RAINMAKER SYSTEMS INC - 10-Q Quarterly Report

	June 30,			December 31,
	2002			2001
	(Unaudited)			*
ASSETS
Current assets:
Cash and cash equivalents	$	7,599		$	8,606
Accounts receivable, less allowance for doubtful accounts
of $328 in 2002 and $410 in 2001		4,683			4,778
Prepaid expenses and other current assets		921			1,167

Total current assets		13,203			14,551
Property and equipment, net		4,067			5,075
Other noncurrent assets		103			284

Total assets	$	17,373		$	19,910


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	6,438		$	4,855
Payable to a related party		—			861
Accrued compensation and benefits		798			758
Accrued restructuring and other related charges		414			552
Other accrued liabilities		1,218			1,213
Current portion of capital lease obligations		560			713

Total current liabilities		9,428			8,952

Capital lease obligations, less current portion		92			305
Accrued restructuring and other related charges, less current portion		188			369

Stockholders’ equity:
Preferred stock, $0.001 par value:
Authorized shares — 20,000,000
Issued and outstanding – none		—			—
Common stock, $0.001 par value:
Authorized shares — 80,000,000
Issued and outstanding shares — 38,678,169 at June 30, 2002 and 38,417,625 at December 31, 2001		38			38
Additional paid-in capital		56,705			56,676
Accumulated other comprehensive income		1			45
Accumulated deficit		(49,079	)		(46,475	)

Total stockholders’ equity		7,665			10,284

Total liabilities and stockholders’ equity	$	17,373		$	19,910

	Three Months Ended June 30,						Six Months Ended June 30,
	2002			2001			2002			2001
	(Unaudited)						(Unaudited)
CRM services revenue	$	9,724		$	10,755		$	18,209		$	22,979
Cost of CRM services revenue		7,091			7,169			13,171			15,971

CRM services gross profit		2,633			3,586			5,038			7,008

Selling, general and administrative expenses		3,893			6,962			7,811			15,270

Operating loss		(1,260	)		(3,376	)		(2,773	)		(8,262	)
Interest income, net		11			94			23			305

Loss before income taxes		(1,249	)		(3,282	)		(2,750	)		(7,957	)
Income tax benefit		—			—			(146	)		—

Net loss	$	(1,249	)	$	(3,282	)	$	(2,604	)	$	(7,957	)


Basic and diluted net loss per common share	$	(0.03	)	$	(0.09	)	$	(0.07	)	$	(0.21	)

Number of shares used in basic and diluted per share computations		38,665			37,856			38,645			37,958

	Six Months Ended June 30,
	2002			2001
	(Unaudited)
Operating activities:
Net loss	$	(2,604	)	$	(7,957	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,096			1,527
Amortization of deferred stock compensation		—			180
Reduction in allowance for doubtful accounts		(82	)		(36	)
Changes in operating assets and liabilities:
Accounts receivable		177			2,655
Inventories		—			359
Income taxes receivable		(150	)		2
Prepaid expenses and other assets		403			219
Other receivables		—			451
Accounts payable		1,583			(3,198	)
Payable to a related party		(861	)		(517	)
Accrued compensation and benefits		40			(1,247	)
Accrued restructuring and other related charges		(319	)		—
Other accrued liabilities		5			(674	)

Net cash used in operating activities		(712	)		(8,236	)


Investing activities:
Purchases of property and equipment		(88	)		(755	)
Sale of long-term investments		130			—

Net cash provided by (used in) investing activities		42			(755	)


Financing activities:
Proceeds from issuance of common stock from option exercises		23			71
Repurchase of common stock		—			(1,184	)
Proceeds from issuance of common stock from ESPP		6			50
Repayment of capital lease obligations		(366	)		(801	)

Net cash used in financing activities		(337	)		(1,864	)


Net decrease in cash and cash equivalents		(1,007	)		(10,855	)

Cash and cash equivalents at beginning of period		8,606			22,879


Cash and cash equivalents at end of period	$	7,599		$	12,024


Supplemental disclosure of cash paid during the period:
Interest paid	$	46		$	96

Income taxes paid, net of refunds	$	—		$	—

The accompanying financial statements of Rainmaker Systems, Inc. (“Rainmaker”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The interim financial statements are unaudited but reflect all normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of the results of these periods. The results of operations for the three and six months ended June 30, 2002 are not necessarily indicative of results to be expected for the year ending December 31, 2002, or any other period. These financial statements should be read in conjunction with Rainmaker’s financial statements and notes thereto included in Rainmaker’s Annual Report on Form 10-K for the year ended December 31, 2001 and our Form 10-Q for the quarter ended March 31, 2002.

