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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-
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RAINMAKER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0442860
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1800 Green Hills Road
Scotts Valley, California 95066
(address of principal executive offices) (zip code)
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)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
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. [_]
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of February 28, 2001, was $44,398,517 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 28, 2001, registrant had outstanding 38,044,716 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed by Registrant with the
Securities and Exchange Commission within 120 days of Registrant's fiscal year
ended December 31, 2000 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 assume no obligation to update such forward-looking statements
publicly for any reason even if new information becomes available in the
future.
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RAINMAKER SYSTEMS, INC.
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
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PART I.
Item 1. Business..................................................... 4
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.......................................... 11
Item 6. Selected financial data...................................... 13
Item 7. Management's discussion and analysis of financial condition
and results of operations.................................... 14
Item 7A. Qualitative and quantitative disclosures about market risk... 26
Item 8. Financial statements and supplementary data.................. 27
Item 9. Changes and disagreements with accountants on accounting and
financial disclosure......................................... 27
PART III.
Item 10. Directors and executive officers of the registrant........... 28
Item 11. Executive compensation....................................... 28
Item 12. Security ownership of certain beneficial owners and
management................................................... 28
Item 13. Certain relationships and related transactions............... 28
PART IV.
Item 14. Exhibits, financial statements schedules, and reports on Form
8-K.......................................................... 29
Signatures................................................... 50
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PART I
ITEM 1. BUSINESS
Introduction
Rainmaker Systems, Inc. ("Rainmaker") is a leading outsource provider of
Internet-enabled sales and marketing services. We deliver targeted programs to
maximize revenue per customer and strengthen customer loyalty. Our Contract
Renewals PlusSM and Education Sales PlusSM services optimize the sales and
management of support contracts, software subscriptions and training
offerings. By integrating technology, processes and people, Rainmaker provides
a transparent customer relationship infrastructure for its clients.
On January 8, 1991, Rainmaker filed its initial Articles of Incorporation
with the California Secretary of State. On October 29, 1999, we reincorporated
in the State of Delaware.
Industry Background
Businesses are recognizing the value of improving their customer
relationships to increase revenue and customer loyalty. For technology
companies, this revenue and loyalty is often the result of customers
purchasing support contracts, software subscriptions and training. The
contracts and training are a source of revenue for technology companies, and
customers who take advantage of training and support are more loyal customers
since they get the most from their products. According to industry analysts,
within the United States, the market for hardware and software support and
training are expected to grow significantly. Dataquest estimates that the
software support and maintenance market in the US will grow from $25 billion
in 2000 to $42 billion in 2003. IDC forecasts that in the US, approximately
$15 billion will be spent on hardware support and installation services per
year through 2003. In addition, IDC estimates that information technology
education and training revenue in the US will increase from $11 billion in
2000 to $17 billion in 2004.
As technology companies evaluate the resources needed to deploy sales and
marketing programs for support contracts and training, they find a significant
commitment is required for technology, building expertise and staffing. They
must also decide what level of internal resource to devote to building
existing customers relationships and the level to commit to other corporate
priorities such as acquiring new customers and developing new products.
According to Dun and Bradstreet, companies faced with this type of resource
dilemma are finding it advantageous to focus on their core strengths and to
outsource their non-core functions to others with expertise in those specific
areas. Recently, outsourcing has moved from traditional functions such as
manufacturing and facilities management to critical areas such as customer
service. According to IDC, US revenues from outsourced customer relationship
management services will grow from $15 billion in 2000 to $38 billion in 2004;
this amounts to a compounded annual growth rate of approximately 26%.
The Rainmaker Solution
We specialize in Internet-enabled sales and marketing services on an
outsourced basis for technology companies. In addition to sales and marketing,
our services also include back office support for all the financial,
fulfillment and IT related functions. Our services to our technology clients
are designed to increase the revenue from their support contracts, software
subscriptions and training, and to enhance their customer relationships. By
selecting Rainmaker to focus on this aspect of their business, clients are
able to focus their attention on other business priorities.
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 services incorporate the following
distinguishing characteristics:
. Combination of Technology, Process and People. We offer our clients
comprehensive services that combine technology infrastructure with
established processes and a dedicated staff to establish frequent
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personalized contact with 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, direct mail, fax and telephone campaigns. Our
processes are designed to successfully market support contracts,
software subscriptions, and training services throughout all points of
the customer life cycle.
. Database Expertise. We use our proprietary database expertise to combine
clients' disparate databases into an integrated view of their contract
and training customers. Once this singular view is developed, we
thoroughly analyze the characteristics of the customer base and identify
the best approach to segmenting and stratifying the database for
effective marketing programs. We continue to enhance the customer data
with information we uncover through profiling and regular contact. This
enhanced customer information increases our ability to refine the
targeting of our sales and marketing services. We also feed this
enhanced data back to our clients so they have the benefit of a richer
customer profile.
. Expertise in Technology Markets. Our understanding of technology
customer buying behavior and industry-specific marketing strategies is
built upon years of experience and millions of customer contacts. This
focus on technology benefits our hardware and software clients through
reduced program implementation times and the sharing of best practices
from our collective experience.
. Pay-for-Performance Contracts. We provide our services primarily under
pay-for-performance arrangements in which our revenue is based on our
ability to sell our clients' products and services to their customers.
Clients can also purchase complementary services, such as additional
data base management and supplementary marketing programs, on a fee
basis. We believe that this business model 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
needs and increase our ability to maximize revenue per customer.
The Rainmaker Strategy
Our objective is to strengthen our leadership position in providing
outsourced sales and marketing services to technology companies. The following
are the key elements of our strategy:
. Sign New Clients. We will continue to emphasize our hardware and
software industry focus while seeking to expand the scope of this
expertise. Over the past year we have refined our targeting for new
clients to include a rigorous analysis of the prospect's business
opportunities and challenges. Since our sales process now begins with
significant discovery and collaboration with prospects, we are able to
quickly tell which prospects warrant formal data analysis and can
develop a proposal that specifically addresses their needs. We believe
that our expertise in providing services to the installed customer base
of our existing clients enhances our ability to help new clients use our
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.
. 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 services.
. Grow Our Revenue from Education Sales. Our revenues from sales of our
clients' education offerings grew from $300,000 in 1999 to $10.4 million
in 2000. For 2000, this represented 18% of total revenue. For 1999,
education sales represented less than 1% of total revenue. We believe
that major technology companies are looking for ways to improve the
attendance at their instructor-led classes and to increase utilization
of their web-based training. We intend to grow revenue from education
sales by demonstrating the value of our specialized knowledge and expert
systems to these companies and identifying that outsourcing to Rainmaker
is a solid approach for achieving their goals.
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. Improve Productivity. We will continue to identify ways to streamline
our processes and deploy technology to increase the productivity of our
staff and to deliver our services more efficiently. One measure of this
improved productivity is gross profit per average customer telesales
representative, which increased from $65,000 in the first quarter of
2000 to $78,000 in fourth quarter of 2000.
Services
Our services combine a technology infrastructure, established processes,
and highly trained, 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 service and support contracts, software
subscriptions, and training services. We implement these services using a
variety of proprietary systems and communication channels, including Web site
and e-mail interaction, fax, personal assistance and direct mail. The
objective of our 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 services that meet the needs of the customer.
Rainmaker's primary service offerings are Contract Renewals Plus and Education
Sales Plus. During 2000, Contract Renewals Plus generated 54% of Rainmaker's
total revenue; Education Sales Plus generated 18% of Rainmaker's total
revenue.
Contract Renewals Plus ("CRP"), Rainmaker's sales and marketing services
for time-based contracts, is designed to provide the programs and expertise
organizations need to drive revenue and maintain a competitive advantage. In
selecting Rainmaker's proven, best-practice programs for service and support
contracts and subscriptions, organizations can focus their time and resources
on other business priorities knowing that their contract renewals are in
expert hands.
Within CRP, there are three specialized sales and marketing services:
Renewal, Attach, and Rescue. The Renewal service is designed to maximize the
number of customers who renew their contracts and ensure customers purchase
the most appropriate level of contract. The Attach service encourages new
product purchasers to also purchase a support contract or software
subscription. The Rescue service reaches out to existing customers who are not
on a contract to help them understand a contract's value and to get them to
purchase.
Education Sales Plus ("ESP"), Rainmaker's sales and marketing services for
training offerings, such as instructor-led and web-based training, provides
innovative programs that build customer loyalty, drive demand and close sales.
Clients provide their course catalog and customer list, and Rainmaker does the
rest to drive attendance and increase revenues.
Within ESP, there are three services geared to increase education revenue
for clients. The Continuing Education service targets current education
customers to continue to purchase additional training classes. The Attach
service is geared to sell education offerings to new customers as a companion
to their product purchase. The Rescue service encourages long-standing
customers who have not purchased training to take advantage of training
options.
Within both CRP and ESP, Rainmaker generates additional sales and
cultivates closer customer relationships through innovative sales and
marketing programs that include:
. Web Site and E-mail Interaction. Rainmaker's client-branded web sites
and e-mail interaction allow customers to obtain key information and
purchase online. Rainmaker develops a Web presence managed and operated
by Rainmaker that reflects the look and feel of our clients' corporate
branding. E-mail campaigns include links to personalized Web pages, and
alert customers of product enhancements, new courses and schedule
changes, special promotions or upcoming renewal dates.
. Fax and Direct Mail Marketing. In addition to web and e-mail, Rainmaker
uses compelling marketing programs, including traditional mail and fax
campaigns. These campaigns alert customers to service and course
enhancements, special promotions and renewal opportunities.
6
. Personal Assistance and Telesales. Rainmaker is expert at creating
sophisticated outbound calling programs. We also provide sales
assistance to customers who e-mail, call or fax in response to marketing
campaigns. Our client teams are extensively trained to answer questions,
provide detailed product information, pursue up-sell and cross-sell
opportunities and close orders.
