<PAGE>
As filed with the Securities and Exchange Commission on October 22, 1999
Registration No. 333-86445
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
RAINMAKER SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
--------------
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<S> <C> <C>
California 7379 33-0442860
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Number) Identification No.)
</TABLE>
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1800 Green Hills Road, Scotts Valley, California 95066
(831) 430-3800
(Address, Including Zip Code and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
--------------
Michael Silton
Chief Executive Officer
RAINMAKER SYSTEMS, INC.
1800 Green Hills Road, Scotts Valley, California 95066
(831) 430-3800
(Name, Address, Including Zip Code and Telephone Number, Including Area Code,
of Agent for Service)
--------------
Copies to:
<TABLE>
<S> <C>
Bruce R. Hallett, Esq. Richard D. Harroch, Esq.
Scott R. Santagata, Esq. Peter Lillevand, Esq.
Ryan S. Hong, Esq. Brett E. Cooper, Esq.
Joo Ryung Kang, Esq. Thomas R. Brida, Esq.
Brobeck, Phleger & Harrison LLP Orrick, Herrington & Sutcliffe LLP
38 Technology Drive, Irvine, California 92618 Old Federal Reserve Bank Building
(949) 790-6300 400 Sansome Street, San Francisco, California 94111
(415) 392-1122
</TABLE>
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
--------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Company shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+We will amend and complete the information in this prospectus. Although we +
+are permitted by U.S. federal securities laws to offer these securities using +
+this prospectus, we may not sell them or accept your offer to buy them until +
+the registration statement filed with the Securities and Exchange Commission +
+relating to these securities is effective. This prospectus is not an offer to +
+sell these securities or our solicitation of your offer to buy these +
+securities in any jurisdiction where that would not be permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION--October 22, 1999
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- --------------------------------------------------------------------------------
Prospectus
, 1999
[LOGO OF RAINMAKER]
5,000,000 Shares of Common Stock
- --------------------------------------------------------------------------------
The Offering:
Rainmaker Systems,
Inc.:
. We provide customer relationship . We are offering 5,000,000
management services to software shares of our common
and other technology companies. stock.
. Rainmaker Systems, Inc. . The underwriters have an
1800 Green Hills Road Scotts option to purchase an
Valley, CA 95066 (831) 430-3800 additional 750,000
shares from us to cover
Proposed Symbol & over-allotments.
Market:
. This is our initial public
. RMKR/Nasdaq National Market offering, and no public
market currently exists
for our shares.
. We anticipate that the
initial public offering
price of the shares will
be between $8.00 and
$10.00 per share.
. We intend to use the
proceeds of this offering
for general corporate
purposes such as new
client acquisition,
expansion into
international markets, the
development of new
services and capital
expenditures.
. Closing: , 1999
<TABLE>
<CAPTION>
---------------------------------------------------
Per Share Total
---------------------------------------------------
<S> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds to Rainmaker Systems:
--------------------------------------------
</TABLE>
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 7.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.
- --------------------------------------------------------------------------------
Joint Book-Running Managers
Donaldson, Lufkin & Jenrette Thomas Weisel Partners LLC
-----------
SG Cowen DLJdirect Inc.
<PAGE>
Inside Front Cover of Prospectus
a. Flap/Outside (half wide)
Text: "Our Clients:"
Graphic: Logos of the following Rainmaker clients:
. Borland, a division of Inprise . Open Connect Systems
Corporation Incorporated
. Puma Technology, Inc.
. Lotus Development Corporation, a . The Santa Cruz Operation, Inc.
subsidiary of IBM . Sun Microsystems, Inc.
. Network Computing Devices, Inc. . Sybase Inc.
. Novell, Inc. . Symantec Corporation
b. Flap/Inside (halfwide) and Inside Cover
Text (in upper left corner): "Rainmaker develops, manages and operates
web sites that are an integral part of building customer relationships
for our clients."
Text (in right hand column): "The Relationship Infrastructure behind
the Technology Brand."
Graphic: three screen shots of Web pages that Rainmaker created for its
client companies -- Novell, Borland and Sybase.
Rainmaker logo (in lower left corner)
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
<S> <C>
Prospectus Summary......................................................... 3
Risk Factors............................................................... 7
Information Regarding Forward-Looking Statements........................... 14
Use of Proceeds............................................................ 15
Dividend Policy............................................................ 15
Capitalization............................................................. 16
Dilution................................................................... 17
Selected Financial Data.................................................... 18
Management's Discussion and
Analysis of Financial Condition and Results of Operations................. 19
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Business................................................................... 28
Management................................................................. 38
Certain Transactions....................................................... 49
Principal Stockholders..................................................... 51
Description of Capital Stock............................................... 53
Shares Eligible for Future Sale............................................ 56
Underwriting............................................................... 58
Legal Matters.............................................................. 60
Experts.................................................................... 60
Where You Can Find More Information........................................ 61
Financial Statements....................................................... F-1
</TABLE>
1
<PAGE>
PROSPECTUS SUMMARY
This summary highlights the information contained elsewhere in this
prospectus. Because this is only a summary, it does not contain all of the
information that may be important to you. You should read the entire prospectus
carefully, and you should consider the information under "Risk Factors" and in
the financial statements and notes before deciding to invest in the shares of
our common stock.
In this prospectus, "Rainmaker Systems," "Rainmaker," the "Company," "we,"
"us" and "our" refer to Rainmaker Systems, Inc. Unless otherwise indicated, all
information in this prospectus assumes that:
. the initial public offering price will be $9.00 per share;
. each share of our preferred stock will be converted into shares of
common stock immediately prior to the closing of this offering;
. upon the approval of our stockholders, Rainmaker will be reincorporated
as a Delaware corporation on or before the closing of this offering; and
. the underwriters will not exercise their over-allotment option and no
other person will exercise any other outstanding option or warrant.
The Company
Our Business
We provide customer relationship management (CRM) services to software and
other technology companies. We design and implement sophisticated sales,
marketing and other customer relationship programs using the Internet and other
communication channels. By integrating technologies, processes and people, we
provide a transparent customer relationship infrastructure behind our clients'
brands. Our solutions are used to increase the frequency and quality of
customer interactions and provide greater opportunities to sell and renew
software subscriptions, support and service contracts, training services,
licenses and upgrades. Rainmaker's services are designed to increase revenue
per customer, strengthen customer loyalty and retention, and improve customer
awareness of our clients' products and services. Our comprehensive CRM
solutions incorporate the following distinguishing characteristics:
. We identify and profile customers, establish meaningful interactions
with them, and enhance selling opportunities throughout the customer
life cycle.
. We build and manage integrated customer databases and provide reporting
services to clients on product usage, product and service interests and
buying patterns.
. We use our expertise in software and other technology industries to
design and implement focused marketing strategies.
. We sell our clients' products and services under a pay-for-performance
model.
We have 13 clients consisting of software and technology companies. Our
clients include Borland, a division of Inprise Corporation, Intuit Inc., Lotus
Development Corporation, a subsidiary of IBM, Network Computing Devices, Inc.,
Novell, Inc., Open Connect Systems Incorporated, Parametric Technology
Corporation, Puma Technology, Inc., The Santa Cruz Operation, Inc., Sun
Microsystems, Inc., Sybase Inc. and Symantec Corporation.
Our revenue from CRM services increased 96.4% from $22.5 million in 1997 to
$44.2 million in 1998. Our revenue from CRM services also increased 38.3% from
$30.4 million for the nine months ended September 30, 1998 to $42.0 million for
the nine months ended September 30, 1999. We incurred a net loss of $4.6
million for the nine months ended September 30, 1999, and we expect to continue
to incur losses for at least the next 18 months as we increase our operating
expenses to build our business.
3
<PAGE>
Our Market Opportunity
Competitive global markets and the increasing acceptance of the Internet as
a medium for customer interaction have caused companies to transform CRM from a
back office cost center to a revenue generating strategic operation. Many
businesses, however, are not achieving the results they desire from their CRM
programs. We believe there are three basic reasons why many CRM efforts are not
performing as expected:
. The Internet and the proliferation of customer data have increased the
frequency and complexity of customer interaction.
. Many current CRM solutions have inherent limitations.
. In-house solutions require a level of specialization that is not
consistent with many businesses' core competencies.
We believe that companies will increase and realign their spending on CRM
services. AMR Research estimates that more than $2.3 billion was spent on CRM
in 1998, and that CRM spending will grow to $16.8 billion by 2003, a compounded
annual growth rate of 49%. In spite of these expenditures, many businesses are
not achieving the results they desire. A July 1999 study by Frontline Solutions
indicated that 70% - 80% of software and hardware vendors were not satisfied
with their CRM tools. We believe a substantial market opportunity exists for a
CRM service provider like us that can combine the technology infrastructure,
established processes and knowledgeable people to deliver a comprehensive
outsourced solution that increases revenue from existing customers.
Our Strategy
Our objective is to become the leader in providing CRM services to software
and other technology companies. The key elements of our strategy to achieve
this objective are to:
. further penetrate our existing client base;
. sign new software industry clients;
. create additional services and delivery models;
. develop our international presence; and
. extend our solutions into additional technology markets.
Our History
Rainmaker was founded in 1991 as UniDirect Corporation, a
catalog/distributor of business software. In January 1995, we entered the CRM
services business and signed our first CRM services contract. In 1997, we
decided to focus exclusively on CRM services and added three new CRM services
clients that year. In May 1998, we sold our catalog/distributor businesses.
Corporate Information
We are located at 1800 Green Hills Road, Scotts Valley, California 95066.
Our telephone number is (831) 430-3800. Our Web site address is
www.rainmakersystems.com. Information contained on our Web site is not a part
of this prospectus.
4
<PAGE>
The Offering
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<C> <S>
Common stock offered............. 5,000,000 shares
Common stock to be outstanding
after this offering............. 37,460,544 shares
Use of proceeds.................. We intend to use the proceeds of this
offering for general corporate purposes
such as new client acquisition, expansion
into international markets, development of
new services and capital expenditures.
Proposed Nasdaq National Market
symbol.......................... RMKR
</TABLE>
The number of shares of common stock to be outstanding after the offering is
based on the number of shares outstanding as of September 30, 1999 and
excludes:
. 3,773,230 shares of common stock issuable upon the exercise of options
outstanding as of September 30, 1999 at a weighted average exercise
price of $1.66 per share; and
. 113,750 shares of common stock issuable upon the exercise of outstanding
warrants at an exercise price of $0.21 per share.
5
<PAGE>
Summary Financial Data
(in thousands, except per share data)
You should read the following summary financial data together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the accompanying financial statements and related notes which
are included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Years Ended December Nine Months
31, Ended September 30,
------------------------- -------------------
1996 1997 1998 1998 1999
------- ------- ------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
CRM services.................. $12,384 $22,515 $44,212 $ 30,402 $ 42,035
Catalog/distributor(1)........ 14,551 16,985 6,165 6,165 --
------- ------- ------- --------- ---------
Total revenue................. 26,935 39,500 50,377 36,567 42,035
Cost of revenue:
CRM services.................. 7,929 14,810 30,196 20,526 28,937
Catalog/distributor(1)........ 11,370 13,575 5,135 5,135 --
------- ------- ------- --------- ---------
Total cost of revenue......... 19,299 28,385 35,331 25,661 28,937
Gross profit:
CRM services.................. 4,455 7,705 14,016 9,876 13,098
Catalog/distributor(1)........ 3,181 3,410 1,030 1,030 --
------- ------- ------- --------- ---------
Total gross profit............ 7,636 11,115 15,046 10,906 13,098
Selling, general and
administrative expenses....... 6,954 9,828 13,457 9,639 18,651
------- ------- ------- --------- ---------
Operating income (loss)........ 682 1,287 1,589 1,267 (5,553)
Interest income (expense),
net.......................... (35) (66) 138 70 370
Gain from sale of
catalog/distributor(1)....... -- -- 2,525 2,525 80
------- ------- ------- --------- ---------
Income (loss) before income
taxes......................... 647 1,221 4,252 3,862 (5,103)
Income tax expense (benefit).. 216 450 1,702 1,545 (521)
------- ------- ------- --------- ---------
Net income (loss).............. $ 431 $ 771 $ 2,550 $ 2,317 $ (4,582)
======= ======= ======= ========= =========
Net income (loss) per share(2):
Basic......................... $ 0.02 $ 0.04 $ 0.12 $ 0.11 $ (0.40)
======= ======= ======= ========= =========
Diluted....................... $ 0.02 $ 0.03 $ 0.09 $ 0.08 $ (0.40)
======= ======= ======= ========= =========
Pro forma--basic.............. $ 0.10 $ (0.14)
======= =========
Pro forma--diluted............ $ 0.09 $ (0.14)
======= =========
Number of shares used in per
share calculations(2):
Basic......................... 21,009 21,019 21,004 21,035 18,961
======= ======= ======= ========= =========
Diluted....................... 29,600 29,943 30,356 30,105 18,961
======= ======= ======= ========= =========
Pro forma--basic.............. 25,623 32,825
======= =========
Pro forma--diluted............ 30,356 32,825
======= =========
</TABLE>
<TABLE>
<CAPTION>
As of September 30, 1999
-------------------------------
Pro Pro Forma
Actual Forma(4) As Adjusted(5)
------- ------- -------------
(unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents, and short-term
investments................................. $ 6,136 $ 6,136 $46,744
Working capital.............................. 5,722 5,722 46,330
Total assets................................. 21,227 21,227 61,835
Capital lease obligations, less current
portion..................................... 604 604 604
Redeemable preferred stock................... 15,287 -- --
Total stockholders' equity (net capital
deficiency)(3).............................. (8,170) 7,117 47,725
</TABLE>
- -------
(1) Effective May 15, 1998, we sold our catalog/distributor businesses. The
results of operations for our catalog/distributor businesses are included
in our financial statements through May 15, 1998.
(2) See Note 2 of the notes to financial statements which are included
elsewhere in this prospectus.
(3) As of September 30, 1999, actual stockholders' equity (net capital
deficiency) reflects the conversion of shares of Series B and D preferred
stock into shares of common stock and the repurchase of approximately $9.7
million (5,908,707 shares) of common stock during the nine months ended
September 30, 1999.
(4) Reflects the conversion of our outstanding preferred stock to common stock,
which will occur immediately prior to the closing of this offering.
(5) Reflects the conversion of our outstanding preferred stock to common stock,
which will occur immediately prior to the closing of this offering, the
sale of 5,000,000 shares of common stock in this offering and the receipt
of the net proceeds from this offering, after deducting underwriting fees
and estimated offering expenses.
6
<PAGE>
RISK FACTORS
You should carefully consider the following risks before you decide to buy
our common stock. The risks and uncertainties described below are not the only
ones that we face. Additional risks and uncertainties not presently known to us
or that we currently deem immaterial may also adversely affect our business
operations. If any of the following risks actually occur, they could seriously
harm our business, financial condition or results of operations, and the
trading price of our common stock could decline. You should also refer to the
other information set forth in this prospectus, including our financial
statements and the related notes.
We have incurred recent losses and expect to incur losses in the future.
We entered into the CRM services business in January 1995 and have a limited
operating history. As a result, it is difficult for us to predict future
results of operations. Although our CRM services revenues have grown
significantly in each year from 1995 to 1998, this rate of growth may not be
sustainable. In addition, we incurred an operating loss of $5.6 million and a
net loss of $4.6 million for the nine months ended September 30, 1999. We
expect to incur operating and net losses for at least the next eighteen months
as we increase our operating expenses to build our business.
Because we depend on a small number of clients for a significant portion of our
revenue, the loss of a single client could result in a substantial decrease in
our revenue.
We have generated a significant portion of our revenue from a limited
numbers of clients. We currently have only 13 clients. In 1997, sales to
customers of The Santa Cruz Operation, Inc. (SCO), FTP Software, Inc., and Sun
Microsystems, Inc. accounted for approximately 72%, 10% and 12%, respectively,
of our CRM services revenue. In 1998, sales to customers of SCO, FTP and
Novell, Inc. accounted for approximately 46%, 21% and 16%, respectively, of our
CRM services revenue. For the nine months ended September 30, 1999, sales to
customers of SCO, FTP, and Sybase accounted for approximately 47%, 13% and 13%,
respectively, of our CRM services revenue. We expect that a small number of
clients will continue to account for a significant portion of our revenue for
the foreseeable future. The loss of any of our principal clients could cause a
significant decrease in our revenue.
In addition, our software and other technology clients operate in industries
that are consolidating, which may reduce the number of our existing and
potential clients. FTP was acquired by NetManage, Inc. in August 1998. Since
that acquisition, our revenue from FTP has decreased, is expected to continue
to decrease and could eventually be eliminated.
Our revenue will decline if demand for our clients' products and services
decreases.
Our business primarily consists of selling and marketing our clients'
products and services to their existing customers. In addition, most of our
revenue is based on a "pay for performance" model in which our compensation is
based on the amount of our clients' products and services that we sell.
Accordingly, if a particular client's products and services fail to appeal to
its customers for reasons beyond our control, such as preference for a
competing product or service, our revenue from that client's products and
services may decline.
Our quarterly operating results may fluctuate, and, if we do not meet market
expectations, our stock price could decline.
We believe that quarter-to-quarter comparisons of our operating results are
not a good indication of future performance. Although our operating results
have generally improved from quarter to quarter until recently, our future
operating results may not follow any past trends. In some future quarter our
operating results may be below the expectation of public market analysts and
investors.
7
<PAGE>
Factors which may cause our future operating results to be below
expectations include:
. the growth of the market for outsourced CRM solutions;
. the demand for and acceptance of our services;
. the demand for our clients' products and services;
. the length of the sales and integration cycle for our new clients;
. our ability to develop and implement additional services, products and
technologies; and
. the expansion of our direct sales force and its rate of success.
The length and unpredictability of the sales and integration cycles for our
services could cause delays in our revenue growth.
Selection of our services often entails an extended decision-making process
on the part of prospective clients. We often must provide a significant level
of education regarding the use and benefit of our services, which may delay the
evaluation and acceptance process. The selling cycle can extend to
approximately six to nine months or longer between initial client contact and
signing of a contract for our services. Additionally, once our services are
selected, the integration of our services often can be a lengthy process which
further impacts the timing of revenue. Because we are unable to control many of
the factors that will influence our clients' buying decisions or the
integration of our services, the length and unpredictability of the sales and
integration cycles will make it difficult for us to forecast the growth and
timing of our revenue.
If we are unable to attract and retain highly qualified management and sales
and technical personnel the quality of our services may decline, and our
ability to execute our growth strategies may be harmed.
Our success depends to a significant extent upon the contributions of our
executive officers and key sales and technical personnel and our ability to
attract and retain highly qualified sales, technical and managerial personnel.
Competition for personnel is intense as these personnel are limited in supply.
We have at times experienced difficulty in recruiting qualified personnel, and
there can be no assurance that we will not experience difficulties in the
future. Any difficulties could limit our future growth. The loss of certain key
personnel, particularly Michael Silton, our chairman, president and chief
executive officer, could seriously harm our business. We have obtained life
insurance policies in the amount of $6.3 million on Michael Silton.
Six of our eleven officers joined Rainmaker in 1999. As a result, our
current management team has worked together for only a relatively short time.
Our ability to execute our strategies will depend upon our ability to integrate
these and future managers into our operations.
We have strong competitors and may not be able to compete effectively against
them.
Competition in business process outsourcing is intense, and we expect such
competition to increase in the future. Our competitors include comprehensive
system integrators, e-commerce solutions providers, and other outsource
providers of different components of customer interaction management. We also
face competition from internal marketing departments of current and potential
clients. Many of our existing or potential competitors have longer operating
histories, greater name recognition and significantly greater financial,
technical and marketing resources, which could further impact our ability to
address competitive pressures. Should competitive factors require us to
increase spending for, and investment in, client acquisition and retention or
for the development of new services, our expenses could increase
disproportionately to our revenues. Competitive pressures may
8
<PAGE>
also necessitate price reductions and other actions that would likely affect
our business adversely. Additionally, there can be no assurances that we will
have the resources to maintain a higher level of spending to address changes in
the competitive landscape. Failure to maintain or to produce revenue
proportionate to any increase in expenses would have a negative impact on our
financial results and stock price.
Our success depends on our ability to successfully manage additional growth.
Our recent growth has placed significant demands on our management,
administrative, operational and financial resources. In addition, our
anticipated future growth will place additional demands on our resources. We
will need to continue to improve our operational, financial and managerial
controls and information systems and procedures and will need to continue to
expand, train and manage our overall work force. If we are unable to manage
additional growth effectively our business will be harmed.
We could face additional risks and challenges if we do not successfully develop
our international business operations, which could adversely affect our revenue
and cash flow and the growth of our business.
Although our growth strategy includes expansion into international markets,
to date, only a small portion of our revenue is derived from international
sales, primarily to customers in Canada.
International operations are subject to many risks, including:
. the appeal of our marketing programs to international customers;
. difficulties in staffing and managing multinational operations;
. designing and operating Web sites in numerous foreign languages;
. export restrictions, licenses, tariffs, different regulatory agencies
and other trade barriers; and
. differing technology standards and internet regulations that may affect
access to and operation of our Websites.
Any acquisitions we make could result in dilution, unfavorable accounting
charges and difficulties in successfully managing our business.
As part of our business strategy, we review acquisition prospects that would
complement our existing business or enhance our technological capabilities.
Future acquisitions by us could result in potentially dilutive issuances of
equity securities, large and immediate write-offs, the incurrence of debt and
contingent liabilities or amortization expenses related to goodwill and other
intangible assets, any of which could cause our financial performance to
suffer. Furthermore, acquisitions entail numerous risks and uncertainties,
including:
. difficulties in the assimilation of operations, personnel, technologies,
products and the information systems of the acquired companies;
. diversion of management's attention from other business concerns;
. risks of entering geographic and business markets in which we have no or
limited prior experience; and
. potential loss of key employees of acquired organizations.
We cannot be certain that we would be able to successfully integrate any
businesses, products, technologies or personnel that might be acquired in the
future, and our failure to do so could limit
9
<PAGE>
our future growth. Although we do not currently have any agreement with respect
to any material acquisitions, we may make acquisitions of complementary
businesses, products or technologies in the future. However, we may not be able
to locate suitable acquisition opportunities.
We rely heavily on our communications infrastructure, and the failure to invest
in or the loss of these systems could disrupt the operation and growth of our
business and result in the loss of customers or clients.
Our success is dependent in large part on our continued investment in
sophisticated computer, Internet and telecommunications systems. We have
invested significantly in technology and anticipate that it will be necessary
to continue to do so in the future to remain competitive. These technologies
are evolving rapidly and are characterized by short product life cycles, which
require us to anticipate technological developments. We may be unsuccessful in
anticipating, managing, adopting and integrating technological changes on a
timely basis, or we may not have the capital resources available to invest in
new technologies. Temporary or permanent loss of these systems could limit our
ability to conduct our business and result in lost revenue.
If we are unable to safeguard our networks and clients' data, our clients may
not use our services and our business may be harmed.
Our networks may be vulnerable to unauthorized access, computer hacking,
computer viruses and other security problems. A user who circumvents security
measures could misappropriate proprietary information or cause interruptions or
malfunctions in our operations. We may be required to expend significant
resources to protect against the threat of security breaches or to alleviate
problems caused by any breaches. Although we intend to continue to implement
industry-standard security measures, these measures may be inadequate.
Damage to our single facility may disable our operations.
Our operations are housed in a single facility in Scotts Valley, California.
We have taken precautions to protect ourselves from events that could interrupt
our services, such as off-site storage of computer backup data and a backup
power source, but there can be no assurance that an earthquake, fire, flood or
other disaster affecting our facility would not disable these operations. Any
significant damage to this facility from an earthquake or other disaster could
prevent us from operating our business.
If we fail to adequately protect our intellectual property or face a claim of
intellectual property infringement by a third party, we may lose our
intellectual property rights and be liable for significant damages.
We cannot guarantee that the steps we have taken to protect our proprietary
rights will be adequate to deter misappropriation of our intellectual property.
In addition, we may not be able to detect unauthorized use of our intellectual
property and take appropriate steps to enforce our rights. If third parties
infringe or misappropriate our trade secrets, copyrights, trademarks, service
marks, trade names or other proprietary information, our business could be
seriously harmed. In addition, although we believe that our proprietary rights
do not infringe the intellectual property rights of others, other parties may
assert infringement claims against us that we violated their intellectual
property rights. These claims, even if not true, could result in significant
legal and other costs and may be a distraction to management. In addition,
protection of intellectual property in many foreign countries is weaker and
less reliable than in the United States, so if our business expands into
foreign countries, risks associated with protecting our intellectual property
will increase. We have recently applied for registration of the service mark
"Rainmaker Systems" in the United States, but we presently have no applications
pending in foreign countries for this or any other trademark or service mark.
10
<PAGE>
If we do not adequately address Year 2000 compliance issues, our business could
be disrupted, we could incur unanticipated expenses and we could lose customers
and clients.
Significant uncertainty exists concerning the potential effects associated
with the treatment of the Year 2000. The Year 2000 issue exists because many
currently installed computer systems, software products and applications use
two-digit date fields to designate a year. As the century date change occurs,
date-sensitive systems may not be able to recognize or distinguish the Year
2000 from 1900. The inability to recognize or properly treat the Year 2000 may
cause systems to incorrectly process critical operational and financial
information.
Our services rely on a complex communications infrastructure including the
Internet and telecommunications systems that we cannot adequately evaluate for
Year 2000 compliance. In addition, our services are dependent upon equipment
and software provided by third parties that may not be Year 2000 compliant. In
performing our services, we also sell software provided by third parties which
may not be Year 2000 compliant.
The failure of these systems or of any third-party equipment or software to
achieve Year 2000 compliance could result in:
. delay or loss of revenue;
. cancellations of contracts by clients;
. diversions of our management's attention and development resources;
. damage to our reputation;
. litigation costs, and
. difficulties in contacting or being contacted by our clients' customers
or operating our clients' web sites.
For more information on our Year 2000 issues, you should read the discussion
in the "Management's Discussion and Analysis of Financial Condition and Results
of Operations-- Year 2000 Compliance" section of this prospectus.
Increased government regulation of the Internet could decrease the demand for
our services and increase our cost of doing business.
The increasing popularity and use of the Internet and online services may
lead to the adoption of new laws and regulations in the U.S. or elsewhere
covering issues such as online privacy, copyright and trademark, sales taxes
and fair business practices or which require qualification to do business as a
foreign corporation in certain jurisdictions. Increased government regulation,
or the application of existing laws to online activities, could inhibit
Internet growth. A decline in the growth of the Internet could decrease demand
for our services and increase our cost of doing business and otherwise harm our
business.
We are subject to government regulation of telemarketing, which could restrict
the operation and growth of our business.
The FTC's telemarketing sales rules prohibit misrepresentations of the cost,
terms, restrictions, performance or duration of products or services offered by
telephone solicitation and specifically addresses other perceived telemarketing
abuses in the offering of prizes. Additionally, the FTC's rules limit the hours
during which telemarketers may call consumers. The federal Telephone Consumer
Protection Act of 1991 contains other restrictions on telemarketers, including
a prohibition on the use of automated telephone dialing equipment to call
certain telephone numbers. A number of states also regulate telemarketing and
some states have enacted restrictions similar to these federal laws. The
failure to comply with applicable statutes and regulations could result in
penalties.
11
<PAGE>
There can be no assurance that additional federal or state legislation, or
changes in regulatory implementation, would not limit our activities in the
future or significantly increase the cost of regulatory compliance.
Our directors and their affiliates will own a large percentage of our stock and
can significantly influence all matters requiring stockholder approval.
After this offering, our directors and entities affiliated with them will
together control approximately 52.2% of our outstanding shares (based on the
number of shares outstanding as of September 30, 1999). As a result, any
significant combination of those stockholders, acting together, will have the
ability to control all matters requiring stockholder approval, including the
election of all directors, and any merger, consolidation or sale of all or
substantially all of our assets. Accordingly, such concentration of ownership
may have the effect of delaying, deferring or preventing a change in control of
Rainmaker, which, in turn, could depress the market price of our common stock.
Our charter documents and Delaware law contain anti-takeover provisions that
could deter takeover attempts, even if a transaction would be beneficial to our
stockholders.
In connection with this offering, Rainmaker will be reincorporated in
Delaware. The provisions of Delaware law and of the certificate of
incorporation and bylaws that we will adopt in connection with the
reincorporation could make it difficult for a third party to acquire us, even
though an acquisition might be beneficial to our stockholders. Our certificate
of incorporation will provide our board of directors the authority, without
stockholder action, to issue up to 20,000,000 shares of preferred stock in one
or more series. Our board determines when we will issue preferred stock, and
the rights, preferences and privileges of any preferred stock. Our certificate
of incorporation will also provide for a classified board, with each board
member serving a staggered three-year term. In addition, our bylaws will
establish an advance notice procedure for stockholder proposals and for
nominating candidates for election as directors. Delaware corporate law also
contains provisions that can affect the ability to take over a company. You
should read "Description of Capital Stock--Certain Anti-Takeover Provisions."
There is no prior market for our stock and our stock price may be volatile
resulting in potential litigation.
There has been no public market for our common stock prior to this offering.
The initial public offering price will be determined by negotiation with the
representatives of the underwriters, based upon factors that may be unrelated
to future market performance. We cannot be certain that an active public market
for our common stock will develop or be sustained after this offering. Nor can
we be certain that the market price of our common stock will not decline below
the initial public offering price.
If our stock price is volatile, we could face securities class action
litigation. In the past, following periods of volatility in the market price of
their stock, many companies have been the subjects of securities class action
litigation. If we were sued in a securities class action, it could result in
substantial costs and a diversion of management's attention and resources and
could cause our stock price to fall. The trading price of our common stock
could fluctuate widely due to:
. quarter to quarter variations in results of operations;
. loss of a major client;
. announcements of technological innovations by us or our competitors;
. changes in or our failure to meet, the expectations of securities
analysts;
. new products or services offered by us or our competitors;
12
<PAGE>
. changes in market valuations of similar companies;
. announcements of strategic relationships or acquisitions by us or our
competitors; or
. other events or factors that may be beyond our control.
In addition, the securities markets in general have experienced extreme
price and trading volume volatility in the past. The trading prices of
securities of many business process outsourcing companies have fluctuated
broadly, often for reasons unrelated to the operating performance of the
specific companies. These general market and industry factors may adversely
affect the trading price of our common stock, regardless of our actual
operating performance.
A significant number of shares are or may become available for sale and their
sale could depress our stock price.
Sales of substantial amounts of our common stock in the public market after
this offering could reduce the market price of our common stock. These sales
also might make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we deem appropriate. For a
description of the shares of our common stock that are available for future
sale see "Shares Eligible for Future Sale."
New investors will experience immediate and substantial dilution.
The assumed public offering price is substantially higher than the book
value per share of our common stock. Purchasers of our common stock in this
offering will experience immediate and substantial dilution in the pro forma
net tangible book value of their shares of approximately $7.73 per share from
the assumed initial public offering price of $9.00 per share. Purchasers will
experience additional dilution upon the exercise of outstanding options and
warrants.
13
<PAGE>
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are based on our
current expectations, assumptions, estimates and projections about us and our
industry. When used in this prospectus, the words "expects," "anticipates,"
"estimates," "intends" and similar expressions are intended to identify
forward-looking statements. These statements include, but are not limited to,
statements under the captions "Risk Factors," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this prospectus concerning, among other things:
. future fluctuations in our revenues and operating expenses;
. the adequacy of our capital resources to meet our future requirements;
. anticipated growth in the market for CRM services in the software and
other technology industries;
. our strategy for expanding and growing our business;
. our ability to address Year 2000 issues adequately; and
. the use of the proceeds from this offering.
These forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those expected. The
cautionary statements made in this prospectus should be read as being
applicable to all related forward-looking statements wherever they appear in
this prospectus. We assume no obligation to update such forward-looking
statements publicly for any reason, or to update the reasons actual results
could differ materially from those anticipated in such forward-looking
statements, even if new information becomes available in the future.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the 5,000,000 shares of common stock
offered by this prospectus are estimated to be $40,608,000, after deducting the
underwriting fees and estimated offering expenses. We will receive an
additional $6,277,500 in net proceeds if the underwriters fully exercise their
over-allotment option to purchase 750,000 shares of common stock.
We intend to use the net proceeds for general corporate purposes to support
business expansion including new client acquisition, expansion into
international markets, the development of new services and capital
expenditures. In addition, we may use a portion of the net proceeds to acquire
complementary products, technologies or businesses; however, we currently have
no commitments or agreements and are not involved in any negotiations to do so.
Pending their use, we intend to invest the net proceeds in short-term,
interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently expect to retain future earnings, if any, for use in the operation
and expansion of our business and do not anticipate paying any cash dividends
in the foreseeable future.
15
<PAGE>
CAPITALIZATION
The following table sets forth as of September 30, 1999:
. our actual capitalization;
. our pro forma capitalization giving effect to the conversion of all
outstanding shares of preferred stock into 14,497,216 shares of common
stock (including the conversion of 334,889 shares of Series B preferred
stock into 1,674,445 shares of common stock); and
. our pro forma capitalization as adjusted to reflect the issuance of
5,000,000 shares of common stock offered by this prospectus and the
receipt of the estimated net proceeds therefrom, after deducting
underwriting fees and estimated offering expenses payable by us.
This table excludes (i) 3,773,230 shares of common stock issuable upon the
exercise of outstanding options as of September 30, 1999 at a weighted average
exercise price of $1.66 per share and (ii) the exercise of warrants to purchase
22,750 shares of Series B preferred stock, which shares are convertible into
113,750 shares of common stock. This table should be read in conjunction with
our financial statements and notes included elsewhere in this prospectus. See
"Use of Proceeds" and "Description of Capital Stock."
<TABLE>
<CAPTION>
September 30, 1999
-----------------------------
Pro Forma
Actual Pro Forma As Adjusted
------ --------- -----------
(in thousands, except share
data)
<S> <C> <C> <C>
Cash, cash equivalents and short-term
investments..................................... $6,136 $6,136 $ 46,744
====== ====== ========
Capital lease obligations, less current portion.. $ 604 $ 604 $ 604
Redeemable preferred stock:
Series C convertible preferred stock, $0.001 par
value; 8,536,585 shares authorized, issued and
outstanding, actual; no shares authorized,
issued or outstanding, pro forma and pro forma
as adjusted.................................... 13,809 -- --
Series D convertible preferred stock, $0.001 par
value; 5,717,470 shares authorized, 4,286,186
issued and outstanding, actual; no shares
authorized, issued or outstanding, pro forma
and pro forma as adjusted...................... 1,478 -- --
Stockholders' equity (net capital deficiency):
Series B convertible preferred stock, $0.001 par
value; 402,710 shares authorized, 334,889
issued and outstanding, actual; no shares
authorized, issued or outstanding, pro forma
and pro forma as adjusted...................... -- -- --
Common stock, $0.001 par value; 50,000,000
shares authorized, 17,963,328 issued and
outstanding, actual; 32,460,544 issued and
outstanding, pro forma; 37,460,544 issued and
outstanding pro forma as adjusted.............. 18 32 37
Additional paid-in capital....................... 2,619 17,892 58,495
Deferred stock compensation...................... (1,566) (1,566) (1,566)
Accumulated deficit.............................. (9,241) (9,241) (9,241)
------ ------ --------
Total stockholders' equity (net capital
deficiency).................................... (8,170) 7,117 47,725
------ ------ --------
Total capitalization.......................... $7,721 $7,721 $ 48,329
====== ====== ========
</TABLE>
16
<PAGE>
DILUTION
Our pro forma net tangible book value as of September 30, 1999 was
approximately $7.1 million, or $0.22 per share of common stock. Pro forma net
tangible book value per share represents the amount of our total tangible
assets less total liabilities divided by the number of shares of common stock
outstanding as of September 30, 1999 on a pro forma basis. Without taking into
account any other changes in net tangible book value other than to give effect
to our sale of the 5,000,000 shares of common stock in this offering and the
receipt of the net proceeds therefrom, our pro forma net tangible book value as
of September 30, 1999 would have been $47.7 million, or $1.27 per share of
common stock. This represents an immediate increase in pro forma net tangible
book value of $1.05 per share to existing stockholders and an immediate
dilution in pro forma net tangible book value of $7.73 per share to investors
purchasing common stock in this offering. The following table illustrates this
per share dilution:
<TABLE>
<CAPTION>
Per Share
-----------
Assumed initial public offering price ............................... $9.00
<S> <C> <C>
Pro forma net tangible book value as of September 30, 1999......... $0.22
Increase attributable to new investors............................. 1.05
-----
Pro forma net tangible book value after this offering.............. 1.27
-----
Dilution to new investors.......................................... $7.73
=====
</TABLE>
The following table summarizes on a pro forma basis as of September 30,
1999, the difference between the number of shares of common stock purchased
from us, the total consideration paid and the average price per share paid by
our existing stockholders and by new investors before deduction of underwriting
fees and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 32,460,544 86.7% $15,487,000 25.6% $0.48
---------- ----- ----------- -----
New investors.......... 5,000,000 13.3 45,000,000 74.4 9.00
---------- ----- ----------- -----
Total.............. 37,460,544 100.0% $60,487,000 100.0%
========== ===== =========== =====
</TABLE>
The foregoing table assumes no exercise of the underwriters' over-allotment
option or shares underlying outstanding options or warrants. As of September
30, 1999, options to purchase 3,773,230 shares of common stock were outstanding
at a weighted average exercise price of $1.66 per share and warrants to
purchase 113,750 shares of common stock were outstanding at an exercise price
of $0.21 per share. To the extent that these options and warrants are
exercised, new investors will experience further dilution.
17
<PAGE>
SELECTED FINANCIAL DATA
(in thousands, except per share data)
The following selected financial data as of December 31, 1997 and 1998 and
for each of the three years in the period ended December 31, 1998 have been
derived from our financial statements and notes thereto audited by Ernst &
Young LLP, independent auditors, and included elsewhere in this prospectus. The
selected financial data as of and for the years ended December 31, 1994 and
1995, and as of December 31, 1996, are derived from our audited financial
statements not included in this prospectus. The selected financial data as of
September 30, 1999 and for the nine months ended September 30, 1998 and 1999
are derived from our unaudited interim financial statements included elsewhere
in this prospectus. Such unaudited financial statements, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of our financial position and
results of operation for that period. The results of operations for the period
ended September 30, 1999 are not necessarily indicative of the results to be
expected for any other interim period or for the full year. The following data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
CRM services............. $ -- $ 8,230 $12,384 $22,515 $44,212 $ 30,402 $ 42,035
Catalog/distributor(1)... 11,489 12,317 14,551 16,985 6,165 6,165 --
------- ------- ------- ------- ------- -------- ---------
Total revenue............ 11,489 20,547 26,935 39,500 50,377 36,567 42,035
Cost of revenue:
CRM services............. -- 5,681 7,929 14,810 30,196 20,526 28,937
Catalog/distributor(1)... 8,780 9,686 11,370 13,575 5,135 5,135 --
------- ------- ------- ------- ------- -------- ---------
Total cost of revenue.... 8,780 15,367 19,299 28,385 35,331 25,661 28,937
Gross profit:
CRM services............. -- 2,549 4,455 7,705 14,016 9,876 13,098
Catalog/distributor(1)... 2,709 2,631 3,181 3,410 1,030 1,030 --
------- ------- ------- ------- ------- -------- ---------
Total gross profit....... 2,709 5,180 7,636 11,115 15,046 10,906 13,098
Selling, general and
administrative expenses.. 2,947 4,792 6,954 9,828 13,457 9,639 18,651
------- ------- ------- ------- ------- -------- ---------
Operating income (loss)... (238) 388 682 1,287 1,589 1,267 (5,553)
Interest income
(expense), net.......... (25) (16) (35) (66) 138 70 370
Gain from sale of
catalog/distributor(1).. -- -- -- -- 2,525 2,525 80
------- ------- ------- ------- ------- -------- ---------
Income (loss) before
income taxes............. (263) 372 647 1,221 4,252 3,862 (5,103)
Income tax expense
(benefit)............... (13) 87 216 450 1,702 1,545 (521)
------- ------- ------- ------- ------- -------- ---------
Net income (loss)......... (250) 285 431 771 2,550 2,317 (4,582)
Preferred A dividends..... -- -- -- -- (36) (18) --
Preferred C and D
cumulative dividends..... -- -- -- -- -- -- (1,064)
Excess of redemption of
preferred stock over
stated value............. -- -- -- -- -- -- (1,941)
------- ------- ------- ------- ------- -------- ---------
Income (loss) available to
common stockholders...... $ (250) $ 285 $ 431 $ 771 $ 2,514 $ 2,299 $ (7,587)
======= ======= ======= ======= ======= ======== =========
Net income (loss) per
share(2):
Basic.................... $ (0.01) $ 0.01 $ 0.02 $ 0.04 $ 0.12 $ 0.11 $ (0.40)
======= ======= ======= ======= ======= ======== =========
Diluted.................. $ (0.01) $ 0.01 $ 0.02 $ 0.03 $ 0.09 $ 0.08 $ (0.40)
======= ======= ======= ======= ======= ======== =========
Pro forma--basic......... $ 0.10 $ (0.14)
======= =========
Pro forma--diluted....... $ 0.09 $ (0.14)
======= =========
Number of shares used in
per share
calculations(2):
Basic.................... 21,000 21,005 21,009 21,019 21,004 21,035 18,961
======= ======= ======= ======= ======= ======== =========
Diluted.................. 21,000 25,424 29,600 29,943 30,356 30,105 18,961
======= ======= ======= ======= ======= ======== =========
Pro forma--basic......... 25,623 32,825
======= =========
Pro forma--diluted....... 30,356 32,825
======= =========
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
------------------------------------ As of September 30,
1994 1995 1996 1997 1998 1999
------ ------ ------ ------- ------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents
and short-term
investments............ $ 63 $1,082 $1,259 $ 269 $ 4,608 $ 6,136
Working capital......... 110 1,490 1,257 1,307 5,123 5,722
Total assets............ 1,703 4,826 8,233 11,912 17,209 21,227
Long-term debt and
capital lease
obligations, less
current portion........ 39 558 1,065 1,278 1,438 604
Redeemable preferred
stock.................. -- 977 977 977 977 15,287
Total stockholders'
equity (net capital
deficiency)(3)......... 361 646 1,078 1,852 4,500 (8,170)
</TABLE>
- --------
(1) Effective May 15, 1998, we sold our catalog and distributor businesses.
The results of operations for our catalog and distributor businesses are
included in our financial statements through May 15, 1998.
(2) See Note 2 of the notes to financial statements which are included
elsewhere in this prospectus.
(3) As of September 30, 1999, actual stockholders' equity (net capital
deficiency) reflects the conversion of Series B and D preferred stock into
shares of common stock and the repurchase of approximately $9.7 million
(5,908,707 shares) of common stock during the nine months ended
September 30, 1999.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations of the Company should be read in conjunction with "Selected
Financial Data" and the Company's financial statements and the related notes
thereto. This discussion contains forward-looking statements that involve risks
and uncertainties that could cause actual results to differ materially from
historical results or anticipated results including those set forth in "Risk
Factors" and elsewhere in this prospectus.
Overview
We provide CRM services to software and other technology companies. We
design and implement sophisticated sales, marketing and other customer
relationship programs using the Internet and other communication channels. By
integrating technologies, processes and people, we provide a transparent
customer relationship infrastructure behind our clients' brands. Our solutions
are used to increase the frequency and quality of customer interactions and
provide greater opportunities to sell and renew software subscriptions, support
and service contracts, training services, licenses and upgrades. Rainmaker's
services are designed to increase revenue per customer, strengthen customer
loyalty and retention, and improve customer awareness of our clients' products
and services. Our clients are Borland, a division of Inprise Corporation, FTP
Software, Inc., Intuit Inc., Lotus Development Corporation, a subsidiary of
IBM, Network Computing Devices, Inc., Novell, Inc., Open Connect Systems
Incorporated, Parametric Technology Corporation, Puma Technology, Inc., The
Santa Cruz Operation, Inc., Sun Microsystems, Inc., Sybase, Inc. and Symantec
Corporation.
Rainmaker was founded in 1991 as UniDirect Corporation, a
catalog/distributor of business software. We distributed UNIX, NT and Web
Server software products manufactured primarily by SCO, Microsoft Corporation,
Corel Corporation, V-Systems Inc. and SunSoft, Inc. Our customers consisted of
end users, resellers and distributors. In January 1995, we entered the CRM
services business and signed our first CRM services contract. In 1997, we
decided to focus exclusively on CRM services and added three new CRM services
clients that year. In May 1998, we sold certain assets related to our
catalog/distributor businesses for approximately $5.2 million in total
consideration. The assets sold included approximately $450,000 of inventory,
approximately $750,000 of computer software as well as intangible assets
including the domain names and logos. The buyer also assumed approximately
$600,000 of accounts payable related to these businesses, which is included as
part of total consideration. We received $2.9 million in cash on the closing
date and a note for $1.7 million, of which $900,000 was paid in May 1999. The
$800,000 balance is due by May 15, 2000. The note bears interest at 8.25% per
annum payable quarterly in arrears.
As of September 30, 1999, we have recorded a gain related to the sale of
these businesses of approximately $2.6 million. This gain consisted of the $5.2
million of consideration less assets sold of approximately $1.2 million,
compensation and severance amounts paid to former employees of these businesses
of approximately $700,000, $350,000 of catalog/distributor businesses assets
disposed of because they were no longer used by us and $350,000 of direct
transaction costs including banking, legal and accounting fees.
Our historical financial statements separate revenue, cost of revenue and
gross profit between the CRM services business and the catalog/distributor
businesses. Operating expenses cannot be broken out historically between the
CRM service business and the catalog/distributor businesses because they shared
a common sales, marketing and administrative infrastructure. The following
discussion of our financial history highlights our performance in both the CRM
services and catalog/distributor businesses.
19
<PAGE>
Our CRM services revenue consists of sales of our clients' software
subscriptions, support and service contracts, training services, licenses and
upgrades to our clients' installed customer base. This revenue includes the
total purchase price billed by us to customers for our clients' products and
services. Revenue from support and service contracts is recognized upon receipt
of the customer's written purchase order, as service obligations are the
responsibility of the client. Revenue from product sales is recognized at the
time of shipment. Revenue from sales of new clients' products and services
typically increases over several quarters before reaching a more moderate level
of growth. Revenue growth during this period can be affected by many factors
including customer contract renewal history, customer product satisfaction and
competitive pricing.
Cost of revenue includes payments for our clients' products and services
based on the specific pricing terms of each contract. The costs of these
products and services are typically higher during the start up phase of our
relationship with a client until higher purchase discounts are achieved from
increased sales volume. As a result, the gross margins earned on sales during
the start up phase are lower, which can reduce our overall margins. This impact
on overall margins may be significant depending on the number of new clients in
any period. Once we integrate a client's customer database and begin to meet
targeted sales volumes, our gross margins from that client typically improve.
It typically takes three to six months before this improvement in margins
begins.
Selling, general and administrative expenses include all costs associated
with the marketing and selling of our clients' products and services, including
client integration costs, salaries of marketing and sales personnel, technology
systems and communications costs, product and service development and
administrative overhead. Interest income (expense), net reflects income
received on cash, cash equivalents and short-term investments and interest
expense on leases to secure equipment and software.
Although our operating income and net income have grown in each year from
1994 to 1998, we incurred an operating loss and net loss for the nine months
ended September 30, 1999. We expect to incur increasing operating and net
losses in future periods as we increase our operating expenses to build our CRM
services business. New clients require significant up-front investments
including the costs to hire additional staff and create the necessary
infrastructure to deliver our services. These costs are typically incurred
several quarters before significant revenue is generated. These costs could
have an adverse effect on our future financial condition and operating results.
20
<PAGE>
Results of Operations
The following table presents, for the periods given, selected financial data
as a percentage of our revenue.
<TABLE>
<CAPTION>
Nine Months
Years Ended Ended
December 31, September 30,
---------------------- --------------
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenue:
CRM services........................ 46.0% 57.0% 87.8% 83.1% 100.0%
Catalog/distributor................. 54.0 43.0 12.2 16.9 --
------ ------ ------ ------ ------
Total revenue...................... 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
CRM services........................ 64.0 65.8 68.3 67.5 68.8
Catalog/distributor................. 78.1 79.9 83.3 83.3 --
------ ------ ------ ------ ------
Total cost of revenue.............. 71.7 71.9 70.1 70.2 68.8
Gross profit:
CRM services........................ 36.0 34.2 31.7 32.5 31.2
Catalog/distributor................. 21.9 20.1 16.7 16.7 --
------ ------ ------ ------ ------
Total gross profit................. 28.3 28.1 29.9 29.8 31.2
Selling, general and administrative
expenses............................ 25.8 24.8 26.8 26.3 44.4
------ ------ ------ ------ ------
Operating income (loss).............. 2.5 3.3 3.1 3.5 (13.2)
Interest income (expense), net...... (0.1) (0.2) 0.3 0.2 0.9
Gain from sale of
catalog/distributor................ -- -- 5.0 6.9 0.2
------ ------ ------ ------ ------
Income (loss) before income taxes.... 2.4 3.1 8.4 10.6 (12.1)
Income tax expense (benefit)........ 0.8 1.1 3.3 4.3 (1.2)
------ ------ ------ ------ ------
Net income (loss).................... 1.6% 2.0% 5.1% 6.3% (10.9)%
====== ====== ====== ====== ======
</TABLE>
Comparison of Nine Months Ended September 30, 1999 and 1998
Revenue. Revenue from CRM services increased 38.3% to $42.0 million for the
nine months ended September 30, 1999 from $30.4 million for the nine months
ended September 30, 1998. During the first nine months of 1999, revenue from
CRM services provided to existing clients (clients for which we generated
revenue over the entire period) accounted for $4.8 million of the increase over
the prior period. This increase was primarily due to the inclusion of new
services and product lines and growth of the installed customer base partially
offset by a $1.6 million decline in revenue from FTP, which was acquired by
NetManage, Inc. in August 1998. In addition, revenue from existing clients
included two clients added during the first nine months of 1998 from which we
derived the full period benefit of the sales of their products and services
during the first nine months of 1999. Revenue from these clients was $6.2
million and $4.8 million for the nine-month periods ended September 30, 1999
and 1998, respectively. During the nine month period ended September 30, 1999,
we added six new clients which accounted for $6.8 million of our revenue during
that period.
During the nine months ended September 30, 1999, there was no revenue from
the catalog/distributor businesses, which were sold in May 1998. In the nine
months ended September 30, 1998, these businesses generated revenues of $6.2
million.
Gross Profit. Gross profit from CRM services increased 32.6% to $13.1
million for the nine months ended September 30, 1999 from $9.9 million for the
nine months ended September 30, 1998. Gross margin from CRM services declined
to 31.2% in the most recent period from 32.5% during the prior period due
primarily to lower margins on sales of new clients' products and services.
Gross margins on sales of newer clients' products and services are typically
lower during the start-up phase.
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There was no gross profit for the nine months ended September 30, 1999 on
the catalog/distributor businesses, which were sold in May 1998. For the nine
months ended September 30, 1998, these businesses generated $1.0 million in
gross profit.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 93.5% to $18.7 million for the nine months
ended September 30, 1999 from $9.6 million for the nine months ended September
30, 1998. These expenses for the nine months ended September 30, 1998 included
approximately five months of operations associated with the catalog/distributor
businesses, which were sold in May 1998. As a percentage of total revenue,
these expenses increased to 44.4% for the most recent period from 26.3% in the
prior period. This increase was primarily attributable to the strategic
decision to increase levels of investment in personnel, systems and
infrastructure and product development to support recent and anticipated new
client growth. Specifically, we hired 40 additional personnel within sales,
marketing and product development since September 30, 1998. Depreciation
expense increased by $777,000 during the nine months ended September 30, 1999
due primarily to accelerated depreciation on information systems anticipated to
be substantially replaced within six to nine months. In addition, during the
first nine months of 1999, we wrote off approximately $296,000 of older non-
Year 2000 compliant computers and telephone systems, which were replaced with
new equipment.
We recorded deferred compensation of $2.0 million in the nine months ended
September 30, 1999. This represents the difference between the exercise price
of options granted to acquire our common stock and the deemed fair value for
financial reporting purposes of our common stock on the grant date. We
amortized deferred compensation expense of approximately $460,000 during the
nine months ended September 30, 1999. Deferred compensation expense at
September 30, 1999 is being amortized using a graded vesting method over the
vesting period of the options.
Interest Income (Expense), Net. We recorded $370,000 of net interest income
in the nine months ended September 30, 1999, as compared to $70,000 in the
first nine months of 1998. The increase was primarily attributable to higher
invested cash balances resulting from the sale of preferred stock of $13.8
million in February 1999 partially offset by $9.7 million used to repurchase
stock during the same period.