In November 2001, the Financial Accounting Standards Board (“FASB”) issued a Staff Announcement (the “Announcement”), Topic D-103, which concluded that the reimbursement of “out-of-pocket” expenses should be classified as revenue in the statement of operations. This Announcement should be applied in financial reporting periods beginning after December 15, 2001. Upon application of this Announcement, comparative financial statements for prior periods should be reclassified to comply with the guidance in this Announcement. Rainmaker previously recorded reimbursement of “out-of-pocket” expenses in cost of services. Effective January 1, 2002, Rainmaker adopted the Announcement. The adoption of the Announcement had no significant impact on our results of operation and on our comparative financial statements for prior periods.

In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” (“EITF 94-3”). The principle difference between SFAS 146 and EITF 94-3 relates to its requirement for recognition of a liability for a cost associated with an exit or disposal activity. This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity’s commitment to an exit plan. This statement also establishes that fair value is the objective for initial measurement of the liability. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. We do not expect adoption of SFAS 146 will have a material impact on our financial statements.

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. Fee based pricing revenue is recognized once these services have been delivered. 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. We also sell products and services on behalf of our clients whereby we record revenue net, equal to the amount earned in the transaction.

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. The adoption of SAB 101 did not have a material impact on our revenue or results of operations.

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 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 it sells to its customers. Absence of these 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 equal to the net 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.

Basic net 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 loss per share also gives effect, as applicable, to the potential dilutive effect of outstanding stock options, using the if converted method, as of the beginning of the period presented or the original date of issuance, if later. Rainmaker has excluded all outstanding options and shares subject to repurchase from the calculation of diluted net loss per share because all such securities are anti-dilutive.

The primary difference between net loss and comprehensive loss for Rainmaker arises from unrealized gains/(losses) on investments classified as available-for-sale. For the three months and six months ended June 30, 2002, the net change in unrealized holding loss on investments was approximately $24,000 and $44,000, respectively. Comprehensive loss for Rainmaker for the three and six months ended June 30, 2002 was $1.3 million and $2.6 million, respectively.

During the fourth quarter of 2001, we recorded restructuring and other related charges of $2.4 million or $0.06 per share in connection with a restructuring program approved by the Board of Directors during the quarter. This resulted in a reduction of 39 positions at all levels throughout Rainmaker, for which the total annual salary at the date of termination was approximately $2.6 million. All affected employees were informed of the reduction and their severance amounts prior to December 31, 2001. The charges consisted of cash severance payments to be made to severed employees, lease payments related to property abandoned as a result of our facilities consolidation, write-offs of excess equipment and leasehold improvements that were abandoned and whose estimated fair market value was zero, and discontinued use of internally developed and licensed software.

	Employee Severance			Lease Cancellation and Facility Exit Costs			Legal and Other Expenses			Subtotal			Less Current Portion			Accrued Restructuring Costs Less Current Portion
Balance at December 31, 2001	$	26,000		$	877,000		$	18,000		$	921,000		$	552,000		$	369,000

Less cash payments		(1,000	)		(144,000	)		(18,000	)		(163,000	)		(73,000	)		(90,000	)

Balance at March 31, 2002		25,000			733,000			—			758,000			479,000			279,000

Adjustment to reserve		6,000			(66,000	)		60,000			—			—			—
Less cash payments		—			(100,000	)		(56,000	)		(156,000	)		(65,000	)		(91,000	)

Balance at June 30, 2002	$	31,000		$	567,000		$	4,000		$	602,000		$	414,000		$	188,000

On November 30, 2001, we announced a voluntary stock option exchange program for our employees. Under the program, Rainmaker employees were given the opportunity, if they chose, to cancel outstanding stock options previously granted to them in exchange for an equal number of replacement options to be granted at a future date at least six months and one day from the cancellation date, which was January 24, 2002. Rainmaker employees were required to remain employed with Rainmaker at the date of the replacement grant in order to receive replacement options. Non-employee members of our Board of Directors were not eligible to participate in this program. Under the exchange program, options for approximately 2.5 million shares of our common stock were tendered and cancelled. See Note 11, “Subsequent Events.”

