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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q - QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(MARK ONE)
/ X / FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NUMBER 000-28009
RAINMAKER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0442860
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1800 GREEN HILLS ROAD 95066
SCOTTS VALLEY, CALIFORNIA (zip code)
(address of principal executive offices)
Registrant's telephone number, including area code: (831) 430-3800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
At April 28, 2000, registrant had outstanding 38,769,083 shares of Common
Stock.
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RAINMAKER SYSTEMS, INC.
FORM 10-Q QUARTERLY REPORT
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000
TABLE OF CONTENTS
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Page
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PART I. - FINANCIAL STATEMENTS
Item 1. Financial statements 1
Item 2. Management's discussion and analysis of financial condition and results of operations 5
Item 3. Qualitative and quantitative disclosures about market risk 13
PART II. - OTHER INFORMATION
Item 1. Legal proceedings 13
Item 2. Changes in securities and use of proceeds 13
Item 3. Defaults upon senior securities 14
Item 4. Submission of matters to a vote of security holders 14
Item 5. Other information 14
Item 6. Exhibits and reports on Form 8-K 16
Signatures
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PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Rainmaker Systems, Inc.
Balance Sheets
(In thousands)
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<CAPTION>
March 31, December 31,
2000 1999
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(unaudited)
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Assets
Current assets:
Cash and cash equivalents....................................... $ 33,701 $ 41,129
Short-term investments.......................................... 5,758 2,756
Accounts receivable, less allowance for sales returns and doubtful
accounts of $544 in 2000 and $536 in 1999..................... 9,047 8,192
Note receivable................................................. 800 800
Inventories..................................................... 760 637
Income taxes receivable......................................... 923 960
Prepaid expenses and other current assets....................... 651 563
Other receivables............................................... 599 291
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Total current assets....................................... 52,239 55,328
Property and equipment, net......................................... 4,126 2,373
Other noncurrent assets............................................. 190 166
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Total assets............................................... $ 56,555 $ 57,867
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Liabilities and Stockholders' equity
Current liabilities:
Accounts payable................................................ $ 8,348 $ 6,456
Payable to a related party...................................... 2,780 1,677
Accrued compensation and benefits............................... 2,317 2,131
Accrued liabilities............................................. 866 804
Current portion of capital lease obligations.................... 506 501
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Total current liabilities.................................. 14,817 11,569
Capital lease obligations, less current portion..................... 1,031 1,090
Commitments and contingencies
Stockholder's equity:
Common stock, $0.001 par value:
Authorized shares-80,000,000;
Issued and outstanding shares-38,403,321 in 2000 and
38,370,955 in 1999......................................... 38 38
Additional paid-in capital.......................................... 58,524 58,482
Deferred stock compensation......................................... (1,139) (1,344)
Accumulated deficit................................................. (16,716) (11,968)
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Total stockholders' equity................................. 40,707 45,208
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Total liabilities and stockholders' equity................. $ 56,555 $ 57,867
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1
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Rainmaker Systems, Inc.
Statements of Operations
(in thousands, except per share amounts)
<TABLE>
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Three months ended
March 31,
-----------------------------------
2000 1999
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(unaudited)
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CRM services revenue $17,451 $12,943
Cost of CRM services revenue 12,828 8,719
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CRM services gross profit 4,623 4,224
Selling, general and administrative expenses 9,881 3,950
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Operating income (loss) (5,258) 274
Interest income, net 510 139
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Income (loss) before income taxes (4,748) 413
Income tax expense - 164
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Net income (loss) (4,748) 249
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Net income (loss) per common share:
Basic $ (0.12) $ 0.01
=============== =============
Diluted $ (0.12) $ 0.01
=============== =============
Number of shares used in per share computations:
Basic 38,383 21,373
=============== =============
Diluted 38,383 37,227
=============== =============
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Rainmaker Systems, Inc.
Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------------
2000 1999
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(unaudited)
<S> <C> <C>
Operating activities
Net (loss) income................................................... $(4,748) $ 249
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization of property and equipment............ 280 164
Amortization of deferred stock compensation........................ 205 --
Provision for sales returns and doubtful accounts.................. 8 14
Changes in operating assets and liabilities:
Accounts receivable............................................... (863) 494
Inventories....................................................... (123) (45)
Income taxes receivable........................................... 37 164
Prepaid expenses and other assets................................. (112) (76)
Other receivables................................................. (308) (40)
Accounts payable.................................................. 1,892 (603)
Payable to a related party........................................ 1,103 1,056
Accrued compensation and benefits................................. 186 (288)
Accrued liabilities............................................... 62 (12)
Deferred revenue.................................................. -- (22)
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Net cash (used in) provided by operating activities.................. (2,381) 1,055
Investing activities
Purchase of property and equipment.................................. (2,033) (358)
Purchase of short-term investments.................................. (3,002) --
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Net cash used in investing activities................................ (5,035) (358)
Financing activities
Proceeds from issuance of preferred stock, net...................... -- 13,929
Proceeds from issuance of common stock from option exercises........ 42 3
Repayment of capital lease obligations.............................. (54) (93)
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Net cash (used in) provided by financing activities.................. (12) 13,839
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Net (decrease) increase in cash and cash equivalents................. (7,428) 14,536
Cash and cash equivalents at beginning of period.................... 41,129 4,608
------- -------
Cash and cash equivalents at end of period.......................... $33,701 $19,144
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Supplemental disclosure of cash paid during the period
Interest paid....................................................... $ 42 $ 15
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Income taxes paid, net of refunds................................... $ (50) $ --
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Supplemental schedule of noncash investing and financing activities
Acquisition of equipment under capital leases....................... $ -- $ 287
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Conversion of subordinated convertible note payable to
preferred stock............................................... $ -- $ 996
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</TABLE>
3
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NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying financial statements for the three months ended March 31,
2000 and 1999 have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. In the opinion of the Company's
management , all adjustments (consisting of normal recurring items) which are
necessary for their fair presentation have been made. These financial statements
should be read in conjunction with the Company's financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999. The results of operations for the interim period ended March
31, 2000 are not necessarily indicative of results to be expected for the full
year.
NOTE 2. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share has been computed using the weighted-average
number of shares of common stock outstanding during the year, less shares
subject to repurchase. Diluted net income (loss) per share also gives effect, as
applicable, to the potential dilutive effect of outstanding stock options, and,
to the conversion of the convertible preferred stock and convertible debentures,
using the if converted method, as of the beginning of the period presented or
the original date of issuance, if later.
NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 "Revenue Recognition" ("SAB 101"), which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met to recognize revenue and provides guidance for disclosures related to
revenue recognition policies. We believe that our revenue recognition policy is
in compliance with the provisions of SAB 101 and that the impact of SAB 101 will
have no material effect on the Company's financial position or results of
operations.
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.
NOTE 4. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes revenues and expenses and gains and
losses that are not included in net income (loss), but, rather are recorded
directly in stockholders' equity. To date, the Company has not had any
significant transactions that are required to be reported in comprehensive
income (loss).
NOTE 5. SEGMENT REPORTING
Rainmaker Systems operates in one market segment, the sale of installed base
marketing services, software maintenance licenses, services, and customer
retention programs to software and other technology companies. Rainmaker
primarily operates in one geographical segment, North America. Substantially all
of the Company's sales are made to customers in the United States.
4
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "may", "will", "should", "expects", "plans", "anticipates",
"believes", "estimates", "predicts", "potential" or "continue" or the negative
of such terms or other comparable terminology. These statements are only
predictions and involve known and unknown risks, uncertainties and other
factors, including the risks outlined under "Factors That May Affect Future
Results and Market Price of Stock", that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activities, performance or
achievements expressed or implied by such forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of such
statements.
Comparison of Three Months Ended March 31, 2000 and 1999
CRM Services Revenue. Revenue from CRM services increased 34.8% to $17.5
million for the three months ended March 31, 2000 from $12.9 million for the
comparable period of 1999. Since April 1, 1999, nine new clients were signed
which accounted for $8.9 million of the Company's revenue during the three
months ended March 31, 2000. During the first three months of 2000, revenue
from CRM services sold to customers of existing clients (clients for which we
generated revenue during the three months ended March 31, 1999) decreased $4.6
million in the three months ended March 31, 2000 compared to the comparable
period of the prior year. This decrease was primarily due to business factors
confronting one of our largest clients, The Santa Cruz Operation, Inc., and a
decline in revenue from sales to customers of FTP Software, Inc., which was
acquired by NetManage, Inc. in August 1998.