Income Tax Expense (Benefit). We recorded a $521,000 income tax benefit for
the nine months ended September 30, 1999 compared to $1,545,000 of income tax
expense for the nine months ended September 30, 1998. The expected benefit
derived by applying the federal statutory rate to the operating loss for the
nine months ended September 30, 1999 differs from the benefit recorded because
we established a valuation allowance for deferred tax assets that exceed income
taxes recoverable from prior years. The income tax expense for the nine months
ended September 30, 1998 was recorded at the federal statutory rate plus state
income taxes.
Comparison of Years Ended December 31, 1998 and 1997
Revenue. Revenue from CRM services increased 96.4% to $44.2 million for 1998
from $22.5 million in 1997. Revenue from CRM services associated with existing
clients accounted for $12.6 million of the increase in 1998 over 1997. This
increase was primarily due to the inclusion of new services and product lines
and growth of the installed customer base. In addition, revenue from existing
clients included three clients added during 1997 from which we derived the full
period benefit of the sales of their products and services during 1998. Revenue
from these clients was $14.6 million and $6.3 million in 1998 and 1997,
respectively. We also added two new clients during 1998, who accounted for $9.1
million of revenue.
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Revenue from the catalog/distributor businesses decreased 63.7% to
$6.2 million in 1998 from $17.0 million in 1997, due to the sale of these
businesses in May 1998.
Gross Profit. Gross profit for CRM services increased 81.9% to $14.0 million
in 1998 from $7.7 million for 1997. Gross margin from CRM services declined to
31.7% for 1998 from 34.2% for 1997. The margin decline was primarily due to an
increase in the mix of lower margin products sold in 1998 versus those sold in
1997.
Gross profit for the catalog/distributor businesses decreased 69.8% to $1.0
million for 1998 from $3.4 million for 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 36.9% to $13.5 million for 1998 from $9.8
million for 1997. These amounts included approximately five months of expenses
associated with the catalog/distributor businesses during 1998 and twelve
months during 1997. As a percentage of revenue, these expenses increased to
26.8% in 1998 from 24.8% in 1997. This increase was primarily due to the
addition of 30 employees hired during 1998 to support the expansion in our CRM
services business.
Interest Income (Expense), Net. We recorded $138,000 of net interest income
in 1998 as compared to net interest expense of $66,000 in 1997. The 1998 amount
was primarily due to interest income derived from outstanding notes related to
the sale of the catalog/distributor businesses and higher average cash
balances. The 1997 amount was primarily due to expenses associated with our
capital leases.
Income Tax Expense (Benefit). We recorded a $1.7 million income tax
provision for 1998 compared to $450,000 for 1997, representing annual effective
tax rates of 40% and 37%, respectively. Our annual effective tax rate for 1998
differs from the federal statutory rate primarily due to state taxes. Our
annual effective tax rate for 1997 differs from the federal statutory rate
primarily due to state taxes and the benefit of the research and development
tax credit.
Comparison of Years Ended December 31, 1997 and 1996
Revenue. Revenue from CRM services increased 81.8% to $22.5 million in 1997
from $12.4 million in 1996. This increase was driven by $3.7 million in
increased revenue from sales of products and services of our existing client as
well as an additional $6.3 million in revenue from the sales of products and
services of three new clients added during 1997.
Revenue from our catalog/distributor businesses increased 16.7% to $17.0
million in 1997 from $14.6 million in 1996.
Gross Profit. Gross profit from CRM services increased 73.0% to $7.7 million
in 1997 from $4.5 million in 1996. Gross margin from CRM services declined to
34.2% in 1997 from 36.0% in 1996. The margin decline was primarily associated
with the addition of three new clients in 1997 whose average gross margin was
26.8%.
Gross profit on our catalog/distributor businesses increased to $3.4 million
in 1997 from $3.2 million in 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 41.3% to $9.8 million in 1997 from $7.0
million in 1996. This increase was due primarily to headcount and
infrastructure growth associated with the addition of new clients and services.
As a percentage of revenue, these expenses declined to 24.8% in 1997 from 25.8%
in 1996.
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Interest Income (Expense), Net. Net interest expense was $66,000 in 1997
compared to $35,000 in 1996. This increase was primarily due to higher
borrowings under capital lease lines.
Income Tax Expense (Benefit). We recorded a $450,000 income tax provision
for 1997 compared to $216,000 for 1996, representing annual effective tax rates
of 37% and 33%, respectively. Our annual effective tax rates for 1997 and 1996
differ from the federal statutory rate primarily due to state taxes and the
benefit of the research and development tax credit.
Selected Quarterly Results of Operations
The following table presents our unaudited quarterly statement of operations
data for each quarter in the seven quarters ended September 30, 1999. This data
has been derived from unaudited financial statements that have been prepared on
the same basis as the audited financial statements and include all adjustments
(consisting of normal recurring adjustments) that we consider necessary for a
fair presentation of such information.
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30,
1998 1998 1998 1998 1999 1999 1999
--------- -------- --------- -------- --------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
CRM services.......... $ 7,748 $10,607 $12,047 $13,810 $12,943 $13,145 $15,947
Catalog/distributor... 4,024 2,141 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total revenue....... 11,772 12,748 12,047 13,810 12,943 13,145 15,947
Cost of revenue:
CRM services.......... 5,284 7,357 7,885 9,670 8,719 8,815 11,403
Catalog/distributor... 3,283 1,852 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total cost of
revenue............ 8,567 9,209 7,885 9,670 8,719 8,815 11,403
Gross profit:
CRM services.......... 2,464 3,250 4,162 4,140 4,224 4,330 4,544
Catalog/distributor... 741 289 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total gross profit.. 3,205 3,539 4,162 4,140 4,224 4,330 4,544
Selling, general and
administrative
expenses............... 2,986 2,930 3,723 3,818 3,950 6,114 8,587
------- ------- ------- ------- ------- ------- -------
Operating income
(loss)................. 219 609 439 322 274 (1,784) (4,043)
Interest income
(expense), net....... (18) 22 66 68 139 146 85
Gain from sale of
catalog/distributor.. -- 2,525 -- -- -- 80 --
------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... 201 3,156 505 390 413 (1,558) (3,958)
Income tax expense
(benefit)............ 80 1,263 202 157 164 (595) (90)
------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ 121 $ 1,893 $ 303 $ 233 $ 249 $ (963) $(3,868)
======= ======= ======= ======= ======= ======= =======
</TABLE>
Our historical revenue has tended to fluctuate based on seasonal buying
patterns in the computer industry. A higher proportion of computers, software,
and contract services tend to be sold in the fourth calendar quarter. As a
result, we have experienced seasonal declines in revenues between the fourth
and first calendar quarters. Our quarterly operating results may continue to
fluctuate in the future based on a number of factors, many of which are beyond
our control. We believe that quarter-to-quarter comparisons of our operating
results are not a good indication of future performance. See "Risk Factors--Our
Future Operating Results May Not Follow Past Trends or Meet Market
Expectations."
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Liquidity and Sources of Capital
Historically, we have funded operations from operating cash flows and net
cash proceeds from private placements of preferred stock. Cash, cash
equivalents and short-term investments were $6.1 million at September 30, 1999.
Working capital at September 30, 1999 was $5.7 million. Our $2.5 million line
of credit agreement with an interest rate of prime plus 1.0% (8.75% at
September 30, 1999) expired in September 1999, and we currently are in the
process of negotiating an extension of this line. No amounts under the line of
credit were outstanding as of September 30, 1999. We have two capital lease
lines outstanding totaling $2.0 million at September 30, 1999, of which
$816,000 is available for future borrowings.
Cash used by operating activities during the nine months ended September 30,
1999 was $1.9 million compared to $1.9 million provided by operations for the
same period in the prior year. The change of $3.8 million was due primarily to
the absolute change in net income of $6.9 million as we earned $2.3 million
during the first nine months of 1998 but lost $4.6 million during the first
nine months of 1999. In addition, we increased our inventories by $1.4 million
in the first nine months of 1999 due to the addition of new clients. This
increase in inventories compares to a decrease of $881,000 for the comparable
period in 1998, primarily due to the sale of the catalog/distributor
businesses. Deferred taxes accounted for $1.0 million of the change in the
period. Changes in other operating assets and liabilities, primarily trade
accounts receivable, accounted for the balance of the decrease in cash used by
operating activities. Cash used by operating activities for the nine months
ended September 30, 1998 included cash used by the catalog/distributor
businesses.
Cash used by investing activities during the nine months ended September 30,
1999 was $1.7 million compared to $1.3 million provided by investing activities
for the same period of the prior year. The decrease was due primarily to
amounts received from the sale of our catalog/distributor businesses in May
1998 and the purchase of short-term investments in the nine months ended
September 30, 1999. The total sales price is to be paid in three installments.
We received the first installment of $2.9 million from the sale in May 1998,
and we received the second installment of $900,000 in May 1999. We expect to
receive the final $800,000 installment in May 2000. Capital expenditures
totaled $1.6 million for the nine months ended September 30, 1999 compared to
$692,000 for the nine months ended September 30, 1998. Capital expenditures
consisted primarily of additional computers and software in both periods. In
addition, we spent $320,000 in the nine months ended September 30, 1999 to
replace our older non-Year 2000 compliant computers and telephone systems.
Cash provided by financing activities during the nine months ended September
30, 1999 was $4.1 million compared to $61,000 for the comparable period of the
prior year. The increase was primarily attributable to the sale of preferred
stock of $13.8 million in February 1999 partially offset by $9.7 million used
to repurchase stock during the same period.
In connection with our Series C and D preferred stock issuances in February
1999, we granted certain stockholders the right to sell shares of our common
stock back to us at $1.64 per share. As of September 30, 1999, stockholders had
exercised rights to sell 5,908,707 shares back to us at an aggregate price of
approximately $9.7 million. Of the total common shares repurchased through
September 30, 1999, a total of 1,497,389 shares (after conversion of 13,221
shares and 1,431,284 shares of Series B and D preferred stock, respectively)
were repurchased (at $1.64 per share) at an amount in excess of the stated
value of the underlying preferred stock. In accordance with Securities and
Exchange Commission (SEC) Staff guidance, this excess amount, $1,941,000, has
been treated as a return to the preferred stockholders and deducted from net
income (loss) on the accompanying statement of operations in order to derive
income (loss) available to common stockholders. The remaining rights to sell
back shares expired on September 30, 1999.
We believe that our cash, cash equivalents and short-term investments at
September 30, 1999, together with expected cash from operations and the net
proceeds from this offering, will be sufficient
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<PAGE>
to meet our liquidity needs for at least the next two years. In the event that
this offering is not completed, we believe that our cash, cash equivalents and
short-term investments, together with available borrowings, will be sufficient
to meet our liquidity needs for at least the next twelve months.
Potential Impact of Inflation
To date, inflation has not had a material impact on our business.
Qualitative and Quantitative Disclosure about Market Risk
We do not use derivative financial instruments and do not have significant
operations subject to fluctuations in foreign currency exchange rates. Our $2.5
million credit facility, which expired in September 1999, had an interest rate
based upon the lender's prime rate plus 1.0%. We currently are negotiating an
extension of this credit facility. As of September 30, 1999, no amounts were
outstanding under this credit facility. An increase in the interest rate on
this credit facility, if successfully renegotiated, would make it more costly
to borrow and may impede our growth strategies.
Year 2000 Compliance
Many existing computer systems and software are coded to accept only two
digit entries in the date code field and, as the century date change occurs,
cannot distinguish the year 2000 from the year 1900. If not corrected, there
could be system failures or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions or
engage in normal business activities. As a result, many companies' software and
computer systems may need to be upgraded or replaced to comply with these "Year
2000" requirements.
Our State of Readiness. We are assessing the impact that the Year 2000
problem may have on our operations and we have identified the following three
areas of our business that may be affected:
Internal Infrastructure. We have implemented a program to evaluate and
address the impact of the Year 2000 problem on our information systems and
non-information systems. Testing of our key production systems was
completed in September 1999. We have partially replaced our computer
information systems. As a result, we believe our systems are substantially
Year 2000 ready. A program to replace potentially non-compliant desktop
software is underway and is expected to be completed in November 1999.
Nevertheless, there can be no assurance that we will not experience
unexpected Year 2000 problems.
Third Party Suppliers and Partners. We use third-party equipment and
software that may or may not be Year 2000 compliant. Consequently, our
ability to address Year 2000 issues is, to a large extent, dependent upon
the Year 2000 readiness of these third parties' hardware and software
products. We have established Year 2000 readiness requirements for newly
acquired products and services and are contacting the third parties from
whom we have purchased any hardware and software products to validate that
such products are Year 2000 compliant. We intend to complete our
assessment, including the collection of Year 2000 readiness statements from
our partners and vendors, of these parties' products by the end of October
1999.
Clients. We have collected preliminary statements of Year 2000 readiness
from each of our clients. Based on these preliminary statements, we believe
our clients' systems are substantially Year 2000 ready. In addition, we are
working with our clients to test data transmission and other integration
processes. If our clients' products or systems are not Year 2000 compliant,
our ability to sell our clients' products and services would be adversely
affected.
The Costs of Addressing Our Year 2000 Issues. To date, we have incurred only
minimal internal costs in connection with identifying and evaluating Year 2000
compliance issues. Our expenses have
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<PAGE>
generally related to the operational costs associated with time spent by our
employees in the evaluation process and Year 2000 compliance in general. In the
second quarter of 1999, we spent $320,000 to replace our older non-Year 2000
compliant computers and telephone systems. We do not expect the total costs of
our Year 2000 compliance efforts to be material. If, however, these costs are
substantially higher than we anticipate, it could have a material adverse
effect on our business.
The Risks Associated with Our Year 2000 Issues. Any failure of our
equipment, software or services to operate properly could require us to incur
unanticipated expenses, which could seriously harm our business. Our failure to
make our Web site, network infrastructure and transaction processing systems
Year 2000 compliant could result in:
. a decrease in our sales;
. an increase in our allocation of resources to address Year 2000
problems without additional revenue commensurate with such
dedication of resources; and
. an increase in litigation costs relating to losses suffered by our
clients and our clients' customers due to Year 2000 problems.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies, third party service providers and others
outside of our control will be Year 2000 compliant. The failure of these
entities to be Year 2000 compliant could result in a systemic failure beyond
our control, such as a prolonged Internet, telecommunications or electrical
failure, which could also prevent us from operating our business, prevent
visitors from accessing Web sites or change the behavior of consumers accessing
Web sites, which could have a material adverse effect on our business.
Our Contingency Plans. Our Year 2000 readiness program includes the periodic
implementation of Year 2000 failure and disaster recovery scenarios designed to
test our ability to conduct business under unexpected conditions, including
power outages, Internet service outages, server or network hardware failure,
date-based data inconsistencies and other Year 2000 contingencies. Based upon
the results of these scenarios, we periodically update our preparedness
practices and policies, including provisions for short-term manual operations,
alternative data receipt and storage methodologies, secure off-site storage of
software and data restoration media, and the establishment of a Year 2000
restoration team. As a result of our scenario development and response
practices, we believe that our Year 2000 failure and disaster recovery plans
are adequate, but not all inclusive, because all contingencies cannot be
reasonably anticipated.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." We are required
to adopt FAS No. 133 for the year ending December 31, 2001. FAS No. 133
establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. Because we currently hold no derivative financial instruments and
do not currently engage in hedging activities, adoption of FAS No. 133 is not
expected to have a material impact on our financial position or results of
operations.
In March 1998, the American Institute of Certified Public Accountants issued
SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." SOP 98-1 requires that entities capitalize certain costs
related to internal use software once certain criteria have been met. We
adopted SOP 98-1 on January 1, 1999. The adoption of SOP 98-1 did not have a
material impact on our financial position or results of operations.
27
<PAGE>
BUSINESS
Introduction
Our CRM services consist of designing and implementing sophisticated sales,
marketing and other customer relationship programs using the Internet and other
communication channels. By integrating technologies, processes and people, we
provide a transparent customer relationship infrastructure behind our clients'
brands. Our solutions are used to increase the frequency and quality of
customer interactions and provide greater opportunities to sell and renew
software subscriptions, support and service contracts, training services,
licenses and upgrades. Rainmaker's services are designed to increase revenue
per customer, strengthen customer loyalty and retention, and improve customer
awareness of our clients' products and services. We provide our services to
software and other technology companies.
Industry Background
Competitive global markets and the increasing acceptance of the Internet as
a medium for customer interaction have led to greater customer demands for
higher levels of service, responsiveness, convenience, personalization and
quality. In response to these pressures, the customer relationship function is
evolving from a back office cost center to a revenue generating strategic
operation. Maintaining quality customer relationships, as much as product
quality and cost, is increasingly becoming an important competitive factor.
Businesses are recognizing the value of improving their customer
relationships to increase revenue and customer loyalty. One indicator of this
heightened interest is the emergence of the CRM industry. AMR Research
estimates that more than $2.3 billion was spent on CRM services in 1998, and
that CRM spending will grow to $16.8 billion by 2003, representing a compounded
annual growth rate of 49%. In spite of these expenditures, many businesses are
not achieving the results they desire. A July 1999 study by Frontline Solutions
indicated that 70%-80% of software and hardware vendors were not satisfied with
their CRM tools. We believe there are several basic reasons why many CRM
efforts are not delivering the desired results.
The Internet and the proliferation of customer data have increased the
frequency and complexity of customer interaction. The rapid growth of the
Internet is changing the way businesses interact with their customers. We
believe that customers' use of the Internet to compare products and transact
business on-line is reducing customer loyalty, intensifying competition,
increasing customer expectations for rapid response and increasing the
frequency and complexity of direct customer interactions. In addition, there
has also been a proliferation of customer data that companies are often unable
to organize or use in a timely or efficient manner. These challenges can be
more acute for software and other technology companies who face short product
life cycles and who often serve sophisticated Internet users.
Many current CRM solutions have inherent limitations. In response to the
increasing complexity of CRM requirements and the expanding availability of
customer data, businesses have invested in various software applications and
services to address discrete aspects of CRM functions. Although these single-
point solutions may be combined in an attempt to develop a comprehensive CRM
program, we believe that this approach may not provide a satisfactory solution
for many businesses for several reasons:
. Most software applications and services do not easily integrate with each
other or existing information systems. As a result, they often do not
present a consistent and complete profile of the customer, which may
sacrifice functionality and limit revenue generating opportunities.
. Many providers of outsourced CRM services structure their compensation
incentives based on activity levels, such as the number of customer e-
mails or telephone calls handled, rather than
28
<PAGE>
the beneficial results those activities achieve. These compensation
structures create incentives to shorten the length and quality of each
customer interaction, which reduces the ability to obtain customer
information and identify sales opportunities.
. Effective CRM solutions require more than just the assembly of technology.
They also require the development and coordination of processes and personnel
throughout an organization and a comprehensive understanding of customer
needs, marketing, data collection and analysis, Web application development
and systems integration.
In-house solutions require a level of specialization that is not consistent
with many businesses' core competencies. To address the limitations of most
commercially available single-point solutions, some companies have built
custom in-house CRM solutions and applications. These solutions typically
require lengthy implementation periods and can be expensive to build and
maintain. Often companies are not able to build successful in-house CRM
solutions because other priorities are more central to their organization's
success. The core competencies of software and other technology companies are
focused on product development and sales and marketing to new customers. As a
result, a number of these companies view outsourcing of CRM functions as a way
to focus their energies on core capabilities while increasing the revenue
potential of their customer base and strengthening customer relationships. We
believe that many companies can benefit from CRM solutions that:
. enable businesses to rapidly deploy comprehensive programs that utilize
the capabilities of the Web and maximize the use of customer data
sources;
. are easy to integrate with existing systems and third-party applications
and enable businesses to adapt their CRM infrastructures to their
continually evolving CRM needs; and
. meet the demanding scalability, reliability and customization
requirements of large installed customer bases and multiple product
offerings.
The Rainmaker Solution
We specialize in providing software and other technology companies with a
comprehensive, outsourced approach to CRM for their installed customer base.
We identify and profile our clients' customers, establish quality interactions
with them, and increase selling opportunities through all stages of the
customer life cycle. Our CRM solutions incorporate the following
distinguishing characteristics:
Comprehensive CRM Solutions. We offer our clients comprehensive CRM
programs that combine technology infrastructure with established processes and
a dedicated staff to deliver frequent personalized contact to our clients'
installed customer bases. We act as a transparent extension of our clients'
sales and marketing organization by designing targeted direct marketing
programs using coordinated Web, e-mail, mail, fax and telephone campaigns. Our
processes are designed to successfully market annual software subscriptions,
service and support contracts, training services, and additional licenses
throughout all points of the customer life cycle. These processes are
complemented by loyalty programs designed to maintain customer satisfaction,
renewal programs to prompt annual repurchases and fulfillment programs.
Integrated Database Management and Reporting. We use our proprietary
database expertise in combination with our sales and marketing programs,
frequent customer profiling, data exchanges and reporting to deliver valuable
customer intelligence to our clients. We utilize applications that share
common access to a master, unified customer record. Our master customer record
provides current data on each customer's product usage, product and service
interests, buying patterns and preferred method of communication. This unified
view of the customer, along with continual customer contact and intelligence
gathering, is key to our CRM services.
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<PAGE>
Expertise in Selected Industries. We offer expertise in designing and
implementing CRM solutions for software and other technology clients through
our understanding of customer buying behavior and industry-specific marketing
strategies. Our industry focus also benefits our clients through reduced
program implementation times and the sharing of best practices from our
collective experience.
Pay-for-Performance Contracts. We provide our CRM services under pay-for-
performance arrangements in which our revenue is based on our ability to sell
our clients' products and services to their customers. We believe that this
business model better aligns our activities with the goals of our clients.
Under our pay-for-performance model, our staff is encouraged to develop
stronger relationships with our clients' customers, which lead to a better
understanding of a customer's need and increase our ability to maximize revenue
per customer.
The Rainmaker Strategy
Our objective is to become the leader in providing CRM services to
technology companies. The following are the key elements of our strategy:
. Further Penetrate Our Existing Client Base. We intend to use our
experience to increase the amount, scope and sophistication of services
provided to existing clients, many of whom currently outsource only a
small portion of their CRM functions.
. Sign New Software Industry Clients. We will continue to emphasize our
software industry focus and seek to expand the scope of this expertise.
We believe that our expertise in providing CRM services to the installed
customer base of software publishers enhances our ability to help
additional software companies use CRM services to gain competitive
advantages. Our focus enables us to employ industry experts, pursue
targeted sales and marketing campaigns, develop effective marketing and
customer retention programs and capitalize on referrals from existing
clients.
. Create Additional Services & Delivery Models. We intend to develop and
offer CRM services beyond our current outsourcing model, such as CRM
consulting services and CRM application rental through an application
service provider model. We believe that the continued evolution of our
CRM services will strengthen our competitive position.
. Develop Our International Presence. We currently provide our CRM services
to our clients' installed customer bases located principally in the
United States and with a small number located in Canada. We intend to
broaden our capabilities to serve additional international markets to
more fully address our clients' installed customer bases, many of which
we believe have significant international needs for CRM. We believe that
the continued growth and acceptance of the Internet, combined with the
proliferation of increasingly cheap, high-bandwidth telecommunication
infrastructures worldwide, will facilitate our ability to provide Web-
based and other CRM programs in international markets.
. Extend Our Solutions Into Additional Technology Markets. In addition to
further penetrating the software industry, we intend to broaden our
market to include warranty and service contracts for leading hardware and
other technology companies. These companies typically have large
installed customer bases and market multiple products with frequent
enhancements and after-market products and services.
Services
Our CRM services combine a technology infrastructure, established processes,
and customer-oriented personnel to deliver a comprehensive solution that is
designed to derive increased revenue from our clients' customer bases. Our
services are designed to effectively profile a client's customer base and then
market software subscriptions, service and support contracts, training
services, licenses and upgrades. We implement these services using a variety of
communication channels including
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Web site and e-mail interaction, personal assistance and direct marketing. The
objective of our CRM services is to foster deeper, richer customer
relationships that strengthen customer loyalty to our clients. We believe that
the more information we obtain concerning a customer, the more likely that we
will be able to market additional products and services that meet the needs of
the customer. Our CRM services can be broadly categorized as follows:
Client Integration Services. Once a new client has signed a contract, we
establish a dedicated Client Integration team to understand the client's
business processes and to integrate such processes with our services and
solutions. Our Client Integration team works closely with our client's product
management and marketing executives to ensure a coordinated effort and to
expedite information exchange throughout the entire integration process. This
integration phase typically requires up to four months from contract signing,
and generally entails the following steps:
. integrating and mapping the client's different databases into a unified
view of the customer profile, which resides in our database;
. defining the underlying business rules of the client which affect systems
and procedures, including sales operations, channel coordination,
reporting, lead routing, and post-sale information exchange;
. developing a detailed marketing plan to increase the revenue potential of
the client's installed customer base and ensure consistency with existing
marketing programs;
. building Web-based capabilities and hosting new Web functionality that
transparently integrates with the client's Web site; and
. forming our dedicated sales, marketing and support teams and training
them on the client's products and business practices.
Customer Revenue Programs. Upon completion of client integration, we
initiate a variety of sales and marketing programs designed to foster customer
loyalty and enhance knowledge about the customer through frequent interaction.
These programs focus on increasing sales to our clients' installed customer
base. We implement these programs in a continuous cycle throughout the life of
the contract based on the individual buying patterns of each customer, as shown
in the graphic below.
[Graphic appears here, with the following descriptions:
Our marketing, sales and client interaction programs are focused on four stages
of the customer life cycle to grow the customer base and increase the lifetime
value of each customer.
1) Attachment programs focus on the sale of software subscriptions and service
contracts immediately after the initial sale.
2) Search for and Rescue of unregistered or inactive customers further
increases the lifetime value of customers.
3) Loyalty programs focus on building brand and product loyalty to ensure the
customer is well informed and well served.
4) Renewal programs are designed to increase contract renewal rates.
. Attachment Programs. Attachment programs focus on the sale of additional
subscriptions and service contracts immediately after the initial sale,
which often represents the time of greatest customer interest in a
client's product. Through customer profiling and monitoring, we combine
targeted marketing initiatives and incentives to improve attachment rates
for software subscriptions and service contracts. Successful attachment
programs generate incremental revenue streams while establishing a
stronger link with customers.
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. Search and Rescue Programs. Search and Rescue programs use proactive
communications to enhance the accuracy, completeness and value of our
clients' databases of installed customers. These programs locate and
pursue inactive or unregistered customers from our clients' databases. By
pursuing and profiling customers, we can then reestablish and broaden
customer relationships through cross-selling and special promotions.
. Loyalty Programs. Loyalty programs are designed to measure and enhance
customer satisfaction throughout the customer life cycle. Loyalty program
initiatives include periodically distributing customized newsletters
containing helpful product information and customer satisfaction surveys
to update and refine customer profiles in advance of renewal dates.
. Renewal Programs. Renewal programs involve repetitive sales processes and
automated marketing activities that are designed to increase contract
renewal rates and to create a reliable and predictable stream of revenue.
We contact the customer in advance of and after contract expiration, and
appropriately escalate the frequency of customer interaction. In
addition, we collect customer responses and provide statistical feedback
to our clients.
Implementation of Revenue Programs. We employ a variety of methods to
communicate with our clients' installed customer base, foster closer
relationships with those customers and generate additional sales. These methods
include the following:
. Web Site and E-mail Interaction. We create and manage online customer
interaction by developing and hosting client-branded interactive Web
pages and implementing frequent e-mail marketing campaigns. These efforts
allow us to distribute helpful information to customers such as the
availability of product enhancements and special promotions, and answers
to frequently asked questions. Through these Web pages, customers can
complete, confirm and track orders online and download trial software and
associated product literature. E-mail campaigns include the distribution
of messages that link to personalized Web pages, and electronic
newsletters that alert customers of product enhancements, special
promotions or upcoming renewal dates.
. Personal Assistance and Sales. We manage inbound and outbound calling
programs. We create sophisticated outbound calling programs that use our
databases to implement our sales and marketing initiatives. We provide
sales assistance to customers who click on a Web-call button when using
one of our client-branded Web sites or who call a published 800-number.
Our client teams are specifically trained to answer questions, provide
product information, pursue cross selling opportunities and execute
orders.
. Direct Marketing. We create and implement frequent direct marketing
campaigns using fax and postal distribution. These campaigns provide
another way to alert customers of product enhancements, special
promotions and renewal opportunities and to enhance our customer database
with survey information.
Fulfillment Services. We maintain a selected inventory of our clients'
products and associated documentation and packaging. We also produce electronic
licenses for many clients. Orders are typically processed on the same day they
are received, and non-electronically delivered items are sent by the customer's
preferred shipping method. Customers are invoiced and payments are collected by
us.
Customer Intelligence and Reporting Services. Our frequent one-on-one
interaction with the customer provides us with customer intelligence including
levels of overall satisfaction with our clients' products, their interest in
future product releases, additional functionality needs, and interest in other
competitive product offerings. We share this customer intelligence with our
clients, allowing them to better tailor future releases to meet customer
demand, while increasing their overall knowledge of the market, technology
shifts and competitive offerings. We also provide daily, weekly and monthly
revenue reports to our clients that demonstrate the financial contributions of
our programs and help clients measure sales progress and build their revenue
forecasts.
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Our Clients
Our clients consist of software and other technology companies with
significant installed customer bases and products that benefit from improved
software subscription, maintenance or service contract marketing programs. Our
current clients are listed below:
<TABLE>
<CAPTION>
Client Name Client Since Type of Business
----------- ------------ ----------------
<S> <C> <C>
The Santa Cruz Operation, Inc. January 1995 Software
Sun Microsystems, Inc. March 1997 Hardware/Software
Network Computing Devices,
Inc. May 1997 Hardware
FTP Software, Inc. July 1997 Software
Novell, Inc. April 1998 Software
OpenConnect Systems, Incorporated April 1998 Software
Symantec Corporation January 1999 Software
Sybase, Inc. March 1999 Software
Borland, a division of Inprise Corporation April 1999 Software
Lotus Development Corporation,
a subsidiary of IBM May 1999 Software
Puma Technology, Inc. July 1999 Software
Intuit Inc. September 1999 Software
Parametric Technology Corporation October 1999 Software
</TABLE>
In 1997, sales to customers of SCO, FTP and Sun accounted for approximately
72%, 10% and 12%, respectively, of our CRM services revenue. In 1998, sales to
customers of SCO, FTP and Novell accounted for approximately 46%, 21% and 16%,
respectively, of our CRM services revenue. For the nine months ended September
30, 1999, sales to customers of SCO, FTP and Sybase accounted for approximately
47%, 13% and 13%, respectively, of our CRM services revenue. Since the
acquisition of FTP by NetManage, Inc. in August 1998, our revenue from FTP has
decreased, is expected to continue to decrease and could eventually be
eliminated.
Customer Case Studies
The following examples illustrate how some clients are using our services
and solutions to manage their customer relationships. There can be no assurance
that new or existing clients will achieve any or all of the benefits described
below.
Sybase, Inc.
Sybase, Inc. (Nasdaq: SYBS), a leader in enterprise data management and
application development, focuses on delivering end-to-end solutions for mobile
and embedded computing, data warehousing, and Web computing environments.
Challenge: Sybase wanted to quickly introduce and market a new product,
PowerBuilder Web Deployment Kit (WDK), to its installed customer base.
Solution: We proposed and implemented a Web-based "Try-and-Buy Program"
within 48 hours of receiving approval from Sybase. We designed, established and
hosted a client-branded Web site linked to Sybase's corporate site. This Web
site contained PowerBuilder WDK product information and a trial version which
customers could download once key profile data was provided. To drive customers
to this Web site, we designed and sent an e-mail promoting PowerBuilder WDK to
Sybase customers that included a link to our newly designed Web site. In
addition, we promoted the PowerBuilder WDK product and Web site in outbound
phone calls to selected Sybase customers.
Results: Thousands of trial versions of PowerBuilder WDK have been
downloaded since June 15, 1999 by customers who provided us with customer
profile data. Using this data, we follow up on customer reaction to, and
interest in, this product, sell PowerBuilder WDK subscriptions, and report
customer feedback to Sybase.
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The Santa Cruz Operation, Inc.
SCO (Nasdaq: SCOC) is a global leader in business system software for
network computing. By combining UNIX(R) systems with Intel processor-based
servers, SCO has become the leading provider of UNIX server operating systems.
Challenge: SCO sought to increase their customer purchase and renewal rate
for software maintenance programs.
Solution: In 1995, SCO engaged us to create a new software maintenance
subscription program to attract new purchasers, improve renewal rates and build
closer ties with its installed customer base. To accomplish this, we worked
with SCO management and their channel partners to create a robust subscription
offering including upgrades, monthly e-newsletters, and CD-based software
libraries. We marketed this program through e-mail and fax distribution, a
client-branded Web site that we created and maintained and worked with channel
partners at the point-of-sale. Throughout this ongoing program, we catalog and
report customer trends and responses, refine and populate SCO's customer
databases and automatically alert customers to renewal dates for the extension
of their maintenance contracts.
Results: Since working with us, SCO has significantly increased the number
of maintenance subscription customers and renewal rates, enhanced its knowledge
of these customers and streamlined their ongoing product offering. On the basis
of this performance, SCO has increased its use of our CRM services.
Novell, Inc.
Novell, Inc (Nasdaq: NOVL) is the world's leading provider of directory-
enabled networking software. Novell solutions give businesses control of their
private networks and the Internet, simplifying the management of user access
and identity. Novell's worldwide channel, consulting, developer, education and
technical support programs are the most extensive in the networking computing
industry.
Challenge: Novell sought to gain additional license, upgrade and maintenance
fees from a sizeable portion of its customer base who were not eligible for its
high volume licensing programs.
Solution: We worked with Novell's salesforce and channel partners to create
and implement a subscription offering targeting this large customer segment.
Specifically, we created an upgrade subscription program and implemented a
client-branded Web site for end users and channel partners to identify,
purchase and confirm purchases online. As part of the subscription offering, we
created an electronically distributed newsletter offering insights into
upgrades and enhancements and provided direct links to Novell technical support
sites. Also, in advance of launching the subscription offering, we updated and
refined Novell's customer database to enhance results from our marketing
effort.
Results: We marketed the subscription offering through hundreds of thousands
of marketing contacts, in addition to placing an average of 30,000 outbound
calls per quarter. We also promoted the subscription offering through our
client-branded Web site and worked with Novell's channel partners to market
subscriptions to customers. As a result, Novell has achieved higher
subscription sales than originally forecasted. In addition, we believe that
Novell significantly heightened customer awareness of its products and re-
engaged a sizable portion of its customer base.
Sales and Marketing
We market our services to software and other technology companies through a
direct sales force. Our direct sales professionals typically have significant
technology sales experience. As of September 30, 1999, we had 11 sales and
marketing professionals who were responsible for
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developing new clients as well as new opportunities within existing clients. We
have significantly expanded our direct sales force in the past year and intend
to continue this expansion to broaden our sales and marketing efforts.
Our marketing efforts typically involve sales cycles of six to nine months
followed by an integration cycle of up to four months due to the significant
strategic implications associated with outsourcing CRM solutions. Throughout
the sales cycle, our direct sales professionals maintain frequent contact with
senior management of a potential client. The typical sales cycle involves the
following primary stages:
. prospecting, qualifying and opportunity identification;
. conferring with the client, fine-tuning recommendations, developing
proposals; and
. developing business and revenue plans and contract signing.
Corporate marketing efforts promote client growth and acquisition by
creating strategically focused programs that drive understanding and belief in
our CRM vision, create preference for our products and services and build the
Rainmaker brand. These programs consist of customized direct marketing
activities using e-mail, Web, presentations and printed literature targeted at
the senior management level of prospective clients.
Service and Technology Development
We set a high priority on developing new service offerings for our clients
and their installed customer bases. Our goal is to develop new offerings that
extend our current capabilities into a series of services that can be rapidly
sold and delivered to multiple clients and customer bases. Service development
cycles begin when an individual or team receives or conceives an idea through
interaction with prospective or existing clients, customers and existing
systems. Ideas are documented and presented to an evaluation committee who in
turn filters and prioritizes these ideas.
After new offerings are approved, projects are assigned to teams comprised
of experienced business and technical professionals for rapid prototyping and
development. These teams, led by product or project managers, are responsible
for developing the design, coding, production, and testing of new offerings, as
well as coordinating the development of pricing methodologies, product life
cycle plans, documentation, marketing materials, training and rollout plans.
Upon completion of testing, services are rolled out initially to one client or
a select customer segment, or in the case of entirely new services, interested
clients previously identified by client development, client relations or
product management groups.
Competition
The market for CRM solutions is intensely competitive and subject to rapid
change. However, we believe that no single competitor has amassed the full
complement of integrated CRM services or software products for our targeted
markets. In addition to the competitors listed below, we face competition from
internal CRM departments of current and potential clients. Our competitors
approach CRM from a variety of different strategic and pricing models
including:
Custom-built and tailored point solutions. Comprehensive system integrators,
such as Andersen Consulting and Sapient Corp. implement either in-house CRM
systems incorporating point solutions from companies, such as Siebel Systems,
Inc., E.piphany, Inc., Pivotal Corporation, Silknet Software, Inc., Clarify,
Inc. and Kana Communications, Inc., or custom built solutions tailored to a
customer's needs.
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E-commerce solutions providers. E-commerce solutions providers, including
Razorfish Inc., Scient Corp. and Viant Corp., design and implement customized
e-commerce Web sites addressing customer segmentation, online customer
behavior, the design and creation of positive user experiences, customer
information capture and analyses, and effective online customer service.
Outsource providers of individual types of customer interaction. A variety
of businesses offer different components of customer interaction management
including data and Web-hosting services from Exodus Communications, Inc. and
USinternetworking, Inc., one-stop Web transaction and fulfillment solutions
from CyberSource Corp., telesales-based marketing campaign management from
Harte-Hanks, Inc. and Sitel Corp. and fulfillment services from Modus Media
International, Inc.
The principal competitive factors affecting our market include the return on
investment from the implementation of the service or solution, and the breadth,
performance, scalability and reliability of the service and solution once
implemented. Although we believe that our pay-for-performance model, ease of
integration and comprehensive service offering currently competes favorably
with respect to these factors, our market is relatively new and evolving
rapidly.
Intellectual Property and Proprietary Rights
We protect our intellectual property through a combination of trademark,
service mark, trade name and copyright protection, trade secret protection and
confidentiality agreements with our employees and independent contractors, and
have procedures to control access to and distribution of our technology,
documentation and other proprietary information and the proprietary information
of our clients. Effective trade name, trademark, service mark, copyright and
trade secret protection may not be available in every country in which our
services and products are made available on-line. The steps we take to protect
our proprietary rights may not be adequate and third parties may infringe or
misappropriate our copyrights, trade names, trademarks, service marks and
similar proprietary rights. In addition, other parties may assert claims of
infringement of intellectual property or other proprietary rights against us.
The legal status of many aspects of intellectual property on the Internet is
currently uncertain. We have recently applied for registration of the service
mark "Rainmaker Systems" in the United States, but we presently have no
applications pending in foreign countries for this or any other trademark or
service mark.
Government Regulation
We are subject, both directly and indirectly, to various laws and
governmental regulations relating to our business. The Internet is rapidly
evolving and there are few laws or regulations directly applicable to online
commerce. Due to the increasing popularity and use of the Internet,
governmental authorities in the United States and abroad may adopt laws and
regulations to govern Internet activities. Laws with respect to online commerce
may cover issues such as pricing, distribution and characteristics and quality
of products and services. Laws affecting the Internet may also cover content,
copyrights, libel, and personal privacy. Any new legislation or regulation or
the application of existing laws and regulations to the Internet could have a
material adverse effect on our business.
Although our online transmissions currently originate in California, the
governments of other states or foreign countries might attempt to regulate our
transmissions or levy sales or other taxes relating to our activities. As our
services are available over the Internet virtually anywhere in the world,
multiple jurisdictions may claim that we are required to qualify to do business
as a foreign corporation in each of those jurisdictions. Our failure to qualify
as a foreign corporation in a jurisdiction where we are required to do so could
subject us to taxes and penalties for the failure to qualify. It is possible
that state and foreign governments might also attempt to regulate our
transmissions of content on our Web site or prosecute us for violations of
their laws. We cannot assure you that state or foreign governments will not
charge us with violations of local laws or that we might not unintentionally
violate these laws in the future.
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A number of government authorities are increasingly focusing on online
privacy issues and the use of personal information. Our business could be
adversely affected if new regulations regarding the use of personal information
are introduced or if government authorities choose to investigate our privacy
practices. In addition, the European Union recently adopted a directive
addressing data privacy that may limit the collection and use of some
information regarding Internet users. This directive may limit our ability to
target customers or collect and use information in some European countries.
Our business is also subject to regulation in connection with our
telemarketing activities. The FTC's telemarketing sales rules prohibit
misrepresentations of the cost, terms, restrictions, performance or duration of
products or services offered by telephone solicitation and specifically
addresses other perceived telemarketing abuses in the offering of prizes.
Additionally, the FTC's rules limit the hours during which telemarketers may
call consumers. The federal Telephone Consumer Protection Act of 1991 contains
other restrictions on telemarketers, including a prohibition on the use of
automated telephone dialing equipment to call certain telephone numbers. A
number of states also regulate telemarketing and some states have enacted
restrictions similar to these federal laws. The failure to comply with
applicable statutes and regulations could have a material adverse effect on our
business. There can be no assurance that additional federal or state
legislation, or changes in regulatory implementation, would not limit our
activities in the future or significantly increase the cost of regulatory
compliance.
Employees
As of September 30, 1999, we employed 212 persons. Our 120 service delivery
personnel are responsible for promoting and selling our clients' products and
building relationships with our clients' customers. Our 11 sales and marketing
employees are responsible for promoting our services to new and existing
clients. We also have 31 product development personnel who develop the
computer, Internet, Web and telecommunications infrastructure that provides the
foundation for our service offerings. Our remaining 50 employees are in the
finance, operations and human resources departments. None of our employees is
represented by a labor union or is subject to a collective bargaining
agreement, nor have we experienced any work stoppage. We consider our
relationships with our employees to be good.
Properties
Our facility is located in one building in Scotts Valley, California. The
space is covered by leases which expire between February 2002 and December 2004
and cover approximately 69,000 square feet. We believe that this facility is
adequate for our current needs.
Legal Proceedings
We currently are not a party to any material legal proceedings and are not
aware of any pending or threatened litigation that would have a material
adverse effect on us or our business.
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MANAGEMENT
Executive Officers and Directors
The following table provides certain information with respect to our
directors, executive officers and certain key employees:
<TABLE>
<CAPTION>
Name Age Position
---- --- ------------------------------------------------------------
<S> <C> <C>
Michael Silton.......... 35 Chairman of the Board, President and Chief Executive Officer
Martin Hernandez........ 42 Chief Financial Officer and Secretary
Janice Wissler.......... 53 Executive Vice President, Worldwide Sales and Marketing
Robert Mason............ 43 Senior Vice President, Service Delivery
Michael Tilson.......... 47 Senior Vice President, Technology Development and
Information Systems
Frank Orasin............ 51 Vice President, Finance
Randy Lowe.............. 41 Vice President, Sales
Richard Kiely, Ph.D. ... 45 Vice President and General Manager, Europe
Richard Marotta......... 40 Vice President, Information Technology
Tina Lally.............. 28 Vice President, Marketing Service Delivery
Winifred "Wink" Grelis.. 51 Vice President, Corporate Marketing
Alok Mohan(1)........... 51 Director
Robert Leff(2).......... 52 Director
Peter Silton(1)(2)...... 67 Director
Andrew Sheehan(1)(2).... 41 Director
</TABLE>
- --------
(1) Member of the audit committee.
(2) Member of the compensation committee.
Michael Silton has served as President and Chief Executive Officer since
October 1997 and our Chairman of the Board since inception. In 1991, he founded
Rainmaker's former business UniDirect, which specialized in the direct
marketing and sales of business software.
Martin Hernandez has served as Secretary and Chief Financial Officer since
October 1999. From May 1994 to October 1999, Mr. Hernandez held senior
positions at Silicon Graphics, Inc., most recently as Director, Finance-
Worldwide Sales and Marketing, and Director, Finance and Operations for the
company's Cosmo Software subsidiary. From April 1991 to March 1994, he served
as Director, Corporate Planning/Operations and Investor Relations for Meris
Laboratories, Inc. From October 1988 to April 1991, Mr. Hernandez was a Senior
Accountant with Price Waterhouse.
Janice Wissler has served as Executive Vice President, Worldwide Sales and
Marketing since May 1999. From July 1998 to May 1999, Ms. Wissler served as the
Executive Vice President of Global PC, a start-up computer hardware company.
From June 1994 to July 1998, she served as General Manager, Vice President,
Worldwide Sales and Marketing for Traveling Software. Prior to joining
Traveling Software, Ms. Wissler held senior positions in several software
companies, including Vice President, International for Claris, President and
Chief Executive Officer of Intelligent Graphics Corp., Director of Marketing
Services at WordStar International and Director of Marketing and Sales for ITT
Publishing.
Robert Mason has served as Senior Vice President, Service Delivery since
April 1999 and was the Chief Financial Officer and Secretary from May 1995 to
April 1999. From May 1993 to May 1995, Mr. Mason served as the Chief Financial
Officer, Chief Operating Officer and Secretary of General Micro Systems, Inc.,
a computer manufacturer. From May 1980 to May 1993, he held several positions
at MAI Systems, an enterprise solution provider, most recently as the Director
of Finance and Administration for North American sales. Mr. Mason is a CPA and
a Certified Internal Auditor.
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Michael Tilson has served as Senior Vice President, Technology Development
and Information Systems since September 1999. From March 1997 to August 1999,
Mr. Tilson held executive positions at Decisive Technology Corporation
including Senior Vice President, Business Development from March 1999 to August
1999, Chief Executive Officer from August 1998 to February 1999, and Vice
President and General Manager, Service Division from March 1997 to July 1998.
From August 1995 to February 1997, Mr. Tilson was Senior Vice President and
Chief Information Officer for SCO. He also served as Senior Vice President of
Services at SCO from August 1993 to August 1995.
Frank Orasin has served as Vice President, Finance since June 1999. Mr.
Orasin also served as our Secretary from June to October 1999 and as a finance
and information technology consultant for us from April 1999 to June 1999. From
June 1996 to March 1999, Mr. Orasin served as Vice President of Finance,
Information Technology and Legal for Hitachi PC Corporation. From October 1995
to March 1996, he served as the Chief Financial Officer and Vice President,
Finance of Berkeley Software Design, a software company. From November 1993 to
September 1995, Mr. Orasin served as Director of Finance of SCO, where he
managed merger and acquisition activities.
Randy Lowe has served as Vice President, Sales since February 1995. From
October 1993 to February 1995, Mr. Lowe served as the General Manager of
Distribution at Rainmaker. From August 1992 to September 1993, Mr. Lowe was
employed at Specialix, a manufacturer of UNIX connectivity hardware.
Richard Kiely, Ph.D. has served as Vice President and General Manager,
Europe since September 1999. From April 1996 to September 1999, Dr. Kiely
served as General Manager Europe for Traveling Software. From December 1994 to
March 1996, he was Director, Sales Marketing and Operations for Hi Resolution,
a UK-based networking software company. From April 1991 to May 1994, Dr. Kiely
served as Managing Director for Claris International.
Richard Marotta has served as Vice President, Information Technology since
July 1995. From April 1984 to August 1997, Mr. Marotta also served as the
President of Your Way Automation, a private company which specialized in
distribution systems for commercial environments.
Tina Lally has served as Vice President, Marketing Service Delivery since
April 1999. Since joining Rainmaker in March 1994 as a member of our sales
team, Ms. Lally has held various positions, including Director of Creative
Services from February 1998 to April 1999.
Winifred "Wink" Grelis has served as Vice President, Corporate Marketing
since July 1999. From January 1995 to September 1998, she served as Senior
Director of Corporate Communications for Adobe Systems, Inc., a graphic design
and publishing software company. From March 1994 to January 1995, Ms. Grelis
served as the Director of Market Services for The Nasdaq Stock Market, Inc.
From September 1992 to March 1994, Ms. Grelis served as the Director of
Customer Marketing of EO, Inc., a hardware and software company.
Alok Mohan has served as a director of Rainmaker since 1996. Mr. Mohan has
been serving as Chairman of SCO, a software company, since April 1998. From
July 1995 to April 1998, Mr. Mohan served as the Chief Executive Officer of
SCO. Prior to that, Mr. Mohan served as Senior Vice President, Operations and
Chief Financial Officer of SCO. Prior to joining SCO, Mr. Mohan was employed
with NCR Corporation, a business software and services company, where he served
as Vice President and General Manager of the Workstation Products Division,
from January 1990 until July 1993 before assuming the position of Vice
President of Strategic Planning and Controller from July 1993 to May 1994.
Robert Leff has served as a director since 1996. Mr. Leff also serves as a
strategic and financial consultant to growth stage companies in the personal
computer industry. From 1980 to 1985, Mr. Leff served as President and Chief
Executive Officer and from 1985 to 1994 he served as Co-Chairman of
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Merisel, Inc., a wholesale distributor of computer products, which he co-
founded. Mr. Leff serves on the board of directors of PC Service Source, a
service logistics company, and AudioHighway.com, Inc., an Internet-related
company.
Peter Silton has served as a director since 1996. From 1969 to 1987, Mr.
Silton served as President of Silton Apparel Management Systems, a company
which specialized in systems, software and computer operations for the apparel
industry which he founded. Mr. Silton is the father of Michael Silton, our
Chairman, President and Chief Executive Officer.
Andrew Sheehan has served as a director of Rainmaker since February 1999.
Since April 1998, Mr. Sheehan has been employed by and is a managing member of
the general partner of ABS Capital Partners III, L.P. From 1985 to 1998, Mr.
Sheehan held various positions at BT Alex. Brown, most recently as Managing
Director.
Board Composition
Our board of directors currently has five members. In accordance with the
terms of our certificate of incorporation to be filed prior to this offering in
connection with our reincorporation in Delaware, the board of directors will be
divided into three classes, each serving staggered three-year terms: Class I,
whose initial term will expire at the annual meeting of stockholders held in
2000; Class II, whose initial term will expire at the annual meeting of
stockholders in 2001; and Class III, whose initial term will expire at the
annual meeting of stockholders in 2002. As a result, only one class of
directors will be elected at each annual meeting of our stockholders, with the
other classes continuing for the remainder of their respective terms. Michael
Silton and Robert Leff have been designated as Class I directors; Alok Mohan
and Peter Silton have been designated as Class II directors; and Andrew Sheehan
has been designated as a Class III director. These provisions in our
certificate of incorporation may have the effect of delaying or preventing
changes in control or management of Rainmaker. See "Description of Capital
Stock."
Committees of the Board
The board of directors has established two standing committees: the audit
committee and the compensation committee. The audit committee consists of
Andrew Sheehan, Alok Mohan and Peter Silton and recommends the appointment of
independent public accountants for the annual audit of our financial statements
to the board of directors. The audit committee reviews the annual audit and our
accounting and financial policies in general. The audit committee also reviews
management's procedures and policies with respect to our internal accounting
controls.
The compensation committee consists of Andrew Sheehan, Robert Leff and Peter
Silton and reviews and approves salaries, benefits and bonuses for the Chief
Executive Officer and Chief Financial Officer. It reviews and recommends to the
board of directors on matters relating to employee compensation and benefit
plans. The compensation committee also administers our stock plans.
Compensation Committee Interlocks and Insider Participation
Prior to the formation of our compensation committee in May 1999, all
decisions relating to compensation of our executive officers were made by the
board of directors.
On February 12, 1999, ABS Capital Partners III, L.P., purchased 7,926,829
shares of Series C preferred stock and currently holds more than five percent
of our outstanding stock. Andrew Sheehan is a managing member of the general
partner of ABS Capital Partners III, L.P.
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In March 1999, we repurchased at a price of $1.64 per share:
. 2,033,222 shares from Michael Silton, our Chief Executive Officer and
son of Peter Silton;
. 150,000 shares of common stock from Peter Silton;
. 58,800 shares from Petra Silton, a daughter of Peter Silton;
. 30,000 shares from Triana Silton, a daughter of Peter Silton; and
. 8,000 shares from Peter Silton, Trustee of the Anthony and Deborah
Romain Irrevocable Trust.
In December 1996 and January 1997, we loaned approximately $98,200 to
Michael Silton, the son of Peter Silton, for relocation expenses which was
payable without interest. In June 1998, we forgave the loan amount and paid Mr.
Silton an additional $85,900 to account for the income tax liability associated
with the loan forgiveness.
None of our executive officers serves as a member of the board of directors
or compensation committee of any entity that has one or more of its executive
officers serving as a member of our board of directors or compensation
committee. No current member of our compensation committee has ever been an
officer or employee of Rainmaker.