During March 2002, the Internal Revenue Service issued the Job Creation and Worker Assistance Act of 2002 which extended the regular and alternative minimum tax net operating loss carryback period from two years to five years for losses arising in 2001 or 2002 tax years. As a result of this new law, Rainmaker recorded a $146,000 income tax benefit during the three months ended March 31, 2002 attributable to the recovery of income taxes paid in prior periods.

In prior years and during the three and six months ended June 30, 2002, Rainmaker purchased inventories and service agreements from a customer who had a board member who also sits on Rainmaker’s Board of Directors. As of June 28, 2002, this board member was no longer on the board of Rainmaker’s customer, and accordingly, Rainmaker’s outstanding payables to that customer totaling $303,000 as of June 30, 2002 have been included in our balance sheet as a component of accounts payable. Total purchases from such customer during the three and six months ended June 30, 2002, amounted to $451,000 and $1.1 million, respectively. Also during the three and six months ending June 30, 2002, Rainmaker received marketing development fund reimbursements of $14,000 and $32,000 from that customer. Amounts totaling $14,000 were receivable from that customer at June 30, 2002.

In February of 2002, Rainmaker entered into an agreement with a member of its Board of Directors to procure consulting services. The agreement had a two month term commencing February 2002, with minimum cash compensation to the board member of $53,000, based upon specific deliverables during the term. As of June 30, 2002, the Company had recorded all $53,000 of consulting fees related to this agreement and the consulting agreement has expired pursuant to its terms.

In July 2002, we also entered into a 12 month capital lease with future minimum lease payments of approximately $45,000 in fiscal year 2002 and $45,000 in fiscal year 2003. In June 2002, we obtained a letter of credit in the original amount of $89,000 to secure financing for this obligation. This letter of credit will decline over time, in accordance with the remaining balance payable under the financing which it secures.

In addition, in December 2001, we obtained a standby letter of credit in the original amount of $552,000 to secure financing for our Directors & Officers insurance premiums, which will be paid prior to the end of the 2002 fiscal year. This letter of credit declines over time, in accordance with the remaining balance payable under the financing which it secures. As of June 30, 2002, this letter of credit had a current value of $307,000.

On July 25, 2002, pursuant to the voluntary employee stock option exchange program discussed in Note 6, each participating employee received, for each option included in the exchange, a one-for-one replacement option. Under the exchange program, Rainmaker issued approximately 2.4 million shares of replacement options. The exercise price of each replacement option was $0.23, equal to the closing selling price per share of our common stock on the trading day immediately before day of grant, which was the highest of (i) the closing selling price per share of our common stock on the trading day immediately before day of grant, (ii) the average of the high and low per share sales price on day of grant and (iii) the closing selling price per share on day of grant, as quoted on Nasdaq or on the OTC Bulletin Board. The replacement options have terms and conditions that are substantially the same as those of the canceled options. The exchange program did not result in any compensation charges.

This Form 10-Q contains forward-looking statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of such terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks outlined under “Factors That May Affect Future Results and Market Price of Stock”, that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activities, performance or achievements expressed or implied by such forward-looking statements.

Rainmaker Systems, Inc. (“Rainmaker”) is a leading outsource provider of sales and marketing programs. Rainmaker’s cost-effective programs generate service revenue and promote customer retention for its clients. Core services include professional telesales, direct marketing, and hosted e-commerce. Additional services include customer database enhancement, CRM technology integration, and order management. These services are available individually or as an integrated solution. By integrating technology, processes and people, Rainmaker provides a transparent customer relationship infrastructure for its clients.

We incurred operating losses and net losses for the three and six months ended June 30, 2002 and for the fiscal years ended 2001, 2000, and 1999. During 1999 and 2000, we incurred increasing operating and net losses as we increased our operating expenses to build our 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. Revenue is recognized once these services have been delivered. 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.

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 period-to-period comparisons of operating results should not be relied upon as predictive of future performance. Our operating results are expected to vary significantly from quarter to quarter and are difficult to predict. Our historical revenue has tended to fluctuate based on seasonal buying patterns in the computer industry. Our prospects must be considered in light of the risks, expenses and difficulties encountered by high-technology companies, particularly given that we operate in new and rapidly evolving markets, and face an uncertain economic environment. We may not be successful in addressing such risks and difficulties. 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 and during 2001, we discontinued reselling certain client products and services which has resulted in a lower base of revenues. See “Factors That May Affect Future Results and Market Price of Stock.”