As part of CRP and ESP, Rainmaker also offers back office services to
handle the financial aspects of the sale such as invoicing and payment
processing, and physical and electronic fulfillment.
While not part of Rainmaker's core CRP and ESP services, Rainmaker also
sells and markets upgrades and new software licenses for some clients. Our
sales and marketing services for these products are delivered via the web, e-
mail, fax, direct mail and telesales and are supported by our full back office
services.
Our Clients
Our clients consist of hardware and software companies with significant
installed customer bases and products that benefit from focused sales and
marketing programs for support contracts, software subscriptions, or training.
Our clients as of December 31, 2000 are listed below:
Client Name Client Since
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The Santa Cruz Operation, Inc. ............................ January 1995
Sun Microsystems, Inc. .................................... March 1997
Network Computing Devices, Inc. ........................... May 1997
Novell, Inc. .............................................. April 1998
Sybase, Inc. .............................................. March 1999
Lotus Development Corporation, a subsidiary of IBM ........ May 1999
PumaTech, Inc. ............................................ July 1999
Parametric Technology Corporation ......................... October 1999
Motorola, Inc. ............................................ August 2000
Hewlett Packard Company ................................... September 2000
3Com Corporation .......................................... October 2000
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, 2000, we had 15
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.
In selling and marketing our clients' products and services to their
customers, as of December 31, 2000, we had 69 trained telesales personnel who
proactively work with customers to understand their business issues, identify
solutions and close sales for our clients. Marketing programs, including web,
e-mail, direct mail and fax, are designed to address key needs and buying
cycles and drive demand.
Service and Technology Development
We set a high priority on developing new service offerings and providing
continued enhancements of existing features and functionality for our clients
and their installed customer bases and also to drive improved productivity for
our operational groups. Our goal is to continue extending our current
capabilities for contract renewals and education sales. Service development
cycles begin when an individual or team receives or conceives an idea through
interaction with prospective or existing clients, customers and existing
systems or processes. The product management team filters and prioritizes
these ideas, working closely with executive management, business operations
teams and the technology development group.
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After new offerings or enhancements to existing 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, documentation and testing of
new offerings. In addition, the teams establish pricing strategies, business
process changes, marketing materials, training and rollout plans. Upon
completion of testing, services are rolled out initially to one client or a
select customer segment.
Competition
The market for solutions to drive revenue from installed base customers and
build relationships with those customers is intensely competitive and subject
to rapid change. While we participate in a rapidly changing and intensely
competitive market, we believe that no single competitor has amassed the full
complement of integrated services for our targeted markets. In addition to the
competitors listed below, we face competition from internal departments of
current and potential clients. Our competitors have a variety of strategic
business and pricing models including:
. Custom-built and Tailored Point Solutions. Comprehensive system
integrators, such as Accenture (formerly Andersen Consulting) and
Sapient Corporation, implement either in-house systems, incorporating
point solutions from companies such as E.piphany, Inc., Kana
Communications, Inc., Oracle Corporation, Saba Software, Inc. and Siebel
Systems, 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 Corporation, and Viant Corporation, 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 Various 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 Corporation,
Digital River, Inc., and Intraware, Inc.; telesales, marketing campaign
management and fulfillment services from APAC Customer Services, Inc.,
Convergys Corporation, Digital Impact, Inc. Harte-Hanks, Inc., Modus
Media International, Inc. and Sitel Corporation.
The principal competitive factors affecting our market include the return
on investment from the implementation of the service and the breadth,
performance, scalability and reliability of the service once implemented.
Although we believe that our pay-for-performance model, ease of integration
and comprehensive service offering currently competes favorably with respect
to these factors, our market is relatively new and evolving rapidly.
Intellectual Property and Proprietary Rights
We protect our intellectual property through a combination of trademark,
service mark, trade name and copyright protection, trade secret protection and
confidentiality agreements with our employees and independent contractors, and
have procedures to control access to and distribution of our technology,
documentation and other proprietary information and the proprietary
information of our clients. Effective trade name, trademark, service mark,
copyright and trade secret protection may not be available in every country in
which our services and products are made available on-line. The steps we take
to protect our proprietary rights may not be adequate and third parties may
infringe or misappropriate our copyrights, trade names, trademarks, service
marks and similar proprietary rights. In addition, other parties may assert
claims of infringement of intellectual property or other proprietary rights
against us. The legal status of many aspects of intellectual property on the
Internet is currently uncertain. We have applied for registration of the
service mark "Rainmaker Systems," "Contract Renewals Plus," and "Education
Sales Plus" in the United States and certain foreign countries.
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Government Regulation
We are subject, both directly and indirectly, to various laws and
governmental regulations relating to our business. In addition, 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, 2000, we employed 191 persons. Our 104 service delivery
personnel are responsible for promoting and selling our clients' products and
building relationships with our clients' customers. Our 15 sales and marketing
employees are responsible for promoting our services to new and existing
clients. We also have 28 product development and information technology
personnel who develop the computer, Internet, Web and telecommunications
infrastructure that provides the foundation for our service offerings. Our
remaining 44 employees are in general administration and finance. 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.
Financial Information About Geographic Areas
Rainmaker primarily operates in one geographical segment, North America.
Substantially all of our sales are made to customers in the United States of
America. See "Segment Reporting" in Note 1 to the Notes to Financial
Statements.
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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
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Rainmaker's common stock is traded on the Nasdaq National Market under the
symbol RMKR. 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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2000:
First quarter............................................. $19.38 $ 8.00
Second quarter............................................ $ 7.63 $ 2.25
Third quarter............................................. $ 3.06 $ 1.56
Fourth quarter............................................ $ 2.47 $ 0.78
1999:
Fourth quarter (from November 17, 1999)................... $27.25 $16.00
As of February 28, 2001, we had approximately 200 common stockholders of
record. On February 28, 2001, the last reported sale price of the Rainmaker's
common stock on the Nasdaq National Market was $1.88 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
On February 12, 1999, we issued 8,536,585 shares of Series C preferred
stock at $1.64 per share for an aggregate price of approximately $14 million
to certain accredited investors.
On February 12, 1999, we issued 5,717,470 shares of Series D preferred
stock to The Santa Cruz Operation, Inc. ("SCO") in exchange for all of the
securities previously held by SCO, including a convertible debenture in the
principal amount of $995,529, warrants to purchase 2,844,370 shares of common
stock and Series A preferred stock convertible into 2,873,100 shares of common
stock.
Between January 1, 1996 and November 17, 1999, we 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. Between January 1, 1996 and November 17, 1999, 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 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.
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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, Rainmaker 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 (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 Rainmaker (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, we paid $3,220,000 in underwriting
discounts and commissions to the Underwriters and other related expenses of
$2,207,000. Approximately $13.2 million of the proceeds have been used for
operating activities and $7.2 million of the proceeds have been used for
capital expenditures from January 1, 2000 through December 31, 2000.
Approximately $2.0 million of the proceeds were used for operating activities
and $220,000 of the proceeds were used for capital expenditures during 1999
after the initial offering. The balance of such proceeds is to be used for
general corporate purposes to support business expansion including new client
acquisition, capital expenditures, development of new services and possible
expansion into international markets. 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 Rainmaker'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
Rainmaker, or an affiliate of Rainmaker.
12
ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31,
---------------------------------------------
2000 1999 1998 1997 1996
-------- -------- ------- ------- -------
(in thousands, except per share data)
Statement of Operations Data:
Revenue:
CRM services................... $ 59,371 $ 60,665 $44,212 $22,515 $12,384
Catalog/distributor(1)......... -- -- 6,165 16,985 14,551
-------- -------- ------- ------- -------
Total revenue................. 59,371 60,665 50,377 39,500 26,935
Cost of revenue:
CRM services................... 42,508 41,539 30,196 14,810 7,929
Catalog/distributor(1)......... -- -- 5,135 13,575 11,370
-------- -------- ------- ------- -------
Total cost of revenue......... 42,508 41,539 35,331 28,385 19,299
Gross profit:
CRM services................... 16,863 19,126 14,016 7,705 4,455
Catalog/distributor(1)......... -- -- 1,030 3,410 3,181
-------- -------- ------- ------- -------
Total gross profit............ 16,863 19,126 15,046 11,115 7,636
Selling, general and
administrative expenses......... 38,150 28,939 13,457 9,828 6,954
Restructuring charge............. 675 -- -- -- --
-------- -------- ------- ------- -------
Operating income (loss).......... (21,962) (9,813) 1,589 1,287 682
Interest income (expense),
net........................... 1,756 774 138 (66) (35)
Gain from sale of
catalog/distributor(1)........ 50 80 2,525 -- --
-------- -------- ------- ------- -------
Income (loss) before income
taxes........................... (20,156) (8,959) 4,252 1,221 647
Income tax expense (benefit)..... -- (1,650) 1,702 450 216
-------- -------- ------- ------- -------
Net income (loss)................ (20,156) (7,309) 2,550 771 431
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.................... $(20,156) $(10,515) $ 2,514 $ 771 $ 431
======== ======== ======= ======= =======
Net income (loss) per share(2):
Basic.......................... $ (0.52) $ (0.49) $ 0.12 $ 0.04 $ 0.02
======== ======== ======= ======= =======
Diluted........................ $ (0.52) $ (0.49) $ 0.09 $ 0.03 $ 0.02
======== ======== ======= ======= =======
Number of shares used in per
share calculations(2):
Basic.......................... 38,798 21,300 21,004 21,019 21,009
======== ======== ======= ======= =======
Diluted........................ 38,798 21,300 30,356 29,943 29,600
======== ======== ======= ======= =======
As of December 31,
---------------------------------------------
2000 1999 1998 1997 1996
-------- -------- ------- ------- -------
Balance Sheet Data:
Cash, cash equivalents and short-
term investments................ $ 22,879 $ 43,885 $ 4,608 $ 269 $ 1,259
Working capital.................. 17,546 43,759 5,123 1,307 1,257
Total assets..................... 42,222 57,867 17,209 11,912 8,233
Long-term debt and capital lease
obligations, less current
portion......................... 1,041 1,090 1,438 1,278 1,065
Redeemable preferred stock....... -- -- 977 977 977
Total stockholders' equity....... 25,283 45,208 4,500 1,852 1,078
- --------
(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.
