services primarily
consist of implementation services related to the installation of the Company's
products and do not include significant customization to or development of the
underlying software code.
COST OF LICENSE AND SERVICE REVENUE - Cost of license revenue is comprised of
direct costs associated with software license sales including software
packaging, documentation, and physical media costs. Cost of service revenue
includes consulting, technical support, and training, which consist primarily of
personnel related costs. Other costs specifically identifiable to the revenue
source have been classified accordingly.
F-6
RAINING DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
PROPERTY, FURNITURE AND EQUIPMENT - Property, furniture, and equipment are
stated at historical cost. Equipment under capital lease is stated at the
present value of minimum lease payments. Depreciation and amortization are
computed on a straight-line basis over the estimated useful lives of the assets
and ranges from 2 to 5 years. Equipment held under capital leases and leasehold
improvements are amortized on a straight-line basis over the shorter of the
lease term or the estimated useful lives of the assets.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF -
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted net cash flows expected to be generated by the asset. If
such assets, excluding enterprise, goodwill, are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount of fair value less costs to
sell. The Company assesses the recoverability of enterprise goodwill by
determining whether the amortization of the balance over its remaining life can
be recovered through undiscounted future operating cash flows. The assessment of
the recoverability of such assets will be impacted if estimated future operating
cash flows are not achieved.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS - Costs for the development of new
software products and substantial enhancements to existing software products are
expensed as incurred until technological feasibility has been established, at
which time any additional costs would be capitalized until the software is
available for general release to customers. The Company does not currently have
any software development costs capitalized because management believes software
is available for general release concurrently with the establishment of
technological feasibility.
GOODWILL AND INTANGIBLE ASSETS - Goodwill, which represents the excess of
purchase price over fair value of identifiable net assets acquired, is amortized
on a straight-line basis over a period of 4 years. Other intangible assets are
amortized over their expected lives of 3 to 4 years.
INCOME TAXES - Income taxes are accounted for under the asset and liability
method. Deferred tax assets, when their realization is more likely than not, and
liabilities are recognized for the future tax consequences attributable to
differences between the deferred tax financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's consolidated balance sheet
includes the following financial instruments: cash, accounts receivable,
accounts payable, accrued liabilities, amounts due to stockholders, and notes
payable. The Company considers the carrying amount in the financial statements
to approximate fair value for these financial instruments because of the
relatively short period of time between origination of the instruments and their
expected realization. The Company considers the carrying value of its notes
payable to approximate fair market value based on the borrowing rates that would
be available to the Company for bank loans with similar terms and maturities.
STOCK-BASED COMPENSATION - The Company applies the intrinsic value-based method
to account for its fixed stock-based awards. Under this method, deferred
stock-based compensation is recorded on the date of grant only if the current
market price of the underlying stock exceeds the exercise price. Deferred
stock-based compensation is then amortized using the straight-line method over
the vesting term of the underlying option. The Company uses the fair value
method based upon the Black-Scholes model to account for stock-based awards to
nonemployees. A final measurement date for these awards is established when they
vest.
NET LOSS PER SHARE - The Company computes basic loss per share using the net
loss and the weighted average number of common shares outstanding during the
period. Dilutive loss per share is computed using the net loss and the weighted
average number of common shares and dilutive potential common shares outstanding
during the period. Dilutive common shares include outstanding employee stock
options and warrants to purchase common stock. There were 2,980,591 and
1,636,359 outstanding options to purchase shares of the Company's common stock
with an exercise price from $0.72 to $52.50 per share as of March 31, 2001 and
March 31, 2000, respectively. Warrants to purchase 2,086,689 and 152,970 shares
of the Company's common stock with exercise prices ranging from $0.72 to $33.75
per share were outstanding at March 31, 2001 and March 31, 2000. The total of
these items were not included in the computation of diluted earnings per share
because their effect was antidilutive.
CONCENTRATION OF CREDIT RISK - The Company supports computer software systems
worldwide in diversified industries, primarily through system integrators and
value added resellers. On an ongoing basis the Company performs credit
evaluations of its customers financial condition and generally requires no
collateral. No single customer accounted for more than 10% of revenues during
the fiscal year ended March 31, 2001. In the fiscal year ended March 31, 2000,
one customer in the United States accounted for approximately 19% of revenue.
F-7
RAINING DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
FOREIGN CURRENCY TRANSLATION - The financial position and results of operations
of the Company's foreign subsidiaries are determined using local currency as the
functional currency. Assets and liabilities of these subsidiaries are translated
at the exchange rate in effect at each year-end. Income statement accounts are
translated at the average rate of exchange prevailing during the year.
Translation adjustments arising from the use of differing exchange rates from
period to period are included in accumulated other comprehensive income (loss)
in stockholders' equity (deficit). Gains and losses resulting from foreign
currency transactions and translation adjustments relating to foreign entities
deemed to be operating in U.S. dollar functional currency in highly inflationary
economies are included in earnings.
COMPREHENSIVE INCOME (LOSS) - Comprehensive income (loss) encompasses all
changes in equity other than those with stockholders and consists of net
loss and foreign currency translation adjustments. The Company does not
provide for U.S. income taxes on foreign currency translation adjustments since
it does not provide for such taxes on undistributed earnings of foreign
subsidiaries.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 141, Business Combinations, (SFAS No.
141) and SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). SFAS
No. 141 requires that the purchase method of accounting be used for all business
combinations. SFAS No. 141 specifies criteria that intangible assets acquired in
a business combination must meet to be recognized and reported separately from
goodwill. SFAS No. 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121 and
subsequently, SFAS No. 144 after its adoption.
