<PAGE>
As filed with the Securities and Exchange Commission on September 2, 1999
Registration No. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
RAINMAKER SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
--------------
<TABLE>
<S> <C> <C>
California 5961 33-0442860
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Number) Identification No.)
</TABLE>
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1800 Green Hills Road
Scotts Valley, California 95066
(831) 430-3800
(Address, Including Zip Code and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
--------------
Michael Silton
Chief Executive Officer
RAINMAKER SYSTEMS, INC.
1800 Green Hills Road
Scotts Valley, California 95066
(831) 430-3800
(Name, Address, Including Zip Code and Telephone Number,
Including Area Code, of Agent for Service)
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Copies to:
<TABLE>
<S> <C>
Bruce R. Hallett, Esq. Richard D. Harroch, Esq.
Scott R. Santagata, Esq. Peter Lillevand, Esq.
Ryan S. Hong, Esq. Brett E. Cooper, Esq.
Joo Ryung Kang, Esq. Thomas R. Brida, Esq.
Brobeck, Phleger & Harrison LLP Orrick, Herrington & Sutcliffe LLP
38 Technology Drive Old Federal Reserve Bank Building
Irvine, California 92618 400 Sansome Street
(949) 790-6300 San Francisco, California 94111
(415) 392-1122
</TABLE>
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
--------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed Maximum
Title of Each Class of Aggregate Offering Amount of Registration
Securities to be Registered Price(1)(2) Fee
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<S> <C> <C>
Common Stock, $0.001 par value...... $50,000,000 $13,900.00
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</TABLE>
(1) Includes shares that the Underwriters have the option to purchase
solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the registration fee
pursuant to Rule 457(a).
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Company shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+We will amend and complete the information in this prospectus. Although we +
+are permitted by U.S. federal securities laws to offer these securities using +
+this prospectus, we may not sell them or accept your offer to buy them until +
+the registration statement filed with the Securities and Exchange Commission +
+relating to these securities is effective. This prospectus is not an offer to +
+sell these securities or our solicitation of your offer to buy these +
+securities in any jurisdiction where that would not be permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION--September 2, 1999
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- --------------------------------------------------------------------------------
Prospectus
, 1999
[LOGO]
Shares of Common Stock
- --------------------------------------------------------------------------------
Rainmaker Systems, The Offering:
Inc.:
. We provide . We are offering
customer shares
relationship of our common
management stock.
services to
software and other . The underwriters
technology have an option to
companies. purchase an
additional
. Rainmaker Systems, shares from us to
Inc. 1800 Green cover over-
Hills Road Scotts allotments.
Valley, CA 95066
(831) 430-3800 . This is our
initial public
offering, and no
public market
currently exists
for our shares.
Proposed Symbol &
Market:
. RMKR/Nasdaq . We anticipate that
National Market the initial public
offering price of
the shares will be
between $ and
$ per share.
. We intend to use
the proceeds of
this offering for
working capital
and general
corporate purposes
such as new client
acquisition,
expansion into
international
markets, the
development of new
services and
capital
expenditures.
. Closing:
, 1999
<TABLE>
<CAPTION>
------------------------------------------------
Per Share Total
------------------------------------------------
<S> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds to Rainmaker Systems:
</TABLE>
---------------------------------------------
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 7.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.
- --------------------------------------------------------------------------------
Joint Book-Running Managers
Donaldson, Lufkin & Jenrette Thomas Weisel Partners LLC
-----------
SG Cowen
The undersigned is facilitating Internet distribution.
DLJdirect Inc.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary......................................................... 3
Risk Factors............................................................... 7
Information Regarding Forward-Looking Statements........................... 15
Use of Proceeds............................................................ 16
Dividend Policy............................................................ 16
Capitalization............................................................. 17
Dilution................................................................... 18
Selected Financial Data.................................................... 19
Management's Discussion and
Analysis of Financial Condition and Results of Operations................. 20
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Business................................................................... 28
Management................................................................. 38
Certain Transactions....................................................... 48
Principal Stockholders..................................................... 50
Description of Capital Stock............................................... 52
Shares Eligible for Future Sale............................................ 55
Underwriting............................................................... 57
Legal Matters.............................................................. 59
Experts.................................................................... 59
Additional Information..................................................... 60
Financial Statements....................................................... F-1
</TABLE>
1
<PAGE>
PROSPECTUS SUMMARY
This summary highlights the information contained elsewhere in this
prospectus. Because this is only a summary, it does not contain all of the
information that may be important to you. You should read the entire prospectus
carefully, and you should consider the information under "Risk Factors" and in
the financial statements and notes before deciding to invest in the shares of
our common stock.
In this prospectus, "Rainmaker Systems," "Rainmaker," the "Company," "we,"
"us" and "our" refer to Rainmaker Systems, Inc. Unless otherwise indicated, all
information in this prospectus assumes that:
. the initial public offering price will be $ per share;
. each share of our preferred stock will be converted into shares of
common stock immediately prior to the closing of this offering;
. upon the approval of our stockholders, Rainmaker will be reincorporated
as a Delaware corporation on or before the closing of this offering; and
. the underwriters will not exercise their over-allotment option and no
other person will exercise any other outstanding option or warrant.
The Company
Our Business
We provide customer relationship management (CRM) services to software and
other technology companies. We design and implement sophisticated sales,
marketing and other customer relationship programs using the Internet and other
communication channels. By integrating technologies, processes and people, we
provide a transparent customer relationship infrastructure behind our clients'
brands. Our solutions are used to increase the frequency and quality of
customer interactions and provide greater opportunities to sell and renew
software subscriptions, support and service contracts, training services,
licenses and upgrades. Rainmaker's services are designed to increase revenue
per customer, strengthen customer loyalty and retention, and improve customer
awareness of our clients' products and services. Our comprehensive CRM
solutions incorporate the following distinguishing characteristics:
. We identify and profile customers, establish meaningful interactions
with them, and enhance selling opportunities throughout the customer
life cycle.
. We build and manage integrated customer databases and provide reporting
services to clients on product usage, product and service interests and
buying patterns.
. We use our expertise in software and other technology industries to
design and implement focused marketing strategies.
. We sell our clients' products and services under a pay-for-performance
model.
Our clients are Borland, a division of Inprise Corporation, FTP Software,
Inc., Lotus Development Corporation, a subsidiary of IBM, Network Computing
Devices, Inc., Novell, Inc., Open Connect Systems Incorporated, Puma
Technology, Inc., The Santa Cruz Operation, Inc., Sun Microsystems, Inc.,
Sybase Inc. and Symantec Corporation.
3
<PAGE>
Our Market Opportunity
Competitive global markets and the increasing acceptance of the Internet as
a medium for customer interaction have caused companies to transform CRM from a
back office cost center to a revenue generating strategic operation. Many
businesses, however, are not achieving the results they desire from their CRM
programs. We believe there are three basic reasons why many CRM efforts are not
performing as expected:
. The Internet and the proliferation of customer data have increased the
frequency and complexity of customer interaction.
. Many current CRM solutions have inherent limitations.
. In-house solutions require a level of specialization that is not
consistent with many businesses' core competencies.
We believe that companies will increase and realign their spending on CRM
services. AMR Research estimates that more than $2.3 billion was spent on CRM
in 1998, and that CRM spending will grow to $16.8 billion by 2003, a compounded
annual growth rate of 49%. In spite of these expenditures, many businesses are
not achieving the results they desire. A July 1999 study by Frontline Solutions
indicated that 70% - 80% of software and hardware vendors were not satisfied
with their CRM tools. We believe a substantial market opportunity exists for a
CRM service provider like us that can combine the technology infrastructure,
established processes and knowledgeable people to deliver a comprehensive
outsourced solution that increases revenue from existing customers.
Our Strategy
Our objective is to become the leader in providing CRM services to software
and other technology companies. The key elements of our strategy to achieve
this objective are to:
. further penetrate our existing client base;
. sign new software industry clients;
. create additional services and delivery models;
. develop our international presence; and
. extend our solutions into additional technology markets.
Our History
Rainmaker was founded in 1991 as UniDirect Corporation, a
catalog/distributor of business software. In January 1995, we entered the CRM
services business and signed our first CRM services contract. In 1997, we
decided to focus exclusively on CRM services and added three new CRM services
clients that year. In May 1998, we sold our catalog/distributor businesses.
Corporate Information
We are located at 1800 Green Hills Road, Scotts Valley, California 95066.
Our telephone number is (831) 430-3800. Our Web site address is
www.rainmakersystems.com. Information contained on our Web site is not a part
of this prospectus.
4
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered............. shares
Common stock to be outstanding
after this offering............. shares
Use of proceeds.................. We intend to use the proceeds of this
offering for working capital and general
corporate purposes such as new client
acquisition, expansion into international
markets, development of new services and
capital expenditures.
Proposed Nasdaq National Market
symbol.......................... RMKR
</TABLE>
The number of shares of common stock to be outstanding after the offering
excludes:
. 3,632,407 shares of common stock issuable upon the exercise of options
outstanding as of June 30, 1999 at a weighted average exercise price of
$0.69 per share and 6,000,000 shares of common stock reserved for future
issuance under our stock plans; and
. 113,750 shares of common stock issuable upon the exercise of outstanding
warrants at an exercise price of $0.21 per share.
5
<PAGE>
Summary Financial Data
(in thousands, except per share data)
You should read the following summary financial data together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the accompanying financial statements and related notes which
are included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Years Ended December Six Months
31, Ended June 30,
------------------------- ---------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
CRM services...................... $12,384 $22,515 $44,212 $18,355 $26,088
Catalog/distributor(1)............ 14,551 16,985 6,165 6,165 --
------- ------- ------- ------- -------
Total revenue..................... 26,935 39,500 50,377 24,520 26,088
Cost of revenue:
CRM services...................... 7,929 14,810 30,196 12,641 17,534
Catalog/distributor(1)............ 11,370 13,575 5,135 5,135 --
------- ------- ------- ------- -------
Total cost of revenue............. 19,299 28,385 35,331 17,776 17,534
Gross profit:
CRM services...................... 4,455 7,705 14,016 5,714 8,554
Catalog/distributor(1)............ 3,181 3,410 1,030 1,030 --
------- ------- ------- ------- -------
Total gross profit................ 7,636 11,115 15,046 6,744 8,554
Selling, general and administrative
expenses.......................... 6,954 9,828 13,457 5,916 10,064
------- ------- ------- ------- -------
Operating income (loss)............ 682 1,287 1,589 828 (1,510)
Interest income (expense), net.... (35) (66) 138 4 285
Gain from sale of
catalog/distributor(1)........... -- -- 2,525 2,525 80
------- ------- ------- ------- -------
Income (loss) before income taxes.. 647 1,221 4,252 3,357 (1,145)
Income tax expense (benefit)...... 216 450 1,702 1,343 (431)
------- ------- ------- ------- -------
Net income (loss).................. $ 431 $ 771 $ 2,550 $ 2,014 $ (714)
======= ======= ======= ======= =======
Net income (loss) per share(2):
Basic............................. $ 0.02 $ 0.04 $ 0.12 $ 0.10 $ (0.14)
======= ======= ======= ======= =======
Diluted........................... $ 0.02 $ 0.03 $ 0.09 $ 0.07 $ (0.14)
======= ======= ======= ======= =======
Pro forma--basic.................. $ 0.10 $ (0.02)
======= =======
Pro forma--diluted................ $ 0.09 $ (0.02)
======= =======
Number of shares used in per share
calculations(2):
Basic............................. 21,009 21,019 21,004 21,026 19,469
======= ======= ======= ======= =======
Diluted........................... 29,600 29,943 30,356 30,211 19,629
======= ======= ======= ======= =======
Pro forma--basic.................. 25,623 33,284
======= =======
Pro forma--diluted................ 30,356 33,444
======= =======
</TABLE>
<TABLE>
<CAPTION>
As of June 30, 1999
-------------------------------
Pro Pro Forma
Actual Forma(4) As Adjusted(5)
------- ------- -------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents, and short-term
investments................................. $ 7,960 $ 7,960 $
Working capital.............................. 9,591 9,591
Total assets................................. 20,928 20,928
Capital lease obligations, less current
portion..................................... 659 659
Redeemable preferred stock................... 15,474 -- --
Total stockholders' equity (net capital
deficiency)(3).............................. (4,441) 11,033
</TABLE>
- -------
(1) Effective May 15, 1998, we sold our catalog/distributor businesses. The
results of operations for our catalog/distributor businesses are included
in our financial statements through May 15, 1998.
(2) See Note 2 of the notes to financial statements which are included
elsewhere in this prospectus.
(3) On June 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 $8.8 million
(5,368,065 shares) of common stock during the six months ended June 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 shares of common stock in this offering and the receipt
of the net proceeds from this offering, after deducting underwriting fees
and estimated offering expenses.
6
<PAGE>
RISK FACTORS
You should carefully consider the following risks before you decide to buy
our common stock. The risks and uncertainties described below are not the only
ones that we face. Additional risks and uncertainties not presently known to us
or that we currently deem immaterial may also adversely affect our business
operations. If any of the following risks actually occur, they could seriously
harm our business, financial condition or results of operations, and the
trading price of our common stock could decline. You should also refer to the
other information set forth in this prospectus, including our financial
statements and the related notes.
We Have Incurred Recent Losses and Expect to Incur Losses in the Future
We entered into the CRM services business in January 1995 and have a limited
operating history. As a result, it is difficult for us to predict future
results of operations. Although our CRM services revenues have grown
significantly in each year from 1995 to 1998, this rate of growth may not be
sustainable. In addition, we incurred an operating loss and net loss for the
six months ended June 30, 1999. We expect to incur operating and net losses in
future periods as we increase our operating expenses to build our business.
We Depend on a Small Number of Clients for a Significant Portion of Our Revenue
We have generated a significant portion of our revenue from a limited
numbers of clients. We currently have only eleven clients. In 1997, sales to
customers of The Santa Cruz Operation, Inc. ("SCO"), FTP Software, Inc.
("FTP"), 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. ("Novell") accounted for approximately 46%, 21% and
16%, respectively, of our CRM services revenue. For the six months ended June
30, 1999, sales to customers of SCO, FTP, and Novell accounted for
approximately 49%, 17% and 10%, 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 would have a material adverse effect on our business.
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 Is Directly Related to the Marketability of Our Clients' Products
and Services
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 revenue we generate for our clients. 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 Future Operating Results May Not Follow Past Trends or Meet Market
Expectations
We believe that quarter-to-quarter comparisons of our operating results are
not a good indication of future performance. Although our operating results
have generally improved from quarter to quarter until recently, our future
operating results may not follow any past trends. In some future quarter our
operating results may be below the expectation of public market analysts and
investors.
7
<PAGE>
Factors which may cause our future operating results to be below
expectations include:
. the growth of the market for outsourced CRM solutions;
. the demand for and acceptance of our services;
. our ability to develop and implement additional services, products and
technologies;
. the introduction, timing and competitive pricing of our services and
those of our competitors;
. the demand for our clients' products and services;
. the expansion of our direct sales force and its rate of success;
. our ability to manage continued growth in our business;
. the attraction and retention of key personnel, particularly in our
sales, development, services and support groups;
. the length of the sales and integration cycle for our new clients;
. the timing and successful integration of, and costs related to,
technologies and businesses we may acquire in the future;
. our ability to expand our business internationally; and
. general economic and market conditions.
Our Revenue Growth Will be Impacted by the Length and Unpredictability of the
Sales and Integration Cycles for Our Services
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.
Our Ability to Attract and Retain Highly Qualified Management and Personnel Is
Critical to Our Business
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. 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 adversely
affect our business. The loss of certain key personnel, particularly Michael
Silton, our Chairman, President and Chief Executive Officer, could affect our
business adversely. We have obtained life insurance policies in the amount of
$6.3 million on Michael Silton.
We have recently hired many of our key employees and officers. As a result,
our current management team has worked together for only a relatively short
time. Our ability to execute our strategies will depend in part upon our
ability to integrate these and future managers into our operations.
8
<PAGE>
We Have Strong Competitors and May Not be Able to Compete Effectively Against
Them
We experience competition from many sources including:
Custom-built and tailored point solutions. Comprehensive system integrators,
such as Andersen Consulting and Sapient Corp., implement either 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
particular needs.
E-commerce solutions providers. E-commerce solutions providers, including
Razorfish Inc., Scient Corp. and Viant Corp., design and implement customized
e-commerce 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.
Competition in business process outsourcing is intense, and we expect such
competition to increase in the future. In addition to competition from other
outsource providers listed above, we face competition from internal marketing
departments of current and potential clients. 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 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. Many of our existing competitors, as well as a number of
potential new 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. Failure to maintain or to produce revenue proportionate to any
increase in expenses would have a material adverse effect on our business.
We May Not Be Able 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. Our inability to manage
additional growth could adversely impact our business.
We May Not Be Able to Successfully Develop Our International Business
Operations
Our growth strategy includes expansion into international markets. Our
international operations are at an early stage of development, and we have
limited experience in marketing, selling and supporting our services in foreign
countries. Developing these skills may be more difficult or take longer than we
anticipate. To date, only a small portion of our revenue is derived from
international sales, primarily to customers in Canada. We intend to expand our
operations internationally by hiring international personnel and pursuing
potential arrangements with strategic partners.
9
<PAGE>
Some markets in which we may undertake international expansion currently have
technology and online industries that are less well developed than in the U.S.
There are also certain risks inherent in doing business in international
markets, such as the following:
. difficulties in staffing and managing multinational operations;
. currency fluctuations and restrictions on the repatriation of funds;
. export restrictions, licenses, tariffs, different regulatory agencies
and other trade barriers;
. reduced protection for intellectual property in some countries;
. greater difficulty in collecting accounts receivable;
. political instability;
. differing technology standards;
. potentially adverse tax consequences; and
. the appeal of our marketing programs to international customers.
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 materially and adversely affect our
business. Furthermore, acquisitions entail numerous risks and uncertainties,
including:
. difficulties in the assimilation of operations, personnel, technologies,
products and the information systems of the acquired companies;
. diversion of management's attention from other business concerns;
. risks of entering geographic and business markets in which we have no or
limited prior experience; and
. potential loss of key employees of acquired organizations.
We cannot be certain that we would be able to successfully integrate any
businesses, products, technologies or personnel that might be acquired in the
future, and our failure to do so could have a material adverse effect on our
business. 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
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 have a
material adverse effect on our business.
10
<PAGE>
Our Networks May Be Vulnerable to Security Risks
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.
We Depend on a Single Facility
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 a fire, flood, earthquake or
other disaster affecting our facility would not disable these operations. Any
significant damage to this facility would have a material adverse effect on our
business.
We May Not Be Able to Protect Our Intellectual Property and Proprietary Rights
We cannot guarantee that the steps we have taken to protect our proprietary
rights will be adequate to deter misappropriation of our intellectual property.
In addition, we may not be able to detect unauthorized use of our intellectual
property and take appropriate steps to enforce our rights. If third parties
infringe or misappropriate our trade secrets, copyrights, trademarks, service
marks, trade names or other proprietary information, our business could be
seriously harmed. In addition, although we believe that our proprietary rights
do not infringe the intellectual property rights of others, other parties may
assert infringement claims against us that we violated their intellectual
property rights. These claims, even if not true, could result in significant
legal and other costs and may be a distraction to management. In addition,
protection of intellectual property in many foreign countries is weaker and
less reliable than in the United States, so if our business expands into
foreign countries, risks associated with protecting our intellectual property
will increase. We have recently applied for registration of the service mark
"Rainmaker Systems" in the United States, but we presently have no applications
pending in foreign countries for this or any other trademark or service mark.
Year 2000 Compliance Issues May Adversely Affect Our Business
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,
increased service and warranty expense, and the costs of litigation, including
amounts paid in damages or settlement. As a result, our business could be
materially and adversely affected. 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.
11
<PAGE>
Increased Government Regulation of the Internet Could Have a Material Adverse
Effect on Our Business
The increasing popularity and use of the Internet and online services may
lead to the adoption of new laws and regulations in the U.S. or elsewhere
covering issues such as online privacy, copyright and trademark, sales taxes
and fair business practices or which require qualification to do business as a
foreign corporation in certain jurisdictions. Increased government regulation,
or the application of existing laws to online activities, could inhibit
Internet growth. A decline in the growth of the Internet could decrease demand
for our services and increase our cost of doing business and otherwise harm our
business.
We Are Subject to Government Regulation of Telemarketing
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. The federal Telephone Consumer Protection Act
of 1991 limits the hours during which telemarketers may call consumers and
prohibits 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 this federal law. 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.
Our Stock Is Controlled by Our Directors and Their Affiliates
After this offering, our directors and entities affiliated with them will
together control approximately % of our outstanding shares. 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 have an adverse effect on the market price of
our common stock.
Anti-Takeover Provisions Could Deter Takeover Attempts
In connection with this offering, Rainmaker will be reincorporated in
Delaware. The provisions of Delaware law and of the certificate of
incorporation and bylaws that we will adopt in connection with the
reincorporation could make it difficult for a third party to acquire us, even
though an acquisition might be beneficial to our stockholders. Our certificate
of incorporation will provide our board of directors the authority, without
stockholder action, to issue up to 20,000,000 shares of preferred stock in one
or more series. Our board determines when we will issue preferred stock, and
the rights, preferences and privileges of any preferred stock. Our certificate
of incorporation will also provide for a classified board, with each board
member serving a staggered three-year term. In addition, our bylaws will
establish an advance notice procedure for stockholder proposals and for
nominating candidates for election as directors. Delaware corporate law also
contains provisions that can affect the ability to take over a company. You
should read "Description of Capital Stock--Certain Anti-Takeover Provisions."
12
<PAGE>
There Is No Prior Market for Our Stock and Our Stock Price May Be Volatile
Resulting in Potential Litigation
There has been no public market for our common stock prior to this offering.
The initial public offering price will be determined by negotiation with the
representatives of the underwriters, based upon factors that may be unrelated
to future market performance. We cannot be certain that an active public market
for our common stock will develop or be sustained after this offering. Nor can
we be certain that the market price of our common stock will not decline below
the initial public offering price.
If our stock price is volatile, we could face securities class action
litigation. In the past, following periods of volatility in the market price of
their stock, many companies have been the subjects of securities class action
litigation. If we were sued in a securities class action, it could result in
substantial costs and a diversion of management's attention and resources and
could cause our stock price to fall. The trading price of our common stock
could fluctuate widely due to:
. quarter to quarter variations in results of operations;
. loss of a major client;
. announcements of technological innovations by us or our competitors;
. new products or services offered by us or our competitors;
. failure to meet the expectations of securities analysts;
. changes in earnings estimates or buy/sell recommendations by securities
analysts;
. additions or departures of key personnel;
. changes in market valuations of similar companies;
. announcements of strategic relationships or acquisitions by us or our
competitors;
. sales of our equity securities in the open market; 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, including shares issued
upon the exercise of outstanding options and warrants, in the public market
after this offering could adversely affect 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. Upon completion of this offering, we will have shares of
common stock outstanding. Of these shares, the shares sold in this
offering will be freely tradable in the public market. The remaining 32,145,724
shares will be eligible for sale in the public market under Rule 144 (subject
to volume limitations).
Our existing stockholders and option holders are subject to agreements that
limit their ability to sell common stock. These holders cannot sell or
otherwise dispose of any shares of common stock for a period of at least 180
days after the date of this prospectus without the prior written approval of
Donaldson, Lufkin & Jenrette Securities Corporation and Thomas Weisel Partners
LLC. When these agreements expire, these shares and the shares underlying the
options will become eligible for sale, in some cases only pursuant to the
volume, manner of sale and notice requirements of Rule 144.
13
<PAGE>
We also intend to file registration statements covering the sale of
9,632,407 shares of our common stock issuable under our stock plans. As of June
30, 1999, we had outstanding options to purchase a total of approximately
3,632,407 shares of our common stock. Sales of large amounts of these shares in
the public market or the prospect of such sales could adversely affect the
market price of our common stock. We cannot predict what impact, if any, that
future sales of shares or the availability of shares for sale will have on the
market price of our common stock.
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. Sales of a substantial number of shares of our common stock into
the public market after this offering, or the perception that such sales could
occur, could materially and adversely affect our stock price or could impair
our ability to obtain capital through an offering of equity securities.
New Investors Will Experience Immediate and Substantial Dilution
The assumed public offering price is substantially higher than the book
value per share of our common stock. Purchasers of our common stock in this
offering will experience immediate and substantial dilution in the pro forma
net tangible book value of their shares of approximately $ per share from
the assumed initial public offering price of $ per share. Purchasers will
experience additional dilution upon the exercise of outstanding options and
warrants.
14
<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.
15
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the shares of common
stock offered by this prospectus are estimated to be $ , after
deducting the underwriting fees and estimated offering expenses. We will
receive an additional $ in net proceeds if the underwriters
fully exercise their over-allotment option to purchase shares of
common stock.
We intend to use the net proceeds for working capital and 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. Our existing bank line of credit prohibits the
payment of dividends.
16
<PAGE>
CAPITALIZATION
The following table sets forth as of June 30, 1999:
. our actual capitalization;
. our pro forma capitalization giving effect to the conversion of all
outstanding shares of preferred stock into 15,043,108 shares of common
stock (including the conversion of 335,939 shares of Series B preferred
stock into 1,679,695 shares of common stock); and
. our pro forma capitalization as adjusted to reflect the issuance of
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) 3,632,407 shares of common stock issuable upon the
exercise of outstanding options as of June 30, 1999 at a weighted average
exercise price of $0.69 per share and 6,000,000 shares of common stock reserved
for future issuance under our stock plans 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>
June 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.................................... $ 7,960 $ 7,960 $
======= ======= ======
Capital lease obligations, less current
portion........................................ $ 659 $ 659 $
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,
4,826,828 issued and outstanding, actual; no
shares authorized, issued or outstanding, pro
forma and pro forma as adjusted............... 1,665 -- --
Stockholders' equity (net capital deficiency):
Series B convertible preferred stock, $0.001
par value; 402,710 shares authorized, 335,939
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, 17,581,816 issued and
outstanding, actual; 32,624,924 issued and
outstanding, pro forma; issued and
outstanding pro forma as adjusted............. 17 33
Additional paid-in capital...................... 1,479 16,937
Deferred stock compensation..................... (1,259) (1,259)
Accumulated deficit............................. (4,678) (4,678)
------- ------- ------
Total stockholders' equity (net capital
deficiency)................................... (4,441) 11,033
------- ------- ------
Total capitalization......................... $11,692 $11,692 $
======= ======= ======
</TABLE>
17
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was approximately
$11.0 million, or $0.34 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
June 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
shares of common stock in this offering and the receipt of the net
proceeds therefrom, our net tangible book value as of June 30, 1999 would have
been $ million, or $ per share of common stock. This represents an
immediate increase in net tangible book value of $ per share to existing
stockholders and an immediate dilution in net tangible book value of $ per
share to investors purchasing common stock in this offering. The following
table illustrates this per share dilution:
<TABLE>
<CAPTION>
Per Share
---------
Assumed initial public offering price ................................. $
<S> <C> <C>
Pro forma net tangible book value as of June 30, 1999................ 0.34
Increase attributable to new investors...............................
----
Pro forma net tangible book value after this offering................
----
Dilution to new investors............................................ $
====
</TABLE>
The following table summarizes on a pro forma basis as of June 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.. 32,624,924 % $16,201,000 % $0.50
---------- ------ ----------- -----
New investors..........
---------- ------ ----------- -----
Total.............. 100% 100.0%
========== ====== =========== =====
</TABLE>
The foregoing table assumes no exercise of the underwriters' over-allotment
option or shares underlying outstanding options or warrants. As of June 30,
1999, options to purchase 3,632,407 shares of common stock were outstanding at
a weighted average exercise price of $0.69 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.
18
<PAGE>
SELECTED FINANCIAL DATA
(in thousands, except per share data)
The following selected financial data as of December 31, 1997 and 1998 and
as of June 30, 1999 and for each of the three years in the period ended
December 31, 1998 and for the six months ended June 30, 1999 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 statement of operations data for the six
months ended June 30, 1998 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 June 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>
Six Months
Years Ended December 31, Ended June 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 $18,355 $26,088
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 24,520 26,088
Cost of revenue:
CRM services............. -- 5,681 7,929 14,810 30,196 12,641 17,534
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 17,776 17,534
Gross profit:
CRM services............. -- 2,549 4,455 7,705 14,016 5,714 8,554
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 6,744 8,554
Selling, general and
administrative expenses.. 2,947 4,792 6,954 9,828 13,457 5,916 10,064
------- ------- ------- ------- ------- ------- -------
Operating income (loss)... (238) 388 682 1,287 1,589 828 (1,510)
Interest income
(expense), net.......... (25) (16) (35) (66) 138 4 285
Gain from sale of
catalog/distributor(1).. -- -- -- -- 2,525 2,525 80
------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes............. (263) 372 647 1,221 4,252 3,357 (1,145)
Income tax expense
(benefit)............... (13) 87 216 450 1,702 1,343 (431)
------- ------- ------- ------- ------- ------- -------
Net income (loss)......... $ (250) $ 285 $ 431 $ 771 $ 2,550 $ 2,014 $ (714)
======= ======= ======= ======= ======= ======= =======
Net income (loss) per
share(2):
Basic.................... $ (0.01) $ 0.01 $ 0.02 $ 0.04 $ 0.12 $ 0.10 $ (0.14)
======= ======= ======= ======= ======= ======= =======
Diluted.................. $ (0.01) $ 0.01 $ 0.02 $ 0.03 $ 0.09 $ 0.07 $ (0.14)
======= ======= ======= ======= ======= ======= =======
Pro forma--basic......... $ 0.10 $ (0.02)
======= =======
Pro forma--diluted....... $ 0.09 $ (0.02)
======= =======
Number of shares used in
per share
calculations(2):
Basic.................... 21,000 21,005 21,009 21,019 21,004 21,026 19,469
======= ======= ======= ======= ======= ======= =======
Diluted.................. 21,000 25,424 29,600 29,943 30,356 30,211 19,629
======= ======= ======= ======= ======= ======= =======
Pro forma--basic......... 25,623 33,284
======= =======
Pro forma--diluted....... 30,356 33,444
======= =======
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
------------------------------------ As of June 30,
1994 1995 1996 1997 1998 1999
------ ------ ------ ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents
and short-term
investments............ $ 63 $1,082 $1,259 $ 269 $ 4,608 $ 7,960
Working capital......... 110 1,490 1,257 1,307 5,123 9,591
Total assets............ 1,703 4,826 8,233 11,912 17,209 20,928
Long-term debt and
capital lease
obligations, less
current portion........ 39 558 1,065 1,278 1,438 659
Redeemable preferred
stock.................. -- 977 977 977 977 15,474
Total stockholders'
equity (net capital
deficiency)(3)......... 361 646 1,078 1,852 4,500 (4,441)
</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) On June 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 $8.8 million (5,368,065
shares) of common stock during the six months ended June 30, 1999.
19
<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., Lotus Development Corporation, a subsidiary of IBM, Network
Computing Devices, Inc., Novell, Inc., Open Connect Systems Incorporated, 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. 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.
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.
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 our contract with each client. Our CRM
service contracts typically contain incentives whereby our pricing terms
improve as performance benchmarks are achieved, thereby improving our gross
margin. 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
20
<PAGE>
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 six months
ended June 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.
Results of Operations
The following table presents, for the periods given, selected financial data
as a percentage of our revenue.
<TABLE>
<CAPTION>
Years Ended December Six Months Ended
31, June 30,
---------------------- ------------------
1996 1997 1998 1998 1999
------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C>
Revenue:
CRM services.................... 46.0% 57.0% 87.8% 74.9% 100.0%
Catalog/distributor............. 54.0 43.0 12.2 25.1 --
------ ------ ------ -------- --------
Total revenue.................. 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
CRM services.................... 64.0 65.8 68.3 68.9 67.2
Catalog/distributor............. 78.1 79.9 83.3 83.3 --
------ ------ ------ -------- --------
Total cost of revenue.......... 71.7 71.9 70.1 72.5 67.2
Gross profit:
CRM services.................... 36.0 34.2 31.7 31.1 32.8
Catalog/distributor............. 21.9 20.1 16.7 16.7 --
------ ------ ------ -------- --------
Total gross profit............. 28.3 28.1 29.9 27.5 32.8
Selling, general and
administrative expenses......... 25.8 24.8 26.8 24.1 38.6
------ ------ ------ -------- --------
Operating income (loss).......... 2.5 3.3 3.1 3.4 (5.8)
Interest income (expense), net.. (0.1) (0.2) 0.3 0.0 1.1
Gain from sale of
catalog/distributor............ -- -- 5.0 10.3 0.3
------ ------ ------ -------- --------
Income (loss) before income
taxes........................... 2.4 3.1 8.4 13.7 (4.4)
Income tax expense (benefit).... 0.8 1.1 3.3 5.5 (1.7)
------ ------ ------ -------- --------
Net income (loss)................ 1.6% 2.0% 5.1% 8.2% (2.7)%
====== ====== ====== ======== ========
</TABLE>
Comparison of Six Months Ended June 30, 1999 and 1998
Revenue. Revenue from CRM services increased 42.1% to $26.1 million for the
six months ended June 30, 1999 from $18.4 million for the six months ended June
30, 1998. During the first six months of 1999, revenue from CRM services
provided to existing clients (clients for which we generated revenue over the
entire period) accounted for $5.7 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
$867,000 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 half of 1998 from which we derived the full period
benefit of the sales
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of their products and services during the first half of 1999. During the six
month period ended June 30, 1999, we added four new clients which accounted for
$2.0 million of our revenue during that period.
During the six months ended June 30, 1999, there was no revenue from the
catalog/distributor businesses, which were sold in May 1998. In the six months
ended June 30, 1998, these businesses generated revenues of $6.2 million.
Gross Profit. Gross profit from CRM services increased 49.7% to $8.6 million
for the six months ended June 30, 1999 from $5.7 million for the six months
ended June 30, 1998. Gross margin from CRM services increased to 32.8% in the
most recent period from 31.1% during the prior period due to improvements in
margins on sales of our existing clients' products and services, partially
offset by 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.
There was no gross profit for the six months ended June 30, 1999 on the
catalog/distributor businesses, which were sold in May 1998. For the six months
ended June 30, 1998, these businesses generated $1.0 million in gross profit.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 70.1% to $10.1 million for the six months
ended June 30, 1999 from $5.9 million for the six months ended June 30, 1998.
These expenses for the six months ended June 30, 1998 included approximately
five months of operations associated with the catalog/distributor businesses,
which were sold in May 1998. As a percentage of revenue, these expenses
increased to 38.6% for the most recent period from 24.1% 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 47 additional personnel within sales, marketing and product
development since June 30, 1998. Depreciation expense increased by $215,000
during the six months ended June 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 half of 1999, we wrote
off approximately $165,000 of older non-Year 2000 compliant computers and
telephone systems which were replaced with new equipment.
We recorded deferred compensation of $1.4 million in the six months ended
June 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 $119,000 during the
six months ended June 30, 1999. Deferred compensation at June 30, 1999 is being
amortized using a graded vesting method over the vesting period of the options.
Interest Income (Expense), Net. We recorded $285,000 of net interest income
in the six months ended June 30, 1999, as compared to $4,000 in the first six
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 $8.8 million used to repurchase stock during
the same period.
Income Tax Expense (Benefit). We recorded a $431,000 income tax benefit for
the six months ended June 30, 1999 to reflect income taxes recoverable from
prior years. We recorded a $1.3 million income tax provision for the six months
ended June 30, 1998, representing an effective tax rate of 40%. The effective
tax rate for the six months ended June 30, 1998 differs from the federal
statutory rate primarily due to state taxes.
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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. We also
added two new clients during 1998, who accounted for $9.1 million of revenue.
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 associated
with the addition of two new clients in 1998 and gross margins of newer
clients' products and services are typically lower during their start-up phase.
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 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, primarily due to lower margins associated
with the start up of sales of three new clients' products and services in 1997.
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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.
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 six quarters ended June 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
---------------------------------------------------
June Sept. Dec. June
March 31, 30, 30, 31, March 31, 30,
1998 1998 1998 1998 1999 1999
--------- ------- ------- ------- --------- -------
(in thousands)
<S> <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
Catalog/distributor... 4,024 2,141 -- -- -- --
------- ------- ------- ------- ------- -------
Total revenue....... 11,772 12,748 12,047 13,810 12,943 13,145
Cost of revenue:
CRM services.......... 5,284 7,357 7,885 9,670 8,719 8,815
Catalog/distributor... 3,283 1,852 -- -- -- --
------- ------- ------- ------- ------- -------
Total cost of
revenue............ 8,567 9,209 7,885 9,670 8,719 8,815
Gross profit:
CRM services.......... 2,464 3,250 4,162 4,140 4,224 4,330
Catalog/distributor... 741 289 -- -- -- --
------- ------- ------- ------- ------- -------
Total gross profit.. 3,205 3,539 4,162 4,140 4,224 4,330
Selling, general and
administrative
expenses............... 2,986 2,930 3,723 3,818 3,950 6,114
------- ------- ------- ------- ------- -------
Operating income
(loss)................. 219 609 439 322 274 (1,784)
Interest income
(expense), net....... (18) 22 66 68 139 146
Gain from sale of
catalog/distributor.. -- 2,525 -- -- -- 80
------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... 201 3,156 505 390 413 (1,558)
Income tax expense
(benefit)............ 80 1,263 202 157 164 (595)
------- ------- ------- ------- ------- -------
Net income (loss)....... $ 121 $ 1,893 $ 303 $ 233 $ 249 $ (963)
======= ======= ======= ======= ======= =======
</TABLE>
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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."
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 $8.0 million at June 30, 1999.
Working capital at June 30, 1999 was $9.6 million. We also have a $2.5 million
line of credit agreement that bears interest at the prime rate plus 1.0% (8.75%
at June 30, 1999) and expires in September 1999. We are currently in the
process of extending this line of credit as well as negotiating a second line
of credit for $5.0 million with another lender. No amounts under the current
line of credit were outstanding as of June 30, 1999. We have a $1.0 million
capital lease line outstanding at June 30, 1999, and, in August 1999, added an
additional $1.0 million capital lease line with a new lender.
Cash used by operating activities during the six months ended June 30, 1999
was $1.6 million compared to $1.5 million provided by operations for the same
period in the prior year. The decrease of $3.1 million was due primarily to the
change in net income of $2.7 million as we earned $2.0 million during the first
six months of 1998 but lost $714,000 during the first six months of 1999. In
addition, we increased our inventories by $560,000 in the first six months of
1999, due to increased revenue and the addition of new clients. This increase
in inventories compares to a decrease of $770,000 for the comparable period of
1998, primarily due to the sale of the catalog/distributor businesses. Deferred
taxes accounted for $1.2 million of the change in the period. Changes in other
operating assets and liabilities, primarily income taxes receivable, accounted
for the balance of the decrease in cash used by operating activities. Cash used
by operating activities for the six months ended June 30, 1998 included cash
used by the catalog/distributor businesses.
Cash used by investing activities during the six months ended June 30, 1999
was $945,000 compared to $1.6 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 six months ended June 30, 1999.
The total sales price is to be paid in three installments. We received the
first installment of $2.0 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 totalled $845,000 for
the six months ended June 30, 1999 compared to $391,000 for the six months
ended June 30, 1998. Capital expenditures consisted of additional computer and
software in both periods. In addition, we spent $320,000 in the six months
ended June 30, 1999 to replace our older non-Year 2000 compliant computers and
telephone systems.
Cash provided by financing activities during the six months ended June 30,
1999 was $4.9 million compared to a use of $27,000 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
$8.8 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 June 30, 1999, stockholders had
exercised rights to sell 5,368,065 shares back to us at an aggregate
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<PAGE>
price of approximately $8.8 million. Rights to sell back 623,895 shares at an
aggregate price of approximately $1.0 million were outstanding as of June 30,
1999 and will expire on September 30, 1999 if not exercised. During August
1999, rights to sell back 540,642 shares were exercised and such shares were
sold back to us at an aggregate price of approximately $887,000.
We believe that our cash, cash equivalents and short-term investments at
June 30, 1999, together with expected cash from operations and the net proceeds
from this offering, will be sufficient 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 has an interest rate which is based upon the lender's
prime rate plus 1.0%. As of June 30, 1999, no amounts were outstanding under
this credit facility. An increase in the interest rate on this credit facility
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. We have partially replaced our computer
information systems. As a result, we believe our systems are substantially
Year 2000 ready. We expect that modifications or replacements with respect
to any remaining Year 2000 issues will be made by the end of September
1999. Nevertheless, there can be no assurance that we will not experience
unexpected Year 2000 problems.
Third Party Suppliers and Partners. We use third-party equipment and
software that may or may not be Year 2000 compliant. Consequently, our
ability to address Year 2000 issues is, to a large extent, dependent upon
the Year 2000 readiness of these third parties' hardware and software
products. We have established Year 2000 readiness requirements for newly
acquired products and services and are contacting the third parties from
whom we have purchased any hardware and software products to validate that
such products are Year 2000 compliant. We intend to complete our
assessment, including the collection of Year 2000 readiness statements from
our partners and vendors, of these parties' products by the end of
September 1999.
Clients. We have collected preliminary statements of Year 2000 readiness
from each of our clients. Based on these preliminary statements, we believe
our clients' systems are substantially Year 2000 ready. In addition, we are
working with our clients to test data transmission and other integration
processes. If our clients' products or systems are not Year 2000 compliant,
our ability to sell our clients' products and services would be adversely
affected.
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<PAGE>
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 generally related to the operational costs
associated with time spent by our employees in the evaluation process and Year
2000 compliance in general. In the second quarter of 1999, we spent $320,000 to
replace our older non-Year 2000 compliant computers and telephone systems. We
do not expect the total costs of our Year 2000 compliance efforts to be
material. If, however, these costs are substantially higher than we anticipate,
it could have a material adverse effect on our business.
The Risks Associated with Our Year 2000 Issues. Any failure of our
equipment, software or services to operate properly could require us to incur
unanticipated expenses, which could seriously harm our business. Our failure to
make our Web site, network infrastructure and transaction processing systems
Year 2000 compliant could result in:
. a decrease in our sales;
. an increase in our allocation of resources to address Year 2000
problems without additional revenue commensurate with such
dedication of resources; and
. an increase in litigation costs relating to losses suffered by our
clients and our clients' customers due to Year 2000 problems.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies, third party service providers and others
outside of our control will be Year 2000 compliant. The failure of these
entities to be Year 2000 compliant could result in a systemic failure beyond
our control, such as a prolonged Internet, telecommunications or electrical
failure, which could also prevent us from operating our business, prevent
visitors from accessing Web sites or change the behavior of consumers accessing
Web sites, which could have a material adverse effect on our business.
Our Contingency Plans. Our Year 2000 readiness program includes the periodic
implementation of Year 2000 failure and disaster recovery scenarios designed to
test our ability to conduct business under unexpected conditions, including
power outages, Internet service outages, server or network hardware failure,
date-based data inconsistencies and other Year 2000 contingencies. Based upon
the results of these scenarios, we periodically update our preparedness
practices and policies, including provisions for short-term manual operations,
alternative data receipt and storage methodologies, secure off-site storage of
software and data restoration media, and the establishment of a Year 2000
restoration team. As a result of our scenario development and response
practices, we believe that our Year 2000 failure and disaster recovery plans
are adequate, but not all inclusive, because all contingencies cannot be
reasonably anticipated.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." We are required
to adopt FAS No. 133 for the year ending December 31, 2001. FAS No. 133
establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. Because we currently hold no derivative financial instruments and
do not currently engage in hedging activities, adoption of FAS No. 133 is not
expected to have a material impact on our financial position or results of
operations.
In March 1998, the American Institute of Certified Public Accountants issued
SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." SOP 98-1 requires that entities capitalize certain costs
related to internal use software once certain criteria have been met. We
adopted SOP 98-1 on January 1, 1999. The adoption of SOP 98-1 did not have a
material impact on our financial position or results of operations.
27
<PAGE>
BUSINESS
Introduction
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., Lotus Development Corporation, a subsidiary of IBM, Network
Computing Devices, Inc., Novell, Inc., Open Connect Systems Incorporated, 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. 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.
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.
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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 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,
29
<PAGE>
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.
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 in the United States and 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.
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. 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 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.
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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.
. 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,
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confirm and track orders online and download ordered 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.
