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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1999
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-_______
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.001 par value (TITLE OF CLASS)
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 / / No /X/
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of voting stock held by non-affiliates of the
registrant as of February 29, 2000, was $148,958,000 based upon the last sales
price reported for such date on The Nasdaq National Market. For purposes of this
disclosure, shares of Common Stock held by persons who hold more than 5% of the
outstanding shares of Common Stock and shares held by officers and directors of
the registrant, have been excluded in that such persons may be deemed to be
affiliates. This determination is not necessarily conclusive.
At February 29, 2000, registrant had outstanding 38,387,160 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed by the Company with the
Securities and Exchange Commission within 120 days of the Company's fiscal year
ended December 31, 1999 are incorporated by reference in Part III of this Form
10-K.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K 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. We are under no duty to update any of the forward-looking
statements after the date of this Form 10-K or to conform such statements to
actual results.
RAINMAKER SYSTEMS, INC.
1999 FORM 10-K ANNUAL REPORT
Table of Contents
Page
PART I.
Item 1. Business 3
Item 2. Properties 10
Item 3. Legal proceedings 10
Item 4. Submission of matters to a vote of security holders 10
PART II.
Item 5. Market for the registrant's common equity and related
stockholder matters 10
Item 6. Selected financial data 12
Item 7. Management's discussion and analysis of financial condition
and results of operations 13
Item 7A. Qualitative and quantitative disclosures about market risk 25
Item 8. Financial statements and supplementary data 26
Item 9. Changes and disagreements with accountants on accounting and
financial disclosure 26
PART III.
Item 10. Directors and executive officers of the registrant 26
Item 11. Executive compensation 26
Item 12. Security ownership of certain beneficial owners and management 26
Item 13. Certain relationships and related transactions 26
PART IV.
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Item 14. Exhibits, financial statements schedules, and reports on
Form 8-K 26
Signatures
PART I
ITEM 1. BUSINESS
Introduction
Our customer relationship management (eCRM) services consist of designing and
implementing sophisticated eSales, eMarketing 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. Today, we provide our services to hardware and software companies.
On January 8, 1991, the Company filed its initial Articles of Incorporation
with the California Secretary of State. On October 29, 1999, the Company
reincorporated in the State of Delaware.
Industry Background
Competitive global markets and the increasing acceptance of the Internet as a
medium for customer interaction have led to greater customer demands for higher
levels of service, responsiveness, convenience, personalization and quality. In
response to these pressures, the customer relationship function is evolving from
a back office cost center to a revenue generating strategic operation.
Maintaining quality customer relationships, as much as product quality and cost,
is increasingly becoming an important competitive factor.
Businesses are recognizing the value of improving their customer relationships
to increase revenue and customer loyalty. One indicator of this heightened
interest is the emergence of the CRM industry. AMR Research estimates that more
than $2.3 billion was spent on CRM services in 1998, and that CRM spending will
grow to $16.8 billion by 2003, representing a compounded annual growth rate of
49%. In spite of these expenditures, many businesses are not achieving the
results they desire. A July 1999 study by Frontline Solutions indicated that
70%-80% of software and hardware vendors were not satisfied with their CRM
tools. We believe there are several basic reasons why many CRM efforts are not
delivering the desired results.
The Internet and the proliferation of customer data have increased the
frequency and complexity of customer interaction. The rapid growth of the
Internet is changing the way businesses interact with their customers. We
believe that customers' use of the Internet to compare products and transact
business on-line is reducing customer loyalty, intensifying competition,
increasing customer expectations for rapid response and increasing the frequency
and complexity of direct customer interactions. In addition, there has also been
a proliferation of customer data that companies are often unable to organize or
use in a timely or efficient manner. These challenges can be more acute for
software and other technology companies who face short product life cycles and
who often serve sophisticated Internet users.
Many current CRM solutions have inherent limitations. In response to the
increasing complexity of CRM requirements and the expanding availability of
customer data, businesses have invested in various software applications and
services to address discrete aspects of CRM functions. Although these single-
point solutions may be combined in an attempt to develop a comprehensive CRM
program, we believe that this approach may not provide a satisfactory solution
for many businesses for several reasons:
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. 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 hardware and software companies with a
comprehensive approach to CRM solutions to promote and sell time-based contracts
such as software subscriptions and support plans, and education services, such
as instructor-led and web-based training to their installed customer base. We
identify and profile our clients' customers, establish quality interactions with
them, and increase selling opportunities through all stages of the customer life
cycle. Our CRM solutions incorporate the following distinguishing
characteristics:
Comprehensive CRM Solutions. We offer our clients comprehensive CRM programs
that combine technology infrastructure with established processes and a
dedicated staff to deliver frequent personalized contact to our clients'
installed customer bases. We act as a transparent extension of our clients'
sales and marketing organization by designing targeted direct marketing programs
using coordinated Web, e-mail, mail, fax and telephone campaigns. Our processes
are designed to successfully market annual software subscriptions, service and
support contracts, training services, and additional licenses throughout all
points of the customer life cycle.
Integrated Database Management and Reporting. We use our proprietary
database expertise in combination with our sales and marketing programs,
frequent customer profiling, data exchanges and reporting to deliver valuable
customer intelligence to our clients. We utilize applications that share common
access to a master, unified customer record. Our master customer record provides
current data on each customer's product usage, product and service interests,
buying patterns and preferred method of communication. This unified view of the
customer, along with continual customer contact and intelligence gathering, is
key to our CRM services.
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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 programs are designed 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 eCRM services to hardware
and software 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 use only a portion of our CRM
services.
. Sign New Clients. We will continue to emphasize our hardware and software
industry focus while seeking to expand the scope of this expertise. We
believe that our expertise in providing CRM services to the installed
customer base of our existing clients enhances our ability to help new
clients 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.
. Develop Our International Presence. We currently provide our CRM services
to our clients' installed customer bases located principally in the United
States and with a small number located in Canada. We intend to broaden our
capabilities to serve additional international markets to more fully
address our clients' installed customer bases, many of which we believe
have significant international needs for CRM.
. Extend Our Solutions Into Additional Markets. In addition to further
penetrating the hardware and software industry, we intend to broaden our
market to include time-based contracts and educational services for other
vertical markets.
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
proprietary systems and 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
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systems 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 six weeks from contract
signing.
eSales and eMarketing 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.
. eAcquire. This program, implemented through plug-in web services linked to
clients' main corporate sites, simplifies the process for customers to
obtain evaluation copies of software prior to purchase and extends the
traditional `Try & Buy' cycle. eAcquire spans the entire evaluation and
purchase cycle from lead generation to electronic software delivery,
including customer recognition to make repeat trials and purchases more
convenient, trial downloads, on-line payment, automatic form fill-in, and
immediate access to purchased software.
. 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 programs
include initiatives such as 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 if necessary, 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 eSales and eMarketing Programs. We employ a variety of
methods to communicate with our clients' installed customer base, foster closer
relationships with those customers and generate additional sales. These methods
include the following:
. Web Site and E-mail Interaction. We create and manage online customer
interaction by developing and hosting client-branded interactive Web pages
and implementing frequent e-mail marketing campaigns. These efforts allow
us to distribute helpful information to customers such as the availability
of product enhancements and special promotions, and answers to frequently
asked questions. Through these Web pages, customers can complete, confirm
and track orders online and download 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.
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. 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 eSales and
eMarketing programs and help clients measure sales progress and build their
revenue forecasts.
Our Clients
Our clients consist of hardware and software companies with significant
installed customer bases and products that benefit from focused eSales and
eMarketing programs for maintenance, software subscription, or service
contracts. Our clients as of December 31, 1999 are listed below:
Client Name Client Since Type of Business
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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 April 1999 Software
Corporation
Lotus Development Corporation,
a subsidiary of IBM May 1999 Software
Puma Technology, Inc. July 1999 Software
Intuit Inc. September 1999 Software
Parametric Technology Corporation October 1999 Software
Sales and Marketing
We market our services to hardware, software and other technology companies
through a direct sales force. Our direct sales professionals typically have
significant technology sales experience. As of December 31, 1999, we had 10
sales and marketing professionals who were responsible for developing new
clients as well as new opportunities with 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.
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
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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 a product management team which in turn filters and
prioritizes these ideas working closely with executive management, business
operations teams and with the technology development group.
After new offerings are approved and product requirements are specified,
projects are assigned to teams comprised of experienced business and technical
professionals for 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, business process changes, product life cycle plans,
documentation, marketing materials, training and rollout plans. Upon completion
of testing, services are rolled out initially to one client or a select customer
segment, or in the case of entirely new services, interested clients previously
identified by client development, client relations or product management groups.
Competition
The market for CRM solutions is intensely competitive and subject to rapid
change. However, we believe that no single competitor has amassed the full
complement of integrated CRM services or software products for our targeted
markets. In addition to the competitors listed below, we face competition from
internal CRM departments of current and potential clients. Our competitors
approach CRM from a variety of different strategic and pricing models including:
Custom-built and tailored point solutions. Comprehensive system integrators,
such as Andersen Consulting and Sapient Corp., implement either in-house CRM
systems incorporating point solutions from companies, such as Siebel Systems,
Inc., E.piphany, Inc., Pivotal Corporation, and Kana Communications, Inc., or
custom built solutions tailored to a customer's needs.
E-commerce solutions providers. E-commerce solutions providers, including
Breakaway Solutions, Inc., Razorfish Inc., Sapient Corporation, Scient Corp.,
USinternetworking, Inc. 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. and Intraware, Inc., telesales-based and e-mail-based
marketing campaign management from Harte-Hanks, Inc., Sitel Corp and Digital
Impact, Inc. 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
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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 applied for registration of the service
mark "Rainmaker Systems'' in the United States and certain foreign countries.