CRM Services Gross Profit. Gross profit from CRM services increased 9.4%
to $4.6 million for the three months ended March 31, 2000, from $4.2 million
for the comparable period in 1999. Gross margin from CRM services decreased to
26.5% in the most recent period compared to 32.6% during the comparable period
of the prior year. The decrease is due primarily to the Company's changing mix
of new and existing clients with lower margins on newer clients during the
start-up phase, and a few large, lower margin sales in the three months ended
March 31, 2000. The Company does not expect these large, lower margin sales to
be recurring in the future.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 150.2% to $9.9 million for the three months
ended March 31, 2000 from $4.0 million for the comparable period of 1999. As a
percentage of total revenue, these expenses increased to 56.6% for the most
recent period from 30.5% in the comparable period of the prior year. This
increase was primarily attributable to the strategic decision to increase
personnel (90 additional personnel at March 31, 2000 compared to March 31,
1999), and increase levels of investment in systems and infrastructure and
product development all of which are to support recent and anticipated new
client growth.
Interest Income and Expense. The Company recorded $510,000 of net interest
income in the three months ended March 31, 2000, as compared to $139,000 in the
comparable period of 1999. The increase was primarily attributable to higher
invested cash balances resulting from the sale of common stock in the initial
public offering in November 1999 which resulted in the Company receiving $40.6
million of net proceeds.
5
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Income Tax Expense (Benefit). Due to the Company's overall loss position, a
valuation allowance has been established in an amount equal to the expected
benefit derived by applying the statutory rate to the net loss for the three
months ended March 31, 2000. We recorded $164,000 of income tax expense for the
three months ended March 31, 1999.
Liquidity and Sources of Capital
Historically, we have funded operations from operating cash flows and net cash
proceeds from private placements of preferred stock and in November 1999, the
initial public offering of our common stock. Cash, cash equivalents and short-
term investments were $39.5 million at March 31, 2000. Working capital at March
31, 2000 was $37.4 million.
Cash used in operating activities during the three months ended March 31, 2000
was $2.4 million compared to $1.1 million provided by operations for the
comparable period of the prior year. The change of $3.5 million was due
primarily to the change in net income (loss) of $5.0 million as we earned $0.3
million during the first quarter of 1999 but lost $4.7 million during the first
quarter of 2000. In addition, accounts receivable increased by $863,000 in the
first quarter of 2000 due to the addition of new clients compared to a decrease
of $494,000 in the comparable period of the prior year. These uses are
partially offset by the $1.9 million increase in accounts payable in the first
quarter of 2000 compared to a decrease of $603,000 in the comparable period of
the prior year.
Cash used in investing activities during the first quarter of 2000 was $5.0
million compared to $358,000 for the comparable period of the prior year. The
change was due primarily to increased capital expenditures in 2000 and the
purchase of $3.0 million of short-term investments in 2000. The capital
expenditures consisted primarily of computers and software related to the
Company's new ERP system and other technology initiatives.
Cash used in financing activities during the three months ended March 31, 2000
was $12,000 compared to $13.8 million provided by financing activities for the
comparable period of the prior year. In the first quarter of 1999, the Company
sold $13.9 million of preferred stock.
We believe that our cash, cash equivalents and short-term investments at
March 31, 2000 will be sufficient to meet our liquidity needs for at least the
next twelve months.
YEAR 2000 COMPLIANCE
At the date of this report, the passage into the year 2000 has
occurred. To date, we have not experienced any Y2K problems in our own systems.
We are continuing to carefully monitor our systems and communicating regularly
with our vendors and customers as to their view of the any potential impact.
There can be no assurance, however, that the Company will not experience
unanticipated negative consequences, including material costs caused by
undetected errors or defects in the technology used in its internal systems. If,
in the future, it comes to the Company's attention that certain of its services
need modification or certain of its third-party hardware and software are not
year 2000 compliant, then the Company will seek to make modifications to its
systems. In such case, the Company expects such modifications to be made on a
timely basis and does not believe that the cost of such modifications will have
a material effect on its operating results. There can be no assurance, however,
that the Company will be able to modify such products, services and systems in a
timely and successful manner to comply with the year 2000 requirements, which
could have a material adverse effect on its business and operating results.
6
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The Company has no contingency plan to address the effect of year 2000
noncompliance of the software products it sells. However, the Company, in the
normal course of its business, seeks to identify additional software products
that are year 2000 compliant and to enter into arrangements to sell these
products. There can be no assurance that the Company's efforts to identify and
sell additional software products would timely address revenue shortfalls that
could result from software products of one or more of its clients being
noncompliant.
Year 2000 issues also could cause a significant number of companies,
including current customers, to reevaluate their current system needs and, as a
result, consider switching to other systems and suppliers. Any of these events
could result in a material adverse effect on the Company's business, operating
results and financial condition.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
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 1999, this rate of growth may not be sustainable. In
addition, we incurred an operating loss of $9.8 million and a net loss of $7.3
million for 1999. We expect to incur operating and net losses for at least the
next twelve months as we continue to invest in building our business.
Because we depend on a small number of clients for a significant portion of our
revenue, the loss of a single client could result in a substantial decrease in
our revenue.
We have generated a significant portion of our revenue from a limited numbers
of clients. We currently have 15 clients. In 1999, sales to customers of The
Santa Cruz Operation, Inc. (SCO), and Sybase, Inc. accounted for approximately
43%, and 18%, respectively, of our CRM services revenue. In 1998, sales to
customers of SCO, FTP Software, Inc. (FTP) and Novell, Inc. accounted for
approximately 46%, 21% and 16%, respectively, of our CRM services revenue. In
1997, sales to customers of SCO, FTP, and Sun Microsystems, Inc. accounted for
approximately 72%, 10% and 12%, respectively, of our CRM services revenue. We
expect that a small number of clients will continue to account for a significant
portion of our revenue for the foreseeable future. The loss of any of our
principal clients could cause a significant decrease in our revenue.
In addition, our software and other technology clients operate in industries
that are consolidating, which may reduce the number of our existing and
potential clients. For example, FTP was acquired by NetManage, Inc. in August
1998. Since that acquisition, our revenue from sales to customers of FTP has
decreased, is expected to continue to decrease and will eventually be
eliminated.
Our revenue will decline if demand for our clients' products and services
decreases.
Our business primarily consists of selling and marketing our clients' products
and services to their existing customers. In addition, most of our revenue is
based on a "pay for performance" model in which our compensation is based on
the amount of our clients' products and services that we sell. Accordingly, if a
particular client's products and services fail to appeal to its customers for
reasons beyond our control, such as preference for a competing product or
service, our revenue from that client's products and services may decline.
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Our quarterly operating results may fluctuate, and, if we do not meet market
expectations, our stock price could decline.
We believe that quarter-to-quarter comparisons of our operating results are
not a good indication of future performance. Although our operating results have
generally improved from quarter to quarter until recently, our future operating
results may not follow past trends in every quarter even if they continue to
improve overall. In any future quarter, our operating results may be below the
expectation of public market analysts and investors.
Factors which may cause our future operating results to be below expectations
include:
. the growth of the market for outsourced CRM solutions;
. the demand for and acceptance of our services;
. the demand for our clients' products and services;
. the length of the sales and integration cycle for our new clients;
. our ability to develop and implement additional services, products and
technologies; and
. the expansion of our direct sales force and its rate of success.
The length and unpredictability of the sales and integration cycles for our
services could cause delays in our revenue growth.
Selection of our services often entails an extended decision-making process on
the part of prospective clients. We often must provide a significant level of
education regarding the use and benefit of our services, which may delay the
evaluation and acceptance process. The selling cycle can extend to approximately
six to nine months or longer between initial client contact and signing of a
contract for our services. Additionally, once our services are selected, the
integration of our services often can be a lengthy process which further impacts
the timing of revenue. Because we are unable to control many of the factors that
will influence our clients' buying decisions or the integration of our services,
the length and unpredictability of the sales and integration cycles will make it
difficult for us to forecast the growth and timing of our revenue.
If we are unable to attract and retain highly qualified management and sales and
technical personnel, the quality of our services may decline, and our ability to
execute our growth strategies may be harmed.