Director Compensation
Robert Leff was granted options to purchase 400,000 and 10,000 shares of
common stock at an exercise price of $0.315 and $0.435 per share in 1996 and
1998, respectively. Alok Mohan was granted options to purchase 200,000, 10,000
and 30,000 shares of common stock at an exercise price of $0.315, $0.435 and
$0.50 per share in November 1996, September 1998 and December 1998,
respectively. Peter Silton was granted options to purchase 49,000 and 10,000
shares of common stock at an exercise price of $0.06 and $0.435 per share in
August 1995 and September 1998, respectively. Our directors do not receive cash
compensation for their services on the board. Alok Mohan and Peter Silton
provide consulting services to us for which they are paid $1,500 and $2,500 per
month, respectively. Under our 1999 Stock Incentive Plan, each person who first
becomes a non-employee board member after this offering will receive an option
grant for 10,000 shares of common stock on the date such individual joins the
board. In addition, on the date of each annual stockholders meeting held after
the effective date of this offering, each non-employee board member who
continues to serve as a non-employee board member, including each of our
current non-employee board members, will automatically be granted an option to
purchase 4,000 shares of common stock, provided such individual has served on
the board for at least six months.
41
<PAGE>
Executive Compensation
Summary Compensation Information
The following table summarizes the compensation earned by, or paid to, our
Chief Executive Officer and our four other most highly compensated executive
officers, who received compensation in excess of $100,000 in 1998 (the "Named
Executive Officers"). The compensation table excludes other annual compensation
in the form of perquisites and other personal benefits that constitute the
lesser of $50,000 or 10% of the total annual salary and bonus earned by each of
the Named Executive Officers in 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
Annual ------------
Compensation Securities
----------------- Underlying All Other
Name and Principal Position Salary Bonus Options Compensation
- --------------------------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Michael Silton.................. $244,720 $106,742 -- $194,691(1)
Chairman, President and
Chief Executive Officer
Robert Mason(2)................. 195,010 59,492 20,100 127,134(3)
Senior Vice President, Service
Delivery
Chris Sterbenc(4)............... 115,648 82,962 10,000 2,237(5)
Vice President, Sales Service
Delivery
Randy Lowe...................... 146,786 24,250 10,000 534(5)
Vice President, Sales
Richard Marotta................. 153,750 11,779 160,000 --
Vice President, Information
Technology
</TABLE>
- --------
(1) Includes a relocation loan of $98,191 which was forgiven and $85,918 to
account for the income tax liability associated with the loan forgiveness,
$8,893 of life insurance premiums paid by us and $1,689 of 401(k) matching
contributions paid by us.
(2) Served as Chief Financial Officer and Secretary in 1998.
(3) Includes a relocation loan of $67,804 which was forgiven and $59,330 to
account for the income tax liability associated with the loan forgiveness.
(4) No longer an employee of Rainmaker.
(5) Represents 401(k) matching contributions paid by us.
42
<PAGE>
Option Grants
The following table sets forth summary information concerning individual
grants of stock options made to the Named Executive Officers in 1998.
Option Grants in 1998
<TABLE>
<CAPTION>
Potential Realizable
Individual Grants Value at Assumed
--------------------------------------------- Annual Rates of
Numbers of Percentage of Stock Price
Securities Total Options Appreciation for
Underlying Granted to Exercise Option Term
Options Employees in Price Per Expiration --------------------
Name Granted Fiscal Year Share Date 5% 10%
- ---- ---------- ------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael Silton.......... -- -- -- -- -- --
Robert Mason............ 20,100 2% $0.44 9/26/08 $ 5,562 $ 14,095
Chris Sterbenc(1)....... 10,000 1 0.44 4/1/99 2,767 7,012
Randy Lowe.............. 10,000 1 0.44 9/26/08 2,767 7,012
Richard Marotta......... 160,000 14 0.44 2/4/08 44,274 112,199
</TABLE>
- --------
(1) No longer an employee of Rainmaker.
Each option listed in the table above was granted under our 1998 Stock
Option/Stock Issuance Plan. The options shown in this table vest as follows:
. 25% upon the completion of one year of employment from the date of
grant, and
. 2.1% upon the completion of each month of employment thereafter such
that after the next 36 months of employment all options will have
vested.
To the extent not already vested, all of these options will become vested in
the event of a merger in which more than 50% of our outstanding securities are
transferred to persons different from those persons who are our stockholders
prior to the merger or upon the sale of substantially all our assets in
complete liquidation or dissolution. This acceleration feature does not apply
in the event that the options are assumed by the successor corporation in the
merger or are replaced with a cash incentive program.
The potential realizable value is calculated based on the ten year term of
the option at its time of grant. It is calculated based on assumed annualized
rates of stock price appreciation from the exercise price at the date of grant
of 5% and 10% (compounded annually) over the full term of the grant with
appreciation determined as of the expiration date. The 5% and 10% assumed rates
of appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent our estimate or projections of future common
stock prices. Actual gains, if any, on stock option exercises are dependent on
the future performance of the common stock and overall stock market conditions.
The amounts reflected in the table may not necessarily be achieved.
43
<PAGE>
Option Exercises and Holdings
The following table sets forth certain information regarding options held by
the Named Executive Officers on December 31, 1998. No options were exercised by
the Named Executive Officers during 1998.
Aggregated Option Exercises in Last Fiscal Year And Fiscal Year End Option
Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at Fiscal Year End(#) Fiscal Year End($)
---------------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
Michael Silton.......... -- -- -- --
Robert Mason............ 740,100 -- $482,233 --
Chris Sterbenc (1)...... 360,000 -- 260,700 --
Randy Lowe.............. 457,000 -- 348,140 --
Richard Marotta......... 510,050 -- 290,545 --
</TABLE>
- --------
(1) No longer an employee of Rainmaker.
Employment Agreements
We do not currently have any employment agreements with any of our Named
Executive Officers. Accordingly, the board of directors may terminate the
employment of any such officer at any time in its discretion. Effective April
1, 1999, Chris Sterbenc resigned as our Vice President, Sales Service Delivery.
We entered into a Separation Agreement with Mr. Sterbenc pursuant to which he
will be paid an aggregate amount of approximately $103,600 and his COBRA
premiums from May 1 through October 31, 1999.
1999 Stock Incentive Plan.
Introduction. The 1999 Stock Incentive Plan is intended to serve as the
successor program to our 1995 Stock Option/Stock Issuance Plan and 1998 Stock
Option/Stock Issuance Plan. The 1999 plan was adopted by the board in October
1999 and approved by the stockholders in October 1999. The 1999 plan will
become effective when the underwriting agreement for this offering is signed.
At that time, all outstanding options under our existing 1995 Plan and 1998
Plan will be transferred to the 1999 plan, and no further option grants will be
made under the 1995 Plan and 1998 Plan. The transferred options will continue
to be governed by their existing terms, unless our compensation committee
decides to extend one or more features of the 1999 plan to those options.
Except as otherwise noted below, the transferred options have substantially the
same terms as will be in effect for grants made under the discretionary option
grant program of our 1999 plan.
Share Reserve. 8,632,407 shares of our common stock have been authorized for
issuance under the 1999 plan. This share reserve consists of the number of
shares we estimate will be carried over from the 1995 Plan and 1998 Plan plus
an additional increase of 3,958,703 shares. The share reserve under our 1999
plan will automatically increase on the first trading day in January each year,
beginning with calendar year 2001, by an amount equal to four percent of the
total number of shares of our common stock outstanding on the last trading day
of December in the prior year, but in no event will this annual increase exceed
3,000,000 shares. In addition, no participant in the 1999 plan may be granted
stock options or direct stock issuances for more than 1,000,000 shares of
common stock in total in any calendar year.
Programs. Our 1999 plan has five separate programs:
. the discretionary option grant program, under which eligible individuals
in our employ may be granted options to purchase shares of our common
stock at an exercise price not less than the fair market value of those
shares on the grant date;
44
<PAGE>
. the stock issuance program, under which eligible individuals may be
issued shares of common stock which will vest upon the attainment of
performance milestones or upon the completion of a period of service or
which are fully vested at issuance as a bonus for past services;
. the salary investment option grant program, under which our executive
officers and other highly compensated employees may be given the
opportunity to apply a portion of their base salary to the acquisition
of special below market stock option grants;
. the automatic option grant program, under which option grants will
automatically be made at periodic intervals to eligible non-employee
board members to purchase shares of common stock at an exercise price
equal to the fair market value of those shares on the grant date; and
. the director fee option grant program, under which our non-employee
board members may be given the opportunity to apply a portion of any
retainer fee otherwise payable to them in cash for the year to the
acquisition of special below-market option grants.
Eligibility. The individuals eligible to participate in our 1999 plan
include our officers and other employees, our board members and any consultants
we hire.
Administration. The discretionary option grant and stock issuance programs
will be administered by our compensation committee. This committee will
determine which eligible individuals are to receive option grants or stock
issuances under those programs, the time or times when the grants or issuances
are to be made, the number of shares subject to each grant or issuance, the
status of any granted option as either an incentive stock option or a
nonstatutory stock option under the federal tax laws, the vesting schedule to
be in effect for the option grant or stock issuance and the maximum term for
which any granted option is to remain outstanding. The compensation committee
will also have the authority to select the executive officers and other highly
compensated employees who may participate in the salary investment option grant
program in the event that program is put into effect for one or more calendar
years.
Plan Features. Our 1999 plan will include the following features:
. The exercise price for any options granted under the plan may be paid in
cash or in shares of our common stock valued at fair market value on the
exercise date. The option may also be exercised through a same-day sale
program without any cash outlay by the optionee.
. The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program, including any
transferred options from our 1995 Plan and 1998 Plan, in return for the
grant of new options for the same or different number of option shares
with an exercise price per share based upon the fair market value of our
common stock on the new grant date.
. Stock appreciation rights may be issued under the discretionary option
grant program. These rights will provide the holders with the election
to surrender their outstanding options for a payment from us equal to
the fair market value of the shares subject to the surrendered options
less the exercise price payable for those shares. We may make the
payment in cash or in shares of our common stock. None of the options
under our 1998 plan have any stock appreciation rights.
Change in Control. The 1999 plan will include the following change in
control provisions which may result in the accelerated vesting of outstanding
option grants and stock issuances:
. In the event that we are acquired by merger or asset sale, each
outstanding option under the discretionary option grant program which is
not to be assumed by the successor corporation
45
<PAGE>
will immediately become exercisable for all the option shares, and all
outstanding unvested shares will immediately vest, except to the extent
our repurchase rights with respect to those shares are to be assigned to
the successor corporation.
. The compensation committee will have complete discretion to grant one or
more options which will become exercisable for all the option shares in
the event those options are assumed in the acquisition but the
optionee's service with us or the acquiring entity is subsequently
terminated. The vesting of any outstanding shares under our 1999 plan
may be accelerated upon similar terms and conditions.
. The compensation committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase rights
will immediately vest in connection with a successful tender offer for
more than 50% of our outstanding voting stock or a change in the
majority of our board through one or more contested elections. Such
accelerated vesting may occur either at the time of such transaction or
upon the subsequent termination of the individual's service.
. The options currently outstanding under our 1995 Plan and 1998 Plan will
immediately vest in the event we are acquired and the acquiring company
does not assume those options. Certain of those options, however,
contain an additional vesting acceleration feature which will result in
the immediate vesting of those options upon an involuntary termination
of the optionee's employment within 18 months following an acquisition
of Rainmaker in which those options are assumed.
Salary Investment Option Grant Program. In the event the compensation
committee decides to put this program into effect for one or more calendar
years, each of our executive officers and other highly compensated employees
may elect to reduce his or her base salary for the calendar year by an amount
not less than $10,000 nor more than $50,000. Each selected individual who
makes such an election will automatically be granted, on the first trading day
in January of the calendar year for which his or her salary reduction is to be
in effect, an option to purchase that number of shares of common stock
determined by dividing the salary reduction amount by two-thirds of the fair
market value per share of our common stock on the grant date. The option will
have an exercise price per share equal to one-third of the fair market value
of the option shares on the grant date. As a result, the option will be
structured so that the fair market value of the option shares on the grant
date less the exercise price payable for those shares will be equal to the
amount of the salary reduction. The option will become exercisable in a series
of twelve equal monthly installments over the calendar year for which the
salary reduction is to be in effect.
Automatic Option Grant Program. Each individual who first becomes a non-
employee board member at any time after the effective date of this offering
will receive an option grant for 10,000 shares of common stock on the date
such individual joins the board. In addition, on the date of each annual
stockholders meeting held after the effective date of this offering, each non-
employee board member who is to continue to serve as a non-employee board
member, including each of our current non-employee board members, will
automatically be granted an option to purchase 4,000 shares of common stock,
provided such individual has served on the board for at least six months.
Each automatic grant will have an exercise price per share equal to the
fair market value per share of our common stock on the grant date and will
have a term of 10 years, subject to earlier termination following the
optionee's cessation of board service. The option will be immediately
exercisable for all of the option shares; however, we may repurchase, at the
exercise price paid per share, any shares purchased under the option which are
not vested at the time of the optionee's cessation of board service. The
shares subject to each annual automatic grant will vest in a series of two
successive semi-annual installments upon the optionee's completion of each six
month period of board service over the twelve month period measured from the
grant date. The shares subject to each
46
<PAGE>
initial 10,000-share automatic option grant will vest in a series of eight
successive quarterly installments upon the optionee's completion of each three-
month period of board service over the 24-month period measured from the grant
date. However, the shares will immediately vest in full upon certain changes in
control or ownership or upon the optionee's death or disability while a board
member.
Director Fee Option Grant Program. If this program is put into effect in the
future, then each non-employee board member may elect to apply all or a portion
of any cash retainer fee for the year to the acquisition of a below-market
option grant. The option grant will automatically be made on the first trading
day in January in the year for which the non-employee board member would
otherwise be paid the cash retainer fee in the absence of his or her election.
The option will have an exercise price per share equal to one-third of the fair
market value of the option shares on the grant date, and the number of shares
subject to the option will be determined by dividing the amount of the retainer
fee applied to the program by two-thirds of the fair market value per share of
our common stock on the grant date. As a result, the option will be structured
so that the fair market value of the option shares on the grant date less the
exercise price payable for those shares will be equal to the portion of the
retainer fee applied to that option. The option will become exercisable in a
series of twelve equal monthly installments over the calendar year for which
the election is in effect. However, the option will become immediately
exercisable for all the option shares upon the death or disability of the
optionee while serving as a board member.
Additional Program Features. Our 1999 plan will also have the following
features:
. Outstanding options under the salary investment and director fee option
grant programs will immediately vest if we are acquired by a merger or
asset sale or if there is a successful tender offer for more than 50% of
our outstanding voting stock or a change in the majority of our board
through one or more contested elections.
. Limited stock appreciation rights will automatically be included as part
of each grant made under the salary investment option grant program and
the automatic and director fee option grant programs, and these rights
may also be granted to one or more officers as part of their option
grants under the discretionary option grant program. Options with this
feature may be surrendered to us upon the successful completion of a
hostile tender offer for more than 50% of our outstanding voting stock.
In return for the surrendered option, the optionee will be entitled to a
cash distribution from us in an amount per surrendered option share
based upon the highest price per share of our common stock paid in that
tender offer.
. The board may amend or modify the 1999 plan at any time, subject to any
required stockholder approval. The 1999 plan will terminate no later
than October 2009.
1999 Employee Stock Purchase Plan.
Introduction. Our 1999 Employee Stock Purchase Plan was adopted by the board
in October 1999 and approved by the stockholders in October 1999. The plan will
become effective immediately upon the signing of the underwriting agreement for
this offering. The plan is designed to allow our eligible employees and the
eligible employees our participating subsidiaries to purchase shares of common
stock, at semi-annual intervals, with their accumulated payroll deductions.
Share Reserve. 1,000,000 shares of our common stock will initially be
reserved for issuance. The reserve will automatically increase on the first
trading day in January each year, beginning in calendar year 2001, by an amount
equal to one percent of the total number of outstanding shares of our common
stock on the last trading day in December in the prior year. In no event will
any such annual increase exceed 400,000 shares.
47
<PAGE>
Offering Periods. The plan will have a series of successive offering
periods, each with a maximum duration of 24 months. The initial offering period
will start on the date the underwriting agreement for the offering covered is
signed and will end on the last business day in October 2001. The next offering
period will start on the first business day in November 2001, and subsequent
offering periods will set by our compensation committee.
Eligible Employees. Individuals scheduled to work more than 20 hours per
week for more than five calendar months per year may join an offering period on
the start date or any semi-annual entry date within that period. Semi-annual
entry dates will occur on the first business day of May and November each year.
Individuals who become eligible employees after the start date of an offering
period may join the plan on any subsequent semi-annual entry date within that
offering period.
Payroll Deductions. A participant may contribute up to 15% of his or her
cash earnings through payroll deductions, and the accumulated deductions will
be applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be equal to 85% of the fair market value per
share on the participant's entry date into the offering period or, if lower,
85% of the fair market value per share on the semi-annual purchase date. Semi-
annual purchase dates will occur on the last business day of April and October
each year. In no event, however, may any participant purchase more than 1,250
shares on any purchase date, and not more than 200,000 shares may be purchased
in total by all participants on any purchase date.
Reset Feature. If the fair market value per share of our common stock on any
purchase date is less than the fair market value per share on the start date of
the two-year offering period, then that offering period will automatically
terminate, and a new two-year offering period will begin on the next business
day. All participants in the terminated offering will be transferred to the new
offering period.
Change in Control. Should we be acquired by merger or sale of substantially
all of our assets or more than 50% of our voting securities, then all
outstanding purchase rights will automatically be exercised immediately prior
to the effective date of the acquisition. The purchase price will be equal to
85% of the market value per share on the participant's entry date into the
offering period in which an acquisition occurs or, if lower, 85% of the fair
market value per share immediately prior to the acquisition.
Plan Provisions. The following provisions will also be in effect under the
plan:
. The plan will terminate no later than the last business day of October
2009.
. The board may at any time amend, suspend or discontinue the plan.
However, certain amendments may require stockholder approval.
401(k) Plan
We sponsor a defined contribution plan intended to qualify under Section 401
of the Internal Revenue Code, or a 401(k) plan. Employees who are at least 18
years old may enter the plan as of the first day of their employment.
Participants may make pre-tax contributions to the plan of up to 20% of their
eligible earnings, subject to a statutorily prescribed annual limit. Each
participant is fully vested in his or her contributions and the investment
earnings. We match 25% of the first 6% of the employee's compensation
contributed to the plan. Our contribution vests 20% on each anniversary date.
Contributions by the participants, or us, to the plan and the income earned on
these contributions are generally not taxable to the participants until
withdrawn. Our matching contributions, if any, are generally deductible when
made. Participant and company matching contributions are held in trust as
required by law. Individual participants may direct the trustee to invest their
accounts in authorized investment alternatives.
48
<PAGE>
CERTAIN TRANSACTIONS
On February 12, 1999, we issued 8,536,585 shares of Series C convertible
participating preferred stock at $1.64 per share for cash proceeds of
approximately $14 million. ABS Capital Partners III, L.P., or ABS, purchased
7,926,829 shares of Series C preferred stock. Andrew Sheehan, a managing member
of the general partner of ABS, became a member of our Board of Directors in
February 1999.
Concurrently with the closing of the Series C investment, we also issued
5,717,470 shares of Series D convertible participating preferred stock to SCO
in exchange for all of the securities previously held by SCO, including a
convertible debenture in the principal amount of $995,529, warrants to purchase
2,844,370 shares of common stock and Series A convertible preferred stock
convertible into 2,873,100 shares of common stock.
We purchased products and service agreements from SCO at a cost of $11.7
million in 1996, $15.6 million in 1997, $15.9 million in 1998 and $13.8 million
during the nine months ended September 30, 1999. Also, during 1996, 1997 and
1998, and the nine months ended September 30, 1999, we received marketing
development fund reimbursements of $674,000, $995,000, $982,000, and $513,000,
respectively, from SCO. SCO holds more than five percent of our outstanding
shares of common stock. Alok Mohan, a member of our board of directors, is the
Chairman of the Board of SCO and from July 1995 to April 1998 was the Chief
Executive Officer of SCO.
During April and May 1999, we used $7.9 million of the Series C investment
proceeds to repurchase shares of common stock at a price of $1.64 per share
from certain of our stockholders, including:
. 2,033,222 shares from Michael Silton our Chief Executive Officer who
holds more than five percent of our outstanding common stock;
. 1,048,904 shares from Laurel James, who holds more than five percent of
our outstanding common stock;
. 1,033,884 shares from Bernard Jubb, who holds more than five percent of
our outstanding common stock;
. 350,000 shares from SCO;
. 150,000 shares from Peter Silton, a director and father of Michael
Silton;
. 58,800 shares from Petra Silton, a sister of Michael Silton and a
daughter of Peter Silton;
. 43,808 shares from Jill Silton, mother of Michael Silton;
. 36,799 shares from Richard Marotta, our Vice President, Information
Technology;
. 30,000 shares from Triana Silton, a sister of Michael Silton and a
daughter of Peter Silton; and
. 8,000 shares from Peter Silton, Trustee of the Anthony and Deborah
Romain Irrevocable Trust.
In connection with the repurchase of common stock, SCO elected to receive a
put right to cause us, at SCO's option, to purchase additional shares of our
common stock. SCO subsequently exercised its put right, and we repurchased from
SCO 540,642 shares in June 1999 and 540,642 shares in August 1999, at a price
of $1.64 per share.
In February 1999, we loaned $100,000 to Mr. Jubb as an advance of a portion
of the purchase price for the anticipated repurchase of shares of common stock
held by Mr. Jubb. The loan was secured by 60,975 shares of common stock and was
repaid in April 1999 upon the repurchase of Mr. Jubb's shares as described
above. No interest was charged on the loan.
Richard Marotta, our Vice President, Information Technology, was the
President and sole stockholder of Your-Way Automation, Inc., which provided
information technology consulting services and sales of hardware to us. For
these services rendered to us, Your-Way received fees of $599,355 in 1996,
$774,842 in 1997 and $15,224 in 1998.
49
<PAGE>
In December 1996 and January 1997, we loaned approximately $98,200 to
Michael Silton for relocation expenses which was payable without interest. In
June 1998, we forgave the loan amount and paid Mr. Silton an additional
approximately $85,900 to account for the income tax liability associated with
the loan forgiveness. We loaned approximately $67,800 during 1997 to Robert
Mason for relocation expenses which was payable without interest. In June 1998,
we forgave the loan amount and paid Mr. Mason an additional approximately
$59,300 to account for the income tax liability associated with the loan
forgiveness. Mr. Mason is Senior Vice President, Service Delivery and was our
Chief Financial Officer and Secretary from May 1995 to April 1999.
Effective September 30, 1997, Bernard Jubb resigned as our President and
Chief Executive Officer. Mr. Jubb and Rainmaker entered into a Separation
Agreement pursuant to which Mr. Jubb was engaged as a consultant for us
following his resignation. Mr. Jubb was paid consulting fees of approximately
$56,400 in 1997 and $267,600 in 1998, and his COBRA premiums from October 1997
to March 1999. Mr. Jubb's consulting arrangement with us terminated in February
1999. We also cancelled $21,000 of indebtedness owed by Mr. Jubb. Mr. Jubb also
served as a director from January 1991 to February 1999. Mr. Jubb owns more
than five percent of our outstanding shares of common stock.
50
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of September 30, 1999
and as adjusted to reflect the sale of common stock offered hereby, regarding
the ownership of our common stock by:
. each person who is known by us to own more than five percent of our
common stock;
. each Named Executive Officer;
. each of our directors;
. all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules and
regulations of the Securities and Exchange Commission. Shares subject to
options that are exercisable currently or within 60 days of September 30, 1999
are deemed to be outstanding and beneficially owned by the person for the
purpose of computing share and percentage ownership of that person. They are
not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person. Except as indicated in the footnotes to this
table and as affected by applicable community property laws, all persons listed
have sole voting and investment power for all shares shown as beneficially
owned by them. Unless otherwise indicated, all addresses for the stockholders
set forth below is c/o Rainmaker Systems, Inc., 1800 Green Hills Road, Scotts
Valley, California 95066.
<TABLE>
<CAPTION>
Number of Shares Number of Shares
Beneficially Owned Beneficially Owned Percent of Shares
(Including the As a Result of Outstanding
Number of Shares Options Exercisable -----------------
Shown in the within 60 Days of Before After
Name of Beneficial Owner Second Column) September 30, 1999 Offering Offering
- ------------------------ ------------------ ------------------- -------- --------
<S> <C> <C> <C> <C>
ABS Capital Partners
III, L.P.
101 California Street,
47th Floor
San Francisco,
California 94111...... 8,199,556 25.3% 21.9%
Michael Silton (1)...... 5,983,778 18.4 16.0
The Santa Cruz
Operation, Inc.
425 Encinal Street
Santa Cruz, California
95060................. 4,013,459 12.4 10.7
Laurel James (2)........ 3,141,096 9.7 8.4
Bernard Jubb (3)........ 3,056,116 9.4 8.2
Robert Mason............ 790,100 675,157 2.4 2.1
Chris Sterbenc.......... 303,749 * *
Randy Lowe.............. 567,000 372,000 1.7 1.5
Richard Marotta......... 630,250 520,050 1.9 1.7
Peter Silton (4)........ 887,000 59,000 2.7 2.4
Robert Leff............. 410,000 10,000 1.3 1.1
Andrew Sheehan (5)...... 8,199,556 25.3 21.9
Alok Mohan (6).......... 4,253,459 240,000 13.0 11.3
All directors and
executive officers as a
group (14 persons)..... 22,542,993 2,548,161 64.4% 56.3%
</TABLE>
- --------
* Less than 1%.
(1) Includes 15,000 shares held by Michael Silton as Trustee of the Petra
Silton Children's Trust.
(2) Includes 3,141,096 shares held by Laurel F. James, Trustee of the Laurel
Ann James Grantor Trust dated July 3, 1997.
(3) Includes 3,056,116 shares held by Bernard P. Jubb, TTE UTD 11/11/97.
51
<PAGE>
(4) Includes 32,000 shares held by Peter Silton as Trustee of the Anthony and
Deborah Romain Irrevocable Trust.
(5) Includes 7,926,829 shares of Series C preferred stock and 272,727 shares
of Series D preferred stock held by ABS Capital Partners III, L.P., which
will convert into common stock upon the completion of this offering. Mr.
Sheehan is a managing member of ABS Capital Partners III, LLC, which is a
general partner of ABS Capital Partners III, L.P. Mr. Sheehan disclaims
beneficial ownership of all shares held by ABS Capital Partners III, L.P.
except to the extent of his pecuniary interest therein.
(6) Includes 4,013,459 shares of Series D preferred stock held by SCO which
will convert into common stock upon the completion of this offering. Mr.
Mohan is the Chairman of SCO. Mr. Mohan disclaims beneficial ownership of
all shares held by SCO except to the extent of his pecuniary interest
therein.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary of our capital stock and certain provisions of our
certificate of incorporation and bylaws does not purport to be complete. It is
qualified in its entirety by the provisions of the certificate and bylaws.
Copies of the certificate and bylaws have been filed as exhibits to the
registration statement of which this prospectus is a part. The discussion below
reflects changes to our capital structure and charter documents that will be
adopted in connection with our reincorporation in Delaware.
Upon the closing of this offering, our authorized capital stock will consist
of 80,000,000 shares of common stock, par value $0.001 per share, and
20,000,000 shares of preferred stock, par value $0.001 per share.
Common Stock
As of September 30, 1999, there were 32,460,544 shares of common stock
outstanding and held of record by approximately 120 stockholders, assuming
conversion of all shares of preferred stock into common stock. Based on the
number of shares of common stock outstanding as of that date and giving effect
to the issuance of the 5,000,000 shares of common stock in this offering, there
will be 37,460,544 shares of common stock outstanding upon the closing of this
offering.
Subject to preferences that may apply to shares of preferred stock
outstanding at the time, the holders of outstanding shares of common stock are
entitled to receive dividends out of assets legally available therefor at such
times and in such amounts as the board of directors may from time to time
determine. Each stockholder is entitled to one vote for each share of common
stock held on all matters submitted to a vote of stockholders. Cumulative
voting for the election of directors is not provided for in our certificate of
incorporation, which means that the holders of a majority of the shares voted
can elect all of the directors then standing for election. The holders of
common stock have no preemptive rights and no shares of common stock are
subject to conversion or redemption. Upon the occurrence of a liquidation,
dissolution or winding-up, the holders of common stock would be entitled to
share ratably in the distribution of all of our assets available for
distribution after satisfaction of all our liabilities and payment of the
liquidation preference of any outstanding preferred stock. Each outstanding
share of common stock is, and all shares of common stock to be outstanding upon
completion of this offering will be, fully paid and nonassessable.
Preferred Stock
Upon the closing of this offering, all outstanding shares of preferred stock
will convert into shares of common stock. Thereafter, the board of directors
will be authorized without further stockholder approval to issue up to
20,000,000 shares of preferred stock in one or more series and fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preferences
and the number of shares constituting any series or the designation of such
series. The board of directors, without stockholder approval, can issue
preferred stock with voting, conversion or other rights which are superior to
the rights of the common stock or which could adversely affect the voting power
and other rights of the holders of common stock. The issuance of preferred
stock also may have the effect of delaying, deferring or preventing a change in
control of our management.
Certain Anti-Takeover Provisions
Certain provisions of Delaware law, our certificate of incorporation and our
bylaws may make it more difficult to acquire control of us by various means.
These provisions could deprive the
53
<PAGE>
stockholders of opportunities to realize a premium on the shares of common
stock owned by them. In addition, they may adversely affect the prevailing
market price of the stock.
Delaware Law. After the closing of this offering, we will be subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation
Law. In general, Section 203 prohibits a publicly-held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date of the transaction in which the person
became an interested stockholder, unless the interested stockholder attained
that status with the approval of the board of directors or unless the business
combination is approved in a prescribed manner. "Business combinations" include
mergers, asset sales and other transactions resulting in a financial benefit to
the interested stockholder. Generally, an "interested stockholder" is a person
who, together with his affiliates and associates, owns, or within the prior
three years did own, 15% or more of the corporation's voting stock.
Special Stockholder Meetings. The certificate of incorporation will provide
that special meetings of the stockholders for any purpose or purposes, unless
required by law, may only be called by a majority of the entire board. This
limitation on the ability to call a special meeting could make it more
difficult for stockholders to initiate actions that are opposed by the board.
These actions could include the removal of an incumbent director or the
election of a stockholder nominee as a director. They could also include the
implementation of a rule requiring stockholder ratification of specific
defensive strategies that have been adopted by the board with respect to
unsolicited takeover bids. In addition, the limited ability to call a special
meeting of stockholders may make it more difficult to change the existing board
and management.
Classified Board of Directors. Prior to the closing of this offering, our
board will be divided into three classes of directors serving staggered three-
year terms. As a result, approximately one-third of the board of directors will
be elected each year. These provision are likely to increase the time required
for stockholders to change the composition of our board of directors. For
example, in general at least two annual meetings will be necessary for
stockholders to effect a change in the majority of our board of directors.
Subject to the rights of the holders of any outstanding series of preferred
stock, the certificate of incorporation will authorize only the board of
directors to fill vacancies, including newly created directorships. The
certificate of incorporation will also provide that directors may be removed by
stockholders only for cause and only by affirmative vote of holders of two-
thirds of the outstanding shares of voting stock.
Supermajority Vote to Amend Charter and Bylaws. Our certificate of
incorporation and bylaws will each provide that our bylaws may only be amended
by a two-thirds vote of the outstanding shares. In addition, our certificate of
incorporation will provide that its provisions related to bylaw amendments,
staggered board and indemnification may only be amended by a two-thirds vote of
the outstanding shares.
Indemnification of Directors and Officers
Under Section 145 of the Delaware General Corporation Law, we can indemnify
our directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act of 1933 (the
"Securities Act"). Our certificate of incorporation will further provide that
we are authorized to indemnify our directors and officers to the fullest extent
permitted by law through the bylaws, agreement, vote of stockholders or
disinterested directors, or otherwise. Our bylaws will provide that we will
indemnify our directors and officers to the fullest extent permitted by law and
require us to advance litigation expenses upon our receipt of an undertaking by
the director or officer to repay such advances if it is ultimately determined
that the director or officer is not entitled to indemnification. Our bylaws
will further provide that rights conferred under such bylaws do not exclude any
other right such persons may have or acquire under any bylaw, agreement, vote
of stockholders or disinterested directors or otherwise.
54
<PAGE>
We also have directors' and officers' liability insurance. In addition,
concurrently with this offering, we will enter into agreements to indemnify our
directors and certain of our officers, in addition to the indemnification
provided for in the certificate of incorporation and bylaws. These agreements
will, among other things, indemnify our directors and certain of our officers
for certain expenses (including attorneys fees), judgments, fines and
settlement amounts incurred by such person in any action or proceeding,
including any action by or in our right, on account of services by that person
as our director or officer or as a director or officer of any subsidiary of
ours, or as a director or officer of any other company or enterprise that the
person provides services to at our request.
Our certificate of incorporation will provide that, pursuant to Delaware
Law, our directors shall not be liable for monetary damages for breach of the
directors' fiduciary duty of care to us or our stockholders. This provision in
the certificate of incorporation does not eliminate the duty of care, and in
appropriate circumstances equitable remedies such as injunctive or other forms
of non-monetary relief will remain available under Delaware Law. In addition,
each director will continue to be subject to liability for breach of the
director's duty of loyalty to Rainmaker or our stockholders, for acts or
omissions not in good faith or involving intentional misconduct or knowing
violations of law, for actions leading to improper personal benefit to the
director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware Law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws.
Registration Rights
After this offering, holders of approximately 12,936,521 shares of common
stock (or securities convertible into common stock) will be entitled to
registration rights with respect to their shares. Of these shares, 113,750
shares of common stock (or securities convertible into common stock) are
entitled only to "piggy-back" registration rights. Holders of securities with
registration rights may require us to register all or part of their shares at
any time following 180 days after this offering. In addition, these holders may
also require us to include their shares in future registration statements that
we file and may require us to register their shares on Form S-3. Upon
registration, these shares will be freely tradable in the public market without
restriction.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is U.S. Stock Transfer
Corporation.
Listing
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "RMKR."
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and
there can be no assurance that a significant public market for our common stock
will develop or be sustained after this offering. Future sales of substantial
amounts of our common stock, including shares issued upon exercise of
outstanding options and warrants, in the public market after this offering
could adversely affect market prices prevailing from time to time and could
impair our ability to raise capital through the sale of our equity securities.
Upon completion of the offering, we will have 37,460,544 shares of common
stock outstanding (38,210,544 shares if the underwriter's over-allotment option
is exercised in full) based on the number of shares outstanding as of September
30, 1999. Of this amount, the 5,000,000 shares offered hereby will be available
for immediate sale in the public market as of the date of this prospectus.
Approximately 32,284,150 additional shares will be available for sale in the
public market following the expiration of 180-day lock-up agreements with the
representatives of the underwriters or us, subject in some cases to compliance
with the volume and other limitations of Rule 144. An additional 176,394 shares
will be available for sale in the public market 90 days following the date of
this Prospectus, subject in some cases to compliance with the volume and other
limitations of Rule 144.
<TABLE>
<CAPTION>
Approximate
Days after the Number of Shares
Date of this Eligible for
Prospectus Future Sale Comment
-------------- ---------------- -------
<S> <C> <C>
Upon
effectiveness..... 5,000,000 Freely tradeable shares sold in this offering
90 days............ 176,394 Shares saleable under Rule 144, 144(k) or 701 that are not
subject to 180-day lock up
180 days........... 32,284,150 Lock-up released; shares saleable under Rule 144, 144(k) or 701
</TABLE>
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares for at least one year is entitled to sell within any
three-month period commencing 90 days after the date of this prospectus a
number of shares that does not exceed the greater of one percent of the then
outstanding shares of common stock or the average weekly trading volume during
the four calendar weeks preceding such sale. Rule 144 also requires the filing
of a Form 144 with respect to such sale. A person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of ours at any time
during the 90 days immediately preceding the sale and who has beneficially
owned his or her shares for at least two years is entitled to sell such shares
pursuant to Rule 144(k) without regard to the limitations described above.
Persons deemed to be affiliates must always sell pursuant to Rule 144, even
after the applicable holding periods have been satisfied.
We are unable to estimate the number of shares that will be sold under Rule
144, since this will depend on the market price for our common stock, the
personal circumstances of the sellers and other factors. Any future sale of
substantial amounts of our common stock in the open market may adversely affect
the market price of our common stock offered hereby.
We, our directors, executive officers and many of our stockholders and
option holders have agreed pursuant to the Underwriting Agreement and other
agreements that they will not sell any common stock without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation and Thomas
Weisel Partners LLC for a period of 180 days from the date of this prospectus,
except that we may, without such consent, grant options and sell shares
pursuant to our stock plans or pursuant to outstanding warrants.
Any employee or consultant who purchased his or her shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701, which permits nonaffiliates to sell their Rule 701
shares without having to comply with the public information,
56
<PAGE>
holding period, volume limitation or notice provisions of Rule 144 and permits
affiliates to sell their Rule 701 shares without having to comply with the Rule
144 holding period restrictions, in each case commencing 90 days after the date
of this prospectus. The holders of options outstanding as of September 30, 1999
to purchase approximately 3,773,230 shares of common stock will be eligible to
sell their shares upon the expiration of the 180-day lock-up period, subject in
certain cases to vesting of such options.
We intend to file a registration statement on Form S-8 under the Securities
Act of 1933 as soon as practicable after the completion of the offering to
register up to 9,632,407 shares of common stock subject to outstanding stock
options or reserved for issuance under our stock plans. This registration
statement will permit the resale of these shares by nonaffiliates in the public
market without restriction under the Securities Act, upon completion of the
lock-up period described above. Shares registered under such registration
statement held by affiliates will be subject to Rule 144 volume limitations. In
addition, the holders of a substantial number of shares of our common stock are
entitled to registration rights with respect to their shares. See "Management"
and "Description of Capital Stock--Registration Rights."
57
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement,
dated , 1999, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, Thomas Weisel Partners
LLC, SG Cowen Securities Corporation and DLJdirect Inc. have severally agreed
to purchase from us the number of shares of common stock set forth opposite
their names below:
<TABLE>
<CAPTION>
Number
of
Underwriters Shares
------------- ------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation...............
Thomas Weisel Partners LLC........................................
SG Cowen Securities Corporation...................................
DLJdirect Inc.....................................................
----
Total...........................................................
====
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval by their counsel of certain legal matters and
to certain other conditions. The underwriters are obligated to purchase and
accept delivery of all the shares (other than those covered by the over-
allotment option described below) if they purchase any of the shares.
The underwriters initially propose to offer some of the shares directly to
the public at the public offering price set forth on the cover page of this
prospectus and some of the shares to certain dealers at the public offering
price less a concession not in excess of $ per share. The
underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per share on sales to certain other dealers. After the
initial offering of the shares to the public, the representatives may change
the public offering price and such concessions. The underwriters do not intend
to confirm sales to any accounts over which they exercise discretionary
authority. An electronic prospectus is available on the Web site maintained by
DLJdirect Inc.
The following table shows the underwriting fees to be paid to the
underwriters by us in connection with this offering. The amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of our common stock.
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share.......................................... $ $
Total.............................................. $ $
</TABLE>
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 750,000 additional shares at the
public offering price less the underwriting fees. The underwriters may exercise
such option solely to cover over-allotments, if any, made in connection with
this offering. To the extent that the underwriters exercise such option, each
underwriter will become obligated, subject to certain conditions, to purchase a
number of additional shares approximately proportionate to that underwriter's
initial purchase commitment.
58
<PAGE>
We estimate our expenses relating to the offering to be $1,242,000.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments
the underwriters may be required to make with respect these liabilities.
Our officers, directors and many of our stockholders and option holders have
agreed that they will not, without the prior consent of Donaldson, Lufkin &
Jenrette Securities Corporation and Thomas Weisel Partners LLC, offer, sell or
otherwise dispose of: (1) any shares of common stock, (2) options or warrants
to acquire shares of common stock or (3) securities exchangeable for or
convertible into shares of common stock owned by them for a period of 180 days
after the date of this prospectus. We have agreed not to offer, sell or
otherwise dispose of any of the above securities for a period of 180 days after
the date of this prospectus, except for issuances under our stock plans or
pursuant to outstanding warrants. See "Shares Eligible for Future Sales."
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners LLC has been named as a lead or co-
manager on 76 filed public offerings of equity securities, of which 53 have
been completed, and has acted as a syndicate member in an additional 38 public
offerings of equity securities. Thomas Weisel Partners does not have any
material relationship with us or any of our officers, directors or other
controlling persons, except with respect to its contractual relationship with
us pursuant to the underwriting agreement entered into in connection with this
offering.
At our request, the underwriters have reserved up to five percent of the
shares offered hereby for sale at the initial public offering price to certain
of our employees, members of their immediate families and other individuals who
are our business associates. The number of shares available for sale to the
general public will be reduced to the extent these individuals purchase such
reserved shares. Any reserved shares not purchased will be offered by the
underwriters to the general public on the same basis as the other shares
offered hereby.
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "RMKR." In order to meet the requirements for listing
our common stock on the Nasdaq National Market, the underwriters have
undertaken to sell lots of 100 or more shares to a minimum of 400 beneficial
owners.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares included in this
offering in any jurisdiction where action for that purpose is required. The
shares included in this offering may not be offered or sold, directly or
indirectly, nor may this prospectus or any other offering material or
advertisement in connection with the offer and sale of any such shares be
distributed or published in any jurisdiction, except under circumstances that
will result in compliance with the applicable rules and regulations of such
jurisdiction. Persons who receive this prospectus are advised to inform
themselves about and to observe any restrictions relating to this offering of
our common stock and the distribution of this prospectus. This prospectus is
not an offer to sell or a solicitation of an offer to buy any shares included
in this offering in any jurisdiction where that would not be permitted or
legal.
DLJdirect Inc. will make all allocations of securities distributed in this
offering through the use of the Internet. Approximately two to three weeks
prior to the scheduled offering date, DLJdirect will post on its Web site
(www.dljdirect.com) a brief description of the offering which contains only the
information permitted under Rule 134. At this time, DLJdirect will also send an
e-mail to all DLJdirect account holders with $100,000 or more in assets in
their accounts advising them of the offering. These account holders will have
access to the preliminary prospectus by links on the DLJdirect Web site.
DLJdirect will allocate the shares it has underwritten based on its judgment of
what is in the best
59
<PAGE>
interest of the issuer, considering the following criteria with respect to the
account holders expressing an interest in the offering: asset level of the
account, investment objectives of the account holder, trading history of the
account, tenure of the account at DLJdirect and post-offering activity in
previous offerings.
Stabilization
In connection with this offering, certain underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of our
common stock. Specifically, the underwriters may overallot this offering,
creating a syndicate short position. In addition, the underwriters may bid for
and purchase shares of common stock in the open market to cover syndicate short
positions or to stabilize the price of the common stock. In addition, the
underwriting syndicate may reclaim selling concessions from syndicate members
and selected dealers if they repurchase previously distributed common stock in
syndicate covering transactions, in stabilizing transactions or otherwise.
These activities may stabilize or maintain the market price of the common stock
above independent market levels. The underwriters are not required to engage in
these activities and may end any of these activities at any time.
Pricing of this Offering
Prior to this offering, there has been no established market for our common
stock. The initial public offering price for the shares of common stock offered
by this prospectus will be determined by negotiation between us and the
representatives of the underwriters. The factors to be considered in
determining the initial public offering price include:
. the history of and the prospects for the industry in which we compete;
. our past and present operations;
. our historical results of operations;
. our prospects for future earnings;
. the recent market prices of securities of generally comparable
companies; and
. general conditions of the securities market at the time of this
offering.
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered by this
prospectus will be passed upon for us by Brobeck, Phleger & Harrison LLP,
Irvine, California. Certain legal matters relating to this offering will be
passed upon for the underwriters by Orrick, Herrington & Sutcliffe LLP, San
Francisco, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1997 and 1998, and for each of the three years in
the period ended December 31, 1998, as set forth in their report which is
included in this prospectus and elsewhere in the registration statement. We
have included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
60
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Rainmaker has filed a registration statement on Form S-1 with the Securities
and Exchange Commission under the Securities Act with respect to the common
stock offered by this prospectus. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to us and our common
stock offered hereby, please see the registration statement and the exhibits
and schedules filed with the registration statement. Statements contained in
this prospectus concerning the contents of any contract or other document
referred to are not necessarily complete. Please refer to the copy of such
contract or other document filed as an exhibit to the registration statement.
Each such statement is qualified in all respects by such reference. The
registration statement, including the exhibits and schedules thereto, may be
inspected without charge at the principal office of the Commission in
Washington, D.C. Copies of all or any part of the registration statement may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Such
copies may also be inspected and copied at the Commission's Regional Offices
located at:
. Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511; and
. 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such material may be obtained at prescribed rates by mail from the
public reference section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, the Commission maintains an Internet site
at www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants, including us, that file
electronically.
61
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Auditors............................................ F-2
Balance Sheets as of December 31, 1997 and 1998 and September 30, 1999
(unaudited).............................................................. F-3
Statements of Operations for the three years ended December 31, 1998 and
the nine months ended September 30, 1998 and 1999 (unaudited)............ F-4
Statements of Redeemable Convertible Preferred Stock and Stockholders'
Equity (Net Capital Deficiency) for the three years ended December 31,
1998 and the nine months ended September 30, 1999 (unaudited)............ F-5
Statements of Cash Flows for the three years ended December 31, 1998 and
the nine months ended September 30, 1998 and 1999 (unaudited)............ F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Rainmaker Systems, Inc.