Government Regulation
We are subject, both directly and indirectly, to various laws and governmental
regulations relating to our business. The Internet is rapidly evolving and there
are few laws or regulations directly applicable to online commerce. Due to the
increasing popularity and use of the Internet, governmental authorities in the
United States and abroad may adopt laws and regulations to govern Internet
activities. Laws with respect to online commerce may cover issues such as
pricing, distribution and characteristics and quality of products and services.
Laws affecting the Internet may also cover content, copyrights, libel, and
personal privacy. Any new legislation or regulation or the application of
existing laws and regulations to the Internet could have a material adverse
effect on our business.
Although our online transmissions currently originate in California, the
governments of other states or foreign countries might attempt to regulate our
transmissions or levy sales or other taxes relating to our activities. As our
services are available over the Internet virtually anywhere in the world,
multiple jurisdictions may claim that we are required to qualify to do business
as a foreign corporation in each of those jurisdictions. Our failure to qualify
as a foreign corporation in a jurisdiction where we are required to do so could
subject us to taxes and penalties for the failure to qualify. It is possible
that state and foreign governments might also attempt to regulate our
transmissions of content on our Web site or prosecute us for violations of their
laws. We cannot assure you that state or foreign governments will not charge us
with violations of local laws or that we might not unintentionally violate these
laws in the future.
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 direct
marketing activities. The FTC's telemarketing sales rules prohibit
misrepresentations of the cost, terms, restrictions, performance or duration of
products or services offered by telephone solicitation and specifically
addresses other perceived telemarketing abuses in the offering of prizes.
Additionally, the FTC's rules limit the hours during which telemarketers may
call consumers. The federal Telephone Consumer Protection Act of 1991 contains
other restrictions on 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 e-mail and facsimile transmissions. 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 December 31, 1999, we employed 232 persons. Our 136 service delivery
personnel are responsible for promoting and selling our clients' products and
building relationships with our clients' customers. Our 10 sales and marketing
employees are responsible for promoting our services to new and existing
clients. We also have 33 product development personnel who develop the computer,
Internet, Web and telecommunications infrastructure that provides the foundation
for our service offerings. Our remaining 53 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.
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ITEM 2. PROPERTIES
Facilities
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.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted a vote of security holders during the fourth
quarter of 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the Nasdaq National Market under the
symbol RMKR since the Company's initial public offering in November 1999. The
following table lists the high and low closing prices for Rainmaker's common
stock as reported on Nasdaq.
High Low
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1999:
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Fourth quarter (from November 17, 1999) $27.25 $16.00
As of February 29, 2000, the approximate number of common shareholders of
record was 187. On February 29, 2000, the last reported sale price of the
Company's common stock on the Nasdaq National Market was $12.00 per share.
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.
SALES OF UNREGISTERED SECURITIES
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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 San 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.
Since January 1, 1996, we have granted options to purchase an aggregate of
5,655,936 shares of common stock to our directors, executive officers,
employees and consultants at exercise prices of $0.06 to $21.13 per share. Since
January 1, 1996, options to purchase 1,417,419 shares at a weighted exercise
price of $0.31 per share had been exercised.
In April and May 1999, we granted put rights to six existing stockholders to
sell back to us up to 1,164,537 shares of common stock at $1.64 per share. One
stockholder, SCO, subsequently exercised its put right, and we purchased from
SCO 540,642 shares in June 1999 and 540,642 shares in August 1999, at a price of
$1.64 per share. The remaining put rights to 83,253 shares of common stock
expired on September 30, 1999.
In connection with the reincorporation of Rainmaker from California to
Delaware in October 1999, the surviving Delaware corporation issued 17,965,016
shares of its common stock and 334,889, 8,536,585 and 4,286,186 shares of its
Series B, C, and D preferred stock, respectively in exchange for the issued and
outstanding shares of capital stock of the predecessor corporation. In addition,
in connection with such
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reincorporation, all options to purchase shares of common stock of the
predecessor corporation were converted into options to purchase common stock of
the surviving Delaware corporation, and all warrants to purchase Series B
preferred stock of the predecessor corporation were converted into warrants to
purchase Series B preferred stock of the surviving Delaware corporation.
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, or, with respect to issuances in connection with the
reincorporation, in reliance on Rule 145(a)(2) under the Securities Act.
Appropriate legends were 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.
USE OF PROCEEDS FROM SALES OF REGISTERED SECURITIES
On November 17, 1999, the Company completed an initial public offering of its
common stock. The managing underwriters in the offering were Donaldson, Lufkin
& Jenrette and Thomas Weisel Partners LLC (the "Underwriters"). The shares of
common stock sold in the offering were registered under the Securities Act of
1933, as amended, on a Registration Statement on Form S-1 (the "Registration
Statement") (Reg. No. 333-86445) that was declared effective by the SEC on
November 17, 1999.
The Offering was completed on November 17, 1999 after all 5,750,000 shares
sold, all of which were sold by the Company (including 750,000 shares sold
pursuant to the exercise of the Underwriter's over-allotment option). The
purchase price was $8.00 per share. The aggregate price of the offering amount
registered was $46,000,000.
In connection with the offering, the Company paid an aggregate of $3,220,000
in underwriting discounts and commissions to the Underwriters. In addition, the
following table sets forth the costs and expenses, other than underwriting
discounts and commissions.
Item
----
Registration fee .......................... $ 52,000
NASD filing fee .......................... 101,000
Nasdaq National Market listing fee ....... 27,000
Blue sky fees and expenses ............... 20,000
Printing and engraving expenses .......... 295,000
Legal fees and expenses .................. 525,000
Accounting fees and expenses ............. 543,000
Miscellaneous ............................ 644,000
----------
Total ................................. $2,207,000
==========
After deducting the underwriting discounts and commissions and the offering
expenses described above, the Company received net proceeds from the offering of
approximately $40,573,000. We intend to use the net proceeds for general
corporate purposes to support business expansion including new client
acquisition, expansion into international markets, the development of new
services and capital expenditures. In addition, we may use a portion of the net
proceeds to acquire complementary products, technologies or businesses; however,
we currently have no commitments or agreements and are not involved in any
negotiations to do so. None of the Company's net proceeds of the offering were
paid directly or indirectly to any director, officer, or their associates,
persons owning 10% or more of any class of equity securities of the Company, or
an affiliate of the Company.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(in thousands, except per share data) Years Ended December 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
---------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
CRM services ....................................................... $ 60,665 $44,212 $22,515 $12,384 $ 8,230
Catalog/distributor(1) ............................................. -- 6,165 16,985 14,551 12,317
-------- ------- ------- ------- -------
Total revenue ..................................................... 60,665 50,377 39,500 26,935 20,547
Cost of revenue:
CRM services ....................................................... 41,539 30,196 14,810 7,929 5,681
Catalog/distributor(1) ............................................. -- 5,135 13,575 11,370 9,686
-------- ------- ------- ------- -------
Total cost of revenue ............................................. 41,539 35,331 28,385 19,299 15,367
Gross profit:
CRM services ....................................................... 19,126 14,016 7,705 4,455 2,549
Catalog/distributor(1) ............................................. -- 1,030 3,410 3,181 2,631
-------- ------- ------- ------- -------
Total gross profit ................................................ 19,126 15,046 11,115 7,636 5,180
Selling, general and administrative expenses ........................ 28,939 13,457 9,828 6,954 4,792
-------- ------- ------- ------- -------
Operating income (loss) ............................................. (9,813) 1,589 1,287 682 388
Interest income (expense), net ..................................... 774 138 (66) (35) (16)
Gain from sale of catalog/distributor(1) ........................... 80 2,525 -- -- --
-------- ------- ------- ------- -------
Income (loss) before income taxes ................................... (8,959) 4,252 1,221 647 372
Income tax expense (benefit) ....................................... (1,650) 1,702 450 216 87
-------- ------- ------- ------- -------
Net income (loss) ................................................... (7,309) 2,550 771 431 285
Preferred A dividends ............................................... -- (36) -- -- --
Preferred C and D cumulative dividends .............................. (1,265) -- -- -- --
Excess of redemption of preferred stock over stated value............. (1,941) -- -- -- --
======== ------- ------- ------- -------
Income (loss) available to common stockholders ...................... $(10,515) $ 2,514 $ 771 $ 431 $ 285
======== ======= ======= ======= =======
Net income (loss) per share(2):
Basic .............................................................. $(0.49) $0.12 $0.04 $0.02 $0.01
======== ======= ======= ======= =======
Diluted ............................................................ $(0.49) $0.09 $0.03 $0.02 $0.01
======== ======= ======= ======= =======
Number of shares used in per share calculations(2):
Basic .............................................................. 21,300 21,004 21,019 21,009 21,005
======== ======= ======= ======= =======
Diluted ............................................................ 21,300 30,356 29,943 29,600 25,424
======== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term investments ................... $43,885 $ 4,608 $ 269 $1,259 $1,082
Working capital ..................................................... 43,759 5,123 1,307 1,257 1,490
Total assets ........................................................ 57,867 17,209 11,912 8,233 4,826
Long-term debt and capital lease obligations, less current portion .. 1,090 1,438 1,278 1,065 558
Redeemable preferred stock .......................................... -- 977 977 977 977
Total stockholders' equity .......................................... 45,208 4,500 1,852 1,078 646
</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 Form 10-K.
ITEM 7. 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
Today, we provide CRM services to hardware and software companies. We design
and implement sophisticated eSales, eMarketing 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. As of December 31, 1999, our clients are Borland, a division of
Inprise Corporation, FTP Software, Inc., Intuit Inc., Lotus Development
Corporation,
<PAGE>
a subsidiary of IBM, Network Computing Devices, Inc., Novell, Inc., Open Connect
Systems Incorporated, Parametric Technology Corporation, Puma Technology, Inc.,
The Santa Cruz Operation, Inc., Sun Microsystems, Inc., Sybase, Inc. and
Symantec Corporation.