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
</TABLE>
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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 six months ended June 30,
1999, sales to customers of SCO, FTP and Novell accounted for approximately
49%, 17% and 10%, 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.
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.
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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.
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 June 30, 1999, we had nine sales and
marketing professionals who were responsible for 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:
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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.
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
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<PAGE>
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.
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. The
federal Telephone Consumer Protection Act of 1991 limits the hours during which
telemarketers may call consumers and prohibits 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
this federal law. 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 June 30, 1999, we employed 179 persons. Our 101 service delivery
personnel are responsible for promoting and selling our clients' products and
building relationships with our clients' customers. Our nine sales and
marketing employees are responsible for promoting our services to new and
existing clients. We also have 27 product development personnel who develop the
computer, Internet, Web and telecommunications infrastructure that provides the
foundation for our service offerings. Our remaining 42 employees are in the
finance, operations and human resources departments. None of our employees is
represented by a labor union or is subject to a collective bargaining
agreement, nor have we experienced any work stoppage. We consider our
relationships with our employees to be good.
Properties
Our facility is located in one building in Scotts Valley, California. The
space is covered by leases which expire between February 2002 and December 2004
and cover approximately 69,000 square feet. We believe that this facility is
adequate for our current needs.
Legal Proceedings
We currently are not a party to any material legal proceedings and are not
aware of any pending or threatened litigation that would have a material
adverse effect on us or our business.
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MANAGEMENT
Executive Officers and Directors
The following table provides certain information with respect to our
executive officers and directors:
<TABLE>
<CAPTION>
Name Age Position
---- --- ------------------------------------------------------------
<S> <C> <C>
Michael Silton.......... 35 Chairman of the Board, President and Chief Executive Officer
Janice Wissler.......... 53 Executive Vice President, Worldwide Sales and Marketing
Robert Mason............ 43 Senior Vice President, Service Delivery
Frank Orasin............ 51 Vice President, Finance
Randy Lowe.............. 41 Vice President, Sales
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.
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.
Frank Orasin has served as Vice President, Finance since June 1999 and
served 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
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1992 to September 1993, Mr. Lowe was employed at Specialix, a manufacturer of
UNIX connectivity hardware.
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 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
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<PAGE>
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.
In March 1999, we repurchased at a price of $1.64 per share (i) 150,000
shares of common stock from Peter Silton; (ii) 2,033,222 shares from Michael
Silton, our Chief Executive Officer and son of Peter Silton; (iii) 58,800
shares from Petra Silton, a daughter of Peter Silton; (iv) 30,000 shares from
Triana Silton, a daughter of Peter Silton; and (v) 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
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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.
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.
41
<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.
42
<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 September
1999 and approved by the stockholders in September 1999. The 1999 plan will
become effective when the underwriting agreement for this offering is signed.
At that time, all outstanding options under our existing 1995 Plan and 1998
Plan will be transferred to the 1999 plan, and no further option grants will be
made under the 1995 Plan and 1998 Plan. The transferred options will continue
to be governed by their existing terms, unless our compensation committee
decides to extend one or more features of the 1999 plan to those options.
Except as otherwise noted below, the transferred options have substantially the
same terms as will be in effect for grants made under the discretionary option
grant program of our 1999 plan.
Share Reserve. 8,632,407 shares of our common stock have been authorized for
issuance under the 1999 plan. This share reserve consists of the number of
shares we estimate will be carried over from the 1995 Plan and 1998 Plan plus
an additional increase of 5,000,000 shares. The share reserve under our 1999
plan will automatically increase on the first trading day in January each year,
beginning with calendar year 2000, 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;
43
<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 will immediately become
exercisable for all the option shares, and all outstanding unvested
44
<PAGE>
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 initial 10,000-share automatic option
grant will vest in a series of eight successive quarterly
45
<PAGE>
installments upon the optionee's completion of each six 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 September 2009.
1999 Employee Stock Purchase Plan.
Introduction. Our 1999 Employee Stock Purchase Plan was adopted by the board
in September 1999 and approved by the stockholders in September 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 2000, 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.
46
<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 1,000
shares on any purchase date, and not more than 100,000 shares may be purchased
in total by all participants on any purchase date.
Reset Feature. If the fair market value per share of our common stock on any
purchase date is less than the fair market value per share on the start date of
the two-year offering period, then that offering period will automatically
terminate, and a new two-year offering period will begin on the next business
day. All participants in the terminated offering will be transferred to the new
offering period.
Change in Control. Should we be acquired by merger or sale of substantially
all of our assets or more than 50% of our voting securities, then all
outstanding purchase rights will automatically be exercised immediately prior
to the effective date of the acquisition. The purchase price will be equal to
85% of the market value per share on the participant's entry date into the
offering period in which an acquisition occurs or, if lower, 85% of the fair
market value per share immediately prior to the acquisition.
Plan Provisions. The following provisions will also be in effect under the
plan:
. The plan will terminate no later than the last business day of October
2009.
. The board may at any time amend, suspend or discontinue the plan.
However, certain amendments may require stockholder approval.
401(k) Plan
We sponsor a defined contribution plan intended to qualify under Section 401
of the Internal Revenue Code, or a 401(k) plan. Employees who are at least 18
years old may enter the plan as of the first day of their employment.
Participants may make pre-tax contributions to the plan of up to 20% of their
eligible earnings, subject to a statutorily prescribed annual limit. Each
participant is fully vested in his or her contributions and the investment
earnings. We match 25% of the first 6% of the employee's compensation
contributed to the plan. Our contribution vests 20% on each anniversary date.
Contributions by the participants, or us, to the plan and the income earned on
these contributions are generally not taxable to the participants until
withdrawn. Our matching contributions, if any, are generally deductible when
made. Participant and company matching contributions are held in trust as
required by law. Individual participants may direct the trustee to invest their
accounts in authorized investment alternatives.
47
<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 $8.6 million
during the six months ended June 30, 1999. Also, during 1996, 1997 and 1998,
and the six months ended June 30, 1999, we received marketing development fund
reimbursements of $674,000, $995,000, $982,000, and $447,000 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 (i) 2,033,222 shares from Michael
Silton our Chief Executive Officer who holds more than five percent of our
outstanding common stock; (ii) 1,048,904 shares from Laurel James, who holds
more than five percent of our outstanding common stock; (iii) 1,033,884 shares
from Bernard Jubb, who holds more than five percent of our outstanding common
stock; (iv) 350,000 shares from SCO, (v) 36,799 shares from Richard Marotta,
our Vice President, Information Technology (vi) 43,808 shares from Jill Silton,
mother of Michael Silton; (vii) 150,000 shares from Peter Silton, a director
and father of Michael Silton; (viii) 58,800 shares from Petra Silton, a sister
of Michael Silton and a daughter of Peter Silton; (ix) 30,000 shares from
Triana Silton, a sister of Michael Silton and a daughter of Peter Silton; and
(x) 8,000 shares from Peter Silton, Trustee of the Anthony and Deborah Romain
Irrevocable Trust.
In connection with the repurchase of common stock, SCO elected to receive a
put right to cause us, at SCO's option, to purchase additional shares of our
common stock. SCO subsequently exercised its put right, and we repurchased from
SCO 540,642 shares in June 1999 and 540,642 shares in August 1999, at a price
of $1.64 per share.
In February 1999, we loaned $100,000 to Mr. Jubb as an advance of a portion
of the purchase price for the anticipated repurchase of shares of common stock
held by Mr. Jubb. The loan was secured by 60,975 shares of common stock and was
repaid in April 1999 upon the repurchase of Mr. Jubb's shares as described
above. No interest was charged on the loan.
Richard Marotta, our Vice President, Information Technology, was the
President and sole stockholder of Your-Way Automation, Inc., which provided
information technology consulting services and sales of hardware to us. For
these services rendered to us, Your-Way received fees of $599,355 in 1996,
$774,842 in 1997 and $15,224 in 1998.
48
<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.
49
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of August 31, 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 August 31, 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>
Percent of Shares
Beneficially
Owned
-----------------
Number of Before After
Name of Beneficial Owner Shares Offering Offering
- ------------------------ ---------- -------- --------
<S> <C> <C> <C>
ABS Capital Partners III, L.P.
101 California Street, 47th Floor
San Francisco, California 94111................. 7,926,829 24.7%
Michael Silton (1)............................... 5,983,778 18.6
The Santa Cruz Operation, Inc.
425 Encinal Street
Santa Cruz, California 95060.................... 4,286,186 13.3
Laurel James (2)................................. 3,141,096 9.8
Bernard Jubb (3)................................. 3,056,116 9.5
Robert Mason (4)................................. 790,100 2.4
Chris Sterbenc................................... 303,749 *
Randy Lowe (5)................................... 567,000 1.7
Richard Marotta (6).............................. 630,250 1.9
Peter Silton (7)................................. 897,000 2.8
Robert Leff (8).................................. 410,000 1.3
Andrew Sheehan (9)............................... 7,926,829 24.7
Alok Mohan (10).................................. 4,526,186 14.0
All directors and executive officers as a group
(12 persons) (11)............................... 22,419,452 64.6%
</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.
(4) Includes options to purchase up to 790,100 shares of our common stock
exercisable within 60 days of August 31, 1999.
50
<PAGE>
(5) Includes options to purchase up to 372,000 shares of our common stock
exercisable within 60 days of August 31, 1999.
(6) Includes options to purchase up to 520,050 shares exercisable within 60
days of August 31, 1999.
(7) Includes 32,000 shares held by Peter Silton as Trustee of the Anthony and
Deborah Romain Irrevocable Trust and options to purchase up to 59,000
shares of our common stock exercisable within 60 days of August 31, 1999.
(8) Includes options to purchase up to 10,000 shares of our common stock
exercisable within 60 days of August 31, 1999.
(9) Includes 7,926,829 shares of Series C 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.
(10) Includes 4,286,186 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. Also includes options to purchase up to 240,000 shares
exercisable within 60 days of August 31, 1999.
(11) Includes options to purchase up to 2,879,459 shares exercisable within 60
days of August 31, 1999.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary of our capital stock and certain provisions of our
certificate of incorporation and bylaws does not purport to be complete. It is
qualified in its entirety by the provisions of the certificate and bylaws.
Copies of the certificate and bylaws have been filed as exhibits to the
registration statement of which this prospectus is a part. The discussion below
reflects changes to our capital structure and charter documents that will be
adopted in connection with our reincorporation in Delaware.
Upon the closing of this offering, our authorized capital stock will consist
of 80,000,000 shares of common stock, par value $0.001 per share, and
20,000,000 shares of preferred stock, par value $0.001 per share.
Common Stock
As of August 31, 1999, there were 32,145,724 shares of common stock
outstanding and held of record by approximately 85 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 shares of common stock in this offering, there
will be 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
52
<PAGE>
stockholders of opportunities to realize a premium on the shares of common
stock owned by them. In addition, they may adversely affect the prevailing
market price of the stock.
Delaware Law. After the closing of this offering, we will be subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation
Law. In general, Section 203 prohibits a publicly-held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date of the transaction in which the person
became an interested stockholder, unless the interested stockholder attained
that status with the approval of the board of directors or unless the business
combination is approved in a prescribed manner. "Business combinations" include
mergers, asset sales and other transactions resulting in a financial benefit to
the interested stockholder. Generally, an "interested stockholder" is a person
who, together with his affiliates and associates, owns, or within the prior
three years did own, 15% or more of the corporation's voting stock.
Special Stockholder Meetings. The certificate of incorporation will provide
that special meetings of the stockholders for any purpose or purposes, unless
required by law, may only be called by a majority of the entire board. This
limitation on the ability to call a special meeting could make it more
difficult for stockholders to initiate actions that are opposed by the board.
These actions could include the removal of an incumbent director or the
election of a stockholder nominee as a director. They could also include the
implementation of a rule requiring stockholder ratification of specific
defensive strategies that have been adopted by the board with respect to
unsolicited takeover bids. In addition, the limited ability to call a special
meeting of stockholders may make it more difficult to change the existing board
and management.
Classified Board of Directors. Prior to the closing of this offering, our
board will be divided into three classes of directors serving staggered three-
year terms. As a result, approximately one-third of the board of directors will
be elected each year. These provision are likely to increase the time required
for stockholders to change the composition of our board of directors. For
example, in general at least two annual meetings will be necessary for
stockholders to effect a change in the majority of our board of directors.
Subject to the rights of the holders of any outstanding series of preferred
stock, the certificate of incorporation will authorize only the board of
directors to fill vacancies, including newly created directorships. The
certificate of incorporation will also provide that directors may be removed by
stockholders only for cause and only by affirmative vote of holders of two-
thirds of the outstanding shares of voting stock.
Supermajority Vote to Amend Charter and Bylaws. Our certificate of
incorporation and bylaws will each provide that our bylaws may only be amended
by a two-thirds vote of the outstanding shares. In addition, our certificate of
incorporation will provide that its provisions related to bylaw amendments,
staggered board and indemnification may only be amended by a two-thirds vote of
the outstanding shares.
Indemnification of Directors and Officers
Under Section 145 of the Delaware General Corporation Law, we can indemnify
our directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act of 1933, as amended
(the "Securities Act"). Our certificate of incorporation will further provide
that we are authorized to indemnify our directors and officers to the fullest
extent permitted by law through the bylaws, agreement, vote of stockholders or
disinterested directors, or otherwise. Our bylaws will provide that we will
indemnify our directors and officers to the fullest extent permitted by law and
require us to advance litigation expenses upon our receipt of an undertaking by
the director or officer to repay such advances if it is ultimately determined
that the director or officer is not entitled to indemnification. Our bylaws
will further provide that rights conferred under such bylaws do not exclude any
other right such persons may have or acquire under any bylaw, agreement, vote
of stockholders or disinterested directors or otherwise.
53
<PAGE>
We also have directors' and officers' liability insurance. In addition,
concurrently with this offering, we will enter into agreements to indemnify our
directors and certain of our officers, in addition to the indemnification
provided for in the certificate of incorporation and bylaws. These agreements
will, among other things, indemnify our directors and certain of our officers
for certain expenses (including attorneys fees), judgments, fines and
settlement amounts incurred by such person in any action or proceeding,
including any action by or in our right, on account of services by that person
as our director or officer or as a director or officer of any subsidiary of
ours, or as a director or officer of any other company or enterprise that the
person provides services to at our request.
Our certificate of incorporation will provide that, pursuant to Delaware
Law, our directors shall not be liable for monetary damages for breach of the
directors' fiduciary duty of care to us or our stockholders. This provision in
the certificate of incorporation does not eliminate the duty of care, and in
appropriate circumstances equitable remedies such as injunctive or other forms
of non-monetary relief will remain available under Delaware Law. In addition,
each director will continue to be subject to liability for breach of the
director's duty of loyalty to Rainmaker or our stockholders, for acts or
omissions not in good faith or involving intentional misconduct or knowing
violations of law, for actions leading to improper personal benefit to the
director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware Law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws.
Registration Rights
After this offering, holders of approximately 12,936,521 shares of common
stock (or securities convertible into common stock) will be entitled to
registration rights with respect to their shares. Of these shares, 113,750
shares of common stock (or securities convertible into common stock) are
entitled only to "piggy-back" registration rights. Holders of securities with
registration rights may require us to register all or part of their shares at
any time following 180 days after this offering. In addition, these holders may
also require us to include their shares in future registration statements that
we file and may require us to register their shares on Form S-3. Upon
registration, these shares will be freely tradable in the public market without
restriction.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is U.S. Stock Transfer
Corporation.
Listing
We have applied to list our common stock for quotation on the Nasdaq
National Market under the symbol "RMKR."
54
<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 shares of common
stock outstanding ( shares if the underwriter's over-allotment
option is exercised in full). Of this amount, the shares offered
hereby will be available for immediate sale in the public market as of the date
of this prospectus. The remaining 32,145,724 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 to compliance with
the volume and other limitations of Rule 144.
<TABLE>
<CAPTION>
Approximate
Number of Shares
Days after the Eligible for
Date of this Prospectus Future Sale Comment
----------------------- ---------------- -------
<S> <C> <C>
Upon effectiveness...... Freely tradeable shares sold in this offering
180 days................ 32,145,724 Lock-up released; shares saleable under Rule 144
</TABLE>
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) 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 (i) one percent of the then outstanding shares of common stock or (ii) the
average weekly trading volume during the four calendar weeks preceding such
sale, subject to 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 stockholders have agreed pursuant
to the Underwriting Agreement 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.
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, 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 June 30, 1999 to purchase
approximately 3,632,407 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.
55
<PAGE>
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 9,632,407 shares of common stock subject to outstanding stock options
or reserved for issuance under our stock plans. This registration statement
will permit the resale of these shares by nonaffiliates in the public market
without restriction under the Securities Act, upon completion of the lock-up
period described above. See "Management." Shares registered under such
registration statement held by affiliates will be subject to Rule 144 volume
limitations. See "Management."
56
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement,
dated , 1999, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, Thomas Weisel Partners LLC
and SG Cowen Securities Corporation have severally agreed to purchase from us
the number of shares of common stock set forth opposite their names below:
<TABLE>
<CAPTION>
Number
of
Underwriters Shares
------------- ------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation...............
Thomas Weisel Partners LLC........................................
SG Cowen Securities Corporation...................................
----
Total...........................................................
====
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval by their counsel of certain legal matters and
to certain other conditions. The underwriters are obligated to purchase and
accept delivery of all the shares (other than those covered by the over-
allotment option described below) if they purchase any of the shares.
The underwriters initially propose to offer some of the shares directly to
the public at the public offering price set forth on the cover page of this
prospectus and some of the shares to certain dealers at the public offering
price less a concession not in excess of $ per share. The
underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per share on sales to certain other dealers. After the
initial offering of the shares to the public, the representatives may change
the public offering price and such concessions. The underwriters do not intend
to confirm sales to any accounts over which they exercise discretionary
authority.
The following table shows the underwriting fees to be paid to the
underwriters by us in connection with this offering. The amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of our common stock.
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share.......................................... $ $
Total.............................................. $ $
</TABLE>
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 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.
57
<PAGE>
We estimate our expenses relating to the offering to be $ .
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 stockholders 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. 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 61 filed public offerings of equity securities, of which 33 have
been completed, and has acted as a syndicate member in an additional 32 public
offerings of equity securities. Thomas Weisel Partners does not have any
material relationship with us or any of our officers, directors or other
controlling persons, except with respect to its contractual relationship with
us pursuant to the underwriting agreement entered into in connection with this
offering.
At our request, the underwriters have reserved up to five percent of the
shares offered hereby for sale at the initial public offering price to certain
of our employees, members of their immediate families and other individuals who
are our business associates. The number of shares available for sale to the
general public will be reduced to the extent these individuals purchase such
reserved shares. Any reserved shares not purchased will be offered by the
underwriters to the general public on the same basis as the other shares
offered hereby.
Application will be made to list our common stock 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., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation and a member of the selling group, is facilitating the distribution
of the shares sold in the offering over the Internet. The underwriters have
agreed to allocate a limited number of shares to DLJdirect Inc. for sale to its
brokerage account holders.
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
58
<PAGE>
overallot this offering, creating a syndicate short position. In addition, the
underwriters may bid for and purchase shares of common stock in the open market
to cover syndicate short positions or to stabilize the price of the common
stock. In addition, the underwriting syndicate may reclaim selling concessions
from syndicate members and selected dealers if they repurchase previously
distributed common stock in syndicate covering transactions, in stabilizing
transactions or otherwise. These activities may stabilize or maintain the
market price of the common stock above independent market levels. The
underwriters are not required to engage in these activities and may end any of
these activities at any time.
Pricing of this Offering
Prior to this offering, there has been no established market for our common
stock. The initial public offering price for the shares of common stock offered
by this prospectus will be determined by negotiation between us and the
representatives of the underwriters. The factors to be considered in
determining the initial public offering price include:
. the history of and the prospects for the industry in which we compete;
. our past and present operations;
. our historical results of operations;
. our prospects for future earnings;
. the recent market prices of securities of generally comparable
companies; and
. general conditions of the securities market at the time of this
offering.
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered by this
prospectus will be passed upon for us by Brobeck, Phleger & Harrison LLP,
Irvine, California. Certain legal matters relating to this offering will be
passed upon for the underwriters by Orrick, Herrington & Sutcliffe LLP, San
Francisco, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1997 and 1998 and June 30, 1999, and for each of the
three years in the period ended December 31, 1998 and for the six months ended
June 30, 1999, 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.
59
<PAGE>
ADDITIONAL 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.
60
<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 June 30, 1999........ F-3
Statements of Operations for the three years ended December 31, 1998 and
the six months ended June 30, 1998 (unaudited) and June 30, 1999........ F-4
Statements of Redeemable Convertible Preferred Stock and Stockholders'
Equity for the three years ended December 31, 1998 and the six months
ended June 30, 1999..................................................... F-5
Statements of Cash Flows for the three years ended December 31, 1998 and
the six months ended June 30, 1998 (unaudited) and June 30, 1999........ 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 June 30, 1999, 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 and for the six month period ended June 30,
1999. 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 June 30, 1999, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998 and for the six months ended June 30, 1999, 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>
Pro Forma
Dec. 31, Dec. 31, June 30, June 30,
1997 1998 1999 1999
-------- -------- -------- -----------
(unaudited)
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.............. $ 269 $ 4,608 $ 6,960
Short-term investments................. -- -- 1,000
Accounts receivable, less allowance for
sales returns and doubtful accounts of
$298 in 1997, $314 in 1998 and $366 in
1999.................................. 6,339 6,881 6,825
Current portion of note receivable..... 166 900 800
Other receivables...................... 162 52 174
Income taxes receivable................ -- 951 931
Inventories............................ 1,397 4 564
Deferred taxes......................... 318 354 467
Prepaid expenses and other current
assets................................ 285 278 124
------- ------- -------
Total current assets................... 8,936 14,028 17,845
Property and equipment, net............ 2,785 2,337 2,951
Note receivable, less current portion.. -- 720 --
Other noncurrent assets................ 191 124 132
------- ------- -------
Total assets........................... $11,912 $17,209 $20,928
======= ======= =======
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................... $ 6,002 $ 6,855 $ 5,968
Accrued compensation and related
liabilities........................... 684 1,220 1,357
Income taxes payable................... 431 -- --
Accrued liabilities.................... 393 585 628
Deferred revenue....................... 5 40 --
Current portion of capital lease
obligations........................... 114 205 301
------- ------- -------
Total current liabilities.............. 7,629 8,905 8,254
Capital lease obligations, less current
portion............................... 282 442 659
Convertible subordinated note payable.. 996 996 --
Deferred taxes......................... 176 1,389 982
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 June 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 June 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, 4,826,828 in 1999,
none pro forma; aggregate
liquidation preference at June 30,
1999--$1,689......................... -- -- 1,665 --
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, 335,939 in
1999, none pro forma; aggregate
liquidation preference at June 30,
1999--$499........................... 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, 17,581,816 in 1999, and
32,624,924 pro forma................. 21 21 17 33
Additional paid-in capital............. 223 741 1,479 16,937
Deferred stock compensation............ -- -- (1,259) (1,259)
Retained earnings (accumulated
deficit).............................. 1,224 3,738 (4,678) (4,678)
------- ------- ------- -------
Total stockholders' equity (net
capital deficiency)................. 1,852 4,500 (4,441) 11,033
------- ------- ------- -------
Total liabilities and stockholders'
equity (net capital deficiency)..... $11,912 $17,209 $20,928 $20,928
======= ======= ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
RAINMAKER SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December Six Months Ended
31, June 30,
------------------------- -------------------
1996 1997 1998 1998 1999
------- ------- ------- ----------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
CRM services.................. $12,384 $22,515 $44,212 $18,355 $26,088
Catalog/distributor........... 14,551 16,985 6,165 6,165 --
------- ------- ------- ------- -------
Total revenue................ 26,935 39,500 50,377 24,520 26,088
Cost of revenue:
CRM services.................. 7,929 14,810 30,196 12,641 17,534
Catalog/distributor........... 11,370 13,575 5,135 5,135 --
------- ------- ------- ------- -------
Total cost of revenue........ 19,299 28,385 35,331 17,776 17,534
Gross profit:
CRM services.................. 4,455 7,705 14,016 5,714 8,554
Catalog/distributor........... 3,181 3,410 1,030 1,030 --
------- ------- ------- ------- -------
Total gross profit........... 7,636 11,115 15,046 6,744 8,554
Selling, general and
administrative expenses....... 6,954 9,828 13,457 5,916 10,064
------- ------- ------- ------- -------
Operating income (loss)....... 682 1,287 1,589 828 (1,510)
Interest income (expense),
net........................... (35) (66) 138 4 285
Gain from sale of
catalog/distributor........... -- -- 2,525 2,525 80
------- ------- ------- ------- -------
Income (loss) before income
taxes........................ 647 1,221 4,252 3,357 (1,145)
Income tax expense (benefit)... 216 450 1,702 1,343 (431)
------- ------- ------- ------- -------
Net income (loss)............. $ 431 $ 771 $ 2,550 $ 2,014 $ (714)
======= ======= ======= ======= =======
Net income (loss) per share:
Basic......................... $ 0.02 $ 0.04 $ 0.12 $ 0.10 $ (0.14)
======= ======= ======= ======= =======
Diluted....................... $ 0.02 $ 0.03 $ 0.09 $ 0.07 $ (0.14)
======= ======= ======= ======= =======
Pro forma--basic.............. $ 0.10 $ (0.02)
======= =======
Pro forma--diluted............ $ 0.09 $ (0.02)
======= =======
Number of shares used in per
share computations:
Basic......................... 21,009 21,019 21,004 21,026 19,469
======= ======= ======= ======= =======
Diluted....................... 29,600 29,943 30,356 30,211 19,629
======= ======= ======= ======= =======
Pro forma--basic.............. 25,623 33,284
======= =======
Pro forma--diluted............ 30,356 33,444
======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
RAINMAKER SYSTEMS, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (NET CAPTIAL 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 Deferred
---------------- ----------------- ----------------- --------------- ------------------ Paid-in Stock
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Capital Compensation
-------- ------ --------- ------- --------- ------ ------- ------ ---------- ------ ---------- ------------
<CAPTION>
Retained
Earnings
(Accumulated
Deficit) Total
------------ --------
<S> <C> <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........... -- -- 8,536,585 13,809 -- -- -- -- -- -- -- --
Exercise of
employee stock
options......... -- -- -- -- -- -- -- -- 532,240 -- 58 --
Options issued
to a consultant
in exchange for
services........ -- -- -- -- -- -- -- -- -- -- 101 --
Conversion of
Series A
preferred stock
and debt into
Series D
preferred
stock........... (574,620) (977) -- -- 5,717,470 1,973 -- -- -- -- -- --
Conversion of
preferred stock
into common
stock........... -- -- -- -- (890,642) (308) (13,221) -- 956,747 1 307 --
Repurchase of
common stock.... -- -- -- -- -- -- -- -- (5,368,065) (5) (1,106) --
Deferred stock
compensation.... -- -- -- -- -- -- -- -- -- -- 1,378 (1,378)
Amortization of
deferred stock
compensation.... -- -- -- -- -- -- -- -- -- -- -- 119
Net loss........ -- -- -- -- -- -- -- -- -- -- -- --
Dividends
declared........ -- -- -- -- -- -- -- -- -- -- -- --
-------- ---- --------- ------- --------- ------ ------- ---- ---------- --- ------ -------
Balance at June
30, 1999......... -- $ -- 8,536,585 $13,809 4,826,828 $1,665 335,939 $ -- 17,581,816 $17 $1,479 $(1,259)
======== ==== ========= ======= ========= ====== ======= ==== ========== === ====== =======
<S> <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........... -- --
Exercise of
employee stock
options......... -- 58
Options issued
to a consultant
in exchange for
services........ -- 101
Conversion of
Series A
preferred stock
and debt into
Series D
preferred
stock........... -- --
Conversion of
preferred stock
into common
stock........... -- 308
Repurchase of
common stock.... (7,694) (8,805)
Deferred stock
compensation.... -- --
Amortization of
deferred stock
compensation.... -- 119
Net loss........ (714) (714)
Dividends
declared........ (8) (8)
------------ --------
Balance at June
30, 1999......... $(4,678) $(4,441)
============ ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
RAINMAKER SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
------------------------- -------------------
1996 1997 1998 1998 1999
------- ------- ------- ----------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net income (loss)............. $ 431 $ 771 $ 2,550 $ 2,014 $ (714)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization................ 258 550 635 363 658
Gain on sale of
catalog/distributor......... -- -- (2,525) (2,525) (80)
Loss on disposal of property
and equipment............... 191 -- -- -- 163
Issuance of stock for
consulting services......... -- -- -- -- 101
Deferred income taxes........ 74 (160) 1,177 663 (520)
Provision for sales returns
and doubtful accounts....... 11 142 16 77 52
Changes in operating assets
and liabilities:
Accounts receivable.......... (1,180) (3,049) (577) (41) 4
Other receivables............ (305) 143 410 83 (122)
Inventories.................. (40) (729) 948 770 (560)
Prepaid expenses and other
assets...................... (313) (57) (53) 93 146
Accounts payable............. 1,424 2,320 1,468 (815) (887)
Income taxes receivable,
net......................... 64 358 (1,382) 295 20
Accrued compensation and
related liabilities......... 152 380 536 426 137
Accrued liabilities.......... 596 (280) 73 151 61
Deferred revenue............. 97 (178) 35 (5) (40)
------- ------- ------- ------- -------
Net cash provided by (used in)
operating activities.......... 1,460 211 3,311 1,549 (1,581)
Investing activities
Proceeds from sale of
catalog/distributor, net of
liabilities paid............. -- -- 1,907 1,998 900
Purchases of property and
equipment.................... (1,565) (1,098) (874) (391) (845)
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 1,607 (945)
Financing activities
Increase in subordinated
convertible note payable..... 496 -- -- -- --
Proceeds from issuance of
preferred stock ............. -- -- -- -- 13,809
Repurchase of common stock.... -- -- -- -- (8,805)
Proceeds from issuance of
common stock................. 1 3 134 -- 58
Repayment of capital lease
obligations.................. (68) (62) (121) (27) (158)
Dividends paid................ -- -- (18) -- (26)
Line of credit repayment...... (25) -- -- -- --
------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities.......... 404 (59) (5) (27) 4,878
------- ------- ------- ------- -------
Net increase (decrease) in cash
and cash equivalents.......... 177 (990) 4,339 3,129 2,352
Cash and cash equivalents at
beginning of year............ 1,082 1,259 269 269 4,608
------- ------- ------- ------- -------
Cash and cash equivalents at
end of year.................. $ 1,259 $ 269 $ 4,608 $ 3,398 $ 6,960
======= ======= ======= ======= =======
Supplemental disclosure of cash
paid during the year
Interest paid................. $ 13 $ 30 $ 217 $ 13 $ 23
======= ======= ======= ======= =======
Income taxes paid, net of
refunds...................... $ 74 $ 252 $ 1,908 $ 385 $ 70
======= ======= ======= ======= =======
Supplemental schedule of
noncash investing and
financing activities
Acquisition of equipment under
capital leases............... $ 144 $ 327 $ 372 $ 143 $ 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
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 for the six months ended June 30, 1998 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 operating results and cash flows for the
interim period. Results for the six months ended June 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 upon receipt of the customer's written purchase order as all future
obligations to provide the services rests with the client outsource partner
company. The Company recognizes revenue from product sales at the time of
shipment.
Revenues from sales of professional services to clients are recognized as
the services are performed.
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)
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 six months
ended June 30, 1999, sales to customers of SCO, FTP and Novell accounted for
approximately 49%, 17% and 10% 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, 1998 and June
30, 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------- June 30,
1997 1998 1999
------ ------ --------
<S> <C> <C> <C>
Property and equipment, at cost:
Computer equipment..................................... $3,507 $2,864 $3,686
Furniture and fixtures................................. 322 451 498
Leasehold improvements................................. 25 100 99
------ ------ ------
3,854 3,415 4,283
Accumulated depreciation and amortization................ 1,069 1,078 1,332
------ ------ ------
$2,785 $2,337 $2,951
====== ====== ======
</TABLE>
As of June 30, 1999, property and equipment included amounts held under
capital leases of approximately $1.5 million and related accumulated
amortization of approximately $217,000.
F-8
<PAGE>
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
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 June 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 six months ended June
30, 1999 aggregated $1.4 million, $1.9 million, $1.4 million and $455,000,
respectively. The Company charged several vendors for reimbursement under
advertising programs of $1.5 million, $1.9 million, $1.7 million and $712,000
during the years ended December 31, 1996, 1997, 1998 and the six months ended
June 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)
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. 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 and convertible preferred stock issued
or granted for nominal consideration prior to the anticipated effective date of
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.
F-10
<PAGE>
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
2. Net Income (Loss) Per Share (Continued)
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>
Years Ended Six Months Ended
December 31, June 30,
-------------------- -------------------
1996 1997 1998 1998 1999
<S> <C> <C> <C> <C> <C>
------ ------ ------ ------ -------
<CAPTION>
(unaudited)
<S> <C> <C> <C> <C> <C>
Net Income (Loss) Per Common Share--
Basic
Net income (loss)................... $ 431 $ 771 $2,550 $2,014 $ (714)
Less: Preferred A dividends......... -- -- (36) -- --
Preferred C cumulative dividends.. -- -- -- -- (583)
Preferred D cumulative dividends.. -- -- -- -- (89)
Excess of redemption of preferred
stock over stated value........... -- -- -- -- (1,244)
------ ------ ------ ------ -------
Income (loss) available to common
stockholders....................... $ 431 $ 771 $2,514 $2,014 $(2,630)
====== ====== ====== ====== =======
Weighted-average shares of common
stock outstanding.................. 21,009 21,019 21,196 21,026 19,629
Less: weighted average shares
subject to repurchase -- -- (192) -- (160)
------ ------ ------ ------ -------
Weighted-average shares used in
computing basic net income (loss)
per common share................... 21,009 21,019 21,004 21,026 19,469
====== ====== ====== ====== =======
Basic net income (loss) per common
share.............................. $ 0.02 $ 0.04 $ 0.12 $ 0.10 $ (0.14)
====== ====== ====== ====== =======
Net Income (Loss) Per Common Share--
Diluted
Net income (loss)................... $ 431 $ 771 $2,550 $2,014 $ (714)
Add: Accrued interest on convertible
debenture.......................... 39 39 39 10 --
Less: Preferred C cumulative
dividends.......................... -- -- -- -- (583)
Preferred D cumulative dividends.. -- -- -- -- (89)
Excess of redemption of preferred
stock over stated value........... -- -- -- -- (1,244)
------ ------ ------ ------ -------
Income (loss) available to common
stockholders....................... $ 470 $ 810 $2,589 $2,024 $(2,630)
====== ====== ====== ====== =======
Weighted-average shares of common
stock outstanding.................. 21,009 21,019 21,196 21,026 19,629
Add:
Number of dilutive common stock
equivalents--options and warrants.. 1,128 1,461 1,697 1,722 --
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 --
------ ------ ------ ------ -------
Weighted-average shares used in
computing diluted net income (loss)
per common share................... 29,600 29,943 30,356 30,211 19,629
------ ------ ------ ------ -------
Diluted net income (loss) per common
share.............................. $ 0.02 $ 0.03 $ 0.09 $ 0.07 $ (0.14)
====== ====== ====== ====== =======
</TABLE>
F-11
<PAGE>
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
2. Net Income (Loss) Per Share (Continued)
<TABLE>
<CAPTION>
Six
Months
Years Ended Ended
December 31, June 30,
1998 1999
------------ --------
<S> <C> <C>
Pro Forma Net Income (Loss) Per Common Share--Basic
Net income (loss)....................................... $2,550 $ (714)
====== ======
Shares used above....................................... 21,004 19,469
Pro forma adjustment to reflect weighted effect of
assumed conversion of convertible preferred stock...... 4,619 13,815
------ ------
Shares used in computing pro forma basic net income
(loss) per common share (unaudited).................... 25,623 33,284
====== ======
Pro forma basic net income (loss) per common share
(unaudited)............................................ $ 0.10 $(0.02)
====== ======
Pro Forma Net Income (Loss) Per Common Share--Diluted
Net income (loss)....................................... $2,589 $ (714)
====== ======
Shares used above....................................... 30,356 19,629
Pro forma adjustment to reflect weighted effect of
assumed conversion of convertible preferred stock...... -- 13,815
------ ------
Shares used in computing pro forma diluted net income
(loss) per common share (unaudited).................... 30,356 33,444
====== ======
Pro forma diluted net income (loss) per share
(unaudited)............................................ $ 0.09 $(0.02)
====== ======
</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
six months ended June 30, 1999 because all such securities are anti-dilutive.
The total number of shares excluded from the calculation of diluted net loss
per common share was 16,434,589 for the six months ended June 30, 1999.
F-12
<PAGE>
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
3. Cash Equivalents and Short-Term Investments
The following is a summary of available-for-sale securities. All available-
for-sale securities at June 30, 1999 have a maturity of less than one year. As
of December 31, 1997 and 1998 and June 30, 1999 the fair market value of
available-for-sale securities approximates their carrying value (in thousands):
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1997 1998 1999
------------ ------------ --------
<S> <C> <C> <C>
Money market fund........................... $ 559 $ 996 $ 2,664
Commercial paper............................ -- -- 2,994
Government securities....................... -- 3,200 1,895
Municipal bonds............................. -- -- 1,000
----- ------- -------
$ 559 $ 4,196 $ 8,553
===== ======= =======
Classified as:
Cash equivalents............................ $ 559 $ 4,196 $ 7,553
Short-term investments...................... -- -- 1,000
----- ------- -------
$ 559 $ 4,196 $ 8,553
===== ======= =======
</TABLE>
4. Line of Credit Agreement
At June 30, 1999, the Company had a $2,500,000 line of credit agreement with
a bank which expires in September 1999. Advances under the line are limited to
70% of eligible accounts receivable. Advances bear interest at 1% plus the
bank's prime rate (8.75% at June 30, 1999). Advances are secured by
substantially all the Company's assets. At June 30, 1999, there were no amounts
outstanding under the line and $2,500,000 was available.
The loan agreement contains certain restrictive covenants and conditions,
including the requirement to maintain certain key financial ratios and
restrictions on the Company's ability to enter into certain transactions. The
Company has obtained a waiver from the bank which relieves them of the
prohibition to pay dividends through August 31, 1999.
F-13
<PAGE>
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
5. Debt and Commitments
Debt
In 1995, the Company entered into a $1,000,000 subordinated convertible
debenture agreement, a warrant agreement, and a distribution agreement. On
January 29, 1999, the Company and the subordinated convertible debenture holder
entered into an Exchange Agreement where this debenture and related warrant
were converted into 2,844,370 shares of Series D Convertible Participating
Preferred Stock.
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
June 30, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Leases Operating Leases
-------------- ----------------
<S> <C> <C>
2000.......................................... $ 360 $ 981
2001.......................................... 330 896
2002.......................................... 293 696
2003.......................................... 92 577
2004.......................................... 8 349
Thereafter.................................... -- 139
----- ------
Total minimum lease payments................ 1,083 $3,638
======
Less amount representing interest............. 123
-----
Present value of minimum lease payments....... 960
Less current portion.......................... 301
-----
Obligations under capital leases due after one
year......................................... $ 659
=====
</TABLE>
Rent expense under operating leases was approximately $338,000, $458,000,
and $522,000 in 1996, 1997, and 1998, respectively, and approximately $494,000
for the six months ended June 30, 1999.
6. 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-14
<PAGE>
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
6. Income Taxes (Continued)
The federal and state income tax provision (benefit) for the years ended
December 31, 1996, 1997 and 1998 and the six months ended June 30, 1999 is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------ June 30,
1996 1997 1998 1999
---- ----- ------ --------
<S> <C> <C> <C> <C>
Current:
Federal........................................... $122 $ 500 $ 420 $ 55
State............................................. 20 110 105 34
---- ----- ------ -----
142 610 525 89
Deferred:
Federal........................................... 68 (130) 915 (399)
State............................................. 6 (30) 262 (121)
---- ----- ------ -----
74 (160) 1,177 (520)
---- ----- ------ -----
$216 $ 450 $1,702 $(431)
==== ===== ====== =====
</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,
------------------ June 30,
1996 1997 1998 1999
---- ---- ------ --------
<S> <C> <C> <C> <C>
Provision (benefit) computed at federal statutory
rate............................................. $220 $415 $1,446 $(389)
Change in valuation allowance..................... (14) -- -- --
Research and development tax credit............... (28) (28) -- --
California franchise tax expense (benefit), net of
federal effect................................... 31 53 242 (42)
Nondeductible expenses............................ 7 10 14 --
---- ---- ------ -----
$216 $450 $1,702 $(431)
==== ==== ====== =====
</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
and June 30, 1999 are (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------- June 30,
1997 1998 1999
----- ------- --------
<S> <C> <C> <C>
Deferred tax assets:
Accounts receivable reserve.......................... $ 129 $ 135 $ 157
Inventory reserves................................... 63 53 47
Accrued expenses..................................... 126 166 263
----- ------- -----
Total deferred tax assets.............................. 318 354 467
Deferred tax liabilities:
Tax over book depreciation........................... (176) (882) (713)
Installment gain..................................... -- (507) (269)
===== ======= =====
Total deferred tax liabilities......................... (176) (1,389) (982)
===== ======= =====
Net deferred tax assets (liabilities).................. $ 142 $(1,035) $(515)
===== ======= =====
</TABLE>
F-15
<PAGE>
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
7. 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
June 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 June 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 $583,000 accumulated as of June 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.
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.
F-16
<PAGE>
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
7. Stockholders' Equity (Continued)
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 $89,000 accumulated as of June 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
June 30, 1999, the Company had repurchased a total of 5,368,065 shares for
approximately $8.8 million, and rights to sell back 623,895 shares at $1.64 per
share remained outstanding. These rights expire on September 30, 1999.
In August 1999, a stockholder exercised its right to sell back 540,642
common shares to the Company at an aggregate purchase price of approximately
$887,000.
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.
Stock Option and Stock Issuance Plans
In 1995, the Company adopted the 1995 Stock Option/Issuance Plan (the 1995
Stock Option Plan) under which 2,873,100 shares have been reserved for future
issuance as of June 30, 1999. In 1998, the Company adopted the 1998 Stock
Option/Issuance Plan (the 1998 Stock Option Plan) under which 3,170,000 shares
have been reserved for future issuance as of June 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 become exercisable 25% after the first year and 2.1%
per month thereafter, then expire no later than ten years from the date of
grant.
F-17
<PAGE>
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
7. Stockholders' Equity (Continued)
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 six months ended June 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>
Six Months
Years Ended December 31, Ended
------------------------ June 30,
1996 1997 1998 1999
------------------------ ----------
<S> <C> <C> <C> <C>
Pro forma net income (loss)................ $ 419 $ 740 $ 2,499 $ (820)
======= ======= ======== ======
Pro forma net income (loss) per share:
--basic.................................. $ 0.02 $ 0.04 $ 0.12 $(0.04)
======= ======= ======== ======
--diluted................................ $ 0.01 $ 0.02 $ 0.08 $(0.04)
======= ======= ======== ======
</TABLE>
The weighted-average fair value of options granted during 1996, 1997, 1998
and for the six months ended June 30, 1999 was $0.06, $0.08, $0.08 and $0.08,
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 six-months ended June 30, 1999 with an exercise price below the deemed fair
value of the Company's common stock on the date of grant was $1.60.
F-18
<PAGE>
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
7. Stockholders' Equity (Continued)
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................................................. 1,196,494 $1.65
Exercised............................................... (532,240) $0.10
Canceled................................................ (283,238) $0.62
---------
Balance at June 30, 1999.................................. 3,632,407 $0.69
=========
</TABLE>
At December 31, 1998 and June 30, 1999, 2,458,985 and 1,545,729 shares,
respectively, were available for future grant under the Plans.
The following summarizes information about stock options outstanding as of
June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding
------------------------------------
Weighted
Average
Remaining
Contractual
Outstanding Life (in Number
Exercise Price Number Years) Exerciseable
- -------------- ----------- ----------- ------------
<S> <C> <C> <C>
$0.06...................................... 1,038,680 6.16 989,276
$0.32...................................... 631,570 7.07 464,785
$0.44...................................... 859,329 8.67 446,636
$0.50...................................... 64,885 9.41 --
$0.83...................................... 191,908 9.65 291
$1.64...................................... 504,335 9.81 50,000
$2.50...................................... 341,700 9.95 --
--------- ---------
3,632,407 8.02 1,950,988
========= =========
</TABLE>
In connection with the grant of certain options to employees during the six
months ended June 30, 1999, the Company recorded deferred compensation of
approximately $1.4 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. The compensation expense of $119,000
during the six months ended June 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.