The Company adopted the provisions of SFAS No. 141 as of July 1, 2001, and SFAS
No. 142 is effective for the Company on April 1, 2002. Goodwill and intangible
assets determined to have an indefinite useful life acquired in a purchase
business combination completed after June 30, 2001, but before SFAS No. 142 is
adopted in full, are not amortized. Goodwill and intangible assets acquired in
business combinations completed before July 1, 2001 continued to be amortized
and tested for impairment prior to the full adoption of SFAS No. 142.
Upon adoption of SFAS No. 142, the Company is required to evaluate its existing
intangible assets and goodwill that were acquired in purchase business
combinations, and to make any necessary reclassifications in order to conform
with the new classification criteria in SFAS No. 141 for recognition separate
from goodwill. The Company will be required to reassess the useful lives and
residual values of all intangible assets acquired, and make any necessary
amortization period adjustments by the end of the first interim period after
adoption. If an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of SFAS No. 142 within the first interim
period. Impairment is measured as the excess of carrying value over the fair
value of an intangible asset with an indefinite life. Any impairment loss will
be measured as of the date of adoption and recognized as the cumulative effect
of a change in accounting principle in the first interim period.
In connection with SFAS No. 142's transitional goodwill impairment evaluation,
the Statement requires the Company to perform an assessment of whether there is
an indication that goodwill is impaired as of the date of adoption. To
accomplish this, the Company must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of April 1, 2002. The Company will then have up to six months from April 1,
2002 to determine the fair value of each reporting unit and compare it to the
carrying amount of the reporting unit. To the extent the carrying amount of a
reporting unit exceeds the fair value of the reporting unit, an indication
exists that the reporting unit goodwill may be impaired and the Company must
perform the second step of the transitional impairment test. The second step is
required to be completed as soon as possible, but no later than the end of the
year of adoption. In the second step, the Company must compare the implied fair
value of the reporting unit goodwill with the carrying amount of the reporting
unit goodwill, both of which would be measured as of the date of adoption. The
implied fair value of goodwill is determined by allocating the fair value of the
reporting unit to all of the assets (recognized and unrecognized) and
liabilities of the reporting unit in a manner similar to a purchase price
allocation, in accordance with SFAS No. 141. The residual fair value after this
allocation is the implied fair value of the reporting unit goodwill. Any
transitional impairment loss will be recognized as the cumulative effect of a
change in accounting principle in the Company's statement of operations.
As of the date of adoption of SFAS No. 142, the Company expects to have
unamortized goodwill in the amount of $36,833,000 and unamortized identifiable
intangible assets in the amount of $12,480,000, all of which will be subject to
the transition provisions of SFAS No. 142. Amortization expense related to
goodwill was $3,066,000 for the year ended March 31, 2001. Because of the
extensive effort needed to comply with adopting SFAS No. 141 and No. 142, it is
not practicable to reasonably estimate the impact of adopting the Statements on
the Company's consolidated financial statements at the date of this report,
including whether it will be required to recognize any transitional impairment
losses as the cumulative effect of a change in accounting principle.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations (SFAS No. 143). SFAS No. 143 requires the Company to record the fair
value of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development and/or normal
use of the assets. The Company also records a corresponding asset which is
depreciated over the life of the asset. Subsequent to the initial measurement of
the asset retirement obligation, the obligation will be adjusted at the end of
each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. The Company is required to adopt SFAS No.
143 on April 1, 2003, but does not expect adoption to have a material effect on
its financial condition or results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This Statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized by
the amount by which the carrying amount of the asset exceeds the fair value of
the asset. SFAS No. 144 requires companies to separately report discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell. The Company is
required to adopt SFAS No. 144 on April 1, 2002. The Company has not yet
determined the effect, if any, from the adoption of SFAS No. 144 on its
financial condition and results of operations.
4. PROPERTY, FURNITURE AND EQUIPMENT
Property, furniture and equipment at March 31 consisted of: (in thousands)
2001 2000
------- -------
Land and Buildings $ 607 $ 684
Office Equipment, Furniture and Fixtures 5,091 2,998
Automobiles 14 --
------- -------
Total 5,712 3,682
Accumulated depreciation and amortization (4,309) (2,759)
------- -------
$ 1,403 $ 923
======= =======
F-8
RAINING DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
5. BUSINESS ACQUISITION
On December 1, 2000, the Company completed its acquisition of PickAX, Inc.,
(PickAX) the parent company of Pick Systems. Accordingly, the consolidated
financial statements presented herein for the year ended March 31, 2001 include
only the four months of activity for PickAX since the date of acquisition. Pick
Systems was formed in 1982 and markets a multi-dimensional database management
system, which includes a set of traditional 3rd generation software development
tools.
The consideration paid by the Company to PickAX stockholders in connection with
the purchase consisted of approximately 2,563,172 newly issued shares of the
Company's common stock in exchange for all of the outstanding stock of PickAX.
An additional 284,797 shares were provided for potential issuance in the event
that revenue of the combined companies reached certain specified levels by
December 31, 2001; however, such revenue targets were not achieved. In addition,
the Company assumed pre-existing PickAX employee stock options for 3,022,000
shares of PickAX common stock, which options were exchanged for options for the
purchase of 1,538,673 shares of the Company's common stock at an equivalent
option exercise price. The Company also agreed to issue warrants for 1,981,218
shares of the Company's common stock in exchange for pre-existing warrants for
4,323,500 shares of PickAX common stock. An additional 220,135 warrants were
provided to be issued in the event that revenue of the combined companies
reached certain specified levels by December 31, 2001; however, such revenue
targets were not achieved.