Our success depends to a significant extent upon the contributions of our
executive officers and key sales and technical personnel and our ability to
attract and retain highly qualified sales, technical and managerial personnel.
Competition for personnel is intense as these personnel are limited in supply.
We have at times experienced difficulty in recruiting qualified personnel, and
there can be no assurance that we will not experience difficulties in the
future. Any difficulties could limit our future growth. The loss of certain key
personnel, particularly Michael Silton, our chairman, president and chief
executive officer, could seriously harm our business. We have obtained life
insurance policies in the amount of $6.3 million on Michael Silton.
Six of our eleven executive officers joined Rainmaker in 1999. As a result,
our current management team has worked together for only a relatively short
time. Our ability to execute our strategies will depend upon our ability to
integrate these and future managers into our operations.
8
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We have strong competitors and may not be able to compete effectively against
them.
Competition in business to business eServices is intense, and we expect such
competition to increase in the future. Our competitors include comprehensive
system integrators, e-commerce solutions providers, and other outsource
providers of different components of customer interaction management. We also
face competition from internal marketing departments of current and potential
clients. Many of our existing or potential competitors have greater name
recognition, longer operating histories, and significantly greater financial,
technical and marketing resources, which could further impact our ability to
address competitive pressures. Should competitive factors require us to increase
spending for, and investment in, client acquisition and retention or for the
development of new services, our expenses could increase disproportionately to
our revenues. Competitive pressures may also necessitate price reductions and
other actions that would likely affect our business adversely. Additionally,
there can be no assurances that we will have the resources to maintain a higher
level of spending to address changes in the competitive landscape. Failure to
maintain or to produce revenue proportionate to any increase in expenses would
have a negative impact on our financial results and stock price.
Our success depends on our ability to successfully manage additional growth.
Our recent growth has placed significant demands on our management,
administrative, operational and financial resources. In addition, our
anticipated future growth will place additional demands on our resources. We
will need to continue to improve our operational, financial and managerial
controls and information systems and procedures and will need to continue to
expand, train and manage our overall work force. If we are unable to manage
additional growth effectively our business will be harmed.
Our business strategy may ultimately include expansion into foreign markets
which would require increased expenditures, and if our international operations
are not successfully implemented they may not result in increased revenue or
growth of our business.
Our long term growth strategy includes expansion into international markets.
As a result, we may need to establish international operations, hire additional
personnel and establish relationships with additional clients and customers in
those markets. This expansion will require significant financial resources and
management attention and could have a negative effect on our earnings. We cannot
assure you that we will be successful in creating international demand for our
CRM services or that we will be able to effectively sell our clients' products
and services in international markets.
The development of international operations may also involve the following
risks:
. the appeal of our marketing programs, including the use of e-mail and
direct marketing techniques, to international customers;
. the increased cost associated with designing and operating Web sites in
foreign languages;
. differing technology standards and internet regulations in other
countries that may affect access to and operation of our Web sites;
and
. difficulties in collecting international accounts receivable for the
products and services that we sell.
We cannot assure you that these factors will not have an adverse effect on
future international sales and earnings.
9
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Any acquisitions we may make could result in dilution, unfavorable accounting
charges and difficulties in successfully managing our business.
As part of our business strategy, we review acquisition prospects that would
complement our existing business or enhance our technological capabilities.
Future acquisitions by us could result in potentially dilutive issuances of
equity securities, large and immediate write-offs, the incurrence of debt and
contingent liabilities or amortization expenses related to goodwill and other
intangible assets, any of which could cause our financial performance to suffer.
Furthermore, acquisitions entail numerous risks and uncertainties, including:
. difficulties in the assimilation of operations, personnel, technologies,
products and the information systems of the acquired companies;
. diversion of management's attention from other business concerns;
. risks of entering geographic and business markets in which we have no or
limited prior experience; and
. potential loss of key employees of acquired organizations.
We cannot be certain that we would be able to successfully integrate any
businesses, products, technologies or personnel that might be acquired in the
future, and our failure to do so could limit our future growth. Although we do
not currently have any agreement with respect to any material acquisitions, we
may make acquisitions of complementary businesses, products or technologies in
the future. However, we may not be able to locate suitable acquisition
opportunities.
We rely heavily on our communications infrastructure, and the failure to invest
in or the loss of these systems could disrupt the operation and growth of our
business and result in the loss of customers or clients.
Our success is dependent in large part on our continued investment in
sophisticated computer, Internet and telecommunications systems. We have
invested significantly in technology and anticipate that it will be necessary to
continue to do so in the future to remain competitive. These technologies are
evolving rapidly and are characterized by short product life cycles, which
require us to anticipate technological developments. We may be unsuccessful in
anticipating, managing, adopting and integrating technological changes on a
timely basis, or we may not have the capital resources available to invest in
new technologies. Temporary or permanent loss of these systems could limit our
ability to conduct our business and result in lost revenue.
If we are unable to safeguard our networks and clients' data, our clients may
not use our services and our business may be harmed.
Our networks may be vulnerable to unauthorized access, computer hacking,
computer viruses and other security problems. A user who circumvents security
measures could misappropriate proprietary information or cause interruptions or
malfunctions in our operations. We may be required to expend significant
resources to protect against the threat of security breaches or to alleviate
problems caused by any breaches. Although we intend to continue to implement
industry-standard security measures, these measures may be inadequate.
Damage to our single facility may disable our operations.
Our operations are housed in a single facility in Scotts Valley, California.
We have taken precautions to protect ourselves from events that could interrupt
our services, such as off-site storage of computer backup data and a backup
power source, but there can be no assurance that an earthquake, fire, flood or
other disaster affecting our facility would not disable these operations. Any
significant damage to this facility from an earthquake or other disaster could
prevent us from operating our business.
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If we fail to adequately protect our intellectual property or face a claim of
intellectual property infringement by a third party, we may lose our
intellectual property rights and be liable for significant damages.
We cannot guarantee that the steps we have taken to protect our proprietary
rights will be adequate to deter misappropriation of our intellectual property.
In addition, we may not be able to detect unauthorized use of our intellectual
property and take appropriate steps to enforce our rights. If third parties
infringe or misappropriate our trade secrets, copyrights, trademarks, service
marks, trade names or other proprietary information, our business could be
seriously harmed. In addition, although we believe that our proprietary rights
do not infringe the intellectual property rights of others, other parties may
assert infringement claims against us that we violated their intellectual
property rights. These claims, even if not true, could result in significant
legal and other costs and may be a distraction to management. In addition,
protection of intellectual property in many foreign countries is weaker and less
reliable than in the United States, so if our business expands into foreign
countries, risks associated with protecting our intellectual property will
increase. We have applied for registration of the service mark ''Rainmaker
Systems'' in the United States, and certain foreign countries.
If Year 2000 compliance issues arise, our business could be disrupted, we could
incur unanticipated expenses and we could lose customers and clients.
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company
expensed approximately $600,000 during 1999 in connection with remediating its
systems. The Company is not aware of any material problems resulting from Year
2000 issues, either with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors throughout
the year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
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 be
Year 2000 compliant could result in:
. delay or loss of revenue;
. cancellations of contracts by clients;
. diversions of our management's attention and development resources;
. damage to our reputation;
. litigation costs; and
. difficulties in contacting or being contacted by our clients' customers
or operating our clients' web sites.
For more information on our Year 2000 issues, you should read the discussion
in the "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Year 2000 Compliance" section of this prospectus.
11
<PAGE>
Increased government regulation of the Internet could decrease the demand for
our services and increase our cost of doing business.
The increasing popularity and use of the Internet and online services may lead
to the adoption of new laws and regulations in the U.S. or elsewhere covering
issues such as online privacy, copyright and trademark, sales taxes and fair
business practices or which require qualification to do business as a foreign
corporation in certain jurisdictions. Increased government regulation, or the
application of existing laws to online activities, could inhibit Internet
growth. A decline in the growth of the Internet could decrease demand for our
services and increase our cost of doing business and otherwise harm our
business.
We are subject to government regulation of direct marketing, which could
restrict the operation and growth of our business.