Accounting policies, methods and estimates are an integral part of the financial statements prepared by management and are based upon management’s current judgments. Those judgments are normally based on knowledge and experience with regard to past and current events and assumptions about future events. Certain accounting policies, methods and estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ markedly from management’s current judgments. Actual results may differ from these estimates under different assumptions or conditions. While there are a number of accounting policies, methods and estimates affecting our financial statements, areas that are particularly significant include revenue recognition policies, valuation of accounts receivable, the assessment of recoverability and measuring impairment of fixed assets, and recognition of restructuring reserves.

Our CRM services revenue consists of sales of our clients’ software subscriptions, support and service contracts, licenses and license 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. We also sell products and services on behalf of our clients whereby we record revenue equal to the net amount earned in the transaction. 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 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. 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.

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 it sells to its customers. Absence of these 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 business primarily consists of marketing and selling 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 revenue is generated by 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.

We have generated a significant portion of our revenue from the marketing and selling of products and services from a limited number of clients. For the three and six months ended June 30, 2002, sales to customers of Nortel Networks, Inc., Hewlett-Packard (“HP”), and Sybase, Inc. (“Sybase”) each individually accounted for 10% or more of our CRM services revenue. For the three months ended June 30, 2001, sales to customers of Sybase, HP, Santa Cruz Operation (“SCO”), IBM and Novell, Inc. (“Novell”) each individually accounted for 10% or more of our CRM services revenue. For the six months ended June 30, 2001, sales to customers of Sybase, HP, SCO, PTC, and Novell each individually accounted for approximately 10% or more 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

We focus our resources on service offerings and client relationships with which we can maintain profitable business relationships. In the past, this focus has resulted in the discontinuation of relationships with certain clients and a lower base of revenues. There is a possibility that more client relationships may be discontinued which could cause a decrease to our revenue in future periods.

Until recently, and as a result of unfavorable economic conditions in the United States, our revenue had declined, and may once again decline. If the economic conditions in the United States continue to worsen or if a wider or global economic slowdown occurs, we may experience a material adverse impact on our business, operating results, and financial condition. During these unfavorable economic periods, it may be more difficult to sign new clients or expand relationships with existing clients.

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments of amounts due to us. The allowance is comprised of specifically identified customer account balances for which collection is currently deemed doubtful. In addition to specifically identified accounts, estimates of amounts that may not be collectible are made based on actual historical bad debt write off experience of those accounts whose collection is not yet deemed doubtful but which may become doubtful in the future if the financial condition of our customers were to deteriorate.

We review all of our long-lived assets, including fixed assets, for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, a significant decline in our stock price for a sustained period, and our market capitalization relative to net book value. An asset or a group of assets is determined to be impaired if the estimated future undiscounted net cash flows attributable to the asset or group of assets are less than their carrying value. If impairment exists, it is measured by the amount of which the fair value of the assets, estimated by Rainmaker using estimated future discounted cash flows, appraisals, or other methods, is less than the asset or group of assets’ carrying value. The identification of long-lived asset impairment and the amount of impairment charges, if any, recorded in any one period, are subject to the aforementioned events and management estimates and therefore, could change in the future requiring additional charges to our operating results.

During the fourth quarter of fiscal 2001, we restructured the company under a plan approved by the Board of Directors, by reducing our headcount and consolidating our facilities utilization. As a result of these actions, we recorded restructuring and other related charges consisting of cash severance payments to be made to severed employees, lease payments related to property abandoned as a result of our facilities consolidation, write-offs of excess equipment and leasehold improvements that were abandoned and whose estimated fair market value was zero, and discontinued use of internally developed software. Each reporting period we will review these estimates based on the status of execution of our restructuring plan and, to the extent that these assumptions change due to changes in market conditions and our business, the ultimate restructuring expenses could vary by material amounts.

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. Some client relationships may be structured such that 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. In these relationships, once we integrate a client’s customer database and begin to meet targeted sales volumes, our gross margins from that client can improve.