13
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 Rainmaker Systems, Inc. ("Rainmaker") should be read in
conjunction with "Selected Financial Data" and Rainmaker'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
Rainmaker Systems, Inc. ("Rainmaker") is a leading outsource provider of
Internet-enabled sales and marketing services. Rainmaker delivers targeted
programs to maximize revenue per customer and strengthen customer loyalty. Our
Contract Renewals Plus(SM) and Education Sales Plus(SM) services optimize the
sales and management of support contracts, software subscriptions and training
offerings. By integrating technology, processes and people, Rainmaker provides
a transparent customer relationship infrastructure for its clients.
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 The Santa Cruz Operation,
Inc. ("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 customer relationship management
("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
remaining $800,000 balance was paid in May 2000.
In 1998, we 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. In 1999 and
2000, we recorded additional gains of approximately $80,000 and $50,000,
respectively, based on receipt of remaining sales proceeds paid to us.
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. SAB 101 was required to
be adopted by Rainmaker in the fourth quarter of 2000 with retroactive
adoption as of January 1, 2000. We believe our revenue recognition policies
conform to the requirements of SAB 101 and, therefore, our adoption did not
have a material impact on our revenue or results of operations in 2000.
Concurrent with the adoption of SAB 101, Rainmaker also adopted the
Financial Accounting Standards Board's Emerging Issues Task Force Issue No.
99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent" ("EITF
99-19"). EITF 99-19 interprets SAB 101 and addresses when a company should
report revenue as the gross amount billed to a customer versus the net amount
earned by the company in the transaction. Specific "indicators" should be used
by companies to determine if it is more appropriate for them to record
revenues on a "gross" versus a "net" basis. These "indicators" include, but
are not limited to, 1) whether the vendor is the primary obligor in the
transaction, 2) whether the vendor assumes general inventory risk, and 3)
whether the vendor has latitude for setting the pricing for the goods or
services its sells to its customers. Absence of these
14
indicators might indicate that revenue should be recorded on a "net" basis.
Substantially all of our sales transactions are reported under the "gross"
method based on amounts billed to our customers as we take title and assume
risk of loss for products sold and assume the full credit risk and establish
pricing for the products and services we sell. However, we also sell products
and services on behalf of customers of our clients whereby, based on the
evaluation of the same indicators, we record revenue net equal to the amount
earned in the transaction. Our current revenue reporting practices are
consistent with the revenue reporting criteria established in EITF 99-19. The
adoption of EITF 99-19 did not have a material impact on our reported
revenues.
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. Substantially all of our
sales transactions are reported under the "gross" method, which is based on
the total purchase price billed by us to customers for our clients' products
and services. Revenue from the sale of service contracts and maintenance
renewals is recognized when a purchase order from the end user is received;
the service contract or maintenance agreement is delivered; the collection of
the receivable is reasonably assured; 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. Revenue from sales of new
clients' products and services typically increases over several quarters
before reaching a more moderate level of growth. However, revenue growth 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 and costs associated with
fee-based revenues. Costs associated with fee-based revenues consist primarily
of salaries and other personnel-related expenses. The costs of these products
and services can be 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 can be 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 can improve.
Selling, general and administrative expenses primarily include 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 and 2000.
During 1999 and 2000, we incurred increasing operating and net losses as we
increased 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 some time before significant
revenue is generated. In late 2000, we repackaged our service offering to
include fee-based pricing. We now charge for many of these costs; however,
these costs could have an adverse effect on our future financial condition and
operating results, depending on market acceptance of new service combinations
and pricing options.
15
Results of Operations
The following table presents, for the periods given, selected financial
data as a percentage of our revenue.
Years Ended December 31,
------------------------------
2000 1999 1998
-------- -------- --------
Revenue:
CRM services............................. 100.0 % 100.0 % 87.8%
Catalog/distributor...................... -- -- 12.2
-------- -------- --------
Total revenue.......................... 100.0 100.0 100.0
Cost of revenue:
CRM services............................. 71.6 68.5 68.3
Catalog/distributor...................... -- -- 83.3
-------- -------- --------
Total cost of revenue.................. 71.6 68.5 70.1
Gross profit:
CRM services............................. 28.4 31.5 31.7
Catalog/distributor...................... -- -- 16.7
-------- -------- --------
Total gross profit..................... 28.4 31.5 29.9
Selling, general and administrative
expenses.................................. 64.3 47.7 26.8
Restructuring charge....................... 1.1 -- --
-------- -------- --------
Operating income (loss).................... (37.0) (16.2) 3.1
Interest income (expense), net........... 3.0 1.3 0.3
Gain from sale of catalog/distributor.... 0.1 0.1 5.0
-------- -------- --------
Income (loss) before income taxes.......... (33.9) (14.8) 8.4
Income tax expense (benefit)............. -- (2.8) 3.3
-------- -------- --------
Net income (loss).......................... (33.9)% (12.0)% 5.1%
======== ======== ========
Comparison of Years Ended December 31, 2000 and 1999
CRM Services Revenue. Revenue from CRM services decreased 2.1% to $59.4
million for 2000 from $60.7 million for 1999. This decrease is primarily due
to a decline in business from our largest client and to clients who we
discontinued provided services to in 2000. In late 2000, we decided to focus
our resources on clients with which we can maintain profitable business
relationships. Since January 1, 2000, six new clients were signed which
accounted for $1.6 million of revenue during 2000. This compares to seven new
clients which were signed in 1999 and accounted for $14.4 million of revenue
during that year. During 2000, revenue from CRM services sold to customers of
existing clients (clients for which we generated revenue during 1999)
decreased a net amount of $2.9 million. Revenue from our largest client
decreased $14.9 million from 1999 to 2000. One client signed in the fourth
quarter of 1999 generated $137,000 in revenue during 1999 and $9.8 million
during 2000 and is not included in the $1.6 million of revenue noted above for
clients signed since January 1, 2000.
CRM Services Gross Profit. Gross profit from CRM services decreased 11.8%
to $16.9 million for 2000, from $19.1 million for 1999. Gross margin from CRM
services decreased to 28.4% in 2000 compared to 31.5% during 1999. The
decrease in gross margin is due primarily to a change in service and product
mix and a change in the mix of new and existing clients with lower margins on
sales of services. Gross margin in the third and fourth quarters of 2000 was
28.1% and 31.0%, respectively.
Selling, General and Administrative Expenses. Excluding restructuring
charges, selling, general and administrative expenses increased 31.8% to $38.2
million for 2000 from $28.9 million for 1999. As a percentage of total
revenue, these expenses increased to 64.3% for 2000 from 47.7% in 1999. The
percentage increase was primarily attributable to the strategic decision to
increase personnel (40 additional average number of personnel
16
during 2000 as compared to 1999), and to increase levels of investment in
systems, infrastructure and product development, all of which are designated
to support recent and anticipated new client growth and new service offerings
and deliver a more robust infrastructure to support that growth.
Restructuring. During the second quarter of 2000, we recorded a
restructuring charge of $0.9 million or $0.02 per share, in connection with a
restructuring program, approved by the Board of Directors during the quarter,
designed to accelerate a return to profitability. The program resulted in a
reduction of 22 positions at all levels in Rainmaker. $0.7 million of the
charge was related to cash severance payments. The restructuring was complete
as of December 31, 2000. The remaining $0.2 million of the charge was not used
and was reversed in the fourth quarter of 2000.
Below is a table summarizing activity related to the restructuring charge
(in 000's):
Severance Legal
and benefits and other Total
------------ --------- -----
Q2 2000 Provision............................ $ 743 $ 125 $ 868
Cash payments.............................. (625) (50) (675)
Reverse unused accruals.................... (118) (75) (193)
----- ----- -----
Balance at December 31, 2000............. $ -- $ -- $ --
===== ===== =====
Interest Income and Expense. We recorded $1.8 million of net interest
income in 2000, as compared to $0.8 million in 1999. The increase was
primarily attributable to higher average invested cash balances, resulting
from the sale of common stock in our initial public offering in November 1999,
which resulted in Rainmaker receiving $40.6 million of net proceeds.
Income Tax Expense (Benefit). We did not record any income tax expense or
benefit for 2000 compared to a $1.7 million income tax benefit for 1999. The
expected benefit derived by applying the federal statutory rate to the
operating loss for 2000 was not recorded because we established a full
valuation allowance for deferred tax assets due to the uncertainty of future
taxable income. 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.
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 Software, Inc. ("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.
17
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.
18
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,
2000. 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.