The FTC's telemarketing sales rules prohibit misrepresentations of the cost,
terms, restrictions, performance or duration of products or services offered by
telephone solicitation and specifically addresses other perceived telemarketing
abuses in the offering of prizes. Additionally, the FTC's rules limit the hours
during which telemarketers may call consumers. The federal Telephone Consumer
Protection Act of 1991 contains other restrictions on facsimile transmissions
and on telemarketers, including a prohibition on the use of automated telephone
dialing equipment to call certain telephone numbers. A number of states also
regulate telemarketing and some states have enacted restrictions similar to
these federal laws. In addition, a number of states regulate email and facsimile
transmissions. The failure to comply with applicable statutes and regulations
could result in penalties. There can be no assurance that additional federal or
state legislation, or changes in regulatory implementation, would not limit our
activities in the future or significantly increase the cost of regulatory
compliance.
Our directors and their affiliates will own a large percentage of our stock and
can significantly influence all matters requiring stockholder approval.
Our directors and entities affiliated with them together control approximately
51% of our outstanding shares (based on the number of shares outstanding as of
February 29, 2000). As a result, any significant combination of those
stockholders, acting together, will have the ability to control all matters
requiring stockholder approval, including the election of all directors, and any
merger, consolidation or sale of all or substantially all of our assets.
Accordingly, such concentration of ownership may have the effect of delaying,
deferring or preventing a change in control of Rainmaker, which, in turn, could
depress the market price of our common stock.
Our charter documents and Delaware law contain anti-takeover provisions that
could deter takeover attempts, even if a transaction would be beneficial to our
stockholders.
The provisions of Delaware law and of our certificate of incorporation and
bylaws could make it difficult for a third party to acquire us, even though an
acquisition might be beneficial to our stockholders. Our certificate of
incorporation provides our board of directors the authority, without stockholder
action, to issue up to 20,000,000 shares of preferred stock in one or more
series. Our board determines when we will issue preferred stock, and the rights,
preferences and privileges of any preferred stock. Our certificate of
incorporation also provides for a classified board, with each board member
serving a staggered three-year term. In addition, our bylaws establish an
advance notice procedure for stockholder proposals and for nominating candidates
for election as directors. Delaware corporate law also contains provisions that
can affect the ability to take over a company.
12
<PAGE>
Our stock price may be volatile resulting in potential litigation.
If our stock price is volatile, we could face securities class action
litigation. In the past, following periods of volatility in the market price of
their stock, many companies have been the subjects of securities class action
litigation. If we were sued in a securities class action, it could result in
substantial costs and a diversion of management's attention and resources and
could cause our stock price to fall. The trading price of our common stock could
fluctuate widely due to:
. quarter to quarter variations in results of operations;
. loss of a major client;
. announcements of technological innovations by us or our competitors;
. changes in, or our failure to meet, the expectations of securities
analysts;
. new products or services offered by us or our competitors;
. changes in market valuations of similar companies;
. announcements of strategic relationships or acquisitions by us or our
competitors; or
. other events or factors that may be beyond our control.
In addition, the securities markets in general have experienced extreme price
and trading volume volatility in the past. The trading prices of securities of
many business process outsourcing companies have fluctuated broadly, often for
reasons unrelated to the operating performance of the specific companies. These
general market and industry factors may adversely affect the trading price of
our common stock, regardless of our actual operating performance.
A significant number of shares are or may become available for sale and their
sale could depress our stock price.
Sales of substantial amounts of our common stock in the public market after
the expiration of lock up agreements could reduce the market price of our common
stock. These sales also might make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
appropriate.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily to
the increase or decrease in the amount of interest income we can earn on our
investment portfolio. We currently do not and do not plan to use derivative
financial instruments in our investment portfolio. We plan to ensure the safety
and preservation of our invested principal funds by limiting default risk,
market risk and investment risk. We plan to mitigate default risk by investing
in low-risk securities. If market interest rates were to increase immediately
and uniformly by 10% from the levels as of March 31, 2000, the decline of the
fair market value of our fixed income portfolio would not be material.
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Rainmaker completed the initial public offering of 5,750,000 shares of its
common stock, including 750,000 shares subject to an overallotment option,
pursuant to a registration statement on Form S-1 (Commission File No. 333-86445)
declared effective on November 16, 1999. The joint book-running managing
underwriters of the public offering were Donaldson, Lufkin & Jenrette and Thomas
Weisel Partners LLC.
13
<PAGE>
The shares were sold at a price per share of $8.00. The aggregate offering
price of the shares offered by Rainmaker was $46,000,000, less underwriting
discounts and commissions of $3,220,000 and expenses of approximately
$2,207,000. The proceeds are to be used for general corporate purposes to
support business expansion including new client acquisition, expansion into
international markets, the development of new services and capital expenditures.
In addition, we may use a portion of the net proceeds to acquire complementary
products, technologies or businesses; however, we currently have no commitments
or agreements and are not involved in any negotiations to do so.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following Exhibits are incorporated herein by reference or are filed with
this report as indicated below.
3.1 *Certificate of Incorporation of Rainmaker Systems, Inc. filed with the
Delaware Secretary of State on October 29, 1999.
3.2 *Bylaws of Rainmaker Systems, Inc.
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.
10.1 *Form of Indemnification Agreement.
10.2 *1999 Stock Incentive Plan.
10.3 *1999 Stock Purchase Plan.
10.4 *Amended and Restated Loan and Security Agreement dated May 9, 1997
between UniDirect Corporation and Silicon Valley Bank, as amended on
September 22, 1997, April 15, 1998 and September 14, 1998.
10.5 *1995 Stock Option/Stock Issuance Plan, together with form of Notice of
Grant of Stock Option, Stock Option Agreement, Stock Purchase
Agreement and Stock Issuance Agreement.
10.6 *1998 Stock Option/Stock Issuance Plan, together with form of Notice of
Grant of Stock Option, Stock Option Agreement, Stock Purchase
Agreement and Stock Issuance Agreement.
10.7 *Net Lease Agreement dated July 29, 1996 between UniDirect Corporation
and Borland International, Inc., together with amendments dated
February 27, 1997, April 14, 1998 and November 15, 1998.
14
<PAGE>
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.
10.14 *Loan and Security Agreement dated October 28, 1997 between UniDirect
Corporation and MetLife Capital Corporation, together with related
agreements dated May 5, 1999.
10.15 *Compensation Agreement dated January 1, 1995 between UniDirect
Corporation and Richard Marotta, together with Notice of Grant of
Stock Option and Stock Option Agreement.
10.16 *Compensation Agreement dated November 1, 1995 between UniDirect
Corporation and Richard Marotta, together with Notice of Grant of
Stock Option and Stock Option Agreement.
10.17 *Separation Agreement and Release dated September 30, 1997 between
UniDirect Corporation and Bernard Jubb, together with Amendment No. 1
dated January 27, 1997 and the Promissory Note and Security Agreement
dated February 5, 1999.
10.18 *Separation Agreement and Release dated April 8, 1999 between
Rainmaker Systems, Inc. and Chris Sterbenc.
10.19 *+Distributor Agreement dated January 24, 1995 between UniDirect
Corporation and The Santa Cruz Operation, Inc., together with
amendments dated April 8, 1996, November 5, 1997, March 16, 1999 and
May 17, 1999.
10.20 ++Internet Applications Division (IAD) Reseller Agreement dated March
22, 1999 between Sybase, Inc., and Rainmaker Systems, Inc.
10.21** Form of Notice of Grant of Stock Option
10.22***Form of Stock Option Agreement
23.1 *Consent of Ernst & Young LLP.
23.2 *Consent of Brobeck, Phleger & Harrison LLP.
27.1 Financial Data Schedule.
15
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- --------
* Incorporated by reference to the similarly numbered exhibit to the
Registration Statement on Form S-1 filed by the Company (Reg. No. 333-86445).
** Incorporated by reference to exhibit number 99.2 to the Registration
Statement on Form S-8 filed by the Company (Reg. No. 333-91095).
*** Incorporated by reference to exhibit number 99.3 to the Registration
Statement on Form S-8 filed by the Company (Reg. No. 333-91095).
+ Confidential treatment has previously been granted by the Commission for
certain portions of the referenced exhibit.
++ Confidential treatment for certain portions of the referenced exhibit has
been requested by the Company pursuant to Rule 24b-2.