All of these exchanges in the acquisition were based upon a negotiated exchange
ratio of 0.50916 shares of the common stock of the Company for each one share of
PickAX common stock. In addition, a convertible promissory note previously
issued by PickAX to Astoria Capital Partners, L.P. (Astoria) in the amount of
$18,525,000 in principal and accrued interest was exchanged for a new
nonconvertible promissory note made by the Company in the same amount, and
Astoria also received warrants to purchase an additional 500,000 shares of the
Company's common stock at an exercise price of $7.00 per share. The debt was
recorded at its fair value of $18,525,000 and the additional warrants were
valued at $4,960,000 using the Black-Sholes option pricing model and recorded as
a discount against the note. As a result, the debt is recorded at a discount
from its face amount and it is being accreted to its maturity value using the
interest method.
As a condition to closing the acquisition, the Company was required to negotiate
the terms and effect the conversion of its $3,000,000 note payable to Astoria
the controlling stockholder of PickAX and a significant stockholder of the
Company. The final terms of this conversion were established on November 30,
2001, when Astoria, through the exercise of a stock warrant effectively
converted the note with a principal and accrued interest balance of $3,227,000
into 645,467 shares of common stock. Because this conversion was an integral
part of the merger agreement and the terms were not established until just prior
to the closing, the shares issued by the Company in the acquisition were valued
at $4.13 per share, the fair value of the Company's common at and just prior
to the closing date. The value of the shares reserved by the Company for the
PickAX options and warrants was $3.95 per share using the Black-Scholes option
model for unvested options and warrants and the intrinsic value method for
vested options.
An independent valuation of the intangible assets acquired was performed and the
purchase price was allocated as follows:
Net tangible liabilities acquired (13,986,000)
Assembled workforce 2,080,000
Installed base 10,400,000
Goodwill 37,752,000
----------
Total cost of acquisition 36,246,000
==========
F-9
RAINING DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
The summarized unaudited pro forma consolidated results of operations presented
below reflects the effect of the acquisition as if it had occurred at the
beginning of the periods presented. The summarized unaudited pro forma
consolidated results of operations are not necessarily indicative of operating
results which would have been achieved had the acquisition been consummated at
the beginning of the periods presented and should not be construed as
representative of future operations.
Years Ended March 31,
---------------------
2001 2000
------ ------
(in thousands)
Revenue 20,743 23,544
Net Loss (30,257) (41,953)
Net Loss per Share $(3.35) $(2.96)
6. OTHER CURRENT ASSETS
Other current assets at March 31 consisted of: (in thousands)
2001 2000
------ ------
Prepaid Expenses 167 194
Other Current Assets 96 229
---- ---
Total Other
Current Assets $263 $423
==== ====
F-10
RAINING DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
7. LONG-TERM DEBT
Long-term debt at March 31 consisted of: (in thousands)
2001 2000
-------- -------
Capital Lease Obligations $ 157 $ 29
Note Payable and Accrued Interest-Astoria
Less Unamortized Discount 14,855 2,028
Notes Payable and Accrued Interest-Other Stockholders 768 --
Note Payable to Individual, maturing September 30,
2002, bearing interest at 10% 250 --
Note Payable to General Automation 108 --
Notes Payable and Accrued Interest-Others 120 27
-------- -------
Total 16,086 2,084
Less Current Portion of Long-Term Debt (328) (2,084)
-------- -------
Long-Term Debt $ 15,758 $ --
======== =======
The note payable to Astoria is for $18,525,000 plus accrued interest at 8% per
annum of $492,000 at March 31, 2001 (effective rate including accretion of
discount is 23%). The note is secured by all the tangible and intangible assets
of the Company. The principal and all accrued interest are payable at maturity
in November 2002.
Notes payable to other stockholders are unsecured and consist of:
(a) Notes payable for $750,000 accruing interest at 4% per year, are all due
and payable upon maturity in August 2002. They may be converted to shares
of the common stock of the Company at $6.17 per share at any time.
(b) Notes payable for $250,000 at 10% interest per year, payable quarterly, due
and payable in September 2002.
8. SERIES A CONVERTIBLE PREFERRED STOCK
The Company had 300,000 outstanding shares of Series A convertible preferred
stock (Series A) authorized, issued and outstanding at March 31, 2001 and 2000.
Holders of Series A are entitled to that number of votes equal to the number of
shares of common stock into which Series A is then convertible. Dividends are
paid at the option of the Board of Directors at the rate of $0.125 per share per
annum, in preference to all other stockholders. Preferred stock ranks senior to
the Company's common stock as to liquidation rights. Each share of preferred
stock may be converted at the option of the holder into 1.667 shares of common
stock. In effecting the conversion, any unpaid dividends on the preferred stock
shall be disregarded. No dividends have been declared on the preferred stock
since its issuance.
9. WARRANTS
During April 1999, the 1993 Directors' Warrant Plan and the 1993 Advisors' Plan
were terminated, except as such Plans apply to any warrants then outstanding
under such Plans.