Quarter Ended
------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1999 1999 1999 1999 2000 2000 2000 2000
--------- -------- --------- -------- --------- -------- --------- --------
(in thousands except per share amounts)
Statement of Operations
Data:
Revenue:
CRM services.......... $12,943 $13,145 $15,947 $18,630 $17,451 $14,807 $14,279 $12,834
Catalog/distributor... -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total revenue........ 12,943 13,145 15,947 18,630 17,451 14,807 14,279 12,834
Cost of revenue:
CRM services.......... 8,719 8,815 11,403 12,602 12,828 10,562 10,264 8,854
Catalog/distributor... -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total cost of
revenue............. 8,719 8,815 11,403 12,602 12,828 10,562 10,264 8,854
Gross profit:
CRM services.......... 4,224 4,330 4,544 6,028 4,623 4,245 4,015 3,980
Catalog/distributor... -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total gross profit... 4,224 4,330 4,544 6,028 4,623 4,245 4,015 3,980
Selling, general and
administrative
expenses............... 3,950 6,114 8,587 10,288 9,881 9,982 9,371 8,916
Restructuring charge.... -- -- -- -- -- 868 -- (193)
------- ------- ------- ------- ------- ------- ------- -------
Operating income
(loss)................. 274 (1,784) (4,043) (4,260) (5,258) (6,605) (5,356) (4,743)
Interest income
(expense), net....... 139 146 85 404 510 503 417 326
Gain from sale of
catalog/distributor.. -- 80 -- -- -- -- -- 50
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... 413 (1,558) (3,958) (3,856) (4,748) (6,102) (4,939) (4,367)
Income tax expense
(benefit)............ 164 (595) (90) 1,129 -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... 249 (963) (3,868) (2,727) (4,748) (6,102) (4,939) (4,367)
Preferred C and D
cumulative dividends... (281) (392) (392) (200) -- -- -- --
Excess of redemption of
preferred stock over
stated value........... (546) (698) (697) -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net loss available to
common stockholders.... $ (578) $(2,053) $(4,957) $(2,927) $(4,748) $(6,102) $(4,939) $(4,367)
======= ======= ======= ======= ======= ======= ======= =======
Basic net income (loss)
per share.............. $ 0.01 $ (0.11) $ (0.28) $ (0.10) $ (0.12) $ (0.16) $ (0.13) $ (0.11)
======= ======= ======= ======= ======= ======= ======= =======
Diluted net income
(loss) per share....... $ 0.01 $ (0.11) $ (0.28) $ (0.10) $ (0.12) $ (0.16) $ (0.13) $ (0.11)
======= ======= ======= ======= ======= ======= ======= =======
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. In the second quarter
of 2000, we began a review of our existing client base, as well as our client
targeting process and methodology. As a result, in the last half of 2000, we
have discontinued services to certain clients which have resulted in a lower
base of revenues. See "Risk Factors--Our Future Operating Results May Not
Follow Past Trends or Meet Market Expectations."
Liquidity and Sources of Capital
Historically, we have funded operations from operating cash flows and net
cash proceeds from private placements of preferred stock, and in November
1999, the initial public offering of our common stock. Cash and cash
equivalents were $22.9 million at December 31, 2000. Working capital at
December 31, 2000 was $17.5 million.
19
Cash used in operating activities during 2000 was $13.2 million compared to
$4.6 million for 1999. The change of $8.6 million year over year was due
primarily to the increase in net loss of $12.8 million. The increase in net
loss was primarily attributable to the strategic decision to increase
personnel (40 additional average number of personnel during 2000 as compared
to 1999), and to increase levels of investment in systems, infrastructure and
product development, all of which are designated to support recent and
anticipated new client growth and new service offerings and deliver a more
robust infrastructure to support that growth. In addition, we reduced the
payable to a related party of $860,000 in 2000. These were partially offset by
changes in deferred income taxes and other operating assets and liabilities,
primarily accounts payable, trade accounts receivable, and income taxes
receivable, net. Excluding restructuring related transactions, cash used by
operations was approximately $12.5 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. This increase in net loss 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. 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 2000 was $3.7 million compared to
$3.5 million for 1999. The increase was primarily due to capital expenditures,
totaling $7.2 million partially offset by the sale of $2.8 million of short
term investments in 2000. The capital expenditures consisted primarily of
computers and software related to our new ERP system and other technology
initiatives. In 1999, we had $1.6 million of capital expenditures and $3.8
million of purchases of short-term investments partially offset by $1.0
million of sales of short-term investments and $900,000 of proceeds received
from the sale of our 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 was paid in three
installments. We received the first installment of $2.9 million from the sale
in May 1998, the second installment of $900,000 in May 1999, and 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 used in financing activities during 2000 was $1.4 million compared to
cash provided of $44.6 million for 1999. In 2000, we repurchased and retired
$1.2 million of common stock and repaid $1.0 million of capital lease
obligations. This was offset by $0.8 million of proceeds received from the
issuance of common stock from stock option exercises and our employee stock
purchase plan.
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 and cash equivalents at December 31, 2000 will be
sufficient to meet our liquidity needs for at least the next twelve months.
20
Potential Impact of Inflation
To date, inflation has not had a material impact on our business.
Recent Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board ("FASB") issued FAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of FASB Statement No. 133," which amends FAS
133 to be effective for all fiscal years beginning after June 15, 2000. FAS
133 establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. We will adopt FAS 133 in the first
quarter of 2001. Because we currently hold no derivative financial instruments
and do not currently engage in hedging activities, adoption of FAS 133 is not
expected to have a material impact on our financial position or results of
operations.
In March 2000, the FASB issued Financial Standards Board Interpretation No.
44, "Accounting for Certain Transactions involving Stock Compensation--an
Interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44 addresses the
application of APB No. 25 to clarify, among other issues, (a) the definition
of employee for purposes of applying APB No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1,
2000, but certain conclusions cover specific events that occur after December
15, 1998 or January 12, 2000. The adoption of FIN 44 did not have a material
effect on Rainmaker's 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. We incurred an
operating and net loss of $20.2 million for 2000 and an operating loss of $9.8
million and a net loss of $7.3 million for 1999. We expect to incur operating
and net losses for at least the next twelve months as we continue to 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 the sales of
products and services of a limited numbers of clients. As of December 31,
2000, we have 11 clients. In 2000, sales to customers of Sybase, Inc.
("Sybase"), SCO, Parametric Technology Corporation, and Novell, Inc.
("Novell") accounted for approximately 24%, 19%, 17%, and 12%, respectively of
our CRM services revenue. In 1999, sales to customers of SCO and Sybase
accounted for approximately 43% and 18%, respectively, of our CRM services
revenue. In 1998, sales to customers of SCO, FTP and Novell accounted for
approximately 46%, 21% and 16%, respectively, of our CRM services revenue. 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 declined significantly and declined to zero in the third quarter of
2000.
In late 2000, we decided to focus our resources on clients with which we
can maintain a profitable business relationship. This resulted in
discontinuation of relationships to certain clients and a lower base of
revenues. There is a possibility that we may discontinue more client
relationships which could cause a decrease in our revenue.
21
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 the sale of 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 past trends in every quarter, even if they
continue to improve overall. In any future quarter, our operating results may
be below the expectation of public market analysts and investors.
Factors which may cause our future operating results to be below
expectations include:
. the growth of the market for outsourced CRM solutions;
. the demand for and acceptance of our services;
. the demand for our clients' products and services;
. the length of the sales and integration cycle for our new clients;
. our ability to develop and implement additional services, products and
technologies; and
. the expansion of our direct sales force and its rate of success.
The length and unpredictability of the sales and integration cycles for our
services could cause delays in our revenue growth.
Selection of our services often entails an extended decision-making process
on the part of prospective clients. We often must provide a significant level
of education regarding the use and benefit of our services, which may delay
the evaluation and acceptance process. The selling cycle can extend to
approximately six to nine months or longer between initial client contact and
signing of a contract for our services. Additionally, once our services are
selected, the integration of our services often can be a lengthy process which
further impacts the timing of revenue. Because we are unable to control many
of the factors that will influence our clients' buying decisions or the
integration of our services, the length and unpredictability of the sales and
integration cycles will make it difficult for us to forecast the growth and
timing of our revenue.
If we are unable to attract and retain highly qualified management and sales
and technical personnel, the quality of our services may decline, and our
ability to execute our growth strategies may be harmed.
Our success depends to a significant extent upon the contributions of our
executive officers and key sales and technical personnel and our ability to
attract and retain highly qualified sales, technical and managerial personnel.
Competition for personnel is intense as these personnel are limited in supply.
We have at times experienced difficulty in recruiting qualified personnel, and
there can be no assurance that we will not experience difficulties in the
future. Any difficulties could limit our future growth. The loss of certain
key personnel, particularly Michael Silton, our chairman, president and chief
executive officer, could seriously harm our business. We have obtained life
insurance policies in the amount of $6.3 million on Michael Silton.
22
During 2000, we have had some turnover within our executive management
team. 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 CRM services 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.
The growth in demand for outsourced sales and marketing services is highly
uncertain.
Demand and acceptance of our sales and marketing services is dependent upon
companies being willing to outsource these processes. It is possible that
these solutions may never achieve broad market acceptance. If the market for
our services does not grow or grows more slowly than we currently anticipate,
our business, financial condition and operating results may be materially
adversely affected.
Our success depends on our ability to successfully manage additional growth.
Our recent growth has placed significant demands on our management,
administrative, operational and financial resources. In addition, our
anticipated future growth will place additional demands on our resources. We
will need to continue to improve our operational, financial and managerial
controls and information systems and procedures and will need to continue to
expand, train and manage our overall work force. If we are unable to manage
additional growth effectively, our business will be harmed.
Our business strategy may ultimately include expansion into foreign markets
which would require increased expenditures, and if our international
operations are not successfully implemented, they may not result in increased
revenue or growth of our business.
Our long-term growth strategy includes expansion into international
markets. As a result, we may need to establish international operations, hire
additional personnel and establish relationships with additional clients and
customers in those markets. This expansion may require significant financial
resources and management attention and could have a negative effect on our
earnings. We cannot assure you that we will be successful in creating
international demand for our CRM services or that we will be able to
effectively sell our clients' products and services in international markets.
The development of international operations may also involve the following
risks:
. the appeal of our marketing programs, including the use of e-mail and
direct marketing techniques, to international customers;
. the increased cost associated with designing and operating Web sites in
foreign languages;
. differing technology standards and internet regulations in other
countries that may affect access to and operation of our Web sites; and
. difficulties in collecting international accounts receivable for the
products and services that we sell.
23
We cannot assure you that these factors will not have an adverse effect on
future international sales and earnings.
Any acquisitions we may make could result in dilution, unfavorable accounting
charges and difficulties in successfully managing our business.
As part of our business strategy, we review acquisition prospects that
would complement our existing business or enhance our technological
capabilities. Future acquisitions by us could result in potentially dilutive
issuances of equity securities, large and immediate write-offs, the incurrence
of debt and contingent liabilities or amortization expenses related to
goodwill and other intangible assets, any of which could cause our financial
performance to suffer. Furthermore, acquisitions entail numerous risks and
uncertainties, including:
. difficulties in the assimilation of operations, personnel, technologies,
products and the information systems of the acquired companies;
. diversion of management's attention from other business concerns;
. risks of entering geographic and business markets in which we have no or
limited prior experience; and
. potential loss of key employees of acquired organizations.