F-19
<PAGE>
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
7. Stockholders' Equity (Continued)
Common Stock Reserved for Future Issuance
Shares of common stock of the Company reserved for future issuance at June
30, 1999 are as follows:
<TABLE>
<S> <C>
Warrants............................................................. 113,750
Stock options........................................................ 5,178,136
Series B preferred stock............................................. 1,679,695
Series C preferred stock............................................. 8,536,585
Series D preferred stock............................................. 4,826,828
----------
20,334,994
==========
</TABLE>
8. Related Party Transactions
During 1996, 1997, 1998 and the six months ended June 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 $8.6
million, respectively. At December 31, 1997 and 1998 and at June 30, 1999, the
Company owed that stockholder $3.2 million, $1.0 million, and $1.3 million,
respectively, for such purchases. Also, during 1996, 1997 and 1998, and the six
months ended June 30, 1999, the Company received marketing development fund
reimbursements of $674,000, $995,000, $982,000, and $447,000 respectively, from
that stockholder. Amounts totaling $433,000, $341,000 and $403,000 were
receivable from that stockholder at December 31, 1997 and 1998 and June 30,
1999, respectively.
9. 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 six months ended June 30, 1999, the Company made cash
contributions to the plan of $30,000, $37,000, $62,000 and $47,000,
respectively.
10. 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 June 30, 1999, as adjusted for the
assumed conversion of convertible preferred stock based on shares of
convertible preferred stock outstanding at June 30, 1999, is disclosed on the
balance sheet.
F-20
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
RAINMAKER SYSTEMS, INC.
[logo]
Shares of Common Stock
----------------
PROSPECTUS
----------------
Donaldson, Lufkin & Jenrette Thomas Weisel Partners LLC
SG Cowen
----------------
DLJdirect Inc.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell those securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor
any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of the company
have not changed since the date hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 1999 (25 days after the date of this prospectus), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting fees, payable in connection with the sale and distribution of the
securities being registered. All amounts are estimated except the Securities
and Exchange Commission and NASD registration fees. All of the expenses below
will be paid by Rainmaker.
<TABLE>
<CAPTION>
Item
----
<S> <C>
Registration fee.................................................... $13,900
NASD filing fee..................................................... 5,500
Nasdaq National Market listing fee.................................. *
Blue sky fees and expenses.......................................... *
Printing and engraving expenses..................................... *
Legal fees and expenses............................................. *
Accounting fees and expenses........................................ *
Transfer Agent and Registrar fees................................... *
Miscellaneous....................................................... *
-------
Total............................................................. $
=======
</TABLE>
- --------
* To be filed by amendment.
Item 14. Indemnification of Directors and Officers.
Under Section 145 of the Delaware General Corporation Law, we can indemnify
our directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act of 1933, as amended
(the "Securities Act"). Our certificate of incorporation will further provide
that we are authorized to indemnify our directors and officers to the fullest
extent permitted by law through the bylaws, agreement, vote of stockholders or
disinterested directors, or otherwise. Our bylaws will provide that we will
indemnify our directors and officers to the fullest extent permitted by law and
require us to advance litigation expenses upon our receipt of an undertaking by
the director or officer to repay such advances if it is ultimately determined
that the director or officer is not entitled to indemnification. Our bylaws
will further provide that rights conferred under such bylaws do not exclude any
other right such persons may have or acquire under any bylaw, agreement, vote
of stockholders or disinterested directors or otherwise.
We also have directors' and officers' liability insurance. In addition,
concurrently with this offering, we will enter into agreements to indemnify our
directors and certain of our officers in addition to the indemnification
provided for in the certificate of incorporation and bylaws. These agreements
will, among other things, indemnify our directors and certain of our officers
for certain expenses (including attorneys fees), judgments, fines and
settlement amounts incurred by such person in any action or proceeding,
including any action by or in our right, on account of services by that person
as a director or officer of Rainmaker or as a director or officer of any
subsidiary of Rainmaker, or as a director or officer of any other company or
enterprise that the person provides services to at the request of Rainmaker.
Our certificate of incorporation will provide that, pursuant to Delaware
Law, our directors shall not be liable for monetary damages for breach of the
directors' fiduciary duty of care to Rainmaker and our stockholders. This
provision in the certificate of incorporation does not eliminate the duty of
care, and in appropriate circumstances equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware Law. In
addition, each director will continue to
II-1
<PAGE>
be subject to liability for breach of the director's duty of loyalty to
Rainmaker or our stockholders, for acts or omissions not in good faith or
involving intentional misconduct or knowing violations of law, for actions
leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware Law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
The Underwriting Agreement provides for indemnification by the underwriters
of Rainmaker and its officers and directors, and by Rainmaker of the
underwriters, for certain liabilities arising under the Securities Act or
otherwise.
Item 15. Recent Sales of Unregistered Securities
The following is a summary of transactions by Rainmaker during the past
three years involving sales of our securities that were not registered under
the Securities Act of 1933, as amended:
In March 1994, we issued a warrant to Silicon Valley Bank to purchase 22,750
shares of Series B preferred stock at an exercise price of $1.03 per share in
consideration of a line of credit to borrow funds with an expiration date of
March 1999. We extended the expiration date of this warrant to March 8, 2000 in
consideration of an amendment to the credit facility dated as of April 15,
1998.
On February 12, 1999, we issued 8,536,585 shares of Series C preferred stock
at $1.64 per share for an aggregate price of approximately $14 million to
certain accredited investors.
On February 12, 1999, we issued 5,717,470 shares of Series D preferred stock
to The Santa Cruz Operation, Inc. ("SCO") in exchange for all of the securities
previously held by SCO, including a convertible debenture in the principal
amount of $995,529, warrants to purchase 2,844,370 shares of common stock and
Series A preferred stock convertible into 2,873,100 shares of common stock.
From January 1, 1996 to June 30, 1999, we have granted options to purchase
an aggregate of 4,087,002 shares of common stock to our directors, executive
officers, employees and consultants at exercise prices of $0.06 to $2.50 per
share. As of June 30, 1999, options to purchase 993,134 shares at an weighted
exercise price of $0.02 per share had been exercised.
In April and May 1999, we granted put rights to six existing stockholders to
sell back to us up to 1,164,537 shares of common stock at $1.64 per share. One
stockholder, SCO, subsequently exercised its put right, and we purchased from
SCO 540,642 shares in June 1999 and 540,642 shares in August 1999, at a price
of $1.64 per share.
The sale and issuance of securities in the above transactions were deemed to
be exempt from registration under the Securities Act by virtue of Section 4(2)
or Rule 701 thereof, or Regulation D, as transactions by an issuer not
involving a public offering. Appropriate legends are affixed to the stock
certificates issued in such transactions. Similar legends were imposed in
connection with any subsequent sales of any such securities. All recipients
either received adequate information about Rainmaker or had access, through
employment or other relationships, to such information.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
The following Exhibits are attached hereto and incorporated herein by
reference.
<TABLE>
<C> <S>
1.1 *Form of Underwriting Agreement.
3.1 *Certificate of Incorporation of Rainmaker Systems, Inc. to be filed
with the Delaware Secretary of State in October 1999.
3.2 *Bylaws of Rainmaker Systems, Inc. to be adopted in October 1999.
4.1 *Specimen certificate representing shares of common stock of Rainmaker
Systems, Inc.
4.2 *Registration Rights Agreement dated March 8, 1994 between UniDirect
Corporation and Silicon Valley Bank.
4.3 *Registration Rights Agreement dated February 12, 1999 among Rainmaker
Systems, Inc., ABS Capital Partners III, L.P., H & Q Rainmaker
Investors, L.P., Hambrecht & Quist California, Hambrecht & Quist
Employee Venture Fund, L.P. II and The Santa Cruz Operation, Inc.
5.1 *Opinion of Brobeck, Phleger & Harrison LLP.
10.1 *Form of Indemnification Agreement.
10.2 *1999 Stock Incentive Plan.
10.3 *1999 Stock Purchase Plan.
10.4 *Amended and Restated Loan and Security Agreement dated May 9, 1997
between UniDirect Corporation and Silicon Valley Bank, as amended by
letter agreement dated April 15, 1998.
10.5 1995 Stock Option/Stock Issuance Plan, together with form of Notice
of Grant of Stock Option, Stock Option Agreement, Stock Purchase
Agreement and Stock Issuance Agreement.
10.6 1998 Stock Option/Stock Issuance Plan, together with form of Notice
of Grant of Stock Option, Stock Option Agreement, Stock Purchase
Agreement and Stock Issuance Agreement.
10.7 *Net Lease Agreement dated July 29, 1996 between UniDirect Corporation
and Borland International, Inc., together with amendments dated
February 27, 1997, April 14, 1998 and November 15, 1998.
10.8 *Net Lease Agreement dated November 5, 1998 between UniDirect
Corporation and Inprise Corporation.
10.9 *Warrant to Purchase Stock dated March 8, 1994 issued to Silicon
Valley Bank, as amended by letter agreement dated April 15, 1998.
10.10 *Stock Purchase Agreement dated January 29, 1999 among Rainmaker
Systems, Inc., ABS Capital Partners III, L.P., H & Q Rainmaker
Investors, L.P., Hambrecht & Quist California and Hambrecht & Quist
Employee Venture Fund, L.P. II.
10.11 *Exchange Agreement dated January 29, 1999 between Rainmaker Systems,
Inc. and The Santa Cruz Operation, Inc.
10.12 *Asset Purchase Agreement dated May 18, 1998 between UniDirect
Corporation and Savoir Technology Group, Inc.
10.13 *Master Lease Agreement dated May 5, 1999 between Rainmaker Systems,
Inc. and Celtic Leasing Corp.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.14 *Loan and Security Agreement dated October 28, 1997 between UniDirect
Corporation and MetLife Capital Corporation.
10.15 *Compensation Agreement dated January 1, 1995 between UniDirect
Corporation and Richard Marotta, together with Notice of Grant of
Stock Option and Stock Option Agreement.
10.16 *Compensation Agreement dated November 1, 1995 between UniDirect
Corporation and Richard Marotta, together with Notice of Grant of
Stock Option and Stock Option Agreement.
10.17 *Separation Agreement and Release dated September 30, 1997 between
UniDirect Corporation and Bernard Jubb, together with Amendment No. 1
to Separation Agreement and Release dated January 27, 1997 and the
Promissory Note and Security Agreement dated February 5, 1999.
10.18 *Separation Agreement and Release dated April 8, 1999 between
Rainmaker Systems, Inc. and Chris Sterbenc.
23.1 Consent of Ernst & Young LLP.
23.2 *Consent of Brobeck, Phleger & Harrison LLP (contained in Exhibit
5.1).
24.1 Power of Attorney (contained on the signature page hereof).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
(b) Financial Statement Schedules
The following financial statement schedule for the three years in the period
ended December 31, 1998 and for the six months ended June 30, 1999 should be
read in conjunction with the financial statements of Rainmaker Systems, Inc.
filed as part of this Registration Statement.
.Schedule II--Valuation and qualifying accounts
Schedules other than that listed above have been omitted because the
information required to be set forth therein is not applicable or is shown in
the financial statements or notes thereto.
II-4
<PAGE>
Item 17. Undertakings
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and this offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Palo Alto, State of
California, on the 2nd day of September, 1999.
RAINMAKER SYSTEMS, INC.
/s/ Michael Silton
By: _________________________________
Michael Silton,
Chairman of the Board, President
and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, the undersigned hereby constitute and
appoint Michael Silton his true and lawful attorney-in-fact and agent with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, or any related
registration statement filed pursuant to Rule 462(b) under the Securities Act
of 1933, and to file the same, with exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite or necessary to be done in connection
therewith, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Michael Silton Chairman of the Board, September 2, 1999
____________________________________ President and Chief
Michael Silton Executive Officer
(principal executive
officer)
/s/ Frank Orasin Secretary and Vice September 2, 1999
____________________________________ President, Finance
Frank Orasin (principal financial and
accounting officer)
Director
____________________________________
Robert Leff
Director
____________________________________
Alok Mohan
/s/ Peter Silton Director September 2, 1999
____________________________________
Peter Silton
/s/ Andrew Sheehan Director August 31, 1999
____________________________________
Andrew Sheehan
</TABLE>
<PAGE>
Schedule II-Valuation and Qualifying Accounts
A schedule of the allowance for sales returns and doubtful accounts is
presented below (in thousands):
<TABLE>
<CAPTION>
Balance Additions
at Charged Write-offs Balance at
Beginning to Costs and End
Description of Period and Expenses Recoveries of Period
----------- --------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Allowance for sales returns and
doubtful accounts:
Six months ended June 30, 1999... $314 $ 80 $ 28 $366
Year ended December 31, 1998..... $298 $286 $270 $314
Year ended December 31, 1997..... $156 $338 $196 $298
Year ended December 31, 1996..... $145 $278 $267 $156
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
1.1 *Form of Underwriting Agreement.
3.1 *Certificate of Incorporation of Rainmaker Systems, Inc. to be filed
with the Delaware Secretary of State in October 1999.
3.2 *Bylaws of Rainmaker Systems, Inc. to be adopted in October 1999.
4.1 *Specimen certificate representing shares of common stock of Rainmaker
Systems, Inc.
4.2 *Registration Rights Agreement dated March 8, 1994 between UniDirect
Corporation and Silicon Valley Bank.
4.3 *Registration Rights Agreement dated February 12, 1999 among Rainmaker
Systems, Inc., ABS Capital Partners III, L.P., H & Q Rainmaker
Investors, L.P., Hambrecht & Quist California, Hambrecht & Quist
Employee Venture Fund, L.P. II and The Santa Cruz Operation, Inc.
5.1 *Opinion of Brobeck, Phleger & Harrison LLP.
10.1 *Form of Indemnification Agreement.
10.2 *1999 Stock Incentive Plan.
10.3 *1999 Stock Purchase Plan.
10.4 *Amended and Restated Loan and Security Agreement dated May 9, 1997
between UniDirect Corporation and Silicon Valley Bank, as amended by
letter agreement dated April 15, 1998.
10.5 1995 Stock Option/Stock Issuance Plan, together with form of Notice
of Grant of Stock Option, Stock Option Agreement, Stock Purchase
Agreement and Stock Issuance Agreement.
10.6 1998 Stock Option/Stock Issuance Plan, together with form of Notice
of Grant of Stock Option, Stock Option Agreement, Stock Purchase
Agreement and Stock Issuance Agreement.
10.7 *Net Lease Agreement dated July 29, 1996 between UniDirect Corporation
and Borland International, Inc., together with amendments dated
February 27, 1997, April 14, 1998 and November 15, 1998.
10.8 *Net Lease Agreement dated November 5, 1998 between UniDirect
Corporation and Inprise Corporation.
10.9 *Warrant to Purchase Stock dated March 8, 1994 issued to Silicon
Valley Bank, as amended by letter agreement dated April 15, 1998.
10.10 *Stock Purchase Agreement dated January 29, 1999 among Rainmaker
Systems, Inc., ABS Capital Partners III, L.P., H & Q Rainmaker
Investors, L.P., Hambrecht & Quist California and Hambrecht & Quist
Employee Venture Fund, L.P. II.
10.11 *Exchange Agreement dated January 29, 1999 between Rainmaker Systems,
Inc. and The Santa Cruz Operation, Inc.
10.12 *Asset Purchase Agreement dated May 18, 1998 between UniDirect
Corporation and Savoir Technology Group, Inc.
10.13 *Master Lease Agreement dated May 5, 1999 between Rainmaker Systems,
Inc. and Celtic Leasing Corp.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.14 *Loan and Security Agreement dated October 28, 1997 between UniDirect
Corporation and MetLife Capital Corporation.
10.15 *Compensation Agreement dated January 1, 1995 between UniDirect
Corporation and Richard Marotta, together with Notice of Grant of
Stock Option and Stock Option Agreement.
10.16 *Compensation Agreement dated November 1, 1995 between UniDirect
Corporation and Richard Marotta, together with Notice of Grant of
Stock Option and Stock Option Agreement.
10.17 *Separation Agreement and Release dated September 30, 1997 between
UniDirect Corporation and Bernard Jubb, together with Amendment No. 1
to Separation Agreement and Release dated January 27, 1997 and the
Promissory Note and Security Agreement dated February 5, 1999.
10.18 *Separation Agreement and Release dated April 8, 1999 between
Rainmaker Systems, Inc. and Chris Sterbenc.
23.1 Consent of Ernst & Young LLP.
23.2 *Consent of Brobeck, Phleger & Harrison LLP (contained in Exhibit
5.1).
24.1 Power of Attorney (contained on the signature page hereof).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
Exhibit 10.5
UNIDIRECT CORPORATION
1995 STOCK OPTION/STOCK ISSUANCE PLAN
-------------------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1995 Stock Option/Stock Issuance Plan is intended to promote the
interests of UniDirect Corporation, a California corporation, by providing
eligible persons with the opportunity to acquire a proprietary interest, or
otherwise increase their proprietary interest, in the Corporation as an
incentive for them to remain in the service of the Corporation.
Capitalized terms herein shall have the meanings assigned to such
terms in the Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into two (2) separate components: the
Option Grant Program and the Stock Issuance Program. Under the Option Grant
Program, eligible persons may, at the discretion of the Plan Administrator, be
granted options to purchase shares of Common Stock. Under the Stock Issuance
Program, eligible persons may, at the discretion of the Plan Administrator, be
issued shares of Common Stock directly, either through the immediate purchase of
such shares or as a bonus for services rendered the Corporation (or any Parent
or Subsidiary).
B. The provisions of Articles One and Four shall apply to both the
Option Grant and Stock Issuance Programs and shall accordingly govern the
interests of all persons under the Plan.
III. ADMINISTRATION OF THE PLAN
A. The Plan shall be administered by the Board. However, any or all
administrative functions otherwise exercisable by the Board may be delegated to
the Committee. Members of the Committee shall serve for such period of time as
the Board may determine and shall be subject to removal by the Board at any
time. The Board may also at any time terminate the functions of the Committee
and reassume all powers and authority previously delegated to the Committee.
<PAGE>
B. The Plan Administrator shall have full power and authority
(subject to the provisions of the Plan) to establish such rules and regulations
as it may deem appropriate for proper administration of the Plan and to make
such determinations under, and issue such interpretations of, the Plan and any
outstanding options and stock issuances as it may deem necessary or advisable.
Decisions of the Plan Administrator shall be final and binding on all parties
who have an interest in the Plan or any option or stock issuance thereunder.
IV. ELIGIBILITY
A. The persons eligible to participate in the Plan are as follows:
(i) Employees,
(ii) non-employee members of the Board or the non-employee
members of the board of directors of any Parent or Subsidiary, and
(iii) consultants who provide services to the Corporation
(or any Parent or Subsidiary).
B. The Plan Administrator shall have full authority to determine,
(i) with respect to the option grants under the Option Grant Program, which
eligible persons are to receive option grants, the time or times when such
option grants are to be made, the number of shares to be covered by each such
grant, the status of the granted option as either an Incentive Option or a Non-
Statutory Option, the time or times at which each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding, and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive stock issuances, the time or times when such issuances
are to be made, the number of shares to be issued to each Participant, the
vesting schedule (if any) applicable to the issued shares and the consideration
to be paid by the Participant for such shares.
C. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Option Grant Program or to effect stock
issuances in accordance with the Stock Issuance Program.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock. The maximum number of shares of Common
Stock which may be issued over the term of the Plan shall not exceed 574,620
shares.
2.
<PAGE>
B. Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent (i) the options
expire or terminate for any reason prior to exercise in full or (ii) the options
are cancelled in accordance with the cancellation-regrant provisions of Article
Two. All shares issued under the Plan, whether or not those shares are
subsequently repurchased by the Corporation pursuant to its repurchase rights
under the Plan, shall reduce on a share-for-share basis the number of shares of
Common Stock available for subsequent issuance under the Plan.
C. In the event any change is made to the Common Stock by reason of
any stock split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the outstanding Common Stock as a
class without the Corporation's receipt of consideration, appropriate
adjustments shall be made to (i) the maximum number and/or class of securities
issuable under the Plan and (ii) the number and/or class of securities and the
exercise price per share in effect under each outstanding option in order to
prevent the dilution or enlargement of benefits thereunder. The adjustments
determined by the Plan Administrator shall be final, binding and conclusive. In
no event shall any such adjustments be made in connection with the conversion of
one or more outstanding shares of the Corporation's preferred stock into shares
of Common Stock.
3.
<PAGE>
ARTICLE TWO
OPTION GRANT PROGRAM
--------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. Exercise Price.
--------------
1. The exercise price per share shall be fixed by the Plan
Administrator in accordance with the following provisions:
(i) The exercise price per share shall not be less than
eighty-five percent (85%) of the Fair Market Value per share of Common
Stock on the option grant date.
(ii) If the person to whom the option is granted is a 10%
Shareholder, then the exercise price per share shall not be less than one
hundred ten percent (110%) of the Fair Market Value per share of Common
Stock on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Four and the documents evidencing the option grant, be payable in cash
or check made payable to the Corporation. Should the Common Stock be registered
under Section 12(g) of the 1934 Act at the time the option is exercised, then
the exercise price may also be paid as follows:
(i) in shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise Date, or
(ii) to the extent the option is exercised for vested shares,
through a special sale and remittance procedure pursuant to which the
Optionee shall concurrently provide irrevocable written instructions (a) to
a Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise and (b) to the
Corporation to
4.
<PAGE>
deliver the certificates for the purchased shares directly to such
brokerage firm in order to complete the sale transaction.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. Exercise and Term of Options. Each option shall be exercisable
----------------------------
at such time or times, during such period and for such number of shares as shall
be determined by the Plan Administrator and set forth in the documents
evidencing the option grant. However, no option shall have a term in excess of
ten (10) years measured from the option grant date.
C. Effect of Termination of Service. The following provisions shall
--------------------------------
govern the exercise of any options held by the Optionee at the time of cessation
of Service or death:
(i) Should the Optionee cease to remain in Service for any
reason other than Disability or death, then the Optionee shall have a
period of three (3) months following the date of such cessation of Service
during which to exercise each outstanding option held by such Optionee.
(ii) Should such Service terminate by reason of Disability,
then the Optionee shall have a period of six (6) months following the date
of such cessation of Service during which to exercise each outstanding
option held by such Optionee. However, should such Disability be deemed to
constitute Permanent Disability, then the period during which each
outstanding option held by the Optionee is to remain exercisable shall be
extended by an additional six (6) months so that the exercise period shall
be the twelve (12)-month period following the date of the Optionee's
cessation of Service by reason of such Permanent Disability.
(iii) Should the Optionee die while holding one or more
outstanding options, then the personal representative of the Optionee's
estate or the person or persons to whom the option is transferred pursuant
to the Optionee's will or in accordance with the laws of descent and
distribution shall have a period of twelve (12) months following the date
of the Optionee's death during which to exercise each such option.
(iv) Under no circumstances, however, shall any such option
be exercisable after the specified expiration of the option term.
5.
<PAGE>
(v) During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Service, terminate and cease
to be outstanding to the extent it is not exercisable for vested shares on
the date of such cessation of Service.
D. Shareholder Rights. The holder of an option shall have no
------------------
shareholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. Unvested Shares. The Plan Administrator shall have the
---------------
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares,
the Corporation shall have the right to repurchase, at the exercise price paid
per share, all or (at the discretion of the Corporation and with the consent of
the Optionee) any of those unvested shares. The terms upon which such
repurchase right shall be exercisable (including the period and procedure for
exercise and the appropriate vesting schedule for the purchased shares) shall be
established by the Plan Administrator and set forth in the document evidencing
such repurchase right. In no event, however, may the Plan Administrator impose
a vesting schedule upon any option grant or any shares of Common Stock subject
to the option which provides for vesting of less than twenty percent (20%) of
the option shares per year measured from and after the option grant date.
F. First Refusal Rights. Until such time as the Common Stock is
--------------------
first registered under Section 12(g) of the 1934 Act, the Corporation shall have
the right of first refusal with respect to any proposed disposition by the
Optionee (or any successor in interest) of any shares of Common Stock issued
under the Option Grant Program. Such right of first refusal shall be
exercisable in accordance with the terms established by the Plan Administrator
and set forth in the document evidencing such right.
G. Limited Transferability of Options. During the lifetime of the
----------------------------------
Optionee, the option shall be exercisable only by the Optionee and shall not be
assignable or transferable other than by will or by the laws of descent and
distribution following the Optionee's death. However, a Non-Statutory Option
may be assigned in accordance with the terms of a Qualified Domestic Relations
Order. The assigned option may only be exercised by the person or persons who
acquire a proprietary interest in the option pursuant to such Qualified Domestic
Relations Order. The terms applicable to the assigned option (or portion
thereof) shall be the same as those in effect for the option immediately prior
to such assignment and shall be set forth in such documents issued to the
assignee as the Plan Administrator may deem appropriate.
6.
<PAGE>
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Four shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options
shall not be subject to the terms specified in this Section II.
---
A. Eligibility. Incentive Options may only be granted to Employees.
-----------
B. Exercise Price. The exercise price per share shall not be less
--------------
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.
C. Dollar Limitation. The aggregate Fair Market Value of the shares
-----------------
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one (1) calendar year
shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two (2) or more such options which become exercisable
for the first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
D. 10% Shareholder. If any Employee to whom an Incentive Option is
---------------
granted is a 10% Shareholder, then the option term shall not exceed five (5)
years measured from the option grant date.
III. CORPORATE TRANSACTION
A. In the event of any Corporate Transaction, each outstanding
option shall terminate and cease to be outstanding, except to the extent assumed
by the successor corporation (or parent thereof) in connection with such
Corporate Transaction. In addition, all outstanding repurchase rights under the
Option Grant Program shall terminate automatically in the event of any Corporate
Transaction, except to the extent the repurchase rights are assigned to the
successor corporation (or parent thereof) in connection with such Corporate
Transaction.
B. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in the consummation of such Corporate Transaction,
had the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to (i) the number and class of
securities available for issuance under the Plan following the consummation of
such Corporate Transaction and (ii) the exercise price payable per share under
each outstanding option, provided the aggregate exercise price payable for such
--------
securities shall remain the same.
7.
<PAGE>
C. The grant of options under the Plan shall in no way affect the
right of the Corporation to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Option Grant Program
and to grant in substitution therefor new options covering the same or different
numbers of shares of Common Stock but with an exercise price per share based on
the Fair Market Value per share of Common Stock on the new option grant date.
V. ADDITIONAL AUTHORITY
The Plan Administrator shall have the discretion, exercisable either
at the time an option is granted or at any time while the option remains
outstanding, to:
(i) extend the period of time for which the option is to remain
exercisable following the Optionee's cessation of Service or death from the
limited period otherwise in effect for that option to such greater period
of time as the Plan Administrator shall deem appropriate; provided, that in
--------
no event shall such option be exercisable after the specified expiration of
the option term, and/or
(ii) permit the option to be exercised, during the applicable
post-Service exercise period, not only with respect to the number of vested
shares of Common Stock for which such option is exercisable at the time of
the Optionee's cessation of Service or death but also with respect to one
or more additional installments of vested shares for which the option would
otherwise have become exercisable had the Optionee continued in Service.
8.
<PAGE>
ARTICLE THREE
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below.
A. Purchase Price.
--------------
1. The purchase price per share shall be fixed by the Plan
Administrator in accordance with the following provisions:
(i) The purchase price per share shall not be less than
eighty-five percent (85%) of the Fair Market Value per share of Common
Stock on the stock issuance date.
(ii) If the person to whom the stock issuance is made is a 10%
Shareholder, then the purchase price per share shall not be less than one
hundred ten percent (110%) of the Fair Market Value per share of Common
Stock on the stock issuance date.
2. Subject to the provisions of Section I of Article Four,
shares of Common Stock may be issued under the Stock Issuance Program for one or
both of the following items of consideration which the Plan Administrator may
deem appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any
Parent or Subsidiary).
B. Vesting Provisions.
------------------
1. Shares of Common Stock issued under the Stock Issuance
Program may, in the absolute discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified performance
objectives. The elements of the vesting schedule applicable to any unvested
shares of Common Stock issued under the Stock Issuance Program, namely:
(i) the Service period to be completed by the Participant
9.
<PAGE>
or the performance objectives to be attained,
(ii) the number of installments in which the shares are to
vest,
(iii) the interval or intervals (if any) which are to lapse
between installments, and
(iv) the effect which death, Disability or other event
designated by the Plan Administrator is to have upon the vesting schedule,
shall be determined by the Plan Administrator and incorporated into the Stock
Issuance Agreement. In no event, however, may the Plan Administrator impose a
vesting schedule upon any stock issuance effected under the Stock Issuance
Program which provides for vesting of less than twenty percent (20%) per year
vesting measured from and after the stock issuance date.
2. The Participant shall have full shareholder rights with respect
to any shares of Common Stock issued to him or her under the Stock Issuance
Program, whether or not his or her interest in those shares is vested.
Accordingly, the Participant shall have the right to vote such shares and to
receive any regular cash dividends paid on such shares. Any new, additional or
different shares of stock or other property (including money paid other than as
a regular cash dividend) which the Participant may have the right to receive
with respect to his or her unvested shares by reason of any stock dividend,
stock split, recapitalization, combination of shares, exchange of shares or
other change affecting the outstanding Common Stock as a class without the
Corporation's receipt of consideration shall be issued subject to (i) the same
vesting requirements applicable to the Participant's unvested shares and (ii)
such escrow arrangements as the Plan Administrator shall deem appropriate.
3. Should the Participant cease to remain in Service while holding
one or more unvested shares of Common Stock issued under the Stock Issuance
Program or should the performance objectives not be attained with respect to one
or more such unvested shares of Common Stock, then those shares shall be
immediately surrendered to the Corporation for cancellation, and the Participant
shall have no further shareholder rights with respect to those shares. To the
extent the surrendered shares were previously issued to the Participant for
consideration paid in cash or cash equivalent (including the Participant's
purchase-money indebtedness), the Corporation shall repay to the Participant the
cash consideration paid for the surrendered shares and shall cancel the unpaid
principal balance of any outstanding purchase-money note of the Participant
attributable to such surrendered shares.
4. The Plan Administrator may in its discretion waive the surrender
and cancellation of one or more unvested shares of Common Stock (or other assets
attributable thereto) which would otherwise occur upon the non-completion of the
vesting schedule applicable to such shares. Such waiver shall result in the
immediate vesting of the Participant's interest in the shares of Common Stock as
to which the waiver applies. Such waiver may be effected at any time, whether
10.
<PAGE>
before or after the Participant's cessation of Service or the attainment or non-
attainment of the applicable performance objectives.
C. First Refusal Rights. Until such time as the Common Stock is
--------------------
first registered under Section 12(g) of the 1934 Act, the Corporation shall have
the right of first refusal with respect to any proposed disposition by the
Participant (or any successor in interest) of any shares of Common Stock issued
under the Stock Issuance Program. Such right of first refusal shall be
exercisable in accordance with the terms established by the Plan Administrator
and set forth in the document evidencing such right.
II. CORPORATE TRANSACTION
All of the outstanding repurchase rights under the Stock Issuance
Program shall terminate automatically in the event of any Corporate Transaction,
except to the extent the repurchase rights are assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.
11.
<PAGE>
ARTICLE FOUR
MISCELLANEOUS
-------------
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price or the purchase price for shares issued to such
Participant under the Plan by delivering a promissory note payable in one or
more installments. The terms of any such promissory note (including the
interest rate and the terms of repayment) shall be established by the Plan
Administrator in its sole discretion. Promissory notes may be authorized with
or without security or collateral. However, any promissory notes delivered by a
consultant must be secured by property other than the purchased shares of Common
Stock. In all events, the maximum credit available to each Optionee or
Participant may not exceed the sum of (i) the aggregate option exercise price or
---
purchase price payable for the purchased shares plus (ii) any Federal, state and
local income and employment tax liability incurred by the Optionee or the
Participant in connection with the option exercise or share purchase.
II. EFFECTIVE DATE AND TERM OF PLAN
A. The Plan shall become effective when adopted by the Board, but no
option granted under the Plan may be exercised, and no shares shall be issued
under the Plan, until the Plan shall have been approved by the Corporation's
shareholders. If such shareholder approval is not obtained within twelve (12)
months after the date of the Board's adoption of the Plan, then all options
previously granted under the Plan shall terminate and cease to be outstanding,
and no further options shall be granted and no shares shall be issued under the
Plan. Subject to such limitation, the Plan Administrator may grant options and
issue shares under the Plan at any time after the effective date of the Plan and
before the date fixed herein for termination of the Plan.
B. The Plan shall terminate upon the earliest of (i) the expiration
--------
of the ten (10)-year period measured from the date the Plan is adopted by the
Board, (ii) the date on which all shares available for issuance under the Plan
shall have been issued or (iii) the termination of all outstanding options in
connection with a Corporate Transaction. Upon such Plan termination, each
option and unvested share issuance outstanding under the Plan shall continue to
have full force and effect in accordance with the provisions of the documents
evidencing that option or share issuance.
12.
<PAGE>
III. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect the rights and obligations of any
Optionee with respect to options at the time outstanding under the Plan, nor
adversely affect the rights and obligations of any Participant with respect to
Common Stock issued under the Plan prior to such action, unless the Optionee or
the Participant consents to such amendment or modification. In addition, the
Board shall not, without the approval of the Corporation's shareholders, (i)
increase the maximum number of shares issuable under the Plan, except for
permissible adjustments in the event of certain changes in the Corporation's
capitalization, (ii) materially modify the eligibility requirements for
participation in the Plan or (iii) otherwise materially increase the benefits
accruing to persons who participate in the Plan.
B. Options to purchase shares of Common Stock may be granted under
the Plan and shares of Common Stock may be issued under the Plan that are in
both instances in excess of the number of shares then available for issuance
under the Plan, provided any excess shares actually issued under the Plan are
--------
held in escrow until there is obtained shareholder approval of an amendment
sufficiently increasing the number of shares of Common Stock available for
issuance under the Plan. If such shareholder approval is not obtained within
twelve (12) months after the date the first such excess issuances are made, then
(i) any unexercised options granted on the basis of such excess shares shall
terminate and cease to be outstanding and (ii) the Corporation shall promptly
refund to the Optionees and the Participants the exercise or purchase price paid
for any excess shares issued under the Plan and held in escrow, together with
interest (at the applicable Short-Term Federal Rate) for the period the shares
were held in escrow, and such shares shall thereupon be automatically cancelled
and cease to be outstanding.
IV. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
V. WITHHOLDING
The Corporation's obligation to deliver shares of Common Stock upon
the exercise of any options or upon the issuance or vesting of any shares issued
under the Plan shall be subject to the satisfaction of all applicable Federal,
state and local income and employment tax withholding requirements.
13.
<PAGE>
VI. REGULATORY APPROVALS
The implementation of the Plan, the granting of any options under the
Plan and the issuance of Common Stock (i) upon the exercise of any option or
(ii) under the Stock Issuance Program shall be subject to the Corporation's
procurement of all approvals and permits required by regulatory authorities
having jurisdiction over the Plan, the options granted under it and the shares
of Common Stock issued pursuant to it.
VII. NO EMPLOYMENT OR SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining the Optionee or the
Participant) or of the Optionee or the Participant, which rights are hereby
expressly reserved by each, to terminate the Service of the Optionee or the
Participant at any time for any reason, with or without cause.
VIII. FINANCIAL REPORTS
The Corporation shall deliver a balance sheet and an income statement
at least annually to each individual holding an outstanding option under and
each Participant in the Plan, unless such individual is a key Employee whose
duties in connection with the Corporation (or any Parent or Subsidiary) assure
such individual access to equivalent information.
14.
<PAGE>
APPENDIX
The following definitions shall be in effect under the Plan:
A. Board shall mean the Corporation's Board of Directors.
-----
B. Code shall mean the Internal Revenue Code of 1986, as amended.
----
C. Committee shall mean a committee of two (2) or more Board members
---------
appointed by the Board to exercise one or more administrative functions under
the Plan.
D. Common Stock shall mean the Corporation's common stock.
------------
E. Corporate Transaction shall mean either of the following shareholder-
---------------------
approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
F. Corporation shall mean UniDirect Corporation, a California
-----------
corporation.
G. Disability shall mean the inability of an individual to engage in any
----------
substantial gainful activity by reason of any medically determinable physical or
mental impairment and shall be determined by the Plan Administrator on the basis
of such medical evidence as the Plan Administrator deems warranted under the
circumstances. Disability shall be deemed to constitute Permanent Disability in
the event that such Disability is expected to result in death or has lasted or
can be expected to last for a continuous period of twelve (12) months or more.
H. Domestic Relations Order shall mean any judgment, decree or order
------------------------
(including approval of a property settlement agreement) which provides or
otherwise conveys, pursuant to applicable State domestic relations laws
(including community property laws), marital property rights to any spouse or
former spouse of the Optionee.
I. Employee shall mean an individual who is in the employ of the
--------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
J. Exercise Date shall mean the date on which the Corporation shall have
-------------
received written notice of the option exercise.
A-1.
<PAGE>
K. Fair Market Value per share of Common Stock on any relevant date shall
-----------------
be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq National
Market, the Fair Market Value shall be the closing selling price per share
of Common Stock on the date in question, as such price is reported by the
National Association of Securities Dealers on the Nasdaq National Market or
any successor system. If there is no closing selling price for the Common
Stock on the date in question, then the Fair Market Value shall be the
closing selling price on the last preceding date for which such quotation
exists.
(ii) If the Common Stock is at the time listed on any Stock Exchange,
then the Fair Market Value shall be the closing selling price per share of
Common Stock on the date in question on the Stock Exchange determined by
the Plan Administrator to be the primary market for the Common Stock, as
such price is officially quoted in the composite tape of transactions on
such exchange. If there is no closing selling price for the Common Stock on
the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation exists.
(iii) If the Common Stock is at the time neither listed on any
Stock Exchange nor traded on the Nasdaq National Market, then the Fair
Market Value shall be determined by the Plan Administrator after taking
into account such factors as the Plan Administrator shall deem appropriate.
L. Incentive Option shall mean an option which satisfies the requirements
----------------
of Code Section 422.
M. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.
--------
N. Non-Statutory Option shall mean an option not intended to satisfy the
--------------------
requirements of Code Section 422.
O. Option Grant Program shall mean the option grant program in effect
--------------------
under the Plan.
P. Optionee shall mean any person to whom an option is granted under the
--------
Option Grant Program.
Q. Parent shall mean any corporation (other than the Corporation) in an
------
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in
A-2.
<PAGE>
such chain.
R. Participant shall mean any person who is issued shares of Common Stock
-----------
under the Stock Issuance Program.
S. Plan shall mean the Corporation's 1995 Stock Option/Stock Issuance
----
Plan, as set forth in this document.
T. Plan Administrator shall mean either the Board or the Committee, to
------------------
the extent the Committee is at the time responsible for the administration of
the Plan.
U. Qualified Domestic Relations Order shall mean a Domestic Relations
----------------------------------
Order which substantially complies with the requirements of Code Section 414(p).
The Plan Administrator shall have the sole discretion to determine whether a
Domestic Relations Order is a Qualified Domestic Relations Order.
V. Service shall mean the provision of services to the Corporation (or
-------
any Parent or Subsidiary) by a person in the capacity of an Employee, a non-
employee member of the board of directors or a consultant.
W. Stock Exchange shall mean either the American Stock Exchange or the
--------------
New York Stock Exchange.
X. Stock Issuance Agreement shall mean the agreement entered into by the
------------------------
Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
Y. Stock Issuance Program shall mean the stock issuance program in effect
----------------------
under the Plan.
Z. Subsidiary shall mean any corporation (other than the Corporation) in
----------
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
AA. 10% Shareholder shall mean the owner of stock (as determined under
---------------
Code Section 424(d)) possessing ten percent (10%) or more of the total combined
voting power of all classes of stock of the Corporation (or any Parent or
Subsidiary).
A-3.
<PAGE>
Grant No.___________
UNIDIRECT CORPORATION
NOTICE OF GRANT OF STOCK OPTION
-------------------------------
UNVESTED SHARES
---------------
Notice is hereby given of the following option grant (the "Option") to
purchase shares of the Common Stock of UniDirect Corporation (the
"Corporation"):
Optionee:_____________________________________________________________
--------
Grant Date:___________________________________________________________
----------
Vesting Commencement Date:____________________________________________
-------------------------
Exercise Price: $________________ per share
--------------
Number of Option Shares: ___________________ shares
-----------------------
Expiration Date:______________________________________________________
---------------
Type of Option: ______ Incentive Stock Option
--------------
______ Non-Statutory Stock Option
Date Exercisable: Immediately Exercisable
----------------
Vesting Schedule: The Option Shares shall be unvested and subject to
----------------
repurchase by the Corporation at the Exercise Price paid per share.
Optionee shall acquire a vested interest in, and the Corporation's
repurchase right will accordingly lapse with respect to, (i) twenty-
five percent (25%) of the Option Shares upon Optionee's completion of
one (1) year of Service measured from the Vesting Commencement Date
and (ii) the balance of the Option Shares in equal successive monthly
installments upon Optionee's completion of each of the next thirty-six
(36) months of Service measured from and after the first anniversary
of the Vesting Commencement Date. In no event shall any additional
Option Shares vest after Optionee's cessation of Service.
Optionee understands and agrees that the Option is granted subject to
and in accordance with the terms of the UniDirect Corporation 1995 Stock
Option/Stock Issuance Plan (the "Plan"). Optionee further agrees to be bound by
the terms of the Plan and the terms of the Option as set forth in the Stock
Option Agreement attached hereto as Exhibit A. Optionee understands that any
Option Shares purchased under the Option will be subject to the terms set forth
in the Stock Purchase Agreement attached hereto as Exhibit B.
Optionee hereby acknowledges receipt of a copy of the Plan in the form
attached hereto as Exhibit C.
<PAGE>
REPURCHASE RIGHTS. OPTIONEE HEREBY AGREES THAT ALL OPTION SHARES
-----------------
ACQUIRED UPON THE EXERCISE OF THE OPTION SHALL BE SUBJECT TO CERTAIN REPURCHASE
RIGHTS AND RIGHTS OF FIRST REFUSAL EXERCISABLE BY THE CORPORATION AND ITS
ASSIGNS. THE TERMS OF SUCH RIGHTS ARE SPECIFIED IN THE ATTACHED STOCK PURCHASE
AGREEMENT.
No Employment or Service Contract. Nothing in this Notice or in the
---------------------------------
Plan shall confer upon Optionee any right to continue in Service for any period
of specific duration or interfere with or otherwise restrict in any way the
rights of the Corporation (or any Parent or Subsidiary employing or retaining
Optionee) or of Optionee, which rights are hereby expressly reserved by each, to
terminate Optionee's Service at any time for any reason, with or without cause.
Definitions. All capitalized terms in this Notice shall have the
-----------
meaning assigned to them in this Notice or in the attached Stock Option
Agreement.
____________, 199_
Date
UNIDIRECT CORPORATION
By:_____________________________________
Title:__________________________________
________________________________________
OPTIONEE
Address:________________________________
________________________________________
ATTACHMENTS
- -----------
Exhibit A - Stock Option Agreement
Exhibit B - Stock Purchase Agreement
Exhibit C - 1995 Stock Option/Stock Issuance Plan
2.
<PAGE>
EXHIBIT A
---------
STOCK OPTION AGREEMENT
----------------------
<PAGE>
EXHIBIT B
---------
STOCK PURCHASE AGREEMENT
------------------------
<PAGE>
EXHIBIT C
---------
1995 STOCK OPTION/STOCK ISSUANCE PLAN
-------------------------------------
<PAGE>
UNIDIRECT CORPORATION, INC.
STOCK OPTION AGREEMENT
----------------------
RECITALS
- --------
A. The Board has adopted the Plan for the purpose of retaining the
services of selected Employees, non-employee members of the Board or the board
of directors of any Parent or Subsidiary and consultants who provide services to
the Corporation or any Parent or Subsidiary.