F-11
RAINING DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
The following table summarizes the warrants outstanding, excluding the 2,481,218
warrants issued by the Company in connection with its acquisition of PickAX at
exercise prices ranging from $2.46 to $7.00:
Weighted
Average
Remaining
Contractual
Warrants Exercise Price Life (Years)
-------- -------------- ------------
Warrants outstanding at March 31, 1999 183,729 $0.718 - $58.50 2.86
Granted --
Exercised --
Cancelled (30,759) $ $58.50
-------
Warrants outstanding at March 31, 2000 152,970 $ $33.75 1.91
Granted --
Exercised (25,833) $0.718
Cancelled (21,666) $ $10.94
-------
Warrants outstanding at March 31, 2001 105,471 $ $33.75 0.98
=======
The warrants expire at various dates to 2003. At March 31, 2001, there were
105,471 warrants exercisable at a weighted average exercise price of $5.74.
As part of the acquisition of PickAX, the Company assumed the warrant
obligations for PickAX stock after adjusting both the option price and shares
under option for the conversion ratio of 0.50916, which was the same ratio used
for acquiring the PickAX common stock. All the PickAX warrants are for a term of
five years from the date of grant. At March 31, 2001 there were 1,981,218
warrants outstanding for shares of Raining Data Corporation common stock at an
exercise price of $2.46 and $2.95 per share, expiring at various dates through
.
10. STOCK OPTIONS
In 1987, the Company adopted a stock option plan (1987 Plan) pursuant to which
the Board of Directors may grant stock options to directors, officers, key
employees and consultants. The 1987 Plan had a ten-year term which expired in
1997. Options granted and outstanding under the 1987 Plan remain outstanding
until either exercised by the holder, cancelled when the holder terminates
employment or until the 10-year term of the option expires. In anticipation of
the termination of the 1987 Plan, the stockholders of the Company approved the
1996 Stock Plan (1996 Plan). Collectively, the 1987 Plan and the 1996 Plan are
hereafter referred to as the Plans.
In April 1999, the Company adopted a new stock option plan (1999 Plan) and
merged it with the existing Plans. In conjunction with the adoption of the 1999
Plan, the Company terminated the Directors' Plan, the Advisors' Plan and the
1996 Plan, except as to options then issued and outstanding as to such plans.
The 1999 Plan authorizes grants of options to purchase up to 5,000,000 shares of
authorized but unissued common stock. Stock options are generally granted with
an exercise price equal to the stock's fair market value at the date of grant.
All options under the 1999 Plan have ten-year terms and generally vest ratably
over a period of three to four years. As of March 31, 2001, there were 3,153,675
shares available for future option grants under the 1987 Plan, 1996 Plan and
1999 Plan.
F-12
RAINING DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
Pro forma information assuming the Company had accounted for stock options
granted under the fair value method prescribed by SFAS 123 is presented below.
The per share weighted-average fair value of stock options granted for the years
ended March 31, 2001 and 2000 was $4.94 and $2.47, respectively, as estimated
using the Black-Scholes option-pricing model with the following assumptions:
dividend yield of 0% in 2001 and 2000; expected volatility of 180% in 2001 and
2000; risk-free interest rate of 4.86% and 3.87% in 2001 and 2000,
respectively; and expected life of 4 years for 2001 and 2000 grants.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting periods. The Company's
historical and pro forma net loss per share for the years ended March 31, 2001
and 2000 are as follows:
2001 2000
---- ----
Net loss:
As reported ......................... $(14,186,000) $(4,696,000)
------- -------
Pro forma ........................... $(16,331,000) $(5,522,000)
------- -------
Basic and diluted net loss per share:
As reported ......................... $ (1.21) $ (0.48)
------- -------
Pro forma ........................... $ (1.39) $ (0.57)
------- -------
A summary of changes in common stock options is as follows:
Weighted
average
exercise price
Shares per share
------ ---------
Options outstanding as of March 31, 1999 635,599 $ 2.11
Granted 1,290,300 $ 6.32
Cancelled (259,450) $ 1.09
Exercised (10,090) $ 0.89
--------- ---------
Options outstanding as of March 31, 2000 1,656,359 $ 4.22
Granted 924,400 $ 4.97
Assumed in acquisition of PickAX 1,538,673 $ 2.95
Cancelled (804,877) $ 9.12
Exercised (333,964) $ 1.15
--------- ---------
Options outstanding as of March 31, 2001 2,980,591 $ 4.33
========= =========
F-13
RAINING DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
The following table presents information about outstanding stock options as of
March 31, 2001:
Weighted average Options vested and exercisable
Range of ---------------- ------------------------------
Exercise Options Exercise Contractual Number of Exercise
Price Outstanding Price Life Options Price
----- ----------- ----- ---- ------- -----
$0.75 - 0.78 31,830 $ 0.75 7.13 17,403 $ 0.75
$1.02 - 3.88 1,785,278 $ 2.70 8.19 778,757 $ 2.63
$4.09 - 8.50 936,996 $ 4.88 9.81 42,527 $ 5.52
$10.42 - 23.75 208,758 $12.94 8.71 81,990 $13.09
$33.13 - 52.50 17,729 $37.19 2.61 17,729 $37.19
-------------- --------- ------ ---- ------- ------
$0.75 - 52.50 2,980,591 $ 4.33 9.27 938,406 $ 4.29
The Company had $2,073,000 and $2,045,000 of deferred stock option compensation
related to employee stock options as of March 31, 2001 and 2000, respectively,
and recognized stock-based compensation expense of $1,755,000 and $1,092,000
during the years ended March 31, 2001 and 2000, respectively, as a result of
granting stock option with exercise prices below the estimated fair value of the
Company's common stock at the date of grant. Deferred stock option compensation
has been presented as a component of stockholders' equity and is being amortized
as a charge to expense over the vesting period of the applicable options.