Rainmaker was founded in 1991 as UniDirect Corporation, a catalog/distributor
of business software. We distributed UNIX, NT and Web Server software products
manufactured primarily by SCO, Microsoft Corporation, Corel Corporation, V-
Systems Inc. and SunSoft, Inc. Our customers consisted of end users, resellers
and distributors. In January 1995, we entered the CRM services business and
signed our first CRM services contract. In 1997, we decided to focus exclusively
on CRM services and added three new CRM services clients that year. In May 1998,
we sold certain assets related to our catalog/distributor businesses for
approximately $5.2 million in total consideration. The assets sold included
approximately $450,000 of inventory, approximately $750,000 of computer software
as well as intangible assets including the domain names and logos. The buyer
also assumed approximately $600,000 of accounts payable related to these
businesses, which is included as part of total consideration. We received $2.9
million in cash on the closing date and a note for $1.7 million, of which
$900,000 was paid in May 1999. The $800,000 balance is due by May 15, 2000. The
note bears interest at 8.25% per annum payable quarterly in arrears.
As of December 31, 1999, we have recorded a gain related to the sale of these
businesses of approximately $2.6 million. This gain consisted of the $5.2
million of consideration less assets sold of approximately $1.2 million,
compensation and severance amounts paid to former employees of these businesses
of approximately $700,000, $350,000 of catalog/distributor businesses assets
disposed of because they were no longer used by us and $350,000 of direct
transaction costs including banking, legal and accounting fees.
Our historical financial statements separate revenue, cost of revenue and
gross profit between the CRM services business and the catalog/distributor
businesses. Operating expenses cannot be broken out historically between the CRM
service business and the catalog/distributor businesses because they shared a
common sales, marketing and administrative infrastructure. The following
discussion of our financial history highlights our performance in both the CRM
services and catalog/distributor businesses.
Our CRM services revenue consists of sales of our clients' software
subscriptions, support and service contracts, training services, licenses and
upgrades to our clients' installed customer base. This revenue includes the
total purchase price billed by us to customers for our clients' products and
services. Revenue from support and service contracts is recognized upon receipt
of the customer's written purchase order, as service obligations are the
responsibility of the client. Revenue from product sales is recognized at the
time of shipment. Revenue from sales of new clients' products and services
typically increases over several quarters before reaching a more moderate level
of growth. Revenue growth during this period can be affected by many factors
including customer contract renewal history, customer product satisfaction and
competitive pricing.
Cost of revenue includes payments for our clients' products and services based
on the specific pricing terms of each contract. The costs of these products and
services are typically higher during the start up phase of our relationship with
a client until higher purchase discounts are achieved from increased sales
volume. As a result, the gross margins earned on sales during the start up phase
are lower, which can reduce our overall margins. This impact on overall margins
may be significant depending on the number of new clients in any period. Once we
integrate a client's customer database and begin to meet targeted sales volumes,
our gross margins from that client typically improve.
Selling, general and administrative expenses include all costs associated with
the marketing and selling of our clients' products and services, including
client integration costs, salaries of marketing and sales personnel, technology
systems and communications costs, product and service development and
administrative overhead. Interest income (expense), net reflects income received
on cash, cash equivalents and short-term investments and interest expense on
leases to secure equipment and software.
Although our operating income and net income have grown in each year from 1994
to 1998, we incurred an operating loss and net loss for 1999. We expect to incur
increasing operating and net losses in
<PAGE>
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 31,
-----------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Revenue:
CRM services .................................... 100.0% 87.8% 57.0%
Catalog/distributor ............................. -- 12.2 43.0
------ ----- -----
Total revenue .................................. 100.0 100.0 100.0
Cost of revenue:
CRM services .................................... 68.5 68.3 65.8
Catalog/distributor ............................. -- 83.3 79.9
------ ----- -----
Total cost of revenue .......................... 68.5 70.1 71.9
Gross profit:
CRM services .................................... 31.5 31.7 34.2
Catalog/distributor ............................. -- 16.7 20.1
------ ----- -----
Total gross profit ............................. 31.5 29.9 28.1
Selling, general and administrative expenses ..... 47.7 26.8 24.8
------ ----- -----
Operating income (loss) .......................... (16.2) 3.1 3.3
Interest income (expense), net .................. 1.3 0.3 (0.2)
Gain from sale of catalog/distributor ........... 0.1 5.0 --
------ ----- -----
Income (loss) before income taxes ................ (14.8) 8.4 3.1
Income tax expense (benefit) .................... (2.8) 3.3 1.1
------ ----- -----
Net income (loss) ................................ (12.0)% 5.1% 2.0%
====== ===== =====
</TABLE>
Comparison of Years Ended December 31, 1999 and 1998
Revenue. Revenue from CRM services increased 37.2% to $60.7 million for 1999
from $44.2 million for 1998. During 1999, revenue from CRM services provided to
existing clients (clients for which we generated revenue over the entire year)
accounted for $2.1 million of the increase over the prior year. 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 $2.6 million decline in
revenue from FTP, which was acquired by NetManage, Inc. in August 1998. During
1999, we added seven new clients which accounted for $14.4 million of our
revenue during that year.
During 1999, there was no revenue from the catalog/distributor businesses,
which were sold in May 1998. In 1998, these businesses generated revenues of
$6.2 million.
Gross Profit. Gross profit from CRM services increased 36.5% to $19.1
million for 1999 from $14.0 million for 1998 in line with revenue growth. Gross
margin from CRM services decreased slightly to 31.5% in the most recent year
compared to 31.7% during the prior year.
There was no gross profit for 1999 on the catalog/distributor businesses,
which were sold in May 1998. For 1998, these businesses generated $1.0 million
in gross profit.
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 115.0% to $28.9 million for 1999 from $13.5
million for 1998. These expenses for 1998 included approximately five months of
operations associated with the catalog/distributor businesses, which were sold
in May 1998. As a percentage of total revenue, these expenses increased to 47.7%
for the most recent year from 26.8% in the prior year. 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 44
additional personnel within sales, marketing and product development in 1999.
Depreciation expense increased by $1.5 million in 1999 compared to 1998 due
primarily to accelerated depreciation on information systems to be substantially
replaced. In addition, during 1999, we wrote off approximately $296,000 of older
non-Year 2000 compliant computers and telephone systems, which were replaced
with new equipment.
We recorded deferred compensation of $2.0 million in 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 $682,000 during 1999. Deferred compensation expense at December
31, 1999 is being amortized using the graded vesting method over the vesting
period of the options.
Interest Income (Expense), Net. We recorded $774,000 of net interest income
in 1999, as compared to $138,000 in 1998. The increase was primarily
attributable to higher invested cash balances resulting from the sale of common
stock in our initial public offering of $40.6 million in November 1999 and sale
of preferred stock of $13.8 million in February 1999 partially offset by $9.7
million used to repurchase stock during the year.
Income Tax Expense (Benefit). We recorded a $1.7 million income tax benefit
for 1999 compared to $1.7 million of income tax expense for 1998. The expected
benefit derived by applying the federal statutory rate to the operating loss for
1999 differs from the benefit recorded because we established a valuation
allowance for deferred tax assets that exceed income taxes recoverable from
prior years. The income tax expense for 1998 was recorded at the federal
statutory rate plus state income taxes.
Comparison of Years Ended December 31, 1998 and 1997
Revenue. Revenue from CRM services increased 96.4% to $44.2 million for 1998
from $22.5 million in 1997. Revenue from CRM services associated with existing
clients accounted for $12.6 million of the increase in 1998 over 1997. This
increase was primarily due to the inclusion of new services and product lines
and growth of the installed customer base. In addition, revenue from existing
clients included three clients added during 1997 from which we derived the full
period benefit of the sales of their products and services during 1998. Revenue
from these clients was $14.6 million and $6.3 million in 1998 and 1997,
respectively. We also added two new clients during 1998, who accounted for $9.1
million of revenue.
Revenue from the catalog/distributor businesses decreased 63.7% to $6.2
million in 1998 from $17.0 million in 1997, due to the sale of these businesses
in May 1998.
Gross Profit. Gross profit for CRM services increased 81.9% to $14.0 million
in 1998 from $7.7 million for 1997. Gross margin from CRM services declined to
31.7% for 1998 from 34.2% for 1997. The margin decline was primarily due to an
increase in the mix of lower margin products sold in 1998 versus those sold in
1997.
Gross profit for the catalog/distributor businesses decreased 69.8% to $1.0
million for 1998 from $3.4 million for 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 36.9% to $13.5 million for 1998 from $9.8
million for 1997. These amounts included approximately five months of expenses
associated with the catalog/distributor businesses during 1998 and twelve months
during 1997. As a percentage of revenue, these expenses increased to 26.8% in
1998 from
<PAGE>
24.8% in 1997. This increase was primarily due to the addition of 30 employees
hired during 1998 to support the expansion in our CRM services business.
Interest Income (Expense), Net. We recorded $138,000 of net interest income
in 1998 as compared to net interest expense of $66,000 in 1997. The 1998 amount
was primarily due to interest income derived from outstanding notes related to
the sale of the catalog/distributor businesses and higher average cash balances.
The 1997 amount was primarily due to expenses associated with our capital
leases.
Income Tax Expense (Benefit). We recorded a $1.7 million income tax
provision for 1998 compared to $450,000 for 1997, representing annual effective
tax rates of 40% and 37%, respectively. Our annual effective tax rate for 1998
differs from the federal statutory rate primarily due to state taxes. Our annual
effective tax rate for 1997 differs from the federal statutory rate primarily
due to state taxes and the benefit of the research and development tax credit.