(b) Reports on Form 8-K
On April 3, 2000, the Company filed a report on Form 8-K under Item 5-Other
Items. The 8-K discussed one line item labeled "Excess of redemption of
preferred stock over stated value" which was omitted on the 1999 Statements of
Operations data that was attached to the press release announcing the Company's
fourth quarter and annual results as of and for the year ended December 31,
1999. This line item, which does not impact net income (loss) should have been
subtracted from net income (loss) to calculate income (loss) available to common
stockholders.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RAINMAKER SYSTEMS, INC.
Dated: May 15, 2000 By: /s/ MICHAEL SILTON
-------------------
Michael Silton,
Chairman of the Board, President and
Chief Executive Officer
By: /s/ MARTIN HERNANDEZ
---------------------
Martin Hernandez,
Secretary and
Chief Financial Officer
16
<PAGE>
Exhibit 10.20
INTERNET APPLICATIONS DIVISION (IAD) RESELLER AGREEMENT
-------------------------------------------------------
This Agreement is made 22 March 1999 between Sybase, Inc. ("Sybase")
with offices at 1475 Christie Ave., Emeryville, California 94608, and Rainmaker
Systems, Inc. ("Rainmaker") with offices at 1800 Green Hills Rd., Suite 201,
Scotts Valley, California 95066.
1. License Grant. Subject to the terms and conditions below, Sybase
grants Rainmaker a nonexclusive and nontransferable license to market and
distribute copies of unmodified object code versions of those Sybase Internet
Applications Division ((IAD) development tool and design tool software products
identified in the attached initialed Schedule A ("Schedule") along with
accompanying documentation ("Programs") to Rainmaker's customers ("End-Users")
which will use the Programs in the applicable Territory described in the
Schedule, provided that Rainmaker is then in the business of generally offering
software in End-Users. Rainmaker may also sell to End-users certain Sybase
services as described in the Schedule. Rainmaker may not market or distribute
the Programs through any reseller or distributor. Rainmaker may order under this
Agreement copies of the Programs for its own Internal use and up to that number
of Demonstration Copies and Evaluation Copies allowed as stated in the Schedule.
2. Fees and Payment Terms. Fees as set forth in the Schedule shall be
due to Sybase for each copy of the Programs ordered by Rainmaker for an End-User
or ordered by Rainmaker for its own internal use, such fees based on Sybase's
then-current price list for the country in which the programs are to be used
("Price List"). The license fee for Demonstration Copies, if any, is set forth
in the Schedule. Notwithstanding the above, there is no charge for authorized
"Evaluation Copies", which are copies of the Programs that may only be used by
End-users for up to the number of days designated in the Schedule after which
they must be returned to Rainmaker. All fees resulting from this Agreement shall
be due and payable to Sybase within thirty (30) days after the date of Sybase's
invoice for such fees. Any past-due invoice may subject Rainmaker to credit hold
at Sybase's sole discretion. All such fees are stated in United States dollars.
3. Ownership. Programs are owned by Sybase or its licensors and are
protected by copyright law, trade secret laws and international conventions. All
rights in and to patents, copyrights, trademarks and trade secrets in the
Programs are and shall remain with Sybase and its licensors. No title to or
ownership of the Programs is transferred to Rainmaker or End-User.
4. Ordering and Delivery. Rainmaker shall place all orders directly
with Sybase. All Rainmaker orders placed with Sybase for End-Users will be
delivered by Sybase directly to End-Users. Rainmaker shall state the ship-to and
bill-to addresses on each Rainmaker order for End-User. Rainmaker is strictly
prohibited from delivering Programs to End-users. Orders placed by Rainmaker for
Demonstration Copies, Evaluation Copies or copies to be used by Rainmaker for
its internal use shall be delivered to Rainmaker. All shipments are FOB origin,
and Rainmaker is responsible for all shipping charges. Except for taxes on
Sybase's income, Rainmaker shall be responsible for any sales, use, excise or
any other form of taxes resulting from this Agreement.
1
<PAGE>
5. License Accompanying Programs. If Rainmaker uses the Programs,
Rainmaker agrees to be bound by the terms and conditions of the Sybase license
agreement accompanying each copy of the Program that Rainmaker obtains hereunder
("Sybase Shrinkwrap"). Notwithstanding the above, "Demonstration Copies"
licensed by Rainmaker shall only be used by the Rainmaker for demonstration and
training purposes and shall be returned to Sybase upon expiration or termination
of this Agreement. All End-users shall be subject to the terms and conditions of
the Sybase Shrinkwrap. If a conflict arises between this Agreement and the
Sybase Shrinkwrap, the terms of this Agreement shall prevail.
6. Independent Contractors. Rainmaker and Sybase are independent
contractors and are not agents or representatives of each other. Rainmaker does
not have the right to bind Sybase and shall not misstate or misrepresent its
relationship to Sybase.
7. Advertising; Trademarks. Rainmaker shall not make any
representations concerning the Programs which are inconsistent with Sybase's
marketing materials and advertising. Rainmaker may utilize applicable Sybase
trademarks and logos only in accordance with Sybase's then-current published
guidelines, and trademarks shall remain the exclusive property of Sybase or its
licensors.
8. Term and Rights Upon Termination. This Agreement will become
effective as of the date first shown above and shall continue in force for a
period of two (2) years, subject to termination under Section 9 below.
Thereafter, the Agreement shall automatically renew for additional one (1)
periods unless, prior to the end of the initial term or any subsequent term,
either party gives the other party no fewer than ninety (90) days advance
written notice of its intent not to renew. No expiration or termination of this
Agreement shall impair or affect copies of Programs distributed by Rainmaker to
End-Users in accordance with this Agreement prior to the effective date of the
expiration or termination of this Agreement. Termination or expiration shall not
release either party from its obligation to pay any fees accruing prior to the
date of the termination or expiration. Sections 3, 5, 8, 9, 10, 11, 12 and 16 of
this Agreement shall survive any expiration or termination of this Agreement.
9. Default. Either party may immediately terminate this Agreement or
any license granted hereunder by written notice to the other if such other party
breaches any term or condition of this Agreement, including but not limited to
failure to pay when due any fee hereunder, and does not remedy such breach
within thirty (30) days of written notice thereof from the non-breaching party.
Each party will reimburse the other party for all reasonable costs incurred by
the other party (including attorneys' fees) in collecting past-due amounts
hereunder. Any breach which by its nature cannot be remedied shall entitle the
non-breaching party to terminate this Agreement immediately upon written notice
to the other party. This remedy shall not be an exclusive remedy and shall be in
addition to any other remedies which the non-breaching party may have under this
Agreement or otherwise.
10. Confidential Information. Each party will not disclose or use any
business and/or technical information of the other designated orally or in
writing as "Confidential" or "Proprietary" (together, "Confidential
Information") without the prior written consent of the other party. Such
restrictions do not extend to any item of information which
2
<PAGE>
(a) is now or later becomes available in the public domain without the fault of
the receiving party; (b) is disclosed or made available to the receiving party
by a third party without restrictions and without breach of any relationship of
confidentiality; (c) is independently developed by the receiving party without
access to the disclosing party's Confidential Information, (d) is known to the
recipient at the time of disclosure, or (e) is produced in compliance with
applicable law or court order, provided that the disclosing party is given
reasonable notice of such law or order and an opportunity to attempt to preclude
or limit such production. Upon termination or expiration of this Agreement, each
party shall immediately return all copies of Confidential Information received
from the other party. Rainmaker shall not release the results of any benchmark
of the Programs to any third party without Sybase's prior written approval for
each such release (except to clients of Rainmaker who are not direct competitors
of Sybase, provided that the benchmarking methodologies used by Rainmaker and
the results are first provided to Sybase for review, and the client is required
to maintain the confidentiality of such results).
11. Disclaimer of Warranty; Limitation of Liability. Except as
expressly provided in the Sybase Shrinkwrap, NO EXPRESS OR IMPLIED WARRANTY OR
CONDITION IS MADE WITH RESPECT TO THE PROGRAMS OR SERVICES SUPPLIED BY SYBASE OR
ITS SUBSIDIARIES, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. The aggregate liability to
Sybase and its subsidiaries, if any, for any losses or damages arising out of or
in connection with this Agreement, whether the claim is in contract, tort or
otherwise, shall not exceed the amount paid by Rainmaker to Sybase under this
Agreement for the affected programs or services. UNDER NO CIRCUMSTANCES SHALL
SYBASE, ITS SUBSIDIARIES OR ITS LICENSORS BE LIABLE FOR SPECIAL, INDIRECT,
EXEMPLARY, INCIDENTAL AND/OR CONSEQUENTIAL DAMAGES INCLUDING, BUT NOT LIMITED
TO, LEGAL FEES, LOSS OF PROFITS, LOSS OR INACCURACY OF DATA OR LOSS RESULTING
FROM BUSINESS DISRUPTION, EVEN IF SYBASE HAS BEEN ADVISED OF THE POSSIBILITY OF
SUCH DAMAGES.