B. Optionee is to render valuable services to the Corporation or a Parent
or Subsidiary, and this Agreement is executed pursuant to, and is intended to
carry out the purpose of, the Plan in connection with the Corporation's grant of
an option to Optionee.
C. All capitalized terms in this Agreement shall have the meaning assigned
to them in the attached Appendix.
NOW, THEREFORE, it is hereby agreed as follows:
1. Grant of Option. The Corporation hereby grants to Optionee, as
---------------
of the Grant Date, an option to purchase up to the number of Option Shares
specified in the Grant Notice. The Option Shares shall be purchasable from time
to time during the option term specified in Paragraph 2 at the Exercise Price.
2. Option Term. This option shall have a term of ten (10) years
-----------
measured from the Grant Date and shall accordingly expire at the close of
business on the Expiration Date, unless sooner terminated in accordance with
Paragraph 5, 6 or 17.
3. Limited Transferability. This option shall be neither
-----------------------
transferable nor assignable by Optionee other than by will or by the laws of
descent and distribution following Optionee's death and may be exercised, during
Optionee's lifetime, only by Optionee. However, if this option is designated a
Non-Statutory Option in the Grant Notice, then this option may also be assigned
in accordance with the terms of a Qualified Domestic Relations Order. If so
assigned, the assigned option shall be exercisable only by the person or persons
who acquire a proprietary interest in the option pursuant to such Qualified
Domestic Relations Order. The terms applicable to the assigned option (or
portion thereof) shall be the same as those in effect for this option
immediately prior to such assignment and shall be set forth in such documents
issued to the assignee as the Plan Administrator may deem appropriate.
4. Dates of Exercise. This option shall become exercisable for the
-----------------
Option Shares in one or more installments as specified in the Grant Notice. As
the option becomes exercisable for such installments, those installments shall
accumulate and the option shall remain
<PAGE>
exercisable for the accumulated installments until the Expiration Date or sooner
termination of the option term under Paragraph 5, 6 or 17.
5. Cessation of Service. The option term specified in Paragraph 2
--------------------
shall terminate (and this option shall cease to be outstanding) prior to the
Expiration Date should any of the following provisions become applicable:
(a) Should Optionee cease to remain in Service for any reason
(other than death or Disability) while this option is outstanding, then Optionee
shall have a period of three (3) months (commencing with the date of such
cessation of Service) during which to exercise this option, but in no event
shall this option be exercisable at any time after the Expiration Date.
(b) Should Optionee die while this option is outstanding, then the
personal representative of Optionee's estate or the person or persons to whom
the option is transferred pursuant to Optionee's will or in accordance with the
laws of descent and distribution shall have the right to exercise this option.
Such right shall lapse and this option shall cease to be outstanding upon the
earlier of (i) the expiration of the twelve (12)- month period measured from the
- -------
date of Optionee's death or (ii) the Expiration Date.
(c) Should Optionee cease Service by reason of Disability while
this option is outstanding, then Optionee shall have a period of six (6) months
(commencing with the date of such cessation of Service) during which to exercise
this option. However, should such Disability be deemed to constitute Permanent
Disability, then the period during which this option is to remain exercisable
shall be extended by an additional six (6) months so that the exercise period
shall be the twelve (12)-month period following the date of Optionee's cessation
of Service by reason of such Permanent Disability. In no event shall this option
be exercisable at any time after the Expiration Date.
Note: Exercise of this option on a date later than three (3) months
----
following cessation of Service due to Disability will result in loss
of favorable Incentive Option treatment, unless such Disability
------
constitutes Permanent Disability. In the event that Incentive Option
treatment is not available, this option will be taxed as a Non-
Statutory Option upon exercise.
(d) During the limited period of post-Service exercisability, this
option may not be exercised in the aggregate for more than the number of vested
Option Shares for which the option is exercisable at the time of Optionee's
cessation of Service. Upon the expiration of such limited exercise period or
(if earlier) upon the Expiration Date, this option shall terminate and cease to
be outstanding for any vested Option Shares for which the option has not been
exercised. To the extent Optionee is not vested in the Option Shares at the
time of his/her cessation of Service, this option shall immediately terminate
and cease to be outstanding with respect to those shares.
2.
<PAGE>
6. Special Termination of Option.
-----------------------------
(a) In the event of a Corporate Transaction, this option shall
terminate and cease to be outstanding, except to the extent assumed by the
successor corporation or parent thereof in connection with such Corporate
Transaction.
(b) This Agreement shall not in any way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
7. Adjustment in Option Shares.
---------------------------
(a) In the event any change is made to the Common Stock by reason
of any stock split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the outstanding Common Stock as a
class without the Corporation's receipt of consideration, appropriate
adjustments shall be made to (i) the total number and/or class of securities
subject to this option and (ii) the Exercise Price in order to reflect such
change and thereby preclude a dilution or enlargement of benefits hereunder.
(b) If this option is assumed in connection with a Corporate
Transaction, then this option shall be appropriately adjusted, immediately after
such Corporate Transaction, to apply to the number and class of securities which
would have been issuable to Optionee in the consummation of such Corporate
Transaction had the option been exercised immediately prior to such Corporate
Transaction, and appropriate adjustments shall also be made to the Exercise
Price, provided the aggregate Exercise Price payable shall remain the same.
--------
8. Shareholder Rights. The holder of this option shall not have any
------------------
shareholder rights with respect to the Option Shares until such person shall
have exercised the option, paid the Exercise Price and become a holder of record
of the purchased Option Shares.
9. Manner of Exercising Option.
---------------------------
(a) In order to exercise this option with respect to all or any
part of the Option Shares for which this option is at the time exercisable,
Optionee (or any other person or persons exercising the option) must take the
following actions:
(i) Execute and deliver to the Corporation a
Purchase Agreement for the shares for which the option is exercised.
(ii) Pay the aggregate Exercise Price for the
purchased shares in one or more of the following forms:
(A) cash or check made payable to the Corporation;
or
3.
<PAGE>
(B) a promissory note payable to the Corporation,
but only to the extent approved by the Plan Administrator in
accordance with Paragraph 14.
Should the Common Stock be registered under Section 12(g) of the
1934 Act at the time the option is exercised, then the Exercise Price
may also be paid as follows:
(C) in shares of Common Stock held by Optionee (or
any other person or persons exercising the option) for the requisite
period necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on the
Exercise Date; or
(D) to the extent the option is exercised for
vested Option Shares, through a special sale and remittance procedure
pursuant to which Optionee (or any other person or persons exercising
the option) shall concurrently provide irrevocable written
instructions (a) to a Corporation-designated brokerage firm to effect
the immediate sale of the purchased shares and remit to the
Corporation, out of the sale proceeds available on the settlement
date, sufficient funds to cover the aggregate Exercise Price payable
for the purchased shares plus all applicable Federal, state and local
income and employment taxes required to be withheld by the Corporation
by reason of such exercise and (b) to the Corporation to deliver the
certificates for the purchased shares directly to such brokerage firm
in order to complete the sale transaction.
Except to the extent the sale and remittance procedure is
utilized in connection with the option exercise, payment of the
Exercise Price must accompany the Purchase Agreement delivered to the
Corporation.
(iii) Furnish to the Corporation appropriate
documentation that the person or persons exercising the option (if other
than Optionee) have the right to exercise this option.
(iv) Execute and deliver to the Corporation such
written representations as may be requested by the Corporation in order for
it to comply with the applicable requirements of Federal and state
securities laws.
(v) Make appropriate arrangements with the
Corporation or Parent or Subsidiary employing or retaining Optionee for the
satisfaction of all Federal, state and local income and employment tax
withholding requirements applicable to the option exercise.
4.
<PAGE>
(b) As soon after the Exercise Date as practical, the Corporation
shall mail or deliver to or on behalf of Optionee (or any other person or
persons exercising this option) a certificate for the purchased Option Shares,
with the appropriate legends affixed thereto.
(c) In no event may this option be exercised for any fractional
shares.
10. REPURCHASE RIGHTS. ALL OPTION SHARES ACQUIRED UPON THE EXERCISE
-----------------
OF THIS OPTION SHALL BE SUBJECT TO CERTAIN RIGHTS OF THE CORPORATION AND ITS
ASSIGNS TO REPURCHASE THOSE SHARES IN ACCORDANCE WITH THE TERMS SPECIFIED IN THE
PURCHASE AGREEMENT.
11. Compliance with Laws and Regulations.
------------------------------------
(a) The exercise of this option and the issuance of the Option
Shares upon such exercise shall be subject to compliance by the Corporation and
Optionee with all applicable requirements of law relating thereto and with all
applicable regulations of any stock exchange (or of the Nasdaq National Market
if applicable) on which the Common Stock may be listed at the time of such
exercise and issuance.
(b) The inability of the Corporation to obtain approval from any
regulatory body having authority deemed by the Corporation to be necessary to
the lawful issuance and sale of any Common Stock pursuant to this option shall
relieve the Corporation of any liability with respect to the non-issuance or
sale of the Common Stock as to which such approval shall not have been obtained.
The Corporation, however, shall use its best efforts to obtain all such
approvals.
12. Successors and Assigns. Except to the extent otherwise provided
----------------------
in Paragraphs 3 and 6, the provisions of this Agreement shall inure to the
benefit of, and be binding upon, the Corporation and its successors and assigns
and Optionee, Optionee's assigns and the legal representatives, heirs and
legatees of Optionee's estate.
13. Notices. Any notice required to be given or delivered to the
-------
Corporation under the terms of this Agreement shall be in writing and addressed
to the Corporation at its principal corporate offices. Any notice required to
be given or delivered to Optionee shall be in writing and addressed to Optionee
at the address indicated below Optionee's signature line on the Grant Notice.
All notices shall be deemed effective upon personal delivery or upon deposit in
the U.S. mail, postage prepaid and properly addressed to the party to be
notified.
5.
<PAGE>
14. Financing. The Plan Administrator may, in its absolute
---------
discretion and without any obligation to do so, permit Optionee to pay the
Exercise Price for the purchased Option Shares by delivering a promissory note.
The terms of any such promissory note (including the interest rate, the
requirements for collateral and the terms of repayment) shall be established by
the Plan Administrator in its sole discretion./1/
-
15. Construction. This Agreement and the option evidenced hereby are
------------
made and granted pursuant to the Plan and are in all respects limited by and
subject to the terms of the Plan. All decisions of the Plan Administrator with
respect to any question or issue arising under the Plan or this Agreement shall
be conclusive and binding on all persons having an interest in this option.
16. Governing Law. The interpretation, performance and enforcement
-------------
of this Agreement shall be governed by the laws of the State of California
without resort to that State's conflict-of-laws rules.
17. Shareholder Approval.
--------------------
(a) The grant of this option is subject to approval of the Plan
by the Corporation's shareholders within twelve (12) months after the adoption
of the Plan by the Board. Notwithstanding any provision of this Agreement to the
------------------------------------------------------
contrary, this option may not be exercised in whole or in part until such
- -------------------------------------------------------------------------
shareholder approval is obtained. In the event that such shareholder approval is
- --------------------------------
not obtained, then this option shall terminate in its entirety and Optionee
shall have no further rights to acquire any Option Shares hereunder.
(b) If the Option Shares covered by this Agreement exceed, as of
the Grant Date, the number of shares of Common Stock which may without
shareholder approval be issued under the Plan, then this option shall be void
with respect to such excess shares, unless shareholder approval of an amendment
sufficiently increasing the number of shares of Common Stock issuable under the
Plan is obtained in accordance with the provisions of the Plan.
18. Additional Terms Applicable to an Incentive Option. In the event
--------------------------------------------------
this option is designated an Incentive Option in the Grant Notice, the following
terms and conditions shall also apply to the grant:
(a) This option shall cease to qualify for favorable tax
treatment as an Incentive Option if (and to the extent) this option is exercised
for one or more Option Shares: (i) more than three (3) months after the date
Optionee ceases to be an Employee for any reason
________________________________________________________________________________
/1/ Authorization of payment of the Exercise Price by a promissory note
-
under such provisions may, under currently proposed Treasury Regulations, result
in the loss of incentive stock option treatment under the Federal tax laws.
6.
<PAGE>
other than death or Permanent Disability or (ii) more than twelve (12) months
after the date Optionee ceases to be an Employee by reason of Permanent
Disability.
(b) This option shall not become exercisable in the calendar
year in which granted if (and to the extent) the aggregate Fair Market Value
(determined at the Grant Date) of the Common Stock for which this option would
otherwise first become exercisable in such calendar year would, when added to
the aggregate value (determined as of the respective date or dates of grant)
of the Common Stock and any other securities for which one or more other
Incentive Options granted to Optionee prior to the Grant Date (whether under
the Plan or any other option plan of the Corporation or any Parent or
Subsidiary) first become exercisable during the same calendar year, exceed One
Hundred Thousand Dollars ($100,000) in the aggregate. To the extent the
exercisability of this option is deferred by reason of the foregoing
limitation, the deferred portion shall become exercisable in the first
calendar year or years thereafter in which the One Hundred Thousand Dollar
($100,000) limitation of this Paragraph 18(b) would not be contravened, but
such deferral shall in all events end immediately prior to the effective date
of a Corporate Transaction in which this option is not to be assumed,
whereupon the option shall become immediately exercisable as a Non-Statutory
Option for the deferred portion of the Option Shares.
(c) Should Optionee hold, in addition to this option, one or more
other options to purchase Common Stock which become exercisable for the first
time in the same calendar year as this option, then the foregoing limitations on
the exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
7.
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Agreement:
A. Agreement shall mean this Stock Option Agreement.
---------
B. Board shall mean the Corporation's Board of Directors.
-----
C. Code shall mean the Internal Revenue Code of 1986, as amended.
----
D. Common Stock shall mean the Corporation's common stock.
------------
E. Corporate Transaction shall mean either of the following shareholder-
---------------------
approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or substantially
all of the Corporation's assets in complete liquidation or dissolution of
the Corporation.
F. Corporation shall mean UniDirect Corporation, Inc., a California
-----------
corporation.
G. Disability shall mean the inability of Optionee to engage in any
----------
substantial gainful activity by reason of any medically determinable physical or
mental impairment and shall be determined by the Plan Administrator on the basis
of such medical evidence as the Plan Administrator deems warranted under the
circumstances. Disability shall be deemed to constitute Permanent Disability in
the event that such Disability is expected to result in death or has lasted or
can be expected to last for a continuous period of twelve (12) months or more.
H. Domestic Relations Order shall mean any judgment, decree or order
------------------------
(including approval of a property settlement agreement) which provides or
otherwise conveys, pursuant to applicable State domestic relations laws
(including community property laws), marital property rights to any spouse or
former spouse of the Optionee.
I. Employee shall mean an individual who is in the employ of the
--------
Corporation or any Parent or Subsidiary, subject to the control and direction of
the employer entity as to both the work to be performed and the manner and
method of performance.
J. Exercise Date shall mean the date on which the option shall have been
-------------
exercised in accordance with Paragraph 9 of the Agreement.
A-1.
<PAGE>
K. Exercise Price shall mean the exercise price per share as specified in
--------------
the Grant Notice.
L. Expiration Date shall mean the date on which the option expires as
---------------
specified in the Grant Notice.
M. Fair Market Value per share of Common Stock on any relevant date shall
-----------------
be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq National
Market, the Fair Market Value shall be the closing selling price per share
of Common Stock on the date in question, as the price is reported by the
National Association of Securities Dealers on the Nasdaq National Market or
any successor system. If there is no closing selling price for the Common
Stock on the date in question, then the Fair Market Value shall be the
closing selling price on the last preceding date for which such quotation
exists.
(ii) If the Common Stock is at the time listed on any Stock Exchange,
then the Fair Market Value shall be the closing selling price per share of
Common Stock on the date in question on the Stock Exchange determined by
the Plan Administrator to be the primary market for the Common Stock, as
such price is officially quoted in the composite tape of transactions on
such exchange. If there is no closing selling price for the Common Stock on
the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation exists.
(iii) If the Common Stock is at the time neither listed on any Stock
Exchange nor traded on the Nasdaq National Market, then such Fair Market
Value shall be determined by the Plan Administrator after taking into
account such factors as the Plan Administrator shall deem appropriate.
N. Grant Date shall mean the date of grant of the option as specified in
----------
the Grant Notice.
O. Grant Notice shall mean the Notice of Grant of Stock Option
------------
accompanying the Agreement, pursuant to which Optionee has been informed of the
basic terms of the option evidenced hereby.
P. Incentive Option shall mean an option which satisfies the requirements
----------------
of Code Section 422.
Q. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.
--------
R. Non-Statutory Option shall mean an option not intended to satisfy the
--------------------
requirements
A-2.
<PAGE>
of Code Section 422.
S. Option Shares shall mean the number of shares of Common Stock subject
-------------
to the option.
T. Optionee shall mean the person to whom the option is granted as
--------
specified in the Grant Notice.
U. Parent shall mean any corporation (other than the Corporation) in an
------
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
V. Plan shall mean the Corporation's 1995 Stock Option/Stock Issuance
----
Plan.
W. Plan Administrator shall mean either the Board or a committee of Board
------------------
members, to the extent the committee is at the time responsible for the
administration of the Plan.
X. Purchase Agreement shall mean the stock purchase agreement in
------------------
substantially the form of Exhibit B to the Grant Notice.
Y. Qualified Domestic Relations Order shall mean a Domestic Relations
----------------------------------
Order which substantially complies with the requirements of Code Section 414(p).
The Plan Administrator shall have the sole discretion to determine whether a
Domestic Relations Order is a Qualified Domestic Relations Order.
Z. Service shall mean the provision of services to the Corporation or any
-------
Parent or Subsidiary by a person in the capacity of an Employee, a non-employee
member of the board of directors or a consultant.
AA. Stock Exchange shall mean the American Stock Exchange or the New York
--------------
Stock Exchange.
BB. Subsidiary shall mean any corporation (other than the Corporation) in
----------
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
A-3.
<PAGE>
UNIDIRECT CORPORATION
STOCK PURCHASE AGREEMENT
------------------------
UNVESTED SHARES
---------------
AGREEMENT made as of this ___ day of _________ 19____, by and among
UniDirect Corporation, a California corporation,
________________________________, Optionee under the Corporation's 1995 Stock
Option/Stock Issuance Plan, and ________________________, Optionee's spouse.
All capitalized terms in this Agreement shall have the meaning
assigned to them in this Agreement or in the attached Appendix.
A. EXERCISE OF OPTION
------------------
1. Exercise. Optionee hereby purchases _____________ shares of
--------
Common Stock (the "Purchased Shares") pursuant to that certain option (the
"Option") granted Optionee on ____________________, 199__ (the "Grant Date") to
purchase up to _______________ shares of Common Stock under the Plan at the
exercise price of $______ per share (the "Exercise Price").
2. Payment. Concurrently with the delivery of this Agreement to the
-------
Corporation, Optionee shall pay the Exercise Price for the Purchased Shares in
accordance with the provisions of the Option Agreement and shall deliver
whatever additional documents may be required by the Option Agreement as a
condition for exercise, together with a duly-executed blank Assignment Separate
from Certificate (in the form attached hereto as Exhibit I) with respect to the
Purchased Shares.
3. Delivery of Certificates. The certificates representing any
------------------------
Purchased Shares which are subject to the Corporation's Repurchase Right shall
be held in escrow in accordance with the provisions of this Agreement.
4. Shareholder Rights. Until such time as the Corporation exercises
------------------
the Repurchase Right, the First Refusal Right or the Special Purchase Right,
Optionee (or any successor in interest) shall have all the rights of a
shareholder (including voting, dividend and liquidation rights) with respect to
the Purchased Shares, including the Purchased Shares held in escrow hereunder,
subject, however, to the transfer restrictions of Articles B and C.
<PAGE>
B. SECURITIES LAW COMPLIANCE
-------------------------
1. Restricted Securities. The Purchased Shares have not been
---------------------
registered under the 1933 Act and are being issued to Optionee in reliance upon
the exemption from such registration provided by SEC Rule 701 for stock
issuances under compensatory benefit plans such as the Plan. Optionee hereby
confirms that Optionee has been informed that the Purchased Shares are
restricted securities under the 1933 Act and may not be resold or transferred
unless the Purchased Shares are first registered under the Federal securities
laws or unless an exemption from such registration is available. Accordingly,
Optionee hereby acknowledges that Optionee is prepared to hold the Purchased
Shares for an indefinite period and that Optionee is aware that SEC Rule 144
issued under the 1933 Act which exempts certain resales of unrestricted
securities is not presently available to exempt the resale of the Purchased
Shares from the registration requirements of the 1933 Act.
2. Restrictions on Disposition of Purchased Shares. Optionee shall
-----------------------------------------------
make no disposition of the Purchased Shares (other than a Permitted Transfer)
unless and until there is compliance with all of the following requirements:
(i) Optionee shall have provided the Corporation with a written
summary of the terms and conditions of the proposed disposition.
(ii) Optionee shall have complied with all requirements of this
Agreement applicable to the disposition of the Purchased Shares.
(iii) Optionee shall have provided the Corporation with written
assurances, in form and substance satisfactory to the Corporation, that (a)
the proposed disposition does not require registration of the Purchased
Shares under the 1933 Act or (b) all appropriate action necessary for
compliance with the registration requirements of the 1933 Act or any
exemption from registration available under the 1933 Act (including Rule
144) has been taken.
(iv) Optionee shall have provided the Corporation with written
assurances, in form and substance satisfactory to the Corporation, that the
proposed disposition will not result in the contravention of any transfer
restrictions applicable to the Purchased Shares pursuant to the provisions
of the Rules of the California Corporations Commissioner identified in
Paragraph B.4.
The Corporation shall not be required (i) to transfer on its books any
---
Purchased Shares which have been sold or transferred in violation of the
provisions of this Agreement or (ii) to treat as the owner of the Purchased
--
Shares, or otherwise to accord voting, dividend or liquidation rights to, any
transferee to whom the Purchased Shares have been transferred in contravention
of this Agreement.
3. Restrictive Legends. The stock certificates for the Purchased
-------------------
Shares shall be endorsed with one or more of the following restrictive legends:
(i) "The shares represented by this certificate have not been
2.
<PAGE>
registered under the Securities Act of 1933. The shares may not be sold or
offered for sale in the absence of (a) an effective registration statement
for the shares under such Act, (b) a ?no action? letter of the Securities
and Exchange Commission with respect to such sale or offer or (c)
satisfactory assurances to the Corporation that registration under such Act
is not required with respect to such sale or offer."
(ii) "It is unlawful to consummate a sale or transfer of this
security, or any interest therein, or to receive any consideration
therefor, without the prior written consent of the Commissioner of
Corporations of the State of California, except as permitted in the
Commissioner's Rules."
(iii) "The shares represented by this certificate are subject to
certain repurchase rights and rights of first refusal granted to the
Corporation and accordingly may not be sold, assigned, transferred,
encumbered, or in any manner disposed of except in conformity with the
terms of a written agreement dated ____________, 199__ between the
Corporation and the registered holder of the shares (or the predecessor in
interest to the shares). A copy of such agreement is maintained at the
Corporation's principal corporate offices."
4. Receipt of Commissioner Rules. Optionee hereby acknowledges
-----------------------------
receipt of a copy of Section 260.141.11 of the Rules of the California
Corporations Commissioner, a copy of which is attached as Exhibit II to this
Agreement.
C. TRANSFER RESTRICTIONS
---------------------
1. Restriction on Transfer. Except for any Permitted Transfer,
-----------------------
Optionee shall not transfer, assign, encumber or otherwise dispose of any of the
Purchased Shares which are subject to the Repurchase Right. In addition,
Purchased Shares which are released from the Repurchase Right shall not be
transferred, assigned, encumbered or otherwise disposed of in contravention of
the First Refusal Right, the Market Stand-Off or the Special Purchase Right.
2. Transferee Obligations. Each person (other than the Corporation)
----------------------
to whom the Purchased Shares are transferred by means of a Permitted Transfer
must, as a condition precedent to the validity of such transfer, acknowledge in
writing to the Corporation that such person is bound by the provisions of this
Agreement and that the transferred shares are subject to (i) the Repurchase
Right, (ii) the First Refusal Right and (iii) the Market Stand-Off, to the same
extent such shares would be so subject if retained by Optionee.
3. Market Stand-Off.
----------------
(a) In connection with any underwritten public offering by the
Corporation of its equity securities pursuant to an effective registration
statement filed under the 1933 Act, including the Corporation's initial public
offering, Owner shall not sell, make any short sale of, loan, hypothecate,
pledge, grant any option for the purchase of, or otherwise dispose or transfer
for value or otherwise agree to engage in any of the foregoing transactions with
respect to, any Purchased
3.
<PAGE>
Shares without the prior written consent of the Corporation or its underwriters.
Such limitations (the "Market Stand-Off") shall be in effect for such period of
time from and after the effective date of the final prospectus for the offering
as may be requested by the Corporation or such underwriters. In no event,
however, shall such period exceed one hundred eighty (180) days and the Market
Stand-Off shall in all events terminate two (2) years after the effective date
of the Corporation's initial public offering.
(b) Owner shall be subject to the Market Stand-Off provided and
------------
only if the officers and directors of the Corporation are also subject to
- -------
similar restrictions.
(c) Any new, substituted or additional securities which are by
reason of any Recapitalization or Reorganization distributed with respect to the
Purchased Shares shall be immediately subject to the Market Stand-Off, to the
same extent the Purchased Shares are at such time covered by such provisions.
(d) In order to enforce the Market Stand-Off, the Corporation
may impose stop-transfer instructions with respect to the Purchased Shares until
the end of the applicable stand-off period.
D. REPURCHASE RIGHT
----------------
1. Grant. The Corporation is hereby granted the right (the
-----
"Repurchase Right"), exercisable at any time during the sixty (60)-day period
following the date Optionee ceases for any reason to remain in Service or (if
later) during the sixty (60)-day period following the execution date of this
Agreement, to repurchase at the Exercise Price all or (at the discretion of the
Corporation and with the consent of Optionee) any portion of the Purchased
Shares in which Optionee is not, at the time of his or her cessation of Service,
vested in accordance with the Vesting Schedule (such shares to be hereinafter
referred to as the "Unvested Shares").
2. Exercise of the Repurchase Right. The Repurchase Right shall be
--------------------------------
exercisable by written notice delivered to each Owner of the Unvested Shares
prior to the expiration of the sixty (60)-day exercise period. The notice shall
indicate the number of Unvested Shares to be repurchased and the date on which
the repurchase is to be effected, such date to be not more than thirty (30) days
after the date of such notice. The certificates representing the Unvested
Shares to be repurchased shall be delivered to the Corporation prior to the
close of business on the date specified for the repurchase. Concurrently with
the receipt of such stock certificates, the Corporation shall pay to Owner, in
cash or cash equivalents (including the cancellation of any purchase-money
indebtedness), an amount equal to the Exercise Price previously paid for the
Unvested Shares which are to be repurchased from Owner.
3. Termination of the Repurchase Right. The Repurchase Right shall
-----------------------------------
terminate with respect to any Unvested Shares for which it is not timely
exercised under Paragraph D.2. In addition, the Repurchase Right shall
terminate and cease to be exercisable with respect to any and all Purchased
Shares in which Optionee vests in accordance with the Vesting Schedule. All
4.
<PAGE>
Purchased Shares as to which the Repurchase Right lapses shall, however, remain
subject to (i) the First Refusal Right, (ii) the Market Stand-Off and (iii) the
Special Purchase Right.
4. Aggregate Vesting Limitation. If the Option is exercised in more
----------------------------
than one increment so that Optionee is a party to one or more other Stock
Purchase Agreements (the "Prior Purchase Agreements") which are executed prior
to the date of this Agreement, then the total number of Purchased Shares as to
which Optionee shall be deemed to have a fully-vested interest under this
Agreement and all Prior Purchase Agreements shall not exceed in the aggregate
the number of Purchased Shares in which Optionee would otherwise at the time be
vested, in accordance with the Vesting Schedule, had all the Purchased Shares
(including those acquired under the Prior Purchase Agreements) been acquired
exclusively under this Agreement.
5. Recapitalization. Any new, substituted or additional securities
----------------
or other property (including cash paid other than as a regular cash dividend)
which is by reason of any Recapitalization distributed with respect to the
Purchased Shares shall be immediately subject to the Repurchase Right, but only
to the extent the Purchased Shares are at the time covered by such right.
Appropriate adjustments to reflect such distribution shall be made to the number
and/or class of Purchased Shares subject to this Agreement and to the price per
share to be paid upon the exercise of the Repurchase Right in order to reflect
the effect of any such Recapitalization upon the Corporation's capital
structure; provided, however, that the aggregate price shall remain the same.
--------
6. Corporate Transaction.
---------------------
(a) Immediately prior to the consummation of any Corporate
Transaction, the Repurchase Right shall automatically lapse in its entirety,
except to the extent the Repurchase Right is to be assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction.
(b) To the extent the Repurchase Right remains in effect
following a Corporate Transaction, the right shall apply to the new capital
stock or other property (including any cash payments) received in exchange for
the Purchased Shares in consummation of the Corporate Transaction, but only to
the extent the Purchased Shares are at the time covered by such right.
Appropriate adjustments shall be made to the price per share payable upon
exercise of the Repurchase Right to reflect the effect of the Corporate
Transaction upon the Corporation's capital structure; provided, however, that
--------
the aggregate price shall remain the same.
E. RIGHT OF FIRST REFUSAL
----------------------
1. Grant. The Corporation is hereby granted the right of first
-----
refusal (the "First Refusal Right"), exercisable in connection with any proposed
transfer of the Purchased Shares in which Optionee has vested in accordance with
the Vesting Schedule. For purposes of this Article E, the term "transfer" shall
include any sale, assignment, pledge, encumbrance or other disposition of the
Purchased Shares intended to be made by Owner, but shall not include any
Permitted Transfer.
5.
<PAGE>
2. Notice of Intended Disposition. In the event any Owner of
------------------------------
Purchased Shares in which Optionee has vested desires to accept a bona fide
third-party offer for the transfer of any or all of such shares (the Purchased
Shares subject to such offer to be hereinafter referred to as the "Target
Shares"), Owner shall promptly (i) deliver to the Corporation written notice
(the "Disposition Notice") of the terms of the offer, including the purchase
price and the identity of the third-party offeror, and (ii) provide satisfactory
proof that the disposition of the Target Shares to such third-party offeror
would not be in contravention of the provisions set forth in Articles B and C.
3. Exercise of the First Refusal Right. The Corporation shall, for
-----------------------------------
a period of twenty-five (25) days following receipt of the Disposition Notice,
have the right to repurchase any or all of the Target Shares subject to the
Disposition Notice upon the same terms as those specified therein or upon such
other terms (not materially different from those specified in the Disposition
Notice) to which Owner consents. Such right shall be exercisable by delivery of
written notice (the "Exercise Notice") to Owner prior to the expiration of the
twenty-five (25)-day exercise period. If such right is exercised with respect
to all the Target Shares, then the Corporation shall effect the repurchase of
such shares, including payment of the purchase price, not more than five (5)
business days after delivery of the Exercise Notice; and at such time the
certificates representing the Target Shares shall be delivered to the
Corporation.
Should the purchase price specified in the Disposition Notice be
payable in property other than cash or evidences of indebtedness, the
Corporation shall have the right to pay the purchase price in the form of cash
equal in amount to the value of such property. If Owner and the Corporation
cannot agree on such cash value within ten (10) days after the Corporation's
receipt of the Disposition Notice, the valuation shall be made by an appraiser
of recognized standing selected by Owner and the Corporation or, if they cannot
agree on an appraiser within twenty (20) days after the Corporation's receipt of
the Disposition Notice, each shall select an appraiser of recognized standing
and the two (2) appraisers shall designate a third appraiser of recognized
standing, whose appraisal shall be determinative of such value. The cost of
such appraisal shall be shared equally by Owner and the Corporation. The
closing shall then be held on the later of (i) the fifth business day following
-----
delivery of the Exercise Notice or (ii) the fifth business day after such
valuation shall have been made.
4. Non-Exercise of the First Refusal Right. In the event the
---------------------------------------
Exercise Notice is not given to Owner prior to the expiration of the twenty-five
(25)-day exercise period, Owner shall have a period of thirty (30) days
thereafter in which to sell or otherwise dispose of the Target Shares to the
third-party offeror identified in the Disposition Notice upon terms (including
the purchase price) no more favorable to such third-party offeror than those
specified in the Disposition Notice; provided, however, that any such sale or
--------
disposition must not be effected in contravention of the provisions of Articles
B and C. The third-party offeror shall acquire the Target Shares free and clear
of the Repurchase Right and the First Refusal Right, but the acquired shares
shall remain subject to Articles B and C. In the event Owner does not effect
such sale or disposition of the Target Shares within the specified thirty (30)-
day period, the First Refusal Right shall continue to be applicable to any
subsequent disposition of the Target Shares by Owner until such right lapses.
6.
<PAGE>
5. Partial Exercise of the First Refusal Right. In the event the
-------------------------------------------
Corporation makes a timely exercise of the First Refusal Right with respect to a
portion, but not all, of the Target Shares specified in the Disposition Notice,
Owner shall have the option, exercisable by written notice to the Corporation
delivered within five (5) days after Owner's receipt of the Exercise Notice, to
effect the sale of the Target Shares pursuant to either of the following
alternatives:
(i) sale or other disposition of all the Target Shares to the
third-party offeror identified in the Disposition Notice, but in full
compliance with the requirements of Paragraph E.4, as if the Corporation
did not exercise the First Refusal Right; or
(ii) sale to the Corporation of the portion of the Target Shares
which the Corporation has elected to purchase, such sale to be effected in
substantial conformity with the provisions of Paragraph E.3. The First
Refusal Right shall continue to be applicable to any subsequent disposition
of the remaining Target Shares until such right lapses.
Failure of Owner to deliver timely notification to the Corporation
shall be deemed to be an election by Owner to sell the Target Shares pursuant to
alternative (i) above.
6. Recapitalization/Reorganization.
-------------------------------
(a) Any new, substituted or additional securities or other
property which is by reason of any Recapitalization distributed with respect to
the Purchased Shares shall be immediately subject to the First Refusal Right,
but only to the extent the Purchased Shares are at the time covered by such
right.
(b) In the event of a Reorganization, the First Refusal Right
shall remain in full force and effect and shall apply to the new capital stock
or other property received in exchange for the Purchased Shares in consummation
of the Reorganization, but only to the extent the Purchased Shares are at the
time covered by such right.
7. Lapse. The First Refusal Right shall lapse upon the earliest to
----- --------
occur of (i) the first date on which shares of the Common Stock are held of
record by more than five hundred (500) persons, (ii) a determination is made by
the Board that a public market exists for the outstanding shares of Common Stock
or (iii) a firm commitment underwritten public offering, pursuant to an
effective registration statement under the 1933 Act, covering the offer and sale
of the Common Stock in the aggregate amount of at least ten million dollars
($10,000,000). However, the Market Stand-Off shall continue to remain in full
force and effect following the lapse of the First Refusal Right.
F. MARITAL DISSOLUTION OR LEGAL SEPARATION
---------------------------------------
1. Grant. In connection with the dissolution of Optionee's marriage
-----
or the legal separation of Optionee and Optionee's spouse, the Corporation shall
have the right (the "Special
7.
<PAGE>
Purchase Right") to purchase from Optionee's spouse, in accordance with the
provisions of Paragraph F.3, all or, with the consent of Optionee's spouse, any
portion of the Purchased Shares which would otherwise be awarded to such spouse
in settlement of any community property or other marital property rights such
spouse may have in such shares.
2. Notice of Decree or Agreement. Optionee shall promptly provide
-----------------------------
the Corporation with written notice (the "Dissolution Notice") of (i) the entry
of any judicial decree or order resolving the property rights of Optionee and
Optionee's spouse in connection with their marital dissolution or legal
separation or (ii) the execution of any contract or agreement relating to the
distribution or division of such property rights. The Dissolution Notice shall
be accompanied by a copy of the actual decree or order of dissolution or
contract or agreement between Optionee and Optionee's spouse which provides for
the award to the spouse of one or more Purchased Shares in settlement of any
community property or other marital property rights such spouse may have in such
shares.
3. Exercise of the Special Purchase Right. The Special Purchase
--------------------------------------
Right shall be exercisable by delivery of written notice (the "Purchase Notice")
to Optionee and Optionee's spouse within thirty (30) days after the
Corporation's receipt of the Dissolution Notice. The Purchase Notice shall
indicate the number of shares to be purchased by the Corporation, the date such
purchase is to be effected (such date to be not less than five (5) business
days, nor more than ten (10) business days, after the date of the Purchase
Notice) and the Fair Market Value to be paid for such Purchased Shares.
Optionee (or Optionee's spouse, to the extent such spouse has physical
possession of the Purchased Shares) shall, prior to the close of business on the
date specified for the purchase, deliver to the Corporation the certificates
representing the shares to be purchased. The Corporation shall, concurrently
with the receipt of the stock certificates, pay to Optionee's spouse (in cash or
cash equivalents) an amount equal to the Fair Market Value specified for such
shares in the Purchase Notice.
If Optionee's spouse does not agree with the Fair Market Value
specified for the shares in the Purchase Notice, then the spouse shall promptly
notify the Corporation in writing of such disagreement and the fair market value
of such shares shall thereupon be determined by an appraiser of recognized
standing selected by the Corporation and the spouse. If they cannot agree on an
appraiser within twenty (20) days after the date of the Purchase Notice, each
shall select an appraiser of recognized standing, and the two (2) appraisers
shall designate a third appraiser of recognized standing whose appraisal shall
be determinative of such value. The cost of the appraisal shall be shared
equally by the Corporation and Optionee's spouse. The closing shall then be
held on the fifth business day following the completion of such appraisal;
provided, however, that if the appraised value is more than twenty-five percent
- --------
(25%) greater than the Fair Market Value specified for the shares in the
Purchase Notice, the Corporation shall have the right, exercisable prior to the
expiration of such five (5) business-day period, to rescind the exercise of the
Special Purchase Right and thereby revoke its election to purchase the shares
awarded to the spouse. In the event the Corporation so revokes its election,
the Corporation shall bear the entire cost of the appraisal.
4. Lapse. The Special Purchase Right shall lapse upon the earlier
----- -------
to occur of (i)
8.
<PAGE>
the lapse of the First Refusal Right or (ii) the expiration of the thirty (30)-
day exercise period specified in Paragraph F.3, to the extent the Special
Purchase Right is not timely exercised in accordance with such paragraph.
G. ESCROW
------
1. Deposit. Upon issuance, the certificates for the Purchased
-------
Shares which are subject to the Repurchase Right shall be deposited in escrow
with the Corporation to be held in accordance with the provisions of this
Article G. Each deposited certificate shall be accompanied by a duly-executed
Assignment Separate from Certificate in the form of Exhibit I. The deposited
certificates, together with any other assets or securities from time to time
deposited with the Corporation pursuant to the requirements of this Agreement,
shall remain in escrow until such time or times as the certificates (or other
assets and securities) are to be released or otherwise surrendered for
cancellation in accordance with Paragraph G.3. Upon delivery of the
certificates (or other assets and securities) to the Corporation, Owner shall be
issued a receipt acknowledging the number of Purchased Shares (or other assets
and securities) delivered in escrow.
2. Recapitalization/Reorganization. Any new, substituted or
-------------------------------
additional securities or other property which is by reason of any
Recapitalization or Reorganization distributed with respect to the Purchased
Shares shall be immediately delivered to the Corporation to be held in escrow
under this Article G, but only to the extent the Purchased Shares are at the
time subject to the escrow requirements hereunder. However, all regular cash
dividends on the Purchased Shares (or other securities at the time held in
escrow) shall be paid directly to Owner and shall not be held in escrow.
3. Release/Surrender. The Purchased Shares, together with any other
-----------------
assets or securities held in escrow hereunder, shall be subject to the following
terms relating to their release from escrow or their surrender to the
Corporation for repurchase and cancellation:
(i) Should the Corporation elect to exercise the Repurchase
Right with respect to any Purchased Shares, then the escrowed certificates
for those Purchased Shares (together with any other assets or securities
attributable thereto) shall be surrendered to the Corporation concurrently
with the payment to Owner, in cash or cash equivalent (including the
cancellation of any purchase-money indebtedness), of an amount equal to the
aggregate Exercise Price for such Purchased Shares, and Owner shall cease
to have any further rights or claims with respect to such Purchased Shares
(or other assets or securities attributable thereto).
(ii) Should the Corporation elect to exercise the First Refusal
Right with respect to any Target Shares held at the time in escrow
hereunder, then the escrowed certificates for those Target Shares (together
with any other assets or securities attributable thereto) shall be
surrendered to the Corporation concurrently with the payment of the
Paragraph E.3 purchase price for such Target Shares to Owner, and Owner
shall cease to have any further rights or claims with respect to
9.
<PAGE>
such Target Shares (or other assets or securities attributable thereto).
(iii) Should the Corporation elect not to exercise the Repurchase
---
Right with respect to any Purchased Shares or the First Refusal Right with
respect to any Target Shares held at the time in escrow hereunder, then the
escrowed certificates for those Purchased Shares or Target Shares (together
with any other assets or securities attributable thereto) shall be released
to Owner.
(iv) As the Purchased Shares (or any other assets or securities
attributable thereto) vest in accordance with the Vesting Schedule, the
certificates for those vested shares (as well as all other vested assets
and securities) shall be released from escrow upon Owner's request, but not
more frequently than once every six (6) months.
(v) All Purchased Shares which vest (and any other vested
assets and securities attributable thereto) shall be released within thirty
(30) days after the earlier to occur of (a) Optionee's cessation of Service
-------
or (b) the lapse of the First Refusal Right.
(vi) All Purchased Shares (or other assets or securities)
released from escrow shall nevertheless remain subject to (a) the First Refusal
Right, to the extent such right has not otherwise lapsed, (b) the Market Stand-
Off, until such limitations terminate, and (c) the Special Purchase Right, to
the extent such right has not otherwise lapsed.
H. SPECIAL TAX ELECTION
--------------------
The acquisition of the Purchased Shares may result in adverse tax
consequences which may be avoided by filing an election under Code Section
83(b). Such election must be filed within thirty (30) days after the date of
this Agreement. A description of the tax consequences applicable to the
acquisition of the Purchased Shares and the form for making the Code Section
83(b) election are set forth in Exhibit III. OPTIONEE SHOULD CONSULT WITH HIS
OR HER TAX ADVISOR TO DETERMINE THE TAX CONSEQUENCES OF ACQUIRING THE PURCHASED
SHARES AND THE ADVANTAGES AND DISADVANTAGES OF FILING THE CODE SECTION 83(b)
ELECTION. OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE RESPONSIBILITY, AND
NOT THE CORPORATION'S, TO FILE A TIMELY ELECTION UNDER CODE SECTION 83(b), EVEN
IF OPTIONEE REQUESTS THE CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS FILING
ON HIS OR HER BEHALF.
I. GENERAL PROVISIONS
------------------
1. Assignment. The Corporation may assign the Repurchase Right, the
----------
First Refusal Right and/or the Special Purchase Right to any person or entity
selected by the Board,
10.
<PAGE>
including (without limitation) one or more shareholders of the Corporation.
If the assignee of the Repurchase Right is other than (i) a wholly
owned subsidiary of the Corporation or (ii) the parent corporation owning one
hundred percent (100%) of the Corporation's outstanding capital stock, then such
assignee must make a cash payment to the Corporation, upon the assignment of the
Repurchase Right, in an amount equal to the excess (if any) of (i) the Fair
Market Value of the Purchased Shares at the time subject to the assigned
Repurchase Right over (ii) the aggregate repurchase price payable for the
Purchased Shares.
2. No Employment or Service Contract. Nothing in this Agreement or
---------------------------------
in the Plan shall confer upon Optionee any right to continue in Service for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Parent or Subsidiary employing or
retaining Optionee) or of Optionee, which rights are hereby expressly reserved
by each, to terminate Optionee's Service at any time for any reason, with or
without cause.
3. Notices. Any notice required to be given under this Agreement
-------
shall be in writing and shall be deemed effective upon personal delivery or upon
deposit in the U.S. mail, registered or certified, postage prepaid and properly
addressed to the party entitled to such notice at the address indicated below
such party's signature line on this Agreement or at such other address as such
party may designate by ten (10) days advance written notice under this Paragraph
I.3 to all other parties to this Agreement.