Selected Quarterly Results of Operations
The following table presents our unaudited quarterly statement of operations
data for each quarter in the eight quarters ended December 31, 1999. This data
has been derived from unaudited financial statements that have been prepared on
the same basis as the audited financial statements and include all adjustments
(consisting of normal recurring adjustments) that we consider necessary for a
fair presentation of such information.
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
---------- -------- --------- -------- --------- --------- ---------- --------
1998 1998 1998 1998 1999 1999 1999 1999
---------- -------- --------- -------- --------- --------- ---------- ---------
(in thousands)
Statement of Operations Data:
Revenue:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CRM services .......................... $ 7,748 $10,607 $12,047 $13,810 $12,943 $13,145 $15,947 $18,630
Catalog/distributor ................... 4,024 2,141 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total revenue ...................... 11,772 12,748 12,047 13,810 12,943 13,145 15,947 18,630
Cost of revenue:
CRM services .......................... 5,284 7,357 7,885 9,670 8,719 8,815 11,403 12,602
Catalog/distributor ................... 3,283 1,852 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenue .............. 8,567 9,209 7,885 9,670 8,719 8,815 11,403 12,602
Gross profit:
CRM services .......................... 2,464 3,250 4,162 4,140 4,224 4,330 4,544 6,028
Catalog/distributor ................... 741 289 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total gross profit ................. 3,205 3,539 4,162 4,140 4,224 4,330 4,544 6,028
Selling, general and administrative
expenses ............................... 2,986 2,930 3,723 3,818 3,950 6,114 8,587 10,288
------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss) .................. 219 609 439 322 274 (1,784) (4,043) (4,260)
Interest income (expense), net ........ (18) 22 66 68 139 146 85 404
Gain from sale of
catalog/distributor ................. -- 2,525 -- -- -- 80 -- --
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes ........ 201 3,156 505 390 413 (1,558) (3,958) (3,856)
Income tax expense (benefit) .......... 80 1,263 202 157 164 (595) (90) (1,129)
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) ........................ $ 121 $ 1,893 $ 303 $ 233 $ 249 $ (963) $(3,868) $(2,727)
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Our historical revenue has tended to fluctuate based on seasonal buying
patterns in the computer industry. A higher proportion of computers, software,
and contract services tend to be sold in the fourth calendar quarter. As a
result, we have experienced seasonal declines in revenues between the fourth and
first calendar quarters. Our quarterly operating results may continue to
fluctuate in the future based on a number of factors, many of which are beyond
our control. We believe that quarter-to-quarter comparisons of our operating
results are not a good indication of future performance. See "Risk Factors--Our
Future Operating Results May Not Follow Past Trends or Meet Market
Expectations."
<PAGE>
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 $43.9 million at December 31, 1999. Working capital
at December 31, 1999 was $43.8 million.
Cash used in operating activities during 1999 was $4.6 million compared to
$3.3 million provided by operations for the prior year. The change of $7.9
million was due primarily to the absolute change in net income (loss) of $9.9
million as we earned $2.6 million during 1998 but lost $7.3 million during 1999.
In addition, we increased our inventories by $633,000 in 1999 due to the
addition of new clients. This increase in inventories compares to a decrease of
$948,000 for 1998, primarily due to the sale of the catalog/distributor
businesses. The decrease in deferred taxes accounted for $1.0 million of the
change in the year. Changes in other operating assets and liabilities, primarily
trade accounts receivable, accounted for the balance of the decrease in cash
used by operating activities. Cash used by operating activities for 1998
included cash used by the catalog/distributor businesses.
Cash used in investing activities during 1999 was $3.5 million compared to
$1.0 million provided by investing activities for 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 1999. The
total sales price of our catalog/distributor businesses is to be paid in three
installments. We received the first installment of $2.9 million from the sale in
May 1998, and we received the second installment of $900,000 in May 1999. We
expect to receive the final $800,000 installment in May 2000. Capital
expenditures totaled $1.6 million for 1999 compared to $874,000 for 1998.
Capital expenditures consisted primarily of additional computers and software in
both periods. In addition, we spent $320,000 in 1999 to replace our older non-
Year 2000 compliant computers and telephone systems.
Cash provided by financing activities during 1999 was $44.6 million compared
to a use of $5,000 for the prior year. The increase was primarily attributable
to the sale of common stock in our initial public offering of $40.6 million and
sale of preferred stock of $13.8 million in February 1999 partially offset by
$9.7 million used to repurchase shares of our stock during the year.
We believe that our cash, cash equivalents and short-term investments at
December 31, 1999 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.
Year 2000 Compliance
Our State of Compliance. To date, the Year 2000 problem (that is the
inability of computers, as well as embedded microchips in non-computing devices,
to perform properly date-sensitive functions with respect to certain dates prior
to and after December 31, 1999) has not had a material impact on our business.
We identified three areas of our business that could be affected by the Year
2000 problem:
Internal Infrastructure. We implemented a program to evaluate and address
the impact of the Year 2000 problem on our information systems and non-
information systems. Testing of our key production systems was completed in
September 1999. We have partially replaced our computer information systems.
As a result, we believe our systems remain Year 2000 compliant.
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 compliance of these third parties' hardware and software products.
Prior to year-end 1999, we established Year 2000 readiness requirements for
newly acquired
<PAGE>
products and services and contacted the third parties from whom we purchased
any hardware and software products to validate that such products were Year
2000 compliant. We collected satisfactory Year 2000 readiness statements from
our significant partners and vendors prior to year-end 1999.
Clients. We collected preliminary statements of Year 2000 readiness from
each of our clients prior to year-end 1999. Based on those preliminary
statements, we believe that our clients' systems are substantially Year 2000
compliant. In addition, we have worked with our clients to test data
transmission and other integration processes. If our clients' products or
systems are not Year 2000 compliant, our ability to sell our clients' products
and services would be adversely affected.
The Costs of Addressing Our Year 2000 Issues. To date, we have incurred only
minimal internal costs in connection with identifying and evaluating Year 2000
compliance issues. Our expenses have 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, and
in all of 1999 the Company expensed approximately $600,000 in the aggregate
remediating its systems. The total costs of our Year 2000 compliance efforts
have not been, nor do we expect them to be, material. If, however, these costs
were to become 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. The failure of
our Web site, network infrastructure and transaction processing systems to be
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 are 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.
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." 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.
<PAGE>
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.
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 eighteen months as we increase our operating expenses to build our
business.
Because we depend on a small number of clients for a significant portion of our
revenue, the loss of a single client could result in a substantial decrease in
our revenue.
We have generated a significant portion of our revenue from a limited numbers
of clients. We currently have only 13 clients. In 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 could eventually be
eliminated.
Our revenue will decline if demand for our clients' products and services
decreases.
Our business primarily consists of selling and marketing our clients' products
and services to their existing customers. In addition, most of our revenue is
based on a "pay for performance" model in which our compensation is based on
the amount of our clients' products and services that we sell. Accordingly, if a
particular client's products and services fail to appeal to its customers for
reasons beyond our control, such as preference for a competing product or
service, our revenue from that client's products and services may decline.
Our quarterly operating results may fluctuate, and, if we do not meet market
expectations, our stock price could decline.
We believe that quarter-to-quarter comparisons of our operating results are
not a good indication of future performance. Although our operating results have
generally improved from quarter to quarter until recently, our future operating
results may not follow any past trends. In some future quarter our operating
results may be below the expectation of public market analysts and investors.
Factors which may cause our future operating results to be below expectations
include:
. the growth of the market for outsourced CRM solutions;
<PAGE>
. 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 executives joined Rainmaker in 1999. As a result, our
current management team has worked together for only a relatively short time.
Our ability to execute our strategies will depend upon our ability to integrate
these and future managers into our operations.
We have strong competitors and may not be able to compete effectively against
them.
Competition in business 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
<PAGE>
resources. We will need to continue to improve our operational, financial and
managerial controls and information systems and procedures and will need to
continue to expand, train and manage our overall work force. If we are unable to
manage additional growth effectively our business will be harmed.
Our business strategy includes expansion into foreign markets which will require
increased expenditures, and if our international operations are not successfully
implemented they may not result in increased revenue or growth of our business.
Our growth strategy includes expansion into international markets. As a
result, we may need to establish international operations, hire additional
personnel and establish relationships with additional clients and customers in
those markets. This expansion will require significant financial resources and
management attention and could have a negative effect on our earnings. We cannot
assure you that we will be successful in creating international demand for our
CRM services or that we will be able to effectively sell our clients' products
and services in international markets.
The development of our international operations may also involve the following
risks:
. the increased cost associated with designing and operating Web sites
in foreign languages;
. the inability to protect our intellectual property in foreign
markets;
. differing technology standards and internet regulations in other
countries that may affect access to and operation of our Web sites;
. the appeal of our marketing programs, including the use of e-mail and
direct marketing techniques, to international customers; and
. difficulties in collecting international accounts receivable for the
products and services that we sell.
We cannot assure you that these factors will not have an adverse effect on
future international sales and earnings.
Any acquisitions we make could result in dilution, unfavorable accounting
charges and difficulties in successfully managing our business.
As part of our business strategy, we review acquisition prospects that would
complement our existing business or enhance our technological capabilities.
Future acquisitions by us could result in potentially dilutive issuances of
equity securities, large and immediate write-offs, the incurrence of debt and
contingent liabilities or amortization expenses related to goodwill and other
intangible assets, any of which could cause our financial performance to suffer.
Furthermore, acquisitions entail numerous risks and uncertainties, including:
. difficulties in the assimilation of operations, personnel,
technologies, products and the information systems of the acquired
companies;
. 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.