We have audited the accompanying balance sheets of Rainmaker Systems, Inc. as
of December 31, 1997 and 1998 and the related statements of operations,
redeemable convertible preferred stock and stockholders' equity (net capital
deficiency), and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express our opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rainmaker Systems, Inc. at
December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
San Jose, California
August 31, 1999
F-2
<PAGE>
RAINMAKER SYSTEMS, INC.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, Pro Forma
--------------- September 30, September 30,
1997 1998 1999 1999
------- ------- ------------- -------------
(unaudited)
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents......... $ 269 $ 4,608 $ 5,136
Short-term investments............ -- -- 1,000
Accounts receivable, less
allowance for sales returns and
doubtful accounts of $298 in
1997, $314 in 1998 and $408 in
1999............................. 6,339 6,881 7,926
Current portion of note
receivable....................... 166 900 800
Other receivables................. 162 52 178
Income taxes receivable........... -- 951 946
Inventories....................... 1,397 4 1,421
Deferred taxes.................... 318 354 467
Prepaid expenses and other current
assets........................... 285 278 371
------- ------- -------
Total current assets.............. 8,936 14,028 18,245
Property and equipment, net....... 2,785 2,337 2,819
Note receivable, less current
portion.......................... -- 720 --
Other noncurrent assets........... 191 124 163
------- ------- -------
Total assets...................... $11,912 $17,209 $21,227
======= ======= =======
LIABILITIES, REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................. $ 6,002 $ 6,855 $10,809
Accrued compensation and related
liabilities...................... 684 1,220 1,150
Income taxes payable.............. 431 -- --
Accrued liabilities............... 393 585 268
Deferred revenue.................. 5 40 --
Current portion of capital lease
obligations...................... 114 205 296
------- ------- -------
Total current liabilities......... 7,629 8,905 12,523
Capital lease obligations, less
current portion.................. 282 442 604
Convertible subordinated note
payable.......................... 996 996 --
Deferred taxes.................... 176 1,389 983
Commitments and contingencies
Redeemable preferred stock:
Series A convertible preferred
stock, no par value:
Authorized shares--none
Issued and outstanding shares--
574,620 in 1997 and 1998, none
in 1999 and pro forma;
aggregate liquidation
preference at September 30,
1999--none...................... 977 977 -- $ --
Series C convertible preferred
stock, $0.001 par value:
Authorized shares--8,536,585
Issued and outstanding shares--
none in 1997 and 1998,
8,536,585 in 1999, none pro
forma; aggregate liquidation
preference at September 30,
1999--$14,000................... -- -- 13,809 --
Series D convertible preferred
stock, $0.001 par value:
Authorized shares--5,717,470
Issued and outstanding shares--
none in 1997 and 1998,
4,286,186 in 1999, none pro
forma; aggregate liquidation
preference at September 30,
1999--$1,500.................... -- -- 1,478 --
Stockholders' equity (net capital
deficiency):
Series B convertible preferred
stock, $0.001 par value:
Authorized shares--402,710
Issued and outstanding shares--
349,160 in 1997 and 1998,
334,889 in 1999, none pro
forma; aggregate liquidation
preference at September 30,
1999--$479...................... 384 -- -- --
Common stock, $0.001 par value:
Authorized shares--50,000,000
Issued and outstanding shares--
21,025,988 in 1997, 21,460,894
in 1998, 17,963,328 in 1999,
and 32,460,544 pro forma........ 21 21 18 32
Additional paid-in capital........ 223 741 2,619 17,892
Deferred stock compensation....... -- -- (1,566) (1,566)
Retained earnings (accumulated
deficit)......................... 1,224 3,738 (9,241) (9,241)
------- ------- ------- -------
Total stockholders' equity (net
capital deficiency)............ 1,852 4,500 (8,170) 7,117
------- ------- ------- -------
Total liabilities and
stockholders' equity (net
capital deficiency)............ $11,912 $17,209 $21,227 $21,227
======= ======= ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
RAINMAKER SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months
Years Ended December Ended
31, September 30,
------------------------- ----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
CRM services................ $12,384 $22,515 $44,212 $30,402 $42,035
Catalog/distributor......... 14,551 16,985 6,165 6,165 --
------- ------- ------- ------- -------
Total revenue.............. 26,935 39,500 50,377 36,567 42,035
Cost of revenue:
CRM services................ 7,929 14,810 30,196 20,526 28,937
Catalog/distributor......... 11,370 13,575 5,135 5,135 --
------- ------- ------- ------- -------
Total cost of revenue...... 19,299 28,385 35,331 25,661 28,937
Gross profit:
CRM services................ 4,455 7,705 14,016 9,876 13,098
Catalog/distributor......... 3,181 3,410 1,030 1,030 --
------- ------- ------- ------- -------
Total gross profit......... 7,636 11,115 15,046 10,906 13,098
Selling, general and
administrative expenses..... 6,954 9,828 13,457 9,639 18,651
------- ------- ------- ------- -------
Operating income (loss)..... 682 1,287 1,589 1,267 (5,553)
Interest income (expense),
net......................... (35) (66) 138 70 370
Gain from sale of
catalog/distributor......... -- -- 2,525 2,525 80
------- ------- ------- ------- -------
Income (loss) before income
taxes...................... 647 1,221 4,252 3,862 (5,103)
Income tax expense
(benefit)................... 216 450 1,702 1,545 (521)
------- ------- ------- ------- -------
Net income (loss)........... 431 771 2,550 2,317 (4,582)
Preferred A dividends........ -- -- (36) (18) --
Preferred C and D cumulative
dividends................... -- -- -- -- (1,064)
Excess of redemption of
preferred stock over stated
value....................... -- -- -- -- (1,941)
------- ------- ------- ------- -------
Income (loss) available to
common stockholders......... $ 431 $ 771 $ 2,514 $ 2,299 $(7,587)
======= ======= ======= ======= =======
Net income (loss) per common
share:
Basic....................... $ 0.02 $ 0.04 $ 0.12 $ 0.11 $ (0.40)
======= ======= ======= ======= =======
Diluted..................... $ 0.02 $ 0.03 $ 0.09 $ 0.08 $ (0.40)
======= ======= ======= ======= =======
Pro forma--basic............ $ 0.10 $ (0.14)
======= =======
Pro forma--diluted.......... $ 0.09 $ (0.14)
======= =======
Number of shares used in per
share computations:
Basic....................... 21,009 21,019 21,004 21,035 18,961
======= ======= ======= ======= =======
Diluted..................... 29,600 29,943 30,356 30,105 18,961
======= ======= ======= ======= =======
Pro forma--basic............ 25,623 32,825
======= =======
Pro forma--diluted.......... 30,356 32,825
======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
RAINMAKER SYSTEMS, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(In thousands, except share data)
<TABLE>
<CAPTION>
Redeemable Redeemable Redeemable Convertible
Convertible Convertible Convertible Preferred
Preferred Stock Preferred Stock Preferred Stock Stock Series
Series A Series C Series D B Common Stock Additional
---------------- ----------------- ------------------ --------------- ------------------ Paid-in
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Capital
-------- ------ --------- ------- ---------- ------ ------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1995............. 574,620 $977 -- $ -- -- $ -- 349,160 $384 21,000,000 $21 $ 219
Exercise of
employee stock
options......... -- -- -- -- -- -- -- -- 8,750 -- 1
Net income...... -- -- -- -- -- -- -- -- -- -- --
-------- ---- --------- ------- ---------- ------ ------- ---- ---------- --- ------
Balance at
December 31,
1996............. 574,620 977 -- -- -- -- 349,160 384 21,008,750 21 220
Exercise of
employee stock
options......... -- -- -- -- -- -- -- -- 17,238 -- 3
Net income...... -- -- -- -- -- -- -- -- -- -- --
-------- ---- --------- ------- ---------- ------ ------- ---- ---------- --- ------
Balance at
December 31,
1997............. 574,620 977 -- -- -- -- 349,160 384 21,025,988 21 223
Conversion of
nonpar preferred
stock to $0.001
par value
preferred
stock........... -- -- -- -- -- -- -- (384) -- -- 384
Exercise of
employee stock
options......... -- -- -- -- -- -- -- -- 434,906 -- 134
Net income...... -- -- -- -- -- -- -- -- -- -- --
Dividends
declared........ -- -- -- -- -- -- -- -- -- -- --
-------- ---- --------- ------- ---------- ------ ------- ---- ---------- --- ------
Balance at
December 31,
1998............. 574,620 977 -- -- -- -- 349,160 -- 21,460,894 21 741
Issuance of
Series C stock,
net of issuance
costs
(unaudited)..... -- -- 8,536,585 13,809 -- -- -- -- -- -- --
Exercise of
employee stock
options
(unaudited)..... -- -- -- -- -- -- -- -- 908,502 -- 244
Options issued
to consultants
in exchange for
services
(unaudited)..... -- -- -- -- -- -- -- -- -- -- 411
Conversion of
Series A
preferred stock
and debt into
Series D
preferred stock
(unaudited)..... (574,620) (977) -- -- 5,717,470 1,973 -- -- -- -- --
Conversion of
preferred stock
into common
stock
(unaudited)..... -- -- -- -- (1,431,284) (495) (14,271) -- 1,502,639 2 493
Repurchase of
common stock
(unaudited)..... -- -- -- -- -- -- -- -- (5,908,707) (5) (1,296)
Deferred stock
compensation
(unaudited)..... -- -- -- -- -- -- -- -- -- -- 2,026
Amortization of
deferred stock
compensation
(unaudited)..... -- -- -- -- -- -- -- -- -- -- --
Net loss
(unaudited)..... -- -- -- -- -- -- -- -- -- -- --
Dividends
declared
(unaudited)..... -- -- -- -- -- -- -- -- -- -- --
-------- ---- --------- ------- ---------- ------ ------- ---- ---------- --- ------
Balance at
September 30,
1999
(unaudited)...... -- $ -- 8,536,585 $13,809 4,286,186 $1,478 334,889 $ -- 17,963,328 $18 $2,619
======== ==== ========= ======= ========== ====== ======= ==== ========== === ======
<CAPTION>
Retained
Deferred Earnings
Stock (Accumulated
Compensation Deficit) Total
------------ ------------ --------
<S> <C> <C> <C>
Balance at
December 31,
1995............. $ -- $ 22 $ 646
Exercise of
employee stock
options......... -- -- 1
Net income...... -- 431 431
------------ ------------ --------
Balance at
December 31,
1996............. -- 453 1,078
Exercise of
employee stock
options......... -- -- 3
Net income...... -- 771 771
------------ ------------ --------
Balance at
December 31,
1997............. -- 1,224 1,852
Conversion of
nonpar preferred
stock to $0.001
par value
preferred
stock........... -- -- --
Exercise of
employee stock
options......... -- -- 134
Net income...... -- 2,550 2,550
Dividends
declared........ -- (36) (36)
------------ ------------ --------
Balance at
December 31,
1998............. -- 3,738 4,500
Issuance of
Series C stock,
net of issuance
costs
(unaudited)..... -- -- --
Exercise of
employee stock
options
(unaudited)..... -- -- 244
Options issued
to consultants
in exchange for
services
(unaudited)..... -- -- 411
Conversion of
Series A
preferred stock
and debt into
Series D
preferred stock
(unaudited)..... -- -- --
Conversion of
preferred stock
into common
stock
(unaudited)..... -- -- 495
Repurchase of
common stock
(unaudited)..... -- (8,389) (9,690)
Deferred stock
compensation
(unaudited)..... (2,026) -- --
Amortization of
deferred stock
compensation
(unaudited)..... 460 -- 460
Net loss
(unaudited)..... -- (4,582) (4,582)
Dividends
declared
(unaudited)..... -- (8) (8)
------------ ------------ --------
Balance at
September 30,
1999
(unaudited)...... $(1,566) $(9,241) $(8,170)
============ ============ ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
RAINMAKER SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months
Years Ended Ended September
December 31, 30,
------------------------- ----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net income (loss)................ $ 431 $ 771 $ 2,550 $ 2,317 $(4,582)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Depreciation and amortization... 258 550 635 521 1,758
Gain on sale of
catalog/distributor............ -- -- (2,525) (2,525) (80)
Loss on disposal of property and
equipment...................... 191 -- -- -- 296
Issuance of stock for consulting
services....................... -- -- -- -- 411
Deferred income taxes........... 74 (160) 1,177 484 (519)
Provision for sales returns and
doubtful accounts.............. 11 142 16 69 94
Changes in operating assets and
liabilities:
Accounts receivable............. (1,180) (3,049) (577) (228) (1,139)
Other receivables............... (305) 143 410 93 (126)
Inventories..................... (40) (729) 948 881 (1,417)
Prepaid expenses and other
assets......................... (313) (57) (53) 128 (132)
Accounts payable................ 1,424 2,320 1,468 (76) 3,954
Income taxes receivable, net.... 64 358 (1,382) (97) 5
Accrued compensation and related
liabilities.................... 152 380 536 292 (70)
Accrued liabilities............. 596 (280) 73 69 (299)
Deferred revenue................ 97 (178) 35 (5) (40)
------- ------- ------- ------- -------
Net cash provided by (used in)
operating activities............. 1,460 211 3,311 1,923 (1,886)
Investing activities
Proceeds from sale of
catalog/distributor............. -- -- 2,900 2,900 900
Liabilities paid related to sale
of catalog/distributor.......... -- -- (993) (944) --
Purchases of property and
equipment....................... (1,565) (1,098) (874) (692) (1,605)
Purchase of short-term
investments..................... -- -- -- -- (1,000)
Proceeds from issuance of notes
receivable from officers........ (122) (44) -- -- --
------- ------- ------- ------- -------
Net cash provided by (used in)
investing activities............. (1,687) (1,142) 1,033 1,264 (1,705)
Financing activities
Increase in subordinated
convertible note payable........ 496 -- -- -- --
Proceeds from issuance of
preferred stock ................ -- -- -- -- 13,809
Repurchase of common stock....... -- -- -- -- (9,690)
Proceeds from issuance of common
stock........................... 1 3 134 134 244
Repayment of capital lease
obligations..................... (68) (62) (121) (73) (218)
Dividends paid................... -- -- (18) -- (26)
Line of credit repayment......... (25) -- -- -- --
------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities............. 404 (59) (5) 61 4,119
------- ------- ------- ------- -------
Net increase (decrease) in cash
and cash equivalents............. 177 (990) 4,339 3,248 528
Cash and cash equivalents at
beginning of period............. 1,082 1,259 269 269 4,608
------- ------- ------- ------- -------
Cash and cash equivalents at end
of period....................... $ 1,259 $ 269 $ 4,608 $ 3,517 $ 5,136
======= ======= ======= ======= =======
Supplemental disclosure of cash
paid during the period
Interest paid.................... $ 13 $ 30 $ 217 $ 203 $ 43
======= ======= ======= ======= =======
Income taxes paid, net of
refunds......................... $ 74 $ 252 $ 1,908 $ 1,158 $ (7)
======= ======= ======= ======= =======
Supplemental schedule of noncash
investing and financing
activities
Acquisition of equipment under
capital leases.................. $ 144 $ 327 $ 372 $ 221 $ 471
======= ======= ======= ======= =======
Dividends declared, but unpaid... $ -- $ -- $ 18 $ -- $ --
======= ======= ======= ======= =======
Conversion of subordinated
convertible note to preferred
stock........................... $ -- $ -- $ -- $ -- $ 996
======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited.)
1. Summary of Significant Accounting Policies
Business
Founded in 1991 as UniDirect Corporation, Rainmaker Systems, Inc. (Rainmaker
or the Company) provides customer relationship management (CRM) services to
software and other technology companies. Rainmaker specializes in selling
software and service products to the installed customer base of its outsource
clients.
Effective May 15, 1998, the Company sold its UniDirect catalog and VarCity
distributor businesses to Savoir Technology Group, Inc. These operating units
were not considered segments as defined by Accounting Principles Board Opinion
No. 30, "Reporting the Results of Operations, --Reporting the Effects of
Disposals of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." The total consideration to be
received is $4.6 million, to be paid as follows: $2.9 million was paid at
closing, $0.9 million was paid on May 15, 1999 and $0.8 million is to be paid
on May 15, 2000. The Company retained and subsequently collected approximately
$2 million of accounts receivable related to the UniDirect catalog and VarCity
distribution businesses. The results of operations for UniDirect and VarCity
are included in Rainmaker's financial statements through May 15, 1998.
Interim Financial Information
The financial information as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 is unaudited but, in the opinion of
management, includes all adjustments, consisting only of normal recurring
adjustments, that the Company considers necessary for a fair presentation of
the financial position, operating results and cash flows for such periods.
Results for the nine months ended September 30, 1999 are not necessarily
indicative of results for the full year or any future period.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the accompanying financial
statements. Actual results could differ from those estimates.
Revenue Recognition
Revenue from the sale of service contracts and maintenance renewals is
recognized when a purchase order from the end user customer is received; the
service contract or maintenance agreement is delivered; the collection of the
receivable is considered probable; and no significant post-delivery obligations
remain. Revenue from product sales is recognized at the time of shipment of the
product directly to the customer. Revenue from services we perform is
recognized as the services are delivered.
Concentrations of Credit Risk and Credit Evaluations
The Company sells its clients' products and services primarily to business
end users. Credit is extended based on an evaluation of the customer's
financial condition, and collateral is generally not required. Credit losses
have traditionally been minimal, and such losses have been within management's
expectations.
F-7
<PAGE>
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
1. Summary of Significant Accounting Policies (Continued)
Rainmaker enters into contracts with its outsource clients to market and
sell its clients' products and services to the end user customers. As a result,
Rainmaker primarily earns revenue from sales to the outsource client's
customer, not the outsource client itself.
In 1996, sales to customers of The Santa Cruz Operation, Inc. (SCO)
accounted for 100% of CRM services revenue. In 1997, sales to customers of SCO,
FTP Software, Inc. (FTP) and Sun Microsystems, Inc. accounted for approximately
72%, 10% and 12%, respectively, of CRM services revenue. In 1998, sales to
customers of SCO, FTP and Novell, Inc. (Novell) accounted for approximately
46%, 21% and 16%, respectively, of CRM services revenue. For the nine months
ended September 30, 1999, sales to customers of SCO, FTP and Sybase accounted
for approximately 47%, 13% and 13% of CRM services revenue.
The Company has a distribution agreement with SCO that is in effect through
September 2002 and an outsource services agreement with FTP that is in effect
through July 2000. These clients may however terminate their contracts for
cause in accordance with the provisions of each contract. In most cases, a
client must provide the Company with advance written notice of its intention to
terminate. No individual end user customer accounted for 10% or more of
revenues in any period presented.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market.
Inventories consist primarily of shrink-wrap software products and user manuals
purchased for resale.
Property and Equipment
Depreciation of property and equipment is recorded using the straight-line
method over the assets' estimated useful lives of three to seven years.
Amortization of leasehold improvements is recorded using the straight-line
method over the shorter of the lease term or the estimated useful lives of the
assets. Amortization of fixed assets under capital leases is included in
depreciation expense.
The components of property and equipment at December 31, 1997 and 1998 and
September 30, 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------- September 30,
1997 1998 1999
------ ------ -------------
<S> <C> <C> <C>
Property and equipment, at cost:
Computer equipment................................ $3,507 $2,864 $4,161
Furniture and fixtures............................ 322 451 394
Leasehold improvements............................ 25 100 175
------ ------ ------
3,854 3,415 4,730
Accumulated depreciation and amortization........... 1,069 1,078 1,911
------ ------ ------
$2,785 $2,337 $2,819
====== ====== ======
</TABLE>
As of September 30, 1999, property and equipment included amounts held under
capital leases of approximately $1.2 million and related accumulated
amortization of approximately $193,000.
F-8
<PAGE>
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
1. Summary of Significant Accounting Policies (Continued)
Stock-Based Compensation
The Company accounts for stock-based awards to employees under the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" (APB 25), and has adopted the
disclosure-only alternative of Financial Accounting Standards Board Statement
No. 123 (FAS 123), "Accounting for Stock-Based Compensation."
Fair Value of Financial Instruments
The fair value for marketable debt securities is based on quoted market
prices. The carrying value of those securities, as of each period presented
approximates their fair value.
The fair value of notes receivable and payable is estimated by discounting
the future cash flows using the current interest rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities. The carrying values of these receivables and obligations,
as of each period presented approximate their respective fair values.
The fair value of short-term and long-term capital lease obligations is
estimated based on current interest rates available to Rainmaker for debt
instruments with similar terms, degrees of risk and remaining maturities. The
carrying values of these obligations, as of each period presented approximate
their respective fair values.
Advertising
The Company expenses the production costs of advertising as incurred, except
for direct response advertising, which it capitalizes. Direct response
advertising consists primarily of the costs to produce e-mails, faxes and
mailings. The capitalized production costs are amortized over the three-month
period following the advertising campaign.
At December 31, 1997 and 1998 and September 30, 1999 deferred advertising
costs aggregated $5,000, $107,000, and $0, respectively. Gross advertising
costs for the years ended December 31, 1996, 1997 and 1998 and the nine months
ended September 30, 1999 aggregated $1.4 million, $1.9 million, $1.4 million
and $842,000, respectively. The Company charged several vendors for
reimbursement under advertising programs of $1.5 million, $1.9 million, $1.7
million and $856,000 during the years ended December 31, 1996, 1997, 1998 and
the nine months ended September 30, 1999, respectively.
Cash, Cash Equivalents and Short-Term Investments
Rainmaker considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Cash equivalents
consist primarily of money market funds, commercial paper, and government
bonds.
Rainmaker classifies, at the date of acquisition, its marketable debt and
equity securities in accordance with the provisions of FAS 115, "Accounting for
Certain Investments in Debt and Equity Securities." Currently, Rainmaker
classifies its marketable securities as available-for-sale which are recorded
at fair market value with the related unrealized gains and losses included in
stockholders' equity. Unrealized gains and losses were not material for all
periods presented. Realized gains and losses and declines in value judged to be
other than temporary on available-for-sale securities are included in interest
income, net. The cost of securities sold is based on specific identification.
F-9
<PAGE>
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
1. Summary of Significant Accounting Policies (Continued)
Premiums and discounts are amortized over the period from acquisition to
maturity and are included in interest income, along with interest and
dividends.
Comprehensive Income
Effective January 1, 1998, the Company adopted FAS 130, "Reporting
Comprehensive Income." Rainmaker has no components of other comprehensive
income and accordingly the comprehensive income (loss) is the same as net
income (loss) for all periods presented.
Segment Reporting
Effective January 1, 1998, Rainmaker Systems adopted FAS 131, "Disclosures
About Segments of an Enterprise and Related Information" (FAS 131). FAS 131
changes the way companies report financial and descriptive information about
reportable operating segments in annual financial statements and interim
financial reports issued to stockholders. Rainmaker Systems operates in one
market segment, the sale of installed base marketing services, software
maintenance licenses, services, and customer retention programs to software and
other technology companies. Rainmaker primarily operates in one geographical
segment, North America. Substantially all of the Company's sales are made to
customers in the United States. Therefore, there was no impact on the Company's
financial statement disclosures due to the adoption of FAS 131.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (FAS 133).
Rainmaker is required to adopt FAS 133 for the year ending December 31, 2001.
FAS 133 establishes methods of accounting for derivative financial instruments
and hedging activities related to those instruments as well as other hedging
activities. Because Rainmaker currently holds no derivative financial
instruments and does not currently engage in hedging activities, adoption of
FAS 133 is expected to have no material impact on the Company's financial
position or results of operations.
In March 1998, the American Institute of Certified Public Accountants issued
SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." SOP 98-1 requires that entities capitalize certain costs
related to internal use software once certain criteria have been met. Rainmaker
adopted SOP 98-1 on January 1, 1999, and there was no material impact of
adoption on the Company's financial position or results of operations.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform
with the current period presentation.
2. Net Income (Loss) Per Share
Basic net income (loss) per share and diluted net income (loss) per share
are presented in conformity with FAS 128, "Earnings Per Share," (FAS 128) for
all periods presented. Pursuant to the Securities and Exchange Commission Staff
Accounting Bulletin No. 98, common stock andconvertible preferred stock issued
or granted for nominal consideration prior to the anticipated effective date of
F-10
<PAGE>
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
2. Net Income (Loss) Per Share (Continued)
an initial public offering must be included in the calculation of basic and
diluted net (loss) per common share as if they had been outstanding for all
periods presented. To date, Rainmaker has not had any issuances or grants for
nominal consideration.
In accordance with FAS 128, basic net income (loss) per share has been
computed using the weighted-average number of shares of common stock
outstanding during the period, less shares subject to repurchase. Basic and
diluted pro forma net income (loss) per share, as presented in the statement of
operations, has been computed as described above and also gives effect, under
Securities and Exchange Commission guidance, to the conversion of the
convertible preferred stock (using the if-converted method) from the original
date of issuance.
The following table presents the calculation of basic and diluted and pro
forma basic and diluted net income (loss) per common share (in thousands,
except per share data):
<TABLE>
<CAPTION>
Nine Months
Years Ended Ended
December 31, September 30,
-------------------- ---------------
1996 1997 1998 1998 1999
------ ------ ------ ------ -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net Income (Loss) Per Common Share--
Basic
Net income (loss)...................... $ 431 $ 771 $2,550 $2,317 $(4,582)
Less: Preferred A dividends............ -- -- (36) (18) --
Preferred C cumulative dividends..... -- -- -- -- (933)
Preferred D cumulative dividends..... -- -- -- -- (131)
Excess of redemption of preferred
stock over stated value.............. -- -- -- -- (1,941)
------ ------ ------ ------ -------
Income (loss) available to common
stockholders.......................... $ 431 $ 771 $2,514 $2,299 $(7,587)
====== ====== ====== ====== =======
Weighted-average shares of common stock
outstanding........................... 21,009 21,019 21,196 21,108 19,174
Less: weighted average shares subject
to repurchase......................... -- -- (192) (73) (213)
------ ------ ------ ------ -------
Weighted-average shares used in
computing basic net income (loss) per
common share.......................... 21,009 21,019 21,004 21,035 18,961
====== ====== ====== ====== =======
Basic net income (loss) per common
share................................. $ 0.02 $ 0.04 $ 0.12 $ 0.11 $ (0.40)
====== ====== ====== ====== =======
Net Income (Loss) Per Common Share--
Diluted
Net income (loss)...................... $ 431 $ 771 $2,550 $2,317 $(4,582)
Add: Accrued interest on convertible
debenture........................... 39 39 39 31 --
Less: Preferred C cumulative
dividends........................... -- -- -- -- (933)
Preferred D cumulative dividends..... -- -- -- -- (131)
Excess of redemption of preferred
stock over stated value.............. -- -- -- -- (1,941)
------ ------ ------ ------ -------
Income (loss) available to common
stockholders.......................... $ 470 $ 810 $2,589 $2,348 $(7,587)
====== ====== ====== ====== =======
Weighted-average shares of common stock
outstanding........................... 21,009 21,019 21,196 21,108 19,174
Add: Number of dilutive common stock
equivalents--options and warrants... 1,128 1,461 1,697 1,534 --
Assumed conversion of subordinated
debentures........................... 2,844 2,844 2,844 2,844 --
Assumed conversion of convertible
preferred stock...................... 4,619 4,619 4,619 4,619 --
Less: weighted average shares subject
to repurchase....................... -- -- -- -- (213)
------ ------ ------ ------ -------
Weighted-average shares used in
computing diluted net income (loss)
per common share...................... 29,600 29,943 30,356 30,105 18,961
====== ====== ====== ====== =======
Diluted net income (loss) per common
share................................. $ 0.02 $ 0.03 $ 0.09 $ 0.08 $ (0.40)
====== ====== ====== ====== =======
</TABLE>
F-11
<PAGE>
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
2. Net Income (Loss) Per Share (Continued)
<TABLE>
<CAPTION>
Nine Months
Years Ended Ended
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Pro Forma Net Income (Loss) Per Common Share--Basic
Net income (loss)................................... $2,550 $(4,582)
====== =======
Shares used above................................... 21,004 18,961
Pro forma adjustment to reflect weighted effect of
assumed conversion of convertible preferred stock
(unaudited)........................................ 4,619 13,864
------ -------
Shares used in computing pro forma basic net income
(loss) per common share (unaudited)................ 25,623 32,825
====== =======
Pro forma basic net income (loss) per common share
(unaudited)........................................ $ 0.10 $ (0.14)
====== =======
Pro Forma Net Income (Loss) Per Common Share--
Diluted
Net income (loss)................................... $2,589 $(4,582)
====== =======
Shares used above................................... 30,356 18,961
Pro forma adjustment to reflect weighted effect of
assumed conversion of convertible preferred stock
(unaudited)........................................ -- 13,864
------ -------
Shares used in computing pro forma diluted net
income (loss) per common share (unaudited)......... 30,356 32,825
====== =======
Pro forma diluted net income (loss) per common share
(unaudited)........................................ $ 0.09 $ (0.14)
====== =======
</TABLE>
Rainmaker has excluded all convertible preferred stock, warrants for
convertible preferred stock, outstanding stock options and shares subject to
repurchase from the calculation of diluted net loss per common share for the
nine months ended September 30, 1999 because all such securities are anti-
dilutive. The total number of potential shares excluded from the calculation of
diluted net loss per common share was 16,552,677 for the nine months ended
September 30, 1999.
3. Cash Equivalents and Short-Term Investments
The following is a summary of available-for-sale securities. All available-
for-sale securities at September 30, 1999 have a maturity of less than one
year. As of December 31, 1997 and 1998 and September 30, 1999 the fair market
value of available-for-sale securities approximates their carrying value (in
thousands):
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1997 1998 1999
------------ ------------ -------------
<S> <C> <C> <C>
Money market fund...................... $ 559 $ 996 $ 467
Commercial paper....................... -- -- 2,997
Government securities.................. -- 3,200 1,258
Municipal bonds........................ -- -- 1,000
----- ------- -------
$ 559 $ 4,196 $ 5,722
===== ======= =======
Classified as:
Cash equivalents....................... $ 559 $ 4,196 $ 4,722
Short-term investments................. -- -- 1,000
----- ------- -------
$ 559 $ 4,196 $ 5,722
===== ======= =======
</TABLE>
F-12
<PAGE>
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
4. Debt and Commitments
Debt
In 1995, the Company entered into a $1.0 million subordinated convertible
debenture and related warrant agreement and a distribution agreement with the
holder of the Series A convertible preferred stock. On January 29, 1999, the
Company and this stockholder entered into an Exchange Agreement whereby this
debenture and all outstanding shares of Series A convertible preferred stock
were converted into 5,717,470 shares of Series D convertible preferred stock
and the related warrant was cancelled.
Obligations Under Capital Leases and Operating Lease Commitments
The Company leases office space and property and equipment under capital and
operating leases that expire at various dates through 2004. Future minimum
lease payments under noncancelable operating and capital lease arrangements at
September 30, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Leases Operating Leases
-------------- ----------------
<S> <C> <C>
2000.......................................... $ 474 $ 979
2001.......................................... 280 946
2002.......................................... 187 651
2003.......................................... 56 544
2004.......................................... 4 306
Thereafter.................................... -- 69
------ ------
Total minimum lease payments................ 1,001 $3,495
======
Less amount representing interest............. 101
------
Present value of minimum lease payments....... 900
Less current portion.......................... 296
------
Obligations under capital leases due after one
year......................................... $ 604
======
</TABLE>
Rent expense under operating leases was approximately $338,000, $458,000,
and $522,000 in 1996, 1997, and 1998, respectively, and approximately $717,000
for the nine months ended September 30, 1999.
5. Income Taxes
The Company utilizes the liability method of accounting for income taxes as
set forth in Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Under the liability method, deferred taxes are determined
based on the differences between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse. Deferred tax assets are recognized and
measured based upon the likelihood of realization of the related tax benefit in
the future.
F-13
<PAGE>
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
5. Income Taxes (Continued)
The federal and state income tax provision (benefit) for the years ended
December 31, 1996, 1997 and 1998 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------
1996 1997 1998
---- ----- ------
<S> <C> <C> <C>
Current:
Federal.................................................... $122 $ 500 $ 420
State...................................................... 20 110 105
---- ----- ------
142 610 525
Deferred:
Federal.................................................... 68 (130) 915
State...................................................... 6 (30) 262
---- ----- ------
74 (160) 1,177
---- ----- ------
$216 $ 450 $1,702
==== ===== ======
</TABLE>
A reconciliation of taxes computed at the statutory federal income tax rate
to income tax expense (benefit) follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------
1996 1997 1998
---- ---- ------
<S> <C> <C> <C>
Provision (benefit) computed at federal statutory rate..... $220 $415 $1,446
Change in valuation allowance.............................. (14) -- --
Research and development tax credit........................ (28) (28) --
California franchise tax expense (benefit), net of federal
effect.................................................... 31 53 242
Nondeductible expenses..................................... 7 10 14
---- ---- ------
$216 $450 $1,702
==== ==== ======
</TABLE>
Deferred income taxes reflect the tax effects of temporary differences
between the value of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities as of December 31, 1997 and 1998
are (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
----- -------
<S> <C> <C>
Deferred tax assets:
Accounts receivable reserve.................................. $ 129 $ 135
Inventory reserves........................................... 63 53
Accrued expenses............................................. 126 166
----- -------
Total deferred tax assets...................................... 318 354
Deferred tax liabilities:
Tax over book depreciation................................... (176) (882)
Installment gain............................................. -- (507)
----- -------
Total deferred tax liabilities................................. (176) (1,389)
===== =======
Net deferred tax assets (liabilities).......................... $ 142 $(1,035)
===== =======
</TABLE>
F-14
<PAGE>
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
6. Stockholders' Equity
Shares authorized
The articles of incorporation, as amended in February 1999, authorize the
Company to issue 50,000,000 shares of common stock and 15,000,000 shares of
preferred stock. The Series A preferred stock (Series A Stock) was exchanged
for a new Series D preferred stock in February 1999 and ceased to exist. As of
September 30, 1999, the Company has designated 402,710 shares as Series B
preferred stock (Series B Stock) 8,536,585 shares as Series C preferred stock
(Series C Stock) and 5,717,470 shares as Series D preferred stock (Series D
Stock).
Convertible Preferred Stock
Series A
Dividends on the Series A Stock were cumulative commencing July 1, 1998 at a
rate of $0.1225 per share per annum. Dividends totaling $44,000 were declared
and paid through September 30, 1999.
Series B
The Series B Stock ranks senior to the Company's common stock and junior to
the Series C and D Stock with respect to dividends and liquidation preference.
The stated value per share of the Series B Stock for liquidation purposes is
$1.43. The Series B Stock is not redeemable by the Company. The Articles
provide that each share of Series B Stock is convertible into five shares of
the Company's common stock. The Series B Stock votes with the Company's common
stock on an as- converted basis (i.e., each share of Series B Stock has five
votes). The Series B Stock automatically converts to common stock immediately
prior to the closing of an underwritten initial public offering resulting in
net proceeds to the Company of at least $30 million where the public offering
price implies a pre-offering equity valuation of the Company of at least $80
million (a Qualified IPO).
Convertible Redeemable Preferred Stock
Series C
The Series C Stock has a stated value per share of $1.64, and is entitled to
cumulative dividends, at a compounded annual rate per share of 10% of its
stated value (approximately $933,000 accumulated as of September 30, 1999). In
addition, the Series C Stock, along with the Series D Stock, is entitled to the
pro rata portion, on an as-converted basis, of any common stock dividends, if
any are declared. In the event of liquidation of the Company, the Series C
Stock ranks senior to the Series B Stock and pari passu with the Series D
Stock. The holders of Series C Stock may, at any time after February 8, 2004,
require the redemption of all or a portion of the shares owned by such holder
at $1.64 per share plus any accrued and unpaid dividends per share. The Series
C Stock is convertible at any time at the option of the holder, initially on a
one-to-one basis, and is subject to anti-dilution protection. In addition, the
conversion price is subject to yearly anti-dilution adjustments for certain
liquidity events. In no event will the number of shares of common stock
issuable upon conversion of each share of Series C Stock be less than one. The
outstanding shares of Series C Stock will automatically be converted into
common stock immediately prior to the closing of a Qualified IPO.
F-15
<PAGE>
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
6. Stockholders' Equity (Continued)
The holders of Series C Stock vote on an as-converted basis with common
stock and are entitled to notice of all stockholders meetings and to vote
generally on all matters submitted to the stockholders for a vote as required
by law. In addition, the approval of holders of a majority of shares of Series
C Stock and Series D Stock voting or consenting together as a single class
(Protective Provisions), is required for the Company to enter into certain
transactions.
Series D
The Series D Stock has a stated value per share of $0.35, and is entitled to
cumulative dividends, at a compounded annual rate per share of 10% of its
stated value (approximately $131,000 accumulated as of September 30, 1999). In
addition, the Series D Stock, on an as-converted basis, is entitled to the pro
rata portion of any common stock dividends if any are declared. In the event of
liquidation of the Company, the Series D Stock ranks senior to Series B Stock
and pari passu with the Series C Stock. The holders of Series D Stock may, at
any time after February 8, 2004, require the redemption of all or portion of
the shares owned by such holder at $0.35 per share plus any accrued and unpaid
dividends per share. The Series D Stock is convertible at any time at the
option of the holder, initially on a one-to-one basis, subject to anti-dilution
protection. The outstanding shares of Series D Stock will automatically be
converted into common stock immediately prior to the closing of a Qualified
IPO. The Series D Stock votes on an as-converted basis with common stock.
The holders of Series D Stock are entitled to notice of all stockholders
meetings and to vote generally on all matters submitted to the stockholders for
a vote as required by law. In addition, the Series D Stock is afforded the
protection of the Protective Provisions described above for the Series C Stock.
In connection with its issuance of Series D Stock in February 1999, the
Company issued the right to certain stockholders to sell outstanding shares of
their common stock back to the Company at a price of $1.64 per share. As of
September 30, 1999, stockholders had exercised rights to sell 5,908,707 shares
back to the Company at an aggregate price of approximately $9.7 million. Of the
total common shares repurchased through September 30, 1999, a total of
1,497,389 shares (after conversion of 13,221 shares and 1,431,284 shares of
Series B and D preferred stock, respectively) were repurchased (at $1.64 per
share) at an amount in excess of the stated value of the underlying preferred
stock. In accordance with Securities and Exchange Commission (SEC) Staff
guidance, this excess amount, $1,941,000, has been treated as a return to the
preferred stockholders and deducted from net income (loss) on the accompanying
statement of operations in order to derive income (loss) available to common
stockholders. Rights to sell back 83,253 shares at an aggregate price of
$136,500 expired on September 30, 1999.
Warrant
In March 1994, the Company granted a warrant to purchase 22,750 shares of
Series B Stock (which would be convertible into 113,750 shares of common stock)
at $1.03 per share in connection with obtaining a line of credit. The warrant
expires in March 2000.
F-16
<PAGE>
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
6. Stockholders' Equity (Continued)
Stock Option and Stock Issuance Plans
In 1995, the Company adopted the 1995 Stock Option/Issuance Plan (the 1995
Stock Option Plan) under which 1,635,105 shares have been reserved for future
issuance as of September 30, 1999. In 1998, the Company adopted the 1998 Stock
Option/Issuance Plan (the 1998 Stock Option Plan) under which 3,038,599 shares
have been reserved for future issuance as of September 30, 1999. Under both the
1995 and 1998 Stock Option Plans, the Board of Directors is authorized to grant
incentive stock options or nonqualified stock options to eligible employees,
members of the Board of Directors, and consultants, although incentive stock
options may be granted only to employees. Incentive stock options may be
granted at an exercise price of not less than 100% of the fair market value of
common stock on the date of grant while nonqualified stock options may be
granted at a price not less than 85% of the fair market value of the common
stock. Options generally vest 25% after the first year and 2.1% per month
thereafter, then expire no later than ten years from the date of grant.
Under both the 1995 and 1998 Stock Option Plans, the Board of Directors is
authorized to issue shares of common stock to eligible employees, members of
the Board of Directors, and consultants. Stock may be issued at a price not
less than 85% of the fair value of the common stock. Shares of common stock
issued under both the 1995 and 1998 Stock Option Plans may be fully vested upon
issuance or may vest in one or more installments over the participant's period
of service.
As discussed in Note 1, the Company has elected to follow APB 25 and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
FAS 123 requires use of option valuation models that were not developed for use
in valuing employee stock options. Under APB 25 when the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income is required by FAS 123, which
also requires the information be determined as if the Company has accounted for
its employee stock options granted subsequent to December 31, 1994 under the
fair value method of that statement. The fair value of the Company's options
was estimated at the grant date using the minimum value method option pricing
model with the following weighted-average assumptions for the years ended
December 31, 1996, 1997 and 1998 and the nine months ended September 30, 1999:
dividend yield of 0%; expected life of 4 years; and weighted average risk-free
interest rate of approximately 6.0%, 5.5%, 5.0% and 6.0%, respectively. Pro
forma information is as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Nine Months
Years Ended December 31, Ended
------------------------ September 30,
1996 1997 1998 1999
------------------------ -------------
<S> <C> <C> <C> <C>
Pro forma net income (loss)............. $ 419 $ 740 $ 2,499 $(4,925)
======= ======= ======== =======
Pro forma net income (loss) per share:
--basic............................... $ 0.02 $ 0.04 $ 0.12 $ (0.26)
======= ======= ======== =======
--diluted............................. $ 0.01 $ 0.02 $ 0.08 $ (0.26)
======= ======= ======== =======
</TABLE>
F-17
<PAGE>
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
6. Stockholders' Equity (Continued)
The weighted-average fair value of options granted during 1996, 1997, 1998
and for the nine months ended September 30, 1999 was $0.06, $0.08, $0.08 and
$1.92, with an exercise price equal to the fair value of the Company's common
stock on the date of grant. The weighted-average fair value of options granted
during the nine-months ended September 30, 1999 with an exercise price below
the deemed fair value of the Company's common stock on the date of grant was
$2.31.
A summary of activity under the Plans is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Options Price
Outstanding Per Share
----------- ---------
<S> <C> <C>
Balance at December 31, 1995.............................. 1,922,700 $0.09
Granted................................................. 1,239,700 $0.28
Exercised............................................... (8,750) $0.06
Canceled................................................ (369,900) $0.11
---------
Balance at December 31, 1996.............................. 2,783,750 $0.17
Granted................................................. 541,250 $0.41
Exercised............................................... (17,238) $0.19
Canceled................................................ (233,512) $0.33
---------
Balance at December 31, 1997.............................. 3,074,250 $0.20
Granted................................................. 1,109,558 $0.44
Exercised............................................... (434,906) $0.33
Canceled................................................ (497,511) $0.42
---------
Balance at December 31, 1998.............................. 3,251,391 $0.23
Granted................................................. 2,055,188 $3.45
Exercised............................................... (908,502) $0.27
Canceled................................................ (624,847) $2.18
---------
Balance at September 30, 1999............................. 3,773,230 $1.66
=========
</TABLE>
At December 31, 1998 and September 30, 1999, 2,458,985 and 1,028,644 shares,
respectively, were available for future grant under the Plans.
F-18
<PAGE>
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
6. Stockholders' Equity (Continued)
The following summarizes information about stock options outstanding as of
September 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding
-----------------------------------
Weighted
Average
Remaining
Contractual
Outstanding Life (in Number
Exercise Price Number Years) Exercisable
- -------------- ----------- ----------- -----------
<S> <C> <C> <C>
$0.06....................................... 1,006,617 5.92 984,612
$0.32....................................... 558,695 6.81 440,967
$0.44....................................... 624,299 8.52 300,637
$0.50....................................... 60,308 9.16 3,624
$0.83....................................... 153,512 9.40 2,744
$1.64....................................... 475,405 9.56 50,000
$2.50....................................... 487,950 9.72 25,000
$6.50....................................... 26,000 9.87 --
$9.00....................................... 380,444 9.99 2,901
--------- ---------
3,773,230 8.06 1,810,485
========= =========
</TABLE>
In connection with the grant of certain options to employees during the nine
months ended September 30, 1999, the Company recorded deferred compensation
expense of approximately $2.0 million based on the difference between the
exercise prices of those options at their respective grant dates and the deemed
fair value for accounting purposes of the shares of common stock subject to
such options. This amount is included as a reduction of stockholders' equity
and is being amortized on a graded vesting method over the vesting period of
the options. Compensation expense of $460,000 recognized during the nine months
ended September 30, 1999 relates to options awarded to employees in all
operating expense categories and has been recorded in selling, general and
administrative expenses on the accompanying statement of operations.
Common Stock Reserved for Future Issuance
Shares of common stock of the Company reserved for future issuance at
September 30, 1999 are as follows:
<TABLE>
<S> <C>
Warrants............................................................. 113,750
Stock options........................................................ 4,801,874
Series B preferred stock............................................. 1,674,445
Series C preferred stock............................................. 8,536,585
Series D preferred stock............................................. 4,286,186
----------
19,412,840
==========
</TABLE>
F-19
<PAGE>
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
7. Related Party Transactions
During 1996, 1997, 1998 and the nine months ended September 30, 1999 the
Company purchased inventories and service agreements from its Series A and D
preferred stockholder at a cost of $11.7 million, $15.6 million, $15.9 million
and $13.8 million, respectively. At December 31, 1997 and 1998 and at September
30, 1999, the Company owed that stockholder $3.2 million, $1.0 million, and
$3.9 million, respectively, for such purchases. Also, during 1996, 1997 and
1998, and the nine months ended September 30, 1999, the Company received
marketing development fund reimbursements of $674,000, $995,000, $982,000, and
$513,000 respectively, from that stockholder. Amounts totaling $433,000,
$341,000 and $276,000 were receivable from that stockholder at December 31,
1997 and 1998 and September 30, 1999, respectively.
8. Employee Benefit Plan
The Company has a defined contribution benefit plan established under the
provisions of Section 401(k) of the Internal Revenue Code. All employees may
elect to contribute up to 20% of their compensation to the plan through salary
deferrals. The Company matches 25% of the first 6% of the employee's
compensation contributed to the plan. During the years ended December 31, 1996,
1997 and 1998 and the nine months ended September 30, 1999, the Company made
cash contributions to the plan of $30,000, $37,000, $62,000 and $74,000,
respectively.
9. Subsequent Event
Initial Public Offering
In August 1999, the Company's Board of Directors authorized the sale of its
common stock in a proposed initial public offering ("IPO"). If the offering is
consummated under the terms presently anticipated, all the convertible
preferred stock outstanding will automatically be converted into common stock.
Unaudited pro forma stockholders' equity at September 30, 1999, as adjusted for
the assumed conversion of convertible preferred stock based on shares of
convertible preferred stock outstanding at September 30, 1999, is disclosed on
the balance sheet.
F-20
<PAGE>
[Inside Back Cover]
Inside Back Cover of Prospectus
a. Flap/Outside (half wide)
Graphic: stylized circle showing four stages of the customer life cycle
Annotation for graphic:
1. "Attachment Programs focus on the sale of software subscriptions
and service contracts immediately after the initial sale."
2. "Search for and Rescue of unregistered or inactive customers
further increase the lifetime value of customers."
3. "Loyalty Programs focus on building brand and product loyalty to
ensure the customer is well informed and well served."
4. "Renewal Programs are designed to increase contract renewal rates."
Caption for Graphic: "Programs for Every Stage of the Customer Life cycle
Our marketing, sales and client interaction programs are
focused on four stages of the customer life cycle to grow
the customer base and increase the lifetime value of each
customer."
b. Flap/Inside (halfwide) and Inside Cover
Graphic: Stylized, flowchart-like graphic depicting Rainmaker's
personalized automated selling capabilities. Elements of the graphic
includes simple illustrations to depict steps of the selling process
including personalized e-mail, personalized client Web pages, and client
Web pages for online ordering, payment and confirmation. It also includes a
picture of a woman typing on a computer.
Annotation for graphic:
1. "Begins with...Personalized Marketing"
2. "Links to...Customized Web Pages"
3. "Provides you...
. Easy Online Ordering
. Secure Online Payment
. Order Specific Confirmation"
4. "Customer profile is refined at every step"
Caption for Graphic: "Personalized Automated Selling"
Rainmaker Logo (on lower right corner)
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
[LOGO OF RAINMAKER]
5,000,000 Shares of Common Stock
----------------
PROSPECTUS
----------------
Donaldson, Lufkin & Jenrette Thomas Weisel Partners LLC
SG Cowen DLJdirect Inc.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell those securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor
any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of the company
have not changed since the date hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 1999 (25 days after the date of this prospectus), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting fees, payable in connection with the sale and distribution of the
securities being registered. All amounts are estimated except the Securities
and Exchange Commission and NASD registration fees. All of the expenses below
will be paid by Rainmaker.
<TABLE>
<CAPTION>
Item
----
<S> <C>
Registration fee................................................. $ 15,985
NASD filing fee.................................................. 6,825
Nasdaq National Market listing fee............................... 95,000
Blue sky fees and expenses....................................... 10,000
Printing and engraving expenses.................................. 200,000
Legal fees and expenses.......................................... 460,000
Accounting fees and expenses..................................... 425,000
Transfer Agent and Registrar fees................................ 2,000
Miscellaneous.................................................... 27,190
----------
Total.......................................................... $1,242,000
==========
</TABLE>
- --------
* To be filed by amendment.
Item 14. Indemnification of Directors and Officers.
Under Section 145 of the Delaware General Corporation Law, we can indemnify
our directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act of 1933, as amended
(the "Securities Act"). Our certificate of incorporation will further provide
that we are authorized to indemnify our directors and officers to the fullest
extent permitted by law through the bylaws, agreement, vote of stockholders or
disinterested directors, or otherwise. Our bylaws will provide that we will
indemnify our directors and officers to the fullest extent permitted by law and
require us to advance litigation expenses upon our receipt of an undertaking by
the director or officer to repay such advances if it is ultimately determined
that the director or officer is not entitled to indemnification. Our bylaws
will further provide that rights conferred under such bylaws do not exclude any
other right such persons may have or acquire under any bylaw, agreement, vote
of stockholders or disinterested directors or otherwise.
We also have directors' and officers' liability insurance. In addition,
concurrently with this offering, we will enter into agreements to indemnify our
directors and certain of our officers in addition to the indemnification
provided for in the certificate of incorporation and bylaws. These agreements
will, among other things, indemnify our directors and certain of our officers
for certain expenses (including attorneys fees), judgments, fines and
settlement amounts incurred by such person in any action or proceeding,
including any action by or in our right, on account of services by that person
as a director or officer of Rainmaker or as a director or officer of any
subsidiary of Rainmaker, or as a director or officer of any other company or
enterprise that the person provides services to at the request of Rainmaker.
Our certificate of incorporation will provide that, pursuant to Delaware
Law, our directors shall not be liable for monetary damages for breach of the
directors' fiduciary duty of care to Rainmaker and our stockholders. This
provision in the certificate of incorporation does not eliminate the duty of
care, and in appropriate circumstances equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware Law. In
addition, each director will continue to
II-1
<PAGE>
be subject to liability for breach of the director's duty of loyalty to
Rainmaker or our stockholders, for acts or omissions not in good faith or
involving intentional misconduct or knowing violations of law, for actions
leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware Law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
The Underwriting Agreement provides for indemnification by the underwriters
of Rainmaker and its officers and directors, and by Rainmaker of the
underwriters, for certain liabilities arising under the Securities Act or
otherwise.
Item 15. Recent Sales of Unregistered Securities
The following is a summary of transactions by Rainmaker during the past
three years involving sales of our securities that were not registered under
the Securities Act of 1933, as amended:
In March 1994, we issued a warrant to Silicon Valley Bank to purchase 22,750
shares of Series B preferred stock at an exercise price of $1.03 per share in
consideration of a line of credit to borrow funds with an expiration date of
March 1999. We extended the expiration date of this warrant to March 8, 2000 in
consideration of an amendment to the credit facility dated as of April 15,
1998.
On February 12, 1999, we issued 8,536,585 shares of Series C preferred stock
at $1.64 per share for an aggregate price of approximately $14 million to
certain accredited investors.
On February 12, 1999, we issued 5,717,470 shares of Series D preferred stock
to The Santa Cruz Operation, Inc. ("SCO") in exchange for all of the securities
previously held by SCO, including a convertible debenture in the principal
amount of $995,529, warrants to purchase 2,844,370 shares of common stock and
Series A preferred stock convertible into 2,873,100 shares of common stock.
From January 1, 1996 to September 30, 1999, we have granted options to
purchase an aggregate of 4,945,696 shares of common stock to our directors,
executive officers, employees and consultants at exercise prices of $0.06 to
$9.00 per share. As of September 30, 1999, options to purchase 1,369,396 shares
at an weighted exercise price of $0.29 per share had been exercised.
In April and May 1999, we granted put rights to six existing stockholders to
sell back to us up to 1,164,537 shares of common stock at $1.64 per share. One
stockholder, SCO, subsequently exercised its put right, and we purchased from
SCO 540,642 shares in June 1999 and 540,642 shares in August 1999, at a price
of $1.64 per share. The remaining put rights to 83,253 shares of common stock
expired on September 30, 1999.
The sale and issuance of securities in the above transactions were deemed to
be exempt from registration under the Securities Act by virtue of Section 4(2)
or Rule 701 thereof, or Regulation D, as transactions by an issuer not
involving a public offering. Appropriate legends are affixed to the stock
certificates issued in such transactions. Similar legends were imposed in
connection with any subsequent sales of any such securities. All recipients
either received adequate information about Rainmaker or had access, through
employment or other relationships, to such information.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
The following Exhibits are attached hereto and incorporated herein by
reference.
<TABLE>
<C> <S>
1.1 **Form of Underwriting Agreement.
3.1 Certificate of Incorporation of Rainmaker Systems, Inc. to be filed
with the Delaware Secretary of State in October 1999.
3.2 Bylaws of Rainmaker Systems, Inc. to be adopted in October 1999.
4.1 Specimen certificate representing shares of common stock of
Rainmaker Systems, Inc.
4.2 *Registration Rights Agreement dated March 8, 1994 between UniDirect
Corporation and Silicon Valley Bank.
4.3 *Registration Rights Agreement dated February 12, 1999 among
Rainmaker Systems, Inc., ABS Capital Partners III, L.P., H & Q
Rainmaker Investors, L.P., Hambrecht & Quist California, Hambrecht
& Quist Employee Venture Fund, L.P. II and The Santa Cruz
Operation, Inc.
5.1 Opinion of Brobeck, Phleger & Harrison LLP.
10.1 Form of Indemnification Agreement.
10.2 1999 Stock Incentive Plan.
10.3 1999 Stock Purchase Plan.
10.4 *Amended and Restated Loan and Security Agreement dated May 9, 1997
between UniDirect Corporation and Silicon Valley Bank, as amended
on September 22, 1997, April 15, 1998 and September 14, 1998.
10.5 *1995 Stock Option/Stock Issuance Plan, together with form of Notice
of Grant of Stock Option, Stock Option Agreement, Stock Purchase
Agreement and Stock Issuance Agreement.
10.6 *1998 Stock Option/Stock Issuance Plan, together with form of Notice
of Grant of Stock Option, Stock Option Agreement, Stock Purchase
Agreement and Stock Issuance Agreement.
10.7 *Net Lease Agreement dated July 29, 1996 between UniDirect
Corporation and Borland International, Inc., together with
amendments dated February 27, 1997, April 14, 1998 and November 15,
1998.
10.8 *Net Lease Agreement dated November 5, 1998 between UniDirect
Corporation and Inprise Corporation.
10.9 *Warrant to Purchase Stock dated March 8, 1994 issued to Silicon
Valley Bank, as amended by letter agreement dated April 15, 1998.
10.10 *Stock Purchase Agreement dated January 29, 1999 among Rainmaker
Systems, Inc., ABS Capital Partners III, L.P., H & Q Rainmaker
Investors, L.P., Hambrecht & Quist California and Hambrecht & Quist
Employee Venture Fund, L.P. II.
10.11 *Exchange Agreement dated January 29, 1999 between Rainmaker Systems,
Inc. and The Santa Cruz Operation, Inc.
10.12 *Asset Purchase Agreement dated May 18, 1998 between UniDirect
Corporation and Savoir Technology Group, Inc.
10.13 *Master Lease Agreement dated May 5, 1999 between Rainmaker Systems,
Inc. and Celtic Leasing Corp.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.14 *Loan and Security Agreement dated October 28, 1997 between UniDirect
Corporation and MetLife Capital Corporation, together with related
agreements dated May 5, 1999.
10.15 *Compensation Agreement dated January 1, 1995 between UniDirect
Corporation and Richard Marotta, together with Notice of Grant of
Stock Option and Stock Option Agreement.
10.16 *Compensation Agreement dated November 1, 1995 between UniDirect
Corporation and Richard Marotta, together with Notice of Grant of
Stock Option and Stock Option Agreement.
10.17 *Separation Agreement and Release dated September 30, 1997 between
UniDirect Corporation and Bernard Jubb, together with Amendment No.
1 dated January 27, 1997 and the Promissory Note and Security
Agreement dated February 5, 1999.
10.18 *Separation Agreement and Release dated April 8, 1999 between
Rainmaker Systems, Inc. and Chris Sterbenc.
10.19 *+Distributor Agreement dated January 24, 1995 between UniDirect
Corporation and The Santa Cruz Operation, Inc., together with
amendments dated April 8, 1996, November 5, 1997, March 16, 1999
and May 17, 1999.
10.20 *+Sun Software Subscription Services Outsourcing and Distribution
Agreement dated March 18, 1997 between UniDirect Corporation and
SunSoft, Inc., together with amendments dated May 20, 1997, June
16, 1997, April 30, 1999, May 19, 1999 and Assignment dated August
25, 1998.
10.21 *+Outsourcing Services Agreement dated July 21, 1997 between UniDirect
Corporation and FTP Software, Inc., together with amendments dated
September 12, 1997, October 1, 1997, November 11, 1997, January 21,
1998, January 28, 1998, May 26, 1998 and August 1998.
10.22 *+Outsource Services Agreement dated March 26, 1999 between Rainmaker
Systems, Inc. and Novell, Inc.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Brobeck, Phleger & Harrison LLP (contained in Exhibit
5.1).
24.1 Power of Attorney (contained on the signature page hereof).
27.1 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
** To be filed by amendment.
+ Confidential treatment is being sought with respect to certain portions of
this agreement. Such portions have been omitted from this filing and have
been filed separately with the Securities and Exchange Commission.
(b) Financial Statement Schedules
The following financial statement schedule for the three years in the period
ended December 31, 1998 should be read in conjunction with the financial
statements of Rainmaker Systems, Inc. filed as part of this Registration
Statement.
. Schedule II--Valuation and qualifying accounts
Schedules other than that listed above have been omitted because the
information required to be set forth therein is not applicable or is shown in
the financial statements or notes thereto.
II-4
<PAGE>
Item 17. Undertakings
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and this offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Scotts Valley, State of California, on the 21st day of October, 1999.
RAINMAKER SYSTEMS, INC.
/s/ Michael Silton
By: ____________________________________
Michael Silton,
Chairman of the Board, President
and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, the undersigned hereby constitute and
appoint Michael Silton his true and lawful attorney-in-fact and agent with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, or any related
registration statement filed pursuant to Rule 462(b) under the Securities Act
of 1933, and to file the same, with exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite or necessary to be done in connection
therewith, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement on Form S-1 has been signed by the
following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Michael Silton Chairman of the Board, October 21, 1999
____________________________________ President and Chief
Michael Silton Executive Officer
(principal executive
officer)
/s/ Martin Hernandez Secretary and Chief October 21, 1999
____________________________________ Financial Officer
Martin Hernandez (principal financial and
accounting officer)
* Director October 21, 1999
____________________________________
Robert Leff
Director
____________________________________
Alok Mohan
* Director October 21, 1999
____________________________________
Peter Silton
* Director October 21, 1999
____________________________________
Andrew Sheehan
</TABLE>
/s/ Michael Silton
*By: _______________________________
Michael Silton, attorney-in-fact
II-6
<PAGE>
Schedule II-Valuation and Qualifying Accounts
A schedule of the allowance for sales returns and doubtful accounts is
presented below (in thousands):
<TABLE>
<CAPTION>
Balance Additions
at Charged Write-offs Balance at
Beginning to Costs and End
Description of Period and Expenses Recoveries of Period
----------- --------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Allowance for sales returns and
doubtful accounts:
Year ended December 31, 1998..... $298 $286 $270 $314
Year ended December 31, 1997..... $156 $338 $196 $298
Year ended December 31, 1996..... $145 $278 $267 $156
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
1.1 **Form of Underwriting Agreement.