4. No Waiver. The failure of the Corporation in any instance to
---------
exercise the Repurchase Right, the First Refusal Right or the Special Purchase
Right shall not constitute a waiver of any other repurchase rights and/or rights
of first refusal that may subsequently arise under the provisions of this
Agreement or any other agreement between the Corporation and Optionee or
Optionee's spouse. No waiver of any breach or condition of this Agreement shall
be deemed to be a waiver of any other or subsequent breach or condition, whether
of like or different nature.
5. Cancellation of Shares. If the Corporation shall make available,
----------------------
at the time and place and in the amount and form provided in this Agreement, the
consideration for the Purchased Shares to be repurchased in accordance with the
provisions of this Agreement, then from and after such time, the person from
whom such shares are to be repurchased shall no longer have any rights as a
holder of such shares (other than the right to receive payment of such
consideration in accordance with this Agreement). Such shares shall be deemed
purchased in accordance with the applicable provisions hereof, and the
Corporation shall be deemed the owner and holder of such shares, whether or not
the certificates therefor have been delivered as required by this Agreement.
J. MISCELLANEOUS PROVISIONS
------------------------
1. Optionee Undertaking. Optionee hereby agrees to take whatever
--------------------
additional action and execute whatever additional documents the Corporation may
deem necessary or advisable in order to carry out or effect one or more of the
obligations or restrictions imposed on either Optionee or the Purchased Shares
pursuant to the provisions of this Agreement.
11.
<PAGE>
2. Agreement is Entire Contract. This Agreement constitutes the
----------------------------
entire contract between the parties hereto with regard to the subject matter
hereof. This Agreement is made pursuant to the provisions of the Plan and shall
in all respects be construed in conformity with the terms of the Plan.
3. Governing Law. This Agreement shall be governed by, and
-------------
construed in accordance with, the laws of the State of California without resort
to that State's conflict-of-laws rules.
4. Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
5. Successors and Assigns. The provisions of this Agreement shall
----------------------
inure to the benefit of, and be binding upon, the Corporation and its successors
and assigns and upon Optionee, Optionee's assigns and the legal representatives,
heirs and legatees of Optionee's estate, whether or not any such person shall
have become a party to this Agreement and have agreed in writing to join herein
and be bound by the terms hereof.
12.
<PAGE>
6. Power of Attorney. Optionee's spouse hereby appoints Optionee
-----------------
his or her true and lawful attorney in fact, for him or her and in his or her
name, place and stead, and for his or her use and benefit, to agree to any
amendment or modification of this Agreement and to execute such further
instruments and take such further actions as may reasonably be necessary to
carry out the intent of this Agreement. Optionee's spouse further gives and
grants unto Optionee as his or her attorney in fact full power and authority to
do and perform every act necessary and proper to be done in the exercise of any
of the foregoing powers as fully as he or she might or could do if personally
present, with full power of substitution and revocation, hereby ratifying and
confirming all that Optionee shall lawfully do and cause to be done by virtue of
this power of attorney.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
day and year first indicated above.
UNIDIRECT CORPORATION
By:______________________________________
Title:___________________________________
Address:_________________________________
_________________________________________
_________________________________________
OPTIONEE
Address:_________________________________
_________________________________________
13.
<PAGE>
SPOUSAL ACKNOWLEDGMENT
The undersigned spouse of Optionee has read and hereby approves the
foregoing Stock Purchase Agreement. In consideration of the Corporation's
granting Optionee the right to acquire the Purchased Shares in accordance with
the terms of such Agreement, the undersigned hereby agrees to be irrevocably
bound by all the terms of such Agreement, including (without limitation) the
right of the Corporation (or its assigns) to purchase any Purchased Shares in
which Optionee is not vested and the right of the Corporation (or its assigns)
to purchase any and all interest or right the undersigned may otherwise have in
the Purchased Shares pursuant to community property laws or other marital
property rights.
__________________________________________
OPTIONEE'S SPOUSE
Address:__________________________________
__________________________________________
14.
<PAGE>
EXHIBIT I
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED ______________________ hereby sell(s), assign(s)
and transfer(s) unto UniDirect Corporation (the "Corporation"),
_______________________ (________) shares of the Common Stock of the Corporation
standing in his or her name on the books of the Corporation represented by
Certificate No. ___________________ herewith and do hereby irrevocably
constitute and appoint _______________________________ Attorney to transfer the
said stock on the books of the Corporation with full power of substitution in
the premises.
Dated: ________________
Signature ________________________________
Instruction: Please do not fill in any blanks other than the signature line.
Please sign exactly as you would like your name to appear on the issued stock
certificate. The purpose of this assignment is to enable the Corporation to
exercise the Repurchase Right without requiring additional signatures on the
part of Optionee.
<PAGE>
EXHIBIT II
SECTION 260.141.11
TITLE 10, CALIFORNIA ADMINISTRATIVE CODE
260.141.11 Restriction on Transfer. (a) The issuer of any security
upon which a restriction on transfer has been imposed pursuant to Sections
260.102.6, 260.141.10 or 260.534 shall cause a copy of this section to be
delivered to each issuee or transferee of such security at the time the
certificate evidencing the security is delivered to the issuee or transferee.
(b) It is unlawful for the holder of any such security to consummate a
sale or transfer of such security, or any interest therein, without the prior
written consent of the Commissioner (until this condition is removed pursuant to
Section 260.141.12 of these rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in Subdivision (i) of Section 25102 of
the Code or Section 260.105.14 of these rules;
(4) to the transferor's ancestors, descendants or spouse, or any
custodian or trustee for the account of the transferor or the transferor's
ancestors, descendants, or spouse; or to a transferee by a trustee or custodian
for the account of the transferee or the transferee's ancestors, descendants or
spouse;
(5) to holders of securities of the same class of the same issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code (either
acting as such or as a finder) to a resident of a foreign state, territory or
country who is neither domiciled in this state to the knowledge of the broker-
dealer, nor actually present in this state if the sale of such securities is not
in violation of any securities law of the foreign state, territory or country
concerned;
(8) to a broker-dealer licensed under the Code in a principal
transaction, or as an underwriter or member of an underwriting syndicate or
selling group;
(9) if the interest sold or transferred is a pledge or other lien
given by the purchaser to the seller upon a sale of the security for which the
Commissioner's written consent is obtained or under this rule not required;
(10) by way of a sale qualified under Sections 25111, 25112, 25113 or
25121 of the Code, of the securities to be transferred, provided that no order
under Section 25140 or Subdivision (a) of Section 25143 is in effect with
respect to such qualification;
II-1.
<PAGE>
(11) by a corporation to a wholly owned subsidiary of such
corporation, or by a wholly owned subsidiary of a corporation to such
corporation;
(12) by way of an exchange qualified under Section 25111, 25112 or
25113 of the Code, provided that no order under Section 25140 or Subdivision (a)
of Section 25143 is in effect with respect to such qualification;
(13) between residents of foreign states, territories or countries who
are neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property Law or
to the administrator of the unclaimed property law of another state; or
(15) by the State Controller pursuant to the Unclaimed Property Law or
by the administrator of the unclaimed property law of another state if, in
either such case, such person (i) discloses to potential purchasers at the sale
that transfer of the securities is restricted under this rule, (ii) delivers to
each purchaser a copy of this rule, and (iii) advises the Commissioner of the
name of each purchaser;
(16) by a trustee to a successor trustee when such transfer does not
involve a change in the beneficial ownership of the securities;
(17) by way of an offer and sale of outstanding securities in an
issuer transaction that is subject to the qualification requirement of Section
25110 of the Code but exempt from that qualification requirement by subdivision
(f) of Section 25102; provided that any such transfer is on the condition that
any certificate evidencing the security issued to such transferee shall contain
the legend required by this section.
(c) The certificates representing all such securities subject to such
a restriction on transfer, whether upon initial issuance or upon any transfer
thereof, shall bear on their face a legend, prominently stamped or printed
thereon in capital letters of not less than 10-point size, reading as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
II-2.
<PAGE>
EXHIBIT III
FEDERAL INCOME TAX CONSEQUENCES AND
SECTION 83(b) TAX ELECTION
I. Federal Income Tax Consequences and Section 83(b) Election For
--------------------------------------------------------------
Exercise of Non-Statutory Option. If the Purchased Shares are acquired pursuant
- --------------------------------
to the exercise of a Non-Statutory Option, as specified in the Grant Notice,
then under Code Section 83, the excess of the Fair Market Value of the Purchased
Shares on the date any forfeiture restrictions applicable to such shares lapse
over the Exercise Price paid for such shares will be reportable as ordinary
income on the lapse date. For this purpose, the term "forfeiture restrictions"
includes the right of the Corporation to repurchase the Purchased Shares
pursuant to the Repurchase Right. However, Optionee may elect under Code
Section 83(b) to be taxed at the time the Purchased Shares are acquired, rather
than when and as such Purchased Shares cease to be subject to such forfeiture
restrictions. Such election must be filed with the Internal Revenue Service
within thirty (30) days after the date of the Agreement. Even if the Fair
Market Value of the Purchased Shares on the date of the Agreement equals the
Exercise Price paid (and thus no tax is payable), the election must be made to
avoid adverse tax consequences in the future. The form for making this election
is attached as part of this Exhibit III. FAILURE TO MAKE THIS FILING WITHIN THE
APPLICABLE THIRTY (30)-DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY
INCOME BY OPTIONEE AS THE FORFEITURE RESTRICTIONS LAPSE.
II. Federal Income Tax Consequences and Conditional Section 83(b) Election
----------------------------------------------------------------------
For Exercise of Incentive Option. If the Purchased Shares are acquired pursuant
- --------------------------------
to the exercise of an Incentive Option, as specified in the Grant Notice, then
the following tax principles shall be applicable to the Purchased Shares:
(i) For regular tax purposes, no taxable income will be
recognized at the time the Option is exercised.
(ii) The excess of (a) the Fair Market Value of the Purchased
Shares on the date the Option is exercised or (if later) on the date any
forfeiture restrictions applicable to the Purchased Shares lapse over (b) the
Exercise Price paid for the Purchased Shares will be includible in Optionee's
taxable income for alternative minimum tax purposes.
(iii) If Optionee makes a disqualifying disposition of the
Purchased Shares, then Optionee will recognize ordinary income in the year of
such disposition equal in amount to the excess of (a) the Fair Market Value of
the Purchased Shares on the date the Option is exercised or (if later) on the
date any forfeiture restrictions applicable to the Purchased Shares lapse over
(b) the Exercise Price paid for the Purchased Shares. Any additional gain
recognized upon the disqualifying disposition will be either short-term
or long-term capital gain depending upon the period for which the Purchased
Shares are held prior to the disposition.
III-1.
<PAGE>
(iv) For purposes of the foregoing, the term "forfeiture
restrictions" will include the right of the Corporation to repurchase the
Purchased Shares pursuant to the Repurchase Right. The term "disqualifying
disposition" means any sale or other disposition /1/ of the Purchased Shares
-
within two (2) years after the Grant Date or within one (1) year after the
exercise date of the Option.
(v) In the absence of final Treasury Regulations relating to
Incentive Options, it is not certain whether Optionee may, in connection with
the exercise of the Option for any Purchased Shares at the time subject to
forfeiture restrictions, file a protective election under Code Section 83(b)
which would limit (a) Optionee's alternative minimum taxable income upon
exercise and (b) Optionee's ordinary income upon a disqualifying disposition to
the excess of the Fair Market Value of the Purchased Shares on the date the
Option is exercised over the Exercise Price paid for the Purchased Shares.
Accordingly, such election if properly filed will only be allowed to the extent
the final Treasury Regulations permit such a protective election. Page 2 of the
attached form for making the election should be filed with any election made in
connection with the exercise of an Incentive Option.
_________________________
/1/ Generally, a disposition of shares purchased under an Incentive Option
-
includes any transfer of legal title, including a transfer by sale, exchange or
gift, but does not include a transfer to the Optionee's spouse, a transfer into
joint ownership with right of survivorship if Optionee remains one of the joint
owners, a pledge, a transfer by bequest or inheritance or certain tax free
exchanges permitted under the Code.
III-2.
<PAGE>
SECTION 83(b) ELECTION
This statement is being made under Section 83(b) of the Internal
Revenue Code, pursuant to Treas. Reg. Section 1.83-2.
(1) The taxpayer who performed the services is:
Name:
Address:
Taxpayer Ident. No.:
(2) The property with respect to which the election is being made is
____________ shares of the common stock of UniDirect Corporation
(3) The property was issued on _____________, 199__.
(4) The taxable year in which the election is being made is the calendar year
199__.
(5) The property is subject to a repurchase right pursuant to which the issuer
has the right to acquire the property at the original purchase price if for
any reason taxpayer's employment with the issuer is terminated. The
issuer's repurchase right lapses in a series of annual and monthly
installments over a four (4)-year period ending on ____________, 199__.
(6) The fair market value at the time of transfer (determined without regard to
any restriction other than a restriction which by its terms will never
lapse) is $_____________per share.
(7) The amount paid for such property is $____________ per share.
(8) A copy of this statement was furnished to UniDirect Corporation for whom
taxpayer rendered the services underlying the transfer of property.
(9) This statement is executed on _______________________, 199__.
____________________________ ___________________________________________
Spouse (if any) Taxpayer
This election must be filed with the Internal Revenue Service Center with which
taxpayer files his or her Federal income tax returns and must be made within
thirty (30) days after the execution date of the Stock Purchase Agreement. This
filing should be made by registered or certified mail, return receipt requested.
Optionee must retain two (2) copies of the completed form for filing with his or
her Federal and state tax returns for the current tax year and an additional
copy for his or her records.
<PAGE>
The property described in the above Section 83(b) election is comprised of
shares of common stock acquired pursuant to the exercise of an incentive stock
option under Section 422 of the Internal Revenue Code (the "Code").
Accordingly, it is the intent of the Taxpayer to utilize this election to
achieve the following tax results:
1. The purpose of this election is to have the alternative minimum
taxable income attributable to the purchased shares measured by the amount by
which the fair market value of such shares at the time of their transfer to the
Taxpayer exceeds the purchase price paid for the shares. In the absence of this
election, such alternative minimum taxable income would be measured by the
spread between the fair market value of the purchased shares and the purchase
price which exists on the various lapse dates in effect for the forfeiture
restrictions applicable to such shares. The election is to be effective to the
full extent permitted under the Code.
2. Section 421(a)(1) of the Code expressly excludes from income any
excess of the fair market value of the purchased shares over the amount paid for
such shares. Accordingly, this election is also intended to be effective in the
event there is a "disqualifying disposition" of the shares, within the meaning
of Section 421(b) of the Code, which would otherwise render the provisions of
Section 83(a) of the Code applicable at that time. Consequently, the Taxpayer
hereby elects to have the amount of disqualifying disposition income measured by
the excess of the fair market value of the purchased shares on the date of
transfer to the Taxpayer over the amount paid for such shares. Since Section
421(a) presently applies to the shares which are the subject of this Section
83(b) election, no taxable income is actually recognized for regular tax
purposes at this time, and no income taxes are payable, by the Taxpayer as a
result of this election.
THIS PAGE 2 IS TO BE ATTACHED TO ANY SECTION 83(b) ELECTION FILED IN CONNECTION
WITH THE EXERCISE OF AN INCENTIVE STOCK OPTION UNDER THE FEDERAL TAX LAWS.
2.
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Agreement:
A. Agreement shall mean this Stock Purchase Agreement.
---------
B. Board shall mean the Corporation's Board of Directors.
-----
C. Code shall mean the Internal Revenue Code of 1986, as amended.
----
D. Common Stock shall mean the Corporation's common stock.
------------
E. Corporate Transaction shall mean either of the following shareholder-
---------------------
approved transactions:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the Corporation's
outstanding securities are transferred to a person or persons different from the
persons holding those securities immediately prior to such transaction, or
(ii) the sale, transfer or other disposition of all or substantially
all of the Corporation's assets in complete liquidation or dissolution of the
Corporation.
F. Corporation shall mean UniDirect Corporation, a California
-----------
corporation.
G. Disposition Notice shall have the meaning assigned to such term in
------------------
Paragraph E.2.
H. Dissolution Notice shall have the meaning assigned to such term in
------------------
Paragraph F.2.
I. Exercise Notice shall have the meaning assigned to such term in
---------------
Paragraph E.3.
J. Exercise Price shall have the meaning assigned to such term in
--------------
Paragraph A.1.
K. Fair Market Value of a share of Common Stock on any relevant date,
-----------------
prior to the initial public offering of the Common Stock, shall be determined by
the Plan Administrator after taking into account such factors as it shall deem
appropriate.
L. First Refusal Right shall mean the right granted to the Corporation in
-------------------
accordance with Article E.
M. Grant Date shall have the meaning assigned to such term in Paragraph
----------
A.1.
N. Grant Notice shall mean the Notice of Grant of Stock Option pursuant
------------
to which Optionee has been informed of the basic terms of the Option.
A-1.
<PAGE>
O. Incentive Option shall mean an option which satisfies the requirements
----------------
of Code Section 422.
P. Market Stand-Off shall mean the market stand-off limitations specified
----------------
in Paragraph C.3.
Q. 1933 Act shall mean the Securities Act of 1933, as amended.
--------
R. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.
--------
S. Non-Statutory Option shall mean an option not intended to satisfy the
--------------------
requirements of Code Section 422.
T. Option shall have the meaning assigned to such term in Paragraph A.1.
------
U. Option Agreement shall mean all agreements and other documents
----------------
evidencing the Option.
V. Optionee shall mean the person to whom the Option is granted under the
--------
Plan.
W. Owner shall mean Optionee and all subsequent holders of the Purchased
-----
Shares who derive their chain of ownership through a Permitted Transfer from
Optionee.
X. Parent shall mean any corporation (other than the Corporation) in an
------
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
Y. Permitted Transfer shall mean (i) a gratuitous transfer of the
------------------
Purchased Shares, provided and only if Optionee obtains the Corporation's prior
written consent to such transfer, (ii) a transfer of title to the Purchased
Shares effected pursuant to Optionee's will or the laws of intestate succession
following Optionee's death or (iii) a transfer to the Corporation in pledge as
security for any purchase-money indebtedness incurred by Optionee in connection
with the acquisition of the Purchased Shares.
Z. Plan shall mean the Corporation's 1995 Stock Option/Stock Issuance
----
Plan.
AA. Plan Administrator shall mean either the Board or a committee of Board
------------------
members, to the extent the committee is at the time responsible for
administration of the Plan.
AB. Prior Purchase Agreement shall have the meaning assigned to such term
------------------------
in Paragraph D.4.
A-2.
<PAGE>
AC. Purchase Notice shall have the meaning assigned to such term in
---------------
Paragraph F.3.
AD. Purchased Shares shall have the meaning assigned to such term in
----------------
Paragraph A.1.
AE. Recapitalization shall mean any stock split, stock dividend,
----------------
recapitalization, combination of shares, exchange of shares or other change
affecting the Corporation's outstanding Common Stock as a class without the
Corporation's receipt of consideration.
AF. Reorganization shall mean any of the following transactions:
--------------
(i) a merger or consolidation in which the Corporation is not the
surviving entity,
(ii) a sale, transfer or other disposition of all or substantially
all of the Corporation's assets,
(iii) a reverse merger in which the Corporation is the surviving
entity but in which the Corporation's outstanding voting securities are
transferred in whole or in part to a person or persons different from the
persons holding those securities immediately prior to the merger, or
(iv) any transaction effected primarily to change the state in which
the Corporation is incorporated or to create a holding company structure.
AG. Repurchase Right shall mean the right granted to the Corporation in
----------------
accordance with Article D.
AH. SEC shall mean the Securities and Exchange Commission.
---
II. Service shall mean the provision of services to the Corporation or any
-------
Parent or Subsidiary by an individual in the capacity of an employee, subject to
the control and direction of the employer entity as to both the work to be
performed and the manner and method of performance, a non-employee member of the
board of directors or a consultant.
AJ. Special Purchase Right shall mean the right granted to the Corporation
----------------------
in accordance with Article F.
AK. Subsidiary shall mean any corporation (other than the Corporation) in
----------
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
AL. Target Shares shall have the meaning assigned to such term in
-------------
Paragraph E.2.
A-3.
<PAGE>
AM. Vesting Schedule shall mean the vesting schedule specified in the
----------------
Grant Notice.
AN. Unvested Shares shall have the meaning assigned to such term in
---------------
Paragraph D.1.
A-4.
<PAGE>
UNIDIRECT CORPORATION
STOCK ISSUANCE AGREEMENT
------------------------
AGREEMENT made as of this ___ day of _________ 19__, by and among
UniDirect Corporation, a California corporation, _______________________,
Participant in the Corporation's 1995 Stock Option/Stock Issuance Plan, and
________________________, Participant's spouse.
All capitalized terms in this Agreement shall have the meaning
assigned to them in this Agreement or in the attached Appendix.
A. PURCHASE OF SHARES
------------------
1. Purchase. Participant hereby purchases _____________ shares of
--------
Common Stock (the "Purchased Shares") pursuant to the provisions of the Stock
Issuance Program at the purchase price of $______ per share (the "Purchase
Price").
2. Payment. Concurrently with the delivery of this Agreement to the
-------
Corporation, Participant shall pay the Purchase Price for the Purchased Shares
in cash or check payable to the Corporation and shall deliver a duly-executed
blank Assignment Separate from Certificate (in the form attached hereto as
Exhibit I) with respect to the Purchased Shares.
3. Delivery of Certificates. The certificates representing any
------------------------
Purchased Shares which are subject to the Corporation's Repurchase Right shall
be held in escrow in accordance with the provisions of this Agreement.
4. Shareholder Rights. Until such time as the Corporation exercises
------------------
the Repurchase Right, the First Refusal Right or the Special Purchase Right,
Participant (or any successor in interest) shall have all the rights of a
shareholder (including voting, dividend and liquidation rights) with respect to
the Purchased Shares, including the Purchased Shares held in escrow hereunder,
subject, however, to the transfer restrictions of Articles B and C.
B. SECURITIES LAW COMPLIANCE
-------------------------
1. Restricted Securities. The Purchased Shares have not been
---------------------
registered under the 1933 Act and are being issued to Participant in reliance
upon the exemption from such registration provided by SEC Rule 701 for stock
issuances under compensatory benefit plans such as the Plan. Participant hereby
confirms that Participant has been informed that the Purchased Shares are
restricted securities under the 1933 Act and may not be resold or transferred
unless the Purchased Shares are first registered under the Federal securities
laws or unless an exemption from such registration is available. Accordingly,
Participant hereby acknowledges that Participant is prepared to hold the
Purchased Shares for an indefinite period and that Participant is aware that
SEC Rule 144 issued under the 1933 Act which exempts certain resales of
unrestricted securities is not presently available to exempt the resale of the
Purchased Shares from the registration
<PAGE>
requirements of the 1933 Act.
2. Disposition of Purchased Shares. Participant shall make no
-------------------------------
disposition of the Purchased Shares (other than a Permitted Transfer) unless and
until there is compliance with all of the following requirements:
(i) Participant shall have provided the Corporation with a
written summary of the terms and conditions of the proposed disposition.
(ii) Participant shall have complied with all requirements of
this Agreement applicable to the disposition of the Purchased Shares.
(iii) Participant shall have provided the Corporation with
written assurances, in form and substance satisfactory to the Corporation,
that (a) the proposed disposition does not require registration of the
Purchased Shares under the 1933 Act or (b) all appropriate action necessary
for compliance with the registration requirements of the 1933 Act or any
exemption from registration available under the 1933 Act (including Rule
144) has been taken.
(iv) Participant shall have provided the Corporation with
written assurances, in form and substance satisfactory to the
Corporation, that the proposed disposition will not result in the
contravention of any transfer restrictions applicable to the Purchased
Shares pursuant to the provisions of the Rules of the California
Corporations Commissioner identified in Paragraph B.4.
The Corporation shall not be required (i) to transfer on its books any
---
Purchased Shares which have been sold or transferred in violation of the
provisions of this Agreement or (ii) to treat as the owner of the Purchased
--
Shares, or otherwise to accord voting, dividend or liquidation rights to, any
transferee to whom the Purchased Shares have been transferred in contravention
of this Agreement.
3. Restrictive Legends. The stock certificates for the Purchased
-------------------
Shares shall be endorsed with one or more of the following restrictive legends:
(i) "The shares represented by this certificate have not been
registered under the Securities Act of 1933. The shares may not be sold
or offered for sale in the absence of (a) an effective registration
statement for the shares under such Act, (b) a 'no action' letter of the
Securities and Exchange Commission with respect to such sale or offer or
(c) satisfactory assurances to the Corporation that registration under
such Act is not required with respect to such sale or offer."
(ii) "It is unlawful to consummate a sale or transfer of this
security, or any interest therein, or to receive any consideration
therefor, without the prior written consent of the Commissioner of
Corporations of the State of
2.
<PAGE>
California, except as permitted in the Commissioner's Rules."
(iii) "The shares represented by this certificate are subject to
certain repurchase rights and rights of first refusal granted to the
Corporation and accordingly may not be sold, assigned, transferred,
encumbered, or in any manner disposed of except in conformity with the
terms of a written agreement dated ____________, 199_ between the
Corporation and the registered holder of the shares (or the predecessor in
interest to the shares). A copy of such agreement is maintained at the
Corporation's principal corporate offices."
4. Receipt of Commissioner Rules. Participant hereby
-----------------------------
acknowledges receipt of a copy of Section 260.141.11 of the Rules of the
California Corporations Commissioner, a copy of which is attached as Exhibit II
to this Agreement.
C. TRANSFER RESTRICTIONS
---------------------
1. Restriction on Transfer. Except for any Permitted Transfer,
-----------------------
Participant shall not transfer, assign, encumber or otherwise dispose of any of
the Purchased Shares which are subject to the Repurchase Right. In addition,
Purchased Shares which are released from the Repurchase Right shall not be
transferred, assigned, encumbered or otherwise disposed of in contravention of
the First Refusal Right, the Market Stand-Off or the Special Purchase Right.
2. Transferee Obligations. Each person (other than the
----------------------
Corporation) to whom the Purchased Shares are transferred by means of a
Permitted Transfer must, as a condition precedent to the validity of such
transfer, acknowledge in writing to the Corporation that such person is bound by
the provisions of this Agreement and that the transferred shares are subject to
(i) the Repurchase Right, (ii) the First Refusal Right and (iii) the Market
Stand-Off, to the same extent such shares would be so subject if retained by
Participant.
3. Market Stand-Off.
----------------
(a) In connection with any underwritten public offering by the
Corporation of its equity securities pursuant to an effective registration
statement filed under the 1933 Act, including the Corporation's initial public
offering, Owner shall not sell, make any short sale of, loan, hypothecate,
pledge, grant any option for the purchase of, or otherwise dispose or transfer
for value or otherwise agree to engage in any of the foregoing transactions
with respect to, any Purchased Shares without the prior written consent of the
Corporation or its underwriters. Such limitations (the "Market Stand-Off")
shall be in effect for such period of time from and after the effective date
of the final prospectus for the offering as may be requested by the
Corporation or such underwriters. In no event, however, shall such period
exceed one hundred eighty (180) days and the Market Stand-Off shall in all
events terminate two (2) years after the effective date of the Corporation's
initial public offering.
(b) Owner shall be subject to the Market Stand-Off provided and only
-----------------
if
- --
3.
<PAGE>
the officers and directors of the Corporation are also subject to similar
restrictions.
(c) Any new, substituted or additional securities which are by reason
of any Recapitalization or Reorganization distributed with respect to the
Purchased Shares shall be immediately subject to the Market Stand-Off, to the
same extent the Purchased Shares are at such time covered by such provisions.
(d) In order to enforce the Market Stand-Off, the Corporation may
impose stop-transfer instructions with respect to the Purchased Shares until the
end of the applicable stand-off period.
D. REPURCHASE RIGHT
----------------
1. Grant. The Corporation is hereby granted the right (the
-----
"Repurchase Right"), exercisable at any time during the sixty (60)-day period
following the date Participant ceases for any reason to remain in Service or (if
later) during the sixty (60)-day period following the execution date of this
Agreement, to repurchase at the Purchase Price all or (at the discretion of the
Corporation and with the consent of Participant) any portion of the Purchased
Shares in which Participant is not, at the time of his or her cessation of
Service, vested in accordance with the Vesting Schedule (such shares to be
hereinafter referred to as the "Unvested Shares").
2. Exercise of the Repurchase Right. The Repurchase Right shall
--------------------------------
be exercisable by written notice delivered to each Owner of the Unvested Shares
prior to the expiration of the sixty (60)-day exercise period. The notice shall
indicate the number of Unvested Shares to be repurchased and the date on which
the repurchase is to be effected, such date to be not more than thirty (30) days
after the date of such notice. The certificates representing the Unvested
Shares to be repurchased shall be delivered to the Corporation prior to the
close of business on the date specified for the repurchase. Concurrently with
the receipt of such stock certificates, the Corporation shall pay to Owner, in
cash or cash equivalents (including the cancellation of any purchase-money
indebtedness), an amount equal to the Purchase Price previously paid for the
Unvested Shares which are to be repurchased from Owner.
3. Termination of the Repurchase Right. The Repurchase Right
-----------------------------------
shall terminate with respect to any Unvested Shares for which it is not timely
exercised under Paragraph D.2. In addition, the Repurchase Right shall
terminate and cease to be exercisable with respect to any and all Purchased
Shares in which Participant vests in accordance with the following provisions:
(i) Upon Participant's completion of one (1) year of Service
measured from ______________, 199__, Participant shall acquire a vested
interest in, and the Repurchase Right shall lapse with respect to, twenty-
five percent (25%) of the Purchased Shares.
(ii) Participant shall acquire a vested interest in, and the
4.
<PAGE>
Repurchase Right shall lapse with respect to, the remaining Purchased
Shares in equal successive monthly installments upon Participant's
completion of each additional month of Service over the thirty-six (36)-
month period measured from the initial vesting date under subparagraph (i)
above.
All Purchased Shares as to which the Repurchase Right lapses shall,
however, remain subject to (i) the First Refusal Right, (ii) the Market Stand-
Off and (iii) the Special Purchase Right.
4. Recapitalization. Any new, substituted or additional
----------------
securities or other property (including cash paid other than as a regular cash
dividend) which is by reason of any Recapitalization distributed with respect to
the Purchased Shares shall be immediately subject to the Repurchase Right, but
only to the extent the Purchased Shares are at the time covered by such right.
Appropriate adjustments to reflect such distribution shall be made to the number
and/or class of Purchased Shares subject to this Agreement and to the price per
share to be paid upon the exercise of the Repurchase Right in order to reflect
the effect of any such Recapitalization upon the Corporation's capital
structure; provided, however, that the aggregate price shall remain the same.
--------
5. Corporate Transaction.
---------------------
(a) Immediately prior to the consummation of any Corporate
Transaction, the Repurchase Right shall automatically lapse in its entirety,
except to the extent the Repurchase Right is to be assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction.
(b) To the extent the Repurchase Right remains in effect
following a Corporate Transaction, the right shall apply to the new capital
stock or other property (including any cash payments) received in exchange for
the Purchased Shares in consummation of the Corporate Transaction, but only to
the extent the Purchased Shares are at the time covered by such right.
Appropriate adjustments shall be made to the price per share payable upon
exercise of the Repurchase Right to reflect the effect of the Corporate
Transaction upon the Corporation's capital structure; provided, however,
--------
that the aggregate price shall remain the same.
E. RIGHT OF FIRST REFUSAL
----------------------
1. Grant. The Corporation is hereby granted the right of first
-----
refusal (the "First Refusal Right"), exercisable in connection with any proposed
transfer of the Purchased Shares in which Participant has vested in accordance
with the Vesting Schedule. For purposes of this Article E, the term "transfer"
shall include any sale, assignment, pledge, encumbrance or other disposition of
the Purchased Shares intended to be made by Owner, but shall not include any
Permitted Transfer.
2. Notice of Intended Disposition. In the event any Owner of
------------------------------
Purchased Shares in which Participant has vested desires to accept a bona fide
third-party offer for the transfer
5.
<PAGE>
of any or all of such shares (the Purchased Shares subject to such offer to be
hereinafter referred to as the "Target Shares"), Owner shall promptly (i)
deliver to the Corporation written notice (the "Disposition Notice") of the
terms of the offer, including the purchase price and the identity of the third-
party offeror, and (ii) provide satisfactory proof that the disposition of the
Target Shares to such third-party offeror would not be in contravention of the
provisions set forth in Articles B and C.
3. Exercise of the First Refusal Right. The Corporation shall,
-----------------------------------
for a period of twenty-five (25) days following receipt of the Disposition
Notice, have the right to repurchase any or all of the Target Shares subject to
the Disposition Notice upon the same terms as those specified therein or upon
such other terms (not materially different from those specified in the
Disposition Notice) to which Owner consents. Such right shall be exercisable by
delivery of written notice (the "Exercise Notice") to Owner prior to the
expiration of the twenty-five (25)-day exercise period. If such right is
exercised with respect to all the Target Shares, then the Corporation shall
effect the repurchase of such shares, including payment of the purchase price,
not more than five (5) business days after delivery of the Exercise Notice; and
at such time the certificates representing the Target Shares shall be delivered
to the Corporation.
Should the purchase price specified in the Disposition Notice be
payable in property other than cash or evidences of indebtedness, the
Corporation shall have the right to pay the purchase price in the form of cash
equal in amount to the value of such property. If Owner and the Corporation
cannot agree on such cash value within ten (10) days after the Corporation's
receipt of the Disposition Notice, the valuation shall be made by an appraiser
of recognized standing selected by Owner and the Corporation or, if they cannot
agree on an appraiser within twenty (20) days after the Corporation's receipt of
the Disposition Notice, each shall select an appraiser of recognized standing
and the two (2) appraisers shall designate a third appraiser of recognized
standing, whose appraisal shall be determinative of such value. The cost of
such appraisal shall be shared equally by Owner and the Corporation. The
closing shall then be held on the later of (i) the fifth business day
-----
following delivery of the Exercise Notice or (ii) the fifth business day after
such valuation shall have been made.
4. Non-Exercise of the First Refusal Right. In the event the
---------------------------------------
Exercise Notice is not given to Owner prior to the expiration of the twenty-five
(25)-day exercise period, Owner shall have a period of thirty (30) days
thereafter in which to sell or otherwise dispose of the Target Shares to the
third-party offeror identified in the Disposition Notice upon terms (including
the purchase price) no more favorable to such third-party offeror than those
specified in the Disposition Notice; provided, however, that any such sale or
--------
disposition must not be effected in contravention of the provisions of Articles
B and C. The third-party offeror shall acquire the Target Shares free and clear
of the Repurchase Right and the First Refusal Right, but the acquired shares
shall remain subject to Articles B and C. In the event Owner does not effect
such sale or disposition of the Target Shares within the specified thirty (30)-
day period, the First Refusal Right shall continue to be applicable to any
subsequent disposition of the Target Shares by Owner until such right lapses.
5. Partial Exercise of the First Refusal Right. In the event the
-------------------------------------------
Corporation
6.
<PAGE>
makes a timely exercise of the First Refusal Right with respect to a portion,
but not all, of the Target Shares specified in the Disposition Notice, Owner
shall have the option, exercisable by written notice to the Corporation
delivered within five (5) days after Owner's receipt of the Exercise Notice,
to effect the sale of the Target Shares pursuant to either of the following
alternatives:
(i) sale or other disposition of all the Target Shares to the
third-party offeror identified in the Disposition Notice, but in full
compliance with the requirements of Paragraph E.4, as if the Corporation
did not exercise the First Refusal Right; or
(ii) sale to the Corporation of the portion of the Target Shares
which the Corporation has elected to purchase, such sale to be effected in
substantial conformity with the provisions of Paragraph E.3. The First
Refusal Right shall continue to be applicable to any subsequent disposition
of the remaining Target Shares until such right lapses.
Failure of Owner to deliver timely notification to the Corporation
shall be deemed to be an election by Owner to sell the Target Shares pursuant to
alternative (i) above.
6. Recapitalization/Reorganization.
-------------------------------
(a) Any new, substituted or additional securities or other
property which is by reason of any Recapitalization distributed with respect
to the Purchased Shares shall be immediately subject to the First Refusal
Right, but only to the extent the Purchased Shares are at the time covered by
such right.
(b) In the event of a Reorganization, the First Refusal
Right shall remain in full force and effect and shall apply to the new capital
stock or other property received in exchange for the Purchased Shares in
consummation of the Reorganization, but only to the extent the Purchased
Shares are at the time covered by such right.
7. Lapse. The First Refusal Right shall lapse upon the earliest
----- --------
to occur of (i) the first date on which shares of the Common Stock are held of
record by more than five hundred (500) persons, (ii) a determination is made by
the Board that a public market exists for the outstanding shares of Common Stock
or (iii) a firm commitment underwritten public offering, pursuant to an
effective registration statement under the 1933 Act, covering the offer and sale
of the Common Stock in the aggregate amount of at least ten million dollars
($10,000,000). However, the Market Stand-Off shall continue to remain in full
force and effect following the lapse of the First Refusal Right.
F. MARITAL DISSOLUTION OR LEGAL SEPARATION
---------------------------------------
1. Grant. In connection with the dissolution of Participant's
-----
marriage or the legal separation of Participant and Participant's spouse, the
Corporation shall have the right (the
7.
<PAGE>
"Special Purchase Right") to purchase from Participant's spouse, in accordance
with the provisions of Paragraph F.3, all or, with the consent of Optionee's
spouse, any portion of the Purchased Shares which would otherwise be awarded
to such spouse in settlement of any community property or other marital
property rights such spouse may have in such shares.
2. Notice of Decree or Agreement. Participant shall promptly
-----------------------------
provide the Corporation with written notice (the "Dissolution Notice") of (i)
the entry of any judicial decree or order resolving the property rights of
Participant and Participant's spouse in connection with their marital
dissolution or legal separation or (ii) the execution of any contract or
agreement relating to the distribution or division of such property rights. The
Dissolution Notice shall be accompanied by a copy of the actual decree or order
of dissolution or contract or agreement between Participant and Participant's
spouse which provides for the award to the spouse of one or more Purchased
Shares in settlement of any community property or other marital property rights
such spouse may have in such shares.
3. Exercise of the Special Purchase Right. The Special Purchase
--------------------------------------
Right shall be exercisable by delivery of written notice (the "Purchase Notice")
to Participant and Participant's spouse within thirty (30) days after the
Corporation's receipt of the Dissolution Notice. The Purchase Notice shall
indicate the number of shares to be purchased by the Corporation, the date such
purchase is to be effected (such date to be not less than five (5) business
days, nor more than ten (10) business days, after the date of the Purchase
Notice) and the Fair Market Value to be paid for such Purchased Shares.
Participant (or Participant's spouse, to the extent such spouse has physical
possession of the Purchased Shares) shall, prior to the close of business on the
date specified for the purchase, deliver to the Corporation the certificates
representing the shares to be purchased. The Corporation shall, concurrently
with the receipt of the stock certificates, pay to Participant's spouse (in
cash or cash equivalents) an amount equal to the Fair Market Value specified
for such shares in the Purchase Notice.
If Participant's spouse does not agree with the Fair Market Value
specified for the shares in the Purchase Notice, then the spouse shall promptly
notify the Corporation in writing of such disagreement and the fair market value
of such shares shall thereupon be determined by an appraiser of recognized
standing selected by the Corporation and the spouse. If they cannot agree on an
appraiser within twenty (20) days after the date of the Purchase Notice, each
shall select an appraiser of recognized standing, and the two (2) appraisers
shall designate a third appraiser of recognized standing whose appraisal shall
be determinative of such value. The cost of the appraisal shall be shared
equally by the Corporation and Participant's spouse. The closing shall then be
held on the fifth business day following the completion of such appraisal;
provided, however, that if the appraised value is more than twenty-five percent
- --------
(25%) greater than the Fair Market Value specified for the shares in the
Purchase Notice, the Corporation shall have the right, exercisable prior to the
expiration of such five (5) business-day period, to rescind the exercise of the
Special Purchase Right and thereby revoke its election to purchase the shares
awarded to the spouse. In the event the Corporation so revokes its election,
the Corporation shall bear the entire cost of the appraisal.
8.
<PAGE>
4. Lapse. The Special Purchase Right shall lapse upon the
-----
earlier to occur of (i) the lapse of the First Refusal Right or (ii) the
- -------
expiration of the thirty (30)-day exercise period specified in Paragraph F.3, to
the extent the Special Purchase Right is not timely exercised in accordance with
such paragraph.
G. ESCROW
------
1. Deposit. Upon issuance, the certificates for the Purchased
-------
Shares which are subject to the Repurchase Right shall be deposited in escrow
with the Corporation to be held in accordance with the provisions of this
Article G. Each deposited certificate shall be accompanied by a duly-executed
Assignment Separate from Certificate in the form of Exhibit I. The deposited
certificates, together with any other assets or securities from time to time
deposited with the Corporation pursuant to the requirements of this Agreement,
shall remain in escrow until such time or times as the certificates (or other
assets and securities) are to be released or otherwise surrendered for
cancellation in accordance with Paragraph G.3. Upon delivery of the
certificates (or other assets and securities) to the Corporation, Owner shall be
issued a receipt acknowledging the number of Purchased Shares (or other assets
and securities) delivered in escrow.
2. Recapitalization/Reorganization. Any new, substituted or
-------------------------------
additional securities or other property which is by reason of any
Recapitalization or Reorganization distributed with respect to the Purchased
Shares shall be immediately delivered to the Corporation to be held in escrow
under this Article G, but only to the extent the Purchased Shares are at the
time subject to the escrow requirements hereunder. However, all regular cash
dividends on the Purchased Shares (or other securities at the time held in
escrow) shall be paid directly to Owner and shall not be held in escrow.
3. Release/Surrender. The Purchased Shares, together with any
-----------------
other assets or securities held in escrow hereunder, shall be subject to the
following terms relating to their release from escrow or their surrender to the
Corporation for repurchase and cancellation:
(i) Should the Corporation elect to exercise the Repurchase
Right with respect to any Purchased Shares, then the escrowed
certificates for those Purchased Shares (together with any other assets
or securities attributable thereto) shall be surrendered to the
Corporation concurrently with the payment to Owner, in cash or cash
equivalent (including the cancellation of any purchase-money
indebtedness), of an amount equal to the aggregate Purchase Price for
such Purchased Shares, and Owner shall cease to have any further rights
or claims with respect to such Purchased Shares (or other assets or
securities attributable thereto).
(ii) Should the Corporation elect to exercise the First Refusal
Right with respect to any Target Shares held at the time in escrow
hereunder, then the escrowed certificates for those Target Shares (together
with any other assets or securities attributable thereto) shall be
surrendered to the Corporation concurrently with the payment of the
Paragraph E.3 purchase price for such Target Shares to
9.
<PAGE>
Owner, and Owner shall cease to have any further rights or claims with
respect to such Target Shares (or other assets or securities attributable
thereto).
(iii) Should the Corporation elect not to exercise the
---
Repurchase Right with respect to any Purchased Shares or the First Refusal
Right with respect to any Target Shares held at the time in escrow
hereunder, then the escrowed certificates for those Purchased Shares or
Target Shares (together with any other assets or securities attributable
thereto) shall be released to Owner.
(iv) As the Purchased Shares (or any other assets or securities
attributable thereto) vest in accordance with the Vesting Schedule, the
certificates for those vested shares (as well as all other vested assets
and securities) shall be released from escrow upon Owner's request, but not
more frequently than once every six (6) months.
(v) All Purchased Shares which vest (and any other vested
assets and securities attributable thereto) shall be released within
thirty (30) days after the earlier to occur of (a) Participant's
-------
cessation of Service or (b) the lapse of the First Refusal Right.
(vi) All Purchased Shares (or other assets or securities)
released from escrow shall nevertheless remain subject to (a) the First
Refusal Right, to the extent such right has not otherwise lapsed, (b) the
Market Stand-Off, until such limitations terminate, and (c) the Special
Purchase Right, to the extent such right has not otherwise lapsed.
H. SPECIAL TAX ELECTION
--------------------
1. Section 83(b) Election. Under Code Section 83, the excess of
----------------------
the Fair Market Value of the Purchased Shares on the date any forfeiture
restrictions applicable to such shares lapse over the Purchase Price paid for
such shares will be reportable as ordinary income on the lapse date. For this
purpose, the term "forfeiture restrictions" includes the right of the
Corporation to repurchase the Purchased Shares pursuant to the Repurchase Right.