We cannot be certain that we would be able to successfully integrate any
businesses, products, technologies or personnel that might be acquired in the
future, and our failure to do so could limit our future growth. Although we do
not currently have any agreement with respect to any material acquisitions, we
may make acquisitions of complementary businesses, products or technologies in
the future. However, we may not be able to locate suitable acquisition
opportunities.
We rely heavily on our communications infrastructure, and the failure to
invest in or the loss of these systems could disrupt the operation and growth
of our business and result in the loss of customers or clients.
Our success is dependent in large part on our continued investment in
sophisticated computer, Internet and telecommunications systems. We have
invested significantly in technology and anticipate that it will be necessary
to continue to do so in the future to remain competitive. These technologies
are evolving rapidly and are characterized by short product life cycles, which
require us to anticipate technological developments. We may be unsuccessful in
anticipating, managing, adopting and integrating technological changes on a
timely basis, or we may not have the capital resources available to invest in
new technologies. Temporary or permanent loss of these systems could limit our
ability to conduct our business and result in lost revenue.
If we are unable to safeguard our networks and clients' data, our clients may
not use our services and our business may be harmed.
Our networks may be vulnerable to unauthorized access, computer hacking,
computer viruses and other security problems. A user who circumvents security
measures could misappropriate proprietary information or cause interruptions
or malfunctions in our operations. We may be required to expend significant
resources to protect against the threat of security breaches or to alleviate
problems caused by any breaches. Although we intend to continue to implement
industry-standard security measures, these measures may be inadequate.
Damage to our single facility and the California energy crisis 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.
24
California's two largest power companies are currently experiencing a power
shortage that has resulted in "rolling" blackouts to maintain the stability of
the state power grid. Our facilities are susceptible to power interruptions as
long as the energy crisis continues. One of the power companies, PG&E, has
filed an additional contingency plan with the California Public Utilities
Commission that would, if implemented, result in lengthy and routine power
interruptions that would directly impact our leading-edge process technology
development efforts, which could have a material adverse impact on our
business. We are continuing to assess the impact of the energy crisis on our
operations.
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," "Contracts Renewals Plus," and "Education Sales Plus" in
the United States, and certain foreign countries.
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 Federal Trade Commission's ("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 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.
25
Our directors and their affiliates own a large percentage of our stock and
can significantly influence all matters requiring stockholder approval.
Our directors and entities affiliated with them together control
approximately 50% of our outstanding shares (based on the number of shares
outstanding as of February 28, 2001). 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.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on
our investment portfolio. We currently do not and do not plan to use
derivative financial instruments in our investment portfolio. We plan to
ensure the safety and preservation of our invested principal funds by limiting
default risk, market risk and investment risk. We plan to mitigate default
26
risk by investing in low-risk securities. To minimize our risks, we maintain
our portfolio of cash equivalents and short-term investments in a variety of
short-term and liquid securities including money market funds, commercial
paper, U.S. government and agency securities and municipal bonds. In general,
money market funds are not subject to market risk because the interest paid on
such funds fluctuates with the prevailing interest rate. As of December 31,
2000, 100% of our portfolio was invested in instruments which mature in less
than 90 days. See Note 4 of Notes to Financial Statements.
The following presents the amount of our cash equivalents that may be
subject to market risk and weighted average interest rate as of December 31,
2000. This amount does not include money market funds because those funds are
not subject to market risk.
Maturing in Estimated
three months Fair
or less Value
------------ ---------
(in thousands)
Fixed rate securities............................. $14,055 $14,055
Weighted average interest rate.................... 6.83%
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
27
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 Rainmaker's officers required by this Item is
incorporated by reference to Rainmaker's Proxy Statement under the heading
"Executive Officers". The information concerning Rainmaker's Directors
required by this Item is incorporated by reference to Rainmaker's Proxy
Statement under the heading "Election of Directors--Nominees". Information
concerning Rainmaker's officers, Directors and 10% stockholders compliance
with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference to the information contained in Rainmaker's 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
Rainmaker'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
Rainmaker'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
Rainmaker's Proxy Statement under the heading "Certain Transactions with
Management."
28
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
----
Report of Independent Auditors......................................... 32
Financial Statements:
Balance Sheets as of December 31, 2000 and 1999...................... 33
Statements of Operations for the Years ended December 31, 2000, 1999
and 1998............................................................ 34
Statements of Redeemable Convertible Preferred Stock and
Stockholders' Equity for the Years ended December 31, 2000, 1999 and
1998................................................................ 35
Statements of Cash Flows for the Years ended December 31, 2000, 1999
and 1998............................................................ 36
Notes to Financial Statements........................................ 37
(a) 2. Financial Statement Schedules
The following financial statement schedule is filed as a part of this
report:
Schedule II Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the Financial Statements or the notes
thereto.
(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.
29
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.
10.15* Compensation Agreement dated January 1, 1995 between UniDirect
Corporation and Richard Marotta, together with Notice of Grant of
Stock Option and Stock Option Agreement.
10.16* Compensation Agreement dated November 1, 1995 between UniDirect
Corporation and Richard Marotta, together with Notice of Grant of
Stock Option and Stock Option Agreement.
10.17* Separation Agreement and Release dated September 30, 1997 between
UniDirect Corporation and Bernard Jubb, together with Amendment No.
1 dated January 27, 1997 and the Promissory Note and Security
Agreement dated February 5, 1999.
10.18* Separation Agreement and Release dated April 8, 1999 between
Rainmaker Systems, Inc. and Chris Sterbenc.
10.19*+ Distributor Agreement dated January 24, 1995 between UniDirect
Corporation and The Santa Cruz Operation, Inc., together with
amendments dated April 8, 1996, November 5, 1997, March 16, 1999 and
May 17, 1999.
10.20*+ Sun Software Subscription Services Outsourcing and Distribution
Agreement dated March 18, 1997 between UniDirect Corporation and
SunSoft, Inc., together with amendments dated May 20, 1997, June 16,
1997, April 30, 1999, May 19, 1999 and Assignment dated August 25,
1998.
10.21+ Outsourcing Services Agreement dated July 21, 1997 between UniDirect
Corporation and FTP Software, Inc., together with amendments dated
September 12, 1997, October 1, 1997, November 11, 1997, January 21,
1998, January 28, 1998, May 26, 1998 and August 1998.
10.22+ Outsource Services Agreement dated March 26, 1999 between Rainmaker
Systems, Inc. and Novell, Inc., together with amendment dated
September 8, 1999.
10.23** Form of Notice of Grant of Stock Option
10.24*** Form of Stock Option Agreement
21 List of Subsidiaries
23.1 Consent of Independent Auditors.
23.2* Consent of Brobeck, Phleger & Harrison LLP.
30
(b) Reports on Form 8-K
On December 5, 2000, Rainmaker filed a report on Form 8-K under Item 5-
Other Items. The 8-K discussed a press release issued by Rainmaker Systems,
Inc. on November 30, 2000 relating to its Board of Directors authorizing a
program to repurchase up to 2,000,000 shares of the Company's common stock.
- --------
* Incorporated by reference to the similarly numbered exhibit to the
Registration Statement on Form S-1 filed by Rainmaker (Reg. No. 333-
86445).
** Incorporated by reference to exhibit number 99.2 to the Registration
Statement on Form S-8 filed by Rainmaker (Reg. No. 333-91095).
*** Incorporated by reference to exhibit number 99.3 to the Registration
Statement on Form S-8 filed by Rainmaker (Reg. No. 333-91095).
+ Confidential treatment has previously been granted by the Commission for
certain portions of the referenced exhibit.
31
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, 2000 and 1999 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, 2000. 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, 2000 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2000, 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 18, 2001
32
RAINMAKER SYSTEMS, INC.
BALANCE SHEETS
(In thousands, except share data)
December 31,
----------------
2000 1999
------- -------
ASSETS
------
Current assets:
Cash and cash equivalents.................................... $22,879 $41,129
Short-term investments....................................... -- 2,756
Accounts receivable, less allowance for sales returns and
doubtful accounts of $608 in 2000 and $536 in 1999.......... 8,271 8,192
Inventories.................................................. 403 637
Other receivables............................................ 680 291
Note receivable.............................................. -- 800
Income taxes receivable...................................... -- 960
Prepaid expenses and other current assets.................... 1,211 563
------- -------
Total current assets..................................... 33,444 55,328
Property and equipment, net.................................. 8,483 2,373
Other noncurrent assets...................................... 295 166
------- -------
Total assets............................................. $42,222 $57,867
======= =======
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY
----------------------------------------
Current liabilities:
Accounts payable............................................. $ 9,508 $ 6,456
Payable to a related party................................... 817 1,677
Accrued compensation and related liabilities................. 2,567 2,131
Accrued liabilities.......................................... 1,823 804
Current portion of capital lease obligations................. 1,183 501
------- -------
Total current liabilities................................ 15,898 11,569
Capital lease obligations, less current portion.............. 1,018 1,090
Other long term liabilities.................................. 23 --
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value:
Authorized shares--20,000,000
Issued and outstanding--none in 2000 and 1999............. -- --
Common stock, $0.001 par value:
Authorized shares--80,000,000
Issued and outstanding shares--38,336,904 in 2000 and
38,370,955 in 1999....................................... 38 38
Additional paid-in capital................................... 57,732 58,482
Deferred stock compensation.................................. (363) (1,344)
Accumulated deficit.......................................... (32,124) (11,968)
------- -------
Total stockholders' equity............................... 25,283 45,208
------- -------
Total liabilities and stockholders' equity............... $42,222 $57,867
======= =======
See accompanying notes.
