<PAGE>
Filed Pursuant to Rule 424(B)(4)
File No. 333-86445
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Prospectus
November 16, 1999
[LOGO OF RAINMAKER(SM)]
5,000,000 Shares of Common Stock
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Rainmaker Systems, Inc.: The Offering:
. We provide customer . We are offering 5,000,000
relationship management shares of our common stock.
services to software and
other technology companies.
. The underwriters have an
option to purchase an
additional 750,000 shares
from us to cover over-
allotments.
. Rainmaker Systems, Inc. 1800
Green Hills Road Scotts
Valley, CA 95066 (831) 430-
3800
. This is our initial public
offering, and no public
market currently exists for
our shares.
Symbol & Market:
. RMKR/Nasdaq National Market
. 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: November 22, 1999
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Per Share Total
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Public offering price: $8.00 $40,000,000
Underwriting fees: 0.56 2,800,000
Proceeds to Rainmaker Systems: 7.44 37,200,000
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Investing in our common stock involves risks. See "Risk Factors" beginning on
page 7.
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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.
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[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)
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TABLE OF CONTENTS
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Page
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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
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Page
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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.............................................................. 61
Experts.................................................................... 61
Where You Can Find More Information........................................ 61
Financial Statements....................................................... F-1
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1
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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:
. each share of our preferred stock will be converted into shares of
common stock immediately prior to 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.
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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.
Rainmaker was reincorporated from California to Delaware in November 1999.
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
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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.
Nasdaq National Market symbol.... RMKR
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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
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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.
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Years Ended December Nine Months
31, Ended September 30,
------------------------- -------------------
1996 1997 1998 1998 1999
------- ------- ------- --------- ---------
(unaudited)
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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
======= =========
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As of September 30, 1999
-------------------------------
Pro Pro Forma
Actual Forma(4) As Adjusted(5)
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(unaudited)
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Balance Sheet Data:
Cash, cash equivalents, and short-term
investments................................. $ 6,136 $ 6,136 $42,094
Working capital.............................. 5,722 5,722 41,680
Total assets................................. 21,227 21,227 57,185
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 43,075
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(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
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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.
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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
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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.
Our business strategy includes expansion into foreign markets which will
require increased expenditures, and if our international operations are not
successfully implemented they may not result in increased revenue or growth of
our business.
Our growth strategy includes expansion into international markets. As a
result, we may need to establish international operations, hire additional
personnel and establish relationships with additional clients and customers in
those markets. This expansion will require significant financial resources and
management attention and could have a negative effect on our earnings. We
cannot assure you that we will be successful in creating international demand
for our CRM services or that we will be able to effectively sell our clients'
products and services in international markets.
The development of our international operations may also involve the
following risks:
. the increased cost associated with designing and operating Web sites in
foreign languages;
. the inability to protect our intellectual property in foreign markets;
. differing technology standards and internet regulations in other
countries that may affect access to and operation of our Web sites;
. the appeal of our marketing programs, including the use of e-mail and
direct marketing techniques, to international customers; and
. difficulties in collecting international accounts receivable for the
products and services that we sell.
We cannot assure you that these factors will not have an adverse effect on
future international sales and earnings.
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;
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. 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 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,
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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.
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.
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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. 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.
The provisions of Delaware law and of our certificate of incorporation and
bylaws 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 provides 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 also provides for a classified board, with each board member
serving a staggered three-year term. In addition, our bylaws 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 was 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;
12
<PAGE>
. 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;
. 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 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 $6.85 per share from the initial
public offering price of $8.00 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 $35,958,000, after deducting the
underwriting fees and estimated offering expenses. We will receive an
additional $5,580,000 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 $ 42,094
====== ====== ========
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 53,845
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 43,075
------ ------ --------
Total capitalization.......................... $7,721 $7,721 $ 43,679
====== ====== ========
</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 $43.1 million, or $1.15 per share of
common stock. This represents an immediate increase in pro forma net tangible
book value of $0.93 per share to existing stockholders and an immediate
dilution in pro forma net tangible book value of $6.85 per share to investors
purchasing common stock in this offering. The following table illustrates this
per share dilution:
<TABLE>
<CAPTION>
Per Share
-----------
<S> <C> <C>
Initial public offering price ....................................... $8.00
Pro forma net tangible book value as of September 30, 1999......... $0.22
Increase attributable to new investors............................. 0.93
-----
Pro forma net tangible book value after this offering.............. 1.15
-----
Dilution to new investors.......................................... $6.85
=====
</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 27.9% $0.48
---------- ----- ----------- -----
New investors.......... 5,000,000 13.3 40,000,000 72.1 8.00
---------- ----- ----------- -----
Total.............. 37,460,544 100.0% $55,487,000 100.0%
========== ===== =========== =====
</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.