EXCEPT IF RAINMAKER IS FOUND TO HAVE (i) MADE UNAUTHORIZED COPIES OF
THE PROGRAM(S) OR (ii) DISTRIBUTED THE PROGRAM(S) TO THIRD PARTIES IN VIOLATION
OF THE AGREEMENT OR (iii) DISCLOSED SYBASE PROPRIETARY OR CONFIDENTIAL
INFORMATION IN VIOLATION OF SECTION 10 OF THIS AGREEMENT, UNDER NO CIRCUMSTANCES
SHALL RAINMAKER BE LIABLE FOR SPECIAL, INDIRECT, EXEMPLARY, INCIDENTAL AND/OR
CONSEQUENTIAL DAMAGES, INCLUDING, BUT NOT LIMITED TO, LEGAL FEES, LOSS OF
PROFITS, LOSS OR INACCURACY OF DATA OR LOSS RESULTING FROM BUSINESS DISRUPTION,
EVEN IF SYBASE HAS BEEN ADVISE OF THE POSSIBILITY OF SUCH DAMAGES.
12. Indemnification. Rainmaker indemnifies and holds harmless Sybase,
its affiliates, directors, employees and agents from all third party claims,
including court costs and reasonable fees of attorneys and expert witnesses,
arising in connection with Rainmaker's selling of the Programs or any Sybase
services if liability is not caused by the Programs or services as provided by
Sybase. Sybase indemnifies and holds harmless Rainmaker, its affiliates,
directors, employees and agents from all third party claims, including court
costs and reasonable fees of
3
<PAGE>
attorneys and expert witnesses, arising in connection with use of the Programs
or services as provided by Sybase if liability is not caused by Rainmaker.
13. Export Restriction. Rainmaker shall not transfer, directly or
indirectly, any restricted programs or technical data received from Sybase or
its subsidiaries, or the direct product of such data, to any destination subject
to export restrictions under U.S. law, unless prior written authorization is
obtained from the appropriate U.S. agency.
14. Assignment. This Agreement may not be assigned (by operation of
law or otherwise) or otherwise transferred in whole or in part by Rainmaker
unless Rainmaker has received prior written permission from Sybase. To the
extent Rainmaker is permitted to assign this Agreement, all provisions of this
Agreement shall be binding upon Rainmaker's successors or assigns.
15. Notices. All notices under this Agreement shall be in writing and
either delivered personally, sent by first class mail, express carrier or by
confirmed facsimile transmission to the address of the party set forth above
(and if to Sybase, to the attention of the General Counsel). All notices shall
be deemed given on the business day actually received.
16. Other. This Agreement, the Schedule, and any documents explicitly
referred to herein, constitute the entire agreement between the parties, and no
representation, condition, understanding or agreement of any kind, oral or
written, shall be binding upon the parties unless incorporated herein. This
Agreement may not be modified or amended, nor will the rights of either party be
deemed waived, except by an agreement in writing signed by authorized
representation of Rainmaker and Sybase. Purchase orders shall be binding as to
the products and services ordered, and the site for delivery of Programs or
performance of services as set forth on the face side of or a special attachment
to the purchase order. Other terms and preprinted terms on or attached to any
purchase order shall be void. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of California without regard to its
conflict of laws rules or the United Nations Convention on the International
Sale of Goods. If any provision of this Agreement is held to be unenforceable,
the parties shall substitute for the affected provision an unforceable provision
which approximates the intent and economic effect of the provision. The parties
have requested that this Agreement and all documents contemplated hereby be
drawn up in English.
Accepted and agreed on behalf of Sybase, Inc. ("Sybase")
Rainmaker Systems, Inc. ("Rainmaker")
/s/ Michael Silton /s/ G. M. Riddle
- ------------------------------------- -------------------------------------
(Authorized Signature) (Authorized Signature)
Michael Silton G. Mack Riddle
- ------------------------------------- -------------------------------------
(Name) (Name)
Chief Executive Officer Senior Corporate Counsel
- ------------------------------------ -------------------------------------
(Title) (Date) (Title) (Date)
4
<PAGE>
SCHEDULE A
to the IAD Reseller Agreement
Fees and Guidelines
-------------------
Territory United States and Canada.
- -------------------------------------------------------------------------------
Demonstration Copies TBD
- -------------------------------------------------------------------------------
Evaluation Copies Entitled to 30-day Evaluation Copies.
- -------------------------------------------------------------------------------
Discount for the IAD Programs Discounts for IAD development tool and design
tool software are specified in Sybase's then-
current IAD Reseller Price List.
- -------------------------------------------------------------------------------
Discount for sale of End-User *** discount off the Price List price for
Technical Support technical support offerings that Sybase makes
generally available to its customers for the
Programs.
- -------------------------------------------------------------------------------
Discount for sale of End-User *** discount off the Price List price for
Update Subscriptions update subscriptions Sybase makes generally
available to its customers for the Programs.
- -------------------------------------------------------------------------------
Discount for Rainmaker Technical *** discount off the Price List price for
Support technical support offerings that Sybase makes
generally available to its customers for the
Programs.
- -------------------------------------------------------------------------------
Discount for Rainmaker Training *** discount off the Price List price on any
Sybase standard training rate for the
Programs for Rainmaker employees or agents
trained at Sybase public training center.
- -------------------------------------------------------------------------------
ACCEPTED and AGREED: ---------------------------- -----------------------
(Rainmaker Initials) (Date)
---------------------------- -----------------------
(Sybase Initials) (Date)
The Price Lists and all discounts are subject to change upon thirty (30) days
prior written notice by Sybase to Rainmaker.
- -----------------------
*** Confidential treatment has been requested.
5
<PAGE>
OUTSOURCING ADDENDUM (for IAD Subscription Services)
----------------------------------------------------
in the IAD Reseller Agreement
-----------------------------
This addendum ("Addendum"), made 22 March 1999 ("Effective Date"), supplements
and amends the IAD Reseller Agreement dated 22 March 1999 ("Agreement") between
Sybase, Inc. ("Sybase") and Rainmaker Systems, Inc. ("Rainmaker"). Capitalized
terms not defined herein shall be as defined in the Agreement. Any conflict
between the terms and conditions of this Addendum and the Agreement, the terms
and conditions of this Addendum shall prevail.
WHEREAS, Sybase owns certain software programs specified in Exhibit A ("IAD
Program") which it provides to customers through its Internet Applications
Division ("IAD") using various direct and indirect channels, and
WHEREAS, IAD wishes to provide a subscription service to its IAD Customers so
they may purchase a subscription to major releases of the IAD Programs
("Subscription Service"), and
WHEREAS, IAD wishes Rainmaker to act as an independent vendor of such
Subscription Service to IAD Customers and Rainmaker desires to act in such
capacity;
NOW, THEREFORE, for good and valuable consideration between the parties hereto,
Sybase and Rainmaker agree as follows:
1. Definitions
a) "IAD" Customer" means any entity or person authorized by Sybase per
the list of customer accounts provided by Sybase to Rainmaker that (or who) has
previously licensed an IAD Program listed on Exhibit A from Sybase and to which
(or whom) Rainmaker is entitled to market the Subscription Service.
b) "Outsourced Services" means those services provided by Rainmaker as
specified in Section 5 of this Addendum.
c) "Subscription Service" means annual updates that entitle the IAD
Customer to minor and major releases of the IAD Programs.
d) "Territory" means the United States of American and Canada.