On August 14, 2000, the Company accelerated the vesting period for an option
previously granted to an employee to purchase 96,825 shares of common stock in
connection with his termination. Additionally, the Company extended the life of
such option through March 31, 2001. Accordingly, the Company remeasured the
option recording total compensation expense of $84,237 for the year ended March
31, 2001, which represents the intrinsic value of the options on the
remeasurement date.
On January 31, 2001, the Company granted an option to purchase 5,000 shares of
common stock at $6.50 per share to a nonemployee in exchange for services to
develop a software application. As the option is fully vested at the time of
grant, the Company recorded $36,782 of compensation expense in the period ended
March 31, 2001. The fair value of the option was computed using the
Black-Scholes model using an assumed volatility of 180%, a risk-free interest
rate of 5.19%, a dividend rate of 0% and a 10 year life.
On March 7, 2001, the Company accelerated the vesting period for an option
previously granted to an employee to purchase 30,550 shares of common stock in
connection with the employee's termination. Additionally, the Company extended
the life of such option through December 31, 2004. Accordingly, the Company
remeasured the option recording total compensation expense of $80,346 for the
year ended March 31, 2001, which represents the intrinsic value of the options
on the remeasurement date.
On March 29, 2001, the Company granted an option to purchase 25,000 shares of
common stock at $4.25 per share to a nonemployee in exchange for services to
develop a software application. As the option is fully vested at the time of
grant, the Company recorded $130,095 of compensation expense in the period ended
March 31, 2001. The fair value of the option was computed using the
Black-Scholes model using an assumed volatility of 180%, a risk-free interest
rate of 4.98%, a dividend rate of 0% and a 10 year life.
11. INCOME TAXES
Due to the Company's operating losses, there were no current or deferred income
taxes during any of the periods presented.
The foreign net loss before income taxes was approximately $1,170,000 and
$607,000 in 2001 and 2000, respectively.
A reconciliation of the expected U.S. Federal tax expense (benefit) attributable
to income from continuing operations differed from the amounts computed by
applying the statutory U.S. Federal statutory tax rate to pretax income from
continuing operations as follows:
2001 2000
------ ------
Expected U.S. federal tax (34.0)% (34.0)%
State tax (5.0)% (4.1)%
Change in valuation allowance and
effect of purchase accounting
on deferred taxes 24.5% 19.7%
Effect of permanent differences
and foreign losses 14.4% 15.1%
Other .1% 3.3%
------ ------
Actual effective tax rate 0.0% 0.0%
====== ======
F-14
RAINING DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
Deferred income tax assets and liabilities are recorded for differences between
the financial statement and tax basis of the assets and liabilities that will
result in taxable or deductible amounts in the future based on enacted tax laws
and rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Significant
components of the Company's net deferred tax assets are as follows at March 31
(in thousands):
2001 2000
-------- --------
Deferred tax assets:
Net operating loss carryforwards $ 19,176 $ 14,764
Accruals and reserves recognized in different periods 4,068 3,221
Tax credits 1,426 788
Depreciation -- 703
Deferred tax liabilities:
Purchased intangibles (4,154)
Depreciation (1,058) --
State income taxes (658) --
-------- --------
Total 30,540 19,476
Valuation allowance (30,540) (19,476)
-------- --------
Net deferred tax assets $ -- $ --
======== ========
Due to uncertainties surrounding the timing of realizing the benefits of its net
favorable tax attributes in future tax returns, the Company has recorded a full
valuation allowance against its net deferred tax assets at March 31, 2001 and
2000. The net change in the valuation allowance was an increase of $3,478,000 in
2001 and $923,000 in 2000.
Subsequently recognized tax benefits relating to the valuation allowance for
purchased deferred tax assets as of March 31, 2001 will be allocated to
goodwill.
At March 31, 2001, the Company had net operating loss carryforwards of $56.4
million for federal income tax purposes and $8.5 million for state tax purposes
which expire at various dates through 2021. Any changes in ownership, as defined
by section 382 of the Internal Revenue Code, may have limited the amount of net
operating loss carryforwards used in any one year.
12. RETIREMENT PLANS
The Company sponsors a 401(k) Savings and Retirement Plan (the Plan) for
substantially all of its employees in the United States of America. Employees
meeting the eligibility requirements, as defined, may contribute specified
percentages of their salaries. Under the Plan, which is qualified under Section
401(k) of the federal tax laws, the Company's Board of Directors, at its sole
discretion, makes discretionary profit-sharing contributions at 50% of the
employees' contributions up to 4% of the employees' total compensation, to the
Plan. For the years ended March 31, 2001 and 2000, discretionary annual
contributions of $46,800 and $3,000, respectively, were made to the Plan. The
higher amount in the fiscal year ending March 31, 2001 reflects the increased
number of employees in the Company following the acquisition of PickAX
effective December 1, 2000.
The Company sponsors the Raining Data UK Limited Retirement Benefits Scheme (the
RDUKL Plan) for substantially all of its employees in the United Kingdom. The
RDUKL Plan provides retirement benefits upon attaining normal retirement age,
and incidental benefits in the case of death or termination of employment prior
to retirement. Raining Data UK contributes an amount ranging from 3% to 8% of
each participant's compensation to fund such benefits. In addition, participants
are entitled to make voluntary contributions under the RDUKL Plan. The Company
contributed approximately $78,600 and $87,000 to the RDUKL Plan for the years
ended March 31, 2001 and 2000, respectively.