<PAGE>
Our success is dependent in large part on our continued investment in
sophisticated computer, Internet and telecommunications systems. We have
invested significantly in technology and anticipate that it will be necessary to
continue to do so in the future to remain competitive. These technologies are
evolving rapidly and are characterized by short product life cycles, which
require us to anticipate technological developments. We may be unsuccessful in
anticipating, managing, adopting and integrating technological changes on a
timely basis, or we may not have the capital resources available to invest in
new technologies. Temporary or permanent loss of these systems could limit our
ability to conduct our business and result in lost revenue.
If we are unable to safeguard our networks and clients' data, our clients may
not use our services and our business may be harmed.
Our networks may be vulnerable to unauthorized access, computer hacking,
computer viruses and other security problems. A user who circumvents security
measures could misappropriate proprietary information or cause interruptions or
malfunctions in our operations. We may be required to expend significant
resources to protect against the threat of security breaches or to alleviate
problems caused by any breaches. Although we intend to continue to implement
industry-standard security measures, these measures may be inadequate.
Damage to our single facility may disable our operations.
Our operations are housed in a single facility in Scotts Valley, California.
We have taken precautions to protect ourselves from events that could interrupt
our services, such as off-site storage of computer backup data and a backup
power source, but there can be no assurance that an earthquake, fire, flood or
other disaster affecting our facility would not disable these operations. Any
significant damage to this facility from an earthquake or other disaster could
prevent us from operating our business.
If we fail to adequately protect our intellectual property or face a claim of
intellectual property infringement by a third party, we may lose our
intellectual property rights and be liable for significant damages.
We cannot guarantee that the steps we have taken to protect our proprietary
rights will be adequate to deter misappropriation of our intellectual property.
In addition, we may not be able to detect unauthorized use of our intellectual
property and take appropriate steps to enforce our rights. If third parties
infringe or misappropriate our trade secrets, copyrights, trademarks, service
marks, trade names or other proprietary information, our business could be
seriously harmed. In addition, although we believe that our proprietary rights
do not infringe the intellectual property rights of others, other parties may
assert infringement claims against us that we violated their intellectual
property rights. These claims, even if not true, could result in significant
legal and other costs and may be a distraction to management. In addition,
protection of intellectual property in many foreign countries is weaker and less
reliable than in the United States, so if our business expands into foreign
countries, risks associated with protecting our intellectual property will
increase. We have 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
<PAGE>
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.
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.
<PAGE>
Our directors and entities affiliated with them will 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.
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 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
<PAGE>
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 December 31, 1999, the decline of the
fair market value of our fixed income portfolio would not be material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included in Part IV Item 14 (a) (1)
and (2).
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
PART III
Certain information required by Part III is omitted from this Report because
the Registrant will file a definitive Proxy Statement pursuant to Regulation 14A
(the "Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this Report, and certain information included therein is incorporated
herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's officers required by this Item is
incorporated by reference to the Company's Proxy Statement under the heading
"Executive Officers". The information concerning the Company's Directors
required by this Item is incorporated by reference to the Company's Proxy
Statement under the heading "Election of Directors - Nominees". Information
concerning the Company's officers, Directors and 10% shareholders compliance
with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference to the information contained in the Company' Proxy Statement under the
heading "Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Certain Transactions with
Management."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS OF FORM 8-K
(a) 1. Financial Statements
The following financial statements are filed as a part of this report:
<PAGE>
Page
Report of Independent Auditors 30
Financial Statements:
Balance Sheets as of December 31, 1999 and 1998 31
Statements of Operations for the Years ended December 31, 1999,
1998 and 1997 33
Statements of Redeemable Convertible Preferred Stock and
Stockholders' Equity for the Years ended
December 31, 1999, 1998 and 1997 34
Statements of Cash Flows for the Years ended December 31, 1999,
1998 and 1997 35
Notes to Financial Statements 36
(a) 2. Financial Statement Schedules
The following financial statement schedule is filed as a part of this
report:
II Valuation and Qualifying Accounts
(a) 3. 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.
10.8* Net Lease Agreement dated November 5, 1998 between UniDirect
Corporation and Inprise Corporation.
<PAGE>
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** Form of Notice of Grant of Stock Option
10.21***Form of Stock Option Agreement
23.1 Consent of Ernst & Young LLP.
23.2* Consent of Brobeck, Phleger & Harrison LLP.
24.1* Power of Attorney (contained on the signature page hereof).
<PAGE>
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the fourth quarter of 1999.
- --------
* 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.
<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, 1999 and 1998 and the related statements of operations, redeemable
convertible preferred stock and stockholders' equity, and cash flows for each of
the three years in the period ended December 31, 1999. Our audits also included
the financial statement schedule listed in the Index at Item 14 (a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information stated therein.
/s/ ERNST & YOUNG LLP
San Jose, California
January 26, 2000
<PAGE>
RAINMAKER SYSTEMS, INC.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 1998
------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................................................... $ 41,129 $ 4,608
Short-term investments .......................................................... 2,756 --
Accounts receivable, less allowance for sales returns and doubtful accounts
of $536 in 1999 and $314 in 1998 ........................................... 8,192 6,881
Current portion of note receivable .............................................. 800 900
Income taxes receivable ......................................................... 960 951
Other receivables ............................................................... 291 52
Inventories ..................................................................... 637 4
Deferred taxes .................................................................. -- 354
Prepaid expenses and other current assets ....................................... 563 278
-------- -------
Total current assets ........................................................... 55,328 14,028
Property and equipment, net .................................................. 2,373 2,337
Note receivable, less current portion ........................................... -- 720
Other noncurrent assets ......................................................... 166 124
-------- -------
Total assets ................................................................... $ 57,867 $17,209
======== =======
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................ $ 6,456 $ 5,824
Payable to a related party........................................................ 1,677 1,031
Accrued compensation and related liabilities .................................... 2,131 1,220
Accrued liabilities ............................................................. 804 585
Deferred revenue ................................................................ -- 40
Current portion of capital lease obligations .................................... 501 205
-------- -------
Total current liabilities ...................................................... 11,569 8,905
Capital lease obligations, less current portion ................................. 1,090 442
Convertible subordinated note payable ........................................... -- 996
Deferred taxes .................................................................. -- 1,389
Commitments and contingencies
Redeemable convertible preferred stock:
Series A convertible preferred stock, no par value:
Authorized shares--none in 1999 and 1,143,494 in 1998
Issued and outstanding shares--none in 1999 and 574,620 in 1998................ -- 977
Stockholders' equity:
Preferred stock, $0.001 par value:
Series B
Authorized shares--402,710 in 1999 and 1998
Issued and outstanding--none in 1999 and 349,160 in 1998.................... -- --
Series C
Authorized shares--8,536,585 in 1999 and 1998
Issue and outstanding--none in 1999 and 1998................................ -- --
Series D
Authorized shares--5,717,470 in 1999 and 1998
Issue and outstanding--none in 1999 and 1998................................ -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Undesignated
Authorized shares--5,343,235 in 1999 and 343,235 1998
Issue and outstanding--none in 1999 and 1998................................ -- --
Common stock, $0.001 par value:
Authorized shares--80,000,000
Issued and outstanding shares--38,370,955 in 1999 and 21,460,894 in 1998........ 38 21
Additional paid-in capital ...................................................... 58,482 741
Deferred stock compensation ..................................................... (1,344) --
Retained earnings (accumulated deficit) ......................................... (11,968) 3,738
-------- -------
Total stockholders' equity ................................................... 45,208 4,500
-------- -------
Total liabilities and stockholders' equity ................................... $ 57,867 $17,209
======== =======
</TABLE>
See accompanying notes.
<PAGE>
RAINMAKER SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1999 1998 1997
----------- ------------ ------------
Revenue:
<S> <C> <C> <C>
CRM services .................................................. $ 60,665 $44,212 $22,515
Catalog/distributor ........................................... -- 6,165 16,985
-------- ------- -------
Total revenue ................................................ 60,665 50,377 39,500
Cost of revenue:
CRM services .................................................. 41,539 30,196 14,810
Catalog/distributor ........................................... -- 5,135 13,575
-------- ------- -------
Total cost of revenue ........................................ 41,539 35,331 28,385
Gross profit:
CRM services .................................................. 19,126 14,016 7,705
Catalog/distributor ........................................... -- 1,030 3,410
-------- ------- -------
Total gross profit ........................................... 19,126 15,046 11,115
Selling, general and administrative expenses ................... 28,939 13,457 9,828
-------- ------- -------
Operating income (loss) ....................................... (9,813) 1,589 1,287
Interest income (expense), net ................................. 774 138 (66)
Gain from sale of catalog/distributor .......................... 80 2,525 --
-------- ------- -------
Income (loss) before income taxes ............................. (8,959) 4,252 1,221
Income tax expense (benefit) ................................... (1,650) 1,702 450
-------- ------- -------
Net income (loss) ............................................. (7,309) 2,550 771
Preferred A dividends .......................................... -- (36) --
Preferred C and D cumulative dividends ......................... (1,265) -- --
Excess of redemption of preferred stock over stated value........ (1,941) -- --
======== ------- -------
Income (loss) available to common stockholders ................. $(10,515) $ 2,514 $ 771
======== ======= =======
Net income (loss) per common share:
Basic ......................................................... $(0.49) $0.12 $0.04
======== ======= =======
Diluted ....................................................... $(0.49) $0.09 $0.03
======== ======= =======
Number of shares used in per share computations:
Basic ......................................................... 21,300 21,004 21,019
======== ======= =======
Diluted ....................................................... 21,300 30,356 29,943
======== ======= =======
</TABLE>
See accompanying notes.