Participant may elect under Code Section 83(b) to be taxed at the time the
Purchased Shares are acquired, rather than when and as such Purchased Shares
cease to be subject to such forfeiture restrictions. Such election must be
filed with the Internal Revenue Service within thirty (30) days after the date
of this Agreement. Even if the Fair Market Value of the Purchased Shares on the
date of this Agreement equals the Purchase Price paid (and thus no tax is
payable), the election must be made to avoid adverse tax consequences in the
future. THE FORM FOR MAKING THIS ELECTION IS ATTACHED AS EXHIBIT III HERETO.
PARTICIPANT UNDERSTANDS THAT FAILURE TO MAKE THIS FILING WITHIN THE APPLICABLE
THIRTY (30)-DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY INCOME BY
PARTICIPANT AS THE FORFEITURE RESTRICTIONS LAPSE.
10.
<PAGE>
2. FILING RESPONSIBILITY. PARTICIPANT ACKNOWLEDGES THAT IT IS
---------------------
PARTICIPANT'S SOLE RESPONSIBILITY, AND NOT THE CORPORATION'S, TO FILE A TIMELY
ELECTION UNDER CODE SECTION 83(b), EVEN IF PARTICIPANT REQUESTS THE CORPORATION
OR ITS REPRESENTATIVES TO MAKE THIS FILING ON HIS OR HER BEHALF.
I. GENERAL PROVISIONS
------------------
1. Assignment. The Corporation may assign the Repurchase Right,
----------
the First Refusal Right and/or the Special Purchase Right to any person or
entity selected by the Board, including (without limitation) one or more
shareholders of the Corporation.
If the assignee of the Repurchase Right is other than (i) a wholly
owned subsidiary of the Corporation or (ii) the parent corporation owning one
hundred percent (100%) of the Corporation's outstanding capital stock, then such
assignee must make a cash payment to the Corporation, upon the assignment of the
Repurchase Right, in an amount equal to the excess (if any) of (i) the Fair
Market Value of the Purchased Shares at the time subject to the assigned
Repurchase Right over (ii) the aggregate repurchase price payable for the
Purchased Shares.
2. No Employment or Service Contract. Nothing in this Agreement
---------------------------------
or in the Plan shall confer upon Participant any right to continue in Service
for any period of specific duration or interfere with or otherwise restrict in
any way the rights of the Corporation (or any Parent or Subsidiary employing
or retaining Participant) or of Participant, which rights are hereby expressly
reserved by each, to terminate Participant's Service at any time for any
reason, with or without cause.
3. Notices. Any notice required to be given under this Agreement
-------
shall be in writing and shall be deemed effective upon personal delivery or upon
deposit in the U.S. mail, registered or certified, postage prepaid and properly
addressed to the party entitled to such notice at the address indicated below
such party's signature line on this Agreement or at such other address as such
party may designate by ten (10) days advance written notice under this Paragraph
I.3 to all other parties to this Agreement.
4. No Waiver. The failure of the Corporation in any instance to
---------
exercise the Repurchase Right, the First Refusal Right or the Special Purchase
Right shall not constitute a waiver of any other repurchase rights and/or rights
of first refusal that may subsequently arise under the provisions of this
Agreement or any other agreement between the Corporation and Participant or
Participant's spouse. No waiver of any breach or condition of this Agreement
shall be deemed to be a waiver of any other or subsequent breach or condition,
whether of like or different nature.
5. Cancellation of Shares. If the Corporation shall make
----------------------
available, at the time and place and in the amount and form provided in this
Agreement, the consideration for the Purchased Shares to be repurchased in
accordance with the provisions of this Agreement, then from and after such time,
the person from whom such shares are to be repurchased shall no longer have
11.
<PAGE>
any rights as a holder of such shares (other than the right to receive payment
of such consideration in accordance with this Agreement). Such shares shall be
deemed purchased in accordance with the applicable provisions hereof, and the
Corporation shall be deemed the owner and holder of such shares, whether or
not the certificates therefor have been delivered as required by this
Agreement.
J. MISCELLANEOUS PROVISIONS
------------------------
1. Participant Undertaking. Participant hereby agrees to take
-----------------------
whatever additional action and execute whatever additional documents the
Corporation may deem necessary or advisable in order to carry out or effect one
or more of the obligations or restrictions imposed on either Participant or the
Purchased Shares pursuant to the provisions of this Agreement.
2. Agreement is Entire Contract. This Agreement constitutes the
----------------------------
entire contract between the parties hereto with regard to the subject matter
hereof. This Agreement is made pursuant to the provisions of the Plan and shall
in all respects be construed in conformity with the terms of the Plan.
3. Governing Law. This Agreement shall be governed by, and
-------------
construed in accordance with, the laws of the State of California without
resort to that State's conflict-of-laws rules.
4. Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
5. Successors and Assigns. The provisions of this Agreement
----------------------
shall inure to the benefit of, and be binding upon, the Corporation and its
successors and assigns and upon Participant, Participant's assigns and the legal
representatives, heirs and legatees of Participant's estate, whether or not any
such person shall have become a party to this Agreement and have agreed in
writing to join herein and be bound by the terms hereof.
6. Power of Attorney. Participant's spouse hereby appoints
-----------------
Participant his or her true and lawful attorney in fact, for him or her and in
his or her name, place and stead, and for his or her use and benefit, to agree
to any amendment or modification of this Agreement and to execute such further
instruments and take such further actions as may reasonably be necessary to
carry out the intent of this Agreement. Participant's spouse further gives and
grants unto Participant as his or her attorney in fact full power and authority
to do and perform every act necessary and proper to be done in the exercise of
any of the foregoing powers as fully as he or she might or could do if
personally present, with full power of substitution and revocation, hereby
ratifying and confirming all that Participant shall lawfully do and cause to be
done by virtue of this power of attorney.
12.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the
day and year first indicated above.
UNIDIRECT CORPORATION
By:_______________________________
Title:____________________________
Address:__________________________
__________________________________
__________________________________
PARTICIPANT
Address:__________________________
__________________________________
SPOUSAL ACKNOWLEDGMENT
The undersigned spouse of Participant has read and hereby approves the
foregoing Stock Issuance Agreement. In consideration of the Corporation's
granting Participant the right to acquire the Purchased Shares in accordance
with the terms of such Agreement, the undersigned hereby agrees to be
irrevocably bound by all the terms of such Agreement, including (without
limitation) the right of the Corporation (or its assigns) to purchase any
Purchased Shares in which Participant is not vested and the right of the
Corporation (or its assigns) to purchase any and all interest or right the
undersigned may otherwise have in the Purchased Shares pursuant to community
property laws or other marital property rights.
__________________________________
PARTICIPANT'S SPOUSE
Address:__________________________
__________________________________
13.
<PAGE>
EXHIBIT I
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED ______________________ hereby sell(s), assign(s)
and transfer(s) unto UniDirect Corporation (the "Corporation"),
______________________ (_______) shares of the Common Stock of the Corporation
standing in his or her name on the books of the Corporation represented by
Certificate No. ___________________ herewith and do hereby irrevocably
constitute and appoint _______________________________ Attorney to transfer the
said stock on the books of the Corporation with full power of substitution in
the premises.
Dated: ________________
Signature_______________________________
Instruction: Please do not fill in any blanks other than the signature line.
Please sign exactly as you would like your name to appear on the issued stock
certificate. The purpose of this assignment is to enable the Corporation to
exercise the Repurchase Right without requiring additional signatures on the
part of Participant.
<PAGE>
EXHIBIT II
SECTION 260.141.11
TITLE 10, CALIFORNIA ADMINISTRATIVE CODE
260.141.11 Restriction on Transfer. (a) The issuer of any security
upon which a restriction on transfer has been imposed pursuant to Sections
260.102.6, 260.141.10 or 260.534 shall cause a copy of this section to be
delivered to each issuee or transferee of such security at the time the
certificate evidencing the security is delivered to the issuee or transferee.
(b) It is unlawful for the holder of any such security to consummate a
sale or transfer of such security, or any interest therein, without the prior
written consent of the Commissioner (until this condition is removed pursuant to
Section 260.141.12 of these rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in Subdivision (i) of Section 25102 of
the Code or Section 260.105.14 of these rules;
(4) to the transferor's ancestors, descendants or spouse, or any
custodian or trustee for the account of the transferor or the transferor's
ancestors, descendants, or spouse; or to a transferee by a trustee or custodian
for the account of the transferee or the transferee's ancestors, descendants or
spouse;
(5) to holders of securities of the same class of the same issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code (either
acting as such or as a finder) to a resident of a foreign state, territory or
country who is neither domiciled in this state to the knowledge of the broker-
dealer, nor actually present in this state if the sale of such securities is not
in violation of any securities law of the foreign state, territory or country
concerned;
(8) to a broker-dealer licensed under the Code in a principal
transaction, or as an underwriter or member of an underwriting syndicate or
selling group;
(9) if the interest sold or transferred is a pledge or other lien
given by the purchaser to the seller upon a sale of the security for which the
Commissioner's written consent is obtained or under this rule not required;
(10) by way of a sale qualified under Sections 25111, 25112, 25113 or
25121 of the Code, of the securities to be transferred, provided that no order
under Section 25140 or
II-1.
<PAGE>
Subdivision (a) of Section 25143 is in effect with respect to such
qualification;
(11) by a corporation to a wholly owned subsidiary of such
corporation, or by a wholly owned subsidiary of a corporation to such
corporation;
(12) by way of an exchange qualified under Section 25111, 25112 or
25113 of the Code, provided that no order under Section 25140 or Subdivision (a)
of Section 25143 is in effect with respect to such qualification;
(13) between residents of foreign states, territories or countries who
are neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property Law or
to the administrator of the unclaimed property law of another state; or
(15) by the State Controller pursuant to the Unclaimed Property Law or
by the administrator of the unclaimed property law of another state if, in
either such case, such person (i) discloses to potential purchasers at the sale
that transfer of the securities is restricted under this rule, (ii) delivers to
each purchaser a copy of this rule, and (iii) advises the Commissioner of the
name of each purchaser;
(16) by a trustee to a successor trustee when such transfer does not
involve a change in the beneficial ownership of the securities;
(17) by way of an offer and sale of outstanding securities in an
issuer transaction that is subject to the qualification requirement of Section
25110 of the Code but exempt from that qualification requirement by subdivision
(f) of Section 25102; provided that any such transfer is on the condition that
any certificate evidencing the security issued to such transferee shall contain
the legend required by this section.
(c) The certificates representing all such securities subject to such
a restriction on transfer, whether upon initial issuance or upon any transfer
thereof, shall bear on their face a legend, prominently stamped or printed
thereon in capital letters of not less than 10-point size, reading as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERA TION THEREFOR, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMIS SIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
II-2.
<PAGE>
EXHIBIT III
SECTION 83(b) TAX ELECTION
This statement is being made under Section 83(b) of the Internal Revenue Code,
pursuant to Treas. Reg. Section 1.83-2.
(1) The taxpayer who performed the services is:
Name:
Address:
Taxpayer Ident. No.:
(2) The property with respect to which the election is being made is
____________ shares of the common stock of UniDirect Corporation.
(3) The property was issued on _____________, 199___.
(4) The taxable year in which the election is being made is the calendar year
199_.
(5) The property is subject to a repurchase right pursuant to which the issuer
has the right to acquire the property at the original purchase price if for
any reason taxpayer's employment with the issuer is terminated. The
issuer's repurchase right lapses in a series of annual and monthly
installments over a four (4)-year period ending on ____________, 199_.
(6) The fair market value at the time of transfer (determined without regard to
any restriction other than a restriction which by its terms will never
lapse) is $____________ per share.
(7) The amount paid for such property is $____________ per share.
(8) A copy of this statement was furnished to UniDirect Corporation for whom
taxpayer rendered the services underlying the transfer of property.
(9) This statement is executed on ________________________, 199_.
______________________________ _______________________________
Spouse (if any) Taxpayer
This election must be filed with the Internal Revenue Service Center with which
taxpayer files his or her Federal income tax returns and must be made within
thirty (30) days after the execution date of the Stock Issuance Agreement. This
filing should be made by registered or certified mail, return receipt requested.
Participant must retain two (2) copies of the completed form for filing with his
or her Federal and state tax returns for the current tax year and an additional
copy for his or her records.
<PAGE>
EXHIBIT IV
1995 STOCK OPTION/STOCK ISSUANCE PLAN
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Agreement:
A. Agreement shall mean this Stock Issuance Agreement.
---------
B. Board shall mean the Corporation's Board of Directors.
-----
C. Code shall mean the Internal Revenue Code of 1986, as amended.
----
D. Common Stock shall mean the Corporation's common stock.
------------
E. Corporate Transaction shall mean either of the following shareholder-
---------------------
approved transactions:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately
prior to such transaction, or
(ii) the sale, transfer or other disposition of all or substantially
all of the Corporation's assets in complete liquidation or dissolution of
the Corporation.
F. Corporation shall mean UniDirect Corporation, a California
-----------
corporation.
G. Disposition Notice shall have the meaning assigned to such term in
------------------
Paragraph E.2.
H. Dissolution Notice shall have the meaning assigned to such term in
------------------
Paragraph F.2.
I. Exercise Notice shall have the meaning assigned to such term in
---------------
Paragraph E.3.
J. Fair Market Value of a share of Common Stock on any relevant date,
-----------------
prior to the initial public offering of the Common Stock, shall be determined by
the Plan Administrator after taking into account such factors as it shall deem
appropriate.
K. First Refusal Right shall mean the right granted to the Corporation in
-------------------
accordance with Article E.
L. Market Stand-Off shall mean the market stand-off limitations specified
----------------
in Paragraph C.3.
M. 1933 Act shall mean the Securities Act of 1933, as amended.
--------
N. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.
--------
A-1.
<PAGE>
O. Owner shall mean Participant and all subsequent holders of the
-----
Purchased Shares who derive their chain of ownership through a Permitted
Transfer from Participant.
P. Parent shall mean any corporation (other than the Corporation) in an
------
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
Q. Participant shall mean the person to whom shares are issued under the
-----------
Stock Issuance Program.
R. Permitted Transfer shall mean (i) a gratuitous transfer of the
------------------
Purchased Shares, provided and only if Participant obtains the Corporation's
--------------------
prior written consent to such transfer, (ii) a transfer of title to the
Purchased Shares effected pursuant to Participant's will or the laws of
intestate succession following Participant's death or (iii) a transfer to the
Corporation in pledge as security for any purchase-money indebtedness incurred
by Participant in connection with the acquisition of the Purchased Shares.
S. Plan shall mean the Corporation's 1995 Stock Option/Stock Issuance
----
Plan attached hereto as Exhibit IV.
T. Plan Administrator shall mean either the Board or a committee of Board
------------------
members, to the extent the committee is at the time responsible for the
administration of the Plan.
U. Purchase Notice shall have the meaning assigned to such term in
---------------
Paragraph F.3.
V. Purchase Price shall have the meaning assigned to such term in
--------------
Paragraph A.1.
W. Purchased Shares shall have the meaning assigned to such term in
----------------
Paragraph A.1.
X. Recapitalization shall mean any stock split, stock dividend,
----------------
recapitalization, combination of shares, exchange of shares or other change
affecting the Corporation's outstanding Common Stock as a class without the
Corporation's receipt of consideration.
Y. Reorganization shall mean any of the following transactions:
--------------
(i) a merger or consolidation in which the Corporation is not the
surviving entity,
(ii) a sale, transfer or other disposition of all or substantially
all of the Corporation's assets,
A-2.
<PAGE>
(iii) a reverse merger in which the Corporation is the surviving
entity but in which the Corporation's outstanding voting securities are
transferred in whole or in part to a person or persons different from the
persons holding those securities immediately prior to the merger, or
(iv) any transaction effected primarily to change the state in which
the Corporation is incorporated or to create a holding company structure.
Z. Repurchase Right shall mean the right granted to the Corporation in
----------------
accordance with Article D.
AA. SEC shall mean the Securities and Exchange Commission.
---
BB. Service shall mean the provision of services to the Corporation or any
-------
Parent or Subsidiary by an individual in the capacity of an employee, subject to
the control and direction of the employer entity as to both the work to be
performed and the manner and method of performance, a non-employee member of the
board of directors or a consultant.
CC. Special Purchase Right shall mean the right granted to the Corporation
----------------------
in accordance with Article F.
DD. Stock Issuance Program shall mean the Stock Issuance Program under the
----------------------
Plan.
EE. Subsidiary shall mean any corporation (other than the Corporation) in
----------
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
FF. Target Shares shall have the meaning assigned to such term in
-------------
Paragraph E.2.
GG. Vesting Schedule shall mean the vesting schedule specified in
----------------
Paragraph D.3.
HH. Unvested Shares shall have the meaning assigned to such term in
---------------
Paragraph D.1.
A-3.
<PAGE>
Exhibit 10.6
RAINMAKER SYSTEMS, INC.
1998 STOCK OPTION/STOCK ISSUANCE PLAN
-------------------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1998 Stock Option/Stock Issuance Plan is intended to promote the
interests of Rainmaker Systems, Inc., a California corporation, by providing
eligible persons in the Corporation's employ or service with the opportunity to
acquire a proprietary interest, or otherwise increase their proprietary
interest, in the Corporation as an incentive for them to continue in such employ
or service.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into two (2) separate equity programs:
1. the Option Grant Program under which eligible persons may, at
the discretion of the Plan Administrator, be granted options to purchase shares
of Common Stock, and
2. the Stock Issuance Program under which eligible persons may, at
the discretion of the Plan Administrator, be issued shares of Common Stock
directly, either through the immediate purchase of such shares or as a bonus for
services rendered the Corporation (or any Parent or Subsidiary).
B. The provisions of Articles One and Four shall apply to both equity
programs under the Plan and shall accordingly govern the interests of all
persons under the Plan.
III. ADMINISTRATION OF THE PLAN
A. The Plan shall be administered by the Board. However, any or all
administrative functions otherwise exercisable by the Board may be delegated to
the Committee. Members of the Committee shall serve for such period of time as
the Board may determine and shall be subject to removal by the Board at any
time. The Board may also at any time terminate the functions of the Committee
and reassume all powers and authority previously delegated to the Committee.
B. The Plan Administrator shall have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Plan and to make such
determinations under, and issue such
<PAGE>
interpretations of, the Plan and any outstanding options or stock issuances
thereunder as it may deem necessary or advisable. Decisions of the Plan
Administrator shall be final and binding on all parties who have an interest in
the Plan or any option or stock issuance thereunder.
IV. ELIGIBILITY
A. The persons eligible to participate in the Plan are as follows:
(i) Employees,
(ii) non-employee members of the Board or the non-employee
members of the board of directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).
B. The Plan Administrator shall have full authority to determine, (i)
with respect to the grants under the Option Grant Program, which eligible
persons are to receive the option grants, the time or times when those grants
are to be made, the number of shares to be covered by each such grant, the
status of the granted option as either an Incentive Option or a Non-Statutory
Option, the time or times when each option is to become exercisable, the vesting
schedule (if any) applicable to the option shares and the maximum term for which
the option is to remain outstanding, and (ii) with respect to stock issuances
under the Stock Issuance Program, which eligible persons are to receive stock
issuances, the time or times when those issuances are to be made, the number of
shares to be issued to each Participant, the vesting schedule (if any)
applicable to the issued shares and the consideration to be paid by the
Participant for such shares.
C. The Plan Administrator shall have the absolute discretion either to
grant options in accordance with the Option Grant Program or to effect stock
issuances in accordance with the Stock Issuance Program.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized but
unissued or reacquired Common Stock. The maximum number of shares of Common
Stock which may be issued over the term of the Plan shall not exceed 1,585,000
shares.
B. Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent (i) the options
expire or terminate for any reason prior to exercise in full or (ii) the options
are cancelled in accordance with the cancellation-regrant provisions of Article
Two. Unvested shares issued under the Plan and subsequently repurchased by the
Corporation, at the option exercise or direct issue price paid per share,
pursuant to the Corporation's repurchase rights under the Plan shall be added
back to the number of shares of Common Stock reserved for issuance under the
Plan and shall accordingly be available for reissuance through one or more
subsequent option grants or direct stock issuances under the Plan.
2
<PAGE>
C. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and/or class of securities issuable
under the Plan and (ii) the number and/or class of securities and the exercise
price per share in effect under each outstanding option in order to prevent the
dilution or enlargement of benefits thereunder. The adjustments determined by
the Plan Administrator shall be final, binding and conclusive. In no event shall
any such adjustments be made in connection with the conversion of one or more
outstanding shares of the Corporation's preferred stock into shares of Common
Stock.
3
<PAGE>
ARTICLE TWO
OPTION GRANT PROGRAM
--------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. Exercise Price.
1. The exercise price per share shall be fixed by the Plan
Administrator in accordance with the following provisions:
(i) The exercise price per share shall not be less than eighty-
five percent (85%) of the Fair Market Value per share of Common Stock on
the option grant date.
(ii) If the person to whom the option is granted is a 10%
Shareholder, then the exercise price per share shall not be less than one
hundred ten percent (110%) of the Fair Market Value per share of Common
Stock on the option grant date.
2. The exercise price shall become immediately due upon exercise of
the option and shall, subject to the provisions of Section I of Article Four and
the documents evidencing the option, be payable in cash or check made payable to
the Corporation. Should the Common Stock be registered under Section 12 of the
1934 Act at the time the option is exercised, then the exercise price may also
be paid as follows:
(i) in shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise Date, or
(ii) to the extent the option is exercised for vested shares,
through a special sale and remittance procedure pursuant to which the
Optionee shall concurrently provide irrevocable instructions (A) to a
Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise and (B) to the
Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
4
<PAGE>
B. Exercise and Term of Options. Each option shall be exercisable at
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option grant. However, no option shall have a term in excess of ten (10)
years measured from the option grant date.
C. Effect of Termination of Service.
1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:
(i) Should the Optionee cease to remain in Service for
any reason other than death, Disability or Misconduct, then the Optionee
shall have a period of three (3) months following the date of such
cessation of Service during which to exercise each outstanding option held
by such Optionee.
(ii) Should Optionee's Service terminate by reason of
Disability, then the Optionee shall have a period of twelve (12) months
following the date of such cessation of Service during which to exercise
each outstanding option held by such Optionee.
(iii) If the Optionee dies while holding an outstanding
option, then the personal representative of his or her estate or the person
or persons to whom the option is transferred pursuant to the Optionee's
will or the laws of inheritance shall have a twelve (12)-month period
following the date of the Optionee's death to exercise such option.
(iv) Under no circumstances, however, shall any such
option be exercisable after the specified expiration of the option term.
(v) During the applicable post-Service exercise period,
the option may not be exercised in the aggregate for more than the number
of vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Service, terminate and cease
to be outstanding with respect to any and all option shares for which the
option is not otherwise at the time exercisable or in which the Optionee is
not otherwise at that time vested.
(vi) Should Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to remain outstanding.
2. The Plan Administrator shall have the discretion, exercisable
either at the time an option is granted or at any time while the option remains
outstanding, to:
(i) extend the period of time for which the option is to
remain exercisable following Optionee's cessation of Service or death from
the limited period
5
<PAGE>
otherwise in effect for that option to such greater period of time as the
Plan Administrator shall deem appropriate, but in no event beyond the
expiration of the option term, and/or
(ii) permit the option to be exercised, during the applicable
post-Service exercise period, not only with respect to the number of vested
shares of Common Stock for which such option is exercisable at the time of
the Optionee's cessation of Service but also with respect to one or more
additional installments in which the Optionee would have vested under the
option had the Optionee continued in Service.
D. Shareholder Rights. The holder of an option shall have no
shareholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become the
recordholder of the purchased shares.
E. Unvested Shares. The Plan Administrator shall have the discretion
to grant options which are exercisable for unvested shares of Common Stock.
Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right. The Plan Administrator may not impose a vesting schedule upon
the option grant or any shares of Common Stock subject to that option which is
more restrictive than twenty percent (20%) per year vesting, with the initial
vesting to occur not later than one (1) year after the option grant date.
However, such limitation shall not be applicable to any option grants made to
individuals who are officers of the Corporation, non-employee Board members or
independent consultants.
F. First Refusal Rights. Until such time as the Common Stock is first
registered under Section 12 of the 1934 Act, the Corporation shall have the
right of first refusal with respect to any proposed disposition by the Optionee
(or any successor in interest) of any shares of Common Stock issued under the
Plan. Such right of first refusal shall be exercisable in accordance with the
terms established by the Plan Administrator and set forth in the document
evidencing such right.
G. Limited Transferability of Options. During the lifetime of the
Optionee, the option shall be exercisable only by the Optionee and shall not be
assignable or transferable other than by will or by the laws of descent and
distribution following the Optionee's death.
H. Withholding. The Corporation's obligation to deliver shares of
Common Stock upon the exercise of any options granted under the Plan shall be
subject to the satisfaction of all applicable Federal, state and local income
and employment tax withholding requirements.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of the Plan shall be applicable to Incentive Options. Options which
are specifically designated as Non-Statutory Options shall not be subject to the
---
terms of this Section II.
6
<PAGE>
A. Eligibility. Incentive Options may only be granted to Employees.
B. Exercise Price. The exercise price per share shall not be less
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.
C. Dollar Limitation. The aggregate Fair Market Value of the shares
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one (1) calendar year
shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two (2) or more such options which become exercisable
for the first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
D. 10% Shareholder. If any Employee to whom an Incentive Option is
granted is a 10% Shareholder, then the option term shall not exceed five (5)
years measured from the option grant date.
III. CORPORATE TRANSACTION
A. The shares subject to each option outstanding under the Plan at
the time of a Corporate Transaction shall automatically vest in full so that
each such option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable for all of the shares of Common Stock at
the time subject to that option and may be exercised for any or all of those
shares as fully-vested shares of Common Stock. However, the shares subject to an
outstanding option shall not vest on such an accelerated basis if and to the
extent: (i) such option is assumed by the successor corporation (or parent
thereof) in the Corporate Transaction and the Corporation's repurchase rights
with respect to the unvested option shares are concurrently assigned to such
successor corporation (or parent thereof) or (ii) such option is to be replaced
with a cash incentive program of the successor corporation which preserves the
spread existing on the unvested option shares at the time of the Corporate
Transaction and provides for subsequent payout in accordance with the same
vesting schedule applicable to those unvested option shares or (iii) the
acceleration of such option is subject to other limitations imposed by the Plan
Administrator at the time of the option grant.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate Transaction,
except to the extent: (i) those repurchase rights are assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction or
(ii) such accelerated vesting is precluded by other limitations imposed by the
Plan Administrator at the time the repurchase right is issued.
C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
7
<PAGE>
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction, had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to (i) the number and class of
securities available for issuance under the Plan following the consummation of
such Corporate Transaction and (ii) the exercise price payable per share under
each outstanding option, provided the aggregate exercise price payable for such
--------
securities shall remain the same.
E. The Plan Administrator shall have the discretion, exercisable
either at the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration (in whole or in part) of
one or more outstanding options (and the immediate termination of the
Corporation's repurchase rights with respect to the share subject to those
options) upon the occurrence of a Corporate Transaction, whether or not those
options are to be assumed in the Corporate Transaction.
F. The Plan Administrator shall also have full power and authority,
exercisable either at the time the option is granted or at any time while the
option remains outstanding, to structure such option so that the shares subject
to that option will automatically vest on an accelerated basis should the
Optionee's Service terminate by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Corporate Transaction in which the option is assumed and the
repurchase rights applicable to those shares do not otherwise terminate. Any
option so accelerated shall remain exercisable for the fully-vested option
shares until the earlier of (i) the expiration of the option term or (ii) the
-------
expiration of the one (1)-year period measured from the effective date of the
Involuntary Termination. In addition, the Plan Administrator may provide that
one or more of the Corporation's outstanding repurchase rights with respect to
shares held by the Optionee at the time of such Involuntary Termination shall
immediately terminate on an accelerated basis, and the shares subject to those
terminated rights shall accordingly vest at that time.
G. The portion of any Incentive Option accelerated in connection with
a Corporate Transaction shall remain exercisable as an Incentive Option only to
the extent the applicable One Hundred Thousand Dollar limitation is not
exceeded. To the extent such dollar limitation is exceeded, the accelerated
portion of such option shall be exercisable as a Non-Statutory Option under the
Federal tax laws.
H. The grant of options under the Plan shall in no way affect the
right of the Corporation to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Plan and to grant in
substitution therefor new options covering the
8
<PAGE>
same or different number of shares of Common Stock but with an exercise price
per share based on the Fair Market Value per share of Common Stock on the new
option grant date.
9
<PAGE>
ARTICLE THREE
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below.
A. Purchase Price.
1. The purchase price per share shall be fixed by the Plan
Administrator but shall not be less than eighty-five percent (85%) of the Fair
Market Value per share of Common Stock on the issue date. However, the purchase
price per share of Common Stock issued to a 10% Shareholder shall not be less
than one hundred and ten percent (110%) of such Fair Market Value.
2. Subject to the provisions of Section I of Article Four,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any Parent
or Subsidiary).
B. Vesting Provisions.
1. Shares of Common Stock issued under the Stock Issuance
Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified performance
objectives. However, the Plan Administrator may not impose a vesting schedule
upon any stock issuance effected under the Stock Issuance Program which is more
restrictive than twenty percent (20%) per year vesting, with initial vesting to
occur not later than one (1) year after the issuance date. Such limitation shall
not apply to any Common Stock issuances made to the officers of the Corporation,
non-employee Board members or independent consultants.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the
10
<PAGE>
Participant's unvested shares of Common Stock and (ii) such escrow arrangements
as the Plan Administrator shall deem appropriate.
3. The Participant shall have full shareholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further shareholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase-money note of
the Participant attributable to such surrendered shares.
5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock (or
other assets attributable thereto) which would otherwise occur upon the non-
completion of the vesting schedule applicable to such shares. Such waiver shall
result in the immediate vesting of the Participant's interest in the shares of
Common Stock as to which the waiver applies. Such waiver may be effected at any
time, whether before or after the Participant's cessation of Service or the
attainment or non-attainment of the applicable performance objectives.
C. First Refusal Rights. Until such time as the Common Stock is
first registered under Section 12 of the 1934 Act, the Corporation shall have
the right of first refusal with respect to any proposed disposition by the
Participant (or any successor in interest) of any shares of Common Stock issued
under the Stock Issuance Program. Such right of first refusal shall be
exercisable in accordance with the terms established by the Plan Administrator
and set forth in the document evidencing such right.
II. CORPORATE TRANSACTION
A. Upon the occurrence of a Corporate Transaction, all outstanding
repurchase rights under the Stock Issuance Program shall terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, except to the extent: (i) those repurchase
rights are assigned to the successor corporation (or parent thereof) in
connection with such Corporate Transaction or (ii) such accelerated vesting is
precluded by other limitations imposed by the Plan Administrator at the time the
repurchase right is issued.
B. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights with respect to those shares remain
outstanding, to provide that those rights shall automatically terminate on an
accelerated basis, and the shares of Common Stock subject to
11
<PAGE>
those terminated rights shall immediately vest, in the event the Participant's
Service should subsequently terminate by reason of an Involuntary Termination
within a designated period (not to exceed eighteen (18) months) following the
effective date of any Corporate Transaction in which those repurchase rights are
assigned to the successor corporation (or parent thereof).
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.
12
<PAGE>
ARTICLE FOUR
MISCELLANEOUS
-------------
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price or the purchase price for shares issued to such person
under the Plan by delivering a full-recourse, interest-bearing promissory note
payable in one or more installments and secured by the purchased shares.
However, any promissory note delivered by a consultant must be secured by
collateral in addition to the purchased shares of Common Stock. In no event
shall the maximum credit available to the Optionee or Participant exceed the sum
---
of (i) the aggregate option exercise price or purchase price payable for the
purchased shares plus (ii) any Federal, state and local income and employment
tax liability incurred by the Optionee or the Participant in connection with the
option exercise or share purchase.
II. EFFECTIVE DATE AND TERM OF PLAN The Plan shall become effective when
adopted by the Board, but no option granted under the Plan may be exercised, and
no shares shall be issued under the Plan, until the Plan is approved by the
Corporation's shareholders. If such shareholder approval is not obtained within
twelve (12) months after the date of the Board's adoption of the Plan, then all
options previously granted under the Plan shall terminate and cease to be
outstanding, and no further options shall be granted and no shares shall be
issued under the Plan. Subject to such limitation, the Plan Administrator may
grant options and issue shares under the Plan at any time after the effective
date of the Plan and before the date fixed herein for termination of the Plan.
B. The Plan shall terminate upon the earliest of (i) the expiration
--------
of the ten (10)-year period measured from the date the Plan is adopted by the
Board, (ii) the date on which all shares available for issuance under the Plan
shall have been issued as vested shares or (iii) the termination of all
outstanding options in connection with a Corporate Transaction. All options and
unvested stock issuances outstanding at that time under the Plan shall continue
to have full force and effect in accordance with the provisions of the documents
evidencing such options or issuances.
III. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect the rights and obligations with respect to
options or unvested stock issuances at the time outstanding under the Plan
unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require shareholder approval
pursuant to applicable laws and regulations.
B. Options may be granted under the Option Grant Program and shares
may be issued under the Stock Issuance Program which are in each instance in
excess of the number of shares of Common Stock then available for issuance under
the Plan, provided any excess shares
13
<PAGE>
actually issued under those programs shall be held in escrow until there is
obtained shareholder approval of an amendment sufficiently increasing the number
of shares of Common Stock available for issuance under the Plan. If such
shareholder approval is not obtained within twelve (12) months after the date
the first such excess issuances are made, then (i) any unexercised options
granted on the basis of such excess shares shall terminate and cease to be
outstanding and (ii) the Corporation shall promptly refund to the Optionees and
the Participants the exercise or purchase price paid for any excess shares
issued under the Plan and held in escrow, together with interest (at the
applicable Short Term Federal Rate) for the period the shares were held in
escrow, and such shares shall thereupon be automatically cancelled and cease to
be outstanding.
IV. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.
V. WITHHOLDING
The Corporation's obligation to deliver shares of Common Stock upon
the exercise of any options or upon the issuance or vesting of any shares issued
under the Plan shall be subject to the satisfaction of all applicable Federal,
state and local income and employment tax withholding requirements.
VI. REGULATORY APPROVALS
The implementation of the Plan, the granting of any options under
the Plan and the issuance of any shares of Common Stock (i) upon the exercise of
any option or (ii) under the Stock Issuance Program shall be subject to the
Corporation's procurement of all approvals and permits required by regulatory
authorities having jurisdiction over the Plan, the options granted under it and
the shares of Common Stock issued pursuant to it.
VII. NO EMPLOYMENT OR SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the
Participant any right to continue in Service for any period of specific duration
or interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
VIII. FINANCIAL REPORTS
The Corporation shall deliver a balance sheet and an income
statement at least annually to each individual holding an outstanding option
under the Plan, unless such individual is a key Employee whose duties in
connection with the Corporation (or any Parent or Subsidiary) assure such
individual access to equivalent information.
14
<PAGE>
PLAN APPENDIX
-------------
The following definitions shall be in effect under the Plan:
A. Board shall mean the Corporation's Board of Directors.
-----
B. Code shall mean the Internal Revenue Code of 1986, as amended.
----
C. Committee shall mean a committee of two (2) or more Board members
---------
appointed by the Board to exercise one or more administrative functions under
the Plan.
D. Common Stock shall mean the Corporation's common stock.
------------
E. Corporate Transaction shall mean either of the following shareholder-
---------------------
approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
F. Corporation shall mean Rainmaker Systems, Inc., a California
-----------
corporation, and any successor corporation to all or substantially all of the
assets or voting stock of Rainmaker Systems, Inc. which shall by appropriate
action adopt the Plan.
G. Disability shall mean the inability of the Optionee or the Participant
----------
to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment and shall be determined by the Plan
Administrator on the basis of such medical evidence as the Plan Administrator
deems warranted under the circumstances.
H. Employee shall mean an individual who is in the employ of the
--------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
I. Exercise Date shall mean the date on which the Corporation shall have
-------------
received written notice of the option exercise.
J. Fair Market Value per share of Common Stock on any relevant date shall
-----------------
be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per
A-1
<PAGE>
share of Common Stock on the date in question, as such price is reported by
the National Association of Securities Dealers on the Nasdaq National
Market or any successor system. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.
(iii) If the Common Stock is at the time neither listed on any
Stock Exchange nor traded on the Nasdaq National Market, then the Fair
Market Value shall be determined by the Plan Administrator after taking
into account such factors as the Plan Administrator shall deem appropriate.
K. Incentive Option shall mean an option which satisfies the requirements
----------------
of Code Section 422.
L. Involuntary Termination shall mean the termination of the Service of
-----------------------
any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation which materially reduces
his or her duties and responsibilities or the level of management to which
he or she reports, (B) a reduction in his or her level of compensation
(including base salary, fringe benefits and target bonuses under any
corporate-performance based bonus or incentive programs) by more than
fifteen percent (15%) or (C) a relocation of such individual's place of
employment by more than fifty (50) miles, provided and only if such change,
reduction or relocation is effected without the individual's consent.
M. Misconduct shall mean the commission of any act of fraud, embezzlement
----------
or dishonesty by the Optionee or Participant, any unauthorized use or disclosure
by such person of confidential information or trade secrets of the Corporation
(or any Parent or Subsidiary), or any other intentional misconduct by such
person adversely affecting the business or affairs of the Corporation (or any
Parent or Subsidiary) in a material manner. The foregoing definition shall not
be deemed to be inclusive of all the acts or omissions which the Corporation (or
any Parent or Subsidiary) may consider as grounds for the dismissal or discharge
of any Optionee, Participant or other person in the Service of the Corporation
(or any Parent or Subsidiary).
A-2
<PAGE>
N. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.
--------
O. Non-Statutory Option shall mean an option not intended to satisfy the
--------------------
requirements of Code Section 422.
P. Option Grant Program shall mean the option grant program in effect
--------------------
under the Plan.
Q. Optionee shall mean any person to whom an option is granted under the
--------
Plan.
R. Parent shall mean any corporation (other than the Corporation) in an
------
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
S. Participant shall mean any person who is issued shares of Common Stock
-----------
under the Stock Issuance Program.
T. Plan shall mean the Corporation's 1998 Stock Option/Stock Issuance
----
Plan, as set forth in this document.
U. Plan Administrator shall mean either the Board or the Committee acting
------------------
in its capacity as administrator of the Plan.
V. Service shall mean the provision of services to the Corporation (or any
-------
Parent or Subsidiary) by a person in the capacity of an Employee, a non-employee
member of the board of directors or a consultant or independent advisor, except
to the extent otherwise specifically provided in the documents evidencing the
option grant.
W. Stock Exchange shall mean either the American Stock Exchange or the New
--------------
York Stock Exchange.
X. Stock Issuance Agreement shall mean the agreement entered into by the
------------------------
Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
Y. Stock Issuance Program shall mean the stock issuance program in effect
----------------------
under the Plan.
Z. Subsidiary shall mean any corporation (other than the Corporation) in
----------
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
A-3
<PAGE>
AA. 10% Shareholder shall mean the owner of stock (as determined under
---------------
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
A-4
<PAGE>
RAINMAKER SYSTEMS, INC.
NOTICE OF GRANT OF STOCK OPTION
-------------------------------
Notice is hereby given of the following option grant (the "Option") to
purchase shares of the Common Stock of RAINMAKER SYSTEMS, INC. (the
"Corporation"):
Optionee:_____________________________________________________________
--------
Grant Date:___________________________________________________________
----------
Vesting Commencement Date:____________________________________________
-------------------------
Exercise Price: $______________________________________ per share
--------------
Number of Option Shares:_________________________ shares
-----------------------
Expiration Date:______________________________________________________
---------------
Type of Option: ______ Incentive Stock Option
--------------
______ Non-Statutory Stock Option
Date Exercisable: Immediately Exercisable
----------------
Vesting Schedule: The Option Shares shall be unvested and subject to
----------------
repurchase by the Corporation at the Exercise Price paid per share.
Optionee shall acquire a vested interest in, and the Corporation's
repurchase right shall accordingly lapse with respect to, (i) twenty-
five percent (25%) of the Option Shares upon Optionee's completion of
one (1) year of Service measured from the Vesting Commencement Date
and (ii) the balance of the Option Shares in a series of thirty-six
(36) successive equal monthly installments upon Optionee's completion
of each additional month of Service over the thirty-six (36)-month
period measured from the first anniversary of the Vesting Commencement
Date. In no event shall any additional Option Shares vest after
Optionee's cessation of Service.
Optionee understands and agrees that the Option is granted subject to
and in accordance with the terms of the RAINMAKER SYSTEMS, INC. 1998 Stock
Option/Stock Issuance Plan (the "Plan"). Optionee further agrees to be bound by
the terms of the Plan and the terms of the Option as set forth in the Stock
Option Agreement attached hereto as Exhibit A.
Optionee understands that any Option Shares purchased under the Option
will be subject to the terms set forth in the Stock Purchase Agreement attached
hereto as Exhibit B. Optionee hereby acknowledges receipt of a copy of the Plan
in the form attached hereto as Exhibit C.
<PAGE>
REPURCHASE RIGHTS. OPTIONEE HEREBY AGREES THAT ALL OPTION SHARES
-----------------
ACQUIRED UPON THE EXERCISE OF THE OPTION SHALL BE SUBJECT TO CERTAIN REPURCHASE
RIGHTS AND RIGHTS OF FIRST REFUSAL EXERCISABLE BY THE CORPORATION AND ITS
ASSIGNS. THE TERMS OF SUCH RIGHTS ARE SPECIFIED IN THE ATTACHED STOCK PURCHASE
AGREEMENT.
No Employment or Service Contract. Nothing in this Notice or in the
---------------------------------
attached Stock Option Agreement or Plan shall confer upon Optionee any right to
continue in Service for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation (or any Parent or
Subsidiary employing or retaining Optionee) or of Optionee, which rights are
hereby expressly reserved by each, to terminate Optionee's Service at any time
for any reason, with or without cause.
Definitions. All capitalized terms in this Notice shall have the
-----------
meaning assigned to them in this Notice or in the attached Stock Option
Agreement.
DATED: ________________________, 199__
RAINMAKER SYSTEMS, INC.
By: _____________________________
Title: _____________________________
______________________________________
OPTIONEE
Address: _____________________________
______________________________________
Attachments
- -----------
Exhibit A - Stock Option Agreement
Exhibit B - Stock Purchase Agreement
Exhibit C - 1998 Stock Option/Stock Issuance Plan
2
<PAGE>
EXHIBIT A
---------
STOCK OPTION AGREEMENT
----------------------
<PAGE>
EXHIBIT B
---------
STOCK PURCHASE AGREEMENT
------------------------
<PAGE>
EXHIBIT C
---------
1998 STOCK OPTION/STOCK ISSUANCE PLAN
-------------------------------------
<PAGE>
RAINMAKER SYSTEMS, INC.
STOCK OPTION AGREEMENT
----------------------
RECITALS
- --------
A. The Board has adopted the Plan for the purpose of retaining the
services of selected Employees, non-employee members of the Board or the board
of directors of any Parent or Subsidiary and consultants and other independent
advisors in the service of the Corporation (or any Parent or Subsidiary).
B. Optionee is to render valuable services to the Corporation (or a
Parent or Subsidiary), and this Agreement is executed pursuant to, and is
intended to carry out the purposes of, the Plan in connection with the
Corporation's grant of an option to Optionee.
C. All capitalized terms in this Agreement shall have the meaning
assigned to them in the attached Appendix.
NOW, THEREFORE, it is hereby agreed as follows:
1. Grant of Option. The Corporation hereby grants to Optionee, as of
the Grant Date, an option to purchase up to the number of Option Shares
specified in the Grant Notice. The Option Shares shall be purchasable from time
to time during the option term specified in Paragraph 2 at the Exercise Price.
2. Option Term. This option shall have a term of ten (10) years
measured from the Grant Date and shall accordingly expire at the close of
business on the Expiration Date, unless sooner terminated in accordance with
Paragraph 5 or 6.
3. Limited Transferability. During Optionee's lifetime, this option
shall be exercisable only by Optionee and shall not be assignable or
transferable other than by will or by the laws of descent and distribution
following Optionee's death.