F-15
RAINING DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
13. COMMITMENTS AND CONTINGENCIES
LEASES - The Company leases office space and certain equipment under
noncancelable operating lease agreements with terms expiring through 2006.
Additionally, the Company is obligated under capital leases covering certain
equipment that expire in 2003.
At March 31, 2001 and 2000, the gross amount of equipment and related
accumulated amortization recorded under capital lease arrangements were as
follows:
2001 2000
---- ----
Equipment 255,000 147,000
Less: Accumulated amortization (67,000) (132,000)
------- -------
188,000 15,000
======= =======
Rent expense related to operating these leases is recognized ratably over the
entire lease term. The Company is required to pay property taxes, insurance and
normal maintenance costs.
Future minimum lease payments under noncancelable operating leases with initial
or remaining lease terms in excess of one year and future minimum capital lease
payments, as of March 31, 2001 are as follows: (in thousands)
Year Ending March 31, Capital Leases Operating Leases
--------------------- -------------- ----------------
2002 $115 $1,133
2003 58 1,066
2004 -- 1,078
2005 -- 1,108
2006 -- 795
---- ------
Total minimum lease payments 173 5,180
Less: Amount representing interest (16) ======
----
Present value of minimum capital lease
payments $157
====
The total of minimum rentals to be received in the future under noncancelable
subleases as of March 31, 2001 was $765,000.
Rent expense of $385,000 and $223,000 was incurred in 2001 and 2000,
respectively. Amortization of assets held under capital leases is included with
depreciation expense.
14. SEGMENT INFORMATION
The Company operates in a single reportable segment. International operations
consist primarily of foreign sales offices selling software developed in the
United States of America combined with local service revenue. The following
table summarizes consolidated financial information of the Company's operations
by geographic location:
(in thousands)
North Europe/
America Africa Total
-------- -------- --------
Fiscal Year 2001
Net Revenue $ 5,306 $ 4,013 $ 9,319
Operating Loss 11,530 (869) (12,399)
Interest and other expense, net (1,487) (300) (1,787)
Total assets 49,924 2,931 52,855
Depreciation and amortization expense (4,531) (174) (4,705)
Net Loss (13,017) (1,169) (14,186)
Fiscal Year 2000
Net Revenue $ 2,806 $ 3,404 $6,210
Operating Loss (3,958) (616) (4,574)
Interest and other expense, net (22) (100) (122)
Total assets 1,700 1,478 3,178
Depreciation and amortization expense (155) (186) (341)
Net Loss (3,980) (716) (4,696)
F-16
RAINING DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
No customer accounted for revenues in excess of 10% in 2001. One customer
accounted for approximately 19% of revenues in 2000.
15. LITIGATION
COMPASS LITIGATION - Since 1994, the Company and Compass Software (Compass) have
been in litigation over software copyright infringement and related claims in
the courts of the State of Washington. The Company has generally prevailed in
these matters. In the most recent action, the US District Court for the Western
District of the State of Washington awarded statutory damages to the Company in
the amount of approximately $150,000 in addition to injunctive relief and
attorney fees from Compass. The Company obtained a motion for judgment to
collect the $150,000 judgment awarded and for an additional $245,000 in legal
fees. In February 2001, Earl Asmus, the principal in Compass, sued the Company
in the Central District of California on a number of issues related to the State
of Washington court proceedings. In early April 2000, the suit was dismissed;
however, Mr. Asmus subsequently appealed the decision. In October 2001, the case
was settled with no material effect on the Company's financial condition or
results of operations.
PACE-NORTHERN IRELAND LITIGATION - In July 2000, Park Applications Computer
Engineering, Ltd. (PACE) sued the Company in the Queen's Bench Division Company
of the High Court of Justice in Northern Ireland. PACE sought damages of
$800,000 plus penalties and interest for alleged breach of contract relating to
the purchase by Pick Systems of software from PACE. In January 2002, the Company
and PACE entered into a settlement agreement of the matter under which the
Company agreed to pay $500,000 to PACE. Of this settlement, $250,000 was paid to
PACE in January 2002 and the remaining $250,000 will be paid over a two year
period.
OLENIK LITIGATION - In November 2000, George Olenik, former President and Chief
Executive Officer of Pick Systems filed a lawsuit in Orange County Superior
Court. Mr. Olenik asserted claims relating to his resignation from Pick Systems
in March 2000, and sought unspecified damages including a success fee for the
sale of Pick Systems to PickAX. In November 2001, the Company and Mr. Olenik
entered into a settlement agreement whereby the Company agreed to pay $200,000
to Mr. Olenik. Such amount was paid in November 2001.
GENERAL AUTOMATION LITIGATION - In May 2001, General Automation initiated
litigation in Superior Court of the State of California for the County of Orange
against the Company for breach of contract relating to the Pick Systems purchase
of selected assets of General Automation in August 2000. General Automation
seeks in excess of $1,000,000 in damages, penalties and interest, in addition to
attorneys' fees and costs. The Company has asserted counterclaims for fraud,
breach of contract and indemnity. The Company believes that the suit is without
merit and intends to defend the suit vigorously. A jury trial is scheduled to
begin July 28, 2002. The Company does not expect the ultimate resolution of
this matter to have a material adverse effect on its financial condition or
results of operations.