2. License Grants
a) Subscription Services. Sybase hereby grants to Rainmaker, for the
---------------------
term of the Addendum and subject to the terms and conditions contained herein, a
nontransferable license to be IAD's sole (with respect only to this type of
business arrangement) external provider of "Non-Point-Of-Sale" Update
Subscription Plan ("USP") subscriptions and renewals for IAD Customers in the
Territory. Rainmaker understands and agrees that the Subscription Service
license granted in the immediately preceding sentence does not preclude Sybase
from selling Subscription Services, nor does it preclude Sybase or its
authorized resellers or distributors from
6
<PAGE>
selling Subscription Services at the point of initial sale of the Sybase Program
or from selling any other Sybase product as authorized by Sybase.
b) Advertising Trademarks. Sybase hereby grants to Rainmaker, for the
----------------------
term of this Addendum and subject to the terms and conditions contained herein,
a nonexclusive and nontransferable license to use the trademarks, service marks,
logos and trade names that relate to Sybase or the IAD Programs (the "Marks")
solely in connection with this Addendum; provided that Rainmaker clearly
identifies Sybase's ownership of such Marks and uses such Marks in accordance
with Sybase's then-current trademark guidelines. Furthermore, Rainmaker shall
use the name "Sybase IAD Subscription Services" when performing its obligations
with respect to the Outsourced Services.
3. Title and Ownership
a) Rights. Nothing contained in this Addendum shall directly or
------
indirectly be construed to assign or to grant to Rainmaker any right (other than
that right expressly granted in Section 2 of this Addendum), title or interest
in or to the IAD Programs or Subscription Services or any intellectual property
embodied in or related to the IAD Programs or Subscription Services.
b) Proprietary Notices. Rainmaker agrees not to alter or remove any
-------------------
logo, insignia, copyright notice, trademark notice or other proprietary notice
on or in any IAD program or Subscription Service materials.
c) Sybase Marks. Rainmaker acknowledges and agrees that the Marks are
------------
owned solely and exclusively by Sybase and, except as expressly set forth in
Section 2(b) of this Addendum, Rainmaker has no rights, title or interest in or
to such Marks and all use of such Marks by Rainmaker shall inure to the benefit
of Sybase. Rainmaker agrees not to apply for registration of any Marks (or any
mark confusingly similar thereto) anywhere in the world. It is further agreed by
Rainmaker that Sybase owns the names "Sybase," "Sybase, Inc.," and "Sybase IAD
Subscription Services." Rainmaker will not use Rainmaker marks when pursuing
business as Sybase IAD Subscription Services.
Any and all use under this Addendum of the Marks requires the prior written
consent of Sybase. Rainmaker agrees not to take any action that jeopardizes
Sybase's proprietary rights in the Marks. Rainmaker shall only use the Marks in
unaltered form and agrees to cooperate with Sybase's instructions and quality
procedures. Sybase reserves the right to require Rainmaker to discontinue use
of any advertising or marketing materials relating to Sybase, the Marks or the
Programs. Rainmaker acknowledges and agrees that the presentation and image of
the Marks as provided to Rainmaker by Sybase shall be uniform and consistent
with respect to all services, activities and products associated therewith.
Rainmaker agrees to use the Marks in any printed materials created by Rainmaker
solely in the manner that Sybase may specify from time to time upon reasonable
advance written notice.
d) IAD Customer Data. Sybase shall retain sole ownership of all IAD
-----------------
Customer data provided to Rainmaker, including, but not limited to, any database
or IAD Customer credit information repository resulting therefrom. In addition,
Sybase shall solely own all such IAD
7
<PAGE>
Customer records that are created, modified or entered into any database or
repository created by Rainmaker. Other than for the express purposes of
performing the Outsourced Services under this Addendum, Rainmaker shall not
disclose, or in any way use, any such IAD Customer records. Upon the termination
or expiration of this Addendum for any reason, and in addition to the
requirements imposed on Rainmaker under Section 9(c) of this Addendum with
respect to the IAD Customer data, under no circumstances shall Rainmaker utilize
any IAD Customer data for any purpose and any rights to use such Customer data
shall be terminated. Furthermore, any and all such IAD Customer records,
including records and any form of information resulting from such IAD Customer
records, shall be considered Sybase confidential information and shall be held
in confidence by Rainmaker in accordance with Section 10 of the Agreement.
4. Start-Up Period
a) Initial Start-Up Funds. Sybase shall pay Rainmaker Initial Start-Up
----------------------
funds as specified in Exhibit B to this Addendum. Rainmaker shall use such funds
for recruitment of any new sales and management personnel necessary to
successfully begin the Outsourced Services.
b) Marketing Start-Up Funds. Sybase shall pay Rainmaker Initial Start-Up
------------------------
funds as specified in Exhibit B to this Addendum. Rainmaker shall use such funds
to support initial market development efforts with respect to the Subscription
Services as approved in advance by Sybase in writing.
c) IAD Customer Data. Within a reasonable period after the Effective
-----------------
Date, Sybase shall deliver to Rainmaker a copy of IAD's then-current IAD
Customer list applicable to those accounts Sybase wishes Rainmaker to solicit
with respect to purchasing the Subscription Services. Such list shall include,
but not be limited to, company names, contact names, addresses, telephone
numbers, subscription and service contract information, and product registration
information of IAD Customers. Rainmaker may only use such information to assist
it in selling the Subscription Services.
d) Sybase Liaison. During the Start-Up Period stated in Exhibit B to
--------------
this Addendum, Sybase shall appoint an employee to assist Rainmaker in
addressing any problems or issues that may arise that may negatively impact
Rainmaker's performance of the Outsourced Services.
5. Outsourced Services
Under the terms of this Addendum, Rainmaker shall provide the following
Outsourced Services:
a) Selling Subscription Services. Actively solicit IAD Customers to
-----------------------------
purchase Subscription Services in the net amount paid by Rainmaker to Sybase of
at least the following amounts ("Quarterly Revenue Target") beginning with the
October 1999 through December 1999 calendar quarter and for each calendar
quarter thereafter during the term of this Addendum.
8
<PAGE>
Oct. '99 through Dec. '99 - ***
Jan. '00 through Mar. '00 - ***
Apr. '00 through Jun. '00 - ***
Jul. '00 through Sept. '00 - ***
Oct. '00 through Dec. '00 - ***
Jan. '01 through Mar. '01 - ***
*** Confidential treatment has been requested.
b) IAD Customer Orders. IAD Customers shall be able to place orders for
-------------------
Subscription Services with Rainmaker, and Rainmaker shall issue purchase orders
to Sybase in order to fulfill such orders.
c) Subscription Service Renewals. During the term of this Addendum,
-----------------------------
Rainmaker shall track the expiration dates for Subscription Services acquired by
IAD Customers and offer such IAD Customers the opportunity to renew upon
expiration.
d) Leads. If Rainmaker receives a request from an IAD Customer for a
-----
product or service that Rainmaker does not provide to IAD Customers under this
Addendum, Rainmaker shall forward information concerning such IAD Customer and
the IAD Customer's request to Sybase in a timely fashion.
e) Rainmaker's Marketing Efforts. Rainmaker shall use all reasonable
-----------------------------
commercial efforts to market the Subscription Services throughout the Territory
to the target market identified by Sybase and approved in an advance writing by
Sybase.
6. Reports and Records
a) Monthly Reports. within five (5) business days of the close of each
---------------
calendar month, Rainmaker shall provide Sybase, in a format acceptable to
Sybase, the following reports covering the immediately preceding month:
(i) a sales-out report;
(ii) a consolidated purchase order report;
(iii) Any additional reports upon Sybase's reasonable request
at no additional charge to Sybase.
b) Records. Rainmaker shall keep accurate and proper books and records,
-------
in conformity with good business and accounting practices, relating to its
provision of the Outsourced Services hereunder. No more than twice each year,
Sybase may retain an independent third party accountant of its choosing to
review such books and records (to determine compliance with this Addendum and
the Agreement) that pertain directly or indirectly to Sybase and the Outsourced
Services during Rainmaker's normal business hours upon ten (10) business days
advance written notice.
9
<PAGE>
7. Marketing Funds
a) Marketing Funds. Sybase shall reserve funds in the amount of *** of
---------------
all amounts that Rainmaker has paid Sybase for Subscription Services that
Rainmaker has sold. Such funds are available only for the exclusive purpose of
Rainmaker's marketing and promoting of the Subscription Services. No more than
on a calendar quarter basis, Rainmaker shall report to Sybase its commitments
and expenditures associated with such funds, and any such commitments or
expenditures acceptable to Sybase shall be paid for by Sybase to Rainmaker not
to exceed the total amount of the aforementioned funds. Any Rainmaker
commitments or expenditures not pre-approved by Sybase in writing shall not be
paid for by Sybase.