4. Dates of Exercise. This option shall become exercisable for the
Option Shares in one or more installments as specified in the Grant Notice. As
the option becomes exercisable for such installments, those installments shall
accumulate, and the option shall remain exercisable for the accumulated
installments until the Expiration Date or sooner termination of the option term
under Paragraph 5 or 6.
5. Cessation of Service. The option term specified in Paragraph 2
shall terminate (and this option shall cease to be outstanding) prior to the
Expiration Date should any of the following provisions become applicable:
(a) Should Optionee cease to remain in Service for any reason
(other than death, Disability or Misconduct) while this option is outstanding,
then Optionee shall have a period of three (3) months (commencing with the date
of such cessation of Service) during which
<PAGE>
to exercise this option, but in no event shall this option be exercisable at any
time after the Expiration Date.
(b) Should Optionee die while this option is outstanding, then
the personal representative of Optionee's estate or the person or persons to
whom the option is transferred pursuant to Optionee's will or in accordance with
the laws of inheritance shall have the right to exercise this option. Such right
shall lapse, and this option shall cease to be outstanding, upon the earlier of
-------
(i) the expiration of the twelve (12)-month period measured from the date of
Optionee's death or (ii) the Expiration Date.
(c) Should Optionee cease Service by reason of Disability while
this option is outstanding, then Optionee shall have a period of twelve (12)
months (commencing with the date of such cessation of Service) during which to
exercise this option. In no event shall this option be exercisable at any time
after the Expiration Date.
Note: Exercise of this option on a date later than three (3) months
----
following cessation of Service due to Disability will result in loss
of favorable Incentive Option treatment, unless such Disability
------
constitutes Permanent Disability. In the event that Incentive Option
treatment is not available, this option will be taxed as a Non-
Statutory Option upon exercise.
(d) During the limited period of post-Service exercisability,
this option may not be exercised in the aggregate for more than the number of
Option Shares in which Optionee is, at the time of Optionee's cessation of
Service, vested pursuant to the Vesting Schedule specified in the Grant Notice
or the special vesting acceleration provisions of Paragraph 6. Upon the
expiration of such limited exercise period or (if earlier) upon the Expiration
Date, this option shall terminate and cease to be outstanding for any vested
Option Shares for which the option has not been exercised. To the extent
Optionee is not vested in the Option Shares at the time of Optionee's cessation
of Service, this option shall immediately terminate and cease to be outstanding
with respect to those shares.
(e) Should Optionee's Service be terminated for Misconduct, then
this option shall terminate immediately and cease to remain outstanding.
(f) In the event of a Corporate Transaction, the provisions of
Paragraph 6 shall govern the period for which this option is to remain
exercisable following Optionee's cessation of Service and shall supersede any
provisions to the contrary in this paragraph.
6. Accelerated Vesting.
(a) In the event of any Corporate Transaction, the Option Shares
at the time subject to this option but not otherwise vested shall automatically
vest in full so that this option shall, immediately prior to the effective date
of the Corporate Transaction, become fully exercisable for all of those Option
Shares and may be exercised for any or all of those Option Shares as fully-
vested shares of Common Stock. However, the Option Shares shall not vest on
2
<PAGE>
such an accelerated basis if and to the extent: (i) this option is assumed by
the successor corporation (or parent thereof) in the Corporate Transaction and
the Corporation's repurchase rights with respect to the unvested Option Shares
are assigned to such successor corporation (or parent thereof) or (ii) this
option is to be replaced with a cash incentive program of the successor
corporation which preserves the spread existing on the unvested Option Shares at
the time of the Corporate Transaction (the excess of the Fair Market Value of
those Option Shares over the Exercise Price payable for such shares) and
provides for subsequent payout in accordance with the same Vesting Schedule
applicable to those unvested Option Shares as set forth in the Grant Notice.
(b) Immediately following the Corporate Transaction, this option
shall terminate and cease to be outstanding, except to the extent assumed by the
successor corporation (or parent thereof) in connection with the Corporate
Transaction.
(c) If this option is assumed in connection with a Corporate
Transaction, then this option shall be appropriately adjusted, immediately after
such Corporate Transaction, to apply to the number and class of securities which
would have been issuable to Optionee in consummation of such Corporate
Transaction had the option been exercised immediately prior to such Corporate
Transaction, and appropriate adjustments shall also be made to the Exercise
Price, provided the aggregate Exercise Price shall remain the same.
--------
(d) Should there occur an Involuntary Termination of Optionee's
Service within twelve (12) months following a Corporate Transaction in which the
Option Shares do not otherwise vest on an accelerated basis pursuant to
Paragraph 6(a), then all the Option Shares subject to this option at the time of
such Involuntary Termination but not otherwise vested shall automatically vest
and the Corporation's repurchase rights with respect to those shares shall
terminate so that this option shall immediately become exercisable for all the
Option Shares as fully-vested shares. The option shall remain exercisable for
any or all of those vested Option Shares until the earlier of (i) the Expiration
-------
Date or (ii) the expiration of the one (l)-year period measured from the date of
the Involuntary Termination.
(e) This Agreement shall not in any way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
7. Adjustment in Option Shares. Should any change be made to the
Common Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration, appropriate adjustments shall be made to (i) the total number
and/or class of securities subject to this option and (ii) the Exercise Price in
order to reflect such change and thereby preclude a dilution or enlargement of
benefits hereunder.
8. Shareholder Rights. The holder of this option shall not have any
shareholder rights with respect to the Option Shares until such person shall
have exercised the option, paid the Exercise Price and become the recordholder
of the purchased shares.
3
<PAGE>
9. Manner of Exercising Option.
(a) In order to exercise this option with respect to all or any
part of the Option Shares for which this option is at the time exercisable,
Optionee (or any other person or persons exercising the option) must take the
following actions:
(i) Execute and deliver to the Corporation a Purchase
Agreement for the Option Shares for which the option is exercised.
(ii) Pay the aggregate Exercise Price for the purchased
shares in one or more of the following forms:
(A) cash or check made payable to the Corporation; or
(B) a promissory note payable to the Corporation, but
only to the extent authorized by the Plan Administrator in accordance
with Paragraph 14. Should the Common Stock be registered under Section
12 of the 1934 Act at the time the option is exercised, then the
Exercise Price may also be paid as follows:
(C) in shares of Common Stock held by Optionee (or
any other person or persons exercising the option) for the requisite
period necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on the
Exercise Date; or
(D) to the extent the option is exercised for vested
Option Shares, through a special sale and remittance procedure
pursuant to which Optionee (or any other person or persons exercising
the option) shall concurrently provide irrevocable instructions (a) to
a Corporation-designated brokerage firm to effect the immediate sale
of the purchased shares and remit to the Corporation, out of the sale
proceeds available on the settlement date, sufficient funds to cover
the aggregate Exercise Price payable for the purchased shares plus all
applicable Federal, state and local income and employment taxes
required to be withheld by the Corporation by reason of such exercise
and (b) to the Corporation to deliver the certificates for the
purchased shares directly to such brokerage firm in order to complete
the sale.
Except to the extent the sale and remittance procedure is utilized
in connection with the option exercise, payment of the Exercise Price
must accompany the Purchase Agreement delivered to the Corporation in
connection with the option exercise.
(iii) Furnish to the Corporation appropriate documentation
that the person or persons exercising the option (if other than Optionee)
have the right to exercise this option.
4
<PAGE>
(iv) Execute and deliver to the Corporation such written
representations as may be requested by the Corporation in order for it to
comply with the applicable requirements of Federal and state securities
laws.
(v) Make appropriate arrangements with the Corporation (or
Parent or Subsidiary employing or retaining Optionee) for the satisfaction
of all Federal, state and local income and employment tax withholding
requirements applicable to the option exercise.
(b) As soon as practical after the Exercise Date, the Corporation
shall issue to or on behalf of Optionee (or any other person or persons
exercising this option) a certificate for the purchased Option Shares, with the
appropriate legends affixed thereto.
(c) In no event may this option be exercised for any fractional
shares.
10. REPURCHASE RIGHTS. ALL OPTION SHARES ACQUIRED UPON THE EXERCISE
OF THIS OPTION SHALL BE SUBJECT TO CERTAIN RIGHTS OF THE CORPORATION AND ITS
ASSIGNS TO REPURCHASE THOSE SHARES IN ACCORDANCE WITH THE TERMS SPECIFIED IN THE
PURCHASE AGREEMENT.
11. Compliance with Laws and Regulations.
(a) The exercise of this option and the issuance of the Option
Shares upon such exercise shall be subject to compliance by the Corporation and
Optionee with all applicable requirements of law relating thereto and with all
applicable regulations of any stock exchange (or the Nasdaq National Market, if
applicable) on which the Common Stock may be listed for trading at the time of
such exercise and issuance.
(b) The inability of the Corporation to obtain approval from any
regulatory body having authority deemed by the Corporation to be necessary to
the lawful issuance and sale of any Common Stock pursuant to this option shall
relieve the Corporation of any liability with respect to the non-issuance or
sale of the Common Stock as to which such approval shall not have been obtained.
The Corporation, however, shall use its best efforts to obtain all such
approvals.
12. Successors and Assigns. Except to the extent otherwise provided
in Paragraphs 3 and 6, the provisions of this Agreement shall inure to the
benefit of, and be binding upon, the Corporation and its successors and assigns
and Optionee, Optionee's assigns and the legal representatives, heirs and
legatees of Optionee's estate.
13. Notices. Any notice required to be given or delivered to the
Corporation under the terms of this Agreement shall be in writing and addressed
to the Corporation at its principal corporate offices. Any notice required to be
given or delivered to Optionee shall be in writing and addressed to Optionee at
the address indicated below Optionee's signature line on the Grant Notice. All
notices shall be deemed effective upon personal delivery or upon deposit in the
U.S. mail, postage prepaid and properly addressed to the party to be notified.
5
<PAGE>
14. Financing. The Plan Administrator may, in its absolute discretion
and without any obligation to do so, permit Optionee to pay the Exercise Price
for the purchased Option Shares by delivering a full-recourse, interest-bearing
promissory note secured by those Option Shares. The payment schedule in effect
for any such promissory note shall be established by the Plan Administrator in
its sole discretion.
15. Construction. This Agreement and the option evidenced hereby are
made and granted pursuant to the Plan and are in all respects limited by and
subject to the terms of the Plan. All decisions of the Plan Administrator with
respect to any question or issue arising under the Plan or this Agreement shall
be conclusive and binding on all persons having an interest in this option.
16. Governing Law. The interpretation, performance and enforcement of
this Agreement shall be governed by the laws of the State of California without
resort to that State's conflict-of-laws rules.
17. Shareholder Approval. If the Option Shares covered by this
Agreement exceed, as of the Grant Date, the number of shares of Common Stock
which may be issued under the Plan as last approved by the shareholders, then
this option shall be void with respect to such excess shares, unless shareholder
approval of an amendment sufficiently increasing the number of shares of Common
Stock issuable under the Plan is obtained in accordance with the provisions of
the Plan.
18. Additional Terms Applicable to an Incentive Option. In the event
this option is designated an Incentive Option in the Grant Notice, the following
terms and conditions shall also apply to the grant:
(a) This option shall cease to qualify for favorable tax
treatment as an Incentive Option if (and to the extent) this option is exercised
for one or more Option Shares: (i) more than three (3) months after the date
Optionee ceases to be an Employee for any reason other than death or Permanent
Disability or (ii) more than twelve (12) months after the date Optionee ceases
to be an Employee by reason of Permanent Disability.
(b) This option shall not become exercisable in the calendar
year in which granted if (and to the extent) the aggregate Fair Market Value
(determined at the Grant Date) of the Common Stock for which this option would
otherwise first become exercisable in such calendar year would, when added to
the aggregate value (determined as of the respective date or dates of grant) of
the Common Stock and any other securities for which one or more other Incentive
Options granted to Optionee prior to the Grant Date (whether under the Plan or
any other option plan of the Corporation or any Parent or Subsidiary) first
become exercisable during the same calendar year, exceed One Hundred Thousand
Dollars ($100,000) in the aggregate. To the extent the exercisability of this
option is deferred by reason of the foregoing limitation, the deferred portion
shall become exercisable in the first calendar year or years thereafter in which
the One Hundred Thousand Dollar ($100,000) limitation of this Paragraph 18(b)
would not be contravened, but such deferral shall in all events end immediately
prior to the effective date of a Corporate Transaction in which this option is
not to be assumed or an Involuntary Termination following a Corporate
Transaction in which this option is assumed,
6
<PAGE>
whereupon the option shall become immediately exercisable as a Non-Statutory
Option for the deferred portion of the Option Shares.
(c) Should Optionee hold, in addition to this option, one or
more other options to purchase Common Stock which become exercisable for the
first time in the same calendar year as this option, then the foregoing
limitations on the exercisability of such options as Incentive Options shall be
applied on the basis of the order in which such options are granted.
7
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Agreement:
A. Agreement shall mean this Stock Option Agreement.
---------
B. Board shall mean the Corporation's Board of Directors.
-----
C. Code shall mean the Internal Revenue Code of 1986, as amended.
----
D. Common Stock shall mean the Corporation's common stock.
------------
E. Corporate Transaction shall mean either of the following shareholder-
---------------------
approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or substantially
all of the Corporation's assets in complete liquidation or dissolution of
the Corporation.
F. Corporation shall mean Rainmaker Systems, Inc., a California
-----------
corporation, and any successor corporation to all or substantially all of the
assets or voting stock of Rainmaker Systems, Inc. which shall by appropriate
action adopt the Plan.
G. Disability shall mean the inability of Optionee to engage in any
----------
substantial gainful activity by reason of any medically determinable physical or
mental impairment and shall be determined by the Plan Administrator on the basis
of such medical evidence as the Plan Administrator deems warranted under the
circumstances. Disability shall be deemed to constitute Permanent Disability in
the event that such Disability is expected to result in death or has lasted or
can be expected to last for a continuous period of twelve (12) months or more.
H. Employee shall mean an individual who is in the employ of the
--------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
I. Exercise Date shall mean the date on which the option shall have been
-------------
exercised in accordance with Paragraph 9 of the Agreement.
J. Exercise Price shall mean the exercise price payable per Option Share
--------------
as specified in the Grant Notice.
K. Expiration Date shall mean the date on which the option expires as
---------------
specified in the Grant Notice.
A-1
<PAGE>
L. Fair Market Value per share of Common Stock on any relevant date shall
-----------------
be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq National
Market, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question, as the price is reported by
the National Association of Securities Dealers on the Nasdaq National
Market. If there is no closing selling price for the Common Stock on the
date in question, then the Fair Market Value shall be the closing selling
price on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock Exchange,
then the Fair Market Value shall be the closing selling price per share of
Common Stock on the date in question on the Stock Exchange determined by
the Plan Administrator to be the primary market for the Common Stock, as
such price is officially quoted in the composite tape of transactions on
such exchange. If there is no closing selling price for the Common Stock
on the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation exists.
(iii) If the Common Stock is at the time neither listed on any Stock
Exchange nor traded on the Nasdaq National Market, then the Fair Market
Value shall be determined by the Plan Administrator after taking into
account such factors as the Plan Administrator shall deem appropriate.
M. Grant Date shall mean the date of grant of the option as specified in
----------
the Grant Notice.
N. Grant Notice shall mean the Notice of Grant of Stock Option
------------
accompanying the Agreement, pursuant to which Optionee has been informed of the
basic terms of the option evidenced hereby.
O. Incentive Option shall mean an option which satisfies the requirements
----------------
of Code Section 422.
P. Involuntary Termination shall mean the termination of Optionee's
-----------------------
Service which occurs by reason of:
(i) Optionee's dismissal or discharge by the Corporation for reasons
other than Misconduct, or
(ii) Optionee's voluntary resignation following (A) a change in
Optionee's position with the Corporation (or Parent or Subsidiary employing
Optionee) which materially reduces Optionee's level of responsibility, (B)
a reduction in Optionee's level of compensation (including base salary,
fringe benefits and target bonuses under any corporate-performance based
bonus or incentive programs) by more than fifteen percent (15%) in the
aggregate or (C) a relocation of Optionee's place of employment by more
than fifty (50) miles from Optionee's place of employment immediately prior
to the Corporate Transaction, provided and only if such change, reduction
or relocation is effected by the Corporation without Optionee's consent.
A-2
<PAGE>
Q. Misconduct shall mean the commission of any act of fraud, embezzlement
----------
or dishonesty by Optionee, any unauthorized use or disclosure by Optionee of
confidential information or trade secrets of the Corporation (or any Parent or
Subsidiary), or any other intentional misconduct by Optionee adversely affecting
the business or affairs of the Corporation (or any Parent or Subsidiary) in a
material manner. The foregoing definition shall not be deemed to be inclusive of
all the acts or omissions which the Corporation (or any Parent or Subsidiary)
may consider as grounds for the dismissal or discharge of Optionee or any other
individual in the Service of the Corporation (or any Parent or Subsidiary).
R. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.
--------
S. Non-Statutory Option shall mean an option not intended to satisfy the
--------------------
requirements of Code Section 422.
T. Option Shares shall mean the number of shares of Common Stock subject
-------------
to the option.
U. Optionee shall mean the person to whom the option is granted as
--------
specified in the Grant Notice.
V. Parent shall mean any corporation (other than the Corporation) in an
------
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
W. Plan shall mean the Corporation's 1998 Stock Option/Stock Issuance
----
Plan.
X. Plan Administrator shall mean either the Board or a committee of the
------------------
Board acting in its capacity as administrator of the Plan.
Y. Purchase Agreement shall mean the stock purchase agreement in
------------------
substantially the form of Exhibit B to the Grant Notice.
Z. Service shall mean the Optionee's performance of services for the
-------
Corporation (or any Parent or Subsidiary) in the capacity of an Employee, a non-
employee member of the board of directors or an independent consultant.
AA. Stock Exchange shall mean the American Stock Exchange or the New York
--------------
Stock Exchange.
BB. Subsidiary shall mean any corporation (other than the Corporation) in
----------
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
A-3
<PAGE>
CC. Vesting Schedule shall mean the vesting schedule specified in the
----------------
Grant Notice pursuant to which the Optionee is to vest in the Option Shares in a
series of installments over his or her period of Service.
A-4
<PAGE>
ADDENDUM
TO
STOCK OPTION AGREEMENT
The following provisions are hereby incorporated into, and are hereby
made a part of, that certain Stock Option Agreement (the "Option Agreement") by
and between Rainmaker Systems, Inc. (the "Corporation") and ___________________
____________________________ ("Optionee") evidencing the stock option (the
"Option") granted on this date to Optionee under the terms of the Corporation's
1998 Stock Option/Stock Issuance Plan, and such provisions shall be effective
immediately. All capitalized terms in this Addendum, to the extent not
otherwise defined herein, shall have the meanings assigned to them in the Option
Agreement.
INVOLUNTARY TERMINATION FOLLOWING
CORPORATE TRANSACTION
1. To the extent the Option is, in connection with a Corporate
Transaction, to be assumed in accordance with Paragraph 6 of the Option
Agreement, none of the Option Shares shall vest on an accelerated basis upon the
occurrence of that Corporate Transaction, and Optionee shall accordingly
continue, over his or her period of Service following the Corporate Transaction,
to vest in the Option Shares in one or more installments in accordance with the
provisions of the Option Agreement. However, upon an Involuntary Termination of
Optionee's Service within eighteen (18) months following such Corporate
Transaction, all the Option Shares at the time subject to the Option shall
automatically vest in full on an accelerated basis so that the Option shall
immediately become exercisable for all the Option Shares as fully-vested shares
and may be exercised for any or all of those vested shares. The Option shall
remain so exercisable until the earlier of (i) the Expiration Date or (ii) the
-------
expiration of the one (1)-year period measured from the date of the Involuntary
Termination.
2. For purposes of this Addendum, an Involuntary Termination shall
mean the termination of Optionee's Service by reason of:
(i) Optionee's involuntary dismissal or discharge by the
Corporation for reasons other than for Misconduct, or
(ii) Optionee's voluntary resignation following (A) a change in
Optionee's position with the Corporation (or Parent or Subsidiary employing
Optionee) which materially reduces Optionee's duties and responsibilities
or the level of management to which he or she reports, (B) a reduction in
Optionee's level of compensation (including base salary, fringe benefits
and target bonuses under any corporate-performance based incentive
programs) by more than fifteen percent (15%) or (C) a relocation of
Optionee's place of employment by more than fifty (50) miles, provided and
only if such change, reduction or relocation is effected by the Corporation
without Optionee's consent.
3. The provisions of Paragraph 1 of this Addendum shall govern the
period for which the Option is to remain exercisable following the Involuntary
Termination of Optionee's Service within eighteen (18) months after the
Corporate Transaction and shall supersede any provisions to the contrary in
Paragraph 5 of the Option Agreement. The provisions of this Addendum shall also
supersede any provisions to the contrary in Paragraph 18 of the Option Agreement
concerning the deferred exercisability of the Option.
IN WITNESS WHEREOF, Rainmaker Systems, Inc. has caused this Addendum
to be executed by its duly-authorized officer as of the Effective Date specified
below.
RAINMAKER SYSTEMS, INC.
1
<PAGE>
By: ________________________________
Title: _____________________________
EFFECTIVE DATE: _________________, 199__
2
<PAGE>
RAINMAKER SYSTEMS, INC.
STOCK PURCHASE AGREEMENT
------------------------
AGREEMENT made this _____ day of __________ 199____, by and between
Rainmaker Systems, Inc., a California corporation, and ________________________,
Optionee under the Corporation's 1998 Stock Option/Stock Issuance Plan.
All capitalized terms in this Agreement shall have the meaning
assigned to them in this Agreement or in the attached Appendix.
A. EXERCISE OF OPTION
1. Exercise. Optionee hereby purchases __________________ shares of
Common Stock (the "Purchased Shares") pursuant to that certain option (the
"Option") granted Optionee on _____________________ (the "Grant Date") to
purchase up to _____________ shares of Common Stock (the "Option Shares") under
the Plan at the exercise price of $ __________ per share (the "Exercise Price").
2. Payment. Concurrently with the delivery of this Agreement to the
Corporation, Optionee shall pay the Exercise Price for the Purchased Shares in
accordance with the provisions of the Option Agreement and shall deliver
whatever additional documents may be required by the Option Agreement as a
condition for exercise, together with a duly-executed blank Assignment Separate
from Certificate (in the form attached hereto as Exhibit I) with respect to the
Purchased Shares.
3. Shareholder Rights. Until such time as the Corporation exercises
the Repurchase Right or the First Refusal Right, Optionee (or any successor in
interest) shall have all the rights of a shareholder (including voting, dividend
and liquidation rights) with respect to the Purchased Shares, subject, however,
to the transfer restrictions of Articles B and C.
B. SECURITIES LAW COMPLIANCE
1. Restricted Securities. The Purchased Shares have not been
registered under the 1933 Act and are being issued to Optionee in reliance upon
the exemption from such registration provided by SEC Rule 701 for stock
issuances under compensatory benefit plans such as the Plan. Optionee hereby
confirms that Optionee has been informed that the Purchased Shares are
restricted securities under the 1933 Act and may not be resold or transferred
unless the Purchased Shares are first registered under the Federal securities
laws or unless an exemption from such registration is available. Accordingly,
Optionee hereby acknowledges that Optionee is prepared to hold the Purchased
Shares for an indefinite period and that Optionee is aware that SEC Rule 144
issued under the 1933 Act which exempts certain resales of unrestricted
securities is not presently available to exempt the resale of the Purchased
Shares from the registration requirements of the 1933 Act.
<PAGE>
2. Restrictions on Disposition of Purchased Shares. Optionee shall
make no disposition of the Purchased Shares (other than a Permitted Transfer)
unless and until there is compliance with all of the following requirements:
(i) Optionee shall have provided the Corporation with a
written summary of the terms and conditions of the proposed disposition.
(ii) Optionee shall have complied with all requirements of
this Agreement applicable to the disposition of the Purchased Shares.
(iii) Optionee shall have provided the Corporation with
written assurances, in form and substance satisfactory to the Corporation,
that (a) the proposed disposition does not require registration of the
Purchased Shares under the 1933 Act or (b) all appropriate action necessary
for compliance with the registration requirements of the 1933 Act or any
exemption from registration available under the 1933 Act (including Rule
144) has been taken.
The Corporation shall not be required (i) to transfer on its books any
---
Purchased Shares which have been sold or transferred in violation of the
provisions of this Agreement or (ii) to treat as the owner of the Purchased
--
Shares, or otherwise to accord voting, dividend or liquidation rights to, any
transferee to whom the Purchased Shares have been transferred in contravention
of this Agreement.
3. Restrictive Legends. The stock certificates for the Purchased
Shares shall be endorsed with one or more of the following restrictive legends:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933. The shares may not be sold or
offered for sale in the absence of (a) an effective registration statement
for the shares under such Act, (b) a "no action" letter of the Securities
and Exchange Commission with respect to such sale or offer or (c)
satisfactory assurances to the Corporation that registration under such Act
is not required with respect to such sale or offer."
"The shares represented by this certificate are subject to
certain repurchase rights and rights of first refusal granted to the
Corporation and accordingly may not be sold, assigned, transferred,
encumbered, or in any manner disposed of except in conformity with the
terms of a written agreement dated _________________, 199____ between the
Corporation and the registered holder of the shares (or the predecessor in
interest to the shares). A copy of such agreement is maintained at the
Corporation's principal corporate offices."
C. TRANSFER RESTRICTIONS
1. Restriction on Transfer. Except for any Permitted Transfer,
Optionee shall not transfer, assign, encumber or otherwise dispose of any of the
Purchased Shares which are subject to the Repurchase Right. In addition,
Purchased Shares which are released from the Repurchase Right shall not be
transferred, assigned, encumbered or otherwise disposed of in contravention of
the First Refusal Right or the Market Stand-Off.
2
<PAGE>
2. Transferee Obligations. Each person (other than the Corporation)
to whom the Purchased Shares are transferred by means of a Permitted Transfer
must, as a condition precedent to the validity of such transfer, acknowledge in
writing to the Corporation that such person is bound by the provisions of this
Agreement and that the transferred shares are subject to (i) the Repurchase
Right, (ii) the First Refusal Right and (iii) the Market Stand-Off, to the same
extent such shares would be so subject if retained by Optionee.
3. Market Stand-Off.
(a) In connection with any underwritten public offering by the
Corporation of its equity securities pursuant to an effective registration
statement filed under the 1933 Act, including the Corporation's initial public
offering, Owner shall not sell, make any short sale of, loan, hypothecate,
pledge, grant any option for the purchase of, or otherwise dispose or transfer
for value or otherwise agree to engage in any of the foregoing transactions with
respect to, any Purchased Shares without the prior written consent of the
Corporation or its underwriters. Such restriction (the "Market Stand-Off") shall
be in effect for such period of time from and after the effective date of the
final prospectus for the offering as may be requested by the Corporation or such
underwriters. In no event, however, shall such period exceed one hundred eighty
(180) days and the Market Stand-Off shall in all events terminate two (2) years
after the effective date of the Corporation's initial public offering.
(b) Owner shall be subject to the Market Stand-Off provided and
------------
only if the officers and directors of the Corporation are also subject to
- -------
similar restrictions.
(c) Any new, substituted or additional securities which are by
reason of any Recapitalization or Reorganization distributed with respect to the
Purchased Shares shall be immediately subject to the Market Stand-Off, to the
same extent the Purchased Shares are at such time covered by such provisions.
(d) In order to enforce the Market Stand-Off, the Corporation
may impose stop-transfer instructions with respect to the Purchased Shares until
the end of the applicable stand-off period.
D. REPURCHASE RIGHT
1. Grant. The Corporation is hereby granted the right (the
"Repurchase Right"), exercisable at any time during the sixty (60)-day period
following the date Optionee ceases for any reason to remain in Service or (if
later) during the sixty (60)-day period following the execution date of this
Agreement, to repurchase at the Exercise Price any or all of the Purchased
Shares in which Optionee is not, at the time of his or her cessation of Service,
vested in accordance with the Vesting Schedule applicable to those shares or the
special vesting acceleration provisions of Paragraph D.6 of this Agreement (such
shares to be hereinafter referred to as the "Unvested Shares").
2. Exercise of the Repurchase Right. The Repurchase Right shall be
exercisable by written notice delivered to each Owner of the Unvested Shares
prior to the expiration of the sixty (60)-day exercise period. The notice shall
indicate the number of
3
<PAGE>
Unvested Shares to be repurchased and the date on which the repurchase is to be
effected, such date to be not more than thirty (30) days after the date of such
notice. The certificates representing the Unvested Shares to be repurchased
shall be delivered to the Corporation on or before the close of business on the
date specified for the repurchase. Concurrently with the receipt of such stock
certificates, the Corporation shall pay to Owner, in cash or cash equivalents
(including the cancellation of any purchase-money indebtedness), an amount equal
to the Exercise Price previously paid for the Unvested Shares which are to be
repurchased from Owner.
3. Termination of the Repurchase Right. The Repurchase Right shall
terminate with respect to any Unvested Shares for which it is not timely
exercised under Paragraph D.2. In addition, the Repurchase Right shall terminate
and cease to be exercisable with respect to any and all Purchased Shares in
which Optionee vests in accordance with the Vesting Schedule. All Purchased
Shares as to which the Repurchase Right lapses shall, however, remain subject to
(i) the First Refusal Right and (ii) the Market Stand-Off.
4. Aggregate Vesting Limitation. If the Option is exercised in more
than one increment so that Optionee is a party to one or more other Stock
Purchase Agreements (the "Prior Purchase Agreements") which are executed prior
to the date of this Agreement, then the total number of Purchased Shares as to
which Optionee shall be deemed to have a fully-vested interest under this
Agreement and all Prior Purchase Agreements shall not exceed in the aggregate
the number of Purchased Shares in which Optionee would otherwise at the time be
vested, in accordance with the Vesting Schedule, had all the Purchased Shares
(including those acquired under the Prior Purchase Agreements) been acquired
exclusively under this Agreement.
5. Recapitalization. Any new, substituted or additional securities
or other property (including cash paid other than as a regular cash dividend)
which is by reason of any Recapitalization distributed with respect to the
Purchased Shares shall be immediately subject to the Repurchase Right and any
escrow requirements hereunder, but only to the extent the Purchased Shares are
at the time covered by such right or escrow requirements. Appropriate
adjustments to reflect such distribution shall be made to the number and/or
class of Purchased Shares subject to this Agreement and to the price per share
to be paid upon the exercise of the Repurchase Right in order to reflect the
effect of any such Recapitalization upon the Corporation's capital structure;
provided, however, that the aggregate purchase price shall remain the same.
- --------
6. Corporate Transaction.
(a) The Repurchase Right shall automatically terminate in its
entirety, and all the Purchased Shares shall vest in full, immediately prior to
the consummation of any Corporate Transaction, except to the extent the
Repurchase Right is to be assigned to the successor entity in such Corporate
Transaction.
(b) To the extent the Repurchase Right remains in effect
following a Corporate Transaction, such right shall apply to any new securities
or other property (including any cash payments) received in exchange for the
Purchased Shares in consummation of the Corporate Transaction, but only to the
extent the Purchased Shares are at the time covered by such right. Appropriate
adjustments shall be made to the price per share payable upon exercise
4
<PAGE>
of the Repurchase Right to reflect the effect of the Corporate Transaction upon
the Corporation's capital structure; provided, however, that the aggregate
--------
purchase price shall remain the same. The new securities or other property
(including any cash payments) issued or distributed with respect to the
Purchased Shares in consummation of the Corporate Transaction shall be
immediately deposited in escrow with the Corporation (or the successor entity)
and shall not be released from escrow until Optionee vests in such securities or
other property in accordance with the same Vesting Schedule in effect for the
Purchased Shares.
(c) The Repurchase Right shall automatically lapse in its
entirety, and all the Purchased Shares shall immediately vest in full, upon an
Involuntary Termination of Optionee's Service within twelve (12) months
following the effective date of a Corporate Transaction in which the Repurchase
Right does not otherwise terminate pursuant to Paragraph D.6(a) above.
E. RIGHT OF FIRST REFUSAL
1. Grant. The Corporation is hereby granted the right of first
refusal (the "First Refusal Right"), exercisable in connection with any proposed
transfer of the Purchased Shares in which Optionee has vested in accordance with
the provisions of Article D. For purposes of this Article E, the term "transfer"
shall include any sale, assignment, pledge, encumbrance or other disposition of
the Purchased Shares intended to be made by Owner, but shall not include any
Permitted Transfer.
2. Notice of Intended Disposition. In the event any Owner of
Purchased Shares in which Optionee has vested desires to accept a bona fide
third-party offer for the transfer of any or all of such shares (the Purchased
Shares subject to such offer to be hereinafter referred to as the "Target
Shares"), Owner shall promptly (i) deliver to the Corporation written notice
(the "Disposition Notice") of the terms of the offer, including the purchase
price and the identity of the third-party offeror, and (ii) provide satisfactory
proof that the disposition of the Target Shares to such third-party offeror
would not be in contravention of the provisions set forth in Articles B and C.
3. Exercise of the First Refusal Right. The Corporation shall, for a
period of twenty-five (25) days following receipt of the Disposition Notice,
have the right to repurchase any or all of the Target Shares subject to the
Disposition Notice upon the same terms as those specified therein or upon such
other terms (not materially different from those specified in the Disposition
Notice) to which Owner consents. Such right shall be exercisable by delivery of
written notice (the "Exercise Notice") to Owner prior to the expiration of the
twenty-five (25)-day exercise period. If such right is exercised with respect to
all the Target Shares, then the Corporation shall effect the repurchase of such
shares, including payment of the purchase price, not more than five (5) business
days after delivery of the Exercise Notice; and at such time the certificates
representing the Target Shares shall be delivered to the Corporation.
Should the purchase price specified in the Disposition Notice be
payable in property other than cash or evidences of indebtedness, the
Corporation shall have the right to pay the purchase price in the form of cash
equal in amount to the value of such property. If Owner and the Corporation
cannot agree on such cash value within ten (10) days after the Corporation's
5
<PAGE>
receipt of the Disposition Notice, the valuation shall be made by an appraiser
of recognized standing selected by Owner and the Corporation or, if they cannot
agree on an appraiser within twenty (20) days after the Corporation's receipt of
the Disposition Notice, each shall select an appraiser of recognized standing
and the two (2) appraisers shall designate a third appraiser of recognized
standing, whose appraisal shall be determinative of such value. The cost of
such appraisal shall be shared equally by Owner and the Corporation. The
closing shall then be held on the later of (i) the fifth (5th) business day
-----
following delivery of the Exercise Notice or (ii) the fifth (5th) business day
after such valuation shall have been made.
4. Non-Exercise of the First Refusal Right. In the event the
Exercise Notice is not given to Owner prior to the expiration of the twenty-five
(25)-day exercise period, Owner shall have a period of thirty (30) days
thereafter in which to sell or otherwise dispose of the Target Shares to the
third-party offeror identified in the Disposition Notice upon terms (including
the purchase price) no more favorable to such third-party offeror than those
specified in the Disposition Notice; provided, however, that any such sale or
--------
disposition must not be effected in contravention of the provisions of Articles
B and C. The third-party offeror shall acquire the Target Shares free and clear
of the First Refusal Right, but the acquired shares shall remain subject to the
provisions of Article B and Paragraph C.3. In the event Owner does not effect
such sale or disposition of the Target Shares within the specified thirty (30)-
day period, the First Refusal Right shall continue to be applicable to any
subsequent disposition of the Target Shares by Owner until such right lapses.
5. Partial Exercise of the First Refusal Right. In the event the
Corporation makes a timely exercise of the First Refusal Right with respect to a
portion, but not all, of the Target Shares specified in the Disposition Notice,
Owner shall have the option, exercisable by written notice to the Corporation
delivered within five (5) business days after Owner's receipt of the Exercise
Notice, to effect the sale of the Target Shares pursuant to either of the
following alternatives:
(i) sale or other disposition of all the Target Shares to
the third-party offeror identified in the Disposition Notice, but in full
compliance with the requirements of Paragraph E.4, as if the Corporation
did not exercise the First Refusal Right; or
(ii) sale to the Corporation of the portion of the Target
Shares which the Corporation has elected to purchase, such sale to be
effected in substantial conformity with the provisions of Paragraph E.3.
The First Refusal Right shall continue to be applicable to any subsequent
disposition of the remaining Target Shares until such right lapses.
Owner's failure to deliver timely notification to the Corporation
shall be deemed to be an election by Owner to sell the Target Shares pursuant to
alternative (i) above.
6. Recapitalization/Reorganization.
(a) Any new, substituted or additional securities or other
property which is by reason of any Recapitalization distributed with respect to
the Purchased Shares shall
6
<PAGE>
be immediately subject to the First Refusal Right, but only to the extent the
Purchased Shares are at the time covered by such right.
(b) In the event of a Reorganization, the First Refusal Right
shall remain in full force and effect and shall apply to the new capital stock
or other property received in exchange for the Purchased Shares in consummation
of the Reorganization, but only to the extent the Purchased Shares are at the
time covered by such right.
7. Lapse. The First Refusal Right shall lapse upon the earliest to
--------
occur of (i) the first date on which shares of the Common Stock are held of
record by more than five hundred (500) persons, (ii) a determination is made by
the Board that a public market exists for the outstanding shares of Common Stock
or (iii) a firm commitment underwritten public offering, pursuant to an
effective registration statement under the 1933 Act, covering the offer and sale
of the Common Stock in the aggregate amount of at least ten million dollars
($10,000,000). However, the Market Stand-Off shall continue to remain in full
force and effect following the lapse of the First Refusal Right.
F. SPECIAL TAX ELECTION
The acquisition of the Purchased Shares may result in adverse tax
consequences which may be avoided or mitigated by filing an election under Code
Section 83(b). Such election must be filed within thirty (30) days after the
date of this Agreement. A description of the tax consequences applicable to the
acquisition of the Purchased Shares and the form for making the Code Section
83(b) election are set forth in Exhibit II. OPTIONEE SHOULD CONSULT WITH HIS OR
HER TAX ADVISOR TO DETERMINE THE TAX CONSEQUENCES OF ACQUIRING THE PURCHASED
SHARES AND THE ADVANTAGES AND DISADVANTAGES OF FILING THE CODE SECTION 83(b)
ELECTION. OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE RESPONSIBILITY, AND
NOT THE CORPORATION'S, TO FILE A TIMELY ELECTION UNDER CODE SECTION 83(b), EVEN
IF OPTIONEE REQUESTS THE CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS FILING
ON HIS OR HER BEHALF.
G. GENERAL PROVISIONS
1. Assignment. The Corporation may assign the Repurchase Right
and/or the First Refusal Right to any person or entity selected by the Board,
including (without limitation) one or more shareholders of the Corporation. If
the assignee of the Repurchase Right is other than (i) a wholly owned subsidiary
of the Corporation or (ii) the parent corporation owning one hundred percent
(100%) of the Corporation's outstanding capital stock, then such assignee must
make a cash payment to the Corporation, upon the assignment of the Repurchase
Right, in an amount equal to the excess (if any) of (i) the Fair Market Value of
the Purchased Shares at the time subject to the assigned Repurchase Right over
(ii) the aggregate repurchase price payable for the Purchased Shares.
2. No Employment or Service Contract. Nothing in this Agreement or
in the Plan shall confer upon Optionee any right to continue in Service for any
7
<PAGE>
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Parent or Subsidiary employing or
retaining Optionee) or of Optionee, which rights are hereby expressly reserved
by each, to terminate Optionee's Service at any time for any reason, with or
without cause.
3. Notices. Any notice required to be given under this Agreement
shall be in writing and shall be deemed effective upon personal delivery or upon
deposit in the U.S. mail, registered or certified, postage prepaid and properly
addressed to the party entitled to such notice at the address indicated below
such party's signature line on this Agreement or at such other address as such
party may designate by ten (10) days advance written notice under this paragraph
to all other parties to this Agreement.
4. No Waiver. The failure of the Corporation in any instance to
exercise the Repurchase Right or the First Refusal Right shall not constitute a
waiver of any other repurchase rights and/or rights of first refusal that may
subsequently arise under the provisions of this Agreement or any other agreement
between the Corporation and Optionee. No waiver of any breach or condition of
this Agreement shall be deemed to be a waiver of any other or subsequent breach
or condition, whether of like or different nature.
5. Cancellation of Shares. If the Corporation shall make available,
at the time and place and in the amount and form provided in this Agreement, the
consideration for the Purchased Shares to be repurchased in accordance with the
provisions of this Agreement, then from and after such time, the person from
whom such shares are to be repurchased shall no longer have any rights as a
holder of such shares (other than the right to receive payment of such
consideration in accordance with this Agreement). Such shares shall be deemed
purchased in accordance with the applicable provisions hereof, and the
Corporation shall be deemed the owner and holder of such shares, whether or not
the certificates therefor have been delivered as required by this Agreement.
H. MISCELLANEOUS PROVISIONS
1. Optionee Undertaking. Optionee hereby agrees to take whatever
additional action and execute whatever additional documents the Corporation may
deem necessary or advisable in order to carry out or effect one or more of the
obligations or restrictions imposed on either Optionee or the Purchased Shares
pursuant to the provisions of this Agreement.
2. Agreement is Entire Contract. This Agreement constitutes the
entire contract between the parties hereto with regard to the subject matter
hereof. This Agreement is made pursuant to the provisions of the Plan and shall
in all respects be construed in conformity with the terms of the Plan.
3. Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of California without resort to that
State's conflict-of-laws rules.
8
<PAGE>
4. Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
5. Successors and Assigns. The provisions of this Agreement shall
inure to the benefit of, and be binding upon, the Corporation and its successors
and assigns and upon Optionee, Optionee's permitted assigns and the legal
representatives, heirs and legatees of Optionee's estate, whether or not any
such person shall have become a party to this Agreement and have agreed in
writing to join herein and be bound by the terms hereof.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the
day and year first indicated above.
RAINMAKER SYSTEMS, INC.
By:______________________________________
Title:___________________________________
Address:_________________________________
_________________________________________
OPTIONEE
Address:_________________________________
_________________________________________
10
<PAGE>
SPOUSAL ACKNOWLEDGMENT
The undersigned spouse of Optionee has read and hereby approves the
foregoing Stock Purchase Agreement. In consideration of the Corporation's
granting Optionee the right to acquire the Purchased Shares in accordance with
the terms of such Agreement, the undersigned hereby agrees to be irrevocably
bound by all the terms of such Agreement, including (without limitation) the
right of the Corporation (or its assigns) to purchase any Purchased Shares in
which Optionee is not vested at time of his or her cessation of Service.
_________________________________
OPTIONEE'S SPOUSE
Address:_________________________
_________________________________
11
<PAGE>
EXHIBIT I
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED ______________________ hereby sell(s), assign(s)
and transfer(s) unto Rainmaker Systems, Inc., (the "Corporation"),
_______________________ (_____________) shares of the Common Stock of the
Corporation standing in his or her name on the books of the Corporation
represented by Certificate No. ___________________ herewith and do(es) hereby
irrevocably constitute and appoint _______________________________ Attorney to
transfer the said stock on the books of the Corporation with full power of
substitution in the premises.
Dated: ________________
Signature_______________________________
Instruction: Please do not fill in any blanks other than the signature line.
Please sign exactly as you would like your name to appear on the issued stock
certificate. The purpose of this assignment is to enable the Corporation to
exercise the Repurchase Right without requiring additional signatures on the
part of Optionee.
<PAGE>
EXHIBIT II
FEDERAL INCOME TAX CONSEQUENCES AND
SECTION 83(b) TAX ELECTION
II. Federal Income Tax Consequences and Section 83(b) Election For
--------------------------------------------------------------
Exercise of Non-Statutory Option. If the Purchased Shares are acquired pursuant
- --------------------------------
to the exercise of a Non-Statutory Option, as specified in the Grant Notice,
then under Code Section 83, the excess of the Fair Market Value of the Purchased
Shares on the date any forfeiture restrictions applicable to such shares lapse
over the Exercise Price paid for such shares will be reportable as ordinary
income on the lapse date. For this purpose, the term "forfeiture restrictions"
includes the right of the Corporation to repurchase the Purchased Shares
pursuant to the Repurchase Right. However, Optionee may elect under Code
Section 83(b) to be taxed at the time the Purchased Shares are acquired, rather
than when and as such Purchased Shares cease to be subject to such forfeiture
restrictions. Such election must be filed with the Internal Revenue Service
within thirty (30) days after the date of the Agreement. Even if the Fair
Market Value of the Purchased Shares on the date of the Agreement equals the
Exercise Price paid (and thus no tax is payable), the election must be made to
avoid adverse tax consequences in the future. The form for making this election
is attached as part of this exhibit. FAILURE TO MAKE THIS FILING WITHIN THE
APPLICABLE THIRTY (30)-DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY
INCOME BY OPTIONEE AS THE FORFEITURE RESTRICTIONS LAPSE.