DOUCE BIS LITIGATION - In June 2001, Douce Bis Company sued the Company in the
Commercial Court of Paris, France for approximately $990,000 plus costs. The
claim is for compensation and loss of profits due Douce Bis under the terms of
the Douce Bis/Omnis distributorship agreement entered into in 1983 and extended
from time
F-17
RAINING DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
to time thereafter. The Company terminated Douce Bis as the Omnis distributor in
France effective in December 2000. The Company believes the suit is without
merit and intends to defend the suit vigorously. The litigation is in the
discovery phase and a hearing is scheduled in March 2002.
ARATA LITIGATION - In June 2001, Thomas Arata, a former employee of Pick,
sued the Company in the Civil District Court for the Parish of Orleans in
Louisiana. The suit is for unspecified amounts charging breach of contract,
fraud, breach of fiduciary duty, unfair trade practices, and unjust enrichment
concerning Arata's activities for and on behalf of PickAX prior to and during
PickAX's acquisition of Pick Systems in March 2000, and the termination of
Arata's employment in December 2000. The Company believes the suit is without
merit and intends to defend the suit vigorously. The litigation is in the
discovery phase.
The Company is from time to time subject to claims and suits arising in the
ordinary course of business. In the Company's opinion, the ultimate resolution
of these matters will not have a material adverse effect on its financial
position, results of operations, or liquidity.
F-18
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
2.1 Agreement and Plan of Merger, dated as of August 23, 2000, by and
among the Registrant, Raining Merger Sub, Inc., PickAX, Inc. and
Gilbert Figueroa (included as Appendix A to the Registrant's
Definitive Proxy Statement filed with the Commission on November 16,
2000 and incorporated herein by reference)
2.2 Merger Agreement dated as of August 23, 2000 by and among the
Registrant, PickAX, Inc., Gilbert Figueroa, and Raining Merger Sub,
Inc. (included as Exhibit 10.1 to the Registrant's Form 10-QSB filed
with the Commission on November 6, 2000 and incorporated herein by
reference)
2.3 Asset Purchase Agreement by and among the Registrant, the Wainer
Group, Dirk Wainer, Shirley-Anne Wainer, Dennis Janossich and Joseph
Bernard as to all matters, and Paradigm Designs Software Pty Ltd.,
as to certain matters dated as of May 19, 2000 (included as Exhibit
10.1 to the Registrant's Form 10-QSB filed with the Commission on
August 10, 2000 and incorporated herein by reference)
3.1 Restated Certificate of Incorporation dated September 17, 1997, as
amended and corrected of the Registrant (included as Exhibit 3.1 to
the Registrant's Form 8-K filed with the Commission on June 16, 1998
and incorporated herein by reference)
3.2 Certificate of Amendment of Certificate of Incorporation of the
Registrant dated February 9, 1999 (included as Exhibit 3.2 to the
Registrant's Form 10-KSB filed with the Commission on July 7, 1999
and incorporated herein by reference)
3.3 Certificate of Designation 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)
3.4 Certificate of Amendment of Restated Certificate of Incorporation of
the Registrant dated November 29, 2000 (included as Exhibit 3.1 to
the Registrant's Form 10-QSB filed with the Commission on February
14, 2001 and incorporated herein by reference)
3.5 Bylaws dated August 7, 1987, as amended (included as Exhibit 3.3 to
the Registrant's Form 10-KSB filed with the Commission on June 29,
1998 and incorporated herein by reference)
EXHIBIT DESCRIPTION
------- -----------
4.1 Registration Rights Agreement by and among the Registrant, Pamela
Conrad, Donald D. Durr, Lee Summers, Robert J. Rosenberg, Gil
Figueroa, Michael E. McGoey, Gerald L. Cohn and Timothy Holland
dated as of November 30, 2000 (included as Exhibit 4.1 to the
Registrant's Form 10-QSB filed with the Commission on February 14,
2001 and incorporated herein by reference)
4.2 Note and Warrant Purchase Agreement by and between the Registrant
and Astoria Capital Partners, L.P. dated as of November 30, 2000
(included as Exhibit 4.2 to the Registrant's Form 10-QSB filed with
the Commission on February 14, 2001 and incorporated herein by
reference)
4.3 Secured Promissory Note issued by the Registrant to Astoria Capital
Partners, L.P. dated November 30, 2000 (included as Exhibit 4.3 to
the Registrant's Form 10-QSB filed with the Commission on February
14, 2001 and incorporated herein by reference)
4.4 Common Stock Purchase Warrant issued by the Registrant to Astoria
Capital Partners, L.P. dated November 30, 2000 (included as Exhibit
4.4 to the Registrant's Form 10-QSB filed with the Commission on
February 14, 2001 and incorporated herein by reference)
4.5 Second Amendment to Credit Facility Agreement, Promissory Note and
Non-Transferable Warrant by and between the Registrant and Astoria
Capital Partners, L.P. dated as of December 21, 1999, as amended
April 30, 2000 (included as Exhibit 4.5 to the Registrant's Form
10-QSB filed with the Commission on February 14, 2001 and
incorporated herein by reference)
4.6 Common Stock Purchase Agreement - Cash Purchase, by and between the
Registrant and Astoria Capital Partners, L.P. dated as of December
4, 2000 (included as Exhibit 4.1 to the Registrant's Form 8-K/A
filed with the Commission on June 21, 2001 and incorporated herein
by reference)
4.7 Common Stock Purchase Agreement - PickAX Note, by and between the
Registrant and Astoria Capital Partners, L.P. dated as of December