<PAGE>
RAINMAKER SYSTEMS, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Redeemable Redeemable Redeemable
------------------ ---------------------- ---------------------
Convertible Convertible Convertible
------------------ ---------------------- ---------------------
Preferred Stock Preferred Stock Preferred Stock
------------------ ---------------------- ---------------------
Series A Series C Series D
------------------ ---------------------- ---------------------
Shares Amount Shares Amount Shares Amount
--------- ------- ----------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 ............................. 574,620 $ 977 -- $ -- -- $ --
Exercise of employee stock options........................ -- -- -- -- -- --
Net income and comprehensive net income ................. -- -- -- -- -- --
-------- ------ ---------- -------- ---------- -------
Balance at December 31, 1997 ............................. 574,620 977 -- -- -- --
Conversion of nonpar
preferred stock to $0.001 par
value preferred stock .................................. -- -- -- -- -- --
Exercise of employee stock options ...................... -- -- -- -- -- --
Net income and comprehensive net income ................. -- -- -- -- -- --
Dividends declared ...................................... -- -- -- -- -- --
-------- ------ ---------- -------- ---------- -------
Balance at December 31, 1998 ............................. 574,620 977 -- -- -- --
Issuance of Series C preferred stock, net
of issuance costs ...................................... -- -- 8,536,585 13,809 -- --
Issuance of common stock in
initial public offering, net of issuance costs.. -- -- -- -- -- --
Exercise of warrant to purchase common stock......... -- -- -- -- -- --
Exercise of employee stock options........................ -- -- -- -- -- --
Options issued to consultants
in exchange for services ............................... -- -- -- -- -- --
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 ...................................... -- -- (8,536,585) (13,809) (5,717,470) (1,973)
Repurchase of common stock .............................. -- -- -- -- -- --
Deferred stock compensation ............................. -- -- -- -- -- --
Amortization of deferred stock
compensation ........................................... -- -- -- -- -- --
Net loss and comprehensive net loss ..................... -- -- -- -- -- --
Dividends declared ...................................... -- -- -- -- -- --
-------- ------ ---------- -------- ---------- -------
Balance at December 31, 1999 ............................. -- $ -- -- $ -- -- $ --
======== ====== ========== ======== ========== =======
Convertible ----------- Deferred
------------------ Additional -------------
Preferred Stock ----------- Stock
------------------ Paid-in -------------
Series B Common Stock ----------- Compensation
------------------ -------------------- Capital -------------
-----------
Shares Amount Shares Amount
--------- ------- ----------- -------
<C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 ............................. 349,160 $ 384 21,008,750 $21 $ 220 $ --
Exercise of employee stock options........................ -- -- 17,238 -- 3 --
Net income and comprehensive net income ................. -- -- -- -- -- --
-------- ------ ---------- --- ------- ------------
Balance at December 31, 1997 ............................. 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 and comprehensive net income ................. -- -- -- -- -- --
Dividends declared ...................................... -- -- -- -- -- --
-------- ------ ---------- --- ------- ------------
Balance at December 31, 1998 ............................. 349,160 -- 21,460,894 21 741 --
Issuance of Series C preferred stock, net
of issuance costs ...................................... -- -- -- -- -- --
Issuance of common stock in
initial public offering, net of issuance costs.. -- -- 5,750,000 6 40,567 --
Exercise of warrant to purchase common stock......... -- -- 112,388 -- -- --
Exercise of employee stock options........................ -- -- 956,525 -- 267 --
Options issued to consultants
in exchange for services ............................... -- -- -- -- 411 --
Conversion of Series A
preferred stock and debt
into Series D preferred stock .......................... -- -- -- -- -- --
Conversion of preferred stock
into common stock ...................................... (349,160) -- 15,999,855 16 15,766 --
Repurchase of common stock .............................. -- -- (5,908,707) (5) (1,296) --
Deferred stock compensation ............................. -- -- -- -- 2,026 (2,026)
Amortization of deferred stock
compensation ........................................... -- -- -- -- -- 682
Net loss and comprehensive net loss ..................... -- -- -- -- -- --
Dividends declared ...................................... -- -- -- -- -- --
-------- ------ ---------- --- ------- ------------
Balance at December 31, 1999 ............................. -- $ -- 38,370,955 $38 $58,482 $(1,344)
======== ====== ========== === ======= ============
Retained
---------------------
Earnings
---------------------
(Accumulated
---------------------
Deficit)
---------------------
<C> <C>
Balance at December 31, 1996 ............................. $ 453 $ 1,078
Exercise of employee stock options........................ -- 3
Net income and comprehensive 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 and comprehensive net income ................. 2,550 2,550
Dividends declared ...................................... (36) (36)
-------- -------
Balance at December 31, 1998 ............................. 3,738 4,500
Issuance of Series C preferred stock, net
of issuance costs ...................................... --
Issuance of common stock in
initial public offering, net of issuance costs.. --
Exercise of warrant to purchase common stock......... -- --
Exercise of employee stock options........................ -- 267
Options issued to consultants
in exchange for services ............................... --
Conversion of Series A
preferred stock and debt
into Series D preferred stock .......................... --
Conversion of preferred stock
into common stock ...................................... --
Repurchase of common stock .............................. (8,389) (9,690)
Deferred stock compensation ............................. -- --
Amortization of deferred stock
compensation ........................................... --
Net loss and comprehensive net loss ..................... (7,309) (7,309)
Dividends declared ...................................... (8) (8)
-------- -------
Balance at December 31, 1999 ............................. $(11,968) $45,208.
======== =======
</TABLE>
See accompanying notes.
<PAGE>
RAINMAKER SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------------------------------------------------
1999 1998 1997
---------------- ---------- ---------------
<S> <C> <C> <C>
Operating activities
Net income (loss) ................................................. $(7,309) $ 2,550 $ 771
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization of property and equipment............ 2,545 635 550
Amortization of deferred stock compensation........................ 682 -- --
Gain on sale of catalog/distributor businesses ................... (80) (2,525) --
Loss on disposal of property and equipment ....................... 309 -- --
Issuance of stock for consulting services ........................ 411 -- --
Deferred income taxes ............................................ (1,035) 1,177 (160)
Provision for sales returns and doubtful accounts ................ 222 16 142
Changes in operating assets and liabilities:
Accounts receivable ............................................. (1,533) (577) (3,049)
Income taxes receivable, net .................................... (9) (1,382) 358
Other receivables ............................................... (239) 410 143
Inventories ..................................................... (633) 948 (729)
Prepaid expenses and other assets ............................... (327) (53) (57)
Accounts payable ................................................ 632 3,588 1,361
Payable to a related party ....................................... 646 (2,120) 959
Accrued compensation and related liabilities .................... 911 536 380
Accrued liabilities ............................................. 237 73 (280)
Deferred revenue ................................................ (40) 35 (178)
------- ------- -------
Net cash provided by (used in) operating activities ................ (4,610) 3,311 211
Investing activities
Proceeds from sale of catalog/distributor ......................... 900 2,900 --
Liabilities paid related to sale of catalog/distributor ........... -- (993) --
Purchases of property and equipment ............................... (1,642) (874) (1,098)
Purchase of short-term investments ................................ (3,756) -- --
Sale of short-term investments .................................... 1,000 -- --
Proceeds from issuance of notes receivable from officers .......... -- -- (44)
------- ------- -------
Net cash provided by (used in) investing activities ................ (3,498) 1,033 (1,142)
Financing activities
Proceeds from issuance of common stock from IPO, net .............. 40,573 -- --
Proceeds from issuance of preferred stock, net .................... 13,809 -- --
Repurchase of common stock ........................................ (9,690) -- --
Proceeds from issuance of common stock from option exercises ...... 267 134 3
Repayment of capital lease obligations ............................ (304) (121) (62)
Dividends paid .................................................... (26) (18) --
------- ------- -------
Net cash provided by (used in) financing activities ................ 44,629 (5) (59)
Net increase (decrease) in cash and cash equivalents ............... 36,521 4,339 (990)
Cash and cash equivalents at beginning of year .................... 4,608 269 1,259
------- ------- -------
Cash and cash equivalents at end of year .......................... $41,129 $ 4,608 $ 269
======= ======= =======
Supplemental disclosure of cash paid during the period
Interest paid ..................................................... $ 125 $ 217 $ 30
======= ======= =======
Income taxes paid, net of refunds ................................. $ (604) $ 1,908 $ 252
======= ======= =======
Supplemental schedule of noncash investing and financing
activities
Acquisition of equipment under capital leases ..................... $ 1,248 $ 372 $ 327
======= ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Dividends declared, but unpaid .................................... $ -- $ 18 $ --
======= ======= =======
Conversion of subordinated convertible note to preferred stock .... $ 996 $ -- $ --
======= ======= =======
</TABLE>
See accompanying notes
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
hardware and software 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 separate operating 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.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the accompanying financial statements. Actual
results could differ from those estimates.
Revenue Recognition
Revenue from the sale of service contracts and maintenance renewals is
recognized when a purchase order from the end user customer is received; the
service contract or maintenance agreement is delivered; the collection of the
receivable is considered probable; and no significant post-delivery obligations
remain. Revenue from product sales is recognized at the time of shipment of the
product directly to the customer. Revenue from services we perform is recognized
as the services are delivered.
Cost of Revenue
Cost of revenue consists of the cost of products sold to customers, the cost
of inbound and outbound shipping, net of amounts recovered from customers and
the costs of designing, producing and delivering marketing services.
Concentrations of Credit Risk and Credit Evaluations
The Company sells its clients' products and services primarily to business end
users and assumes full credit risk on the sale. 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.
<PAGE>
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.