In prior years and during the three and six months ended June 30, 2002, Rainmaker purchased inventories and service agreements from a customer who had a board member who also sits on Rainmaker’s Board of Directors. As of June 28, 2002, this board member was no longer on the board of Rainmaker’s customer, and accordingly Rainmaker’s outstanding payables to that customer totaling $303,000 as of June 30, 2002 have been included in our balance sheets as a component of accounts payable. Total purchases from such customer during the three and six months ended June 30, 2002, amounted to $451,000 and $1.1 million, respectively. Also during the three and six months ending June 30, 2002, Rainmaker received marketing development fund reimbursements of $14,000 and $32,000 from that customer. Amounts totaling $14,000 were receivable from that customer at June 30, 2002.

In February of 2002, Rainmaker entered into an agreement with a member of its Board of Directors to procure consulting services. The agreement had a two month term commencing February 2002, with a minimum cash compensation to the board member of $53,000, based upon specific deliverables during the term. As of June 30, 2002, the Company had recorded all $53,000 of consulting fees related to this agreement and the agreement had expired pursuant to its terms.

The following table sets forth for the periods given, selected financial data as a percentage of our revenue. The table and discussion below should be read in connection with the financial statements and the notes thereto, which appear elsewhere in this report as well as with Rainmaker’s financial statements and notes thereto included in Rainmaker’s Annual Report on Form 10-K for the year ended December 31, 2001 and our Form 10-Q for the quarter ended March 31, 2002.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2002		2001		2002		2001
CRM services revenue	100.0	%	100.0	%	100.0	%	100.0	%
Cost of CRM services revenue	72.9		66.7		72.3		69.5

CRM services gross profit	27.1		33.3		27.7		30.5
Selling, general and administrative expenses	40.0		64.7		42.8		66.4

Operating loss	(12.9	)	(31.4	)	(15.1	)	(35.9	)
Interest income, net	0.1		0.9		0.1		1.3

Loss before income taxes	(12.8	)	(30.5	)	(15.0	)	(34.6	)
Income tax benefit	—		—		(0.8	)	—

Net loss	(12.8	)%	(30.5	)%	(14.2	)%	(34.6	)%

CRM Services Revenue. Revenue from CRM services decreased 9.6% to $9.7 million for the three months ended June 30, 2002 from $10.8 million for the comparable period of 2001. This decrease is primarily due to a decline in business attributable to clients for whom we discontinued marketing and selling their products and services in 2001. In late 2000 and during 2001, we decided to focus our resources on clients with whom we could maintain profitable business relationships. As a result, we discontinued relationships with various clients that

represented no revenue for the three months ended June 30, 2002, but from which we generated $2.8 million for the comparable period in 2001. This was offset by the addition of a new client in July 2001 who represented $3.4 million of revenue during the three months ended June 30, 2002. Our quarterly operating results have fluctuated in the past and are likely to do so in the future. In particular, our revenues are not predictable with any significant degree of certainty. In the current economic environment, we have very limited visibility over revenue trends in future periods.

CRM Services Gross Profit. Gross profit from CRM services decreased 26.6% to $2.6 million for the three months ended June 30, 2002, from $3.6 million for the comparable period in 2001. Gross margin from CRM services decreased to 27.1% in the most recent period compared to 33.3% during the comparable period of the prior year. The decrease in gross margin is due primarily to a change in the mix of client products and services sold. For the three months ended June 30, 2001, 20.6% of total revenues were generated through sales of upgrades, new licenses and education, compared with 6.6% in the same period in fiscal 2002. In prior years, these non-core contract revenues did generate higher gross margins, but proved less profitable to deliver because we could not leverage our core business processes or systems. We expect our gross margins to continue to vary based on the mix of clients and the services provided.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 44.1% to $3.9 million for the three months ended June 30, 2002 from $6.9 million for the comparable period of 2001. The percentage and absolute dollar decrease was primarily attributable to a reduction in personnel (a decrease of 100 average headcount from June 30, 2001 to June 30, 2002) and an associated reduction of $1.7 million in personnel-related expenses, reductions of $265,000 in depreciation and $228,000 in rent expenses associated with our restructuring in fiscal 2001, and a reduction of $978,000 in consulting expenses and outside services as part of ongoing efforts to reduce operating expenses. As a percentage of total revenue, selling, general and administrative expenses decreased to 40.0% for the most recent period from 64.7% in the comparable period of the prior year. The decrease in selling, general and administrative expenses as a percentage of total revenue is primarily due to management’s ongoing efforts to control and reduce operating expenses, and to leverage our cost structure. Operating expenses in absolute dollars and as a percentage of revenue will continue to fluctuate based on our revenue base and management of operating expenses.