4, 2000 (included as Exhibit 4.2 to the Registrant's Form 8-K/A
filed with the Commission on June 21, 2001 and incorporated herein
by reference)
4.8 Common Stock Purchase Agreement - Individual, by and between the
Registrant and Harry Augur dated as of December 4, 2000 (included as
Exhibit 4.3 to the Registrant's Form 8-K/A filed with the Commission
on June 21, 2001 and incorporated herein by reference)
4.9 Common Stock Purchase Agreement - Individual, by and between the
Registrant and Robert van Roijen dated as of December 4, 2000
(included as Exhibit 4.4 to the Registrant's Form 8-K/A filed with
the Commission on June 21, 2001 and incorporated herein by
reference)
EXHIBIT DESCRIPTION
------- -----------
4.10 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 (included as Exhibit 4.5 to
the Registrant's Form 8-K/A filed with the Commission on June 21,
2001 and incorporated herein by reference)
10.1 At-Will Employment Agreement between the Registrant and James Dorst
dated as of November 23, 1999 (included as Exhibit 10.1 to the
Registrant's Form 10-QSB filed with the Commission on February 14,
2000 and incorporated herein by reference)
10.2 Stock Purchase Agreement by and between the Registrant and Astoria
Capital Partners, L.P. dated as of March 31, 1999 (included as
Exhibit 10.1 to the Registrant's Form 8-K filed with the Commission
on April 5, 1999 and incorporated herein by reference)
10.3 Common Stock Purchase Agreement by and between the Registrant and
Astoria Capital Partners, L.P. dated as March 31, 1999 (included as
Exhibit 10.2 to the Registrant's Form 8-K filed with the Commission
on April 5, 1999 and incorporated herein by reference)
10.4 Common Stock Purchase Agreement by and between the Registrant and
Gwyneth Gibbs dated as of March 31, 1999 (included as Exhibit 10.3
to the Registrant's Form 8-K filed with the Commission on April 5,
1999 and incorporated herein by reference)
10.5 Common Stock Purchase Agreement by and between the Registrant and
Philip and Debra Barrett Charitable Remainder Trust dated as of
March 31, 1999 (included as Exhibit 10.4 to the Registrant's Form
8-K filed with the Commission on April 5, 1999 and incorporated
herein by reference)
10.6 Common Stock Purchase Agreement by and between the Registrant and
RCJ Capital Partners, L.P. dated as of March 31, 1999 (included as
Exhibit 10.5 to the Registrant's Form 8-K filed with the Commission
on April 5, 1999 and incorporated herein by reference)
10.7 Common Stock Purchase Agreement by and between the Registrant and
Rockport Group, L.P. dated as of March 31, 1999 (included as Exhibit
10.6 to the Registrant's Form 8-K filed with the Commission on April
5, 1999 and incorporated herein by reference)
10.8 Incentive Stock Option Agreement by and between the Registrant and
Bryce Burns dated as of February 14, 2000 (included as Exhibit 10.15
to the Registrant's Form 10-KSB/A filed with the Commission on July
31, 2000 and incorporated herein by reference)
EXHIBIT DESCRIPTION
------- -----------
10.9 Form of Employment Agreement by and between the Registrant and each
of Mssrs. Figueroa, Lauer, Holland, Barrenechea and Anderson
(included as Exhibit 10.1 to the Registrant's Form 10-QSB filed with
the Commission on February 14, 2001 and incorporated herein by
reference)
10.10 Nonincentive Stock Option Agreement by and between the Registrant
and Bryan Sparks dated as of August 14, 2000 (included as Exhibit
10.1 to the Registrant's Form 8-K filed with the Commission on
October 24, 2000 and incorporated herein by reference)
10.11 Amended and Restated Nonincentive Stock Option Agreement by and
between the Registrant and Bryce J. Burns dated as of February 14,
2000 (included as Exhibit 10.2 to the Registrant's Form 8-K filed
with the Commission on October 24, 2000 and incorporated herein by
reference)
10.12 Nonincentive Stock Option Agreement by and between the Registrant
and Bryce J. Burns dated as of September 22, 2000 (included as
Exhibit 10.3 to the Registrant's Form 8-K filed with the Commission
on October 24, 2000 and incorporated herein by reference)
10.13 Form of Promissory Note dated September 28, 2000, issued by the
Registrant to The Philip and Debra Barrett Charitable Remainder
Trust (included as Exhibit 10.4 to the Registrant's Form 8-K filed
with the Commission on October 24, 2000 and incorporated herein by
reference)
10.14 Form of Note Purchase Agreement and Form of Nonsecured Convertible
Promissory Note dated as of August 23, 2000, respectively, issued by
the Registrant to three lenders (included as Exhibit 10.5 to the
Registrant's Form 8-K filed with the Commission on October 24, 2000
and incorporated herein by reference)
10.15* Transition Agreement and Releases by and between the Registrant and
Gilbert Figueroa dated as of March 7, 2001.
10.16* Service Agreement by and between the Registrant and Gwyneth Gibbs
dated April 1, 2000.
10.17 Omnis Technology Corporation 1999 Stock Option Plan and Form of
Option Agreement (included as Exhibit 10.24 to the Registrant's
Annual Report on Form 10-KSB/A filed with the Commission on July 29,
1999 and incorporated herein by reference)
10.18 Omnis Technology Corporation Amended 1999 Stock Option Plan
(included as Appendix A to the Registrant's Definitive Proxy
Statement filed with the Commission on October 10, 2000 in
connection with the October 23, 2000 Annual Meeting of Stockholders
of the Registrant and incorporated herein by reference)
21.1 * Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
24.1 * Power of Attorney
* previously filed with Commission.
(b) Reports on Form 8-K
None