III. Federal Income Tax Consequences and Conditional Section 83(b)
-------------------------------------------------------------
Election For Exercise of Incentive Option. If the Purchased Shares are acquired
- -----------------------------------------
pursuant to the exercise of an Incentive Option, as specified in the Grant
Notice, then the following tax principles shall be applicable to the Purchased
Shares:
(i) For regular tax purposes, no taxable income will be recognized
at the time the Option is exercised.
(ii) The excess of (a) the Fair Market Value of the Purchased Shares
on the date the Option is exercised or (if later) on the date any
forfeiture restrictions applicable to the Purchased Shares lapse over (b)
the Exercise Price paid for the Purchased Shares will be includible in
Optionee's taxable income for alternative minimum tax purposes.
(iii) If Optionee makes a disqualifying disposition of the Purchased
Shares, then Optionee will recognize ordinary income in the year of such
disposition equal in amount to the excess of (a) the Fair Market Value of
the Purchased Shares on the date the Option is exercised or (if later) on
the date any forfeiture restrictions applicable to the Purchased Shares
lapse over (b) the Exercise Price paid for the Purchased Shares. Any
additional gain recognized upon the disqualifying disposition will be
either short-term or long-term capital gain depending upon the period for
which the Purchased Shares are held prior to the disposition.
(iv) For purposes of the foregoing, the term "forfeiture
restrictions" will include the right of the Corporation to repurchase the
Purchased Shares pursuant to the
II-1
<PAGE>
Repurchase Right. The term "disqualifying disposition" means any sale or
other disposition /1/ of the Purchased Shares within two (2) years after
the Grant Date or within one (1) year after the exercise date of the
Option.
(v) In the absence of final Treasury Regulations relating to
Incentive Options, it is not certain whether Optionee may, in connection
with the exercise of the Option for any Purchased Shares at the time
subject to forfeiture restrictions, file a protective election under Code
Section 83(b) which would limit (a) Optionee's alternative minimum taxable
income upon exercise and (b) Optionee's ordinary income upon a
disqualifying disposition to the excess of the Fair Market Value of the
Purchased Shares on the date the Option is exercised over the Exercise
Price paid for the Purchased Shares. Accordingly, such election if properly
filed will only be allowed to the extent the final Treasury Regulations
permit such a protective election. Page 2 of the attached form for making
the election should be filed with any election made in connection with the
exercise of an Incentive Option.
______________________
/1// Generally, a disposition of shares purchased under an Incentive
---
Option includes any transfer of legal title, including a transfer by sale,
exchange or gift, but does not include a transfer to the Optionee's spouse, a
transfer into joint ownership with right of survivorship if Optionee remains one
of the joint owners, a pledge, a transfer by bequest or inheritance or certain
tax free exchanges permitted under the Code.
II-2
<PAGE>
SECTION 83(b) ELECTION
This statement is being made under Section 83(b) of the Internal
Revenue Code, pursuant to Treas. Reg. Section 1.83-2.
(1) The taxpayer who performed the services is:
Name:
Address:
Taxpayer Ident. No.:
(2) The property with respect to which the election is being made is
____________ shares of the common stock of Rainmaker Systems, Inc. .
(3) The property was issued on ________, 199_.
(4) The taxable year in which the election is being made is the calendar year
199__.
(5) The property is subject to a repurchase right pursuant to which the issuer
has the right to acquire the property at the original purchase price if for
any reason taxpayer's service with the issuer terminates. The issuer's
repurchase right lapses in a series of annual and monthly installments over
a four (4)-year period ending on ____________________, 200____.
(6) The fair market value at the time of transfer (determined without regard to
any restriction other than a restriction which by its terms will never
lapse) is $_____________per share.
(7) The amount paid for such property is $_____________ per share.
(8) A copy of this statement was furnished to Rainmaker Systems, Inc. for whom
taxpayer rendered the services underlying the transfer of property.
(9) This statement is executed on _______________________, 199__.
_____________________________________ _____________________________
Spouse (if any) Taxpayer
This election must be filed with the Internal Revenue Service Center with which
taxpayer files his or her Federal income tax returns and must be made within
thirty (30) days after the execution date of the Stock Purchase Agreement. This
filing should be made by registered or certified mail, return receipt requested.
Optionee must retain two (2) copies of the completed form for filing with his or
her Federal and state tax returns for the current tax year and an additional
copy for his or her records.
<PAGE>
The property described in the above Section 83(b) election is
comprised of shares of common stock acquired pursuant to the exercise of an
incentive stock option under Section 422 of the Internal Revenue Code (the
"Code"). Accordingly, it is the intent of the Taxpayer to utilize this election
to achieve the following tax results:
1. The purpose of this election is to have the alternative minimum
taxable income attributable to the purchased shares measured by the amount by
which the fair market value of such shares at the time of their transfer to the
Taxpayer exceeds the purchase price paid for the shares. In the absence of this
election, such alternative minimum taxable income would be measured by the
spread between the fair market value of the purchased shares and the purchase
price which exists on the various lapse dates in effect for the forfeiture
restrictions applicable to such shares. The election is to be effective to the
full extent permitted under the Code.
2. Section 421(a)(1) of the Code expressly excludes from income any
excess of the fair market value of the purchased shares over the amount paid for
such shares. Accordingly, this election is also intended to be effective in the
event there is a "disqualifying disposition" of the shares, within the meaning
of Section 421(b) of the Code, which would otherwise render the provisions of
Section 83(a) of the Code applicable at that time. Consequently, the Taxpayer
hereby elects to have the amount of disqualifying disposition income measured by
the excess of the fair market value of the purchased shares on the date of
transfer to the Taxpayer over the amount paid for such shares. Since Section
421(a) presently applies to the shares which are the subject of this Section
83(b) election, no taxable income is actually recognized for regular tax
purposes at this time, and no income taxes are payable, by the Taxpayer as a
result of this election.
THIS PAGE 2 IS TO BE ATTACHED TO ANY SECTION 83(b) ELECTION FILED IN CONNECTION
WITH THE EXERCISE OF AN INCENTIVE STOCK OPTION UNDER THE FEDERAL TAX LAWS.
2
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Agreement:
A. Agreement shall mean this Stock Purchase Agreement.
---------
B. Board shall mean the Corporation's Board of Directors.
-----
C. Code shall mean the Internal Revenue Code of 1986, as amended.
----
D. Common Stock shall mean the Corporation's common stock.
------------
E. Corporate Transaction shall mean either of the following shareholder-
---------------------
approved transactions:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or substantially
all of the Corporation's assets in complete liquidation or dissolution of
the Corporation.
F. Corporation shall mean Rainmaker Systems, Inc., a California
-----------
corporation, and any successor corporation to all or substantially all of the
assets or voting stock of Rainmaker Systems, Inc. which shall by appropriate
action adopt the Plan.
G. Disposition Notice shall have the meaning assigned to such term in
------------------
Paragraph E.2.
H. Exercise Notice shall have the meaning assigned to such term in
---------------
Paragraph E.3.
I. Exercise Price shall have the meaning assigned to such term in
--------------
Paragraph A.1.
J. Fair Market Value of a share of Common Stock on any relevant date,
-----------------
prior to the initial public offering of the Common Stock, shall be determined by
the Plan Administrator after taking into account such factors as it shall deem
appropriate.
K. First Refusal Right shall mean the right granted to the Corporation in
-------------------
accordance with Article E.
L. Grant Date shall have the meaning assigned to such term in Paragraph
----------
A.1.
M. Grant Notice shall mean the Notice of Grant of Stock Option pursuant
------------
to which Optionee has been informed of the basic terms of the Option.
A-1
<PAGE>
N. Incentive Option shall mean an option which satisfies the requirements
----------------
of Code Section 422.
O. Involuntary Termination shall mean the termination of Optionee's
-----------------------
Service which occurs by reason of:
(i) Optionee's involuntary dismissal or discharge by the Corporation
for reasons other than Misconduct, or
(ii) Optionee's voluntary resignation following (A) a change in his or
her position with the Corporation which materially reduces his or her level
of responsibility, (B) a reduction in Optionee's level of compensation
(including base salary, fringe benefits and target bonuses under any
corporate-performance based bonus or incentive programs) by more than
fifteen percent (15%) or (C) a relocation of Optionee's place of employment
by more than fifty (50) miles, provided and only if such change, reduction
or relocation is effected by the Corporation without Optionee's consent.
P. Market Stand-Off shall mean the market stand-off restriction
----------------
specified in Paragraph C.3.
Q. Misconduct shall mean the commission of any act of fraud, embezzlement
----------
or dishonesty by Optionee, any unauthorized use or disclosure by Optionee of
confidential information or trade secrets of the Corporation (or any Parent or
Subsidiary), or any other intentional misconduct by Optionee adversely affecting
the business or affairs of the Corporation (or any Parent or Subsidiary) in a
material manner. The foregoing definition shall not be deemed to be inclusive
of all the acts or omissions which the Corporation (or any Parent or Subsidiary)
may consider as grounds for the dismissal or discharge of Optionee or any other
individual in the Service of the Corporation (or any Parent or Subsidiary).
R. 1933 Act shall mean the Securities Act of 1933, as amended.
--------
S. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.
--------
T. Non-Statutory Option shall mean an option not intended to satisfy the
--------------------
requirements of Code Section 422.
U. Option shall have the meaning assigned to such term in Paragraph A.1.
------
V. Option Agreement shall mean all agreements and other documents
----------------
evidencing the Option.
W. Optionee shall mean the person to whom the Option is granted under the
--------
Plan.
X. Owner shall mean Optionee and all subsequent holders of the Purchased
-----
Shares who derive their chain of ownership through a Permitted Transfer from
Optionee.
Y. Parent shall mean any corporation (other than the Corporation) in an
------
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken
A-2
<PAGE>
chain (other than the Corporation) owns, at the time of the determination, stock
possessing fifty percent (50%) or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.
Z. Permitted Transfer shall mean (i) a gratuitous transfer of the
------------------
Purchased Shares, provided and only if Optionee obtains the Corporation's prior
written consent to such transfer, (ii) a transfer of title to the Purchased
Shares effected pursuant to Optionee's will or the laws of intestate succession
following Optionee's death or (iii) a transfer to the Corporation in pledge as
security for any purchase-money indebtedness incurred by Optionee in connection
with the acquisition of the Purchased Shares.
AA. Plan shall mean the Corporation's 1998 Stock Option/Stock Issuance
----
Plan.
BB. Plan Administrator shall mean either the Board or a committee of the
------------------
Board acting in its capacity as administrator of the Plan.
CC. Prior Purchase Agreement shall have the meaning assigned to such term
------------------------
in Paragraph D.4.
DD. Purchased Shares shall have the meaning assigned to such term in
----------------
Paragraph A.1.
EE. Recapitalization shall mean any stock split, stock dividend,
----------------
recapitalization, combination of shares, exchange of shares or other change
affecting the Corporation's outstanding Common Stock as a class without the
Corporation's receipt of consideration.
FF. Reorganization shall mean any of the following transactions:
--------------
(i) a merger or consolidation in which the Corporation is not the
surviving entity,
(ii) a sale, transfer or other disposition of all or substantially
all of the Corporation's assets,
(iii) a reverse merger in which the Corporation is the surviving
entity but in which the Corporation's outstanding voting securities are
transferred in whole or in part to a person or persons different from the
persons holding those securities immediately prior to the merger, or
(iv) any transaction effected primarily to change the state in which
the Corporation is incorporated or to create a holding company structure.
GG. Repurchase Right shall mean the right granted to the Corporation in
----------------
accordance with Article D.
HH. SEC shall mean the Securities and Exchange Commission.
---
A-3
<PAGE>
II. Service shall mean the Optionee's performance of services for the
-------
Corporation (or any Parent or Subsidiary) in the capacity of an employee,
subject to the control and direction of the employer entity as to both the work
to be performed and the manner and method of performance, a non-employee member
of the board of directors or an independent consultant.
JJ. Subsidiary shall mean any corporation (other than the Corporation) in
----------
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
KK. Target Shares shall have the meaning assigned to such term in
-------------
Paragraph E.2.
LL. Vesting Schedule shall mean the vesting schedule specified in the
----------------
Grant Notice pursuant to which the Optionee is to vest in the Option Shares in a
series of installments over his or her period of Service.
MM. Unvested Shares shall have the meaning assigned to such term in
---------------
Paragraph D.1.
A-4
<PAGE>
RAINMAKER SYSTEMS, INC.
STOCK ISSUANCE AGREEMENT
------------------------
AGREEMENT made as of this _____ day of ______________ 199___, by and
Rainmaker Systems, Inc., a California corporation, and _________, Participant in
the Corporation's 1998 Stock Option/Stock Issuance Plan.
All capitalized terms in this Agreement shall have the meaning
assigned to them in this Agreement or in the attached Appendix.
A. PURCHASE OF SHARES
------------------
1. Purchase. Participant hereby purchases ___________ shares of
--------
Common Stock (the "Purchased Shares") pursuant to the provisions of the Stock
Issuance Program at the purchase price of $ ___________ per share (the
"Purchase Price").
2. Payment. Concurrently with the delivery of this Agreement to the
-------
Corporation, Participant shall pay the Purchase Price for the Purchased Shares
in cash or through a full-recourse interest-bearing promissory payable in full
to the Corporation in one year and shall deliver a duly-executed blank
Assignment Separate from Certificate (in the form attached hereto as Exhibit I)
with respect to the Purchased Shares.
3. Shareholder Rights. Until such time as the Corporation exercises
------------------
the Repurchase Right or the First Refusal Right, Participant (or any successor
in interest) shall have all shareholder rights (including voting, dividend and
liquidation rights) with respect to the Purchased Shares, subject, however, to
the transfer restrictions of Articles B and C.
B. SECURITIES LAW COMPLIANCE
-------------------------
1. Restricted Securities. The Purchased Shares have not been
---------------------
registered under the 1933 Act and are being issued to Participant in reliance
upon the exemption from such registration provided by SEC Rule 701 for stock
issuances under compensatory benefit plans such as the Plan. Participant
hereby confirms that Participant has been informed that the Purchased Shares
are restricted securities under the 1933 Act and may not be resold or
transferred unless the Purchased Shares are first registered under the Federal
securities laws or unless an exemption from such registration is available.
Accordingly, Participant hereby acknowledges that Participant is prepared to
hold the Purchased Shares for an indefinite period and that Participant is
aware that SEC Rule 144 issued under the 1933 Act which exempts certain
resales of unrestricted securities is not presently available to exempt the
resale of the Purchased Shares from the registration requirements of the 1933
Act.
2. Disposition of Purchased Shares. Participant shall make no
-------------------------------
disposition of the Purchased Shares (other than a Permitted Transfer) unless
and until there is compliance with all of the following requirements:
<PAGE>
(i) Participant shall have provided the Corporation with a
written summary of the terms and conditions of the proposed disposition.
(ii) Participant shall have complied with all requirements of this
Agreement applicable to the disposition of the Purchased Shares.
(iii) Participant shall have provided the Corporation with written
assurances, in form and substance satisfactory to the Corporation, that
(a) the proposed disposition does not require registration of the
Purchased Shares under the 1933 Act or (b) all appropriate action
necessary for compliance with the registration requirements of the 1933
Act or any exemption from registration available under the 1933 Act
(including Rule 144) has been taken.
The Corporation shall not be required (i) to transfer on its books any
---
Purchased Shares which have been sold or transferred in violation of the
provisions of this Agreement or (ii) to treat as the owner of the Purchased
--
Shares, or otherwise to accord voting, dividend or liquidation rights to, any
transferee to whom the Purchased Shares have been transferred in contravention
of this Agreement.
3. Restrictive Legends. The stock certificates for the Purchased
-------------------
Shares shall be endorsed with one or more of the following restrictive legends:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933. The shares may not be sold or offered for
sale in the absence of (a) an effective registration statement for the shares
under such Act, (b) a "no action" letter of the Securities and Exchange
Commission with respect to such sale or offer or (c) satisfactory assurances to
the Corporation that registration under such Act is not required with respect to
such sale or offer."
"The shares represented by this certificate are subject to certain
repurchase rights and rights of first refusal granted to the Corporation and
accordingly may not be sold, assigned, transferred, encumbered, or in any manner
disposed of except in conformity with the terms of a written agreement dated
______________________, 199__ between the Corporation and the registered holder
of the shares (or the predecessor in interest to the shares). A copy of such
agreement is maintained at the Corporation's principal corporate offices."
C. TRANSFER RESTRICTIONS
---------------------
1. Restriction on Transfer. Except for any Permitted Transfer,
-----------------------
Participant shall not transfer, assign, encumber or otherwise dispose of any
of the Purchased Shares which are subject to the Repurchase Right. In
addition, Purchased Shares which are released from the Repurchase Right shall
not be transferred, assigned, encumbered or otherwise disposed of in
contravention of the First Refusal Right or the Market Stand-Off.
2. Transferee Obligations. Each person (other than the Corporation)
----------------------
to whom the Purchased Shares are transferred by means of a Permitted Transfer
must, as a condition precedent to the validity of such transfer, acknowledge
in writing to the Corporation that such person is bound by the provisions of
this Agreement and that the transferred shares are subject to
2
<PAGE>
(i) the Repurchase Right, (ii) the First Refusal Right and (iii) the Market
Stand-Off, to the same extent such shares would be so subject if retained by
Participant.
3. Market Stand-Off.
----------------
(a) In connection with any underwritten public offering by the
Corporation of its equity securities pursuant to an effective registration
statement filed under the 1933 Act, including the Corporation's initial public
offering, Owner shall not sell, make any short sale of, loan, hypothecate,
pledge, grant any option for the purchase of, or otherwise dispose or transfer
for value or otherwise agree to engage in any of the foregoing transactions
with respect to, any Purchased Shares without the prior written consent of the
Corporation or its underwriters. Such restriction (the "Market Stand-Off")
shall be in effect for such period of time from and after the effective date
of the final prospectus for the offering as may be requested by the
Corporation or such underwriters. In no event, however, shall such period
exceed one hundred eighty (180) days and the Market Stand-Off shall in all
events terminate two (2) years after the effective date of the Corporation's
initial public offering.
(b) Owner shall be subject to the Market Stand-Off provided
--------
and only if the officers and directors of the Corporation are also subject to
- -----------
similar restrictions.
(c) Any new, substituted or additional securities which are by
reason of any Recapitalization or Reorganization distributed with respect to
the Purchased Shares shall be immediately subject to the Market Stand-Off, to
the same extent the Purchased Shares are at such time covered by such
provisions.
(d) In order to enforce the Market Stand-Off, the Corporation
may impose stop-transfer instructions with respect to the Purchased Shares
until the end of the applicable stand-off period.
D. REPURCHASE RIGHT
----------------
1. Grant. The Corporation is hereby granted the right (the "Repurchase
-----
Right"), exercisable at any time during the sixty (60)-day period following the
date Participant ceases for any reason to remain in Service, to repurchase at
the Purchase Price any or all of the Purchased Shares in which Participant is
not, at the time of his or her cessation of Service, vested in accordance with
the Vesting Schedule (such shares to be hereinafter referred to as the "Unvested
Shares").
2. Exercise of the Repurchase Right. The Repurchase Right shall be
--------------------------------
exercisable by written notice delivered to each Owner of the Unvested Shares
prior to the expiration of the sixty (60)-day exercise period. The notice
shall indicate the number of Unvested Shares to be repurchased and the date on
which the repurchase is to be effected, such date to be not more than thirty
(30) days after the date of such notice. The certificates representing the
Unvested Shares to be repurchased shall be delivered to the Corporation on or
before the close of business on the date specified for the repurchase.
Concurrently with the receipt of such stock certificates, the Corporation
shall pay to Owner, in cash or cash equivalents (including the cancellation of
any purchase-money indebtedness), an amount equal to the
3
<PAGE>
Purchase Price previously paid for the Unvested Shares which are to be
repurchased from Owner.
3. Termination of the Repurchase Right. The Repurchase Right shall
-----------------------------------
terminate with respect to any Unvested Shares for which it is not timely
exercised under Paragraph D.2. In addition, the Repurchase Right shall
terminate and cease to be exercisable with respect to any and all Purchased
Shares in which Participant vests in accordance with the following Vesting
Schedule:
Participant shall vest in twenty-five percent (25%) of the Purchased
Shares, and the Repurchase Right shall concurrently lapse with respect to those
Purchased Shares, upon Participant's completion of one (1) year of Service
measured from ________________________, 199____.
Participant shall vest in the remaining seventy-five percent
(75%) of the Purchased Shares, and the Repurchase Right shall concurrently
lapse with respect to those Purchased Shares, in a series of thirty-six
(36) successive equal monthly installments upon Participant's completion of
each additional month of Service over the thirty-six (36)-month period
measured from the vesting date for the first twenty-five percent (25%) of
the Purchased Shares.
All Purchased Shares as to which the Repurchase Right lapses
shall, however, remain subject to (i) the First Refusal Right and (ii) the
Market Stand-Off.
4. Recapitalization. Any new, substituted or additional securities
----------------
or other property (including cash paid other than as a regular cash dividend)
which is by reason of any Recapitalization distributed with respect to the
Purchased Shares shall be immediately subject to the Repurchase Right and any
escrow requirements hereunder, but only to the extent the Purchased Shares are
at the time covered by such right or escrow requirements. Appropriate
adjustments to reflect such distribution shall be made to the number and/or
class of Purchased Shares subject to this Agreement and to the price per share
to be paid upon the exercise of the Repurchase Right in order to reflect the
effect of any such Recapitalization upon the Corporation's capital structure;
provided, however, that the aggregate purchase price shall remain the same.
5. Corporate Transaction.
---------------------
(a) The Repurchase Right shall automatically terminate in its
entirety, and all the Purchased Shares shall vest in full, immediately prior
to the consummation of any Corporate Transaction, except to the extent the
Repurchase Right is to be assigned to the successor entity in such Corporate
Transaction.
(b) To the extent the Repurchase Right remains in effect
following a Corporate Transaction, such right shall apply to any new
securities or other property (including any cash payments) received in
exchange for the Purchased Shares in consummation of the Corporate
Transaction, but only to the extent the Purchased Shares are at the time
covered by such right. Appropriate adjustments shall be made to the price per
share payable upon exercise of the Repurchase Right to reflect the effect of
the Corporate Transaction upon the Corporation's
4
<PAGE>
capital structure; provided, however, that the aggregate purchase price shall
--------
remain the same. The new securities or other property (including any cash
payments) issued or distributed with respect to the Purchased Shares in
consummation of the Corporate Transaction shall be immediately deposited in
escrow with the Corporation (or the successor entity) and shall not be
released from escrow until Participant vests in such securities or other
property in accordance with the same Vesting Schedule in effect for the
Purchased Shares.
(c) The Repurchase Right shall automatically lapse in its
entirety, and the Purchased Shares shall immediately vest in full, upon an
Involuntary Termination of Participant's Service within twelve (12) months
following the effective date of a Corporate Transition in which the Repurchase
Right does not otherwise terminate pursuant to Paragraph D.5(a) above.
E. RIGHT OF FIRST REFUSAL
----------------------
1. Grant. The Corporation is hereby granted the right of first
-----
refusal (the "First Refusal Right"), exercisable in connection with any
proposed transfer of the Purchased Shares in which Participant has vested in
accordance with the provisions of Article D. For purposes of this Article E,
the term "transfer" shall include any sale, assignment, pledge, encumbrance or
other disposition of the Purchased Shares intended to be made by Owner, but
shall not include any Permitted Transfer.
2. Notice of Intended Disposition. In the event any Owner of Purchased
------------------------------
Shares in which Participant has vested desires to accept a bona fide third-
party offer for the transfer of any or all of such shares (the Purchased
Shares subject to such offer to be hereinafter referred to as the "Target
Shares"), Owner shall promptly (i) deliver to the Corporation written notice
(the "Disposition Notice") of the terms of the offer, including the purchase
price and the identity of the third-party offeror, and (ii) provide
satisfactory proof that the disposition of the Target Shares to such third-
party offeror would not be in contravention of the provisions set forth in
Articles B and C.
3. Exercise of the First Refusal Right. The Corporation shall, for a
-----------------------------------
period of twenty-five (25) days following receipt of the Disposition Notice,
have the right to repurchase any or all of the Target Shares subject to the
Disposition Notice upon the same terms as those specified therein or upon such
other terms (not materially different from those specified in the Disposition
Notice) to which Owner consents. Such right shall be exercisable by delivery
of written notice (the "Exercise Notice") to Owner prior to the expiration of
the twenty-five (25)-day exercise period. If such right is exercised with
respect to all the Target Shares, then the Corporation shall effect the
repurchase of such shares, including payment of the purchase price, not more
than five (5) business days after delivery of the Exercise Notice; and at such
time the certificates representing the Target Shares shall be delivered to the
Corporation.
Should the purchase price specified in the Disposition Notice be
payable in property other than cash or evidences of indebtedness, the
Corporation shall have the right to pay the purchase price in the form of cash
equal in amount to the value of such property. If Owner and the Corporation
cannot agree on such cash value within ten (10) days after the Corporation's
receipt of the Disposition Notice, the valuation shall be made by an appraiser
of recognized
5
<PAGE>
standing selected by Owner and the Corporation or, if they cannot agree on an
appraiser within twenty (20) days after the Corporation's receipt of the
Disposition Notice, each shall select an appraiser of recognized standing and
the two (2) appraisers shall designate a third appraiser of recognized
standing, whose appraisal shall be determinative of such value. The cost of
such appraisal shall be shared equally by Owner and the Corporation. The
closing shall then be held on the later of (i) the fifth (5th) business day
-----
following delivery of the Exercise Notice or (ii) the fifth (5th) business day
after such valuation shall have been made.
4. Non-Exercise of the First Refusal Right. In the event the Exercise
---------------------------------------
Notice is not given to Owner prior to the expiration of the twenty-five (25)-
day exercise period, Owner shall have a period of thirty (30) days thereafter
in which to sell or otherwise dispose of the Target Shares to the third-party
offeror identified in the Disposition Notice upon terms (including the
purchase price) no more favorable to such third-party offeror than those
specified in the Disposition Notice; provided, however, that any such sale or
disposition must not be effected in contravention of the provisions of
Articles B and C. The third-party offeror shall acquire the Target Shares free
and clear of the Repurchase Right and the First Refusal Right, but the
acquired shares shall remain subject to the provisions of Article B and
Paragraph C.3. In the event Owner does not effect such sale or disposition of
the Target Shares within the specified thirty (30)-day period, the First
Refusal Right shall continue to be applicable to any subsequent disposition of
the Target Shares by Owner until such right lapses.
5. Partial Exercise of the First Refusal Right. In the event the
-------------------------------------------
Corporation makes a timely exercise of the First Refusal Right with respect to
a portion, but not all, of the Target Shares specified in the Disposition
Notice, Owner shall have the option, exercisable by written notice to the
Corporation delivered within five (5) business days after Owner's receipt of
the Exercise Notice, to effect the sale of the Target Shares pursuant to
either of the following alternatives:
(i) sale or other disposition of all the Target Shares to the
third-party offeror identified in the Disposition Notice, but in full
compliance with the requirements of Paragraph E.4, as if the Corporation
did not exercise the First Refusal Right; or
(ii) sale to the Corporation of the portion of the Target Shares
which the Corporation has elected to purchase, such sale to be effected
in substantial conformity with the provisions of Paragraph E.3. The First
Refusal Right shall continue to be applicable to any subsequent
disposition of the remaining Target Shares until such right lapses.
Failure of Owner to deliver timely notification to the Corporation
shall be deemed to be an election by Owner to sell the Target Shares pursuant
to alternative (i) above.
6. Recapitalization/Reorganization.
-------------------------------
(a) Any new, substituted or additional securities or other
property which is by reason of any Recapitalization distributed with respect
to the Purchased Shares shall be
6
<PAGE>
immediately subject to the First Refusal Right, but only to the extent the
Purchased Shares are at the time covered by such right.
(b) In the event of a Reorganization, the First Refusal Right
shall remain in full force and effect and shall apply to the new capital stock
or other property received in exchange for the Purchased Shares in
consummation of the Reorganization, but only to the extent the Purchased
Shares are at the time covered by such right.
7. Lapse. The First Refusal Right shall lapse upon the earliest to
-----
occur of (i) the first date on which shares of the Common Stock are held of
record by more than five hundred (500) persons, (ii) a determination is made
by the Board that a public market exists for the outstanding shares of Common
Stock or (iii) a firm commitment underwritten public offering, pursuant to an
effective registration statement under the 1933 Act, covering the offer and
sale of the Common Stock in the aggregate amount of at least ten million
dollars ($10,000,000). However, the Market Stand-Off shall continue to remain
in full force and effect following the lapse of the First Refusal Right.
F. SPECIAL TAX ELECTION
--------------------
1. Section 83(b) Election. Under Code Section 83, the excess of the
----------------------
Fair Market Value of the Purchased Shares on the date any forfeiture
restrictions applicable to such shares lapse over the Purchase Price paid for
such shares will be reportable as ordinary income on the lapse date. For this
purpose, the term "forfeiture restrictions" includes the right of the
Corporation to repurchase the Purchased Shares pursuant to the Repurchase
Right. Participant may elect under Code Section 83(b) to be taxed at the time
the Purchased Shares are acquired, rather than when and as such Purchased
Shares cease to be subject to such forfeiture restrictions. Such election must
be filed with the Internal Revenue Service within thirty (30) days after the
date of this Agreement. Even if the Fair Market Value of the Purchased Shares
on the date of this Agreement equals the Purchase Price paid (and thus no tax
is payable), the election must be made to avoid adverse tax consequences in
the future. THE FORM FOR MAKING THIS ELECTION IS ATTACHED AS EXHIBIT II
HERETO. PARTICIPANT UNDERSTANDS THAT FAILURE TO MAKE THIS FILING WITHIN THE
APPLICABLE THIRTY (30)-DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY
INCOME AS THE FORFEITURE RESTRICTIONS LAPSE.
2. FILING RESPONSIBILITY. PARTICIPANT ACKNOWLEDGES THAT IT IS
PARTICIPANT'S SOLE RESPONSIBILITY, AND NOT THE CORPORATION'S, TO FILE A TIMELY
ELECTION UNDER CODE SECTION 83(b), EVEN IF PARTICIPANT REQUESTS THE
CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS FILING ON HIS OR HER BEHALF.
G. GENERAL PROVISIONS
------------------
1. Assignment. The Corporation may assign the Repurchase Right and/or
----------
the First Refusal Right to any person or entity selected by the Board, including
(without limitation) one or more shareholders of the Corporation. If the
assignee of the Repurchase Right is other than (i) a wholly owned subsidiary of
the Corporation or (ii) the parent corporation owning one
7
<PAGE>
hundred percent (100%) of the Corporation's outstanding capital stock, then
such assignee must make a cash payment to the Corporation, upon the assignment
of the Repurchase Right, in an amount equal to the excess (if any) of (i) the
Fair Market Value of the Purchased Shares at the time subject to the assigned
Repurchase Right over (ii) the aggregate repurchase price payable for the
Purchased Shares.
2. No Employment or Service Contract. Nothing in this Agreement or in
---------------------------------
the Plan shall confer upon Participant any right to continue in Service for
any period of specific duration or interfere with or otherwise restrict in any
way the rights of the Corporation (or any Parent or Subsidiary employing or
retaining Participant) or of Participant, which rights are hereby expressly
reserved by each, to terminate Participant's Service at any time for any
reason, with or without cause.
3. Notices. Any notice required to be given under this Agreement shall
-------
be in writing and shall be deemed effective upon personal delivery or upon
deposit in the U.S. mail, registered or certified, postage prepaid and
properly addressed to the party entitled to such notice at the address
indicated below such party's signature line on this Agreement or at such other
address as such party may designate by ten (10) days advance written notice
under this paragraph to all other parties to this Agreement.
4. No Waiver. The failure of the Corporation in any instance to
---------
exercise the Repurchase Right or the First Refusal Right shall not constitute
a waiver of any other repurchase rights and/or rights of first refusal that
may subsequently arise under the provisions of this Agreement or any other
agreement between the Corporation and Participant. No waiver of any breach or
condition of this Agreement shall be deemed to be a waiver of any other or
subsequent breach or condition, whether of like or different nature.
5. Cancellation of Shares. If the Corporation shall make available, at
----------------------
the time and place and in the amount and form provided in this Agreement, the
consideration for the Purchased Shares to be repurchased in accordance with the
provisions of this Agreement, then from and after such time, the person from
whom such shares are to be repurchased shall no longer have any rights as a
holder of such shares (other than the right to receive payment of such
consideration in accordance with this Agreement). Such shares shall be deemed
purchased in accordance with the applicable provisions hereof, and the
Corporation shall be deemed the owner and holder of such shares, whether or not
the certificates therefor have been delivered as required by this Agreement.
H. MISCELLANEOUS PROVISIONS
------------------------
1. Governing Law. This Agreement shall be governed by, and construed
-------------
in accordance with, the laws of the State of California without resort to that
State's conflict-of-laws rules.
2. Participant Undertaking. Participant hereby agrees to take whatever
-----------------------
additional action and execute whatever additional documents the Corporation may
deem necessary or advisable in order to carry out or effect one or more of the
obligations or restrictions
8
<PAGE>
imposed on either Participant or the Purchased Shares pursuant to the
provisions of this Agreement.
3. Agreement is Entire Contract. This Agreement constitutes the entire
----------------------------
contract between the parties hereto with regard to the subject matter hereof.
This Agreement is made pursuant to the provisions of the Plan and shall in all
respects be construed in conformity with the terms of the Plan.
4. Counterparts. This Agreement may be executed in counterparts, each
------------
of which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
5. Successors and Assigns. The provisions of this Agreement shall
----------------------
inure to the benefit of, and be binding upon, the Corporation and its
successors and assigns and upon Participant, Participant's assigns and the
legal representatives, heirs and legatees of Participant's estate, whether or
not any such person shall have become a party to this Agreement and have
agreed in writing to join herein and be bound by the terms hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
day and year first indicated above.
RAINMAKER SYSTEMS, INC.
By:___________________________________
Title:________________________________
Address:______________________________
______________________________
______________________________________
Participant
Address:______________________________
______________________________
9
<PAGE>
SPOUSAL ACKNOWLEDGMENT
The undersigned spouse of Participant has read and hereby approves the
foregoing Stock Issuance Agreement. In consideration of the Corporation's
granting Participant the right to acquire the Purchased Shares in accordance
with the terms of such Agreement, the undersigned hereby agrees to be
irrevocably bound by all the terms of such Agreement, including (without
limitation) the right of the Corporation (or its assigns) to purchase any
Purchased Shares in which Participant is not vested at the time of his or her
cessation of Service.
__________________________________
PARTICIPANT'S SPOUSE
Address:__________________________
__________________________
10
<PAGE>
EXHIBIT I
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED ____________ hereby sell(s), assign(s) and
transfer(s) unto Rainmaker Systems, Inc., (the "Corporation"),
_________________________ (_______) shares of the Common Stock of the
Corporation standing in his or her name on the books of the Corporation
represented by Certificate No. ___________________ herewith and do(es) hereby
irrevocably constitute and appoint _______________________________ Attorney to
transfer the said stock on the books of the Corporation with full power of
substitution in the premises.
Dated: ________________
Signature ________________________________
Instruction: Please do not fill in any blanks other than the signature line.
Please sign exactly as you would like your name to appear on the issued stock
certificate. The purpose of this assignment is to enable the Corporation to
exercise the Repurchase Right without requiring additional signatures on the
part of Participant.
11
<PAGE>
EXHIBIT II
SECTION 83(b) TAX ELECTION
12
<PAGE>
SECTION 83(b) TAX ELECTION
This statement is being made under Section 83(b) of the Internal Revenue Code,
pursuant to Treas. Reg. Section 1.83-2.
(1) The taxpayer who performed the services is:
Name:
Address:
Taxpayer Ident. No.:
(2) The property with respect to which the election is being made is ____ shares
of the common stock of Rainmaker Systems, Inc.
(3) The property was issued on ______________________, 199_.
(4) The taxable year in which the election is being made is the calendar year
199_.
(5) The property is subject to a repurchase right pursuant to which the issuer
has the right to acquire the property at the original purchase price if
for any reason taxpayer's service with the issuer terminates. The issuer's
repurchase right lapses in a series of annual and monthly installments
over a four (4)-year period ending on _______________________, 200_.
(6) The fair market value at the time of transfer (determined without regard
to any restriction other than a restriction which by its terms will never
lapse) is $______ per share.
(7) The amount paid for such property is $ ________ per share.
(8) A copy of this statement was furnished to Rainmaker Systems, Inc. for whom
taxpayer rendered the services underlying the transfer of property.
(9) This statement is executed on ___________________, 199_.
____________________________ _____________________________
Spouse (if any) Taxpayer
This election must be filed with the Internal Revenue Service Center with which
taxpayer files his or her Federal income tax returns and must be made within
thirty (30) days after the execution date of the Stock Issuance Agreement. This
filing should be made by registered or certified mail, return receipt requested.
Participant must retain two (2) copies of the completed form for filing with his
or her Federal and state tax returns for the current tax year and an additional
copy for his or her records.
<PAGE>
EXHIBIT III
1998 STOCK OPTION/STOCK ISSUANCE PLAN
1
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Agreement:
A. Agreement shall mean this Stock Issuance Agreement.
---------
B. Board shall mean the Corporation's Board of Directors.
-----
C. Code shall mean the Internal Revenue Code of 1986, as amended.
----
D. Common Stock shall mean the Corporation's common stock.
------------
E. Corporate Transaction shall mean either of the following shareholder-
---------------------
approved transactions:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately
prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
F. Corporation shall mean Rainmaker Systems, Inc., a California corporation.
-----------
G. Disposition Notice shall have the meaning assigned to such term in Paragraph
------------------
E.2.
H. Exercise Notice shall have the meaning assigned to such term in Paragraph
---------------
E.3.
I. Fair Market Value of a share of Common Stock on any relevant date, prior to
-----------------
the initial public offering of the Common Stock, shall be determined by the Plan
Administrator after taking into account such factors as it shall deem
appropriate.
J. First Refusal Right shall mean the right granted to the Corporation in
-------------------
accordance with Article E.
K. Involuntary Termination shall mean the termination of Participant's Service
-----------------------
which occurs by reason of:
(i) Participant's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or
(ii) Participant's voluntary resignation following (A) a
change in his or her position with the Corporation which materially
reduces his or her level of responsibility, (B) a reduction in
Participant's level of compensation (including base salary, fringe
benefits and target bonuses under any corporate-performance based bonus
or incentive programs) by more than fifteen percent
2
<PAGE>
(15%) or (C) a relocation of Participant's place of employment by more
than fifty (50) miles, provided and only if such change, reduction or
relocation is effected by the Corporation without Participant's consent.
L. Market Stand-Off shall mean the market stand-off restriction specified in
----------------
Paragraph C.3.
M. Misconduct shall mean the commission of any act of fraud, embezzlement or
----------
dishonesty by Participant, any unauthorized use or disclosure by Participant of
confidential information or trade secrets of the Corporation (or any Parent or
Subsidiary), or any other intentional misconduct by Participant adversely
affecting the business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be deemed
to be inclusive of all the acts or omissions which the Corporation (or any
Parent or Subsidiary) may consider as grounds for the dismissal or discharge of
Participant or any other individual in the Service of the Corporation (or any
Parent or Subsidiary).
N. 1933 Act shall mean the Securities Act of 1933, as amended.
--------
O. Owner shall mean Participant and all subsequent holders of the Purchased
-----
Shares who derive their chain of ownership through a Permitted Transfer from
Participant.
P. Parent shall mean any corporation (other than the Corporation) in an
------
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
Q. Participant shall mean the person to whom shares are issued under the Stock
-----------
Issuance Program.
R. Permitted Transfer shall mean (i) a gratuitous transfer of the Purchased
------------------
Shares, provided and only if Participant obtains the Corporation's prior
--------------------
written consent to such transfer, (ii) a transfer of title to the Purchased
Shares effected pursuant to Participant's will or the laws of intestate
succession following Participant's death or (iii) a transfer to the
Corporation in pledge as security for any purchase-money indebtedness incurred
by Participant in connection with the acquisition of the Purchased Shares.
S. Plan shall mean the Corporation's 1998 Stock Option/Stock Issuance Plan
----
attached hereto as Exhibit III.
T. Plan Administrator shall mean either the Board or a committee of the Board
------------------
acting in its capacity as administrator of the Plan.
U. Purchase Price shall have the meaning assigned to such term in
--------------
Paragraph A.1.
V. Purchased Shares shall have the meaning assigned to such term in
----------------
Paragraph A.1.
W. Recapitalization shall mean any stock split, stock dividend,
----------------
recapitalization,
3
<PAGE>
combination of shares, exchange of shares or other change affecting the
Corporation's outstanding Common Stock as a class without the Corporation's
receipt of consideration.
X. Reorganization shall mean any of the following transactions:
--------------
(i) a merger or consolidation in which the Corporation is
not the surviving entity,
(ii) a sale, transfer or other disposition of all or
substantially all of the Corporation's assets,
(iii) a reverse merger in which the Corporation is the
surviving entity but in which the Corporation's outstanding voting
securities are transferred in whole or in part to a person or persons
different from the persons holding those securities immediately prior to
the merger, or
(iv) any transaction effected primarily to change the state
in which the Corporation is incorporated or to create a holding company
structure.
Y. Repurchase Right shall mean the right granted to the Corporation in
----------------
accordance with Article D.
Z. SEC shall mean the Securities and Exchange Commission.
---
AA. Service shall mean the provision of services to the Corporation (or any
-------
Parent or Subsidiary) by an individual in the capacity of an employee, subject
to the control and direction of the employer entity as to both the work to be
performed and the manner and method of performance, a non-employee member of
the board of directors or an independent consultant.
BB. Stock Issuance Program shall mean the Stock Issuance Program under the Plan.
----------------------
CC. Subsidiary shall mean any corporation (other than the Corporation) in an
----------
unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
DD. Target Shares shall have the meaning assigned to such term in Paragraph E.2.
-------------
EE. Vesting Schedule shall mean the vesting schedule specified in Paragraph D.3
----------------
pursuant to which Participant is to vest in the Purchased Shares in a series of
installments over the Participant's period of Service.
FF. Unvested Shares shall have the meaning assigned to such term in
---------------
Paragraph D.1.
4
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected Financial
Data" and "Experts" and to the use of our report dated August 31, 1999, in the
Registration Statement (Form S-1) and related Prospectus of Rainmaker Systems,
Inc. for the registration of shares of its common stock.
Our audits also included the financial statement schedule of Rainmaker Systems,
Inc. listed in Item 16(b). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
San Jose, California
August 31, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS FILED AS PART OF THIS FORM S-1 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 JUN-30-1999
<CASH> 4,608 6,960
<SECURITIES> 0 1,000
<RECEIVABLES> 7,195 7,191
<ALLOWANCES> (314) (366)
<INVENTORY> 4 564
<CURRENT-ASSETS> 14,028 17,845
<PP&E> 3,415 4,283
<DEPRECIATION> (1,078) (1,332)
<TOTAL-ASSETS> 17,209 20,928
<CURRENT-LIABILITIES> 8,905 8,254
<BONDS> 996 0
977 15,474
0 0
<COMMON> 21 17
<OTHER-SE> 4,479 (4,458)
<TOTAL-LIABILITY-AND-EQUITY> 17,209 20,928
<SALES> 50,377 26,088
<TOTAL-REVENUES> 50,377 26,088
<CGS> 35,331 17,534
<TOTAL-COSTS> 13,457 10,064
<OTHER-EXPENSES> (2,525) (80)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (138) (285)
<INCOME-PRETAX> 4,252 (1,145)
<INCOME-TAX> 1,702 (431)
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,550 (714)
<EPS-BASIC> 0.12 (0.14)
<EPS-DILUTED> 0.09 (0.14)
</TABLE>