Interest Income, Net. We recorded $31,000 of interest income and $20,000 of interest expense or net interest income of $11,000 for the three months ended June 30, 2002. This compares to $137,000 of interest income and $43,000 of interest expense or net interest income of $94,000 in the comparable period of 2001. The net decrease was primarily attributable to lower invested cash balances and lower interest rates.

CRM Services Revenue. Revenue from CRM services decreased 20.8% to $18.2 million for the six months ended June 30, 2002 from $23 million for the comparable period of 2001. This decrease is primarily due to a decline in business attributable to clients for whom we discontinued marketing and selling their products and services in 2001. In late 2000 and during 2001, we decided to focus our resources on clients with whom we could maintain profitable business relationships. As a result, we discontinued relationships with various clients that represented no revenue for the six months ended June 30, 2002, but from which we generated $8.4 million for the comparable period in 2001. This was partially offset by the addition of a new client in July 2001 who represented $6.2 million of revenue during the six months ended June 30, 2002. Our quarterly operating results have fluctuated in the past and are likely to do so in the future. In particular, our revenues are not predictable with any significant degree of certainty. In the current economic environment, we have very limited visibility over revenue trends in future periods.

CRM Services Gross Profit. Gross profit from CRM services decreased 28.1% to $5.0 million for the six months ended June 30, 2002, from $7.0 million for the comparable period in 2001. Gross margin from CRM services decreased to 27.7% in the most recent period compared to 30.5% during the comparable period of the prior year. The decrease in gross margin is due primarily to a change in the mix of services provided clients. For the six months ended June 30, 2001, 32.5% of total revenues were generated through sales of upgrades, new licenses and education, compared with 6.5% in the same period in fiscal 2002. In prior years, these non-core contract revenues did generate higher gross margins, but proved less profitable to deliver because we could not leverage our core

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 48.8% to $7.8 million for the six months ended June 30, 2002 from $15.3 million for the comparable period of 2001. The percentage and absolute dollar decrease was primarily attributable to a reduction in personnel (a decrease of 100 average headcount from June 30, 2001 to June 30, 2002) and an associated reduction of $4.7 million in personnel-related expenses, reductions of $431,000 in depreciation and $427,000 in rent expenses associated with our restructuring in fiscal 2001, and a reduction of $2 million in consulting expenses and outside services as part of ongoing efforts to reduce operating expenses. As a percentage of total revenue, selling, general and administrative expenses decreased to 42.8% for the most recent period from 66.4% in the comparable period of the prior year. The decrease in selling, general and administrative expenses as a percentage of total revenue is primarily due to management’s ongoing efforts to control and reduce operating expenses, and to leverage our cost structure. Operating expenses in absolute dollars and as a percentage of revenue will continue to fluctuate based on our revenue base and management of operating expenses.

Interest Income, Net. We recorded $69,000 of interest income and $46,000 of interest expense or net interest income of $23,000 for the six months ended June 30, 2002. This compares to $401,000 of interest income and $96,000 of interest expense or net interest income of $305,000 in the comparable period of 2001. The net decrease was primarily attributable to lower invested cash balances and lower interest rates.

Income Tax Benefit. During March 2002, the Internal Revenue Service issued the Job Creation and Worker Assistance Act of 2002 which extended the regular and alternative minimum tax net operating loss carryback period from two years to five years for losses arising in 2001 or 2002 tax years. As a result of this new law, Rainmaker recorded a $146,000 income tax benefit during the six months ended June 30, 2002 that is attributable to the recovery of income taxes paid in prior periods. During the six months ended June 30, 2001, no income tax benefit was recorded.

Cash used in operating activities during the six months ended June 30, 2002 was $712,000, primarily from net losses, net of non-cash expenses including depreciation, and an increase in accounts payable. Cash used in operating activities was $8.2 million for the six months ended June 30, 2001, primarily from net losses, net of non-cash expenses including depreciation, and decreases in accrued liabilities and accounts payable, offset by a decrease in accounts receivable.