33
RAINMAKER SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Years Ended December 31,
---------------------------
2000 1999 1998
-------- -------- -------
Revenue:
CRM services................................... $ 59,371 $ 60,665 $44,212
Catalog/distributor............................ -- -- 6,165
-------- -------- -------
Total revenue................................ 59,371 60,665 50,377
Cost of revenue:
CRM services................................... 42,508 41,539 30,196
Catalog/distributor............................ -- -- 5,135
-------- -------- -------
Total cost of revenue........................ 42,508 41,539 35,331
Gross profit:
CRM services................................... 16,863 19,126 14,016
Catalog/distributor............................ -- -- 1,030
-------- -------- -------
Total gross profit........................... 16,863 19,126 15,046
Selling, general and administrative expenses..... 38,150 28,939 13,457
Restructuring charge............................. 675 -- --
-------- -------- -------
Operating income (loss)...................... (21,962) (9,813) 1,589
Interest income (expense), net................... 1,756 774 138
Gain from sale of catalog/distributor............ 50 80 2,525
-------- -------- -------
Income (loss) before income taxes............ (20,156) (8,959) 4,252
Income tax expense (benefit)..................... -- (1,650) 1,702
-------- -------- -------
Net income (loss)............................ (20,156) (7,309) 2,550
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... $(20,156) $(10,515) $ 2,514
======== ======== =======
Net income (loss) per common share:
Basic.......................................... $ (0.52) $ (0.49) $ 0.12
======== ======== =======
Diluted........................................ $ (0.52) $ (0.49) $ 0.09
======== ======== =======
Number of shares used in per share computations:
Basic.......................................... 38,798 21,300 21,004
======== ======== =======
Diluted........................................ 38,798 21,300 30,356
======== ======== =======
See accompanying notes.
34
RAINMAKER SYSTEMS, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(In thousands, except share data)
Redeemable Redeemable Redeemable
Convertible Convertible Convertible Convertible
Preferred Stock Preferred Stock Preferred Stock Preferred Stock
Series A Series C Series D Series B Common Stock Additional
---------------- -------------------- ------------------- ---------------- ------------------ Paid-in
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Capital
-------- ------ ---------- -------- ---------- ------- -------- ------ ---------- ------ ----------
Balance at
December 31,
1997............. 574,620 $ 977 -- $ -- -- $ -- 349,160 $ 384 21,025,988 $21 $ 223
Conversion of
nonpar preferred
stock to $0.001
par value
preferred
stock........... -- -- -- -- -- -- -- (384) -- -- 384
Exercise of
employee stock
options......... -- -- -- -- -- -- -- -- 434,906 -- 134
Net income and
comprehensive
net income...... -- -- -- -- -- -- -- -- -- -- --
Dividends
declared........ -- -- -- -- -- -- -- -- -- -- --
-------- ----- ---------- -------- ---------- ------- -------- ----- ---------- --- -------
Balance at
December 31,
1998............. 574,620 977 -- -- -- -- 349,160 -- 21,460,894 21 741
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.. -- -- -- -- -- -- -- -- 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........... (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) (349,160) -- 15,999,855 16 15,766
Repurchase of
common stock.... -- -- -- -- -- -- -- -- (5,908,707) (5) (1,296)
Deferred stock
compensation.... -- -- -- -- -- -- -- -- -- -- 2,026
Amortization of
deferred stock
compensation.... -- -- -- -- -- -- -- -- -- -- --
Net loss and
comprehensive
net loss........ -- -- -- -- -- -- -- -- -- -- --
Dividends
declared........ -- -- -- -- -- -- -- -- -- -- --
-------- ----- ---------- -------- ---------- ------- -------- ----- ---------- --- -------
Balance at
December 31,
1999............. -- -- -- -- -- -- -- -- 38,370,955 38 58,482
Exercise of
employee stock
options......... -- -- -- -- -- -- -- -- 633,202 -- 194
Issuance of
common stock
under
employee stock
purchase plan... -- -- -- -- -- -- -- -- 228,416 1 622
Repurchase of
common stock for
retirement...... -- -- -- -- -- -- -- -- (895,669) (1) (1,195)
Amortization of
deferred stock
compensation.... -- -- -- -- -- -- -- -- -- -- --
Cancellation of
options with
deferred
stock
compensation
charges......... -- -- -- -- -- -- -- -- -- -- (371)
Net loss and
comprehensive
net loss........ -- -- -- -- -- -- -- -- -- -- --
-------- ----- ---------- -------- ---------- ------- -------- ----- ---------- --- -------
Balance at
December 31,
2000............. -- $ -- -- $ -- -- $ -- -- $ -- 38,336,904 $38 $57,732
======== ===== ========== ======== ========== ======= ======== ===== ========== === =======
Retained
Deferred Earnings
Stock (Accumulated
Compensation Deficit) Total
------------ ------------ ---------
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.. -- -- 40,573
Exercise of
warrant to
purchase common
stock........... -- -- --
Exercise of
employee stock
options......... -- -- 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.... -- -- 15,782
Repurchase of
common stock.... -- (8,389) (9,690)
Deferred stock
compensation.... (2,026) -- --
Amortization of
deferred stock
compensation.... 682 -- 682
Net loss and
comprehensive
net loss........ -- (7,309) (7,309)
Dividends
declared........ -- (8) (8)
------------ ------------ ---------
Balance at
December 31,
1999............. (1,344) (11,968) 45,208
Exercise of
employee stock
options......... -- -- 194
Issuance of
common stock
under
employee stock
purchase plan... -- -- 623
Repurchase of
common stock for
retirement...... -- -- (1,196)
Amortization of
deferred stock
compensation.... 610 -- 610
Cancellation of
options with
deferred
stock
compensation
charges......... 371 -- --
Net loss and
comprehensive
net loss........ -- (20,156) (20,156)
------------ ------------ ---------
Balance at
December 31,
2000............. $ (363) $(32,124) $ 25,283
============ ============ =========
See accompanying notes.
35
RAINMAKER SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended
December 31,
-------------------------
2000 1999 1998
-------- ------- ------
Operating activities:
Net income (loss)................................... $(20,156) $(7,309) $2,550
Adjustments to reconcile net income (loss) to net
cash provided by
(used in) operating activities:
Depreciation and amortization of property and
equipment......................................... 1,838 2,545 635
Amortization of deferred stock compensation........ 610 682 --
Gain on sale of catalog/distributor businesses..... (50) (80) (2,525)
Loss on disposal of property and equipment......... 788 309 --
Issuance of stock for consulting services.......... -- 411 --
Deferred income taxes.............................. -- (1,035) 1,177
Provision for sales returns and doubtful
accounts.......................................... 72 222 16
Changes in operating assets and liabilities:
Accounts receivable.............................. (151) (1,533) (577)
Income taxes receivable.......................... 1,123 (9) (1,382)
Other receivables................................ (389) (239) 410
Inventories...................................... 234 (633) 948
Prepaid expenses and other assets................ (627) (327) (53)
Accounts payable................................. 3,052 632 3,588
Payable to a related party....................... (860) 646 (2,120)
Accrued compensation and related liabilities..... 436 911 536
Accrued liabilities.............................. 879 237 73
Deferred revenue................................. -- (40) 35
-------- ------- ------
Net cash provided by (used in) operating
activities.................................... (13,201) (4,610) 3,311
Investing activities:
Proceeds from sale of catalog/distributor........... 800 900 2,900
Liabilities paid related to sale of
catalog/distributor................................ -- -- (993)
Purchases of property and equipment................. (7,167) (1,642) (874)
Purchase of short-term investments.................. (3,001) (3,756) --
Sale of short-term investments...................... 5,757 1,000 --
Purchase of long-term investments................... (100) -- --
-------- ------- ------
Net cash provided by (used in) investing
activities.................................... (3,711) (3,498) 1,033
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.......................... (1,194) (9,690) --
Proceeds from issuance of common stock from option
exercises.......................................... 191 267 134
Proceeds from issuance of common stock under ESPP... 624 -- --
Repayment of capital lease obligations.............. (959) (304) (121)
Dividends paid...................................... -- (26) (18)
-------- ------- ------
Net cash provided by (used in) financing
activities.................................... (1,338) 44,629 (5)
Net increase (decrease) in cash and cash
equivalents........................................ (18,250) 36,521 4,339
Cash and cash equivalents at beginning of year...... 41,129 4,608 269
-------- ------- ------
Cash and cash equivalents at end of year............ $ 22,879 $41,129 $4,608
======== ======= ======
Supplemental disclosure of cash paid during the
period:
Interest paid...................................... $ 257 $ 125 $ 217
======== ======= ======
Income taxes paid, net of refunds.................. $ (1,123) $ (604) $1,908
======== ======= ======
Supplemental schedule of noncash investing and
financing activities:
Acquisition of equipment under capital leases...... $ 1,569 $ 1,248 $ 372
======== ======= ======
Dividends declared, but unpaid..................... $ -- $ -- $ 18
======== ======= ======
Conversion of subordinated convertible note to
preferred stock................................... $ -- $ 996 $ --
======== ======= ======
See accompanying notes.
36
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Business
Founded in 1991 as UniDirect Corporation, Rainmaker Systems, Inc.
("Rainmaker") is a leading outsource provider of Internet-enabled sales and
marketing services. Rainmaker delivers targeted programs to maximize revenue
per customer and strengthen customer loyalty.
Effective May 15, 1998, Rainmaker sold its UniDirect catalog and VarCity
distributor businesses to Savoir Technology Group, Inc. The total
consideration received was $4.6 million, paid as follows: $2.9 million paid at
closing, $0.9 million paid on May 15, 1999 and $0.8 million 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 fee is fixed or
determinable; the collection of the receivable is reasonably assured; 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.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial
Statements" ("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.
SAB 101 was required to be adopted by Rainmaker in the fourth quarter of 2000
with retroactive adoption as of January 1, 2000. Rainmaker believes its
revenue recognition policies conform to the requirements of SAB 101 and,
therefore, its adoption did not have a material impact on its revenue or
results of operations in 2000.