3.1 Certificate of Incorporation of Rainmaker Systems, Inc. to be filed
with the Delaware Secretary of State in October 1999.
3.2 Bylaws of Rainmaker Systems, Inc. to be adopted in October 1999.
4.1 Specimen certificate representing shares of common stock of
Rainmaker Systems, Inc.
4.2 *Registration Rights Agreement dated March 8, 1994 between UniDirect
Corporation and Silicon Valley Bank.
4.3 *Registration Rights Agreement dated February 12, 1999 among
Rainmaker Systems, Inc., ABS Capital Partners III, L.P., H & Q
Rainmaker Investors, L.P., Hambrecht & Quist California, Hambrecht &
Quist Employee Venture Fund, L.P. II and The Santa Cruz Operation,
Inc.
5.1 Opinion of Brobeck, Phleger & Harrison LLP.
10.1 Form of Indemnification Agreement.
10.2 1999 Stock Incentive Plan.
10.3 1999 Stock Purchase Plan.
10.4 *Amended and Restated Loan and Security Agreement dated May 9, 1997
between UniDirect Corporation and Silicon Valley Bank, as amended by
letter agreement dated April 15, 1998.
10.5 *1995 Stock Option/Stock Issuance Plan, together with form of Notice
of Grant of Stock Option, Stock Option Agreement, Stock Purchase
Agreement and Stock Issuance Agreement.
10.6 *1998 Stock Option/Stock Issuance Plan, together with form of Notice
of Grant of Stock Option, Stock Option Agreement, Stock Purchase
Agreement and Stock Issuance Agreement.
10.7 *Net Lease Agreement dated July 29, 1996 between UniDirect
Corporation and Borland International, Inc., together with amendments
dated February 27, 1997, April 14, 1998 and November 15, 1998.
10.8 *Net Lease Agreement dated November 5, 1998 between UniDirect
Corporation and Inprise Corporation.
10.9 *Warrant to Purchase Stock dated March 8, 1994 issued to Silicon
Valley Bank, as amended by letter agreement dated April 15, 1998.
10.10 *Stock Purchase Agreement dated January 29, 1999 among Rainmaker
Systems, Inc., ABS Capital Partners III, L.P., H & Q Rainmaker
Investors, L.P., Hambrecht & Quist California and Hambrecht & Quist
Employee Venture Fund, L.P. II.
10.11 *Exchange Agreement dated January 29, 1999 between Rainmaker Systems,
Inc. and The Santa Cruz Operation, Inc.
10.12 *Asset Purchase Agreement dated May 18, 1998 between UniDirect
Corporation and Savoir Technology Group, Inc.
10.13 *Master Lease Agreement dated May 5, 1999 between Rainmaker Systems,
Inc. and Celtic Leasing Corp.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.14 *Loan and Security Agreement dated October 28, 1997 between UniDirect
Corporation and MetLife Capital Corporation.
10.15 *Compensation Agreement dated January 1, 1995 between UniDirect
Corporation and Richard Marotta, together with Notice of Grant of
Stock Option and Stock Option Agreement.
10.16 *Compensation Agreement dated November 1, 1995 between UniDirect
Corporation and Richard Marotta, together with Notice of Grant of
Stock Option and Stock Option Agreement.
10.17 *Separation Agreement and Release dated September 30, 1997 between
UniDirect Corporation and Bernard Jubb, together with Amendment No. 1
to Separation Agreement and Release dated January 27, 1997 and the
Promissory Note and Security Agreement dated February 5, 1999.
10.18 *Separation Agreement and Release dated April 8, 1999 between
Rainmaker Systems, Inc. and Chris Sterbenc.
10.19 *+Distributor Agreement dated January 24, 1995 between UniDirect
Corporation and The Santa Cruz Operation, Inc., together with
amendments dated April 8, 1996, November 5, 1997, March 16, 1999
and May 17, 1999.
10.20 *+Sun Software Subscription Services Outsourcing and Distribution
Agreement dated March 18, 1997 between UniDirect Corporation and
SunSoft, Inc., together with amendments dated May 20, 1997, June
16, 1997, April 30, 1999, May 19, 1999 and Assignment dated August
25, 1998.
10.21 *+Outsourcing Services Agreement dated July 21, 1997 between UniDirect
Corporation and FTP Software, Inc., together with amendments dated
September 12, 1997, October 1, 1997, November 11, 1997, January 21,
1998, January 28, 1998, May 26, 1998 and August 1998.
10.22 *+Outsource Services Agreement dated March 26, 1999 between Rainmaker
Systems, Inc. and Novell, Inc.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Brobeck, Phleger & Harrison LLP (contained in Exhibit
5.1).
24.1 Power of Attorney (contained on the signature page hereof).
27.1 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
** To be filed by amendment.
+ Confidential treatment is being sought with respect to certain portions of
this agreement. Such portions have been omitted from this filing and have
been filed separately with the Securities and Exchange Commission.
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
RAINMAKER SYSTEMS, INC.
ARTICLE I
The name of this corporation is Rainmaker Systems, Inc. (the
"Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is 9 East Loockerman Street, Dover, Delaware 19901. The name of the
Corporation's registered agent at such address is National Registered Agents,
Inc.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware (the "GCL").
ARTICLE IV
The Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares that the Corporation is authorized to issue is One Hundred
Million (100,000,000). Eighty Million (80,000,000) shares shall be Common
Stock, par value $0.001 per share, and Twenty Million (20,000,000) shares shall
be Preferred Stock, par value $0.001 per share.
The Preferred Stock may be issued from time to time in one or more
series, without further stockholder approval. The Board of Directors of the
Corporation is hereby authorized to fix or alter the rights, preferences,
privileges and restrictions granted to or imposed upon each series of Preferred
Stock, and the number of shares constituting any such series and the designation
thereof, or of any of them. Subject to compliance with applicable protective
voting rights which have been or may be granted to the Preferred Stock or series
thereof in Certificates of Designation or the Corporation's Certificate of
Incorporation, but notwithstanding any other rights of the Preferred Stock or
any series thereof, the rights, privileges, preferences and restrictions of any
such additional series may be subordinated to, pari passu with (including,
----------
without limitation, inclusion in provisions with respect to liquidation and
acquisition preferences, redemption and/or approval of matters by vote), or
senior to any of those of any present or future class or series of Preferred
Stock or Common Stock. The Board of Directors is also authorized to increase or
decrease the number of shares of any series prior or subsequent to the issue of
that series, but not below the number of shares of such series then outstanding.
In case the number of shares of any series shall be so decreased, the shares
constituting such decrease shall resume the
<PAGE>
status which they had prior to the adoption of the resolution originally fixing
the number of shares of such series.
The relative rights, preferences, privileges and restrictions granted
to or imposed upon the respective classes of Common Stock and Preferred Stock or
the holders thereof are further described in Articles V through VIII below.
ARTICLE V
SERIES C CONVERTIBLE
PARTICIPATING PREFERRED STOCK
The following sections set forth the powers, rights and preferences,
and the qualifications, limitations and restrictions thereof, of the
Corporation's Series C Convertible Participating Preferred Stock.
Section 1. Designation and Amount.
----------------------
1.1 Number of Shares. The designation of the series of Preferred
----------------
Stock, $0.001 par value per share, provided for herein shall be "Series C
Convertible Participating Preferred Stock" (hereinafter referred to as the
"Series C Preferred"), and the number of authorized shares constituting Series C
Preferred is 8,536,585.
1.2 Restrictions on Reissuance. All shares of Series C Preferred
--------------------------
redeemed, purchased or otherwise acquired by the Corporation shall be canceled
and shall be restored to the status of authorized, but unissued shares of
Preferred Stock, without designation as to series, and may thereafter be issued,
but not as shares of Series C Preferred.
1.3 Stated Value Per Share. The Stated Value Per Share of the
----------------------
Series C Preferred (the "Series C Stated Value Per Share") shall be $1.64.
1.4 Rank. The Series C Preferred shall with respect to rights upon
----
liquidation, winding up or dissolution, and redemption rights, rank (a) junior
to any other series of Preferred Stock duly established by the Board of
Directors of the Corporation, the terms of which shall specifically provide that
such series shall rank prior to the Series C Preferred, whether now existing or
hereafter created, so long as the issuance thereof is approved as provided in
Section 4 below (the "Senior Preferred Stock"), (b) prior to any other class or
series of Preferred Stock, unless the terms of which specifically provide that
such series shall rank senior to or pari passu with the Series C Preferred, so
long as the issuance thereof is approved as provided in Section 4 below, and
prior to any other class or series of capital stock of the Corporation
heretofore issued ("Junior Securities"), including all classes of the Common
Stock, par value $0.001 per share, of the Corporation, whether now existing or
hereafter created (the "Common Stock") and the Corporation's Series B Preferred
Stock, par value $0.001 per share (the "Series B Preferred") and (c) pari passu
with the Series D Convertible Participating Preferred Stock, par value $0.001
per share (the "Series D Preferred") and any other series of Preferred Stock the
terms of which shall specifically provide that such series shall rank pari passu
with the Series C Preferred and the Series D Preferred, so long as the issuance
thereof is approved as provided in Section 4 below.
2
<PAGE>
Section 2. Dividends.
---------
2.1 General Obligation. Subject to any prior preferences and other
------------------
rights of any Senior Preferred Stock and to the provisions of this Section 2.1,
the holders of the Series C Preferred shall be entitled to receive, when, as and
if declared by the Corporation's Board of Directors and to the extent permitted
under applicable law: (i) dividends in an amount per share (on an as if
converted basis) equal to any dividends declared and paid on the Common Stock or
any other Junior Securities, and (ii) cumulative dividends, at a compounded
annual rate per share of ten percent (10%) of the Series C Stated Value Per
Share of the Series C Preferred ("Series C Preferred Dividends"). Series C
Preferred Dividends on the Series C Preferred shall be cumulative and calculated
beginning on February 12, 1999 (the "Original Issue Date"), whether or not
declared and whether or not in any period there shall have been net profits or
net assets of the Corporation legally available for the payment of those
dividends.
2.2 Payment of Dividends. Any Series C Preferred Dividend accrued
--------------------
on the Series C Preferred shall be paid in cash only upon the redemption of the
Series C Preferred in accordance with Section 3.2 (such date being referred to
as a "Series C Dividend Payment Date"). Dividends paid on the shares of Series C
Preferred in an amount less than the total amount of such dividends at the time
accrued on such shares shall be allocated pro rata on a share-by-share basis
among all shares of Series C Preferred and Series D Preferred at the time
outstanding.
2.3 Dividends on Junior Securities. The Corporation shall not
------------------------------
declare and pay any dividends on Junior Securities unless an equivalent amount
is declared and paid on the shares of Series C Preferred as provided in Section
2.1 above.
Section 3. Liquidation and Redemption.
--------------------------
3.1 Liquidation. In the event of any dissolution, liquidation or
-----------
winding up of the Corporation, whether voluntary or involuntary (a
"Liquidation"), the holders of shares of Series C Preferred shall be entitled to
receive an amount equal to any amounts to which the holders of the shares of
Series C Preferred would have been entitled assuming the conversion of all
outstanding shares of Series C Preferred into Common Stock immediately prior to
such Liquidation, but in no event an amount less than the Series C Stated Value
Per Share, out of the assets of the Corporation legally available for
distribution to stockholders (whether representing capital or surplus), before
any payment or distribution shall be made on the Common Stock or any other
Junior Securities, but after distribution of such assets among, or payment
thereof over to, creditors of the Corporation and to holders of the Senior
Preferred Stock (the "Series C Preferred Liquidation Distribution"). After the
Series C Preferred Liquidation Distribution has been made (as provided above),
the remaining assets of the Corporation available for distribution to
stockholders shall be distributed pro rata among the holders of the Junior
Securities. If the assets distributable to holders of the Series C Preferred and
any parity stock, including Series D Preferred, upon such dissolution,
liquidation or winding up shall be insufficient to pay cash in an amount equal
to the amount of the Series C Preferred Liquidation Distribution to the holders
of shares of Series C Preferred, then such assets or the proceeds thereof shall
be distributed among the holders of the Series C Preferred and any parity stock,
including Series D Preferred, ratably in proportion to the respective amounts to
which they otherwise would be entitled. The sale,
3
<PAGE>
conveyance, exchange or transfer of all or substantially all of the property or
assets of the Corporation, or the consolidation or merger of the Corporation
with any other corporation in which the Corporation's stockholders prior to the
consolidation or merger own less than a majority of the voting securities of the
surviving corporation (any such event a "Reorganization Event") will be deemed
to be a Liquidation for purposes of this paragraph at the election of holders of
a majority of the shares of Series C Preferred then outstanding.
3.2 Redemption.
----------
a. Redemption at the Option of the Holder. At any time after
--------------------------------------
February 8, 2004, any holder of Series C Preferred may, by written notice to the
Corporation, require the redemption of all or any portion of the shares of
Series C Preferred owned by such holder at a redemption price per share equal to
the Series C Stated Value Per Share plus any accrued but unpaid Series C
Preferred Dividends as of the Series C Redemption Date (as defined below).
b. Redemption Payment. Subject to the following sentence, the
------------------
Corporation shall pay the redemption price for the shares of Series C Preferred
requested to be redeemed in any such notice within thirty (30) days after the
date of such notice (or such later date upon which the certificates evidencing
the shares of Series C Preferred are surrendered to the Corporation) (the
"Series C Redemption Date"). If the funds of the Corporation legally available
for payment of the redemption price of the Series C Preferred on any Series C
Redemption Date are insufficient to pay the redemption price for the total
number of shares of Series C Preferred to be redeemed on such date, those funds
which are legally available shall be used to redeem the maximum possible number
of such shares ratably based upon the number of such shares of Series C
Preferred requested to be redeemed by the holders thereof. At any time
thereafter when additional funds of the Corporation are legally available for
the redemption of the Series C Preferred, such funds shall immediately be used
to redeem the balance of the shares of Series C Preferred that the Corporation
has become obligated to redeem on any Series C Redemption Date, but which it has
not redeemed.
c. Dividends after Redemption Date. No share of Series C
-------------------------------
Preferred that is redeemed is entitled to any dividends accruing after the
Series C Redemption Date. On the Series C Redemption Date of any share of Series
C Preferred, all rights of the holder of such share shall cease, and such share
shall be deemed to be no longer outstanding.
Section 4. Voting Rights.
-------------
The holders of the Series C Preferred shall be entitled to notice of
all stockholder meetings, and except as otherwise required by law or this
Certificate, the holders of the Series C Preferred shall be entitled to vote
generally on all matters submitted to the stockholders for a vote together with
the holders of the Common Stock, and each share of Series C Preferred (including
fractional shares) shall be entitled to one vote for each whole share of Common
Stock that would be issuable upon conversion of such share on the record date
for determining eligibility to participate in the action being taken. In
addition to any other rights provided by law, the consent of holders of a
majority of the shares of the Series C Preferred and Series D
4
<PAGE>
Preferred then outstanding, in the aggregate and given in writing or by vote at
a meeting, and consenting or voting together as a single class, shall be
required for the Corporation to:
a. authorize or effect any liquidation or dissolution of the
Corporation, or any consolidation, merger or sale of the Corporation or all or
substantially all of its assets in which holders of Series C Preferred or Series
D Preferred would receive consideration of less than $6.00 per share (adjusted
for any recapitalizations, stock splits, or the like);
b. amend or repeal any provision of the Corporation's
Certificate of Incorporation or bylaws in a manner that adversely affects the
rights, preferences or privileges of either or both of the Series C Preferred
and Series D Preferred;
c. authorize the issuance of any additional shares of the
Corporation's capital stock which would rank senior to or pari passu with the
Series C Preferred or Series D Preferred;
d. authorize or effect the payment of dividends on, or the
redemption or repurchase of, any capital stock of the Corporation (other than
(i) the payment of dividends on or the redemption or repurchase of the Series C
Preferred or Series D Preferred or (ii) the repurchase of stock from employees
of the Corporation at not more than the employees' original purchase price for
such stock or pursuant to a stock plan);
e. authorize or effect, or enter into any agreement,
transaction, commitment or arrangement to authorize or effect, any business
combination with any other person, firm or corporation or acquire one or more
businesses through an asset acquisition; or
f. increase or decrease the size of the Corporation's Board of
Directors.
Section 5. Optional Conversion.
-------------------
5.1 General. At any time and from time to time after the issuance
-------
thereof, holders of shares of Series C Preferred shall have the right to
surrender such shares and receive, in lieu and in conversion thereof for each
one share of Series C Preferred so surrendered, a number of shares of Common
Stock equal to the greater of (i) one or (ii) the quotient obtained by dividing
$1.64 by the then applicable "Conversion Price". The Conversion Price shall
initially be $1.64, and shall be subject to adjustment for dilutive events as
described below. In addition to any adjustments to the Conversion Price for
dilutive events, the number of shares of Common Stock issuable upon conversion
of each share of Series C Preferred shall be increased (but not decreased)
proportionately as provided below:
If a Liquidity Event (as defined below) occurs, the Conversion Price
shall be adjusted by multiplying the then applicable Conversion Price by a
fraction, the numerator of which shall be one and the denominator of which shall
be the quotient obtained by dividing the Liquidity Event Numerator determined as
follows by the Liquidity Event Price as defined below:
5
<PAGE>
<TABLE>
<CAPTION>
Liquidity Event Numerator
-------------------------
<S> <C>
Beginning on the Original Issue Date
and ending on February 8, 2000 $2.19
From February 8, 2000 until
February 8, 2001 $3.28
From February 8, 2001 until
February 8, 2002 $4.37
After February 8, 2002 $6.56
</TABLE>
The "Liquidity Event Price" shall mean the value of the consideration
received (less applicable underwriting discounts and other expenses paid by
sellers) at closing in a Liquidity Event for a share of Common Stock sold in the
Liquidity Event, and "Liquidity Event" shall mean an initial public offering of
equity securities of the Corporation, a Reorganization Event or any other
transaction or series of related transactions in which more than 25% of the
Common Stock then outstanding is sold, conveyed, transferred or exchanged for
cash or securities of another issuer (other than as a result of redemption of
Series C Preferred). Consideration received in a Liquidity Event consisting of
marketable securities shall be valued at the average high and low last reported
sale prices for such securities for the five trading days immediately preceding
the Liquidity Event; all other non-cash consideration shall be valued in the
good faith estimate of the Board of Directors.
If a Liquidity Event occurs between the dates indicated above, the
weighted average of the Liquidity Event Numerators for the relevant dates shown
above shall be used. In the event of a mandatory or optional conversion
occurring at the time of a Liquidity Event, the adjustment to the Conversion
Price for the Liquidity Event shall be made immediately prior to the conversion.
In no event shall any adjustment to the Conversion Price cause the
number of shares of Common Stock issuable upon conversion of a share of Series C
Preferred to be less than one.
5.2 Conversion Procedure.
--------------------
a. Except in the case of a mandatory conversion as provided
below, any holder of shares of Series C Preferred desiring to convert any
portion thereof into Common Stock shall surrender each certificate representing
one or more shares of the Series C Preferred to be converted, duly endorsed in
favor of the Corporation or in blank and accompanied by proper instruments of
transfer, at the principal business office of the Corporation (or such other
place as may be designated by the Corporation), and shall give written notice to
the Corporation at that office of its election to convert the same, setting
forth therein the name or names (with the address or addresses) in which the
shares of Common Stock are to be issued. Conversion shall be effective upon
receipt by the Corporation of the notice and the share certificate or
certificates contemplated by the preceding sentence. In case of (x) the
redemption of any shares of Series C Preferred pursuant to Section 3.2, such
right of conversion shall cease and terminate, as to the
6
<PAGE>
shares to be redeemed, upon the receipt by the Corporation of the written notice
from the redeeming holder described in Section 3.2, unless the Corporation shall
thereafter default in the payment of the redemption price for the shares to be
so redeemed or (y) any Liquidation of the Corporation, such right of conversion
shall cease and terminate at the close of business on the business day fixed for
payment of the amount distributable to the holders of the Series C Preferred
pursuant to Section 3.1.
b. As soon as possible after a conversion has been effected
(but in any event within three business days), the Corporation shall deliver to
the converting holder:
(i) a certificate or certificates representing the number
of shares of Common Stock issuable by reason of such conversion in such name or
names and such denomination or denominations as the converting holder has
specified; and
(ii) a certificate representing any shares of Series C
Preferred which were represented by the certificate or certificates delivered to
the Corporation in connection with such conversion but which were not converted.
c. The issuance of certificates for shares of Common Stock
upon conversion of Series C Preferred shall be made without charge to the
holders of such Series C Preferred for any issuance tax in respect thereof or
other cost incurred by the Corporation in connection with such conversion and
the related issuance of shares of Common Stock.
d. The Corporation shall not close its books against the
transfer of Series C Preferred or of Common Stock issued or issuable upon
conversion of Series C Preferred in any manner which interferes with the timely
conversion of Series C Preferred. The Corporation shall assist and cooperate
(but the Corporation shall not be required to expend substantial efforts or
funds) with any holder of Series C Preferred required to make any governmental
filings or obtain any governmental approval prior to or in connection with any
conversion of shares of Series C Preferred hereunder (including, without
limitation, making any filings required to be made by the Corporation).
e. The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Common Stock, solely for
the purpose of issuance upon the conversion of the Series C Preferred, shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding Series C Preferred that may then be exercised. All shares of
Common Stock which are so issuable shall, when issued, be duly and validly
issued, fully paid and nonassessable and free from all taxes, liens and charges.
The Corporation shall take all such actions as may be necessary to ensure that
all such shares of Common Stock may be so issued without violation of any
applicable law or governmental regulation or any requirements of any domestic
securities exchange upon which shares of Common Stock may be listed (except for
official notice of issuance which shall be immediately delivered by the
Corporation upon each such issuance).
f. No fractional shares shall be issued upon the conversion
of any share or shares of Series C Preferred, and the number of shares issuable
upon any conversion shall be rounded to the nearest whole share of Common Stock.
7
<PAGE>
5.3 Subdivision or Combination of Common Stock. If the Corporation
------------------------------------------
at any time subdivides (by any stock split, stock dividend, recapitalization or
otherwise) the outstanding shares of one or more classes of Common Stock into a
greater number of shares, the Conversion Price and the Liquidity Event Numerator
in effect immediately prior to such subdivision shall be proportionately
adjusted to account equitably for such subdivision, and if the Corporation at
any time combines (by reverse stock split or otherwise) the outstanding shares
of one or more classes of Common Stock into a smaller number of shares, the
Conversion Price and the Liquidity Event Numerator in effect immediately prior
to such combination shall again be proportionately adjusted.
5.4 Reorganization, Reclassification, Consolidation, Merger or Sale.
---------------------------------------------------------------
In connection with any Reorganization Event, the holders of Series C Preferred
shall thereafter have the right to acquire and receive, in lieu of or in
addition to (as the case may be) the shares of Common Stock immediately
theretofore acquirable and receivable upon the conversion of such holder's
Series C Preferred, such shares of stock, securities, cash or other assets (or,
if not practicably attainable, the reasonable equivalent thereof) as such holder
would have received in connection with such Reorganization Event if such holder
had converted its Series C Preferred immediately prior to such Reorganization
Event. The Corporation shall make appropriate provisions to ensure that the
requirements of the previous sentence are effected.
5.5 Adjustment of Price upon Issuance of Common Stock.
-------------------------------------------------
a. After the Original Issue Date and until February 8, 2000,
if and whenever the Corporation shall issue or sell, or is, in accordance with
subparagraphs 5.5(c) through 5.5(g), deemed to have issued or sold, any shares
of Common Stock or other equity securities of the Corporation or any Option or
Convertible Securities for a price per share less than the applicable Conversion
Price for the Series C Preferred immediately prior to the time of such issue or
sale (except for (A) shares issued in connection with the conversion of Series B
Preferred, Series C Preferred or Series D Preferred, (B) shares issued in order
to effect a business combination approved by the Board of Directors and
stockholders (if required), (C) the issuance of options, warrants or other
rights or shares issued upon the exercise thereof, to directors, consultants or
employees of the Corporation or its subsidiaries under a stock plan), or (D)
shares issued to persons, firms or corporations with which the Corporation has a
service relationship, provided that all such issuances are for purposes other
than raising capital or providing financing) (a "Dilutive Financing"), the
Conversion Price (prior to any adjustment for a Liquidity Event, even if the
Dilutive Financing itself constitutes a Liquidity Event for which an additional
adjustment shall be made) shall be reduced to the price at which the Corporation
issued or sold, or is deemed to have issued or sold the shares of securities in
the Dilutive Financing.
b. After February 8, 2000, if and whenever a Dilutive
Financing shall occur, then, forthwith upon the Dilutive Financing, (prior to
any adjustment for a Liquidity Event, even if the Dilutive Financing itself
constitutes a Liquidity Event for which an additional adjustment shall be made)
the Conversion Price shall be reduced by multiplying the Conversion Price in
effect immediately before the issuance or sale by a fraction, the numerator of
which is the number of shares of Common Stock that are Outstanding on an As-
Converted Basis (as defined below) immediately before the Dilutive Financing
plus the number of shares of Common Stock that could be purchased at the
Conversion Price at the time of the Dilutive Financing for
8
<PAGE>
the aggregate consideration paid or payable upon the sale or issuance of Common
Stock or other equity securities in the Dilutive Financing, and the denominator
of which is the number of shares of Common Stock that are Outstanding on an As-
Converted Basis immediately before the Dilutive Financing plus the number of
shares that are acquired or to be acquired upon the sale or issuance of the
Common Stock and other equity securities in the Dilutive Financing. For purposes
of this Section, "Outstanding on an As-Converted Basis" immediately before the
Dilutive Financing means the sum of (i) all Common Stock issued and outstanding
immediately before the Dilutive Financing plus and (ii) all Common Stock that
would be issued if all Series C Preferred and other convertible securities were
converted hereunder immediately before the Dilutive Financing.
c. Issuance of Rights or Options. In case at any time the
-----------------------------
Corporation shall in any manner grant (whether directly or by assumption in a
merger or otherwise) any warrants or other rights to subscribe for or to
purchase, or any options for the purchase of, Common Stock or any stock or
security convertible into or exchangeable for Common Stock (such warrants,
rights or options being called "Options" and such convertible or exchangeable
stock or securities being called "Convertible Securities") whether or not such
Options or the right to convert or exchange any such Convertible Securities are
immediately exercisable, and the price per share for which Common Stock is
issuable upon the exercise of such Options or upon the conversion or exchange of
such Convertible Securities (determined by dividing (i) the total amount, if
any, received or receivable by the Corporation as consideration for the granting
of such Options, plus the minimum aggregate amount of additional consideration
payable to the Corporation upon the exercise of all such Options, plus, in the
case of such Options which relate to Convertible Securities, the minimum
aggregate amount of additional consideration, if any, payable upon the issue or
sale of such Convertible Securities and upon the conversion or exchange thereof,
by (ii) the total maximum number of shares of Common Stock issuable upon the
exercise of all such Options or upon the conversion or exchange of all such
Convertible Securities issuable upon the exercise of such Options) shall be less
than the applicable Conversion Price for the Series C Preferred immediately
prior to the time of the granting of such Options or Convertible Securities,
then the total maximum number of shares of Common Stock issuable upon the
exercise of such Options or upon conversion or exchange of the total maximum
amount of such Convertible Securities issuable upon the exercise of such Options
shall be deemed to have been issued for such price per share as of the date of
granting of such Options or the issuance of such Convertible Securities and
thereafter shall be deemed to be outstanding.
d. Issuance of Convertible Securities. In case the
----------------------------------
Corporation shall in any manner issue (whether directly or by assumption in a
merger or otherwise) or sell any Convertible Securities, whether or not the
rights to exchange or convert any such Convertible Securities are immediately
exercisable, and the price per share for which Common Stock is issuable upon
such conversion or exchange (determined by dividing (i) the total amount
received or receivable by the Corporation as consideration for the issue or sale
of such Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Corporation upon the conversion or
exchange thereof, by (ii) the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible Securities)
shall be less than the applicable Conversion Price for the Series C Preferred
immediately prior to the time of such issue or sale, then the total maximum
number of shares of
9
<PAGE>
Common Stock issuable upon conversion or exchange of all such Convertible
Securities shall be deemed to have been issued for such price per share as of
the date of the issue or sale of such Convertible Securities and thereafter
shall be deemed to be outstanding.
e. No Adjustment on Issuance. No adjustment of any Conversion
-------------------------
Price shall be made upon the actual issue of such Common Stock upon conversion
or exchange of Options or Convertible Securities, and if any such issue or sale
of such Convertible Securities is made upon exercise of any Options to purchase
any such Convertible Securities for which adjustments of any Conversion Price
have been or are to be made pursuant to other provisions of this Section 5.5.,
no further adjustment of such Conversion Price shall be made by reason of such
issue or sale.
f. Change in Option Price or Conversion Rate. Upon the
-----------------------------------------
happening of any of the following events, namely, if the purchase price provided
for in any Option referred to in subparagraph (a), the additional consideration,
if any, payable upon the conversion or exchange of any Convertible Securities
referred to in subparagraph (a) or (b), or the rate at which Convertible
Securities referred to in subparagraph (a) or (b) are convertible into or
exchangeable for Common Stock shall change at any time (including, but not
limited to, changes under or by reason of provisions designed to protect against
dilution), the applicable Conversion Price for the Series C Preferred at the
time of such event shall forthwith be readjusted to the Conversion Price which
would have been in effect at such time had such Options or Convertible
Securities still outstanding provided for such changed purchased price,
additional consideration or conversion rate, as the case may be, at the time
initially granted, issued or sold, but only if as a result of such adjustment
the Conversion Price then in effect hereunder is thereby reduced; and on the
expiration or exchange of such Option or Convertible Securities, the Conversion
Price then in effect hereunder shall forthwith be increased to the Conversion
Price which would have been in effect at the time of such expiration or
termination had such Option or Convertible Securities, to the extent outstanding
immediately prior to such expiration or termination, never been issued;
provided, that any consideration which was actually received by the Corporation
- --------
in connection with the issuance or sale of such Options or Convertible
Securities shall be included in the readjustment computation even though such
Options or Convertible Securities shall have expired or terminated.
g. Consideration for Stock. In case any shares of Common
-----------------------
Stock, Options or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received by the
Corporation therefor, without deduction therefrom of any amounts paid or
receivable for accrued interest or accrued dividends and any expenses incurred
or any underwriting commissions or concessions paid or allowed by the
Corporation in connection therewith. In case any shares of Common Stock, Options
or Convertible Securities shall be issued or sold for a consideration other than
cash, the amount of the consideration other than cash received by the
Corporation shall be deemed to be the fair value of such consideration as
determined in good faith by the Board of Directors of the Corporation, without
deduction of any amounts paid or receivable for accrued interest or accrued
dividends and any expenses incurred or any underwriting commissions or
concessions paid or allowed by the Corporation in connection therewith. In case
any Options shall be issued in connection with the issue and sale of other
securities of the Corporation, together comprising one integral transaction in
which no specific consideration is allocated to such Options by the parties
10
<PAGE>
thereto, such Options shall be deemed to have been issued for such consideration
as determined in good faith by the Board of Directors of the Corporation.
h. Record Date. In case the Corporation shall take a record
-----------
of the holders of its Common Stock for the purpose of entitling them (i) to
receive a dividend or other distribution payable in Common Stock, Options or
Convertible Securities or (ii) to subscribe for or purchase Common Stock Options
or Convertible Securities, then such record date shall be deemed to be the date
of the issue or sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
5.6 Notices.
-------
a. Immediately upon any adjustment of the Conversion Price,
the Corporation shall give written notice thereof to all holders of Series C
Preferred, setting forth in reasonable detail and certifying the calculation of
such adjustment.
b. The Corporation shall give written notice to all holders
of Series C Preferred at least 20 days prior to the date on which the
Corporation closes its books or fixes a record date (i) with respect to any
dividend or distribution upon Common Stock, (ii) with respect to any pro rata
subscription offer to holders of Common Stock or (iii) for determining rights to
vote with respect to any Liquidation or Reorganization Event.
Section 6. Mandatory Conversion.
--------------------
Each outstanding share of Series C Preferred shall automatically be
converted into a number of shares of Common Stock determined in accordance with
Section 5 above, immediately prior to the closing of an underwritten initial
public offering of the Corporation pursuant to an effective registration
statement under the Securities Act of 1933, as amended, covering the offer and
sale of Common Stock for the account of the Corporation to the public resulting
in the net proceeds to the Corporation of not less than $30 million where the
public offering price implies a pre-offering equity valuation of the Corporation
of at least $80 million (a "Qualified IPO"). In such event, the Qualified IPO
shall be considered a Liquidity Event for which appropriate adjustment to the
Conversion Price, if any, shall be made pursuant to Section 5.
Section 7. Registration of Transfer.
------------------------
The Corporation shall keep at its principal office a register for the
registration of issuance and transfers of Series C Preferred. Upon the surrender
of any certificate representing Series C Preferred at such place, the
Corporation shall, at the request of the record holder of such certificate,
execute and deliver (at the Corporation's expense) a new certificate or
certificates in exchange therefor representing in the aggregate the number of
shares of Series C Preferred represented by the surrendered certificate. Each
such new certificate shall be registered in such name and shall represent such
number of shares of Series C Preferred as is requested by the holder of the
surrendered certificate and shall be substantially identical in form to the
surrendered certificate.
11
<PAGE>
Section 8. Replacement.
-----------
Upon receipt of evidence reasonably satisfactory to the Corporation
(an affidavit of the registered holder shall be satisfactory) of the ownership
and the loss, theft, destruction or mutilation of any certificate evidencing
shares of Series C Preferred, and in the case of any such loss, theft or
destruction, upon receipt of indemnity reasonably satisfactory to the
Corporation (provided that if the holder is a financial institution or other
institutional investor, its own agreement shall be satisfactory), or, in the
case of any such mutilation upon surrender of such certificate, the Corporation
shall (at its expense) execute and deliver in lieu of such certificate a new
certificate of like kind representing the number of shares of Series C Preferred
represented by such lost, stolen, destroyed or mutilated certificate and dated
the date of such lost, stolen, destroyed or mutilated certificate.
Section 9. Notices.
-------
Except as otherwise expressly provided hereunder, all notices referred
to herein shall be in writing and shall be delivered by registered or certified
mail, return receipt requested and postage prepaid, or by reputable overnight
courier service, charges prepaid, and shall be deemed to have been given when so
mailed or sent (a) to the Corporation, at its principal executive offices and
(b) to any stockholder, at such holder's address as it appears in the stock
records of the Corporation (unless otherwise indicated by any such holder).
ARTICLE VI
SERIES D CONVERTIBLE
PARTICIPATING PREFERRED STOCK
The following sections set forth the powers, rights and preferences,
and the qualifications, limitations and restrictions thereof, of the
Corporation's Series D Convertible Participating Preferred Stock.
Section 1. Designation and Amount.
----------------------
1.1 Number of Shares. The designation of the series of Preferred
----------------
Stock, $0.001 par value per share, provided for herein shall be "Series D
Convertible Participating Preferred Stock" (hereinafter referred to as the
"Series D Preferred"), and the number of authorized shares constituting Series D
Preferred is 5,717,470.
1.2 Restrictions on Reissuance. All shares of Series D Preferred
--------------------------
redeemed, purchased or otherwise acquired by the Corporation shall be canceled
and shall be restored to the status of authorized, but unissued shares of
Preferred Stock, without designation as to series, and may thereafter be issued,
but not as shares of Series D Preferred.
1.3 Stated Value Per Share. The Stated Value Per Share of the
----------------------
Series D Preferred (the "Series D Stated Value Per Share") shall be $0.35.
1.4 Rank. The Series D Preferred shall with respect to rights upon
----
liquidation, winding up or dissolution, and redemption rights, rank (a) junior
to any other series of Preferred Stock duly established by the Board of
Directors of the Corporation, the terms of which shall
12
<PAGE>
specifically provide that such series shall rank prior to the Series D
Preferred, whether now existing or hereafter created, so long as the issuance
thereof is approved as provided in Section 4 below (the "Senior Preferred
Stock"), (b) prior to any other class or series of Preferred Stock unless the
terms of which shall specifically provide that such series shall rank senior to
or pari passu with the Series D Preferred, so long as the issuance thereof is
approved as provided in Section 4 below, and prior to any class or other series
of capital stock of the Corporation heretofore issued ("Junior Securities"),
including all classes of the Common Stock of the Corporation and the Series B
Preferred and (c) pari passu with the Series C Preferred Stock and any other
series of Preferred Stock the terms of which shall specifically provide that
such series shall rank pari passu with the Series D Preferred, so long as the
issuance thereof is approved as provided in Section 4 below.
Section 2. Dividends.
---------
2.1 General Obligation. Subject to any prior preferences and other
------------------
rights of any Senior Preferred Stock and to the provisions of this Section 2.1,
the holders of the Series D Preferred shall be entitled to receive when, as and
if declared by the Corporation's Board of Directors and to the extent permitted
under applicable law: (i) dividends in an amount per share (on an as if
converted basis) equal to any dividends declared and paid on the Common Stock or
any other Junior Securities and (ii) cumulative dividends, at a compounded
annual rate per share of ten percent (10%) of the Series D Stated Value Per
Share of the Series D Preferred ("Series D Preferred Dividends"). Series D
Preferred Dividends on the Series D Preferred shall be cumulative and calculated
beginning on February 12, 1999, whether or not declared and whether or not in
any period there shall have been net profits or net assets of the Corporation
legally available for the payment of those dividends.
2.2 Payment of Dividends. Any Series D Preferred Dividend accrued
--------------------
on the Series D Preferred shall be paid in cash only upon the redemption of the
Series D Preferred in accordance with Section 3.2 (such date being referred to
as a "Series D Dividend Payment Date"). Dividends paid on the shares of Series D
Preferred in an amount less than the total amount of such dividends at the time
accrued on such shares shall be allocated pro rata on a share-by-share basis
among all shares of Series C Preferred and Series D Preferred at the time
outstanding.
2.3 Dividends on Junior Securities. The Corporation shall not
------------------------------
declare and pay any dividends on Junior Securities unless an equivalent amount
is declared and paid on the shares of Series D Preferred (as provided in Section
2.1 above).
Section 3. Liquidation and Redemption.
--------------------------
3.1 Liquidation. In the event of a Liquidation of the Corporation,
-----------
the holders of shares of Series D Preferred shall be entitled to receive an
amount equal to any amounts the holders of the shares of Series D Preferred
would have been entitled to receive assuming conversion of the Series D
Preferred immediately prior to such Liquidation (but in no event less than the
Series D Stated Value Per Share), out of the assets of the Corporation legally
available for distribution to stockholders (whether representing capital or
surplus), before any payment or distribution shall be made on the Common Stock
or any other Junior Securities, but after
13
<PAGE>
distribution of such assets among, or payment thereof over to, creditors of the
Corporation and to holders of the Senior Preferred Stock (the "Series D
Preferred Liquidation Distribution"). After the Series D Preferred Liquidation
Distribution has been made (as provided above), the remaining assets of the
Corporation available for distribution to stockholders shall be distributed pro
rata among the holders of the Junior Securities. If the assets distributable to
holders of the Series D Preferred and any parity stock, including Series C
Preferred, upon such dissolution, liquidation or winding up shall be
insufficient to pay cash in an amount equal to the amount of the Series D
Preferred Liquidation Distribution to the holders of shares of Series D
Preferred, then such assets or the proceeds thereof shall be distributed among
the holders of the Series D Preferred and any parity stock, including Series C
Preferred, ratably in proportion to the respective amounts to which they
otherwise would be entitled. A Reorganization Event will be deemed to be a
Liquidation for purposes of this paragraph at the election of holders of a
majority of the shares of Series D Preferred then outstanding.
3.2 Redemption.
----------
a. Redemption at the Option of the Holder. At any time after
--------------------------------------
February 8, 2004, any holder of Series D Preferred may, by written notice to the
Corporation, require the redemption of all or any portion of the shares of
Series D Preferred owned by such holder at a redemption price per share equal to
the Series D Stated Value Per Share plus any accrued but unpaid Series D
Preferred Dividends as of the Series D Redemption Date (as defined below).
b. Redemption Payment. Subject to the following sentence, the
------------------
Corporation shall pay the redemption price for the shares of Series D Preferred
requested to be redeemed in any such notice within thirty (30) days after the
date of such notice (or such later date upon which the certificates evidencing
the shares of Series D Preferred are surrendered to the Corporation) (the
"Series D Redemption Date"). If the funds of the Corporation legally available
for payment of the redemption price of the Series D Preferred on any Series D
Redemption Date are insufficient to pay the redemption price for the total
number of shares of Series D Preferred to be redeemed on such date, those funds
which are legally available shall be used to redeem the maximum possible number
of such shares ratably based upon the number of such shares of Series D
Preferred requested to be redeemed by the holders thereof. At any time
thereafter when additional funds of the Corporation are legally available for
the redemption of the Series D Preferred, such funds shall immediately be used
to redeem the balance of the shares of Series D Preferred that the Corporation
has become obligated to redeem on any Series D Redemption Date, but which it has
not redeemed.
c. Dividends after Redemption Date. No share of Series D
-------------------------------
Preferred that is redeemed is entitled to any dividends accruing after the
Series D Redemption Date. On the Series D Redemption Date of any share of Series
D Preferred, all rights of the holder of such share shall cease, and such share
shall be deemed to be no longer outstanding.
Section 4. Voting Rights.
-------------
The holders of the Series D Preferred shall be entitled to notice of
all stockholder meetings, and except as otherwise required by law or this
Certificate, the holders of the Series D
14
<PAGE>
Preferred shall be entitled to vote generally on all matters submitted to the
stockholders for a vote together with the holders of the Common Stock, and each
share of Series D Preferred (including fractional shares) shall be entitled to
one vote for each whole share of Common Stock that would be issuable upon
conversion of such share on the record date for determining eligibility to
participate in the action being taken. In addition to any other rights provided
by law, the consent of holders of a majority of the shares of the Series C
Preferred and Series D Preferred then outstanding, in the aggregate and given in
writing or by vote at a meeting, and consenting or voting together as a single
class, shall be required for the Corporation to:
a. authorize or effect any liquidation or dissolution of the
Corporation, or any consolidation, merger or sale of the Corporation or all or
substantially all of its assets in which holders of Series C Preferred or Series
D Preferred would receive consideration of less than $6.00 per share (adjusted
for any recapitalizations, stock splits, or the like);
b. amend or repeal any provision of the Corporation's
Certificate of Incorporation or bylaws in a manner that adversely affects the
rights, preferences or privileges of either or both of the Series C Preferred
and Series D Preferred;
c. authorize the issuance of any additional shares of the
Corporation's capital stock which would rank senior to or pari passu with the
Series C Preferred or Series D Preferred;
d. authorize or effect the payment of dividends on, or the
redemption or repurchase of, any capital stock of the Corporation (other than
(i) the payment of dividends on or the redemption or repurchase of the Series C
Preferred or Series D Preferred or (ii) the repurchase of stock from employees
of the Corporation at not more than the employees original purchase price for
such stock or pursuant to a stock plan);
e. authorize or effect, or enter into any agreement,
transaction, commitment or arrangement to authorize or effect, any business
combination with any other person, firm or corporation or acquire one or more
businesses through an asset acquisition; or
f. increase or decrease the size of the Corporation's Board of
Directors.
Section 5. Optional Conversion.
-------------------
5.1 General. At any time and from time to time after the issuance
-------
thereof, holders of shares of Series D Preferred shall have the right to
surrender such shares and receive, in lieu and in conversion thereof for each
one share of Series D Preferred so surrendered, one (1) share of Common Stock
(subject to adjustment as hereinafter provided).
5.2 Conversion Procedure.
--------------------
a. Except in the case of a mandatory conversion as provided
below, any holder of shares of Series D Preferred desiring to convert any
portion thereof into Common Stock shall surrender each certificate representing
one or more shares of the Series D Preferred
15
<PAGE>
to be converted, duly endorsed in favor of the Corporation or in blank and
accompanied by proper instruments of transfer, at the principal business office
of the Corporation (or such other place as may be designated by the
Corporation), and shall give written notice to the Corporation at that office of
its election to convert the same, setting forth therein the name or names (with
the address or addresses) in which the shares of Common Stock are to be issued.
Conversion shall be effective upon receipt by the Corporation of the notice and
the share certificate or certificates contemplated by the preceding sentence. In
case of (x) the redemption of any shares of Series D Preferred pursuant to
Section 3.2, such right of conversion shall cease and terminate, as to the
shares to be redeemed, upon the receipt by the Corporation of the written notice
from the redeeming holder described in Section 3.2, unless the Corporation shall
thereafter default in the payment of the redemption price for the shares to be
so redeemed or (y) any Liquidation of the Corporation, such right of conversion
shall cease and terminate at the close of business on the business day fixed for
payment of the amount distributable to the holders of the Series D Preferred
pursuant to Section 3.1.
b. As soon as possible after a conversion has been effected
(but in any event within three business days), the Corporation shall deliver to
the converting holder:
(i) a certificate or certificates representing the number
of shares of Common Stock issuable by reason of such conversion in such name or
names and such denomination or denominations as the converting holder has
specified; and
(ii) a certificate representing any shares of Series D
Preferred which were represented by the certificate or certificates delivered to
the Corporation in connection with such conversion but which were not converted.
c. The issuance of certificates for shares of Common Stock upon
conversion of Series D Preferred shall be made without charge to the holders of
such Series D Preferred for any issuance tax in respect thereof or other cost
incurred by the Corporation in connection with such conversion and the related
issuance of shares of Common Stock.
d. The Corporation shall not close its books against the
transfer of Series D Preferred or of Common Stock issued or issuable upon
conversion of Series D Preferred in any manner which interferes with the timely
conversion of Series D Preferred. The Corporation shall assist and cooperate
(but the Corporation shall not be required to expend substantial efforts or
funds) with any holder of Series D Preferred required to make any governmental
filings or obtain any governmental approval prior to or in connection with any
conversion of shares of Series D Preferred hereunder (including, without
limitation, making any filings required to be made by the Corporation).
e. The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Common Stock, solely for
the purpose of issuance upon the conversion of the Series D Preferred, such
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding Series D Preferred that may then be exercised. All
shares of Common Stock which are so issuable shall, when issued, be duly and
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges. The Corporation shall take all such actions as may be necessary to
ensure that all such shares of
16
<PAGE>
Common Stock may be so issued without violation of any applicable law or
governmental regulation or any requirements of any domestic securities exchange
upon which shares of Common Stock may be listed (except for official notice of
issuance which shall be immediately delivered by the Corporation upon each such
issuance).
f. No fractional shares shall be issued upon the conversion of
any share or shares of Series D Preferred, and the number of shares issuable
upon any conversion shall be rounded to the nearest whole share of Common Stock.
5.3 Subdivision or Combination of Common Stock. If the Corporation at
------------------------------------------
any time subdivides (by any stock split, stock dividend, recapitalization or
otherwise) the outstanding shares of one or more classes of Common Stock into a
greater number of shares, the number of shares of Common Stock issuable upon
conversion as in effect immediately prior to such subdivision shall be
proportionately increased to account for such subdivision, and if the
Corporation at any time combines (by reverse stock split or otherwise) the
outstanding shares of one or more classes of Common Stock into a smaller number
of shares, the number of shares of Common Stock issuable upon conversion as in
effect immediately prior to such combination shall be proportionately decreased.
5.4 Reorganization, Reclassification, Consolidation, Merger or Sale.
---------------------------------------------------------------
In connection with any Reorganization Event, the holders of Series D Preferred
shall thereafter have the right to acquire and receive, in lieu of or in
addition to (as the case may be) the shares of Common Stock immediately
theretofore acquirable and receivable upon the conversion of such holder's
Series D Preferred, such shares of stock, securities, cash or other assets (or,
if not practicably attainable, the reasonable equivalent thereof) as such holder
would have received in connection with such Reorganization Event if such holder
had converted its Series D Preferred immediately prior to such Reorganization
Event. The Corporation shall make appropriate provisions to ensure that the
requirements of the previous sentence are effected.
5.5 Notices.
-------
a. Immediately upon any adjustment of the Conversion Price, the
Corporation shall give written notice thereof to all holders of Series D
Preferred, setting forth in reasonable detail and certifying the calculation of
such adjustment.
b. The Corporation shall give written notice to all holders of
Series D Preferred at least 20 days prior to the date on which the Corporation
closes its books or fixes a record date (i) with respect to any dividend or
distribution upon Common Stock, (ii) with respect to any pro rata subscription
offer to holders of Common Stock or (iii) for determining rights to vote with
respect to any Liquidation or Reorganization Event.
Section 6. Mandatory Conversion.
--------------------
Each outstanding share of Series D Preferred shall automatically be
converted into the number of shares of Common Stock determined in accordance
with Section 5 above immediately prior to the closing of a Qualified IPO.
17
<PAGE>
Section 7. Registration of Transfer.
------------------------
The Corporation shall keep at its principal office a register for the
registration of issuance and transfers of Series D Preferred. Upon the surrender
of any certificate representing Series D Preferred at such place, the
Corporation shall, at the request of the record holder of such certificate,
execute and deliver (at the Corporation's expense) a new certificate or
certificates in exchange therefor representing in the aggregate the number of
shares of Series D Preferred represented by the surrendered certificate. Each
such new certificate shall be registered in such name and shall represent such
number of shares of Series D Preferred as is requested by the holder of the
surrendered certificate and shall be substantially identical in form to the
surrendered certificate.
Section 8. Replacement.
-----------
Upon receipt of evidence reasonably satisfactory to the Corporation
(an affidavit of the registered holder shall be satisfactory) of the ownership
and the loss, theft, destruction or mutilation of any certificate evidencing
shares of Series D Preferred, and in the case of any such loss, theft or
destruction, upon receipt of indemnity reasonably satisfactory to the
Corporation (provided that if the holder is a financial institution or other
institutional investor, its own agreement shall be satisfactory), or, in the
case of any such mutilation upon surrender of such certificate, the Corporation
shall (at its expense) execute and deliver in lieu of such certificate a new
certificate of like kind representing the number of shares of Series D Preferred
represented by such lost, stolen, destroyed or mutilated certificate and dated
the date of such lost, stolen, destroyed or mutilated certificate.
Section 9. Notices.
-------
Except as otherwise expressly provided hereunder, all notices referred
to herein shall be in writing and shall be delivered by registered or certified
mail, return receipt requested and postage prepaid, or by reputable overnight
courier service, charges prepaid, and shall be deemed to have been given when so
mailed or sent (a) to the Corporation, at its principal executive offices and
(b) to any stockholder, at such holder's address as it appears in the stock
records of the Corporation (unless otherwise indicated by any such holder).
ARTICLE VII
SERIES B CONVERTIBLE
PREFERRED STOCK
The following sections set forth the powers, rights and preferences,
and the qualifications, limitations and restrictions thereof, of the
Corporation's Series B Convertible Preferred Stock.
Section 1. Designation and Amount.
----------------------
1.1 Number of Shares. The designation of the series of Preferred
----------------
Stock, $0.001 par value per share, provided for herein shall be "Series B
Convertible Preferred Stock" (hereinafter referred to as the "Series B
Preferred"), and the number of authorized shares constituting Series B Preferred
is 402,710.
18
<PAGE>
1.2 Restrictions on Reissuance. All shares of Series B Preferred
--------------------------
redeemed, purchased or otherwise acquired by the Corporation shall be canceled
and shall be restored to the status of authorized, but unissued shares of
Preferred Stock, without designation as to series, and may thereafter be issued,
but not as shares of Series B Preferred.
1.3 Stated Value Per Share. The Stated Value Per Share of the Series
----------------------
B Preferred (the "Series B Stated Value Per Share") shall be $1.43.
1.4 Rank. The Series B Preferred shall with respect to rights upon
----
liquidation, winding up or dissolution, and redemption rights, rank (a) junior
to any other series of Preferred Stock duly established by the Board of
Directors of the Corporation, the terms of which shall specifically provide that
such series shall rank prior to the Series B Preferred, including the Series C
Preferred and Series D Preferred, whether now existing or hereafter created, so
long as the issuance thereof is approved as provided in Section 4 below (for
purposes of this Article VII, the "Senior Preferred Stock"), (b) prior to all
classes of the Common Stock of the Corporation.
Section 2. Dividends.
---------
2.1 General Obligation. Subject to any prior preferences and other
------------------
rights of any Senior Preferred Stock and to the provisions of this Section 2.1,
the holders of the Series B Preferred shall be entitled to receive when, as and
if declared by the Corporation's Board of Directors and to the extent permitted
under applicable law, dividends in an amount of $0.14 per share of Series B
Preferred ("Series B Preferred Dividends"). Such dividends shall not be
cumulative.
2.2 Dividends on Junior Securities. The Corporation shall not declare
------------------------------
and pay any dividends on Junior Securities until any accrued Series B Preferred
Dividends have been paid (as provided in Section 2.1 above).