21
<PAGE>
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 have collected satisfactory Year
2000 readiness statements from our significant partners and vendors, and we
are continuing to gather such statements from our other providers.
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.
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<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
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<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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<PAGE>
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.
33
<PAGE>
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
34
<PAGE>
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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<PAGE>
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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<PAGE>
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.
37
<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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.
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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. Up to a maximum of 8,595,217 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 approximately 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 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 $663,351 in 1996,
$731,074 in 1997 and $13,542 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.
Common Stock
Our authorized capital stock consists 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. 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 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. We are 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
53
<PAGE>
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 provides 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. Our board is 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 authorizes only the
board of directors to fill vacancies, including newly created directorships.
The certificate of incorporation also provides 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 each provide that our bylaws may only be amended by a
two-thirds vote of the outstanding shares. In addition, our certificate of
incorporation provides 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 further provides 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 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
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
54
<PAGE>
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 provides 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 32,403,982 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 56,562 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............ 56,562 Shares saleable under Rule 144, 144(k) or 701 that are not
subject to 180-day lock up
180 days........... 32,403,982 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 9,595,217 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 November 16, 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............ 1,398,750
Thomas Weisel Partners LLC..................................... 1,398,750
SG Cowen Securities Corporation................................ 932,500
DLJdirect Inc.................................................. 100,000
Bear, Stearns & Co. Inc........................................ 60,000
Credit Suisse First Boston Corporation......................... 60,000
A.G. Edwards & Sons, Inc....................................... 60,000
FIRST UNION SECURITIES, INC.................................... 60,000
Goldman, Sachs & Co............................................ 60,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated............. 60,000
Salomon Smith Barney Inc....................................... 60,000
C.E. Unterberg, Towbin......................................... 60,000
Adams, Harkness & Hill, Inc.................................... 30,000
William Blair & Company, L.L.C................................. 30,000
J.C. Bradford & Co............................................. 30,000
The Chapman Company............................................ 30,000
Crowell, Weedon & Co........................................... 30,000
Fahnestock & Co. Inc........................................... 30,000
Gruntal & Co. L.L.C............................................ 30,000
Harris Webb & Garrison, Inc.................................... 30,000
Wachovia Securities, Inc....................................... 30,000
C.L. King & Associates, Inc.................................... 30,000
Ladenburg Thalmann & Co. Inc................................... 30,000
Legg Mason Wood Walker, Incorporated........................... 30,000
McDonald Investments Inc., a KeyCorp Company................... 30,000
Parker/Hunter Incorporated..................................... 30,000
Pennsylvania Merchant Group.................................... 30,000
Raymond James & Associates, Inc................................ 30,000
Sanders Morris Mundy........................................... 30,000
Sands Brothers & Co., Ltd...................................... 30,000
The Seidler Companies Incorporated............................. 30,000
Suntrust Equitable Securities Corporation...................... 30,000
Sutro & Co. Incorporated....................................... 30,000
Tucker Anthony Cleary Gull..................................... 30,000
Volpe Brown Whelan & Company................................... 30,000
---------
Total........................................................ 5,000,000
=========
</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.
58
<PAGE>
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 $0.34 per share. The underwriters may
allow, and such dealers may re-allow, a concession not in excess of $0.10 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.......................................... $ 0.56 $ 0.56
Total.............................................. $2,800,000 $3,220,000
</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.
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 87 filed public offerings of equity securities, of which 64 have
been completed, and has acted as a syndicate member in an additional 45 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 approximately six
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.
59
<PAGE>
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 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;
60
<PAGE>
. 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.
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)
<S> <C> <C> <C> <C>
ASSETS
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
Ended
Years Ended December 31, September 30,
------------------------- ----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(unaudited)
<S> <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 Page"
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>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
November 16, 1999
[LOGO OF RAINMAKER(SM)]
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 December 11, 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.
- --------------------------------------------------------------------------------