Cash provided by investing activities during the six months ended June 30, 2002 was $42,000 compared to cash used of $755,000 for the comparable period of the prior year. In the six months ended June 30, 2002, cash provided by investing activities was due primarily to a sale of a long-term investment of $130,000, offset by purchase of equipment of $88,000. In the comparable six month period of 2001, cash used by investing activities was due to the purchase of fixed assets.

Cash used in financing activities during the six months ended June 30, 2002 was $337,000 compared to $1.9 million for the comparable period of the prior year. In the first six months of 2002, we repaid $366,000 of capital lease obligations, offset by $29,000 of net proceeds from the issuance of common stock from stock option exercises and from ESPP. In the comparable first six months of 2001, we repurchased and retired $1.2 million of common stock and repaid $800,000 of capital lease obligations. This was offset partially by $121,000 of proceeds received from the issuance of common stock from stock option exercises and from ESPP.

Our principal source of liquidity as of June 30, 2002 consisted of $7.6 million of cash and cash equivalents. We anticipate that our existing capital resources and cash flow expected to be generated from future operations will enable us to maintain our current level of operations, our planned operations and our planned capital expenditures for at least the next twelve months.

Stock Option Exchange Program. On November 30, 2001, we announced a voluntary stock option exchange program for our employees. Under the program, Rainmaker employees were given the opportunity, if they chose, to cancel outstanding stock options previously granted to them in exchange for an equal number of replacement options to be granted at a future date at least six months and one day from the cancellation date, which was January 24, 2002. Rainmaker employees were required to remain employed with Rainmaker at the date of the replacement grant in order to receive replacement options. Non-employee members of our Board of Directors were not eligible to participate in this program. Under the exchange program, options for approximately 2.5 million shares of our common stock were tendered and cancelled.

On July 25, 2002, each participating employee received, for each option included in the exchange, a one-for-one replacement option. Under the exchange program, Rainmaker issued approximately 2.4 million shares of replacement options. The exercise price of each replacement option was $0.23, equal to the closing selling price per share of our common stock on the trading day immediately before day of grant, which was the highest of (i) the closing selling price per share of our common stock on the trading day immediately before day of grant, (ii) the average of the high and low per share sales price on day of grant and (iii) the closing selling price per share on the day of grant, as quoted on Nasdaq or on the OTC Bulletin Board. The replacement options have terms and conditions that are substantially the same as those of the canceled options. The exchange program did not result in any compensation charges.

We incurred operating and net losses of $1.3 million for the three months ended June 30, 2002, and operating and net losses of $2.8 million and $2.6 million, respectively for the six months ended June 30, 2002. We incurred an operating loss of $14.8 million and net loss of $14.4 million for fiscal year 2001. We may incur losses in the future, depending in part on the timing of signing of new clients, impact of new and existing clients and our ability to continue to increase our operating efficiencies.

Our business primarily consists of marketing and selling 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 the client’s products and services may decline.

As a result of recent unfavorable economic conditions in the United States, our revenue has declined, and may continue to do so. If the economic conditions in the United States worsen or if a wider or global economic slowdown occurs, we may experience a material adverse impact on our business, operating results, and financial condition. During these unfavorable economic periods, it may be more difficult to sign new clients or expand relationships with existing clients.

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.

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 make it difficult for us to forecast the growth and timing of our revenue.

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, and Martin Hernandez, our chief operating officer and acting chief financial officer, could seriously harm our business. We have obtained life insurance policies in the amount of $6.3 million on Michael Silton and $3.0 million on Martin Hernandez.

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.

Demand and acceptance of our sales and marketing services is dependent upon companies being willing to outsource these processes. It is possible that these outsourced 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.

Any future growth will place additional demands on our managerial, administrative, operational and financial 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 train and manage our overall work force. If we are unable to manage additional growth effectively, our business will be harmed.

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.

As part of our business strategy, we review from time to time 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 expense related to other intangible assets, any of which could cause our financial performance to suffer. Furthermore, acquisitions entail numerous risks and uncertainties, including:

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.

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

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.

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.

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 to register the RAINMAKER SYSTEMS, RAINMAKER (and Design), CONTRACT RENEWALS PLUS, and EDUCATION SALES PLUS services marks in the United States and certain foreign countries, and have received trademark registrations for the RAINMAKER SYSTEMS service mark in the United States, Australia, the European Community, Switzerland, Norway and New Zealand; the EDUCATION SALES PLUS mark in the United States and Switzerland; and the CONTRACTS RENEWALS PLUS mark in Switzerland.