Section 3. Liquidation.
-----------
3.1 Liquidation. In the event of a Liquidation of the Corporation,
-----------
the holders of shares of Series B Preferred shall be entitled to receive an
amount equal to the Series B Stated Value Per Share plus all declared and unpaid
dividends thereon, out of the assets of the Corporation legally available for
distribution to stockholders (whether representing capital or surplus), before
any payment or distribution shall be made on the Common Stock, but after
distribution of such assets among, or payment thereof over to, creditors of the
Corporation and to holders of the Senior Preferred Stock (the "Series B
Preferred Liquidation Distribution"). After the Series B Preferred Liquidation
Distribution has been made (as provided above), the remaining assets of the
Corporation available for distribution to stockholders shall be distributed pro
rata among the holders of Common Stock. If the assets distributable to holders
of the Series B Preferred and any parity stock, upon such dissolution,
liquidation or winding up shall be insufficient to pay cash in an amount equal
to the amount of the Series B Preferred Liquidation Distribution to the holders
of shares of Series B Preferred, then such assets or the proceeds thereof shall
be distributed among the holders of the Series B Preferred and any parity stock,
ratably in proportion to the respective amounts to which they otherwise would be
entitled. A Reorganization Event will be deemed to be a Liquidation for purposes
of this paragraph.
19
<PAGE>
Section 4. Voting Rights.
-------------
The holders of the Series B Preferred shall be entitled to notice of
all stockholder meetings, and except as otherwise required by law or this
Certificate, the holders of the Series B Preferred shall be entitled to vote
generally on all matters submitted to the stockholders for a vote together with
the holders of the Common Stock, and each share of Series B Preferred shall be
entitled to one vote for each whole share of Common Stock that would be issuable
upon conversion of such share on the record date for determining eligibility to
participate in the action being taken. Fractional votes by the holders of the
Series B Preferred shall not be permitted and any fractional voting rights shall
(after aggregating all shares into which shares of Series B Preferred held by
each holder could be converted) be rounded to the nearest whole number (with
one-half being rounded upward).
Section 5. Optional Conversion.
-------------------
5.1 General. At any time and from time to time after the issuance
-------
thereof, holders of shares of Series B Preferred shall have the right to
surrender such shares and receive, in lieu and in conversion thereof for each
one share of Series B Preferred so surrendered, five (5) shares of Common Stock
(subject to adjustment as hereinafter provided).
5.2 Conversion Procedure.
--------------------
a. Except in the case of a mandatory conversion as provided
below, any holder of shares of Series B Preferred desiring to convert any
portion thereof into Common Stock shall surrender each certificate representing
one or more shares of the Series B Preferred to be converted, duly endorsed in
favor of the Corporation or in blank and accompanied by proper instruments of
transfer, at the principal business office of the Corporation (or such other
place as may be designated by the Corporation), and shall give written notice to
the Corporation at that office of its election to convert the same, setting
forth therein the name or names (with the address or addresses) in which the
shares of Common Stock are to be issued. Conversion shall be effective upon
receipt by the Corporation of the notice and the share certificate or
certificates contemplated by the preceding sentence. In case of any Liquidation
of the Corporation, such right of conversion shall cease and terminate at the
close of business on the business day fixed for payment of the amount
distributable to the holders of the Series B Preferred pursuant to Section 3.1.
b. As soon as possible after a conversion has been effected (but
in any event within three business days), the Corporation shall deliver to the
converting holder:
(i) a certificate or certificates representing the number of
shares of Common Stock issuable by reason of such conversion in such name or
names and such denomination or denominations as the converting holder has
specified; and
(ii) a certificate representing any shares of Series B
Preferred which were represented by the certificate or certificates delivered to
the Corporation in connection with such conversion but which were not converted.
20
<PAGE>
c. The issuance of certificates for shares of Common Stock upon
conversion of Series B Preferred shall be made without charge to the holders of
such Series B Preferred for any issuance tax in respect thereof or other cost
incurred by the Corporation in connection with such conversion and the related
issuance of shares of Common Stock.
d. The Corporation shall not close its books against the
transfer of Series B Preferred or of Common Stock issued or issuable upon
conversion of Series B Preferred in any manner which interferes with the timely
conversion of Series B Preferred. The Corporation shall assist and cooperate
(but the Corporation shall not be required to expend substantial efforts or
funds) with any holder of Series B Preferred required to make any governmental
filings or obtain any governmental approval prior to or in connection with any
conversion of shares of Series B Preferred hereunder (including, without
limitation, making any filings required to be made by the Corporation).
e. The Corporation shall at all times reserve and keep available
out of its authorized but unissued shares of Common Stock, solely for the
purpose of issuance upon the conversion of the Series B Preferred, such shares
of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding Series B Preferred that may then be exercised. All
shares of Common Stock which are so issuable shall, when issued, be duly and
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges. The Corporation shall take all such actions as may be necessary to
ensure that all such shares of Common Stock may be so issued without violation
of any applicable law or governmental regulation or any requirements of any
domestic securities exchange upon which shares of Common Stock may be listed
(except for official notice of issuance which shall be immediately delivered by
the Corporation upon each such issuance).
f. No fractional shares shall be issued upon the conversion of
any share or shares of Series B Preferred, and the number of shares issuable
upon any conversion shall be rounded upward to the nearest whole share of Common
Stock.
5.3 Subdivision or Combination of Common Stock. If the Corporation at
------------------------------------------
any time subdivides (by any stock split, stock dividend, recapitalization or
otherwise) the outstanding shares of one or more classes of Common Stock into a
greater number of shares, the number of shares of Common Stock issuable upon
conversion as in effect immediately prior to such subdivision shall be
proportionately increased to account for such subdivision, and if the
Corporation at any time combines (by reverse stock split or otherwise) the
outstanding shares of one or more classes of Common Stock into a smaller number
of shares, the number of shares of Common Stock issuable upon conversion as in
effect immediately prior to such combination shall be proportionately decreased.
5.4 Reorganization, Reclassification, Consolidation, Merger or Sale.
---------------------------------------------------------------
In connection with any Reorganization Event, the holders of Series B Preferred
shall thereafter have the right to acquire and receive, in lieu of or in
addition to (as the case may be) the shares of Common Stock immediately
theretofore acquirable and receivable upon the conversion of such holder's
Series B Preferred, such shares of stock, securities, cash or other assets (or,
if not practicably attainable, the reasonable equivalent thereof) as such holder
would have received in connection with such Reorganization Event if such holder
had converted its Series B Preferred
21
<PAGE>
immediately prior to such Reorganization Event. The Corporation shall make
appropriate provisions to ensure that the requirements of the previous sentence
are effected.
5.5 Notices.
-------
a. Immediately upon any adjustment of the Conversion Price, the
Corporation shall give written notice thereof to all holders of Series B
Preferred, setting forth in reasonable detail and certifying the calculation of
such adjustment.
b. The Corporation shall give written notice to all holders of
Series B Preferred at least 20 days prior to the date on which the Corporation
closes its books or fixes a record date (i) with respect to any dividend or
distribution upon Common Stock, (ii) with respect to any pro rata subscription
offer to holders of Common Stock or (iii) for determining rights to vote with
respect to any Liquidation or Reorganization Event.
Section 6. Mandatory Conversion.
--------------------
Each outstanding share of Series B Preferred shall automatically be
converted into the number of shares of Common Stock determined in accordance
with Section 5 above upon the earlier to occur of: (i) immediately prior to the
closing of a Qualified IPO; or (ii) the date upon which the Corporation obtains
the consent of the holders of a majority of the shares of Series B Preferred
then outstanding, voting as a class.
Section 7. Registration of Transfer.
------------------------
The Corporation shall keep at its principal office a register for the
registration of issuance and transfers of Series B Preferred. Upon the surrender
of any certificate representing Series B Preferred at such place, the
Corporation shall, at the request of the record holder of such certificate,
execute and deliver (at the Corporation's expense) a new certificate or
certificates in exchange therefor representing in the aggregate the number of
shares of Series B Preferred represented by the surrendered certificate. Each
such new certificate shall be registered in such name and shall represent such
number of shares of Series B Preferred as is requested by the holder of the
surrendered certificate and shall be substantially identical in form to the
surrendered certificate.
Section 8. Replacement.
-----------
Upon receipt of evidence reasonably satisfactory to the Corporation
(an affidavit of the registered holder shall be satisfactory) of the ownership
and the loss, theft, destruction or mutilation of any certificate evidencing
shares of Series B Preferred, and in the case of any such loss, theft or
destruction, upon receipt of indemnity reasonably satisfactory to the
Corporation (provided that if the holder is a financial institution or other
institutional investor, its own agreement shall be satisfactory), or, in the
case of any such mutilation upon surrender of such certificate, the Corporation
shall (at its expense) execute and deliver in lieu of such certificate a new
certificate of like kind representing the number of shares of Series B Preferred
represented by such lost, stolen, destroyed or mutilated certificate and dated
the date of such lost, stolen, destroyed or mutilated certificate.
22
<PAGE>
Section 9. Notices.
-------
Except as otherwise expressly provided hereunder, all notices referred
to herein shall be in writing and shall be delivered by registered or certified
mail, return receipt requested and postage prepaid, or by reputable overnight
courier service, charges prepaid, and shall be deemed to have been given when so
mailed or sent (a) to the Corporation, at its principal executive offices and
(b) to any stockholder, at such holder's address as it appears in the stock
records of the Corporation (unless otherwise indicated by any such holder).
ARTICLE VIII
COMMON STOCK
The following sections set forth the powers, rights and preferences,
and the qualifications, limitations and restrictions thereof, of the
Corporation's Common Stock.
Section 1. Dividend Rights. Subject to the prior rights of holders of
---------------
all classes of stock at the time having prior rights as to dividends, including
the Series B Preferred, Series C Preferred and Series D Preferred, the holders
of Common Stock shall be entitled to receive, when, as and if declared by the
Board of Directors, out of any assets of the Corporation legally available
therefor, such dividends as may be declared from time to time by the Board of
Directors.
Section 2. Liquidation Rights. Upon a Liquidation, the assets of this
------------------
corporation shall be distributed as provided in Article V (Section 3.1), Article
VI (Section 3.1) and Article VII (Section 3.1).
Section 3. Voting Rights. The holder of each share of Common Stock
-------------
shall have the right to one vote, and shall be entitled to notice of any
stockholders' meeting in accordance with the bylaws of this Corporation, and
shall be entitled to vote upon such matters and in such manner as may be
provided by law.
ARTICLE IX
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, repeal, alter,
amend and rescind any or all of the Bylaws of the Corporation. In addition, the
Bylaws may be amended by the affirmative vote of holders of at least sixty-six
and two-thirds percent (66 2/3%) of the outstanding shares of voting stock of
the Corporation entitled to vote at an election of directors.
ARTICLE X
The number of directors of the Corporation shall be determined by
resolution of the Board of Directors.
Elections of directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide. Advance notice of stockholder nominations
for the election of directors and of any other business to be brought before any
meeting of the stockholders shall be given in the manner provided in the Bylaws
of this Corporation.
23
<PAGE>
At each annual meeting of stockholders, directors of the Corporation
shall be elected to hold office until the expiration of the term for which they
are elected, or until their successors have been duly elected and qualified;
except that if any such election shall not be so held, such election shall take
place at a stockholders' meeting called and held in accordance with the GCL.
The directors of the Corporation shall be divided into three (3)
classes as nearly equal in size as is practicable, hereby designated Class I,
Class II and Class III. For the purposes hereof, the initial Class I, Class II
and Class III directors shall be those directors so designated by a resolution
of the Board of Directors. At the first annual meeting of stockholders
following the closing of the initial public offering of the Corporation's Common
Stock, the term of office of the Class I directors shall expire and Class I
directors shall be elected for a full term of three (3) years. At the second
annual meeting of stockholders following the closing of the initial public
offering of the Corporation's Common Stock, the term of office of the Class II
directors shall expire and Class II directors shall be elected for a full term
of three (3) years. At the third annual meeting of stockholders following the
initial public offering of the Corporation's Common Stock, the term of office of
the Class III directors shall expire and Class III directors shall be elected
for a full term of three (3) years. At each succeeding annual meeting of
stockholders, directors shall be elected for a full term of three (3) years to
succeed the directors of the class whose terms expire at such annual meeting.
If the number of directors is hereafter changed, each director then serving as
such shall nevertheless continue as a director of the Class of which he is a
member until the expiration of his current term or until his earlier death,
resignation, disqualification or removal, and any newly created directorships or
decrease in directorships shall be so apportioned among the classes as to make
all classes as nearly equal in number as is practicable.
Vacancies occurring on the Board of Directors for any reason may be
filled only by vote of a majority of the remaining members of the Board of
Directors, even if less than a quorum, at any meeting of the Board of Directors.
A person so elected by the Board of Directors to fill a vacancy shall hold
office for the remainder of the full term of the director for which the vacancy
was created or occurred and until such director's successor shall have been duly
elected and qualified. A director may be removed from office by the affirmative
vote of the holders of 66 2/3% of the outstanding shares of voting stock of the
Corporation entitled to vote at an election of directors, provided that such
removal is for cause.
ARTICLE XI
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. Special meetings of the stockholders, for
any purpose or purposes, may only be called by the Board of Directors of the
Corporation. The books of the Corporation may be kept (subject to any provision
contained in the statutes) outside the State of Delaware at such place or places
as may be designated from time to time by the Board of Directors or in the
Bylaws of the Corporation.
24
<PAGE>
ARTICLE XII
To the fullest extent permitted by applicable law, this Corporation is
authorized to provide indemnification of (and advancement of expenses to)
directors, officers, employees and agents (and any other persons to which
Delaware law permits this Corporation to provide indemnification) through Bylaw
provisions, agreements with such agents or other persons, vote of stockholders
or disinterested directors or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the GCL, subject only to
limits created by applicable Delaware law (statutory or non-statutory), with
respect to action for breach of duty to the Corporation, its stockholders, and
others.
No director of the Corporation shall be personally liable to the
Corporation or any stockholder for monetary damages for breach of fiduciary duty
as a director, except for any matter in respect of which such director shall be
liable under Section 174 of the GCL or any amendment thereto or shall be liable
by reason that, in addition to any and all other requirements for such
liability, such director (1) shall have breached the director's duty or loyalty
to the Corporation or its stockholders, (2) shall have acted in manner involving
intentional misconduct or a knowing violation of law or, in failing to act,
shall have acted in a manner involving intentional misconduct or a knowing
violation of law, or (3) shall have derived an improper personal benefit. If
the GCL is hereafter amended to authorize the further elimination or limitation
of the liability of a director, the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the GCL, as so
amended.
If the GCL is hereafter amended to permit the Corporation to provide
broader indemnification rights than said law permitted the Corporation to
provide prior to such amendment, the indemnification rights conferred by this
Article XII shall be broadened to the fullest extent permitted by the GCL, as so
amended.
ARTICLE XIII
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation. Notwithstanding the foregoing,
the provisions set forth in Articles IX, X, XI, XII and XIII of this Certificate
of Incorporation may not be repealed or amended in any respect without the
affirmative vote of holders of at least 66-2/3% of the outstanding voting stock
of the Corporation entitled to vote at the election of directors.
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IN WITNESS WHEREOF, the undersigned has executed this certificate on
October 13, 1999.
____________________________
Michael Silton, Incorporator
26
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EXHIBIT 3.2
BYLAWS
OF
RAINMAKER SYSTEMS, INC.
ARTICLE I
OFFICES
Section 1. The registered office shall be in the City of Dover, County of
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Kent, State of Delaware.
Section 2. The corporation may also have offices at such other places
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both within and without the State of Delaware as the Board of Directors may from
time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of directors
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shall be held at such place as may be fixed from time to time by the Board of
Directors, or at such other place either within or without the State of Delaware
as shall be designated from time to time by the Board of Directors and stated in
the notice of the meeting. Meetings of stockholders for any other purpose may be
held at such time and place, within or without the State of Delaware, as shall
be stated in the notice of the meeting or in a duly executed waiver of notice
thereof.
Section 2. Annual meetings of stockholders shall be held at such date and
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time as shall be designated from time to time by the Board of Directors and
stated in the notice of the meeting. At each annual meeting, the stockholders
shall elect directors to succeed those directors whose terms expire in that year
and shall transact such other business as may properly be brought before the
meeting.
Section 3. Written notice of the annual meeting stating the place, date
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and hour of the meeting shall be given to each stockholder entitled to vote at
such meeting not less than ten (10) nor more than sixty (60) days before the
date of the meeting.
Section 4. The officer who has charge of the stock ledger of the
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corporation shall prepare and make available, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
<PAGE>
Section 5. Special meetings of the stockholders, for any purpose or
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purposes, may only be called by the Board.
Section 6. Written notice of a special meeting stating the place, date
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and hour of the meeting and the purpose or purposes for which the meeting is
called, shall be given not fewer than ten (10) nor more than sixty (60) days
before the date of the meeting, to each stockholder entitled to vote at such
meeting.
Section 7. Business transacted at any special meeting of stockholders
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shall be limited to the purposes stated in the notice.
Section 8. The holders of a majority of the stock issued and outstanding
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and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum shall not be present or represented at
any meeting of the stockholders, either the Chairman of the Board, or the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented any business may be transacted that might have been transacted at
the meeting as originally notified. If the adjournment is for more than thirty
(30) days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of the
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holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of applicable statute
or of the certificate of incorporation, a different vote is required, in which
case such express provision shall govern and control the decision of such
question.
Section 10. Unless otherwise provided in the certificate of incorporation
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each stockholder shall at every meeting of the stockholders be entitled to one
vote in person or by proxy for each share of the capital stock having voting
power held by such stockholder, but no proxy shall be voted on or after three
(3) years from its date, unless the proxy provides for a longer period.
Section 11. Nominations for election to the Board of Directors must be
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made by the Board of Directors or by a committee appointed by the Board of
Directors for such purpose or by any stockholder of any outstanding class of
capital stock of the corporation entitled to vote for the election of directors.
Nominations by stockholders must be made pursuant to timely notice in writing to
the Secretary of the corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
corporation not less than 120 days nor more than 150 days prior to the first
anniversary of the date of the previous year's annual meeting of stockholders;
provided that if no annual meeting of stockholders was held in the previous year
or the date of the annual meeting of stockholders has been changed to be more
than 30 calendar days earlier than or 60 calendar days after such anniversary,
notice by
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the stockholder, to be timely, must be so received not more than 90 days nor
later than the later of (i) 60 days prior to the annual meeting of stockholders
or (ii) the close of business on the 10th day following the date on which notice
of the date of the meeting is given to stockholders or made public, whichever
first occurs. A stockholder's notice to the Secretary shall contain the written
consent of each proposed nominee to serve as a director if so elected and the
following information as to each proposed nominee and as to each person, acting
alone or in conjunction with one or more other persons as a partnership, limited
partnership, syndicate or other group, who participates or is expected to
participate in making such nomination or in organizing, directing or financing
such nomination or solicitation of proxies to vote for the nominee:
(a) the name, age, residence, address, and business address of each
proposed nominee and of each such person;
(b) the principal occupation or employment, the name, type of
business and address of the corporation or other organization in which such
employment is carried on of each proposed nominee and of each such person;
(c) the amount of stock of the corporation owned beneficially, either
directly or indirectly, by each proposed nominee and each such person;
(d) a description of any arrangement or understanding of each
proposed nominee and of each such person with each other or any other person
regarding future employment or any future transaction to which the corporation
will or may be a party; and
(e) any other information relating to such person that is required to
be disclosed in solicitations of proxies for election of directors, or is
otherwise required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended, or any successor statute thereto.
The presiding officer of the meeting shall have the authority to determine
and declare to the meeting that a nomination not preceded by notification made
in accordance with the foregoing procedure shall be disregarded.
Section 12. At any annual meeting of the stockholders, only such business
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shall be conducted as shall have been brought before the meeting (a) pursuant to
the corporation's notice of meeting, (b) by or at the direction of the Board of
Directors or (c) by any stockholder of the corporation who is a stockholder of
record at the time of giving of the notice provided for in this Bylaw, who shall
be entitled to vote at such meeting and who complies with the notice procedures
set forth in this Bylaw.
For business to be properly brought before any annual meeting by a
stockholder pursuant to clause (c) above of this Section 12, the stockholder
must have given timely notice thereof in writing to the Secretary of the
corporation. To be timely, a stockholder's notice must be delivered to or mailed
and received at the principal executive offices of the corporation not less than
120 days nor more than 150 days prior to the first anniversary of the date of
the previous year's annual meeting of stockholders; provided that if no annual
meeting of stockholders was held in the previous year or the date of the annual
meeting of stockholders has been changed to be more than 30 calendar days
earlier than or 60 calendar days after such
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anniversary, notice by the stockholder, to be timely, must be so received not
more than 90 days nor later than the later of (i) 60 days prior to the annual
meeting of stockholders or (ii) the close of business on the 10th day following
the date on which notice of the date of the meeting is given to stockholders or
made public, whichever first occurs. A stockholder's notice to the secretary
shall set forth as to each matter the stockholder proposes to bring before the
meeting (a) a brief description of the business desired to be brought before the
meeting and the reasons for conducting such business at the meeting, (b) the
name and address, as they appear on the corporation's books, of the stockholder
proposing such business, and the name and address of the beneficial owner, if
any, on whose behalf the proposal is made, (c) the class and number of shares of
the corporation which are owned beneficially and of record by such stockholder
of record and by the beneficial owner, if any, on whose behalf of the proposal
is made and (d) a description of any material interest of such stockholder of
record and the beneficial owner, if any, on whose behalf the proposal is made in
such business.
Notwithstanding anything in these Bylaws to the contrary, no business shall
be conducted at a meeting except in accordance with the procedures set forth in
this Section 12. The presiding officer of the meeting shall, if the facts
warrant, determine and declare to the meeting that business was not properly
brought before the meeting and in accordance with the procedures prescribed by
this Section 12, and if such person should so determine, such person shall so
declare to the meeting and any such business not properly brought before the
meeting shall not be transacted. Notwithstanding the foregoing provisions of
this Section 12, a stockholder shall also comply with all applicable
requirements of the Securities Exchange Act of 1934, as amended, and the rules
and regulations thereunder with respect to the matters set forth in this Section
12.
Section 13. Any action which may be taken at any meeting of stockholders
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may be taken without a meeting and without prior notice, if a consent in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding shares having not less than the minimum number of votes that would
be necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted; provided, however, that (1)
-------- -------
unless the consents of all stockholders entitled to vote have been solicited in
writing, notice of any stockholder approval without a meeting by less than
unanimous written consent shall be given as required by the Delaware General
Corporation Law, and (2) directors may not be elected by written consent except
by unanimous written consent of all shares entitled to vote for the election of
directors.
Any written consent may be revoked by a writing received by the Secretary
of the Corporation prior to the time that written consents of the number of
shares required to authorize the proposed action have been filed with the
Secretary.
ARTICLE III
DIRECTORS
Section 1. The number of directors of this corporation that shall
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constitute the whole board shall be determined by resolution of the Board of
Directors; provided, however, that no decrease in the number of directors shall
have the effect of shortening the term of an
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incumbent director. The Board of Directors shall be classified, with respect to
the time for which they severally hold office, into three classes, as nearly
equal in number as possible, as determined by the Board of Directors, one class
to hold office initially for a term expiring at the annual meeting to be held in
2000, another class to hold office initially for a term expiring at the annual
meeting of stockholders held in 2001 and another class to hold office initially
for a term expiring at the annual meeting of stockholders to be held in 2002,
with the members of each class to hold office until their successors are elected
and qualified. At each annual meeting of stockholders, the successors of the
class of directors whose term expires at that meeting shall be elected to hold
office for a term expiring at the annual meeting of stockholders held in the
third year following the year of their election.
Section 2. Vacancies and newly created directorships resulting from any
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increase in the authorized number of directors may be filled by a majority of
the directors then in office, even if less than a quorum, or by a sole remaining
director, and the directors so chosen shall hold office until the next election
of the class for which such directors were chosen and until their successors are
duly elected and qualified or until earlier resignation or removal. If there are
no directors in office, then an election of directors may be held in the manner
provided by statute.
Section 3. The business of the corporation shall be managed by or under
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the direction of its Board of Directors which may exercise all such powers of
the corporation and do all such lawful acts and things as are not by statute or
by the certificate of incorporation or by these bylaws directed or required to
be exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
Section 4. The Board of Directors of the corporation may hold meetings,
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both regular and special, either within or without the State of Delaware.
Section 5. The first meeting of each newly elected Board of Directors
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shall be held at such time and place as shall be fixed by the vote of the
stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
Board of Directors, or in the event such meeting is not held at the time and
place so fixed by the stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the Board of Directors, or as shall be specified in a
written waiver signed by all of the directors.
Section 6. Regular meetings of the Board of Directors may be held without
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notice at such time and at such place as shall from time to time be determined
by the board.
Section 7. Special meetings of the board may be called by the Chairman of
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the Board or the president on twelve (12) hours' notice to each director by
phone, fax or electronic mail; special meetings shall be called by the Chairman
of the Board, the president or secretary in like manner and on like notice on
the written request of a majority of the Board unless the Board consists of only
one director, in which case special meetings shall be called by the Chairman of
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the Board, the president or secretary in like manner and on like notice on the
written request of the sole director.
Section 8. At all meetings of the board a majority of the directors shall
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constitute a quorum for the transaction of business and the act of a majority of
the directors present at any meeting at which there is a quorum shall be the act
of the Board of Directors, except as may be otherwise specifically provided by
statute or by the certificate of incorporation. If a quorum shall not be present
at any meeting of the Board of Directors, the directors present thereat may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present.
Section 9. Unless otherwise restricted by the certificate of
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incorporation or these bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the board or committee.
Section 10. Unless otherwise restricted by the certificate of
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incorporation or these bylaws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
COMMITTEES OF DIRECTORS
Section 11. The Board of Directors may, by resolution passed by a majority
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of the whole board, designate one (1) or more committees, each committee to
consist of one (1) or more of the directors of the corporation. The board may
designate one (1) or more directors as alternate members of any committee, who
may replace any absent or disqualified member at any meeting of the committee.
In the absence of disqualification of a member of a committee, the member
or members thereof present at any meeting and not disqualified from voting,
whether or not he or they constitute a quorum, may unanimously appoint another
member of the Board of Directors to act at the meeting in the place of any such
absent or disqualified member.
Any such committee, to the extent provided in the resolution of the Board
of Directors, shall have and may exercise all the powers and authority of the
Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers that may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the bylaws of the corporation; and,
unless the resolution or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend or to
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authorize the issuance of stock. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the Board of Directors.
Section 12. Each committee shall keep regular minutes of its meetings and
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report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
Section 13. Unless otherwise restricted by the certificate of
-----------
incorporation or these bylaws, the Board of Directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the statutes or of the
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certificate of incorporation or of these bylaws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice (except as provided in Section 7 of Article III of these Bylaws), but
such notice may be given in writing, by mail, addressed to such director or
stockholder, at his address as it appears on the records of the corporation,
with postage thereon prepaid, and such notice shall be deemed to be given at the
time when the same shall be deposited in the United States mail. Notice to
directors may also be given by telephone, telegram or facsimile.
Section 2. Whenever any notice is required to be given under the
----------
provisions of the statutes or of the certificate of incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the corporation shall be chosen by the Board
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of Directors and shall be a president, a chief financial officer and a
secretary. The Board of Directors may elect from among its members a Chairman of
the Board. The Board of Directors may also choose one or more vice-presidents,
assistant secretaries and assistant treasurers. Any number of offices may be
held by the same person, unless the certificate of incorporation or these bylaws
otherwise provide.
Section 2. The Board of Directors at its first meeting after each annual
----------
meeting of stockholders shall choose a president, a chief financial officer, and
a secretary and may choose vice presidents.
7
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Section 3. The Board of Directors may appoint such other officers and
----------
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board.
Section 4. The salaries of all officers of the corporation shall be fixed
----------
by the Board of Directors or any committee established by the Board of Directors
for such purpose. The salaries of agents of the corporation shall, unless fixed
by the Board of Directors, be fixed by the president or any vice-president of
the corporation.
Section 5. The officers of the corporation shall hold office until their
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successors are chosen and qualify. Any officer elected or appointed by the
Board of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors. Any vacancy occurring in any office of the
corporation shall be filled by the Board of Directors.
THE CHAIRMAN OF THE BOARD
Section 6. The Chairman of the Board, if any, shall preside at all
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meetings of the Board of Directors and of the stockholders at which he/she shall
be present. He/she shall have and may exercise such powers as are, from time to
time, assigned to him/her by the Board and as may be provided by law.
Section 7. In the absence of the Chairman of the Board, the president,
----------
shall preside at all meetings of the Board of Directors and of the stockholders
at which he shall be present. He shall have and may exercise such powers as are,
from time to time, assigned to him by the Board and as may be provided by law.
THE PRESIDENT AND VICE-PRESIDENTS
Section 8. The president shall be the chief executive officer of the
----------
corporation; and in the absence of the Chairman of the Board he/she shall
preside at all meetings of the stockholders and the Board of Directors; he/she
shall have general and active management of the business of the corporation and
shall see that all orders and resolutions of the Board of Directors are carried
into effect.
Section 9. The president or any vice president shall execute bonds,
----------
mortgages and other contracts requiring a seal, under the seal of the
corporation, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the corporation.
Section 10. In the absence of the president or in the event of his
-----------
inability or refusal to act, the vice-president, if any, (or in the event there
be more than one vice-president, the vice-presidents in the order designated by
the directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the president, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
president. The vice-presidents shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
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THE SECRETARY AND ASSISTANT SECRETARY
Section 11. The secretary shall attend all meetings of the Board of
-----------
Directors and all meetings of the stockholders and record all the proceedings of
the meetings of the corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He/she shall give, or cause to be given, notice of all meetings
of the stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or
president, under whose supervision he/she shall be. He/she shall have custody of
the corporate seal of the corporation and he/she, or an assistant secretary,
shall have authority to affix the same to any instrument requiring it and when
so affixed, it may be attested by his signature or by the signature of such
assistant secretary. The Board of Directors may give general authority to any
other officer to affix the seal of the corporation and to attest the affixing by
his signature.
Section 12. The assistant secretary, or if there be more than one, the
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assistant secretaries in the order determined by the Board of Directors (or if
there be no such determination, then in the order of their election) shall, in
the absence of the secretary or in the event of his inability or refusal to act,
perform the duties and exercise the powers of the secretary and shall perform
such other duties and have such other powers as the board of directors may from
time to time prescribe.
THE CHIEF FINANCIAL OFFICER
Section 13. The chief financial officer shall be the chief financial
-----------
officer of the corporation, shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors.
Section 14. He/she shall disburse the funds of the corporation as may be
-----------
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the president and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as Chief Financial Officer and of the financial condition
of the corporation.
Section 15. If required by the Board of Directors, he/she shall give the
-----------
corporation a bond (which shall be renewed every six years) in such sum and with
such surety or sureties as shall be satisfactory to the Board of Directors for
the faithful performance of the duties of his/her office and for the restoration
to the corporation, in case of his/her death, resignation, retirement or removal
from office, of all books, papers, vouchers, money and other property of
whatever kind in his possession or under his/her control belonging to the
corporation.
Section 16. The treasurer or an assistant treasurer, in the order
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determined by the Board of Directors (or if there be no such determination, then
in the order of their election) shall, in the absence of the Chief Financial
Officer or in the event of his inability or refusal to act, perform the duties
and exercise the powers of the Chief Financial Officer and shall perform such
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other duties and have such other powers as the Board of Directors may from time
to time prescribe.
ARTICLE VI
CERTIFICATE OF STOCK
Section 1. Every holder of stock in the corporation shall be entitled to
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have a certificate, signed by, or in the name of the corporation by, the
Chairman of the Board of Directors, or the president or a vice-president and the
treasurer or an assistant treasurer, or the secretary or an assistant secretary
of the corporation, certifying the number of shares owned by him/her in the
corporation.
Certificates may be issued for partly paid shares and in such case upon the
face or back of the certificates issued to represent any such partly paid
shares, the total amount of the consideration to be paid therefor, and the
amount paid thereon shall be specified.
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate that the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
Any of or all the signatures on the certificate may be facsimile. In case
any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the corporation with the same effect as if he/she were such
officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
Section 2. The Board of Directors may direct a new certificate or
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certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his/her
legal representative, to advertise the same in such manner as it shall require
and/or to give the corporation a bond in such sum as it may direct as indemnity
against
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any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
TRANSFER OF STOCK
Section 3. Upon surrender to the corporation or the transfer agent of the
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corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
FIXING RECORD DATE
Section 4. In order that the corporation may determine the stockholders
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entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty (60) nor less than ten (10) days before the
date of such meeting, nor more than sixty (60) days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
REGISTERED STOCKHOLDERS
Section 5. The corporation shall be entitled to recognize the exclusive
----------
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the corporation, subject
----------
to the provisions of the certificate of incorporation, if any, may be declared
by the Board of Directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock,
subject to the provisions of the certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside out of
----------
any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for
11
<PAGE>
such other purposes as the directors shall think conducive to the interest of
the corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
CHECKS
Section 3. All checks or demands for money and notes of the corporation
----------
shall be signed by such officer or officers or such other person or persons as
the Board of Directors may from time to time designate.
FISCAL YEAR
Section 4. The fiscal year of the corporation shall be fixed by
----------
resolution of the Board of Directors.
SEAL
Section 5. The Board of Directors may adopt a corporate seal having
----------
inscribed thereon the name of the corporation, the year of its organization and
the words "Corporate Seal, Delaware." The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
INDEMNIFICATION
Section 6. The corporation shall, to the fullest extent authorized under
----------
the laws of the State of Delaware, as those laws may be amended and supplemented
from time to time, indemnify any director made, or threatened to be made, a
party to an action or proceeding, whether criminal, civil, administrative or
investigative, by reason of being a director of the corporation or a predecessor
corporation or, at the corporation's request, a director or officer of another
corporation, provided, however, that the corporation shall indemnify any such
agent in connection with a proceeding initiated by such agent only if such
proceeding was authorized by the Board of Directors of the corporation. The
indemnification provided for in this Section 6 shall: (i) not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any bylaw, agreement or vote of stockholders or disinterested directors or
otherwise, both as to action in their official capacities and as to action in
another capacity while holding such office, (ii) continue as to a person who has
ceased to be a director, and (iii) inure to the benefit of the heirs, executors
and administrators of such a person. The corporation's obligation to provide
indemnification under this Section 6 shall be offset to the extent of any other
source of indemnification or any otherwise applicable insurance coverage under a
policy maintained by the corporation or any other person .
Expenses incurred by a director of the corporation in defending a civil or
criminal action, suit or proceeding by reason of the fact that he is or was a
director of the corporation (or was serving at the corporation's request as a
director or officer of another corporation) shall be paid by the corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such director to repay such amount if it
shall ultimately be determined that he is not entitled to be indemnified by the
corporation as authorized by relevant sections of the General Corporation Law of
Delaware. Notwithstanding the foregoing, the corporation shall not be required
to advance such expenses to an agent who is
12
<PAGE>
a party to an action, suit or proceeding brought by the corporation and approved
by a majority of the Board of Directors of the corporation which alleges willful
misappropriation of corporate assets by such agent, disclosure of confidential
information in violation of such agent's fiduciary or contractual obligations to
the corporation or any other willful and deliberate breach in bad faith of such
agent's duty to the corporation or its stockholders.
The foregoing provisions of this Section 6 shall be deemed to be a contract
between the corporation and each director who serves in such capacity at any
time while this bylaw is in effect, and any repeal or modification thereof shall
not affect any rights or obligations then existing with respect to any state of
facts then or theretofore existing or any action, suit or proceeding theretofore
or thereafter brought based in whole or in part upon any such state of facts.
The Board of Directors in its discretion shall have power on behalf of the
corporation to indemnify any person, other than a director, made a party to any
action, suit or proceeding by reason of the fact that he, his testator or
intestate, is or was an officer or employee of the corporation.
To assure indemnification under this Section 6 of all directors, officers
and employees who are determined by the corporation or otherwise to be or to
have been "fiduciaries" of any employee benefit plan of the corporation which
may exist from time to time, Section 145 of the General Corporation Law of
Delaware shall, for the purposes of this Section 6, be interpreted as follows:
an "other enterprise" shall be deemed to include such an employee benefit plan,
including without limitation, any plan of the corporation which is governed by
the Act of Congress entitled "Employee Retirement Income Security Act of 1974,"
as amended from time to time; the corporation shall be deemed to have requested
a person to serve an employee benefit plan where the performance by such person
of his duties to the corporation also imposes duties on, or otherwise involves
services by, such person to the plan or participants or beneficiaries of the
plan; excise taxes assessed on a person with respect to an employee benefit plan
pursuant to such Act of Congress shall be deemed "fines."
ARTICLE VIII
AMENDMENTS
Section 1. These bylaws may be altered, amended or repealed or new bylaws
----------
may be adopted by the affirmative vote of holders of at least 66-2/3% vote of
the outstanding voting stock of the corporation. These bylaws may also be
altered, amended or repealed or new bylaws may be adopted by the Board of
Directors, when such power is conferred upon the Board of Directors by the
certificate of incorporation. The foregoing may occur at any regular meeting of
the stockholders or of the Board of Directors or at any special meeting of the
stockholders or of the Board of Directors if notice of such alteration,
amendment, repeal or adoption of new bylaws be contained in the notice of such
special meeting. If the power to adopt, amend or repeal bylaws is conferred upon
the Board of Directors by the certificate of incorporation it shall not divest
or limit the power of the stockholders to adopt, amend or repeal bylaws.
13
<PAGE>
EXHIBIT 4.1
COMMON STOCK COMMON STOCK
NUMBER SHARES
RM
[LOGO OF RAINMAKER
APPEARS HERE]
INCORPORATED UNDER THE LAWS SEE REVERSE FOR
OF THE STATE OF DELAWARE CERTAIN DEFINITIONS
CUSIP 750875 10 6
THIS CERTIFIES THAT
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $.001 PAR VALUE, OF
- -------------------------- RAINMAKER SYSTEMS, INC. ----------------------------
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
/s/ MARTY HERNANDEZ [CORPORATE SEAL /s/ MICHAEL SILTON
APPEARS HERE]
SECRETARY CHAIRMAN
COUNTERSIGNED AND REGISTERED:
U.S. STOCK TRANSFER CORPORATION
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
The Corporation shall furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional, or other special rights of each class of stock of the
Corporation or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Such requests shall be made to
the Corporation's Secretary at the principal office of the Corporation.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, OR DESTROYED
THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE
OF A REPLACEMENT CERTIFICATE.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - ______________ Custodian ________________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act _____________________________________
in common (State)
COM PROP - as community property
UNIF TRF MIN ACT - ______________ Custodian (until age ____)
(Cust)
_________________ under Uniform Transfers
(Minor)
to Minors Act ___________________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received, ________________________________________ hereby sell(s),
assign(s) and transfer(s) unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ----------------------------------------
- ----------------------------------------
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint ____________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated ______________________________
X _______________________________________________________________________
X _______________________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By ________________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 5.1
October 22, 1999
Rainmaker Systems, Inc.
1800 Green Hills Road, 2nd Floor
Scotts Valley, CA 95066
Re: Rainmaker Systems, Inc. Registration Statement on Form S-1
for 5,750,000 Shares of Common Stock
----------------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Rainmaker Systems, Inc. the ("Company"),
in connection with the proposed issuance and sale by the Company of up to
5,750,000 shares of the Company's Common Stock (the "Shares") pursuant to the
Company's Registration Statement on Form S-1 (the "Registration Statement")
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Act").
This opinion is being furnished in accordance with the requirements of
Item 16(a) of Form S-1 and Item 601(b)(5)(i) of Regulation S-K.
We have reviewed the Company's charter documents and the corporate
proceedings taken by the Company in connection with the issuance and sale of the
Shares. Based on such review, we are of the opinion that the Shares have been
duly authorized, and if, as and when issued in accordance with the Registration
Statement and the related prospectus (as amended and supplemented through the
date of issuance) will upon such issuance and sale, be legally issued, fully
paid and nonassessable.
We consent to the filing of this opinion letter as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the prospectus which is part of the Registration Statement.
In giving this consent, we do not thereby admit that we are within the category
of persons whose consent is required under Section 7 of the Act, the rules and
regulations of the Securities and Exchange Commission promulgated thereunder, or
Item 509 of Regulation S-K.
<PAGE>
Rainmaker Systems, Inc. October 22, 1999
Page 2
This opinion letter is rendered as of the date first written above and
we disclaim any obligation to advise you of facts, circumstances, events or
developments which hereafter may be brought to our attention and which may
alter, affect or modify the opinion expressed herein. Our opinion is expressly
limited to the matters set forth above and we render no opinion, whether by
implication or otherwise, as to any other matters relating to the Company or the
Shares.
Very truly yours,
BROBECK, PHLEGER & HARRISON LLP
<PAGE>
EXHIBIT 10.1
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (the "Agreement") is made and entered into
---------
this ___ day of _________, ____, between Rainmaker Systems, Inc., a Delaware
corporation (the "Company"), and ____________ ("Indemnitee").
------- ----------
A. Indemnitee, as a member of the Company's Board of Directors and/or an
officer of the Company, performs valuable services for the Company;
B. The Company and Indemnitee recognize the continued difficulty in
obtaining liability insurance for corporate directors, officers, employees,
controlling persons, agents and fiduciaries, the significant increases in the
cost of such insurance and the general reductions in the coverage of such
insurance.
C. The Company and Indemnitee further recognize the substantial increase
in corporate litigation in general, subjecting directors, officers, employees,
controlling persons, agents and fiduciaries to expensive litigation risks at the
same time as the availability and coverage of liability insurance has been
severely limited.
D. The stockholders of the Company have adopted Bylaws (the "Bylaws")
------
providing for the indemnification of the officers, directors, agents and
employees of the Company to the maximum extent authorized by Section 145 of the
Delaware General Corporation Law, as amended ("DGCL").
----
E. Indemnitee does not regard the current protection available for the
Company's directors, officers, employees, controlling persons, agents and
fiduciaries as adequate under the present circumstances, and Indemnitee and
other directors, officers, employees, controlling persons, agents and
fiduciaries of the Company may not be willing to serve or continue to serve in
such capacities without additional protection.
F. The Bylaws and the DGCL, by their non-exclusive nature, permit
contracts between the Company and its directors, officers, employees,
controlling persons, agents or fiduciaries with respect to indemnification of
such directors.
G. The Company (i) desires to attract and retain the involvement of
highly qualified individuals, such as Indemnitee, to serve the Company and (ii)
in part, to induce Indemnitee to be involved with the Company, wishes to provide
for the indemnification and advancing of expenses to Indemnitee to the maximum
extent permitted by law.
H. In view of the considerations set forth above, the Company desires
that Indemnitee be indemnified by the Company as set forth herein.
NOW, THEREFORE, in consideration of Indemnitee's service to the Company,
the parties hereto agree as follows:
1. Indemnity of Indemnitee. The Company hereby agrees to indemnify
-----------------------
Indemnitee to the fullest extent permitted by law, even if such indemnification
is not specifically authorized
<PAGE>
by the other provisions of this Agreement, the Company's Certificate of
Incorporation (the "Certificate"), the Company's Bylaws or by statute. In the
-----------
event of any change after the date of this Agreement in any applicable law,
statute or rule which expands the right of a Delaware corporation to indemnify a
member of its Board of Directors or an officer, employee, controlling person,
agent or fiduciary, it is the intent of the parties hereto that Indemnitee shall
enjoy by this Agreement the greater benefits afforded by such change. In the
event of any change in any applicable law, statute or rule which narrows the
right of a Delaware corporation to indemnify a member of its Board of Directors
or an officer, employee, agent or fiduciary, such change, to the extent not
otherwise required by such law, statute or rule to be applied to this Agreement,
shall have no effect on this Agreement or the parties' rights and obligations
hereunder except as set forth in Section 9(a) hereof.
2. Additional Indemnity. The Company hereby agrees to hold harmless and
--------------------
indemnify the Indemnitee:
(a) against any and all expenses incurred by Indemnitee, as set forth
in Section 3(a) below; and
(b) otherwise to the fullest extent not prohibited by the
Certificate, the Bylaws or the DGCL.
3. Indemnification Rights.
----------------------
(a) Indemnification of Expenses. The Company shall indemnify and
---------------------------
hold harmless Indemnitee, together with Indemnitee's partners, affiliates,
employees, agents and spouse and each person who controls any of them or who may
be liable within the meaning of Section 15 of the Securities Act of 1933, as
amended (the "Securities Act"), or Section 20 of the Securities Exchange Act of
--------------
1934, as amended (the "Exchange Act"), to the fullest extent permitted by law if
------------
Indemnitee was or is or becomes a party to or witness or other participant in,
or is threatened to be made a party to or witness or other participant in, any
threatened, pending or completed action, suit, proceeding or alternative dispute
resolution mechanism, or any hearing, inquiry or investigation that Indemnitee
and the Company believe might lead to the institution of any such action, suit,
proceeding or alternative dispute resolution mechanism, whether civil, criminal,
administrative, investigative or other (hereinafter a "Claim") against any and
-----
all expenses (including attorneys' fees and all other costs, expenses and
obligations incurred in connection with investigating, defending, being a
witness in or participating in (including on appeal), or preparing to defend, be
a witness in or participate in, any such action, suit, proceeding, alternative
dispute resolution mechanism, hearing, inquiry or investigation, judgments,
fines, penalties and amounts paid in settlement (if such settlement is approved
in advance by the Company, which approval shall not be unreasonably withheld) of
such Claim and any federal, state, local or foreign taxes imposed on Indemnitee
as a result of the actual or deemed receipt of any payments under this Agreement
(collectively, hereinafter "Expenses"), including all interest, assessments and
--------
other charges paid or payable in connection with or in respect of such Expenses,
incurred by Indemnitee by reason of (or arising in part out of) any event or
occurrence related to the fact that Indemnitee is or was a director, officer,
employee, controlling person, agent or fiduciary of the Company or any
subsidiary of the Company, or is or was serving at the request of the Company as
a director, officer, employee, controlling person,
2
<PAGE>
agent or fiduciary of another corporation, partnership, joint venture, trust or
other enterprise, or by reason of any action or inaction on the part of
Indemnitee while serving in such capacity including, without limitation, any and
all losses, claims, damages, expenses and liabilities, joint or several
(including any investigation, legal and other expenses incurred in connection
with, and any amount paid in settlement of, any action, suit, proceeding or any
claim asserted) under the Securities Act, the Exchange Act or other federal or
state statutory law or regulation, at common law or otherwise, which relate
directly or indirectly to the registration, purchase, sale or ownership of any
securities of the Company or to any fiduciary obligation owed with respect
thereto (hereinafter an "Indemnification Event"). Such payment of Expenses shall
----------------------
be made by the Company as soon as practicable but in any event no later than 25
days after written demand by Indemnitee therefor is presented to the Company.
(b) Reviewing Party. Notwithstanding the foregoing, (i) the
---------------
obligations of the Company under Section 2 shall be subject to the condition
that the Reviewing Party (as described in Section 11(e) hereof) shall not have
determined (in a written opinion in any case in which the Independent Legal
Counsel, as defined in Section 11(d) hereof, is involved) that Indemnitee would
not be permitted to be indemnified under applicable law, and (ii) Indemnitee
acknowledges and agrees that the obligation of the Company to make an advance
payment of Expenses to Indemnitee pursuant to Section 4(a) (an "Expense
-------
Advance") shall be subject to the condition that if, when and to the extent that
- -------
the Reviewing Party determines that Indemnitee would not be permitted to be so
indemnified under applicable law, the Company shall be entitled to be reimbursed
by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts
theretofore paid; provided, however, that if Indemnitee has commenced or
thereafter commences legal proceedings in a court of competent jurisdiction to
secure a determination that Indemnitee should be indemnified under applicable
law, any determination made by the Reviewing Party that Indemnitee would not be
permitted to be indemnified under applicable law shall not be binding and
Indemnitee shall not be required to reimburse the Company for any Expense
Advance until a final judicial determination is made with respect thereto (as to
which all rights of appeal therefrom have been exhausted or lapsed).
Indemnitee's obligation to reimburse the Company for any Expense Advance shall
be unsecured and no interest shall be charged thereon. If there has not been a
Change in Control (as defined in Section 11(c) hereof), the Reviewing Party
shall be selected by the Board of Directors, and if there has been such a Change
in Control (other than a Change in Control which has been approved by a majority
of the Company's Board of Directors who were directors immediately prior to such
Change in Control), the Reviewing Party shall be the Independent Legal Counsel
referred to in Section 3(e) hereof. If there has been no determination by the
Reviewing Party or if the Reviewing Party determines that Indemnitee
substantively would not be permitted to be indemnified in whole or in part under
applicable law, Indemnitee shall have the right to commence litigation seeking
an initial determination by the court or challenging any such determination by
the Reviewing Party or any aspect thereof, including the legal or factual bases
therefor, and the Company hereby consents to service of process and to appear in
any such proceeding. Any determination by the Reviewing Party otherwise shall be
conclusive and binding on the Company and Indemnitee.
(c) Contribution. If the indemnification provided for in Section
------------
3(a) above for any reason is held by a court of competent jurisdiction to be
unavailable to an Indemnitee in respect of any losses, claims, damages, expenses
or liabilities referred to therein, then the Company, in lieu of indemnifying
Indemnitee thereunder, shall contribute to the amount paid or
3
<PAGE>
payable by Indemnitee as a result of such losses, claims, damages, expenses or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company and Indemnitee, or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company and Indemnitee
in connection with the action or inaction which resulted in such losses, claims,
damages, expenses or liabilities, as well as any other relevant equitable
considerations. In connection with the registration of the Company's securities,
the relative benefits received by the Company and Indemnitee shall be deemed to
be in the same respective proportions that the net proceeds from the offering
(before deducting expenses) received by the Company and the Indemnitee, in each
case as set forth in the table on the cover page of the applicable prospectus,
bear to the aggregate public offering price of the securities so offered. The
relative fault of the Company and Indemnitee shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or Indemnitee and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Company and Indemnitee agree that it would not be just and equitable if
contribution pursuant to this Section 3(c) were determined by pro rata or per
capita allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately preceding
paragraph. In connection with the registration of the Company's securities, in
no event shall an Indemnitee be required to contribute any amount under this
Section 3(c) in excess of the lesser of (i) that proportion of the total of such
losses, claims, damages or liabilities indemnified against equal to the
proportion of the total securities sold under such registration statement which
is being sold by Indemnitee or (ii) the proceeds received by Indemnitee from its
sale of securities under such registration statement. No person found guilty of
fraudulent misrepresentation (within the meaning of Section 10(f) of the
Securities Act) shall be entitled to contribution from any person who was not
found guilty of such fraudulent misrepresentation.
(d) Survival Regardless of Investigation. The indemnification and
------------------------------------
contribution provided for herein will remain in full force and effect regardless
of any investigation made by or on behalf of Indemnitee or any officer,
director, employee, agent or controlling person of Indemnitee.
(e) Change in Control. After the date hereof, the Company agrees
-----------------
that if there is a Change in Control of the Company (other than a Change in
Control which has been approved by a majority of the Company's Board of
Directors who were directors immediately prior to such Change in Control) then,
with respect to all matters thereafter arising concerning the rights of
Indemnitee to payments of Expenses under this Agreement or any other agreement
or under the Company's Certificate or Bylaws as now or hereafter in effect,
Independent Legal Counsel (as defined in Section 11(d) hereof) shall be selected
by Indemnitee and approved by the Company (which approval shall not be
unreasonably withheld). Such counsel, among other things, shall render its
written opinion to the Company and Indemnitee as to whether and to what extent
Indemnitee would be permitted to be indemnified under applicable law. The
Company agrees to abide by such opinion and to pay the reasonable fees of the
Independent Legal Counsel referred to above and to fully indemnify such counsel
against any and all reasonable expenses
4
<PAGE>
(including attorneys' fees), claims, liabilities and damages arising out of or
relating to this Agreement or its engagement pursuant hereto.
(f) Mandatory Payment of Expenses. Notwithstanding any other
-----------------------------
provision of this Agreement, to the extent that Indemnitee has been successful
on the merits or otherwise, including, without limitation, the dismissal of an
action without prejudice, in the defense of any action, suit, proceeding,
inquiry or investigation referred to in Section 3(a) hereof or in the defense of
any claim, issue or matter therein, Indemnitee shall be indemnified against all
Expenses incurred by Indemnitee in connection herewith.
4. Expenses; Indemnification Procedure.
-----------------------------------
(a) Advancement of Expenses. The Company shall advance all Expenses
-----------------------
incurred by Indemnitee. The advances to be made hereunder shall be paid by the
Company to Indemnitee as soon as practicable but in any event no later than
ten business days after written demand by Indemnitee therefor to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall give the
--------------------------------
Company notice in writing in accordance with Section 15 of this Agreement as
soon as practicable of any Claim made against Indemnitee for which
indemnification will or could be sought under this Agreement.