For the year ended December 31, 1999, sales to customers of The Santa Cruz
Operation, Inc. (SCO) and Sybase, Inc. accounted for approximately 43% and 18%
of CRM services revenue. respectively. In 1998, sales to customers of SCO, FTP
Software, Inc. (FTP) and Novell, Inc. (Novell) accounted for approximately 46%,
21% and 16%, respectively, of CRM services revenue. In 1997, sales to customers
of SCO, FTP and Sun Microsystems, Inc. accounted for approximately 72%, 10% and
12%, respectively, 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 Sybase that is in effect
through March 2001. 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
Property and equipment are stated at cost. 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, 1999 and 1998 were as
follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
---------- -------------
<S> <C> <C>
Computer equipment .......................................................... $ 4,393 $ 2,864
Furniture and fixtures ...................................................... 472 451
Leasehold improvements ...................................................... 263 100
------- -------
5,128 3,415
Accumulated depreciation and amortization ..................................... (2,755) (1,078)
------- -------
$ 2,373 $ 2,337
======= =======
</TABLE>
As of December 31, 1999, property and equipment included amounts held under
capital leases of approximately $1.7 million and related accumulated
amortization of approximately $442,000.
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" for disclosing
the effects of the fair value method on reported results of operations.
<PAGE>
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, 1999 and 1998 deferred advertising costs aggregated $0 and
$107,000, respectively. Gross advertising costs for the years ended December 31,
1999, 1998 and 1997 aggregated $1.4 million, $1.4 million and $1.9 million,
respectively. The Company charged several vendors for reimbursement under
advertising programs of $1.1 million, $1.7 million and $1.9 million during the
years ended December 31, 1999, 1998 and 1997, 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 its marketable securities as available-for-sale which are
recorded at fair market value with the related unrealized gains and losses
included in comprehensive income/loss. 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.
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 (Loss)
Comprehensive income (loss) includes revenues and expenses and gains and
losses that are not included in net 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).
Segment Reporting
<PAGE>
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.
Recently Issued Accounting Standards
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.
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
years presented.
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, if
dilutive, 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.
The following table presents the calculation of basic and diluted net income
(loss) per common share (in thousands, except per share data):
<TABLE>
<CAPTION>
Years Ended
-------------------------------------
December 31,
-------------------------------------
1999 1998 1997
------------ ----------- ----------
Net Income (Loss) Per Common Share--Basic
<S> <C> <C> <C>
Net income (loss) ................................................................ $ (7,309) $ 2,550 $ 771
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>................................................................................<C> <C> <C>
Less: Preferred A dividends ...................................................... -- (36) --
Preferred C cumulative dividends ............................................... (1,112) -- --
Preferred D cumulative dividends ............................................... (153) -- --
Excess of redemption of preferred stock over stated value........................ (1,941) -- --
-------- ------- -------
Income (loss) available to common stockholders ................................... $(10,515) $ 2,514 $ 771
======== ======= =======
Weighted-average shares of common stock outstanding .............................. 21,491 21,196 21,019
Less: weighted average shares subject to repurchase .............................. (191) (192) --
-------- ------- -------
Weighted-average shares used in computing basic net income (loss) per
common share .................................................................... 21,300 21,004 21,019
======== ======= =======
Basic net income (loss) per common share ......................................... $(0.49) $0.12 $0.04
======== ======= =======
Net Income (Loss) Per Common Share--Diluted
Net income (loss) ................................................................ $ (7,309) $ 2,550 $ 771
Add: Accrued interest on convertible debenture ................................... -- 39 39
Less: Preferred C cumulative dividends ........................................... (1,112) -- --
Preferred D cumulative dividends .............................................. (153) -- --
Excess of redemption of preferred stock over stated value....................... (1,941) -- --
-------- ------- -------
Income (loss) available to common stockholders ................................... $(10,515) $ 2,589 $ 810
======== ======= =======
Weighted-average shares of common stock outstanding .............................. 21,491 21,196 21,019
Add: Number of dilutive common stock equivalents--options and warrants ........... -- 1,697 1,461
Assumed conversion of subordinated debentures .................................. -- 2,844 2,844
Assumed conversion of convertible preferred stock .............................. -- 4,619 4,619
Less: weighted average shares subject to repurchase .............................. (191) -- --
-------- ------- -------
Weighted-average shares used in computing diluted net income (loss)
per common share ................................................................ 21,300 30,356 29,943
======== ======= =======
Diluted net income (loss) per common share ....................................... $(0.49) $0.09 $0.03
======== ======= =======
</TABLE>
Rainmaker has excluded all outstanding stock options and shares subject to
repurchase from the calculation of diluted net loss per common share for the
year ended December 31, 1999 because all such securities are anti-dilutive. The
total number of potential shares excluded from the calculation of diluted net
loss per common share was 17,873,064 for the year ended December 31, 1999.
3. Cash Equivalents and Short-Term Investments
The following is a summary of available-for-sale securities. All available-
for-sale securities at December 31, 1999 have a maturity of less than one year.
As of December 31, 1999 and 1998 the fair market value of available-for-sale
securities approximates their carrying value (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
------------- -------------
1999 1998
------------- -------------
<S> <C> <C>
Money market fund ............................................................. $ 4,134 $ 996
Commercial paper .............................................................. 7,886 --
Corporate bonds................................................................ 2,756 --
Government securities ......................................................... 5,109 3,200
Municipal bonds ............................................................... 24,000 --
------- ------
$43,885 $4,196
======= ======
Classified as:
Cash equivalents .............................................................. $41,129 $4,196
Short-term investments ........................................................ 2,756 --
------- ------
$43,885 $4,196
======= ======
</TABLE>
4. Debt and Commitments
Debt
<PAGE>
In 1995, the Company entered into a $1.0 million subordinated convertible
debenture and related warrant agreement and a distribution agreement with the
holder of the Series A convertible preferred stock. On January 29, 1999, the
Company and this stockholder entered into an Exchange Agreement whereby this
debenture and all outstanding shares of Series A convertible preferred stock
were converted into 5,717,470 shares of Series D convertible preferred stock and
the related warrant was cancelled. The Series D convertible preferred stock
automatically converted to common stock immediately prior to the closing of the
initial public offering in November 1999.
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
December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
<S> <C> <C>
2000.................................................. $ 607 $ 981
2001.................................................. 599 891
2002.................................................. 409 607
2003.................................................. 181 498
2004.................................................. 12 279
------ ------
Total minimum lease payments ...................... 1,808 $3,256
======
Less amount representing interest ................... 217
------
Present value of minimum lease payments ............. 1,591
Less current portion ................................ 501
------
Obligations under capital leases due after one year . $1,090
======
</TABLE>
Rent expense under operating leases was approximately $1,022,000, $522,000,
and $458,000 in 1999, 1998, and 1997, respectively.
5. Income Taxes
The Company utilizes the liability method of accounting for income taxes,
under which 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.
The federal and state income tax provision (benefit) for the years ended
December 31, 1999, 1998 and 1997 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------
1999 1998 1997
---------- --------- -----------
Current:
<S> <C> <C> <C>
Federal ......................................................... $ (370) $ 420 $ 500
State ........................................................... (245) 105 110
------- ------ -----
(615) 525 610
Deferred:
Federal ......................................................... (830) 915 (130)
State ........................................................... (205) 262 (30)
------- ------ -----
(1,035) 1,177 (160)
------- ------ -----
$(1,650) $1,702 $ 450
======= ====== =====
</TABLE>
<PAGE>
A reconciliation of taxes computed at the statutory federal income tax rate to
income tax expense (benefit) follows (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------
1999 1998 1997
----------- -------- -----------
<S> <C> <C> <C>
Provision (benefit) computed at federal statutory rate.................. $(3,046) $1,446 $ 415
Research and development tax credit..................................... -- -- (28)
California franchise tax expense (benefit), net of federal effect....... 1 242 53
Nondeductible expenses.................................................. 1,395 14 10--
------- ------ -----
$(1,650) $1,702 $ 450
======= ====== =====
</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, 1999 and 1998 are (in
thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
----------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ................................ $ 1,856 $ --
Accounts receivable reserve ..................................... 214 135
Inventory reserves .............................................. 28 53
Accrued expenses ................................................ 128 166
------- -------
Total deferred tax assets ......................................... 2,226 354
Valuation allowance ............................................... (1,714) --
------- -------
Net deferred tax assets ........................................... 512 354
Deferred tax liabilities:
Tax over book depreciation ...................................... (262) (882)
Installment gain ................................................ (250) (507)
------- -------
Total deferred tax liabilities .................................... (512) (1,389)
======= =======
Net deferred tax assets (liabilities) ............................. $ -- $(1,035)
======= =======
</TABLE>
Realization of deferred tax assets is dependent upon future earnings, the
timing and amount of which are uncertain. Accordingly, deferred tax assets have
been offset by a valuation allowance to reflect these uncertainties. The
valuation allowance for deferred tax assets increased approximately $1,714,000
during the year ended December 31, 1999.
As of December 31, 1999, the Company had net operating loss carryforwards for
federal and state tax purposes of approximately $4,700,000 and $4,100,000,
respectively. The federal and state net operating loss carryforwards will expire
at various dates beginning in 2004 through 2019, if not utilized.
Utilization of the net operating loss carryforwards may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986, as amended, and similar state provisions.
The annual limitation may result in the expiration of net operating loss
carryforwards before utilization.
6. Stockholders' Equity
During 1999, the Series A preferred stock was exchanged for a new Series D
preferred stock.
In connection with its issuance of Series D preferred stock, the Company
granted 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. Stockholders
exercised rights to sell 5,908,707 shares back to the Company at an aggregate
price of approximately $9.7 million. Of the total common shares repurchased, a
total of 1,497,389 shares of
<PAGE>
common stock, issued upon the conversion of 13,221 shares of Series B preferred
stock and 1,431,284 shares of Series D preferred stock, were repurchased at an
amount in excess of the stated value of the underlying preferred stock. This
excess amount, $1,941,000, has been treated as a return to the stockholders and
deducted from net income (loss) on the accompanying statement of operations in
order to derive income (loss) available to common stockholders. Rights to sell
back 83,253 shares at an aggregate price of $136,500 expired on September 30,
1999.