Concurrent with the adoption of SAB 101, Rainmaker also adopted the
Financial Accounting Standards Board's Emerging Issues Task Force Issue No.
99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent" (EITF
99-19). EITF 99-19 interprets SAB 101 and addresses when a company should
report revenue as the gross amount billed to a customer verses the net amount
earned by the company in the transaction. Specific "indicators" should be used
by companies to determine if it is more appropriate for them to record
revenues on a "gross" versus a "net" basis. These "indicators" include, but
are not limited to, 1) whether the vendor is the primary obligor in the
transaction, 2) whether the vendor assumes general inventory risk, and 3)
whether the vendor has latitude for setting the pricing for the goods or
services its sells to its customers. Absence of these indicators might
indicate that revenue should be recorded on a "net" basis. Substantially all
of Rainmaker's sales transactions are reported under the "gross" method based
on amounts billed to the customers as Rainmaker takes
37
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
title and assumes risk of loss for products sold, assumes full credit risk and
establishes pricing for the products and services it sells. However, Rainmaker
also sells products and services on behalf of customers of its clients
whereby, based on the evaluation of the same indicators, it records revenue
net equal to the amount earned in the transaction. Rainmaker's revenue
reporting practices are consistent with the revenue reporting criteria
established in EITF 99-19. The adoption of EITF 99-19 did not have a material
impact on Rainmaker's reported revenues.
Cost of Revenue
Cost of revenue consists of the cost of products and service arrangements
sold to customers, the cost of inbound and outbound shipping, net of amounts
recovered from customers and the costs of designing, producing and delivering
services.
Concentrations of Credit Risk and Credit Evaluations
Rainmaker 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 not traditionally been material,
and such losses have been within management's expectations.
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, 2000, sales to customers of Sybase, Inc
("Sybase"), The Santa Cruz Operation, Inc. ("SCO"), Parametric Technology
Corporation ("PTC") and Novell, Inc. ("Novell") accounted for approximately
24%, 19%, 17% and 12% of customer relationship management ("CRM") services
revenue. respectively. For the year ended December 31, 1999, sales to
customers of SCO and Sybase accounted for approximately 43% and 18% of CRM
services revenue, respectively. In 1998, sales to customers of SCO, FTP
Software, Inc. and Novell accounted for approximately 46%, 21% and 16%,
respectively, of CRM services revenue.
Rainmaker has an outsource services agreement with Sybase that is in effect
through March 2002, a distribution agreement with SCO that is in effect
through September 2002, an outsourcing agreement with PTC that is in effect
through October 2001 and an outsource services agreement with Novell that is
in effect through January 2003. These clients may however terminate their
contracts for cause in accordance with the provisions of each contract. In
most cases, a client must provide Rainmaker 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 two 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.
38
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The components of property and equipment at December 31, 2000 and 1999 were
as follows (in thousands):
December 31,
----------------
2000 1999
------- -------
Computer equipment......................................... $12,107 $ 4,393
Furniture and fixtures..................................... 547 472
Leasehold improvements..................................... 422 263
------- -------
13,076 5,128
Accumulated depreciation and amortization.................. (4,593) (2,755)
------- -------
$ 8,483 $ 2,373
======= =======
As of December 31, 2000, property and equipment included amounts held under
capital leases of approximately $3.2 million and related accumulated
depreciation of approximately $1.3 million.
Stock-Based Compensation
Rainmaker 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.
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
Rainmaker 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, 2000 and 1999, there were no deferred advertising costs.
Gross advertising costs for the years ended December 31, 2000, 1999 and 1998
aggregated $1.4 million, $1.4 million and $1.4 million, respectively.
Rainmaker charged several vendors for reimbursement under advertising programs
of $135,000, $1.1 million and $1.7 million during the years ended December 31,
2000, 1999 and 1998, respectively.
39
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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, Rainmaker has not had any significant
transactions that require reporting in comprehensive income (loss).
Segment Reporting
Rainmaker operates in one market segment, the sale of installed base
marketing and sales services to software and other technology companies, for
their support contracts, software subscriptions and education offerings.
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 June 1999, the Financial Accounting Standards Board ("FASB") issued FAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of FASB Statement No. 133," which amends FAS
133 to be effective for all fiscal years beginning after June 15, 2000. FAS
133 establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Rainmaker does not hold any
derivative financial instruments and does not currently engage in hedging
activities. Adoption of FAS 133 is not expected to have a material impact on
Rainmaker's financial position or results of operations. Rainmaker will adopt
FAS 133 in the first quarter of 2001, effective January 1, 2001.
In March 2000, the FASB issued Financial Standards Board Interpretation No.
44, "Accounting for Certain Transactions involving Stock Compensation--an
Interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44 addresses the
application of APB No. 25 to clarify, among other issues, (a) the definition
of employee for purposes of applying APB No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 was effective July 1,
2000, but certain conclusions cover specific events that occur after December
15, 1998 or January 12, 2000. The adoption of FIN 44 did not have a material
effect on Rainmaker's financial position or results of operations.
40
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. Net Income (Loss) Per Share
Basic net income (loss) per share has been computed using the weighted-
average number of shares of common stock outstanding during the year, less
shares subject to repurchase. Diluted net income (loss) per share also gives
effect, 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):
Years Ended December 31,
--------------------------
2000 1999 1998
-------- -------- ------
Net Income (Loss) Per Common Share--Basic
Net income (loss).................................. $(20,156) $ (7,309) $2,550
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..... $(20,156) $(10,515) $2,514
======== ======== ======
Weighted-average shares of common stock
outstanding....................................... 38,810 21,491 21,196
Less: weighted average shares subject to
repurchase........................................ (12) (191) (192)
-------- -------- ------
Weighted-average shares used in computing basic net
income (loss) per common share.................... 38,798 21,300 21,004
======== ======== ======
Basic net income (loss) per common share........... $ (0.52) $ (0.49) $ 0.12
======== ======== ======
Net Income (Loss) Per Common Share--Diluted
Net income (loss).................................. $(20,156) $ (7,309) $2,550
Add: Accrued interest on convertible debenture..... -- -- 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.................................. $(20,156) $(10,515) $2,589
======== ======== ======
Weighted-average shares of common stock
outstanding....................................... 38,810 21,491 21,196
Add: Number of dilutive common stock equivalents--
options and warrants.............................. -- -- 1,697
Assumed conversion of subordinated debentures.... -- -- 2,844
Assumed conversion of convertible preferred
stock........................................... -- -- 4,619
Less: weighted average shares subject to
repurchase........................................ (12) (191) --
-------- -------- ------
Weighted-average shares used in computing diluted
net income (loss) per common share................ 38,798 21,300 30,356
======== ======== ======
Diluted net income (loss) per common share......... $ (0.52) $ (0.49) $ 0.09
======== ======== ======
Rainmaker has excluded all outstanding stock options and shares subject to
repurchase from the calculation of diluted net loss per common share for the
years ended December 31, 2000 and 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 5,917,970 and 17,873,064 for the
years ended December 31, 2000 and 1999, respectively.
41
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Restructuring Charge
During the second quarter of 2000, Rainmaker recorded a restructuring
charge of $0.9 million or $0.02 per share, in connection with a restructuring
program, approved by the Board of Directors during the quarter, designed to
accelerate a return to profitability. The program resulted in a reduction of
22 positions at all levels throughout Rainmaker. $0.7 million of the charge
was related to cash severance payments. The restructuring was complete as of
December 31, 2000. The remaining $0.2 million of the charge was not used and
was reversed in the fourth quarter of 2000.
Below is a table summarizing activity related to the restructuring charge
(in 000's):
Severance Legal
and benefits and other Total
------------ --------- -----
Q2 2000 Provision........................... $ 743 $125 $ 868
Cash payments............................. (625) (50) (675)
Reverse unused accruals................... (118) (75) (193)
----- ---- -----
Balance at December 31, 2000............ $ -- $-- $ --
===== ==== =====
4. Cash Equivalents and Short-Term Investments
The following is a summary of available-for-sale securities. All available-
for-sale securities at December 31, 2000 have a maturity of less than one
year. As of December 31, 2000 and 1999 the fair market value of available-for-
sale securities approximates their carrying value (in thousands):
December 31, December 31,
2000 1999
------------ ------------
Money market fund.............................. $ 8,824 $ 4,134
Commercial paper............................... 1,481 7,886
Corporate bonds................................ -- 2,756
Government securities.......................... 2,074 5,109
Municipal bonds................................ 10,500 24,000
------- -------
$22,879 $43,885
======= =======
Classified as:
Cash equivalents............................. $22,879 $41,129
Short-term investments....................... -- 2,756
------- -------
$22,879 $43,885
======= =======
During the year ended December 31, 2000, and 1999, Rainmaker sold short-
term investments with a fair value of $5.8 million, and $1 million, resulting
in no gross realized gains or losses for both years. During the year ended
December 31, 1998, Rainmaker did not have any short-term investments.
5. Debt and Commitments
Debt
In 1995, Rainmaker 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,
Rainmaker 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
42
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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
Rainmaker 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, 2000 are as follows (in thousands):
Capital Leases Operating Leases
-------------- ----------------
2001.................................... $1,345 $ 989
2002.................................... 787 750
2003.................................... 306 559
2004.................................... 12 349
2005.................................... -- 5
------ ------
Total minimum lease payments.......... 2,450 $2,652
======
Less amount representing interest....... 249
------
Present value of minimum lease
payments............................... 2,201
Less current portion.................... 1,183
------
Obligations under capital leases due
after one year....................... $1,018
======
Rent expense under operating leases was approximately $1,238,000,
$1,022,000 and $522,000 in 2000, 1999 and 1998, respectively.
6. Income Taxes
Rainmaker utilizes the liability method of accounting for income taxes.