(c) No Presumptions; Burden of Proof. For purposes of this
--------------------------------
Agreement, the termination of any Claim by judgment, order, settlement (whether
with or without court approval) or conviction, or upon a plea of nolo
contendere, or its equivalent, shall not create a presumption that Indemnitee
did not meet any particular standard of conduct or have any particular belief or
that a court has determined that indemnification is not permitted by applicable
law. In addition, neither the failure of the Reviewing Party to have made a
determination as to whether Indemnitee has met any particular standard of
conduct or had any particular belief, nor an actual determination by the
Reviewing Party that Indemnitee has not met such standard of conduct or did not
have such belief, prior to the commencement of legal proceedings by Indemnitee
to secure a judicial determination that Indemnitee should be indemnified under
applicable law, shall be a defense to Indemnitee's claim or create a presumption
that Indemnitee has not met any particular standard of conduct or did not have
any particular belief. In connection with any determination by the Reviewing
Party or otherwise as to whether Indemnitee is entitled to be indemnified
hereunder, the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
(d) Notice to Insurers. If, at the time of the receipt by the
------------------
Company of a notice of a Claim pursuant to Section 4(b) hereof, the Company has
liability insurance in effect which may cover such Claim, the Company shall give
prompt notice of the commencement of such Claim to the insurers in accordance
with the procedures set forth in each of the Company's policies. The Company
shall thereafter take all necessary or desirable action to cause such insurers
to pay, on behalf of Indemnitee, all amounts payable as a result of such action,
suit, proceeding, inquiry or investigation in accordance with the terms of such
policies.
5
<PAGE>
(e) Selection of Counsel. In the event the Company shall be
--------------------
obligated hereunder to pay the Expenses of any Claim, the Company shall be
entitled to assume the defense of such Claim, with counsel approved by the
Indemnitee (which approval shall not be unreasonably withheld) upon the delivery
to Indemnitee of written notice of its election to do so. After delivery of such
notice, approval of such counsel by Indemnitee and the retention of such counsel
by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees of counsel subsequently incurred by Indemnitee with
respect to the same Claim; provided that (i) Indemnitee shall have the right to
employ Indemnitee's counsel in any such Claim at Indemnitee's expense and (ii)
if (A) the employment of counsel by Indemnitee has been previously authorized by
the Company, (B) Indemnitee shall have reasonably concluded that there is a
conflict of interest between the Company and Indemnitee in the conduct of any
such defense, or (C) the Company shall not continue to retain such counsel to
defend such Claim, then the fees and expenses of Indemnitee's counsel shall be
at the expense of the Company.
5. Nonexclusivity. The indemnification provided by this Agreement shall
--------------
be in addition to any rights to which Indemnitee may be entitled under the
Company's Certificate of Incorporation, its Bylaws, any agreement, any vote of
stockholders or disinterested directors, the DGCL, or otherwise. The
indemnification provided under this Agreement shall continue as to Indemnitee
for any action Indemnitee took or did not take while serving in an indemnified
capacity even though Indemnitee may have ceased to serve in such capacity.
6. No Duplication of Payments. The Company shall not be liable under
--------------------------
this Agreement to make any payment in connection with any Claim made against any
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, Certificate of Incorporation, Bylaw or otherwise)
of the amounts otherwise indemnifiable hereunder.
7. Partial Indemnification. If any Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for any portion of
Expenses incurred in connection with any Claim, but not, however, for all of the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion of such Expenses to which Indemnitee is entitled.
8. Mutual Acknowledgement. The Company and Indemnitee acknowledge that
----------------------
in certain instances, Federal law or applicable public policy may prohibit the
Company from indemnifying its directors, officers, employees, controlling
persons, agents or fiduciaries under this Agreement or otherwise. Each
Indemnitee understands and acknowledges that the Company has undertaken or may
be required in the future to undertake with the Securities and Exchange
Commission to submit the question of indemnification to a court in certain
circumstances for a determination of the Company's rights under public policy to
indemnify Indemnitee.
9. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to any Indemnitee with respect to Claims initiated or brought voluntarily by
Indemnitee and not by way of defense, except (i) with respect to actions or
proceedings to establish or enforce a right to
6
<PAGE>
indemnify under this Agreement or any other agreement or insurance policy or
under the Company's Certificate of Incorporation or Bylaws now or hereafter in
effect relating to Claims for Indemnifiable Events, (ii) in specific cases if
the Board of Directors has approved the initiation or bringing of such Claim, or
(iii) as otherwise required under Section 145 of the Delaware General
Corporation Law, regardless of whether Indemnitee ultimately is determined to be
entitled to such indemnification, advance expense payment or insurance recovery,
as the case may be; or
(b) Claims Under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Exchange Act or any similar
successor statute; or
(c) Claims Excluded Under Section 145 of the Delaware General
---------------------------------------------------------
Corporation Law. To indemnify Indemnitee if (i) Indemnitee did not act in good
- ---------------
faith or in a manner reasonably believed by such Indemnitee to be in or not
opposed to the best interests of the Company, or (ii) with respect to any
criminal action or proceeding, Indemnitee had reasonable cause to believe
Indemnitee's conduct was unlawful, or (iii) Indemnitee shall have been adjudged
to be liable to the Company unless and only to the extent the court in which
such action was brought shall permit indemnification as provided in Section
145(b) of the Delaware General Corporation Law.
10. Period of Limitations. No legal action shall be brought and no cause
---------------------
of action shall be asserted by or in the right of the Company against any
Indemnitee, any Indemnitee's estate, spouse, heirs, executors or personal or
legal representatives after the expiration of five years from the date of
accrual of such cause of action, and any claim or cause of action of the Company
shall be extinguished and deemed released unless asserted by the timely filing
of a legal action within such five-year period; provided, however, that if any
shorter period of limitations is otherwise applicable to any such cause of
action, such shorter period shall govern.
11. Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
-------
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, employees, agents or
fiduciaries, so that if Indemnitee is or was a director, officer, employee,
agent, control person, or fiduciary of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee, control person, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise,
Indemnitee shall stand in the same position under the provisions of this
Agreement with respect to the resulting or surviving corporation as Indemnitee
would have with respect to such constituent corporation if its separate
existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
-----------------
shall include employee benefit plans; references to "fines" shall include any
-----
excise taxes assessed on any Indemnitee with respect to an employee benefit
plan; and references to "serving at the request of the Company" shall include
-------------------------------------
any service as a director, officer, employee, agent or
7
<PAGE>
fiduciary of the Company which imposes duties on, or involves services by, such
director, officer, employee, agent or fiduciary with respect to an employee
benefit plan, its participants or its beneficiaries; and if any Indemnitee acted
in good faith and in a manner Indemnitee reasonably believed to be in the
interests of the participants and beneficiaries of an employee benefit plan,
Indemnitee shall be deemed to have acted in a manner "not opposed to the best
interests of the Company" as referred to in this Agreement.
(c) For purposes of this Agreement, a "Change in Control" shall be
-----------------
deemed to have occurred in any of the following cases: (i) any "person" (as such
------
term is used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), other than
a trustee or other fiduciary holding securities under an employee benefit plan
of the Company or a corporation owned directly or indirectly by the stockholders
of the Company in substantially the same proportions as their ownership of stock
of the Company, (A) who is or becomes the beneficial owner, directly or
indirectly, of securities of the Company representing 10% or more of the
combined voting power of the Company's then outstanding Voting Securities,
increases his or her beneficial ownership of such securities by 5% or more over
the percentage so owned by such person or (B) becomes the "beneficial owner" (as
----------------
defined in Rule 13d-3 under said Exchange Act), directly or indirectly, of
securities of the Company representing more than 20% of the total voting power
represented by the Company's then outstanding Voting Securities; (ii) during any
period of two consecutive years, individuals who at the beginning of such period
constitute the Board of Directors of the Company and any new director whose
election by the Board of Directors or nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds of the directors then
still in office who either were directors at the beginning of the period or
whose election or nomination for election was previously so approved, cease for
any reason to constitute a majority thereof; (iii) the stockholders of the
Company approve a merger or consolidation of the Company with any other
corporation other than a merger or consolidation which would result in the
Voting Securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into Voting Securities of the surviving entity) at least 80% of the total voting
power represented by the Voting Securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation; or (iv) the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of (in one
transaction or a series of transactions) all or substantially all of the
Company's assets.
(d) For purposes of this Agreement, "Independent Legal Counsel" shall
-------------------------
mean an attorney or firm of attorneys, selected in accordance with the
provisions of Section 3(d) hereof, who shall not have otherwise performed
services for the Company or any Indemnitee within the last three years (other
than with respect to matters concerning the right of any Indemnitee under this
Agreement, or of other indemnitees under similar indemnity agreements).
(e) For purposes of this Agreement, a "Reviewing Party" shall mean
---------------
any appropriate person or body consisting of a member or members of the
Company's Board of Directors or any other person or body appointed by the Board
of Directors who is not a party to the particular Claim for which Indemnitee is
seeking indemnification, or Independent Legal Counsel.
8
<PAGE>
(f) For purposes of this Agreement, "Voting Securities" shall mean
-----------------
any securities of the Company that vote generally in the election of directors.
12. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
13. Binding Effect; Successors and Assigns. This Agreement shall be
--------------------------------------
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns, including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the Company, spouses, heirs,
and personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect by purchase, merger, consolidation or
otherwise) to all, substantially all, or a substantial part, of the business
and/or assets of the Company, by written agreement in form and substance
satisfactory to Indemnitee, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place. This Agreement shall
continue in effect with respect to Claims relating to Indemnifiable Events
regardless of whether any Indemnitee continues to serve as a director, officer,
employee, agent, controlling person, or fiduciary of the Company or of any other
enterprise, including subsidiaries of the Company, at the Company's request.
14. Attorneys' Fees. In the event that any action is instituted by an
---------------
Indemnitee under this Agreement or under any liability insurance policies
maintained by the Company to enforce or interpret any of the terms hereof or
thereof, any Indemnitee shall be entitled to be paid all Expenses incurred by
Indemnitee with respect to such action if Indemnitee is ultimately successful in
such action, and shall be entitled to the advancement of Expenses with respect
to such action, unless, as a part of such action, a court of competent
jurisdiction over such action determines that the material assertions made by
Indemnitee as a basis for such action were not made in good faith or were
frivolous. In the event of an action instituted by or in the name of the Company
under this Agreement to enforce or interpret any of the terms of this Agreement,
Indemnitee shall be entitled to be paid all Expenses incurred by Indemnitee in
defense of such action (including costs and expenses incurred with respect to
Indemnitee counterclaims and cross-claims made in such action), and shall be
entitled to the advancement of Expenses with respect to such action, unless, as
a part of such action, a court having jurisdiction over such action determines
that the Indemnitee's material defenses to such action were made in bad faith or
were frivolous.
15. Notice. All notices and other communications required or permitted
------
hereunder shall be in writing, shall be effective when given, and shall in any
event be deemed to be given (a) five calendar days after deposit with the U.S.
Postal Service or other applicable postal service, if delivered by first class
mail, postage prepaid, (b) upon delivery, if delivered by hand, (c) one business
day after the business day of deposit with Federal Express or similar overnight
courier, freight prepaid, or (d) one day after the business day of delivery by
facsimile transmission, if deliverable by facsimile transmission, with copy by
first class mail, postage prepaid, and shall be addressed if to Indemnitee, at
Indemnitee's address as set forth beneath Indemnitee's signature to this
Agreement and if to the Company at the address of its principal
9
<PAGE>
corporate offices (attention: Chief Executive Officer) or at such other address
as such party may designate by ten calendar days' advance written notice to the
other party hereto.
16. Severability. The provisions of this Agreement shall be severable in
------------
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including, without limitations, each portion of this Agreement containing any
provision held to be invalid, void or otherwise unenforceable, that is not
itself invalid, void or unenforceable) shall be construed so as to give effect
to the intent manifested by the provision held invalid, illegal or
unenforceable.
17. Choice of Law. This Agreement shall be governed by and its provisions
-------------
construed and enforced in accordance with the laws of the State of Delaware, as
applied to contracts between Delaware residents, entered into and to be
performed entirely within the State of Delaware, without regard to the conflict
of laws principles thereof.
18. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
19. Amendment and Termination. No amendment, modification, termination or
-------------------------
cancellation of this Agreement shall be effective unless it is in writing signed
by all parties hereto. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.
20. Integration and Entire Agreement. This Agreement sets forth the
--------------------------------
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.
21. No Construction as Employment Agreement. Nothing contained in this
---------------------------------------
Agreement shall be construed as giving the Indemnitee any right to be retained
in the employ of the Company or any of its subsidiaries.
22. Corporate Authority. The Board of Directors of the Company has
-------------------
approved the terms of this Agreement.
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and
as of the day and year first above written.
COMPANY:
RAINMAKER SYSTEMS, INC.,
a Delaware corporation
By:_________________________________
Michael Silton,
President
Address:____________________________
____________________________________
INDEMNITEE:
____________________________________
[Name of Indemnitee]
Address:____________________________
____________________________________
11
<PAGE>
EXHIBIT 10.2
RAINMAKER SYSTEMS, INC.
1999 STOCK INCENTIVE PLAN
-------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1999 Stock Incentive Plan is intended to promote the interests of
Rainmaker Systems, Inc., a Delaware corporation, by providing eligible persons
in the Corporation's service with the opportunity to acquire a proprietary
interest, or otherwise increase their proprietary interest, in the Corporation
as an incentive for them to remain in such service.
Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into five separate equity incentives
programs:
- the Discretionary Option Grant Program under which eligible
persons may, at the discretion of the Plan Administrator, be granted options to
purchase shares of Common Stock,
- the Salary Investment Option Grant Program under which
eligible employees may elect to have a portion of their base salary invested
each year in special option grants,
- the Stock Issuance Program under which eligible persons may,
at the discretion of the Plan Administrator, be issued shares of Common Stock
directly, either through the immediate purchase of such shares or as a bonus for
services rendered the Corporation (or any Parent or Subsidiary),
- the Automatic Option Grant Program under which eligible non-
employee Board members shall automatically receive option grants at designated
intervals over their period of continued Board service, and
- the Director Fee Option Grant Program under which non-
employee Board members may elect to have all or any portion of their annual
retainer fee otherwise payable in cash applied to a special stock option grant.
B. The provisions of Articles One and Seven shall apply to all
equity programs under the Plan and shall govern the interests of all persons
under the Plan.
<PAGE>
III. ADMINISTRATION OF THE PLAN
A. The Primary Committee shall have sole and exclusive authority to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to Section 16 Insiders. Administration of the Discretionary Option Grant
and Stock Issuance Programs with respect to all other persons eligible to
participate in those programs may, at the Board's discretion, be vested in the
Primary Committee or a Secondary Committee, or the Board may retain the power to
administer those programs with respect to all such persons. However, any
discretionary option grants or stock issuances for members of the Primary
Committee must be authorized by a disinterested majority of the Board.
B. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions of
any Secondary Committee and reassume all powers and authority previously
delegated to such committee.
C. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of those programs and any outstanding options
or stock issuances thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an interest in the
Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or
any stock option or stock issuance thereunder.
D. The Primary Committee shall have the sole and exclusive authority
to determine which Section 16 Insiders and other highly compensated Employees
shall be eligible for participation in the Salary Investment Option Grant
Program for one or more calendar years. However, all option grants under the
Salary Investment Option Grant Program shall be made in accordance with the
express terms of that program, and the Primary Committee shall not exercise any
discretionary functions with respect to the option grants made under that
program.
E. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.
F. Administration of the Automatic Option Grant and Director Fee
Option Grant Programs shall be self-executing in accordance with the terms of
those programs, and no Plan Administrator shall exercise any discretionary
functions with respect to any option grants or stock issuances made under those
programs.
2.
<PAGE>
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of
directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).
B. Only Employees who are Section 16 Insiders or other highly
compensated individuals shall be eligible to participate in the Salary
Investment Option Grant Program.
C. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine,
(i) with respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive such grants, the time or times
when those grants are to be made, the number of shares to be covered by each
such grant, the status of the granted option as either an Incentive Option or a
Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive such issuances, the time or times when the issuances are
to be made, the number of shares to be issued to each Participant, the vesting
schedule (if any) applicable to the issued shares and the consideration for such
shares.
D. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Discretionary Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.
E. The individuals who shall be eligible to participate in the
Automatic Option Grant Program shall be limited to (i) those individuals who
first become non-employee Board members on or after the Underwriting Date,
whether through appointment by the Board or election by the Corporation's
stockholders, and (ii) those individuals who continue to serve as non-employee
Board members at one or more Annual Stockholders Meetings held after the
Underwriting Date. A non-employee Board member who has previously been in the
employ of the Corporation (or any Parent or Subsidiary) shall not be eligible to
receive an option grant under the Automatic Option Grant Program at the time he
or she first becomes a non-employee Board member, but shall be eligible to
receive periodic option grants under the Automatic Option Grant Program while he
or she continues to serve as a non-employee Board member.
F. All non-employee Board members shall be eligible to participate in
the Director Fee Option Grant Program.
3.
<PAGE>
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The number of shares of Common Stock initially
reserved for issuance over the term of the Plan shall not exceed Eight Million
Six hundred Thirty-Two Thousand Four-Hundred Seven (8,632,407) shares. Such
reserve shall consist of (i) the number of shares estimated to remain available
for issuance, as of the Plan Effective Date, under the Predecessor Plans as last
approved by the Corporation's stockholders, including the shares subject to
outstanding options under the Predecessor Plans, (ii) plus an additional
increase of approximately Three Million Nine Hundred Fifty Eight Thousand Seven
Hundred Three (3,958,703) shares to be approved by the Corporation's
stockholders prior to the Underwriting Date.
B. The number of shares of Common Stock available for issuance under
the Plan shall automatically increase on the first trading day of January each
calendar year during the term of the Plan, beginning with calendar year 2001, by
an amount equal to four percent (4%) of the total number of shares of Common
Stock outstanding on the last trading day in December of the immediately
preceding calendar year, but in no event shall any such annual increase exceed
Three Million (3,000,000) shares.
C. No one person participating in the Plan may receive stock options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 1,000,000 shares of Common Stock in the aggregate per calendar year.
D. Shares of Common Stock subject to outstanding options (including
options incorporated into this Plan from the Predecessor Plans) shall be
available for subsequent issuance under the Plan to the extent (i) those options
expire or terminate for any reason prior to exercise in full or (ii) the options
are cancelled in accordance with the cancellation-regrant provisions of Article
Two. Unvested shares issued under the Plan and subsequently cancelled or
repurchased by the Corporation at the original issue price paid per share,
pursuant to the Corporation's repurchase rights under the Plan shall be added
back to the number of shares of Common Stock reserved for issuance under the
Plan and shall accordingly be available for reissuance through one or more
subsequent option grants or direct stock issuances under the Plan. However,
should the exercise price of an option under the Plan be paid with shares of
Common Stock or should shares of Common Stock otherwise issuable under the Plan
be withheld by the Corporation in satisfaction of the withholding taxes incurred
in connection with the exercise of an option or the vesting of a stock issuance
under the Plan, then the number of shares of Common Stock available for issuance
under the Plan shall be reduced by the gross number of shares for which the
option is exercised or which vest under the stock issuance, and not by the net
number of shares of Common Stock issued to the holder of such option or stock
issuance. Shares of Common Stock underlying one or more stock appreciation
rights exercised under Section IV of Article Two, Section III of Article Three,
Section II of Article Five or Section III of Article Six of the Plan shall not
be available for subsequent issuance under the Plan.
4.
<PAGE>
E. If any change is made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made by the Plan Administrator to (i) the maximum number and/or class of
securities issuable under the Plan, (ii) the maximum number and/or class of
securities for which any one person may be granted stock options, separately
exercisable stock appreciation rights and direct stock issuances under the Plan
per calendar year, (iii) the number and/or class of securities for which grants
are subsequently to be made under the Automatic Option Grant Program to new and
continuing non-employee Board members, (iv) the number and/or class of
securities and the exercise price per share in effect under each outstanding
option under the Plan, (v) the number and/or class of securities and exercise
price per share in effect under each outstanding option incorporated into this
Plan from the Predecessor Plans and (vi) the maximum number and/or class of
securities by which the share reserve is to increase automatically each calendar
year pursuant to the provisions of Section V.B of this Article One. Such
adjustments to the outstanding options are to be effected in a manner which
shall preclude the enlargement or dilution of rights and benefits under such
options. The adjustments determined by the Plan Administrator shall be final,
binding and conclusive.
5.
<PAGE>
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
----------------------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. Exercise Price.
--------------
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon exercise
of the option and shall, subject to the provisions of Section I of Article Seven
and the documents evidencing the option, be payable in one or more of the forms
specified below:
(i) cash or check made payable to the Corporation,
(ii) shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise Date, or
(iii) to the extent the option is exercised for vested
shares, through a special sale and remittance procedure pursuant to which
the Optionee shall concurrently provide irrevocable instructions to (a) a
Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise and (b) the
Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. Exercise and Term of Options. Each option shall be exercisable at
----------------------------
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.
6.
<PAGE>
C. Effect of Termination of Service.
--------------------------------
1. The following provisions shall govern the exercise of any options
held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan Administrator
and set forth in the documents evidencing the option, but no such option
shall be exercisable after the expiration of the option term.
(ii) Any option held by the Optionee at the time of death and
exercisable in whole or in part at that time may be subsequently exercised
by the personal representative of the Optionee's estate or by the person or
persons to whom the option is transferred pursuant to the Optionee's will
or the laws of inheritance or by the Optionee's designated beneficiary or
beneficiaries of that option.
(iii) Should the Optionee's Service be terminated for Misconduct
or should the Optionee otherwise engage in Misconduct while holding one or
more outstanding options under this Article Two, then all those options
shall terminate immediately and cease to be outstanding.
(iv) During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Service, terminate and cease
to be outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.
2. The Plan Administrator shall have complete discretion, exercisable
either at the time an option is granted or at any time while the option remains
outstanding, to:
(i) extend the period of time for which the option is to remain
exercisable following the Optionee's cessation of Service from the limited
exercise period otherwise in effect for that option to such greater period
of time as the Plan Administrator shall deem appropriate, but in no event
beyond the expiration of the option term, and/or
(ii) permit the option to be exercised, during the applicable
post-Service exercise period, not only with respect to the number of vested
shares of Common Stock for which such option is exercisable at the time of
the Optionee's cessation of Service but also with respect to one or more
additional installments in which the Optionee would have vested had the
Optionee continued in Service.
7.
<PAGE>
D. Stockholder Rights. The holder of an option shall have no
------------------
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. Repurchase Rights. The Plan Administrator shall have the
-----------------
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.
F. Limited Transferability of Options. During the lifetime of the
----------------------------------
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or the laws of inheritance
following the Optionee's death. However, a Non-Statutory Option may be assigned
in whole or in part during the Optionee's lifetime to one or more members of the
Optionee's family or to a trust established exclusively for one or more such
family members or to Optionee's former spouse, to the extent such assignment is
in connection with the Optionee's estate plan or pursuant to a domestic
relations order. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate. Notwithstanding the foregoing, the Optionee may also designate
one or more persons as the beneficiary or beneficiaries of his or her
outstanding options under this Article Two, and those options shall, in
accordance with such designation, automatically be transferred to such
beneficiary or beneficiaries upon the Optionee's death while holding those
options. Such beneficiary or beneficiaries shall take the transferred options
subject to all the terms and conditions of the applicable agreement evidencing
each such transferred option, including (without limitation) the limited time
period during which the option may be exercised following the Optionee's death.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Seven shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options
when issued under the Plan shall not be subject to the terms of this Section II.
---
A. Eligibility. Incentive Options may only be granted to
-----------
Employees.
B. Dollar Limitation. The aggregate Fair Market Value of the
-----------------
shares of Common Stock (determined as of the respective date or dates of grant)
for which one or more options granted to any Employee under the Plan (or any
other option plan of the Corporation or any Parent or Subsidiary) may for the
first time become exercisable as Incentive Options during any one calendar year
shall not exceed the sum of One Hundred Thousand Dollars ($100,000).
8.
<PAGE>
To the extent the Employee holds two (2) or more such options which become
exercisable for the first time in the same calendar year, the foregoing
limitation on the exercisability of such options as Incentive Options shall be
applied on the basis of the order in which such options are granted.
C. 10% Stockholder. If any Employee to whom an Incentive Option
---------------
is granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding
option shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
exercisable for all the shares of Common Stock at the time subject to such
option and may be exercised for any or all of those shares as fully vested
shares of Common Stock. However, an outstanding option shall not become
exercisable on such an accelerated basis if and to the extent: (i) such option
is, in connection with the Corporate Transaction, to be assumed by the successor
corporation (or parent thereof) or (ii) such option is to be replaced with a
cash incentive program of the successor corporation which preserves the spread
existing at the time of the Corporate Transaction on any shares for which the
option is not otherwise at that time exercisable and provides for subsequent
payout in accordance with the same exercise/vesting schedule applicable to those
option shares or (iii) the acceleration of such option is subject to other
limitations imposed by the Plan Administrator at the time of the option grant.
B. All outstanding repurchase rights shall automatically
terminate, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate Transaction,
except to the extent: (i) those repurchase rights are to be assigned to the
successor corporation (or parent thereof) in connection with such Corporate
Transaction or (ii) such accelerated vesting is precluded by other limitations
imposed by the Plan Administrator at the time the repurchase right is issued.
C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments to reflect such Corporate Transaction shall also be made
to (i) the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
- --------
the same, (ii) the maximum number and/or class of securities available for
issuance over the remaining term of the Plan and
9.
<PAGE>
(iii) the maximum number and/or class of securities for which any one person may
be granted stock options, separately exercisable stock appreciation rights and
direct stock issuances under the Plan per calendar year and (iv) the maximum
number and/or class of securities by which the share reserve is to increase
automatically each calendar year. To the extent the actual holders of the
Corporation's outstanding Common Stock receive cash consideration for their
Common Stock in consummation of the Corporate Transaction, the successor
corporation may, in connection with the assumption of the outstanding options
under this Plan, substitute one or more shares of its own common stock with a
fair market value equivalent to the cash consideration paid per share of Common
Stock in such Corporate Transaction.
E. The Plan Administrator shall have the discretionary authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall, immediately prior to the effective date of
such Corporate Transaction, become exercisable for all the shares of Common
Stock at the time subject to those options and may be exercised for any or all
of those shares as fully vested shares of Common Stock, whether or not those
options are to be assumed in the Corporate Transaction. In addition, the Plan
Administrator shall have the discretionary authority to structure one or more of
the Corporation's repurchase rights under the Discretionary Option Grant Program
so that those rights shall not be assignable in connection with such Corporate
Transaction and shall accordingly terminate upon the consummation of such
Corporate Transaction, and the shares subject to those terminated rights shall
thereupon vest in full.
F. The Plan Administrator shall have full power and authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall become exercisable for all the shares of
Common Stock at the time subject to those options in the event the Optionee's
Service is subsequently terminated by reason of an Involuntary Termination
within a designated period (not to exceed eighteen (18) months) following the
effective date of any Corporate Transaction in which those options are assumed
and do not otherwise accelerate. In addition, the Plan Administrator may
structure one or more of the Corporation's repurchase rights so that those
rights shall immediately terminate with respect to any shares held by the
Optionee at the time of his or her Involuntary Termination, and the shares
subject to those terminated repurchase rights shall accordingly vest in full at
that time.
G. The Plan Administrator shall have the discretionary authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall, immediately prior to the effective date of
a Change in Control, become exercisable for all the shares of Common Stock at
the time subject to those options and may be exercised for any or all of those
shares as fully vested shares of Common Stock. In addition, the Plan
Administrator shall have the discretionary authority to structure one or more of
the Corporation's repurchase rights under the Discretionary Option Grant Program
so that those rights shall terminate automatically upon the consummation of such
Change in Control, and the shares subject to those terminated rights shall
thereupon vest in full. Alternatively, the Plan Administrator may condition the
automatic acceleration of one or more outstanding options under the
Discretionary Option Grant Program and the termination of one or more of the
10.
<PAGE>
Corporation's outstanding repurchase rights under such program upon the
subsequent termination of the Optionee's Service by reason of an Involuntary
Termination within a designated period (not to exceed eighteen (18) months)
following the effective date of such Change in Control.
H. The portion of any Incentive Option accelerated in connection
with a Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
($100,000) limitation is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated portion of such option shall be exercisable as a
Nonstatutory Option under the Federal tax laws.
I. The outstanding options shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program (including outstanding options incorporated from the Predecessor
Plans) and to grant in substitution new options covering the same or a different
number of shares of Common Stock but with an exercise price per share based on
the Fair Market Value per share of Common Stock on the new grant date.
V. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have full power and authority to
grant to selected Optionees tandem stock appreciation rights and/or limited
stock appreciation rights.
B. The following terms shall govern the grant and exercise of tandem
stock appreciation rights:
(i) One or more Optionees may be granted the right,
exercisable upon such terms as the Plan Administrator may establish, to
elect between the exercise of the underlying option for shares of Common
Stock and the surrender of that option in exchange for a distribution from
the Corporation in an amount equal to the excess of (a) the Fair Market
Value (on the option surrender date) of the number of shares in which the
Optionee is at the time vested under the surrendered option (or surrendered
portion thereof) over (b) the aggregate exercise price payable for such
shares.
(ii) No such option surrender shall be effective unless it
is approved by the Plan Administrator, either at the time of the actual
option surrender or at any earlier time. If the surrender is so approved,
then the distribution to which the Optionee shall be entitled may be made
in shares of Common Stock valued at Fair Market Value on the option
surrender date, in cash, or partly in shares and partly in cash, as the
Plan Administrator shall in its sole discretion deem appropriate.
11.
<PAGE>
(iii) If the surrender of an option is not approved by the
Plan Administrator, then the Optionee shall retain whatever rights the
Optionee had under the surrendered option (or surrendered portion thereof)
on the option surrender date and may exercise such rights at any time prior
to the later of (a) five (5) business days after the receipt of the
-----
rejection notice or (b) the last day on which the option is otherwise
exercisable in accordance with the terms of the documents evidencing such
option, but in no event may such rights be exercised more than ten (10)
years after the option grant date.
C. The following terms shall govern the grant and exercise of
limited stock appreciation rights:
(i) One or more Section 16 Insiders may be granted
limited stock appreciation rights with respect to their outstanding
options.
(ii) Upon the occurrence of a Hostile Take-Over, each
individual holding one or more options with such a limited stock
appreciation right shall have the unconditional right (exercisable for a
thirty (30)-day period following such Hostile Take-Over) to surrender each
such option to the Corporation. In return for the surrendered option, the
Optionee shall receive a cash distribution from the Corporation in an
amount equal to the excess of (A) the Take-Over Price of the shares of
Common Stock at the time subject to such option (whether or not the option
is otherwise at that time exercisable for those shares) over (B) the
aggregate exercise price payable for those shares. Such cash distribution
shall be paid within five (5) days following the option surrender date.
(iii) At the time such limited stock appreciation right is
granted, the Plan Administrator shall pre-approve any subsequent exercise
of that right in accordance with the terms of this Paragraph C.
Accordingly, no further approval of the Plan Administrator or the Board
shall be required at the time of the actual option surrender and cash
distribution.
12.
<PAGE>
ARTICLE THREE
SALARY INVESTMENT OPTION GRANT PROGRAM
--------------------------------------
I. OPTION GRANTS
The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years (if any) for which the Salary Investment
Option Grant Program is to be in effect and to select the Section 16 Insiders
and other highly compensated Employees eligible to participate in the Salary
Investment Option Grant Program for such calendar year or years. Each selected
individual who elects to participate in the Salary Investment Option Grant
Program must, prior to the start of each calendar year of participation, file
with the Plan Administrator (or its designate) an irrevocable authorization
directing the Corporation to reduce his or her base salary for that calendar
year by an amount not less than Ten Thousand Dollars ($10,000.00) nor more than
Fifty Thousand Dollars ($50,000.00). Each individual who files such a timely
authorization shall automatically be granted an option under the Salary
Investment Grant Program on the first trading day in January of the calendar
year for which the salary reduction is to be in effect.
II. OPTION TERMS
Each option shall be a Non-Statutory Option evidenced by one or more
documents in the form approved by the Plan Administrator; provided, however,
--------
that each such document shall comply with the terms specified below.
A. Exercise Price.
--------------
1. The exercise price per share shall be thirty-three and one-
third percent (33-1/3%) of the Fair Market Value per share of Common Stock on
the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall be payable in one or more of the alternative
forms authorized under the Discretionary Option Grant Program. Except to the
extent the sale and remittance procedure specified thereunder is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. Number of Option Shares. The number of shares of Common Stock
-----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
13.
<PAGE>
A is the dollar amount of the reduction in the Optionee's base
salary for the calendar year to be in effect pursuant to this program,
and
B is the Fair Market Value per share of Common Stock on the
option grant date.
C. Exercise and Term of Options. The option shall become
----------------------------
exercisable in a series of twelve (12) successive equal monthly installments
upon the Optionee's completion of each calendar month of Service in the calendar
year for which the salary reduction is in effect. Each option shall have a
maximum term of ten (10) years measured from the option grant date.
D. Effect of Termination of Service. Should the Optionee cease
--------------------------------
Service for any reason while holding one or more options under this Article
Three, then each such option shall remain exercisable, for any or all of the
shares for which the option is exercisable at the time of such cessation of
Service, until the earlier of (i) the expiration of the ten (10)-year option
-------
term or (ii) the expiration of the three (3)-year period measured from the date
of such cessation of Service. Should the Optionee die while holding one or more
options under this Article Three, then each such option may be exercised, for
any or all of the shares for which the option is exercisable at the time of the
Optionee's cessation of Service (less any shares subsequently purchased by
Optionee prior to death), by the personal representative of the Optionee's
estate or by the person or persons to whom the option is transferred pursuant to
the Optionee's will or the laws of inheritance or by the designated beneficiary
or beneficiaries of the option. Such right of exercise shall lapse, and the
option shall terminate, upon the earlier of (i) the expiration of the ten (10)-
-------
year option term or (ii) the three (3)-year period measured from the date of the
Optionee's cessation of Service. However, the option shall, immediately upon the
Optionee's cessation of Service for any reason, terminate and cease to remain
outstanding with respect to any and all shares of Common Stock for which the
option is not otherwise at that time exercisable.
III. CORPORATE TRANSACTION/ CHANGE IN CONTROL/ HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction while the Optionee
remains in Service, each outstanding option held by such Optionee under this
Salary Investment Option Grant Program shall automatically accelerate so that
each such option shall, immediately prior to the effective date of the Corporate
Transaction, become exercisable for all the shares of Common Stock at the time
subject to such option and may be exercised for any or all of those shares as
fully vested shares of Common Stock. Each such outstanding option shall
terminate immediately following the Corporate Transaction, except to the extent
assumed by the successor corporation (or parent thereof) in such Corporate
Transaction. Any option so assumed and shall remain exercisable for the fully
vested shares until the earlier of (i) the expiration of the ten (10)-year
-------
option term or (ii) the expiration of the three (3)-year period measured from
the date of the Optionee's cessation of Service.
B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Salary
Investment Option Grant Program shall automatically accelerate so that each such
option shall, immediately prior to the effective date of the Change in Control,
become exercisable for all the shares of Common Stock
14.
<PAGE>
at the time subject to such option and may be exercised for any or all of those
shares as fully vested shares of Common Stock. The option shall remain so
exercisable until the earliest to occur of (i) the expiration of the ten (10)-
--------
year option term, (ii) the expiration of the three (3)-year period measured from
the date of the Optionee's cessation of Service, (iii) the termination of the
option in connection with a Corporate Transaction or (iv) the surrender of the
option in connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Salary Investment Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to the surrendered option
(whether or not the option is otherwise at the time exercisable for those
shares) over (ii) the aggregate exercise price payable for such shares. Such
cash distribution shall be paid within five (5) days following the surrender of
the option to the Corporation. The Primary Committee shall, at the time the
option with such limited stock appreciation right is granted under the Salary
Investment Option Grant Program, pre-approve any subsequent exercise of that
right in accordance with the terms of this Paragraph C. Accordingly, no further
approval of the Primary Committee or the Board shall be required at the time of
the actual option surrender and cash distribution.
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
--------
payable for such securities shall remain the same. To the extent the actual
holders of the Corporation's outstanding Common Stock receive cash consideration
for their Common Stock in consummation of the Corporate Transaction, the
successor corporation may, in connection with the assumption of the outstanding
options under this Plan, substitute one or more shares of its own common stock
with a fair market value equivalent to the cash consideration paid per share of
Common Stock in such Corporate Transaction.
E. The grant of options under the Salary Investment Option Grant
Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
IV. REMAINING TERMS
The remaining terms of each option granted under the Salary Investment
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
15.
<PAGE>
ARTICLE FOUR
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below. Shares of Common Stock may also be
issued under the Stock Issuance Program pursuant to share right awards which
entitle the recipients to receive those shares upon the attainment of designated
performance goals.
A. Purchase Price.
--------------
1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the issuance date.
2. Subject to the provisions of Section I of Article Seven,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any
Parent or Subsidiary).
B. Vesting Provisions.
------------------
1. Shares of Common Stock issued under the Stock Issuance
Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified performance
objectives. The elements of the vesting schedule applicable to any unvested
shares of Common Stock issued under the Stock Issuance Program shall be
determined by the Plan Administrator and incorporated into the Stock Issuance
Agreement. Shares of Common Stock may also be issued under the Stock Issuance
Program pursuant to share right awards which entitle the recipients to receive
those shares upon the attainment of designated performance goals.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or
16.
<PAGE>
other change affecting the outstanding Common Stock as a class without the
Corporation's receipt of consideration shall be issued subject to (i) the same
vesting requirements applicable to the Participant's unvested shares of Common
Stock and (ii) such escrow arrangements as the Plan Administrator shall deem
appropriate.
3. The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further stockholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase-money note of
the Participant attributable to the surrendered shares.
5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock which
would otherwise occur upon the cessation of the Participant's Service or the
non-attainment of the performance objectives applicable to those shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares of Common Stock as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.
6. Outstanding share right awards under the Stock Issuance
Program shall automatically terminate, and no shares of Common Stock shall
actually be issued in satisfaction of those awards, if the performance goals
established for such awards are not attained. The Plan Administrator, however,
shall have the discretionary authority to issue shares of Common Stock under one
or more outstanding share right awards as to which the designated performance
goals have not been attained.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. All of the Corporation's outstanding repurchase rights under the
Stock Issuance Program shall terminate automatically, and all the shares of
Common Stock subject to those terminated rights shall immediately vest in full,
in the event of any Corporate Transaction, except to the extent (i) those
repurchase rights are to be assigned to the successor corporation (or parent
thereof) in connection with such Corporate Transaction or (ii) such accelerated
vesting is precluded by other limitations imposed in the Stock Issuance
Agreement.
17.
<PAGE>
B. The Plan Administrator shall have the discretionary authority to
structure one or more of the Corporation's repurchase rights under the Stock
Issuance Program so that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any
Corporate Transaction in which those repurchase rights are assigned to the
successor corporation (or parent thereof).
C. The Plan Administrator shall also have the discretionary
authority to structure one or more of the Corporation's repurchase rights under
the Stock Issuance Program so that those rights shall automatically terminate in
whole or in part, and the shares of Common Stock subject to those terminated
rights shall immediately vest, in the event the Participant's Service should
subsequently terminate by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Change in Control.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.
18.
<PAGE>
ARTICLE FIVE
AUTOMATIC OPTION GRANT PROGRAM
------------------------------
I. OPTION TERMS
A. Grant Dates. Option grants shall be made on the dates specified
-----------
below:
1. Each individual who is first elected or appointed as a non-
employee Board member at any time on or after the Underwriting Date shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to purchase Ten Thousand (10,000) shares of Common Stock,
provided that individual has not previously been in the employ of the
Corporation or any Parent or Subsidiary.
2. On the date of each Annual Stockholders Meeting held after
the Underwriting Date, each individual who is to continue to serve as a non-
employee Board member, whether or not that individual is standing for re-
election to the Board at that particular Annual Meeting, shall automatically be
granted a Non-Statutory Option to purchase Four Thousand (4,000) shares of
Common Stock, provided such individual has served as a non-employee Board member
for at least six (6) months. There shall be no limit on the number of such Four
Thousand (4,000)-share option grants any one non-employee Board member may
receive over his or her period of Board service, and non-employee Board members
who have previously been in the employ of the Corporation (or any Parent or
Subsidiary) or who have otherwise received one or more stock option grants from
the Corporation prior to the Underwriting Date shall be eligible to receive one
or more such annual option grants over their period of continued Board service.
B. Exercise Price.
--------------
1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option
grant date.
2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
C. Option Term. Each option shall have a term of ten (10) years
-----------
measured from the option grant date.
D. Exercise and Vesting of Options. Each option shall be
-------------------------------
immediately exercisable for any or all of the option shares. However, any
unvested shares purchased under the option shall be subject to repurchase by the
Corporation, at the exercise price paid per share, upon the Optionee's cessation
of Board service prior to vesting in those shares. The shares subject to each
initial Ten Thousand (10,000)-share grant shall vest, and the Corporation's
repurchase right shall lapse, in a series of eight (8) successive equal
quarterly installments upon
19.
<PAGE>
the Optionee's completion of each three (3)-month period of service as a Board
member over the twenty-four (24)-month period measured from the option grant
date. The shares subject to each annual Four Thousand (4,000)-share option grant
shall vest in a series of two successive semi-annual installments upon the
Optionee's completion of each six (6)-month period of service over the twelve
(12)-month period measured from the grant date.
E. Limited Transferability of Options. Each option under this
----------------------------------
Article Five may be assigned in whole or in part during the Optionee's lifetime
to one or more members of the Optionee's family or to a trust established
exclusively for one or more such family members or to Optionee's former spouse,
to the extent such assignment is in connection with the Optionee's estate plan
or pursuant to domestic relations order. The assigned portion may only be
exercised by the person or persons who acquire a proprietary interest in the
option pursuant to the assignment. The terms applicable to the assigned portion
shall be the same as those in effect for the option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Plan Administrator may deem appropriate. The Optionee may also designate one
or more persons as the beneficiary or beneficiaries of his or her outstanding
options under this Article Five, and those options shall, in accordance with
such designation, automatically be transferred to such beneficiary or
beneficiaries upon the Optionee's death while holding those options. Such
beneficiary or beneficiaries shall take the transferred options subject to all
the terms and conditions of the applicable agreement evidencing each such
transferred option, including (without limitation) the limited time period
during which the option may be exercised following the Optionee's death.
F. Termination of Board Service. The following provisions shall
----------------------------
govern the exercise of any options held by the Optionee at the time the Optionee
ceases to serve as a Board member:
(i) The Optionee (or, in the event of Optionee's death,
the personal representative of the Optionee's estate or the person or
persons to whom the option is transferred pursuant to the Optionee's will
or the laws of inheritance or the designated beneficiary or beneficiaries
of such option) shall have a twelve (12)-month period following the date of
such cessation of Board service in which to exercise each such option.
(ii) During the twelve (12)-month exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares of Common Stock for which the option is exercisable at the
time of the Optionee's cessation of Board service.
(iii) Should the Optionee cease to serve as a Board member
by reason of death or Permanent Disability, then all shares at the time
subject to the option shall immediately vest so that such option may,
during the twelve (12)-month exercise period following such cessation of
Board service, be exercised for all or any portion of those shares as fully
vested shares of Common Stock.
20.
<PAGE>
(iv) In no event shall the option remain exercisable after the
expiration of the option term. Upon the expiration of the twelve (12)-month
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Board service for any reason
other than death or Permanent Disability, terminate and cease to be
outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.
II. CORPORATE TRANSACTION/ CHANGE IN CONTROL/ HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Corporate Transaction, become exercisable for
all the option shares as fully vested shares of Common Stock and may be
exercised for any or all of those vested shares. Immediately following the
consummation of the Corporate Transaction, each automatic option grant shall
terminate and cease to be outstanding, except to the extent assumed by the
successor corporation (or parent thereof).
B. In connection with any Change in Control, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Change in Control, become exercisable for all
the option shares as fully vested shares of Common Stock and may be exercised
for any or all of those vested shares. Each such option shall remain exercisable
for such fully vested option shares until the expiration or sooner termination
of the option term or the surrender of the option in connection with a Hostile
Take-Over.
C. All outstanding repurchase rights shall automatically terminate,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction or Change in
Control.
D. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding automatic option grants. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to each surrendered option (whether or not the Optionee is otherwise at
the time vested in those shares) over (ii) the aggregate exercise price payable
for such shares. Such cash distribution shall be paid within five (5) days
following the surrender of the option to the Corporation. No approval or consent
of the Board or any Plan Administrator shall be required at the time of the
actual option surrender and cash distribution.
E. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such
21.
<PAGE>
Corporate Transaction. Appropriate adjustments shall also be made to the
exercise price payable per share under each outstanding option, provided the
--------
aggregate exercise price payable for such securities shall remain the same. To
the extent the actual holders of the Corporation's outstanding Common Stock
receive cash consideration for their Common Stock in consummation of the
Corporate Transaction, the successor corporation may, in connection with the
assumption of the outstanding options under this Plan, substitute one or more
shares of its own common stock with a fair market value equivalent to the cash
consideration paid per share of Common Stock in such Corporate Transaction.
F. The grant of options under the Automatic Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic Option
Grant Program shall be the same as the terms in effect for option grants made
under the Discretionary Option Grant Program.
22.
<PAGE>
ARTICLE SIX
DIRECTOR FEE OPTION GRANT PROGRAM
---------------------------------
I. OPTION GRANTS
The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years for which the Director Fee Option Grant
Program is to be in effect. For each such calendar year the program is in
effect, each non-employee Board member may irrevocably elect to apply all or any
portion of the annual retainer fee otherwise payable in cash for his or her
service on the Board for that year to the acquisition of a special option grant
under this Director Fee Option Grant Program. Such election must be filed with
the Corporation's Chief Financial Officer prior to the first day of the calendar
year for which the annual retainer fee which is the subject of that election is
otherwise payable. Each non-employee Board member who files such a timely
election shall automatically be granted an option under this Director Fee Option
Grant Program on the first trading day in January in the calendar year for which
the annual retainer fee which is the subject of that election would otherwise be
payable in cash.
II. OPTION TERMS
Each option shall be a Non-Statutory Option governed by the terms and
conditions specified below.
A. Exercise Price.
--------------
1. The exercise price per share shall be thirty-three and one-
third percent (33-1/3%) of the Fair Market Value per share of Common Stock on
the option grant date.
2. The exercise price shall become immediately due upon exercise
of the option and shall be payable in one or more of the alternative forms
authorized under the Discretionary Option Grant Program. Except to the extent
the sale and remittance procedure specified thereunder is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.
B. Number of Option Shares. The number of shares of Common Stock
-----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
A is the portion of the annual retainer fee subject to the non-
employee Board member's election, and
23.
<PAGE>
B is the Fair Market Value per share of Common Stock on the
option grant date.
C. Exercise and Term of Options. The option shall become exercisable
----------------------------
in a series of twelve (12) equal monthly installments upon the Optionee's
completion of each calendar month of Board service during the calendar year for
which the retainer fee election is in effect. Each option shall have a maximum
term of ten (10) years measured from the option grant date.
D. Limited Transferability of Options. Each option under this
----------------------------------
Article Six may be assigned in whole or in part during the Optionee's lifetime
to one or more members of the Optionee's family or to a trust established
exclusively for one or more such family members or to Optionee's former spouse,
to the extent such assignment is in connection with Optionee's estate plan or
pursuant to a domestic relations order. The assigned portion may only be
exercised by the person or persons who acquire a proprietary interest in the
option pursuant to the assignment. The terms applicable to the assigned portion
shall be the same as those in effect for the option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Plan Administrator may deem appropriate. The Optionee may also designate one
or more persons as the beneficiary or beneficiaries of his or her outstanding
options under this Article Six, and those options shall, in accordance with such
designation, automatically be transferred to such beneficiary or beneficiaries
upon the Optionee's death while holding those options. Such beneficiary or
beneficiaries shall take the transferred options subject to all the terms and
conditions of the applicable agreement evidencing each such transferred option,
including (without limitation) the limited time period during which the option
may be exercised following the Optionee's death.
E. Termination of Board Service. Should the Optionee cease Board
----------------------------
service for any reason (other than death or Permanent Disability) while holding
one or more options under this Director Fee Option Grant Program, then each such
option shall remain exercisable, for any or all of the shares for which the
option is exercisable at the time of such cessation of Board service, until the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the
- ------
expiration of the three (3)-year period measured from the date of such cessation
of Board service. However, each option held by the Optionee under this Director
Fee Option Grant Program at the time of his or her cessation of Board service
shall immediately terminate and cease to remain outstanding with respect to any
and all shares of Common Stock for which the option is not otherwise at that
time exercisable.
F. Death or Permanent Disability. Should the Optionee's service as a
-----------------------------
Board member cease by reason of death or Permanent Disability, then each option
held by such Optionee under this Director Fee Option Grant Program shall
immediately become exercisable for all the shares of Common Stock at the time
subject to that option, and the option may be exercised for any or all of those
shares as fully vested shares until the earlier of (i) the expiration of the ten
-------
(10)-year option term or (ii) the expiration of the three (3)-year period
measured from the date of such cessation of Board service. In the event of the
Optionee's death while holding such option, the option may be exercised by the
personal representative of the Optionee's estate or by the person or persons to
whom the option is transferred pursuant to the Optionee's will or the laws of
inheritance or by the designated beneficiary or beneficiaries of such option.
24.
<PAGE>
Should the Optionee die after cessation of Board service but
while holding one or more options under this Director Fee Option Grant Program,
then each such option may be exercised, for any or all of the shares for which
the option is exercisable at the time of the Optionee's cessation of Board
service (less any shares subsequently purchased by Optionee prior to death), by
the personal representative of the Optionee's estate or by the person or persons
to whom the option is transferred pursuant to the Optionee's will or the laws of
inheritance or by the designated beneficiary or beneficiaries of such option.
Such right of exercise shall lapse, and the option shall terminate, upon the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the three
- -------
(3)-year period measured from the date of the Optionee's cessation of Board
service.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction while the Optionee
remains a Board member, each outstanding option held by such Optionee under this
Director Fee Option Grant Program shall automatically accelerate so that each
such option shall, immediately prior to the effective date of the Corporate
Transaction, become exercisable for all the shares of Common Stock at the time
subject to such option and may be exercised for any or all of those shares as
fully vested shares of Common Stock. Each such outstanding option shall
terminate immediately following the Corporate Transaction, except to the extent
assumed by the successor corporation (or parent thereof) in such Corporate
Transaction. Any option so assumed and shall remain exercisable for the fully
vested shares until the earlier of (i) the expiration of the ten (10)-year
-------
option term or (ii) the expiration of the three (3)-year period measured from
the date of the Optionee's cessation of Board service.
B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Director Fee
Option Grant Program shall automatically accelerate so that each such option
shall, immediately prior to the effective date of the Change in Control, become
exercisable for all the shares of Common Stock at the time subject to such
option and may be exercised for any or all of those shares as fully vested
shares of Common Stock. The option shall remain so exercisable until the
earliest to occur of (i) the expiration of the ten (10)-year option term, (ii)
- --------
the expiration of the three (3)-year period measured from the date of the
Optionee's cessation of Board service, (iii) the termination of the option in
connection with a Corporate Transaction or (iv) the surrender of the option in
connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Director Fee Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to each surrendered option
(whether or not the option is otherwise at the time exercisable for those
shares) over (ii) the aggregate exercise price payable for such shares. Such
cash distribution shall be paid within five (5) days following the surrender of
the option to the Corporation. No approval or consent of the Board or any Plan
Administrator shall be required at the time of the actual option surrender and
cash distribution.
25.
<PAGE>
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
--------
payable for such securities shall remain the same. To the extent the actual
holders of the Corporation's outstanding Common Stock receive cash consideration
for their Common Stock in consummation of the Corporate Transaction, the
successor corporation may, in connection with the assumption of the outstanding
options under this Plan, substitute one or more shares of its own common stock
with a fair market value equivalent to the cash consideration paid per share of
Common Stock in such Corporate Transaction.
E. The grant of options under the Director Fee Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
IV. REMAINING TERMS
The remaining terms of each option granted under this Director Fee
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
26.
<PAGE>
ARTICLE SEVEN
MISCELLANEOUS
-------------
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest-bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest
rate and the terms of repayment) shall be established by the Plan Administrator
in its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares (less the par value of
such shares) plus (ii) any Federal, state and local income and employment tax
liability incurred by the Optionee or the Participant in connection with the
option exercise or share purchase.
II. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or the issuance or vesting of such shares under the
Plan shall be subject to the satisfaction of all applicable Federal, state and
local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan (other than the options granted or the shares issued under the Automatic
Option Grant or Director Fee Option Grant Program) with the right to use shares
of Common Stock in satisfaction of all or part of the Withholding Taxes to which
such holders may become subject in connection with the exercise of their options
or the vesting of their shares. Such right may be provided to any such holder in
either or both of the following formats:
Stock Withholding: The election to have the Corporation
-----------------
withhold, from the shares of Common Stock otherwise issuable upon the exercise
of such Non-Statutory Option or the vesting of such shares, a portion of those
shares with an aggregate Fair Market Value equal to the percentage of the
Withholding Taxes (not to exceed one hundred percent (100%)) designated by the
holder.
Stock Delivery: The election to deliver to the Corporation, at
--------------
the time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Withholding
Taxes) with an aggregate Fair Market Value equal to the percentage of the
Withholding Taxes (not to exceed one hundred percent (100%)) designated by the
holder.
27.
<PAGE>
III. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately on the Plan Effective
Date. However, the Salary Investment Option Grant Program and the Director Fee
Option Grant Program shall not be implemented until such time as the Primary
Committee may deem appropriate. Options may be granted under the Discretionary
Option Grant at any time on or after the Plan Effective Date, and the initial
option grants under the Automatic Option Grant Program shall also be made on the
Plan Effective Date to any non-employee Board members eligible for such grants
at that time. However, no options granted under the Plan may be exercised, and
no shares shall be issued under the Plan, until the Plan is approved by the
Corporation's stockholders. If such stockholder approval is not obtained within
twelve (12) months after the Plan Effective Date, then all options previously
granted under this Plan shall terminate and cease to be outstanding, and no
further options shall be granted and no shares shall be issued under the Plan.
B. The Plan shall serve as the successor to the Predecessor Plans,
and no further option grants or direct stock issuances shall be made under the
Predecessor Plans after the Plan Effective Date. All options outstanding under
the Predecessor Plans on the Plan Effective Date shall be incorporated into the
Plan at that time and shall be treated as outstanding options under the Plan.
However, each outstanding option so incorporated shall continue to be governed
solely by the terms of the documents evidencing such option, and no provision of
the Plan shall be deemed to affect or otherwise modify the rights or obligations
of the holders of such incorporated options with respect to their acquisition of
shares of Common Stock.
C. One or more provisions of the Plan, including (without limitation)
the option/vesting acceleration provisions of Article Two relating to Corporate
Transactions and Changes in Control, may, in the Plan Administrator's
discretion, be extended to one or more options incorporated from the Predecessor
Plans which do not otherwise contain such provisions.
D. The Plan shall terminate upon the earliest to occur of (i) October
--------
1, 2009, (ii) the date on which all shares available for issuance under the Plan
shall have been issued as fully vested shares or (iii) the termination of all
outstanding options in connection with a Corporate Transaction. Should the Plan
terminate on October 1, 2009, then all option grants and unvested stock
issuances outstanding at that time shall continue to have force and effect in
accordance with the provisions of the documents evidencing such grants or
issuances.
IV. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect the rights and obligations with respect
to stock options or unvested stock issuances at the time outstanding under the
Plan unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.
28.
<PAGE>
B. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant and Salary Investment Option Grant Programs and
shares of Common Stock may be issued under the Stock Issuance Program that are
in each instance in excess of the number of shares then available for issuance
under the Plan, provided any excess shares actually issued under those programs
shall be held in escrow until there is obtained stockholder approval of an
amendment sufficiently increasing the number of shares of Common Stock available
for issuance under the Plan. If such stockholder approval is not obtained within
twelve (12) months after the date the first such excess issuances are made, then
(i) any unexercised options granted on the basis of such excess shares shall
terminate and cease to be outstanding and (ii) the Corporation shall promptly
refund to the Optionees and the Participants the exercise or purchase price paid
for any excess shares issued under the Plan and held in escrow, together with
interest (at the applicable Short Term Federal Rate) for the period the shares
were held in escrow, and such shares shall thereupon be automatically cancelled
and cease to be outstanding.
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall be
subject to the Corporation's procurement of all approvals and permits required
by regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
VII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
29.
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. Automatic Option Grant Program shall mean the automatic option
------------------------------
grant program in effect under Article Five of the Plan.
B. Board shall mean the Corporation's Board of Directors.
-----
C. Change in Control shall mean a change in ownership or control of
-----------------
the Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders, or
(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B) have
been elected or nominated for election as Board members during such period
by at least a majority of the Board members described in clause (A) who
were still in office at the time the Board approved such election or
nomination.
D. Code shall mean the Internal Revenue Code of 1986, as amended.
----
E. Common Stock shall mean the Corporation's common stock.
------------
F. Corporate Transaction shall mean either of the following
---------------------
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
<PAGE>
G. Corporation shall mean Rainmaker Systems, Inc., a Delaware
-----------
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Rainmaker Systems, Inc. which shall by appropriate
action adopt the Plan.
H. Director Fee Option Grant Program shall mean the special stock
---------------------------------
option grant in effect for non-employee Board members under Article Six of the
Plan.
I. Discretionary Option Grant Program shall mean the discretionary
----------------------------------
option grant program in effect under Article Two of the Plan.
J. Employee shall mean an individual who is in the employ of the
--------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
K. Exercise Date shall mean the date on which the Corporation shall
-------------
have received written notice of the option exercise.
L. Fair Market Value per share of Common Stock on any relevant date
-----------------
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market. If there is no closing selling price for the Common Stock
on the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for the
Common Stock on the date in question, then the Fair Market Value shall be
the closing selling price on the last preceding date for which such
quotation exists.
(iii) For purposes of any option grants made on the Underwriting
Date, the Fair Market Value shall be deemed to be equal to the price per
share at which the Common Stock is to be sold in the initial public
offering pursuant to the Underwriting Agreement.
A-2.
<PAGE>
M. Hostile Take-Over shall mean the acquisition, directly or
-----------------
indirectly, by any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is controlled by,
or is under common control with, the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly to
the Corporation's stockholders which the Board does not recommend such
stockholders to accept.
N. Incentive Option shall mean an option which satisfies the
----------------
requirements of Code Section 422.
O. Involuntary Termination shall mean the termination of the Service
-----------------------
of any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by
the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation which materially reduces
his or her duties and responsibilities or the level of management to which
he or she reports, (B) a reduction in his or her level of compensation
(including base salary, fringe benefits and target bonus under any
corporate-performance based bonus or incentive programs) by more than
fifteen percent (15%) or (C) a relocation of such individual's place of
employment by more than fifty (50) miles, provided and only if such change,
reduction or relocation is effected by the Corporation without the
individual's consent.
P. Misconduct shall mean the commission of any act of fraud,
----------
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing definition
shall not be deemed to be inclusive of all the acts or omissions which the
Corporation (or any Parent or Subsidiary) may consider as grounds for the
dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).
Q. 1934 Act shall mean the Securities Exchange Act of 1934, as
--------
amended.
R. Non-Statutory Option shall mean an option not intended to satisfy
--------------------
the requirements of Code Section 422.
S. Optionee shall mean any person to whom an option is granted
--------
under the Discretionary Option Grant, Salary Investment Option Grant, Automatic
Option Grant or Director Fee Option Grant Program.
A-3.
<PAGE>
T. Parent shall mean any corporation (other than the Corporation)
------
in an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
U. Participant shall mean any person who is issued shares of Common
-----------
Stock under the Stock Issuance Program.
V. Permanent Disability or Permanently Disabled shall mean the
--------------------------------------------
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more. However, solely for purposes of the Automatic Option Grant
and Director Fee Option Grant Programs, Permanent Disability or Permanently
Disabled shall mean the inability of the non-employee Board member to perform
his or her usual duties as a Board member by reason of any medically
determinable physical or mental impairment expected to result in death or to be
of continuous duration of twelve (12) months or more.
W. Plan shall mean the Corporation's 1999 Stock Incentive Plan, as
----
set forth in this document.
X. Plan Administrator shall mean the particular entity, whether the
------------------
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.
Y. Plan Effective Date shall mean the date the Plan shall become
-------------------
effective and shall be coincident with the Underwriting Date.
Z. Predecessor Plans shall mean the Corporation's 1995 Stock
-----------------
Option/Stock Issuance Plan and 1998 Stock Option/Stock Issuance Plan in effect
immediately prior to the Plan Effective Date hereunder.
AA. Primary Committee shall mean the committee of two (2) or more
-----------------
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders and to administer the Salary Investment Option Grant Program solely
with respect to the selection of the eligible individuals who may participate in
such program.
BB. Salary Investment Option Grant Program shall mean the salary
--------------------------------------
investment option grant program in effect under Article Three of the Plan.
CC. Secondary Committee shall mean a committee of one or more Board
-------------------
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.
A-4.
<PAGE>
DD. Section 16 Insider shall mean an officer or director of the
------------------
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
EE. Service shall mean the performance of services for the
-------
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in the
documents evidencing the option grant or stock issuance.
FF. Stock Exchange shall mean either the American Stock Exchange or
--------------
the New York Stock Exchange.
GG. Stock Issuance Agreement shall mean the agreement entered into
------------------------
by the Corporation and the Participant at the time of issuance of shares of
Common Stock under the Stock Issuance Program.
HH. Stock Issuance Program shall mean the stock issuance program in
----------------------
effect under Article Four of the Plan.
II. Subsidiary shall mean any corporation (other than the Corporation)
----------
in an unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain owns,
at the time of the determination, stock possessing fifty percent (50%) or more
of the total combined voting power of all classes of stock in one of the other
corporations in such chain.
JJ. Take-Over Price shall mean the greater of (i) the Fair Market
--------------- -------
Value per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.
KK. 10% Stockholder shall mean the owner of stock (as determined under
---------------
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
LL. Underwriting Agreement shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
MM. Underwriting Date shall mean the date on which the Underwriting
-----------------
Agreement is executed and priced in connection with an initial public offering
of the Common Stock.
NN. Withholding Taxes shall mean the Federal, state and local income
-----------------
and employment withholding taxes to which the holder of Non-Statutory Options or
unvested shares of Common Stock may become subject in connection with the
exercise of those options or the vesting of those shares.
A-5.
<PAGE>
RAINMAKER SYSTEMS, INC.
STOCK OPTION AGREEMENT
----------------------
RECITALS
- --------
A. The Board has adopted the Plan for the purpose of retaining the
services of selected Employees, non-employee members of the Board (or the board
of directors of any Parent or Subsidiary) and consultants and other independent
advisors who provide services to the Corporation (or any Parent or Subsidiary).
B. Optionee is to render valuable services to the Corporation (or a
Parent or Subsidiary), and this Agreement is executed pursuant to, and is
intended to carry out the purposes of, the Plan in connection with the
Corporation's grant of an option to Optionee.
C. All capitalized terms in this Agreement shall have the meaning
assigned to them in the attached Appendix.
NOW, THEREFORE, it is hereby agreed as follows:
1. Grant of Option. The Corporation hereby grants to Optionee, as
---------------
of the Grant Date, an option to purchase up to the number of Option Shares
specified in the Grant Notice. The Option Shares shall be purchasable from time
to time during the option term specified in Paragraph 2 at the Exercise Price.
2. Option Term. This option shall have a maximum term of ten (10)
-----------
years measured from the Grant Date and shall accordingly expire at the close of
business on the Expiration Date, unless sooner terminated in accordance with
Paragraph 5 or 6.
3. Limited Transferability.
-----------------------
(a) This option shall be neither transferable nor
assignable by Optionee other than by will or the laws of inheritance following
Optionee's death and may be exercised, during Optionee's lifetime, only by
Optionee. However, Optionee may designate one or more persons as the beneficiary
or beneficiaries of this option, and this option shall, in accordance with such
designation, automatically be transferred to such beneficiary or beneficiaries
upon the Optionee's death while holding this option. Such beneficiary or
beneficiaries shall take the transferred option subject to all the terms and
conditions of this Agreement, including (without limitation) the limited time
period during which this option may, pursuant to Paragraph 5, be exercised
following Optionee's death.
(b) If this option is designated a Non-Statutory Option
in the Grant Notice, then this option may be assigned in whole or in part during
Optionee's lifetime to one or more members of Optionee's family or to a trust
established for the exclusive benefit of one or more such family members or to
Optionee's former spouse, to the extent such
<PAGE>
assignment is in connection with the Optionee's estate plan or pursuant to a
domestic relations order. The assigned portion shall be exercisable only by the
person or persons who acquire a proprietary interest in the option pursuant to
such assignment. The terms applicable to the assigned portion shall be the same
as those in effect for this option immediately prior to such assignment.
4. Dates of Exercise. This option shall become exercisable for the
-----------------
Option Shares in one or more installments as specified in the Grant Notice. As
the option becomes exercisable for such installments, those installments shall
accumulate, and the option shall remain exercisable for the accumulated
installments until the Expiration Date or sooner termination of the option term
under Paragraph 5 or 6.
5. Cessation of Service. The option term specified in Paragraph 2
--------------------
shall terminate (and this option shall cease to be outstanding) prior to the
Expiration Date should any of the following provisions become applicable:
(a) Should Optionee cease to remain in Service for any reason
(other than death, Permanent Disability or Misconduct) while holding this
option, then Optionee shall have a period of three (3) months (commencing with
the date of such cessation of Service) during which to exercise this option, but
in no event shall this option be exercisable at any time after the Expiration
Date.
(b) Should Optionee die while holding this option, then the
personal representative of Optionee's estate or the person or persons to whom
the option is transferred pursuant to Optionee's will or the laws of inheritance
shall have the right to exercise this option. However, if Optionee has
designated one or more beneficiaries of this option, then those persons shall
have the exclusive right to exercise this option following Optionee's death. Any
such right to exercise this option shall lapse, and this option shall cease to
be outstanding, upon the earlier of (i) the expiration of the twelve (12)-month
-------
period measured from the date of Optionee's death or (ii) the Expiration
Date.
(c) Should Optionee cease Service by reason of Permanent
Disability while holding this option, then Optionee shall have a period of
twelve (12) months (commencing with the date of such cessation of Service)
during which to exercise this option. In no event shall this option be
exercisable at any time after the Expiration Date.
(d) During the limited period of post-Service exercisability,
this option may not be exercised in the aggregate for more than the number of
Option Shares for which the option is exercisable at the time of Optionee's
cessation of Service. Upon the expiration of such limited exercise period or (if
earlier) upon the Expiration Date, this option shall terminate and cease to be
outstanding for any exercisable Option Shares for which the option has not been
exercised. However, this option shall, immediately upon Optionee's cessation of
Service for any reason, terminate and cease to be outstanding with respect to
any Option Shares for which this option is not otherwise at that time
exercisable.
2
<PAGE>
(e) Should Optionee's Service be terminated for Misconduct or
should Optionee otherwise engage in any Misconduct while this option is
outstanding, then this option shall terminate immediately and cease to remain
outstanding.
6. Special Acceleration of Option.
------------------------------
(a) This option, to the extent outstanding at the time of a
Corporate Transaction but not otherwise fully exercisable, shall automatically
accelerate so that this option shall, immediately prior to the effective date of
such Corporate Transaction, become exercisable for all of the Option Shares at
the time subject to this option and may be exercised for any or all of those
Option Shares as fully vested shares of Common Stock. No such acceleration of
this option shall occur, however, if and to the extent: (i) this option is, in
connection with the Corporate Transaction, to be assumed by the successor
corporation (or parent thereof) or (ii) this option is to be replaced with a
cash incentive program of the successor corporation which preserves the spread
existing at the time of the Corporate Transaction on any Option Shares for which
this option is not otherwise at that time exercisable (the excess of the Fair
Market Value of those Option Shares over the aggregate Exercise Price payable
for such shares) and provides for subsequent payout in accordance with the same
option exercise/vesting schedule for those Option Shares set forth in the Grant
Notice.
(b) Immediately following the Corporate Transaction, this
option shall terminate and cease to be outstanding, except to the extent assumed
by the successor corporation (or parent thereof) in connection with the
Corporate Transaction.
(c) If this option is assumed in connection with a Corporate
Transaction, then this option shall be appropriately adjusted, immediately after
such Corporate Transaction, to apply to the number and class of securities which
would have been issuable to Optionee in consummation of such Corporate
Transaction had the option been exercised immediately prior to such Corporate
Transaction, and appropriate adjustments shall also be made to the Exercise
Price, provided the aggregate Exercise Price shall remain the same. To the
--------
extent the actual holders of the Corporation's outstanding Common Stock receive
cash consideration for their Common Stock in consummation of the Corporate
Transaction, the successor corporation may, in connection with the assumption of
this option, substitute one or more shares of its own common stock with a fair
market value equivalent to the cash consideration paid per share of Common Stock
in such Corporate Transaction.
(d) This Agreement shall not in any way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
7. Adjustment in Option Shares. Should any change be made to the
---------------------------
Common Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class
3
<PAGE>
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the total number and/or class of securities subject to this
option and (ii) the Exercise Price in order to reflect such change and thereby
preclude a dilution or enlargement of benefits hereunder.
8. Stockholder Rights. The holder of this option shall not have any
------------------
stockholder rights with respect to the Option Shares until such person shall
have exercised the option, paid the Exercise Price and become a holder of record
of the purchased shares.
9. Manner of Exercising Option.
---------------------------
(a) In order to exercise this option with respect to all or any
part of the Option Shares for which this option is at the time exercisable,
Optionee (or any other person or persons exercising the option) must take the
following actions:
(i) Execute and deliver to the Corporation a Notice of
Exercise for the Option Shares for which the option is exercised.
(ii) Pay the aggregate Exercise Price for the purchased
shares in one or more of the following forms:
(A) cash or check made payable to the Corporation;
(B) a promissory note payable to the Corporation, but
only to the extent authorized by the Plan Administrator in accordance
with Paragraph 13;
(C) shares of Common Stock held by Optionee (or any
other person or persons exercising the option) for the requisite
period necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on the
Exercise Date; or
(D) through a special sale and remittance procedure
pursuant to which Optionee (or any other person or persons exercising
the option) shall concurrently provide irrevocable instructions (i) to
a Corporation-designated brokerage firm to effect the immediate sale
of the purchased shares and remit to the Corporation, out of the sale
proceeds available on the settlement date, sufficient funds to cover
the aggregate Exercise Price payable for the purchased shares plus all
applicable Federal, state and local income and employment taxes
required to be withheld by the Corporation by reason of such exercise
and (ii) to the Corporation to deliver the certificates for the
purchased shares directly to such brokerage firm in order to complete
the sale.
4
<PAGE>
Except to the extent the sale and remittance procedure is
utilized in connection with the option exercise, payment of the
Exercise Price must accompany the Notice of Exercise delivered to the
Corporation in connection with the option exercise.
(iii) Furnish to the Corporation appropriate
documentation that the person or persons exercising the option (if other
than Optionee) have the right to exercise this option.
(iv) Make appropriate arrangements with the Corporation
(or Parent or Subsidiary employing or retaining Optionee) for the
satisfaction of all Federal, state and local income and employment tax
withholding requirements applicable to the option exercise.
(b) As soon as practical after the Exercise Date, the
Corporation shall issue to or on behalf of Optionee (or any other person or
persons exercising this option) a certificate for the purchased Option Shares,
with the appropriate legends affixed thereto.
(c) In no event may this option be exercised for any fractional
shares.
10. Compliance with Laws and Regulations.
------------------------------------
(a) The exercise of this option and the issuance of the Option
Shares upon such exercise shall be subject to compliance by the Corporation and
Optionee with all applicable requirements of law relating thereto and with all
applicable regulations of any stock exchange (or the Nasdaq National Market, if
applicable) on which the Common Stock may be listed for trading at the time of
such exercise and issuance.
(b) The inability of the Corporation to obtain approval from any
regulatory body having authority deemed by the Corporation to be necessary to
the lawful issuance and sale of any Common Stock pursuant to this option shall
relieve the Corporation of any liability with respect to the non-issuance or
sale of the Common Stock as to which such approval shall not have been obtained.
The Corporation, however, shall use its best efforts to obtain all such
approvals.
11. Successors and Assigns. Except to the extent otherwise provided
----------------------
in Paragraphs 3 and 6, the provisions of this Agreement shall inure to the
benefit of, and be binding upon, the Corporation and its successors and assigns
and Optionee, Optionee's assigns, the legal representatives, heirs and legatees
of Optionee's estate and any beneficiaries of this option designated by
Optionee.
12. Notices. Any notice required to be given or delivered to the
-------
Corporation under the terms of this Agreement shall be in writing and addressed
to the Corporation at its principal corporate offices. Any notice required to
be given or delivered to Optionee shall be in writing and addressed to Optionee
at the address indicated below Optionee's signature line on the Grant Notice.
All notices shall be deemed effective upon personal delivery or upon deposit in
the U.S. mail, postage prepaid and properly addressed to the party to be
notified.
5
<PAGE>
13. Financing. The Plan Administrator may, in its absolute
---------
discretion and without any obligation to do so, permit Optionee to pay the
Exercise Price for the purchased Option Shares by delivering a full-recourse
promissory note payable to the Corporation. The terms of any such promissory
note (including the interest rate, the requirements for collateral and the terms
of repayment) shall be established by the Plan Administrator in its sole
discretion.
14. Construction. This Agreement and the option evidenced hereby are
------------
made and granted pursuant to the Plan and are in all respects limited by and
subject to the terms of the Plan. All decisions of the Plan Administrator with
respect to any question or issue arising under the Plan or this Agreement shall
be conclusive and binding on all persons having an interest in this option.
15. Governing Law. The interpretation, performance and enforcement
-------------
of this Agreement shall be governed by the laws of the State of California
without resort to that State's conflict-of-laws rules.
16. Excess Shares. If the Option Shares covered by this Agreement
-------------
exceed, as of the Grant Date, the number of shares of Common Stock which may
without stockholder approval be issued under the Plan, then this option shall be
void with respect to those excess shares, unless stockholder approval of an
amendment sufficiently increasing the number of shares of Common Stock issuable
under the Plan is obtained in accordance with the provisions of the Plan.
17. Additional Terms Applicable to an Incentive Option. In the event
--------------------------------------------------
this option is designated an Incentive Option in the Grant Notice, the following
terms and conditions shall also apply to the grant:
(a) This option shall cease to qualify for favorable tax
treatment as an Incentive Option if (and to the extent) this option is exercised
for one or more Option Shares: (A) more than three (3) months after the date
Optionee ceases to be an Employee for any reason other than death or Permanent
Disability or (B) more than twelve (12) months after the date Optionee ceases to
be an Employee by reason of Permanent Disability.
(b) No installment under this option shall qualify for
favorable tax treatment as an Incentive Option if (and to the extent) the
aggregate Fair Market Value (determined at the Grant Date) of the Common Stock
for which such installment first becomes exercisable hereunder would, when added
to the aggregate value (determined as of the respective date or dates of grant)
of the Common Stock or other securities for which this option or any other
Incentive Options granted to Optionee prior to the Grant Date (whether under the
Plan or any other option plan of the Corporation or any Parent or Subsidiary)
first become exercisable during the same calendar year, exceed One Hundred
Thousand Dollars ($100,000) in the aggregate. Should such One Hundred Thousand
Dollar ($100,000) limitation be exceeded in any calendar year, this option shall
nevertheless become exercisable for the excess shares in such calendar year as a
Non-Statutory Option.
6
<PAGE>
(c) Should the exercisability of this option be accelerated
upon a Corporate Transaction, then this option shall qualify for favorable tax
treatment as an Incentive Option only to the extent the aggregate Fair Market
Value (determined at the Grant Date) of the Common Stock for which this option
first becomes exercisable in the calendar year in which the Corporate
Transaction occurs does not, when added to the aggregate value (determined as of
the respective date or dates of grant) of the Common Stock or other securities
for which this option or one or more other Incentive Options granted to Optionee
prior to the Grant Date (whether under the Plan or any other option plan of the
Corporation or any Parent or Subsidiary) first become exercisable during the
same calendar year, exceed One Hundred Thousand Dollars ($100,000) in the
aggregate. Should the applicable One Hundred Thousand Dollar ($100,000)
limitation be exceeded in the calendar year of such Corporate Transaction, the
option may nevertheless be exercised for the excess shares in such calendar year
as a Non-Statutory Option.
(d) Should Optionee hold, in addition to this option, one or
more other options to purchase Common Stock which become exercisable for the
first time in the same calendar year as this option, then the foregoing
limitations on the exercisability of such options as Incentive Options shall be
applied on the basis of the order in which such options are granted.
7
<PAGE>
EXHIBIT I
NOTICE OF EXERCISE
I hereby notify Rainmaker Systems, Inc. (the "Corporation") that I
elect to purchase ______________ shares of the Corporation's Common Stock (the
"Purchased Shares") at the option exercise price of $ ________ per share (the
"Exercise Price") pursuant to that certain option (the "Option") granted to me
under the Corporation's 1999 Stock Incentive Plan on _____________,________.
Concurrently with the delivery of this Exercise Notice to the
Corporation, I shall hereby pay to the Corporation the Exercise Price for the
Purchased Shares in accordance with the provisions of my agreement with the
Corporation (or other documents) evidencing the Option and shall deliver
whatever additional documents may be required by such agreement as a condition
for exercise. Alternatively, I may utilize the special broker-dealer sale and
remittance procedure specified in my agreement to effect payment of the Exercise
Price.
______________________, _________
Date
<TABLE>
<CAPTION>
<S> <C>
________________________________
Optionee
Address:________________________
________________________________
Print name in exact manner it is
to appear on the stock
certificate: ________________________________
Address to which certificate is to
be sent, if different from
address above: ________________________________
________________________________
Social Security Number: ________________________________
</TABLE>
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Agreement:
A. Agreement shall mean this Stock Option Agreement.
---------
B. Board shall mean the Corporation's Board of Directors.
-----
C. Common Stock shall mean shares of the Corporation's common stock.
------------
D. Code shall mean the Internal Revenue Code of 1986, as amended.
----
E. Corporate Transaction shall mean either of the following stockholder-
---------------------
approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
F. Corporation shall mean Rainmaker Systems, Inc., a Delaware
-----------
corporation, and any successor corporation to all or substantially all of the
assets or voting stock of Rainmaker Systems, Inc. which shall by appropriate
action adopt the Plan.
G. Employee shall mean an individual who is in the employ of the
--------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
H. Exercise Date shall mean the date on which the option shall have been
-------------
exercised in accordance with Paragraph 9 of the Agreement.
I. Exercise Price shall mean the exercise price per Option Share as
--------------
specified in the Grant Notice.
J. Expiration Date shall mean the date on which the option expires as
---------------
specified in the Grant Notice.
K. Fair Market Value per share of Common Stock on any relevant date shall
-----------------
be determined in accordance with the following provisions:
A-1
<PAGE>
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be deemed equal to the
closing selling price per share of Common Stock on the date in question, as
the price is reported by the National Association of Securities Dealers on
the Nasdaq National Market. If there is no closing selling price for the
Common Stock on the date in question, then the Fair Market Value shall be
the closing selling price on the last preceding date for which such
quotation exists, or
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be deemed equal to the closing
selling price per share of Common Stock on the date in question on the
Stock Exchange determined by the Plan Administrator to be the primary
market for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no closing
selling price for the Common Stock on the date in question, then the Fair
Market Value shall be the closing selling price on the last preceding date
for which such quotation exists.
L. Grant Date shall mean the date of grant of the option as specified in
----------
the Grant Notice.
M. Grant Notice shall mean the Notice of Grant of Stock Option
------------
accompanying the Agreement, pursuant to which Optionee has been informed of the
basic terms of the option evidenced hereby.
N. Incentive Option shall mean an option which satisfies the requirements
----------------
of Code Section 422.
O. Misconduct shall mean the commission of any act of fraud, embezzlement
----------
or dishonesty by Optionee, any unauthorized use or disclosure by Optionee of
confidential information or trade secrets of the Corporation (or any Parent or
Subsidiary), or any other intentional misconduct by Optionee adversely affecting
the business or affairs of the Corporation (or any Parent or Subsidiary) in a
material manner. The foregoing definition shall not be deemed to be inclusive
of all the acts or omissions which the Corporation (or any Parent or Subsidiary)
may consider as grounds for the dismissal or discharge of Optionee or any other
individual in the Service of the Corporation (or any Parent or Subsidiary).
P. Non-Statutory Option shall mean an option not intended to satisfy the
--------------------
requirements of Code Section 422.
Q. Notice of Exercise shall mean the notice of exercise in the form
------------------
attached hereto as Exhibit I.
R. Option Shares shall mean the number of shares of Common Stock subject
-------------
to the option as specified in the Grant Notice.
A-2
<PAGE>
S. Optionee shall mean the person to whom the option is granted as
--------
specified in the Grant Notice.
T. Parent shall mean any corporation (other than the Corporation) in an
------
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
U. Permanent Disability shall mean the inability of Optionee to engage in
--------------------
any substantial gainful activity by reason of any medically determinable
physical or mental impairment which is expected to result in death or has lasted
or can be expected to last for a continuous period of twelve (12) months or
more.
V. Plan shall mean the Corporation's 1999 Stock Incentive Plan.
----
W. Plan Administrator shall mean either the Board or a committee of the
------------------
Board acting in its capacity as administrator of the Plan.
X. Service shall mean the Optionee's performance of services for the
-------
Corporation (or any Parent or Subsidiary) in the capacity of an Employee, a non-
employee member of the board of directors or a consultant or independent
advisor.
Y. Stock Exchange shall mean the American Stock Exchange or the New York
--------------
Stock Exchange.
Z. Subsidiary shall mean any corporation (other than the Corporation) in
----------
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
A-3
<PAGE>
EXHIBIT 10.3
RAINMAKER SYSTEMS, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
I. PURPOSE OF THE PLAN
This Employee Stock Purchase Plan is intended to promote the interests
of Rainmaker Systems, Inc., a Delaware corporation, by providing eligible
employees with the opportunity to acquire a proprietary interest in the
Corporation through participation in a payroll deduction-based employee stock
purchase plan designed to qualify under Section 423 of the Code.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. ADMINISTRATION OF THE PLAN
The Plan Administrator shall have full authority to interpret and
construe any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary in order to comply with the
requirements of Code Section 423. Decisions of the Plan Administrator shall be
final and binding on all parties having an interest in the Plan.
III. STOCK SUBJECT TO PLAN
A. The stock purchasable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares of Common
Stock purchased on the open market. The number of shares of Common Stock
initially reserved for issuance over the term of the Plan shall be limited to
One Million (1,000,000) shares.
B. The number of shares of Common Stock available for issuance under
the Plan shall automatically increase on the first trading day of January each
calendar year during the term of the Plan, beginning with calendar year 2001, by
an amount equal to one percent (1%) of the total number of shares of Common
Stock outstanding on the last trading day in December of the immediately
preceding calendar year, but in no event shall any such annual increase exceed
Four Hundred Thousand (400,000) shares.
C. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and class of securities issuable under
the Plan, (ii) the maximum number and class of securities purchasable per
Participant on any one Purchase Date, (iii) the maximum number and class of
securities purchasable in total by all Participants on any one Purchase Date,
(iv) the maximum
<PAGE>
number and/or class of securities by which the share reserve is to increase
automatically each calendar year pursuant to the provisions of Section III.B of
this Article One and (v) the number and class of securities and the price per
share in effect under each outstanding purchase right in order to prevent the
dilution or enlargement of benefits thereunder.
IV. OFFERING PERIOdS
A. Shares of Common Stock shall be offered for purchase under the
Plan through a series of successive offering periods until such time as (i) the
maximum number of shares of Common Stock available for issuance under the Plan
shall have been purchased or (ii) the Plan shall have been sooner terminated.
B. Each offering period shall be of such duration (not to exceed
twenty-four (24) months) as determined by the Plan Administrator prior to the
start date of such offering period. However, the initial offering period shall
commence at the Effective Time and terminate on the last business day in October
2001. The next offering period shall commence on the first business day in
November 2001, and subsequent offering periods shall commence as designated by
the Plan Administrator.
C. Each offering period shall consist of a series of one or more
successive Purchase Intervals. Purchase Intervals shall run from the first
business day in May to the last business day in October each year and from the
first business day in November each year to the last business day in April in
the following year. However, the first Purchase Interval in effect under the
initial offering period shall commence at the Effective Time and terminate on
the last business day in April 2000.
D. Should the Fair Market Value per share of Common Stock on any
Purchase Date within an offering period be less than the Fair Market Value per
share of Common Stock on the start date of that offering period, then that
offering period shall automatically terminate immediately after the purchase of
shares of Common Stock on such Purchase Date, and a new offering period shall
commence on the next business day following such Purchase Date. The new offering
period shall have a duration of twenty (24) months, unless a shorter duration is
established by the Plan Administrator within five (5) business days following
the start date of that offering period.
V. ELIGIBILITY
A. Each individual who is an Eligible Employee on the start date of
any offering period under the Plan may enter that offering period on such start
date or on any subsequent Semi-Annual Entry Date within that offering period,
provided he or she remains an Eligible Employee.
B. Each individual who first becomes an Eligible Employee after the
start date of an offering period may enter that offering period on any
subsequent Semi-Annual Entry Date within that offering period on which he or she
is an Eligible Employee.
2.
<PAGE>
C. The date an individual enters an offering period shall be
designated his or her Entry Date for purposes of that offering period.
D. To participate in the Plan for a particular offering period, the
Eligible Employee must complete the enrollment forms prescribed by the Plan
Administrator (including a stock purchase agreement and a payroll deduction
authorization) and file such forms with the Plan Administrator (or its
designate) on or before his or her scheduled Entry Date.
VI. PAYROLL DEDUCTIONS
A. The payroll deduction authorized by the Participant for purposes
of acquiring shares of Common Stock during an offering period may be any
multiple of one percent (1%) of the Cash Earnings paid to the Participant during
each Purchase Interval within that offering period, up to a maximum of fifteen
percent (15%). The deduction rate so authorized shall continue in effect
throughout the offering period, except to the extent such rate is changed in
accordance with the following guidelines:
(i) The Participant may, at any time during the
offering period, reduce his or her rate of payroll deduction to
become effective as soon as possible after filing the appropriate
form with the Plan Administrator. The Participant may not,
however, effect more than one (1) such reduction per Purchase
Interval.
(ii) The Participant may, prior to the
commencement of any new Purchase Interval within the offering
period, increase the rate of his or her payroll deduction by
filing the appropriate form with the Plan Administrator. The new
rate (which may not exceed the fifteen percent (15%) maximum)
shall become effective on the start date of the first Purchase
Interval following the filing of such form.
B. Payroll deductions shall begin on the first pay day
administratively feasible following the Participant's Entry Date into the
offering period and shall (unless sooner terminated by the Participant) continue
through the pay day ending with or immediately prior to the last day of that
offering period. The amounts so collected shall be credited to the Participant's
book account under the Plan, but no interest shall be paid on the balance from
time to time outstanding in such account. The amounts collected from the
Participant shall not be required to be held in any segregated account or trust
fund and may be commingled with the general assets of the Corporation and used
for general corporate purposes.
C. Payroll deductions shall automatically cease upon the termination
of the Participant's purchase right in accordance with the provisions of the
Plan.
D. The Participant's acquisition of Common Stock under the Plan on
any Purchase Date shall neither limit nor require the Participant's acquisition
of Common Stock on any subsequent Purchase Date, whether within the same or a
different offering period.
3.
<PAGE>
VII. PURCHASE RIGHTS
A. Grant of Purchase Rights. A Participant shall be granted a
------------------------
separate purchase right for each offering period in which he or she
participates. The purchase right shall be granted on the Participant's Entry
Date into the offering period and shall provide the Participant with the right
to purchase shares of Common Stock, in a series of successive installments over
the remainder of such offering period, upon the terms set forth below. The
Participant shall execute a stock purchase agreement embodying such terms and
such other provisions (not inconsistent with the Plan) as the Plan Administrator
may deem advisable.
Under no circumstances shall purchase rights be granted under the Plan
to any Eligible Employee if such individual would, immediately after the grant,
own (within the meaning of Code Section 424(d)) or hold outstanding options or
other rights to purchase, stock possessing five percent (5%) or more of the
total combined voting power or value of all classes of stock of the Corporation
or any Corporate Affiliate.
B. Exercise of the Purchase Right. Each purchase right shall be
------------------------------
automatically exercised in installments on each successive Purchase Date within
the offering period, and shares of Common Stock shall accordingly be purchased
on behalf of each Participant on each such Purchase Date. The purchase shall be
effected by applying the Participant's payroll deductions for the Purchase
Interval ending on such Purchase Date to the purchase of whole shares of Common
Stock at the purchase price in effect for the Participant for that Purchase
Date.
C. Purchase Price. The purchase price per share at which Common Stock
--------------
will be purchased on the Participant's behalf on each Purchase Date within the
offering period shall be equal to eighty-five percent (85%) of the lower of (i)
the Fair Market Value per share of Common Stock on the Participant's Entry Date
into that offering period or (ii) the Fair Market Value per share of Common
Stock on that Purchase Date.
D. Number of Purchasable Shares. The number of shares of Common Stock
----------------------------
purchasable by a Participant on each Purchase Date during the offering period
shall be the number of whole shares obtained by dividing the amount collected
from the Participant through payroll deductions during the Purchase Interval
ending with that Purchase Date by the purchase price in effect for the
Participant for that Purchase Date. However, the maximum number of shares of
Common Stock purchasable per Participant on any one Purchase Date shall not
exceed One Thousand Two Hundred Fifty (1,250) shares, subject to periodic
adjustments in the event of certain changes in the Corporation's capitalization.
In addition, the maximum number of shares of Common Stock purchasable in total
by all Participants on any one Purchase Date shall not exceed Two Hundred
Thousand (200,000) shares, subject to periodic adjustments in the event of
certain changes in the Corporation's capitalization. However, the Plan
Administrator shall have the discretionary authority, exercisable prior to the
start of any offering period under the Plan, to increase or decrease the
limitations to be in effect for the number of shares purchasable per Participant
and in total by all Participants on each Purchase Date during that offering
period.
4.
<PAGE>
E. Excess Payroll Deductions. Any payroll deductions not applied to
-------------------------
the purchase of shares of Common Stock on any Purchase Date because they are not
sufficient to purchase a whole share of Common Stock shall be held for the
purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitation on the maximum number of shares purchasable per Participant or in
total by all Participants on the Purchase Date shall be promptly refunded.
F. Termination of Purchase Right. The following provisions shall
-----------------------------
govern the termination of outstanding purchase rights:
(i) A Participant may, at any time prior to the next
scheduled Purchase Date in the offering period, terminate his or
her outstanding purchase right by filing the appropriate form
with the Plan Administrator (or its designate), and no further
payroll deductions shall be collected from the Participant with
respect to the terminated purchase right. Any payroll deductions
collected during the Purchase Interval in which such termination
occurs shall, at the Participant's election, be immediately
refunded or held for the purchase of shares on the next Purchase
Date. If no such election is made at the time such purchase right
is terminated, then the payroll deductions collected with respect
to the terminated right shall be refunded as soon as possible.
(ii) The termination of such purchase right shall be
irrevocable, and the Participant may not subsequently rejoin the
offering period for which the terminated purchase right was
granted. In order to resume participation in any subsequent
offering period, such individual must re-enroll in the Plan (by
making a timely filing of the prescribed enrollment forms) on or
before his or her scheduled Entry Date into that offering period.
(iii) Should the Participant cease to remain an Eligible Employee
for any reason (including death, disability or change in status) while his
or her purchase right remains outstanding, then that purchase right shall
immediately terminate, and all of the Participant's payroll deductions for
the Purchase Interval in which the purchase right so terminates shall be
immediately refunded. However, should the Participant cease to remain in
active service by reason of an approved unpaid leave of absence, then the
Participant shall have the right, exercisable up until the last business
day of the Purchase Interval in which such leave commences, to (a) withdraw
all the payroll deductions collected to date on his or her behalf for that
Purchase Interval or (b) have such funds held for the purchase of shares on
his or her behalf on the next scheduled Purchase Date. In no event,
however, shall any further payroll deductions be collected on the
Participant's behalf during such leave. Upon the Participant's return to
active service (x) within ninety (90) days following the commencement of
such leave or (y) prior to the expiration of any longer period for which
such Participant's right to reemployment with the Corporation is guaranteed
by statute or contract, his or her payroll deductions under the Plan shall
automatically resume at the rate in
5.
<PAGE>
effect at the time the leave began, unless the Participant
withdraws from the Plan prior to his or her return. An individual
who returns to active employment following a leave of absence
that exceeds in duration the applicable (x) or (y) time period
will be treated as a new Employee for purposes of subsequent
participation in the Plan and must accordingly re-enroll in the
Plan (by making a timely filing of the prescribed enrollment
forms) on or before his or her scheduled Entry Date into the
offering period.
G. Change in Control. Each outstanding purchase right shall
-----------------
automatically be exercised, immediately prior to the effective date of any
Change in Control, by applying the payroll deductions of each Participant for
the Purchase Interval in which such Change in Control occurs to the purchase of
whole shares of Common Stock at a purchase price per share equal to eighty-five
percent (85%) of the lower of (i) the Fair Market Value per share of Common
Stock on the Participant's Entry Date into the offering period in which such
Change in Control occurs or (ii) the Fair Market Value per share of Common Stock
immediately prior to the effective date of such Change in Control. However, the
applicable limitation on the number of shares of Common Stock purchasable per
Participant shall continue to apply to any such purchase, but not the limitation
applicable to the maximum number of shares of Common Stock purchasable in total
by all Participants on any one Purchase Date.
The Corporation shall use its best efforts to provide at least ten
(10) days' prior written notice of the occurrence of any Change in Control, and
Participants shall, following the receipt of such notice, have the right to
terminate their outstanding purchase rights prior to the effective date of the
Change in Control.
H. Proration of Purchase Rights. Should the total number of shares of
----------------------------
Common Stock to be purchased pursuant to outstanding purchase rights on any
particular date exceed the number of shares then available for issuance under
the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded.
I. Assignability. The purchase right shall be exercisable only by the
-------------
Participant and shall not be assignable or transferable by the Participant.
J. Stockholder Rights. A Participant shall have no stockholder rights
------------------
with respect to the shares subject to his or her outstanding purchase right
until the shares are purchased on the Participant's behalf in accordance with
the provisions of the Plan and the Participant has become a holder of record of
the purchased shares.
VIII. ACCRUAL LIMITATIONS
A. No Participant shall be entitled to accrue rights to acquire
Common Stock pursuant to any purchase right outstanding under this Plan if and
to the extent such accrual, when aggregated with (i) rights to purchase Common
Stock accrued under any other purchase right granted under this Plan and (ii)
similar rights accrued under other employee stock purchase plans
6.
<PAGE>
(within the meaning of Code Section 423)) of the Corporation or any Corporate
Affiliate, would otherwise permit such Participant to purchase more than Twenty-
Five Thousand Dollars ($25,000.00) worth of stock of the Corporation or any
Corporate Affiliate (determined on the basis of the Fair Market Value per share
on the date or dates such rights are granted) for each calendar year such rights
are at any time outstanding.
B. For purposes of applying such accrual limitations to the purchase
rights granted under the Plan, the following provisions shall be in effect:
(i) The right to acquire Common Stock under each
outstanding purchase right shall accrue in a series of
installments on each successive Purchase Date during the offering
period on which such right remains outstanding.
(ii) No right to acquire Common Stock under any
outstanding purchase right shall accrue to the extent the
Participant has already accrued in the same calendar year the
right to acquire Common Stock under one or more other purchase
rights at a rate equal to Twenty-Five Thousand Dollars
($25,000.00) worth of Common Stock (determined on the basis of
the Fair Market Value per share on the date or dates of grant)
for each calendar year such rights were at any time outstanding.
C. If by reason of such accrual limitations, any purchase right of a
Participant does not accrue for a particular Purchase Interval, then the payroll
deductions that the Participant made during that Purchase Interval with respect
to such purchase right shall be promptly refunded.
D. In the event there is any conflict between the provisions of this
Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.
IX. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on September __, 1999, and shall
become effective at the Effective Time, provided no purchase rights granted
under the Plan shall be exercised, and no shares of Common Stock shall be issued
hereunder, until (i) the Plan shall have been approved by the stockholders of
the Corporation and (ii) the Corporation shall have complied with all applicable
requirements of the 1933 Act (including the registration of the shares of Common
Stock issuable under the Plan on a Form S-8 registration statement filed with
the Securities and Exchange Commission), all applicable listing requirements of
any stock exchange (or the Nasdaq National Market, if applicable) on which the
Common Stock is listed for trading and all other applicable requirements
established by law or regulation. In the event such stockholder approval is not
obtained, or such compliance is not effected, within twelve (12) months after
the date on which the Plan is adopted by the Board, the Plan shall terminate and
have no further force or effect, and all sums collected from Participants during
the initial offering period hereunder shall be refunded.
7.
<PAGE>
B. Unless sooner terminated by the Board, the Plan shall terminate
upon the earliest of (i) the last business day in October 2009, (ii) the date on
which all shares available for issuance under the Plan shall have been sold
pursuant to purchase rights exercised under the Plan or (iii) the date on which
all purchase rights are exercised in connection with a Change in Control. No
further purchase rights shall be granted or exercised, and no further payroll
deductions shall be collected, under the Plan following such termination.
X. AMENDMENT OF THE PLAN
A. The Board may alter, amend, suspend or terminate the Plan at any
time to become effective immediately following the close of any Purchase
Interval. However, the Plan may be amended or terminated immediately upon Board
action, if and to the extent necessary to assure that the Corporation will not
recognize, for financial reporting purposes, any compensation expense in
connection with the shares of Common Stock offered for purchase under the Plan,
should the financial accounting rules applicable to the Plan at the Effective
Time be subsequently revised so as to require the Corporation to recognize
compensation expense in the absence of such amendment or termination.
B. In no event may the Board effect any of the following amendments or
revisions to the Plan without the approval of the Corporation's stockholders:
(i) increase the number of shares of Common Stock issuable under the Plan,
except for permissible adjustments in the event of certain changes in the
Corporation's capitalization, (ii) alter the purchase price formula so as to
reduce the purchase price payable for the shares of Common Stock purchasable
under the Plan or (iii) modify the eligibility requirements for participation in
the Plan.
XI. GENERAL PROVISIONS
A. All costs and expenses incurred in the administration of the Plan
shall be paid by the Corporation; however, each Plan Participant shall bear all
costs and expenses incurred by such individual in the sale or other disposition
of any shares purchased under the Plan.
B. Nothing in the Plan shall confer upon the Participant any right to
continue in the employ of the Corporation or any Corporate Affiliate for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Corporate Affiliate employing such person)
or of the Participant, which rights are hereby expressly reserved by each, to
terminate such person's employment at any time for any reason, with or without
cause.
C. The provisions of the Plan shall be governed by the laws of the
State of California without resort to that State's conflict-of-laws rules.
8.
<PAGE>
Schedule A
Corporations Participating in
Employee Stock Purchase Plan
As of the Effective Time
------------------------
Rainmaker Systems, Inc.
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. Board shall mean the Corporation's Board of Directors.
-----
C. Cash Earnings shall mean the (i) regular base salary paid to a
-------------
Participant by one or more Participating Companies during such individual's
period of participation in one or more offering periods under the Plan plus (ii)
all overtime payments, bonuses, commissions, profit-sharing distributions and
other incentive-type payments received during such period. Such Cash Earnings
shall be calculated before deduction of (A) any income or employment tax
withholdings or (B) any contributions made by the Participant to any Code
Section 401(k) salary deferral plan or Code Section 125 cafeteria benefit
program now or hereafter established by the Corporation or any Corporate
Affiliate. However, Cash Earnings shall not include any contributions made by
the Corporation or any Corporate Affiliate on the Participant's behalf to any
employee benefit or welfare plan now or hereafter established (other than Code
Section 401(k) or Code Section 125 contributions deducted from such Cash
Earnings).
B. Change in Control shall mean a change in ownership of the
-----------------
Corporation pursuant to any of the following transactions:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined
voting power of the Corporation's outstanding securities are
transferred to a person or persons different from the persons
holding those securities immediately prior to such transaction,
or
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete
liquidation or dissolution of the Corporation, or
(iii) the acquisition, directly or indirectly, by a person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by or is under common
control with the Corporation) of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders.
C. Code shall mean the Internal Revenue Code of 1986, as amended.
----
D. Common Stock shall mean the Corporation's common stock.
------------
E. Corporate Affiliate shall mean any parent or subsidiary
-------------------
corporation of the Corporation (as determined in accordance with Code Section
424), whether now existing or subsequently established.
A-1
<PAGE>
F. Corporation shall mean Rainmaker Systems, Inc., a Delaware
-----------
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Rainmaker Systems, Inc. that shall by appropriate
action adopt the Plan.
H. Effective Time shall mean the time at which the Underwriting
--------------
Agreement is executed and the Common Stock priced for the initial public
offering of such Common Stock. Any Corporate Affiliate that becomes a
Participating Corporation after such Effective Time shall designate a subsequent
Effective Time with respect to its employee-Participants.
I. Eligible Employee shall mean any person who is employed by a
-----------------
Participating Corporation on a basis under which he or she is regularly expected
to render more than twenty (20) hours of service per week for more than five (5)
months per calendar year for earnings considered wages under Code Section 3401
(a).
J. Entry Date shall mean the date an Eligible Employee first
----------
commences participation in the offering period in effect under the Plan. The
earliest Entry Date under the Plan shall be the Effective Time.
K. Fair Market Value per share of Common Stock on any relevant date
-----------------
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the
closing selling price per share of Common Stock on the date in
question, as such price is reported by the National Association
of Securities Dealers on the Nasdaq National Market. If there is
no closing selling price for the Common Stock on the date in
question, then the Fair Market Value shall be the closing selling
price on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question
on the Stock Exchange determined by the Plan Administrator to be
the primary market for the Common Stock, as such price is
officially quoted in the composite tape of transactions on such
exchange. If there is no closing selling price for the Common
Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which
such quotation exists.
(iii) For purposes of the initial offering period that
begins at the Effective Time, the Fair Market Value shall be
deemed to be equal to the price per share at which the Common
Stock is sold in the initial public offering pursuant to the
Underwriting Agreement.
L. 1933 Act shall mean the Securities Act of 1933, as amended.
--------
M. Participant shall mean any Eligible Employee of a Participating
-----------
Corporation who is actively participating in the Plan.
A-2
<PAGE>
N. Participating Corporation shall mean the Corporation and such
-------------------------
Corporate Affiliate or Affiliates as may be authorized from time to time by the
Board to extend the benefits of the Plan to their Eligible Employees. The
Participating Corporations in the Plan are listed in attached Schedule A.
0. Plan shall mean the Corporation's 1999 Employee Stock Purchase
----
Plan, as set forth in this document.
P. Plan Administrator shall mean the committee of two (2) or more
------------------
Board members appointed by the Board to administer the Plan.
Q. Purchase Date shall mean the last business day of each Purchase
-------------
Interval. The initial Purchase Date shall be April 28, 2000.
R. Purchase Interval shall mean each successive six (6)-month period
-----------------
within the offering period at the end of which there shall be purchased shares
of Common Stock on behalf of each Participant.
S. Semi-Annual Entry Date shall mean the first business day in May
----------------------
and November each year on which an Eligible Employee may first enter an offering
period.
T. Stock Exchange shall mean either the American Stock Exchange or
--------------
the New York Stock Exchange.
U. Underwriting Agreement shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
A-3
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected Financial
Data" and "Experts" and to the use of our report dated August 31, 1999, in the
Registration Statement (Form S-1, Amendment No. 3) and related Prospectus of
Rainmaker Systems, Inc. for the registration of shares of its common stock.
Our audits also included the financial statement schedule of Rainmaker Systems,
Inc. listed in Item 16(b). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
San Jose, California
October 21, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENTS OF OPERATIONS FILED AS PART OF THIS FORM S-1 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 SEP-30-1999
<CASH> 4,608 5,136
<SECURITIES> 0 1,000
<RECEIVABLES> 7,195 8,334
<ALLOWANCES> (314) (408)
<INVENTORY> 4 1,421
<CURRENT-ASSETS> 14,028 18,245
<PP&E> 3,415 4,730
<DEPRECIATION> (1,078) (1,911)
<TOTAL-ASSETS> 17,209 21,227
<CURRENT-LIABILITIES> 8,905 12,523
<BONDS> 996 0
977 15,287
0 0
<COMMON> 21 18
<OTHER-SE> 4,479 (8,188)
<TOTAL-LIABILITY-AND-EQUITY> 17,209 21,227
<SALES> 50,377 42,035
<TOTAL-REVENUES> 50,377 42,035
<CGS> 35,331 28,937
<TOTAL-COSTS> 13,457 18,651
<OTHER-EXPENSES> (2,525) (80)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (138) (370)
<INCOME-PRETAX> 4,252 (5,103)
<INCOME-TAX> 1,702 (521)
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,550 (4,582)
<EPS-BASIC> 0.12 (0.40)
<EPS-DILUTED> 0.09 (0.40)
</TABLE>