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 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 has adopted directives addressing data privacy that may limit the collection and use of some information regarding Internet users. Such directives may limit our ability to target customers or collect and use information. 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.

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, or judicial interpretation of existing or future laws would not limit our activities in the future or significantly increase the cost of regulatory compliance.

Our directors and entities affiliated with them together control a large percentage of our outstanding shares. As a result, any significant combination of those stockholders, acting together, will have the ability to control all matters requiring stockholder approval, including the election of all directors, and any merger, consolidation or sale of all or substantially all of our assets. Accordingly, such concentration of ownership may have the effect of delaying, deferring or preventing a change in control of Rainmaker, which, in turn, could depress the market price of our common stock.

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.

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:

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.

Our common stock was previously listed on the Nasdaq National Market and, effective as of May 30, 2002, is currently listed on the Nasdaq SmallCap Market. Nasdaq has requirements that a company must meet in order to remain listed on the Nasdaq SmallCap Market. If we continue to experience losses from our operations, are unable to raise additional funds or our stock price does not meet minimum standards, we may not be able to maintain the standards for continued listing on the Nasdaq SmallCap Market, which include, among other things, that our stock maintain a minimum closing bid price of at least $1.00 per share (subject to applicable grace periods). If as a result of the application of such listing requirements our common stock is delisted from the Nasdaq SmallCap Market, our stock would become harder to buy and sell. Consequently, if we were removed from the Nasdaq SmallCap Market, the ability or willingness of broker-dealers to sell or make a market in our common stock might decline. As a result, the ability to resell shares of our common stock could be adversely affected.

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 mitigate default 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 June 30, 2002, 96% of our portfolio was invested in instruments that mature in less than 90 days, 4% of our portfolio was invested in instruments that mature in less than 184 days.

Rainmaker completed the initial public offering of 5,750,000 shares of its common stock, including 750,000 shares subject to an over allotment option, pursuant to a registration statement on Form S-1 (Commission File No. 333-86445) declared effective on November 16, 1999. The joint book-running managing underwriters of the public offering were Donaldson, Lufkin & Jenrette and Thomas Weisel Partners LLC.

The shares were sold at a price per share of $8.00. The aggregate offering price of the shares offered by Rainmaker was $46,000,000, less underwriting discounts and commissions of $3,220,000 and expenses of approximately $2,207,000. Approximately $27.1 million of the proceeds have been used for operating activities through June 30, 2002 and approximately $8.3 million of the proceeds have been used for capital expenditures. 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.

Delaware		33-0442860
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Interim Financial Statements:
	Balance Sheets – June 30, 2002 and December 31, 2001	3
	Statements of Operations – Three and Six Months Ended June 30, 2002 and 2001	4
	Statements of Cash Flows – Six Months Ended June 30, 2002 and 2001	5
	Notes to Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10

Item 3.	Qualitative and Quantitative Disclosures About Market Risk	23

PART II.	OTHER INFORMATION

Item 1.	Legal proceedings	24

Item 2.	Changes in securities and use of proceeds	24

Item 4.	Submission of matters to vote of security holders	24

Item 6.	Exhibits and reports on Form 8-K	24

Signatures		25

	Capital Leases		Operating Leases		Total
2002	$	375	$	365	$	740
2003		306		620		926
2004		12		391		403
2005		—		46		46
2006		—		5		5

Total minimum lease payments	$	693	$	1,427	$	2,120

	Capital Leases		Operating Leases		Total
2002	$	375	$	365	$	740
2003		306		620		926
2004		12		391		403
2005		—		46		46
2006		—		5		5

Total minimum lease payments	$	693	$	1,427	$	2,120

Nominee		Votes For		Votes Against		Withheld		Broker non-votes
Andrew T.Sheehan		15,934,850		0		24,077		0

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	RAINMAKER SYSTEMS, INC.

Dated: August 14, 2002		/S/ MICHAEL SILTON

		Michael Silton Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)

		/S/ MARTIN HERNANDEZ

		Martin Hernandez Secretary, Chief Operating Officer and acting Chief Financial Officer (Chief Accounting Officer)