8. Pricing and Payment Terms
a) Subscription Services Pricing. In consideration of the first *** of
-----------------------------
Subscription Services revenue paid to Sybase by Rainmaker, Subscription Services
pricing covered by this Addendum shall be provided to Rainmaker at *** off
Sybase's then-current North American End User Price List price for the
applicable Subscription Service. In consideration of Subscription Services
revenue paid to Sybase by Rainmaker in excess of ***, Subscription Services
pricing covered by this Addendum shall be provided to Rainmaker at *** off
Sybase's then-current North American End User Price List price for the
applicable Subscription Service. The aforementioned increase in the discount
rate to *** shall not have retroactive effect. In no event shall Sybase dictate
to Rainmaker the price at which Rainmaker may sell the Subscription Service to
the IAD Customer.
b) Subscription Services Orders and Payment Terms. Rainmaker shall place
----------------------------------------------
monthly purchase orders with Sybase for Subscription Services. Following
Sybase's receipt and fulfillment of such monthly purchase order, Sybase shall
issue Rainmaker an invoice corresponding to such purchase order. Rainmaker shall
pay to Sybase all amounts set forth in such invoice within thirty (30) days from
the date of such invoice.
c) Unpaid Subscription Services Orders. In the unlikely event that
-----------------------------------
Rainmaker is not paid by an IAD Customer for a Subscription Service sold to the
IAD Customer by Rainmaker, then Sybase shall credit Rainmaker *** of the amount
unpaid by such IAD Customer. In no event shall such credits in their annual
cumulative total amount in any year during the term of this Addendum exceed ***
of the actual yearly revenue derived by Sybase from sales of the Subscription
Services by Rainmaker under this Addendum.
*** Confidential treatment has been requested.
10
<PAGE>
9. Term of Termination
a) Term. This Addendum shall be in force for two (2) years from the
----
Effective Date, and thereafter shall automatically renew or additional one (1)
year periods unless, prior to the end of the initial term or any subsequent
term, either party gives the other party no fewer than ninety (90) days advance
written notice of its intent not to renew this Addendum.
b) Termination for Cause. This Addendum may be terminated by either
---------------------
party for cause. Events constituting cause shall include:
(i) Rainmaker does not meet its Quarterly Revenue Target specified
in Section 5(a) of this Addendum;
(ii) the other party's material breach of any warranty provision in
this Addendum;
(iii) a violation of law, including, but not limited to, any law
relating to trademark, copyright, patent, or other intellectual
property infringement;
(iv) any assignment by a party in violation of this Addendum or the
Agreement without the other party's express written consent;
(v) if any proceedings are commenced by or against the other party
under the U.S. Bankruptcy Code;
(vi) immediately upon the other party's material breach of Section
10 of the Agreement; or
(vii) any other material breach of, or default under, this Addendum
by the other party that is not remedied within thirty (30) days
after written notice in accordance with Section 9 of the
Agreement.
c) Other. Upon the termination or expiration of this Addendum for any
-----
reason, Rainmaker shall promptly deliver to Sybase or its designee all documents
and all media or items containing, in whole or in part, any Proprietary or
Confidential Information of Sybase including, but not limited to, all IAD
Customer data provided to Rainmaker by Sybase, and any other marketing or other
information of Sybase that Sybase requests. Rainmaker shall retain a copy
(subject to confidentially as stipulated under section 10 of the Agreement) of
all such documents, media, items or portions thereof that contain Sybase
information only for so long as retention of such records is required for
federal and state tax reporting purposes or under other governmental rules or
regulations, after which the copy of such records shall be returned to Sybase.
10. Other
a) Independent Contractor. The parties shall be deemed for all purposes
----------------------
to be independent contractors. This Agreement shall not constitute either party
the employee, legal representative or agent of the other, nor shall either party
have the right or authority to assume, create, or incur any liability or any
obligation of any kind on behalf of the other party.
11
<PAGE>
Except as amended above, the Agreement shall remain in full force and effect.
Rainmaker Systems, Inc. ("Rainmaker") Sybase, Inc. ("Sybase")
/s/ Michael Silton /s/ G. M. Riddle
- ---------------------------------------- -------------------------------------
Authorized Signature Authorized Signature
Michael Silton G. M. Riddle
- ---------------------------------------- ------------------------------------
Printed Name Printed Name
Chief Executive Officer Senior Corporate Counsel
- ---------------------------------------- -------------------------------------
Title Title
March 22, 1999 March 22, 1999
- ---------------------------------------- -------------------------------------
Date Signed Date Signed
12
<PAGE>
EXHIBIT A
Sybase IAD Program Subscription Plans
Commercially Available Update Subscription Service Plans for the following
- --------------------------------------------------------------------------
Sybase IAD Programs:
- -------------------
Enterprise Application Server
Enterprise Application Studio
Power Builder
Power J
Power ++
Power Designer
NOTE: If Sybase decides to discontinue any Subscription Service covered by this
- ----
Addendum, Sybase shall provide Rainmaker with thirty (30) days advance written
notice of such discontinuance.
13
<PAGE>
EXHIBIT B
Funds and Schedule
Start-up Period: 22 March 1999 through 29 April 1999.
---------------
Initial Start-Up Funds: ***
- ----------------------
Initial Start-Up Schedule: To be completed on or before 29 April 1999.
- -------------------------
Marketing Start-Up Funds: ***
- ------------------------
Marketing Start-Up Schedule: To be completed on or before 29 April 1999.
- ---------------------------
Start-Up Phase Completed: 29 April 1999.
- ------------------------
Outsource Services Start Date: 29 April 1999.
- -----------------------------
*** Confidential treatment has been requested.
14
<PAGE>
Rainmaker Systems, Inc. will perform the following services for Sybase IAD
including: (a) initiate fully functioning outsource selling capability by April
1999; (b) perform sales and marketing services including but not limited to
designing and executing email, fax, brochures, web sites and other media to
Sybase IAD customers (with prior Sybase approval); and (c) loading and analyzing
Sybase's customer data including but not limited to de-duping of duplicate
records, fax and zip code appends and customer surveys. Invoicing for the
services will be quarterly for any and all services completed in the previous
quarter. Once the services are performed consistent with these terms, the fees
are non-refundable. In no event will the total amount of service fees due to
Rainmaker Systems, Inc. under this agreement exceed *** of all amounts paid by
Rainmaker to Sybase for IAD subscriptions purchased by Rainmaker.
In addition, as may be agreed by the parties, Rainmaker may perform further
services for which Rainmaker will be compensated.
Sybase, Inc. Rainmaker Systems, Inc.
By: /s/ Peter Howard By: /s/ Robert Mason
------------------------- ---------------------------------
Name: Peter Howard Name: Robert Mason
------------------------- ---------------------------------
Title: Director of Sales Title: Sr. VP Sales and Marketing
------------------------- ---------------------------------
Date: July 30, 1999 Date: July 30, 1999
------------------------- ---------------------------------
*** Confidential treatment has been requested.
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENTS OF OPERATIONS FILED AS PART OF THIS FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-2000 DEC-31-1999
<PERIOD-START> JAN-01-2000 JAN-01-1999
<PERIOD-END> MAR-31-2000 DEC-31-1999
<CASH> 33,701 41,129
<SECURITIES> 5,758 2,756
<RECEIVABLES> 9,591 8,728
<ALLOWANCES> (544) (536)
<INVENTORY> 760 637
<CURRENT-ASSETS> 52,239 55,328
<PP&E> 7,161 5,128
<DEPRECIATION> (3,035) (2,755)
<TOTAL-ASSETS> 56,555 57,867
<CURRENT-LIABILITIES> 14,817 11,569
<BONDS> 0 0
0 0
0 0
<COMMON> 38 38
<OTHER-SE> 40,669 45,170
<TOTAL-LIABILITY-AND-EQUITY> 56,555 57,867
<SALES> 17,451 12,943
<TOTAL-REVENUES> 17,451 12,943
<CGS> 12,828 8,719
<TOTAL-COSTS> 9,881 3,950
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (510) (139)
<INCOME-PRETAX> (4,748) 413
<INCOME-TAX> 0 164
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,748) 249
<EPS-BASIC> (0.12) 0.01
<EPS-DILUTED> (0.12) 0.01
</TABLE>