In January 1999, the Company also issued 8,536,585 shares of Series C
preferred stock for approximately $13,809,000 net of issuance costs.
On November 17, 1999, the Company completed an initial public offering (the
"IPO") of approximately 5.75 million shares of its common stock, generating
proceeds of approximately $40.6 million, net of offering expenses. The offering
proceeds were used for general corporate purposes.
Under the terms of the Company's restated Certificate of Incorporation in
effect at the time of the IPO, each share of each class of issued and
outstanding capital stock of the Company automatically converted to common stock
upon the consummation of the IPO on November 17, 1999.
In March 1994, the Company granted a warrant to purchase 22,750 shares of
Series B preferred stock which was converted into 113,750 shares of common
stock) at $1.03 per share in connection with obtaining a line of credit. In
December 1999, 112,388 shares of common stock were issued upon the net exercise
of the warrant.
Stock Option and Stock Issuance Plan
The 1999 Stock Option/Issuance Plan (the 1999 Stock Option Plan) has 7,305,968
shares reserved for issuance as of December 31, 1999. Under the 1999 Stock
Option Plan, the Board of Directors is authorized to grant incentive stock
options or nonqualified stock options to eligible employees, members of the
Board of Directors, and consultants, although incentive stock options may be
granted only to employees. Incentive stock options may be granted at an
exercise price of not less than 100% of the fair market value of common stock
on the date of grant while nonqualified stock options may be granted at a
price not less than 85% of the fair market value of the common stock. Options
generally vest 25% after the first year and 2.1% per month thereafter, then
expire no later than ten years from the date of grant.
Under the 1999 Stock Option Plan, the Board of Directors is authorized to
issue shares of common stock to eligible employees, members of the Board of
Directors, and consultants. Options may be granted at a price not less than 85%
of the fair value of the common stock. Shares of common stock issued under the
1999 Stock Option Plan may be fully vested upon issuance or may vest in one or
more installments over the participant's period of service.
A summary of activity under the Plan is as follows:
<TABLE>
<CAPTION>
Weighted
---------
Average
---------
Options Price
------------- ---------
Outstanding Per Share
------------- ---------
<S> <C> <C>
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
---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Balance at December 31, 1998 ........................................................ 3,251,391 $0.23
Granted ........................................................................... 2,765,428 $4.68
Exercised ......................................................................... (956,525) $0.32
Canceled .......................................................................... (685,073) $2.42
---------
Balance at December 31, 1999 ......................................................... 4,375,221 $2.68
=========
</TABLE>
At December 31, 1999, 2,930,747 shares were available for future grant under
the Plans.
The following summarizes information about stock options outstanding as of
December 31, 1999:
Options Outstanding
----------------------------------------
Weighted
Average
Remaining
Contractual
Outstanding Life (in Number
Exercise Price Number Years) Exercisable
- -------------- ------------ ------------ ------------
$0.06 ............... 1,005,296 5.66 1,005,149
$0.32 ............... 549,513 6.55 460,629
$0.44 ............... 588,408 8.25 312,311
$0.50 - $0.83 ....... 203,422 9.08 40,739
$1.64 ............... 467,738 9.30 50,000
$2.50 ............... 477,625 9.47 25,000
$6.50 ............... 22,300 9.61 --
$8.00 ............... 697,975 9.88 349
$9.00 ............... 350,944 9.74 26,090
$21.13 .............. 12,000 9.97 --
--------- ---------
4,375,221 8.12 1,920,267
========= =========
In connection with the grant of certain options to employees during the year
ended December 31, 1999, the Company recorded deferred compensation expense of
approximately $2.0 million based on the difference between the exercise prices
of those options at their respective grant dates and the deemed fair value for
accounting purposes of the shares of common stock subject to such options. This
amount is included as a reduction of stockholders' equity and is being amortized
on the graded vesting method over the vesting period of the options.
Compensation expense of $682,000 recognized during the year ended December 31,
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.
As discussed in Note 1, the Company has elected to follow the intrinsic value
method to account for its employee stock options because, as discussed below,
the alternative fair value accounting method requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
the intrinsic value method, 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 concerning the fair value of the Company's options was
estimated at the grant date using the Black-Scholes method option pricing model
with the following weighted-average assumptions for the years ended December 31,
1999, 1998 and 1997: dividend yield of 0%; expected life of 4 years; volatility
of 1.3358%, 0% and 0%; and weighted average risk-free interest rate of
approximately 6.0%,, 5.0% and 5.5%, respectively. Pro forma information is as
follows (in thousands, except per share amounts):
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
Pro forma net income (loss) ........... $(11,778) $2,499 $ 740
======== ====== =====
Pro forma net income (loss) per share:
--basic ............................. $ (0.55) $ 0.12 $0.04
======== ====== =====
--diluted ........................... $ (0.55) $ 0.08 $0.02
======== ====== =====
</TABLE>
The weighted-average fair value of options granted during 1999, 1998 and 1997
was $4.46, $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 nine-months ended September 30, 1999 with an
exercise price below the deemed fair value of the Company's common stock on the
date of grant was $2.56.
7. Related Party Transactions
One of the Company's clients owns approximately 11% of our outstanding common
stock as of December 31, 1999 and its Chairman of the Board serves as a
Director of the Company. During 1999, 1998 and 1997, the Company purchased
inventories and service agreements from its Series A and D preferred
stockholder at a cost of $17.5 million, $15.9 million and $15.6 million,
respectively. At December 31, 1999 and 1998, the Company owed that stockholder
$1.7 million and $1.0 million, respectively, for such purchases. Also, during
1999, 1998 and 1997, the Company received marketing development fund
reimbursements of $992,000, $982,000, and $995,000 respectively, from that
stockholder. Amounts totaling $257,000, and $341,000 were receivable from that
stockholder at December 31, 1999 and 1998, respectively. Management believes
that these transactions were conducted on terms that would have been obtained
if the parties were dealing at arms length.
8. Employee Benefit Plan
The Company has a defined contribution benefit plan established under the
provisions of Section 401(k) of the Internal Revenue Code. All employees may
elect to contribute up to 20% of their compensation to the plan through salary
deferrals. The Company matches 25% of the first 6% of the employee's
compensation contributed to the plan. During the years ended December 31, 1999,
1998 and 1997, the Company made cash contributions to the plan of $103,000,
$62,000, and $37,000, respectively.
Schedule II - Valuation and Qualifying Accounts
A schedule of the allowance for sales returns and doubtful accounts is
presented below (in thousands):
<TABLE>
<CAPTION>
Additions
Balance at Charged Write-offs Balance at
Beginning to Costs and End
Description of Year and Expenses Recoveries of Year
- ----------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Allowance for sales returns
and doubtful accounts:
Year ended December 31, 1999 $314 $299 $ 77 $536
Year ended December 31, 1998 $298 $286 $270 $314
Year ended December 31, 1997 $156 $338 $196 $298
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Scotts
Valley, State of California, on the 29th day of March, 2000.
RAINMAKER SYSTEMS, INC.
By: /s/ Michael Silton
-------------------------------------
Michael Silton,
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report
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, March 29, 2000
- -------------------------------------- President and Chief
Michael Silton Executive Officer
(principal executive
officer)
/s/ Martin Hernandez Secretary and Chief March 29, 2000
- -------------------------------------- Financial Officer
Martin Hernandez (principal financial
and accounting officer)
/s/ Alok Mohan Director March 29, 2000
- --------------------------------------
Alok Mohan
/s/ Peter Silton Director March 29, 2000
- --------------------------------------
Peter Silton
/s/ Andrew Sheehan Director March 29, 2000
- --------------------------------------
Andrew Sheehan
</TABLE>
<PAGE>
EXHIBIT INDEX
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.
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.
<PAGE>
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** Form of Notice of Grant of Stock Option
10.21*** Form of Stock Option Agreement
23.1 Consent of Ernst & Young LLP.
23.2 *Consent of Brobeck, Phleger & Harrison LLP.
24.1 *Power of Attorney (contained on the signature page hereof).
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the fourth quarter of 1999.
- --------
* 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.
2
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-91905)pertainig to the 1999 Stock Incentive Plan and 1999 Employee
Stock Purchase Plan of Rainmaker Systems, Inc. of our report dated January
26,2000, with respect to the financial statements and schedules of Rainmaker
System, Inc. included in the Annual Report (Form 10-K) for the year ended
December 31, 1999.
/s/ ERNST & YOUNG LLP
San Jose, CA
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AND STATEMENTS OF OPERATIONS FILED AS PART OF THIS FORM 10-K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 41,129 4,608
<SECURITIES> 2,756 0
<RECEIVABLES> 8,728 7,195
<ALLOWANCES> (536) (314)
<INVENTORY> 637 4
<CURRENT-ASSETS> 55,328 14,028
<PP&E> 5,128 3,415
<DEPRECIATION> (2,755) (1,078)
<TOTAL-ASSETS> 57,867 17,209
<CURRENT-LIABILITIES> 11,569 8,905
<BONDS> 0 996
0 977
0 0
<COMMON> 38 21
<OTHER-SE> 45,170 4,479
<TOTAL-LIABILITY-AND-EQUITY> 57,867 17,209
<SALES> 60,665 50,377
<TOTAL-REVENUES> 60,665 50,377
<CGS> 41,539 35,331
<TOTAL-COSTS> 28,989 13,457
<OTHER-EXPENSES> 80 (2,525)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (774) (138)
<INCOME-PRETAX> (8,959) 4,252
<INCOME-TAX> (1,650) 1,702
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,309) 2,550
<EPS-BASIC> (0.49) 0.12
<EPS-DILUTED> (0.49) 0.09
</TABLE>