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, 2000, 1999 and 1998 is summarized as follows (in thousands):
December 31,
--------------------
2000 1999 1998
---- ------- ------
Current:
Federal............................................ $-- $ (370) $ 420
State.............................................. -- (245) 105
---- ------- ------
-- (615) 525
Deferred:
Federal............................................ -- (830) 915
State.............................................. -- (205) 262
---- ------- ------
-- (1,035) 1,177
---- ------- ------
$-- $(1,650) $1,702
==== ======= ======
43
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
A reconciliation of taxes computed at the statutory federal income tax rate
to income tax expense (benefit) follows (in thousands):
December 31,
------------------------
2000 1999 1998
------- ------- ------
Provision (benefit) computed at federal
statutory rate................................ $(6,853) $(3,046) $1,446
California franchise tax expense, net of
federal effect................................ 1 1 242
Valuation allowance............................ 6,744 -- --
Nondeductible expenses......................... 108 1,395 14
------- ------- ------
$ -- $(1,650) $1,702
======= ======= ======
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
Rainmaker's deferred tax assets and liabilities as of December 31, 2000 and
1999 are (in thousands):
December 31,
--------------
2000 1999
------ ------
Deferred tax assets:
Net operating loss carryforwards....................... $7,021 $1,856
Book over tax depreciation............................. 478 --
Accounts receivable allowance.......................... 242 214
Inventory reserves..................................... 53 28
Accrued expenses....................................... 664 128
------ ------
Total deferred tax assets................................ 8,458 2,226
Valuation allowance...................................... (8,458) (1,714)
------ ------
Net deferred tax assets.................................. $ -- $ 512
====== ======
Deferred tax liabilities:
Tax over book depreciation............................. $ -- $ (262)
Installment gain....................................... -- (250)
------ ------
Total deferred tax liabilities........................... -- (512)
====== ======
Net deferred tax assets (liabilities).................... $ -- $ --
====== ======
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 $6,744,000
and $1,714,000 during the years ended December 31, 2000 and 1999,
respectively.
As of December 31, 2000, Rainmaker had net operating loss carryforwards for
federal and state tax purposes of approximately $18,800,000 and $11,000,000,
respectively. The federal and state net operating loss carryforwards will
expire at various dates beginning in 2004 through 2020, 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.
44
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. 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, Rainmaker
granted the right to certain stockholders to sell outstanding shares of their
common stock back to Rainmaker at a price of $1.64 per share. Stockholders
exercised rights to sell 5,908,707 shares back to Rainmaker at an aggregate
price of approximately $9.7 million. Of the total common shares repurchased, a
total of 1,497,389 shares of 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, Rainmaker also issued 8,536,585 shares of Series C
preferred stock for approximately $13,809,000 net of issuance costs.
On November 17, 1999, Rainmaker 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 Rainmaker'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 Rainmaker automatically converted to common stock
upon the consummation of the IPO on November 17, 1999.
In March 1994, Rainmaker 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.
In December 2000, Rainmaker repurchased and retired 870,000 shares of its
common stock, for total consideration of $1.2 million.
Stock Option and Stock Issuance Plans
The 1999 Stock Option/Issuance Plan (the "1999 Stock Option Plan") has
9,486,746 shares reserved for issuance as of December 31, 2000. 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, and
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. Stock 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.
45
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
A summary of activity under the 1999 Stock Option Plan is as follows:
Weighted
Average
Price
Options Per
Outstanding Share
----------- --------
Balance at December 31, 1997........................ 3,074,250 $0.20
Granted........................................... 1,109,558 $0.44
Exercised......................................... (434,906) $0.33
Canceled.......................................... (497,511) $0.42
----------
Balance at December 31, 1998........................ 3,251,391 $0.23
Granted........................................... 2,765,428 $4.68
Exercised......................................... (956,525) $0.32
Canceled.......................................... (685,073) $2.42
----------
Balance at December 31, 1999........................ 4,375,221 $2.68
Granted........................................... 3,475,963 $3.80
Exercised......................................... (633,202) $0.29
Canceled.......................................... (1,312,010) $4.35
----------
Balance at December 31, 2000........................ 5,905,972 $3.23
==========
Under the 1999 Stock Option Plan, the pool of shares available for future
grant automatically increases on an annual basis by 4% of Rainmaker's
outstanding common stock at the end of the calendar year. This annual increase
is capped at three million shares per year. At December 31, 2000, pursuant to
the 1999 Stock Option Plan, 1,533,476 shares were automatically added to the
pool available for future grant. At December 31, 2000, a total of 3,580,774
shares were available for future grant.
The following summarizes information about stock options outstanding as of
December 31, 2000:
Options Outstanding
---------------------------------------
Weighted
Average
Remaining
Outstanding Contractual Number
Exercise Price Number Life (in Years) Exercisable
-------------- ----------- --------------- -----------
$0.06............................. 651,596 4.67 651,596
$0.32 - $0.44..................... 837,150 6.29 749,231
$0.50 - $2.19..................... 644,583 8.94 190,769
$2.41 - $2.50..................... 209,885 8.78 73,582
$2.66............................. 2,343,875 9.47 284,006
$3.88 - $8.00..................... 601,900 8.95 93,205
$9.00 - $14.31.................... 586,683 8.93 117,292
$14.81............................ 11,000 9.14 --
$16.63............................ 9,300 9.05 425
$21.13............................ 10,000 8.97 2,784
--------- ---------
5,905,972 8.30 2,162,890
========= =========
In connection with the grant of certain options to employees during the
year ended December 31, 1999, Rainmaker 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
46
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
of the options. Compensation expense of $610,000 and $682,000 recognized
during the years ended December 31, 2000 and 1999, respectively, 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.
Employee Stock Purchase Plan
Rainmaker's employee stock purchase plan ("ESPP") provides for the issuance
of up to 1,000,000 shares of common stock. Under the ESPP, employees may
purchase, on a periodic basis, a limited number of shares of common stock
through payroll deductions over a six-month period. The per share purchase
price is 85% of the fair value of the stock at the beginning or end of the
offering period, whichever is lower. As of December 31, 2000, 228,416 shares
had been issued under the ESPP.
Stock Based Compensation
As discussed in Note 1, Rainmaker 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 Rainmaker'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 Rainmaker'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, 2000, 1999 and 1998: dividend yield of 0%; expected life of 4
years; volatility of 1.68, 1.34 and 0.0 and weighted average risk-free
interest rate of approximately 5.4%, 6.0% and 5.0%, respectively. Pro forma
information is as follows (in thousands, except per share amounts):
Years Ended December 31,
--------------------------
2000 1999 1998
-------- -------- ------
Net income (loss):
As reported.................................. $(20,156) $(10,515) $2,514
======== ======== ======
Pro forma.................................... (23,264) (11,778) 2,499
======== ======== ======
Basic EPS:
As reported.................................. $ (0.52) $ (0.49) $ 0.12
======== ======== ======
Pro forma.................................... (0.60) (0.55) 0.12
======== ======== ======
Diluted EPS
As reported.................................. $ (0.52) $ (0.49) $ 0.09
======== ======== ======
Pro forma.................................... (0.60) (0.55) 0.08
======== ======== ======
The weighted-average fair value of options granted during 2000, 1999 and
1998 was $3.47, $4.46 and $0.08 per share, respectively, with an exercise
price equal to the fair value of the Rainmaker's common stock on the date of
grant. The weighted-average fair value of options granted during 2000 with an
exercise price below the deemed fair value of Rainmaker's common stock on the
date of grant was $5.60 per share.
8. Related Party Transactions
During 2000, 1999 and 1998, Rainmaker purchased inventories and service
agreements from a stockholder at a cost of $5.4 million, $17.5 million and
$15.9 million, respectively. At December 31, 2000 and 1999,
47
RAINMAKER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Rainmaker owed that stockholder $817,000, and $1.7 million, respectively, for
such purchases. Also, during 2000, 1999 and 1998, Rainmaker received marketing
development fund reimbursements of $630,000, $992,000 and $982,000,
respectively, from that stockholder. Amounts totaling $386,000 and $257,000
were receivable from that stockholder at December 31, 2000 and 1999,
respectively. Management believes that these transactions were conducted on
terms that would have been obtained if the parties were dealing at arm's
length.
9. Employee Benefit Plan
The Company has a defined contribution benefit plan established under the
provisions of Section 401(k) of the Internal Revenue Code. All employees may
elect to contribute up to 20% of their compensation to the plan through salary
deferrals. The Company matches 25% of the first 6% of the employee's
compensation contributed to the plan. During the years ended December 31,
2000, 1999 and 1998, the Company made cash contributions to the plan of
$112,000, $103,000 and $62,000, respectively.
48
Schedule II--Valuation and Qualifying Accounts
A schedule of the allowance for sales returns and doubtful accounts is
presented below (in thousands):
Additions
Balance at Charged to Write-offs Balance
Beginning Costs and and at End of
Description of Year Expenses Recoveries Year
----------- ---------- ---------- ---------- ---------
Allowance for sales returns and
doubtful accounts:
Year ended December 31, 2000..... $536 $177 $105 $608
Year ended December 31, 1999..... $314 $299 $ 77 $536
Year ended December 31, 1998..... $298 $286 $270 $314
49
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 27th day of March, 2001.
RAINMAKER SYSTEMS, INC.
/s/ Michael Silton
By: _________________________________
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:
Signature Title Date
--------- ----- ----
/s/ Michael Silton Chairman of the Board, President March 27, 2001
____________________________________ and Chief Executive Officer
Michael Silton (Principal Executive Officer)
/s/ Martin Hernandez Secretary, Chief Operating Officer March 27, 2001
____________________________________ and Acting Chief Financial Officer
Martin Hernandez (Chief Accounting Officer)
/s/ Alok Mohan Director March 27, 2001
____________________________________
Alok Mohan
/s/ Peter Silton Director March 27, 2001
____________________________________
Peter Silton
/s/ Andrew Sheehan Director March 27, 2001
____________________________________
Andrew Sheehan
/s/ Robert Leff Director March 27, 2001
____________________________________
Robert Leff
50